FRANKFORT — Kentuckians pay more than $1.5 billion each year to special taxing districts, such as library and sewer districts, but a new report shows many of those districts have little oversight, don't get required audits and have large cash reserves.
In the first-ever accounting of special taxing districts in Kentucky, State Auditor Adam Edelen identified 1,268 districts that spend a total of $2.7 billion a year — a combination of taxes, fees and other funding. In all but three Kentucky counties, citizens pay more to special taxing districts than to the county government, the report shows.
The survey of taxing districts found they are holding more than $1.3 billion in reserves, twice the amount held in contingency funds by the state's 174 school systems. The $2.7 billion spent by the districts is more than what the state spends on Medicaid; twice what it spends on roads; and roughly equivalent to spending on the main funding formula for K-12 schools.
It's a staggering amount of spending that has gone largely unmonitored, Edelen said at a news conference Wednesday morning.
"The system of oversight that we have is so fundamentally flawed, so broken, so outdated, so Byzantine that until today, we had no sense of the scope and scale of these districts," Edelen said.
He called for legislative reform of special taxing districts, describing them as Kentucky's "ghost government."
"In short, the system is broken and in need of big change," Edelen said. "A reformed and modernized system will make this ghost government more accountable to the public it serves."
The report concluded there are more than 1,000 statutes governing special taxing districts. The laws are often confusing and contradictory. For example, the laws governing how to dissolve a special taxing district are so confusing that it's not clear how to do it, Edelen said.
Edelen's office spent six months tracking down information about the districts and found that laws regarding them are routinely disregarded.
For example, about 40 percent of the special taxing districts that are required to submit budgets to county governments do not, the survey found. Half the special districts with revenues of more than $750,000 a year were not audited, even though that's required by law. That represents $461 million in tax revenue that had no oversight, Edelen's office found.
Some districts did not even know they are required to file financial information with their county government or the state Department for Local Government, Edelen said.
Kentucky's special districts can levy taxes and fees but are typically overseen by non-elected boards.
The number of special taxing districts varies by county. Jefferson County, the state's most populous county, has 33 special taxing districts. Marshall County, with a population of 31,000, has 23 special districts. Fayette County, which has more than 300,000 people, has nine special districts.
In recent years, scathing audits have found poor oversight and out-of-control spending in several special taxing districts, including the Louisville and Jefferson County Metro Sewer District.
In October, the auditor's office released a review of the Garrett Fire District in Floyd County that found more than $123,000 in questionable spending and pornographic material on the department's computers. A former assistant chief with the department had purchased a vehicle without the board's knowledge and opened credit cards in the department's name, spending money on such things as flat screen televisions, electronic equipment and tobacco products.
Edelen's latest report recommends a host of changes to state laws to better track how special taxing districts spend taxpayers' money.
Those recommendations include creating a central registry of all special taxing districts, creating uniform reporting requirements for special taxing districts and lowering the threshold for requirements of audits. Edelen's office suggested mandatory audits for all special taxing districts with budgets of more than $500,000.
In addition, penalties should be added to laws that require special taxing districts to file budgets with county governments or financial reports with the Department of Local Government. About 15 percent of the taxing districts required to file financial reports with the state failed to do so in 2011, the report showed. There is no penalty for failing to report, Edelen said.
State Sen. Damon Thayer, R-Georgetown, has been pushing for reform of special taxing districts since 2005. Thayer said he will craft a proposal for the 2013 legislative session that could include many of the report's recommendations.
"I want to file a bill that has broad support so that we can get something passed in 2013," Thayer said. "We've got to bring more accountability and transparency into a system that spends more than $2.7 billion of taxpayer money. We have got to give the taxpayers more assurances that their tax dollars are being spent wisely."
A database of special taxing districts is available at Citizenauditor.ky.gov.