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An Audit Report on the Major Events Trust Fund

September 2015

Report Number 16-001

Overall Conclusion

Several key aspects of the administration of the State's Major Events Trust Fund (METF), both before and after a major event occurs, should be strengthened to help ensure accountability for METF funds. The METF uses the incremental increase in tax receipts from state sales and use taxes, hotel occupancy taxes, mixed beverage taxes, motor vehicle rental taxes, and wholesale alcoholic beverage taxes that major events generate to pay costs incurred in hosting those events.

The Office of the Comptroller of Public Accounts (Comptroller's Office) administered the METF from the METF's inception in 2003 and throughout the scope of this audit. However, it is important to note that the administration of the METF moved to the Office of the Governor on September 1, 2015. No later than September 10, 2015, the Comptroller's Office and the Office of the Governor were required to coordinate the transfer of powers and duties to ensure a smooth transition.

METF Administration Before a Major Event Occurs

Estimates of incremental tax receipt increases. Overall, the Comptroller's Office has established a reasonable methodology, based on its interpretation of statute, to estimate the incremental tax receipt increase associated with a major event. That estimate is important because it determines the amount of the METF funds available for disbursement for a major event. However, the Comptroller's Office did not document why it used certain amounts to estimate the incremental tax receipt increases for major events. Two of those amounts—the estimated number of out-of-state attendees and those attendees' expected spending—are the two key inputs in estimating incremental tax receipt increases.

In addition, although its methodology for estimating the incremental tax receipt increase is reasonable, the Comptroller's Office inappropriately implemented that methodology by including certain information in its calculations that is not permissible. Specifically, when the Comptroller's Office used economic modeling software to estimate the incremental tax receipt increases associated with major events, its estimates included tax impacts for tax types that statute does not permit to be considered. Based on output from a demonstration that the Comptroller's Office's staff performed using the estimated direct spending amounts for an actual major event, auditors determined that 22 percent of the total funding that would have been approved for that major event was caused by the inclusion of tax types that were not permissible. Because that percentage was applicable only to the demonstration, it would not be appropriate to apply it to the major events tested. However, including tax types that are not statutorily permissible results in major events receiving significantly more funds than they should receive.

Eligibility. For all seven major events that auditors tested, the Comptroller's Office ensured that the major events were eligible for METF funds and generally met other METF requirements.

METF Administration After a Major Event Occurs

Out-of-state attendance certifications. Effective June 2013, after a major event occurs, local governments and local organizing committees must submit to the Comptroller's Office a certification of the estimated out-of-state attendance for the major event. However, the Comptroller's Office does not review and approve the methodology for calculating out-of-state attendance, and it does not review supporting documentation for out-of-state attendance. Without reviewing the supporting documentation or the methodology for calculating the reported out-of-state attendance, the Comptroller's Office lacks assurance that the attendance information is valid and, therefore, whether a reduction in the METF disbursement for a major event is necessary.

Disbursements. Statute specifies that METF disbursements may be made for a purpose obligated in an event support contract between a local government or local organizing committee and a site selection organization. The METF does not operate as a reimbursement program because local governments and local organizing committees are not required to pay contractual obligations before requesting disbursement. In addition, statute permits event support contracts to cover costs that are "necessary and desirable" for the conduct of the major event. However, the event support contracts often include vague language and do not specify the types of expenses that would be necessary to conduct the event. As a result, METF funds have been disbursed to cover expenses such as cash prizes, salaried employees' pay and benefits, and the hotel accommodations for athletes who participate in a major event. Effective September 2014, the Comptroller's Office revised its rules to more clearly define allowable and unallowable costs; under the revised rules, the METF will no longer pay for those types of costs. The revised rules also provided guidance for developing event support contracts. However, the revised rules still allow for costs such as sanctioning fees, large monitors and scoreboards for sporting events, and costs associated with ancillary events.

The Comptroller's Office has established a consistent process to make METF disbursements. However, the METF should ensure that it obtains detailed documentation to support costs approved for disbursement.

Post-event studies. Although the Comptroller's Office prepares post-event studies after a major event, those studies cannot accurately determine whether the estimated incremental tax receipt increases were actually collected. Specifically, those studies state that determining the measurable change in tax receipts due to a major event is difficult due to the size and population of the state. In addition, taxes are remitted to the State based on receipts from 30-day to 90-day periods, which makes it difficult to isolate the economic effect of a particular major event.

Auditors communicated other, less significant issues separately in writing to management of the Comptroller's Office.

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