In 2003, the U.S. Department of Labor released new rules and forms for union financial disclosure. The most substantial and controversial changes were made to form LM-2. After a federal court rejected a union challenge to DOL's revised LM-2, the new regulations took effect on July 1, 2004; union organizations were required to file the revised form for fiscal years beginning on or after that date. The revised LM-2, which now applies to unions with disbursements of $250,000 or more, requires that vendors receiving more than $5,000, or individual disbursements greater than that amount, be itemized. Most expenditures must now be allocated to one of five functional categories:
Representation. This covers collective bargaining, administration and enforcement of contracts, and attempts to organize new bargaining units. Strike benefits are a separate item.
Political Activities and Lobbying. This covers all attempts to affect elections, or to influence legislation or regulatory actions. Get-out-the-vote drives, voter education and PAC expenses are included as well.
Contributions, Gifts and Grants. This mainly consists of charitable activities.
General Overhead. This involves operational costs, such as building maintenance and security, that cannot be attributed to another function.
Union Administration. This category covers the costs of union membership meetings, union conventions, officer elections, disciplinary proceedings and trusteeships. (Readers should bear in mind that although "overhead" and "administration" are often conflated in nonprofit finance, they cover very distinct aspects of union operation under the LM-2 rules.)
The form also has separate entries for purchases of investments and fixed assets, goods for resale, and benefits for employees and officers, as well as the payment of strike benefits. In addition, union officers and staff are required to estimate the percentage of time that they spend on each of the five functional categories. These are then used to allocate officer and employee salaries into an overall calculation of union spending for each category.
The revised LM-2 forms are not without shortcomings. The statute does not allow DOL to impose fines or administrative penalties when a union fails to file a financial disclosure report or when a union files a report deemed unresponsive: DOL instead must file a civil action against those responsible, a clumsy and time-consuming enforcement mechanism. The threshold for itemization is higher than necessary and still allows important transactions to remain hidden.
The definitions for functional categories are perfunctory and give little guidance on specific cases in gray areas. For instance, if a union buys office supplies and equipment for an employee who spends most of his time on collective bargaining and the rest on internal union discipline, the rules give little guidance as to whether this purchase should be considered a representation expense or overhead. The definition for bargaining does not mention overhead costs, while the definition for general overhead reads as follows:
SCHEDULE 18 - GENERAL OVERHEAD
Report the labor organization's direct and indirect disbursements to all entities and individuals during the reporting period associated with general overhead that cannot be allocated to any of the other disbursement categories in Statement B.
Some disbursements for overhead do not support a specific function, so these disbursements should be reported in this schedule. Include support personnel at the labor organization's headquarters, such as building maintenance personnel and security guards, and other overhead costs. Not all support staff should be included in General Overhead. For instance, the salary of an assistant, whenever possible, should be allocated at the same ratio as the person or persons to whom they provide material support.
A union official apportioning expenses among the various functions may find it difficult to determine just how closely a particular item should relate to representation, politics, charitable activities or union administration in order to qualify for inclusion under these categories, as opposed to general overhead. In addition, the rules give no guidance on such issues as how costs of a union publication with articles about both political issues and collective bargaining should be allocated, or the treatment of a training program that covers topics ranging from grievances to the procedural rules for union elections.
Though there are shortcomings, revisions to the forms overall have made union spending more transparent. The functional categories were introduced as part of the 2003 LM-2 revisions. A certain amount of trial-and-error in clarifying the definitions is to be expected. It would be unrealistic to expect DOL to anticipate where every gray area would be or develop practical rules for handling them until the department had the chance to see what the itemized disbursements look like and what sorts of disbursements are most likely to cause confusion.
Given the lack of specificity in the rules, combined with the political and legal incentives facing union officials, one can reasonably expect that they will tend to categorize borderline items as representational where possible and avoid treating disbursements as political or lobbying expenses where they can plausibly be considered something else. Union political activism has been the subject of controversy for many years, with the Landmark Legal Foundation actively pursuing an investigation of the National Education Association for failing to report extensive political activities to the IRS. The extent of representational spending, meanwhile, is at the crux of litigation based on Beck v. Communications Workers of America. It is in a union's best interest to have worker representation appear to be as large a portion of union spending as possible in order to discourage workers from invoking their rights under Beck and to avoid undercutting their position in various lawsuits. Consequently, we are reasonably confident that the LM-2 figures for representation effectively capture all or nearly all costs necessary for a union to carry out its duties as collective representative in the workplace. If anything, the representation expenses on LM-2 forms are likely to be inflated.
Finally, the rules do not require any external audit or other independent verification of the information in the report. This omission distinguishes union financial disclosure from the filings required of corporations under the Sarbanes-Oxley Act of 2002 and from the regular practices of most private-sector organizations.
