Basic Legal Principles

The New York Prudent Management of Institutional Funds Act (“NYPMIFA”), the New York version of UPMIFA, took effect on September 17, 2010.  That law made important changes to rules governing the spending of institutional funds and replaced key provisions of the prior statute known as the Uniform Management of Institutional Funds Act (“UMIFA”).  The new law was passed after the 2008-2009 financial crisis, a very difficult period for charities administering institutional funds, and gave nonprofit boards broader authority to spend donor-restricted institutional funds while establishing provisions to ensure that boards exercise their authority responsibly.  

Significantly, NYPMIFA made a few changes to the rules governing the modification or release of donor-imposed restrictions on institutional funds.  These changes are summarized in the guidance provided on the website of the Office of the New York Attorney General (the “Attorney General”), entitled A Practical Guide to The New York Prudent Management of Institutional Funds Act. In this article we focus on a new procedure created by NYPMIFA for lifting or modifying a donor-imposed restriction on the management, investment, or purpose of an institutional fund without donor or court approval when the institutional fund is less than $100,000 in value and has been in existence for more than 20 years. 

Below I outline the steps for releasing or modifying donor-restricted institutional funds that are under $100,000 and older than 20 years, as outlined in section 555(d) of the Not-for-Profit Corporation Law (N-PCL). In brief, if the institution determines that the restriction is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction, in whole or part, without court approval, after giving written notice to the Attorney General, unless the Attorney General objects to the release or modification within 90 days. It is the view of the Attorney General that such notice must also be given to the donor if available. The organization may proceed to release or modify the restriction if the Attorney General does not notify the institution within 90 days, or if the Attorney General provides its consent. 

Step 1. Identify Eligible “Small and Old Funds”

The institution should identify any donor-restricted institutional funds that are currently less than $100,000 in value and more than 20 years have elapsed since the fund was established. The institution should locate the original gift instrument and any other supporting document that indicates the fund’s age and value. 

Step 2. Determine Whether to Seek Modification/Release

Once the eligible small and old funds are identified, the institution should determine whether the restrictions on any or all of those funds are unlawful, impracticable, impossible to achieve, or wasteful, such as to warrant release or modification of the restrictions in whole or in part. This determination should be made in a careful and prudent manner by the institution’s board in the exercise of its reasonable business judgment, and documented in appropriate detail in the minutes of the board meeting where the decision was made. 

Step 3. Notify Donors 

Once the institution has determined which of the applicable small and old funds warrant release or modification, the institution must contact the original donor, if available, and try to obtain consent to the modification. A donor who is an individual is “available” if the donor is living and can be identified and located with reasonable efforts. There is no requirement to contact an executor or heir of the donor of the fund. If a donor’s current address is unknown, the institution should make reasonable efforts to locate the donor, including Internet searches and contacting known associates of the donor, such as an attorney who represented the donor when the gift was made. The institution should keep a record of its statutory notice to donors and should document the institution’s efforts to locate donors, even if those efforts are unsuccessful. If donor consent is received, the institution can proceed with its intentions without any further action. 

Step 4. Notify the New York Attorney General 

If the original donor cannot be reached or does not consent to the proposed modification, the institution must notify the New York Attorney General of the institution’s intent to modify or release the donor restrictions from the institutional funds. 

The notice to the Attorney General must contain the following. 

1. An explanation of the institution’s determination that the restriction is unlawful, impracticable, impossible to achieve, or wasteful.
2. An explanation of the proposed release or modification.
3. A copy of a record of the institution approving the release or modification.
4. A statement of the proposed use of the institutional fund after such release or modification.

The notice to the Attorney General must be submitted with the following supporting documents.

1. A copy of the gift instrument and other documentary evidence sufficient to show that the fund’s total value is less than $100,000 and that more than 20 years have elapsed since the fund was established.
2. If the donor is available, and particularly if the donor has withheld consent, a copy of any correspondence between the institution and the donor regarding the proposed release or modification.

