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SUMMARY
The Office of the Auditor General has conducted a
performance audit of the Arizona Sports and Tourism Authority (Authority)
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.
The Legislature established the Authority in 2000 as a
separate legal body of the State contingent upon voter approval of Proposition
302, which was obtained in the November 2000 election. As required by statute,
the Authority built and operates a multipurpose facility known as University of
Phoenix Stadium in Glendale, which is the home of the Arizona Cardinals football
team and the Fiesta Bowl. The Authority also distributes monies to the Arizona
Office of Tourism for tourism promotion. Finally, the Authority expends monies
to help promote the development of new construction and renovation of existing
Cactus League spring baseball facilities, and to promote the development of
youth and amateur sports facilities and programs. All of these activities are
performed in Maricopa County. The Authority’s funding comes primarily from a 1
percent increase in hotel bed taxes and a 3.25 percent rental car surcharge in
Maricopa County. Both funding sources will expire in 2031. The Authority also
receives funding from state income taxes paid by the Cardinals organization and
its employees and their spouses, rent for using the multipurpose facility,
concession commissions, facility-use fees on tickets for authority events and
Fiesta Bowl games, and state and City of Glendale sales taxes generated from
events held at the multipurpose facility.
Authority should continue to address its financial
situation
(see pages 11 through 22)
The Authority has reported operating deficits for fiscal
years 2002, 2006, and 2008 of $78,103, $3,381,792, and $457,536, respectively,
and projects that costs will exceed revenues from fiscal years 2009 through
2014. Once the bond debt service and other statutorily required distributions
are made, projected revenues will be insufficient to pay for all of the
facility’s projected operating expenses. Although the Authority can use its
operating reserve balance to cover these shortfalls for fiscal year 2009, this
$8.7 million reserve balance as of June 30, 2008, may be exhausted in fiscal
year 2010. In total, authority projections show that operating expenses will
exceed available monies by almost $29 million through fiscal year 2014.
Further, these projections do not account for the
establishment and maintenance of three statutorily required reserves including a
capital repair and replacement reserve of $25 million adjusted for inflation
each year after 2001, an operating reserve, and an annual increase of $100,000
to the youth and amateur sports reserve. As of June 30, 2008, although the
Authority had fully funded the youth and amateur sports reserve and had an $8.7
reserve balance in its operating account, the capital repair and replacement
reserve, which is critical for addressing future major capital needs as the
facility ages, had not received any funding. Additionally, the Authority’s
projected revenue is insufficient to either fund or maintain these reserve
amounts in the future.
Many factors contribute to the Authority’s financial
situation. Specifically:
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Lower NFL income tax collections—These
collections, which consist of the Arizona state income taxes paid by the
Arizona Cardinals’ corporation and employees, including players and their
spouses, and are distributed to the Authority, have not grown as projected.
Growth in these revenues was originally projected at 8 percent annually, but
has actually increased by an average of 2.2 percent annually. For example,
based on the 8 percent growth projection, the Authority should have received
almost $5.6 million in fiscal year 2008, but instead received slightly more
than $4.1 million.
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Authority decisions—Various authority decisions
have reduced available monies and resulted in additional debt obligations.
These include increased multipurpose facility construction costs. The
Authority’s $299.4 million share of these costs was $53.4 million more than
originally projected. According to the Authority, the increased costs of
construction materials contributed to the higher facility construction
costs. Additionally, according to the Authority, $32.3 million of the
increased costs were for site improvements that were originally to be funded
by the City of Glendale (City). Instead, the City remits to the Authority
city sales tax revenues from sales at the facility to help repay bonds the
Authority issued to pay for the site improvements. According to the
Authority, to fulfill a contract obligation and enhance the operational
aspects of the facility, it also paid an additional $9.61 million in
facility interior improvements to add temporary seating, furniture,
fixtures, equipment, and meeting space. Between fiscal years 2012 and 2020,
the Authority expects it will pay a total of approximately $15 million to
the Cardinals pursuant to an agreement to reimburse the Cardinals for land
acquisition, site improvements, and stadium costs that were originally the
City’s obligation, but that the Cardinals agreed to pay to help ensure the
facility was completed on time.
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Event expenses—The Authority pays unreimbursed
Cardinals’ game day expenses, which were more than $2.3 million annually in
fiscal years 2007 and 2008, while the Cardinals receive all game day
revenues. The Authority receives a portion of all sales tax revenues
generated at the Cardinals’ games. The Authority also agreed to pay $300,000
of annual Fiesta Bowl game day expenses, with this amount increasing
annually at 2 percent through 2035, in exchange for the Fiesta Bowl’s paying
$5.2 million toward the multipurpose facility’s interior improvement costs.
