INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTERonline.recordnet.com/projects/blog/159E Events Center.pdf · Office of the City Auditor • 22 E. Weber Avenue, Suite 325, Stockton,

Stockton City Council Mayor

Edward J. Chavez

Vice-Mayor Leslie Baranco Martin

Council Members Steve Bestolarides

Dan Chapman Clem Lee

Susan Eggman Rebecca Nabors

City Auditor F. Michael Taylor

OFFICE OF THE CITY AUDITOR Audit Report

INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTER

MARCH 2007

Stockton, California

Office of the City Auditor • 22 E. Weber Avenue, Suite 325, Stockton, CA 95202 209-937-8916 • www.stocktongov.com

April 3, 2007

Stockton City Council INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTER In accordance with the City Auditor’s 2006-2007 audit plan, we have completed our evaluation of management’s internal controls over the Stockton Events Center Project. The objectives of our audit were to determine whether internal controls over the Stockton Events Center were adequate and functioning as intended and to determine total project costs. Based on the results of our work, we identified weaknesses related to the City’s process for documenting the use of special revenue funds and management of City-wide construction projects that require corrective action. We computed a total project budget of $143,130,611 and total project expenditures of $145,443,182 for the Stockton Events Center. Total project expenditures do not include labor charges for City staff who expended effort on the Events Center as not all departments use a time reporting system to record hours worked on a particular project. Additional information about our audit can be found in the attached Audit Report.

F. MICHAEL TAYLOR, CIA VANESSA D’SOUZA, CGAP CITY AUDITOR SENIOR DEPUTY CITY AUDITOR emc: J. Gordon Palmer, Jr., City Manager Ren Nosky, City Attorney Katherine Gong Meissner, City Clerk Connie Cochran, Public Information Officer Macias, Gini, O’Connell, LLP

The Record

TABLE OF CONTENTS

Internal Control Evaluation: Stockton Events Center Page Audit Summary Audit Report Background 1 Objectives and Scope 3 Methodology 4 Results 4 Attachment Events Center Contracts 19

INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTER

In accordance with the City Auditor's 2006-2007 audit plan, we have completed our audit of management’s internal controls over the Stockton Events Center Project (Events Center). BACKGROUND

The Events Center was initiated in April 2001 when the City issued a Request for Proposal (RFP) for a feasibility study to determine if demand for an Arena, meeting facility, and hotel existed in the downtown area. Economic Research Associates conducted the study and the City Council accepted their report in April 2002. On July 30, 2002, the City Council authorized the issuance of an RFP for a qualified development and management services team to manage construction of an Arena and hotel complex on the north shore of the Stockton Channel. The City then requested a baseball park stadium (Ballpark) be added to the project. On February 25, 2003 under Resolution No. 03-0097, the City Council awarded Regent Development, Inc. (Regent) an Exclusive Negotiating Rights Agreement to provide the requested development and operation management services, including procurement and provision of architectural design and construction oversight services, for the proposed project. On March 2, 2004, the City Council adopted numerous resolutions and a budget in the amount of $113,512,640 for the construction of the Events Center. The Events Center included the following components:

• a City-owned multipurpose indoor Arena, to be used for sports, entertainment, and community events and activities, which has approximately 10,000 seats, 24 luxury suites, and 4,000 square feet of meeting rooms and administrative offices;

• a City-owned Ballpark with 5,200 seats, including four luxury suites, to serve as the home of the Stockton Ports professional baseball team;

• a privately owned hotel and subsidized conference center; • surface parking lots and a multi-level parking structure containing approximately

650 public parking spaces funded by the City’s Central Parking District; • approximately 60,000 square feet of retail and restaurant development; and, • other public improvements, including a “loop road” which provides access to

most of the components of the project, and improvements to Fremont Street. The resolutions approved by Council included the following contracts or agreements:

• Development Coordination Agreement (DCA) with Regent Development, Inc. to coordinate the planning, design, financing and development of the Events Center.

• Amendment to the existing contract with Swinerton Builders (Swinerton) to establish a Guaranteed Maximum Price (GMP) and activate the Construction Phase Services for the Public Improvements Elements.

AUDIT REPORT INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTER APRIL 3, 2007

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• Facilities Management Agreement with International Facilities Group, LLC. (IFG) to manage and operate the Arena, Ballpark (for times not operated by the Ports), Bob Hope Theatre, and the Oak Park Ice Rink.

