Journal-Times (Grayson, KY)

October 17, 2012

Olive Hill audits reveal history of utility fund misuse

By Joe Lewis - Staff Writer
CNHI

Oct. 17, 2012 —  

Past audits of Olive Hill’s finances by the Kentucky State Auditor, both in 1997 and 2000, show that the city has a history of using the utility fund to bolster its general fund.

In outlining the city’s areas of noncompliance in his 1997 report, then auditor Edward B. Hatchett specifically stated, “The city should cease subsiding the general fund with utility fund resources.”

In an August 2000 report, the state auditor documents his return for a special examination to determine whether or not his recommendations had been put into effect.

Hatchett outlines his findings in an executive summary that states:

“Our report reveals that the City failed to implement several of our previous audit recommendations. Chief among these was the recommendation that the City cease subsidizing the operations of the general fund through transfers and other payments from the utility fund.”

“We note that these subsidies and other factors resulted in a utility rate increase substantially higher than would otherwise have been needed.”

“The failure to implement these recommendations, along with other incidents of fiscal mismanagement, increased by 40 percent the level of utility rate increases,” Hatchett adds.

These comments are directly in response to the city’s adoption of new utility ordinances in April 2000, specifically ones dealing with electric rates, which the auditor describes as amounting to “substantial flat rate increases” to customers.

Using utility profits to fund general government operations isn’t categorically illegal, though. In some cases, cities are able to transfer profits from municipal utilities into the general fund. KRS 96.200 deals specifically with this scenario. It states:

“Any city of the third through sixth classes inclusive may, by ordinance, provide in what manner and for what purpose any profits, earnings or surplus funds arising from the operation of any public utility owned or operated by the city may be used and expended.” 

“Until such an ordinance is enacted any surplus earnings shall be paid into the city treasury, to be expended for the general purposes of government in the city.”

Auditor Hatchett, however, determined that this provision does not apply to Olive Hill, because rate increases directly imply that the public utility company does not have profits or extra funds to contribute to the general fund.

Specifically, Hatchett make the following comments:

“While the Utility Fund continues to subsidize the General Fund with transfers, the necessity for utility rate increases clearly illustrates that excess funds do not exist. Therefore, the transfers are contrary to KRS 96.200 and an opinion of Kentucky’s highest court.”

Though this report is just over 12 years old, it appears that the administration in Olive Hill continues to use funds from utility accounts to subsidize the general fund, particularly in the event of a budget shortfall.

During last Monday’s special meeting regarding police salaries, Council member Linda Lowe cited concerns with any potential budget increases that might arise from a pay bump, stating that the city commonly has had to transfer money, “...sometimes as much as $50,000,” to cover budget deficits.

When asked specifically about the transfers, Lowe indicated that funds are placed in the general fund from the utility fund to cover such shortfalls – the very same practice that State Auditor Hatchett told the city to refrain from in both of his reports.

Also, City Clerk Cheri James is quoted in a Journal-Times article from 2007 as saying that she “...could generate $60,000 from the electric department” to offset a shortfall in the budget.

An attempt to verify that comment was unsuccessful. According to James, City Hall only keeps tapes from meetings back to 2008. 
During its August regular meeting, the Olive Hill Council unanimously voted in favor of requesting another audit by the state in response to mounting questions regarding the management of city utility funds. 

At the time, James indicated that she was unsure whether or not a city could specifically request an audit from the state.

In a recent telephone interview, however, Communications Director for the State Auditor Stephenie Steitzer informed the Journal-Times that such requests can be made. 

“Cities do have the ability to request that the state conduct their regular annual audit. We look at these requests on a case-by-case basis to determine whether we can perform the audit ourselves, or if we refer the case to a third party,” Steitzer said.

Regarding Council’s request, Steitzer indicated that the auditor’s office had been made aware that a request for an audit would be forthcoming from the city, but has yet to receive any official documentation to that end.

Steitzer also stated that any in the community has the ability to request a special examination by the auditor, and that citizens with concerns or persons with any information of potential wrongdoing are encouraged to use the “Safe House” feature of the State Auditor’s website to report such matters.

This feature is completely anonymous and allows individuals to submit complaints, along with any supporting documents, to the auditor’s office for review.

“We take all allegations of waste and fraud very seriously,” Steitzer added.

The Safe House, along with a copy of the 2000 special examination, can be found online at http://auditor.ky.gov.
 
Joe Lewis can be reached at jlewis@journal-times.com or by telephone at 286-4201.