CITYWIDE AUDIT LEASES AND OTHER CONTRACTS AUDIT SEPTEMBER 30, 2010

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1 CITYWIDE AUDIT LEASES AND OTHER CONTRACTS AUDIT SEPTEMBER 30, 2010

2 CITY OF TAMPA Pam Iorio, Mayor Internal Audit Department Roger Strout, Internal Audit Director September 30, 2010 Honorable Pam Iorio Mayor, City of Tampa 1 City Hall Plaza Tampa, Florida RE: Leases and Other Contracts, Audit Dear Mayor Iorio: Attached is the Internal Audit Department's report on Leases and Other Contracts. All of the responsible departments are in the process of implementing the recommendations. We thank the management and staff of the responding departments for their cooperation and assistance during this audit. Sincerely, /s/ Roger Strout Roger Strout Director of Internal Audit cc: Darrell Smith, Chief of Staff Bonnie Wise, Chief Financial Officer Lee Huffstutler, Chief Accountant Cynthia Miller, Director of Growth Management and Development Services Herb Fecker, Real Estate Manager Irvin Lee, Director of Public Works Jim Corbett, Parking Manager Santiago Corrada, Administrator of the Convention Center, Tourism, Recreation, and Cultural Arts Karen Palus, Director of Parks & Recreation 306 E. Jackson Street, 5N Tampa, Florida (813) FAX: (813)

3 CITYWIDE AUDIT LEASES AND OTHER CONTRACTS AUDIT SEPTEMBER 30, 2010 /s/ Thomas Sanchez Auditor /s/ Roger Strout Audit Director

4 CITYWIDE AUDIT LEASES & OTHER CONTRACTS AUDIT BACKGROUND The City leases approximately 150 properties to other parties. Many of these leases were intended to be at market rates. These include cellular antenna tower agreements, retail building space downtown, and several of the parking lot leases. Most of the other leases are to non-profits and other governments at nominal amounts. One waterfront property lease stipulates that the lessee provide in-kind services to the community in return for paying only a nominal lease amount. The Real Estate Division of the Department of Growth Management and Development Services manages most leases. All leases and amendments administered by the Division are uploaded into a special use web site maintained by ProLease, a third party vendor. The data is available on line via a secure web site. ProLease is also capable of producing various reports, such as items requiring attention in the near future. Billings for items administered by the Real Estate Division are the responsibility of the Accounting Division of the Department of Revenue and Finance. Accounting took over this function from Real Estate in Nineteen of these are long term contracts for cellular antenna towers with seven cellular companies. Most of the contracts permit the contractor to utilize its sites for 25 or 30 years, including renewals, and contain a cost of living or fixed escalation every year or every 5 years throughout the contract and renewals. The Parking Division is responsible for a few leases, but the dollar value of those leases is relatively high. The City s Miscellaneous Accounts Receivable System (MARS) is utilized by the Parking Division for managing and billing these accounts. Certificates of Insurance are usually required of lessees. These are managed by the Risk Management Division of the Human Resources Department. Management of certificates has been outsourced to EBIX, a third party vendor. Generally, lessees submit Certificates directly to EBIX, which then uploads them to a secure web site. EBIX also follows up on Certificates coming due or past due. These are monitored by Risk Management. The Real Estate Division also reviews EBIX records as a backup check. With few exceptions 1, property the City leases from others are from other governmental entities, such as the Florida Department of Transportation. These are generally at nominal rates and for extended terms. At the request of the City s Chief Financial Officer, we reviewed procedures related to accounting for capital leases 2. 1 Construction Services Building, Parking lot at Bayshore and Bay-to-Bay, the German American Club building. 2 Capital leases are accounted for in much the same manner as an installment sale. The asset, liability, depreciation, and interest expense should all be recorded in the City s financial records.

