The October 2003 merger of two influential health insurance associations made Karen Ignagni president and chief executive officer of a tax-exempt corporation-with $48 million in annual revenue and $31.8 million in assets-that's the primary trade group for a multibillion-dollar industry.
But that is not why her total compensation-salary, benefits and expense allowance-rose 49% in 2003 to just under $1.2 million.
In fact, tax filings for America's Health Insurance Plans show Ignagni had no expense account in 2003. Her base salary has steadily increased, climbing about 24% to roughly $770,000 in 2002 and rising another 8% in 2003 to about $835,000. But this year's spike in Ignagni's overall compensation is largely attributable to her sharply fluctuating benefits, which plummeted in 2002 to $25,000 and rebounded to roughly $300,000 in 2003 according to Ignagni's benefits schedule, a spokeswoman says.
Don't expect not-for-profit corporations' tax filings, called the Form 990, to explain what happened.
That's because the Internal Revenue Service does not require not-for-profits to report a breakdown of executive benefits in its Form 990, and fuzzy standards give tax-exempt corporations leeway on how and when to report deferred compensation, retention bonuses or other payments as a lump sum under the catchall heading of "benefits."
That may soon change. Tolerance for such confusion evaporated as governance and accounting scandals erupted in recent years among for-profit and tax-exempt corporations alike. Efforts to overhaul charity regulation may soon widen public scrutiny of not-for-profit compensation packages, such as that of Ignagni and 32 other top officers listed in Modern Healthcare's fourth annual healthcare association compensation report.
`Behind the times'
Bernadette Broccolo, a Chicago partner in the law firm McDermott Will & Emery who specializes in not-for-profits and governance in the healthcare industry, calls the Form 990 "behind the times" and too simple to clearly reflect sophisticated compensation packages.
The ambiguity hampers taxpayers' and regulators' ability to determine whether executives are adequately or inappropriately compensated, or make side-by-side comparisons of executives at similar not-for-profits, she says. "You don't always know what the apples and oranges are."
Indeed, efforts to better enforce regulation and prevent abuse among tax-exempt charities prompted the IRS in 2004 to launch inquiries into compensation practices and insider dealing at 2,000 U.S. not-for-profits. In early March, tax-exempt hospitals began receiving inquiry letters, or soft audits, and among those likely to be targeted are charities with executive compensation of more than $1 million (March 21, p. 16). Four executives in Modern Healthcare's compensation survey of 2003 tax filings received more than $1 million overall.
More than a dozen states have put forward-and in some cases enacted-reforms to improve public access to not-for-profits' financial information or heighten officers' and executives' accountability. Reform proponents say maintaining public trust in not-for-profits requires improving tax-exempt organizations' transparency.
"We are absolutely committed to having a zero-tolerance approach to any abuse in the sector," says Diana Aviv, president and CEO of Independent Sector, an advocacy and trade group for foundations and charities. "We believe the public expects ethical, responsible behavior and good governance," Aviv says. "We aspire to that standard."
Independent Sector weighed in on heightening not-for-profit transparency and oversight in early March with a 68-page interim report by its Panel on the Nonprofit Sector. The document pushes for a blend of voluntary governance reforms and increased IRS oversight, though in several cases its suggestions stop short of the stiffer penalties and more stringent filing requirements that were proposed by the Senate Finance Committee in June.
The Finance Committee's proposal doubles existing fines for tax-exempt corporations that fail to file required tax returns, triples penalties for charities with $2 million or more in annual revenue and requires a CEO to sign off on the accuracy of financial statements. Independent Sector also recommends that a top executive-CEO, chief financial officer or the highest ranking officer-verify the financial accuracy of the Form 990 but urges fully enforcing existing penalties for inaccurate or late financial disclosure, rather than adopting harsher fines.
"We think that some things need to change," Aviv says, but not so much that not-for-profits lose their autonomy or struggle under overly burdensome regulations. For example, encouraging voluntary conflict-of-interest policies or separate audit committees would give charities flexibility to make cost-effective reforms that adhere to local laws, the panel says.
The Form 990 dates back to 1941 and has always required not-for-profits to report compensation. Filings first specifically requested officers' compensation in 1947. The high cost of collecting and processing paper Form 990s eats away at enforcement budgets, says Linda Lampkin, program director for the Urban Institute's National Center for Charitable Statistics. Switching to electronic reporting would improve accuracy and timeliness of tax filings as well as public access, according to Independent Sector.
As it stands, not-for-profits must readily provide copies of Form 990s to a visitor or in response to a written request. Under proposed Senate Finance Committee rules, a tax-exempt organization with a Web site would be required to post its five most recent Form 990s online.
