Thirteen state agencies released proposed regulations to limit spending for administrative costs and executive compensation at state-funded not-for-profit and for-profit service providers. The comment period expired on July 14, 2012 and final regulations will likely be issued shortly. The regulations are anticipated to take effect January 1, 2013. They are designed to limit excessive compensation and administrative expenses at service providers that receive state funds or state-authorized payments of federal funds.
Who is a covered provider under the new regulations?
The regulations, as proposed, would apply to both not-for-profit and for-profit “covered providers” if:
- the provider has received state funds or state-authorized payments to render program services in an average annual amount greater than $500,000 over a three year reporting period; and
- at least thirty (30%) percent of the provider’s total annual in-state revenues for the most recent reporting period were derived from state funds or state-authorized payments. 1
The regulations exclude certain governmental units, tribal governments and childcare service providers from the definition of "covered provider." The proposed regulations exclude many state procurement contracts, all capital expenses, awards to for-profit corporations or other entities engaged exclusively in commercial or manufacturing activities, payments or vouchers for specific services made to individual members of the public, subsidies to support hiring or retention, and payments for policy development or research.
The regulations are broad and would apply to service providers that receive New York state funds or state-authorized payments regardless of where the providers are incorporated or headquartered.
Limits on Administrative Expenses
The proposed regulations require that at least 75% of a provider's operating expenses paid for with state funds are for program services rather than administrative expenses. This percentage will increase in 2014 and 2015 by 5% each year (reaching 85% in 2015). These restrictions shall also apply to subcontractors and agents of covered providers that are related entities if such a subcontractor or agent has received state funds or state-authorized payments from the covered provider during the reporting period.
“Program services” are those services rendered by a covered provider or its agent directly to and for the benefit of members of the public (and not for the benefit or on behalf of the state or the awarding agency) that are paid for in whole or in part by state funds or state-authorized funds and do not include (i) policy development or research; or (ii) staffing or other assistance to a state agency or local unit of government in such agency’s or government’s provision of services to members of the public. “Administrative expenses” under the proposed regulations are a provider's management and overhead expenses that are not directly attributable to program services.
Limits on Executive Compensation
The proposed regulations restrict providers (and related entities) from using state funds or state-authorized payments to pay directors, trustees, managing partners, officers whose salary and/or benefits, in whole or in part, are administrative expenses, and any employee whose salary and/or benefits, in whole or in part, are administrative expenses, in excess of $199,000 per annum. A provider may pay a covered executive more than $199,000 using state funds and funds from other sources if (i) such compensation is not greater than the 75th percentile for comparable executives of comparable employers based on an approved compensation comparability survey and (ii) such compensation is approved by its board of directors, including at least two independent directors and the directors must have performed a review of the comparability data.
Waivers Under Certain Circumstances
The proposed regulations establish procedures allowing a covered provider to obtain a waiver of these requirements upon the covered provider’s showing of good cause. The following factors will be considered in determining whether to grant a waiver:
- comparability of executive compensation at comparable providers of the same size and within the same program service sector and the same or comparable geographic area
- the extent to which the covered provider would be unable to provide the program services reimbursed with state funds or state-authorized payments at the same levels of quality and availability
- the nature, size, and complexity of the covered provider’s operations and the program services provided
- the provider’s review and approval process for the executive compensation
- the provider’s efforts, if any, to secure executives with the same levels of experience, expertise, and skills for the positions of covered executives at lower levels of compensation
Every covered provider will be required to submit a disclosure report, which will be electronically available for each reporting period beginning with the 2013 reporting period. Providers receiving state funds from multiple agencies will only need to submit one disclosure report.
The relevant agency may impose sanctions on the covered provider in the event of its failure to satisfy the new regulations in the absence of a waiver. Sanctions may include (i) redirection of state funds where permitted so that they are used for program services instead of administrative expenses; (ii) suspension, modification or revocation of the covered provider's license to operate program services; and (iii) suspension or termination of contracts or agreements with the covered provider.
Edwards Wildman’s Business Law Practice Group will provide further updates on this topic when the final rules are released.
1 Where the covered provider is organized as a part of a corporate structure that includes a parent and a subsidiary corporation, the total annual in-state revenues shall be measured as consolidated at the parent level.
If you would like further information, please contact the Edwards Wildman lawyer responsible for your matters or one of the authors linked above.