[Senate Hearing 108-266]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-266

                UNION FINANCIAL REPORTING AND DISCLOSURE

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                     JULY 31, 2003--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                                 senate

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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
JUDD GREGG, New Hampshire            ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho                   DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
TED STEVENS, Alaska                  HERB KOHL, Wisconsin
MIKE DeWINE, Ohio                    PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama           MARY L. LANDRIEU, Louisiana
                           Professional Staff
                            Bettilou Taylor
                              Jim Sourwine
                              Mark Laisch
                         Sudip Shrikant Parikh
                             Candice Rogers
                        Ellen Murray (Minority)
                         Erik Fatemi (Minority)
                      Adrienne Hallett (Minority)

                         Administrative Support
                             Carole Geagley


                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Statement of Hon. Victoria A. Lipnic, Assistant Secretary for 
  Employment Standards, Department of Labor......................     1
    Prepared statement...........................................     4
Statement of Jonathan P. Hiatt, general counsel, AFL-CIO.........     8
    Prepared statement...........................................    10
Statement of Jay Cochran, Ph.D., research fellow, Mercatus 
  Center, George Mason University................................    17
    Prepared statement...........................................    30
Statement of Lynn Turner, director, Center for Quality Financial 
  Reporting, Colorado State University...........................    31
    Prepared statement...........................................    33
Questions submitted by Senator Patty Murray......................    45

 
                UNION FINANCIAL REPORTING AND DISCLOSURE

                              ----------                              


                        THURSDAY, JULY 31, 2003

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 3:47 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senators Specter, Craig, Harkin, and Murray.


               opening statement of senator arlen specter


    Senator Specter. We now turn to the issue of proposed 
revision of forms for union financial reporting to the Labor 
Department, and our first witness is Ms. Victoria Lipnic. She 
has served as Secretary of Labor for Employment Standards since 
March 2002, has a bachelor's degree in political science and 
history from Allegheny College, and a law degree from George 
Mason University School of Law. Thank you very much for joining 
us, Ms. Lipnic.
    Mr. Jonathan Hiatt and Ms. Jay Cochran, and Lynn Turner may 
all come to the panel table as well, if you would, please.
    We have the 5-minute rule, as I think you have heard, and 
we look forward to your testimony.

STATEMENT OF HON. VICTORIA A. LIPNIC, ASSISTANT 
            SECRETARY FOR EMPLOYMENT STANDARDS, 
            DEPARTMENT OF LABOR
    Ms. Lipnic. Thank you, Mr. Chairman. Mr. Chairman, Senator 
Harkin, members of the committee, I am pleased to appear before 
you today to discuss the Department of Labor's proposed 
revision of forms used by labor organizations to file the 
annual financial reports required under the Labor-Management 
Reporting and Disclosure Act of 1959, also known as the 
Landrum-Griffin Act.
    Mr. Chairman, I would ask that my longer written statement 
be submitted for the record, and I will briefly summarize my 
testimony in the time permitted.
    The Landrum-Griffin Act is one of a number of important 
statutes administered by the Department of Labor to safeguard 
the rights of workers. The LMRDA is administered by the Office 
of Labor-Management Standards at the department. The LMRDA was 
enacted in 1959 after congressional investigations into the 
labor and management fields found corruption, disregard for 
employee rights, breaches of trust, and other unethical 
behavior.
    The LMRDA is centered on three fundamental goals: promoting 
union democracy, providing fiscal transparency, and ensuring 
union financial integrity. We take very seriously our 
responsibility to enforce each of the important worker 
protection statutes administered by the Department and are not 
at liberty to treat any one of the statutes we enforce as less 
important than the other.
    A critical part of our enforcement strategy and indeed a 
central part of the LMRDA enforcement, as set out by Congress, 
is for union members to be able to engage in effective self-
governance. In order to do so, it is appropriate that there be 
some periodic review of the rules and regulations under the 
statute in order to ensure that they continue to fulfill the 
statutory goals and are relevant to the work force today.
    In setting out on this rulemaking, the Department asked 
three critical questions. First, are there any changes to the 
current reporting forms necessary in order to provide increased 
transparency and accountability for union members? Second, are 
there ways to take advantage of the technology that heretofore 
did not exist to facilitate providing some more meaningful 
information to union members? And third, will the changes 
regarding increased transparency and accountability benefit 
union members?
    We believe the answer to all three of these questions is 
yes. People who believe in strong unions, strongly committed to 
advancing members' welfare should want a strong Landrum-Griffin 
Act that brings union finances into the sunshine and ensures 
that union leaders are working for their members, not against 
them, by preying on union funds and members' dues.
    Title II of the LMRDA requires reports from unions, union 
officers, employees, employers, labor relations consultants, 
and surety companies.
    The Act grants broad authority to the Secretary to issue 
regulations prescribing the form of the reports required by the 
statute and other reasonable rules and regulations necessary to 
prevent the circumvention or evasion of the reporting 
requirements.
    Senators, Secretary Chao firmly believes that no entity 
should be allowed to shield its finances from its members. 
Unfortunately, OLMS' existing financial reporting forms, which 
were created nearly 40 years ago, have been substantially 
unchanged since then, and they have simply not kept pace with 
changes in financial practices. The existing forms utilize such 
broad, general categories that union management could easily 
use to hide overspending, financial mismanagement, and other 
irregularities from their members. It is impossible, for 
example, for union members to evaluate in any meaningful way 
the management of their unions when the financial disclosure 
reports filed with the Department include items like $7,800,000 
for civic organizations, or $62 million to grants for joint 
projects with State and local affiliates. Such aggregate 
entries make it virtually impossible for members to determine 
how their dues money was spent.
    In December 2002, the Department published a notice of 
proposed rulemaking to revise the form LM-2, the annual 
reporting form used by the largest unions, and to revise, 
although less significantly, Forms LM-3 and LM-4 which are used 
by smaller unions. The Department proposed these changes in 
order to ensure the continuing relevance of the reporting 
requirements of the LMRDA and to promote the overarching 
purposes of union reporting to fully inform union members about 
their union's financial condition and operations and to deter 
the abuse of stewardship duties by those union officials and 
employees who might otherwise be inclined to take advantage of 
their positions.
    The Act expressly requires that reports filed with the 
Secretary be made public. The public nature of the contents of 
these reports allows members and the public, in addition to the 
Department, an opportunity to review a union's financial 
information as a check on the actions of its officials. These 
purposes can only be served if the information that is reported 
is meaningful, and it follows that, as illustrated by the 
examples I gave earlier about the extraordinarily broad 
information being captured by the current LM-2 form, a certain 
level of detail is necessary to make it meaningful.
    Only unions with receipts of $200,000 or more per year and 
unions that are in trusteeship are required to use the form LM-
2. Accordingly, approximately 20 percent of all reporting 
unions, or approximately 5,500 unions out of approximately 
30,000, use form LM-2 reports. The new forms will provide union 
members, the Department, and other interested parties with more 
information about the financial conditions and operations of 
unions. The changes proposed include requiring LM-2 filers to 
file electronically using software that the Department will 
provide to the unions.
    The Department also proposed a new form, the T-1, on which 
a labor organization would report information about a trust or 
its interest in a trust.
    I would also add the Department proposed to make these 
changes effective for each union's fiscal year that begins 
after the final rule is published. Since unions do not have to 
file their annual reports until 90 days after the end of their 
fiscal year, this means that the earliest possible date a union 
would need to file a report under the new rule would be 15 
months after any final rule is published, and the Department 
specifically sought comment on the effective date.
    Mr. Chairman, the Department appreciates that this proposal 
has engendered serious comment and debate. In fact, we embarked 
on this rulemaking precisely to engage all sides in that 
debate. The comment period for this rule closed on March 27. 
During this time, the Department received more than 35,000 
comments. Although many of these comments expressed opposition 
to the Department's proposal to revise the forms, many other 
comments expressed support for the proposal. Many lengthy, 
substantive, and specific comments were received from local 
intermediate national and international labor organizations, 
employers and trade organizations, public interest groups, 
accountants, accounting firms, academicians, and Members of 
Congress. The Department is carefully reviewing all of the 
comments and will give all points of view careful 
consideration.

                           PREPARED STATEMENT

    I would be pleased to take your questions, but certainly 
note for the record that because we are in the midst of the 
rulemaking, we will consider all of the comments in the record 
before we decide any further steps.
    [The statement follows:]
                Prepared Statement of Victoria A. Lipnic
    Mr. Chairman and Members of the Subcommittee: I am pleased to 
appear before the Subcommittee today to discuss the Department of 
Labor's proposed revision of forms used by labor organizations to file 
the annual financial reports required under the Labor-Management 
Reporting and Disclosure Act of 1959 (LMRDA), also known as the 
Landrum-Griffin Act.
    The LMRDA was enacted in 1959 after congressional investigations 
into the labor and management fields found corruption, disregard for 
employee rights, breaches of trust, and other unethical behavior. The 
central message of the Landrum-Griffin Act is that financial 
transparency is critical to protecting workers. It establishes the 
basic ``right to know'' for union members.
    The Landrum-Griffin Act is one of a number of important statutes 
that have been passed over the years to safeguard the rights of 
workers. We have the Occupational Safety and Health Act to protect 
worker safety, the Fair Labor Standards Act to guarantee worker wages, 
the Employee Retirement Income Security Act to protect worker pensions, 
and the Landrum-Griffin Act to protect the rights of union workers. We 
take very seriously our responsibility to enforce each of these 
statutes. Congress passed each of these statutes in order to protect 
the rights of American workers, and the Department is not permitted to 
treat one of these statutes as less important than any other statute.
    People who believe in strong unions, strongly committed to 
advancing members' welfare, should want a strong Landrum-Griffin Act 
that brings union finances out into the sunshine and ensures that union 
leaders are working for their members, not against them by preying on 
union funds and member dues. As AFL-CIO President George Meany noted at 
the time, ``if the powers conferred [in the Landrum-Griffin Act] are 
vigorously and properly used, the reporting requirements will make a 
major contribution towards the elimination of corruption and 
questionable practices.''
    The LMRDA is centered on three fundamental goals--promoting union 
democracy, providing fiscal transparency and ensuring union financial 
integrity.
    The Employment Standards Administration's Office of Labor-
Management Standards (OLMS) administers and enforces the provisions of 
the LMRDA that are within the jurisdiction of the Department of Labor. 
These include civil and criminal provisions that provide standards for 
achieving the goals of the statute. OLMS also administers and enforces 
provisions of the Civil Service Reform Act of 1978 and the Foreign 
Service Act of 1980, which apply similar standards to Federal sector 
unions.
    Title II of the LMRDA (the Act) requires reports from unions, union 
officers and employees, employers, labor relations consultants, and 
surety companies. The Department of Labor has authority to enforce 
these reporting requirements, and the Act provides for the public 
disclosure of the reports. In addition, union members have the right to 
examine the underlying union financial records in order to verify the 
reports filed pursuant to the Act, but can enforce that right only by 
demonstrating just cause in Federal court. However, a member can obtain 
neither the records, nor attorney fees, if the court does not agree 
that just cause has been demonstrated.
    The LMRDA requires each labor organization to include in its annual 
financial report the following information:
    (1) assets and liabilities at the beginning and end of the fiscal 
year;
    (2) receipts and their sources;
    (3) payments to officers and employees;
    (4) loans over $250 to officers, employees, or members, along with 
an explanation for each loan;
    (5) loans to businesses, along with an explanation for each loan; 
and
    (6) other payments made, along with explanations, in categories the 
Secretary of Labor designates.----29 U.S.C.  431(b).
    In addition to the annual union financial report, the Act requires 
officers and employees of covered labor organizations, as well as 
employers and labor consultants to report other information 
periodically. The Act grants broad authority to the Secretary to issue 
regulations prescribing the form of the reports required by the statute 
and other reasonable rules and regulations ``necessary to prevent the 
circumvention or evasion of [the] reporting requirements.''
  the department's proposal to revise form lm-2 and create a form t-1
    Secretary Chao firmly believes that no entity should be allowed to 
shield its finances from its shareholders. Unfortunately, OLMS' 
existing financial reporting forms, which were created 40 years ago and 
have been substantially unchanged since then, simply have not kept pace 
with changes in financial practices. The existing forms utilize such 
broad, general categories that union leaders could easily use them to 
hide overspending, financial mismanagement, and other irregularities 
from their members. It is impossible, for example, for union members to 
evaluate in any meaningful way the management of their unions when the 
financial disclosure reports filed with DOL include items like 
$7,805,827 for ``Civic Organizations,'' $62,028,329 for ``Grants to 
Joint Projects with State and Local Affiliates,'' or $7,863,527 for 
``Political Education.'' Such aggregate entries make it virtually 
impossible for members to determine how their dues money was spent.
    In December 2002, the Department published a Notice of Proposed 
Rulemaking to revise Form LM-2, the annual reporting form used by the 
largest unions, and to revise, although less significantly, Forms LM-3 
and LM-4, which are used by smaller unions. The Department proposed 
these changes in order to ensure the continuing relevance of the 
reporting requirements of the LMRDA and to promote the overarching 
purposes of union reporting: to fully inform union members about their 
union's ``financial condition and operations,'' and to deter the abuse 
of stewardship duties by those union officials and employees who might 
otherwise be inclined to take advantage of their positions. The form 
that is currently used by the largest labor unions to file their annual 
reports has not been significantly changed in 40 years and provides 
only general information that is of limited use to union members. The 
Department's proposal is an attempt to ensure that union members are 
provided with information that is relevant today and will enable them 
to play a meaningful role in the governance of their unions.
    The Act expressly requires that reports filed with the Secretary be 
made public. The public nature of the contents of these reports allows 
members and the public, in addition to the Department, an opportunity 
to review a union's financial information as a check on the actions of 
its officials and employees. These purposes can only be served if the 
information that is reported is meaningful and a certain level of 
detail is necessary to make it meaningful.
    Only unions with receipts of $200,000 or more per year and unions 
that are in trusteeship are required to use the Form LM-2. Accordingly, 
approximately 20 percent of all reporting unions (or approximately 
5,500 unions out of approximately 30,000 unions) use Form LM-2 reports. 
The new forms will provide union members, the Department, and other 
interested parties with more information about the financial activities 
of unions. The changes proposed include requiring Form LM-2 filers to 
file electronically using software the Department will provide to labor 
organizations. The proposed revision also requires information about 
accounts payable and receivable that are more than 90 days overdue at 
the end of the reporting period, changes the minimum amounts for 
reporting the value of certain investments from $1,000 and 20 percent 
of the total value to $5,000 and 5 percent respectively, requires 
unions to estimate the percentage of time that its officers and 
employees spend on various duties and to allocate that time in 
relationship to the union's payments for those duties, requires 
information about different categories of union membership and the 
number of members in each category instead of simply reporting the 
total number of members, and requires labor organizations to provide 
specific information about certain major receipts and major 
disbursements in several categories.
    The proposed revised Form LM-2 would require itemization of the 
following receipts and disbursements categories:
  --Other Receipts (Schedule 14)
  --Contract Negotiation and Administration (Schedule 15)
  --Organizing (Schedule 16)
  --Political Activities (Schedule 17)
  --Lobbying (Schedule 18)
  --Contributions, Gifts, and Grants (Schedule 19)
  --Benefits (Schedule 20)
  --General Overhead (Schedule 21)
  --Other Disbursements (Schedule 22)
    However, the proposed Form LM-2 does not require itemization or a 
supporting schedule of any type for the following receipts and 
disbursements categories:
  --Dues and Other Payments (Receipts)
  --Per Capita Tax (Receipts)
  --Fees, Fines, Assessments, Work Permits (Receipts)
  --Sale of Supplies (Receipts)
  --Interest (Receipts)
  --Dividends (Receipts)
  --Rents (Receipts)
  --On Behalf of Affiliates for Transmittal to Them (Receipts)
  --From Members for Disbursement on Their Behalf (Receipts)
  --Per Capita Tax (Disbursements)
  --Strike Benefits (Disbursements)
  --Fees, Fines, Assessments, etc. (Disbursements)
  --Supplies for Resale (Disbursements)
  --To Affiliates of Funds Collected on Their Behalf (Disbursements)
  --On Behalf of Individual Members (Disbursements)
    Many of the categories in the proposed revised form are the same 
ones that are in the existing form. The Department proposed to drop 
seven categories from the current form (on Statement B the following 
categories were eliminated--To Officers; To Employees; Office and 
Administrative Expense; Educational and Publicity Expense; Professional 
Fees; Direct Taxes and Withholding Taxes) and to add six categories 
that are not on the current form (Contract Negotiation and 
Administration; Organizing; Political Activities; Lobbying; General 
Overhead; and Strike Benefits).
    The Department also proposed a new form, the T-1, on which a labor 
organization would report information about its interest in a trust or 
other fund established or governed by the labor organization primarily 
for the benefit of its members. The LMRDA specifically authorizes the 
Secretary to issue rules requiring ``reports concerning trusts in which 
a labor organization is interested,'' which the statute defines as:

``. . . a trust or other fund or organization (1) which was created or 
established by a labor organization, or one or more of the trustees or 
one or more members of the governing body of which is selected or 
appointed by a labor organization, and (2) a primary purpose of which 
is to provide benefits for the members of such labor organization or 
their beneficiaries.''----29 U.S.C.  402(l).

    In the past, the current LM-2 form has required unions to simply 
disclose whether they have created or participated in the 
administration of a trust. If so, the unions are required to disclose 
the name, address, and purpose of each trust and to disclose the file 
number for reports filed under the Employee Retirement Income Security 
Act, if applicable. The current form has also required a union to 
report in full about the financial transactions of wholly owned, 
controlled and financed subsidiaries. Subsidiaries that meet this test 
are, in effect, no different from the union itself. Many unions, 
however, engage in extensive financial dealings with trusts that meet 
the statutory definition of a trust in which a union is interested but 
do not meet the Form LM-2 subsidiary definition. For example, a trust 
may have several participating unions, or be jointly controlled by a 
union and an employer, or may have several ``owners'' as in the case of 
a member-owned credit union. The current Form LM-2 does not require a 
union to report any information about such a trust--other than its 
existence, name, address, purpose, and the file number for reports 
filed under the Employee Retirement Income Security Act, if there is 
one--even though a very significant amount of union dues may be spent 
through such a fund. Because these transactions are unreported, the 
purpose of the reporting requirements of the LMRDA can be easily 
circumvented. In a sense, expenditures made by a trust on the union's 
behalf are simply off the books, even though the original source of the 
funding may be members' dues or funds contributed by employers pursuant 
to union negotiated agreements. The Department proposed to eliminate 
this means of evading the reporting requirements of the statute and to 
require unions to provide significantly more information about such 
trusts than previously available.
    The Department proposed to make these changes effective for each 
union's fiscal year that begins after the final rule is published. 
Since unions do not have to file their annual reports until 90 days 
after the end of their fiscal year, this means that the earliest 
possible date a union would need to file a report under the new rule 
would be fifteen months after the final rule is published. The 
Department specifically asked for comments on the effective date.
    The Department also specifically requested comments on many aspects 
of its proposal. Recognizing that it did not have as much information 
about the way unions keep accounts as unions themselves and recognizing 
that it was important to hear from union members, as well as unions, 
regarding the assumptions underlying the proposal, the Department 
requested comments on such issues as the appropriate threshold for 
filing a Form LM-2, the appropriate level for itemizing certain 
receipts and disbursements, whether the statutory definition of a trust 
should be used to require reports regarding financial transactions of 
such entities, and whether these requirements are unduly burdensome. 
The Department also recognized that certain financial information, 
while important to union members, might result in harm to union 
interests if disclosed publicly. Accordingly, the Department proposed 
that information regarding disbursements for organizing not include the 
name of the employer or bargaining unit involved. The Department also 
sought specific comments as to whether this measure was sufficient to 
protect legitimate union interests while providing an important measure 
of transparency.

