Performance audit, Arizona Coliseum and Exposition Center

              PERFORMANCE AUDIT
ARIZONA COLISEUM
and
EXPOSITION CENTER
State o f Arizona
office
of the
Auditor General
Report to the Arizona Legislature
By Douglas R. Norton
Auditor General
August 1996
Report 96- 12
DOUGLAS R. NORTON, CPA
RUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY a" D, ToeGENcmAL
August 14,1996
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Ms. Yolanda Kizer, Chairman
Arrzona Coliseum and Exposition Center
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona
Coliseum and Exposition Center. This report is in response to a May 17,1995, resolution of
the Joint Legislative Audit Committee. The performance audit was conducted as part of the
Sunset review set forth in A. R. S. 5941- 2951 through 41- 2957.
The report addresses the Arizona Coliseum and Exposition Center Board's ability to generate
sufficient revenues to defray the operating costs of the Arizona Veteran's Memorial Coliseum
and the state fairgrounds as well as its ability to fulfill its role to provide affordable
entertainment for the citizens of the State, promote the State's interests, and expand fair
facilities. Regarding the Coliseum, it has operated at a net loss for much of its history. While
it was not constructed with the intent of generating profits, the Coliseum's financial condition
has worsened in recent years. These losses primarily result from increased competition from
a number of venues in the Phoenix metropolitan area that offer considerably more amenities
than the 30- year- old Coliseum. In fact, due to the increased competition and the subsequent
loss of events hosted by the Coliseum, the Board had taken steps to temporarily close it, with
the prospect of permanent closure. However, during the temporary closure period, the Board
entered into a lease agreement with a private company to assume complete financial and
operational control of the Coliseum. This lease agreement offers hope for improved financial
conditions and the continued operation of the Coliseum. However, the Board should be
prepared to reconsider options for closing the Coliseum if the lessee defaults under terms of
the lease agreement,
Regarding the State Fair, we believe there are several opportunities for the Agency to generate
additional fair revenues of approximately $ 1.2 million to allow the Board to continue to be
self- sufficient and meet its mandate to promote state interests. While the State Fair has always
maintained a profit, in recent years the costs to conduct the Fair have been rising faster than
the revenues it generates. For example, between 1990 and 1995, the Fair experienced an
approximate 24 percent increase in expenses and only a 7 percent increase in revenue.
B 2 9 1 0 NORTH 44TH STREET . SUITE 4 1 0 m PHOENIX, ARIZONA 8 5 0 1 8 . ( 6 0 2 ) 5 5 3 - 0 3 3 3 . FAX ( 6 0 2 ) 5 5 3 - 0 0 5 1
August 14,1996
Page - 2-
Increased personnel and contractual entertainment expenses as well as decreased sponsorship
and decreased carnival and food vendor revenues have been the main reasons for profit
deche. Continued reductions in the Faifs profitability, combined with losses from non- fair
activities, could jeopardize the Board's ability to maintain self- sufficiency for the Agency as
well as its abhty to meet the State Faifs mission and goals of promoting the State's interests.
Therefore, we identified several opportunities the Board could consider to increase
profitability, ensure its continued compliance with statutory mandates, and support future
goals. For example, the Agency could potentially generate an additional $ 900,000 in revenue
by charging more for entertainment. Likewise, it could increase food vendor fees and
sponsorship revenues.
My staff and I will be pleased to discuss or clalrfy items in the report.
This report will be released to the public on August 15,1996.
Sincerely,
~ ough; RJ. Norton
Auditor General
Enclosure
SUMMARY
The Office of the Auditor General has conducted a performance audit and Sunset review of
the Arizona Coliseum and Exposition Center Board, pursuant to a May 17,1995, resolution
of the Joint Legislative Audit Committee. This audit was conducted as part of the Sunset
review set forth in A. R. S. 9541- 2951 through 41- 2957.
