Call to Order and Roll Call
The first meeting of the Interim Joint Committee on Local Government was held on Wednesday, June 25, 2014, at 10:00 AM, in Room 171 of the Capitol Annex. Representative Steve Riggs, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Steve Riggs, Co-Chair; Senators Ernie Harris, Stan Humphries, Christian McDaniel, Morgan McGarvey, Gerald A. Neal, R.J. Palmer II, Albert Robinson, Damon Thayer, and Reginald Thomas; Representatives Julie Raque Adams, Ron Crimm, Richard Henderson, Adam Koenig, Stan Lee, Brian Linder, Tom McKee, Michael Meredith, Jody Richards, Jonathan Shell, Arnold Simpson, Kevin Sinnette, and Rita Smart.
Guests: Representative Susan Westrom; Darren Sammons and Robert Brown, Department for Local Government; Adam Edelen, Tom Bennett and Stephanie Hoelscher, Auditor of Public Accounts; Charles Payne and Dave Vinson, River Park Neighborhood Association; David Duttlinger, Bluegrass Area Development Districts; Shellie Hampton, Kentucky Association of Counties; Jim McWilliams, State Budget Director’s Office; Mark Mangeot, Department of Parks; and Judy Taylor, Lexington-Fayette County Urban-County Government.
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, John Ryan, Jessica Causey, and Cheryl Walters.
Consideration of Referred Administrative Regulation
The committee considered referred Administrative Regulation 109 KAR 15:020, which updates the standards for budgeting, reporting, and recordkeeping for debt, receipts, and disbursements for local government officials handling public funds. Representative Riggs stated that a written report of the review will be submitted to LRC.
Briefing of the Auditor’s Report on the Bluegrass Area Development District
Auditor of Public Accounts Adam Edelen said the scope of the examination of the Bluegrass Area Development District (BGADD) included activities beginning July 1, 2010, through September 30, 2013. This investigation does not impugn the other 14 area development districts (ADDs). Allegations, initially thought to be minor, related to activities of former employees and open records concerns, in addition to the concerns of Representative Susan Westrom. The examination was issued March 3, 2014.
Governance practices were not conducive to proper oversight. BGADD by-passed executive committee approvals, which were required by the by-laws. For example, the executive committee was notified after the fact for the purchase of the $600,000 Trent Boulevard property purchase for an offender re-entry program. Open Records Act violations were also identified.
BGADD was engaged in activities that were beyond its statutory authority; some activities appeared to create conflicts of interest. Several organizations created by the former executive director or others were used to expand the BGADD’s scope: Bluegrass Industrial Foundation (BIF), Bluegrass Regional Recycling Corporation, Global Opportunities for Kentucky, Inc. and Bluegrass International Trade Association, Inc.
Auditor Edelen explained that the offender re-entry program that BGADD created was not within its mission. BIF was created by the former executive director Jas Sekhon, and headed by him after leaving BGADD. BGADD leased space from BIF, effectively leasing space from itself without the financial benefit of ownership at the end of the lease term. BGADD provided financing of $1.1 million of the original $1.6 million building price.
The Auditor’s internal investigation occurred January through April, 2013. Results identified possible criminal violations involving former BGADD employees. These were not reported to law enforcement. Former executive director Lenny Stoltz attempted to halt the investigation. In regard to the re-entry program, eight of 15 individuals, housed at a location under contract with BGADD for program participants, had not been enrolled in the program at any time. There were agreements to pay a BGADD employee up to $350 per month for housing that was already paid by BGADD with federal funds. A former employee, placed on administrative leave, was permitted unsupervised to access to her office during this period. The employee entered the building 16 times, and BGADD subsequently identified 268 missing participant files, which were reported to the Lexington-Fayette Urban-County Government police.
Procurement violations were found regarding the Trent Boulevard property, in which $200,000 worth of improvements was approved, and $500,000 in improvements was actually expended for the $600,000 building. About $465,000 worth of improvements was made from a single vendor (HVAC) without a contract or scope of work, and no invoices to support $63,000 in invoices paid to the HVAC vendor. Procurement violations were also found regarding implementation of a mechanism to avoid bid requirements related to Aging grants by contracting with county governments, but sending funds to senior centers directly. Senior centers were not created by the government, and were not part of the county.
The Auditor’s examination found excessive and/or unnecessary expenditures. For example, breakfast and lunch meals were charged to BGADD when the employee was not in travel status; hotel, meal, and transportation charges for non-employees and/or additional days were added to conferences for personal travel; hotel charges were for stays in the employee’s hometown; and a $20,000 lump sum payment was made to former executive director Lenny Stoltz without support.
Federal grant noncompliances were found including grant funds requested for more than actual expenditures; questionable items charged which were listed as excessive or unnecessary expenses as indirect costs to help recoup some of those costs from federal grants; and employees were paid “bonuses” using unspent federal funds.