The notice must also be given to the original donor, if available. The Attorney General has 90 days to review the notification and object to the release or modification. If the Attorney General does not respond within 90 days, or if the Attorney General responds favorably, then the modification or release is deemed approved. 

Given the many specific requirements that must be met to obtain approval for the release or modification of small and old funds, institutions should consider consulting with legal counsel to ensure compliance with the required process. 

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Expansion of Electronic Consent

Under the N-PCL, members and directors are permitted to take action without a meeting by unanimous written consent, which consent can be either written or electronic. (See N-PCL §§ 614(a) and 708(b)) Under the previous law, electronic consent was limited to electronic mail, otherwise known as e-mail.

To keep up with emerging changes in technology, the legislation allows members and directors to act without a meeting by unanimous consent undertaken by “other electronic means” in addition to email. This means that director or member consent can also be provided through other technology methods besides e-mail, such as the use of electronic portals that facilitate the collection of votes.

Board Vacancies

Under the previous law, when a director was elected or appointed to fill a vacancy in an unexpired term, that director was only able to fill that vacancy until the organization’s next annual meeting. (See N-PCL § 705(c)) This provision was often impractical for organizations with classified boards in which board members serve for staggered, multi-year terms, and the seat of the director whose vacancy was being filled was not set to expire at the next annual meeting.

The legislation provides increased flexibility in selecting terms for replacement directors. A director elected to fill a vacancy in an unexpired term can now hold office until the end of the term that the director was elected or appointed to fill, or for a different term determined by the board which ends at an annual meeting. These changes give boards more leeway to select a different term when filling a vacancy that better aligns with the organization’s specific objectives.

Clarification to Board Quorums

Under the N-PCL, any action taken by the board of directors requires a quorum to be present at the time of the vote.  (See N-PCL § 708(d)) The amendment clarifies that directors who are present at a meeting but not at the time of a vote due to a conflict of interest or related party transaction are deemed present at the time of the vote in determining if there is a quorum.

Takeaway

These latest amendments to the N-PCL help to modernize and update the laws around not-for-profit governance structures in a positive way. New York not-for-profit organizations may want to consider updating their certificate of incorporation and/or by-laws to reflect these changes, which may help them streamline their governance procedures.

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What is a whistleblower policy?

A whistleblower policy is an organizational policy that encourages workers to report suspected illegal or improper activity within the organization while protecting workers from retaliation for making such reports.

Is our nonprofit required to have a whistleblower policy?

New York nonprofits that have at least twenty employees and annual revenues of $1 million or more are required to have a whistleblower policy under Section 715-b of the New York Not-for-Profit Corporation Law.

Keep in mind that whistleblowers have significant protections under other federal, state, and local laws, even if those laws do not explicitly require adoption of a whistleblower policy. For example, Section 1107 of the American Competitiveness and Corporate Accountability Act of 2002 (more commonly known as the Sarbanes-Oxley Act) makes it a crime to intentionally retaliate against any individual, “including interference with the[ir] lawful employment or livelihood,”  for providing law enforcement with truthful information relating to the commission or possible commission of any federal offense. Many states and municipalities have other laws that protect whistleblowers from retaliation.

A whistleblower policy helps to educate management and workers about these legal protections. It is a helpful tool in promoting a culture of lawfulness and integrity. By explicitly stating management’s commitment to protect whistleblowers from retaliation and laying out a process for reporting illegal or improper activity, a whistleblower policy encourages workers to communicate their concerns to the employer in good faith without fear of reprisal. Adopting a whistleblower policy is a recommended best practice for nonprofit employers.

What are the key changes to New York’s whistleblower protections?

Effective January 26, 2022, New York amended Section 740 of the New York Labor Law, which protects workers who engage in whistleblowing activity from retaliation by their employers.¹ The amendments expanded the classes of protected workers, the types of protected whistleblower actions, the types of employment-related actions that are considered illegal retaliation, the time frame for individuals to file a retaliation claim, and the potential penalties for employers who do retaliate against whistleblowers. Below is a summary of some of the key changes.

