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SUMMARY
The Office of the Auditor General has conducted a
performance audit of the Arizona Tourism and Sports Authority (TSA) pursuant
to Arizona Revised Statutes (A.R.S.) §5-812. This statute requires a
performance audit no later than 2004 and at least every 5 years thereafter.
This audit was conducted under the authority vested in the Auditor General
by A.R.S. §41-1279.03.
Established in 2000, TSA is in charge of designing and
constructing a multipurpose facility in Glendale, which will be the new home of
the Arizona Cardinals football team and Tostito’s Fiesta Bowl, and which will
host the 2008 Super Bowl. Construction of the facility began in July 2003 and is
scheduled for completion during the summer of 2006. TSA also funds tourism
promotion, expansion and renovation of Cactus League spring baseball facilities,
and youth and amateur sports facilities and programs. TSA’s responsibilities
pertain only to Maricopa County. TSA’s funding comes primarily from two
voter-approved taxes in the County—a 1 percent increase in hotel bed taxes and a
3.25 percent rental car surcharge. TSA also receives funding from income taxes
collected from the Cardinals’ corporate organization, its employees (including
players), and their spouses, and it will also receive all sales taxes collected
at Cardinals home games and other events held in the new facility.
Multipurpose facility cost at $370.6 million
(see pages 15 through 21)
While TSA has taken steps to help protect the public’s
interest during the construction of the multipurpose facility, the facility’s
total cost has increased by nearly $40 million from the original estimate. The
facility was originally estimated to cost $331 million, but as of January 2004,
was projected to cost $370.6 million. Statute does not cap facility construction
costs, and as design plans for the facility were largely finalized in January
2004, construction costs increased. Specifically:
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Design-build agreement established construction price—In
August 2003, TSA entered into a design-build agreement with the facility’s
contractor, which set a guaranteed maximum price of $346.3 million for the
multipurpose facility’s construction. At this time, the design plans were
not finalized. However, the agreement required the contractor to be
responsible for any planned construction costs that exceeded the guaranteed
maximum price. As such, the price included $9 million in contingency that
the contractor set aside to pay for unexpected cost increases to the planned
construction. The Cardinals also committed an additional $9 million in
contingency to pay for any new costs associated with upgraded design changes
or improvements they request that were not in the facility designs at the
time construction began, as well as any other increases in the guaranteed
maximum price. Finally, TSA was planning to contribute an additional $6.5
million as part of a lease purchase of some cooling and central plant
equipment for the facility. Altogether, the facility cost was budgeted at
$361.8 million.
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Design-build agreement price revised—As facility design
plans were largely finalized in January 2004, the contractor was able to
provide more information regarding construction costs. TSA, in conjunction
with the Cardinals, decided which features to retain, add, or remove. While
some significant changes were made to try to stay within the original budget
of $361.8 million, TSA and the Cardinals agreed to retain facility features
with the project design at a higher cost or approved other changes. TSA
modified the original design-build agreement and increased the guaranteed
maximum price to $357.8 million. Additionally, there is nearly $12.9 million
in costs for such things as city permit fees, facility testing and
inspection, and insurance not included in the design-build agreement,
bringing the total project cost to $370.6 million.
TSA has various mechanisms and a budget in place for
overseeing construction that, if used properly, can help limit TSA’s liability
for future cost overruns, and ensure the project is completed on time and with
sufficient quality. In collaboration with the Cardinals, TSA is overseeing the
facility’s construction through an onsite staff member, the use of construction
consultants, and through budgeted allowances for facility construction
inspections, contingencies, and insurance. The original amount budgeted for
contingency was equal to about 5 percent of the original project budget, but the
Cardinals and the construction contractor have both used some of their
contingencies to cover some of the recent facility cost increases. However, a
TSA official stated that with the completion of the facility’s design, the risk
of further construction cost increases has been significantly reduced.
