Serial No. 105-118


Printed for the use of the Committee on Education

and the Workforce





Tuesday, June 16, 1998


House of Representatives,

Subcommittee on Oversight and Investigations,

Committee on Education and the Workforce,


Washington, D.C.











Table of Indexes *

Wednesday, June 17 , 1998 Hearing…………………………………………………165


The subcommittee met, pursuant to call, at 1:30 p.m., in Room 2175, Rayburn House Office Building, Hon. Peter Hoekstra [chairman of the subcommittee] presiding.

Present: Representatives Hoekstra, Norwood, Hilleary, Parker, Mink, Scott, Kind, and Clay (ex officio).

Staff Present: Rebecca Campoverde, Professional Staff; Lyden Patrick, Staff Assistant; Mark Rodgers, Workforce Policy Coordinator; Dan Anderson, Brian Connelly, Joe diGenova, Chris Donesa, John Loesch, William Outhier, Michael Qickel, Michael Reynard, Philip Smith, Fred Smolen, August Stofferahn, Dan Sullivan, and Victoria Toensing; Cassandra Lentchner, Minority Special Counsel/Investigations; Gail Weiss, Minority Staff Director; Mark Zuckerman, Minority General Counsel; James Jordan, Minority Director of Communications; Cheryl Johnson, Minority Legislative Associate; Brian Compagnone, Minority Staff Assistant; John Lee, Minority Senior Investigator; Mike, Berlin, Minority Counsel; Greg Jefferson, Minority Counsel; and Darryl Chang, Minority GAO Detailee.


Chairman Hoekstra. The subcommittee will come to order. Mrs. Mink and I have discussed it. I ask unanimous consent, pursuant to clause 2(J)2(C) of the House Rule XI, that counsel be permitted to question each panel of witnesses during this hearing for 1 hour prior to questioning by the Members, for the time to be equally divided between Majority and Minority counsel, and that counsel be permitted to further question each panel of witnesses after questioning by the Members for up to an additional hour, with that time to be equally divided between the Majority and the Minority counsel. Any objections?


Mrs. Mink. No objection.



Chairman Hoekstra. So moved. Thank you. I have a statement that Chairman Bill Goodling, Chairman of the full committee has asked me to read on his behalf:

"Mr. Chairman, it is important to note prior to the start of this week's hearing that behind the scenes the International Brotherhood of Teamsters continues to block access to key information, while publicly appearing to cooperate with this investigation. As you know, Mr. Chairman, counsel for the Teamsters prevented the two witnesses scheduled to appear today from participating in pre-hearing interviews. Such interviews are standard and would have been conducted by a bipartisan group of committee staff. These interviews maximize time at a public hearing by narrowing the scope of questioning by Members. The interviews also make it possible to delve more deeply into specific topics at the public hearing.

"Once again, the Teamsters Union has done a disservice to its members and to the American public by trying to limit the amount of information revealed about legitimate topics of concern. This is particularly troubling in light of testimony given before this subcommittee in May by Mr. Tom Sever who is the acting President of the IBT. Mr. Sever said then that he would cooperate fully with all outside investigations. If this is cooperation, Mr. Chairman, there must be a new creative definition of which I am unaware.

"I would remind today's witnesses that while they have a responsibility to their clients, the officials of the Teamsters Union, the witnesses have a greater responsibility to the Union's 1.4 million members. We will focus on the membership's hard-earned dollars and learn how they were used by the union's officials.

"I look forward to reading today's testimony which will also serve as a basis for further discussion tomorrow, when the hearing continues, with officials from the Department of Labor."

That is Mr. Goodling's testimony, Chairman of the Committee on Education and the Workforce.


Chairman Hoekstra. Mrs. Mink, do you have a statement?


Mrs. Mink. No, I have no statement.


Chairman Hoekstra. Mr. Clay?


Mr. Clay. Mr. Chairman, just a question for the record. Did those witnesses agree to testify before this committee?


Chairman Hoekstra. The witnesses are here under subpoena.


Mr. Clay. Then why was it necessary to have a pre-hearing interview? If they are here, let us interview them now.


Chairman Hoekstra. That is exactly what we are going to do.


Mr. Clay. Then why was it necessary for the Chairman of the full committee to write such a letter and say that they were attempting to frustrate the aims of this committee? They agreed to testify.


Chairman Hoekstra. They are here under subpoena. I think, as the Ranking Member of the full committee recognizes, that it is pretty standard operating procedure that as we prepare for hearings, that the witnesses meet with staff to outline and answer questions to make sure that we can use the time in the subcommittee most productively. The IBT, even though Mr. Sever had indicated that he would fully cooperate and try to do everything that he could to facilitate and expedite the work of this subcommittee, refused to even allow these individuals to be interviewed prior to the hearing.


Mr. Clay. If the gentleman would further yield for a unanimous consent, I would ask unanimous consent that a letter from Mr. Sever explaining why they did not agree to the pre-hearing interviews be inserted in the record immediately following the chairman of the full committee's statement.


Chairman Hoekstra. I am reading the letter.


Mr. Clay. I ask unanimous consent that the letter be inserted in the record.


Chairman Hoekstra. I am waiting for Mr. Parker to review and see if he has any objection or not.


Mr. Clay. Objections?


Chairman Hoekstra. I am not sure he does, but Mr. Parker requested that he be able to review the letter.


Mr. Clay. Certainly.


Chairman Hoekstra. Are there any objections to the unanimous consent request?


Mr. Parker. I object.


Chairman Hoekstra. Hearing objection, the request is denied.


Mr. Clay. Mr. Chairman, did I hear the gentleman say that he objects to the Teamsters explaining why they did not agree to the pre-hearing interviews?


Chairman Hoekstra. I heard an objection to the Ranking Member's request for unanimous consent.


Mr. Clay. So now we know who it is that is stalling and frustrating the stated aim of this committee to get to the truth. I thank the gentleman.


Mr. Parker. Mr. Chairman.


Chairman Hoekstra. Mr. Parker.


Mr. Parker. I objected for a specific reason. The reason is that we have a man who is acting head of the IBT who says that he has so much confidence in all of these people who have been asked to step down that he has not even had an internal review of his own organization. It is my view that I do not need any more lame, what I consider fraudulent excuses sent by Mr. Sever to this committee. What I would like to have is just some fact and some cooperation.

So it seems like it is a little simple matter to me that if the man really wants to get to the bottom of what is going on, he has all the power to do it. Sending a little two-page letter up here trying to cover himself, I have a real problem with that. Because of that, I objected and will continue to object.


Chairman Hoekstra. Objection having been heard, Mr. Scott.


Mr. Scott. Mr. Chairman, I move that the letter be entered into the record right after your statement and I would like to speak to the motion.


Chairman Hoekstra. The gentleman is recognized.


Mr. Scott. Mr. Chairman, this letter, after the Chairman has suggested that the Teamsters are not cooperating, this letter indicates in the last 3 months the IBT has produced to the subcommittee more than 75,000 pages of documents. The staff and outside counsel have spent thousands of hours responding to requests for information from the subcommittee in order to respond to a demand on a Monday for thousands of pages of documents by the following Friday. The IBT pulled 27 employees from their regular duties so that they could locate and photocopy the requested records. The IBT has made available to the subcommittee the work papers of its outside accountants, Grant Thornton, for the period 1991 to 1997, and it goes on and on.

I think it is appropriate in light of the accusation that they are stonewalling that their response be in the record.


Chairman Hoekstra. Does the gentleman ask for unanimous consent for the letter to be submitted?


Mr. Scott. No, Mr. Chairman, I made a motion.


Chairman Hoekstra. All those in favor--are there any other comments on the motion?

All those in favor signify by saying aye.

All those opposed.

The ayes have it.

The letter is submitted for the record. The motion carries.





Chairman Hoekstra. Now I do my opening statement. You get to listen to two of them today.

Today we continue hearings in the failed Teamsters election of 1996 and the Federal supervisors' failure to ensure the integrity of that election. Furthermore, I fear the independent review board, the Department of Justice, and the Union's own leadership are unable to ensure a successful fair election in the vote scheduled for later this year.

We learn more every day of this investigation about the failure of the Federal Government's so-called supervisors at detecting, let alone stopping, financial irregularities and management abuses over a period of years at the IBT. The tragedy is that these failings occurred at the same time the Teamsters rank and file we’re being led to believe that a new day had dawned at the marble palace, that a new period of union democracy and accountability had begun.

This afternoon our panel includes Mr. Stephen Leser of Grant Thornton, which was the Teamsters' accounting firm during the years of Ron Carey's presidency and still is today. We will also hear from Mr. A. Donald Morgan of the Segal Company, the actuarial firm upon which the IBT relied in certain pension fund transactions.

Our investigation's goal is to obtain answers to four basic questions:

Question one: What really happened in the failed Teamsters election in 1996? We have some answers because three Carey campaign consultants have pleaded guilty to Federal charges. The fourth, Bill Hamilton, has been indicted and the U.S. Attorney's criminal investigation continues. But I am interested in any light these gentlemen today can shed on this unfortunate incident.

Question number two: Was the Carey campaign's stealing the election a fluke? As this subcommittee compiles its record of sworn testimony and documentary evidence, it appears to me that this election scandal was not isolated misconduct. Rather, it was an inevitable development after years of financial self-dealing, disregard for Federal supervision, and disdain for the rank and file members by the very people who were touted as the saviors and reformers of the Union. All this was at a time when the Union was plunging into bankruptcy and its leadership was unable or unwilling do anything about it.

Question number three: Is this pattern of high-handed mismanagement and defiance of normal business practices continuing today? The signs are not good. We know that the IBT's counterfeit leadership is still in power with its hands at the controls of the marble palace. We know that the people who ran the Union under Ron Carey are the same people who are running the Union today under acting President Tom Sever. We know that despite his adamant promises made at our May 19 hearing to cooperate with this subcommittee, Mr. Sever refused our request to interview his assistant, Tom Bosley, and the Teamsters' director of accounting Joe, Selsavage. He also ordered our witnesses today not to cooperate with this investigation today by refusing to participate in pre-hearing interviews. We know that third parties, specifically the law firm of Covington & Burling and the private investigation firm of Palladino & Sutherland have been ordered by Mr. Sever and the IBT not to comply with this subcommittee's subpoenas for documents about the work they performed for the IBT. We also still do not have agreement on the issue of the tapes, as we will hear and find out later on through the testimony today. We also continue to get new and more examples of the withholding of documents.

I can only echo what the full committee Chairman said: If Mr. Sever calls this cooperation and getting to the bottom as quickly as possible, he has a much different definition of cooperation than what I have. If he characterizes meeting with Minority and Majority staff in a meeting, in a pre-hearing meeting, as being private meetings, he has a little bit different view of what private is than what I have.

I will say that I appreciate the support that we have received from Mrs. Mink on this subcommittee in going and trying to get answers to these questions. I think we have developed a good working relationship on the work of this subcommittee and how we are going to process through this.

We also know that although the Teamsters plead poverty and demand that the taxpayers, not the IBT, pay for the rerun election made necessary by the Carey fiasco, the Union continues to pour money into political efforts. One million over the past 15 months, according to one press report. We know that despite its broad mandate which is written into the IBT Constitution, the independent review board chooses to take a very narrow approach to its responsibility to monitor and supervise this historically troubled Union. And we know from his own testimony that the independent financial auditor appointed by the Justice Department has chosen to function essentially as a bookkeeper. He is a long way from the financial junkyard dog we were led to expect by Justice. We also know that the Department of Labor's financial reporting requirements for unions like the IBT are inadequate and do not provide meaningful information to the IBT membership. We will hear more about that tomorrow when we will have several Labor Department witnesses on hand.

So are the practices of the bad old Carey days still around? I fear they are. All of which leads me to my fourth and final question: Could what happened in the 1996 election happen again?

The answer is clear. It absolutely could happen again. The audacity of the IBT's current leadership is undiminished. The government's safeguards have not improved. I do not see any way in which this Congress can or should ask the American people, the taxpayers to bail out this union leadership one more time. This is an important, serious matter for the 1.4 million rank and file members of the Teamsters. I don't say that an unsupervised election or no election at all would produce a better outcome. But I do say, unfortunately, that I don't believe another supervised election under the current circumstances, paid for again by the American people, would produce a superior outcome either. Too much remains unchanged.

Let me just also state there is nothing that I would rather have than a quick election, but it has to be a fair election. And I don't believe that those conditions to conduct a fair election exist today. Today we want to know whether there are changes at the IBT or whether our Federal supervisors, auditors, and actuaries are enablers of present misconduct. Who protects the rank and file pension fund, or is the fund simply a tool manipulated by the Union hierarchy to protect their narrow personal interests and suck more money out of the pockets of the people they are supposed to represent? Who ensures there are no more money swaps going on for the next election, or are consultants giving counsel on how to hide this kind of misconduct? Who ensures that the rank and file are able to easily track how their dues are spent, or are the Department of Labor's reporting requirements for the Union so vague that no one can really know what is going on without bringing on an expensive lawsuit? How is it that a Union under Federal supervision can time and time again thumb its nose at a congressional subcommittee requesting evidence and interviews, or it is that the executive branch really does not want the evidence to be given to us because it might have even greater implications?

Witnesses, are you protecting the Union's members' interest, or are you protecting those people who have broken their trust with the rank and file membership?

We need answers to our questions so that we can work to make sure these breaches of the public trust are not repeated in the future.




Mrs. Mink. Mr. Chairman, may I make my comments at this time?


Chairman Hoekstra. Absolutely.


Mrs. Mink. Thank you.

The Chair's indication that the Ranking Member has been willing to cooperate in bringing the issues of importance to the forefront is absolutely true. But I certainly do not share the comments that the Chair has made with reference to the circumstances that we find ourselves in. It seems to me that to repeatedly talk about the failings of the leadership of the Union in the conduct of the last election is not very instructive in terms of what this committee and what we must do as a Nation to make sure that people who are members of the Union have a timely election for the selection of their new officers. Certainly the elections failed the last time and the leadership has been set aside, banned from running for reelection.

It is really time for us to look to the future of this Union. What needs to be done is to insist that a timely, appropriate election be conducted and new leadership selected. There is no point to be gained by talking about the conduct of the last election or the conduct of the current leadership. The current leadership is not duly elected and our responsibility is to make sure that a new group of officers are elected and the membership have a timely opportunity to do so. They have called for, the government has called for the process to begin. Yesterday June 15 was the timetable. We have passed it. We passed the opportunity to have a supervised election. The supervised election was not my doing. It was the doing of an agreement reached under the Bush administration. It was a Republican administration that decided instead of proceeding in criminal court on corruption and all of the other violations that they felt were rampant in this Union, they said our objective is to make sure that democratic policies are instituted and fair elections are conducted so that this Union can have elected officials of their choice.

So a consent decree was entered into in 1989 which called for supervised monitored elections. The first one was paid for by the Union. The cost was something like $20 million, we are told. The second one, conducted in 1996, was to be paid for fully by the Federal Government, which was done. However, in the process of monitoring that election, certain problems arose which could not have been determined except for the fact that there was this monitoring. So to keep hammering at that failed election as the cause for which we need now to postpone again another several months an election because we refuse to pay for it seems to me absolutely contrary to the intended purposes of this committee or the Congress. We have banned the government from paying for the next election even though the courts have said that the Union does not have to pay. It is not relevant to the discussion of the election about all this financial discussion of where the money went or how the pension funds operate, any of the internal operations of this Union.

What is important is that we allow the Union to have an election and under the consent decree it should be monitored and should be paid for by the U.S. Government. The court has said so. It seems to me to thwart not only the court's decision but also the government's consent decree and the will of the members of this Union is not really within the purview of our responsibility or our fulfillment of our purposes in this instance.

I think that it is important for us to investigate and look into the internal books and examine the auditing, but the primary responsibility that we are delaying is the responsibility to call for the election of new officers for this Union.

All of the things that the Chairman has discussed about what he sees perhaps going wrong in the Union, the management and lack of audits and all the rest can be corrected with a new election and new officers who will then be more or less impaneled to conduct the Union in the way that the Chairman sees fit.

My feeling is that the unions as well as corporations in this country have a major responsibility to see that they conduct their business honorably and within the law. Beyond that, I don't feel that the Congress has the responsibility to assure that conduct at every step of the way. We have found out what was wrong in '96. We have determined that these were terrible things that occurred. We concurred with the election officer in putting aside that election.

Now is the time to get to the business at hand, and that is to make it possible for this Union to have its election. My own view is that if we continue to refuse to pay for this election, as the court has ordered us to, then we will have defaulted on the consent decree. By our own default, as the Government of the United States, it seems to me that the Union is free now to conduct its own election in the protection of its members, call for the election. If it is not to be monitored, it is not their fault. It is the fault of the Congress and of the Federal Government. It seems to me that is where we are at.

While this search for what went on in the examination of the books and what is going on now in the examination of the books is very interesting and perhaps relevant to the future operation of this Union, what is really important is that we get to the decision that is at hand. And that is, when is this election to occur and is the government going to do as it is supposed to, pay for the monitoring? If not, then we should stay out of it totally and let the Union have an election. Thank you, Mr. Chairman.


Chairman Hoekstra. I thank the gentlewoman for her statement. What happened in 1996 is very relevant because, if we are going to run a new election in '98.


Mrs. Mink. Mr. Chairman, we don't know that we are going to run a new election because we decided we are not going to pay for the monitoring. I believe they should have an election and the issue of who monitors or not, since we have decided not to pay for it, is already totally irrelevant.


Chairman Hoekstra. May I finish?


Mrs. Mink. Sure.


Chairman Hoekstra. Thank you. The reason what happened in '96 is relevant is because whoever runs an election in '98 wants to have a better result than what they had in '96. We have spent a lot of time taking a look at what was broken in '96. We have taken a look at what has taken place and changed now, as we moved into '98, because the last thing we want to do is have anybody run an election that is going to be overturned again.

Asking unanimous consent to submit for the record a letter from Al Hobart--actually I got demoted here--it is a letter from Al Hobart, secretary-treasurer of the Teamsters food processing employees, public employees, warehousemen and helpers, local Union number 760. Demoted because it is to Dear Senator Hoekstra. But other than that slight, it goes and again is detailing the same kinds of illegal, potentially illegal activities that happened in 1996 under Mr. Carey's campaign are now happening again in 1998, for the candidacy of vice president Tom Leedham and that Mr. Sever has not, Mr. Sever, the IRB or the Justice Department have not put the controls in place that are going to ensure a fair election. I would like to submit this for the record.


Mrs. Mink. I object, Mr. Chairman.


Chairman Hoekstra. You object.


Mr. Clay. Mr. Parker?


Chairman Hoekstra. Mr. Parker, all right.

The Chair recognizes Mr. Parker for a motion.


Mr. Parker. I just thought I would tell my colleague from Hawaii, you just can't win that.


Chairman Hoekstra. Is that a motion?


Mrs. Mink. That was capitulation.


Chairman Hoekstra. All right. We will take this and submit it or we will have a motion to submit it for the record later on in the hearing today.


Mrs. Mink. May we read it?


Chairman Hoekstra. No, because you have already objected. So if you want to read it later on when I ask for consent again--you are right, it is totally irrelevant at this point since it is not going to be submitted for the record and when we come to it later, we will have a copy for you to review and read and maybe you will see the light.

Let us move on to our panel. Are we ready? We have two important witnesses with us today to offer testimony regarding the reporting of information relating to the finances of the Teamsters Union including Union pension funds. Stephen Leser is here as a representative of Grant Thornton which was retained by the Teamsters as its outside accounting firm. Donald Morgan represents the Segal Company, an actuarial firm that conducted work relating to Teamsters pension funds and other matters. Welcome to each of the witnesses. Thank you for being here.

Note for the record that the committee has issued subpoenas to each of you for your testimony today. I will ask each of you to summarize your testimony this afternoon in a brief statement and without objection your full testimony will be included in the hearing record.

Before receiving the testimony of the witnesses, the Chair will ask them to take an oath. The witnesses should also be aware that making a false statement to Congress while under oath may be prosecuted under law. In light of this, will the witnesses please rise and raise your right hands?

[Witnesses sworn.]


Chairman Hoekstra. Let the record reflect that each of the witnesses has answered in the affirmative and can be seated. Mr. Leser, you are recognized for your opening statement.



Mr. Leser. I don't have an opening statement. If I may, I will just do a little background for one minute.


Mr. Chairman, Mrs. Mink, members of the subcommittee, I appreciate the opportunity to introduce myself and my firm. My name is Stephen Leser. I am an insurance services partner at Grant Thornton, the sixth largest accounting and management consulting firm in the world. The firm provides services in accounting and automation, taxation and management consulting to a variety of clients throughout the world.

I have been practicing for 26 years, auditing public and privately held commercial clients, exempt organizations and governmental entities. I have been the engagement partner on the audits of the International Brotherhood of Teamsters since 1992. I am a member of the American Institute of CPAs, a member of the Maryland and Virginia Society of CPAs and the District of Columbia. I appreciate the opportunity to come before the subcommittee today to answer your questions about the audited financial statements and any related matters. Grant Thornton is pleased to assist the subcommittee in its investigation today and in the future. It is an honor to be here. Thank you.


Chairman Hoekstra. Mr. Morgan.





Mr. Morgan. Mr. Chairman, members of the subcommittee, my name is Don Morgan. I am a vice president and actuary with the Segal Company. Seated to my left, your right, is my legal counsel, Tom Gigot of the Bloom Law Group.

Segal is an employee-owned company that provides actuarial and consulting services for employee pension and welfare benefit plans and the organizations who sponsor them. We advise a diverse group of clients including corporations, multi-employer plans, nonprofit organizations, State and local governments, law firms and other professional partnerships.

Taken together, the employees' benefit plans for which we provide actuarial services, benefit millions of working and retired men and women nationwide. As a company, we have more than 50 years of experience and are recognized as industry leaders. Segal was pleased to count among its clients the International Brotherhood of Teamsters and two of the employee pension plans it sponsors, the Teamster Affiliates Pension Plan and the IBT Retirement and Family Protection Plan. Since the late 1980s, Segal has performed annual valuations of these IBT plans' benefit liabilities and provided expense determinations for financial reporting purposes. We have made those evaluations and determinations in accordance with the actuarial standards, practices and procedures, and applicable financial reporting standards governing all private pension plans of this type.

We understand the subcommittee may have questions about the measurement of the plans' liabilities and about how those measurements have been reported on financial statements and other reports. The IBT, as sponsor of the plans, has authorized us to answer such questions in this forum. I will gladly answer any questions the subcommittee may have. One thing I would also like to add, I have a severe hearing loss and I have found it is a little hard for me to understand what you are saying so I may ask you to repeat a question, just one thing.




Chairman Hoekstra. Fine.

Thank you both for being here. The Chair now recognizes the Majority counsel, Ms. Toensing, for 30 minutes to question the panel.


Ms. Toensing. Good afternoon, Mr. Leser. You said that you have been the partner for the IBT since 1992.


Mr. Leser. Correct.


Ms. Toensing. Has Grant Thornton performed audits prior to that time or was 1982 the first?


Mr. Leser. They have not. Can I clarify that? We first started in March of 1992, but the first year we would have audited was December 31, '91, because the audit covered the prior year.


Ms. Toensing. Do you do any other professional services for IBT besides auditing?


Mr. Leser. No.


Ms. Toensing. You still are the auditor for the IBT.


Mr. Leser. Yes.


Ms. Toensing. Do you know when the 1997 audit report will be issued?


Mr. Leser. I do not.


Ms. Toensing. But it is not issued yet?


Mr. Leser. It is not.


Ms. Toensing. Did you talk to anyone in preparation for your testimony here?


Mr. Leser. I don't--could you clarify what you mean by that?


Ms. Toensing. Did you talk to any person in preparing your testimony?


Mr. Leser. I talked with my firm's counsel.


Ms. Toensing. And who is that?


Mr. Leser. Mr. Tom Rafter and representatives of our legal firm.


Ms. Toensing. Did you talk to Joe Selsavage?


Mr. Leser. I did not.


Ms. Toensing. Did you talk to any member of the Minority staff?


Mr. Leser. I have not.


Ms. Toensing. So your counsel is the only person that you talked to in preparing for your testimony here?


Mr. Leser. That is correct. I also talked to a member of my staff yesterday about some issues.


Ms. Toensing. It was limited to the people at Grant Thornton?


Mr. Leser. That is correct, a member of my staff.


Ms. Toensing. Mr. Leser, we gave you a stack of documents.


Mr. Leser. Yes.


Ms. Toensing. We have them numbered. I hope that it enables you to find them when I am referring to a certain document. I would like for you to turn your attention to document number, it is I.A. It is Bates stamped number GTOTR, which means Grant Thornton, 0159. Do you recognize that document?




Mr. Leser. It is pretty ugly but I do, it is my handwriting.


Ms. Toensing. We could decipher pretty much. Those are your notes. Do you recall this conversation?


Mr. Leser. I don't recall any of the specifics but I do recall having a conversation on the subject.


Ms. Toensing. In looking at it, does that help refresh your recollection?


Mr. Leser. The only thing I recall is it had to do with the issue of curtailment of the Teamsters affiliate pension plan.


Ms. Toensing. At the top of the document it says, conference call, and it is dated October 26, 1994. And it lists Bob Hauptman, Jim Bosley, Jim Laws, Sherman Sass and someone named Don with no last name. Would that be Don Morgan who is sitting with you?


Mr. Leser. I believe that is correct.


Ms. Toensing. During this time period, 1994, my information is that Bob Hauptman worked in the general secretary's office at the IBT. Jim Bosley was the chief accountant for the IBT. Jim Laws and Sherman Sass worked at the Segal Company. Is that correct as far as you know?


Mr. Leser. Actually, I think Bob Hauptman worked for the President's Office. But that is just my memory.


Ms. Toensing. Okay. On the upper left side of the lined page is written 7-1/4 to 8 percent; "discount rate" is written underneath that. Do you recall discussing a change in the discount rate for the affiliates' pension plan in the conference call when you discussed ending the plan?


Mr. Leser. No, I do not.


Ms. Toensing. Do you recall whether in 1994 the affiliates' pension plan discount rate was increased from 7-1/4 to 8 percent?


Mr. Leser. I honestly don't recall.


Ms. Toensing. Do you know who would have made that decision to have increased it?


Mr. Leser. If it was changed, I am sure it was, the decision was made by the management of the Union in consultation with the actuaries, and I may have been in that discussion. I don't know. It was a management decision. I don't really actually recall that.


Ms. Toensing. But this is your handwriting discussing the various interest rates; is that correct?


Mr. Leser. Yes, it is.


Ms. Toensing. Do you know when the decision would have been made? Your telephone call took place in October of 1994. Would the decision have been made at that time of the year or later, November-December?


Mr. Leser. I think after this, there was actually a meeting to conclude upon the decision to have a curtailment, which is a freeze, a partial freeze of benefits of the plan, which I believe was discussed at a board meeting. After that, they went forward with whatever changes were made. But I don't really recall the timing of it.


Ms. Toensing. Is it your testimony that it would have happened after you had this discussion, sometime afterwards, maybe November, December?


Mr. Leser. I will be honest, I don't recall. I just can't recall.


Ms. Toensing. I would like to turn your attention to Exhibit 1.C.2. Do you have any information today that the discount rate was changed from 7-1/4 percent to 8 percent in that year, at the end of '94?


Mr. Leser. In that case the discount rate was 7-1/4 for '95 and '94.


Ms. Toensing. That is correct. That is the financial report for 1995.


Mr. Leser. That is correct.


Ms. Toensing. Now let me turn your attention to the next document, I.C.1. That is the IBT 1994 audited financial statement. There it says that the discount rate used in determining the actuarial present value of projected benefit obligation was 8 percent and 7.25 percent for 1994 and 1993.


Mr. Leser. Yes.


Ms. Toensing. That is not consistent with what the financial report for 1995 says; is that correct?


Mr. Leser. It does not appear to be consistent. It may have just been reversed. No, it is not consistent.


Ms. Toensing. Are you aware that when the IBT first produced financial documents to the subcommittee, that the very page, 1.C.2, the 1994 that disclosed the discount rate was 8 percent, was omitted from its production?


Mr. Leser. No.


Ms. Toensing. Are you aware that when this key page disclosing the 8 percent, actually it was on page 27 of the report, when that key page was omitted, that the Bates stamp numbers from the page before and the page after had no omission? So in other words the Bates stamps on pages 26 went from page 26 to 28, but the Bates stamps did not miss a beat. They went from 0265 to 0266, thereby making it appear that no page was missing. Are you aware of that?


Mr. Leser. No.


Ms. Toensing. Are you aware that the Teamsters counsel, after we called it to their attention, later called the omission of this document inadvertent and that they later Bates stamped it 0265A?


Mr. Leser. Of course not.


Ms. Toensing. Do you know why that 1994 page showing 8 percent would have been omitted while the 1995 page, incorrectly stating that it stayed at 7-1/4 for both years, was produced?


Mr. Leser. I would have no idea.


Ms. Toensing. Let us look back at your notes. On the right side of your notes on Exhibit I.A, immediately across from the writing I just described, saying 7-1/4 to 8 percent discount rate, the notes calculate 7-1/4 and provide a bottom line of net loss at 16, it says, with the dollar sign, 16. That referred to $16 million; would that be correct?


Mr. Leser. I believe so, yes.


Ms. Toensing. Does that mean with a discount rate of 7-1/4, which was the rate used in previous years, the affiliates' pension plan would show a loss of $16 million?


Mr. Leser. I think that is what it means, yes.


Ms. Toensing. Under 8 percent, your notes, it says, gain plus, dollar sign, plus 13. That is $13 million; is that correct?


Mr. Leser. I would believe that is correct.


Ms. Toensing. Does that mean that at a discount rate of 8 percent, the affiliates' pension plan would show a gain of $13 million?


Mr. Leser. I believe that is correct. That is what my notes indicate.


Ms. Toensing. Were you aware, as the auditor, that a net loss of $16 million in the affiliates' pension plan would significantly, significantly reduce the net worth of IBT?


Mr. Leser. Well, it is true a net loss would reduce their net worth, yes.


Ms. Toensing. Were you aware that increasing the discount rate to 8 percent would reflect a profit for the year because that would lessen their liability?


Mr. Leser. That is true.


Ms. Toensing. You wrote a letter to Joe Selsavage, March 25, 1998, coincidentally right before a hearing we had on this where we were mentioning this issue. Do you recall if Mr. Selsavage, that is Exhibit I.H, do you recall how that letter came about?


Mr. Leser. He asked me to write the letter because he believed there was some confusion about the accounting.


Ms. Toensing. He called you and asked you to write the letter?


Mr. Leser. Yes, he did.


Ms. Toensing. Did he tell you it was because there was a congressional hearing?


