[Senate Hearing 108-266]
[From the U.S. Government Publishing Office]
S. Hrg. 108-266
UNION FINANCIAL REPORTING AND DISCLOSURE
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
JULY 31, 2003--WASHINGTON, DC
__________
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Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas MARY L. LANDRIEU, Louisiana
James W. Morhard, Staff Director
Lisa Sutherland, Deputy Staff Director
Terrence E. Sauvain, Minority Staff Director
------
Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi TOM HARKIN, Iowa
JUDD GREGG, New Hampshire ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas HARRY REID, Nevada
TED STEVENS, Alaska HERB KOHL, Wisconsin
MIKE DeWINE, Ohio PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama MARY L. LANDRIEU, Louisiana
Professional Staff
Bettilou Taylor
Jim Sourwine
Mark Laisch
Sudip Shrikant Parikh
Candice Rogers
Ellen Murray (Minority)
Erik Fatemi (Minority)
Adrienne Hallett (Minority)
Administrative Support
Carole Geagley
C O N T E N T S
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Page
Opening statement of Senator Arlen Specter....................... 1
Statement of Hon. Victoria A. Lipnic, Assistant Secretary for
Employment Standards, Department of Labor...................... 1
Prepared statement........................................... 4
Statement of Jonathan P. Hiatt, general counsel, AFL-CIO......... 8
Prepared statement........................................... 10
Statement of Jay Cochran, Ph.D., research fellow, Mercatus
Center, George Mason University................................ 17
Prepared statement........................................... 30
Statement of Lynn Turner, director, Center for Quality Financial
Reporting, Colorado State University........................... 31
Prepared statement........................................... 33
Questions submitted by Senator Patty Murray...................... 45
UNION FINANCIAL REPORTING AND DISCLOSURE
----------
THURSDAY, JULY 31, 2003
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 3:47 p.m., in room SD-192, Dirksen
Senate Office Building, Hon. Arlen Specter (chairman)
presiding.
Present: Senators Specter, Craig, Harkin, and Murray.
opening statement of senator arlen specter
Senator Specter. We now turn to the issue of proposed
revision of forms for union financial reporting to the Labor
Department, and our first witness is Ms. Victoria Lipnic. She
has served as Secretary of Labor for Employment Standards since
March 2002, has a bachelor's degree in political science and
history from Allegheny College, and a law degree from George
Mason University School of Law. Thank you very much for joining
us, Ms. Lipnic.
Mr. Jonathan Hiatt and Ms. Jay Cochran, and Lynn Turner may
all come to the panel table as well, if you would, please.
We have the 5-minute rule, as I think you have heard, and
we look forward to your testimony.
STATEMENT OF HON. VICTORIA A. LIPNIC, ASSISTANT
SECRETARY FOR EMPLOYMENT STANDARDS,
DEPARTMENT OF LABOR
Ms. Lipnic. Thank you, Mr. Chairman. Mr. Chairman, Senator
Harkin, members of the committee, I am pleased to appear before
you today to discuss the Department of Labor's proposed
revision of forms used by labor organizations to file the
annual financial reports required under the Labor-Management
Reporting and Disclosure Act of 1959, also known as the
Landrum-Griffin Act.
Mr. Chairman, I would ask that my longer written statement
be submitted for the record, and I will briefly summarize my
testimony in the time permitted.
The Landrum-Griffin Act is one of a number of important
statutes administered by the Department of Labor to safeguard
the rights of workers. The LMRDA is administered by the Office
of Labor-Management Standards at the department. The LMRDA was
enacted in 1959 after congressional investigations into the
labor and management fields found corruption, disregard for
employee rights, breaches of trust, and other unethical
behavior.
The LMRDA is centered on three fundamental goals: promoting
union democracy, providing fiscal transparency, and ensuring
union financial integrity. We take very seriously our
responsibility to enforce each of the important worker
protection statutes administered by the Department and are not
at liberty to treat any one of the statutes we enforce as less
important than the other.
A critical part of our enforcement strategy and indeed a
central part of the LMRDA enforcement, as set out by Congress,
is for union members to be able to engage in effective self-
governance. In order to do so, it is appropriate that there be
some periodic review of the rules and regulations under the
statute in order to ensure that they continue to fulfill the
statutory goals and are relevant to the work force today.
In setting out on this rulemaking, the Department asked
three critical questions. First, are there any changes to the
current reporting forms necessary in order to provide increased
transparency and accountability for union members? Second, are
there ways to take advantage of the technology that heretofore
did not exist to facilitate providing some more meaningful
information to union members? And third, will the changes
regarding increased transparency and accountability benefit
union members?
We believe the answer to all three of these questions is
yes. People who believe in strong unions, strongly committed to
advancing members' welfare should want a strong Landrum-Griffin
Act that brings union finances into the sunshine and ensures
that union leaders are working for their members, not against
them, by preying on union funds and members' dues.
Title II of the LMRDA requires reports from unions, union
officers, employees, employers, labor relations consultants,
and surety companies.
The Act grants broad authority to the Secretary to issue
regulations prescribing the form of the reports required by the
statute and other reasonable rules and regulations necessary to
prevent the circumvention or evasion of the reporting
requirements.
Senators, Secretary Chao firmly believes that no entity
should be allowed to shield its finances from its members.
Unfortunately, OLMS' existing financial reporting forms, which
were created nearly 40 years ago, have been substantially
unchanged since then, and they have simply not kept pace with
changes in financial practices. The existing forms utilize such
broad, general categories that union management could easily
use to hide overspending, financial mismanagement, and other
irregularities from their members. It is impossible, for
example, for union members to evaluate in any meaningful way
the management of their unions when the financial disclosure
reports filed with the Department include items like $7,800,000
for civic organizations, or $62 million to grants for joint
projects with State and local affiliates. Such aggregate
entries make it virtually impossible for members to determine
how their dues money was spent.
In December 2002, the Department published a notice of
proposed rulemaking to revise the form LM-2, the annual
reporting form used by the largest unions, and to revise,
although less significantly, Forms LM-3 and LM-4 which are used
by smaller unions. The Department proposed these changes in
order to ensure the continuing relevance of the reporting
requirements of the LMRDA and to promote the overarching
purposes of union reporting to fully inform union members about
their union's financial condition and operations and to deter
the abuse of stewardship duties by those union officials and
employees who might otherwise be inclined to take advantage of
their positions.
The Act expressly requires that reports filed with the
Secretary be made public. The public nature of the contents of
these reports allows members and the public, in addition to the
Department, an opportunity to review a union's financial
information as a check on the actions of its officials. These
purposes can only be served if the information that is reported
is meaningful, and it follows that, as illustrated by the
examples I gave earlier about the extraordinarily broad
information being captured by the current LM-2 form, a certain
level of detail is necessary to make it meaningful.
Only unions with receipts of $200,000 or more per year and
unions that are in trusteeship are required to use the form LM-
2. Accordingly, approximately 20 percent of all reporting
unions, or approximately 5,500 unions out of approximately
30,000, use form LM-2 reports. The new forms will provide union
members, the Department, and other interested parties with more
information about the financial conditions and operations of
unions. The changes proposed include requiring LM-2 filers to
file electronically using software that the Department will
provide to the unions.
The Department also proposed a new form, the T-1, on which
a labor organization would report information about a trust or
its interest in a trust.
I would also add the Department proposed to make these
changes effective for each union's fiscal year that begins
after the final rule is published. Since unions do not have to
file their annual reports until 90 days after the end of their
fiscal year, this means that the earliest possible date a union
would need to file a report under the new rule would be 15
months after any final rule is published, and the Department
specifically sought comment on the effective date.
Mr. Chairman, the Department appreciates that this proposal
has engendered serious comment and debate. In fact, we embarked
on this rulemaking precisely to engage all sides in that
debate. The comment period for this rule closed on March 27.
During this time, the Department received more than 35,000
comments. Although many of these comments expressed opposition
to the Department's proposal to revise the forms, many other
comments expressed support for the proposal. Many lengthy,
substantive, and specific comments were received from local
intermediate national and international labor organizations,
employers and trade organizations, public interest groups,
accountants, accounting firms, academicians, and Members of
Congress. The Department is carefully reviewing all of the
comments and will give all points of view careful
consideration.
PREPARED STATEMENT
I would be pleased to take your questions, but certainly
note for the record that because we are in the midst of the
rulemaking, we will consider all of the comments in the record
before we decide any further steps.
[The statement follows:]
Prepared Statement of Victoria A. Lipnic
Mr. Chairman and Members of the Subcommittee: I am pleased to
appear before the Subcommittee today to discuss the Department of
Labor's proposed revision of forms used by labor organizations to file
the annual financial reports required under the Labor-Management
Reporting and Disclosure Act of 1959 (LMRDA), also known as the
Landrum-Griffin Act.
The LMRDA was enacted in 1959 after congressional investigations
into the labor and management fields found corruption, disregard for
employee rights, breaches of trust, and other unethical behavior. The
central message of the Landrum-Griffin Act is that financial
transparency is critical to protecting workers. It establishes the
basic ``right to know'' for union members.
The Landrum-Griffin Act is one of a number of important statutes
that have been passed over the years to safeguard the rights of
workers. We have the Occupational Safety and Health Act to protect
worker safety, the Fair Labor Standards Act to guarantee worker wages,
the Employee Retirement Income Security Act to protect worker pensions,
and the Landrum-Griffin Act to protect the rights of union workers. We
take very seriously our responsibility to enforce each of these
statutes. Congress passed each of these statutes in order to protect
the rights of American workers, and the Department is not permitted to
treat one of these statutes as less important than any other statute.
People who believe in strong unions, strongly committed to
advancing members' welfare, should want a strong Landrum-Griffin Act
that brings union finances out into the sunshine and ensures that union
leaders are working for their members, not against them by preying on
union funds and member dues. As AFL-CIO President George Meany noted at
the time, ``if the powers conferred [in the Landrum-Griffin Act] are
vigorously and properly used, the reporting requirements will make a
major contribution towards the elimination of corruption and
questionable practices.''
The LMRDA is centered on three fundamental goals--promoting union
democracy, providing fiscal transparency and ensuring union financial
integrity.
The Employment Standards Administration's Office of Labor-
Management Standards (OLMS) administers and enforces the provisions of
the LMRDA that are within the jurisdiction of the Department of Labor.
These include civil and criminal provisions that provide standards for
achieving the goals of the statute. OLMS also administers and enforces
provisions of the Civil Service Reform Act of 1978 and the Foreign
Service Act of 1980, which apply similar standards to Federal sector
unions.
Title II of the LMRDA (the Act) requires reports from unions, union
officers and employees, employers, labor relations consultants, and
surety companies. The Department of Labor has authority to enforce
these reporting requirements, and the Act provides for the public
disclosure of the reports. In addition, union members have the right to
examine the underlying union financial records in order to verify the
reports filed pursuant to the Act, but can enforce that right only by
demonstrating just cause in Federal court. However, a member can obtain
neither the records, nor attorney fees, if the court does not agree
that just cause has been demonstrated.
The LMRDA requires each labor organization to include in its annual
financial report the following information:
(1) assets and liabilities at the beginning and end of the fiscal
year;
(2) receipts and their sources;
(3) payments to officers and employees;
(4) loans over $250 to officers, employees, or members, along with
an explanation for each loan;
(5) loans to businesses, along with an explanation for each loan;
and
(6) other payments made, along with explanations, in categories the
Secretary of Labor designates.----29 U.S.C. 431(b).
In addition to the annual union financial report, the Act requires
officers and employees of covered labor organizations, as well as
employers and labor consultants to report other information
periodically. The Act grants broad authority to the Secretary to issue
regulations prescribing the form of the reports required by the statute
and other reasonable rules and regulations ``necessary to prevent the
circumvention or evasion of [the] reporting requirements.''
the department's proposal to revise form lm-2 and create a form t-1
Secretary Chao firmly believes that no entity should be allowed to
shield its finances from its shareholders. Unfortunately, OLMS'
existing financial reporting forms, which were created 40 years ago and
have been substantially unchanged since then, simply have not kept pace
with changes in financial practices. The existing forms utilize such
broad, general categories that union leaders could easily use them to
hide overspending, financial mismanagement, and other irregularities
from their members. It is impossible, for example, for union members to
evaluate in any meaningful way the management of their unions when the
financial disclosure reports filed with DOL include items like
$7,805,827 for ``Civic Organizations,'' $62,028,329 for ``Grants to
Joint Projects with State and Local Affiliates,'' or $7,863,527 for
``Political Education.'' Such aggregate entries make it virtually
impossible for members to determine how their dues money was spent.
In December 2002, the Department published a Notice of Proposed
Rulemaking to revise Form LM-2, the annual reporting form used by the
largest unions, and to revise, although less significantly, Forms LM-3
and LM-4, which are used by smaller unions. The Department proposed
these changes in order to ensure the continuing relevance of the
reporting requirements of the LMRDA and to promote the overarching
purposes of union reporting: to fully inform union members about their
union's ``financial condition and operations,'' and to deter the abuse
of stewardship duties by those union officials and employees who might
otherwise be inclined to take advantage of their positions. The form
that is currently used by the largest labor unions to file their annual
reports has not been significantly changed in 40 years and provides
only general information that is of limited use to union members. The
Department's proposal is an attempt to ensure that union members are
provided with information that is relevant today and will enable them
to play a meaningful role in the governance of their unions.
The Act expressly requires that reports filed with the Secretary be
made public. The public nature of the contents of these reports allows
members and the public, in addition to the Department, an opportunity
to review a union's financial information as a check on the actions of
its officials and employees. These purposes can only be served if the
information that is reported is meaningful and a certain level of
detail is necessary to make it meaningful.
Only unions with receipts of $200,000 or more per year and unions
that are in trusteeship are required to use the Form LM-2. Accordingly,
approximately 20 percent of all reporting unions (or approximately
5,500 unions out of approximately 30,000 unions) use Form LM-2 reports.
The new forms will provide union members, the Department, and other
interested parties with more information about the financial activities
of unions. The changes proposed include requiring Form LM-2 filers to
file electronically using software the Department will provide to labor
organizations. The proposed revision also requires information about
accounts payable and receivable that are more than 90 days overdue at
the end of the reporting period, changes the minimum amounts for
reporting the value of certain investments from $1,000 and 20 percent
of the total value to $5,000 and 5 percent respectively, requires
unions to estimate the percentage of time that its officers and
employees spend on various duties and to allocate that time in
relationship to the union's payments for those duties, requires
information about different categories of union membership and the
number of members in each category instead of simply reporting the
total number of members, and requires labor organizations to provide
specific information about certain major receipts and major
disbursements in several categories.
The proposed revised Form LM-2 would require itemization of the
following receipts and disbursements categories:
--Other Receipts (Schedule 14)
--Contract Negotiation and Administration (Schedule 15)
--Organizing (Schedule 16)
--Political Activities (Schedule 17)
--Lobbying (Schedule 18)
--Contributions, Gifts, and Grants (Schedule 19)
--Benefits (Schedule 20)
--General Overhead (Schedule 21)
--Other Disbursements (Schedule 22)
However, the proposed Form LM-2 does not require itemization or a
supporting schedule of any type for the following receipts and
disbursements categories:
--Dues and Other Payments (Receipts)
--Per Capita Tax (Receipts)
--Fees, Fines, Assessments, Work Permits (Receipts)
--Sale of Supplies (Receipts)
--Interest (Receipts)
--Dividends (Receipts)
--Rents (Receipts)
--On Behalf of Affiliates for Transmittal to Them (Receipts)
--From Members for Disbursement on Their Behalf (Receipts)
--Per Capita Tax (Disbursements)
--Strike Benefits (Disbursements)
--Fees, Fines, Assessments, etc. (Disbursements)
--Supplies for Resale (Disbursements)
--To Affiliates of Funds Collected on Their Behalf (Disbursements)
--On Behalf of Individual Members (Disbursements)
Many of the categories in the proposed revised form are the same
ones that are in the existing form. The Department proposed to drop
seven categories from the current form (on Statement B the following
categories were eliminated--To Officers; To Employees; Office and
Administrative Expense; Educational and Publicity Expense; Professional
Fees; Direct Taxes and Withholding Taxes) and to add six categories
that are not on the current form (Contract Negotiation and
Administration; Organizing; Political Activities; Lobbying; General
Overhead; and Strike Benefits).
The Department also proposed a new form, the T-1, on which a labor
organization would report information about its interest in a trust or
other fund established or governed by the labor organization primarily
for the benefit of its members. The LMRDA specifically authorizes the
Secretary to issue rules requiring ``reports concerning trusts in which
a labor organization is interested,'' which the statute defines as:
``. . . a trust or other fund or organization (1) which was created or
established by a labor organization, or one or more of the trustees or
one or more members of the governing body of which is selected or
appointed by a labor organization, and (2) a primary purpose of which
is to provide benefits for the members of such labor organization or
their beneficiaries.''----29 U.S.C. 402(l).
In the past, the current LM-2 form has required unions to simply
disclose whether they have created or participated in the
administration of a trust. If so, the unions are required to disclose
the name, address, and purpose of each trust and to disclose the file
number for reports filed under the Employee Retirement Income Security
Act, if applicable. The current form has also required a union to
report in full about the financial transactions of wholly owned,
controlled and financed subsidiaries. Subsidiaries that meet this test
are, in effect, no different from the union itself. Many unions,
however, engage in extensive financial dealings with trusts that meet
the statutory definition of a trust in which a union is interested but
do not meet the Form LM-2 subsidiary definition. For example, a trust
may have several participating unions, or be jointly controlled by a
union and an employer, or may have several ``owners'' as in the case of
a member-owned credit union. The current Form LM-2 does not require a
union to report any information about such a trust--other than its
existence, name, address, purpose, and the file number for reports
filed under the Employee Retirement Income Security Act, if there is
one--even though a very significant amount of union dues may be spent
through such a fund. Because these transactions are unreported, the
purpose of the reporting requirements of the LMRDA can be easily
circumvented. In a sense, expenditures made by a trust on the union's
behalf are simply off the books, even though the original source of the
funding may be members' dues or funds contributed by employers pursuant
to union negotiated agreements. The Department proposed to eliminate
this means of evading the reporting requirements of the statute and to
require unions to provide significantly more information about such
trusts than previously available.
The Department proposed to make these changes effective for each
union's fiscal year that begins after the final rule is published.
Since unions do not have to file their annual reports until 90 days
after the end of their fiscal year, this means that the earliest
possible date a union would need to file a report under the new rule
would be fifteen months after the final rule is published. The
Department specifically asked for comments on the effective date.
The Department also specifically requested comments on many aspects
of its proposal. Recognizing that it did not have as much information
about the way unions keep accounts as unions themselves and recognizing
that it was important to hear from union members, as well as unions,
regarding the assumptions underlying the proposal, the Department
requested comments on such issues as the appropriate threshold for
filing a Form LM-2, the appropriate level for itemizing certain
receipts and disbursements, whether the statutory definition of a trust
should be used to require reports regarding financial transactions of
such entities, and whether these requirements are unduly burdensome.
The Department also recognized that certain financial information,
while important to union members, might result in harm to union
interests if disclosed publicly. Accordingly, the Department proposed
that information regarding disbursements for organizing not include the
name of the employer or bargaining unit involved. The Department also
sought specific comments as to whether this measure was sufficient to
protect legitimate union interests while providing an important measure
of transparency.
