Performance audit, Arizona Office of Tourism

              State of Arizona
Office
of the
Auditor General
PERFORMANCE AUDIT
Report to the Arizona Legislature
By Debra K. Davenport
Auditor General
August 2000
Report No. 00-11
ARIZONA
OFFICE
OF
TOURISM
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
Melanie Chesney—Manager
and Contact Person (602) 553-0333
Suzanne Marette—Audit Senior
Ryan Curtis—Staff
Cathleen Akers—Staff
William Parker—Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
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Phoenix, AZ 85018
(602) 553-0333
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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
August 23, 2000
Members of the Legislature
The Honorable Jane Dee Hull, Governor
Mr. Mark McDermott, Director
Arizona Office of Tourism
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona
Office of Tourism. 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.
As outlined in the last page of its response, the agency states that it agrees with and will
implement 15 of the 16 report recommendations. However, given the positions
outlined in the body of the agency response, it is clear that the agency does not accept
this report’s findings, including those involving statutory violations. Further, the
agency response contains some statements that are inaccurate or misleading. To ensure
that our readers are fully informed of all the facts, we have included brief comments on
the agency response immediately preceding the response.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 24, 2000.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
OFFICE OF THE AUDITOR GENERAL
Program Fact Sheet
Arizona Office of Tourism
Services: This report addresses four closely related programs that in fiscal year 2000 be-came
subprograms of the Tourism Promotion program:
n Domestic Media Advertising, which creates and places advertisements in print and
broadcast media promoting Arizona;
n Travel Counseling and Direct Mail Marketing, which operates a contracted call center that
responds to requests for Arizona travel planning information;
n International and Domestic Trade Marketing, which promotes Arizona as a travel desti-nation
to tour operators and travel agents and assists them in creating pre-packaged tours;
and
n Media Promotion and Communications, which assists media contacts in developing arti-cles
and broadcasts about Arizona.
Facilities: All four programs occupy space
within the office suite leased by the Arizona
Office of Tourism at 2702 North Third Street
in Phoenix.
Equipment: All four programs own or lease
only typical office equipment.
Revenue: $8,849,300 (Fiscal Year 2000 est.)
Other Agency Programs
$2,617,400
Domestic
Media Advertising
$3,630,100
Travel
Counseling
$1,301,800
International
and Domestic
Trade
Marketing
$900,000
Media Promotion
$400,000
All agency funding is from the General Fund.
Programs— Mission and Goal:
Domestic Media Advertising:
Mission:
“To create awareness of Arizona as well as
stimulate interest and motivation levels of
travelers in key target markets, demographic
groups, geographic regions and interest cate-gories
regarding travel to and throughout
Arizona.”
Personnel: 22.5 full-time staff
(Fiscal Year 2000)
Other Agency
Travel Staff—12
Counseling—1
Media
Promotion—
3.5
International and
Domestic Trade
Marketing—4
Domestic Media
Advertising—2
OFFICE OF THE AUDITOR GENERAL
Programs—Mission and Goal (cont’d)
Domestic Media Advertising:
Goal:
“To shape a positive image of Arizona which
affirmatively motivates travelers to experi-ence
the diversity of the state.”
Travel Counseling and Direct Mail
Marketing:
Mission:
“To convert awareness generated by the
Domestic Media Advertising program into
interest and motivation to travel to Arizona.”
Goal:
“To efficiently and effectively assist travelers
in making plans to visit Arizona by provid-ing
compelling information to induce ex-tended
length of stay throughout the state.”
International and Domestic Trade
Marketing:
Mission:
“To direct and coordinate Arizona’s public
and private sector tourism entities in an effort
to inform and motivate travel agents, tour op-erators,
and air and ground transportation
companies regarding opportunities to create
and market individual and group tour pack-ages
for vacations throughout Arizona.”
Goal:
“To create a well-informed travel industry (i.e.
agents, operators, and wholesalers) that ac-tively
promotes Arizona to domestic and in-ternational
tourists and travelers.”
Programs—Mission and Goal (concl’d)
Media Promotion and Communications:
Mission:
“To generate positive media coverage of Ari-zona
(e.g. printed articles and broadcast fea-tures
on travel destinations and tourism attrac-tions)
in an effort to increase public interest in
the state and enhance Arizona’s overall image
as a premier tourist destination.”
Goal:
“To develop extensive media contacts and fos-ter
relationships between representatives of
print and broadcast media and Arizona tour-ism
partners to stimulate positive media cover-age
for Arizona destinations.”
Adequacy of Performance Measures:
The Domestic Media Advertising’s economic
impact measures are based upon inappropri-ate
methodology. Also, all of Advertising’s
performance measures are slightly overstated
due to mathematical errors in the calculations
used to arrive at the measures.
Domestic Media Advertising’s performance
measures neglect to:
Ü Address whether AOT’s advertising is suc-cessful
in directly motivating consumer travel
to the State, or
Ü If advertising is affecting key target markets.
Trade Marketing’s measures do not convey
the extent to which the travel industry ac-tively
promotes Arizona to its clients.
Although all program goals appear to be
aligned with the program missions, AOT has
not developed specific objectives for any of
the programs.
i
OFFICE OF THE AUDITOR GENERAL
SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Arizona Office of Tourism (AOT). This audit was
completed in response to a June 16, 1999, resolution of the Joint
Legislative Audit Committee, which required a review of four
programs within AOT: (1) Domestic Media Advertising, (2)
Travel Counseling and Direct Mail Marketing, (3) International
and Domestic Trade Marketing, and (4) Media Promotion and
Communications.1 The audit was conducted as part of the Sun-set
review set forth in A.R.S. §41-2951 et seq.
Created by the Legislature in 1978, AOT is charged with promot-ing
tourism and encouraging tourism development throughout
the State.
Many of AOT’s Contracting
Practices Violate State
Procurement Requirements
(See pages 9 through 18)
AOT’s contracting practices have violated state procurement
statutes and rules in several ways.
n Purchases not made through the State Procurement Of-fice
or bid competitively—Since fiscal year 1997, AOT has
made at least 16 purchases totaling approximately $1.2 mil-lion
that exceeded its purchasing authority. For example, in
1998, AOT paid more than $102,000 for marketing activities
in Canada without going through the State Procurement Of-fice.
Further, AOT did not competitively bid these services.
1 As of fiscal year 2000, the four program areas became subprograms
within the Tourism Promotion program of the Arizona Office of
Tourism.
Summary
ii
OFFICE OF THE AUDITOR GENERAL
n Services improperly obtained under joint ventures—
Although AOT has authority to enter into joint ventures
with private corporations for promotional activities, state
procurement requirements still apply. Since fiscal year 1997,
AOT paid more than $440,000 into joint ventures that did not
meet these requirements or AOT’s own rules.
n Use of advertising contract circumvents and violates
procurement requirements—AOT circumvented procure-ment
requirements and threatened the fairness of the bid
process by directing its advertising contractor to sign with
specific vendors. AOT also made significant modifications to
the contract without formally amending the contract and
without required authorization. Without formal contract
amendments, the State has no protection if the contractor de-cides
not to comply with those changes.
AOT used these practices for reasons such as greater flexibility
and limited staff time to handle contract administration. How-ever,
these practices threaten the fairness of the procurement
process and expose the agency and the State to risks. Complicat-ing
matters further, AOT’s contract records and procurement co-ordination
are inadequate.
AOT’s Membership in a Limited
Liability Company Violated
State Constitution and Statutes
(See pages 19 through 23)
AOT’s membership in a limited liability company violated the
state constitution and statutes. In 1997, AOT and three other Ari-zona
tourism promotion organizations formed the company to
purchase and share the Internet address for AOT’s travel infor-mation
Web site. The company spent approximately $34,000 for
the Internet address and over $13,000 in legal fees. When the
company dissolved in 1999, AOT assumed it was the owner of
the address. However, as of June 2000 the company was still the
registered owner of the address and AOT lacked an operating
contract with the current Web site service provider.
Summary
iii
OFFICE OF THE AUDITOR GENERAL
AOT’s membership in the company violated the state constitu-tion
and statutes in several ways.
n First, the Constitution forbids state agencies from being a
shareholder or joint owner of a company.
n Second, AOT received only approximately 50 percent of the
company’s financial assets when it dissolved, despite con-tributing
67 percent of the financial assets. This violated stat-utes
governing limited liability companies and was an un-constitutional
gift of public monies. 1
n Third, AOT received services from a private legal firm de-spite
the statutory requirement that state agencies use only
the Attorney General’s Office for such services.
n Fourth, in becoming a member of the company, AOT ex-ceeded
its statutory authority to participate in joint ventures.
n Finally, AOT exceeded its $10,000 expenditure authority
when it provided $60,000 to the company.
Additional Performance
Measures Needed to
Demonstrate Effectiveness
(See pages 25 through 32)
AOT needs to develop additional performance measures to cap-ture
the agency’s accomplishments. AOT currently attempts to
measure its performance in large part by estimating the impact
its tourism efforts are having on the State’s economy. However,
the methodology and assumptions used are seriously flawed
and overstate its economic impact. Improving the methods is
important if it continues to measure economic impact as an indi-cator
of the agency’s performance. Further, AOT should develop
additional measures to demonstrate its effectiveness in working
with tourists, the travel industry, and communities to facilitate
tourism.
1 According to AOT officials, AOT’s remaining share of the financial assets
was used to purchase the Internet address from the other partners; how-ever,
this was not documented until June 2000.
Summary
iv
OFFICE OF THE AUDITOR GENERAL
AOT Should Conduct Required
Long-Range Planning
(See pages 33 through 36)
Despite a mandate in A.R.S. §41-2305(A) to “perform research
necessary to determine a long-range tourism development plan”
for Arizona, AOT does not have a long-range state tourism plan.
Instead, AOT has focused its planning and research on short-term
marketing issues. Genuine long-range planning would en-able
AOT to respond to strategic issues that AOT itself has iden-tified
as challenges and make better resource allocation deci-sions.
In developing a long-range tourism plan for Arizona, AOT
should work with the Tourism Advisory Council and other in-dustry
stakeholders.
Other Pertinent Information
(See pages 37 through 43)
During the audit, other pertinent information was collected re-garding
how Arizona and other states structure and fund their
tourism promotion efforts. A few states have developed pub-lic/
private partnerships, while most have maintained more tra-ditional
organizational structures within other state agencies.
Twenty-one states fund tourism with traditional tourism reve-nue
sources, such as general fund appropriations, while 19 states
use dedicated taxpayer-funded appropriations to support tour-ism
promotion.
v
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS
Page
Introduction and Background.......................... 1
Finding I: Many of AOT’s Contracting
Practices Violate State Procurement
Requirements ............................................... 9
Procurement Requirements
Are Designed to Promote
Fairness and Prevent Fraud............................................ 9
Procurement Requirements
Were Not Followed in Many
Contracts and Joint Ventures......................................... 10
AOT Used Large Advertising
Contract to Circumvent
Procurement Requirements............................................ 12
Poor Contract Procurement and
File Management
Exacerbated Problems .................................................... 16
Recommendations .......................................................... 18
Finding II: AOT’s Membership in
a Limited Liability Company
Violated State Constitution
and Statutes.................................................. 19
Company Formed
for Internet Activities...................................................... 19
AOT Violated the
Constitution and Statutes ............................................... 21
AOT Failed to Protect
the State’s Interest........................................................... 22
Recommendations .......................................................... 23
Table of Contents
vi
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS (cont’d)
Page
Finding III: Additional Performance
Measures Needed to Demonstrate
Effectiveness................................................ 25
AOT’s Performance Measures
Call for Measuring Impact
on Economy .................................................................... 25
AOT’s Approach to Measuring
Its Impact Is Severely Flawed......................................... 27
Additional Measures Needed........................................ 29
Recommendations .......................................................... 32
Finding IV: AOT Should
Conduct Required
Long-Range Planning.................................. 33
Current Planning
Inadequate....................................................................... 33
Additional Efforts
Are Needed..................................................................... 35
Recommendations .......................................................... 36
Other Pertinent Information ............................. 37
New Public/Private
Partnerships .................................................................... 37
Traditional Organizational
Structures and Funding
Mechanisms .................................................................... 39
Arizona Tourism
Past and Future ............................................................... 41
Table of Contents
vii
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS (concl’d)
Page
Sunset Factors.................................................. 45
Agency Response
Auditor General Comments to
Agency Response
Agency Response
Tables
Table 1 Arizona Office of Tourism
Statement of Revenues, Expenditures, and
Changes in Fund Balance
Years Ended or Ending June 30, 1999 and 2000
(Unaudited)......................................................... 5
Table 2 Arizona Office of Tourism
Arizona Tourism Internet Partners, LLC (ATIP)
Schedule of Funding Sources and Uses
For the Period July 1997 through November 1999
(Unaudited)......................................................... 21
Table 3 Arizona Office of Tourism
Economic Impact Performance Measures......... 26
viii
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 Sunset review
of the Arizona Office of Tourism and a performance audit of the
Arizona Office of Tourism’s Domestic Media Advertising, Travel
Counseling and Direct Mail Marketing, International and Do-mestic
Trade Marketing, and Media Promotions and Communi-cations
programs 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 Arizona Revised Statutes
§41-2951 et seq.
