COMMITTEE FOR PURCHASE FROM PEOPLE WHO ARE BLIND OR SEVERELY DISABLED PUBLIC HEARING NON-PROFIT AGENCY GOVERNANCE AND EXECUTIVE COMPENSATION Crystal Gateway Marriott Arlington, Virginia Thursday, January 12, 2006 2 1 PARTICIPANTS: 2 Board Members: 3 Steven B. Schwalb, Chair (UNICOR, DOJ) 4 Andrew Houghton, Vice-Chair (Private Citizen) 5 Frederick R. Beamen, III (Chief, Air Force Labor Advisors, Department of the Air Force) 6 Steven R. Bernett (DSCP-Philadephia) 7 Osborne Day (Private Citizen) 8 W. Roy Grizzard, Jr., Ed.D. (Department of 9 Labor) 10 Robert T. Kelly, Jr. (Private Citizen) 11 Felipe Mendoza (General Services Administration) 12 Rear Admiral Daniel H. Stone (Department of 13 Navy) 14 Committee Staff: 15 Annemarie Hart-Bookbinder (Manager, Communication) 16 Stephanie Hilmon (Legal Counsel) 17 Angela Phifer (Executive Assistant) 18 Leon A. Wilson, Jr. (Executive Director) 19 Kim Zeich (Director, JWOD Business 20 Development) 21 Speakers: 22 Bob Hofmann (Maryland Works, Inc.) BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 3 1 PARTICIPANTS (CONT'D): 2 Janet Samuelson (ServiceSource) 3 Henry Walton (SOC Enterprises) 4 James McCarthy (National Federation of the Blind) 5 Susan Fonfa (Fedcap) 6 Douglas Lemmonds (Melwood) 7 Marc Kilmer (ACCSES) 8 Terri McRae (Advocacy & Resource Corp, 9 ARC-Diversified) 10 Charles Ray (CARF) 11 John-Robert Curtin (Goodwill Industries of Kentucky, Inc.) 12 Eric Dunham (GSA) 13 Susanne Matthiesen (CARF) 14 15 16 17 18 * * * * * 19 20 21 22 BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 4 1 P R O C E E D I N G S 2 (02:00 p.m.) 3 MS. ZEICH: Good afternoon, 4 everyone. I'm Kim Zeich. I'm a member of 5 the Committee staff. It is just a moment 6 after 02:00 p.m., so we will go ahead and 7 begin the hearing. And thank you all for 8 being here and for being on time. 9 This hearing has been convened by 10 the Committee For Purchase From People Who 11 Are Blind Or Severely Disabled, which is the 12 federal agency that administers the 13 Javits-Wagner-O'Day Act. 14 This hearing relates to the 15 Committee's consideration of revisions to the 16 agency regulations for the qualifications 17 required of both central nonprofit agencies, 18 and nonprofit agencies to participate in the 19 Javits-Wagner-O'Day program, and the 20 guidelines under which executive compensation 21 will be considered as either influencing or 22 not influencing a fair market price. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 5 1 The Committee is represented today 2 by several presidentially appointed members, 3 whom I will now introduce. 4 On the stage we have, near the 5 center, our Chairperson Steve Schwalb, 6 representing the Department of Justice. 7 Mr. Andrew Houghton, our 8 vice-chairperson, private citizen. 9 Mr. Rick Beaman, representing the 10 Department of the Air Force. 11 Mr. Steve Bernett, representing the 12 Department of Defense. 13 Mr. Osborne Day, private citizen. 14 Mr. Bob Kelly will be joining us in 15 just a moment, private citizen. 16 Mr. Felipe Mendoza, representing 17 the General Services Administration. 18 And also Admiral Dan Stone 19 representing the Department of the Navy. 20 I would also like to introduce our 21 senior staff at this time, the Committee's 22 Executive Director, Lee Wilson, and the BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 6 1 Committee's Deputy Executive Director, 2 Patrick Rowe. 3 Mr. Steve Schwalb will now make a 4 brief opening statement and I will then 5 return to address the process for testimony 6 to follow and to introduce each speaker in 7 turn. Mr. Schwalb. 8 MR. SCHWALB: Thank you, Kim. 9 First of all, let me say that we all very 10 much appreciate the interest that you've 11 demonstrated by attending today. 12 This is the first of three public 13 hearings on these important regulatory issues 14 that Kim has referred to. 15 The Committee strongly believes 16 that accountability, and stewardship, and 17 value form the foundation for maintaining and 18 growing employment opportunities for people 19 who are blind and have other severe 20 disabilities. 21 We have a statutory responsibility 22 as a committee to determine both the BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 7 1 suitability of products and services that are 2 proposed for the federal procurement list, 3 and to determine that the price paid by the 4 government for such items is fair. 5 This responsibility includes 6 determining whether central nonprofit 7 agencies or other individual nonprofit 8 agencies are qualified to participate in the 9 program and whether their delivery of 10 products and services can be sustained at 11 fair market prices. 12 We take these responsibilities and 13 our authority to carry them out very 14 seriously. But at the same time the 15 Committee decided that it was appropriate to 16 hold public hearings on these issues in order 17 to obtain a broad and diverse perspective on 18 our planned rulemaking. 19 Specifically, the committee is 20 seeking input on, one, alternative approaches 21 to determine that central nonprofit agencies 22 and nonprofit agencies are initially BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 8 1 qualified to participate and then qualified 2 to continue participating in the program. 3 And two, alternative approaches and 4 mechanisms to assess that the fair market 5 price set by the Committee and paid by the 6 federal customers, the various federal 7 agencies and departments, is not burdened 8 inappropriately by excessive executive 9 compensation costs. 10 These are the broad topics that 11 were addressed in the questions that we 12 published in our Federal Register notice. 13 On behalf of the Committee, I would 14 like to assure you that we intend to give 15 very careful and thorough consideration to 16 all of the relevant factors and particularly 17 to the input received from our many program 18 stakeholders. 19 In addition to the current 20 opportunity to provide testimony or to 21 provide written statements through the end of 22 the month, the Committee will continue to BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 9 1 solicit public comments through the Federal 2 Register as we make any specific regulatory 3 changes. 4 So we look forward to your 5 constructive suggestions and input today, and 6 I will turn it back over to Kim Zeich to 7 describe the process for today's hearing. 8 MS. ZEICH: Thank you, Mr. Schwalb. 9 All of today's speakers were notified in 10 advance by the Committee staff, and their 11 names are listed on the handout that we have 12 provided in the back of the room. 13 We have been apprised of a few 14 changes to that list and I will notify you of 15 those changes as we go along. We do ask each 16 speaker to please begin your testimony by 17 stating the organization that you are 18 representing for the record. 19 We also ask each of the speakers to 20 please stay within the five-minute time 21 limit, so that we can accommodate hearing 22 from everyone that is scheduled to speak BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 10 1 today. 2 We have a timekeeper, Angela 3 Phifer, to my left. She will hold up a 4 one-minute signal and she will also let me 5 know when the time has expired. 6 Please note the testimony will only 7 be heard, and comments will only be 8 considered by the members, to the extent that 9 they address the questions listed in the 10 Committee's Federal Register notice. 11 As a reminder, as Mr. Schwalb said, 12 in addition to this opportunity to testify 13 the Committee is accepting written statements 14 for the record. For more information you may 15 refer to the Federal Register notice, or you 16 may refer to Stephanie Hilmon, our assistant 17 general counsel, for directions. 18 Before we proceed, I do have two 19 administrative announcements. First of all, 20 we do expect to call for about a ten-minute 21 break at 3:30 p.m. today. Also we do ask 22 that you please turn off any cell phones, BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 11 1 ringers, pagers or anything that would 2 distract from the hearing. 3 At this time, I would like to 4 invite the first speaker, Mr. Bob Hofmann, up 5 to the podium, please. 6 MR. SCHWALB: As Mr. Hofmann is 7 presumably coming forward, just for the 8 benefit of all the speakers, let me just also 9 add, we have a court reporter who is 10 recording this, so it will be very helpful in 11 that effort if you would make sure when you 12 are speaking that your voice can be heard 13 throughout the room by the microphone, and 14 that you articulate or spell out acronyms and 15 unusual words. 16 And I have already given the court 17 reporter a license to interrupt, if she has a 18 difficult time either hearing or you are 19 talking too fast, or if she can't understand 20 what you are saying, because we do want to 21 get this record properly established. 22 MS. ZEICH: Mr. Schwalb, we have BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 12 1 been joined by Dr. Roy Grizzard. He is our 2 Committee member representing the Department 3 of Education. I would like to call for Bob 4 Hofmann one last time. 5 MR. SCHWALB: Department of Labor. 6 MS. ZEICH: Labor, I'm sorry, 7 Department of Labor. 8 SPEAKER: He is here. He'll be 9 here in about thirty seconds. 10 MS. ZEICH: Okay. 11 MR. SCHWALB: Great. 12 MS. ZEICH: Thank you. We do have 13 a second speaker who could probably begin, 14 and then we will give Mr. Hofmann his turn. 15 MR. SCHWALB: Sure. 16 MS. ZEICH: Janet Samuelson was 17 second on the list. Ms. Samuelson, I believe 18 is here. 19 MR. SCHWALB: Welcome. 20 MS. SAMUELSON: Thank you. 21 MR. SCHWALB: Thank you. 22 MS. SAMUELSON: Hi, my name is BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 13 1 Janet Samuelson, and I'm the President and 2 CEO of the ServiceSource Network Affiliates. 3 That includes four producing nonprofit 4 organizations in the JWOD program. 5 ServiceSource in Alexandria, Virginia; 6 Employment Source in Fayetteville, North 7 Carolina; Abilities, Inc., of Florida 8 headquartered in Clearwater; and Opportunity 9 Center headquartered in Wilmington, Delaware. 