Report of Independent Auditors Report of the Audit Committee - IUPAT

I N T E R N A T I O N A L U N I O N O FP A I N T E R S A N D A L L I E D T R A D E SAUDITREPORTReport of Independent AuditorsMembers of the General Executive BoardInternational Union of Painters and Allied TradesWe have audited the accompanying consolidated statementof financial position of the International Union ofPainters and Allied Trades (the International Union) as ofDecember 31, 2006, and the related consolidated statementsof activities and cash flows for the year then ended.These consolidated financial statements are the responsibilityof the International Union’s management. Our responsibilityis to express an opinion on these consolidatedfinancial statements based on our audit.We conducted our audit in accordance with auditingstandards generally accepted in the United States ofAmerica. Those standards require that we plan and performthe audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosuresin the consolidated financial statements. An auditalso includes assessing the accounting principles used andsignificant estimates made by the International Union’smanagement, as well as evaluating the overall consolidatedfinancial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, thefinancial position of the International Union as ofDecember 31, 2006 and the changes in its net assets andits cash flows for the year then ended, in conformity withaccounting principles generally accepted in the UnitedStates of America.March 9, 2007Report of the Audit CommitteeJanuary 1, 2006 To December 31, 2006International Union of Painters and Allied TradesIn accordance with Section 22 of the Constitution of theInternational Union of Painters and Allied Trades, the AuditCommittee convened on April 10, 2007 for the purpose of auditingthe accounts of the International Union for the year endedDecember 31, 2006. The Committee members were duly electedand consisted of Daniel Poling, District Council 53/Local Union1144; Grady Bryant, District Council 80/Local Union 1225;and David Wenninger, District Council 88/Local Union 130.The General Executive Board engaged the services of theindependent certified public accounting firm of Novak FrancellaLLC to act in conjunction with the Audit Committee. TheCommittee reviewed the consolidated financial statements of theInternational Union for the year ended December 31, 2006,including the detail of assets, liabilities, revenue and expenses.The Committee concludes that the transactions undertaken by theInternational Union were in accordance with established policiesand the Constitution.The Committee had access to all of the International Union’srecords including bank statements, investment custody reports,receipts and disbursements. The Committee noted that a stronginternal control system was in place for safeguarding the assets ofthe International Union. A review of expense vouchers revealedthat expenditures have the proper supporting documentation.General Fund operating revenue exceeded expenses by $3.1million during 2006. The total assets of the International Unionexceeded $58 million at December 31, 2006. The savings thatwere planned from increased efficiencies and cost controls havecontinued to be realized. More importantly, services have beenexpanded. Over $35 million was spent this year for the benefitand advancement of our members and affiliates. The savings thathave been realized will be invested in additional services andgreater organizing efforts.This year was particularly significant for one of our Councils.District Council 80 was devastated by Hurricane Katrina. During2006, the IUPAT along with the 36 District Councils collectivelyprovided financial assistance of over $2.2 million to DistrictCouncil 80. The members contributed many hours of their timehelping to rebuild the Gulf Coast. A Disaster Relief Fund wasestablished and utilized in 2006 for District Council 80. TheFund will be used for disasters to IUPAT affiliates and members inthe future.The per capita has only been increased in one year duringthe last four years 2003 through 2006. That increase in 2005was for funding the International Training Center. TheInternational Training Center opened and began operating during2006. The Organizing Fund, established during 2004, hadassets of $2.6 million at December 31, 2006. During 2006, theamount returned to the affiliates from the Organizing Fund was$1.15 million. There is a per capita increase effective 2007which is to increase funding for the Death Benefit Fund. The estimatedfunding to the Death Benefit Fund will increase from $1.5million to approximately $2.5 million per year. The Death BenefitFund is used exclusively to pay benefits to members’ families.During 2006, the members’ families received $2.2 million fromthe Death Benefit Fund.The financial condition of our International Union is sound.We noted that the General Executive Board has worked to minimizethe operating costs and maximize the investment performanceto provide, at the lowest cost to members, the financialstrength and stability that is reflected in our net assets.22 APRIL-JUNE 2007 • JOURNAL