The Arizona State Fair and the agency charged with conducting it existed prior to Arizona
becoming a state. In 1905, the Territory of Arizona established the Territorial Fair Commission,
which conducted the first fair on the current site. The Commission eventually became the
Arizona State Fair Commission, so named until 1967 when the Legislature established the
Arizona Coliseum and Exposition Center Board, consisting of five members appointed by the
Governor. According to statute, board responsibilities include directing and conducting the
State Fair, conducting an annual livestock show, maintaining the state fairgrounds and
Veteran's Memorial Coliseum in good condition, and generating sufficient revenue to defray
the operating expenses of the state fairgrounds and Coliseum.
Recently, the Board developed a strategic plan to better enable it to meet its responsibilities
for producing and conducting the State Fair. In a presentation to the Joint Interim Committee
on State Assets on November 15,1995, the Board presented its plans to relocate the Fair or
restructure its facilities on the current site. By relocating, the Board believes it can better meet
the Fair's mission: to display and promote the interests of the State, including agriculture,
livestock, and mining. Space limitations at the current fairgrounds prevent the Board from
showcasing these and other industries to the fullest extent,
Coliseum Lease Offers
Opportunity to Reduce Losses
( See pages 7 through 12)
Faced with the possibhty of closing the Veteran's Memorial Coliseum due to sigruficant cash
losses, the Board recently leased the Coliseum to a private company. While the State did not
construct the Coliseum with the intent of generating profits, the Coliseum's financial condition
has signhcantly worsened in recent years. For example, since fiscal year 1991- 92, cash losses,
excluding depreciation, increased from approximately $ 278,000 to $ 843,000 in fiscal year 1994-
95. In addition to these losses, the Board expended an average of $ 385,000 annually during the
same time for coliseum capital improvements. Furthermore, as of May 31,1996, fiscal year
1995- 96 cash losses for the Coliseum have already reached an estimated $ 602,500, with one
month remaining in the fiscal year.
Compebtion from other venues has sigruficantly reduced the number of profitable events the
Coliseum hosts. In recent years, the Coliseum's major competitors - America West Arena,
Blockbuster Desert Sky Pavilion, Mesa Amphitheater, and Phoenix Civic Plaza- have attracted
many lucrative events that were once the Coliseum's mainstay. These events include Phoenix
Suns games, concerts, and ice skating shows. As a result, the Coliseum experienced a 50
percent drop in event days, from 284 in fiscal year 1991- 92 to 143 in fiscal year 1994- 95.
Recognizing the Coliseum's inability to generate sufficient revenues, the Board explored
various options for reducing coliseum losses. Recently, the Board closed the Coliseum from
May 20 through September 4,1996, anticipating a cost savings of over $ 300,000. While the
Board was considering permanently closing the Coliseum, Valley Iceplex Professionals ( VIP)
approached it with a proposal to lease the Coliseum. Since permanently closing the Coliseum
would only reduce cash losses by approximately !$ 400,000, and a lease of the Coliseum offered
further reductions in cash losses, the Board entered into a contract with VIP. However, given
the Coliseum's poor financial performance and the unfavorable evaluations offered by the two
other arena management groups, which were unwilling to risk running the Coliseum, the
Board should reconsider options for closing the Coliseum if VIP defaults under terms of the
lease agreement,
Increased Fair Profits Could
Help the Board Achieve
Its Mandates and Goals
( See pages 13 through 20)
While the Coliseum has had ddficulty generating revenues, the State Fair has the potential to
generate an additional $ 1.2 million in profits that would allow it to better meet statutory
mandates and realize future plans. Over the past 6 years, costs to conduct the Fair have risen
at a faster rate than revenues, resulting in a 49 percent decrease in profitability, from $ 2.26
million for the 1990 State Fair to $ 1.14 & on for the 1995 State Fair. Several factors, including
increased personnel and entertainment costs, have contributed to reduced profits. Addition-ally,
the Fair has not taken advantage of ways it could enhance revenue through food vendor
fees and sponsorship.