AOT’s Responsibilities
The Legislature created the Arizona Office of Tourism (AOT) in
1978 and charged it with performing many duties related to
statewide tourism research, development, and promotion. These
duties include:
n Promoting and developing tourism business and planning;
n Developing a campaign of information, advertising, promo-tion,
exhibition, and publicity relating to statewide recrea-tional,
scenic, and historical attractions and all communities
and regions of the State;
n Undertaking a comprehensive research program designed to
establish the Office as the central repository and clearing-house
for all tourism-related data;
n Performing the research necessary to determine a long-range
tourism development plan for Arizona; and
n Conducting research at the request of the Governor, Legisla-ture,
or state and local agencies and providing information
and advice as requested by local, state, and federal agencies
as well as private citizens and businesses.
AOT is responsible for
statewide tourism promo-tion.
Introduction and Background
2
OFFICE OF THE AUDITOR GENERAL
The Arizona Office of Tourism’s mission is :
Organization and Staffing
To carry out its responsibilities, for fiscal year 1999 the Arizona
Office of Tourism was divided into seven programs. This audit
reviewed the following four programs, each of which contracts
for many services and is provided additional administrative
support by other AOT programs.1 In fiscal year 2000, the follow-ing
four programs became subprograms within the Tourism
Promotion program:
n Domestic Media Advertising (2 FTE)—This is a compre-hensive
program of paid media placements (for example,
television, print) in targeted markets to promote Arizona as a
travel destination. The majority of this program’s activities
are performed by a contracted Arizona advertising agency.
In 1999, the National Council of State Tourism Directors
awarded three first-place prizes to AOT’s most recent adver-tisement
campaign.
1 The three AOT programs not reviewed are Tourism Development and
Funds Sharing, Welcome Center Operations, and Business Administra-tion,
the latter two of which received Program Authorization Reviews in
1998.
To expand the volume
of tourism activity and
related expenditures in
the state in order to en-hance
the economy, the
stability of the work-force
and the standard
of living for all Arizo-nans.
AOT’s advertising recently
won awards.
Introduction and Background
3
OFFICE OF THE AUDITOR GENERAL
n Travel Counseling and Direct Mail Marketing (1 FTE)—
This program responds to calls, requests for information, and
requests for travel planning assistance and provides travel
planning materials by mail to encourage new and repeat
travelers to spend more time in Arizona. Travel planning ma-terials
include The Arizona Journeys state travel guide, the ac-commodations
guide, the visitor map, and destination bro-chures.
Requests for travel planning materials are handled
through a contracted call center that receives on average
47,000 requests monthly.
n International and Domestic Trade Marketing (4 FTE)—
This program promotes Arizona to travel agents and tour
operators through participation in trade shows and trade
marketing organizations by educating tour operators on Ari-zona’s
range and extent of destinations and attractions. Fur-ther,
this program assists tour operators in developing and
promoting prepackaged tours for groups and individual
travelers. This program contracts with trade marketing rep-resentatives
located in Canada, Germany, Japan, Mexico, and
the United Kingdom for international representation.
n Media Promotions and Communications (3.5 FTE)—This
program develops media publicity for Arizona (for example,
magazine stories and newspaper articles) domestically and
internationally to increase public awareness and interest in
the State, and to position Arizona’s image as a year-round
tourist destination. Activities include assisting media con-tacts,
coordinating tours for travel journalists throughout the
State, and serving as a central resource for in-state tourism
promoters. This program contracts with media representa-tives
located in Canada, Germany, Japan, Mexico, and the
United Kingdom for international representation.
The Office of Tourism’s statutes also establish a 15-member gov-ernor-
appointed tourism advisory council. The Council’s duty is
to assist and advise the director in preparing the budget and es-tablishing
policies and programs that promote and develop tour-ism
in the State. The council includes representatives from all
over the State who represent recreational and tourist attractions,
lodging, restaurants, and other tourism businesses, and the gen-eral
public.
Introduction and Background
4
OFFICE OF THE AUDITOR GENERAL
Funding and Budget
The Office of Tourism is funded through a biennial General
Fund appropriation. Approximately 31 percent of AOT’s fiscal
year 2000 $8.8 million General Fund appropriation is derived
from a portion of the state lodging tax. As is illustrated in Table 1
(see page 5), the Domestic Media Advertising program is the
program with the highest expenditures. In fiscal year 2000, this
program’s expenditures are estimated to be $3.6 million, or 41
percent, of AOT’s total expenditures. Further, a majority of
AOT’s budget is expended for contractors. For fiscal year 2000,
AOT estimates that $7.3 million, or 83 percent, of total expendi-tures
will be for contractors.
Recent law changes will impact AOT’s future revenues. Laws
2000, Chapter 375 provides dedicated lodging tax revenues to
AOT that are estimated to be $9.2 million for fiscal year 2002.
Moreover, Laws 2000, Chapter 372, the stadium bill passed dur-ing
the 2000 session, places an initiative on the November 2000
ballot which, if approved by voters, will provide additional
dedicated revenues to AOT.
1994 Report
and Update
Auditor General staff revisited the concerns identified in AOT’s
1994 performance audit (see Report No. 94-4). Below is a sum-mary
of the 1994 report’s major recommendations and their cur-rent
status:
Staffing-related statutory changes needed—Due to concerns
with director turnover and political patronage, the report rec-ommended
that the Legislature should consider amending
AOT’s statutes to add minimum qualifications and possibly es-tablish
a term of office for the AOT director, establish a search
committee process for selecting the director, and place all clerical
and administrative support positions under the state personnel
system.
Recent law changes increase
AOT’s revenues.
Introduction and Background
5
OFFICE OF THE AUDITOR GENERAL
Table 1
Arizona Office of Tourism
Statement of Revenues, Expenditures, and Changes in Fund Balance
Years Ended or Ending June 30, 1999 and 2000
(Unaudited)
1999 (Actual)
Programs
Domestic
Media
Advertising
Travel
Counseling
and Direct
Mail
Marketing
International
and
Domestic
Trade
Marketing
Media
Promotion
and
Communica-tions
Other 1
Agency
Total
Revenues 2 $3,630,100 $1,422,790 $ 894,000 $286,100 $2,595,050 $8,828,040
Expenditures:
Personal services and
employee related 1,010,227 1,010,227
Professional and outside services 88,656 425,012 429,045 240,129 302,419 1,485,261
Travel 12,144 46,758 12,955 27,905 99,762
Other operating and equipment 3 3,527,283 996,563 415,191 32,960 1,420,286 6,392,283
Total expenditures 3,628,083 1,421,575 890,994 286,044 2,760,837 8,987,533
Excess of revenues over
expenditures 2,017 1,215 3,006 56 (165,787) (159,493)
Other financing uses 4 75 1,254 3,006 56 4,671 9,062
Excess of revenues over (under)
expenditures and other uses $ 1,942 $ (39) $ 0 $ 0 $ (170,458)5 $ (168,555)
2000 (Estimated)
Programs
Domestic
Media
Advertising
Travel Coun-seling
and
Direct Mail
Marketing
International
and
Domestic
Trade
Marketing
Media
Promotion
and
Communica-tions
Other 1
Agency
Total
Revenues 2 $3,630,100 $ 1,301,800 $900,000 $400,000 $2,617,400 $8,849,300
Expenditures:
Personal services and employee
related 1,000,000 1,000,000
Professional and outside services 75,000 480,000 475,000 330,000 250,000 1,610,000
Travel 8,000 50,000 20,000 35,000 113,000
Other operating and equipment 3 3,547,100 821,800 375,000 50,000 1,332,400 6,126,300
Total expenditures 3,630,100 1,301,800 900,000 00,000 2,617,400 8,849,300
Excess of revenues over
expenditures 0 0 0 0 0
Other financing uses                         0
Excess of revenues over
expenditures and other uses $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
1 Includes the Tourism Development and Funds Sharing, Welcome Center Operations, and Business Administration programs that were not within
the scope of this audit.
2 Less than 1 percent of the amount is miscellaneous revenue collected by the Office. The rest is State General Fund appropriations.
3 Includes $4.44 and $4.45 million expended or estimated to be expended on advertising in 1999 and 2000, respectively.
4 Includes reversions and remittances to the State General Fund and net operating transfers.
5 Deficiency covered by approximately $170,500 of beginning fund balances from the Office’s donation accounts.
Source: The Arizona Financial Information System Accounting Event Extract File and Status of Appropriations and Expenditures reports for the year
ended June 30, 1999; and Division-prepared estimates of financial activity for the year ending June 30, 2000.
Introduction and Background
6
OFFICE OF THE AUDITOR GENERAL
Current Status: In 1996, the Legislature amended AOT’s
statutes to require the director to have minimum qualifica-tions,
including at least five years of management experience
in the tourism and travel industry and experience in market-ing
or public relations. Further, the Governor’s Office used a
search committee to select the current director. Legislation
was never introduced to place AOT’s clerical and administra-tive
support positions under the state personnel system.
n Agency restructuring options—If the Legislature felt
stronger action was needed to reduce concerns with director
turnover and political patronage, the report recommended
that the Legislature consider restructuring the agency under
a number of options including a tourism commission, com-bining
AOT with the Department of Commerce, or merging
AOT with the Arizona Highways Magazine under a single of-fice.
n Current Status: AOT is still a separate agency. This report
presents some information on Arizona’s and other states’
structures and funding mechanisms for state tourism efforts
(see Other Pertinent Information, pages 37 through 43).
n Recovery of misspent contracting monies recom-mended—
The report recommended that AOT take steps to
recover misspent contract funds. First, it recommended that
AOT request the Attorney General’s Office to review the fea-sibility
of recovering misspent funds. If recovery was possi-ble,
it was recommended that AOT contract for an independ-ent
audit to identify all monies improperly paid to its former
advertising firm.
Current Status: AOT sought advice from the Attorney Gen-eral’s
Office, which recommended taking no action to seek a
refund. This report identified different problems with AOT’s
contracting practices (see Finding I, pages 9 through 18).
Audit Scope and
Methodology
Audit work focused on AOT’s contracting practices, perform-ance
measures, and long-term planning efforts. This perform-
AOT previously misspent
advertising monies.
Introduction and Background
7
OFFICE OF THE AUDITOR GENERAL
ance audit and Sunset review includes findings and recommen-dations
in four areas:
n The need for the Office to comply with state procurement
laws and regulations when procuring contracts. A copy of
this report has been forwarded to the Attorney General’s Of-fice
(see Finding I, pages 9 through 18) ;
n The need for the Office to work with the Attorney General’s
Office to address outstanding issues related to its member-ship
in a limited liability company (see Finding II, pages 19
through 23).
n The need for the Office to abandon its current method of cal-culating
economic impact performance measures and de-velop
more appropriate measures that demonstrate AOT’s
role in facilitating statewide tourism efforts (see Finding III,
pages 25 through 32); and
n The need for the Office to develop a long-term tourism plan
(see Finding IV, pages 33 through 36).
In addition, this report contains an other pertinent information
section regarding tourism office funding, and restructuring in
other states, and legislation passed during the 2000 session that
impacts AOT’s funding (see pages 37 through 43). Finally, the
report presents responses to the 12 statutory Sunset Factors (see
pages 45 through 51).
Auditors used a number of research methods for this review.
Specifically,
n To determine the extent to which the Office complies
with procurement laws and regulations—Auditors inter-viewed
AOT staff, representatives of the State Procurement
Office, and representatives from the AOT advertising con-tractor.
Additionally, auditors reviewed state procurement
rules and regulations, the state accounting handbook, AOT
contract/subcontract documents, AOT expenditure records,
and contract files located at the State Procurement Office per-taining
to the evaluation and award process and rejected
proposals.
Introduction and Background
8
OFFICE OF THE AUDITOR GENERAL
n To determine the appropriateness of AOT’s membership
in a limited liability company—Auditors interviewed AOT
staff, former company officials, AOT’s former Attorney Gen-eral
representative, and Corporation Commission staff. Addi-tionally,
auditors reviewed the state constitution, statutes,
and AOT rules as well as the company’s corporate docu-ments,
financial records, contracts, and legal invoices.
n To determine the appropriateness of AOT’s performance
measures—Auditors reviewed audit reports from Florida
and Georgia and interviewed tourism office representatives in
California, Florida, Illinois, South Carolina, Texas, Vermont,
and Virginia to determine how other states developed per-formance
measurements. Additionally, auditors interviewed
AOT staff, tourism experts, and a representative from the U.S.
