"Excessive spending" and "inadequate oversight" within the Kentucky Association of Counties and the Kentucky League of Cities prompted state Auditor Crit Luallen to launch an investigation of the two groups on Wednesday.
Luallen said that "alarming media reports" by the Lexington Herald-Leader over the past month have created "serious concerns over spending" at the organizations.
"In both of these cases, we want to get to the bottom of exactly what has caused a pattern of excessive spending with inadequate oversight, how extensive was that, and what other issues are out there that also need to be reviewed and analyzed," Luallen said.
The auditor's investigation comes after the Herald-Leader reported this week that KACo's five top officials spent nearly $600,000 in two years on travel, meals and other expenses. More than half of those expenses were charged by Bob Arnold, KACo's executive director.
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Last month, the newspaper reported that the League's top three leaders charged $300,000 in trips and expenses over three years. Eighteen of its 83 employees earn $100,000 or more, and Executive Director Sylvia Lovely's compensation package is $315,000.
"It is clear by the examples of extravagant spending and lack of transparency that these agencies and their boards need the necessary tools to fulfill their responsibilities to the taxpayers," Luallen said.
Luallen notified KACo President J. Michael Foster, the Christian County attorney, and League President Connie Lawson, Richmond's mayor, of the audit in letters that spelled out her authority to conduct an investigation.
Both organizations are non-profit groups funded through dues from local governments and fees for providing insurance and financing services to counties and cities. Public officials from across the state serve on the groups' boards of directors.
In addition to the newspaper articles, Luallen said, her office received "specific concerns" about the two groups.
Both organizations' boards of directors plan to discuss the audits in coming days.
"We're waiting for direction from them," said League spokesman Robin Cooper, who declined to comment further. The League's board has scheduled a conference call for Thursday.
KACo's board will discuss the issue later this week, although a time hadn't been set by late Wednesday, said Chris Harris, a Pike County magistrate and KACo's second vice president.
"I feel sure the executive board will cooperate with the auditor in any way we can to open our books," Harris said.
Foster, the group's president, pledged his full cooperation to Luallen.
"I always consider an audit a useful tool in terms of financial management and fiscal responsibility," he said. "I've never been defensive about an audit."
Luallen said she hadn't determined how many of her 133 employees will be assigned to scrutinize the two organizations. The reviews will first focus on the expenses and compensation of executives at the League and KACo, as well as their boards' oversight procedures, she said. The scope could expand to the organizations' insurance or financing programs, depending what auditors find, she said.
"We will be looking at every area we have concerns and questions about," she said.
Luallen's staff examined spending by officials at the Blue Grass Airport earlier this year, completing the audit in about three months.
"I don't think this will be as quick as the airport," she said. "It will be several months."
KACo and the League will have to reimburse the auditor's office when the reviews are completed, said Terry Sebastian, Luallen's spokesman.
Arnold, KACo's executive director, said he was concerned because "there's not the money in the budget for that."
Overall, Arnold said KACo doesn't have anything to hide. "But I still don't think she's got the authority to do it," he said.
In her letters to leaders of KACo and the League, Luallen cited several state statutes that she says authorizes the auditor's office to examine the organizations.
"There's no doubt in our mind," Luallen said. "Were we to receive a legal challenge on this, we're prepared to fight that in court."
Several KACo board members said earlier this week that they want new procedures to tighten oversight and reduce spending after the newspaper revealed expenses that included $450-a-night hotel rooms, thousands of dollars in sports tickets and 50 meals costing $1,000 or more.
In addition, charges to two strip clubs and a Lexington escort service appeared on the KACo-issued credit card statements of Spencer County Judge-Executive David Jenkins, the group's 2008 president. He and KACo are disputing those charges.
In March, the KACo board of directors passed a new travel-expense policy that requires monthly reports on out-of-state travel and designated KACo's general counsel, Tim Sturgill, to monitor all employee credit card statements and reimbursements.
"I still believe that policy, once it takes root, will go a long way down the road toward reigning in expenses," Foster said. "On the other hand, I don't think that's enough."
At a meeting in late June, the League's executive board created a committee to review its policies and rules, along with a set of recommendations for public boards that Luallen issued earlier this year after the Blue Grass Airport audit.
In addition, Lovely, the executive director, said she would discontinue several corporate perks, including League-paid travelling for spouses and holding League functions at a restaurant co-owned by her husband.
Since then, the League declined a subsequent request under the Open Records Act from the Herald-Leader, saying it had complied with earlier requests voluntarily and is not a public agency. The Herald-Leader plans to seek a ruling from the attorney general's office on the League's status as a public agency.
Luallen said the League's decision to stop providing documents to the newspaper made her reconsider an earlier choice to hold off on deciding whether to audit the agency until its board implemented new rules.
"We felt it was important to move forward in spite of that (reform) because, once the League made the decision not to share any more public records, I think it raised questions about transparency," Luallen said.
Madisonville Mayor Will Cox, a member of the League's insurance-services board, said he thought the League erred in closing its records.
"I thought that was a mistake, and I was disappointed with that decision, and I told them so at the time," Cox said. "Given everything that has come to light over the last few weeks regarding the Kentucky League of Cities, I think an audit is probably needed and will help start the League on the path to recovery."
Lexington Mayor Jim Newberry, who has urged reform over the past few weeks, said he was pleased about the audit, according to spokeswoman Susan Straub.
Another board member, Mayfield Mayor Arthur Byrn, said the League has nothing to hide, but he's concerned about proprietary information regarding insurance rates and actuarial studies.
"We need to look at the way we do things, but I firmly believe there's nothing sinister going on at the League and never has been," he said.