• License agreements for use of the Ballpark and Arena with four sports teams. • Exclusive negotiating agreement with Regent Development, Inc. for development

of the Marina Retail, which is to include restaurants and retail stores. We did not include a review of the above mentioned Facilities Management Agreement, team lease agreements, and exclusive negotiating agreement with Regent. Our office, however, did perform a separate audit of IFG’s lease agreement entitled, “Contract Compliance: IFG Facilities Management Agreement,” which was issued on March 30, 2007. The City previously entered into the following contracts related to the Events Center:

• Agreement for architect services with HKS Architects, Inc. (HKS) for design of the Ballpark on November 18, 2003.

• Agreement for architect services with ThreeSixty Architects (ThreeSixty), formerly Heinlein Schrock Stearns (HSS), for design of the Arena on November 18, 2003.

• Amendment to the professional services contract with Treadwell and Rollo, Inc. for testing and geotechnical services on October 28, 2003.

• Design-build agreement with F&H Construction for the design and construction of the multi-level parking structure on November 4, 2003.

We developed a diagram to illustrate the numerous contracts and relationships involved with the Events Center and have included it as an Attachment, page 19, to our report. On December 14, 2004 under Resolution No. 04-0836, the City Council approved a revised budget of $115,384,299 for the Events Center. In addition, the City Council gave the City Manager the authority to approve change orders up to ten percent over the revised budget. The net amount to fund the revised budget and change order authority amounted to $11,465,170. The revised budget took into consideration a revised GMP for the Ballpark and provided for additional unforeseen costs. In total, the City Council approved a revised budget of $126,849,469. Concerned about the rising costs, the City Council amended the City’s contract with Macias, Gini & Company (Macias) on March 22, 2005 to include an audit of the Events Center construction under Resolution No. 05-0109. On August 16, 2005, the City Council agreed to expand the scope of the audit of the Events Center under Resolution No. 05-0370. The total amount authorized and expended for the audit was $178,000. The City Council requested Macias to:

1) assess the total expenditures of the Arena and Ballpark; 2) review the change order process;


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3) conduct a billing examination of contractor invoices; 4) identify the revenue sources used to fund the Events Center; and 5) assess the impact on the City for debt incurred in financing the Events Center.

Macias submitted their report to the City Council on February 17, 2006. A copy of the report is available on the Office of the City Auditor’s website, http://www.stocktongov.com/Auditor/, under the Audit Reports link. We modified the scope of our audit to avoid a duplication of effort as discussed in the “Objectives and Scope” section of our report. The Ballpark was completed and opened on April 28, 2005 and the Arena opened on December 2, 2005. Although both venues were in operation, Swinerton continued to correct outstanding items identified in the final punch lists, which are listings of identified items to be corrected. As the project was in its final stage, the City was faced with negotiating settlement contracts with various vendors who had experienced increased costs. Most of the settlement agreements were approved by the City Council under separate resolutions as discussed in the “Results” section of our audit report (Note 1a, page 12). Settlement agreements that did not exceed management’s spending authority were approved through the change order process. OBJECTIVES AND SCOPE The objectives of our audit were to determine whether internal controls over the Events Center were adequate and functioning as intended and to determine total project costs. Specifically, we examined controls over contract management, processing of payment applications, the submission and approval of change orders and we assessed contract compliance of select contractors. For contractors with a significant role in the Events Center, we verified that a business license was obtained. Where exceptions were observed, we worked to identify the cause, and to assess the impact. The scope of our audit included an examination of:

• contracts with Regent, Swinerton, F&H Construction, Treadwell & Rollo, HKS, and ThreeSixty;

• sampled invoices submitted for payment from Regent, F&H Construction, Treadwell & Rollo, HKS, and ThreeSixty;

• payment applications 1 through 20 submitted by Swinerton; • timesheets submitted by Regent for the period April 2004 through February 2006; • business licenses for contractors; • change orders 1 through 192 submitted under the project; and, • expenditures recorded in the City’s computerized financial management system.

Our audit testing focused on transactions processed during the period July 2002 through January 2007.


