Responses to the Audit
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County of Los Angeles
October 20, 2016
Elaine M. Howle, State Auditor
State of California
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle,
Thank you for the opportunity to review the draft report of your audit of the Los Angeles County Fair Association. At this time, we do not have specific comments on the report or its recommendations. We will not have an opportunity to review the Fair Association’s portion of the report until it is issued. We look forward to reviewing the entire report when it becomes available.
While, we generally agree with the recommendations based on what we have seen thus far, as you understand, our ability to implement them may be dependent on cooperation from the Los Angeles County Fair Association. We look forward to working with the Fair Association with the intent of implementing these recommendations; and we will also consider any observations or recommendations your report may make pertaining to the Fair Association.
If you have any questions, please contact me at (213) 893-2477.
Sincerely,
DAVID P. HOWARD
Assistant Chief Executive Officer
Asset Management Branch
Comments
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE COUNTY OF LOS ANGELES
To provide clarity and perspective, we are commenting on the response to our audit report from the county. The numbers below correspond to the numbers we placed in the margin of the county’s response.
We provided the county with a redacted draft report that contained only those portions relevant to the county. We provided enough information and context to support our recommendations to the county.
While we recognize that the county will require the association’s cooperation to implement our recommendations related to any potential amendment to the lease or to resolve issues related to rent due from the hotel’s and conference center’s operations, we note that the county has the ability to implement certain recommendations on its own. For instance, the county can create and adhere to a policy of reviewing the association’s rent calculations at least every three years.
Los Angeles County Fair Association
November 4, 2016
BY E-MAIL ELAINEH@AUDITOR.CA.GOV
Ms. Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, California 95814
Re: Audit No. 2016-106 – Preliminary Response of the Los Angeles County Fair Association
Dear Ms. Howle:
Thank you for providing the Los Angeles County Fair Association (“LACFA”) an opportunity to comment on a portion of the forthcoming audit of the County of Los Angeles’ (“County”) oversight of its lease with LACFA. We welcome the opportunity to collaborate with your office to ensure that the facts and analysis in the State Auditor’s report are accurate. LACFA also appreciates that your audit has found that:
- LACFA has “reported positive income from its operations in every year throughout [the] audit period.” Tax filings seldom represent the financial health of any organization, particularly non-profits, yet, as your audit report notes, net operating income through the audit period averaged several millions every year during the audit period.
- LACFA receives “relatively little public funding or other assistance from the State or from local governments.” Moreover, LACFA has not received any direct public funding since 2011, and in fact, has not received direct funding from the County for a decade.
- During the audit period, LACFA had the highest revenues of any fair organization in the State and employed more workers than every major fair combined.
- LACFA has continuously maintained its non-profit status.
Questions about these issues led to the audit in the first place, and we are pleased that the State Auditor’s report has clarified these facts.
We also appreciate that you have supplied, if not full, at least some context and history so that LACFA’s current position can be placed in better perspective. Your audit report notes that LACFA is not an agency of the State or County, but a private non-profit that has existed in some form or another since 1922, and you correctly noted that LACFA deeded much of the 543-acre Fairplex to the County. Having given so much valuable land to the County, for many years LACFA did not pay any annual rent for use of the land, although in 1988 the County and LACFA entered into the current 56-year lease (the “Lease”), which was geared at generating revenues to the County while still allowing LACFA to continue providing significant community benefits to the east San Gabriel Valley. This history is critical to an understanding of the Lease, and should have informed much of the analysis in the State Audit. See GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS at § 6.13 (stating that auditors should obtain an understanding of “[a] program’s strategic plan and objectives; and the external factors that could directly affect the program”).
Not many tenants give away their land to a landlord, and perhaps to the casual observer this does not make sense. However, LACFA’s primary mission has always been to serve the County and its residents, and for decades, the County and LACFA have worked hand-in-hand in this same spirit of cooperation to further the public interest. That should have been the starting point to the State Audit report, but unfortunately, it appears that the historic relationship was not put in its full context.
In an e-mail from Mr. Joe Meyer of your office on August 2, 2016, LACFA was informed that it would be presented with a “final draft” of the audit. We did not expect to receive a highly redacted draft and thus we may provide additional comments once the full report is released to LACFA and the public. However, based on the material that LACFA has been allowed to review, it is apparent that the State Auditor’s report is premised on a fundamental misunderstanding of LACFA and this longstanding relationship with the County—a relationship that recognizes LACFA’s role as a major economic engine for the east San Gabriel Valley, and perhaps most importantly, values the non-profit programming that have made the Fairplex a hub for community building and education for tens of thousands of County families.
Much of the State Auditor’s report is based on an erroneous Lease interpretation that defies decades of practice, prior independent audit reports, a 2006 confirmation by then-Chief Administrative Officer (“CAO”) David Jannsen, and critically, the whole foundation upon which LACFA’s partnership with the County is based. Largely relying on correspondence drafted by a single employee which dates back 25 years ago, has no official independent status, and is itself flawed on its face (for example, it provides an illogical hotel gross revenue number that is smaller than even the debt service for the hotel’s construction, so it cannot possibly be referring to gross revenues), the State Auditor’s report still takes the position that the County should have interpreted the Lease to require the payment of rent based on the hotel’s gross revenues. This rewriting of history and re-interpretation of the Lease, which was entered into decades ago before the County even corresponded via e-mail, is particularly twisted and defies logic. For one, the State Auditor’s interpretation would have never allowed a hotel to be financed and constructed during California’s crippling recession of the early 1990s, which is why—from day one—the Lease has been interpreted in a consistent fashion by LACFA and the County that excludes the hotel’s gross revenue.
While the report implies that there may be a different interpretation, in re-construing the Lease, the State Auditor’s report violates Generally Accepted Government Auditing Standards, which specify that “[a]uditors must obtain sufficient, appropriate evidence to provide a reasonable basis for their findings and conclusions.” See GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS at § 6.56 (emphasis added). Similarly, “[e]vidence is not sufficient when . . . using the evidence carries an unacceptably high risk that it could lead the auditor to reach an incorrect or improper conclusion . . . .” Id. at § 6.71(b) (emphasis added). Unfortunately, the State Auditor’s report appears to be premised on a guessing game as to what should have been intended by LACFA and the County when the Lease was drafted, rather than the County’s own interpretation or a deeper analysis of the LACFA-County relationship and the economic environment of the early 1990s.