                           COMMENTS RECEIVED

    The comment period for this rule, including a 30-day extension, was 
open from December 27, 2002, to March 27, 2003. During this time, the 
Department received over 35,000 comments. Although many of these 
comments expressed opposition to the Department's proposal to revise 
the forms, many other comments expressed support for the proposal. Many 
lengthy, substantive, and specific comments were received from local, 
intermediate, national and international labor organizations, employers 
and trade organizations, public interest groups, accountants, 
accounting firms, academicians and Members of Congress.
    The Department is carefully reviewing all of the comments and will 
give all points of view careful consideration. Many union members 
expressed support for the proposed rule and suggested that it was 
``long overdue.'' Some union members and other commenters advocated 
even more sweeping change. Some comments from union members centered on 
their personal difficulties in obtaining financial information from 
their unions, describing fruitless attempts to obtain information about 
union finances from the union leadership. Other union members supported 
the initiative as a means of deterring fraud by union leaders; one 
said, ``It will be a great victory for [the union's] membership when 
the reform is passed.''
    Many commenters opposed the proposed changes, believing that the 
changes will hamper the ability of unions to service their members and 
strain union budgets. Many commented that the proposed rule was 
burdensome and argued that the detail that would be required of unions 
was greater than that required of corporations. Other commenters argued 
that the requirements proposed do not comport with Generally Accepted 
Accounting Principles (GAAP) and are beyond the Secretary's authority. 
Union commenters have argued that requiring unions to report 
identifying information about those who receive disbursements for 
organizing activities could reveal union organizing strategies and 
place individuals at risk or that other itemized disclosures could 
result in an invasion of privacy for individuals reimbursed for medical 
fees or burial expenses.
    Some commenters have expressed concern that the changes were 
intended to expand Beck requirements to appease anti-union 
organizations and to provide more information to employers and anti-
union organizations. Many comments were received on the proposal to 
revise the information to be reported by unions about disbursements to 
officers and employees and to require unions to report, by estimation 
to the nearest 10 percent, how these individuals spent their working 
time. Unions objected to this proposal as disruptive, intrusive, 
burdensome, and expensive. The Department is currently reviewing all of 
the comments and takes all of these concerns very seriously.
    Some commenters have compared the Department's current proposal to 
an earlier attempt by the Department to revise the LM-2 form to require 
``functional reporting'' by unions. The Department's current rulemaking 
is very different from the rule published by the Department in 1992, 
revising the form. The Department rescinded most of this rule at the 
end of 1993, but retained the Form LM-4 for the smallest unions, as 
well as the increased threshold for filing Forms LM-2 and 3. These two 
elements of the 1992 rule remain today. The 1993 rule rescinding the 
1992 revisions also left in place, and the current Form LM-2 includes, 
the requirement that labor organizations report all disbursements 
during the reporting period in certain defined categories. It 
rescinded, however, the requirement for a second allocation of the same 
disbursements into additional categories reflecting only functional 
activities.

                       TECHNOLOGICAL DEVELOPMENTS

    Significant improvements in accounting software since 1993 make it 
possible to change the Form LM-2 in ways that will provide additional 
useful information to union members and the public without unduly 
burdening unions. Most importantly, the current proposal takes 
advantage of technology developed over the last 10 years that 
simplifies maintaining, reporting and accessing the required financial 
information. Computers and financial management programs have become 
much more widely used. Internet access is more commonly available and 
the benefit of making information available over the Internet has been 
generally, and Congressionally, recognized. These changes make it 
possible to provide substantially more information to union members and 
the public with less burden on unions than the changes considered in 
1992 would have imposed at that time.
    The Department is providing technical specifications and electronic 
software to greatly ease the process of functional reporting and 
facilitate the use of the new LM-2 generally. The Department will also 
provide extensive compliance assistance to unions and is planning 
briefings, workshops, a help desk and toll-free telephone assistance. 
Helpful information will be made available to unions through mass 
mailings, a list-serve email system, and on the Department's website.
    Beginning in 1997, at the request of Congress, the Department has 
pursued a course towards the development and implementation of 
electronic filing of annual reports required by the LMRDA, along with 
an indexed and easily searchable computer database of the information 
submitted, accessible by the public over the Internet. In January 2002, 
the Department began distributing to labor organizations a free CD-ROM 
containing a computer software program that they can use to 
electronically complete the annual financial reports they currently are 
required to file. Those reports can now be submitted over the Internet. 
Further, these annual reports, as well as the reports of employers and 
labor relations consultants, now are available for public disclosure on 
the Internet. All of these reports for the year 2000 and later can now 
be examined from any computer with access to the Internet and printed 
free of charge. The proposed rule's requirement that all Form LM-2s be 
filed electronically, with an exception for situations where it would 
impose real hardship, will greatly facilitate the Department's efforts 
to maintain such access, as Congress has repeatedly directed us to do. 
The Department is pleased to have the technological capability to 
assist unions with their reporting requirements, as we attempt to 
improve labor accountability and protect union members and the public.
    Mr. Chairman, the Department appreciates that this proposal has 
engendered serious comment and debate. In fact, the Department embarked 
on this rulemaking precisely to engage all sides in that debate. I 
would be pleased to take your questions, but must note for the record 
that the Department is in the midst of the rulemaking and must 
carefully consider the entire record before deciding on any next steps.
    Thank you for giving me the opportunity to discuss these important 
reporting changes. I would be pleased to answer your questions.

STATEMENT OF JONATHAN P. HIATT, GENERAL COUNSEL, AFL-
            CIO
    Senator Specter. Thank you very much, Ms. Lipnic. We now 
turn to Mr. Jonathan Hiatt, General Counsel of AFL-CIO since 
November 1995, a graduate of Boult Hall School of Law, UCal and 
Harvard College. Thank you for joining us, Mr. Hiatt, and the 
floor is yours.
    Mr. Hiatt. Thank you very much, Senator Specter, Senator 
Harkin, and members of the subcommittee.
    We filed written testimony describing our major concerns. 
So for now, I would simply like to emphasize three key points 
that go to the heart of our opposition and illustrate the 
proposal's fundamental flaws.
    I would stress at the outset that we do not take issue in 
any way with the underlying principles of the LMRDA that Ms. 
Lipnic alludes to or are supportive of union democracy or the 
general principles underlying the importance of sunshine and 
transparency.
    The first of our key concerns, however, with this proposal 
involve the enormous financial burdens that this proposal would 
impose upon unions. The second involves a comparison of these 
requirements that the Labor Department seeks to impose on 
unions, in contrast to the financial reporting obligations that 
pertain to virtually all other profit and nonprofit 
organizations. And the third involves the Department's stated 
goals of transparency in deterring fraud and embezzlement and 
the plain fact that this proposal would be entirely ineffective 
in achieving these goals.
    A Department that has publicly deplored imposing regulatory 
burdens of any kind on employers has here proposed sweeping new 
requirements in union reporting and record keeping that have 
not been deemed necessary for some 45 years. There are some 16 
major proposed changes, but probably the single most onerous 
would be the requirement that unions itemize every disbursement 
to a single entity that in their aggregate reach a threshold 
proposed to be in the range of $2,000 to $5,000 and then to 
allocate the costs to one of eight very rigid functional 
categories without any regard to the specific programs that any 
one particular union is engaged in.
    Just to give you an example, if a union receives bills 
during the course of a year from a certain printer, each bill 
may be totaling $200, $250, the fact that those bills by the 
end of the year may total $2,000 to $5,000 means that the union 
would have to keep track of every bill, would have to record 
information concerning the vendor, the date, the address, the 
cost, the purpose of that particular job, the description of 
it, and that would all have to be allocated by category. Some 
of that bill may have gone to work done for an organizing 
campaign, some in connection with a training conference, some 
in connection with negotiations. It would all have to be broken 
down, that one bill, into many, many transactions because of 
the possibility that by the end of the year that printer would 
have been paid a total of $2,000 to $5,000 or more.
    In addition to the substantive changes that will be 
required, unions will have to file their LM reports 
electronically with software that the Department has promised 
to provide, as Ms. Lipnic says, but which does not yet even 
exist.
    The revisions would apply to all covered unions with annual 
receipts of at least $200,000. That is a total of 5,426 unions, 
of which only 141 are national unions. So the rest, some 97 
percent, are local unions. For the most part, these are small 
volunteer organizations whose officers hold full-time jobs and 
also run the local. Their resources are limited as is their 
wherewithal to fill out complex and time-consuming forms. They 
do not have a bevy of paid staff. Some have none. They do not 
have sophisticated computer equipment or consultants to help 
them to do their jobs. Yet, the Department proposes to saddle 
them with unsurpassed record keeping and reporting obligations.
    DOL estimated that the average burden per union for the 
revised form after the first year would be just a few hundred 
dollars per union, or a total cost for all unions of somewhere 
between $2 million and $3 million per year. These figures so 
thoroughly underestimate the burden on the regulated entities 
as to defy logic and common sense. And they know it. And I say 
they know it because the Department admits that they had no 
data on which to base these numbers, so that the numbers amount 
to nothing more than guesswork. They conceded in the Federal 
Register that it would be incumbent upon the unions, responding 
in their comments, to provide the information concerning the 
actual burden costs.
    The one empirical study that has now been performed based 
on a survey of national local unions shows that the average 
cost to national unions would be over $1 million a year and to 
local unions over $217,000. In other words, the total cost for 
all unions, varying based on what methodology is used and 
whether you use average or median costs of the samples 
involved, range from $300 million to $1.1 billion. Compare that 
to the Department's $2 million to $3 million range. It is as if 
DOL would simply ignore the fact that to comply with its 
proposal, unions will have to classify, identify, and describe 
virtually every expenditure by functional category, assign 
staff and officer time by functional category, train and 
allocate additional time for staff and officers to keep records 
that meet the new requirements, adapt existing hardware and 
software to fulfill the new requirements, and pay for 
sufficient computer and accounting expertise.
    I will let the next witness speak to the second point about 
relative inequity because I understand that former SEC Chief 
Accountant Lynn Turner will be describing the differences that 
are imposed on corporations compared to that that this proposal 
would impose on unions. But the key point there is at least the 
SEC understands that disclosure of information and financial 
reporting is based on what is material information, what is 
looked at as material information under the generally accepted 
accounting principles which govern both for-profit and not-for-
profit entities.
    Here the Department would be requiring every single 
transaction regardless of how minute, how detailed, and how 
unimportant that particular transaction is to the overall 
financial stability of the organization.
    Finally, the Department's own deterrence claim is 
completely unsupported. There is simply nothing in the 
accounting literature to support the notion that itemization 
deters corruption. Instead, the literature makes plain that 
verification of the reliability of financial statements is 
provided through the well-established system of outside 
auditing by highly trained professionals who know how to verify 
that allocations are properly made and that organizations have 
adequate internal controls to ensure that corruption cannot 
take root.

                           PREPARED STATEMENT

    That takes me to my conclusion. The AFL-CIO and our 
affiliates, while we support disclosure that provides 
meaningful and useful financial information to union members in 
aid of union democracy and fiscal accountability, we have 
indicated our willingness to work with the Department to 
explore a requirement that LM-2 filers would undergo an 
independent audit each year by a certified public accountant, 
tailored to their size and resources, that would potentially 
provide much more meaningful information to union members and 
provide a much truer test of the integrity of their union's 
financial accounting systems. But in the meantime, we would 
certainly hope you would urge the Department to withdraw this 
proposal.
    Thank you.
    [The statement follows:]

                Prepared Statement of Jonathan P. Hiatt

                              INTRODUCTION

    Thank you, Mr. Chairman, for the opportunity to testify today 
before this subcommittee on the Department of Labor's proposal to 
revise union financial reporting requirements under the Labor 
Management Reporting and Disclosure Act. This is an issue of tremendous 
significance for the labor movement.
    As you know, the AFL-CIO and its affiliated unions oppose the 
Department's proposal. Today I want to emphasize three points that 
underlie our opposition and illustrate the proposal's fundamental 
flaws. First, the proposal will impose enormous--and in many cases 
insuperable--financial burdens on unions. Second, the proposal violates 
basic principles of fairness, as no other organizations, whether 
profit-making or non-profit, bear such onerous financial reporting 
obligations as the Department seeks to impose on unions. Third--
although not least important--the Department's proposal will be 
entirely ineffective in achieving its purported goals of transparency 
and deterring fraud and embezzlement. For all of these reasons, the 
proposal lacks any justification.
    Before I address each of these issues, I want to reiterate that the 
AFL-CIO and its affiliates deplore the misuse of union members' dues 
wherever and whenever it occurs. There is no contradiction, however, 
between our staunch opposition to fraud and embezzlement and our 
equally staunch opposition to the Department of Labor's proposal. On 
the contrary, precisely because of our commitment to union financial 
integrity we oppose rules that would divert union members' dues from 
their intended purpose of providing strong and effective workplace 
representation and redirect them into costly, time-consuming, and 
irrational reporting.

                  STATUTORY AND REGULATORY BACKGROUND

    Congress passed the LMRDA in 1959. Expressing support for the Act, 
George Meany stated in his testimony before the House Labor Committee, 
``if the powers conferred [in the LMRDA] are vigorously and properly 
used, the reporting requirements will make a major contribution towards 
the elimination of corruption and questionable practices.'' These 
powers conferred on the Department of Labor by the LMRDA include not 
only reporting requirements for labor organizations, but also reporting 
requirements for employers and their consultants. This is because 
Congress, as early as 1959, was also concerned with the growing 
practice of so-called management consultants who were hired by 
employers to threaten and intimidate workers who attempted to exercise 
their rights under the National Labor Relations Act to choose a union. 
Thus, Section 203(b) of the LMRDA requires management consultants to 
file a report with the Department of Labor if they have been hired by 
an employer ``to persuade employees to exercise or not to exercise, or 
persuade employees as to the manner or exercising, the right to 
organize and bargain collectively through representatives of their own 
choosing.'' (29 U.S.C.  433(b)). And, that same section of the LMRDA 
requires employers also to file a report with the Department 
documenting that they have hired such a consultant. (29 U.S.C.  
433(c)).
    I know that we are not here to discuss these ``persuader reports'' 
and their employer counterparts. However, this Subcommittee cannot 
fully evaluate the impact of the changes proposed by the Department to 
union financial reports without taking notice of the fact that 
virtually no employer and consultant reporting takes place under the 
Act at present. This is so because the Administration has interpreted 
the relevant statutory provisions to mean that unless a management 
consultant has face-to-face contact with workers, that consultant has 
no obligation whatsoever to file a persuader report, even though the 
consultant plans, scripts, and directs a virulent union-busting 
campaign on behalf of the employer. In fact, in one of the first 
official acts of the Bush Administration, the Labor Department 
rescinded an interpretation of this requirement by the Clinton 
Administration that would have required management consultants to file 
reports regardless of whether they operated behind the scenes or in 
person to persuade employees not to vote for a union.
    Thus, while Congress made it clear that ``[g]reat care should be 
taken not to . . . weaken unions in their role as collective bargaining 
agents'' through enforcement of the Act (S. Rep. No. 187, 86th Cong., 
1st Sess. 1959), this is precisely the situation we face today. At the 
same time as the Department has abandoned its enforcement 
responsibilities with respect to employers and unionbusting 
consultants, it intends to saddle unions with unprecedented and 
unjustified burdens.
    I also want to emphasize how much unions already have to disclose 
under the LMRDA. Under Section 201(b), each covered labor organization 
must file annual financial reports with the Department of Labor setting 
forth information in six categories ``in such detail as may be 
necessary accurately to disclose its financial condition and operations 
for its preceding year . . .'' (29 U.S.C.  431(b)). The LMRDA also 
requires unions to make those reports available to their members. In 
addition, the statute goes one step further, however, and requires 
unions to ``permit . . . [their] member[s] for just cause to examine 
any books, records, and accounts necessary to verify such report,'' and 
union members can enforce this right in federal court.----29 U.S.C.  
431(c).
    In practice, unions do not require their members to prove ``just 
cause'' in order to inspect the books and records. Rather, they make 
those materials freely available to members upon request. As democratic 
institutions, unions at the local level hold monthly membership 
meetings where, typically, the treasurer of the local provides a 
financial report and is available to answer questions about the union's 
treasury. International unions almost universally conduct annual audits 
by independent certified public accountants. These audits are often 
published in the union's newsletter or otherwise made available to the 
entire membership.

                        SUMMARY OF THE PROPOSAL

    Despite the breadth of the current statutory and regulatory 
schemes, the Department has proposed sweeping changes in union 
reporting and recordkeeping requirements. These proposed revisions 
apply to all unions with annual receipts of at least $200,000 that file 
form LM-2 under the LMRDA. These changes include:
    Itemization.--Unions must itemize every disbursement to a single 
entity/person that reaches a threshold (proposed in the range of $2,000 
to $5,000), and allocate the cost to one of 8 functional categories 
(schedules), including contract negotiation and administration; 
organizing; politics; lobbying; and general overhead.
    Aging Accounts.--Unions must itemize accounts payable/receivable 
over $1000 according to how many days they are past due.
    Allocation of Officer/Employee Time & Salary.--Unions must estimate 
to nearest 10 percent all officer time and allocate it to the 8 
functional categories, along with salary and withholdings; same for 
employees who receive at least $10,000 per year.
    Dues Itemization.--Unions must categorize membership, dues, and per 
capita tax by membership categories that include agency fee payers.
    Trusts.--Unions (even if they do not file LM-2) must file a new T-1 
report for ``trusts''--entities in which they appoint at least one 
trustee/person on the governing body; that have a primary purpose to 
provide benefits to the union's members; that have receipts of at least 
$200,000 per year; and to which the union has contributed or has had a 
contribution made on its behalf of at least $10,000. This substitutes 
for and is broader than current ``subsidiary'' reports. Trusts may 
include credit unions, joint funds under a collective bargaining 
agreement, building funds, education or training institutions, 
redevelopment or investment funds (unless trust files certain other 
reports).
    Intermediate bodies.--Conferences, joint committees, joint or 
system boards, or joint councils not currently covered by the reporting 
requirements must file if subordinate to a labor organization that is 
covered under the LMRDA.
    Electronic filing.--Unions must file their LM-2 reports 
electronically with software that the Department has promised to 
provide, but which does not yet exist. Many smaller LM-2 filers file 
manually and will have to invest in electronic systems to comply. Those 
unions that keep their records electronically will also face huge costs 
since they will have to adapt their systems to the new LM requirements. 
Compliance will generate ongoing costs as well.

