mpa comp exam august 2010faculty.cbpp.uaa.alaska.edu/afgjp/comps/compexamaug2010.pdfdept. of public...

Dept. of Public Administration University of Alaska Anchorage Fall 2010 Comprehensive Core Exam August 20, 2010

Answer the following questions as completely as possible (the questions are of equal weight so divide your time accordingly):

1. Based on your reading of the case study and the new powers

and duties of the City Auditor as defined in Appendices A and B, evaluate the outcomes of the new Charter amendment in terms of political independence, economic efficiency and professional service to the city and its citizens.

Consider the follow areas in your discussion:

(a) The previous Comptroller’s selection and hiring process that reached beyond traditional candidates.

(b) Masters’ “myriad of questions” about how to achieve “her vision for a successful and relevant Office of City Auditor.”

(c) Masters’ timing and selection of Audits

2. One criticism of the city’s past approach to the Bumbershoot

festival was that market forces were not used to create efficiencies.

a. What does the auditor mean by this?

b. Explain how the city could use market forces to achieve efficiencies. Be specific and describe the benefits and limits of your scheme.

3. The final recommendation in the draft Bumbershoot audit is to survey Seattle citizens to determine the future direction of the festival.

a. Do you agree with the auditor’s recommendation? Why or why not?

b. What would your approach be? i. If you are recommending a survey, what type of survey and

what would be the objectives for the survey? How much should the City budget for this?

ii. If you are not recommending a survey, what approach do you recommend to address the concerns the auditor has raised?

This case was written by Eileen M. Norton, J.D. and former City of Seattle Council member Thomas T. Weeks, Ph.D.

THE SEATTLE CITY AUDITOR

Background Shortly after Norm Rice was elected Mayor of the City of Seattle in 1989, his administration, with City Council support, set into motion a series of amendments to the City Charter aimed at streamlining City government. The most controversial of these would abolish the elected offices of Treasurer and Comptroller. Politics aside, Mayor Rice believed that these fundamental changes to City government would not only save money, but would also provide more efficient and professional services to the City and its citizens. Rice and the City Council knew that a system that elected a Treasurer and a Comptroller provided little guarantee that the individuals in these positions would have the necessary qualifications to effectively carry out their duties. Further, citizens paid very little attention to these offices and incumbents rarely faced a legitimate challenge come election time. Once in office, as long as there were no scandals, performance mattered little to the voters. The Office of Comptroller was responsible for maintaining official City documents, such as ordinances and resolutions, and he or his designee signed every ordinance passed by the City Council. All claims for damages against the City were required by law to be submitted to the Comptroller before any lawsuit could be filed against the City. Any initiative or referendum had to be filed with the Comptroller, who was also responsible for verifying the signatures on these citizen- initiated ballot measures. The Comptroller administered the oath of office to City officials, and his office housed the City’s auditing function. The Treasurer was responsible for the financial affairs of the City. All money that came in or went out of City coffers passed through the Treasurer’s office. Each year it produced the City’s Annual Financial Report (CAFR), and the office had won major national awards over the years. It was a powerful position within City government, which made the voters’ apathy somewhat distressing. On the other hand, that apathy may have helped the Mayor and Council when it came time to abolish the office.

The Seattle City Auditor

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In the fall of 1991, the City Council voted to place two City Charter amendments on the November ballot. These amendments would abolish the elected offices of Treasurer and Comptroller and divide their respective functions between a Mayor-appointed City Finance Director, a Council-appointed independent City Auditor, and a City Clerk position within the Legislative Department. Needless to say, the incumbent Comptroller and Treasurer opposed the measures and campaigned against them. Each had strong ties to their respective political parties and they were not without their supporters. However, the Mayor and members of the City Council put together a small, but effective campaign. The opposition was never able to organize and the Charter amendments easily passed on the promise that the City would save money through consolidation of functions, and provide better, more professional services. The new Charter provisions would take effect on January 1, 1993, giving the Mayor and City Council 13 months to reorganize the two offices and to find a Finance Director, a City Auditor and a City Clerk. The Mayor began a national search for a Finance Director while Councilmember Tom Weeks, Chair of the Finance Committee, began a national search for a City Auditor. Under the new Charter amendments, the Mayor appointed the Finance Director, subject to Council confirmation, and the Chair of the Finance Committee appointed the City Auditor, subject to confirmation by the full Council. (See Appendix A for City Charter language creating the Office of City Auditor.) The Hunt for the First City Auditor Tom Weeks had only been in office two years when he became Chair of the Council’s Finance, Budget, Management & Personnel Committee. He was a strong, vocal advocate for the Charter amendments, believing that an elected Comptroller and Treasurer made it nearly impossible to reform the City’s financial policies. The mistrust between the Comptroller, Treasurer, Mayor and Council was palpable at times and made it nearly impossible to implement greater efficiencies and accountability in City government. By the end of 1992, the headhunting firm hired to conduct the national search for a City Auditor had given its first cut of candidates to Weeks. While the candidates’ resumes were impressive, they were all cut from the same traditional auditor cloth. Weeks wanted someone different, someone with the necessary auditing skills, but who was non-traditional in his/her approach to using those skills. The first City Auditor would lay the groundwork for all other auditors who followed, and it was paramount that there be distance between the Comptroller’s rather ineffective audit shop and the new Office of City Auditor.

After the first set of candidates fell short of Weeks’ expectations, he decided to follow a hunch. Nora Masters, a recent hire to the Council’s Central Staff, had been assisting in the City Auditor hiring process. She had an MBA, was a CPA, had worked as a budget analyst for the City of Bellevue and had been a senior auditor/supervisor for the City of


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Austin. While she had far less auditing experience than the other candidates, she had the necessary “professional” qualifications, and more importantly, she had very non-traditional ideas about what an audit shop could offer the City of Seattle. Further, she didn’t look like the stereotypical auditor. She was outgoing, assertive, easily laughed, and while she worked very hard, she wasn’t afraid to have fun. With her permission, Weeks submitted Masters’ resume to the hiring firm requesting they review her application along with the others, and with the same scrutiny.

