Score: +12
(13/11/1)
Santa Clara County Grand Jury
• 2009-2010
• Agency Response
Response to:
City of San Jose
Should the City Council Continue to Subsidize Team San Jose's Increasing Loses?
⚠️ Translation Notice: This content has been automatically translated. The original English text is the official version. Translation may contain errors.
⚠️ Este contenido ha sido traducido automáticamente. El texto original en inglés es la versión oficial. La traducción puede contener errores.
Note: Missing finding numbers detected: F13, F14, F15, F16, F17, F18, F19, F20, F21, F22, F23, F24, F25, F26, F27, F28, F29, F30, F31, F32, F33, F34, F35, F36, F37, F38, F39, F40, F41, F42, F43, F44, F45, F46, F47, F48, F49, F50, F51, F52, F53, F54, F55, F56, F57, F58, F59, F60, F61, F62, F63, F64, F65, F66, F67, F68, F69, F70, F71, F72, F73, F74, F75, F76, F77, F78, F79, F80, F81, F82, F83, F84, F85, F86, F87, F88, F89, F90, F91, F92, F93, F94, F95, F96, F97, F98, F99, F100, F101, F102, F103, F104, F105, F106, F107, F108, F109, F110, F112, F113, F114, F115, F116, F117, F118, F119, F120, F121, F122, F123, F124, F125, F126, F127, F128, F129, F130, F131, F132, F133, F134, F135, F136, F137, F138, F139, F140, F141, F142, F143, F144, F145, F146, F147, F148, F149, F150, F151, F152, F153, F154, F155, F156, F157, F158, F159, F160, F161, F162, F163, F164, F165, F166, F167, F168, F169, F170, F171, F172, F173, F174, F175, F176, F177, F178, F179, F180, F181, F182, F183, F184, F185, F186, F187, 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F1016, F1017, F1018, F1019, F1020, F1021, F1022, F1023, F1024, F1025, F1026, F1027, F1028, F1029, F1030, F1031, F1032, F1033, F1034, F1035, F1036, F1037, F1038, F1039, F1040, F1041, F1042, F1043, F1044, F1045, F1046, F1047, F1048, F1049, F1050, F1051, F1052, F1053, F1054, F1055, F1056, F1057, F1058, F1059, F1060, F1061, F1062, F1063, F1064, F1065, F1066, F1067, F1068, F1069, F1070, F1071, F1072, F1073, F1074, F1075, F1076, F1077, F1078, F1079, F1080, F1081, F1082, F1083, F1084, F1085, F1086, F1087, F1088, F1089, F1090, F1091, F1092, F1093, F1094, F1095, F1096, F1097, F1098, F1099, F1100, F1101, F1102, F1103, F1104, F1105, F1106, F1107, F1108, F1109, F1110, F1111, F1112, F1113, F1114, F1115, F1116, F1117, F1118, F1119, F1120, F1121, F1122, F1123, F1124, F1125, F1126, F1127, F1128, F1129, F1130, F1131, F1132, F1133, F1134, F1135, F1136, F1137, F1138, F1139, F1140, F1141, F1142, F1143, F1144, F1145, F1146, F1147, F1148, F1149, F1150, F1151, F1152, F1153, F1154, F1155, F1156, F1157, F1158, 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F1874, F1875, F1876, F1877, F1878, F1879, F1880, F1881, F1882, F1883, F1884, F1885, F1886, F1887, F1888, F1889, F1890, F1891, F1892, F1893, F1894, F1895, F1896, F1897, F1898, F1899, F1900, F1901, F1902, F1903, F1904, F1905, F1906, F1907, F1908, F1909, F1910, F1911, F1912, F1913, F1914, F1915, F1916, F1917, F1918, F1919, F1920, F1921, F1922, F1923, F1924, F1925, F1926, F1927, F1928, F1929, F1930, F1931, F1932, F1933, F1934, F1935, F1936, F1937, F1938, F1939, F1940, F1941, F1942, F1943, F1944, F1945, F1946, F1947, F1948, F1949, F1950, F1951, F1952, F1953, F1954, F1955, F1956, F1957, F1958, F1959, F1960, F1961, F1962, F1963, F1964, F1965, F1966, F1967, F1968, F1969, F1970, F1971, F1972, F1973, F1974, F1975, F1976, F1977, F1978, F1979, F1980, F1981, F1982, F1983, F1984, F1985, F1986, F1987, F1988, F1989, F1990, F1991, F1992, F1993, F1994, F1995, F1996, F1997, F1998, F1999, F2000, F2001, F2002, F2003, F2004, F2005, F2006, F2007, F2008, F2009
Findings and Recommendations 18 findings
F1
The City has subsidized substantially higher than anticipated operating losses. City Response: The City agrees with this finding. The new Management Agreement with TSJ does provide for the City to track operating losses, but does not make them a specific performance measure. The City Auditor reveals that this last fiscal year Team San Jose exceeded their anticipated budgeted operating loss. It should be noted that during the period of the previous agreement with TSJ, the City's Convention and Cultural Affairs Fund (Fund 536) grew to a balance to over $9.8 million at its peak, which is partially attributed to TSJ's efforts. This fund accumulation has been used by the City and hotel community to proceed with the potential expansion and renovation of the convention center and avoid General Fund subsidies due to the economic downturn. However, the City is concerned that this fund balance, when coupled with the future expansion, the economic downturn, and increased TSJ spending levels, will be depleted in the near future and the General Fund may need to cover operational losses incurred by Team San Jose. Especially concerning is the possibility of continued low TOT projections, negative operating results from TSJ's agreement with Nederlander, and continued low building rental trends for the City's convention center operations under TSJ.
Related Recommendations (1)
R1
Accept the staff response to the Civil Grand Jury Report "Should the City Council Continue to Subsidize Team San Jose's Increasing Losses?" 2. Direct staff to forward results of City's caused audits of Team San Jose to the Santa Clara County Civil Grand Jury when they are completed. OUTCOME Compliance with the legal requirements to respond to the Santa Clara County Civil Grand Jury.
F2
A significant portion of TSJ' s operating losses is attributed to the costs of the salaries and benefits of Shared Employees and overhead paid to the City for the use of those employees in TSJ's operation. City Response: The City agrees partially with this finding. While labor costs for the Shared Employees represented a significant portion of 2009-2010 expenses in Fund 536, many other factors can also be attributed to operating losses, including worsening economic conditions and the unsuccessful concert series at the San Jose Civic Auditorium. The City and TSJ have taken steps to balance operational costs in 2010- 2011, including reducing the number of shared employees, which in turn reduces the amount of overhead paid to the City. The City Auditor's Report includes a
Related Recommendations (1)
R2
The City should reassign the Shared Employees currently working for TSJ and allow TSJ to replace those employees with private sector equivalents in order to reduce TSJ's operating loss.
F3
The incentive fee in the current contract is based on revenues and contains no incentive for TSJ to rein in costs which continue to escalate. TSJ continues to receive an incentive fee while the City pays for its mounting costs. City Response: The City agrees partially with this finding. Under IRS Revenue Procedure 97-13, a management fee may be based on revenues, but it cannot be based on HONORABLE MAYOR AND CITY COUNCIL November 24, 2010 Subject: 2009-2010 Civil Grand Jury Report: Team San Jose gross profits. Gross Operating Revenue is used as one of the measures for the incentive fee. The contract does include a Gross Operating Profit measure, which accounts for the relationship between revenues and expenditures, but this measure does not affect the incentive fee. Incentive and Performance Measures are monitored monthly by the City and TSJ. In addition, the City Council annually reviews these measures through the City's budget process and through the city's annual performance audit completed each year by the City Auditor. Pursuant to the City Auditor's report the City will work with TSJ to amend the 2010-2011 Performance and Incentive targets to align with the 2010- 2011 budget and increase coordination, and in future years will work with TSJ to ensure , that the budget for Fund 536 is balanced without use of fund balance to subsidize operational losses.
Related Recommendations (1)
R3
The current contract has a Termination for Convenience clause starting July 1, 2012. The City should make use of that clause to negotiate an incentive fee based on TSJ's operating profit.
F4
The budget for salaries and benefits paid to TSJ's employees (excluding Shared Employees) has increased by 65% in the first year of the new contract with additional funding for TSJ's executive team. City Response: The City disagrees partially with this finding. The following clarifications should be noted: First, the TSJ executive team was previously funded through the General Fund's portion of the undedicated TOT funds that TSJ receives annually and the General Fund transfer to the Convention and Visitors Bureau (CVB). Partial funding for these positions was shifted to Fund 536 in 2009-2010 which enabled a reduction of contributions from the General Fund to the CVB. Second, according to TSJ, in an effort to streamline processes and provide better customer service, TSJ brought food and beverage responsibilities "in-house." While this action triggered an increase in TSJ employees and personnel expenses, it also saw a decrease in contractual expenses. According to TSJ this shift has the potential to make San Jose more competitive and increase revenue for the convention center and theater food and beverage operations. According to the City Auditor's Report, TSJ profitably HONORABLE MAYOR AND CITY COUNCIL November 24, 2010 Subject: 2009-2010 Civil Grand Jury Report: Team San Jose operated catering operations at the convention center and food and beverage concessions at the cultural facilities. Lastly, according to TSJ (not verified by the City), in 2009-2010 the TSJ employees reduced their base salary by 5% and the value of benefits by 11%. This reduction was based on the downturn in economic conditions and was in addition to three waves of lay- offs of CVB and TSJ employees.