10 These four affiliated producing 11 nonprofits employ over 1,000 people with 12 disabilities, more than 700 of whom work on 13 JWOD projects. We are a pretty big JWOD 14 player. JWOD revenues represent over 60 15 percent of our $70 million combined budgets. 16 I'm summarizing some of the key 17 points of my written testimony, but I hope 18 that you will have a chance to review it in 19 detail, since there is a lot of specific 20 detail that I think is important to the 21 review process. However, generally, here is 22 some of the key thoughts that we have. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 14 1 First, we understand and support 2 your efforts to make sure that some basic 3 critical standards are in place for all JWOD 4 producing programs as long as it's done 5 reasonably and has a positive impact. 6 Given the current scrutiny of 7 preferential programs as well as nonprofits 8 generally, I think it's prudent to have 9 better systems of self regulation. On the 10 surface, many of the governance practices 11 published are considered best practices. 12 However, there are some that would 13 need more interpretation for adequate comment 14 and others that seem too specific or without 15 obvious outcome value. I have provided 16 specific comment on those as an attachment to 17 the written remarks that you have. 18 We use most of the governance 19 practices promoted in the announcement. 20 However, not all standards really create 21 value. 22 Standards related to independence BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 15 1 of directors in decision-making, conflict of 2 interest, and compensation oversight are very 3 important and should be considered a priority 4 in your process. 5 The compliance process needs to be 6 cost effective, non duplicative, reliable, 7 and have integrity. For most of us the cost 8 of managing a variety of stakeholders' 9 compliance requirements continues to spiral 10 upwards, and without creating any concrete 11 personal benefit to the people that we are 12 trying to serve. 13 I would encourage you to adopt 14 reasonable self-certification processes by 15 boards, perhaps by annual resolution for as 16 much of the governance oversight process as 17 possible. 18 If external independent review is 19 required for any of the final requirements, I 20 would urge one of two sources that are 21 already readily and nationally in play. 22 First, CARF. This third party BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 16 1 accreditation is already widely required by 2 rehabilitation funders in the field. All of 3 our four affiliate programs are accredited, 4 and all but one is required to be by state 5 funding sources. CARF is in the process of 6 implementing governance standards and could 7 develop JWOD's specific standards as required 8 to mirror your requirements. This would 9 permit a non-duplicative external review for 10 many producers, if required. 11 Secondly, if you need it, we 12 suggest that the independent audit process 13 can be readily used for certain types of 14 periodic external assurance. For example, 15 our voluntary Board of Directors has had our 16 independent audit include a review of our 17 executive compensation processes, tax-exempt 18 purposes, and unrelated business income with 19 very little additional work or expense. 20 Generally, it appears that the 21 current enforcement mechanisms articulated in 22 Section 51.4 of the JWOD Act are appropriate BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 17 1 to deal with qualification issues. However, 2 we are involved in the Fort Carson suit where 3 the judge has just indicated that he, at 4 least, doesn't clearly understand processes 5 other than qualification. 6 I think it may be important to 7 develop clear written procedures that address 8 intermediate sanctions and allocation 9 processes to deal with problems or 10 violations. 11 Regarding executive compensation, I 12 believe you already have the mechanism that 13 prevents executive compensation from having 14 an adverse impact on the fair market price. 15 The established processes for JWOD 16 pricing provide transparency to the 17 government, the CNA, and the Committee and 18 the Safe Harbor 9-1/2 percent rate limits the 19 allowance for G&A costs. It is from G&A that 20 all overhead and indirect costs such as 21 executive compensation are paid. 22 In reference to public perception BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 18 1 on that issue, the proposed governance 2 requirements for board processes in review 3 are generally consistent with those required 4 by IRS of tax-exempt organizations. I would 5 encourage the Committee to reference its 6 requirements to those rather than 7 specifically restating them, since it appears 8 they are under review and could change. 9 Compensation of employees is 10 complex and impacted by many factors. The 11 Committee should not be involved in the 12 business of establishing compensation 13 requirements or limits except to make sure 14 that legally required oversight and 15 governance is executed. 16 I am concerned about the concept of 17 correlating wages of JWOD line workers in any 18 capacity that will affect opportunities for 19 people we serve. There are many, many 20 disincentives to serve people with the most 21 significant disabilities and barriers to 22 employment. I would hope that you would not BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 19 1 adapt any criteria that would provide a 2 disincentive to serve people with 3 productivity barriers to employment in JWOD 4 contracts. 5 In conclusion, I appreciate that 6 you are considering these and other field 7 comments as you proceed to look at nonprofit 8 qualifications in the JWOD program. To help 9 assure our common purpose, it's important 10 that the final rules adopted create the 11 intended outcomes without unintended negative 12 consequences on individual or organizational 13 participation in the JWOD program. 14 My written testimony includes a lot 15 more detail on some of the questions that 16 were posed in the announcement. I would be 17 happy to answer any questions that you have 18 now or in the future and I would also like to 19 invite you to visit some of our local 20 programs any time, if that would be of 21 interest. 22 MR. SCHWALB: Thank you very much. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 20 1 Does any of the Committee have any questions? 2 MR. HOUGHTON: I just have a point 3 of clarification based on your knowledge of 4 -- you mentioned CARF for accreditation. 5 It's my understanding that not every 6 nonprofit -- you have to be a member of CARF. 7 Isn't -- is there a cost associated to the 8 nonprofit or agency by being either 9 accredited or by participating in CARF? 10 MS. SAMUELSON: There is a cost for 11 the survey process as well as the annual 12 recertification or review process. In some 13 cases for organizations that's offset by 14 rehabilitation funders if you decided -- and 15 I've lived through two states that 16 implemented CARF as a requirement where it 17 had not been before, and found that most of 18 the objections that people have, or programs 19 have, can be fairly readily overcome either 20 by helping with the costs of the survey 21 process, which could be done certainly 22 through the JWOD program if you chose that. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 21 1 The other thing I say in my 2 testimony that I didn't say in my remarks is 3 I think there should be some minimum 4 threshold for participation, both annual 5 budget as well as JWOD participation before 6 you would have that formal of an external 7 survey process required. 8 MR. GRIZZARD: A follow-up on this 9 question. Counselor, is CARF accepted in 10 general by all VR agencies and nonprofits? 11 MS. SAMUELSON: I think from a 12 vocational standpoint it is primarily the 13 primary vocational accreditation that is used 14 in the United States. There are some 15 programs, residential or hospital type 16 programs, that use other accreditation, but 17 where VR requires accreditation, generally 18 it's CARF. 19 MR. SCHWALB: Any other questions? 20 MS. SAMUELSON: Thank you. 21 MR. SCHWALB: Thank you, Ms. 22 Samuelson, appreciate it. Excuse me. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 22 1 MS. ZEICH: At this time we'd like 2 to invite Bob Hofmann to come up to the 3 podium and make his remarks. 4 MR. SCHWALB: And we're being 5 joined by committee member Bob Kelly. 6 MR. HOFMANN: Good afternoon, 7 honorable Committee members and staff of the 8 Committee. My name is Robert Hofmann. I 9 serve as president with Maryland Works, and 10 we are a statewide organization that promotes 11 employment and economic opportunities for 12 people with disabilities. And we do that 13 through training, public policy advocacy, 14 partnership building, and we also coordinate 15 a state contracting program that's akin to 16 the JWOD program on the federal level. 17 I'm here today to support the 18 Committee's efforts to promulgate regulations 19 related to nonprofit agency governance and 20 executive compensation issues, and to comment 21 specifically on the questions outlined in the 22 December 16, 2005 Federal Register. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 23 1 Utilizing the federal government's 2 vast procurement system for training and 3 employment of people with disabilities makes 4 a lot of sense, and the JWOD program has a 5 long history of providing bona fide skills, 6 training, work experience, good wages, good 7 benefits, et cetera. 8 However, I think we're at a point 9 in time that it's time to take it to the next 10 level. And we're also at a point in time, 11 where some questions were raised about the 12 program, questions that need to be addressed 13 in an expeditious and definitive manner. 