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Arizona Tourism and Sports Authority Highlights

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					                                                                                  Arizona Tourism and
                                                                                  Sports Authority

 REPORT
 HIGHLIGHTS                   TSA’s Funding Priorities
 PERFORMANCE AUDIT


Subject                       The TSA has a number of sources to fund
                              the construction of its multipurpose facility
The Arizona Tourism and       and its other responsibilities. Statute
Sports Authority (TSA) is
responsible for the follow-
                              establishes the priorities for the use of
ing in Maricopa County:       these funds.
designing, constructing,
and operating a multipur-
pose facility; distributing   TSA funding
monies to the Arizona                                                               TSA’s state-of-the-art multipurpose facility, with a retractable
Office of Tourism for         TSA has five major funding sources:                   roof, will have a capacity of 63,000 air-conditioned seats. The
tourism promotion; fund-                                                            facility is located in the City of Glendale. Construction began in
ing Cactus League base-         Hotel bed tax—TSA’s largest source of               July 2003 and is expected to be completed in the summer of
                                                                                    2006.
ball stadium improve-           funding is from a 1 percent increase in the
ments; and awarding             Maricopa County hotel bed tax. This tax             Source: Arizona Tourism and Sports Authority.
grants for youth and ama-       began on March 1, 2001, and is projected
teur sports facilities and      to produce $610 million through 2031,
programs.                       when it ends.                                       Facility revenue—Once the facility is oper-
                                                                                    ating, TSA projects generating $2 million in
Our Conclusions                 Car rental surcharge—TSA receives a por-            its first full year from rent and concessions
The multipurpose facility's     tion of a 3.25 percent rental car surcharge         at nonfootball events, in addition to the
total cost has increased        in Maricopa County. The car rental sur-             $250,000 rent (increasing at 2 percent per
to $370.6 million. While        charge is split between the County Stadium          year) the Cardinals will pay each year. Total
TSA receives funding from       District, which receives the first $2.50 from       projected revenues are $115 million
several sources, the
                                each car rental surcharge, and the TSA.             through 2031.
Legislature may want to
reduce the burden on the        This tax is expected to produce $382 million
State General Fund. TSA         for TSA through 2031, when it ends.                                 Funding
can enhance the grant                                                                  March 1, 2001—December 31, 2003
process for youth and           NFL tax—TSA also receives all state
amateur sports and the          income taxes paid by the Arizona Cardinals’
                                football corporate organization, its employ-         Hotel Bed Tax                          $26.7 million
Cactus League. In addi-
tion, it needs to improve       ees (including players) and their spouses. If        Car Rental Surcharge                   $19.1 million
its administrative prac-        these taxes do not meet a specified mini-            NFL Tax                                $ 9.4 million
tices. The report also con-     mum amount, the State General Fund must              Sales Tax Recapture                    $ 3.9 million
tains information on rev-       make up the difference. These taxes are              General Fund                           $ .83 million
enue projections.               projected to provide at least $397 million by
                                2031; however, this tax does not expire.
                                                                                  TSA funding priorities
                                Sales tax—TSA receives the state sales
                                taxes paid at Cardinals’ games, including
                                                                                  Statute prioritizes the uses and distribu-
                                those played at Arizona State University’s
                                                                                  tion of TSA’s monies.

     2004
                                Sun Devil Stadium until the facility is built,
                                and all other events at the facility once it is     Debt service—The first priority is to pay
                                built. These taxes are projected to total           principal and interest on $222 million in
                                $130 million through 2031. This tax does            bonds that TSA issued in February 2003 to
  March • Report No. 04-01      not have an expiration date.                        finance facility construction. These bonds
                                                                                    are due to be retired in 2031. The payment
             amounts for fiscal years 2005 through 2007         Youth and amateur sports—After tourism
             are $11.1 million per year, and then increase      promotion and the Cactus League, statute
             to approximately $19 million per year for the      provides for TSA to fund youth and amateur
             last 15 years of the bonds’ life. The total        sports. This program will receive an estimat-
             principal and interest payments are project-       ed $73.5 million through 2031.
             ed to cost $457 million.                           Operations—After funding all of the areas
             Tourism—The next funding priority is for           above, TSA can use the remaining money
             tourism promotion. TSA will distribute $4          for operating the facility, staff salaries, travel,
             million annually, growing at 5 percent each        and insurance. Operating expenses for FY
             year, to the Arizona Office of Tourism to pro-     2003 were $1.9 million, but are expected to
             mote tourism in Maricopa County. Through           grow to $11.6 million in FY 2007 after the
             2031, an estimated $264 million will be dis-       facility begins operating.
             tributed for tourism promotion.
             Cactus League Baseball—TSA’s third fund-         In addition to these funding priorities,
             ing priority is construction or renovation of    TSA is required to establish and fund
             Cactus League baseball facilities. TSA esti-     reserves for its operations, youth and
             mates a total of $205 million will be spent by   amateur sports, and for repairs and other
             2031.                                            long-term costs associated with the facili-
                                                              ty.



