Performance audit, Arizona Office of Tourism

              DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY AUDITOm GENERAL
September 26, 1994
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Greg Gilstrap, Director
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 May 5, 1993,
resolution of the Joint Legislative Audit Committee.
The report addresses the important role the Office now plays in the State's multi-billion
dollar tourism industry, and the need to professionalize the Office's
operations and buffer it more effectively from the political process. We also
address unjustified and wasteful payments that were made to the Office's
previous advertising firm.
My staff and I will be pleased to discuss or clardy items in the report.
This report will be released to the public on September 27,1994.
Sincerely,
DO@ S R. Norton
Auditor General
2910 NORTH 44TH STREET 1 SUITE 410 1 PHOENIX, ARIZONA 85018 l( 602) 553- 0333 1 FAX ( 602) 553- 0051
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona Office of Tourism, pursuant to a May 5, 1993, resolution of the
Joint Legislative Audit Committee. Ths audit was conducted as part of the Sunset
review as set forth in Arizona Revised Statutes # 41- 2951 through 41- 2957.
Promoting tourism was originally a responsibility of the Governor's Office of Economic
Planning and Development. In 1975, the Governor created a separate Office of Tourism
by executive order. The Office continued under ths order until 1978, when the
Legislature created the Arizona Office of Tourism ( AOT). Under the statutes creating
it, AOT is charged with developing tourism business in Arizona through the
advertising, promotion, and dissemination of information regarding the state's
attractions. Its responsibilities include conducting research for long- range tourism
development, and formulating policies, plans, and programs to promote tourism.
Statutory Changes Are Needed to
Professionalize the Arizona Office
of Tourism ( see pages 5 through 10)
Although the Arizona Office of Tourism began as a small program withn the
Governor's Office, it has grown to become a key player in the state's efforts to promote
the tourism industry. However, the structure and conditions under whch the Office
functions have not changed to reflect the growth and increased importance of AOT's
role. As a result, the Office has had difficulty managing such basic tasks as budgeting,
contracting, and planning and research. For Arizona to have an effective, professional
tourism organization, steps must be taken to stabilize turnover in the director's position,
and buffer the Office from the political process. At a minimum, the Legislature should
consider specifying qualifications for the director's position, and requiring the use of
a search committee process to fill it, and placing clerical and administrative support
positions under the state personnel system. The Legislature may also wish to consider
several options used by other states, such as placing the Office under a commission,
withn the Department of Commerce, or combining it with another promotional group
such as Arizona Highways Magazine.
Advertising Dollars Were Wasted In
Unjustified Payments to the Former
Advertising Finn ( see pages 11 through 15)
Under the contract provisions, AOT's former advertising firm was not entitled to payment
for services performed by AOT or a third party. However, in the projects we reviewed,
AOT paid the firm nearly $ 100,000 for publishing and broadcasting services performed
by AOT staff or a third party. For example, AOT paid the fun over $ 26,000 in commissions
for broadcasting services performed by the Arizona Broadcasters Association as part
of a public service campaign with AOT.
Our investigation revealed that poor judgment, and the former director's belief that the
contract language was vague, may have contributed to the improper payment of
commissions in these cases. AOT has improved the language of the current contract in
an effort to elminate opportunities for the advertising firm to blll for unearned commissions
in the future; however, it has taken no action to recover these misspent funds. AOT should
seek the opinion of the Attorney General's Office to determine the feasibility of recovering
these funds. If recovery is feasible, a closeout audit could help identify any other charges
paid to the advertising firm whch were unjustified.
Table of Contents
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Finding I: Statutory Changes Are Needed
To Professionalize The
Arizona Office of Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . s
Director Turnover and Political
Patronage Adversely Impact
AOTOperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statutory Changes Are Needed
to Address the Root Causes of
AOT's Ineffectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Finding II: Advertising Dollars Were
Wasted In Unjustified Payments To
The Former Advertising Firm . . . . . . . . . . . . . . . . . . . . . . . . 13
Advertising Firm Paid Commissions
for Services Performed by Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3
AOT Should Take Steps to
Recover Misspent Contract Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 7
Other Pertinent Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Statutory and Budget Reform Mandates . . . . . . . . . . . . . . . . . . . . . . . . . 19
AOT's Current Status on
Budget Reform Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9
Sunset Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Agency Response
Tables
Table 1 Arizona Office of Tourism
Actual and Approved Expenditures
Appropriated Funds
Fiscal Years 1992- 93, 1993- 94, and 1994- 95
( unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Arizona Office of Tourism, pursuant to a May 5, 1993, resolution of the Joint
Legislative Audit Committee. Ths audit was conducted as part of the Sunset review
as set forth in Arizona Revised Statutes 5541- 2951 through 41- 2957.
The Office of Tourism was created by Executive Order in 1975. At that time, all duties
related to tourism were transferred from the Governor's Office of Economic Planning
and Development to the Office of Tourism. The executive order was later repealed in
1978, after the Legislature passed a bill establishng the Arizona Office of Tourism ( AOT).
AOT is charged with planning and developing tourism business in Arizona through
advertising, promotion, and dissemination of information regarding the state's attractions.
Its responsibilities include conducting research for long- range tourism development,
establishing the Office as the central repository for tourism information, and formulating
policies, plans, and programs designed to promote tourism in the state.
Importance of Tourism
in Arizona
Tourism plays an important role in our state's economy. While exact data on the impact
of tourism is not available, the Arizona Hospitality Research and Resource Center at
Northern Arizona University ( NAU) estimates that travelers spent from $ 7 billion to
$ 8 billion in Arizona in 1993. These expenditures directly supported over 100,000 tourism
jobs, and resulted in over $ 288 million in tax revenues.
Organization
The current director recently reorganized AOT into four divisions, each headed by a
manager. The responsibilities of each division are summarized below:
International & Domestic Trade Marketing - This division is responsible for
developing an international marketing strategy, and coordinating the state's
participation in sales missions and marketing events. In addition, ths division
develops and implements all AOT marketing programs aimed at domestic tour
operators, wholesalers, and travel agents.
