Audit: Board of mental health agency didn't oversee spending of millions on executive benefits

jcheves@herald-leader.comDecember 20, 2012 

Top executives at Central Kentucky's state-backed provider of mental health care awarded themselves millions of dollars in benefits without scrutiny by the agency's board of directors, state Auditor Adam Edelen said Thursday.

An audit released by Edelen's office cited lax oversight and questionable spending at the non-profit Bluegrass Regional Mental Health-Mental Retardation Board, based in Lexington.

The state paid $156 million to Bluegrass in 2012 to provide community mental health care and manage the state-owned Eastern State Hospital in Lexington and Bluegrass Oakwood in Somerset. The audit did not examine the adequacy of patient care provided by Bluegrass.

Since 1997, Bluegrass has given more than $2.8 million in executive benefit contributions to its chief executive officer and other top executives, at the sole discretion of the CEO. The contributions, which were incentives paid in addition to salaries, mostly went to "a core group of central office administrative staff" while rank-and-file employees received no contributions or small sums, Edelen said in a statement.

"Dedicated professionals, many of whom face great challenges on a daily basis in our commonwealth's mental health facilities, had not received raises since at least 2009," Edelen said. "As we've recently been reminded, untreated mental illness can have tragic consequences. To provide that care and protect the public, we must provide those on the front lines with respect and fair pay."

The Bluegrass board of directors did not approve the individual payments to executives, Edelen said. Several board members, including chairman Scott Gould, did not understand how the so-called "executive benefit plan" was supposed to work, he said.

Bluegrass CEO Shannon Ware announced last week that she's retiring after four years at the helm to collect her state pension from the Kentucky Retirement Systems. Ware's predecessor as CEO, Joseph Toy, is her husband, and he remained on the Bluegrass payroll through this year as a paid consultant. Toy began collecting his state pension in 1999, though he remained at Bluegrass until retiring in June.

In stories about Bluegrass published in June, the Lexington Herald-Leader reported that Ware and Toy together took home more than $1 million in total compensation in 2010, including $377,637 in base salary. By contrast, many of the agency's employees who work directly with patients earned between $20,000 and $35,000, according to the agency's payroll database.

Speaking Thursday, Ware said her departure is not because of the critical audit.

"They've pointed out some things that we need to do better, and we're getting on top of those immediately," Ware said. "We have a very informed and a very engaged board. What we need to do better and what the auditors saw is a piece of documentation here and a piece of documentation there — building the paper trail so we can be sure we're doing what the board wants."

Nobody deliberately misspent taxpayer money at Bluegrass, Ware said.

"I'm not flying off to Hawaii; I'm not drinking bottles of champagne," she said.

In his written response to the audit, Gould said the Bluegrass board will study the audit's findings and recommendations "and take action to preserve the integrity of our policies and procedures." Gould said Bluegrass will begin immediate discussion of creating an internal auditor position that reports to the board, as auditors recommended.

"We have always had tremendous respect for the ethical behavior of each member of our executive team, and we believe the internal auditor could complement our existing staff and will help insure transparency and confidence in Bluegrass's corporate structure," Gould wrote.

Edelen said his auditors also found that:

■ In 2006, Bluegrass bought and furnished a 2,508-square-foot house near Lake Cumberland using $320,621 from the state Cabinet for Health and Family Services. Senior Bluegrass executives working at Oakwood in Somerset stayed overnight at the house rather than drive from Lexington or rent a hotel room. By earlier this year, the house was sitting vacant.

The cabinet did not realize its money was used to buy a house, Edelen said. Bluegrass submitted an invoice to the cabinet describing the $320,621 as "administrative support" for their Oakwood duties, and despite some internal questions, the cabinet reimbursed it.

After the Herald-Leader reported on the purchase of the house this year, Bluegrass sold it for $292,000, Edelen said. In a letter this week to Edelen, the cabinet said it considers the house to have been state property, since it was purchased with state funds, and it expects Bluegrass to give the cabinet the money from the sale.

"Bluegrass should not be allowed to benefit from this transaction since approval for the purchase was not requested by Bluegrass and exceeds what is usual and customary," wrote Beth Jurek, executive director of the cabinet's Office of Policy and Budget.

Ware said Thursday that Bluegrass will enter negotiations with the cabinet after winter holidays to discuss what will be repaid.

■ Bluegrass spent $172,025 on political lobbying from January 2011 to September 2012 without adequate documentation of lobbying activities.

■ Ware and Toy spent nearly $38,000 using their Bluegrass-issued credit cards during an 18-month period without providing receipts to show why the spending was necessary. Auditors flagged a number of credit card purchases as "excessive or inappropriate due to a lack of documented business purpose," including tickets to University of Kentucky basketball and football games. Bluegrass officials told auditors that some of the purchases were for "staff awards."

Speaking Thursday, Ware said she typically provided copies of her credit card statements to Bluegrass's finance office, believing that to be adequate. She said it would not be a problem in the future for executives to include receipts and an explanation of what they purchased.

■ Eastern State Hospital and Oakwood had built up cash reserves of more than $20 million combined by fiscal year 2012, although each facility had stable funding sources that made it unnecessary to hold back so much cash. Bluegrass could have invested some of that money in its employees and physical improvements to the facilities, Edelen said.

■ The Bluegrass board of directors failed to address several conflicts of interest created by personal relationships that existed among Bluegrass employees who supervised each other. Chief among them, Toy was CEO and Ware was one of his vice presidents when they began dating, auditors wrote. After Toy retired in 2008 and became a consultant, Ware replaced him as CEO and essentially served as his supervisor, often signing his timesheets, auditors wrote. They married in 2009.

Also, Ware supervised her son-in-law, Eric Crabtree, director of information technology at Bluegrass, until the Herald-Leader reported on it in June. The next month, Bluegrass changed its organizational structure to insert a vice president between Ware and Crabtree, auditors wrote.

The Bluegrass board of directors should revise the agency's nepotism policy so personal relationships are formally discussed with the board and employees in personal relationships cannot supervise each other, Edelen said.

John Cheves: (859) 231-3266. Twitter: @BGPolitics. Blog:

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