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HomeMy WebLinkAboutAudit - Other Publications - Public - Professional Management Services and Arena Lease Agreement Contract Compliance Review - 7/7/2017 _____________________________________________________________________________________ City Auditor’s Office 1 FY15 PMSA Compliance Review 1. Date: July 7, 2017 To: Kevin R. Phelps, City Manager From: Candace MacLeod, City Auditor Subject: Contract Compliance Review: Professional Management Services and Arena Lease Agreement The City Auditor’s Office performed a contract compliance review of the Professional Management Services and Arena Lease Agreement (PMSA) in March 2017 for the period July 1, 2014 to July 24, 2015. The purpose of the review was to determine whether the terms and conditions of the PMSA were being complied with by the City and IceArizona. A prior review was conducted by the City Auditor’s Office in 2015 for FY14, which provided 40 recommendations to management. In 2017, management indicated that all 40 recommendations had been addressed, either by the 2015 Settlement Agreement, the 2015 Amendment to the PMSA, or other actions that were taken. Background On July 8, 2013, the City entered into the PMSA (C-8532) with IceArizona Manager Co., LP and IceArizona Hockey Co., LP (IceArizona) to manage the Gila River Arena facility. In consideration of IceArizona’s agreement to perform management and other services set forth in the PMSA, the City agreed to pay IceArizona a $15,000,000 annual management fee for 15 years. Under the terms of the PMSA, the City would receive surcharge, supplemental surcharge, parking and naming rights revenue, rent and other reimbursements, including safety and security costs. In FY15, the City received $5.68 M. in revenue under the PMSA and expended $15.5 M. in management fees and capital improvement costs. Settlement Agreement and First Amendment to PMSA On July 24, 2015, the City and IceArizona entered into a Settlement Agreement and Mutual Release (Settlement Agreement) whereby both parties released one another from any and all claims. On July 24, 2015, the City also entered into the first amendment to the PMSA (Amendment) with IceArizona (C-8532-4). The amendment reduced the City’s annual management fee payable from $15,000,000 to $6,500,000 and eliminated all revenue sharing provisions between IceArizona and the City except for those relating to naming rights. The Amendment reduced the term of the agreement from fifteen years to four years with a June 30, 2017 termination date. Under the _____________________________________________________________________________________ City Auditor’s Office 2 FY15 PMSA Compliance Review 1. Amendment, the City had the option to replace the Arena Manager at any time after June 30, 2016 with a 90 day notice. The City chose to exercise the option to replace the Arena Manager, effective July 1, 2016. Following the City’s exercise of this option, AEG Facilities was chosen to manage the Arena with the professional hockey team contractually agreeing to occupy the facility through June 30, 2017. Scope and Methodology The scope of the contract compliance review was July 1, 2014 to July 24, 2015. Information requested by the City was provided by IceArizona and viewed electronically at the Gila River Arena. Review procedures included: follow-up on findings reported in FY14 review; interviews with staff from the City and IceArizona; review of financial reports and agreements; and confirmation of paid admissions and ticket sales. Summary of Findings 1. Qualified Tickets: The FY14 review identified $39,640 in surcharge and supplemental surcharge fees due to the City. According to the City Attorney’s Office, the Settlement Agreement addressed this claim. No discrepancies of this nature were identified during the FY15 review. 2. Naming Rights: The FY14 review identified between $76,460 and $239,460 in naming rights revenue due to the City. According to the City Attorney’s Office, the Settlement Agreement addressed this claim. No naming rights discrepancies were identified during the FY15 review. 3. Supplemental Surcharge Escrow Account: The FY14 review reported that a supplemental surcharge escrow account was not established in accordance with the PMSA and funds were wired to the City for fees collected during the year on July 9, 2014. In FY15, City supplemental surcharge fees collected during the year were deposited into the escrow account beginning on March 13, 2015. 4. Community Events: The FY14 review indicated that controls over the negotiation, formalization, and approval of Community Events had not been established. In FY14, the City was unable to verify whether it had received its correct share of the proceeds from the Arizona Interscholastic Association (AIA) Basketball Tournament because it did not have a copy of the AIA Event License Agreement (AIA Agreement) between the IceArizona, Global Spectrum, and the AIA. Although the City received the AIA Agreement during the City’s FY14 review, the City split $24,510 in 2015 AIA parking revenue with IceArizona, even though the AIA Agreement stated that the City would retain 100% of the parking fees. The City also split $39,998 _____________________________________________________________________________________ City Auditor’s Office 3 FY15 PMSA Compliance Review 1. in facility use charges with IceArizona even though the PMSA stated that these fees should not be charged to the City. A review of AIA revenue paid to the City was conducted by IceArizona during the City’s FY15 review. IceArizona indicated that an additional $32,776 was potentially owed to the City for AIA events held in 2014 and 2015. According to the City Attorney’s Office, the Settlement Agreement addressed this claim. The 2015 AIA event ended on March 2, 2015 and the City received 50% of the event proceeds on April 3, 2015. The supplemental surcharge fee for AIA was wired to the City on July 9, 2015, four months after the event. In addition, the City did not have official documentation to support the waiver or reduction of surcharge, supplemental surcharge, and parking fees for either of the two Community Events held in FY15. 