Executive Order No. 38 – Not Just for Nonprofits

In a bold attempt to prevent New York State funds from being expended for what has been determined to be excessive executive compensation and administrative costs, Governor Cuomo issued Executive Order No. 38 effective July 1, 2013.  While the nonprofit industry is receiving a great deal of attention and appears to be focused on these limitations, we recommend that affected for-profit entities not use a “wait and see” approach. If you are a nonprofit or a for-profit “Covered Provider”, then the limitations to executive compensation and administrative costs become effective with the period beginning on or after July 1, 2013. Thus, for calendar year Covered Providers, the initial year of compliance is January 1, 2014. Importantly, there is pending litigation brought by several groups seeking to undo Executive Order No. 38; however the outcome is clearly uncertain.

Summary of the Regulations:

Covered Providers:

There are two tests that are required to be met to be considered a Covered Provider, unless specifically excluded under the final regulations.

  1. Anyone or any company that receives at least $500,000 of NYS funds or NYS authorized payments in the reporting period and the one year period immediately preceding the reporting period (two-year average), and
  2. Such NYS funds are at least 30% of total in-state revenues.

Limitations:

Limits on executive compensation – A Covered Provider may not use NYS funds for executive compensation in excess of $199,000 per year. Executive compensation will include all salaries, wages, bonuses and non-mandated benefits. It should be noted that compensation for this purpose includes distributions from Partnerships, LLC’s and S-Corporations, which are not normally associated with the term ‘compensation’. Covered executives are owners, directors, officers and key employees as defined under the IRS rules covering the IRS Form 990. Those who are directly involved in program services will not be considered covered executives. It also includes those who are indirectly paid through related organizations as defined under the rules covering IRS Form 990. Severe penalties apply to those in excess of the limitation unless the compensation is below the 75th percentile of compensation paid to comparable executives of similar organizations of comparable size and geographic area as determined through a recognized acceptable compensation survey,and was approved by the provider’s governing body.

Limits on administrative expenses – A Covered Provider’s outlay for administrative expenses must not exceed 25% in the initial covered reporting period, 20%  for the next covered reporting period and 15% for the next covered reporting period that begins July 1, 2015 and thereafter. The State has developed a worksheet to assist in determining which of its covered operating expenses are administrative. The final regulations also list certain expenses that are not considered to be administrative in nature, such as, capital expenses, property maintenance, taxes, interest, expenses in excess of $10,000 that are non-recurring, (e.g. litigation), and that portion of salaries that pertains to research and policy development.

Waivers:

A Covered Provider may apply for waivers from these limitations.  Separate waivers are required for each covered executive seeking exemption from the compensation limits. Consideration will be given to those covered executives that can show the rationale of the excess payments through comparable salaries, type and size of the entity, qualifications and essential nature of such executives to allow the entity to render its program services, the entity’s compensation review process, among others. Waivers can be revoked if salary increases by more than 5% in a year.   For administrative expense waivers, the State will consider the rationale for the excess payments by a determination of the unavoidability of the expenses, evidence of the impact not paying the expenses, description of controls in place and alternative funding sources sought. All waivers must be filed no later than when the Covered Provider submits the required disclosure form. A determination will be made within 60 days after submission. The disclosure form is due no later than 180 days after the close of their covered reporting period. Advance waiver requests are permitted.

Consequences:

If a Covered Provider exceeds the limitations and a waiver is not granted, then a plan of corrective actions is required. Once approved, the Covered Provider will have six months to implement the plan. Should the Covered Provider be unable to cure the noncompliance, then they are subject to sanctions.  These sanctions can be as harsh as loss of the provider’s license and referral to law enforcement.

Conclusion:

Executive Order No. 38 is presently the law in New York State and it behooves all providers to be certain of its impact on their organizations. Nonprofit Organizations and for-profit entities such as S Corporations, Partnerships and LLC’s should already be making their determinations, policies and reporting strategies to address the executive order and its regulations.

Our firm is available to answer all your questions concerning Executive Order No. 38 and remains ready to assist your organization with compliance. Contact one of our many Partners.

Article written by Vincent P. Pancaldo, CPA, Partner in D’Arcangelo’s Westchester office

Vincent P. Pancaldo, CPA