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May 18, 2009

1) Indiana State Teachers Association Insurance Trust Near Bankruptcy, Under Investigation. The insurance trust fund managed by the Indiana State Teachers Association and overseen by the union's top officers faces a $67 million deficit due to "high-risk investments." The state's securities division and the FBI are reportedly investigating.

Bill Ruthhart of the Indianapolis Star broke the story last Thursday and added further details Friday and Saturday. According to Ruthhart:

"The health program was losing money and cashing in its investments to keep up with claims payments. As a result, [the Indiana Department of Insurance] helped broker a tentative deal with United Healthcare, which is expected to take over the health insurance program July 1.

"In the process, however, state regulators say what they found was startling: more than a dozen high-risk investments in hedge funds and private equities accounting for 88 percent of the trust's $19 million in assets."

Much of what remains cannot be liquidated because the money is tied up in long-term investments. That's bad enough. What's worse is the trust has about $86 million in liabilities. It's about $40 million short in long term disability obligations alone.

A report commissioned by the state found that ISTA Executive Director Warren L. Williams and Morgan Stanley investment broker David Karandos controlled all investments made by the fund, and that Williams approved a 50 percent fee hike for Karandos "despite large losses in the portfolio" and the fact Karandos was also receiving full commissions on his more than 4,000 trades over a nine-month period. Williams, who had announced his impending retirement last month, resigned effective immediately last Thursday.

"They need to open their books," Insurance Commissioner Jim Atterholt said. "We don't think ISTA membership is aware of how serious the situation is, and we don't even know how well-informed their board is."

ISTA Deputy Executive Director Dan Clark also said it was unclear how much the union's board of directors knew. "It's my understanding that (Williams and Karandos) reported information to the boards," he said, "but there are some issues about how well all of the information was explained." If the state union's top officers were ignorant and incurious about such large sums of money, well, it wouldn't be the first time.

Part of the reason for the doubts is an April 28 memorandum from ISTA insurance trust director Richard J. Darko to the union's UniServ directors (attached as Exhibit A here). In it, Darko does not mention the trust's financial problems, and insists UniServ directors keep districts from dropping the ISTA long term disability coverage, to the point of threatening grievances against districts who try to opt out:

"It is CRITICAL that you remind your local leaders that long term disability insurance, and all other insurance, is a mandatory subject of bargaining. A school corporation cannot drop an insurance plan, add an insurance plan, or change an insurance plan, without the agreement of the local collective bargaining agent.

"We implore you to suggest strongly to your local leaders that there be NO AGREEMENT on a change in regard to long term disability coverage carried by the Trust, for the next 30 days.

"ISTA's Programs and Legal departments will vigorously assist any local association in filing proceedings with the Indiana Education Employment Relations Board to stop attempted, unilateral, changes in long term disability coverage."

Even with a new insurance carrier, the ISTA trust would still be responsible for the 650 teachers to whom it currently pays disability benefits, and would still be liable for $21 million in health insurance credits. If the trust defaults, Indiana taxpayers would be on the hook for those funds.

The directors of the trust made efforts to generate more income to close the deficit, but at least in one case, a school board didn't fall for the pitch.

The Bloomfield Board of School Trustees voted unanimously to drop ISTA as the district's health coverage reinsurer after the union's financial services corporation proposed a 26 percent increase in premiums.

"We had an outstanding claim year last year...We only used about 67 percent of what could have been our maximum claim liability amount," superintendent Dan Sichting said. "When that happens, usually when it is at 72 percent or below, premiums hold where they are, or the premiums decrease."

The board voted just before the story broke. The Washington Township school board plans to follow suit. I've posted on EIA's Declassified page a current ISTA analysis of all fringe benefit costs and coverage for each school district in the state, including a table of long-term disability costs.

The ISTA Financial Services Program has faced controversy before. Several ISTA members sued the union subsidiary and MetLife for misinformation about their 403(b) retirement plans. With strange timing, the U.S. District Court was scheduled to grant the union's motion to dismiss that two-year-old lawsuit on or about last Friday.

Indiana becomes the second NEA affiliate this year to experience a financial scandal because of a subsidiary. The Hawaii State Teachers Association Member Benefits Corporation filed for bankruptcy after being "grossly mismanaged," according to a team of attorneys and accountants.

