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

United Way of Greater Rochester 12

Ann Marie Cook 92 101 13 President & CEO

Lifespan 14

Joseph G. Casion, Esq. 105 111 15 Partner

Harter, Secret & Emery, LLP 16

John Cirando, Esq. 116 121 17 Counsel

New York State Law Revision Commission 18 19 ---oOo--- 20 21 22 23 24 25 1 SENATOR RANZENHOFER: I'd like to welcome 2 everybody to the Senate Standing Committee on 3 Corporations, Authorities, and Commissions. 4 My name is Senator Mike Ranzenhofer. I am 5 the Chairman of this Committee. 6 And I'm joined by my colleague today, from 7 Rochester, Joe Robach. 8 This is the final public hearing in a series 9 of three hearings that we conducted regarding the 10 Not-For-Profit Law across the state of New York; 11 looking to make some revisions to the law. It has 12 not been revised since 1969. 13 And as I said, I'm joined here today by my 14 friend, and my colleague, Senator Joe Robach. 15 And, Joe, would you like to say a few words? 16 SENATOR ROBACH: Sure. 17 Good morning. 18 Let me not only thank you for being here, but 19 also thank Chairman Ranzenhofer for holding these 20 across the state. 21 I think the topic is certainly important, not 22 only to the organizations, but to the many, many 23 people who get services. 24 And, really, I say this, I think government 25 partners oftentimes, through reimbursement, through 1 funding, with the not-for-profits in this state, 2 probably more so than any other state in the nation, 3 to make sure we are meeting the collective need, so 4 to speak. 5 So this is an important area, and I 6 appreciate your willingness to take this on for 7 legislation. 8 And a little bit of a note: 9 I always appreciate -- oftentimes hearings 10 seem to be in Buffalo, Albany, and New York City. 11 I appreciate it greatly, 12 Chairman Ranzenhofer, as you now represent more of 13 Monroe County, bringing this here to make it easier 14 for our not-for-profits to testify without having to 15 travel as far. 16 So, a "thank you" to everyone who is going to 17 testify. 18 And, I, unfortunately, very shortly, am going 19 to be headed in the other direction to the Capitol, 20 but, happy to be here to participate. 21 And, again, thank you, Mike, for doing this, 22 and taking on this important topic. 23 Interestingly enough, as a Met fan, nothing 24 has happened since 1969 in this category, since the 25 Mets won the World Series. 1 And even though we're not at 500, hopefully, 2 not only will this hearing be successful, but the 3 Mets will be back in the World Series. 4 How's that? 5 SENATOR RANZENHOFER: Well, with that 6 introduction, I don't know how we can go wrong. 7 The last analogy was not to the Mets, but it 8 was when Neil Armstrong walked on the moon -- 9 SENATOR ROBACH: That, too. 10 SENATOR RANZENHOFER: -- which also puts it 11 into perspective. 12 SENATOR ROBACH: There you go. 13 SENATOR RANZENHOFER: But I would also like 14 to thank our Senate special-events staff who is here 15 with us today, doing the hard work that they do in 16 recording all of these meetings, media services. 17 Also thanks to the Monroe County Legislature, 18 and the Clerk's Office, for allowing us to use these 19 really beautiful chambers here today; 20 And, to my staff, both in the district and in 21 Albany. 22 As Joe said, you know, we're winding down our 23 legislative session. 24 We have four weeks left, and I know that Joe 25 has some other legislative responsibilities that he 1 has to attend to as we are winding down these last 2 several weeks. 3 There may be some other members of the 4 Monroe County delegation that join us for this 5 hearing today. 6 With that said, what I would like to do is, I 7 would like to get started, and welcome, again, the 8 New York State Office of the Attorney General, 9 represented by Jason Lilien, bureau chief of the 10 Charities Bureau. 11 Jason has testified in Albany, Jason has 12 testified in New York, Jason is now here in 13 Rochester testifying again. 14 There are a couple of bills that are before 15 the Legislature; one sponsored by myself and 16 Assemblyman Brennan, which really came from the 17 Attorney General's Office. 18 And, again, I don't want to steal your 19 thunder, but the Attorney General really worked 20 very, very hard, and with outreach to the community, 21 in putting these working groups together. 22 Also the Law Revision bill, the Law Revision 23 has also worked very, very hard across the state, 24 and in working with groups and soliciting input, to 25 deal with this particular issue. 1 So with that being said, we have a number of 2 speakers today. 3 And, again, Jason, welcome, for the third 4 time in five days, or six days, or however many it's 5 been. 6 I appreciate you, you know, participating in 7 these very, very important public hearings. 8 We do feel it's very important to be able to 9 solicit and gather input on this bill. 10 We want to make sure that we get it right, or 11 as close to right as we can. And, a lot of hard 12 work has gone in, but it's very, very important to 13 have public input and dialogue. 14 And I know, you know, that in our 15 conversations, you know, you've had a chance to 16 listen to the comments as well. You've stayed for 17 the entire hearing, and, you know, you've also heard 18 the input from the -- you know, from -- you know, 19 the professionals, lawyer, accountants, and most 20 importantly, from the not-for-profit community. 21 So, welcome again, and I look forward to 22 hearing from you again. 23 JASON LILIEN: Thank you, Chairman; thank 24 you, Senator. 25 And, Senator, I share your opinion. I too am 1 a Mets fan. And while we -- you know, while 2 enacting this bill may not have the same sense of 3 satisfaction as the Mets winning the World Series, I 4 think it will be fairly close. 5 So, hopefully, you know, we're getting close 6 there. 7 And thank you again for conducting this 8 hearing. 9 I really enjoyed being part of this process. 10 You know, I think the last two hearings were 11 very important, very informative, and I think they 12 have moved us one step closer. 13 I guess the challenge today for me is, not 14 repeating myself, for you, but also making it 15 meaningful for those who may have not heard my 16 testimony previously. 17 At the outset, let me just again extend the 18 Attorney General's appreciation to the Chairman, and 19 to members of the Committee, for all the work you've 20 done. 21 I think the work of your staff; your work, of 22 course; your colleagues, that of 23 Assemblyman Brennan; has been vitally important in 24 getting us one step closer to real meaningful 25 reform. 1 So, thank you very much. 2 You know, as -- Senator, as you've mentioned, 3 you know, this -- the Nonprofit Revitalization Act 4 is the process of a very robust and collaborative 5 process that started over two years ago. 6 In 2011, the Attorney General convened a 7 Leadership Committee For Nonprofit Revitalization to 8 hear directly from the nonprofit sector, what the 9 biggest issues are facing this sector. 10 Recognizing that the bill has not had -- 11 New York law has not been meaningfully changed in 12 decades, and we have an opportunity now to get 13 something done, we asked nonprofit leaders from 14 across the state -- small organizations; large 15 organizations; organizations upstate, downstate; 16 from all across the different types of service and 17 program -- programs that are represented in the 18 nonprofit sector -- asked them, "What are your 19 biggest challenges?" recognizing that not all -- it 20 may not be possible to address all of the key 21 issues, but wanted to tell us what the most 22 important ones are. 23 And for the first time in recent memory, the 24 nonprofit sector sat at the same table with its 25 regulator, to identify the most pressing issues, and 1 to figure out constructive, pragmatic, but 2 meaningful ways of addressing them. 3 And what resulted from that process is the 4 Nonprofit Revitalization Act. 5 And as we've discussed in the prior hearings, 6 and as you know, the Nonprofit Revitalization Act 7 has two main objectives: 8 One is to reduce burdens on the nonprofit 9 sector, burdens that have existed for decades. 10 As you are well aware, nonprofits throughout 11 the state face bureaucracy and red tape and 12 obstacles, both, in terms of operating on a daily 13 basis, as well as new entities trying to form in 14 New York State. 15 And so a key goal -- a key goal was to 16 identify ways to reduce those burdens, to make 17 New York a more business-friendly state for 18 nonprofits that are doing important work here, and 19 nonprofits that are desiring to form here; 20 At the same time -- at the same time, the 21 Attorney General recognized, as did our 22 Leadership Committee For Nonprofit Revitalization, 23 that it was essential -- it was essential that the 24 public maintain its trust in the nonprofit sector. 25 Literally, billions of dollars of taxpayer 1 and private donations flow, annually, to nonprofits. 2 And both donors and taxpayers have to have a 3 reasonable level of assurance that when the money 4 reaches the nonprofit, there are oversight 5 mechanisms in place, boards of directors are 6 performing their responsibilities, and they're aware 7 and knowledgeable of those responsibilities, and 8 they have a road map, they have an understanding, of 9 what they need to do in order to give that 10 protection to the public. 11 So, our Nonprofit Revitalization Act contains 12 a series of commonsense, meaningful, but balanced 13 reforms in key issues, such as, audit oversight; 14 conflicts-of-interest; whistle-blower policies; 15 related-party, or more pejoratively speaking, 16 self-dealing transactions. 17 Importantly here, this was not the 18 Attorney General trying to impose on the 19 nonprofit sector its beliefs on what regulations 20 should be. 21 We've tried that, that hasn't worked. 22 "We," the Attorney General's Office, said, 23 We need to work more collectively in government. 24 As opposed to what this process really was, 25 was asking the nonprofit sector to work with us, to 1 find those commonsense solutions that will work -- 2 that will work. 3 And in each of these areas, we believe we 4 have achieved a balanced framework of reforms. 5 Now, I will say it's been gratifying for 6 the -- you know, to hear over the past two hearings, 7 and also outside of the hearing rooms, the 8 emergings -- that the consensus is really starting 9 to emerge around the core provisions of the 10 Nonprofit Revitalization Act. 11 When you actually, you know, listen to the 12 comments and listen to the testimony, at least I 13 have been able to -- you know, I have been -- I find 14 hope, that we're going to get something done, 15 finally, because, if you really listen to what is 16 being said, we're really talking -- where there are 17 comments, we're talking about things on the edges. 18 In terms of the core provisions, I think 19 there's a lot of -- there's significant consensus. 20 And, you know, I think, to a large degree, 21 that is result of the process that we've followed. 22 Chairman, as you have mentioned, we have gone 23 on -- out of way over the past two years, to seek, 24 and incorporate, extensive input; input from 25 nonprofits across the state, from their leaders, 1 from their lawyers, who have deal with many of these 2 issues. 3 And, you know, I think, as a result of the 4 that -- as a result of that, we know now have 5 consensus -- considerable consensus among -- you 6 know, in terms of the key provisions of the bill. 7 And I just would like to just repeat -- 8 repeat one of the things that Sue Hager from the 9 United Way said. 10 In -- you know, she's been working at this 11 for, literally, decades, and she said, that: This 12 process that we followed over the past two years is 13 a model in policy transparency. 14 And I think that speaks volumes, and I think 15 it's one of the main reasons why we now have a bill 16 that has, you know, been commented on, vetted, 17 refined and improved, and positioned to be enacted. 18 Having said that, let me just touch on a few 19 comments that have been raised in the prior 20 hearings, and in some of the testimony, and offer 21 some perspectives. 22 I think in the area of reducing burdens, 23 making it easier for nonprofits to operate in 24 New York, to form in New York, and eliminate some of 25 that unnecessary bureaucracy and obstacles, I think 1 there's widespread support around those provisions. 2 There are two areas where there has been, I 3 think, a higher level of comment. 4 One area has to do with, whether, and to what 5 extent, approvals prior to incorporation are 6 required for newly formed entities. 7 New York has a unique statutory regime, 8 requiring nonprofits to obtain particular 9 government-agency approvals prior to incorporation. 10 What our bill does, our bill focuses on the 11 one consent that -- the consent that has caused the 12 most difficulty, the most frustration, the most 13 delays, over many years, and that is the 14 preapprove -- the consent required of the 15 State Education Department for institutions that are 16 not curriculum-based or collections-based. 17 So, these organizations that are not museums, 18 and organizations that are not schools, many 19 organizations today are required to get preapproval 20 of the State Education Department if their 21 certificate of incorporation includes purposes that 22 may -- "may" -- I emphasize "may" -- may require 23 chartering from the Board of Regents. 24 That provision has been interpreted loosely, 25 or generously, over the years. 1 And I think what's happened is, most 2 organizations that contain certain key words in 3 their purposes are required to get consent from 4 State Ed. 5 And that process, to no fault of State Ed, 6 they've got resource limitations, as well as others, 7 you know, that process, unfortunately, take -- has 8 taken a long time. 9 And as a result of not just that, that 10 process, but related processes, what we've been 11 hearing, and you've heard in others' testimony, is 12 many organizations are encouraged, when they can, to 13 incorporate in other states, like Delaware, where -- 14 where the process is much simpler. 15 The other area that we've heard some comments 16 on, is in the area of how -- how -- whether, and how 17 high, should the threshold be raised for financial 18 audits. 19 One of the burdens that was most frequently 20 identified -- has been most frequently identified, 21 is the burden that small nonprofits face in -- in 22 obtaining a CPA's audits -- a CPA audit. 23 Under current law, a -- an organization that 24 is raising funds from the public, and is therefore 25 registered under Article 7-A of the Executive Law, 1 is required to obtain an independent financial 2 audit, a CPA's audit, if they have revenues over 3 $250,000. 4 That compares -- that figure is relatively 5 low compared to other states. 6 Massachusetts, for example, is $500,000. 7 California is $2 million. 8 And, so, what we've tried to do here, is 9 recognize that the compliance costs on smaller 10 organizations may be disproportionately high. 11 An organization at $250,000 may not have the 12 resources to spend ten, fifteen, twenty, 13 twenty-five thousand dollars on an audit. 14 So in the Nonprofit Revitalization Act, we 15 had raised that threshold to $500,000; again, after 16 extensive public input, extensive conversations, 17 again, trying to strike the right balance. 18 We recognize that others have advocated a 19 higher -- a higher threshold, a million or 20 2 million, but we think, as an incremental step, 21 raising to $500,000 would, both, reduce burdens, but 22 also give the public confidence that audits are 23 being obtained at the appropriate levels. 24 In the area of governance, I think it's fair 25 to say we've heard more comments. 1 You know, we went out last May with an 2 earlier version of this bill, at the end of last 3 session. 4 And since then, we, as we've discussed, 5 worked very extensively in trying to get input from 6 the nonprofit sector on the governance provisions of 7 the bill. 8 As Chairman Ranzenhofer had mentioned a few 9 minutes ago, the goal is to get it done right. 10 You know -- you know -- you know, the 11 AG's Office, while we have our owner perspectives 12 and views as to governance, we have to make sure 13 it's work -- whatever is introduced and enacted is 14 workable, and understandable. 15 So, at the end of the last legislative 16 session, we sat down with nonprofits from across the 17 state, and as a result of those conversations, we've 18 refined the governance provisions quite -- in some 19 areas, quite significantly. 20 And those changes are reflected in the 21 Nonprofit Revitalization Act that 22 Chairman Ranzenhofer has introduced. 