COMMENTS RECEIVED
The comment period for this rule, including a 30-day extension, was
open from December 27, 2002, to March 27, 2003. During this time, the
Department received over 35,000 comments. Although many of these
comments expressed opposition to the Department's proposal to revise
the forms, many other comments expressed support for the proposal. Many
lengthy, substantive, and specific comments were received from local,
intermediate, national and international labor organizations, employers
and trade organizations, public interest groups, accountants,
accounting firms, academicians and Members of Congress.
The Department is carefully reviewing all of the comments and will
give all points of view careful consideration. Many union members
expressed support for the proposed rule and suggested that it was
``long overdue.'' Some union members and other commenters advocated
even more sweeping change. Some comments from union members centered on
their personal difficulties in obtaining financial information from
their unions, describing fruitless attempts to obtain information about
union finances from the union leadership. Other union members supported
the initiative as a means of deterring fraud by union leaders; one
said, ``It will be a great victory for [the union's] membership when
the reform is passed.''
Many commenters opposed the proposed changes, believing that the
changes will hamper the ability of unions to service their members and
strain union budgets. Many commented that the proposed rule was
burdensome and argued that the detail that would be required of unions
was greater than that required of corporations. Other commenters argued
that the requirements proposed do not comport with Generally Accepted
Accounting Principles (GAAP) and are beyond the Secretary's authority.
Union commenters have argued that requiring unions to report
identifying information about those who receive disbursements for
organizing activities could reveal union organizing strategies and
place individuals at risk or that other itemized disclosures could
result in an invasion of privacy for individuals reimbursed for medical
fees or burial expenses.
Some commenters have expressed concern that the changes were
intended to expand Beck requirements to appease anti-union
organizations and to provide more information to employers and anti-
union organizations. Many comments were received on the proposal to
revise the information to be reported by unions about disbursements to
officers and employees and to require unions to report, by estimation
to the nearest 10 percent, how these individuals spent their working
time. Unions objected to this proposal as disruptive, intrusive,
burdensome, and expensive. The Department is currently reviewing all of
the comments and takes all of these concerns very seriously.
Some commenters have compared the Department's current proposal to
an earlier attempt by the Department to revise the LM-2 form to require
``functional reporting'' by unions. The Department's current rulemaking
is very different from the rule published by the Department in 1992,
revising the form. The Department rescinded most of this rule at the
end of 1993, but retained the Form LM-4 for the smallest unions, as
well as the increased threshold for filing Forms LM-2 and 3. These two
elements of the 1992 rule remain today. The 1993 rule rescinding the
1992 revisions also left in place, and the current Form LM-2 includes,
the requirement that labor organizations report all disbursements
during the reporting period in certain defined categories. It
rescinded, however, the requirement for a second allocation of the same
disbursements into additional categories reflecting only functional
activities.
TECHNOLOGICAL DEVELOPMENTS
Significant improvements in accounting software since 1993 make it
possible to change the Form LM-2 in ways that will provide additional
useful information to union members and the public without unduly
burdening unions. Most importantly, the current proposal takes
advantage of technology developed over the last 10 years that
simplifies maintaining, reporting and accessing the required financial
information. Computers and financial management programs have become
much more widely used. Internet access is more commonly available and
the benefit of making information available over the Internet has been
generally, and Congressionally, recognized. These changes make it
possible to provide substantially more information to union members and
the public with less burden on unions than the changes considered in
1992 would have imposed at that time.
The Department is providing technical specifications and electronic
software to greatly ease the process of functional reporting and
facilitate the use of the new LM-2 generally. The Department will also
provide extensive compliance assistance to unions and is planning
briefings, workshops, a help desk and toll-free telephone assistance.
Helpful information will be made available to unions through mass
mailings, a list-serve email system, and on the Department's website.
Beginning in 1997, at the request of Congress, the Department has
pursued a course towards the development and implementation of
electronic filing of annual reports required by the LMRDA, along with
an indexed and easily searchable computer database of the information
submitted, accessible by the public over the Internet. In January 2002,
the Department began distributing to labor organizations a free CD-ROM
containing a computer software program that they can use to
electronically complete the annual financial reports they currently are
required to file. Those reports can now be submitted over the Internet.
Further, these annual reports, as well as the reports of employers and
labor relations consultants, now are available for public disclosure on
the Internet. All of these reports for the year 2000 and later can now
be examined from any computer with access to the Internet and printed
free of charge. The proposed rule's requirement that all Form LM-2s be
filed electronically, with an exception for situations where it would
impose real hardship, will greatly facilitate the Department's efforts
to maintain such access, as Congress has repeatedly directed us to do.
The Department is pleased to have the technological capability to
assist unions with their reporting requirements, as we attempt to
improve labor accountability and protect union members and the public.
Mr. Chairman, the Department appreciates that this proposal has
engendered serious comment and debate. In fact, the Department embarked
on this rulemaking precisely to engage all sides in that debate. I
would be pleased to take your questions, but must note for the record
that the Department is in the midst of the rulemaking and must
carefully consider the entire record before deciding on any next steps.
Thank you for giving me the opportunity to discuss these important
reporting changes. I would be pleased to answer your questions.
STATEMENT OF JONATHAN P. HIATT, GENERAL COUNSEL, AFL-
CIO
Senator Specter. Thank you very much, Ms. Lipnic. We now
turn to Mr. Jonathan Hiatt, General Counsel of AFL-CIO since
November 1995, a graduate of Boult Hall School of Law, UCal and
Harvard College. Thank you for joining us, Mr. Hiatt, and the
floor is yours.
Mr. Hiatt. Thank you very much, Senator Specter, Senator
Harkin, and members of the subcommittee.
We filed written testimony describing our major concerns.
So for now, I would simply like to emphasize three key points
that go to the heart of our opposition and illustrate the
proposal's fundamental flaws.
I would stress at the outset that we do not take issue in
any way with the underlying principles of the LMRDA that Ms.
Lipnic alludes to or are supportive of union democracy or the
general principles underlying the importance of sunshine and
transparency.
The first of our key concerns, however, with this proposal
involve the enormous financial burdens that this proposal would
impose upon unions. The second involves a comparison of these
requirements that the Labor Department seeks to impose on
unions, in contrast to the financial reporting obligations that
pertain to virtually all other profit and nonprofit
organizations. And the third involves the Department's stated
goals of transparency in deterring fraud and embezzlement and
the plain fact that this proposal would be entirely ineffective
in achieving these goals.
A Department that has publicly deplored imposing regulatory
burdens of any kind on employers has here proposed sweeping new
requirements in union reporting and record keeping that have
not been deemed necessary for some 45 years. There are some 16
major proposed changes, but probably the single most onerous
would be the requirement that unions itemize every disbursement
to a single entity that in their aggregate reach a threshold
proposed to be in the range of $2,000 to $5,000 and then to
allocate the costs to one of eight very rigid functional
categories without any regard to the specific programs that any
one particular union is engaged in.
Just to give you an example, if a union receives bills
during the course of a year from a certain printer, each bill
may be totaling $200, $250, the fact that those bills by the
end of the year may total $2,000 to $5,000 means that the union
would have to keep track of every bill, would have to record
information concerning the vendor, the date, the address, the
cost, the purpose of that particular job, the description of
it, and that would all have to be allocated by category. Some
of that bill may have gone to work done for an organizing
campaign, some in connection with a training conference, some
in connection with negotiations. It would all have to be broken
down, that one bill, into many, many transactions because of
the possibility that by the end of the year that printer would
have been paid a total of $2,000 to $5,000 or more.
In addition to the substantive changes that will be
required, unions will have to file their LM reports
electronically with software that the Department has promised
to provide, as Ms. Lipnic says, but which does not yet even
exist.
The revisions would apply to all covered unions with annual
receipts of at least $200,000. That is a total of 5,426 unions,
of which only 141 are national unions. So the rest, some 97
percent, are local unions. For the most part, these are small
volunteer organizations whose officers hold full-time jobs and
also run the local. Their resources are limited as is their
wherewithal to fill out complex and time-consuming forms. They
do not have a bevy of paid staff. Some have none. They do not
have sophisticated computer equipment or consultants to help
them to do their jobs. Yet, the Department proposes to saddle
them with unsurpassed record keeping and reporting obligations.
DOL estimated that the average burden per union for the
revised form after the first year would be just a few hundred
dollars per union, or a total cost for all unions of somewhere
between $2 million and $3 million per year. These figures so
thoroughly underestimate the burden on the regulated entities
as to defy logic and common sense. And they know it. And I say
they know it because the Department admits that they had no
data on which to base these numbers, so that the numbers amount
to nothing more than guesswork. They conceded in the Federal
Register that it would be incumbent upon the unions, responding
in their comments, to provide the information concerning the
actual burden costs.
The one empirical study that has now been performed based
on a survey of national local unions shows that the average
cost to national unions would be over $1 million a year and to
local unions over $217,000. In other words, the total cost for
all unions, varying based on what methodology is used and
whether you use average or median costs of the samples
involved, range from $300 million to $1.1 billion. Compare that
to the Department's $2 million to $3 million range. It is as if
DOL would simply ignore the fact that to comply with its
proposal, unions will have to classify, identify, and describe
virtually every expenditure by functional category, assign
staff and officer time by functional category, train and
allocate additional time for staff and officers to keep records
that meet the new requirements, adapt existing hardware and
software to fulfill the new requirements, and pay for
sufficient computer and accounting expertise.
I will let the next witness speak to the second point about
relative inequity because I understand that former SEC Chief
Accountant Lynn Turner will be describing the differences that
are imposed on corporations compared to that that this proposal
would impose on unions. But the key point there is at least the
SEC understands that disclosure of information and financial
reporting is based on what is material information, what is
looked at as material information under the generally accepted
accounting principles which govern both for-profit and not-for-
profit entities.
Here the Department would be requiring every single
transaction regardless of how minute, how detailed, and how
unimportant that particular transaction is to the overall
financial stability of the organization.
Finally, the Department's own deterrence claim is
completely unsupported. There is simply nothing in the
accounting literature to support the notion that itemization
deters corruption. Instead, the literature makes plain that
verification of the reliability of financial statements is
provided through the well-established system of outside
auditing by highly trained professionals who know how to verify
that allocations are properly made and that organizations have
adequate internal controls to ensure that corruption cannot
take root.
PREPARED STATEMENT
That takes me to my conclusion. The AFL-CIO and our
affiliates, while we support disclosure that provides
meaningful and useful financial information to union members in
aid of union democracy and fiscal accountability, we have
indicated our willingness to work with the Department to
explore a requirement that LM-2 filers would undergo an
independent audit each year by a certified public accountant,
tailored to their size and resources, that would potentially
provide much more meaningful information to union members and
provide a much truer test of the integrity of their union's
financial accounting systems. But in the meantime, we would
certainly hope you would urge the Department to withdraw this
proposal.
Thank you.
[The statement follows:]
Prepared Statement of Jonathan P. Hiatt
INTRODUCTION
Thank you, Mr. Chairman, for the opportunity to testify today
before this subcommittee on the Department of Labor's proposal to
revise union financial reporting requirements under the Labor
Management Reporting and Disclosure Act. This is an issue of tremendous
significance for the labor movement.
As you know, the AFL-CIO and its affiliated unions oppose the
Department's proposal. Today I want to emphasize three points that
underlie our opposition and illustrate the proposal's fundamental
flaws. First, the proposal will impose enormous--and in many cases
insuperable--financial burdens on unions. Second, the proposal violates
basic principles of fairness, as no other organizations, whether
profit-making or non-profit, bear such onerous financial reporting
obligations as the Department seeks to impose on unions. Third--
although not least important--the Department's proposal will be
entirely ineffective in achieving its purported goals of transparency
and deterring fraud and embezzlement. For all of these reasons, the
proposal lacks any justification.
Before I address each of these issues, I want to reiterate that the
AFL-CIO and its affiliates deplore the misuse of union members' dues
wherever and whenever it occurs. There is no contradiction, however,
between our staunch opposition to fraud and embezzlement and our
equally staunch opposition to the Department of Labor's proposal. On
the contrary, precisely because of our commitment to union financial
integrity we oppose rules that would divert union members' dues from
their intended purpose of providing strong and effective workplace
representation and redirect them into costly, time-consuming, and
irrational reporting.
STATUTORY AND REGULATORY BACKGROUND
Congress passed the LMRDA in 1959. Expressing support for the Act,
George Meany stated in his testimony before the House Labor Committee,
``if the powers conferred [in the LMRDA] are vigorously and properly
used, the reporting requirements will make a major contribution towards
the elimination of corruption and questionable practices.'' These
powers conferred on the Department of Labor by the LMRDA include not
only reporting requirements for labor organizations, but also reporting
requirements for employers and their consultants. This is because
Congress, as early as 1959, was also concerned with the growing
practice of so-called management consultants who were hired by
employers to threaten and intimidate workers who attempted to exercise
their rights under the National Labor Relations Act to choose a union.
Thus, Section 203(b) of the LMRDA requires management consultants to
file a report with the Department of Labor if they have been hired by
an employer ``to persuade employees to exercise or not to exercise, or
persuade employees as to the manner or exercising, the right to
organize and bargain collectively through representatives of their own
choosing.'' (29 U.S.C. 433(b)). And, that same section of the LMRDA
requires employers also to file a report with the Department
documenting that they have hired such a consultant. (29 U.S.C.
433(c)).
I know that we are not here to discuss these ``persuader reports''
and their employer counterparts. However, this Subcommittee cannot
fully evaluate the impact of the changes proposed by the Department to
union financial reports without taking notice of the fact that
virtually no employer and consultant reporting takes place under the
Act at present. This is so because the Administration has interpreted
the relevant statutory provisions to mean that unless a management
consultant has face-to-face contact with workers, that consultant has
no obligation whatsoever to file a persuader report, even though the
consultant plans, scripts, and directs a virulent union-busting
campaign on behalf of the employer. In fact, in one of the first
official acts of the Bush Administration, the Labor Department
rescinded an interpretation of this requirement by the Clinton
Administration that would have required management consultants to file
reports regardless of whether they operated behind the scenes or in
person to persuade employees not to vote for a union.
Thus, while Congress made it clear that ``[g]reat care should be
taken not to . . . weaken unions in their role as collective bargaining
agents'' through enforcement of the Act (S. Rep. No. 187, 86th Cong.,
1st Sess. 1959), this is precisely the situation we face today. At the
same time as the Department has abandoned its enforcement
responsibilities with respect to employers and unionbusting
consultants, it intends to saddle unions with unprecedented and
unjustified burdens.
I also want to emphasize how much unions already have to disclose
under the LMRDA. Under Section 201(b), each covered labor organization
must file annual financial reports with the Department of Labor setting
forth information in six categories ``in such detail as may be
necessary accurately to disclose its financial condition and operations
for its preceding year . . .'' (29 U.S.C. 431(b)). The LMRDA also
requires unions to make those reports available to their members. In
addition, the statute goes one step further, however, and requires
unions to ``permit . . . [their] member[s] for just cause to examine
any books, records, and accounts necessary to verify such report,'' and
union members can enforce this right in federal court.----29 U.S.C.
431(c).
In practice, unions do not require their members to prove ``just
cause'' in order to inspect the books and records. Rather, they make
those materials freely available to members upon request. As democratic
institutions, unions at the local level hold monthly membership
meetings where, typically, the treasurer of the local provides a
financial report and is available to answer questions about the union's
treasury. International unions almost universally conduct annual audits
by independent certified public accountants. These audits are often
published in the union's newsletter or otherwise made available to the
entire membership.
SUMMARY OF THE PROPOSAL
Despite the breadth of the current statutory and regulatory
schemes, the Department has proposed sweeping changes in union
reporting and recordkeeping requirements. These proposed revisions
apply to all unions with annual receipts of at least $200,000 that file
form LM-2 under the LMRDA. These changes include:
Itemization.--Unions must itemize every disbursement to a single
entity/person that reaches a threshold (proposed in the range of $2,000
to $5,000), and allocate the cost to one of 8 functional categories
(schedules), including contract negotiation and administration;
organizing; politics; lobbying; and general overhead.
Aging Accounts.--Unions must itemize accounts payable/receivable
over $1000 according to how many days they are past due.
Allocation of Officer/Employee Time & Salary.--Unions must estimate
to nearest 10 percent all officer time and allocate it to the 8
functional categories, along with salary and withholdings; same for
employees who receive at least $10,000 per year.
Dues Itemization.--Unions must categorize membership, dues, and per
capita tax by membership categories that include agency fee payers.
Trusts.--Unions (even if they do not file LM-2) must file a new T-1
report for ``trusts''--entities in which they appoint at least one
trustee/person on the governing body; that have a primary purpose to
provide benefits to the union's members; that have receipts of at least
$200,000 per year; and to which the union has contributed or has had a
contribution made on its behalf of at least $10,000. This substitutes
for and is broader than current ``subsidiary'' reports. Trusts may
include credit unions, joint funds under a collective bargaining
agreement, building funds, education or training institutions,
redevelopment or investment funds (unless trust files certain other
reports).
Intermediate bodies.--Conferences, joint committees, joint or
system boards, or joint councils not currently covered by the reporting
requirements must file if subordinate to a labor organization that is
covered under the LMRDA.
Electronic filing.--Unions must file their LM-2 reports
electronically with software that the Department has promised to
provide, but which does not yet exist. Many smaller LM-2 filers file
manually and will have to invest in electronic systems to comply. Those
unions that keep their records electronically will also face huge costs
since they will have to adapt their systems to the new LM requirements.
Compliance will generate ongoing costs as well.
THE DEPARTMENT'S PROPOSAL IMPOSES AN UNTOLD BURDEN ON UNIONS
No factor may be more critical in determining whether this proposal
should become a final rule than the burden it would impose on the
regulated unions. As you know, the proposal to revise what is known as
the ``LM-2'' form affects all unions with annual receipts of at least
$200,000. According to the Department itself, 5,426 unions filed LM-2's
in 2000. Only 141 of these unions were national or international
bodies. This means that almost 5,300 LM-2 filers--a figure that
represents 97 percent of all such filers--are local unions. For the
most part, these are small, volunteer organizations whose officers hold
full-time jobs and also run the local. According to the Small Business
Administration, they are all small businesses (67 Fed. Reg. at 79290),
not, as the Department asserts, entities that ``resemble modern
corporations in their structure, scope and complexity.'' (Id. at
79280). Their financial resources are limited, as is their wherewithal
to fill out complex and time-consuming forms. They do not have a bevy
of paid staff, sophisticated computer equipment, or consultants to help
them do their jobs. Nonetheless, the Department proposes to saddle them
with unsurpassed recordkeeping and reporting burdens.
According to the Department's Paperwork Reduction Act analysis, the
average reporting burden per union for the revised form LM-2 will be
104.03 hours in the first year, 24.96 hours in the second year, and
21.81 hours in the third year. 67 Fed. Reg. at 79297. For each of these
years the Department estimates that unions will experience only one
hour of recordkeeping burden. Id. at 79296, 79297. The Department
estimates total annual cost to LM-2 filers in the first three years as
$14.618 million, $3.281 million, and $2.867 million, respectively. Id.
at 79293. These figures so thoroughly underestimate the burden on the
regulated entities as to defy both logic and common sense.
Why are the Department's burden estimates so inherently unreliable?
