T-1 Could Help Terminate Union Financial Abuse

(Editor’s note: The following was recently submitted by Mackinac Center Director of Labor Policy Paul Kersey to the U.S. Department of Labor during the public comment period on proposed changes to forms labor unions must submit regarding financial disclosure.)

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There can be little doubt that a more transparent and accountable union movement is in the best interest of workers throughout the country. The improved LM-2 reports have already increased our understanding of union finance and spending, but the ability of unions to create trust funds which are beyond the reach of LM-2 reporting was a major flaw in the reporting process. The new T-1 forms and rules will do much to correct that flaw, allowing workers, whether already members or contemplating union membership, a more complete understanding of union operations and financial priorities.

The importance of full disclosure should not be underestimated. While the Mackinac Center for Public Policy generally is skeptical about the value of government intervention in the affairs of private organizations, there are compelling reasons for making an exception here. Federal regulation in this area is entirely appropriate given the unique prerogatives that federal law gives to unions.

Among these is the authority to represent all employees in a given bargaining unit, without regard to the interests or opinions of individual bargaining unit members. Under the National Labor Relations Act, a fully competent, law-abiding adult may find that a workplace representative has been chosen for her in spite of her opposition to representation or preference for another representative. That unwanted representative will nonetheless be in a position to negotiate wages, benefits, working conditions, hours, promotions, demotions, layoffs and the rest of the range of employment issues on her behalf. Any grievance or disagreement she might have with the employer will be handled by that same representative. This writer is unaware of any other situation where a competent adult can have a representative appointed for him without his consent, and without the ability to opt-out individually and either bring in another representative or negotiate for himself.

That the law in most states allows for the negotiation of an agency-fee clause, under which that same employee must pay union dues or fees for that undesired representation, only adds to the case for strong union financial disclosure rules.

As much as union officials may protest against the burden represented by financial disclosure rules, there is a strong case to be made that financial disclosure is in the long-term best interests of the union movement itself. One of the worst-kept secrets in labor policy is the extent to which union members themselves harbor doubts about the priorities of union officials: In our 2004 poll of union members, fewer than half — 42 percent — of those surveyed agreed that the bulk of union funds were spent "helping workers get better pay, benefits and working conditions." The rest were of the opinion that their dues were mainly spent on "big salaries and perks" for union officials and staff (22 percent) or political parties and candidates (12 percent) or "something else" (10 percent), while 10 percent didn’t know how the union spent their dues. While the slenderest of majorities believed their union was doing what it needed "to make sure it is strong and healthy," a large number of union members, 44 percent, believed their union was "on the decline." These results show that among union members there was much anxiety over the direction of the union movement and the use or misuse of union funds.

Since then the Department of Labor has implemented its revised LM-2 forms, which have done much to make union finances, and particularly union spending, transparent. But that LM-2 form left an important gap: the activities of union trusts.

In the past these trusts have engaged in some rather questionable activities that union members deserve to be made aware of. In our survey of union financial disclosure in Michigan, we found accounts of union joint trusts with employers that sponsored activities such as NASCAR races, lavish receptions at political conventions and conferences in Las Vegas. While none of these activities are illegal, and may even have the support of many union members, they are well outside of the core responsibility of unions, which is the representation of workers in the workplace. If union members are to exercise effective control over their unions, they deserve a full accounting of union spending, including the activities of trusts in which unions are active. The proposed regulation will do much to close this gap and give union members a complete picture of their union’s activities.

We do, however, have some reservations about specific provisions of the T-1 regulations:

• Union Control: In the Department of Labor’s original proposal, a trust would be required to file a T-1 form if a single member of its governing board were appointed by a union, a position that the U.S. Court of Appeals for the D.C. Circuit rejected in AFL-CIO v. Chao. While we understand the Secretary’s desire to avoid further litigation on this point, the revised rule, in which a T-1 form need not be filed unless union appointees make up a majority of the governing board, arguably goes too far in the other direction.

  An illustration of a possible problem with this rule is the makeup of the board of trustees for the Voluntary Employee Benefits Association (VEBA) that was created by the UAW’s recent collective bargaining agreement with GM. The VEBA’s 11-member board will have five members appointed directly by the union, and six "neutral" members appointed by a federal court. If the UAW appointees are inclined to vote as a block, while the neutral members are not — an entirely plausible scenario — the UAW would have effective control over the operation of the trust, but the VEBA would not be required to file a T-1 form or any other report with DOL under these rules.

  A trust governing board in which unions appoint less than a majority of the governing board may still be under effective union control, especially if the other trustees are appointed by a variety of different entities with different agendas. We would prefer that a reporting requirement be triggered when unions appoint one-third or more of the governing board.

• Contributions: The reporting requirement may also be triggered in years when a union contributes more than 50 percent of the trust’s revenues. (This amount includes contributions to the trust made on behalf of a union or its members, for instance, as part of a collective bargaining agreement.) But trust funds are generally not required to pay out in benefits within a year of receiving a contribution. Union members have legitimate interests in the governance of a trust that may very well extend beyond the year in which contributions are made. The reporting requirement should ideally last for several years in these situations, so that union members will be in a better position to track the use of these funds over time.

• Reporting Thresholds: The threshold for itemizing individual disbursements on an LM-2 is set at $5,000. For the T-1 the threshold for itemizing disbursements is set at $10,000. We are aware of no reason why union-controlled trusts should not be subject to the same itemization thresholds as unions themselves.

These concerns aside, however, the new T-1 form, combined with the improved LM-2 form, is an important improvement in union financial reporting, and the Secretary deserves credit for addressing the long-neglected issue of union accountability. The long-term interests of union members and unions themselves would best be promoted by the prompt adoption of the T-1 form and regulations.

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Paul Kersey is director of labor policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.