Audit of KY Workers’ Comp Insurer Finds Questionable Expenditures

Liz Carey

Frankfort, KY (WorkersCompensation.com) – Among the purchases made by the Kentucky workers’ compensation agency the Kentucky State Auditor has questions about are thousands spent at one of the state’s race tracks, tickets to college sports games, and lavish meals.

Mike Harmon told the Lexington Herald-Leader recently that his office’s audit of Kentucky Employers’ Mutual Insurance, the state’s largest insurer for workers’ compensation, found problems including a lack of competitive bidding and cost controls, inaccurate reporting and tax payer funds used for the benefit of the organizations’ senior managers.

“They acted as if it was their own money rather than policyholders’ money or taxpayers’ money,” the Herald-Leader quoted him as saying.

The report cited examples like a $4,734 tab for an event at Keeneland race track, with a separate reimbursement request for a $589.36 bar tab and a $1,030.64 tip. Other examples included KEMI providing senior managers with hundreds of UK basketball and football tickets, a payment of $48,825 to a real estate broker, failure to put contracts out for competitive bidding, and in some cases, failure to report some contracts, as required by law.

Brandon Voelker, a North Kentucky attorney who was appointed chairman of the KEMI board in 2016 by Governor Matt Bevin, said he requested the audit after noticing some eyebrow-raising practices at the insurer.

“I didn’t know about the Keeneland thing at the time because I wasn’t personally involved in that,” he was quoted as saying. “But there was a land deal that didn’t seem right to me, and so I started asking a ton of questions of the general counsel and other people inside and outside (the board).”

Voelker told WorkersCompensation.com that between $1.4 million and $1.6 million a year was spent on a “generous employee incentive plan,” that often raised employees’ base salary by 15 to 20 percent. Voelker said the practice has since been halted.

In addition, Harmon’s office identified nearly 450 tickets to University of Kentucky and University of Louisville basketball and football games that were given to KEMI managers, spouses and board members between 2016 and 2018.

“In discussing the use of season tickets to the University of Kentucky basketball games, the manager acknowledged the tickets were not used for marketing purposes,” Harmon said in the audit. “The tickets were provided to KEMI as part of a sponsorship package. The manager stated that he had used the tickets as his predecessor had – distributing the tickets to employees.”

Voelker said the questionable expenditures were a small portion of the organization’s operating budget, but that the nature of the organization’s public origins called for stricter control over procedures and expenditures. He said the organization has helped many entities in the state, like schools and the coal industry, save money on their workers’ compensation insurance and would continue to provide a competitive product.

Nevertheless, Voelker said the practice wasn’t one he approved of.
“It was everyone in senior management,” he said. “When I saw it, I was not a happy camper… as you can expect, anytime you’ve got an organization of 220 employees that has been doing things a certain way for 25 years, it takes some time to change behaviors.”

Voelker said the 10-member board was trying to rein in the organization.
Harmon advised the organization to find a legitimate business purpose for expenses as part of his audit.

“We recommend KEMI adequately track the distribution and use of tickets, tables and registrations associated with all advertising, marketing and sponsorship activity to ensure transparency and accountability in its operations,” he wrote. “We further recommend KEMI use all benefits derived from its spending on advertising, marketing and sponsorship activity toward meeting its marketing and communication plan to ensure the most effective use of policyholder funds.”

KEMI president and chief executive Jon Stewart said in a statement that he accepted some of the auditor’s findings.
“In fact, prior to the audit being released, we made several changes to strengthen KEMI and address concerns that are referenced in the report,” he said. “We will continue to review the APA recommendations and determine what actions are necessary to ensure that we meet our dual role of being a state-created entity and a competitive insurance company.”

Stewart said the insurer has already taken several steps to correct issues that came up in the audit, including working with the Board and procurement experts to revise the organization’s procurement policies; creating a notification and approval process for contracts; revising internal procedures for procurement; implementing new contract management software; introducing mandatory procurement training for all management; and hiring a human resources consulting firm to ensure management structure conforms to HR best practices.

“Generally, we agree with many of the findings noted in the report regarding governance and internal controls. Our actions prior to the issuance of your report reflect the same,” Stewart said. “However, the findings related to marketing, advertising, and business development do not take into consideration that we are statutorily required to function as a competitive insurance carrier and that we strive to be a good corporate citizen. Many of the examples you note in the report may seem without a business purpose to a state-created entity but may bring value to a competitive insurance company.”

The KEMI board recommended that Stewart take a pay cut after a three-and-a-half hour closed-door meeting in Lexington with representatives of Harmon’s office and the state’s attorney general.
According to state databases, Stewart’s annual salary is listed as $445,438 for his role as CEO, a position he has held since 2012.

The board also recommended that Stewart’s long-term contract be replaced by a year-to-year contract on probation.
“The board has authorized the executive committee to work with Mr. Stewart to implement a probationary contract at a reduced salary for a one-year term, with opportunity for annual renewals,” the board said in a prepared statement. “As evidenced by the board’s audit request, we continually look for opportunities to make improvements for the benefit of Kentucky’s employers.”

No information was provided as to Stewart’s new salary.

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