Related Recommendations (1)
R4
The City should insure that the increased employee compensation costs are justified by a higher level of Facilities usage and higher revenues.
F5
Although the City agreed in the TSJ contracts to transfer 25% of the estimated TOT revenues to Fund 536 to cover TSJ's operating losses, the City has consistently paid more than 25% of TOT revenues into Fund 536 to ensure that TSJ's losses are adequately covered, no matter how high they are. Overfunding Fund 536 has' the effect of masking TSJ's losses and covering up its underperformance. City Response: The City respectfully disagrees wholly with this finding. Fund 536 has not received a disproportionate percentage of TOT funds over the past five years. A thorough analysis is completed each year to ensure that the transfers are made in accordance with the San Jose Municipal Code (SJMC). The City currently assesses a 10% TOT, 40% of which is allocated to the City's General Fund, with the remainder credited to the City's TOT Fund and allocated according to the following formula after an initial base amount is set aside for allocation to the City's cultural grants and fine arts division and to convention and visitors bureau services: • 50% of the increase in receipts are allocated for convention and cultural facilities (currently a transfer to the City's Convention and Cultural Affairs Fund — 536); • 25% of the increase in receipts are allocated for the cultural grant program and fine arts divisions; and • 25% of the increase in receipts are allocated for a convention and visitors bureau (currently a transfer to the San Jose Convention and Visitor's Bureau). In accordance with the ordinance all allocations are subject to annual approval by the City Council as part of the annual budget process. HONORABLE MAYOR AND CITY COUNCIL November 24, 2010 Subject: 2009-2010 Civil Grand Jury Report: Team San Jose
Related Recommendations (1)
R5
The City should adhere to the terms of the contract and transfer only 25% or less of the TOT revenue to Fund 536.
F6
No exceptions were noted as a result of applying the procedures. TSJ Response 6: TS., will continue to follow procedure thereby ensuring we continue to record revenue properly between TSJ and CVB.
Related Recommendations (1)
R6
We recommend the City amend the Management Agreement with TSJ to: (a) renegotiate the annual fixed management fee; and (b) revise the incentive fee payment structure such that TSJ receives incentive payments only if it achieves a specified threshold. Rethink the Process for Developing Performance and Incentive Targets Under the prior management agreement performance targets were set far in advance—up to four years before TSJ would try to achieve them. Under the new agreement, each year TSJ proposes targets for City review and approval. Specifically, TSJ submits to the City its preferred budget and proposed performance and incentive targets, which according to TSJ, reflect trends in the convention industry. After TSJ submits its targets, City staff reviews them, and either approves the submissions or pursues revisions with TSJ. We believe performance and incentive measures are a useful tool for evaluating the management of the Facilities and holding TSJ accountable to agreed-upon expectations. We also believe this new annual schedule for developing targets is an improvement, as it allows for the City and TSJ to create more achievable and realistic goals. However, as they are currently set, TSJ's performance and incentive targets appear to be not as rigorous as they could be as witnessed by the fact that TSJ achieved a weighted performance of 102 percent and weighted incentive score of 106 percent earning an incentive fee of $400,000 out of a possible $500,000 in spite of generating the largest net loss in its six years managing the City's convention and cultural facilities. In hindsight, it appears that the weighting of the performance and incentive measures shown in Exhibit 2, contributed to this outcome. Specifically, gross operating profit and gross operating revenue are only 35 percent of performance and incentive scores, respectively. Clearly, the purpose of the convention center is to help stimulate the economy and further economic growth, and the weighting of the performance and incentive measures reflect that purpose. However, in our opinion, stronger consideration must be given to maintaining the fiscal health of the City's fund for convention and 20 We discuss TSJ's process for setting executive salaries and compensation in Finding Ill. 27 2009- I 0 Annual Performance Audit of Team San Jose cultural facilities. Furthermore, to avoid the appearance of conflict of interest, we believe the City should take a stronger lead in the annual development of TSJ's budget and performance and incentive targets. In our opinion, the City should enter into the annual process of developing TSJ's operating budget and performance targets with limits in mind that reflect the City's financial reality and resources, and should review TSJ's proposals against objective, external experts' assumptions to ensure that targets are reasonable. This could entail reviewing research from the Professional Convention Management Association (PCMA) which TSJ reportedly uses to develop its performance and incentive targets. For 2010-1 I, the City and TSJ agreed to performance and incentive measures that were less ambitious than the 2009-10 targets in part because of the view that that "the downturn in the economy will last through the entire fiscal year." However, PCMA's projections suggest an improved meeting and convention outlook for the next two years. The Management Agreement provides for a benchmarking study in year two of the Agreement — FY 2010-1 I. According to the Management Agreement During the second and fourth years of the Initial Term, in coordination with City, will cause to be conducted a report (the benchmark survey) comparing the convention center operations to at least five of the Designated Convention Centers based on a set of comparison metrics to be mutually agreed to by City and Operator. This study, in combination with other research and analysis, can provide the avenue for revised performance and incentive targets.
F7
We did not find any transactions where the same employee compensation was recorded in both the Center and CVB accounting records. We did note that all of the employees selected for testing allocated 100% of their time to either the Center or CVB even though these employees did not spend 100% of their time on either the Center or CVB. TSJ Response 7: Currently TSJ assigns employees to either the Center or CVB based on overall outcome of shared responsibilities. In 2009-2010 the split between the Center and CVB heavily weighted with CVB carrying higher expenses in relation to the responsibility split. TSJ will work with City Oversight and within the next 30 days develop an agreed upon allocation process for employees with shared responsibilities.
Related Recommendations (1)
R7
To better incorporate the City's financial reality into TSJ's performance and incentive targets, and to ensure targets, and to ensure targets are rigorous without penalizing TSJ for a poor economy, we recommend that the City revisit its weighting of performance and incentive measures and tighten the gross operating revenue and gross operating profit targets for management of the Convention and cultural facilities. TEAM SAN JOSE RESPONSE: Partially agree. TEAM SAN JOSE RESPONSE TO RECOMMENDATION #7: Per City Council direction, when the Team San Jose contract was renewed last year for an additional five years, the City Council revised the contract to include the creation of performance measures on an annual basis through the budget process. This was to incorporate external factors like national, regional economic conditions, City of San Jose budget decisions that directly impact the performance of the Convention Center and theater operations and other impacts into performance conversations. This direction provided the City and Team San Jose a way to tailor performance measures based on factors outside of Team San Jose's control. Overarching Constraints that tie to performance measures include the following: The proposed performance measures take into account the following factors: • Economic downturn and trends associated. • Less attendee attending all event types and less visitor spending based on economic downturn. • San Jose Convention Center has not been renovated or significant capital investment since 1989, which will continue to impact overall customer satisfaction and business opportunities. • Potential Expansion and other construction impacts will affect customer satisfaction levels. • With a reduction in TSJ workforce, lower levels of staffing resources are available to handle all event needs. The approved measures balance historical results that Team San Jose has demonstrated over the last five years, while taking into account economic challenges facing the tourism and hotel community. During the FY 2009-2010 budget process, Team San Jose and the City's Office of Economic Development deferred the completion of Team San Jose's performance measures until the budget was final. This process is outlined within our new contact with the City of San Jose to respond to the challenges of our previous agreement that required TSJ and the City to agree to a five year proforma that dictated performance measures. The new agreement requires TSJ to submit its annual targets for the following performance measures to be weighted as follows: Economic Impact Measures 40%, Gross Operating Profit 35%, Theatre Performance 15%, and Customer Service Survey Results 10%. What this demonstrates is the City Council's already strict direction to focus on fiscal results. While we agree with revisiting a fixed fee for services, we feel incentive targets and structure already incorporate the City's focus on fiscal results. 