14 It's not the time for defensiveness 15 or protectionism. It's really the time to 16 take action, make sure that some of these 17 surface issues are addressed and then get to 18 the business of expanding the JWOD program, 19 and the opportunities it provides in a manner 20 that will keep it on the cutting edge for 21 many years and decades to come. 22 Let me start by commenting on the BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 24 1 nonprofit agency governance questions. First 2 of all, we agree with the Committee's 3 assertion that the criteria outlined in the 4 Federal Register are a good core set of 5 criteria. I think we could squabble over 6 what's included or not included for a long 7 time, but this set of criteria actually 8 mirrors criteria that were advocated for and 9 recommended by quite a significant study by 10 nonprofit consultants and organizations, 11 government officials, et cetera. These are 12 good core criteria to put into place. They 13 also address some of the issues that were 14 raised. 15 Are there additional criteria? 16 There are always additional criteria, but 17 again these are good core criteria to start 18 with. 19 Should accreditation by one or more 20 state or national organizations be accepted? 21 We think that they should, but we also think 22 that careful consideration should be made to BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 25 1 be sure that these independent accrediting 2 bodies incorporate all of the criteria that 3 are set forth in the notice in the Federal 4 Register. 5 And we also think it's important 6 that there is a very high level of assurance 7 that any approved independent accrediting 8 bodies will implement those evenly and 9 definitively across the board. And that 10 means that there is a certain element of 11 ongoing monitoring of the monitors, if you 12 will. That adds another layer of need there. 13 The other thing is that indeed as 14 the first speaker mentioned, it's possible 15 that these accrediting bodies will actually 16 adopt, maybe in total form, the 17 recommendations that appeared in the Federal 18 Register back in December. 19 Should different benchmarks be used 20 for nonprofit agencies that are state, 21 county, et cetera? We think that while 22 certain aspects of the proposed criteria may BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 26 1 be difficult to apply to public entities, 2 it's essential -- it's critical -- that the 3 core concepts be applied across the board. 4 Public entities shouldn't in and of 5 themselves be exempt. 6 I think the assumption that public 7 entities are not subject to the same kind of 8 problems that were raised within the current 9 program would be a mistake. For example it's 10 entirely possible that a work center is 11 operated as a unit of government, but given 12 certain autonomies up to and including, some 13 of them have separate operating accounts. In 14 many cases the staff aren't public employees. 15 So to provide a blanket exception for public 16 entities we think would be a mistake. 17 Should the size or the annual 18 revenue of an individual nonprofit agency be 19 a factor? We say absolutely not. These are 20 not criteria that raise the grade a hundred 21 times above what is accepted or what's 22 normally required of all nonprofits. These BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 27 1 are core criteria. All agencies regardless 2 of size should be meeting these criteria. 3 At the same time, if the Committee 4 decides to adopt a third party entity or 5 entities to do the accreditation, some of 6 them are very expensive. 7 And in that case we think it may be 8 appropriate to provide a subsidy to some of 9 the smaller agencies in order for them to get 10 these accreditations. 11 But otherwise, again, the standards 12 should apply across the board. And having 13 personally worked at a number of small 14 nonprofit agencies I could tell you that they 15 do. 16 Going on to the best way to ensure 17 that agencies are qualified, we really have 18 to have standards and they need to be 19 enforced. 20 And additionally, what kind of 21 enforcement mechanisms are necessary? We 22 think there ought to be clear sanctions to BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 28 1 individual agencies that don't comply. And 2 that may include being put on probation, not 3 being able to get new contracts -- but in 4 severe and extended cases it may mean having 5 to forfeit existing contracts under the 6 program. 7 I'm going to skip ahead because I 8 did provide this in written form, but I just 9 want to comment on the executive compensation 10 area, and you couldn't -- 11 MS. ZEICH: I'm sorry, sir, if I 12 could let you know, your five minutes are up. 13 If you could bring your remarks to a close? 14 MR. HOFMANN: I'll bring it to a 15 close. 16 MS. ZEICH: Thank you. 17 MR. HOFMANN: The issue of 18 executive compensation in this whole thing is 19 tied to the impact of the influence on fair 20 market price. We say it doesn't influence 21 fair market price, but in general it should 22 be looked at, and it should be monitored, and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 29 1 there should be some controls in place. 2 Thank you ever so much, I'll answer any 3 questions you might have. 4 MR. SCHWALB: Questions from 5 anybody? Okay, thank you very much. 6 MR. HOFMANN: Thank you. 7 MS. ZEICH: Thank you. The next 8 speaker on the list is Mr. Henry Walton. 9 MR. WALTON: Good afternoon, Mr. 10 Chairman and Committee members. I appreciate 11 the opportunity of presenting comments to the 12 Committee for the Purchase From People Who 13 Are Blind or Severely Disabled. My comments 14 are in response to the advance notice of 15 these hearings contained in the Federal 16 Register and pertain to nonprofit agencies 17 only. 18 My name is Henry Walton and I'm the 19 chair of the SOC board of directors, and for 20 more than seven years I have been a member of 21 that board. SOC has provided high quality 22 administrative services to the federal BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 30 1 government through the auspices of JWOD for 2 more than 25 years. 3 I believe that the adherence to the 4 14 governance criteria listed in the advance 5 notice will demonstrate that a nonprofit 6 agency qualifies for participation in the 7 JWOD program. On a related note, I'm very 8 proud, through excellent management, 9 leadership and a very active board of 10 directors, SOC are adhering to these best 11 practices at the present time. 12 The following are the answers to 13 questions related to the good governance 14 practices. Questions one and two, the best 15 practices listed cover many of the key 16 elements of good nonprofit governance and 17 should be adopted as soon as possible. 18 The Better Business Bureau lists 19 additional standards and provides information 20 needed to determine compliance and how 21 standards are applied in practice. They also 22 include standards on the minimum number of BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 31 1 board meetings required with majority 2 attending, restrictions on participation of 3 compensated members and so forth, so that 4 there are alternatives to these 14 if 5 necessary. 6 Questions three and six, we 7 strongly -- and I can't emphasize that enough 8 -- recommend that CARF accreditation be the 9 standard for all nonprofit organizations 10 wishing to participate in JWOD programs. 11 CARF-accredited agencies should be 12 afforded deemed status for compliance with 13 any current or future governance regulatory 14 compliance regulations. Currently deemed 15 status is also recognized for Medicare and 16 Medicaid providers. 17 It's interesting to note that at 18 the present time my information is anyway 19 that almost half of all agencies 20 participating in JWOD programs are indeed 21 CARF-accredited. 22 Question 4, in my view all agencies BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 32 1 participating in the JWOD program should be 2 required to use the benchmarks and 3 governmental agencies should not be exempt. 4 Regarding size and revenue, good 5 governance practices should be the norm for 6 all nonprofit agencies regardless of the size 7 and/or annual revenue. 8 Enforcement mechanism: I believe 9 that continued annual certification by the 10 Committee should be maintained. 11 Participating agencies should be required to 12 certify their accreditation status and verify 13 ongoing accreditation status. 14 Regarding conflicts of interest, 15 agencies must establish a well defined and 16 clear policy that spells out what constitutes 17 conflicts of interests. Policy must be 18 clearly articulated to board members during 19 the vetting process and they must certify 20 their willingness to abide by the policy. 21 Also, the same should apply to all 22 employees of the nonprofit organization. On BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 33 1 an annual basis board members should review 2 and recertify their acceptance of the 3 conflicts of interest policy. 4 Regarding the financial 5 responsibility question, there must be a 6 willingness to be totally transparent in all 7 business dealings, also a willingness to 8 share annual budget and audit results with 9 any interested party. These are also 10 required by IRS as disclosures by 501(c)(3) 11 organizations. 12 The following are responses to 13 related executive compensation and fair 14 market price determinations. Questions one 15 and two, I believe that setting an artificial 16 threshold for the CEO, president and other 17 highly compensated employees is not 18 appropriate. These levels should be 19 market-based determinations. Direct and 20 indirect cost must be reasonable, allowable 21 and not prohibitive, consistent with 22 applicable accounting practices and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 34 1 standards, which is the wording of an OMB 2 circular, A-1-22. 