Financial Transparency? Restoring Trust in the Knox County Trustee's Office

At first blush, the recent revelation that Knox County property tax revenues were overstated by $2.4 million in fiscal year 2011 seems scandalous—all the more so since it took over two years to detect it.

County Finance Director Chris Caldwell is convincing that the overstatement was purely the result of an erroneous accounting entry and that "no taxpayer funds were lost." But the fact remains that Knox County had to absorb a $2.4 million reduction in its fund balance. And it's fortunate that the fund balance was robust enough to take the hit without raising any red flags on the part of the bond-rating agencies that assess the county's credit worthiness.

The accounting glitches that gave rise to the overstatement revolve around the independently elected office of Knox County trustee, which collects the county's taxes and serves as its fund repository. Once Pugh & Co. became the county's auditor in 2012, it identified numerous deficiencies on the trustee's part in reconciling its bank accounts and other ledgers. It was in the course of rectifying one such deficiency that the $2.4 million error was discovered.

The trustee at the time was John Duncan III, who resigned in disgrace last July after pleading guilty to felony charges of official misconduct. So the problem didn't arise on the watch of his successor, Craig Leuthold, who got a County Commission appointment to fill the vacancy until this year's county election.

Leuthold insists that all of the trustee's accounts are now being reconciled on a current basis. "With the steps we've put in place, now if we are out of balance we will find it immediately and be able to fix it," he states.

Perhaps. But you wouldn't know it from looking at the way the trustee's office publicly accounts for its own revenues and expenses.

Those revenues are derived from state-prescribed fees that the trustee gets paid for collecting county taxes. The expenses are mainly the salaries and related employment expenses of the trustee's 34 full-time and six part-time staffers. Any excess fees—and they are considerable—are paid over to the county's general fund.

In an effort to familiarize myself with the trustee's P&L, I went to his website where the first schedule I encountered is headed as follows:

For the Six Months Ended December 31, 2013

Budget; Actual; Variance

Excess Fees $5,242,800; $287,612; ($4,955,188)

There is no explanation of what the fees are in excess of. And why on earth is the actual so far below the budget, I ask Leuthold.

Beyond venturing that "It has to do with a timing issue of when it's accounted for," Leuthold says, "I'll have to get my chief accountant David Skinner in here to explain it to you." Skinner explains that the "budget" amount is actually for the full fiscal year ending June 30, not the six months ended Dec. 31 as labeled. As for the actual amount of $287,612, Skinner says that this doesn't include excess fees of $2.77 million generated for the period October through December because the county only makes a quarterly payment to the trustee's office in January, and this payment isn't included in revenues for the period ended Dec. 31 since the trustee's books are kept on a cash basis that only recognizes revenue when it's received. On the other hand, the budget amount for the fiscal year is on an accrual basis.

So much for transparency, congruity, or even comprehensibility in the trustee's public reporting. But wait, there's more: For the fiscal year ended last June 30, the trustee's report shows excess fees of $7.1 million. So how come this year's budgeted amount is only $5.2 million (or $5.6 million when some other fees are added in)?

Well, Skinner patiently explains, revenues for the prior year are also on a cash basis, and the county didn't get around to making payments for the preceding five months until October 2012. Oh, and I then note that the $7.1 million for fiscal 2013 does indeed reflect an inordinate spike from $4.5 million reported in fiscal 2012.

When I tell Leuthold that his reports are anything but a model of transparency, he responds, "I have to beg to disagree with you." In a subsequent e-mail, he amplifies as follows: "With the audit firm telling us to be on a cash basis and Finance on an accrual basis, there will always be a timing difference. This is the system that I've inherited, and we and the Finance Department are working on ways to minimize these issues as much as can be done."

Prior to his appointment as trustee last July, Leuthold had worked for predecessors in that post for 16 years (until Duncan took office in 2010), serving most of the time in the trustee's satellite office in Cedar Bluff. From 2002 to 2010, he also served on County Commission, succeeding his illustrious father, Frank Leuthold.

In seeking the appointment, Leuthold bucked the preference of then Commission Chairman Tony Norman to name someone who would pledge to serve on an interim basis and not attempt to parlay the appointment into election to the post this year, which Leuthold is now seeking. This in the name of avoiding the appearance of cronyism. But Leuthold prevailed.

He explains that, "When the position became available, I saw myself as a public servant who has learned all this information because I was here. So I felt I owed it to the citizens to put my name forward ... Knox County needed me."

We will see whether the voters agree with him on May 6 when the Republican primary will virtually decide this year's election. Leuthold's main opponent is County Commissioner Ed Shouse, a retired banker cum railroad executive who serves as chairman of Commission's Finance Committee and Vice Chairman of its Audit Committee. Shouse withdrew his name from consideration for the interim appointment last July, also in the name of avoiding the appearance of cronyism.

A key question for the voters to decide is which candidate will make the trustee's office the most accountable.