      THE DEPARTMENT'S PROPOSAL IMPOSES AN UNTOLD BURDEN ON UNIONS

    No factor may be more critical in determining whether this proposal 
should become a final rule than the burden it would impose on the 
regulated unions. As you know, the proposal to revise what is known as 
the ``LM-2'' form affects all unions with annual receipts of at least 
$200,000. According to the Department itself, 5,426 unions filed LM-2's 
in 2000. Only 141 of these unions were national or international 
bodies. This means that almost 5,300 LM-2 filers--a figure that 
represents 97 percent of all such filers--are local unions. For the 
most part, these are small, volunteer organizations whose officers hold 
full-time jobs and also run the local. According to the Small Business 
Administration, they are all small businesses (67 Fed. Reg. at 79290), 
not, as the Department asserts, entities that ``resemble modern 
corporations in their structure, scope and complexity.'' (Id. at 
79280). Their financial resources are limited, as is their wherewithal 
to fill out complex and time-consuming forms. They do not have a bevy 
of paid staff, sophisticated computer equipment, or consultants to help 
them do their jobs. Nonetheless, the Department proposes to saddle them 
with unsurpassed recordkeeping and reporting burdens.
    According to the Department's Paperwork Reduction Act analysis, the 
average reporting burden per union for the revised form LM-2 will be 
104.03 hours in the first year, 24.96 hours in the second year, and 
21.81 hours in the third year. 67 Fed. Reg. at 79297. For each of these 
years the Department estimates that unions will experience only one 
hour of recordkeeping burden. Id. at 79296, 79297. The Department 
estimates total annual cost to LM-2 filers in the first three years as 
$14.618 million, $3.281 million, and $2.867 million, respectively. Id. 
at 79293. These figures so thoroughly underestimate the burden on the 
regulated entities as to defy both logic and common sense.
    Why are the Department's burden estimates so inherently unreliable? 
This is because the Department has no data on which to base these 
numbers, so the numbers amount to nothing more than guesswork. Let me 
briefly list just some of the material gaps in the Department's 
knowledge to show that DOL could not possibly have performed a 
meaningful burden analysis or arrived at a credible burden estimate:
  --The Department concedes at the outset of its proposal that 
        ``[i]nformation regarding the burden imposed by making the 
        proposed changes . . . is most likely to be obtained by 
        proposing the changes for comment so that unions . . . can 
        express their views.'' (67 Fed. Reg. at 79282);
  --The Department has not yet designed, developed, or tested the 
        software it will require unions to use when submitting their 
        revised financial reports that it claims will minimize the 
        unions' burden of complying with the proposal. 67 Fed. Reg. at 
        79282);
  --The Department admits that ``no specific data exists regarding the 
        extent to which unions have already embraced the technology 
        necessary to provide reports in electronic form.'' (67 Fed. 
        Reg. at 79282);
  --The Department assumes, without further inquiry, that unions 
        maintain their records in precisely the way that the proposal 
        seeks to capture the information. (67 Fed. Reg. at 79288);
  --When the AFL-CIO asked for all records underlying the specific time 
        and dollar estimates set forth in the proposal, the Department 
        asserted that ``no identifiable records'' exist.
    We responded to the Department's invitation to come up with our own 
burden estimate by hiring an economist and performing our own survey, a 
copy of which I have attached to my testimony. This is the only 
empirical study of the burden to unions that would be imposed by the 
Department's proposal. The survey identified 16 significant actions 
that unions would need to take in order to comply with the proposal, 
such as maintaining new records and charts of account, adapting 
existing hardware and software, and obtaining sufficient accounting, 
computer, and legal expertise on an ongoing basis. Each responding 
union was asked first to rank the difficulty of complying with a given 
change and then to estimate the cost of compliance with that change. In 
nearly every instance, a union's chief financial officer, comptroller, 
or secretary-treasurer completed the survey. Most of these individuals 
have many years of experience filing the LM-2, and they drew upon this 
experience in estimating the likely cost of the Department's proposed 
changes.
    In our comments to the Department of Labor we have asserted that 
the total cost of complying with the revised financial reporting 
requirements is anywhere from $309 million to $1.1 billion. As the 
following discussion reveals, these numbers are derived from our study, 
and vary according to the way in which the data is aggregated.
    Our survey reveals that the average cost to national/international 
unions of complying with the 16 changes is $1,239,482. The average cost 
to local unions of complying with the 16 changes is $217,509. Median 
estimates are $422,700 for national/international unions and $138,000 
for locals.
    These data on average and median cost per national/international 
and local union were then utilized to develop an overall burden 
estimate for unions affiliated with the AFL-CIO. Using the average per 
union figures above, the total burden estimate for national/
international unions is $80,566,330. For local unions, the total burden 
estimate is $1,078,627,131. The combined total is $1,159,193,461 (which 
represents the high end of our estimate). Using the Department of 
Labor's e.LORS database, Professor John Lund of the University of 
Wisconsin performed an analysis of LM-2 filers nationwide and developed 
a distribution of LM-2 filers by nine levels of revenue. Unions that 
responded to the 2003 AFL-CIO survey were then similarly distributed by 
level of revenue, and average and median burdens were calculated in 
each category. Using this methodology, the total average cost to unions 
across revenue tiers is $552,249,334, while the total median cost to 
unions across revenue tiers is $309,175,462 (which represents the low 
end of our estimate).
    As you can see, these estimates are radically different from those 
that the Department came up with. But, as I have already stated, they 
are the only estimates based on legitimate, empirical data about the 
regulated community and they make a mockery of the Department's 
miniscule figures. Among the most costly aspects of complying with the 
proposal are the recordkeeping changes that would have to occur in 
order to classify, identify, and describe expenses by functional 
category; to assign staff and officer time by functional category; to 
train and allocate additional time for staff and officers to keep 
records that meet the new requirements; to adapt existing hardware and 
software to fulfill the new requirements, and to pay for sufficient 
computer, accounting, and legal expertise. Each of these changes will 
impose substantial costs on both local and national/international 
unions.
    One of the most significant facts that these numbers reveal is that 
local unions will bear a disproportionate financial burden under the 
proposal. As noted above, at least 97 percent of all LM-2 filers are 
local unions, some with revenues of as little as $200,000 per year. In 
fact, a study by Professor John Lund at the University of Wisconsin 
School for Workers showed that almost 40 percent of all LM-2 filers 
have annual revenues of less than half a million dollars. Yet the 
average cost of compliance for local unions is over $217,000.
    What could possibly justify such a crushing burden? The practical 
implications are staggering. Imagine the local union that cannot 
process meritorious grievances to arbitration because it must spend the 
hard-earned dues money of its members on tracking each and every 
expense according to the Department's idiosyncratic accounting 
requirements. Imagine the local that cannot effectively conduct 
contract negotiations or engage in standard grievance handling because 
those costs have been trumped by LM-2 compliance? Imagine the union 
that cannot train its stewards in effective representation because 
government reporting costs have sapped the local's treasury. What 
better way to hobble thousands of local unions than by moving forward 
with a rule that prevents them from fulfilling their statutory 
responsibilities to their members in the name of democracy and 
transparency?
    Interestingly, in response to an AFL-CIO Freedom of Information Act 
request to the Department, we received a copy of a February 1992 
memorandum to then-Secretary of Labor Lynn Martin from then-Congressman 
Newt Gingrich, urging the Department to implement similar (though less 
onerous) changes to the LM reporting requirements. According to 
Representative Gingrich, such changes would ``weaken our opponents and 
encourage our allies.'' How ironic that in launching such an attack on 
unions, those who support such changes in the LM reporting requirements 
would so easily sacrifice employees' rights to effective representation 
at the workplace.
 the department's proposal violates principles of fundamental fairness
    This leads me to my second point. Federal securities law does not 
subject the business community to a financial reporting regime nearly 
as onerous or costly as the one proposed by the Department for labor 
unions.
    At the outset, bear in mind that the reporting requirements of the 
Securities and Exchange Act, enforced by the SEC, applies only to 
publicly-traded corporations. As a result, only approximately 10 
percent of all U.S. companies are subject to such requirements. In 
fact, even some of the nation's largest companies--Mars, Bechtel, and 
Cargill, for example--have no reporting requirements whatsoever because 
they are privately-held.
    Moreover, the Department's itemization requirement--which lies at 
the heart of its proposal and is the most onerous aspect of the new 
rule--has no parallel in the entire SEC scheme of corporate reporting. 
Under this requirement unions must report detailed information about 
every single disbursement that (alone or in the aggregate) reaches the 
low threshold of $2,000 to $5,000 to any single individual or entity in 
one of eight ``functional categories.'' The only way to comply with the 
requirement is for unions to record these specific details about every 
single transaction in which they are engaged during the year. Our 
affiliates have provided detailed information to the Department in 
their comments about the untold recordkeeping and reporting burden this 
would impose on them.
    There is a very simple reason why corporations have no such 
parallel requirement. As Secretary Chao acknowledged in a recent letter 
to Subcommittee Chairman Specter, the reports that publicly-traded 
corporations have to file ``must disclose `material' financial 
information'' only. What that letter did not reveal, however, is that 
disclosure of only such information as is deemed material is all that 
is required by Generally Accepted Accounting Principles (GAAP), which 
govern the way public, for-profit, and not-for-profit entities should 
report their finances. Under GAAP, the principle of materiality means 
that items that are too small to influence an individual's judgments 
about an entity's financial condition are routinely aggregated into 
meaningful categories. The Department's proposal, by contrast, would 
for the first time require unions to keep track of and report 
individually, in great detail, an overwhelming number of transactions 
without regard to their materiality. Under this proposal, the LMRDA 
would stand alone among federal financial reporting standards in 
failing to embrace universally accepted GAAP principles.
    Why such a radical departure from principles that corporations--
whether they are for-profit or non-profit--must follow under federal 
law? Secretary Chao's letter claims that the virtue of the Department's 
proposal is that it spares the regulated community--i.e., unions--of 
the task of deciding whether information is material or not. This is 
nothing more than a double standard designed to cripple unions with 
pointless recordkeeping and reporting requirements.
    Our survey revealed that over 90 percent of national/international 
unions and 60 percent of locals have at least 1,000 or more 
disbursements annually. Over 40 percent of national/international 
unions and almost 20 percent of locals have 10,000 or more 
disbursements annually. They, like their corporate counterparts, are 
entitled to follow Generally Accepted Accounting Principles, which 
impose order, rationality, and cost/benefit justification on financial 
reporting. They, like their corporate counterparts, would far prefer to 
make whatever decisions are involved in determining materiality than to 
waste their financial and human resources in tracking the minutiae of 
useless information. And, like their corporate counterparts, they are 
entitled to get on with the work that they are entrusted by their 
constituents to perform. Saddling them with any greater burden has no 
justification under principles of fundamental fairness, good 
government, or responsible financial reporting.

     THE DEPARTMENT'S PROPOSAL CANNOT ACCOMPLISH ITS INTENDED GOALS

    My third and final concern flows inevitably from this last point. 
The Department's proposal will not accomplish its stated purposes of 
providing greater transparency to union members or deterring fraud and 
embezzlement. The Department claims that the current LM-2 form 
generates ``large dollar amount[s] and vague description[s] . . . that 
make it essentially impossible for members to determine whether or not 
their dues were spent properly.'' 67 Fed. Reg. at 79282. However, under 
no circumstances will the proposal result in more useful reporting.
    To be sure, the Department's proposal will generate thousands of 
lines of ``data'' per union, each one showing an individual 
disbursement during the accounting year, in chronological order, in 
eight separate categories. A union that has a modest 8,000 transactions 
per year would file an LM-2 report that could cover as many as 1,500 
pages. A mid-sized union with 13,000 transactions would file a 2,200-
page report. A large international union with 150,000 disbursements 
would file a 25,000-page report. But we all know that volume and 
transparency are not the same. Without meaningful aggregation of data, 
and eliminating immaterial information, union members will wind up with 
reams of paper containing the most detailed, often confusing 
information that they have neither the time nor the expertise to 
decipher.
    Such enormous masses of data do nothing to simplify, condense or 
aggregate financial information into meaningful totals that unions' 
members could use to understand the financial status of their union. 
Rather, the proposed forms would simply disclose massive amounts of 
non-material financial data, with the result that union members are 
more likely to be frustrated and deterred in their efforts to glean any 
meaningful information from the form.
    The Department's claim that providing such minute and detailed data 
to union members ``will enable them to be responsible and effective 
participants in the democratic governance of their unions'' (67 Fed. 
Reg. at 79281) is absurd on its face. If the Department were genuinely 
concerned that the current reporting system resulted in vague 
descriptions that did not permit union members to know how their dues 
are spent, then it would have proposed that unions aggregate their 
disbursements into more meaningful categories. This is the solution 
dictated by GAAP and that every other financial reporting system relied 
on by the federal government has adopted.
    If union members would not benefit from the proposed disclosure 
scheme who would? We think the answer to that is obvious. Anti-union 
organizations who have the research capability to comb through the 
union's LM-2's and analyze the data would reap an enormous windfall. In 
essence, they would gain access over the Internet--since the Department 
will publish these forms on-line--to over 5,000 labor organizations' 
general ledgers. Employers would gain access to a myriad of 
confidential information about a union's bargaining strategy and 
organizing activities. Imagine a company having to post its entire 
ledger on the web in order to comply with government financial 
reporting requirements in the name of transparency.
    The Department also claims--although it provides no evidence 
whatsoever to support this claim--that the revised reporting 
requirements will deter corruption and financial mismanagement because 
``more detailed reporting of all financial transactions . . .  would 
[make it] . . . more difficult to hide financial mismanagement from 
members.'' 67 Fed. Reg. at 79291. But DOL itself has starkly described 
the limits of deterrence that detailed reporting can provide. In a 
letter from Deputy Assistant Secretary for Labor Management Standards 
Don Todd to Representative Charles Norwood, Mr. Todd made this 
observation:

``[I]t is often difficult to detect financial corruption or 
mismanagement from a reporting form, no matter what disclosure is 
required, since the perpetrators will often attempt to conceal illegal 
and improper actions.''

    The Department's deterrence claim is not only unsupported in the 
proposal itself, but it cannot be justified. First, it does not take 
much to realize that the Department's proposal would provide those 
engaged in fraud with thousands of minute transactions in which to bury 
illegal transactions. Thus, there is nothing in the accounting 
literature to support the notion that itemization deters corruption. 
Rather, that literature makes plain that verification of the 
reliability of financial statements is provided through the well-
established system of outside auditing. Auditors are highly trained 
professionals who know how to verify that allocations are properly made 
and that organizations have adequate internal controls to ensure that 
corruption cannot take root.
    When auditors fail to carry out this role faithfully in the for-
profit sector--as happened with Enron--no one suggests that for-profit 
entities should itemize their disbursements and receipts as a way to 
deter corruption. Instead, reform efforts focus on fixing the private 
auditing system to ensure that it works the way it is supposed to. 
Thus, legislation was passed in response to Enron that establishes more 
federal oversight on auditing standards, that limits opportunities for 
auditor conflicts of interest, and that sets rules for internal audit 
committees in those for-profit corporations that choose to avail 
themselves of the public securities markets. See Sarbanes-Oxley Act of 
2002, Public Law No. 107-204, 116 Stat. 745 (2002).
    Similarly, many federal statutes rely on the private auditing 
system to deter corruption and financial mismanagement. Two examples 
illustrate this point:
  --when Congress sought to assure that federal awards to state and 
        local governments and not-for-profits are properly spent, it 
        dictated that specific auditing standards be developed for 
        private auditors. (See Audits of States, Local governments, and 
        Not-for-Profit Organizations Receiving Federal Awards, 
        Statement of Position No. 98-3 (American Inst. Of Certified 
        Public Accountants);
  --Under Section 302 of the Labor-Management Relations Act, 29 U.S.C. 
         186, there is a general exception to the rule against 
        employer payments to union representatives or labor 
        organizations, where such payments are made into a trust fund 
        that, among other requirements, contains a provision for an 
        annul audit to be made available for inspection by interested 
        persons.
    Lastly, in agency fee cases, the United States Supreme Court has 
recognized the centrality of private audits in shaping labor 
organization disclosure requirements. Even though what is at stake in 
the agency fee context is nonmembers' constitutional right to avoid 
subsidizing political activities to which they object, the Court 
specifically rejected the argument that unions should have to disclose 
itemized lists of individual disbursements--instead holding that an 
audit should be the mechanism to provide assurance of the accuracy of a 
union's allocations between categories of chargeable and nonchargeable 
expenditures:

    ``The union need not provide nonmembers with an exhaustive and 
detailed list of all its expenditures, but adequate disclosure surely 
would include the major categories of expenses, as well as verification 
by an independent auditor.''----Chicago Teachers Union Local No. 1 v. 
Hudson, 475 U.S. 292, 307 n.18 (1986) (emphasis added).

                               CONCLUSION

    I want to reiterate the AFL-CIO's longstanding support for the 
LMRDA. Our commitment to the principles behind the Act remains as firm 
today as it was some forty-four years ago when it was passed. We 
support disclosure that provides meaningful and useful financial 
information to union members in aid of union democracy and fiscal 
accountability. And, to the extent that there are rational, cost-
effective ways to improve current disclosure requirements for unions, 
we would support such changes.
    Nevertheless, any changes to the current rules must fit within the 
bounds of the statute and be consistent with the carefully constructed 
system of accounting standards to which unions are already subject. Any 
changes should demonstrably improve the quality of the information 
reported, and should not be unduly burdensome to unions or undermine 
their ability to conduct their activities on behalf of their members. 
In furtherance of such improvements, the AFL-CIO and its affiliates 
have indicated their willingness to work with the Department to explore 
a requirement that LM-2 filers, at both the national and local level, 
would undergo an independent audit each year by a certified public 
accountant, tailored to their size and resources. Such an approach 
would potentially provide much more meaningful information to union 
members and also provide a much truer test of the integrity of their 
unions' financial accounting systems.
    In contrast, as I have discussed, the Department's proposal fails 
in numerous and substantial respects to meet any of the well-accepted 
accounting and auditing standards that are the prerequisites to 
meaningful and rational financial reporting. And, at the same time, the 
proposal singles out unions to shoulder an astronomical compliance 
burden. We hope you will urge the Department to withdraw its proposal.
    Thank you for the opportunity to comment on this important matter.

STATEMENT OF JAY COCHRAN, Ph.D., RESEARCH FELLOW, 
            MERCATUS CENTER, GEORGE MASON UNIVERSITY
    Senator Specter. Thank you very much, Mr. Hiatt. Our next 
witness is Mr. Jay Cochran, a research fellow in regulatory 
studies at the Mercatus Center at George Mason University. Mr. 
Cochran has a bachelor's and master's degree from Virginia 
Polytech and a master's and Ph.D. from George Mason University. 
Thank you for joining us, Mr. Cochran, and we look forward to 
your testimony.
    Dr. Cochran. Good afternoon, Mr. Chairman, Mr. Harkin, 
members of the committee, ladies and gentlemen. Thank you for 
the opportunity to comment today on the Labor Department's 
proposed rule regarding labor organization annual financial 
reports.
    I am Jay Cochran, a research fellow in regulatory studies 
at the Mercatus Center at George Mason University and an 
adjunct professor of economics at GMU. Our mission at the 
regulatory studies program is to advance knowledge of the 
impact of regulations on society by conducting careful, 
independent analyses using contemporary economic scholarship to 
assess rulemaking proposals from the perspective of the public 
interest. Thus, the work we do does not represent the views of 
any particular affected party or special interest group, but 
rather is designed to evaluate rulemaking proposals from the 
perspective of their effect on overall consumer welfare. I 
would like to emphasize, Mr. Chairman, that the views that I 
express today are my own and do not reflect an official 
position of the university.
    In February of this year, I authored a public interest 
comment on the Labor Department's proposed union financial 
reports rule. Mr. Chairman, I respectfully request that those 
formal comments on the rule be incorporated into the hearing 
record as part of my remarks here today.
    Senator Specter. Without objection, they will be made a 
part of the record.
    [The information follows:]
                       Regulatory Studies Program

    PUBLIC INTEREST COMMENT ON LABOR ORGANIZATION ANNUAL FINANCIAL 
                 DISCLOSURE REPORTS; PROPOSED RULE \1\

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    \1\ Prepared by Jay Cochran, Research Fellow, Regulatory Studies 
Program. This comment is one in a series of Public Interest Comments 
from Mercatus Center's Regulatory Studies Program and does not 
represent an official position of George Mason University.
---------------------------------------------------------------------------
    The Regulatory Studies Program (RSP) of the Mercatus Center at 
George Mason University is dedicated to advancing knowledge of the 
impact of regulation on society. As part of its mission, RSP conducts 
careful and independent analyses employing contemporary economic 
scholarship to assess rulemaking proposals from the perspective of the 
public interest. Thus, this comment on the Department of Labor's 
proposed rule, Labor Organization Annual Financial Disclosure 
Reports,\2\ does not represent the views of any particular affected 
party or special interest group, but is designed to evaluate the effect 
of the Department's proposals on overall consumer welfare.
---------------------------------------------------------------------------
    \2\ See, ``Labor Organization Annual Financial Disclosure Reports; 
Proposed Rule,'' Federal Register 67 (249), pp. 79280-79414. Hereafter 
referred to as the ``proposed rule.''
---------------------------------------------------------------------------
    This comment is organized such that Section I provides a brief 
introduction to the proposed rule. Section II provides some economic 
background to the rule and our analysis of it. Section III reviews the 
main benefits ascribed to the proposed rule. Section IV discusses the 
cost estimates developed by the Department, while Section V provides an 
alternative estimate of rule-associated costs. Section VI provides 
various benchmarks against which the cost estimates can be compared and 
placed into a larger context.

                            I. INTRODUCTION

    Under the Labor-Management Reporting and Disclosure Act of 1959 
(or, the ``Landrum-Griffin Act''), the Employment Standards 
Administration (ESA) within the Department of Labor is seeking to 
reform the financial disclosure requirements applicable to organized 
labor. The Department's purpose in reforming the reporting requirements 
applicable to labor organizations is ``to improve the transparency and 
accountability of labor organizations to their members, the public, and 
the government; to increase the information available to members of 
labor organizations, and to make the data disclosed in such reports 
more understandable and accessible.'' \3\
---------------------------------------------------------------------------
    \3\ ibid., p. 79280.
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    More than forty years have passed since enactment of the Landrum-
Griffin Act, and only once in that time have the reporting procedures 
applicable to organized labor undergone any appreciable change.\4\ The 
Department suggests it may once again be time to reform reporting 
requirements, especially in light of the myriad technological changes 
affecting both organized labor in general and financial reporting in 
particular.
---------------------------------------------------------------------------
    \4\ Late in 1992, changes to union reporting requirements were 
implemented that increased the classification detail of disbursements. 
This rule, however, was rescinded in December 1993.
---------------------------------------------------------------------------
    Some of the reforms the Department seeks under the proposed rule 
include: (a) an electronic filing requirement for labor organizations 
reporting financial disclosures using Form LM-2; \5\ (b) identification 
of ``major'' receipts and disbursements; and (c) reporting of assets, 
liabilities, receipts, and disbursements of organizations with annual 
receipts of $200,000 or more that meet the statutory definition of a 
``trust in which a labor organization is interested.'' \6\
---------------------------------------------------------------------------
    \5\ According to the Department, Form LM-2 currently applies to 
labor organizations with $200,000 or more in annual receipts (p. 
79290). The Department estimates that Form LM-2, therefore, applies to 
5,514 labor organizations. An additional 21,398 other labor 
organizations fall below this $200,000 threshold and will have to file 
the simpler LM-3 or LM-4 forms. Another 3,551 ``trusts'' or 
organizations or funds held by multiple labor organizations will be 
required to file a modified form T-1. (See also Table 2, p. 79297.)
    \6\ ibid., p. 79280.
---------------------------------------------------------------------------
    Before discussing the specific benefits and costs of the 
Department's proposed rules, we provide some basic background on the 
economics of organized labor. Doing so will establish an important 
contextual foundation for the remainder of our comment on the proposed 
rule.

