New York Limits Executive Compensation and Administrative Expenses at State-Funded Service Providers

 by Joseph G. Casion and Joshua E. Gewolb

Excerpt: 

On May 29, 2013, thirteen New York State agencies, including the Department of Health ("DoH"), adopted final regulations limiting executive compensation and administrative expenses at State-funded service providers. The final regulations apply to service providers whose funding exceeds certain thresholds and:

  • Require that at least 75% of state-reimbursed costs be spent on direct care or services, not administration, increasing to 85% by 2015.
  • Cap state reimbursement used for executive salaries at $199,000, subject to an annual adjustment.
  • Limit use of non-state funds for executive salaries.
  • Provide that state contracts can be terminated if the new rules are violated.

The final rules are the culmination of an intense process that began in 2012, when Governor Cuomo issued Executive Order 38 "to curb abuses in executive compensation and administrative costs and ensure that taxpayer dollars are used first and foremost to help New Yorkers in need." The executive order was a response to a number of scandals involving Medicaid abuses in New York. One scandal gained significant media attention at Brooklyn's Young Adult Institute (YAI), a not-for-profit organization serving the developmentally disabled. As revealed by a New York Times feature story, the top executives at YAI received seven-figure compensation packages, which included luxury cars, college tuition payments for their children, and expensive visits to high-end hotels.

The proposed regulations have gone through several iterations, beginning with a first draft issued in May 2012. In the case of the DoH regulations, a second notice of revised rulemaking was issued in March 2013, with a third notice of revised rulemaking issued in April 2013. The final regulations were adopted on May 29, 2013.

The regulations, effective July 1, 2013, have already proven to be extremely divisive. Opponents argue that the regulations will cripple organizations' ability to recruit qualified and experienced leadership and assert that the regulations unnecessarily burden entities whose administrative spending is already strictly limited, while placing additional burdens on similarly understaffed and under-funded state agencies. The State and proponents of the measure insist that the regulations will reduce wasteful spending and eliminate fraud and abuse so taxpayer dollars may provide more efficient program services to those in need: Agencies that are performing services on behalf of the public using the public's money should be accountable to the public and compensation of executives should be limited to amounts consistent with their public service role.

Substantial unanswered questions exist as to how the regulations will affect service providers in light of the fact that the required reporting forms and implementation details have not yet been developed or distributed. This article will provide a general overview of the adopted regulations, discuss other states' attempts to enact similar rules, and discuss the key constitutional concerns raised by opponents of the regulations. [footnotes omitted]

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Joseph G. Casion is a partner in Harter Secrest & Emery LLP, Rochester, N.Y., providing general corporate counsel to both business entities and not-for-profit organizations. His practice includes providing counsel toclients on formation, transactions, joint ventures, mergers, and acquisitions, and advising not-for-profit organizations regarding the attainment of tax-exempt status and ongoing compliance with federal and state tax-exempt requirements.

Joshua E. Gewolb is an associate with Harter Secrest & Emery LLP, Rochester, N.Y. He is experienced in federal income tax matters, along with a wide range of corporate transactions, including asset and stock acquisitions, reorganizations, and spin-offs in the context of both closely held and publicly traded businesses. He also maintains an active practice advising not-for-profit entities on tax and corporate matters.