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% 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 Atrusts@ -- 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 Asubsidiary@ 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 5300 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 approximately10 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 1000 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 1500 pages. A mid-sized union with 13,000 transactions would file a 2200-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, Pub. L. 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 willingess 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.
