OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND AGREEMENT COMPLIANCE AUDIT DECEMBER 2007 ` Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX December 7, 2007 Mr. Turner West, Manager Department of Aviation City and County of Denver Mr. Harold Callahan Regional Director South Central Area Properties Avis Budget Group, Inc P.O. Box Dallas, TX Dear Mr. West and Mr. Callahan: Attached is the Auditor s Office Audit Services Division s revenue and agreement compliance audit report of the Budget Rent A Car System, Inc. (Budget) Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 and the Special Facilities and Ground Lease dated September 1, 1999 and applicable amendments (Agreements), for operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of the audit was to determine whether Budget and the City and County of Denver complied with the terms of the agreements and whether internal controls in place were adequate. The Audit Services Division found instances of non-compliance to contract conditions as described in the accompanying report. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, DJG/kh cc: Dennis J Gallagher Auditor Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Cheryl Cohen-Vader, Chief Deputy Manager of Aviation Stan Koniz, Deputy Manager of Aviation for Business and Technologies Kelly Brough, Chief of Staff The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 1

3 Mr. West and Mr. Callahan December 7, 2007 Page Two Claude Pumilia, Chief Financial Officer Chris Henderson, Chief Operating Officer David Fine, City Attorney Lauri Dannemiller, Executive Staff Director, City Council Beth Machann, Controller Patrick Heck, Deputy Manager of Aviation - Revenue Management and Business Development Pete Gingras, Assistant Deputy Manager of Aviation/Properties Laura Trujillo, Co-Assistant Deputy Manager of Finance Amy Weston, Co-Assistant Deputy Manager of Finance Sharon Shannon, Audit Supervisor, Department of Aviation 2

4 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 3 Internal Auditor s Report 4 Executive Summary 5 Background, Scope, Objective, and Methodology 6 Findings, Recommendations, and Responses 8 Schedule of Amounts Due and Paid and Related Notes 13 3

5 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed a revenue and contract compliance audit of the Budget Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 and its First, Second and Third amendments dated February 5, 1996, December 24, 1996, and September 1, 1999 respectively; and the Special Facilities and Ground Lease dated September 1, 1999 and its First amendment dated March 22, 2001, (Agreements) between Budget Rent A Car System, Inc. (Budget) and the City and County of Denver. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2006 is presented in accordance with the Agreements. We also determined whether Budget and the Department of Aviation complied with various other terms and conditions of the Agreements, City rules and regulations, and whether internal controls were adequate. This audit was included in the Auditor s Office Audit Services Division s 2006 Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the revenue amounts. Our objectives were met in all areas except as noted in the findings in this report. We extend our appreciation to the personnel who assisted and cooperated with us during the audit. Audit Services Division Date: December 7, 2007 Staff: Dick Wibbens, CPA, Audit Manager Sonia Montano, CICA, Internal Audit Supervisor Wayne Leon Sanford, CICA, Senior Internal Auditor Rudy M. Lopez, Staff Internal Auditor Kip R. Memmott, CGAP Director of Audit Services The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 4

6 EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2006 This summary highlights the findings of the revenue and contract compliance audit, which are more fully described in the Findings, Recommendations, and Responses section beginning on page 8. The Findings, Recommendations, and Responses section includes responses from the Department of Aviation and Budget to our findings. 1. Refund Due the City and County of Denver Budget did not comply with the concession agreement requirement for reporting airport gross revenue generated at rental locations within a 20-mile driving distance of the Terminal Building (curbside). Budget also applied deductions from gross revenue which are not authorized by the concession agreement. As a result, Budget owes the City a refund of $10, Concession Revenue Monthly Reports Concession revenue monthly reports do not agree with the annual schedule of gross revenue (ASGR). Specifically, listed monthly gross revenue and authorized deductions are not verifiable. Budget internal controls did not identify nor prevent these report errors. 3. Annual Statements and Usage Fee Disclosure Budget has not provided the City with an annual statement of gross revenues, prepared and certified by the Budget Chief Financial Officer or by an Independent Certified Public Accountant. Additionally, Budget has not provided the City with the proper annual statement of usage fees, prepared and certified by an Independent Certified Public Accountant. For example, the usage fee disclosed on the DIA rental location rental agreement for 2006 was $1.70 but the figure should have been $ Insurance Terms and Conditions The City and County of Denver insurance requirement for this agreement is inconsistent. Specifically, the Facilities Lease stipulates that the City be named as additional insured on the certificate of insurance but the Concession Agreement does not stipulate that the City be named as additional insured on the certificate of insurance provided to the City. Additionally, Budget has not provided the City with the certificate of insurance which contains the proper ten day written notice provision for non-payment of premiums as required. 5. Deductions of Corporate Discounts Budget deducts vehicle rental corporate discounts, which are separately awarded by Budget to their corporate customers, from monthly and annual gross revenue reported to the City. However, the Concession Agreement does not define gross revenue as including corporate discounts as an authorized deduction. As a result of this type of deduction from gross revenue, the percentage compensation fee paid to the City for 2006 was $18,453 less than it should have been. 5