1. Protected Individuals. The prior law appeared to protect current employees only. The amended law protects current employees, former employees, and independent contractors from retaliation for whistleblowing activity.

2. Protected Actions. Under the prior law, whistleblower protections only applied to disclosures or threats of disclosure that involved an actual violation of a law, rule, or regulation and presented a substantial danger to the public health or safety or constituted health care fraud. There were many types of illegal activities that did not fit within this standard, leaving employees who reported such activities at risk of retaliation. The prior law also stipulated that whistleblower protections did not apply if an employee disclosed an illegal activity, policy, or practice to a public body without first notifying the employer and giving the employer a reasonable opportunity to correct the problem.

The amended law changes these standards. An employer may not retaliate against a protected individual for doing any of the following:

• Disclosing or threatening to disclose to a supervisor or public body an activity, policy, or practice of the employer that the individual “reasonably believes” violates a law, rule, or regulation or poses a substantial and specific danger to the public health or safety;
• Providing information to, or testifying before, any public body conducting an investigation into any such activity, policy, or practice by the employer; or
• Objecting to, or refusing to participate in any such activity, policy, or practice.
• Protected individuals also need only make a “good faith effort” to report the activity, policy, or practice to the employer prior to notifying a public body. No employer notification is required at all when:
  • There is an imminent and serious danger to the public health or safety;
  • The whistleblower reasonably believes that reporting to the supervisor would result in a destruction of evidence or other concealment of the activity, policy, or practice;
  • The activity, policy, or practice could reasonably be expected to lead to endangering the welfare of a minor;
  • The whistleblower reasonably believes that reporting to the supervisor would result in physical harm to the whistleblower or any other person; or
  • The whistleblower reasonably believes that the supervisor is already aware of the activity, policy, or practice and will not correct it. 

3. Prohibited Retaliation. The amended law expands the definition of unlawful retaliation to mean any adverse action taken by an employer or the employer’s agent “to discharge, threaten, penalize, or in any other manner discriminate against” a protected individual who engages in protected whistleblowing activity. This includes:

• Actual or threatened adverse employment actions against a protected individual in the terms and conditions of employment, including but not limited to discharge, suspension, or demotion;
• Actions or threats to take actions that would adversely impact a former employee’s current or future employment; or
• Contacting or threatening to contact United States immigration authorities or otherwise reporting or threatening to report a protected individual’s suspected citizenship or immigration status or the suspected citizenship or immigration status of a protected individual’s family or household member. 

4. Increased Filing Time, Right to Jury Trial, and Penalties for Retaliation Claims. The statute of limitations for filing a retaliation claim under Section 740 is increased from one year to two years. Parties are entitled to a jury trial. A successful retaliation claim against an employer may result in any of the following penalties:

• An injunction against the employer;
• Reinstatement of the whistleblower to their same position or an equivalent position, or front pay in lieu of reinstatement;
• Reinstatement of full fringe benefits and seniority rights;
• Compensation for lost wages, benefits, and other remuneration;
• Payment by the employer of reasonable costs, disbursements, and attorneys’ fees;
• A civil penalty for the employer of up to $10,000; and/or
• Payment of punitive damages by the employer, if the violation was willful, malicious, or wanton. 

5. Employer Notice Requirement. Employers are required to inform protected individuals of their protections, rights, and obligations under the law by posting a notice “conspicuously in easily accessible and well-lighted places customarily frequented by employees and applicants for employment.” The New York State Department of Labor has issued a model notice that employers can post. Employers must also provide an electronic copy of the whistleblower notice to protected individuals via email and/or posting on their website.

1 In 2022, New York also amended Section 741 of the Labor Law, which applies to whistleblower complaints against health care employers.

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The bill follows New York’s passage in 2019 of another diversity related law which calls for a study of the number of women serving on certain corporate boards.