I N T E R N A T I O N A L U N I O N O FP A I N T E R S A N D A L L I E D T R A D E SAUDITREPORTREPORT OF INDEPENDENT AUDITORSContinued from page 23ing each month $3.00 per participating life member and $1.00per participating active member.Organizing Fund - This Fund was established to defray thecosts of enhanced organizing activities. Funding sources includeadministrative processing fees and an allocation of per capita taxin the amount of seventy-five cents per member per month.PAT - The International Union has established two separatesegregated entities for political, legislative and educational purposes.The Political Action Together - Legislative and EducationalFund (PAT-LEC) is financed through payments from Local Unionsand District Councils. The Political Action Together - PoliticalCommittee Fund (PAT-PC) directly receives voluntary contributions,including payroll check-offs, from members of theInternational Union.Canadian Currency - The International Union maintains checkingand savings accounts in Canada as well as the UnitedStates. For financial statement purposes, all assets are expressedin U.S. dollar equivalents.Canadian currencies included in the consolidated statementof financial position are translated at the exchange rates in effecton the last day of the year. Unrealized increases and decreasesdue to fluctuations in exchange rates are included in the consolidatedstatement of activities.Funds received and disbursed in Canada are stated in U.S.dollars based on the average exchange rate in effect during theyear when reported in the revenue and expenses included in theconsolidated statement of activities. The average exchange ratefor 2006 used to translate revenue and expenses was $.8818per Canadian dollar. At December 31, 2006, the exchange ratewas $.8582 per Canadian dollar.Cash and Cash Equivalents - Cash and cash equivalents consistof amounts held in demand deposit and money marketaccounts.Investments - Securities are reported at their aggregate fairvalue. The fair value of investments in common and preferredstocks and U.S. Government and Government Agency securitiesare determined by quoted market prices. The fair value of themortgage is estimated by the investment custodian. The short-terminvestments are carried at cost which approximates fair value.The Union’s investment in 33% of the stock of United Unions,Inc. is accounted for using the equity method of accounting.Capital contributed to United Unions, Inc. by the InternationalUnion is adjusted for 33% of United Unions, Inc.’s earningsbased on the most recent financial report of United Unions, Inc.,with an additional adjustment for depreciation expense on thebuilding and building improvements not recognized by UnitedUnions, Inc.Property and Equipment - Property and Equipment are carriedat cost. Major additions in excess of $10,000 are capitalizedwhile replacements and repairs that do not improve or extend thelives of the respective assets are expensed. Depreciation andamortization expense is computed using the straight line methodover the following estimated useful lives of the assets:Leasehold improvementsFurniture and equipmentAutomobilesComputer equipment20 years5 years4 years5 yearsDepreciation and amortization expense totaled $631,764 forthe year ended December 31, 2006.Use of Estimates in the Preparation of Financial Statements -The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of thefinancial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differfrom those estimates.Financial Presentation - The International Union’s financialstatements present its net assets, revenues, expenses, gains andlosses, classified between unrestricted, temporarily restricted, andpermanently restricted based on the existence or absence ofdonor-imposed restrictions.NOTE 3. TAX STATUSThe International Union is exempt from Federal income taxesunder Section 501(c)(5) of the Internal Revenue Code.The financial statements include the activity of the PAT-LECand PAT-PC. Section 527 of the Internal Revenue Code providesfor the exemption from Federal income tax for “exempt functionincome” of a political committee that is a separate segregatedfund of an exempt organization which is not a political organization.Contributions received are exempt function income providedthat the receipts are primarily expended for an exemptfunction or for some or all of its administrative expenses.However, interest income will be taxed. Both the PAT-LEC andthe PAT-PC file Internal Revenue Service Form 1120-POL to reportfinancial activities.The Disaster Relief Fund is exempt from Federal income taxesunder Section 501(c)(3) of the Internal Revenue Code.24 APRIL-JUNE 2007 • JOURNAL

