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State of Arizona Office of the Auditor General PERFORMANCE AUDIT Report to the Arizona Legislature By Debra K. Davenport Auditor General September 2000 Report No. 00-15 ARIZONA DEPARTMENT OF AGRICULTURE COMMODITY DEVELOPMENT AND PROMOTION PROGRAM The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators and five representatives. Her mission is to provide independent and impar-tial information and specific recommendations to improve the operations of state and local government entities. To this end, she provides financial audits and accounting services to the state and political subdivisions and performance audits of state agencies and the programs they administer. The Joint Legislative Audit Committee Representative Roberta L. Voss, Chairman Senator Tom Smith, Vice-Chairman Representative Robert Burns Senator Keith Bee Representative Ken Cheuvront Senator Herb Guenther Representative Andy Nichols Senator Darden Hamilton Representative Barry Wong Senator Pete Rios Representative Jeff Groscost Senator Brenda Burns (ex-officio) (ex-officio) Audit Staff Dale Chapman—Manager and Contact Person (602) 553-0333 Jay Dunkleberger—Team Leader Julie Maurer—Team Member Copies of the Auditor General’s reports are free. You may request them by contacting us at: Office of the Auditor General 2910 N. 44th Street, Suite 410 Phoenix, AZ 85018 (602) 553-0333 Additionally, many of our reports can be found in electronic format at: www.auditorgen.state.az.us 2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553 -0333 • FAX (602) 553-0051 DEBRA K. DAVENPORT, CPA AUDITOR GENERAL STATE OF ARIZONA OFFICE OF THE AUDITOR GENERAL September 21, 2000 Members of the Legislature The Honorable Jane Dee Hull, Governor Mr. Sheldon Jones, Director Arizona Department of Agriculture Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program. This report is in response to a June 16, 1999, resolution of the Joint Legislative Audit Committee. The performance audit was conducted as part of the Sunset review set forth in A.R.S. §41-2951 et seq. I am also transmitting with this report a copy of the Report Highlights for this audit to provide a quick summary for your convenience. This is the sixth in a series of reports to be issued on the Arizona Department of Agriculture. Recent studies, including one specifically of this Program, show promotion efforts often have little or no effect on fresh produce sales. While we found refocusing the Program’s efforts on specialty crops and processed goods would provide the greatest likelihood for success, as outlined in its response, the Department does not agree with this finding. My staff and I will be pleased to discuss or clarify items in the report. This report will be released to the public on September 22, 2000. Sincerely, Debbie Davenport Auditor General Enclosure OFFICE OF THE AUDITOR GENERAL Program Fact Sheet Department of Agriculture Commodity Development and Promotion Program Services: The Commodity Development and Promotion Program performs the following services: 1) Domestic Promotion—Through Arizona Grown and other activities, familiar-izes and educates retailers and consumers about Arizona agricultural products, works to increase the consumption of those products, and performs these same activities for Pride of Arizona, which specifically focuses on Arizona processed goods, such as salsa and wine; 2) International export promotion—Educates international importers, wholesalers, retailers, and consumers about the advantages of choosing Arizona products; 3) Council administra-tion— Provides accounting, budgeting, and other administrative services to five agriculture councils and one board; and 4) Certificate of Free Sale collection—Collects fees for certifi-cates that ensure commodities can be bought and sold freely domestically and abroad. Program Revenue: $406,443 (fiscal year 2000) $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 1998 1999 2000 General Fund Miscellaneous Revenue Industry Contributions $308,905 $361,724 $406,443 Personnel: 5 FTEs as of July 2000 Assistant Director Domestic Program Manager Export Program Manager Marketing Assistant/ Retail Liaison Marketing Assistant/ Council Administrator Facilities: The Program operates no facilities outside of the Department’s offices at the Capi-tol complex in Phoenix. The Program’s export manager generally operates from her home in southern Arizona. Equipment: The Program owns only standard office equipment. Program Goals (Fiscal years 2000-2002) 1. To stimulate the international sales of Arizona agricultural commodities and value-added products abroad. 2. To increase awareness of Arizona agricul-tural products through the Arizona Grown program. 3. To provide administrative support to Commodity Councils and the Agriculture Employment Relations Board (AERB). OFFICE OF THE AUDITOR GENERAL Adequacy of Goals and Performance Measures: Several improvements could be made to the Department’s 3 goals and 43 performance measures for its Commodity Development and Promotion Program. n The Program’s goals incorporate too many performance measures to effectively track performance. For example, the Depart-ment’s goals for Arizona Grown include 24 measures, including a measure for the number of customers familiar with the Ari-zona Grown logo. This information is not collected by the Department on a regular basis. As a result, the Department may want to consider revising and condensing its goals and measures. Adequacy of Goals and Performance Measures: (Concl’d) Further, some of the Department’s measure-ments need to be clarified. For example, one of the Department’s efficiency measures records the number of “solid” trade inquiries, yet it does not define “solid.” Finally, the Department should develop goals and measurements specifically for its Pride of Arizona promotion activities. Since the Depart-ment recently initiated these activities, it has not had an opportunity to develop goals and meas-urements, but should consider developing a goal, and input, output, outcome, efficiency, and quality measures for these activities. Arizona Grown Logo n While the Department generally employs outcome, output, input, and quality meas-ures, it employs only two measures track-ing program efficiencies. As a result, the Department could adopt efficiency meas-ures, such as comparing promotion expenditures to promotion benefits. i OFFICE OF THE AUDITOR GENERAL SUMMARY The Office of the Auditor General has conducted a performance audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program pursuant to a June 16, 1999, resolution of the Joint Legislative Audit Committee. This audit was conducted as part of the Sunset review set forth in A.R.S. §§41-2961 et seq, and is the sixth in a series of audits to be conducted on programs within the Arizona Department of Agriculture (Department). The Commodity Development and Promotion Program pro-motes Arizona’s agricultural products domestically and abroad. Arizona Grown, a key component of its domestic promotion efforts, seeks to familiarize and educate retailers and consumers about the quality and diversity of Arizona’s agricultural prod-ucts and to increase the consumption of these products. While Arizona Grown activities typically focus on promoting unproc-essed agricultural goods, the Department recently created Pride of Arizona, which uses a portion of Arizona Grown funding to promote Arizona processed goods, such as salsa and wine. As part of the Arizona Grown efforts the Legislature appropriates $50,000 annually to specifically fund joint agricultural indus-try/ Department promotion projects. However, the Department cannot spend this money without receiving required matching dollars from the agricultural industry. The Department also dedicates approximately one of the Program’s FTEs to support international promotion efforts by working with the Arizona agricultural industry to stimulate the export of Arizona farm and food products. Refocusing Arizona Grown Activities Would Help Make It More Effective (See pages 7 through 15) As currently operated, Arizona Grown has limited impact. Studies of Arizona Grown and similar efforts in other states Summary ii OFFICE OF THE AUDITOR GENERAL indicate that they have little effectiveness unless they are focused in certain key ways. The key components for success include targeting Arizona specialty and processed products and pur-chasers who are likely to be most affected by the promotional efforts. However, Arizona Grown’s efforts have been focused on fresh food commodities, such as lettuce and broccoli. Because the market for such commodities is primarily price competitive, promotions such as those sponsored under Arizona Grown tend to have little effect on consumer behavior. In addition, the Ari-zona Grown promotional efforts are not clearly focused. Instead, they are spread across many goals and purposes. The Department should take several steps to increase the effec-tiveness of Arizona Grown efforts. n First, the Department should develop a strategy for Arizona Grown’s promotions that includes a focus on specialty and processed goods; and identifies and targets consumers who are more likely to purchase local products. Additionally, the Department should seek to support projects that are in line with this strategy. n Second, the Department should measure the effectiveness of promotional activities to ensure they have a demonstrable impact. The Department can achieve this by incorporating an evaluation component into promotional projects. n Finally, the Department should take steps to increase the available monies for Arizona Grown promotional projects by taking advantage of additional industry funding. The De-partment’s General Fund appropriation requires that every dollar the Department spends on joint agricultural indus-try/ Department promotional projects be matched by $.50 from the industry. Based on the advice of its Attorney Gen-eral representative, the Department believes this requires the State to pay one dollar for every $.50 contributed by the in-dustry for these projects. However, Auditor General legal counsel, Joint Legislative Budget Committee staff, and Legis-lative Council staff review of this requirement suggests it out-lines a minimum industry contribution for Arizona Grown projects and does not prevent the industry from contributing Summary iii OFFICE OF THE AUDITOR GENERAL additional monies. Nonetheless, the Department has turned down additional funds offered by industry because it did not have enough money to match them on a 2-to-1 basis. iv OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) v OFFICE OF THE AUDITOR GENERAL TABLE OF CONTENTS Page Introduction and Background....................... 1 Finding I: Refocusing Arizona Grown Activities Would Help Make It More Effective......................................... 7 Current Promotional Efforts Lack Key Components...................................... 7 The Department Should Improve Arizona Grown’s Project Management...................... 10 Recommendations........................................................... 15 Agency Response Table Table 1 Arizona Department of Agriculture Commodity Development and Promotion Program Statement of Revenues and Expenditures Years Ended June 30, 1999 and 2000 .......... 