The bill’s sponsors say ethnic diversity is critical to a nonprofit board’s ability to understand its community’s needs.  They say when the ethnic makeup of a nonprofit board mirrors that of the community it serves, the board is more able to relate to the shared experiences of its community, and is therefore better equipped to identify problems and feasible solutions.   The bill makes an analogy to ethnically diverse police departments, stating that as data bears out that diverse police forces provide better service to diverse communities, the same may be true for nonprofit boards.

On January 5, 2022, the bill was referred to the Senate’s Corporations, Authorities and Commissions Committee.  It’s unclear whether this bill will gain traction during this legislative session.  Nevertheless, the call for more diversity on boards is trending not only in New York, but in California, Maryland, Illinois and other states where board diversity requirements have either been enacted or proposed.  Given the growing expectation for greater inclusion of underrepresented minorities on boards, nonprofits should consider familiarizing themselves with best practices for board diversity.

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Effective April 3, 2020, New York amended its paid election leave law, again, to require an employer to provide an employee with up to two hours—not three hours—of paid voting leave if the employee does not have sufficient time to vote. The State has issued an FAQ, explaining the amendment.  An employee is deemed to have “sufficient time to vote” if he/she has four consecutive hours to vote either from the time the polls open to the beginning of their work shift, or four consecutive hours between the end of a working shift and the time the polls close.   An example is provided of an employee who is scheduled to work from 9 am to 6 pm.  In that instance, where the polls open at 6 a.m. and close at 9 p.m., the employee is eligible for paid time off to vote, because the employee only has three consecutive hours off at the beginning of their shift and end of their shift.

Employees must provide their employers with at least two working days’ notice of an intent to take voting leave before an election, but not more than 10 working days.

The amendment explains that employers may not require employees to use their “personal” time off to vote.

Employers should update their voting leave policies and notices to comply with this change in the law.

As you may know, due to COVID-19, Governor Cuomo cancelled the June 23, 2020 Presidential primary in New York though other Congressional and local primaries in New York are scheduled to occur on that date.

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The Empire State Development (ESD) guidance on which organizations are deemed “essential” in New York State was updated on April 9, 2020, and can be found here.  Businesses and organizations deemed “essential” by ESD must continue to comply with the New York State Department of Health’s guidance and directives for maintaining a clean and safe work environment.

Every business is being strongly urged by New York State to continue to maintain social distancing measures to the extent possible.  Governor Phil Murphy of New Jersey has recently issued a similar executive order for essential businesses in New Jersey.

Governor Andrew Cuomo also directed that, effective at 8 p.m. on Friday, April 17, 2020, any individual who is over age two and able to medically tolerate a face-covering, must cover their nose and mouth with a mask or cloth face-covering when in public and unable to maintain, or when not maintaining, social distance.  This includes but is not limited to, when walking on the sidewalk or in a park, traveling on public transit or in an Uber, Lyft, Via, etc. 

On April 16th, 2020, Governor Andrew Cuomo also ordered “New York on PAUSE” extended to May 15, 2020.  The Executive Order requires all workers at non-essential businesses, including nonprofit organizations, to work from home, schools to remain closed, and individuals to maintain a 6-foot distance from others in public, as per an Executive Order.

If you have any questions, please contact Lisa M. Brauner, Esq., Head of Employment Law Practice, Perlman & Perlman LLP, lisa@perlmanandperlman.com, 212-889-0575 ext. 207.

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The SHIELD Act creates two primary obligations: 1) the adoption and maintenance of a comprehensive cybersecurity data protection program to safeguard private information; and 2) compliance with specific data breach notification requirements.

The SHIELD Act broadens what is considered to be personally identifiable information (“PII”) which means that most organizations will be deemed to be collecting PII.  Under the Shield Act, any organization that collects PII must “develop, implement and maintain reasonable safeguards to protect the security, confidentiality and integrity” of the PII.   While the extent of the safeguards is expected to be relational to the size and complexity of the organization, it is clear that all organizations will have to meet the minimum requirements as outlined below.

