A Notice of Revised Rule Making, I.D. No. ASA-22-12-00014-RP, pertaining to Limits on Administrative Expenses and Executive Compensation, published in the March 13, 2013 issue of the State Register contained the incorrect assessment of public comment. Following is the correct assessment of public comment:

Assessment of Public Comment: Assessment of Public Comments OASAS received in response to its revised rule to add 14 NYCRR Part 812 “Limits on Administrative Expenses and Executive Compensation”.

A Notice of Revised Rule Making was published in the New York State Register on October 31, 2012. The Office of Alcoholism and Substance Abuse Services (OASAS) received four (4) sets of comments during the public comment period associated with the revised rulemaking from The Association of Fundraising Professionals (“AFP”), Coalition of Behavioral Health Agencies (“BHA”), Lawyers Alliance (“LA”), and Charity Defense Council (“CDC”).

The issues and concerns raised in these comments are set forth below, grouped according to the part of the revised rule they. Other participating state agencies received comments that applied to all agencies implementing Executive Order No. 38 and those comments and responses are incorporated by reference into these responses; however, only OASAS’ response is provided regarding issues addressed to OASAS.

Applicability

Issue/Concern: The Internal Revenue Service (IRS) rules and the Executive Order No. 38 regulations are not necessarily compatible concerning the issue of executive compensation. For instance, an organization that provides executive compensation which is reasonable pursuant to IRS rules may suddenly be subjected to penalties under the regulations.

Response: OASAS and the Division of the Budget (DOB) are aware that there are differences between the IRS rules and the revised regulations. The goal of these regulations is to implement Executive Order No. 38. Regarding penalties, the penalty provisions would not be applied “suddenly” ; rather Section 812.8 provides for notification of non-compliance, the submission of additional or clarifying information, a corrective action period, and the opportunity to appeal.

Issue/Concern: The regulations should cover only State-authorized payments, and not other State funds. When State funds are awarded through a State agency contract, that State agency has multiple opportunities to review the contractor’s use of the funds.

Response: The regulations cover those funds that are either State funds or State-authorized payments. The regulations would not adequately address the targeted problems of excessive administrative costs and inflated compensation and would create inequities if only State-authorized payments were covered.

Issue/Concern: Payments through municipal or county contracts should not be considered for purposes of determining whether a provider is covered. Funds awarded or granted by county or local governmental units should be excluded from the definitions of State-authorized payments and State funds. Such a provision intrudes on local contracting authority, burdens local governments and confuses service providers having to distinguish proportion of funds from county contracts originating with state funding.

Response: The regulations cover those funds that are awarded through a county or local government contract and are either State funds or State-authorized funds. The regulations would not adequately address the targeted problems of excessive administrative costs and inflated compensation if only providers that contracted directly with State agencies were covered. This would create inequities among providers depending upon whether their funding was received directly or indirectly from the State.

Issue/Concern: It is discriminatory that not-for-profit human service providers are subject to these regulations, but for profit corporations are not.

Response: For profit organizations that meet the definition of “covered provider” pursuant to Section 812.3(d) may be subject to these regulations.

Issue/Concern: It is wrong that the regulations do not apply to State agencies that pay their employees large salaries.

Response: The regulations have been developed to implement Executive Order No. 38, which addresses contracts to render program services. Executive Order No. 38 does not address the salaries of particular State employees.

Definitions

Issue/Concern: The definition of “covered provider” at 812.3(d)(1)(ii) should be based on total revenues, and not in-State revenues. The explanation of “in-State revenues” does not resolve the inherent complications that arise from the receipt of contributed revenue from outside New York State or the question as to “philanthropic” support for providers with multi-state operations; suggest based on total support.

Response: The regulations focus on New York State with the goal of identifying contractors providing program services in New York State who receive a significant portion of their funds to provide such services from State funds or State-authorized payments.