4 Figures Figure 1 Arizona Grown Logo..................................... 2 Figure 2 Pride of Arizona Logo.................................... 2 vi OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) 1 OFFICE OF THE AUDITOR GENERAL INTRODUCTION AND BACKGROUND The Office of the Auditor General has conducted a performance audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program (Program) pursuant to a June 16, 1999, resolution of the Joint Legislative Audit Commit-tee. This audit was conducted as part of the Sunset review set forth in A.R.S. §§41-2951 et seq and is the sixth in a series of audits to be conducted on programs within the Arizona De-partment of Agriculture (Department). Commodity Development and Promotion Program The Department’s Commodity Development and Promotion Program operates under the following statutory mandate: “The office of commodity development and promotion shall provide for programs to stimulate, educate, encour-age, and foster the production and consumption of Ari-zona agricultural products domestically and abroad.” To carry out this mandate, the Program employs a total of 5 FTEs to promote Arizona’s agricultural products through a combina-tion of statewide and international efforts that include two main activities: n Domestic promotion: Through domestic promotions, the Program seeks to familiarize and educate retailers and con-sumers about the quality and diversity of Arizona’s agricul-tural products and to increase the consumption of these products. A key component of its domestic promotion efforts is Arizona Grown. As part of Arizona Grown, the Program performs a variety of activities, such as encouraging the Ari-zona agricultural industry to use the Arizona Grown logo to help identify Arizona products, creating informational mate-rial, and jointly funding agricultural product promotions Department supports state-wide and international agricultural promotions. Introduction and Background 2 OFFICE OF THE AUDITOR GENERAL Figure 1: Arizona Grown Logo Figure 2: Pride of Arizona Logo with the agricultural industry. For example, during fiscal year 2000, the Program helped promote the Arizona agricultural industry and activities at two trade shows and one national conference, completed three promotional projects in cooperation with industry, helped organize a “January Winter Vegetable Promotion” and the “Yuma Lettuce Days,” and jointly funded an Arizona Grown spokesperson with the agricultural industry to promote Arizona agricultural goods. Additionally, the Program has recently developed a “Pride of Arizona” logo to distinguish the promotion of processed goods. Pride of Arizona, a component of Arizona Grown, seeks to increase the consumption and use of agricultural products, such as salsa and wine, that are made and/or proc-essed in Arizona. n International Export Promotion: Through international export promotions, the Program seeks to increase international trade of Arizona products and to educate international im-porters, wholesalers, retailers, and consumers about the ad-vantages of choosing Arizona foods. During fiscal year 2000, the Program participated in trade shows, trade missions, and field tours, coordinated export missions, and produced bilin-gual educational materials to promote melons to Canada, live-stock to Mexico, and fruits and vegetables to Japan, Hong Kong, Korea, and Mexico. Likewise, the Program offers assis-tance to Arizona exporters through coordinating international activities, assisting Arizona exporters with USDA require-ments, linking foreign buyers with domestic sellers, and assist-ing the Arizona agriculture industry to pursue federal grants. Introduction and Background 3 OFFICE OF THE AUDITOR GENERAL In addition to its two main promotional activities, the Program provides services to five agricultural entities. These entities collec-tively pay for one FTE who provides general support for the Program, but also spends approximately three-quarters of his time providing accounting and budgeting services to the Arizona Wine Commission, Arizona Grain Research and Promotion Council, Arizona Iceberg Lettuce Research Council, Arizona Citrus Re-search Council, and the Agricultural Employment Relations Board. As illustrated in Table 1 (see page 4), the Department receives over $1.6 million annually on behalf of these commis-sions/ councils and the Arizona Cotton Research and Protection Council. Each commission/council reimburses the General Fund for the Program’s services based on agreements renegotiated annually. Finally, the Program issues and collects fees for Arizona’s Certifi-cates of Free Sale. Some countries require these certificates before Arizona producers of processed foods, beverages, and animal feeds can sell their products abroad. By law, the fees that the Program charges cannot exceed the actual cost to prepare the Certificate of Free Sale. Budget During fiscal year 2000 and as seen in Table 1 (see page 4), the Program received over $301,000 from the General Fund, primarily for salaries and other operating and equipment expenditures. Of the $301,000 appropriated to the Program, $50,000 is earmarked for Arizona Grown promotions, approximately 20 percent of which also funds Pride of Arizona promotions. To ensure indus-try contributes to these promotions, businesses are required to contribute $.50 for every $1 in General Fund monies the Program spends. Any unmatched monies revert to the State General Fund. While in the past some unused monies were remitted back to the General Fund, in fiscal year 2000 all Arizona Grown appropria-tions were expended. Furthermore, the Program collected addi-tional revenue from the commissions/councils to provide for Table 1 Arizona Department of Agriculture Commodity Development and Promotion Program Statement of Revenues and Expenditures Years Ended June 30, 1999 and 2000 (Unaudited) Program Operations Commissions and Councils 1 Program Total 1999 2000 1999 2000 1999 2000 Revenues: State General Fund appropriations $270,200 $301,800 $ 270,200 $ 301,800 Charges for services: Cotton assessments $ 888,301 $1,125,963 888,301 1,125,963 Grain assessments 209,500 139,490 209,500 139,490 Citrus assessments 153,921 91,806 153,921 91,806 Iceberg lettuce assessments 97,814 104,377 97,814 104,377 Other charges for services 43,884 42,380 43,884 42,380 Intergovernmental 5,000 5,000 133,648 165,186 138,648 170,186 Industry contributions 24,280 45,573 24,280 45,573 Fines and forfeits 25,134 14,871 25,134 14,871 Interest on investments 113,629 21,442 113,629 21,442 Other 18,360 11,690 7,945 18,538 26,305 30,228 Total revenues 361,724 406,443 1,629,892 1,681,673 1,991,616 2,088,116 Expenditures: Personal services and employee related 217,524 225,813 789,091 814,156 1,006,615 1,039,969 Professional and outside services 14,487 25,185 529,574 358,925 544,061 384,110 Travel 21,092 23,174 20,793 17,380 41,885 40,554 Other operating and equipment 105,292 102,982 1,001,599 2 634,699 1,106,891 737,681 Total expenditures 358,395 377,154 2,341,057 1,825,160 2,699,452 2,202,314 Excess of revenues over expenditures 3,329 29,289 (711,165) (143,487) (707,836) (114,198) Operating transfer in 7,000 7,273 7,273 7,000 Excess of revenues and operating transfers in over (under) ex-penditures $ 3,329 $ 36,289 $ (703,892)3 $ (143,487)3 $ (700,563) $ (107,198) 1 Includes the Arizona Grain Council, Arizona Wine Commission, Arizona Iceberg Lettuce Research Council, Arizona Citrus Research Council, and Arizona Cotton Research and Protection Council. These entities were not within the scope of our audit. 2 In 1999, changes to the facilities and equipment that the Arizona Cotton Research and Protection Council used for the aflatoxin production process caused additional equipment purchases as well as significant repair and replacement expenditures. 3 Deficit amounts are primarily due to the Cotton Council using their available fund balance to pay expenditures. Source: The Arizona Financial Information System Accounting Event Extract File and Status of Appropriations and Expenditures reports for the years ended June 30, 1999 and 2000. 4 Introduction and Background 5 OFFICE OF THE AUDITOR GENERAL administrative services and Certificate of Free Sale fees, which totaled approximately $50,000 during fiscal year 2000. Scope and Methodology This audit focuses on the Department’s efforts to promote and develop opportunities for Arizona’s agricultural products through Arizona Grown promotions. To determine the extent to which the Department fulfills these requirements, several meth-ods were used, including: n Examining several academic studies of commodity pro-grams, literature regarding agriculture promotion programs, and material from national agriculture organizations to ob-tain information on the economic, social, and political bene-fits and drawbacks of commodity programs, as well as to gain information on components of effective promotional programs; n Reviewing the federal grant requirements of state agriculture promotional activities and the federal mandates for “check-off” commodity programs to obtain information on federal requirements that aid in ensuring the most effective use of promotional programs’ monies and activities; n Obtaining information from 18 other states that employ agriculture development and promotion programs in order to compare them with Arizona’s funding and activities;1 n Evaluating program budget and expenditure documentation, agreements with commodity councils, and joint ventures with industry, as well as planning documents such as strate-gic and marketing plans to obtain comprehensive informa-tion on the Department’s monies, services, activities, and fu-ture plans; 1 The 18 states were California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New Mexico, North Carolina, Rhode Island, South Carolina, Tennessee, and Virginia. Introduction and Background 6 OFFICE OF THE AUDITOR GENERAL n Interviewing experts and others involved in the agriculture industry and its promotion to obtain their perspective on the benefits and drawbacks of the Department’s program. Inter-viewees included agriculture promotion evaluators; Arizona Department of Agriculture staff; Arizona agriculture indus-try and retail representatives; and national agriculture coun-cil representatives. This report presents a finding and recommendations concerning the need for the Department to increase Arizona Grown’s effec-tiveness by developing a strategy for Arizona Grown promo-tions that focuses on specialty products or processed goods, and consumers most likely to purchase local products, supporting those promotional projects that are in line with this strategy, and taking greater advantage of industry funding. This audit was conducted in accordance with government audit-ing standards. The Auditor General and staff express appreciation to the Direc-tor and staff of the Department of Agriculture for their coopera-tion and assistance throughout the audit. 7 OFFICE OF THE AUDITOR GENERAL FINDING I REFOCUSING ARIZONA GROWN ACTIVITIES WOULD HELP MAKE IT MORE EFFECTIVE As currently operated, Arizona Grown has little effect on con-sumers’ awareness of Arizona products or on their buying preferences. Studies have found that promotional efforts like Arizona Grown have the greatest impact when focused on promoting specialty and processed agricultural products or when targeted to consumers who are more likely to purchase local products. However, Arizona Grown focuses most efforts on products that are not unique to Arizona. The Department should take steps to more effectively focus Arizona Grown activities, evaluate the impact of these activities, and increase industry contributions for these activities. Current Promotional Efforts Lack Key Components Past studies of Arizona Grown and similar efforts in other states indicate that these efforts have little effectiveness unless they are focused in certain key ways. The key components for success include being able to target: n Specialty and processed products produced in the state; and n Purchasers who are likely to be most affected by the promo-tional efforts. Arizona Grown does not meet these criteria. For the most part, it promotes fresh food commodities that are produced in many states or targets its promotional efforts to a variety of audiences. Studies identify approaches that fail and strategies that suc-ceed— Studies indicate that efforts such as Arizona Grown do not automatically produce marketing successes. These studies in-clude one that focused specifically on Arizona Grown, and concluded that it had relatively little impact. Overcoming these Finding I 8 OFFICE OF THE AUDITOR GENERAL limitations, the studies found, meant focusing promotional activities in certain ways. n Arizona Grown study—A 1998 study found that Arizona Grown promotions have little to no effect on product sales and only a modest effect on consumer preferences.1 Specifi-cally, the study found that consumers were largely unaware of Arizona Grown, that in-store promotions conducted with state and industry monies had little to no effect on product sales, and that these promotions had only a modest effect on consumer preferences. One of the reasons was that the pro-motions focused on fresh food commodities, such as lettuce, oranges, and broccoli, that are grown in other states and coun-tries and difficult to differentiate based on price and product characteristics. Follow-up discussion with one of the study’s authors indi-cated that promotional efforts were likely to be more success-ful if they focused on specialty and processed Arizona prod-ucts, such as Arizona-produced salsas and wines, as well as specific food service providers, such as “Arizona marketed” restaurants. n Indiana consumer analysis—A study published in April 2000 that focused on a consumer survey in Indiana reported, “Building a brand image which effectively differenti-ates food products by their place of origin can be a daunting task, since the market for fresh food com-modities (especially fruits and vegetables) is over-whelmingly price competitive. While some producer groups have successfully differentiated particular commodities by their place of production (e.g., Florida 1 Olofsson, Hans, Paul M. Patterson, Timothy J. Richards, and Sharon Sass. An Empirical Analysis of State Agricultural Product Promotions: A Case Study of Arizona Grown. Agribusiness, 1999. 