Advertising and Tourism Development - Ths division oversees the creation and
placement of advertisements designed to attract travelers to Arizona. The division
works with the Department of Commerce in rural economic development as it
relates to tourism. In addition, the division oversees the cooperative advertising
grant program, an effort aimed at assisting Arizona's local communities in their
marketing campaigns. This division is also responsible for coordinating and
overseeing the agency's research projects.
Communications - Ths division promotes the state's tourism attractions through
nonadvertising formats such as media relations, industry cooperation, travel writer
familiarization tours('), and the publication of the Arizona Calendar of Events.
This division serves as a key communication hk with the public and private sectors
for information about AOT programs, opportunities, and industry trends.
Business Affairs - This division provides the administrative functions of the Office,
including purchasing, budgeting, human resources, and other operational measures,
such as response to requests for travel information, computer operations, and internal
tracking procedures. In addition, this division is responsible for the dissemination
and implementation of consistent office policies and procedures, as well as the
management of the Office's administrative legal issues.
In addition to establishing the Office, AOT's statutes also provide for a Tourism Advisory
Council ( TAC) to advise the Office in preparing the budget and establishing policies
and programs that promote and develop tourism. Membershp of the council, whch
is established by statute, consists of representatives from various tourism related businesses,
and represents different geographical areas of the state. The TAC is strictly advisory
in nature, and has no authority over AOT.
Budget and Personnel
The Office's operating budget consists mostly of appropriated funds. In addition, AOT
receives nonappropriated revenues from trade show registration fees, which are intended
to reimburse AOT for expenses incurred in organizing trade show participation.
Actual and approved expenditures of appropriated funds for fiscal years 1993 through
1995 are shown in Table 1 ( page 3). The Tourism Fund consists of an annual appropriation
AOT organizes familiarization tours ( fam tours) for travel writers with the expectation that they will
write and publish a firsthand account of their travels in Arizona.
2
of $ 2 million, plus a portion of what is referred to as the " bed tax."(') The Tourism Fund
is designated for use in promotional activities.
Table 1
Arizona Office of Tourism
Actual and Approved Expenditures
Appropriated Funds
Fiscal Years 1992- 93, 1993- 94, and 1994- 95
( unaudited)
Fiscal Year Fiscal Year Fiscal Year
General Fund 1993 1994 1995
Lactual) [ approved) { approved)
FTE Positions 17.0 18.0 19.0
Personal Services $ 469,880 $ 564,500 $ 584,300
Employee Related 105,951 1 10,200 123,100
Prof. Outside Services 116,068 140,000 52,200
Travel, In- State 22,436 17,000 19,000
Travel, Out- of- State 39,392 50,000 50,000
Other Operating 630,195 665,000 548,400
Equipment 22.1 24 10,000 10,000
Operating Subtotal $ 1,406.045 $ 1,556,700 $ 1,387,000
Toll- Free Line Production
and Placement NIA N/ A 2,810,300 ( a)
Toll- Free Line Response NIA NIA 1,121,700
International & Domestic
Marketing NIA NIA 877,200
Other Marketing NIA NIA 1,202,000
Media Advertising Fund 1,897,698 1,477,800 NIA
Tourism Fund 2,170,977 2,368.800 NIA
Total $ 5.474.720 $ 5.403.300 $ 7,398.200
Source: Joint Legislative Budget Committee Appropriations Report for Fiscal Year 1995 and AFlS
Expenditure Reports.
( a) In fiscal year 1995, below- the- line classifications were expanded from two categories to four to
improve expenditure tracking. Of the $ 2,810,300 appropriated to Toll- Free Line Production and
Placement, $ 2,365,000 shall be deposited in the Tourism Fund.
( I' Hotels and other lodging businesses pay one- half percent more in state sales taxes than other types
of Arizona businesses. This extra one- half percent is known as the " bed tax." AOT is annually
appropriated 75 percent of the growth in the amount of bed tax collected over the previous year.
In fiscal year 1994, AOT received an estimated $ 368,800 as its portion of the bed tax.
Audit Scope
Our audit report of the Office of Tourism presents findings and recommendations in
two areas:
w The need for statutory changes to improve AOT's efficiency and effectiveness and
provide long- term stability, and
The extent to whch advertising expenditures have been unjustified and wasteful.
In addition to these audit areas, we present a section of Other Pertinent Information
on AOT's status in meeting the mandates of Budget Reform ( see pages 19 through 21),
and a response to the 12 Sunset Factors ( see pages 23 through 25).
Ths audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the Office
of Tourism for their cooperation and assistance throughout the audit.
FINDING I
STATUTORY CHANGES ARE NEEDED
TO PROFESSIONALIZE THE
ARIZONA OFFICE OF TOURISM
Beginrung as a small program withm the Governor's Office, the Arizona Office of Tourism
( AOT) has grown significantly in size and importance. Now a key player in efforts to
promote the state's tourism industry, the Office is an independent agency with a $ 7.4
million budget. However, in many ways the conditions under which the Office operates
have not changed since it was smaller and was organized as part of the Governor's Office.
As a result, AOT's efficiency and effectiveness have suffered. For Arizona to have an
effective professional tourism organization, the Legislature should consider taking steps
to provide more stability in the director's position and insulate the Office from the political
process.
Director Turnover and Political
Patronage Adversely Impact
AOT Operations
In many ways, AOT operates as though it were still part of the Governor's Office. Staffing
has been fluid, with hgh turnover in the director's position, and few, if any, policies
and procedures governing the employment of staff. Internal agency operations have little
or no buffering from the political process. AOT's vulnerability to an ever- changing stream
of directors and political influence has resulted in fundamental management weaknesses
that undermine the agency's effectiveness.