23 And I think as a result of those changes, and 24 as a result of the process we followed, I think, 25 again -- again, the focus is trying to find the -- 1 strike the right balance here, a lot of the comments 2 we received are -- reflect that that appropriate 3 balance has been struck. 4 I think an area of financial-audit oversight, 5 I think we've seen a lot of support for the 6 provisions in the Attorney General's bill. 7 I think there's an increasing recognition 8 that boards need to be engaged, or committees of the 9 board need to be engaged, in the audit-oversight 10 process. 11 As you are aware -- as you are aware, while 12 the statute requires certain charities of a certain 13 size to obtain this financial audit, there are no 14 requirements -- no requirements in the statute as to 15 what a board should be doing with that audit. 16 And not surprisingly, there is, I would say, 17 inconsistent levels of review across the nonprofit 18 sector, in terms of board oversight. 19 Some boards, of course, are meaningfully 20 engaged; and, unfortunately, many boards are not. 21 And the goal here is to provide to boards, or 22 to committees of the boards, a road map as to what 23 their baseline responsibilities are with respect to 24 audit oversight, recognizing, of course, that -- 25 that, in terms of voluntary practice, there are far 1 more additional practices, best practices, that 2 boards should follow. 3 But, the goal was to build into statute at 4 least those minimal baseline requirements. 5 There's been, I think, widespread support for 6 the conflict-of-interest policies and whistle-blower 7 policies, but there's been discussion as to what -- 8 which entities these policies should apply to, and 9 at what -- if there should be higher thresholds 10 built in. 11 You know, in the area of conflict-of-interest 12 policies, given the importance of these policies and 13 their widespread use today, we believe that those 14 policies should apply to all nonprofits irrespective 15 of whether they're a charity or not. 16 In terms of whistle-blower policies, we have 17 built-in thresholds. 18 We've raised those thresholds, so that they 19 only apply to large organizations; organizations 20 that have above a million dollars in revenue and 21 20 or more employees. 22 Again, trying to strike the right balance. 23 I would say the area of related-party 24 transactions is an area that's received a lot of 25 attention. 1 I think what we have tried to do here, is two 2 things: 3 One, make these provisions meaningful, but 4 balanced, but, also, to be as consistent as possible 5 with existing Internal Revenue Code requirements 6 that deal with related-party transactions. 7 And, so, in the areas of consistency and 8 balance, I think we've reflected a lot of input from 9 the nonprofit sector, and, you know, there are 10 still -- there are still some -- some still have 11 some comments. 12 One of the comments we've heard in terms of 13 these provisions, is there are some that who would 14 still like to see them made more consistent with 15 IRS provisions. 16 We can, obviously, you know, still have 17 some -- you know, open to discussion regarding that. 18 I would just point out, that the core 19 substantive requirements that are in New York -- in 20 the Nonprofit Revitalization Act, that would be in 21 New York law, are modeled on the IRS. They're 22 virtually identical. 23 The requirements that nonprofit boards 24 consider these transactions, making sure they're 25 fair and reasonable, and do benchmarking, and then 1 document your determination when they're -- when 2 they're -- when the process is finished, are modeled 3 off the IRS provisions. 4 And we believe there's a lot of consistency 5 already in the bill. 6 You know, one area where -- which we've 7 discussed, is whether or not to incorporate a 8 presumption, as exists in the IRS rules. 9 If certain of these policies are followed, 10 for reasons we've discussed at prior hearings, and 11 we can continue to discuss, we don't think that's a 12 good idea, because the Attorney General's Office 13 would be in a position that it could not as 14 effectively, as it needs to, protect taxpayer and 15 donors when there are related-party transactions 16 that are improper. 17 But, overall, I think these provisions 18 reflect a great deal of balance. 19 You know, as you know, from prior -- the 20 prior hearings, there have some -- some have 21 advocated for a complete ban on related-party 22 transactions: Why should nonprofits have their 23 board members, their insiders, engage in any 24 self-dealing transactions at all in transactions 25 that benefit the private -- their private -- 1 officers' or directors' private interests? 2 Others have articulated and advocated for, or 3 explained, why some related-party transactions are 4 beneficial: They provide low, or under-market, 5 below-market, benefits to nonprofits, and we should 6 not be excluding those -- or, eliminating those. 7 So, again, with our bill, we've tried to 8 achieve the appropriate balance. 9 While not eliminating these transactions 10 entirely, we have built-in procedures to ensure that 11 these transactions are fair and reasonable, to 12 promote active board engagement regarding these 13 transactions, to ensure there's adequate disclosure. 14 And, ultimately, if there are improper 15 transactions, the Attorney General's Office have the 16 tools necessary to go into court to unwind those 17 transactions. 18 Senator, I am mindful of the time, I'm 19 mindful of the lengthy agenda you have today. 20 What I think makes most sense is, perhaps, to 21 conclude my remarks, and answer any questions you 22 may have. 23 24 25 1 SENATOR RANZENHOFER: Well, thank you very 2 much. 3 First of all, I'll ask, Senator Robach, do 4 you have any -- 5 SENATOR ROBACH: I would just say, thank you, 6 Jason. 7 It sounds like you're very amenable in the 8 AG's Office to -- in working with 9 Senator Ranzenhofer, amend this bill, given the 10 testimony, for what it is. 11 It is, as you say, striking the right 12 balance. 13 Clearly, everybody wants to make sure that 14 the greatest amount of resources goes to, for lack 15 of a better term in our world, constituent services 16 for those meeting that goal or getting to the 17 people. 18 It does it. 19 At the same time, we don't want to put 20 regulations in -- I think most of the 21 not-for-profits I speak to say, they don't mind 22 rules or regulations that serve a real purpose in 23 their goal and mission. What we don't want to do 24 is, spend more money on administration, when our 25 very goal is to get more money to the people. 1 But it sounds like everybody's open to 2 adjusting, or amending, if that need should occur, 3 to get this done. 4 JASON LILIEN: Senator, I agree with you. 5 I mean, we're all discussing, or still 6 discussing, and after this hearing, we're going to 7 continue to discuss, refinements to the bill. 8 And I just want to echo what you have said: 9 There is a limit as to what can be, or should 10 be, done by statute. 11 Most of governance is a matter of voluntary 12 practice, and, you know, depends on who's actually 13 on the boards. 14 And we have to be mindful of not imposing too 15 many regulations that would discourage board 16 service, but at the same time, we are all aware 17 that, you know, the public trust is essential. 18 And we've got -- there's a tremendous amount 19 of money that's flowing through nonprofits, and we 20 have to strike that right balance, as we discussed, 21 in making sure the public maintains that trust. 22 SENATOR RANZENHOFER: Well, thank you. 23 I know that, Joe, you've got some other 24 legislative responsibilities. 25 Some people may be leaving, some people may 1 be joining us, as we move along. 2 But I want to thank you for joining us here 3 today. 4 I also want to acknowledge, James Katz, who 5 is here from the Attorney General's Office as well. 6 I know he was with us in New York as well, 7 and has worked very, very hard on this issue. 8 I'm glad that you tailored your testimony to, 9 you know, some of the conversations that we've 10 already had. 11 And, you know, I think as we go through this 12 process, we're -- you know, we're narrowing in on -- 13 well, first of all, we're identifying those areas 14 where there is substantial agreement, and then we're 15 trying to narrow down, you know, for instance, you 16 know, on the preapprovals, Is it enough just to get 17 rid of the preapproval for State Ed, or do we need 18 other -- you know, do we need to add other agencies 19 where you don't need to get preapproval, in order to 20 make it easier, you know, versus, you know, the 21 balance on the other side? 22 You know, the same thing with the audit 23 function. 24 I know you had mentioned, ten, fifteen, 25 twenty. 1 And I know we heard from somebody in our last 2 hearing, where, you know, typical audit for their 3 group could be 80,000. 4 So, again, you know, we're narrowing down 5 into those areas, in terms of, you know, what's the 6 proper limit? 7 You know, is it the California limit at 8 2 million? 9 Is it the Massachusetts limit, which New York 10 has now adopted, at 500,000? 11 Again, you know, those are going to be 12 continuing discussions that we're going have to 13 have, as well as some of the issues on the 14 governance. 15 At some of the other hearings, you know, is 16 it enough that the New York regulations are 17 patterned after the IRS regulations? 18 Or, you know, some of the testimony is, as 19 CPAs and accountants are advising their clients, you 20 know, do they then advise, you know, do they then 21 feel, that this is another -- you know, just another 22 regulation that they have to comply with? 23 And, you know, I appreciate you really -- you 24 know, you really hitting all the key points. 25 I mean, those -- those are the key points 1 that have come out in -- over the hearings. 2 And I think over the next four weeks, as we, 3 you know, wind up into middle to late June, you 4 know, we're going to try to, you know, make some 5 decisions on those key issues, so that we can pass a 6 bill. 7 And, obviously, working very closely with the 8 Assemblyman Brennan, you know, a lot of this 9 involves choices. 10 And, you know, hopefully, we'll come up with 11 a final bill, and, you know, sometimes bills then 12 get amended afterwards. 13 But I think it's important, you know, that we 14 continue to work together, and try to pass something 15 before the end of the session, so we at least get a 16 very good start in the reform that you and your 17 office and the Attorney General has worked so hard 18 on, that we've been working very hard on. 19 That the public has just -- you know, and 20 when I say "the public," I mean, the nonprofit 21 community has really -- you know, they're watching, 22 they're waiting. You know, they want something to 23 happen. 24 So, hopefully, you know, we'll be able to 25 work through this and pass something before the end 1 of the legislative session. 2 Again, I want to thank you, you know, for 3 attending, personally, you know, all the hearings; 4 for, obviously, paying attention and listening very 5 carefully to what all of the testimony has been. 6 And then you really, you know, keying in and 7 focusing on those comments, as we try to pass the 8 legislation. 9 So, again, I want to thank you again for 10 being here today, and, you know, for all of your 11 hard work so far. 12 JASON LILIEN: Thank you, Chairman. 13 Thank you. 14 SENATOR RANZENHOFER: Our next speaker today 15 is from the New York State Bar Association, 16 Michael de Freitas, who's a representative of the 17 bar association; in particular, the Business Law 18 Section. 19 Welcome. 20 MICHAEL DE FRIETAS: Thank you, Senator. 21 SENATOR RANZENHOFER: I just want to mention, 22 you know, the New York State Bar Association, in 23 particular, has really worked very, very hard. 24 I know that I have met with some 25 representatives, who I see out in the audience here 1 today, and others. You know, the membership of the 2 State Bar has really been focused on this issue. 3 They've been, you know, working very, very 4 hard, you know, not only with us, with the 5 Attorney General, but on behalf of the 6 not-for-profits, to try to, you know, come up with a 7 law that's really going to be beneficial to 8 everybody concerned. 9 So, again, you know, Michael, I want to thank 10 you for being here, and, you know, for testifying 11 and commenting on the bills that we have in front of 12 us. 13 MICHAEL DE FRIETAS: Thank you very much, 14 Senator. 15 Obviously, you have my written testimony. 16 You've heard from me in Albany. 17 SENATOR RANZENHOFER: Yes. 18 MICHAEL DE FRIETAS: I suppose I could maybe 19 just merely hit the highlights, to refresh memory, 20 and comment on some of the comments, and take 21 questions, if that's acceptable to you. 22 SENATOR RANZENHOFER: Absolutely. 23 MICHAEL DE FRIETAS: The bar association 24 commenced looking at these issues years ago, in the 25 2000s, and devoted wide attention, solicited 1 information and views from across the spectrum of 2 practitioners and academics, with the idea of trying 3 to look at the issues in the newest light they've 4 been looked at in years. 5 And, we heard many concerns about operational 6 issues. 7 So even with all the recent publicity of 8 financial scandals, and the like, the focus on 9 operational issues we thought has been important 10 throughout, because we hear regularly from 11 not-for-profits concerned about the transactional 12 burdens in the statute. 13 And so we're pleased that the bills that are 14 out there make good strides in addressing those 15 issues, with simplifying the "types" system, from 16 the confusing four types to the more common national 17 pattern of two types, and, reducing the burdens of 18 obtaining agency consents to incorporation and other 19 transactions that burden and slow down those 20 transactions as well. 21 We did express our reservations about the 22 proposals in both bills that would extend certain 23 core and Attorney General supervisions and duties to 24 not-for-profit corporations that are not charitable; 25 those traditionally private institutions, such as 1 recreational and social clubs and trade associations 2 that don't solicit charitable contributions, and 3 few, if any, of which receive State funds. 4 We -- some of the comments -- many of the 5 comments, as Jason reiterated, concern the 6 governance provisions, matters like the IRS 7 standards for treating excess-benefit transactions, 8 which have been in place under IRS rules for more 9 than a decade, and have been in place under 10 statutory law in the Internal Revenue Code since the 11 1990s. 12 So there's long and wide experience with 13 them, and many organizations follow them, both 14 501(c)(3)s and the 501(c)(4)s, the social-welfare 15 organizations, a slightly broader class than the 16 charitable class. 17 The concern with the bills' proposals is the 18 additional level of compliance, to the extent that 19 there are differences from the federal standards. 20 So it's very good to hear that there's a 21 desire to make those as consistent as possible. 22 But, the concern with the rebuttable 23 presumption that Jason mentioned, is that -- is the 24 chilling effect of the Attorney General's powers. 25 The -- it appears from the language that it 1 is, essentially, a de novo review, or a 2 second-guessing power, that the Attorney General 3 could have. 4 The Congress and the IRS recognized the 5 chilling effect, by having a rebuttable presumption 6 if the corporation has followed the procedures. 7 It's not at all clear whether boards that 8 follow the New York procedures will have any 9 confidence that the decision they reach will be 10 respected in any way, or whether it will be all the 11 way back to scratch, to the drawing board, in the 12 event of an action by the Attorney General. 13 That's the kind of thing that will cause 14 advisors, we believe, to work harder with those 15 clients on the compliance in those transactions, 16 which simply makes it another compliance burden, and 17 we fear greater expense and time consumed in those 18 transactions beyond what they're already doing to 19 comply with the broad IRS procedures. 20 There's some language that could be reviewed. 21 The -- I'm not sure whether it's the 22 Commission's ability or the Attorney General's bill 23 refers to a requirement that compensation be fair, 24 reasonable, and commensurate with services. 25 And as worded, that implies that low pay has 1 to be increased. 2 I'm not sure that's the intent, but that 3 seems to be what the language implies. 4 And there were comments in previous testimony 5 about liability of directors. 