Audit of KCTCS found lack of transparency, overcharging community colleges by $24M

A special examination of the Kentucky Community and Technical College System released Thursday found five issues related to finances and accounting at the system offices.

Among the findings, the state auditor’s office found:

  • The KCTCS System Office’s unrestricted carryforward balance was not accurately reported to the board of regents;

  • The system office overcharged community colleges by $24 million and retained that money as part of the office’s unrestricted carryforward balance;

  • Discrepancies between balances reported to community colleges;

  • Weaknesses in KCTCS’ internal accounting system.

An “unrestricted carryforward fund” is unused funds that accumulate over time. They are carried forward from fiscal year to fiscal year. Unrestricted funds do not have limitations on how they must be used, but are typically used for “asset preservation, initial start-up costs, maintenance and construction costs,” according to the report.

Two other observations were noted: a misunderstanding about workforce training funding raised concerns about a transfer to the system’s general fund, and nepotism disclosures were not properly completed. The examination focused on activity that took place between July 1, 2020, and April 30, 2023. Only the system offices were part of the examination, not individual community colleges.

“We appreciate the cooperation of KCTCS, and their leadership provided to our office which allowed auditors to complete their work in a timely fashion,” said Kentucky Auditor of Public Accounts Mike Harmon in a news release. “As the system prepares to welcome a new president, it is our hope this examination provides insight into some of their operations and gives them a road map to address the issues identified by our office.”

Ryan Quarles, the outgoing Kentucky Commissioner of Agriculture, will begin as the KCTCS president on Jan. 1. During the time period examined by the auditor’s office, the KCTCS president was Paul Czarapata, who resigned in February 2023. Larry Ferguson as been the acting president since then.

The examination began in May, after the system’s acting president sent a request from the board of regents. The request was made for a “thorough examination by the State Auditor’s office of actions taken by past administrators,” according to a news release.

“In response to the report’s findings, the Board of Regents and current administration will work closely with the General Assembly, regulatory agencies and Council on Postsecondary Education to make necessary reforms. We have already begun that process, implementing new policies and procedures in advance of the State Auditor’s final recommendations,” said Barry K. Martin, Chair of the KCTCS Board of Regents, in a news release.

The KCTCS System Offices oversee management and organization responsibilities for the 16 colleges in the system. The system office also makes payments for system-wide contracts, and performs some services on behalf of the colleges, including payroll, legal and financial services, and academic support, according to the report. All funding for community and technical colleges received from the state budget is sent to the system office to be distributed to colleges.

“It is readily apparent that we can and must do more to ensure accountability and transparency, and everyone at KCTCS is committed to doing just that,” Martin said.

In a statement on the audit, Martin and KCTCS General Counsel Pamela Duncan said they reviewed the findings and recommendations, and briefed Quarles on the findings.

“We greatly appreciate the State Auditor and staff for their diligent work, confirming our suspicions and profound disappointment in previous administrators,” Martin and Duncan said. “In anticipation of this report, the System began creating and implementing new policies and procedures to promote transparency and clear oversight. Our students’ tuition dollars and Kentuckians’ taxpayer dollars must be applied with utmost transparency and accountability.”

Lack of transparency with carryforward fund

With the carryforward fund, issues were raised about the accuracy and transparency around reporting that fund to the board of regents.

“Lack of transparent communication with the KCTCS Board has allowed the System Office carryforward to build up over time and without the Board’s awareness of the System Office carryforward issue,” according to the report.

The issue was identified earlier this year, when the board of regents was told a “discovery” had been made in regards to the carryforward fund.

“The discovery was that the KCTCS System Office believed it had an unrestricted carryforward fund balance of over $75 million at the time of the March 23 meeting. The acting President indicated this amount had not previously been transparently reported to the Board,” according to the report.

Throughout the examination, staff from the auditor’s office found that KCTCS had not maintained accurate documentation for transactions in the past 20 years.

To address this, the report recommends a forensic accounting firm be hired to look at the use of the account, reassess the budgetary needs of the System Office and determine what is appropriate for the carryforward funds and establish a way to report financial information to the board, as well as develop written policies around the carryforward fund.

Community colleges overcharged by $24 million; other fund issues

A billing practice dating back to 2018 resulted in KCTCS charging community and technical colleges for expenses based on anticipated costs each quarter, and not reconciling the actual expenses at the end of the year. The examination found that this practice contributed to the issues with the unrestricted carryforward fund.

The funds should have been returned to the colleges after year-end reconciliations, which will become practice in fiscal year 2024, according to the report. It is recommended that KCTCS return all excess funds from 2018 to 2023 to colleges, and that a process for returning actual costs in real time be developed.

Letters sent to colleges showing the amount each college has in its unrestricted operating funds was not accurate, according to the report. Amounts reported to colleges were incorrect by $14.3 million between fiscal year 2022 and 2023.

The auditor’s office recommended making sure balance amounts are reported accurately to colleges going forward, and establishing a policy to recapture costs.

Other findings, observations

The fourth finding showed KCTCS did not use its accounting system properly to track spending, and failed to maintain all required documentation for contracts, resulting in weaknesses in the system office’s finances and internal accounting systems.

The report recommends staff make sure all procurement policies are followed, purchases are properly tracked and documentation is maintained.

The last finding centered around spending on TRAINS projects, which provided employee training for companies to build and educate their employees. Guidelines required that after completing a TRAINS project, KCTCS send a company feedback within 60 days. That practice was not followed due to a lack of response.

The examination also identified more than $10,700 in duplicate charges in one TRAINS project, which ran from November 2021 to December 2022. The report recommends internal controls placed for verifying reimbursements, and that the survey process be redeveloped.

Lastly, the report had two observations about KCTCS. During the examination, employees reported concerns about fiscal year 2015 transfer of $11.6 million of workforce training funds to KCTCS’ general fund as inappropriate. The auditor’s office determined the concerns came from a misunderstanding about restricted and unrestricted budget funds.

A second observation was that nepotism disclosures were not completed as required by KCTCS policy, and in several instances, one spouse approved transactions for the other spouse. Although the spouses do not work in the same department, “this can give the appearance of a conflict of interest,” according to the report.

For proper internal controls, employees with personal relationships should not oversee or approve the work of the other person, according to the report. To resolve this issue, KCTCS should revisit its nepotism disclosure policy and work to strengthen its internal financial controls.