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 Back in February, following news that YAI had agreed to pay $18 million to settle charges by Federal and State prosecutors that it had filed “false claims” for Medicaid reimbursement, NYNP noted the remarkably high levels of compensation paid to YAI’s CEO Philip H. Levy and former CEO Joel M. Levy. Recent IRS 990 filings had put their total compensation levels for FY2009 at approximately $2 million each – a figure that YAI argued was inflated due to lump sum payouts of retirement benefits which had been accumulated over 40 years. Excluding those payments would bring Philip Levy down to $903,070 and Joel Levy to $1,024,126.
Sidebars:
“The New Jersey Model: How Low Can You Go?”
“IRS Excess Benefit and Intermediate Sanctions”
No matter how you slice and dice the actual numbers, NYNP had received a flood of comments submitted for posting on our website that raised the YAI compensation issue in increasingly critical and highly personal terms. Clearly this was something that people felt strongly about – and not just at YAI. Our editorial described the issue of excessive executive compensation as the “Elephant in the Room”.
Last month, Governor Andrew Cuomo announced that he was taking the “elephant” out for a very public stroll by creating a new task force to investigate executive and administration compensation levels at not-for-profits “that receive taxpayer support from the state”.
The Governor’s announcement came just one day after The New York Times published its own front-page article focusing on the compensation paid by YAI to Joel and Philip Levy. In addition to noting the high overall levels of reimbursement, the article included examples of what many saw as extreme abuse, including $50,400 to cover the down payment on a co-op apartment in Greenwich Village for Philip Levy’s daughter when she was attending graduate school.
“Not-for-profits that provide services to the poor and the needy have a special obligation to the taxpayers that support them,” said Governor Cuomo. “Executives at these not-for-profits should be using the taxpayer dollars they receive to help New Yorkers, not to line their own pockets.”
The Governor noted that “there are currently no state rules governing executive and administrative compensation for not-for-profits that receive state support.”
The task force, said the Governor, “will do a top-to-bottom review, not only to audit current compensation levels, but also to make recommendations for future rules to ensure taxpayer dollars are used to serve and support the people of this state, not pay for excessive salaries and compensation.”
The task force will be led by the New York State Inspector General Ellen Biben, Secretary of State Cesar A. Perales, Medicaid Inspector General Jim Cox, and Superintendent of the Department of Financial Services Benjamin Lawsky. Commissioners from the Department of Health, the Office of Mental Health (OMH), the Office for People with Developmental Disabilities (OPWDD), and the Office of Alcoholism and Substance Abuse Services (OASAS) will also serve on the task force. The governor subsequently added Senator Carl L. Marcellino and Assemblyman Steve Englebright, chairmen of the Senate and Assembly Government Operations Committees.
Nonprofit leaders responded to the Governor’s announcement with mixed emotions. They recognized that instances of abuse, while rare, do occur and that these needed to be addressed. At the same time, they expressed concern that the nonprofit sector – and human service providers in particular -- might be unfairly singled out for an investigation in which the sins of a very few could taint the entire charitable sector. And, they worried that far-reaching regulatory actions, in response to only a handful of abusive situations, could negatively impact the sector as a whole.
“NYCON supports IRS and state enforcement efforts to root out those relatively few and often large institutional nonprofits, especially in health care and higher education, where charitable resources are used for the private and personal gain of executives,” said Doug Sauer, CEO of the New York Council of Nonprofits (NYCON). “Such abuses are a stain on the sector and the Governor is right, public trust is integral to the mission and work of our state’s charities.”
“The disgraceful actions of the leadership of YAI – both its executives and board – unfortunately have maligned the reputation of all the hardworking, generally underpaid executives and staff who provide vitally needed social services,” said Michael Stoller, Executive Director of the Human Services Council of New York (HSC). “Exorbitant pay for some translates into disrespect and mistrust of all. Therefore, to restore this trust, the Human Services Council supports the Governor’s efforts to ensure appropriate executive compensation for nonprofit service providers.”
“We support the Governor’s effort to establish clear policies and procedures regarding how much State government will support executive compensation,” said Peter Pieri, Executive Director of the InterAgency Council of Developmental Disabilities Agencies. “This will help guide local boards of directors in their decisions on these matters.”
“We have values around public service,” said Philip Saperia, Executive Director of the Coalition of Behavioral Health Agencies. “In instances of fraud or betrayal of the public trust, those individuals and those agencies should be investigated.”
At the same time, however, nonprofit leaders expressed concern that a few instances of abuse were leading to a wholesale indictment of the sector.
“It needs to be emphasized that that these cases are very much the exception,” said NYCON’s Doug Sauer. “The vast majority of community-based nonprofit employees are doing hard and challenging work at compensation levels that are far below public employees and often the for-profit sector.”