179-196. Promotions should stress specialty and processed, state-specific products. Finding I 9 OFFICE OF THE AUDITOR GENERAL Orange Juice, California Raisins, Washington Apples), most fresh produce commodities are homogeneous and compete primarily on price and easily perceptible quality differences.” 1 This study noted the importance of targeting promotional ef-forts based on consumer and product factors. It emphasized the need for state programs to identify and target those consumers with the highest likelihood of purchasing local products and to promote those commodities that ensure the largest possible return from promotional budgets. It cited the example of New Jersey tomatoes—a commodity examined in a different study.2 This other study found there were few substitutes for these tomatoes and that consumer demand for the “Jersey Fresh” tomato does not change according to price. Identifying these types of factors contributed to New Jersey’s successful promotion program. n Agribusiness analysis—A 1989 analysis of state agriculture promotional programs concluded that state commodity pro-grams do not show clear economic impacts.3 Like the two studies already cited, this study suggested that state-supported market promotion programs cannot succeed when they go against basic tenets of economic theory. It also concluded that the most successful agriculture promotion programs occur in states that produce specialty crops, as well as those that promote processed products. Consequently, commodity promotions with the most likelihood for success are those with products that are easily distinguishable. 1 Jekanowski, Mark D., William A. Schiek, and Daniel R. Williams II. Consumers’ Willingness to Purchase Locally Produced Agricultural Products: An Analysis of an Indiana Survey. Agricultural and Resource Economics Review, April 2000. 43-53. 2 A.O. Adelajo, Bromfield, R.G. and Lininger, K. Product Differentiation and State Promotion of Farm Product. An Analysis of the Jersey Fresh Tomato. Journal of Food Distribution Research 21(3) 73-85. 3 Halloran, John and Michael V. Martin. Should States be in the Agricul-tural Promotion Business? Agribusiness, 1989. 65-75. Promotions should also target consumers who are more likely to purchase local products. Finding I 10 OFFICE OF THE AUDITOR GENERAL Arizona Grown approach does not center on successful strate-gies— In contrast to the conclusions of these studies, the Depart-ment continues to focus most of Arizona Grown’s efforts on fresh food commodities rather than specialized Arizona prod-ucts. Department officials estimate that during fiscal year 2000, over 80 percent of Arizona Grown’s monies were spent on promotional activities for fresh food commodities, such as lettuce and broccoli. For instance, during fiscal year 2000, Arizona Grown supported a winter vegetable promotion, a watermelon promotion, and the “Yuma Lettuce Days.” Because such efforts are directed at products that come from many sources and are not unique to Arizona, they are of limited usefulness in building consumer loyalty and increased sales. Also in contrast to the study conclusions, the Department’s efforts encompass a wide variety of projects with diverse goals and purposes. For example, during fiscal year 2000, Arizona Grown’s limited resources supported trade show promotions ranging from an event aimed to develop economic opportunities with Dutch greenhouse companies, to a conference for farmers who directly market their products. Likewise, the Department’s commodity-based promotions varied from distributing 300 free watermelons and related informational materials, to a newslet-ter publication that supplied information about harvested dates to more than 500 consumers. In all, the efforts were spread across trade shows, media exposure, conferences, agriculture informa-tional materials, retail product promotions, and agriculture festivals. The Department Should Improve Arizona Grown’s Project Management The Department should take several steps to increase the effec-tiveness of Arizona Grown efforts. n First, the Department should develop a strategy for Arizona Grown promotions that includes a focus on specialty or processed goods and identifies and targets consumers most likely to purchase local products. Furthermore, the Depart-ment should seek to support projects that are in line with this strategy. Finding I 11 OFFICE OF THE AUDITOR GENERAL n Second, the Department should assess the impact of these projects by developing processes to measure individual pro-ject effectiveness. n Finally, the Department should take steps to increase the available monies for promotional activities by taking advan-tage of additional industry-provided funding. The Department should reevaluate Arizona Grown’s focus—The Department can improve the management of Arizona Grown’s promotional activities by continuing to develop specific areas of focus for these activities. While Department officials indicate that they have developed strategies for focusing Arizona Grown activities on retail and media-related efforts, these strategies do not include an emphasis on targeting specialty and processed products, or focusing on consumers likely to be affected by promotional efforts. Although the Department has taken initial steps in developing a “Pride of Arizona” logo to distinguish the promotion of processed products, few promotional activities focus on processed products. The Department should then add guidelines to its joint venture application system that reflect these strategies. The Department recently developed and implemented a joint venture application process that includes guidelines for the selection of promotional projects. While these guidelines require industry groups to submit applications that describe the objectives of the proposed activity, the economic development potential of the activity, and the desired target market, these guidelines do not include an emphasis on strategies targeting specialty products or customers more likely to purchase local products. Expanding the guidelines within the application process to include project selection criteria will help ensure that proposed projects are aligned with these strategies developed for Arizona Grown. Also, by adopting these additional project selection criteria, the Department would have a way to decide which project applications represent the best use of the State’s money. The Department should measure Arizona Grown’s effective-ness— To ensure projects selected for funding have a demonstra-ble impact, the Department should measure the effectiveness of its promotional activities. Experts note that examining pre- and post-sales figures from retail promotions is an effective way to Department should focus activities on specialty Ari-zona products and processed foods. Finding I 12 OFFICE OF THE AUDITOR GENERAL measure the rate of return on the State’s investments. Addition-ally, providing feedback on promotional projects not only meas-ures the impact of these projects, but suggests which activities might be beneficial in the future. Currently, however, the De-partment does not require that its promotional activities include provisions for measuring outcomes. As a result, the Department participates in projects with only a limited understanding of how effective they are. During fiscal year 2000, only one Arizona Grown project in-cluded provisions for measuring its effect on sales. In this case, the industry contributor, the National Pork Producers’ Council, requires any project it funds to have an evaluation component. The $12,000 project included $9,000 for a media campaign and increased retail sales of Arizona pork in participating stores by approximately 43 percent during the promotion. The Department should require grant recipients to evaluate the impact of their promotional efforts. Specifically, each grant proposal should include a requirement for the industry partici-pant to measure the project’s effectiveness. These evaluations could assess product sales before, during, and after a promotion or measure a promotion’s impact upon consumer awareness. However, the Department should place the evaluation compo-nent of each grant in the context of the proposal’s size. Complex evaluation requirements should not be required for promotional projects with minimal funding. Other states look for the presence of an industry evaluation when they decide which projects to fund. The manager of the “Minnesota Grown” program considers the presence of an evaluation component a major factor in deciding whether to dedicate state funds to a project. Likewise, North Carolina re-quests that project participants report percentage growths for promotions and considers the evaluation of its activities a key program component. The Department should effectively use industry funds—Finally, the Department should also increase available funding for Ari-zona Grown projects by taking advantage of additional funding that industry could contribute. Currently, the Department matches every $0.50 contribution from industry with one dollar from its Arizona Grown fund. The Legislature appropriates Department should require evaluations for projects using large amounts of state monies. Department should take steps to increase industry contribu-tions. Finding I 13 OFFICE OF THE AUDITOR GENERAL monies for Arizona Grown to support joint ventures with the private sector and requires that each dollar expended by the Department be matched by at least $0.50 from industry.1 Our legal counsel, Joint Legislative Budget Committee (JLBC) staff, and Legislative Council staff interpret this requirement to outline a minimum industry contribution for Arizona Grown projects, a requirement that does not preclude industry from contributing additional monies. However, based on its Attorney General representative’s advice, the Department has concluded that this provision means that it must pay two-thirds of every project. As a result, the Department has declined significant industry contri-butions. For example, during fiscal year 2000, an industry repre-sentative proposed contributing $3,000 toward a project to promote a quality assurance program for Arizona beef. How-ever, the Department limited industry’s contribution to $2,000 because it had only $4,000 available. Therefore, to increase funding for Arizona Grown activities, the Department should use its Arizona Grown matching funds in a manner that does not restrict industry contributions. Addition-ally, the Department should more efficiently leverage state monies through its joint venture application system by possibly requiring a higher minimum level of industry contributions and favoring those proposals that contain more significant industry participation. Specifically, other states set higher minimum matching amounts for industry contributions in order to more effectively use state monies. For example, both Massachusetts and New Jersey require participants to match or exceed the amount of the grant being requested. Additionally, Montana requires a minimum 1:1 applicant funding match for all projects, while proposed projects with contributions exceeding the 1:1 level may have an advantage in being selected. To facilitate compliance with the original intent of the Arizona Grown matching funds and begin seeking additional industry contributions for this current fiscal year, the Department might 1 General Appropriations Act footnote. “Of the Operating Lump Sum appropriation in FY 2000 and FY 2001, the sum of $50,000 is appropriated in both fiscal years for the Arizona Grown Promotion Program. Every dollar ex-pended by the Department of Agriculture for the Arizona Grown Program shall be matched by $0.50 in contributions from the private sector. Any unmatched monies revert to the state General Fund.” Finding I 14 OFFICE OF THE AUDITOR GENERAL consider soliciting a formal opinion on the General Appropria-tions Act footnote from the Attorney General’s Office. Addition-ally, the JLBC should consider further clarifying the footnote in the next appropriations bill by specifying that the private sector should contribute a minimum of $0.50 for every dollar expended by the Department. Finding I 15 OFFICE OF THE AUDITOR GENERAL Recommendations 1. The Department should develop strategies for its agricultural promotional and/or developmental activities that include a focus on specialty Arizona products and processed foods; and targets consumers most likely to purchase local prod-ucts. 2. Within its joint venture application system, the Department should establish additional criteria for project consideration that reflect the strategies developed for Arizona Grown pro-motional activities and seek to support projects that meet this criteria. 