Mr. Leser. That I don't recall. I know that he suggested that there had been some members of the Union who were raising questions about the accounting for this curtailment. He asked me to write a letter explaining the accounting that was involved. Whether or not it was going, that part I don't recall actually.


Ms. Toensing. The letter is dated March 25 of this year, that was the week that we did have such a hearing here.


Mr. Leser. That may well be.


Ms. Toensing. According to your document, you said that the calculations are made according to the financial accounting standards number 87. According to those standards the primary source to be used in choosing a discount rate are those rates published by the Pension Benefit Guaranty Corporation or the PBGC; is that correct?


Mr. Leser. I think there are different options you can select in selecting those rates.


Ms. Toensing. Do you know, then, what was the basis for the discount rate for 1994?


Mr. Leser. I do not.


Ms. Toensing. You were not part of that decision in any way?


Mr. Leser. As I have told you, I participated in a phone conversation that discussed the curtailment but I did not make the decision about what discount rates were to be used. I think that was a management decision.


Ms. Toensing. If you will look at Exhibit I.F which is the PBGC various rates where they published the rates for the year '94, you will see, '95, '96 and looking back for October of 1994, the rate suggested there is .070; is that correct?


Mr. Leser. October 1994, .070, if that is i-t, yes.


Ms. Toensing. And then in December, the highest rate even for that year was .075; is that correct?


Mr. Leser. That is what it indicates.


Ms. Toensing. Do you know why these rates were not used?


Mr. Leser. I do not.


Ms. Toensing. According to your notes, changing the discount rate three quarters of a percent would cause a $30 million swing, right, either a $16 million loss or a gain of $13 million? That is a lot of money in between there, it is about $30 million. That rounds out to about $10 million per quarter percent if we agree on the math here. So for every quarter percent there is a $10 million gain.

Mr. Leser. I agree that there is a difference of 16 versus 13. How exactly that math works, I am not an actuary, I'm not going to step on that one, I am afraid.


Ms. Toensing. Okay. Are you aware that the IBT Constitution provides that when the net worth of the Union drops below $20 million, that $1 member per month assessment is triggered?


Mr. Leser. I thought it was $25 million.


Ms. Toensing. No. If it goes below $20 million, then the assessment is triggered. When it gets back up over $25 million, then that assessment is taken off.


Mr. Leser. Okay.


Ms. Toensing. It is terminated. Are you aware of that?


Mr. Leser. I am aware there is an issue about their assets dropping below a certain point. I just expressed my view of that. I thought it was a $25 million number. You may be correct.


Ms. Toensing. You can see on Exhibit Roman numeral I.G, we have the Constitution there. In section 2 it says: Whenever the assets run below $20 million, the General Executive Board shall levy an assessment of $1 per member per month on all local units until such assets reach $25 million.


Mr. Leser. Thank you.


Ms. Toensing. So if you had kept the 7-1/4 rate or even gone with 7-1/2 percent, the Teamsters would have shown to be bankrupt on their books, correct, because it would have been a loss of their assets such that there would have been a loss on their books?

On the other hand, if you chose an 8-1/4 percent, the Teamsters would have shown a net worth of over $25 million, and the $1 per member per month assessment it received when the net worth dropped below $20 million would have terminated, causing the IBT to lose about $17 million a year.


Mr. Leser. I think you have made a couple of leaps of faith there. I think there are a lot of other numbers that would have gone into those calculations. I am not sure that I can--I understand what you are saying, but I am not sure that you can add all those things up and get that result.


Ms. Toensing. That is--the discount rate was changed to 8 percent. In the years previous it had been 7-1/4.


Mr. Leser. I understand.


Ms. Toensing. So by raising it three-quarters of a percent, the value then became $30 million more than if it had been consistent with the years before?


Mr. Leser. Yes.


Ms. Toensing. Which was just high enough so that the $25 million was not exceeded. We have more information, of course, if we could have interviewed you prior to this, but of course we were not allowed to do that. But those are the figures that we have. Those are the figures that stood out with us, the spike in the discount rate of going from 7-1/4 percent to 8, and then going back down to 7-1/4 percent the following year.

In looking at those figures, what we see is an increase or a decrease in the debit side, or an increase in the worth side of $30 million; just enough, according to the figures we have, to keep it under the $25 million so as not to lose the special assessment, but enough to keep the Union appearing solvent.

It would have been nice if we could have interviewed you ahead of time. Maybe you could have thought about all this, and maybe there is some way to clear up these figures. But those are what all the figures and the documents that we have tell us.

Do you have, Mr. Leser, the underlying documents for establishing the discount rate?


Mr. Leser. I do not.


Ms. Toensing. You did not participate in that whatsoever?


Mr. Leser. The actuaries prepared those calculations.


Ms. Toensing. You participated in a conference call regarding those?


Mr. Leser. I participated in a conference call.


Ms. Toensing. So you were somewhat involved in this?


Mr. Leser. I listened to a discussion of these issues, yes.


Ms. Toensing. So you were part of it in learning all this factual information about how the interest rate, the discount rate, would work?


Mr. Leser. Yes. I participated in a phone call that discussed these matters.


Ms. Toensing. Now I would like to turn your attention to another area. If you would look at the document under Roman numeral II, II.A, I think you testified that you or Grant Thornton is a member of the American Institute of Certified Public Accountants.


Mr. Leser. I am a member of the American Institute, yes.


Ms. Toensing. So those are the standards that you would use in conducting an audit; is that correct?


Mr. Leser. Correct. Generally accepted auditing standards.


Ms. Toensing. In the course of conducting your 1996 audit of the IBT, you, I guess meaning Grant Thornton, and we will find out if it is you in a minute or two--find some questionable conduct regarding political contributions and activities by the IBT, specifically, by Bill Hamilton, correct?


Mr. Leser. No.


Ms. Toensing. All right. Then take me through this document.


Mr. Leser. Please.


Ms. Toensing. Do you recognize this document, II.A, entitled "Reportable Conditions and Advisory Comments," and dated December 31, 1996, and Bates-stamped 960390?


Mr. Leser. This is a form that we use for accumulating various advisory comments, matters that are encountered in our audits. All throughout the audit process there can be any number of these prepared where various staff that work on the engagement will come up with suggestions or recommendations of things that they encounter. So there can be, in any engagement, any series of forms just like this.


Ms. Toensing. I interpreted this, and this might not have been your exact words, that you were the partner in charge.


Mr. Leser. That's correct.


Ms. Toensing. I sort of translated it to like a law firm. If I would be a partner in charge of the case, the buck stops on my desk.


Mr. Leser. Yes.


Ms. Toensing. So the buck stops on your desk in this?


Mr. Leser. That is correct.


Ms. Toensing. Have you seen this document before?


Mr. Leser. Actually I did not see this until yesterday.


Ms. Toensing. How did you see it yesterday?


Mr. Leser. My attorney showed it to me.


Ms. Toensing. Let me read it for you, and maybe you can see if you recall why you did not see it if you were the partner in charge, or what happened.

The document says "IBT had significant contribution expense in FY 96 due to the election year causing the drive," which is the political arm, the financial political arm of the Teamsters, the fund they use to give their political contributions, "causing the drive to have to use most of its money in order to support some activities. General fund dollars were used. We noted the support for these contributions included memos from Bill Hamilton noting specific political contest and party/candidate."

I assume you are aware that Bill Hamilton was indicted in May of this year in the Southern District of New York for conspiracy and embezzlement, including the contribution swaps involving the Carey campaign and certain other political contributions?


Mr. Leser. Yes.


Ms. Toensing. Do you know who wrote this document?


Mr. Leser. Yes. I understand who wrote this document, a member of my staff.


Ms. Toensing. Who was that?


Mr. Leser. Rebecca Lundgren, I believe.


Ms. Toensing. Lundgren, L-U-N-D-G-R-E-N?


Mr. Leser. Correct; Rebecca.


Ms. Toensing. What was the purpose of this document?


Mr. Leser. As I started to speak to earlier, in the process of doing the audit, our people are directed to identify any kinds of suggestions, and they may relate to costs, they may relate to efficiencies, they may relate to anything at all they see in the audit process. They prepare forms like this.

After the audit is complete, after the audit field work is finished, when we have a time to look at that, the staff go back, usually with the manager, and look through the comments to see which ones are appropriate or valid, which ones have been repeated before, and eventually to make a decision about whether or not these comments should make their way into a letter of recommendation. That is a by-product of the audit.


Ms. Toensing. Let me read to you a recommendation on this.


Mr. Leser. Could I finish?


Ms. Toensing. Go ahead. I am sorry. I thought you were through.


Mr. Leser. No. I was trying to finish. So they go through a process of looking through these, and there may be 10, there may be 20. It varies with the audit. They then decide from that process whether or not there needs to be a written letter, and then what items, if any, should go in the written letter that are appropriate.

Looking at this, the genesis of this is a newsletter that came to someone in our tax department, who wrote this note on the next page behind it, indicating that they believed that this comment should be included, and the Susan is a Susan in our tax department. I noticed this newsletter is dated April 21, 1997. The audit field work has already been long completed, and I believe that Susan, just making comments as tax people do, passed this along to Rebecca for her to include it, as I look at this note.

Like I said, in the process of drafting the advisory letter, which is done after the audit is complete, the managers will look at that information and then decide whether the letter should be prepared. The draft letter that was prepared did not include this comment.


Ms. Toensing. Excuse me. I need to ask you a few more questions. Did you remember all this after you talked with your counsel yesterday?


Mr. Leser. I did not see these documents, as I was about to get to, if you will allow me to finish, please--


Ms. Toensing. I only have so much time, so I have to ask you some more questions.


Mr. Leser. Of course.


Ms. Toensing. But if you would like to meet with us at a time after this hearing, we would love to meet with you. We would love to have an interview.

Let me just read to you the recommendation here. That says, "We recommend that memos to support such distribution not highlight the political nature of the contribution, in order to protect the exempt status of the organization. The IRS may question the excessive use of member dues for such activities relative to other member benefits. Also, consider transferring the money to the PAC to distribute."

I don't know, are you a lawyer also?


Mr. Leser. No, I am not.


Ms. Toensing. Smart. Smart person, there. But in the legal arena, those who do this kind of law know that there is case law that says that if a Union transfers money from its general funds to its political funds, it is taxed. Are you aware of that?


Mr. Leser. I am not a tax expert.


Ms. Toensing. All right. Are you aware that 2 USC 44 1b(a) states that it is illegal for any labor organization to make a contribution or expenditure in connection with any election at which a Senator or Representative in Congress are to be voted for or in connection with any primary election or political convention or caucus?


Mr. Leser. No, I am not.


Ms. Toensing. I have the statute for you in II.C.

So there appear to be two issues raised by these documents that could warrant further investigation. That is, as this document indicates, the money spent in these transactions lose their tax exempt status under the relevant tax laws, and I have a case at II.E for you to review; and second, whether these contributions are a violation of the FEC law, specifically 44b(A), which I just cited.

Did you or anyone else at Grant Thornton discuss this memo or inquire what was happening about this?


Mr. Leser. No. As I said, I never saw this memo. We made no such recommendation.


Ms. Toensing. So it never came to your desk as a partner?


Mr. Leser. It did not.


Ms. Toensing. Why do you think that is, if this is what one of your staff observed and wrote a memo on?


Mr. Leser. I think that the manager who looked at this decided it was an inappropriate recommendation.


Ms. Toensing. Who was the manager?


Mr. Leser. The draft that came to me never included this comment.


Ms. Toensing. Who was the manager who looked at it who you must assume did not think that it merited going up the ladder?


Mr. Leser. His name is Kevin Madden.


Ms. Toensing. Can you spell that last name?


Mr. Leser. M-A-D-D-E-N.


Ms. Toensing. Kevin Madden?


Mr. Leser. Correct.


Ms. Toensing. So to your knowledge, nobody at Grant Thornton caught this, a possible violation of the election laws and the attempt to evade an IRS exemption, even though it was written in a memo; is that correct?


Mr. Leser. I am not sure that that is what this really says. I think, if I understood this, reading it for the first time yesterday, it is that someone in our tax department thought there could be potentially an issue here, and recommended that that issue--


Ms. Toensing. They were right.


Mr. Leser. I--


Ms. Toensing. Weren't they?


Mr. Leser. I don't know. I can't conclude on that. I only know that someone saw this newsletter article and suggested that a certain recommendation be made. That recommendation was not addressed.


Ms. Toensing. Well, in that document, which is at II.B, and that is the document that you were referring to where, the note, the handwritten note at the top of the document says, "Rebecca, this is why I thought the memo re specific political party/candidate support should be removed from Teamsters' files."


Mr. Leser. Yes.


Ms. Toensing. Who is the person who wrote that?


Mr. Leser. Susan, in our tax department.


Ms. Toensing. Susan? What is her last name?


Mr. Leser. Vowell, V-O-W-E-L-L.


Ms. Toensing. So the tax department wrote this to Rebecca, alerting her to a problem that the tax department saw, where she talked about specific political party/candidate support should be removed from the Teamsters files. Is that Grant Thornton's files, or from the Teamsters files?


Mr. Leser. I can only interpret. My understanding of what she was recommending is that the Teamsters' memos that are describing these contributions not be related to a specific contest, political contest. That is the way I interpreted what is written here. But again, I never saw this before. We did not make any such recommendation.


Ms. Toensing. But the recommendation was, don't put it in your memos anymore, Teamsters, that you have a specific political candidate in mind when you make these contributions, or the IRS may take away your exempt status on that money?


Mr. Leser. I think that is an issue that is being discussed here. We did not conclude on that.


Ms. Toensing. I'm told I am out of time.


Chairman Hoekstra. Minority counsel will be recognized for 30 minutes.


Ms. Lentchner. Thank you, Mr. Chairman. Mr. Leser, it has been widely reported that the IBT's net worth has declined substantially in the last 6 years. People have asked where that money has gone. Can you tell this committee where the money has gone?


Mr. Leser. It has gone lots of places, but I think you have to go back and look at the convention in 1991. At the convention in 1991 the delegates voted to increase the strike benefit of $55 a week to $200 a week. Unfortunately, at that time they also did not think it was appropriate or necessary, I guess, to change the dues structure, which had been fixed for a long time back, I guess to the early 1980s. So one of the immediate issues that came to be is that you had a significant increase in the strike benefits.

The next factor that comes into this is that already in 1991, and prior to that, the Union was already running at a deficit. I think in 1991 the Union actually had a deficit of about $40 million. So now we had an increase of almost a fourfold increase in the strike benefit.

We also had a new administration that wanted to be much more active, do a lot more for its members in terms of organizing and in terms of growing the Union, which had a membership that had been shrinking. They wanted to be a more active administration, which caused them to engage in deficit spending, particularly in 1992 and 1993. That has a compound effect. As you engage in deficit spending, they also have a large amount of investment income. So as you spend down your investments, then your investment income drops also.

So we have a significant increase in expenditures, we have reduced constant dues income and reduced investment income, which had been significant. So the answer to your question is that we had some very significant increases in expenses without an increase in the dues at that point.


Ms. Lentchner. As a general matter, the increased expenses that you have been discussing, in your opinion are those policy decisions, which are within the discretion of the IBT general executive board?


Mr. Leser. Yes.


Ms. Lentchner. Were the increased expenditures and the decrease in the Teamsters' net worth disclosed?


Mr. Leser. Absolutely.


Ms. Lentchner. Are they in your audit opinions?


Mr. Leser. The opinion is where we express our opinion on the financial statements. They are disclosed in the financial statements. All our opinion does is speaks to those financial statements.


Ms. Lentchner. To your knowledge, are the audited financial statements published in the Teamsters magazine?


Mr. Leser. Yes, they are.


Ms. Lentchner. So in answer to the Chairman's question that he asked in his opening statement as to who ensures that the rank and file are able to track the way their dues are spent, would you agree that publication of the audited financial statements in the Teamsters magazine is at least one way that the rank and file members are able to track how their dues are spent?


Mr. Leser. I think it is an excellent way.


Ms. Toensing. Could you describe for the committee the role of an auditor, and in particular, whether an auditor is generally charged with making sure that accurate financial numbers are disclosed in audited financial statements versus questioning the prudence of management's business judgments?


Mr. Leser. Our job is to form a professional opinion on the financial statements, and the financial statements fairly present the financial position or results of operations of the activity's financials, so we want to see that the financial statements present fairly the information.

The financial statements are primarily the responsibility of management. We include our opinion on that, on those financial statements. But the financial statements reflect business decisions that are made in the course of operations, and we do not make decisions about our clients' operations. Those are decisions made by management.


Ms. Lentchner. Generally you do have experience in auditing other nonprofit organizations, in addition to the Teamsters; is that correct?


Mr. Leser. Correct; yes.


Ms. Lentchner. In your experience, is it the goal of a nonprofit organization to build its treasury and asset value?


Mr. Leser. No. No. Not-for-profit organizations, it is not measured by the bottom line, it is measured by--I think its success is measured by the benefits it provides to its members, and the fact that in a commercial setting your bottom line, your net income, net loss, deficit, however you describe it in the commercial world versus the not-for-profit-world, has a very different significance.

For a commercial entity having a loss can be a very negative thing. In a not-for-profit organization, having a profit or loss may or may not be a good thing, depending upon the circumstances. A not-for-profit may engage in deficit spending in any given year for a specific purpose, as opposed to a commercial organization. You do not normally want to see a commercial company without good purpose engaging in repeated losses. It is usually a negative indication.


Ms. Lentchner. So as a general matter, was the decrease in the Teamsters' net worth something that concerned you in auditing their books and records?


Mr. Leser. I would say it is a concern. I think the most important issue that I saw when seeing the large loss in 1991 and then seeing the projections they had prepared early in 1992 for the future, that they understood that they needed a permanent solution to their dues structure in order to accomplish their goals.

So I would say yes, I had some concerns that they were engaged in deficit spending, but I was--I think those concerns were partially satisfied by the fact that they had projections. They understood that they would need to dues increase. They had projections showing that they were going to engage in deficit spending for several years. This was not something they were doing accidentally. This is something that they had planned for.

They had outside consultants come in and prepare projections for them in 1992, when they were first taking over the management of the Union, so it was not--I think if a client incurs losses that are unsuspected, you have a greater level of concern than where they have consciously looked at it and said, yes, we are going to engage in deficit spending because we want to accomplish certain goals, and that we have a plan. We realize we need to increase our dues in order to carry out our future activities.


Ms. Lentchner. This committee has heard testimony about alleged irregularities in the Teamsters' reporting of its liabilities to two pension plans, the Teamsters Affiliate Pension Plan and the Retirement Affiliate Pension Plan. In particular, there was testimony by Mr. Smolen, a consultant to this committee, on March 26. Are you familiar with that testimony? Have you read it?


Mr. Leser. I have read it.


Ms. Lentchner. I have a few questions generally to ask both Mr. Morgan and you about it.

First, just a little background. Am I correct, Mr. Leser, that there are approximately 1.4 million Teamsters?


Mr. Leser. I think that is generally correct.


Ms. Toensing. With respect to the two pension plans we are discussing here, the affiliate plan and the family plan, do you know approximately what percentage of the 1.4 million Teamsters are involved in those plans?


Mr. Leser. Those plans are not really meant for rank and file Teamsters. One is a headquarters plan. One is a plan for local officers. I would imagine very few, less than 1 percent.


Ms. Lentchner. In your opinion, Mr. Leser, is the description of the Teamsters' affiliate pension plan and the retirement and family pension plan in the Teamsters' audited financial statements fairly presented and prepared in accordance with generally accepted accounting principles?


Mr. Leser. Yes, it is.


Ms. Lentchner. Are you aware of any money disappearing from either of these pension plans?


Mr. Leser. No.


Ms. Lentchner. Are you aware of any illegal conduct or mismanagement in connection with the administration or reporting with regard to either of these pension plans?


Mr. Leser. No, I am not.


Ms. Lentchner. Mr. Morgan, I understand that there have been some changes made to the Teamsters' affiliate pension plan in the last 6 years. In particular, there was a freezing of that plan.

Could you describe to this committee what it means to freeze a pension plan?


Mr. Morgan. When you freeze a pension plan, you basically cease all of the accruals after a certain date. The date was as of December 31, 1994. There would be no accruals after that date except for some minimal accruals required by law, and some locals elected to continue to contribute and receive accruals. It was 20 or 30 locals out of about 600 that chose to do that.


Ms. Lentchner. Were the options taken to freeze this pension plan legal and proper?


Mr. Morgan. I am sorry, what was that?


Ms. Lentchner. Was the freezing of this pension plan, the Teamsters' Affiliate Pension Plan, legal and proper?


Mr. Morgan. It was certainly legal. It was something that people do oftentimes when they are in financial difficulties.


Ms. Lentchner. Do you have an understanding of the reasons that a decision was made to freeze this pension plan?


Mr. Morgan. I don't know the details of people's thinking during the course of the year or so, but prior to the freeze, concerns were expressed about the financial implications, the cost of the plan; in addition, the question of people being covered by more than one plan.

We did a study, and almost everybody in the pension plan was covered by at least one other pension plan. Then there were questions about the level of pension benefits that people were getting.


Ms. Lentchner. Is it accurate that both cost and fairness policy reasons were among the motivations?


Mr. Morgan. Right.


Ms. Lentchner. With respect to the Retirement and Family Pension Plan, there were changes made to that plan in the last 6 years as well, weren't there?


Mr. Leser. There have been several. The main one was effective in 1996, where there was a sort of package of plan changes that were put into place. They changed the lump sum factor to be used to calculate, which would reduce the lump sum benefits that were paid out.

Under the law, you can recognize compensation up to $150,000. That was lowered to $100,000. They adopted 3-year vesting, and previously you could recognize affiliate service, transfer from the affiliate plan to the pension plan. That was frozen, and instead, they would recognize, for eligibility purposes only, service with any Teamster plans. So if you had service under a multi-employer plan, that service would count towards that for vesting purposes.


Ms. Lentchner. Were these changes all legal and appropriate?


Mr. Morgan. They were all legal and appropriate.


Ms. Lentchner. Were cost savings the motivation for these changes as well?


Mr. Morgan. That was certainly one of their concerns that was expressed to me. The total package, I think it was like half a million dollars' reduction.


Ms. Lentchner. Were there also fairness and equity concerns that were expressed to you as one of the motivations for the changes?


Mr. Morgan. There were. The lump sum factors, they changed to sort of the new minimum required by law, but only for computation above $30,000. For benefits accrual compensation below $30,000, it was the old package, which was more generous to the participants.


Ms. Lentchner. Now, Mr. Smolen testified before this committee on March 26 regarding the change in the vesting period for the Retirement and Family Pension Plan, the change in the vesting period that you just referred to. He stated that as the plan covered only headquarters personnel, in substance, it was a self-dealing transaction, the costs of which were charged to the Union treasury but borne by the rank and file workers.

Do you have an opinion regarding that statement?


Mr. Morgan. I think, to sort of--there were a number of things going on. Changing to 3-year vesting was sort of a move to not give people more, necessarily, just vest them in the amount they had already approved. It was consistent with the 3-year vesting, and the affiliates' plan had sort of a vesting standard put forth of a plan, which was top-heavy, for example. The Internal Revenue Code would require that. It is sort of a decision that someone made, depending if they wanted to keep workers or hire workers, if they would be turning over, or something like that.


Ms. Lentchner. In your view, is the characterization of a self-dealing transaction a fair characterization?


Mr. Morgan. I don't think so. I don't think they were doing anything like that. I think it was a reasonable plan change. "Self-dealing" is not in my vocabulary, I guess.


Ms. Lentchner. Mr. Smolen also had some statements relating to the accuracy of the reporting of these pension liabilities on the Teamsters' financial statements.


Mr. Leser, I thought maybe you could address your opinion of the following statement. It was said that the liability, when we are referring to the Teamsters Affiliate Pension Plan, "The liability, which ranged between $27 and $31 million since 1993, has appeared in the financial statements every year since 1993, even though the plan is fully funded."

Can you address that statement?


Mr. Leser. I think the plan was underfunded for a number of years. If you go back to 1991, I don't recall, but I think the investment performance as well as a lot of other factors went into determining whether the plan was fully funded or underfunded. So I think up until 1994, if I recall, the plan actually was underfunded.

An amazing thing happened in 1995, 1996, and 1997, of which we have all been benefits of, which is the U.S. economy. This plan has done very, very well. Pension information is based on long-term investment rates, and we talked earlier about one of the assumptions in making these calculations, one being the discount rate. Another assumption is what is your long-term return on your plan assets.

Typically those rates tend to be 8, 8-1/2 percent. In fact, if we take that rate much above 9-1/2 you get a nasty letter from the SEC asking you, what do you think you're doing here? In any event, the long-term rates the plans use to estimate their investment performance tends to be in the 8 or 8-1/2 long-term rates. But what we have seen, and I think it is probably a good thing, in the last--1995 and 1996 and 1997, is that many plans have experienced_the investments have done marvelously better than the long-term rate that is used in those assumptions.

So many defined benefit plans, in fact, are now overfunded simply due to the excellent performance of the market. So whether or not--with the testimony about having a liability in the plan, it being overfunded, the recognition of those liabilities in an employer's financial statements, any employer's financial statements, be it IBT or any number of corporations, is driven by accounting rules that I think were described in Sunday's Washington Post as being arcane. They certainly are complex, but the rules are meant to--that we are dealing with long-term pension liabilities. They are talking about people retiring 20 or 30 years from now, so the accounting rules try to recognize that expense, if you would, as it is over a long-term rate.

So the accounting rules don't cause the fact that a plan has great performance in 1996 and 1997 to instantly record that benefit. It is recorded over a number of years. Likewise, God forbid, if the market tanks in the next week or two and loses a specific amount of its value, the accounting rules do not require immediate recognition of that liability. These things are amortized over a period of time.

So it is an accounting rule that tries to recognize that investment performance and other changes in these actuarial benefits are things that are caused over a long period of time, and are not things that require immediate recognition. So as far as the testimony, I think the plan has been underfunded. It is currently overfunded. It may be underfunded again. I don't know. It depends on a lot of factors.


Ms. Lentchner. Mr. Morgan, I wanted to ask you two questions I asked a few minutes ago of Mr. Leser.

Are you aware of any money disappearing from the Teamsters Affiliate Pension Plan or the Retirement Family Pension Plan?


Mr. Morgan. I am not aware of any.


Ms. Lentchner. Are you aware of any illegal conduct or mismanagement in connection with the administration or reporting relating to either of these plans?


Mr. Morgan. I am not aware of any.


Ms. Lentchner. Mr. Leser, in connection with the audit work that Grant Thornton has done for the Teamsters, would you generally describe the audit process as a document-intensive process?


Mr. Leser. Yes.


Ms. Lentchner. Has Grant Thornton reviewed a significant amount of the IBT's financial books and records?


Mr. Leser. Yes.


Ms. Lentchner. Has Grant Thornton ever had a problem in finding documentation that was needed for an audit was missing?


Mr. Leser. No.


Ms. Lentchner. Has Grant Thornton ever been refused access to any information or documentation it had requested?


Mr. Leser. Not that I recall.


Ms. Lentchner. Have any Teamsters personnel ever tried to obstruct Grant Thornton's work?


Mr. Leser. Not that I can recall, no.


Ms. Lentchner. Have you ever seen any evidence that Teamsters personnel were attempting to conceal financial information?


Mr. Leser. No.


Ms. Lentchner. This committee has heard testimony concerning two former Teamsters' trustees who had claimed they were denied access to Teamsters' financial information. As a general matter or, actually, to back up for a moment, how often does Grant Thornton audit the books and records of the Teamsters?


Mr. Leser. Actually, the constitution requires two audits a year. It is an interesting, different kind of provision.


Ms. Lentchner. Generally speaking, are they subjected to two audits a year?


Mr. Leser. No, just one. That is the more common practice.


Ms. Lentchner. Following each audit twice a year, do you meet with or have discussions with the General Executive Board and/or trustees of the Teamsters to explain the financial condition?


Mr. Leser. We have met with the three trustees after every audit, yes.


Ms. Lentchner. Every audit, twice a year since 1992?


Mr. Leser. Correct, yes.


Ms. Lentchner. At what level of depth did you review the financial information and the financial statements with them?


Mr. Leser. I think it would vary. At the very first, when they were new, I went in great detail. Any time a new member came onto the committee I went through in great detail. I walked them through both the auditing process, the audit work we did, completely through all the financial statements, explained how the financial statements worked, explained changes in the financial statements to them, explained the difference between accrual and cash accounting, explained the cash flow statement, which I think sometimes people find a little bit confusing. I explained each footnote fully.

So I tried to explain in as much depth as I could and certainly answer any questions I had both about our audit process as well as the financial statements, and after I had done that with the same set of trustees two or three times, then I would probably then not be as in depth, but more highlight for them things that were new or different, changes, those kinds of things.

But any time a new trustee came, I would go through this in great depth again. So--


Ms. Lentchner. And you did answer all of the questions that the trustees posed to you regarding the financial statements?


Mr. Leser. Yes. Yes.


Ms. Lentchner. There has been discussion within this committee about the concept of internal controls. Could you just describe for this committee briefly what internal controls in a financial context means?


Mr. Leser. Internal controls are the procedures that are used to safeguard the assets and to assist in the accurate preparation of financial statements. There are typically approvals, the documentation of certain transactions and who approved that, and how things are reviewed internally. They are all the kinds of procedures--the system, the overall environment, that causes there to be accurate financial information, and that transactions are executed in accordance with the intentions of management.


Ms. Lentchner. Now, in deciding whether or not to implement internal controls in a company, what types of factors does management need to consider?


Mr. Leser. I think the most important probably is the nature of their operations. The controls for a smaller enterprise are not usually as sophisticated as those for a larger enterprise: the nature of your operations, do you have foreign operations or domestic operations; the nature and sources of your revenue; the types of expenses you have.

Basically, management should do a risk analysis and look at their size and the nature of their operations, the environment they are dealing with, and try to come up with an effective overall set of internal controls.


Ms. Lentchner. In your experience auditing the IBT's financial books and records, have you found their internal control systems to be sufficient?


Mr. Leser. Yes.


Ms. Lentchner. Following discovery of the swap scheme transactions, are you aware of changes taken within the IBT to step up or otherwise improve their internal control systems?


Mr. Leser. I know one change was bringing on the agreement to have the independent financial auditor, which reviews transactions prior to them taking place. That certainly is a pretty extensive review in terms of it is an advanced review of all their transactions. That is a very significant change, yes.


Ms. Lentchner. Are you also aware of the fact that there has been a procedure put in place whereby certain contributions are passed on or reviewed by legal counsel?


Mr. Leser. I am not aware of that.


Ms. Lentchner. Following the discovery of the swap scheme, did Grant Thornton change or adjust its audit program in any way?