Dimdm turnover - Frequent turnover at the director level has had a significant impact
on AOT's effectiveness. Since 1980, the directorshp of AOT has changed hands ten times.
Seven individuals served as director and three as acting director. Only two were in office
for more than two years. By contrast, tourism directors in other states average about
four years in office.
Director turnover has a ripple effect, causing additional turnover among managers and
staff, and bringing new priorities to the Office. As directors have taken office and then
left, activities have been initiated and then abandoned. For example, AOT developed
a strategic plan covering years 1991 through 1996, under the leadership of one of its
former directors. At the time of our audit, most managers currently with the Office were
unaware of the plan's existence. The plan was essentially abandoned after the director
who served during its development left the Office.
Although it is difficult to document the reasons for AOT's hgher turnover level, AOT
officials and tourism professionals point to poor director quality and changes withn
the Governor's Office. One method of minimizing director turnover employed by tourism
offices in six other states is to classify the director position under the state personnel
system. In most of these states, the tourism office is located withn a larger commerce
or economic development agency. Another way to reduce director turnover would be
to specify a term of office for the tourism director. Five agencies in Arizona specify a
term of office for the director in statute.
Political i n t 4 - - In some cases, the political process impacts not only the staffing
of AOT, but decisions regarding the way AOT conducts its work. All AOT positions
are exempt from the state's classified personnel system. AOT lacks policies governing
the hring, employment, evaluation, and discipline of personnel. In addition, AOT has
not defined speclfrc responsibilities for each position and identdied minimum qualhcations
for positions, nor has it established appropriate pay ranges. In fact, for some positions,
jobs were developed to match the needs of the employee, rather than to accommodate
the needs of the organization.
For example, an examination of personnel files confirmed that one individual had been
b e d as an administrative assistant at a substantially higher salary than that of comparable
positions. AOT officials explained the circumstances surrounding ths appointment, stating
that the Office had been directed ( by the Governor's Office) to hre the employee, and
to set the annual compensation at a level above $ 30,000. Because there were no openings
in the Office's professional ranks, AOT initially placed the individual in a support position.
f i s employee was subsequently appointed to head a major functional area despite laclung
the necessary experience and background.
In another case, we noted a series of letters and memos documenting the nonperformance,
absenteeism, and drunkenness of a former AOT employee. In one letter to a foreign travel
writer, AOT apologzed for the employee's embarrassing behavior during a famharization
tour the agency hosted. The employee was h ttra nsferred to the Department of Commerce
and then returned to AOT for six months before finally being terminated. When we inquired
about the delay in taking disciplinary action, we were told the Office had encountered
difficulty taking action because the employee was related to a state legislator.
AOT's lack of insulation from the political process has had impacts extending beyond
personnel matters. In 1992, with the support of the advertising manager and the State
Procurement Office, AOT's former director provided written notice to the former advertising
firm that its contract would not be renewed for fiscal year 1993. AOT was concerned
about excessive costs ( see Finding 11, pages 13 through 17) and h i t e d creativity. Interviews
with three former AOT officials and correspondence from the advertising firm indicate
some legislators tied renewal of the contract into a larger political issue involving
confirmation of one of the Governor's appointees. As a result, the contract was not
terminated and the advertising firm was retained for another year.
Basic management weaknesses - High director turnover and political patronage has
adversely impacted AOT's basic operations. AOT has had d~ fficultyin managmg its finances,
overseeing its outside contracts and its grant program, and performing its research and
planning functions. Many of the weaknesses we identified below were also identified
by the current director after he took office, and corrective actions have been initiated
to address these problems ( see page 8).
Financial Management - The Office has done a poor job of monitoring and
controlling its budget, possibly because staff did not have sufficient expertise in
the requirements of good financial management. No budgetary or expenditure
reports were prepared and reviewed on a regular basis, and financial information
was not reported to division managers.
This mode of operation has led to repeated overspending of agency funds. In 1991,
AOT was unaware that it had exceeded its quarterly allotment of funds, until the
Department of Administration's general accounting office rejected AOT claims
to& g over $ 10,000. In May 1992, the Joint Tqplative Budget Committee discovered
that because AOT had hred additional staff and granted salary raises for its top
positions, it had overspent its personal services appropriation by $ 43,000. To help
AOT recover from these overexpenditures, funds were transferred from future
allotments and other AOT funding sources.
Contract and Grant Program Oversight - AOT has also been lax in monitoring
its outside contracts and grant program. When we requested copies of AOT's outside
contracts and intergovernmental agreements, AOT did not have them readily
available. Copies of some contracts were never provided. Others had to be obtained
through the State Procurement Office or the contractor. We question AOT's ability
to oversee contracts that it did not have in its possession.
AOT's oversight of its Cooperative Advertising Grant Program has also been laclung.
Under the grant program, AOT provides matching dollars to communities to help
them advertise the tourist attractions in their area. According to a recent review
of AOT's administrative rules ( R4- 41- 101 through R4- 41- 104), the grant recipient
is required to provide at least 50 percent of the cost of the joint project in cash
or in- kind services. However, in fiscal year 1993, AOT paid grant recipients more
than $ 82,000 in excess of the matchng limit. In addition, AOT committed to
overspending the 50 percent matchng rate by over $ 25,000 in fiscal year 1994.
Strategic Planning and Research - AOT has lacked commitment in developing
a research- based strategic plan. Literature and tourism professionals agree that
strategic planning is important, because it provides long- term continuity for the
Office's advertising and marketing activities, and focuses on making efficient and
effective use of limited resources. At the time of the audit, AOT had no strategic
plan. Moreover, AOT's research efforts have been limited and poorly coordinated.
Although AOT spent over $ 360,000 on contracted research projects over a 3- year
period, much of the research had never been used. When we requested copies
of the research reports developed under ths agreement, only one of several reports
requested was available in the AOT research department. Representatives of the
research contractor and AOT officials stated that some of the research used
questionable data and reporting methods. Without reliable research, AOT has no
empirical basis for establishing and evaluating strategic goals.
