State Auditor Crit Luallen blasted the Kentucky League of Cities on Thursday, citing loans and bonuses to top executives that cost the group $500,000, "excessive" salaries and a host of conflicts of interest that provided personal gain, including trips to the Caribbean and Europe paid for by League vendors.
Luallen said she was amazed to see people she had known for many years create a culture of such excess.
"I was shocked. I was outraged on behalf of the public, which has supported this organization through their tax dollars," she said.
Luallen referred the report to the state attorney general, the U.S. Attorney's Office and the IRS. She said law enforcement officials agreed that the findings bear further scrutiny.
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The League's official response came from board members who vowed to do better; top officials named in the report declined to comment.
The audit, conducted during the past five months, cites $350,000 in "questionable" expenses that Luallen said allowed the group's leaders to spend money for "their primary benefit rather than providing additional benefits to Kentucky's cities and communities." More than $430,000 was spent on 162 out-of-state trips of "questionable benefit" to the League's members, cities across the state who pay dues and buy insurance and other services through the League.
Luallen also cited a complete lack of oversight by the board, made up of city officials.
"KLC should have found ways to return increases in revenue, the successes they were seeing, to their member cities ... instead of spending it on personal gain," Luallen said. "The findings in this exam clearly point out the need for this board to strengthen its oversight and make sure it maximizes benefits back to member cities."
The audit was spurred by stories in the Herald-Leader this summer about high salaries and perks for League executives and credit card spending on trips, restaurants, sports tickets and cars for the group. Executive director Sylvia Lovely, who has headed the non-profit since 1980, announced in August she would resign effective Jan. 1.
Luallen said she could not comment on whether other top KLC officials should keep their jobs following the audit's findings.
Among the new findings by the auditor:
■ A compensation program that provided forgivable bonuses and loans to executives cost the League $533,000, some of which was not paid back. That program had "questionable benefit" to the League. The board originally set aside a total of $400,000 for the program, with $125,000 of it for Lovely. But the actual pre-tax amounts to Lovely added up to $218,000.
Because the loans allowed executive staff to buy more time in the County Employee Retirement System, Luallen estimates that if Lovely, 59, officially retires in January, her monthly pension benefit will be $13,769. If she kept working at the League until age 65, her monthly benefit would be $17,725.
The report says William Hamilton, chief of the League's insurance services, received $58,000 through the program even though he was ineligible to purchase the time in the county employees retirement system.
■ Hamilton's wife, Denise Hamilton, was paid $14,413 for decorating services to the League, as well as $1,000 for a trip to New York to select artwork. In addition, the League paid Hamilton's brother and his company $13,576 for renovation work on the League's Frankfort office. A League vendor employed Hamilton's son and another currently employs his daughter.
■ Deputy director Neil Hackworth bought a 2005 Volvo XC 90 SUV from the League's vehicle pool for $9,000; the actual value of the car was at least $15,623.
The League spent $314,000 over two years on vehicles for its officials, including Lovely's $64,000 BMW SUV, but the report found that income related to personal use of those cars was not properly reported on the staff's W-2 tax forms. (Lovely gave up the SUV in June.)
■ There was no competitive, independent vendor selection process at the League, and executive staff members chose many vendors — whom they paid $63.7 million during the period. That included Collins & Co., which was paid $6.6 million over three years for its work processing insurance claims and rented office space in Georgetown from Hamilton and his wife.
■ Collins & Co. was one of numerous vendors that bestowed gifts and gratuities on KLC staff members. (Its president, James Johnston, reimbursed KLC for $80 in charges at a Las Vegas strip club where he went with three KLC staffers.)
Johnston also provided housing and other expenses annually for Hamilton; Mike Goff, the director of product development; and general counsel Temple Juett and their families at a vacation home in Bonaire, an island in the Dutch Caribbean.
■ League staff members did not inform the board about a harassment investigation of Hamilton, who allegedly blew up at an employee. A law firm's investigative report said Hamilton possibly had "unethical business practices" and "explosive" outbursts. The report recommended an independent audit of the finance and insurance department, which Hamilton oversees, but it never occurred.
■ The League subsidized the NewCities Institute, a think tank headed by Lovely to encourage civic engagement, to the tune of $7.2 million over an eight-year period with "few quantifiable results." Despite that subsidy, the institute has a net operating loss of more than $600,000.
■ League officials accepted numerous gifts from current and prospective vendors. In one example, a company that serves as an independent insurance agent for products sold by KLC invited executive staff to an annual company day with a houseboat and golf outing. The League recently signed a contract with the group for a $50,000 health insurance analysis that previously had been done in-house at less expense.
"It's very disturbing — this lack of judgment and lack of common sense," said Frankfort City Manager Anthony Massey, a member of the League's executive board. "The entire city commission for the city of Frankfort is not only disappointed but disgusted."
KLC tightened some controls during the summer, including limiting credit cards. But Luallen said the new rules do not adequately address conflicts and gifts.
"I would urge all these executive board members to carefully review these findings as they look to their future course," she said.
The League's executive board president, Jackson Mayor Mike Miller, said in an interview Thursday the board will hold a retreat in January to do just that.
"It's our intention to go through all the findings and her recommendations and, as we did before, make the changes that need to be made, and carry on with the same attitude we've had," he said, calling the situation "a learning process."
However, the League's official response to the audit already has triggered a tiff among executive board members. The official board response spoke of change that has already begun, which provoked other board members to fire back in disagreement, according to letters and e-mail messages included in the report.
The board's official response, written by Miller and executive board officers, noted that some practices reported by the audit are "necessary business actions in the competitive insurance market. ... We cannot say that we agree that it (the audit) paints a wholly accurate picture of the organization."
A letter written by two executive board members, Lexington Mayor Jim Newberry and Massey to Luallen on Wednesday questioned whether the executive board was taking the matter seriously.
"Unfortunately, there are some members of the executive board who do not believe the practices identified to be significant," the letter said. "We do not see where having questionable associations with third-party insurance vendors and staff taking trips paid by such vendors is a necessary business activity."
Luallen said she agreed with Newberry and Massey that the board response was not good enough.
"I don't think the official response adequately addresses the magnitude of the problem they have and the waste that has occurred," Luallen said.
It was not clear to her, she said, that, even now, the group perceives its responsibility to the public.
"There is still a sense that the League is a different kind of organization that shouldn't be subject to some degree of public scrutiny," she said.
"I think the League maybe got a little too big for its britches, and we've got to correct that," said Paducah Mayor William Paxton, the newly elected second vice president of KLC.