Executive Order #38
Issues & Guidance
Fred M. LaMarca CPA, CFP®
Zoltan 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).”
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EO 38 also adds a reporting requirement
with which all covered agencies must
comply. The EO38 Disclosure Form.
Background and Time Line
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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.
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Who is subject to EO 38?
Covered providers are subject to regulatory
limitations on administrative expenses and
executive compensation for a covered
reporting period.
Applicability
Determining Covered Provider Status
1.
2.
Governmental Exemptions
Reporting Period
•
3.
4.
5.
Covered Reporting Period
Program Services
Other Exemptions
Determine State Funds/ State Authorized
Payments (SF/SAP) Received
•
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Calculate amount received during applicable
period.
Calculate In-State Revenue from SF/SAP
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.
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Compliance with Administrative
Expenses Limitations:
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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.
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(ie. Direct care supplies, public outreach, legal expenses
necessary to accomplish program service objectives)
Administrative Expenses
Salaries for administrative functions
 Legal expenses
 Overhead
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(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 :
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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
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Which individuals are
considered covered
executives?
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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 Compensation
1.
2.
3.
4.
5.
Identify the name & title of the potential executive
Indentify CRP (Covered Reporting Period)
Determine the executive’s gross compensation
Determine gross compensation paid to executive for
program services that is excluded from Executive
Compensation.
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
Threshold for compensation is $199,000 of SF/SAP
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)
Executive Compensation
Other Exceptions:
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.
Remedies
Waivers 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 explanation
If that fails:
2.
Covered provider will submit
a corrective action plan
3.
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If that fails:
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
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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.
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