2) The Story Behind the Story. On April 27 I received a tip from a source outside the union that Indiana State Teachers Association Executive Director Warren L. Williams had been fired, that the firing was related to financial problems with ISTA's Insurance Trust, and that an internal NEA investigation had been launched to determine if any wrongdoing had occurred.

That's pretty big stuff on my beat. I don't have eyes and ears everywhere, but I did my best to dig further. All I could learn was that Williams hadn't been fired, but that he had announced his retirement (effective at the end of the year) on April 25 at the ISTA Representative Assembly (RA). I also discovered that ISTA had received a clean audit, though I couldn't determine if the Insurance Trust was included as part of that audit. No one at the national level knew anything about an investigation.

In short, I couldn't confirm any of it as true, and could confirm one key fact - Williams' firing – was false. So I kept the net out for further information but filed the story away. As it turns out, I was sitting on something that wouldn't hit the state's newspapers for another two-and-a-half weeks.

The Darko memorandum, referenced in the above story, highlights a difficulty in reporting about teachers' unions: information control. Union sources can't confirm facts they know nothing about. ISTA's RA delegates weren't told about the insurance trust's immense financial problems, and the union's UniServ directors were being advised to stonewall any change to a school district's long-term care coverage for at least 30 days. One ISTA employee issued a flat denial even after the story broke.

I feel like I screwed up, but I don't want my failure to get the story to discourage any sources out there from sending tips my way. It's my job to separate the wheat from the chaff, but I can't do it unless you pass along the grain.

3) California Teachers Association Reaches Tentative Agreement with Staff Unions. The California Teachers Association and unions representing their professional and support employees reached agreement on a three-year contract. The deal calls for no increases to the salary scale for the first two years, and a 1.6 percent increase in the third year

CTA's contributions to staff pensions were the major sticking point in negotiations. The new contract includes a 12 percent increase in CTA's contributions, with 2 percent of that increase coming from a "redirection" of CTA's contribution to employee 401k accounts in the first year, 1 percent in the second year, and none in the third year.

Overall, the contract looks like a victory for the staff, as major cuts, benefit caps, and revisions to seniority language were averted. CTA did manage to hold salaries in check, and was able to increase vesting for retiree health care benefits from 10 years to 12, beginning in 2012.

The next big union management/staff battle now moves to NEA headquarters, where professional employees are balking at a management proposal of a four-year contract with raises of 0, 0.5, 0, and 1 percent. One source tells EIA the staff held a mini-protest/rally at NEA HQ last Friday.

4) Contract Hits. Wherein we highlight a contract provision from the current agreement between the National Education Association and its largest staff union. This is Article 16, Section 3, subsection (a):

"If an employee who is required to relocate within the meaning of Section 1 as the result of an involuntary transfer or reassignment is unable to fulfill the terms of a lease on an apartment or house which is his/her actual and primary residence and which is located in the metropolitan area which includes the employee's principal place of assignment, NEA shall indemnify him/her for any liability incurred up to a maximum cost of 12 months rent, provided the employee authorizes NEA to take such steps as it may deem appropriate to reduce his/her liability under said lease."

5) Last Week's Intercepts. EIA's blog, Intercepts, covered these topics from May 11-18:

* Randi's Garden. Performance pay cross-purposes.

* California: Coming to a State Near You. Reason TV boils it down.

* CA Public Employee Unions Account for Half of Initiative Spending. The only people in California with money to burn.

* Who's Climbing the Education Career Ladder? Teachers teach. So who moves into labor/management positions and why?

* United Teachers Los Angeles Opposes 1A. But they're paying to support it anyway.

6) Scheduling Note. The next communiqué will appear Tuesday, May 26.

7) Quote of the Week. "If you got ten or twelve of America's largest unions to relocate to the metropolitan South, and offer its employees top wages and benefits for routine clerical work, word would spread. Working for a national labor union would now be coveted position. ("Hey, where do you work?" "I work for the Teamsters."). By becoming an integral part of a municipal economy in the Deep South, organized labor will have effectively infiltrated enemy lines without, figuratively, firing a shot (i.e., without anyone even having to join a union). Brilliant." – David Macaray. (May 15-17 CounterPunch)


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