7 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2006 Background Budget Rent A Car System, Inc. (Budget) operates a nonexclusive concession for the rental of motor vehicles to the public at the Denver International Airport (DIA) under the terms of a Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 between the City and County of Denver (City) and Budget. Budget is required to report to the City all Budget rentals of motor vehicles and all other authorized items or services from each customer of Budget who has arrived at DIA within 24 hours prior to entering into a motor vehicle rental agreement with Budget including services provided at locations within a 20-mile driving distance of the Terminal Building (curbside) at DIA. Budget is required to either pay the City 10% of the Company s annual gross revenues (as defined in the Concession Agreement) derived from its operation or the defined Minimum Annual Guaranteed (MAG) amount, whichever is greater. For 2006, the Percentage Compensation Fee of $3,383,855 was greater than the MAG of $2,336,825. Budget is also required to pay rent for a counter located in DIA s terminal building. The details of counter rental fees are outlined in the accompanying notes to the schedule of amounts due and paid. In addition to the Concession Agreement and Terminal Building Premises Lease noted above, Budget operates under the terms of the Special Facilities and Ground Lease dated September 1, 1999 between the City and Budget. This agreement allows Budget to occupy a ground facility near the terminal building at Denver International Airport for the purpose of renting motor vehicles to the public. The rent for the ground rental areas are noted in the accompanying notes to schedule of amounts due and paid. Scope The scope of our audit of Budget operations at DIA was to examine and evaluate the adequacy and effectiveness of internal controls and to determine whether Budget and the City complied with the agreements. Additionally, we determined that the Schedule of Amounts Due and Paid included in this report is in accordance with the Concession Agreement and Terminal Building Premises Lease, the Special Facilities and Ground Lease and applicable amendments for the year ended December 31, 2006, and is not materially misstated. Objective The objective of our audit was to determine whether Budget properly reported gross revenue, usage fees, and paid the City the correct amounts for percentage compensation fees, space rent, and ground rent in accordance with the agreements. Additional objectives included determining whether Budget and the Department of Aviation complied with various other terms and conditions of the agreements, as well as other City rules and regulations, and assessing the adequacy of accounting and administrative internal controls. 6

8 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Methodology To meet audit objectives, we utilized several methodologies. These evidence gathering and analysis techniques included but were not limited to: Review of internal controls Verification of monthly and annual reportable gross revenue Accuracy of Budget deductions of gross revenue Verification of usage fees charged Recalculation of 10% compensation fee Review and reconciliation of Budget combined sales tax rate, annual statement of gross revenues, monthly and annual compensation fees amounts due, and monthly and annual minimum guarantee amounts due Recalculation of rental agreement transactions Determination of payment timeliness of amounts due Discussions with DIA and Budget management and staff Verification of evidence of insurance and bonding requirements Examination of annual usage fee report for compliance with facilities lease terms and conditions Onsite physical inspections 7

9 FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, Balance Due the City and County of Denver Audit work identified several issues related to Budget reporting of gross revenue during the period reviewed. Specifically, Budget used unauthorized deductions from gross revenue to calculate monthly reportable gross revenue. Therefore, the monthly concession revenue reports and annual schedule of gross revenues for 2006 are inaccurate. Audit work determined that Budget lacked effective internal controls for reporting revenue and that DIA revenue report review procedures failed to identify reporting errors. As a result, Budget underreported revenue to the City. DIA is therefore due a net refund of $10,413 as a result of reporting errors. This amount includes delinquent interest of $726. The following detail the specific revenue reporting issues identified: Budget did not report to the City monthly Airport gross revenue generated at the Budget rental location, 3901 Quebec St., Denver, CO. Budget is required by Concession Agreement and Terminal Building Premises Lease Section 6.2 (c) (i) to report all Airport rental revenue generated at Budget rental locations within a 20-mile driving distance from the Terminal (curbside). The Quebec St. location is 17.5 miles driving distance from DIA. This issue has been identified in prior audits issued by the Auditor s Office. However, DIA has not enforced this provision. As a result of not reporting revenues from the Quebec St. location, Budget underreported Airport gross revenue by $92,078. Budget did not obtain the required rental agreement customer designation as airport or non-airport customer on 23.5% of the rental agreements sampled. Additional percentage compensation fee due the City is $9,209. Budget calculated a 2006 year end credit of $27,758. DIA agreed with this amount and issued Budget a credit memo in May 2007 for $27,758. Subsequently, DIA applied this credit to Budget amounts due in June and July As a result of this underreporting, the credit calculated by Budget and approved by the City was incorrect. The audit determined that the correct amount of credit due Budget should have been $18,071. Budget incorrectly applied $4,787 for Parking Garage and Valet Services revenue items as deductions from gross revenue at the DIA location. As a result, percentage compensation fee was reduced by $478. The concession agreement does not authorize these items as deductions from gross revenue. 8

