Analysis of the Financial and Operating Practices of the Union-Administered Benefit Funds with Fiscal Years Ending in Calendar Year 2004

Audit Report In Brief

Background

New York City contributed approximately $946.4 million to the 116 union-administered annuity, active and retiree welfare funds with fiscal years ending during calendar year 2004. The benefit funds were established under the provisions of collective bargaining agreements between the unions and the City of New York. Benefit funds provide City employees, retirees, and dependents with a variety of supplemental health benefits not provided under City-administered health insurance plans, including dental care, optical care, and prescription drug benefits. Other benefits are provided at the discretion of the individual funds.  Annual contributions to the welfare funds for full time employees ranged from $729 to $1,675 per employee during 2004.

Accountability for fund expenditures is a contractual requirement: the funds must be audited annually by a certified public accountant (retained by the funds); they must submit an annual statement showing their “condition and affairs” in the form prescribed by the City Comptroller; and they must provide an annual report to each employee covered by the fund.

In November 1977, the Comptroller’s Office published the first Internal Control and Accountability Directive #12, which contained uniform reporting and auditing requirements for benefit funds.  In 1997, Directive #12 was revised to include provisions that modified fund reporting requirements, required assessments of consultant services, modified the criteria for contracting services through competitive bids, and expanded the requirements for hiring independent certified public accountants to audit the funds.

These reporting requirements provide a basis for our comparative analyses of fund operations to identify deviations from the norm. To perform these analyses, we compute certain expense and benefit category averages that are used to compare funds of similar size; our results can then be used by fund trustees and administrators to perform their own internal analysis.

This is the Comptroller’s 25th annual report related to the data received in response to Directive #12.  The analysis is based on the financial activities of 116 benefit funds receiving contributions from the City during calendar year 2004. Annual reports from these funds are usually delayed at least one year because, according to Directive #12, the funds have up to nine months after the close of their fiscal years (some of which end on December 31st) to submit the required data.

We reviewed the financial information provided by 116 funds that received City contributions during Fiscal Year 2004. (Exhibit A at the end of this report lists each fund by its official and its abbreviated name.)  However, the computation of category averages and our other financial analyses were limited to 98 funds that received approximately $921.5 million in total City contributions during each fund’s 2004 Fiscal Year (most of the funds’ Fiscal Years ended in either June or September of 2004)—15 funds that received a substantial portion of their revenues from sources other than the City, one College Scholarship Fund that provides benefits only to high school students, and two funds with a different fiscal year-ends than their associated welfare funds were not included in either the computation of category averages or in the financial analyses, since they would have distorted the results.  (These funds are listed separately in Exhibit B.)

As of the end of their 2004 Fiscal Years, the welfare funds’ net assets available for 86 plan benefits totaled $748.5 million, and the 30 annuity funds had a net fund balance of approximately $1.3 billion.

Objective of Analysis

Our objective was to provide comparative data on the overall financial activities of the 98 union-administered active and retiree welfare, education, and annuity funds that received City contributions during Fiscal Year 2004.

Observations

As in previous reviews of the financial data submitted by the funds for the past 25 years, there were variations in the amounts spent for administrative purposes although, in certain instances, there was a clear indication that these expenses were reduced.  Some of the funds cited in our 2003 report for spending higher-than-average amounts on administration remain in that same category in 2004, while other funds were added to this category because their administrative costs increased in 2004.  In 2004, $78.5 million (7.2%) of total revenue for all funds was spent on administration, as compared to $70.5 million (7.05%) spent on administration in 2003. The percentage of total revenue spent on administration varied among funds, reflecting the broad discretion exercised by each fund’s Board of Trustees.

As before, several welfare funds expended lower-than-average amounts for benefits and maintained high reserves.  In addition, the benefit expenditures of each of 13 funds exceeded their individual total revenues, causing the funds to dip into their reserves. The use of reserves to provide benefits may indicate that the benefits provided were not evaluated in relation to the resources available to the funds.  Reserves held by funds provide a cushion if claims for benefits exceed revenues in any given year.  In the past, the Comptroller’s Office has used general guidelines of 100 percent of revenue for insured funds and 200 percent of revenue for self-insured funds as reasonable levels for welfare fund reserves.  High reserves are an indication of a fund’s financial viability, but may also indicate that a fund is not providing as many benefits to its members as it could.  Furthermore, in 2004, 33 of 74 active and retiree welfare funds in our analysis incurred operating deficits totaling $70.8 million, which reduced their available reserves. The deficits ranged from $2,734 to $50.6 million.