Statutory Changes Are Needed
to Address the Root Causes of
AOT's Ineffectiveness
While AOT's current director is taking steps to improve Office management, lus efforts
alone cannot address the fundamental problems that continue to threaten the agency's
effectiveness. Statutory changes are needed to stabilize the Office's leadershp, and buffer
it from the adverse impacts of political patronage.
Improvements initiated - Since assuming his responsibilities in June 1993, the current
director of AOT has undertaken a number of significant initiatives to improve the Office's
operations. These initiatives include:
Financial Management - AOT developed a new internal accounting system that permits
monitoring and reconciliation of program expenditures on a monthly basis. The new
system is tied to the Arizona Financial Information System ( AFIS) and relies on AFIS
to generate financial reports useful to both AOT and state budget officials.
Contract and Grant Program - The new accounting system facilitates contract oversight
by enabling AOT to compare advertising expenditures to approved project estimates.
AOT has also redefined the guidelines of the Cooperative Advertising Grant Program
in fiscal year 1995 to adhere to the 50 percent matchng rate limit.
Strategic Planning and Research - AOT has conducted an internal evaluation to help
determine the Office's role and establish its priorities. Also, AOT has contracted for
the development of a research plan whch makes use of existing tourism studies and
identifies further research needed to achieve strategic goals.
In addition, AOT has developed position descriptions and responsibhties for its personnel.
Wlule these efforts have significantly improved Office management, further changes
are needed to address the fundamental problems undermining long- term effectiveness.
S t a M q changes taaeded - Statutory changes are needed to help s t a b h AOTs leaderslup
and reduce its vulnerabihty to political pressures. At a minimum, the following modhcations
could be implemented without altering AOT's status as an independent state agency:
Director Qualifications - Minimum qualifications for the director of the Office
of Tourism could be established in statute. These qualifications could specify
education and training, and prior experience required for appointment. Fourteen
Arizona state agencies specify qualifications their director must meet in state law.
Two states we surveyed, Texas and Colorado, had established such minimum
qualifications for their directors of tourism.
Search Committee - Although not required by law, the Governor used a search
committee process to fill the director's position in 1993. Representatives of the
tourism industry and other tourism " stakeholders" identified candidates for the
position of director and made recommendations to the Governor, who then selected
the director from the list of recommended candidates. This process resulted in
the appointment of a qualified and experienced tourism professional from out
of state. The use of a search committee could be formalized in statute by assigning
responsibihty for recommending director candidates to the Tourism Advisory Coun-cil.
However, if search committee responsibilities are assigned to the TAC, its
membership should be reviewed to ensure that all stakeholders are adequately
and fairly represented.
Classifying Personnel - AOT personnel ( at a minimum clerical and administrative
support positions) should be covered by the state personnel system and subject
to rules and requirements of the Personnel Division of the Department of
Administration. Covering these positions would provide a buffer to political pressures
that have been experienced in the past when personnel appointments have been
made. Of the nine state tourism offices we surveyed for detailed information about
their structure and operations, all reported that at least some positions are classified,
nonexempt positions subject to state personnel rules. Five states specifically cited
buffering from political pressures as one advantage of tlus arrangement.
Over the long term, these modifications to the existing structure may prove insufficient,
and the Legislature may want to consider other, more extensive options for restructuring
the Office of Tourism. We examined three potential options: ( 1) establishng the Office
under a commission, ( 2) consolidating the Office witlun the Department of Commerce,
and ( 3) combining AOT with the Arizona Highways Magazine ( AHM) under a single office.
To assess these options, we reviewed alternative structures in other states, and conducted
focus groups with industry and governmental representatives to solicit feedback on the
feasibility of each option.(') Despite concerns raised through the individual perspectives
of our focus group members, we believe that each alternative is viable. Because these
(') The industry focus group included representatives from: urban and rural chambers of commerce,
or convention and visitors bureaus; Arizona's hotel/ motel, tour operators, and restaurant associations;
and the Native American Tourism Center. The government focus group included representatives
from: Department of Commerce, Arizona Highways Magazine Division of the Department of Transportation;
Arizona Office of Tourism; the Office for Excellence in Government; the Joint Legislative Budget
Committee; the Office for Strategic Planning and Budgeting; and House and Senate Research.
options have been successfully implemented in other states, they deserve further
consideration.
Commission - Four of the nine highly regarded tourism programs we surveyed
( California,") Colorado, Missouri, and Nevada) use commissions to oversee their
tourism programs. In general, these commissions approve budget requests and
marketing and advertising plans, hue ( or nominate) and fire the director of tourism,
and evaluate the success of tourism efforts through the use of performance
measure^.'^) Commissions tend to provide improved oversight due to high levels
of tourism expertise provided by the stakeholders on the commission. Stakeholders
and tourism professionals are uniquely qualified to select a capable director as
well as evaluate the director's and program's effectiveness. Those states with
commissions also indicated that the commission helped reduce political influences.
AOT under the Department of Commerce - In 33 other states, tourism is placed
under commerce or economic development agencies. Six of the nine states in our
survey were structured in ths manner. These states indicated that under a larger
agency such as Commerce, a tourism office receives sufficient oversight and " political
buffering." In addition, AOT and Commerce could benefit through shared resources
and an increased synergy for economic development, especially between AOT
and Commerce's motion picture and sports development divisions. However, one
of the drawbacks of this structure is the perceived loss of focus and prestige for
tourism activities.
Merging AOT with AHM under a single office - Both AOT's and Arizona Highways
Magazine's missions include bringing travelers to Arizona. AOT accomplishes ths
through various advertising media such as television, radio, newspapers and
magazines. AHM advertises Arizona through Arizona Highways Magazine and the
various books, calendars, maps and clothng it sells at its retail locations. A few
states combine these various promotional activities under a single office. Combining
these two entities could provide several benefits. For example, AOT could combine
its expertise in advertising and marketing with AHM's expertise in printing and
mailing. While AOT is weak in financial management and performance tracking,
and lacks a personnel system, AHM is self- funded, tracks its performance, and
has an established personnel evaluation system.