If the County and LACFA had only viewed their partnership through the narrow prism of rent, or if LACFA was only interesting in maximizing its own revenues, then LACFA certainly would not have deeded away the Fairplex land to the County so that it could serve the public interest in perpetuity, or provided millions in non-profit programming to County residents, none of which is required by the Lease. For decades, LACFA and the County have been partners working to foster educational opportunities for youth throughout the east San Gabriel Valley and have worked to develop the Fairplex with an eye toward creating community-building and economic growth for the region. The State Auditor report’s failure to discuss these matters in depth and to instead view the LACFA-County relationship as a traditional landlord-lessee relationship, does a disservice to the public.
Throughout all areas of the audit report, the State Auditor provides an incomplete picture and this necessitates significant revisions to the document. Furthermore, several conclusions in the report lack accurate facts or sound analysis. The comments below address important revisions that the State Auditor should make in order to provide a more balanced final report.
- BACKGROUND AND HISTORY OF THE LOS ANGELES COUNTY FAIR ASSOCIATION AND ITS RELATIONSHIP WITH THE COUNTY
Over the last seven decades, the County and LACFA have shared a mission to promote agriculture, horticulture, forestry and viniculture in the region. Through the years, the County has experienced social change, economic change, and political change, yet the relationship between the County and LACFA has endured—and in fact, thrived.
This sense of community is at the heart of the unique partnership between the County and LACFA. The Los Angeles County Fair began in 1922. Nearly a century later, the Fair is one of the most prominent fairs in the United States, entertaining and educating millions. The Fairplex property has also changed. In the 1940s, LACFA deeded much of the Los Angeles Fairgrounds to the County. The Fairplex is now one of the most valuable properties in the County’s real estate portfolio, and houses a museum, hotel, and conference and trade center, among other assets. Although the County supported these endeavors, LACFA financed most of this development without County support. Today, the facilities at the Fairplex are worth over $60 million, but cognizant of its longstanding commitment to community investment, LACFA will eventually transfer ownership of these facilities to the County, just as it did with the land. Unfortunately, the draft report only makes passing reference to these facts and fails to connect them to the Lease.
The remarkable growth of the Fairplex exemplifies what LACFA can do when aligned with the County. LACFA employs nearly 1,500 workers annually to support the Fair. With the construction of the hotel and conference center, over 160 full time equivalent jobs poured into the County, providing a direct impact in the lives of County residents. These jobs provide income and spur additional economic growth in Pomona. Parents can support their families and afford housing. Businesses have more customers. Residents pay their taxes. By extension, the County and LACFA are able to realize their goal of enriching the lives of others. None of this happens without LACFA and the County working together, yet the connection between the Lease and job creation is not drawn in the State Auditor’s report.
Moreover, LACFA’s work goes beyond hosting a fair, building a hotel, and creating jobs. Supported by the development of the Fairplex, LACFA supports several affiliated non-profit organizations and community programs. For instance, LACFA operates and maintains a year-round 5-acre educational farm at the Fairplex (known as “The Farm”). LACFA invites over 175,000 students to the Farm annually to learn about agriculture, horticulture, forestry and viniculture. LACFA also oversees numerous programs such as (1) The Learning Centers, (2) the Career and Technical Education Center, (3) Junior Fair Board, (4) Millard Sheets Art Center, and (5) the Alex Xydias Center for Automotive Arts, among others. These programs provide vocational training in auto mechanics, arts, landscaping, and other skills. Finally, LACFA administers The Child Development Center, which offers early education for 250 children ages 8 weeks to 6 years, approximately half of whom are from low-income families. The State Auditor reduces a discussion of this important work to a handful of footnotes.
LACFA also continues to make a tremendous impact in the community. In 2016, over 1.3 million people visited the Fairplex, an increase of 3.18% from the prior year. LACFA also paid millions in taxes and other fees to the County and the City of Pomona. Furthermore, LACFA promotes numerous community events. This includes hosting of annual competitions for craft beer, extra virgin olive oil and dairy products, hosting the 48th District Agricultural Association Schools’ Agriculture and Nutrition Fair, hosting AGDAY LA, hosting the SoCal College Fair, and overseeing the Upland Lemon Festival and the Los Angeles Oktoberfest, just to name a few. Again, the State Auditor overlooks these facts.
II. COMMENTS TO DRAFT REPORT
A. CALCULATION OF RENT
In 1948 and 1988, the County and LACFA established long-term ground leases and operating agreements. The current Lease expires on December 31, 2043. The Ground Lease is performance-based; the County receives payments based on certain percentages of the gross revenue from Fair and non-Fair events. In this way, the Lease is community-focused; if more people come to the Fair and visit the Fairplex, the County receives more rent. Thus, the County encourages LACFA to find ways to bring people together at the Fairplex. However, the State Auditor ignores that the Lease is ultimately a device used to achieve the greatest community benefit for the County and its residents—the Lease does not exist to simply make money.
The State Auditor finds that hotel and affiliate revenue should be included in the Lease’s definition of “Gross Revenue.” However, requiring LACFA to pay a share of Gross Revenues to the County on the businesses that it operates is inconsistent with the performance-based nature of the Lease. As discussed below, charging rent based on Gross Revenue: a) creates a disincentive and unfair disadvantage for LACFA to develop new business on the property compared to the economic arrangement that third parties have, b) discourages LACFA from trying profitable businesses that could better utilize the Fairplex property and pay rent to the County, c) discourages LACFA from looking for ways to diversify income streams and generate net income, and d) ultimately allows for fewer dollars for reinvestment back into the County’s asset.
The Lease does not contain any provision that would expressly require the inclusion of hotel or affiliate revenue in the rent. Section 3.01 of the Lease states “For each Lease Year, Fair Association shall pay as Rent to County the percentages of gross revenues derived from the use of the Property and received by Fair Association during such Lease Year as hereinafter set forth.” (Emphasis added.) Similarly, Section 3.07(a) of the Lease defines “Gross Revenue” to include “any and all money and cash receipts . . . received by Fair Association from use of the Property . . . .” (Emphasis added.) Accordingly, the Lease makes three things clear:
- Rent is calculated based on “Gross Revenue,”
- “Gross Revenue” is a term-of-art under the Lease, and
- Under the Lease, Gross Revenue—and therefore Rent—is solely calculated based upon items of value (such as cash or money) “received by Fair Association.”
The obvious implication is that if monies are not received by LACFA, monies are not included as part of Gross Revenue and are therefore excluded from Rent. This view of Rent under the Lease—adopted and put into practice by the parties for over 25 years—is not adequately addressed in the report. In fact, the State Auditor comes to a contrary conclusion.