In summary, we identified the following financial issues that should be addressed:

• The expenses of certain funds exceeded their revenues, resulting in operating deficits.  Operating deficits could deplete fund reserves, which could ultimately lead to insolvency.
• Certain funds spent a large percentage of their revenue on administrative expenses. Reducing administrative expenses would allow funds to increase benefits for members.
• Certain funds had large operating surpluses resulting in high reserves. Excess reserves may indicate that funds should increase members’ benefits.

The chart on the following page lists those funds with financial issues (indicated in the shaded areas of the chart) that should be addressed by fund management.

Fund managers have a fiduciary responsibility to provide optimum benefits to members while keeping administrative costs to a minimum.  A fund that accumulates excessive reserves or expends large amounts for administrative costs does not achieve its basic goal of providing optimum benefits to members.  The trustees of these funds should evaluate how their funds could be better operated.

This report’s exhibits and appendices can be a starting point for fund trustees and administrators to identify areas for cost reduction or other appropriate action to ensure financial stability.  No conclusions should be drawn from any single exhibit in this report.  For example, even though an exhibit might show that a particular fund’s benefit expenses exceeded its revenues; this might not be a problem if the fund has sufficient or high reserves.  On the other hand, funds incurring high administrative costs relative to other funds of a similar size should review their costs carefully and reduce them whenever possible.

Other Issues

Improper Eligibility Delay

The intent of the standard benefit fund agreements between the City and the unions is that welfare fund benefits be available during each member’s entire period of employment with the City. Thus, the funds should make their members eligible for benefits, beginning on their first day of employment with the City.  However, two funds (Local 237 Teamsters’ Welfare Fund and District Council 9 Painters Industry Welfare Fund) improperly delay eligibility for their members to receive benefits from 30 and 90 days, respectively.  Consequently, members or their dependents that may be in need of benefits during the funds’ waiting periods are precluded from obtaining such benefits.

CPA Opinions

Directive #12 requires that all welfare, retiree, annuity, and affiliated funds receiving City contributions have their financial statements audited annually by certified public accountants.  Each audit must include a complete examination in accordance with generally accepted auditing standards whereby an opinion is expressed on the financial statements taken as a whole.  Furthermore, the fund agreements between the City and the unions require the preparation of each fund’s financial statements on the accrual basis of accounting and in conformance with generally accepted accounting principles (GAAP).  Of the 98 funds reviewed, 10 received adverse opinions, six received qualified opinions and one received a disclaimer from their independent auditors because their financial statements were not in compliance with GAAP.  (The 17 funds as well as the specific issues raised in the CPA reports are detailed on pages 37 to 39 of this report.)

Consolidation of Professional Services

Most funds receiving City contributions enter into contracts with various professional providers for services such as accounting/auditing and legal counsel.  Many funds use the same professional service provider for similar services. (Appendix D lists the funds using the same providers for similar professional services.)        Trustees of funds using the same providers for similar services may reduce their funds’ administrative expenses by negotiating future contracts jointly.

Recommendations

• Trustees of funds with high percentages of administrative costs to total revenue and/or low percentages of benefit expenses to total revenue should reduce administrative expenses and increase benefits to members.

• Trustees of funds using the same professional service providers for similar services should consider jointly negotiating future contracts with these providers to reduce administrative expenses through economies of scale.

• Trustees of funds with low reserve levels should take steps to ensure that their funds remain solvent.  To accomplish this goal, funds should endeavor to reduce administrative expenses.  If this is not possible or does not provide sufficient funds to ensure solvency, the Trustees should attempt to reduce costs associated with benefits.

• Trustees of funds that are incurring significant operating deficits, particularly those with low reserve levels, should ensure that anticipated benefit and administrative expenses will not exceed projected total revenue.

• Trustees of funds with high reserve levels, particularly those whose funds spend less than average amounts of their revenue on benefits, should consider enhancing their members’ benefits.

• Trustees of funds that delay members’ eligibility for benefits beyond their first day of employment should revise their fund’s policy to comply with their union’s welfare fund agreement with the City.

• OLR (Office of Labor Relations) should use the information in this report to ensure that the trustees of the funds cited herein correct the adverse and qualified opinions received from their independent accounts

• OLR should recover the portion of City contributions from those funds that do not provide benefits to members from their first day of employment.