New York State Executive Order 38: The Soft Cap is Gone…What’s Next?

December 19, 2019

By: XiXi Dong

In the world of nonprofit organizations that receive state funds or state-authorized payments, Executive Order 38 (EO38) had provided an executive compensation cap as well as an administrative expense cap since July 1, 2013. Following New York’s Court of Appeals decision on October 18, 2018, New York’s Office for People with Developmental Disabilities (OPWDD) amended its executive compensation regulations on November 6, 2019 eliminating the so-called “soft cap.”

Here’s a brief background and information on why this is important for nonprofit executives and Boards:

First is the executive compensation “hard cap” that prohibits covered providers from providing executive compensation in an amount greater than $199,000 using state funds; and second is the “soft cap” that prohibits covered providers from providing executive compensation in an amount greater than $199,000 – regardless of funding source.

What has changed is that the “soft cap” provision for EO-38 compensation was found unconstitutional by the New York Court of Appeals and was removed from regulation by the OPWDD. The option to avoid a waiver if the executive’s compensation was under the 75th percentile of comparable executives for the region and service sector is now removed. Under the amended regulations, an organization may pay executive compensation in excess of $199,000 if (i) it uses private funds to pay the amount over $199,000; or (ii) it requests a waiver from the regulatory agency to use state funds to pay any amount over $199,000.

The challenge for nonprofits of having such a limit is in finding the executive talent where compensation is capped at $199,000. In the highly competitive marketplace that is New York, this limit affects virtually all nonprofits that receive state funds. Nonprofits will need to demonstrate that executive compensation is privately-sourced. Entities without privately-sourced funding must continue to comply with the cap as well as satisfy annual reporting and disclosure obligations.

With the potential for increased focus on executive compensation, it is a good time for the OPWDD  and other social service providers to review and evaluate their compliance under 14 NYCRR Part 645, including:

  1. Confirming that the organization is a covered provider and subject to the executive compensation limits.
  2. Reviewing internal allocation methodology of executive compensation between program and administrative functions. For instance, does the executive have additional duties that are program and non-administrative? Remember that the $199,000 limit does not apply to compensation allocated to program services.
  3. Be sure your waiver requests are submitted in a timely manner if the compensation exceeded $199,000.
  4. Reviewing the executive’s compensation funding source to ensure compliance and using EO-38 worksheet which is available at https://www.eo38.ny.gov/xo/determinationForm

EO-38 is a topic that continues to vex nonprofit management and boards, but there are steps nonprofits can take to avoid executive compensation pitfalls. It is anticipated that other New York State agencies may also issue similar guidelines issued by OPWDD. I’d welcome the opportunity to speak with any organization on the issues stemming from the regulation and its amendments and look forward to your comments as well.

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