PUBLIC HEARING: TO EXAMINE THE RE-CODIFICATION OF NEW YORK STATE'S NOT-FOR-PROFIT CORPORATION LAW IN AN EFFORT TO REDUCE UNNECESSARY BURDENS ON NONPROFITS AND TO ENHANCE NONPROFIT GOVERNANCE AND OVERSIGHT

Consulting Counsel 10 NYS Law Revision Commission 11 12 ---oOo--- 13 14 15 16 17 18 19 20 21 22 23 24 25 1 SENATOR RANZENHOFER: Well, good morning, 2 everybody. 3 My name is Mike Ranzenhofer. 4 This is the Senate Standing Committee on 5 Corporations, Authorities, and Commissions. 6 I would like to welcome everybody here today, 7 May 24th. 8 This is the second in a series of statewide 9 hearings that we are conducting, to discuss 10 revisions and changes to the not-for-profit law. As 11 many of you know, changes have not been made in many 12 decades. 13 And before us, that is the Senate, and also 14 the Senate, is Attorney General's bill, which 15 Assemblyman Brennan and I have introduced in our 16 separate Houses. There's a bill that I've 17 introduced, the suggestion of the Law Revision 18 Commission. 19 And I just want to thank the many people that 20 are here today, number one, who have submitted 21 written testimony in advance, who are here today to 22 provide additional testimony. I really appreciate 23 all of your efforts. 24 I want to thank in particular, the 25 Attorney General's Office and their representatives, 1 the Law Revision Commission and their 2 representatives, the State Bar, the City Bar, and 3 all of the individuals from the various 4 not-for-profit groups that have taken so much time, 5 not only to participate in this hearing today, but 6 all the work that you've done over the last couple 7 of years, particularly with respect to 8 Attorney General Schneiderman's efforts. 9 So this is really, you know, kind of getting 10 towards the end of a work that has really been going 11 on for quite a long period of time. 12 So I would also like to thank the Senate 13 special-events staff who have here today; the 14 New York City Senate staff who is here today, media 15 services; and, again, all those people who are here 16 today, the day before the Memorial Day weekend, so 17 this is a dedicated group of individuals. 18 So, why don't we get started. 19 The first group that's here, representatives 20 from the Attorney General's Office. 21 And, again, you know, you gentlemen were here 22 on Wednesday in Albany, which is when we conducted 23 our first hearing. 24 Again, this is the second of three hearings, 25 and the third will be in Rochester. 1 We may be joined by other members of the 2 Corporations and Authorities Committee. We may be 3 joined by other members of the Senate, and we may 4 not. 5 I know at the Wednesday hearing, we had 6 members from the Senate. We also had 7 Assemblymen Brennan and Montesano from the Assembly. 8 So, we're going to get started; you're all 9 here, I'm ready to go. 10 So with that, why don't we turn it over to 11 the folks from the Attorney General's Office. 12 JASON LILIEN: Thank you, Mr. Chairman. 13 I am Jason Lilien. I'm the bureau chief of 14 the charities bureau in the Attorney General's 15 Office. 16 Joining me today is James Katz of our office, 17 who has worked closely with me in drafting the 18 Nonprofit Revitalization Act. 19 I just want to thank you again for conducting 20 this hearing, for inviting us to speak today. 21 I believe Wednesday's hearing was 22 informative, it was substantive, productive, and I 23 look forward to the dialogue today, and listening to 24 the esteemed group of speakers you have testifying 25 today. 1 You know, at the outset, let me extend again, 2 Attorney General Schneiderman's appreciation you to, 3 Chairman, for introducing the 4 Nonprofit Revitalization Act on behalf of the 5 Attorney General. 6 As I've previously mentioned, because of your 7 leadership, and the work of the Committee, and your 8 staff, we are one step closer to achieving 9 long-needed reform in New York State. 10 And I know the nonprofit sector appreciates 11 it, and thanks you for it. 12 Now, today, what I'm not going to do, I don't 13 think, is re-read the testimony. 14 SENATOR RANZENHOFER: I heard it once myself. 15 JASON LILIEN: You heard it. 16 What I thought made most sense, is to share 17 some observations, and address some comments that 18 have been raised, including at Wednesday's hearing. 19 And I think the first thing is, I think what 20 emerged at the hearing on Wednesday, and what we 21 have certainly been hearing from representatives of 22 the nonprofit sector, is that there is considerable 23 consensus emerging around the core provisions of the 24 Nonprofit Revitalization Act. 25 I mean, yes, you know, we heard on Wednesday, 1 some have some differences, or differences in 2 approach, but I think, in terms of the core 3 provisions, we're pretty close there. 4 And I think the fact that we've been so 5 successful, Chairman, in achieving this consensus, 6 in large -- is due, in large part, to the process 7 we've developed over the past two years. 8 You know, I was very gratified to hear 9 Sue Hager of the United Way, who testified, as you 10 know, on Wednesday, you know, calling our process a 11 model in policymaking transparency. 12 And, you know, we have indeed spent the last 13 two years receiving extensive input from nonprofit 14 leaders across New York State, both through the 15 Leadership Committee for Nonprofit Revitalization, 16 but also through numerous additional discussions. 17 You know, I think a number of the folks we've 18 been speaking to, who have helped to shape our 19 legislation, will be speaking here today. 20 And so what you have before you is a piece of 21 legislation that has been vetted, tested, commented 22 on, and I believe enhanced and refined as a result 23 of this extensive outreach and collaboration on the 24 part of the nonprofit sector. 25 Now, as you know, in drafting the 1 Nonprofit Revitalization Act, we had two principle 2 objectives in mind: 3 One, reduce burdens on nonprofits operating 4 and forming in New York, as well as maintaining the 5 public's trust and confidence in the nonprofit 6 sector. 7 And I think what was evident on Wednesday, is 8 that, in the area of reducing burdens, there is 9 widespread support for the provisions contained in 10 the bill, from expediting merger and sale 11 transactions, to simplifying dissolution procedures, 12 to allowing e-mail and video conferencing for board 13 and committee meetings and membership meetings, to 14 raising the revenue threshold for financial audits, 15 to simplifying the incorporation process for new 16 nonprofits. 17 I believe there is strong support to see 18 these changes implemented. 19 There is one area that I think has received 20 the disproportion -- well, a fair amount of comment, 21 and that is, in the area of preapprovals, and, you 22 know, the need for consents from state agencies 23 prior to incorporation. 24 You know, the question is, is whether or not 25 the Not-For-Profit Corporation Law should be amended 1 to no longer require consents from state agencies -- 2 any consents from state agencies, but replace them, 3 instead, with a notice requirement. 4 Now, our bill, the Nonprofit Revitalization 5 Act, doesn't eliminate the need for all consents 6 prior to incorporation. It focuses, instead, on the 7 change -- the area that would make the most 8 difference to nonprofits forming in New York. 9 And leading up to introduction of this 10 legislation, what lawyers and nonprofit leaders and 11 others have repeatedly told us, is that the 12 State Education Department consent, the Board of 13 Regents' consent, represents the vast majority of 14 cases in which consents require be obtained. 15 And that if you limit the need for the 16 consents, you know, to curriculum-based 17 institutions, or collection-based institutions -- 18 school, libraries, museums, historical societies, 19 and the like -- you will have dramatically improved 20 and simplified the incorporation process in 21 New York. 22 Now, we are not opposed, in concept, to 23 expanding, or eliminating, further consents from 24 other state agencies, but I think it's important 25 that those agencies -- I think the agencies' input 1 will be needed as to whether those consents should 2 be retained. 3 The Department of Health, for example, may 4 want to remain involved when a nonprofit hospital is 5 being formed. Even if the hospital cannot commence 6 operations until it is licensed, the Department of 7 Health may still want to be -- have a voice in 8 whether the organization should form or not. 9 So I would view this as a pilot effort, which 10 will eliminate the biggest source of delays, and 11 make the most immediate difference, while we examine 12 whether, and how, to expand this in the future. 13 Let me just turn to the "Governance" sections 14 of the bill, and, you know, let me say, that I'm 15 also gratified here that there's been so much 16 consensus emerging on the governance reforms that 17 are included in the Nonprofit Revitalization Act. 18 You know, I do think there's growing 19 recognition that a few meaningful but balanced 20 reforms to New York law will help ensure that both 21 donors and taxpayers remain confident that the money 22 that is being -- billions of dollars that are being 23 entrusted to nonprofits are being put to proper and 24 effective use. 25 Now, I just want to emphasize the word that I 1 raised on Wednesday, and you've heard others raise 2 it, and I am -- I have again, I just want to 3 emphasize the word "balanced." 4 You know, as I said in my earlier testimony, 5 there are some who believe our governance reforms 6 did not go far enough, others believe they may have 7 went too far, but I think we've really aimed at 8 trying to strike the right balance in terms of what 9 should be required in statute. 10 Let me just give you an example, and this was 11 raised on Wednesday's hearing: 12 You know, some have advocated, some have 13 called for, a complete ban of related-party 14 transactions. And this was subject to discussion on 15 Wednesday. 16 You know, others reject that position, as you 17 heard, arguing that there are many related-party 18 transactions that are, in fact, beneficial to the 19 nonprofit because the goods and services are 20 provided at reduced costs. 21 I believe the Nonprofit Revitalization Act 22 strikes the right balance. 23 While it doesn't eliminate these 24 transactions -- related-party transactions outright, 25 I do believe it will reduce the improper ones -- 1 help eliminate the improper ones, by engaging 2 boards; by having boards make determinations, 3 require them to make determinations, that these 4 transactions are fair, reasonable, and in the best 5 interests of the corporation; as well as giving new 6 tools to our office, to unwind these transactions 7 when they're not. 8 I think there's also been a fair number of 9 comments, as you have heard, encouraging, where 10 possible, the alignment of the 11 Nonprofit Revitalization Act with existing IRS rules 12 so there aren't competing or inconsistent regulatory 13 regimes. 14 And I think we have strived to do that, where 15 possible, in the Nonprofit Revitalization Act, in 16 the Leadership Committee for Nonprofit 17 Revitalization, whose recommendations form the basis 18 of our bill, stress that, and encouraged us -- 19 certainly encouraged us to do that. 20 You know, I do think some of the comments are 21 valid, that some further changes can be made to 22 reconcile state and federal requirements even more, 23 but I think it's important to emphasis that 24 alignment will not be possible in all cases. It's 25 two different regulatory structures, or two 1 different policy rationales, underlying a lot of the 2 regulations, but we can certainly try to get closer 3 in some key areas. 4 There was also discussion at Wednesday's 5 hearing about which governance provisions apply to 6 which nonprofits. 7 Do they apply to just travel organizations, 8 or more broadly across the sector? 9 And I thought it would be helpful just to 10 clarify at the outset of our discussion today, which 11 provisions apply to which entities. 12 On the proposed audit-oversight requirements, 13 those requirements would only apply to organizations 14 that are registered under Article 7-A of the 15 Executive Law. These are entities that, because 16 they are soliciting the public for contributions or 17 receiving government funds, are required, not just 18 to register, but are also required to obtain an 19 audit -- a financial audit, a CPA audit, if under -- 20 under current law, if the revenues are above 21 $250,000. 22 So those requirements would not, for the most 23 part, apply to organizations that are not 24 charities -- public charities. 25 Now, in terms of the regulations themselves, 1 there are two different levels. 2 For organizations that have $500,000 in 3 revenues, which is, as I believe you are aware, 4 under our legislation, we would be raising the 5 threshold required for an audit, from two-fifty to 6 five hundred thousand dollars. 7 For those that have $500,000, those entities 8 must be two -- must be two things: 9 One is, the board of those organizations 10 would be required to retain the outside auditor, so 11 the relationship -- to make clear, the relationship 12 exists between the outside auditor and the board, 13 because that's where the conversation needs to 14 occur. 15 And for the board to provide effective 16 oversight over audits, boards need to be engaged, 17 and there needs to be clear indication that they 18 are, in fact, the ones who are doing the 19 communication to the outside auditor. 20 Secondly, and this is important, that when 21 the audit is completed, the board actually discuss 22 the findings of the audit with the outside auditor. 23 What we have done, or what we did, is reach 24 out to the accounting sector, to reach out to the 25 auditing community, as well as nonprofits, and ask: 1 What are the one or two baseline requirements that 2 all boards require -- board organizations required 3 to get an audit should do, to make the 4 audit-oversight process effective, and make -- and 5 have value -- give value to the audit and the 6 current audit requirements? 7 And it was nearly universal, those were the 8 two basic steps that audit committees or boards 9 should be taking. 10 Now, for larger organizations -- for larger 11 organizations, those with revenues over 12 a million dollars, they would be responsible to 13 engage in more detailed procedures with the 14 boards -- or, with the outside auditors. 15 And what we were trying to do here, is 16 respond to -- respond to public comments, respond to 17 nonprofit comments -- comments in the nonprofit 18 sector, that smaller organizations may not be as 19 equipped as larger organizations to have discussions 20 with outside auditors, you know, regarding adequacy 21 of the organization's financial function, or the 22 adequacy of the organization's internal controls. 23 And what we were trying to do here, is figure 24 out, again, the right balance between oversight -- 25 oversight for smaller organizations, oversight for 1 larger organizations. And I believe we -- we 2 have -- I believe we've struck that appropriate 3 balance. 4 In the areas of conflict-of-interest policies 5 and whistle-blower policies, those policies would 6 apply, not just to charitable organizations -- not 7 just the public charities, but to all nonprofits. 8 So the requirement that organizations under 9 our statute -- our proposed legislation adopt a 10 conflict-of-interest policy applies to all nonprofit 11 organizations irrespective of size. 12 With respect to whistle-blower policies, they 13 would apply to all nonprofits, but there are certain 14 thresholds. 15 Again, there was significant feedback from 16 the nonprofit community: 17 That we should build in some revenue 18 thresholds; 19 Whistle-blower policies are good in concept, 20 as being more widely accepted and recognized as an 21 effective tool, but we really -- they really should 22 apply, for them to have -- really work and have 23 value, they should be required only of larger 24 organizations. 25 So our -- our -- 1 SENATOR RANZENHOFER: Over 20; right? 2 JASON LILIEN: Over 20, exactly. 3 -- over 20, and organizations that have more 4 than a million dollars in revenue. 5 Now, finally, in the area of related-party 6 transactions, because I think this is where there 7 was a lot of discussion on Wednesday, the 8 requirement that related-party transactions be fair, 9 reasonable, and in the best interests of the 10 corporation applies to all nonprofits. 11 And, similarly, the requirement that there be 12 full disclosure of an insider's interest in a 13 nonprofit transaction, and that a related-party 14 transaction be disclosed, applies to all nonprofits. 15 However, the additional requirements that we 16 have proposed in our legislation, that a board or 17 committee consider alternative transactions, and 18 document why the board approved the transactions, 19 would only apply to charitable corporations. 20 So let me just emphasize again, in 21 concluding, that, you know, these are baseline 22 requirements. 23 You know, as I said on Wednesday, while I 24 believe the Nonprofit Revitalization Act will result 25 in New York having the strongest 1 nonprofit-governance framework in the country, I 2 recognize that much of governance needs to be left 3 to voluntary practice. That, there's a limit as to 4 what can, and should be, mandated by statute. 5 But I believe -- I do believe, having gone 6 through this process, having listened to the input 7 of the nonprofit sector, and from my own experience, 8 that incorporating these baseline requirements into 9 statute will make an important difference in 10 promoting the public confidence that we talked about 11 earlier. 12 You know, finally, let me just say, I think, 13 what we heard on Wednesday, and it is true, there is 14 a real sense that we're very close to achieving 15 long-needed reform. 16 The nonprofit sector has struggled for 17 decades with these unnecessary burdens and 18 obstacles. 19 If you just -- if it was possible to 20 calculate the amount of unnecessary legal fees, the 21 unnecessary amount of expenses -- administrative 22 expenses that have been incurred, over decades, and 23 how much could have been put to charitable purposes, 24 I think that would be shocking. 25 We have an opportunity here, not to -- not 1 just to eliminate those burdens, not just to reduce 2 costs for nonprofits, but really to inspire the 3 confidence and trust of donors and taxpayers. 4 I look forward to working with you, Chairman, 5 in the weeks ahead, with you and your staff. 6 And, I'm happy to answer any questions you 7 might have. 8 SENATOR RANZENHOFER: James, do you have any 9 comments? 10 JAMES KATZ: No, I don't. 11 SENATOR RANZENHOFER: Okay. I just want to 12 make sure, because you're -- I didn't want to 13 deprive you of that opportunity. 14 Jason, thanks again for being here, and again 15 for, not only testifying, but for staying at the -- 16 you know, for the entire hearing on Wednesday, and 17 listening to the comments of others. 18 There's a couple of questions that I want to 19 ask you, but I also think, you know, the ultimate 20 difficulty is this: Is try to achieve, like, what 21 is the proper balance? 22 I think you, you know, hit that right in your 23 opening remarks, in trying to achieve the opening 24 balance. 25 And, obviously, by having public hearings 1 such as this, and giving people an opportunity to 2 comment, you know, gives us better opportunity to 3 try to achieve that balance. 4 There's a couple of questions I wanted to 5 ask, and specifically, the comments regarding the 6 preapprovals. 7 I mean, I got the impression that it ranged, 8 if you took a look at the spectrum: 9 There were some that advocated for zero 10 preapprovals; 11 There were some that advocated for 12 preapproval in the area of SED, as you do; 13 And some that advocated for approvals in the 14 area of State Ed and the Department of Health; 15 And then there are some that said, you know, 16 we should have it for all. 17 With respect to the -- all the other 18 agencies, other than the Department of Health, and, 19 you know, State Ed, Regents, educational type of 20 not-for-profits, other than, you know, the turf 21 issues, so to speak, okay, I mean, how -- you know, 22 how is that -- how does it benefit, making it better 23 for the not-for-profit community, to get those 24 preapprovals? 