The hiring firm submitted the top five candidates, which included Masters, who was selected as the first City Auditor. Her six-year appointment was met with great enthusiasm by most of his colleagues and she was unanimously confirmed as the first City Auditor.

Making a Silk Purse Out of A Sow’s Ear Masters’ first challenge was to create an Office of City Auditor out of the ashes of the old Comptroller’s office. She inherited several auditors, including the former Acting Comptroller who had wanted her job. She knew that if she was to be successful she needed instant credibility for her office, which would begin with the quality of her staff. Masters immediately announced that the “old” auditors would have to compete for positions in the new Office of City Auditor. She then set her sights on plundering the General Accounting Office’s (GAO) Seattle branch for talent. While the Federal bureaucracy is often maligned, GAO’s staff boasts some of the best auditors in the country. When the hiring process was complete, Masters offered positions to three former Comptroller auditors and to five GAO auditors. She had met her first challenge, now it was time for the Office of City Auditor to take its rightful place in City government. Masters’ Vision for the New Office of City Auditor Masters envisioned an Office of City Auditor that would be a proactive voice for improvement and innovation, while also performing the traditional function of safeguarding City assets. She understood that when most City employees and citizens heard “auditor” they pictured an eyeshade-wearing geek hovering over an inch-thick ledger filled with numbers. The audits performed by the Comptroller’s office did nothing to dispel this myth. There was no question that her office would ensure that the numbers added up and that departments were following the law, but it would be through performance audits where the Office of City Auditor would justify the faith of the voters.1

1 Just to clarify, in a nutshell, the different types of audits: A financial audit looks at the books – do all the numbers add up like they should? Is there sufficient segregation of duties between the employees who take in the money and those who deposit it? Compliance audits determine whether a department or program is following the law and related rules and regulations. A performance audit looks at the efficacy of a program —what is the result of the program? Is the


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Masters also had another vision, relatively unique in the world of auditing. She wanted to build a reputation within the City for providing helpful, proactive performance audits, as well as financial and management oversight—to the extent that departments would invite the Auditor to come and review their programs. In short, she wanted departments to trust her office so that they would come to her before she was forced to go to them. While a laudable goal, Masters also realized that her job was to create a professional auditing office that met the demanding professional requirements that the United States Comptroller General has prescribed for governmental auditing. These generally accepted government auditing standards (GAGAS) govern the placement of the audit function, scoping and planning of work, determining a review’s objectives, describing audit scope and methodology, selecting criteria for evaluating the subject matter, and ensuring that evidence is sufficient, accurate, and relevant. She understood that her duties under GAGAS could at times undermine the relationships she hoped to build with City departments. Not only did she have to separate in the minds of City employees and citizens the new Office of City Auditor from the Comptroller, but also she needed to emphatically establish her office’s independence from the Mayor and the Council. On paper, her office had sufficient independence to satisfy the requirements of GAGAS. Under the new Charter provision, she had been appointed to a six-year term and could only be removed for cause, and City ordinance made sure that she could “force” recalcitrant departments to cooperate during an audit. (See Appendix B for selected ordinances related to the City Auditor’s authority.) However, the deed is in the doing and she had to assert and protect her office’s independence in all aspects. She knew that even though the Charter amendments passed with ease, there was a small, but very vocal group of citizens, including the former elected Comptroller and Treasurer, who believed that an appointed auditor could never be completely independent of Council and Mayoral influence. An appointed auditor would never have the freedom to be as critical of City departments and programs as would an elected auditor. Furthermore, she knew that as a minority woman in her early 30’s, she would have to be “better than expected.” Bumbershoot In mid-1993, Masters has hired her staff and is now ready to conduct her office’s first audit. The Office of Management and Budget (OMB) is interested in changing the City’s relationship, and financial support, to Bumbershoot, one of Seattle’s most beloved festivals since 1971. Bumbershoot is Seattle’s annual City-sponsored arts and music festival held over the Labor Day weekend at the Seattle Center, providing an opportunity for Seattle residents and visitors to enjoy a showcase of regional, national, and international arts. To complement its review of Bumbershoot, OMB asks Masters to audit the festival. program achieving its goals? Is the City getting its money’s worth? Could the City get more for its money? Is the program costing too much? What improvements could be made?


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One Reel Productions, a nonprofit run by Norm Langill, has managed Bumbershoot for over a decade. One Reel has a cozy relationship with the City, producing Bumbershoot and Concerts on the Pier (on City property) with little City oversight, and Langill has never been required to compete for the right to manage either of these events. His virtual monopoly on summer music events in Seattle has made him a powerful figure within the arts community. Any person or group wanting to perform or participate in these events may only do so with Langill’s blessing. Many artists, therefore, are in debt to him professionally.

Masters is excited, and terrified, at the prospect of reviewing Bumbershoot. She knows this audit has great potential for providing significant savings to the City, but it could also bring great enmity to her and the City’s brand new Office of City Auditor. She is very aware that the Office’s first audit will set the tone and tenor for the duration of her term as City Auditor. The Mayor, Council, City departments and citizens will be paying close attention to her first product.

She is concerned that Bumbershoot’s funding and the One Reel contract are much more political than most audit subjects. Bumbershoot is a discretionary expense, as is arts funding in general. Critics question why the festival is subsidized when most musical enterprises are profitable. Supporters in the arts community, on the other hand, are very vocal in lobbying the Council for funding for arts programs, and Langill’s standing gives him the ability to “call out the arts troops” for Bumbershoot.

