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Michael Brandy, Deseret News
FILE — Ken Bullock, longtime director of the League of Cities and Towns, listens during the Immigration Roundtable hosted by Governor Gary R. Herbert at the State Capitol. Bullock resigned Jan. 19, the day before an audit says he improperly charged about $57,000 to the taxpayer-funded group's credit card for personal purposes and racked up about $130K in questionable charges.

SALT LAKE CITY — Auditors are investigating a mysterious trust fund that has close ties to the Utah League of Cities and Towns and its former director, but even the league's own board members are confused about its origin, use and what's feeding the fund.

The league has come under fire after a state audit last week reported questionable accounting and spending practices for former Utah League of Cities and Towns leaders.

The fund — called the Utah Municipal Cooperative II — is controlled by four trustees, two of whom resigned from their league positions the day before the release of last week's state audit: former league director Ken Bullock and the league board's former treasurer, Midvale Mayor JoAnn Seghini. Michelle Reilly resigned from her post as the league's chief financial officer last year.

Bullock, Seghini and Reilly no longer work for the league.

The fund's origin and purpose is "somewhat unknown" to current league leaders, said league board president Steve Hiatt (who is the mayor of Kaysville). Auditors and board members are now questioning the fund's role in the league's business and whether it contains any public or private dollars.

It's unclear even to trustees exactly when the trust was formed or how much money it currently contains, but Seghini calls it a private "endowment fund" with a sole purpose of funding league projects. She and fellow trustee Tom Godfrey said it originated from what was once a bond pool of roughly $200 million meant to finance capital improvement projects for the cities that are members of the league.

The existence of the trust has also caused the state auditor to raise concerns about possible conflicts of interest involving Bullock.

The Deseret News first learned about the cooperative after its sister company, Deseret Digital Media, began receiving payments from the trust as part of an advertising buy with the Utah League of Cities and Towns. The one-year contract costs the league $10,000 a month. The sponsored content is published on deseretnews.com and features advertisements such as "Can you spot the services offered in Utah's cities and towns," "Recycling in Utah: How it works," "Cities team up to curb underage drinking" and "What people really want for Christmas: Our holiday shopping habits," among others.

"We entered into an advertising contract with the League of Cities and Towns in good faith," said Greg Peterson, president of Deseret Digital Media in charge of online operations for the Deseret News and KSL. "It's meant to promote the local government and is an advertising vehicle for the league," he said.

Since the contract with the Utah League of Cities and Towns was finalized on Sept. 16, Bullock has signed the payments to Deseret Digital Media. But the money doesn't appear to be coming directly from the league.

Following the money

Instead, the funds originate from the Utah Municipal Cooperative II, the trust that Hiatt said has a "strange" and "unique" relationship with the league — a tie that several board members didn't even know about until the state auditor's office brought it to their attention during its investigation into potential misuse of public funds.

Hiatt said the auditor is now completing a review to determine the nature of the trust. But until the review is complete, he said the league is in an "awkward" position because there appears to be little information about the cooperative, its genesis or whether it should be considered a public or a private entity.

"It does put us in a precarious situation, to want to know more about this entity that is affecting the league," Hiatt said. "But that being said, it may very well be operating in a completely legitimate matter, and it would be unfair to assume otherwise until the state auditor's review is complete."

When asked about the Utah Municipal Cooperative II, Utah State Auditor John Dougall declined to confirm that his office is investigating the fund, but he did confirm that Bullock, Seghini and Reilly all have active roles in the organization.

"We don't typically speak to audits that are ongoing," Dougall said. "We're trying to determine the nature of the organization and whether it has a duty to report to my office."

That's because Dougall said Bullock has "contended" to auditors that the funds are private, but "others may say that it's not."

The question is whether the entity has any control or influence over tax dollars, Dougall said.

His office became aware of the trust when it found that Bullock had received payments of nearly $80,000 over a 10-year period from an organization he claimed was "private" and separate from the league. Bullock said that a portion of the payments was for personal compensation and some was for reimbursements of expenses, according to the audit.

