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Administration admits to discrepancies in vendor salary info

May 16, 2011 3 comments

Patrick administration officials appear to be admitting we may be on to something when we pointed out the state may be getting different information than the federal government gets about salaries earned by human services contractors in Massachusetts.

In an email sent to us on May 11, Terry McCarthy, director of audit in the state Operational Services Division (OSD), acknowledged there were discrepancies between executive salary information provided to the OSD and to the federal Internal Revenue Service for the same contractors.

McCarthy stated that the OSD will “reexamine the cited (federal and state salary reports) for proper compensation disclosures,”  and will seek explanations from two of the contractors we identfied for apparent discrepancies in their numbers.

At the same time, McCarthy put forward at least three explanations for the discrepancies, none of which fully satisfy our concerns about them.

First, a bit of background.  Concern has mounted around the country about salaries of executives of nonprofits.   In Massachusetts, that concern has largely centered around the pay of executives of hospitals and health insurers, but it has also extended to the hundreds of nonprofit vendors that contract with the state to provide human services to people with disabilities.

The OSD, which oversees the contracts with these vendors, requires them to provide detailed financial reports that disclose, among other things, the salaries made by their executives.  In addition, a state regulation caps the amount of state funding that goes to pay these salaries at $143,986 a year, meaning that sources other than the state would have to fund salaries higher than that amount.

One of the purposes of this regulation capping executive salaries is to ensure that an adequate amount of state funding is put towards wages of direct-care workers.

COFAR examined state Uniform Financial Reports (UFRs), which are filed with the OSD, and Form 990s, which are filed with the IRS,  for the May Institute, Vinfen, and Seven Hills, three of the largest contractors to the Department of Developmental Services.  In each case, the UFRs for the Fiscal Year 2009 listed lower salaries and other compensation for the same executives than did 2009 IRS tax filings for the same firms. 

The UFRs also listed a lower number of executives earning high levels of compensation than were listed on the Form 990s for the same firms.   These discrepancies imply that OSD may be unaware of the total amount of state funding potentially being used to pay salaries of these executives.

In his response, McCarthy acknowledged that the total compensation of four of five identified Vinfen executives appeared to be underreported on the UFRs by $101,539, while the compensation of two executives of Seven Hills appeared to be underreported by $18,509.  McCarthy said OSD will seek explanations from those contractors about those differences.

COFAR also reported that the 2009 IRS form for Seven Hills listed four employees making over the $143,986 threshold, while the state UFR listed only two employees making over that amount.  The difference in reported compensation between the two forms was $385,000. 

For Vinfen, the 2009 IRS form listed a total of 10 employees earning more than the threshold compensation amount, while the UFR listed only four employees earning more than that amount.  The difference was $1.2 million. 

McCarthy, as noted, stated that the OSD will reexamine the compensation disclosures made by these vendors.  However, he also offered two explanations for the differences in the numbers of executives listed on the state and federal forms.  One is that there are different filing deadlines for the two forms: the IRS forms lag behind the UFRs.

That may be, but it doesn’t seem a sufficient reason to list different salary numbers on each report or to report salaries for more people on the 990 forms than on the UFRs.   Moreover,  the 2009 Form 990 for Vinfen was signed by its president on May 14, 2010.  The UFR was first submitted to OSD in November 2009 and refiled in April 2010 and then in December 2010.  Again, there’s no apparent reason why the final UFR, which was submitted after the Form 990, would have less executives listed and lower salaries than the Form 990.

The second explanation offered by McCarthy was that the Form 990 has “more expansive” compensation disclosure requirements than the UFR.  McCarthy said the UFR is limited to including individuals in policy making positions, and would therefore not include a highly paid clinician, for instance. 

That doesn’t seem to jibe, however, with the OSD’s reimbursable cost regulation, which doesn’t say anything about exempting non-policy making individuals from the salary cap.

Also, all of the 13 individuals listed in the May Institute Form 990 as making over $150,000 are executive-level employees, starting at senior vice presidents on up to the president and CEO.  Those people are all clearly policy-making individuals, yet only two of them are listed on the UFR. 

Finally, McCarthy addressed our finding that there was more than a half million dollar difference in the reporting of the compensation of the CEO of the May Institute on the state and federal forms in 2009.  This, he said, appeared to be largely due to a one-time $682,343 distribution to the CEO on a vested deferred compensation plan that had been previously reported annually as deferred compensation. 

It wasn’t clear, however, whether McCarthy was saying that because this was a one-time distribution on a previously reported deferred compensaton plan that it didn’t need to be reported on the 2009 UFR.   But even if the CEO’s compensation isn’t counted, the difference between the total compensation for the 12 other May Institute executives listed on the IRS form and the compensation for the one other executive listed on the state UFR is $2.8 million.

We’re glad the OSD will go back to these three vendors and check to see that their UFRs were filled out accurately.  But we’re concerned that there is a potentially larger problem here.  It seems OSD does not have the capacity to adequately oversee the contracting system in this state.  One indication of that is that the latest online version of the May Institute 2009 UFR  had been submitted by the contractor on March 22, 2010, more than a year ago, yet it still hadn’t been reviewed by OSD as of today’s date. 