Masters is especially concerned about how the audit is presented to City staff, the Mayor, the press, the Council and the public. She has been with the City long enough to know that its culture is one that shuns confrontations—Seattle bureaucrats are known for being “nice”—perhaps too nice. Masters sees part of her job as helping City departments provide better, more effective and less costly programs, but in order to do this, sometimes it’s necessary to be critical. Everyone loves Bumbershoot, and she suspects that the audit’s findings will upset the Festival’s many supporters, which include several high-profile community members close to elected officials, and one very important councilmember, Jim Street, Council President

While independent, the Office of City Auditor is within the Legislative Department and the head of that department is, in essence, the Council President. Masters knows that Street absolutely loves Bumbershoot and he believes that the City should do whatever is necessary to ensure that Bumbershoot not only survives, but also thrives. Masters must keep Street’s strong opinions in mind if she is going to convince the decision-makers that the City should take a more business- like approach to its relationship with Bumbershoot.

Councilmember Cheryl Chow, as Chair of the Parks Committee has responsibility for Seattle Center, also has expressed strong interest in the audit. Chow doesn’t trust Langill and openly wonders if he is “taking the city for a ride.” Langill and members of the Bumbershoot Commission are actively lobbying the Council in defense of One Reel and


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the festival. Commission members assert that attendance and revenues are down because of rain during the festival.

Preliminary Audit Findings

Masters’ office has conducted some preliminary work and the initial findings are not favorable to the City or to its financial relationship with the Festival. Over the past few years Bumbershoot’s attendance has significantly dropped and the City has had to absorb losses the past two years and will again in 1993, a year in which the City’s appropriation to Bumbershoot increased to $1.8 million. Even with these appropriations, Bumbershoot’s accumulated deficit at the end of 1992 was $254,000. This figure does not include the City’s indirect costs for Bumbershoot, which has been estimated at over $500,000, and the fact that the City accepts all liabilities for the Festival. In the booming economic times of the late 1980’s and into 1990, the City had few qualms about its sizable subsidy. However, as the economy tightens, some in the City question if it can absorb such large losses and accept all financial risk for Bumbershoot. When her staff has completed its draft audit (Appendix C), Masters reviews the report. The main draft recommendation is that the City should adopt a management structure, which will ensure that proper management and financial oversight is in place and creates appropriate market forces, such as competition in the selection of the contractor. More specific recommendations are: § The City’s Executive branch should be responsible and accountable for

administrative and financial oversight of the Festival activities unless otherwise specified. The City's financial oversight and administration for City liabilities should not be placed in a volunteer commission nor with a contractor;

§ All revenue and expenditures for Bumbershoot for which the City is liable should be processed through the City's financial system and the City Council’s appropriation should represent the total liability for the City;

§ The City should enter into a contract with a private or nonprofit entity in which each party’s risks and liabilities are clearly stated;

§ An open Request for Proposals (RFP) process should be designed which promotes competition for the contract to run the festival. Such a process will ensure that the City is not vulnerable to charges of favoritism, to overpriced contracts, and to not identifying and using the most qualified available contractors.

§ The City should incorporate incentives into the contract with the producer, which encourage efficiencies by tying the producer's compensation to the Festival's net revenues.

§ Seattle citizens should be surveyed to determine the future direction of the Festival. Declining attendance at Bumbershoot suggests the need for a survey of Seattle citizens to determine what the citizens want in regards to entertainment and price.


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To the “good government” crowd, these recommendations would make sense, but to many in Seattle, and especially in Seattle government, they could be viewed as an unwelcome attack on a Seattle institution. Many feel that Bumbershoot has survived just fine for the past 20 years and its current structure should not be disturbed.

Presenting the Bumbershoot Audit

Masters feels good about the quality of the analytic work done by her staff on the Bumbershoot audit. She now faces the challenge of how to frame the findings. On the other hand, if the findings are “sanitized” then she bolsters the argument of those citizens who oppose an appointed auditor, and of alienating elected officials who want to see reports that challenge City departments and the status quo. If she is too critical, and the City and Bumbershoot are criticized in the media, then other City managers and staff will be reticent to share information and cooperate fully with audit staff in the future. She also puts at risk her long-term vision of marketing to City managers the benefits from an audit—better program design, greater quality of services, greater program effectiveness and reduced costs.

Masters and her family have recently moved to Bainbridge Island. During this critical juncture in the infancy of her office, she spends her morning and evening ferry rides wrestling with a myriad of questions, contemplating the direction she must take in order to achieve her vision for a successful and relevant Office of City Auditor:

§ What is the right relationship with the Council and Mayor and their respective

staffs, especially given their control over her Office’s budget? § How does she balance the reality of political influence and producing a quality

report that may attack a favored program or even a beloved Seattle institution? § How much does she involve the department or program being audited? § How much influence, if any, should an auditee have on the final report? § What should be her office’s relationship with the media? Should she publicly

announce when her office publishes a report or issue them more quietly? Will departments trust her Office if she “courts” the press?

§ Who is her audience? How does she balance her audience’s different agendas? § Do reports that are perceived as “nice” put her office’s independence at risk? § How does she resolve these questions in a “generally acceptable government

auditing” standard and still realize her vision?

All these questions need to be resolved before she publishes her first report. The Council has indicated it would appreciate the audit findings in time to help them during deliberations on the 1994 budget as they decide the City’s future financial support for Bumbershoot. She knows the audit will be looking at more than just the City’s historical financial support of Bumbershoot and will also assess the City’s oversight and management structure of Bumbershoot. Masters knows that the Councilmembers will want objective information to help them re-think their decision-making processes for the


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Festival, and some councilmembers will expect recommendations for improving the Festival’s management and financial structure.

She knows how much OMB and some councilmembers want the Bumbershoot audit, and she believes there are real savings to be found which will benefit the City as a whole. She also knows that this audit must travel a road full of political potholes. One question continues to nag her, and she knows she must resolve it quickly: Should Bumbershoot be the first audit published? Should she, instead, select a less political issue, delaying the release of the Bumbershoot findings?