Both the County and LACFA agree that revenues “received by” LACFA are included in the Rent, but revenues “earned by” LACFA are not. In a letter provided by the County Chief Administration Officer dated September 11, 2006 (cited in the report but buried in small font provided at Figure 4), the County stated as follows:
We [the County] agree that revenues earned by [LACFA’s separately owned affiliates] and the Hotel do not meet the definition of Gross Revenue and as such shall not be included in the County lease calculation.
Id. County Counsel affirmed this interpretation of the Lease, and the Board of Supervisors received notice of the same. See infra (citing 2005 Independent Auditor Report). The report fails to quote this language and completely ignores County Counsel’s affirmation.
The State Audit report goes on to state that “[r]evenues earned by the hotel . . . falls under the lease’s definition of gross revenues because the hotel is not a separate legal entity, but rather an asset owned by the association.” See Report at 15. The existence of a separate legal entity is irrelevant. LACFA earns money from the hotel (and LACFA affiliates) in the same way it earns money from every company doing business with LACFA. A third party (Sheraton) operates the hotel under a management agreement. When customers visit the hotel and pay for rooms, events, etc., the Sheraton—not LACFA—receives cash coming into the hotel. LACFA earns amounts set forth pursuant to the management agreement.
Third parties, affiliate companies, the hotel—in fact, every company or vendor doing business at LACFA—receive cash from customers but pay negotiated rents or fees to LACFA. The negotiated rents or fees are monies “received by” LACFA. LACFA adds these amounts to the Gross Revenue as defined under the Lease and calculates the Rent. The County does not receive gross revenues from third party or affiliate companies so it makes little sense to treat the hotel differently, especially when the monies at issue here are “received by” Sheraton. The State Auditor should accurately report the way by which LACFA earns monies from the hotel. Money “earned by” LACFA is not included in Rent. The State Auditor should make this point clear and prominent in its report.
Since the early 1990s, LACFA and the County have excluded hotel and affiliate revenues from rent. Several independent audit firms conducting County-requested reviews, dating back as far as 2000 (beyond the scope of the audit), demonstrate that the payment of rent consistently excluded hotel and affiliate revenues from the definition of “Gross Revenue.” Every available audit report is addressed to the County Board of Supervisors with courtesy copies to the Board-appointed Audit Committee. The independent auditors confirm (1) the historic treatment of hotel revenue as excluded from rent under the Lease, (2) the consistent practice between the parties, (3) the CAO’s interpretation of the Lease, and (4) County Counsel’s review and approval of the same.
The State Auditor ignores the following:
| Report | Content |
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2000 Auditor: Williams & Tucker Accountancy Corp. Addressed to Los Angeles County Board of Supervisors |
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2001 Auditor: Conrad and Associates, LLP Addressed to Los Angeles County Board of Supervisors |
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2003 Auditor: Conrad and Associates, LLP Addressed to Los Angeles County Board of Supervisors |
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2004 Auditor: Conrad and Associates, LLP Addressed to Los Angeles County Board of Supervisors |
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2005 Auditor: Mayer Hoffman McCann, P.C. Addressed to Los Angeles County Board of Supervisors |
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2006 Auditor: Mayer Hoffman McCann, P.C. Addressed to Los Angeles County Board of Supervisors |
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2007-11 Auditor: Vasquez & Company, LLP Addressed to Los Angeles County Board of Supervisors |
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As a matter of law, the State Auditor’s refusal to give adequate weight and deference to the interpretation of the Lease ascribed by the County and LACFA (and validated by the independent auditors and County Counsel) is unprecedented. Courts routinely find that the conduct of the parties is the “most reliable evidence” of what a written agreement means. California case law explains:
[A] construction given to [a contract] by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the court.
The conduct of the parties after execution of the contract and before any controversy has arisen as to its effect affords the most reliable evidence of the parties’ intentions. This rule of practical construction is predicated on the common sense concept that ‘actions speak louder than words.’ Words are frequently but an imperfect medium to convey thought and intention. When the parties to a contract perform under it and demonstrate by their conduct that they knew what they were talking about the courts should enforce that intent.
Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 921 (citations omitted) (emphasis added).
The State Auditor ignores that the longstanding interpretation of the County and LACFA “is entitled to great weight” and “affords the most reliable evidence” of how rent under the Lease should be calculated—not some interpretation recently conceived by the State Auditor. The County and LACFA have treated hotel rent in a consistent manner since the opening of the hotel 26 years ago. There is no basis for the State Auditor’s contrary opinion, and this error should be corrected in the report. Moreover, there is a formal writing supporting the historic treatment of hotel revenues under the Lease.
The report only cites two documents to support its interpretation of the Lease. First, the report cites to a document drafted by an Assistant Administrative Officer dated June 1990 (approximately two years before the hotel was constructed), which supposedly “indicates” that hotel revenue would be included in the Lease.1 See Report at 15. Second, the report cites a 1992 letter by the same Assistant Administrative Officer to an unidentified state agency that apparently “suggested” the same. Id. As evidenced by the equivocal language used by the State Auditor in the report, neither document comes to any conclusion regarding rent. It should be obvious that this material cannot evidence an agreement or understanding between the parties.
1 From what we understand, the 1990 letter from the Assistant Administrative Officer “indicates” that the County expected to receive 3.5% of $1.1 million in revenues from the hotel. While we are not sure where the $1.1 million number comes from, it is clearly not Gross Revenues – hotel revenues from 1992 to 1995 were approximately $2.3 million (half-year), $5.4 million, $5.95 million, and $6.4 million, respectively. For perspective, the debt service alone on the hotel was around $1.8 million.Go back to text
Moreover, the cited letter takes a position that is inconsistent with the County’s Chief Administrative Officer. It is also unclear whether the State Auditor actually interviewed the author of this correspondence, particularly when it so clearly contradicts the historic practice of the parties. “Indications” or “suggestions” should not take precedence over “the most reliable evidence” of how rent should be calculated—the conduct of the parties, their documented course of performance, numerous independent reports, and correspondence confirming that hotel (and affiliate) revenue is not included in the Rent.
By relying on the 1990 and 1992 correspondence, the State Auditor’s report is inconsistent with Generally Accepted Government Auditing Standards. Under those standards, “[a]uditors must obtain sufficient, appropriate evidence to provide a reasonable basis for their findings and conclusions.” See GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS at § 6.56 (emphasis added). Similarly, “[e]vidence is not sufficient when . . . using the evidence carries an unacceptably high risk that it could lead the auditor to reach an incorrect or improper conclusion . . . .” Id. at § 6.71(b) (emphasis added). No audit report, financial record, or document between the parties permits the State Auditor to conclude that hotel or affiliate revenues were ever included as part of rent. Compared against the conduct of the parties and express writings interpreting the Lease, the 1990 and 1992 correspondence carries an “unacceptably high risk” that it will lead to an incorrect or improper conclusion.
