KACo audit finds $3 million in excessive spending

Current and former officials at the Kentucky Association of Counties fostered a culture of "lavish" spending that led to $3 million in questionable expenses in three years, according to state Auditor Crit Luallen, but they are unlikely to face criminal charges.

Luallen described the pattern of spending by some of KACo's leaders as "absolutely unacceptable." They racked up thousands of dollars in spending on alcohol, tickets for shows and sports events, trips, gifts, parties and generous benefits for themselves, according to the audit, released Thursday.

But, after consulting with investigators at the attorney general's office, Luallen said, she wouldn't forward the nearly 400-page report to law enforcement, as she did in the case of Blue Grass Airport, because KACo officials didn't try to deceive their board with their flagrant spending.

"There's no question that many of these charges are excessive, they're extravagant, they're outrageous, and in some cases they're distasteful, but apparently not illegal," Luallen said. "There was no attempt to conceal their purpose."

However, Luallen is sending the audit to the Internal Revenue Service after finding that some fringe benefits -- such as use of a KACo-owned BMW SUV and a country club membership -- provided to former executive director Bob Arnold weren't reported on his W-2 forms.

Arnold was forced to resign in September, although he will be paid his $178,000 salary through June because of a clause in his contract that allows full payment even if "acts of dishonesty" were committed -- a phrase Luallen said should be struck from future employment contracts.

The audit outlines 40 findings of systemic problems of spending and oversight at the organization, which provides services including insurance, lobbying, legal advice and financing for Kentucky's counties. The audit also makes 150 recommendations to prevent future conflicts of interest and unnecessary spending.

Luallen launched the audit in July after the Herald-Leader reported that the top five officials spent $600,000 in 2007 and 2008 on travel, meals, entertainment and gifts, including $890 in charges to a Lexington escort service and two Louisville strip clubs.

'Self-serving culture'

The audit, conducted by a team of 16, found $804,000 in expenses with no documentation. In total, the report detailed $1.4 million in excessive, undocumented or improper expenses between July 2006 and June 2009. Among those cited were:

-- An October 2007 insurance-related trip to New York City, in which officials spent $13,700 on travel and other items, including a sightseeing tour, tickets to the Empire State Building and the Statue of Liberty and a carriage ride through Central Park.

-- A $19,700 December 2008 New York City trip for 11 KACo representatives and guests, which included $1,814 spent for 13 tickets to the Radio City Christmas Spectacular.

-- $11,593 in staff birthday parties.

-- At least $43,000 in alcohol expenses.

The audit notes that the total for alcohol expenses probably is much more than that because employees and board members often didn't turn in documentation.

The organization also spent a combined $48,426 on two Christmas banquets.

In 2007, members of KACo's board of directors and program boards spent an average of 33 minutes in meetings before they and their spouses took part in the Christmas festivities held at Spindletop Hall in Lexington.

"This self-serving culture flourished as many board members, management and staff benefited from (the) spending," Luallen said. "In this current economic downturn, when our counties are struggling and our families are struggling, our citizens have no patience for waste and excess from those who hold their trust and handle tax dollars."

KACo, which is set up as a non-profit, receives $134,000 in dues from counties. Most of rest of its $5.7 million budget comes from fees collected from counties as part of its insurance and financing programs.

Luallen said KACo provides quality services, but as those operations became increasingly profitable, officials increased their spending to keep pace instead of using the money to provide "reduced costs or expanded services to the counties."

KACo's board barely securitized the budget, routinely receiving and approving it in the same day, the audit said. And the board left expense oversight to the executive director, who also had wide latitude in setting staff salaries and planning extravagant events and expensive trips attended by many board members, the report said.

Changes in the works

Since March, KACo's president, Christian County Attorney J. Michael Foster, has instituted several rounds of policy changes to bolster oversight and prevent improper spending.

Foster said he realized soon after becoming president in November 2008 that there was "a remarkable lack of policies and procedures."

"I think we're well on the way to reform and recovery," Foster said. "I consider the audit report that was released today to be a significant and valuable management tool."

In addition to Luallen's recommendations, Foster is awaiting the results of an outside management review that he commissioned last month before making further changes or personnel moves.

"I like to do my homework," he said. "When you do your homework, you get a better grade."

Bonuses and operations

The audit also unearthed several perks quietly paid out to employees.

For instance, Joe Greathouse, KACo's director of insurance, and Grant Satterly, director of financial services, received bonuses from KACo's Commonwealth Insurance Corp. division totalling $140,000 over three years -- in addition to their six-figure salaries.

"These bonuses were never discussed in the minutes and there is no contract outlining the details of the payments" or criteria for the bonuses, the audit report said. The $25,000 bonuses this year pushed Greathouse's total pay to $196,000 and Satterly's to $129,000.

KACo, meanwhile, paid $17,962 over the last three years for Arnold's membership in the Frankfort Country Club and related charges.

But that benefit wasn't reported to the IRS, nor was Arnold's use of the BMW SUV, which KACo sold in July.

Arnold declined to be interviewed by auditors. His attorney, John L. Smith of Louisville, said Arnold wouldn't comment on the report.