Final Regulations Issued Affecting New York State-Funded Service Providers
States are now beginning to take more of an interest in tax-exempt organization compliance, as evidenced by New York Governor Cuomo’s “Executive Order 38, Limits on State-Funded Administrative Costs & Executive Compensation” (“Executive Order”).
BACKGROUND
State Government in New York has issued the Final Regulations (“Final Regulations”) with respect to Executive Order 38 to be effective July 1, 2013.
The Final Regulations require that within ninety days of the Executive Order, commissioners of each Executive State Agency that provide State funds or State-authorized payments to providers of services “shall promulgate regulations, and take any other actions within the agency’s authority including amending agreements with such providers to address the extent and nature of a provider’s administrative costs and executive compensation that shall be eligible to be reimbursed within State financial assistance or State-authorized payments for operating expenses”. The Final Regulations were created to limit the amount of State funds or State-authorized payments that may be spent on administrative costs and executive compensation, subject to the availability of certain waivers, and to impose reporting obligations on certain State-funded nonprofit and for-profit service providers.
APPLICABILITY
The Final Regulations define a covered provider to be an entity or individual that “has received pursuant to contract or other agreement with the department, or with another governmental entity, including county and local governments, or an entity contracting on its behalf, to render program services, State funds or State-authorized payments during the covered reporting period and the year prior to the covered reporting period, and in an average annual amount greater than $500,000 during those two years; and at least 30 percent of whose total annual in-state revenues for the covered reporting period and for the year prior to the covered reporting period were from State funds or State-authorized payments.”
This 30 percent will be comprised of total annual revenues that relate to activities in New York State, regardless of whether the provider has additional revenues from activities in other states. This amount will include revenues from sources outside of New York State if they were derived from or in connection with activities performed in New York State. It is important to note that in accordance with the Final Regulations, parent and subsidiary revenues will not be consolidated.
State funds, as defined by the Final Regulations, are those funds appropriated by law in the annual State budget. The Final Regulations also include a definition of State-authorized payments as payments of funds that are not State funds, but are distributed or disbursed upon a State agency’s approval, or by another governmental unit within New York State upon a State agency’s approval, such as Medicaid program payments approved by a State agency. There will be a published listing by each agency of government programs whose funds will be considered State funds or State authorized payments. Under the Final Regulations, the agency has deemed certain entities and individuals to be excluded from a covered provider. A complete list of these excluded entities and individuals is included in section 1002.1 of the Final Regulations.
EXECUTIVE COMPENSATION
The Final Regulations state that executive compensation must not utilize more than $199,000 of State funds or State-authorized payments unless a covered provider has obtained a waiver. Compensation includes all forms of cash and noncash payments or benefits given directly or indirectly to a covered executive. This includes, but is not limited to, salary and wages, bonuses, dividends, housing, personal vehicles and below-market loans reportable on the executive’s Form W-2 or Form 1099. It does not include mandated benefits such as Social Security or worker’s compensation, or other benefits such as healthcare premiums and qualified retirement pension contributions.
A covered executive is considered to be a compensated director, trustee, officer, or key employee; as aligned with Form 990, Part VII; Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors. Pursuant to the Final Regulations, a covered executive does not include clinical and program personnel, such as chairs of departments and chief medical officers, in a hospital or other entity providing program services.
With respect to related organizations, if a covered provider pays a related organization to perform administrative or program services, the covered executive will be considered a covered executive of the covered provider if more than 30 percent of compensation is paid out of State funds or State-authorized payments received from the covered provider. Related organizations will be determined to be those entities which are, or should be included, on the organizations Form 990, Schedule R, Related Organizations and Unrelated Partnerships.
ADMINISTRATIVE EXPENSES
Under the Final Regulations, at least seventy five percent of the covered operating expenses of a covered provider paid for with the State funds or State-authorized payments must be used for program service expenses, rather than for administrative expenses. This amount includes a five percent annual increase over a two year period to reach eighty five percent in April 2015. The Final Regulations define covered operating expenses to be “the sum of program services expenses and administrative expenses of a covered provider.”
According to the State, administrative expenses are expenses authorized and allowable pursuant to applicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments that are incurred in connection with the covered provider’s overall management and necessary overhead that cannot be attributed directly to the provision of program services.
