Audit Report on the Financial and Operating Practices of the United Probation Officers Association Retirement Welfare Fund

Executive Summary

The United Probation Officers Association Retirement Welfare Fund (Retirement Fund) and Welfare Fund (Welfare Fund) (also referred to collectively as the Funds) were established as retirement and employee benefit funds (Benefit Funds), respectively, under the provisions of two separate fund agreements (one for each entity) between the City of New York (the City) and the United Probation Officers Association (the Union).^[1]  These fund agreements are a result of collective bargaining between the City and the Union under which the Funds receive contributions from the City (City Contributions) for the purpose of providing supplementary health and welfare benefits to eligible retired and active City employees, including Community Workers, Probation Assistants, Probation Officer Trainees, Probation Officers, Senior Probation Officers, and Supervising Probation Officers.  Pursuant to the Retirement Fund’s Trust Agreement, the activity of the Retirement Fund is overseen by a board of trustees.  The day to day operations of the Retirement Fund are carried out by a fund administrator (the Fund Administrator) who is paid a salary for that work.

The City contributes to the Retirement Fund to cover the payment of benefits to City employees as well as a reasonable amount of administrative expenses related to the payment of those benefits.  Accounting, auditing and financial guidelines for Benefit Funds are set forth in Comptroller’s Directive 12 and include guidelines for spending City funds.  In Fiscal Year 2014, the Retirement Fund received $674,554 in City Contributions and reported that it paid $337,840 in benefits and $183,670 in administrative expenses.  As of June 30, 2014, the Retirement Fund reported net assets of $764,030.

Audit Findings and Conclusions

The audit found that the Retirement Fund failed to implement effective controls over its financial affairs and its management of City Contributions of $674,554 in Fiscal Year 2014.  Specifically, we found that:

• The Retirement Fund violated Comptroller’s Directive 12 and its own Fund and Trust Agreements in connection with the disbursement of benefits and administrative expenditures. Among other things, the Retirement Fund was allocated part of the $183,670 spent on employee compensation but kept no records of the hours worked and absences of its only two employees, paid its trustees $900 in prohibited stipends, and had no fiduciary insurance to cover its trustees as required by its Fund Agreement.  The Retirement Fund also received a “qualified opinion” from its Independent Auditors on its Fiscal Year 2014 financial statements based on its failure to obtain marriage licenses and birth certificates to establish the eligibility of dependents for benefits and its inability to locate claims for audit-testing.  Those failures resulted in a potential error of $311,332 (92 percent of its benefit expenditures for 2014) in its financial statements.  Finally, we note that the Retirement Fund has no written investment policy, which is contrary to guidance provided in Directive 12.
• The Retirement Fund failed to minimize, control and properly allocate administrative expenses. It spent more than $180,000 (27 percent) of its City Contributions on administrative expenses, which is more than one and a half times the 17 percent average of six similarly-sized Benefit Funds.  That spending included $50,319 in unsupported and improper administrative expenses, rent, utilities, officers’ compensation, and other expenses of the Union.^[2]
• The Retirement Fund failed to adequately support, record, and report benefit payments. It improperly paid $12,815 in undocumented or questionable benefit claims, failed to list some benefits in the benefit booklet provided to its members, and did not include almost $19,000 in benefit claim payments as part of its benefit expenses.

Audit Recommendations

To address these issues, we recommend that the Retirement Fund Board of Trustees:

• Take all necessary corrective actions to address the deficiencies identified in the “Independent Audit Report,” prepared by the Retirement Fund’s Independent Auditors, the “qualified opinion” given therein, and the accompanying “Management Letter” dated March 19, 2015, that constitute violations of Directive 12.
• Evaluate the performance of the Fund Administrator in carrying out the Trustees’ delegated fiduciary duties under the Retirement Fund’s Fund and Trust Agreements and Comptroller’s Directive 12 to ensure that City Contributions are spent appropriately, monitored carefully, and used only for expenditures that directly or indirectly benefit Retirement Fund members and that complete and accurate records, including documentation of claim eligibility and all administrative expenses, are maintained.
• Take all actions necessary to ensure that the Trustees’ delegated fiduciary duties are properly carried out based on the evaluation of the Fund Administrator conducted by the Board of Trustees.
• Develop internal controls that address the weaknesses cited in this report to ensure the Retirement Fund achieves compliance with Comptroller’s Directive 12.
• Improve the Retirement Fund’s record keeping procedures and practices to ensure that the Retirement Fund records all transactions in a timely manner, retains all billed invoices, and conducts regular bank reconciliations.
• Ensure that the Retirement Fund maintains adequate personnel records, including records of attendance and leaves, to support payments to its employees.
• Evaluate how the Retirement Fund resources could be better used to reach its ultimate goal—providing maximum benefits to its members—while keeping administrative costs to a minimum.
• Ensure that the Retirement Fund obtains and maintains copies of appropriate documentation that establishes the eligibility of dependents, such as birth and marriage certificates.
• Ensure that the Retirement Fund ceases making payments in violation of Comptroller’s Directive 12 and the Retirement Fund’s Trust Agreement.
• Ensure that the Retirement Fund both discontinues paying Union expenses and allocates an equitable amount from the Union to the Retirement Fund to cover the Union’s share of administrative expenses.
• Ensure that all benefit and administrative expenses charged to the Retirement Fund are appropriate and properly documented.
• Ensure that the Retirement Fund maintains and regularly disseminates an up-to-date benefit book for Retirement Fund members.