Department of Commerce regarding tourism promotion and
accountability. Finally, auditors conducted a literature review.
n To determine the extent of AOT’s planning efforts—
Auditors interviewed tourism stakeholders, tourism research
firms, AOT’s advertising contractor, and representatives from
California, Connecticut, Florida, Illinois, Nevada, Oregon,
Texas, and Washington’s tourism offices regarding research
and planning efforts. Finally, auditors performed a literature
review pertaining to long-term planning, particularly in rela-tion
to tourism marketing.
n Finally, to provide information regarding tourism pro-grams
in other states and the Arizona Office of Tour-ism—
Auditors reviewed professional journals, other litera-ture,
and audit reports to identify innovative partnerships be-tween
states and the tourism industry. Auditors also re-viewed
legislation pertaining to AOT proposed during the
2000 Arizona legislative session.
This audit was completed in accordance with government audit-ing
standards.
The Auditor General and staff express appreciation to the direc-tor
and staff of the Arizona Office of Tourism for their coopera-tion
and assistance throughout the audit.
9
OFFICE OF THE AUDITOR GENERAL
FINDING I MANY OF AOT’S CONTRACTING
PRACTICES VIOLATE STATE
PROCUREMENT REQUIREMENTS
AOT has engaged in many contract practices that violate state
procurement statutes and guidelines. For example, AOT has ex-ceeded
its delegated purchasing authority, failed to seek com-petitive
bids, and paid for services before they were provided.
Additionally, AOT circumvented procurement requirements by
subcontracting for a variety of services under a broad and largely
open-ended contract. Such practices expose the agency and the
State to risks the procurement process was designed to protect
against. Complicating matters further, AOT’s contract records
and contract procurement coordination are not adequate. The
agency needs to make substantial changes in its contracting prac-tices
to ensure maximum competition and fairness, protect the
State’s liability, and avoid the appearance of impropriety.
Procurement Requirements
Are Designed to Promote
Fairness and Prevent Fraud
Procurement requirements are designed to ensure that the State
purchases the highest-quality product or service at the most eco-nomical
price, to ensure fair competition, and to prevent fraudu-lent
activities while, at the same time, protecting state agencies
from the appearance of fraud. Violations of procurement re-quirements
can carry serious penalties. Further, failing to follow
procurement requirements can put both the State and vendors at
risk, because the validity of improperly procured contracts can
be challenged.
Procurement requirements
exist to ensure fair competi-tion
and prevent fraud.
Finding I
10
OFFICE OF THE AUDITOR GENERAL
Procurement Requirements
Were Not Followed in Many
Contracts and Joint Ventures
AOT entered into many of its contracts and joint venture agree-ments
in violation of state procurement requirements. The
agency awarded contracts noncompetitively that should have
been awarded through the State Procurement Office. It also
failed to follow procurement requirements in joint ventures with
visitors’ bureaus and other organizations.
Many purchases exceeded AOT’s purchasing authority and were
not bid competitively—Auditor General staff identified 16 pur-chases
since fiscal year 1997 in which AOT exceeded its purchas-ing
authority for procuring services without seeking competitive
bids.1 These expenditures totaled approximately $1.2 million. All
AOT purchases worth more than $10,000 must be procured
competitively through the State Procurement Office, unless the
procurement office delegates authority to AOT or determines in
advance that competition is not practicable or that only one pro-vider
is available. However, AOT did not comply with this re-quirement,
making the 16 purchases on its own and not seeking
competitive bids in doing so. For example:
ü AOT paid more than $102,000 for Canadian market advertis-ing
and other services but did not seek competitive bids be-fore
signing the contract. This contract should have been pro-cured
through the State Procurement Office.
ü Over three fiscal years, AOT paid $120,000 for tourism re-search
through its Arizona tourism organization member-ship
dues without going through the State Procurement Of-fice.
AOT paid this amount to the tourism organization,
which then contracted with independent research firms for
approximately $51,600 of research and professional fees.
AOT considers this expenditure part of its membership dues;
however, all other members paid dues ranging from
1 Auditors checked AOT’s compliance with procurement requirements
only for purchases for which the agency provided documentation to the
auditors by June 2000 and that exceeded the agency’s $10,000 purchasing
authority.
AOT spent approximately
$1.2 million without com-plying
with procurement
requirements.
Finding I
11
OFFICE OF THE AUDITOR GENERAL
$100 to $5,000 each year. AOT should pay no more than the
basic membership dues to this organization and purchase its
research through proper procurement procedures.
AOT improperly procured and paid for services under its joint
venture rules—AOT also violated state procurement require-ments
and its own rules when procuring over $440,000 worth of
services through joint ventures. AOT’s statutes and rules allow it
to enter joint ventures with private corporations for promotional
activities in order to extend the value of the State’s investment.
However, these joint ventures are still subject to state procure-ment
requirements.
n In fiscal year 1999, AOT paid over $98,000 toward two joint
ventures with a partnership of chambers of commerce, city
convention and visitors’ bureaus, and Sky Harbor Interna-tional
Airport for international representation in the United
Kingdom and Germany. These joint ventures violated state
procurement and joint venture requirements in four ways.
ü AOT’s shares of the joint ventures exceeded AOT’s pur-chasing
authority and should have been procured
through the State Procurement Office.
ü AOT paid its advertising agency to sign contracts for in-ternational
representation and to provide billing services
for the joint venture agreements. However, according to
AOT, these services are separate from the advertising
contract. If so, they should have been procured as a sepa-rate
contract.
ü AOT paid for services before they were provided. These
pre-payments violate the Arizona Accounting Manual, sec-tion
II-H-1, which requires an agency to pay for services
after they are received. Additionally, AOT’s rules regulat-ing
joint ventures specifically state that “the state shall
pay no monies before receipt of the services.”
ü AOT did not document the steps it took to enter these
joint ventures as required by its rules. For example, AOT
did not document proposals from the private corpora-tions
that are required by rule before entering joint ven-tures.
These proposals should contain such information
AOT violated procurement
requirements and its own
rules.
Finding I
12
OFFICE OF THE AUDITOR GENERAL
as the benefit to the State for engaging in a joint venture
activity as well as the project’s estimated budget and
length.
State law permits AOT to participate in joint ventures with pri-vate
corporations; however, it is not clear that any of AOT’s
partners are “private corporations.” Two of AOT’s partners are
not registered with the Corporation Commission, and the others
are registered as nonprofit corporations.
AOT Used Large Advertising
Contract to Circumvent
Procurement Requirements
For fiscal year 2000 it is estimated that nearly half of AOT’s
budget will be spent on an advertising contract that AOT uses
mainly to obtain advertising services, but also to obtain many
other types of services from other contractors. Although this con-tract
was procured through the State Procurement Office, it does
not specifically define all tasks to be done and does not limit the
ultimate cost the State can pay. By using it as a mechanism to
subcontract for other services, AOT circumvented procurement
requirements and threatened the fairness of the bid process.
AOT also made modifications to the contract that it was not au-thorized
to make. Several changes are needed to prevent further
misuse of this contract and to ensure fair competition.
Advertising contract used to subcontract for many other ser-vices—
In fiscal year 2000, AOT estimates it will pay approxi-mately
$3.8 million of its $8.85 million budget to its advertising
contractor. The majority of the contract involves the creative de-velopment
and purchasing of advertising by the contracted ad-vertising
firm. However, AOT has also used the advertising con-tract
to purchase at least 18 subcontracted goods and services
ranging from $4,500 for modeling the economic impact of tour-ism
on Arizona to over $500,000 for representation in interna-tional
markets.
AOT staff said they used this subcontracting approach because
the agency did not have enough staff resources to contract for so
many services. The agency believes the approach was acceptable
because of two main features in the contract:
AOT spends almost half of
its annual budget on its ad-vertising
contract.
Finding I
13
OFFICE OF THE AUDITOR GENERAL
n The contract does not specifically identify all of the services to
be provided. Specifically, the contract’s scope of work states
that the contractor shall provide those services customarily
performed by an advertising/marketing agency necessary
for the development, preparation, and placement of advertis-ing.
AOT believes this means it can purchase any marketing-related
goods or services through the contract.
n The contract does not place a cap on the amount AOT can
pay the contractor. The contractor does not collect a set fee for
its services, but rather charges a percentage markup on its
costs for fulfilling the contract. Without a cap, AOT is not re-stricted
to a dollar limit that could help prevent AOT from
adding the expense of additional subcontracted services to
the contract.
Subcontracting approach violates procurement code—AOT has
used its broad advertising contract to circumvent procurement
requirements by directing its advertising contractor to sign spe-cific
vendors as subcontractors, and directing services provided
by those subcontractors. For example:
n AOT asked its advertising contractor to subcontract with a
former employee of AOT’s Canadian representation firm
rather than subcontracting with the firm again. The advertis-ing
contractor did as directed and since then AOT has over-seen
the services provided by that representative.
n In another case, a subcontractor signed at AOT’s request was
given AOT office space and equipment and receives an
hourly wage for work done at the direction of AOT’s director
of media relations.
AOT’s circumvention of the procurement process violates the
procurement code and is problematic for other reasons as well:
n AOT is choosing vendors to provide services without
requiring them to submit competitive bids. Selecting ven-dors
without competition increases the potential for fraudu-lent
activities and denies many vendors the opportunity to
bid on state projects.
Selecting vendors without
competition increases the
potential for fraud.
Finding I
14
OFFICE OF THE AUDITOR GENERAL
n Directing subcontractors could complicate AOT’s liabil-ity,
according to the State Procurement Office. Normally,
a contractor is liable for the performance of subcontractors it
signs; however, AOT could be held liable for problems that
arise when it directs those subcontractors.
n AOT unnecessarily pays the advertising contractor a
markup on the costs of the subcontracts. Once the con-tractor
signs some of the subcontracts for goods or services,
the contractor’s role is limited to handling payments to the
subcontractor; however, the contractor continues to charge
AOT a markup on the cost of the subcontractors.
AOT made unauthorized modifications to its advertising con-tract—
Additionally, AOT has made unauthorized modifications
to its advertising contract. The standard terms and conditions of
all state contracts prohibit contractors from entering into any
subcontract without the procurement officer’s approval. Because
the State Procurement Office procured the advertising contract, it
has the sole authority to approve contract modifications, through
formal amendments. These provisions protect the State from un-desirable
subcontractors, prevent fraudulent activities, and en-sure
that the contractor will be accountable for the subcontrac-tors’
work.
AOT has made two types of modifications without formal con-tract
amendments approved by the State Procurement Office.
n Fees for outside services reduced—AOT verbally agreed
with the contractor to reduce the markup it pays its advertis-ing
contractor for some subcontracted services. AOT now
pays a markup ranging from 5.26 to the contracted 17.65 per-cent
for most outside services.
n Many subcontractors added or changed—Since the con-tract
was signed in 1996, many subcontractors not specified
in the original contract have been added and all but one of
the five original subcontractors have been changed.
While these changes were made to improve services and save
AOT money, they fail to protect the State and compromise the
fair treatment of both past and potential bidders.
Formal contract amend-ments
protect the State.
Finding I
15
OFFICE OF THE AUDITOR GENERAL
n First, AOT’s verbal agreements to lower prices do not protect
the State to the extent formal contract amendments would
because the State has no assurance this price reduction will
continue.
n Second, adding or changing subcontractors not specified in
the original contract and thereby increasing the number of
services provided by the contract is unfair to past bidders be-cause
if such significant deviations from the original proposal
had been known during the bidding and selection processes,
the original contract award may have been granted to an-other
bidder.
n Third, these modifications are unfair to potential future bid-ders
because without formal amendments they are likely un-aware
of the services provided or the actual fees charged by
the current advertising contractor. Further, future bidders
may find it difficult to provide such a wide range of services.
According to the State Procurement Office, the inappropriate
practice of purchasing several dissimilar services under one
contract is called “bundling” and limits competition to only
the largest vendors.
Changes needed to prevent misuse of advertising contract—
Several changes are needed to prevent future misuse of the ad-vertising
contract.
n First, to better control the size and scope of the contract, the
next request for proposal should specifically identify the ser-vices
expected, require bidders to quote their fees for those
services, and limit the total amount AOT can pay the contrac-tor.
AOT will soon have this opportunity since the current
advertising contract will expire in 2001.
n Second, AOT must discontinue using its advertising con-tract
to purchase subcontracted goods and services in a man-ner
that circumvents the procurement code. AOT should se-lect
its vendors by following state procurement guidelines
and directly contract with vendors independent of any other
contract if it plans to oversee and direct those vendors’ activi-ties.
AOT should ensure future ad-vertising
contracts follow pro-curement
requirements.
Finding I
16
OFFICE OF THE AUDITOR GENERAL
n Third, to better protect the State and ensure fairness to past
and future bidders, AOT should obtain formal contract
amendments approved by the State Procurement Office for
any modifications of contracts that the Office has procured.
