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Scott G Winterton, Deseret News
The office of the Utah League of Cities and Towns is pictured in Salt Lake City on Monday, April 24, 2017.

SALT LAKE CITY — After monthslong investigations into a mysterious trust fund linked to the embattled Utah League of Cities and Towns, state auditors released an audit Friday determining that the fund contains public money and should have been terminated years ago.

Two ex-league leaders, Ken Bullock and Michelle Reilly — who both stepped down from their positions before a state audit was released that accuses them of misusing public funds — each helped manage the trust fund, called the Utah Municipal Cooperative II.

Questions about the fund arose after state auditors discovered it while investigating the league, concluding at the time that Bullock, the former director, and Reilly, the former chief financial officer, used taxpayer-funded league credit cards for personal purposes, some of which has been repaid. As a result of their findings, auditors recommended a criminal investigation into Reilly. Bullock resigned.

In his role as a trustee of the fund, Bullock was paid a total of $80,000 from the trust over the past 10 years in compensation and expense reimbursements. Reilly, who acted as the trust's accountant, was paid more than $40,000 between 2012 and 2016, according to records obtained by the Deseret News.

Auditors concluded that the trust — which contained about $1.3 million when it was created in 1993 for the purpose of benefiting the Utah League of Cities and Towns — was not used inappropriately, but did not abide by some of its own bylaws.

Those bylaws included reporting its accounting to the league and terminating no later than Dec. 31, 2012.

Utah State Auditor John Dougall said it's "concerning" that although Bullock was both director of the league and a trustee of the fund, the league's current board of directors had no knowledge of the trust.

"They did not even know it existed. Yet you did have an individual who sat on both sides of the fence who did know," Dougall said. "Clearly he met with the board regularly and was not sharing this information. And that's clearly very concerning."

Dougall said it's "clearly concerning" that the trust did not abide by its own rules or was not subject to oversight that is required of public entities.

"We're adamant in our position that from the get-go, we believe it was governmental throughout its existence," he said. "Therefore, they had a duty to comply with various governmental responsibilities, and they did not.”

Auditors recommended the trust "wind up" its operations and release its remaining assets to the Utah League of Cities and Towns.

Kaysville Mayor Steve Hiatt, who is the league board president, said the league and the trustees signed an agreement Thursday night to transfer the trust's remaining funds to the league. That wire transfer happened Friday, he said.

The league received $320,000 — the remaining balance with the exception of $75,000 the trust retained to handle closure expenses, including taxes and attorney fees charged over the past several months.

"Candidly, it's been an awkward situation for the league," Hiatt said, noting that it's a relief to know the auditor didn't find any wrongdoing as far as how the trust's funds were spent, given the fact the league wasn't aware of the trust.

"I'm pleased with the outcome," Hiatt said. "Admittedly, it would have been more ideal to resolve this months ago, but we're looking forward to putting this issue behind us."

Dougall said it's unfortunate that the matter took several months to resolve — meanwhile, racking up attorney fees — when the situation could have been avoided if the trustees had followed the fund's contract in the first place.

"My position from the start was this thing should have already been shut down years ago, so to extend it further is unacceptable from my perspective," Dougall said. "But clearly the trustees needed to vote amongst themselves to figure out what they needed to do."

Jim Bradshaw, Bullock's attorney, said Friday that he's "heartened" by the auditor's findings.

"Hopefully what comes of (the audit) today is the public sees (Bullock) has not done anything that's dishonest or on the edge or self-dealing — it's all been for the league and above board," Bradshaw said. "There's no question there was no self-dealing or corruption. Ken's now been through two audits and all they've come up with is lax reporting, which is a very common thing with an entity of this size and structure."

When asked about why the fund wasn't dissolved in 2012 or why it didn't report its accounting to the league, Bradshaw acknowledged there were shortcomings.

"There's no question (the trustees) were lax," he said. "They were not detailed in their attending of the requirements of the organization. And I think the trustees have been candid about that and have admitted that's happened. But that's not to say something was dishonest or there was some ulterior motive. They just didn't abide by all of the rules laid out in the corporate requirements."

In a phone interview Friday, Bullock said he's spent the last 30 years working for the benefit of the league and he never intended anything "onerous."

When asked why the trust wasn't following its own bylaws — like dissolving in 2012 or reporting its finances to the league — Bullock said that was an oversight.

"The league has a very small staff and a lot of expectations on us," Bullock said. "I got caught up in taking care of expectations of the league and didn't pay attention to that detail."

Bradshaw said Bullock continues to disagree with the auditor's conclusion that the entity is public. He said when the fund was created in 1993, it was specifically defined and declared private.

Just because the trust "acted" like a public entity — by participating in the Public Treasurer's Investment Fund, which only government agencies do — that doesn't necessarily mean its definition automatically changes to governmental, Bradshaw said. That's an assertion Dougall contests.

The Deseret News first learned about the trust 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, a one-year $120,000 contract for advertising content published on deseretnews.com.

Though the contract was with the league, Bullock wrote checks to Deseret Digital Media from the Utah Municipal Cooperative II fund, though Bullock had previously told the league's board that the contract would be funded through an "anonymous donation."

When asked why he referred to the trust's funding as an "anonymous donation," Bullock said he "didn't think very clearly" at the time.

"I just should have told them where it was coming from," he said. "I had no intention to be secretive. In my mind, that's something I should have been very clear about and I wasn't, and there's no excuse."

Since Bullock entered the league into a one-year publishing agreement with Deseret Digital Media, Hiatt said the league intends to honor the agreement. But because the league board approved the project under the assumption that the contract was being paid for by a donor — rather than technically the league's own funds — Hiatt said the league board will have to revisit the contract once it ends in September to decide whether to continue it or not.

"Short of a sponsor sponsoring the project, we will likely have to re-evaluate the future after we fulfill the contract," Hiatt said.