3 Also the de minimis test is 4 likewise, I believe, inappropriate. As far 5 as the absolute dollar threshold it would be 6 appropriate to utilize the audit agency cap 7 for FY '05 and beyond of $473,318 for cost 8 incurred after 1 January '05, for all 9 contracts issued by defense and civilian 10 agencies covered by FAR cost principles. 11 This dollar amount is based on the median 12 compensation for all senior executives and 13 defines reasonableness. 14 As far as rebuttable presumption, 15 yes, this standard is supported by the IRS 16 and OMB for reasonableness. The question of 17 relation of executive page and line workers, 18 there should be no such comparison applied as 19 a standard. The recognized approach to 20 determining reasonableness is not determined 21 in this manner. 22 Appropriate review, executive BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 35 1 compensation should be considered 2 independently from fair market price 3 determination. If appropriate, it could be 4 considered when documentation for G&A costs 5 are required in the fair market pricing 6 determination. 7 And finally, identifying and 8 monitoring compensation. GuideStar Salary 9 research methodology is online, easy and 10 timely, and extensive. This reports IRS Form 11 990 data on board members, officers, and top 12 compensated employees whose compensation 13 exceeds $50,000, and allows bench-marking 14 comparison analysis on more than one million 15 nonprofits filing Form 990. 16 In closing, I would like to thank 17 the Committee for soliciting input on their 18 proposed rule making. We strongly believe 19 that disabled individuals employed and 20 trained under the JWOD Program contracts will 21 benefit from nonprofit agencies practicing 22 good governance. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 36 1 Market-based compensation practice 2 comparisons are essential, demonstrating 3 there's good governance. Voluntary 4 compliance through accreditation should 5 provide the necessary assurances to the JWOD 6 Committee and the public that best practices 7 are maintained through continuing quality 8 improvement. 9 SOC is committed to continuing to 10 provide the most progressive and transparent 11 management for the persons that we employ and 12 serve. Thank you very much. If you have any 13 questions, I would be happy to try and answer 14 them. 15 MR. SCHWALB: Any questions? Andy? 16 MR. HOUGHTON: Mr. Walton, if you 17 could just clarify or perhaps give a little 18 more explanation as to why you feel there 19 should not be a relationship between the 20 compensation of line workers and highly 21 compensated individuals, given that the 22 intent of this program is to effectively BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 37 1 serve individuals with the most significant 2 disabilities. 3 And when and if at all possible 4 there are revenues as a result of the 5 program, why those shouldn't go directly to 6 the employee in terms of compensation, if in 7 fact there's a correlation between some of 8 the higher paid executives within that 9 organization. 10 MR. WALTON: Good question. What I 11 didn't say at the outset was that I have a 12 particular interest in JWOD, because my 13 daughter works at a JWOD facility. She has 14 for a number of years been a part of the SOC, 15 Army Corp of Engineers project in downtown 16 D.C., so I have a little bit of a feel for 17 this and I can't help but see this, your 18 question, in view of my daughter. 19 It seems to me that when she goes 20 to work that she's there under a certain 21 program, because her abilities are such that 22 she is not necessarily at this point in time BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 38 1 able to produce as another person would, and 2 she is compensated in that way. 3 So for example, for a clerk, which 4 she is at this time, the base salary for 5 someone who could do it at a 100 percent is 6 $13 an hour. She's not able to do that. 7 She's timed on a regular basis and what have 8 you, so she only makes, let's say $10.85, or 9 that amount of money. To me that is a very 10 fair way of determining her compensation. 11 Now, we could pay more as I 12 understand it under the JWOD contract, but it 13 seems to me that that then provides her with 14 a false sense of her understanding as to 15 where she is, and it's a disincentive to try 16 and do better in her regard. 17 To me, the executive is a guy who 18 is really holding the whole ship together. 19 He's the one that makes it possible for my 20 daughter to have an employment with JWOD. It 21 seems to me that his salary ought to be 22 determined by what is a salary determination BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 39 1 based on what everybody else doing like 2 things should be making. I hope I have 3 answered that, but I really don't see that 4 there's a nexus between the two. 5 MR. HOUGHTON: Thank you. 6 MR. WALTON: Thank you. Thank you 7 very much. 8 MR. SCHWALB: Any other question? 9 Thank you, Mr. Walton. 10 MS. ZEICH: The next speaker 11 scheduled is Mr. James McCarthy. 12 MR. McCARTHY: Mr. Chairman, 13 members of the Committee, my name is James 14 McCarthy. I'm the Director of Governmental 15 Affairs with the National Federation of the 16 Blind, and I appreciate the opportunity to 17 share the comments of our organization this 18 afternoon with you all. 19 Over 65 years ago, when the NFB was 20 established as the voice of the nation's 21 blind, blind people primarily worked in 22 sheltered shops, or they didn't work at all. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 40 1 Today a much wider array of jobs is 2 available, yet the largest number work direct 3 labor jobs in community rehabilitation 4 programs to fulfill contracts under the JWOD 5 Act. 6 Therefore, the NFB maintains a 7 profound interest in governance of these 8 facilities -- especially in the compensation 9 provided both management and direct labor 10 employees. As the federal monitor of this 11 procurement contracting priority program, the 12 Committee is empowered to establish 13 governance standards applicable to the 14 nonprofit agencies, which includes controls 15 on executive compensation. 16 The nonprofits do not compete in 17 the market place for the federal contracts 18 that are provided to them, which makes these 19 executives different from those in American 20 business. This occurs to create employment 21 opportunities for people who are blind or 22 have other severe disabilities. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 41 1 Nevertheless, no one now disputes 2 that some of these executives receive 3 extraordinary compensation from this program 4 to benefit people with disabilities. 5 I would also note that many line 6 workers receive wages that are sometimes less 7 than the minimum wage. Let me reiterate the 8 position taken by the National Federation of 9 the Blind and comments we provided this 10 Committee last year. 11 The problem with looking only at 12 executive compensation is that it only 13 addresses one kind of abuse that has come to 14 light. Though the extravagant compensation 15 of some executives is startling, it should 16 equally shock the conscience of this 17 Committee that several of the direct labor 18 employees are paid well below the prevailing 19 wage in the area for the jobs they have and 20 many are paid below the minimum wage. This 21 committee has the authority to address both 22 issues and I urge it to do so. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 42 1 In our view, establishing a ratio 2 of executive compensation to line 3 compensation is a means for doing just that. 4 The founders of the Ben and Jerry's 5 Ice Cream Company determined that their 6 compensation as executives would not exceed 7 seven times that of the lowest paid direct 8 labor worker. 9 Contrast this with the altruistic, 10 non-competitive JWOD program where the 11 executive compensation may be 100 times that 12 of a line worker and more. 13 As the company grew, Ben and 14 Jerry's executives realized that the seven to 15 one ratio was difficult to maintain. 16 Therefore, I would propose establishing a 17 fifteen to one ratio, which is more than 18 double that Ben and Jerry's elected to use. 19 This approach I think also would 20 make it somewhat easier for reporting, but it 21 finally has the added advantage that when 22 determining executive compensation boards BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 43 1 would consider the compensation of direct 2 line workers and any reward for the success 3 of the organization would be fairly 4 distributed among all those who were 5 responsible for that success. 6 Thanks so much. 7 MR. SCHWALB: Any questions? Thank 8 you very much, Mr. McCarthy. 9 MS. ZEICH: The next speaker is 10 Susan Fonfa. 11 MS. FONFA: Good afternoon, Mr. 12 Schwalb, and other Committee members. Thank 13 you for inviting us to speak today on your 14 proposed regulations. I'm representing 15 Fedcap Rehabilitation Services which is a 16 nonprofit organization in New York City. 17 Although I'm affiliated with other 18 organizations, I'm only speaking for myself 19 and for Fedcap today. I just want to be 20 clear on that, okay? 21 Fedcap is, as I said, a New York 22 City based nonprofit organization and our BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 44 1 mission is to help individuals with 2 disabilities and other barriers to achieve 3 independence and full participation in the 4 economic mainstream. 5 Currently, we have 18 JWOD projects 6 for nine government entities. And we provide 7 employment for approximately 370 people under 8 those contracts. Overall, we have served 9 approximately 3,000 people with disabilities 10 every year in our training programs and 11 employment opportunities. 12 We fully endorse good governance 13 standards, and accountability for all 14 nonprofits. We understand that the Committee 15 wants to protect the integrity and image of 16 the JWOD program and its participating 17 nonprofits. 