Poor Contract Procurement
and File Management
Exacerbated Problems
Further exacerbating the contracting violations, AOT manage-ment
has provided inadequate oversight over contract procure-ment
and file management. Auditors identified problems in the
following areas:
n AOT lacks a central procurement coordinator—Rather
than having a central procurement coordinator, each division
director procures and oversees contracts necessary for his or
her division. This decentralized system may make it difficult
for AOT management to be aware of all its contract obliga-tions
and to ensure that procurement requirements are fol-lowed.
Good business practices suggest that organizations
should segregate responsibilities between individuals who
work directly with contractors and a procurement coordina-tor
who verifies that the proper procurement procedures are
followed. AOT should designate a central procurement co-ordinator,
who should receive training in proper state pro-curement
requirements and consult with the procurement of-fice
when areas are beyond his or her expertise.
n AOT lacks central contract files—AOT does not maintain a
set of central contract files. Rather, each AOT division direc-tor
is responsible for maintaining his or her contract files.
During the audit:
ü AOT was unable to provide many important contracting
documents. For example, AOT had no documentation to
show what markups the advertising agency was charging
for its various subcontracts. This information had to be
obtained from the advertising agency.
Finding I
17
OFFICE OF THE AUDITOR GENERAL
ü Further, due to the lack of central contract files auditors
had to request copies of all AOT contracts and subcon-tracts
from each AOT program. Auditors are still uncer-tain
whether all have been provided since, throughout
the audit, they continued to discover contracts that had
not been given to them before.
Centralized contract files better enable an agency to monitor
its contracts. These files should contain documentation for all
of AOT’s contracts, including subcontracts held by AOT con-tractors
and contracts procured through the State Procure-ment
Office.
n AOT does not adequately maintain records—The Arizona
Accounting Manual states that all state agencies must keep of-ficial
agency copies of contracts for six years. However, dur-ing
the audit, some AOT contracts were unavailable for re-view.
For example, AOT could not provide contract docu-ments
for the 1999 Governor’s Conference on Tourism. AOT
should follow state requirements for the retention of contract-ing
documents.
Finding I
18
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. AOT should make any purchases that exceed its $10,000 purchas-ing
authority through the State Procurement Office or obtain ap-propriate
delegation.
2. AOT should pay no more than the basic membership fee in tour-ism
associations and appropriately follow procurement require-ments
for any additional services it receives from those associa-tions.
3. AOT should comply with state procurement laws and regulations
when procuring contracts as part of joint ventures.
4. AOT should comply with rule R20-3-104(2) and section II-H-1 of
the Arizona Accounting Manual and discontinue paying for joint
venture services in advance.
5. In the request for proposal for the 2001 advertising contract, AOT
should specifically state the services it expects the awarded contrac-tor
to provide, request the bidders to quote their fees for those ser-vices,
and set a limit on the total amount it will pay.
6. AOT should ask the Attorney General’s Office what entities it may
participate with as private corporations in joint ventures.
7. To ensure compliance with procurement requirements and to
avoid paying unnecessary markups, AOT should select vendors
through a competitive bid process for services it plans to oversee
and direct.
8. AOT should obtain formal contract amendments approved by the
State Procurement Office for any modification of contracts pro-cured
by the State Procurement Office. Modifications include
changes in subcontractors, services added to the original contract
performed by the contractor or by subcontract, and any changes to
the proposed pricing schedule.
9. AOT should designate a staff member as a central procurement co-ordinator.
That staff member should consult with and receive train-ing
from the State Procurement Office.
10. AOT’s new procurement coordinator should establish and main-tain
central contract files.
11. AOT should follow Arizona Accounting Manual requirements for
the retention of contracting documents.
19
OFFICE OF THE AUDITOR GENERAL
A limited liability com-pany
(LLC) is a rela-tively
new and flexible
business structure that
offers limited personal
liability and a choice of
being taxed as a corpo-ration
or a partnership.
LLC participants are
filed with the Corpora-tion
Commission as
“Member.”
FINDING II AOT’S MEMBERSHIP IN
A LIMITED LIABILITY COMPANY
VIOLATED STATE CONSTITUTION
AND STATUTES
AOT violated the state constitution and statutes through its
membership in a limited liability company (company). AOT be-came
a member of the company as a means to purchase the
Internet address and further develop the Web site AOT previ-ously
developed to provide travel information. However, AOT’s
involvement with the company was unconstitutional, violated
statutes, and caused public monies to be misspent. Further, AOT
failed to execute the necessary agreements to own and operate
the Internet address and Web site once the company dissolved.
Company Formed for
Internet Activities
In 1997, AOT became a member of a company, Arizona Tourism
Internet Partners, that included three other Arizona tourism
promotion organizations in order to purchase an Internet ad-dress
and share a Web site. Following is an overview of the
company’s history:
n Creation: The company was
created to purchase and share the
Internet address for a Web site,
“arizonaguide.com.” In 1996
AOT had contracted with a
publishing company that owned
that address to develop AOT’s
travel information Web site.
When the publisher no longer
wanted to operate the site,
AOT’s options were to purchase
the address, purchase or partner
with another existing Arizona
travel Web site, or spend less than $100 to register a new ad-dress.
In continuing its Internet efforts, AOT decided
Finding II
20
OFFICE OF THE AUDITOR GENERAL
to work with three of Arizona’s larger tourism promotion or-ganizations
to pool resources and purchase the address as
well as potentially generate more Internet activity. The part-ners
created the company so a single entity would represent
the group’s interests. Initially, AOT contributed 50 percent of
the company’s funding ($30,000), which is also the maximum
percentage permissible for AOT’s joint venture projects. AOT
later contributed another $30,000 as an annual membership
fee; however, none of the other partners made further contri-butions.
n Expenditures: The majority of the company’s expenditures
were for the Internet address purchase and legal fees. The
company purchased the Internet address for approximately
$34,000. This price was set by the owner, who charged what
the market would bear. In addition, the company spent al-most
$13,000 in legal fees associated with the company’s
creation and Internet address purchase and almost another
$1,000 for its dissolution. The majority of one approximately
$2,500 bill was for “seeking different alternatives to the par-ticipation
of the Arizona Office of Tourism.” Table 2 (see
page 21) illustrates the contributions, expenditures, and final
distribution of the company’s financial assets.
n Dissolution: The company dissolved in 1999. According to a
former company official, some members were dissatisfied
with the way the current service provider operated the Web
site and wanted to pursue their individual interests. On dis-solution,
the company’s financial assets were divided among
the members based on the understanding that AOT would
continue with the site. However, as of June 12, 2000, the
company was still the registered owner of the Internet ad-dress.
Finding II
21
OFFICE OF THE AUDITOR GENERAL
AOT Violated the
Constitution and Statutes
AOT’s participation in the limited liability company violated the
state constitution and statutes in several ways:
n First, Article 9, §7 of the Arizona Constitution prohibits state
agencies from providing funds to and being a shareholder in
a company or corporation.
Table 2
Arizona Office of Tourism
Arizona Tourism Internet Partners, LLC (ATIP)
Schedule of Funding Sources and Uses
For the Period July 1997 through November 1999
(Unaudited)
Amount
Percentage
Contributed and
Returned
Sources:
Contributions:
Office of Tourism $60,000 67%
Member 2 10,000 11
Member 3 10,000 11
Member 4 10,000 11
Total contributions 90,000 100%
Interest income 2,328
Total sources 92,328
Uses:
Internet address $33,975
Attorney fees 13,793
Data entry 750
Total uses 48,518
Net sources available
at dissolution: $43,810
Return of contributions
on dissolution:
Office of Tourism $21,901 49%
Member 2 7,303 17
Member 3 7,303 17
Member 4 7,303 17
Total return $43,810 100%
Source: Auditor General staff analysis of the Arizona Tourism Internet Partners Final Account-ing
provided by the Office of Tourism.
Finding II
22
OFFICE OF THE AUDITOR GENERAL
n Second, the Limited Liability Company Act requires a com-pany’s
assets to be distributed in the same proportion they
were contributed, unless the company’s operating agreement
specifies otherwise. The company had no operating agree-ment.
However, AOT received only approximately 50 per-cent
of the company’s financial assets when it dissolved, de-spite
having contributed 67 percent of the financial assets.
Therefore, the monies that AOT should have received could
be considered a gift of public monies to the other members,
which is also unconstitutional.1
n Third, A.R.S. §41-192(E) prohibits state agencies from em-ploying
legal counsel other than the state Attorney General,
except in specific circumstances. AOT did not seek the Attor-ney
General’s Office’s advice regarding its involvement with
the company. In addition, company records indicate that
AOT received advice from the company’s private law firm
regarding its involvement with the company.
n Fourth, although AOT has the statutory authority to enter
into joint ventures with private corporations, the company
was not a joint venture. Therefore, AOT exceeded its joint
venture statutory authority in creating the company. Further,
if this company had been a joint venture, AOT’s rules would
limit its financial participation to 50 percent.
n Finally, AOT violated procurement requirements on two oc-casions
when it exceeded the limits of its $10,000 expenditure
authority by providing two $30,000 payments to the com-pany.
AOT Failed to Protect
the State’s Interest
In addition to the constitutional and statutory violations result-ing
from AOT’s participation in the company, little benefit was
realized.
1 According to AOT officials, AOT’s remaining share of the financial assets
was used to purchase the Internet address from the other partners. How-ever,
this was not documented until June 2000.
Finding II
23
OFFICE OF THE AUDITOR GENERAL
n Principally, when the company was dissolved, the Internet
address asset was not distributed to any one of the members.
When auditors researched the Internet address registration in
June 2000, it was still registered with the company, eight
months after the company had dissolved.
n Further, AOT lacks an agreement with the service provider
that currently operates the Web site. AOT is working with
the State Procurement Office and the Attorney General’s Of-fice
to develop an agreement.
Recommendations
1. AOT should work with the Attorney General’s Office and the
State Procurement Office to develop an appropriate Web site
operating agreement.
2. AOT should seek the Attorney General’s advice prior to en-tering
into significant agreements that obligate the State, such
as AOT’s agreement with the original Web site publisher and
AOT’s membership in the limited liability company.
24
OFFICE OF THE AUDITOR GENERAL
(This Page Intentionally Left Blank)
25
OFFICE OF THE AUDITOR GENERAL
FINDING III ADDITIONAL PERFORMANCE
MEASURES NEEDED TO
DEMONSTRATE EFFECTIVENESS
AOT needs to develop additional performance measures to as-sess
the agency’s effectiveness. AOT currently attempts to meas-ure
its performance in large part by estimating the impact its
tourism efforts are having on the State’s economy. However, the
methodology and assumptions it uses to do so are seriously
flawed. AOT needs to develop performance measures that
measure its indirect impact, such as the effectiveness of a particu-lar
advertising campaign in raising awareness about Arizona.
AOT’s Performance Measures
Call for Measuring Impact
on Economy
As a way to make state government more accountable, A.R.S.
§35-122 requires Arizona agencies to develop performance
measures and report how well they are doing with regard to
these measures. The performance measures, together with agen-cies’
data on how well they are doing, are included in the 2000-
2001 Arizona Master List of State Government Programs, compiled
by the Governor’s Office of Strategic Planning and Budgeting.
Six of AOT’s performance measures focus on the agency’s im-pact
on Arizona’s economy.1 As illustrated in Table 3, page 26,
three of the economic impact measures are agency-wide meas-ures,
while the other three measures are specifically for the do-mestic
media advertising program.
AOT’s performance meas-ures
focus on AOT’s eco-nomic
impact.
1 Although three additional agency-wide performance measures relate
to economic impact, these measures pertain to the Lupton Welcome
Center, which is not part of this audit.
Finding III
26
OFFICE OF THE AUDITOR GENERAL
In the 2000-2001 Arizona Master List of State Government Programs,
AOT reported that in 1998, 242,000 travel parties visited the State
after receiving its travel information packet, increasing state tour-ism
revenues by $193 million. When put in the context of esti-mated
total tourism activity in Arizona, this was about 2.2 per-cent
of the estimated number of travel parties who visited Ari-zona
in 1998 and about 1.8 percent of the estimated amount all
travel parties spent that year in Arizona.1
1 According to the Arizona Office of Tourism 1998 Summary Report, compiled
by D. K. Shifflet and Associates, an estimated 11 million travel parties vis-ited
Arizona in 1998, spending a total of $10.9 billion. A travel party con-sists
of one tourist or two or more tourists traveling together.
Table 3
Arizona Office of Tourism
Economic Impact Performance Measures
Agency-wide Performance Measures
1. Economic impact for Arizona economy related to AOT efforts in media advertising and
direct mail marketing.
2. Economic impact per $1 expended by AOT in media advertising and direct mail mar-keting.
3. Tax revenues for Arizona related to AOT efforts in media advertising and direct mail
marketing.