25 JASON LILIEN: Listen, I think it would be a 1 huge, huge savings in terms of time and cost if the 2 process was expedited. Right? 3 Chairman, there -- you know, before I entered 4 into government service, I was a private-sector 5 lawyer, advising nonprofits, often --- 6 SENATOR RANZENHOFER: You did this work. 7 JASON LILIEN: Huh? 8 SENATOR RANZENHOFER: You did this work -- 9 JASON LILIEN: I did this work, and I will 10 tell you how frustrating it is to go through the 11 process. 12 And one really has to, from a policy 13 perspective, as you're alluding to, question the 14 policy of need for it -- the policy rationale for 15 it. 16 The difficulty is, part of it is practical; 17 getting state agencies buy-in, and making sure, you 18 know, their views are heard, and there isn't 19 something that's not obvious as to why a particular 20 approval is needed. 21 You know, I will say this: 22 You know, when these attempts have been tried 23 in the past, there has been some resistance on the 24 part of agencies. I think that's partly, perhaps, 25 the tactics, or the strategy, that was used in 1 trying to get them eliminated. 2 I do believe that if most of the consents 3 were eliminated, there would be -- there could be 4 sufficient protections built into statute to avoid 5 abuse. 6 One of the provisions that's in our bill, is 7 to make clear, that until an -- for an organization 8 that is required to be licensed, for example, the 9 organization cannot be fundraising, and not be 10 raising money from the public for a purpose that it 11 has not yet been licensed to do. 12 It's challenging. 13 There are -- beyond Department of Health, 14 there are approvals required in order to form a 15 cemetery corporation. You know, the Division of 16 Cemeteries may, in fact, have policy reasons why, 17 notwithstanding the fact the cemetery still needs to 18 receive its license and permitting, the cemetery 19 division would not want an organization starting to 20 form, and starting to conduct its work -- 21 SENATOR RANZENHOFER: That's where we have to 22 strike the balance between what the Division of 23 Cemeteries wants and, you know, what would be -- 24 JASON LILIEN: That's right. 25 SENATOR RANZENHOFER: -- best for the 1 not-for-profits. 2 And it may be same, and it may be different. 3 JASON LILIEN: That's right. I agree with 4 you. 5 I agree. 6 SENATOR RANZENHOFER: What about -- some of 7 the comments were made, I think, with respect to 8 whistle-blower provisions, that there are other 9 whistle-blower provisions that are already in law 10 that govern, and these are additional. 11 And, you know, is this adding on another 12 layer of whistle-blower, as opposed to those 13 provisions that are already in existing law and 14 govern not-for-profits? 15 JASON LILIEN: No, I think it was a fair 16 comment. 17 I don't think we want to add redundant 18 requirements to the statute. 19 And if, in fact, the -- there's two ways of 20 looking at this: 21 One is, if they're already doing it, they 22 shouldn't be -- 23 SENATOR RANZENHOFER: Such as, you know, if 24 you don't already have it in there, then you need 25 this. But if you don't, then, you know, that's 1 going to apply to you. 2 JASON LILIEN: Right. That's right, that's 3 right. 4 So, to the -- you know, I think a change 5 could be made to the statute that makes clear, that 6 if an organization already has a whistle-blower 7 policy in place, as a result of the other statutory 8 requirements, then one is not needed here; or, one 9 would satisfy this requirement. 10 SENATOR RANZENHOFER: And the same thing with 11 the IRS regulations, there were some comments. 12 You've said you've already, you know, worked 13 hard to, where possible, to apply those in, you 14 know, the bill that we've got in front of us that's 15 sponsored by Assemblyman Brennan and myself. 16 And then there was some comment that said, 17 there should be -- there is other opportunities to 18 further that effort, you know, so that it would not 19 be duplicative. 20 Are there -- you know, are there other areas 21 to take a look at, that we could do that within the 22 bill that we have in front of us? 23 JASON LILIEN: Sure, there are. There are 24 some areas. 25 You know, the -- we strived, as I said, to 1 make it to reconcile them, where possible. 2 There are some definitions that could be 3 better aligned, and I think you might hear that from 4 some of the testimony today. 5 I will say this: 6 There's one area that I will caution you and 7 the members of the Committee on, in terms of 8 incorporating that change, and that's in the area of 9 related-party transactions. 10 There have been comments or suggestions that 11 the Internal Revenue Code's provision that allows 12 for a rebuttal presump -- allows for a rebuttable 13 presumption, if an organization has followed certain 14 procedures, I don't think is a good idea for 15 New York. 16 What this presumption effectively does, is -- 17 is allow an organization's -- if an organization or 18 related party wants to engage in a related-party 19 transaction, and if the organization has followed a 20 set of procedures that's built into Internal Revenue 21 Code rules, then the transaction will be deemed 22 presumptively reasonable. 23 The reason why that's not a good idea, is -- 24 there are several reasons why it's not a good idea: 25 One is, the regulatory rationales are 1 different. 2 First of all, the IRS is a taxation 3 authority. The IRS has no jurisdiction and no role 4 in enforcing state corporate law, state governance 5 requirements, or state fiduciary requirements. 6 That's up to states and state corporate laws; 7 Second, the IRS, as a taxation authority, has 8 the authority to impose its own penalties. 9 And one of the reasons why this presumption 10 was built into statute -- I mean, into IRS rules, 11 was to give some protection to nonprofits who may be 12 subject to these taxes, and excess excise taxes and 13 penalties, from the IRS. 14 The Attorney General as the entity 15 principally charged with enforcing nonprofit laws, 16 doesn't have the ability to impose their own 17 penalties or taxes. 18 We need to go into court. 19 And we need to go into court, and argue, that 20 in excess -- I mean, a related-party transaction was 21 improper -- was improper. 22 I don't think that -- 23 SENATOR RANZENHOFER: [Inaudible] that you're 24 talking about? 25 JASON LILIEN: Unwind it, that's right. 1 So our proposed legislation would give the 2 Attorney General's Office the ability to go into 3 court and unwind a transaction that was not fair, or 4 reasonable, in the best interests of the 5 corporation. 6 Now, we have to make that argument in court. 7 And if we had to overcome a presumption of 8 reasonableness merely because an organization 9 followed a process -- followed a process, I think we 10 would not be doing a service to the public or to 11 taxpayers, because we would be, in effect, operating 12 a step or two behind the starting line. 13 While we have built into our proposed 14 legislation certain procedural requirements, those 15 requirements are intended to provide board members 16 with a road map -- a clear road map, as to what 17 their responsibility -- minimal responsibilities 18 are, in order to, both, protect them, as well as the 19 organization, and, better understand how they should 20 handle the transactions. 21 I don't think we want to be in a position 22 where, "just because" -- just because an 23 organization followed those protections, we somehow 24 are -- you know, just because they followed those 25 protections, that somehow we are in a weakened 1 state, in terms of trying to protect New York law. 2 And I will just say this -- 3 SENATOR RANZENHOFER: Just to ask you a more 4 fundamental question: 5 I mean, shouldn't be there a presumption, if 6 they follow the IRS regulations, that they did do 7 something right; as opposed to assuming that they 8 didn't? 9 You know, even though it might put the 10 Attorney General at a disadvantage of proving a 11 case, I mean, shouldn't there be that presumption 12 that things were done properly? 13 JASON LILIEN: So there are two points on 14 that, to respond to that question: 15 First is, under existing case law, directors 16 of nonprofits operating in New York have the benefit 17 of a presumption, under the business-judgment law, 18 that if they have exercised adequate care and 19 they've operated in good faith, they have the 20 benefit of the presumption that they've operated in 21 the best interests of the organization, and they 22 already have a protection built into -- already have 23 some protections built in. 24 Secondly, I will say this: 25 I think it's important that this is not a 1 self-executing action on the part of the 2 Attorney General's Office. 3 We cannot, on our own, as I said a minute 4 ago, go into court, and -- I mean, go on our own, 5 impose any penalties -- impose any penalties. 6 I think in those instances where there are 7 abuse -- there is abuse, it is incumbent upon us to 8 do that. 9 Where an organization has acted reasonably, 10 has acted in compliance, or individuals have acted 11 in compliance with their fiduciary responsibilities, 12 our office would not be in a position to, would not 13 succeed in court, in trying to argue a transaction 14 was entered into improperly. 15 So I think there are practical considerations 16 here beyond legal ones as well. 17 SENATOR RANZENHOFER: Okay. 18 Thank you very much. I appreciate your 19 testimony again. 20 JASON LILIEN: Thank you very much. 21 SENATOR RANZENHOFER: Our next speaker is 22 going to be Peter Kiernan from the New York State 23 Law Revision Commission. 24 And as Peter is approaching the table, I just 25 want to also thank him and his folks that have been 1 very involved in this process over a number of 2 years. 3 And, you know, again, Peter, you testified on 4 Wednesday, which I appreciate, and, you know, stuck 5 around and listened to what the others had to say. 6 So, I appreciate you coming back today for 7 some additional comments. 8 PETER KIERNAN: Well, thank you, 9 Mr. Chairman. 10 Thank you again for inviting me to speak on 11 behalf of the Law Revision Commission with respect 12 to the reform of the Not-For-Profit Corporation Law. 13 On Wednesday, I was given an opportunity to 14 argue why reform of the law is so important. 15 The not-for-profit sector of the 16 New York State economy is enormously significant. 17 The law has not been substantially revised 18 since 1970, and before then, 1896. 19 As has been delved into by Mr. Lilien, the 20 current law is unwieldy. There are unacceptable 21 delays in formation and mergers and dissolution, 22 approvals thereof. 23 These -- these things lead to frustration, 24 unnecessary costs, and also resentment. 25 Also, entities are being formed in other 1 jurisdictions, most notably, Delaware, which means 2 that corporations are operating in New York outside 3 of the regulatory purview of the New York State law. 4 The bill submitted by the Law Revision 5 Commission addresses all of those issues, equally 6 important. 7 Current law provides little, if any guidance, 8 with respect to conflict of interest, related-party 9 transactions, board-member responsibilities, 10 compensation reviews, the requirements of audits. 11 And we think it should. 12 Now, I made the argument in Albany on 13 Wednesday, that it would be a mistake to liken 14 for-profit corporations and not-for-profit 15 corporations, or to liken the Not-For-Profit 16 Corporation Law to the Business Corporation Law. 17 Business corporations have shareholders, they 18 have owners, that watch the bottom line. 19 Not-for-profit corporations are charged with 20 promoting and protecting the public interest, and, 21 increasingly, I think it's important to add, that 22 not-for-profits are delegated the responsibilities 23 of government, particularly in the social-service 24 areas. 25 But there isn't -- there is a way that both 1 corporations are alike, and that is, that 2 human nature doesn't distinguish between a 3 for-profit corporation and a not-for-profit 4 corporation. 5 And there's always the capacity for mischief. 6 And when more money is involved, the opportunity for 7 wrongdoing may be greater. 8 So when the public interest is involved, it's 9 important to be diligent to protect it. 10 The draft bill submitted by the Law Revision 11 Commission provides protections and guidelines, and 12 what we think is a very commonsensible way, and it 13 would also enhance the power of the Attorney General 14 to provide for effective enforcement. 15 I just would like to add that, both the 16 State Bar Association, the City Bar Association, 17 other bar associations, ourselves, and the 18 Attorney General, have been working on this issue 19 for a couple of years. 20 Our objective is to try to forge consensus. 21 And I would like to say to you, that although 22 we have differences with the Attorney General's bill 23 in certain respects, there's very little daylight 24 between what we would urge you to act upon and what 25 the Attorney General urges you to act upon. 1 Two final points: 2 In Albany, in comments induced by 3 Senator Marcellino, the suggestions were made that 4 we should just outlaw -- or, ban all conflicts of 5 interest for not-for-profit corporations. 6 I want you to know that the Law Revision 7 Commission would not oppose that, I think, 8 certainly, for those corporations that are above a 9 certain rather sizeable threshold. 10 My friend Dennis Conner says, "Bet on 11 self-interest. It's always running." 12 But in the not-for-profit sector, there is no 13 room for self-interest; there is no place for it. 14 In small communities, however, certain 15 related-party transactions may be unavoidable, and 16 they're not necessarily inherently bad. 17 So long as there is a process that is -- it's 18 where its nature is that of transparency, and there 19 is disclosure, it seems to me, certain related-party 20 transactions may be permissible. 21 Finally, observations were voiced earlier 22 this week, that membership corporations should be 23 excluded from the law's good-governance provisions, 24 on the argument that their members play the guardian 25 role of shareholders. 1 We disagree. 2 Human nature prevails there also, and there 3 are many glaring examples of wrongdoing in 4 membership corporations and trade associations. 5 I would just note that the New York Racing 6 Association is a trade association. 7 Mr. Chairman, as I mentioned, our objective 8 is to achieve consensus, and reform. 9 And we applaud your efforts to achieve it, 10 and we support it. 11 SENATOR RANZENHOFER: Thank you. 12 One question I wanted to ask: 13 With respect to the related-party 14 transactions, is there a threshold that you think is 15 appropriate? 16 PETER KIERNAN: With related-party 17 transactions, no, we don't think there should be a 18 threshold. 19 I think that -- 20 SENATOR RANZENHOFER: What about the small 21 not-for-profits that you had suggested? 22 And if you recall, on Wednesday, you know, we 23 heard about, small community, a lawyer serves on the 24 board, maybe the painter serves on the board, the -- 25 PETER KIERNAN: Yeah, I -- 1 SENATOR RANZENHOFER: -- the accountant 2 serves on the board. And, you know, if you don't 3 have these people, who, you know, may be doing some 4 work for the corporation at a reduced rate, or 5 pro bono, or whatever the case may be, you may not 6 have a board of directors for that organization. 7 So how do you differ between -- 8 PETER KIERNAN: Well, as you discussed with 9 the prior witness, it's incumbent to try to draw, 10 and achieve, balances here. 11 I mean, as a lawyer, I would see -- maybe 12 only a lawyer can see it, but I would see some 13 distinction between a conflict of interest and a 14 related-party transaction. 15 That's why I was careful to say, we wouldn't 16 oppose forbidding conflicts of interest, 17 particularly over a certain threshold, but, maybe 18 just generally. 19 But there -- 20 SENATOR RANZENHOFER: [Inaudible] threshold. 21 PETER KIERNAN: Well, I think, maybe the one 22 that equates to the requirement that there be audits 23 at $500,000. 24 But again, as I said on Wednesday, setting 25 thresholds is arbitrary. It depends on the data, 1 and where the data shows where the bulk of 2 corporations are. 3 But I think that, as I did say, as in small 4 communities, related-party transactions, it could be 5 that the Boys and Girls Club uniforms are cleaned by 6 a dry cleaner that's a cousin of a member of the 7 board of directors. 8 I mean, it gets to a point where, while that 9 may be a related-party transaction, that it can be 10 acceptable, it should be disclosed, it should be 11 considered. 12 But there are -- we don't want to discourage 13 people from serving on boards. We want to have 14 prominent, responsible people to be on boards. 15 When I -- one time in my career, I was happy 16 to serve as a chair of a foundation. And I learned 17 that the three kinds of people that serves on -- 18 that serve on not-for-profit boards, are those that 19 give money, there are those that raise money, and 20 there are those that do the work. And sometimes a 21 person can be all three. 22 And, you don't want too discourage any of 23 those kinds of people. 24 So, nobody wants to build into the law traps 25 for the unwary, and so forth. 1 So I think, again, the balance has to be 2 drawn. 3 But there are a difference -- I mean, a 4 lawyer serving on a board, or an accountant serving 5 on the board, and doing the accounting work, or 6 doing the legal work, and getting paid for it, even 7 if it may be reduced, is a very questionable 8 conflict. 9 And I think we would be better off not having 10 any of those. 11 SENATOR RANZENHOFER: Again, thank you for 12 your comments, and thank you for all the work that 13 you've done over the last couple of years. 14 And, you know, I really appreciate that. 15 PETER KIERNAN: You're welcome. 16 And good luck. 17 SENATOR RANZENHOFER: Thank you. 18 Our next speaker is Richard Moylan, president 19 of the Green-Wood Cemetery. 20 And, again, as Richard is approaching the 21 table, I just want to thank all of the 22 not-for-profits who have been so active and 23 involved, not only in the these hearings that we're 24 conducting, but over the last couple of years with 25 the Law Revision Commission and with the 1 Attorney General's Office. 2 So, thank you for being here today, Richard. 3 RICHARD J. MOYLAN: Thank you, Senator. 4 Good morning, Chairman Ranzenhofer. 5 Thank you for this opportunity to present 6 testimony today regarding proposed reforms of 7 New York's Not-For-Profit Corporation Law. 8 As you mentioned, my name is Richard Moylan, 9 and I have the privilege of serving as president of 10 Green-Wood Cemetery located in Brooklyn. 11 Founded in 1838, as one of America's first 12 rural cemeteries, Green-Wood soon developed an 13 international reputation for its magnificent beauty. 14 By 1860, Green-Wood rivaled Niagara Falls as 15 the country's greatest tourist attraction, bringing 16 in half a million visitors a year. Crowds flocked 17 to Green-Wood to enjoy family outings, carriage 18 rides, sculpture viewing, and enjoying the 19 landscape. 20 Our popularity helped inspire the creation of 21 public parks, including Central and Prospect. 22 We are 478 acres of hills, valleys, glacial 23 ponds, and paths, with the -- one of the largest 24 collections of outdoor nineteenth and 25 twentieth century sculpture and mausoleums. 1 Our 560,000 residents -- permanent residents 2 include Leonard Bernstein; Charlie Abbott; 3 Jean-Michael Basquiat; Louis Comfort Tiffany; 4 Horace Greeley; Civil War generals; baseball 5 legends; artists; entertainers; inventors; 6 politicians, honest and dishonest, including 7 Boss Tweed; and many others. 