Mr. Leser. Yes. We looked at that and decided that given the swap scheme, that we wanted to put in some additional procedures in our audits, so we adjusted our audit program.


Ms. Lentchner. Now, we have heard testimony on March 26 from Mr. Smolen with respect to alleged irregularities in the financial books and records of the Teamsters. Mr. Smolen testified that he concluded that there was fraud based on four factors: one, the domination without controls of Teamsters' management by a small group of individuals; two, missing documents; three, refusal by IBT to provide information, including financial books and records; and four, financial analyses reflecting unexpected and significant differences.

With respect to the first factor identified by Mr. Smolen, Mr. Leser, is it accurate that you have not found insufficiencies in the IBT's internal control systems?


Mr. Leser. I am sorry, could you repeat that?


Ms. Lentchner. Sure.


Mr. Leser. It got long.


Ms. Lentchner. I am running out of time and talking too fast.

With respect to the first factor upon which Mr. Smolen based his conclusion of fraud, insufficiencies in the internal control systems of the IBT, is it accurate that you have not found there to be insufficiencies in the internal control system?


Mr. Leser. No. I believe the internal controls are generally good for the size of the organization.


Ms. Lentchner. With respect to the second factor, the missing documentation, is it accurate that you have not found missing documentation in your review of the IBT's books and records?


Mr. Leser. We have not encountered that problem.


Ms. Lentchner. With respect to the third factor, refusal by IBT personnel to provide information regarding financial books and records--


Mr. Leser. We have not encountered that problem.


Ms. Lentchner. With respect to the last factor, financial analyses reflecting unexpected and significant differences, have you found financial analyses reflecting unexpected and significant differences in connection with your review of the IBT's books and records?


Mr. Leser. No. I think most of the differences are ones that were expected or can be explained. At least the major differences are ones that are explainable, yes.


Ms. Lentchner. I understand generally that, while Grant Thornton has not certified to the nonexistence of fraud, I understand that Mr. Smolen relied on those four factors to support his conclusion of fraudulent activity of the IBT. Do you agree that you have not found evidence of the four factors relied upon by Mr. Smolen?


Mr. Leser. I am sorry?


Ms. Lentchner. You, in your review of the IBT's books and records, have not found evidence of any of the factors upon which Mr. Smolen based his conclusion of fraudulent activity; is that right?


Mr. Leser. No. That's right. We have not.


Ms. Lentchner. In your review of the Teamsters books and records, have you found any evidence of illegal conduct relating to either the keeping of the books and records or the pension plans?


Mr. Leser. No. No. The only issue would be the kickback with the contributions.


Ms. Lentchner. Thank you.


Mr. Leser. Certainly.


Chairman Hoekstra. I think you hit it right on the head, you haven't found the problem.

Did I hear you say that internal controls at the IBT are good?


Mr. Leser. Yes, I think they are good.


Chairman Hoekstra. Is there a written procedures manual? What do you go through to determine whether they are good or not?


Mr. Leser. We perform tests.


Chairman Hoekstra. On what? Is there an internal procedures manual?


Mr. Leser. No, there is not. But there are a series of memos, and there are procedures. We test what we view as the key controls.


Chairman Hoekstra. Could you provide those to the committee?


Mr. Leser. Copies of their accounting procedures?


Chairman Hoekstra. Could you provide what you determine to be the set of internal_compile them for us and say here are the internal controls and procedures that we believe in 1996 guided the behavior of the Teamsters, check approval and those kinds of things?


Mr. Leser. I think we can provide, I think we have, but we certainly can provide information about the key controls that we rely upon in performing our audit, yes.


Chairman Hoekstra. I would like to see those collected in such a way, since the Teamsters have not provided us with those, an internal procedures manual or anything like that.


Mr. Leser. I am sorry, I didn't suggest that I had their internal procedures manual. What I was trying to say, and I hope I am not out of order, but that we do have documentation in our work papers as it relates to their key controls that we tested and relied upon as being significant in our financial audit. That is what I was suggesting that I certainly could provide. I thought we had provided that.


Chairman Hoekstra. "We recommend that memos to support such distributions not highlight the political nature of the contribution." That is the Grant Thornton document 96390, and 96391, "Rebecca, this is why I thought the memo regarding specific political party names should be removed from Teamsters' files."

Are you aware of whether any documents were actually destroyed?


Mr. Leser. No, I am not aware of that. As I have said, we never made such a recommendation. We did not make such a recommendation, at no time.


Chairman Hoekstra. Did you say that in 1994 or 1993 the pension plan was underfunded? I think I heard you say that.


Mr. Leser. I get the years, they kind of run together, but I could look back at my notes. There are years it was underfunded, there are years it has been overfunded. I can't remember if 1993 is an underfunded year.


Chairman Hoekstra. I think you were pretty specific just a few minutes ago. I think we heard you say that 1993 was an--what did we hear, 1994.

Mr. Leser. I am going to do this from recollection. It would be easy enough to answer with just a look.


Chairman Hoekstra. You were fairly specific when questioned before on which years were underfunded and overfunded.


Mr. Leser. It is my recollection, Mr. Chairman, that they were underfunded through 1994, and then after that they were overfunded, but I think we can check those reports. I guess I would like to check that and get back to you.


Chairman Hoekstra. I think you ought to. I will clarify it for you. Grant Thornton, and this is a document, I don't think this is a Bates-stamped document, it is Grant Thornton 0171, it shows "Does this mean the plan is overfunded?" And the Grant Thornton statement is, "I believe, based on the underlying actuarial assumptions, it means that the assets received exceed the amount required to be provided as of January 1993 by $30.4 million. The most significant assumptions are an interest assumption of 8 percent, retirement assumption of"--crossed out--"59 to 62, and no recognition given to future salary increases."


Mr. Leser. My notes show the plan being underfunded at the end of 1993 by $46 million.


Chairman Hoekstra. Hey, I am just going to your documents. If you have some documents that say underfunded, some overfunded, that is one of the reasons we try to do the prehearings, which you guys are--you know, we have had Mr. Sever here, so his quotes are, "I have cooperated completely with all the investigative branches. I will continue to do so. Congressman, I want to reveal any information that is necessary for your committee or any other investigative committee, and I will cooperate to the best of my ability. I have cooperated with every investigative authority instantly and wherever I can, and that is where the record is. There are multiple investigations going on, ongoing. We are cooperating in every way possible and we will continue to do so."

Who told you not to meet with us?


Mr. Leser. It wasn't communicated directly to me. I think the communication was with our attorneys. I don't know exactly who made that decision, frankly.


Chairman Hoekstra. It could have been Grant Thornton?


Mr. Leser. It absolutely was not Grant Thornton.


Chairman Hoekstra. So it was, what, the IBT?


Mr. Leser. I thought you were asking me specifically who made the decision at the IBT.


Chairman Hoekstra. No, not specifically, but generally.


Mr. Leser. I am sorry. I misunderstood your question. The decision was made by the IBT. We needed, under our rules of ethics, under professional standards, before we could consent to that discussion of confidential information with a client, we needed their permission. They denied that permission. I thought you were asking who specifically did that.


Chairman Hoekstra. The same for you, Mr. Morgan?


Mr. Morgan. I am sorry?


Chairman Hoekstra. The same for you? The IBT were the ones that instructed you not to cooperate?


Mr. Morgan. We were told, I think, the IBT talked to our attorneys and said they didn't want us to discuss anything in a public forum, and, the same as in the accounting practice, we have a standard about not talking about clients unless they authorize it or unless required by law.


Chairman Hoekstra. Mrs. Mink.


Mrs. Mink. Mr. Chairman, I would like to address a few questions in the 5 minutes I have to the larger issues that the committee has been undertaking to try to find some specific explanations for. That goes to the question of what happened to the $150 million that we have heard about so often, and the current Treasury situation of IBT, which is somewhere around $750,000. The big question is what happened to these funds.

Is there, Mr. Leser, any ready explanation? You attempted to give us an explanation by, one, talking about strike benefits that were raised from $55 a week to $200 a week, without any compensatory actions taken with reference to increasing dues and so forth.

Could you give us the specific details on what the strike benefit liability was prior to 1991 at the $55 a week payment, and what the strike liability was when the payment was increased to $200 a week?


Mr. Leser. I couldn't do that exactly, but I think what had happened, it also has to do with how many strikes you have and how active you are in organizing. I believe those benefits increased by many multiples. I believe over the last 5 or 6 years those have been well over $100 million in strike benefits that have been paid. But the function, it is not just that you increase the amount, it is also how many strikes you have had.


Mrs. Mink. Is there a summary in your company that shows this particular issue, so we don't just talk around it and cite it without the specifics? I really want to see the total amount of payments prior to 1991, or going back to the consent decree in 1989, leading up to 1991 when this change was made, prior to the election of Mr. Carey, and then what the liability for the strikes were in subsequent years.


Mr. Leser. There actually is a 5-year report that would provide a good summary of that information.


Mrs. Mink. Good.


Mr. Leser. But that would be the easiest way, I think, to accomplish your goal. There is an annual report every year. But you can look at any number of reports. There actually is a 5-year report that summarizes that information. I think it would be very beneficial to the committee to have that.


Mrs. Mink. Over the 5-year period, what would be your recollection as to what the total payments were for strike benefits?


Mr. Leser. It is something like $100 million, would be just a rough memory.


Mrs. Mink. For the total 5-year period?


Mr. Leser. I believe that is correct. That is just--


Mrs. Mink. You also stated that in 1991 there was a $40 million deficit. This is a deficit of the operating expenses; that is, dues revenues and others revenues coming in did not meet the obligations of the Union to the extent of $40 million over the year in 1991?


Mr. Leser. The expenses exceeded the revenue in 1991 by about $40 million. That is correct.


Mrs. Mink. Do you know what accounted for that deficit, primarily, since the dues only went up that year; I mean, since the strike payments only went up that year?


Mr. Leser. I think the strike benefits didn't have that much to do with it. Part of it was the election, which the IBT had to pay for at that time. That was part. I actually think that even before the strike benefits were increased, for several years the Union had been deficit spending, albeit it had a very large Treasury, but it had been deficit spending for several years.


Mrs. Mink. When you say deficit spending--


Chairman Hoekstra. Will the gentlewoman yield?


Mrs. Mink. Yes.


Chairman Hoekstra. I will yield and give you a little more time.

Reports indicate in Exhibit III.A, our number, and this must have been for perhaps the last hearing, that from 1992 to 1997 receipts of spending, in that period there were $679 million available, $122 million went for strike benefits, and $553 million went for IBT headquarters expenditures.

From 1995 to 1997, a period of time which was after the emergency assessment, roughly $299 million was spent, of which $19 million went to a strike benefit, and $276 million went for IBT headquarters. The amount of money that was spent on strike benefits for the 5- or 6-year period went from 18 percent of total expenditures to 1995, 1996, and 1997, it went to only 7 percent of total income.


Mrs. Mink. Does that reflect your understanding of the expenditure portfolio for the Union?


Mr. Leser. Again, I don't have that report in front of me. I think it would be a lot easier to do this with the audited financial statements in front of us. But I think that one of the things you have to note is the strike fund actually was totally wiped out in 1994 by the national strike. So essentially there were no strike benefits at all paid because the fund was wiped out in 1994 until, I think, the fall of 1995 when they began to pay a limited benefit of back to $55 out of their general fund. But the strike fund essentially was totally bankrupted by the last major strike, so you have a period of over a year where there were no benefits, strike benefits paid, I believe.


Mrs. Mink. So going back, since my time is running out, going back to your statement that there are all these deficit years that the union experienced, how did they keep operating then with the deficit. Did they borrow? Where did they get the money from?


Mr. Leser. They had a very--


Mrs. Mink. Did they sell out their assets? Is this an explanation of why their asset values went down?


Mr. Leser. They had a very large investment portfolio. They had a very large accumulated surplus. They have been engaging in deficit spending, spending down their surplus.


Mrs. Mink. Do you have a table that shows that spenddown which might explain in some ways the financial picture now of the Union?


Mr. Leser. I think there is a 5-year report that would help you with that.


Mrs. Mink. You have a 5-year report.


Mr. Leser. Yes.


Mrs. Mink. Thank you very much, Mr. Chairman.


Chairman Hoekstra. For the record, where the money came from from 1995 to 1997, 8 percent of it was a reduction in their net worth, so the $299 million that was spent, $51 million was a reduction, excuse me, is emergency assessments, $23 million is from their net worth, and $225 million comes from members' dues and others.

The reason I am embarrassed for you that you have to sit here and say, "I don't know and I wish I had the documents in front of me," because we could have had answers to those kinds of questions if your client had permitted you to be here earlier, and Mrs. Mink and I would not have to wrestle with getting some very, very basic information and getting an answer to some of these questions. We are spending a lot of members' time because of the IBT's refusal to cooperate.


Mr. Norwood?


Mr. Norwood. Thank you Mr. Chairman. I just want to remind us all that the primary focus of this hearing and the entire purpose of this is about the financial condition of the IBT and the changes made to the Teamsters Affiliate Pension Plan and the family plan. That is why we are here. That is why we are asking these questions.

I would agree with you, Mr. Chairman, it is rather amazing that it is so difficult for us to visit with these witnesses in particular not ahead of time in order to try to simply determine the truth of what is going on out there for the members of the Teamsters Union and, I think that the working, everyday hardworking Teamsters member should be absolutely furious that you were not--not just agreed to come in and talk to us, but you should have been told to come in and talk to us so that we could get to the bottom of it.


Mr. Leser, let me ask you a question or two about travel expenses, because all of this seems to come around and make a big circle as to what happened to all the money. The document that is labeled IBT LM-2 Travel Expenses, which I am sure you are familiar with Bates, and it is numbered 2GT93006, and in your documents in front of you is document IV.A.1,this document was provided to the subcommittee by Grant Thornton. It is an audit paperwork, is it not, Mr. Leser?


Mr. Leser. It looks like it is--


Mr. Norwood. Audit workpaper.


Mr. Leser. Yes, it looks like one.


Mr. Norwood. This audit workpaper states in part, "Approximately 200 employees have Teamsters Crestar Visas which they can use to charge hotel expenses, airline tickets and other travel expenses." Employees with the Teamsters Visas are the individuals which do the most traveling, and since the largest travel expenses are run through the Visa, these expenses are not reportable with that individual for purposes of the LM-2 document. That is how I understand it.

The LM-2 lists each individual who incurs travel expenses that is reimbursed by the IBT along with the amount of expenses they incur. However, if someone uses a Teamsters's credit card so that their bill is paid directly by the Union, that expense does not show up next to their name on the LM-2. Do I have that correct?


Mr. Leser. I believe that is correct, yes.


Mr. Norwood. So if you put these travel expenses onto the Visa card, IBT officials are able to basically--I hate the word "hide," but maybe that will do to hide their actual travel activities from their members who they are responsible to; is that correct?


Mr. Leser. I won't use the word "hide," but they are not reflected on that report.


Mr. Norwood. We won't use the word "hide." We will just say it is impossible for the everyday Teamster to know, if they are interested, what happens to all of this money that is used to travel around the country; is that correct?


Mr. Leser. They can't identify it with specific individuals. I think that is correct.


Mr. Norwood. They see the dollar amount. They don't know who used what.


Mr. Leser. They can see the total because that appears in other places in the report. But they can't identify--


Mr. Norwood. Most people might think this isn't important. Why would you care, why is it worth discussing? But looking at the LM-2s since 1994 through 1997, it is sort of interesting. $11.7 million in travel expenses reported and broken down for each officer and employee who traveled. However, about 17 million in travel expenses, almost 60 percent of the IBT's travel expense was paid for by credit card. So there is no way for a member to look at the form and determine who is spending so much of the Union expenses traveling. What was that number? 17 million. I guess that is why we are talking about this. It is a fair amount of money, that people can know that amount of money was spent but the Union members cannot have a clue who spent what. Am I still correct in my thinking here?


Mr. Leser. That is correct.


Mr. Norwood. Well, now, let us work on an example of this. In 1997, now-President Tom Sever is shown as having spent only $183 in travel and $5,134 meals and lodging. That was in 1997. In 1994, then-secretary-treasurer Sever had $249 in travel and $12,000, $12,000-plus in meals and lodging. From your knowledge of the reporting requirements, would you have reason to believe that Mr. Sever spent more than $5,300 in 1997, just from your experience?


Mr. Leser. Well, if I understand your question, you are asking would his total travel costs be in excess of the amount that he received in cash. I think that is your question.


Mr. Norwood. That will work.


Mr. Leser. I think you are correct. That would be my assumption. This LM-2 only reports the amount of cash the individual received as opposed to the amounts that were paid on his behalf to the common carriers or to hotels. I think that is correct.


Mr. Norwood. So he was paid the same thing in '94, or paid more in '94, as secretary-treasurer, than he was in '97 as acting president. Am I right? I am right, 12,000 and 5, he is paid more. That is sort of strange.

From your knowledge of the reporting requirement, you would have reason to believe that Mr. Sever spent more than 12,000; is that what you said a minute ago? You think he really spent more than the $12,300?


Mr. Leser. Let us be clear here.


Mr. Norwood. That is exactly what we are trying to do.


Mr. Leser. I think the form asks for the amount of cash that he received. It does not reflect amounts that were paid on his behalf, either to airlines or travel of that type. So if I am understanding your question, I think it is very likely that his expenses, his actual expenses, as opposed to cash received, are greater; that is correct.


Mr. Norwood. It is unfortunate we can't tell. I am not a member of the Union. Maybe I don't need to know. But it is unfortunate that--is that red light on?


Chairman Hoekstra. I think that is the red light.


Mr. Norwood. All right.


Chairman Hoekstra. Mr. Kind?


Mr. Kind. Thank you, Mr. Chairman. I want to yield to our distinguished ranking member, Mrs. Mink.


Mrs. Mink. Thank you very much.

I have a bunch of other questions that I couldn't ask the first go-around. The deficit which you mentioned that has continued in the Union for a long period of time, how does it basically get underwritten in terms of meeting the current expenses? The Chairman read off this chart to indicate how it is spent. If it is a deficit situation, what does it do and what is its loan obligation as a result of these deficits? How much of the assets have to be drawn down in order to maintain the expenditures of the Union?


Mr. Leser. Well, what happens is they have an investment portfolio that is built up from years when they have revenue in excess of their expenses from prior years. That is an investment portfolio as well as their own cash. To the extent they have expenditures exceeding revenue, as they did certainly in '91, '2, '3, '4, they liquidate their investments generally.


Mrs. Mink. So before you came on board in 1991, what was the investment portfolio's value that you recall as compared to what it is now currently?


Mr. Leser. I don't recall exactly but I think it was significant. It was, I want to say 160 million, and now it is maybe about 70 million. It has been significantly reduced.


Mrs. Mink. That is because of the necessity to meet the ongoing expenses?


Mr. Leser. Correct.


Mrs. Mink. Functioning as the auditor of the Union, was it your responsibility to look at these management issues with respect to the deficit and how it was being managed and what they were doing to meet their current obligations?


Mr. Leser. Well, I think it was our responsibility to see that these things were properly reflected in the financial statements.


Mrs. Mink. Was it also your responsibility to make recommendations?


Mr. Leser. Well, not as related to business decisions they were making about how they chose to allocate their resources. But we did make inquiries, I discussed earlier, about their plans, because you can't deficit spend, at least private organizations cannot deficit spend forever. So I inquired as to their plans to eventually be able to stop this practice and that they in fact had a study to look into this and see how long this would continue and what they needed to do to return to a surplus situation.


Mrs. Mink. So the management of that operating picture of revenue and expenditure is different than the management of the pension fund; is that correct?


Mr. Leser. That is correct.


Mrs. Mink. Were they intertwined? They are completely different and separate issues?


Mr. Leser. No, they do intertwine to the extent that the Union puts funding into these two pension plans.


Mrs. Mink. From their operating budget, they put money into the pension?


Mr. Leser. Which would end up being an expense, as we talked about earlier in the testimony, that to the extent that they made, to the extent that they had an expense for those plans, it would be reflected on their financial statements. Other than the employer's expense related to those plans, their operations are separate. So where they cross over is to the extent that as the employer, they have the ultimate liability and have an expense related to those plans. Beyond that, they are separated.


Mrs. Mink. In examining both, did you ever come across anything in the expenditure side or the revenue side that would indicate that the management of the pension fund was questionable, that there was something wrong going on with the way that that fund was managed or the funds expended therefrom?


Mr. Leser. No.


Mrs. Mink. Was there any cheating going on in the pension program where monies were paid out that were unauthorized to be paid out?


Mr. Leser. Not that we are aware of.


Mrs. Mink. How many people were serviced under the pension fund? How many people were members of this pension fund?


Mr. Leser. There are actually two funds. There is a headquarters fund.


Mrs. Mink. Combined, how many people were the beneficiaries of that fund?


Mr. Leser. I am going to guess less than 10,000. I think the Teamsters affiliate plan maybe has 7,500, 8,000 folks, and the other plan, I would guess less than 1,000.


Mrs. Mink. These are the headquarters people.


Mr. Leser. There are two. One is the affiliates, which are the local officers and all the locals. That is the Teamsters' affiliate. The other is the headquarters plan. There are actually two plans.


Mrs. Mink. So that in the management of this, you feel certain that as the auditor for the Union, you investigated and maintained the accuracy of the funding and the payouts?


Mr. Leser. We have audited the financial statements of both those pension plans.


Mrs. Mink. The other question, before my time again runs out, on the trustees that have come before this committee and alleged that they could not get their questions answered, you testified earlier that when they asked questions, that you responded to what their inquiries were. Was there any occasion in which they asked questions of you that you felt you could not reveal because of the confidentiality of the information being sought?


Mr. Leser. No.


Mrs. Mink. Anything like that?


Mr. Leser. No, never.


Mrs. Mink. You were completely forthcoming to their questions and their inquiries?


Mr. Leser. Yes. Absolutely.


Mrs. Mink. That is your obligation as the auditor for the Union, to explain it to the trustees; is that correct?


Mr. Leser. Yes. And we did as best we could in as much detail as they would like to hear.


Mrs. Mink. Thank you very much.


Chairman Hoekstra. When you do the audits, you don't do a fraud audit; is that correct?


Mr. Leser. That is absolutely correct.


Chairman Hoekstra. So when you say you don't find something, it does not mean that you have necessarily been looking for fraud; is that correct?


Mr. Leser. No.


Chairman Hoekstra. There is a difference with a fraud audit.


Mr. Leser. Absolutely. We search for errors that would be material in the financial statements. We did not do a fraud examination; you are correct.


Chairman Hoekstra. Thank you. Is Mr. Carey, is he a trustee of both of the pension plans that we have talked about today?


Mr. Leser. I believe he is.


Chairman Hoekstra. Is he still a trustee of the two pension plans?


Mr. Leser. I don't know the answer to that.


Chairman Hoekstra. Are you doing an audit of those for 1997?


Mr. Leser. Yes. They are not complete.


Chairman Hoekstra. Is that not material as to whether Mr. Carey, recognizing that Mr. Carey has been removed from office for illegal campaign activities, is that not a material piece of information that you should know? Recognizing that for the last 5 years he has been a trustee of those plans, would you recommend to the IBT that they do a fraud audit of those pension plans because of the criminal, potential irregularities and what has happened with the Teamsters and that a trustee has been removed from office?


Mr. Leser. No. I don't believe that I would. But I think that is a management decision. I think that--


Chairman Hoekstra. I mean, you are representing Grant Thornton. When the president of the Teamsters is removed for illegal activity and he is a trustee of the pension plans, you would not recommend to this organization that they do a fraud audit to see whether perhaps that pattern of behavior that he carried on in an election may be carried on to his behavior at a pension plan? Your answer is no; is that correct?


Mr. Leser. My answer is no.


Chairman Hoekstra. Your answer, I hate to even ask the question. When would you recommend to the IBT that perhaps they do a fraud audit?


Mr. Leser. When I believe that there were specific allegations or any indication of fraud involving those pension plans, certainly. But a fraud audit, you have to understand, is an incredibly detailed examination. It has to be aimed to a specific allegation, to an area that you suspect there is abuse in. I would view, if there were any allegations, any indication of fraud involving, as an example, the payments in that plan, then, yes, I would think then it is appropriate to devise a fraud examination to address that area.


Chairman Hoekstra. Is there a lot of money in the pensions?


Mr. Leser. Yes, there is.


Chairman Hoekstra. I came out of a marketing background. When we sold products and we looked and identified markets to go to, we always looked for customers with money. I would think that when you find somebody who has stolen from the general treasury that you would also see what they did in those other areas to find out what went on in those other areas, because you go where the money is.


Mr. Hilleary?


Mr. Hilleary. Thank you, Mr. Chairman. I would like to go back to Mr. Morgan just a couple minutes. How long has Segal Company been the actuary for IBT?


Mr. Morgan. Since the late 1980s; '88 or '89.


Mr. Hilleary. How long have you been working on the IBT account?


Mr. Morgan. I have been working on it in one way or another since the beginning.


Mr. Hilleary. Are you still the actuary for IBT?


Mr. Morgan. Yes, I am the enrolled actuary for the plan.


Mr. Hilleary. Who did you talk to in preparation for your testimony today? I assume you talked to your counsel.


Mr. Morgan. Talked to counsel, talked to a couple people at the office about things. Spoke to the counsel for the IBT asked me some questions about what, you know, what went on in some of the cases, to get an explanation.


Mr. Hilleary. You talked to nobody connected with this committee?


Mr. Morgan. No, I haven't talked to anyone at the committee.


Mr. Hilleary. When Mr. Leser, when he testified earlier, he said that he believed you were the Don with the question mark?


Mr. Morgan. Given that it was on that side, it was probably, I was part of that discussion at that time. At that time Jim Walls was the enrolled actuary. I would have been involved at the very technical parts of the calculation so I would have been most likely, I don't remember a specific phone call, but I remember having some discussions with them and being in the room.


Mr. Hilleary. You believe you probably were Don.


Mr. Morgan. I probably was.


Mr. Hilleary. As actuary, are you aware that a net loss of 16 million in the affiliates' pension plan would leave the IBT insolvent?


Mr. Morgan. I know that at the time IBT was very concerned knowing what the numbers were going to be. I knew they had concerns about being insolvent. I knew they had, they always wanted to know exactly what the numbers were going to be. They did not, they were saying how was it looking, as we were trying to do the calculation and figure out what the results would be.


Mr. Hilleary. Were you aware that changing the discount rate to 8 percent would leave the IBT's paperwork showing positive net assets?


Mr. Morgan. I knew that I would have actually performed the calculations and these numbers look like reasonable whether they are the exact numbers or not. I knew that interest rates during 1994 had increased, and so it made sense for the liability interest rate to be used to increase, which would lower the liability, and the same prevailing rise in the interest rates also lowered the asset value. So there is sort of prevailing interest rate happening to change both the liability and the--


Mr. Hilleary. Specifically, were you aware that changing the discount rate to 8 percent


Mr. Morgan. Would give you these numbers? Yes.


Mr. Hilleary. Who got involved with this decision to change the discount rate? Was this your decision?


Mr. Morgan. It was not our decision. What we would do is talk to the client and say, all right, what interest rate should we be using, look at a variety of interest rates that are in the marketplace, and see are they going up or down, by about how much, and use that to give them some information to make a decision as to what to do.


Mr. Hilleary. Was it your goal to use the most accurate discount rate to show accurate numbers the best you can on the balance sheet?


Mr. Morgan. You try to be as accurate as possible. There is always a range of possible interest rates. The accounting does studies every year like after the fact, the range that companies are using, and it usually can vary a percent or so. We are saying, okay, interest rates have gone up, using an 8 percent rate is reasonable. In many ways it is not an actuarial assumption as much as it is a management and accounting assumption.


Mr. Hilleary. But you want it to be accurate?


Mr. Morgan. The whole purpose is to try to be as accurate in measuring the numbers as possible.


Mr. Hilleary. I am trying to figure out who came up with this decision to change the discount rate because it almost looks on the face as just--I can't figure out the substantive reason other than maybe just to almost cook the books; that is a very untechnical term. You say that you personally did not make that decision.


Mr. Morgan. That is correct.


Mr. Hilleary. You are saying that there was a collection, it sort of came to a consensus.


Mr. Morgan. That it would be--that increasing the interest rate was required, and that 8 percent seemed reasonable.


Mr. Hilleary. Where does the buck stop? Which person actually is the decisionmaker on the final decision on where that discount rate is set?


Mr. Morgan. It would be the client's responsibility to do that, and it would be the auditor's to sort of pass on the financial statement.


Mr. Hilleary. On the IBT, who was that that made that final decision? Who with the IBT?


Mr. Morgan. We would have talked to Bob Hauptman and Jim Bosley. At what point, who made the exact final decision, I don't know.


Mr. Hilleary. One of those two people would have made the final decision with regard to IBT's


Mr. Morgan. One of those two people would have come back to us and said we want to use 8 percent rate. And we would have said, okay, we will calculate the numbers on that basis.


Mr. Hilleary. Based on the best of your knowledge, would one of those two people have had the authority to make the final decision on what the discount rate was?


Mr. Morgan. Yes. Jim Bosley was the director of accounting at that time. Bob Hauptman, sort of like an assistant to the President in terms of special issues. So if we heard back from one of them to use the 8 percent rate, that would make sense.


Mr. Hilleary. Based on your knowledgem, I am out of time, based on your knowledge, would one of those people have had the final authority to make this decision?


Mr. Morgan. I would assume so.


Mr. Hilleary. Thank you very much.


Chairman Hoekstra. Mr. Scott?


Mr. Scott. Thank you. Mr. Leser, this issue of the unindividualized receipts, is that normal?


Mr. Leser. Are you talking about the LM-2, sir?


Mr. Scott. Yes. The fact that a significant amount of reimbursements were made, instead of reimbursing, were made by direct purchases. Is that normal?


Mr. Leser. Yes. That is the way the form is prepared.


Mr. Scott. Do other organizations do it the same way?


Mr. Leser. They do, yes.


Mr. Scott. So the fact that you have some unindividualized travel expenses, that is consistent with normal accounting principles?


Mr. Leser. Well, it is the practice for filling out the form. The forms are based on the rules set by the Department of Labor, and this LM-2 report is a very specific report that the LM-2, that the Labor Department has provided.


Mr. Scott. How about in business generally, is that how you, I mean, in business generally, do you have individualized travel reimbursement numbers, or is it normal to aggregate the numbers?


Mr. Leser. Normally in business you would never produce a report that lists the individual expenses of a person in a report. That is very unusual. A commercial enterprise would never prepare such a schedule.


Mr. Scott. Did you indicate that the 1997 audit is not ready yet?


Mr. Leser. That is correct.


Mr. Scott. Is that not a long time to get last year's audit prepared?