5 STATEMENT OF OBJECTIVES This audit was conducted in accordance with the Internal Audit Department's FY10 Audit Agenda. The objectives of this audit were to ensure that: 1. Rents were properly billed, recorded, and collected. 2. Certificates of Insurance (COI's) were properly filed and are up-to-date. 3. In-kind service requirements were in compliance with lease agreements. 4. The City was in compliance with agreements for properties leased by the City from others. 5. Capital leases were properly recorded. STATEMENT OF SCOPE This audit covered lease activity from February 1, 2009, to January 31, Source documentation was obtained from Real Estate, Accounting, Parking, and the City Clerk. Original and electronic records, including web based data, were used as appropriate. Actions taken prior to the audit period, such as rent adjustments, which affect the current lease, were included. Parking leases only included special leases approved by resolution. It did not include regular daily and monthly parking. STATEMENT OF METHODOLOGY All Council Resolutions in DocDepot records were word searched for words "lease" or "rent" from 2005 through the audit period. When resolutions meeting this criteria were found, they were matched to other databases or records, if appropriate, to determine if leases approved by council were entered into City databases or records. Essentially all existing leases in any of the relevant databases were examined, including both leases in which the City was lessor or the lessee. To achieve the audit s objectives, reliance was placed on computer-processed data contained in the City s accounting system (FAMIS). The City's Miscellaneous Accounts Receivable System (MARS) was used as background information for payments of Parking leases. Payments were traced from MARS to CashWeb to validate that deposits were made and that the data were entered into the City's accounting system. FAMIS, MARS, and CashWeb have been previously determined to be reliable. All of the databases and other records referenced above were utilized to meet the audit objectives. In addition, activity logs were reviewed from the one waterfront property lease which required in-kind services. 2

6 STATEMENT OF AUDITING STANDARDS We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that 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 provides a reasonable basis for our findings and conclusions based on our audit objectives. AUDIT CONCLUSIONS Based upon the test work performed and the audit findings noted below, we conclude that leases/rents are generally billed and collected as required. However, there were some contracts that were deficient in one or more ways: Rents were properly billed, recorded, and collected. However, in a few instances the amounts were calculated incorrectly and these were generally related to rent escalation clauses. Certificates of Insurance were generally in accordance with lease requirements and were up to date. The in-kind compensation requirement of one property was not in compliance and not monitored. Leases in which the City was the lessee were in compliance. Procedures for identifying capital leases could be improved. Accounting for one large lease was improperly accounted for as an operating lease. NOTEWORTHY ACCOMPLISHMENT We found the records maintained in the Real Estate Division to be very well organized and up to date. Recordkeeping by staff was virtually flawless. There were no findings requiring a response by the Real Estate Division. 3

7 RENTAL AMOUNTS FOR PATIO LEASE INCORRECTLY CALCULATED AUDIT ISSUE A patio lease for outdoor property adjacent to the Riverside Tower was underbilled and underpaid due to cost of living escalations being improperly calculated. OBSERVATIONS A patio lease adjacent to the Colonnade Ashley (ACP Pinnacle) was enacted in 1988 with a rent of $900 per quarter. A Cost of Living (C-O-L) adjustment was to be made every five years. The first and second adjustments in 1994 and 1999 only reflected the C-O-L adjustment for the previous one year, not the previous five. The next adjustment was made in At that time, Accounting had taken over the billing function (from real estate) and noted the error. The adjustment for that year reflected the C-O-L for the previous five years, but did not take into account the cumulative effect that the past omissions caused. The same situation existed when the rent was adjusted in At that point in time, the rent was increased from $1,062 to $1,242 per quarter. By our calculation, the quarterly rent as of January 2009 should have been $1,569.46, which would reflect the cumulative increase in the cost of living index 3 from 1989 through This results in an underpayment of $ per quarter, or $1, per year. The cumulative underpayment from 1994 through January 2010 is $16, CRITERIA Correct billing of City property. RISK DESCRIPTION The City has lost over $16,000 in revenue over the course of this lease and continues to underbill each quarter. RECOMMENDATION 1 Correct the current rent to $1, per quarter and determine if action can be taken to recover past underpayments. MANAGEMENT'S RESPONSE - REVENUE AND FINANCE We agree with the recommendation that the adjusted rent calculation should utilize the Consumer Price Index (CPI) published for the month immediately preceding the Adjustment Date and the CPI published for the month immediately preceding the Commencement Date as outlined in Section 5.3 of the Amended and Restated Patio Lease. We will consult with the Legal Department regarding advisability of collecting past undercharges, if any. 3 Source: U. S. Bureau of Labor Statistics-Consumer Price Index-All Urban Consumers 4