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As noted in the “Background” section of our report, the City contracted with Macias to conduct an audit of the Events Center. Accordingly, our audit of payment applications submitted by Swinerton and change orders submitted under the project was limited to a review of internal controls in order to avoid a duplication of effort. METHODOLOGY

To gain an understanding and history of the Events Center, we reviewed the City’s staff reports, Council Resolutions, and Council Study Session material dated December 17, 2003, related to the Events Center. We reviewed applicable sections of the City Charter, Stockton Municipal Code, and City Manager Administrative Directives, restrictions of funding sources, Redevelopment Agency Resolutions, and City of Stockton Standard Specifications, as well as select contracts to identify the criteria relevant to our audit. We interviewed staff from the City and select contractors to gain an understanding of their duties as they related to the project. We conducted a risk assessment to identify potential threats that could result in loss of funds, inefficient use of resources, and prevent the City from achieving its objectives. We then tested and evaluated operating procedures to verify our understanding of the internal control system. Where weaknesses in internal controls were observed, we communicated them to management with our recommendations for improvement. We also provided management with a list of suggestions for system improvements under a separate memorandum. Management suggestions are opportunities to make system improvements. Unlike reportable findings, management is not asked to submit corrective action plans related to suggestions, and formal audit follow-up is not performed. We examined expenditures recorded in the City’s computerized financial management system to determine total project costs. We also reviewed the accounts of various departments that had a significant role in the Events Center to identify costs either charged directly to the departments or transferred through adjusting journal entries. Our audit was conducted in accordance with Generally Accepted Government Auditing Standards. RESULTS

We examined internal controls over the Events Center. We identified weaknesses related to the City’s process for documenting the use of special revenue funds and management of City-wide construction projects which are summarized in the findings below and discussed in detail in the following audit results sections:

• Contract Compliance, page 7 • Total Project Costs, page 9


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• Swinerton Payment Applications, page 16 • Change Order Authorization, page 17 • Business License, page 18

We provided the audit findings to the City Manager’s Office and requested management’s action plan and target dates for corrective action, which have been included for each finding. Based on our analysis, we computed a total project budget of $143,130,611 and total project expenditures of $145,443,182 as detailed in our Schedule of Budget & Total Expenditures, page 11. Total project expenditures do not include labor charges for City staff who expended effort on the Events Center as not all departments use a time reporting system to record hours worked on a particular project. The computed difference of $2,312,571 represents only the arithmetic difference between the total budget and total project expenditures and is included for presentation purposes only as our analysis identified costs prior to the inception of the project. Finding: Process to Track the Use of Special Revenue Funds Needs

Improvement While we did not identify an inappropriate use of special revenue funds, the City lacks a process in place to ensure that special revenue funds have been expended for their intended purpose once the funds are appropriated to specific projects. During the course of our audit, we noted that the Events Center received funds from special revenue accounts including Public Facilities Fees, Measure K, and Gas Tax. Each of these revenue sources has restrictions on how the funds may be used since they were collected for a specific purpose. In receiving these funds, the City has an obligation to ensure the funds are expended according to specific requirements. The City does not have formal procedures requiring project managers to match expenditures against the restricted revenue sources to ensure compliance. For the Events Center, we noted Measure K revenue was recorded under a separate project which recorded expenditures related to the Fremont Street widening project. However, funds from Public Facilities Fees and Gas Tax were recorded under the main Events Center project number, with no clear link as to how the subsequent expenditures satisfied the special revenue restrictions. Management's Action Plan: A Project Manager is assigned to each project that involves spending Public Facilities Fees. As projects are designed and built, changes in expenditures are assessed and communicated by the Project Manager through their department. Some changes result in contract change orders. The forms that Project Managers use to communicate changes in design or authorized cost are called by different names in the different


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departments. Each of these forms will be modified by December 2007 to include an area for the Project Manager to communicate that changes have been considered for their potential impact on use of public facilities fees and other funding sources. If a change does disqualify all or a portion of a funding source from being used on the project, the Project Manager will be responsible to notify their department managers so that a search for viable alternative funding while reducing the disqualified amount from being charged against the planned funding source. Target Date for Corrective Action: December 10, 2007 Finding: Internal Control Weaknesses Over Management of City-wide

Construction Projects Administrative Directive Contracts - 25.2, Management of Contracts, states department heads are responsible for enforcing their department’s compliance with the administrative directives on contracts and each contract will be assigned a contract manager for monitoring all aspects of the contract including:

• payments, • performance provisions to provide remedial response at earliest possible breach, • billings and collections, • construction progress, and • preparation of a staff report to City Manager detailing all aspects of contract

performance to assure compliance upon contract completion.