This is because the Department has no data on which to base these
numbers, so the numbers amount to nothing more than guesswork. Let me
briefly list just some of the material gaps in the Department's
knowledge to show that DOL could not possibly have performed a
meaningful burden analysis or arrived at a credible burden estimate:
--The Department concedes at the outset of its proposal that
``[i]nformation regarding the burden imposed by making the
proposed changes . . . is most likely to be obtained by
proposing the changes for comment so that unions . . . can
express their views.'' (67 Fed. Reg. at 79282);
--The Department has not yet designed, developed, or tested the
software it will require unions to use when submitting their
revised financial reports that it claims will minimize the
unions' burden of complying with the proposal. 67 Fed. Reg. at
79282);
--The Department admits that ``no specific data exists regarding the
extent to which unions have already embraced the technology
necessary to provide reports in electronic form.'' (67 Fed.
Reg. at 79282);
--The Department assumes, without further inquiry, that unions
maintain their records in precisely the way that the proposal
seeks to capture the information. (67 Fed. Reg. at 79288);
--When the AFL-CIO asked for all records underlying the specific time
and dollar estimates set forth in the proposal, the Department
asserted that ``no identifiable records'' exist.
We responded to the Department's invitation to come up with our own
burden estimate by hiring an economist and performing our own survey, a
copy of which I have attached to my testimony. This is the only
empirical study of the burden to unions that would be imposed by the
Department's proposal. The survey identified 16 significant actions
that unions would need to take in order to comply with the proposal,
such as maintaining new records and charts of account, adapting
existing hardware and software, and obtaining sufficient accounting,
computer, and legal expertise on an ongoing basis. Each responding
union was asked first to rank the difficulty of complying with a given
change and then to estimate the cost of compliance with that change. In
nearly every instance, a union's chief financial officer, comptroller,
or secretary-treasurer completed the survey. Most of these individuals
have many years of experience filing the LM-2, and they drew upon this
experience in estimating the likely cost of the Department's proposed
changes.
In our comments to the Department of Labor we have asserted that
the total cost of complying with the revised financial reporting
requirements is anywhere from $309 million to $1.1 billion. As the
following discussion reveals, these numbers are derived from our study,
and vary according to the way in which the data is aggregated.
Our survey reveals that the average cost to national/international
unions of complying with the 16 changes is $1,239,482. The average cost
to local unions of complying with the 16 changes is $217,509. Median
estimates are $422,700 for national/international unions and $138,000
for locals.
These data on average and median cost per national/international
and local union were then utilized to develop an overall burden
estimate for unions affiliated with the AFL-CIO. Using the average per
union figures above, the total burden estimate for national/
international unions is $80,566,330. For local unions, the total burden
estimate is $1,078,627,131. The combined total is $1,159,193,461 (which
represents the high end of our estimate). Using the Department of
Labor's e.LORS database, Professor John Lund of the University of
Wisconsin performed an analysis of LM-2 filers nationwide and developed
a distribution of LM-2 filers by nine levels of revenue. Unions that
responded to the 2003 AFL-CIO survey were then similarly distributed by
level of revenue, and average and median burdens were calculated in
each category. Using this methodology, the total average cost to unions
across revenue tiers is $552,249,334, while the total median cost to
unions across revenue tiers is $309,175,462 (which represents the low
end of our estimate).
As you can see, these estimates are radically different from those
that the Department came up with. But, as I have already stated, they
are the only estimates based on legitimate, empirical data about the
regulated community and they make a mockery of the Department's
miniscule figures. Among the most costly aspects of complying with the
proposal are the recordkeeping changes that would have to occur in
order to classify, identify, and describe expenses by functional
category; to assign staff and officer time by functional category; to
train and allocate additional time for staff and officers to keep
records that meet the new requirements; to adapt existing hardware and
software to fulfill the new requirements, and to pay for sufficient
computer, accounting, and legal expertise. Each of these changes will
impose substantial costs on both local and national/international
unions.
One of the most significant facts that these numbers reveal is that
local unions will bear a disproportionate financial burden under the
proposal. As noted above, at least 97 percent of all LM-2 filers are
local unions, some with revenues of as little as $200,000 per year. In
fact, a study by Professor John Lund at the University of Wisconsin
School for Workers showed that almost 40 percent of all LM-2 filers
have annual revenues of less than half a million dollars. Yet the
average cost of compliance for local unions is over $217,000.
What could possibly justify such a crushing burden? The practical
implications are staggering. Imagine the local union that cannot
process meritorious grievances to arbitration because it must spend the
hard-earned dues money of its members on tracking each and every
expense according to the Department's idiosyncratic accounting
requirements. Imagine the local that cannot effectively conduct
contract negotiations or engage in standard grievance handling because
those costs have been trumped by LM-2 compliance? Imagine the union
that cannot train its stewards in effective representation because
government reporting costs have sapped the local's treasury. What
better way to hobble thousands of local unions than by moving forward
with a rule that prevents them from fulfilling their statutory
responsibilities to their members in the name of democracy and
transparency?
Interestingly, in response to an AFL-CIO Freedom of Information Act
request to the Department, we received a copy of a February 1992
memorandum to then-Secretary of Labor Lynn Martin from then-Congressman
Newt Gingrich, urging the Department to implement similar (though less
onerous) changes to the LM reporting requirements. According to
Representative Gingrich, such changes would ``weaken our opponents and
encourage our allies.'' How ironic that in launching such an attack on
unions, those who support such changes in the LM reporting requirements
would so easily sacrifice employees' rights to effective representation
at the workplace.
the department's proposal violates principles of fundamental fairness
This leads me to my second point. Federal securities law does not
subject the business community to a financial reporting regime nearly
as onerous or costly as the one proposed by the Department for labor
unions.
At the outset, bear in mind that the reporting requirements of the
Securities and Exchange Act, enforced by the SEC, applies only to
publicly-traded corporations. As a result, only approximately 10
percent of all U.S. companies are subject to such requirements. In
fact, even some of the nation's largest companies--Mars, Bechtel, and
Cargill, for example--have no reporting requirements whatsoever because
they are privately-held.
Moreover, the Department's itemization requirement--which lies at
the heart of its proposal and is the most onerous aspect of the new
rule--has no parallel in the entire SEC scheme of corporate reporting.
Under this requirement unions must report detailed information about
every single disbursement that (alone or in the aggregate) reaches the
low threshold of $2,000 to $5,000 to any single individual or entity in
one of eight ``functional categories.'' The only way to comply with the
requirement is for unions to record these specific details about every
single transaction in which they are engaged during the year. Our
affiliates have provided detailed information to the Department in
their comments about the untold recordkeeping and reporting burden this
would impose on them.
There is a very simple reason why corporations have no such
parallel requirement. As Secretary Chao acknowledged in a recent letter
to Subcommittee Chairman Specter, the reports that publicly-traded
corporations have to file ``must disclose `material' financial
information'' only. What that letter did not reveal, however, is that
disclosure of only such information as is deemed material is all that
is required by Generally Accepted Accounting Principles (GAAP), which
govern the way public, for-profit, and not-for-profit entities should
report their finances. Under GAAP, the principle of materiality means
that items that are too small to influence an individual's judgments
about an entity's financial condition are routinely aggregated into
meaningful categories. The Department's proposal, by contrast, would
for the first time require unions to keep track of and report
individually, in great detail, an overwhelming number of transactions
without regard to their materiality. Under this proposal, the LMRDA
would stand alone among federal financial reporting standards in
failing to embrace universally accepted GAAP principles.
Why such a radical departure from principles that corporations--
whether they are for-profit or non-profit--must follow under federal
law? Secretary Chao's letter claims that the virtue of the Department's
proposal is that it spares the regulated community--i.e., unions--of
the task of deciding whether information is material or not. This is
nothing more than a double standard designed to cripple unions with
pointless recordkeeping and reporting requirements.
Our survey revealed that over 90 percent of national/international
unions and 60 percent of locals have at least 1,000 or more
disbursements annually. Over 40 percent of national/international
unions and almost 20 percent of locals have 10,000 or more
disbursements annually. They, like their corporate counterparts, are
entitled to follow Generally Accepted Accounting Principles, which
impose order, rationality, and cost/benefit justification on financial
reporting. They, like their corporate counterparts, would far prefer to
make whatever decisions are involved in determining materiality than to
waste their financial and human resources in tracking the minutiae of
useless information. And, like their corporate counterparts, they are
entitled to get on with the work that they are entrusted by their
constituents to perform. Saddling them with any greater burden has no
justification under principles of fundamental fairness, good
government, or responsible financial reporting.
THE DEPARTMENT'S PROPOSAL CANNOT ACCOMPLISH ITS INTENDED GOALS
My third and final concern flows inevitably from this last point.
The Department's proposal will not accomplish its stated purposes of
providing greater transparency to union members or deterring fraud and
embezzlement. The Department claims that the current LM-2 form
generates ``large dollar amount[s] and vague description[s] . . . that
make it essentially impossible for members to determine whether or not
their dues were spent properly.'' 67 Fed. Reg. at 79282. However, under
no circumstances will the proposal result in more useful reporting.
To be sure, the Department's proposal will generate thousands of
lines of ``data'' per union, each one showing an individual
disbursement during the accounting year, in chronological order, in
eight separate categories. A union that has a modest 8,000 transactions
per year would file an LM-2 report that could cover as many as 1,500
pages. A mid-sized union with 13,000 transactions would file a 2,200-
page report. A large international union with 150,000 disbursements
would file a 25,000-page report. But we all know that volume and
transparency are not the same. Without meaningful aggregation of data,
and eliminating immaterial information, union members will wind up with
reams of paper containing the most detailed, often confusing
information that they have neither the time nor the expertise to
decipher.
Such enormous masses of data do nothing to simplify, condense or
aggregate financial information into meaningful totals that unions'
members could use to understand the financial status of their union.
Rather, the proposed forms would simply disclose massive amounts of
non-material financial data, with the result that union members are
more likely to be frustrated and deterred in their efforts to glean any
meaningful information from the form.
The Department's claim that providing such minute and detailed data
to union members ``will enable them to be responsible and effective
participants in the democratic governance of their unions'' (67 Fed.
Reg. at 79281) is absurd on its face. If the Department were genuinely
concerned that the current reporting system resulted in vague
descriptions that did not permit union members to know how their dues
are spent, then it would have proposed that unions aggregate their
disbursements into more meaningful categories. This is the solution
dictated by GAAP and that every other financial reporting system relied
on by the federal government has adopted.
If union members would not benefit from the proposed disclosure
scheme who would? We think the answer to that is obvious. Anti-union
organizations who have the research capability to comb through the
union's LM-2's and analyze the data would reap an enormous windfall. In
essence, they would gain access over the Internet--since the Department
will publish these forms on-line--to over 5,000 labor organizations'
general ledgers. Employers would gain access to a myriad of
confidential information about a union's bargaining strategy and
organizing activities. Imagine a company having to post its entire
ledger on the web in order to comply with government financial
reporting requirements in the name of transparency.
The Department also claims--although it provides no evidence
whatsoever to support this claim--that the revised reporting
requirements will deter corruption and financial mismanagement because
``more detailed reporting of all financial transactions . . . would
[make it] . . . more difficult to hide financial mismanagement from
members.'' 67 Fed. Reg. at 79291. But DOL itself has starkly described
the limits of deterrence that detailed reporting can provide. In a
letter from Deputy Assistant Secretary for Labor Management Standards
Don Todd to Representative Charles Norwood, Mr. Todd made this
observation:
``[I]t is often difficult to detect financial corruption or
mismanagement from a reporting form, no matter what disclosure is
required, since the perpetrators will often attempt to conceal illegal
and improper actions.''
The Department's deterrence claim is not only unsupported in the
proposal itself, but it cannot be justified. First, it does not take
much to realize that the Department's proposal would provide those
engaged in fraud with thousands of minute transactions in which to bury
illegal transactions. Thus, there is nothing in the accounting
literature to support the notion that itemization deters corruption.
Rather, that literature makes plain that verification of the
reliability of financial statements is provided through the well-
established system of outside auditing. Auditors are highly trained
professionals who know how to verify that allocations are properly made
and that organizations have adequate internal controls to ensure that
corruption cannot take root.
When auditors fail to carry out this role faithfully in the for-
profit sector--as happened with Enron--no one suggests that for-profit
entities should itemize their disbursements and receipts as a way to
deter corruption. Instead, reform efforts focus on fixing the private
auditing system to ensure that it works the way it is supposed to.
Thus, legislation was passed in response to Enron that establishes more
federal oversight on auditing standards, that limits opportunities for
auditor conflicts of interest, and that sets rules for internal audit
committees in those for-profit corporations that choose to avail
themselves of the public securities markets. See Sarbanes-Oxley Act of
2002, Public Law No. 107-204, 116 Stat. 745 (2002).
Similarly, many federal statutes rely on the private auditing
system to deter corruption and financial mismanagement. Two examples
illustrate this point:
--when Congress sought to assure that federal awards to state and
local governments and not-for-profits are properly spent, it
dictated that specific auditing standards be developed for
private auditors. (See Audits of States, Local governments, and
Not-for-Profit Organizations Receiving Federal Awards,
Statement of Position No. 98-3 (American Inst. Of Certified
Public Accountants);
--Under Section 302 of the Labor-Management Relations Act, 29 U.S.C.
186, there is a general exception to the rule against
employer payments to union representatives or labor
organizations, where such payments are made into a trust fund
that, among other requirements, contains a provision for an
annul audit to be made available for inspection by interested
persons.
Lastly, in agency fee cases, the United States Supreme Court has
recognized the centrality of private audits in shaping labor
organization disclosure requirements. Even though what is at stake in
the agency fee context is nonmembers' constitutional right to avoid
subsidizing political activities to which they object, the Court
specifically rejected the argument that unions should have to disclose
itemized lists of individual disbursements--instead holding that an
audit should be the mechanism to provide assurance of the accuracy of a
union's allocations between categories of chargeable and nonchargeable
expenditures:
``The union need not provide nonmembers with an exhaustive and
detailed list of all its expenditures, but adequate disclosure surely
would include the major categories of expenses, as well as verification
by an independent auditor.''----Chicago Teachers Union Local No. 1 v.
Hudson, 475 U.S. 292, 307 n.18 (1986) (emphasis added).
CONCLUSION
I want to reiterate the AFL-CIO's longstanding support for the
LMRDA. Our commitment to the principles behind the Act remains as firm
today as it was some forty-four years ago when it was passed. We
support disclosure that provides meaningful and useful financial
information to union members in aid of union democracy and fiscal
accountability. And, to the extent that there are rational, cost-
effective ways to improve current disclosure requirements for unions,
we would support such changes.
Nevertheless, any changes to the current rules must fit within the
bounds of the statute and be consistent with the carefully constructed
system of accounting standards to which unions are already subject. Any
changes should demonstrably improve the quality of the information
reported, and should not be unduly burdensome to unions or undermine
their ability to conduct their activities on behalf of their members.
In furtherance of such improvements, the AFL-CIO and its affiliates
have indicated their willingness to work with the Department to explore
a requirement that LM-2 filers, at both the national and local level,
would undergo an independent audit each year by a certified public
accountant, tailored to their size and resources. Such an approach
would potentially provide much more meaningful information to union
members and also provide a much truer test of the integrity of their
unions' financial accounting systems.
In contrast, as I have discussed, the Department's proposal fails
in numerous and substantial respects to meet any of the well-accepted
accounting and auditing standards that are the prerequisites to
meaningful and rational financial reporting. And, at the same time, the
proposal singles out unions to shoulder an astronomical compliance
burden. We hope you will urge the Department to withdraw its proposal.
Thank you for the opportunity to comment on this important matter.
STATEMENT OF JAY COCHRAN, Ph.D., RESEARCH FELLOW,
MERCATUS CENTER, GEORGE MASON UNIVERSITY
Senator Specter. Thank you very much, Mr. Hiatt. Our next
witness is Mr. Jay Cochran, a research fellow in regulatory
studies at the Mercatus Center at George Mason University. Mr.
Cochran has a bachelor's and master's degree from Virginia
Polytech and a master's and Ph.D. from George Mason University.
Thank you for joining us, Mr. Cochran, and we look forward to
your testimony.
Dr. Cochran. Good afternoon, Mr. Chairman, Mr. Harkin,
members of the committee, ladies and gentlemen. Thank you for
the opportunity to comment today on the Labor Department's
proposed rule regarding labor organization annual financial
reports.
I am Jay Cochran, a research fellow in regulatory studies
at the Mercatus Center at George Mason University and an
adjunct professor of economics at GMU. Our mission at the
regulatory studies program is to advance knowledge of the
impact of regulations on society by conducting careful,
independent analyses using contemporary economic scholarship to
assess rulemaking proposals from the perspective of the public
interest. Thus, the work we do does not represent the views of
any particular affected party or special interest group, but
rather is designed to evaluate rulemaking proposals from the
perspective of their effect on overall consumer welfare. I
would like to emphasize, Mr. Chairman, that the views that I
express today are my own and do not reflect an official
position of the university.
In February of this year, I authored a public interest
comment on the Labor Department's proposed union financial
reports rule. Mr. Chairman, I respectfully request that those
formal comments on the rule be incorporated into the hearing
record as part of my remarks here today.
Senator Specter. Without objection, they will be made a
part of the record.
[The information follows:]
Regulatory Studies Program
PUBLIC INTEREST COMMENT ON LABOR ORGANIZATION ANNUAL FINANCIAL
DISCLOSURE REPORTS; PROPOSED RULE \1\
---------------------------------------------------------------------------
\1\ Prepared by Jay Cochran, Research Fellow, Regulatory Studies
Program. This comment is one in a series of Public Interest Comments
from Mercatus Center's Regulatory Studies Program and does not
represent an official position of George Mason University.
---------------------------------------------------------------------------
The Regulatory Studies Program (RSP) of the Mercatus Center at
George Mason University is dedicated to advancing knowledge of the
impact of regulation on society. As part of its mission, RSP conducts
careful and independent analyses employing contemporary economic
scholarship to assess rulemaking proposals from the perspective of the
public interest. Thus, this comment on the Department of Labor's
proposed rule, Labor Organization Annual Financial Disclosure
Reports,\2\ does not represent the views of any particular affected
party or special interest group, but is designed to evaluate the effect
of the Department's proposals on overall consumer welfare.
---------------------------------------------------------------------------
\2\ See, ``Labor Organization Annual Financial Disclosure Reports;
Proposed Rule,'' Federal Register 67 (249), pp. 79280-79414. Hereafter
referred to as the ``proposed rule.''
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This comment is organized such that Section I provides a brief
introduction to the proposed rule. Section II provides some economic
background to the rule and our analysis of it. Section III reviews the
main benefits ascribed to the proposed rule. Section IV discusses the
cost estimates developed by the Department, while Section V provides an
alternative estimate of rule-associated costs. Section VI provides
various benchmarks against which the cost estimates can be compared and
placed into a larger context.
I. INTRODUCTION
Under the Labor-Management Reporting and Disclosure Act of 1959
(or, the ``Landrum-Griffin Act''), the Employment Standards
Administration (ESA) within the Department of Labor is seeking to
reform the financial disclosure requirements applicable to organized
labor. The Department's purpose in reforming the reporting requirements
applicable to labor organizations is ``to improve the transparency and
accountability of labor organizations to their members, the public, and
the government; to increase the information available to members of
labor organizations, and to make the data disclosed in such reports
more understandable and accessible.'' \3\
---------------------------------------------------------------------------
\3\ ibid., p. 79280.
