Independent Auditors’ Report
Officers and Trustees
New York State Public Employees Federation

We have audited the accompanying consolidated statements of financial position of the New York State Public Employees Federation and Subsidiary (Federation) as of March 31, 2000 and 1999, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Federation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New York State Public Employees Federation and Subsidiary as of March 31, 2000 and 1999, and the changes in their net assets and their cash flows for the years then ended in conformity with generally accepted accounting principles.

As discussed in Note 7 to the consolidated financial statements, the Federation was unsuccessful in its appeal of a judgment which confirmed its liability for certain per capita taxes. The impact of this judgment raises substantial doubt about the Federation’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 7. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating statement of financial position, the consolidating statement of activities, and the schedule of consolidated detail of expenses are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

Marvin and Company, P.C.

June 9, 2000

NEW YORK STATE PUBLIC EMPLOYEES FEDERATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2000 and 1999

1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The New York State Public Employees Federation (PEF) is affiliated with the American Federation of Teachers (AFT) and the Service Employees International Union (SEIU). It is a self-governing unit representing predominantly the professional, scientific and technical employees of the State of New York. The majority of revenues are from membership dues and agency shop fees.

The consolidated financial statements include the accounts of PEF and its subsidiary, PEF Land Holding Corporation. The accounts of PEF include a general fund, a political action fund, a Committee on Political Education (COPE) fund and a plant fund. PEF Land Holding Corporation is a not-for-profit corporation formed to hold title to the land and office building used to house PEF’s headquarters. All material interfund accounts and transactions between the entities have been eliminated in arriving at the consolidated totals.

PEF and its subsidiary adhere to generally accepted accounting principles as described in the American Institute of Certified Public Accountants (AICPA) Industry Audit Guide, Not-for-Profit Organizations. As such, the consolidated financial statements include the activities of the COPE fund established to submit donations to political activities and organizations based upon voluntary contributions from PEF members. In addition, net assets and revenue, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Changes in unrestricted net assets include certain grants whose donor imposed restrictions are for current or developing programs which were met during the fiscal year. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the consolidated statement of activities as net assets released from restrictions.

Income Taxes
PEF is a labor union exempt from Federal income taxes under Section 501(c)(5) of the Internal Revenue Code. However, under Section 527 of the Code, PEF's investment income from the Political Action Fund is subject to tax. PEF Land Holding Corporation is a title holding corporation and is exempt from Federal income taxes under Section 501(c)(2) of the Code.

Cash Equivalents
Cash equivalents consist of investments in certificates of deposit with original maturities of three months or less.

Investment Securities
PEF follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. Under the provisions of SFAS No. 124, investment securities are measured at fair value. Investment in equity securities with readily determinable fair values and all investments in debt securities (see Note 3) are valued at their fair market value determined by quoted market prices. Realized gains and losses from the sale of securities are recognized on the trade date and are calculated based on market value.

The net change in unrealized appreciation (depreciation) from the beginning of the year to the end of the year is included in net unrealized and realized gains (losses) in the consolidated statement of activities. Interest income is recognized as earned.

Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations using the straight-line method over the following estimated useful lives:

Maintenance and repairs are charged to operations when incurred; betterments and renewals are capitalized. When property, plant and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation are relieved, any gain or loss is included in operations.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. NET MEMBERSHIP DUES AND AGENCY SHOP FEES
Membership Dues and Agency Shop Fees
Revenue is comprised of membership dues paid by members of PEF and agency shop fees paid by those employees who are members of the bargaining unit but not of PEF. Dues income is recognized based upon the pay period for which members' salaries are paid by the State of New York. The biweekly dues and fees are calculated based on .8% of a member's annual compensation and are limited to a maximum annual amount of $640.

Divisional Distributions
Divisional distributions represent allocations to local organizations of PEF members. Each division was paid $5.18 per member up to 200 members and $4.14 for each member in excess of 200, in each calendar quarter for the years ended March 31, 2000 and 1999.

Per Capita Taxes
PEF is required to pay per capita taxes on a monthly basis to AFT and SEIU as a result of its affiliation with these organizations. Per capita taxes are presented net of the AFT constitutional rebates of $158,855 and $156,625 for the years ended March 31, 2000 and 1999, respectively.