5. Safety and Security Fees: The FY14 review reported that the City was not charging IceArizona for overhead costs associated with safety and security services. The FY15 review indicated that the same issue still existed. IceArizona paid the City the FY15 Safety and Security Fee of $182,828 on July 1, 2014, in accordance with the PMSA. A year-end reconciliation was performed by the City on September 28, 2015. The reconciliation indicated that IceArizona was owed a refund of $6,049, which was paid by the City on October 6, 2015. However, the City did not charge IceArizona safety and security overhead costs associated with technology, fuel, and vehicles. In addition to overhead, $300 in Fire Department permit fees for one community event and one hockey game were not charged to the Arena, along with $9,000 in Fire Marshal inspection fees. According to the City Attorney’s Office, the Settlement Agreement addressed this claim. The City charged IceArizona for 100% of the fire administration’s secretary salary; however, staff reported that the full salary allocation was an overstatement. Fire reported that additional staff worked on scheduling and were not included in the department’s cost summary. The auditors also noted that the hourly rates charged by Fire, Police, and Transportation for personnel providing safety and security services were understated. Approximately 75% of payments to the City from IceArizona for safety and security services were not made within 30 days, as required by the PMSA. An annual reconciliation was not performed by the City in FY15 to ensure recovery of actual costs plus overhead. 6. Sales Tax: The FY14 review indicated that IceArizona and the City had not clarified responsibilities regarding the collection and remittance of sales tax on certain Arena revenues. In 2017, management indicated that this issue would be addressed when the Department of Revenue conducts an audit. 7. Contract Administrator: The FY14 review reported that neither the City nor IceArizona formally designated a representative at the working level to act as a contract administrator for the PMSA. In 2017, management indicated that a contract manager was hired in October 2016. 8. Monthly and Quarterly Financial Reports: The FY14 review reported that the City did not retain documentation to verify whether IceArizona monthly reports were _____________________________________________________________________________________ City Auditor’s Office 4 FY15 PMSA Compliance Review 1. submitted in accordance with the PMSA. The FY15 review indicated that all monthly and two quarterly financial reports were submitted to the City late. 9. Surcharge Fees: The FY14 review indicated that 32% of surcharge fees were submitted to the City late by IceArizona. The FY15 review noted that 10% of surcharge fees were submitted late. Management’s response to the FY14 and FY15 compliance review is attached as Appendix A. Please let me know if you have any questions or comments. cc: Michael D. Bailey, City Attorney Tom Duensing, Assistant City Manager Vicki Rios, Director of Budget and Finance Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 5 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 1.1 The City should request that the Arena Manager provide the City with the Team Owner’s audited financial statements for the period ended June 30, 2015. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 1.2 The City, the Arena Manager and the Team Owner should formalize the definition of “operating loss” in the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 1.3 The City should seek legal interpretation to determine whether the lack of provision of the Team Owner’s 2013/2014 audited financial statements and the inability to verify the Team Owner’s operating loss is deemed to be a violation of the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 2.1 The City should seek legal interpretation as to whether management fees paid to the Arena Manager can or cannot be used to pay for the Team Owner’s debt associated with the acquisition of a hockey team. Management reviewed the legal opinion from outside counsel Mariscal, Weeks, MacIntyre, and Friedlander, PA regarding a substantially similar management agreement. Per that legal opinion, management believes that payment of the management fees may constitute a public purpose. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 6 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 3.1 The City should seek legal interpretation as to the amount of naming rights still owed to the City by the Arena Manager and submit a demand for payment of that amount. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 3.2 The City should seek legal interpretation as to whether failure to provide naming rights payments due to the City is a violation of the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 4.1 The City should review surcharge and supplemental surcharge fees remitted to the City in 2013/2014 and seek legal interpretation to determine any amounts still due to the City from the Arena Manager on qualified ticket sales. