State Auditor Mike Harmon said Tuesday that his office has uncovered spending problems at Kentucky Employers’ Mutual Insurance, including a lack of competitive bidding and cost controls, inaccurate reporting of its contracts and business funds used for expensive meals, liquor, gifts and entertainment for insiders’ personal benefit.
For example, in April 2017, KEMI hosted an annual event at Keeneland that cost $4,734. Separately, a KEMI manager then “submitted a reimbursement request for a bar tab of $589.36 along with a tip of $1,030.64,” auditors wrote in their report. The audit also criticized KEMI for giving hundreds of University of Kentucky basketball and football tickets to senior managers for no identifiable business purpose.
“They acted as if it was their own money rather than policyholders’ money or taxpayers’ money,” Harmon said in an interview Tuesday.
The chairman of KEMI’s governing board, Brandon Voelker, said he requested the audit after growing concerned about slipshod spending practices at the insurer.
“I didn’t know about the Keeneland thing at the time because I wasn’t personally involved in that. But there was a land deal that didn’t seem right to me, and so I started asking a ton of questions of the general counsel and other people inside and outside,” said Voelker, a Northern Kentucky lawyer whom Gov. Matt Bevin named to the KEMI board in 2016.
The 10-member board is trying to impose stronger oversight at KEMI, Voelker added.
“As you can expect, anytime you’ve got an organization of 220 employees that has been doing things a certain way for 25 years, it takes some time to change behaviors,” Voelker said.
Lexington-based KEMI is Kentucky’s largest issuer of workers’ compensation insurance, collecting money from 23,000 policyholders in all 120 counties, including most of the school districts. The General Assembly created it as an independent nonprofit in 1994 to serve as an insurer of last resort, staking it with a $7 million loan of public funds.
KEMI lacked adequate controls in a number of business deals examined, Harmon said in his audit.
“One of the biggest concerns our auditors discovered relates to KEMI’s purchase of land for a new office location near Interstate 75 and Newtown Pike in Lexington in which a real estate broker was paid an additional $38,825 above the original ($10,000) agreement,” Harmon wrote. “This is just one of several issues identified.”
Jon Stewart, KEMI’s president and chief executive, was not available for comment Tuesday, a spokesman said. A state database lists Stewart’s annual salary as $445,438. He has served in his position since 2012.
In a prepared statement posted to KEMI’s website, Stewart said he accepted some of the auditor’s findings.
“In fact, prior to the audit being released, we made several changes to strengthen KEMI and address concerns that are referenced in the report,” Stewart said. “We will continue to review the APA recommendations and determine what actions are necessary to ensure that we meet our dual role of being a state-created entity and a competitive insurance company.”
Among the audit’s findings:
▪ KEMI has increased its “small purchase” authority from $10,000 to $50,000, allowing employees to make much larger purchases without competitive bidding or oversight by the board of directors. KEMI also uses “extension contracts” with existing vendors to avoid putting work out for competitive bids.
In one such deal Harmon’s office examined, a KEMI manager agreed to pay $48,825 to real estate broker Barry Mangold in several installments during 2015 and 2016 through a no-bid contract as the nonprofit searched for a new headquarters outside of downtown Lexington.
“Because the full amount of the payment to the broker was less than $50,000, KEMI policy did not require the expense to be presented to the board for approval,” Harmon wrote.
“Further complicating the matter, the KEMI manager acknowledged knowing the broker prior to selecting and engaging Barry Mangold, Mangold Real Estate, in business with KEMI. The KEMI manager stated that the broker is from his hometown, the two have mutual acquaintances, and both had kids competing in high school athletics at the same time,” he wrote. “However, the KEMI manager stated that they are ‘not running buddies’ and while they would occasionally see each other at events and speak, they do not socialize.”
▪ KEMI inaccurately reports the size and scope of some contracts to the legislature’s Government Contract Review Committee in Frankfort. In other cases, KEMI simply fails to disclose contracts to the committee, although it is required by law to do so.
▪ Policyholders who have a financial stake in the nonprofit lack representation on the KEMI board of directors because there is no requirement for it. KEMI’s board is named by the governor and also includes the state’s secretaries of personnel, finance and labor. By contrast, Missouri’s workers’ comp insurance agency board is elected by its policyholders.
▪ KEMI awarded between $1.4 million and $1.6 million a year to Stewart and other employees through “a generous employee incentive plan.” Voelker said these incentives often boosted base salaries by 15 percent to 20 percent, and the incentive plan has been halted for now.
▪ Business funds are spent on meals and entertainment without a clearly identified business purpose.
For example, Harmon’s office identified 373 tickets to UK and University of Louisville athletics events given to KEMI managers, 55 to KEMI spouses and 17 to KEMI board members from 2016 to 2018.
“It was everyone in senior management,” Voelker said of the free ticket distribution. “When I saw it, I was not a happy camper.”
In his audit, Harmon advised KEMI to find a legitimate business purpose for such expenses if it’s going to make them at all.
“In discussing the use of season tickets to the University of Kentucky basketball games, the manager acknowledged the tickets were not used for marketing purposes. The tickets were provided to KEMI as part of a sponsorship package. The manager stated that he had used the tickets as his predecessor had, distributing the tickets to employees,” Harmon wrote.
Likewise, KEMI formally sponsored golf tournaments and days at racetracks that seemed primarily to be enjoyed by KEMI managers, with no apparent benefit for the policyholders picking up the tab, the auditor found.
“We recommend KEMI adequately track the distribution and use of tickets, tables and registrations associated with all advertising, marketing and sponsorship activity to ensure transparency and accountability in its operations,” Harmon wrote. “We further recommend KEMI use all benefits derived from its spending on advertising, marketing, and sponsorship activity toward meeting its marketing and communication plan to ensure the most effective use of policyholder funds.”