Office of the City Auditor. Audit of Virginia Beach Sportsplex Contract

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1 Report Date: October 24, 2014 Office of the City Auditor 2401 Courthouse Drive, Room 344 Virginia Beach, Virginia Promoting Accountability and Integrity in City Operations

2 Contact Information Office of the City Auditor Promoting Accountability and Integrity in City Operations Lyndon Remias, CPA, CIA, CRMA Timothy Bell, CICA City Auditor Senior Auditor Office of the City Auditor 2401 Courthouse Drive, Room 344 Virginia Beach, VA Telephone: Fax: Fraud, Waste, and Abuse Hotline

Transmittal Letter Date: October 24, 2014 To: Subject: James K. Spore, City Manager I am pleased to present the report of our Audit of the Virginia Beach Sportsplex Contract.

3 Transmittal Letter Date: October 24, 2014 To: Subject: James K. Spore, City Manager I am pleased to present the report of our Audit of the Virginia Beach Sportsplex Contract. Our audit focused on compliance with contract terms with a focus on payments due from the contractor to the City. Overall, based on our review, not all contract terms were complied with but by implementing our recommendations related to revenue reporting and the submission of required reports will fulfill contract terms and promote accountability over management of the Sportsplex and the accompanying Field Hockey Regional Training Center facility. Findings considered to be of insignificant risk have been discussed with management. The results of this audit will be provided to City Council and the City s Audit Committee. The Office of the City Auditor reports to City Council through the City s Audit Committee and is organizationally independent of all other City Departments. This report is intended solely for the information and use of the Audit Committee, City Council, City Manager, and appropriate management. It is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. We would like to thank the staff of Parks and Recreation and the Sportsplex contractor, Hometown Sports Management, for their courteous and prompt assistance during our review. If you have any questions about this report, or any audit-related issue, I can be reached at or via at lremias@vbgov.com. Respectfully submitted, Lyndon S. Remias, CPA, CIA, CRMA City Auditor c: City Council Members Audit Committee Members Cindy Curtis, Deputy City Manager Michael Kalvort, Director, Department of Parks and Recreation i The Office of the City Auditor is an independent audit function reporting directly to the Virginia Beach City Council.

4 Table of Contents Transmittal Letter... i Purpose... 1 Scope and Objectives... 1 Methodology... 1 Standards... 2 Background... 3 Findings and Recommendations... 5 Conclusion Acknowledgements Management s Response... Attachment A ii The Office of the City Auditor is an independent audit function reporting directly to the Virginia Beach City Council.

5 Purpose The purpose of this audit was to ensure compliance of the contractor with the Sportsplex and Field Hockey Regional Training Center contract terms with a focus on payments due from the contractor to the City. This audit was requested by department management through the annual risk assessment process performed by the City Auditor s Office. Scope and Objectives The objective of our audit was: To ensure adequate procedures and processes are in place to properly account for Sportsplex and Field Hockey Regional Training Center revenue and that all required reports were submitted by the contractor to the Parks and Recreation management. This audit included the Sportsplex and the Field Hockey Regional Training Center owned by the City of Virginia Beach and managed via contractor through management agreements with the City. The audit covered revenue from Calendar Years 2009 through Our fieldwork concluded on September 15, Methodology To accomplish our objectives, we performed the following procedures: Reviewed existing Sportsplex and Field Hockey Regional Training Center contracts related to management of said facilities to gain an understanding of contract terms. Interviewed City s Parks and Recreation staff and the contractor for understanding of operations and concerns of both parties. Reviewed revenue documents and required management reports to determine completeness of report submissions as required by contract. Performed analysis of contractor bank deposits to determine completeness of revenue received and reported to Parks and Recreation. Independently computed revenue and compared results with projected revenue and reported revenue. Reconciled reported 2013 revenue with contractor s tax return reported revenue. Toured the Sportsplex and Field Hockey Regional Training Center facilities. Made recommendations to improve reporting process and enhance internal controls. Page 1