Further, although operating revenues were never expected to cover all
operating expenses and it was planned for the Authority to use nonoperating
revenues to help pay for operating expenses, unrecovered operating costs
were approximately $8.6 million in fiscal year 2007 and $9.1 million in
fiscal year 2008.
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Declining Tourism Revenues—Economic conditions
could significantly impact the Authority’s revenues. Although combined hotel
bed tax and car rental surcharge revenues had grown an average of 7.9
percent annually through fiscal year 2007, they decreased almost 1 percent
in fiscal year 2008 from almost $24.3 million in fiscal year 2007 to less
than $24.1 million in fiscal year 2008. Additionally, revenues for the first
6 months of fiscal year 2009 were 3.3 percent lower than for the same period
of fiscal year 2008.
The Authority has begun to take steps to address its
financial situation and should continue these efforts. With the help of the
Arizona Cardinals, additional NFL state income taxes paid in 2005 and 2006
totaling nearly $1.2 million have been identified and will be distributed to the
Authority in fiscal year 2010. The Authority is also exploring revising its
business plan for multipurpose facility operations by working with its facility
manager to reduce operating costs by at least $1 million in fiscal year 2009 and
by another undetermined amount in fiscal year 2010. Finally, on February 3,
2009, the Authority suspended one of its interest rate swap agreements for a
2-year period and received payment of more than $1 million. Additional options
the Authority could consider include seeking an increase in dedicated tax
sources; increasing the Authority’s facility-use fee; seeking to reorder the
statutory funding priorities or reduce the amount of required payments for
tourism, Cactus League, and youth and amateur sports; and renegotiating its
agreements with the Arizona Cardinals to receive a contribution for game day
expenses and with the Fiesta Bowl to receive facility rent.
Authority should enhance its oversight of the facility
manager
(see pages 23 through 29)
The Authority contracted with a facility management company
(facility manager) to manage and operate the multipurpose facility. The facility
manager is responsible for all aspects of facility management and operations,
including marketing, maintenance, security, and finances. The facility manager
pays all of its and the facility’s expenses from an authority bank account that
the Authority authorized the facility manager to establish to pay for the
facility’s marketing, operation, and management expenses. The Authority also
pays the facility manager an annual fixed management fee and incentive fee.
However, the Authority should revise its management agreement to establish a
more performance-based incentive fee structure. Currently, half of the incentive
fee is based on 5 percent of all adjusted operating revenues not obtained from
Arizona Cardinals and Fiesta Bowl events, while the other half of the incentive
fee is based on subjective criteria established by the Authority, Cardinals, and
Fiesta Bowl. An authority official indicated that the Authority is planning to
revisit the incentive fee structure. In doing so, the Authority should also
ensure that the fee structure conforms with U.S. Internal Revenue Service
regulations regarding management fees for facilities financed by tax-exempt
bonds, such as the multipurpose facility.
Additionally, the Authority has performed limited contractor
oversight and should increase facility manager monitoring and oversight. The
Authority’s monitoring efforts center on reviewing high-level financial reports,
such as financial statements and budgets, and attending monthly meetings with
facility manager staff. However, this level of monitoring does not ensure the
adequate operation of the multipurpose facility and appropriate expenditure of
the Authority’s monies. Therefore, the Authority should develop and implement a
formal contract-monitoring plan detailing the activities that its staff will
perform to adequately monitor the facility manager’s performance in several key
areas, such as the facility manager’s financial activities, event settlements,
and preventative maintenance.
Minor improvements needed to better fulfill mission
(see pages 31 through 36)
The Authority has taken steps to fulfill its purposes, but it
can make some minor improvements. The Authority has met statutory requirements
to fund tourism, Cactus League, and youth and amateur sports promotion. For
example, the Authority distributed almost $5.4 million to the Arizona Office of
Tourism (Office) in fiscal year 2008, and the Office in turn redistributed these
monies to local tourism promotion agencies in Maricopa County. These monies
represented nearly 25 percent of all tourism promotion funding for those local
agencies for fiscal years 2006 to 2008.
Additionally, the Authority has created appropriate policies
and procedures for expending its Cactus League monies and committed nearly
$403.1 million through fiscal year 2031 to assist in developing the Cactus
League in Maricopa County. This commitment represents all $205 million required
to be distributed under the Authority’s statutes through fiscal year 2031 and an
additional projected $198.1 million from an authority agreement with the
Maricopa County Stadium District.
Finally, minor improvements to the Authority’s youth and
amateur sports grant program could further advance efforts to promote youth and
amateur sports activities. The Authority reports that it has authorized $11.3
million in funding for more than 110 youth and amateur sports facilities and
programs in Maricopa County through fiscal year 2008. The Authority follows its
grant application, grant-award criteria, and cost-reimbursement policies and
procedures, but some policies and procedures should be updated
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