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 5.1 The City should seek legal interpretation as to whether the lack of establishment of a Supplemental Surcharge Escrow Account and the failure to deposit supplemental surcharge fees into the Escrow Account was a violation of the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 7 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 5.2 The City should request that the Arena Manager establish a Supplemental Surcharge Escrow Account and deposit the supplemental surcharge fees into the Escrow Account in accordance with the PMSA and verify this is occurring. In light of the settlement agreement between the parties and the amendment to the PMSA, thi s recommendation is no longer applicable. Same response as August 2015. Closed 5.3 The City and the Arena Manager should formalize deposit timeline requirements for the Supplemental Surcharge. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 5.4 The City should assess accrued interest lost on the Supplemental Surcharge Account for 2013/2014 and consider issuing a demand for this amount from the Arena Manager. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 6.1 The City should issue a formal demand for the Team Owner’s financial statements in accordance with the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 6.2 The City should seek legal interpretation to determine whether failure to provide the Team Owner’s audited financial statements to the City is deemed to be a violation of the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 8 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 7.1 The City should clarify responsibilities for the collection and remittance of sales taxes associated with the PMSA with the Arena Manager. The City will work with the Arena Manager and clarify responsibilities for collection and remittance of sales taxes by December 31, 2015. The City worked with the Arena Manager and the Arizona Department of Revenue who intended to initiate an audit regarding any potential tax liabilities. When audits are conducted by the Arizona Department of Revenue, they represent the City as well. Closed 7.2 The City should review sales tax liabilities associated with the PMSA and file amended returns, as appropriate. The City will review the sales tax liabilities associated with the PMSA and file amended returns, as appropriate, by December 31, 2015. The City worked with the Arena Manager and the Arizona Department of Revenue who intended to initiate an audit regarding any potential tax liabilities. When audits are conducted by the Arizona Department of Revenue, they represent the City as well. Closed 8.1 The City will review the sales tax liabilities associated with the PMSA and file amended returns, as appropriate, by December 31, 2015. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. The City worked with the Arena Manager and the Arizona Department of Revenue who intended to initiate an audit regarding any potential tax liabilities. When audits are conducted by the Arizona Department of Revenue, they represent the City as well. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 9 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 8.2 The City should consider including provisions for permanent records and document retention requirements in all City contracts. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 8.3 The City should reconsider bearing the full expense for accessing documentation from the Arena Manager and the Team Owner during future reviews. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 8.4 The City should seek legal interpretation to ensure the Audit Addendum was properly authorized. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 9.1 The City, the Arena Manager and the Team Owner should establish controls regarding the negotiation, formalization, approval and monitoring of Community Events held under the PMSA, including the AIA License Agreement. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 10 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 10.1 The City should request that the Arena Manager remit detailed backup reports to support parking revenue remittances in 2014/2015 and in the future to ensure parking rates are in compliance with the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 10.2 The City should work with the Arena Manager to ensure parking revenue is remitted in a timely manner in accordance with the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 10.3 The City should work with the Arena Manager to develop a set of mutually acceptable policies, procedures and internal controls for the operation of the Arena Parking Areas in accordance with the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 10.4 The City should work with the Arena Manager to ensure the Arena’s official parking matrix is accurate and complete and parking spaces are utilized efficiently and effectively. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 10.5 The City should work with the Arena Manager to evaluate parking internal controls to ensure all parking revenue due to the City is received. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 11 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 11.1 The City Manager should formally designate a City representative to act as a contract administrator in administering, monitoring and reporting on the provisions of the PMSA. The City Manager has designated a City representative to act as a contract administrator in administering, monitoring and reporting on the provisions of the PMSA. The Contracts Program Manager, hired in October 2016, has now been assigned the responsibility of contract administration. Closed 11.2 The City should request that the Arena Manager formally designate an Arena Manager representative to act as a contact in administering, monitoring and reporting on the provisions of the PMSA. The City is working with a designated Arena Manager representative to act as a contact in administering, monitoring and reporting on the provisions of the PMSA. Effective July 1, 2015, AEG Facilities was selected as the Arena Manager. The Arena Manager, General Manager is assigned the responsibility of contract administration. Closed 12.1 The City should establish controls to ensure that the R&R account is funded in accordance with the PMSA. The City has established controls and the R&R is now being funded on time. Same response as August 2015. Closed 12.2 The City should establish review procedures to ensure that R&R reimbursement requests from the Arena Manager comply with the requirements of the PMSA. The City has worked and will continue to work with the Arena Manager to ensure that R&R reimbursement requests from the Arena Manager comply with the requirements of the PMSA. