REPORT TO STADIUM AUTHORITY BOARD
SUBJECT
Title
Note and File this Informational Report on FY2019/20 Net Loss on Non-NFL Events [Board Pillar: Ensure Compliance with Measure J and Manage Levi’s Stadium]
Report
BACKGROUND
On June 8, 2020, Stadium Authority staff received an email (Attachment 1) from the Vice President/Controller of the Stadium Manager, Esther Chi, requesting the Stadium Authority submit a Withdrawal Certificate to Bank of America and the Collateral Trustee, responsible for initiating cash disbursements, to fund the FY 2019/20 Net Non-NFL event loss of $2,741,014 by June 12, 2020. The highly summarized Non-NFL Event profit and loss statement (Attachment 2) was included as support for the loss calculation. In addition to the request to fund the loss, Ms. Chi indicated the outstanding public safety invoices totaling $1.1 million due to the City of Santa Clara would only be paid after the Stadium Authority funded the loss. Subsequently, Stadium Manager staff sent Invoice SLS-060820-A (Attachment 3) to the Stadium Authority for the FY 2019/20 Non-NFL Events Net Loss in the amount of $2,741,014.
On June 10, 2020, the Stadium Authority responded with a letter (Attachment 4) to Ms. Chi requesting an explanation for the urgency of the disbursement and notifying the Stadium Manager that four days for review and approval of such a large disbursement is unreasonable. The letter also notified Ms. Chi that the accounting records related to the calculation of the net Non-NFL loss must be reviewed prior disbursement; once the records are reviewed, the Stadium Authority Board must approve the appropriation as the loss was not included in the FY 2019/20 budget. In addition, the Stadium Authority reminded Ms. Chi that Measure J does not allow City funds to cover any costs related to Stadium operations and that prompt payment of outstanding invoices is requested.
On June 15, 2020, the Stadium Authority received correspondence (Attachment 5) from Larry MacNeil outlining many claims. Of most importance, the Stadium Manager is continuing to withhold payment of City of Santa public safety invoices in direct violation of Measure J. The Stadium Authority responded to this letter on June 19, 2020, to notify Larry MacNeil that the Stadium Authority does not agree with the claims nor the characterization of the issue at hand (Attachment 6). The purpose of this report is to provide the Stadium Authority Board a status of current Non-NFL Event performance, the withholding of payments, and respond to some of the points raised by the Stadium Manager.
DISCUSSION
This informational report provides an update to the Stadium Authority Board (Board) on the status of correspondence with Forty Niner’s Stadium Management Company (Stadium Manager) in relation to Fiscal Year (FY) 2019/20 Net Non-NFL Loss. The Stadium Manager has currently invoiced the Stadium Authority for $2.7 million to reflect the preliminary net Non-NFL Event loss. Section 4.7.3 of the Amended and Restated Stadium Lease requires that the Stadium Authority receive all revenue and pay for all expenses related to Non-NFL Events, “The Stadium Authority shall be entitled to all Stadium Authority Event Revenue; and…the Stadium Authority shall pay all Stadium Authority Event Expenses.” However, prior to funding the loss, Stadium Authority staff are requesting to review the accounting records that support the calculation of the loss.
The City Auditor Linh Lam, emailed Esther Chi on June 9, 2020, to request a time to review the accounting records for FY2019/20 Non-NFL events. It was made clear that staff is open to reviewing the documents remotely or in a large room that supports social distancing and workplace safety. Historically, the documents have not been made remotely available to Stadium Authority staff and the reviews have always taken place with Stadium Manager staff on site. Esther Chi responded that staff are complying with local health authorities and no visitors are allowed at the facility. Once Stadium Manager staff have returned to the office, Esther Chi will reach out to schedule the review. There was no indication of allowing Stadium Authority staff to review documents remotely. The Stadium Authority expects to bring an update on the review of these documents during the year-end financial report to the Board after the audit of the financial statements. The audit will be complete by September 30, 2020.
In addition, the outlined claims were made from Larry MacNeil in the letter dated June 15, 2020 (Attachment 5) regarding the loss and Stadium Authority’s responses. Following each statement by the Stadium Manager, a response is included from the Stadium Authority.
• Stadium Manager: The net loss from NNE (meaning Non-NFL Events) for 2019 should come as no surprise to you or the Board. The Stadium Manager advised you years ago that the Mayor’s PR/political strategy would result in fewer events, and those events would be less profitable. The Mayor’s music ban, the bureaucratic red tape devised by the SCSA and the City to scare off event promoters, and the alarming increase in the cost of City employees being charged to stadium events will continue to adversely impact event profitability.