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More than forty years have passed since enactment of the Landrum-
Griffin Act, and only once in that time have the reporting procedures
applicable to organized labor undergone any appreciable change.\4\ The
Department suggests it may once again be time to reform reporting
requirements, especially in light of the myriad technological changes
affecting both organized labor in general and financial reporting in
particular.
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\4\ Late in 1992, changes to union reporting requirements were
implemented that increased the classification detail of disbursements.
This rule, however, was rescinded in December 1993.
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Some of the reforms the Department seeks under the proposed rule
include: (a) an electronic filing requirement for labor organizations
reporting financial disclosures using Form LM-2; \5\ (b) identification
of ``major'' receipts and disbursements; and (c) reporting of assets,
liabilities, receipts, and disbursements of organizations with annual
receipts of $200,000 or more that meet the statutory definition of a
``trust in which a labor organization is interested.'' \6\
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\5\ According to the Department, Form LM-2 currently applies to
labor organizations with $200,000 or more in annual receipts (p.
79290). The Department estimates that Form LM-2, therefore, applies to
5,514 labor organizations. An additional 21,398 other labor
organizations fall below this $200,000 threshold and will have to file
the simpler LM-3 or LM-4 forms. Another 3,551 ``trusts'' or
organizations or funds held by multiple labor organizations will be
required to file a modified form T-1. (See also Table 2, p. 79297.)
\6\ ibid., p. 79280.
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Before discussing the specific benefits and costs of the
Department's proposed rules, we provide some basic background on the
economics of organized labor. Doing so will establish an important
contextual foundation for the remainder of our comment on the proposed
rule.
II. ECONOMIC BACKGROUND
Normally, when an executive branch agency considers the
implementation of a new regulation, our first question asks whether a
significant market failure exists that merits federal regulatory
attention.\7\ Clearly, such an argument cannot be advanced in the
present case. The most one can claim is that a regulatory or government
failure exists, and that the present regulation is an attempt to remedy
part of that failure. This conclusion rests on and results from the
basic political economy of organized labor.
---------------------------------------------------------------------------
\7\ See the Mercatus Center Regulatory Checklist, where we ask
whether (i) a market failure has been identified by the regulating
agency; (ii) a federal role has been appropriately established; (iii)
the agency examined alternative approaches; (iv) the agency attempted
to maximize net benefits; (v) there is a strong scientific or technical
basis for the regulation; (vi) the distributional effects are clearly
understood; and (vii) individual choices and property impacts are
clearly understood. The checklist has been applied to the present rule,
and the results of that evaluation are attached in an Appendix to this
comment.
---------------------------------------------------------------------------
Unions are customarily treated in microeconomic theory as monopoly
suppliers of labor in a particular industry or trade, with the
attendant reduction in labor supply and increase in wage rates
characteristic of a typical industrial monopoly. The precise
combination of wage rate increases and labor supply reductions remains
a function of union goals (e.g., maximized union employment, capture of
economic rents, or maximization of total union wage payments, for
example).\8\ It is crucial to recall, however, that the monopoly
position enjoyed by organized labor in the United States today is not a
``natural'' monopoly in the economic sense of that term, but rather
arises from the various privileges and immunities awarded and protected
by the federal government since about the time of the New Deal.\9\
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\8\ In this connection, see, for example, Walter Nicholson (1995),
Microeconomic Theory Sixth Edition, New York: Dryden Press, pp. 753-
757, or Richard Posner (1984), ``Some Economics of Labor Law,''
University of Chicago Law Review 51: pp. 988-1011.
\9\ See, for example, Morgan Reynolds (1987), Making America
Poorer: The Cost of Labor Law, Washington, D.C.: Cato Institute, pp.
15-25. Reynolds draws a useful distinction between privileges (i.e.,
special rights conferred on organized labor that are unavailable to
other members of U.S. society), and immunities (i.e., actual exemptions
from law that are similarly unavailable to others in the United
States.). The National Labor Relations Act of 1935 (``Wagner Act''),
for example, provides that employers must bargain in ``good faith''
with ``duly elected'' union representatives. Union representatives, in
turn, may require compulsory dues payments from non-members, and may
provide collective representation to those who wish no such
representation. The Wagner Act in effect gives unions the privilege of
representing both those who wish to be so represented as well as those
who do not wish such representation and to collect dues from both
parties.
By contrast, the Clayton Act of 1914 and the Anti-Injunction Act of
1932 (``Norris-LaGuardia Act'') exempt unions from antitrust laws,
immunize them against federal court injunctions, and grant immunity
from private civil damage suits. In addition, the Anti-Racketeering Act
of 1934 specifically exempted unions from anti-racketeering laws. (The
Hobbs Amendment attempted to overcome this exemption, but was
unsuccessful on subsequent Court challenge, when the U.S. Supreme Court
upheld the use of union violence to achieve legitimate labor goals,
saying, ``the [Hobbs] Act does not apply to the use of force to achieve
legitimate labor ends''--as quoted in Reynolds [1987, p. 23].)
Lastly, to curtail some of the unintended consequences of pro-labor
legislation, Congress sought to reign in organized labor through the
Labor-Management Relations Act of 1947 (``Taft-Hartley Act'') and the
Labor-Management Reporting and Disclosure Act of 1959 (``Landrum-
Griffin Act''). As Reynolds (1987, p. 21) points out, shortly after the
passage of the Wagner Act, ``Government regulation expanded to deal
with some of the effects of union power, largely created by privileges
and immunities.'' Expansion of the regulatory requirements on organized
labor under the Landrum-Griffin Act, in fact, is the subject of the
present set of regulations.
---------------------------------------------------------------------------
It is therefore difficult to make the case that the labor market
has failed in any substantive sense with respect to organized labor
given that it has not been allowed to function without impediment.
Rather what we are presented with in the current set of regulations is
an effort to curb the more egregious financial practices of some
unions--practices that have emerged, in part, by virtue of their
specially protected status. In other words, the present set of
regulations attempts to correct and control abuses stemming from a
previous set of laws and regulations that distorted the operation of
the labor market and in effect opened the door to such abuses in the
first place.
It is perhaps unreasonable, therefore, to expect this set of
regulations for enhanced financial disclosure to achieve its intended
aim, since the problem is not with financial disclosure per se, but
rather with the market distortions created by government interference
in the labor market. Nevertheless, this should not be taken as
disparaging the effort entirely; inasmuch as if the latter path (i.e.,
restoration of free contract in labor) is not currently a viable
option, then curbing the more egregious abuses attendant with monopoly
labor supply may be a second-best course of action.
The specific problem the present regulation attempts to remedy is a
variant of the principal-agent problem: in particular, an information
asymmetry between the principal (labor) and his/her agent (union
officials). This asymmetry emerges largely because the usual set of
market checks and balances has been attenuated in the case of organized
labor.\10\ Under present disclosure standards, it is difficult, and in
some cases impossible, for the principals to know the applications to
which union funds and other resources have been put, due to the opaque
and infrequent nature of union financial disclosure statements.
---------------------------------------------------------------------------
\10\ That is, because of the privileges granted by U.S. labor laws,
such as compulsory collective bargaining and representation, a union
does not have to compete for its membership or income stream. Because
of the immunities that unions enjoy, organized labor does not have to
rise to the same standards of conduct as other members and institutions
of U.S. society.
---------------------------------------------------------------------------
Without meaningful external checks on an agent's financial
decisions afforded by vigorous market competition for resources
(including membership), it becomes easier to understand the increased
frequency of self-dealing, embezzlement, or other problems that have
checkered the history of organized labor.\11\ Such undesirable behavior
need not, however, be the case. Controls to prevent or uncover
financial abuses can arise out of the natural operation of market
competition for resources or, failing that course, can be brought about
through the deliberate design and application of regulations.\12\
---------------------------------------------------------------------------
\11\ This is not to suggest either that such temptations do not
occur when competition is vigorous. They do. The point, however, is
that such problems tend to be caught more quickly, and the damages that
result are contained more efficiently under competition than without
it.
\12\ The regulatory approach is necessarily a second-best
alternative since it is impossible to design a regulatory apparatus
that foresees every eventuality, and because those subject to
regulation innovate along non-regulated dimensions as well as in the
necessarily ``grey areas'' of any rule.
---------------------------------------------------------------------------
III. BENEFITS ATTRIBUTED TO THE RULE
The Department lists three main benefits from the reform of union
financial disclosures:
--Better reporting will allow union members to make better decisions
about the governance of their unions.\13\
---------------------------------------------------------------------------
\13\ The Department and ESA suggest that increasing the volume of
financial disclosures made by labor organizations will provide ``union
members with useful data that will enable them to be responsible and
effective participants in the democratic governance of their unions.''
(p. 79281)
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--More-detailed financial reporting will make it more difficult to
hide fraud.\14\
---------------------------------------------------------------------------
\14\ The Department suggests ``the broad aggregated categories on
the existing forms made it possible to hide embezzlements, self-
dealing, overspending, and financial mismanagement.'' (p. 79282)
---------------------------------------------------------------------------
--More-detailed reporting will provide an effective deterrent to
financial mismanagement.\15\
---------------------------------------------------------------------------
\15\ ``. . . detailed reporting can be an effective deterrent, and
that more detail throughout the form LM-2 would further discourage
malfeasance.'' (p. 79282)
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A. More-Informed Governance Decisions
To be sure, more disclosure has the potential for union members to
make more informed decisions about their union. However, the Department
may be making an overly strong benefit claim when it states, ``If the
members of labor organizations had more complete, understandable
information about their unions' financial transactions, investments,
and solvency, they would be in a much better position than they are
today to protect their personal financial interests and exercise their
democratic rights of self-governance.'' \16\
---------------------------------------------------------------------------
\16\ Proposed Rule, pp. 79280-79281.
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This unqualified statement can be incorrect if union members suffer
from other impediments to effective action beyond a simple lack of
information. Indeed, just having more information may not necessarily
be beneficial by itself if individuals, for example, bear concentrated
costs of taking action arising from their evaluation of financial
information, while the benefits accruing from such action remain
dispersed among the union membership as a whole.\17\ If concentrated
personal costs and dispersed benefits exist, then it does not follow
that individual union members will automatically be in any better
position today from increased disclosure.
---------------------------------------------------------------------------
\17\ It is possible, for example, to imagine a case where a union
member--through her own analysis of union finances, made possible by
the proposed regulation--uncovers financial mismanagement. However,
because of intimidation (physical violence or threats of same), she has
to bear substantial personal costs unless she remains quiet. If, on the
other hand, she successfully pursues her discovery, the benefits of
better union management will be bestowed not just on her, but also on
all the members of her union.
This example should not be taken as arguing that union members
should or should not pursue discoveries of mismanagement as and when
they find them, nor that enhanced disclosure should not be in place to
facilitate such potential discoveries. Rather its purpose is merely to
illustrate the concept of concentrated costs and dispersed benefits,
and how such a situation can present a barrier to acting on information
that will not always be solved by the provision of more information.
---------------------------------------------------------------------------
It is important to stress, however, that this line of reasoning
does not argue against increased disclosure and improved transparency.
Increased disclosure is more likely than less disclosure to bring about
improved transparency; however, it will not automatically do so, and
overly strong benefit claims may not advance the case for improved
disclosure in any event.
B. More-Detailed Financial Reporting Will Make it More Difficult to
Hide Fraud
We concur with the Department's assessment that in comparison to
the current reporting requirements on labor organizations, more
detailed financial reporting will tend to raise the cost of hiding
fraud. By increasing the number of classification categories, lowering
the dollar level of disclosures, and by potentially increasing the
number of people who must participate in a potential fraud, the revised
reports sought by ESA and the Department should make committing fraud
more costly than it is under current disclosure rules.
C. More-Detailed Reporting Will Provide an Effective Deterrent to
Financial Mismanagement
Since more-detailed financial reporting is likely to raise the cost
of committing fraud, less financial mismanagement can be a likely
outcome, other things being equal. This result occurs because the
potentially dishonest respond to incentives just as the honest do, and
therefore by raising the cost of committing fraud, one can reasonably
expect to see less of it. Despite this basic economic relationship,
however, we would hasten to add that deterrence per se, is not simply a
matter of increased or more-detailed disclosures. Rather, it can be
argued that disclosure is instead a necessary but insufficient
precondition for effective discovery and deterrence of financial
mismanagement.
The Department seems implicitly to understand that a more involved
process of deterrence operates than simply more-detailed reporting. In
the proposed rule, it cites a recent case in which ``the lack of
supporting detail [on expenditures] enabled [union] officials to hide
in excess of $1.5 million in personal dining, drinking and
entertainment expenses from 1992 to 1999.'' \18\ The important
attribute to consider in this case, though, is not that certain
officials hid their misappropriation of funds, but rather that it was a
Departmental investigation that uncovered the fraud, and that this
discovery, moreover, occurred within the current environment of
comparatively poor disclosure.
---------------------------------------------------------------------------
\18\ Proposed Rule, p. 79282.
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In other words, actual deterrence of financial mismanagement is
more difficult in an organized labor setting than in a comparable
competitive setting for reasons outlined earlier, and because fewer
checks on the financial performance of unions occur on a regular basis.
This means improved financial disclosure is an important component of
the overall deterrent process, but it is not all. We would add that
examinations of financial data by interested parties (union members,
journalists, citizens, etc.); regular audits by disinterested
accounting professionals; and periodic investigations by appropriate
Department personnel are other important tools that complement and
complete any enhanced disclosure process aimed at deterring financial
mismanagement.
1. Disclosure Thresholds
To enhance the disclosure process and to deter mismanagement, the
Department establishes minimum disclosure standards for various balance
sheet and income statement items.\19\ At several places throughout the
proposed rule, the Department asks for comment on whether these
specifically proposed dollar thresholds of disclosure are set at
appropriate levels. Given the operational peculiarities of individual
unions as well as their wide disparity in sizes, it is probably
impossible to determine an appropriate level of disclosure for all
unions under all circumstances.
---------------------------------------------------------------------------
\19\ The new LM-2 for example, requires attachment of an accounts
receivable aging schedule recording any individual or entity from which
more than $1,000 is due. A similar schedule (and threshold) is applied
to accounts payable. All investments with a market value of at least
$5,000 (or representing more than 5 percent of the total market value
of all investments) must be reported on a separate schedule to the LM-
2. Similarly, disbursements to employees totaling more than $10,000 in
a reporting period, and all disbursement to officers must be documented
in attachments to the required filings. Receipts and disbursements to
any individual or entity totaling more than $5,000 during the reporting
must also be separately reported. See the Proposed Rule, p. 79285-
79289.
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To resolve the threshold issue while still recognizing the
likelihood of important differences among the various unions, we
suggest that the Department may wish to consider implementing a
disclosure standard based on whether an outside observer (i.e., a
reasonable person unconnected with the union) would consider a given
disclosure material to an accurate understanding of a labor
organization's financial position. Implementing a materiality standard
(similar to the standard that exists with regard to corporate
disclosure and auditing standards) helps to resolve the Department's
issues with respect to absolute disclosure levels.
Admittedly, a materiality standard introduces an element of
judgment in the reporting process and has the potential to complicate
the investigative process. However, such tradeoffs seem no worse than
establishing what are in fact arbitrary reporting thresholds and then
applying those thresholds in a one-size-fits-all fashion to every labor
organization.\20\
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\20\ It is possible also to address (at least partly) a one-size-
fits-all criticism to disclosure thresholds by assigning differing
thresholds based on union size (using assets, receipts, membership, or
other appropriate measures). Doing so lifts the judgment burden
regarding disclosures that exists under a materiality standard from the
unions and places it on the Department. In addition, a disclosure
threshold that varies with union size reflects an acknowledgment that
there are likely to be important differences among unions as to what
constitutes a material disbursement, investment, accounts receivable
and so on.
In sum, an explicit regulatory threshold places an ex ante judgment
burden on the regulators to establish appropriate thresholds that are
neither too rigid nor too lax. A materiality threshold, by contrast,
places an ex post judgment burden on the disclosing union and its
auditors.
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IV. DEPARTMENT COST ESTIMATES OF THE PROPOSED RULE
The Department estimates that the proposed changes to the four
financial disclosure forms (LM-2, LM-3, LM-4, and T-1) will be $17.8
million in the first year, $5.8 million in year two, and $5.3 million
in year three.\21\ These costs result from increased recordkeeping and
reporting burdens, software changes, training and so on, that the
unions will incur in order to comply with the proposed rule. In
addition, the Department estimates that the Federal government will
incur incremental equipment, personnel, and overhead expenses of $7.2
million per year in connection with implementing and overseeing the new
rule.\22\ Below we offer comments on the Department's estimates.
---------------------------------------------------------------------------
\21\ Proposed Rule, p. 79293.
\22\ Loc. cit.
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A. Very Precise Burden-Hour Estimates
We congratulate the Department for being able to make such precise
burden-hour estimates for over 26,000 unions and over 3,000 trusts.
However, precision carried out to two decimal places does lead one to
wonder whether it is reasonable to assume that the 8,108 unions filing
form LM-4, for example, will incur precisely 0.03 hours (or 1.8
minutes) of on-gong recordkeeping burden in connection with the
rule.\23\
---------------------------------------------------------------------------
\23\ Proposed Rule, Table 2, p. 79297.
---------------------------------------------------------------------------
We would suggest in the alternative that if the actual incremental
burden is negligible, then zero should be used. If, however, there is
expected to be some non-trivial increase in on-going recordkeeping
burden, more defensible estimates would consider making allowances for
error and correction, for personnel time to recall proper
classifications, and so on. In other words, additional recordkeeping
rules mean that those responsible for implementing such rules may be
likely to incur additional, non-trivial amounts of time in on-going
recordkeeping procedures if such recording is to be undertaken
accurately.
Perhaps just as important in this connection is the recognition
that on-going recordkeeping functions with respect to the new
requirements are likely to exist beyond the confines of a union's
accounting department. Thus, for example, when a union organizer hosts
an educational program and then seeks reimbursement for her expenses,
she will have to consider and follow the rule's requirements pertaining
to documentation, record retention, appropriate expense classification,
and so on (and the new rules are likely to be different from and more
complicated than the rules she has been accustomed to observing).\24\
Such burdens, though perhaps small for any given accounting event, and
likely to be dispersed across many people throughout an organization,
nevertheless seem unlikely to be as small in the aggregate as the
Department suggests in its recordkeeping burden estimates for the
various forms.
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\24\ The new rules might suggest that such costs are learning curve
related and thus unlikely to recur once the learning is completed.
While there is, no doubt, some truth to that assertion, it also seems
equally likely that a changed institutional environment is likely to
involve changes of permanent nature.
---------------------------------------------------------------------------
In the alternative estimates we provide below, we have used small
(though non-trivial) hourly estimates for on-going recordkeeping
burdens. With respect to burden estimates more generally, we have
chosen to provide round figures (typically rounded to nearest half
working day) rather than very precise estimates. The rationale for such
an approach is to produce cost estimates that are defensible in general
magnitude rather than in particular exactitude.
B. Inconsistent Cost/Burden Hour Applied
Laying aside the issue of burden-hour estimate precision, and
taking the total burden hours estimated by the department at face
value, we are still left with the application of inconsistent dollar
costs per hour to the burden-hour estimates themselves. For example,
the Department estimates that the new LM-2 form will entail total
reporting and recordkeeping burdens of 579,135 hours. Dividing this
figure into the Department's total cost estimate for the LM-2 form
($14.618 million) yields an hourly cost of $25.24. Similar calculations
for the LM-3, LM-4, and T-1 forms yield per hour cost estimates of
$20.36, $24.79, and $26.61 respectively.\25\
---------------------------------------------------------------------------
\25\ The hourly rates also change without explanation for
subsequent year estimates for forms LM-2 and T-1.