15 [Page Auorr FINDING: TSJ BUSINESS MODEL AND BOARD OF DIRECTORS AND CITY INVOLVEMENT AUDITOR Recommendation 8: Auditor recommends TSJ management and its Board of Directors improve transparency and governance process so that its Board of Directors and city oversight team members are made aware of and approve key business decisions. TEAM SAN JOSE RESPONSE: Agree. TEAM SAN JOSE RESPONSE TO AUDIT RECOMMENDATION #8 Board of Directors Transparency and Governance Since its establishment over six years ago, Team San Jose's corporate mission has been to support the local economy through a unique community-based partnership with local hotel, arts, labor and business industries. Twenty months ago, the corporation's two Board of Directors, merged to one-streamlined governance board. This Board since that time has implemented a number of new governance practices to support efficiencies, increase governance and engagement. Councilmember Sam Liccardo's memorandum asked the City Auditor to understand Board of Directors involvement around specific business decisions. The Auditor reviewed board minutes and interviewed a small percentage of the Board around a few specific business decisions. The Board has specific oversight responsibilities including approving an annual budget and approving a marketing plan. Per the bylaws and governance practices, operational decisions have been discussed and reviewed by our executive board. In addition, it is important to note that the strategy behind having a strong board of directors is they are people who have a direct stake and involvement in the visitor industry and understand the industry and business operations. The Board of Directors approves budget and operational business decisions as part of their annual budget approval and reviewed operational decisions including the food and beverage transition, Civic concerts, Broadway agreement, SJ Ti; and Genghis Khan opportunity. In April 2010, the Team San Jose Board of Directors implemented a number of actions to improve governance and strengthen communication and Board of Directors engagement. This includes oversight over changes to the budget of $250,000, multiple year contracts/agreements. It also includes additional communication requirements, establishing an Audit Committee, Compensation Committee, and other responsibilities for the Finance Oversight Committee. New revisions to the Team San Jose Board structure are being considered this November to further streamline, create efficiencies, increase communication and engagement. 16IPage City Involvement In addition to monthly meetings with the City Oversight Team, Team San Jose recently implemented the following actions to increase the City's involvement: • Revised financial reporting to track to budget and forecast • Written notification on any business changes • City finance staff invited to the Team San Jose Finance Committee meetings • City Finance Team and Team San Jose Finance Team monthly meetings • Monthly performance measure reporting to the Mayor and City Council to track financial and economic results • Variance to budget reports are provided in the monthly report package and reviewed monthly • Formal requests will be provided to City oversight with regard to budget adjustments • Per City Council request, Team San Jose has provided City Oversight access to all financial and accounting software systems AUDITOR Recommendation 9: We recommend the City amend the agreement with TSJ to clarify that TSJ must formally notify the City in advance of business decisions with potential revenue or budgetary impacts of $250,000 or more. TEAM SAN JOSE RESPONSE: Agree. TEAM SAN JOSE RESPONSE TO RECOMMENDATION #9: Team San Jose agrees to recommendation number 3. We currently have established financial thresholds required for Team San Jose Finance and Board approvals. Notifying the City in advance of business decisions with potential revenue or budgetary impacts of $250,000 is in line with our Board governance practice. This recommendation is already implemented as Team San Jose provides notification to the City of San Jose Director of Finance on business decisions that impact budget. AUDITOR Recommendation 10: To improve ongoing communications, we recommend that the City and TSJ work together to determine the appropriate composition of the staff teams to be involved in monthly financial oversight meetings and when potential issues should be elevated to a broader consideration. TEAM SAN JOSE RESPONSE: Agree. 171Page TEAM SAN JOSE RESPONSE TO RECOMMENDATION #10: Team San Jose agrees to this recommendation and has already made a number of changes to the oversight meetings, including additional reporting and process around communicating operational issues. AUDITOR Recommendation 11: we recommend TS1 present quarterly performance reports to the Public Safety, Finance and Strategic Support Committee. TEAM SAN JOSE RESPONSE: Agree. TEAM SAN JOSE RESPONSE TO RECOMMENDATION #11: Team San Jose agrees to this recommendation and look forward to presenting our performance results in the year to the Public Safety, Finance and Strategic Support Committee. Starting in September, Team San Jose began reporting monthly results to the Mayor and City Council. Team San Jose will continue to refine this report and include quarterly information to the council committee.
F8
The final budget was approved by the Finance Committee on June 25, 2009 and the Board of Directors on June 26, 2009. TS/ Response 8: TSJ will continue to follow the bi-laws related to the budget approval process. However, note that the budget approval process time-line was delayed due to challenges related to the budget approval process with the City of San Jose.
Related Recommendations (1)
R8
We recommend Team San Jose management and its Board improve transparency and governance processes so that its Board members are made aware of and formally approve all key business decisions. Improvements Are Needed to Ensure the City Is Notified in Advance of Key Business Decisions City Oversight Team The City has a team of staff that meets monthly with TSJ executives to discuss TSJ's finances and operational results. In 2009-2010 the City's Chief Development Officer, with assistance from the Office of Economic Development, served as the administrator of the contract between the City and TSJ. In addition, the Finance Department and City Manager's Budget Office provided assistance on budget/financial monitoring and budget development Two meetings occur monthly between City and TSJ to discuss TSJ financial and operational results. The first meeting involves TSJ financial staff and City finance staff to review financial reports and budgetary information, and discuss any discrepancies. The second meeting involves TSJ's CEO and the OED director. Since the issuance of TSJ's default notice, the Finance Director has now been participating in these monthly oversight meetings. Both parties have reported that it is important to have the right people in the room. Duty to Keep the City Informed The Management Agreement requires that Operator shall keep City's Director of Finance and Contract Administrator informed and advised of all material financial and other matters concerning the Facilities and the operation thereof, and give due consideration to suggestions which City's designees or consultants may offer with respect thereto from time to time. 34
F9
We reconciled the budget amounts approved by the Finance Committee and the Board of Directors to the monthly budget to actual report generated in MAS 90. The Team San Jose approved annual budget under reported budgeted revenues by $60,000 and under reported budgeted expenses by $1,087,695 compared to the City Council approved budget. TSJ Response 9: Within the next 30 days TSJ will add to the budget procedures the reconciliation process between (MAS90) and the approved annual budget. Any changes which are approved over and above the original annual budget will be reflected in (MAS90) and documentation will be maintained from (MAS90) of the original budget as well as the adjusted budget.
Related Recommendations (1)
R9
We recommend the City amend the agreement with Team San Jose to clarify that Team San Jose must formally notify the City in advance of business decisions with potential revenue or budgetary impacts of $250,000 or more.
F10
We indentified 3 line items each in November 2009, March 2010, April 2010 and May 2010 where actual amounts were trending higher than the thresholds stated above within a range from $115,724 to $564,414. We were unable to verify that TSJ submitted budget amendments to the City for additional contributions related to these line items for the four months tested. TSJ Response 10: In the prior year, variance analysis and budget adjustments were done between the prior Chief Financial Officer and City Oversight in a very informal manner. Although monthly meetings to review variances to budget were conducted between the prior Chief Financial Officer and City Oversight, little to no written documentation was completed. To date, the current Chief Financial Officer has implemented a new Variance to Budget Report that includes a clear comparison of expenditures to the budgeted appropriation. This report is now utilized as part of the monthly review with the City. In addition, going forward budget appropriation changes based on annual requests will be accompanied by clear communication between the City Budget office and TSJ.
Related Recommendations (1)
R10
To improve on-going communications, we recommend that the City and Team San Jose work together to formalize the monthly review process and determine the appropriate composition of the staff teams to be involved in monthly financial oversight meetings, and when potential issues should be elevated for broader consideration. Improved Communications Between TSJ and the City Council In February 2010, the City Council requested that TSJ present to the Public Safety, Finance and Strategic Support Committee quarterly performance reports so that TSJ financial and performance information can be received by the Council in a timelier manner. To date those presentations have not been scheduled per City direction.