8 HCC/NORIEGA GARAGE AGREEMENT - RENT ESCALATION NOT APPLIED AUDIT ISSUE Escalation provision has not been implemented. OBSERVATIONS In 1999, the City entered into a long term agreement with Hillsborough Community College. The College agreed to pay to the City $100,000 per year, which it has been paying annually. However, the agreement provides that if garage rates are increased, the amount due from the college is to be increased by the same percentage. A 7.5 percent increase was enacted in September 2003, which would result in a new rent of $107,500 per year. The rent has remained at $100,000. Over the approximately six year period since the increase, the City has underbilled the College by $45,000 and continues to underbill each year be $7,500. CRITERIA Correct billing for compliance with the agreement. RISK DESCRIPTION Over the course of this agreement, the City has lost over $45,000 in revenue to which it was entitled, and continues to underbill by $7,500 each year. RECOMMENDATION 2 Immediately begin billing at the correct rate of $107,500 per year and determine if action can be taken to collect past underpayments. MANAGEMENT'S RESPONSE - PARKING The Parking Division agrees with the recommendation. We will contact the agreement contact at the college and inform them of the audit finding. We will submit and FY11 invoice for the amount of $107,500 and discuss an underpayment plan to recoup the past underpayments ($7,500 per year) dating back to FY04. 5

9 SPACE IN REGIONAL GARAGE UNDERBILLED AUDIT ISSUE Terms of parking agreement changed without proper approval. OBSERVATIONS A 1997 agreement with HMC Development Corp (Marriott Waterside Hotel) provided for the hotel to lease a block of 400 spaces, essentially the first two decks of the garage. The agreement provided 91 valet spaces and 309 general spaces at $70 and $45 per month, respectively. In November 2000, billing was changed to 91 valet and 294 regular spaces (385 total) at rates then in effect. A notation in the Accounts Receivable System that month indicated a reduction of 15 spaces, and a corresponding reduction in monthly billings. We could find no authority for this change. An amendment adopted April 26, , still references 91 valet and 309 regular spaces. A physical count observed by Internal Audit found 74 valet spaces and 318 regular spaces currently in use. Under the terms of the agreement, including an escalation that was applied in 2003, total billing should be $21,966 per month. Actual current billing is $21,231 per month, a difference of $735 per month. CRITERIA Adherence to contract. RISK DESCRIPTION City has not collected revenue it was due amounting to approximately $79,000 over the last nine years and is continuing to underbill by $8,820 per year. RECOMMENDATION 3 Correct current billing amount for the 15 spaces. Determine if action can be taken to collect underpayments for the past nine years. MANAGEMENT'S RESPONSE - PARKING The Parking Division agrees with the recommendation. We will contact the agreement contact at the Marriott Waterside Hotel and inform them of the audit finding. We will adjust the FY11 invoices to reflect the increase amount of $8,820 per year and discuss an underpayment plan to recoup the past underpayments ($8,820 per year) dating back to FY01. 4 Reso which amended the term of the lease. 6

10 IN-KIND CELLULAR SERVICE AUDIT ISSUE A number of cell phone tower contracts require in-kind service, in the form of free cell phones and service, in additional to monetary compensation. There are a total of 12 cell phones and related service included in these contracts. The cell phones cannot be accounted for, or determined if the service is being used. We believe the primary value of this provision to be the ongoing compensation in the form of cellular service, not the devices themselves. OBSERVATIONS A number of cell phone tower lease contracts that originated between 1994 and 1998 require in-kind service, in the form of free cellular service, in additional to monetary compensation. We have identified six contracts from three vendors which provide for a total of 12 cell phone lines and related cellular minutes. Minutes included range from 2400 to 3600 per phone, per year. This was probably considered an adequate amount of minutes at the time it was negotiated, and minutes were somewhat more expensive in the past than they are now. The contracts were all originally entered into between 1994 and As the City consolidated cell phone service into one provider, administration of the in-kind provisions were not included in new cell tower contracts. The Real Estate Division made an initial attempt to determine the status of the in-kind cellular service provision. CRITERIA Compliance with contract, maximization of revenue. RISK DESCRIPTION Loss of approximately $600 per month in value of the cellular service required under the cell tower lease contracts. RECOMMENDATION 4 Determine if in-kind services are being provided, and, if appropriate, negotiate monetary compensation in lieu of the in-kind services. MANAGEMENT S RESPONSE - TECHNOLOGY AND INNOVATION We will review the six contracts noted that include provisions for in-kind cell phone services in addition to monetary rental to better understand the details. We will certainly assist with contract review and entering into discussions with the current vendors to determine how the City might benefit from monetary reimbursements. 7

