Audit Report on the Financial and Operating Practices of the Garment District Alliance Business Improvement District

Executive Summary

In 1981, New York City and State passed legislation permitting property owners to define and self-fund commercial districts known as Business Improvement Districts (BIDs).  A BID is a public-private partnership through which property and business owners elect to contribute to the maintenance, development, and promotion of their district.  Special assessments paid by benefiting property owners fund BID operations.

When BIDs are initially proposed, the prospective BID provides a district plan (the Plan) to the Department of Small Business Services (DSBS), which describes the formula used to calculate the special assessment and proposed services and operating budget.  BIDs provide services that supplement municipal services (supplemental services) including security, sanitation, and marketing, and capital improvements.

In 1993 the City, through DSBS, entered into a contract with the entity currently known as the Garment District Alliance (GDA), a BID and a not-for-profit corporation created pursuant to § 201 of the New York State Not-For-Profit Corporation Law.  The GDA was formerly known as the Fashion Center District Management Association, Inc. (the DMA).  Under the terms of the contract, the City collects and pays to GDA the assessments that are levied on real property within the district.  In return, GDA agrees to provide certain supplemental services, and capital improvements within the district.  The GDA BID is located in western Midtown, bounded by Fifth Avenue on the east, Ninth Avenue on the west, 41^st Street on the north, and 35^th Street on the south.  The GDA contract states that GDA “shall” provide security, sanitation, social services, and administration.  In addition, the contract states that GDA “may” provide marketing and promotion, economic development, special projects, capital improvements, and other services.

In its Financial Statements for Fiscal Year 2017, GDA reported revenues of $8,010,378 and expenditures of $7,739,825, which included $6,454,580 in program expenses and $1,285,245 in management and general expenses.

Audit Findings and Conclusion

GDA provided supplemental services in accordance with its contract, in that it:

• Employed security officers to patrol the district and provide assistance to the public;
• Employed sanitation workers to sweep sidewalks, empty trash and recycling bins, paint street furniture, remove graffiti, posters, and stickers, and power-wash sidewalks;
• Contracted with Urban Pathways to provide and report on homeless outreach and referral services;
• Provided marketing and promotion services including special events, a social media presence, an information kiosk, and a website that included business directories, maps, newsletters, and guides;
• Provided economic development services by conducting pedestrian counts, publishing reports including an Economic Quarterly Report, offering seminars, and advocating for projects to promote or improve economic and real estate conditions; and
• Employed a full-time staff to administer its operations.

However, GDA did not provide supplemental services in accordance with its annual budget, and GDA did not explain the budget variances to its members and DSBS, as its contract with DSBS required.  Specifically, for Fiscal Year 2017, the GDA Board approved a budget with program expenses totaling $8,061,136, but GDA spent only $7,744,417, and carried forward the balance of $316,719 to Fiscal Year 2018.  In addition, GDA’s budgeted and actual line item expenditures for four programs had variances of greater than 10 percent each.  Specifically, GDA spent $123,829 more than was budgeted on beautification and horticulture, and $288,407 less than what was budgeted and approved by the Board on homeless outreach and referral; marketing, special events, and holiday lighting; and security services.

GDA members expressed dissatisfaction with some of those same services where actual expenditures were less than the amounts budgeted and approved by the Board by more than 10 percent.  We surveyed GDA property owners and tenants to assess their satisfaction with GDA’s supplemental services.  Based on the results of our survey, 40 of 183 respondents (21.9 percent) were dissatisfied or very dissatisfied with GDA’s overall supplemental services.  In their responses and comments, GDA property owners and tenants particularly expressed dissatisfaction with homeless outreach and referral, sanitation, and security services.  (Appendices I and II to this report contain a summary of survey results and narrative comments related to homeless outreach and referral services, sanitation, and security.)