• Develop, implement and maintain “reasonable [administrative, physical and technical] safeguards to protect the security, confidentiality and integrity” of PII.
• When utilizing third-party service providers, include specific contractual provisions that stipulate that maintenance of appropriate cybersecurity practices are necessary for compliance. (This suggests that all current, and certainly future, vendor agreements must be reviewed and appropriately negotiated).
• Adopt a data retention and destruction policy to safely and securely store, and when appropriate, permanently dispose of, PII.

Added to this, the SHIELD Act broadens the definition of data breach, requiring prompt notice to affected individuals and to government authorities.  For those organizations that have yet to adopt a “data breach response plan”, the time to do so is now.   This clause includes penalties for failing to provide timely notice in the event of a data breach as well as for failing to adopt reasonable safeguards.

The organizational costs related to unauthorized access continue to grow.  Therefore, procuring and maintaining a comprehensive and appropriate tailored cyber-security insurance policy has never been more important (also see Cyber Security Insurance – A Must Have).

Although the law took effect on October 23, 2019, it provides organizations a grace period until March 21, 2020 for the establishment of the required data protection policies and practices. I highly suggest organizations use this time wisely!  Businesses that have not previously been subject to cybersecurity regulatory requirements should promptly evaluate the sufficiency of their internal policies and practices – as well as the third-party service providers they use – to ensure compliance with the SHIELD Act requirements.  Those organizations with existing cybersecurity programs should review and update their policies and practices in light of these new requirements.

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This new law reflects a trend in New York State for enacting highly prescriptive nonprofit governance requirements and restrictions in an effort to curb abuse of nonprofit organizations’ assets.  It is worth noting, however, that a sole membership structure is not uncommon and is often used by organizations for legitimate reasons, such as to ensure that the organization continues to adhere to its original charitable mission and vision. The IRS, which enforces laws prohibiting private benefit, has approved tax-exempt status for organizations that utilize a sole member structure.  This sole membership structure is allowed under other states’ laws.

The new law becomes effective on July 1, 2019.  Not-for-profit corporations incorporated in New York should review their governance structures to determine whether any changes are required to maintain compliance, including the addition of new members. Nonprofits incorporated in other states which are doing business in New York should not be affected by this change.

For information on why Delaware is such a popular state for incorporating not only businesses but also nonprofits, you can read the blog post written by my colleague, Jeremy Coffey.

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Delaware is Corporation-Friendly

Delaware is a corporation-friendly state. Delaware statutes are very flexible when it comes to formation. Where New York might require three directors for a new nonprofit, Delaware only requires one. Unlike New York, California, Massachusetts, and other states with more complex nonprofit statutes, Delaware doesn’t have a nonprofit-specific statute nor does it impose complex regulations or restrictions on a nonprofit’s activities. Because Delaware nonprofits are formed under the same statute as for-profit non-stock corporations, governance and annual reporting are fairly straightforward and flexible.

Delaware also has a thoroughly developed body of corporate law. Delaware is an incredibly popular state for all types of entities, so many corporate attorneys have a working familiarity with Delaware corporate law even if they practice elsewhere.

Nonprofit Statutes Can be Onerous

Numerous states, including New York, California, and Massachusetts, have specific statutory regimes that govern nonprofits. In each of New York, California, and Massachusetts, a nonprofit must obtain permission to merge, sell its assets or dissolve. New York’s requirements related to a nonprofit’s internal governance can be complicated – they include audit requirements, restrictions on who may serve as the chair of the board, and required procedures for managing conflicts of interest. Certain kinds of real estate transactions may require regulatory approval. Electronic voting and meetings are prohibited or discouraged. Even the timing and content of board notices may be regulated. Most of the requirements are applicable to nonprofits of every size and can be challenging for nonprofits that don’t have large infrastructure and budgets.

