Another small step toward tighter control over how nonprofits operate in New York was taken yesterday when the state’s Attorney General, Eric Schneiderman, announced a package of initiatives intended, according to his press release, to “revitalize and reform” New York’s nonprofit sector. This is no small matter, given that the report contains the eye-opening facts that the state had 22,000 active contracts with nonprofits totaling, almost $17 billion last October; and that the sector has over 1.2 million paid employees, representing 18% of New York’s private workforce in 2010. In New York, nonprofits are a $200 billion industry, a presence larger than in any other state in the nation.
The set of suggested changes to current law, regulation, and practice came in the form of a report issued by the Leadership Committee for Nonprofit Revitalization Schneiderman formed last year…interestingly enough, with days of the launch of the Nonprofit Task Force created by Governor Andrew Cuomo, Schneiderman’s predecessor in the AG’s office. But where the Governor’s Task Force seems to be, at least for the moment, focusing specifically upon the issue of executive compensation paid to nonprofits receiving state funds –in his State of the State speech last month Cuomo announced that he wants to cap such compensation at $199,000 and also require that at least 85 cents of each public dollar a nonprofit collects should go to services and not administration- the committee formed by Schneiderman, including over thirty well respected representatives of the Empire State’s nonprofit sector, went more broadly afield and took into consideration a wide range of issues of concern to the sector itself.
The result, not surprisingly, is largely a sector wish list of suggested actions intended to remove or at least reduce a number of patently onerous burdens in the state’s system of government-by-contract through nonprofit agencies. For example, there are numerous laudable provisions for addressing delays in contract approval and payment, removing redundant reporting and auditing requirements, and for making cash flow loans to nonprofits awaiting delayed state payments. Also included are suggestions for engaging the state’s business community in recruiting nonprofit board members, and for launching a “Directors U,” a statewide initiative that would utilize a consortium of organizations and academic institutions to provide training for new and prospective members of nonprofit boards. The full report can be viewed here.
But buried in the generally feel-good verbiage are also several proposals that not only parallel the efforts of the Governor’s Task Force, but which, potentially, take a much needed step toward addressing a root cause of some continuing scandals plaguing both New York and other states.
In answer to the Gordian Knot issue of executive compensation, the Committee makes the common-sense suggestion that executives simply should not be involved in determining their own compensation, and that state law should be amended to require that independent directors make an annual affirmative determination that compensation paid to the chief executive -as well as the chief financial officer and other key employees- is reasonable, justified, and commensurate with services provided. Under the AG’s recommendation, Boards would also be required to 1) consider total compensation, including all perquisites and benefits; take into account relevant comparability data appropriate to the size and type of nonprofit; employees’ qualifications and performance; payments or other benefits from related entities; and consider budgetary challenges and other issues affecting the corporation’s overall financial position; 2) provide contemporaneous documentation of the justifications for and reasonableness of compensation; and 3) adopt polices and procedures governing outside compensation consultants’ selection and retention, and oversight of their work. Boards would also be required to affirm compensation consultants’ qualifications and independence, which, under the recommendation, should be also defined by statute.
Going further, the Committee included proposals for the adoption of Conflict-of-Interest and Whistleblower policies, for full disclosure to the board of material terms that would constitute an “interest” of a board member in a matter that body may be deciding, for recusal of such interested board members, and in such cases where a member’s interest is established, that the board make an affirmative determination that a transaction with that person is fair and reasonable before it can be approved.
But the sharpest teeth the recommendations contain are provisions for giving the Attorney General the express authority to investigate improper interested party transactions.
It remains an open question whether these changes, should they be adopted by the Legislature and the Executive Branch, will change things measurably. There is nothing in these proposals, for example, that would prevent collusion on the part of board members where another member’s interest is being served. Similarly, it is hard to say that any of these suggestions would have an impact on cases such as the recently revealed fact that one lawmaker had the director of a nonprofit he created and greatly influenced (a woman who also happened to be his girlfriend) paid $782,000 in 2009…or the case of the former NY state senator who stole more than $700,000 from nonprofit groups for which he’d obtained taxpayer money…or the DC councilman who used a nonprofit to divert to himself more than $300,000 meant for youth baseball…or the Georgia state senator who devised a scheme to use her office to arrange for state funds to be disbursed to a pair of non-profit organizations that, in turn, funneled more than $80,000 of the money back to her through businesses she owned and operated…or the several members of Congress whose favored nonprofits are miraculously receiving sizable contributions from interests seeking favorable attitudes from those legislators…or the North Carolina legislator who was on the payroll to two publicly funded nonprofits to the tune of $195,000 –at least one of which also made a 6-figure loan to the legislator’s wife…a board member (the other board member is his brother)…or in a host of other examples involving practices which are “questionable” at the least.
But they are a step in the right direction. Unfortunately, few initiatives such as the ones announced by the Schneiderman committee will do much good as long as human nature remains what it is (which it will), and powerful legislators remain in a position to not only direct public funding to, but to strongly influence the hiring, contracting, and spending decisions of nonprofits. Unless and until a strong, firm firewall is erected between politicians having access to the public purse, and nonprofits which might find themselves in an uncomfortable position (how do you say NO to the person who essentially funded you?) situations like those listed above will continue.
Attorney General Schneiderman’s committee is to be applauded for the work it has done and for the many needed reforms it has suggested (not a few of which could probably find significant resonance in other states). Sadly, one of the most needed reforms is not on the list. Given that, it is probable that stories like those cited above will continue to come to light.