Issue/Concern: The definition of “executive compensation” at 812.3(e) should be revised to clarify that the qualifying phrase “reportable on a covered executive’s W-2 form” is applicable not only to the personal use of the organization’s property, but also to other non-salary benefits.

Response: This technical revision will be made to § 812.3.

Issue/Concern: The definition of “program services expenses” at 812.3 should allow property rental, mortgage and maintenance expenses to be allocated between “program services” and “administrative expenses” based on the actual use of the property.

Response: With the noted exception of providing housing to members of the public receiving program services, OASAS maintains that for purposes of Executive Order No. 38, property rental, mortgage and maintenance expenses are not “program services expenses.”

Limits on administrative expenses

Issue/Concern: The regulations at 812.4 and 812.5 applying Executive Order No. 38 restrictions to subcontractors and agents of covered providers should be amended to remove “or administrative” from the following language: “…if and to the extent that such a subcontractor or agent has received State funds or State-authorized payments from the covered provider to provide program or administrative services during the reporting period and would otherwise meet the definition of a covered provider but for the fact that it has receive State funds or State-authorized payments from the covered provider rather than directly from a governmental agency.” This language makes it unclear whether a subcontractor or agent providing purely administrative services would be subject to the limitations.

Response: The language “or administrative” does not need to be removed. As stated in the quote above, to be subject to the regulatory limitations, a subcontractor or agent would need to meet the definition of a “covered provider.” The definition of “covered provider” requires a contract or other agreement to render program services.

Issue/Concern: The revised regulations create complicated new definitions and reporting requirements. Implementing the revised regulations will add significantly to the providers’ administrative costs.

Response: The participating State agencies will maintain on-line guidance to assist providers in complying with the new regulations. The participating State agencies are developing with DOB a stream-lined reporting system that will be operational prior to the effective date of the regulations to ensure that the burden of reporting the information required by these regulations will be minimal.

Issue/Concern: The required allocation of increased percentage to program services may restrict fundraising expenses as a percentage of administrative costs; not an accurate measure of an agency’s effectiveness.

Response: The intent of this regulation is to maximize expenditures for program services; this could be an incentive to potential donors or repeat donors to increase donations if they know they will be going for treatment.

Issue/Concern: The limits on administrative expenses, set forth in 812.4, should require the Generally Accepted Accounting Principles (GAAP) permitted by the Form 990 as the allocation methodology for differentiating between administrative expenses and program expenses.

Response: The allocation methodology is flexible to allow for agency specific applications.

Issue/Concern: Concern that efficiencies of size may adversely affect corporate growth: smaller voluntary agencies may be hindered in growth because of complexities of administration and conflicts with federal 990.

Response: Executive Order No. 38 is encouraging the effective and efficient delivery of program services to New Yorkers by encouraging the redirection of funds from administrative expenses to service delivery. OASAS believes this is not necessarily the case; rather, dedicated donors will appreciate this and may be willing to increase contributions; the waiver option is always available.

Issue/Concern: Agencies should periodically re-evaluate the impact of the limitation on administrative expenses to ensure that organizations are not cutting back on key administrative functions in such a manner as to jeopardize their ability to deliver quality program services. Response: The participating State agencies together with DOB plan to monitor the impact of the regulations and make periodic updates as needed.

Limits on Executive Compensation

Issue/Concern: Providers may need to pay more than $199,000 per annum to find the quality leaders needed to facilitate the growth of their organizations.

Response: The regulations take this concern into consideration in § § 812.6 and 812.6 by permitting consideration of such factors such as the compensation provided to comparable executives; the qualifications and experience possessed by or required of the covered executive; the provider’s efforts to secure other comparable executives; and/or the nature, size and complexity of the covered provider’s operations and program services.

Issue/Concern: The benefits “consistent with those paid to other employees” creates a conflict with Form 990 and will impose additional reporting and administrative burden on agencies needing to determine the 75% threshold.

