HOW SHOULD UNIONS RUN THEIR INVESTMENT PROGRAMS?
The quick answer is, “Very carefully.” A slightly longer answer is, “The opposite of what Madoff was allowed to do.” The four biggest federal sector unions have reported over $50 million in investments to DOL. NTEU leads the pack with $34 million, AFGE follows at $14 million, NFFE is next at $5 million while IFPTE and NATCA reported around 1.3 million. (NTEU’s edge is largely due to the recent sale of its headquarters building while AFGE has $48 million in fixed real estate assets from the building it owns. NTEU has less than 1% of AFGE’s fixed asset value.) Moreover, these are very actively managed funds. AFGE, for example, reported over $11 million in net investment sales and over $9 million in net purchases last year on its $14 million total. Further complicating the risks of managing this money is that investment advisors and houses are not beyond sprinkling generous “perks” on the financial decision-makers to win their business or push them to a certain investment. Does anyone really think that they will not dangle “perks” to convince a union’s decision-maker to use them or to buy into one fund versus another? One of the unions named above almost removed its national president because a vendor gave him furniture for his apartment. Fortunately, that was decades ago. Given the political climate for federal employees and unions, it would only take one good financial scandal to get them all dragged across the coals of a Congressional committee for a roasting on any embarrassing expenditure as well as their stewardship of negotiated official time and other federal funds. Congressman Issa’s eyes would roll back into his head as he slipped into a state of prolonged quivering ecstasy if he came across a union miscue he could exploit. So, we want to share our thoughts on the matter to get a few conversations going out there before the union convention season arrives this summer.
It is easy to understand why national presidents or national secretary-treasurers want unrestrained power and next to no oversight on their financial decisions. To begin, they have an abundance of confidence in themselves. They are politicians, and successful politicians at that, with a large number of praise-heaping constituents while they rub shoulders with leaders of Congress, the media and sometimes even the President. Washington is a town where the egos of elected leaders of government or associations are forced fed like a goose overdue at the liver pate bar.
Consequently, unions should consider putting significant oversight procedures in place so that the hard work of tens of thousands union activists is not undone by one ego-obese, finance-challenged, poorly advised, or simply pre-occupied executive. Whether you call it a sunshine provision or the application of pre-decisional involvement inside the union, more of the union’s leaders need to have on-going information about all investment transactions, advance notice of big ones, and the right to chime in with recommendations, if not consent, before big money is moved.
Some unions have taken steps to reduce the possibility of abuse. For example, AFGE requires that at least the National President and National Secretary-Treasurer agree on investment decisions. (See Art. X, Sec 2 of its Constitution.) NATCA’s constitution requires that the National President give to the National Executive Vice President all account records, papers, contracts, and financial reports. It also gives the Executive Vice President the power to pay all bills, which is more than enough power to force the National President to share any investment decisions promptly with the EVP. (See Art. IV, Sec. 5 of the Constitution)
Those are good starts, especially when you consider some unions have no oversight, leaving the National President with God-like power to take nearly whatever investment risk s/he has a hunch about. But let’s remember that Madoff’s closest (and now convicted) employees knew what was going on. So, more oversight than involvement by a second national elected official, who often is a close friend and running mate, can only make things safer.
Having applied the rapidly diminishing brain-power of the FEDSMILL advisers to the problem, it seems like the following are necessary ingredients of a Constitutional oversight process for investments (assume that the National President makes all the investment decisions):
- Designate an oversight group that is reasonably independent of the National Presidents’ appointment power and chain of command. NVP elected independently, diif segments of union
- Require the National President or whoever makes the investment decisions to give advance notice to the oversight group of significant investment decisions, e.g., anything over $100,000 and to at least call for majority consent of the for transactions of over a half-million. However, the National President should retain the power to act unilaterally in an investment emergency so long as he/she promptly documents the need and notifies the oversight group. It would also be within the bounds of reasonableness to let the National President override the group’s majority vote under the same conditions. Generally, we do not favor handcuffing the National President so long as s/he must disclose and explain significant decisions.
- Require the National President to report all perks to the oversight group and to pledge not to take any personal perks, e.g., trips to investment conferences, personal investment advice, preferred rates on personal accounts, etc. The same goes for the oversight group.
- Monthly investment statements posted on line for the entire executive board to see and perhaps even local union presidents.
- Adoption of a list of standard metrics that would be used annually to assess the investment program, e.g., what did the market do, what did similarly situated unions do, what did select mutual funds like Vanguard do, etc.
As we look over the federal sector, NTEU probably has the most to lose from any financial abuse or embarrassments. It not only has the largest amount in investments, but it represents most of the sensitive federal financial agencies, e.g., IRS, SEC, FDIC, CFPB, NCUA, and Department of Treasury. The fallout for NTEU could be fatal. However, all unions need to make sure that the potential for one person to screw things up financially for the many is infinitesimal. And no one should be waiting until there is an actual problem. Pick up your Constitution today and see if there are enough financial controls from your perspective. If not, pull on the “big boy” pants and get that changed. If you still need convincing check out how many union leaders were convicted of financial crimes in 2014.