As Kentucky's Auditor of Public Accounts, Mike Harmon says he's operated his office on a simple guiding principal: “We don't target anyone, we don't give anybody a pass, we just simply follow the data.”
First elected in 2015, Harmon's team has conducted a number of high-profile audits, including reviews of the KentuckyWired internet project, the state Administrative Office of the Courts, and the University of Louisville Foundation. Those special reviews come in addition to the statutorily required annual audits of state agencies, public and quasi-private agencies that receive state tax dollars, fiscal courts, and county clerks and sheriffs around the commonwealth.
“We stay very busy,” says Harmon.
Noncompliance Not Necessarily Criminal
One of Harmon's first special audits came at the request of a legislator. Louisville Rep. Denny Butler, who was then a Democrat, asked the new Republican auditor to review the finances of the Kentucky Law Enforcement Foundation Program Fund (KLEFPF). Harmon says Butler had long sought such a review but could not get previous auditors to perform it or the former Democratic leadership in the House of Representatives to request it.
Harmon's review found questionable spending and hiring practices in the fund and his office referred the matter to the Executive Branch Ethics Commission for possible action. He says it was one of about 60 cases that have been referred to other entities for follow-up during his first term in office.
“We do not have prosecutorial power,” say Harmon. “We refer them on [to] the attorney general’s office, we refer them to the treasurer, the FBI, sometimes local ethics boards, sometimes executive branch ethics… Once we refer them, then it's up to those departments to determine whether they want to explore it further.”
That doesn't mean every finding of noncompliance is a criminal act, according to Harmon. Sometimes inexperience or a lack of training can result in an innocent mistake on the part of a state or local official.
“Most people, I believe, want to do what's right,” says the auditor. “Most people want to have a finding-free audit.”
Harmon says he sees the audits his office conducts as providing guardrails to the agencies they review so they can stay on the proper track or get back on the track if there are problems. He says most issues are resolved in three to six months; more complex problems may take a year to address.
Contract for Internet Project Questioned
The auditor's office also found significant issues during its review of the KentuckyWired initiative to bring high-speed broadband internet service to all 120 counties in the state.
The project launched by former Gov. Steve Beshear has been mired in cost overruns and installation delays. The massive undertaking was created as a public-private partnership (or P3) between the state and international investment bank, Macquarie Capital of Australia.
“It was a P3... before we even had P3 legislation,” says Harmon. “The goal of a P3 is really to offload the risk in exchange for some reward to the private sector.”
The problem, according to Harmon, was that between the initial negotiations and execution of the final agreement, the risk shifted from Macquarie to the state. He says that put Kentucky taxpayers on the hook for $1.5 billion in project costs instead of the original estimate of $30 million.
The audit found state officials ignored warnings from consultants that the deal with Macquirie would cost the commonwealth more. The administration of current Gov. Andy Beshear wants to put an additional $100 million toward the project. Harmon says it's up to legislature to decide how to proceed, but warns there are still dangers ahead. With the state more liable for the debt, he says that could put the commonwealth’s bond rating at risk.
Findings About Pension Plans and Other Entities
During his first term, Harmon's team also audited the Kentucky Retirement Systems and the Kentucky Teachers' Retirement System to detail the full extent of the unfunded liabilities in each of the pension plans. The office also did a special review to determine if the systems are in compliance with transparency requirements mandated by a state law enacted in 2017.
“The systems weren't complying to the spirit or to the letter [of the law]," says Harmon. “There's been a great deal of improvement since that time."
The auditor is a member of the Public Pension Oversight Board, which reviews the administration of the systems. Harmon says lawmakers must honor the pension promises made to current workers and retirees.
“At a minimum we have to continue to fully fund it,” he says, “and then beyond that, we may need to look at some additional adjustments.”
Such adjustments could include level-dollar funding, which involves annual pension payments by the state of the same amount, and moving future teacher hires into a cash-hybrid or defined-contribution retirement plan.
“They were promised a good retirement in lieu of what they would consider a good salary,” says Harmon. “I think the General Assembly should probably look at some sweeteners.”
For example, if new teachers are moved into a 401(k)-type retirement plan, which is considered by some to be less secure than a traditional pension, Harmon says the state could offer them a higher salary during their working years.
The auditor’s office also completed the first-ever review of the Administrative Office of the Courts, which identified dozens of troublesome findings, including a lease agreement for office space from a company owned by the sons of a justice. Auditors found that lease cost three times more than the next closest bid.
Auditors also reviewed the University of Louisville Foundation and its relationship to the University of Louisville. They found dysfunctional governance, bylaw violations, unapproved salaries increases, and other issues. Harmon says there was some question whether the state Auditor of Public Accounts could investigate the U of L Foundation, which is a private entity. He says the audit moved forward based on the fact that the foundation had received state money through the Bucks for Brains research program.
Harmon says that detail may allow his office to review the books of Braidy Industries, the company that plans to build an aluminum mill near Ashland. Late in the 2017 General Assembly session, lawmakers approved a $15 million investment of state funds in the project. Then-Gov. Matt Bevin requested the money but did not disclose the exact nature of the deal to legislators at the time. The project remains stalled because Braidy has yet to acquire sufficient financing to construct the facility.
“At a minimum we should be able to audit the process for the money that was appropriated and the use of that specific money,” says the auditor. “I would think we would be able to compel to go even further, if we chose to.”
Working with ‘the Kids’
Harmon was a state representative from Danville for 13 years before being elected as auditor in 2015. The Republican defeated incumbent Democrat Adam Edelen by some 36,000 votes. Harmon easily won a second term last November, beating political newcomer Sheri Donahue by more than 200,000 votes.
As a legislator, Harmon says he had good relationships with Republicans and Democrats. During his first term as auditor, he says he worked well with Andy Beshear, who was then the state attorney general. He says he hopes that can continue now that Harmon is in his second term as auditor and Beshear is governor.
“Obviously we’re going to disagree on some political issues,” he says, “but at the same time, where we can agree... we can work together, and where we disagree, we can be respectful of those differences.”
Harmon says his office will request additional funding in the new state budget to help fill at least seven vacancies on his staff. Given state pay scales, he says it's hard for his office to attract qualified auditors.
“We end up having to compete with the private sector,” he says.
At 53 years of age, Harmon is the oldest of the state's constitutional officers. He jokingly calls his colleagues "the kids," but says he's developed camaraderie with Attorney General Daniel Cameron and Secretary of State Michael Adams, who are in their first terms, and Agriculture Commissioner Ryan Quarles and Treasurer Allison Ball, who, like Harmon, are in their second terms.
Harmon says he also likes to joke with Ball about which one of them is the biggest watchdog over taxpayer dollars.
“The treasurer is the watchdog on the front end [of state spending], the auditor’s office is the watchdog on the back end,” he says. “Between the two of us, we've got your dog covered on both ends."