Mr. Leser. Yes, it is. Would you like me to describe why?


Mr. Scott. I was afraid to ask, but since you suggested.


Mr. Leser. It is not a great mystery. That is why I thought I might help the committee and explain it. In 1994, the IBT closed down something called the conferences. And these were intermediate organizations that they believed to be redundant. And to save money, they closed them down. And in that process there is a 2-year window where these conferences can either be reorganized or eventually any net assets of the conferences would revert to the Union. The IBT has hired other auditors to audit those conferences and have now made the decision that they are not going to reorganize the conferences. They are in fact going to be closed down. So we have been awaiting the reports of these other auditors in order to finish our audit. That has been promised for--


Mr. Scott. Has a preliminary audit been completed?


Mr. Leser. There is a draft, sir.


Mr. Scott. Is that available to people?


Mr. Leser. Well, it is a draft. If it is useful, I could provide a draft.


Chairman Hoekstra. Do we want to ask for one?


Mr. Scott. They have provided 75,000 pages of information already, Mr. Chairman. I don't know where we would put it.


Chairman Hoekstra. Well, we will have room and we will even store yours for you.


Mr. Leser. We are awaiting this information from these other auditors relating to these specific conferences.


Mr. Scott. Mr. Leser, the pension plans, at this time would you know if the pension plans are solvent?


Mr. Leser. I believe they are solvent. In fact I believe they are overfunded. They are more than solvent.


Mr. Scott. I am not sure whether this is--should be aimed at you or Mr. Morgan. Was there any time in the last few years where it was not solvent?


Mr. Leser. Well, let me try to answer that question. I don't think they were ever not solvent. But what happens is plans can become over- or underfunded. These are dealing with concepts 20 and 30 years in the future. But solvency really runs to liquidity.


Mr. Scott. I meant able to pay its promised benefits. I don't know what the technical term for that it. Maybe it is not "solvent." Have enough money to be able to meet its promises; what is that called?


Mr. Leser. I think the answer is yes.


Mr. Scott. Yes, what?


Mr. Leser. Yes, they were able to pay their benefits.


Mr. Scott. The question was asked about the fraud audit. Did Mr. Carey have access to the checkbook where he could write checks, or was he a trustee in a policymaking position and other staff people made all those decisions such that a fraud audit would never have been appropriate to ask?


Mr. Leser. Well, I don't think he has any day-to-day involvement in any of the expenditures related to the pension fund.


Mr. Scott. Therefore his integrity or questions about his integrity would not trigger an audit of the pension fund from a fraud perspective?


Mr. Leser. I don't believe so, but we have not even completed the regular financial statement audit yet.


Mr. Scott. The question on the discount rate goes to that solvency, if that is the right question. Mr. Leser, could you tell me what all those questions were about, the 7-1/4 to 8 percent? We spent a lot of time asking you. I did not quite get the point. Could you help me on that?


Mr. Leser. Well, there are a number of assumptions. And what actuaries do, and maybe Don could speak to this, but they are trying to estimate what future benefits are going to be for people who are going to retire, 10, 20, 30 years out. There are a lot of variables that go into this in terms of how long people are going to live, what are interest rates going to be, what is a discount rate, what are the returns on the assets. There are a whole bunch of assumptions that go into this mishmash to try to come up with a good estimate.


Mr. Scott. Were the decisions, Mr. Morgan or Mr. Leser, were the decisions made on the decision to go from 7-1/4 to 8 and back and forth, were those decisions made according to normal practices?


Mr. Morgan. I would say they were. I don't know what thought process was going on, but it is normal for a corporate, when they are doing the FAS 87 accounting, that the discount rate is intended to fluctuate according to prevailing interest rates. So if the prevailing interest rates go up, the interest rate--


Mr. Scott. Was anything unusual done in setting the rate?


Mr. Morgan. I am sorry.


Mr. Scott. Was anything unusual done with this pension fund in terms of setting the rate?


Mr. Morgan. From my point of view, no.


Mr. Scott. Thank you, Mr. Chairman.


Chairman Hoekstra. Just a question. Calculating the discount rate, I love your work, but it is fairly mundane stuff; right? You kind of plug it into a formula, return on assets, the expected liabilities, life expectancy, and maybe a couple other things.


Mr. Morgan. It is very boring work.


Chairman Hoekstra. It is very boring work. Have you been able to provide this committee with the boring work that makes up this boring analysis each and every boring year?


Mr. Morgan. Could you repeat that?


Chairman Hoekstra. Have you provided us with the boring analysis that makes up this boring work that you have to do in a boring way every year?


Mr. Morgan. Yes. We have provided copies of the valuation report, which would cover the minimum funding requirement and the FAS 87 reports, which would have--


Chairman Hoekstra. Have you provided us with all of the information that is necessary to take a look at this?


Mr. Morgan. Right. I mean all the--

Chairman Hoekstra. Can you explain this privileged log that we received?


Mr. Morgan. There is, my understanding is there is some documents in connection with, not the reports themselves, but some of the backup paperwork.


Chairman Hoekstra. Why a decision was made to move from 7-1/4 to 8?


Mr. Morgan. I actually don't know what is in them. I provided all the information that we had in our office and gave it to our attorneys, and they have been working with your staff on that.


Chairman Hoekstra. So specifically the boring work, the boring calculations, the boring year-after-year process, the IBT has determined they can't review that boring work with us, which I would think would answer all of these questions and might answer that one fundamental question: Why did, as Mr. Hilleary stated before he left, why do they let that cloud hang out there that they cooked the books back in '94?


Mr. Parker?


Mr. Parker. I thank the Chairman. I realize full well that both of you are in an odd position because of your professional position in representing the Teamsters and what they have allowed and not allowed you to do. I have just a few questions on this discount rate, because I have not really been satisfied with the answers.

First of all, I would think that $29 million swing, which is what occurred between the 7-1/4 and 8 percent amount, would be significant. Would both of you agree with that?


Mr. Morgan. Yes.


Mr. Leser. Yes, I would agree with that.


Mr. Parker. Since you have the Teamsters as your client, it would be so significant that you would pay very close attention to that swing; yes or no?


Mr. Morgan. We would certainly look at it, what was, doing the calculations, saying what it was, make it clear.


Mr. Parker. Mr. Leser?


Mr. Leser. I think it is an important factor, yes.


Mr. Parker. I do, too.

Now, it is your job, Mr. Leser, to look at key controls, what you classified as significant figures or whatever. I think you referred to them as key controls.


Mr. Leser. Yes.


Mr. Parker. And you have made the determination that that discount rate is a key control.


Mr. Leser. No.


Mr. Parker. It is not? A $29 million swing is not significant?


Mr. Leser. No. A control are the procedures that--they are the approvals, they are the getting a check signed, those kinds of procedures.


Mr. Parker. So it would be a significant, I guess you would say, "estimate"?


Mr. Leser. Yes. That is correct.


Mr. Parker. Okay. So there is certain procedures, when you look at an estimate, there is certain things that you have to do and that you have to take into consideration.

As an actuary, Mr. Morgan, you are kind of in that same situation. You base your decisions on things that are going to happen, that you think the trend is there.


Mr. Morgan. Right. That is correct.


Mr. Parker. And we are basically talking about people's lives, because $29 million is a lot of money. And basically it is moving from the pension fund into the Teamsters', I guess, operating fund. Would that be a correct assumption?


Mr. Leser. No. That is not a correct assumption.


Mr. Parker. How does that work? Explain how exactly that works?


Mr. Leser. Well, to make--


Mr. Parker. Make it real simple. I don't have a lot of time, and I have got some more questions.


Mr. Morgan. It is not a cash flow understanding.


Mr. Parker. It is just a number? It is an estimate?


Mr. Leser. It is an estimate, and it is an estimate that is used that deals with very large numbers, very far in the future, and these are estimates that are going to change every year, they change all the time. And the actual performance changes, too. That drives the other estimates coming into this, as we talked earlier.


Mr. Parker. Mr. Morgan, you agree that 8 percent was a good figure, moving from 7-1/4 to 8 percent. Now the Pension Benefit Guaranty Corporation put together a valuation, had a schedule that it had on a monthly basis, and the decision was made, in October the figure was .07 and in December--this is '94--and in December of '94, it was .075. That is in Exhibit I-F.

Now, you made a decision that 8 percent is a reasonable, I think it was your word, it was a reasonable figure. And they were at 7-1/4. The Pension Benefit Guaranty Corporation said that in October, 7 percent was reasonable; they felt that was. But they are actuaries, and you never can reach a good conclusion anyway. But December, it is 7-1/2. Okay. So they made that decision. You said 8.

Now, you said it was reasonable. What is the point that you determined that it is not reasonable? Is it 8-1/4, 8-1/2, 9? Because every time that it was raised a quarter of a percent, you had basically a $10 million change as far as the net worth. So let us say we went from 8 and we had a 30 million, let us go to 9 and we will have another 40 million, and for every 1 percent, we have got another $40 million we are dealing with. What is the point that you come to that you say that is not reasonable?


Mr. Morgan. Generally we look at, in some ways, the consensus that developed. There is always a range. Many corporate planners would have been using 8 percent at that time.


Mr. Parker. You made a basic decision that 8 percent was reasonable.


Mr. Morgan. That would be part of our looking at it and saying that makes sense, looking at the changes in the prevailing interest rate. Generally, the PBGC rates are a little bit lower than what you might get if you were to go to an insurance company, a little bit more conservative.


Mr. Parker. That decision was made. Mr. Leser, when they made that decision, that was an estimate out there that directly affected the--let us, for lack of a better term, let us say the bottom line much of the Teamsters; right?


Mr. Leser. Yes.


Mr. Parker. All right. And you have made the statement that you practice generally accepted auditing standards for your profession.


Mr. Leser. Yes.


Mr. Parker. Now, on estimates, this is what, it is AICPA professional standards. You are familiar with that?


Mr. Leser. Yes.


Mr. Parker. As of June 1, 1997, they make an interesting observation on page 638. They talk about this in evaluating reasonableness, the auditor should obtain an understanding of how management developed the estimate. Based on that understanding, the auditor should use one or a combination of the following approaches.

All I want to do is give you these approaches, if you would just respond and tell me how you followed them and give me some data.

A, review and test the process used by management to develop the estimate. B, develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate. And C, review subsequent events or transactions occurring prior to completion of field work.

Now, Mr. Leser, those are the standards that you follow. Can you give me documentation as far as how you did it, as far as this 8 percent, because I think that we all agree that it was a pretty significant figure. It had a major impact on the bottom line. Tell me what you did as far as those three things?


Mr. Leser. Well, first of all, I agree that they are estimates in the calculation under FAS 87, but the FAS 87 number is not actually an estimate. It is a calculation that is actually performed by the actuaries. It is driven by a number of estimates that are made in the actuarial process, but the actual booking of that pension expense is not an estimate. It is actually a hard calculation that is made by these actuaries.


Mr. Parker. So you felt no compunction whatsoever to question that number to see what effect it would have or whatever? They gave you that number and you just go with it?


Mr. Leser. Are we talking about the FAS 87 expense? Is that what you are referring to when you say that number?


Mr. Parker. The 8 percent, the discount rate moving from 7-1/4 to 8 percent.


Mr. Leser. Again the calculation is done by the actuaries. We will look at the estimates. If they look unreasonable that are driven in that calculation, we may raise a question about that. But the actual calculation is done by the actuaries, and we accept that number.


Mr. Parker. My time is up. I am just trying to figure out why you were on the telephone call.

I thank the Chairman.


Chairman Hoekstra. We are going to have another round.

This is fascinating for me, because I think it is very instructive. Coming out of the private sector, we always dreaded the days when the accountants would come in and do the audits and those types of things, making sure we got everything done right. A whole new perspective on it now, when I take a look at what is going on. What triggers concern, movement of $29 million; maybe, maybe not. The privilege log concerns me, because we don't at that point see the working papers.


Mr. Morgan, can you explain why Segal cannot find the report it provided the IBT board in October of 1994? Where did that report go?


Mr. Morgan. I am embarrassed to say I can't. I would have thought I would have had a copy in my files but I could find--


Chairman Hoekstra. This is why we get nervous. Everything around this change just kind of wreaks to high heaven. The document is missing when we ask for documents. There is a privilege log. The number just kind of happens to work just right.


Mr. Leser, you stated that, I want to know, did you do much different for the 1997 audit than you did for 1996 for the Teamsters?


Mr. Leser. Yes, we did. We put in a very specific procedure that we thought, yes, we did.


Chairman Hoekstra. That does what?


Mr. Leser. Well, we increased our testing of disbursements, checks being paid out. We put in an additional procedure on top of all of our other procedures, a specific procedure to examine all checks over a certain amount.


Chairman Hoekstra. Because of what happened in '96?


Mr. Leser. Yes. Because of what happened in '96, we thought that it was appropriate to put in additional procedures just in case there might be something else that had not come up.


Chairman Hoekstra. Have you recommended or will you recommend to the IBT that they do a fraud audit for '97?


Mr. Leser. I really haven't concluded on that. I would think that any additional auditing they would want to do would have to be directed to a specific area.


Chairman Hoekstra. I am trying to figure out, when do you reach the point that says, wow, I mean, Carey is gone for illegal activity in this campaign. That has been established in the courts and three people have pled guilty. Have you read the pleadings?


Mr. Leser. I have read some. I am not sure I have read everything. I have read a whole pile of--


Chairman Hoekstra. They just spell to me trouble the whole way. Hamilton is now indicted. Does that cause you concern?


Mr. Leser. Yes.


Chairman Hoekstra. Money has been laundered. Does it concern you at all that the people running the Teamsters today are unelected? These are unelected leadership. Does that concern you?


Mr. Leser. Not particularly. I mean, not in itself, because I think that they were prior officers. I don't think it causes me any more concern than other matters. Not specifically, I am not concerned with that.


Chairman Hoekstra. I am going to be interested, I would like to ask, what can you actually, I mean these people got elected on a fraudulent slate that was thrown, where the leader of the slate was thrown out for illegally laundering money, and they are still there. And that does not cause you a great deal of concern. Who is the responsibility to? Is it to the leadership or is it to the rank and file?


Mr. Leser. Are you talking about my responsibility, sir?


Chairman Hoekstra. Yes.


Mr. Leser. I think my responsibility is to the client.


Chairman Hoekstra. Who is your client? Is it the people here in Washington, the leadership, or do you have a responsibility to the rank and file, the 1.4 million members that if there is a problem with the finances, they find out?


Mr. Leser. I think I have a responsibility to those members, yes, I do. I think that our financial statements do disclose, I think our responsibility is to see the financial statements appropriately disclose the financial condition of the Union and the results of its activities. I think those financial statements do disclose that.


Chairman Hoekstra. I don't know how you can say that. I mean, I don't trust those people over there. I don't know how you can. They stole an election. They stole an election that the taxpayer paid $20 million for. You are saying there is not a problem. You trust them.

Are you also willing to testify, you are under oath, every time Robert DeRusha and Robert Simpson asked you for information, you provided them with all of the information and a full explanation of all the financials that they needed to have?


Mr. Leser. That is certainly my recollection, that I tried to answer any question they ever asked, tried to provide information and even provided where I thought there were concerns that they should be aware of.


Chairman Hoekstra. So at any time during those last--when they were trustees, at any given time, they could have called you and you would have given them all of the information and answered all of their questions?


Mr. Leser. I sat with these gentlemen twice a year in a conference room, answered any questions.


Chairman Hoekstra. These two.


Mr. Leser. There were three trustees at all times. I answered any question they ever asked of me that I could, that I knew the answer to. And I don't recall there being any questions they asked that I did not answer. And then I would walk them through the audit procedures and the financial statements. I don't recall in any case there ever being any question they asked that we did not give them an accurate answer.


Chairman Hoekstra. When they came here and said that they did not have access to financial data, you would dispute that claim and say that as long as they were trustees, at any given time they could have called you directly, and you would have answered all of their questions?


Mr. Leser. No, I did not say that. What I think they said is they were not always provided financial information by the IBT. I did not say that I_I think I understand what they have said, because they have said it to me, is that the IBT on many occasions wouldn't give them information they asked of the IBT. Never were there cases where they asked us for information we did not provide it for them. I believe, because I sat with these gentlemen twice a year repeatedly, I know that they had concerns about getting information and being able to take documents out of IBT. And I know there was a great debate about that. But what I answered was, there was no information they asked of me related to the audit or the financial statements in any of the work that we did that we did not answer for them.


Chairman Hoekstra. Did that ever raise any red flags with you that the trustees couldn't get information from their own Union?


Mr. Leser. Well, it is something we certainly listened to.


Chairman Hoekstra. Did you ever bring it up with management at the IBT?


Mr. Leser. Absolutely.


Chairman Hoekstra. And you were satisfied with their answers?


Mr. Leser. Yes. I was satisfied with their answers.


Chairman Hoekstra. My last: Did you give Rebecca a raise?


Mr. Leser. Pardon me?


Chairman Hoekstra. Did you give Rebecca a raise?


Mr. Leser. I always give Rebecca a raise.


Chairman Hoekstra. She should get a big raise, because it seems like at least on 12/31/96, she was the one that came closest to hitting the nail on the head as to what was going on within the IBT and that they might be doing something funny with their money. It was ignored. It was absolutely ignored and that is too bad.


Mrs. Mink?


Mrs. Mink. Thank you. I just have a few questions. The Chairman indicated that he is upset because you continue to work with the leadership at the IBT, notwithstanding the fact that the election of '96 was set aside and that these people are unelected. I think I share that concern with the Chairman. I am calling for elections to be held. If this is a problem of dealing with unelected officials, we can easily correct it. We can have an election and have duly elected officers that you can then continue to relate to. The problem is one we have created, and it is a problem that we have to solve. It is certainly not your burden that you have to deal with. Your clients are your clients. So I commiserate with you in that regard.

The problem that has come to our attention is the matter of the trustees, their relationship with the Union. Perhaps you could explain how you saw their function as being different than your major client, which was the Union, because the difficulty was, as I understand it, the trustees wanted to remove documents which they could then take back to their locals and display. I understand they made the same request of you for the documents. You have produced the documents, but you also did not allow them to take them with them; is that correct? Is that about a correct explanation of the problem with the trustees?


Mr. Leser. Well, let me try to clarify that. As I understand, at some point in the process there are allegations of the management of IBT versus the trustees, where the trustees were removing documents and using them for political purposes. There were significant_


Mrs. Mink. Were those documents that you gave to the trustees?


Mr. Leser. No. The only documents that we would have ever had in our possession that we discussed with the trustees or provided to them our audit reports. No, I think that they-


Mrs. Mink. What about your worksheets? Did you ever give those out, or other substantiating background information, which you used to write the financial audit?


Mr. Leser. No. They never asked for them and we certainly did not discuss that with them.


Mrs. Mink. What did they ask you for in the way of documents?


Mr. Leser. The only specific documents I think they ever asked us for or asked us about is whether or not we had kept in our work papers specific information about the client records, did we have copies of expense reports in our working papers. And our explanation to them was we examined them, we have working papers. We make tick marks that we examine things, but we don't keep the original documents.

So that is the only information they ever asked us about, and we explained that we simply don't keep that information. It is not in the nature of auditors. We are not the recordkeepers. The company has the records.

But I think this whole dispute in terms of information had to do with how management of the Union believed that the trustees were misusing their power and in terms of taking the information outside and using it for political purposes. That is my understanding of what came to be a pretty frequent discussion topic with management in our presence. But never related to information that we had because we don't_simply didn't have that kind of information.


Mrs. Mink. You indicated in a response to the Chairman that you are aware of this problem and that you did discuss it with the IBT management.


Mr. Leser. Yes, and we talked to them about it because these were difficult meetings, sometimes in terms of what I will describe as political debate, and just trying to understand what were the issues in their minds in terms of what was this debate about. So that was the way it was explained. But by the way, we continued to meet with them and certainly continued to answer any questions they had. In no way did we ever stop those meetings.


Mrs. Mink. When they raised the question on an expense account to where you could not produce the documents, you did take the time to explain what the expense item was and that in your view it was an appropriate and legitimate expenditure?


Mr. Leser. They never even asked us about anything specific. They just simply said, do you have in your work paper copies of a generic question, and we said we did not. And it wasn't that they said, do you have John Smith's expense report for April, whatever. It was, do you keep such documents in your work papers. And we would say no. So they never asked us for any one specifically because we already told them we didn't have such information to be able to provide.


Mrs. Mink. Now, the Union has in its presence an independent auditor that has been appointed to look at their books. How is that individual's job, how does that individual's position differ from the type of examination that you would make?


Mr. Leser. Well, as I understand it, they are doing pretty much 100 percent advanced approval. Ours is one of testing information to prepare financial statements. They are doing a, before an expenditure takes place, an advanced approval. So it is incredibly different. Our goal is to see that information accurately gets in their financial statements. I think their goal is to make sure that inappropriate expenditures are not made. So I think they have much broader authority and power than we do.


Mrs. Mink. So, since the imposition of this independent financial auditor, there really is no need for fraud audit as well, because every single check is being examined?


Mr. Leser. Well, it certainly reduced, it certainly would reduce, since they have examined every transaction on the front end; but, you know, I think whether or not there is a need for some additional fraud examination really depends, I guess, on any findings that come out of that process or any other findings.


Mrs. Mink. How does the presence of this individual there in IBT affect your function?


Mr. Leser. Well, at the point we did the '97 audit, they had only one in place for a few weeks so we really did not take that to any, we did not really take--


Mrs. Mink. So say for the '98.


Mr. Leser. I think in '98 it would add considerably to the--it would have considerable impact because we would have known that an outside auditor has pre-reviewed every transaction. So I think it would probably have an effect on our scope, yes.


Mrs. Mink. Would it cut your fees?


Mr. Leser. A little bit.


Mrs. Mink. Thank you, Mr. Chairman.


Chairman Hoekstra. Mr. Leser, I would just encourage you to take a look at what the independent financial auditor is before you submit your bid to the IBT to do their audits for '98. I am not sure that you are going to find that this person is going to have made your job all that much easier. Have you met with this person and reviewed exactly how they are performing their function?


Mr. Leser. I have met with them and discussed some of the procedures they are performing. I haven't talked to them recently. I think the scope of what they were doing was somewhat up in the air when I did meet with them. But in terms of their initial scope, as I understood it, was pretty significant, yes.


Chairman Hoekstra. Read the testimony of –what is the gentleman's name, Mr. Levy, and the testimony that he gave in front of our committee, and I think you will find that to be perhaps much more instructive than other things that you have read. And then prepare your bid for the Teamsters for next year based on that. I wouldn't cut your hours back a whole lot. I hate to have you lose money.


Mr. Leser. I appreciate that.


Chairman Hoekstra. Mr. Norwood?


Mr. Norwood. Mr. Chairman, to follow up on that, if I were you, I would try to get his job. He is being well paid to do what he says to us is nothing. I think it is a great situation.

Let us go back, gentlemen, a little bit and think back about that conference call in 1994, where I understand both of you were on the line. And this was a call that was with IBT officials relating to perhaps the discount rate of TAPP. Both of you all remember that telephone call?


Mr. Leser. I remember there being a phone call. I don't remember any of the specifics. I do recall there being a phone call. I have notes from it, yes.


Mr. Norwood. You have your notes in front of you about that conversation? Is that what you are saying? Mr. Morgan, were you on the line during that telephone call?


Mr. Morgan. I was on the line with a conference call. I am assuming it was this one. I don't actually remember_


Mr. Norwood. This one particularly was about the discount rate. Do you recall that telephone call?


Mr. Leser. I know there were discussions. I don't remember the specifics of any one discussion.


Mr. Norwood. I know. I would not remember either, in 1994. But in general, there was a conference call that occurred about the discount rate.


Mr. Leser, was there any mention during this telephone call about the emergency assessment that the Union had in place? Do you recall that?


Mr. Leser. Not that I recall. Not that I recall.


Mr. Norwood. Was there any discussion of changing the discount rate, Mr. Leser? Do you remember that?


Mr. Leser. Based on my notes, it seems that that was discussed.


Mr. Norwood. That was discussed?


Mr. Leser. Based on reading these notes it looks like it, yes.


Mr. Norwood. Is there anything in your notes about the emergency assessment?


Mr. Leser. No. No.


Mr. Norwood. Is there anything in your notes that shows that you were asked what might be the right rate? And I guess if they were not going to ask you that, why would they have you on the line? But do you have any information about that, what might be the correct discount rate? This was a $167 million telephone call, guys. Come on. This was important.


Mr. Leser. I think we need to go back a little, if I might. The Teamster affiliate plan was frozen in an effort to save the cost in the future.


Mr. Norwood. At 7.25?


Mr. Leser. Pardon me?


Mr. Norwood. The rate was frozen?


Mr. Leser. No, the additional benefits.


Mr. Norwood. I understand that. We will get into that in a minute.


Mr. Leser. So that was the general discussion topic. The rate issue, frankly, I don't even recall.


Mr. Norwood. There was no discussion that if the discount rate stayed at 7.25, that this plan would be insolvent or right at insolvency if it stayed at 7.25? You mean, that didn't come up?


Mr. Leser. I think the plan was already underfunded, if I recall, I believe, at that point.


Mr. Norwood. IBT would be insolvent at 7.25?


Mr. Leser. You mean the plan?


Mr. Norwood. Yes. This is a really important telephone call.


Mr. Morgan, can you shed any light on this?


Mr. Morgan. I know that the IBT was very concerned about where they were going to fall out.


Mr. Norwood. Where the rate would fall out?


Mr. Morgan. Where the net worth was going to fall out.


Mr. Norwood. Yes, I'm sure so.


Mr. Morgan. We did calculations. These look like the differences in the numbers, and we said, okay, this is--at the beginning of the year the discount rate was 7-1/4. Interest rates have gone up since then. It would be a reasonable rate used by a lot of corporate plans at around this time. If we did that at 8 percent, this is what the numbers would be.


Mr. Norwood. Did anybody say, at 8 percent we remain solvent, but at the same time we continue with the emergency assessment?


Mr. Morgan. I don't remember any discussion like that.


Mr. Norwood. That had to be of some concern. That is $17 million that would not be coming in had that rate been high enough.


Mr. Morgan. It must have been. I would assume that, but I don't know.


Mr. Norwood. Mr. Leser, can you shed any light on this? Somebody, if it had been me, I would have been asking that in a running minute; where does this rate need to be so I can keep that $17 million coming in and can stay solvent?


Mr. Leser. But I think if they had picked a lower rate, that it had a loss as opposed to the curtailment gain, they would still have received, if I am remembering this right, I think whether or not, whichever method was used, they were still going to receive the special assessment.


Mr. Norwood. As long as the net worth stayed under $25 million?


Mr. Leser. If they used the 7-1/4 rate it was going to be well under the $25 million. But I am--


Mr. Norwood. Before that little red light comes on, let me just ask you a question, Mr. Leser. I find it interesting, in your 1995 financial statement, you showed the discount rate for 1994 at 7.25, but in the actual document I have around here, I believe it is right here, it says 7.25 for 1995 and 1994.

It is my understanding that 1994 was not 7.25 but was 8 percent? I am just curious why you put 7.25, rather than 8 percent in there.


Mr. Leser. I think that is something we would like to check and get back to you.


Mr. Norwood. I will send it down right now. This is a copy right out of your page. It says right here, 7.25 percent for 1995 and 1994. Yet it was 8 percent. And those two numbers make a big difference.


Mr. Leser. I think what I was trying to suggest is I think that I would like to look at the supporting information that produces those rates, those disclosures, to make sure what actually is the actual rate that was used. I don't actually recall at this point.


Mr. Norwood. Are you questioning whether it was 8 percent?


Mr. Leser. I am just not sure. I think I would like to be able to look at our work papers and come back with a written response on that point.


Mr. Norwood. I would like for you to come back with a written response, because this is a report put out by your firm that says, and I quote, "The discount rate used in determining the actuarial present value and projected benefit obligation was 7.25 for 1995 and 1994," and that is very misleading to anyone who picked this up and wondered what was going on.

So if you would, we would be very grateful if you would get back to us in a lot of detail about this.


Mr. Leser. We would find it appropriate and we will do so.


Mr. Norwood. If you don't find it appropriate, would it be appropriate for us to re-subpoena you, or try a contempt of Congress? It is very appropriate that you answer this question, Mr. Leser, because you have misrepresented in this document that went out to anybody who wanted to see it what that rate was. That is important to this whole thing.


Mr. Leser. I agree. I said we would get back to you on it.


Mr. Norwood. I thought you said, we will get back if it suits us.


Mr. Leser. I did not mean to say that. I meant we would get back with the appropriate information. I am sorry.


Chairman Hoekstra. If you can get the work papers, the documents that you have provided that would not include the working papers that show how we get from 7-1/4 to 8 percent.


Mr. Leser. Okay.


Chairman Hoekstra. Mr. Norwood, for your benefit, the importance of maintaining the emergency assessment for 3 years, 1995, 1996, and 1997, that is about $51 million, or 17 percent of the Teamsters' total revenue. So it was important to them to keep the assessment. $17 million annually.


Mr. Parker?


Mr. Parker. Thank you, Mr. Chairman.


Mr. Leser, you audit the Teamsters. Now, maybe my understanding of what an auditor does is different than other people's. I have this theory that you audit to see if there are any problems that exist, any mismanagement, anything that is not being done by, let's say, the constitution itself of the organization.

Let me ask you this. Do you believe that embezzlement occurred in the Teamsters?


Mr. Leser. I believe it appears there was a kickback of donations, yes.


Mr. Parker. Mr. Sever agrees with that, too?


Mr. Leser. Yes.


Mr. Parker. Do you know of any internal group, any study, any investigation, anything that has been done internally to address that situation? I am not talking about the outside investigators, I am talking about internally. What has been done internally to address that?


Mr. Leser. I think that any future contributions are being reviewed by legal counsel.


Mr. Parker. So you don't think that anything internal that was done was wrong? The money_you had embezzlement occur, but there was nothing from the standpoint of recordkeeping or whatever that should have been changed to control that?

I mean, I would think an auditor would say this is what you need to do to prevent that from occurring in the future.


Mr. Leser. I think that is very difficult. I think you raise a very valid question. Unfortunately, the best controls in the world can be overridden, and particularly when you have third parties outside the organization involving a kickback scheme. That is a really difficult issue. I think it is very hard, especially if you look at the nature of these expenditures.

These were voluntary contributions. They were not an exchange transaction where they were buying something, where you would get an invoice that would, you know--when you are buying a car or something like that. It is not a material item. So I think that the nature of it is one that makes it very difficult, and particularly when you bring in collusion by third parties outside the organization.


Mr. Parker. But you had people in your own organization which saw that there were some problems.