                        II. ECONOMIC BACKGROUND

    Normally, when an executive branch agency considers the 
implementation of a new regulation, our first question asks whether a 
significant market failure exists that merits federal regulatory 
attention.\7\ Clearly, such an argument cannot be advanced in the 
present case. The most one can claim is that a regulatory or government 
failure exists, and that the present regulation is an attempt to remedy 
part of that failure. This conclusion rests on and results from the 
basic political economy of organized labor.
---------------------------------------------------------------------------
    \7\ See the Mercatus Center Regulatory Checklist, where we ask 
whether (i) a market failure has been identified by the regulating 
agency; (ii) a federal role has been appropriately established; (iii) 
the agency examined alternative approaches; (iv) the agency attempted 
to maximize net benefits; (v) there is a strong scientific or technical 
basis for the regulation; (vi) the distributional effects are clearly 
understood; and (vii) individual choices and property impacts are 
clearly understood. The checklist has been applied to the present rule, 
and the results of that evaluation are attached in an Appendix to this 
comment.
---------------------------------------------------------------------------
    Unions are customarily treated in microeconomic theory as monopoly 
suppliers of labor in a particular industry or trade, with the 
attendant reduction in labor supply and increase in wage rates 
characteristic of a typical industrial monopoly. The precise 
combination of wage rate increases and labor supply reductions remains 
a function of union goals (e.g., maximized union employment, capture of 
economic rents, or maximization of total union wage payments, for 
example).\8\ It is crucial to recall, however, that the monopoly 
position enjoyed by organized labor in the United States today is not a 
``natural'' monopoly in the economic sense of that term, but rather 
arises from the various privileges and immunities awarded and protected 
by the federal government since about the time of the New Deal.\9\
---------------------------------------------------------------------------
    \8\ In this connection, see, for example, Walter Nicholson (1995), 
Microeconomic Theory Sixth Edition, New York: Dryden Press, pp. 753-
757, or Richard Posner (1984), ``Some Economics of Labor Law,'' 
University of Chicago Law Review 51: pp. 988-1011.
    \9\ See, for example, Morgan Reynolds (1987), Making America 
Poorer: The Cost of Labor Law, Washington, D.C.: Cato Institute, pp. 
15-25. Reynolds draws a useful distinction between privileges (i.e., 
special rights conferred on organized labor that are unavailable to 
other members of U.S. society), and immunities (i.e., actual exemptions 
from law that are similarly unavailable to others in the United 
States.). The National Labor Relations Act of 1935 (``Wagner Act''), 
for example, provides that employers must bargain in ``good faith'' 
with ``duly elected'' union representatives. Union representatives, in 
turn, may require compulsory dues payments from non-members, and may 
provide collective representation to those who wish no such 
representation. The Wagner Act in effect gives unions the privilege of 
representing both those who wish to be so represented as well as those 
who do not wish such representation and to collect dues from both 
parties.
    By contrast, the Clayton Act of 1914 and the Anti-Injunction Act of 
1932 (``Norris-LaGuardia Act'') exempt unions from antitrust laws, 
immunize them against federal court injunctions, and grant immunity 
from private civil damage suits. In addition, the Anti-Racketeering Act 
of 1934 specifically exempted unions from anti-racketeering laws. (The 
Hobbs Amendment attempted to overcome this exemption, but was 
unsuccessful on subsequent Court challenge, when the U.S. Supreme Court 
upheld the use of union violence to achieve legitimate labor goals, 
saying, ``the [Hobbs] Act does not apply to the use of force to achieve 
legitimate labor ends''--as quoted in Reynolds [1987, p. 23].)
    Lastly, to curtail some of the unintended consequences of pro-labor 
legislation, Congress sought to reign in organized labor through the 
Labor-Management Relations Act of 1947 (``Taft-Hartley Act'') and the 
Labor-Management Reporting and Disclosure Act of 1959 (``Landrum-
Griffin Act''). As Reynolds (1987, p. 21) points out, shortly after the 
passage of the Wagner Act, ``Government regulation expanded to deal 
with some of the effects of union power, largely created by privileges 
and immunities.'' Expansion of the regulatory requirements on organized 
labor under the Landrum-Griffin Act, in fact, is the subject of the 
present set of regulations.
---------------------------------------------------------------------------
    It is therefore difficult to make the case that the labor market 
has failed in any substantive sense with respect to organized labor 
given that it has not been allowed to function without impediment. 
Rather what we are presented with in the current set of regulations is 
an effort to curb the more egregious financial practices of some 
unions--practices that have emerged, in part, by virtue of their 
specially protected status. In other words, the present set of 
regulations attempts to correct and control abuses stemming from a 
previous set of laws and regulations that distorted the operation of 
the labor market and in effect opened the door to such abuses in the 
first place.
    It is perhaps unreasonable, therefore, to expect this set of 
regulations for enhanced financial disclosure to achieve its intended 
aim, since the problem is not with financial disclosure per se, but 
rather with the market distortions created by government interference 
in the labor market. Nevertheless, this should not be taken as 
disparaging the effort entirely; inasmuch as if the latter path (i.e., 
restoration of free contract in labor) is not currently a viable 
option, then curbing the more egregious abuses attendant with monopoly 
labor supply may be a second-best course of action.
    The specific problem the present regulation attempts to remedy is a 
variant of the principal-agent problem: in particular, an information 
asymmetry between the principal (labor) and his/her agent (union 
officials). This asymmetry emerges largely because the usual set of 
market checks and balances has been attenuated in the case of organized 
labor.\10\ Under present disclosure standards, it is difficult, and in 
some cases impossible, for the principals to know the applications to 
which union funds and other resources have been put, due to the opaque 
and infrequent nature of union financial disclosure statements.
---------------------------------------------------------------------------
    \10\ That is, because of the privileges granted by U.S. labor laws, 
such as compulsory collective bargaining and representation, a union 
does not have to compete for its membership or income stream. Because 
of the immunities that unions enjoy, organized labor does not have to 
rise to the same standards of conduct as other members and institutions 
of U.S. society.
---------------------------------------------------------------------------
    Without meaningful external checks on an agent's financial 
decisions afforded by vigorous market competition for resources 
(including membership), it becomes easier to understand the increased 
frequency of self-dealing, embezzlement, or other problems that have 
checkered the history of organized labor.\11\ Such undesirable behavior 
need not, however, be the case. Controls to prevent or uncover 
financial abuses can arise out of the natural operation of market 
competition for resources or, failing that course, can be brought about 
through the deliberate design and application of regulations.\12\
---------------------------------------------------------------------------
    \11\ This is not to suggest either that such temptations do not 
occur when competition is vigorous. They do. The point, however, is 
that such problems tend to be caught more quickly, and the damages that 
result are contained more efficiently under competition than without 
it.
    \12\ The regulatory approach is necessarily a second-best 
alternative since it is impossible to design a regulatory apparatus 
that foresees every eventuality, and because those subject to 
regulation innovate along non-regulated dimensions as well as in the 
necessarily ``grey areas'' of any rule.
---------------------------------------------------------------------------

                  III. BENEFITS ATTRIBUTED TO THE RULE

    The Department lists three main benefits from the reform of union 
financial disclosures:
  --Better reporting will allow union members to make better decisions 
        about the governance of their unions.\13\
---------------------------------------------------------------------------
    \13\ The Department and ESA suggest that increasing the volume of 
financial disclosures made by labor organizations will provide ``union 
members with useful data that will enable them to be responsible and 
effective participants in the democratic governance of their unions.'' 
(p. 79281)
---------------------------------------------------------------------------
  --More-detailed financial reporting will make it more difficult to 
        hide fraud.\14\
---------------------------------------------------------------------------
    \14\ The Department suggests ``the broad aggregated categories on 
the existing forms made it possible to hide embezzlements, self-
dealing, overspending, and financial mismanagement.'' (p. 79282)
---------------------------------------------------------------------------
  --More-detailed reporting will provide an effective deterrent to 
        financial mismanagement.\15\
---------------------------------------------------------------------------
    \15\ ``. . . detailed reporting can be an effective deterrent, and 
that more detail throughout the form LM-2 would further discourage 
malfeasance.'' (p. 79282)
---------------------------------------------------------------------------
A. More-Informed Governance Decisions
    To be sure, more disclosure has the potential for union members to 
make more informed decisions about their union. However, the Department 
may be making an overly strong benefit claim when it states, ``If the 
members of labor organizations had more complete, understandable 
information about their unions' financial transactions, investments, 
and solvency, they would be in a much better position than they are 
today to protect their personal financial interests and exercise their 
democratic rights of self-governance.'' \16\
---------------------------------------------------------------------------
    \16\ Proposed Rule, pp. 79280-79281.
---------------------------------------------------------------------------
    This unqualified statement can be incorrect if union members suffer 
from other impediments to effective action beyond a simple lack of 
information. Indeed, just having more information may not necessarily 
be beneficial by itself if individuals, for example, bear concentrated 
costs of taking action arising from their evaluation of financial 
information, while the benefits accruing from such action remain 
dispersed among the union membership as a whole.\17\ If concentrated 
personal costs and dispersed benefits exist, then it does not follow 
that individual union members will automatically be in any better 
position today from increased disclosure.
---------------------------------------------------------------------------
    \17\ It is possible, for example, to imagine a case where a union 
member--through her own analysis of union finances, made possible by 
the proposed regulation--uncovers financial mismanagement. However, 
because of intimidation (physical violence or threats of same), she has 
to bear substantial personal costs unless she remains quiet. If, on the 
other hand, she successfully pursues her discovery, the benefits of 
better union management will be bestowed not just on her, but also on 
all the members of her union.
    This example should not be taken as arguing that union members 
should or should not pursue discoveries of mismanagement as and when 
they find them, nor that enhanced disclosure should not be in place to 
facilitate such potential discoveries. Rather its purpose is merely to 
illustrate the concept of concentrated costs and dispersed benefits, 
and how such a situation can present a barrier to acting on information 
that will not always be solved by the provision of more information.
---------------------------------------------------------------------------
    It is important to stress, however, that this line of reasoning 
does not argue against increased disclosure and improved transparency. 
Increased disclosure is more likely than less disclosure to bring about 
improved transparency; however, it will not automatically do so, and 
overly strong benefit claims may not advance the case for improved 
disclosure in any event.

B. More-Detailed Financial Reporting Will Make it More Difficult to 
        Hide Fraud
    We concur with the Department's assessment that in comparison to 
the current reporting requirements on labor organizations, more 
detailed financial reporting will tend to raise the cost of hiding 
fraud. By increasing the number of classification categories, lowering 
the dollar level of disclosures, and by potentially increasing the 
number of people who must participate in a potential fraud, the revised 
reports sought by ESA and the Department should make committing fraud 
more costly than it is under current disclosure rules.

C. More-Detailed Reporting Will Provide an Effective Deterrent to 
        Financial Mismanagement
    Since more-detailed financial reporting is likely to raise the cost 
of committing fraud, less financial mismanagement can be a likely 
outcome, other things being equal. This result occurs because the 
potentially dishonest respond to incentives just as the honest do, and 
therefore by raising the cost of committing fraud, one can reasonably 
expect to see less of it. Despite this basic economic relationship, 
however, we would hasten to add that deterrence per se, is not simply a 
matter of increased or more-detailed disclosures. Rather, it can be 
argued that disclosure is instead a necessary but insufficient 
precondition for effective discovery and deterrence of financial 
mismanagement.
    The Department seems implicitly to understand that a more involved 
process of deterrence operates than simply more-detailed reporting. In 
the proposed rule, it cites a recent case in which ``the lack of 
supporting detail [on expenditures] enabled [union] officials to hide 
in excess of $1.5 million in personal dining, drinking and 
entertainment expenses from 1992 to 1999.'' \18\ The important 
attribute to consider in this case, though, is not that certain 
officials hid their misappropriation of funds, but rather that it was a 
Departmental investigation that uncovered the fraud, and that this 
discovery, moreover, occurred within the current environment of 
comparatively poor disclosure.
---------------------------------------------------------------------------
    \18\ Proposed Rule, p. 79282.
---------------------------------------------------------------------------
    In other words, actual deterrence of financial mismanagement is 
more difficult in an organized labor setting than in a comparable 
competitive setting for reasons outlined earlier, and because fewer 
checks on the financial performance of unions occur on a regular basis. 
This means improved financial disclosure is an important component of 
the overall deterrent process, but it is not all. We would add that 
examinations of financial data by interested parties (union members, 
journalists, citizens, etc.); regular audits by disinterested 
accounting professionals; and periodic investigations by appropriate 
Department personnel are other important tools that complement and 
complete any enhanced disclosure process aimed at deterring financial 
mismanagement.

            1. Disclosure Thresholds
    To enhance the disclosure process and to deter mismanagement, the 
Department establishes minimum disclosure standards for various balance 
sheet and income statement items.\19\ At several places throughout the 
proposed rule, the Department asks for comment on whether these 
specifically proposed dollar thresholds of disclosure are set at 
appropriate levels. Given the operational peculiarities of individual 
unions as well as their wide disparity in sizes, it is probably 
impossible to determine an appropriate level of disclosure for all 
unions under all circumstances.
---------------------------------------------------------------------------
    \19\ The new LM-2 for example, requires attachment of an accounts 
receivable aging schedule recording any individual or entity from which 
more than $1,000 is due. A similar schedule (and threshold) is applied 
to accounts payable. All investments with a market value of at least 
$5,000 (or representing more than 5 percent of the total market value 
of all investments) must be reported on a separate schedule to the LM-
2. Similarly, disbursements to employees totaling more than $10,000 in 
a reporting period, and all disbursement to officers must be documented 
in attachments to the required filings. Receipts and disbursements to 
any individual or entity totaling more than $5,000 during the reporting 
must also be separately reported. See the Proposed Rule, p. 79285-
79289.
---------------------------------------------------------------------------
    To resolve the threshold issue while still recognizing the 
likelihood of important differences among the various unions, we 
suggest that the Department may wish to consider implementing a 
disclosure standard based on whether an outside observer (i.e., a 
reasonable person unconnected with the union) would consider a given 
disclosure material to an accurate understanding of a labor 
organization's financial position. Implementing a materiality standard 
(similar to the standard that exists with regard to corporate 
disclosure and auditing standards) helps to resolve the Department's 
issues with respect to absolute disclosure levels.
    Admittedly, a materiality standard introduces an element of 
judgment in the reporting process and has the potential to complicate 
the investigative process. However, such tradeoffs seem no worse than 
establishing what are in fact arbitrary reporting thresholds and then 
applying those thresholds in a one-size-fits-all fashion to every labor 
organization.\20\
---------------------------------------------------------------------------
    \20\ It is possible also to address (at least partly) a one-size-
fits-all criticism to disclosure thresholds by assigning differing 
thresholds based on union size (using assets, receipts, membership, or 
other appropriate measures). Doing so lifts the judgment burden 
regarding disclosures that exists under a materiality standard from the 
unions and places it on the Department. In addition, a disclosure 
threshold that varies with union size reflects an acknowledgment that 
there are likely to be important differences among unions as to what 
constitutes a material disbursement, investment, accounts receivable 
and so on.
    In sum, an explicit regulatory threshold places an ex ante judgment 
burden on the regulators to establish appropriate thresholds that are 
neither too rigid nor too lax. A materiality threshold, by contrast, 
places an ex post judgment burden on the disclosing union and its 
auditors.
---------------------------------------------------------------------------
           IV. DEPARTMENT COST ESTIMATES OF THE PROPOSED RULE

    The Department estimates that the proposed changes to the four 
financial disclosure forms (LM-2, LM-3, LM-4, and T-1) will be $17.8 
million in the first year, $5.8 million in year two, and $5.3 million 
in year three.\21\ These costs result from increased recordkeeping and 
reporting burdens, software changes, training and so on, that the 
unions will incur in order to comply with the proposed rule. In 
addition, the Department estimates that the Federal government will 
incur incremental equipment, personnel, and overhead expenses of $7.2 
million per year in connection with implementing and overseeing the new 
rule.\22\ Below we offer comments on the Department's estimates.
---------------------------------------------------------------------------
    \21\ Proposed Rule, p. 79293.
    \22\ Loc. cit.
---------------------------------------------------------------------------
A. Very Precise Burden-Hour Estimates
    We congratulate the Department for being able to make such precise 
burden-hour estimates for over 26,000 unions and over 3,000 trusts. 
However, precision carried out to two decimal places does lead one to 
wonder whether it is reasonable to assume that the 8,108 unions filing 
form LM-4, for example, will incur precisely 0.03 hours (or 1.8 
minutes) of on-gong recordkeeping burden in connection with the 
rule.\23\
---------------------------------------------------------------------------
    \23\ Proposed Rule, Table 2, p. 79297.
---------------------------------------------------------------------------
    We would suggest in the alternative that if the actual incremental 
burden is negligible, then zero should be used. If, however, there is 
expected to be some non-trivial increase in on-going recordkeeping 
burden, more defensible estimates would consider making allowances for 
error and correction, for personnel time to recall proper 
classifications, and so on. In other words, additional recordkeeping 
rules mean that those responsible for implementing such rules may be 
likely to incur additional, non-trivial amounts of time in on-going 
recordkeeping procedures if such recording is to be undertaken 
accurately.
    Perhaps just as important in this connection is the recognition 
that on-going recordkeeping functions with respect to the new 
requirements are likely to exist beyond the confines of a union's 
accounting department. Thus, for example, when a union organizer hosts 
an educational program and then seeks reimbursement for her expenses, 
she will have to consider and follow the rule's requirements pertaining 
to documentation, record retention, appropriate expense classification, 
and so on (and the new rules are likely to be different from and more 
complicated than the rules she has been accustomed to observing).\24\ 
Such burdens, though perhaps small for any given accounting event, and 
likely to be dispersed across many people throughout an organization, 
nevertheless seem unlikely to be as small in the aggregate as the 
Department suggests in its recordkeeping burden estimates for the 
various forms.
---------------------------------------------------------------------------
    \24\ The new rules might suggest that such costs are learning curve 
related and thus unlikely to recur once the learning is completed. 
While there is, no doubt, some truth to that assertion, it also seems 
equally likely that a changed institutional environment is likely to 
involve changes of permanent nature.
---------------------------------------------------------------------------
    In the alternative estimates we provide below, we have used small 
(though non-trivial) hourly estimates for on-going recordkeeping 
burdens. With respect to burden estimates more generally, we have 
chosen to provide round figures (typically rounded to nearest half 
working day) rather than very precise estimates. The rationale for such 
an approach is to produce cost estimates that are defensible in general 
magnitude rather than in particular exactitude.

