2009-2010 Santa Clara County Civil Grand Jury Report Should the City Council Continue to Subsidize Team San Jose’s

Conclusions 6

• CL1 Page 9
  The City has subsidized substantially higher than anticipated operating losses.
• CL2 Page 10
  A significant portion of TSJ’s operating losses is attributable 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.
• CL3 Page 10
  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.
• CL4 Page 10
  The budget for salaries and benefits paid to TSJ’s employees (excluding the Shared Employees) has increased by 65% in the first year of the new contract with additional funding for TSJ’s executive team.
• CL5 Page 10
  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.
• CL6 Page 9
  Twice in the last six years, San Jose has negotiated a contract with TSJ which seems to be financially advantageous only to TSJ. In the first contract, the City covered $20.2 million in losses when it had agreed to subsidize a loss of $9.8 million. Many decisions contributed to that loss, one of which was to place 86 City employees on TSJ’s payroll when other, less-costly alternatives could have been chosen. In the current contract, it appears that neither TSJ nor the City is focused on reducing TSJ’s operating losses, which would reduce the City’s subsidy. In fact, TSJ’s operating losses are escalating, largely as a result of increased salary and benefits costs. The San Jose Convention and Cultural Facilities Notes to Financial Statements for the Year Ended June 30, 2009 include the following statement: “In order for [TSJ] to continue its operations, it relies on the City for operating contributions…Accordingly, any significant changes in the TOT or parking garage revenues or decision to change the amount of support could greatly affect [TSJ’s] ability to continue as a going concern.” San Jose is facing the worst budget deficit crisis in its history. The City should be working with TSJ to aggressively reduce TSJ’s operating losses, thereby reducing the City’s subsidy. Findings and Recommendations Finding 1 The City has subsidized substantially higher than anticipated operating losses. Recommendation 1 The current contract has a Termination for Convenience clause starting July 1, 2012. The City should make use of that clause to re-establish revenue and operating loss targets for TSJ. This will encourage cost control by TSJ in managing the Facilities. 9 Finding 2 A significant portion of TSJ’s operating losses is attributable 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. Recommendation 2 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. Finding 3 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. Recommendation 3 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. Finding 4 The budget for salaries and benefits paid to TSJ’s employees (excluding the Shared Employees) has increased by 65% in the first year of the new contract with additional funding for TSJ’s executive team. Recommendation 4 The City should insure that the increased employee compensation costs are justified by a higher level of Facilities usage and higher revenues. Finding 5 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. Recommendation 5 The City should adhere to the terms of the contract and transfer only 25% or less of the TOT revenues to Fund 536. 10 Appendix 1 Comparison of Salaries and Benefits of Shared Employees and Their Private Sector Equivalents Private sector TSJ total Private sector TSJ annual average Number of Hourly annual total annual Classification salary per annual salary Employees rate salaries per salaries per classification(1) per classification classification classification(2) Air Conditioning Mechanic 2 $44 $90,522 $181,043 $63,000 $126,000 Air Conditioning Mechanic, Sr. 1 $47 $97,344 $97,344 $81,000 $81,000 Custodian 6 $23 $47,986 $287,914 $37,000 $222,000 Custodian, Sr. 1 $26 $54,787 $54,787 $44,000 $44,000 Electrician 2 $45 $94,390 $188,781 $81,000 $162,000 Facility Attendant 23 $24 $50,419 $1,159,642 $50,419(3) $1,159,642 Facility Attendant, Sr. 5 $28 $57,450 $287,248 $57,450(3) $287,248 Facility Repair Worker 4 $33 $68,120 $272,480 $60,000 $240,000 Security Officer 9 $27 $55,286 $497,578 $45,000 $405,000 Security Officer, Sr. 1 $32 $67,496 $67,496 $62,000 $62,000 Supervisor of Facilities 2 $46 $95,846 $191,693 $95,846(3) $191,693 Totals 56 $3,286,005 $2,345,582 Retirement, Medical, Dental, & OPEB(4) $1,643,002 $703,675 Total for TSJ Employees $4,929,007 $3,049,257 (1) Annual cost (salaries and benefits) of Shared Employees at TSJ for fiscal year 2010. (2) Private sector annual salaries taken from www.salary.com. (3) No clear equivalent was found in the private sector; the public sector salary was repeated here. (4) Benefit costs are calculated as 50% of annual salaries for TSJ and 30% for private sector. 11 APPENDIX 2 Convention & Cultural Affairs Fund (Fund 536) Flow 75% Targeted 6% Transient Occupancy Tax Split 10% Other Fund (Fund 461) Hotel Tax 4% 25% Targeted Split General Convention & Cultural Team SJ Revenues Fund Affairs Fund (Fund 536) Parking Fees General Fund (as needed) Team SJ Other Uses Expenses (cid:132) Civic Center Expansion (cid:132) Sinking Fund for Capital needs 12 APPENDIX 3 Funding of Convention and Cultural Affairs Fund (Fund 536) Planned vs. Actual $8,000 $7,000 $6,000 $5,000 Plan $4,000 Actual $3,000 $2,000 $1,000 $0 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 13 This report was PASSED and ADOPTED with a concurrence of at least 12 grand jurors on this 6th day of May, 2010. Angie M. Cardoza Foreperson Judy B. Shaw Foreperson pro tem Mary Nassau Secretary 14