Analysis of the Financial and Operating Practices of Union-Administered Benefit Funds with Fiscal Years Ending in Calendar Year 2013

Executive Summary

This report provides a comparative analysis of the overall financial activities of 90 union-administered active and retiree welfare funds and annuity funds that received approximately $1.1 billion in City contributions for 2013^[1].  It is prepared annually based on independently audited financial reports and other information filed by the funds in accordance with New York City Comptroller’s Directive #12.  The report aggregates reported information and compares funds of similar type and size of City contribution in order to compare the amounts that are spent on administration, operating surplus/deficits, benefits provided, and year-end reserves. ^[2]  

Findings and Conclusions

In 2013, $101.2 million (8.38 percent on average) of the total revenue for the 90 welfare and annuity funds was spent on administration as compared to $94.1 million (8.76 percent on average) spent on administration in 2012.  Of these:

• 14 welfare funds spent a 30 percent larger percentage of their revenue on administrative expenses than other funds of a similar type and size.
• Seven welfare funds, which maintained high reserves, expended 20 percent lower-than-average amounts for benefits than other funds of a similar type and size.
• 14 funds had benefit expenditures that exceeded their revenues, causing each of these funds to dip into their reserves.
• 20 welfare funds in our analysis incurred operating deficits totaling $14.0 million, which reduced their available reserves. The deficits ranged from $5,479 to approximately $2.7 million.

In summary, we identified the following financial issues in one or more of the funds that should be addressed by those funds:

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

The analysis also identified other areas of concern, which include:

• 15 funds received qualified opinions from their independent auditors.
• 46 funds did not submit their Directive #12 reports in a timely manner.
• 81 funds did not use a certified public accountant (CPA) firm listed on the Comptroller’s prequalified list as recommended by Directive #12.
• One fund delays benefit eligibility for new members in violation of its agreement with the City of New York. 

Recommendations

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

• Trustees of funds with higher than average percentages of administrative costs as compared to total revenues and/or low percentages of benefit expenses as compared with their total revenues should reduce administrative expenses and/or increase benefits to members.
• Trustees of funds that use 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 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 should ensure that these filings are timely made in accordance with Directive #12.
• Trustees of funds should consider contracting 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 correct the conditions cited in qualified opinions received from their independent accountants.
• OLR should consider withholding City contributions from delinquent funds that failed to submit their Directive #12 reports to the Comptroller’s Office or fail to otherwise abide by the terms of that Directive and/or their Welfare Fund Agreements with the City.
• 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 2013, this report has identified 10 funds that had potential financial issues that should be addressed by fund management as shown in the chart on the following page. 

[1] For 2013, the City contributed approximately $1.17 billion to 107 union-administered funds that submitted Directive #12 filings.  However, we limited the computation of category averages and other financial analyses in this report to 90 of the funds, which received $1.14 (98 percent) of $1.17 billion in total City contributions.  The remaining 17 funds, which received a total of $26.2 million (2 percent) of the City’s contributions in 2013, were excluded from the analysis for different reasons which are detailed in the Scope of Analysis section of this report, and on page 4 of Exhibit B.

[2]The Comptroller’s Office issued Directive #12 to ensure uniform reporting and auditing requirements for 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.  The Comptroller is not, however, a regulator with remedial powers charged with enforcing fiduciary obligations under a rubric of laws and regulations akin, for example, to the United States Department of Labor or the New York State Department of Financial Services.