Review needed of General Fund support for TSA
(see pages 23 through 29)
The Legislature may wish to consider revising statute to
reduce the burden placed on the General Fund when shortfalls occur in the amount
of NFL tax available to TSA. Statute provides that TSA is to receive the greater
of (1) all state income taxes paid by Cardinals players and other personnel,
their spouses, and the Cardinals’ corporation each year; or (2) a guaranteed
minimum that was $3.5 million in fiscal year 2002 and rising at 8 percent a
year. If NFL income tax collections do not equal the guaranteed minimum amount,
additional General Fund monies must make up the difference, irrespective of
whether they are needed to sustain TSA operations. By 2031, the minimum amount
that must be transferred to TSA, either through actual NFL tax collections or
any necessary General Fund subsidy, will increase to nearly $33 million and will
continue growing after that as this tax does not expire.
For fiscal years 2003, 2004, and 2005, the NFL tax is
expected to be over $2.6 million less than the guaranteed minimum. To comply
with the law, TSA will receive this amount in General Fund revenues, although
TSA’s other revenue is adequate to fund all operations and begin establishing
required reserves. Further payments from the General Fund may be needed because
in any given year, several factors could negatively affect the amount of NFL tax
collected. These factors include year-to-year fluctuations in the Cardinals’
salaries, economic downturns that affect corporate and employee earnings, and
potential players’ strikes or other work stoppages.
The Legislature has several options available to limit or
otherwise control General Fund disbursements that may not be necessary to
sustain TSA’s operations. These include:
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Discontinuing the automatic transfer of non-NFL income
tax General Fund monies to cover shortfalls in the guaranteed minimum
amount. Instead, when shortfalls occur and TSA needs additional funding, it
could still request General Fund appropriations from the Legislature. This
option would give the Legislature greater discretion in providing funding
based on the State’s budget, economic conditions, and TSA’s needs.
While two of these options would retain the statutory minimum
distribution to the TSA, these options could potentially affect TSA’s ability to
meet its funding obligations. For example, TSA’s ability to establish and fund
required reserves for operations, repairs, and other long-term costs associated
with the multipurpose facility could be affected. Additionally, reduction in or
elimination of non-NFL income tax General Fund monies for TSA could affect its
ability to adequately fund operations.
Defined processes will help TSA objectively evaluate
funding requests
(see pages 31 through 37)
Greater specificity in evaluation processes will better
enable TSA to objectively evaluate funding requests for youth and amateur sports
and Cactus League projects. TSA’s decision-making process for committing
approximately $5.2 million for three youth and amateur sports projects in 2001
and 2002 was not clearly defined. The three projects chosen are new sports
fields at South Mountain YMCA, a regional sports complex in Avondale, and sports
fields that will double as overflow parking at the new multipurpose facility in
Glendale. However, the Glendale project is on hold until Glendale acquires the
land, and TSA and Glendale enter into another agreement that will clarify the
city’s match and identify the project’s total cost.
TSA has since implemented a new process for evaluating future
requests to fund youth and amateur sports projects. Under this new process, TSA
received and evaluated 92 grant applications requesting over $35.2 million. In
February 2004, TSA awarded 13 grants, totaling over $1.3 million to various
communities and community organizations in Maricopa County. However, this
process can be improved. These improvements include establishing grant
administration and oversight requirements; defining how long funded facilities
must remain in existence and operational; and further clarifying what costs will
be considered for the applicant’s local match.
TSA should also develop and implement written guidelines for
awarding Cactus League monies to spring training baseball facilities in Maricopa
County. As of December 31, 2003, TSA had committed approximately one-quarter of
the total estimated $205 million that will be available for Cactus League
facilities over 30 years. The guidelines need to address the standards to which
facilities will be built or renovated, and the length of the baseball team’s
lease extension. Guidelines could also help direct decisions about whether to
fund new facilities or renovate existing ones. While TSA states that it
considers some of these factors already, establishing a more clearly defined set
of guidelines would better ensure consistency and fairness in the process.