B. Inconsistent Cost/Burden Hour Applied
    Laying aside the issue of burden-hour estimate precision, and 
taking the total burden hours estimated by the department at face 
value, we are still left with the application of inconsistent dollar 
costs per hour to the burden-hour estimates themselves. For example, 
the Department estimates that the new LM-2 form will entail total 
reporting and recordkeeping burdens of 579,135 hours. Dividing this 
figure into the Department's total cost estimate for the LM-2 form 
($14.618 million) yields an hourly cost of $25.24. Similar calculations 
for the LM-3, LM-4, and T-1 forms yield per hour cost estimates of 
$20.36, $24.79, and $26.61 respectively.\25\
---------------------------------------------------------------------------
    \25\ The hourly rates also change without explanation for 
subsequent year estimates for forms LM-2 and T-1.
---------------------------------------------------------------------------
    In its description of the burden estimates, the Department suggests 
that little beyond incremental labor will be required by the unions to 
comply with the new disclosure requirements.\26\ If this is true, then 
the hourly rates used to monetize the hourly burden estimates, 
arguably, should be more consistent. In our cost estimates, presented 
below, we have applied instead an hourly labor rate of $27.80, which 
represents the fully loaded hourly wage rate of union employees in the 
United States.\27\
---------------------------------------------------------------------------
    \26\ In calculating the burden for form LM-2, for example, ``the 
Department carefully considered the amount of time it takes to: (a) 
Read the reporting instructions; (b) gather the books and records to 
respond to various reporting requirements; (c) organize the books and 
records to respond to various reporting requirements; (d) complete the 
form; and (e) check the responses.'' (Proposed Rule, p. 79294) This 
suggests the burden-hour estimates consist almost entirely of labor 
hours. This perception is further reinforced when the Department 
states, ``. . . any capital investment including computers and software 
that are usual and customary expenses incurred by persons in the normal 
course of their business are excluded from the regulatory definition of 
burden.'' (Proposed Rule, p. 79294)
    \27\ This figure includes wage and salary payments, fringe 
benefits, as well as Social Security, unemployment insurance, and 
workers compensation payment paid on behalf of a union employee. 
Source: Statistical Abstract of the United States (2001), Table 626, 
``Employer Costs for Employee Compensation per Hour Worked: 2001,'' p. 
406. Union data taken from column 6 of Table 626.
---------------------------------------------------------------------------
C. Little Documentation of the Government's Own Incremental Costs
    The Department estimates that incremental costs to the federal 
government of changing the reporting requirements for unions are $7.187 
million per year. It suggests that this estimate ``includes operational 
expenses such as equipment, overhead, and printing, as well as salaries 
and benefits for the OLMS staff in the National Office and field 
offices that are involved with reporting and disclosure activities. The 
estimate also includes the annualized cost for redesigning the forms, 
developing and implementing the electronic software, and implementing 
digital signature capability.'' \28\ Without any supporting 
documentation or detail of the data included in the Department's 
estimate, it is impossible to validate this figure, or to offer an 
alternative estimate. In our alternative estimates (see below), we have 
simply adopted the Department's estimates of incremental governmental 
expenses related to the rule.
---------------------------------------------------------------------------
    \28\ Proposed Rule, p. 79296.
---------------------------------------------------------------------------
D. No Capitalization of Cost Estimates Provided
    Although the Department displays a high level of precision in 
developing its compliance burden estimates, nowhere does it capitalize 
the cost estimates that it does generate. The sum of the discounted 
present value of all the cost streams is important so that the proposed 
rule can be evaluated against other alternatives with potentially 
different time dimensions as well as to give policymakers an indication 
of the total lifetime costs of a particular rule.
    Capitalizing the Department's annual cost estimates, using the OMB-
suggested discount rate of seven percent, produces an estimated 
lifetime cost of the rule of $212.5 million.\29\ About $103 million of 
this figure represents capitalized government-incurred costs of the 
rule, while the remaining $110 million represents the long-run 
compliance costs incurred by the labor organizations themselves.
---------------------------------------------------------------------------
    \29\ We applied the 7 percent discount rate assuming that the first 
year's compliance costs would be back-end loaded; that is, incurred 
mostly toward the end of the first year in which the rule was 
applicable. Thus, the first year's costs are not discounted, while the 
second year's costs are discounted one period. Third and subsequent 
year's costs were then assumed to recur. To arrive at a capitalized 
cost for these out-year estimates, the recurring costs were first 
annuitized back to the third year, and then the annuitized sum was 
discounted back for two periods at the seven percent rate.
---------------------------------------------------------------------------
           V. ALTERNATIVE COST ESTIMATES OF THE PROPOSED RULE

    Appendix I details the sources and methods used to estimate the 
costs of the Labor Department's enhanced financial disclosure 
regulation. In short, however, it is estimated that the lifetime cost 
of the rule will be roughly $298 million, including the incremental 
costs to the government to administer and enforce the new standards. 
Capitalizing the up-front and annually recurring costs using OMB's 
recommended 7 percent discount rate produced this estimate.
    In the first year of application, the revised form LM-2, LM-3, LM-
4, and T-1 are estimated to result in compliance costs of $63.3 million 
for the more than 26,000 affected labor unions and 3,500 labor-related 
trusts in the United States. In the second year, estimated total 
compliance costs are expected to decline to $19.9 million, while costs 
in the third and succeeding years are expected to total $9.0 million 
each year. With respect to incremental cost of administration and 
enforcement for the federal government, we adopted the estimates made 
by the Department of $7.2 million per year.
A. Differences Explained
    The two main areas that account for the difference between our 
estimates and the Department's are (1) the number of hours for 
reporting and record keeping expected to be incurred by the average 
union organization, and (2) the application of a consistent (and 
higher) labor rate per hour. The change in the number of hours 
estimated for reporting and recording keeping (mostly in form of 
rounding and more generous allowances for initial compliance) accounted 
for roughly three-fourths of the deviation between our estimate and the 
Department's. The remaining one-quarter of the difference can be 
accounted for by the application of a standardized labor-hour rate. We 
believe these adjustments provide a more generous estimate of both 
burden hours and costs likely to be incurred by the affected labor 
organizations.

B. Average Cost per Union
    The Department estimates that 26,912 unions and 3,551 labor trusts 
will be affected by the changed financial disclosure regulations. Based 
on our estimates of lifetime costs to the unions (and ignoring 
incremental costs to the federal government), the average union will 
bear a cost of approximately $4,715 to comply with the new disclosure 
requirements, while the average labor-related trust will bear a long-
run cost of $19,035 to comply.
    Averages can be misleading since they can obscure large variances 
among the different organizations. This suggests costs may be 
disproportionately higher for larger unions. However, averages are 
supplied so that some standardized comparisons can be made to other 
organizations that disclose financial information on a regular basis.

                       VI. COST ESTIMATE CONTEXT

    This section provides several different ways to put the various 
compliance cost estimates of the rule into context.

A. Comparison to Union Estimates
    The long-run cost estimates provided in this comment were about 40 
percent higher than a capitalized version of the Department's 
estimates. Our estimates, however, remain at the low end of published 
reports of cost estimates made by union representatives. Laurence Gold, 
associate general counsel to the AFL-CIO suggested, for example, in a 
recent Associated Press story ``the accounting and recordkeeping 
changes could cost unions $250 million to $1 billion.'' \30\
---------------------------------------------------------------------------
    \30\ Leigh Strope, ``Proposed Regulations Would Require Unions To 
Open Books, Report More Financial Detail,'' Associated Press, 
Washington, December 21, 2002. It was unclear from the AP story whether 
Mr. Gold was referring to annually recurring costs or lifetime costs of 
the rule. Given the context of the other estimates herein, the latter 
case seems more likely.
---------------------------------------------------------------------------
    Observing that there are 26,912 unions and 3,551 trusts covered by 
the new rule,\31\ the average compliance cost--using the AFL-CIO's 
estimates--ranges from about $8,200 to just under $33,000 per covered 
labor organization.
---------------------------------------------------------------------------
    \31\ See Table 2, Proposed Rule, p. 79297.
---------------------------------------------------------------------------
B. Comparisons to Corporate Disclosure Costs
    Comparing the unions' disclosure costs to the costs incurred by 
other agents as they report to their principals provides another means 
of putting the rule's compliance costs into context. U.S. corporate 
managers (agents), for instance, regularly disclose their financial 
performances to shareholders (principals) through corporate annual 
reports, among other means. In calendar year 2001, it is estimated that 
the 12,000 public corporations in the United States communicated with 
their shareholders through corporate annual reports at a cost of 
slightly more than $9.0 billion.\32\ These annual report production and 
distribution costs represented an average disclosure cost per 
corporation of slightly more than $750,000 in 2001, or about 23 times 
more than the AFL-CIO's own worst-case cost estimate.
---------------------------------------------------------------------------
    \32\ Glenn Hasek (1997), ``Adding Art to Numbers: Corporate Annual 
Reports,'' Industry Week 246: 21, p. 122. In this article Hasek cites 
Sid Cato, publisher of the Newsletter on Annual Reports, who states 
``more than 12,000 U.S. companies generated an average 232,000 copies 
of annual reports for 1996 at a cost of approximately $3 per copy.'' 
Mr. Cato updated his estimate for 2001 in a news release stating ``that 
average per-copy investment in 2001 annual [reports] was $3.24 . . .'' 
From a news release dated November 1, 2002, taken from http://
www.sidcato.com/news/2002/rel1102.html. These per-copy figures include 
printing and distribution costs, but not other costs such as executive 
and employee preparation time, related capital investments, etc.
---------------------------------------------------------------------------
C. Cost per Union Member of Enhanced Disclosure
    The capitalized Department-estimated cost of the detailed financial 
disclosure (or $110 million, which excludes the additional $103 million 
of federal government costs for implementation and enforcement) 
represents an average cost of $6.15 per union member.\33\ By 
comparison, our cost estimates yield an average long-run cost of $10.88 
per member. Even using the AFL-CIO's high-end estimate of $1.0 billion 
produces a cost estimate for more detailed disclosure of $55.94 per 
union member (while its low-end estimate works out to an average cost 
per member of $13.99).
---------------------------------------------------------------------------
    \33\ As stated above, the Department did not capitalize its cost 
estimates. Therefore, we capitalized their estimates by applying OMB's 
suggested 7 percent discount rate to the various estimates of annual 
costs. Estimates of third year costs were treated as subsequently 
recurring into the indefinite future. The bulk of first year costs were 
treated as having been incurred near the end of first year in which the 
rule was applicable; therefore, year one's costs were not discounted.
---------------------------------------------------------------------------
    Regardless of which estimate proves closest to being correct, the 
decision of whether or not this cost provides a positive value to 
individual union members is a question only individual members can 
answer. However, we can say that given our estimate of lifetime costs 
for enhanced disclosure represents about 24 minutes of the average U.S. 
union member's hourly pay rate, many may consider it bargain--but only 
if the new rules deliver the benefits the Department suggests they 
will.

D. Compliance Costs in Relation to Union Receipts
    A sampling of union receipts (from dues, services, etc.) per union 
member can also help to put the rule's estimated compliance in 
perspective. Consider, for instance, that the Auto Workers Union (AFL-
CIO) as of December 2001 reported on its LM-2 form that it had 701,818 
members and total receipts of $328.7 million, or roughly $468 in 
receipts per member that year.\34\ Even if the worst case prevailed and 
compliance costs totaled $1 billion, resulting in average compliance 
costs of $55.44 per union member, that would still represent about 12 
percent of 1 year's UAW average, per-member receipts. On the other 
hand, if our estimates or the Department's are closer to the mark, the 
lifetime costs of the rule would equate to roughly 2 percent of average 
per member receipts for the Auto Workers' Union in 2001.\35\
---------------------------------------------------------------------------
    \34\ Data taken from the Department's financial reporting database, 
at the Office of Labor-Management Standards, at http://www.union-
reports.dol.gov. The search criteria were for national/international 
unions with total receipts greater than $200,000 per year for the 
latest reported data.
    \35\ The Auto Workers have neither the highest nor the lowest per 
member receipt totals, based on our search criteria of the Department's 
database. The Air Line Pilots Association (AFL-CIO), for example, 
reported total receipts as of December 2001 of $274.0 million and 
54,513 members, yielding average per member receipts of $5,026. By 
contrast, the Catholic School Teachers Association (an independent 
union) reported total receipts of $307,149 as of August 2001 and 4,762 
members, giving it average per member receipts of just $65. Even in the 
case of Catholic schoolteachers, our compliance cost estimate amounts 
to roughly 14 percent of their reported 2001 receipts. These compliance 
cost estimates, moreover, reflect lifetime costs of the rule and thus 
represent costs that would not be borne in any 1 year, but rather 
represent costs that would be spread out over several years.
---------------------------------------------------------------------------
Appendix I.--Cost Estimates of the Department of Labor's Proposed Labor 
                 Organization Financial Disclosure Rule

                     I. COMPLIANCE BURDEN ESTIMATES

    Form LM-2 involved the most significant changes and increases in 
supporting data to be provided. In the estimates that follow, our 
general procedure was to opt for burden estimates rounded to the 
nearest half working day, under the assumption that general orders of 
magnitude rather than precision are the best estimating outcome that 
one can hope to achieve. In addition, our estimates do not include any 
burden or cost estimates for legal oversight such as legal review of 
the regulation's applicability or subsequent compliance assurance 
before filing.

A. First Year Compliance Burden Estimates

            1. Install New Software
    We allocated one-half working day (i.e., four hours) for software 
installation. Though the software installation itself should be fairly 
rapid and uncomplicated, additional time is allotted to allow for 
unanticipated bugs, incompatibilities, or to installation of additional 
software utilities and/or hardware as may be required to make a fully 
functional system.

            2. Design/Adjust Report Forms and Format Structures to 
                    Comport with Regulatory Requirements
    Electronic data processing systems simply store and facilitate the 
manipulation of basic accounting data, and though such systems greatly 
ease reporting in comparison to manual systems, one cannot necessarily 
conclude from this that little or no incremental effort is involved to 
comport with new or modified regulatory reporting requirements. That 
is, new or significantly modified reports are likely to be necessary in 
order to reflect the changed regulatory requirements.
    We estimate that because of the detail involved in the seven new 
schedules on the LM-2, for example, each additional report will require 
at least one working day to design new output reports that follow the 
regulatory forms' requirements. This new burden is in addition to the 
15.25 hours the Department estimates that it already takes to complete 
the forms, as they exist currently. In addition, although the new LM-2 
also saw a net reduction in the number of questions asked by the 
Department, those reductions nevertheless represent changes to existing 
procedures that will have to be incorporated into new reporting 
practices. Therefore, we retain the Department's original estimate of 
15.25 hours (rounded up to an even 16 hours, or two working days) and 
add to it the allowances described above for the new supporting 
schedules, resulting in an estimated total of 72 hours to design and 
reformat output reports.

            3. Modify Existing Accounting Systems and Interfaces
    Beyond reconfiguring and adding new accounting output reports, 
adjustments will also likely be required to the accounting systems 
themselves. Such adjustments may include addition of or modification to 
audit trails (to track why data were changed or accessed and when), 
time to adjust accounting procedures to reflect new regulatory 
thresholds (such as the changed minimum levels for disbursement 
tracking, investments, and so on), and time to implement data exporting 
features into the Department-provided software (e.g., e.LORS) or into 
similar reporting systems from the existing accounting programs. 
Additional time should also be allowed to accommodate the adjustment of 
any documentation retention policies and to communicate these policies 
to appropriate union personnel. We assumed these tasks could be 
completed, on average, in four working days, or 32 hours.

            4. Incorporate Electronic Signatures
    We assumed that two working days at a minimum would be required to 
incorporate electronic signatures into the reporting documents filed 
with the Department. This time includes not only incorporation of the 
signatures themselves, but also time to test and verify the security 
features of this application. As with any new technology, time 
estimates are only rough approximations. Substantially more time may be 
required to implement this new and unusual feature successfully and to 
ensure its overall integrity as part of the reporting system.

            5. Validate and Reconcile Reported Output; Systems Testing
    Reports, supporting schedules, and other output will have to be 
compared to known-good data sources in order to validate that the 
reports are producing reliable and accurate output. Inevitable 
discrepancies will have to be reconciled and corrective procedures 
implemented. In addition, the overall system will need to be tested to 
ensure smooth integration and functioning of all subcomponents. We 
allotted three working days to complete the validation processes for 
the new reports. Although this procedure is classified as a reporting 
function, it can also result in increased recordkeeping costs if 
records have to be revised as a result of errors uncovered during a 
reconciliation process.

            6. Employee Training
    We assumed that, on average, four accounting and/or regulatory 
compliance staff members would require training for two full working 
days (i.e., at 8 hours per day per person). Large unions are likely to 
incur proportionately more training costs in order to ensure that 
enough personnel are proficient in the new reporting requirements. 
Conversely, smaller unions are likely to see proportionately smaller 
training requirements.

B. Second Year Reporting
    We made a simplifying assumption that, on the average, LM-2 report 
filers would be able to ascend 80 percent of the learning curve toward 
their final and best efficiency, with best efficiency being achieved in 
year three. In other words, although filers are expected to be much 
more efficient in year two than in year one, they will not reach peak 
efficiency until year three. Subsequent years beyond year three are 
assumed to see reporting burdens similar to those occurring in year 
three.

C. Third Year Reporting
    By year three, we expect that unions filing form LM-2 will have 
become proficient at doing so and will require approximately 24 staff 
hours to complete the reporting required by the revised form. This 
figure represents an augmentation to the time estimated to complete 
existing forms. The Department estimates that it currently takes 15.25 
hours to complete the LM-2 including its 15 supporting schedules. By 
adding 7 new and schedules, the Department has increased the simple 
volume of schedules by nearly 50 percent. In a few cases, moreover, the 
new schedules have the potential to be quite lengthy (e.g., the 
accounts receivable aging schedule, as well as the investments, 
receipts, and disbursements detail schedules). While it is true that 
the Department has shortened some of the existing up-front questions 
and data classification requirements, the largest incremental increase 
in reporting and record keeping seems likely to occur as a result of 
these new schedules.
    We have, therefore, conservatively added 1 hour per new schedule to 
the existing estimate of 15.25 hours giving a total slightly less than 
23 hours, on average, to complete LM-2 (once the institutional learning 
curve has been ascended). We then rounded our estimate up to the 
nearest whole working day, or 24 hours, consistent with our view that 
precision is not as important as general orders of magnitude.

D. LM-2 On-going Recordkeeping Estimates
    We estimated that incremental changes to record keeping 
requirements would total approximately one additional working day on 
average. These estimates reflect our belief that on-going recordkeeping 
functions with respect to the new requirements are likely to exist 
beyond the confines of the union's accounting department--e.g., for 
anyone disbursing or receiving funds for example, who now must keep 
more-accurate records regarding where such funds were disbursed to or 
from whom such funds were received. These additional burdens, though 
probably small for any given accounting event, and likely to be 
dispersed across many people throughout a labor organization, 
nevertheless seem equally likely to sum to non-trivial amounts in the 
aggregate. This on-going recordkeeping burden is expected to persist at 
one working day, moreover, for years two, three, and beyond.

                     II. FORM LM-3 BURDEN ESTIMATES

    The changes to the LM-3 form are minor. The requirements as to who 
must file a Form LM-3 have been changed, as has the requirement for 
increased disclosure if an LM-3 filer had an interest in a trust to 
which the filer contributed more than $10,000 in a given year. Since 
these changes are minor, we assumed that initial reporting burdens 
(software changes, report adjustments, training, and so on) would 
amount to one additional working day per union filing the LM-3. As the 
LM-3 union became more proficient in year two, this burden would be 
expected to drop to 2 hours, and then to one-half hour by year three 
and beyond.
    On-going record keeping requirements may be expected to total one 
hour in the first year and at most an additional half an hour in 
succeeding years.

                    III. FORM LM-4 BURDEN ESTIMATES

    The changes to form LM-4 are as minor as for LM-3. Therefore, we 
assumed that initial reporting burdens (software changes, report 
adjustments, training, and so one) would amount to at most one 
additional working day per union filing the LM-4. Moreover, as the 
union became more proficient in year two, this burden would be expected 
to drop to 2 hours, and then to one-half hour by year three and beyond.
    On-going record keeping requirements may be expected to total one 
hour in the first year and at most an additional half an hour in 
succeeding years.

                     IV. FORM T-1 BURDEN ESTIMATES

    In estimating the burden for filers of the T-1 form, we used the 
same estimates of reporting and record keeping burdens used for the 
revised LM-2 form. The justification for this approach is suggested by 
the Department itself, when it states, ``The new T-1 is structured 
similarly to the LM-2.'' \36\
---------------------------------------------------------------------------
    \36\ Proposed Rule, p. 79295.
---------------------------------------------------------------------------

                           V. SUMMARY TABLES

    The following tables summarize the cost estimates based on the 
preceding sources and methods. Table A.1 summarizes the estimated 
hourly compliance burden and resulting cost estimates, while Table A.2 
summarizes the capitalized estimates of the data in Table A.1.