           Facility Cost at $370.6 Million
           The multipurpose facility’s cost has               agreement and increased the guaranteed
           increased to $370.6 million, nearly $40            maximum price to $357.8 million. There is
           million over its original cost estimate.           also nearly $12.9 million in costs for such
           Statute does not cap facility construction         things as city permit fees, construction
           costs, and as design plans for the facility        testing and inspection, and insurance not
           were largely finalized in January 2004,            included in the guaranteed maximum
           construction costs increased. According            price bringing the total project cost to
           to its agreement with the Cardinals, TSA           $370.6 million.
           will pay an estimated $266.6 million, or 72
           percent, of the facility’s costs. The              Cardinal’s agreement—TSA developed
           Cardinals are obligated to pay approxi-            an agreement with the Cardinals under
           mately $104 million toward facility con-           which, if the Cardinals want construction
           struction.                                         upgrades, they are solely responsible for
                                                              the costs. The Cardinals set aside $9 mil-
                    b
           Design-build agreement—In August 2003,             lion to pay for such possible changes.
           TSA entered into a design-build agree-             However, the Cardinals committed nearly
           ment with the facility’s contractor, which         $5.8 million of this amount to help cover
           set a guaranteed maximum price of                  some of the recent cost increases.
           $346.3 million for the multipurpose facili-
           ty’s construction. At that time, the facility      Construction oversight—TSA has also
           design plans were not finalized. As part of        hired staff, construction consultants, and
           this agreement, the contractor assumed             testing consultants to oversee construc-
           responsibility for any planned construction        tion and help ensure proper building tech-
           costs that exceed the maximum price.               niques. Monies have also been budgeted
           However, as design plans were largely              for contingencies. While $18 million was
           finalized in January 2004, the contractor          designated for contingency, including the
           provided more information regarding con-           $9 million from the Cardinals and another
           struction costs. TSA and the Cardinals             $9 million that is part of the contractor’s
           then decided which features to retain,             guaranteed maximum price, over 60 per-
           add, or remove. TSA and the Cardinals              cent of this money has already been
           also agreed to modify the design-build             committed to cover facility cost increases.

page   2
 Legislature Should Review
 General Fund Subsidy
One of the tax revenues TSA receives is         Alternatives to General Fund
the state income taxes paid by the the          Guarantee
Cardinals’ corporate organization, person-
nel (including players), and their spouses.     The Legislature could
This is called the NFL tax, and the statute     consider at least three                                             Comparison of General
creating it guarantees the TSA a minimum        options to limit or con-                                            Fund Guarantee to NFL Tax
amount each year. This minimum amount           trol General Fund pay-                                                                                          $1.2
was projected at about $3.5 million in fis-     ments that may not be                                        $5.0                                  $1.2        million
cal year 2002 and increases by 8 percent        needed to sustain TSA
                                                                                                             $4.5          $205,000               million

each year. TSA keeps any amounts
                                                                                                             $4.0
                                                operations:                                                  $3.5




                                                                                       Millions of Dollars
above the minimum. However, in the                                                                           $3.0

event the tax falls short of the minimum          Continue to distribute                                     $2.5


amount, additional General Fund monies            the minimum specified                                      $2.0
                                                                                                             $1.5
must make up the difference. This guar-           amount, but allow the                                      $1.0

antee continues indefinitely, even if the         General Fund to keep                                       $0.5


Cardinals relocate.                               any NFL tax revenues                                       $0.0
                                                                                                                    2002         2003                   2004      2005
                                                  in excess of the mini-                                                                 Fiscal Year