Domestic Media Advertising Performance Measures
1. Average incremental expenditure by travel party receiving AOT materials over average
expenditure by all Arizona travel parties.
2. Economic impact for Arizona economy related to AOT efforts in media advertising and
direct mail marketing.
3. Tax revenues for the State of Arizona stimulated by AOT efforts.
Source: Auditor General staff summary of performance measures reported in the 2000-2001 Ari-zona
Master List of State Government Programs.
Few travelers obtain
AOT’s travel information
packet.
Finding III
27
OFFICE OF THE AUDITOR GENERAL
A conversion study:
Estimates what per-centage
of people
who request travel in-formation
about a
destination end up
traveling to that des-tination.
AOT’s Approach to Measuring
Its Impact Is Severely Flawed
AOT’s method for measuring its economic impact on tourism in
Arizona has several flaws. First, it inappropriately used the re-sults
of a study to measure economic impact. Second, its dollar
estimates are based on assumptions that are not valid. It is espe-cially
important to fix these flaws because measuring economic
impact is challenging. AOT’s promotional efforts are only one of
many factors that can affect people’s decisions about whether to
travel to Arizona.
AOT’s measure overstates economic impact—To develop its es-timate,
AOT misused the results of an AOT-contracted “conver-sion
study” conducted in 1994. Travel
and tourism research indicates that a
conversion study is an appropriate
way to calculate the usefulness of a
tourism office’s travel packets or the
effectiveness of a specific advertising
campaign. However, some re-searchers
caution against using a
conversion study to estimate
economic impact because of the risk of overstating impact.
AOT has overstated its economic impact by reporting the money
spent by all Arizona travel parties who received its information
packet rather than reporting only the money spent by those who
said that AOT’s packet influenced their decision to visit Arizona.
By comparison, California recently used a conversion study to
evaluate its travel literature but reported only the economic im-pact
of those travelers influenced by the information. A further
problem with AOT’s use of this method is that AOT continues to
use the 1994 data to measure its current advertising efforts de-spite
the fact that campaigns and information have changed and
may have a different impact on people’s travel decisions.
Estimates for dollar amounts are based on invalid comparison
of two studies—AOT makes an invalid assumption about tourist
spending with its use of the 1994 conversion study results. The
conversion study indicated that the travel parties AOT influ-enced
to travel to Arizona spent almost twice as much as the av-erage
Arizona travel party, as determined by another study. This
Finding III
28
OFFICE OF THE AUDITOR GENERAL
assumption is flawed. The two studies are not comparable be-cause
each has a different purpose, method, and population. To
be valid, such a comparison would have to be made against a
control group of the same population covered in the conversion
study.
Measuring economic impact is challenging—It is especially im-portant
for AOT to fix these flaws if it continues to measure eco-nomic
impact because AOT’s impact on tourists cannot be easily
isolated from all of the other factors that affect tourists’ decisions
about whether to visit the State. For example,
n AOT is not the only tourism marketer in the State. Al-though
AOT is the only entity which markets the entire state
as a vacation destination, many other organizations and
businesses also promote tourism to locations within Arizona.
At the regional and local level, convention and visitors’ bu-reaus
and chambers of commerce promote tourism to the ar-eas
they represent. For fiscal year 2000, AOT estimates that it
will spend nearly $9 million to promote statewide tourism,
whereas the convention and visitors’ bureaus of Phoenix and
Tucson together estimate they will spend approximately $13
million to promote their municipalities. Further, hotels and
attractions necessarily promote travel to Arizona when they
advertise themselves. With multiple entities promoting dif-ferent
aspects of Arizona, it is difficult to determine how in-fluential
any one organization’s marketing efforts are on a
consumer’s decision to vacation in Arizona.
n No direct sales means no direct economic data. Isolating
the impact of AOT’s marketing effectiveness is especially dif-ficult
because AOT does not sell a product or service for
which sales can be tracked. Unlike hotels and attractions that
sell services to tourists and can monitor their sales perform-ance,
AOT markets the idea of vacationing in Arizona in or-der
to motivate tourists to travel to the State. As a result, AOT
has no direct knowledge of transactions it may have facili-tated.
Finding III
29
OFFICE OF THE AUDITOR GENERAL
The goal of AOT’s
Domestic Media Ad-vertising
program is:
“to shape a positive
image of Arizona
which affirmatively
motivates travelers to
experience the diver-sity
of the state.”
Additional Measures Needed
AOT should develop other
measures to demonstrate its effec-tiveness
in stimulating statewide
tourism. AOT’s role is one of a
facilitator that connects potential
travel consumers with Arizona
communities and businesses that
make the tourism sales. To better
reflect this role, AOT should
develop additional performance measures.
AOT’s role is a facilitator—AOT’s role is a facilitator who shares
information with potential tourists, travel agents, tour operators,
travel writers, and Arizona businesses and communities. The de-cision
to act on the information and to transact the actual busi-ness
of tourism rests with those AOT has interacted with, not
with AOT itself. For example:
n AOT’s advertising and travel information packets provide in-formation
about the kinds of sites, attractions, and events
available in Arizona. Tourists then deal directly with those
sites and attractions if they select Arizona as their vacation
destination.
n Further, AOT’s trade marketing efforts provide information
and tours to tour operators and travel agents who then de-cide
whether to promote Arizona itineraries to their clients.
More appropriate performance measures needed—To better
demonstrate its effectiveness as a facilitator, AOT should de-velop
more appropriate performance measures. Performance
measures are important for indicating how well an agency is ful-filling
its role. Further, by gathering performance measure in-formation,
an agency can obtain feedback and information that is
valuable for improving its operations. Following are examples of
some areas where AOT should improve its performance meas-ures:
n Advertising—AOT’s advertising program can better measure
its role in generating consumer awareness and interest in Ari-zona
as a place to vacation. None of the program’s current per-
Finding III
30
OFFICE OF THE AUDITOR GENERAL
The goal of AOT’s Inter-national
and Domestic
Trade Marketing pro-gram
is:
“to create a well-informed
travel indus-try
(i.e., travel agents,
tour operators, and
wholesalers) that ac-tively
promotes Arizona
to domestic and interna-tional
tourists and
travelers.”
formance measures report the extent to which AOT’s advertis-ing
increases consumer awareness of Arizona as a vacation
destination or the diversity of the State’s attractions. AOT
should report the percentage increase in consumer awareness
and interest in Arizona as a result of AOT advertising.
AOT can measure this kind of effectiveness through pre- and
post-studies of its advertising campaigns, as other state tour-ism
offices routinely do. AOT paid approximately $5,000 for
a preliminary study of consumer awareness in key target
markets prior to its 2000 advertising campaign. AOT plans to
perform a post-test in order to gauge how effective the cam-paign
was in increasing awareness and motivating consum-ers
to travel to Arizona. AOT should consider performing
this type of study regularly and report the results as a per-formance
measure.
n Trade Marketing—Further, AOT’s program in International
and Domestic Trade Marketing can better measure its role in
generating travel industry awareness and interest in Arizona
as a tour destination. This program promotes Arizona travel
itineraries to domestic and international tour operators and
travel agents in several ways, such as providing tours of the
State, exhibiting at trade shows, and contracting with interna-tional
trade representatives. Despite its various promotional
activities, Trade Marketing has only one performance meas-ure
that indicates how much AOT pays in relation to its part-ners
in sponsoring tours for travel industry representatives.
However, this single measure does not indicate how well the
program has familiarized the
travel industry with Arizona.
Trade Marketing should adopt
an appropriate effectiveness
measure for each of its major
activities. For example, with lit-tle
effort AOT could report the
number of Arizona communi-ties
and businesses with which
Trade Marketing shared tour
operator contact information
obtained at trade shows. With
greater effort, Trade Marketing
Trade marketing could
measure the success of its
tours.
Finding III
31
OFFICE OF THE AUDITOR GENERAL
could also measure the success of the tours it offers to travel
agents and tour operators. Trade Marketing staff could ob-tain
feedback from tour attendees on whether they have cre-ated
or marketed more trips to Arizona as a result of their
tour.
Trade Marketing should also report separate performance
measures for international trade marketing efforts. If AOT
obtained comparable and consistent data from each of its in-ternational
trade representatives, AOT could measure the
performance of each representative as well as AOT’s interna-tional
trade efforts on the whole. Data from the international
representatives could include the number of contacts made
with international tour operators and the number of tour
itineraries created as a result of representatives’ efforts to
promote Arizona abroad.
n Constituent interactions—Finally, in addition to improving
program-specific measures, AOT should adopt measures
that indicate the level of interaction it has with individuals
and groups throughout the State. For example, in fiscal year
2000, AOT initiated a community outreach effort that in-volves
AOT staff visiting 12 communities in 8 predominantly
rural counties in order to help each community develop its
own tourism marketing plan. AOT should quantify the
amount of interaction its staff has with statewide constitu-ents.
AOT already tracks the number of times staff meet with
constituents and reports this total on a monthly basis to the
Governor’s Office. AOT could consider evaluating these
numbers at a regional or county level and report the annual
number of constituent meetings by region/county as per-formance
measures in order to demonstrate that AOT serves
all areas of the State.
Finding III
32
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. AOT should discontinue its current method of calculating
economic impact performance measures since the methodol-ogy
and assumptions it uses are flawed. If AOT wants to
measure its return on investment for an individual advertis-ing,
marketing, or fulfillment project, it should use appropri-ate
methods and assumptions.
2. AOT should develop additional performance measures that
reflect its facilitator role. Specifically, AOT should develop
additional performance measures in the program areas of
advertising and trade marketing, as well as for constituent re-lations.
33
OFFICE OF THE AUDITOR GENERAL
FINDING IV AOT SHOULD CONDUCT
REQUIRED LONG-RANGE
PLANNING
The Arizona Office of Tourism (AOT) needs to develop a statu-torily
required long-range tourism plan for the State. The experi-ence
of other states shows that long-range planning can help a
state tourism agency better focus its marketing efforts. In devel-oping
such a plan, AOT should work with tourism stakeholders
to identify challenges, determine potential research areas, and
develop specific goals and objectives.
Current Planning
Inadequate
Although statute requires AOT to develop a long-range tourism
plan, AOT has focused its efforts on other priorities. Lack of a
long-range plan limits AOT’s ability to respond to strategic is-sues,
such as the State’s ability to maintain its share of the tour-ism
market. Other states have experienced positive benefits
from their long-range planning efforts.
AOT lacks a statutorily mandated long-range plan—AOT has
not developed a long-range tourism plan, as statute requires.
A.R.S. §41-2305(A) requires AOT to “perform research necessary
to determine a long-range tourism development plan for this
state.” However, AOT’s planning focus has been short-term, fo-cusing
on how advertising dollars are spent each year. In addi-tion,
AOT has chosen to pursue goals outside of a formal plan-ning
process. For example, in recent years AOT’s priority has
been to increase its funding and obtain dedicated funding
through lodging taxes.
Lack of long-range plan leaves AOT unable to respond to strate-gic
issues—Without a long-range tourism development plan,
AOT is unable to focus its efforts beyond immediate efforts, even
though it has identified a need to deal with longer-term issues.
Finding IV
34
OFFICE OF THE AUDITOR GENERAL
For example:
n In 1994, AOT identified competition from other states as a
long-term strategic challenge. AOT still considers this an im-portant
issue; however, it has not developed goals and objec-tives
to address the problem.
n In addition, AOT has recently expressed concern that Ari-zona’s
tourism market share has declined. However, AOT
has not conducted research to determine the cause nor de-veloped
goals and action steps to address the problem.
n Further, without established long-term priorities, AOT is not
prepared to make the most effective use of the additional
revenues it will receive as a result of recent legislative
changes. Having established objectives for spending the ad-ditional
revenues would help ensure that they are spent on
areas that would address identified needs.
Other states experience significant benefits from planning—In
addition, long-range planning has proven beneficial for other
states’ tourism marketing agencies. In 1999, the National Con-ference
of State Legislatures concluded that states can greatly
benefit from establishing comprehensive master plans for tour-ism
development. For example, Connecticut determined that a
long-term development plan was necessary because its market-ing
efforts alone could not ensure that the state would continue
to attract repeat visitors. One element of Connecticut’s plan in-volved
outlining funding criteria to assist lending institutions in
evaluating tourism-related proposals in order to encourage more
investment. Further, according to a state tourism official, Wash-ington
also benefited from fulfilling its planned enhancement of
its travel writers program, experiencing a 60 percent increase in
media coverage about the state. In addition, Nevada has success-fully
fulfilled its long-term goal to draw visitors using Arizona’s
Grand Canyon.
Nevada achieved its goal to
draw visitors using Ari-zona’s
Grand Canyon.
