Kentucky Audit Blasts Spending at County Insurance Provider

The association that sells and manages insurance programs for Kentucky’s 120 counties operates with a “self-serving culture” that has resulted in millions of dollars in questionable spending the past three years, according to a critical report by the state auditor.

State Auditor Crit Luallen today released a special examination of the Kentucky Association of Counties (KACo), which found that as KACo’s revenues increased 75 percent from 2003 through 2008 to more than $5.7 million, the level of discretionary spending by the organization also increased dramatically– on parties, adult entertainment, expensive meals, sporting events, some employee retirement benefits, even condo rentals for executives.

KACo, a public, non-profit association primarily funded by public dollars and governed by county officials, offers lobbying and financing services and sells insurance to member counties, which pay insurance premiums and membership dues.

The majority – more than 90 percent– of KACo’s revenue comes from fees paid by the insurance and financial programs administered by KACo staff. The insurance portion of the organization is regulated and audited by the Kentucky Department of Insurance. County membership dues are not a large source of income for KACo, having averaged only about $130,000 each year since 2003.

The state auditor’s report claims that a culture of overspending flourished as board members, management and staff spent funds on lavish dinners, alcohol, sports and entertainment tickets, staff birthday meals, adult entertainment, and fancy Christmas parties. The exam found nearly $2 million charged on agency credit cards over a three-year period, with $1.4 million having inadequate or no supporting documentation, an unclear business purpose or was excessive in nature.

The lack of board oversight included weak internal controls, minimal conflicts of interest and ethics policies, and no whistleblower policy, the audit report says.

The exam reviews KACo’s finances from July 1, 2006 through June 30, 2009 and makes 40 findings and more than 150 recommendations to improve board oversight and management operations.

“Our examination provides the leadership of KACo the proper tools to continue to strengthen accountability and to fulfill its responsibilities to the counties and the taxpayers,” Luallen said. “I believe the public expects no less. In this current economic downturn, when our counties are struggling, our citizens have no patience for waste and excess from those who hold their trust and handle their tax dollars.”

Luallen’s office announced its plans to audit both KACo and the Kentucky League of Cities (KLC) in July after media reports raised questions about spending at both organizations. Luallen said the KLC audit would be released in the coming weeks.

Luallen said KACo should have found ways to return increases in revenues to its member counties as lower membership dues and insurance premiums or as additional training programs instead of on wasteful spending.

She said the KACo board has taken steps recently as a result of public scrutiny and media reports to begin to achieve greater accountability. She also said that there were some board members and employees of KACo who resisted excesses evidenced in the exam and who worked effectively, despite the culture that developed.

Luallene said the KACo board has indicated it would move forward with reforms in reponse to her examination.

The audit uncovered $1.4 million in questionable credit card charges that lacked adequate documentation of their business purpose, including:

• KACo paid $219,144 for 77 restaurant charges that each cost more than $1,000. Examples include: an $8,857 meal at Mike Dikta’s Restaurant in Chicago; an $8,161 meal at Z’s Oyster Bar and Steakhouse in Louisville; a $7,237 meal at Sal’s Italian Chophouse in Lexington; and a $7,082 meal at Starker’s Restaurant in Kansas City.

• In 2007 and 2008, the organization spent $48,426 for two board Christmas parties for management, staff and board members. After brief board meetings that were held during the day, these individuals, along with their guests, were driven to Spindletop Hall in Lexington by a tour bus to attend the Christmas parties each year.

• KACo spent $43,000 on alcohol, although auditors believe the amount is significantly higher based on information provided through staff interviews.

• The organization also spent $28,700 in entertainment ticket purchases, including university football and basketball game tickets, and Kentucky Derby tickets, along with other entertainment venues.

• Auditors found a $1,814 credit card charge for 13 tickets to the Radio City Christmas Spectacular in 2008. The tickets were for entertainment for five board members, along with spouses and companions, during a bond closing in New York City.

• The organization spent $11,593 on staff birthday lunches, $7,262 on staff Christmas gifts, $3,053 on other board and staff gifts, $8,119 on air travel insurance, $2,385 on conference meals and $890 on adult entertainment.

• Adult entertainment charges included escort services on two occasions and four charges at two different strip clubs. These were charged to KACo credit cards of the former executive director and former board president.

Besides the $1.4 million in undocumented credit card expenses, auditors also found other instances of questionable expenditures by KACo.

According to the exam, KACo offers two retirement benefits for its employees: one in the County Employee Retirement System (CERS) and a 6-percent match in the Kentucky Public Employee Deferred Compensation Authority. Over a three-year period, KACo paid $622,355 for the employee 6-percent retirement match.

Additionally, auditors found that KACo spent $334,300 to pay board members for meetings, $278,154 for legal defense for convicted officials, $247,944 for a sports advertising contract, $83,000 for donations and sponsorships, and $12,600 for use of two condominiums.

Auditors found KACo rented two condominiums: One used by the organization’s product development manager in Frankfort at a cost of $11,000 over a 10-month period and another Frankfort condominium for its former executive director for $1,600 for a two-month period.

The list of expenditures can be viewed at www.auditor.ky.gov.

KACo was founded in 1974 as a 501(c)(3) non-profit corporation by a group of county officials. Its membership includes all 120 county governments of Kentucky. It was initially formed to offer educational programs, cooperative undertakings and issue advocacy but over the years had expanded to provide various products and services including insurance. The KACo insurance units include:

• Commonwealth Insurance Company, Inc (CIC), a for-profit corporation that provides employee dishonesty fidelity bond coverage, business income coverage, and extra expense coverage exclusively to the members of KALF.

• KACo Insurance Agency, Inc. (KIA), a wholly owned subsidiary of KACo and a for-profit corporation. KIA was originally formed to market the KACo group health plan, but has expanded in recent years to also market public official bonds, excess earthquake coverage, and spectators’ liability coverage.

• KACo Worker’s Compensation Fund (KACo WC), an unincorporated association created by KACo that allows county governments and other public agencies to pool resources and creates a self-insurance fund for the provision of worker’s compensation coverage. In addition, the KACo WC Fund also provides risk management and loss control training to the counties and agencies that are members of the fund.

• KACo All Lines Fund (KALF), a group self-insurance pool to provide liability insurance products, including products such as auto liability, general liability, property, law enforcement liability, public officials liability, employment practices, and intentional tort and criminal charges defense. KALF also offers risk management and loss control training.

Topics Profit Loss Training Development Kentucky