Retirement Fund Response

We received a one-page response to the audit on the letterhead of the “United Probation Officers Association Welfare Fund and Retirement Welfare Fund,” which we were subsequently informed was intended as a full response to the both this audit and to our companion audit of the UPOA Welfare Fund.^[3]  In that single response, the Fund Administrator of both the Retirement Fund and the Welfare Fund represented that “[t]he UPOA Welfare Fund will address all the recommendation [sic] made to the Trustee Board and will do all that is necessary to comply with the Comptrollers [sic] Directive 12.”  While this statement literally only references the Welfare Fund, we understand from subsequent oral representations that it is intended to apply to the Retirement Fund as well.

Nonetheless, the Retirement Fund does not expressly agree or disagree with any of the 12 recommendations made in the audit report, and instead merely states that it will “address all” of them, without stating whether the Fund will implement any of them.  With respect to the audit findings, the Retirement Fund states that:

[the audit report] is misleading and replete with half-truths and scurrilous innuendos.  The report refers to many potential errors due to our Policies and Procedures yet was unable to find even one case where any error, which may have occurred was of any material impact.

We strongly disagree with the Retirement Fund’s characterization of the audit report.  In addition, as described in detail in the report,, the Retirement Fund’s assertion that the audit did not find “even one case where any error, which may have occurred was of any material impact,” is untrue.  In fact, among other material findings set forth in the report, the audit report found that:

• The Retirement Fund’s Independent Auditors—selected by the Retirement Fund itself—issued a “qualified opinion” on the Retirement Fund’s Fiscal Year 2014 financial statements, citing specific omissions in its benefit-processing operation, which the Fund’s selected auditors found resulted in a potential error of $311,332 (92 percent of its benefit expenditures for 2014) in the Retirement Fund’s financial statements.
• The Retirement Fund spent more than $180,000 (27 percent) of its City Contributions on administrative expenses, more than one and a half times the 17 percent average of six similarly-sized Benefit Funds. That spending included $50,319 for unsupported and improper administrative expenses, including the improper payment of employees’ personal expenses and expenditures for legal and IT services and for computer equipment that were not adequately documented and supported.  The Retirement Fund’s administrative spending improperly included Retirement Fund expenses, payment of rent, utilities, officers’ compensation, and other expenses of the Union.

In sum, the audit identified material failures, inefficiencies, and improper expenditures that may have deprived the Retirement Fund’s members of hundreds of thousands of dollars that would otherwise be available for the payment of their legitimate benefit claims.

However, the Retirement Fund’s response is most telling in what it does not say.  It neither refutes any specific audit finding nor disputes any specific fact cited in the report.  The undisputed facts supporting the audit findings are cited in the report, which accordingly speaks for itself.

We urge the Trustees of the Retirement Fund to carefully review the entire report, adopt its recommendations, and thereby keep the promise expressed on their behalf in the Retirement Fund’s written response: to “do all that is necessary to comply with Comptrollers [sic] Directive 12.”  We further urge the Trustees to carry out their responsibility to ensure that City Contributions are spent appropriately and monitored carefully, and used only for expenditures that directly or indirectly benefit Retirement Fund members.

[1] This audit (#FM16-070A) is of the Retirement Fund, only.  A separate audit (#FM16-069A) of the Welfare Fund has also been conducted, and the findings of that audit will be published in a separate report.

[2] The Welfare Fund also pays some of these same administrative expenses for the Union.  The Funds combined could potentially be owed as much as $97,090 from the Union for occupancy and office expenses, alone.

[3]  Audit Report on the Financial and Operating Practices of the United Probation Officers Association Welfare Fund, Audit No. FM16-069A, dated May 23, 2017.