10 FINDINGS, RECOMMENDATIONS AND RESPONSES Recommendation We recommend DIA invoice Budget $10,413 for additional percentage compensation fee due and delinquent interest. Budget should review their reporting procedure internal controls and implement any adjustments needed to ensure that all concession agreement reporting terms are in full compliance. DIA should review their current revenue report review procedures to ensure they are effective for determining the accuracy and completeness of Budget monthly and annual reporting of gross revenue. Budget should report all 2007 Airport revenue for the Quebec Street location and DIA should confirm the accuracy and propriety of the amounts reported. Budget Rent A Car System, Inc., Response Budget Rent A Car System, Inc. has agreed to remit the amount due. Department of Aviation Response The Department of Aviation will invoice Budget for the net refund of $10,413. The airport rental car companies previously have been notified in writing that all locations within the 20- mile drive must be included in their revenue reports. Before November 22, 2007, the Airport Property Office will send another letter to all companies with a list of specifically included offairport business locations. 2. Concession Revenue Monthly Reports Budget concession revenue monthly report s (CRMR) and the annual statement of gross revenues (ASGR) do not agree in all categories. Budget s revenue report internal controls did not identify nor prevent incorrect data from being submitted to the City. Inaccurate reports result in the City tracking and reporting incorrect gross revenue data, negatively impacting the City s revenue analysis. Additionally, the ability to verify the accuracy of the data is hindered owing to a lack of supporting documentation. CRMR report errors are identified below: Amounts listed for monthly gross revenues (line 1) and for authorized deductions on the report do not agree with amounts on the Budget annual statement of gross revenues (ASGR), or the monthly Budget business and activity report. For five months of 2006, the monthly usage fee amount was included in the authorized deduction amount listed on the CRMR, and also listed separately on the CRMR as a deduction. For July and October of 2006, the usage fee amount listed on the CRMR is incorrect and did not agree with the July and October amounts reported on the ASGR. Budget concession agreement Section 6.02, (g), requires that the company submit a true and correct statement of the gross revenues for the preceding month. Additionally, the CRMR Oath of Concessionaire stipulates a true and just report is the reporting standard. 9

11 FINDINGS, RECOMMENDATIONS AND RESPONSES It should be noted that the audit determined the CRMR reportable revenue did agree with the monthly business activity data, meaning the monthly percentage compensation fee was not impacted by these errors. Recommendation Budget should submit revenue reports that identify data that is 100% verifiable and supported by proper documentation. Budget should improve their internal controls for preparing and reviewing the CRMR. The reporting expectation is that the CRMR and ASGR should reconcile. Additionally, DIA should review their report review procedures and make adjustments as needed to ensure revenue reports are providing true and correct data. Budget Rent A Car System, Inc., Response Budget Rent A Car System, Inc. did not respond. Department of Aviation Response The Airport Property Office currently sends a letter in January to all rental car companies reminding them of the requirement to submit annual revenue reports, and includes a sample format for the Certified Annual Statement. The companies also receive reminder for the annual reports due when the MAGA increase notice is issued in mid-february. No reminder for monthly reporting has been sent in the past. Prior to the end of 2007, the Airport Property Office will draft and send a one-time notice of the monthly reporting requirements and include threat of default in the language of the notice to all the rental car operators. 3. Annual Statements and Usage Fee Disclosure Budget has not provided the City an annual statement of the total of all revenues certified by the Chief Financial Officer (CFO) of the Company or by an independent Certified Public Accountant (CPA), as required by Section 6.2 of the Concession Agreement and Terminal Building Premises Lease. Budget has also not provided the City an annual statement of usage fees prepared and certified by an independent CPA, which is non-compliant with Section 5.08 of the Special Facilities and Ground Lease. DIA has not enforced these provisions. Audit work determined that Budget printed the incorrect usage fee daily rate on 100% of the DIA rental agreements tested for the audit period. Budget printed $1.70 on the rental agreements instead of the correct daily usage fee amount of $1.80. Budget s internal controls failed to identify and correct the daily usage fee amount. However, it should be noted that for the rental agreements tested as part of audit work, a correct usage fee amount was calculated and charged. Therefore, the usage fee charged for 2006 was accurate. The usage fee annual statement is to be furnished to the City, the usage fee Trustee, and the Independent Consultant for usage fee analysis and future calculation. Without this information, the intended report recipients must rely on usage fee data that is not independently prepared and certified. 10

