Audit Report on the Compliance of Carnegie Hall Corporation’s Special Program Fund with Its City Lease Agreement

In 1960, after acquiring Carnegie Hall (CH), the City of New York entered into a lease agreement with the Carnegie Hall Corporation (the Corporation) to operate the CH Premises consisting of the land, together with all buildings and improvements and other rights. Later in 1987, when the City, through the Department of General Services, currently known as the Department of Citywide Administrative Services (DCAS), amended the lease to include the development of the adjacent Carnegie Hall Tower , it negotiated the rental amount that the Corporation would be required to pay the City. In so doing, the City allowed the Corporation, in lieu of rent, to set aside $183,600 into a Special Program Fund (SPF) to be used exclusively to fund high quality public services programs. City public funds allocated to assist in CH’s operations are provided through the New York City Department of Cultural Affairs (DCA).

Under the lease agreement, the Corporation is required to submit proposed programs and an annual budget to DCA for approval. Further, the Corporation is required to designate a separate bank account for the SPF and obtain DCA’s approval for any withdrawals of grants, contributions, or other payments to the SPF. Additionally, the Corporation is required to maintain records of payments into or charges against the SPF.

Audit Findings and Conclusion

Our review found that the Corporation maintained general records supporting the SPF-related activities. However, DCA did not ensure the Corporation complied with significant SPF requirements stated in Article 3 of its lease agreement with the City. Specifically, DCA did not ensure the Corporation submitted proposed programs and an annual budget for approval, did not ensure the Corporation distributed the neighborhood concerts equitably within the five boroughs and monitored the level of attendance, and did not maintain a separate bank account for the SPF. Without a proper approval process, DCA was unable to ensure the diversity of the programs provided and whether the programs were equitably distributed among the five boroughs and to benefit the intended population of the City.

Further, regarding another matter, DCAS did not renegotiate the terms of the CH lease and reassess the amount of the public service contribution after the Carnegie Hall Studio Towers were reclassified from residential to exclusively commercial use including music education, rehearsal space, and event space. In 2009, DCAS approved a proposed modification for the studio portion of the CH premises. The approved physical modification resulted in the reclassification of space from residential to exclusively commercial use. However, despite the substantial change in the architectural integrity of the premises, DCAS did not seek to renegotiate the lease terms that would have allowed for a proportionate increase in SPF contributions to the City. As the Carnegie Hall Studio Towers were repurposed to enhance the value of the premises, the City should reassess the lease terms to ascertain an equitable increase in its public service contribution.

Audit Recommendations

To address these issues, the audit recommends that DCA should ensure the Corporation:

• Submits proposed programs and an annual budget for approval.
• Diversifies the fund programs.
• Distributes the neighborhood concerts equitably within the five boroughs and attains a high level of attendance.
• Maintains a separate bank account for the SPF.

The audit recommends that DCAS should:

• Renegotiate an equitable increase in the City’s public service contribution.

Agency Response

In its response, DCA stated that “the Draft Report contains a number of inaccuracies and mischaracterizations about the Carnegie Hall Corporation (‘Carnegie Hall’ or the ‘Hall’) and the Special Program Fund (the ‘Fund’).” Specifically, DCA stated, “The most troubling aspect of the first finding is the assertion that the Agency was required to guarantee equitable distribution of the Neighborhood Concerts within the five boroughs and monitor attendance levels as a means of ensuring that musical programming was ‘broad and diverse’ as required by Article 3.” DCA stated that “…this finding is largely inconsistent with the terms of the lease and immaterial to the public service that was successfully delivered by Carnegie Hall in FY 2010.”

We disagree. A lack of adequate Fund records precluded the DCA from properly monitoring Article 3’s requirement for “broad and diverse” musical programming. If DCA had carried out the type of analysis that we conducted, it would have known that the Neighborhood Concert programs were falling short in attracting capacity audiences by almost 25 percent.

Additionally, DCA’s inability in tracking actual expenses hindered its ability for measuring and determining whether the quantity and quality of Corporation programs was satisfactory.

DCA also disagreed that “DCAS should have renegotiated the terms of the public service contribution associated with the Fund in concert with its review of the Hall’s renovation of its Studio Towers…”, and deemed the report conclusion as “a fundamental misunderstanding of the City’s partnership with Carnegie Hall and its not-for-profit mission. Contrary to the description in the Draft Report, the Studio Towers Project is intended to create additional spaces for its music-education programs and modernize its back stage to ensure that the Hall remains a destination for world-renowned artists and educators….Most important, however, is the marked increase in public service that will result from the additional space created by the Project….To the extent that the roof-top event space will generate revenue for the Hall through rentals and catered events, such revenue will be used toward not-for-profit operations and mission-driven programming. As a result, DCA does not deem an increase in Carnegie Hall’s public service contribution to be necessary.”

In its response, DCAS stated that “…DCAS believes that renegotiation of the lease in connection with the renovation is inconsistent with the public policy detailed heretofore. We therefore respectfully decline the recommendation to do so.”

Despite DCA’s and DCAS’s disagreement, we maintain our position that the lease renegotiated in 1987 may need to be updated as a result of the Corporation’s ability to enhance its revenue. Accordingly, it is our opinion that a sensible renegotiation be attempted.