Unions and their supporters have also been critical of the LM-2 requirements. In its suit to prevent the implementation of the 2003 revisions, the AFL-CIO argued that the new rules were more extensive than allowed under the statute and that union financial disclosures should be limited to a balance sheet and income statement. In a longer critique of the LM-2 rules which was highlighted by the AFL-CIO's blog, Scott Lilly of the Center for American Progress argued that the DOL was guilty of "rigorous and in fact pernicious regulatory enforcement," and that the LM-2 forms were part of a DOL effort designed to, "Greatly increase the time, effort, and expense to labor union, their officers, and employees with department reporting requirements" and "Use information gleaned from Labor Department investigations of union officials and employees along with data from expanded union reporting requirements to launch a public relations effort to discredit unions and weaken their ability to organize and act on behalf of their members."
Lilly also observed that the five functional categories used by the Department of Labor did not line up with the budgeting categories used by unions. According to Lilly, this meant that the new regulations "created an entire second layer of accounting simply for the purpose of filing the reports."
There is little doubt that the new regulations create some burdens for union officials. Certainly the filings are longer: UAW Local 600's LM-2 for 2004, the last under the prior rules, covers 21 pages, while the LM-2 for 2005 covers 30 pages of somewhat smaller type. The DOL has created software that might ease things somewhat, but installing software and entering data have costs, too.
But unions are not alone in bemoaning the burden of government paperwork or even of disclosure forms. Groups such as the U.S. Chamber of Commerce have been sharply critical of the financial reporting requirements for corporations established by the Sarbanes-Oxley Act. Estimates of the cost of complying with Sarbanes-Oxley are as high as $6 billion annually and likely to increase. The experience of filling out detailed financial reports has not made the union movement more sensitive to the regulatory burdens confronted by others, however; the AFL-CIO was opposed to regulatory modifications of Sarbanes-Oxley intended to lower the burden of corporate financial reporting.
The other objections raised to the higher standard of financial reporting under the 2003 LM-2 rules are ultimately unpersuasive. To the extent that public confidence in unions might be undermined by the manipulation of data found in LM-2 reports, the proper response for unions is more disclosure - telling "the rest of the story," and letting their members and the general public come to their own conclusions.
As for the incompatibility of the LM-2 functional categories and union budgeting procedures, Lilly does not identify where the mismatches are, but if union budgeting procedures cannot be resolved with the functional categories established under the LM-2 forms, it may be an indication that the unions are out of touch with their membership. The creation of the "representation" function in particular seems common-sensical. A 2004 survey of union members undertaken by Zogby International and the Mackinac Center for Public Policy found that the vast majority of union members, 73 percent, consider the primary responsibility of unions to be that of "bargaining for better wages, benefits, and working conditions for its members." Separating the representation function from political activism or internal union governance is very much in line with the priorities of union members.
Unlike shareholders of the publicly traded corporations covered by Sarbanes-Oxley, union members cannot sever their relationship with a union by selling shares if they are unsatisfied with the union's performance or with information the union discloses. Individual employees must be prepared to change jobs to avoid the injuries they might suffer because of irresponsible union leadership. If anything, the case for stringent financial reporting is stronger in the case of unions than for private companies.
 68 Fed. Reg. 58449-523 (Oct 9, 2003); AFL-CIO Slapped Back in Effort to Stop Disclosure Reforms, Union Corruption Report, National Legal and Policy Center, Feb. 2, 2004, available online at: http://www.nlpc.org/view.asp?action=viewArticle&aid=563.
 29 USC §440.
 Department of Labor, Instruction for Form LM-2 Labor Organization Annual Report, pp. 30-35.
 Department of Labor, Instruction for Form LM-2 Labor Organization Annual Report, p. 34.
 Landmark Legal Foundation, NEA Accountability Project Summary, available online at http://www.landmarklegal.org/DesktopDefault .aspx?tabid=161.
 It is not our intention here to accuse unions of dishonesty in a general sense, merely to point out the weaknesses that remain in the regulatory scheme, and the incentives confronted by union officials.
 AFL-CIO Slapped Back in Effort to Stop Disclosure Reforms, Union Corruption Report, National Legal and Policy Center, Feb. 2, 2004, available online at: http://www.nlpc.org/view.asp?action= viewArticle&aid=563.
 Lilly, Scott, Beyond Justice, Bush Administration Labor Department Abuses Labor Union Regulatory Authorities, The Center for American Progress, (December 2007), p. 6.
 Lilly, Scott, Beyond Justice, Bush Administration Labor Department Abuses Labor Union Regulatory Authorities, The Center for American Progress, (December 2007), p. 7.
 Reilly, Kevin, AMR Research Finds Spending on Sarbanes-Oxley Compliance Will Remain Steady at $6.0B in 2007, News release Feb. 22, 2007, available online at http://www.amrresearch.com/ content/View.asp?pmillid=20232.
 AFL-CIO: SEC Has No Power to Exempt Firms from SOX Internal Controls Provision, Bureau of National Affairs, January 16, 2006.