6 One of the concerns that we have expressed is 7 the indemnification provisions. 8 There is a provision in both bills, I 9 believe, that would require, that when a director or 10 officer receives advanced indemnification of 11 expenses, which is, of course, quite common when the 12 frivolous action is brought that must be defended, 13 that an undertaking sufficient to ensure repayment, 14 and it's the "sufficient to ensure repayment" that 15 would be the new language, is required. 16 The concerns, that that would make 17 indemnification available only to wealthy directors 18 and officers who can put up however many thousands 19 of dollars might potentially be at issue on an 20 indemnification claim. 21 And since frivolous actions are by no means 22 unheard of, we're concerned about the effect on 23 director recruitment, and director faith in their 24 ability to be protected from frivolous actions. 25 There's also some concern that that would 1 adversely affect directors' and officers' liability 2 insurance, because the fundamental obligation 3 insured by such insurance is the indemnification 4 obligation. 5 So, the -- this provision would have 6 ramifications. 7 Fred Attea from the bar association, who's 8 led our effort over the these years, was also part 9 of the legislative effort in the 1980s when these 10 indemnification provisions were first enacted. 11 And he reminded me that he recalls that that 12 very issue was discussed extensively at that time, 13 and the conclusion was, that the risk of reducing 14 indemnification was the reason they didn't add that 15 language at that time. 16 And we would suggest that not be done in this 17 case. 18 And I believe that's a good summary. 19 I guess the only other comment I heard, 20 directed at our product over the years, was in the 21 Albany session, about director liability and 22 exculpation. 23 The comment was to the effect, that our work 24 product had suggested, and I believe I'm quoting, 25 "that all director liability would be exculpated." 1 That's not accurate. 2 The proposal that was, I believe, in the 2009 3 bill, was to pick up the same language that's in the 4 national model Not-For-Profit Corporation Act, the 5 same language that's in the Business Corporation Law 6 in New York, and the same language that is in many 7 states around the country, to provide that directors 8 who act in good faith, without intentional 9 misconduct, without a knowing violation of the law, 10 without personally gaining any financial profit, 11 would not have any liability for damages for breach 12 of duty. 13 And I say that because that's a summary of 14 what every other provision that I referred to says, 15 and that was simply the extent to which our 16 suggestion had gone in the original proposal. 17 And that's the sort of thing that 18 practitioners look at when practitioners are, as 19 Jason alluded to, advising clients on where to 20 incorporate their not-for-profit. 21 This is one of those issues, as it is for 22 business corporations, when business lawyers look at 23 the shareholder liability for unpaid wages. 24 So with that, I would welcome any questions, 25 Senator. 1 SENATOR RANZENHOFER: Okay, well, Michael, 2 again, thank you very much for appearing in Albany, 3 and again today. 4 And I would like to publicly acknowledge 5 Fred Attea, who's also here, and has worked very, 6 very hard along with you, as you mentioned in your 7 testimony. 8 One of the benefits, as we move through the 9 hearing, is, as we really come down to, maybe, you 10 know, six or seven points, where there are 11 differences between the bills, and then different 12 groups, whether it be the bar association, the 13 Law Revision Commission, the Attorney General, you 14 know, one or more of the not-for-profits. 15 I'd like to go through some of those with 16 you, just for some clarification and edification. 17 And the first is: with respect to agency 18 consents. 19 Obviously, there are two bills out there. 20 I think it's the Attorney General bill that 21 suggests that we get rid of the State Ed consent. 22 And there's, I think, the Law Revision, which 23 suggests that that be broader; that there be other 24 consents that are no longer necessary. 25 Where do you come down in terms of what 1 consents are needed? 2 And let me direct your attention to State Ed, 3 Department of Health, and then, all other. 4 So if you could just give me your 5 association's opinion on those three. 6 MICHAEL DE FRIETAS: Certainly. 7 That's has been the subject of extensive 8 discussion over the years in our committee. 9 The -- and we agree with Jason, that the 10 majority of the problematic issues are the 11 Education Department simply because of the breadth 12 of the language on that point. 13 So that change will help considerably. 14 But, with the Department of Health, and other 15 agencies as well, I'm mindful that HANYS's, in 16 Albany, lobbied for the change that we're talking 17 about, to eliminate the prior consent for 18 incorporation, or other transactions, to separate 19 the CON process, the regulatory-approval process, 20 from the corporate-structuring process. 21 That's also the view of our committee. 22 We had had -- we not only believed that 23 that's appropriate, but we couple it with language 24 drawn from other sources where this has been done in 25 a -- in, I think, the model act. 1 We got suggestions from others, to provide 2 specific language, which we have, that the absence 3 of getting such consents by no means implies that an 4 entity has authority to conduct regulated activity 5 absent approval. 6 We have noticed that agencies are dropping 7 the consent requirement. 8 In 2010, I believe it was, that the 9 Office for Persons With Developmental 10 Disabilities -- or, perhaps as it was then-called, 11 the Office of Mental Retardation and Developmental 12 Disabilities -- had legislation to eliminate its 13 requirement, the requirement for it. 14 I heard some of these agencies referred to as 15 "budget-buster agencies." 16 I have to suggest that OPW must be considered 17 a large agency in with that respect, with the 18 dollars that go through that agency. 19 Anecdotally, I think I and other lawyers have 20 dealt with different agencies who have expressed 21 greater or lesser frustration with the process of 22 them having to go through this for so many 23 corporations that really aren't subject to 24 jurisdiction of those agencies. 25 We're not talking about organizations that 1 are subject to regulation anyway; and, yet, large 2 bodies of organization not within the scope of those 3 agencies need to get such consents because a word 4 appears implicate mental health, or may implicate 5 education. 6 Since mental-health education, these are 7 fundamental charitable concepts. It's not unusual 8 to have those words appear. 9 SENATOR RANZENHOFER: So your suggestion 10 would be, that there should not be any preapprovals 11 required for Department of Health; obviously, SED; 12 and all the other agencies? 13 MICHAEL DE FRIETAS: That's what we believe 14 is appropriate. 15 SENATOR RANZENHOFER: Okay. 16 MICHAEL DE FRIETAS: There may be 17 organizations, like fire companies, where town 18 boards need to be concerned about the division and 19 allocation of emergency services; 20 Or, perhaps, SPCAs, which have certain 21 legal authority; 22 And, perhaps, labor unions with the interest 23 in organizing their internal affairs; 24 But governmental bodies is what we, I 25 believe, are appropriate to address this with. 1 SENATOR RANZENHOFER: Okay. 2 Now, on the governance issue, you're 3 suggesting language that would say something, like, 4 unless otherwise provided in federal statute, or, 5 unless otherwise provided for -- in the 6 Internal Revenue Code, then they would be bound by 7 the regulations in this bill. 8 But if they are already bound by the 9 Internal Revenue Code, or other federal regulations, 10 the language to that effect would be satisfactory. 11 Do I understand that correctly? 12 MICHAEL DE FRIETAS: Well, I don't think 13 we've gotten to the point of language. 14 SENATOR RANZENHOFER: But, concept. 15 MICHAEL DE FRIETAS: Yeah, conceptually, that 16 is our point, because it's the level -- it's the 17 duplicative -- or, arguably, overlapping and 18 duplicative burdens. 19 SENATOR RANZENHOFER: Okay. 20 I understand your point on the rebuttal 21 presumption. 22 What about -- we'll get to the liability of 23 the directors and indemnification in a minute, but, 24 I just wanted to ask your comments, with respect to 25 the audit thresholds for -- you know, that are there 1 now, that are being proposed in this bill, compared 2 to what is done in other states. 3 MICHAEL DE FRIETAS: Well, we recognize the 4 same range of thresholds that other states have, 5 that Jason referred to. 6 We notice the cost burdens that these 7 organizations face, among our clients, and so it 8 becomes a judgment matter. 9 Is $500,000 the right number? 10 Is 1 million the right number? 11 The funding realities for the nonprofits who 12 are under $5 million, actually, is quite 13 challenging. 14 I've heard reputable national accounting 15 practitioners suggest things, like: A nonprofit 16 with less than 5 million in budget is not viable. 17 I think we need -- we are conscious of the 18 financial straights and challenges that 19 organizations at that budget level face. 20 And that's the rationale behind our thought, 21 that a $1 million level is appropriate to consider, 22 but, we recognize this is a judgment matter. This 23 is not necessarily a legal matter. 24 SENATOR RANZENHOFER: Right, and I understand 25 that. 1 I understand that. 2 But, you know, that's why you're here, 3 because you deal with this in your practice, in 4 terms of advising these not-for-profits. And, you 5 know, so you're dealing with the very large ones, 6 you're dealing with small ones, so you, you know, 7 being there as a day-to-day practitioner, you have 8 an understanding as to, you know, where you need it, 9 where you don't need it. 10 And that's why I wanted to ask you that 11 question. 12 The final question I wanted to ask you is: 13 What specifically are you proposing, or is 14 your comment, with respect to liability of directors 15 and indemnification? 16 Are you saying that the existing language 17 that's contained in the Business Corporation Law is 18 sufficient -- sufficiently satisfactory for the 19 not-for-profit community? 20 MICHAEL DE FRIETAS: That's the exculpation 21 issue? 22 SENATOR RANZENHOFER: Right. 23 MICHAEL DE FRIETAS: Yes. 24 Yes, in a word, that is exactly what we're 25 suggesting. 1 SENATOR RANZENHOFER: Okay. 2 And then the other point about the 3 undertaking, what was your -- just explain again, 4 what your precise point was with respect to that. 5 MICHAEL DE FRIETAS: Certainly. 6 The bill would require that a director who 7 must give an undertaking, which is existing law, 8 must now, under the new law, provide an undertaking 9 that is sufficient to repay the advancement of 10 expenses that would be made. 11 SENATOR RANZENHOFER: So the difference is: 12 Right now it just says "undertaking"; 13 And under the new law, it defines it a little 14 bit greater, which means the amount would be 15 greater. 16 What you're say is, somewhat of a chilling 17 effect, in terms of the ability to do it and the 18 ability to recruit directors? 19 MICHAEL DE FRIETAS: Yeah, we're concerned 20 that nonprofits would interpret that language to 21 mean they must require a bond, or, deposit of 22 personal assets, to match the amount of 23 indemnification. 24 We don't know how that could be applied, but 25 we're concerned about it. 1 SENATOR RANZENHOFER: What's required? 2 How is it -- how does that actually work in 3 practice right now, if you're required to post an 4 undertaking which is not really defined? 5 What actually happens right now? 6 MICHAEL DE FRIETAS: I think it's variable. 7 I'm not even sure that organizations go to 8 the trouble of getting the signature on the line 9 that says, "I undertake to repay." 10 That doesn't mean that that's not a 11 responsible thing to do, but it's a far cry from 12 trying to bolster compliance with that requirement, 13 to making it financially burdensome. 14 SENATOR RANZENHOFER: Okay. 15 Well, thanks. 16 You know, I appreciate your narrow focus 17 today. 18 And, really, again, having listened to a lot 19 of the testimony, and attended the hearings, you 20 know, really drawing our attention to, you know, 21 what the focal points are in terms of what has to be 22 decided, in terms of, what's going to be in a bill, 23 what's going to be out of a bill, as we have try to 24 move forward. 25 So, again, I want to thank you personally for 1 being here today. 2 And, really, for your entire membership, and 3 the -- you know, the extremely laudable efforts and 4 very, very time-consuming efforts that you've spent 5 over the years. 6 So, thank you for being here today. 7 MICHAEL DE FRIETAS: Thank you, Senator. 8 SENATOR RANZENHOFER: Our next speaker is 9 from the New York State Association of Cemeteries, 10 and that is, Joseph Dispenza, president of The 11 Forest Lawn Cemetery and Cremation Group. 12 And, Joe, as you're walking down here, again, 13 I want to thank you, you know, personally, for -- 14 you know, for being here today, and traveling from 15 Buffalo to Rochester to testify. 16 We have heard, in Albany and in 17 New York City, for -- or, from, you know, the 18 Cemetery Association, and, you know, the very 19 specific concerns that they have, because cemetery 20 not-for-profits are very different than other 21 not-for-profits. 22 So, again, you know, I want to thank you for 23 your involvement, you know, for you being here, and 24 for the very hard work that your, you know, 25 association has done, you know, and being very 1 attentive, and attending all three of the hearings. 2 So, welcome, and we look forward to hearing 3 what you have to say. 4 JOSEPH DISPENZA: Thank you. 5 Thank you, Senator, very much. 6 And good morning, Senator, and other guests 7 here today. 8 I thank you for the opportunity to appear 9 before you, and I will be reading from my prepared 10 remarks, which I do have copies of for those who may 11 choose to take one. 12 My name is Joseph Dispenza, as the good 13 Senator said, and I am the president, and have the 14 privilege of serving, The Forest Lawn Group of 15 Cemeteries and Crematories in Buffalo, New York. 16 Forest Lawn Cemetery, located in Buffalo, was 17 started in 1849 as more than a burial ground. 18 It was created in an effort to balance nature 19 and art. 20 Although Senator Ranzenhofer is familiar with 21 Forest Lawn, those who are not familiar with 22 Forest Lawn should know that it is a picturesque 23 cemetery, resplendent with rolling hills, charming 24 valleys, spring-fed lakes, and a meandering creek. 25 It is also the internment site of the 1 13th President of the United States, 2 Millard Fillmore, along with 162,000 other souls who 3 rest inside our gates. 4 Our founders encouraged the policy of 5 displaying interesting and appropriate sculpture to 6 complement Forest Lawn's natural setting, making a 7 cemetery a renowned outdoor sculpture museum. 8 The cemetery is a national asset, and fully 9 deserves its designation in the New York State and 10 National Registry of Historic Places. 11 Today, the Forest Lawn Group of Cemeteries 12 includes Forest Lawn proper in Buffalo, Lakeside 13 Cemetery in Hamburg, Williamsville Cemetery in the 14 village of Williamsville, St. Matthews Cemetery in 15 West Seneca, and recently acquired, the historic 16 Buffalo Cremation Company. 17 Each year, our group serves over 18 3500 families in western New York. 19 Senator, there is no doubt that reforms are 20 necessary to the New York's Not-For-Profit 21 Corporation Law. 22 The cumbersome red tape that not-for-profits 23 face in this state is remarkable. 24 The efforts put forth by the Attorney General 25 and other groups speak to this fact directly. 1 New York could, and should, be a leader in 2 oversight of not-for-profit organizations, but it 3 should also be a leader in balancing this oversight 4 with providing flexibility to meet the needs of the 5 public they serve. 6 As this Committee is well aware, the 7 Empire State's not-for-profits are tremendously 8 diverse. 9 The nearly 103,000 not-for-profits range from 10 vast public-service corporations with tens of 11 millions of dollars in assets, to a group of 12 neighbors operating the small rural cemetery in a 13 remote part of the state. 14 A few thousand of these not-for-profits are 15 cemetery organizations. 16 The nearly 1,800 regulated cemeteries are 17 just as diverse as the not-for-profits as a whole. 18 They each have significant and very challenges in 19 functioning and dealing with the cumbersome 20 bureaucracy. 