Nonprofit Salary Caps Sought By NJ

June 1, 2010       Kate Rogers      

In a controversial attempt to cut corners, New Jersey Gov. Chris Christie has proposed a cap on how much the state is willing to pay toward CEO salaries and employee benefits for nonprofit social service agencies with which the state contracts.

According to a draft of the Proposed Amendment to Third Party Contract Language, which was distributed to providers at a meeting with the state Division of Developmental Disabilities and obtained by The NonProfit Times, the state would cap reimbursements for the salaries of CEOs and executive directors of social services nonprofits at $141,000 for any agency with a budget more than $20 million. The cap for those with budgets of between $10 and $20 million would be $126,900. The cap for organizations with budgets between $5 and $10 million would be $119,850, and $105,750 for budgets less than $5 million. It was not immediately clear if that number is total compensation or base salary as reported on the federal Form 990.

The document was dated April 16, and the amendments would go into effect July 1.

Under the proposal, the state would prorate reimbursement for the CEO salary based upon the percentage of time the executive spent to execute elements of the contract, according to Nicole Brossoie, assistant commissioner of Public Affairs for the New Jersey Department of Human Services in Trenton, N.J. Brossoie declined to be interviewed via telephone. She emailed responses to questions emailed to her. She examined some the calculations in the email exchange.

“Provider agency X employs a CEO for an annual full time salary of $150,000 related to all activities. The Department of Health Services contracts for services from this provider and the contract indicates 50 percent of the CEOs activity is allocable to the contract. Before application of the screen $75,000 of this salary would be allocable to the contract. In this example, the salary screen of $141,000 is allocated between contract and non-contract activity yielding $70,500 as the amount of salary that would be allocable to this contract,” she wrote.

“The difference between the unscreened allocable salary of $75,000 and the screened allocable salary of $70,500 would be reflected as an unallowable cost,” Brossoie stated in the email message.

The state would also contribute less to reimbursement for travel, education, severance and vehicle expenses for all nonprofit employees, trying to save a projected $5 million.

According to NPT’s 2009 Special Report on Salary & Benefits, nonprofit executive chief executives in the Mid-Atlantic region made an average $111,675 annually. The governor’s salary is $157,000 and is allowed by the state law to reach $175,000, according to the state’s Web site.

“If a CEO earns more than the $141,000 state contract maximum, the provider agency can use other revenues, including fundraising, to equalize the salary,” Brossoie wrote. “The state is only limiting the salary of the CEO derived from the contract, so if an agency chooses to compensate its CEO with more money, the difference would have to be made up through fundraising, grant monies or other revenue sources.”

State services should not be affected under the amendment, she said, and it is likely the government will impose similar amendments on other areas of nonprofit service.

“We do not expect service dollars to be impacted by an agency’s CEO salary line item,” Brossoie wrote. “Our responsibility is to ensure the provision of quality services with state dollars. If an agency is unable to continue contracting with us for any reason, we will have to procure those services with alternative providers.”More than one million people throughout the state are annually served through private agencies.

Debra Wentz, CEO of Mental Health Agencies, Inc. in Mercerville, N.J., thinks the proposal is uncalled for, as the Christie administration via its Red Tape Review Group has already recognized that businesses are over-regulated.Nonprofits provide work for the state in the same ways that builders and contractors do, Wentz said, meaning they should follow the same set of rules. The fact that human services nonprofit organizations have been singled out is especially troubling, she said.

“I wonder if there is some residual of discrimination and bias against the vulnerable citizens that we serve,” Wentz said, “as though the leadership of our nonprofits are deserving of less in terms of salary and benefits than someone who serves a different type of population.”

Likewise, Linda Czipo, executive director of the New Jersey Center for Nonprofits in New Brunswick, N.J., said the nonprofit community is being treated unfairly, and the emphasis should be shifted from salaries to results.“The contract focus should be on outcomes and impact on the community, and that is not being mentioned here,” Czipo said. “The gross revenue of an organization can fluctuate greatly from year-to-year, especially in a volatile economy. You are potentially having havoc reeked on your budget.”

Jon Pratt, executive director of the Minnesota Council on Nonprofits in St. Paul, Minn., is all too familiar with the concept of capping CEO salaries. Minnesota state Rep. Marty Seifert, R-Marshall, has twice attempted to introduce proposals to cap nonprofit pay at the Minnesota governor’s salary of $120,000.

“I think it’s a poor idea,” Pratt said. “Nonprofits do compete for talent and have always been an easy target. Organizations that serve the poor look bad when they pay high salaries at the top and most social services agencies serve low income populations. It’s a way of pointing fingers, as if a small number of peoples’ salaries are the problem, when the real problem is lack of revenue and the economy.”

Although the state is seeking to cut costs, Wentz said she believes the opposite will be the outcome. “I think this is contrary to what the administration had been proposing,” she said. “The proposals are being added as an addendum to renewed contracts, but there were no proposed regulations to the public to get input, there was no opportunity to really comment.”

With travel budgets, salaries and tuition reimbursement at stake, Wentz said she fears social service nonprofits will have greater challenges recruiting and retaining quality employees. Budget cuts in other areas, as well as looming service cuts, are inevitable, she said.

“At the end of the day, if an organization is going to attract that leadership talent, they will have to take the money from other funds,” she said. “There will be less dollars ultimately.”

Czipo said securing effective leaders in the nonprofit sector is not as simple as some might believe, and therefore employee incentive is valuable to running a successful charity.

“Some of the folks who support this concept, it is important for them to remember the kinds of qualifications needed to run a nonprofit,” she said. “The idea that they (CEOs) will leave and there is somebody waiting in the wings is not a necessarily a sound kind of logic…there are not a lot of skill sets that are automatically replaced easily.”

Nonprofit employees often make less than market value for the majority of their careers, until they work their way up the ladder, Pratt said. If the salary caps move forward in New Jersey, it is likely the idea will spread.“It’s short-sighted,” he said of the proposals. “We would hope they are able to talk some sense into the governor’s office.”

National organizations will only be affected if they contract to do work with the state, Wentz said, although New Jersey can not legally dictate CEO salaries. Czipo said several organizations are looking into the legality of the proposal, which is not put to a public vote.

Although it might not be the state government’s intention, services will undoubtedly be affected, Czipo said.

“Nonprofits are the first and sometimes only source of help for people in distress,” she said. “This is not the time to be removing the flexibility to try to pursue their missions in the best possible way. This is really tying the hands of boards and independent organizations at a time when we need to retain flexibility…the cumulative effect is really troublesome.”