                           TABLE A.1.--SUMMARY OF COMPLIANCE BURDEN AND COST ESTIMATES
----------------------------------------------------------------------------------------------------------------
                                              First year              Second year         Third year and beyond
                 Form                 --------------------------------------------------------------------------
                                          Hours        Cost        Hours        Cost        Hours        Cost
----------------------------------------------------------------------------------------------------------------
LM-2.................................   1,305,040    $36,280.1     413,240    $11,543.7     189.824     $5,277.1
LM-3.................................     116,266      3,232.2      32,389        900.4      13,081        363.7
LM-4.................................      72,972      2,028.6      20,270        563.5       8,108        225.4
T-1..................................     781,220     21,717.9     248,570      6,910.2     113,632      3,159.0
                                      --------------------------------------------------------------------------
      Total..........................   2,275,498     63,258.8     716,469     19,917.8     324,645      9,025.1
                                      ==========================================================================
Cost to Federal Government...........                  7,187.0                  7,187.0                  7,187.0
----------------------------------------------------------------------------------------------------------------


                                TABLE A.2.--SUMMARY OF CAPITALIZED COST ESTIMATES
----------------------------------------------------------------------------------------------------------------
                                                                                         Third year   Discounted
                                                               First year  Second uear   and beyond     totals
----------------------------------------------------------------------------------------------------------------
Unions......................................................    $41,540.9    $12,156.6    $73,196.2   $126,893.7
Labor Trusts................................................     21,717.9      6,456.2     39,416.7     67,592.8
Federal Government..........................................      7,187.0      6,716.8     89.677.2    103,581.0
                                                             ---------------------------------------------------
      Total Capitalized Costs...............................     70,445.8     25,331.6    202,290.0    298,067.5
----------------------------------------------------------------------------------------------------------------


       APPENDIX II.--RSP CHECKLIST--LABOR ORGANIZATION ANNUAL FINANCIAL DISCLOSURE REPORTS; PROPOSED RULE
----------------------------------------------------------------------------------------------------------------
                    Element              Agency approach                    RSP comments and grades
----------------------------------------------------------------------------------------------------------------
    Has the agency identified a   Although not clearly       There can be no market failure if the market is
     significant market failure?   articulated, there is an   not allowed to function. The unionized labor
                                   implicit information       market in the United States has been thoroughly
                                   asymmetry argument made    impeded by previous federal legislation and
                                   throughout the proposed    regulations. These previous impediments opened
                                   rule.                      the door to the abuses that the present rule
                                  Grade: N/A                  attempts to correct. Thus the present rule is in
                                                              fact an attempt to remedy a government not a
                                                              market failure.
    Has the agency identified an  The Department cites the   Given the way unions have been organized since at
     appropriate federal role?     1959 Landrum Griffin Act   least the New Deal, the federal role cited by
                                   as the basis for its       the Department seems correct.
                                   action.
                                  Grade: A
    Has the agency examined       The Department explores    Within the confines of the legislation and within
     alternative approaches?       some alternatives with     the proposed rule itself, the Department has
                                   the context of the 1959    identified some alternative approaches to, and
                                   Act.                       thresholds within, the present rule. The
                                  Grade: B                    Department could have been more thorough however
                                                              in recognizing that deterrence of financial
                                                              mismanagement is not simply a matter of better
                                                              reporting, but is instead also a function of
                                                              periodic audits and investigations. Regular
                                                              validation of reported data, in other words,
                                                              should be made part of the rule.
    Does the agency attempt to    The Department does not    Although we do not place a dollar value on the
     maximize net benefits?        attempt to value the       benefits either, we do attempt to put the costs
                                   benefits attributed to     of compliance into a variety of different
                                   the rule. It does          contexts so that some evaluation can be
                                   however assign a dollar    attempted.
                                   value to compliance
                                   costs.
                                  Grade: C
    Does the proposal have a      The rule has the           It is possible that the Department's job could be
     strong scientific or          potential for some         greatly simplified by drawing upon disclosure
     technical basis?              scientific basis through   procedures already established under GAAP.
                                   the application of         Adjusting GAAP to the peculiarities on union
                                   Generally Accepted         finance might then constitute the Department's
                                   Accounting Principles      marginal contribution to enhancing the
                                   (GAAP).                    disclosure process.
                                  Grade: C
    Are distributional effects    The Department seems to    By establishing single disclosure thresholds, the
     clearly understood?           ignore distributional      Department ignores potentially important
                                   consequences among         differences among unions based on size. Thus,
                                   unions themselves.         disbursements of less than $5,000, for example,
                                  Grade: D                    may be material for small unions, but are not
                                                              material for larger unions until a much higher
                                                              dollar figure is disbursed. A uniform disclosure
                                                              threshold for all unions glosses over these
                                                              differences.
    Are individual choices and    The Department recognizes  By recognizing that members who own the unions,
     property impacts              that the union members     and the public who confers the special
     understood?                   themselves are the         privileges and immunities on them have a right
                                   owners (principals) and    to know the financial status of these
                                   therefore have a right     organizations, the current rule is step in the
                                   to know how the agents     direction of reasserting proper control over
                                   are performing on the      these organizations.
                                   owners' behalf.
                                  Grade: A
----------------------------------------------------------------------------------------------------------------


    Dr. Cochran. Thank you, Mr. Chairman.
    My findings then, as well as my remarks here today, support 
the idea that the new rules should help union members: one, 
better understand their union's financial position; two, make 
better decisions about the governance of their unions; and 
three, should help union members by making it more difficult to 
hide fraud and financial mismanagement.
    The estimates provided in my original analysis of the rule 
placed its long-run or lifetime costs at roughly $11 per union 
member on the average. My estimate of $11 falls between 
estimates prepared by the Department of roughly $6 per member 
and AFL-CIO cost estimates that range between $14 and $55 per 
union member based on newspaper accounts of the AFL-CIO cost 
estimates available at the time.
    The Department's proposed regulations are an attempt to 
remedy a variant of the principal-agent problem; that is, the 
new rules try to correct an information asymmetry that exists 
between principals, union members, and their agents, union 
officials. Under the 1959 disclosure standards established with 
the Landrum-Griffin Act, it can be difficult for union 
principals to know the precise applications to which their 
funds have been put by their agents because of the summary 
nature of current union financial disclosure reports. The 
revised rules increase the volume and substance of disclosure 
and, by implication, raise the cost of committing fraud or 
hiding financial mismanagement. Basic economics tells us, 
therefore, that if we raise the cost of any activity, we are 
likely to see less of it; and clearly, reducing fraud works to 
the benefits of union member principals.
    Of course, better financial disclosure is an important 
element of improving the financial transparency and 
accountability of unions to their members, but it is not all. I 
would, therefore, concur with Mr. Hiatt and suggest, for 
example, that regular audits by independent accounting 
professionals, periodic investigations by appropriate Labor 
Department personnel, as well as examinations of financial data 
by independent parties, such as union members themselves, 
journalists, Members of Congress, and ordinary citizens, are 
additional important tools that complement and complete any 
enhanced disclosure process. With respect to this last point, 
Mr. Chairman, I would like to commend you and the members of 
this subcommittee for your willingness to examine the issue of 
union financial disclosure more carefully.
    Thank you.
    [The statement follows:]

                 Prepared Statement of Dr. Jay Cochran

    Good afternoon Mr. Chairman, Senator Harkin, members of the 
subcommittee, ladies and gentlemen. Thank you for the opportunity to 
comment today on the Labor Department's proposed rule regarding Labor 
Organization Annual Financial Reports.
    I am Jay Cochran, a Research Fellow in Regulatory Studies at the 
Mercatus Center at George Mason University, and an adjunct professor of 
economics at GMU. Our mission at the Regulatory Studies Program is to 
advance knowledge of the impact of regulations on society by conducting 
careful and independent analyses using contemporary economic 
scholarship to assess rulemaking proposals from the perspective of the 
public interest. Thus, the work we do does not represent the views of 
any particular affected party or special interest group, but rather is 
designed to evaluate the effects of government policies on overall 
consumer welfare. I would like to emphasize that the views I express 
today are my own and do not represent an official position of George 
Mason University.
    In February of this year, I authored a Public Interest Comment on 
the Labor Department's proposed union financial reports rule. Mr. 
Chairman, I respectfully request that those formal comments on the rule 
be incorporated into the hearing record as part of my remarks here 
today.
    My findings then, as well as my remarks here today, support the 
idea that the new rules should help union members:
    1. Better understand their union's financial position;
    2. Make better decisions about the governance of their unions; and,
    3. By making it more difficult to hide fraud or financial 
mismanagement.
    The estimates provided in my original analysis of the rule placed 
its long-run (or lifetime) costs at roughly $11 per union member, on 
average. My estimate of $11 falls between estimates prepared by the 
Department of roughly $6 per union member, and AFL-CIO cost estimates 
that ranged from $14 to $55 per union member based on newspaper 
accounts of AFL-CIO cost estimates available at the time.\1\
---------------------------------------------------------------------------
    \1\ In preparing the estimate comparisons for the February 2003 
Comment, at the time, I was unable to determine whether the AFL-CIO 
estimates presented in press accounts were annual or lifetime estimates 
of rule costs. I made the assumption, given the ranges of my estimates 
as well as those of the Department, that the AFL-CIO estimates were 
lifetime or long-run cost estimates. I have learned since filing our 
comments that the AFL-CIO's estimates were instead annually recurring 
estimates of cost. Using the AFL-CIO estimate, annual per member costs 
of the new rules are expected to be roughly $56--equivalent to roughly 
two hours of the fully loaded labor cost of union labor in the United 
States. [Average hourly union labor rate from the Statistical Abstract 
of the U.S. (2001), Table 626, p. 406, and includes fringe benefits, 
SSI, UI, and workers compensation.]
    The AFL-CIO's estimate of a billion dollars of annually recurring 
costs may be overstated for a number of reasons. First, we cannot 
verify the estimates since we do not know the method with which they 
were derived nor the data sources and assumptions upon which their 
estimates rely. Second, to generate first year costs of a billion 
dollars using the Mercatus method and assumptions requires that the 
applicable hourly wage rates double, while the number of labor hours 
required to bring union financial systems into compliance increase by 
an order of magnitude (or tenfold). While cost and burden estimates can 
be subject to some degree of latitude, a tenfold swing seems 
implausible because it would imply that adaptation to the new rules 
requires half a year just to modify systems and another half year to 
test the changes and train personnel. The changes as described by the 
Department do not seem likely to entail adjustment periods as lengthy 
as these. Third, a pattern of annually recurring billion dollar costs 
seems untenable on its face inasmuch as it reflects no learning curve 
effects, and because it apparently fails to distinguish between up-
front and annually recurring costs.
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    The Department's proposed regulations are an attempt to remedy a 
variant of the principal-agent problem. That is, the new rules try to 
correct an information asymmetry between the principals (union members) 
and their agents (union officials). Under the 1959 disclosure standards 
established with the Landrum-Griffin Act, it can be difficult for union 
principals to know the precise applications to which their funds have 
been put by their agents, because of the summary nature of current 
union financial disclosure reports. The revised rules increase the 
volume and substance of disclosure, and, by implication, raise the cost 
of committing fraud or of hiding financial mismanagement. Basic 
economics tells us that if we raise the cost of an activity, we are 
likely to see less of it; and clearly, reducing fraud works to the 
benefit of union member principals.
    Of course, better financial disclosure is an important element of 
improving the financial transparency and accountability of unions to 
their members, but it is not all. I would suggest, for example, that 
regular audits by independent accounting professionals, periodic 
investigations by appropriate Labor Department personnel, as well as 
examinations of financial data by independent parties--such as union 
members themselves, journalists, members of Congress, and ordinary 
citizens--are additional, important tools that complement and complete 
any enhanced disclosure process. With respect to this last point, Mr. 
Chairman, I would like to commend you and the members of this 
subcommittee for your willingness to examine the issue of union 
financial disclosure more carefully.
    Thank you.

STATEMENT OF LYNN TURNER, DIRECTOR, CENTER FOR QUALITY 
            FINANCIAL REPORTING, COLORADO STATE 
            UNIVERSITY
    Senator Specter. Thank you very much, Mr. Cochran. Our 
final witness on this panel is Mr. Lynn Turner, Director of the 
Center for Quality Financial Reporting at Colorado State 
University, bachelor's degree from Colorado State and an M.A. 
in accounting from the University of Nebraska. Thank you for 
joining us, Mr. Turner, and we look forward to your testimony.
    Mr. Turner. Thank you, Chairman Specter, ranking member 
Harkin, and the other members of the committee. I appreciate 
the invitation to testify at this hearing. I think it is a 
timely hearing on this important issue.
    Due to the late hour in the day, I am going to summarize my 
written remarks fairly quickly here for you and ask that the 
entire written statement be put in the record.
    Senator Specter. Your full statement will be in the record.
    Mr. Turner. As the former Chief Accountant for the U.S. 
Securities and Exchange Commission, as well as being a former 
executive in a major business, a former employee and union 
member as well, I fully understand the need for transparency in 
the union force and I do think it is important. Just as 
transparency, though, was important for us in the U.S. capital 
markets and for investors who use that information, it is 
equally important for union members and their regulator.
    But it is important to remember that it has been 
demonstrated time and time again that proper governance, 
internal controls, and transparency are a prerequisite to a 
reduction of fraud, along with aggressive law enforcement and 
prosecution of those who have failed to maintain their 
fiduciary responsibilities. Disclosure of mountains of detailed 
financial data without independent verification or validation 
of that data absolutely does not ensure the mitigation of fraud 
or the transparency of the information.
    Unfortunately, I believe the new rules proposed by ESA will 
fall short of their stated goal, while adding significant costs 
to a system that will have to be borne by the members and the 
dues that they pay to reimburse those costs.
    The proposed approach is also significantly different from 
that adopted by the Senate by a 99 to 0 vote last year and by 
the House by a 432 to 3 vote, as well as signed into 
legislation by the President 1 week ago this year, that being 
the Sarbanes-Oxley Act.
    The proposed rules are also dramatically different from 
those established by the U.S. General Accounting Office for 
ensuring proper reporting of receipts and disbursements by the 
Federal Government.
    The level of detail reporting is significantly greater than 
businesses have to report today, certainly for those public 
companies that report with us at the Securities and Exchange 
Commission. For example, ESA has asked that accounts receivable 
and payables of $1,000 or more be listed. It also requires 
investments and securities with a book value of $1,000 or more 
be listed. There is no such reporting requirement for public 
companies. And as a CFO and VP of a major international 
semiconductor company, I never had to report in such small 
detail this type of information. I am concerned it will set a 
dangerous precedent in the future for requiring other entities, 
such as business, to have to report such minutiae.
    In lieu of this, I would encourage ESA to adopt an approach 
similar to what Congress and the President did last year. Such 
an approach would, one, require an annual audit of the 
financial statements being supplied to the agency, which in 
this case is ESA. Disclosure would be required of material 
information, a standard set by the U.S. Supreme Court and the 
SEC and used by tens of thousands of private and public 
companies throughout the country.
    Two, requiring the auditor to report on compliance with 
laws and regulations consistent with today's requirements of 
audits done in accordance with the GAO standards, consistent as 
well with those requirements requiring the auditor to issue a 
report on internal control. Smaller organizations could comply 
by including in their financial report to ESA a report by the 
responsible fiduciaries on the effectiveness of their 
organizations' controls so we get the right benefit and cost.
    Three, a requirement that the auditor separately report on 
whether receipts and disbursements have been properly 
classified in accordance with generally accepted accounting 
principles, as we use them in the private sector.
    Finally, fourth, proper accountability and oversight of the 
financial reporting process. This should be accompanied by 
requiring executives or fiduciaries filing financial reports to 
certify their accuracy and to the effectiveness of the controls 
necessary to ensure the safeguarding of assets and proper 
financial reporting and to require the establishment of an 
audit or advisory committee that would be responsible and 
accountable to the members of the respective labor 
organization.
    Thank you and I would be happy to respond to any questions 
the members of the subcommittee may have.
    [The statement follows:]

                   Prepared Statement of Lynn Turner

    Chairman Specter, and Ranking Member Harkin: Thank you for the 
invitation to testify at this timely hearing on the issue of Union 
Financial Reporting and Disclosure.
    As I believe you are aware, I served as the Chief Accountant of the 
SEC from July of 1998 through August of 2001. I also served on the 
staff of the SEC from June of 1989 through July of 1991. Currently I am 
a professor of accounting and Director of The Center For Quality 
Financial Reporting at Colorado State University. I also serve as 
Director of Research to Glass Lewis who provides independent research 
on public companies proxies and financial reports and as a senior 
adviser to Kroll, a financial services firm.
    From June of 1996 to June of 1998, I was Vice President and Chief 
Financial Officer (CFO) of Symbios, Inc., an international manufacturer 
of semiconductors and storage solution products. Prior to joining 
Symbios, I served as a partner at one of the then ``Big Six'' 
international accounting firms, Coopers & Lybrand (C&L).
    Financial transparency is important today. When financial 
transparency fails to meet the needs of the users of financial 
information, it can result in significant costs as the investing public 
has experienced during recent years.
    As a former partner and leader of a business unit in one of the 
largest international accounting firms, as a former vice president and 
chief financial officer of a large international semiconductor 
manufacturer domiciled in the United States, and as a former regulator 
very familiar with financial reporting and disclosures (Chief 
Accountant of the Securities and Exchange Commission) I have 
significant experience with transparency in financial reporting, with 
employees and the work force environment, with business and with the 
public. As a former employee as well as a former union member, I fully 
understand the need for transparency for the labor force.

                            GENERAL COMMENTS

    It is appropriate for The Department of Labor's (DOL) Employment 
Standards Administration (ESA) to improve transparency and to utilize 
newer technologies available today. It is also important that the 
current system be periodically revised to ensure its efficiency and 
transparency.
    However, it is just as important to remember that it has been 
demonstrated time and time again that proper governance, internal 
controls and transparency are a prerequisite to a reduction of fraud, 
along with aggressive law enforcement and prosecution of those who have 
failed in their fiduciary responsibilities. Submission of data without 
independent verification or validation of that data does not ensure the 
mitigation of fraud or the transparency of the information. Rather, 
independent examinations and audits of the information by the private 
sector have proven to be a more cost beneficial approach to achieving 
the objectives of ESA.
    Unfortunately the new rules proposed by ESA fall short of their 
stated goal. Instead, they raise a number of serious concerns 
including:
    1. The approach taken in the proposed rules will not result in 
achieving the goal of reducing the level of fraud as discussed in the 
release. The proposed approach is dramatically different from that 
Congress and President chose to use in addressing fraudulent financial 
reporting by business, as set forth in the Sarbanes-Oxley Act of 2002. 
This legislation relies to a great extent on proper governance and the 
private sector as opposed to a government mandated system of reporting. 
The proposed rules are also dramatically different from the system 
established by the U.S. General Accounting Office (GAO) for ensuring 
proper reporting of receipts and disbursements of federal funds. 
Accordingly, ESA needs to revise its approach or it will entirely miss 
the target when it comes to a reduction in the level of fraud, while 
imposing significant costs.
    2. The level of detail reporting is significantly greater than 
businesses have to report. For example, ESA has proposed that Unions be 
required to list accounts receivable and payables of $1,000 or more. It 
also requires investments and securities to be reported if they have a 
book value of $1,000 or more. There is no such reporting requirement of 
such small amounts by public companies and certainly I did not have to 
report such small details as the CFO of a large international 
semiconductor company. Adoption of this rule proposal would set a 
dangerous precedent for requiring other entities, such as business, to 
have to report such insignificant details. If businesses and the 
pension funds of their employees were compelled to report their 
receipts and disbursements in the level of detail to the various 
government agencies (DOL, Internal Revenue Service, and SEC) set forth 
in this proposal, it could harm the competitiveness of business and 
cause them to incur significant costs, without a corresponding level of 
benefit.
    3. The Mercatus Center Regulatory Studies Program has commented on 
the costs expected to be incurred by the unions and government were the 
proposed rule to be implemented. I believe they have raised legitimate 
questions regarding the cost analysis. In addition, the proposal is 
deficient in that it fails to quantify in any meaningful way the 
benefits expected. Even with today's sophisticated financial systems, 
it takes time to program systems to provide disaggregated information 
regarding receipts or disbursements. In addition, many smaller 
organizations, such as those with under $5 million a year in receipts 
may not have available to them the financial systems or resources that 
will readily provide the data requested. As a result, additional 
resources may have to be devoted to gathering this data.