Stadium Authority Response: There is no rational basis for Mayor, City, or SCSA to devise a “PR/political strategy” to reduce the net income of Non-NFL events and, ultimately, reduce the revenue received by SCSA and the City. There is no evidence that the City’s enforcement of the 10pm curfew (that the Stadium Manager agreed to as a development requirement) to address residents’ concerns and included as part of the original agreement to construct the stadium has resulted in the losses by the Stadium Manager. Rather these losses appear to be due to mismanagement. The record is clear that no one from the Authority communicated anything about “red tape” to any event promoter and the City’s involvement has been based strictly on rules, laws, and safety. Costs of Stadium Authority staff reflect time required to maintain a base level of support for the Stadium Authority. A large part of the costs includes outside legal counsel necessary to defend the seven lawsuits by the Forty Niners.
• Stadium Manager: The profitability of NNE for 2019 was impacted by the City’s charges for prior years workers’ comp claims. You will recall that the City recently invoiced stadium events more than $1M for workers compensation claims for City employees, including more than $250,000 for a Santa Clara police officer who was charged with felony workers’ comp fraud by the Santa Clara County District Attorney in February 2020, which you failed to disclose.
Stadium Authority Response: The City of Santa Clara, in compliance with Measure J, invoiced a total of $1,004,367 of worker’s compensation claims after crediting the claims amount with worker’s compensation benefit amounts previously invoiced. However, only $277,346 of those costs were related to Non-NFL events. While this amount is included in the FY 2019/20 Net Non-NFL loss, it certainly does not make up the majority of the loss; without the worker’s compensation claims the loss would still be almost $2.5 million.
Additionally, the referenced fraudulent workers’ compensation claim is a matter currently before the District Attorney based on an event that took place in 2018 and since no court determination as been made, the Authority has requested full reimbursement in compliance with Measure J. Workers’ compensation invoicing for this individual are for 2015 injuries, which are not the subject of the District Attorney’s actions.
• Stadium Manager: Your assertion that the amount of the loss increased from TBD to $2.7M “…in a matter of a few months” is intentionally misleading, suggesting that the Stadium Manager concealed the loss, or that you were somehow unaware of the loss. But that’s demonstrably false. We informed you in writing on 3.11.2020 that we were projecting a loss through 3.31.2020 in the range of $1.7M to $2.0M. You included that estimate in your report to your Board on 3.24.2020, and City Manager Santana’s letter to the Board that same day stated “Net Non-NFL Events revenue loss of $2.0 million for the current year…” Obviously the estimate we provided in early March was before the impacts of the COVID pandemic were apparent, and before the year-end accounting was complete.
Stadium Authority Response: In February 2019, the Stadium Manager verbally told the Stadium Authority that there would be a reduction in performance from Non-NFL Events. In late Mach 2019, as part of the Stadium Authority budget development for FY 2019/20, the Stadium Manager informed us that the projected revenue of $750,000 was anticipated for the fiscal year. With no explanation or backup as to the trending of how this decrease would be achieved, and because of the lateness of this information, the Board approved a FY 2019/20 Adopted Budget that assumed $5.8 million in Net Non-NFL Event Performance based on the Stadium Management Fee benchmark, with the goal of reevaluating actual performance during the fiscal year.
The Non-NFL event update report from Stadium Manager for Quarter ending December 31, 2019, loaded to the SCSA laptop at the Stadium on February 26, 2020 showed net income of $400,000. While this information reflects a point in time and an incomplete accounting of all costs, it provides a general sense of projected performance. This figure was reported to the Board as part of the 3rd Quarter Financial Report.
As part of the FY 2020/21 budget submittal received on February 14, 2020, the Stadium Manager indicated “TBD” for estimated FY 2019/20 Non-NFL events performance. SCSA was only informed of the potential net loss of $1.7 to $2.0 million on March 11, 2020, after additional information was requested by SCSA staff on February 25, 2020. Considering there were no large ticketed events in the 4th Quarter, the change from a net operating income of $400,000 in the 3rd Quarter to a total loss of $2.7 million over four months is an unexpected loss. While the Stadium Manager has not indicated how the pandemic has affected FY 2019/20 net income there were no large events scheduled or cancelled in the 4th Quarter; the large events that were cancelled or rescheduled due to the pandemic were scheduled in FY 2020/21.
• Stadium Manager: Furthermore, the SCSA has consistently ignored the guidance we have provided with respect to NNE profits. For example, the budget you recommended to the Board for 2019 NNE profit was $5.8M, which was a number plucked from a 30-year projection prepared by the City seven years ago. We have previously advised you that this irresponsible budgeting was significantly overstating the expected Stadium Authority revenues.
Stadium Authority Response: As described earlier, because of the lateness and lack of detail in the development of the FY 2019/20 budget for the decrease in performance to $750,000, the Stadium Authority adopted a budget based on the Stadium Management Fee benchmark in line with budgeting in past years.