(" The California Division of Tourism resides with- and is also overseen by, the Department of Commerce.
( 2) See section on Other Pertinent Information ( pages 19 through 21) for information on AOT's status
in the use of performance measures.
RECOMMENDATIONS
1. The Legislature should consider amending AOT statutes by:
Adding minimum qualifications, and possibly establishng a term of office for
the director of AOT,
Establishng a search committee process for selecting the AOT director, and
Placing all clerical and administrative support positions under the state
personnel system.
2. If the Legislature feels that stronger action is needed, it should consider restructuring
the agency. Three structural options that should be considered include: ( 1) creating
a tourism commission, ( 2) combining AOT with the Department of Commerce, and
( 3) merging AOT with the Arizona Highways Magazine under a single office.
FINDING II
ADVERTISING DOLLARS WERE WASTED
IN UNJUSTIFIED PAYMENTS TO
THE FORMER ADVERTISING FIRM
Between fiscal years 1991 and 1993, AOT paid nearly $ 100,000 to its former advertising
firm for publishng and broadcast services that the firm did not perform. Although AOT
has terminated its relationshp with this advertising firm and has taken action to correct
the factors contributing to these unjustified payments, steps should be taken to recover
misspent funds.
Between fiscal years 1991 and 1993, AOT designated about 70 percent of its budget for
advertising use. AOT promotes tourism in the state through various means, such as radio
and television commercials, printed brochures, calendars of events, public service
announcements, and sponsorshp of national sporting events. For 11 of the last 16 years,
AOT has contracted most of the production and placement of its advertising through
a single private advertising agency. AOT's latest advertising contract with this agency
was in effect from July 1, 1990, to June 30, 1993. During this time, AOT paid over $ 6.6
million to the advertising contractor.
During the audit, concern was expressed that AOT may have improperly paid the contractor
for several advertising projects during ths time period. In ths finding, we present four
case examples based on our investigation of these allegations. A limited review of
expenditures claims for over 240 other advertising pro* suggests that similar overpayment
may have occurred in several other sponsorshp and printing projects under ths contract.
Therefore, the cases presented do not represent the full extent of the wasted resources
that may exist under ths or previous contracts; rather, they illustrate the consequences
of inadequate contract management.
Advertising Firm Paid
Commissions for Services
Performed by Others
Under the contract provisions, the advertising firm was not entitled to payment for work
performed by AOT staff or a third party. However, between fiscal years 1991 and 1993
AOT paid the firm $ 50,900 in commissions for publishng services performed by AOT's
own staff and not by the firm. In addition, AOT paid $ 46,278 in commissions for
broadcasting services the firm did not perform.
Payment provisions - AOT's advertising contract established the manner in whch the
advertising firm was to receive payment. The contract listed compensable services re-lated
to creating and producing advertisements for radio and television broadcast, or
for print media advertising. If the firm's internal personnel performed these services,
the firm was reimbursed according to an hourly fee schedule. If the work was subcontracted
out - of- house, the firm was reimbursed and paid a 17.65 percent commission on the
subcontracted production services. In addition, if AOT gave authorization, the advertising
firm was required to select, contract for, and supervise the placement of advertisements.
For these placement services, AOT paid the firm its net placement costs plus a 17.65
percent commission on these costs.
Contract provisions limit payments - In each of the cases discussed below, the advertising
firm argued that it was entitled to a commission on all of AOT's publishing or broadcasting
projects, if two conditions were met: ( 1) if the firm performed any production services
on the project, and ( 2) if the funding for the project came from AOT's advertising budget.
Thus, the firm believed it was entitled to a commission on the cost of publishing or
broadcasting an advertisement, regardless of whether it actually performed the publishing
or broadcasting services.
However, the firm's argument was not supported by the contract terms. Payment for
production services was separate from payment for publishng and broadcasting services.
Having created or produced advertisements only entitled the firm to compensation for
production services - it did not entitle the firm to commissions on the cost of publishng
or broadcasting those advertisements. Furthermore, because AOT owned the advertising
material created under the contract, AOT could place the advertisement itself in print,
outdoor, or electronic media, with no obligation to pay the firm for the use of the
advertising materials.
Moreover, the advertising firm was not automatically entitled to any amount of AOT's
advertising budget solely on the basis of being the successful bidder. The contract states
that the amount of the contract " is subject to a reduction by ... administrative policy of ( AOT)
when deemed to be in the best interest of the State of Arizona." In addition, the contract provided
that, "... this contract shall not be construed as an exclusive arrangement ... ( AOT) may secure
identical and/ m similar services fiom other sources at any time in conjunction with, m in
replacement of, the contractm's m. ice." AOT's dim3 procurement of printing and broadcasting
services with a thrd party fell withn these provisions.
Publishing services - Under the terms of the contract, publishing services are described
as the selecting and contracting for space in publications, or printing. The following are
examples of projects in whch a commission was improperly paid to the advertising firm
for publishing services performed by AOT staff.
Case 1: From September 1990 to September 1991, AOT published four quarterly issues
of the Calendar of Events in the Arizona Republic and Phoenix Gazette. AOT
staff had produced the listings in the calendars, and paid the contractor for
its work involved in making the calendar suitable for print. A former AOT
director during 1990 had selected, contracted, and paid for the publication
of the Calendar directly with the newspaper. When the next director came
to AOT in 1991, AOT paid the advertising firm $ 37,418 in commissions for
publishng services on this project.
Case 2: Early in 1991, AOT asked the firm to update two brochures to include a letter
from the new governor and some revisions to the listings of tourism contacts.
