Several top officials in Gov. Matt Bevin’s administration are calling for comprehensive reform of Kentucky’s 15 area development districts, saying they no longer trust the agencies to manage and spend millions of dollars in federal and state funds for workforce development and other programs.
“We have collectively lost confidence in the ADDs’ ability to responsibly administer public funds and to independently manage their finances,” the officials wrote in a Nov. 18 letter to State Auditor Mike Harmon.
The letter asks Harmon for guidance in enacting “one consistent financial reporting format” to help improve area development district transparency. It was signed by Adam Meier, secretary of the Cabinet for Health and Family Services; Derrick Ramsey, secretary of the Education and Workforce Development Cabinet; Sandra Dunahoo, commissioner of the Department for Local Government; Shannon Gadd, commissioner of the Department for Aging and Independent Living; and Ray Leathers, commissioner of the Department for Workforce Investment.
The issue, the letter said, is that a scathing audit in 2014 of the Bluegrass Area Development District and a 2017 law that requires development districts to report how federal and state money is spent have not been “sufficient to ensure the appropriate use of public funds.”
“Specific instances of extravagant spending, improper billing practices and other financial mismanagement continue to come to light despite the legislature’s best efforts to implement a system of oversight,” the letter said.
For example, local government staffers tracked travel costs by the Purchase Area Development District in Western Kentucky, where officials spent almost $100,000 on three National Association of Development Organization conferences in New Orleans, Alaska and San Antonio, Texas, from 2015 to 2017. The New Orleans trip in 2015 cost more than $41,000 because 22 people associated with the district went along, according to local government documents. The Herald-Leader obtained the documents through an Open Records Act request.
Purchase Executive Director Jennifer Walker disputes those numbers, which local government staffers compiled from receipts and travel reports. She said the cost is closer to $69,000.
“The Purchase ADD Board believes there is value in this training and the Department for Local Government (DLG) must as well, as they provide training hours to the local elected officials who attend,” she wrote in an email.
Tony Wilder, executive director of the Kentucky Council of Area Development Districts, said the districts have been working hard to comply with the 2017 law that required uniform reporting and said the letter made sweeping generalizations without specifics.
“The letter was vague,” Wilder said. “The auditor said show us specifics and there has been no response.”
Wilder said each area development district “would welcome any scrutiny or any examination of what they do. They work very, very hard and their staffs work hard. They have been cut and cut and cut and still provide services.”
Details about the Purchase Area Development District’s travel expenses were not included in the November letter to Harmon, but Wilder said all local governments and state officials attend trainings.
“These travel expenses are all verified and approved by the local (area development district) boards,” Wilder said. “They are all elected officials. These folks live a life of transparency in their jobs as elected officials and with the ADD districts.”
An ongoing conflict
The area development districts were created more than 40 years ago to help encourage regional planning and development. The districts receive federal and state funding for workforce training, aging and home care, transportation, and planning and development. Their executive committees are typically made up of county judge-executives and other locally-elected officials.
Most of the funding for those services comes from the Department of Local Government, Education and Workforce Development Cabinet and the Cabinet for Health and Family Services. The biggest chunk comes from the federal government and then flows through the Education and Workforce Development Cabinet, but cabinet officials refused to tell the Herald-Leader how much money it provides the districts, instead directing a reporter to file an open records request that doesn’t have to be answered for several days.
The letter to Harmon is just the latest dust up between development districts and many of the agencies that fund them.
In the 2014 special examination of the Bluegrass Area Development District, which is based in Lexington, then Auditor Adam Edelen’s office questioned $513,770 worth of credit card expenditures — 77 percent of the $669,179 charged on the district’s cards from 2010 to 2013. The charges either lacked supporting documentation or appeared unnecessary or excessive, Edelen found. Many of those charges were for meals in and around Lexington, and travel expenses for people who weren’t district employees.
At one point, state workforce officials had asked Bluegrass, which serves 17 counties, to repay nearly $900,000 in what they said was misspent federal workforce training money from 2010 to 2013. Bluegrass appealed the decision. A settlement agreement has been reached and is waiting to be approved by federal workforce officials, according to state officials.
The Cabinet for Health and Family Services, which oversees aging and other senior programs, had yanked Bluegrass’ designation as the area’s coordinating agency for aging programs because of questions about how it spent the money. The two groups eventually settled that dispute and the cabinet reinstated Bluegrass’ designation. The executive director of Bluegrass at the time of the questionable spending resigned.
