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Office of Labor-Management Standards
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Office of Labor-Management Standards (OLMS)

U.S. Department of Labor
Office of Labor-Management Standards
Milwaukee District Office
310 West Wisconsin Avenue, Suite 1160W
Milwaukee, WI 53203
(414) 297-1501 Fax: (414) 297-1685

June 13, 2011

Mr. Scott Kirk, President
Machinists, AFL-CIO, Lodge 2575
4000 S. Kingan, Apt. 1
Milwaukee, WI 53235

Case Number:
LM Number: 507505

Dear Mr. Kirk:

This office has recently completed an audit of Machinists Lodge 2575 under the Compliance
Audit Program (CAP) to determine your organization’s compliance with the provisions of the
Labor-Management Reporting and Disclosure Act of 1959 (LMRDA). As discussed during the
exit interview with Secretary Treasurer Dan Schaufhauser and IAM Grand Lodge Auditor Rick
Fischer on June 8, 2011, the following problems were disclosed during the CAP. The matters
listed below are not an exhaustive list of all possible problem areas since the audit conducted was
limited in scope.

Recordkeeping Violations

Title II of the LMRDA establishes certain reporting and recordkeeping requirements. Section
206 requires, among other things, that labor organizations maintain adequate records for at least
five years by which each receipt and disbursement of funds, as well as all account balances, can
be verified, explained, and clarified. As a general rule, labor organizations must maintain all
records used or received in the course of union business.

For disbursements, this includes not only original bills, invoices, receipts, vouchers, and
applicable resolutions, but also documentation showing the nature of the union business
requiring the disbursement, the goods or services received, and the identity of the recipient(s) of
the goods or services. In most instances, this documentation requirement can be satisfied with a
sufficiently descriptive expense receipt or invoice. If an expense receipt is not sufficiently
descriptive, a union officer or employee should write a note on it providing the additional
information. For money it receives, the labor organization must keep at least one record showing
the date, amount, purpose, and source of that money. The labor organization must also retain
bank records for all accounts.

The audit of Lodge 2575’s 2010 records revealed the following recordkeeping violations:

Mr. Scott Kirk
June 13, 2011
Page 2 of 5

1. Reimbursed Auto Expenses
Union officers who received reimbursement for business use of their personal vehicles did
not retain adequate documentation to support payments to them totaling at least $300 during
2010. Union officers prepare a lost wage and expense voucher to document and claim
reimbursement for lost wages and expenses incurred while working on union matters,
including mileage. The information included on the vouchers identifies the dates and number
of miles claimed on each date; however, the vouchers fail to adequately identify the union
business purpose of the mileage expenses as well as the starting and ending destinations of
each trip.

In the case of mileage expenses, Lodge 2575 must maintain records which identify the dates
of travel, locations traveled to and from, and the number of miles driven. The record must
also show the business purpose of each use of a personal vehicle for business travel by an
officer or employee who was reimbursed for mileage expenses.

2. Reimbursed Internet and Cellular Phone Expenses
During 2010, Lodge 2575 disbursed over $1,000 to officers for the business use of personal
cell phones and home internet access. However, the documentation retained in support of
these expenses included only the summary page of each officer’s personal cell phone or
home internet bill.

If Lodge 2575 pays for any portion of an individual officer’s personal cell phone or home
internet bill, or pays the entire bill, either as a direct payment to the cellular phone company
or internet service provider, or as a reimbursement to an officer, Lodge 2575 must retain the
original bill in its entirety.

3. Per Diem Payments
Officers of Lodge 2575 received more than $3,500 in per diem payments during the audit
year. Article VII, Section 8(a) of the Lodge 2575 by-laws provide that “Delegates to
conventions, conferences, Winpisinger School and negotiators shall receive the applicable
federal rate, plus transportation and lodging and $20 per day for extra expenditures.” As
noted above, union officers routinely prepare vouchers to document expenses such as per
diem. A majority of the vouchers prepared by officers claiming a per diem expense failed to
document the date on which per diem was claimed. For example, a voucher prepared for
check # to Recording Secretary Gary Vargo issued on January 4, 2010 indicates that the
check included payment for one day of per diem; however, Mr. Vargo also claimed four days
of lost wages on the expense voucher and it is not clear for which date Mr. Vargo claimed the
per diem.

In the case of per diem payments to officers and employees for travel on union business,
Lodge 2575 must maintain records which identify the business purpose of each trip, the dates
of travel, the destinations traveled to, and the per diem rate claimed for each date.

Mr. Scott Kirk
June 13, 2011
Page 3 of 5

4. Taxable Per Diem Payments
Article III, Section 4(a) of the Local 2575 bylaws identifies the amounts of the officers’
monthly salaries, including $150 per month for the president and recording secretary, the
“dues equivalent’ per month for the vice president, and .75¢ per member per month for the
secretary treasurer. In addition to these salaries, the lost wage and expense vouchers
prepared by union officers indicate that Lodge 2575 disbursed at least $3,500 in additional
compensation to officers through per diem payments on dates that officers were absent from
work to conduct union business and received lost wage reimbursement payments from Local
2575. These included claims for per diem on dates that officers were not in travel status.
You indicated during the exit interview that the per diem payments issued in these instances
are considered additional compensation to officers. Additionally, Lodge 2575 payroll and
tax records indicate the payments are recorded as wages in union records and included in the
total wages reported on IRS Forms W-2. However, the authorization of this additional
compensation is not recorded in union records. Authorization of all forms of salary and other
compensation must be recorded in union meeting minutes or some other record to verify that
the salaries reported in Item 24 (All Officer and Disbursements to Officers) of the Labor-
Organization Annual Report (Form LM-3) were the authorized amounts and were therefore
correctly reported.