Reduced fair profits coupled with coliseum losses have contributed to overall agency losses
for the past three fiscal years, affecting the Board's ability to meet its statutory mission of self-sufficiency.
While the Arizona Coliseum and Exposition Center ( ACEC) currently has
approximately $ 2 to $ 2.5 million in cash reserves and liquid investments available to cover
losses, continued agency losses could ultimately threaten its ability to remain self- sufficient,
Specifically, ACEC has incurred losses of approximately $ 1 million, $ 560,000, and $ 367,000 in
fiscal years 1992- 93,1993- 94, and 199495, respectively. These losses hamper the Board's ability
to meet the Arizona State Fair's mission and goals, including showcasing state industries and
possibly relocating the Fair, by reducing the resources available to the Board for these
purposes.
I To ens- continued compliance with statutory mandates and to support future goals, there
are several profit enhancement opportunities the Board can consider. For example, ACEC
1 could increase fair entertainment ticket prices, food vendor fees, and sponsorship revenue. At the same time, ACEC should analyze personnel costs and idenhf) ways to reduce them.
iii
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Table of Contents
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Finding I: Coliseum Lease Offers
Opportunity to Reduce Losses . . . . . . . . . . . . . . . . . . . . . . . . 7
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Board Temporarily Closed
Coliseum Due to Losses from
Increased Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Lease Agreement Provides
Opportunity to Reduce Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Finding II: Increased Fair Profits
Could Help Board Achieve
Its Mandates and Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Decreasing Profits Jeopardize
Board'sMandates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Board Should Consider Revenue
Enhancement and Cost Reduction Options ............................ 16
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Sunset Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Agency Response
Tables and Figure
Paue
Table 1 Arizona Coliseum and Exposition Center
Revenues and Expenses for
Fiscal Years 1992- 93 through 1995- 96
( Unaudited) ............................................... 3
Table 2 Arizona Coliseum and Exposition
Center Entertainment Event Cost
Recoveryoptions ................................... ss.~. 18
Figure 1 Arizona Coliseum and Exposition Center
Coliseum Estimated Net Cash Losses
Fiscal Years 1991- 92 through 1994- 95 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Arizona Coliseum and Exposition Center Board pursuant to a May 17, 1995,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part of
the Sunset review set forth in A. R. S. 5941- 2951 through 41- 2957.
Board History
and Responsibilities
The history of the Arizona Coliseum and Exposition Center Board precedes Arizona
statehood. In 1905, the Territory of Arizona established the Territorial Fair Commission
for the purpose of administering a fair. This Commission eventually became the Arizona
State Fair Commission, so named until 1967, at which time the Legislature established the
Arizona Coliseum and Exposition Center Board. Establishment of the Board coincided
with the completion of the Veteran's Memorial Coliseum.
The Board, consisting of five members appointed by the Governor, has three basic
responsibilities:
Maintain the state fairgrounds and Veteran's Memorial Coliseum facilities in good
condition and use these facilities for the enjoyment of the people of Arizona.
Direct and conduct state fairs, exhbits, contests, and entertainment for the purpose of
advancing the interests of this State and its counties.
Generate sufficient monies to defray the operating expenses of the state fairgrounds
and the Veteran's Memorial Coliseum.
Additionally, according to A. R. S. 95- 113. C., the Board is responsible for conducting an
annual livestock fair for the purpose of promoting Arizona's livestock and agricultural
resources.
Organization and Staffing
To assist the Board in meeting its responsibilities, the Arizona Coliseum and Exposition
Center ( ACEC) is authorized 278 FTE positions for fiscal year 1995- 96. Howeveq the
Agency currently employs only 45 permanent, full- time employees.' The remaining
employees either work part- time or are hired to provide ushering, security, or parking
attendant services for specific events. In addition to the full- time and temporary staff
employed throughout the year, the ACEC typically hires 1,500 to 1,650 people each year
for the State Fair to assist with security, ticket sales, ushering, maintenance, and janitorial
duties.