As a practical matter, the exclusion of hotel revenues from rent is consistent with the spirit of the Lease. Under the Lease, ownership of the hotel eventually vests in the County, not LACFA. The County did not finance the development of the hotel, nor does the County pay for maintenance or building upgrades, yet at the end of the Lease, the County will receive a fully functional asset worth several millions of dollars. This connection between hotel revenue and the Lease should be made when discussing rent in the Report.
Additionally, the hotel allows LACFA to host more events and bring more people to the Fairgrounds, which in turn increases the Rent paid to the County. Affiliate revenue also allows LACFA to continue with its non-profit mission. The report states that “[t]he association receives relatively little public funding or other assistance from local governments.” See Draft at 7. As it follows, additional revenues allow LACFA to make a greater impact in the community. The report provides no detail on how these revenues are used or how they benefit the County. The State Auditor should at least add the following facts to its discussion concerning the use of hotel and affiliate revenue:
- Hotel and affiliate revenue help pay for the FairKids Field Trip Program, inviting over 150,000 students to the Farm annually to learn about agriculture, horticulture, forestry and viniculture.
- The revenues also support programs such as The Learning Centers, the Career and Technical Education Center, Junior Fair Board, Millard Sheets Art Center, the Alex Xydias Center for Automotive Arts, the Ambassador Program, and Adopt a School program. These programs provide vocational training in auto mechanics, arts, landscaping, leadership, and other skills.
- Finally, operating profits are used to administer The Child Development Center, which offers early education for 250 children ages 8 weeks to 6 years, approximately half of who are from low-income families.
The State Auditor also fails to consider that the hotel generates millions in tax revenue. Since the completion of the hotel, the City of Pomona has received more than $13 million in transient occupancy tax. The hotel has also generated millions more in other fees and taxes and is one of the largest employers in Pomona, providing approximately 160 full-time equivalent jobs to local residents. LACFA provides a substantial economic impact to Los Angeles County. According to the last report done on the Los Angeles County Fair’s economic impact by the Los Angeles Economic Development Corporation in 2003, LACFA’s impact exceeded $300 million. Adjusted for inflation, that figure could be as much as $400 million or more today.
Having not been involved in the negotiation or administration of the Lease, the State Auditor does not appreciate how the hotel and LACFA’s affiliates fit within the overall relationship between the County and LACFA. Under Generally Accepted Government Auditing Standards, the State Auditor should have obtained an understanding of “[a] program’s strategic plan and objectives; and the external factors that could directly affect the program.” See GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS at § 6.13. Instead, the State Auditor has its own interpretation of the Lease, disregards the interpretation of the parties, ignores the parties’ course of performance, and gives no weight to the opinions of several independent auditors. This reveals serious errors in the State Auditor’s analysis.
B. EXECUTIVE COMPENSATION
The State Auditor’s review of executive compensation speculates that “[p]erhaps because the county has not collected rents, the LA Fair was able to provide executives much higher compensation than executives of other large fairs in California.” See Report at 27. There is no basis for this statement—it is unfair and unfounded, especially in light of other conclusions in the report. As discussed below, the State Auditor acknowledges that LACFA is a non-profit, and not required to implement compensation at levels that public entities must implement. This explains differences in compensation. Similarly, the report acknowledges that the Los Angeles County Fair employs more people than every fair cited in the report combined and that LACFA generates more revenue than any fair. This also explains the differences in compensation.
Comparing the Los Angeles County Fair to other, smaller fairs in California run by public entities departs from what the State Auditor promised to investigate. The State Auditor’s January 13, 2016 “Analysis of Audit Request” states that it would “[c]ompare the association’s executive compensation with executive compensation of organizations of similar size.” State Auditor Howle testified before the Joint Legislative Audit Committee that “[Assemblymember Freddie Rodriguez] is interested in having us compare the executive compensation for individuals at the Association with executive compensation of organizations of similar size.” See Joint Legislative Audit Committee Testimony, January 13, 2016 at Min. 16:50-58. Audit Objective No. 3 in the report confirms that the State Auditor was to “[c]ompare the association’s executive compensation with executive compensation of organizations of similar size.” Despite these instructions, every fair cited by the State Auditor bears absolutely no resemblance to the Los Angeles County Fair Association, which operates much more than a fair.
As the report explains, LACFA receives “relatively little” public funding and does not receive funds from the State’s Fairs and Exposition Fund. However, the State Auditor compares LACFA to public entities and those provided with state funding. LACFA is not subject to the same oversight as state-affiliated fairs. Likewise, the state-affiliated fairs exclusively follow state-mandated salary structures regardless of size, attendance, or revenue. See e.g. State of California Exempt Pay Scale as of August 31, 2016 at p. 51 (“NA00” salary classification exclusive of retirement and health costs). State employees also enjoy long-term retirement benefits as part of their employment with the State, whereas LACFA employees do not enjoy this opportunity for continued benefits after retirement. The State Auditor should note these discrepancies in its report on executive compensation as well as in its table of “Key Differences” between District Agricultural Associations and LACFA. See Report at 7 (Table 1); Report at 27-30.
The State Auditor only cites four fairs—the report does not consider non-profit organizations in similar industries, review other non-profit or for-profit organizations in Los Angeles, or study fairs of comparable size. Two of the fairs cited in the report, CalExpo (Sacramento Fair) and Alameda County, have revenues of approximately 1/3 of the Los Angeles County Fair. See Report at 29 (Figure 2). A third fair, the Orange County Fair, has revenues of approximately 1/2 of LACFA. Id. The State Auditor never explains why it believes these fairs are of “similar size” to Los Angeles. All three are substantially smaller. And obviously, none run a Hotel and Conference Center, or oversee multiple year-round businesses and activities on an almost 500-acre campus. At a minimum, the State Auditor should identify and discuss these differences in the report.
Of the fairs cited by the State Auditor, the San Diego County Fair is closest to the Los Angeles County Fair by revenue, but the revenues in San Diego are below those generated by LACFA. This is quite an accomplishment for LACFA given the practical limitations it deals with compared to San Diego. LACFA does not have a world-class turf club, which contributes to more than half of all the organization’s revenue streams, nor is it located in a very affluent seaside community with great year-round weather. LACFA is away from major tourist destinations and in a location where high summer temperatures can create fair attendance issues. Still, LACFA’s operations do tremendously well financially and are outstanding community resources. In fact, LACFA’s gross revenue numbers under its prior CEO more than doubled.