18 The importance of good governance 19 has certainly increased in recent years with 20 the Sarbanes-Oxley Act, and from other parts 21 of the government as well. 22 Although Fedcap recognizes that BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 45 1 negative publicity and negative perceptions 2 by the public and by the federal customers 3 can in fact jeopardize and stigmatize all 4 participating nonprofits, we believe that 5 most nonprofits are ethical, follow best 6 practices regarding good government and 7 executive compensation. 8 Since the passing of the 9 Sarbanes-Oxley Act in 2002, nonprofits, if 10 they were not already doing so, have adopted 11 many new benchmarks in best practices, such 12 as those developed by the independent sector, 13 for good governance including a whistleblower 14 policy, document retention policies, audited 15 financial statements, and an audit committee, 16 board review of executive compensation based 17 on market research, and board and staff code 18 of conflict of interest policy. And we 19 certainly support all of those items. 20 Fedcap believes that executive 21 compensation should be the purview of the 22 nonprofit board of directors based on market BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 46 1 research and existing rules established by 2 the IRS. 3 If a nonprofit agency is in 4 compliance with existing rules and 5 regulations set forth by the federal and 6 state laws, is providing the JWOD customer 7 with excellent quality for goods and services 8 at fair prices, and is training and employing 9 people with severe disabilities, executive 10 compensation decisions should be made by each 11 organization's board. 12 Checks and balances already exist 13 within the JWOD program regarding 14 administrative costs, of which executive 15 compensation is a component. 16 Pricing Memorandum Number 3 states 17 that, "A minimum rate of 9.5 percent will 18 apply for the combination of overhead G&A and 19 net proceeds. If the nonprofit organization 20 proposes a higher rate then it is subject to 21 audit." And at that point the executive 22 compensation could be audited as part of that BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 47 1 process. The tax-paying public is already 2 assured that no undue proceeds are going 3 towards executive compensation through that 4 process. 5 The answer to the Committee's 6 question regarding the relationship between 7 the pay and compensation of individual 8 workers and highly compensated individuals, I 9 believe, rests with the Department of Labor. 10 Fedcap agrees that direct labor 11 wages must continue to be protected by 12 Department of Labor Regulations and the 13 direct labor wages should not be artificially 14 low, so that executives can make more money. 15 If the Department of Labor Section 16 14(c) regs protect direct labor wages from 17 impropriety as the wages are subject to audit 18 from the Department of Labor itself, NISH and 19 the Committee, so those regulations are in 20 place and are audited. 21 By linking direct labor wages and 22 executive compensation in these cases, BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 48 1 executives of JWOD producing nonprofits would 2 in fact be punished for allowing increased 3 employment and training opportunities for 4 those with the lowest productivity and 5 therefore possibly the most severely 6 disabled. 7 I know that the way that it's being 8 looked at is if you put in some kind of 9 ratio, then it will lower the executive 10 compensation salary -- the executive 11 salary -- but in fact what might happen is 12 that the nonprofit might not include people 13 who they are already including because of low 14 productivity, and I think that's something we 15 need to be very concerned about. 16 Fedcap believes that many of the 17 good governance benchmarks noted by the 18 committee along with additional best 19 practices outlined above are adequate and 20 essential to ensure good governance among 21 nonprofits. And it is the nonprofit board 22 who must be responsible for ensuring that BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 49 1 these qualifications are met. 2 When a nonprofit is considered for 3 a JWOD contract or renewal of that contract, 4 the nonprofit's agency board should have the 5 responsibility to certify, possibly in the 6 current extension of the Committee Form 404, 7 that the following criteria have been met. 8 A whistleblower policy should be in 9 place. 10 A document retention policy should 11 be in place. 12 There should be an audited 13 financial statement with an audit committee. 14 There should be board review of 15 executive directors' total compensation, 16 including compensation from all sources based 17 on market research. 18 And a board and staff code of 19 ethics, and a conflict of interest policy. 20 The Committee and NISH can review 21 that documentation during compliance reviews, 22 which they can do on a regular basis every BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 50 1 two, three years. 2 And we appreciate the consideration 3 of our remarks. 4 One of the things that I want to 5 add that's not in my testimony, but based on 6 what I have heard today so far, is the 7 question of CARF. I have to say that the 8 individuals from other nonprofits who have 9 testified so far are in states where CARF is 10 currently required. 11 I come from New York, and in New 12 York it is not required. And, in fact, it 13 would be an additional burden on 14 organizations in states where it's not 15 already required. 16 So I don't want you to think that 17 it's universally accepted. But we do 18 appreciate the consideration of our remarks 19 and we look forward to working with the 20 Committee to ensure the JWOD programs and 21 participating nonprofits maintain good 22 governance standards and appropriate BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 51 1 executive compensation. Thank you. 2 MR. SCHWALB: Thank you. Any 3 comments or questions? Thank you very much, 4 Ms. Fonfa, I appreciate it. 5 MS. FONFA: Thank you. 6 MS. ZEICH: The next speaker will 7 be Douglas Lemmonds. He's speaking in lieu 8 of Thomas Roberts. 9 MR. LEMMONDS: Thank you. My name 10 is Douglas Lemmonds, and I am the Chairman of 11 the Board of Melwood. I want to thank you 12 for the opportunity to testify. 13 MR. SCHWALB: Excuse me. Since you 14 are a substitute speaker, could you please 15 spell your name for the record for the court 16 reporter? 17 MR. LEMMONDS: Okay. The last name 18 is Lemmonds. L-e-m-m-o-n-d, like in David, 19 -s. 20 MR. SCHWALB: Thank you. 21 MR. LEMMONDS: Okay. I would like 22 to thank the committee for the opportunity to BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 52 1 testify. These types of hearings are 2 important for maintaining the public trust in 3 a very worthy program. We particularly 4 appreciate the fact that the issues raised by 5 the committee prior to this hearing were in 6 the forms of questions rather than 7 conclusions. Melwood welcomes such an open 8 dialogue. 9 For those of you who may not be 10 familiar with Melwood, we are a 11 Washington-based local agency. Our mission 12 is to empower people with developmental 13 disabilities to enrich their own lives. 14 Melwood was founded over 40 years 15 ago by the families of people who had 16 children with disabilities. One of the first 17 things that Melwood soon found as a program 18 was JWOD. And we have been an active 19 participant in JWOD for over 30 years. 20 Today Melwood serves almost 2,000 21 people with disabilities through its 22 vocational training, its residential, BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 53 1 recreational, and employment services. 2 Over 800 of these individuals have 3 found fulfilling employment under 4 JWOD-related contracts. We can therefore 5 directly attest to the beneficial impact this 6 program has had upon the lives, the 7 livelihood, and the self perception of 8 thousands of people with disabilities. 9 Now, although the title of today's 10 hearing is "Non-profit agency governance and 11 executive compensation," executive 12 compensation is not my issue as the unpaid 13 chairman, but governance is my issue. 14 But to short-circuit that, we 15 believe that the term "governance" alone 16 embraces every matter before the committee 17 today, particularly including executive 18 compensation and other compensation. 19 I will not argue with the need for 20 reform in the governance of certain 21 non-profit organizations. Compensation 22 levels for some top level people can and do BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 54 1 catch the eye of the public. We believe 2 however that within the JWOD world such 3 situations exist in only a very few 4 organizations. 5 Now, the committee has posed the 6 question as to whether it should accept 7 accreditation standards already in place. 8 Melwood would respond with an unqualified, 9 "Yes." We encourage the committee to examine 10 any and all accreditation standards to which 11 JWOD-related organizations may submit 12 themselves. 13 If you are satisfied with any of 14 these existing standards, publish a list of 15 acceptable standards for JWOD-related 16 entities. Please do not require an 17 additional accreditation process. The 18 Committee For Purchase does not need to get 19 into the business of administrating such 20 programs. 21 Now, Melwood itself invests 22 considerable effort and expense in its BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 55 1 governance efforts. We have an annual audit 2 and much like many of our colleagues we file 3 an accurate and complete IRS 990, and we work 4 to comply with all state laws regulating 5 organizations serving people with 6 disabilities. 7 In addition, much like many of the 8 other people here, we have earned the highest 9 rating from CARF. In fact we've held that 10 for over 15 years. 11 Lastly, we are currently in the 12 process of becoming certified under the 13 Standards of Excellence program, of the 14 Maryland Association of Nonprofits, one of 15 the programs that is being used as a 16 benchmark around the country for good 17 governance. 