2010-2011 Santa Clara County Civil Grand Jury Report Santa Clara County Fairgrounds Management

Conclusions 8

• CL1 Page 7
  The County established FMC as a nonprofit to operate the Fairgrounds; however, FMC has not been successful. FMC has operated at a loss and has required County bailout in all but one of the past sixteen years.
• CL2 Page 7
  In the last sixteen years, the FMC Board has not commissioned—nor has the County requested the Board to commission—an independent performance audit of FMC, even though FMC’s poor performance warrants this type of audit.
• CL3 Page 7
  The County does not hold the FMC Board accountable for its lack of oversight in ensuring FMC meets its contractual obligations, and the FMC Board does not demonstrate the business acumen necessary to effectively oversee FMC. There is a seat vacant (to be filled by the District 4 Supervisor) on the FMC Board.
• CL4 Page 8
  The County, supported by the Office of the County Executive, appears to have only a “land management” concern when FMC is required by contract to pay all expenses of the fair.
• CL5 Page 8
  FMC has not optimized its supplier contracts and has demonstrated inability to fully perform its own contract to effectively manage the Fairgrounds, costing the taxpayers in the form of County bailouts.
• CL6 Page 9
  The FMC Board does not adequately perform its oversight function of FMC.
• CL7 Page 9
  The County is undercharging communications tower renters, effectively diluting potential revenue to FMC.
• CL8 Page 6
  FMC is an example of how the County uses nonprofit organizations to perform functions of the unfunded or underfunded local government. Time will tell whether the continued use of a nonprofit organization is a symptom of decline in our elected officials willingness to work through the difficult economic challenges, or a creative management paradigm where the artificial barriers between the governmental and private sectors are blurred for the benefit of the taxpayers. Nonetheless, if the BOS specifically establishes a nonprofit such as FMC, it must be held responsible for ensuring it is working effectively. The BOS created the nonprofit FMC as a way to avoid the financial burdens of a County-run department, e.g., higher labor costs and more rigorous purchasing procedures. However, FMC does not employ sound business practices, such as requiring competitive bids for contracted work and relying heavily on the good graces of other County agencies to forgo repayment of services provided. Such poor management decisions have resulted in poor FMC performance and have cost the County. Throughout FMC’s existence, the Fairgrounds have consistently reported being overspent relative to its revenue. Such operation results in regular requests for County subsidy. In fact, 2009-2010 was the only year in the past sixteen years where FMC has shown a profit. However, except for a recent rental (auto auction tenant) the reason for this “turnaround” was not explained by interviewees and is hard to understand since no apparent change in operational strategy or goals has been developed or implemented. It is the Grand Jury’s position that if the Fairgrounds were operated using best management practices, then FMC should be able to operate with a break-even or positive cash flow. Instead, poorly operated by FMC, the Fairgrounds is a County asset that is not generating a return that is commensurate with its value. The nonprofit model is not working in this case. 6 Findings and Recommendations Finding 1 The County established FMC as a nonprofit to operate the Fairgrounds; however, FMC has not been successful. FMC has operated at a loss and has required County bailout in all but one of the past sixteen years. Recommendation 1 The County should reconsider whether the nonprofit model is the best way to operate the Fairgrounds. Finding 2 In the last sixteen years, the FMC Board has not commissioned—nor has the County requested the Board to commission—an independent performance audit of FMC, even though FMC’s poor performance warrants this type of audit. Recommendation 2A The County should request the FMC Board to commission an independent performance audit of FMC and the FMC Board. Recommendation 2B The FMC Board should require FMC to comply with its contractual requirement to produce an annual budget and business plan and financial audit. Finding 3 The County does not hold the FMC Board accountable for its lack of oversight in ensuring FMC meets its contractual obligations, and the FMC Board does not demonstrate the business acumen necessary to effectively oversee FMC. There is a seat vacant (to be filled by the District 4 Supervisor) on the FMC Board. Recommendation 3A District 4 Supervisor Yeager should recruit to fill the vacancy with an individual with strong business acumen. Recommendation 3B The FMC Board should hold the FMC Executive Director accountable for ensuring appropriate actions are taken to operate FMC as a well-run, break-even or profitable operation. 7 Finding 4 The County, supported by the Office of the County Executive, appears to have only a “land management” concern when FMC is required by contract to pay all expenses of the fair. Recommendation 4 The County should modify its contractual agreement with FMC stipulating that FMC be required to sustain a break-even or positive cash flow operation. Finding 5 FMC has not optimized its supplier contracts and has demonstrated inability to fully perform its own contract to effectively manage the Fairgrounds, costing the taxpayers in the form of County bailouts. Recommendation 5A The FMC Board should require FMC to prepare plans and implement changes geared toward increasing revenue to cover costs. Recommendation 5B The FMC Board should require FMC to restructure the concessionaire contract to a best practices model, such as paying FMC a percentage on sales, not profits, and should seek competitive bids for this and all other contracts as a means to increase revenue and profits. Recommendation 5C The FMC Board should require FMC to seek to increase short- and long-term use agreements to improve the positive cash operation. Recommendation 5D The FMC Board should require FMC to be in compliance with the contractual management agreement. Finding 6 FMC paid bonuses to employees in 2010. The reason for these bonuses has no apparent connection to any operational decisions that would ensure continued profitability. Rather, the bonuses looked like a distribution of an unexplained windfall. 8 Recommendation 6 The FMC Board should not permit bonuses to be paid unless FMC demonstrates the ability to consistently run a profitable operation, as measured against specific goals. To this end, the FMC Board should require FMC to develop and implement a business plan with measureable goals specifically tied to the operational success of the Fairgrounds. Finding 7 The FMC Board does not adequately perform its oversight function of FMC. Recommendation 7A The FMC Board should require that FMC provide a training program with orientation for current and future incoming Board members, defining roles, duties and fiduciary responsibilities. This would familiarize board members on how this nonprofit business can be managed. Recommendation 7B The FMC Board should review and approve all requests for proposals and bid documents that would precede issuing a contract to ensure that the best interests of the Fairgrounds are reflected in such requests. Finding 8 The County is undercharging communications tower renters, effectively diluting potential revenue to FMC. Recommendation 8 The County should increase communications tower rental fees in line with local rates for similar service. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 This report was PASSED and ADOPTED with a concurrence of at least 12 grand jurors on this 26th day of May, 2011. Helene I. Popenhager Foreperson Gerard Roney Foreperson pro tem Kathryn Janoff Secretary 76

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