Analysis of the Financial and Operating Practices of Union-Administered Benefit Funds with Fiscal Years Ending in Calendar Year 2002

Recommendations

New York City contributed approximately $861.7 million to the 112 union-administered annuity, active and retiree welfare funds with fiscal years ending during calendar year 2002. 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 ranged from $1,025 to $1,525 per employee during 2002.

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 23^rd annual report related to the data received in response to Directive #12. The analysis is based on the financial activities of 112 benefit funds receiving contributions from the City during calendar year 2002. 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 31^st) to submit the required data.

We reviewed the financial information provided by 112 funds that received City contributions during Fiscal Year 2002. (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 87 funds that received approximately $803.5 million in total City contributions during each fund’s 2002 Fiscal Year (most of the funds’ Fiscal Years ended in either June or September of 2002)—15 funds were excluded since they receive a substantial portion of their revenues from sources other than the City; one College Scholarship Fund was excluded since it does not provide benefits to union members or their dependents; and nine annuity funds were excluded because they incurred substantial losses on their investments that offset their total revenue (putting their revenue in “negative” terms and making a calculation of ratios impossible. These funds are listed separately in Exhibit B.)

As of the end of their 2002 Fiscal Years, the welfare funds’ net assets available for plan benefits totaled $772.4 million, and the annuity funds had a net fund balance of approximately $409.1 million.

Our objective was to provide comparative data on the overall financial activities of the 87 union-administered active and retiree welfare, education, and annuity funds which received City contributions during Fiscal Year 2002. (Most of the funds’ fiscal years ended in either June or September 2002.)

As in previous reviews of the financial data submitted by the funds for the past 23 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 2001 report for spending higher-than-average amounts on administration remain in that same category in 2002, while other funds were added to this category because their administrative costs increased in 2002. In 2002, $63.8 million (7.55%) of total revenue for all funds was spent on administration, as compared to $57.98 million (6.49%) spent on administration in 2001.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 funds expended lower-than-average amounts for benefits and maintained high reserves. In addition, the benefit expenditures of each of 11 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 2002, 26 of 73 active and retiree welfare funds in our analysis incurred operating deficits totaling $18.07 million, which reduced their available reserves. The deficits ranged from $2,167 to $7,032,805.

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

• Operating deficits could deplete fund reserves, which could ultimately lead to insolvency.
• Reducing administrative expenses would allow funds to increase benefits for members.
• 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.

I – InsolvencyN – Currently not at Risk of InsolvencyP – Possible Risk of Insolvency in less than 1 yearST – Short-term Risk of Insolvency within 1 – 2 yearsMT – Mid-term Risk of Insolvency between 2- 3 yearsLT – Long-term Risk of Insolvency greater than 3 years

*A ratio estimating the number of years that a fund can operate before being “in the red” if all factors remain constant. For example, number “101%” would indicate the fund has approximately one year before becoming insolvent.

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 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.

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.

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 87 funds reviewed, 10 funds received adverse opinions, and six funds received qualified opinions because their financial statements were not in compliance with GAAP. (The 16 funds as well as the specific issues raised in the CPA reports are detailed on pages 39 to 41 of this report.)

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.

In addition to analyzing Directive #12 filings, the Comptroller’s Office periodically performs audits of the financial and operating practices of selected funds. There were 76 such audit reports issued by the Comptroller’s Office during Fiscal Years 1985-2004. (These audits are listed in Appendix C at the end of this report.) During Fiscal Year 2004, we issued the following three reports:

• Audit Report on the Financial and Operating Practices of the Uniformed Fire Officers Association Family Protection Plan, Report # FL04-094A
• Audit Report on the Financial and Operating Practices of the Uniformed Fire Officers Association Retired Fire Officers Family Protection Plan, Report # FL04-095A
• Audit Report on the Financial and Operating Practices of the Local 721 Licensed Practical Nurses Welfare Fund, Report #FL04-093A

• 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 using the same providers for similar services should solicit competitive proposals and negotiate future contracts jointly.
• 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 noted exceptions.
• OLR should recover the portion of City contributions from those funds that do not provide benefits to members from their first day of employment.