             IMPROVING TRANSPARENCY FOR LABOR ORGANIZATIONS

    The proposed rule relies on disaggregated reporting of financial 
information to improve transparency to members of labor organizations. 
The proposal cites a particular case before stating: ``This case 
demonstrates that detailed reporting can be an effective deterrent, and 
that more detail throughout the form LM-2 would further discourage 
malfeasance.'' Unfortunately, this is an improper conclusion. In fact 
as has been demonstrated on more than one occasion with the business 
community in recent years, those who have desired to commit fraud will 
do so, regardless of the level of detail reporting required. In the 
case cited there were improperly classified costs. Such costs can and 
most likely would continue to be misclassified by someone desiring to 
commit fraud, regardless of the level of detail required by form LM-2.
    Rather than a bureaucratic governmental approach to improving 
transparency, ESA should follow an approach consistent with that used 
by other governmental agencies including the GAO and the SEC. This 
private sector based approach is also consistent with that establish by 
Congress in the Sarbanes-Oxley Act of 2002 (Sarbanes). Rather than a 
focus on overly burdensome and costly detail reporting, it decreases 
the likelihood of fraud and increases transparency by requiring the 
establishment of proper oversight and governance, accountability, the 
adequacy of necessary internal controls and timely reporting of a lack 
of compliance with applicable laws and regulations by independent 
auditors. By utilizing outside ``gatekeepers'' in such a manner, it 
increases the likelihood that internal controls will prevent the 
occurrence of fraud in the first instance, and when fraud is committed, 
it will be detected in a timely fashion and provides a basis for prompt 
enforcement action by the responsible legal authorities.
    The approach used by the GAO \1\ and SEC, which has been widely 
heralded around the globe, would in lieu of the ESA proposal, require:
---------------------------------------------------------------------------
    \1\ For further information on the United States General Accounting 
Office approach, see Government Auditing Standards, June 2003 Revision.
---------------------------------------------------------------------------
    1. An annual audit of the financial statements being supplied to 
the agency which in this case is ESA. This could be accomplished by 
requiring larger labor organizations to have an independent audit 
performed of the financial reports and an independent auditor review 
financial statements of smaller organizations.
    2. Requiring the auditor to report on compliance with laws and 
regulations consistent with the requirements of the GAO.
    3. Requiring the auditor to issue a report on internal controls, 
consistent with the requirements of the GAO and Sarbanes-Oxley. Smaller 
organizations could comply by including in their financial report to 
ESA a report by the responsible fiduciaries on the effectiveness of the 
organizations controls.
    4. A requirement that the auditor separately report on whether the 
receipts and disbursements have been properly classified in accordance 
with generally accepted accounting principles (GAAP).
    5. Proper accountability and oversight of the financial reporting 
process. This should be accomplished by requiring executives or 
fiduciaries filing financial reports to certify their accuracy and to 
the effectiveness of the controls necessary to ensure the safeguarding 
of assets and proper financial reporting and to require the 
establishment of audit or advisory committees that would be responsible 
and accountable to the members of the respective labor organization.

      OVERLY BURDENSOME DETAIL REPORTING SETS DANGEROUS PRECEDENT

    The rule proposal sets forth a requirement for reporting of 
extremely detailed financial information for such financial statement 
line items as accounts receivable ($1,000), investments ($1,000), 
accounts payable ($1,000), major receipts ($5,000) and major 
disbursements ($5,000). I can think of no other government regulation 
that I have ever dealt with or been subject to that requires such 
detail reporting by business entities. A government agency requiring 
reporting of detailed information that may clearly be immaterial, 
therefore sets a dangerous precedent that may used as a basis by other 
agencies to also require such intrusive reporting of unnecessary 
detail.
    Other U.S. Government agencies such as the GAO and SEC have instead 
set financial reporting requirements that require ``material'' 
information be disclosed to those using the financial information.\2\ 
ESA's proposing release states that today's workforce is better 
educated, more empowered and more familiar with financial data than 
before. Given that statement, ESA should focus on ensuring members of 
labor organizations receive ``material'' information rather than 
bombard them with detailed reporting they will not utilize and which 
will result in government imposed costs that are ultimately born by the 
members.
---------------------------------------------------------------------------
    \2\ Staff Accounting Bulletin No. 99, Materiality, Securities and 
Exchange Commission. 1999. Available at website: http://www.sec.gov/
interps/account/sab99.htm. This guidance which has also been upheld in 
the U.S. Federal courts establishes what information is to be 
considered material information.
---------------------------------------------------------------------------
    Some have argued that materiality is a ``vague and complicated'' 
standard for determining disclosures to be made to interested parties. 
However, the U.S. Supreme Court has established a standard for applying 
materiality in assessing necessary disclosures to the investing public. 
Both public and private companies have for decades applied this 
standard when preparing their financial reports and have become 
accustomed to its application. It has proven to be an enhanced approach 
to one that is ``rule-based'' on a bright line test that is mandated 
for every reporting entity.
    Rather than the proposed detail reporting approach, ESA should rely 
on private sector standard setters, just as the DOL has for many years 
for financial reporting of private sector pensions. ESA should look to 
the accounting standard setters such as the Financial Accounting 
Standards Board (FASB), and the Auditing Standards Board (ASB) of the 
American Institute of Certified Public Accountants for the 
establishment of the necessary financial reporting and auditing 
standards. The government including the DOL, has for many years have 
relied upon the private sector to establish the appropriate standards 
that will provide the necessary level of transparency in financial 
reports and the appropriate auditing standards. ESA should not engage 
in government intervention in financial reporting, a role that is 
better left to the private sector. Rather ESA should work with the 
private sector standard setters to improve the existing system if ESA 
believes there are areas in need of improvement.
    A prime example of why ESA should rely on the private sector rests 
in the proposal to require additional detail reporting by 
unconsolidated affiliates of labor organizations. However, as is often 
the case in private business enterprises, the reporting entity may not 
have the prerequisite authority to demand the information that ESA is 
specifying be disclosed. In fact, the reporting entity may not have the 
legal authority to require that information if it is not in control of 
the affiliate. When it is in control of the affiliate, GAAP would 
require the accounts of the affiliate be consolidated with those of the 
reporting entity. GAAP also requires disclosure of material 
transactions with related parties such as affiliates.\3\
---------------------------------------------------------------------------
    \3\ FASB Statement No. 57, Related Party Disclosures. 1982.
---------------------------------------------------------------------------
    The FASB and business enterprises have worked for some period of 
time trying to develop a workable approach to disclosure of information 
with respect to affiliated entities that are controlled by the 
reporting entity as well as those who are subject to significant 
influence by the reporting entity, such as the labor organization.\4\ 
This has been a very difficult undertaking for the FASB, its 
predecessors and businesses. Some of the same difficulties will no 
doubt be encountered by ESA and the reporting labor unions. A hastily 
developed rule by ESA may in fact turn out to be one that cannot be 
complied with. Accordingly, ESA should work closely with the private 
sector to develop a workable approach and avoid a costly mistake.
---------------------------------------------------------------------------
    \4\ See also Accounting Principles Board Opinion No. 18, Accounting 
for Equity Method Investments in Common Stock. 1971.
---------------------------------------------------------------------------
                    SIGNIFICANT COSTS TO BE INCURRED

    The proposing release states that ``In 2000, 5,426 unions, 
including 141 national and international unions reported $200,000 or 
more in total annual receipts . . .'' Later on in its Initial 
Regulatory Flexibility Analysis ESA also questions the $6 million 
dollar threshold set by the Small Business Administration.
    I strongly disagree with ESA's statement that the SBA standard is 
unreasonably high. These standards are established in consideration of 
smaller organizations that may be unfairly burdened with government 
mandates and imposed costs, in light of their very limited resources. 
Regardless of whether it is a labor organization or a business, an 
entity with annual receipts of between $200,000 and $6 million is 
clearly a small entity that will have limited resources. The SBA's 
determination in this respect was not unreasonable. The ESA conclusion 
based simply on the number of unions with over $1 million in receipts 
is ill-reasoned. Using that type of reasoning for businesses would 
result the bar being raised significantly on what constitutes a small 
business as the vast majority of businesses in the American economy 
fall within the definition of a small business by the SBA or other 
government agencies such as the SEC.
    As a former chief financial officer, I have also had to work with 
and use disaggregated information. I believe the agency has 
significantly underestimated the amount of hours, perhaps by a multiple 
rather than just a percentage that it will take to gain an 
understanding of the new rules, reprogram software, determine and 
report the requested disaggregated information properly. I find the 
type of analysis prepared by the Mercutus Center to be worthy of your 
consideration. There will also be a significant hidden cost if this 
reporting becomes a precedent used by the DOL for other pensions or by 
other government agencies for business enterprises. The proposing 
release also fails to quantify the benefits of the proposal, why they 
exceed the expected costs. The proposal also fails to provide evidence 
that the detailed reporting approach will yield the benefits it seeks 
to achieve for members of labor organizations when in fact there is a 
lack of such evidence in the private sector.

                               CONCLUSION

    ESA should revise its proposal to adopt the approach recently 
enacted by Congress and the current administration in dealing with 
misleading financial reporting in the private sector. ESA's approach to 
reducing fraud by requiring disclosure of information in greater detail 
in no way ensures the integrity of the data through independent 
verification. As a result, fraud may continue to go undetected and 
union members mislead by disclosures that have not been independently 
verified. Instead, ESA should adopt a proven approach based on 
establishing proper oversight and governance, accountability, the 
adequacy of necessary internal controls and timely reporting of a lack 
of compliance with applicable laws and regulations by independent 
auditors. It is an approach that relies on the private sector standard 
setters and gatekeepers as opposed to a bureaucratically imposed 
governmental system that is unlikely to achieve its stated objectives. 
It is also a system that will likely have a lower cost while achieving 
the desired benefits.

