Audit Report on the Compliance of Metro Cruise Services, L.L.C. with Its Operating Agreement for the Brooklyn Cruise Terminal

In May 2013, the City of New York (the City), acting through the New York City Economic Development Corporation (EDC), entered into an operating agreement (the Operating Agreement) with Metro Cruise Services, L.L.C. (MCS), which provides that MCS shall be the sole and exclusive operator of the Brooklyn Cruise Terminal (BCT)[1].   As operator, MCS is responsible for the day-to-day operations of the BCT and is tasked with the management of the pier.  MCS’ responsibilities include providing docking, stevedoring, and meeting any other needs of vessels accommodated there.

Under the Operating Agreement, MCS is required to remit the revenue generated from the BCT’s operation to the City, through EDC, after deducting specified types of revenue—MCS’ compensation—and allowable costs.  The City’s share is referred to as Operating Income.  The revenue that MCS shares with the City consists principally of three categories—wharfage (based on cruise ships’ passenger counts), dockage, and special events.  In addition, MCS shares with the City the fees MCS collects for furnishing cruise ships with fresh water drawn from the City’s water supply system.  EDC is responsible for administering the Operating Agreement on behalf of the City and for ensuring that the City receives the correct amount of revenue thereunder.

The objectives of this audit were to determine whether MCS paid the City the correct amounts required under the Operating Agreement and whether it complied with the other major requirements of that agreement.  In addition, the audit sought to determine whether EDC provided sufficient oversight of MCS’ performance to protect the City’s interests.

Audit Findings and Conclusions

Our audit found that MCS understated the Operating Income due the City by at least $98,221 through its inaccurate computation and deduction of security costs.  We further found that MCS maintained insufficient records, specifically copies of executed contracts, to enable us to determine whether it properly reported and shared with the City the special event revenue generated at the BCT.  Lastly, our audit identified gaps within MCS’ fresh water meter readings that MCS did not document or satisfactorily explain.   As a result, we question the accuracy of the payments made to the City for the provision of fresh water.

With respect to EDC’s oversight of the BCT, we found that EDC did not sufficiently oversee MCS’ compliance with the Operating Agreement to ensure that MCS paid the correct amount to the City.  Specifically, EDC did not verify the accuracy of the passenger counts on which MCS computed the wharfage fees due to the City, MCS’ reported fresh water revenue, Safety and Security Costs, and routine maintenance costs.

Audit Recommendations

This report makes a total of four recommendations to MCS and EDC, including that:

MCS should:

• Remit $98,221 to the City for improperly claimed Safety and Security Costs.

EDC should:

• Review all prior payments and corresponding supporting documentation used by MCS to calculate the Operating Income payable to the City;
• Recoup all Operating Income owed to the City by MCS, including underpayments in previous calendar years that resulted from MCS’ inappropriate deductions and calculations; and
• Implement the following procedures to ensure that MCS, any successor, or any other BCT operator accurately reports BCT Operating Revenue.
  • Implement sufficient verification procedures for the passenger (PAX) counts reported by the third-party cruise lines;
  • Request and review the supporting documentation for fresh water usage to identify any unexplained water consumption and any unexplained gaps or other anomalies in the reported water meter readings;
  • Review security invoices and supporting documentation to ensure the accuracy and validity of the Safety and Security Cost deductions under the Operating Agreement;
  • Ensure that all appropriate and necessary special event documents are maintained by the BCT operator; and
  • Request and review operator’s documentation for all claimed maintenance deductions to determine whether they are deductible under the Operating Agreement.

MCS Response

In its written response, MCS agreed with the report’s finding that it improperly deducted $98,221 for Safety and Security Costs for Calendar Years 2014 through 2016.  However, MCS also stated in response to that finding that it was now “seeking reimbursement” for a separate security staffing expense it incurred throughout the same three-year period—totaling $109,053—for hiring a “Roundsman.”  With regard to the finding that MCS did not always execute written contracts for special events, MCS noted that it had provided us with “Hold Harmless & Indemnity Agreements (HH&I) and/or other legally binding documents” for those events.  In addition, MCS disagreed with our finding that it failed to account for unexplained gaps in its water meter readings, claiming that the water meter “can record terminal water usage,” and is not a “single designated water meter exclusively to measure the fresh water supplied to the cruise ships it accommodates.”

It appears that MCS attempts to offset its acknowledged overbilling for Safety and Security expenses by seeking reimbursement—three years after the fact—for an unrelated expense.  However, that expense—for hiring a “Roundsman”—is not an allowable charge that MCS is permitted to deduct from Operating Revenue under the Safety and Security provisions of the Operating Agreement.  Moreover, MCS provided no documentation or evidence of having raised this issue with EDC or having sought EDC’s approval for such a deduction during the three-year period when it was incurred.  MCS has provided no new information that would justify offsetting its debt to the City with its unrelated overhead expense.

Concerning the absence of written contracts for certain special events, MCS’ HH&I agreements merely address insurance and liability issues and do not establish payment amounts and due dates.  Thus, they are not substitutes for standard special event contracts that would show whether MCS properly reported and shared with the City the special event revenue generated at the BCT.

Finally, the recent claim by MCS that the water meter it used to measure the fresh water supplied to cruise vessels “can record [other] terminal water usage” contradicts what its representatives and EDC officials said during the audit and is inconsistent with records obtained during the audit.  Moreover, in making this claim in response to the audit finding, MCS did not provide any additional documentation.

In sum, MCS has provided no new information that would cause us to revise the audit findings and recommendations.

EDC Response

In its response, EDC agreed with the audit finding that MCS had overbilled the City by $98,221 for Safety and Security costs and stated it would recoup that amount from MCS, but did not agree that EDC inadequately oversaw MCS’ operations.  Specifically, EDC objected to the audit’s statement that “EDC informed us that it did not verify the information submitted to it by MCS,” stating that “[t]his statement was taken out of context.  In accordance with the EDC Cruise Billing Manual highlighted by the Comptroller’s Office in the Draft Audit Report, EDC routinely conducted quarterly reconciliation and verification or [sic] revenues and costs associated with the operation of the cruise terminal.  We will re-emphasize with staff the importance of identifying unallowable costs.”

EDC also wrote, “As was mentioned during the audit process, the water meter that records fresh water supplied to cruise ships does not do so exclusively. The meter can also record water supplied to other parts of BCT such as public bathrooms in passenger waiting areas and facilities occupied by CBP [U.S. Customs and Border Protection].  The Comptroller’s Office cannot, therefore, demonstrate the veracity of their claim to unexplained inaccuracies associated with the provision of fresh water to cruise vessels.”  This statement in EDC’s response is, however, inconsistent with the statements that EDC officials made during the audit and is inconsistent with water meter reading records obtained during the audit.

EDC did not respond to the recommendations addressed to it in the report.

EDC’s responsibilities include the proper oversight of City contracts and business operations to ensure the accuracy of the revenue reported and remitted to the City.  As identified in this audit, EDC’s existing procedures were insufficient.  Had EDC implemented sufficient verification procedures, the issues cited in the report, such as MCS’ overbilling for Safety and Security Costs and the large unexplained gaps in water meter readings would have been identified and addressed in a timely manner.

[1] As of this writing, the extended term of the agreement ends on June 30, 2017.