Auditor Edelen concluded by saying that the report was referred to eight agencies, including state and federal grantor agencies and law enforcement. BGADD provided a 60-day corrective action plan to the Auditor’s Office in April and is currently underway. BGADD is negotiating for ownership of its building.
In response to a question from Representative Riggs, Auditor Edelen said no criminal charges have been filed in regard to the misconduct of the employees. The investigation is on-going.
In response to another question from Representative Riggs regarding negligence on the part of the auditing firm, Auditor Edelen stated that his office would leave that concern to the leadership of the BGADD. Representative Riggs commented that maybe the concerns should be taken to the CPAs as well. Auditor Edelen agreed.
Representative Henderson commented that he has complained for ten years about BGADD’s lack of attention to the small, rural counties. There should be legislative oversight of the BGADD, who has dropped the ball in his opinion.
In response to questions from Senator McDaniel, Auditor Edelen answered that the fiduciary board is responsible to the taxpayers. He would provide Senator McDaniel a list of those people who have lost their job or have been reprimanded.
In response to another question from Senator McDaniel, Auditor Edelen replied that the executive board is made up of local elected officials.
In response to a question from Senator Bowen, Auditor Edelen said that eight referrals for potential criminal violations have been made and that it will take time. He added that he could not comment on an on-going investigation.
Senator Bowen encouraged the Auditor’s Office to be diligent. Many entities are being abusive that are going undetected. Auditor Edelen agreed.
Representative Richards suggested that minimum training be required for board members. Auditor Edelen noted that his office had held “good government” summits all over the state. Auditor Luallen previously released a document noting best practices for non-profit boards.
In response to a question from Representative Koenig, Auditor Edelen answered that the Department for Local Government’s (DLG) role is one of a depository for information. It does not have a role as analyst. Representative Koenig commented that DLG should be given more authority.
In response to a question from Representative Meredith, Auditor Edelen said the money from the lease of the Bluegrass Industrial Foundation (BIF) goes to pay the salary of the BIF’s executive director and funding for the functions of the BIF.
In response to a question from Senator Thayer, Auditor Edelen said that he would have to consider whether previous laws passed by the General Assembly would apply in the case of the area development districts (ADDs), and if so, whether any violations of that law occurred. At this time, Auditor Edelen did not know if stronger legislation was needed.
In response to a question from Representative McKee, Auditor Edelen replied that ADDs and their board members are formed by statute. Representative Riggs informed Representative McKee that KRS 147A.060 sets out the makeup of ADD boards.
In response to a question from Senator Thomas, Auditor Edelen stated that the BGADD and the BIF have one week to transfer ownership of the building to the BGADD.
In response to a question from Representative Smart, Auditor Edelen said his office will act on any allegations of abuse from other ADDs. His office has not seen anything on the scope of BGADD.
Senator Humphries commented that throughout the state there are some of the best ADD boards. This is the case of a bad apple in a good group of people.
Representative Susan Westrom told the committee that Charles Payne and Dave Vinson, members of the River Park Neighborhood Association, brought the issue of abuse by the BGADD to her. Mr. Payne and Mr. Vinson raised questions about the plan of the BGADD to start a felony re-entry program in their neighborhood. After information requests were denied, they got an opinion from the Attorney General’s Office that the ADDs were subject to the open records law. In addition, federal grants demand meticulous accounting. Grant money is subsequently jeopardized.
Mr. Payne noted that Mr. Stoltz was allowed to resign with a $138,000 check as a board corrective action. Part of the money was from the fact that he is on a state pension. There is concern that because of former leadership’s role in other groups, that BGADD’s business model may have been disseminated to other ADDS relating to the treatment of federal funds. ADDs could be prohibited from receiving federal funds. The role of ADDs needs to be clarified. Board training is needed. ADD by-laws are not standardized and should be relative to federal guidelines for federal money. Conditions for conflict of interest are more relative to staffing, by-laws, and affiliated boards.
In response to a question from Senator Bowen, Mr. Payne said that term limits of board members would help to eliminate the abuse. There have only been three executive directors of the BGADD. Those positions are appointed. He added that conflict of interest is a big issue.
Representative Westrom emphasized the importance of service on the board by the local elected officials.
Mr. Vinson told the committee that, in his opinion, the greatest concern is that the by-laws are not being followed and furthermore without legislative intervention, the BGADD will never come into compliance with the Auditor’s recommendations. BGADD still has not gotten the message.
Representative Crimm commented that the committee would have never known about this abuse if Mr. Payne and Mr. Vinson had not begun this scrutiny.
Representative Riggs moved, seconded by Senator Bowen, to have a resolution written in honor of Mr. Payne and Mr. Vinson for bringing this abuse of the BGADD to light. The motion carried by voice vote.
There being no further business, the meeting was adjourned at 12:00 p.m.