6 Standards We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained during this audit provides a reasonable basis for our findings and conclusions. The Office of the City Auditor reports to City Council through the Audit Committee and is organizationally independent of all City Departments. This report will be distributed to the City s Audit Committee, City Council, City Manager, and appropriate management within the City of Virginia Beach. This report will also be made available to the public. Page 2

Background Owned by the City of Virginia Beach and leased to Hometown Sports Management, the Virginia Beach Sportsplex is comprised of the Sportsplex Stadium, Sportsplex Field Hockey Regional

The Service Level contains ticketing functions, administration area, souvenir store, team and officials dressing rooms and miscellaneous support spaces.

The Club Level leads to the upper seating deck as well as six (6) luxury suites. The Regional Training Center is one of America s most well-known field hockey complexes.

7 Background Owned by the City of Virginia Beach and leased to Hometown Sports Management, the Virginia Beach Sportsplex is comprised of the Sportsplex Stadium, Sportsplex Field Hockey Regional Training Center, Sportsplex Criterium, and Sportsplex Athletic Fields. The Sportsplex Stadium is a 3-level steel and concrete structure with the capacity to seat 10,000. The Service Level contains ticketing functions, administration area, souvenir store, team and officials dressing rooms and miscellaneous support spaces. The Concourse Level consists of a broad spectator walkway leading to the lower seating deck, plus concessions and restroom areas. The Club Level leads to the upper seating deck as well as six (6) luxury suites. The Regional Training Center is one of America s most well-known field hockey complexes. Opened in October of 2001, the Center features two artificial, international, competition-quality turf fields. Each field has a complex underground irrigation system and high-powered watering systems that can completely saturate each field in less than 10 minutes. In addition, the Center features lighting, locker rooms, parking, equipment room and a concession stand. Turf time is available for rent for field hockey events, training camps, clinics and tournaments. In April 2009, the City executed two contracts (Management Agreements) with Hometown Sports Management (HSM), LLC for a 16 year lease term to HSM is responsible for the supervision, management, scheduling and operation, all facility utilities, and routine maintenance and repairs of the facilities and parking lots. HSM is also responsible to conduct at least 35 events per calendar year at each facility. Parks and Recreation provides the agreement administration and management. Among the terms of the contracts is the requirement that HSM will share 5% of annual gross revenue above $850,000 for the Sportsplex and $400,000 for the Regional Training Center with the City. Page 3

8 Once HSM assumed the management of the Sportsplex and the Field Hockey Regional Training Center, the City benefited by reduced City operating expenses and it help fund long term capital needs at the Sportsplex and Regional Training Center. Parks and Recreation s annual operating loss of approximately $400,000 was converted to Capital Improvement Program (CIP) funding. The following Chart 1 shows the amount of CIP funding spent (for FYs 2010 to 2014) and projected (for FYs 2015 to 2020). Chart 1 - CIP Spending for Sportsplex and Field Hockey Regional Training Center $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Sportsplex/Regional Training Center CIP Spending Per Fiscal Year Among other benefits to the City for these management agreements with HSM are: Increased number of events held at these facilities. Increased the amount of revenue generated from events. Increased the number of partnerships and sponsorships to keep these facilities viable. Generated additional tax revenue for the City: o Heads in Beds economic impact. o Personal property, business license and concessions trustee tax paid in 2013 total $20,965. Conversion from natural turf to artificial turf which expanded programming opportunities. Contributions made by HSM to the Princess Anne Commons Athletic Village. Page 4

Findings and Recommendations Finding 1: Revenue under-reported The 2013 annual report of revenue generated at the Sportsplex and Regional Training Center did not include concession revenue and

