Last year, the Kentucky League of Cities warned that cities were on the financial brink, facing higher retirement costs and growing fiscal pressures.
"Make no mistake," said League Executive Director Sylvia Lovely in a press release. "Cities are in a full-blown financial crisis."
But as Kentucky cities' coffers have been depleted, the League — funded through city dues, city insurance premiums and city loan payments — has, in its own words, become "one of the largest and most successful municipal leagues in the country." The small non-profit that was formed 80 years ago to help cities is now a multimillion-dollar operation, but one with little oversight and plenty of perks for its employees.
As cities have laid workers off, Lovely, who came to the League as a lawyer in 1988, has seen her compensation package grow to $315,000 — a 25.5 percent increase since 2006. She drives a BMW SUV provided by the League and, when she travels, her husband, Bernard Lovely, often goes with her at the expense of the organization.
As cities have cut services, the top three executives of the League have charged more than $300,000 for travel, meals and other expenses since 2006, according to records obtained by the Herald-Leader under the state's Open Records Act. In 2008, travel by all League employees cost about $457,000, according to its 2008 financial statement.
As cities struggled to pay higher rates in the state's retirement system, the League gave more than a quarter of a million dollars to five employees, including Lovely and her top lieutenants, in the form of forgivable loans to buy more years of retirement benefits in the same system — money they never had to pay back.
The League is a mixture of non-profit and for-profit enterprise, which, supporters say, does untold good for 382 Kentucky cities by providing free legal advice, superlative insurance service and lobbying on such issues as lower pension rates.
"It's dynamic, it's exciting, it is unique and it helps cities in so many fundamental ways," Lovely said of the League.
At the same time, the organization — which provides insurance and services only to cities — has little oversight from the state or its own executive board, which is made up entirely of the mayors and city managers it serves. The board was informed of executive compensation, according to Lovely, but it does not sign off on individual travel or other expenses.
State Auditor Crit Luallen questions the lack of oversight. "The League is an association of government entities and they are governed by a board of elected officials who have a fiduciary responsibility to ensure the appropriate use of public funds," Luallen said. "Their expenditures should be transparent and reasonable in nature, and those expenditures should be tied to quantifiable benefits to the public."
The Herald-Leader examined the credit card expenses of Lovely, Deputy Executive Director Neil Hackworth and Chief Insurance Services Officer William Hamilton. Included in the $304,000 in expenses for the three were nearly $176,000 for travel, and more than $77,000 for meals. Their travels included stays at the Portola Hotel and Spa in Monterey, Calif., the Fairmont Hotel in San Francisco and the Alyeska Resort in Alaska. Lunches and dinners entertaining others included thousands spent at restaurants such as Galatoire's in New Orleans and Citronelle in Washington, D.C.
In addition to numerous meetings and travel, the executives enjoy other privileges charged to the League, including a box at Churchill Downs, Ryder Cup tickets, University of Kentucky football and basketball season tickets, and roughly $2,300 spent for Lovely and her husband to fly to Washington, D.C., to attend President Barack Obama's inauguration and the Bluegrass Ball.
Lovely said she believes the League is serving cities well.
"I think we stay in touch with those cities," Lovely said. "If I could, I'd be in every one of them because my heart is breaking for them for what they're going through. Our travel brings back so much more. If I could explain it to them, I would."
The documents also show:
■ The spouses of the top three executives travel on the League's dime. At least $19,000 was spent in the past three years for airline tickets and hotel expenses for spouses of League executives. Most spousal expenses were not separately detailed on credit card receipts, making it impossible to know the real total. The League says the perk is part of the executives' compensation.
■ In the past three years, the three League executives have spent almost $21,000 on meals at Azur, a restaurant in south Lexington that Bernard Lovely, Sylvia's husband, co-owns.
■ Hamilton, the director of the League's multimillion-dollar insurance and finance arms, rents office space in Georgetown to one of the League's major insurance adjustors, Collins and Co., according to property documents. In an interview, Hamilton said he saw no problem with either spending money at Azur or making money personally by renting space to a League contractor.
"We're a business organization," he said. "We do businesslike things."
Hamilton's rental arrangement was disclosed to the board, which approved it, Lovely said.
"It's fully disclosed," Lovely said. "That's the basis of a good conflict-of-interest policy."
Defenders and doubters
The League has many defenders and fans who say their small cities simply could not survive without the services they receive as League members. The KLC's insurance programs offer special risk analysis, extra training for police officers and $275,000 a year in safety grants for cities to buy things such as bulletproof vests.
