1. Executive Order #38 Issues & Guidance Fred M. LaMarca CPA, CFP® Zoltan Kemeny, CPA

2. 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.

3. 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

4. Reporting Date: The reporting date is to coincide with the providers 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.

5. Who is subject to EO 38? Covered providers are subject to regulatory limitations on administrative expenses and executive compensation for a covered reporting period.

6. Applicability 1. 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

7. Covered Provider Determination Worksheet (CPDW)

9. From CPDW: Determines the entitys reporting period. The $500,000 test - current year and prior year. The 30% test - current reporting year and prior year. Information to determine the entitys status as a Covered Provider for the CRP.

10. 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.

11. Covered Operating Expenses Distinguishing between Program Service Expenses and Administrative Expenses

12. 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)

13. Administrative Expenses Salaries for administrative functions Legal expenses Overhead (ie. Computer networks, audit services, publicity not attributable to the provision of program services)

14. 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

15. 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.

16. Calculating Executive Compensation 1. Identify the name & title of the potential executive 2. Indentify CRP (Covered Reporting Period) 3. Determine the executives gross compensation 4. 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.

17. 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

18. Executive Compensation Compensation is in excess of $199,000 from all sources – not only SF/SAP And 1. Compensation is below 75 th percentile of comparable executives determined by a valid compensation survey. 2. Compensation is approved by the Board of Directors. Other Exceptions:

19. 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.

20. 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 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

21. 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?

22. 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.