9 Findings and Recommendations Finding 1: Revenue under-reported The 2013 annual report of revenue generated at the Sportsplex and Regional Training Center did not include concession revenue and revenue from a partnership, RUSH Soccer, totaling $242,890. Per the management agreements with the contractor, the contractor is required to submit an itemized report setting forth the amount of all gross revenue received by the contractor (Manager) for the previous calendar year and to be certified by the chief financial officer or chief executive officer of the contractor as to the accuracy thereof. The itemized report is to include concessions and any other revenue received by the contractor. As revenues were far from the revenue sharing threshold levels ($850,000 for the Sportsplex and $400,000 for the Regional Training Center), the revenue reporting process was rather informal and sense of accuracy was not high. Therefore, the annual report of revenue was incomplete and under-reported for each calendar year. The management agreement requires concessions to be reported using the largest of 25% of actual concession revenue or the projected concession revenue as shown in Exhibit B of the agreement. Page 5

10 Table 1 below compares the revenue reported in the 2013 Annual Itemized Revenue Report and adjusted revenue (with concessions and RUSH revenue) per management agreement with HSM. Table 1 - Reported Revenue versus Revenue per Contract Terms Reported Revenue Per Revenue Categories Revenues Contract Difference Sportsplex Sponsorships $67,832 $67,832 $0 Field Rental $209,030 $209,030 $0 Facility Rental $59,020 $59,020 $0 Concessions Sportsplex $0 $103,000 ($103,000) RUSH $0 $75,000 ($75,000) Sportsplex Totals $335,882 $513,882 ($178,000) Regional Training Center Sponsorships $9,950 $9,950 $0 Field Rental $148,480 $148,480 $0 Facility Rental $0 $0 $0 Concessions USFHA RTC $0 $64,890 ($64,890) Management Fee * $12,500 $12,500 $0 RTC Totals $170,930 $235,820 ($64,890) Overall Totals $506,812 $749,702 ($242,890) *NOTE: Management Fee is for contractor s role in working a land transfer deal for the Virginia Beach Professional Baseball group. Recommendations We recommend Parks and Recreation management: 1.1 Develop a template for the contractor to use for submitting the annual itemized revenue report that would include all revenue especially concessions and sponsorships. 1.2 Review the annual itemized revenue report submitted by the contractor to ensure completeness and reasonableness of amounts reported. Any discrepancies should be immediately resolved with the contractor. Page 6

11 Finding 2: Reported Revenue does not meet Projected Revenue The revenue during the 2010 through 2013 calendar years do not meet the projected revenue stated in the management agreements with the contractor. Exhibit B of the agreements show projected revenue for 20 years out starting with the The contractor stated that the combination of the downturn in the economy and the departure of the Virginia Destroyers football were some key factors impacting revenues. As a result, revenue realized fell short of the revenue sharing threshold. Table 2 below shows the difference in revenue reported (adjusted for concessions and RUSH revenue) with the projected revenue of Exhibit B in the management agreements. We do note that revenues have been rising from the 2010 low point. Table 2 - Projected Revenue versus Adjusted Revenue Revenue Categories * 2013 Adjusted Revenue Sponsorships- Sportsplex $60,307 $121,600 $67,832 Field Rental- Sportsplex $88,862 $125,625 $209,030 Facility Rental- Sportplex $92,600 $54,430 $59,020 Concessions Sportsplex $75,000 $90,000 $103,000 ATM Machine Commission $275 $480 $0 RUSH $0 $0 $75,000 Total - Sportsplex $317,044 $392,135 $0 $513,882 Sponsorships- USFHA RTC $2,086 $7,050 $9,950 Field Rental- USFHA RTC $80,278 $100,685 $148,480 Facility Rental- USFHA RTC $5,000 $0 $0 Concessions USFHA RTC $53,000 $58,000 $64,890 Management Fee $0 $0 $12,500 Total - RTC $140,364 $165,735 $0 $235,820 Total- Sportsplex and RTC $457,408 $557,870 $0 $749,702 Projected Revenues- Combined Sponsorships $275,000 $302,500 $344,578 Field Rental $115,000 $140,000 $168,300 Concessions Sportsplex $75,000 $90,000 $103,000 Concessions USFHA RTC $53,000 $58,000 $64,890 Tournaments $46,000 $54,000 $63,240 Events $134,500 $155,600 $193,903 Projected Revenues $698,500 $800,100 $0 $937,911 Difference (Shortfall) ($241,092) ($242,230) ($188,209) *NOTE: The 2012 Annual Itemized Revenue Report was missing. Neither the contractor or Parks and Recreation had a copy. See Finding 3. Page 7

