Last month Santa Clara’s finance, police, and fire departments and the 49ers both weighed in on Harvey M. Rose’s (HMR) draft report, now public at the Mercury News website. The number and kinds of corrections made by City staff may suggest to some a startling lack of understanding or attention on HMR’s part.
Forty-Niners General Counsel Hannah Gordon put bluntly, “The lack of business sophistication [shown by the report]… casts a shadow over the entire exercise and all conclusions reached.”
Gordon was withering in her critique. “It will only serve to further confuse the Board and the public with erroneous information, incomplete and out-of-context half-truths, and outright misrepresentations,” she wrote. “Throughout the report, Harvey Rose, which is neither a law firm nor a certified public accounting firm qualified to perform an audit or give legal advice, draws legal conclusions and gives legal counsel.”
City Staff Finds Potential Errors
City staff reviewers—which included City Manager Rajeev Batra, Acting Finance Director Angela Kraetch, Fire Chief Bill Kelly and Police Chief Mike Sellers—were less pointed in their language, but their assessment was no less withering.
They identified confusion on the part of HMR about what Measure J is. They also pointed to inconsistent numbers and accounting methods, unfounded assumptions, misunderstood contract provisions, questionable legal advice and outright misstatements—starting with the title of the report.
“Comprehensive Audit of Stadium Finances,” wrote Kraetch, “is the annual financial audit performed by KPMG, the international accounting firm. HMR’s review was of the Santa Clara Stadium Authority’s compliance with Measure J—the voter-approved measure to build Levi’s Stadium.
“This title is not a true characterization of the scope of work performed,” she continued. “Since this document gives direction, there should be a statement about the Stadium Authority’s ability to rely on its contents similar to what someone would be able to rely on from a financial audit.”
The City’s response noted that HMR sometimes refers to Measure J as a “framework” and other times as an ordinance. “We have not received any legal opinion whether the terms of Measure J are legally binding or not,” wrote Batra in his cover letter. “It would be prudent either to have a legal opinion or Harvey Rose Assoc. should affirm that all Measure J language is not just the framework but that it is legally binding.”
You could say that’s all nit-picking, but since the report claims that City employees didn’t charge the 49ers for $425,000 of stadium-related work— Mayor Lisa Gillmor has been saying for more than a year that the City has been cheated—and should send a bill post haste, these details beg the question of whether the analysis supporting this conclusion is reliable.
The Finance Department questioned HMR’s use of estimate and extrapolation, asking, “Why are these costs based on estimates and not actual amounts?”
Further, HMR extrapolates their estimated numbers to 39 Non-NFL events from April 1, 2014 to June 30, 2016, when, Kraetch notes, there were only 27 events. The arithmetic on the correct number of events is about $94,000 less than HMR’s $245,000. [3-7]
Other administrative costs that HMR claims were inconsistently charged were similarly incorrect, the Finance Department says. Regarding per diem officers, CAD training, and new hire orientation, Kraetch wrote, “Stadium Authority staff has provided backup to HMR that these costs were correctly charged to the Stadium Authority.” [3-8]
HMR alleges Fire Dept. costs for planning and event day activities were unbilled. However, the procedures HMR questions were changed as a result of the Fire Dept.’s April 2016 internal audit. “These costs were billed …on June 1, 2016 based on actual labor and equipment costs,” Kraetch wrote. [3-5]
Together, the already-billed costs add up to another $118,000 HMR error.
There are also $17,000 worth of expenses HMR lists—such as writing standard police reports, making arrests and testifying in court—that may in fact be illegal charges according California’s constitution.*
“The Chief of Police was told by the City Attorney that the 49ers are taxpayers in the City and they should be provided with the same services consistent with other residents and businesses,” Kraetch wrote. Measure J says that the City will be reimbursed for “reasonable” public safety costs.
The sum of these corrections comes to $229,000, leaving $196,000 of possibly unbilled work—$4,000 less than HMR’s audit bill.
The report drags in several issues that have nothing to do with stated aim of this review—the Santa Clara Stadium Authority’s Measure J compliance. One is current negotiations about the bill for golf course parking, which was discontinued in 2016; something that “the City was aware of” and “was not discovered as part of this audit process,” Kraetch wrote.
The report also includes flat-out factual misstatements, including HMR’s claim for nearly a year that there was no organized reporting of stadium time prior to a City Manager directive issued in August 2016. At the very first meeting of the Ad Hoc Stadium Audit Committee meeting in September 2016, HMR Principal Fred Brousseau stated to a KPIX reporter that there was no framework for stadium time reporting.
“After the stadium opened, the City’s Finance Department created time codes and worked with individual departments,” Brousseau wrote in the draft report. “Managers and timekeepers attempted to resolve questions…” but this “was often in response to questions … and reflected an absence of central Citywide and departmental direction and written policies and procedures.” [3-2]
Since being shown City emails that show there was, in fact, “central and city-wide direction” [3-2] well before the stadium opened, HMR has since claimed that the information wasn’t communicated, a view that Mayor Gillmor clearly conveyed by her repeated questions at the Sept. 26, 2016 committee meeting.
The first stadium-related charge-codes were set up in 2011 and payroll charge codes for public safety were established in 2013. These emails also show that communications to all division directors, managers and employees about reporting stadium-related work were sent in April 2013.
Payroll codes were communicated to all departments—including police time-keepers—in April 2014, four months before Levi’s Stadium opened, and the City has had written operating procedures for reporting stadium-related work, updated annually, at least since that time. (Stadium Authority Operating Business Procedures, Section 9).
Other errors in the draft report noted by City staff include combining cash and accrual accounting in comparisons which then led to incorrect conclusions [2-1, 2-3, 2-4, 2-10]; inconsistent information [2-32, 2-8]; apparent failure to validate information like actual deposits and transfers [2-8, 2-9, 2-23, 2-52, 2-30]; seeming lack of familiarity with the annual KPMG Stadium Authority audits [2-8, 45]; and misunderstanding the terms of the development, lease and management contracts.
For example, HMR gets a lease provision (Section 7.3.2) about concession revenue backwards, saying that the 49ers receive all Non-NFL concession revenue in excess of concessionaires’ minimum lease payments [1-23, 38]. In fact, the 49ers get none of the concession revenue from Non-NFL events unless the revenue is less than the minimum concessionaire lease payment. In this case, they get the difference between the revenue and the minimum. The report also recommends that the Authority renegotiate its fixed payment for stadium insurance, failing to note that “this could also cause the Stadium Authority’s insurance expense to increase,” wrote Kraetch. [2-37]
Whistle Blowers No-show
But there was one subject that the HMR report was noticeably silent about. That’s the plethora of whistle-blowers Mayor Gillmor claimed were coming to her with stories of being told by their superiors not to report time against the stadium accounts. HMR said last September they had spoken with “15 or 20” such people. At a review meeting in January the consultant reported that the whistle-blowing fell off dramatically in November following the 2016 election.
The Council will discuss the audit when they return from summer break in August. Additionally, Mayor Gillmor stated in a Facebook Live video that there will be a Measure J audit part 2.
*Article 8, Section 6, b(5): No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance … where the service is available to the public at large in substantially the same manner as it is to property owners … In any legal action contesting the validity of a fee or charge, the burden shall be on the agency to demonstrate compliance.
Bracketed numbers refer to relevant pages of the draft Harvey M. Rose report.