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APPENDIX A SEATTLE CITY CHARTER ARTICLE VIII Sec. 2. CITY AUDITOR: There shall be a City Auditor who shall examine and verify the accuracy of the accounts and records of the City; inspect the receipt, safekeeping, and disbursement of public funds; and perform such other duties as are prescribed by law. The City Auditor shall have a term of six years and shall be appointed by the Chair of the Finance Committee, subject to confirmation by a majority of the City Council and may be removed for cause by a majority of the City Council. (As amended at November 5, 1991 election.)


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APPENDIX B SEATTLE MUNICIPAL CHAPTER 3.40 - OFFICE OF CITY AUDITOR SMC 3.40.010 City Auditor-Duties-Appointment. A. There is established in the Legislative Department an office of City Auditor to perform the duties provided in Article VIII, Section 2 of the City Charter. The City Auditor shall have a term of six (6) years, and shall be appointed by the Chair of the Finance Committee, subject to confirmation by a majority of the City Council, and may be removed for cause by a majority of the City Council. B. The first term of the City Auditor shall commence upon the effective date of confirmation by the City Council. Succeeding terms that are not consecutive terms for the same individual shall commence for six (6) years upon confirmation of the new City Auditor, regardless of the length of term served by the preceding City Auditor. Consecutive terms for the same individual shall commence for six (6) additional years from the date that individual's previous term expires if the incumbent is reappointed and reconfirmed within ninety (90) days before or ninety (90) days after the expiration of the previous term; otherwise the successive term shall commence upon reconfirmation. If an incumbent seeks reappointment, the Chair of the Finance Committee should propose action, and the City Council should act upon a proposal, at least forty-five (45) days before the expiration of the incumbent's term. SMC 3.40.020 City Auditor-Ancillary powers. Under the direction of the City Council, the City Auditor shall have the power to: A. Arrange for audits of federally assisted grants and programs; coordinate auditing activities with the Washington State Auditor and personnel in other City departments; and follow up on reports of examination of the State Auditor; B. Require City departments to: 1. Supply access to accounts and records in whatever media they may be kept, and assist in finding and identifying them; supply documents, computer-readable copies, use of copying machines, and working space for the City Auditor and staff, 2. Retain identified records pending completion of the audit, and 3. Cooperate in interviewing of personnel, all for the purpose of conducting audits; C. Direct comprehensive internal auditing activities, including financial audits, performance audits, and other initiatives to improve City operations for all City departments; D. Bring to the attention of the State Auditor and to law enforcement authorities information about a suspected violation of state criminal laws or the City's criminal ordinances; and to the City Attorney information about a suspected violation of the laws where the City has a civil remedy that may result in the recovery of funds or property due to the City;


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E. Authenticate papers issued by his or her office; F. Audit the affairs of the City's public corporations established pursuant to Chapter 3.110; of recipients of City contracts; and of accounts with other governmental agencies established with City assistance under the Interlocal Cooperation Act (RCW 39.340); and G. Perform such other activities as may be assigned by ordinance from time to time. SMC 3.40.040 Auditing authority. The City Auditor is authorized to audit the records of the Seattle Public Library, the Seattle City Employees Retirement System, the Firefighters' Pension Fund, and the Police Pension Fund and, to the extent authorized by law, the Seattle Municipal Court. SMC 3.40.050 Audit reports-Follow-up required. A. It is City policy to follow up on audit reports by the City Auditor. B. Whenever an audit report identifies a tortious or criminal misappropriation of City funds or property, the department head and the City Attorney shall seek recovery of the moneys and/or other relief as allowed by law. C. When an audit report discovers a misexpenditure and/or makes a recommendation for a change in practice or procedures of a City department, the affected department shall respond within thirty (30) days. If the City Auditor finds the response unsatisfactory, the City Auditor shall refer the matter to the Finance Chair of the City Council and the Budget Director for their review and guidance. D. When an audit of a City contract or project determines that ineligible costs were paid, the department responsible for the contract shall promptly seek recovery of sums due to the City. The City Auditor may participate in discussions with the contractor toward recovery of moneys due and shall be consulted before a settlement is made. In event of a disagreement between the City Auditor and a department head, the Mayor or, at his discretion, the Budget Director shall serve as a mediator.


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Other City Ordinances Relevant To The City Auditor SMC 3.116.080 Audit. The books and records and transactions of the Corporation shall be subject to audit by the State Auditor and the City Auditor at all times. SMC 5.12.040 Petty cash accounts-Establishment-Operation and expenditures. The City Finance Director is authorized to establish petty cash accounts within the operating funds of City departments for the payment of miscellaneous items not payable by voucher and warrant. The establishment of petty cash accounts shall be requested in writing by the head of the department in the form and detail prescribed by the City Finance Director. All expenditures from such accounts shall be made from appropriations and for purposes authorized by the department annual budget. The maximum amount of such accounts shall be set by the City Finance Director in consultation with the City Auditor according to the needs of the petitioning department. SMC 5.14.030 Duties of City personnel. Any City officer or employee, who receives moneys belonging to the City in the scope and course of his or her duties, shall: A. Immediately deliver the same to the City Finance Director or, when so authorized, deposit the moneys with a City depository designated by the City Finance Director to the credit of the City. The delivery or deposit must be made within twenty-four (24) hours after receipt unless otherwise authorized by the Finance Director; B. Comply with rules promulgated by the City Finance Director for handling and processing of City moneys and for documentation and dissemination of records, and with departmental internal procedures established in conformity with the City Finance Director's rules; and C. Notify the Seattle Police Department, the City Finance Director, and the City Auditor of any loss or theft of City money immediately upon discovery. Written notice shall be given to them no later than twenty-four (24) hours after discovery. SMC 5.14.050 Departmental functions. The head of any City department or office who anticipates receiving City moneys on a regular basis in the course of its activities shall: A. Contract with the City Finance Director for cash collection services or, after the Finance Director's Rules take effect, assign the receiving and handling of City moneys only to those persons who are certified by the City Finance Director for performing those functions; B. Establish and maintain a system of procedures, documentation and reporting on receipts handling and deposit of City moneys satisfactory to the City Finance Director;


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C. Notify the Seattle Police Department, the City Finance Director, and the City Auditor of any loss or theft of City money immediately upon discovery. Written notice shall be given no later than twenty-four (24) hours after discovery; D. Allow the City Finance Director or an authorized deputy to make on-site inspections and observe the processing of City moneys, and to make inspections of departmental collection records. SMC 20.48.080 Auditing authority. The City Auditor is authorized to audit public works contracts to determine whether required procedures were followed; the compensation or other consideration was properly paid; and the improvement or services, which were contracted for, were received in a timely manner.