Delaware has no such system of regulations. The Delaware Attorney General does not review and pre-approve corporate transactions. There is no required regulatory approval for real estate transactions. Meeting requirements are flexible. A Delaware nonprofit that chooses to dissolve can do so using the same simple process available to other Delaware non-stock corporations.

Most of New York’s, California’s, and Massachusetts’s most complex and onerous regulations are inapplicable to nonprofits that are formed elsewhere regardless of whether they operate, conduct activities, or solicit funds in those states. Foreign nonprofits are still required to register with charity regulators to solicit funds or hold assets in those states, and in many cases, to submit annual filings. A Delaware nonprofit soliciting funds in New York is not required to comply with New York’s myriad of internal governance requirements but must register with New York’s Charities Bureau and submit an annual filing called the CHAR500.

Best Practices Are Great – But Should Work for the Organization

To be clear, many of the requirements found in nonprofit-specific statutes are good for nonprofits. Statutes in states such as New York, California, and Massachusetts help ensure a nonprofit is well-run and responsive to its donors, the populations it serves, and the taxpayers. But many nonprofit-specific statutes are written as a one-size-fits-all solution in a nonprofit world filled with organizations of varying sizes run by individuals with varying levels of expertise. Nonprofits should consider adopting policies which help the organization avoid conflicts of interest, ensure the board is well-run, place proper financial controls on employees and officers, and help guarantee that the nonprofit succeeds in achieving its charitable mission. But those policies should reflect the needs of the particular nonprofit in question and may vary greatly from organization to organization. By incorporating in Delaware, a nonprofit can retain the flexibility to tailor its governance to meet its unique needs.

When Away From Home, Know The Rules

A nonprofit incorporated in Delaware (or any other state) is still subject to oversight by state charity officials in the states where the nonprofit operates. If a nonprofit operates in a state with active charity regulators, the nonprofit must remain vigilant of its registration and reporting requirements, as well as rules that govern charitable solicitation. Local rules regarding employment, banking, insurance, contracts, and liability still apply even if the group is incorporated in Delaware. In recent years we have seen a growing number of charity officials taking an active role in encouraging nonprofits to adopt “best practices” by bringing enforcement actions against groups that the regulators perceive as poorly-run. Therefore, even a Delaware nonprofit should be familiar with the rules in every jurisdiction where it operates – competent counsel is almost indispensable.

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As with most reactionary legislation and regulations, this ill-conceived proclamation fails to fully comprehend the collateral impact as it was guided by political expediency and the myth that high overhead cost equates with poor performance.

The Executive Order sets limits on administrative expenses and executive compensation to any entity regulated by a list of thirteen specified state agencies if those entities receive more than $500,000 in annual state support and at least 30% of their annual funding from the State (or from New York City or other local jurisdictions through State funded programs). EO #38 became effective as of July 1^st, 2013. (10 NYCCR Part 1002)

The regulations require that “covered entities” shall not use State funds to pay Executive Compensation (10 NYCCR Part 1002.5) in amounts greater than $199,000 a year unless (i) the entity obtains a waiver from the state; (ii) the compensation is paid from other sources; or (iii) the compensation is for direct services, and

• the compensation, regardless of its source, is not greater than the 75^th percentile of compensation paid to comparable executives as established by state recognized compensation surveys; and
• the Executive compensation is approved by the entity’s board of directors or compensation committee after reviewing the comparability data and surveys.

EO #38 also limits Administrative Expenses (10 NYCCR 1002.2a), calculated as a percentage of total operating expenses, to no more  than 15% of the funds provided by the State or from State authorized funds. (This limit started at 25% in 2013 and was reduced to 15% in 2015.)

To complicate matters, the covered entity may obtain a waiver of the compensation and administrative expense limits if the entity can demonstrate “good cause” by showing that the availability and quality of the program services will be negatively impacted due to the nature, size, and complexity of the programs funded. If the covered entity fails to comply with these rules or obtain the appropriate waivers from one of the thirteen State Agencies (each of which appear to have their own process for obtaining a waiver), the entity is subject to suspension, modification or termination of its State funded service contracts and/or its Office of Mental Health (OMH) or Department of Health (DOH) license. Non-compliance can potentially be cured through a corrective action plan approved by the State. The entity can also file an administrative appeal of the sanctions.