Now, in exhibit II.A, followed by exhibit II.B, this is the note from, I think that you said her name was Rebecca that wrote the memorandum. She picked up on this. I would love for Rebecca to come and tell us how she picked up on this.

Then you have a thing from Susan to Rebecca on that exhibit II.B in which they say there could be some problems here. So you have people in your own organization who are saying, it is like a red flag that is being put up, and it never got to you. You have testified that information never got to you. There was a manager, and you gave us his name earlier, that made a decision not to forward that on. I think that may have been a problem there. It was a judgment call on his part.


Mr. Leser. Yes. The information didn't come to me. But I think, as I read this, what_the way this worked is Susan was raising the issue to Rebecca. Susan, being a tax person, was raising a tax issue, which really, she was not really raising an audit issue, the way I read it.


Mr. Parker. If you look at what Susan wrote, what Susan highlighted, it was something illegal. And it would seem to me, with you being in charge of the auditing, if you had known about this, let me ask it like that: If you had known about this, would you have addressed this issue?


Mr. Leser. If I had reason to believe that there was any kind of illegal activity, certainly we would investigate that, yes.


Mr. Parker. Because it seems to me this was a red flag. I am not an auditor, I am not a CPA, I am not a lawyer. But at the same time and I am involved in politics, so I know a lot of the political areas, the laws that involve campaigns and disclosure, that type of thing.

It would seem to me that this would raise a flag, a red flag, in my own mind. I would think if you had seen that you would have done it. Have you had a discussion with the manager who this information was evidently brought to and did not forward it on to you? Have you discussed this with him at all?


Mr. Leser. Very briefly. Like I said, the first time I saw this was yesterday afternoon.


Mr. Parker. Are you planning on talking to him?


Mr. Leser. Yes.


Mr. Parker. Do you think it is a problem?


Mr. Leser. I am not really sure that I completely understand what is being raised here, so I would like to understand it a little better.


Mr. Parker. But you are going to investigate this yourself?


Mr. Leser. I am going to have further discussions with him.


Mr. Parker. Good. What was his name again?


Mr. Leser. Kevin Madden.


Mr. Parker. He would be classified as a manager?


Mr. Leser. Correct.


Mr. Parker. My time is up, Mr. Chairman.


Chairman Hoekstra. Just a couple of questions.


Mr. Morgan, you made some statements about the change from 5 years to 3 years was not self-dealing in the family plan administrative committee.

Who benefited primarily from that change?


Mr. Morgan. People who would benefit would be people who left between 3 and 5 years of service.


Chairman Hoekstra. All right. Who might that have been in 1995?


Mr. Morgan. In 1995, if you are looking at the short term, it would be anybody who was hired up to, say, 3 years prior to that. One of the problems is that there are also people who get credited with service under the affiliates' plan.


Chairman Hoekstra. Who might those people have been?


Mr. Morgan. It could have been anyone hired in that time period.


Chairman Hoekstra. Who might those people have been?


Mr. Morgan. It might have been people who were part of the Carey administration.


Chairman Hoekstra. A lot of them came in with the Carey administration, right? What was happening in 1996?


Mr. Morgan. In 1996 was the election.


Chairman Hoekstra. Isn't there, which was going to be a very contested election. In recognizing that perhaps a lot of the staff changes, if there is a change in administration, you--


Mr. Morgan. There might be large staff changes.


Chairman Hoekstra. If that were true, wouldn't that kind of be self-dealing? These people made sure that if there was a change in administration, that they were going to walk away with a pension.


Mr. Morgan. It would mean that they would be vested and not get something, yes. Not all of them would have been affected by that. In fact, many of them would not have been affected by the change.


Chairman Hoekstra. How do you know? I mean, I am assuming a number of them got elected or were hired in the period after Mr. Carey was sworn into office, and recognizing that there had been a 5-year term, I believe, and that if he had not won the reelection, there might have been a new administration and significant change in the headquarters, meaning that a lot of these people, to get their full vesting, would have had to have served a period of time in a new administration, which might be kind of unreasonable.


Mr. Morgan. There would be--for some of them, they would have been granted service or credit for vesting for their affiliate service. So that is why I am saying it is not black and white.


Chairman Hoekstra. Yes. I guess I have a few more things.

Reviewing your LM-2s and IRS reports for IBT, it appears that during the last 5 years, while the net worth of the IBT has been plummeting, certain expenses rose sharply. I think it is document Roman numeral V.A, some 1996 expense increases--it shows increases in spending in six different categories. Legal costs rose 40 percent, from $4.26 million in 1995 to 6.05 in 1996.

Can a Union member find out how this $6.05 million is spent, Mr. Leser?


Mr. Leser. I am sorry, I was looking at the chart. Which item in particular?


Chairman Hoekstra. Can rank and file Union members find out how this $6.05 million is spent?


Mr. Leser. The components from the LM-2, is that your question?


Chairman Hoekstra. Or any documents out there in the public domain, whether it is LM-2 or your financial reports or anything? Can you really get an understanding as to where that money is spent?


Mr. Leser. In more detail, I guess that is your question? Can you look at more detail?


Chairman Hoekstra. Yes.


Mr. Leser. No, I don't think so.


Chairman Hoekstra. Civic betterment, down from $150,000 in 1994 to $100,000 in 1995, and nearly $1 million in 1996. Is that broken down anywhere else so that members can tell how that money is being spent?


Mr. Leser. Not in reports that are provided to the general membership.


Chairman Hoekstra. What expenses are included in the category of civic betterment?


Mr. Leser. I don't know exactly.


Chairman Hoekstra. Are political contributions included in civic betterment expense?


Mr. Leser. I don't recall exactly what would have been the classifications.


Chairman Hoekstra. You don't know, okay. Just to finish the chart, publicity and advertising costs rose from $800,000 in 1995 to 4.98 million in 1996. Do you know where those costs went?


Mr. Leser. No. Are you asking me specific items? No, I don't know.


Chairman Hoekstra. Yes. The travel cost rose from $5.3 to $7.5 million. You don't know where that went?


Mr. Leser. It has to do with the convention. This information comes from the LM-2. The LM-2 has very specific categories of information. If I am reading what it says the source is, the LM-2 characterizes expenditures in a functional classification as opposed to the financial statements that report information by department. I think it gives you a little clearer picture of where the monies go.

But your earlier question was asking me, could I tell from these numbers what exactly are components of that, and I don't think you can from looking at the LM-2. The LM-2 provides the information be reported in very specific categories.


Chairman Hoekstra. Do you guys review the LM-2s?


Mr. Leser. The LM-2 is that odd animal in terms of it is produced on a cash basis, so we have performed certain procedures to look at how that information reconciles back to their basic books and records, because it doesn't flow from the general books and records, because it is an accrual basis.

I am sorry if I am getting complicated, but one is an accrual basis financial accounting statement and the books are kept on an accrual basis. The LM-2 is a cash receipts kind of report. It also calls the information in the report in different categories, so we have performed certain procedures to look at how the information is converted, if you would, to fill out the LM-2 report.


Chairman Hoekstra. As these costs were going up, is this also the period of time where strike benefits were being reduced? Is this the year that you were talking about where perhaps for one year there were no strike benefits paid?


Mr. Leser. I think strike benefits stopped after the large strike in the spring of 1994, when the strike fund was depleted, and they started paying strike benefits in I believe the fall of 1995, where they paid it out of the general fund. That is where they took the strike benefits from the $200 back to the old $55 rate, so there is a period covering part of 1994 and most of 1995, and they did not pay strike benefits.


Chairman Hoekstra. You--


Mr. Leser. A lot of these expenditures were also affected by the convention.


Chairman Hoekstra. The convention is broken out separately on the LM-2?


Mr. Leser. I think some of the costs are broken out, but earlier costs were in other places. That was my recollection.


Chairman Hoekstra. I will ask unanimous consent to insert for the Record a letter to Senator Hoekstra. Thank you.



Chairman Hoekstra. All right. Thank you for your patience today, recognizing that we would have gotten this done in an hour today if it had not been that we could not meet in an informal time with staff to go through a lot of this information.

I am very concerned that a number of what I would call the red flags, and I think my colleagues have called red flags, did not trigger more activity. I am hoping that as we move forward, you take a look at what is going on in the organization, and you have a responsibility I think to the rank and file. I hope you take that responsibility very seriously, because I am very concerned and continue to be concerned about what is going on in the headquarters.


Mrs. Mink, do you have a statement?


Mrs. Mink. I just want to conclude by saying that based upon what I know about the audits and statements that have been provided, and your testimony today, I am absolutely satisfied that in your capacity as the examiners of the books and records of the IBT, and in your professional capacity as auditors, that you were not aware at any time that funds of the IBT were being removed surreptitiously or otherwise illegally; and that in your view, based upon your examination of the books, that the pension funds are sound and no monies were stolen from them, and this is also true with respect to the operating side of the transaction.

So I think that your testimony today is very, very important, because there have been these lingering accusations and assumptions that have sort of colored the whole situation. So I am pleased that you came today, and that you, as I understand it, volunteered to come and have been very helpful in our understanding of what exactly has transpired with reference to the financial activities and transactions of this Union.

Thank you very much.


Chairman Hoekstra. One last question. You are going to provide us with the working draft of 1997, the 1997 audit, is that correct?


Mr. Leser. If you would like it, yes.


Chairman Hoekstra. We would like it very much. That is a formal request to have that.


Mr. Leser. I would just hope you would understand that it is a draft, and it may change.


Chairman Hoekstra. I am very interested in taking a look at how the audit that you are conducting for 1997 has changed based on the information we have learned in the last year.

Thank you very much for bearing with us this afternoon. The hearing will stand in recess until tomorrow morning at 10:30.

[Whereupon, at 5:52 p.m., the subcommittee was adjourned.]








Wednesday, June 17, 1998


House of Representatives,


Subcommittee on Oversight


and Investigations,


Committee on Education and the Workforce,


Washington, D.C.











The subcommittee met, pursuant to call, at 10:33 a.m., in Room 2175, Rayburn House Office Building, Hon. Peter Hoekstra [chairman of the subcommittee] presiding.

Present: Representatives Hoekstra, Mink, Scott, Parker, and Norwood.

Staff Present: Rebecca Campoverde, Professional Staff; Patrick Lyden, Staff Assistant; Mark Rodgers, Workforce Policy Coordinator; Dan Anderson; Brian Connelly; Joe diGenova; Chris Donesa; John Loesch; William Outhier; Michael Quickel; Michael Reynard; Philip Smith; Fred Smolen; August Stofferahn; Dan Sullivan; and Victoria Toensing; Gail Weiss, Minority Staff Director; Mark Zuckerman, Minority General Counsel/Press; Cheryl Johnson, Minority Legislative Associate/Education; Pat Crawford, Minority Legislative Associate/Labor; Cassie Lentchner, Minority Special Counsel/Investigations; Jim Jordan, Minority Director of Communications; Brian Campagnone, Minority Staff Assistant; Mike Berlin, Minority Counsel; John Lee, Senior Investigator; Greg Jefferson, Minority Counsel; and Pat Dugan, GAO Detailee.




Chairman Hoekstra. The subcommittee will come to order. Good morning. We continue today on our hearings on the failed Teamsters election and the larger issue, how IBT was mismanaged by Ron Carey and his lieutenants, and whether things have changed since Mr. Carey stepped aside.

After yesterday's hearing, I think we have made progress in compiling a record of sworn testimony and documentary evidence. I can't say that I am happy about the picture that is emerging from the record. After a lot of hard work answers are emerging from the investigation, but at the end, the questions we are trying to answer still are pretty simple; what became of the rank and file members' money? Did the Teamsters' leadership act in their members' best interests? If not, why not? Were there internal financial controls in place? Were they easily circumvented? If so, why? How easy or how hard is it for the union's hard-working rank and file men and women to find out what is going on and to hold their leadership accountable?

It is still amazing and surprising to me that we have met so much resistance from the people controlling the IBT, when the answers we are looking for are matters of simple fairness and basic accountability. We got some more answers in yesterday's hearing, and let me summarize them by walking briefly through our hearing scorecard. Keep in mind that the things we heard about yesterday occurred at the biggest private union in this country during 10 years of so-called Federal supervision.


The scorecard that is displayed over there talks about what has happened under the current IBT management from 1993 to the present, and what the activities evidence to the membership.

In 1998, the IBT has directed that no witnesses be interviewed. What this tells our members is that there is stonewalling of a congressional investigation. In 1996, the IBT directed illegal political contributions. What this signals to their leadership is a failure to safeguard union assets. In 1996, the IBT shows over $12.5 million of expense increases. I think what this shows to their membership is inadequate overall financial controls.

In 1995, the IBT changed the pension vesting to 3 years from 5 years for their leadership. I think that is a costly self-dealing transaction. In 1994, the IBT manipulated the pension plan, its Affiliates Pension Plan. To the rank and file, this is evidence of financial deception, impacting the net worth of the union.

In 1993 and later, there were millions of LM-2 underreported expenses. What this tells their members, intentional nondisclosure of officer expenses. In 1993 and later, the IBT trustees, trustees elected by the rank and file, were stonewalled. What this tells rank and file workers is that even the members that they elect to represent them at the GEB, or the General Executive Board, are denied access to records and documents.

The bottom line is that for the current IBT management there are questions of ongoing fraud and corruption. I would ask for unanimous consent to insert into the record a document that I received last night that was mailed to Mr. Cherkasky, that was copied to me and to Mary Jo White, the U.S. Attorney, from Roy Atha, the Secretary Treasurer of Local 654.


Mrs. Mink was not copied, but here is a copy for you.


Mrs. Mink. No objection.



Chairman Hoekstra. What this tells, I think, the IBT rank and file members, there are deficiencies and failures in internal controls, inaccurate and misleading financial reporting, and perhaps a million dollars in questionable illegal cost. That is the scorecard. Much of that came out yesterday.

I hope today's panel will shed some light on the Labor Department's responsibilities to the rank and file union members and the American taxpayers. The Federal government's decision a decade ago to involve itself in supervising the Teamsters was a major commitment. It was a serious decision, and it has certainly turned out to be an expensive one, both for the taxpayers and for the union. The role of the U.S. Department of Labor is one of the cornerstones of what is held up to the public as supervision of the historically troubled IBT.

The instrument the DOL uses to carry out its supervisory function is the LM-2 form, the form used for the annual financial disclosures required of the labor organization under Federal law.

In light of the broad questions I mentioned, what we want to know this morning is how well does the LM-2 function, how good a job does it do at letting rank and file members of a union learn where their money is going, how it is being spent by their leaders, and for what purposes.

This is a somewhat arcane topic, but it is very, very important. It is important because the Federal government is telling union members, in effect, this is a financial reporting required by the United States Government. This is how you, the layman, can see what your union is up to.

Now we heard yesterday that the IBT has an annual audit of its books, and that the audited financial statements are published in the Teamsters magazine. But there are a lot of holes there.

For one thing, what the auditors do is very different from what is called a fraud audit. I could not get Mr. Leser to say that he would recommend the Teamsters have a fraud audit, even though three people have pleaded guilty to felonies and a fourth has been indicted, and the president has been removed from office. Unfortunately, I am not sure that the LM-2 form is much better. Maybe our panel this morning can convince me otherwise.

I did agree with one thing Mr. Leser said yesterday. He called the LM-2, and this is a quote, "an odd animal." An odd animal. That is true even in the bureaucratic world of Washington. To cite one example, we already know that the LM-2 form requires disclosure of certain travel and entertainment expenses by individual IBT officers and senior executives, but other travel and meal expenses can simply be lumped into one large sum elsewhere in the report.

In 1996, there were at least 200 Teamsters' Crestar Visa cards issued to IBT executives and staff members. None of those expenses had to be listed by the individuals who used the cards on the LM-2s, so if Ron Carey reported $500 in expenses for the entire year, who could tell how much he really spent, or for what? The answer, I believe, is you cannot really tell.

Likewise, since at least 1992, it appears that the IBT did not report on the LM-2 the money contained in three funds, the general fund, the special organizing fund, and the so-called defense fund. These funds added up to about $111 million. Yet, I would not be able to find those funds in the LM-2 report.

We have asked the Labor Department in writing about these funds, and the answer was, "It would appear that the 1993 IBT LM-2 report does include the above-mentioned funds, or that at least the reported total assets, liabilities, receipts, and disbursements, are large enough to include these funds."

It sounds to me as if the Labor Department isn't quite sure whether the money was reported or not. But hey, it is only $111 million. So I look forward to hearing from our panel of witnesses, and learning more about how the Labor Department does its job.

Is the LM-2 the best way for rank and file union members to keep an eye on their union finances? If not, what function is it supposed to serve? Does anyone at the Department actually review these reports? What is done with that information?

Yesterday we had a lesson in accounting; not all that good of one, I am disappointed to say. I have much less confidence in annual reports today than I had yesterday. Maybe today we can find out whether the Department of Labor's financial oversight is something rank and file members can take to the bank.


Mrs. Mink.


Mrs. Mink. Thank you, Mr. Chairman. I, too, acknowledge the participation of the U.S. Labor Department today, and I am pleased you are here to respond to the interests of this subcommittee.


Mr. Chairman, yesterday in our hearing we spoke about the relevance of internal controls with reference to financial matters in the IBT, and you made an inquiry on any memorandum that the Grant Thornton Company made with reference to the effectiveness of the internal controls. I just wanted to submit for the Record what information we had received pursuant to this committee's request to Grant Thornton. It covers the periods 1993, 1994, and 1995.

I ask that this be inserted in the record at this point.


Chairman Hoekstra. Without objection, so ordered.


Mrs. Mink. Thank you.


Chairman Hoekstra. Without objection, the statement of any other member of the subcommittee who wishes to provide one will be included in the record.


Chairman Hoekstra. Of course, Mr. Norwood, you could use Mrs. Mink's unclaimed time.


Mrs. Mink. I don't yield.


Chairman Hoekstra. Just kidding. Just kidding.

We have several witnesses with us today to offer testimony as to how the Department of Labor manages and oversees reporting of information relating to the financing of the Teamsters and other unions, including union pension funds.

Appearing from the Office of Labor Management Standards are John Kotch, the Acting Deputy Assistant Secretary, and Mr. Howard Campbell, the Acting Chief of the Reporting and Disclosure Section. Good morning.

From the Pension and Welfare Benefits Administration we have Mr. Alan Lebowitz, the Deputy Assistant Secretary; Ian Dingwall, the Chief Accountant; and Joseph Applebaum, the Chief Actuary. Good morning to the three of you. Welcome to each of you and thank you for being with us.

I will ask you to summarize your testimony this morning in a brief statement, and without objection, your full testimony will be included in the hearing record.

Before receiving the testimony, the Chair will ask the witnesses to take an oath. The witnesses should also be aware that making a false statement to Congress while under oath may be prosecuted under law. In light of this, will the witnesses please rise and raise your right hand?

[Witnesses sworn.]


Mr. Hoekstra. Let the record reflect that each of the witnesses has answered in the affirmative.

I believe that we are going to begin with Mr. Lebowitz. Mr. Lebowitz, you are recognized for your opening statement.






Mr. Lebowitz. Thank you very much, Mr. Chairman. Thank you for the opportunity to talk to you today about the Pension and Welfare Benefits Administration, and in particular, the reporting and disclosure requirements for employee benefit plans that we enforce under the Employee Retirement Income Security Act, or ERISA. I am Alan Lebowitz, Deputy Assistant Secretary for Program Operations.

PWBA is the agency of the Department of Labor responsible for administering and enforcing ERISA, the primary Federal statute that governs employment-based pension and welfare benefit plans. ERISA was enacted in 1974, primarily to address abuses in private sector pension plans. ERISA dealt with these problems with respect to pension plans by providing minimum Federal standards for participation, vesting, and funding of plans, and uniform reporting, disclosure, and fiduciary requirements. It also provided uniformity by preempting, with certain specific exceptions, State laws relating to ERISA-covered employee benefit plans.

ERISA Title I is administered by the Department of Labor, Title II by the Internal Revenue Service, and Title IV by the Pension Benefit Guarantee Corporation. ERISA requires administrators of welfare and pension plans to file an annual report with the Secretary.

Most pension plans and certain fringe benefit plans are also required to file annual reports with the IRS under the Internal Revenue Code, and defined benefit pension plans must provide information to the PBGC under Title IV of ERISA. The Form 5500 series was developed as a consolidated annual report to eliminate duplicative reporting that would otherwise result from separate reporting to each agency.

There are approximately 750,000 private sector pension plans, and 2.5 million health and other welfare benefit plans subject to ERISA. Over 800,000 of these plans are required to file a Form 5500 series report each year. These plans cover an estimated 200 million participants and hold an estimated $3.5 trillion in assets. PBWA currently has authorized staffing of 709 FTEs to administer and enforce all of ERISA's requirements.

Through our enforcement and compliance program, we conduct civil and criminal investigations to ensure compliance with ERISA. In fiscal year 1997, PWBA recovered more than $363 million on behalf of employee benefit plans. Also, 143 criminal investigations were opened, and 85 closed. Prosecution from criminal investigations in which PWBA was involved resulted in 105 indictments. Of the 105 persons indicted, 68 have been convicted, and charges against two were dismissed. Actions remain pending against 35.

Through our customer service staff, information is provided to participants and beneficiaries that enable them to better understand and exercise their rights under the law and protect their economic security. In addition, our staff assists participants in recovering benefits to which they are entitled.

In fiscal year 1997, PWBA's customer service staff responded to over 134,000 telephone calls and nearly 20,000 written inquiries and complaints, over 800 in person visitors, and about 100 e-mail contacts. The customer service staff was also responsible for nearly $24 million in benefit recoveries for participants.

The Form 5500 series is the principal source of information and data available to the Department, the IRS, PBGC, plan participants, and beneficiaries, as well as the general public, concerning the operation of employee benefit plans. The Form 5500 also serves as a tool that allows PWBA to leverage its limited enforcement resources, and constitutes a critical part of the Department's enforcement, research, and policy formulation programs.

The Form 5500, which is required to be made available to participants by the plan administrator, and to the public by the Department, is intended to act as a deterrent to noncompliance with the statutory minimum standards and duties imposed on those responsible for plan management by opening the operations of the plan and the dealings of those responsible for the plan to participant and public disclosure.

An integral component of ERISA's annual reporting and disclosure provisions is the requirement that employee benefit plans with 100 or more participants generally must obtain an audited--an annual financial audit by an independent, qualified public accountant, and file a copy of the auditor's report with the Form 5500.

The annual audit must be conducted in accordance with generally accepted auditing standards. The accountant also must render an opinion on whether the plan's financial statements are presented fairly and in accordance with generally accepted accounting principles. Even with these professional standards governing the work of auditors, the Department of Labor has long supported legislative reforms that would further improve the quality of pension plan audits.

In addition to audit reports, defined benefit pension plans subject to the minimum funding standards of the Internal Revenue Code, sections 412 and part 3 of ERISA, must also file with their Form 5500 an actuarial report signed by an enrolled actuary. Generally this requirement is satisfied by filing the schedule B with the Form 5500, and required attachments.

PWBA does not have a primary role in this area. Rather, the joint board for the enrollment of actuaries established by the Secretary of labor and the Secretary of the Treasury under ERISA section 3041 is responsible for setting standards and qualifications for employee benefit plan actuaries, and the funding standard requirements for defined benefit pension plans are principally enforced by the Internal Revenue Service.

Because all form 5500s are initially filed with the IRS, the IRS, as our agent, processes the filing and scrutinizes them by applying over 140 computerized edit tests designed by the Department for completeness and consistency. If a filing error cannot be resolved by correspondence between the IRS and the plan administrator, the filing is forwarded to PWBA to determine whether ERISA's reporting requirements have been met. PWBA maintains a non-filer and late filer enforcement program under which we target employee benefit plans that have not filed required annual reports or failed to file timely annual reports.

Since the inception of our reporting enforcement programs in 1988 through May of 1998, PWBA has opened over 20,000 cases for deficient or incomplete annual reports, and assessed penalties of more than $224 million against plan administrators who fail to meet their reporting obligations.

We have also established several proactive programs that are designed to help educate employee benefit plan professionals and encourage through reduced fines voluntary compliance. Since the inception of one such program in 1995 through 1998, we have received 500 filings and collected over $27 million of civil penalties.

Finally, I want to mention that the agencies responsible for the Form 5500 published their proposal in September of 1997 to replace it with a new annual reporting form designed to reduce reporting burdens and collect better information. The Department also intends to employ a contractor to develop and implement a new system to simplify and expedite the receipt and processing of the Form 5500 series. The new Form 5500 and new form processing system are expected to be implemented for the 1999 plan year, which the forms for which generally will not be due until July of the year 2000.

We understand that the subcommittee is particularly interested in the Teamster Affiliates Pension Fund. As you have been advised, PWBA has undertaken an investigation of this plan under ERISA, and is in the process of gathering the facts and information that will enable us to determine what, if any, additional enforcement actions are necessary.

Thank you very much, Mr. Chairman and Members of the subcommittee. I would be happy to respond to any questions.





Chairman Hoekstra. Thank you very much. Mr. Kotch, you are now recognized for your opening statement.








Mr. Kotch. Mr. Chairman and Members of the subcommittee, thank you for inviting me to testify today.

The Office of Labor Department Standards, OLMS, has primary responsibility for administering the Labor-Management Reporting and Disclosure Act of 1959, as amended, LMRDA. OLMS is part of the Employment Standards Administration of the Department of Labor. With me today is Mr. Howard Campbell, Acting Chief of the Section of Reports and Disclosure.

The LMRDA includes civil and criminal provisions that provide standards for union democracy and protect the financial integrity of labor organizations that represent private sector employees. Responsibility for the investigation and prosecution of crimes and civil enforcement action under the LMRDA is shared by the Department of Justice and the Department of Labor under a 1960 memorandum of understanding between the two departments. Any evidence of criminal conduct uncovered by OLMS is referred to the Department of Justice for prosecution.

In addition, criminal enforcement activity relating to organized crime in the context of a labor organization is handled by the Department's office of the Inspector General and the Federal Bureau of investigation. OLMS cooperates with the Office of the Inspector General and the Department of Justice in particular cases, as appropriate. OLMS has a total staff of approximately 300, including 175 investigators in our 21 district offices.

Over the years we have developed and implemented an enforcement strategy based on the Department of Labor-specific responsibilities contained in the LMRDA, and the effective use of available resources to promote union and democracy and fiscal integrity in the approximately 33,000 local, intermediate, national, and international unions covered by the LMRDA.

Our most recent enforcement strategy is articulated in the OLMS 5-year strategic plan developed in accordance with the Government Performance and Review Act. OLMS enforcement plans involve both criminal and civil provisions of the LMRDA. About half of OLMS' investigative time is spent on civil and half on criminal programs.

Section 20 1(b) of the LMRDA requires that unions file with the Department of Labor annual financial reports that are available for public disclosure. Section 201(b) requires that the annual reports disclose the union's assets, liabilities, receipts, and disbursements, including payments to officers, employees, and loans made by the union.

As noted in the July 30, 1959, report of the House Committee on Education and the Workforce and Labor, the primary purpose of the union reporting requirements is to provide the information necessary for union members to participate in their unions and to prevent or correct abuses. The labor organization annual financial reports are also used by the Department of Labor and other government agencies for law enforcement purposes, and by members of the public.

Labor organizations are required to file their annual financial reports on one of three reporting forms prescribed by OLMS, depending on the total annual receipts of the union. The form LM-2 is the most detailed form. It is six pages long with 77 items and 15 supporting schedules. It is required to be filed by unions with total annual receipts of $200,000 or more and by unions which are under a trusteeship imposed by the parent body. Approximately 6,000 unions file form LM-2.

The two-page form LM-3 is less detailed than form LM-2, and may be used by unions with total annual receipts less than $200,000. The one-page form LM-4, the shortest form, may be used by unions with less than $10,000 in total annual receipts.

While LM-2 has been refined over the years as various revisions have been made to the forms through the regulatory process, its basic elements have remained essentially the same since 1962. The three labor organization reporting forms reflect a number of factors, including the statutory language, the congressional goals in enacting the LMRDA, and a consideration of the balance of costs and benefits as reflected in the Paperwork Reduction Act's requirement that reporting burdens imposed on the public by the government not be unduly burdensome, and the LMRDA requirement that simplified reports be prescribed for smaller unions.

OLMS conducts periodic desk audits to determine if union financial reports are completed in accordance with the instructions on the form. Desk audits are conducted solely on the filed reports, without reference to the underlying records. We are currently in the process of desk auditing the 1996 and 1997 LM-2 reports filed by the International Brotherhood of Teamsters.

In addition to the reports from unions, the LMRDA also requires reports under certain circumstances from employers, labor relations consultants, union officers, and employees in surety companies. All of these reports are available for public disclosure from the OLMS national office, and OLMS district offices maintain copies of reports for the unions in their geographic jurisdiction.

In 1997, OLMS responded to almost 8,000 disclosure requests by providing copies of over 2,800 LM reports totalling approximately 370,000 pages. On January 1, 1998, OLMS initiated a customer service survey of persons requesting disclosure of LM reports. Of 240 responses received for the period January 1 through March 31, 1998, 97.9 percent of respondents rated OLMS disclosure service as good or excellent.

Congress appropriated $500,000 in fiscal year 1998 for the development of a system to provide for electronic filing, Internet disclosure of reports required to be filed under the LMRDA, and an indexed computer database of information from the reports that is searchable through the Internet. The implementation plan for modernizing LMRDA reporting public disclosure was recently submitted to the House Appropriations Committee. In addition to describing our reporting program, I would like to briefly summarize OLMS' other major programs and responsibilities under the LMRDA.

First is our Compliance Audit Program, or CAP, for local unions. OLMS field office managers are delegated authority to conduct CAPs and select local unions for a CAP based on analysis review of LM reports, delinquent LM listings, complaints, and other information. A CAP generally takes about 7 days to complete. During a CAP, OLMS interviews union officials and conducts a specialized streamlined review of the union's records to ensure compliance with the LMRDA reporting and recordkeeping requirements, and with other provisions of the LMRDA. OLMS investigators also review LM reports, identify deficiencies, and obtain amended reports, as necessary.

OLMS has completed over 3,000 CAPS in the last 5 fiscal years. OLMS has a companion program for international unions called I-CAP, or International Compliance Audit Program. Each year as part of the OLMS planning process the Deputy Assistant Secretary for Labor and Management Standards determines the total number of I-CAP cases to be completed by OLMS field offices based on program priorities, workload consideration, and other factors, such as available travel funds and staff resources.