F11
On Balance, Team San Jose Met Its Performance and Incentive Targets, but Some of Those Targets Should be More Rigorous The 2009 Management Agreement and addendum require Team San Jose to report annual performance measures and to adhere to agreed-upon targets for its incentive measures. These incentive targets are the basis for the City's payments to TSJ. The City's annual incentive payment grows as TSJ approaches and exceeds targets. In FY 2009-10, TSJ drew nearly I million people to events at the Facilities, resulting in more than 183,000 hotel night bookings. Overall, it achieved a weighted performance of more than 100 percent, earning an incentive fee of $400,000 out of a possible $500,000 (the largest it has ever earned), in spite of generating the largest net loss in its six years managing the City's convention and cultural facilities.B In our opinion, tougher incentive and performance targets should be considered — ones that do not penalize TSJ for a poor economy, but incentivize improved performance. Team San Jose Met Most Performance and Incentive Targets Based on our review of Team San Jose's attendance reports and other records, and of audited financial statements for the Convention and Cultural Affairs Fund, we found that Team San Jose: • Met targets for five of eight performance measures, resulting in a total weighted performance score of 101.51 percent and • Met targets for six of seven incentive measures, resulting in a total weighted incentive fee score of 106.49 percent Generally, Team San Jose was most successful in meeting its targets for the Gross Operating Revenue, Theater, and Customer Satisfaction metrics; it was less successful in meeting targets related to Gross Operating Profit, and Economic Impact Some of the effects of the economic downturn may have contributed to Team San Jose falling short on targets. Exhibit 10 details FY 2009-10 measures, targets and results. The exhibit also shows the weighted scores for incentive payment based on the weights given to each incentive measure as described in Exhibit 2. Appendix B describes each of the individual measures and explains how the scores are calculated. FY 2009-10 was the first under a new Management Agreement that included an incentive fee based on a sliding scale. The prior Management Agreement had a fixed management fee of $150,000 that, in years four and five of the agreement, were contingent on TSJ's accomplishment of three of four performance measures. 21 0 0 22 2ALADthaladamailacAudisalinSaals Exhibit 10: Scores for Team San Jose's FY 2009-10 Performance and Incentive Measures Goal Performance Incentive Measures (cid:9) Target Result Met? Weight , Score Weight (cid:9) Score Economic Impact Hotel Nights 180,000 183,451 Yes 1 10.00% 10.19% 15.00% 15.29% Event Attendance 953,250 946,779 No 10.00% 9.93% 10.00% 9.93% Estimated Impact $88,750,000 $88,796,347 Yes 10.00% 10.01% 15.00% 15.01% Return on Investment 2.77 2.44 No 10.00% 8.82% n/a n/a Gross Operating Profit/Revenue14 Gross Operating Revenue's (cid:9) $16,500,000 $18,039,449 Yes n/a n/a 35.00% 1 38.27% Gross Operating Profit" (cid:9) ($6,800,000)1 ($6,884,092) No 35.00% 34.57% n/a (cid:9) n/a Theater Performance Performance Days (cid:9) 275 345 Yes 11.00% j (cid:9) 13.80% 11.00% 13.80% Occupied Days (cid:9) 625 655 Yes i 4.00% 11- 4.19% 4.00% (cid:9) 4.19% Customer Satisfaction Satisfaction Rate (cid:9) 95% 95% Yes (cid:9) ; 10.00% 10.00% 10.00% (cid:9) 10.00% Total Weighted Score 101.51% 106.49% Source: Auditor analysis of addendum to Management Agreement, audited financial statements, attendance reports, and other Team San Jose records Note: Weighted scores are the product of the measure weights listed in Exhibit 2 in the Background, and the percentage of actual performance with respect to the goal. For instance, the Hotel Nights measure is given a weighted score of 15.29 percent because hotel nights were 102.92 percent of target and it is assigned a weight of 15 percent. 101.92 percent * 15 percent = 15.29 percent Exhibit I I below shows total incentive targets TSJ is to achieve for the City to make specific annual incentive payments. Exhibit I I: Incentive Measure Payment Schedule Weighted Incentive Fee Score Incentive Fee Less than 80% $150,000 At least 80% but less than 90% $200,000 At least 90% but less than 100% $300,000 At least 100% but less than 110% $400,000 110% or Greater $500,000 ource: Addendum to Management Agreement between TSJ and City 14 The gross revenue target was set with the understanding that the introduction of food and beverage services would increase TSJ's gross revenues. IS For the purpose of measuring performance, the gross revenue total we present includes all revenues generated by TSJ's operation of the Facilities. The financial audit of the Convention and Cultural Affairs Fund deducts the City's free use and power charges from gross revenue; however, for our purpose, we include those amounts. Is For the purpose of measuring performance, the loss number we present does not include all costs that the City incurs to operate the Facilities. Specifically, we do not include TSJ's fixed management fee, depreciation expense, City contract oversight costs, fire insurance, City funded repairs and maintenance, or the City's free use of the Convention Center. Altogether, these costs totaled $1.6 million in FY 2009-10. Finding II Per the agreement between TSJ and the City, the Total Weighted Incentive Fee Score of 106 percent equates to a $400,000 incentive payment from the City.'? This incentive payment is in addition to the management fee of $663,321 the City pays TSJ for part of the executive team's compensation. Gross Operating Revenue Requires Clarification Team San Jose and the City use performance and incentive measures to provide a quantifiable way of evaluating TSJ's management of the convention and cultural facilities. For example, Gross Operating Revenue is defined as revenue from operation of the Facilities excluding revenue billed by TSJ on behalf of other vendors. Similarly, the calculation of Return on Investment is based on operating revenue and expense of both the Facilities and CVB. For purposes of calculating its Gross Operating Revenue, TSJ reported about $148,000 in convention subsidies from the City's Hotel Business Improvement District as part of the Facilities' gross revenues of $18 million. These funds, which are collected from hotels for the purpose of increasing hotel occupancy rates, are administered by a non-profit corporation, San Jose Hotels, Inc., that is essentially staffed by TSJ. In addition to the HBID revenues, the $18 million in gross revenues includes, according to TSJ, about $70,000 expensed by CVB to sponsor events. Although we do not believe that public funding of subsidies and sponsorships from these related-party organizations should be included in the calculation of performance measures such as gross operating revenue, the Management Agreement is not clear in this regard. As a result, we have not deducted these amounts from the gross revenues in Exhibit 10. It should be noted that such a deduction would not have impacted either the attainment of the incentive targets or TSJ's incentive fee.18 However, recognizing that any changes to what can or cannot be included in gross revenues will also have an effect on the calculation of gross operating profit and return on investment, and could require changes to how TSJ and the City set performance and incentive targets, we recommend the Management Agreement be clarified.
Related Recommendations (1)
R11
We recommend Team San Jose present quarterly performance reports to the Public Safety, Finance, and Strategic Support Committee. 35 2009- I 0 Annual Pedwalapme Audit of Team San Jose This page was intentionally left blank 36
F12
Revenues earned in May 2010 were consolidated with June 2010 revenues and recorded as one journal entry. Revenues in the consolidated journal entry were $107 higher than the supporting documentation based on actual ticket counts. As the journal entry did not show a breakdown of May 2010 and June 2010 revenues, we were unable to determine whether the overstatement applies to May or June, or whether the overstatement should be allocated to both months. TSJ Response 12. The Chief Financial Officer will review the policies and procedures with the finance team related to required documentation for the Technology Museum ticket transactions within the next 30 days to ensure that in the future postings have proper supporting documentation. The Chief Financial Officer will also review with the finance team the procedures related to reporting of revenue within the correct month. L:\TSJ\Audit Agreed Upon Procedures (CIty)\Team San Jose AUP 2010 audit responses_ INALdocx
Related Recommendations (1)
R12
We recommend that the City amend the Management Agreement with Team San Jose to require that no later than the close of the third quarter of the fiscal year, Team San Jose conduct a detailed analysis of TSJ's actual spending to date and projected spending for the last three months, compared to the budget appropriation (as adjusted during the course of the fiscal year), and present any needed adjustments for City consideration.
F111
T51 has established a financial threshold of $250,000 above which the item must be presented to the board of directors for the board's consideration and approval.
No recommendations for this finding
F2010
While TSJ has written procedures in place to document the process for recording accounts payable, TSJ does not have written procedures for the financial statement line items identified above. In addition, 2 out of the 60 expense transactions that we tested were not recorded in the correct fiscal year. The misallocation totaled $1,462. 35005 Street 2121 N. CaBdomia Olvd. 505 14111 Steel 515 5. Figueroa Steer 2029 Century Park Fest 1201 Dove Street 225 Broadway Bine 300 Suite 750 5th Floor Suite 325 Suite 500 Suite 680 Suite 1750 Sacramento Walnut Oak Oakland Los Angeles Los Angeles NeeportBeed. San Diego CA 95816 CA 95496 CA 94612 CA 90071 CA 90067 CA 92660 CA921111 2. We tested the transactions selected in procedure #1 to determine that the expense was an appropriate Center operating expense and not a misallocated TSJ operating expense. Finding: No exceptions were noted as a result of applying the procedures. 3. We judgmentally selected and tested fifteen (15) TSJ Executive Management Team incentive and payroll payments from January 1 through June 30, 2010 using a listing of Executive Management Team names and payroll period end dates. We evaluated whether the incentive fees paid were consistent with the employees' evaluations based on personal performance objectives and whether any pay increases were authorized. Finding: We tested for incentive fees and pay increases during the period from January 1 through June 30, 2010 and noted no pay increases in the sample selected. The seven members of the TSJ Executive Management Team received incentive fee payments totaling $111,883 on February 15, 2010 for achieving performance objectives for the period from July 1 through December 31, 2009. 