Audit Report on the Compliance of Sterling Doubleday Enterprises, L.P., (New York Mets) With Their Lease Agreement And Fees They Owe the City

EXECUTIVE SUMMARY

In September 1998, the City, through the Department of Information Technology and Tele-communications (DOITT), and Paragon Cable doing business as Time Warner Cable of New York City, Northern Manhattan Division (Time Warner) agreed to a renewed franchise agreement for 10 years. Section 9 of the renewed agreement requires that Time Warner pay the City 5 percent of its gross revenue, less the mandatory payments made to the New York State Public Service Commission (NYSPSC). In addition, Time Warner is required to: carry $50 million in insurance that names the City as an additional insured; maintain a security fund deposit of $2.3 million; and provide specified annual payments to the NYSPSC and the Community Access Organization (CAO).

This audit determined whether Time Warner maintained adequate internal controls over the recording and the reporting of its gross revenues; reported accurately its gross revenues, and calculated and paid the appropriate franchise fees due, paying those franchise fees on time; and complied with certain other requirements of its franchise agreement. For the two-year audit period––January 1, 1999, through December 31, 2000––Time Warner reported gross revenues totaling $210.3 million, paying the City franchise fees of $10.2 million. In addition, Time Warner paid the NYSPSC $302,440. (See Appendix I.)

Time Warner had an adequate system of internal controls over its revenue collection process. However, Time Warner under-reported its gross revenue by $10,300,790 for the period January 1, 1999 to December 31, 2000. This resulted in Time Warner owing the City $551,684 in additional franchise fees and calculated interest.

Commencing February 1998, Time Warner separately identified the cost of franchise fees in its bills to subscribers, but improperly excluded the franchise fee portion totaling $10,209,284 of the billed amount from January 1, 1999, to December 31, 2000 in its gross revenues reported to the City. Prior to February 1998, Time Warner reported the total amount collected from subscribers (including franchise fees collected from subscribers) on its gross revenue statements and paid the pertinent fees on these amounts. In addition, Time Warner did not report $52,889 in revenue from Non-Sufficient Fund check charges––a fee charged to each customer for each check returned by the bank as uncollectable. Finally, Time Warner did not report $38,617 on its gross revenue statements to the City relating to the value of free services that Time Warner provided to new employees and apartment managers.

The preliminary draft of this report recommended that Time Warner pay the City $551,684 for additional franchise fees and interest due; and include on its gross revenue statements to the City, all franchise fees collected from subscribers, Non-Sufficient Fund check charges, and the value of all free services provided to apartment managers and employees.

However, as a result of this audit and two other audits of Time Warner cable franchise agreements—Time Warner Southern Manhattan Division and Queens Inner Unity Cable System––Time Warner, through an agreement with the City, paid the City $7,677,521 on May 31, 2002. This payment covered franchise fees that were excluded from gross revenue calculations to May 31, 2002, and owed under the seven Time Warner cable franchise agreements with the City. (Of the total amount paid, $1,121,617 pertained to the Northern Manhattan Division.) Therefore, this report now recommends that Time Warner pay the City $2,446 in franchise fees and interest owed under its franchise agreement for the Northern Manhattan Division for excluding Non-Sufficient Fund check charges and the value of free services on its gross revenue statements from January 1, 1999, through December 31, 2000.

Time Warner officials responded that ‘We disagree with your characterization of our not including the amount of franchise fees in our computation of gross revenues as an ‘underreporting’ and an ‘improper exclusion’. As you are aware, there was a difference of opinion between the City and Time Warner with regard to this fee on fee issue. It was Time Warner’s position that franchise fees should not be included as part of gross revenues while it was the City’s position that they should. Subsequently, as you discuss in the Report, an Agreement settling this matter was reached, although it should be pointed out that neither party conceded their position. Further, although the audit periods vary, it should be made clear in each Report that the $7,677,521 payment covered the period from February 1, 1998 through May 31, 2002, in each case a period beyond the Audit period.’

DOITT officials responded that ‘the financial issues brought forward during the audit have been addressed and are now correctly being reported as gross revenue [by Time Warner]. The appropriate franchise fees will be paid quarterly. Franchise fee payments will continue to be reviewed and monitored by this agency accordingly.’

Neither Time Warner nor DOITT responded to the audit’s findings pertaining to the exclusion of Non-Sufficient Fund check charges.