Analysis of the Financial and Operating Practices of Union-Administered Benefit Funds With Fiscal Years Ending in Calendar Year 2010

Audit Report In Brief

The purpose of this report is to provide a comparative analysis of the overall financial activities of union-administered active and retiree welfare, education, and annuity funds that receive City contributions.  The report is based on our analyses of individual funds.

The City of New York contributed approximately $1.23 billion to the 111 union-administered annuity, active, and retiree welfare funds with fiscal years ending during calendar year 2010.  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 $1,100 to $2,370 per employee during 2010.

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

In November 1977, the Comptroller’s Office first published 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.

The information generated as a result of Directive #12 reporting requirements provides 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 analyses.

This report comprises data received in response to Directive #12.  The analysis is based on the financial activities of benefit funds receiving contributions from the City during calendar year 2010.  Annual reports from these funds are usually delayed 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) to submit the required data.

We reviewed the financial information for 111 funds that received City contributions during 2010.  (Exhibit A at the end of this report lists each fund by its official and abbreviated name.)  However, the computation of category averages and our other financial analyses were further limited to 91 of 111 funds that received City contributions during each fund’s 2010 fiscal year (most of the funds’ fiscal years ended in either June or December 2010), approximately $1.18 billion in total.  Twenty funds were not included in either the computation of category averages or in the financial analyses because they would have distorted the results of this report.

Twelve funds that received a substantial portion of their revenues from sources other than the City, one College Scholarship Fund that provides benefits only to public high school students, three funds with fiscal year-ends different from their associated welfare funds, one fund that receives funds on an as needed basis from its Administrative Fund, and three funds that were either new or discontinued operations were not included in either the computation of category averages or in the financial analyses because they would have distorted the results.

As of the end of their 2010 fiscal years, the welfare funds’ net assets available for 80 plan benefits totaled $1.9 billion, and the 31 annuity funds had a net fund balance of approximately $5.3 billion.

Audit Findings and Conclusion

As in previous reviews of the financial data submitted by the funds, there were variations in the amounts spent for administrative purposes, although in certain instances there was an indication that these expenses were reduced.  Some of the funds cited in our 2009 report for spending higher-than-average amounts on administration remain in that same category in 2010, while other funds were added to this category because their administrative costs increased in 2010.  In 2010, $96.3 million (6.49 percent) of total revenue for all funds was spent on administration as compared to $88.8 million (7.03 percent) spent on administration in 2009. 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 four 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.  Moreover, in 2010, 12 of 67 active and retiree welfare funds in our analysis incurred operating deficits totaling $5.3 million, which reduced their available reserves. The deficits ranged from $261 to approximately $3.6 million.

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

• 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 expenses of certain funds exceeded their revenues, resulting in operating deficits.  Operating deficits could deplete fund reserves, which could ultimately lead to insolvency.

The chart on the following page lists those funds with potential 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 tables, 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, it 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.

In addition, we identified other issues that should be addressed.

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, one fund (District Council 9 Painters Industry Welfare Fund) delays eligibility for its members to receive benefits for a maximum of 90 days.  Consequently, members or their dependents who may need 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.  Further, 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 91 funds reviewed, 14 received qualified opinions from their independent auditors because their financial statements were not in compliance with GAAP.  One fund received a disclaimer whereby its auditors concluded that they were unable to form an opinion due to their inability to confirm the existence and valuation of the investments.  (The 15 funds as well as the specific issues raised in the CPA reports are detailed on pages 36 to 38 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.

CPAs Were not Selected from the Prequalified List

Directive #12 recommends that funds should only contract with CPA firms listed on the Office of the Comptroller’s prequalified list.  Our review found that only 27 funds (24.3 percent) of the 111 funds selected a CPA firm that was on the Comptroller’s prequalified list.  (See Exhibit F for a list of the 84 funds that did not use a prequalified CPA firm.)

Late Submission of Directive #12 Reports

In 2010, 54 of the 111 funds (48.6 percent) in our analysis did not submit their Directive #12 reports in a timely fashion.  Comptroller’s Directive #12 requires that within nine months after the close of a fund’s fiscal year, each fund’s trustees must submit a report to the City Comptroller showing the fund’s condition and affairs during its preceding fiscal year.  The Directive #12 reports provide a basis for a timely comparative analysis of fund operations and for the identification of deviations from the norm.

Audit Recommendations

As a result of our analysis, we make the following 12 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 the insolvent fund and funds with low reserve levels should take steps to ensure that their funds remain solvent.  To accomplish this goal, funds should seek 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.
• Trustees of funds should contract with CPAs who are listed on the Office of the Comptroller’s prequalified list.
• Trustees of funds must submit to the Comptroller’s office an annual report showing the fund’s condition and affairs in accordance with Directive #12 and be submitted within nine months after the close of a fund’s fiscal year-end.
• Office of Labor Relations (OLR) should recover the portion of City contributions from those funds that do not provide benefits to members from their first day of employment.
• OLR should use the information in this report to ensure that the trustees of the funds cited herein correct the conditions cited in adverse or qualified opinions received from their independent accountants.
• 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.  At a minimum, trustees should use the Comptroller’s prequalified list of CPAs for accounting and auditing services.
• OLR should consider withholding City contributions from delinquent funds that failed to submit their Directive #12 to the Comptroller’s office.