Affiliation Dues
Affiliation dues are amounts paid by PEF to participate with other labor organizations in various labor councils in New York State.

3. INVESTMENT SECURITIES
Investment securities are carried at fair value and consist of the following:

Realized gains (losses) for the years ended March 31, 2000 and 1999 were (21,250) and $52,700 respectively.

4. POLITICAL ACTION FUND
PEF maintains a Political Action Fund (the Fund) from which political contributions are disbursed. Contributions are approved by PEF's Executive Board and funded from PEF's unrestricted net assets. The Fund is administered within PEF by the Legislative Department, which is also responsible for other lobbying activities. For the years ended March 31, 2000 and 1999, the Legislative Department has allocated $978,189 and $799,170 from unrestricted net assets for its operations, including political contributions. During the years ended March 31, 2000 and 1999, $880,269 and $732,650 were allocated for Legislative Department operations. For the years ended March 31, 2000 and 1999, expenses were less than the allocation by $97,919 and $66,520. At March 31, 2000 and 1999, the amount due from the general fund was $142,130 and $44,211, respectively.

5. PENSION FUND
Substantially all employees of PEF are eligible to participate in the Affiliates' Officers and Employees Pension Fund of SEIU (the Pension Fund). The Pension Fund is a defined benefit multi-employer pension plan. Total pension expense approximated $796,000 and $802,000 for the years ended March 31, 2000 and 1999, respectively. These amounts are based upon a contribution rate of 14% of total eligible employee compensation. Actuarial and plan asset data relating to employees of PEF is not available.

6. LEASES
PEF has entered into a variety of leases, primarily for the use of office space and equipment, which are accounted for as operating leases. In addition, PEF has certain office and computer equipment leases that are accounted for as capital leases. Included within "furniture, fixtures and equipment" is equipment held under capital leases with a cost basis of $442,661 and $392,243, and accumulated amortization of $281,433 and $199,157 at March 31, 2000 and 1999, respectively. Amortization of leased assets is included in depreciation and amortization expense. Future minimum payments under all noncancelable leases having initial terms in excess of one year at March 31, 2000 consist of the following:

Total rental expense related to operating leases was approximately $464,743 and $448,320 for the years then ended March 31, 2000 and 1999. Lease agreements frequently include renewal options and require PEF to pay utilities, taxes, insurance and maintenance.
Additionally, PEF, as lessor, leases certain office space in its main office building. Future minimum rental payments receivable by year, under a noncancelable operating lease and sublease for the next five years, consist of the following at March 31, 2000:

2001 - $ 45,870
2002 - $ 28,657
2003 - $ 22,920
2004 - $ 22,920
2005 - $ 22,920
Total - $ 143,287

7. LITIGATION
Under an arbitration award rendered in May 1985, PEF was ordered to pay New York State United Teachers/American Federation of Teachers (AFT) in excess of $9 million in back per capita taxes for the period March 1983 through May 1985. During fiscal 1988, a State Supreme Court decision vacated the award in its entirety. However, AFT subsequently appealed the decision and, in May 1989, the Appellate Division reversed the lower court decision, thereby awarding AFT approximately $9.2 million of back per capita taxes. In 1989, PEF attempted to appeal the decision of the Appellate Division.

On March 27, 1990, the Court of Appeals denied PEF’s motion and reaffirmed the judgment to AFT of approximately $9.2 million for per capita taxes. During the fiscal year ending March 31, 1991, AFT made a motion to the State Supreme Court to be awarded prejudgment date interest. In June 1991, the State Supreme Court granted AFT’s motion for prejudgment date interest. Interest on the outstanding balance accrues at the rate of 9% annually. Each year since 1991 AFT has unilaterally forgiven one twentieth of the total outstanding principal balance and the annual accrued interest amount.

"AFT has not sought enforcement of the judgment in the past, but rather, as noted, has forgiven a portion of the indebtedness and interest. It is not possible to predict whether AFT will seek to enforce the judgment in the future. Accordingly, PEF has reported a liability of $8.9 million which represents the judgment amount plus accrued interest at 9% per annum from the arbitration dates less amounts previously forgiven. PEF has an accumulated deficit of approximately $4.2 million, which raises substantial doubt whether PEF would be able to continue operations upon enforcement of the judgment. It is management’s intention to continue to pursue a settlement plan with AFT which will not adversely impact PEF’s operations.

