August 13, 2022

How Politics Are Ruining Union Financial Reports

The Office of Labor-Management Standard (OLMS) positions on union financial reporting and disclosure requirements are like a pendulum, swinging back and forth in time with the duopoly nature of the US election. By facilitating a political battle between Democrats and Republicans over union financial reporting rules, the Workforce Reporting and Disclosure Act (LMRDA) has become overly complex and inconsistent. As a result, the main purpose of union reports is threatened: to give union members an accurate, understandable and timely view of their union’s finances.

Union financial reports

Under the LMRDA, all unions (except public service unions) are required to file financial reports with OLMS. These financial reports are publicly available on the OLMS website. Depending on the union’s total annual revenue, they file different forms: LM-4 for unions with revenue less than $10,000, LM-3 for unions with revenue between $10,000 and $250,000, and LM -2 for unions with revenues over $250. K As unions grow, so do reporting requirements. In fact, LM-2 requirements are much more demanding than publicly traded companies.

For one thing, large unions are required to disclose the total of “salaries, allowances, and all direct and indirect disbursements” to all of their officers and employees that exceed $10,000 in a fiscal year. This would include everyone from the president of the union to his maintenance staff. In contrast, publicly traded companies are only required to disclose the compensation of their senior executives and board members.

Another example is that large syndicates must provide details of all their transactions over $5,000 identifying the consideration and the subject. Meanwhile, companies are under no obligation to disclose the source or purpose of money flowing in and out of their bank accounts. They might even group over $1 billion in revenue as “Other Revenue” without even a sentence explaining its origins.

And the list continues. Due to the additional requirements placed on unions, the union financial reporting regime can be incredibly difficult for accountants to navigate. In such a complex reporting environment, a SALY approach by OLMS would make a significant difference in helping unions make correct financial reporting decisions and improve transparency for union members.

Who is SALY?

Among accountants, SALY is a wise and respected mentor. It’s an acronym for “Same As Last Year”, and it’s an unspoken doctrine that accounting treatments and methods should be copied from the previous year. To some extent, SALY reflects an attitude to avoid making changes in her work. However, SALY remains an effective mentor because accounting issues are rarely new, and she defends an accounting principle of crucial importance: consistency.

Consistency is important to accountants for two reasons. First, maintaining consistent accounting policies means you can compare your current year’s performance with the prior year’s financial statements. Imagine if a baker decided that the ovens she bought in the current year should be treated as an expense rather than a fixed asset. As a result of his change in accounting rule, the bakery’s financial statements would show that his expenses have increased by the cost of the ovens, so his business is less profitable. Yet, in reality, she could have actually earned the same amount of income as last year. By changing accounting policies, financial statements become less useful for comparing the organization’s performance over the past year.

Second, consistency is easy to enforce. In the rare event that there are new transactions or even minor changes to financial reporting standards, accountants must research hours and write accounting notes that justify reporting to future auditors. When the accounting rules are applied for the first time, the risk of misrepresentation is significantly higher. But once that work is done, joining SALY means you’ll be successful without having to do all the extra research and paperwork.

SALY is an incredibly useful tool for accountants working in corporations, nonprofits, and government agencies. However for the unions, SALY is constantly attacked.

Politics in the Union’s financial reports

Due to political pressure, union reporting standards are under constant threat of major changes. Under Republican presidencies, OLMS often cites concerns about misappropriation of funds by union leadership and the need to protect members’ interests to impose new reporting requirements. The T-1 form is a good example.

First proposed in 2002 under the Bush administration, the T-1 was intended to address the “increasing number of financial failures and irregularities involving pension funds and other membership accounts operated by labor organizations.” As a remedy, large unions would be required to file an additional form to disclose more information about trusts owned or controlled by union management. The proposed rule was the subject of multiple legal challenges from labor organizations and was not enacted until 2008. But in 2010, under the Obama administration, the OLMS decided that the T-1 was too heavy and did not achieve its stated purpose. Therefore, the rule was repealed. In 2019, the T-1 made a comeback under the Trump administration, citing concerns that union leadership was using trusts to hide union funds. You might be able to guess what happened to T-1 last year under President Biden. It was canceled once again.

The T-1 is not an anomaly. In 2020, OLMS proposed an expansion of LM-2 to include more reporting requirements, such as having to disclose strike funds, which would be devastating to unions’ bargaining power. But in March 2021, the proposal was withdrawn.

Neither the T-1 nor an enlarged LM-2 saw the light of day. In each case, a change in administration quickly overturned the rules before labor organizations had to file either form. But the process of enacting and rescinding the rules has brought about significant changes in other ways. When the T-1 rule was first published in 2003, the OLMS also removed the requirement to disclose LM-2 union affiliates, as they would have been captured as part of the T-1. But when the DC Court of Appeals overturned the T-1 form in AFL-CIO vs. Chao, the LM-2 was never restored to its original condition. The discrepancy in union branch reporting was not corrected until 2010, when OLMS repealed the entire T-1 rule. For the 1,128 unions that have at least one subsidiary organization, the LM-2s in 2010 and 2011 might look like this:

An average reader who is blissfully unaware of the LM-2 debacle would assume that the UAW purchased $12.2 million in other investments between 2010 and 2011: that is not the case. Instead, the rules have changed and subsidiaries that should have appeared in 2010 appear in post-2011 information. If UAW accountants followed SALY and applied the same accounting principles as of 2010, the 2011 LM-2 would have violated the new reporting guidelines. On the other hand, the new LM-2s reflect a departure from previous accounting policies that may mislead union members.

Had the 2008 and 2020 elections ended differently, the changes to union financial reporting would have been even more drastic. Such changes would make SALY an unenforceable doctrine for union accountants and increase the risk of reporting violations, while hampering members’ ability to understand their union’s financial activities. While Democrats and Republicans may pursue legitimate policy goals when changing financial reporting rules, the endless back and forth comes at a cost to the public who might prefer to keep it SALY.