18
Jun
2002
When it became public in late May that Compass Facility Management had discovered $14,000 in misappropriated funds in its management of the RiverCenter/Adler Theatre in Davenport, the timing could scarcely have been worse for the Ames-based company.
Compass' five-year contract with the City of Davenport to manage the city-owned facility is set to expire on June 30, and in addition to covering the misused money and the cost of a $40,000 audit performed by McGladrey & Pullen, the company has agreed to a variety of concessions that will hurt its bottom line.
City Administrator Craig Malin said that city staff was negotiating contract changes when an internal audit by Compass revealed nearly $14,000 in misappropriated funds. As a result of the investigation, RiverCenter/Adler Theatre Executive Director Michael Hartman resigned, and another employee was placed on administrative leave. An investigation by the Davenport Police Department is ongoing, according to Malin.
"Recent events," as Malin calls them, have resulted in further negotiations, and a better deal for citizens. "The city has taken good advantage of Compass' desire to improve its reputation," Malin said.
The Davenport City Council is expected to vote June 19 on whether to authorize Malin to execute a three-year addendum to the current contract with Compass. Alderman Ray Ambrose has inquired about the possibility of holding off on a new contract until after the investigation is complete, but Malin thinks it's prudent to move forward. "The addendum covers any potential outcome of the ongoing audit," Malin said.
Aside from the wisdom of signing a contract while Compass' management of the RiverCenter/Adler Theatre is still under investigation, the city with this new contract might have also ignored a prime opportunity to reduce the amount of public funds the RiverCenter/Adler Theatre gets each year.
The facility, with expected spending of $2.8 million in the current fiscal year, has always been a money-loser for the city, and it receives an annual subsidy of roughly $630,000 to $650,000. That money comes from the hotel and motel tax charged to visitors to Davenport. Compass currently receives $100,000 a year to manage the RiverCenter/Adler Theatre, and it can also receive a bonus.
While Compass would subject itself to a variety of new financial controls and city oversight under the proposed contract, it has little incentive to make the RiverCenter/Adler Theatre more self-sufficient.
Paying the Price
The city is clearly focused on ensuring that the RiverCenter/Adler Theatre is properly managed financially, and that the city has enough oversight to prevent what recently happened from occurring again.
The new contract provides a variety of new controls:
• Compass would perform quarterly audits of the RiverCenter/Adler Theatre.
• Compass would pay for an annual outside audit.
• The RiverCenter/Adler Theatre director would be subject to approval by the city council. The city would also reserve the right to do its own background check on the candidate.
• Compass would agree to implement any audit recommendations that the city deems reasonable.
• The RiverCenter/Adler Theatre business manager would be a city (rather than a Compass) employee, paid for through the facility's operational money. (Compass employees who operate the RiverCenter/Adler Theatre are also paid for through the facility's revenues and its city subsidy.)
"It's not costing the city anything, and it's giving us an independent voice," Malin said. Because the employee would report to the city's finance director, that person might be more likely to disclose abuses, he said. Malin would not say whether a business manager under city control would have prevented the problems under Hartman, but he said that generally, "if you have an executive director and a person who reports to him, it really depends on that person's ethics" whether mismanagement is reported.
Compass would also get significantly less money out of the deal. The company's base fee, currently $100,000 a year, would be $80,000 in the next fiscal year, $90,000 the year after, and $100,000 in the final year - essentially a financial sanction for the recently discovered mismanagement. "In concept, the base management fee has been reduced to a level such that it will return to the present level over the span of three years of acceptable performance," noted a background document prepared for the city council.
That's $30,000 less over the course of the contract than Compass would have received under its current agreement, but before the improper expenditures Compass was in line for even more money in management fees. This new contract represents another $20,000 in lost revenue for the company over the next three years. "The contract extension, as originally negotiated with city staff, called for Compass to receive an annual base management fee of $105,000 the first year, increasing to $111,600 by year five of the extension," Compass President Steven L. Peters wrote to Malin on June 6.
In addition, Compass has agreed to provide consulting and marketing services for John O'Donnell Stadium, for no charge. Over the life of the three-year contract, Malin said, the city will realize "$178,000 in direct savings or added services" over the contract's three years.
"If any good can come out of a bad situation," said Steve Ahrens, an at-large member of the city council and liaison to RiverCenter/Adler Theatre board, "this contract actually addresses some needed safeguards."
