The Urban County Council voted unanimously Tuesday to form a special investigative committee to scrutinize allegations of fraud by a city employee whose job has been targeted for elimination.
The committee, whose membership of five to seven people will be set by Vice Mayor Jim Gray, has the power to subpoena witnesses and documents, according to the city's charter. It must report back to the full council before July 6.
Meanwhile, Lexington Mayor Jim Newberry's administration recommended a third-party review of its handling of the fraud allegations, possibly by State Auditor Crit Luallen.
"There are certainly questions surrounding this controversy that need to be answered," Luallen said in a statement Tuesday. "We will be monitoring Lexington's next steps to determine what action our office needs to take."
The third-party review, which might also be conducted by a private accounting firm, was recommended in a June 1 letter to Newberry and council members from Law Commissioner Logan Askew and Finance Commissioner Linda Rumpke.
Newberry, who was not at Tuesday morning's council meeting, said through a spokeswoman he welcomed a third-party review.
"Despite attempts by a couple of council members to confuse these issues, the only goal of our proposal is to save taxpayer dollars," the statement said. "No taxpayer wants the government to continue to pay these employees when we have found a way to do the work more efficiently."
At the center of the controversy are fraud allegations made in 2008 and 2009 by Patrick Johnston, director of the Division of Risk Management. The city has refused to release the allegations to Councilwoman KC Crosbie and the Herald-Leader, which is challenging the denial under the state's Open Records Act.
Johnston's position was slated for elimination under a reorganization of his department, which oversees insurance, loss control and other risk issues for the city. Under the proposal, those tasks would be split among the city's law department and human resources department.
On Thursday, a council committee declined to accept the plan after raising several issues, including whether Johnston was being punished for his allegations. Also at issue is whether the city has saved money by hiring the Kentucky League of Cities as its insurance agent in 2007. The city says it has; Johnston disputes those numbers.
Crosbie has asked to see the fraud allegations to determine whether the two issues are related. Johnston has said he won't release the documents because city officials warned him he'd be personally liable if he did so.
After Tuesday's meeting, Crosbie said she was pleased with the unanimous vote to set up the investigative committee, which "shows the council wants transparency."
Johnston, who will probably keep his job for the next few months, said he also appreciated the council's move.
"I am extremely pleased the council members are willing to investigate this and hear my side," he said.
Council members initially disagreed over the new committee, which was proposed by Councilman Julian Beard, because some felt it would take too long to investigate issues surrounding the fraud allegations.
Some also cited the potential for charges of political interference. Gray, who is appointing the committee, is challenging Newberry in November and has been endorsed by KC Crosbie's husband, Scott Crosbie. The chairman of the Internal Audit Board is DeWitt Hisle, who is the finance chairman for Newberry's campaign.
"I think we need to get to the bottom of it before August," said councilwoman Cheryl Feigel.
A majority of members defeated another motion to have the entire council serve on the committee. After the motion was amended to require a July 6 reporting date, the council voted unanimously to form the investigative panel.
The council also spent time Tuesday discussing the merits of abolishing the risk management department.
Askew and Crosbie butted heads after she asked him if the city's charter and ordinances allowed any reorganization of departments that are required under the charter.
"I think you're misleading the public by suggesting the charter requires certain things and we're violating that," he said.
At that, Gray intervened.
"I don't think it's appropriate to engage a council member in what amounts to, in my interpretation, an intimidating way," he said. "I would like to suggest a little more respect."
Councilman George Myers presented a memo a staff member wrote in which he contacted numerous fraud risk associations around the country. In 80 percent of cities with a population over 100,000, the memo said, risk management was centralized in its own department.
"That's one of the reasons I voted against it (the proposed reorganization)," Myers said. "I think it would do more damage than good."
Johnston told a council committee on Thursday the reorganization would not save the city money, but the letter from Askew and Rumpke disputes his claims.
According to city documents, overall expenses on insurance have gone from $1.376 million in 2007 to $1.274 million in 2010.
Since 2008, the administration has split 12 of risk management's employees between finance and law. The department has three employees, including the director.
Johnston, who said he had not been given a copy of the letter, would not comment.