8 In 2006, the Department of the Interior 9 designated Green-Wood a national historic landmark, 10 which recognized our national significance in art, 11 architecture, landscaping, and history. 12 In 1999, we established the 13 Green-Wood Historic Fund, the 501(c)(3) corporation, 14 with -- in New York, by the way. 15 Our attorneys did recommend that we 16 incorporate in Delaware, and we just thought that 17 was the real wrong thing to do, so, we did bear the 18 burden of New York Not-For-Profit Corporation Law. 19 The mission of that fund is to maintain our 20 monuments and buildings of historical, cultural, and 21 architectural significance; advance public knowledge 22 and appreciation of that -- of the building of the 23 history; and preserve the natural habitat and 24 parkland of one of New York's great green spaces. 25 With funding from memberships and donations, 1 our historic fund not only preserves the past to 2 enrich our future, but keeps the vibrant presence in 3 our current time by presenting open-to-the-public 4 events, which include themed walking tours, trolley 5 tours, book talks, theater performances, and special 6 seasonal events. 7 But even with our diverse portfolio of 8 events, we're still a very active cemetery. 9 In 2012, we interred about 1200 people, and 10 we had about 2800 cremations. 11 We're thankful that Green-Wood has been, and 12 continues to be, a vital part of New York City. 13 As you can see from this overview of our 14 efforts in history, we're a complex organization 15 with many arms and many efforts. All of this is 16 necessary to meet challenges facing a larger 17 not-for-profit in a significant recession and 18 evolving economy. 19 With all these organizational efforts and 20 programs, I know very well the challenges that face 21 New York's not-for-profits, their aging assets, and 22 the management of trusts and other funds. 23 What I know quite clearly, is how 24 opportunities for greater success for 25 not-for-profits in our state often face significant 1 statutory and regulatory obstacles. Red tape has, 2 at times, nearly scrapped many efforts to continue 3 the vibrancy of our organization. 4 We have faced the not-for-profit governance 5 structure and regulatory network that has not been 6 able to keep up with the times. 7 Our efforts to complete transactions in the 8 fluid and fast-paced market of New York City have, 9 at times, crashed into the painfully slow 10 bureaucracy of the state's not-for-profit oversight. 11 Thick red tape has nearly scuttled plans. 12 A very specific example: 13 An otherwise simple real estate deal for our 14 organization involved -- involved, but should not 15 require, the New York State Supreme Court, the 16 New York State Cemetery Board, and the 17 New York State [sic] City Council. 18 Simple real estate deals should be just that. 19 All of these additional and redundant 20 approvals have led to many more thousands of dollars 21 in legal fees, and a tremendous number of months 22 added to the length of what should have been a 23 simple process. 24 I also strongly support efforts presented in 25 the legislation before the Committee today which 1 would streamline procedures for mergers and 2 acquisitions. 3 I know firsthand how important these 4 transactions are for -- to the survival of many of 5 these not-for-profits. 6 The more time, experts, consultants, and 7 lawyers necessary to complete such transactions, the 8 less money is available for the organization to be 9 successful to meet its goals. 10 Fortunately, I'm blessed with an outstanding 11 board that has proved to be constantly 12 forward-thinking and open to new ideas to meet the 13 needs of Green-Wood and to forcefully continue our 14 mission. 15 Even with this dedicated, highly-acclaimed 16 board members from the field of law and business, we 17 face State-imposed obstacles to progressive 18 not-for-profit governance. 19 As you are well aware, since your Committee 20 handles all cemetery legislation, New York's 21 cemeteries, like Green-Wood, are quite unique 22 not-for-profits. We face high regulatory standards 23 on top of traditional not-for-profit governance, and 24 we are required to continue our mission, not just 25 for this generation, but for perpetuity. 1 It's a tall order when you face a regulatory 2 structure that makes it difficult to acquire 3 property, invest as other organizations do, and 4 which lacks flexibility in allowing expansion of 5 services. 6 We're very thankful for our success. We have 7 a healthy endowment, an active and engaged board, 8 and public engagement in our efforts. 9 However, again, we face the challenges of 10 outdated legislation and regulatory structure. 11 Over the years, I've had the opportunity to 12 work with members of the Corporations Committee, and 13 your Assembly partners, as you look to address 14 positive changes in not-for-profit governance. 15 Organizations and government together have 16 made some important amendments to the 17 Not-For-Profit Corporation Law. 18 Certainly, Article 15 has changed in many 19 positive ways in the last 15 years. For this, we 20 are grateful. 21 But there is much more that needs to be done 22 to help struggling not-for-profits, and, yes, 23 successful ones like Green-Wood. 24 The efforts included in the Senate proposals 25 and those by the New York State Attorney General 1 have many positive elements. Of particular 2 importance, to the provisions cutting red tape and 3 eliminating duplicative processes. 4 This may all be done, as demonstrated, by 5 statutory change that balances protection of the 6 public, and protection of the assets of the 7 not-for-profit. 8 We strongly support efforts that balance all 9 of these requirements. 10 There's no doubt there are many successful 11 not-for-profits across the state; however, I 12 interact with many other diverse organizations that 13 face tremendous challenges in just trying to keep 14 their doors opened and to serve their mission to the 15 best of the their ability. 16 Each time these volunteer organizations face 17 more regulations, more statutory requirements, more 18 board directives, it becomes harder and harder for 19 them to continue their mission. It also then 20 becomes more difficult to find volunteers willing to 21 serve as board members. 22 If you look across the state, there are 23 thousands of volunteer boards of just cemeteries 24 alone. That is thousands and thousands more 25 trustees needed to meet the needs of their 1 communities. 2 We should be looking for ways to make their 3 jobs easier, not harder, while being cognizant of 4 the protections necessary to these organizations and 5 their assets. 6 We all know that it's a very small percentage 7 of people that are doing a very large percentage of 8 the work of successful not-for-profits. 9 We need to aid their efforts. 10 This commitment is, no doubt -- this 11 Committee is, no doubt -- the Committee is, no 12 doubt, aware of the conflicts and statutes that 13 arise in corporate governance and the associated 14 challenges that are created. 15 We're particularly thankful that you have 16 introduced Senate Bill 4324, which cuts red tape 17 relating to the regulation of cemetery trust funds 18 and finances and transactions. 19 This really is a commonsense approach. 20 So too is Senate Bill 5111, which conforms 21 cemetery not-for-profit expenditures with those of 22 other not-for-profits. 23 5111 is an example of the correction that's 24 necessary in not-for-profit reform. 25 Under current scenarios, cemetery 1 corporations have to -- have to hire or retain 2 special counsel that can figure out a very unusual 3 formula to utilize returns on some of their 4 investments. 5 In nearly every other instance, the more 6 simple and easy-to-understand prudent investment 7 standard is utilized for not-for-profit 8 expenditures. 9 There needs to be consistency in statute and 10 regulation, so that not only the diversity of the 11 not-for-profits is protected, but also their ease of 12 operations. 13 The simple premise of Senate 5111 is an 14 example of a prudent and significant approach. A 15 positive change. 16 I also support efforts in these recent bill 17 drafts to modernize board functions by allowing the 18 increased use of electronic communications. It is 19 important that our regulatory structure recognize 20 the advances in technology. 21 These tools allow organizations, such as 22 Green-Wood, to streamline their operations, while, 23 at the same time, utilizing these same instruments 24 to actively engage those we serve. 25 Modern technology can be a valuable tool in 1 easing corporate-governance challenges to those 2 entities that can afford these options. 3 I'd specifically request that this Committee 4 continue to explore necessary changes, and that you 5 also keep in mind the diversity of New York's 6 not-for-profit organizations. 7 As you consider these specific and detailed 8 requirements for auditing and oversight, please 9 remember the one-size-does-not-fit-all approach. 10 That approach just will not work. 11 More work needs to be done in addressing 12 corporate oversight, based on the size of the 13 corporation. 14 But as you look to eliminate red tape, an 15 across-the-board approach might be quite useful. 16 Again, I thank you for the opportunity to 17 present this testimony, and I would be happy to try 18 to answer any questions you might have. 19 SENATOR RANZENHOFER: Okay, well, I do have a 20 question, and I note on the first page of your 21 testimony, you refer to that you were one of the 22 first rural cemeteries. 23 Do you have still have that rural nature? 24 PETER KIERNAN: It's a little more crowded, 25 but -- 1 [Laughter.] 2 SENATOR RANZENHOFER: I found that 3 interesting. 4 One of the things I wanted to ask you: 5 On Wednesday, there was testimony from 6 JoAnne Sullivan, who's the president of the 7 New York State Association of Cemeteries, and she 8 had made a comment about the audit provision for -- 9 applying to not-for-profit cemeteries with trust 10 funds, with assets of over a million, but that have 11 no income. 12 You know, that some have a lot of revenue, 13 and some have a lot of assets. 14 So if you don't have a lot of revenue, it 15 might be difficult to comply with audit 16 requirements, of having that expenditure. 17 And I'm wondering if, you know, as the 18 representative from Green-Wood, if you had any 19 thought on her comments from Wednesday? 20 RICHARD J. MOYLAN: It's a tough nut. 21 I mean, I'm leaving here to go to an 22 audit-committee meeting of Green-Wood. And, our 23 audit fees are huge. 24 But even -- even a -- 25 SENATOR RANZENHOFER: [Inaudible] huge. 1 And without disclosing anything that, you 2 know, you don't want to or shouldn't disclose, I 3 mean, what would -- you know, what would an audit 4 expense be for -- you know, for a year, for your 5 type of cemetery? 6 RICHARD J. MOYLAN: Our board -- our board 7 insists on more testing than would normally be 8 required, so our fees might be a little higher. But 9 I -- in excess of $80,000 a year, for us. 10 SENATOR RANZENHOFER: Okay. 11 RICHARD J. MOYLAN: It's a problem for the 12 small cemeteries, especially in this environment -- 13 in economic environment, where, we're kind of 14 getting whip-sawed. 15 I mean, there's no income coming from 16 investments, but you can't tie it up in -- they're 17 afraid to tie it up in the stock market. 18 It's really -- it's a real problem for them. 19 And then to have -- there needs to be 20 oversight, clearly. Too many bad things have 21 happened over the years. 22 Making it easier for them would be a good 23 thing. I don't know how -- how much you can lower 24 the bar. Honestly. 25 SENATOR RANZENHOFER: With respect to audits, 1 you're talking about; right? 2 RICHARD J. MOYLAN: Yes. 3 SENATOR RANZENHOFER: Okay. 4 Well, I appreciate your testimony, and I 5 appreciate you coming here today. 6 RICHARD J. MOYLAN: Thank you. 7 SENATOR RANZENHOFER: Thank you very much. 8 Our next speaker is going to be 9 Michael Cooney, representative of the business law 10 section of the New York State Bar Association. 11 Welcome, Michael. 12 And as you're sitting down, again, I just 13 want to highlight the very involved membership of 14 the New York State Bar Association all across the 15 state. 16 You know, your cooperation and efforts with 17 the Attorney General and with the Law Revision 18 Commission are to be lauded. 19 I've met with many representatives of the bar 20 association across the state, and, you know, the 21 efforts that you have put in over the years, and 22 again on Wednesday and today, are very much 23 appreciated. 24 So thanks for being here. 25 MICHAEL COONEY: Great, thank you so much, 1 Senator. I greatly appreciate it. 2 Indeed, my name is Mike Cooney. I'm a 3 partner with the firm of Nixon Peabody, but I'm here 4 on behalf of the State Bar. 5 I know that my good colleague Mike de Freitas 6 presented testimony in Albany. 7 And for the benefit of your Committee, and 8 all the rest of speakers here, I shan't repeat it. 9 What I wanted to do, however, was to just 10 highlight a few points, perhaps amplify a few 11 points, and then be ready for questions. 12 First, and foremost, the State Bar has had a 13 subcommittee at this for over a decade now, and so 14 we're overjoyed to see movement on this point. 15 The statute has been in place for quite a 16 long time. 17 Neil Armstrong was walking on the moon when 18 we last amended the Not-For-Profit Corporation Law 19 in any true substantive sense. 20 SENATOR RANZENHOFER: That puts it better in 21 perspective than anybody else has put it. 22 MICHAEL COONEY: Well, you know, Jimi Hendrix 23 was still playing guitar. 24 So, it's great that -- appreciate the work of 25 your Committee, certainly the Attorney General, the 1 Law Revision Commission, all those here, working. 2 I hope you have a strong sense, really 3 cooperatively, to try to make life better for 4 New Yorkers, and for our New York nonprofits, and to 5 strike a balance to do the right thing. 6 The bar association, as you know, is 7 generally supportive of these proposed changes; 8 heartened to see that the legislation that we 9 advanced in 2009 has grown and morphed and become a 10 point of discussion. 11 I have a few points of reference, though, 12 that I just wanted to emphasize, in part, as a 13 result of the testimonies in Albany. 14 We've had continued discussion about a single 15 statute regulating both mutual-benefit corporations 16 and charitable corporations, and it becomes this 17 question of drawing the line between the two. 18 Interestingly enough, it was in 1895, I 19 believe, that the Membership Corporations Law was 20 put into place, and allowed in New York State, 21 voluntary organizations to come together, not 22 necessarily with a charitable bent, immigrant 23 organizations and others serving their communities, 24 to come together in some recognized corporate sense. 25 Really a groundbreaking statute for the time. 1 On behalf of the bar, we would only suggest 2 that it is vitally important to keep that 3 distinction between charitable entities, which 4 receives so many of the benefits of the people of 5 the state -- charitable contributions, tax 6 deductions, exemptions, so on and so forth -- from 7 these more mutual-benefit organizations, which do 8 exist for the benefit of their own members. 9 The question, really, whether or not the 10 public trust is enhanced by taking public resources 11 and investing them in the regulation of what are, in 12 essence, private associations. 13 There's been discussion as well about the 14 standards, with respect to fiduciary obligations, 15 the ability of the Attorney General's Office to 16 unwind transactions not in the best interest of the 17 corporation. 18 From the bar's perspective, what is very 19 vital, is to be sure that fiduciary responsibilities 20 are really as well defined as possible. 21 This is a community which, despite the fact 22 that there are some bad actors -- there are always 23 bad actors in any environment -- for the most part, 24 is incredibly dedicated to advancing the aims of the 25 people of the state of New York, and of these 1 nonprofits. They want to do the right thing. 2 So the clarity of these standards is very, 3 very important: what do they need to do? 4 And in that regard, compensation of nonprofit 5 executives has received quite a bit of attention in 6 recent years. It's always something that appears 7 above the fold in the local newspaper. 8 Interestingly enough, the point is not that 9 we're undercompensating our nonprofit executives -- 10 Which I think, if you asked anyone in the 11 room, would probably say, on the whole, that's -- 12 these people are doing God's work, and we could 13 never pay them enough for what it is that they do. 14 -- but in terms of a structure, an ability of 15 these volunteer board members to decide whether or 16 not compensation is reasonable. 17 We have had a system in place for the past 18 ten years, this IRS, quote, Section 4958 system. 19 And interestingly enough, when the IRS came 20 out just -- I believe it was last week, with a 21 report on the audits they did of colleges and 22 universities, what they found, among other things, 23 was that those institutions that, by statute, didn't 24 need to apply that rubric, that approach, of 25 assessing executive compensation, the so-called 1 "first bite" rule, indeed, they took the approach, 2 in any case. 3 And why? Because it's time-tested, because 4 it's clear, because it's straightforward, and people 5 understand it. 6 So the thought again, from the State Bar, is, 7 to the extent that we have systems which are already 8 well understood, and currently being implemented, 9 that we might be sure to rely upon them perhaps more 10 heavily, to be sure that they accomplish our ends. 11 And with that, I'm happy to take any 12 questions. 13 SENATOR RANZENHOFER: Okay, thank you. 14 When you talk about keeping the distinction 15 between the mutual-benefit organizations and the 16 charitable organizations -- you've had an 17 opportunity to take a look at both bills -- what 18 specifically, in terms of the language of the bills, 19 do you agree with, don't agree with, in terms of, 20 maybe, same rules apply to both, and shouldn't be? 21 Or, one needs to be different than the other? 22 Do you have any specific -- I don't want you 23 to, you know, quote line and verse and section, but 24 just, category, I mean, what specific things do you 25 think, if any, need to be better defined or changed, 1 with respect to keeping those distinctions, so one 2 group is not burdened by a -- you know, by some sort 3 of requirement that's going to fall through the 4 charitables [unintelligible]? 5 MICHAEL COONEY: Sure. 6 So, I think the very first point is a point 7 of definition. 8 New York has really been burdened, I think 9 that's a fair expression, by this typing system, 10 since 1970. 11 And the fact of the matter is, where we stand 12 today, it's not so simple by merely saying, one is a 13 Type B Corporation, or, certainly, a Type C or D 14 Corporation, that you fit into a particular 15 category. 16 Currently, the Attorney General's bill seems 17 to be more in tune with those distinctions about 18 which organizations really are charitable, if you 19 will, and in the broadest sense, 501(c)(3), and 20 making sure that they're put in that category. 21 Then, substantively, after that distinction 22 is made, it becomes a matter of: Well, what really 23 is the level of regulation that's needed in order to 24 assure that -- for the benefits of operating in 25 New York State? 1 SENATOR RANZENHOFER: That's what I want to 2 ask you. 3 Let's say, we have the charitable and 4 other -- or, "beneficent," I think they're referred 5 to. 6 If you could just really particularize, you 7 know, what different regulations should apply -- 8 MICHAEL COONEY: Sure. 9 And in the charitable sector, it really is a 10 matter, very often, of using state funds. 