Nonprofit providers and advocates are speaking out — albeit very cautiously — about Governor Andrew Cuomo’s Executive Budget proposal and a subsequent Executive Order limiting reimbursement for executive compensation and administrative overhead. And, with many nonprofit provider agency executives reluctant themselves to speak out publicly on the sensitive topic, a number of consultants and financial advisors to the sector are taking up the issue.
Last Wednesday, the Governor instructed commissioners at State agencies which provide health and human services through for-profit and nonprofit vendors to write regulations limiting total reimbursement for executive salaries to $199,000 and capping administrative expenses at no more than 25% of State financial assistance in FY2012-13, a level which would drop by 5% each year to a cap of 15% on April 1, 2015.
“The human service sector has several questions and concerns about the administration’s approach to this issue,” says Michael Stoller, Executive Director of the Human Services Council of New York. “The Governor’s Executive Order took us by surprise. We have yet to see findings from the Task Force which he appointed last August and which has gathered substantial data from nonprofit human service providers. We also had expected that we would be able to provide input for the development of policy during a State Senate hearing which is scheduled for February.
“The details of regulations which State agencies develop to implement the Governor’s guidelines will be extremely important,” Stoller continued. “We hope that the nonprofit provider community will be able to play an active role in helping to formulate this critical policy.”
Providers expressed some concern that individual agencies – DOH, OMH, OPWDD, etc. – are each being asked to develop their own regulations. “We worry about whether there will be differences in regulation which will impose added compliance burdens on nonprofits which provide contractual services for multiple state agencies,” said HSC’s Stoller.
Many individual agency executives questioned the rationale behind the cap. “I don’t know where they came up with the $199,000 figure,” said one. “It seems pretty random.”
They also noted that the $199,000 level was a limit on State reimbursement, not on the salary levels of executives. Several executives noted that this would allow larger organizations with diverse funding streams to cover executive salaries above the cap through allocations of donated funds or other revenue sources. However, organizations whose revenues were almost entirely dependent on State funding, regardless of size, would face more significant challenges in maintaining executive salary levels.
For many, the Governor’s focus on executive compensation limits seemed like an unwarranted slap at the nonprofit sector as a whole. “There are always outliers and individual cases of abuse,” said one executive. “But this makes it look like all nonprofit executives are simply lining their pockets. That is simply not the case.”
Advocates expressed equal, if not greater concern regarding proposed restrictions on reimbursement for administrative expenses.
“The administrative overhead limit is unfair to smaller and emerging organizations, often providers of niche and grass roots services, who simply do not have the budget size scale to maximize overhead efficiencies,” said Doug Sauer, CEO of the New York Council of Nonprofits. “Also, if a limit is to be had, then the State Government should immediately look at reducing the unnecessary regulatory and reporting burdens that are often responsible for pushing overhead to be higher. The State should also raise all administrative caps that they currently impose which are less than 15% — often 10% — to the 15% level. These artificial levels force nonprofits to use charitable funds to subsidize government required mandates that raise overhead costs.”
“Historically, we believe that State government contracts have usually underfunded nonprofit agency administrative expenses,” said HSC’s Michael Soller. “We are not certain that the proposed 15% cap on administrative overhead reimbursement is the correct level. However, we do believe that the implementation of any appropriate ‘cap’ on administrative expenses should also ensure that all state contracts provide reimbursement for administrative expenses up to that level as well.”
Several consultants and financial advisors to the nonprofit sector are also beginning to weigh in on the issue.
“In these times when the demand for services in New York is growing at a pace faster than organizations can meet, there needs to be a focus on and change in how government-funded service providers operate,” writes Ken Cerini, CPA, CFP, DABFA, Managing Partner of Cerini & Associates, LLP. “It is imperative that providers become more effective and efficient in their operations. Placing limitations on administrative spending and executive compensation isn’t necessarily the right answer.”
“New York Governor Andrew Cuomo has turned what should have been a simple, targeted criminal justice investigation into a destructive witch hunt of all New York charities,” writes Dan Pallotta, a well known fundraising consultant and advocate for more entrepreneurial approaches to nonprofit work, in his Harvard Business Review blog. “Such populist opportunism at the expense of the good name of the humanitarian sector has become epidemic. Elected officials consistently conflate smart investments in the talent, organizational strength, and long-term planning necessary to address massive social problems with fraud. Why? Because they lack a fundamental understanding of how long-term social problems get solved and because the humanitarian sector has been too terrified to stand up to them.”