The League provides a team of three lobbyists to represent cities' interests in Frankfort, answers 2,400 calls a year for legal advice and provides training for newly elected officials.
Lovely, 58, is described by mayors as a tireless speaker on civic issues, and is often mentioned as a future political candidate. In 2001, she started the NewCities Institute, a civic think tank supported by the League, to get residents engaged in public issues.
(Herald-Leader Publisher Timothy M. Kelly was added to the board of the NewCities Institute for a one-year term this year along with several other former board members of the Partnership for Successful Schools after the merger of the two organizations. After learning of the newsroom's impending stories about the League of Cities, Kelly said, he resigned from the board last week in order to be able to perform his role as publisher without any perceived conflict of interest.)
Susan Barto, the mayor of Lyndon, says she is "so pleased with the League that I don't have any problems with what they're doing right now." Barto serves on the KLC executive board.
Others say they believe the non-profit League's corporate-style perks and salaries hurt its mission at a time when city budgets are strained.
"They do incredibly good things, but I've got some serious concerns," said Madisonville Mayor Will Cox, a member of the League's advisory board. "I've expressed those, and we'll see what happens."
Lexington Mayor Jim Newberry, who serves on the executive board, wants more direct action. In February, he said, he found out what the League's top salaries were when Lovely came to tell him about them after the Herald-Leader's records request.
On May 27, he wrote a letter to the League's executive board chairwoman, Richmond Mayor Connie Lawson. The letter, obtained by the Herald-Leader through an open records request, said he will ask the executive board to end spousal travel, buy more economical vehicles, prohibit business with League relations, and re-evaluate staff salaries.
"I'm sure you agree that, as mayors entrusted with public funds, we are accountable to the public for every dollar spent," he wrote.
Lexington Vice Mayor Jim Gray, who serves on the advisory board, which Gray says was never informed about salaries or expenses, also called for the executive board to investigate further.
"These reports suggest a disturbing detachment from fiscal responsibility," he said.
High pay, frequent travel
The Herald-Leader's request for League records followed newspaper investigations that found questionable spending at Blue Grass Airport and the Lexington Public Library, both of which receive public money.
Four airport officials resigned or were fired after the reports, and a criminal inquiry is under way. Bernard Lovely was chairman of the airport board at the time and uncovered some of the most egregious expenditures — such as money spent at strip clubs — after the first reports.
The Kentucky League of Cities does not have a direct tax allocation, as the library does. Nor does it get state and federal funds for projects, as the airport does. Its funds come directly from member cities in the form of dues, insurance premiums and interest on loans.
The League expanded its services in 1987, when private insurers decided to pull out of the municipal insurance market. It started a non-profit insurance company, a for-profit insurance agency and a financing company. Though revenues change from year to year, officials estimate that the League subsidiaries bring in about $53 million a year and return about $4.9 million to the League.
In turn, the League has rewarded its employees. In 2008, 18 of its 83 employees made more than $100,000 a year.
League officials spend much of their time crisscrossing the state in League cars. Lovely and her two lieutenants spent nearly $17,000 on gas in the past three years.
Deputy Director Neil Hackworth, the former mayor of Shelbyville, still lives there, and Hamilton lives in Georgetown. KLC bought the office building at 100 Vine Street in Lexington in 2000 for $7 million; they occupy two floors and rent out the rest at a profit.
League executives also travel around the country — often to events of the National League of Cities and its related committees. Lovely is on the board of the NLC.
Among Lovely's travel expenses was an $8,100 trip to Dublin, Ireland, for herself and her husband with Greater Louisville Inc., the city's chamber of commerce and economic development agency.
On one overnight trip, Lovely flew to New York City with Denise Hamilton, the wife of insurance services director William Hamilton. Lovely's plane ticket was $859, with an additional $446 for a night at the Surrey Hotel, which included $148 spent at Café Boulud. The League paid about $900 for Denise Hamilton's trip.
Lovely said she and Hamilton, an artist, went to pick out paintings donated to the League by a New York artist. They now hang in the League's Lexington offices.
In 2007, Neil and Sharon Hackworth spent four nights at the Grand Hotel on Mackinac Island, Mich., for an NLC meeting at $517 a night. Sylvia and Bernard Lovely also attended, spending nearly $2,000 over four days.
Lovely said the travel is an important part of her job. She's passionate about raising Kentucky's profile nationally and bringing new ideas home, she said.
"It's all about mixing and mingling and building relationships, which is so much a part of this business," she said.