11 The whistle-blower requirements, the 12 conflict-of-interest requirements, would seem 13 perfectly appropriate, reasonable, and, in fact, 14 some of them do apply in that context currently. 15 But with respect to these private 16 associations or societies, do we really gain 17 anything in New York State by imposing those same 18 restrictions, those two in particular, on those 19 organizations? 20 Someone could argue: Well, it's best 21 practices, they should be doing it anyway. 22 Personally, I would agree with that. 23 Is that something, however, that we should be 24 legislating? That's a different question. 25 SENATOR RANZENHOFER: Okay. And one other 1 question I had for you: 2 If you recall, I was asking Jason Lilien, 3 regarding the IRS rules, and, you know, with respect 4 to the presumption, and whether or not, you know, we 5 need to go further with respect to that. 6 Is your position that, across the board, that 7 the IRS -- the IRS system is sufficient right now, 8 that the IRS language should be applied? 9 We should not have anything over and above 10 what is required by the IRS in these bills? 11 MICHAEL COONEY: Yes, I'm not aware that the 12 State Bar has, at that level of detail, reviewed the 13 distinction with respect to standards over and above 14 4958. 15 What I would say to you, however, is that --- 16 SENATOR RANZENHOFER: We're getting into the 17 weeds now. I mean -- 18 MICHAEL COONEY: Well, no, it's certainly so, 19 but it's vitally important: 20 In any case, whether or not, for example, 21 New York State, in its enforcement actions -- 22 And it certainly has to have the ability to 23 enforce actions in case of unreasonable or excessive 24 compensation with these charitable entities. 25 -- but in those cases, should the entity have 1 the power to shift the burden of proof to the 2 State Attorney General in that case? 3 I would simply offer to you, that, no matter 4 what, the standards are, essentially, going to be 5 those same standards that the organizations are 6 following currently with the IRS: an independent 7 committee, comparables, fair and reasonable 8 compensation, and memorializing all of this in 9 minutes. 10 And on many of those things, there's full 11 agreement. 12 SENATOR RANZENHOFER: Again, I thank you for 13 your testimony today. I appreciate you coming in. 14 And, again, thanks for your good work, and 15 continuing to stay involved in this. 16 Thank you very much. 17 MICHAEL COONEY: Thank you, Senator. 18 SENATOR RANZENHOFER: Our next speaker is 19 James Robert Pigott, Jr., who is the chair of the 20 Not-For-Profit [sic] Organizations Committee of the 21 New York State -- oh, I'm sorry -- New York City Bar 22 Association. 23 Pardon me for that slip-up in distinguishing 24 between the bar associations. 25 And again, James, I want to thank you and the 1 City Bar, as I did with the State Bar. 2 You and your organization have been very, 3 very involved in this process for a long time, and I 4 appreciate, you know, as we're talking about 5 membership organizations, you know, talking about a 6 membership organization where a lot of, you know, 7 attorneys giving their time and effort, you know, 8 you and your colleagues are to be commended for 9 everything that you've done. 10 So I appreciate you being here today, and I 11 look forward to hearing from you. 12 JAMES ROBERT PIGGOT, JR.: Thank you, 13 Senator. 14 I am a member, and the incoming chair, of the 15 Nonprofit Organizations Committee of the Association 16 of the Bar of the City of New York. 17 And I was, from 1997 to 2008, a section 18 chief, and ultimately bureau chief, of the New York 19 Attorney General's Charities Bureau. 20 And since then, I've been the general counsel 21 of two large nonprofit tax-exempt organizations. 22 The Nonprofit Organizations Committee is very 23 appreciative of this opportunity to appear before 24 this Committee. 25 Our committee consists of lawyers, whose work 1 is either primarily, or in some cases exclusively 2 dedicated, to the nonprofit sector. 3 We have some lawyers who represent 4 billion-dollar foundations; 5 We have some lawyers who represent small 6 social-service organizations that operate on a 7 shoestring; 8 We have law-school professors; 9 And we have in-house counsel, such as myself. 10 And for that reason, we've been very much 11 interested in this activity over the last five or 12 six years, to revise the New York Not-For-Profit 13 Corporation Law. 14 We've worked closely with the New York State 15 Bar Association since it first introduced its bill 16 in 2009. 17 We hosted a forum at the City Bar 18 Association, "Ideas For Change: A Conversation About 19 Reforming New York Nonprofit Law and Regulation," in 20 which then-sponsor Assemblyman Richard Brodsky 21 participated. 22 And when, in 2011, 23 Attorney General Schneiderman announced that 24 changing the nonprofit -- the environment for 25 nonprofits in New York State would be a priority for 1 his administration, we've been very involved in 2 communicating with his charities bureau. 3 Shortly after that announcement, we sent the 4 Attorney General a letter, identifying ten respects 5 in which we thought the Not-For-Profit Corporation 6 Law should be revised. 7 And then after he introduced his bill in 8 May of 2012, we've sent two letters, one -- to the 9 Attorney General: one in September and -- of last 10 year, and one in March of this year. 11 I would ask that those three letters which 12 are annexed to my written testimony be included in 13 the hearing record. 14 SENATOR RANZENHOFER: And they have been. 15 JAMES ROBERT PIGGOT, JR.: Thank you very 16 much. 17 SENATOR RANZENHOFER: And I've read them. 18 Thank you. 19 JAMES ROBERT PIGGOT, JR.: Thank you. 20 So now your Committee has before it two 21 bills -- well, actually three bills, and any efforts 22 to amend the Not-For-Profit Corporation Law are 23 trying to accomplish one of four things: 24 The one that's being talked about the most, 25 eliminating the obstacles and burdens to 1 incorporation in New York State, seeks to reverse a 2 trend that we've seen in recent years, of some 3 practitioners advising their nonprofit clients to 4 incorporate outside of New York State; 5 The second objective that these changes 6 attempt to achieve, is to enhance New Yorkers 7 confidence by improving governance practices; 8 Thirdly, there are certain provisions that 9 strengthen the State's enforcement powers by which 10 it polices nonprofits; 11 And, finally, there's an effort to eliminate 12 certain statutory ambiguities. And these are things 13 that drive even experienced practitioners crazy, 14 where, even an experienced practitioner can have 15 some doubt as to whether he's properly counting the 16 number of votes needed for a certain kind of 17 approval. 18 And if there are provisions in the bill -- in 19 both -- in all bills that make those things clear, 20 and they will be greatly appreciated by the bar. 21 Now, we've had only a limited opportunity to 22 review the two -- the most recent bills that are 23 before this Committee, and we'll be offering more 24 details and comments in the coming few weeks. 25 But we can say this at this time: 1 In all of the bills, there are a number of 2 versions that are very welcome. 3 First, and foremost, is the elimination -- in 4 the category of "Reducing Burdens," the elimination 5 of corporate types and preincorporation approvals, 6 about which I'll say more in a moment; 7 The provisions that clarify the rules for 8 board votes, and -- as to certain matters; and in 9 particular, the vote for approving real estate 10 transactions, which currently requires a 11 supermajority of the board -- of the entire board, 12 which many people think is onerous for those 13 transactions of that nature; 14 This is already been spoken about, electronic 15 notification and electronic approvals by which you 16 can accomplish unanimous written consents in lieu of 17 meetings; 18 And, finally, for those transactions that 19 require court approval, such as mergers, sales of 20 all -- substantially, all of your assets, 21 dissolution; whereas, under current law, those 22 require starting a court proceeding after review by 23 the Attorney General. 24 The bills would permit -- and this is the 25 Law Revision Commission and the Attorney General's 1 program bill -- would permit you just to go to the 2 Attorney General. 3 If the Attorney General is satisfied, you 4 wouldn't need to go to court and buy an index number 5 and start a court proceeding. 6 We think all of those things are very, very 7 welcome. 8 Now, with regard to eliminating burdens, I'm 9 not going to -- I think the question has been very 10 well developed by this hearing. I'm not going to go 11 it into. 12 I think most practitioners agree that it 13 would be welcome, if that could be extended beyond 14 State Education. 15 But, in dealing with State Education, you 16 would be dealing with the burden that's most 17 frequently encountered by nonprofits. 18 But I think -- I think we would favor going 19 beyond that, to other state agencies, if it's 20 achievable. 21 SENATOR RANZENHOFER: You're talking about 22 the preapproval process? 23 JAMES ROBERT PIGGOT, JR.: Yes, the state -- 24 the preapproval process. 25 SENATOR RANZENHOFER: Okay, so you think it 1 should be kept for State Ed? Is that correct? 2 JAMES ROBERT PIGGOT, JR.: Well, no. 3 Right now, it's being eliminated for 4 State Ed, and being kept -- being kept for the 5 others, in AG bill; 6 And then in the Law Revision Commission bill, 7 it's being eliminated for all, replaced by a 8 notification process. 9 And if it's achievable to eliminate it for 10 all, we would favor that. 11 SENATOR RANZENHOFER: Okay. 12 JAMES ROBERT PIGGOT, JR.: Elimination of 13 types, this is something that both the Law Revision 14 Commission bill and the AG bill favor. And it's 15 not -- it's not an elimination of types. It's a 16 consolidation and renaming of types. 17 Right now, you have this very troublesome 18 Type C Corporation, which can be formed for any 19 lawful business purpose to achieve a lawful public 20 or quasi-public objective. 21 And very experienced practitioners have some 22 doubt as to what that means, and you draft your 23 certificate of incorporation, you present it to the 24 Division of Corporations at the State Department of 25 State, and they tell you, what you thought should be 1 a B, is, in fact, a C, or vice versa, and a lot of 2 time is lost in that process. 3 And through the consolidation of these types, 4 the process would be much more efficient, but you 5 will always need categories. You will always need 6 two categories: the more highly regulated, and the 7 less highly regulated. 8 The more highly regulated being, primarily, 9 the charitable; those that enjoy tax benefits; 10 The less highly regulated, private clubs, 11 trade associations. 12 And both bills, that have different names for 13 how they do it, but both bills preserve the 14 two categories. 15 But, I think we have to be very careful to 16 ensure that no organization that is currently on the 17 "highly regulated" side of the line migrates over to 18 the "less highly regulated" side of the line by 19 virtue of these consolidations. 20 I think the Attorney General bill -- 21 Attorney General bill does a good job of preserving 22 those distinctions. 23 The great majority of the comments that the 24 New York City Bar Association made to the 25 Attorney General's bill that was introduced by the 1 Legislature last May, and this is something that's 2 been spoken about a lot at these hearings, I know, 3 is that the governance procedures that are being 4 mandated, in some instances, either, are being 5 mandated to organizations that are not large enough 6 to have the wherewithal to adopt them; 7 Or, with respect to transactions, that even 8 if some organization is very large, the transaction, 9 in and of itself, is very trivial, and doesn't 10 warrant these heightened, enhanced procedures for 11 approval. 12 And, we were very pleased to see how 13 responsive the New York Attorney General has been to 14 those kinds of comments. 15 And the new bill that was unveiled just a few 16 weeks ago, addresses many of the concerns that we 17 raised in our March 2013 letter. 18 And I would note, in particular, a few of 19 them: 20 One was, the reintroduction back of the 21 requirement that these procedures apply only when 22 the interested director have a substantial financial 23 interest in the transaction, so you're not applying 24 all the these procedures for something that's really 25 a trivial de minimus type of transaction. 1 SENATOR RANZENHOFER: Does that need any 2 further definition, or are you satisfied with the 3 word "substantial"? 4 JAMES ROBERT PIGGOT, JR.: Well, 5 "substantial," it is -- I think it's better to have 6 a general term like that, and allow rules of reason, 7 in given cases, to define what it will mean, because 8 as soon as you try and particularize things, there 9 will always be people who are trying to get just on 10 the other side of a line. 11 So I think, in this instance, I personally 12 would favor, and I think it's worked well in the 13 past, the definition of "substantial." 14 SENATOR RANZENHOFER: That's why I asked, 15 because, you know, we're looking for, you know, 16 improvements, or things are great the way they are. 17 And that's why I asked the question. 18 Okay. 19 JAMES ROBERT PIGGOT, JR.: Another thing that 20 was very useful in the last go-around, the work of a 21 compensation committee would have needed to have 22 been redone by the full board. 23 And it's important that a full board be able 24 to rely on committee work. The committee members 25 are focused on this, they have invested the time. 1 And that's one thing that this redraft this 2 year does; it allows the full board to rely on a 3 committee. 4 One very important thing: 5 Previously, these enhanced approval processes 6 for approval of executive compensation would have 7 applied to all officers, even the officer who's 8 earning -- the president of A very not-for-profit 9 corporation who's earning $50,000 a year, he would 10 have been subject -- his organization would have 11 been subject to these enhanced review-and-approval 12 procedures. 13 And in the new bill now, there's a minimum of 14 $150,000 for officers; and we think that's a very 15 important and useful change. 16 And, finally, there's been a scaling back of 17 the requirement for review of alternative 18 transactions, that we think -- for related-party 19 transactions, that we think is useful. 20 I can't -- before ending, I would like to 21 just acknowledge the work of Law Revision 22 Commission, because we know to what extent many 23 members of the Senate and the Assembly attach a lot 24 of weight to its views. 25 And the fact that it has decided that it is 1 time now to weigh into this question of revising the 2 Not-For-Profit Corporation Law, I think a lot of 3 legislators will sit up and take notice when they 4 see that. 5 So, we're very indebted to the work of the 6 Law Revision Commission. 7 I think now is the time -- 8 New York State has such a rich and diverse 9 nonprofit community that contributes so much, now is 10 the time to give that community the legislation, the 11 regulatory framework, that it deserves. 12 And I would be very happy to answer any 13 questions, either on behalf of the committee, if 14 it's something we've considered, or based on my own 15 personal experience otherwise. 16 SENATOR RANZENHOFER: Okay, well, I 17 appreciate that, and I appreciate your testimony. 18 And I appreciate the conversation that we had 19 a little bit earlier, with respect to the 20 approval -- or, the preapproval, let me say. 21 One of the things that I probably should have 22 mentioned earlier, is there has been a lot of work 23 done in the past. 24 And we are trying to move together, the 25 Assembly and the Senate, to pass a bill this 1 session, to incorporate, you know, all of the good 2 work that has been done. 3 And one of the things that's a benefit to me, 4 is, when we were just going over, you know, you had 5 referenced your March 2013 letter, and, you know, 6 we're very happy to see that a lot of the 7 suggestions that you had made had already been 8 incorporated. 9 And now we have a bill that's been 10 introduced, although relatively recently. 11 Are there any other, you know, suggestions or 12 changes or tweaks to the language of the bill, 13 either the Law Revision Commission-generated bill or 14 the Attorney General-generated bill, that would be 15 helpful to me and my Committee, and that we'll also 16 share with Assemblyman Brennan and his Corporations 17 Committee in the Assembly, that as we move forward 18 over these next four or five weeks, any other 19 changes that you feel would be helpful to make 20 either or both of the bills, a better bill, you 21 know, better for the public, better for the 22 not-for-profit community? 23 JAMES ROBERT PIGGOT, JR.: Well, when the 24 Law Revision Commission introduced its bill, it 25 clearly incorporated, almost in toto, a lot of 1 provisions that were in the AG's bill from last 2 spring. 3 And now the AG -- the Attorney General has 4 come out with a new bill that has changed many of 5 those provisions. 6 And it's not yet clear whether it's the 7 intention of the Law Revision Commission to match 8 all those changes, or not. 9 So I think that would be one thing that would 10 be very useful to people on the sidelines who are 11 commenting on the bill, to know whether it's 12 really -- whether there needs to be a -- such a 13 contrast between the two bills, or not. 14 SENATOR RANZENHOFER: And we've actually 15 gone, you know, through the bills, you know, in 16 almost like a lineup, and, you know, lined up the 17 provisions of the bill, to see which provisions are 18 the same, and which provisions are different. 19 Because you're right, I think that as, you 20 know, Peter Kiernan had stated earlier, you know, 21 there is consensus on the vast majority of the 22 provisions of the bills and -- at this point in 23 time. 24 You know, and that's one of the reasons why 25 we're having these hearings, is not only to just 1 seek general comment, but, you know, to get into the 2 weeds, and say: Is Provision A better in Bill A and 3 Bill B? 4 And, you know, we've heard a lot about that 5 in Albany on Wednesday. 6 We're hearing some of that today as well. 7 So, I appreciate that. 8 JAMES ROBERT PIGGOT, JR.: Where the 9 Law Revision Commission, in its bill, adopted, 10 verbatim, something that appeared originally in the 11 New York Attorney General's bill, and the 12 Attorney General has now changed that provision, you 13 would assume that the Law Revision Commission might 14 consider doing the same. 15 But that hasn't happened yet, so, we will be 16 very interested to see whether that does happen. 17 SENATOR RANZENHOFER: Well, again, I thank 18 you for being here today. 19 I appreciate, again, all the work that you've 20 done, and for your testimony today. 21 So, thank you very much. 22 JAMES ROBERT PIGGOT, JR.: Thank you, 23 Senator. 24 SENATOR RANZENHOFER: For our next speakers 25 we're having a combination. 1 Just to make sure that I have all the groups 2 correctly, prior to the hearing -- 3 Randi? 4 (Pause in the proceeding.) 5 (The proceeding resumed, as follows:) 6 SENATOR RANZENHOFER: For the record, I'm 7 going to hopefully get this right. 8 We have a number of groups that, prior to the 9 hearing, asked to appear together, which is fine 10 with me. I just want to make sure that we have 11 everybody right. 12 Michael Clark, right, from the 13 Not-For-Profit [sic] Coordinating Committee of 14 New York. 15 Is that correct? 16 MICHAEL E. CLARK: Yes, correct. 17 SENATOR RANZENHOFER: And we have, 18 Michael Stoller from the Human Services Council of 19 New York. 20 MICHAEL STOLLER: Yes, sir. 21 SENATOR RANZENHOFER: We have 22 Maclain Berhaupt, state advocacy director from 23 Supportive Housing Network of New York. 24 And we have -- is -- are you Sean? 25 No? 1 ROBERT VANNI: Sean will be testifying 2 separately. 3 I'm Bob Vanni, and I'm also with the 4 Nonprofit Coordinating Committee. 