    Senator Specter. Well, thank you, Mr. Turner.
    Mr. Cochran, what is your evaluation of the LM-2 
requirements compared to Sarbanes-Oxley? Are they more 
complicated?
    Dr. Cochran. I did not do a comparison between this rule 
and Sarbanes-Oxley, so I cannot answer that directly. But I do 
believe that to say that this rule imposes a burden that is 
heavier on unions than the disclosure standards incumbent upon 
publicly traded corporations I do not think is true, or at 
least I do not think it will hold up to detailed study.
    However, having said that----
    Senator Specter. Are the requirements of Sarbanes-Oxley not 
a fair statement today at least as to the level of inquiry 
which the Congress has asked for?
    Dr. Cochran. I am not sure I understand the question, 
Senator.
    Senator Specter. Well, Sarbanes-Oxley was enacted after 
there were very substantial failures of integrity in corporate 
disclosures and was subjected to a lot of analysis. There has 
been some contention that it goes too far, in fact, a fair 
amount of contention. So one baseline for consideration would 
be whether LM-2 goes beyond Sarbanes-Oxley because Sarbanes-
Oxley had a lot of consideration and analysis by the Congress.
    Dr. Cochran. That is right. And there is one attribute with 
respect to the LM-2 where it could possibly exceed what is 
placed on corporations, whether it is through Sarbanes-Oxley or 
traditional SEC filings or whichever, and that is the detailed 
disclosure standards with respect to disbursements, accounts 
payable and receivable, and so on. And we indicated in our 
comments filed last winter that we would support or we would 
suggest that a materiality standard might be the more 
appropriate response rather than specifying a dollar threshold 
so that you do not get reams and reams of paper of, for 
example, accounts receivable printouts.
    Senator Specter. Define what you mean by a materiality 
standard.
    Dr. Cochran. Well, a materiality standard as it applies in 
accounting. In other words, would a reasonable person need to 
know this information in order to have an accurate picture of 
the financial position of the union.
    Senator Specter. Ms. Lipnic, what do you think about a 
materiality standard?
    Ms. Lipnic. Senator, that is something that we have had 
some comments on and we are taking a look at that. I think in 
many ways the threshold requirements that we are putting into 
the LM-2 reporting serve some of that purpose as a materiality 
standard, and we specifically sought comments----
    Senator Specter. Serve some of the purpose, but does it go 
beyond materiality?
    Ms. Lipnic. Not being an expert in accounting, I do not 
necessarily feel qualified to give a----
    Senator Specter. You may not be an expert. You know more 
than the Senators do. That may be an unrealistic minimal 
standard to compare to, and it may be that the inquiry is 
premature because you have not promulgated the regulation. We 
do not know whether it is $2,000 or $5,000. And if you are 
considering materiality, it may well be that your final product 
will be somewhat, if not substantially, different. But when you 
talk about materiality, you are talking about an accepted 
accounting principle, something as the word ``materiality'' 
says, which is material, that is, relevant, germane to 
accomplish a purpose. I would suggest that that might be 
something worth looking at.
    The estimates as to cost differ enormously. The Department 
of Labor says the first-year costs should be $14.6 million and 
about $3.3 million in second year. The AFL-CIO estimates that 
the total cost to unions will range from $309 million to $1.1 
billion. It sounds to me like we are trying to settle a 
personal injury case, with all due respect.
    Mr. Hiatt, how do you come to $309 million to $1.1 billion?
    Mr. Hiatt. That is a large range, Senator, but----
    Senator Specter. I know it is a large range. How do you get 
there?
    Mr. Hiatt. We had an economist do a survey of all of our 
national and local unions, and we obviously were dealing, 
therefore, with a sample of unions that responded to the 
survey. It was the overwhelming percentage of national unions 
and a significant number of the local unions. Within that 
sample, the economist broke down the cost based on locals and 
national unions, and then we had another expert who used the 
Department's own filing system that breaks out local unions by 
nine levels of revenue. Within the sample, they came up with 
average costs, as well as median costs. Because of the 
difference in outliers under the two systems, you had more 
medians. As a result, we took the very lowest----
    Senator Specter. Average as well as median cost?
    Mr. Hiatt. We did average as well as median.
    Senator Specter. Did you get mean costs?
    Mr. Hiatt. And mean costs. As a result, we had the very 
lowest coming out at $300 million and the very highest at $1.1 
billion.
    But I think the most significant issue here is that the 
Department admits in Federal Register that its estimate is not 
based on data. It is based on a gut feeling or based on 
discussions that it may have had with some of its staff, but it 
acknowledges that it did not start out with any of the data 
that would allow it to perform a burden analysis and instead 
was relying on the unions in their comments to provide the 
data. We have done the best we can, and as big a range as it 
is, it is clear that this burden is multiples more than what 
the Department would like to think would be involved in this 
record keeping.
    I think the materiality standard would certainly be one 
factor that would affect the cost here because as it now 
stands, no matter how detailed, no matter how trivial, no 
matter how minute the transaction is, if it ends up totaling in 
the aggregate more than this $2,000 to $5,000 threshold, the 
union will have to keep records as to all aspects of that 
transaction and it probably will not know during the year 
whether we end up with a $2,000 or a $5,000 limit. It probably 
will not matter because for most of these transactions, the 
union will not know at the beginning of the year whether it is 
going to hit the $2,000 or the $5,000, whatever the level would 
be, until the end of the year.
    Senator Specter. Let the record show that I finished my 
question before the red light went on.
    Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman.
    Ms. Lipnic, the Department's notice of proposed rulemaking 
makes it clear that the Department did not conduct any survey 
of the unions before it published its proposal. In fact, the 
notice of proposed rulemaking states--and I am going to quote 
this--``information regarding the burden imposed by making the 
proposed changes and the benefit to be gained is most likely to 
be obtained by proposing the changes for comment so that unions 
who file these reports, union members, and other groups that 
represent workers can express their views.''
    How do you justify your failure to conduct a survey of the 
unions that will have to shoulder the immense financial burden 
of this rule in light of the regulatory requirements that the 
Department is required to follow such as Executive Order 12866 
and the Regulatory Flexibility Act?
    Ms. Lipnic. Senator, in doing our analysis in proposing 
this rule, we did follow all of the requirements from OMB under 
the executive order. We also did a regulatory flexibility 
analysis even though we were not required to do this because 
this was not an economically significant rule.
    Senator Murray. It is not an economically significant rule 
for who?
    Ms. Lipnic. Within the context of how OMB determines 
whether rules have economic significance for the economy.
    Senator Murray. Mr. Hiatt, will this have an economic 
impact?
    Mr. Hiatt. This would certainly have an economic impact and 
we do not believe the OMB has accepted the Department's 
conclusion that this is not an economically significant rule. 
There was a good deal of controversy around that. The 
Department was basing its conclusion in part on the belief that 
local unions are not small businesses, even though under the 
Small Business Administration's own definition of a small 
business, every single one of these covered entities would come 
under the small business threshold. The Department apparently 
did not accept that and that is what at least in part has led 
them to conclude this does not have to be treated as an 
economically significant rule.
    Senator Murray. Ms. Lipnic.
    Ms. Lipnic. Although Mr. Hiatt is correct that we did not 
accept the $6 million threshold, we did in fact do the 
regulatory flexibility analysis that is required by OMB for 
promulgating this rule, and in terms of the controversy 
associated with whether OMB determined it was an economically 
significant rule, in fact I think the record would reflect that 
OMB concluded with the Department's analysis that it would be 
considered what is called an ``other significant rule,'' and 
that was what had long been on the Department's regulatory 
agenda.
    Senator Murray. Regardless, there was no survey of unions 
done beforehand. Correct?
    Ms. Lipnic. That is correct.
    Senator Murray. The Department's proposal states that no 
specific data exists regarding the extent to which unions have 
already embraced the technology necessary to provide reports in 
electronic form, but the Department has proposed a technology-
based rule that requires unions to file their LM forms 
electronically. Can you explain the Department's failure to 
conduct any study whatsoever on the technological capabilities 
of the unions that are now going to have to file these LM-2 
forms?
    Ms. Lipnic. Actually, Senator, we did engage an outside 
contractor, a software firm, and part of the technical 
feasibility study that the software firm put together for the 
Department and that we made available through the public 
comment period included some analysis of software packages, 
accounting packages in particular, that are used by unions to 
file their forms.
    Senator Murray. Well, but the fact is that the software 
does not exist today.
    Ms. Lipnic. That is correct. The software is under 
development.
    Senator Murray. I have seen software under development for 
large projects for years before it ever works. Is the 
Department aware of that?
    Ms. Lipnic. We certainly are aware that software projects 
can take a long time. That is also why we engaged the 
contractor, we had the feasibility done, and----
    Senator Murray. I have heard a lot of contractors say we 
are going to have this done by July 1 and it is July 1, 3 years 
later, and it costs 10 times as much. I just have to tell you, 
having worked with many government agencies that have gone down 
that road--how can the Department even have the vaguest idea 
whether unions can comply with this proposal if it does not 
have the software there now that is going to enable them to 
file these forms that are going to be required?
    Ms. Lipnic. Again, Senator, our study tells us that this is 
relatively simple software that will not create great problems 
for the unions or the Department in filing----
    Senator Murray. You have a contractor who says I can do 
this.
    Ms. Lipnic. We have a feasibility study that says that, 
yes.
    Senator Murray. Well, I would just remind all of us that 
anybody who has worked with large government agencies, whether 
it is a school district or a business that has required an IT 
department to come up with software, they always say they can 
get it done, but there is always cost overruns. It always takes 
longer and it does not always work. So I would hate to see a 
rule imposed on unions without knowing that they have the 
ability to have the software in front of them that works. 
Otherwise, this is going to be a real burden to a lot of 
people.
    I know my red light is on. I do have some other questions, 
Mr. Chairman, and I assume we can submit them for the record 
and get responses back.
    Senator Specter. Of course, Senator Murray, if you submit 
them for the record, I am sure they will be answered by the 
panel.
    Senator Craig.
    Senator Craig. Mr. Chairman, thank you very much.
    I am pleased that you brought up Sarbanes-Oxley. That seems 
to be at least a threshold measurement today that we here in 
Congress believe is critical and important.
    Those of us who sit at this dias are also subject to 
something else, campaign finance reform. And a lot of us run 
mom and pop organizations once every 6 years. We gear up. We 
spend hundreds of thousands of dollars, but we report every 
financial transaction that is conducted within a campaign. We 
do it for legitimacy. We also do it for the electorate to know 
where our money comes from and where it is spent.
    While I agree with the Senator from the State of Washington 
that software is always a problem, there are 15 or 20 vendors 
out there in the public arena today that are hawking the 
software for campaign reporting. It is all geared to the FEC 
rules and regulations. Once input is made on a function by 
function basis, a button is pushed and electronic reporting 
occurs. Or I can walk down to the Secretary of the Senate's 
Office and hand it in in paper form. That is true for the U.S. 
Senate where campaigns are oftentimes more expensive. It is 
also true for the U.S. House where I think by definition you 
could still say in a few congressional districts mom and pop 
campaigns operate up to maybe $500,000 or $600,000 or $800,000 
or maybe $1 million every 2 years. But that reporting is 
necessary and it is demanded by law. We are doing the same 
thing of corporate America today for the obvious reasons.
    I must tell you that when I hear about furs and Tiffany 
silverware being purchased or I see tens of millions of dollars 
being labeled as vague and non-informative categories, like $62 
million simply being labeled for grants to and joint projects 
with State and local affiliates or $45 million for other 
disbursements and these are union members' dues and money that 
is being spent, what I would want to have would be the same 
kind of functional disclosure that every political campaign, 
Federal political campaign, in this Nation is subject to. I 
think it is right and appropriate, honest, fair, and most 
importantly, it is transparent because it is the members of the 
unions' money. That is what it is.
    What is more important about it is not necessarily the 
critical eye that the Department of Labor gives it, it is the 
critical eye that public disclosure gives it. FEC sometimes 
does not really ever get at what we report in a timely fashion, 
but the news media does, and every time a financial statement 
by a campaign is made, it is oftentimes printed up within 24 
hours in the local media, and that is without doubt the finest 
disclosure available in the world today. I believe in it. It is 
honest and it is fair.
    Now, in multi-million dollar union organizations, I would 
not expect the kind of full disclosure that political campaigns 
are subject to, but I do believe that if these rules have not 
been reformed in 44 years, they deserve a thorough reforming. 
And for anybody to suggest that it is going to be too expensive 
is to suggest that fraud and abuse is okay if it exists or that 
the inability to find it through disclosure is okay because the 
other side of it is just too expensive. Well, if it is too 
expensive, let us figure out a way to make it less expensive. 
But let us have full disclosure.
    I applaud DOE--or in this case, DOL, Department of Labor--I 
have been involved with DOE too much all day today for going 
after it. At the same time, I would expect that they would work 
with the unions to develop something functional, viable, 
hopefully less expensive than what is at least being bandied 
around in the broad perspective of it, but something that the 
public can effectively look at and say, oh, that is where our 
money is going, or in the case of the membership, that is where 
our money is going. That is how much it costs. And thresholds 
would be important.
    Mr. Hiatt, I hear it bandied around. What is a mom and pop 
union?
    Mr. Hiatt. Well, just to give you an example, Senator, 40 
percent of all of the unions that would be covered by this rule 
have, according to the Department's own figures, annual revenue 
that is $400,000 or less. What that means is that if, in fact, 
the average of what our survey showed, the average cost to a 
local of complying with just the record keeping and reporting--
I am not talking about the cost of the underlying transactions. 
Just the record keeping and reporting at $217,000 for a local 
union, not a national union, this would be more than half of 
the annual revenue of the local itself. I would call that 
relatively speaking a mom and pop local union. It is a union 
whose lead officer has a full-time job on the factory floor or 
in the work place who on a volunteer basis is serving as the 
president or secretary or treasurer of his or her local union 
who is not being paid for that, who does not have staff, who 
does not have professionals, who would have to go out and hire 
professionals for this kind of work. I would call that a mom 
and pop operation, and it is not a rare exception. It is very 
common within this universe of entities that would be 
regulated.
    Senator Craig. What is the requirement of their disclosure 
today?
    Mr. Hiatt. Actually, in many ways, Senator, for any 
individual union member who wants access to all of the 
underlying documents and records, they have under Landrum-
Griffin today, under the LMRDA, the right to go beyond the 
forms that are filed. And there is an elaborate record keeping 
and reporting system that already, of course, is in place where 
unions do have to file annually. All of these entities already 
are having to file. But to take the example that you raised of 
the category of other disbursements that do not fit into one of 
the functional categories on the form, any union member who has 
any questions or is at all suspicious has the right to seek 
access to the books, and the union--``for cause'' is the 
language in the statute, but as a practical matter, I am not 
aware of one union who denies an individual member who comes in 
and asks to see the underlying books, under the Landrum-Griffin 
right to do so, that right. And he or she then can get access 
to the records showing each and every one of the disbursements 
or the other underlying financial documents.
    Senator Craig. Do they have to request the examination or 
is it printed so they can see it publicly on an annual basis?
    Mr. Hiatt. If they wish to go beyond what is now made 
public on an annual basis, then they make a request to see 
more. The regular LM-2 forms are submitted. They are available. 
If you go into the Labor Department at any given time to ask 
for access to the LM-2's--and this is actually before--I think 
they have just now put them online, but if you go in in person 
and ask, you are given access to them.
    Although interestingly, it is very rare that a person who 
is in the Labor Department's Office inspecting LM-2's is anyone 
other than a management-labor lawyer seeking information off of 
those forms on how to use information about the union in the 
next organizing campaign or in the next bargaining campaign. 
For the most part, the entities that have been complaining 
about inadequate disclosure on the LM forms are these so-called 
union busting consultants who have been looking for more 
information about where the union has been organizing or what 
kind of legislative lobbying they have been doing.
    Senator Craig. Nobody is in there looking or concerned 
about fraud or abuse.
    Mr. Hiatt. I am sure there are. There should be. I would 
hope there are. And we support that.
    Senator Craig. I would agree with you that if the forms 
being proposed are going to cost half the income, if you will, 
or the general revenue of a local union on an annual basis, 
that is excessive. My guess is that could not happen. To report 
$400,000 worth of income and general disbursement twice a year, 
quarterly, campaigns do it every month. Sometimes they do it 
every 2 weeks in the last month of a campaign by pushing a 
computer button. And software, once developed is very 
inexpensive. And I understand mom and pops very well, from 
businesses to unions. So I would concur with you. That would be 
excessive.
    What I cannot and will not accept--and I applaud the 
Department for doing it--is taking 44-year-old ideas and making 
them 21st century transparent. No union member should feel 
intimidated by asking to go beyond what is open and readily 
available in the public eye because intimidation might be a 
factor if he or she suggests that they want to look deeper into 
the records of their own union.
    Mr. Hiatt. Senator, I do not disagree. I think the whole 
question is what is the nature of the specific requirement that 
is being imposed, and we are only arguing with what is the 
nature of this particular proposal, not whether there should be 
transparency.
    We made a Freedom of Information Act request as part of 
this process, and we received a memo that then-Congressman 
Gingrich had sent to Senator Martin in 1992 when the Department 
briefly considered a very similar proposal, although not as 
onerous, urging Senator Martin, Labor Secretary Martin at the 
time, to speed up this type of reporting requirement because it 
would weaken our opponents and encourage our allies.
    Senator Craig. Well, Newt is not around anymore.
    I do not care what Newt Gingrich said.
    Mr. Hiatt. This is even worse. What they are now proposing 
is more onerous than what was done in 1992.
    Senator Craig. What I most care about and will urge the 
Department to do is to move you toward economically feasible, 
fully transparent reporting for the sake of your membership.
    Thank you.
    Mr. Hiatt. Thank you.
    Senator Specter. I would pick up on what I understood 
Senator Craig to say, if I am correct about this, that it would 
be useful for the parties to try to see if there is some middle 
ground. Mr. Hiatt agrees with transparency and Mr. Cochran, who 
speaks in support of the Department of Labor position, injects 
the word ``materiality.'' And there is not now an audit 
requirement. Senator Craig starts off with reference to 
Sarbanes-Oxley as a standard which the Congress has accepted. 
And I have heard a lot of comment.
    I would be interested, Ms. Lipnic, in your view. Do you 
agree that the current LM-2 is more complicated than Sarbanes-
Oxley?
    Ms. Lipnic. Actually, no, Senator. We specifically looked 
at revising the LM-2 form because we thought that would be a 
less burdensome requirement than attempting to impose the kind 
of reporting requirements under Sarbanes-Oxley.
    Senator Specter. So you think LM-2 is easier than Sarbanes-
Oxley?
    Ms. Lipnic. Yes, we do, and also it is a familiar reporting 
form that has been in place for 40 years and unions are 
certainly used to filing under this form.
    Senator Specter. But there are a lot of changes. Dr. 
Cochran, you said you do not really know. What is your position 
on the LM-2 proposal compared to Sarbanes-Oxley?
    Dr. Cochran. Well, again, I did not do a direct comparison 
between the rule and Sarbanes-Oxley, so I cannot answer that 
directly. But I think it is clear that the rule does increase 
the burden on unions. That is why we have costs. Right? Because 
we are increasing the burden, we are increasing the number of 
hours----
    Senator Specter. The question that I am trying to focus on 
is whether it increases the burden beyond that which 
corporations now have.
    Dr. Cochran. In an unduly burdensome fashion? I do not 
think so. In our comments we----
    Senator Specter. Not unduly burdensome.
    Dr. Cochran. No, I understand.
    Senator Specter. Sarbanes-Oxley, because unduly burdensome 
is subjective. Sarbanes-Oxley is tangible.
    Let me suggest to the parties here you have not come to a 
final rule. Have the parties, the AFL-CIO and the Department of 
Labor, sat down to try to find common ground?
    Mr. Hiatt. I will be interested to hear the Department's 
version in answer to that question.
    Senator Specter. Do not everyone speak at once.
    How about it? Have the parties sat down? How about it, Dr. 
Cochran?
    Dr. Cochran. I have no idea whether the parties have sat 
down. I am an outsider.
    Senator Specter. Apparently nobody else does either.
    Mr. Hiatt. We sat down with the Department about 9 months 
before they published the proposed regs when, as a result of 
testimony by the Deputy Secretary of Labor at a hearing, they 
acknowledged they were considering changing these regs. And we 
asked if we could sit down with them. The panel was surprised 
to hear there had not been any input. We sat down at the time--
--
    Senator Specter. What panel was surprised?
    Mr. Hiatt. It was a House panel.
    Senator Specter. House of Representatives?
    Mr. Hiatt. Yes, Senator.
    Senator Specter. The Senate might be able to agree with the 
House on something.
    Mr. Hiatt. Well, it was on a different subject, but in the 
course of it, the Deputy Secretary acknowledged that this 
exercise was going on.
    We then met and at the time the Department was not able to 
tell us what they were going to be proposing. They said it was 
still too early. We asked if they would agree to meet with us 
when they had a better idea but before the proposed regulation 
was published. At the time, they said yes, but then they 
withdrew that offer and we were never able to have a meeting 
from the point at which they had apparently decided what the 
proposed reg would include.
    Senator Specter. Well, let me make a suggestion. The 
parties can do as they choose, and the Congress has its own 
options in the legislative context. But it could be an 
extension of the comment period. It could be a form of comment 
on discussions. We have been in the midst of the complexities 
of asbestos and this is not as complicated as the asbestos 
bill. All the parties have thought it would be useful to go to 
the Chief Judge Emeritus of the Third Circuit to take a look at 
it, and it might be that somebody could sit down with the 
parties here. I think there is a general recognition that more 
needs to be done. There is now not a requirement for an audit.
    Would you agree that there ought to be an audit, Mr. Hiatt?
    Mr. Hiatt. We have indicated that we believe that some sort 
of an audit requirement would make sense.
    Senator Specter. That is a yes?
    Mr. Hiatt. Yes, it is, subject to specific issues that 
probably would vary based on size of unions and so on.
    Senator Specter. So it is subject to. Well, an audit will 
have to be defined. If it is a yes----
    Mr. Hiatt. Yes.
    Senator Specter [continuing]. That is a little progress.
    Mr. Hiatt. Maybe Judge Becker could help us out with that.
    Senator Specter. He is busy.
    I think this hearing has been very useful. I have talked to 
Secretary Chao about it, and I know she wants to come to a 
reasonable resolution. It seemed to me that this hearing would 
be helpful to bring the parties together and talk about it. I 
personally believe that most of these issues are susceptible to 
agreement. We are all after a common goal. The parties are a 
lot better off sitting down together and figuring it out as 
opposed to having it come to the Congress because the Congress 
invariably knows a lot less than the parties do, even those of 
us who have sat through this hearing.

                     ADDITIONAL COMMITTEE QUESTIONS

    There will be some additional questions which will be 
submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
              Questions Submitted by Senator Patty Murray

           PROPOSED RULE FOR ELECTRONIC FILING OF LM-2 FORMS

    Question. The Department's Notice of Proposed Rulemaking makes it 
clear that the Department did not conduct any ``survey of unions'' 
before publishing its proposal. In fact, the NPRM states that, 
``[I]nformation regarding the burden imposed by making the `proposed 
changes' and the benefit to be gained is most likely to be obtained by 
`proposing' the changes for comments so that unions who file these 
reports, union members, and other groups that represent workers can 
express their views.''
    How do you justify your failure to conduct a survey of the unions 
that will have to shoulder the immense financial burden of the rule in 
light of the regulatory requirements that the Department is required to 
follow, such as Executive Order 12866 and the Regulatory Flexibility 
Act?
    Answer. The Department of Labor has engaged in a process that fully 
complies with all regulatory requirements, including Executive Order 
12866 and the Regulatory Flexibility Act, and was designed to ensure 
that all stakeholders have meaningful input.
    The Office of Labor-Management Standards (OLMS) had meetings with 
the AFL-CIO and representatives from more than 40 international unions 
in which OLMS described the Department's general approach to the reform 
and encouraged the attendees of the meetings to submit ideas on a range 
of subjects. Other senior officials of the Department also met with 
union leaders to discuss their concerns before and during the 
rulemaking process.
    In addition to the outreach discussed above, the Department 
extended the comment period for the proposed rule by 30 days and 
published a technology study conducted by an independent software 
developer to ensure that the public had an opportunity to comment on 
the rule and the burden associated with the proposal. As your quote 
from the NPRM indicates the Department correctly believed that the 
comment period would be the best source of input from our important 
stakeholders. The Department received over 35,000 comments, including a 
218 page comment from the AFL-CIO that contained 3 studies. Other 
detailed comments were submitted by almost every international union. 
The Department is carefully reviewing and considering all of these 
comments.
    Question. The Department's proposal states that ``no specific data 
exist regarding the extent to which unions have already embraced the 
technology necessary to provide reports in electronic format.'' Yet the 
Department has proposed a technology-based rule, in that it requires 
unions to file their LM forms electronically.
    Can you explain the Department's failure to conduct any study 
whatsoever on the technological capabilities of the unions that will 
have to file the revised LM-2 forms?
    How does this failure square with the Department's responsibility 
under Executive Order 12866 to base its rules on the best scientific, 
technical, economic, or other evidence?
    Answer. The Department of Labor has engaged in a process that fully 
complies with all regulatory requirements, including Executive Order 
12866. The Department is confident of the technological aspects of the 
proposed rule for a number of reasons.
    The development and implementation of an electronic filing system 
is not a new project for the federal government or the Department. In 
fact, OLMS completed an electronic filing system last year that 
performs many of the key functions that the proposed system would be 
required to perform, such as pre-populating certain data, importing 
certain schedules, entering information directly into the form, various 
levels of data validation, attaching digital signatures using Public 
Key Infrastructure (PKI) technology, and submission via the Internet. 
Other government agencies, including the Securities and Exchange 
Commission (SEC) and the Federal Election Commission (FEC) have 
successfully developed electronic filing systems that involve 
comparable system requirements. The success of OLMS's effort is 
reflected in the fact that approximately 75 percent of Form LM-2 filers 
now use the OLMS provided software to prepare their annual financial 
reports.
    The AFL-CIO also reported in their public comments that all 
national and international unions and over 87 percent of all local 
unions use computer accounting software. The NPRM explained that the 
OLMS electronic filing software would be designed to work with 
commercial-off-the-shelf accounting packages that are inexpensive and 
widely used. Most unions would continue to use the same accounting 
software they use today and at the end of the year they would transfer 
the appropriate financial data to the Department's filing software 
provided at no cost to the unions. The Department also included a 
hardship exemption procedure in the NPRM that was modeled after the 
procedure used by the SEC for those few Form LM-2 filers that do not 
have the capacity to prepare and submit the form electronically and 
specifically asked for comments regarding whether this procedure is 
appropriate or another procedure might better address legitimate 
problems. The Department is carefully reviewing and considering all of 
the comments.
    Question. One of the Department's central claims about the rule is 
that unions will not have a huge compliance burden because DOL will 
provide the software necessary to file the forms electronically. Yet 
the software does not exist yet and the Department refused to slow down 
the timetable so that it could develop the software and allow the 
unions to comment on the feasibility of using it.
    How can the Department have even the vaguest idea of whether unions 
can comply with the proposal if it has not yet developed the software 
that will ostensibly enable unions to file the forms electronically?
    How can you justify proceeding with the rulemaking in the absence 
of the software in light of your obligation under Executive Order 12866 
to base the rule on the best available technical and scientific 
information?
    Answer. In January 2002, the Office of Labor-Management Standards 
began distributing computer software to unions that enables them to 
complete the existing forms electronically. Approximately 75 percent of 
the unions currently filing Form LM-2 reports are using that software 
to prepare those reports.
    In connection with the proposed rule, the Department contracted 
with a professional provider of information technology services, SRA 
International (SRA), to assess the technical feasibility of 
electronically collecting and reporting the information that would be 
required by the proposed changes. SRA concluded that the technology 
existed and was mature enough to support the Department's proposed 
reporting system. The study was helpful in preparing the Department's 
burden estimates in the NPRM. In particular, the study provided 
insights regarding the costs that would be incurred by unions to make 
adjustments to their recordkeeping systems and to transfer the data to 
the filing software at the end of the year. The SRA technical 
feasibility study was also made available for public comment during the 
rulemaking.
    While the SRA study confirmed that the Department's proposal was 
feasible, in terms of current technology, it would not make sense to 
develop software based solely on a proposal because the Department is 
seriously considering thousands of comments, many of which suggest 
changes to the proposal. The software that will enable unions to file 
their reports electronically cannot be developed until there is a final 
decision whether the final rule will require electronic filing and what 
the report will contain. Software would then be made available to 
unions long before they would be required to file a report in 
compliance with such a final rule.
    It is important to note that the purpose of the software is to 
reduce the reporting burden on unions and to reduce the cost of 
disseminating the information on the Internet to union members. The 
implementation of the reporting software would come in two phases. 
First, in conjunction with any final rule that requires electronic 
filing, the Department would provide a Data Specifications Document, 
that will give unions the information they will need to interface with 
the software and report their information to the Department 
electronically. Second, as noted above, the software enabling unions to 
file electronically would be provided to the unions well before they 
would have to use it to file their reports.
    Finally, the Department specifically requested, and is currently 
considering, comments on whether the proposed effective date (allowing 
at least fifteen months following publication of a final rule before 
any union would have to file electronically) provided a sufficient time 
period for unions to comply with a final rule. The Department is also 
going to establish a help line to answer any questions and will make 
other compliance assistance available, including assistance with 
respect to changes that would be necessary to implement an electronic 
filing requirement. Moreover, all of the information that unions will 
need to update their internal recordkeeping and reporting requirements 
for the proposed Form LM-2 will be contained in the final rule that is 
published in the Federal Register.
    Question. Unions have a legal obligation to represent their members 
in the workplace, and fulfilling these obligations costs money. As I 
understand your proposal, even local unions will have to spend 
thousands of dollars to comply with the new financial requirements.
    What possible justification could you have to take money away from 
representing workers so that unions can comply with paperwork 
requirements imposed by the government?
    Answer. The Labor-Management Reporting and Disclosure Act of 1959 
which was passed by large majorities in both the Senate (a 95 to 2 
vote) and House (a 352 to 52 vote) requires that labor unions file 
annual financial reports with the Secretary of Labor setting forth 
certain specified information in such detail as may be necessary to 
accurately disclose their financial condition and operations. The 
Congress considered disclosure of such information to be necessary to 
protect the rights and interests of union members and the public.
    In satisfying this congressional mandate, the Department's proposed 
rule attempts to balance the rights of union members and others to 
disclosure of the financial information called for by the statute with 
the burden placed on unions to furnish that information.
    The principal changes being proposed by the Department to improve 
transparency and disclosure affect only the largest unions 
(approximately one of every five unions). As also noted in the proposed 
rule, significant improvements in the software available to facilitate 
accounting make it possible to change the form LM-2 in ways that will 
provide additional useful information to union members and the public 
without unduly burdening unions. The Department is currently reviewing 
over 35,000 comments received on the proposed rule, many of which 
address the level of reporting and the associated burden.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here. 
That concludes our hearing.
    [Whereupon, at 4:43 p.m., Thursday, July 31, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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