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Auditor's report blisters League of Cities
By Tom Loftus

FRANKFORT, Ky. — With little oversight from its executive board, the top staff of the Kentucky League of Cities lavished itself with excessive salaries and retirement bonuses in recent years, State Auditor Crit Luallen reported Thursday.

Several top staff members tangled themselves in conflicts of interest and approved hundreds of thousands of dollars in “excessive or questionable” expenses, a report from the auditor’s office said.

At the center of the hard-hitting, 228-page exam by Luallen is the league’s executive director, Sylvia Lovely. The report found that Lovely's salary soared from $170,248 in 2002 to $331,186 in 2009.

The organization paid $218,000 over five years in a retirement bonus for Lovely and bought a $64,000 vehicle for her use. The report noted the league even bought 500 copies of a book authored by Lovely — “The Little Red Book of Everyday Heroes” — for $3,300.

But the report goes beyond Lovely to question the conduct and compensation of other executives in the organization.

“If KLC is to continue providing valuable services to our cities, many of which are struggling, its board must strengthen its financial oversight,” Luallen said in a statement released with the audit.

The audit makes 30 findings about the spending, ethical conduct and lack of board oversight. And it makes 140 recommendations to improve management.

Because of the “nature and complexity of the exam's findings,” Luallen said the report has been turned over to state and federal law enforcement agencies as well as the IRS and Kentucky Department of Revenue for possible investigation.

Luallen launched the examination last summer after reports in the Lexington Herald-Leader revealed questionable spending and generous salaries at the league during a time when a national recession is forcing cities to cut spending.

Luallen's report examined spending and policies back to July 1, 2006. On some issues, the report examined prior years.

The organization was formed in 1927 when 12 Kentucky cities assembled to address common legislative issues and save money through cooperative purchasing. Today it is a non-stock, non-profit corporation with 382 member cities.

It provides training, financial and legal advice and lobbying services for its members. Its affiliated companies also provide insurance coverage and issue tax-exempt bonds for member cities.

The audit reports that in the 2008 fiscal year 87 percent of its revenue came from administrative fees and commissions paid by the insurance and financial programs it administers. The rest came from membership dues paid by cities, interest income and other sources.

Lovely, executive director since 1990, said in August that she accepted responsibility for problems in management and that she would resign effective Jan. 1.

Luallen's report includes a three-page response to the findings from league President Michael D. Miller, the mayor of Jackson.

Miller acknowledged that the organization had “become complacent” in some respects and has already addressed many issues raised in the audit. But he also defended the league against some findings.

“Some issues raised in the report are necessary business actions in the competitive insurance marketplace,” he said

But some city officials submitted letters offering a stronger commitment to reform or disputing Miller's response.

“We do not see where having questionable associations with third-party insurance vendors and staff taking trips paid by such vendors as a necessary business activity,” Lexington Mayor Jim Newberry and Frankfort city manager Tony Massey said in one letter.

Among its findings about questionable spending, the report found that the organization:

*Paid more than $7 million over eight years to an organization founded to educate communities about “civic engagement” called the NewCities Institute. This spending produced “few quantifiable results.”

*Paid high salaries. Lovely is just one of 19 employees paid more than $100,000.

*Paid what Luallen called “exorbitant retirement bonuses” to six officials at a cost of $533,998. The report said this money was primarily used by the officials to buy five years of service in the County Employees Retirement System.

*Sold a vehicle worth at least $14,623 to its deputy executive director for $9,000.

*Paid $212,871 in questionable credit card expenses and $74,463 in expenses that lacked supporting documentation.

*Spent $430,000 on 162 out-of-state trips that often included spouses.

*Spent $50,000 for tickets to various sporting events and shows with questionable benefit to the league.

*Spent more than $314,000 for vehicles over a two-year period.

The report raised questions of the ethical conduct of some top staff:

*The league spent $1.4 million for legal services at a firm where Lovely's husband is a partner, and it spent $28,600 at a Lexington restaurant partly owned by Lovely's husband.

*The organization’s chief insurance services officer, administrator of product development, general counsel and their spouses annually accepted housing and other expenses at a vendor president's home on a Caribbean island.

*A vendor paid the league for a cover charge for admission to a strip club in Las Vegas for three staff members.

*The chief insurance services officer and his spouse took two free trips to Naples, Fla., from a reinsurance vendor.

*Lodging in Munich, Germany, was provided by a reinsurance vendor to the deputy executive director and the chief insurance services officer.

The report also criticized the staff for not informing the board of a harassment investigation that raised concerns involving an executive staff member.

Reporter Tom Loftus can be reached at (502) 875-5136.

Editor's note: Read the report here, or a summary here.