During our audit, we noted several internal control weaknesses related to management of City-wide construction projects which are summarized here and discussed in detail in the corresponding results sections:

• The City’s contract with Treadwell & Rollo lacked specific terms describing what was to be provided, the basis for making payments, and how progress would be measured and monitored. (See Contract Compliance, page 9)

• The City contracted with Regent and HKS for specific services to assist in contract management but did not ensure these services were rendered. (See Contract Compliance, page 8)

• Total project costs for the Events Center were difficult to determine as not all costs were recorded under assigned project numbers. (See Total Project Costs, page 9)

• City-wide procedures addressing supporting documentation to be submitted to Accounts Payable to support payments are lacking. (See Contract Compliance, page 7)

Management's Action Plan: Management agrees with the need for effective construction contract management and orderly organization of supporting documentation. As pointed out in this finding,


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Management's current administrative directive regarding contracts expresses the importance of contract monitoring for progress, performance and payment. Management will ensure that all construction contracts include provisions for deliverables, milestones and payment terms in order that contract performance can be monitored and payment processing expectations are clear. All contract managers will be expected to monitor the performance of the contracts under the terms of the construction contracts. Project numbers will be assigned to all projects for which establishing such numbers is necessary to facilitate accurate financial reporting. Supporting documentation will be maintained by project managers who will note where supporting documentation can be found on all invoices submitted for payment to Accounts Payable that do not have the complete documentation attached. Target Date for Corrective Action: June 30, 2007 CONTRACT COMPLIANCE The Events Center included numerous contracts. We selected contracts with Regent, HKS Architects, ThreeSixty Architects, Swinerton, Treadwell & Rollo, and F&H Construction to test for compliance with contract terms. We reviewed each contract and selected contract clauses to verify compliance. With the exception of Regent and HKS as noted below, we determined that the contractors were in compliance with contract terms, and the contracts were appropriately monitored by City staff. We also verified that payments to contractors were within authorized contract amounts by examining total payments to contractors in the City’s computerized financial management system. Based on our review of invoices submitted to Accounts Payable, we determined City-wide procedures addressing supporting documentation to be submitted to Accounts Payable with requests for payment are lacking. Payments to Regent, F&H Construction, HKS, and ThreeSixty, were processed without adequate supporting documentation submitted to Accounts Payable. The amount of supporting documentation provided to Accounts Payable varied depending on the individual submitting the invoice for payment. It was unclear whether the detail in support of the invoices was maintained by individuals submitting the invoices. Accounts Payable is often viewed as a control point as all documentation submitted in support of payments is eventually scanned and maintained electronically by check number. Supporting documentation for Events Center invoices was voluminous in some instances and may explain why it was not submitted to Accounts Payable.


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Regent: The City’s contract with Regent was in place to address project controls, schedule and budget issues. We determined that Regent was generally in compliance with the terms of their contract. We noted that Regent was unable to comply with Section 3.2(b), “provide monthly updates to the DPI Project Budget,” as the City did not provide Regent access to financial data. In addition, City staff allowed Regent to bill project management labor contrary to terms of their contract without a mechanism to prevent over billing. During our review of monthly invoices, we noted that Regent was allowed to bill project management labor based upon a monthly agreed upon rate of $35,000, rather than based upon actual time expended as required by the contract. Regent submitted some timesheets to the City; however, a reconciliation of billed amounts to actual labor incurred per the timesheets was not performed. We performed a reconciliation and computed an over billed amount of $33,930 to which Regent concurred and subsequently provided a credit to the City. HKS: We determined that the HKS contract was appropriately monitored by City staff. However, HKS did not perform work in compliance with the terms of their contract, specifically in reviewing Swinerton’s payment applications and observations to determine if punch list items were completed. Based on their observations on site, the architects were required to review and comment on Swinerton’s percentage of completion and quality of work in accordance with the construction documents. As evidence of their review, they were to execute the “Architect’s Certification of Application for Payment.” We noted both architects did not review and certify all of Swinerton’s applications for payment. HKS, the architect for the Ballpark, certified only 2 of 19 payment applications. For payment application numbers 14 to 19, HKS notified the City that they would not perform the work until the City resolved the payment issues with their invoices. Accordingly, the City reduced the final settlement amount with HKS to adjust for the work that was not performed. ThreeSixty: We determined that ThreeSixty performed work in compliance with the terms of their contract and the contract was appropriately monitored by City staff. As noted above, the architects were required to review and comment on Swinerton’s percentage of completion and quality of work. ThreeSixty, the architect for the Arena, stated the initial payment applications provided to them for review were payment application numbers 7, 9, and 10. ThreeSixty did review and certify the remaining payment applications related to the Arena as required.