Administrative expenses can include the portion of the salaries and benefits of staff performing administrative and coordination functions that cannot be attributed to particular program services; the portion of legal expenses that cannot be attributed directly to the provision of program services; and office expenses that cannot be attributed to program services such as computer systems and networks, audit services, insurance premiums, interest expenses and expensed equipment (not depreciated) in each case not attributable to the provision of program services.
Administrative expenses do not include capital expenditures including, but not limited to, non-personal service expenditures for the purchase, development, installation, and maintenance of real estate or other real property; property rental, mortgage or maintenance expenses; taxes, payments in lieu of taxes, or assessments paid to any unit of government; equipment rental, depreciation and interest expenses, major movable and adaptive equipment that is expensed; expenses of an amount greater than $10,000 that would otherwise be administrative, except that they are non-recurring or unanticipated and; the portion of the salaries and benefits of staff performing policy development or research.
SUBCONTRACTORS AND AGENTS
Under the Final Regulations, the restrictions will also apply to subcontractors and agents if State funds or State-authorized payments were made from a covered provider to provide program services or administrative services and would otherwise meet the definition of a covered provider but for the fact that it has received State funds or State-authorized payments from a covered provider rather than directly from a governmental agency. The Final Regulations state that covered providers must incorporate in all agreements with any subcontractors and agents the terms of these regulations. However, covered providers will not be held responsible for a subcontractor or agent’s failure to comply with the Final Regulations.
WAIVERS
The Executive Order states that “A provider’s failure to comply with such regulations established by the applicable State agency shall, in the commissioner’s sole discretion, form the basis for termination or non-renewal of the agency’s contract with or continued support of the provider. Each agency’s regulations shall provide that, under appropriate circumstances and upon a showing of good cause, a provider may be granted a waiver from compliance with these or other related requirements in whole or in part subject to the approval of the applicable State agency and the Director of the Budget.”
The Final Regulations allow that the applicable agency may grant a waiver on the limits on executive compensation and administrative expenses upon a showing of good cause. In order to receive a waiver on the limit on executive compensation, an agency will consider the following: comparison to other comparable executives of same size and sector and the same geographic area; the extent to which the covered provider would be unable to provide the program services at the same levels of quality and availability without the waiver; the nature, size, and complexity of the covered provider’s operations and the program services provided; the review and approval process for the subject executive compensation; the qualifications and experience possessed by or required for the covered executive(s) or position(s); and the efforts of the covered provider to secure executives with the same levels of experience, expertise, and skills at lower levels of compensation.
A waiver for executive compensation will remain in effect for the time the agency specifies but will be revoked if executive compensation increases by more than five percent in any calendar year.
Waivers for administrative expenses will consider the following: the extent to which the administrative expenses are necessary or avoidable, whether a failure to reimburse specific administrative expenses would negatively affect the availability or quality of program services in the covered provider’s geographic area; the nature, size, and complexity of the covered provider’s operations and programs; the efforts to monitor and control administrative expenses and limit requests for reimbursement of such costs; and the nature and extent of covered provider’s efforts, if any, to find other sources of funding to support its administrative expenses.
The waiver will only be granted for the annual reporting period but requests may be made for an additional extension of the effective period of the waiver.
NON-COMPLIANCE AND ENFORCEMENT
Under the Final Regulations, an agency must provide notice to any covered provider that is determined not to be compliant with the limits on executive compensation and/or administrative expenses. If non- compliance is determined; the covered provider may work with an agency to formulate a corrective action plan. The covered provider will be granted at least six months to implement the corrective action plan. If a covered provider fails to implement a corrective action plan within the allotted time frame, the agency may, in its discretion modify the corrective action plan, extend the period for implementation or issue a determination of non-compliance, together with a notice of sanctions, which may include the following: redirection of State funds or State-authorized payments; suspension, modification, limitation, or revocation of the covered provider’s licenses, or the contracts or other agreements with the covered provider; and any other lawful actions or penalties deemed appropriate by the relevant agency. The covered provider may appeal any such sanctions.
A copy of the New York State Department of Health (NYS DOH) Final Regulations can be accessed at the healthcare services section of our firm’s website.
For more information on the topics discussed or services we can provide, please contact:
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