---------------------------------------------------------------------------
In its description of the burden estimates, the Department suggests
that little beyond incremental labor will be required by the unions to
comply with the new disclosure requirements.\26\ If this is true, then
the hourly rates used to monetize the hourly burden estimates,
arguably, should be more consistent. In our cost estimates, presented
below, we have applied instead an hourly labor rate of $27.80, which
represents the fully loaded hourly wage rate of union employees in the
United States.\27\
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\26\ In calculating the burden for form LM-2, for example, ``the
Department carefully considered the amount of time it takes to: (a)
Read the reporting instructions; (b) gather the books and records to
respond to various reporting requirements; (c) organize the books and
records to respond to various reporting requirements; (d) complete the
form; and (e) check the responses.'' (Proposed Rule, p. 79294) This
suggests the burden-hour estimates consist almost entirely of labor
hours. This perception is further reinforced when the Department
states, ``. . . any capital investment including computers and software
that are usual and customary expenses incurred by persons in the normal
course of their business are excluded from the regulatory definition of
burden.'' (Proposed Rule, p. 79294)
\27\ This figure includes wage and salary payments, fringe
benefits, as well as Social Security, unemployment insurance, and
workers compensation payment paid on behalf of a union employee.
Source: Statistical Abstract of the United States (2001), Table 626,
``Employer Costs for Employee Compensation per Hour Worked: 2001,'' p.
406. Union data taken from column 6 of Table 626.
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C. Little Documentation of the Government's Own Incremental Costs
The Department estimates that incremental costs to the federal
government of changing the reporting requirements for unions are $7.187
million per year. It suggests that this estimate ``includes operational
expenses such as equipment, overhead, and printing, as well as salaries
and benefits for the OLMS staff in the National Office and field
offices that are involved with reporting and disclosure activities. The
estimate also includes the annualized cost for redesigning the forms,
developing and implementing the electronic software, and implementing
digital signature capability.'' \28\ Without any supporting
documentation or detail of the data included in the Department's
estimate, it is impossible to validate this figure, or to offer an
alternative estimate. In our alternative estimates (see below), we have
simply adopted the Department's estimates of incremental governmental
expenses related to the rule.
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\28\ Proposed Rule, p. 79296.
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D. No Capitalization of Cost Estimates Provided
Although the Department displays a high level of precision in
developing its compliance burden estimates, nowhere does it capitalize
the cost estimates that it does generate. The sum of the discounted
present value of all the cost streams is important so that the proposed
rule can be evaluated against other alternatives with potentially
different time dimensions as well as to give policymakers an indication
of the total lifetime costs of a particular rule.
Capitalizing the Department's annual cost estimates, using the OMB-
suggested discount rate of seven percent, produces an estimated
lifetime cost of the rule of $212.5 million.\29\ About $103 million of
this figure represents capitalized government-incurred costs of the
rule, while the remaining $110 million represents the long-run
compliance costs incurred by the labor organizations themselves.
---------------------------------------------------------------------------
\29\ We applied the 7 percent discount rate assuming that the first
year's compliance costs would be back-end loaded; that is, incurred
mostly toward the end of the first year in which the rule was
applicable. Thus, the first year's costs are not discounted, while the
second year's costs are discounted one period. Third and subsequent
year's costs were then assumed to recur. To arrive at a capitalized
cost for these out-year estimates, the recurring costs were first
annuitized back to the third year, and then the annuitized sum was
discounted back for two periods at the seven percent rate.
---------------------------------------------------------------------------
V. ALTERNATIVE COST ESTIMATES OF THE PROPOSED RULE
Appendix I details the sources and methods used to estimate the
costs of the Labor Department's enhanced financial disclosure
regulation. In short, however, it is estimated that the lifetime cost
of the rule will be roughly $298 million, including the incremental
costs to the government to administer and enforce the new standards.
Capitalizing the up-front and annually recurring costs using OMB's
recommended 7 percent discount rate produced this estimate.
In the first year of application, the revised form LM-2, LM-3, LM-
4, and T-1 are estimated to result in compliance costs of $63.3 million
for the more than 26,000 affected labor unions and 3,500 labor-related
trusts in the United States. In the second year, estimated total
compliance costs are expected to decline to $19.9 million, while costs
in the third and succeeding years are expected to total $9.0 million
each year. With respect to incremental cost of administration and
enforcement for the federal government, we adopted the estimates made
by the Department of $7.2 million per year.
A. Differences Explained
The two main areas that account for the difference between our
estimates and the Department's are (1) the number of hours for
reporting and record keeping expected to be incurred by the average
union organization, and (2) the application of a consistent (and
higher) labor rate per hour. The change in the number of hours
estimated for reporting and recording keeping (mostly in form of
rounding and more generous allowances for initial compliance) accounted
for roughly three-fourths of the deviation between our estimate and the
Department's. The remaining one-quarter of the difference can be
accounted for by the application of a standardized labor-hour rate. We
believe these adjustments provide a more generous estimate of both
burden hours and costs likely to be incurred by the affected labor
organizations.
B. Average Cost per Union
The Department estimates that 26,912 unions and 3,551 labor trusts
will be affected by the changed financial disclosure regulations. Based
on our estimates of lifetime costs to the unions (and ignoring
incremental costs to the federal government), the average union will
bear a cost of approximately $4,715 to comply with the new disclosure
requirements, while the average labor-related trust will bear a long-
run cost of $19,035 to comply.
Averages can be misleading since they can obscure large variances
among the different organizations. This suggests costs may be
disproportionately higher for larger unions. However, averages are
supplied so that some standardized comparisons can be made to other
organizations that disclose financial information on a regular basis.
VI. COST ESTIMATE CONTEXT
This section provides several different ways to put the various
compliance cost estimates of the rule into context.
A. Comparison to Union Estimates
The long-run cost estimates provided in this comment were about 40
percent higher than a capitalized version of the Department's
estimates. Our estimates, however, remain at the low end of published
reports of cost estimates made by union representatives. Laurence Gold,
associate general counsel to the AFL-CIO suggested, for example, in a
recent Associated Press story ``the accounting and recordkeeping
changes could cost unions $250 million to $1 billion.'' \30\
---------------------------------------------------------------------------
\30\ Leigh Strope, ``Proposed Regulations Would Require Unions To
Open Books, Report More Financial Detail,'' Associated Press,
Washington, December 21, 2002. It was unclear from the AP story whether
Mr. Gold was referring to annually recurring costs or lifetime costs of
the rule. Given the context of the other estimates herein, the latter
case seems more likely.
---------------------------------------------------------------------------
Observing that there are 26,912 unions and 3,551 trusts covered by
the new rule,\31\ the average compliance cost--using the AFL-CIO's
estimates--ranges from about $8,200 to just under $33,000 per covered
labor organization.
---------------------------------------------------------------------------
\31\ See Table 2, Proposed Rule, p. 79297.
---------------------------------------------------------------------------
B. Comparisons to Corporate Disclosure Costs
Comparing the unions' disclosure costs to the costs incurred by
other agents as they report to their principals provides another means
of putting the rule's compliance costs into context. U.S. corporate
managers (agents), for instance, regularly disclose their financial
performances to shareholders (principals) through corporate annual
reports, among other means. In calendar year 2001, it is estimated that
the 12,000 public corporations in the United States communicated with
their shareholders through corporate annual reports at a cost of
slightly more than $9.0 billion.\32\ These annual report production and
distribution costs represented an average disclosure cost per
corporation of slightly more than $750,000 in 2001, or about 23 times
more than the AFL-CIO's own worst-case cost estimate.
---------------------------------------------------------------------------
\32\ Glenn Hasek (1997), ``Adding Art to Numbers: Corporate Annual
Reports,'' Industry Week 246: 21, p. 122. In this article Hasek cites
Sid Cato, publisher of the Newsletter on Annual Reports, who states
``more than 12,000 U.S. companies generated an average 232,000 copies
of annual reports for 1996 at a cost of approximately $3 per copy.''
Mr. Cato updated his estimate for 2001 in a news release stating ``that
average per-copy investment in 2001 annual [reports] was $3.24 . . .''
From a news release dated November 1, 2002, taken from http://
www.sidcato.com/news/2002/rel1102.html. These per-copy figures include
printing and distribution costs, but not other costs such as executive
and employee preparation time, related capital investments, etc.
---------------------------------------------------------------------------
C. Cost per Union Member of Enhanced Disclosure
The capitalized Department-estimated cost of the detailed financial
disclosure (or $110 million, which excludes the additional $103 million
of federal government costs for implementation and enforcement)
represents an average cost of $6.15 per union member.\33\ By
comparison, our cost estimates yield an average long-run cost of $10.88
per member. Even using the AFL-CIO's high-end estimate of $1.0 billion
produces a cost estimate for more detailed disclosure of $55.94 per
union member (while its low-end estimate works out to an average cost
per member of $13.99).
---------------------------------------------------------------------------
\33\ As stated above, the Department did not capitalize its cost
estimates. Therefore, we capitalized their estimates by applying OMB's
suggested 7 percent discount rate to the various estimates of annual
costs. Estimates of third year costs were treated as subsequently
recurring into the indefinite future. The bulk of first year costs were
treated as having been incurred near the end of first year in which the
rule was applicable; therefore, year one's costs were not discounted.
---------------------------------------------------------------------------
Regardless of which estimate proves closest to being correct, the
decision of whether or not this cost provides a positive value to
individual union members is a question only individual members can
answer. However, we can say that given our estimate of lifetime costs
for enhanced disclosure represents about 24 minutes of the average U.S.
union member's hourly pay rate, many may consider it bargain--but only
if the new rules deliver the benefits the Department suggests they
will.
D. Compliance Costs in Relation to Union Receipts
A sampling of union receipts (from dues, services, etc.) per union
member can also help to put the rule's estimated compliance in
perspective. Consider, for instance, that the Auto Workers Union (AFL-
CIO) as of December 2001 reported on its LM-2 form that it had 701,818
members and total receipts of $328.7 million, or roughly $468 in
receipts per member that year.\34\ Even if the worst case prevailed and
compliance costs totaled $1 billion, resulting in average compliance
costs of $55.44 per union member, that would still represent about 12
percent of 1 year's UAW average, per-member receipts. On the other
hand, if our estimates or the Department's are closer to the mark, the
lifetime costs of the rule would equate to roughly 2 percent of average
per member receipts for the Auto Workers' Union in 2001.\35\
---------------------------------------------------------------------------
\34\ Data taken from the Department's financial reporting database,
at the Office of Labor-Management Standards, at http://www.union-
reports.dol.gov. The search criteria were for national/international
unions with total receipts greater than $200,000 per year for the
latest reported data.
\35\ The Auto Workers have neither the highest nor the lowest per
member receipt totals, based on our search criteria of the Department's
database. The Air Line Pilots Association (AFL-CIO), for example,
reported total receipts as of December 2001 of $274.0 million and
54,513 members, yielding average per member receipts of $5,026. By
contrast, the Catholic School Teachers Association (an independent
union) reported total receipts of $307,149 as of August 2001 and 4,762
members, giving it average per member receipts of just $65. Even in the
case of Catholic schoolteachers, our compliance cost estimate amounts
to roughly 14 percent of their reported 2001 receipts. These compliance
cost estimates, moreover, reflect lifetime costs of the rule and thus
represent costs that would not be borne in any 1 year, but rather
represent costs that would be spread out over several years.
---------------------------------------------------------------------------
Appendix I.--Cost Estimates of the Department of Labor's Proposed Labor
Organization Financial Disclosure Rule
I. COMPLIANCE BURDEN ESTIMATES
Form LM-2 involved the most significant changes and increases in
supporting data to be provided. In the estimates that follow, our
general procedure was to opt for burden estimates rounded to the
nearest half working day, under the assumption that general orders of
magnitude rather than precision are the best estimating outcome that
one can hope to achieve. In addition, our estimates do not include any
burden or cost estimates for legal oversight such as legal review of
the regulation's applicability or subsequent compliance assurance
before filing.
A. First Year Compliance Burden Estimates
1. Install New Software
We allocated one-half working day (i.e., four hours) for software
installation. Though the software installation itself should be fairly
rapid and uncomplicated, additional time is allotted to allow for
unanticipated bugs, incompatibilities, or to installation of additional
software utilities and/or hardware as may be required to make a fully
functional system.
2. Design/Adjust Report Forms and Format Structures to
Comport with Regulatory Requirements
Electronic data processing systems simply store and facilitate the
manipulation of basic accounting data, and though such systems greatly
ease reporting in comparison to manual systems, one cannot necessarily
conclude from this that little or no incremental effort is involved to
comport with new or modified regulatory reporting requirements. That
is, new or significantly modified reports are likely to be necessary in
order to reflect the changed regulatory requirements.
We estimate that because of the detail involved in the seven new
schedules on the LM-2, for example, each additional report will require
at least one working day to design new output reports that follow the
regulatory forms' requirements. This new burden is in addition to the
15.25 hours the Department estimates that it already takes to complete
the forms, as they exist currently. In addition, although the new LM-2
also saw a net reduction in the number of questions asked by the
Department, those reductions nevertheless represent changes to existing
procedures that will have to be incorporated into new reporting
practices. Therefore, we retain the Department's original estimate of
15.25 hours (rounded up to an even 16 hours, or two working days) and
add to it the allowances described above for the new supporting
schedules, resulting in an estimated total of 72 hours to design and
reformat output reports.
3. Modify Existing Accounting Systems and Interfaces
Beyond reconfiguring and adding new accounting output reports,
adjustments will also likely be required to the accounting systems
themselves. Such adjustments may include addition of or modification to
audit trails (to track why data were changed or accessed and when),
time to adjust accounting procedures to reflect new regulatory
thresholds (such as the changed minimum levels for disbursement
tracking, investments, and so on), and time to implement data exporting
features into the Department-provided software (e.g., e.LORS) or into
similar reporting systems from the existing accounting programs.
Additional time should also be allowed to accommodate the adjustment of
any documentation retention policies and to communicate these policies
to appropriate union personnel. We assumed these tasks could be
completed, on average, in four working days, or 32 hours.
4. Incorporate Electronic Signatures
We assumed that two working days at a minimum would be required to
incorporate electronic signatures into the reporting documents filed
with the Department. This time includes not only incorporation of the
signatures themselves, but also time to test and verify the security
features of this application. As with any new technology, time
estimates are only rough approximations. Substantially more time may be
required to implement this new and unusual feature successfully and to
ensure its overall integrity as part of the reporting system.
5. Validate and Reconcile Reported Output; Systems Testing
Reports, supporting schedules, and other output will have to be
compared to known-good data sources in order to validate that the
reports are producing reliable and accurate output. Inevitable
discrepancies will have to be reconciled and corrective procedures
implemented. In addition, the overall system will need to be tested to
ensure smooth integration and functioning of all subcomponents. We
allotted three working days to complete the validation processes for
the new reports. Although this procedure is classified as a reporting
function, it can also result in increased recordkeeping costs if
records have to be revised as a result of errors uncovered during a
reconciliation process.
6. Employee Training
We assumed that, on average, four accounting and/or regulatory
compliance staff members would require training for two full working
days (i.e., at 8 hours per day per person). Large unions are likely to
incur proportionately more training costs in order to ensure that
enough personnel are proficient in the new reporting requirements.
Conversely, smaller unions are likely to see proportionately smaller
training requirements.
B. Second Year Reporting
We made a simplifying assumption that, on the average, LM-2 report
filers would be able to ascend 80 percent of the learning curve toward
their final and best efficiency, with best efficiency being achieved in
year three. In other words, although filers are expected to be much
more efficient in year two than in year one, they will not reach peak
efficiency until year three. Subsequent years beyond year three are
assumed to see reporting burdens similar to those occurring in year
three.
C. Third Year Reporting
By year three, we expect that unions filing form LM-2 will have
become proficient at doing so and will require approximately 24 staff
hours to complete the reporting required by the revised form. This
figure represents an augmentation to the time estimated to complete
existing forms. The Department estimates that it currently takes 15.25
hours to complete the LM-2 including its 15 supporting schedules. By
adding 7 new and schedules, the Department has increased the simple
volume of schedules by nearly 50 percent. In a few cases, moreover, the
new schedules have the potential to be quite lengthy (e.g., the
accounts receivable aging schedule, as well as the investments,
receipts, and disbursements detail schedules). While it is true that
the Department has shortened some of the existing up-front questions
and data classification requirements, the largest incremental increase
in reporting and record keeping seems likely to occur as a result of
these new schedules.
We have, therefore, conservatively added 1 hour per new schedule to
the existing estimate of 15.25 hours giving a total slightly less than
23 hours, on average, to complete LM-2 (once the institutional learning
curve has been ascended). We then rounded our estimate up to the
nearest whole working day, or 24 hours, consistent with our view that
precision is not as important as general orders of magnitude.
D. LM-2 On-going Recordkeeping Estimates
We estimated that incremental changes to record keeping
requirements would total approximately one additional working day on
average. These estimates reflect our belief that on-going recordkeeping
functions with respect to the new requirements are likely to exist
beyond the confines of the union's accounting department--e.g., for
anyone disbursing or receiving funds for example, who now must keep
more-accurate records regarding where such funds were disbursed to or
from whom such funds were received. These additional burdens, though
probably small for any given accounting event, and likely to be
dispersed across many people throughout a labor organization,
nevertheless seem equally likely to sum to non-trivial amounts in the
aggregate. This on-going recordkeeping burden is expected to persist at
one working day, moreover, for years two, three, and beyond.
II. FORM LM-3 BURDEN ESTIMATES
The changes to the LM-3 form are minor. The requirements as to who
must file a Form LM-3 have been changed, as has the requirement for
increased disclosure if an LM-3 filer had an interest in a trust to
which the filer contributed more than $10,000 in a given year. Since
these changes are minor, we assumed that initial reporting burdens
(software changes, report adjustments, training, and so on) would
amount to one additional working day per union filing the LM-3. As the
LM-3 union became more proficient in year two, this burden would be
expected to drop to 2 hours, and then to one-half hour by year three
and beyond.
On-going record keeping requirements may be expected to total one
hour in the first year and at most an additional half an hour in
succeeding years.
III. FORM LM-4 BURDEN ESTIMATES
The changes to form LM-4 are as minor as for LM-3. Therefore, we
assumed that initial reporting burdens (software changes, report
adjustments, training, and so one) would amount to at most one
additional working day per union filing the LM-4. Moreover, as the
union became more proficient in year two, this burden would be expected
to drop to 2 hours, and then to one-half hour by year three and beyond.
On-going record keeping requirements may be expected to total one
hour in the first year and at most an additional half an hour in
succeeding years.
IV. FORM T-1 BURDEN ESTIMATES
In estimating the burden for filers of the T-1 form, we used the
same estimates of reporting and record keeping burdens used for the
revised LM-2 form. The justification for this approach is suggested by
the Department itself, when it states, ``The new T-1 is structured
similarly to the LM-2.'' \36\
---------------------------------------------------------------------------
\36\ Proposed Rule, p. 79295.
