A state audit has found that California's second-largest prepaid funeral trust misused millions of dollars that consumers have set aside to pay for cemetery plots, caskets and services when they die.
The money was improperly spent on administrative fees, political lobbying, conventions and other activities, according to the review by the Department of Consumer Affairs.
The department gave more than 300 funeral homes that participate in the California Master Trust until July 21 to say how they will correct the problems found in the audit. The trust serves about a third of the state's funeral homes, holding about $70 million paid in advance for funeral services by 27,000 consumers.
"The one silver lining here is we don't expect consumers to lose money," said department spokesman Russ Heimerich. The trust remains solvent, he said Thursday.
The audit, which was released this week, outlines $12.6 million that was misspent, used improperly for administrative fees, or that should have been reimbursed to consumers but was not.
Only about half the money may need to be paid back, said Heimerich and Rick Wallinder, chief of the department's Cemetery and Funeral Bureau. The remainder has already been repaid, can be adjusted through accounting changes or may be impossible to track because records have been lost during the nearly 10 years covered by the audit, they said.
The audit is the first to find systematic problems with a funeral trust fund, Wallinder said. Typically, auditors find problems involving individual funeral homes or trusts set up for individual consumers, he said.
In this case, the department ordered the trust's governing board to return more than $2 million that was spent on lobbying and conventions for the California Funeral Directors Association. Some of the money already has been paid back, auditors said.
The audit also found the trust failed to pay at least $1.6 million it owed to consumers, their estates or the state treasury in cases where funeral homes went out of business or families paid for funeral services because they didn't know their loved one had a prepaid plan.
The audit found that $4.2 million was improperly spent on administrative fees for the participating funeral establishments over eight years. The trust improperly inflated its income in 2001 and 2002 so it could pay $4.8 million in administration fees to the fund's trustee, Comerica Bank, and Funeral Directors Service Corp., which administered the fund, the audit found.
The department also has ordered the funeral homes and trust administrators to make up for lost investment income from money that was siphoned away from the trust.
In a joint letter, attorneys for the fund trustee and fund administrator disputed many of the report's findings. They called them "factually and legally inaccurate."
The attorneys said the trust always intended to follow state law and regulations.
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