In addition, it should be noted that the Stadium Manager continues to confuse the fiscal years accounted for between the Stadium Authority accrual basis and the Stadium Manager’s cash basis of budgeting these events. To increase transparency of budgeted revenues and expenses, the Stadium Authority began budgeting on an accrual basis in the FY 2018/19 Adopted Budget. The accrual basis accounting is the method of recording revenues and expenses when they are incurred, regardless of when cash is exchanged. However, the Stadium Manager submits a cash basis budget. The FY 2019/20 budget submitted by the Stadium Manager did not include a budget for events occurring in FY 2019/20 on an accrual basis, but rather a projection for events occurring in FY 2018/19. The Stadium Authority had no choice but to use its best projection for FY 2019/20 Non-NFL Event Revenue.
• Stadium Manager: Any delay in reviewing the accounting records for NNE is a result of the SCSA’s unilateral decision in 2018 to suspend the previous process we had followed for years with prior City staff to audit event transactions throughout the year. You decided to resume that process only recently, and Stadium Manager’s accounting staff met with City staff on 2.28.2020. In that meeting City Staff reviewed revenues and expenses for the single event they requested - the 2019 Rolling Stones show. In prior years, the City accountants reviewed records for each NNE shortly after the event occurred. Although we never received any explanation for the decision to suspend this procedure, it appears this was part of a strategy to bolster the false narrative that the 49ers were withholding financial records.
Stadium Authority Response: The Stadium Authority has recently had staff turnover; there was never a 2018 unilateral decision to terminate suspend previous processes as allege by Mr. MacNeil. The audits of Non-NFL events resumed as quickly as staff could be brought up to speed and only stopped due to the recent pandemic requiring shelter-in-place. The Stadium Authority looks to resume this activity as quickly as possible once County guidelines allow.
• Stadium Manager: We will of course be delighted to accommodate your City Auditor’s review of NNE records for 2019. In compliance with Santa Clara County guidelines and NFL rules, we currently have limited access to the facility. As soon as we move from business continuity operations to permitting all staff into the building, we will reach out to arrange a date and time.
Stadium Authority Response: As described earlier, City Auditor Linh Lam, reached out to Esther Chi on June 9, 2020, to schedule the review of FY 2019/20 Non-NFL Events either in person or remotely. Esther Chi has requested this review take place after staff are allowed back to the office based on local health authority guidelines. There was no indication of allowing Stadium Authority staff to review documents remotely. Stadium Authority staff have not previously been allowed remote access to these documents and have reviewed these documents on site with Stadium Manager staff. Stadium Authority staff are prepared for the review of the FY 2019/20 accounting records as soon as the County guidelines allow.
• Stadium Manager: Your reference to the 2018/19 NNE net income transfer in February 2020 suggests that there was some delay in payment on the part of the Stadium Manager. That is false. You sent an invoice for that amount in January 2020, and we paid the invoice in February 2020.
Stadium Authority Response: In prior years, the payment of Net Non-NFL revenue was transferred without the need for invoicing by the Stadium Authority. The FY 2016/17 Net Non-NFL revenue of $5.3 million was received by the Stadium Authority on June 29, 2017; FY 2017/18 Net Non-NFL revenue of $5.2 million was received on June 29, 2018. The Stadium Authority generated an invoice for FY 2018/19 Net Non-NFL income because the transfer had not been made like years past.
• Stadium Manager: Your claim that we are holding payments to the City “hostage” is disingenuous. We have accrued the City invoices in the 2019 NNE accounting, and will make payment as soon as the SCSA funds the net loss. We explained this to you in writing more than a month ago. As we previously indicated, the SCSA has more than enough cash to pay the $2.7M, and that funding will be deposited in your bank account Monday 6.15.2020. If the SCSA decides to hold up that transfer, it is you holding the City payments “hostage”.
Stadium Authority Response: In the June 10, 2020 and the June 19, 2020 letters, the Stadium Authority made it clear that regardless of the amount of cash on hand, the accounting records would need to be reviewed prior to the payment of $2.7 million. In addition, a budget amendment would need to be brought to the Board for appropriation authority. Last, refusal to pay the City for expenditures already incurred results in a Measure J violation, as it is against the local law for the General Fund to incur expenditures for Stadium Authority expenses.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
There is no cost to the Stadium Authority to prepare this report other than administrative staff time and expense.
COORDINATION
This report has been coordinated with the Treasurer and the Stadium Authority Counsel.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov>.
RECOMMENDATION
Recommendation
Note and file the Informational Report on FY2019/20 Net Loss on Non-NFL Events.
Staff
Prepared by: Kenn Lee, Treasurer
Approved by: Deanna J. Santana, Executive Director
ATTACHMENTS
1. June 8, 2020 Email from Esther Chi
2. FY2019/20 Non-NFL Events Profit and Loss Statement
3. Invoice for FY2019/20 Net Non-NFL Loss
4. June 10, 2020 Letter to Esther Chi
5. June 15, 2020 Letter from Larry MacNeil
6. June 19, 2020 Letter to Larry MacNeil