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

Executive Summary

The United Probation Officers Association Welfare Fund (the Welfare Fund) and Retirement Welfare Fund (the Retirement Fund) (also referred to collectively as the Funds) were established as employee and retiree 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 active and retired City employees, including Probation Assistants, Probation Officer Trainees, Probation Officers, Senior Probation Officers, and Supervising Probation Officers.  Pursuant to the Welfare Fund’s Trust Agreement, the activity of the Welfare Fund is overseen by a board of trustees.  The day to day operations of the Welfare Fund are carried out by a fund administrator (the Fund Administrator) who is paid a salary for that work.

The City contributes to the Welfare 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 Welfare Fund received $1,164,595 in City Contributions and reported that it paid $766,793 in benefits and $316,923 in administrative expenses.  As of June 30, 2014, the Welfare Fund reported net assets of $1,385,857.

Audit Findings and Conclusions

The audit found that the Welfare Fund failed to implement effective controls over its financial affairs and its management of City Contributions of $1,164,595 in Fiscal Year 2014.  Specifically, we found that:

• The Welfare 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 Welfare Fund spent more than $183,000 on employee compensation but kept no records of the hours worked and absences of its only two employees, reported that it made a prohibited interest free loan of $11,500 to one of those two employees without a written agreement, paid its trustees $1,000 in prohibited stipends, and had no fiduciary insurance to cover its trustees as required by its Fund Agreement.  The Welfare 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 $336,635 (44 percent of its benefit expenditures for 2014) in its financial statements.  Finally, we note that the Welfare Fund has no written investment policy, which is contrary to guidance provided in Directive 12.
• The Welfare Fund failed to minimize, control and properly allocate administrative expenses. It spent more than $300,000 (27 percent) of its City Contributions on administrative expenses, which is more than two and a half times the 10 percent average of eight similarly-sized Benefit Funds.  That spending included $87,164 in unsupported and improper administrative expenses, rent, utilities, officers’ compensation, and other expenses of the Union[2].
• The Welfare Fund failed to adequately support, record, and report benefit payments. It improperly paid $23,808 in undocumented or questionable benefit claims, failed to list some benefits in the benefit booklet provided to its members, and paid almost $19,000 in medical benefit claims that should have been submitted to the Retirement Fund.  Further, for the three years we reviewed it failed to report its payment of tens of thousands of dollars in taxable short-term disability benefits to OPA, which may expose its members to unpaid-tax assessments and penalties.

Audit Recommendations

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

• Take all necessary corrective actions to address the deficiencies identified in the “Independent Audit Report,” prepared by the Welfare 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 Welfare 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 Welfare 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 Welfare Fund achieves compliance with Comptroller’s Directive 12.
• Improve the Welfare Fund’s record keeping procedures and practices to ensure that the Welfare Fund records all transactions in a timely manner, retains all billed invoices, and conducts regular bank reconciliations.
• Ensure that the Welfare Fund maintains adequate personnel records, including records of attendance and leaves, to support payments to its employees.
• Evaluate how the Welfare 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 Welfare Fund obtains and maintains copies of appropriate documentation that establishes the eligibility of dependents, such as birth and marriage certificates.
• Ensure that the Welfare Fund ceases making payments in violation of Comptroller’s Directive 12 and the Welfare Fund’s Trust Agreement.
• Ensure that the Welfare Fund both discontinues paying Union expenses and allocates an equitable amount from the Union to the Welfare Fund to cover the Union’s share of administrative expenses.
• Ensure that all benefit and administrative expenses charged to the Welfare Fund are appropriate and properly documented.
• Ensure that the Welfare Fund maintains and regularly disseminates an up-to-date benefit book for Welfare Fund members.
• Ensure that taxable short-term disability payments are properly reported by the Welfare Fund to the Office of Payroll Administration (OPA) and filed in a timely manner.

Welfare 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 Retirement 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.”

Nonetheless, the Welfare Fund’s written response does not expressly agree or disagree with any of the 13 specific recommendations made in the audit report, but merely states that the Welfare Fund “will address all” of them, without stating whether the Fund will implement any of them.  With respect to the audit findings, the Welfare 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 Welfare Fund’s characterization of the audit report.  In addition, as described in detail in the report, the Welfare Fund’s assertion that the audit failed to 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 found that:

• The Welfare Fund’s Independent Auditors—selected by the Welfare Fund itself—issued a “qualified opinion” on the Welfare 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 $336,635 (44 percent of its benefit expenditures for the year in question) in the Welfare Fund’s financial statements.
• The Welfare Fund spent more than $300,000 (27 percent) of its City Contributions on administrative expenses, which is more than two and a half times the 10 percent average of eight similarly-sized Benefit Funds.
• The Welfare Fund improperly paid almost $19,000 in medical benefit claims that should have been submitted to a different fund.
• In Fiscal Year 2014, the Welfare Fund paid $30,717 in Disability Benefits to members―City employees—that it failed to report as required to the City’s Office of Payroll Administration for tax reporting purposes, potentially causing its own members to owe taxes.

In sum, the audit identified material failures, inefficiencies, and improper expenditures that may have deprived the Welfare Fund’s members of hundreds of thousands of dollars that would otherwise be available for the payment of their legitimate benefit claims, and in addition may have exposed them to tax liability.

However, the Welfare 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 Welfare Fund to carefully review the entire report, adopt its recommendations, and thereby keep the promise expressed on their behalf in the Welfare 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, monitored carefully, and used only for expenditures that directly or indirectly benefit Welfare Fund members.

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

[2] The Retirement Fund also pays some of these same administrative expenses for the Union.  The two 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 Retirement Welfare Fund, Audit No. FM16-070A, dated May 23, 2017.