KACo was corrected before

In a three-month span 15 years ago, both the state auditor and a legislative investigations panel published scathing reports pointing out "loose control" at the Kentucky Association of Counties and offering a host of recommendations to fix it.

The probes revealed unchecked spending, "a severe lack of documented policies and procedures" and an insurance program for the counties that had big financial problems.

KACo — which offers services such as lobbying, insurance coverage, financing for projects and training to Kentucky's 120 counties — made changes after the scrutiny, particularly to prevent the collapse of its insurance fund.

But, in areas of expenses and travel costs, history appears to be repeating itself.

"There seems to be some similar situations that are going on now: lack of proper oversight and excessive expenditures," said Jack Coleman, the former Democratic state representative who co-chaired the legislature's Committee for Program Review and Investigations that looked into KACo in 1994.

"It seems like it's so similar to what we dealt with in the 1990s," he said.

A Herald-Leader report last week revealed that the five top KACo officials spent nearly $600,000 in two years on travel, meals and other expenses. In many instances, they paid for hotel rooms with rates of more than $450 per night, expensive dinners and sports tickets for county officials who serve on the boards charged with overseeing KACo's operations.

State Auditor Crit Luallen announced Wednesday that her office would launch a review of KACo, as well as of the Lexington-based Kentucky League of Cities, which provides similar services.

KACo's executive committee, made up of five officers who are elected county officials, will discuss this week whether or not to fight the audit, although President J. Michael Foster — the Christian County Attorney — has said he would welcome the scrutiny.

Foster served as a KACo board member during the mid-1990s and returned several years ago before being elected president in November. He said the scope of problems KACo faces now differs from the issues that came to light 15 years ago, especially regarding the financial health of the insurance and financial services.

"We have basically a sound organization," he said. "On the other hand, I think that the recent articles raised the challenges that we face, which is basically management of travel expenses and proper oversight of our finances."

Expense oversight

KACo, through its executive director at the time, requested then-state auditor Ben Chandler to perform a management audit in 1993 after questions were raised about a lack of checks and balances that might put the counties' money at risk.

In addition to paying annual KACo dues, which range from $400 to $9,000 depending on population, county governments spend taxpayer money to buy liability, property, workers' compensation and unemployment insurance and to finance items such as fire trucks and courthouses through KACo.

Chandler's office released a 240-page report on Nov. 8, 1993, that raised concerns about how KACo's programs were being managed and how funds were being spent without proper oversight.

"Our recommendations include establishment of written policies regarding travel and entertainment expenses, board expenses, use of credit cards, documentation of business expenses, prohibiting personal use of credit cards and requiring adequate documentation for expenses incurred and reimbursed by the funds," the audit said.

Among the findings were that the top seven KACo staff members spent $19,894 on travel and entertainment in 1992.

The Herald-Leader's review found that the top five KACo officials in 2007 and 2008 spent $305,000 in travel and hotel costs, more than $195,000 in meals and nearly $17,000 in sports tickets, golf and entertainment.

As was the case in 1992, current KACo officials failed to provide receipts for many of the expenses, even though that was among the recommendations in Chandler's audit and is required according to KACo's employee handbook as of July 2005.

Chandler's audit also recommended KACo establish a formal approval process for travel and entertainment expenses. While employees' expenses were reviewed by supervisors and Executive Director Bob Arnold, no one oversaw Arnold's spending.

Only in March did KACo's board, led by Foster, implement an expense policy requiring that monthly reports of out-of-state travel be provided to the executive committee for review.

Warnings by the wayside

Spending recommendations weren't the only ones not adhered to.

In the early 1990s, contractors managed much of KACo's programs. Many of them got the work without going through a bidding process, signing a contract or submitting invoices for payment.

Chandler's audit said those were poor business practices and should be reversed.

But with at least one current contractor, KACo didn't follow through.

The association hired lobbyist Ellen Williams in 2006 without taking bids from other firms, Arnold confirmed.

Williams still operates under the general terms of her original six-month contract that expired Aug. 31, 2006, which conflicts with another of Chandler's recommendations against automatic renewals. And the organization has been paying Williams' firm $7,500 a month automatically without receiving invoices — which conflicts with both the 1993 recommendation and one of the provisions in her contract.

"It's my mistake that I haven't sent an invoice," Williams said in an interview last month. "I probably should."

Lessons learned

The last round of scrutiny of KACo programs did yield some improvements that stuck.

The legislative investigations committee, particularly, focused on the management of KACo's programs. Most notably, it prompted a Department of Insurance review that revealed KACo's liability insurance program was running a $9.8 million deficit.

Counties found themselves on the hook to pay $4.8 million in assessments, while KACo borrowed the rest.

KACo fired the outside firm contracted to run the program and replaced its actuarial firm. By 1998, KACo had hired a staff to manage the liability and workers' compensation funds in-house.

"It was my observation that the third-party administrators were not setting aside appropriate financial reserves for future claims," Foster said.

Both funds' financial health improved.

KACo's All Lines Fund — the official name for the liability insurance program — has built a $20 million surplus compared with $28 million it takes in each year in premiums, and in March 2007 the state insurance department relaxed its requirements on how often KACo must file financial information with the agency.

"These are well-run programs that provide expanded services at the lowest rate possible," Foster said.

KACo can offer lower rates than many private companies because, as a non-profit self-insured group, it doesn't pay taxes on investment income. Still, several lawmakers said they now question whether counties are getting the best bang for their buck given the reports of high expenses.

Republican state Sen. Damon Thayer, R-Georgetown, said he would consider calling an informational hearing of his State and Local Government Committee on the topic. And Sen. John Schickel, R-Union and co-chairman of the Committee for Program Review and Investigations, said his panel might pick up where the 1994 probe left off.

"Clearly there's a problem with these organizations," said Schickel, a former county jailer. "In the case of KACo, it seems to be cyclical."

This story was originally published July 5, 2009 at 12:00 AM with the headline "KACo was corrected before."