---------------------------------------------------------------------------
V. SUMMARY TABLES
The following tables summarize the cost estimates based on the
preceding sources and methods. Table A.1 summarizes the estimated
hourly compliance burden and resulting cost estimates, while Table A.2
summarizes the capitalized estimates of the data in Table A.1.
TABLE A.1.--SUMMARY OF COMPLIANCE BURDEN AND COST ESTIMATES
----------------------------------------------------------------------------------------------------------------
First year Second year Third year and beyond
Form --------------------------------------------------------------------------
Hours Cost Hours Cost Hours Cost
----------------------------------------------------------------------------------------------------------------
LM-2................................. 1,305,040 $36,280.1 413,240 $11,543.7 189.824 $5,277.1
LM-3................................. 116,266 3,232.2 32,389 900.4 13,081 363.7
LM-4................................. 72,972 2,028.6 20,270 563.5 8,108 225.4
T-1.................................. 781,220 21,717.9 248,570 6,910.2 113,632 3,159.0
--------------------------------------------------------------------------
Total.......................... 2,275,498 63,258.8 716,469 19,917.8 324,645 9,025.1
==========================================================================
Cost to Federal Government........... 7,187.0 7,187.0 7,187.0
----------------------------------------------------------------------------------------------------------------
TABLE A.2.--SUMMARY OF CAPITALIZED COST ESTIMATES
----------------------------------------------------------------------------------------------------------------
Third year Discounted
First year Second uear and beyond totals
----------------------------------------------------------------------------------------------------------------
Unions...................................................... $41,540.9 $12,156.6 $73,196.2 $126,893.7
Labor Trusts................................................ 21,717.9 6,456.2 39,416.7 67,592.8
Federal Government.......................................... 7,187.0 6,716.8 89.677.2 103,581.0
---------------------------------------------------
Total Capitalized Costs............................... 70,445.8 25,331.6 202,290.0 298,067.5
----------------------------------------------------------------------------------------------------------------
APPENDIX II.--RSP CHECKLIST--LABOR ORGANIZATION ANNUAL FINANCIAL DISCLOSURE REPORTS; PROPOSED RULE
----------------------------------------------------------------------------------------------------------------
Element Agency approach RSP comments and grades
----------------------------------------------------------------------------------------------------------------
Has the agency identified a Although not clearly There can be no market failure if the market is
significant market failure? articulated, there is an not allowed to function. The unionized labor
implicit information market in the United States has been thoroughly
asymmetry argument made impeded by previous federal legislation and
throughout the proposed regulations. These previous impediments opened
rule. the door to the abuses that the present rule
Grade: N/A attempts to correct. Thus the present rule is in
fact an attempt to remedy a government not a
market failure.
Has the agency identified an The Department cites the Given the way unions have been organized since at
appropriate federal role? 1959 Landrum Griffin Act least the New Deal, the federal role cited by
as the basis for its the Department seems correct.
action.
Grade: A
Has the agency examined The Department explores Within the confines of the legislation and within
alternative approaches? some alternatives with the proposed rule itself, the Department has
the context of the 1959 identified some alternative approaches to, and
Act. thresholds within, the present rule. The
Grade: B Department could have been more thorough however
in recognizing that deterrence of financial
mismanagement is not simply a matter of better
reporting, but is instead also a function of
periodic audits and investigations. Regular
validation of reported data, in other words,
should be made part of the rule.
Does the agency attempt to The Department does not Although we do not place a dollar value on the
maximize net benefits? attempt to value the benefits either, we do attempt to put the costs
benefits attributed to of compliance into a variety of different
the rule. It does contexts so that some evaluation can be
however assign a dollar attempted.
value to compliance
costs.
Grade: C
Does the proposal have a The rule has the It is possible that the Department's job could be
strong scientific or potential for some greatly simplified by drawing upon disclosure
technical basis? scientific basis through procedures already established under GAAP.
the application of Adjusting GAAP to the peculiarities on union
Generally Accepted finance might then constitute the Department's
Accounting Principles marginal contribution to enhancing the
(GAAP). disclosure process.
Grade: C
Are distributional effects The Department seems to By establishing single disclosure thresholds, the
clearly understood? ignore distributional Department ignores potentially important
consequences among differences among unions based on size. Thus,
unions themselves. disbursements of less than $5,000, for example,
Grade: D may be material for small unions, but are not
material for larger unions until a much higher
dollar figure is disbursed. A uniform disclosure
threshold for all unions glosses over these
differences.
Are individual choices and The Department recognizes By recognizing that members who own the unions,
property impacts that the union members and the public who confers the special
understood? themselves are the privileges and immunities on them have a right
owners (principals) and to know the financial status of these
therefore have a right organizations, the current rule is step in the
to know how the agents direction of reasserting proper control over
are performing on the these organizations.
owners' behalf.
Grade: A
----------------------------------------------------------------------------------------------------------------
Dr. Cochran. Thank you, Mr. Chairman.
My findings then, as well as my remarks here today, support
the idea that the new rules should help union members: one,
better understand their union's financial position; two, make
better decisions about the governance of their unions; and
three, should help union members by making it more difficult to
hide fraud and financial mismanagement.
The estimates provided in my original analysis of the rule
placed its long-run or lifetime costs at roughly $11 per union
member on the average. My estimate of $11 falls between
estimates prepared by the Department of roughly $6 per member
and AFL-CIO cost estimates that range between $14 and $55 per
union member based on newspaper accounts of the AFL-CIO cost
estimates available at the time.
The Department's proposed regulations are an attempt to
remedy a variant of the principal-agent problem; that is, the
new rules try to correct an information asymmetry that exists
between principals, union members, and their agents, union
officials. Under the 1959 disclosure standards established with
the Landrum-Griffin Act, it can be difficult for union
principals to know the precise applications to which their
funds have been put by their agents because of the summary
nature of current union financial disclosure reports. The
revised rules increase the volume and substance of disclosure
and, by implication, raise the cost of committing fraud or
hiding financial mismanagement. Basic economics tells us,
therefore, that if we raise the cost of any activity, we are
likely to see less of it; and clearly, reducing fraud works to
the benefits of union member principals.
Of course, better financial disclosure is an important
element of improving the financial transparency and
accountability of unions to their members, but it is not all. I
would, therefore, concur with Mr. Hiatt and suggest, for
example, that regular audits by independent accounting
professionals, periodic investigations by appropriate Labor
Department personnel, as well as examinations of financial data
by independent parties, such as union members themselves,
journalists, Members of Congress, and ordinary citizens, are
additional important tools that complement and complete any
enhanced disclosure process. With respect to this last point,
Mr. Chairman, I would like to commend you and the members of
this subcommittee for your willingness to examine the issue of
union financial disclosure more carefully.
Thank you.
[The statement follows:]
Prepared Statement of Dr. Jay Cochran
Good afternoon Mr. Chairman, Senator Harkin, members of the
subcommittee, ladies and gentlemen. Thank you for the opportunity to
comment today on the Labor Department's proposed rule regarding Labor
Organization Annual Financial Reports.
I am Jay Cochran, a Research Fellow in Regulatory Studies at the
Mercatus Center at George Mason University, and an adjunct professor of
economics at GMU. Our mission at the Regulatory Studies Program is to
advance knowledge of the impact of regulations on society by conducting
careful and independent analyses using contemporary economic
scholarship to assess rulemaking proposals from the perspective of the
public interest. Thus, the work we do does not represent the views of
any particular affected party or special interest group, but rather is
designed to evaluate the effects of government policies on overall
consumer welfare. I would like to emphasize that the views I express
today are my own and do not represent an official position of George
Mason University.
In February of this year, I authored a Public Interest Comment on
the Labor Department's proposed union financial reports rule. Mr.
Chairman, I respectfully request that those formal comments on the rule
be incorporated into the hearing record as part of my remarks here
today.
My findings then, as well as my remarks here today, support the
idea that the new rules should help union members:
1. Better understand their union's financial position;
2. Make better decisions about the governance of their unions; and,
3. By making it more difficult to hide fraud or financial
mismanagement.
The estimates provided in my original analysis of the rule placed
its long-run (or lifetime) costs at roughly $11 per union member, on
average. My estimate of $11 falls between estimates prepared by the
Department of roughly $6 per union member, and AFL-CIO cost estimates
that ranged from $14 to $55 per union member based on newspaper
accounts of AFL-CIO cost estimates available at the time.\1\
---------------------------------------------------------------------------
\1\ In preparing the estimate comparisons for the February 2003
Comment, at the time, I was unable to determine whether the AFL-CIO
estimates presented in press accounts were annual or lifetime estimates
of rule costs. I made the assumption, given the ranges of my estimates
as well as those of the Department, that the AFL-CIO estimates were
lifetime or long-run cost estimates. I have learned since filing our
comments that the AFL-CIO's estimates were instead annually recurring
estimates of cost. Using the AFL-CIO estimate, annual per member costs
of the new rules are expected to be roughly $56--equivalent to roughly
two hours of the fully loaded labor cost of union labor in the United
States. [Average hourly union labor rate from the Statistical Abstract
of the U.S. (2001), Table 626, p. 406, and includes fringe benefits,
SSI, UI, and workers compensation.]
The AFL-CIO's estimate of a billion dollars of annually recurring
costs may be overstated for a number of reasons. First, we cannot
verify the estimates since we do not know the method with which they
were derived nor the data sources and assumptions upon which their
estimates rely. Second, to generate first year costs of a billion
dollars using the Mercatus method and assumptions requires that the
applicable hourly wage rates double, while the number of labor hours
required to bring union financial systems into compliance increase by
an order of magnitude (or tenfold). While cost and burden estimates can
be subject to some degree of latitude, a tenfold swing seems
implausible because it would imply that adaptation to the new rules
requires half a year just to modify systems and another half year to
test the changes and train personnel. The changes as described by the
Department do not seem likely to entail adjustment periods as lengthy
as these. Third, a pattern of annually recurring billion dollar costs
seems untenable on its face inasmuch as it reflects no learning curve
effects, and because it apparently fails to distinguish between up-
front and annually recurring costs.
---------------------------------------------------------------------------
The Department's proposed regulations are an attempt to remedy a
variant of the principal-agent problem. That is, the new rules try to
correct an information asymmetry between the principals (union members)
and their agents (union officials). Under the 1959 disclosure standards
established with the Landrum-Griffin Act, it can be difficult for union
principals to know the precise applications to which their funds have
been put by their agents, because of the summary nature of current
union financial disclosure reports. The revised rules increase the
volume and substance of disclosure, and, by implication, raise the cost
of committing fraud or of hiding financial mismanagement. Basic
economics tells us that if we raise the cost of an activity, we are
likely to see less of it; and clearly, reducing fraud works to the
benefit of union member principals.
Of course, better financial disclosure is an important element of
improving the financial transparency and accountability of unions to
their members, but it is not all. I would suggest, for example, that
regular audits by independent accounting professionals, periodic
investigations by appropriate Labor Department personnel, as well as
examinations of financial data by independent parties--such as union
members themselves, journalists, members of Congress, and ordinary
citizens--are additional, important tools that complement and complete
any enhanced disclosure process. With respect to this last point, Mr.
Chairman, I would like to commend you and the members of this
subcommittee for your willingness to examine the issue of union
financial disclosure more carefully.
Thank you.
STATEMENT OF LYNN TURNER, DIRECTOR, CENTER FOR QUALITY
FINANCIAL REPORTING, COLORADO STATE
UNIVERSITY
Senator Specter. Thank you very much, Mr. Cochran. Our
final witness on this panel is Mr. Lynn Turner, Director of the
Center for Quality Financial Reporting at Colorado State
University, bachelor's degree from Colorado State and an M.A.
in accounting from the University of Nebraska. Thank you for
joining us, Mr. Turner, and we look forward to your testimony.
Mr. Turner. Thank you, Chairman Specter, ranking member
Harkin, and the other members of the committee. I appreciate
the invitation to testify at this hearing. I think it is a
timely hearing on this important issue.
Due to the late hour in the day, I am going to summarize my
written remarks fairly quickly here for you and ask that the
entire written statement be put in the record.
Senator Specter. Your full statement will be in the record.
Mr. Turner. As the former Chief Accountant for the U.S.
Securities and Exchange Commission, as well as being a former
executive in a major business, a former employee and union
member as well, I fully understand the need for transparency in
the union force and I do think it is important. Just as
transparency, though, was important for us in the U.S. capital
markets and for investors who use that information, it is
equally important for union members and their regulator.
But it is important to remember that it has been
demonstrated time and time again that proper governance,
internal controls, and transparency are a prerequisite to a
reduction of fraud, along with aggressive law enforcement and
prosecution of those who have failed to maintain their
fiduciary responsibilities. Disclosure of mountains of detailed
financial data without independent verification or validation
of that data absolutely does not ensure the mitigation of fraud
or the transparency of the information.
Unfortunately, I believe the new rules proposed by ESA will
fall short of their stated goal, while adding significant costs
to a system that will have to be borne by the members and the
dues that they pay to reimburse those costs.
The proposed approach is also significantly different from
that adopted by the Senate by a 99 to 0 vote last year and by
the House by a 432 to 3 vote, as well as signed into
legislation by the President 1 week ago this year, that being
the Sarbanes-Oxley Act.
The proposed rules are also dramatically different from
those established by the U.S. General Accounting Office for
ensuring proper reporting of receipts and disbursements by the
Federal Government.
The level of detail reporting is significantly greater than
businesses have to report today, certainly for those public
companies that report with us at the Securities and Exchange
Commission. For example, ESA has asked that accounts receivable
and payables of $1,000 or more be listed. It also requires
investments and securities with a book value of $1,000 or more
be listed. There is no such reporting requirement for public
companies. And as a CFO and VP of a major international
semiconductor company, I never had to report in such small
detail this type of information. I am concerned it will set a
dangerous precedent in the future for requiring other entities,
such as business, to have to report such minutiae.
In lieu of this, I would encourage ESA to adopt an approach
similar to what Congress and the President did last year. Such
an approach would, one, require an annual audit of the
financial statements being supplied to the agency, which in
this case is ESA. Disclosure would be required of material
information, a standard set by the U.S. Supreme Court and the
SEC and used by tens of thousands of private and public
companies throughout the country.
Two, requiring the auditor to report on compliance with
laws and regulations consistent with today's requirements of
audits done in accordance with the GAO standards, consistent as
well with those requirements requiring the auditor to issue a
report on internal control. Smaller organizations could comply
by including in their financial report to ESA a report by the
responsible fiduciaries on the effectiveness of their
organizations' controls so we get the right benefit and cost.
Three, a requirement that the auditor separately report on
whether receipts and disbursements have been properly
classified in accordance with generally accepted accounting
principles, as we use them in the private sector.
Finally, fourth, proper accountability and oversight of the
financial reporting process. This should be accompanied by
requiring executives or fiduciaries filing financial reports to
certify their accuracy and to the effectiveness of the controls
necessary to ensure the safeguarding of assets and proper
financial reporting and to require the establishment of an
audit or advisory committee that would be responsible and
accountable to the members of the respective labor
organization.
Thank you and I would be happy to respond to any questions
the members of the subcommittee may have.
[The statement follows:]
Prepared Statement of Lynn Turner
Chairman Specter, and Ranking Member Harkin: Thank you for the
invitation to testify at this timely hearing on the issue of Union
Financial Reporting and Disclosure.
As I believe you are aware, I served as the Chief Accountant of the
SEC from July of 1998 through August of 2001. I also served on the
staff of the SEC from June of 1989 through July of 1991. Currently I am
a professor of accounting and Director of The Center For Quality
Financial Reporting at Colorado State University. I also serve as
Director of Research to Glass Lewis who provides independent research
on public companies proxies and financial reports and as a senior
adviser to Kroll, a financial services firm.
From June of 1996 to June of 1998, I was Vice President and Chief
Financial Officer (CFO) of Symbios, Inc., an international manufacturer
of semiconductors and storage solution products. Prior to joining
Symbios, I served as a partner at one of the then ``Big Six''
international accounting firms, Coopers & Lybrand (C&L).
Financial transparency is important today. When financial
transparency fails to meet the needs of the users of financial
information, it can result in significant costs as the investing public
has experienced during recent years.
As a former partner and leader of a business unit in one of the
largest international accounting firms, as a former vice president and
chief financial officer of a large international semiconductor
manufacturer domiciled in the United States, and as a former regulator
very familiar with financial reporting and disclosures (Chief
Accountant of the Securities and Exchange Commission) I have
significant experience with transparency in financial reporting, with
employees and the work force environment, with business and with the
public. As a former employee as well as a former union member, I fully
understand the need for transparency for the labor force.
GENERAL COMMENTS
It is appropriate for The Department of Labor's (DOL) Employment
Standards Administration (ESA) to improve transparency and to utilize
newer technologies available today. It is also important that the
current system be periodically revised to ensure its efficiency and
transparency.
However, it is just as important to remember that it has been
demonstrated time and time again that proper governance, internal
controls and transparency are a prerequisite to a reduction of fraud,
along with aggressive law enforcement and prosecution of those who have
failed in their fiduciary responsibilities. Submission of data without
independent verification or validation of that data does not ensure the
mitigation of fraud or the transparency of the information. Rather,
independent examinations and audits of the information by the private
sector have proven to be a more cost beneficial approach to achieving
the objectives of ESA.
Unfortunately the new rules proposed by ESA fall short of their
stated goal. Instead, they raise a number of serious concerns
including:
1. The approach taken in the proposed rules will not result in
achieving the goal of reducing the level of fraud as discussed in the
release. The proposed approach is dramatically different from that
Congress and President chose to use in addressing fraudulent financial
reporting by business, as set forth in the Sarbanes-Oxley Act of 2002.
This legislation relies to a great extent on proper governance and the
private sector as opposed to a government mandated system of reporting.
The proposed rules are also dramatically different from the system
established by the U.S. General Accounting Office (GAO) for ensuring
proper reporting of receipts and disbursements of federal funds.
Accordingly, ESA needs to revise its approach or it will entirely miss
the target when it comes to a reduction in the level of fraud, while
imposing significant costs.
2. The level of detail reporting is significantly greater than
businesses have to report. For example, ESA has proposed that Unions be
required to list accounts receivable and payables of $1,000 or more. It
also requires investments and securities to be reported if they have a
book value of $1,000 or more. There is no such reporting requirement of
such small amounts by public companies and certainly I did not have to
report such small details as the CFO of a large international
semiconductor company. Adoption of this rule proposal would set a
dangerous precedent for requiring other entities, such as business, to
have to report such insignificant details. If businesses and the
pension funds of their employees were compelled to report their
receipts and disbursements in the level of detail to the various
government agencies (DOL, Internal Revenue Service, and SEC) set forth
in this proposal, it could harm the competitiveness of business and
cause them to incur significant costs, without a corresponding level of
benefit.
3. The Mercatus Center Regulatory Studies Program has commented on
the costs expected to be incurred by the unions and government were the
proposed rule to be implemented. I believe they have raised legitimate
questions regarding the cost analysis. In addition, the proposal is
deficient in that it fails to quantify in any meaningful way the
benefits expected. Even with today's sophisticated financial systems,
it takes time to program systems to provide disaggregated information
regarding receipts or disbursements. In addition, many smaller
organizations, such as those with under $5 million a year in receipts
may not have available to them the financial systems or resources that
will readily provide the data requested. As a result, additional
resources may have to be devoted to gathering this data.
