Audit Report on the Financial and Operating Practices of the Municipal Employees Welfare Trust Fund of the International Union of Operating Engineers Local 30

AUDIT REPORT IN BRIEF

The Municipal Employees Welfare Trust Fund of the International Union of Operating Engineers Local 30, 30-A, 30-B, and 30-C (Active Fund) was established on December 30, 1964, under the provisions of a Fund Agreement between the City of New York and the International Union of Operating Engineers, Local 30, 30-A, 30-B, and 30-C, AFL-CIO (the Union) and a Declaration of Trust. The agreement and trust stipulate that the City make contributions to the Active Fund and the Active Fund use these contributions to provide supplemental benefits to its members. The Active Fund is required to comply with the New York City Comptroller’s Internal Control and Accountability Directives, Directive #12, “Employee Benefit Funds – Uniform Reporting and Auditing Requirements,” which sets forth accounting, auditing, and financial guidelines for funds and their boards of trustees. For the year ending December 31, 2005, the Active Fund reported an operating deficit of $117,298 and a fund balance of ($115,843).

Audit Findings and Conclusions

The Active Fund Trustees failed to significantly reduce operating costs to ensure that the Active Fund remained solvent, did not evaluate the effect of benefit reductions it did institute, and ultimately merged with the Retiree Fund to sustain itself. Further, the Trustees did not accurately represent the Active Fund’s financial condition and did not disclose either the possibility of a merger or the actual merger to fund membership in its annual reports for 2004 and 2005. In this regard, the Active Fund:

Failed to significantly reduce operating costs to ensure that it remained solvent even though it had severe cash flow problems. From 2002 through 2005, the Active Fund spent more money than it received and depleted its fund balance until it became insolvent in 2005.

Did not take any measures to strengthen its financial position until September 2005 when it enacted benefit reductions. Further, the Active Fund did not wait to see the effect of these benefit reductions, consider reducing or eliminating other benefits, or solicit bids from providers to ensure that it received the best price for coverage provided. Instead, in February 2006, the Active Fund merged with the Retiree Fund which was in sound financial condition.

Did not accurately represent its financial condition to its membership in its annual reports for 2004 and 2005. The Active Fund did not include its most significant liability—benefit obligations—in its reported fund balances and consequently failed to convey the imminent risk of insolvency in 2004 and the fact that it was insolvent in 2005. Additionally, the Active Fund did not disclose in its annual reports either the possibility of a merger or the actual merger with the Retiree Fund.

Our review also found that the Active Fund did not comply with Comptroller’s Directive #12 procedures. The Active Fund misstated administrative and benefit expenses; failed to maintain documentation to support payments for legal benefits; did not maintain eligibility documentation for all claims paid for members’ dependents; could not provide support documentation for all administrative expenses; did not pay all benefits in accordance with Active Fund guidelines; and did not have a written allocation plan for shared administrative expenses and valid agreements with professional service providers.

At our exit conference, Active Fund officials informed us that they acted with due care and performed due diligence prior and subsequent to merging the Active and Retiree Funds. In that regard, the Fund:

• Retained separate legal counsel for the Active and Retiree Funds and sought opinions as to the legality of the merger.

• Informed the New York City Office of Labor Relations (OLR) of its intention to merge and asked OLR to advise it if the City had any legal objections.

• Continues to monitor the effects of the merger by keeping separate books and records and analyzing prescription drug costs for the Active and Retiree Funds.

Audit Recommendations

We make 15 recommendations to the merged Active and Retiree Fund (the Fund), including that the Fund should:

• Ensure that its expenses do not exceed revenue.

• Assess benefit costs and utilization annually.

• Accurately advise membership of the Fund’s financial condition and other significant matters in its annual report.

• Ensure that administrative and benefit expenses are correctly classified.

• Ensure that it maintains complete and accurate records of benefits provided, including but not limited to invoices and utilization reports.

• Maintain eligibility documentation for members’ dependents.

• Maintain documentation, such as original bills and invoices, for all administrative payments

• Ensure that it pays benefit expenses in accordance with its guidelines.

• Establish and employ an allocation plan that methodically distributes the costs of shared expenses among the various Local 30 entities, as required by Comptroller’s Directive #12.

• Maintain valid agreements with consultants that stipulate the services to be provided, the rate and method of compensation, and the period covered.