5 SENATOR RANZENHOFER: Okay, so I just want to 6 make sure that, for the record, I knew who everybody 7 was, and which groups are here. 8 So we have, Bob...? 9 ROBERT VANNI: ...V-A-N-N-I. 10 SENATOR RANZENHOFER: V, like in Victor? 11 V-A-N-N-I. 12 And you're also with the 13 Nonprofit Coordinating Committee of New York; is 14 that correct? 15 And do you have a title as well? 16 ROBERT VANNI: Yes. I'm consultant on 17 government affairs. 18 SENATOR RANZENHOFER: Consultant for 19 government -- 20 ROBERT VANNI: Government relations. 21 Excuse me. 22 SENATOR RANZENHOFER: Okay, now that I know 23 who everybody is, and the record is clear: 24 I want to welcome, gentlemen, and lady, who 25 are being here today. 1 And as I have said previously, you know, the 2 work that the not-for-profit community has done, you 3 know, in these hearings, and in reviewing the bills, 4 and in working with the Attorney General's Office, 5 and working with the Law Revision Commission, and 6 working, you know, among yourselves, as 7 not-for-profits, has been very, very helpful to the 8 work that we're doing here in the Senate. 9 I want to thank you for being here today and 10 providing your comments. 11 And, you know, just as a general comment, you 12 know, for the work that the not-for-profits do 13 across the state, you know, in terms of number of 14 people that are employed by not-for-profits, in 15 terms of the economic impact of not-for-profits, in 16 terms of, you know, the volunteer work that so many 17 people do, I think there are over 18 100,000 not-for-profits across the state, I want to 19 thank each and every one of you for all the work 20 that you do, and for being here today. 21 So, I guess we'll start with, it's kind of 22 like the baseball lineup, and, Michael, you were -- 23 you're -- you were next on the list, so I'll ask you 24 to comment first, and, start it off. 25 Okay? 1 MICHAEL E. CLARK: Well, thank you very much. 2 Leading off, I am Michael Clark from the 3 Nonprofit Coordinating Committee of New York. 4 And maybe, first of all, I want to thank you, 5 and thank the Committee, and express our 6 appreciation for the opportunity to bring a lot of 7 the work that we've been doing for, frankly, a lot 8 of years to the table today. 9 And we have worked, clearly, with a lot of 10 people in the room. I'll say a couple of words 11 about that in a minute. 12 But, I want to say just a few words about -- 13 I want to just talk a little bit about the 14 Nonprofit Coordinating Committee of New York, which 15 may not be as well-known an entity to you, but, in 16 fact, is an organization that represents, on our 17 government relations committee alone, 107 nonprofit 18 attorneys working on nonprofit legal matters 19 throughout the New York City area, including 20 Long Island and Westchester; 21 It includes several of the people who have 22 testified today, and, some of the people that you 23 have yet to hear from; 24 It includes four former heads of the 25 charities bureau of the Attorney General's Office; 1 A number of people representing various the 2 bar associations; 3 And so on. 4 So it's a very broad group, but, I think 5 equally important, it includes a lot of 6 representatives of counsel, and so on, from 7 nonprofit organizations themselves, foundations, 8 et cetera. 9 And we work on a kind of basis of attempting 10 to reach some kind of consensus. We do not view 11 ourselves as a trade association; that is, saying, 12 you know, Government, keep your hands off of 13 nonprofits. 14 Much to the contrary, we spend a lot of time 15 educating and helping our members understand 16 regulations, compliance requirements, and so on. 17 We run a lot of workshops, we do a lot of 18 that sort of educational work. 19 And, we understand the need for 20 enlightened -- what we would think of as 21 "enlightened regulation." 22 We do have a kind of standard way of 23 approaching all of this, which is weighing burdens 24 versus benefits, and that seems to be something that 25 most people testifying today have given a lot of 1 thought to. And we've been engaged in conversations 2 with pretty much everybody who has spoken today. 3 I would just say, Mike Cooney, when we walked 4 in this morning, we said: We never thought we'd get 5 to this point. 6 So, we're immensely grateful to you, to the 7 Law Revision Commission, to the Attorney General's 8 Office, that we're all here. And we have worked 9 closely with all of those bodies. 10 I did serve on the Attorney General's 11 Committee for Revitalization of the Nonprofit 12 Sector. 13 We've served on a lot of other committees. 14 And as I said, we have a lot of other 15 representation. 16 We represent all types, sizes, purposes, of 17 nonprofits, so we see the issues that you're seeing 18 today, from the ground up, as well as from a 19 legislative and government-policy perspective. 20 And as I said, we try to work very closely 21 with government, and we, I think, have done a lot of 22 that in the past. 23 The bottom line to us is, that through the 24 bar association's work, through the Law Revision 25 Commission's work, through the Attorney General's 1 work, this really is an important turning point, we 2 think, and we're excited about the possibility that 3 we will finally get our regulatory framework in the 4 state to be appropriately regulatory, but also 5 appropriately encouraging of nonprofits to do their 6 work in this state. 7 It has been said, that this is the hardest 8 state in the United States to incorporate in, it's 9 one of the hardest states in the United States to do 10 business in, if you are a nonprofit. 11 And that's not said by me. That's said by a 12 number of attorneys on our committee. 13 And we would like to think that we could make 14 this, still, an enlightened state, in terms of the 15 kinds of regulations that we do, but maybe relieve 16 some of those burdens. 17 So, relieving burdens is a big part of our 18 agenda. 19 We are very grateful for our chance to give 20 you some of our thoughts which we have developed as 21 much as possible by consensus, so you'll hear some 22 themes here that you've already heard. 23 We favor eliminating corporate types. We 24 take a pretty broad approach to that. 25 We like the proposal to correct the situation 1 that's contained in the Attorney General's proposal, 2 because it's more comprehensive and direct. 3 We think that, you know, we would lean 4 towards, as one of the previous testimonies 5 suggested, the broadest possible relief on this 6 front, from unnecessary or cumbersome or overlapping 7 corporate types. 8 On agency consents and approvals, we also 9 believe that this is currently a bit of a moras, as 10 you've heard, and we would urge you to think about 11 some of the things you've heard about the 12 difficulties in getting all of those approvals done. 13 I don't think I'm telling you any breaking 14 news here. 15 But, we actually lean more toward the 16 Law Revision Commission's process here, or approach, 17 which is -- which would reduce the number of 18 required preapprovals, pretty much, to a minimum. 19 On consistency with the IRS Code, we're 20 pretty strong on that subject. 21 We believe that the rebuttable-presumption 22 approach, over the last decade or so that it's been 23 in place, has proven, as several people have 24 testified, to be a workable methodology for 25 approaching that issue. 1 We believe it is possible to develop state 2 regulatory teeth, to make sure that it's enforced. 3 And, we would urge that we not add a lot of 4 additional regulatory burden on that front. Or, at 5 least, inconsistent regulatory burden. 6 We think similar definitions are important, 7 et cetera. 8 On mandating governance policies, we support 9 the provisions in both bills, that would encourage 10 increased involvement by nonprofit boards. 11 This is an area that needs a lot of attention 12 from us on a regular basis. 13 I know the Attorney General's Office has 14 created some new programs to try to encourage 15 greater participation on nonprofit boards. 16 We spend a lot of time trying to educate 17 nonprofit boards, and equip them with the kinds of 18 tools they need to make sure that they're doing 19 their job, both on -- basically, under all of the 20 duties for nonprofit board members that are 21 specified in the Not-For-Profit Corporation Law. 22 And, so, we urge that some additional 23 consideration be given here to exemption from some 24 of these provisions for smaller organizations, 25 because, in fact, the hardest problem that the vast 1 majority of nonprofits in the state face, is finding 2 adequate numbers of educated and 3 professionally-equipped board members that can do 4 their job. 5 That's not to minimize conflict of interest, 6 and other issues, which we think are extremely 7 important, but we're just pointing out that it's not 8 so easy to find all those volunteers. 9 So in conclusion, I think the proposals of 10 both the Attorney General's Office and the 11 Law Revision Commission attempt to deal with sorely 12 needed and long-overdue revisions to our state's 13 Not-For-Profit Corporation Law and regulations. 14 We think, in general, the Attorney General's 15 bills have the significant advantage of having been 16 thoroughly informed by an outstanding group of 17 nonprofit representatives, attorneys, board members, 18 and others, over the last two years. 19 We think that the Attorney General's Office 20 has done an extraordinary and really exemplary job 21 of seeking out the opinions of an extraordinarily 22 wide range of nonprofits. 23 There are so many different kinds of 24 nonprofits in this state. When you start listing 25 them, it suddenly jumps in your face. 1 You know, from soup kitchens and food 2 pantries, to the Metropolitan Museum and New York 3 Hospital, you've got quite a range. 4 So, it is our opinion that the 5 Attorney General's bill has the content approach and 6 continuity, probably better, and more directly deals 7 with most of the issues that we think are central to 8 the current discussion. 9 And, we would request that consideration 10 still be given, however, to our comment -- comments, 11 which we think will strengthen those bills. 12 SENATOR RANZENHOFER: Thank you. 13 MICHAEL E. CLARK: We'll take questions. 14 SENATOR RANZENHOFER: Well, the questions I 15 was going to ask you are actually what you just 16 outlined, in terms of your very detailed, you know, 17 going through the bills, and saying: We like this, 18 we like this. You know, this should be changed, 19 that should be changed. 20 So you've actually taken away a lot of the 21 questions I was going ask you, because I think you 22 sat here listening to some of the questions. 23 MICHAEL E. CLARK: Right. 24 SENATOR RANZENHOFER: No, no, no, that's 25 perfectly okay. 1 But a lot of my questions of other speakers, 2 well, you know, really try to get, you know, the 3 A, B, C, and D of, you know, what's good, you know, 4 what needs to be tweaked a little bit. 5 So, I don't have any questions for you yet. 6 One of the things I do want to mention, and I 7 think -- you know, you alluded to the work that you 8 have done in educating, you know, the not-for-profit 9 community, and you made reference to, you know, what 10 the Attorney General has done. 11 And I know Jason was probably trying to keep 12 his testimony short, but he had mentioned on 13 Wednesday, you know, the pamphlets and the programs 14 that they've provided, to help educate the -- you 15 know, the not-for-profit community. 16 And that's also, you know, to be commended. 17 So, even though he was very considerate in 18 trying to keep his remarks short, he did mention 19 that, and I'm going to mention that for him, because 20 he did talk about the very, very good efforts that 21 his office and the Attorney General has taken to, 22 you know, provide education and training for people 23 that are involved in not-for-profits. 24 So, we'll turn to -- I don't know if, Bob, 25 you have any additional comments, because you're the 1 same organization? 2 If you do, you know, you can -- 3 ROBERT VANNI: Just to reinforce Michael's 4 comments, that we commend both the Law Revision 5 Commission and the Attorney General. 6 This is an important move for activities, 7 nonprofits, in New York State. It's timely. 8 We would like to see it move quickly, if we 9 can, in the Legislature, so we support all your 10 efforts. 11 And thank you very, very much. 12 We've worked closely with the AG's office. 13 We look forward to working more closely with 14 the Law Revision Commission in the future on 15 their -- in their -- on their work. 16 But, this is most timely, and we thank you 17 very much for giving us the opportunity to express 18 our views, and assist in any way we can in moving 19 this forward. 20 SENATOR RANZENHOFER: As I said to Michael, 21 you're very, very helpful. You know, your group has 22 been very, very helpful. 23 Your testimony has been very, very helpful 24 today, and I appreciate that. 25 So, now turn to the "other Michael," 1 Michael Stoller, from Human Services Council of 2 New York. 3 And, again, Michael, thank you for being here 4 today as well. 5 MICHAEL STOLLER: Thank you, Senator. 6 I do want to thank you, and your staff, 7 actually, for setting up this hearing, and doing it 8 all over the state, and for that, giving us the 9 opportunity to testify. 10 The Human Services Council represents the 11 human-services-sector nonprofit providers throughout 12 New York City, and we're about to go statewide. 13 So, hopefully, next year I'll be able to say 14 that. 15 We agree with everything Michael and Bob 16 said. We agree with everything Sean's about to say. 17 So -- and with just about everybody else 18 here. 19 [Laughter.] 20 MICHAEL STOLLER: Michael, Bob, everybody, 21 you all did a great job. 22 It's like trying to write those thank-you 23 notes and make it sound different each time. 24 [Laughter.] 25 MICHAEL STOLLER: So, I want to say -- 1 SENATOR RANZENHOFER: Well, when you send a 2 thank-you note, nobody else knows what the other one 3 got. 4 MICHAEL STOLLER: You hope they don't know. 5 SENATOR RANZENHOFER: Well, that's true. 6 But, here, everybody is listening. 7 MICHAEL STOLLER: That's true. 8 That's so true. 9 Maybe I -- I disagree with everything 10 everybody said. 11 [Laughter.] 12 MICHAEL STOLLER: No, seriously, one of the 13 best things that's happening right now, for those of 14 us who have been laboring at this for so many years, 15 is, the stars seem of be aligned: 16 The Governor, with Fran Barrett, is working 17 on contracting for nonprofits; 18 The AG, I've served as co-chair of one of his 19 subcommittees of his task force, so he's clearly 20 involved in this; 21 State Comptroller, and the Legislature. 22 So, if we can't do this now, I'm not sure 23 when the better opportunity will be. 24 One of the things -- there's actually two 25 things that I wanted to say, and then I'll be done: 1 I hope we don't stop here. 2 These are important changes to the 3 Not-For-Profit Corporation Law, and there's ways to 4 go, miles to go, in how the State does business with 5 nonprofits. 6 Fran is working on a lot of that in many 7 positive ways, replicating with what the City of 8 New York has done, which is, under the Mayor and 9 Deputy Mayor Gibbs, has done incredible work in 10 smoothing the process. 11 And I would invite the Legislature to meet 12 with us, meet with all the other folk here, and talk 13 more about that, as well as the changes to the 14 statute. 15 And the last thing I want to say: 16 I want to thank you, because, I mean, you 17 just said a couple of minutes ago, when you 18 acknowledged the work we do. 19 The not-for-profit sector employs about 20 18 percent of the people in this state -- of the 21 workforce to this state. We bring in billions of 22 dollars in economic activity. 23 We do. As someone said earlier, God's work. 24 And, the unfortunate part about the 25 exec-compensation issue, I'm not arguing that 1 everybody gets paid the right way. And as I think 2 Michael said, some of us get paid much too little. 3 But, there's an undertone of vilification of 4 the sector that's unwarranted. 5 And, I really appreciate your acknowledgment 6 of the impact we have on the economy, and the impact 7 we have on people's lives, because it's the right 8 thing to do. 9 So, I want to make that -- I want to ask that 10 you keep that up; that as we talk about the bad 11 apples, if you will, the whole sector doesn't get 12 smeared with that. 13 And I really appreciate that. 14 And, thank you for this opportunity. 15 SENATOR RANZENHOFER: Well, thank you for 16 your comments. 17 And I think that's one thing that everybody 18 realizes, and appreciates. 19 You know, in this day of instant 20 notification, you know, the work of the 99.9 percent 21 of the folks that are involved, whether it's in 22 not-for-profits, whether it's in business, whether 23 it's in athletics, whether it's in politics, you 24 know, that's not exciting, interesting news. It 25 doesn't capture headlines. 1 You know, the person that steps out of line, 2 does, and that obviously affects, you know, public 3 perceptions. 4 So, it is important to acknowledge, and it is 5 important to say publicly, that, you know, it's not 6 even a vast majority. It's almost everybody, except 7 for the rare instances which you read about in the 8 headlines, you know, where people are doing the 9 right thing for the right reasons, and they're not 10 looking to, you know, enrich themselves, and they're 11 not looking to grab a headline. You know, they're 12 doing the work that they've chosen, and the work 13 that they love. 14 So, you know, it does -- you know, you can't 15 say that enough, because, you know, that is hard to 16 compete with, you know, the splashy, you know, 17 front-page story of when something goes awry. 18 So, again, I thank you for being here today, 19 thank you for your comments and your testimony. 20 MICHAEL STOLLER: Thank you, sir. 21 SENATOR RANZENHOFER: We're now going to turn 22 to final -- not the final person for today, but of 23 this foursome that's at the table right now. 24 Maclain, if you want to make yourself 25 comfortable, and grab a seat in front of the 1 microphone. 2 MACLAIN BERHAUPT: Thank you. 3 SENATOR RANZENHOFER: From the Supportive 4 Housing Network of New York, I -- again, I want to 5 welcome you here today. 6 You know, thank -- again, you know, thank 7 everybody for being here on the day before Memorial 8 weekend. 9 You talk about doing God's work, to be here, 10 you know, on the day before a lot of people are, you 11 know, spending time with their families, and, you 12 know, having picnics, and going to ceremonies and 13 parades. 14 This is great. 15 So, again, I thank you for being here today. 16 MACLAIN BERHAUPT: Well, and thank you, you 17 as well, you and your staff, for coming down here 18 today, and putting all this time and energy into a 19 very important topic for us. 20 The Support Housing Network of New York is a 21 statewide membership organization. We represent 22 over 200 nonprofits that build and operate, 23 currently, over 46,000 units of supportive housing 24 in New York State. 25 Supportive housing is housing with on-site 1 services for, typically, low-income and formerly 2 homeless individuals and families who typically have 3 multiple barriers to independent living, such as 4 psychiatric disability, HIV/AIDS, substance-abuse 5 disorder, and they're typically frequent users of 6 expensive emergency services, like shelters, 7 hospitals, prisons, psychiatric centers. 8 For this reason, placement in supportive 9 housing has been proven to reduce the use of these 10 services, and so it is saves taxpayer money often, 11 far more than what it was spent building, operating, 12 and providing the services. 13 Our providers range across the state. 14 Roughly half of them are in the New York City area. 15 The rest of half throughout the rest of upstate and 16 downstate. 