Analysis of the Financial and Operating Practices of Union-Administered Benefit Funds with Fiscal Years Ending in Calendar Year 2011

Executive Summary

This report provides a comparative analysis of the overall financial activities of 91 union-administered active and retiree welfare funds and annuity funds that received approximately $1.1 billion in City contributions for 2011.  Based upon independently audited financial reports and other information filed by the funds in response to the New York City Comptroller’s Directive #12, this analysis is prepared annually to compare each fund to other funds of similar type and size of City contribution in order to evaluate administrative spending for all welfare and annuity funds and operating surplus/deficits, benefits provided, and year-end reserves for all welfare funds.

Findings and Conclusion

In 2011, $97.2 million (7.26 percent) of total revenue for all funds was spent on administration as compared to $96.3 million (6.49 percent) spent on administration in 2010. Twenty-six funds spent a larger percentage of their revenue on administrative expenses than similarly situated funds. In addition, four welfare funds expended lower-than-average amounts for benefits and maintained high reserves, while nine funds had benefit expenditures that exceeded their revenues, causing each fund to dip into their reserves.  Moreover, in 2011, 25 welfare funds in our analysis incurred operating deficits totaling $50.7 million, which reduced their available reserves.  The deficits ranged from $3,679 to approximately $18.1 million.

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

• Expenses that exceeded revenues, resulting in operating deficits;
• Administrative expenses that exceeded the fund’s category average; and
• Operating surpluses that resulted in higher than average reserves.

The analysis also identified other areas of concern, including:

• Seventeen funds received qualified opinions from their independent auditors and one fund received a disclaimer from its auditor.
• Forty-seven funds did not submit their Directive #12 reports in a timely manner.
• Sixty-two funds did not use a CPA firm listed on the Comptroller’s prequalified list as recommended by Directive #12.
• One fund delays benefit eligibility for new members.

Recommendations

As a result of our analysis, we make 11 recommendations, eight to the Trustees of funds and three to the Office of Labor Relations (OLR):

• Trustees of funds with higher than average 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.  At a minimum, trustees should use the Comptroller’s prequalified list of CPAs for accounting and auditing services.
• Trustees of 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 have incurred 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 higher than average 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 are required to submit to the Comptroller’s Office an annual report showing the fund’s condition and affairs in accordance with Directive #12 and that submission must be filed within nine months after the close of a fund’s fiscal year-end.
• Trustees of funds should contract with CPAs that are listed on the Comptroller’s prequalified list.
• Trustees of funds that delay members’ eligibility for benefits beyond their first day of employment must revise their fund’s policy to comply with their union’s welfare fund agreement with the City.
• OLR should use the information in this report to ensure that the trustees of the funds identified herein correct the conditions cited in qualified opinions and disclaimers received from their independent accountants.
• OLR should consider withholding City contributions from delinquent funds that failed to submit their Directive #12 to the Comptroller’s Office.
• OLR should recover the portion of City contributions from those funds that do not provide benefits to members from their first day of employment.

In 2011, the analysis identified seven funds that had potential financial issues that should be addressed by fund management as shown in the chart on the following page.

The Comptroller’s Office issued Directive #12 to ensure uniform reporting and auditing requirements for all union-administered benefit funds that receive contributions from the City.  The Comptroller’s Directives are used to establish policies governing internal controls, accountability, and financial reporting.