Building with big columns in the front

Executive Order 38 Update (2014)

09 Jul 2014

There has been a renewed discussion over the last couple of months regarding Executive Order 38, ever since April 9th when State Supreme Court Justice Feinman ruled that New York State could not regulate the profitability of for profit entities. As a result, many people believed that EO 38 no longer was in effect. The validity of that statement is dependent upon who you ask. The case, and Justice Feinman’s ruling, were fairly specific, focusing on the organization’s members that brought the lawsuit (Agencies for Children’s Therapy Services), for-profit organizations, the Department of Health, and Nassau County. Even so, in Justice Feinman’s ruling he basically said that the regulations were declared to be invalid because the Governor does not possess the constitutional authority to promulgate such regulations based on a lot of case law over many years. The State has not filed an appeal and it is unclear if they will.

With the limited scope of the case, many attorneys have been advising their clients that are subject to EO 38 to proceed as if EO 38 is still in effect. Organizations will need to determine what approach they are going to take.

As a refresher, in order for an organization to be a covered provider under EO 38, that organization must receive in the current reporting period and in the previous year:

  • $500,000 or more of State funds or State authorized payments from one of thirteen NY State agencies, and
  • Such payments constitute 30% or more of the organizations total in state funding

While certain exceptions exist, for the most part, if these criteria are met, the organization (whether nonprofit or for-profit) is subject to EO 38.

Executive 38 places 2 main limits on organizations use of State funds:

  • State funds cannot be used to pay for executive compensation to administrative staff in excess of $199,000 unless a waiver is obtained. Other outside revenue can be used to supplement executive compensation based upon certain salary studies,
  • General administrative costs, exclusive of rent, cannot exceed certain thresholds (25% in year 1, 20% in year 2, and 15% in year 3) unless a waiver is obtained.

EO 38 went into effect for years beginning after June 30, 2013, and is based upon an organizations natural year, unless they file a cost report, in which case it is based upon their cost report year.

Organizations subject to EO 38 are required to complete an annual certification.

The above is a quick summary of a set of complex regulations. We urge providers to review EO 38 by clicking HERE, to see if they are subject and to understand their responsibilities.