21 Consequently, our not-for-profit corporation 22 laws should reflect this diversity. 23 Unlike the Forest Lawn Group, the majority of 24 cemeteries are small organizations whose main 25 operation is the infrequent burial of their fellow 1 community members. 2 We are not talking about multi-million dollar 3 operations; however, in many ways, these 4 organizations are treated the same as large cemetery 5 not-for-profit corporations. 6 The chasm between functioning and 7 practicality as it relates to large not-for-profits 8 and small not-for-profits is vast, and must be taken 9 into consideration, as has been discussed earlier 10 this morning. 11 The expectation to adhere to the same 12 regulations governing large corporations can, and 13 is, detrimental to the smaller not-for-profits. 14 The legislation before this Committee deals 15 in a small way with the auditing requirements for 16 not-for-profits; however, these auditing reforms do 17 not go far enough. 18 In our area of operation, auditing guidelines 19 relate directly to assets, and not revenue. 20 This is a big problem for cemeteries that may 21 have up to a million dollars in trust funds, but 22 very, very little annual revenue. 23 Nonetheless, they're required to spend 24 thousands of dollars on the same expensive audit 25 that a $30 million corporation would need to 1 conduct. 2 Auditing requirements for not-for-profits 3 need to be addressed with thresholds. 4 I encourage this Committee to view revenue as 5 a trigger, and not just assets. 6 Asset-only thresholds have had a financially 7 harmful impact on smaller cemeteries and other 8 smaller not-for-profits. 9 These arbitrary measurements also hinders 10 their ability to continue their mission by 11 significantly diminishing their available funds to 12 pay for over-the-top audits. 13 I would like to draw this Committee's 14 attention to another area of red tape. 15 This issue is the expenditure of funds from 16 not-for-profit trusts. 17 I would like to thank Senator Ranzenhofer for 18 addressing this very important concern in his recent 19 Senate bill, 5111. 20 This language is not addressed in this 21 legislation before the Committee, but it is a vivid 22 example of inconsistencies with the not-for-profit 23 governance. 24 Currently, cemeteries are required to utilize 25 an astounding complex formula to ascertain the funds 1 available for utilization from the various trust 2 funds. 3 This formula is so intricate that it is 4 rarely used by anyone. 5 Its use and application requires specific, 6 very advanced, CPA-level accounting expertise. 7 It is a cost and expense unavailable to many 8 not-for-profits. 9 These existing provisions penalize cemeteries 10 from being able to adequately fulfill their mission 11 by diminishing fund assets. 12 Senate Bill 5111, as proposed, corrects this 13 insurmountable imbalance and conforms cemetery 14 not-for-profit expenditures to those of other 15 not-for-profits. 16 Quite simply, this legislative change would 17 conform all not-for-profit trust expenditures to the 18 simple and easy-to-understand prudent investor 19 standard. 20 This is a common standard that any accountant 21 would be able to assist a not-for-profit with no 22 matter what the size of the not-for-profit. 23 The same commonsense approach needs to be 24 translated across other not-for-profit changes. 25 Not-for-profit cemeteries are some of the 1 most regulated entities in New York. 2 We are regulated by the Attorney General, the 3 Department of Health, and the Department of State. 4 If we have a crematory, we are regulated by 5 the Department of Environmental Conservation. 6 We do not need additional Attorney General or 7 Supreme Court oversight when we are already being 8 regulated by all of these other departments. 9 I would suggest that increased applications 10 or review by the Attorney General, as proposed in 11 legislation before this Committee, is truly 12 unnecessary. 13 And I would argue, there are not sufficient 14 resources to allow for timely processing of reviews 15 by other agencies. 16 In addition, these proposed oversights are in 17 conflict with the recently passed Senate legislation 18 sponsored by you, Senator Ranzenhofer, 19 Senate Bill 4324, which streamlines application 20 processes for not-for-profit cemeteries. 21 We need to follow the example of this pending 22 Senate legislation and streamline laws governing 23 mergers, acquisitions, and services. 24 I am pleased to see that the proposals before 25 this Committee do address some of these needs. 1 We also need to ensure, that of the state's 2 nearly 103,000 not-for-profits, it is easier to 3 eliminate those defunct groups that have ceased 4 operations. 5 Further, I would urge the Committee to look 6 at ways to simplify the process of assuming 7 management of failing not-for-profits. 8 Forest Lawn has been involved in the merger 9 or acquisition of several other not-for-profits that 10 are now part of the Forest Lawn Group. 11 These are opportunities challenged by the 12 financial obligation of legal fees, hearings, and 13 applications. 14 The ultimate goal of these efforts is to 15 create a stronger not-for-profit from one that is in 16 distress; however, the current regulatory scheme 17 makes this task extremely expensive and very 18 time-consuming. 19 This issue needs to be corrected. 20 Finally, I would like to comment on 21 provisions in the legislation before the Committee 22 that deal with professional services provided by the 23 board members to the not-for-profits they serve. 24 This is a very delicate area for many of 25 New York's not-for-profits. 1 In many instances, free services or low-fee 2 services are provided to the organization as a way 3 to aid the mission of the not-for-profit. 4 Cemeteries across New York are always pleased 5 to receive these contributions. 6 I would ask this Committee to be very careful 7 in addressing this matter, as I am sure you would 8 not want to harm not-for-profits that need this 9 assistance. 10 Perhaps much like my comments on auditing, 11 the Committee will consider thresholds for these 12 issues. 13 Again, New York's not-for-profits need help, 14 and not hinderance. 15 It would be unfortunate if a few bad actors 16 prevented needed services being provided to these 17 great community organizations. 18 In conclusion, I urge this Committee to be 19 cognizant of the need to balance reform with 20 projections. 21 We all need to be clear of the diversity of 22 the size of the 103,000 not-for-profits in New York. 23 We owe it to each other to also ensure that 24 any further regulatory structure does not make it 25 harder for our organizations to find volunteers to 1 aid our organizations, when they are already facing 2 an ever-shrinking volunteer pool. 3 Thank you for this opportunity, and I look 4 forward to sharing these thoughts, or others, as 5 this legislation progresses. 6 SENATOR RANZENHOFER: Well, thank you very 7 much for your testimony, and also to the membership 8 of your association. 9 You testified at all three hearings. 10 And I remember one of the -- there was a 11 funny comment in the New York City hearing, when a 12 Brooklyn cemetery was talking about how it was a 13 small rural cemetery in Brooklyn. 14 Obviously, no longer. 15 But, I appreciate all of your input, and all 16 of the time that you took in preparing your 17 testimony, and presenting it here today. 18 And I do have a couple of questions, as I was 19 listening to you. I had read your testimony in 20 advance, so I knew what you were going have to say. 21 And, one of the things about -- I think you 22 had talked about earlier, you're suggesting that the 23 preapprovals, at least with respect to cemeteries, 24 really should -- they really should not be the 25 preapprovals, with respect to, you know, having to 1 get the preapproval from the state agencies? 2 JOSEPH DISPENZA: Yeah, because we already 3 answer directly, through statutory, and regulatory 4 supporting the statutes, to the cemetery board, 5 which consists of those three entities, I think that 6 adding another layer of seeking an application and 7 another preapproval bogs down the process that's 8 typically so involved, Senator, that you have to 9 have an attorney represent you to do it. 10 And many of these small cemeteries, they are 11 truly small cemeteries. 12 And some neighbor or some community group or 13 some opportunity comes along, that, with the 14 jurisdiction and guidance of the cemetery board, and 15 their local investigators within the community, I 16 think the process we have now is fine. And adding 17 another layer just adds burden and expense. 18 SENATOR RANZENHOFER: Okay. 19 And then your suggestion, now I guess that, 20 cemetery -- cemeteries would be different than a lot 21 of not-for-profits because you have substantial 22 assets, mainly the land. 23 And your concern, is that the auditing 24 requirements pertain to assets and revenues, not 25 just revenues? 1 Is that a concern that you have? 2 JOSEPH DISPENZA: Well, correct. 3 And to be -- to clarify it slightly, most 4 cemeteries' assets on their balance sheet, land has 5 no value, because in most cemeteries, it was 6 completely paid off in the nineteenth century, or 7 perhaps even the late eighteenth century. 8 So the assets are the trust funds. 9 SENATOR RANZENHOFER: Okay. 10 JOSEPH DISPENZA: Those cemeteries who are 11 fortunate enough to have a trust fund, and not 12 facing insolvency, but yet their annual burials 13 might be 50 or less, so their annual revenues 14 "might" -- might break ten, twenty, 15 thirty thousand dollars a year, are forced to have 16 the same auditing process, because they may have 17 been prudent and put away a million dollars in a 18 permanent maintenance account. 19 So, why look at just the asset of the 20 permanent maintenance account; why not balance that 21 against operations or current revenues. 22 SENATOR RANZENHOFER: Okay. 23 JOSEPH DISPENZA: And the cemetery board does 24 have accounting staff, presently, that does annual 25 or biannual audits for the cemetery board. 1 SENATOR RANZENHOFER: In terms of an amount, 2 you know, you've heard some testimony here about 3 different thresholds. 4 You know, the Attorney General's bill is 5 proposing $500,000. There are other states which 6 have different amounts. 7 Do you, or does your association, have any 8 comments in terms of what the threshold ought to be? 9 You heard the bar association talk about a 10 million. 11 I mean, in terms of, for your members, the 12 cemeteries, what would work best for them? 13 JOSEPH DISPENZA: Actually, presently, the 14 cemetery, in a cemetery regulation, they do have 15 tiers: A million dollars and over, half a million 16 to a million, or under half a million. 17 And I would recommend, and I am not able to 18 speak for the entire association, but I do sit on 19 their Policy and Government Affairs Committee, I do 20 believe that we are looking for something even 21 closer to what my colleague had mentioned, under the 22 $500,000 level be exempt from these type of annual 23 audits. 24 Perhaps an audit once every three years, or, 25 perhaps, an accountant's review, for those 1 organizations with under half a million dollars in 2 assets; because, again, the land is typically never 3 the asset. 4 SENATOR RANZENHOFER: Okay. 5 Okay, well, thank you very much for -- 6 JOSEPH DISPENZA: Thank you, sir. 7 SENATOR RANZENHOFER: -- appearing here 8 today. I appreciate that. 9 And thank you for answering those questions. 10 JOSEPH DISPENZA: Thank you very much. A 11 pleasure. 12 SENATOR RANZENHOFER: Our next speaker is 13 from the Rochester Area Community Foundation; that 14 is, Jennifer Leonard, president and CEO. 15 And as Jennifer is walking up here, I just 16 want to, you know, thank you on behalf of all of the 17 not-for-profits, for appearing here today. 18 The -- 19 You get to sit front and center. 20 As I was saying, I want to thank you, on 21 behalf of all of the not-for-profits. 22 The not-for-profits have worked, you know, 23 very, very hard over the last number of years, and 24 with the Attorney General, in trying to craft some 25 better legislation that will be beneficial to the 1 not-for-profit communities. 2 So, I wanted to thank you personally for 3 appearing here today. 4 And, again, for all the not-for-profits in 5 the Rochester and Monroe County community, you know, 6 who are so important to the community. 7 There's been some testimony earlier, in terms 8 of the impact that it has on this community, and 9 others, okay, in terms of the services that it 10 provides, the economic impact that it has, and the 11 number of employees. 12 So I look forward to hearing your testimony 13 today, and maybe answering a couple of questions, if 14 that arises. 15 So, welcome, and thank you. 16 JENNIFER LEONARD: Thank you very much, 17 Senator Ranzenhofer, and, ladies and gentlemen. 18 My name is Jennifer Leonard. I serve as 19 president and CEO of Rochester Area Community 20 Foundation, a public charity working to improve the 21 greater Rochester region, together with 22 philanthropic individuals and other local partners. 23 Last year, the Community Foundation awarded 24 $21.5 million in charitable grants and scholarships, 25 chiefly in this region. 1 I also speak as a member of the 2 Community Coalition in Rochester, whose 3 2013 Community Agenda calls for state passage of 4 comprehensive reform legislation for nonprofits, 5 citing, particularly, the Nonprofit Revitalization 6 Act of 2012, which has recently been reintroduced. 7 I also served as a member of 8 Attorney General Schneiderman's Leadership Committee 9 on Nonprofit Revitalization, which was the source of 10 that legislation. 11 And, I am supportive of the version of the 12 bill that Jason Lilien was addressing earlier. 13 I also assisted, at the national level, with 14 the National Panel on the Nonprofit Sector, convened 15 by Independent Sector, particularly with respect to 16 self-regulation by nonprofits. 17 I appreciate the opportunity to address you 18 this morning regarding Senate Bill 3755-A, a 19 critical initiative to simplifying New York's laws 20 regulating nonprofits, while strengthening their 21 governance and accountability. 22 By introducing this bill, 23 Senator Ranzenhofer, you have demonstrated your 24 understanding of the importance of nonprofit 25 organizations to New York State. 1 Excuse me just a minute. 2 SENATOR RANZENHOFER: Take your time. 3 (Pause in the proceeding.) 4 (The proceeding resumed, as follows:) 5 JENNIFER LEONARD: Nonprofits, literally, 6 help make life in New York worth living, with 7 missions that range from providing food, clothing, 8 and shelter, to preventing child abuse, and 9 environmental degradation, to offering health care 10 and education, to fostering ideas, protecting human 11 and civil rights, and, improving our state's quality 12 of life through arts, culture, and historical 13 preservation. 14 Nonprofit organizations are also significant 15 contributors to the state's economy, employing 16 nearly one of every five private-sector workers in 17 New York State. 18 New Yorkers give more to charity than the 19 national average. 20 On federal tax returns, New Yorkers reported 21 donating nearly $15 billion to charity in 2010, 22 representing about 9 percent of reported U.S. giving 23 that year. 24 In addition, more than one in four 25 New Yorkers filing a state return in 2010 left a 1 charitable bequest, for an additional $1.4 billion. 2 And, nonprofits are critical to carrying out 3 the public work of New York State. 4 In 2011, nonprofits received nearly 5 $17 billion in New York State contracts. 6 The breadth and depth of nonprofit initiative 7 in New York State makes it crucial that we get it 8 right when we change the rules affecting nonprofits. 9 Despite the magnitude of the sector and its 10 influence, most nonprofits are small, and struggle 11 to carry out their missions, while meeting the 12 currently burdensome requirements of State 13 regulation. 14 And though we do hear about occasional 15 high-profile scandals, most nonprofits operate with 16 integrity, and, with slim operating margins, usually 17 paying far too little to employees rather than too 18 much. 19 Since the recession, nonprofits of all sizes 20 have failed to regain the revenues that sustained 21 them through 2007. 22 This has encouraged a growing number to find 23 more efficient and effective solutions through 24 cooperating with other nonprofits, up to and 25 including mergers and consolidations. Others have 1 been forced to dissolve. 2 As a result, this is a perfect time to 3 simplify and improve the laws affecting nonprofits 4 in ways that will preserve and enhance their 5 services to the people of New York State. 