3. The Department should require that promotional projects include provisions for assessing and measuring the project’s results. 4. The Department should increase industry contributions to Arizona Grown by correctly matching and leveraging ap-propriated Arizona Grown monies. The Department should change its practice for matching industry contributions so that the industry contribution of $.50 for every $1 from the Arizona Grown fund is considered as a minimum contribu-tion rather than a fixed amount. a. To facilitate implementation of this recommendation, the Department should consider soliciting a formal opinion on the General Appropriations Act footnote governing the expenditure of state monies for Arizona Grown pro-motional activities from the Attorney General’s Office. b. The Joint Legislative Budget Committee staff should con-sider revising the footnote to future appropriations bills to specify that the private sector contribute a minimum of $0.50 for every dollar expended by the Department. 5. The Department should incorporate criteria into its joint venture application system that emphasize the selection of projects with larger industry contributions. 16 OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) OFFICE OF THE AUDITOR GENERAL Agency Response OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) September 12, 2000 The Honorable Debra K. Davenport Auditor General Office of the Auditor General 2910 North 44th Street, Suite 410 Phoenix, Arizona 85018 Dear Ms. Davenport: Enclosed is the Arizona Department of Agriculture’s response to the Office of Commodity Development and Promotion audit. We extend our appreciation to the audit team for their professionalism and attention to detail. I certainly appreciate their willingness to seek out the Department’s input and clarification of some of the issues identified in this report. Sincerely, Sheldon R. Jones Director AUDITOR GENERAL’S RECOMMENDATIONS AGENCY RESPONSE Overview: The Arizona Department of Agriculture would like to thank the Auditor General’s staff for the professional manner in which the audit was performed. We believe the Department, while it continues to identify methods of improving its delivery of service to Arizona’s growing agricultural industry and the public as a whole, is a good example of how government should strive to work. We take very seriously our mission and our charge to regulate and support Arizona agriculture in manner that promotes farming, ranching and agribusiness while protecting consumers and natural resources. While this cabinet level agency was created only ten years ago, to serve and regulate Arizona’s agriculture industry, a number of things have and continue to change about the industry we serve. Foremost is the changing face of our customers, which reflects the industry as a whole. Arizona is internationally renowned for its diverse agricultural production. From artichokes to cattle, cotton and citrus to shrimp and watermelons, Arizona is continuously increasing its agricultural diversity. It is entirely fascinating to observe the customers that call on us every day. The Department is constantly asked to service more than the program crops of wheat, cattle, cotton and dairy. Ten years ago, the aquaculture, ratite, custom slaughter, wine and massive nursery industry did not exist as they do today. Because of the changing face of our customers and the public’s demands for faster, more efficient service, the Department recognizes more must be done to meet the challenges we face today and those we will face in the future. The Department appreciates the attention the Auditor General’s staff has paid to the unique responsibilities and critical functions of the Office of Commodity Development and Promotion. As the report only highlights, the program maintains an award-winning international trade export unit in addition to the domestic marketing efforts of the highly documented Arizona Grown program. It is disappointing that this report finds that the Department’s promotion efforts are too focused on marketing fresh commodities. If the overwhelming amount of agricultural products produced in Arizona were not fresh commodities, which they are, then perhaps the Auditor General’s finding would have more practical merit. Unfortunately that is not the case and the Department is placed in a position where it cannot agree to provide priority marketing assistance to a few processed-good companies over the thousands of growers who secure Arizona’s place as a leading fresh commodity state. When the paradigm shifts, and Arizona begins producing more processed or value-added products than fresh, bulk commodities, the Department will see to it that Arizona Grown promotions reflect the shift proportionately and consistently. Finding: Refocusing Arizona Grown Activities Would Help Make It More Effective Recommendation I: The Department should develop strategies for its agricultural promotional and/or developmental activities that include a focus on specialty Arizona products and processed foods; and targets consumers most likely to purchase local food products. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will not be implemented. Agency Explanation: The Department agrees that its strategies to target consumers most likely to purchase local products warrant further improvements and will soon be amended to more adequately measure the performance of its promotions. It is important to note, however that the “Arizona Grown” study the audit team refers to throughout this report found that 76% of the consumers surveyed “indicated that they would prefer a product grown in Arizona, expressing the belief that these products would be fresher or of higher quality.” Further, the report finds that Arizonans living in metropolitan Phoenix are likely to purchase locally grown products. Based upon that empirical study, the Department believes its branded logo program is already targeted toward a “willing” market. The chore we face is increasing the public’s recognition of the Arizona Grown logo. Also, the Department thoroughly disagrees with the report’s suggestion to redirect Arizona Grown promotional activities to showcase Arizona products and processed foods that are “unique” to Arizona. Such a suggestion suggests that the entirety of Arizona’s $6.3 billion agriculture industry is not worth showcasing. Further, the report mistakenly asserts that products like wine and salsa are unique to Arizona when they are, in fact, not unique at all. The Department will not allow itself to be placed in a position to pick and choose generally which commodities or products warrant promotion. Such selectivity would appear random and discriminatory to the 2,000+ producers in this State. Recommendation II: Within its joint venture application system, the Department should establish additional criteria for project consideration that reflect the strategies developed for Arizona Grown promotional activities and seek to support projects that meet this criteria. Agency Response: The finding of the Auditor General is not agreed to but the audit recommendation will be implemented. Agency Explanation: Again, the Department disagrees to the finding. However, with respect to the recommendation, the Department has already proposed to the auditors its plans to implement the joint venture system as a competitive method to select Arizona Grown promotions. As this is the case, fixed criteria is being created pursuant to R3-6-202 and will reflect the goals and strategic direction of the Department’s marketing efforts. Recommendation III: The Department should require that promotional projects include provisions for assessing and measuring the results of the project. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will be implemented pursuant to the existing Administrative Rule. Agency Explanation: Again, the Department disagrees to the finding. However, with respect to the recommendation, the Department has already proposed to the auditors its plans to implement a grant application system. As this is the case, fixed criteria is being created pursuant to R3-6-202 and will, of course, require that promotional projects include sufficient performance measures. Recommendation IV: The Department should increase industry contributions by correctly matching and leveraging appropriated Arizona Grown monies. The Department should change its practice for matching industry contributions so that the industry contribution of $.50 for every $1 from the Arizona Grown fund is considered as a minimum contribution rather than a fixed amount. a. To facilitate implementation of this recommendation, the Department should consider soliciting a formal opinion on the General Appropriations Act footnote governing the expenditure of state monies for Arizona Grown promotional activities from the Attorney General’s Office. b. The Joint Legislative Budget Committee staff should consider revising the footnote to future appropriations bills to specify that the private sector contribute a minimum of $0.50 for every dollar expended by the Department. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will not be implemented. Agency Explanation: Again, the Department disagrees to the finding and the recommendation because it inaccurately states the Department has discretion in the manner through which it appropriates Arizona Grown funds. While the Auditor General’s staff attorney opined that the Department’s allocation of Arizona Grown funds is subjective, the Department has been advised by its attorneys (two Assistant Attorney Generals) that the General Appropriations Act footnote mandates the Department to assign one dollar for every $0.50 contributed by the private sector. The Department agrees that the appropriation could be stretched further if a 2-to-1 ratio of matching funds was not required. The statute, in this case, however does not at all state, imply or infer that the $0.50 private sector contribution for every $1 from the Arizona Grown fund is, as the Auditor General believes, a “minimum” contribution. The language provided to the Legislature from the Joint Legislative Budget Committee is quite clear, and we see no need to seek a formal opinion from the Attorney General’s office. Recommendation V: The Department should incorporate criteria into its grant application system that emphasize the selection of projects with larger industry contributions. Agency Response: The finding of the Auditor General is not agreed and the audit recommendation will not be implemented. Agency Explanation: Unless the language in specifying the matching funds for the Arizona Grown fund is changed to reflect that a 2-to-1 ration need not be maintained, the Department of Agriculture cannot incorporate criteria into its grant application system that emphasizes the selection of projects with larger industry contributions. Should the Legislature revise the statute governing the Arizona Grown fund to reflect the Auditor General’s opinion, the Department will develop criteria that is consistent with the new mandate. Other Performance Audit Reports Issued Within the Last 12 Months 99-16 Department of Building and Fire Safety 99-17 Department of Health Services’ Tobacco Education and Prevention Program 99-18 Department of Health Services— Bureau of Epidemiology and Disease Control Services 99-19 Department of Health Services— Sunset Factors 99-20 Arizona State Board of Accountancy 99-21 Department of Environmental Quality—Aquifer Protection Permit Program, Water Quality Assurance Revolving Fund Program, and Underground Storage Tank Program 99-22 Arizona Department of Transportation A+B Bidding 00-1 Healthy Families Program 00-2 Behavioral Health Services— Interagency Coordination of Services 00-3 Arizona’s Family Literacy Program 00-4 Family Builders Pilot Program 00-5 Department of Agriculture— Licensing Functions 00-6 Board of Medical Student Loans 00-7 Department of Public Safety— Aviation Section 00-8 Department of Agriculture— Animal Disease, Ownership and Welfare Protection Program 00-9 Arizona Naturopathic Physicians Board of Medical Examiners 00-10 Department of Agriculture— Food Safety and Quality Assurance Program and Non-Food Product Quality Assurance Program 00-11 Arizona Office of Tourism 00-12 Department of Public Safety— Scientific Analysis Bureau 00-13 Arizona Department of Agriculture Pest Exclusion and Management Program 00-14 Arizona Department of Agriculture State Agricultural Laboratory Future Performance Audit Reports Arizona Department of Agriculture—Sunset Factors Arizona Department of Agriculture—Pesticide Compliance and Worker Safety Program Arizona State Boxing Commission