Rewarding Mediocrity
The misused money under Hartman's watch must be especially troubling to Compass because the City of Davenport has been generally pleased with the company's performance.
"With the exception of recent events, ... the city's been extremely happy with the additional events at the Adler Theatre and the number of events at the RiverCenter," said Jef Farland, the city's director of Leisure Facilities & Services. The Adler Theatre hosted fewer than 30 events before Compass came on in 1997, he said, and will have more than 100 in the current fiscal year. Compass appears to be close to achieving or exceeding many of its city-set goals, including attendance, revenues, and use days, Farland said.
Those and other goals are part of Compass' annual evaluation. The company starts with a base bonus amount of $50,000 multiplied by a percentage that reflects how well Compass met its goals in five areas: the number of people staying in area hotels, its gross revenue, attendance, number of events, and "city satisfaction" (a variety of issues scored by board members).
Compass' goals for the 2001-2002 fiscal year (which ends June 30) include :
• maintaining a hotel-occupancy rate of 57.09 percent;
• increasing attendance to 295,876 people;
• increasing revenues to $2,800,062; and
• increasing use days to 858.
Each factor is converted to a percentage - for example, use days of 800 represent 93-percent achievement of the goal of 858 - and then weighted, with attendance (20 percent), gross revenue (25 percent), and use days (30 percent) accounting for 75 percent of the total score. That score is then multiplied by $50,000. (There is currently a $100,000 cap on Compass' bonus, and that amount would be reduced to $75,000 under the proposed contract.)
This formula ensures that even mediocre performance gets rewarded. If Compass only reaches 80 percent in each of the five categories, it would still get $40,000 under the bonus formula. It might make more sense for Compass to be rewarded for achievements beyond baseline levels; because attendance, revenues, and the number of events will never dip below certain levels, it seems wasteful to give money to Compass for reaching them.
There's only one change in the bonus formula in the proposed contract: In any given category, Compass must receive a score of at least 69 percent in any category to receive a bonus in that category. This basically ensures that Compass doesn't receive a bonus when it's performing poorly. But it can still get a vast majority of its base bonus without even reaching its goals.
Reducing the Subsidy
The kicker is that Compass has its bonus reduced by any amount of city subsidy beyond what's budgeted - which has been stable between $630,000 and $650,000 a year. For example, because the RiverCenter/Adler Theatre received a subsidy of $70,000 more than budgeted in 2000-2001, Compass received no bonus payment. In the first four years of its contract with the City of Davenport, Compass has received only one bonus, Farland and Peters said.
So why hasn't Compass done better at controlling costs?
Farland used 2000-2001 as an example and noted that severe flooding on the Mississippi killed attendance at Adler Theatre events in spring 2001, while natural-gas costs that spiked in winter 2000-2001 also did severe damage to the facility's budget. Those were the two biggest factors in the $70,000 in additional subsidy that year, Farland said.
Yet Compass - because of two things completely out of its control - is punished under both its current contract and the bonus structure of the proposed contract. With an additional subsidy of $70,000, Compass would have needed to exceed 140 percent of its goals to see any bonus at all.
And that year wasn't necessarily an anomaly. Farland noted that Compass will probably not meet its current goal for hotel occupancy because of a depression in tourism since the September 11 terrorist attacks. Compass will basically be punished because of a national trend.
"We're comfortable with what we have," Peters told the River Cities' Reader on Monday, calling the incentives in the Davenport contract the "industry standard."
In essence, Compass can only get its full bonus payment if it keeps the RiverCenter/Adler Theatre within its budgeted subsidy. Yet it has no incentive to reduce the amount of that subsidy. There's no financial reward, for example, to reduce the amount of the city subsidy to $600,000.
Compass' measurable goals don't directly affect the city subsidy, and in some ways, those targets are actually redundant; increasing attendance and use days will naturally lead to increased revenues. What's missing, however, is figuring into those goals cost-containment.
The easiest way to reward the reduction of the operating subsidy would be to give Compass as a bonus a certain percentage of any portion of the budgeted operating subsidy that's unspent, most likely replacing the "gross revenue" component of the bonus formula. That was suggested by Alderman George Nickolas at Monday's Committee of the Whole meeting.
But Peters said that tax-exempt bonds were used to pay for the RiverCenter/Adler Theatre, and the federal government forbids incentives directly related to reducing operating subsidy; this would be considered sharing a profit under the tax code, and that would jeopardize the tax-exempt status of the outstanding bonds. "The incentives ... can't be tied to the bottom line," he said.
