By James Sherk and Dan Lips
Teachers in the Hoosier State recently learned that the Indiana State Teachers Association's (ISTA's) Insurance Trust has effectively gone bankrupt. Regulators revealed that the trust, which pays benefits for disabled teachers, owes $86 million in liabilities and has only $19 million in assets. The FBI has begun investigating.
Much of the portfolio's value apparently vanished in high-risk investments. The investment broker managing the trust made 4,000 trades over a nine-month period, perhaps motivated by the 50 percent hike in commissions on trades that ISTA's executive director, Warren Williams, authorized.
As investigators sort out responsibility, school districts and the state government are examining what the fund's shortfall will mean for teachers and taxpayers, who could be on the hook for a bailout to ensure that teachers are insured. Williams has resigned, and the National Education Association announced that it has taken over the Indiana State Teachers Association.
The insurance-fund crisis demonstrates the importance of transparency. Union members deserve to know how their unions spend their money so they can hold the unions accountable. As insurance commissioner Dan Clark argued: "They need to open their books. We don't think ISTA membership is aware of how serious this situation is, and we don't even know how well-informed their board is."
Sunlight protects against corruption and unethical practices. Congress passed the Labor Management Reporting and Disclosure Act (LMRDA) in the wake of scandals in the 1950s involving ties between organized labor and organized crime. Congress believed that workers had a right to know how their unions spent their dues. Lawmakers hoped that transparency would discourage kickbacks to the mob.
For over 40 years, however, the Department of Labor barely enforced the law. The disclosure forms allowed unions to list multimillion-dollar line items for "other" and "miscellaneous" expenses with no further details. In practice, the law did nothing to hold unions accountable.
Elaine Chao, President Bush's labor secretary, made changing that a priority. Her Labor Department enacted reforms that required unions to itemize their expenses and meaningfully disclose their finances. By the end of her tenure, Secretary Chao (who now works with us as a distinguished fellow at the Heritage Foundation) had updated the LM-2 union financial disclosure form, the LM-30 conflict-of-interest-reporting form, and the T-1 forms for union trusts.
These reforms have already borne fruit. Investigative reporters examining the revised LM-2 forms found serious corruption in the Service Employees International Union (SEIU). The president of the Los Angeles local, Tyrone Freeman, stepped down after reporters found that it had paid hundreds of thousands of dollars to companies owned by Freeman's family members, for little apparent benefit. Annelle Grajeda, the executive vice president of the national SEIU, stepped down after investigations revealed that the union had paid her boyfriend tens of thousands of dollars.
Organized labor fought these transparency measures every step of the way. The Alabama Education Association and 31 other state teachers unions -- including the Indiana State Education Association -- filed suit against the Department of Labor, contending that the government should exempt them from disclosure. After several rounds in court, they lost -- but not before delaying the implementation of the reforms by several years.
In hindsight, it's clear why the now-former head of ISTA opposed increasing union transparency. While the regulations that the union leadership attempted to block didn't apply to the Insurance Trust, how likely is it that this was the only incident of fraud or mismanagement in ISTA? Transparency and accountability protect union members from abuses of power by those who should represent them.
Unfortunately, the Obama administration is moving in the other direction -- undoing Secretary Chao's transparency reforms at the behest of organized labor. High on the AFL-CIO's transition wish list was rolling back the new union disclosure requirements. And Obama has delivered.
The Labor Department has begun rescinding the revised LM-2 disclosure forms and has announced it won't enforce the new conflict-of-interest reporting requirements. The Obama administration is also widely expected to begin the process of rescinding the union-trust reporting requirements this fall -- well before unions would have to file the first forms next year. The Labor Department seems intent on ensuring that union members know as little about how their union spends their money as possible.
President Obama wants greater transparency from businesses, banks, the government -- everyone except the union movement. This clearly benefits the union leaders, who will become less accountable to their members. But it's hardly the change Obama promised to bring to Washington.
This article first appeared in National Review Online.