Object Description
TITLE | Performance audit, Arizona Department of Agriculture state agricultural laboratory, report to the Arizona Legislature |
CREATOR | Office of the Auditor General |
SUBJECT | Agricultural laboratories--Arizona; Brucellosis in cattle--Arizona; Pesticides--Arizona; |
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Publisher | Office of the Auditor General |
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TITLE | Performance audit, Arizona Department of Agriculture state agricultural laboratory, report to the Arizona Legislature |
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DATE ORIGINAL | 2000-09 |
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Full Text | State of Arizona Office of the Auditor General PERFORMANCE AUDIT Report to the Arizona Legislature By Debra K. Davenport Auditor General September 2000 Report No. 00-15 ARIZONA DEPARTMENT OF AGRICULTURE COMMODITY DEVELOPMENT AND PROMOTION PROGRAM The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators and five representatives. Her mission is to provide independent and impar-tial information and specific recommendations to improve the operations of state and local government entities. To this end, she provides financial audits and accounting services to the state and political subdivisions and performance audits of state agencies and the programs they administer. The Joint Legislative Audit Committee Representative Roberta L. Voss, Chairman Senator Tom Smith, Vice-Chairman Representative Robert Burns Senator Keith Bee Representative Ken Cheuvront Senator Herb Guenther Representative Andy Nichols Senator Darden Hamilton Representative Barry Wong Senator Pete Rios Representative Jeff Groscost Senator Brenda Burns (ex-officio) (ex-officio) Audit Staff Dale Chapman—Manager and Contact Person (602) 553-0333 Jay Dunkleberger—Team Leader Julie Maurer—Team Member Copies of the Auditor General’s reports are free. You may request them by contacting us at: Office of the Auditor General 2910 N. 44th Street, Suite 410 Phoenix, AZ 85018 (602) 553-0333 Additionally, many of our reports can be found in electronic format at: www.auditorgen.state.az.us 2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553 -0333 • FAX (602) 553-0051 DEBRA K. DAVENPORT, CPA AUDITOR GENERAL STATE OF ARIZONA OFFICE OF THE AUDITOR GENERAL September 21, 2000 Members of the Legislature The Honorable Jane Dee Hull, Governor Mr. Sheldon Jones, Director Arizona Department of Agriculture Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program. This report is in response to a June 16, 1999, resolution of the Joint Legislative Audit Committee. The performance audit was conducted as part of the Sunset review set forth in A.R.S. §41-2951 et seq. I am also transmitting with this report a copy of the Report Highlights for this audit to provide a quick summary for your convenience. This is the sixth in a series of reports to be issued on the Arizona Department of Agriculture. Recent studies, including one specifically of this Program, show promotion efforts often have little or no effect on fresh produce sales. While we found refocusing the Program’s efforts on specialty crops and processed goods would provide the greatest likelihood for success, as outlined in its response, the Department does not agree with this finding. My staff and I will be pleased to discuss or clarify items in the report. This report will be released to the public on September 22, 2000. Sincerely, Debbie Davenport Auditor General Enclosure OFFICE OF THE AUDITOR GENERAL Program Fact Sheet Department of Agriculture Commodity Development and Promotion Program Services: The Commodity Development and Promotion Program performs the following services: 1) Domestic Promotion—Through Arizona Grown and other activities, familiar-izes and educates retailers and consumers about Arizona agricultural products, works to increase the consumption of those products, and performs these same activities for Pride of Arizona, which specifically focuses on Arizona processed goods, such as salsa and wine; 2) International export promotion—Educates international importers, wholesalers, retailers, and consumers about the advantages of choosing Arizona products; 3) Council administra-tion— Provides accounting, budgeting, and other administrative services to five agriculture councils and one board; and 4) Certificate of Free Sale collection—Collects fees for certifi-cates that ensure commodities can be bought and sold freely domestically and abroad. Program Revenue: $406,443 (fiscal year 2000) $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 1998 1999 2000 General Fund Miscellaneous Revenue Industry Contributions $308,905 $361,724 $406,443 Personnel: 5 FTEs as of July 2000 Assistant Director Domestic Program Manager Export Program Manager Marketing Assistant/ Retail Liaison Marketing Assistant/ Council Administrator Facilities: The Program operates no facilities outside of the Department’s offices at the Capi-tol complex in Phoenix. The Program’s export manager generally operates from her home in southern Arizona. Equipment: The Program owns only standard office equipment. Program Goals (Fiscal years 2000-2002) 1. To stimulate the international sales of Arizona agricultural commodities and value-added products abroad. 2. To increase awareness of Arizona agricul-tural products through the Arizona Grown program. 3. To provide administrative support to Commodity Councils and the Agriculture Employment Relations Board (AERB). OFFICE OF THE AUDITOR GENERAL Adequacy of Goals and Performance Measures: Several improvements could be made to the Department’s 3 goals and 43 performance measures for its Commodity Development and Promotion Program. n The Program’s goals incorporate too many performance measures to effectively track performance. For example, the Depart-ment’s goals for Arizona Grown include 24 measures, including a measure for the number of customers familiar with the Ari-zona Grown logo. This information is not collected by the Department on a regular basis. As a result, the Department may want to consider revising and condensing its goals and measures. Adequacy of Goals and Performance Measures: (Concl’d) Further, some of the Department’s measure-ments need to be clarified. For example, one of the Department’s efficiency measures records the number of “solid” trade inquiries, yet it does not define “solid.” Finally, the Department should develop goals and measurements specifically for its Pride of Arizona promotion activities. Since the Depart-ment recently initiated these activities, it has not had an opportunity to develop goals and meas-urements, but should consider developing a goal, and input, output, outcome, efficiency, and quality measures for these activities. Arizona Grown Logo n While the Department generally employs outcome, output, input, and quality meas-ures, it employs only two measures track-ing program efficiencies. As a result, the Department could adopt efficiency meas-ures, such as comparing promotion expenditures to promotion benefits. i OFFICE OF THE AUDITOR GENERAL SUMMARY The Office of the Auditor General has conducted a performance audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program pursuant to a June 16, 1999, resolution of the Joint Legislative Audit Committee. This audit was conducted as part of the Sunset review set forth in A.R.S. §§41-2961 et seq, and is the sixth in a series of audits to be conducted on programs within the Arizona Department of Agriculture (Department). The Commodity Development and Promotion Program pro-motes Arizona’s agricultural products domestically and abroad. Arizona Grown, a key component of its domestic promotion efforts, seeks to familiarize and educate retailers and consumers about the quality and diversity of Arizona’s agricultural prod-ucts and to increase the consumption of these products. While Arizona Grown activities typically focus on promoting unproc-essed agricultural goods, the Department recently created Pride of Arizona, which uses a portion of Arizona Grown funding to promote Arizona processed goods, such as salsa and wine. As part of the Arizona Grown efforts the Legislature appropriates $50,000 annually to specifically fund joint agricultural indus-try/ Department promotion projects. However, the Department cannot spend this money without receiving required matching dollars from the agricultural industry. The Department also dedicates approximately one of the Program’s FTEs to support international promotion efforts by working with the Arizona agricultural industry to stimulate the export of Arizona farm and food products. Refocusing Arizona Grown Activities Would Help Make It More Effective (See pages 7 through 15) As currently operated, Arizona Grown has limited impact. Studies of Arizona Grown and similar efforts in other states Summary ii OFFICE OF THE AUDITOR GENERAL indicate that they have little effectiveness unless they are focused in certain key ways. The key components for success include targeting Arizona specialty and processed products and pur-chasers who are likely to be most affected by the promotional efforts. However, Arizona Grown’s efforts have been focused on fresh food commodities, such as lettuce and broccoli. Because the market for such commodities is primarily price competitive, promotions such as those sponsored under Arizona Grown tend to have little effect on consumer behavior. In addition, the Ari-zona Grown promotional efforts are not clearly focused. Instead, they are spread across many goals and purposes. The Department should take several steps to increase the effec-tiveness of Arizona Grown efforts. n First, the Department should develop a strategy for Arizona Grown’s promotions that includes a focus on specialty and processed goods; and identifies and targets consumers who are more likely to purchase local products. Additionally, the Department should seek to support projects that are in line with this strategy. n Second, the Department should measure the effectiveness of promotional activities to ensure they have a demonstrable impact. The Department can achieve this by incorporating an evaluation component into promotional projects. n Finally, the Department should take steps to increase the available monies for Arizona Grown promotional projects by taking advantage of additional industry funding. The De-partment’s General Fund appropriation requires that every dollar the Department spends on joint agricultural indus-try/ Department promotional projects be matched by $.50 from the industry. Based on the advice of its Attorney Gen-eral representative, the Department believes this requires the State to pay one dollar for every $.50 contributed by the in-dustry for these projects. However, Auditor General legal counsel, Joint Legislative Budget Committee staff, and Legis-lative Council staff review of this requirement suggests it out-lines a minimum industry contribution for Arizona Grown projects and does not prevent the industry from contributing Summary iii OFFICE OF THE AUDITOR GENERAL additional monies. Nonetheless, the Department has turned down additional funds offered by industry because it did not have enough money to match them on a 2-to-1 basis. iv OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) v OFFICE OF THE AUDITOR GENERAL TABLE OF CONTENTS Page Introduction and Background....................... 1 Finding I: Refocusing Arizona Grown Activities Would Help Make It More Effective......................................... 7 Current Promotional Efforts Lack Key Components...................................... 7 The Department Should Improve Arizona Grown’s Project Management...................... 10 Recommendations........................................................... 15 Agency Response Table Table 1 Arizona Department of Agriculture Commodity Development and Promotion Program Statement of Revenues and Expenditures Years Ended June 30, 1999 and 2000 .......... 