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Appendix C

Draft Bumbershoot audit

As a result of the Comptroller’s 1991 and 1992 audit findings, the unanticipated losses of the 1991 and 1992 Festivals and the City Council’s intent to review the structure of Bumbershoot, the Office of City Auditor conducted a 1993 performance review of Bumbershoot. The purpose of this report is to:

• identify the City’s financial support of Bumbershoot; • assess the City’s oversight and management structure of Bumbershoot; • provide the City with objective information relevant to the restructuring policy

decision-making; and • provide recommendations for improving the Festival’s management and financial

structure. We did not evaluate the actions of Bumbershoot Festival Commission nor assess how successfully the Commission was accomplishing its mission. Rather, we reviewed the structure set up by the City. We focused our evaluation according to the Office of City Auditor’s mandate to review the efficiency and effectiveness of City expenditures and the desire of the City to be increasingly entrepreneurial in using its limited resources.

BACKGROUND

Bumbershoot is Seattle’s annual City-sponsored arts and music Festival held over the Labor Day weekend at the Seattle Center. Bumbershoot provides an opportunity for Seattle residents and visitors to enjoy a show case of regional, national, and international arts. The Festival is an established and valued part of the community and receives national acclaim. The first arts festival in Seattle was in 1971 with over 75,000 in attendance. The Festivals’ focus has changed over the years. During the early 70’s, Bumbershoot was a free event featuring regional artists with a City appropriation under $100,000. During the 80's an admission fee was instituted and the Festival’s focus changed to include both national and international artists. In 1993, the City’s appropriation increased to $1.8 million and annual attendance exceeded 187,000. However, since the peak year of 1990, with an attendance over 230,000, the Festival’s attendance has dropped by over 18 percent and the City has had to absorb the losses in 1991, 1992 and will have to for 1993. The accumulated deficit for the Bumbershoot Festival at the end of 1992 was $254,000. (See Addendum A for financial and attendance information.) The City has contracted with One Reel to produce the festival since 1980.


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SCOPE AND METHODOLOGY

Our audit work focused on reviewing the structure of Bumbershoot in the City government, the Request for Proposal process, and the total costs of producing the annual Bumbershoot Festival. We interviewed members of the Bumbershoot Festival Commission, One Reel, Office of Management and Budget (OMB), Department of Finance, Seattle Center, and the coordinator of the Bumbershoot Festival Commission. We relied on the Comptroller’s work papers and collected additional documents concerning the Request for Proposal process. We focused our evaluation on how the City might be more entrepreneurial to more effectively use its limited resources. We also obtained information on Labor Day Festivals from Milwaukee County, Wisconsin, and Denver, Colorado. We conducted our work between July 1 and September 10, 1993 in accordance with the generally accepted government auditing standards.

PRINCIPAL FACTS AND FINDINGS

Beyond providing the up front operating money for the Festival, the City financially supports Bumbershoot in other ways. These include the Festival use of City grounds over the Labor Day weekend without contributing to the City’s indirect costs. The City also has opportunity costs in that the City forgoes potential revenue and accepts certain liabilities with the current contractual arrangement. Currently, the City accepts 100 percent of the financial risks for the Festival without an adequate level of oversight of the finances. A volunteer Commission provides the City's expenditure oversight of the contracted producer and they do not have a sufficiently independent relationship with that contractor. Also, the City’s contract with One Reel does not incorporate market incentives to ensure that the Festival’s production is executed in the most economical and efficient means. City's Financial Support for Bumbershoot

While Bumbershoot is expected to cover its direct costs, it does not contribute to its indirect costs. The City’s indirect costs include:

• Seattle Center facility maintenance and general administrative overhead costs calculated at over $500,000 for 1991, using Seattle Center's cost allocation formula;

• staff time from various City departments, estimated by OMB at $31,000 in 1992; and

• potential interest income of $13,000 in 1993 on the Festival's up front operating money of $1,278,000.

Also, the current contractual relationship has an opportunity cost 1 by not requiring the producer to bear any of the risks.


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Unreimbursed Costs

Although Bumbershoot is expected to cover its direct costs, the City does not expect it to contribute to its indirect costs. Bumbershoot does not reimburse Seattle Center for its annual allocation of its facility maintenance and general administrative overhead costs. Based on Seattle Center's cost allocation formula, in 1990 and 1991, Seattle Center showed cost for Bumbershoot of $420,000 and $573,000 respectively. Seattle Center would incur these facility and overhead charges even if Bumbershoot did not occur. (The Center's cost allocation calculations do not include an additional $60,000 in revenues that Bumbershoot generates for Seattle Center from increased use of parking facilities and the monorail.) However, as discussed below, Seattle Center could be used over the Labor Day weekend in a way that could contribute to these facility and overhead costs. City staff in other departments also spend time on Bumbershoot, including OMB, the City Council, the Mayor’s office, the Department of Finance, and the Office of City Auditor. OMB estimated the cost for this unreimbursed City staff time at $31,000 in 1992. Interest Income

In 1993, the City forgoes over $13,000 in potential interest revenue by providing up front operating funds for the Festival. In addition, over the last two years, the City has needed to use $254,000 of City funds to offset losses from the 1991 and 1992 festivals. Without these losses, these funds would have been available for other City priorities. This amount will increase as a result of the 1993 loss. Contractual Arrangement