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Swinerton: We determined that Swinerton performed work in compliance with the terms of their contract and the contract was appropriately monitored by City staff. Treadwell & Rollo: We determined that Treadwell & Rollo performed work in compliance with the terms of their contract and the contract was appropriately monitored by City staff. However, based on our review of Treadwell & Rollo’s contract, we determined the contract lacked specific terms describing what was to be provided, the basis for making payments, and how progress would be measured and monitored. F&H Construction: We determined that F&H Construction performed work in compliance with the terms of their contract and the contract was appropriately monitored by City staff. TOTAL PROJECT COSTS Based on our analysis, we computed a total project budget of $143,130,611 and total project expenditures of $145,443,182 as shown in our schedule, page 11, and described in the accompanying explanatory notes. The computed difference of $2,312,571 represents only the arithmetic difference between the total budget and total project expenditures and is included for presentation purposes only as our analysis identified costs prior to the inception of the project. Initially, we intended to determine the individual cost of each component (Arena, Ballpark, Public Improvements, Garage, and Hotel) of the Events Center with a comparison to the budgets approved by the City Council. However, in examining expenditures recorded in the City’s computerized financial management system, we found that costs were recorded in total and not by component. The City did not set up the project to track the individual cost of each component as they considered them to be part of one project. In addition to costs incurred by contractors, we noted that various departments throughout the City expended labor hours on the Events Center. The City, however, uses an exception reporting system to record employee hours. Not all departments use a time reporting system to record hours worked on a particular project. Therefore, unless the payroll account to which an employee’s labor is charged in the system was modified to include the Events Center project number, the labor for an employee working on the Events Center would have been charged to the employee’s department. As a result, we did not attempt to identify labor costs that were not recorded against the project and incurred by the various City departments involved with the Events Center.


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In our attempt to quantify total project costs, we encountered the following difficulties, some of which are described in detail in the explanatory notes to our schedule of total project costs.

• Not all costs were recorded under assigned project numbers. • Costs were allocated directly to various departments or later transferred from the

Events Center to departments. • The project experienced turnover of key staff responsible for tracking project

costs. Each individual used a different methodology to track project costs. Costs charged outside the assigned project numbers were overlooked unless the individual tracking the costs knew the specific accounts in which costs were originally recorded.


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Events Parking Explanatory Center (a) Garage (b) Hotel (c) Total Notes

City Council Approved Budget 126,849,469$ 10,047,284$ 500,000$ 137,396,753$ Final Settlement - Separate Resolutions 4,755,858 4,755,858 2006-2007 Budget Appropriation 800,000 800,000 Macias Consulting - Separate Resolution 178,000 -$ -$ 178,000 Total Budget 132,583,327$ 10,047,284$ 500,000$ 143,130,611$ 1a, 1b, 1c

Expenditures:Expenditures identified as 128,877,595$ 10,047,284$ 500,000$ 139,424,879$ 2a, 2b, 2cproject costs by managementand recorded under the project

Other Expenditures:HRD Legal Fees 1,758,253$ 1,758,253$ 3Central Parking District (CPD) Settlement 709,840$ 709,840$ 4

Transfer to CPD Arena Garage/Crystal 376,500$ 376,500$ 5 Marina Tower/Parking 500,000$ 500,000$ 5

