Audit Report on Department of Parks and Recreation Oversight of Capital Improvements by Concessionaires

Audit Report In Brief

We performed an audit on the oversight of concessionaire capital improvements by the Department of Parks and Recreation (Department). The Department oversees various City concessions for ice rinks, marinas, golf courses, restaurants, etc. Under the terms of their agreements with the Department, concessionaires are, in many instances, required to make and pay for specific capital improvements to the facilities they operate. In Fiscal Year 2003, the Department had agreements with 91 concessionaires in which capital improvements were required.

The Department’s Revenue Division (Division) is responsible for monitoring concessionaires to ensure that capital improvements are completed in accordance with requirements of their agreements. Any modifications to the capital improvement requirements require Department approval. If a concessionaire fails to perform required improvements, the Department may issue a “notice-to-cure,” requiring that the concessionaire comply with the provisions of its agreement. If a concessionaire does not comply, the Department may terminate the agreement. After the Department determines that a concessionaire has completed the required improvements, the Department issues a certificate-of-completion to the concessionaire. Most agreements include a provision that requires concessionaires who complete—based on Department approval—capital improvements at a cost lower than the amount specified in their agreements, to remit the difference to the Department as additional fees.

The Department does not effectively monitor concessionaires to ensure that they comply with the capital improvement provisions of their agreements. As a result, capital improvements totaling nearly $10 million were not completed at 37 of the 58 concessions we visited. Moreover, the failure to undertake capital improvements resulted in a loss to the City of at least $290,000 in concessionaire fees from improvements that would have generated revenue. In addition, 10 of the 37 concessionaires who have not completed their capital improvements claimed that the Department had authorized them to modify or cancel improvements specified in their agreements. However, neither the concessionaire nor the Department could provide evidence that such changes were requested by the concessionaires and formally approved by the Department.

Based on our observations, we believe that capital improvements were completed at 18 of the 58 facilities visited. However, the Department has certified that capital improvements at only one of these facilities were complete. As a result, 16 of the remaining concessionaires were not required to submit final drawings, and 13 were not required to provide the Department a certified statement of actual construction costs accompanied by supporting documents and to remit moneys to the City if improvements cost less than the amount stipulated in their agreements.

Moreover, Department files did not indicate whether six concessionaires were assessed liquidated damages when capital improvements were not completed on time as required by the agreements. The audit also noted that although the Department receives invoices and canceled checks from concessionaires, in order to substantiate capital improvement work performed, it does not appear that the Department reviews the documentation submitted. Finally, we found poor conditions at 12 of the concessions that require correction.

This report makes a total of nine recommendations. The major recommendations are as follows:

The Department should:

• Establish a project management system to monitor the progress of concessionaires in completing required capital improvements.
• Issue notices-to-cure to concessionaires who have not completed the capital improvements required by their agreements.
• Ensure that the City receives compensation equivalent to the value of the capital improvements it is forgoing before it approves any modifications to concession agreements. In that regard, the Department should ensure that modifications are documented with formal agreements.
• Issue certificates-of-completion to those concessionaires who have completed their capital improvements.
• Assess liquidated damages when concessionaires fail to complete capital improvements in accordance with their agreements.
• Ensure that concessionaires submit complete documentation needed to determine whether claimed capital improvement work was actually performed.