Under the direction of an executive director who reports to the Board, the ACEC consists
of the following departments:
Operations- By far the largest department, Operations maintains and operates the 35
buildings on the 80- acre fair site and an additional 16 acres on 2 smaller lots, which
are primarily used for parking. The fairground buildings include a mineral building,
civic, agricultural, and vocational/ academic buildings, a grandstand, the Veteran's
Memorial Coliseum, and various physical plant buildings. Operations also selects and
manages ride and game operators during the Fair and is responsible for security and
parking on the fairgrounds throughout the year.
Coliseum Management- Coliseum management books and prepares for all the events
( entertainment, shows, etc.) in the Coliseum and other buildings on the fairgrounds
throughout the year, including the Fair. The department also handles box office and
ushering functions for events and performs marketing, advertising, public relations,
advance ticket sales, and sponsorship solicitation functions for the Fair.
Accounting- In addition to its accounting responsibilities for all activities that occur
on the fairgrounds, this department handles admission and ride ticket sales during the
Fair.
Administrative Services - This department performs personnel, purchasing, and
clerical functions. This department also solicits and manages food and commercial
vendors during the Fair.
As required by statute, ACEC operates with revenues generated from both fair and non-fair
activities. Revenue sources include fair admissions, fair entertainment ticket sales,
facility rental fees, commissions on ticket sales for coliseum events, parking, concessions,
commercial space rentals during the State Fair, a percentage of midway monies ( carnival
rides), and interest income. As illustrated in Table 1 ( see page 3), these sources have
generated revenues that recently have begun to decline from approximately $ 13.3 million
" s of May 20,1996.
in fiscal year 1992- 93 to $ 12.9 million in fiscal year 1994- 95. However, these revenues have
still allowed the Agency to operate without legislative appropriations since fiscal year
1981- 82, and retire the bonds used to finance construction of the Coliseum on schedule in
1994.
Table 1
Arizona Coliseum and Exposition Center
Revenues and Expenses for Fiscal Years 1992- 93 through 1995- 96
( Unaudited)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year
1992- 93 1993- 94 1994- 95 1995- 96 lest.)
Operating Revenue:
State Fair $ 9,100,800 $ 9,632,400 $ 9,685,600 $ 10,244,300
Non- Fair 4,181,000 3,573,400 3,183,100 3,855,200
Total Operating Revenue 13,281,800 13,205,800 12,868,700 14,099,500
Operating Expense:
State Fair 8,297,900 8,520,200 8,366,700 9,103,800
Non- Fair 6,677,000 5,840,400 5,599,200 5,977,700
Total Operating Expense 14,974,900 14,360,600 13,965,900 15,081,500
Operating Loss: ( 1,693,100) ( 1,154,800 ( 1,097,200) ( 982,000)
Non- Operating Revenue:
Racing Receipts 378,700 370,500 421,300 400,000
Interest Earned 291,100 225,600 305,300 50,000
Sales of Capital Assets 0 0 3,600 0
Total Non- Operating Revenue 669,800 596,100 730,200 450,000
Net Loss ($ 1,023,300) ($ 558,700) ($ 367,000) ($ 532,000)
Source: Financial statements and budgets prepared by the accounting office of the Arizona Coliseum.
Actual amounts in fiscal years 1992- 93, 1993- 94, and 1994- 95 are rounded for presentation
purposes.
Despite earning millions in revenues, in recent years the Agency has not generated
sufficient monies to defray its costs. ACEC last generated a profit of $ 749,100 in fiscal year
1991- 92, even though the Agency showed an operating loss. The profit resulted from non-
operating revenues, comprised of interest income and racing receipts.' As shown in Table
1 ( see page 3), ACEC has incurred losses since fiscal year 1992- 93 and has relied on its
retained earnings, accumulated from previous profitable fiscal years, to cover expenses.