In addition, GDA lacked adequate controls over its other than personal services (OTPS) expenses to ensure that they were reasonable, appropriate, adequately supported, and authorized.  Based on our review of GDA’s procurement documentation, GDA did not document that it either solicited bids from at least three responsible and competitive bidders and selected the lowest bid or justified non-competitive procurements to the GDA Board as required.  GDA also did not enter into contracts detailing the scope of services, payment terms, and approvals and did not document how catering and special event expenses related to BID business.

Moreover, GDA leased office space from a related party—the Board Secretary—and based on the GDA Board minutes, the Board did not determine and document in writing that the lease terms were fair, reasonable, and in GDA’s best interest, and the basis for its decision as required by law.  On April 14, 2016, GDA and its landlord amended the terms of their initial lease dated May 16, 2006.  The amended lease deleted the initial lease renewal option and provided for a new lease extension term and annual rent.  Under the terms of the amended lease, GDA will pay, for the five-year period starting on December 1, 2016, $1,054,130 (78 percent) more in base rent than GDA would have paid had it exercised the initial lease’s five-year renewal option.

GDA also lacked adequate controls over its personal services (PS) expenses to ensure that such expenses were reasonable, appropriate, adequately supported, and authorized.  Specifically, GDA lacked controls in that during the audit scope period it: (1) did not conduct research to determine whether top management compensation was reasonable and did not obtain the Board Officers Committee’s or the Finance and Audit Committee’s approval for their salaries; (2) did not present central staff’s salary increases to the Board for its approval, and (3) did not, and does not currently, require supervisory personnel to review and approve central staff’s timesheets or require central staff to certify that they accurately reported their attendance and time.

Audit Recommendations

Based on our findings, we made 15 recommendations to GDA and 2 recommendations to DSBS, including the following:

• GDA should monitor budgeted and actual expenditures to identify variances.
• GDA should ensure that the GDA President notifies the Board of budget increases, decreases, or carryovers and that the Board documents its review and approval.
• GDA should conduct annual surveys of property owners and tenants to determine the current level of support for the Plan, current level of satisfaction with GDA’s performance, and recommendations for possible changes.
• GDA should competitively procure goods and services whenever possible and maintain procurement documentation.
• GDA should consider alternatives to related-party transactions before entering into them and ensure that a majority of Board members present at the meeting approve related-party transactions and contemporaneously document in writing the Board’s consideration of possible alternative transactions and its basis for determining that related party transactions are fair, reasonable, and in GDA’s best interest.
• GDA should maintain copies of vendor contracts and other agreements documenting the scope of services, payment terms, and authorized approvals.
• GDA should ensure that the GDA board researches, reviews, and documents comparability data to determine whether top management compensation is reasonable.
• GDA should obtain Board approval for top management compensation and central staff salary increases, bonuses, or other adjustments.
• GDA should require central staff to certify that they accurately reported their attendance and time.
• GDA should require supervisory personnel to review and approve central staff timesheets.
• DSBS should review annual reports to ensure that BIDs include required budgetary and other requested information including but not limited to a survey collecting program and service impact data.

Agency Response

In its response, GDA generally disagreed with the report’s findings and stated that 11 recommendations made to GDA should be removed since it was either already performing activities or was not contractually required to perform activities.  Nevertheless, with regard to its OTPS expenses, GDA stated that it “has already taken steps to provide more accurate documentation of these activities, ratify prior actions, and ensure the proper policies, procedures and practices are in place going forward.”

For the remaining four recommendations made to GDA regarding its PS expenses, GDA stated that it conducted a comprehensive review of its practices and policies and “has amended its practices to provide additional documentation of compensation reviews.  When reasonable and appropriate, the GDA will provide information on compensation practices by similar organizations to the Officers and Board to inform their review process.  Additionally, [t]he GDA is currently reviewing payroll and time management systems to determine if another system will be more effective.”

DSBS officials stated that “DSBS is the oversight and support agency for [BIDs]” and that it “regularly acts as a liaison for [BIDs] regarding many interagency issues” and “already extensively reviews and [analyzes] submitted annual reports for budgetary, program, and service impact information.”