18 Adding an additional certification 19 process would only create more expense and 20 staff time away from our mission without 21 adding measurable value. 22 The committee also proposed a BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 56 1 provision that the boards of directors must 2 review the appropriateness of the 3 compensation structure in their 4 organizations. We agree to this concept 5 completely. 6 Two years ago, Melwood's governing 7 board engaged an objective third-party firm 8 to conduct a thorough study of our 9 compensation policies, practices, and levels. 10 And this compensation survey went for both 11 overpayment and underpayment. 12 This study was initiated as being 13 consistent with our board's governance 14 obligations -- not due to any regulatory 15 pressures. Melwood's board also constantly 16 and consistently reviews this compensation 17 structure to ensure that we are competitive 18 in our marketplace and are able to retain the 19 caliber of leadership and day-to-day workers 20 necessary to successfully run a complex 21 multi-service organization. 22 We believe our approach to this BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 57 1 issue assures our board, our employees, and 2 all of our stakeholders, including the 3 Committee, that we are in fact exercising 4 good stewardship. 5 Melwood, like many other 6 organizations with JWOD contracts, offers a 7 broad range of services to people with 8 disabilities. Determining an arbitrary level 9 of compensation, requiring additional levels 10 of review and justification, is 11 counterproductive. 12 Any assessment of compensation 13 levels must be placed in context of the 14 overall size and complexity of an 15 organization, its financial condition, and 16 its geographic location. 17 Finally, I'd like to address the 18 committee's concern over the possible 19 relationship between executive compensation 20 and fair market pricing on JWOD contracts. 21 We can understand the committee is concerned 22 at a theoretical level, but we do not believe BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 58 1 this is a problem at a practical level. 2 Melwood and other JWOD contractors operate in 3 a competitive environment within itself. 4 Our federal customers judge us on 5 the basis of many criteria, including their 6 own business requirements, various industry 7 standards, private sector competitors, and 8 even other JWOD-related entities. This is 9 very much competitive. 10 Therefore, the market dynamics that 11 have shaped JWOD contracts in the past should 12 continue to prevent any potential for 13 overcharging due to excessive executive 14 salaries or other factors. 15 Again, I thank you for the 16 opportunity to speak and I appreciate your 17 open minds. 18 MR. SCHWALB: Thank you. 19 Okay, Andy? 20 MR. HOUGHTON: Real quickly, if we 21 -- you mentioned, the executive compensation 22 should be based on the size and complexity -- BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 59 1 MR. LEMMONDS: Right. 2 MR. HOUGHTON: -- and other 3 factors. I guess hypothetically, if you have 4 a person, a manager, an executive who is 5 working at an organization, let's say 20 6 years ago, and they were being compensated 7 you know, X dollars, and that same 8 organization has grown significantly as a 9 result primarily of JWOD contracts -- keeping 10 the intent of the Act in mind, one, that 11 executive's wages has likely increased under 12 this hypothetical scenario. 13 The executive compensation 14 increases over that 20-year period, and yet, 15 the compensation to the direct-labor-wage 16 employee who may have been working on that 17 similar contract for an equal 20 years, has 18 not increased. 19 So I guess you feel that that's 20 okay within the context of this act, that 21 even though the same manager who was working 22 there, back when it was a mom-and-pop shop, BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 60 1 who was getting paid X, that that manager or 2 executive deserves to have a higher level of 3 compensation whereas the employee, basically 4 deserves whatever is commensurate with -- 5 MR. LEMMONDS: Well, I see a couple 6 of issues there. One is that for your hourly 7 employee or your day-to-day employee, over a 8 25-year period their salary is going to go up 9 as well, due to good performance, longevity 10 on the job, and inflation if nothing else. 11 Secondly, when you talk about the 12 executives or the managers, leaders of the 13 organization, as the organization grows over 14 25 years -- this means that they are going to 15 be managing usually a much larger workforce, 16 many more people, and have greater 17 responsibilities. 18 So, it's not going grow that 19 greatly under one static contract. It's 20 going to be several contracts if it's all 21 JWOD. Now, I would say also that many of the 22 organizations which JWOD is looking at do BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 61 1 much more than just JWOD contracts -- such as 2 Melwood which has the vocational training, 3 the recreational, the residential, and 4 everything else. So you are talking about a 5 multi-tasked organization in many cases here. 6 So it's very hard to compare a 7 manager that's looking after four or five 8 different types of businesses -- in the sense 9 of business -- to just an individual that 10 works on an hourly contract. 11 Now, I am not saying that we 12 overpay. I am saying that what the 13 not-for-profits in cases like this need to be 14 is competitive in order to get the right 15 people to do this. Because without the right 16 people in the right positions you are never 17 going to succeed as an organization. 18 And given that we have 19 stakeholders, which includes yourselves, you 20 want us to succeed and not waste money or 21 fail and not be able to offer these 22 opportunities to the consumer. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 62 1 MR. HOUGHTON: Thank you very much 2 Mr. Lemmonds. 3 MR. LEMMONDS: Okay, thank you. 4 MR. SCHWALB: I have a quick 5 question, I am sorry. 6 MR. LEMMONDS: Oh, sorry. 7 MR. SCHWALB: You mentioned that 8 you do surveys. You need a firm to do that? 9 MR. LEMMONDS: Yes. 10 MR. SCHWALB: To what extent did 11 the survey take into account, or distinguish 12 in its data gathering, between salaries for 13 executives of non-profit -- similarly 14 situated non-profit -- 15 MR. LEMMONDS: That's what we 16 compare it to -- executives of nonprofits as 17 well as for-profits. 18 MR. SCHWALB: So that you can 19 account both? 20 MR. LEMMONDS: Well, you have to 21 look at both. In these days, the marketplace 22 is becoming fungible, and I think that you BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 63 1 are finding more for-profit executives 2 interested in not-for-profit jobs. And it's 3 not for money as much as for the ability to 4 make a difference in their community. But in 5 order to attract these type of people as the 6 complexity of the businesses continue to go 7 forth, you have to be somewhere in the 8 ballpark. 9 Now, as I said, with some agencies 10 which are paying excessive salaries -- I mean 11 it's obvious they are excessive salaries -- 12 and those do have to be reined in. But I 13 think if you go through and look at the 14 different accreditation processes, this might 15 help. 16 And I also think that contributors 17 are paying more and more attention to the 18 990's and the publicity of 990's and the 19 percentage of how much money goes to programs 20 and how much money goes to administration. 21 People are becoming more and more 22 aware of that, and as you're well aware, BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 64 1 there are several public websites that people 2 can look up at. And the more we publicize 3 that, and they can look and see the ratings 4 of the different not-for-profits, the better 5 it is for everyone. 6 MR. SCHWALB: Thank you very much. 7 MR. LEMMONDS: Okay, thank you. 8 MS. ZEICH: The next speaker is 9 Marc Kilmer. 10 MR. KILMER: I am Marc Kilmer, the 11 Executive Director and CEO of the American 12 Congress of Community Supports and Employment 13 Services or ACCSES. ACCSES is a national 14 trade association of providers of services to 15 people with disabilities. Many of our 16 members are JWOD producers including some of 17 the largest producers in the country. ACCSES 18 however receives no funds from the JWOD 19 program or from other federal, state, or 20 local governments. 21 Because of the short amount of time 22 allotted to those wishing to testify, these BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 65 1 comments will touch on the major areas of our 2 members' concerns. We will be providing a 3 more detailed written statement to the 4 committee by its January 31st deadline. 5 In the Federal Register notice, the 6 committee asked, "What is the threshold 7 beyond which the compensation paid to the 8 executives in a JWOD participating nonprofit 9 agency should be considered as influencing a 10 proposed fair market price determination?" 11 And also asked, "Is there an established 12 benchmark or absolute dollar threshold above 13 which compensation would be deemed as 14 influencing the proposed fair market price?" 15 We do not feel this is the right 16 way to approach the issue. It would be 17 impossible for the committee to set a firm 18 number that would determine whether or not 19 executive pay influences the proposed fair 20 market determination since JWOD producing 21 nonprofits are very diverse in terms of size, 22 revenue, location and organizational mission. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 66 1 In fact, if such an arbitrary limit 2 were set, it may paradoxically result in 3 nonprofits being less able to offer a fair 4 price on JWOD contracts. Many JWOD 5 producers, in order to attract the best 6 executives possible, must offer salaries and 7 benefits that are competitive with the 8 for-profits sector. 