Property Acquisition, prior to project 680,929$ 680,929$ 6

Property Acquisition Fremont Street 1,468,406$ 1,468,406$ 7

Misc. Fremont Street Acquisition 20,774$ 20,774$ 8

Project Management 79,326$ 79,326$ 9

Macias Consulting Audit 178,000$ 178,000$ 10

Ports Settlement 80,108$ 80,108$ 11

Marina Towers Settlement Estimate 166,167$ -$ -$ 166,167$ 12

Total Other Expenditures 5,641,803$ 376,500$ -$ 6,018,303$

Total Project Expenditures 134,519,398$ 10,423,784$ 500,000$ 145,443,182$

Difference (1,936,071)$ (376,500)$ -$ (2,312,571)$ 13

SCHEDULE OF BUDGET & TOTAL EXPENDITURES


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Explanatory Notes 1. Budget 1a. Events Center The Events Center budget of $132,583,327 is comprised of a revised budget, final settlement amounts for contractors and an audit by Macias approved under separate resolutions or City Council action, and a current year budget appropriation. For the Events Center, the City Council approved a revised budget of $115,384,299 on December 14, 2004. In addition, the City Council gave the City Manager the authority to approve change orders up to ten percent over the revised budget. The net amount to fund the revised budget and change order authority amounted to $11,465,170. Under separate resolutions or action, the City Council approved final settlement amounts of $4,200,000 for Swinerton Builders, $75,000 for ThreeSixty Architects, $400,750 for Regent Development, $80,108 for 7th Inning Stretch, LLC (Ports), and $178,000 for Macias. For the current 2006-2007 fiscal year, a capital improvement appropriation of $800,000 was approved in the annual budget for the Events Center. During the course of our audit, management informed us and we verified that approximately $4.2 million for arena furniture, fixtures, and equipment was inadvertently excluded from the budget that was submitted and approved by Council in December 2004. The amount, however, was listed in a Designated Public Improvement (DPI) budget included in Regent’s contract which was approved by the City Council in March 2004. 1b. Parking Garage

We determined a total budget of $10,047,284 for the parking garage which was based on a design/build contract awarded to F&H Construction.

1c. Hotel On May 10, 2005, the City Council approved a conference center operating subsidy of $500,000 to assist in paying for the initial operation, furniture, fixtures, and equipment for the hotel conference center. The amount was wire transferred into an escrow account and recorded as an adjusting journal entry in the City’s accounting records. During our review, we noted the journal entry was supported only by an email confirming the amount was transferred into an escrow account. Upon further review, we found supporting detail was maintained by the Purchasing Division.


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2. Expenditures 2a. Events Center A majority of the costs for the Events Center were recorded under fund/project 399-9811 which corresponds to the following accounting number designation:

• Fund 399 = Project Clearing Fund, • Department 99 = Multi Funded Construction in Progress, and • Division 11 = Channel District Action Team (CDAT) Site Prep.

We examined transactions from July 1, 2002 through January 4, 2007 and identified a total of $128,877,595 in expenditures reported under the project. While a majority of the expenditures were recorded under the fund/project account number 399-9811, we did review accounts for Housing & Redevelopment Department (HRD), Public Works and Central Parking District (CPD) and identified Events Center project costs which were charged to these departments as explained in the notes below. 2b. Parking Garage

We noted that the contract for F&H Construction included costs for the construction of two garages, Events Center and Coy. Our review of the contract showed that the contract was amended for additional work for the Coy garage. Since no amendments were made for the Events Center garage, we concluded that the expenditures incurred for the garage were the same as the contract amounts. As a result, a total of $10,047,284 was recorded for the construction of the Events Center garage.

2c. Hotel

As discussed in Note 1c, page 12, for the conference center, a total of $500,000

has been deposited into an escrow account. The total amount was disbursed to Regent on February 27, 2007 in accordance with escrow instructions.

3. Legal Costs

During our review of HRD accounts for fiscal years 2003 to 2007, we identified a total of $1,758,253 in legal fees associated with the Events Center that were either transferred or charged directly to HRD.

4. Settlement Costs We reviewed the capital outlay accounts for CPD by examining transactions posted to the accounts for fiscal years 2003 to 2007. We identified $709,840 in settlement costs for the Calcaterra and Crystal Cream properties which were acquired for the Events Center and charged to CPD.


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5. Transfers to Central Parking District

During our review of adjusting journal entries, we identified transfers of property acquisition costs of $376,500 for Crystal Creamery and $500,000 for Marina Towers that were transferred to CPD. The costs were transferred as these sites were used for parking. In particular, the Crystal Creamery site is the location of the parking garage and Marina Towers is the location of a parking lot. As discussed in Note 11, page 15, the revenue from this particular parking lot was subsequently awarded to the Ports as part of their final settlement agreement with the City. We take no exception to the transfers and are including the acquisition costs in our computation of total project costs. 6. Prior Property Acquisition

In examining property acquisitions, one of our objectives was to determine the cost of property acquired during the project and also property previously acquired by the City. Based on the blue print for the Events Center, we identified seven properties with a total acquisition cost of $680,929 that were acquired or donated prior to the start of the Events Center as follows:

Description Acquistion Date AmountCivic Center Parking Lot Acq 1953 27,569$ Western Pacific Railroad Acq 1979 45,350 Auto Investment Co., Inc. Acq 5/15/01 408,000 Part of Chase /Auto Invest. Acq 5/15/01 - Part of Chase /Auto Invest. Donated part of Chase - Miner's Levee Donated by Charles Weber 1850 - Banner Island Acq 1928 200,010

Total 680,929$

7. Property Acquisition Fremont Street As discussed in Note 2a, page 13, a majority of the costs related to the Events

Center were recorded under the fund/project account number 399-9811. During our audit, we determined that property acquisition costs for Fremont Street properties were recorded under fund/project number 399-9989 which corresponds to the following accounting number designation:

• Fund 399 = Project Clearing, • Department 99 = Multi Funded Construction in Progress, and • Division 89 = Fremont Street Improvements.

We also determined that Measure K funds appropriated for the Events Center were also recorded in these accounts. We examined transactions for the period July 1, 2002 through October 25, 2006 and identified $1,468,406 of property acquisition costs related


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to Fremont Street and the Events Center that were recorded under the 399-9989 accounts.

8. Miscellaneous Fremont Street Acquisition Costs

We reviewed the remaining 399-9989 fund/project accounts and identified

$20,774 in miscellaneous costs such as maintenance & repair, legal, professional services, and taxes that were attributed to the acquisition of Fremont Street properties. 9. Project Management

We identified approximately $79,326 of project management labor for a

consultant that was charged to the City Manager’s office instead of the Events Center. After retiring from City employment in 2004, the consultant returned to work on projects for the City on a part time basis. Our review of labor charges recorded in the City’s accounting system disclosed that the consultant’s labor charges from December 1, 2004 to July 22, 2005 were charged to the City Manager’s office instead of the Events Center. We verified that labor charges subsequent to July 2005 were appropriately charged to the project.

10. Macias Consulting

On March 22, 2005, the City Council amended the City’s contract with Macias,

Gini & Company to include an audit of the construction of the Events Center under Resolution No. 05-0109. On August 16, 2005, the City Council agreed to expand the scope of the audit of the Events Center under Resolution No. 05-0370. The total amount authorized and expended for the audit was $178,000.

11. Ports Settlement

On September 13, 2006, under separate action by the City Council, the City

entered into a settlement agreement of all claims asserted in the Civil Action with 7th Inning Stretch, LLC by agreeing to pay a total sum of $80,108 and allowing the Ports to retain all proceeds generated by the parking fees charged to patrons of the West Parking Lot. The settlement amount was recorded against the City’s general fund account.

12. Marina Towers Settlement Estimate

On September 8, 2006, a jury returned its verdict in the valuation case of Marina

Towers in the amount of $1,970,022. Pending a verdict, the City deposited a total of $1,890,000 with the State which was withdrawn by Marina Towers on June 24, 2006. According to the verdict, Marina Towers is entitled to allowable costs of $27,864.49 and statutory interest under section 1268.350 of the California Code of Civil Procedure (CCP). Using the example provided and rates cited in the CCP, we computed an


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estimated remaining balance due to Marina Towers of $166,167 which includes the balance on the verdict, allowable costs, and accrued interest through December 31, 2006. The City was notified in December 2006 that Marina Towers appealed the verdict; however, a hearing date has not been established. Estimated costs may be higher if Marina Towers is awarded a higher valuation amount through the appeals process and statutory interest may be higher if Marina Towers seeks a higher rate of interest. We are, therefore, unable to determine a final settlement amount to include in our report.

13. Difference

The amounts in this row represent only the arithmetic difference between the

total budget and total project expenditures and are included for presentation purposes only. SWINERTON PAYMENT APPLICATIONS We concluded that adequate controls were in place to review Swinerton’s payment applications. As discussed in the “Background” section of our audit report, page 2, Macias’ audit of the Events Center included a billing examination of contractor invoices. We, therefore, limited our audit to an assessment of internal controls over Swinerton’s payment applications. We interviewed staff from Swinerton, Regent, IFG, and the City to gain an understanding of how the payment applications were prepared, reviewed, and approved, and to assess internal controls. In summary, Swinerton would prepare a payment application and submit it to Regent who would then forward the application to IFG, the architects, and City staff for review. IFG reviewed the payment applications until January/February 2005 when Regent replaced IFG with a Construction Consultant to perform the review. Swinerton then held a meeting to discuss any issues with the payment application. Swinerton would make revisions, which would be reviewed and verified by staff, before a final payment application was submitted to the City for payment. We performed a cursory review of payment applications 1 through 20, submitted for the period dated February 29, 2004 to October 31, 2005. We reviewed the payment applications for the following and noted no exceptions:

• evidence that the application was reviewed by City staff, IFG, or the Construction Consultant;

• percentage of completion was reviewed and adjusted accordingly; • appropriate waivers and releases were included; and, • application was signed and approved for payment by City management.


