July 23, 2003

July 23, 2003 | Commentary on Regulation

A Double Standard for Unions

Here we go again. Accounting shenanigans, lack of disclosure, misidentification of expenses, off-the-books enterprises, embezzlement. Who's the corporate villain this time? It's not big business, but big labor.

 

These examples of union financial misconduct investigated by the Department of Labor sound suspiciously like the accounting scandals plaguing corporate America. Last summer, fed up with such scandals, Congress passed the Sarbanes-Oxley Act to reform corporate accounting practices. Its goals received wide support. As AFL-CIO President John Sweeney has said, "transparency, accountability and full and accurate disclosure should be central goals of financial regulation."

 

He's right. Businesses should make regular, full disclosure of their financial activities so that directors and investors can make informed, prudent decisions. But just as investors demand corporate accountability, so union members should be able to know where and how their union funds are being used -- whether it's representing workers at the bargaining table, providing pension plans and other benefits, or whether it's being wasted on lavish personal dining and entertainment, making special deals, or worse.

 

The Bush administration agrees: In December 2002, Labor Secretary Elaine Chao proposed new rules to strengthen the accounting requirements for labor organizations.

 

Yet, in a surprising turn of double-standards, it seems likely that avowedly pro-worker factions in the Senate, pressed by labor union bosses, will scrap Chao's reform measures when the Labor Department's appropriations bill comes up for a vote before the August recess.

 

Current financial disclosure requirements for unions, first passed in 1959, were designed for a time when unions were smaller, with relatively simple structures. Today, unions are larger, often with national or international affiliates. And many are similar in structure, complexity and scope to large corporations. They offer benefit plans for members, have close business ties to insurance companies and investment firms, and run subsidiaries to help raise money.

 

Yet their requirements for financial reporting have remained essentially unchanged for 40 years, and opportunities for abuse are ripe.

 

The current reporting categories are very broad, making it virtually impossible to know where financial receipts came from or disbursements were made. Major expenses are often reported in lump sums under vague categories such as "education and publicity expenses" and "professional fees." Unions have been found improperly moving expenses to these lump-sum categories in order to avoid disclosure and scrutiny.

 

The rules require that subsidiaries be disclosed only if they're wholly owned by one union. This giant loophole allows unions to create joint ventures such as credit unions or joint strike funds under cover of darkness. As long as the subsidiaries are not owned solely by one union, details of their activities can remain undisclosed. Sound like Enron?

 

These outdated disclosure rules have resulted in numerous incidences of unions hiding or not reporting payments for extravagant benefits, lavish personal dining and entertainment, lucrative deals for union bosses and friends, and other questionable activities. In the past five years, more than 640 union officials have been convicted of fraud or embezzlement. The recent Washington Teachers' Union scandal, where FBI agents seized mink coats and Tiffany silver bought with union money, is but one example of the hidden expenses many union bosses don't want to disclose.

 

The proposed rules call for detailed disclosure of major receipts and disbursements. The rules also would require full disclosure of subsidiaries and trusts such as credit unions and special funds, which will eliminate off-the-books accounting gimmicks and make members more aware of what their union is doing.

 

Union leaders decry these proposed rules as onerous, costly and burdensome, especially for the small unions. However, these standards will apply only to organizations with more than $200,000 in annual receipts. The exemption will knock out approximately 80 percent of unions from these more rigorous requirements, leaving only the largest and most sophisticated to comply.

 

But this complaint is a red herring in a high-stakes game where unions control billions of dollars in pension funds and represent millions of members. Shouldn't modern labor unions be held to the same high standards of disclosure, accountability and transparency as corporations operating in a post-Enron, post-WorldCom environment?

 

Apparently, union leaders don't believe their members deserve the full and complete information that would let them make educated and informed decisions about their own union's financial interests or governance.

 

Secretary Chao's efforts to hold unions to modern standards of accountability should be allowed to proceed. What's sauce for the corporate goose should be sauce for the union gander.

 

Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studiesat The Heritage Foundation.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Regulation

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