The third meeting of the Interim Joint Committee on Local Government was held on Wednesday, August 26, 2009, at 10:00 AM, in Room 171 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Steve Riggs, Co-Chair; Senators Walter Blevins Jr., Carroll Gibson, Dan Kelly, Mike Reynolds, John Schickel, Elizabeth Tori, Johnny Ray Turner, and Ed Worley; Representatives Ron Crimm, Mike Denham, Derrick Graham, Richard Henderson, Charlie Hoffman, Brent Housman, Dennis Keene, Adam Koenig, Stan Lee, Tom McKee, Reginald Meeks, David Osborne, Arnold Simpson, Kevin Sinnette, Ancel Smith, and Ken Upchurch.
Guests: Representative Rocky Adkins; Representative Keith Hall; Mayor Connie Lawson, City of Richmond; Mayor Mike Miller, City of Jackson; Mike Foster, Christian County Attorney; Ann Miller and Carl Ellis, City of Versailles; John Brazel, AGC of Kentucky; Vince Lang, Kentucky Association of County Judge/Executives; Richard Tanner, Kentucky Magistrates and Commissioners’ Association; Judy Taylor, Keeneland Association; Gay Dwyer, Kentucky Retail Federation; Neil Hackworth, Temple Juett, Joe Ewalt, J. D. Chaney, and Bert May, Kentucky League of Cities; Bob Arnold, Denny Nunnelley, Tim Sturgill, and Shelley Hampton, Kentucky Association of Counties; Ron Wolf, Louisville Metro Government; and Mark Mangeot, Justice Cabinet.
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, John Ryan, Kris Shera, Tom Dorman, Matt Neihaus, and Cheryl Walters.
Upon the motion of Representative Crimm, seconded by Representative Henderson, the minutes of the July 29, 2009 meeting were approved.
Senator Thayer announced that the purpose of the meeting was to hear from the Kentucky League of Cities (KLC) and the Kentucky Association of Counties (KACo) about their respective operational policy changes. He explained that the recent series of articles in the Lexington Herald-Leader regarding the abuse of spending by KLC and KACo has been troubling to the committee members and their constituents, therefore necessitating an informational hearing. Senator Thayer asked that the two organizations explain what happened and how, and to tell the committee what policy changes they are planning. He then recognized Representative Riggs for some comments.
Representative Riggs commented that he has worked with KLC and KACo for 20 years and that some innovative proposals and useful changes have occurred with their assistance that have benefitted local governments over the years. He asked that the two groups keep on task to make policy changes that they see are necessary so the activities noted in the newspapers will not happen again. Representative Riggs noted that the elected officials of both organizations should be more involved with the operational policy changes.
Senator Thayer introduced Mayor Connie Lawson, outgoing President of KLC, and Mayor Mike Miller, incoming President of KLC. Mayor Lawson told the committee that she was present on behalf of KLC’s Executive Committee, the Board of Directors, the League’s member cities, and staff. She thanked the committee for inviting KLC to come before them to discuss the recent media coverage involving KLC and the actions they have taken to improve policies and procedures. Mayor Lawson stated that the League is confident that these changes will make KLC stronger and more transparent to its members.
Mayor Lawson stated that KLC is governed by an 18-member executive committee comprised of mayors, city council and commission members and other officials from cities of all sizes across the state. She added that a 53-member board of directors, which includes representatives from various local government affiliate organizations, guides KLC’s legislative agenda.