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 12 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 12.3 The City should establish controls to verify that capital assets purchased by the Arena Manager with the City’s funds comply with State and City procurement requirements and are approved by City Council, as required. The City has worked and will continue to work with the Arena Manager to verify that capital assets purchased by the Arena Manager with the City’s funds comply with State and City procurement requirements and are approved by City Council, as required. Same response as August 2015. Closed 12.4 The City should establish controls to ensure that Arena assets purchased with the City’s funds are adequately tracked and titles are registered in the City’s name, as applicable. The City has worked and will continue to work with the Arena Manager to establish controls to ensure that assets purchased with the City’s funds are adequately tracked and titles are registered in the City’s name, as applicable. The City works with current Arena Manager to ensure assets purchased with City funds are adequately tracked and titles are registered in the City’s name, as applicable. Closed 13.1 The City should notify the Arena Manager if the annual and hourly safety and security fees are not remitted to the City in accordance with the PMSA. The City will notify the Ar ena Manager if the annual and hourly safety and security fees are not remitted to the City in accordance with the PMSA, by June 30, 2015. The City will notify the Arena Manager if the annual and hourly safety and security fees are not remitted to the City in accordance with the Arena Management agreement. Closed 13.2 The City should determine if any amounts are owed to the Arena Manager for 2013/2014 Safety and Security fees and reimburse the Arena Manager. The City reconciled the 2014 Safety and Security fees and reimbursed the Arena Manager $23,002 on August 7, 2015. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 13 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 13.3 The City should perform annual reconciliations to ensure full recovery of Safety and Security costs, including overhead, under the PMSA. The City will perform annual reconciliations to ensure full recovery of Safety and Security costs, including overhead, under the PMSA by June 30, 2015. The City’s Finance Department works with the Police and Fire Departments to ensure all costs are recovered. Closed 14.1 The City should notify the Arena Manager if annual budgets are not provided in accordance with the PMSA. The fiscal year 2015/2016 annual budget was provided in accordance with the PMSA. The City will notify the Arena Manager if annual budgets are not provided in accordance with the PMSA. Same response as August 2015. Closed 14.2 The City should request that the Arena Manager and the Team Owner agree upon the standard of the Team Owner's review of the Annual Budget and provide written notice of that standard to the City. The City will work with the Arena Manager and the Team Owner to clarify their understanding of the standard of the Team Owner's review of the Annual Budget and to obtain a written notice of that standard to the City by September 30, 2015. Same response as August 2015. Closed 15.1 The City should retain documentation indicating the date of receipt of the Arena Manager’s monthly and quarterly financial reports. The City has begun and will continue to retain documentation indicating the date of receipt of the Arena Manager’s monthly and quarterly financial reports. Same response as August 2015. Closed Appendix A PMSA Contract Compliance Review Management Responses _____________________________________________________________________________________ City Auditor’s Office 14 FY15 PMSA Compliance Review Recommendation Management Response August 2015 Management Response March 2017 Status 15.2 The City should request that the Arena Manager submit the monthly and quarterly financial reports timely in accordance with the PMSA. The City requested that the Arena Manager submit the monthly and quarterly financial reports timely in accordance with the PMSA, by June 30, 2015. AEG Facilities is required to submit monthly and quarterly financial reports per the Management Agreement. Closed 16.1 The City should request that the Arena Manager remit surcharge fees in accordance with the PMSA. In light of the settlement agreement between the parties and the amendment to the PMSA, this recommendation is no longer applicable. Same response as August 2015. Closed 17.1 The City should establish controls to ensure insurance certificates are provided by the Arena Manager and the Team Owner in accordance with the PMSA and retain documentation to verify compliance. The City will establish controls to ensure insurance certificates are provided by the Arena Manager and the Team Owner in accordance with the PMSA and retain documentation to verify compliance, by September 30, 2015. Same response as August 2015. Closed