17 I would say that, for us, at any one given 18 time, the majority of our members are dealing with 19 contracts from federal, state, city, government 20 entities that can range anywhere from 15 to over 21 20 contracts at one moment in time. 22 So -- 23 SENATOR RANZENHOFER: Each? One particular 24 agency? 25 MACLAIN BERHAUPT: One particular agency, 1 yes, because we do focus on an array of different 2 populations, and provide very important services 3 that are funded by all three different government 4 agencies. 5 For that reason, any regulatory burden that 6 the State is willing to embark on, we support 7 110 percent. 8 You know, we would rather -- to be frank, we 9 would rather see this kind of red tape taken away, 10 because all it's doing is taking critical resources 11 away from the services and the housing that we 12 provide for this very vulnerable population. 13 So, I won't go into all the specifics that 14 were just said, but, yes, we support all of them as 15 well, as eloquently said. 16 And, really, just want to thank you, and 17 offer, you know, any assistance we can provide. 18 As you're wrapping up discussions on trying 19 to finalize this bill, if there's any other 20 additional information that us, as a membership 21 organization, can provide, we're here to help. 22 So, thank you. 23 24 25 1 SENATOR RANZENHOFER: Before you all leave, 2 let me just throw out a general question. 3 You know, the question about audits came up. 4 And if I could just hear, again, I don't want 5 to prolong the discussion, but, if you just have any 6 thoughts, you know, about the audit requirements? 7 You've heard some of the testimony today, 8 and, again, you've all been involved for a while. 9 Do you have any thoughts with respect to the 10 audit requirements for, you know, the different 11 thresholds, the different groups? 12 MICHAEL E. CLARK: We do have some thoughts 13 ourselves, and that is, that we would like to see 14 the audit threshold raised, as has been proposed by 15 the Attorney General's bill, in particular. 16 And, the reason for that is, not that 17 everybody wouldn't probably, if they could get it 18 for free, benefit from an audit. And we think that 19 audits are good. We do a lot of education about 20 audits. We spend a lot of time teaching people, you 21 know, how to make their audits more effective, how 22 to make their audit committees function better. 23 We support the requirement for audit 24 committees for certain sizes of organizations. 25 But this is -- I always come back, in my own 1 brain, to the analogy between this and personal 2 income taxes in this country. 3 I don't want to shock anyone in state 4 government, or in the room, but there is, from time 5 to time, a rumor that some people in this country 6 cheat on their personal income taxes. 7 And I hope that doesn't make a headline, but, 8 if -- if you wanted to eliminate that problem 9 completely in this country, to my knowledge, there's 10 only one way to do that, and that would be to assign 11 an auditor to every home. 12 It would cost more than our national budget 13 currently costs, to do that, but it would eliminate 14 all cheating on personal income taxes. 15 And this is really where you come back to the 16 concept of burdens versus benefits. 17 At what point does that become not 18 cost-effective to insist on it? 19 And given the difficulty and the expense of 20 audits for the 90 percent of nonprofits in the state 21 that are below $1 million in budget, we would 22 suggest that that's probably a reasonable threshold. 23 Or at least 500,000. 24 But I think we would favor $1 million 25 threshold for audit requirements, because, 1 practically speaking, it's very hard for those 2 organizations to find the discretionary money to 3 spend on those kind of administrative costs, given 4 that most foundations and many state agencies don't 5 want to pay for those kind of administrative costs. 6 MICHAEL STOLLER: If I could answer you, 7 Senator? 8 I agree with everything Michael said, 9 including his full-employment program, or whatever 10 it is -- 11 SENATOR RANZENHOFER: Well, the 12 certified public accountants are testifying next. 13 MICHAEL E. CLARK: I should say, by the way, 14 we have four certified public accountants on our 15 government relations committee. 16 MICHAEL STOLLER: The thing I want to add, 17 besides the threshold issue -- well, I actually want 18 to emphasize the threshold issue for a second. 19 I remember when I worked for the New York 20 City government many years ago, I had to write a 21 check to the -- what was then the General Services 22 Department, for 25 cents, for a phone call I had 23 made long distance. 24 The cost to process the check, I understand, 25 back then was five bucks. 1 So I cost the city 4.75, making this phone 2 call. 3 You get what I'm saying. 4 The audits are the same thing. 5 The other point I want to make actually goes 6 back to something Maclain said. 7 Many of our members have multiple contracts 8 with various parts of the state government, and also 9 city government, federal government. And every -- 10 they have separate rooms for the auditors, because 11 they're there all the time. 12 If there's one way to get -- clearly, 13 everybody has to look at their program, but the 14 finances are the finances. Okay? 15 If there's some way to get that coordinated. 16 I know the City's working towards that. 17 I believe Fran Barrett's looking at that. 18 But that would be a wonderful thing. 19 SENATOR RANZENHOFER: Some coordination of 20 all the different audit -- 21 MICHAEL STOLLER: At least the financial part 22 of it, because your books are your books. 23 If the program has to be looked at by 24 different program people, that, I can understand, 25 but, the books are the books. 1 MICHAEL E. CLARK: Perhaps something more 2 like the federal system, which allows you to have 3 one financial audit -- 4 MICHAEL STOLLER: Yes. 5 MICHAEL E. CLARK: -- that covers -- and you 6 don't have to have a separate financial audit for 7 every contract. That becomes -- that becomes 8 extraordinarily cumbersome. 9 And, in fact, the -- you know, it's an 10 enterprise, so the books of the enterprise -- not 11 the Starship Enterprise -- but the enterprise. 12 You know, and it's easy to forget in 13 government, because government agencies are not 14 enterprises. 15 But if you're running an enterprise, and 16 you've got to get an audit, then that audit ought to 17 cover the financial situation across the board. 18 It's not simple, I don't want to pretend it 19 is simple, when you have multiple contracts, but a 20 contract agency is to sort out whether there's -- 21 their money is being spent exactly the right way. 22 But as I said, at the federal level, I think 23 it's 421-A, or whatever that process is called, 24 is -- is, it seems to me, a model for how the state 25 ought to be thinking. 1 MACLAIN BERHAUPT: Yeah, and I do believe 2 Fran Barrett has been looking at that. 3 So maybe it would be worth just a 4 conversation. 5 But, thank you again, and thank you to the 6 Attorney General's Office, for coming together, and 7 trying to make this easier for all of our 8 nonprofits. 9 We really appreciate it. 10 MICHAEL STOLLER: And, Senator, Ethan can 11 figure out how to make the audits work. 12 SENATOR RANZENHOFER: Well, thank you very 13 much. 14 And, actually, I misspoke. 15 The CPAs are not next. 16 Sean Delaney, executive directors [sic] for 17 Lawyers Alliance for New York, is next. 18 I guess lawyers go before accountants today. 19 SEAN DELANEY: Not necessarily. 20 SENATOR RANZENHOFER: Sean, thank you for 21 being here today. 22 And I see you're sitting there with somebody 23 else. 24 If you could just identify yourself for the 25 record. 1 LAURA ABLE: Hi, I'm Laura Abel, and I'm the 2 senior policy counsel for the Lawyers Alliance. 3 SEAN DELANEY: I want to thank you, 4 Chairman Ranzenhofer, for the opportunity to speak 5 today about these important proposals. 6 I am the executive director at 7 Lawyers Alliance for New York. 8 And the reason I wanted to appear separately 9 from my previous colleagues, is not to keep my 10 distance from anything they had to say. 11 In fact, I join the chorus as to so many 12 things that you've already heard today. 13 But I wanted to emphasize Lawyers Alliance's 14 voice for smaller organizations, in particular, by 15 speaking to you separately. 16 We provide legal services on a pro bono basis 17 to nonprofit groups here in New York City, using 18 more than 1300 volunteers from law firms and 19 corporations, to help those organizations on more 20 than 1,000 legal projects each year. 21 And, most of those organizations are small, 22 and community-based organizations, without the 23 resources to pay for counsel. 24 And our work involves advising them on a 25 range of legal issues, but, in particular, their 1 compliance obligations under federal and state law. 2 So it's from that perspective of small 3 organizations that I want to talk to you today. 4 I should also add that I am among the many in 5 this room, who, as a former bureau chief in the 6 charities bureau, spent ten years as a regulator, so 7 I understand the challenges that my colleague 8 Mr. Lilien and his crew have to face in doing the 9 work that they do. 10 So I'm not going to read the testimony, but I 11 will summarize the key points, and I'll leave some 12 room for questions -- 13 SENATOR RANZENHOFER: Thank you. 14 SEAN DELANEY: -- from the Committee. 15 So, before sharing several specific concerns, 16 I do want to join the chorus, and note how important 17 the work of the Attorney General's Office and its 18 Leadership Committee on Revitalization of the 19 Nonprofit Sector has been. The work of the 20 Law Revision Commission has been so essential to get 21 us to this point. 22 And it has been decades that we've been 23 waiting for this day. It really has. 24 I want to particularly commend the 25 Law Revision Commission's proposal with regard to 1 the formation of not-for-profit corporations in 2 New York, and its proposal that a wide range of 3 corporations be able to form with notice, rather 4 than advanced consent from various state agencies. 5 It makes a huge difference in the choice as 6 to whether to incorporate here in New York. 7 I would say that it's half the reason why so 8 many flee to that mail-order-incorporation 9 jurisdiction known as "Delaware." 10 That's not the entire problem, but it is a 11 large part of the problem. 12 There was some talk about specific kinds of 13 corporations; corporations approved by the 14 Department of Health. And, we may want to make 15 exception for those corporations. 16 But, for the wide range of not-for-profit 17 corporations, the Law Revision Commission's proposal 18 has it right. 19 With regard to the proposals that enhance 20 oversight by not-for-profit directors, that are 21 found in both the Attorney General's proposals and 22 the Law Revision Commission's proposals, but we 23 support those enhancements. 24 And we support those bills, particularly the 25 Attorney General's bill, which has been the product 1 of more than two years of cooperative work with the 2 nonprofit sector. It has been improved 3 substantially since its introduction last spring, 4 and we do support that bill. 5 Now, I want to make a few comments about ways 6 in which things might be improved here. 7 Let me first note, that you have with our 8 testimony, a detailed, side-by-side analysis of 9 these bills, at least the key issues that we feel 10 need to be addressed, along with Lawyers Alliance's 11 proposals. 12 I'm going to limit my further comments here 13 to just three areas: 14 First of all, smaller organizations should 15 not bear the same burdens as larger nonprofits. 16 Mr. Lilien noted in his testimony in Albany 17 on Wednesday, that there are more than 18 100,000 nonprofits operating in New York State. 19 About 80 percent of them are small 20 organizations, at least according to the IRS, 21 nationwide. 22 And I believe that to be true here in 23 New York as well. 24 That means that they have assets and revenues 25 of less than $1 million. They are least able to 1 adopt and adhere to multiple new government's 2 policies, nor do their operation or their assets 3 warrant those additional burdens. 4 So, we very much support the changes that the 5 Attorney General has made in his bill, to raise or 6 create thresholds below which certain policies would 7 not be required. 8 There's been a lot of discussion today about 9 the audit threshold, and whether it too should be 10 raised. 11 We think that it should. It should be raised 12 to $500,000. It should be raised to $1 million. 13 I'd note that the California audit threshold 14 is $2 million. And as far as I know, the Republic 15 of California has not yet slid into the sea as a 16 result. 17 I do believe that the cost of obtaining an 18 audit is significant. 19 The gentleman from Green-Wood Cemetery who 20 says his organization pays $80,000, that's not 21 atypical. 22 Even smaller organizations, like the ones 23 represented by Lawyers Alliance, are paying ten and 24 twenty and thirty thousand dollars annually for 25 their audits. 1 So raising the audit threshold is a positive 2 thing, and we would support it. 3 SENATOR RANZENHOFER: You mentioned three 4 numbers: 500,000, 1 million, and then the 5 California of 2 million. 6 Do you have a recommendation to this 7 Committee in terms of what would be the appropriate 8 number, in your judgment? 9 SEAN DELANEY: We agree with the folks who 10 just testified, that $1 million would be the 11 appropriate number. 12 Second, I want to reinforce some other 13 comments that were made earlier, about how any 14 proposals that are enacted into law should be as 15 consistent as they possibly can be with the 16 Internal Revenue Code. 17 That's an extensive preexisting set of 18 regulations, covering much of the same subject 19 matter as we are seeing in these proposals today. 20 Related-party transactions, executive 21 compensation, are being fully regulated by 22 Section 4958 of the tax code, and the reporting 23 obligations that are found in the Form 990. 24 Even minor variations from those preexisting 25 rules will create unnecessary confusion and extra 1 expense for nonprofits in New York that have to 2 comply with those IRS rules already. 3 The Attorney General's proposal in this 4 respect has been significantly improved from the way 5 that it first appeared last spring. 6 We very much appreciate having had the 7 opportunity to help to shape that proposal along 8 these lines. 9 We would make some further suggestions: 10 There are some places where there are 11 differences; in some instances, differences that 12 probably have no policy implications. 13 Things like, the definition of "relative," 14 which, in the Attorney General's -- for 15 related-party-transaction purposes, the 16 Attorney General's bill is somewhat different. 17 I don't believe that it covers adopted 18 children, for example. And it could easily be 19 changed to do so. 20 The definition of "compensation" -- 21 "total compensation," is slightly different under 22 the Internal Revenue Code than it is under the 23 Attorney General's bill. 24 That too could be changed, in a way to make 25 it entirely consistent. 1 I think the definition of 2 "non-salaried benefits" is somewhat different in the 3 two regimes. 4 The reason why that's important, is that 5 there already exists a whole cottage industry of 6 compensation consultants who have produced studies 7 that are based on the Internal Revenue Code. 8 If we follow the Internal Revenue Code in any 9 changes we make here, all of those studies and their 10 compensation information will be valid under the 11 state law. 12 Finally, there's a difference in the 13 definition of "independent director" that I think 14 deserves a second look. 15 The Attorney General's proposal has a 16 look-back of three years. The Internal Revenue Code 17 does not. 18 We think, probably, "independent" should be 19 defined as the Internal Revenue Code does, based on 20 current relationships -- current financial 21 relationships with the organization, not a 22 relationship that might have taken place two years 23 ago. 24 I want to say something about the related -- 25 SENATOR RANZENHOFER: Two or three years ago? 1 I thought I heard -- 2 SEAN DELANEY: Three years ago is the 3 look-back, so I think that there need not be a 4 look-back provision. 5 I do want to address, under related-party 6 transactions as well, a question that came up in 7 your conversation, Mr. Chairman, with my friend 8 Bob Pigott, involving substantial financial interest 9 that would trigger the review under the proposal by 10 the Attorney General. 11 And we too welcome the preservation of that 12 concept in the proposal. 13 I want to say that it could be further 14 defined in a way that would be consistent with the 15 Internal Revenue Code. 16 That would be helpful. 17 These transactions take place in a couple of 18 different ways: 19 They take place directly with an individual 20 who is a director or an officer or a key employee, 21 as an individual person, but they also, often, maybe 22 even more often, take place with an individual who 23 may have a stock-holding interest in a company that 24 does business with a nonprofit. 25 And the question is: What kind of a holding 1 of that kind, in which you have an ownership 2 interest, should be considered substantial enough to 3 trigger these procedures? 4 Well, the Internal Revenue Code answers the 5 question by saying: If you have a 35 percent or 6 more ownership interest in a company, then these 7 rules would be triggered under the code. 8 And they should be similarly triggered under 9 state law. 10 If, however, you happen to own a few shares 11 of stock in Con Edison, and your nonprofit gets its 12 power from Con Edison, that shouldn't be deemed to 13 be a substantial financial interest; and, therefore, 14 it shouldn't trigger these rules. 15 So, we can go further, and consistent with 16 the Internal Revenue Code, and make a further 17 improvement. 18 SENATOR RANZENHOFER: Do you think that would 19 be viewed by anybody as having a substantial 20 interest, because you -- you know, if you get your 21 power from Con Ed, and you have a few shares, I 22 mean, do you think that the Attorney General is 23 going to get into -- 24 SEAN DELANEY: Well, let's say you had, 25 10,000, 50,000 dollars worth of Con Ed stock. 1 $100,000 of Con Ed worth of stock. 2 Once you go down that slope, the questions 3 start to arise. 4 A few shares, perhaps not. 5 But I think the key here is, if you have no 6 controlling interest, or even close to a controlling 7 interest over that company, you really can't 8 influence the terms of the deal between the 9 nonprofit and that company. 10 And that's why the IRS takes a "35 percent or 11 more ownership interest" standard. 12 SENATOR RANZENHOFER: That's what's defined 13 as "controlling interest," at 35 percent -- 14 SEAN DELANEY: That's what's defined as a 15 "substantial financial interest," 35 percent or 16 more. 17 Finally, I want to talk about an aspect of it 18 that's been discussed at some length this morning, 19 and that has to do with the presump -- 20 rebuttable presumption that's found in the 21 Internal Revenue Code. 22 And I want to urge the Committee not to exalt 23 form over substance in mandating governance 24 procedures. 25 There are many small nonprofits who will not 1 be aware that the Not-For-Profit Corporation Law has 2 been changed, who will, in their blissful ignorance, 3 proceed to do as they have always done, and will not 4 follow the procedures that are found in the new 5 Not-For-Profit Corporation Law once we make these 6 momentous changes. 7 However, I think it's fairly said, and it's 8 been observed here before today, that most 9 nonprofits do not overpay their chief executives. 10 They underpay them. 11 Most nonprofits who engage in transactions 12 with their board members, who are supportive of 13 their missions, do not do so at above market rates. 14 Those are at below market rates, many, many, 15 many times. 