Beyond that, Peters said, such an incentive might make it more likely that the operator would cut "loss leaders" - events or functions that lose money but fulfill the RiverCenter/Adler Theatre's "community service" mission. Conferences and the Adler's film series lose money, Peters said, and if incentives put more emphasis on cost savings, those functions might be trimmed or eliminated. Farland echoed that concern.
Nonetheless, there could be incentives that would reward both growth and cost containment; Compass could get a bigger bonus for both revenue growth and relatively low operational expenses.
But city officials didn't seem very interested in adding incentives that might reduce the subsidy.
"Would it be nice to free up that tax money for other uses?" Malin said. "Sure." But while that's a goal, it's not one for which Compass has any direct incentive to reach. "That's something we work toward but don't put in contract form," Malin said. "We're pursuing it actively by having Compass here." Without incentives built into the contract, however, there seems little chance that the operating subsidy will be reduced.
Malin also noted that while the subsidy hasn't been shrinking in recent years in terms of the dollar amount, it has been going down as a percentage of budget, which has grown from approximately $2 million before Compass came on to its current level of $2.8 million. (Before Compass took over the facility, the city subsidy was as much as $1 million and never less than $630,000.)
Civic centers typically require subsidies, noted 8th Ward Alderman Tom Engelmann. "The exception to the rule is a civic center that does make money," he said. But the real issue isn't the subsidy itself but the amount of the subsidy.
Farland said it is one of his goals to reduce the amount of the city subsidy, but he did not put a time frame on it, except to say that it should happen "as soon as possible. We've been working on it for five years."
But he rejected the idea that the compensation formula for Compass needs to be adjusted. "If they're able to bring that [the amount of the subsidy] down, they get more money in their bonus," Farland said.
Not according to the contract; working within the subsidy guarantees a bonus payment, but reducing it nets Compass nothing.
Farland and others basically argue that growth in attendance, revenues, and the number of events will magically reduce the operating subsidy. "The notion of a lower city subsidy will be a natural progression from growth," Ahrens said.
But there's no evidence to support that position. Expenses go up with the number of events, and there's no guarantee they won't outpace revenue growth. So the city is putting a premium on growth, when it could also be trying to wean the RiverCenter/Adler Theatre off the public dollar.
Compass' five-year contract with the City of Davenport to manage the city-owned facility is set to expire on June 30, and in addition to covering the misused money and the cost of a $40,000 audit performed by McGladrey & Pullen, the company has agreed to a variety of concessions that will hurt its bottom line.
City Administrator Craig Malin said that city staff was negotiating contract changes when an internal audit by Compass revealed nearly $14,000 in misappropriated funds. As a result of the investigation, RiverCenter/Adler Theatre Executive Director Michael Hartman resigned, and another employee was placed on administrative leave. An investigation by the Davenport Police Department is ongoing, according to Malin.
"Recent events," as Malin calls them, have resulted in further negotiations, and a better deal for citizens. "The city has taken good advantage of Compass' desire to improve its reputation," Malin said.
The Davenport City Council is expected to vote June 19 on whether to authorize Malin to execute a three-year addendum to the current contract with Compass. Alderman Ray Ambrose has inquired about the possibility of holding off on a new contract until after the investigation is complete, but Malin thinks it's prudent to move forward. "The addendum covers any potential outcome of the ongoing audit," Malin said.
Aside from the wisdom of signing a contract while Compass' management of the RiverCenter/Adler Theatre is still under investigation, the city with this new contract might have also ignored a prime opportunity to reduce the amount of public funds the RiverCenter/Adler Theatre gets each year.
The facility, with expected spending of $2.8 million in the current fiscal year, has always been a money-loser for the city, and it receives an annual subsidy of roughly $630,000 to $650,000. That money comes from the hotel and motel tax charged to visitors to Davenport. Compass currently receives $100,000 a year to manage the RiverCenter/Adler Theatre, and it can also receive a bonus.
While Compass would subject itself to a variety of new financial controls and city oversight under the proposed contract, it has little incentive to make the RiverCenter/Adler Theatre more self-sufficient.
Paying the Price
The city is clearly focused on ensuring that the RiverCenter/Adler Theatre is properly managed financially, and that the city has enough oversight to prevent what recently happened from occurring again.
The new contract provides a variety of new controls:
• Compass would perform quarterly audits of the RiverCenter/Adler Theatre.