While the NFL tax exceeded the minimum            mum amount;                                                               Statutorily Guaranteed Minimum

amount by over $915,000 in fiscal year            Require TSA to hold
                                                                                                                            Actual NFL Income Tax Collected
                                                                                             Additional Amount Transferred from General Fund
2002, by the end of fiscal year 2005, non-        any NFL taxes that
NFL income tax General Fund monies will           exceed the minimum in
have subsidized the guaranteed amount             reserve for use in years when the taxes do
by over $2.6 million.                             not meet the minimum; or

Whether the General Fund subsidizes the           Eliminate the General Fund guarantee, dis-
guaranteed amount can depend on fluc-             tributing only the NFL tax to TSA. If needed,
tuations in Cardinals’ salaries, the state of     the TSA could request additional funding
the economy, and any work stoppage or             through specific legislation.
relocation by the Cardinals.
                                                Because the Legislature created the NFL
                                                tax, and this tax is not pledged to TSA’s
                                                bonds as are the other taxes, the
  Recommendation                                Legislature can modify its provisions.

  The Legislature may want to consider modifying statute to minimize the impact of
  NFL tax shortfalls on the General Fund.



 More Specific Evaluation
 Process Needed for Grants
TSA can improve its processes for fund-         mately $5.2 million for youth and amateur
ing youth and amateur sports and the            sports projects in 2001 and 2002. That
Cactus League.                                  money was committed to:
                                                   Sports fields at South Mountain YMCA
Youth and amateur sports grants                    ($150,000);
TSA lacked a documented decision-mak-              A regional sports complex in Avondale ($3.4
ing process when it committed approxi-             million plus $666,000 in interest); and
                                                                                                                                                                         page   3
             Turf fields in Glendale that will double as       Defining appropriate expenditures that the
             overflow parking for the new multipurpose         applicant may count for its grant match.
             facility ($1 million).
                                                             Cactus league grants
           The Glendale project’s total cost has not
           been established. However, according to           As of December 31, 2003, TSA had
           a TSA official, TSA will enter into an agree-     already committed about one-quarter of
           ment with Glendale that will identify the         the total money it will receive for Cactus
           project’s total cost and the city’s match         League facilities. This money was award-
           once Glendale has obtained the land for           ed for construction of a new spring train-
           this project.                                     ing facility in Surprise ($32 million), and
                                                             renovations at Phoenix Municipal
           TSA has since established a 20-member
                                                             Stadium (over $4.3 million). However, the
           advisory committee to assist it in estab-
                                                             TSA did this without formal guidelines for
           lishing and prioritizing youth and amateur
                                                             its process.
           sports facility needs. TSA has also imple-
           mented a new process for evaluating               The Maricopa County Stadium District,
           grant applications. Under this process,           which also provides funding for Cactus
           TSA received 92 applications and in               League facilities, has developed written
           February 2004, awarded 13 grants totaling         guidelines for its process. These guide-
           over $1.3 million. However, TSA could             lines address its funding priorities, evalu-
           enhance this process by:                          ation criteria, and the types of projects
                                                             and costs that can be funded. While TSA
             Establishing guidelines for grant administra-   said that it already uses some of these to
             tion and oversight;                             evaluate grant applications, it needs for-
             Establishing the period of time an applicant    mal guidelines to ensure consistency
             must operate a facility; and                    and fairness.


             Recommendations

             TSA should:

                Develop and implement additional policies and procedures to evaluate and
                administer youth and amateur sports grants; and
                Develop and implement written Cactus League funding guidelines.




           TSA Needs To Develop Policies
           To Guide Its Administration
           TSA is not a state agency and is exempt           struction management, but has no
           from some policies state agencies must            defined process for conducting these pro-
           follow for things such as procurement and         curements or overseeing the contracts.
           travel. Therefore, it needs to develop its        Several factors that TSA should consider
           own policies for these areas as well as for       that would help ensure the best product
           other, sometimes unique, aspects of its           at the most economical price, promote
           operations.                                       competition, and avoid fraud include:

                                                              Procurement thresholds describing when
           Procurement policies needed                        verbal and written price quotes, and sealed
           TSA has contracts for various services,            bids are required;
           including legal, engineering, and con-

page   4
  Timelines when the Board should ratify con-     Policies needed for other expen-
  tracts entered into by TSA’s executive direc-   ditures
  tor;
                                                  Travel policy—TSA first adopted a travel
  Procedures for overseeing contracts;
                                                  policy in January 2003. Prior to this, TSA
  Procedures for approving smaller dollar         did such things as pay for a staff
  purchases; and                                  overnight stay in town, although this has
                                                  been recently reimbursed. Even since it
  Guidelines for using credit cards.
                                                  adopted the policy, TSA has not always
                                                  followed it. For example, TSA sometimes
Review use of attorneys’                          paid more for hotel rooms than allowed,
legal costs                                       without obtaining written approvals.
                                                  Gifts—Unlike most governmental entities,
TSA should also review its use of attor-
                                                  TSA may provide gifts, but has lacked
neys and consider whether there are
                                                  guidelines defining under what circum-
some things that staff could do, such as
                                                  stances it may provide gifts. Some gifts
prepare minutes and policies, that are
                                                  that TSA has made include flowers and
currently done by its attorneys, and
                                                  meals for staff, consultants, and board
whether it should hire an in-house attor-
                                                  members. While most gifts were under
ney.
                                                  $100, between April 19 and June 18,
                                                  2003, TSA spent about $918 just on
            Attorney fees through                 meals. TSA adopted a policy for providing
                  June 2003                       gifts in December 2003.

     $4.1 million total                           Financial controls—TSA lacks written poli-
                                                  cies and procedures for recording and
     $120 to $160 an hour for drafting
                                                  explaining transactions and transferring
     meeting minutes
                                                  money, and there is no independent inter-
     $200 an hour for developing a con-           nal review of the transactions. In addition,
     flict-of-interest policy                     credit card payments have been delin-
     Up to $325 an hour for developing            quent, resulting in late fees.
     contracts with staff, consultants,
     and organizations.                           Uses of luxury suite—TSA has not devel-
                                                  oped specific policies for the use of its
                                                  luxury suite and tickets that it will receive
                                                  to all football games at the facility. It is
                                                  important to have such a policy, given the
                                                  potential value of the suite and tickets.




  Recommendations

  TSA should:

     Establish and implement purchasing guidelines;
     Ensure it is making the most effective and efficient use of attorneys;
     Follow its travel policy and obtain required approvals for all travel;
     Strengthen its controls over financial matters; and
     Establish a policy for the use of the luxury suite and tickets for football games.




                                                                                                  page   5
                                Projected vs. Actual Revenues

                                Future revenue for TSA depends on the
                                rate of growth of the hotel bed tax and the                       Projected vs. Actual Revenue
                                rental car surcharge. Two sets of revenue
                                projections were prepared, one for the
                                2000 election publicity pamphlet and the                    $12
                                                                                            $10
                                other for the 2003 bond offering. For the                    $8

                                first, consultants suggested an 8 percent




                                                                                 Millions
                                                                                             $6
                                                                                             $4
                                annual increase in the hotel bed tax,                        $2
                                                                                             $0
                                declining after 10 years, and a 5 percent                             Hotel Bed Tax                    Car Rental Surchage
                                annual increase in the car rental sur-                                          Year Ended June 30, 2003

                                charge, declining after 20 years.                                                     Projected   Actual



                                For the bond offering statements, the
                                same consultants suggested a 5 percent          the bonds, while the car rental surcharge
                                annual increase in the hotel bed tax for fis-   is outperforming the estimates by about
                                cal years 2005 through 2011, with no            12 percent.
          TO OBTAIN             change in the rental car surcharge
       MORE INFORMATION         through fiscal year 2011. These estimates       To prepare for the possibility of revenue
                                were revised because of the September           shortfalls, TSA is working to obtain a $3
    A copy of the full report   11, 2001, terrorist attacks and their effect    million line of credit and is establishing
   can be obtained by calling                                                   the operating reserve required by statute.
                                on tourism, and a general economic
                     0
           (602) 553-0333       downturn.                                       If necessary, TSA could reduce its operat-
                                                                                ing expenses and/or renegotiate some of
                                Results from fiscal year 2003 show that         its consultants’ contracts.
                                the hotel bed tax is falling about 4 percent
         or by visiting         short of the revenue estimates used for
       our Web site at:
   www.auditorgen.state.az.us
           Contact person for
              this report:
            Dale Chapman




                                                                                                                                           REPORT
            Arizona Tourism and                                                                                       HIGHLIGHTS
            Sports Authority                                                                                           PERFORMANCE AUDIT
                                                                                                        March 2004• Report No. 04–01

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