16 And if there is an occasion on which an 17 organization fails to follow the compensation-review 18 procedures, or fails to follow the 19 related-party-transaction procedures, but there has 20 resulted in no harm to the corporation, because the 21 transaction is favorable to the corporation, that 22 should not be a violation of law. 23 The rebuttable presumption of reasonableness 24 creates a way to avoid that outcome. 25 That's why it's important to consider it as 1 an option here. 2 Now, do we absolutely need it? No, we don't. 3 "At a minimum" -- at a minimum, the statute 4 should be framed in such a way that it does not 5 create a violation of the law if the outcome is fair 6 and reasonable to the corporation, both, as to 7 executive compensation, and as to related-party 8 transactions. 9 Now, Bureau Chief Lilien would say to you: 10 We'll never bring cases against corporations that 11 underpay their chief executives, or who enter into 12 transactions that are favorable to the corporation, 13 if there is no harm. We would never do that. 14 And that's true. 15 But the Attorney General is not the only one 16 who has standing to bring such claims. 17 While there's limited standing under the 18 Not-For-Profit Corporation Law, insiders, directors, 19 officers, members, dissidents, who want to stir up 20 trouble within a not-for-profit corporation, have 21 that option to bring those claims. 22 And I think we would want to avoid even that 23 expense, so long as the outcomes in question were 24 fair and reasonable to the organization. 25 So there is a way to address this, either 1 with the presumption, or without it, but, in any 2 event, we should make sure that, if there's no harm, 3 there is no foul. 4 I would be happy to answer questions, 5 Mr. Chairman, if you have any. 6 SENATOR RANZENHOFER: You talked very quickly 7 and covered a lot of area. 8 SEAN DELANEY: I'll take that as a 9 compliment. 10 [Laughter.] 11 SENATOR RANZENHOFER: It is a compliment. 12 And, you know, as so many of the others have, 13 you know, you outlined, in the first instance, you 14 know, some very specific, you know, comments with 15 respect to the bills. 16 And I think I just want to highlight, you 17 know, notwithstanding the very specific comments, 18 and I think we can all agree, as has been said by 19 many before, as you, and others, have been very, 20 very involved. 21 And I think, you know, on balance, there is a 22 great deal of consensus, you know, with the bills 23 that are before us, and the issue is, you know: 24 How can you make it a little better? 25 Do you need to make it a little better? 1 If you try to make it better, is it going to 2 get worse? 3 You know, things of that nature. 4 One of the things that you said at the end, I 5 just want to follow up: 6 Your concern was, not that the 7 Attorney General would, you know, be looking at some 8 of these related-party transactions or compensation, 9 because, for the most part, it inures to the benefit 10 of the corporation. 11 But you had expressed some concern that 12 others, I think "dissidents" was the word that you 13 used, might be able to take advantage of some of the 14 language. 15 Can they do that now? 16 Or are you saying that, in the proposals 17 before us, there is language in the bills that would 18 create a new right of action for a dissident or some 19 other group? 20 SEAN DELANEY: I want to be clear: There's 21 no new right of action for those parties being 22 created here. 23 That right of action exists already. 24 SENATOR RANZENHOFER: Fine. 25 SEAN DELANEY: But when you add procedures 1 that now must be followed, and if those procedures 2 are not followed, there are claims that may be 3 asserted that might not have been asserted under 4 previous law. 5 SENATOR RANZENHOFER: Okay, I just wanted to 6 clarify that, because I wasn't quite sure. 7 SEAN DELANEY: Sure. 8 SENATOR RANZENHOFER: One of the things that 9 you had mentioned, the definition of a "relative." 10 And we had some conversation the other day. 11 I don't recall, and I'd have to go back and 12 look at the specific bills, I don't know if there's 13 an inclusion of parents. 14 I think there's children, but I'm not sure if 15 the other end is there. 16 Do you have any comment on that, about 17 whether or not that should be expanded? 18 SEAN DELANEY: Here's a place where we will 19 create traps for the unwary if we deviate from the 20 Internal Revenue Code. 21 Internal Revenue Code definition of 22 "relative" is quite expansive: Parents, children, 23 grandparents, grandchildren, stepparents...it goes 24 on, even including adopted children. 25 It covers a lot of ground. 1 There might be ways in which you might 2 conceptually improve this. 3 You might talk about domestic partners, for 4 example. 5 It's not in the Internal Revenue Code. 6 However, every time you deviate from the 7 code, you're setting traps for the unwary, 8 particularly for smaller organizations that are 9 already complying with the code, and will not have 10 the advantage of qualified counsel to dig deep into 11 treasury regulations to identify places where the 12 New York law is different from those treasury 13 regulations. 14 So, I think a word to wise there would be: 15 Stick with what is already working. 16 SENATOR RANZENHOFER: So for the definitions 17 that you were concerned about, I just want to go 18 through your list and make sure I have them all. 19 One was the definition of "relative." 20 SEAN DELANEY: Uh-huh. 21 SENATOR RANZENHOFER: The other was 22 "adoptive"? Or was that included -- 23 SEAN DELANEY: That's within "relative." 24 That's an example. 25 SENATOR RANZENHOFER: Okay. 1 Then the definition of "compensation"? 2 SEAN DELANEY: "Total compensation," yeah. 3 SENATOR RANZENHOFER: Definition of 4 "non-salaried benefits"? 5 SEAN DELANEY: That's part of 6 "total compensation." 7 SENATOR RANZENHOFER: And, so we -- 8 SEAN DELANEY: And, finally, 9 "independent directors." 10 SENATOR RANZENHOFER: So there's really 11 three, then, because you had -- you had mentioned 12 five, but there's actually three definitions: 13 Relative. Total compensation. Independent 14 directors. 15 SEAN DELANEY: And to that you might add 16 "substantial financial interest," if you waned to 17 improve the "related-party transactions" provision. 18 SENATOR RANZENHOFER: And with that, you were 19 suggesting the IRS regulation, which is defined as 20 35 percent. 21 SEAN DELANEY: As to a transaction with an 22 entity in which a director or officer holds an 23 interest, yes. 24 SENATOR RANZENHOFER: Okay. 25 Okay, well, thank you very much for your 1 testimony today. 2 Seems like a lot of the people who are 3 involved, at one point, were connected with the 4 Attorney General's charity division at some other 5 time in their life. 6 But, your comments, you know, have been very, 7 very instructive and informative. 8 I appreciate for -- you know, the time that 9 you took, not only to explain that here today, but, 10 obviously, you know, with a chart, which I've looked 11 at, but not studied. And I will go back and study 12 it. 13 You know, obviously, a lot of work has been 14 put into your efforts today, and I appreciate that. 15 SEAN DELANEY: And I want to thank my 16 colleague Laura Abel for doing a large part of that 17 good work. 18 Thank you. 19 SENATOR RANZENHOFER: I thought somebody else 20 might have been involved in putting that chart 21 together. 22 [Laughter.] 23 SENATOR RANZENHOFER: Thank you very much. 24 Our-second-to-the-last speaker for today, and 25 I apologize for telling them they were next, when 1 they weren't, is Ethan Kahn, Not-For-Profit 2 Organizations Committee member for the 3 New York State Society for Certified Public 4 Accountants. 5 Obviously, a lot of the language that we're 6 talking about today, with audits, and things like 7 that, directly affects you and your membership. 8 And I want to thank you for appearing here 9 today, for the testimony that's been submitted. You 10 know, for the work that, not only you, but certified 11 public accountants have done across the state. 12 I've served on a couple -- you know, in a 13 couple of organizations throughout my career, and it 14 always seems that, you know, just by virtue of being 15 the accountant, you're always the treasurer. Okay? 16 Sometimes when you're the treasurer, there's 17 a pecking order, and you end up becoming the 18 president after you become treasurer or secretary; 19 or vice president and treasurer. 20 So, the work that members of the, you know, 21 certified-public-accountant fraternity has done over 22 the years for not-for-profits is to be commended. 23 And, again, I thank you for being here today. 24 ETHAN KAHN: Thank you, Mr. Senator. 25 Good morning -- actually, good afternoon. 1 Got to change the notes. 2 It is a pleasure speaking before you today, 3 and I do appreciate the opportunity, on behalf of 4 the New York State Society of Certified Public 5 Accountants, to present various areas for your 6 consideration while proceeding with this bill. 7 The comments being presented today represent 8 multiple perspectives, such as accounting, auditing, 9 consulting, serving on nonprofit boards, training 10 the public, and gleaning the feedback from those 11 different buckets, if you will. 12 The State Society, in itself, represents 13 approximately 29,000 CPAs, who, in turn, many of 14 them are leading partners in their firms that 15 represent many, many other nonprofits, so, their 16 comments are pretty far-reaching. 17 We are definitely enthusiastic about these 18 reforms. They represent a noble step towards a 19 master piece of legislation. 20 Public trust and confidence is at an all-time 21 low, and we believe that, together, we can create, 22 or redefine, nonprofit corporate law that will 23 provide a better future and brighter future for the 24 nonprofit sector. 25 To give you a brief background of myself: 1 I myself have been involved in training, 2 auditing, consulting, advising, serving on boards. 3 The training has been on behalf of many 4 governmental entities, to groups of nonprofits, 5 sharing multiple committees within a nonprofit 6 sector, as well as nonprofit conferences -- 7 exempt-orgs conferences statewide. 8 And as such, I've had the opportunity to be 9 participating in meetings and feedback, and to see 10 what is at the realm and at the helm of these -- of 11 their concerns. 12 My goal today is really to do a broad stroke, 13 is really to cover some general areas, but I would 14 be glad to answer any questions that you may have, 15 Mr. Senator. 16 As an overarching approach, the new bill, if 17 you will -- 18 We've been through the other bill that came 19 out in February, and then March, comprehensively. 20 -- the overarching approach has been a 21 top-down approach, which is, let's try and better 22 the nonprofit sector by dealing with the board. 23 And that's a noble approach. 24 By the mere fact of dealing with the board, 25 we know that the oversight, the top level, will 1 actually be dealt with. They'll be more prudent, 2 they'll move ahead with more transparency. 3 What we would ask for your consideration 4 would be, in addition to that, to go bottom, up, 5 which would be, taking the individuals on the front 6 line, those who perhaps create the issues in the 7 onset, which some of them do rise to a board level, 8 some of them do not. 9 Those that do rise to the board level often 10 are more considerable in nature, and more material, 11 but there can be many that just don't. 12 As I'll speak about in a little bit -- in a 13 little bit down -- further down in a couple of 14 minutes, the auditors do have a responsibility to 15 speak to the board; as well, they have a 16 responsibility to communicate with management, the 17 areas that they feel are pertinent and important, 18 whether they be significant efficiencies, material 19 weaknesses, et cetera. 20 Auditors do not cover the entire gamut, east 21 to west. They do what's material on a test basis. 22 As such, they may or may not uncover areas of 23 malfeasance in areas that we may want to correct. 24 In terms of the audit requirements and the 25 60-day turnaround, we applaud the increased 1 threshold to $500,001 to require an audit. 2 Although that may seem contradictory to an 3 auditor speaking, and that may curb the client base 4 of many, with a passion to know that you'll be 5 receiving competent reports, competent audits, we do 6 feel the smaller organizations don't have the 7 wherewithal, and at times, the sophistication, if 8 you will, to bring in the appropriate auditors, and 9 to have a -- the proper process to go through the 10 various phases. 11 Some of those reasons are because, the costs 12 and the reimbursements for the audit are limiting. 13 Some other reasons may be regarding the 14 compromising in terms of the administrative costs, 15 in terms of, such as the ratios; like, the oversight 16 agencies are looking to state that a nonprofit 17 should adhere to various ratios of administrative 18 costs, versus program costs, versus fundraising. 19 If they go above that threshold, they may 20 lose a certification. They would lose favorability 21 in the eyes of philanthropists. 22 And as such, we're looking to try and help 23 them maneuver those ratios -- not to maneuver, but 24 actually to keep them in line with what's feasible 25 for them. 1 The costs that are not reimbursed, such as, 2 if we had to come back and do an audit for an 3 organization that's required to have a review, that 4 may come out of their pocket, it may come out of 5 fundraising dollars, but likely would not be 6 reimbursed by -- at least from the state agencies 7 that I've been working with for years. 8 The State has clamped down, and the 9 Division of Budget closed its fist, towards 10 increased rates, towards modifying or waiving the 11 rates of reimbursement, for many, many different 12 types of organizations. 13 And, any additional unbudgeted item could -- 14 get looks at really carefully and, often, is just 15 not allowed. 16 As far as the -- last night, and this 17 morning, I got called with two separate issues, 18 where staff of various organizations have called me, 19 and said: Ethan, we need -- there's a power outage 20 on -- in our school. We need food for the kids. We 21 can't provide food. 22 Guess what? Food is a disallowed item by the 23 State for many educational institutions. 24 What do we do then? 25 Do we get into fundraising funds, which may 1 not be there? 2 So, cost, and reimbursements of those costs, 3 is a key measure in determining who could and who 4 can't afford an audit, or, those who are subject to 5 review, and then called back to do an audit by the 6 Attorney General's Office. 7 The timing of the 60-day turnaround for an 8 audit, should the Attorney General request that, may 9 be difficult at times, because, scheduling conflicts 10 between the auditors and the organization, getting 11 an engagement letter together; bidding, if they go 12 through the bidding. And, actually, the audit 13 process, in getting you a final product, may take, 14 and may exceed, the 60-day window. 15 Moving on to the power to solicit 16 contributions for charitable purposes, many today 17 have discussed the approval process in the state for 18 a nonprofit to conduct business and to solicit funds 19 within New York State. 20 There was a nonprofit I was in touch with 21 earlier this week, it was on Monday, they submitted 22 a 1023 last May. 23 They called the IRS. 24 It has not yet been picked up in their 25 office. 1 Clearly, there's issues, there's 2 restructuring, there's budget cuts, at the IRS, and 3 they're contending with that on their level. 4 But, timing wise, these things could be quite 5 time-consuming. 6 This goes without saying, the time to craft 7 the policies, procedures, bylaws; organizing 8 documents; hiring an accountant, hiring an attorney 9 to do that, and at times, hiring someone to actually 10 help you solicit funds. 11 So, we somehow have to figure out a way not 12 to put the cart before the horse, to let them -- 13 allow them have some sort of an approval, if that 14 would be favorable, and -- or a temporary approval, 15 to at least get the ground growing. 16 Nonprofits often begin small, and end large, 17 for those that are successful and growing. 18 Those that begin small, often to be a husband 19 and wife. They are related parties. They're not 20 familiar -- commonly, not familiar with the regs 21 that they have to follow; and, therefore, their 22 passion for their mission just drives them to get 23 the ground rolling on that ended. 24 If they want to save AIDS/HIV homeless, 25 educating individuals with disabilities, that 1 becomes their focus, and, then, they don't see much 2 beyond that until someone actually opens up their 3 eyes. 4 We do believe, that of giving them that 5 window of opportunity to jump on the bandwagon, use 6 that passion, would help them immensely. 7 Regarding conflicts of interest, we're in 8 favor of this piece of legislation. 9 In any policy, there's usually three main 10 components, such as, the design, the implementation, 11 and the monitoring of the policy. 12 The design of the policy is pretty accessible 13 on websites, oversight agencies; models provided by 14 attorneys, as well as CPAs. So they're accessible. 15 Implementation: 16 Implementation, sometimes it's easier to have 17 a softer implementation period, some sort of a grace 18 period, in order to help them facilitate, to learn 19 that this exists, and actually avoid automatic 20 violations. 21 When the IRS incorporated the 990-N for the 22 smaller corporation, they sent out multiple, 23 multiple letters. 24 Despite those letters, I believe that my 25 comments at my previous conference indicated 1 something to the tune of three to 2 four hundred thousand revocations, which means that, 3 even when you try to reach out to some of the 4 smaller nonprofits, not necessarily -- we don't 5 necessarily know that the message is being conveyed 6 to them. 7 As such, it would be helpful to avoid 8 violation to individuals who are actually, in their 9 own mind at least, innocent. It's not malfeasance. 10 It's somewhat of an error, not fraud, and in that 11 differentiation. 12 So a grace period would be extremely helpful 13 to implementing some of these new items on the bill. 14 In terms of the whistle-blower policy, we are 15 in favor of the whistle-blower policy. 16 Whistle-blower policies, 17 conflicts-of-interest, are not required by 18 not-for-profit organizations; however, after 19 Sarbanes-Oxley (SOX) was instituted for public 20 companies, many nonprofits were encouraged, and have 21 adopted, whistle-blower and conflict-of-interest 22 policies. 23 The IRS jumped on the bandwagon by 24 encouraging it as well, although, it's not any 25 violation of federal law not to have them. 1 We are in favor of having that policy. We do 2 feel that it's necessary. 3 The individual to approach when -- should 4 someone have to blow the whistle, we found it 5 productive to either be a board member or a hotline. 6 Both of them seem to have been pretty productive. 7 When it comes to whistle-blowing, there's a 8 sensitive issue, in a sense that there may be some 9 ill-intended claims. 10 I've been called in as an adviser, as a 11 consultant, to some pretty large organizations, to 12 the tune of a 100 million or 110 million, where 13 there may be some disgruntled employees that bring 14 issues to the table that may, in fact, not be an 15 issue. 16 And management finds themselves a -- with 17 dual managements in the organization, with or 18 without a union, where you have individuals 19 protected by the law, and management cannot do 20 anything to avoid the disruption to their 21 operations. 22 And then the management has to deal with a 23 subsequent of that, subsequent events, which are 24 audits -- State audits, which are rigorous. 25 I've been involved in many, many State 1 audits, trying to work through the disallowances and 2 understanding the genesis of them, to see how we 3 could help those organizations. 4 One area to help them would be to try and 5 inculcate, and incorporate, some level of 6 even-keeled understanding from -- between management 7 and a whistle-blower. 