Executive Order #38Issues & Guidance

Fred M. LaMarca CPA, CFP®Fred M. LaMarca CPA, CFP®

Zoltan Kemeny, CPAZoltan Kemeny, CPA

“The EO 38 regulations are designed to place limits on Administrative Expenses and Executive Compensation for certain individuals/entities that receive State Funds or State-Authorized Payments (SF/SAP).”

EO 38 also adds a reporting requirement with which all covered agencies must comply. The EO38 Disclosure Form.

Background and Time Line

January 2012: Governor issues Executive Order #38

March 2012: Budget is adopted without changes to Executive Order #38

May 2012-2013: Several proposed regulations issued

May 2013: Final adoption June 2013 : Preliminary guidance documents

issued July 1, 2013: Effective date of Executive Order #38

Reporting Date: The reporting date is to coincide with the

provider’s annual Cost Report which is 180 days after the close of the period.

If the provider has multiple agencies to which it reports, it can choose a calendar year or fiscal year as to annual reporting period.

Who is subject to EO 38?

Covered providers are subject to regulatory limitations on administrative expenses and executive compensation for a covered reporting period.

Applicability1. Governmental Exemptions 2. Reporting Period

• Covered Reporting Period

3. Program Services 4. Other Exemptions 5. Determine State Funds/ State Authorized

Payments (SF/SAP) Received • Calculate amount received during applicable

period. • Calculate In-State Revenue from SF/SAP

Determining Covered Provider Status

Covered Provider Determination

Worksheet (CPDW)

From CPDW: Determines the entity’s reporting period. The $500,000 test - current year and prior

year. The 30% test - current reporting year and

prior year. Information to determine the entity’s status

as a Covered Provider for the CRP.

Compliance with Administrative

Expenses Limitations: Administrative expenses

cannot exceed 25% in a CRP beginning July 1, 2013 to June 30, 2014

Reduced to 20% for a CRP beginning July 1, 2014 to June 30, 2015.

Final Reduction to 10% Administrative Cost for a CPR on July 1, 2015.

Covered Operating Expenses

Distinguishing between Program Service Expenses and Administrative Expenses

Program Service Expenses

Salaries and benefits of staff providing program services.

Expenses incurred in connection with and attributable to the provision of particular services.

(ie. Direct care supplies, public outreach, legal expenses necessary to accomplish program service objectives)

Administrative Expenses

Salaries for administrative functions Legal expenses Overhead

(ie. Computer networks, audit services, publicity not attributable to the provision of program services)

Other Expense Category Expenses not included in the Covered Operating Expenses and

not part of the 25-75% split :

Capital Expenses Property rental, mortgage,

maintenance (unless specifically part of program services).

Taxes or payments in lieu of taxes

Equipment rental, depreciation, and interest.

Salaries for policy development and research

Compliance with Executive

Compensation

Which individuals are considered covered

executives?

Directors, trustees, officers, and key employees with overall compensation over $199,000.

Individuals directly attributed to Program Services are excluded.

Individuals of related organizations must be considered covered executives.

Calculating Executive

Compensation1. Identify the name & title of the potential executive 2. Indentify CRP (Covered Reporting Period) 3. Determine the executive’s gross compensation4. Determine gross compensation paid to executive for

program services that is excluded from Executive Compensation.

5. Determine if the executive compensation is contracted prior to July 1, 2012 which is not subject to limitation until the end of the contract or April 1, 2015.

Executive Gross Compensation

Gross Includes: W-2 or 1099 wages Housing allowance Below market loans

Excludes: Workers

Compensation Health Insurance

Deferred compensation (as

long as these benefits are offered to other

employees)

Threshold for compensation is $199,000 of SF/SAP

Executive Compensation

Compensation is in excess of $199,000 from all sources – not only SF/SAP

And

1. Compensation is below 75th percentile of comparable executives determined by a valid compensation survey.

2. Compensation is approved by the Board of Directors.

Other Exceptions:

RemediesWaivers available for excess administrative

expenses & executive compensation. Can be submitted early but no later than

the filing date of the covered provider. Waiver available only for a specific time.

Not Compliant Corrective action will commence. 1. Covered provider will submit

an explanationIf that fails:

2. Covered provider will submit a corrective action plan

If that fails: 3. Sanctions and/or

Penalties may be imposed

Redirecting of SF/SAP Suspension,

modification, revocation of CP contracts or licenses

Any other action permitted by law

Take Away – Summary

Verify if you are subject to Executive Order #38 . Did you receive state funds or state approved

funds greater than $500,000 in the past 2 years? Did you have administrative expenses greater

than 25% of total SF/SAP expenses? Do you have executives or other key employees

earning greater than $199,000?

Effect Puts nonprofits on notice of limits of

spending on administrative and executive costs.

Alerts nonprofits of decreasing aid for administrative overhead.

Increases paperwork and reporting requirements.