The State Auditor’s citation to the San Diego County Fair highlights the flaws in the State Auditor’s report. The report states “we note that the San Diego County Fair generated revenue similar to that of the LA County Fair in 2014, yet its CEO received far less total compensation.” See Report at 28. This statement is misleading. The state-affiliated 22nd District Agricultural Association (“DAA”) shares the administration of the Del Mar Fairgrounds with a separately managed entity, the Del Mar Thoroughbred Club (“DMTC”). The State Auditor never mentions the shared responsibility in San Diego, but this is central to understanding the executive compensation and management in San Diego. The combined executive compensation of the administrative units in San Diego, excluding employee benefits and insurance, is approximately $3.7 million—several hundred thousand dollars more than the combined compensation of LACFA executives.2 The DMTC should be addressed in the report.
2 See http://www.delmarfairgrounds.com/pdf/2016/board/2016_01_12_DMF-packet.pdf at p. 42 (reporting combined projected annual combined salaries of $3,683,500 excluding employee benefits and insurance) (last accessed October 31, 2016). Go back to text
The State Auditor also ignores that San Diego privatized many of its operations through the DMTC. According to the 2016 DMTC media guide, the DMTC hosted the following notable events: (1) Friday concert series following horse races, (2) a State BBQ Championship, (3) Food Truck Festival & Craft Beer Fest, (4) Reggae Festival, (5) Western Regional Chili Cookoff, (6) various weekend concerts, and (7) Del Mar Pizza & Beer Fest. The DAA is responsible for other programing. By comparison, LACFA is responsible for providing, arranging, or overseeing all programming. It hosts the Los Angeles County Fair and the numerous non-fair events. Some of these events have included competitions for craft beer, extra virgin olive oil and dairy products, the 48th District Agricultural Association Schools’ Agriculture and Nutrition Fair, AGDAY LA, the Upland Lemon Festival, Oktoberfest, as well as programming for numerous community programs and affiliated non-profits. LACFA does significantly more with less than San Diego.
Furthermore, the State Auditor does not cite executive compensation studies prepared by the 22nd District DAA (or any other fair), even though it apparently considers San Diego to be relevant. On or around August 2015, the Del Mar fairgrounds commissioned a study on executive compensation and it showed that its executives were “woefully undercompensated” and that the agency went on record saying the following: “We at the [San Diego] DAA have not kept up with the times in terms of compensating senior executives in line with the responsibilities they have . . . If we had to go through the market for replacement of senior staff . . . we wouldn’t be able to offer a competitive package. And that’s a concern of the board.” (Emphasis added.)
3 See http://www.delmartimes.net/news/local-news/del-mar/sddmt-del-mar-fairgrounds-pay-study-2015aug20-story.html (last accessed October 31, 2016).Go back to text
While the report overlooks the revenue and administrative differences between Los Angeles and other fairs, the State Auditor states, “[o]f particular note is that the association has significantly more employees than the other organizations do.” See Report at 30. However, this is just a part of the difference between the job responsibilities for executives at LACFA from those at San Diego, Alameda County, Orange County, Sacramento/Cal Expo, or any other fair in this state. As noted above, LACFA employs more people than the San Diego, Alameda County, Orange County, Sacramento/Cal Expo fairs combined. Additionally, LACFA is a community-based organization in ways that San Diego, Alameda County, Orange County, and Sacramento/Cal Expo are not. The State Auditor briefly reports that LACFA supports certain non-profits, but fails to provide details, thereby providing inadequate context concerning LACFA’s operations.
LACFA serves more than 150,000 students with hands-on, educational programming each year through its FairKids program. In addition, more than 1,000 students benefit from LACFA’s year-round educational programs each month. The majority of these students come from socioeconomically challenged communities and benefit from programs that complement the education they receive through the public education system and help prepare them for success in further education and careers. With the exception of about 50% of LACFA’s tuition-paying Child Development Center students, these participants benefit from these programs at no cost. LACFA’s community and educational programming are substantial and significantly exceed the programming of other fairs. LACFA’s CEO and its executive staff lead these efforts. Their compensation is also, in part, recognition of this effort.
Furthermore, the State Auditor renders conclusions without the expertise of compensation experts or a market study supported by competent evidence. In a December 22, 2011 letter from independent compensation experts to the LACFA Board of Directors’ Finance Committee, experts opined:
Based on our evaluation of Fairplex’s executive compensation program, we find overall a competitive program, appropriate for an organization of Fairplex’s size, scope of operations, and tax-exempt status, and we find no problematic or excessive pay practices. On that basis, we have issued our unqualified opinion on the reasonableness of Fairplex’s compensation program . . .”
(Emphasis added.) While the State Auditor notes that independent experts reviewed the reasonableness of LACFA’s compensation, the State Auditor fails to address the fact that the experts made an “unqualified opinion” as to the reasonableness of that compensation. At a minimum, the State Auditor should reference the third party “unqualified opinion” in its report.
For its review of LACFA, the State Auditor only looks at state compensation schedules. According to the expert opinions in the 2011 Fredric W. Cook Compensation Report (Fredric W. Cook also provides compensation review for the California Attorney General), there are multiple Los Angeles-area non-profits where executive compensation is similar—or exceeds—that of LACFA’s executives. This trend is also evidenced at fairs outside of California. For example, the State Fair of Texas reported annual revenue of less than half of LACFA, yet the salary of LACFA’s CEO is on par with the CEO of the Texas State Fair. State Auditor should also include this information in its report.
Whether it is overseeing unparalleled community programming, more than doubling revenue, making the Los Angeles County Fair once again a safe, enjoyable, and educational experience, or running the hotel and conference center, a lot has happened under LACFA’s executive compensation scheme and under the stewardship of its former CEO. We urge the State Auditor to be balanced in its comparisons. A proper comparison should include organizations of similar size regardless of whether those organizations hosted fairs. Moreover, if other fairs are considered, the State Auditor should also consider executive compensation at fair organizations of similar size, regardless of whether they are based in California.
C. RV PARK
The Joint Legislative and Audit Committee did not ask the State Auditor to review the RV Park. Audit objective No. 10 states that the auditor is to “Review and assess other issues that are significant to this audit.” The RV Park represents a minor part of the revenue stream for the County. The report acknowledges that LACFA promptly paid HCD fees, corrected safety issues and is in full compliance with applicable law. Moreover, the State Auditor does not reference or discuss the numerous types of inspections LACFA passes each year, ranging from public health inspections, CalOSHA reviews, and other inspections from other regulatory agencies. Accordingly, it is unclear how the State Auditor can consider the RV Park “significant.”