9 The most successful nonprofits are 10 essentially businesses with a social mission, 11 and they must operate like a business to 12 survive. 13 In the past, nonprofits could 14 survive by pursuing government grants or by 15 receiving fees from the government for 16 services and supports provided for people 17 with disabilities. In the past decade or so, 18 however, this government funding has 19 decreased or become uncertain. 20 Nonprofits serving people with 21 disabilities have begun turning more and more 22 to programs such as the JWOD program and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 67 1 State-Use programs to bring in revenue. They 2 have also contracted with private businesses 3 to supply similar services. This has allowed 4 these nonprofits an independent source of 5 revenue to fund their services. 6 It has also supplemented the money 7 they receive from the federal, state, and 8 local governments, saving taxpayer money. To 9 do this, they must actively seek ways to 10 bring in revenue, just as for-profit 11 businesses do. 12 These nonprofits must offer 13 competitive salaries and benefits in order to 14 attract the level of executives needed to 15 keep their organizations alive and thriving. 16 They are competing against the for-profit 17 business world for talented men and women to 18 professionally run these organizations. 19 If the Committee were to hamper 20 these efforts it is likely that these 21 organizations would be handicapped in their 22 ability to attract the best executives and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 68 1 provide the highest level of services to 2 people with disabilities. This could in turn 3 mean that the organization would be less 4 prepared to offer a fair price on a JWOD 5 contract. 6 Good executives produce the 7 conditions wherein their organizations are 8 efficient, their workers are fairly treated 9 and compensated, and their goods and services 10 are well positioned in the market place. 11 Depriving an organization of good 12 executives by arbitrarily imposing a salary 13 cap will harm their ability to provide goods 14 and services under the JWOD Act and similarly 15 limit their ability to help the people with 16 disabilities and their organizations. 17 We understand the committee's 18 desire to do something about compensation, 19 since this issue has lately received much 20 attention. Like you, we have seen the news 21 stories and have attended the Senate hearing 22 that breathlessly denounced the salaries made BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 69 1 by some executives at JWOD organizations. 2 There is no evidence, however, that 3 there are widespread abuses in this program. 4 The publicity is troubling, but we are 5 unconvinced that the few instances of alleged 6 abuses by JWOD producers should result in 7 penalties for the rest of the JWOD community. 8 ACCSES is also concerned about the 9 item in the Federal Register notice 10 indicating the committee is considering 11 imposing term limits on members of an 12 organization's board of directors. 13 Many organizations, especially 14 smaller organizations or those located in 15 rural areas, have a difficult time recruiting 16 qualified board members, and posing arbitrary 17 term limits would only have the effect of 18 reducing those members who, in the words of 19 the Federal Register notice, "possess the 20 specific skills needed to accomplish the 21 mission," a goal the Committee has also set 22 for a board of directors. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 70 1 While not addressing the Federal 2 Register notice, ACCSES also has a question 3 for the Committee about whether the Committee 4 for Purchase has proper staff and resources 5 necessary to enforce these regulations once 6 promulgated. 7 It seems to us that the current 8 size of the Committee staff would be 9 inadequate to effectively monitor compliance 10 with any governance regulations. Does the 11 Committee have plans to request an increased 12 appropriation from Congress to hire more 13 staff, or will the Committee task NISH and 14 NIB with the responsibility? 15 Since those testifying are only 16 allotted five minutes, and I believe my time 17 is coming to an end, we will leave the rest 18 of our comments on specific items in the 19 Federal Register to a longer, written 20 statement. 21 We would like to urge the Committee 22 to consider, however, that their work in this BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 71 1 area may be in conflict with the stated 2 intent of Congress to make changes to the 3 governance practice of the entire nonprofit 4 sector. Senate Finance Committee Chairman, 5 Charles Grassley, has made it clear that he 6 is determined to enact new rules of nonprofit 7 governance for all nonprofits. 8 If the Committee were to continue 9 with its plan of promulgating its own 10 governance regulations, they may very well 11 result in a situation where JWOD producing 12 nonprofits will be forced to redesign their 13 governance procedures to comply with the 14 Committee for Purchase rules, and then, when 15 legislation is passed for all nonprofits, 16 they'll be forced to change their governance 17 procedures once again. 18 This will result in a needless 19 waste of staff time and organization funds. 20 Instead of promulgating its own set of rules, 21 the Committee may want to defer to the 22 Congress on this issue. BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 72 1 2 MR. LEMMONDS: Thank you for the 3 opportunity to testify. 4 MR. SCHWALB: Thank you. Any 5 questions? Thank you very much. 6 MS. ZEICH: At this time the next 7 speaker is Terri McRae. 8 MS. McRAE: Good afternoon. The 9 Advocacy and Resources Corporation is 10 chartered in the State of Tennessee, in 11 accordance with regulations promulgated under 12 Tennessee Code 48-51-101, and the Internal 13 Revenue Service Code. The agency is a 14 501(c)(3) educational corporation, chartered 15 for the purpose of assisting persons with 16 disabilities to find employment and training, 17 housing, and improved educational supports in 18 the 14 rural counties of the Upper Cumberland 19 region of middle Tennessee. 20 We serve all persons with 21 disabilities, including those with autism, 22 those who are very severely handicapped, and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 73 1 persons with sensory limitations such as 2 those who are blind. The organization is not 3 the recipient of public funds. Unlike many 4 of the organizations that are speaking to you 5 today, we operate with a very different 6 strategy and model. We do not solicit public 7 funds. We are not subsidized in any way. We 8 do not solicit donations from the public, nor 9 are we registered to do charitable 10 solicitation. 11 We are not sponsored by a 12 faith-based organization. The social mission 13 of this organization is accomplished through 14 a non-membership, non-fundraising, 15 affirmative business model, while operating 16 through revenues earned through the operation 17 of our food manufacturing businesses for both 18 government and the commercial trade. 19 Revenue generated by this 20 not-for-profit business, less expenses, is 21 returned to our community in the broad form 22 of assistance to an average of 650 BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 74 1 individuals and families annually, who are 2 not charged for our services, and the 3 establishment of new programs of service 4 consistent with our stated mission throughout 5 our rural 5,000-square mile area. 6 We've been instrumental with these 7 funds in developing drug-court services, a 8 health clinic, a mentoring program for 9 at-risk youth, a homeownership training 10 program for our employees, a construction 11 company, which moves our employees out into 12 the construction trades and is working on 13 building affordable housing, and a 14 USDA-certified laboratory. 15 The structure of this organization 16 is supported by 13 specialized operations 17 areas, 230 employees and a JWOD agency and 18 project ratio that continuously hovers 19 between 75 and 89 percent. 20 The manufacturing arm of the agency 21 produces 125 different part numbers, of which 22 18 are on the procurement list, and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 75 1 constitute about 55 percent of total revenue. 2 Revenues have grown from nothing, 3 in 1986, when this agency did not exist, to 4 $68 million in 2005. We are one of a group 5 of eleven food manufacturers designated by 6 the Department of Defense to supply the 7 government with supplies under unique surge 8 and emergency conditions. This has had an 9 obvious and direct impact on our work in the 10 last three years. 11 End users in 40 states and 60 12 foreign countries are supported by our 13 specialized commercial products. We are 14 inspected by eight federal and state food 15 safety and quality programs and 16 organizations, whether we produce one unit or 17 one million units. Eighty-two percent of our 18 expenses are expended on manufacturing 19 supplies and the supports necessary to 20 mobilize those supplies to our work. 21 Since 2001, the cost of wages and 22 salaries as a feature of overall product cost BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 76 1 has reduced from 17 percent of the total to 2 14 percent of the total, even as the number 3 of employees and wages and benefits, have 4 increased overall. 5 The last reported direct labor 6 hourly wage for persons with severe 7 disabilities was $9.04 an hour. In 2001, we 8 had revenue of $26,771,878. Our expenses 9 that year were $26,088,846. All of these 10 numbers are captured in the materials that 11 have been forwarded to you. 12 In 2005, our revenue has grown to 13 $68,315,527. Eighty-two percent of that is 14 the cost of materials necessary to support 15 manufacturing. Our expenses have been 16 $67,224 and some change. Our JWOD ratio in 17 the last reported report was 89.47. Our 18 total agency was 89.69. 