The Conflict:

From the start, the proclamation has been controversial with state funded nonprofits and exceptionally difficult to administer. In response to an outcry from major health care providers a waiver system was enacted. In addition, further changes to the implementing regulations stirred additional controversy (10 NYCRR sub-part 69-4). The Department of Health (DOH) adopted amendments to address potential conflicts of interest involving early intervention program evaluators. This change in the conflict of interest rule in conjunction with the burden of the other limitations appears to have stimulated covered providers to challenge EO # 38 in court.

Tale of Two Cases:

Case 1  In an April 2014 decision, the Nassau County Supreme Court agreed with the challenging agency’s theory alleged in its suit (Agencies for Children’s Therapy Services, Inc. v. NYS Department of Health et al), which challenged the validity of the Governor’s action as a violation of the separation of powers doctrine. The suit claimed that the state legislature, not the Governor, had the power to enact rules governing state funded executive compensation, administrative expense limitations and conflict of interest rules at private facilities and that the legislature in its 2012 budget evinced no legislative intent to do so.

The Court held that the DOH “usurped the role of the legislature in making public policy assessments” and that DOH lacks “the authority to determine how much a for-profit entity may pay executives and how much to expend on administrative expenses.”

Case 2   In a very similar case brought in the Suffolk County Supreme Court (Concerned Home Care Providers, Inc. v. NYS Department of Health, et al.) the Court ruled that EO #38 and its implementing regulations were a constitutional exercise of Executive power. This decision was completely contrary to the holding in Agencies for Children’s Therapy Services, Inc. Suffolk County Supreme Court Justice Pines concluded that the regulations “are well within the legislatively mandated policy and “that inherent in such authority is the power to determine the terms of such contract so long as they do not deviate from other legal authority.”

The Appeal:

Emboldened by the decision of Judge Pines in Concerned Home Care Providers, the DOH appealed the adverse decision in Agencies for Children’s Therapy Services. On December 30^th, 2015 the Appellate Division 2^nd Department (New York’s intermediate Appeals Court) issued a surprising decision. It reversed the holding in Agencies for Children’s Therapy Services and found that the DOH had not violated the standards enunciated in the precedent setting Court of Appeals decision Boreali v. Axelrod.

 The Appellate Court ruled that the DOH is statutorily required to award service contract “on the basis of best value  . . . in a manner that optimizes quality, cost and efficiency.” The Court went on to state that “ the administrative cost and executive compensation limits contained in the use-of-funds rule are not inconsistent with the above statutory provisions or the underlying purpose of obtaining high quality services with limited available funds.” In what appears to be a stretch by the Court, it went on to determine that high quality services are made available “by ensuring that the DOH awards service contracts to agencies that will use most of the tax dollars they receive directly on the provisions of services rather than upon administrative overhead and executive compensation.”

Clearly, the Court bought into the often challenged and widely discredited theory that lower overhead and executive compensation expenses ensure optimized quality, lower costs and better efficiency. From where and how the Court formed this notion is not clear. —I suspect they simply believe it is common knowledge.  Unfortunately for New York service agencies and the philanthropic sector at large, there is nothing common or empirical about this equivalence. This decision illustrates the uphill battle that the charitable sector faces in convincing the public and our public servants that broad restrictions on the ability of charities to use their funds to appropriately scale and attract much needed talent is counter-productive and ultimately handicaps service providers’ ability to impact and solve difficult social problems.

The New York State Court of Appeals (New York’s top Appellate Court) has issued a stay of the decision in the Agencies for Children’s Services decision pending the outcome of its decision on the appeal of the lower Court’s decision. We shall see if these justices fall prey to the same misguided notion of charitable efficiency and impact which guided the decision of the lower Court.

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