The Nov. 13 letter, which the Herald-Leader obtained through an Open Records Act request, said not all development districts have had problems.
Meier, the health cabinet secretary, said the “quality, consistency and efficiency” of how the area development districts operate varies from district to district.
“Through our request of the auditor, we had hoped to identify best practices and develop guidance that would help ensure more consistency of processes, accounting and cost allocation methodology, as well as improve transparency and efficiency,” Meier said in a written statement.
Harmon, in a letter dated Dec. 18, said he could not make specific recommendations to increase transparency because his office was granted the authority to audit area development districts as part of the 2017 law.
“As auditors, independence requirements mean our role cannot be setting the polices that are then audited to,” Harmon said.
At the same time, if state agencies are concerned about gross mismanagement or specific instances of extravagant spending or improper billing, the auditor’s office would be interested in discussing those issues in detail, he said.
Michael Goins, a spokesman for Harmon, said the law took effect July 1, 2018, which meant it was too late for the auditor’s office to perform audits this year.
“Going forward, the auditor’s office will have the opportunity to perform audits of the ADDs if we feel there is a need to address any concerns or more closely examine particular issues,” Harmon said.
In 2018, seven area development districts sued the Department for Local Government after the department cut their funding when Bevin issued a statewide budget reduction in December 2017.
The development districts argued the Department for Local Governments could not require them to cut their budgets without a reduction in work product, among other things. Franklin Circuit Court Judge Thomas Wingate dismissed the case in September, saying the development districts had not exhausted the Department for Local Government’s internal appeals process.
Bluegrass Area Development District should have been cut by $79,517, which is less than one percent of the district’s total annual budget, the Department of Local Government said in documents.
The district, though, had spent the money before it was cut, the Department for Local Government said in a Nov. 26 decision denying Bluegrass’ appeal of its budget cut.
“BGADD proceeded to incur additional expenses ... in the total amount of $712,644. Over double the entire contract amount,” the letter said. “Knowingly overspending on a contract by $328,176, whether at the discretion of the executive board or otherwise, constitutes prima facie evidence of colossal mismanagement and teeters on the border of a breach of fiduciary duty.”
The development district continued to spend money on “unnecessary expenses,” including $15,000 in membership fees, quarterly meals for 100 elected officials in Lexington and “substantial costs for out-of-state travel,” according to the state.
In a Dec. 7 response letter, Bluegrass disputed those claims. There was only one out-of-state trip in fiscal year 2018, the letter said. The dinners for locally-elected officials are paid for using local funding, not state funding, the letter said. “These members travel on their own expense, in the evening to attend these meetings,” the letter said.
Although Bluegrass appeared to overcharge on its contract with the Department for Local Government, that’s not the case, the letter said. It charges services to that account, or grant, knowing state funding will not cover all of the expenses, and has done so for years.
“Accurately tracking the cost of these services demonstrates fiscal integrity, labeling it as mismanagement is grossly unfair and inaccurate,” the letter said.
“It is critical that we charge any effort to the grant code benefited by that effort,” said David Duttlinger, executive director of Bluegrass. “If we didn’t it would be misappropriation of funds.”
The development district uses local funds — or dues paid by member counties and cities — to cover what state funding does not, Duttlinger said.
Bluegrass and other districts weren’t able to reduce their spending because the Department of Local Government did not announce cuts to the districts until the 11th hour, the Bluegrass letter said.
State officials contend the districts had ample notice of the cuts, but Bluegrass said the notification came May 8, 2018, less than 60 days before the end of the fiscal year on June 30.
In the current fiscal year, which began July 1, the development districts have continued to provide services under the same contract despite not having an agreement with the Department for Local Governments, said Duttlinger.
Only one area development district has signed a contract with the Department of Local Government because the “provisions are incredibly restrictive. To date, and we are in the third quarter, no fiscal year 2019 appropriated funds have been dispersed to any ADD,” Duttlinger said. “This creates a huge cash flow problem for each ADD.”
Dunahoo, the local government commissioner, said her office will continue to pursue better accountability.
“DLG is fulfilling the governor’s commitment to good government. DLG has an obligation to ensure taxpayer dollars are spent responsibly and are accurately accounted for thereafter,” she said. “After 50 years of taxpayer investment in ADDs, it is the legislatures’ role to evaluate the ADDs efficacy going forward.”