19 A lot of the comments that I would 20 like to address are going to come to you in 21 writing because of the period of time that we 22 have to deal with today. But I do want to BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 77 1 deal with the issue of fair market price. 2 In the materials that I've 3 forwarded to the Committee, and that I will 4 certainly forward again, I have provided to 5 you a five-year price history of supplies to 6 all divisions of government, and I want to 7 talk just a minute about fair market price 8 and the concept of best value in JWOD 9 suppliers. 10 Each state has statutes that are 11 designed to implement the regulatory 12 requirements of the IRS Code. The federal 13 government and secretaries of states are 14 responsible for monitoring and implementing 15 these requirements. 16 These requirements have cost of 17 producing these supplies and materials. 18 There's also requirements because of IRS 19 reporting codes and all the other laws and 20 acts under which we operate, there are rules 21 for reporting and dealing with highly 22 compensated employees of all types in an BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 78 1 organization. 2 Those rules are pretty transparent. 3 Fair market price is the price which has 4 determined to be fair and reasonable for the 5 product or service in question. The basis 6 for fair market price is established by a 7 review of customer requirements -- 8 quantities, volumes of service, domestic 9 commercial market conditions, and 10 requirements for the delivery and execution 11 of the service or product. 12 Executive compensation is unlikely 13 to have any significant influence on assessed 14 prices that have been determined by the 15 customer to be fair and reasonable, 16 especially as price has historically been 17 constructed in the JWOD program with the 18 associated protections. 19 Further, OMB Circular A-122, 20 clearly provides guidance for costing and 21 pricing for not-for-profit corporations and 22 educational institutions, and defines the BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 79 1 methods for determining allowable costs. 2 The ARC has a five-year history 3 provided to you in the materials that we have 4 forwarded. Prices, as you will see, have 5 been remarkably stable in this five-year 6 period, even as organizational complexity has 7 grown, in relationship to changing government 8 requirements. Efficiencies have been gained 9 and commodity markets during that period of 10 time have gone up and down like a yo-yo. 11 As our revenues have grown, we have 12 been able to offer every employee the 13 following benefits: Agency-paid individual 14 major medical health insurance -- that's 15 unheard of in our industry; vision and dental 16 benefits; a life insurance policy; 17 participation in a 401(k) with an agency 18 match; access to in-house health clinic 19 services; GED instruction; tuition 20 reimbursement; FICA match; Medicaid tax 21 match; State of Tennessee unemployment 22 compensation insurance; workers' compensation BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 80 1 insurance. 2 MS. ZEICH: I'm sorry, Ms. McRae. 3 We're out of time. If you could wrap it up, 4 please. 5 MS. McRAE: Okay. In general, we 6 believe that there are protections that are 7 already transparent and available to 8 engineering the technologies of the JWOD 9 program. We would like to invite you to 10 Tennessee to look at what we're doing, 11 because we are doing it differently. 12 As Susan indicated, CARF is 13 available in some states, but not all states. 14 We are inspected by eight food safety and 15 quality organizations under the ISO standard. 16 We feel that that's appropriate to determine 17 insurance about compliance with regulatory 18 requirements. 19 My comments are captured in the 20 material that has been forwarded along with 21 the five-year price history, but in general, 22 you will see that there is a four percent BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 81 1 difference over five years overall. Thank 2 you. 3 MR. SCHWALB: Thank you. Any 4 questions? 5 MS. McRAE: I also want to point 6 out to you this document. Do you all have a 7 copy of this book? It's the Guide Book for 8 Directors of Not-for-Profit Corporations. 9 This is the model put out by the American Bar 10 Association, and it is the boiler plate for 11 the various states in this country. Thank 12 you. 13 MR. SCHWALB: Thank you. 14 MS. McRAE: Any questions? 15 MR. SCHWALB: Did you have a 16 question, Roy? 17 MR. GRIZZARD: Yes. There is a 18 law -- 19 MS. ZEICH: Could you use the 20 microphone, please? Is it turned on? 21 MR. GRIZZARD: You've given us a 22 lot of interesting numbers, but -- I wanted BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 82 1 you to give me one -- you're CEO or -- 2 MS. McRAE: I am the CEO. In 2005, 3 my base wage was $215,000 a year. That 4 figure was derived through a compensation 5 study with a legal firm that consults to the 6 IRS. That figure was also used at the same 7 time to study all of our wages which are 8 normed by published indexes every three years 9 in our organization. 10 Nobody in our organization earns 11 sub-minimum wage and the average for direct 12 labor is $9.04 an hour. However, all of our 13 wages are based on essential functions for 14 the value of the work done. They have full- 15 fledged job descriptions and they are normed 16 against published indexes -- for our region 17 in the Southeast. Thank you. 18 MR. SCHWALB: Thank you, Ms. McRae. 19 MS. ZEICH: The next speaker, Mr. 20 Charles Ray. 21 MR. RAY: Mr. Chairman, Committee 22 members, and Committee staff, thank you for BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 83 1 the opportunity of addressing your concerns. 2 My name is Charles Ray, Government and 3 Stakeholder Relations Executive for the 4 Commission on Accreditation of Rehabilitation 5 Facilities, International. 6 My statement today is in response 7 to your request for comments that appeared in 8 the December 16, 2005, Federal Register, on 9 potential regulations regarding the 10 qualification requirement of both central 11 nonprofit agencies and nonprofit agencies to 12 participate in the Javits-O'Day-Wagner -- 13 known as JWOD -- program. 14 My comments also address the 15 guidelines under which executive compensation 16 will be considered as either influencing or 17 not influencing fair market prices. These 18 comments are submitted on behalf of the 19 Commission on Accreditation Rehabilitation 20 Facilities, also known as CARF. 21 CARF is an international nonprofit 22 accrediting body, providing accreditation in BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 84 1 the human services field, focusing on the 2 areas of rehabilitation, employment, 3 community services for children, families, 4 and the ageing. 5 The mission of CARF is to promote 6 the quality, value, and optimal outcomes of 7 services through a consultative accreditation 8 process that centers on enhancing the lives 9 of the person served. 10 CARF applauds the Committee for 11 recognizing the value and importance of 12 qualification standards in order to 13 demonstrate good governance practices and 14 thereby eligibility to participate in the 15 JWOD program. 16 However, CARF would suggest that 17 rather than issuing regulations and 18 attempting to enforce such qualification 19 standards itself, the Committee consider 20 private accreditation organizations as a part 21 and partner in the overall solution. 22 National accreditation review as a BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 85 1 means of ensuring compliance with a variety 2 of business standards including private 3 benefit, immediate sanctions, and executive 4 compensation law should be delivered by 5 independent non-governmental organizations in 6 a public-private partnership, a significant 7 cost savings to the government. 8 CARF believes that the national 9 accreditation is a valuable mechanism that 10 will allow many organizations to demonstrate 11 compliance with the potential requirements as 12 suggested by the Committee in its December 13 16, 2005, Federal Register announcement. 14 This can be analogized to the 15 situation that exists in many states, and in 16 other federal agencies such as the Department 17 of Health and Human Services, whereby 18 accredited organizations have "deemed 19 status" -- that is, they are deemed to be in 20 compliance with federal program requirements. 21 In a true deemed status situation, 22 submission of evidence of accreditation fully BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 86 1 relieves an organization from any further 2 need to demonstrate compliance to the 3 regulator. For example, CARF has developed 4 and implemented business standards that 5 specifically address the benchmarks outlined 6 in the Committee's Federal Register 7 announcement, regarding nonprofit agency 8 governance practices. 9 CARF's new governance standards 10 require CARF accredited organizations to have 11 the following policies in place. First, 12 policies defining independent and unrelated 13 board representation, policies on financial 14 matters between the organization and its 15 board members -- including compensation, 16 loans, and expense reimbursement -- policies 17 on the use of external advisors including 18 auditors and executive compensation advisors. 19 Policies requiring annual ethics and conflict 20 of interest declaration, board oversight of 21 Committee work around governance development 22 and management, financial audit, and BETA COURT REPORTING www.betareporting.com 202-464-2400 800-522-2382 87 1 executive compensation. And policies 2 addressing executive compensation including 3 all specific issues involved in this complex 4 topic. 5 Utilizing private accreditation 6 organizations such as CARF as a means to 7 ensure quality and JWOD eligibility would be 8 an expeditious and efficient response to 9 addressing concerns about good governance. 10 This would essentially leverage the person- 11 power that the Committee has available, and 12 not