4 Figures Figure 1 Arizona Grown Logo..................................... 2 Figure 2 Pride of Arizona Logo.................................... 2 vi OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) 1 OFFICE OF THE AUDITOR GENERAL INTRODUCTION AND BACKGROUND The Office of the Auditor General has conducted a performance audit of the Arizona Department of Agriculture’s Commodity Development and Promotion Program (Program) pursuant to a June 16, 1999, resolution of the Joint Legislative Audit Commit-tee. This audit was conducted as part of the Sunset review set forth in A.R.S. §§41-2951 et seq and is the sixth in a series of audits to be conducted on programs within the Arizona De-partment of Agriculture (Department). Commodity Development and Promotion Program The Department’s Commodity Development and Promotion Program operates under the following statutory mandate: “The office of commodity development and promotion shall provide for programs to stimulate, educate, encour-age, and foster the production and consumption of Ari-zona agricultural products domestically and abroad.” To carry out this mandate, the Program employs a total of 5 FTEs to promote Arizona’s agricultural products through a combina-tion of statewide and international efforts that include two main activities: n Domestic promotion: Through domestic promotions, the Program seeks to familiarize and educate retailers and con-sumers about the quality and diversity of Arizona’s agricul-tural products and to increase the consumption of these products. A key component of its domestic promotion efforts is Arizona Grown. As part of Arizona Grown, the Program performs a variety of activities, such as encouraging the Ari-zona agricultural industry to use the Arizona Grown logo to help identify Arizona products, creating informational mate-rial, and jointly funding agricultural product promotions Department supports state-wide and international agricultural promotions. Introduction and Background 2 OFFICE OF THE AUDITOR GENERAL Figure 1: Arizona Grown Logo Figure 2: Pride of Arizona Logo with the agricultural industry. For example, during fiscal year 2000, the Program helped promote the Arizona agricultural industry and activities at two trade shows and one national conference, completed three promotional projects in cooperation with industry, helped organize a “January Winter Vegetable Promotion” and the “Yuma Lettuce Days,” and jointly funded an Arizona Grown spokesperson with the agricultural industry to promote Arizona agricultural goods. Additionally, the Program has recently developed a “Pride of Arizona” logo to distinguish the promotion of processed goods. Pride of Arizona, a component of Arizona Grown, seeks to increase the consumption and use of agricultural products, such as salsa and wine, that are made and/or proc-essed in Arizona. n International Export Promotion: Through international export promotions, the Program seeks to increase international trade of Arizona products and to educate international im-porters, wholesalers, retailers, and consumers about the ad-vantages of choosing Arizona foods. During fiscal year 2000, the Program participated in trade shows, trade missions, and field tours, coordinated export missions, and produced bilin-gual educational materials to promote melons to Canada, live-stock to Mexico, and fruits and vegetables to Japan, Hong Kong, Korea, and Mexico. Likewise, the Program offers assis-tance to Arizona exporters through coordinating international activities, assisting Arizona exporters with USDA require-ments, linking foreign buyers with domestic sellers, and assist-ing the Arizona agriculture industry to pursue federal grants. Introduction and Background 3 OFFICE OF THE AUDITOR GENERAL In addition to its two main promotional activities, the Program provides services to five agricultural entities. These entities collec-tively pay for one FTE who provides general support for the Program, but also spends approximately three-quarters of his time providing accounting and budgeting services to the Arizona Wine Commission, Arizona Grain Research and Promotion Council, Arizona Iceberg Lettuce Research Council, Arizona Citrus Re-search Council, and the Agricultural Employment Relations Board. As illustrated in Table 1 (see page 4), the Department receives over $1.6 million annually on behalf of these commis-sions/ councils and the Arizona Cotton Research and Protection Council. Each commission/council reimburses the General Fund for the Program’s services based on agreements renegotiated annually. Finally, the Program issues and collects fees for Arizona’s Certifi-cates of Free Sale. Some countries require these certificates before Arizona producers of processed foods, beverages, and animal feeds can sell their products abroad. By law, the fees that the Program charges cannot exceed the actual cost to prepare the Certificate of Free Sale. Budget During fiscal year 2000 and as seen in Table 1 (see page 4), the Program received over $301,000 from the General Fund, primarily for salaries and other operating and equipment expenditures. Of the $301,000 appropriated to the Program, $50,000 is earmarked for Arizona Grown promotions, approximately 20 percent of which also funds Pride of Arizona promotions. To ensure indus-try contributes to these promotions, businesses are required to contribute $.50 for every $1 in General Fund monies the Program spends. Any unmatched monies revert to the State General Fund. While in the past some unused monies were remitted back to the General Fund, in fiscal year 2000 all Arizona Grown appropria-tions were expended. Furthermore, the Program collected addi-tional revenue from the commissions/councils to provide for Table 1 Arizona Department of Agriculture Commodity Development and Promotion Program Statement of Revenues and Expenditures Years Ended June 30, 1999 and 2000 (Unaudited) Program Operations Commissions and Councils 1 Program Total 1999 2000 1999 2000 1999 2000 Revenues: State General Fund appropriations $270,200 $301,800 $ 270,200 $ 301,800 Charges for services: Cotton assessments $ 888,301 $1,125,963 888,301 1,125,963 Grain assessments 209,500 139,490 209,500 139,490 Citrus assessments 153,921 91,806 153,921 91,806 Iceberg lettuce assessments 97,814 104,377 97,814 104,377 Other charges for services 43,884 42,380 43,884 42,380 Intergovernmental 5,000 5,000 133,648 165,186 138,648 170,186 Industry contributions 24,280 45,573 24,280 45,573 Fines and forfeits 25,134 14,871 25,134 14,871 Interest on investments 113,629 21,442 113,629 21,442 Other 18,360 11,690 7,945 18,538 26,305 30,228 Total revenues 361,724 406,443 1,629,892 1,681,673 1,991,616 2,088,116 Expenditures: Personal services and employee related 217,524 225,813 789,091 814,156 1,006,615 1,039,969 Professional and outside services 14,487 25,185 529,574 358,925 544,061 384,110 Travel 21,092 23,174 20,793 17,380 41,885 40,554 Other operating and equipment 105,292 102,982 1,001,599 2 634,699 1,106,891 737,681 Total expenditures 358,395 377,154 2,341,057 1,825,160 2,699,452 2,202,314 Excess of revenues over expenditures 3,329 29,289 (711,165) (143,487) (707,836) (114,198) Operating transfer in 7,000 7,273 7,273 7,000 Excess of revenues and operating transfers in over (under) ex-penditures $ 3,329 $ 36,289 $ (703,892)3 $ (143,487)3 $ (700,563) $ (107,198) 1 Includes the Arizona Grain Council, Arizona Wine Commission, Arizona Iceberg Lettuce Research Council, Arizona Citrus Research Council, and Arizona Cotton Research and Protection Council. These entities were not within the scope of our audit. 2 In 1999, changes to the facilities and equipment that the Arizona Cotton Research and Protection Council used for the aflatoxin production process caused additional equipment purchases as well as significant repair and replacement expenditures. 3 Deficit amounts are primarily due to the Cotton Council using their available fund balance to pay expenditures. Source: The Arizona Financial Information System Accounting Event Extract File and Status of Appropriations and Expenditures reports for the years ended June 30, 1999 and 2000. 4 Introduction and Background 5 OFFICE OF THE AUDITOR GENERAL administrative services and Certificate of Free Sale fees, which totaled approximately $50,000 during fiscal year 2000. Scope and Methodology This audit focuses on the Department’s efforts to promote and develop opportunities for Arizona’s agricultural products through Arizona Grown promotions. To determine the extent to which the Department fulfills these requirements, several meth-ods were used, including: n Examining several academic studies of commodity pro-grams, literature regarding agriculture promotion programs, and material from national agriculture organizations to ob-tain information on the economic, social, and political bene-fits and drawbacks of commodity programs, as well as to gain information on components of effective promotional programs; n Reviewing the federal grant requirements of state agriculture promotional activities and the federal mandates for “check-off” commodity programs to obtain information on federal requirements that aid in ensuring the most effective use of promotional programs’ monies and activities; n Obtaining information from 18 other states that employ agriculture development and promotion programs in order to compare them with Arizona’s funding and activities;1 n Evaluating program budget and expenditure documentation, agreements with commodity councils, and joint ventures with industry, as well as planning documents such as strate-gic and marketing plans to obtain comprehensive informa-tion on the Department’s monies, services, activities, and fu-ture plans; 1 The 18 states were California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New Mexico, North Carolina, Rhode Island, South Carolina, Tennessee, and Virginia. Introduction and Background 6 OFFICE OF THE AUDITOR GENERAL n Interviewing experts and others involved in the agriculture industry and its promotion to obtain their perspective on the benefits and drawbacks of the Department’s program. Inter-viewees included agriculture promotion evaluators; Arizona Department of Agriculture staff; Arizona agriculture indus-try and retail representatives; and national agriculture coun-cil representatives. This report presents a finding and recommendations concerning the need for the Department to increase Arizona Grown’s effec-tiveness by developing a strategy for Arizona Grown promo-tions that focuses on specialty products or processed goods, and consumers most likely to purchase local products, supporting those promotional projects that are in line with this strategy, and taking greater advantage of industry funding. This audit was conducted in accordance with government audit-ing standards. The Auditor General and staff express appreciation to the Direc-tor and staff of the Department of Agriculture for their coopera-tion and assistance throughout the audit. 7 OFFICE OF THE AUDITOR GENERAL FINDING I REFOCUSING ARIZONA GROWN ACTIVITIES WOULD HELP MAKE IT MORE EFFECTIVE As currently operated, Arizona Grown has little effect on con-sumers’ awareness of Arizona products or on their buying preferences. Studies have found that promotional efforts like Arizona Grown have the greatest impact when focused on promoting specialty and processed agricultural products or when targeted to consumers who are more likely to purchase local products. However, Arizona Grown focuses most efforts on products that are not unique to Arizona. The Department should take steps to more effectively focus Arizona Grown activities, evaluate the impact of these activities, and increase industry contributions for these activities. Current Promotional Efforts Lack Key Components Past studies of Arizona Grown and similar efforts in other states indicate that these efforts have little effectiveness unless they are focused in certain key ways. The key components for success include being able to target: n Specialty and processed products produced in the state; and n Purchasers who are likely to be most affected by the promo-tional efforts. Arizona Grown does not meet these criteria. For the most part, it promotes fresh food commodities that are produced in many states or targets its promotional efforts to a variety of audiences. Studies identify approaches that fail and strategies that suc-ceed— Studies indicate that efforts such as Arizona Grown do not automatically produce marketing successes. These studies in-clude one that focused specifically on Arizona Grown, and concluded that it had relatively little impact. Overcoming these Finding I 8 OFFICE OF THE AUDITOR GENERAL limitations, the studies found, meant focusing promotional activities in certain ways. n Arizona Grown study—A 1998 study found that Arizona Grown promotions have little to no effect on product sales and only a modest effect on consumer preferences.1 Specifi-cally, the study found that consumers were largely unaware of Arizona Grown, that in-store promotions conducted with state and industry monies had little to no effect on product sales, and that these promotions had only a modest effect on consumer preferences. One of the reasons was that the pro-motions focused on fresh food commodities, such as lettuce, oranges, and broccoli, that are grown in other states and coun-tries and difficult to differentiate based on price and product characteristics. Follow-up discussion with one of the study’s authors indi-cated that promotional efforts were likely to be more success-ful if they focused on specialty and processed Arizona prod-ucts, such as Arizona-produced salsas and wines, as well as specific food service providers, such as “Arizona marketed” restaurants. n Indiana consumer analysis—A study published in April 2000 that focused on a consumer survey in Indiana reported, “Building a brand image which effectively differenti-ates food products by their place of origin can be a daunting task, since the market for fresh food com-modities (especially fruits and vegetables) is over-whelmingly price competitive. While some producer groups have successfully differentiated particular commodities by their place of production (e.g., Florida 1 Olofsson, Hans, Paul M. Patterson, Timothy J. Richards, and Sharon Sass. An Empirical Analysis of State Agricultural Product Promotions: A Case Study of Arizona Grown. Agribusiness, 1999. 