Mayor Lawson told the committee that over the past three months, KLC’s Executive Board has formed two internal task forces: the Policies and Procedures Task Force and the Finance Task Force. She explained that the Policies and Procedures Task Force reviewed a wide range of KLC’s operational polices in order to improve financial oversight and internal controls. In addition, Mayor Lawson said the task force compared the League’s policies with the list of 28 recommendations for non-profit boards of directors issued by State Auditor Crit Luallen. She stated that the Finance Task Force was created to review future expenditures as they pertain to travel and meeting policies. Mayor Lawson pointed out that based on the recommendations from these task forces, on August 19, 2009, the executive committee unanimously adopted several new policies to govern KLC operations. She noted that the following policies are posted in full on KLC’s website for members, as well as the public, to view: (1) Credit Card Usage—allows revolving business credit cards to be issued to the executive director/CEO and other staff recommended by the executive director/CEO and approved by the executive board for purposes of operational expenses and meeting-related expenses; prohibits personal use of business credit card; requires review of the monthly credit card statement by the employee issued the card and the CFO. Regular Finance Committee review of all credit card statements on a quarterly basis at least; requires submission of receipts with pertinent information regarding business purchase and purpose required for reimbursement; (2) Work conduct and Conflict of Interest Policy for KLC Employees—requires employees to disclose potential conflicts of interest; requires all employees to annually complete and submit a KLC financial disclosure/conflict of interest form; establishes a reporting/complaint procedure if an employee becomes aware of a violation of the conflict of interest policy; revises policies relating to the receipt of gifts and defines the term “gift.”; (3) Travel and Meeting Expense Policy—requires supervisor authorization for employee in-state and out-of-state travel; establishes procedures for making business travel arrangements; establishes standard per diem rates for employee meal reimbursement for out-of-state or overnight travel; requires written approval from executive management for reasonable business expenses incurred in meetings with guests of KLC; requires KLC employees not to be reimbursed for meals during in-state travel not requiring an overnight stay; incorporates process used for submitting and approving expenses reports, with proper documentation, into the employee handbook; and (4) the adoption of a Code of Ethics for KLC board members by the executive board in October, 2008. This code prohibits conflicts of interest and also prohibits board members from accepting gifts or other items of substantial monetary value for personal use from sources that have a business or financial relationship with KLC or is seeking to establish one.
Mayor Miller explained that the Kentucky League of Cities Insurance Services (KLCIS) is governed by a separate board of trustees. He said that group met August 13, 2009, and also took several actions of interest to the committee: (1) The KLCIS board voted to immediately suspend use of the law firm Bowles Rice McDavid Graff & Love as claims counsel of which Sylvia Lovely’s husband is a partner. The KLCIS board directed KLC staff to evaluate current member cases with Bowles Rice, and report back at the next board meeting with recommendations on how they should be handled in the best interest of the particular KLCIS member; (2) The KLCIS board voted to accept the recommendation from the Kentucky Department of Insurance to have its claims administrator, Collins and Company, cease the landlord/tenant relationship it currently has with the wife of KLC insurance pool administrator, Bill Hamilton. Collins and Company will vacate the property within a reasonable timeline, taking into consideration the need for uninterrupted administration of claims; and (3) The KLCIS board also voted to follow the recommended changes from the Kentucky Department of Insurance that creates a more distinct separation between the League’s insurance business entity, and its other member service operations.
Mayor Miller told the committee that KLC believes that it has made significant progress in improving its operations and restoring any lost faith or trust in the organization. He added that KLC’s Executive Director/CEO Sylvia Lovely, has announced her resignation and decision to pursue new opportunities after 22 years of dedicated service to KLC.
Senator Thayer commented that there is no doubt about the great services that KLC provides to cities. He asked about the future of the New Cities Foundation. Mayor Lawson stated that KLC’s programs have not been broken down. She said the League is just addressing policy changes and finances.
Regarding the loan made to an executive to purchase retirement, Senator Thayer asked if the League was looking into that and if the loan was forgiven. Mayor Miller said a loan was made and payment of the loan was deducted from the salary, but that the loan was not forgiven. He added that he could get the documentation for committee members. Senator Thayer also asked if the League was going to continue the policy of giving loans to buy retirement. Mayor Miller said the full board will render a decision on that issue, but that he did not see it being continued.
Senator Thayer suggested that the League’s expenditures be posted on-line. Mayor Lawson agreed, adding that the League will continue moving forward and not wait for the audit to be completed by the State Auditor.
Senator Thayer asked if the League was going to be an agency that provides services to cities or be an insurance agency. Mayor Miller replied that the League has had conversations with the Department of Insurance on how to put up a firewall to do both. He noted that KLC is discussing that issue very seriously.
Senator Gibson asked how KLC’s boards were formed. Mayor Miller said there is a general board consisting of 53 members and an executive board consisting of 18 members. Senator Gibson also asked how the insurance board is formed. Mr. Temple Juett, General Counsel for the League, stated that insurance board members are appointed by the executive board.
