Council controversy stems from vote to hire KLC in 2007

former council member says vote on league contract felt rushed

lblackford@herald-leader.comJune 9, 2010 

On Sept. 11, 2007, Lexington city council members voted to move forward with hiring the Kentucky League of Cities to package the city's excess liability insurance. Everyone agreed, except for council member Richard Moloney, who voted unsuccessfully to move the issue into a committee for more time to consider the proposals.

"I had problems with the rush," Moloney said Tuesday as he recalled the vote. "I didn't want to vote on it because the whole thing stunk, and now I find out it still stinks."

Moloney is a former council member who now works for the Kentucky Department of Housing, Buildings and Construction.

Today, that vote has apparently become the center of two investigations, one by council members and one by State Auditor Crit Luallen, into fraud allegations made in 2008 and 2009 by Patrick Johnston, the director of the division of risk management. The allegations have remained confidential, but a series of e-mails show Johnston asking questions about KLC's ethics leading up to the 2007 deal.

The city's internal and external auditors deemed the allegations to be unfounded. However, Johnston's job was to be eliminated under Mayor Jim Newberry's proposed budget, and council members want to know whether there are any links between the two issues.

On Tuesday, administration spokeswoman Susan Straub dismissed Moloney's comments because he is a supporter of Vice Mayor Jim Gray, who is running against Newberry. Moloney has given $1,000 to Gray's mayoral campaign, according to state campaign reports. On Sept. 27, when the full council had a final vote on KLC, Moloney was absent. The council approved the contract 13-0.

"He (Moloney) did not say he had a problem with KLC," Straub said. "If he had other concerns he was welcome to address them, but he apparently did not have other concerns at the time."

Investigation begins

A city council committee investigating the issue held its first meeting on Tuesday; members agreed to hire an outside attorney before it begins requesting documents and witnesses.

Committee chairman George Myers said he had a short list of retired judges to be considered by the committee as legal counsel. The first requirement, Myers said, is they had not given money in local political races.

Council member Jay McChord said he hoped people will be held accountable if nothing is found.

"These are very, very serious allegations," McChord said. "Two audits say there isn't anything here ... if there's nothing here ... then we really need to look at what are the ramifications of that."

Myers also said he hoped the administration will refrain from press releases and council members will not air their opinions in the media.

"My hope is ... the administration gives this committee the space to do its work," he said. In addition, "I hope it won't be tried in the media."

Myers said that with the eyes of the world on Lexington as the Alltech FEI World Equestrian Games approach, "what we don't want is to have this be what is discussed when people talk about Lexington."

City officials cite savings

In a video of the Sept. 11, 2007 meeting, Law Commissioner Logan Askew recommended the KLC package over AIG because while the overall premium was higher — $615,010 compared to AIG's premium of $491,481 — city officials thought that the extra services KLC offered would save the city money in the end.

City officials have said the two proposals were not officially bid out, but were evaluated competitively against each other. In past years, the city's insurance broker, Marsh, had forwarded what its officials perceived to be the best deal to the council for a flat fee of $80,000 a year.

The KLC package included the League as broker with the company ACE Insurance providing the actual insurance services.

For example, city officials estimated that loss control services through KLC would save $35,000 and claims and appraisal services would save $64,000. With these kinds of savings, Askew concluded, KLC's actual bid was $476,510, less than AIG's.

"We are recommending that we go with the KLC proposal," Askew said in his presentation to the council. "I might say that in addition to these features, KLC is a neighbor ... they are also involved with insurance with more municipalities than any other ... they have worked very very hard to make this proposal to us because they are very interested in having this business relationship with the city of Lexington."

The council voted that day because the new policy year started Oct. 1. It was the first time the council had received a detailed choice between two providers, city officials have said.

Council members received a matrix of criteria that was different from what Johnston originally prepared, according to documents. Four areas of comparison were left out of the document given to the council, including a notation that the League did not have stringent self oversight of its financial and insurance forms, and that the League's finances were not graded by the national rating company A.M. Best.

Don Blevins Jr., a former council member who made the motion to hire KLC, said he recalls that Askew was frustrated the city's broker, Marsh, only brought sole source bids for insurance for the past several years.

"Logan came back and said if we go with KLC for this insurance, if we do things like claims processing through them, it will save us money," Blevins said. "I had no reason to believe it was anything less than that."

KLC's claims processing is done through Collins and Company. A separate state audit of KLC last year found numerous conflicts of interest between Collins and Bill Hamilton, the head of KLC's insurance arm, including the fact that Hamilton owned the building Collins and Co. rented in Georgetown, and that Collins and Co. CEO James Johnston paid for annual trips to the Caribbean for some KLC executives.

City officials say that the KLC deal has provided better insurance for less money: Overall expenses on insurance have gone from $1.376 million in 2007 to $1.274 million in 2010.

Newberry joined the executive board of KLC in February 2007, six months before the city hired KLC. Both Newberry and Gray are on the League's board of directors. Neither board has oversight of the league's insurance arm which has its own board of directors.

Full council could vote

Whatever the outcome of the committee's investigation, Myers said, if action is needed, a vote will be put before the full council.

Myers said he already met with the state auditor's office, which will conduct a simultaneous investigation at Newberry's request.

"I was very pleased with their openness," Myers said.

Myers will e-mail the names of prospective attorneys to committee members, who will winnow down the names before their next meeting on Monday at 5 p.m. That attorney — who will be paid out of the law department's budget — will advise the committee on records requests. All documents will be held by the council clerk.

The committee's next meetings are at 5 p.m. Monday and 3 p.m. June 21.

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