4. We obtained the PACE Revenue Report that lists the events that occurred during fiscal year ended June 30, 2010 and tested the allocation of the revenues generated from the events that were $75,000 or greater by tracing the events to the amounts recorded in the general ledger. Finding: Out of the 43 transactions that we tested that exceeded the $75,000 or greater threshold, no exceptions were noted as a result of applying the procedures. We did note that there was a minor rounding error on one transaction due to a transmission error caused by the credit card processing company during the processing of the transaction. 5. We requested the TSJ policy on cash receipts and deposits and tested advance deposits associated with the events identified in procedure #4 for consistency with the contract and timeliness of advance receipt. Finding: TSJ does not have written procedures for processing cash receipts and deposits. No exceptions were noted as a result of applying the procedures to the deposits selected for testing. 6. We randomly selected and tested twenty (20) revenue transactions from the general ledgers of TSJ and the San Jose Convention and Visitors Bureau (CVB). We verified that these revenue transactions are properly classified as TSJ and CVB revenues by reviewing supporting documentation such as contracts and invoices. Finding: No exceptions were noted as a result of applying the procedures. 7. We randomly selected and tested twenty (20) compensation transactions from July 1, 2009 through June 30, 2010 using a listing of employee names and payroll period end dates. We verified that the transactions are not recorded in both the Center and CVB accounting records Finding: We did not find any transactions where the same employee compensation was recorded in both the Center and CVB accounting records. We did note that all of the employees selected for testing allocated 100% of their time to either the Center or CVB even though these employees did not spend 100% of their time on either the Center or CVB. 2 8. We ascertained that the final budget was approved by both the Finance Committee and the Board of Directors. Finding: The final budget was approved by the Finance Committee on June 25, 2009 and the Board of Directors on June 26, 2009. 9. We reconciled the approved annual budget to the budget amounts recorded in TSJ's general ledger (MAS90) and the City Council approved budget. Finding: We reconciled the budget amounts approved by the Finance Committee and the Board of Directors to the monthly budget to actual report generated in MAS 90. The Team San Jose approved annual budget under reported budgeted revenues by $60,000 and under reported budgeted expenses by $1,087,695 compared to the City Council approved budget. 10.We recomputed the variance analysis of budget to actual line items for the months of November 2009, March 2010, April 2010 and May 2010 prepared by the Chief Financial Officer. We attempted to verify that TSJ submitted proposed budget amendments to the City for actual expenses that were trending higher than 10% and $25,000 compared to the City Council approved budget. Finding: We identified 3 line items each in November 2009, March 2010, April 2010, and May 2010 where actual amounts were trending higher than the thresholds stated above within a range from $115,724 to $564,414. We were unable to verify that TSJ submitted budget amendments to the City for additional contributions related to these line items for the four months tested. 11.We selected four (4) month-end journal entries posted in the general ledger during the year ended June 30, 2010 to record ticketing revenues from the Paciolan system and reconciled the total ticketing revenues posted in the general ledger to the Center's supporting documentation (i.e., Paciolan system reports, Ticket Master reports and Civic Concert ticket reports) to determine that the revenues recorded by TSJ are supported by the detailed subsidiary records. Finding: We identified 2 facility service fees in March 2010 totaling $5,770 that did not have any supporting documentation for the revenues recorded. 12.We selected four (4) month-end journal entries posted in the general ledger during the year ended June 30, 2010 to record revenues earned from events held at the Technology Museum and tracked using the Tessitura system. We obtained supporting documentation from the Tessitura system to determine that the revenues for the months selected reconciled to the amounts reported in the general ledger. Finding: Revenues earned in May 2010 were consolidated with June 2010 revenues and recorded as one journal entry. Revenues in the consolidated journal entry were $107 higher than the supportinedocumentation based on actual ticket counts. As the journal entry did not show a breakdown of May 2010 and June 2010 revenues, we were unable to determine whether the overstatement applies to May or June, or whether the overstatement should be allocated to both months. We were not engaged to, and did not, conduct an audit, the objective of which would be the expression of an opinion on the expanded scope of testing of operating revenues and expenses of the Center as of and for the year ended June 30, 2010. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the specified parties and is not intended to be and should not be used by anyone other than those specified parties. C (cid:9) QJ La ..)AL.AL.stit- Certified Public Accountants Walnut Creek, California November 23, 2010 4 z COUNCIL AGENDA: 12/07/10 3.2 ITEM: (c) rA4 CITY OF SAN JOSE (cid:9) Memorandum CAPITAL OF SILICON VALLEY TO:. HONORABLE MAYOR (cid:9) FROM: Scott P. Johnson AND CITY COUNCIL SUBJECT: SEE BELOW (cid:9) DATE: December 3, 2010 Approved Date /444 COUNCIL DISTRICT: City-Wide SNI AREA: NA SUBJECT: TEAM SAN JOSE MANAGEMENT RESPONSE TO THE INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED-UPON PROCEDURES FOR THE MANAGEMENT OF THE SAN JOSE CONVENTION CENTER AND CULTURAL FACILITIES FOR THE FISCAL YEAR ENDED JUNE 30, 2010 Attached is a copy of Team San Jose's Management Responses related to the Independent Account's Report on Applying Agreed-Upon Procedures for the fiscal year ended June 30, 2010 to be heard by the City Council on December 7, 2010. For questions please contact Scott P. Johnson, Director of Finance, at (408) 535-7000. Team San Jose's MANAGEMENT RESPONSES Related to the Independent Accountant's Report on Applying Agreed-Upon Procedures For the Fiscal Year Ended June 30, 2010 Finding 1: While TSJ has written procedures in place to document the process for recording accounts payable, TSJ does not have written procedures for the financial statement line items identified above. In Addition, 2 out of the 60 expense transactions that we tested were not recorded in the correct fiscal year. The misallocation totaled $1,462. TS) Response 1: TSJ recorded $18.5m in expenses for FY 2010. The accounting department will continue to take steps towards ensuring all expenses are recorded in the correct fiscal year. Additionally, TSJ provided accounts payable procedures that do not explain the treatment for the line items specified above, but have a document called the "Team San Jose Chart of Accounts Dictionary" (the Dictionary) that clearly defines the proper classification of expenses. Test 2: We tested the transactions selected in procedure #1 to determine that the expense was an appropriate Center operating expense and not a misallocated TSJ operating expense. Finding 2: No exceptions were noted as a result of applying the procedures. TS' Response 2: To ensure the accuracy of recording properly between TSJ and the Center, TSJ will revise the current procedures to include a clear delineation between expenses related to TSJ and the Center. Finding 3: We tested for incentive fees and pay increases during the period from January 1 through June 30, 2010 and noted no pay increases in the sample selected. The seven members of the TSJ Executive Management Team received Incentive fee payments totaling $111,883 on February 15, 2010 for achieving performance objectives for the period from July 1 through December 31, 2009. TSJ Response 3: TSJ will continue to have tight controls related to incentive pay ensuring all future incentive pays are based on achieving performance objectives. TSJ will also continue to ensure that any future pay increases follow the current established guidelines. TSJ does not have established plans for increases at this time. Finding 4: Out of the 43 transactions that we tested that exceeded the $75,000 or greater threshold, no exceptions were noted as a result of applying the procedures. We did note that there was a minor rounding error on one transaction due to a transmission error caused by the credit card processing company during the processing of the transaction. TSJ Response 4: TSJ will continue to record revenues accurately. Finding 5: TSJ does not have written procedures for processing cash receipts and deposits. No exceptions were noted as a result of applying the procedures to the deposits selected for testing. TSJ Response 5: TSJ will within the next 30 days formally document its current procedures for the cash receipts and deposits and submit them to Team San Jose's Finance Oversight Committee for approval and City Oversight Team for review and comments. Test 6: We randomly selected and tested twenty (20) revenue transactions from the general ledgers of TSJ and the San Jose Convention and Visitors Bureau (CVB). We verified that these revenue transactions are properly classified as TSJ and CVB revenues by reviewing supporting documentation such as contracts and invoices. Finding 6: No exceptions were noted as a result of applying the procedures. TSJ Response 6: TS., will continue to follow procedure thereby ensuring we continue to record revenue properly between TSJ and CVB. Finding 7: We did not find any transactions where the same employee compensation was recorded in both the Center and CVB accounting records. We did note that all of the employees selected for testing allocated 100% of their time to either the Center or CVB even though these employees did not spend 100% of their time on either the Center or CVB. TSJ Response 7: Currently TSJ assigns employees to either the Center or CVB based on overall outcome of shared responsibilities. In 2009-2010 the split between the Center and CVB heavily weighted with CVB carrying higher expenses in relation to the responsibility split. TSJ will work with City Oversight and within the next 30 days develop an agreed upon allocation process for employees with shared responsibilities. Finding 8: The final budget was approved by the Finance Committee on June 25, 2009 and the Board of Directors on June 26, 2009. TS/ Response 8: TSJ will continue to follow the bi-laws related to the budget approval process. However, note that the budget approval process time-line was delayed due to challenges related to the budget approval process with the City of San Jose. Finding 9: We reconciled the budget amounts approved by the Finance Committee and the Board of Directors to the monthly budget to