AOT paid the firm for the production work involved in making these revisions
according to the terms of the contract. AOT selected and contracted for the
publishng of both brochures through the State Procurement Office's bidding
process. However, in October 1991, AOT paid the advertising firm $ 13,482 in
commissions for these services in the publication of the two brochures.
Broadcasting sennh? s - Under the terms of the contract, broadcasting services are described
as the selection, supervision, and contracting for radio or television time. The following
are examples of projects in whch AOT paid the advertising h commissions for donated
broadcasting.
Case 3: In October of 1991, a former director of AOT agreed to donate $ 100,000 annually
to the Arizona Broadcasters Association's ( ABA) scholarshp programs and
various public service projects. The Arizona Constitution permits state agencies
to make donations to private entities, provided there is a public purpose and
the state receives " valuable consideration" for the donation. In return for AOT's
donation, ABA agreed to encourage radio and television stations to participate
in a public service campaign promoting in- state tourism. ABA coordinated
the campaign activities and monitored the amount of airtime donated by
participating stations for AOT's public service announcements. In the one and
one- half years the agreement was in effect, AOT donated a total of $ 150,000
and received approximately $ 668,000 in airtime on the project Despite not being
directly involved in the placement of these announcements, AOT's advertising
firm requested and received a commission of $ 26,475 for these services, based
on the $ 150,000 donation.
Case 4: Late in 1992, due to the loss of its corporate sponsor, the Fiesta Bowl asked
5 governmental entities to jointly contribute the $ 2 million it needed to join
the Nationwide Bowl Coalition, and thereby remain 1 of the 4 major New Year's
Day Bowls. AOT contributed a payment of $ 400,000 which, according to the
Fiesta Bowl's Executive Director, was " applied directly to ( paying the) teams
that appeared in ( the) game." The Fiesta Bowl donated airtime for nine
commercials, whch aired during the game and the parade, in consideration
for the government group's sponsorshp. The commercials were jointly produced
by the government sponsors' advertising firms. According to AOT's former
director and the Fiesta Bowl's Executive Director, AOT's advertising fLnn played
a minimal role in creating the commercials. In addition, AOT's advertising firm
was present at a meeting where all of the governmental sponsors' advertising
firms agreed not to charge commissions on the project. Reportedly, none of
the other firms received a commission for broadcasting services. However,
although AOT's advertising firm had not provided the required broadcasting
services, it asked AOT for commissions on the $ 400,000 contribution. AOT paid
the firm $ 19,803 in commissions on the value of AOT's share ($ 112,200) of the
airtime.
AOT Should Take Steps
to Recover Misspent
Contract Funds
Poor judgment and misunderstanding of the contract may have contributed to the improper
payment of commissions. While the agency has substantially clarified the terms of its
current contract, AOT should take steps to recover misspent advertising funds under
its previous contract.
Poor Judgment - When the former director was appointed in 1991, lus assistant
director and the advertising manager advised against paying commissions on the
printing projects. AOT's staff argued that the advertising firm was not entitled
to commission on any printing jobs that AOT had procured itself. In the past,
no commission had been paid to the firm on similar printing projects. However,
the director chose not to follow the advice of lus staff. According to the advertising
manager, the former director said he would pay the commissions because he wanted
to start off " in a friendly way" with the advertising firm.
Contract Terms - We believe the contract provisions do not support the advertising
firm's claim for commissions on the projects discussed above. However, the former
AOT director found the firm to be " very persuasive", and believed the contract
was sufficiently vague to warrant payment.
AOT has taken some steps to address the problems associated with unclear contract
provisions. The current contract, with a different advertising agency, represents a substantial
improvement in clarifying AOT's intent regarding the payment of commission for projects
performed by AOT staff or a tlurd party. The language of the new contract specifically
states that AOT has the " fill right to reprint, reproduce and/ or use any products derived ? om
the con tractor's work.. . without payment of any royal ties, commissions, fies, etc. "
Although these changes may help prevent wasted advertising funds in the future, further
steps should be taken. AOT should seek the opinion of the Attorney General's Office
to determine the feasibility of recovering the funds misspent under the previous contract.
If recovery of these funds is feasible, an independent closeout audit of previous contracts
could help identify any other charges paid to the former advertising firm whch were
unjustified.
RECOMMENDATIONS
1. AOT should request the Attorney General's Office to review the feasibility of recovering
misspent funds under its contracts with the former advertising firm. If recovery is
feasible, AOT should contract for an independent audit of the contracts to identify
all monies improperly paid to its former advertising firm.
2. AOT should seek legal advice prior to authorizing payment when it is unsure of how
to interpret a contract's terms.
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OTHER PERTINENT INFORMATION
During the audit, we obtained other pertinent information regarding AOT's status in
meeting its statutory objectives and the requirements of budget reform.
Statutory and
Budget Reform Mandates
The statutory requirements of the Office of Tourism and its director are stated in A. R. S.
5541- 2305 and 41- 2302, respectively. These requirements can be grouped into three overall
objective areas:
1. The promoting, planning, and development of tourism business;
2. The development of a campaign of information, advertising, publicity, promotion,
and exhbition to attract travelers to the state; and,
3. The dissemination of such tourism information to the public through various media.
The Arizona Budget Reform Act of 1993 ( Chapter 252; House Bill 2332) requires AOT
to develop a strategic plan for accomplishmg its objectives. The plan must cover a minimum
three- year period, and include mission statements, goals, objectives, and evaluation criteria
for each of AOT's budget programs. Initial submission of the plan is due by October
1,1994. Beginning in fiscal year 1997, AOT will be required to include in their budget
requests a summary of productivity measures, including the associated unit costs of services
they provide.
The budget reform process begins to shft the focus in state government toward
accountability for program performance and results. According to the Office of Strategic
Planning and Budgeting, budget reform " fbrmally introduces an overdue era@ state government
in which perfmmance and results will count for far more than departmental spending histories
in allocating resources."