5. Pension Calculations
Officers and members participate in the IAM Lodge 2575 Pension Fund held at M&I Bank.
During the audit, M&I Relationship Manager Kurt Mueller advised that the pension fund’s
sponsor is Air Wisconsin and that Lodge 2575 is the plan administrator. He also advised that
the pension plan is funded by 1) Air Wisconsin, which contributes a defined contribution of
5% of the gross wages paid to Lodge 2575 members, 2) Air Wisconsin employees who make
elective contributions to their individual accounts, and 3) Lodge 2575, which contributes 5%
of the total gross lost wages paid to union officers and employees.

During the audit, Secretary Treasurer Dan Schaufhauser advised that Lodge 2575 has always
paid lost wages to union officers who must take time off of work to perform union business.
In addition, he advised that Lodge 2575 also makes contributions to the IAM Lodge 2575
pension fund for the lost pension contributions that occur as a result of incurring lost wages.
During the exit interview, Mr. Schaufhauser advised the he calculated the pension benefit for
each officer and employee of the lodge based on total gross wages, including lost wages,
salary, and taxable per diem payments.

Mr. Schaufhauser stated that the annual payment made by Lodge 2575 to the IAM Lodge
2575 pension fund was reported as a disbursement for benefits in Item 50 of the LM-3 report.
The only record retained in support of this disbursement to the pension fund was a worksheet
that identified the names of the officers and employees who received the pension benefit, the
total wages paid to each officer or employee, and the amount of the pension benefit paid on
their behalf. It is not apparent from the document that the gross wages used to calculate the

Mr. Scott Kirk
June 13, 2011
Page 4 of 5

pension benefit included more than just the gross lost wages. Records, such as a workpaper,
that shows how the contributions were calculated must be retained.

Based on your assurance that Lodge 2575 will retain adequate documentation in the future,
OLMS will take no further enforcement action at this time regarding the above violations.

Reporting Violations

The audit disclosed a violation of LMRDA Section 201(b), which requires labor organizations to
file annual financial reports accurately disclosing their financial condition and operations. The
Labor Organization Annual Report LM-3 filed by Lodge 2575for the fiscal year ended
December 31, 2011 was deficient in the following areas:

1. Initiation Fees (Item 40)
During the audit, Grand Lodge Auditor Rick Fischer provided a report from the IAM Virtual
Lodge Membership that identified 322 members who were initiated into Lodge 2575 during
2010. According to Mr. Schaufhauser, each member is responsible for paying an initiation
fee ($75 for clerks and $100 for mechanics). Union receipts records show that initiation fees
totaling at least $18,000 were collected. However, Lodge 2575 failed to report anything in
Item 40 (Fees, Fines, Assessments and Work Permits). Lodge 2575 erroneously reported the
amounts received for initiation fees as dues in Item 38 (Dues).

2. Employment Taxes
During the audit, Mr. Schaufhauser advised that he reported all disbursements for
employment taxes, including your organization’s FICA taxes as an employer, in Item 54
(Other Disbursements). However, the LM-3 instructions for Item 48 (Office and
Administrative Expense) state that taxes assessed against and paid by Lodge 2575 are
required to be reported as disbursements in Item 48.

I am not requiring that Lodge 2575 file an amended LM report for 2010 to correct the deficient
items, but Lodge 2575 has agreed to properly report the deficient items on all future reports it
files with OLMS.

Other Violation

The audit disclosed the following other violation:

Inadequate Bonding

The audit revealed that Lodge 2575’s officers and employees were not bonded for the
minimum amount required at the time of the audit. However, evidence that adequate
bonding coverage has since been obtained has been provided to OLMS. As a result, OLMS
will take no further enforcement action regarding this issue.

Mr. Scott Kirk
June 13, 2011
Page 5 of 5

Other Issue

Expense Policy

As I discussed with Mr. Schaufhauser during the exit interview, the audit revealed that Lodge
2575 does not have a clear policy regarding the types of expenses personnel may claim for
reimbursement, including cell phone, internet, and taxable per diem expenses. OLMS
recommends that unions adopt written guidelines concerning such matters to help ensure
effective internal controls and safeguard union assets. .

I want to extend my personal appreciation to Machinists Lodge 2575 for the cooperation and
courtesy extended during this compliance audit. I strongly recommend that you make sure this
letter and the compliance assistance materials provided to you are passed on to future officers. If
we can provide any additional assistance, please do not hesitate to call.



Mr. Dan Schaufhauser, Secretary Treasurer
Mr. Gary Vargo, Recording Secretary