12 FINDINGS, RECOMMENDATIONS AND RESPONSES Recommendation Budget should submit the required annual statement of gross revenues and the annual usage fee statement as required. DIA should monitor and enforce these contract provisions. Additionally, Budget should ensure that its rental agreements disclose the proper daily usage fee amount as determined by the Independent Consultant. Budget Rent A Car System, Inc., Response Budget Rent A Car System, Inc. did not respond. Department of Aviation Response Department of Aviation s response to the finding contains the following elements. The Airport Property Office currently sends a letter in January to all rental car companies reminding them of the requirement to submit annual revenue reports, including the requirement for Usage Fee Report prepared by an independent CPA. A sample format for the Certified Annual Statement is also included. The companies also receive a reminder for the annual reports due when the MAGA increase notice is issued in mid-february. As no monetary penalty is associated with the requirement, there is little else the Airport can do to enforce provisions of the agreement, beyond repeated requests. 4. Insurance Terms and Conditions Budget has not provided the ten day written notice for nonpayment of premium as required by the special facilities and ground lease. Additionally, we noted the facilities lease and the concessionaire agreement have inconsistent insurance specifications as noted below. The concession agreement and special facilities and ground lease were executed to operate concurrently and to provide the City with consistent insurance terms. Inconsistent insurance agreement terms and conditions increase the level of risk for the City due to the undisclosed loss of insurance coverage. The facilities lease has a ten day written notice requirement for nonpayment of premium. The concession agreement does not require a ten day written notice for nonpayment of premium. Therefore, under the concession agreement terms, Budget is not required to provide any notice of nonpayment of premium. Which means insurance could be cancelled and the City may not be notified until after the fact. The concession agreement does not include language that requires an endorsement naming the City and County of Denver as an additional insured to be included on the certificate of insurance. The facilities lease contains such an additional insured provision. A situation where the City is not identified as an additional insured presents a risk of potential loss to the City since an extra endorsement is required to affect an additional insured status. 11

13 FINDINGS, RECOMMENDATIONS AND RESPONSES Recommendation The City should amend the contracts to provide consistent insurance terms. The City should contact Budget and obtain the necessary certificate of insurance documentation that complies with all agreement specifications. Budget Rent A Car System, Inc., Response Budget Rent A Car System, Inc. did not respond. Department of Aviation Response This issue of disparate insurance requirements under the two agreements was addressed in 1999/2000. Each agreement file contains an agreement letter between the Airport and the company in which all requirements for insurance to cover both agreements have been combined. 5. Deductions of Corporate Discounts City revenue is reduced for 2006 by $18,453 as result of allowing the use of corporate discounts as a deduction from gross revenue. Budget applies discounts they separately award to corporate customers as a reduction to Airport gross revenue. These corporate discounts are separately negotiated between Budget and each corporation. It is not in the best interest of the City to allow this promotional expense as the practice reduces the monthly and annual amount of percentage compensation fee due the City. Concession agreement Section 6.2 does not have specific language authorizing corporate discounts as a deduction from gross revenue. Recommendation The City should amend the contract definition of gross revenues to prohibit the use of corporate discounts as a deduction from gross revenues. Additionally, this review should be conducted for all of the Airport car rental companies concession agreements to provide consistent concession agreement language. Budget Rent A Car System, Inc., Response Budget Rent A Car System, Inc. did not respond. Department of Aviation Response This is not an issue covered under the current Concession Agreement, and it is highly unlikely that the City will be in position to re-negotiate this single item with this specific company or with the industry as a whole before the agreements expire in January The Airport will consider this along with several other potential revenue sources unaddressed in the 1992 agreements when drafting the new agreements. 12