11 MONITORING OF IN-KIND SERVICES IS INADEQUATE AUDIT ISSUE The in-kind services provided by the Davis Island Yacht Club are not adequately monitored by the City and some required services are not being provided. OBSERVATIONS The City leases a parcel of land to the Davis Island Yacht Club on the southernmost tip of Davis Island, surrounded on three sides by Hillsborough Bay. This property is officially City parkland, and the Club describes itself as a private, member owned yacht club. The original lease was dated The current lease was effective October, 2001 for 40 years. Required consideration is in the form of 5,200 hours per year of in-kind programming of community services to include regattas, sailing lessons, assistance to distressed vessels, and CPR classes. The Club submits activity logs annually documenting the level of services it provides. We found that the logs were being sent to the City s Real Estate Division and filed. Real Estate is not in a position to monitor what are essentially recreation activities. The Parks & Recreation Department had not been provided with copies of the lease or activity logs until this audit. Parks & Recreation Management agrees it is in a better position to monitor the inkind provisions of this lease than is Real Estate, but the Parks & Recreation Department had not been officially assigned this responsibility. The activity logs submitted by the Club indicate that the community service hours are being met several times over. However, there is a specific lease requirement that services include a component for disadvantaged young people. The activity logs have a line to report such activity, but it has been blank for the two years we reviewed. Additionally, it is unclear if all of the other activity reported is community service as opposed to club activities. During the course of this audit, the Club has made five scholarships available to disadvantaged youth for the Summer sailing program. CRITERIA Compliance with lease agreement. RISK DESCRIPTION Services to the public required by the lease may not fully comply with the lease agreement. RECOMMENDATION 5 Parks and Recreation should work closely with the Club to assure requirements are met. For activities to count toward the annual public service requirement, the public should be made aware of the availability of the programs. 8

12 MANAGEMENT'S RESPONSE - PARKS & RECREATION The Parks and Recreation Department supports the findings and agrees with the recommendation of this audit. As stated in this audit, the Parks and Recreation Department had not been provided the activity logs in order to monitor the Club's recreational activities and community service hours necessary to satisfy the lease agreement. Through this audit's findings, the Parks and Recreation Department will now have the necessary information provided directly to this department which will enable the Service Area Team to assure the Club's requirements are met. After an initial meeting with the Program Director, the Club made five scholarships available to disadvantaged youth for the Summer Sailing Program. The Service Area Manager and Team Supervisor will continue to meet with the Club to establish a working relationship and understanding of the lease and its requirements. Quarterly meetings will be established to monitor commitments are met. As stated in the lease, an annual reporting is required and will be submitted directly to the Parks and Recreation Department. The Parks and Recreation Department is committed to implementing the plan above once the audit is final and the Parks and Recreation Department is officially assigned this responsibility. 9

13 CAPITAL LEASES HAVE BEEN CHARGED TO OPERATING ACCOUNTS AUDIT ISSUE Capital leases have been charged to operating accounts. OBSERVATIONS We were advised by Revenue and Finance that there have been instances in the past in which assets which meet the criteria for capital leases were charged to operating lease accounts. Examples given were: Loaders in the Solid Waste Department and copying machines. In addition, we noted that the City entered into a lease for the building commonly called the German American Club (GAC) in The lessor/seller is the Tampa Bay Economic Development Corporation (TEDCO). The lease appears to meet the criteria for a capital lease under City policy, which conforms with Generally Accepted Accounting Principles. However, the City is budgeting and charging lease payments to object code 04400, which is for operating leases. At the same time, the building is carried on the City s books as an asset, and depreciation is being charged monthly. We did not find any adjusting entry at year end, and the notes to the City s Comprehensive Annual Financial Report state that there is a capital lease on the building carried at $2.45 million. CRITERIA Proper budgetary and expenditure reporting. RISK DESCRIPTION Improper reflection of expense in financial statements if not reclassified by year-end. RECOMMENDATION 6 The Chief Accountant should coordinate review by both Accounts Payable and by Property Control. Charges to operating accounts should be reviewed for transactions that should be classified as capital lease payments. MANAGEMENT'S RESPONSE - REVENUE AND FINANCE We agree with the recommendation that operating leases and capital leases must be recorded in the City s accounting records correctly. We will review and remedy any errors immediately. 10