This administration needs to get a better handle on the human services contracting system in Massachusetts.

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Where is our money going?

April 8, 2011 11 comments

How accurately is the state tracking salaries earned by human services contractors in Massachusetts?

We looked at state fiscal reports, known as  Uniform Financial Reports (UFR’s), which were filed by three of the largest contractors to the Department of Developmental Services, and we think these records raise that question.

In each case — the May Institute, Vinfen, and Seven Hills — the UFRs for the Fiscal Year 2009 listed lower salaries and other compensation for the same executives than did 2009 IRS tax filings for the same firms (Form 990s available on GuideStar).  The UFR’s also listed a lower number of executives earning high levels of compensation than were listed on the Form 990s for the same firms.

Why might this be a problem?  Because the state Operational Services Division (OSD) depends on the information in the UFRs to determine how much in state funds to apply to that compensation.  By regulation, state funds going towards an indivdual contractor executive’s compensation are capped at $143,986 a year, according to OSD. 

Take the May Institute, for instance.   According to its UFR, the nonprofit contractor took in roughly $105 million in revenues in 2009, of which about 66 percent came from the Department of Developmental Services and a variety of other government agencies in Massachusetts.  About 79 percent of the total revenues came from all government sources.

As of April 8, 2011, the online UFR states that Walter Christian, the May Institute CEO, made $509,798 in salary and other compensation in the year ending June 30, 2009.  Based on that number and on information from OSD, we calculate that OSD would have been required to “disallow” about $366,000 of that total compensation, meaning that amount would have to come from other sources than the State of Massachusetts.

However, the IRS Form 990 for the May Institute for the same 2009 fiscal year lists Christian’s total compensation as $1.087 million.  That’s a difference of more than half a million dollars between Christian’s compensation as listed on the state’s UFR and on the IRS 990 form.   If Christian really earned $1.087 million in compensation, we calculate that the state should have disallowed more than $940,000 of it, not just $366,000 of it.

All of this suggests that based on the 2009 UFR, the commonwealth may mistakenly think that more than half a million dollars in potential state funds went into direct care or other operations at the May Institute, when it really went toward Christian’s compensation.

I would note that the UFR website stated as of April 8, 2011, that the latest online version of the May Institute 2009 UFR  had been submitted by the contractor on March 22, 2010, more than a year ago, and still hadn’t been reviewed by OSD.  A previous version of the UFR had been submitted in December 2009.  The website stated that there were “no issues pending” regarding that version.

On March 21, I submitted a written question to OSD about the discrepancy in the listing of Christian’s compensation on the UFR and Form 990, and followed up with a phone call and an email on April 5, saying I was preparing a blog post about the issue.  I still haven’t received a response.

An OSD official told me in the April 5 phone conversation that he had been too busy to get an answer to my question (and a few related questions about the UFR) and was going on vacation the following week.  He said he didn’t know when he would be able to get the answers.

It’s not just with Christian’s compensation that there are discrepancies between the UFRs and the Form 990s, however.  The May Institute UFR lists only Christian and one other executive as making over the $143,986 compensation threshold, above which compensation must come from sources other than the state.  The Form 990 lists a total of 13 employees of the May Institute as making over that threshold amount.  The discrepancy in listed compensation between the two forms was $3.4 million.

For Vinfen, the 2009 Form 990 listed a total of 10 employees as making over the threshold compensation for a total of $2.2 million, whereas the UFR lists a total of only  four employees making only $997,000 — a difference of $1.2 million.

The UFR website stated as of April 8, 2011, that the latest online version of the Vinfen 2009 UFR  had been submitted by the contractor on December 10, 2010, and was found by OSD to be “deficient.”  No further information was provided. 

For Seven Hills, the 2009 Form 990 lists four employees making over the threshold, for a total of $1.2 million in compensation, compared with the UFR, which lists only two employees making a total of $816,000.  That’s a difference of $385,000.

The latest online version of the Seven Hills 2009 UFR was submitted to OSD on April 21, 2010.  The OSD website stated that there were “no issues pending.”

Last month, The Globe published a letter I wrote on behalf of COFAR, suggesting that Governor Patrick scrutinize the salaries of human services contractors as part of an overall crackdown he had announced on salaries in the state’s independent agencies.

In response, Michael Weekes, president of the Providers’ Council, accused me  of  attempting to “smear the leaders” of the human services sector and of “making scurrilous attacks that distort the facts and mislead taxpayers.”   Weekes said my concern over executive compensation was “moot” because state law caps the amount of state funds that can be applied to executive compensation.  He added that my “real concern” should be over the low pay of direct-care workers in the human services contract system, many of whom only make $12 an hour and have gone three years with no increase.

I agree with Weekes that we should be concerned over the low pay to those direct care workers.  That’s exactly why we’re asking these questions about the salaries of executives making as much as $1 million or more a year, and whether those executives’ salaries may be soaking up state funds that should be going to the direct care workers.