actual report generated in MAS 90. The Team San Jose approved annual budget under reported budgeted revenues by $60,000 and under reported budgeted expenses by $1,087,695 compared to the City Council approved budget. TSJ Response 9: Within the next 30 days TSJ will add to the budget procedures the reconciliation process between (MAS90) and the approved annual budget. Any changes which are approved over and above the original annual budget will be reflected in (MAS90) and documentation will be maintained from (MAS90) of the original budget as well as the adjusted budget. Finding 10: We indentified 3 line items each in November 2009, March 2010, April 2010 and May 2010 where actual amounts were trending higher than the thresholds stated above within a range from $115,724 to $564,414. We were unable to verify that TSJ submitted budget amendments to the City for additional contributions related to these line items for the four months tested. TSJ Response 10: In the prior year, variance analysis and budget adjustments were done between the prior Chief Financial Officer and City Oversight in a very informal manner. Although monthly meetings to review variances to budget were conducted between the prior Chief Financial Officer and City Oversight, little to no written documentation was completed. To date, the current Chief Financial Officer has implemented a new Variance to Budget Report that includes a clear comparison of expenditures to the budgeted appropriation. This report is now utilized as part of the monthly review with the City. In addition, going forward budget appropriation changes based on annual requests will be accompanied by clear communication between the City Budget office and TSJ. Finding 11: We identified 2 facility service fees in March 2010 totaling $5,770 that did not have any supporting documentation for the revenues recorded. TSJ Response 11: Realizing the two transactions totaling $5,770 is but a fraction of the year's $1,485,610 ticketing revenue, the Chief Financial Officer will review the policies and procedures with the finance team related to required documentation for the recording of facility fees. Finding 12: Revenues earned in May 2010 were consolidated with June 2010 revenues and recorded as one journal entry. Revenues in the consolidated journal entry were $107 higher than the supporting documentation based on actual ticket counts. As the journal entry did not show a breakdown of May 2010 and June 2010 revenues, we were unable to determine whether the overstatement applies to May or June, or whether the overstatement should be allocated to both months. TSJ Response 12. The Chief Financial Officer will review the policies and procedures with the finance team related to required documentation for the Technology Museum ticket transactions within the next 30 days to ensure that in the future postings have proper supporting documentation. The Chief Financial Officer will also review with the finance team the procedures related to reporting of revenue within the correct month. L:\TSJ\Audit Agreed Upon Procedures (CIty)\Team San Jose AUP 2010 audit responses_ INALdocx
No recommendations for this finding
FI
In Spite of Cost Cutting, Team San Jose's Operations of City Facilities Lost $6.9 Million in Fiscal Year 2009-10 (cid:9) 7 Team San Jose Generated Operating Losses of $6.9 Million in FY 2009-10 (cid:9) 7 TSJ Lost $7.1 Million on Convention Center Events (cid:9) 9 San Jose Civic Concerts Lost $1.0 Million; Overall Losses on the Operation of Cultural Facilities Totaled $1.9 Million (cid:9) 12 Net Revenue of $2.1 Million from Food and Beverage and Event Production (cid:9) 15 Gross Operating Revenues Have Increased, but so Have Net Losses (cid:9) 16 Further Depletion of Fund Balance Could Jeopardize the City's Plans to Subsidize Operations During the Upcoming Convention Center Expansion (cid:9) 17
No recommendations for this finding
FII
On Balance, Team San Jose Met Its Performance and Incentive Targets, but Some of Those Targets Should be More Rigorous (cid:9) 21 Team San Jose Met Most Performance and Incentive Targets (cid:9) 21 Gross Operating Revenue Requires Clarification (cid:9) 23 The City Should Refine Its Approach to TSJ Performance and Incentive Targets (cid:9) 24
No recommendations for this finding
FIII
Changes to the Team San Jose Business Model Were Not Always Fully Vetted Through the Board of Directors or the City (cid:9) 29 Team San Jose Is Improving Its Governance Structure (cid:9) 29 Business Decisions Were Not Always Fully Vetted Through the Board (cid:9) 30 Improvements Are Needed to Ensure the City Is Notified in Advance of Key Business Decisions (cid:9) 34 Improved Communications Between TSJ and the City Council (cid:9) 35
No recommendations for this finding
FIV
Team San Jose Overspent Its Budget in FY 2009-10 (cid:9) 37 Timeline of Events Leading to Team San Jose's Overexpenditure and the Notice of Default (cid:9) 37 Efforts Are Underway to Improve Communication and Reporting (cid:9) 41 Conclusion (cid:9) 43 Administration's Response (cid:9) yellow pages Team San Jose's Response (cid:9) yellow pages Appendix A Explanation of Key Variances in Revenue and Expense Categories (cid:9) A- I Appendix B Methodology for Calculating the Performance and Incentive Measures (cid:9) B- 1 Table of Exhibits Exhibit I: Flow of Funds to and from the Convention and Cultural Affairs Fund (cid:9) 3 Exhibit 2: Performance and Incentive Measures, with Relative Weights (cid:9) 4 Exhibit 3: Operating Profit and Loss for the Facilities from 2004-05 to 2009-10 as Calculated in Accordance with the Management Agreement (cid:9) 8 Exhibit 4: Transient Occupancy Tax Fund Revenue Compared to the Facilities' Net Loss (cid:9) 10 Exhibit 5: Event Attendance at Convention and Cultural Facilities from 2004-05 to 2009-10 (cid:9) 11 Exhibit 6: Profit and Loss for the Operation of the City's Cultural Facilities (Millions) (cid:9) 15 Exhibit 7: Food and Beverage Profit in 2008-09 and 2009-10 (cid:9) 16 Exhibit 8: Revenues and Net Losses from the Operation of the Facilities from 2001-02 to 2009-10 (cid:9) 17 Exhibit 9: Budgeted Sources and Uses for the Fund 536 (Convention and Cultural Affairs Fund) from FY 2005-06 through 2009-10 (cid:9) 18 Exhibit 10: Scores for Team San Jose's FY 2009-10 Performance and Incentive Measures (cid:9) 22 Exhibit I I: Incentive Measure Payment Schedule (cid:9) 22 Exhibit 12: Gross Operating Profit Based on TSJ's FY 2009-10 and 2010-11 Budget (cid:9) 24 Exhibit 13: Timeline of Key Events Leading to TSJ's Overspending Its 2009-10 Budget (cid:9) 38 Introduction In accordance with the City Auditor's fiscal year (FY) 2010-1 I Audit Work Plan, we have completed an audit of Team San Jose, Inc.'s (TSJ) management of the City's convention and cultural facilities to determine whether TSJ met the performance measures specified in the Agreement for the Management of the San Jose Convention Center and Cultural Facilities between the City of San Jose and Team San Jose, Inc. (Management Agreement) for FY 2009-10. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions. We limited our work to those areas specified in the Objective, Scope, and Methodology section of this audit report. The City Auditor's Office would like to thank the management and staff of Team San Jose, Inc., the Finance Department the Office of Economic Development the City Attorney's Office, and the City Manager's Budget Office for their time, information, insight, and cooperation during the audit process. Background The City of San Jose has a host of Convention and Cultural Facilities, including three convention facilities and four cultural facilities (Facilities) that are operated on the City's behalf by Team San Jose, Inc. (TSJ), a private, non-profit corporation. The convention facilities operated by TSJ are: San Jose McEnery Convention Center, South Hall, and Parkside Hall. The cultural facilities are Center for the Performing Arts, Montgomery Theater, San Jose Civic, and California Theater. Team San Jose is a unique partnership of TSJ staff, the San Jose Convention & Visitors Bureau (CVB), City employees, and other contracted employees. It was created in December 2003 specifically to manage and operate the Facilities. Its board includes representatives from local hotels, arts, business, and labor. 1 2009-10 Annual Performance Audit of Team San Jose The 2004 and 2009 Management Agreements The City began contracting with TSJ on June 22, 2004, when the City Council approved a Management Agreement with TSJ to manage and operate the Facilities for a five-year period, beginning July I, 2004 and ending June 30, 2009. That agreement included performance measures that were audited annually by the City Auditor's Office) In January 2009, the City Council approved a new five-year Management Agreement beginning July I, 2009 and ending June 30, 2014, with two additional three-year options. In February 2009, TSJ merged with the CVB, which also receives City funding through the Transient Occupancy Tax (TOT) Fund and General Fund to promote San Jose as a destination for meetings, conventions, tradeshows, and pleasure travel. Currently, CVB staff provide sales and marketing support for Team San Jose's operation of the Facilities. TSJ's Operation of the Facilities Relies on Contributions of TOT and Other Revenues The Facilities, under the management of TSJ, generate revenues which help fund the operations. However, to continue its operations, TSJ relies on operating contributions from the TOT Fund (currently, approximately 30 percent of TOT collections are transferred to Fund 536 and approximately 30 percent are split between CVB and the Office of Cultural Affairs—the remaining 40 percent of TOT collections go to the City's General Fund), the General Purpose Parking Fund (net revenue from Convention Center parking facilities), and the General Fund. Exhibit I shows the flow of these funds. I These previous reports are online at latsp-//www.saniosera.goviakisod. Introduction Exhibit I: Flow of Funds to and from the Convention and Cultural Affairs Fund? City revenue collection City fund allocation Team San Jose operations Convention & Visitors CVB expense Bureau (CVB) Office of Cultural Affairs (as budgeted) 30% C&CA operating General Fund Convention and expenses (as needed) (cid:9) 0. Cultural Affairs Fund General Purpose (Fund 536) C&CA operating Parking Fund revenues A Hotel Business Improvement Other uses such as District . Sinking Fund for capital San Jose Hotels, Inc. needs t Source: Interviews with Finance Department and TSJ staff, and review of San Jose Municipal Code and the Civil Grand Jury Report issued May 2010 Related Parties Also Contribute Revenue to TSJ Exhibit I also shows that Team San Jose receives income from related parties—the CVB and San Jose Hotels, Inc. In FY 2009-10, the CVB received $1.7 million from the General Fund and $2.1 million from the TOT Fund to promote San Jose as a tourist and convention destination. Team San Jose used a small portion of these CVB funds— about $70,000—to provide discounts to convention groups. In addition, Team San Jose received funds from San Jose Hotels, Inc. to support convention groups. San Jose Hotels, Inc. is a non-profit corporation that administers the City's Hotel Business Improvement District Fund, which is made up of fees levied on hotel guests to support efforts to increase occupancy rates in City hotels. In FY 2009-10, Team San Jose received revenue of nearly $148,000 from San Jose Hotels, Inc. According to TSJ, these spending decisions were made by the San Jose Hotels, Inc. Board of Directors, who are representatives from the hotel industry, based on suggestions from Team San Jose and CVB staff. Per the San Jose Municipal Code, the amount of TOT revenue allocated to the Office of Cultural Affairs and Convention & Visitors Bureau is to be a base amount, set in the early 1980s, plus 50 percent of the dollar increases to TOT tax receipts. The Convention and Cultural Affairs Fund is to receive the remaining 50 percent. 