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We reviewed transactions in the City’s computerized financial management system to identify payments to Swinerton. We examined copies of checks and supporting documentation submitted to the City’s Accounts Payable Division. We noted that due to the volume of documentation, not all supporting documentation was submitted with the payment application. In addition, we noted that a purchase order was not set up for Swinerton’s contract. Use of purchase orders allows for prompt monitoring of payments against the contract while also ensuring payments do not exceed authorized amounts. We were informed that the City’s accounting system cannot accept amounts greater than $10 million; however, multiple purchase orders can be established in the system. CHANGE ORDER AUTHORIZATION We determined adequate controls were in place to review change orders submitted for the Events Center. As discussed in the “Background” section of our audit report, page 2, Macias’ audit of the Events Center included a review of the change order process. We, therefore, limited our audit to an assessment of internal controls. Based on our cursory review of change orders, we noted that change orders were supported by contractor documentation which supported the approved change order amount. We saw evidence that change orders were reviewed by Regent, City staff, and the architects, if necessary. Depending on the dollar amount, change orders were signed by the appropriate level of City management. During our audit, we found that change orders were being tracked separately using different methodologies, by City staff, Regent, and the Construction Consultant hired by Regent. Since each of the logs tracked different information, we developed a change order log for our audit purposes. In doing so, we noted the following:

• As of October 2, 2006, we determined out of 192 change orders, the City approved a total of 169 while 23 change orders were void, blank, or not approved.

• Change orders were used to document increases to the GMP, move costs from allowances into the GMP, and to document the need for additional work or changes in scope.

• Prior to December 14, 2004, change orders had been approved that exceeded limits authorized by the City Council. However, these change orders were incorporated into the revised GMP which was approved by the City Council. On December 13, 2004, the City Council gave the City Manager the authority to approve a total of $11,465,170 in change orders. Not including final settlement amounts which were approved separately by the City Council, the City Manager approved a total of $10,732,182.97 in change orders after December 14, 2004.

• The consecutive numbers assigned to change orders were applied to all contracts rather than separate consecutive numbers for each contract. As a result, additional effort was needed to determine the total number of change orders per contract.


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• Change orders executed on the Events Center were not submitted to the City Clerk’s office until October 2005. As a result, various individuals maintained multiple copies throughout the City rather than accessing one document through the City’s document management system.

BUSINESS LICENSE Based on our testing results, we determined business licenses were obtained by contractors who had a significant role in the Events Center. Stockton Municipal Code, Section 6-004, requires any person or business that conducts business in the city limits of Stockton to have a business license. We obtained a listing of contractors performing work on the Events Center. We identified contractors who had a significant role in the Events Center and verified a business license was obtained. We noted that the two architects for the Events Center did not have a license; however, their contracts contained a provision which stated the City would reimburse the cost of the license. While the objectives of this audit included evaluating internal controls over the City’s process for constructing the Events Center, results of the audit cannot change this specific project. Rather, the benefit of such an evaluation is to identify improvements that can be applied to future projects. Implementation of management's action plans should positively impact future construction projects.

AUDIT REPORT ATTACHMENT INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTER APRIL 3, 2007

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CITY AUDITOR MISSION STATEMENT The Office of the City Auditor independently promotes ethical, efficient and effective governance for the citizens of Stockton. We provide the City Council, management, and employees with objective analyses, appraisals, and recommendations for improvements to City systems and activities. The department maintains independence and objectivity by reporting directly to the City Council and by not exercising direct authority over any department, system, or activity subject to audit.

Documents

INTERNAL CONTROL EVALUATION: STOCKTON EVENTS CENTERonline.recordnet.com/projects/blog/159E Events Center.pdf · Office of the City Auditor • 22 E. Weber Avenue, Suite 325, Stockton,