Finding IV
35
OFFICE OF THE AUDITOR GENERAL
Additional Efforts
Are Needed
There are a number of steps AOT should follow to successfully
fulfill its statutory mandate to develop a research-based long-range
plan.
n First, AOT should work with the Tourism Advisory Council
and other tourism stakeholders to identify challenges facing
the Arizona tourism industry, and establish agreed-upon
priorities. AOT has not taken full advantage of the Tourism
Advisory Council as a planning resource.
n The next step in the planning process would be to determine
the research needed to identify potential solutions to the chal-lenges
facing Arizona’s tourism industry. AOT spends ap-proximately
$190,000 on research each year, the majority of
which is focused on supporting its research library and pro-viding
statistical information. While this work fulfills some of
AOT’s other statutory research responsibilities, this research
does not assist AOT in making strategic decisions. For exam-ple,
in 1998, AOT provided $40,000 to an Arizona tourism as-sociation
for research on topics such as the state of the tour-ism
industry in Arizona, and tourism’s impact on Arizona’s
quality of life. Instead, AOT needs strategic information such
as why a type of tourist is not currently visiting the State or
the best ways to attract high-spending tourists.
n Finally, AOT and its stakeholders need to use this research to
establish specific goals and objectives and timetables for
achieving them, as well as a process for monitoring progress.
For example, Connecticut’s 1997 plan included two major ini-tiatives
and 22 action steps. One initiative was to enhance
tourism’s infrastructure, including transportation, informa-tion,
and education. An action step associated with this initia-tive
involved increasing the number of tourism educational
programs to ensure a qualified workforce. As a result, Con-necticut
now has a new four-year and several two-year tour-ism
college programs.
Strategic research would
benefit AOT.
Finding IV
36
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. AOT should develop a long-range tourism plan for Arizona
by:
a) Working with the Tourism Advisory Council and indus-try
stakeholders to identify challenges and priorities for
Arizona tourism;
b) Determining research projects to support the develop-ment
of a long-range plan; and
c) Developing specific goals and objectives to address stra-tegic
issues and a monitoring process with specific per-formance
measures to assess progress.
37
OFFICE OF THE AUDITOR GENERAL
OTHER PERTINENT INFORMATION
During this audit, other pertinent information was obtained
about how tourism promotion is structured and funded in other
states and in Arizona. Recently, a number of states restructured
tourism offices into innovative public-private partnerships with
the tourism industry. Information is also provided regarding the
traditional publicly operated structures and funding sources
used by the other states. Finally, information is provided about
other Arizona agencies with tourism responsibilities and fund-ing.
New Public/Private
Partnerships
At least three states, Florida, California, and Colorado, have re-structured
tourism efforts in recent years to develop innovative
partnerships with industry and share responsibility for promot-ing
tourism. These new approaches include contracting a tour-ism
commission to market and operate tourism activities; self-imposed
industry financial assessments; and voluntary funding
of state tourism efforts by the industry.
n Visit Florida—In 1996, Florida restructured its tourism ef-forts
to create a public-private partnership. The Florida legis-lature
abolished the division of tourism within the state de-partment
of commerce and replaced it with a 31-member
tourism commission. The commission identifies the tourism
promotion programs and activities in a four-year marketing
plan. The commission then contracts with a state-created,
not-for-profit corporation to implement this plan. The Florida
Tourism Industry Marketing Corporation operates under the
name “Visit Florida.” Visit Florida administers the state’s
domestic and international tourism activities, manages its
welcome centers, and conducts research on tourism and
travel trends.
In addition to restructuring, Florida has also incorporated
private sector funding into its new organization. Visit Florida
Florida’s state tourism ef-forts
are funded by the state
and the private sector.
Other Pertinent Information
38
OFFICE OF THE AUDITOR GENERAL
must increase private sector financial support to match state
funding on a dollar-per-dollar basis by the end of 2000, its
fourth year of existence. Visit Florida encourages tourism in-dustry
members to pay annual membership fees in exchange
for advertising and promotional opportunities. The corpora-tion
also offers advertising opportunities to private busi-nesses,
which allows partners to cooperatively market the
“Visit Florida” name and logo.
Florida tourism activities are funded by both the state and
private sector businesses. The state funds tourism from a
trust fund, which is financed by proceeds from a $2 per day
car rental surcharge and from private sector businesses con-tributing
through the corporation. State appropriations for
fiscal year 1999 were $22 million and private sector contribu-tions,
including in-kind contributions, totaled $32.8 million.
During fiscal year 1999, “Visit Florida” had operating ex-penses
of $37.8 million and 87 full-time equivalent positions.
n The California Tourism Marketing Act—California has
similarly restructured to incorporate private sector funding.
In 1995 the California legislature passed the California Tour-ism
Marketing Act in response to a 1993 travel industry pro-posal
to the Governor’s Task Force on Tourism Funding.
Travel-related businesses approved the Act in a 1997 refer-endum.
The California Travel and Tourism Commission,
created by the Act, consists of 37 members (including the
Secretary of Trade and Commerce), 24 elected by the travel
industry and 12 appointed by the Governor. The commission
determines how state-appropriated and industry-assessed
funds will be spent by the California Division of Tourism.
The Act includes an industry-imposed financial assessment
on four categories of travel-related activities, including ac-commodations,
restaurants and retail, attractions and recrea-tion,
and transportation and travel services. The assessment
is $450 for every $1 million a business generates in travel and
tourism revenue. Any business failing to report its revenues
is subject to penalties of 10 percent of its assessment plus in-terest,
as well as a civil penalty of up to $10,000 for filing false
information.
California’s state tourism ef-forts
are funded in part by
industry financial assess-ments.
Other Pertinent Information
39
OFFICE OF THE AUDITOR GENERAL
For fiscal year 1999, the assessment generated $5.7 million
and the State contributes $7.3 million annually to fund state
tourism marketing efforts. The program’s goal is to eventu-ally
raise $25 million annually for state tourism marketing,
with the legislature continuing to appropriate the current $7.3
million annually.
n The Colorado Travel and Tourism Authority—In contrast
to California, Colorado’s tourism promotions are funded by
voluntary industry assessments and some state funding. The
privately funded Colorado Travel and Tourism Authority
(CTTA) replaced the state-funded Colorado Tourism Board
after residents voted to not reauthorize the state tourism tax
that initially funded the Board. The CTTA relied on volun-tary
funding from tourism-related businesses to replace the
$12 million previously allocated from the tourism tax. How-ever,
it was not able to garner the financial support necessary
to take over the role of the State Tourism Board as not all
businesses were contributing to the cost of promoting tour-ism.
Therefore, in 1997, the Colorado legislature revived the
State Tourism Board with a $2.1 million state appropriation
to supplement private sector funding and tasked the board
with overseeing the CTTA, which contracts with the state to
provide tourism information. In March of 1999 the Colorado
legislature approved a $5 million appropriation for promot-ing
tourism.
Traditional Organizational
Structures and
Funding Mechanisms
In contrast to the public/private tourism promotion efforts dis-cussed
above, most states include tourism functions as a part of
another office or agency with related responsibilities and fund
tourism through a variety of public appropriations.
States structure tourism promotion efforts in many ways—
Typically, tourism promotion has been the responsibility of a state
agency. States generally structure tourism functions within the
state agency responsible for business development or commerce
or in another state agency with related responsibilities.
Voluntary funding from
Colorado’s tourism industry
was low.
Other Pertinent Information
40
OFFICE OF THE AUDITOR GENERAL
However, there are some states, such as Arizona, that operate
tourism offices which are independent of other agencies. In addi-tion,
there are several states that operate tourism offices in con-junction
with or under the authority of tourism commissions or
state tourism corporations.
n Agency program—The majority of states include their tour-ism
promotion activities within a larger state agency. Most
(32 states) assign tourism responsibilities and staff within the
agency responsible for trade, commerce, or economic devel-opment.
In addition, 5 states operate tourism offices as a part
of various other agencies which have related functions such
as parks, jobs, recreation, or transportation.
n Independent agency—Eight states, including Arizona, op-erate
independent or cabinet-level tourism offices.
n Corporations—Virginia and Rhode Island include tourism
offices under state-operated nonprofit entities. The Virginia
Tourism Corporation is a nonprofit authority which is a po-litical
subdivision of the state. Tourism functions in Rhode
Island are the responsibility of the Rhode Island Economic
Development Corporation, which replaced the Rhode Island
Department of Economic Development.
n Commissions—Seven states operate tourism commissions
in addition to state tourism offices. Tourism commissions in
some states advise governors and legislatures on tourism-related
issues. The duties performed by commissions vary by
state. For example, the Nevada Commission on Tourism op-erates
the state tourism office, and commissions in West Vir-ginia
and Oregon appoint the tourism office director.
Most states fund tourism with traditional revenue sources—
States use a variety of public funding sources to support tourism
including various dedicated taxes, legislative appropriations,
and lottery/gaming revenues.
n State General Fund—Twenty-one states rely on general
fund revenues to support publicly funded tourism efforts.
One state, Ohio, supplements state funding with revenue re-ceived
through federal grants.
In most states, the agencies
responsible for commerce
also handle tourism promo-tion.
Other Pertinent Information
41
OFFICE OF THE AUDITOR GENERAL
n Dedicated Public Funding from Taxes—Nineteen state
tourism offices receive a portion of their public funding
through other dedicated taxpayer-funded appropriations.
Twelve of these states fund tourism offices partially or
wholly through lodging or room taxes. Until the 2000 legisla-tive
session, Arizona funded its office partially through a bed
tax. In 1998, total taxes on lodging, when combined with ex-isting
state and local taxes, ranged from a high of 15.6 percent
in Seattle, Washington, to a low of 4 percent in Bozeman,
Montana. As of May 2000, the total tax in Phoenix is 10.67
percent. Four states that do not impose lodging taxes pay
tourist office costs by dedicating sales tax or assessing taxes
on other businesses such as restaurants, car rentals, and ad-missions
to tourist attractions. Three other states receive part
of their funding from road or highway funds.
n Industry Funding, Sales, and Logos—In addition, six
states fund tourism activities with private funding or sales
revenues. Three of these states obtain a portion of their
budget from the tourism industry and three generate reve-nue
from sales at welcome center vending machines or sales
of novelty items and logos.
n Lottery/Gaming Revenues—Four states use lottery or gam-ing
revenues to fund tourism activities. Lottery revenues in
Kansas, Oregon, South Dakota, and West Virginia are used
for tourism.
Arizona Tourism
Past and Future
Information regarding the Arizona state agencies with tourism
responsibilities and recent legislative changes that modified
AOT’s funding is provided below.
Several agencies in Arizona involved with tourism—The Ari-zona
Office of Tourism is not the only agency in the State in-volved
with tourism.
n Department of Commerce—Originally one agency was re-sponsible
for both tourism and economic development. Tour-ism
duties were transferred from the Governor’s Office of
Most states’ tourism efforts
are publicly funded from
specific taxes.
Other Pertinent Information
42
OFFICE OF THE AUDITOR GENERAL
Economic Planning and Development (now the Arizona De-partment
of Commerce) when the Office of Tourism was cre-ated.
However, A.R.S. §41-1504 directs the Arizona Depart-ment
of Commerce to establish and oversee export and im-port
trade and tourism offices in the Far East, Mexico,
Europe, Japan, and Canada, although the Department does
not currently have tourism offices. Additionally, the Arizona
Department of Commerce currently operates a Rural Tour-ism
Development (RTD) program to help communities
achieve a sustainable tourism industry and assist them with
organizing their tourism efforts.
n Arizona Highways Magazine—Both the Arizona Office of
Tourism and Arizona Highways Magazine’s missions include
bringing travelers to Arizona. Arizona Highways Magazine is a
self-funded entity that promotes Arizona through the sale of
the magazine, books, calendars, and maps. A 1999 guide
published by the National Conference of State Legislatures
noted that state magazines are one means to provide infor-mation
to state visitors. The guide stated that according to the
Arizona Department of Transportation, Arizona Highways,
with a circulation of 400,000, is one of the State’s best tools for
promoting tourism.
n State Parks—Although not directly charged with promoting
tourism, the State Parks Board is responsible for administer-ing
and promoting Arizona’s state parks. Because many state
parks are major tourist attractions, AOT works closely with
the State Parks Board. AOT provides information on state
parks and Internet links to the Arizona State Parks Internet
site. In 1999, the opening of Kartchner Caverns State Park
generated significant interest and has resulted in a high de-mand
for tours.
AOT funding amended—During the 2000 legislative session, leg-islation
was passed that changed the way the AOT is funded.
Legislation included increasing AOT’s funding as part of a pro-posal
to build a stadium and designating dedicated sales tax
revenues for funding AOT.
n The Stadium Proposal—Legislation was passed to refer to
voters a proposal to fund a new stadium that includes an in-crease
in funding to state tourism from a car rental surcharge
Arizona Highways Maga-zine
provides tourist infor-mation.