12 Chart 2 below shows that the revenue shortfall to projected revenue is decreasing as time goes on. Chart 2 - Reported Revenue Shortfall versus Projected Revenue $0 ($50,000) ($100,000) ($150,000) ($200,000) ($250,000) ($300,000) Reported Revenue Shortfall versus Projected Revenue Recommendation We recommend Parks and Recreation management: 2.1 Continue to work with the contractor to ensure the Sportsplex and Field Hockey Regional Training Center facilities realize maximum revenue potential. Page 8

13 Finding 3: Required Reports were not Submitted The 2012 annual itemized revenue report and a number of other required reports were not prepared and/or submitted by the contractor. Per the management agreements with the contractor, the contractor is required to submit an annual itemized report as well as a number of other reports throughout the year to Parks and Recreation management. Without the annual itemized revenue reports, Parks and Recreation management, cannot determine the revenue sharing amount, if any, due from the contractor. Also, management is hindered from conducting adequate contract administration without these reports. Table 3 below lists the required reports. Table 3 - Required Reports to be submitted to the City per Management Agreements Section Frequency Due Date Number Report Name Description Monthly or as 5.6 Upcoming Events Updated facility schedules of events at Sportsplex and requested Schedule the site. Monthly 10th calendar day 3.4.B Schedule of Events Events conducted the prior month at the Sportsplex, Results and the site, along with attendance for same and number of tickets sold, and any other financial or operational information deemed pertinent or as requested by the City. Quarterly April 10th 3.4.C Maintenance Listing of all prior 3 months' preventative maintenace July 10th Report and repairs made at the Sportsplex and the site, along October 10th with dates of the work, inspections received, and other January 10th pertinent information. Annually March 1st of next 3.3.B Itemized Revenue Sets forth the amount of all Gross Revenues actually calendar year Report received for the preceding calendar year as of December 31st. Annually March 1st of next 3.4.B Operating Itemized report listing the number of events calendar year Report conducted at the Sportsplex and the site, attendance for same, number of tickets sold, other revenue collected, taxes paid, and any other pertinent financial or operational information. We were unable to obtain the following reports from either Parks and Recreation management or the contractor: 2012 Annual Itemized Revenue Report Upcoming Events Schedule Schedule of Events Results (prior to May 2013) Quarterly Maintenance Report Annual Operating Report Page 9

14 Recommendation We recommend Parks and Recreation management: 3.1 Develop a process to ensure all required reports are submitted timely and follow up is made with the contractor for any missing reports. Conclusion Overall, based on the results of our audit, the contractor, Hometown Sports Management, has complied with the terms of the Management Agreement with the City over the Sportsplex and Field Hockey Regional Training Center. We do note the revenue reporting process can be enhanced to improve accountability by implementing our recommendations related to the reporting all revenue and the submission of required management reports to the City. Acknowledgements We would like to thank the management and staff of the Parks and Recreation Department and the management of Hometown Sports Management for their courteous and prompt assistance during our audit. Page 10

Office of the City Auditor Audit of Police Property and Evidence Unit Cash Handling. Report Date: February 1, 2011

Office of the City Auditor Audit of Police Property and Evidence Unit Cash Handling. Report Date: February 1, 2011 Audit of Police Property and Evidence Unit Cash Handling Report Date: February 1, 2011 Contact Information Office of the City Auditor Promoting Accountability and Integrity in City Operations www.vbgov.com/cityauditor