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

AUDIT REPORT IN BRIEF

The Retired Municipal Employees Welfare Trust Fund of the International Union of Operating Engineers Local 30, 30-A, 30-B, 30-C, and 30-D (Retiree Fund) was established on March 15, 1978, 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 Retiree Fund and the Retiree Fund use these contributions to provide supplemental benefits to its members. The Retiree 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 Retiree Fund reported an operating surplus of $32,091 and a fund balance of $1,609,554.

Audit Findings and Conclusions

The Retiree Fund Trustees did not accurately represent the Fund’s financial position in its annual report and did not disclose material facts to members. Additionally, the Trustees of the Retiree Fund and the Active Fund—who are the same individuals—approved a merger of the funds that, if not carefully managed, could prove detrimental to the benefits of the retirees in the future. From 2002 through 2005, while the Retiree Fund was prospering, the Active Fund was incurring operating deficits that reduced its fund balance until it became insolvent in 2005. In February 2006, the funds merged, and Retiree Fund reserves were used to pay off Active Fund liabilities. The Retiree Fund did not consult its membership or disclose either the possibility of a merger or the actual merger in its annual report to membership.

Our review also found that during calendar year 2005, the Retiree Fund did not comply with Comptroller’s Directive #12 procedures. Additionally, the Retiree Fund misstated administrative and benefit expenses; did not maintain eligibility documentation for all claims paid for members’ dependents; did not pay all benefits in accordance with Retiree 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, Retiree Fund officials informed us that they considered their actions appropriate and that they acted with due care and performed due diligence prior and subsequent to merging the Active and Retiree Funds. The basis for that assertion is that the Retiree 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.

• Structured payment of Active Fund liabilities incurred prior to merger as a loan from the Retiree Fund payable with 1.1 percent interest.

• Satisfied the loan on September 30, 2008.

Audit Recommendations

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

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

• Ensure that administrative and benefit expenses are correctly classified.

• Maintain eligibility documentation for members’ dependents.

• 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.