• Compass would pay for an annual outside audit.
• The RiverCenter/Adler Theatre director would be subject to approval by the city council. The city would also reserve the right to do its own background check on the candidate.
• Compass would agree to implement any audit recommendations that the city deems reasonable.
• The RiverCenter/Adler Theatre business manager would be a city (rather than a Compass) employee, paid for through the facility's operational money. (Compass employees who operate the RiverCenter/Adler Theatre are also paid for through the facility's revenues and its city subsidy.)
"It's not costing the city anything, and it's giving us an independent voice," Malin said. Because the employee would report to the city's finance director, that person might be more likely to disclose abuses, he said. Malin would not say whether a business manager under city control would have prevented the problems under Hartman, but he said that generally, "if you have an executive director and a person who reports to him, it really depends on that person's ethics" whether mismanagement is reported.
Compass would also get significantly less money out of the deal. The company's base fee, currently $100,000 a year, would be $80,000 in the next fiscal year, $90,000 the year after, and $100,000 in the final year - essentially a financial sanction for the recently discovered mismanagement. "In concept, the base management fee has been reduced to a level such that it will return to the present level over the span of three years of acceptable performance," noted a background document prepared for the city council.
That's $30,000 less over the course of the contract than Compass would have received under its current agreement, but before the improper expenditures Compass was in line for even more money in management fees. This new contract represents another $20,000 in lost revenue for the company over the next three years. "The contract extension, as originally negotiated with city staff, called for Compass to receive an annual base management fee of $105,000 the first year, increasing to $111,600 by year five of the extension," Compass President Steven L. Peters wrote to Malin on June 6.
In addition, Compass has agreed to provide consulting and marketing services for John O'Donnell Stadium, for no charge. Over the life of the three-year contract, Malin said, the city will realize "$178,000 in direct savings or added services" over the contract's three years.
"If any good can come out of a bad situation," said Steve Ahrens, an at-large member of the city council and liaison to RiverCenter/Adler Theatre board, "this contract actually addresses some needed safeguards."
Rewarding Mediocrity
The misused money under Hartman's watch must be especially troubling to Compass because the City of Davenport has been generally pleased with the company's performance.
"With the exception of recent events, ... the city's been extremely happy with the additional events at the Adler Theatre and the number of events at the RiverCenter," said Jef Farland, the city's director of Leisure Facilities & Services. The Adler Theatre hosted fewer than 30 events before Compass came on in 1997, he said, and will have more than 100 in the current fiscal year. Compass appears to be close to achieving or exceeding many of its city-set goals, including attendance, revenues, and use days, Farland said.
Those and other goals are part of Compass' annual evaluation. The company starts with a base bonus amount of $50,000 multiplied by a percentage that reflects how well Compass met its goals in five areas: the number of people staying in area hotels, its gross revenue, attendance, number of events, and "city satisfaction" (a variety of issues scored by board members).
Compass' goals for the 2001-2002 fiscal year (which ends June 30) include :
• maintaining a hotel-occupancy rate of 57.09 percent;
• increasing attendance to 295,876 people;
• increasing revenues to $2,800,062; and
• increasing use days to 858.
Each factor is converted to a percentage - for example, use days of 800 represent 93-percent achievement of the goal of 858 - and then weighted, with attendance (20 percent), gross revenue (25 percent), and use days (30 percent) accounting for 75 percent of the total score. That score is then multiplied by $50,000. (There is currently a $100,000 cap on Compass' bonus, and that amount would be reduced to $75,000 under the proposed contract.)
This formula ensures that even mediocre performance gets rewarded. If Compass only reaches 80 percent in each of the five categories, it would still get $40,000 under the bonus formula. It might make more sense for Compass to be rewarded for achievements beyond baseline levels; because attendance, revenues, and the number of events will never dip below certain levels, it seems wasteful to give money to Compass for reaching them.
There's only one change in the bonus formula in the proposed contract: In any given category, Compass must receive a score of at least 69 percent in any category to receive a bonus in that category. This basically ensures that Compass doesn't receive a bonus when it's performing poorly. But it can still get a vast majority of its base bonus without even reaching its goals.
Reducing the Subsidy
The kicker is that Compass has its bonus reduced by any amount of city subsidy beyond what's budgeted - which has been stable between $630,000 and $650,000 a year. For example, because the RiverCenter/Adler Theatre received a subsidy of $70,000 more than budgeted in 2000-2001, Compass received no bonus payment. In the first four years of its contract with the City of Davenport, Compass has received only one bonus, Farland and Peters said.