6 I would like to commend the Senator for 7 introducing legislation to comprehensively update 8 the Not-For-Profit Corporation Law for the first 9 time in decades, with the purpose of streamlining 10 creation, operations, mergers, and dissolutions of 11 nonprofits, while strengthening nonprofit 12 governance, oversight, and accountability. 13 Speaking again as a member of the 14 Community Coalition in Rochester, I can say that the 15 nonprofit and business sectors welcome the potential 16 easing in nonprofit operations that can result from 17 such an overhaul. 18 The donors who give to charity, the State 19 that contracts with the charity, and the entire 20 citizenry of New York will benefit. 21 I have already provided written testimony to 22 the Committee, and, I have put both written and oral 23 testimony out at the table outside of the room for 24 anyone who is interested. 25 Let me just summarize my main points. 1 First, thank you for helping simplify 2 nonprofit creation, operation, and restructuring. 3 Key examples include: 4 Allowing electronic communications for board 5 operations and for communicating with state 6 agencies; 7 Replacing the current nonprofit types with 8 two simpler categories; 9 Reducing the number of required consents for 10 nonprofit incorporation by expanding use of 11 notice-and-comment periods; 12 Allowing expeditious correction of minor and 13 typographical errors on incorporation documents; 14 Allowing the Attorney General's Office to 15 function in place of judicial approvals, while 16 preserving the right to court intervention if 17 desired; 18 Allowing nonprofits to assign contracts 19 between related entities, such as real-estate 20 affiliates; 21 And allowing nonprofits to serve as 22 successors in mergers and consolidations rather than 23 requiring formation of a new entity. 24 We would also support: 25 Aligning the two new charitable types with 1 federal laws, separating charitable from 2 non-charitable nonprofits; 3 Even further simplification of dissolution 4 paperwork for small or moribund entities; 5 A centralized repository and checklist for 6 any form of nonprofit corporate creation or 7 restructuring, to guide nonprofits through the 8 continued complications of multiple agency 9 regulation; 10 Timely waiver processes that would allow the 11 prompt transfer of licenses from one program to 12 another between related or merging entities; 13 And more flexibility in naming nonprofits, as 14 recommended by the bar association. 15 Secondly, the bill aims to strengthen and 16 clarify the roles of boards of directors in 17 overseeing nonprofit resources and operations; for 18 example, by expanding audit and 19 executive-compensation oversight, and requiring 20 conflict-of-interest and whistle-blower policies. 21 We are pleased that the Committee's bill 22 increases indemnification for directors acting in 23 good faith; 24 Charges boards with overseeing audits and 25 executive compensation using only disinterested 1 members; 2 Prohibits the CEO from serving as board 3 chair, and modernizes language regarding committee 4 functioning. 5 We also recommend: 6 That committee charges be eliminated as 7 unnecessary paperwork; 8 That the term "entire board" be amended to 9 mean the number of directors in office following the 10 most recent nominations' cycle, unless the bylaws 11 fix the number of directors rather than using a 12 range. 13 The bill should clarify: 14 Whether committees of the board may use 15 outside volunteers rather than just board members; 16 Executive-compensation oversight for the CEO 17 should be aligned with national IRS guidelines; 18 Executive-compensation oversight for 19 personnel other than the CEO should involve approval 20 of salary ranges, rather than specific salaries, and 21 affect only higher-paid personnel; for example, 22 those named in the 990 as earning at least $100,000, 23 or, what the AG's bill calls for, at least 150,000; 24 Conflict-of-interest policies should 25 permit -- should be allowed which permit disclosure 1 without voting, even though a board member remains 2 in the board room, as is allowed for related-party 3 transactions, which are often more serious, 4 financially; 5 Greater privacy should be afforded for 6 directors' home addresses by disclosing them to 7 state regulators, but not the public; 8 And any dollar threshold intended to protect 9 small nonprofits from excess burdens should also be 10 indexed for inflation. 11 I appreciate, again, the opportunity to speak 12 with you today, and I welcome your questions. 13 SENATOR RANZENHOFER: Well, thank you very 14 much for a very, very comprehensive analysis of the 15 bills that we have in front of us. 16 I really appreciate that. That's very help 17 to me and the Committee, you know, as we go back and 18 digest all the testimony that we've heard. 19 You know, I also know it's very helpful for 20 the Attorney General's Office, who has stayed, and 21 for the bar associations and the Law Revision 22 Commission, to hear this -- this type of testimony. 23 A couple of specific questions I had for you: 24 You've heard some talk with respect to the 25 preapprovals. 1 And what's developed over the last couple of 2 weeks is, you know, should there be any -- because 3 you have -- you know, you have the regulation, and 4 then you have the preapprovals. 5 You know, should we just get rid of 6 preapproval for State Ed, or, in your opinion, 7 should we get rid of preapproval for all state 8 agencies, including State Ed? 9 I was wondering if you had a thought on that? 10 JENNIFER LEONARD: Well, I've read all three 11 bills, and what struck me as making a great deal of 12 sense, was the use of a notice-and-comment period, 13 basically, putting agencies on notice when an 14 organization goes to incorporate, and giving them 15 45 days to respond if they have concerns, but, 16 otherwise, allowing the group to proceed with its 17 planning. 18 It seemed to me that reasonable exceptions 19 included, those organizations providing health care, 20 and those organizations to be organized as schools. 21 I am neither a school nor a health-care 22 expert, but, it seemed to me that one of the 23 greatest areas of concern has been, that groups 24 planning to include health education, or adult -- or 25 classes, or other forms of -- sort of, what I'd call 1 "health or education light" in their incorporation 2 papers, have been required to get consent from the 3 Departments of Education and Health, and that 4 doesn't make sense. 5 I really liked the bifurcating of the bill 6 that said: 7 If you're going to be a school, then you 8 should have prior consent from the Department of Ed; 9 If you're going to be a health-care 10 institution, you need similar consent; 11 But, that the other nonprofits can use notice 12 and comment. 13 SENATOR RANZENHOFER: Okay, well, let me just 14 follow up on that: 15 Schools and health-care providers still are 16 going to be regulated by those respective 17 departments: State Ed and the Department of Health. 18 Do you feel that, before they are permitted, 19 or enabled, to provide any sort of service, whether 20 it be education service or health-care service, that 21 they should still have to get the preapproval as 22 opposed to the notice provisions? 23 JENNIFER LEONARD: Before they incorporate? 24 I really would defer, Senator, to people in 25 those industries who -- what I do know is, the 1 consents have been onerous. 2 And, that they need to have a purpose, and 3 they need to have -- to be expeditious. 4 So, if they are holding up reasonable 5 planning for, say, a charter school, or for 6 another -- I would think that the regulation itself 7 should take care of it, in the long run. 8 SENATOR RANZENHOFER: Okay. 9 Can you just comment on the provisions, as 10 they apply to what we would call "charitable 11 organizations," and then "membership organizations"; 12 and how, you know, the different entire, you know, 13 regulatory scheme, and the governance provisions, 14 affect each of those differently, and whether or not 15 we should be looking at different standards, whether 16 it be for whistle-blower, conflict of interest, 17 audit; whether we should be looking at different 18 standards for charitable, versus, what I would call 19 "membership." 20 JENNIFER LEONARD: Uhm, I... 21 SENATOR RANZENHOFER: I don't mean to put you 22 on the spot, but, you know -- 23 JENNIFER LEONARD: -- I tend -- no. 24 I tend not to see the division as charitable 25 versus membership, because many charitable 1 organizations are membership organizations. 2 I actually see a division between what 3 California calls "public support" -- or, 4 "public-benefit corporations," which are charitable, 5 and "mutual-benefit corporations," which are 6 non-charitable, in that -- but, you know, do support 7 members. They're fraternities, sororities, veterans 8 groups, chambers of commerce and so forth. 9 So -- and I really have -- I am hoping that 10 when we land on the two types in New York State, 11 that they reflect the federal rules about, that 12 which is charitable remains on one side, and that 13 which is not is on the other side. 14 Now, that said, both types of organizations 15 have very small members. That, they're very small 16 charities, and they're very small mutual-benefit 17 organizations, that are membership organizations, 18 that, you know, can't put a handful of people 19 together, but are still operating. 20 SENATOR RANZENHOFER: Right. 21 JENNIFER LEONARD: So, it makes sense to have 22 thresholds for both. 23 I think that the highest thresholds that have 24 been proposed are the better ones to go with. 25 The Community Foundation field, in its 1 national standards, requires an audit at $1 million 2 of annual revenues, so -- or annual budget. 3 In terms of the -- so the -- I would 4 certainly go higher for all of the organizations. 5 I wouldn't tend to distinguish membership 6 organizations, myself, but, again, my expertise is 7 largely on the charitable side. 8 SENATOR RANZENHOFER: Okay. 9 In the organizations that you deal with, I 10 mean, we've heard quite a bit about differences in 11 regulations between the federal standards, you know, 12 specifically, the Internal Revenue Code, and then 13 references in the bills that we're considering, you 14 know, which are different than that, although the 15 Attorney General said that they incorporate a lot of 16 what the Internal Revenue Code. 17 In the day-to-day -- you know, in your 18 day-to-day feel dealings, I mean, is that a 19 distinction with the difference, or is that a real 20 distinction that we should be focusing on, to -- you 21 know, it's okay to have, you know, slight -- slight 22 differences, or, should we really be focused on, you 23 know, language or concept that says, you know, If 24 you don't have what the Internal Revenue Code says, 25 then you want these others? 1 Or, is it okay to have two slightly 2 different, even if the State won't incorporate what 3 the Internal Revenue Code, or what they have at the 4 federal level? 5 JENNIFER LEONARD: The nonprofit sector 6 worked hard on creating some of the IRS rules, and 7 they represent a lot of agreed-upon wisdom that a 8 number of us apply. 9 So, we would definitely support consistency 10 between the IRS rules and the New York rules, and, 11 it would -- it would -- we could survive the 12 inclusion of those, the IRS rules within the 13 New York rules. 14 But, I think some of the proposals go too 15 far, particularly with respect to the -- overseeing 16 the compensation of the highest-paid people, in 17 addition to the CEO, where I think we need some very 18 high-dollar thresholds, and, the approval of salary 19 ranges, rather than interfering with the CEO's 20 authority to decide on a reasonable salary for his 21 or her direct reports. 22 SENATOR RANZENHOFER: What about, you've 23 heard, and we've heard, at the other hearings about 24 the rebuttal-presumption rule? 25 Do you have any thoughts on that? 1 JENNIFER LEONARD: The -- I was having a 2 little trouble hearing from the back. 3 SENATOR RANZENHOFER: Okay. 4 JENNIFER LEONARD: But, the 5 rebuttable-presumption rule, with respect to CEO 6 compensation, sets out a very logical set of steps 7 for CEO compensation that is reflected in the bills, 8 as they've been presented. 9 And -- 10 SENATOR RANZENHOFER: What about with respect 11 to governance, not necessarily compensation? 12 JENNIFER LEONARD: With respect to 13 governance, can you be a little bit more specific, 14 Senator? 15 SENATOR RANZENHOFER: There were some 16 comments that, right now, under the IRS standards, 17 or under the Internal Revenue Code, there's a 18 rebuttable presumption that what you did is fine. 19 And I may not be artfully saying it the way 20 it should be. 21 The concern is, that, in the bills that we 22 have in front of us, there's almost like a new 23 standard that you -- you know, that you then have to 24 prove that what did you was correct, as opposed to 25 being entitled to this presumption that -- you know, 1 that what you did was fair and reasonable. 2 It's really a shifting of the standard. 3 And I was wondering if you had any thoughts 4 on that, in particular? 5 JENNIFER LEONARD: The -- and I -- 6 SENATOR RANZENHOFER: Eliminating -- 7 JENNIFER LEONARD: Pardon? 8 SENATOR RANZENHOFER: Is eliminating -- what 9 I want to really ask you is: Eliminating the 10 rebuttable presumption, is that going to be -- is 11 that going to make it more difficult for your 12 not-for-profits and not-for-profits around the state 13 to do the job that it does, whether it's recruiting 14 members, and directors, and just doing its work? 15 JENNIFER LEONARD: This is the rebuttable 16 presumption with respect to executive compensation? 17 Or -- can you -- 18 SENATOR RANZENHOFER: More with respect to 19 governance. Just actions. 20 JENNIFER LEONARD: Just governance? 21 I wasn't familiar with that concept, forgive 22 me. 23 It's -- I thought it was appropriate that the 24 bill -- I thought the bill raised the standard -- 25 raised indemnification of directors acting in good 1 faith. 2 From what I've heard this morning, that's 3 not -- there are some parts of the bill I may have 4 not seen, that caused more concern, especially for 5 directors with less wealth. 6 I think there should be a rebuttable 7 presumption for those directors who act in good 8 faith, to protect them and shield them from 9 liability, unless they are acting with malfeasance. 10 SENATOR RANZENHOFER: Okay. 11 The comments that were made with respect to 12 the liability and the responsibility of directors, 13 and possibly a change in the language, may cause 14 them to have to post a bond, or assets. 15 Is that -- you know, you heard the testimony 16 on that, and I just wanted to know if you could 17 weigh in on that; if you have any thoughts on that 18 particular -- those particular comments that were 19 made? 20 JENNIFER LEONARD: I was concerned. 21 I had not thought about that issue before, 22 but it -- we worked very hard to have an economic 23 diversity, as well as other forms of diversity, on 24 our board. 25 And, anything that makes it more difficult 1 for somebody to serve is a concern to us. 2 In general, there's a fine line. 3 Board members are volunteers. They need to 4 be protected, incentivized, and, also, informed of 5 the -- their oversight responsibilities. 6 So the bill has a -- can walk that line 7 pretty well. 8 SENATOR RANZENHOFER: Okay. 9 JENNIFER LEONARD: Thanks. 10 SENATOR RANZENHOFER: I appreciate your 11 answering those questions. 12 I mean, we are now -- you know, we've been 13 working on this, as you have been working this, for 14 a long time. 15 JENNIFER LEONARD: Uh-huh. 16 SENATOR RANZENHOFER: So, you know, we're not 17 asking questions, you know, such as: How do we make 18 life better? 19 I mean, we're dealing -- I mean, that's with 20 everything, you know, we're dealing with that. 21 Obviously, that's the purpose of the hearing. But, 22 we're really trying to focus on, you know, some of 23 the very, very specific provisions of the bill, you 24 know, when we go back and try to incorporate 25 everything that we've heard. 1 And that's why I'm -- you know, I don't mean 2 to put you on the spot, but -- 3 JENNIFER LEONARD: No, thanks. 4 SENATOR RANZENHOFER: -- I asked you some 5 very, very pointed questions about, you know, 6 judgments that are going to have to be made, you 7 know, over the next couple of weeks, not only by 8 myself and my Committee and the Senate, but, you 9 know, working with the Assembly as well, you know, 10 to make sure that everybody is comfortable with, you 11 know, whatever language that we put forth, as a 12 legislative body, in its entirety. 