Not-for-Profit Legislation Proposed in New York State
In New York State, the not-for-profit sector generates hundreds of billions of dollars in revenues and accounts for nearly one in every seven jobs. Over the past 40 years, New York State’s not-for-profit sector laws have remained resistant to major modernization, resulting in a continued struggle to comply with the outdated set of laws that we currently have in place.
Over the past two years, Governor Andrew Cuomo and Attorney General Eric T. Schneiderman have each proposed initiatives and legislation with goals of ensuring 1) the governance and oversight of the sector remain robust and 2) compliance with the laws of the state becomes less confusing. The past proposed legislation did not pass; however, in May 2013, two new bills were introduced into the state assembly and have a possibility of actually becoming law.
These two proposed bills, the “Nonprofit Revitalization Act” and the “Executive Compensation Reform Act,” are the result of significant outreach to both the sector and the community at large. “We must work together with the nonprofit community to cut red tape while strengthening governance and oversight, and that’s exactly what this legislation does. Our goal is to revitalize New York's charitable organizations and, at the same time, put a stop to the financial abuses that have come to light,” stated Schneiderman. If passed, most of the components of the bills would take effect January 1, 2014.
The Nonprofit Revitalization Act
- Financial Statement Audit and Review Thresholds:
o The threshold for audit requirement will increase from $250k to $500k.
o The threshold for reviews will increase from $100k to $250k.
- Increased Oversight of Audit Process:
o The board (or a designated committee) will be responsible for retaining the independent auditor and reviewing audit results including the management letter (if issued).
o For organizations with over $1M in revenues, the board (or designated committee) must engage in certain additional communications with the auditor both prior and subsequent to the audit.
o Only independent directors may serve on the audit committee.
- Conflict of Interest Policy:
o A conflict of interest policy must be adopted and the procedures related to disclosures of conflicts must be documented in the minutes of the board.
o All transactions with insiders must be fully disclosed and boards must determine and document that the transactions be fair, reasonable and in the organization’s best interests.
o An individual on the board who engages in transactions considered to be conflicts will not be independent and may not serve on the audit committee.
o Organizations with twenty or more employees and over $1M of revenue in the prior year must adopt a whistleblower policy.
o No employee may also serve as chair of the board.
- Related Parties:
o The bill proposes a number of rules regarding related parties and related party transactions, creating a clearer and stricter set of criteria to follow.
- Modernization of Procedures and Removal of Burdens:
o Procedures for nonprofit mergers, property and sales, corporate dissolutions are streamlined.
o Use of email and video technology for meetings would be permitted.
o Requirements and process for incorporation in NYS would be more timely and efficient.
The Executive Compensation Act
o No organization would be allowed to pay total compensation to any employee in excess of what is fair, reasonable, and commensurate with services provided. All boards will be required to review and approve the principal executive officer’s compensation.
- Organizations with revenues exceeding 2M will require the board (or its designated committee) to:
- Review the total compensation paid to the five highest compensated employees who are officers or key employees and whose compensation exceeds $150K.
- Make a determination of the reasonableness of compensation, based on the total compensation provided to the employee, the quality of employee’s performance, the financial condition of the organization, and a comparison of the employee’s compensation to a similar employee at a similar organization.
- Keep a contemporaneous written record detailing this process.
- Ensure that only independent directors may participate in this process.
- Approve compensation by majority vote.
- If a compensation consultant is retained, the consultant must be hired by and report directly to the board.