So why hasn't Compass done better at controlling costs?
Farland used 2000-2001 as an example and noted that severe flooding on the Mississippi killed attendance at Adler Theatre events in spring 2001, while natural-gas costs that spiked in winter 2000-2001 also did severe damage to the facility's budget. Those were the two biggest factors in the $70,000 in additional subsidy that year, Farland said.
Yet Compass - because of two things completely out of its control - is punished under both its current contract and the bonus structure of the proposed contract. With an additional subsidy of $70,000, Compass would have needed to exceed 140 percent of its goals to see any bonus at all.
And that year wasn't necessarily an anomaly. Farland noted that Compass will probably not meet its current goal for hotel occupancy because of a depression in tourism since the September 11 terrorist attacks. Compass will basically be punished because of a national trend.
"We're comfortable with what we have," Peters told the River Cities' Reader on Monday, calling the incentives in the Davenport contract the "industry standard."
In essence, Compass can only get its full bonus payment if it keeps the RiverCenter/Adler Theatre within its budgeted subsidy. Yet it has no incentive to reduce the amount of that subsidy. There's no financial reward, for example, to reduce the amount of the city subsidy to $600,000.
Compass' measurable goals don't directly affect the city subsidy, and in some ways, those targets are actually redundant; increasing attendance and use days will naturally lead to increased revenues. What's missing, however, is figuring into those goals cost-containment.
The easiest way to reward the reduction of the operating subsidy would be to give Compass as a bonus a certain percentage of any portion of the budgeted operating subsidy that's unspent, most likely replacing the "gross revenue" component of the bonus formula. That was suggested by Alderman George Nickolas at Monday's Committee of the Whole meeting.
But Peters said that tax-exempt bonds were used to pay for the RiverCenter/Adler Theatre, and the federal government forbids incentives directly related to reducing operating subsidy; this would be considered sharing a profit under the tax code, and that would jeopardize the tax-exempt status of the outstanding bonds. "The incentives ... can't be tied to the bottom line," he said.
Beyond that, Peters said, such an incentive might make it more likely that the operator would cut "loss leaders" - events or functions that lose money but fulfill the RiverCenter/Adler Theatre's "community service" mission. Conferences and the Adler's film series lose money, Peters said, and if incentives put more emphasis on cost savings, those functions might be trimmed or eliminated. Farland echoed that concern.
Nonetheless, there could be incentives that would reward both growth and cost containment; Compass could get a bigger bonus for both revenue growth and relatively low operational expenses.
But city officials didn't seem very interested in adding incentives that might reduce the subsidy.
"Would it be nice to free up that tax money for other uses?" Malin said. "Sure." But while that's a goal, it's not one for which Compass has any direct incentive to reach. "That's something we work toward but don't put in contract form," Malin said. "We're pursuing it actively by having Compass here." Without incentives built into the contract, however, there seems little chance that the operating subsidy will be reduced.
Malin also noted that while the subsidy hasn't been shrinking in recent years in terms of the dollar amount, it has been going down as a percentage of budget, which has grown from approximately $2 million before Compass came on to its current level of $2.8 million. (Before Compass took over the facility, the city subsidy was as much as $1 million and never less than $630,000.)
Civic centers typically require subsidies, noted 8th Ward Alderman Tom Engelmann. "The exception to the rule is a civic center that does make money," he said. But the real issue isn't the subsidy itself but the amount of the subsidy.
Farland said it is one of his goals to reduce the amount of the city subsidy, but he did not put a time frame on it, except to say that it should happen "as soon as possible. We've been working on it for five years."
But he rejected the idea that the compensation formula for Compass needs to be adjusted. "If they're able to bring that [the amount of the subsidy] down, they get more money in their bonus," Farland said.
Not according to the contract; working within the subsidy guarantees a bonus payment, but reducing it nets Compass nothing.
Farland and others basically argue that growth in attendance, revenues, and the number of events will magically reduce the operating subsidy. "The notion of a lower city subsidy will be a natural progression from growth," Ahrens said.
But there's no evidence to support that position. Expenses go up with the number of events, and there's no guarantee they won't outpace revenue growth. So the city is putting a premium on growth, when it could also be trying to wean the RiverCenter/Adler Theatre off the public dollar.