Senator Gibson asked if the League had looked at other states for executive board policies both in its current policies and in prior policies. Mr. Juett replied that the general personnel policies previously in place lended to some flexibility in the reimbursement of business expenses. He continued to say that the newer polices are an aggregation of some other states’ leagues dealing specifically with per diems and expenses. Mayor Miller added that they have incorporated the applicable recommendations from the Kentucky Auditor’s Office. He noted that they already were following a majority of the Auditor’s recommendations.
Senator Gibson asked if there could be a conflict for members to serve on two boards and if members were paid for serving on the boards. Mayor Miller said there were no conflicts for members to serve on two boards and that board members were not compensated but did receive mileage.
Representative Crimm asked if the League’s staff met with new board members to let them know what their responsibilities are going to be. Mayor Lawson stated that training has been one of her main goals and that she has wanted to have an annual retreat for new members.
Regarding the report of violations, Representative Riggs suggested that it would be a good idea to make sure persons reporting violations would be protected by the whistle blower statute.
Representative Riggs commented that he heard that KLC’s board members are not involved in the League’s operations as much as they should be.
Representative Riggs asked what the consequences were going to be for the ones who abused the spending. Mayor Miller stated that the Finance Task Force recommended that any charges that are questioned will be repaid immediately. He added that the League is taking the situation very seriously. Representative Riggs suggested that the consequences be in writing.
Representative Simpson commented that KLC’s insurance operation concerned him. He asked if any consideration had been given to allowing persons with expertise outside of KLC to be a member of the insurance board. Mayor Lawson said they had not considered that but it was a good point.
Representative Simpson noted that he had prefiled a bill that makes entities whose employees participate in a state retirement system be subject to open records law. He suggested that KLC take the opportunity to review the bill and work with him on it.
Representative Keene commented that KLC has been beneficial to his career. He noted that most of the officials who serve on KLC’s boards are volunteers and give up their time to serve. Representative Keene asked what the terms were for Sylvia Lovely’s resignation. Mayor Miller replied that she will be paid her salary through December 31st.
Representative Hoffman asked if KLC had a mission statement. Mayor Lawson said they have always had a mission statement but are in the process of working on a new one. She said their current mission statement is: “KLC serves as the united voice of cities by supporting community innovation, effective leadership and quality governance.” Representative Hoffman commented that he would like to see KLC get back to its humble beginning and that he feels their mission statement is still pertinent.
Representative Graham commended the League for making corrections and addressing questions that have been asked. He asked if there have been discussions within KLC about the possibility of having a limitation of terms on their board members.
Mayor Miller stated that there are term limits for board members. He said there is a maximum of two year terms.
Representative Henderson commented that KLC needs to go back to just providing services. He said KLC has to learn from its mistakes, move on and re-build faith.
Senator Worley commended Mayor Lawson for the job she has done as president of KLC and for the City of Richmond.
Senator Thayer thanked Mayor Lawson and Mayor Miller for appearing before the committee and stated that he looked forward to working with the League.
Senator Thayer lastly introduced Mr. Michael Foster, President of KACo. Mr. Foster told the committee that the same management team that had recently come under fire in the media for mistakes and its failure to build appropriate internal management controls is the same team that has been creative and effective in creating strategies for providing superior member services. He noted that their failure has been not giving that same kind of attention to internal controls to insure appropriate spending on travel and marketing.
Mr. Foster pointed out that in March of this year, he asked the Board of Directors to adopt a travel and expense policy that required a monthly report of travel and entertainment expenses to be reviewed by both a newly established chief financial officer and the executive committee. He said, in his opinion, if this policy had been in place two years ago, it is very likely that most of the problems described in recent news reports would have never occurred in the first place. Mr. Foster hoped this new travel policy will help prevent abuses or suspected abuses in the future.