In addition to the losses posted for fiscal years 1992- 93 through 1994- 95, the Board projects
agency losses averaging approximately $ 1.5 million for each of the next three fiscal years.
State Fair Status and
ACEC's Future Plans
Despite declining revenues, ACEC is recognized as producing and operating one of the
most successful state fairs in the country. Attendance at the Fair ranks within the top ten
state fairs nationally, with reported attendance topping one million during the 1995 State
Fair- the third time in its history that attendance has surpassed one million people.
Agency management has developed innovative ideas, including the independent midway
concept, in which the Fair contracts directly with numerous ride and game operators
rather than one carnival operator. This allows the Fair to offer a greater variety of and the
most current rides, and ensures more control over the safety and operation of those rides.
Based on Arizona's success, other states have adopted this concept. In addition to these
ideas, management's focus on presenting a safe, secure fair enhances the fair experience
for all patrons.
However, despite these achievements, the Board acknowledges that these results were
obtained by sacrificing part of the Fair's core mission: to display and promote the interests
of the State. These interests include agriculture, livestock, mining, hobbies, exhibits, etc.
The lack of attention devoted to these interests partially results from the limited space the
Fair now occupies. Other state fairs with similar attendance occupy, on average,
approximately 250 acres, compared to the 96 acres currently used by the Arizona State
Fair.
Therefore, the Board has taken preliminary steps to reemphasize its mission and address
the space restrictions. In a presentation to the Joint Interim Committee on State Assets on
November 15,1995, the Board communicated its desire to relocate the Fair or restructure
its facilities on the current site. In fact, the Board has already begun the process of
designing a new fairgrounds and estimating potential costs as first steps to achieve this
goal by the year 2000. With additional acreage, the Board indicated that more space could
be devoted to agriculture and livestock, hobby displays, mining and high- tech exhibits,
and possibly even the creation of a working farm that could benefit Arizona citizens year-round.
I According to A. R. S. $ 5- 113. A, the Board receives the greater of 4% percent or $ 400,000 annually of the State's
revenue from pari- mutuel wagering ( racing receipts). Guaranteeing the Board at least $ 400,000 annually from
racing receipts became effective July 1994.
Audit Scope
and Methodology
This audit focuses on ACEC's ability to generate sufficient revenues to defray the
operating costs of the fairgrounds and Arizona Veteran's Memorial Coliseum. The audit
also addresses whether the Agency generates sufficient revenue to facilitate compliance
with its other goals and statutory mandates, including maintaining the fairgrounds and
Coliseum for the public use and enjoyment, promoting the State's interests, and expanding
fair facilities.
To evaluate the continued need for the Coliseum, we contacted event promoters and the
Coliseum's major competitive venues to assess the market in whch it competes.
Additionally, we reviewed and analyzed the Coliseum's financial performance for the past
five fiscal years and reviewed all events held there since July 1990 to note changes in types
of events held and their effect on the Coliseum's financial condition. We also contacted
similar venues in other states to obtain comparative information relating to coliseum
operations and financial performance.
To offer recommendations for improving State Fair profits, we analyzed its financial
statements for the past 6 fiscal years to ascertain changes in financial performance. We also
contacted various organizations and individuals, including 22 state and large county fairs,
national fair associations, commercial and food vendors, and ride operators to determine
what opportunities exist to increase revenues and/ or decrease costs and improve fair
operations.' We also randomly surveyed fair patrons during different days and times to
estimate how much they spent on various fair activities. Finally, we reviewed agency
compliance with statutory mandates, including production of the annual livestock show.
Our report presents findings and recommendations in two areas:
w The Board has recently entered into a lease agreement for the Coliseum, which should
reduce its cash losses; however, the Board should reconsider options for closing the
Coliseum if the lessee defaults under terms of the lease agreement.
w The need for the Board and agency management to increase revenues and reduce state
fair expenses to ensure compliance with statutory mandates and to meet agency goals
for fair expansion.