13 And, again, I want to thank you, you know, on 14 behalf of all the not-for-profits. 15 I mean, you really have done a tremendous 16 job, not only in reviewing these bills, your work 17 with Attorney General Schneiderman, but your 18 knowledge, the breadth of your knowledge, in terms 19 of, you know, what you testified about here today, 20 in trying to, you know, really get down to the 21 nitty-gritty, in terms of details, in terms of 22 what's going to make it easier, smoother, less 23 expensive, so that not -- you know, so that 24 not-for-profits can actually more -- you know, focus 25 more on their mission, you know, in providing better 1 services to the community. 2 So, again, I want to thank you for appearing 3 here today, and for answering the questions that you 4 did. 5 So, thank you very much. 6 JENNIFER LEONARD: Thank you very much, 7 Senator. 8 SENATOR RANZENHOFER: Okay. 9 Our next speaker is from the United Way of 10 Greater Rochester, Peter Carpino, who's the 11 president. 12 Peter, good to see you again. 13 I know we've met and talked briefly, you 14 know, previously this year. 15 And, again, I want to thank you for appearing 16 here today. 17 I know that you've given a lot of thought. 18 I mean, you know, there's no bigger agency. 19 You know, United Way is, obviously, a national 20 organization, and very, very active here in 21 Rochester. 22 And I want to thank you for -- you know, for 23 your involvement, for your leadership, and, you 24 know, for your willingness to come forward and 25 provide some guidance and comments on the bills that 1 we have in front of us. 2 So, thanks very much. 3 PETER CARPINO: Well, Senator, thank you 4 very, very much. 5 As you have indicated, I have the privilege 6 of serving as the president and CEO of the 7 United Way of Greater Rochester, a nonprofit 8 corporation that's been serving the Rochester 9 community for more than 90 years. 10 Like my colleagues, Jennifer Leonard, and 11 Ann Marie Cook who will follow me, I too am a member 12 of the Rochester Community Coalition, which, in its 13 2013 Community Agenda, called for the modernization 14 of the Not-For-Profit Corporation Act. 15 Since its founding by George Eastman in 1918, 16 our United Way has been committed to making the 17 greater Rochester region a better place in which to 18 live. 19 Today, we are the hub of a regional 20 six-county United Way network that collectively 21 raises more than 26 million, and includes the 22 United Way serving Livingston, Wyoming, Genesee, 23 Wayne, and Ontario Counties. 24 Last year, in Monroe County alone, our 25 United Way invested more than $17 1/2 million of 1 unrestricted funds and programs, many of which were 2 considered to be evidence-based or best practices 3 that focused on four key areas: 4 Meeting the basic needs of individuals and 5 families in crisis; 6 Reducing the incidence of child abuse and 7 neglect; 8 And increasing the number of infant 9 screenings and early interventions, ensuring that 10 school-age youth have access to the after-school, 11 summer enrichment, and mentoring programs that will 12 help to ensure their academic and personal success; 13 And providing the necessary supports for 14 seniors and their caregivers so that our older 15 adults can age in place with dignity. 16 Senator, I am so deeply appreciate [sic] your 17 leadership in introducing this legislation. 18 We believe this bill will offer 19 administrative relief to the nonprofit sector, while 20 raising the bar for board governance. 21 And I want to thank you also for inviting our 22 input, and the input of other stakeholders, to help 23 guide the important work that you are doing. 24 My comments this morning are informed by 25 United Way's work in helping nonprofits do business 1 differently in the face of declining resources, and 2 I will focus only on those items that will expedite 3 mergers and affiliations. 4 Like so many of their colleagues across the 5 state, Rochester's nonprofits are in the midst of an 6 unprecedented challenging time, facing reductions in 7 both private and public funding, coupled with an 8 ever-increasing demand for services. 9 That's why United Way, four years ago, formed 10 the Nonprofit Sustainability Consortium. 11 That consortium consists of nearly a 12 dozen organizations committed to helping nonprofits 13 deliver services as efficiently as possible, by 14 coordinating or consolidating program delivery, and 15 administrative infrastructure wherever possible. 16 Our partners in the consortium include the 17 University of Rochester, the Rochester Institute of 18 Technology, Rochester Business Alliance, the Grant 19 Makers Forum of New York, the Council of Agency 20 Executives, the New York Council of Nonprofits, and 21 the Rochester Area Community Foundation. 22 Each of these organizations is committed to 23 taking a leadership role in ensuring the 24 sustainability of the local not-for-profit sector by 25 enabling greater efficiency, less duplication in 1 service delivery, and greater accountability. 2 These restructurings and organizational 3 transformations span the entire collaboration 4 continuum, from simple joint programming, to shared 5 administrative and management agreements, to 6 co-locations, up to and including mergers and 7 affiliations. 8 Over the past few years, our efforts, as a 9 consortium, and as a United Way, have resulted in: 10 Sixteen nonprofit affiliations or mergers; 11 Five more affiliations were explored, but did 12 not result in restructurings; 13 We have three more affiliations in process, 14 that should be completed by year's end. 15 This experience has given me a unique 16 perspective on the proposed legislation. 17 I have experienced firsthand how these 18 mergers unfold, and have witnessed the challenges 19 faced by our nonprofits as they submitted the 20 filings necessary to enact their mergers. 21 That's why United Way particularly 22 appreciates that the proposed legislation allows 23 consolidations, mergers, and dissolutions to be 24 authorized by the Attorney General's Office without 25 judicial approval, while still allowing for court 1 intervention if necessary. 2 This will simplify and expedite the process, 3 eliminating processing delays that sometimes occur 4 in the State Supreme Court. 5 Currently, nonprofit affiliations, as you 6 know, cannot be finalized until court approval is 7 received. 8 This legal process can take years to complete 9 at a cost of tens of thousands of dollars. 10 We also support the provision that allows 11 nonprofits to serve as successors in mergers and 12 consolidations rather than requiring the formation 13 of a new corporate entity. 14 In addition to supporting the items in a 15 proposed legislation already noted by 16 Jennifer Leonard, we would respectfully ask that 17 consideration likewise be given to establishing 18 clear published procedures for completing a merger. 19 Clarity around such procedures would be very 20 beneficial for nonprofits interested in joining 21 together to become more efficient and effective. 22 The procedures themselves should include how 23 submission material should be formatted, and include 24 a checklist of the supporting documentation that's 25 required for regulatory approval of nonprofit 1 restructuring. 2 This would reduce, significantly, the delays 3 resulting from incomplete information or errors in 4 documentation. 5 We've seen final approval take more than 6 three years from when first regulatory approval was 7 received because of documentation errors or missing 8 information that the agency was unaware it needed to 9 provide. 10 Based on conversations with colleagues across 11 the state, this was not an isolated case. 12 The shortest approval time we have 13 experienced is four months, but even this is longer 14 than the three-month time period to process mergers 15 that was pledged by then-Attorney General Cuomo. 16 We believe that these delays could be reduced 17 significantly if the process was clear and uniformly 18 applied. 19 Our second request, is that a single state 20 office be designated to manage and facilitate the 21 processing of all consolidation merger and 22 dissolution requests. 23 Having a single resource from which agencies 24 can seek guidance, and a simple source for 25 shepherding applications, would significantly reduce 1 processing time currently attributed to lack of 2 uniformity between state agencies, and the 3 challenges that applicant agencies face in not 4 knowing how best to address complex affiliation 5 questions. 6 We support these changes. We believe they're 7 critical, not only to the affiliation-restructuring 8 process, but more importantly, to the people in need 9 of the services these agencies provide. 10 As an example, a merger that United Way 11 helped to finalize within the past month has allowed 12 for valuable resources to be redirected from 13 overlapping administrative structures to direct 14 services for people in need. 15 Savings were realized through staffing 16 reductions that included an executive director, a 17 vice president for programs, and a finance director. 18 Additional savings were realized through the 19 consolidation of insurances in audit services. 20 Most staff changes were accomplished through 21 natural attrition without negatively impacting 22 direct services. 23 United Way's ability to continue to encourage 24 and support more agency consolidations and 25 affiliations, and to achieve results like the ones I 1 cited above, will benefit from the proposed 2 legislation from the clarity of instruction, a 3 streamlined process, and centralization of 4 application management at the state level. 5 Thank you for considering this input as you 6 continue to work on this legislation, and as you 7 consider related legislation. 8 SENATOR RANZENHOFER: Well, Peter, again, I 9 just want to reiterate my comments. 10 You know, thank you for appearing and 11 testifying here today. 12 And I also appreciate your focusing on, you 13 know, what appears to be, you know, your primary 14 area of concern, you know, in light of Jennifer's 15 earlier testimony, and that's dealing with the 16 mergers and acquisitions. 17 And, one of the things I want to ask you: 18 You had talked about a need for clearer 19 procedures or guidelines, perhaps a checklist, in 20 terms of, you know, how things should be formatted. 21 Kind of like the nitty-gritty, you know, of things 22 that a not-for-profit would have to submit. 23 Are you -- I guess I want to ask: 24 Are you suggesting that this is something 25 that should be, you know, in the law and the 1 statute? 2 Or, that there should be, as a separate 3 product, you know, some sort of guidebook or 4 checklist that somebody can go to Internet and print 5 off, and say, you know, These are the ten boxes that 6 you have to check? 7 So I'm not sure what type of guidance that 8 you're looking for. 9 PETER CARPINO: Great. 10 I think it could be accomplished through a 11 separate piece that would not need to be necessarily 12 included in the legislation. 13 As I understood it, and as the anecdotes have 14 come back to me, these agencies go into this process 15 in good faith with the best of intentions. 16 And then, as the work is done, it's 17 completed, it's forwarded, then they're caught up 18 with not knowing that a particular piece of 19 information was required. 20 So, where that clarity is best achieved, 21 whether it is separate from the legislation or is 22 part of the legislation, I think it's the clarity 23 that's important. 24 SENATOR RANZENHOFER: Okay. 25 And why is there not clarity now, I mean, if 1 somebody wants to dissolve or somebody wants to 2 merge? 3 Is there not a -- I mean, does someone -- 4 I mean, someone going into this, they either do it 5 themselves, or, they're using professionals? 6 I mean, is there nothing out there where 7 someone can turn to, to say: You've to do A, B, C, 8 and D? 9 Or, do different agencies require different 10 things in order to get to the end product? 11 PETER CARPINO: My understanding, is that 12 different things may be required for different 13 organizations, depending on the state agencies with 14 which they are dealing. 15 And, so, they may fulfill the requirements 16 expected of -- by one agency, but then find that 17 they're falling short on the requirements by 18 another. 19 And I think, again, it's that consistency 20 that would be helpful. 21 SENATOR RANZENHOFER: Okay, so, normally, in 22 order to dissolve or merge, you would require 23 approvals from multiple agencies? 24 PETER CARPINO: That's my understanding, yes. 25 SENATOR RANZENHOFER: Okay. 1 And you're suggesting that there should be a 2 single office? 3 In other words, if you want to dissolve, or 4 you want to merge, that there should be kind of like 5 a one-stop shop; you can go to one place and have 6 all this taken care of? 7 PETER CARPINO: Exactly. 8 That one -- that an oversight organization, 9 or agency, as however that is designated, could then 10 serve as a troubleshooter. 11 SENATOR RANZENHOFER: Okay. 12 Well, again I want to thank you. 13 I appreciate your focusing on, you know, the 14 mergers and the affiliations, which, obviously, you 15 know, you're very well versed in, you know, 16 having -- you know, having dealt with this on a 17 daily basis, and, you know, hearing the anecdotal 18 stories that come back, you know, of having to deal 19 with this day in and day out. 20 So I appreciate your being here today, I 21 appreciate your testimony. 22 And I appreciate, you know, the involvement 23 of the United Way in helping us to shape and form a 24 better piece of legislation. 25 Thank you very much. 1 PETER CARPINO: Well, Senator, thank you very 2 much. 3 Have a nice day. 4 SENATOR RANZENHOFER: Okay, thank you. 5 The next speaker that we are going to hear 6 from is from Life Span, Anna Marie Cook, who is 7 president and CEO. 8 And, we walked into the building together 9 this morning, through the rain. 10 So, I appreciate your being here today, to 11 shed -- you know, to shed light, you know, from a 12 slightly, you know, different perspective, and that 13 is, how the not-for-profit community is operating 14 right now, and how it's affected by this proposed -- 15 by these proposed pieces of legislation; 16 And, what can be done, better, differently, 17 in order to make -- you know, in order to achieve 18 those objectives which the Attorney General's Office 19 testified to earlier, as making it simpler and 20 easier for not-for-profits to operate in the state; 21 and, particularly, in Rochester and Monroe County. 22 So, thank you for being here. 23 ANN MARIE COOK: Well, thank you, Senator, 24 very much. 25 As you said, I'm Ann Marie Cook, president & 1 CEO of Lifespan. 2 And Lifespan is a private not-for-profit. 3 We're an aging-service provider, and we serve 4 approximately 25,000 older adults and their family 5 caregivers every year. 6 I'm also a member of the Rochester Community 7 Coalition, along with Peter Carpino and 8 Jennifer Leonard, because I am the current president 9 of the Council of Agency Executives. 10 The council is a 125-member not-for-profit 11 membership organization. 12 Together, we have about $836 million in 13 revenue. We employ 17,000 people in our various 14 not-for-profits. And as an organization, our 15 members work with almost every state agency. 16 Lifespan, in particular, we have contracts 17 with five different state agencies. 18 I make that point, Senator, because part of 19 my theme today will be balance, as other speakers 20 have talked about, and the redundancy in working 21 with different state agencies. 22 First of all, however, I have to thank you 23 for having this hearing, and inviting members of the 24 not-for-profit community to speak. 25 It certainly has been disappointing and 1 unfortunate for us that many not-for-profit, these 2 scandals, has tarnished the good reputation of those 3 of us who do the work. 4 And in order to restore and preserve our 5 reputations, and, of course, and what we do, we 6 support most of what was in the bill, in terms of 7 greater accountability for not-for-profits, we 8 support the establishment of audit committees, 9 although we do request that audits -- the limit for 10 audits be raised from the current 250,000 to 11 500,000. 12 We support the adoption of code of ethics and 13 the requirement of whistle-blower policies. 14 We support the document-retention policies, 15 and the verification or certification of financial 16 statements, and, of course, for independent audit 17 standards. 18 In more detail, I would just like to say, in 19 terms of indemnification of board members, I want to 20 speak on behalf of our board members who provide 21 countless hours as volunteers, you know, providing 22 their time, treasures, and talents to organizations. 