Lexington Herald Leader: The Real Scandal: No One Noticed.

The real scandal: No one noticed

Let's face it, when strip clubs and escort services pop up in a story, most people sit up and take notice.

And we've had a string of them lately in the Bluegrass.

First, executives at Blue Grass Airport were free with their credit cards at what are called gentlemen's clubs.

Now, it turns out that someone has been using Kentucky Association of Counties (KACo) business credit cards at strip clubs in Louisville and a Lexington escort service.

Who knew there were so many gentlemen who needed to be entertained at our expense?

Ah, the jokes are easy to make and the stories go down like cold water on a hot day.

But, titillating as the mix of sex and public business is, the real scandal isn't the misadventures of a few hormonally challenged middle-aged men.

No, what should alarm us is that, although public monies were involved in both cases, no one was reviewing the credit-card charges of these executives.

Or, perhaps even worse, someone did review them and chose to look the other way when confronted with clearly inappropriate expenses.

This is Personal Finance 101, the kind of thing taught to middle schoolers. When the credit card statement arrives in the mail, you review it to make sure the charges are correct.

But apparently no one bothered to do that at KACo, which is funded through dues paid by counties and fees generated from services purchased by counties. In other words, from taxes paid by county residents.

That's why Central Bank & Trust, which issued KACo's credit cards, is refusing to refund $890 in charges to strip clubs and an escort service made on KACo credit cards in January and February of last year and in May of 2007.

Customers are required to notify the bank within 60 days of disputed charges. Seems reasonable.

The cards used were issued to executive director Bob Arnold and Spencer County Judge-Executive David Jenkins, who was serving as president of the organization at the time of the charges. Arnold and Jenkins said they didn't know about the charges until Herald-Leader reporter Ryan Alessi began looking into KACo's finances.

That's what's scandalous: No one was paying attention to what they spent. It could have been something much more mundane, even benevolent — textbooks for a kid in college, a nice trip for an overworked minister, a load of mulch for the home garden — and there's no reason to believe anyone would have noticed that non-business related expenses were being toted up on the KACo cards.

This is what is called an agency problem, as lucidly described by University of Kentucky economist Donald Mullineaux in a recent Herald-Leader column. One party (in this case, counties and taxpayers) hires another as an agent (KACo, its executives and officers) to provide a service. "Economic theory suggests that people (agents) are more inclined to look out for their own interests than someone else's," Mullineaux wrote.

You don't solve this problem by handing people credit cards and not bothering to pay close attention to what they charge. Instead, as Mullineaux explains, these problems can be avoided only with a system of incentives or penalties that includes regular audits.

It's basic, it's essential and it's what should be in place in every entity that spends public money.