' We contacted state and county fair officials in other states that reported a 1994 fair attendance level of a
minimum 650,000 to the International Association of Fairs and Expositions. State fairs contacted were California,
Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Minnesota, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, and Wisconsin. County fairs contacted were Del Mar,
California; Pomona, California; and Erie County, New York.
In addition to these audit areas, this report also contains responses to the 12 Sunset
Review Factors for the Agency.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the board members, Executive
Director, and staff of the Arizona Coliseum and Exposition Center Board for their
cooperation and assistance throughout the audit.
FINDING I
COLISEUM LEASE OFFERS
OPPORTUNITY TO REDUCE LOSSES
Faced with the prospect of permanently closing the Veteran's Memorial Coliseum, the
Board recently leased the facility to a private company. This move was made in an effort
to reduce cash losses from the Coliseum that have resulted from increased competition in
recent years. While the lease agreement offers the Board an opportunity to significantly
reduce its losses, it should reconsider options for closing the Coliseum should the lessee
default under terms of the lease agreement.
Background
With $ 6.9 million in bond proceeds, the State constructed the Coliseum in the mid 1960s
when it recognized the need for a large multi- purpose facility to hold sporting and
entertainment events. For almost three decades, the Coliseum was virtually the only
facility of its kind, hosting a variety of events, including Phoenix Suns basketball games,
professional ice hockey and tennis, ice shows, rodeos, and concerts. In recent years,
however, competition from new, state- of- the- art venues such as the America West Arena
( AWA) and Blockbuster Desert Sky Pavilion has led to the loss of not only the Suns
basketball games, but also of most major entertainment events occurring in the Phoenix
area. Currently, the Coliseum is used primarily in conjunction with the State Fair;
however, other events, such as Roadrunner ice hockey games, trade shows, car sales, and
occasional concerts, are held in the building.
Board Temporarily Closed
Coliseum Due to Losses from
Increased Competition
For much of its history, the Coliseum has operated at a net loss. While financial losses are
not uncommon among public arenas, the Coliseum's losses have increased in magnitude
over the past three fiscal years. These losses primarily result from increased competition,
whch has ultimately threatened to jeopardize the self- sufficiency of the Arizona Coliseum
and Exposition Center ( Agency). Therefore, in an attempt to minimize losses, the Board
opted to temporarily close the Coliseum.
CoZiseum'sfimncial losses imasing- While public arenas generally do not earn profits,
the Coliseum's operating losses have increased dramatically in recent years. A 1991 study
on government- owned arenas and convention centers reported that these facilities rarely
earn a profit, and their operating costs are, on average, about 42 percent higher than
revenues.' Similarly, not only has the Coliseum rarely generated a profit, its fiscal year
1994- 95 operating costs were more than 70 percent higher than its revenues. As illustrated
in Figure 1, the Coliseum's cash losses, excluding depreciation, have increased
Figure 1
Arizona Coliseum and Exposition Center
Coliseum Estimated Net Cash Losses'")
Fiscal Years 1991 - 92 through 1994- 95
a
Estimated cash losses exclude depreciation.
Source: Auditor General analysis of Arizona Coliseum and Exposition Center financial statements
for fiscal years 1991- 92 through 1991- 95.
Heartland Policy Study No. 33, " Should Governments Own Convention Centers?" by Edwin S. Mills, January 21,
1991.
from approximately $ 278,000 in fiscal year 1991- 92 to $ 843,000 in fiscal year 1994- 95, an
increase of 203 percent. Moreover, these cash losses do not include capital expenditures
made for the Coliseum, which have averaged $ 385,000 annually during that same period.
Finally, as of May 31,1996, fiscal year 1995- 96 cash losses totaled an estimated $ 602,500,
with one month remaining in the fiscal year.