23 And we support the provision to indemnify 24 directors who are acting in good faith, for their -- 25 for the work that they do. 1 And I think that's critical, to ensure that 2 we have highly skilled board members working in 3 not-for-profits. 4 In terms of conflict of interest, I just 5 wanted to support out, that we -- we support the 6 provision that required board members to disclose 7 any conflicts. 8 In reality, Senator, all the not-for-profits 9 that I know of already do this. 10 For instance, all of the board members are 11 required to complete conflict-of-interest 12 statements. For any conflicts they have, they must 13 disclose, cannot vote. 14 We do -- we don't support, though, the 15 provision that those conflicted members not sit in 16 board meetings. 17 For some small not-for-profits, there would 18 be board members in and out of every meeting, and it 19 would be disruptive. 20 We think there should be a reasonable 21 accommodation, so that they can disclose their 22 conflict, however, not have to leave the meeting. 23 In terms of compensation, nonprofit boards in 24 our area follow national protocols in determining 25 CEO compensation. 1 It's based on attainment of goals, comparable 2 with other not-for-profits of similar size and 3 similar responsibilities. 4 Executive compensation is recorded on the 5 990 Form filed by all not-for-profits, and many of 6 our members must also file an audited, consolidated, 7 certified financial report for New York State, which 8 lists the CEO salary and all of top wage earners. 9 That information is available. We've been 10 doing these reports for years. 11 We strongly oppose the requirement that 12 boards set the compensation for employees, other 13 than CEOs, if those employees make less than 14 100,000. 15 It is the responsibility of the CEO to set 16 those salaries. Those individuals report to the 17 CEOs, and, quite frankly, it's micromanaging. 18 We would support, as an alternative, the 19 Not-For-Profit Revitalization Bill, which requires 20 only salaries above 150,000 be considered by board 21 compensation committees, other than the CEO. 22 It was just -- would be difficult for boards 23 to handle all of the compensation levels of 24 different employees. 25 I would be remiss, though, Senator, because, 1 quite frankly, I don't know where else to take this, 2 these comments, if I didn't ask for further mandate 3 relief for nonprofits. 4 There needs to be a paperwork-reduction 5 commission with participation from nonprofit 6 leaders. 7 And while not a popular topic, the redundant 8 paperwork requirements and mandates on 9 not-for-profit make it difficult to direct precious 10 resources to people in need. 11 In isolation, I'll give you a couple of 12 examples, but in isolation, these are going to seem 13 insignificant and small. 14 Quite frankly, they add up, though, in a time 15 when we have diminishing resources. 16 And, also, at this time, we have to say: 17 Every time there's a scandal, we're given another 18 report to do. 19 And as not-for-profit leaders, we scratch our 20 heads, because we already give this information to 21 the State. 22 But let me give you just a few examples of 23 things that have popped up recently that will show 24 you the redundancy in what we do. 25 First of all, the justice center. 1 Honestly, I supported the recent development 2 at the justice centers in which allegations of abuse 3 would be reported to the State through this center. 4 However, in the development of the new 5 center, the requirement to report to other state 6 agencies was not eliminated. 7 So in allegations of abuse, multiple state 8 agencies, all with different time frames, different 9 documentations, different forms, need to be 10 notified. 11 The system makes it impossible to figure out 12 who takes the lead in these investigations, and we 13 need to streamline the process and devote resources 14 to those in need. 15 Another example: For a long time, every 16 agency had different requirements for the exact same 17 information. 18 Honestly, we thought this problem was solved 19 through the Vend Rep process, in which we all 20 electronically submit information. 21 It all sounded good, every state agency could 22 access this information. 23 But, some agencies do not, or will not -- I'm 24 not sure -- will not use that system, and we have to 25 maintain different paper records. 1 We have to print off these records. Some 2 state agencies still require the same information, 3 in different forms. 4 One state-agency staff person told my staff, 5 that they don't have the budget for all this copy 6 paper, so agencies will just have to print it all 7 out and send it to Albany, even though it's in the 8 electronic record. 9 One final example, although, I could, you 10 know, go on forever, in the Office for People With 11 Developmental Disabilities, this happened to me 12 recently: 13 We are still required to certify that an 14 individual with an intellectual or developmental 15 disability still has that disability, every single 16 year. 17 It used to be, Senator -- I guess it's gotten 18 better -- we used to have to certify this through a 19 physician. 20 As you and I both know, an individual with 21 Down Syndrome will always have Down Syndrome. 22 What happened to me recently, is the State is 23 downsizing their own operations. We accepted 24 clients that the State used to serve. 25 The State forgot to certify one of those 1 particular individuals one year, but we accepted the 2 case. 3 Once the State came in and monitored that, 4 and did an accounting of our records, they noticed 5 before we had the case, the State forgot to certify 6 that. 7 Lifespan was fined, even though it wasn't 8 even our client, for prior years that this wasn't 9 certified that this individual still had a 10 developmental disability. 11 I could go on forever about that office. 12 And, finally, I have to mention, I would be 13 remiss if I didn't mention, delayed contracts and 14 payments. 15 Unfortunately, the Prompt Contracting Law 16 that was enacted several years ago has done little 17 to help not-for-profits. 18 I know in my own organization, we had one 19 contract recently that was delayed 14 months in 20 payment, except, we're still expected to serve 21 people, and submit reports. 22 That's a bit unusual, but I will say, 23 routinely, we're not paid for six to eight months 24 for every single State contract. 25 These are small examples where the paperwork 1 has trumped the work. 2 I applaud your efforts on this bill, and I 3 want to thank you very much for tackling this very 4 difficult task. 5 As a nonprofit community, we are committed to 6 making the transactions of nonprofits transparent 7 and accountable, and we want to work with you on 8 that. 9 In terms of management, our goal is to work 10 with you to achieve that highest level of 11 transparency and accountability, but our collective 12 goal must be, to direct resources to those in need. 13 Thank you. 14 SENATOR RANZENHOFER: Thank you very much, 15 Ann Marie. I appreciate your testimony. 16 And I -- you know, we've heard, you know, at 17 a number of the hearings, the issue with respect to 18 prompt payment. 19 That is actually a subject of another bill 20 sponsored by Senator DeFrancisco. 21 I don't know if we're going to have the 22 ability to tackle that particular -- that's a tough 23 issue to tackle. I don't know if we're going to be 24 able to successfully tackle that issue in this bill, 25 if we're going to try to get something passed this 1 session. 2 But I certainly -- we've heard quite a bit 3 about, you know, that particular issue. And, you 4 know, it's one that definitely needs to be 5 addressed. 6 Whether it be in this bill, you know, that 7 will be another subject. 8 In terms of your talk about the paper 9 redundancy, do you have any specific suggestions? 10 For instance, you know: 11 Should everything be submitted 12 electronically? 13 Should there be a number of -- you know, if 14 you have to submit paper documents, should that be 15 limited to a certain number? 16 I mean, do you have any specific suggestions 17 for us on the issue of paper redundancy? 18 And I guess the first one is, you know: 19 Should there be, especially in this day and age, I 20 mean, should anything be done with paper? Should 21 everything be done electronically. 22 ANN MARIE COOK: Well, we would support 23 electronic use. 24 I have to say, Senator, it has started. 25 Like I talked about this Vend Rep system the 1 State started, we thought it was an excellent first 2 step, a huge first step, in allowing us to put this 3 information in electronically, and having state 4 agencies access it that way. 5 However, as I said, some state agencies don't 6 use the system, for whatever reason. 7 So I would like to take that first step that 8 they've started, ensure that state agencies use it, 9 and build upon that system. 10 I think it's a wonderful system. 11 SENATOR RANZENHOFER: You know, "Vend Rep," 12 I'm going to talk -- I presume that means for, you 13 know, submitting reimbursement for vendor payments, 14 and things like that? 15 Is that what it's used for right now? 16 ANN MARIE COOK: Not right now. 17 I wish it would expand to that. 18 Quite frankly, it's used for the basic 19 information that all nonprofits have to submit. 20 SENATOR RANZENHOFER: Okay. 21 ANN MARIE COOK: You know, so we can scan in 22 now, our incorporation papers, our board of 23 directors... information that, quite frankly, every 24 state agency needs to know. 25 And, so, we thought it was a great first step 1 for those -- for them to build that system. 2 Billing, or vouchering, or contracting, is 3 still all done separately. 4 SENATOR RANZENHOFER: Okay. 5 Now, you -- you had mentioned you are 6 primarily dealing with the services that Lifespan 7 provides; right? 8 ANN MARIE COOK: That's right. 9 SENATOR RANZENHOFER: To a more general 10 question: 11 I mean, is there a difference between, you 12 know, that you see in terms of the -- whether it be 13 audit requirements or conflict of interest, 14 related-party transaction, you know, whatever the 15 subject area, you know, do you see a distinction or 16 a difference between, you know, an agency like 17 yours, and, you know, an agency -- more of a member 18 agency, like a veterans organization, a service 19 group, that type of thing? 20 Should there be different standards that 21 apply to different groups? 22 ANN MARIE COOK: I'm not quite sure, Senator. 23 I'm not sure, except, that I would think a 24 member organization should have less requirements 25 than I have. 1 I don't know. 2 SENATOR RANZENHOFER: Okay. 3 Well, again, I appreciate your being here 4 today, and your testifying. 5 You know, one of the beauties about a public 6 hearing is, every speaker that testifies brings a 7 slightly different perspective, you know, which we 8 could never glean from, you know, just having the 9 broader testimony, such as from, you know, the bar 10 association or from the Attorney General's Office. 11 I really appreciate you -- you know, you 12 bringing, you know, not only your perspective, but, 13 you know, providing some very, very specific 14 examples of what you deal with day in and day out in 15 your organization. 16 So, thank you for being here today. 17 ANN MARIE COOK: Thank you, Senator. 18 SENATOR RANZENHOFER: Our next speaker is 19 going to be Joseph Casion, from Harter, Secrest & 20 Emery. Joseph is counsel to Harter, Secrest & 21 Emery. 22 And, Joseph, as you're walking up here today, 23 I want to thank you for being here today -- 24 Make yourself comfortable, have a seat. 25 -- and providing your insight and 1 perspectives on the bills that we have in front of 2 us. 3 So, thank you for being here. 4 JOSEPH G. CASION: My pleasure, Senator. 5 And being mindful of the time, and in order 6 not to duplicate a lot of comments that we heard 7 today, I will keep my remarks very brief. 8 But as you did note, my name is 9 Joseph Casion. I am a partner at Harter, Secrest & 10 Emery here in Rochester, and my practice focuses 11 mainly on nonprofit tax-exempt organizations of all 12 size. 13 And I would really like to compliment the 14 work of the Legislature, the Attorney General's 15 Office, the Bar Association Leadership Committee, 16 funders, and providers, who we have all heard from 17 today, in having their input heard when it comes to 18 the pending legislation. 19 The main theme of my comments is that, to the 20 extent that we have the ability to use existing law, 21 or to use other standards that have been tested, 22 let's try to make the most of that opportunity. 23 And I really have been encouraged today by, 24 frankly, the nature of this hearing; the obvious 25 dialogue that's going on between all of the 1 stakeholders in this, to try to arrive at a properly 2 calibrated law that protects the public, that 3 lessens the burdens on nonprofit, and does our best 4 that we can do to ensure effective service delivery. 5 Along those lines, I just would like to make 6 a few comments about the compensation provisions in 7 the bill. 8 First, New York State standard is, currently, 9 that all compensation paid to individuals must be 10 reasonable and commensurate with the services 11 provided by the individual to the organization, and 12 our Attorney General's Office has the ability to, 13 you know, prosecute claims for improper or excessive 14 compensation. 15 In addition, Executive Order 38 applies 16 different limitations on compensation. 17 And, finally, as we've heard today, the 18 Internal Revenue Service has a robust scheme of 19 regulations to protect against excessive 20 compensation. 21 And the point that I just merely want to 22 reiterate is, to the extent that we've got things 23 like that, let's make the most out of them, 24 including the rebuttable presumption. 25 I think that that is a time-tested standard, 1 in terms of the Internal Revenue Code. 2 And to the extent that we need to replicate 3 these standards in New York laws, that we consider 4 including that provision in any amendments to the 5 Not-For-Profit Corporation Law. 6 The other couple areas that I wanted to touch 7 on briefly, are those of related-party transactions, 8 and those with respect to corporate policies. 9 The related-party-transaction provisions in 10 the pending legislation present a slight concern to 11 me, with respect to the Attorney General's ability 12 to rescind a related-party transaction if they feel 13 it is not in the best interests of the corporation. 14 I am not sure what standard would be applied 15 to that kind of scrutiny. 16 I'm also aware of the fact that we heard 17 today that, you know, in a community the size of 18 Rochester, there are, you know, a limited pool of 19 folks who tend to either provide services in a 20 particular industry, be it construction or 21 professional advice, and then a lot of these folks 22 are called upon, including myself, oftentimes, to 23 serve in multiple capacities with respect to board 24 positions. 25 And then it's a matter of disclosure, of 1 transparency, of sharing that information with your 2 fellow colleagues and board members and 3 decision-makers, that will help them make an 4 informed decision. 5 And that a standard in which a transaction 6 could be unwound, that isn't very clear to me, makes 7 me, in some respects, nervous as a counselor, 8 because, oftentimes, those decisions form the basis 9 for financings, or other things, upon which banks 10 and other third parties may rely. 11 And I'm concerned that it could -- that it 12 could -- that the potential of it being undone could 13 cause problems for those types of organizations. 14 Finally, with respect to some of the policies 15 that the law provides, these exist, I think, in 16 other statutes, especially with respect to the 17 Internal Revenue Code, and Service. 18 A not-for-profit organization, frankly, can't 19 be formed nowadays without having a very extensive 20 conflict-of-interest policy. 21 If you do not submit that with your 22 tax-exempt application, you will be subject to a 23 litany of questions, and, you need to have that 24 before even entertaining a submission to the 25 Internal Revenue Service. 1 Likewise, whistle-blower policies, very good 2 in practice, but what I'm concerned about here is, 3 that we've got existing law out there about 4 whistle-blower policies that is slightly different 5 from what is proposed in the bill. 6 And I'm worried about a footfault, if you 7 will, with respect to some of these policies, where 8 there are those minute differences in the standards, 9 that an organization inadvertently runs afoul of 10 those, to what effect? 