Other Pertinent Information
43
OFFICE OF THE AUDITOR GENERAL
and hotel tax revenues collected in Maricopa County. Under
this proposal, AOT will receive an estimated additional $4
million dollars in the first year of funding with 5 percent in-creases
annually. The implementation of this legislation is
dependent on a public vote in November 2000.
n Dedicated Funding—Two other proposals were introduced
in the 2000 legislative session to change AOT’s funding for-mula.
Historically, AOT has received its funding from the
General Fund and a portion of the revenues collected
through the lodging tax. One proposal passed by the Legisla-ture
in the 2000 session eliminates AOT’s general fund ap-propriations
and replaces them with dedicated funding de-rived
from taxes generated from lodging taxes. For fiscal year
2002, it is estimated that AOT will receive $9.2 million. This
legislation will be repealed if the stadium proposal is ap-proved
by the voters. The proposal that was not passed by
the Legislature also included dedicated funding, but addi-tionally
increased the percentage of the taxes AOT would re-ceive,
essentially doubling AOT’s budget.
44
OFFICE OF THE AUDITOR GENERAL
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45
OFFICE OF THE AUDITOR GENERAL
SUNSET FACTORS
In accordance with A.R.S. §41-2954, the Legislature should con-sider
the following 12 factors in determining whether the Ari-zona
Office of Tourism (AOT) should be continued or termi-nated.
1. The objective and purpose in establishing the
agency.
The purpose of the Arizona Office of Tourism (AOT) is to
promote and develop tourism in the State of Arizona.
AOT was established by the Legislature in 1978 and its
mission is “to expand the volume of tourism activity and
related expenditures in the state in order to enhance the
economy, the stability of the work force and the standard
of living for all Arizonans.”
AOT has a number of statutorily required duties that in-clude
promoting and developing tourism business; plan-ning
and developing a campaign to promote statewide
attractions; and conducting research necessary to 1) estab-lish
the Office as the central repository and clearinghouse
for all tourism-related data, 2) determine a long-range
tourism development plan for Arizona, and 3) provide in-formation
to the Governor, the tourism industry, and the
public.
2. The effectiveness with which the agency has met its
objective and purpose and the efficiency with which
the agency has operated.
Although AOT has demonstrated its efficiency and effec-tiveness
in some areas, it can improve in others. In 1999,
the National Council of State Tourism Directors awarded
three first-place prizes to AOT’s most recent advertise-ment
campaign. In addition, AOT has been successful in
fostering cooperation within the tourism industry
through its support of the Arizona Tourism Alliance, an
Sunset Factors
46
OFFICE OF THE AUDITOR GENERAL
association of tourism businesses and organizations. Fur-ther,
AOT has obtained private sector in-kind contribu-tions
to support its efforts. Finally, auditors’ interviews
with tourism stakeholders indicated that they are gener-ally
satisfied with AOT’s efforts.
However, this audit identified several ways AOT can im-prove
its efficiency and effectiveness.
n First, AOT should improve its contracting practices.
Many of AOT’s contracting practices violate state pro-curement
statutes, rules, and accounting guidelines.
For example, some AOT contracts were never com-petitively
bid. In addition, AOT has used its advertis-ing
contract to avoid complying with procurement
requirements (see Finding I, pages 9 through 18.)
n Second, AOT should adopt additional performance
measures to demonstrate its effectiveness in helping
market Arizona to tourists. Some of AOT’s current
performance measures are based on flawed method-ologies
and assumptions. Improving the methods is
important if AOT continues to measure its economic
impact. Further, AOT should develop additional per-formance
measures that reflect its effectiveness in
working with tourists, the travel industry, and com-munities
to facilitate tourism (see Finding III, pages 25
through 32).
n Third, AOT should develop a long-range tourism
plan. Long-range planning and research is mandated
by state statute; however, AOT’s planning efforts
have focused on short-term rather than long-term
goals. AOT needs to work with tourism stakeholders
to identify strategic issues, determine necessary re-search
projects, and establish goals and objectives as
part of a formal long-range planning process (see
Finding IV, pages 33 through 36).
Sunset Factors
47
OFFICE OF THE AUDITOR GENERAL
3. The extent to which the agency has operated within
the public interest.
AOT operates in the public interest by sharing Arizona
tourism information and research with potential tourists,
businesses, and Arizona communities. For example,
AOT’s Trade Marketing Program staff attend national
and international tourism trade shows to provide travel
agents and tour operators with information about Ari-zona
attractions. AOT then shares the trade show con-tacts
they make with Arizona convention and visitors’
bureaus.
In addition, AOT offers the Tourism Investment Funds
Sharing Program (TIFS) to assist in the development of
tourism promotion projects at the local level. The TIFS
program provides matching funds to nonprofit organiza-tions,
government organizations, and statewide associa-tions
involved in promoting a destination in Arizona.
However, AOT failed to act in the public interest by in-appropriately
becoming a member of a limited liability
company. In fiscal years 1998 and 1999 AOT provided a
total of $60,000 to this limited liability company. The
company subsequently purchased a Web site address.
AOT’s participation exceeded its statutory authority and
is unconstitutional. Article 9, §7 of the Arizona Constitu-tion
prohibits state agencies from being a shareholder in,
and providing monies to, a company or corporation (see
Finding II, pages 19 through 23).
In addition, AOT has not operated in the public interest
by failing to competitively bid many of its contracts and
by using its advertising contract to avoid the procure-ment
process. Because a competitive bidding process was
not used for many contracts, AOT may be spending more
monies than needed for some services. Further, because
AOT has used its advertising contract to avoid the pro-curement
process, past and future bidders may be im-pacted
(see Finding I, pages 9 through 18).
Sunset Factors
48
OFFICE OF THE AUDITOR GENERAL
4. The extent to which rules and regulations promul-gated
by the agency are consistent with the legisla-tive
mandate.
AOT promulgates rules pursuant to A.R.S. §41-2304(B)(5).
Arizona Administrative Code R20-3-101 through R20-3-
104 deals with joint ventures including definitions, pro-cedures,
standards for participants, and conditions of par-ticipation.
In addition, the Governor’s Regulatory Review Council
(GRRC), at the request of the Office of the Auditor Gen-eral,
reviewed the Board’s statutes and determined that
AOT has promulgated some, but not all, of the rules nec-essary
to carry out its statutory provisions. GRRC deter-mined
that the following additional rules may be neces-sary:
n Rules addressing policies or programs to promote
tourism pursuant to A.R.S. §41-2305(A)(5) that require
AOT to “formulate policies, plans and programs de-signed
to promote tourism in this state.”
n Rules concerning how an agency or person makes a
gift or a grant, or the recording and reporting mecha-nisms
that will be used to track the source and
amount of gifts and grants pursuant to A.R.S. §41-
2305(B)(6). This statute allows AOT to “accept gifts,
grants, matching funds and direct payments from
public or private agencies or persons for the conduct
of programs which are consistent with the general
purposes and objectives of this chapter.”
n Rules regarding the establishment of a monitoring
system including who is to report when and in what
manner pursuant to A.R.S. §41-2305(B)(10), which re-quires
AOT to “establish a reporting system for public
agencies and private persons or enterprises in order to
monitor state tourism.”
n Fee rules pursuant to A.R.S. §41-2305(B)(11) that allow
AOT to “charge reasonable fees for services and pub-lications.”
Sunset Factors
49
OFFICE OF THE AUDITOR GENERAL
5. The extent to which the agency has encouraged in-put
from the public before promulgating its rules and
regulations, and the extent to which it has informed
the public as to its actions and their expected impact
on the public.
The public has not had a recent opportunity to comment
on the adoption of rules. On March 4, 1997, the Gover-nor’s
Regulatory Review Council approved AOT’s five-year
rules review report, and the proposed rule amend-ments.
The next five-year review report is due in October
2001.
AOT has not adequately complied with Open Meeting
Laws regarding posting public meeting notices for the
Tourism Advisory Council. Auditors’ contact with the
Secretary of State’s Office in December 1999 revealed that
AOT was not in compliance with the Open Meeting Law
requirement that boards and commissions file a state-ment
with the Secretary of State’s Office providing the lo-cation
where their public meeting notices will be posted.
AOT has since notified the Secretary of State regarding
the location where it will post public meeting notices.
6. The extent to which the agency has been able to in-vestigate
and resolve complaints that are within its
jurisdiction.
This factor is not applicable because AOT does not have
investigative or regulatory authority.
7. The extent to which the attorney general or any other
applicable agency of state government has the au-thority
to prosecute actions under the enabling legis-lation.
This factor is not applicable because AOT is not a regula-tory
agency with enforcement or oversight responsibili-ties.
Sunset Factors
50
OFFICE OF THE AUDITOR GENERAL
8. The extent to which the agency has addressed defi-ciencies
in the enabling statutes that prevent it from
fulfilling its statutory mandate.
AOT has not sought any recent changes to its enabling
statutes. However, legislation was passed during the 2000
legislative session that may increase AOT’s funding and
provided dedicated funding through lodging taxes (see
Other Pertinent Information, pages 37 through 43).
9. The extent to which changes are necessary in the
laws of the agency to adequately comply with the fac-tors
listed in the Sunset Laws.
This audit does not make any recommendations for statu-tory
changes.
10. The extent to which termination of the agency would
significantly harm the public health, safety, or wel-fare.
Terminating AOT would not significantly harm the pub-lic
health, safety, and welfare of Arizona citizens. Al-though
AOT is the only entity that promotes Arizona
statewide, many other public and private entities are in-volved
in promoting tourism. However, all 50 states cur-rently
fund some level of tourism promotion. This report
provides additional information regarding how Arizona
and other states organize and fund their tourism promo-tion
efforts (see Other Pertinent Information, pages 37
through 43).
11. The extent to which the level of regulation exercised
by the agency is appropriate and whether less or
more stringent levels of regulation would be appro-priate.
AOT is not a regulatory agency, thus this factor does not
apply.
Sunset Factors
51
OFFICE OF THE AUDITOR GENERAL
12. The extent to which the agency has used private con-tractors
in the performance of its duties and how e f-fective
use of private contractors could be accom-plished.
AOT relies on private contractors to a great extent. In fis-cal
year 2000, AOT estimates that 83 percent of total ex-penditures,
including salaries, will be for private contrac-tors.
AOT currently uses private contractors for such ser-vices
as advertising, marketing Arizona in international
markets, the operation of a call center to provide tourism
information, research activities, public relations, and pro-duction
of guidebooks and maps.
This audit identifies several problems and makes recom-mendations
concerning AOT’s contracting practices (see
Finding I, pages 9 through 18).
52
OFFICE OF THE AUDITOR GENERAL
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OFFICE OF THE AUDITOR GENERAL
Agency Response
Auditor General Comments to
Agency Response
Agency Response
OFFICE OF THE AUDITOR GENERAL
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OFFICE OF THE AUDITOR GENERAL
The Auditor General’s Comments
On the Audit Response from the
Arizona Office of Tourism
The following response from the Arizona Office of Tourism (AOT) contains both inaccurate and mis-leading
statements, particularly with regard to the report’s first two Findings. To ensure that the reader
has all the information pertaining to the issues in this report, we provide the following comments.
Finding I: We identified 16 purchases in which AOT exceeded its purchasing authority without seeking competi-tive
bids. Seven of these purchases exceeded $100,000. The AOT response attempts to characterize many of these
purchasing violations as either payments for trade association dues or as sole source purchases. However, at least
two of what AOT appears to characterize as “dues” payments actually were used to primarily purchase research
and two “dues” payments were actually AOT’s contribution to the Limited Liability Company of which it illegally
became a member.
With regard to sole source purchases, the following facts should not be ignored. 1) AOT is not exempt from the
State Procurement Law. 2) AOT never received, as required by law, permission from the State Procurement Office
to make sole source purchases. 3) Although AOT states that it was “inconsistent” in documenting the need for,
and approval to make, sole source purchases, AOT could not provide our Office with any such documentation
when we requested it during the audit.
With regard to the improper use of subcontracts to circumvent the purchasing process, AOT’s response
fails to acknowledge that two high-level AOT employees told auditors during the course of the audit
that one reason AOT subcontracted services through its advertising contractor was to avoid procure-ment
requirements.
Finding II: The AOT response suggests that AOT was included as a member of a Limited Liability Company
(LLC) without its consent or knowledge. This position ignores the following facts: 1) billing records from the legal
firm serving the LLC show that the firm contacted an AOT employee prior to filing the articles of incorporation
and provided him a copy of the articles after they were filed. 2) This same AOT employee was later listed as presi-dent
of the LLC on company documents. 3) Although we had several conversations and obtained numerous
documents from AOT employees during the course of the audit relating to the LLC, no AOT employee raised the
issues contained in this response until after receiving the draft report. 4) A former company official stated AOT
was aware of and did consent to its membership in the company.
