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HomeMy WebLinkAbout2006 Audit Report Conference CenterBREMERTON CITY AUDITOR 345 a Street, Bremerton, WA 98337- (360) 473-5369 MANAGEMENT AUDIT REPORT Conference Center Management Contract �, July 19, 2006 w CITY AUDITOR Gary W. Nystul, CPA gnystu1@c1.brennerton.wa.us September 19, 2006 Honorable Cary Bozeman, Mayor The Office of the City Auditor has completed an audit of the Kitsap Conference Center Management Contract and has issued the attached report. Several observations were made but no findings were noted. The assistance provided by Erik Ruud, General Manager of the Kitsap Conference Center and Sonnie Kwong, Corporate Controller of Columbia Hospitality is greatly appreciated. Sincerely, Gary W. Nystul cc: City Council Laura Lyon Erik Ruud To/ 360-4735389 Fax 380-473-5080 345 8th Street, Suite 800 Bremerton, WA 98337 AUDIT REPORT Kitsap Conference Center Management Contract July 19, 2006 Purpose The Office of the City Auditor reviews various phases of city operations. This review of the Kitsap Conference Center was scheduled in the 2006 work plan. Scope This review is of the management contract for the operation of the Kitsap Conference Center at Bremerton Harborside. The city entered into a management contract in June 2003 for the promotion and operation of the conference center. This is a review of the conference center operations from its opening in July 2004 through December 31, 2005. Statement of Auditing Standards This audit was performed in accordance with government auditing standards. Those standards require that I plan and perform the audit to afford a reasonable basis for my judgments and conclusions regarding the organization, program, activity or function being audited. An audit also includes assessing applicable internal controls and compliance with laws and regulations. I believe that my audit provides a reasonable basis for my conclusions. Summary of the Results There are no findings for this report. However several observations were made and are listed below as Other Matters. Several provisions of the management contract between the City and Columbia Hospitality are not practical, are not being followed, or are not applicable to the operation. No comments on any of the observations were received from any department. Background The City of Bremerton entered into a design/build contract in November 2002 for the construction of a three level parking structure, a pad for a hotel and restaurant, and construction of a regional conference center. This project is part of the Harborside development and is located next to the Bremerton Ferry Terminal, the Louis Mentor Boardwalk, and Bremerton Marina. The funding came from several sources. These included $ 10,865,000 of revenue bonds sold by the City that are being paid for by parking fees. The Kitsap Public Facilities District contributed $ 7,389,076. Kitsap Transit contributed $ 4,000,000 towards the parking garage and in addition constructed the three-story Commuter Retail Building which incorporates the conference center. The restaurant and hotel pads were sold to private developers who then built those components. OTHER MATTERS The following are observations regarding the management agreement between Columbia Hospitality, Inc. and the City of Bremerton dated June 1, 2003. A. Section 6.6 requires Columbia Hospitality Inc. (CHI) to submit a proposed operating plan and budget for the following Operating Year by September 1. The City has 60 days to approve or disapprove the Annual Plan and Budget. OBSERVATION. The City's approval of the operating plan and budget is part of the overall city annual budget process. That process is not usually completed until late December. The city is not able to comply with this provision of the contract. In addition, the term "Operating Year" is not defined but is assumed to be the calendar year. B. Section 6.6 also states that the "Contractor may not expend more than the expense items in the Annual Plan and Budget in the aggregate or exceed any line item of the Budget." It further provides that the contractor may not exceed spending for any line item on the Summary Page by more than 15% without the City's prior written approval. OBSERVATION. This provision is inconsistent. In one place it states that the contractor may not exceed spending for any line item of the budget but in another paragraph states that a line item on the Summary Page can be exceeded by not more than 15%. The term Summary Page is not defined. In calendar year 2005, the contractor grew revenue by 125% of budget. To pay for the food and beverage and staff necessary to provide this revenue would require the contractor to exceed the line items. No provision is made in the agreement for situations when the revenue budget is exceeded and offsetting additional costs are incurred that are excess of the line items. The contract should be changed to recognize the ability of CHI to exceed the revenue budget and the logical increase in related expenses. 2 C. Section 6.9.2 requires that "all signatories" to the operating checking account be bonded for any amounts in the accounts. OBSERVATION. The contractor did not have this insurance when this audit started. The contractor has now obtained insurance that is acceptable to the City Risk Manager. D. Section 14.16 addresses confidentiality. The agreement states that, including without limitation, the terms and conditions of the Agreement, are confidential. OBSERVATION. Any contract entered into by a municipality is a public document. This provision is not enforceable. E. This contract has not been assigned to one staff member to administer/monitor. Several different individuals oversee different parts of the contract. For example, the Director of Economic Development approves capital expenditures and grants rights to the use of common space in the plaza. The Director of Financial Services meets monthly with the CHI manager and reviews the financial statements. The Facilities Maintenance department performs maintenance on part of the facility. OBSERVATION. The Mayor may wish to assign one individual to have overall responsibility and to be the city's coordinator of the contract and facility. That would ensure a clear line of responsibility. F. Section 2.1.1 defines the primary premises over which the contractor shall have exclusive control. This list includes bridal/guest dressing rooms, and the conference center patio. OBSERVATION. The bridal/guest dressing rooms do not exist. There are offices in those spaces. The patio location also does not exist. G. Section 4.1 establishes the fixed fee for the contractor. It states the payment is for operating years 1-6. OBSERVATION. The contract term is for five years but the fixed fee is for six years. H. Section 6.7 states that the parties shall conduct a quarterly inspection of the facility, unless waived by the City. OBSERVATION. There is no evidence that a formal quarterly inspection has been conducted. There is also no evidence that the city has waived the inspection. Because no one department or director is responsible for this contract, compliance with this section would be the responsibility of the Mayor. I. During a visit to the CHI's office in Seattle, it was determined that they were backing up the financial data relating to the city's account to the servers daily. However, the servers were themselves not then backed up to an off-site storage of the data. OBSERVATION. Basic procedures in data processing require off-site storage of backup data. J. The City is provided monthly financial reports which show good detail of summary activity in the various profit centers as well as a consolidated view. One category of revenue is entitled Miscellaneous Revenue. For the first six months of operation in 2004 the total miscellaneous revenue was $7,762. However in 2005 it was $113,521. OBSERVATION. The majority of this revenue in 2005 is room rental. Including this in Miscellaneous Revenue obscures a significant revenue category. Using an additional account would present a more informative statement. 4