State Auditor Crit Luallen will investigate how Lexington Mayor Jim Newberry's administration handled an employee's questions and allegations regarding the city's hiring of the Kentucky League of Cities as its insurance agent in 2007, her office announced Thursday.
"Based on recent media coverage, information provided to our office and a direct request by the Lexington Internal Auditor, my office will conduct an independent examination of questions raised by a city employee's allegations concerning procurement issues," Luallen said in a statement Thursday. "This review will include the handling of the allegations and an analysis of the procurement process for the city's insurance services."
Also Thursday, Vice Mayor Jim Gray appointed a seven-member investigative committee to scrutinize the issue.
Eighth District Councilman George Myers will lead the committee. The other members appointed: Linda Gorton, at large; Cheryl Feigel, 5th District; Diane Lawless, 3rd District; Doug Martin, 10th District; Julian Beard, 4th District, and KC Crosbie; 7th District.
Newberry said he welcomed Luallen's help but criticized the makeup of the council committee because two members — KC Crosbie and Diane Lawless — have ties to Gray's campaign for mayor, and Doug Martin contributed $1,000 to Newberry's re-election bid.
"It is inappropriate to include them in this committee," Newberry said in a statement.
Gray dismissed Newberry's criticism.
"This issue is about transparency and not about politics," Gray said. "The council didn't create the issue, but it did vote unanimously to create the committee to investigate it, and I fully trust the committee and the state auditor to investigate it properly."
After reading Newberry's statement, Martin turned down his seat on the panel. "It wouldn't have occurred to me that a donation would prevent me from doing a job as council member, but he is correct," Martin said in an interview, adding that his wife has also donated to Newberry's campaign. "I wish I had thought of it myself."
Crosbie and Lawless said they intend to remain on the committee.
Crosbie's husband, Scott Crosbie, has endorsed Gray, and gave $1,000 to Gray's campaign last month. In 2005, Scott Crosbie donated $500 to Newberry's campaign and gave him another $1,500 in 2006, according to the Kentucky Registry of Election Finance.
Lawless managed Gray's 2006 campaign for a council-at-large seat.
"This is not about who's going to be our next mayor," Crosbie said. "It's about whether we follow our ordinances, whether we get critical information and whether the city has acted in an accountable manner."
The furor is centered on city employee Patrick Johnston, who made fraud allegations in 2008 and 2009, which were dismissed by the city's internal and external auditors as being without merit. Johnston's job is now targeted for elimination under a proposed reorganization.
City council members want to know whether Johnston's fraud allegations are related to the administration's proposal to cut his job as director of the city's risk management division. The department would be dissolved and its remaining employees relocated to the law department and human resources.
Johnston's fraud allegations have remained confidential even though Crosbie has pushed the administration and external auditors to provide the documents to council members. However, a series of 2007 e-mail messages between Johnston and law commissioner Logan Askew indicate Johnston questioned the procurement of insurance services from the Kentucky League of Cities.
Council members unanimously voted Tuesday to form the investigative committee. It will report its findings by July 6, before the council's summer break. The committee has the power to subpoena witnesses and documents.
"It is essential that the recent allegations of fraud are given a thorough and complete review," Gray said in a statement. "I am certain that, through this committee, we will continue to move toward a more ethical, transparent government for the people of Lexington."
Gray, who said he consulted with Myers on the committee's appointments, said he would encourage Myers to meet with Luallen. Myers set the group's first meeting for 8:30 a.m. Tuesday morning.
"The committee and I look forward to meeting with her (Luallen) and working for a precise conclusion to this matter," Myers said Thursday.
Newberry said he would be glad to get the matter straightened out.
"This issue has been seriously distorted by this newspaper and by politics," Newberry said. "I think this examination will clear up some of the distortion and will reaffirm the findings of both our internal and our external auditors, who have found there to be no basis to fraud allegations."
Newberry said he had two goals when making decisions concerning insurance. "First, we have worked to get the best insurance coverage for the best price," his statement said. "Second, we are trying to operate government as efficiently as possible, in this case eliminating several city positions in risk management because they are not needed."