3 2009- I 0 Annual Performance Audit of Team San Jose Current TSJ Performance and Incentive Measures In June 2009, the City and TSJ entered into an addendum to the Management Agreement, clarifying performance measures and incentive pay. Because construction of the facilities managed by TSJ was financed through tax-exempt debt, the management contract cannot, according to the City Attorney's Office, have an incentive pay provision that is based on return on investment or gross operating profits; hence, the incentive measures used to determined TSJ's incentive pay differ slightly from the general performance measures. The 2009 Management Agreement requires TSJ to submit annual targets for the following performance and incentive measures for City review, and joint agreement. Exhibit 2 shows how these measures are to be weighted. Exhibit 2: Performance and Incentive Measures, with Relative Weights Performance Measure Incentive Measure Economic Impact Economic Impact Hotel Room Nights 10% Hotel Room Nights 15% Attendance 10% Attendance 10% Estimated Economic Impact 10% Estimated Economic Impact 15% (EE1, a proxy for visitor spending) (EE1, a proxy for visitor spending) Return on Investment 10% Total Economic Impact 40% Total Economic Impact 40% Gross Operating Profit 35% Gross Operating Revenue 35% Theater Performance 15% Theater Performance 15% Customer Service Survey Results 10% Customer Service Survey Results 10% urce: Addendum to the Management Agreement The 2009 Management Agreement also requires TSJ to submit information on the following new special reporting metrics: Theatre Operations, Benchmark Convention Business, and Impressions, Marketing/Branding. Objective, Scope, and Methodology The objective of our audit was to determine whether TSJ met its performance measures as specified in the Management Agreement for FY 2009-10. Because of concerns that TSJ violated one of the terms of the Management Agreement in FY 2009-10 (not to incur expenses beyond the adopted budget), we also reviewed significant variances to FY 2008-09 revenue and expense information, changes to TSJ's business model, TSJ's board governance, the timeline of events leading to TSJ's overspending its budget, and to a limited extent, TSJ's related-party transactions. The weighting approved by the City Council differs from the weighting City staff had negotiated with TSJ in that the proposal to the City Council, which included only performance measures, weighted Gross Operating Profit at 45 percent and Economic Impact measures at 30 percent. Introduction To determine whether TSJ met its performance measures for economic impact, gross operating profit/revenues, theater performance, and customer service results, we: • Reviewed the Management Agreement and its Addendum for descriptions of performance and incentive measures, and the Council-adopted targets for FY 2009- I 0; • Obtained and reviewed the audited financial statements for the Facilities for FY 2009-10; • Interviewed the external auditor for the Facilities, Macias, Gini, & O'Connell, LLP (MGO), Finance Department, Budget Office, Office of Economic Development and TSJ staff; • Observed testing on accuracy of attendance reporting data for FY 2009-10; • Obtained and reviewed TSJ's customer service surveys for FY 2009-10; and • Reviewed TSJ's FY 2009-10 monthly and annual reports. To identify the cause for significant variances in TSJ's financial results from FY 2008-09 to FY 2009-10, we interviewed TSJ finance and accounting staff and obtained detailed break-downs of TSJ performance by line of business (e.g., convention activities, concerts, food and beverage services, etc). To review TSJ's board governance, we interviewed some members of the Board, and obtained and reviewed Board (including executive committee) agendas and minutes from FY 2008-09 and 2009-10. To identify the timeline of events leading to TSJ's overspending of its budget, we interviewed Finance Department, Budget Office, Office of Economic Development, and TSJ staff. We also obtained and reviewed TSJ's monthly reports, communication between the City and TSJ, and City and TSJ planning documents. To determine the nature of related-party transactions, we interviewed TSJ finance and accounting staff and reviewed TSJ financial records. Concurrent with our review, the City's Finance Department engaged the services of Macias, Gini, & O'Connell to apply agreed-upon procedures specified by the City and to expand the scope of testing the operating revenues and expenses of the facilities managed by TSJ on behalf of the City. The purpose of the engagement was to assist the City in evaluating TSJ's response to the Notice of Default issued by the City on August 18, 2010. In addition to revenues and expenses, procedures were tested for internal controls over TSJ's budget process, stand-alone revenue tracking systems, and potential duplication of recording of financial transactions between TSJ and CVB. 5 2009-10 Annual Performance Audit of Team San Jose This page was intentionally left blank 6
No recommendations for this finding
Conclusions 2
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CL1The City of San Jose contracts the operations of its convention and cultural facilities (Facilities), including the San Jose McEnery Convention Center and San Jose Civic, to Team San Jose, Inc. (TSJ). In spite of cost-cutting in FY 2009-10, Team San Jose's operations of the Facilities resulted in the largest net operating loss in its six years managing them—mainly because of a sharp fall in Convention Center activity—and the health of the Convention and Cultural Affairs Fund continued to deteriorate. Mother key reason Team San Jose's operation of the Facilities resulted in its largest-ever loss was that the concert series at the San Jose Civic proved to be unsuccessful. TSJ's decision to contract with the concert promoter that ran the concert series, like some other key decisions, was not fully vetted through its Board of Directors in advance of the decision. In addition, despite cutting costs mid-year and repeated questions by City staff about its spending rate, Team San overspent its budget. In spite of this, Team San Jose met its performance and incentive measures, on balance, and in so doing earned the largest incentive fee in the company's history.
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CL2Team San Jose is proud of its accomplishments to date, managing city's assets and look forward to continuing to stimulate the local economy and being good fiscal managers for the City of San Jose. Team San Jose looks forward to implementing a number of these recommendations in partnership with the City to strengthen our position in the meetings and convention industry. Team San Jose achieved 102% of the performance targets to stimulate the local economy and balance the fiscal needs of the City. We look forward to continuing these good solid results and with the City's evaluation of the proposed convention center expansion and renovation and the Hotel's investment in ongoing capital improvements of the facility, the future of San Jose's meeting and convention industry looks bright. Team San Jose's mission is to stimulate economic development in San Jose. This mission statement ties to the City's priorities within the Economic Strategy to support economic growth in downtown San Jose. 18IPage Appendix 1 Team San Jose Performance by Fadlity for FY 2010 FY 2010 FY 2009 FY 2009 vs 2010 (cid:9) % FY 2008 FY 2008 vs 2010 % Convention Revenue 4,695 5,843 (1,148) (cid:9) -20% 6,459 (1,764) -27% Labor revenue 1,998 1,478 520 (cid:9) 35% 257 1,741 Labor COS (expense) 1,730 1,227 503 (cid:9) 41% 1,730 Expenses 11,547 12,090 (543) (cid:9) Apt, 11,672 (124) as GOP (6,584) (5,997) (588) (cid:9) 10% (4,955) (1,629) 33% Montgomery Revenue 210 300 (89) (cid:9) -30% 202 8 4% Expenses 409 420 (11) (cid:9) as 321 88 Zia GOP (199) (121) (78) (cid:9) 65% (119) (80) 68% Center for Performing Arts Revenue 2,186 1,182 1,004 (cid:9) 85% 858 1,328 iss% Expenses 1,845 1,331 515 (cid:9) 31% 1,095 751 ati GOP 340 (149) 489 (cid:9) -329% (237) 577 -244% California Revenue 343 430 (88) (cid:9) -20% 328 15 4% Expenses 569 986 (417) (cid:9) An 960 (391) Alti GOP (226) (555) 329 (cid:9) -59% (632) 406 -64% Civic Revenue 1,582 582 1,000 (cid:9) 172% 508 1,074 211% Expenses 3,120 1,123 1,997 (cid:9) ,12g,s 716 2,404 a GOP (1,538) (541) (997) (cid:9) 184% (208) (1,330) 640% Food and Beverage Revenue 6,598 1,968 4,629 (cid:9) 235% 2,745 3,853 140% Expenses 5,008 75 4,933 Eat& 5,008 12026. GOP/Commission 1,590 1,893 (303) (cid:9) -16% 2,745 (1,155) -42% Combined Revenue 17,611 11,783 5,828 (cid:9) 49% 11,358 6,253 55% Expenses 24,228 17,252 6,976 (cid:9) go% 14,763 9,465 £14.% GOP/Commission (6,617) (5,469) (1,148) (cid:9) 21% (3,405) (3,212) 94% 19IPage Appendix 2 Team San Jose Operating Results Actual for the period July 2010to October 2010 2010-2011 2010-2011 Actual Budget Var. Net Revenue 4,867,630 4,882,430 (14,800) Total Non-Personal Expenses related to appropriation 5,530,655 5,797,298 266,643 Management Fees 50,000 50,000 City Overhead 82,895 82,896 1 City Worker's Comp 75,691 33,333 (42,358) Total Personal Exp -Shared Employee. Salaries 901,811 781,550 (120,261) Total Per Personal Appropriation 1,110,397 947,779 (162,618) Gross Operating Profit (1,773,422) (1,862,647) 89,225 20I Page APPENDIX 3 Competitor Information City Attendance Comparisons for 2010 & Future Source http://wvAv.azcentral.com/news/ar Down 15% at national Phoenix Booking pace down 30% from 2009 ticles/2009/05/10/20090510conve conventions ntion0510.html Room Nights booked are down 40-50% and won't be back to 2007 http://www.insidebiz.com/news/re Attendance is down levels until 2013/2014; Number of events flat, but convention Virginia Beach gions-centers-are-quite- overall bookings are down and being replaced with non-room night conventional producing events Due to political backlash about corporate meetings, lost $14M in cancelled meetings in 2008 and led to a challenging 2009/2010 http://vAvw.ci.austin.t.us/edims/d Austin market 2010 was down 25% from 2009 when the marketing plan was ocument.cfm?id=130442 written http://vwcommercia la ppeal.com Memphis Down 10% 2010 could be down 40-50% /news/2010/mar/04/2010- convention-calendar-thin/ Down 99,000 (approx. # of Bookings & Events going up, but average size going down for http://www.bizjournals.com/pacifi Hawaii 16%) in 2010 corporate meetings; astories/2010/01/11/storyl.html http://www.philly.com/philly/busi ness/breaki ng/20100927_Challeng Philadelphia e_Booking_the_bigger_convention center.html http://vvw.publicbroadcasting.net /kera/news.newsmain/article/5/0/ Dallas Down 20% in 2010 from 2008. 