IMPROVING TRANSPARENCY FOR LABOR ORGANIZATIONS
The proposed rule relies on disaggregated reporting of financial
information to improve transparency to members of labor organizations.
The proposal cites a particular case before stating: ``This case
demonstrates that detailed reporting can be an effective deterrent, and
that more detail throughout the form LM-2 would further discourage
malfeasance.'' Unfortunately, this is an improper conclusion. In fact
as has been demonstrated on more than one occasion with the business
community in recent years, those who have desired to commit fraud will
do so, regardless of the level of detail reporting required. In the
case cited there were improperly classified costs. Such costs can and
most likely would continue to be misclassified by someone desiring to
commit fraud, regardless of the level of detail required by form LM-2.
Rather than a bureaucratic governmental approach to improving
transparency, ESA should follow an approach consistent with that used
by other governmental agencies including the GAO and the SEC. This
private sector based approach is also consistent with that establish by
Congress in the Sarbanes-Oxley Act of 2002 (Sarbanes). Rather than a
focus on overly burdensome and costly detail reporting, it decreases
the likelihood of fraud and increases transparency by requiring the
establishment of proper oversight and governance, accountability, the
adequacy of necessary internal controls and timely reporting of a lack
of compliance with applicable laws and regulations by independent
auditors. By utilizing outside ``gatekeepers'' in such a manner, it
increases the likelihood that internal controls will prevent the
occurrence of fraud in the first instance, and when fraud is committed,
it will be detected in a timely fashion and provides a basis for prompt
enforcement action by the responsible legal authorities.
The approach used by the GAO \1\ and SEC, which has been widely
heralded around the globe, would in lieu of the ESA proposal, require:
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\1\ For further information on the United States General Accounting
Office approach, see Government Auditing Standards, June 2003 Revision.
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1. An annual audit of the financial statements being supplied to
the agency which in this case is ESA. This could be accomplished by
requiring larger labor organizations to have an independent audit
performed of the financial reports and an independent auditor review
financial statements of smaller organizations.
2. Requiring the auditor to report on compliance with laws and
regulations consistent with the requirements of the GAO.
3. Requiring the auditor to issue a report on internal controls,
consistent with the requirements of the GAO and Sarbanes-Oxley. Smaller
organizations could comply by including in their financial report to
ESA a report by the responsible fiduciaries on the effectiveness of the
organizations controls.
4. A requirement that the auditor separately report on whether the
receipts and disbursements have been properly classified in accordance
with generally accepted accounting principles (GAAP).
5. Proper accountability and oversight of the financial reporting
process. This should be accomplished by requiring executives or
fiduciaries filing financial reports to certify their accuracy and to
the effectiveness of the controls necessary to ensure the safeguarding
of assets and proper financial reporting and to require the
establishment of audit or advisory committees that would be responsible
and accountable to the members of the respective labor organization.
OVERLY BURDENSOME DETAIL REPORTING SETS DANGEROUS PRECEDENT
The rule proposal sets forth a requirement for reporting of
extremely detailed financial information for such financial statement
line items as accounts receivable ($1,000), investments ($1,000),
accounts payable ($1,000), major receipts ($5,000) and major
disbursements ($5,000). I can think of no other government regulation
that I have ever dealt with or been subject to that requires such
detail reporting by business entities. A government agency requiring
reporting of detailed information that may clearly be immaterial,
therefore sets a dangerous precedent that may used as a basis by other
agencies to also require such intrusive reporting of unnecessary
detail.
Other U.S. Government agencies such as the GAO and SEC have instead
set financial reporting requirements that require ``material''
information be disclosed to those using the financial information.\2\
ESA's proposing release states that today's workforce is better
educated, more empowered and more familiar with financial data than
before. Given that statement, ESA should focus on ensuring members of
labor organizations receive ``material'' information rather than
bombard them with detailed reporting they will not utilize and which
will result in government imposed costs that are ultimately born by the
members.
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\2\ Staff Accounting Bulletin No. 99, Materiality, Securities and
Exchange Commission. 1999. Available at website: http://www.sec.gov/
interps/account/sab99.htm. This guidance which has also been upheld in
the U.S. Federal courts establishes what information is to be
considered material information.
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Some have argued that materiality is a ``vague and complicated''
standard for determining disclosures to be made to interested parties.
However, the U.S. Supreme Court has established a standard for applying
materiality in assessing necessary disclosures to the investing public.
Both public and private companies have for decades applied this
standard when preparing their financial reports and have become
accustomed to its application. It has proven to be an enhanced approach
to one that is ``rule-based'' on a bright line test that is mandated
for every reporting entity.
Rather than the proposed detail reporting approach, ESA should rely
on private sector standard setters, just as the DOL has for many years
for financial reporting of private sector pensions. ESA should look to
the accounting standard setters such as the Financial Accounting
Standards Board (FASB), and the Auditing Standards Board (ASB) of the
American Institute of Certified Public Accountants for the
establishment of the necessary financial reporting and auditing
standards. The government including the DOL, has for many years have
relied upon the private sector to establish the appropriate standards
that will provide the necessary level of transparency in financial
reports and the appropriate auditing standards. ESA should not engage
in government intervention in financial reporting, a role that is
better left to the private sector. Rather ESA should work with the
private sector standard setters to improve the existing system if ESA
believes there are areas in need of improvement.
A prime example of why ESA should rely on the private sector rests
in the proposal to require additional detail reporting by
unconsolidated affiliates of labor organizations. However, as is often
the case in private business enterprises, the reporting entity may not
have the prerequisite authority to demand the information that ESA is
specifying be disclosed. In fact, the reporting entity may not have the
legal authority to require that information if it is not in control of
the affiliate. When it is in control of the affiliate, GAAP would
require the accounts of the affiliate be consolidated with those of the
reporting entity. GAAP also requires disclosure of material
transactions with related parties such as affiliates.\3\
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\3\ FASB Statement No. 57, Related Party Disclosures. 1982.
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The FASB and business enterprises have worked for some period of
time trying to develop a workable approach to disclosure of information
with respect to affiliated entities that are controlled by the
reporting entity as well as those who are subject to significant
influence by the reporting entity, such as the labor organization.\4\
This has been a very difficult undertaking for the FASB, its
predecessors and businesses. Some of the same difficulties will no
doubt be encountered by ESA and the reporting labor unions. A hastily
developed rule by ESA may in fact turn out to be one that cannot be
complied with. Accordingly, ESA should work closely with the private
sector to develop a workable approach and avoid a costly mistake.
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\4\ See also Accounting Principles Board Opinion No. 18, Accounting
for Equity Method Investments in Common Stock. 1971.
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SIGNIFICANT COSTS TO BE INCURRED
The proposing release states that ``In 2000, 5,426 unions,
including 141 national and international unions reported $200,000 or
more in total annual receipts . . .'' Later on in its Initial
Regulatory Flexibility Analysis ESA also questions the $6 million
dollar threshold set by the Small Business Administration.
I strongly disagree with ESA's statement that the SBA standard is
unreasonably high. These standards are established in consideration of
smaller organizations that may be unfairly burdened with government
mandates and imposed costs, in light of their very limited resources.
Regardless of whether it is a labor organization or a business, an
entity with annual receipts of between $200,000 and $6 million is
clearly a small entity that will have limited resources. The SBA's
determination in this respect was not unreasonable. The ESA conclusion
based simply on the number of unions with over $1 million in receipts
is ill-reasoned. Using that type of reasoning for businesses would
result the bar being raised significantly on what constitutes a small
business as the vast majority of businesses in the American economy
fall within the definition of a small business by the SBA or other
government agencies such as the SEC.
As a former chief financial officer, I have also had to work with
and use disaggregated information. I believe the agency has
significantly underestimated the amount of hours, perhaps by a multiple
rather than just a percentage that it will take to gain an
understanding of the new rules, reprogram software, determine and
report the requested disaggregated information properly. I find the
type of analysis prepared by the Mercutus Center to be worthy of your
consideration. There will also be a significant hidden cost if this
reporting becomes a precedent used by the DOL for other pensions or by
other government agencies for business enterprises. The proposing
release also fails to quantify the benefits of the proposal, why they
exceed the expected costs. The proposal also fails to provide evidence
that the detailed reporting approach will yield the benefits it seeks
to achieve for members of labor organizations when in fact there is a
lack of such evidence in the private sector.
CONCLUSION
ESA should revise its proposal to adopt the approach recently
enacted by Congress and the current administration in dealing with
misleading financial reporting in the private sector. ESA's approach to
reducing fraud by requiring disclosure of information in greater detail
in no way ensures the integrity of the data through independent
verification. As a result, fraud may continue to go undetected and
union members mislead by disclosures that have not been independently
verified. Instead, ESA should adopt a proven approach based on
establishing proper oversight and governance, accountability, the
adequacy of necessary internal controls and timely reporting of a lack
of compliance with applicable laws and regulations by independent
auditors. It is an approach that relies on the private sector standard
setters and gatekeepers as opposed to a bureaucratically imposed
governmental system that is unlikely to achieve its stated objectives.
It is also a system that will likely have a lower cost while achieving
the desired benefits.
Senator Specter. Well, thank you, Mr. Turner.
Mr. Cochran, what is your evaluation of the LM-2
requirements compared to Sarbanes-Oxley? Are they more
complicated?
Dr. Cochran. I did not do a comparison between this rule
and Sarbanes-Oxley, so I cannot answer that directly. But I do
believe that to say that this rule imposes a burden that is
heavier on unions than the disclosure standards incumbent upon
publicly traded corporations I do not think is true, or at
least I do not think it will hold up to detailed study.
However, having said that----
Senator Specter. Are the requirements of Sarbanes-Oxley not
a fair statement today at least as to the level of inquiry
which the Congress has asked for?
Dr. Cochran. I am not sure I understand the question,
Senator.
Senator Specter. Well, Sarbanes-Oxley was enacted after
there were very substantial failures of integrity in corporate
disclosures and was subjected to a lot of analysis. There has
been some contention that it goes too far, in fact, a fair
amount of contention. So one baseline for consideration would
be whether LM-2 goes beyond Sarbanes-Oxley because Sarbanes-
Oxley had a lot of consideration and analysis by the Congress.
Dr. Cochran. That is right. And there is one attribute with
respect to the LM-2 where it could possibly exceed what is
placed on corporations, whether it is through Sarbanes-Oxley or
traditional SEC filings or whichever, and that is the detailed
disclosure standards with respect to disbursements, accounts
payable and receivable, and so on. And we indicated in our
comments filed last winter that we would support or we would
suggest that a materiality standard might be the more
appropriate response rather than specifying a dollar threshold
so that you do not get reams and reams of paper of, for
example, accounts receivable printouts.
Senator Specter. Define what you mean by a materiality
standard.
Dr. Cochran. Well, a materiality standard as it applies in
accounting. In other words, would a reasonable person need to
know this information in order to have an accurate picture of
the financial position of the union.
Senator Specter. Ms. Lipnic, what do you think about a
materiality standard?
Ms. Lipnic. Senator, that is something that we have had
some comments on and we are taking a look at that. I think in
many ways the threshold requirements that we are putting into
the LM-2 reporting serve some of that purpose as a materiality
standard, and we specifically sought comments----
Senator Specter. Serve some of the purpose, but does it go
beyond materiality?
Ms. Lipnic. Not being an expert in accounting, I do not
necessarily feel qualified to give a----
Senator Specter. You may not be an expert. You know more
than the Senators do. That may be an unrealistic minimal
standard to compare to, and it may be that the inquiry is
premature because you have not promulgated the regulation. We
do not know whether it is $2,000 or $5,000. And if you are
considering materiality, it may well be that your final product
will be somewhat, if not substantially, different. But when you
talk about materiality, you are talking about an accepted
accounting principle, something as the word ``materiality''
says, which is material, that is, relevant, germane to
accomplish a purpose. I would suggest that that might be
something worth looking at.
The estimates as to cost differ enormously. The Department
of Labor says the first-year costs should be $14.6 million and
about $3.3 million in second year. The AFL-CIO estimates that
the total cost to unions will range from $309 million to $1.1
billion. It sounds to me like we are trying to settle a
personal injury case, with all due respect.
Mr. Hiatt, how do you come to $309 million to $1.1 billion?
Mr. Hiatt. That is a large range, Senator, but----
Senator Specter. I know it is a large range. How do you get
there?
Mr. Hiatt. We had an economist do a survey of all of our
national and local unions, and we obviously were dealing,
therefore, with a sample of unions that responded to the
survey. It was the overwhelming percentage of national unions
and a significant number of the local unions. Within that
sample, the economist broke down the cost based on locals and
national unions, and then we had another expert who used the
Department's own filing system that breaks out local unions by
nine levels of revenue. Within the sample, they came up with
average costs, as well as median costs. Because of the
difference in outliers under the two systems, you had more
medians. As a result, we took the very lowest----
Senator Specter. Average as well as median cost?
Mr. Hiatt. We did average as well as median.
Senator Specter. Did you get mean costs?
Mr. Hiatt. And mean costs. As a result, we had the very
lowest coming out at $300 million and the very highest at $1.1
billion.
But I think the most significant issue here is that the
Department admits in Federal Register that its estimate is not
based on data. It is based on a gut feeling or based on
discussions that it may have had with some of its staff, but it
acknowledges that it did not start out with any of the data
that would allow it to perform a burden analysis and instead
was relying on the unions in their comments to provide the
data. We have done the best we can, and as big a range as it
is, it is clear that this burden is multiples more than what
the Department would like to think would be involved in this
record keeping.
I think the materiality standard would certainly be one
factor that would affect the cost here because as it now
stands, no matter how detailed, no matter how trivial, no
matter how minute the transaction is, if it ends up totaling in
the aggregate more than this $2,000 to $5,000 threshold, the
union will have to keep records as to all aspects of that
transaction and it probably will not know during the year
whether we end up with a $2,000 or a $5,000 limit. It probably
will not matter because for most of these transactions, the
union will not know at the beginning of the year whether it is
going to hit the $2,000 or the $5,000, whatever the level would
be, until the end of the year.
Senator Specter. Let the record show that I finished my
question before the red light went on.
Senator Murray.
Senator Murray. Thank you very much, Mr. Chairman.
Ms. Lipnic, the Department's notice of proposed rulemaking
makes it clear that the Department did not conduct any survey
of the unions before it published its proposal. In fact, the
notice of proposed rulemaking states--and I am going to quote
this--``information regarding the burden imposed by making the
proposed changes and the benefit to be gained is most likely to
be obtained by proposing the changes for comment so that unions
who file these reports, union members, and other groups that
represent workers can express their views.''
How do you justify your failure to conduct a survey of the
unions that will have to shoulder the immense financial burden
of this rule in light of the regulatory requirements that the
Department is required to follow such as Executive Order 12866
and the Regulatory Flexibility Act?
Ms. Lipnic. Senator, in doing our analysis in proposing
this rule, we did follow all of the requirements from OMB under
the executive order. We also did a regulatory flexibility
analysis even though we were not required to do this because
this was not an economically significant rule.
Senator Murray. It is not an economically significant rule
for who?
Ms. Lipnic. Within the context of how OMB determines
whether rules have economic significance for the economy.
Senator Murray. Mr. Hiatt, will this have an economic
impact?
Mr. Hiatt. This would certainly have an economic impact and
we do not believe the OMB has accepted the Department's
conclusion that this is not an economically significant rule.
There was a good deal of controversy around that. The
Department was basing its conclusion in part on the belief that
local unions are not small businesses, even though under the
Small Business Administration's own definition of a small
business, every single one of these covered entities would come
under the small business threshold. The Department apparently
did not accept that and that is what at least in part has led
them to conclude this does not have to be treated as an
economically significant rule.
Senator Murray. Ms. Lipnic.
Ms. Lipnic. Although Mr. Hiatt is correct that we did not
accept the $6 million threshold, we did in fact do the
regulatory flexibility analysis that is required by OMB for
promulgating this rule, and in terms of the controversy
associated with whether OMB determined it was an economically
significant rule, in fact I think the record would reflect that
OMB concluded with the Department's analysis that it would be
considered what is called an ``other significant rule,'' and
that was what had long been on the Department's regulatory
agenda.
Senator Murray. Regardless, there was no survey of unions
done beforehand. Correct?
Ms. Lipnic. That is correct.
Senator Murray. The Department's proposal states that no
specific data exists regarding the extent to which unions have
already embraced the technology necessary to provide reports in
electronic form, but the Department has proposed a technology-
based rule that requires unions to file their LM forms
electronically. Can you explain the Department's failure to
conduct any study whatsoever on the technological capabilities
of the unions that are now going to have to file these LM-2
forms?
Ms. Lipnic. Actually, Senator, we did engage an outside
contractor, a software firm, and part of the technical
feasibility study that the software firm put together for the
Department and that we made available through the public
comment period included some analysis of software packages,
accounting packages in particular, that are used by unions to
file their forms.
Senator Murray. Well, but the fact is that the software
does not exist today.
Ms. Lipnic. That is correct. The software is under
development.
Senator Murray. I have seen software under development for
large projects for years before it ever works. Is the
Department aware of that?
Ms. Lipnic. We certainly are aware that software projects
can take a long time. That is also why we engaged the
contractor, we had the feasibility done, and----
Senator Murray. I have heard a lot of contractors say we
are going to have this done by July 1 and it is July 1, 3 years
later, and it costs 10 times as much. I just have to tell you,
having worked with many government agencies that have gone down
that road--how can the Department even have the vaguest idea
whether unions can comply with this proposal if it does not
have the software there now that is going to enable them to
file these forms that are going to be required?
Ms. Lipnic. Again, Senator, our study tells us that this is
relatively simple software that will not create great problems
for the unions or the Department in filing----
Senator Murray. You have a contractor who says I can do
this.
Ms. Lipnic. We have a feasibility study that says that,
yes.
Senator Murray. Well, I would just remind all of us that
anybody who has worked with large government agencies, whether
it is a school district or a business that has required an IT
department to come up with software, they always say they can
get it done, but there is always cost overruns. It always takes
longer and it does not always work. So I would hate to see a
rule imposed on unions without knowing that they have the
ability to have the software in front of them that works.
Otherwise, this is going to be a real burden to a lot of
people.
I know my red light is on. I do have some other questions,
Mr. Chairman, and I assume we can submit them for the record
and get responses back.
Senator Specter. Of course, Senator Murray, if you submit
them for the record, I am sure they will be answered by the
panel.
Senator Craig.
Senator Craig. Mr. Chairman, thank you very much.
I am pleased that you brought up Sarbanes-Oxley. That seems
to be at least a threshold measurement today that we here in
Congress believe is critical and important.
Those of us who sit at this dias are also subject to
something else, campaign finance reform. And a lot of us run
mom and pop organizations once every 6 years. We gear up. We
spend hundreds of thousands of dollars, but we report every
financial transaction that is conducted within a campaign. We
do it for legitimacy. We also do it for the electorate to know
where our money comes from and where it is spent.
While I agree with the Senator from the State of Washington
that software is always a problem, there are 15 or 20 vendors
out there in the public arena today that are hawking the
software for campaign reporting. It is all geared to the FEC
rules and regulations. Once input is made on a function by
function basis, a button is pushed and electronic reporting
occurs. Or I can walk down to the Secretary of the Senate's
Office and hand it in in paper form. That is true for the U.S.