Response: Limiting the extent of compensation paid by covered providers that rely to a significant degree upon public funds for their program and administrative services funding is the purpose of EO #38. These regulations provide a benchmark to ensure that State funds or State-authorized payments paid by this agency to providers are not used to support excessive compensation or unnecessary administrative costs. Providers and agencies may need to adjust budget items for federal and state reporting purposes, but once past the initial stages, this should not impose a substantial burden.

Issue/Concern: The 75th percentile will drive salaries down as the outliers reduce salaries in order to comply with the regulations. Eventually this will depress the maximum salary permitted under the regulations and lead to a loss of talent in NY.

Response: The participating State agencies periodically will assess the impact of the revised regulations on executive salaries and will propose any necessary adjustments to the regulations accordingly.

Issue/Concern: The revised regulations relating to executive compensation at § § 812.5 and 812.6 should be revised to allow for the delegation of the approval of executive compensation by a committee of the Board of Directors, such as a compensation committee.

Response: This has been addressed in the amended regulation.

Issue/Concern: The regulation at 812.5 should clarify by what mechanism compensation surveys will be “identified, provided or recognized.” Also the participating State agencies need to approve their compensation surveys as soon as possible in order to allow providers sufficient time to review the surveys.

Response: The implementation process will address these issues. It is anticipated that a website will provide organizations guidance regarding acceptable compensation surveys and additional information regarding how compensation surveys will be identified, provided or recognized.

Issue/Concern: Instead of compensation surveys, a better approach would be to permit covered providers to develop and maintain a record of their own comparable salary information or, at a minimum, to explicitly allow the use of surveys based on information about compensation that has been reported for comparable positions at comparable organizations on the IRS Form 990.

Response: The revised regulations allow for new surveys to be developed. Consistent with the regulations at § 812.5, the new surveys would need to be identified, provided, or recognized by OASAS and the Director of DOB.

Issue/Concern: The definitions of “executive compensation” under Form 990 and the regulations vary. Because the regulations use a definition of executive compensation that includes only a portion of the benefits generally reported on Form 990, the comparability data necessary to assess compensation under the regulations may not be available.

Response: The participating State agencies currently are developing with DOB a list of acceptable compensation surveys.

Issue/Concern: The “grandfathering” provision for executive contracts prior to the effective date of the regulation is good but too short; concerns that it may still interfere with existing contractual obligations.

Response: This has period has been extended to exempt contracts entered into prior to July 1, 2012 unless the term of the contract extends beyond April 1, 2015. (812.5(h)).

Waivers

Issue/Concern: The effective date of the revised regulations creates problems because of the effective date. Providers should not be required to file waivers prior to April 1, 2013.

Response: The revised regulations will not require waivers to be filed prior to the effective date of July 1, 2013. The first reporting period for which a waiver, if necessary, is required to be filed is the first full reporting period commencing 90 calendar days after July 1, 2013.

Issue/Concern: The revised regulations at § 812.6 provide that a decision on a timely and complete waiver application shall be provided no later than 60 calendar days after submission of the application. This section should further state that such waiver applications shall be deemed to be granted in the event that a decision is not rendered within the 60 day deadline.

Response: The regulations will not be revised to make this requested change. The implementation process will address waiver issues further.

Issue/Concern: It is unrealistic to ask large organizations that have historically compensated their executives at levels which would necessitate a waiver to spend time and resources in an effort to hire qualified executives at lower rates and to document those efforts, in order to qualify for a waiver.

Response: The goal of Executive Order No. 38 is to ensure that taxpayer dollars are used to provide critical services to New Yorkers in need.

Penalties

Issue/Concern: After the proposed denial of a waiver, the revised regulation at § 812.6 provides, “Submission of a request for reconsideration within thirty (30) calendar days shall stay any action to deny an applicant’s request for a waiver, pending a decision regarding such request for reconsideration, and shall stay any action to enter into a contract or other agreement.” The meaning of this latter statement concerning a “stay” is unclear.

Response: OASAS submits that the plain meaning of the word “stay” in the context of this regulation is sufficiently clear.