AOT's Current Status on
Budget Reform Issues
Strategic pluming - AOT does not have a current strategic plan encompassing all aspects
of its statutory objectives. ( See Finding I, page 7 for further mformation.) The only planning
document that AOT regularly develops is its annual media plan, which directly addresses
only the second statutory objective listed above. The media plan contains relatively few
specific performance goals. Goals mentioned in the fiscal year 1993 media plan include
such measures as the percentage of the targeted audience reached, and the percentage
of times viewers see the advertisement. However, these statistics do not measure how
effective the media campaign is in attracting viewers of the advertisement to Arizona.
P e r f m n c e measures - Performance measures specific to evaluating AOT's efforts in
promoting tourism and tourism development and informing the public are needed.
Traditional evaluation measures assess the productivity/ efficiency of the process, whch
is defined as the cost or time per unit of output. In addition, performance measures must
assess agency input ( determining needs, goals, strateges, and allocating resources), output
( what a program does in terms of the quantity of goods and services provided), and
most importantly, outcomes ( the actual impact of the agency's actions on the public, and
on meeting its goals).
For example, one of AOT's activities includes the development of a Calendar of Events.
The calendar is a listing of tourism events scheduled to take place in various communities
around the state. The development of the calendar is an activity that is primarily aimed
at satisfying the statutory objective of providing information. For the Calendar of Events,
performance measures might include:
Inputs - resources ( dollars and FTEs) allocated to identifying the needs of the
calendar's stakeholders and the type of information to include, resources allocated
to producing the calendar, and the projected demand for it.
Productivity/ efficiency - How long did it take to develop and distribute the calendar?
What was the per- unit cost to produce it?
Outputs - How many calendars did AOT distribute in a given period of time?
Who is requesting/ receiving the calendars ( distribution statistics)?
Outcomes - Were AOT's customers satisfied with the calendar ( do customers view
it as attractive, useful, persuasive in encouraging travel, and sufficient in content)?
Were there enough/ too many calendars distributed to meet demand?
The majority of performance measures currently reported in AOT's budget request focus
on input and output measures, with very little consideration gven to efficiency or outcome
measures. In other words, AOT has begun to track what they are doing, but not how
yeJ it is being done.
Furthermore, these measures tend to cluster around one statutory objective - providing
information - with little data reported on efforts being made in the other objective areas.
I Moreover, most of the data reported by AOT at ths time are " guesstimates" and therefore
do not provide a reliable means of tracking performance.
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SUNSET FACTORS
In accordance with A. R. S. 541- 2954, the Legislature should consider the following 12
factors in determining whether the Arizona Office of Tourism should be continued or
terminated.
1. The objective and purpose in establishing the agency
The statutes do not specifically state the objectives of the Office of Tourism. However,
A. R. S. 541- 2302 defines the director's responsibihties to include, " promoting and dmelaplng
tourism business and planning, and developing a campaign of infmmation, advertising,
promotion, exhibition, and publicity relating to tourism business."
In addition, the Office is statutorily mandated ( A. R. S. 541- 2305) to stimulate and
encourage public and private entities to participate and cooperate in the promotion
of tourism and tourism development; perform research necessary for long- term planning
and establishng the Office as a clearinghouse for tourism data; and provide tourism
information and advice to public agencies, private citizens, and business enterprises.
2. The effectiveness with which the agency has met its objective and purpose and
the efficiency with which it has operated
It is d~ fficultto assess the true effectiveness of the Office in accomplishing its objectives.
There are numerous entities promoting tourism in the state. Chambers of commerce,
convention and visitors bureaus, and private businesses can all claim some contribution
to bringing visitors to Arizona through their own advertising efforts. AOT has done
relatively little over the years to track its own impact on tourism, separate from that
of other tourism entities. As the new director stated, " measurement and evaluation appear
to not have been a consistent portion of the Ofice's previous operations."
Furthermore, AOT has not been managed efficiently. The Office's method of operation
has lacked standard management practices such as research- based planning, and systems
for managing contracts, finances, and personnel. ( See Finding I, pages 6 through 8).
In addition, AOT has wasted agency resources in improper payments to its advertising
contractor ( see Finding 11, pages 13 through 17). AOT's new management team is
in the process of developing a policy and procedures manual to govern the agency's
operations. However, it is unknown at h s time whether the new policies wdl adequately
address the problems identified in the audit.
3. The extent to which the agency has operated within the public interest
AOT attempts to operate in the public interest and be responsive to its public
" customers." AOT defines its " customers" as the tourism industry, the travehg public,
and the state's taxpayers. AOT has recently met with and surveyed the public to obtain
input on tourism issues.
4. The extent to which rules and regulations promulgated by the agency are consistent
with the legislative mandate
AOT has been gven statutory authority under A. R. S. 941- 2305 to adopt rules necessary
or desirable to govern its procedures and business. In 1983, AOT adopted rules R4- 41- 101
through R4- 41- 104 whch govern joint ventures undertaken with private corporations.
These rules appear to be consistent with the legislative mandates placed on the Office.
5. The extent to which the agency has encouraged input from the public before
promulgating rules and regulations and the extent to which it has informed the
public as to its actions and their expected impact on the public
AOT has not promulgated any rules since 1983, and has not identified any areas
requiring such actions at ths time.
6. The extent to which the agency has been able to investigate and resolve complaints
that are within its jurisdiction
Ths factor is not applicable because the Ofice of Tourism 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 authority to prosecute actions under the enabling legislation
Ths factor is not applicable because the Office of Tourism is not a regulatory agency
with enforcement or oversight responsibilities.
8. The extent to which the agency has addressed deficiencies in its enabling statutes
that prevent it from fulfilling its statutory mandate
AOT has not proposed any statutory changes in recent years.