OFFICE OF THE AUDITOR GENERAL
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ARIZONA OFFICE OF TOURISM
RESPONSE TO PERFORMANCE AUDIT
SUBMITTED TO
OFFICE OF THE AUDITOR GENERAL
August 18, 2000
1
Arizona Office of Tourism
Response to Report Highlights
August 18, 2000
Under Arizona Revised Statutes 41-2952, the Office of the Auditor General (OAG) conducts
reviews under the “Sunset Law” for the purpose of providing the Arizona Legislature with
information necessary “for determining if the merits of a program justify its continuation rather
than termination.” The Arizona Office of Tourism acknowledges and appreciates the efforts of
the OAG is conducting this performance review as such.
AOT further appreciates the recommendations for agency improvements in efficiency and
effectiveness as presented in the report, and is already proceeding with the implementation of
policies and procedures not previously in place. However, AOT considers the OAG’s critical
findings to be disconcerting, particularly with regard to the selective use of information that
creates inaccurate or misleading conclusions and impressions. AOT appreciates the opportunity
to supply other pertinent information in the interest of a balanced interpretation of the issues.
Our Conclusions:It is noted with appreciation that the OAG, in its principally intended
focus within this review on AOT’s primary marketing programs, found no issues of
inefficiency suitable for documentation in the report. With regard to the findings that are
documented, AOT finds it appropriate to respond as follows:
Procurement Code Issues Overstated
The OAG has misrepresented AOT’s procurement activity by mis-categorizing sole source
providers and by targeting a handful of necessary trade association dues payments where
approval to exceed usual purchasing limits was, unfortunately, not fully documented. The
OAG’s interpretation of AOT procurement problems avoids review of the complicated
circumstances AOT and all other tourism offices must function under, thus providing an
unbalanced picture of AOT’s unique procurement needs. While AOT was inconsistent in its
efforts to retain procurement documentation concerning these unique industry association
memberships and sole-source vendors, the measures to correct this situation are well underway.
While AOT admits to some administrative processing inconsistencies with regard to the items
specified in the review, and is taking appropriate corrective action, we note and appreciate that
there are no items cited which constitute any misuse of funds or other serious fiscal
wrongdoing by the agency. On the contrary, virtually all of the items cited represent programs
of significant effectiveness and value to the State, as elaborated upon in the full response.
2
AOT appreciates and will heed the OAG’s recommendations for fully documenting the basis for
all its purchasing and contracting practices under the procurement code, and that it obtain
procurement training as necessary. AOT has already initiated discussions with the State
Procurement Office to address the findings in this report.
“Illegal Company” Incorrect and Misleading
AOT, and three non-profit community destination marketing organizations joined together in an
association to develop a website for the benefit of their common public missions. The
association retained legal counsel to assist in the formation of the entity, and, as such, to assure
abidance with all state laws in the interests of, and on behalf of, all of the participating partners.
It is by no means clear as a legal matter that the OAG may assert that AOT acted in
violation of the state constitution with its participation in the limited liability company that
was formed. Article 9, Section 7 of the Arizona Constitution, referenced in this finding, is
called the “gift clause.” The intent of the gift clause is to prevent “public funds from being used
to foster or promote the purely private or personal interests of any individual.” This intent was
clearly adhered to in this situation.
The public received a value much greater than what was paid by AOT into this organization, in
which case the gift clause was further complied with. The State has gained hundreds of
thousands of dollars in net value from AOT’s involvement in this venture, and this public gain is
continuing. The website’s current publisher/host has itself invested over $500,000 in the project
in just the past two years. Additionally, the economic impact benefit provided by visitors to
Arizona who are motivated by the website, which receives nearly one million page views per
month, is certainly significant.
Furthermore, this finding’s allegation that AOT violated statute prohibiting state agencies from
employing legal counsel other than the state Attorney General, is factually unfounded. Counsel
to the organization in question can verify that it never was employed by AOT.
When AOT’s actions in this matter are considered in view of what the overall goal of the
venture was, they can be regarded as completely consistent with its non-profit goals and
purposes, and with the intent of the constitution’s gift clause. The implication in the finding
that AOT took deliberate illegal action in this venture is terribly inappropriate. AOT does
acknowledge and appreciate the OAG’s recommendation that it should seek the advice of
the Attorney General regarding entering such agreements.
Performance Measures
AOT is constantly seeking ways to improve upon its monitoring procedures, and appreciates the
OAG’s recommendations for additional performance measures. AOT does not agree, though,
that its measurement of economic impact and the related return on investment value of its
programs is not reliable or valid. See detailed response document.
3
Long Range Plan Needed…
…But the lack of one does not prevent AOT from addressing strategic issues. See detailed
response document.
AOT appreciates the OAG’s reference to the importance of long-range planning, but must note
that statute does not specifically require AOT to develop a long-range tourism development plan,
as the report suggests. It does require AOT to “perform research necessary to determine a long-range
tourism development plan for the state.” AOT has been conducting such research in
partnership with the state tourism industry for the past three years. This research serves as the
necessary preparation for the long-range planning that is currently underway. AOT and its
board, the Governor’s Tourism Advisory Council, in partnership with the Arizona Tourism
Alliance, have cooperatively undertaken this initiative.
Though the OAG’s report omits review of AOT’s long-range research and planning efforts, AOT
acknowledges the recommendation that it should work with the Arizona tourism industry to
develop a plan, and notes that it is underway.
4
Arizona Office of Tourism
Response to Performance Audit
August 8, 2000
Under the Sunset review statutes, the Joint Legislative Audit Committee authorized the Office of
the Auditor General (the “OAG”) to conduct a performance audit of the Arizona Office of
Tourism (the “AOT”). At the outset of the process, the OAG advised AOT of its intent to
conduct a program review of AOT’s main marketing programs including: (1) Domestic Media
Advertising, (2) Travel Counseling and Direct Mail Marketing, (3) International and Domestic
Trade Marketing and (4) Media Promotion and Communications. According to the OAG, a
program evaluation assesses a program’s “effectiveness and evaluates whether desired outcomes
are being achieved.”1
At the end of this process AOT notes that the audit report offers minimal evaluation of the
Office’s core marketing activities. During discussions with the Auditor General and the
performance audit staff, it was noted that the Legislature has directed the OAG to principally
focus its efforts on the identification of areas of inefficiency, and the delivery of related problem
solving recommendations. Based on this understanding of OAG’s mandate and its 10 month
review of AOT’s operations, we appreciate and are pleased that the performance audit
team identified no basis for recommending significant modifications or improvements to
AOT”s core marketing activities.
We also appreciate the limited recognition of program effectiveness that the report does
expressly provide. AOT received top recognition among all state tourism offices for its most
recent marketing campaign, and had received various related awards during the immediate prior
years. Additionally, AOT enjoys significant support from the Arizona tourism industry,
particularly in terms of wide spread cooperation and participation in its marketing programs,
including considerable in-kind private contributions to leverage AOT program funding. This
industry support and participation is further reflected in the audit’s finding of satisfaction with
AOT’s marketing activities among tourism stakeholders.
AOT appreciates the constructive spirit of the audit’s recommendations for potential
improvements, and is implementing those recommendations as appropriate. This response
reviews the more critical findings regarding the administrative process surrounding certain
vendor relations, organizational memberships, performance measures, and long-term planning
initiatives.
1 Summary of Performance Audit Division of the Office of the Auditor General located at the Internet address,
www.auditorgen.state.az.us/PAD.htm (January 18, 2000).
5
Response to Findings I - IV
I. Interpretations under Procurement Code and Contractual Language
Create Confusion
Purchases Covered by Widely Recognized Exceptions to Procurement Code
In reviewing all of the procurements identified by the OAG, most of the contracts represented
unique opportunities with a particular vendor exclusively situated to provide the proposed
services. For example, six of the contracts represented annual membership dues for participation
in industry associations. AOT has long-standing support, participation and cooperation with
industry associations including national (e.g. Travel Industry Association of America), regional
(e.g. Western States Tourism Policy Council), and state (e.g. Arizona Tourism Association,
Arizona Tourism Internet Partners, etc.) tourism organizations. In each of the six instances
noted, AOT made payment of annual membership dues to an organization for services simply
not duplicated by any other entity.
Another seven contracts included purchases of marketing services from vendors with some
combination of unique marketing vehicles, distinct audience, copyrighted research, and/or
exclusive channels of distribution. AOT believes that each one of these purchases would have
been entirely appropriate within the scope of services expressly recognized by its marketing
contract. However, the agency determined that direct contracts for the unique services offered
the most cost-effective manner of obtaining the services. Once again, each of the purchases
represented a unique mix of services simply not offered by any other vendor.
AOT believed that it appropriately documented the justification for purchases where a vendor
was either clearly unique or offered unique marketing services which could have otherwise been
procured under AOT’s marketing/advertising contract. In any event, under similar
circumstances the State Procurement Office (the “SPO”) authorizes procurement waivers when
appropriate and allowed by law. Procedures have already been put in place by AOT to properly
document and obtain competition or appropriate procurement waivers, to address the findings in
the report, and otherwise.
The OAG has misrepresented AOT’s procurement activity by mis-categorizing sole source
providers and by targeting a handful of necessary trade association dues payments where
approval to exceed purchasing authority was, unfortunately, not consistently documented.
The OAG’s review omits consideration of the complicated circumstances AOT and like
tourism offices must function under, thus providing an unbalanced assessment of AOT’s
unique procurement needs. The great value accrued to the state through AOT’s leveraged
involvement in many of these programs should not be left unrecognized. Issues such as
these suggest that a full review of AOT’s unique role as a marketing entity for the state and
the related special procurement provisions that should be considered may be in order.
The finding with regard the AOT’s use of its advertising contract is dependent on the
interpretation of contract language and the intent at the time of the agreement. AOT notes that
marketing agreement was contracted though formal bid procedure conducted by SPO. The
6
language was developed under the advice of SPO. AOT notes that the advertising agency
contract does expressly provide for a broad scope of work, which essentially provides for the
advertising agency to serve as a “marketing” agency, conducting all such services for the State as
advertising agencies commonly conduct for their clients. AOT notes that the OAG reviewed the
original contract with the same agency as part of its sunset audit in 1995. At the time, the OAG
concluded that “the agency has substantially clarified the terms of its current contract.” Based on
this finding, the revisions the OAG now suggests (e.g. expressly listing all services and sub-contractors,
establishing a total limit on contract size, etc.) seem a significant departure from the
structure of the current contract.
While AOT acknowledges that the benefit of hindsight always raises the potential for
improvements, AOT does not feel that the cited activities of the agency violate procurement
policy, given its understandings with SPO as they evolved through the bid process and beyond.
The advertising contract is due for re-bidding in the near future. The contract will be reviewed
with SPO with the issues raised in this audit included as key considerations.
As such, AOT does not agree with the finding’s implication that it knowingly “violated”
procurement policy. AOT acknowledges inconsistencies with regard to specific
administrative procedures within procurement policy, and has implemented internal
measures and is working with SPO to correct the problem in this area. However, the
agency has in fact conducted its business in the areas cited in compliance with the intent
and spirit of state procurement policy, and with integrity. Because of the nature of AOT’s
destination marketing mission, the agency has procurement needs unique to state
government, particularly with respect to its need for flexibility in order to be able to
respond effectively and efficiently in a dynamic and highly competitive marketing
environment. AOT is grateful for the opportunity to explain its operations and rebut the
severity of the OAG’s conclusion concerning procurement.
II. AOT’s Membership in a Statewide Internet Marketing Association
Generated Great Benefit and Value to the State
With the emergence of the World Wide Web on the Internet in 1994, AOT and other major
Arizona tourism marketing organizations recognized the inevitable importance of this new
medium as a significant marketing channel for the tourism industry. After strategic discussions
through the middle of 1995, the group of marketing organizations collectively concluded that a
coordinated presence on the Internet represented the strongest marketing position for all
participants involved in marketing travel to the state of Arizona. A single site could aggregate
content from every type of travel destination marketing organization (e.g. the state, cities,
community chambers of commerce and convention and visitor bureaus, attractions, lodging
establishments, etc.) where travelers could find all planning materials for their trips throughout
Arizona. Additionally, the tourism marketing organizations recognized that their collective
presence would represent critical mass in an otherwise fragmented environment, and anticipated
that such coordination would allow them to negotiate free web site development and site hosting
services.
7
As part of a joint procurement process during the summer and fall of 1995, the original six
tourism marketing organizations secured a winning bid from a publishing company for free web
site development for the initial participants, as well as free web hosting for all initial and future
participants in the site. The web site debuted at the web address “ArizonaGuide.com” (the
“ArizonaGuide”) in January of 1996. ArizonaGuide enjoyed significant support from the travel
industry growing to include more than 20 community marketing organizations by 1997. In
addition to free web site hosting for the communities’ chambers of commerce and convention
and visitor bureaus,