PEF has been named as a defendant in several other lawsuits and claims. While the ultimate outcome of these actions cannot be predicted at this time, it is the opinion of management that the disposition of these lawsuits and claims will not have a material adverse effect on the financial position of PEF.

8. RELATED ORGANIZATIONS
PEF is affiliated with the following:
Public Employees Federation Membership Benefits Program
This trust was established to provide PEF members the opportunity to obtain various insurance and other benefits at group rates. This program is outside the operations of PEF and is not included within the accompanying consolidated financial statements. PEF is not responsible for the debts of the Membership Benefits Program and any remaining assets upon termination of the program revert to the participants and not to PEF.

PEF incurs costs on behalf of the program, which are billed back to the Membership Benefits Program. Included in other receivables at March 31, 2000 and 1999 are receivables from the program for $112,887 and $151,440, respectively. The Membership Benefits Program occupies space in PEF’s headquarters under a 20-year lease with PEF requiring minimum annual payments of $18,000 plus the proportionate share of taxes, utilities and common area costs.

Retirees’ Fund
The Fund was established to provide various services, such as continuing insurance and seminars, to retired PEF members. This Fund is outside the operations and control of PEF and is not included within the accompanying consolidated financial statements. PEF incurs various costs for payroll, benefits and office expenses on behalf of the Retirees’ Fund which it bills back to the Fund. Included in other receivables at March 31, 2000 and 1999 are receivables from the Fund for $88,642 and $88,415, respectively.

9. PUBLIC SERVICE TUITION PROGRAM (PSTP)
PEF has entered into an agreement with New York State to administer the PSTP for its members. Under PSTP, PEF’s members can receive up to $600 per semester for classes attended at participating colleges with a maximum of $1,200 per fiscal year. The Program has made available over $10 million for tuition payments. During fiscal 1999, PEF received $1,019,758 for tuition and reimbursed members $2,024,915. Under the agreement PEF is reimbursed for administrative expenses. For the year ended March 31, 1999 PEF’s reimbursable administrative expenses were $230,963. As of March 31, 1999, the PSTP was no longer administered by PEF.

10. FUNCTIONAL EXPENSES
PEF’s expenses by functional activity were as follows:

11. TEMPORARILY RESTRICTED NET ASSETS
Temporarily restricted net assets at March 31, 2000 and 1999 are available for the following purposes:

12. CHANGES IN TEMPORARILY RESTRICTED NET ASSETS
Contributions of the following were received with donor restrictions during fiscal 2000 and 1999:

CHART (ART)

Interest earned during fiscal 2000 and 1999 was restricted for the following purposes:

Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes:

13. CONCENTRATION OF CREDIT RISK
At March 31, 2000 PEF’s concentration of credit risk consists of cash deposited in financial institutions in excess of federally insured limits. The amount subject to credit risk is approximately $1,673,000.

14. ACCRUED POST-RETIREMENT BENEFITS
Retired PEF employees can convert unused sick leave to cash for the purpose of paying health insurance benefits. To be eligible, retiring employees must meet one of the three following criteria: sixty-five years of age and three years of service; fifty-five years of age and 10 years of service; or age fifty and 30 years of service. PEF recognizes the cost of providing post-retirement health insurance benefits by expensing the cost as incurred.

The accumulated post-retirement benefit obligations at March 31, 2000 and 1999 were $1,324,790 and $1,163,985 and are accrued in the accompanying statements of financial position. The post-retirement expenses for the years ended March 31, 2000 and 1999 were $160,805 and $120,126 and are included in salary and benefit expenses.

For measurement purposes, a 3% annual rate of pay increase was assumed for all years.

15. SELF-INSURANCE PLAN
PEF provides health insurance benefits utilizing a self-funded plan that covers substantially all full-time employees. The liability for claims incurred and claims incurred but not reported was $180,000 and $89,392 at March 31, 2000 and 1999, respectively.
PEF has purchased individual risk and excess risk stop-loss insurance to limit its exposure to claims in excess of specified amounts.

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