Unlike CAP, unions are selected for I-CAP on a systematic method based on each international union's reported annual receipts. Beginning in 1984, international unions were characterized by receipt size as very large, over $100 million in annual receipts, large, 10 million to 100 million, medium, 100,000 to 999,999, or small, less than 100,000, and have been generally selected for audit on an ascending order within each category. An I-CAP uses more detailed and extensive procedure than a CAP, and requires an average of about 176 field staff days. However, while 176 field staff days is the average, I-CAPs of some of the larger unions have required in excess of 600 staff days.

Since the I-CAP program was initiated in the early 1980s, OLMS has completed I-CAPs on 138 unions, while 15 unions currently on our list of national-international unions remain to be audited under I-CAP. One of these 15 unions is the International Brotherhood of Teamsters. OLMS has completed 24 I-CAPs in the last 5 fiscal years.

During both CAPS and I-CAPs OLMS investigators provide compliance assistance to union officials to help them detect and correct problems to avoid future violations of the LMRDA. Our ability to perform audits under the CAP and I-CAP program depends on the time we must devote to nondiscretionary enforcement programs over which we have no control, primary officer election complaints, and other enforcement priorities, including criminal investigations involving complaints of union financial irregularities.

The enforcement of the union officer election provisions of the LMRDA is another major OLMS program. The LMRDA requires that union officer elections be conducted regularly, at least every 3 years for locals, every 4 years for intermediate bodies, and every 5 years for national and international unions.

The LMRDA also provides a number of other safeguards to ensure democratic officer elections. OLMS is required by section 402 of the LMRDA to investigate every officer election complaint that is properly and timely filed with us. Furthermore, the law requires that OLMS investigate and bring enforcement action, if necessary, within 60 days from the date a member files a complaint with the Department.

If it is determined that a violation occurred that may have affected the outcome of the election, OLMS attempts to reach a settlement with the union to supervise a new election, or if necessary, pursues litigation in U.S. District Court, seeking a court order for a new election under OLMS supervision. In the last 5 years OLMS has conducted 717 election investigations and supervised 210 rerun elections.

Finally, OLMS has responsibility for investigating certain criminal provisions of the LMRDA, primarily involving the embezzlement of union assets and related criminal reporting violations.

Investigations are initiated based on various sources, such as member complaints, review of LM-2-3 reports, leads from compliance audits, and information from other government agencies. OLMS works with the Department of Justice in these investigations and in any subsequent prosecutions. OLMS has conducted approximately 1,600 criminal investigations in the last 5 fiscal years. During that time, 728 indictments and 707 convictions were obtained.

It is also important to note that these convictions resulted in barring the convicted individuals from holding union office and employment for a period of up to 13 years from the date of sentencing or the end of imprisonment, whichever is later, in accordance with section 504 of the LMRDA.

Thank you. At this time Mr. Campbell and I will respond to any questions the subcommittee may have.




Chairman Hoekstra. Thank you very much.

Pursuant to the motion adopted at the start of the hearing yesterday, the Chair now recognizes the majority counsel, Mr. diGenova, for 30 minutes to question the panel.


Mr. diGenova. Thank you, Mr. Chairman.


Mr. Lebowitz, in your statement which was submitted to the committee last night at 8:30 p.m., and I understand that the delay in delivering your testimony was due to OMB, you state as follows:

"We understand that the subcommittee is particularly interested in the Teamsters Affiliates Pension Fund. As you have been advised, PWBA has undertaken an investigation of this plan under ERISA, and is in the process of gathering the facts and information that will enable us to determine what, if any, additional enforcement actions are necessary."

When you say that we have been advised, are you referring to the June 8 letter signed by you and Mr. Kotch in which you outline some activity underway?


Mr. Lebowitz. Yes, sir.


Mr. diGenova. Is that the first time you disclosed the investigation to the subcommittee?


Mr. Lebowitz. Yes, sir.


Mr. diGenova. When did the investigation begin?


Mr. Lebowitz. The case was opened on April 23, 1998.


Mr. diGenova. April 23rd, 1998. Why was it opened?


Mr. Lebowitz. Yes, sir. It was opened following the receipt of information by us from, actually, the source of the information was a little unclear to me, but it was a draft document which purported to have been prepared by Joel LeFevre and two Teamsters local officials, which laid out a whole series of allegations of improprieties in connection with the operation of the international, as well as with the Teamsters staff plan.

While it was not entirely clear from that document exactly what these two gentlemen were getting at, we thought it would be appropriate to take a closer look and come to a determination ourselves.


Mr. diGenova. Thank you very much. I would like to direct your attention to Exhibit Number 37, which is in the packet that has been provided you for today's hearing. Exhibit 37 is the letter of June 8, 1998, signed by you and Mr. Kotch responding to a series of questions which the subcommittee sent to you on May 29.

I would like to direct your attention to page 11 of that exhibit, which is request number 25, and your response. That particular request asks for all documents, including correspondence, memoranda, analyses, notes, briefing materials, meeting agendas, workpapers, et cetera, between Mr. Applebaum or other members of the PWBA and the Segal Company, the IBT, the independent administrator or his staff, the independent review board, or the Teamsters Affiliates Pension Plan in 1991, 1992, and any subsequent years.

Your response is as follows:

"In order to provide you with those documents which are most relevant to your inquiry, we include only those documents which relate to the Teamsters Affiliates Pension Plan, see enclosures," which include the following documents, and there you list a series of letters which begin on--documents or memoranda which begin on January 23rd, 1991, go up to December the 15th, 1992, whereupon there is approximately a 5- to 6-year gap. The documents then begin again on April 28, 1998, and conclude on May 13, 1998.

What happened between December 15, 1992, and April 28, 1998?


Mr. Lebowitz. In connection with the Teamsters' Affiliates Plan? Is that your question?


Mr. diGenova. Yes. Not baseball scores. What happened during that year with regard to that answer to this question and the Teamsters Affiliates Pension Plan? Since there is no documentation alluded to, we are wondering why the gap exists. Was there no activity?


Mr. Lebowitz. There was no activity of the sort requested that would have been responsive to the request.


Mr. diGenova. In other words, are we to take it that there was an investigation of some kind in 1991, or only an investigation begun in 1992?


Mr. Lebowitz. No, there was an investigation in 1991 and 1992, I believe.


Mr. diGenova. And that is what that correspondence relates to?


Mr. Lebowitz. The December 15, 1992, letter from Gerard Gumperts, who was then our Philadelphia regional director, to the board of trustees reflects the closing of that investigation.


Mr. diGenova. So, in other words, whatever issues were raised in that initial investigation, they were closed in 1992?


Mr. Lebowitz. That is correct.


Mr. diGenova. And the matter lay dormant until April 28, 1998, when a request was made to review documents?


Mr. Lebowitz. Well, the investigation in 1992 was closed. There were no open matters. The 1998 investigation is separate.


Mr. diGenova. That is a new matter?


Mr. Lebowitz. It is a new investigation not related to the 1992.


Mr. diGenova. So those are two entirely different matters, not an old investigation being reopened. Rather, there was an old investigation closed, a new investigation opened, which is now pending, and that is the investigation which you allude to in your testimony here today?


Mr. Lebowitz. That is correct.


Mr. diGenova. That investigation has begun during the pendency of these hearings, is that correct?


Mr. Lebowitz. I believe so, yes, sir.


Mr. diGenova. Who made the decision to begin the investigation? Were you gentlemen involved in those decisions?


Mr. Lebowitz. I was, and our director of enforcement, and the director of our Philadelphia region, who is responsible for conducting the investigation.


Mr. diGenova. I take it that the status of that investigation, based on your testimony, is that it is active and open, and therefore, you are not at liberty to discuss, obviously, any of the details of that matter?


Mr. Lebowitz. That is correct.


Mr. diGenova. All right. Other than notifying of this subcommittee through your June 8th letter to us, have you notified any other entities which may also be conducting any other investigations of this matter, or is it simply a Department of Labor investigation at this point?


Mr. Lebowitz. We have obviously notified the subject of the investigation, and various of their service providers.


Mr. diGenova. Any other official government organizations?


Mr. Lebowitz. No, sir, not that I am aware of.


Mr. diGenova. Have you issued requests or administrative subpoenas or document requests for documents or issued letter requests for documents from the parties involved in that?


Mr. Lebowitz. I believe we have asked for documents from the parties. We have not issued any subpoenas, as of this point, I believe.


Mr. diGenova, I want to amend my prior answer. We do, as a matter of course, notify the IRS when we open an investigation, because of their interest in ERISA issues, as well. They were notified when we opened the case.


Mr. diGenova. And obviously since they are involved in the Form 5500 and all reporting requirements, they have a reason to be notified of what you are doing when you receive information about possible alleged illegalities or improprieties or misconduct involving a particular pension fund?


Mr. Lebowitz. That is correct.


Mr. diGenova. I just want to make it clear, there is now an ongoing investigation which you have begun as a result of allegations which you received, which you are actively investigating?


Mr. Lebowitz. That's right.


Mr. diGenova. Under ERISA, and either Mr. Lebowitz or Mr. Dingwall, I think, can answer this question, the Employee Retirement Income Security Act, the Department of Labor has oversight responsibilities for pension plans.

Does the Department use its authority to assess or to evaluate the financial condition of unions as it relates to their affiliated pension plans when it reviews those documents, or is it looking simply for compliance?


Mr. Lebowitz. ERISA focuses solely on employee benefit plans. It does not relate to the plan sponsor's financial condition. So ERISA's reporting requirements and the financial disclosure requirements relate solely to the employee benefit plan, and not to the sponsor of the plan.


Mr. diGenova. Okay. If a Form 5500 is incomplete, or let's assume, presumptively, fraudulent or in some way deceptive, and you have suspicions about that, it is the PWBA's responsibility to investigate the plan at that point, is it not?


Mr. Lebowitz. Yes.


Mr. diGenova. Which office within PWBA has the primary responsibility for pension and benefit plan reporting compliance?


Mr. Lebowitz. The initial review of filings and reports is the office of the chief accountant, headed by Mr. Dingwall.


Mr. diGenova. I want to go back to the June 8 letter from the Department of Labor. How does the PWBA identify an incomplete or false 5500 form?


Mr. Lebowitz. As I said in my testimony, the first thing that happens when a form is filed is that the data from the filing is entered by the IRS onto their computer system, and there are a series of 140 edit checks which determine whether all of the information is there, whether there are internal inconsistencies, things of that sort; whether the attachments, including the financial statements, the audit reports, are there.

If they are not, then the IRS will correspond with the filer to try to get correction. If they don't, it is referred to us. We will then review the filing. Mr. Dingwall's office will review the filing initially and make a determination of what steps to take at that point.


Mr. diGenova. Under the standards of the American Institute of Certified Public Accountants, an auditor performing a financial statement audit should report illegal acts by its client's management to an audit committee or others with equivalent authority and responsibility.

If an auditor finds indications of illegal acts by a union president or others in authority in the union, but the union has no independent compliance committee, who should the auditor contact to discuss the alleged illegal act?


Mr. Dingwall. Absent either one of those organizations being there, it becomes--I don't know that there is any specific guidance on this in the audit literature.


Mr. diGenova. No specific guidance in the audit literature?


Mr. Dingwall. There is none that I can think. Those are the usual channels. You usually go to the audit committee or some level above the level that is involved in the illegal act.


Mr. diGenova. You might end up talking to the very people who had contracted with you in the first instance, as a first point of contact?


Mr. Dingwall. You might.


Mr. diGenova. Within the last few weeks, the subcommittee staff visited the Department of Labor and requested the IBT Teamsters Affiliates Plan's 5500 forms since 1994 to date. Mr. Betrizzi and Mr. Potter were there from our staff. The only available form in the file was in 1994, a 5500 CR form. The staff of the PWBA stated that they were at least 2 years behind in getting information from the IRS.

Can you explain this situation and give us some information about why there seems to be this type of lag?


Mr. Lebowitz. I will try. The system under which the 5500 is processed by the IRS is a cumbersome one, to say the least. It really wasn't designed to handle the type of form that the 5500 is. It was really designed for tax forms. So it is a very labor-intensive and time-consuming process, the result of which, and combined with the fact that ERISA does not require these reports to be filed until 210 days after the end of the year to which it relates, there is a built-in time lag, even if the IRS moves very efficiently to take the data from the paper form and transform it onto their computer systems.

Following that, if there is correspondence because there is some inconsistency or missing piece of information, that may add several months to the process, and then after the service finishes that process they send a paper form to our contractor, where it is copied or an image is created for it, and it goes on-line on our computer system. All of that can take a long time. It can be certainly well into 2 years after the year to which the form relates before the form itself is available to the public and available to us.

The information, however, that the IRS extracts from the paper form when it is filed with them is entered on their computer system, and we get monthly computer tapes, updates, of the record. So we have some information about the filings long before we actually get the form.

All of this is the reason why we are redesigning the form, and we intend to issue a contract in the next month or so to build a system specifically designed for the 5500 that will promote more electronic filing and eliminate a lot of these built-in time delays that we have been struggling with for some time.

Another problem is a fairly technical one, but I think it relates directly to your question. The plan is characterized under ERISA as a multiple employer plan, which means that there are a number of separate employers who participate in it. The way the service works in processing these forms is that they use a taxpayer identification number to establish a file.

More than likely, what happens is that some of the individual local unions who participated in the plan filed their form, or the relatively shorter form, using the plan's taxpayer identification number. So the IRS processes what comes in first. If that came in first, then that is what got entered for that year under the number assigned to the TAPP plan. Everything else that came in after that just sort of got put aside. I hope that is halfway clear to you. It is a complicated process.


Mr. diGenova. Is the information that you get on the computer tapes or the computer information from the IRS, which is not on the form, analytically valuable to you?


Mr. Lebowitz. Yes. Yes, it is.


Mr. diGenova. You get some usable information.


Mr. Lebowitz. We do.


Mr. diGenova. Are not able to connect it to the specific form and use that to hold someone accountable?


Mr. Lebowitz. We know what year and document it relates to. If we see something that triggers investigative interest, the first thing we will do is go to the party and get the form itself from the filer.


Mr. diGenova. Give me an example of what would trigger an investigative interest based on that computer information.


Mr. Lebowitz. There may be an indication of prohibited transactions, insider trading type, the ERISA equivalent of insider trading transactions indicated from the plan filing.

There may be an indication from the financial information that is filed that the plan has suffered a significant loss during the reporting period, or that the plan's investments are concentrated in real estate, or something that is historically rather volatile that may mean that there is something amiss that we need to take a quicker look at than we might otherwise.


Mr. diGenova. In your letter to the committee of June 8, where you refer, in response 25, which we have discussed recently, to the closed investigation, and then the opening of a new investigation unrelated to it, you note, and we have abided by your request, that the foregoing documents, which are all of the ones listed in that response, contain sensitive, non-public information. You indicate that the disclosure of this information could also negatively impact upon the integrity of your investigation.

Are you referring to all those documents from 1991 and 1992 as well?


Mr. Lebowitz. Those documents are public documents. Once the case is filed


Mr. diGenova. So you are not talking about those?


Mr. Lebowitz. No.


Mr. diGenova. Good. Because I have a question for you, then. You received a letter from Mr. Cronin, who was the administrative person for the independent administrator at that time, which was the consent decree operation designed to impose integrity in the operations of the IBT.

On April 29, 1992, Mr. Cronin stated his concern that the funding that TAPP, the Teamsters Affiliates Pension Plan, at $12.5 million in 1991 would allow for what he called creative accounting, which was a matter we dealt with yesterday without ever using that word when we were dealing with how the discount rate was determined in 1994, and how that affected the net worth of the union determining, by the union, in conjunction with its auditors and actuary, determining the discount rate for the pension fund, and how that severely swung a $29 million difference in the net worth of the IBT at that time.


Mr. Cronin expressed his concern about the funding and how that might lead to "creative accounting" on the part of the Carey administration. Did any of you who may have been involved in that process share his concern at that time, or think that his concern was valid?


Mr. Lebowitz. I would like to ask Mr. Applebaum to answer that. He dealt rather extensively with him.


Mr. diGenova. I think it was Mr. Applebaum. I apologize for not directing the question to him.


Mr. Applebaum. Thank you. The primary concern in 1991 and 1992 was not so much with the--and as far as I was concerned, was not so much with the financial statements of the employer, but rather, whether or not more money was being put into the TAPP plan at the time than might be necessary. That was the major concern that I had.

Obviously, in general, we prefer that more money go in, but there are times when putting money into a pension trust can lead to some abuses. That is really my only recollection of what went on. I was not quite sure what the creative accounting that he referred to here was specifically.



Mr. diGenova. I'd like to have you take a look, Mr. Applebaum, at Exhibit Number 51. It was in that packet of materials presented to you.


Mr. Applebaum. Yes.


Mr. diGenova. We spent some time yesterday reviewing the impact or again discount rates on the financial look of an organization like the IBT. If a discount rate such as the one used to calculate earnings on a pension plan's assets or a pension plan's future liabilities over a period of many years, changes for a particular pension plan from year to year, should that change be gradual or large as a general rule?


Mr. Applebaum. Let me try to answer that, and I am not an expert on FASB reporting, and that's I think what is referred to in these Federal documents.


Mr. diGenova. Yes.


Mr. Applebaum. As I understand the discount and the choice of discount rate under financial accounting standards, number 87, the object is to use discounts that are consistent with long-term high quality fixed income instruments. Now, what that means is that the number--the discount rate that is used does not necessarily stay fixed from year to year. And the reason for that is because the rates of return on fixed income obligations, as we're all aware, change from year to year. So there can be suspect, rather considerable swings.

I noticed this before I came over here, and decided that I would look at least at a document that had some historical rates, if the committee needs that, I'll be glad to supply it as a publication of the Society of Actuaries. And one of the things that they had in here, and I just show this as--use this as guidance is the rates on 30-year treasury rates. And what one can observe in that is rather consistent, that there were rather considerable changes in the level of those rates from 1993 to 1994.

For example, in December of 1993, the interest rate on 30-year treasuries was around 6.2 percent. In 1995--in 1994, in December, the rate was around 7.9 percent; in other words, a rather considerable swing from one year to the next. So given what the way that FASB tells people to choose an interest rate, it would not seem unreasonable to me in this instance to have raised the rate by something of that order of magnitude.

Furthermore, I would point out that the next year rates fell. And so I mean I don't see now, I can't make a, you know, a judgment off the top as to the a particular appropriateness of the choice. All I can tell you is that in a relative sense, this seems to be not unreasonable.


Mr. diGenova. So in other words, when you're looking at--I'd like you to look at Exhibit Number 51, which is a chart of the discount rate for the CAP as compiled from the audited financial statement for each of the years indicated, and the discount rate went from 7-1/4 percent in 1993 to 8 percent in 1994, and back down to 7-1/4 in 1995.

Are you suggesting then as a result of your testimony that you think that those swings were a reasonable range?


Mr. Applebaum. Yes.


Mr. diGenova. Okay. In 1991 and in 1992, did you or any of the people here or the DOL staff meet with the Teamsters board to discuss the affiliates plan and, if so, what was the substance of those discussions?


Mr. Applebaum. In 1991, I received a call from John Cronin who was seeking actuarial assistance from the department. I was asked to look over the plan's financial statements and also other documents about recommended contributions for, I believe it was, the 1990 plan year in retrospect.


Mr. diGenova. Right.


Mr. Applebaum. The note that I wrote at the time was incorrect. And in any event, I looked at it, the plan seemed to me to be, what would otherwise--what would otherwise be applicable of full funding limitations of ERISA. The reason that the plan did not--was not constrained by the full funding limitations is because they don't apply to non-profits.

I attended a meeting sometime in early in the spring of 1991 at which a presentation was made by the Segal Company with a recommendation as to their--what they thought was an appropriate level of contribution for that plan year. I then asked--I then asked, well, is the plan fully funded? Is it subject to full funding limitations or something much like that. And I was told, no, it wasn't in full funding. Then I said isn't that because it's--I believe isn't that because it's a private--because it covers a nonprofit entity and someone said yes.

I said, well, if it were subject to full funding--the full funding limitation, what would be the recommended contribution? At which point the plan's actuary who had been,I don't think said much up to that point, if anything, said zero. That was the--that was my only--that's the only contact I remember having with the Teamsters trustees, I assume they were the trustees, but the board.


Mr. diGenova. Did you attend any meetings or were you asked to attend any meetings in 1994 when the plan was terminated?


Mr. Applebaum. No.


Mr. diGenova. Thank you. I don't have any more questions.


Mr. Applebaum. But for the record, the plan was not terminated. It was curtailed.


Mr. diGenova. Curtailed. Thank you.


Mr. Hoekstra. Thank you. Mr. Applebaum, I think we're going to have somebody, if you could just point to the page that you were referencing, just so that we can make a copy of the page or whatever and submit it for the record. Without objection? All right. Without objection, so ordered.


Chairman Hoekstra. Minority counsel is now recognized for 30 minutes.


Ms. Lentchner. Thank you, Mr. Chairman.


Mr. Kotch, could you explain to the committee the history behind the LM-2 requirements and what the LM-2 forms were designed to do?


Mr. Kotch. I alluded to some of this in my opening statement. The law, LRMDA was passed in 1959, and the genesis of the LM-2 and the other reporting forms is straight from the language of the statute, section 201(b).


Ms. Lentchner. And what is the purpose of the LM-2 filings?


Mr. Kotch. The purpose of the LM-2, as well as the other two forms, is primarily to alert or report financial matters to members and, of course, others in terms of the public disclosure aspect of the forms.


Ms. Lentchner. So is it fair to say that the legislative history of the LRMDA shows that the intent of the reporting was to provide rank and file members with financial information about their unions?


Mr. Kotch. I think that from my knowledge of the legislative history that was the primary purpose with notations is the value of having it publicly disclosed as well.


Ms. Lentchner. And why was it deemed to be important for union members to have access to financial information?


Mr. Kotch. I think you have to look at the entire LRMDA, how it is designed, and it's designed to try to encourage labor organization and their members to operate democratically, fiscally, responsibly and so forth. So there's various provisions in the law that try to accomplish that objective.


Ms. Lentchner. Is the statutory scheme of requiring disclosure to interested parties for them to use the information to protect the financial integrity of their organization that is employed for disclosures of unions similar to the statutory scheme utilized with respect to disclosure by corporations?


Mr. Kotch. I'm not an expert on corporate disclosure. I think it probably has some of its own unique features and, again, it's tied to the language of the statute in particular.


Ms. Lentchner. In your opinion, does the LM-2 form as it presently stands meet its objective of providing information to union members?


Mr. Kotch. I think it provides considerable information.


Ms. Lentchner. Have there been any significant changes to the LM-2 requirements since it was adopted?


Mr. Kotch. I think the general reporting scheme or concepts of it remained somewhat the same. There have been revisions. I think the most recent revisions would have been in the early '90s where there were questions added, some of the filing thresholds changed. We added an LM-4 form for smaller unions and made a substantial rewrite of some the instructions to make them clearer. That would have been the last changes.


Ms. Lentchner. Yesterday this committee heard testimony regarding the sufficiency of the financial information given to union members, and we were told that the IBT is subjected to semiannual audits and that audited financial statements are published in the Teamsters magazine, which is mailed to all union members. Are such financial disclosures required under the LRMDA?


Mr. Kotch. I think--no, they're not required. I think some unions chose to do that.


Ms. Lentchner. So the financial disclosures by the Teamsters are actually in excess of the statutory minimum, because people get both the LM-2s and the audited fianancials?


Mr. Kotch. I'm not real familiar with their audited financials. Their constitution and bylaws may require that in that particular union. I'm not exactly certain.


Ms. Lentchner. But under, in fact, I think you just said that the statute doesn't require that it be done.


Mr. Kotch. The statute doesn't require it.


Ms. Lentchner. So the disclosure's in excess of the statutory minimum?


Mr. Kotch. In that regard, they would be.


Ms. Lentchner. Does the Department of Labor ensure that LM-2 forms are available for union members to copy and review?


Mr. Kotch. As I indicated in my opening statement, we work hard at trying to get them available, on time. We've had in recent years about 8,000 requests. Not all of those requests are from union members, but a portion of them are.


Ms. Lentchner. And are they available both in Washington and at the Department of Labor regional offices?


Mr. Kotch. We have 21 district offices; reports for unions in those areas are available there. All the reports are available in Washington.


Ms. Lentchner. Are you aware of any union member being denied access to the Teamsters LM-2s?


Mr. Kotch. I'm not aware of that, no.


Ms. Lentchner. In your opening statement, you indicated that in 1997 your office responded to 8,000 disclosure requests providing 28,000 LM-2 reports. Given those statistics, do you believe that the LM reporting system is an effective method of getting financial information to union members?


Mr. Kotch. I think it's generally effective.


Ms. Lentchner. Could you please?


Mr. Kotch. I think some of the--I made references also to our current plans to make the reports available by Internet, which would certainly improve the availability of the reports.


Ms. Lentchner. Could you describe the Department of Labor's role in evaluating the LM-2 reports? In particular, does the Department of Labor review the reports primarily to ensure accuracy and completeness, or does it use it to question the prudence of business decisions made by unions?


Mr. Kotch. Our role in looking at the reports would be to first determine if the reports are completed correctly, accurately, and of course with the instructions. And I think a secondary purpose that we look at reports is to see if there are potential indications on the report that would require or lead us to conduct an audit or an investigation, a criminal investigation.


Ms. Lentchner. Do you believe that it is the Department of Labor's role to question legally permissible business decisions made by unions?


Mr. Kotch. We don't have that role.


Ms. Lentchner. We've heard several criticisms of the LM-2 reporting requirements, and I guess, Mr. Campbell, that it's mostly your department to review those forms; is that right?


Mr. Campbell. That's right.


Ms. Lentchner. One of the things that's been discussed in the last few days is the difference between the cash versus accrual accounting method and the fact that a cash method is utilized for the preparation of the income statement for the LM-2s. Could you describe for the committee first what the difference--what is the cash versus accrual accounting method?


Mr. Campbell. The difference between the two, on the accrual basis, you would recognize or report income when it was earned and not necessarily received and disbursements when they were incurred and not necessarily paid out. On the cash basis, you would only report those items on the actual receipt when you actually received the money or, you know, you made the actual disbursement.


Ms. Lentchner. And is it true that the LM-2 requirement requires that the income statement be prepared under a cash basis of accounting?


Mr. Campbell. Yes, that's right. Statement B would be receipts and disbursements.


Ms. Lentchner. And that is not in accordance with generally accepted accounting principles, is that right?


Mr. Campbell. Yes, because it is not on an accrual basis.


Ms. Lentchner. Did the Department of Labor consider allowing the option of reporting on a cash or accrual basis?


Mr. Campbell. Did?


Ms. Lentchner. Did the Department of Labor consider changing the LM-2 constructions a few years ago?


Mr. Kotch. Yes, in the early '90s we looked at that issue.


Ms. Lentchner. And why did the Department decide to retain the cash basis of reporting?


Mr. Kotch. I think there was several reasons at the time. One was we felt strongly that the specific language of section 201(b) required us to use receipts and disbursements, which is used in the law. That was our primary reason. We thought that the cash reporting of receipts and disbursements was perhaps easier to understand for members as well as the officers of some smaller unions who file reports. And we've traditionally since the earliest days had that reporting scheme.


Ms. Lentchner. So it was the Department's interpretation that this statute passed in 1959 required the cash reporting system?


Mr. Kotch. I think we generally feel that, yes.


Ms. Lentchner. And it was also your position that the cash reporting system was more understandable to union members; is that right?


Mr. Kotch. I think so, yes.


Ms. Lentchner. There has also been criticism of the LM-2 reporting requirements based on the fact that travel expenses are not reconciled to the particular employees who incurred the expense. In fact, does the LM-2 require that reconciliation of travel expenses?


Mr. Campbell. To the individual that incurred the expense?


Ms. Lentchner. Correct.


Mr. Campbell. Yes, there are exceptions in the instructions for official business travel. If the payment for the hotel room and public carrier transportation is made through a union credit arrangement, then that doesn't have to be reported against the individual's name, and that's for official business only.


Ms. Lentchner. And the LM-2 does require the salaries--


Mr. Campbell. Yes, salaries would have, would be reported against the individuals.


Ms. Lentchner. But it does not require official travel expenses to be reported by employee, correct?


Mr. Campbell. Only the public carrier transportation and the hotel room cost, if it's paid indirectly, not reimbursed to the individual.


Ms. Lentchner. So if the IBT did not separately report those items that are official business, travel that we've just discussed, then they were acting in accordance with the instructions to the form?


Mr. Campbell. If they didn't report them?


Ms. Lentchner. Separately.


Mr. Campbell. Yes, they would report them separately. It should be in the office of administrative expense schedule on the LM-2 report.


Ms. Lentchner. One of the other instructions to the LM-2 forms that we're discussing is the fact that the LM-2 forms require the aggregation of multiple funds into a single line item. Is that in fact the case that the LM-2 instructions require the aggregation of funds and accounts?


Mr. Campbell. Yes, that's correct.


Ms. Lentchner. Why is it that the Department of Labor has decided that various funds and accounts should be aggregated on the LM-2 forms?


Mr. Campbell. I think because as you know it would be a more complex form, or they would have to file a multiple number of forms, you know, one for each fund and, you know, it would be difficult to consolidate all of that information. But, you know, it's just all consolidated on one report.


Ms. Lentchner. So at the end of the day, is the explanation that the single picture has been deemed to be the most understandable to the people?


Mr. Campbell. Yes, I think it's the easiest to comprehend.


Ms. Lentchner. Mr. Applebaum, earlier I think you said that the 8 percent discount rate that we had been discussing earlier that was adopted by the IBT in 1994 was within a reasonable range; is that right?


Mr. Applebaum. What I said was that the change from 7-1/4 to 8 percent did not seem to me to be unreasonable given the change in the interest rate environment.


Ms. Lentchner. There have also been discussions about another change that was made to IBT-related pension plan, the retirement and family pension plan, and there was a change in the investing period from 5 to 3 years. I think that--I don't know if this was Mr. Lebowitz who would be best to answer that, but is it legal under ERISA to change the investing period from 5 to 3 years?


Mr. Lebowitz. Is it legal?


Ms. Lentchner. Yes.


Mr. Lebowitz. It's certainly encouraged and to keep vesting in as short a period as possible, because it will mean that people will get a legal right to the benefits they've accrued that much sooner.


Ms. Lentchner. So is it fair to say that is not the type of action that the PWBA would question?


Mr. Lebowitz. That's correct. Also just by way of more technical explanation, ERISA focuses on the plan once it's established, but Congress was very careful not to create any mandates within ERISA. So that the design of the plan, the benefit structure of the vesting schedule, et cetera, are all within the general discretion of the plan sponsor, the employer, to establish and to change within the framework of the law.

Those are considered set lower judgments, business judgments, not judgments that are governed by ERISA. So it changed from 5 years to 3 years, but the first instance would not be governed by ERISA, it would be a judgment of the plan sponsor, in this case, the international union acting as an employer.