Mr. Foster stated that on July 23, 2009, he convened a special meeting of the Board of Directors where he proposed four significant initiatives that were adopted unanimously by the board: (1) creation of a management review and audit committee, which consists of three county officials with extensive backgrounds in accounting, business, or financial management which will be a standing committee that will monitor the internal financial operations of KACo; (2) appointment of former Madison County Attorney and Inspector General for the Transportation Cabinet, Bobby Russell, to perform a management review of the organization, review the overall management of the organization, and offer recommendations concerning meaningful oversight and procedures concerning the internal management of KACo; (3) full cooperation with work being done by State Auditor Crit Luallen and her staff, who are currently reviewing the records of KACo in an effort to provide them with recommendations as to the best practices necessary to make the organization efficient and accountable; and (4) the elimination of traveling credit cards with travel being processed by way of direct bill or completed travel reimbursement vouchers, review, and subsequent approval if appropriate.
Mr. Foster assured the committee that both KACo’s executive committee and the full board of directors are attempting to address the issues of internal financial management in a very serious and comprehensive manner.
Senator Thayer commented that he disapproved of KACo advertising at UK ballgames. Mr. Foster assured Senator Thayer that there would be no more advertising.
Representative Riggs commented that the challenges KACo face may go beyond what the board can control. He asked Mr. Foster to describe the board makeup. Mr. Foster said that the board has 34 members and a five-member executive committee. He noted that affiliate organizations, such as the sheriffs, county judge/executives, etc., have representatives on hand.
Representative Riggs asked if the board members are compensated. Mr. Foster said he believed they were paid $100 plus mileage.
Representative Riggs asked if Mr. Foster agreed with the 28 recommendations from the State Auditor’s office. Mr. Foster said they were excellent recommendations and should be implemented although some may not be applicable.
Representative Riggs commented that it seemed to him like all of the responsibility was being put on the board and not the staff. He asked Mr. Foster if he thought the board was too big. Mr. Foster said the challenge is to find a balance and that they do want much input. He said this could be addressed in their management review.
Representative Riggs asked if there would be consequences for the ones who abused the spending. Mr. Foster replied yes, and that they will look at all aspects.
Senator Schickel asked if KACo has researched to see if selling insurance is still necessary. Mr. Foster stated that he tells counties if they can get a better opportunity for insurance other than KACo to take it.
Senator Schickel stated that there is a temptation to turn many board decisions over to staff. He added that there has to be consequences for the spending abusers.
Representative Koenig asked if someone from KACo was going to take responsibility as the management did in KLC’s situation. Mr. Foster replied that they were “committed to righting the ship.”
Regarding board composition, Representative Simpson asked if any consideration had been given to opening the board to non-elected members. Mr. Foster replied that they would give consideration to that suggestion.
Regarding insurance, Representative Simpson asked if KACo was governed by the same rules as KLC. Mr. Foster replied yes, that KACo is audited by the Department of Insurance. Representative Simpson also asked if there was a separate board for insurance. Mr. Foster said, “Yes.”
Representative Hoffman asked if KACo had a mission statement. Mr. Foster said KACo’s mission statement is “KACo is dedicated to serving all Kentucky counties by providing the highest quality programs/services and advocating legislative solutions for Kentucky’s counties both today and tomorrow.” Representative Hoffman commented that KACo needs to return to the basics.
Representative Denham commented that revolving credit cards are the real source of the problem. He said they should be eliminated or there should be a strict policy in place.
Senator Reynolds commented that board members should know the roles of their staff and that it is important to give proper training to board members. He added that it takes time for board members to acquaint themselves with the issues facing them.
Representative McKee commented that it is important for both KLC and KACo to move forward and correct the problems. He suggested that both organizations report back to the committee at a future meeting.
Senator Thayer asked Mr. Foster what, in KACo’s opinion, necessitated the construction of a new $12 million headquarters. Mr. Foster said there was not enough room, that they simply outgrew the other facility.
Senator Thayer inquired about the reported expenditures on criminal defense of local officials. Mr. Foster responded that the county would absorb costs only when the official issued in his or her official capacity. When named personally, he said the county does not pay. Mr. Foster noted that this aspect of paying for personal liability in insurance is thought to remove impediments to service. He added that this was the thought behind the service and did not know if it was a good policy or a bad one. Mr. Foster stated that any fine levied by the courts to officials found guilty is not covered by the insurance.
Representative Crimm suggested that KACo come back in a couple of months regarding the credit card situation. Mr. Foster said that they would be glad to come back.
There being no further business, the meeting was adjourned at 12:30 p.m.