Without any explanation of why the report even addresses the RV Park, the State Auditor dedicates three pages to alleged violations, only to state at the very end that HCD “determined that the RV Park was in compliance with the applicable regulations.” See Report at 33. An alternative, more objective analysis would have removed this section of the report in its entirety, or at least started by explaining that LACFA is currently in compliance with applicable law. As drafted, the report leaves the impression that LACFA was somehow dilatory in remedying issues at the RV Park.
When HCD discovered issues at the RV Park, LACFA took immediate steps to remedy the situation. The report discusses problems at the RV Park communal bathrooms. However, the report does not mention that LACFA immediately and completely refurbished the communal bathrooms shortly following the HCD inspections. Similarly, the State Auditor provides pictures of violations but fails to include pictures of the repaired facilities. These refurbishments included new windows, mold removal, new shower curtains, new soap dispensers, and new plumbing, among other work. At a minimum, the State Auditor should provide context to the citations by discussing and graphically depicting LACFA’s remedial efforts.
Similarly, the report discusses electrical service issues and “other violations” at the RV Park. The report points out that LACFA took “immediate steps” to upgrade the electrical system, and also reports that the “other violations” were remedied, but fails to provide context as to how these issues arose, and why in some cases, additional time was needed to correct problems. These issues, especially those that remained after May 2016, were caused by tenant improvements. LACFA informed HCD of these problems. In response, LACFA hosted meetings with individual tenants, HCD, and LACFA’s construction contractor to fix outstanding issues. However, remediation was not as simple as fixing a hole or even renovating communal bathrooms. The State Auditor should address this in the report.
D. ADDITIONAL ERRORS AND OMISSIONS IN THE REPORT
There are a handful of additional issues in the report where a more balanced approach is appropriate. These issues are addressed below.
First, the report notes that there is approximately $70,000 in accrued hotel rent due to financing agreements with lenders, which require the payment of construction debt prior to the payment of hotel usage fees to the County. The State Auditor raises concerns as to when and whether LACFA will pay this amount. LACFA has never denied an obligation to pay. More importantly, despite criticizing the agreed-to arrangement for rent abatement, the State Auditor omits several important facts. For instance, LACFA built the hotel in the early 1990s, at a time when interest rates were higher than they are today. Over the last 25-plus years, LACFA refinances debt to secure the best interest rates available. Through these efforts, LACFA has reduced its loan financing rates from 10% to a blended rate of 3.6%—saving an amount that far exceeds $70,000. Reducing LACFA’s debt obligations benefits the County. LACFA’s debt refinancing is a sound business practice that should be addressed the report.
Second, the report concludes the County “has lost out on roughly $350,000 in total rent revenue related to the conference center since it opened in 2012.” See Report at 21. However, the State Auditor ignores that rent for the Conference Center assumed LACFA would manage the Conference Center. Prior to opening, LACFA assigned management to Sheraton. Because of this change, rather than rent, LACFA paid approximately $300,000 in possessory interest tax to the County. Furthermore, the County rent credit financed the Conference Center. The County provided $12 million in credits for a facility that cost approximately $30 million to construct. Ultimately, the County will have saved $18 million on a project where it did not have to advance any funds and which will be completely owned by the County in the future. The County also gets free or below market access to the Conference Center. The State Auditor should add these facts in its discussion of the Conference Center.
III. CONCLUSION
LACFA and the County have had a fruitful partnership that has served the local community for several decades. LACFA plays a vital role that is both complementary to the County, and as a completely separate organization, provides services different from what the County traditionally offers its residents. However, the report fails to take this into full account by misinterpreting the Lease, providing a flawed analysis of executive compensation, and providing a slanted or misleading view of important facts. The report is correctable, but as it stands, many of its central conclusions are neither accurate nor helpful.
Thank you for your time and attention to this matter. LACFA looks forward to discussing these issues further.
Very truly yours,
Victor De la Cruz
cc: Mr. Joe Meyer, State Auditor
Mr. Nicholas Kolitsos, State Auditor
Heather Kendrick, Esq., Senior Staff Counsel, State Auditor
George Kieffer, Esq., Manatt, Phelps & Phillips, LLP
Comments
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE LOS ANGELES COUNTY FAIR ASSOCIATION
The Audit Committee asked us to audit the county’s oversight of the association, not the association itself. As a result, we audited the county’s oversight of its lease with the association. As a courtesy to the association, we provided it with a redacted draft copy of the audit report to allow the association an opportunity to review it and raise any concerns regarding the accuracy of information in the report. Despite the association’s many disagreements with our analysis and conclusions that it expressed in its 17-page response, the information the association provided did not cause us to change any factual statements in the report or any of our conclusions and recommendations.
To provide clarity and perspective, we are commenting on the response to our audit report from the association. The numbers below correspond to the numbers we placed in the margin of the association’s response.
While the association may not have received direct funding from the county since 2006, the association has received other assistance from the county. As we point out in Table 2, the association received a total of $6.4 million in other assistance from the county for the years 2008 through 2015 in the form of a rent credit to help cover the costs of the conference center’s construction.
We only compared the association’s revenue and number of employees against those of other Class VII fairs for 2014, as shown in Figure 6 and Table 6. We did not analyze this information for the other years in our audit period.
We conducted this audit in accordance with generally accepted government auditing standards and the California State Auditor’s thorough quality control process. In following audit standards, we are required to obtain sufficient and appropriate audit evidence to support our conclusions and recommendations. As is our standard practice, we engaged in extensive research and analysis for this audit to ensure that we could present a thorough and accurate representation of the facts. Furthermore, we note that the association’s response does not indicate any factual errors in our draft report, but rather a different interpretation of the same facts. This paragraph also references the following areas in the response from the Los Angeles County Fair: 3a 3b 3c 3d 3e 3f 3g 3h
We present limited historical information here and here. In our report we present the results of our audit of the county’s oversight of the association’s activities, not a history of the relationship between the association and the county. Nonetheless, according to the association’s website, between 1941 and 1952 the association deeded a total 421 acres of the land it owned to the county, and in return the association received a long-term ground lease. This action occurred long before the association and the county entered into the current lease, long before the association made significant changes to its business structure—such as establishing its for-profit subsidiaries—and long before the association built its hotel and conference center.This paragraph also references the following area in the response from the Los Angeles County Fair: 4a
The association did not, as it asserts, receive a “highly redacted draft.” The association received a draft with certain portions of the report redacted. The association did not see text which summarized text provided to the association, text which pertained solely to entities unrelated to the association, and recommendations we made to the county. In addition, we met with the association in September 2016 for the purpose of holding a confidential exit conference at which we distributed excerpts of the draft report pertaining to the association so that the association could provide feedback and perspective to us, which is an important step in our quality control process. During this meeting we also noted that because we have no recommendations for the association, we would not be seeking a response from the association. However, we subsequently agreed as a courtesy to provide the association with a final redacted draft so it could provide any comments or concerns it might have had about the draft report.
