Auditor Galloway warns of financial instability for the City of Lexington

Audit finds failed plan to build new hospital contributed to overspending
October 5, 2017

Missouri State Auditor Nicole Galloway today released a citizen-requested audit of the City of Lexington. The report details a series of financial missteps, including payments related to a failed venture to build a new city-owned hospital, that has resulted in a steep decline in city funds.

"It is critical that leaders take a proactive approach to budgeting and make sure that taxpayer dollars are managed responsibly," Auditor Galloway said. "The City of Lexington has the potential to get back on track, but needs to ensure appropriate oversight is in place to monitor the city's financial condition. With proper accountability, the city's financial position can be strengthened."  

The city's general fund cash balance declined by $122,000 between fiscal years 2014 and 2016. While the fund was bolstered by a one-time payment from the hospital board in fiscal year 2017, the audit found a significant portion of the money was not due to the city.

In 1985, the city entered into a 30-year lease with a nonprofit corporation to manage a city-owned hospital. In 2001, a for-profit corporation purchased the contract to manage the hospital under the terms of the existing 30-year lease. Shortly thereafter, the hospital's board of directors became inactive.

Beginning in 2009, the city and the hospital management company sought to design and build a new hospital. To support the effort, the management company made an advance lease payment to the city of $515,000 in 2011, which was spent by the city on architectural plans for the new building. However, voters rejected the new hospital plan in the 2012 election. By then, more than $1 million in costs had been incurred related to the project.

In 2014, the city re-established a hospital board of directors ahead of the expiration of the 30-year lease. In 2016, the board finalized a new lease with the existing management company that included an initial lease payment of $1 million to the board's hospital account. The city then billed the hospital for expenses related to the pursuit of a new hospital building. Ultimately, the hospital's board approved a payment of $879,755 to the city for those expenses. However, auditors found that since $515,000 of that amount had previously been paid with hospital funds in 2012, it should not have been included. As a result, the city needs to reimburse the hospital that amount from the general fund.

The audit also identified lack of oversight in regards to accounting duties and recommended better checks and balances so all financial transactions are not overseen by one person. 

Complicated banking practices also make financial monitoring difficult. The city maintains 20 accounts for 16 funds, all under the control of one city employee, making record keeping difficult to track and requiring frequent transfers between funds. For example, during a 15-day period in 2016, there were 20 transfers from the sewer bank account to four other accounts.

The city's budget lacks several required elements, including a beginning and estimated ending cash balance. The audit recommends that the city council regularly compare actual spending to budgeted amounts in order to properly monitor the city's financial situation.  

The City of Lexington has pledged to address many of the findings and in some cases, has already begun to take action on the concerns outlined in the report. The complete audit report, which received an overall performance rating of fair, is available online here.    

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