9. The extent to which changes are necessary in the agency's laws to adequately
comply with the factors listed in the Sunset law
To fulfill its legislative mandate in a more effective and efficient manner, statutory
changes are needed to provide stable leadershp, and insulation from the political
process. The changes that are needed include establishing minimum director
qualifications, establishng a search committee to nominate the AOT director, and
classifying some AOT personnel. If these changes prove to be insufficient, the
Legislature may wish to consider establishing a tourism commission, placing AOT
under the Department of Commerce, or combining AOT with the Arizona Highways
Magazine under a single office. Further discussion of each of these options can be
found in Finding I, pages 8 through 10.
10. The extent to which the termination of the agency would significantly harm the
public health, safety, or welfare
Because other private and public sector entities across the state are involved in
promoting tourism and tourism development, we believe that terminating the agency
would not sig. ruficantly harm public health, safety, or welfare. However, the elimination
of the agency could have some negative effects, because the traveling public would
have no statewide clearinghouse of travel information. In addition, eliminating the
Office of Tourism may adversely impact the ability of many areas to attract tourists.
Many areas lack the funding and expertise to develop tourism, and rely on AOT
to provide those resources.
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 appropriate
The Office of Tourism is not a regulatory agency, thus ths factor does not apply.
12. The extent to which the agency has used private contractors in the performance
of its duties and how effective use of private contractors could be accomplished
AOT has made extensive use of private contractors. Services contracted include the
production and placement of most of its advertising projects; the administration
and conduct of tourism research; the operation of its " 800 line; and the fulfillment
of requests for travel information.
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ARIZONA O F F I C E O F T O U R I S M
September 20, 1994
Mr. Douglas R. Norton
Auditor General
State of Arizona
2910 North 44TH Street, Suite 410
Phoenix, Arizona 8501 5
Dear Mr. Norton:
Thank you for the opportunity to respond to the preliminary report draft
that was delivered to the Arizona Office of Tourism on September 13, 1994.
Your findings regarding improved management and business practices on
page 8 of the document help demonstrate why our staff and many leaders
of the Arizona tourism industry believe the Office of Tourism is functioning
at one of the highest performance levels in the history of this agency. In
addition to the improvements acknowledged in your audit, the list of
achievements the office can now document includes:
* record levels of advertising- generated requests for travel
planning assistance,
* enhanced telecommunications effectiveness,
* consistent customer- focused policies and practices,
* state- of- the- art performance tracking systems, and
* an unprecedented ability to leverage the state's marketing
budget through strategic partnerships with the private
sector.
Mr. Douglas Norton
Auditor General
September 20, 1994
Page 2
Based on our review of previous performance audits conducted by your
office, we understand your efforts are primarily directed at the
identification of problems and the delivery of related problem solving
recommendations. Therefore, we greatly appreciate the documentation of
AOT progress.
Because we are confident the agency is now headed in a progressive
direction, it is difficult to respond to an audit that primarily focuses on
perceived historical problems. However, in the following paragraphs, we
will do our best to communicate our reaction and professional response to
some of the key recommendations offered in your report.
In regards to the recommendations listed on page 11, we again turn to the
current state of the agency. Governor Symington utilized a search
committee to select the new director. As a result, even your comments on
page 9 indicate this process helped accomplish the goal of securing the
services of what you refer to as a " qualified and experienced tourism
professional." Because the merits of this process have been proven, we
question the need to add minimum qualifications to AOT statutes.
The fact that the current system is working efficiently also mitigates the
need to consider merging AOT with a larger agency or placing all clerical and
administrative support positions under the state personnel system. Such a
move would not ensure competence, and would make it increasingly
difficult and time consuming to remove incompetence.
Mr. Douglas Norton
Auditor General
September 20, 1994
Page 3
In regards to your reference to issues resulting from perceived political
patronage, it appears rumors and innuendoes have contributed to such
conclusions. In the 16 months I have served the state, I have been given
the complete ability to put together an extremely qualified staff. If you
compared the qualifications of our staff with any other state tourism office,
I feel confident you would find Arizona currently employs one of the
nation's best qualified and top performing units. I am extremely proud of
our team.
In regards to Finding 11, we feel your office was remiss in not pointing out
the fact that the contract in question was inherited by the former director
mentioned in your report and was awarded " on or about" May 30, 1990 by
the previous administration. The contract has also been described as unduly
vague by those that worked with it. It is reasonable to assume the vague
nature of the contract resulted in problems for both the agency and the
contractor. Repeated correspondence from the former advertising agency
indicate the firm's owner sincerely believed he had a right to such
commissions.
Your " poor judgment" finding on page 16 represents an unusual conclusion
for an audit staff when you consider the report fails to recognize the former
director exercised due diligence by contacting the Attorney General's office
for advice on this issue. This fact has been verified by a former Assistant
Attorney General, who also indicated he concluded the contract was vague in
Mr. Douglas Norton
Auditor General
September 20, 1994
Page 4
nature. He indicated he was unable to recommend non- payment as an
appropriate course of action for the Office of Tourism.
We also want to underscore the fact that such agreement is no longer in
service, the contract deficiencies have been corrected, and the services of a
new advertising agency have been secured.
Because you indicate the audit provides a factual basis for exploring
methods of retrieving the commissions in question, we have again
approached the Attorney General's Office for further assistance. We are
asking them to further determine if there is, in fact, a sound legal basis for
recovering the disputed commission amounts. AOT is moving forward with
implementing the page 17 recommendations.
Throughout this process, we were impressed with the level of
professionalism that was exhibited by the field staff that worked on this
audit. You should be proud of the manner in which they conducted
business. However, we respectfully suggest stronger management practices
would have resulted in the delivery of a timely audit. Significant field work
was completed nearly eight months ago. Initially, we were told to expect a
final report in the March - May time frame. Obviously, the delivery was
delayed several times since then. As a result, we believe you are now
presenting a document that lacks the impact and usefulness it might have
featured had it been delivered in a timely manner.
Mr. Douglas Norton
Auditor General
September 20, 1994
Page 5
In conclusion, we stand ready to discuss the audit with you in greater detail.
Thank you for your interest in our agency.
Sincerely, -
w
Director