We stand behind the analyses, conclusions, and recommendations included in our report. In several areas of its response the association makes certain claims about information that the association believes we should have included in our report but that we note is outside the scope of our audit. We have provided enough background information in our report to support the conclusions we reached.This paragraph also references the following areas in the response from the Los Angeles County Fair: 6a 6b 6c 6d 6e 6f 6g 6h 6i 6j
The association is misrepresenting the timeline related to the county’s understanding of the rent due from the hotel’s operations. We acknowledge that the county confirmed in 2006 that revenue earned by the hotel did not meet the definition of gross revenues but that fees and other payments received by the association from the hotel are included in the calculation. However, this only supports our finding that the county’s expectation of the rent it would receive from the hotel’s operations has changed since the hotel opened in 1992.
We note that the “single employee” the association so easily dismisses was acting in his official capacity as an assistant administrative officer when he represented the county’s position to external parties, including the association, in his 1992 correspondence. We further note that although this “single employee” signed the correspondence, it was sent under the name of the county’s then-Chief Administrative Officer. Finally, it is worth noting that the 2006 confirmation the association refers to was sent under the name of the county’s then-Chief Administrative Officer, but was actually signed by an assistant administrative officer within the county.This paragraph also references the following area in the response from the Los Angeles County Fair: 8a
The association misstates our conclusion. We state that the county’s expectations of how much revenue the association would pay it in rent based on the hotel’s operations changed considerably over time and that the county was unable to provide evidence as to why it allowed the association to exclude the hotel’s revenue from the rent calculation. We note here and here that revenue earned by the hotel falls under the lease’s definition of gross revenue because gross revenue includes any and all money and cash receipts received by the association for its use of the Fairplex and, as the hotel is not a separate legal entity from the association, the association receives the hotel’s revenue. In addition, we state that the association should have been paying rent based on the hotel’s revenue under the terms of the lease. As we point out in Figure 4 and in the text here, the county appears to have had a similar understanding around the time it entered into the lease. We provide the association’s perspective on some of the benefits the hotel provides to the region before noting that we found little evidence that the county had considered these possible benefits and made an informed decision when it allowed the association to exclude the hotel’s revenue from the rent calculation.
Contrary to the association’s assertion, we are hardly engaging in a “guessing game.” In the report we note here and here that revenue earned by the hotel falls under the lease’s definition of gross revenue because gross revenue includes any and all money and cash receipts received by the association for its use of the Fairplex and, as the hotel is not a separate legal entity from the association, the association receives the hotel’s revenue. Notably, the association includes the hotel’s revenue in its financial statements and tax returns. In addition, we state that the association should have been paying rent based on the hotel’s revenue under the terms of the lease. The association has not provided any evidence to contradict this fact. Instead, the association asks us to perform deeper analysis of the association-county relationship and the economic environment of the early 1990s. What the association fails to point out is that the county and the association entered into the current lease in 1988 in part, as we note, to allow the association to construct a hotel. In addition, we show in Figure 4 and here that, based on correspondence in 1990 and again in 1992 from an assistant administrative officer with the county, it appears the county expected the association to pay a percentage of gross revenue generated from the hotel to the association. We further note that the assistant administrative officer sent a copy of the 1992 letter to both the association’s president and its chief financial officer.
We cannot speak to the association’s intentions at the time it deeded land to the county, but it appears the association is currently interested in maximizing its own revenue; otherwise it would not have started engaging in other business activities. In addition, if the association were not interested in maximizing its revenue, it would not include revenue as one of its performance targets in determining its executives’ bonus and incentive compensation, as we note.
We provide the association’s perspective on some of the benefits the hotel provides to the region before noting that we found little evidence that the county had considered these possible benefits and made an informed decision when it allowed the association to exclude the hotel’s revenue from the rent calculation. In addition, the fact that any improvements the association makes on county-owned land at the Fairplex will become assets of the county upon termination of the lease is in addition to the county receiving rent from the association’s gross revenue, not in lieu of the county receiving rent.This paragraph also references the following area in the response from the Los Angeles County Fair: 12a
We never stated that the lease exists solely to make money, as the association asserts. We note multiple purposes of the lease, which included enabling the association to operate the LA County Fair, to develop the Fairplex, and to provide additional revenue to the county.
We note that lease’s definition of gross revenue includes any and all money and cash receipts received by the association for its use of the Fairplex. As we make clear, unlike the hotel and conference center, these subsidiaries are legally separate entities. Therefore, their revenues are not includable in the rent calculation according to the terms of the lease.
Our understanding of the lease is based on a reading of the lease itself. In addition, as noted in Figure 4, we reviewed documents from multiple sources to arrive at our conclusions as to how the understanding of the rent to be paid to the county from the operations of the association’s hotel and conference center has changed over time.
The association argues that it doesn’t directly “receive” hotel revenue and, as a result, it is improper to include such revenue in the calculation of rent. The association’s perspective defies common sense. As described here and here in the report, the association contracted with an outside company to manage and operate its hotel. This management company is an agent of the association that acts on behalf of the association. This relationship does not change the association’s ownership of the hotel or change the fact that the hotel’s revenue belongs to the association as evidenced by the fact that the hotel’s revenue is included in the association’s financial statements and tax returns. According to the association’s logic, the association could continue to hire external agents to manage even more of its operations to the point where it is no longer “directly” receiving any gross revenues, thereby unilaterally controlling the amount of rent due to the county. It defies common sense that a rental agreement would allow a tenant to unilaterally dictate the amount of rent owed.This paragraph also references the following area in the response from the Los Angeles County Fair: 16a
Contrary to the association’s assertion, we did not bury this information in small font in Figure 4. In addition to including it in Figure 4, we provide the relevant information in the text here where we note that “…the county issued a letter in September 2006 that stated in part, that revenue earned by the hotel did not meet the definition of gross revenue but that fees and other payments received by the association from the hotel are included in the calculation.”
The association fails to mention that in the 2005 review, the reviewer also noted that, “Upon reading the definition of gross revenue per the Lease Agreement, it appears that revenues earned by Cornucopia, the Hotel, and Barretts may satisfy the definition of gross revenue as outlined in the Lease Agreement.” Although the county issued a letter in September 2006 that stated in part, that revenue earned by the hotel did not meet the definition of gross revenue but that fees and other payments received by the association from the hotel are included in the calculation, we note that the county could not provide a reasonable explanation as to why it agreed to this treatment.