Bumbershoot's contractual arrangement has an opportunity cost in that the City foregoes potential revenue from sharing the profits and risks with a producer. Other public entities sponsor Labor Day festivals in which the producer is only guaranteed compensation from the profits and the profits have to be split with the sponsor. We contacted officials for two other Labor Day weekend civic festivals, Maritime Days: The Taste of Wisconsin held at Milwaukee’s lakefront, and the Festival of Mountain and Plain: A Taste of Colorado held in downtown Denver. Like Bumbershoot, these festivals offer multiple stages for entertainment including national acts, food and crafts fairs and other special events. While the scope of these three festivals are very different, we believe Denver's and Milwaukee's festival offer a comparison regarding contractual arrangements used by other civic entities. (See addenda B, C and D for a description of Seattle's Bumbershoot Festival and the other two festivals.) Both Milwaukee's and Denver's festival are free to the public. Both festivals cover all their costs from sponsors and from retaining a percentage of items sold (such as food and crafts). Both festivals provide a return on the investment to their civic sponsor. Milwaukee County's five day festival over Labor Day weekend features national and regional entertainment together with a celebration of the county’s maritime heritage. The county’s contract with the producer guarantees that the county’s costs will be covered, that the county will receive $25,000 for the festival plus 15 percent on all revenue over $900,000.


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Denver’s four day festival includes music, food, and cultural exhibits and demonstrations, which highlight the history, culture, and geographic nature of Colorado. This festival generates revenues for its prime sponsor, the Downtown Denver Partnership 2. The Downtown Denver Partnership does not guarantee compensation to the firm managing the Festival. Instead, the firm keeps half of the festival’s profits and the Downtown Denver Partnership keeps the other half of the festival’s profits (see Table 1).

Table 1: Fiscal Comparison of Denver’s and Seattle’s 1992 and 1993 Labor Day Festivals Including Different Contract Arrangements

1992 1993 ------------------------- ------------------------- Seattle Denver Seattle Denver Attendance 205,000 350,000 187,000 300,000 Admission Charge $7.00 Free $9.00 Free Total Budget 3 $2,117,000 $1,926,000 $2,272,000 $1,900,000 Guaranteed Guaranteed Compensation to $415,000 plus $200,000 $436,000 plus $114,000 Management Firm Finder’s Fees (50% of profits) Finder's Fee (50% of profits) Profits or Losses for Sponsoring ($129,000) $200,000 ($30,000)4 $114,000 Organization (50% of profits) (50% of Profits)

City Maintains 100 Percent of Festival’s Risk--Liability is Larger Than Appropriation

Each year the City Council approves an appropriation for the Bumbershoot Festival. This appropriation provides up front operating capital for the up coming Festival. The City Council expects the Festival to generate enough revenue to fully recoup the appropriated expenditures. The 1992 and 1993 Festivals were also expected to contribute to previous years’ deficits but did not due to revenue shortfalls. Bumbershoot’s City appropriation does not represent all the expenses and revenues for the Festival. One Reel solicits and spends money on behalf of Bumbershoot. In addition to the City’s 1993 appropriation of $1,818,000, One Reel raised $454,000 in corporate sponsorships, technical fees, and on-grounds rights. These revenue make up the balance of the festival budget and fund festival production costs, including national acts and setup expenses for vendor booths. These revenues and expenditures do not flow through City accounts. The appropriation does not include twenty percent ($454,000 in 1993) of the Festival’s expenses and revenues which are handled directly by One Reel and never flow through City accounts. This is a key internal control weakness of the current arrangement since contracts that designate others to keep books and records provide significant opportunity for improper payments.


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The City is liable for the entire Bumbershoot budget. The Bumbershoot Festival Commission: Report on Restructuring cites the City’s total liability at $2,712,000. However, this figure includes in kind donations5. Without including in kind donations, the City’s total liability for 1993 is $2,272,000. Table 2 shows the City’s appropriation for the 1993 Festival and the City’s total liability.

Table 2: City Appropriation and Liability for 1993 Total Liability $2,272,0006 Appropriation $1,818,000 ----------- Funds Handled Exclusively by One Reel $454,000 =========== An example of how the City is liable for the funds handled exclusively by One Reel is in 1991, when the Commission approved expenditures for $18,000 based on commitments that it would receive sponsorship funds. However, the Commission did not receive the sponsorship funds as planned and the City was liable for those expenses. Consistent with our recommendation, for 1994, OMB has proposed changes in the City's appropriation and the City's contract with the festival producer to limit the City's liability up to the amount of the City's appropriation.

City Oversight of Bumbershoot

The City’s oversight of the Festival is outside of the normal branches of City government. Except for the appropriation budget review, the Mayor has little oversight responsibility for the Festival. Instead, the volunteer Commission has responsibility for the fiscal, administrative and artistic oversight of the Festival. The Commission relies heavily on One Reel to accomplish its mission. Until 1985, the Executive branch administered Bumbershoot, first through the Seattle Arts Commission and then through the Seattle Center. In 1985, the City Council created the Bumbershoot Festival Commission and gave the Commission administrative and policy oversight of the Festival. The Commission was placed outside of the Executive branch. While the City Council has placed policy oversight in other independent commissions, such as the Seattle Arts Commission, Bumbershoot is the only Commission (or department) outside of the executive branch that has administrative and financial oversight responsibilities7 besides those set up by the Seattle City Charter8. The Executive Director of the Seattle Arts Commission is in the Executive branch and is accountable to the Mayor. Bumbershoot’s City staff person is not in the Executive branch and is not accountable to the Mayor. Instead, she is accountable only to the Bumbershoot Festival Commission.


