Cuomo Orders Review of Nonprofit Compensation

Hot on the heels of a New York Times story that recounted how two brothers, Phillip and Joel Levy of Brooklyn, earned close to $1 million a year each as the two top executives running a Medicaid-financed nonprofit organization serving the developmentally disabled; how they each had luxury cars paid for with public money; how, when their children went to college, they passed on the tuition bills to their nonprofit group; and how one brother went as far as charging the organization $50,400 for his daughter’s living expenses when she attended graduate school at New York University…not for a dorm room, but rather to help her buy a co-op apartment in Greenwich Village—New York Governor Andrew Cuomo yesterday announced that he has created a new task force to investigate the executive and administrator compensation levels at not-for-profits that receive taxpayer support from the state.

This news, of course, comes against the backdrop of numerous other recent scandals involving state-supported nonprofits, including one particularly egregious example wherein a chain of publicly funded nonprofits founded and effectively run by Brooklyn Assemblyman Vito Lopez paid the Assemblyman’s girlfriend $329,910 over 12 months and his campaign manager $659,591 over the same period…for working a 17½-hour week! 

While it is true that there are currently no state rules governing executive and administrative compensation for nonprofits that receive state support, according to the New York State Department of the Budget’s January 2010 preliminary analysis of nonprofit employees contracting with just the state’s three mental hygiene agencies, there were approximately 1,926 employees with annual salaries greater than or equal to $100,000. The total value of their salaries was $324.6 million, with an average salary of $168,555. Nice work if you can get it!

While $160,000 might not seem to some too excessive, at a time when millions of people are out of work, serious questions have to be asked—especially given the example of the Levy brothers and members of Assemblyman Lopez’s posse—regarding whether these levels of pay represent appropriate compensation for the work done, the talents of the recipients, and the responsibilities of the job, or if they are, instead, political rewards or simply outright fraud.

The issue of nonprofit executive compensation has long been the subject of heated debate, irrespective of the source of that funding. Apologists like Dan Palotta suggest that to get “the best and the brightest,” the sector needs to pay its CEOs the same as for-profits corporations do, and if they become millionaires in the process, so be it. Critics such as Ken Berger, president and CEO of Charity Navigator, have argued in contrast that this is an insane approach, and that the best practice is to set nonprofit executive compensation based upon local market conditions, including such considerations as geography, cause area, organizational budget size, and compensation of comparable nonprofit leaders. Nonprofit executive compensation has become such a hot-button issue that the IRS has redesigned Form 990, in part, to force greater transparency around nonprofit compensation. The agency itself has said that it is going to be looking hard at compensation and benefit levels for nonprofit executives, warning that nonprofits that want to avoid unwanted scrutiny may need to be more familiar with such terms as “disqualified persons,” “excess benefit transactions,” and the “rebuttable presumption of reasonableness.” 

Illustrating that this is a sector issue, and not one limited to either just the United States or to the sewer-like political system of New York, last year the Canadian government considered a bill that would have allowed the government to revoke the nonprofit tax-exempt status of any charity paying exorbitant amounts to a single executive or employee. This move was prompted by the revelation that the former president of a Canadian foundation received $2.7 million dollars as a golden parachute upon being dismissed by the organization for poor performance. It is bad enough when for-profit corporations agree to such outrageous compensation packages, but when nonprofits do it, it is unconscionable. Indeed, as the examples of the Levy brothers and the Lopez nonprofit empire demonstrate, it is not compensation alone that needs to be dragged out into the light of public scrutiny, but rather the entire range of unfettered discretion in spending it seems that some nonprofit executives—and their boards—exercise.

For its part, the New York Council of Nonprofits has initially backed Governor Cuomo’s move. The council’s CEO, Doug Sauer, said that the larger nonprofit world must realize that such abuses, where charitable resources are brazenly used for the private and personal gain of executives, are “a stain on the sector.”

Yet while Sauer notes that “public trust is integral to the mission and work of our state’s charities” and Canadian M. P. Guarnieri, the author of the bill introduced in Ottawa last year, stated that its passage could “replace doubt and cynicism about the management of charities with the confidence that the personal financial sacrifices of donors are managed by people [whose compensation packages do not] make a mockery of the concept of charity”—it is clear from the stories that continue to crop up that the sector still has a long way to go when it comes to setting appropriate levels for not only compensation (and executive benefit packages), but also for tuitions, condos, designer suits, and exotic rugs that some nonprofits pay for out of donations and taxpayer dollars. Those bad apples, however many or few they may be, are hurting all of us.

Read more stories by Robert Penna.