That spurred auditors to conclude that Bullock should have submitted a conflict of interest disclosure according to state law, while also expanding their review of the fund and its relationship to the league.

What is the cooperative?

Bullock did not return multiple calls for comment, but Seghini said she is the chairwoman of the trust, while Bullock, Godfrey (a former Salt Lake City Councilman) and Carla Brooks are all trustees. Reilly is a staff member, she said.

When asked for an explanation about the genesis of the cooperative, Seghini said she didn't "know how it was originally set up" because she's "never seen any article of organization," but she guessed it began roughly 40 years ago.

Godfrey, too, said he only knew what he could recall, and he didn't have any official documents. He deferred any official requests for information to Seghini. She told the Deseret News Thursday she didn't have any documents immediately on hand.

When asked how much is left in the fund, Godfrey said he'd defer the question to Seghini because he didn't know if he is supposed to discuss the details of the fund, since he said it's a private entity. But Seghini said she couldn't answer questions about how much money is currently in the fund because she said she couldn't recall from memory.

"I'll look into it, I just don't know quite where to look, but I'll get what I can," she said.

From what they could remember, Seghini and Godfrey said the trust was formed under Bullock in his role as the league's director in order to create a way to reduce financing costs for cities seeking ways to fund capital improvement projects.

They said the cooperative was a "bond pool" financed through investors to the tune of roughly $200 million, and helped fund projects in a variety of cities in towns at lower interest rates. In the decades since, Godfrey said the bonds have been paid off and the bond pool doesn't exist anymore, but what is left in the cooperative's fund is the "arbitrage" or "interest" that the fund earned from the existence of the bonds.

"So what we did was set it aside so it would be an endowment to be used by the League of Cities and Towns to help pay for activities they felt would be useful to its members," Seghini said.

When asked if the money in the trust — generated by the loans that cities paid off — would be considered public money, Seghini said: "I don't think they would be considered tax dollars.

"I think they might be considered earnings, but I'm not even sure about that," she said.

When asked why cooperative funds were being used for league business — including the Deseret Digital Media contract — Godfrey said the cooperative's purpose is to "help the league" fund its projects.

For example, Godfrey said, the contract with Deseret Digital Media seemed like a "good idea" because it helped the league in its desire to promote more awareness of cities and towns' services in the community.

"Our whole focus is, 'How can we support the league?'" Godfrey said, adding that Bullock would come to the league with requests. "If the proposals made sense to us, then we'd fund it."

'Anonymous donation'

Hiatt said the board was not aware that Bullock was paying the Deseret Digital Media contract directly with Utah Municipal Cooperative II checks.

According to minutes of the league's June 2016 board meeting, Bullock told board members the one-year, $120,000 contract with Deseret Digital Media would be funded through an "anonymous donation."

Why Bullock didn't tell the board the money was coming from the cooperative is unclear.

"I can't speak for Ken's decision making, but that's probably the area that at least requires some explanation and has gone unanswered, putting the league in a precarious situation," Hiatt said. "Even if the entity is private, we probably deserve some clarification and answers to those questions."

Godfrey said he didn't know for certain why Bullock didn't tell the board the money would come from the fund, but he noted that it may have been a way of "keeping a distance between the league board and the trust" in order to preserve the life of its funds.

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"Way back when there was some discussion about how we were to handle this pot of money," Godfrey said. "If we just gave it over to the board, they might reduce dues for a year and it would all be gone and wouldn't be a benefit to the league. So it was decided this would be a better way to use the money."

Hiatt said he isn't aware of any other current league business funded by the cooperative fund, but Godfrey said there have been other instances in the past when the fund would pay for other league projects.

Godfrey said in the past, the cooperative has given money directly to the league for projects, so he acknowledged that the direct payments to Deseret Digital Media are a "different" process than what he has seen before.