“This is taking one bad apple and using it to measure the whole bushel,” said Saperia.
Nonprofit executives also took issue with the Governor’s description of the sector as “taxpayer supported nonprofits” – and questioned why similar concerns were not being raised regarding compensation levels at for-profit companies with state contracts.
“The phrase is misleading,” said Sauer. “The State government contracts to buy services from nonprofits just as it contracts with the for-profit sector; except that the nonprofit is often expected to unfairly perform at below the actual cost of doing business. Perhaps it is also time to order an extensive review of the executive compensation of ‘taxpayer supported for-profit businesses’.”
“The Governor’s call to verify the appropriate use of public funds is correct,” said HSC’s Michael Stoller. “The many for-profit companies that derive most of their income from public sources, such as home care agencies and nursing homes, as well as our cultural institutions, public hospitals and universities, for-profit companies that receive tax breaks or government bond money, and government agencies themselves, all need to be examined in this regard to restore public confidence.”
Exactly how the task force will approach its mandate remains somewhat unclear. Pending further announcements, nonprofit leaders were left to parse the words in the Governor’s announcement – like tea leaves – as potential indications of future policy.
How wide a net did the governor intend to cast, even within the overall nonprofit sector?
“I am particularly heartened that the Governor has decided to include DOH and OMH along with OPWDD in this initiative to ensure there are consistent guidelines across state agencies,” said IAC’s Peter Pieri.
Does this mean that the task force will examine compensation at hospitals and other health care providers – where CEO salaries of $1 million or more are not uncommon? What about major arts organizations and institutions of higher learning where that is also true?
Nonprofit leaders noted that there already are a range of legal, regulatory and funding restrictions which effectively limit executive compensation.
“The Internal Revenue Service already provides compensation guidelines as set forth in the federal tax code and we believe those guidelines should be upheld,” said NYCON’s Doug Sauer. (See: “IRS Excess Benefit and Intermediate Sanctions”)
The State also has legal authority to address excessive compensation via the Not-for-Profit Corporations Law (NPCL), says Sean Delaney of Lawyers Alliance for New York. Section 202(a)(12) gives nonprofits the power to appoint officers and employees and set their compensation. “However,” he notes, “the law also states that compensation should be ‘reasonable’ and ‘commensurate with services performed’.”
Both the IRS “Excess Benefit Transactions” restrictions and the more general language in the NYS NPCL theoretically address the need to safeguard charitable assets in general, i.e. avoiding and/or punishing misuse and diversion for personal gain of tax exempt donations intended to serve a charitable purpose.
The Governor’s Task Force, on the other hand, appears to be more tightly focused on preventing the use of state funds – in the form of contractual reimbursements – from supporting “excessive salaries and compensation”. What form would the Task Force’s “recommendations for future rules” take?
Here again, nonprofit leaders argue that there are already regulatory and contractual provisions in place. “This is dealt with through limitations on administrative overhead contributions,” said another executive director. “The state already underfunds the actual cost of providing services. It certainly doesn’t provide enough reimbursement to support excessive executive salaries.”
Those with a particularly pessimistic frame of mind might worry that Governor Cuomo will follow the lead of New Jersey’s Governor Chris Christie in adopting an extremely restrictive and onerous series of contractual caps on reimbursement for executive salaries and other administrative expenses. (See: “The New Jersey Model: How Low Can You Go?”.)
Fueling the anxiety was the Governor’s own announcement, which reported that 1,926 employees at nonprofits with OMH, OPWDD and OASAS contracts had annual salaries greater than or equal to $100,000. The total value of their salaries was $324.6 million, with an average salary of $168,555.
“Are we saying that $100,000 is an excessive salary for senior executives at agencies with total annual budgets of $50, $60, $70 or $100 million,” said one executive director.
The composition of the Task Force, consisting exclusively of administration officials and two key legislators, also gives nonprofit leaders some reasons for concern. “This is an entirely in-house group which is designed to get something done,” says William Josephson, who headed the Attorney General’s Charities Bureau from 1999 to 2004. “They will be responsive to the Governor.”
Nonprofit leaders are hoping that the group will take a broader look at the issue and entertain both the recommendations and concerns of the nonprofit sector itself.
“We ask that the Governor include in his compensation task force responsible representative of the nonprofit social service sector, as well as recognized experts in the field of executive compensation,” said HSC’s Michael Stoller.
“NYCON asks the Governor to take this opportunity to go beyond the immediate executive compensation issue and take a comprehensive look at how the state’s overall regulatory and business relationship with the nonprofit sector can be improved in the interest of all concerned,” said Sauer.
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