11 And if there's really no substantive 12 difference between the actions one organization took 13 under one policy, or that's mandated by a different 14 law, and another one, I'm worried about them being 15 caught in between those. 16 Finally, I just want to conclude, but -- by 17 acknowledging that there have been cases of fraud 18 and abuse in the not-for-profit sector, and that the 19 Attorney General's Office has done a wonderful job 20 of identifying those, prosecuting those instances, 21 and, trying their best to restore the public trust. 22 And I continue to applaud the efforts of the 23 Legislature, and everybody else involved, in coming 24 up with a bill that helps our nonprofit sector, 25 which you've heard how large it is, continue to 1 thrive in New York State. 2 And with that, I will concludes my remarks. 3 Thank you, Senator. 4 SENATOR RANZENHOFER: Okay, well, Joe, thank 5 you very much for your comments. 6 And, again, I appreciate your unique 7 perspective as an attorney specializing in 8 not-for-profit law. I mean, you're doing this day 9 in and day out, and, you know, you know what these 10 different clients of yours have to deal with. 11 The two areas that you talked about, I just 12 wanted to ask some specific questions about the 13 related-party transaction, which you brought up, and 14 the Attorney General's ability to rescind, and 15 favoring more of a, disclosure, transparency type of 16 approach. 17 I mean, what type of -- and, again, we're not 18 going quote on the language, but, you know, what are 19 you looking for in a bill that would balance the -- 20 balance the needs of the not-for-profit, but also 21 protect, you know, the public trust, so that, you 22 know, it doesn't look like, you know, someone is 23 using a board position to their -- you know, to 24 their advantage? 25 I mean, how do you strike that balance? 1 What type of language, you know, would be 2 needed, you know, when we're crafting a final bill? 3 JOSEPH G. CASION: Sure. 4 I think what I would do in those 5 circumstances, is try to focus on other elements of 6 the provisions in the reform bill; or, again, to the 7 extent we've got external legislation. 8 To the extent one of those related-party 9 transactions implicates excessive compensation, or 10 it implicates an undisclosed conflict of interest, 11 then I think those are the types of related-party 12 transactions we should focus on. 13 But a related-party transaction, in and of 14 itself, shouldn't necessarily implicate this kind of 15 scrutiny or potential undoing of the transaction. 16 SENATOR RANZENHOFER: So what type of 17 protection is needed? 18 Like, for instance: You're an attorney, 19 you're providing service -- you know, let's say, you 20 serve on the board. The attorney decides to use 21 your law firm to, you know, close a real-estate 22 transaction, or, secure financing, or, to prepare 23 contracts. 24 You know, how do you -- again, I'm not -- I 25 don't want to pick on you and your firm, but how do 1 you -- I mean, what's needed to allow that to 2 happen, while still preserving the fact that, you 3 know, you're not getting, you know, a direct 4 benefit? 5 JOSEPH G. CASION: Excellent. 6 SENATOR RANZENHOFER: You actually may be 7 doing it at a loss, because you may be doing it 8 pro bono -- 9 JOSEPH G. CASION: Excellent. 10 SENATOR RANZENHOFER: -- or you may be doing 11 it, you know, at a reduced rate. 12 JOSEPH G. CASION: Sure. 13 SENATOR RANZENHOFER: How do you strike that 14 balance? 15 What type of language is needed to allow 16 these type of transactions, you know, a certain 17 degree of scrutiny, but not overbearing, so that 18 you're worried that someone is going to come in and 19 undo what's been done? 20 JOSEPH G. CASION: Sure. 21 Well, I know what I do in practice is, 22 frankly, I prepare a lengthy disclosure letter to 23 the entire body, indicating, that if they are 24 interested in utilizing my service, this is how it 25 would work. 1 And, even if it's not me directly, if it's 2 another member of my firm, you know, by imputation, 3 that implicates a potential conflict of interest for 4 me. 5 And I really address it in that context, of a 6 potential conflict of interest. 7 And I want to make sure that they understand 8 that they have alternatives. That they go out and 9 receive, you know, comparable data as to similar 10 services. 11 And really go through the steps that, you 12 know, frankly, I think exist under the IRS 13 standards, to determine whether or not they can 14 utilize my service. 15 And New York law, for that matter, that would 16 be an interested-party transaction under existing 17 New York law. 18 So I think disclosure, recordkeeping, and 19 informed decision-making by that body, if that is 20 reflected in the records and the minutes of the 21 organization, then, I don't know that that would 22 rise to this level, or require this level of 23 scrutiny. 24 SENATOR RANZENHOFER: Should there be a 25 requirement to getting comparables? 1 JOSEPH G. CASION: Yes. 2 SENATOR RANZENHOFER: Okay. 3 And, let me just make a note on that. 4 And the last question I wanted to ask you: 5 Are you suggesting, with respect to certain 6 policies, like conflict-of-interest policy and 7 whistle-blower policy, where there may be some 8 provisions in federal law, or labor law, that, if 9 the not-for-profit is already governed by those 10 other provisions, then this additional language in 11 these bills would not be necessary; but, that if 12 they are not already governed by those provisions, 13 then these provisions would be acceptable? 14 JOSEPH G. CASION: Yes. 15 SENATOR RANZENHOFER: Okay. And that would 16 be because, there would be no conflict? 17 There wouldn't be two sets, even if they're 18 very close -- there wouldn't be a requirement of 19 having you, as a counsel, having to make sure, you 20 got to look over here, maybe satisfy this, and then 21 you got to look at these new ones? 22 JOSEPH G. CASION: Right. 23 SENATOR RANZENHOFER: Okay. 24 Well, again, I appreciate, Joseph, the unique 25 perspective that you bring, in terms of a 1 practitioner, you know, dealing with this day in and 2 day out. 3 Your insight has been very, very helpful, 4 and, you know, will certainly aid us as we move 5 forward in trying to craft some final legislation. 6 So, thank you for being here. 7 JOSEPH G. CASION: Thank you, Senator. 8 SENATOR RANZENHOFER: Our final speaker for 9 today, and for all of the three hearings, is from 10 the New York State Law Revision Commission, 11 Joseph Cirando, Esquire, counsel. 12 And, although you are the last speaker to 13 appear, certainly, equally as important as everybody 14 else who has been here. 15 And I do want to publicly thank you, and 16 acknowledge your contributions, and the 17 Law Revision's contributions, to this entire 18 process, not only working with myself and, you know, 19 this Senate Committee, but working with the 20 Assembly, with the Attorney General, and everybody 21 else who has been involved in the process. 22 So, John, thank you very much for being here 23 today, and I look forwards to hearing your comments. 24 JOHN CIRANDO: Thank you, Senator. 25 It is an honor to be here representing the 1 Law Revision Commission. 2 I'm from Syracuse, New York. 3 And I would be remiss if I didn't indicate 4 that that was the home of Senator DeFrancisco. 5 SENATOR RANZENHOFER: I'll make sure that 6 when I go back to Albany tomorrow, I will mention 7 that you publicly stated for the record, about -- 8 JOHN CIRANDO: And I will tell him that you 9 publicly mentioned his name as well on his bill. 10 So, thank you. 11 Briefly, since it's just before lunch, I 12 don't think I'm going to read the bill, but, a 13 couple of things were mentioned this morning that I 14 would like to highlight and speak about. 15 Insofar as the concern of the individuals 16 regarding types of corporations, I think the 17 charitable and the beneficent determination would 18 best serve individuals and organizations, going 19 forward. 20 I myself am a member of a -- member of a 21 board of directors of a not-for-profit. 22 I have represented not-for-profits. 23 And, I have also been involved in formation, 24 as well as mergers, of not-for-profits in the 25 Syracuse area. 1 So, this ease of doing business is something 2 that is really needed, and necessary. 3 And, we are in the twenty-first century, so 4 those type of embellishments also would be great. 5 I think there was some concern, and some 6 discussion, and some questions about 7 indemnification. 8 And I think -- when you look at the 9 indemnification process, I think the key to keep in 10 mind is, what is its purpose? 11 And the purpose is, to protect the assets of 12 the not-for-profit. 13 And the proposal that we have put forward is 14 consistent with the Business Corporation Law 15 provision which is already the law. 16 So -- and I would not want to lose sight of 17 the fact that the purpose of that indemnification is 18 to protect the private assets of the 19 not-for-profit -- or, the public assets of the 20 not-for-profit. 21 Concerning the conflict of interest, and the 22 financial integrity, and the monitoring of the 23 activities, there was -- the prior speaker 24 mentioned, was concerned about the standard. 25 I think this standard in our bill was -- is: 1 It violates the law; obviously, should be set 2 aside; 3 Or, it's not reasonable or in the best 4 interests of the corporation. It benefits the 5 individual rather than the entity. 6 And I think that is a measurable standard. 7 You inquired about the procedure, when 8 someone wants to hire someone who's a board member. 9 And the procedures of the quotes, and things 10 like that, I think are very -- they're necessary, 11 required, and very important. 12 I myself, I remember the first closing I did 13 for the -- I think it was the Knights of Columbus, 14 when I came back from the service. 15 And, we got all done -- and, I was the 16 advocate for the council, and we got all done, and 17 the fellow said, "Well, where's your bill? 18 I said, "Bill?" 19 I said, "You're not-for-profit. I don't give 20 you a bill." 21 If we had any expenses and disbursements, you 22 would, you know, but -- 23 So, and that's the procedure that my father 24 taught me, and that's the procedure that we still 25 follow today. 1 So -- but that makes -- you have to be very 2 keen and have a high sense of awareness. 3 And the provisions in the law give that high 4 sense of awareness, so that those individuals making 5 the decision will think about, and do it in the 6 correct manner. 7 We're working on language, insofar as, 8 incorporating the provision that creates a 9 rebuttable presumption, if you are complying with 10 the Internal Revenue Service, which would, I think, 11 allow a safe harbor for those entities that are 12 complying with the law. 13 And, there's a standard, if the 14 Attorney General then seeks to set it aside. 15 And I think -- I just wanted to look over 16 some of the other comments, if that's... 17 As far as the continuation of the consents, I 18 think our bill indicates certain entities that -- 19 agencies that would still be allowed to comment, but 20 it does -- in those other agencies, they're given 21 notice, and if you don't hear anything from them 22 within 45 days, there's -- it's presumed that they 23 approve -- they approve. 24 I think that makes it -- where that comes in, 25 is where the agency is trying to start its business, 1 or start the new merger, and, paperwork -- legal 2 paperwork has to be compiled, and prepared. And it 3 gives them a time frame, at least, when they can -- 4 when they can sign their lease and start their new 5 services. 6 Other than that, Senator, do you have any 7 questions? 8 SENATOR RANZENHOFER: Always have questions, 9 but not as many you as you would think, because, at 10 the other hearings, Peter Kiernan and William 11 Josephson from the Law Revision Commission, also, 12 actually, commented twice. Peter would go second, 13 and Joseph would, or -- and William could wrap up, 14 as you are wrapping up here today. 15 And we really had an opportunity at the other 16 ones as well to really, you know, get into the 17 nitty-gritty and, again, some of the differences you 18 know, between, like, for instance, the preapproval 19 requirements that you just mentioned, the 20 related-party transactions, conflict of interest, 21 and things of that nature. 22 You know, I think, again, you know, these 23 hearings have been exhaustive, in terms of really, 24 you know, talking about the broad brushes, in terms 25 of, you know, easing the burdens, and, increasing 1 the transparency. 2 And we've also gotten down into the weeds, in 3 talking about some very specific language, whether 4 it be for Internal Revenue Code provisions, with 5 respect to whistle-blower, or, you know, the 6 suggestions that are in some -- you know, some of 7 the bills that we're considering. 8 So, I don't have any additional questions. 9 I appreciate, again, you know, your coming 10 from Syracuse today, on behalf of 11 Senator DeFrancisco. 12 And, again, you know, these really have been 13 very, very -- you know, very, very diverse hearings. 14 We've had representatives from Buffalo, 15 Rochester, Syracuse, and Albany, you know, the 16 New York City area. Really have had a very, very 17 wide range and breadth of comments. 18 And your comments, in particular, John, and, 19 you know, the comments from, you know, everybody 20 that we've heard, will be very, very helpful as we 21 move forward during the rest of this legislative 22 session, to try -- you know, for the first time in 23 more than 40 years, to try to make some positive 24 changes to the bill. 25 Comments that we've heard just been so 1 comprehensive, that I honestly don't believe that 2 we're going to be able to incorporate everything 3 that we've heard in our first brush at trying to 4 pass some legislation. 5 It doesn't mean that they're not going to be 6 considered at a later date. 7 But, I want to thank you again, John, for 8 being here today, and for your testimony. 9 JOHN CIRANDO: Thank you, Senator, for what 10 you're doing for the not-for-profits. 11 SENATOR RANZENHOFER: Okay, well, we're 12 trying, so, thanks very much. 13 That now concludes the series of public 14 hearings that began last week in Albany, on 15 Wednesday; the hearing in New York City on Friday; 16 and today's Tuesday hearing. 17 I want to thank the representatives from the 18 Attorney General's Office, and the Attorney General 19 himself. You know, Jason and James who have 20 traveled the state with me, to not only testify, but 21 to listen to the comments that we've heard; 22 Representatives, again, you know, John, who 23 is here today, and, William Josephson and 24 Peter Kiernan, from the Law Revision Commission; 25 The various representatives from the 1 State Bar Association and the City Bar Association; 2 Those groups that are interested, we've heard 3 from representatives from -- you know, from the 4 accounting community, the cemetery community; 5 And then, again, you know, the many 6 representatives that we've heard from the many, many 7 not-for-profit agencies across the state; 8 Your testimony on behalf of the 9 not-for-profits and the good work that they're 10 trying to do, the people that are there, day in and 11 day out, trying to provide these services, is really 12 commendable. 13 And, we're going to try at our end, on the 14 legislative side, to do our best to pass a bill that 15 will be, both, helpful, and also well balanced, in 16 dealing with those issues that needs to be dealt 17 with. 18 So I also, in conclusion, you know, want to 19 thank our Senate special-events staff, our media 20 services, who have done an outstanding job across 21 the state, in recording, and making sure that these 22 hearings take place. 23 We don't hear any feedback, you know, we've 24 have had no technical difficulties, in the three 25 hearings that we've had. And you guys deserve a lot 1 of credit for that. 2 To my own staff, both in my district-office 3 staff, and Senate in Albany, they've done a great 4 job in putting together the packets, and 5 coordinating these hearings, the different groups 6 that have appeared. 7 And, finally, in closing, thank you to 8 Monroe County Legislature and the Clerk's Office for 9 allowing us to use these really beautiful chambers. 10 That now concludes the Senate Standing 11 Committee on Corporations, Authorities, and 12 Commissions' series of public hearings, dealing with 13 revisions to the not-for-profit laws. 14 Thank you, everybody. 15 JOHN CIRANDO: Thank you. 16 [Applause.] 17 (Whereupon, at approximately 12:21 p.m., the 18 public hearing held before the New York State Senate 19 Standing Committee on Corporations, Authorities, and 20 Commissions concluded, and adjourned.) 21 22 ---oOo--- 23 24 25