Ms. Lentchner. You've predicted some of where I was just going to go. So if I correctly understand under ERISA, there are matters of discretion left to the plan sponsor and the plan trustees, and there's room for business decisions. And if I understand it, the role of your agency, the PWBA, together with the other agencies that work with the IRS and the PBGC is essentially to make sure that there's adequate disclosure of the business decisions, and that the minimum requirements under the law are met, but you don't second guess or question, as a general matter, the internal business decisions; is that right?


Mr. Lebowitz. Generally, that's right. The statute establishes minimum standards, and so our role, once the plan is established, is to assure that those responsible for administering the plan, the fiduciaries of the plan, are acting in accordance with all of ERISA's requirements. Now, having established a plan, there are other rules that govern within the Tax Code, for instance, to assure that the plan isn't discriminatory; that is, that the benefits don't go disproportionately to higher paid people and, you know, senior people officials of an organization that's sponsoring the plan.

But the basic framework of the statute is that the rules really don't come into play until the plan, until the employer makes a decision to establish a plan and the design of the plan is the employer's decision, it's not governed by ERISA.


Ms. Lentchner. And with respect to what you just referred to as trying to ensure the lack of discriminatory motivations, has it ever come to your attention that there were discriminatory motivations in connection with any of the decisions made with the two pension plans we've been talking about, the Teamsters affiliate pension and the retirement and family pension plan?


Mr. Lebowitz. No, not that I'm aware of. Those are issues that would be primarily, to the extent they exist, would be primarily the interest of the IRS. But we're not aware of any such allegations.


Ms. Lentchner. Now, in addition to maintaining, making sure that the minimum standards of law are met, as I understand it, the statutory scheme provides for something similar to actually on the LMS side, which is that there is also a requirement that to the extent that there are business decisions to be made, that those are disclosed through the form 5500s; is that right?


Mr. Lebowitz. Well, what's disclosed on the 5500 is information about the plan, and a good deal of financial information relating to the plan. And obviously the plan is described in the form, but and the business decisions that are contained in the form are those that are made by the plan fiduciaries themselves. The employers' decisions are not reported on the form.


Ms. Lentchner. Mr. Applebaum, when you talked before about the investigation, the correspondence with Mr. Cronin in 1991 and 1992, as a result of your review, during that period, did you determine that the minimum funding requirement had been met by the plan sponsor, the IBT?


Mr. Applebaum. According to their filings, they have met minimum funding standards in all of the years.


Ms. Lentchner. So that's all years, 1991 through the present, to your knowledge?


Mr. Applebaum. I've reviewed their filings through 1996.


Ms. Lentchner. Thank you. We've heard testimony before this committee that for financial reporting systems, something is out of place to the extent that there are liabilities declared on a sponsor's financial statement when there are no current payments due. Would it be Mr. Dingwall who I guess might be best to answer that, is there anything out of place by virtue of the fact that a plan sponsor has liabilities listed on its financial statements even when there are no current payments due?


Mr. Dingwall. No.


Ms. Lentchner. In fact, the liability on the financial statement is something that is generally a future obligation and not necessarily tied to the necessity of current payments; is that right?


Mr. Dingwall. That's right.


Ms. Lentchner. Have the Teamsters cooperated with the current inquiry into the Teamsters affiliate pension plan?


Mr. Lebowitz. They have to date, yes.


Ms. Lentchner. Have they given all documents that you've requested?


Mr. Lebowitz. I don't know for certain whether we've received them or not. But I haven't been advised that we're having any difficulty in obtaining them.


Ms. Lentchner. Are any of you aware of any money missing from either the Teamsters' affiliate pension plan or the retirement and family pension plan?


Mr. Lebowitz. None of the allegations that I've seen relate to misuse of the funds within the plan.


Ms. Lentchner. Are you aware of any illegal or improper conduct by the plan sponsor with regard to either of these plans?


Mr. Lebowitz. Well, that's what we're seeking to determine in our investigation. We will come to some conclusion.


Ms. Lentchner. But no illegal conduct has yet been brought to your attention?


Mr. Lebowitz. There have been allegations, and that's the reason why we opened the investigation.


Ms. Lentchner. Thank you, Mr. Chairman.


Mr. Hoekstra. Thank you. There are three votes on the floor, a 15-minute vote and two 5-minute votes. The committee will recess and begin immediately after the last vote.



Mr. Hoekstra. The subcommittee will reconvene. We will begin five-minute questioning by each of the Members. Mr. Applebaum, I want to get back to this discount rate. You indicated that, number 1, you're not an expert in this area; is that correct.


Mr. Applebaum. In FASB '87.


Mr. Hoekstra. And were the calculations of the discount rate? I guess--I want to know whether you're confident in saying that the adjustment that you saw from '93 to '94 was a reasonable, a reasonable adjustment, because then I've got some follow-up questions.


Mr. Applebaum. Sure. As I understand the way that the FASB '87 instructs people to choose a discount rate, it is supposed to be based on current rates.


Mr. Hoekstra. I understand. You are an expert?


Mr. Applebaum. Right.


Mr. Hoekstra. And in January of 1994, the discount rate was 6.25, which is the number that triggered the movement to perhaps as the only number that triggered the movement to going to 8 percent; is that correct?


Mr. Applebaum. No.


Mr. Hoekstra. Or are you going to the December numbers?


Mr. Applebaum. December '94 numbers.


Mr. Hoekstra. December '94. Which would have been?


Mr. Applebaum. 8.08.


Mr. Hoekstra. December '94. 8.08.


Mr. Applebaum. I believe the change was made from the '93 to the '94 report, it went from 7-1/4 to 8.


Mr. Hoekstra. I mean, you know I'm taking a look at, you know, and so you've explained one number. But if we go to-- explain then to me why in December of 1994, if the rate was 8.08, then why for 1991, when the 30-year rate was 8.54 the IBT was reporting 7-1/4.


Mr. Applebaum. I did not--I looked at this in a very limited context to say, gee, this would not be unreasonable given the change in interest rates. I didn't say that it was, you know, that I would necessarily approve or that it would be one that I would choose. I simply said at least I could understand why.


Mr. Hoekstra. Excuse me. But wouldn't, if it's a reasonable change, wouldn't it be as if it was reasonable in the practice of what the IBT had historically done, if they--you made a pretty big leap here that said they're tracking 30-year notes.


Mr. Applebaum. No, that's not what I said. What I said, Mr. Chairman, was the following, that as I understand the FASB directions for choosing discount rates, you are supposed to use rates on long-term corporate securities, high grade corporate securities. When I looked at this last night, admittedly this is incomplete, but the point is that the way treasury rates are largely indicative of the way other fixed income securities move. You are not typically going to look at some bell, depending on the methodology that you use to determine discount rates, you may very well choose other bellwether rates. And in fact, because you're not typically for a pension liability, it's probably more appropriate to use slightly shorter discount obligations. But that's--


Mr. Hoekstra. I'm just trying to stick with, in December 1990, the 30-year rate was 8.54.


Mr. Applebaum. Right.


Mr. Hoekstra. The IBT chose 7-1/4 as a discount rate. In December of 1991, the 30-year rate was identified as 7.92. The IBT chose as a discount rate 7-1/4.


Mr. Applebaum. Right.


Mr. Hoekstra. In December of 1992, the discount rate was 7.61. The IBT chose as a discount rate 7-1/4. In December of 1993, the discount or the 30-year rate was 6.21, they chose the discount rate 7-1/4. In December of 1994, the rate was identified as 8.08 and they moved to 8 percent, even though in December of 1990, roughly December of 1992, or '91, the rates were exactly the same and they chose 7-1/4.

Is it safe--do you still believe that that is a reasonable change based on their history and tracking with 7-1/4?

That means I'm running out of time, not you.


Mr. Applebaum. Okay. No, what I said was just--


Mr. Hoekstra. On a one-year comparison, it might be reasonable?


Mr. Applebaum. On a one-year comparison it might be reasonable. Let me say one other thing, and I cannot provide the history of this, Mr. Chairman.


Mr. Hoekstra. We can't either, so don't feel bad.


Mr. Applebaum. Okay. At some point in within the last four or five years, the director of research of the Financial Accounting Standards Board, and I can't remember his name now, sir, pointed out that they, that the FASB was concerned that people were not using rate, you know, were not using rates that were consistent with the directions that they had been given. Now, whether that affected this particular choice or not is something I could only explicate on. But I'm just trying to tell you to the best of my knowledge.


Mr. Hoekstra. I'm interested in how you made that assumption. Because, you know, yesterday the people from Grant Thornton did not give us that information about FASB expressing a concern.


Mr. Applebaum. I'm not saying it was necessarily, I don't want to leave the impression that it was necessarily relevant to this decision, so, you know, but I do know that they did send out a letter of concern, you know, in the 1990s.


Mr. Hoekstra. I will congratulate you, because as much as I think your analysis or justification on a one-year basis maybe is a valid explanation, when you take it in context of a five-year and their pattern of behavior, say, no, it doesn't fly, but your explanation is about a thousand percent better than what their actuaries or what their accountants and auditors were willing or able to give us yesterday.

So, you know, being an outside observer, not having worked with them, you have a better rationale than they do and that's by looking at, you know, one table and, you know, it's stretching an explanation, but you know, you're doing a much more valiant attempt at trying to explain it than what they did. So congratulations. Good job.


Mr. Applebaum. Thank you, Mr. Chairman.


Mr. Hoekstra. Mrs. Mink? I recognize Mr. Scott, and Mr. Scott is here because I asked him where he was on the elevator, and he said he didn't know about the hearing. I hope that's not an error on our part. If it is, I apologize.


Mr. Scott. I was looking at a schedule I ran off yesterday, and if I had looked at the schedule my staff had run off for me this morning, I would have noticed that the time was right. So it wasn't anybody's fault but my own unfortunately.


Mr. Chairman, I yield back the balance of my time to the ranking member, Mrs. Mink.


Mrs. Mink. I thank Mr. Scott for coming. I know that he's very attentive to all of these schedules and I apologize if we contributed to the failure to notify you yesterday about the change of time.

All of this that we've heard this morning is a bit above my level of comprehension in terms of what impact this has in our being able to understand better what was going on in the Teamsters. I think a clear understanding of what you do in your job, but I'm not so sure that I have any better understanding today than I did a week ago about the internal operations of the Teamsters. Our concern in this whole issue has been the repeated allegations that somehow the leadership of the international union was misusing the funds of the pension fund, of the pension plans.

Now, I want to address this question to all five of you, having your respective responsibilities in the Labor Department in each of the different ways that you function, with respect to the financial statements and ERISA responsibilities and so forth, have you at any time in the period from 1991 to date determined any potential wrongdoing in so far as the management of these funds are concerned?


Mr. Lebowitz. As we testified this morning, we did have an investigation in 1992 and concluded that without finding any violations.


Mrs. Mink. Let's look at that investigation in '91, '92; you say it's concluded and therefore a matter of public record. Can you tell us what the nature of that investigation was and what the conclusions were, since that's not been really alluded to so far?


Mr. Lebowitz. The case was opened based upon a computer review of the 5500s, of the annual report, which indicated, I believe for the plans, this is the affiliate plan, the Teamsters' affiliate plan, which indicated a concentration of investments in real estate and limited partnerships or something of that sort above the computer threshold, something in the order of 9 percent of the plan's assets or 9-1/2 percent.

So we opened an investigation to review that and determined whether or not there were any violations of ERISA's prudent standards or exclusive purpose rule, et cetera. We conducted the investigation, the Philadelphia regional office did, and found no violations and then closed the case in 1992.


Mrs. Mink. How was it that you began that investigation as in this one that you started a few months ago? Was there a complaint sent to you that triggered the investigation, or was this as a result of your own, you know, investigation of the reports that were being filed?


Mr. Lebowitz. In my review of the file, it indicates that it was opened as a result of a computer program that is designed to look for investment concentrations of that sort. It went out of the computer and we opened up a case to look at that.


Mrs. Mink. Now that the computers I'm sure are much more intelligent than they were in 1991, and you have greater access to the data, has there been any other occasions since then when the computer indicated that there was a problem in the form 550?


Mr. Lebowitz. 5500.


Mrs. Mink. 5500.


Mr. Lebowitz. Not that I'm aware of.


Mrs. Mink. Pardon?


Mr. Lebowitz. Not that I know of.


Mrs. Mink. And in respect to the other investigations, has there been anything that triggered your concerns about these plans, investments or ways in which you were being used or the demands against the funds or the depletion or the amount of resources, anything that triggered your concern about the liability?


Mr. Lebowitz. Until the most recent opening of our inquiry, we had no other.


Mrs. Mink. So that's it.


Mr. Lebowitz. Nothing else that caused us to look into the plan.


Mrs. Mink. How about the other gentlemen here. Have you had any occasion to look at these reports and based upon your authority and responsibility to examine these reports, have you found anything that caused you to have any concern about the management?


Mr. Kotch. As I indicated in my opening statement, we're just now looking at the two most recent reports. We haven't looked at prior ones.


Mrs. Mink. I'm talking about those that you looked at ,'91 to now.


Mr. Kotch. In, I think in, we looked at them in '91 and '3 and didn't find anything significant at that time. We haven't looked until recently and we have not audited Teamsters or investigated the international. So I wouldn't be in a position to say there were problems or not.


Mrs. Mink. Now, I understand that the IRS gets a first whack at these forms, and that you do not get them for a long period of time.


Mr. Lebowitz. The 5500 form is filed with the IRS.


Mrs. Mink. Why can't a copy be filed with you at the same time? Why do you have to depend on the IRS? It troubles me. We have copy machines.


Mr. Lebowitz. These are substantial documents and the


Mrs. Mink. They don't have confidence in your ability to go over the data? They look at it first.


Mr. Lebowitz. The form itself is a Labor Department form and an Internal Revenue Service form and a PBGC form combined into one, and we've operated this way for about 20 years where the IRS would be the point of receipt and then they would process all of this paper through their form processing system. As you've noted, it's not without its problems.

We do get indications. As soon as the service starts processing the data and putting it on its computer, we'll get a monthly tape so we will have an early indication, an early indication.


Mrs. Mink. When is the most recent one that you've received? Which filing have you received, the last one I should say?


Mr. Lebowitz. The 1996 return would have been filed in mid-1997.


Mrs. Mink. And you have those?


Mr. Lebowitz. We have that.


Mrs. Mink. So you've had an opportunity to look at '96?


Mr. Lebowitz. That's correct.


Mrs. Mink. And based on your review, you have no, found no deficits or shortfalls or mismanagement or failure to invest according to standards?


Mr. Lebowitz. Nothing jumps out at us in our review.


Mrs. Mink. Thank you, Mr. Chairman.


Mr. Hoekstra. Do you do fraud audits?


Mr. Lebowitz. We do criminal as well as civil.


Mr. Hoekstra. The investigations you have done of the IBT, are those considered fraud audits?


Mr. Lebowitz. They're investigations under ERISA for compliance with ERISA. ERISA has all kinds of standards in it, including criminal.


Mr. Hoekstra. You would have gone through the IBT books to the equivalent of what an accounting firm would describe as a fraud audit?


Mr. Lebowitz. Well, we would have gone through the plan books and records, not necessarily the IBT books and records in connection with our investigations.


Mr. Hoekstra. Just Mrs. Mink, one of the things we are perhaps looking for is whether there's money missing in the pension funds. But the reason we look at the balance sheet and liabilities is that if the IBT, in 1994, had not I believe manipulated the numbers and the discount rate, their balance sheet liabilities would have exceeded their assets, which means that the union would have been insolvent and I think that would have been a major campaign issue for Mr. Carey.

And when you take a look at the potential volatility and nature of the insolvency and manipulating the discount rates to make sure that assets exceeded liabilities, the money swaps, the Nash memo, what was going on in the headquarters of the Teamsters was by hook or by crook, they were going to win the 1996 election. And it was about power, and not necessarily at this point about stealing money.


Mr. Norwood is recognized.


Mr. Norwood. Thank you, gentlemen.


Mr. Applebaum, would you tell me your title?


Mr. Applebaum. Chief Actuary for the Pension and Welfare Benefits Administration.


Mr. Norwood. And that administration enforces ERISA in regards to pension plans?


Mr. Applebaum. Yes.


Mr. Norwood. Very quickly, sort of what does that mean, "enforces ERISA"? Are there compliance standards in there? Do you watch these pension plans to make sure that they don't become insolvent? What do you do briefly?


Mr. Lebowitz. Congressman, maybe I will take a crack at that. We conduct program investigations and inquiries to determine whether or not individuals who are responsible for administering and managing plans, but most particularly for managing the assets.


Mr. Norwood. What triggers an investigation?


Mr. Lebowitz. A variety of things. As I said earlier, a computer can trigger an investigation. One of our computer targeting tolerances is exceeded, complaints from individual participants, referrals from other government agencies.


Mr. Norwood. So you have to have information though from these different pension plans to put into your computer, you have to have knowledge so that it could trigger it?


Mr. Lebowitz. That is an important source, sir.


Mr. Norwood. So does your agency collect information from pension plans through reports and you put it into the computer?


Mr. Lebowitz. Yes, sir, that's the 5500 form, that is the source of information that we have.


Mr. Norwood. All right. Now, back to Mr. Applebaum, would your office or Mr. Lebowitz, either one, would your office then know on a monthly or annual basis what the pension plan discount rates would be?


Mr. Applebaum. For a particular plan, we would not typically, you know, we do not typically review each plan's discount rate, if that's what you mean.


Mr. Norwood. How then are you concerned about what the discount rate is? Does that matter in your oversight?


Mr. Lebowitz. Well, ERISA's funding standards are designed to assure a minimal level of funding, and the schedule B that I described earlier in my testimony goes--is the report of--an actuarial report of the plan's funding status and it's prepared in accordance with actuarial standards developed by the profession and signed by an enrolled licensed actuary.

We will look at the IRS is principally concerned with that information, because they're under the enforcement scheme of ERISA responsible for enforcing the minimum funding standards.


Mr. Norwood. But it's your job to oversee it so they need to enforce something, wouldn't it be?


Mr. Lebowitz. Well, it's our job to assure that the plan's financial statement correctly reflects its financial condition, that the numbers that are reported to us are correct.


Mr. Norwood. Well, let me ask it another way then. In 1994, had the IBT decided that their discount rate needed to be 10 percent, would that have bothered you?


Mr. Lebowitz. In the first instance, it would have to be, it would have to have bothered the plan's actuaries. If the plan's actuaries concluded that that was not a reasonable rate of interest to use for that purpose, then they couldn't have used it, and presumably wouldn't have used it. The actuarial standards have to be reasonable and you--but there is a range of option, as I understand it. I'm not an actuary.


Mr. Norwood. My understanding is I thought some of you said earlier, the pension plan, they can sort of put what they want to there. And you said the law let them do that.


Mr. Lebowitz. Within a range of options that are considered to be reasonable under the circumstances.


Mr. Norwood. Well, had their rate gone to 10 percent, would you have ever known it?


Mr. Applebaum. I'm not sure whether an added test would have kicked it out. I think probably the IRS would have noticed it before we did, but there are, Congressman, there are two different issues here. The discount rate that seems to be at issue in these hearings is the one that was used for the employer's financial statements. We do not typically see that. I mean that's the rate that's being talked about. That's not part of the filings with the Department of Labor.


Mr. Norwood. So you didn't know in '94 they went from 7.25 to 8? You didn't know that till you saw it came up?


Mr. Applebaum. Well, there are two different--we would not know what their discount rate for the employer's financial statements would be in any event. That is never reported--that is not reported to the Department.


Mr. Hoekstra. Will the gentleman yield?


Mr. Norwood. I would yield.


Mr. Hoekstra. So when they make a decision going from 7-1/4 to 8 percent, what I heard you say is the Department never knows about a movement of $30 million roughly?


Mr. Applebaum. Mr. Chairman, there are two different discount rates. There are two different discount rates going on. The rates that are used in the plan, you know, in the plan's financial statements that are filed with the Department. If they make a change, they have to indicate that there is a change in actuarial assumptions, and not only that, but they have to make an attachment of what that change is.

The discount rate that I believe has been at issue here is the one with respect to the--how the plan is portrayed and how its liabilities are portrayed on the employer's financial statements. We do not receive those statements. They are not part of an ERISA filing.


Mr. Hoekstra. The Labor Department doesn't receive those?


Mr. Applebaum. Well, the pension and welfare benefits administration.


Mr. Hoekstra. I think you said the Labor Department. Other people within the Labor Department do?


Mr. Lebowitz. Not that I'm aware of.


Mr. Norwood. May I have my time back?


Mr. Hoekstra. Yes.


Mr. Norwood. Well, a part of why we're asking about this question is that when you change from 7.25 to 8 percent, that lowered the amount obligated by the pension plan around $70 million. And I am curious to know if you have oversight of pension plans, why wouldn't any of that--why would you not want to know that and why would that not be part of what you feed into your computer in order to have oversight?


Mr. Applebaum. Well, I mean it's a perfectly--in many ways a good question. But I do not believe that under the statute we have authority over the employer's financials. We only have authority to get reports on the plan's financial statements. That's my understanding.


Mr. Dingwall. Let me jump in here a second.



Mr. Norwood. Someone needs to help this.


Mr. Dingwall. I have been pretty quiet. Most of the financial statements that we get at the Department of Labor are prepared in accordance with FASB statement 35. That is the document that governs the preparation of the plan's financial statement. It is a different discount rate that is used for that calculation in the reports that we get that is used in the employer's books and records under statement 87.

There are two different calculations, okay? So when we get the financial statements in at the Department of Labor, the interest rate that is used is typically the interest rate that would be used would be earned by the plan over the period of time that the benefits are going to be paid out. So it is not this 30-year rate that Joe has been testifying to about already, it's really the expected rate that the plan assets are expected to realize over the time that the benefits are paid out. So it's a very different calculation and it's a very different rate.

The second thing to tell you that I think you should be aware of is that with respect to these calculations, in statement 35, when we try to compute the benefit obligation at that point in time, it's based on what people currently earn. The idea is to try to give somebody a portrayal of what the assets of the plan are as of the balance sheet date, and to tell you what the balance sheet, what the cumulated benefit obligation is at that point in time, measured in terms of current dollars, based on what people currently get paid.

It doesn't assume as in the FASB 87 calculation an increase for salaries. You know, if you look at the 87 calculation, you will see the increase is for salaries. So they're very different calculations, and you should understand that. But apart from that, what we get in the form 5500 filing is the schedule B that makes three other calculations of what a benefit liability is. And those calculations do come to us at the Department of Labor, and we're aware of them through the annual reporting process, that are basically required statutory calculations to see whether or not the plan has met the minimum requirement and whether or not it's, perhaps it's exceeded the maximum requirement, which isn't as applicable here because this is a not for profit organization.

But the other thing you should understand in terms of the reporting of the disclosure piece of this, what participants get is a summary annual report, and that summary annual report is required to state whether or not enough money was contributed to the plan to keep it funded in accordance with the minimum funding standards of ERISA. And that's different than everything else you've talked about. These are the required minimum payments that have to go into a plan.


Mr. Norwood. So you knew that information then in '94, what the minimum


Mr. Dingwall. It is all available on the computer, when that computer report becomes available. And in 1994, you're talking about a '94 report that's filed in 1995 and the information is made available to the Department, you know, after that time. Sixty days after that time we have it on electronic media, maybe 19 months go by before we have it available on a hard copy that's in a public disclosure report. But, yes, we have it available.


Mr. Hoekstra. The gentleman's time has expired. We gave Mr. Scott a few extra minutes, too, and he gave it to you. That was a pretty nice parliamentary rule. Now we get to recognize the ranking member again for her own time.


Mrs. Mink. Thank you. Mr. Dingwall, I find your comments very interesting. Based upon all of these reports that are filed that you described, did you find anything in there to indicate that the standards have been violated, that the fund didn't have enough money, that there was misappropriation of funds or poor management of the pension programs in the two pension plans that IBT was responsible for maintaining?


Mr. Dingwall. No.


Mrs. Mink. So it met all the standards, met all of the requirements that have been set by the Department, by outside societies that look at this whole pension review situation; is that correct?


Mr. Dingwall. I don't know if that's correct. I will just tell you with respect to what I have been made aware of through our reporting and compliance program.


Mr. Hoekstra. Could you be a little more specific as to specifically what years you're talking about?


Mrs. Mink. I'm talking about the period from '91 to the most recent report that you have.


Mr. Dingwall. Right, let me talk generally about this, because I don't have specific sheets of paper on every single year and every single plan filing.


By and large, this plan has filed reports every year since it was in existence, I guess. They have always been subjected to edit test checks by the Department of Labor. To the extent that they didn't resolve their edit test checks, we would have taken that filing, if you will, into the office and reviewed it.

That never happened with respect to this fund. Does that help?


Mrs. Mink. That was his question.


Chairman Hoekstra. You still didn't tell me for what years. Was that from 1991? My understanding is that this fund was under investigation now.


Mr. Dingwall. That's right.


Chairman Hoekstra. You can't obviously say it for the years under investigation.


Mr. Lebowitz. All Mr. Dingwall is saying, Mr. Chairman, is there was nothing in terms of our automated checks that has come out in connection with this plan.


Mrs. Mink. So the only reason that you are now in an investigatory mode is because of a complaint that has been filed, is that correct?


Mr. Lebowitz. Yes.


Mrs. Mink. Nothing of your own internal computer analysis or your own review suggested that there is anything improper on--


Mr. Lebowitz. As I said before, nothing jumped out at us from our review of the documents filed with us, that is correct.


Mr. Dingwall. That is what I was trying to say, also.


Mrs. Mink. In the prepared testimony that we have for Mr. Kotch, you indicated that there were a whole series of indictments and convictions on page 8 of your testimony.

Were these of IBT personnel or were these locals that you were talking about?


Mr. Kotch. I think for the most part they are locals. I don't have a number


Mrs. Mink. Are these IBT, all of them? Or are these all the unions?


Mr. Kotch. No. All unions.


Mrs. Mink. Everything.


Mr. Kotch. I don't have the number of convictions and indictments for IBT. I think the number of investigations, it was 65 investigations and--I don't have the number of convictions. None of those--


Mrs. Mink. Were there indictments of IBT officers during this period that you refer to, five fiscal years?


Mr. Kotch. Some of those may be Teamsters local officials. I would have to check.


Mrs. Mink. Locals, but how about the international?


Mr. Kotch. To my knowledge, none of the international officials were in that.


Mrs. Mink. Would I be proper in asking him to investigate that further and--


Mr. Kotch. Provide you how many of those ?


Mrs. Mink. Provide that information for the record as to whether, in the statement that you have on page 8, you have any references to IBT officers.


Mr. Kotch. I can provide that.


Mrs. Mink. Or the international officers, is what I mean.


Mr. Kotch. I am fairly certain that none of those indictments were international union officials.


Mrs. Mink. If we could have a verification of that.


Mr. Kotch. I would be glad to provide it.


Mrs. Mink. Thank you very much.

The current investigation, which we have now made mention of that you are now investigating as a result of a complaint, is it appropriate to ask you to describe the nature of that complaint, or are you barred or impounded from even talking about it?


Mr. Lebowitz. Much of the information I think is in the record of this hearing.


Mrs. Mink. I believe so.


Mr. Lebowitz. You have been talking about it this morning, as well as I believe yesterday.


Mrs. Mink. I just wanted to make sure that we are talking about the same investigation, that is all.


Mr. Lebowitz. That is the reason why the case was opened, but once opened, we look fairly broadly at the plan and its operations, and we will go beyond the allegations.


Mrs. Mink. When might we expect a report or a conclusion of your investigation?


Mr. Lebowitz. It is always hard to predict, particularly at the early stages of an investigation. It could be within a month or two, or it could be a lot longer than that, depending on what we come across.


Mrs. Mink. Thank you. I have no further questions, Mr. Chairman.


Chairman Hoekstra. Mr. Parker?


Mr. Parker. Thank you, Mr. Chairman. What are you investigating right now?


Mr. Lebowitz. We have an investigation essentially based on the allegations contained in filings from Mr. LeFevre and Mr. Dumor.


Ms. Toensing. For what years?


Mr. Leser. I think the allegations relate to several years. We will be looking at the whole span of time past, back probably through 1992, 1993.


Mr. Parker. In a nutshell, what are you investigating, though?


Mr. Lebowitz. Most broadly stated, for compliance with ERISA, and the particular allegations relate to their concern that the plan's financial statements do not accurately reflect the plan's financial condition.


Mr. Parker. I am a little concerned, because I keep hearing people say the pension plan is overfunded. Well, it may be over funded for the dollar amount right at that point, but you have fluctuations of plans, and because of the markets and different things, different investments.


Mr. Lebowitz. Right.


Mr. Parker. The problem that I have is even though it may be over funded, it may be shorted. If the management is not correct, even a poor manager can be over funded in flush times.


Mr. Lebowitz. That is correct.


Mr. Parker. Could we agree with that? So even though it may appear that things are going very well and everybody says we have these positive numbers, that doesn't mean anything because you could have very poor decisions being made, and then you would be in a situation where you have really lost money, even though it appears you have made money.

A lot of these things are thrown around. Let me just say, in a letter of June 8, and this was from you, Mr. Lebowitz, and Mr. Kotch, you wrote a letter and you said, that is exhibit 37, you said that, "No immediate plans to conduct an internal compliance audit for the benefit of IBT members," and "at this time, no I-CAP of the IBT is expected to be conducted for at least 2 years and possibly a longer period."

Is that still true?


Mr. Kotch. I think it is generally true based on potential information that may come to us through this proceeding or others.


Mr. Parker. All right. Let me ask you this.

I listened with interest to the ranking member talk about the IRS gets the forms before you do, and then you have a delay, and a long period of time. To me, that is incompetent. You are dealing with the system. I know you are working within the system that was established. That is just incompetent.

I mean, if you make every insurance company, and granted, IBT is the largest union in the country, but you have some insurance companies out there and they are dealing in every State. I used to have an insurance company before I came to Congress.

All of our business that we did the prior year, we had a blue book, and I don't know if you all are familiar with that, actuaries are. But every transaction, everything that was done during the previous year was reported by April 15th to the State, and it was public-- the public could go in and look at it. It was so precise that anybody could see exactly what was happening. They could tell what the value of that insurance company was, what investments they had. If they had an insurance policy there, they would see how much confidence they had in that company. It happens in all 50 States.

You are telling me that you all are 3 years behind on stuff, that you do not get stuff? I have a problem. And then you say, and I am not attacking you personally, because you are dealing with a system that was set up by incompetent people, but that is beside the point. You say a trigger, my friend from Georgia asked you about what triggers an investigation. You said, well, a computer could throw up a red flag on something, and get a complaint, referrals.