TSA needs to make several changes to its administrative
practices
(see pages 39 through 46)
Although TSA is not a state agency and is therefore exempt
from some requirements that state agencies must meet, it still should establish
administrative policies to provide adequate control and oversight of its
functions. Improvements are needed in the following areas:
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Procurement practices—Since its inception, TSA has
entered into agreements totaling million of dollars in services, but it
lacks a defined process for conducting procurements and overseeing its
contracts. Although TSA is exempt from the State’s procurement code, other
exempt or municipal organizations have established their own procurement
policies.
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Attorney use—Through June 30, 2003, TSA has spent nearly
$4.1 million for attorney services. While these attorneys have handled
complicated matters, TSA has also used them to draft board meeting minutes
and to draft and review relatively simple agreements with consultants,
organizations, and TSA staff. To the degree possible, TSA should have its
own staff perform such tasks. TSA should also evaluate the need for an
in-house attorney to handle routine legal matters and, except for litigation
representation, issue requests for proposals for outside legal services in
the future.
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Luxury suite and ticket use—TSA should develop a policy
to guide and control the use of the luxury suite and tickets it will receive
for all football events in the new multipurpose facility. TSA will have one
suite and 16 additional tickets for all football events, including the
Tostito’s Fiesta Bowl—a valuable resource that requires clear policies to
avoid potential misuse.
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Oversight of tourism promotion expenditures—TSA should
continue to work with the Arizona Office of Tourism to ensure all monies TSA
distributes to this agency are used solely to promote tourism in Maricopa
County. Auditors reviewed the tourism promotion expenditures for fiscal
years 2002 and 2003, and found that the Tourism Office used a small portion
of these distributions to promote all of Arizona, rather than Maricopa
County as required by statute.
Other pertinent information
(see pages 47 through 54)
During the audit, auditors developed information regarding
the projected revenue that the Arizona Tourism and Sports Authority expects to
receive over the next several years and gathered information related to the
funding of the multipurpose facility construction and surrounding
infrastructure.
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Projected revenues—While TSA’s revenues for fiscal years
2002 and 2003 have been sufficient to meet the agency’s many funding
obligations, future sufficiency is heavily dependent on the growth rate for
key revenue sources—particularly for the hotel bed tax and car rental
surcharges, the two largest revenue sources. Thus far, hotel bed taxes have
fallen below projections, while car rental surcharges have exceeded
projections. Projections prepared to accompany the issuance of TSA’s bonds
assumed an annual growth rate of 5 percent for the hotel bed tax revenues in
fiscal years 2005 through 2011, and for the car rental surcharge revenues in
fiscal years 2003 through 2011. While TSA has fully funded its priorities to
date, growth rates below 5 percent in the hotel bed tax and car rental
surcharge revenues could limit TSA’s ability to fund all activities and
sustain operations in the future. According to statute, the State is not
financially liable or responsible for any of TSA’s operations or projects,
and therefore, TSA is taking steps to prepare for possible revenue
shortfalls. These steps include working to obtain a $3 million line of
credit to cover short-term costs when revenue shortfalls occur and creating
an operating reserve.
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Multipurpose facility funding—TSA, the Arizona Cardinals,
and the City of Glendale will each contribute millions of dollars toward the
construction of the multipurpose facility and its infrastructure, with TSA
paying 72 percent of the anticipated $370.6 million in construction costs.
Once the facility is constructed, TSA will own and operate it, and generate
revenues from events held there. The Arizona Cardinals will also pay for a
significant portion of facility construction costs, but will own the naming
rights and receive concessions, advertising, and ticket sales revenues from
all Cardinals games held there. The City of Glendale has established a
Community Facilities District that will issue bonds to pay Glendale’s costs
for surrounding infrastructure, and plans to benefit from the economic
impact on neighboring businesses and from local sales taxes the facility
generates.
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