8 In fact, a whistle-blower that is successful, 9 and is, in fact, correct, the message is there 10 within the bill to -- in terms of how to move along 11 with that, and how to report that. 12 Communicating significant deficiencies -- 13 And this will be my final point before, 14 Senator, if you would have any inquiries or 15 questions: 16 Communicating significant deficiencies to 17 those charged with governance has always been 18 required, it still is required, although, there is 19 some words missing from time to time, in terms of a 20 significant deficiency, a material weakness. 21 We do have to meet with -- those involved 22 with governance; however, the board members are 23 not -- are often not auditors, and they don't know 24 that they have the responsibility to meet with the 25 auditors. 1 If the audit firm is competent audit firm, 2 they will initiate, and say: Well, we've got to 3 follow our guidelines. We've got to meet with you, 4 and walk you through this. Next year, we'd like to 5 see this corrected. 6 If they are not on that level, and I've seen 7 this at -- by many predecessors, they won't have 8 those comments; and, so, something is obvious, not 9 doing bank reconciliation, or some kind of obvious 10 issue that would come up in an audit. 11 We have to come in and say: Where were the 12 comments from last year? 13 "Well, what comments? We had no comments. 14 We were clean." 15 "You were clean, but there were no bank 16 reconciliation." 17 So the level of audits, the competency of the 18 audits, and the knowledge base of the auditors 19 themselves, to know that they're required to 20 communicate with the board, is important. 21 And, therefore, we feel, not only, as I 22 started out, is it important to have training for or 23 requirements for individuals involved in management 24 of nonprofits -- "management" meaning below the 25 board level; an executive director, and program 1 directors -- but, also, auditors should have to have 2 some -- and auditors do have CPAs. That's not -- 3 that doesn't go unseen -- but various -- various 4 other steps that may be incorporated into law, 5 requiring them to have those communications. 6 I've had talks with Jason, and others, about 7 the levels of audits, and trying to embetter [sic] 8 them: What could we do about that within 9 New York State? 10 And the word always comes back to "training." 11 I've had conversations with many state 12 agencies, predominantly those that require CFRs 13 (consolidated fiscal reports.) 14 The final end-all seems to always be 15 training -- required training -- in areas that we 16 want them to focus on; not just the technical, but 17 also governance, oversight, and things of that 18 nature. 19 I do look forward to working together with 20 you in the future, and in the coming weeks. 21 We do have many more detailed items that we 22 were looking forward to, hopefully, documenting, and 23 hoping you would consider those items. 24 We would submit them to you within the coming 25 week; pretty timely. 1 And I thank you for this opportunity to 2 present before you today. 3 SENATOR RANZENHOFER: Thank you, Ethan, for 4 your comments, and, you know, your very detailed 5 analysis, which I wouldn't expect anything less from 6 a certified public accountant -- 7 [Laughter.] 8 SENATOR RANZENHOFER: -- but, very, very 9 detailed analysis, and suggestions. 10 I did have two questions I wanted to ask you, 11 which came up as you were testifying and commenting. 12 With respect, you mentioned that you favored 13 the whistle-blower policy. 14 And there has been -- you mentioned something 15 about a disgruntled employee, who -- I mean, I think 16 the inference is, that it would not be a legitimate 17 concern, but, nevertheless, not-for-profit would 18 still have to deal with that issue. 19 I wasn't quite sure of what suggestion you 20 had -- you know, moving into what suggestion you 21 have in terms of the law, to deal with that 22 particular issue that you raised. 23 SEAN DELANEY: On a practical level, when I 24 sit at board meetings and this issue comes up, my 25 goal is to put, obviously, the constituents of the 1 not-for-profit in the center of the table, and those 2 who are making that happen. 3 If there's an individual that is disgruntled, 4 ill-intended, who does bring up claims which are 5 not, in fact, correct, the way to weigh out whether 6 it's good or not, would be to deal with the issue, 7 and in the law, to actually allow management to say, 8 after we've determined that this is not a correct 9 allegation, and it was not through healthy -- 10 through a healthy channel, management should have 11 the right, and the law, to actually come back and 12 say: This is disruptive to our organization. 13 If it won't be this individual, it may 14 translate into another individual learning the same 15 mechanism, and, avoiding that dual administration. 16 So management would actually have the ability 17 to -- I don't like to use the word "retaliate," but 18 do what's right for the organization. 19 If there's something wrong, we've got to deal 20 with it, and we've got to eradicate it. 21 If there's not something wrong, and it's just 22 disruptive, causing State audits coming in. 23 I had a scenario where the staff -- senior 24 staff were on the floor actually in tears. 25 The State auditors came in and peeled away, 1 like an onion, every single receipt. 2 For what? 3 For an individual who went -- 4 I hate to state -- saying specifics, but I'll 5 just give you one scenario. 6 -- they went to the bathroom, they stuffed 7 the toilet and the sink, and then let the water run, 8 and took pictures of that, and sent that in. 9 And then they said: What kind of 10 mismanagement do you have in this organization, with 11 floods, nobody takes care of it? 12 And there are -- there's other scenarios. I 13 just don't want to go into too specific on the 14 record. 15 And those are just disruptive. 16 And, therefore, the law could actually allow 17 the management to -- and/or the board to say: This 18 was -- this is not good for the organization. We 19 have a right to, perhaps, disciplinary action, or 20 dismiss that particular employee. 21 SENATOR RANZENHOFER: Okay. 22 One other question that I wanted to ask you, 23 you had mentioned the conflict-of-interest policy, 24 and asking for a grace period. 25 You mean, a grace period, like, for instance, 1 if the law had an effective date, you know, let's 2 just say, some provision of the law had an effective 3 date of one year from the date that it was enacted, 4 would that be a sufficient grace period? 5 Are you suggesting that, after the law is 6 enacted, let's say, the law is adopted, and it goes 7 into effect the following year, you know, 365 days 8 later, is it your suggestion that there should be a 9 grace period preferred that 365 days after it 10 becomes law, or, from the date that it's passed? 11 ETHAN KAHN: In fact, on a practical level, I 12 do feel that the 365 days, although, for the most 13 part, would be adequate, we will find many 14 organizations, especially on the smaller side -- 15 And "small to medium" means, it's not just a 16 million and below. "Small," to me, is more like 17 3 million and below. 18 -- that have just never heard of it, despite 19 the outreach. 20 Similar to the 990-N situation from the IRS, 21 with, I think it was three to four hundred thousand 22 organizations had -- actually had their revocation 23 enacted. 24 So I -- it's a gray area. And that's 25 something I would like to go back to the society, 1 and kind of refine what that would entail, but some 2 sort of grace period. 3 SENATOR RANZENHOFER: Well, I appreciate your 4 comments on that. 5 And, again, I appreciate the time that you 6 took today, not only to put together in the 7 testimony, but also to come here with your comments. 8 I thank you for that. 9 ETHAN KAHN: Thank you, Senator. 10 SENATOR RANZENHOFER: Our final speaker for 11 today is William Josephson, who appeared on 12 Wednesday in Albany, as the final speaker as well, 13 but is speaking today. 14 WILLIAM JOSEPHSON: I like to provide the 15 cleanup. 16 SENATOR RANZENHOFER: Well, cleanup is 17 fourth. 18 It's ninth to this. You're not cleanup. 19 That was Michael Cooney from the New York 20 State Bar Association; he was cleanup. 21 WILLIAM JOSEPHSON: There's no better cleanup 22 than Mike. 23 SENATOR RANZENHOFER: I won't say last 24 either. Or the bottom of the order. 25 So, from the New York State Law Revision 1 Commission, William Josephson, again, thank you for 2 appearing here again. 3 You know, we've also had an opportunity to 4 meet with you, you know, in my office in Albany, 5 along with Peter, and we've met me with 6 the Attorney General folks. 7 And, again, I appreciate, and I'll say it 8 again publicly for the record, you know, all of your 9 work over many, many years with not-for-profits, and 10 trying to make this law a better law. 11 I know that your heart and soul is in this 12 like no other. 13 And, again, I appreciate your comments, and I 14 appreciate your being here again today. 15 WILLIAM JOSEPHSON: Well, we appreciate it 16 even more, Senator. 17 Your support, and Assemblyman Brennan's 18 support, is vital to getting this job that has been 19 too-long delayed, done. 20 I would like to speak, actually, to the issue 21 that the representative of the New York State 22 Society of CPAs spoke to, because, that, I think 23 has not come up before. 24 And I want to recall to you, Senator, that 25 when the NPCO was enacted in 1969, its effective 1 date was delayed for a year. And that did provide a 2 remarkable opportunity for public education and 3 training. 4 So, perhaps that's something that you want to 5 consider in your formulation of the effective date 6 of whatever finally is enacted. 7 The -- interesting to me, Peter and I are 8 already on the assumption that something will be 9 enacted. We've already been invited to a training 10 session that will take place in the fall. 11 So, I think, you know, this is something that 12 is important. 13 I would like to speak to a number of the 14 themes that came up in Albany, and came up today. 15 One of those themes that I think is very 16 important, which is not addressed in either the 17 Attorney General's bill or the Law Revision 18 Commission bill, but is addressed in the 19 Schneiderman report, the problems that the 20 nonprofits find with State contracting. 21 I don't really understand why that issue has 22 not been addressed by the Attorney General. 23 As you know, in formulating the Law Revision 24 Commission bill, we really worked off the 25 Attorney General's bill last year, and were not 1 aware of the changes the Attorney General had made 2 in his bill until after they were introduced after 3 our bill. 4 We will be taking, as I've told you, a very 5 hard look at the differences between the 6 Attorney General's bill and our bill, and will be 7 making a submission to you as quickly as the 8 Law Revision Commission can. 9 And I'm grateful to the Assembly staff person 10 for his spreadsheet, and now I'm grateful to Sean 11 for his spreadsheet. 12 I want to assure both Chan [ph.] and Sean 13 that I'll be looking very carefully at them. 14 There are a number of matters that came up 15 that I think are potential areas of disagreement. 16 In crafting the Law Revision Commission's 17 bill, we paid very careful attention to the 18 definitions in the Internal Revenue Code of the 19 various types of tax-exempt organizations. 20 And we created what we believe is a more 21 comprehensive definition of what the 22 Attorney General calls "non-charitable 23 organizations," and what we call "beneficent," and 24 what Michael Cooney calls "mutual-benefit"; one that 25 aligns with the way the Internal Revenue Code treats 1 them. 2 And we believe there are discrepancies 3 between the Attorney General's treatment on those 4 definitions, and what the definitions should be. 5 We also -- I am, personally, very, very 6 sympathetic to the many comments that have been made 7 about not having regulatory standards that are 8 inconsistent with those that the Internal Revenue 9 Code has. 10 Those regulatory standards for compensation 11 for related-party transactions apply to the 12 501(c)(3)s; the traditional charities. 13 The code does not attempt to apply those 14 particular regulations -- 15 There are always exceptions, of course. 16 There are a couple, but, they're not material. 17 -- to the non-traditional charities. 18 I would like, as I told you in the joint 19 statement we submitted -- Peter and I submitted to 20 you earlier today, I would like to take a really 21 careful look at aligning the issues of compensation 22 and related transactions between the code and state 23 law. 24 And perhaps a solution here, although, I am 25 not yet in a position to advocate it, is to leave 1 the Attorney General's provisions with respect to 2 those issues, to what the Attorney General calls the 3 "non-charitable organizations," where the code does 4 not really apply, and, to make sure, with respect to 5 the traditional charities, that they do not have to 6 cope with differing standards, and with minute 7 differences between those standards. 8 So, that's an area, as we told you in our 9 memorandum, that we would like to study. 10 Another area that we told you in our 11 memorandum that we would take a look at, is the 12 State Bar's view, which I think is not exactly 13 clear, that certain membership organizations should 14 be exculpated from standards. 15 The fact of the matter is, that many of those 16 organizations do represent opportunities for 17 significant abuse. 18 I brought with me what the Attorney General 19 publishes each year, "Pennies for Charity." 20 And it shows that clubs, associations, in 21 their fundraising activities, are, and should be, 22 the subject of further scrutiny. 23 The Attorney General himself, after years of 24 complaint, even during my regime more than ten years 25 ago, has finally brought an action against the 1 National Arts Club for abuse that its members were 2 unable to counteract. 3 We have the example of the Stock Exchange; 4 We have the example of the 5 Racing Association; 6 We have the example of the New York State 7 Fair. 8 I don't want to plague with you all of these 9 examples, but it is simply not the case that the 10 non-charitable organizations do not deserve 11 scrutiny. 12 Perhaps a less level of scrutiny than the 13 charities, but, certainly, the areas of abuse are 14 very, very present. 15 And, last, but not least, in Albany, in 16 particular, comments were made about the 17 difficulties of applying the extremely complex 18 indemnification provisions in the NPCO. 19 And I'm very sympathetic to that, because 20 I've struggled with them myself. 21 They're, unfortunately, the same as they are 22 in the Business Corporation Law, so, that might be a 23 question of coordination. 24 But, the Law Revision Commission, and I will 25 be recommending, and I hope the Senator will support 1 this, take a hard look at simplifying, and making 2 understandable, the currently incomprehensible 3 provisions with respect to indemnification in both 4 statutes. 5 Thank you, Senator. 6 We applaud your efforts. 7 We'll do everything we can to support you. 8 SENATOR RANZENHOFER: Thank you, William. 9 There's one question that I did want to ask 10 you. 11 In your third comment, about that -- you 12 know, you do think that membership organization 13 should have standards that are applied to them. 14 And you mentioned some examples of what I 15 would consider larger organizations: The New York 16 Stock Exchanged. State Fair. 17 What about membership organizations that are 18 much smaller? 19 WILLIAM JOSEPHSON: We're in favor of 20 thresholds. 21 And, in general, we have deferred to the 22 Attorney General's notion as to what the threshold 23 should be. 24 I personally don't have a view, as whether 25 the Attorney General's thresholds at 500,000; or the 1 thresholds that have been advocated here by a number 2 of organizations, at a million, or even one at 3 2 million. 4 I don't have a personal view on that. 5 I would accept any reasonable threshold that 6 the Legislature decided to establish. 7 SENATOR RANZENHOFER: Well, thank you again 8 for testifying. 9 I appreciate your dedication to this cause, 10 and, you know, to the efforts that, 11 Attorney General, the Law Revision Commission, the 12 Legislature, the not-for-profit community, has made. 13 And your knowledge and your insight and your 14 experience has really been invaluable. And your 15 comments are very, very much appreciated. 16 WILLIAM JOSEPHSON: We're very grateful to 17 you, Senator. 18 Thank you; and to Assemblyman Brennan. 19 SENATOR RANZENHOFER: Well, we will share 20 these comments, obviously, with Assemblyman Brennan. 21 Fong, his staff member was -- has been very, very 22 involved as well. 23 And, again, would like to thank all of the 24 staffs that have worked so hard; 25 You know, my own staff; my counsel; the 1 members that are here today; 2 Particularly Randi Malman, who has worked so 3 hard in putting these hearings together, and, you 4 know, staying up till midnight collating and copying 5 all of the testimony, and putting them in the books 6 for all of the members, and e-mailing to those who 7 would like it. She's really done a fantastic job. 8 But both, you know, my Albany staff, and my 9 district-office staff, and the New York City staff 10 who is here today, helping out, it's very, very much 11 appreciated. A very, very -- very, very 12 professional job that you all did here today. 13 I also want to thank, as you had mentioned, 14 William, you know, Assemblyman Brennan has been, you 15 know, a very close partner, you know, working 16 together. And, again, his staff has also been 17 invaluable in working -- you know, working through 18 the weeds, so to speak, you know, the differences 19 between the bills, and, you know, getting the 20 discussions going, to try to bring something to 21 fruition this particular legislative session. 22 I want to thank the Senate Special Events 23 staff. Again, you know, the New York City staff who 24 worked so hard today, media services. 25 And, again, you know, all of those who 1 submitted testimony. 2 You know, I can tell, from listening to, you 3 know, everything that everybody had to say, that, 4 you know, a lot of people have put in a lot of work, 5 a lot of time, a lot of effort. 6 You know, the representatives from the 7 not-for-profits; representatives from the 8 professionals; the attorneys, you know, the bar 9 associations, city and state; the accountants; and 10 especially, you know, the Law Revision Commission, 11 and the Attorney General's Office, everybody has 12 really done a lot of work. 13 And I sense that we're getting very close. 14 And, hopefully, you know, you never make 15 predictions, because, as you know, the last time 16 that the law was changed, was when Neil Armstrong 17 walked on the moon. I think someone used that 18 reference. 19 So, hopefully we'll have -- you know, we'll 20 be able to put this together in short order, and get 21 something which is really, really going to benefit, 22 you know, the not-for-profits, and most importantly, 23 the people that are served by them. 24 So, again, this concludes today's hearing, 25 here in New York City. 1 This is the second of three hearings. 2 The first was in Albany on Wednesday. 3 This is the second. 4 And we're going of have our final hearing in 5 Rochester, New York, Tuesday, the day after 6 Memorial Day. 7 So, again, everybody, thank you for being 8 here. 9 And that concludes today's hearing. 10 11 (Whereupon, at approximately 12:37 p.m., 12 the public hearing held before the New York State 13 Senate Standing Committee on Corporations, 14 Authorities, and Commissions concluded, and 15 adjourned.) 16 17 ---oOo--- 18 19 20 21 22 23 24 25

Public Hearing: To Examine the Re-Codification of New York State'S Not-For-Profit Corporation Law in an Effort to Reduce Unnecessary Burdens on Nonprofits and to Enhance Nonprofit Governance and Oversight

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