I mean, look, this is just me, but here I am, sitting in charge of making sure that these pension plans are solvent and are run properly. I find out and I mean, I am just looking at the newspaper, I find out that the head of the union has been removed. I find out that there is a consent decree that they are operating under. I see where three of the former President Ron Carey's campaign consultants have plea agreements with Federal prosecutors. I see where the former director of government affairs, Bill Hamilton, was indicted. Then I look at the rank and file members out there who have their lifeblood invested in this plan.

I don't know about you all, but that would give me pause, if I were responsible for this thing, to say, you know, I think it is about time we looked at this sucker. Now I don't know, evidently nobody in the Department of Labor had that urge. Somebody should have, I think.

I mean, do any of the things that I brought up, does that not trigger somebody over there saying, you know, we are responsible to make sure that things are handled properly for these thousands and thousands of Teamsters? Does anybody say, we've got a problem over there and we need to do something ourselves in order to see that it is done right?

Is that just me being so simplistic?


Mr. Lebowitz. No, sir. At any point in time we have somewhere around 3,000 investigations that are open. We have a relatively small staff, and we need to try to do our best to use those resources as effectively as we can. So there are a lot of criteria that we use before we determine to commit those resources, among which is a review of the 5500s and the information that is on it, when we get it.


Mr. Parker. But you are not getting the 5500s until later?


Mr. Lebowitz. The law does not require them to be filed until 7-1/2 months after the end of the year for which they apply. But as soon as they come in and the IRS can enter the data from them, we will get some indication of if there is some anomaly that we ought to look at.


Mr. Parker. I go back to what the ranking member said, why can't you get it the same time the IRS does? That does not make any sense.


Mr. Lebowitz. What we are moving toward ?


Mr. Parker. Would you want that?


Mr. Lebowitz. I am sorry?


Mr. Parker. Would you like to have that?


Mr. Lebowitz. We would like to have it as soon as we can get it, but we can't, as an administrative matter, we can't really deal with 800,000 additional filings, and sort of duplicate what the IRS is already doing. To get that much paper is an enormous challenge to process it.

What we are moving toward is an automated system where much, if not most of it, will come to us electronically.


Mr. Parker. I know my time is up, but let me just say one thing. Do you know all the insurance companies in the United States that do that? Do you know who pays for it? The insurance companies. Because whenever they would come and audit me, and I fill out this stuff and go through the actuaries and I file that blue book, which is a monster, then they come and audit me every year, and they would have it done and they would have it done quickly. The amazing thing is at the end of the week they gave me a bill, and I had to pay them.

What I am saying is, there are ways to handle this thing, but I think that there needs to be some basic changes in structure.

I appreciate the committee's indulgence. Thank you.


Chairman Hoekstra. The gentleman's time has expired.

I just want to build off a little bit of what my colleague was talking about. I guess he was building off of the comments of the ranking member.

Here is the problem that I think we as a subcommittee run into. We look at the facts, and here are the facts that we have seen: Taxpayers pay $20 million, Carey is thrown out of office, an election is overturned, three people have pled guilty, a political officer has been indicted, the AFL-CIO has been implicated, and that is not a very pretty picture, okay?

So now we are just trying to find, you know, where is the line of defense where somebody finally says, I am mad as hell and this is going to stop? Here is what we have run into. Mr. Sever, the un-elected president of the Teamsters, who was part of the Carey slate, installed in office, so he is now running the Teamsters, he comes here, and I can't remember exactly what he has said word for word, but I think it is something like, I would trust Mr. Carey with my life, and I don't have an internal investigation going on. So it is kind of like, all right, Mr. Sever says, I have looked at the same facts that your subcommittee has looked at. I don't see a problem.

The IRB, they are going to be in here. They don't seem to be aggressively going after this. The financial auditors were in here yesterday, Grant Thornton. You run through this litany of activities and facts, and Grant Thornton says, no, everything is okay. We are basically, we have put in one more procedure for the audit of 1997, but other than that we are not really doing a lot more.

The actuary says basically the same thing. The Justice Department is still negotiating after a year-and-a-half or after a number of months with negotiations with the Teamsters of just getting somebody in there to follow their books, with an independent financial auditor who, when he came in here, he was nothing more than a bookkeeper, a qualified one, but his role had been very narrowly defined, and well paid, thank you, Mr. Norwood.

Now we come to you. Again, all of these, you know, you might respond to a red flag in a computer, but have you ever had a discussion with the IRB about saying, these people are under a consent decree; we need your help in rooting out a criminal element, the mob, and we need your help in Federal supervision of these people? Have you had that discussion with the people at the IRB? Have they asked for your help?


Mr. Lebowitz. We have had communication with them from the inception.


Mr. Hoekstra. Did that trigger any special activities by the Labor Department to monitor this union more closely than any other?


Mr. Lebowitz. Well, I can't say more closely than any other, or these plans more closely than any other plans. Certainly if they wanted us to conduct an inquiry, an investigation into something that they believed was amiss, or if they provided us with information that they thought was a problem, we would and we have undertaken investigations.

This is just one of probably hundreds of employee benefit plans sponsored by the International Brotherhood of Teamsters. Over the course of time we have conducted investigations on literally hundreds of investigations relating to Teamster-sponsored plans.


Chairman Hoekstra. Mr. Kotch, have you or has your organization been brought into coordinated activities? I think in your testimony you indicated that, when did you start the desk audits of the LM-2 forms, for 1996 and 1997? Have you done desk audits for 1991 through 1995?


Mr. Kotch. No. We started the recent ones a month ago, two months ago, perhaps.


Chairman Hoekstra. Did the Justice Department or the IRB ever put your department under notice that they were under a consent decree and that maybe they should be more closely monitored?


Mr. Kotch. We obviously knew about the consent decree. We have not gotten any specific requests from either Justice or the IRB.


Chairman Hoekstra. Are there any other large unions under a consent decree today?


Mr. Kotch. No, not that I am aware of.


Chairman Hoekstra. This is fairly unique, isn't it?


Mr. Kotch. Yes.


Chairman Hoekstra. Why, out of all the unions that you have done the, what is it, the I-CAP, why wouldn't the consent decree have sent a red flag through the Department and said, well, rather than having the IBT as being one of the last 15 not to have an I-CAP, we ought to maybe do one of those real soon?


Mr. Kotch. I think there is a couple of reasons. One is starting in 1994 we were committed to a more systematic approach for selecting them. I think the other reason would be a resource consideration.


Chairman Hoekstra. In 1984 you began a systematic approach?


Mr. Kotch. Right.


Chairman Hoekstra. Not very flexible?


Mr. Kotch. There is some flexibility in it. I think you need to distinguish between our I-CAP and what we would term a criminal investigation. If we get specific information we necessarily would not open an I-CAP, we would just pursue the criminal information. I-CAPs are a broader, more routine type program, as distinguished from our criminal investigation.


Chairman Hoekstra. Okay.


Mr. Kotch. Although criminal activity sometimes falls out of an I-CAP.


Chairman Hoekstra. Do you guys review on an annual

basis--you have got this plan in place in 1984 that outlines

how you are going to go through this. Do you have documents

on how you target different organizations?


Mr. Kotch. For the I-CAP program we basically have divided them in four categories. We, in reverse order, we just try to move through them. One of the problems we have faced is a number of the largest international unions are here in Washington. That puts a particular problem for us just from a resource standpoint. Our Washington office here deals with many of the international unions for a number of different programs, so we have a basic resource problem in completing them all.

When we started the I-CAP in the early eighties our intentions were to just audit them all over a period of time. In recent years we have had to slow that down considerably, unfortunately for us.


Chairman Hoekstra. A resource issue?


Mr. Kotch. A resource issue. I didn't mention it in my testimony. I think approximately, since 1990, we have lost 30 percent of staff. So we have certain mandatory functions, and what suffers is that our discretionary work, which is our CAP and our I-CAP, we use those more as general compliance programs and in discovery programs for criminal work, which we then aggressively pursue.


Chairman Hoekstra. I think Mrs. Mink and I have an interest in having this work done, all right? That is why I am asking if you have a system to review the priority.

If you received a letter from Mrs. Mink and I saying, we would really like you to do an I-CAP on the International Brotherhood of Teamsters, and we would like you to do it as soon as possible, as soon as you can adjust some of your plans, do you have a way of processing that request?


Mr. Kotch. We would certainly give that serious consideration.


Chairman Hoekstra. Are we willing to do that?


Mrs. Mink. How much would it cost, Mr. Chairman?


Chairman Hoekstra. The cost I would think would be that another investigation would be moved down in the priority list, and the International Brotherhood of Teamsters would be moved up. That is the cost. It is an opportunity cost. Well, we will think about it.

The chairman, without taking all of this time, yields back the balance of his time to Mrs. Mink.

The Chair recognizes Mrs. Mink. You will notice that that yellow light is still on.


Mrs. Mink. I heard you, Mr. Kotch, respond that there had been no desk audits. Minority counsel has given me a letter that you sent March 17th to the chairman, Mr. Hoekstra, on page 4 in which you said that indeed, desk audits had been conducted in 1991 on the Teamsters annual financial report LM-2 for the fiscal year ending December 30th, 1990; another desk audit was conducted in 1993 on the Teamsters financial report LM-2 for the fiscal year ending December 31, 1992; a third desk audit was conducted in 1986.

I just wanted to understand whether your earlier response was different than what this letter is.


Mr. Kotch. I think I said we had not done any desk audit since then until recently. Now we are looking at the 1996 and 1997.


Mrs. Mink. So from 1993, which was your last desk audit, this would be the most this would be the next one? There hasn't been any intervening?


Mr. Kotch. Right. Also in this letter or another of the letters, we noted that our ability to do a desk audit, again, has dwindled from a resource standpoint.


Mrs. Mink. What is your personnel level now as compared to what it was in 1990?


Mr. Kotch. Approximately 30 percent less.


Mrs. Mink. Which means how many warm bodies?



Mr. Kotch. 120. We only have--


Mrs. Mink. How many reports does that mean you have to do with 120?


Mr. Kotch. Right now we only have two auditors in the national office.


Mrs. Mink. Two auditors?


Mr. Kotch. That is all we have right now. We have 175 investigators in the field.


Mrs. Mink. The two auditors have responsibility to look over all of these LM-2s?


Mr. Kotch. That and other responsibilities.


Mrs. Mink. What about these thousands of calls that you get that inquire about various things that are included in that report? Who handles the physical part of that?


Mr. Kotch. Those two auditors, plus we get a lot of calls in our district offices who would respond to a lot of inquiries. We provide disclosure both here and in our field office.


Mrs. Mink. So if we went along with what the chairman wants, an I-CAP, what would that entail in terms of manpower?


Mr. Kotch. I think one of the first things we would probably do is before we do any I-CAP, we would coordinate with a number of other criminal enforcement agencies: Pension, the Office of the Inspector General, and the Justice Department. I think we also usually alert the U.S. Attorney in that particular district. We do that before we even get started to make sure that we know about any other activities, whether there is any reason that we should not particularly go into a certain union, or to get any information they may have to provide. So we do a lot of homework before we start an I-CAP. So in this particular case, we would obviously have to talk about our counterparts at Justice to see just what would be appropriate and what wouldn't be.


Mrs. Mink. I have a question of Mr. Lebowitz. On your testimony you talked about the Form 5500 being accompanied by a financial audit by an independent, qualified public accountant, so that every Form 5500 also has an audit.

Now, is that an audit different than what we were discussing yesterday with the IBT auditors, or is that the audit that you would use in connection with this Form 5500?


Mr. Lebowitz. The audit related to the Form 5500 is an audit of the plan, not an audit of the employer.


Mrs. Mink. That is separate. Who would do that for the IBT?


Mr. Lebowitz. Whichever accounting firm the trustees of the plan choose. It would have to be a licensed accountant. The law requires that the accountant be licensed as an accountant, and that it be independent of the plan. It could be, as I believe was the case here, the same accountant who does the audit of the employer's books and records. That is quite common for the same accounting firm to do the employer's audit and to do the audit of the plan. But they are separate audits of separate books and records, and they are separate reports.


Mrs. Mink. With respect to the management of the fund and the investments and its reliability, and whatever, that financial audit also would speak to those issues, as well as your office, is that correct?


Mr. Lebowitz. Yes, it would. The audit is a financial audit. It is not an audit for total compliance with ERISA.


Mrs. Mink. It is income and outgo?


Mr. Lebowitz. It looks at the plan's financial statements, and the procedures that the auditor follows are designed to test to see whether there are problems, which presumably would be indicated in the audit report.


Mrs. Mink. In any of the audit reports that accompany this Form 5500 over the period 1991 to the most recent one that you have seen, was there anything in the financial audits that accompanied that form to suggest that there was any trouble in these pension plans?


Mr. Lebowitz. No.


Mrs. Mink. Nothing.

Now, I also wanted to ask one question that goes to the general nature of this Form 5500 and the LM-2s. Since ERISA has also an employer responsibility, to what extent do you examine all the employers with respect to how they are running their pension plans; for instance, IBM or some of the big corporations?

Is that a responsibility that you also have to look after under your authority?


Mr. Lebowitz. In reality, the International Brotherhood of Teamsters for ERISA purposes is just another plan sponsor, just like any other employer, like IBM or General Motors.


Mrs. Mink. Do you look at IBM and all the other employers as well?


Mr. Lebowitz. Not all of them, but we do look at lots of them. As I said, at any point in time we have a few thousand investigations open. The majority of them involve single-employer plans and many involve very small plans, so very small employers.


Mrs. Mink. You have the same responsibility as these other employers that are not union employers?


Mr. Lebowitz. Yes.


Mrs. Mink. So you have this range of plans that you look at and how they are invested and discount rates. So based upon your view of what is happening throughout the industry with regard to employers as well as unions, it is your view, again getting back to the issue at hand, that the issue of this discount rate was handled no differently in the case of the IBT than another corporation?


Mr. Lebowitz. That's right. The discount rate would not normally be something that would trigger any interest on our part, unless something showed up in the plan's financial statements that was just so anomalous or so unusual that it caused something to be triggered through our automated system.


Mrs. Mink. So in and of itself alone, the change from 7.25 to 8 percent would not have been any cause for your special concerns with reference to this particular pension plan?


Mr. Lebowitz. By itself, it would not have been a factor.


Mrs. Mink. Thank you, Mr. Chairman.


Chairman Hoekstra. Would the IBT's insolvency have triggered a DOL investigation?


Mr. Lebowitz. Bankruptcies and insolvencies, when we know about them, often trigger investigations to see whether the employer's insolvency or bankruptcy had some impact on a plan.


Chairman Hoekstra. A change in the discount rate might meant that the Teamsters were insolvent in 1994? That might have triggered an investigation? There are plenty of reasons why I think a discount rate could have been viewed with a lot of suspicion.


Mr. Norwood?


Mr. Lebowitz. I am sorry, Mr. Chairman. I just would make this point, that our interest would be in assuring that the plan is adequately funded, so that the thing we would immediately look at are the plan's financial statements, which indicate what the liabilities of the plan are and what the assets are. That would be our primary concern in any insolvency.


Chairman Hoekstra. The plan versus the overall financial situation of the union, correct?


Mr. Lebowitz. Our concern is the financial status of the plan. If the employer becomes insolvent, we want to make sure that the plan isn't left holding the bag.


Chairman Hoekstra. But if somebody else somewhere--how would you have found out that the company was--if you are only worried about the plan, who would have told you that the union had gone insolvent?


Mr. Lebowitz. We often get information just from everyday sources, from newspapers, from other financial reporting services, things of that sort, that would trigger an interest on our part.


Chairman Hoekstra. Good. Read the last few months of what happened with the Teamsters, and rethink about how you are monitoring it.


Mr. Norwood.


Mr. Norwood. Thank you, Mr. Chairman.


Mr. Lebowitz, would you tell me and tell this committee for the Record what you think this committee is trying to do, what this inquiry is all about?


Mr. Lebowitz. I think, I assume that you are trying to ascertain what the facts are with respect to the union's financial condition and the plan's financial condition.


Mr. Norwood. And then do you understand that we have great concern about the $20 million the taxpayers of this country paid for an election that was a bogus election, and we have concerns about the fact that this union has gone from $155 million in assets to under $1 million? Did you understand these are also things we are concerned about?


Mr. Lebowitz. Yes, I do.


Mr. Norwood. Now, we are also concerned about the pension plan, too; maybe overly so. But the big picture is, $20 million has been wasted. This union does not have a president. Three people have pled guilty. One has been indicted and the union is close to broke. So that is what this inquiry is all about.

On May 29th this committee wrote you a letter, and you responded back on June 8th, both of us having said the same thing, which is this: "We request all documents, including correspondence, memoranda, analysis, notes, briefing materials, meeting agendas, workpapers, regarding any meeting or communication between Mr. Applebaum or any other member of the PWBA and the Segal Company, the IBT, the independent administrator or his staff, the Independent Review Board or its staff, or the Teamsters Affiliates Pension Plans in 1991, 1992, or any subsequent years."

We said that in our letter. You said that in your letter. But you go on to say in your letter, "In order to provide you with those documents which are most relevant to your inquiry, we include only those documents which relate to the Teamsters' Affiliates Pension Plan.

In other words, you sent us stuff for 2 years, and it is very concerning to me that there is absolutely nothing regarding anything but just what you decided was relevant, the pension plan, and there is this period of 6 years where we get nothing. Now, that does not help us have our inquiry into all of the things you already said you understood we were trying to do.

Who decided all we get to see and all that is relevant is 2 years regarding the pension plan?


Mr. Lebowitz. Congressman, my understanding is that there were discussions at the staff level, committee staff and our staff, about the particular interest that the subcommittee had in terms of these documents. We were only trying to provide you with what we understood you were most interested in.


Mr. Norwood. I would ask the staff to get ready to answer the question here. I want to know, is that all they wanted? And while we are there trying to come up with that answer, I would like to go ahead with Mr. Kotch. We will come back to that. If that is all our staff asked you to do, I need to say thank you so much, and I will visit with them. But I can't believe, with a letter that we sent that stated so clearly what we needed to have, that somebody on staff said no, they did not really mean all that, we only mean just those 2 years, when we are worried about a time frame of 1990 to 1995.


Mr. Kotch, while our staff is trying to come up with an answer for that, let's you and I visit for just a minute. The Labor-Management Reporting and Disclosure Act requires unions to file financial reports with your office annually. Your letter to the subcommittee dated June 10 states and I quote, "The primary objective of union reports is to enable union members to have the information necessary for them to participate in their unions and to prevent and/or correct abuses."


Mr. Kotch, do you believe that the current version of the LM-2 accomplishes that goal?


Mr. Kotch. I think it does.


Mr. Norwood. Yes, is your answer?


Mr. Kotch. Yes.


Mr. Norwood. The Labor-Management Reporting and Disclosure Act, U.S. Code Title 29, section 431, requires that the information submitted in this report contain, and I quote, "... such detail as may be necessary accurately to disclose its financial condition and operations for its preceding fiscal year."


Mr. Kotch, do you believe that the financial information disclosed in LM-2 contains sufficient detail for union members?


Mr. Kotch. Generally, yes.


Mr. Norwood. Then I want to tell you a little story. This happened to me at home with rank and file Teamsters members who happened to be in this election on the side of Mr. Hoffa.

They are saying to me that the IBT spent $28 million in travel. Yet, of that $28 million, we can't tell what happened to $17 million. But you know what we think? We think some of the people working in that union used some of that money in order to go out and help reelect Mr. Carey.

Now, I am inclined to see some documents and I think maybe that might have happened, too. But you are telling me that this report is so clear that nobody can figure out really from this LM-2 what happens to $17 million in travel expenses because everybody gets to put it on a Visa card?


Mr. Kotch. I think most of the numbers reported on an LM-2 are subject to further scrutiny. The numbers are there, but what actually makes up some of the numbers, obviously that would take an audit or further investigation.

I mentioned in my testimony that members under the law, one of the provisos of the law is that members have the right to pursue more information about the reports. But that is in the law, specifically given to the member to pursue, section 201(c).


Mr. Norwood. It says, "Such detail as may be necessary accurately to disclose its financial condition." Yet, we have $17 million in this one little area just of travel, that nobody can understand how really it was used. We think perhaps it was used for travel. Was it used for travel to do union business? Was it used for travel to do election business? Maybe not even just the Carey-Hoffa election, maybe it was used for election business regarding the political 1996 election.

How can you continue to say that there is enough detail when this one little area, just $17 million, which my folks at home think is a lot of money, and so do I, how can we say that that report is a good report when you can hide in it one little area, $17 million?


Mr. Kotch. I think we have to look, too, at the concept of reports. There are few unions that have the volume of financial dealings as the Teamsters. The report is geared to $200,000 or more. The Teamsters obviously, and several other large unions, are exceptional situations. They have a tremendous amount of financial dealings. Few unions, I would suspect--


Mr. Norwood. So this is important because it is a large number?


Mr. Kotch. I think the other point is that no matter how much disclosure there is on a report, for a member or us to accurately determine the exact way the money was spent would require an audit or further investigation. The problem we have from a criminal standpoint is that embezzlers often file false reports, so theoretically you could have a 50-page report and not necessarily have an accurate, true report.


Mr. Norwood. Which is another subject?


Mr. Kotch. A whole other subject.


Mr. Norwood. The question here, you are saying the primary objective of the reports is to enable union members to have the necessary information for them to participate in their unions and to prevent and correct abuses.

Here is a perfect opportunity for great abuses that would not require, I don't believe it wouldn't require someone to have an investigation, it would require changing the report so people can understand.


Mr. Kotch. I think you can say that about many of the items. There are I think 50 financial items, 15 schedules. You have to strike a balance between just how much information is appropriate and how much isn't.

As I mentioned in the testimony, you have the Paperwork Reduction Act, which looks to the burden on the filers. Then you have the law which, of course, is trying to provide as much disclosure as possible. So you weigh those, and in weighing them we come out with a 6-page report.


Mr. Norwood. Let's make it an 8-page report for unions this big, why don't we? Maybe we need a little more information on the big guys.


Mr. Kotch. That is a possibility. We talked about that in the past and did not go that way, but that is a possibility, I would think, because of the, plus the internationals themselves file these same reports as locals, and just the way internationals operate, it makes some of the report not as applicable to internationals as it might be to locals.


Mr. Norwood. Mr. Chairman and Mrs. Mink, I would ask unanimous consent to have one or maybe two more minutes so I can follow up with Mr. Lebowitz from that first question, so we don't get this out of line? Because it is rather important.


Chairman Hoekstra. Without objection?


Mrs. Mink. You have already had 2 extra minutes, but I won't object.


Mr. Norwood. Thank you, Mrs. Mink. You have a good watch.

My understanding from what I hear from staff is that our letter says clearly what we needed. It outlines the request.

They go on to say that informal inquiries, oral inquiries, on the staff level were specifically rebuked by the counsel at DOL. I can't read this lady's name, but we will be glad to get it to you. There was really not much going on between staff that would allow our staff says, that would allow you to read into the request that all we wanted was something about pension plans in 1991 and 1992.

The question is, if we send that letter again, will we get an answer this time?


Mr. Lebowitz. Congressman Norwood, if we read the letter too narrowly I apologize for that. The inquiries that we had, which I did not participate in, but what I am advised is that the inquiries were with respect to the Teamsters affiliate plan, so we limited our response to those documents that were related to the Teamsters affiliate plan.


Mr. Norwood. Who recommended that that is what that letter said? I have quoted what it says. There is no way in God's earth you can read it that way.


Mr. Lebowitz. I appreciate the letter does not say that, but let me just say, we were simply making a good-faith effort to try to draw the line somewhere, because--


Mr. Norwood. Now, you--


Mr. Lebowitz. If I might be able to finish, sir, we have had in the last 5 years alone more than 1,300 investigations of various Teamsters plans, not this plan but others. We have letters for interpretations, inquiries from the Segal Company, that have nothing to do with the Teamsters plan, for instance. We have various dealings with the accountants or others who are listed in your request.

So we needed to try to get a sense of perspective in terms of what the subcommittee's interest was. If you have an interest in all of those documents, then I would respectfully suggest that perhaps we sit down with staff and try to sort it out some way so we get you what you want without having to send up several truckloads of paper.


Mr. Norwood. I understand. I think we tried to do that and the counsel at DOL was most uncooperative. I think we can sit down and work it out. I can assure you, we are looking at an election in 1996, we are looking at $20 million spent in 1997, and I think what you sent us about 1991 and 1992 is great. That is not what this committee is all about.

Of all those investigations that are going on, how many of them have triggered a serious investigation from Congress? I will bet this is the only one of those investigations you are looking at that has our full attention. Whoever advised you all we wanted was information from 1991 has got to be nuts. You cannot read that into that letter any kind of way.


Mr. Chairman, I simply request we try this again, and let us see if we cannot get the information so we can carry out our constitutional duty to do oversight to the taxpayers.

Thank you, sir. Thank you, Mrs. Mink.


Chairman Hoekstra. Thank you. The gentleman's time has expired.

Is the gentleman leaving now?


Mr. Norwood. I have to.


Mr. Hoekstra. A couple of other questions. Mr. Lebowitz, if a plan is under funded and a union is insolvent, what happens?


Mr. Lebowitz. If it is the kind of plan that is insured by the PBGC, then the PBGC will step in and pick up the payments.


Chairman Hoekstra. Is that taxpayer dollars?


Mr. Lebowitz. It is actually funded through premiums of all plans.


Chairman Hoekstra. Okay. All right.


Mr. Kotch, just a couple of questions on the LM-2s. The union maintains as part of its budget separate funds for different functions, such as organizing members, paying out-of-work benefits to its members.

Are the assets of each of these funds listed separately on the LM-2?


Mr. Kotch. I think in the response we gave we pointed out that the instructions call for the various funds to be lumped into one single report, so the funds are not reported separately.


Chairman Hoekstra. Why would we do that? In 1993 the IBT had only $40 million in the general fund, $25 million in an organizing fund, and $45 in its strike funds.

If you lump them all together, how can union members be sure their dues are being spent the way that their union heads promise their dues are going to be spent?


Mr. Kotch. I think the determination was made at some earlier point that a single report was adequate.

As Mr. Campbell indicated earlier, I think, you would have to then require probably separate reporting for various funds, and then that would have to be consolidated into a single fund. Again, it is just a question, I think, of the degree of reporting required.


Chairman Hoekstra. Really, the intent here is to provide information to rank and file, correct?


Mr. Kotch. Right.


Chairman Hoekstra. The litmus test needs to be whether this information is important to a rank and file member, and not the convenience of an IBM or IBT or anybody like that, is that correct?


Mr. Kotch. Or the Labor Department.


Chairman Hoekstra. Good. Thank you.

Does the information on an LM-2 adequately or accurately disclose the financial conditions and operations for a preceding fiscal year, or do we run into a problem because it is done on a cash basis?


Mr. Kotch. We don't think it is a problem. Certain information is carried forward in terms of the law requires the beginning and end of the year assets and liabilities. We don't think there is a problem with that.


Chairman Hoekstra. Between 1992 and 1997 the IBT had, according to LM-2 reports, total cash receipts and cash disbursements that ran a loss of $15-plus million for the 6-year period. At the same time, from January 1 of 1992 or on that date the net worth of the Teamsters was $156 million plus a little bit extra. In 1997 the net worth was $3 million.

Is there any inconsistency in those numbers that show an operating loss of only roughly $15 million, but a decrease in net worth of almost $153 million?


Mr. Kotch. I am not sure I can answer that. I think the reports we have looked at to date reflect the decrease in the net worth. I am not sure I can address the rest of your question.


Chairman Hoekstra. Okay.


Mrs. Mink?


Mrs. Mink. Thank you. I have no further questions, but following up on Mr. Norwood's inquiry about the details of various accounts, I just wanted the record to note that his questions about William Paterson, that the committee has had in its possession information supplied by the IBT consisting of all of his expense reports and check receipts and all of the justification.

All of these vouchers have been in boxes that have been in the possession of the committee for several months. As a matter of fact, Mr. Chairman, we have 12 boxes produced by the IBT, which are boxes with expense vouchers of all of these various individuals and activities of the IBT. So perhaps Mr. Norwood was not aware of its existence in our committee.


Chairman Hoekstra. Is the gentlewoman concluded?


Mrs. Mink. I am through.


Chairman Hoekstra. Mr. Norwood is very aware that we have all of those documents, and that we have received those from the IBT. I think Mr. Norwood's concern is that we have that information so we can ascertain the expenses as they relate to everyone within the IBT, but the rank and file don't. The rank and file don't know this kind of information, and the only way we get this information is by basically having to subpoena the information.

If the intent of the LM-2s and if the intent of the controls that somewhere have to be put in place into this system, which I would hope would be in the Labor Department, is to ensure that somebody is holding these organizations accountable for the accuracy and thoroughness of their information, then these documents, the documents that are provided and constantly out of the Labor Department, come up short. They are incomplete in the information and they are not timely. I think that is Mr. Norwood's concern.

If they are not timely, if they are not complete and they don't get into the specificity that you need, then rank and file union members or shareholders, I would guess, or employees of other organizations, are not protected.


Mrs. Mink. If the gentleman will yield, I think the point he makes with reference to the need for details is important. But I see no way that we can require unions or corporations to provide that kind of detail with respect to each individual expense item. That responsibility to be accountable to one's stockholders or fellow employees or union members resides in the officers of those corporations or entities.

I go back to my earlier statement I made yesterday, that the best way to assure protection of the members of the Teamsters Union is to get on with the business of having them elect new officers who will then be accountable, who can then disclose whatever it is needed to provide to these members.

The longer that we delay that election and that accountability between officers and members, the Congress cannot substitute for that element of accountability between member and officers. We cannot impose new restrictions of details in reporting.

These organizations have auditors, they have financial statements that they have to file, labor statements they have to file. It seems to me that if we want greater detail to the membership of any union, that is the responsibility of the elected officers. What we need to do now is to get on with the business of allowing the Teamsters to have their election, and for the new officers to step up to the plate and provide the information that the members seek. It seems to me that is the easiest solution.

Thank you.


Chairman Hoekstra. Having the last word, the best way to do it is we have to fix the Teamsters, yes, but the best way to do it is to take a look at the overall system of how we protect union members, how we protect shareholders, how we protect employees, which I think we do and you do through your organization under the pension plans, to make sure that the system is adequate and it works.

We, I think, in this case are finding that there may be some gaps in the system, because the one thing we don't ever want to have in place, and it will happen again, but I want to improve the system and put some corrections in, whatever they may be, so that no union or no corporate executive can ever again abuse their own rank and file members or the taxpayer in the way that the IBT has.

The committee is adjourned.

[Whereupon, at 2:12 p.m., the subcommittee was adjourned.]