Contrary to the association’s claim, the fact that the hotel is not a separate legal entity from the association itself is very relevant. As we note, the terms of the lease state that the association must annually pay the county a percentage of the gross revenue it receives from its use of the Fairplex. In addition, we note that the association’s hotel constitutes a business activity of the association itself and is legally indistinguishable from the association. Therefore, as we state, under the terms of the lease the association should have been paying rent based on the hotel’s revenue.
We state that the reviewer of the 2004 rent calculation noted that the exclusion of the hotel’s revenue from the rent calculation was consistent with previous years. We are not disputing the historical treatment of the hotel’s revenue in the rent calculation. Rather, as we point out, we find it concerning that the county did not maintain adequate documentation to explain and support the exclusion of the hotel’s revenue from the rent calculation.
The association presumes that the county shares its perspective. However, our audit of the county found that the county’s expectation with respect to the collection of rent on the hotel’s revenue has changed over time. Further, because the amount of rent related to the hotel has been subordinate to the association’s bond debt since the 1990s, the county could not collect any rent related to the hotel’s operations, and thus we are unable to evaluate the county’s conduct with respect to collecting rent.
Contrary to the association’s assertion, our understanding of the lease is based on a reading of the lease itself. In addition, as noted in Figure 4, we reviewed documents from multiple sources to arrive at our conclusions as to how the understanding of the rent to be paid to the county from the operations of the association’s hotel and conference center have changed over time. In addition, we further note that the assistant administrative officer sent a copy of the 1992 letter to both the association’s president and its chief financial officer.This paragraph also references the following area in the response from the Los Angeles County Fair: 22a
The assistant administrative officer wrote this letter in 1990, approximately two years prior to the opening of the association’s hotel. While the association may take issue with the $1.1 million referenced in the letter, the county’s expectation at the time was clearly that it would receive far more than just a percentage of the hotel fees due to the association, which are currently $50,000 annually.
We disagree with the association’s comment that there is no basis for our statement. As we indicate here in the report, the association pays its executives a base salary, plus a bonus for meeting defined performance targets. Such targets may relate to revenue, operating income, and various strategic goals. When the county does not collect all rent due under the terms of the lease, the association retains additional revenue, which potentially contributes to the association’s ability to pay its executives high salaries.
We disagree with the association’s assertion that we did not compare the association’s executive compensation with organizations of similar size. In fact, we compared the association’s executive compensation with organizations of similar size in two ways. Firstly, we compared the association’s executive compensation against that of other organizations that run Class VII fairs, the largest class of fairs in California, and provided the reasons here and here of why its executive compensation is higher. Secondly, we note that the association had commissioned two executive compensation studies during our audit period and that the consulting firms that performed the studies reviewed both for‑profit and nonprofit organizations in a variety of industries. We also point out that both of these studies concluded that the association’s executive compensation was generally reasonable. However, we were unable to provide additional context about these studies in our report because the association considers these studies confidential and we agreed that we would not present certain confidential information about the association’s operations.This paragraph also references the following areas in the response from the Los Angeles County Fair: 25a 25b
We were asked by the Audit Committee to compare the association’s executive compensation with executive compensation of organizations of similar size. In Figure 6 we show that the association’s chief executive officer earned much higher compensation than executives in charge of organizations that run other large fairs in California in 2014 without including retirement and deferred compensation or other nontaxable benefits.
It appears the association means to refer to Figure 6.
The information the association is providing does not alter our conclusions. When we compared the Class VII fairs, we considered various factors that impact the differences in executive compensation, including revenue, type of organization, and number of employees. Our analysis is not misleading. For example, although we noted that the 22nd District Agricultural Association responsible for operating the San Diego County Fair had similar revenue to the association in 2014, we also noted that it is a public entity with set salary ranges, and we note in Table 6 that it has fewer employees than the association. We also present a full-page graphic illustrating the association’s business structure in Figure 2, which provides adequate context concerning its operations.This paragraph also references the following areas in the response from the Los Angeles County Fair: 28a 28b 28c 28d 28e 28f
We reviewed the Del Mar Thoroughbred Club’s (DMTC) 2016 operating budget at the link the association provided and were unable to reach the same conclusion the association did. The $3.7 million figure the association cites comes from a line titled “Salaries—annual administration and expense.” There is no indication in the operating budget or in the accompanying narrative that this $3.7 million contains only San Deigo’s combined executive compensation, as the association claims it does.This paragraph also references the following area in the response from the Los Angeles County Fair: 29a
We are confused as to what point the association is trying to make when it states that we rendered conclusions not supported by competent evidence. We noted that the association commissioned executive compensation studies by two different consulting firms, which they completed in 2008 and 2011. We reviewed these studies and presented an overall conclusion that these studies—which comprise the totality of the compensation studies completed during our audit period—found the association’s executive compensation arrangement to be generally reasonable. In addition, we gathered sufficient evidence and did not need to engage compensation experts or perform a market study to conclude that the association’s executives receive much higher compensation than the executives that run the other Class VII fairs in California.
The association seems to have overlooked the fact that the Audit Committee asked us to identify the public funding received by the association over the past 10 years and the major categories of expenditures of those funds. As we note here, in Table 2, and here, the Redevelopment Agency of Pomona provided the association with $3.3 million in 2009 for the purchase of 50 affordable rental space covenants at the RV park. This represents a significant source of public funding to the association in our audit period. As we noted, although the association received millions of dollars related to the RV park, the RV park was cited for numerous health and safety violations after a tenant filed a complaint with the Department of Housing and Community Development (HCD).
It is worth noting that the association’s response does not dispute the facts presented in our report. Regardless of why it took the association an extended period of time to ensure all the violations at the RV park were rectified, the fact is that the association took so long that in August 2016 HCD determined it needed to issue the association a notice of intent to suspend its permit to operate if the association did not correct the remaining violations within 30 days. This paragraph also references the following areas in the response from the Los Angeles County Fair: 32a 32b
We do not understand the association’s point. We did not take issue in our report with the association’s refinancing of its debt. We simply noted that as a result of these refinancings, the association would not owe any rent to the county from the hotel’s operations until 2039 under the current structure. We also noted here and here that although the association refinanced its debt multiple times without explicitly informing the county or seeking its approval, the association is not required to give notice to the county when it refinances its debt according to the terms of the lease.
Notwithstanding any amounts the association may have paid to the county in taxes, as we note, the association provided information to the county that suggested it would receive $150,000 annually in increased rent revenue from the conference center’s operations once the conference center was at full capacity, but the county has actually received no rent related to the conference center’s operations.