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The Commission does work with OMB and the Department of Finance. OMB provides oversight of the budget and appropriation. OMB has made significant strides over the last few years to improve their oversight of Bumbershoot and to tie the appropriation directly to the Festival's total budget, and specifically to the amount of ticket and concession revenues. This latter step, included in the Mayor's 1994 proposed budget allows the City to limit its liability to the appropriated amount by revising the contract with the festival producer. OMB has previously moved to reduce the City's risk by recommending, for the City Council's ultimate approval, the festival's ticket and concession estimates. The City's greatest financial exposure lies in these revenue estimates, which drive the festival budget. The Department of Finance role is to pay the invoices submitted by the Commission and does not include providing oversight. A significant concern to the Office of City Auditor is that One Reel has spent beyond the Commission approved budget. According to correspondence from OMB, the festival budget was overspent by a total of $20,000 in the 1991 and $35,000 in 1992, contributing to the City's financial loss from these festivals. The City does not have a sufficiently independent relationship with One Reel. Because the Commission is composed of 15 volunteers and has only one paid staff person, almost all the administrative and artistic festival development work is prepared by One Reel. One Reel staff participate in all the Commission’s meetings. One Reel's director was a voting member of the restructuring committee. Typically, the Commission will have an idea or a direction they will want One Reel to explore and One Reel will follow-up on it and present the Commission with options. Market Forces Not Used

The City’s contractual arrangements with One Reel do not utilize market forces to create efficiencies and to ensure that the Festival is executed in the most economical way. The producer is guaranteed a compensation of over $400,000 regardless of the Festival’s outcome and is virtually guaranteed the Festival’s contract for the foreseeable future. Guaranteed Compensation Regardless of Outcome

The City paid One Reel $436,000 for producing the 1993 Festival. One Reel receives this compensation regardless of the Festival’s outcome. In addition, One Reel earned a 10 percent finders fee for the Festival’s first $200,000 in sponsorships and a 15 percent finders fee for the sponsorships above $200,000. In 1993, One Reel’s finders fee was $48,000. In total, One Reel received $484,000. This money is used by One Reel to pay their employee's salaries benefits and overhead. See Table 3 for more details.

Table 3: One Reel’s Compensation to Produce Bumbershoot in 1993 Planning Fee $218,000 Production Fee 20,000 Hourly Reimbursement 198,000

• 5 Principal Directors @ $70/hour • 3 Area Directors @ $45/hour


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• Managers @ $28/hour Commission for All Donated Funds $48,000

• 10% for first $200,000 donated • 15% for donated funds above $200,000

Total Compensation Paid to One Reel $484,000 In addition to the $484,000 compensation that One Reel is paid to produce the festival, One Reel receives and spends, subject to Commission approval, an additional $1,788,000 to produce the festival.

Producer Virtually Guaranteed Contract

The City’s policy is that contracts should be competitively awarded and that sole source contracts should be the exception. Governments have this policy because otherwise the government is vulnerable to charges of favoritism, to overpriced contracts, and to not identifying and using the best qualified available contractors (see Utility Sole Source Consultant Contracts: Management Controls Need Strengthening, Office of City Auditor, September 7, 1993). By ordinance, the Commission is required to re-select a producer for the Bumbershoot every three years. The Commission issued a Request for Proposal (RFP) in December 1991 to select the producer for the 1993, 1994 and 1995 Festivals. The Commission advertised this RFP in late December and had a closing date of January 31, 1992 for potential applicants to submit proposals. One Reel was the only applicant. Another potential applicant informed the commission that it could not submit an application because the time frame was insufficient to prepare an adequate proposal. Commission officials told us that, in their opinion, One Reel is really the only producer who could be awarded the contract since, over the years; they built up the expertise in exactly the areas the Commission wants. Another factor making it unlikely that another producer could win the contract, according to Commission officials, is that the Commission has One Reel working on research and development activities for Festivals 3 to 4 years in the future. Commission officials said that since the RFP process is expensive and time consuming for the Commission, they will explore other alternative arrangements so they will not have to go through an RFP process every three years.

CONCLUSION

Seattle can continue to have an artistically and musically successful Bumbershoot Festival, with a multitude of art offerings, but at a reduced financial cost to the City and/or potentially the attendees if market incentives are used in selecting and contracting with the Festival’s producer(s) including risk and net revenue sharing with the producer. Also, the City’s financial risk would be less if the Executive management had improved oversight over all expenditures (beyond the budget process) for which the City is liable. We found that a volunteer Commission has the responsibility for the fiscal (revenue receipts and spending) oversight and that they did not have a sufficiently independent relationship with the contracted producer, One Reel.


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We do not believe that the Commission has mismanaged the Bumbershoot Festival. However, the City set up the Commission and its mission in a different economic climate. In the 1990s, when the City is being challenged to be more entrepreneurial and to better utilize its assets, we believe the City’s mandate for Bumbershoot should change so that the City can maximize its resources and ensure that the citizens of Seattle continue to enjoy a low cost, multi-stage arts festival over the labor day weekend.

RECOMMENDATIONS

In restructuring the Bumbershoot Festival, the City should adopt a management structure that ensures that proper management and financial oversight is in place and creates appropriate market forces such as competition in the selection of the contractor. Our recommendations neither endorse nor preclude the Restructuring Committee's proposal that the management of Bumbershoot could be delegated to an independent nonprofit. Implementation of the following recommendations would improve the management and financial oversight of the Festival and increase market forces:

1. Bumbershoot, whether it is a City activity run completely by the City, a City-sponsored activity run in partnership with a non-City entity, or a non-City event held at Seattle Center will require some degree of administrative and financial oversight from the City. This administrative and financial oversight should be placed in the Executive branch and the Executive branch should be responsible and accountable for administrative and financial oversight of the Festival activities unless otherwise specified by the Charter. The City's financial oversight and administration for City liabilities should not be placed in a volunteer commission nor with a contractor. Since the Bumbershoot Festival is held at Seattle Center, Seattle Center’s administration is involved with the Festival, and Seattle Center has the City’s expertise in organizing large events, Seattle Center is probably the best suited Executive department to handle the Festival’s administrative and financial oversight in whatever form it takes. If the City opts to set up a long term relationship with a non-City entity, the City will still need a focal point in the City to oversee the City’s contractual relationship with that entity. We believe the creation of an enhanced, independent Bumbershoot department in the Executive branch would create redundancies and inefficiencies in the execution of the Festival.