179-196. Promotions should stress specialty and processed, state-specific products. Finding I 9 OFFICE OF THE AUDITOR GENERAL Orange Juice, California Raisins, Washington Apples), most fresh produce commodities are homogeneous and compete primarily on price and easily perceptible quality differences.” 1 This study noted the importance of targeting promotional ef-forts based on consumer and product factors. It emphasized the need for state programs to identify and target those consumers with the highest likelihood of purchasing local products and to promote those commodities that ensure the largest possible return from promotional budgets. It cited the example of New Jersey tomatoes—a commodity examined in a different study.2 This other study found there were few substitutes for these tomatoes and that consumer demand for the “Jersey Fresh” tomato does not change according to price. Identifying these types of factors contributed to New Jersey’s successful promotion program. n Agribusiness analysis—A 1989 analysis of state agriculture promotional programs concluded that state commodity pro-grams do not show clear economic impacts.3 Like the two studies already cited, this study suggested that state-supported market promotion programs cannot succeed when they go against basic tenets of economic theory. It also concluded that the most successful agriculture promotion programs occur in states that produce specialty crops, as well as those that promote processed products. Consequently, commodity promotions with the most likelihood for success are those with products that are easily distinguishable. 1 Jekanowski, Mark D., William A. Schiek, and Daniel R. Williams II. Consumers’ Willingness to Purchase Locally Produced Agricultural Products: An Analysis of an Indiana Survey. Agricultural and Resource Economics Review, April 2000. 43-53. 2 A.O. Adelajo, Bromfield, R.G. and Lininger, K. Product Differentiation and State Promotion of Farm Product. An Analysis of the Jersey Fresh Tomato. Journal of Food Distribution Research 21(3) 73-85. 3 Halloran, John and Michael V. Martin. Should States be in the Agricul-tural Promotion Business? Agribusiness, 1989. 65-75. Promotions should also target consumers who are more likely to purchase local products. Finding I 10 OFFICE OF THE AUDITOR GENERAL Arizona Grown approach does not center on successful strate-gies— In contrast to the conclusions of these studies, the Depart-ment continues to focus most of Arizona Grown’s efforts on fresh food commodities rather than specialized Arizona prod-ucts. Department officials estimate that during fiscal year 2000, over 80 percent of Arizona Grown’s monies were spent on promotional activities for fresh food commodities, such as lettuce and broccoli. For instance, during fiscal year 2000, Arizona Grown supported a winter vegetable promotion, a watermelon promotion, and the “Yuma Lettuce Days.” Because such efforts are directed at products that come from many sources and are not unique to Arizona, they are of limited usefulness in building consumer loyalty and increased sales. Also in contrast to the study conclusions, the Department’s efforts encompass a wide variety of projects with diverse goals and purposes. For example, during fiscal year 2000, Arizona Grown’s limited resources supported trade show promotions ranging from an event aimed to develop economic opportunities with Dutch greenhouse companies, to a conference for farmers who directly market their products. Likewise, the Department’s commodity-based promotions varied from distributing 300 free watermelons and related informational materials, to a newslet-ter publication that supplied information about harvested dates to more than 500 consumers. In all, the efforts were spread across trade shows, media exposure, conferences, agriculture informa-tional materials, retail product promotions, and agriculture festivals. The Department Should Improve Arizona Grown’s Project Management The Department should take several steps to increase the effec-tiveness of Arizona Grown efforts. n First, the Department should develop a strategy for Arizona Grown promotions that includes a focus on specialty or processed goods and identifies and targets consumers most likely to purchase local products. Furthermore, the Depart-ment should seek to support projects that are in line with this strategy. Finding I 11 OFFICE OF THE AUDITOR GENERAL n Second, the Department should assess the impact of these projects by developing processes to measure individual pro-ject effectiveness. n Finally, the Department should take steps to increase the available monies for promotional activities by taking advan-tage of additional industry-provided funding. The Department should reevaluate Arizona Grown’s focus—The Department can improve the management of Arizona Grown’s promotional activities by continuing to develop specific areas of focus for these activities. While Department officials indicate that they have developed strategies for focusing Arizona Grown activities on retail and media-related efforts, these strategies do not include an emphasis on targeting specialty and processed products, or focusing on consumers likely to be affected by promotional efforts. Although the Department has taken initial steps in developing a “Pride of Arizona” logo to distinguish the promotion of processed products, few promotional activities focus on processed products. The Department should then add guidelines to its joint venture application system that reflect these strategies. The Department recently developed and implemented a joint venture application process that includes guidelines for the selection of promotional projects. While these guidelines require industry groups to submit applications that describe the objectives of the proposed activity, the economic development potential of the activity, and the desired target market, these guidelines do not include an emphasis on strategies targeting specialty products or customers more likely to purchase local products. Expanding the guidelines within the application process to include project selection criteria will help ensure that proposed projects are aligned with these strategies developed for Arizona Grown. Also, by adopting these additional project selection criteria, the Department would have a way to decide which project applications represent the best use of the State’s money. The Department should measure Arizona Grown’s effective-ness— To ensure projects selected for funding have a demonstra-ble impact, the Department should measure the effectiveness of its promotional activities. Experts note that examining pre- and post-sales figures from retail promotions is an effective way to Department should focus activities on specialty Ari-zona products and processed foods. Finding I 12 OFFICE OF THE AUDITOR GENERAL measure the rate of return on the State’s investments. Addition-ally, providing feedback on promotional projects not only meas-ures the impact of these projects, but suggests which activities might be beneficial in the future. Currently, however, the De-partment does not require that its promotional activities include provisions for measuring outcomes. As a result, the Department participates in projects with only a limited understanding of how effective they are. During fiscal year 2000, only one Arizona Grown project in-cluded provisions for measuring its effect on sales. In this case, the industry contributor, the National Pork Producers’ Council, requires any project it funds to have an evaluation component. The $12,000 project included $9,000 for a media campaign and increased retail sales of Arizona pork in participating stores by approximately 43 percent during the promotion. The Department should require grant recipients to evaluate the impact of their promotional efforts. Specifically, each grant proposal should include a requirement for the industry partici-pant to measure the project’s effectiveness. These evaluations could assess product sales before, during, and after a promotion or measure a promotion’s impact upon consumer awareness. However, the Department should place the evaluation compo-nent of each grant in the context of the proposal’s size. Complex evaluation requirements should not be required for promotional projects with minimal funding. Other states look for the presence of an industry evaluation when they decide which projects to fund. The manager of the “Minnesota Grown” program considers the presence of an evaluation component a major factor in deciding whether to dedicate state funds to a project. Likewise, North Carolina re-quests that project participants report percentage growths for promotions and considers the evaluation of its activities a key program component. The Department should effectively use industry funds—Finally, the Department should also increase available funding for Ari-zona Grown projects by taking advantage of additional funding that industry could contribute. Currently, the Department matches every $0.50 contribution from industry with one dollar from its Arizona Grown fund. The Legislature appropriates Department should require evaluations for projects using large amounts of state monies. Department should take steps to increase industry contribu-tions. Finding I 13 OFFICE OF THE AUDITOR GENERAL monies for Arizona Grown to support joint ventures with the private sector and requires that each dollar expended by the Department be matched by at least $0.50 from industry.1 Our legal counsel, Joint Legislative Budget Committee (JLBC) staff, and Legislative Council staff interpret this requirement to outline a minimum industry contribution for Arizona Grown projects, a requirement that does not preclude industry from contributing additional monies. However, based on its Attorney General representative’s advice, the Department has concluded that this provision means that it must pay two-thirds of every project. As a result, the Department has declined significant industry contri-butions. For example, during fiscal year 2000, an industry repre-sentative proposed contributing $3,000 toward a project to promote a quality assurance program for Arizona beef. How-ever, the Department limited industry’s contribution to $2,000 because it had only $4,000 available. Therefore, to increase funding for Arizona Grown activities, the Department should use its Arizona Grown matching funds in a manner that does not restrict industry contributions. Addition-ally, the Department should more efficiently leverage state monies through its joint venture application system by possibly requiring a higher minimum level of industry contributions and favoring those proposals that contain more significant industry participation. Specifically, other states set higher minimum matching amounts for industry contributions in order to more effectively use state monies. For example, both Massachusetts and New Jersey require participants to match or exceed the amount of the grant being requested. Additionally, Montana requires a minimum 1:1 applicant funding match for all projects, while proposed projects with contributions exceeding the 1:1 level may have an advantage in being selected. To facilitate compliance with the original intent of the Arizona Grown matching funds and begin seeking additional industry contributions for this current fiscal year, the Department might 1 General Appropriations Act footnote. “Of the Operating Lump Sum appropriation in FY 2000 and FY 2001, the sum of $50,000 is appropriated in both fiscal years for the Arizona Grown Promotion Program. Every dollar ex-pended by the Department of Agriculture for the Arizona Grown Program shall be matched by $0.50 in contributions from the private sector. Any unmatched monies revert to the state General Fund.” Finding I 14 OFFICE OF THE AUDITOR GENERAL consider soliciting a formal opinion on the General Appropria-tions Act footnote from the Attorney General’s Office. Addition-ally, the JLBC should consider further clarifying the footnote in the next appropriations bill by specifying that the private sector should contribute a minimum of $0.50 for every dollar expended by the Department. Finding I 15 OFFICE OF THE AUDITOR GENERAL Recommendations 1. The Department should develop strategies for its agricultural promotional and/or developmental activities that include a focus on specialty Arizona products and processed foods; and targets consumers most likely to purchase local prod-ucts. 2. Within its joint venture application system, the Department should establish additional criteria for project consideration that reflect the strategies developed for Arizona Grown pro-motional activities and seek to support projects that meet this criteria. 