Senate where campaigns are oftentimes more expensive. It is
also true for the U.S. House where I think by definition you
could still say in a few congressional districts mom and pop
campaigns operate up to maybe $500,000 or $600,000 or $800,000
or maybe $1 million every 2 years. But that reporting is
necessary and it is demanded by law. We are doing the same
thing of corporate America today for the obvious reasons.
I must tell you that when I hear about furs and Tiffany
silverware being purchased or I see tens of millions of dollars
being labeled as vague and non-informative categories, like $62
million simply being labeled for grants to and joint projects
with State and local affiliates or $45 million for other
disbursements and these are union members' dues and money that
is being spent, what I would want to have would be the same
kind of functional disclosure that every political campaign,
Federal political campaign, in this Nation is subject to. I
think it is right and appropriate, honest, fair, and most
importantly, it is transparent because it is the members of the
unions' money. That is what it is.
What is more important about it is not necessarily the
critical eye that the Department of Labor gives it, it is the
critical eye that public disclosure gives it. FEC sometimes
does not really ever get at what we report in a timely fashion,
but the news media does, and every time a financial statement
by a campaign is made, it is oftentimes printed up within 24
hours in the local media, and that is without doubt the finest
disclosure available in the world today. I believe in it. It is
honest and it is fair.
Now, in multi-million dollar union organizations, I would
not expect the kind of full disclosure that political campaigns
are subject to, but I do believe that if these rules have not
been reformed in 44 years, they deserve a thorough reforming.
And for anybody to suggest that it is going to be too expensive
is to suggest that fraud and abuse is okay if it exists or that
the inability to find it through disclosure is okay because the
other side of it is just too expensive. Well, if it is too
expensive, let us figure out a way to make it less expensive.
But let us have full disclosure.
I applaud DOE--or in this case, DOL, Department of Labor--I
have been involved with DOE too much all day today for going
after it. At the same time, I would expect that they would work
with the unions to develop something functional, viable,
hopefully less expensive than what is at least being bandied
around in the broad perspective of it, but something that the
public can effectively look at and say, oh, that is where our
money is going, or in the case of the membership, that is where
our money is going. That is how much it costs. And thresholds
would be important.
Mr. Hiatt, I hear it bandied around. What is a mom and pop
union?
Mr. Hiatt. Well, just to give you an example, Senator, 40
percent of all of the unions that would be covered by this rule
have, according to the Department's own figures, annual revenue
that is $400,000 or less. What that means is that if, in fact,
the average of what our survey showed, the average cost to a
local of complying with just the record keeping and reporting--
I am not talking about the cost of the underlying transactions.
Just the record keeping and reporting at $217,000 for a local
union, not a national union, this would be more than half of
the annual revenue of the local itself. I would call that
relatively speaking a mom and pop local union. It is a union
whose lead officer has a full-time job on the factory floor or
in the work place who on a volunteer basis is serving as the
president or secretary or treasurer of his or her local union
who is not being paid for that, who does not have staff, who
does not have professionals, who would have to go out and hire
professionals for this kind of work. I would call that a mom
and pop operation, and it is not a rare exception. It is very
common within this universe of entities that would be
regulated.
Senator Craig. What is the requirement of their disclosure
today?
Mr. Hiatt. Actually, in many ways, Senator, for any
individual union member who wants access to all of the
underlying documents and records, they have under Landrum-
Griffin today, under the LMRDA, the right to go beyond the
forms that are filed. And there is an elaborate record keeping
and reporting system that already, of course, is in place where
unions do have to file annually. All of these entities already
are having to file. But to take the example that you raised of
the category of other disbursements that do not fit into one of
the functional categories on the form, any union member who has
any questions or is at all suspicious has the right to seek
access to the books, and the union--``for cause'' is the
language in the statute, but as a practical matter, I am not
aware of one union who denies an individual member who comes in
and asks to see the underlying books, under the Landrum-Griffin
right to do so, that right. And he or she then can get access
to the records showing each and every one of the disbursements
or the other underlying financial documents.
Senator Craig. Do they have to request the examination or
is it printed so they can see it publicly on an annual basis?
Mr. Hiatt. If they wish to go beyond what is now made
public on an annual basis, then they make a request to see
more. The regular LM-2 forms are submitted. They are available.
If you go into the Labor Department at any given time to ask
for access to the LM-2's--and this is actually before--I think
they have just now put them online, but if you go in in person
and ask, you are given access to them.
Although interestingly, it is very rare that a person who
is in the Labor Department's Office inspecting LM-2's is anyone
other than a management-labor lawyer seeking information off of
those forms on how to use information about the union in the
next organizing campaign or in the next bargaining campaign.
For the most part, the entities that have been complaining
about inadequate disclosure on the LM forms are these so-called
union busting consultants who have been looking for more
information about where the union has been organizing or what
kind of legislative lobbying they have been doing.
Senator Craig. Nobody is in there looking or concerned
about fraud or abuse.
Mr. Hiatt. I am sure there are. There should be. I would
hope there are. And we support that.
Senator Craig. I would agree with you that if the forms
being proposed are going to cost half the income, if you will,
or the general revenue of a local union on an annual basis,
that is excessive. My guess is that could not happen. To report
$400,000 worth of income and general disbursement twice a year,
quarterly, campaigns do it every month. Sometimes they do it
every 2 weeks in the last month of a campaign by pushing a
computer button. And software, once developed is very
inexpensive. And I understand mom and pops very well, from
businesses to unions. So I would concur with you. That would be
excessive.
What I cannot and will not accept--and I applaud the
Department for doing it--is taking 44-year-old ideas and making
them 21st century transparent. No union member should feel
intimidated by asking to go beyond what is open and readily
available in the public eye because intimidation might be a
factor if he or she suggests that they want to look deeper into
the records of their own union.
Mr. Hiatt. Senator, I do not disagree. I think the whole
question is what is the nature of the specific requirement that
is being imposed, and we are only arguing with what is the
nature of this particular proposal, not whether there should be
transparency.
We made a Freedom of Information Act request as part of
this process, and we received a memo that then-Congressman
Gingrich had sent to Senator Martin in 1992 when the Department
briefly considered a very similar proposal, although not as
onerous, urging Senator Martin, Labor Secretary Martin at the
time, to speed up this type of reporting requirement because it
would weaken our opponents and encourage our allies.
Senator Craig. Well, Newt is not around anymore.
I do not care what Newt Gingrich said.
Mr. Hiatt. This is even worse. What they are now proposing
is more onerous than what was done in 1992.
Senator Craig. What I most care about and will urge the
Department to do is to move you toward economically feasible,
fully transparent reporting for the sake of your membership.
Thank you.
Mr. Hiatt. Thank you.
Senator Specter. I would pick up on what I understood
Senator Craig to say, if I am correct about this, that it would
be useful for the parties to try to see if there is some middle
ground. Mr. Hiatt agrees with transparency and Mr. Cochran, who
speaks in support of the Department of Labor position, injects
the word ``materiality.'' And there is not now an audit
requirement. Senator Craig starts off with reference to
Sarbanes-Oxley as a standard which the Congress has accepted.
And I have heard a lot of comment.
I would be interested, Ms. Lipnic, in your view. Do you
agree that the current LM-2 is more complicated than Sarbanes-
Oxley?
Ms. Lipnic. Actually, no, Senator. We specifically looked
at revising the LM-2 form because we thought that would be a
less burdensome requirement than attempting to impose the kind
of reporting requirements under Sarbanes-Oxley.
Senator Specter. So you think LM-2 is easier than Sarbanes-
Oxley?
Ms. Lipnic. Yes, we do, and also it is a familiar reporting
form that has been in place for 40 years and unions are
certainly used to filing under this form.
Senator Specter. But there are a lot of changes. Dr.
Cochran, you said you do not really know. What is your position
on the LM-2 proposal compared to Sarbanes-Oxley?
Dr. Cochran. Well, again, I did not do a direct comparison
between the rule and Sarbanes-Oxley, so I cannot answer that
directly. But I think it is clear that the rule does increase
the burden on unions. That is why we have costs. Right? Because
we are increasing the burden, we are increasing the number of
hours----
Senator Specter. The question that I am trying to focus on
is whether it increases the burden beyond that which
corporations now have.
Dr. Cochran. In an unduly burdensome fashion? I do not
think so. In our comments we----
Senator Specter. Not unduly burdensome.
Dr. Cochran. No, I understand.
Senator Specter. Sarbanes-Oxley, because unduly burdensome
is subjective. Sarbanes-Oxley is tangible.
Let me suggest to the parties here you have not come to a
final rule. Have the parties, the AFL-CIO and the Department of
Labor, sat down to try to find common ground?
Mr. Hiatt. I will be interested to hear the Department's
version in answer to that question.
Senator Specter. Do not everyone speak at once.
How about it? Have the parties sat down? How about it, Dr.
Cochran?
Dr. Cochran. I have no idea whether the parties have sat
down. I am an outsider.
Senator Specter. Apparently nobody else does either.
Mr. Hiatt. We sat down with the Department about 9 months
before they published the proposed regs when, as a result of
testimony by the Deputy Secretary of Labor at a hearing, they
acknowledged they were considering changing these regs. And we
asked if we could sit down with them. The panel was surprised
to hear there had not been any input. We sat down at the time--
--
Senator Specter. What panel was surprised?
Mr. Hiatt. It was a House panel.
Senator Specter. House of Representatives?
Mr. Hiatt. Yes, Senator.
Senator Specter. The Senate might be able to agree with the
House on something.
Mr. Hiatt. Well, it was on a different subject, but in the
course of it, the Deputy Secretary acknowledged that this
exercise was going on.
We then met and at the time the Department was not able to
tell us what they were going to be proposing. They said it was
still too early. We asked if they would agree to meet with us
when they had a better idea but before the proposed regulation
was published. At the time, they said yes, but then they
withdrew that offer and we were never able to have a meeting
from the point at which they had apparently decided what the
proposed reg would include.
Senator Specter. Well, let me make a suggestion. The
parties can do as they choose, and the Congress has its own
options in the legislative context. But it could be an
extension of the comment period. It could be a form of comment
on discussions. We have been in the midst of the complexities
of asbestos and this is not as complicated as the asbestos
bill. All the parties have thought it would be useful to go to
the Chief Judge Emeritus of the Third Circuit to take a look at
it, and it might be that somebody could sit down with the
parties here. I think there is a general recognition that more
needs to be done. There is now not a requirement for an audit.
Would you agree that there ought to be an audit, Mr. Hiatt?
Mr. Hiatt. We have indicated that we believe that some sort
of an audit requirement would make sense.
Senator Specter. That is a yes?
Mr. Hiatt. Yes, it is, subject to specific issues that
probably would vary based on size of unions and so on.
Senator Specter. So it is subject to. Well, an audit will
have to be defined. If it is a yes----
Mr. Hiatt. Yes.
Senator Specter [continuing]. That is a little progress.
Mr. Hiatt. Maybe Judge Becker could help us out with that.
Senator Specter. He is busy.
I think this hearing has been very useful. I have talked to
Secretary Chao about it, and I know she wants to come to a
reasonable resolution. It seemed to me that this hearing would
be helpful to bring the parties together and talk about it. I
personally believe that most of these issues are susceptible to
agreement. We are all after a common goal. The parties are a
lot better off sitting down together and figuring it out as
opposed to having it come to the Congress because the Congress
invariably knows a lot less than the parties do, even those of
us who have sat through this hearing.
ADDITIONAL COMMITTEE QUESTIONS
There will be some additional questions which will be
submitted for your response in the record.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted by Senator Patty Murray
PROPOSED RULE FOR ELECTRONIC FILING OF LM-2 FORMS
Question. The Department's Notice of Proposed Rulemaking makes it
clear that the Department did not conduct any ``survey of unions''
before publishing its proposal. In fact, the NPRM states that,
``[I]nformation regarding the burden imposed by making the `proposed
changes' and the benefit to be gained is most likely to be obtained by
`proposing' the changes for comments so that unions who file these
reports, union members, and other groups that represent workers can
express their views.''
How do you justify your failure to conduct a survey of the unions
that will have to shoulder the immense financial burden of the rule in
light of the regulatory requirements that the Department is required to
follow, such as Executive Order 12866 and the Regulatory Flexibility
Act?
Answer. The Department of Labor has engaged in a process that fully
complies with all regulatory requirements, including Executive Order
12866 and the Regulatory Flexibility Act, and was designed to ensure
that all stakeholders have meaningful input.
The Office of Labor-Management Standards (OLMS) had meetings with
the AFL-CIO and representatives from more than 40 international unions
in which OLMS described the Department's general approach to the reform
and encouraged the attendees of the meetings to submit ideas on a range
of subjects. Other senior officials of the Department also met with
union leaders to discuss their concerns before and during the
rulemaking process.
In addition to the outreach discussed above, the Department
extended the comment period for the proposed rule by 30 days and
published a technology study conducted by an independent software
developer to ensure that the public had an opportunity to comment on
the rule and the burden associated with the proposal. As your quote
from the NPRM indicates the Department correctly believed that the
comment period would be the best source of input from our important
stakeholders. The Department received over 35,000 comments, including a
218 page comment from the AFL-CIO that contained 3 studies. Other
detailed comments were submitted by almost every international union.
The Department is carefully reviewing and considering all of these
comments.
Question. The Department's proposal states that ``no specific data
exist regarding the extent to which unions have already embraced the
technology necessary to provide reports in electronic format.'' Yet the
Department has proposed a technology-based rule, in that it requires
unions to file their LM forms electronically.
Can you explain the Department's failure to conduct any study
whatsoever on the technological capabilities of the unions that will
have to file the revised LM-2 forms?
How does this failure square with the Department's responsibility
under Executive Order 12866 to base its rules on the best scientific,
technical, economic, or other evidence?
Answer. The Department of Labor has engaged in a process that fully
complies with all regulatory requirements, including Executive Order
12866. The Department is confident of the technological aspects of the
proposed rule for a number of reasons.
The development and implementation of an electronic filing system
is not a new project for the federal government or the Department. In
fact, OLMS completed an electronic filing system last year that
performs many of the key functions that the proposed system would be
required to perform, such as pre-populating certain data, importing
certain schedules, entering information directly into the form, various
levels of data validation, attaching digital signatures using Public
Key Infrastructure (PKI) technology, and submission via the Internet.
Other government agencies, including the Securities and Exchange
Commission (SEC) and the Federal Election Commission (FEC) have
successfully developed electronic filing systems that involve
comparable system requirements. The success of OLMS's effort is
reflected in the fact that approximately 75 percent of Form LM-2 filers
now use the OLMS provided software to prepare their annual financial
reports.
The AFL-CIO also reported in their public comments that all
national and international unions and over 87 percent of all local
unions use computer accounting software. The NPRM explained that the
OLMS electronic filing software would be designed to work with
commercial-off-the-shelf accounting packages that are inexpensive and
widely used. Most unions would continue to use the same accounting
software they use today and at the end of the year they would transfer
the appropriate financial data to the Department's filing software
provided at no cost to the unions. The Department also included a
hardship exemption procedure in the NPRM that was modeled after the
procedure used by the SEC for those few Form LM-2 filers that do not
have the capacity to prepare and submit the form electronically and
specifically asked for comments regarding whether this procedure is
appropriate or another procedure might better address legitimate
problems. The Department is carefully reviewing and considering all of
the comments.
Question. One of the Department's central claims about the rule is
that unions will not have a huge compliance burden because DOL will
provide the software necessary to file the forms electronically. Yet
the software does not exist yet and the Department refused to slow down
the timetable so that it could develop the software and allow the
unions to comment on the feasibility of using it.
How can the Department have even the vaguest idea of whether unions
can comply with the proposal if it has not yet developed the software
that will ostensibly enable unions to file the forms electronically?
How can you justify proceeding with the rulemaking in the absence
of the software in light of your obligation under Executive Order 12866
to base the rule on the best available technical and scientific
information?
Answer. In January 2002, the Office of Labor-Management Standards
began distributing computer software to unions that enables them to
complete the existing forms electronically. Approximately 75 percent of
the unions currently filing Form LM-2 reports are using that software
to prepare those reports.
In connection with the proposed rule, the Department contracted
with a professional provider of information technology services, SRA
International (SRA), to assess the technical feasibility of
electronically collecting and reporting the information that would be
required by the proposed changes. SRA concluded that the technology
existed and was mature enough to support the Department's proposed
reporting system. The study was helpful in preparing the Department's
burden estimates in the NPRM. In particular, the study provided
insights regarding the costs that would be incurred by unions to make
adjustments to their recordkeeping systems and to transfer the data to
the filing software at the end of the year. The SRA technical
feasibility study was also made available for public comment during the
rulemaking.
While the SRA study confirmed that the Department's proposal was
feasible, in terms of current technology, it would not make sense to
develop software based solely on a proposal because the Department is
seriously considering thousands of comments, many of which suggest
changes to the proposal. The software that will enable unions to file
their reports electronically cannot be developed until there is a final
decision whether the final rule will require electronic filing and what
the report will contain. Software would then be made available to
unions long before they would be required to file a report in
compliance with such a final rule.
It is important to note that the purpose of the software is to
reduce the reporting burden on unions and to reduce the cost of
disseminating the information on the Internet to union members. The
implementation of the reporting software would come in two phases.
First, in conjunction with any final rule that requires electronic
filing, the Department would provide a Data Specifications Document,
that will give unions the information they will need to interface with
the software and report their information to the Department
electronically. Second, as noted above, the software enabling unions to
file electronically would be provided to the unions well before they
would have to use it to file their reports.
Finally, the Department specifically requested, and is currently
considering, comments on whether the proposed effective date (allowing
at least fifteen months following publication of a final rule before
any union would have to file electronically) provided a sufficient time
period for unions to comply with a final rule. The Department is also
going to establish a help line to answer any questions and will make
other compliance assistance available, including assistance with
respect to changes that would be necessary to implement an electronic
filing requirement. Moreover, all of the information that unions will
need to update their internal recordkeeping and reporting requirements
for the proposed Form LM-2 will be contained in the final rule that is
published in the Federal Register.
Question. Unions have a legal obligation to represent their members
in the workplace, and fulfilling these obligations costs money. As I
understand your proposal, even local unions will have to spend
thousands of dollars to comply with the new financial requirements.
What possible justification could you have to take money away from
representing workers so that unions can comply with paperwork
requirements imposed by the government?
Answer. The Labor-Management Reporting and Disclosure Act of 1959
which was passed by large majorities in both the Senate (a 95 to 2
vote) and House (a 352 to 52 vote) requires that labor unions file
annual financial reports with the Secretary of Labor setting forth
certain specified information in such detail as may be necessary to
accurately disclose their financial condition and operations. The
Congress considered disclosure of such information to be necessary to
protect the rights and interests of union members and the public.
In satisfying this congressional mandate, the Department's proposed
rule attempts to balance the rights of union members and others to
disclosure of the financial information called for by the statute with
the burden placed on unions to furnish that information.
The principal changes being proposed by the Department to improve
transparency and disclosure affect only the largest unions
(approximately one of every five unions). As also noted in the proposed
rule, significant improvements in the software available to facilitate
accounting make it possible to change the form LM-2 in ways that will
provide additional useful information to union members and the public
without unduly burdening unions. The Department is currently reviewing
over 35,000 comments received on the proposed rule, many of which
address the level of reporting and the associated burden.
CONCLUSION OF HEARING
Senator Specter. Thank you all very much for being here.
That concludes our hearing.
[Whereupon, at 4:43 p.m., Thursday, July 31, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]