14 SCHEDULE OF GROSS REVENUE AND AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2006 Reportable Gross Revenue (Note 1) $33,838,482 Amount Due Amount Paid Balance Due (Note 2) (Note 3) City/(Budget) Concession Fees $3,383,855 $3,401,926 $(18,071) Ground Rent 649, ,808 Additional Rent 545, ,441 Terminal Space 7,770 7,770 Finger Printing Security Badges Usage Fees (Note 4) 1,241,793 1,241, Credit Recovery (Note 5) 27, ,758 Interest (Note 6) Total $5,857,782 $5,847,369 $10,413 The accompanying notes are an integral part of this schedule 13

15 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID 1. Reportable Gross Revenue Gross Revenue includes all charges for time and mileage and other authorized charges for services or rentals of motor vehicles made by customers who arrived at DIA within 24 hours. Other authorized items or services include: Additional equipment Change of equipment Personal accident insurance Uninsured motorist protection Underage fee Additional driver fee Drop off charges Supplemental liability insurance Additional equipment Airport recovery fee Supplemental liability insurance Allowed reductions to gross revenues include: CDW (Collision Damage Waiver) and LDW (Loss Damage Waiver) Gasoline Usage fees Amounts received as insurance proceeds Non-revenue rentals to employees 2. Amounts Due Concession Fees Section 6.2 (a) of the Concession Agreement states that Budget agrees to pay as Concession Fees to the City an amount equal to 10% of the Company s annual gross revenues (Percentage Compensation Fee) derived from its operations or a minimum annual guaranteed amount, whichever is greater. The 2006 Percentage Compensation Fee due of $3,383,855 was greater than the minimum annual guarantee of $2,336,825 for Ground Rentals According to section 5.02 (a) in conjunction with section 5.02 (g) of the Special Facilities and Ground Lease, Denver Municipal Airport System Rules and Regulations section , Budget agreed to pay the following as Ground Rentals to the City: Annual Square Feet Rate Per Period Area Description Square Feet Lease Area 740, $0.87 January 1, 2003 to September 30, 2006 Lease Area 740, $0.90 October 1, 2006 to December 31,

16 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Additional Rental In accordance with section 5.02 (c) of the Special Facilities and Ground Lease, the Special Facilities and Ground Lease Payment Schedule dated September 19, 2000 and the Department of Aviation billing invoices, Budget agreed to pay as Additional Rentals an amount of $545,441 per annum. These amounts are established by the Special Facilities and Ground Lease and Denver Municipal Airport System Rules and Regulations section These additional fees are to cover additional ground lease, construction, improvement costs. The fees charged are evaluated annually. Terminal Building Premises Rental section 6.1 (a) of the Concession Agreement and Terminal Building Premises Lease states that Budget agreed to pay as Terminal Premises Rentals to the City an amount equal to $60 per square foot per year. The space occupied in the Terminal Building Premises was square feet for the year ended December 31, Amounts Paid The amounts paid were compiled from the Department of Aviation s cash receipt records and reports provided. Amounts paid include those billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. The amounts paid also include any credits from prior years overpayments. 4. Usage Fees In accordance with the section 5.01 of the Special Facilities and Ground Lease agreement, Budget agreed to charge and collect usage fees for each rental car transaction day from all airport customers entering into car rental agreements. Such fees are intended to cover the costs of the bonds issued to construct the facilities and are paid over to the trustee of the car rental revenue fund monthly. For the period January 1, 2006 through December 31, 2006 the rental car transaction daily usage fee was $1.80. Total usage fees reported for the audit period were $1,241, Credit Recovery The original 2006 amount due Budget was inaccurate as a result of the exclusion of Airport gross revenue from 3901 Quebec St. ($92,078). Budget had an Airport customer non-designation error rate of 23.5% for not obtaining the customer designation of airport vs. non-airport customer on the rental agreement. Additional percentage compensation fee due the City is $9,209. The net effect is a 2006 credit due Budget in the amount of $18,071. According to Budget original year end Schedule of Gross Revenue, they were due a credit of $27,758 (DIA Revenue Only). $27,758 was incorrect due to the use of unauthorized deductions of Parking Garage Storage ($62) and Valet Service ($4,725) or an over credit of $478. The City issued Credit Memo CM on 05/07/07 for $27,758 to Budget. On 06/26/07 $1,214 of Credit Memo CM was applied. On 07/05/07 the remaining $26,544 was applied, leaving a zero balance. 15

17 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID 6. Interest In accordance with section 6.2 (j) and 6.5 (c) of the Concession Agreement and Terminal Building Premises Lease, and Airport Regulations Part , interest at 18% per annum is due on any underpayment. Interest due from Budget for the year ended December 31, 2006 totaled $777 of which $51 has been paid. Such interest is computed from January 1, 2006 through June 26, 2007 on all 2006 amounts due the City, not received by the due date. 16