3. The Department should require that promotional projects include provisions for assessing and measuring the project’s results. 4. The Department should increase industry contributions to Arizona Grown by correctly matching and leveraging ap-propriated Arizona Grown monies. The Department should change its practice for matching industry contributions so that the industry contribution of $.50 for every $1 from the Arizona Grown fund is considered as a minimum contribu-tion rather than a fixed amount. a. To facilitate implementation of this recommendation, the Department should consider soliciting a formal opinion on the General Appropriations Act footnote governing the expenditure of state monies for Arizona Grown pro-motional activities from the Attorney General’s Office. b. The Joint Legislative Budget Committee staff should con-sider revising the footnote to future appropriations bills to specify that the private sector contribute a minimum of $0.50 for every dollar expended by the Department. 5. The Department should incorporate criteria into its joint venture application system that emphasize the selection of projects with larger industry contributions. 16 OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) OFFICE OF THE AUDITOR GENERAL Agency Response OFFICE OF THE AUDITOR GENERAL (This Page Intentionally Left Blank) September 12, 2000 The Honorable Debra K. Davenport Auditor General Office of the Auditor General 2910 North 44th Street, Suite 410 Phoenix, Arizona 85018 Dear Ms. Davenport: Enclosed is the Arizona Department of Agriculture’s response to the Office of Commodity Development and Promotion audit. We extend our appreciation to the audit team for their professionalism and attention to detail. I certainly appreciate their willingness to seek out the Department’s input and clarification of some of the issues identified in this report. Sincerely, Sheldon R. Jones Director AUDITOR GENERAL’S RECOMMENDATIONS AGENCY RESPONSE Overview: The Arizona Department of Agriculture would like to thank the Auditor General’s staff for the professional manner in which the audit was performed. We believe the Department, while it continues to identify methods of improving its delivery of service to Arizona’s growing agricultural industry and the public as a whole, is a good example of how government should strive to work. We take very seriously our mission and our charge to regulate and support Arizona agriculture in manner that promotes farming, ranching and agribusiness while protecting consumers and natural resources. While this cabinet level agency was created only ten years ago, to serve and regulate Arizona’s agriculture industry, a number of things have and continue to change about the industry we serve. Foremost is the changing face of our customers, which reflects the industry as a whole. Arizona is internationally renowned for its diverse agricultural production. From artichokes to cattle, cotton and citrus to shrimp and watermelons, Arizona is continuously increasing its agricultural diversity. It is entirely fascinating to observe the customers that call on us every day. The Department is constantly asked to service more than the program crops of wheat, cattle, cotton and dairy. Ten years ago, the aquaculture, ratite, custom slaughter, wine and massive nursery industry did not exist as they do today. Because of the changing face of our customers and the public’s demands for faster, more efficient service, the Department recognizes more must be done to meet the challenges we face today and those we will face in the future. The Department appreciates the attention the Auditor General’s staff has paid to the unique responsibilities and critical functions of the Office of Commodity Development and Promotion. As the report only highlights, the program maintains an award-winning international trade export unit in addition to the domestic marketing efforts of the highly documented Arizona Grown program. It is disappointing that this report finds that the Department’s promotion efforts are too focused on marketing fresh commodities. If the overwhelming amount of agricultural products produced in Arizona were not fresh commodities, which they are, then perhaps the Auditor General’s finding would have more practical merit. Unfortunately that is not the case and the Department is placed in a position where it cannot agree to provide priority marketing assistance to a few processed-good companies over the thousands of growers who secure Arizona’s place as a leading fresh commodity state. When the paradigm shifts, and Arizona begins producing more processed or value-added products than fresh, bulk commodities, the Department will see to it that Arizona Grown promotions reflect the shift proportionately and consistently. Finding: Refocusing Arizona Grown Activities Would Help Make It More Effective Recommendation I: The Department should develop strategies for its agricultural promotional and/or developmental activities that include a focus on specialty Arizona products and processed foods; and targets consumers most likely to purchase local food products. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will not be implemented. Agency Explanation: The Department agrees that its strategies to target consumers most likely to purchase local products warrant further improvements and will soon be amended to more adequately measure the performance of its promotions. It is important to note, however that the “Arizona Grown” study the audit team refers to throughout this report found that 76% of the consumers surveyed “indicated that they would prefer a product grown in Arizona, expressing the belief that these products would be fresher or of higher quality.” Further, the report finds that Arizonans living in metropolitan Phoenix are likely to purchase locally grown products. Based upon that empirical study, the Department believes its branded logo program is already targeted toward a “willing” market. The chore we face is increasing the public’s recognition of the Arizona Grown logo. Also, the Department thoroughly disagrees with the report’s suggestion to redirect Arizona Grown promotional activities to showcase Arizona products and processed foods that are “unique” to Arizona. Such a suggestion suggests that the entirety of Arizona’s $6.3 billion agriculture industry is not worth showcasing. Further, the report mistakenly asserts that products like wine and salsa are unique to Arizona when they are, in fact, not unique at all. The Department will not allow itself to be placed in a position to pick and choose generally which commodities or products warrant promotion. Such selectivity would appear random and discriminatory to the 2,000+ producers in this State. Recommendation II: Within its joint venture application system, the Department should establish additional criteria for project consideration that reflect the strategies developed for Arizona Grown promotional activities and seek to support projects that meet this criteria. Agency Response: The finding of the Auditor General is not agreed to but the audit recommendation will be implemented. Agency Explanation: Again, the Department disagrees to the finding. However, with respect to the recommendation, the Department has already proposed to the auditors its plans to implement the joint venture system as a competitive method to select Arizona Grown promotions. As this is the case, fixed criteria is being created pursuant to R3-6-202 and will reflect the goals and strategic direction of the Department’s marketing efforts. Recommendation III: The Department should require that promotional projects include provisions for assessing and measuring the results of the project. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will be implemented pursuant to the existing Administrative Rule. Agency Explanation: Again, the Department disagrees to the finding. However, with respect to the recommendation, the Department has already proposed to the auditors its plans to implement a grant application system. As this is the case, fixed criteria is being created pursuant to R3-6-202 and will, of course, require that promotional projects include sufficient performance measures. Recommendation IV: The Department should increase industry contributions by correctly matching and leveraging appropriated Arizona Grown monies. The Department should change its practice for matching industry contributions so that the industry contribution of $.50 for every $1 from the Arizona Grown fund is considered as a minimum contribution rather than a fixed amount. a. To facilitate implementation of this recommendation, the Department should consider soliciting a formal opinion on the General Appropriations Act footnote governing the expenditure of state monies for Arizona Grown promotional activities from the Attorney General’s Office. b. The Joint Legislative Budget Committee staff should consider revising the footnote to future appropriations bills to specify that the private sector contribute a minimum of $0.50 for every dollar expended by the Department. Agency Response: The finding of the Auditor General is not agreed to and the audit recommendation will not be implemented. Agency Explanation: Again, the Department disagrees to the finding and the recommendation because it inaccurately states the Department has discretion in the manner through which it appropriates Arizona Grown funds. While the Auditor General’s staff attorney opined that the Department’s allocation of Arizona Grown funds is subjective, the Department has been advised by its attorneys (two Assistant Attorney Generals) that the General Appropriations Act footnote mandates the Department to assign one dollar for every $0.50 contributed by the private sector. The Department agrees that the appropriation could be stretched further if a 2-to-1 ratio of matching funds was not required. The statute, in this case, however does not at all state, imply or infer that the $0.50 private sector contribution for every $1 from the Arizona Grown fund is, as the Auditor General believes, a “minimum” contribution. The language provided to the Legislature from the Joint Legislative Budget Committee is quite clear, and we see no need to seek a formal opinion from the Attorney General’s office. Recommendation V: The Department should incorporate criteria into its grant application system that emphasize the selection of projects with larger industry contributions. Agency Response: The finding of the Auditor General is not agreed and the audit recommendation will not be implemented. Agency Explanation: Unless the language in specifying the matching funds for the Arizona Grown fund is changed to reflect that a 2-to-1 ration need not be maintained, the Department of Agriculture cannot incorporate criteria into its grant application system that emphasizes the selection of projects with larger industry contributions. Should the Legislature revise the statute governing the Arizona Grown fund to reflect the Auditor General’s opinion, the Department will develop criteria that is consistent with the new mandate. 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