Blindsided by Benefits

Nearly a year after their long-time property manager died in the summer of 2014, the board in a condominium on the East Side of Manhattan turned to Key Real Estate Associates to take over management of its building. Before long, the new firm came to the board bearing some very bad news.

“They discovered that union benefit payments in excess of $200,000 were owed, and a judgment had been issued,” says Bonnie Reid Berkow, a partner in the firm Wagner Berkow, and the condo’s attorney for the past five years.

The previous (deceased) manager, for reasons that remain a mystery, had failed to make full payments into the union benefit funds, then failed to show up for an arbitration hearing. The State

Supreme Court judgment against the condo was for $218,000. By the time Key discovered the problem, the unpaid benefits, interest, and penalties for the building’s six employees had ballooned to $300,000.

Berkow, who, like the board, was blindsided by the news, had an obvious question: “Why was this not known? This is a lot of money nobody knew about. At the very least there was negligence. Possibly money was being embezzled.”

Part of the problem, Berkow speculates, is that the board had been using the same management company for many years, and it let management handle everything, no questions asked. “I think the accountant may have dropped the ball because he didn’t bring it to the board that there were some outstanding payments,” Berkow says. “They thought it was a simple matter of cash flow.”

Routine but Complex

And they thought wrong. In most co-op and condo buildings with a unionized staff, the monthly payment of employee benefits – health care, retirement, training, and legal fund costs – is a routine, if complex, matter. In March 2013, more than 5,000 city employers – including co-op and condo boards – began phasing out paper billing and began tracking and paying these monthly benefits electronically through the website of the Service Employees International Union’s Local 32BJ, the union that represents more than 30,000 doormen, supers, porters, and handymen in New York City. By the end of 2015, all buildings had shifted to electronic payments, according to 32BJ spokeswoman Carolina Gonzalez.Since the switch to digital, the union has become more aggressive about hitting delinquent buildings with 6 percent annual interest and 24 percent annual penalties, known as “liquidated damages.”

When Berkow contacted 32BJ to try to negotiate the $300,000 debt, she was told that under the Employee Retirement and Income Security Act of 1974, the principal and the accrued interest were sacrosanct and could not be negotiated, but the liquidated damages were in play. She and the union hammered out a debt of $230,000, which called for a $75,000 upfront payment, with the balance to be paid in monthly installments ending in January 2017. The board levied a $200,000 assessment to pay for it.

The board wasn’t happy, but it had learned a valuable lesson: boards should always be able to review union bills, correspondence, and notices of nonpayment and arbitration. In the contract the condo board signed with 32BJ back in 2004, the former property manager was named as the employer and then failed to give the board such access. That changed when Key added the board to its log-on list for the 32BJ website. “Now,” says Berkow, “board members can see what’s being billed and what’s being paid every month.”
A Need for Vigilance

“This was a stunner,” says Phil Whalen, a principal at Key, who first learned about the condo’s unpaid union benefits from a union attorney. “We had no idea what we were getting into. At best this was negligence, at worst someone took money. I don’t think that happened.”

Even so, Whalen put in claims with the condo’s crime insurer and with the previous managing agent’s insurer. The former denied the claim; the latter is now conducting a forensic audit of the condo’s books.

As Whalen sees it, there’s plenty of blame to spread around for this fiasco. “What it comes down to,” he says, “is that there was a long-standing relationship between the property manager and the board. The union didn’t do a very good job of collecting their money – they should have been on this after a month or two of nonpayment. And the accountant says he couldn’t warn the board because he hadn’t created the 2014 financials. I think the accountant should have looked at what the managing agent was paying and not paying – and brought it to the board’s attention. Accountants need to be more vigilant on a monthly basis.”

(The accountant at the time declined to comment for this article, other than to say that the board has not renewed his contract. The board president also declined to comment.)

Another lesson, in Whalen’s view, is that board treasurers need to be diligent, though not necessarily on a monthly basis. “Some treasurers are extra-active and they’re all over the managing agent’s monthly report,” Whalen says. “You want to let the treasurer know how to look for variances between what’s budgeted and what’s actually spent – probably on a quarterly or semi-annual basis.”

This is not to say that the managing agent should be removed from the mix. “Employee benefits are very complex,” says Berkow, the attorney. “There are different types of benefits, employees get hired and fired, there’s maternity leave. There needs to be a significant reliance on the managing agent.”
A Debt Grows in Brooklyn

The East Side condo, as it turns out, was one of several buildings to run afoul of unpaid union benefits in recent years. Howard Lazarus, managing director at Tudor Realty Services, took over management of one of them last year – a 100-unit co-op in Brooklyn, which, he soon discovered, owed more than $100,000 in unpaid union benefits, interest, and penalties. “When we take over a building we routinely check with the union to see the building’s status,” Lazarus says. “We were informed of some arrears, but not to the full extent of what happened.

There was a judgment to be paid, and it took a while to sort it out. First, we had to figure out if the previous managing agent made payments or not. It turned out the agent was not making the payments. There was a big payable number from the accountant’s annual report. This is the biggest instance of unpaid benefits that we’ve seen.”

To avoid such situations, Lazarus tries to train treasurers to spot signs of trouble. “I try to give the treasurer an idea of his job in reviewing the managing agent’s monthly report,” he says.

“There are a number of red flags. Such as, you should see a report of payments and budget and understand what it’s telling you. If you budgeted more than you paid on your union expenses, you need to ask why? Were people fired? Were benefits unpaid? The other red flag is accounts payable. If you’ve got high payables, either from the managing agent or accountant, you need to ask why.”

Berkow adds that it’s not just treasurers, it’s entire boards that need to keep an eye on their professionals. “A board relies on [them],” she says. “Nonetheless the board should review the financial information and make sure the professionals are doing their jobs. Everybody needs to take a certain amount of responsibility for their own financial welfare.”

Adds Whalen: “The message is that boards need to be vigilant. There should be checks and balances – notices of bills that haven’t been paid, rather than just relying on the managing agent or auditor. Notices should get sent to the board’s treasurer, as an extra set of eyes. Things happen, and you want to be sure there’s a system in place to alert you if there’s a problem.”

Otherwise, your board might wind up having to levy a six-figure assessment. Never a popular move.