NOTE 4. UNINSURED CASH BALANCES AND INVESTMENTCONCENTRATIONSThe International Union maintains its cash accounts primarilywith banks located in Washington, D.C. The total cash balancesare insured by the Federal Deposit Insurance Corporation up to$100,000 per bank. The International Union has cash balanceson deposit at December 31, 2006 that exceed the balance ofFDIC insurance coverage by approximately $3,630,000.The International Union also maintains cash at a Canadianfinancial institution, which is insured up to $60,000. As ofDecember 31, 2006, the International Union’s cash in theCanadian financial institution in excess of insurance coveragetotaled approximately $1,775,000 in Canadian dollars($1,550,000 U.S. equivalent).NOTE 5. U.S. GOVERNMENT AGENCY CONTRACTSThe International Union is a party to various cost reimbursementcontracts from U.S. government agencies.The 2006 activity and unexpended contract funds atDecember 31, 2006 were as follows:UnexpendedContract FundsUnexpendedat beginning of Contract Transfers/ Contract Fundsyear Receipts Expenditures at end of yearU.S. Department of LaborJob Corps Program 457,053 7,670,495 7,994,275 133,273Discretionary Fund 91,946 105,802 95,757 101,991$548,999 $7,776,297 $8,090,032 $235,264The contract with the Department of Labor expires onJuly 31, 2007.NOTE 6. INVESTMENTSThe cost and fair value of investments held by theInternational Union at December 31, 2006 is summarizedbelow:CostFair ValueUnited States Government andGovernment Agency obligations $18,817,529 $18,840,687Common stock 6,292,938 6,739,518United Unions, Inc. 5,397,139 5,397,139ULLICO stock 39,826 39,826Mortgage 70 70Short-term investments 3,913,380 3,913,380$34,460,882 $34,930,620Investment income for the year ended December 31,2006 consisted of the following:Interest and dividends $1,247,428Net realized and unrealized gain on investments 246,059$1,493,487NOTE 7. PROPERTY AND EQUIPMENTOn December 31, 2006, property and equipmentconsisted of the following:Furniture and equipment $ 964,805Leasehold improvements 2,359,122National Training Facility 11,203,759Automobiles 122,317Computer hardware and software systems 368,62315,018,626Less accumulated depreciationand amortization (2,199,395)Net property and equipment $ 12,819,231NOTE 8. THE IUPAT GENERAL OFFICERS, STAFF ANDEMPLOYEES RETIREMENT AND PENSION TRUST FUNDThe IUPAT General Officers, Staff and Employees Retirementand Pension Trust Fund (the Plan) provides defined benefits tosubstantially all of its employees. The Plan provides pension benefitsbased on employee compensation and years of service. TheInternational Union reports in accordance with Statement ofFinancial Accounting Standards No. 87, (SFAS No. 87)“Employer’s Accounting for Pensions.” Contributions to the Planare made by the International Union based on the advice of consultingactuaries.The periodic costs of the Plan are recognized over employees’service periods, based on computations made by the Plan’sactuary, rather than recognizing periodic costs when contributionsare actually paid to the Plan.In computing net periodic pension costs as of October 1,2006 to be recognized for the year ended September 30, 2006the consulting actuary used the following assumptions:Projected benefit obligationat September 30 $ 46,986,337Fair value of plan assets at September 30 36,612,527Funded status $(10,373,810)Accumulated benefit obligationat September 30 $ 46,714,632Continued on next pagewww.IUPAT.orgAPRIL-JUNE 2007 • JOURNAL25

I N T E R N A T I O N A L U N I O N O FP A I N T E R S A N D A L L I E D T R A D E SAUDITREPORTAccrued benefit cost recognized inthe statement of financial position $ 10,102,105Weighted averageassumptions at September 30, 2006REPORT OF INDEPENDENT AUDITORSContinued from page 25Discount rate 6.00%Expected return on plan assets 8.00Rate of compensation increase 4.50Benefit expense $ 1,832,513Employer contributions 1,635,065Benefits paid ( 3,449,224)Following is an analysis of the Plan’s assets by category:Fair value, September 30:Equity securities 44%Debt securities 30%Real estate 12%Other 14%Total 100%The Plan’s overall strategy is to invest in securities that willachieve a rate of return sufficient to meet or exceed the Plan’sactuarial interest assumption, which is 8.00%. In general, thePlan’s goal is to maintain the