Spousal travel became part of Lovely's compensation package when she became executive director in 1990, and was then extended to Hackworth and Hamilton.
"I go to a lot of events I'm expected to be at," Lovely said. "I'm gone a lot of weekends; I'm gone a lot of nights. It's like a university president: Spouses play a major role."
The League also sends staff and board members on trips. For example, in 2006, Hamilton spent nearly $10,000 putting up a group of nine people — mayors, staffers and representatives of Fifth Third Bank — at the Casablanca Hotel in Manhattan for meetings with ratings agencies. (The bank, which has done several KLC financing deals, also paid for the publication of Sylvia Lovely's book, The Little Red Book of Everyday Heroes, according to KLC publications.)
Dining at Azur
When in Lexington, there are frequent meals out, usually dinners at Azur and lunches at the downtown Italian restaurant Bellini's. Lovely, Hackworth or Hamilton ate at Bellini's 59 times in three years, spending about $6,600 in all. Most of the lunches were with fellow League employees or mayors. (Many of the credit card receipts had no explanation of the purpose of the lunch.)
But no other restaurant has benefited from League dollars as much as Azur. When asked about taking business to their boss's husband's restaurant, Hamilton said the issue has never come up.
"There's full disclosure," Hamilton said. There are no written policies on where to dine, he said. The 24 mayors on the executive board are not paid, but when they come to Lexington for meetings at least three times a year, the League pays for their hotel rooms and takes them out to dinner.
Lovely said she was "flabbergasted" that anyone would question going to Azur. "Everyone knows about it," she said. "Everyone loves it."
The League also hired Bernard Lovely's law firm, Bowles, Rice McDavid Graff and Love in 2007. They were paid $837 for a "lobbying matter."
Sporting events are also part of the League's business practices. In 2006, the group paid $4,000 for two season tickets to UK basketball games. Since 2007, it has spent $4,986 for UK football tickets, $4,563 for Churchill Downs season tickets and $2,600 for Ryder Cup tickets.
The tickets are a normal part of business, Hackworth says.
"We're a business organization, and a common business custom is to provide them (mayors and contractors) with those kinds of benefits," he said. "Sometimes we take customers, sometimes we don't."
In 2006, when the Breeders' Cup was at Churchill Downs, Lovely bought four tickets for $1,900, according to the expense report, for the Lovelys and the Hackworths. In 2008, Lovely paid $1,000 for two tickets to Gov. Beshear's Derby Soirée.
"With an organization as big as this one, I'm expected to be there," Lovely said. "That's how over the years, I believe ... I've been able to build the prominence of cities."
Several mayors said they don't know much about the day-to-day workings of the League. The executive board works on general policy and the advisory board on legislative and policy issues. The state Department of Insurance reviews the League's insurance programs, but no state agency looks at how it spends the money of cities.
"If this was a private company, no one would be questioning this," said Lyndon Mayor Susan Barto. "I'm very confident with everything they tell us."
Although the majority of Kentucky cities get insurance through the League, some say it can be found more cheaply elsewhere. Last year, St. Matthews switched to Travelers for liability and property insurance, saving $100,000 a year, according to controller Jim King.
Newport also recently switched from the League because they got a better deal, city officials said.
KLC operates in a competitive market, and its rates are as low as possible, said Hamilton.
Jamestown Mayor Roger Brooks Bates says his town has been hit hard by the recession, but the city saved some money when it switched from KLC to Trident insurance. Now he'd like to see KLC giving money back to the cities instead of traveling and dining.
But Hamilton said it would be impossible to return money to cities through lower insurance rates because rates are set by an actuary, who analyzes risks and returns.
League officials say they have saved cities so much money over the years on their services that their travel and entertainment expenses are immaterial.
In a recent interview, Mayor Newberry called League officials "fundamentally good people who have made some mistakes in judgment.
"If there are operational costs that can be eliminated to make premiums or financing costs lower, we need to lower them," he said.
Newberry said he hopes some of these issues will be resolved at the executive board's next meeting on June 19.
But Richmond Mayor Connie Lawson, chairwoman of the League's executive board, thinks the KLC is doing just fine.
"There may be some things we need to look at," said Lawson, "but I'm very happy."
It's your money: The Herald-Leader's examination of the expenses of top officials at the Kentucky League of Cities is the third in a series of stories about how public money is spent by organizations in our area. The first two were Blue Grass Airport and the Lexington Public Library. Each has a different culture, a different purpose and different policies. But these very distinct groups share one vital element: Much of the money they spend comes from you, the taxpayer.