A final report from Independent Sector later this year is expected to include recommendations for revamping the content and structure of Form 990 reports. Independent Sector's panel is also expected to comment on the Senate Finance Committee's proposal to require that "compensation arrangements must be explained and justified and publicly disclosed (with such explanation) in a manner that can be understood by an individual with a basic business background."
Who's paid what?
So what do we know now? Modern Healthcare compiles its compensation survey using Form 990 filings from the most recent tax year, although associations' fiscal years vary.
Richard Davidson, the American Hospital Association's president, was the highest-paid chief executive based on this year's healthcare association compensation report, based on 2003 data. Davidson's 15% increase from 2002 to $1.33 million pushed the high-profile executive into the top spot, while Scott Serota's 2% drop in compensation to $1.28 million dropped the Blue Cross and Blue Shield Association president and CEO from first to second.
Davidson's compensation represented about 1.7% of the AHA's 2003 expenses, which totaled $78.9 million; Serota's compensation equaled about one-half of 1% of the Blues association's $247.3 million in 2003 expenses, according to the organization's Form 990.
The two were among four executives whose total compensation-or salary, benefits and expense account payments as reported to the IRS-totaled more than $1 million in 2003. Ignagni, as head of the AHIP, received total compensation of $1.19 million, making her the third-highest executive surveyed. Her compensation represented about 2.5% of her association's 2003 expenses of $47.2 million.
However, Ignagni's increase was only the second-largest percentage increase on this year's salary ranking. Val Halamandaris, president of the National Association for Home Care, saw his total compensation surge 120% thanks to a $306,000 increase in benefits and a one-time payment of $169,440. An attachment to the Form 990 explains that Halamandaris, who ranked No. 5, received the one-time payment to compensate for voluntary pay cuts he took in 2000 and 2001 after Medicare cuts to home healthcare slashed the NAHC's budget.
Meanwhile, Kenneth Raske, president of the Greater New York Hospital Association, dropped from the No. 3 slot on last year's ranking to No. 4 this year. Raske earned total compensation of $1.1 million in 2003, a 7% increase from the previous year. The GNYHA and its subsidiary, the Greater New York Hospital Association Management Corp., jointly pay Raske's salary. In 2003, the association paid 90% of his salary and 85% of his benefits, a sum of $980,456 or about 17.8% of the association's $5.5 million in annual expenses. Lee Perlman, senior vice president and chief financial officer of the GNYHA, says Raske's compensation reflects his title as CEO of the association, its five for-profit subsidiaries and its foundation.
Aside from the gains by Halamandaris and Ignagni, compensation increases in 2003 ranged from 3% to 23%. Four executives saw their compensation decline, with Linda Stierle's 17% drop-also related to changing benefits-the most severe. Stierle is CEO of the American Nurses Association.
In 2004, legislators in 17 states pushed bills to beef up not-for-profit oversight, according to a survey by the National Council of Nonprofit Associations. States' proposed reforms met with mixed success but signal a mounting frustration among lawmakers and policymakers with oversight and governance of tax-exempt corporations.
An unsuccessful Arizona bill required not-for-profits to include a statement in yearly financial filings certifying at least 90% of revenue went to charitable works, not fund raising or administration. In Connecticut, a failed measure sought to force charities to turn over quarterly records of checking accounts, listing when, to whom and why each check was written, as well as the amount.
Iowa's ban on loans from not-for-profits to directors or officers was signed into law in April 2004. About a month earlier, Maine's governor signed into law a requirement that tax-exempt corporations now submit audited financials to state regulators along with the Form 990.
But it is California's sweeping reform, signed into law by Gov. Arnold Schwarzenegger in late September 2004 that may end up spilling across state borders, says Doug Mancino, a partner with McDermott Will & Emery in Los Angeles who specializes in not-for-profit taxation, formation and mergers.
It's unclear if tax-exempt companies headquartered outside of California but doing business in the state must follow the Charity Integrity Act's more stringent regulations, such as mandating not-for-profits with $2 million or more in revenue to set up an audit committee that excludes directors who are employees, Mancino says. Also, no more than half of audit committee members can sit on the finance committee; the governing board must sign off that CEO and CFO compensation is "just and reasonable"; and contracts between commercial fund-raisers and charities must be available for review on demand by the attorney general.
Even as federal lawmakers debate national reforms, more state legislatures are expected to follow California's lead, creating a hodgepodge of state laws that force ever more disclosure and oversight on not-for-profits that operate nationally, Mancino says. If it sounds like a potentially chaotic scenario as tax-exempt companies struggle to adopt each state's governance and accountability reforms, that's because it is. "Absolutely," Mancino says.
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