2. All revenue and expenditures for Bumbershoot for which the City is liable should be processed through the City's financial system and the City Council’s appropriation should represent the total liability for the City.

This will help to provide the City’s Executive and Legislative branch with proper control of all costs for which the City is liable by allowing the Executive branch


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to monitor the funds and the Legislative branch to set the total budget for which the City is liable. The City might decide to set up a relationship in which a private or nonprofit entity takes responsibility for some portions of the Festivals risks and liabilities and the City's and the contractor's liabilities and risks should be clearly stated in the contract. Those portions of the Festival budget for which the City has no liability do not need to be processed by the City. The Mayor's proposed 1994 budget limits the City's liability to the appropriated amount. The City should rewrite the contract to clarify which portion of the expenses and revenues the City remains liable for and for which portion the contractor is liable.

3. An RFP process should be designed which promotes competition for the contract.

This will ensure that the City is not vulnerable to charges of favoritism, to overpriced contracts, and to not identifying and using the best qualified available contractors. Three considerations for increasing competition are:

• allowing for ample notification periods for the RFP; • actively soliciting potential bidders; and • creating competition for contracts by splitting contracts into several

smaller contracts and by having City departments bid for pieces of a contract, as other cities have done.

If the City decides to restructure the Bumbershoot Festival into a nonprofit or for-profit entity, the City should consider a competitive process for selecting the new entity.

4. The City should consider incorporating incentives into the contract with the

producer that encourage efficiencies by tieing the producer's compensation to the Festival's net revenues. This would allow the City to create a mutually beneficial public-private partnership where risks and net revenues are shared as with Denver and Milwaukee's festivals. The City should consider the possibility of the producer paying more attention to the Festival's net revenues at the expense of other Festival objectives.

5. Seattle citizens should be surveyed to determine the future direction of the

Festival.

Bumbershoot is a customer service that the City provides for the citizens of Seattle. However, Bumbershoot has experienced declining attendance since 1990 when attendance was over 230,000 people. In 1991 and 1992 only slightly more than 205,000 people attended, and in 1993 the attendance was below 190,000. Declining attendance at Bumbershoot suggests the need for a survey of Seattle citizens to determine what the citizens want in regards to entertainment and price. It may be that citizens are willing to pay considerably more for the Festival if they can see more national acts; or it may be that citizens want an inexpensive Festival highlighting Seattle and regional artists.


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Addendum

Addendum A: Bumbershoot's Financial and Attendance Figures

Table 1: Summary of Bumbershoot's Financial and Attendance Data for 1986 Through 1993. 1988 1989 1990 1991 1992 1993 Attendance 200,000 229,000 231,000 205,000 205,000 185,000 General Admission Fee $6.00 $6.00 $6.00 $7.00 $7.00 $9.00 Net Profit/Loss ($50,205) $82,002 *** ($165,099) ($128,916) Est.($30,000)** Rainy Day Fund $70,171 $152,173 $39,991 ($125,108) ($254,024) Est.($284,024) One Reel's Compensation* $372,295 $405,619 $415,500 $415,500 $415,500 $436,275 Total Budget $1,534,423 $1,679,823 $1,879,439 $2,047,083 $2,117,419 $2,272,376 City Appropriation $1,287,498 $1,456,786 $1,659,299 $1,737,775 $1,708,475 $1,818,279 Funds Handled Exclusively by One Reel $246,925 $223,037 $220,140 $309,308 $408,944 $454,097 *These figures do not include One Reel's compensation for obtaining corporate sponsors. In 1993, One Reel's finders fee to locate corporate sponsors was $48,000. **Bumbershoot's 1993 budget included repaying $63,000 to the Rainy Day Fund. The total estimated budget deficit is $93,000. ***For Bumbershoot's 20th anniversary, the City directed Bumbershoot to budget $127,000 from the Rainy Day Fund in 1990, instead of raising ticket prices. The actual use of the Rainy Day Fund was $112,182.


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Table 2: Bumbershoot Festival Financial Performance from 1988 to 1993.

*Bumbershoot's 1993 budget included repaying $63,000 to the Rainy Day Fund. The total estimated budget deficit is $93,000. **For Bumbershoot's 20th anniversary, the City directed Bumbershoot to use the Rainy Day Fund in 1990, instead of raising ticket prices. Table 3: Bumbershoot’s Attendance Declining in Recent Years

Table 4: Bumbershoot's General Admission Fee at the Gate Increases to $9.00 in 1993.


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Table 5: Producer's Compensation has Increased 15 Percent Since 1988.*

*These figures include the portion of the contract used for One Reel's employees' salaries and overhead. The contract provides other compensation to reimburse all of One Reel's expenses. This does not include One Reel's compensation to locate corporate sponsors. In 1993, One Reel's finders fee for corporate sponsors was $48,000. Table 6: Total Festival Budget is 20 Percent Above the City's Appropriations.

Addendum B through Addendum G

Attach


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FOOTNOTES 1 Opportunity cost refers to the cost of making an investment that accounts for the difference

between the return on one investment and the return on an alternative.

2 I2The Downtown Denver Partnership is a public-private partnership promoting the vitality of downtown Denver.

3 This does not include in kind donations.

4 One Reel estimates the operating loss for the 1993 festival between $30,000 and $45,000.

5 The in kind figure does not represent any liability to the City since it primarily represents the value of free media coverage. An example of what is included in the in kind figure, at the 1992 festival, KUBE 93 FM ran promotion ads for the Lamonts Blues stage and the Queen Latifah concert valued at $48,450.

6 This figure does not include in kind donations.

7 The Employee Retirement System is semi- independent of the executive branch. It is run by a seven member board of which two members are accountable to the Mayor.

8 Article V. Section 2 of the Seattle City Charter states that the Mayor shall direct and control all subordinate officers of the City, except in so far as such control is by the Charter reposed in some other officer or board.

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