following allocation ranges:Equity securities 35-45%Debt securities 45-55%Real estate 5-15%The International Union expects to contribute approximately$1,680,000 to the Plan during the year ended September 30,2007. Benefits expected to be paid by the Plan during the ensuingfive years and thereafter are approximately as follows:2007 3,505,1412008 3,520,1212009 3,472,5202010 3,405,2372011 3,419,2102012-2016 16,953,171NOTE 9. AFFILIATIONS PER CAPITADuring the year ended December 31, 2006, the InternationalUnion incurred per capita expenses to affiliated organizations asfollows:AFL-CIO $689,600AFL-CIO - State 534,599Building & Construction Trades Dept., AFL-CIO 577,791Maritime Trades Dept., AFL-CIO 4,320Union Label Trades Dept., AFL-CIO 4,968Metal Trades Department, AFL-CIO 69,800Alliance for Retired Americans 20,130Canadian Labor Congress (U.S. dollars) 93,127Canadian Provincial Federation of Labor (U.S. dollars) 63,304$ 2,057,639NOTE 10. RELATED ENTITIESThe International Union currently subleases a portion of itsleased space to the International Painters and Allied TradesIndustry Pension Plan, Job Corps, International Union of Paintersand Allied Trades Finishing Trades Institute, Political ActionTogether, and Painters and Allied Trades Labor-ManagementCooperation Initiative. The International Union also leases spaceto Job Corps, International Union of Painters and Allied TradesFinishing Trades Institute and Painters and Allied Trades Labor-Management Cooperation Initiative. The International Unionreceived $1,159,453 in rent from these entities for the yearended December 31, 2006.The International Union incurred $1,166,302 in informationtechnology expenditures for the year 2006. During theyear ended December 31, 2006, $344,280 was reimbursedfrom International Painters and Allied Trades Industry PensionPlan, International Union of Painters and Allied TradesFinishing Trades Institute, Painters and Allied Trades Labor-Management Cooperation Initiative, IUPAT General Officers,Staff and Employees Retirement and Pension Trust Fund, JobCorp, and Painters and Allied Trades for Children’s HopeFoundation.On October 31, 2005, the Death Benefit Fund loaned$4,500,000 to the IUPAT Building Corp, LLC to be used for renovatingthe international training facility. The loan is secured byinternational training facility property. The loan is repayable inmonthly installments of $28,314 beginning December 1, 2005including interest at the annual rate of 5.75%. Final payment isdue November 2030.In January 2006, LMCI loaned $2,000,000 to the IUPATBuilding Corp, LLC under the terms of a mortgage loan agreement.The loan bears interest at an annual rate of 5.75% andrequires monthly payments of $12,584, including principal andinterest. The terms of the loan are such that beginning February1, 2006, principal and interest payments are due on the first dayof each month. The loan matures on December 1, 2015 at whichtime the entire balance plus all accrued and unpaid interest shallbe due.26 APRIL-JUNE 2007 • JOURNAL

As of December 31, 2006 the future principal maturity ofthese loans are as follows:Year EndedDeath BenefitDecember 31, 2006 Fund LMCI2007 $88,480 $38,9502008 93,704 41,2502009 99,236 43,6852010 105,095 46,2642011 111,300 48,996Thereafter 3,912,599 1,747,376$4,410,414 $1,966,521NOTE 11. COMMITMENTS AND CONTINGENCIESThe International Union is involved in litigation arising inthe normal course of operations. Some of the litigationinvolves matters common to any organization of comparablesize, including personnel, employment, contract, and trademarkissues. None of this litigation involves any substantialpotential liability on the part of the International Union.www.IUPAT.orgThe members of the International Union of Painters and Allied Trades Audit Committee; (from left to right) IUPAT Executive Assistant to theGeneral Secretary-Treasurer Charlie Harris, Daniel Poling of District Council 53/Local Union 1144, Dave Wenninger of DC 88/LU 130,Grady Bryant of DC 80/LU 1225, IUPAT General Secretary-Treasurer George Galis, CPA Peter Novak of Novak Francella, CPA Steve Mazurof Novak Francella and IUPAT Assistant to the General Secretary-Treasurer Ron Kniess.APRIL-JUNE 2007 • JOURNAL27

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I N T E R N A T I O N A L U N I O N O FP A I N T E R S A N D A L L I E D T R A D E SAUDITREPORTCash flows provided by operating activitiesCash flows used in investing activitiesCash flows provided by financing activitiesNet decrease in cashCash and cash equivalentsReconciliation of change in net assets tonet cash provided by (used for) operating activitieswww.IUPAT.orgNet cash provided by (used for) operating activites32 APRIL-JUNE 2007 • JOURNAL