State Auditor Adam Edelen released a blistering examination of the Bluegrass Area Development District on Tuesday, describing an agency under "rogue" management that misspent federal grants and allowed rampant spending without proper oversight.
The audit will be referred to eight state and federal agencies, including the Kentucky attorney general, the Kentucky State Police and the FBI.
"For over a decade, the former administration of the Bluegrass ADD took advantage of the fact that the average citizen wasn't paying close attention to its activities and may not even understand exactly what a development district does," Edelen said. "It strayed far from its mission and seemingly convinced itself that because it doesn't receive direct payments from taxpayers, it doesn't have to be accountable."
Area development districts were created to assist local governments in regional planning for economic growth. The Bluegrass ADD, in Lexington, serves 17 counties in Central Kentucky. It has an annual budget of more than $24.4 million, 90 percent of which comes from federal and state grants.
Edelen compared the organization to an "octopus, extending its tentacles far beyond its original statutory authority." He described questionable relationships and potential conflicts of interest with the Bluegrass Industrial Foundation, the Bluegrass Regional Recycling Corporation, Bluegrass Tomorrow and the Workforce Investment Board, which oversees federal employment efforts in the region.
Edelen, who has aspirations for higher political office, largely gave a pass to the district's board, which includes several county and city elected officials; instead, he painted a picture of a dysfunctional organization masterminded by an executive director who duped his bosses.
"Certainly, I think we all have responsibilities when we serve on an oversight board, but when you have executive leadership that is empowered to bypass relevant committees ... I think that's indicative of an organization that in no way, shape or form was board-driven," Edelen said. "The abuses were driven from the top down."
Edelen's office questioned $513,770 worth of credit card expenditures — 77 percent of the $669,179 charged on the district's cards from 2010 to 2013. The charges either lacked supporting documentation or appeared unnecessary or excessive, he said. Many of those charges were for meals in and around Lexington, and travel expenses for people who weren't district employees.
The exam also found that former executive director Lenny Stoltz II was paid a $20,000 lump sum reimbursement for 20 years' worth of charges on his personal credit card without providing receipts, detailed credit card statements or other support to justify the charges.
"I don't know what's more astounding: the fact that someone had the gall to make such a request with zero documentation to back it up or that it got approved," Edelen said. "This speaks to a mentality that this wasn't really public money or that the accountability taxpayers expect from public agencies didn't apply here."
Efforts to reach Stoltz for comment Tuesday were unsuccessful.
Edelen's office was asked to investigate last summer after the district's executive board forced out Stoltz after several issues with a felon re-entry program the district had started.
Many of Edelen's findings revolve around the felon re-entry program, including one of the most serious charges: that Stoltz tried to quash an internal investigation into the program, Steppin' To A New Beat, and failed to report potentially criminal activity.
The program was run by Tayna Fogle, a former University of Kentucky basketball player and a former felon. The district's board fired Fogle shortly before Stoltz left the agency.
Edelen's exam didn't identify people by name but said a former BGADD employee collected money from felons who were participating in Steppin' To A New Beat, even though the program was federally funded and didn't require a fee. Auditors were unable to determine how much was collected and for how long.
People who thought they were participants in the re-entry program also were forced to sign a consent to allow drug testing even though that testing wasn't required, according to the audit.
The exam also found that the former employee entered the district offices while on administrative leave, and subsequently nearly 300 files containing personal information about Steppin' To A New Beat participants went missing.
The district reported the missing files to police, and that case remains open, officials said.
"We are talking not just about the questionable use of federal dollars, but what appears to be the exploitation of individuals who were trying to re-enter society," Edelen said.
Under Stoltz's leadership, the district bought a former residential complex on Trent Boulevard for $600,000 to provide housing for the program's participants. When members of the River Park Neighborhood Association tried to find out more about the district's plans, Stoltz denied them both answers and records. The neighborhood association appealed, and Attorney General Jack Conway found that the district wasn't authorized to run a felony re-entry program and required it to comply with the state's Open Records Act.
Edelen's exam also found that the district hired Fayette Heating and Air to work on the Trent property without competitive bidding, as the Herald-Leader first reported last year. The owner of that company, Bret Melrose, is a member of the Bluegrass Workforce Investment Board, which was set up by Bluegrass ADD with federal work-force investment funds.
Edelen found that payments to Fayette Heating and Air totalled $465,000 without any written contract. He said the deal created a possible conflict of interest.
Other problems listed in the audit include:
■ Year-end bonuses paid to select employees despite a prohibition in the Kentucky Constitution against bonuses for public employees. Bonuses were financed with federal grants intended for specific programs, and the district created a fake pay period to support the bonuses.
■ Improper management of federal grants, a crucial mission of the agency. There also was a perception that the district was trying to control the Workforce Investment Board, which spends millions of federal dollars each year.
"Overall, this finding identifies serious concerns that BGADD could be using WIA and other grants as a cash-flow mechanism to fund operations and other grant expenditures during the year," the exam found.
■ The district used an outdated accounting system that only Stoltz knew how to operate, creating a "significant fraud risk for the agency." After Stoltz was forced out, he received an $8,000 consulting contract to work the accounting system, the Herald-Leader previously reported. That was on top of a $128,000 severance package.
Last summer, Stoltz was replaced by another district employee, David Duttlinger. According to a letter from Duttlinger included in the exam, the district doesn't dispute the allegations made by Edelen's office.
"The engagement of your office on July 3, 2013, provided our agency with the necessary demarcation to begin a new era," Duttlinger wrote.
That new era included forcing out Stoltz, eliminating questionable programs, returning federal funds, selling the Trent Boulevard property, and reviewing and reforming internal bylaws and policies, Duttlinger said.
Lexington Mayor Jim Gray, a former member of Bluegrass ADD's executive board, said in a statement Tuesday that he "saw symptoms of mismanagement" as early as late 2011 and brought those issues to the attention of the board.
"Fortunately ... we succeeded in making a change in Bluegrass ADD's top leadership," Gray said.
Charles Payne, president of the River Park Neighborhood Association, who started many of the inquiries into the district, said he was pleased with the audit. "I think it went a long way," he said. "But I'm a little concerned about self-reform. It hasn't worked in the past."
Linda Blackford: (859) 231-1359. Twitter: @lbblackford