1679705/Business/Mary.Kay.Annu al.Convention.Keeps,Dallasin.The. Pink htp://www.aproundtable.org/news Las Vegas # of Conventions down 10.4% in 2008 .cfm?NEWS JD.2219&issuecodex asino # of Convention Visitors http://www.nbj.comPssue/1209/1/ Las Vegas in 2009 down 27% 2146 21 !Page 4 APPENDIX A Explanation of Key Variances in Revenue and Expense Categories Team San Jose provided the following explanations for increases or decreases to key revenue and expense categories in Exhibit 3 in Finding I. Revenues Food and beverage; Most of the $4.4 million increase in this revenue category was the result of a change in the way that TSJ delivered the food concession and catering at the convention center and cultural facilities. In June 2009, TSJ began to provide the food concessions and catering at convention center events with its own staff—a change from previous years in which TSJ had contracted out the food concession to the catering company, Centerplate Inc. Under its contract with Centerplate, Centerplate paid TSJ a fixed percent of its gross sales. In 2008-09, this fee totaled about $2 million. In 2009-10, with TSJ operating the food operation with its own staff, TSJ brought in over $6.5 million in gross revenue, but it would be misleading to compare this $6.5 million to the $2 million fee that Centerplate paid to TSJ in 2008-09. As discussed in the expenses section below, the $6.5 million gross revenue must be offset by $4.9 million in expenses that TSJ incurred for food, labor, and administrative costs associated with providing the food service in-house, which means TSJ earned a net profit of about $1.6 million from its food and beverage operations. It is important to note that in 2009-10, TSJ catered fewer events and to a lower number of convention and meeting-goers than did Centerplate in 2008-09. Despite this lower volume, TSJ's food and beverage operation had a profit margin comparable to the commission it earned when it contracted with Centerplate. Building rental: Due to the economic downturn and fewer events at the convention center, TSJ saw a $700,000 decline in building rental along with other ancillary services, such as event electrical/utility, networking and telecommunication services. Also, during 2009-10, TSJ discounted building rental, relative to what TSJ says it would charge in a good economy, to prevent customers from scheduling their events at other convention centers. Labor/event production revenues: The cost to TSJ of the stagehands, teamsters, and ushers who set up for and stage an event at the convention and cultural facilities is passed along to the customer sponsoring the event. TSJ marks-up these labor costs and bills them to event sponsors. Most of the $1.2 million increase in this line item is due to the Broadway series of musical plays that took place at the Center for the Performing Arts during 2009-10, with the remainder coming mainly from increased event production services at convention center events. Ticketing Services: In late 2008-09, TSJ signed a new business contract in which it took over ticketing services from the American Musical Theatre of San Jose. In 2009-10, TSJ experienced a full year's worth of this new category of revenue of $1.5 million, with nearly all of the revenue coming from the concert series at the San Jose Civic or the Broadway series at the Center for the Performing Arts. Expenses TSJ employee salaries: More than $3.3 million of the $4.2 million increase in this cost category is attributable to the cost of TSJ staff hired to provide food and beverage services at convention center and theater events. As discussed above, a contractor previously supplied food and beverage service at TSJ convention center and theater events. Much of the remaining increase is due to the conversion of several staff that previously had worked at the convention center as A- I City employees, but in FY 2009-10 were converted to TSJ staff, and to the addition of staff for the San Jose Civic concert series. City shared rnRbyggcharges: In fiscal year 2009-10, the adopted operating budget for the Convention and Cultural Facilities reduced the number of City employees that work at the convention center or the cultural facilities, accounting for a $1.6 million reduction in this item. A few City employees who lost their City positions were retained as TSJ staff and contributed to the increase discussed above. Cost of Event/production labor. As discussed in the revenues section, TSJ passes along the cost of stagehands, teamsters, and ushers who set up for and stage an event at the facilities to the customers sponsoring the event The increase in this line item, thus, relates to the increased revenue for labor/event production that resulted from the Broadway series at the Center for the Performing Arts, and events at the convention center. Ticketing (cid:9) As discussed above, TSJ held a concert series at the San Jose Civic in 2009-10. The artist fees for those concerts, totaling more than $ 1.1 million, account for most of this new expense category. Food and beverage costs: As discussed in the revenue section, TSJ began to provide the food concessions and catering at convention center events with its own staff—a change from previous years in which TSJ had contracted out the food concession to the catering company, Centerplate Inc. TSJ's in-house operation of food and beverage services means that it must also purchase the food and beverages that it serves. This new expense category accounts for those costs. Other ex erei: Much of the $400,000 increase in this expense can be attributed to new expenses associated with the decision to do concerts at the Civic and to do the Broadway series at the Center for the Performing Arts with the help of Nederlander. TSJ incurred expenses for advertising, equipment rental, and production royalties that it had not incurred in fiscal year 2008-09 because this was the first year that TSJ was engaged in this line of business. A-2 APPENDIX B Methodology for Calculating the Performance and Incentive Measures Measures Type of Measure Basis for Calculations Gross Operating Profit/Revenue Gross Operating Revenue Incentive only Those revenues from operation of the Facilities excluding revenue billed by TSJ on behalf of other vendors providing services to clients of the Facilities. At the time the management agreement was drafted, revenues from "ticketing services" were not contemplated. In our opinion they should be treated as other revenues generated from the operation of the facilities, and therefore we have included them in calculating gross operating revenue, which consequently affects our calculation of gross operating profit and return on investment In calculating gross operating revenue, we have included $148.000 subsidized by the City's Hotel Business Improvement District and $70,000 expensed by CVB to sponsor events, even though going forward, we believe these revenue sources should be excluded. Gross Operating Profit Performance only Revenues (as described above) minus direct and indirect expenses related to the operation of the Facilities. Per the agreement, we did not include the following expenditures in calculating gross operating profit the fixed management fee, depreciation expense, City contract oversight costs, fire insurance, City funded repairs and maintenance, or the City's free use of the Convention Center. Altogether, these costs totaled $1.6 million in FY 2009-10. Economic Impact Hotel Nights Performance, Measured as the total number of hotel room nights sold by the CVB over Incentive the course of the Fiscal Year and the total number of hotel room nights sold that can be directly or indirectly attributed to activities at the Facilities. Event Attendance Performance, Number of local/social visitors, out of town visitors, and exhibitors. Incentive Estimated Impact Performance, Average daily spending rates multiplied by event attendance. Average daily Incentive spending rates may vary depending on if the attendees are locaUsocial visitors, out of town visitors, or exhibitors. This methodology was mutually agreed upon by the City and TSJ as a means to estimate consumer spending related to events. Return On Investment Performance only [gross revenues from the operation of the Facilities] + [gross revenues from the operation of the CVB] + [estimated economic impact] divided by [expenses paid for the operation of the Facilities] + [expenses from the operation of the CVB] + [Facilities debt service] In its monthly summary reports for FY 2009-10, TSJ included about $4 million in City funding to the Convention and Visitors Bureau (CVB) as part of its calculation of Return on Investment These funds included General Fund subsidies and Transient Occupancy Tax (TOT). TSJ staff believe these funds, particularly TOT funds, reflect TSJ's performance because TSJ staff help generate additional TOT funds by promoting San Jose as a destination. However, the Management Agreement and addendum outline that the Return On Investment performance measure include "aggregate accrued gross revenues from the operation of the CVB"—City contributions to the CVB are not revenue generated from operations. Therefore, for the purpose of calculating ROI, we have excluded "public revenues." Including CVB public revenues in our calculation of the ROI would have resulted in a ROI of 2.53 — 91 percent of the measure target of 2.77. Our exclusion of these revenues does not impact TSJ's incentive payment. B- I Theater Attendance Performance Days Performance, All days that the City and the operator mutually agree are both Incentive available and suitable for a scheduled performance or event Occupied Days Performance, Days that a theater is utilized. Incentive Customer Satisfaction Satisfaction Rate Performance, The results of the operator's surveys that ask the event Incentive coordinators to rate their overall satisfaction with the product and services provided. Satisfactory is considered "excellent," "very good," or "good." Source: Auditor summary of terms outlined in the Management Agreement and Addendum B-2 COUNCIL AGENDA: 12/07/10 3.z(6) ITEM: CITY OF tir% SAN JOSE(cid:9) Memorandum CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR (cid:9) FROM: Scott P. Johnson AND CITY COUNCIL SUBJECT: SEE BELOW (cid:9) DATE: November 23, 2010 (cid:9) 4 Approved Date V izt. 4 COUNCIL DISTRICT: City-Wide SNI AREA: NA SUBJECT: INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED- UPON PROCEDURES FOR THE MANAGEMENT OF THE SAN JOSE CONVENTION CENTER AND CULTURAL FACILITIES FOR 1HE FISCAL YEAR ENDED JUNE 30, 2010
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