Losses due to competition- The Coliseum's ability to attract events and generate profits
has been seriously damaged by the number of venues in the Phoenix metropolitan area.
Recently constructed venues such as the AWA and Blockbuster Desert Sky Pavilion have
attracted premium events such as concerts, ice shows, and circuses, which were once the
Coliseum's mainstay. These new, state- of- the- art facilities offer considerably more
amenities to performers and promoters than the 30- year- old Coliseum. Although event
promoters spoke favorably about ACEC staff and operations, they still fail to book many
top events in the Coliseum.' One promoter explained that while performers usually look
for a deal that best meets their overall needs, they simply prefer a new facility to the aging
Coliseum. A review of event calendars from the Coliseum and its four major competitors
for the period July through December 1995 confirmed this. For example, we found that
the Coliseum hosted only 2 of the 49 concerts held in the Phoenix metropolitan area
during the period e~ aminedI. n~ addition, while the Agency has in more recent years
sought to specialize in such events as home and garden shows, trade shows, and
merchandise sales, the Phoenix Civic Plaza appears to dominate this area, since they
hosted 20 such events compared to the 6 hosted by the Coliseum.
Due to increased competition from other venues, the number and types of events hosted
by the Coliseum do not generate sufficient revenues to cover all its operating costs.
According to the Coliseum Manager, an optimum utilization rate for the Coliseum would
be between 280 to 300 event days throughout the year. 3 However, after the opening of the
AWA in June 1992, the Coliseum experienced over a 40 percent drop in event days, from
284 in fiscal year 1991- 92 to 167 in fiscal year 1992- 93. Consequently, cash losses from the
Coliseum increased by 292 percent, from approximately $ 278,000 to $ 1,091,000 during that
same period. Significant cash losses of $ 701,000 and $ 843,000 continued in fiscal years
1993- 94 and 1994- 95, respectively, as the number of event days fell to 148 and 143,
respectively.
Not only has the Agency been unable to secure many profit- making events for the
Coliseum, it had to retain some events on unfavorable financial terms. For example, to
ensure a long- term anchor tenant for the Coliseum, ACEC entered into a five- year contract
' We spoke to representatives of four major promotion companies that actively promote events in the Phoenix
metropolitan area.
2 The competitors included in this review were AWA, Blockbuster Desert Sky Pavilion, Mesa Amphitheater, and
the Phoenix Civic Plaza, since they compete for the same or similar events as the Coliseum.
3 Event days include the days scheduled for event setup and cleanup in addition to the day an event actually
takes place.
with the Phoenix Roadrunners hockey team to host its home games at the Coliseum
through the 1995- 96 hockey season. However, the contract called for ACEC to pay a $ 1
incentive to the Roadrunners for each person attending a Roadrunners hockey game at the
Coliseum. This contract term cost the Agency $ 236,000 during the 1994- 95 hockey season
and resulted in an estimated loss of $ 106,000 for that season alone.
Board planned to close Coliseum to protect Agency- The various circumstances affecting
the Coliseum's financial viability have ultimately threatened to jeopardize the Agency's
self- sufficiency. According to statutory mandates, the Board should earn sufficient
revenues to cover the operating costs of the fairgrounds and Coliseum. Historically, the
State Fair's success has produced sufficient revenues to cover the losses experienced by
the Coliseum. For example, although ACEC earned a $ 1.6 million profit from the 1994
State Fair, it posted an overall net loss of $ 367,000 during fiscal year 1995 due primarily
to the Coliseum's net loss of over $ 1.5 million ( including depreciation). The Agency also
incurred overall net losses of $ 558,700 in fiscal year 1994 and $ 1,023,300 in fiscal year 1993,
despite earning over $ 800,000 in state fair profits during each of those fiscal years.
Due to the Coliseum's deteriorating financial situation, the Board began considering
various options for reducing coliseum losses. Under the Legislature's direction, the Board
first explored the possibility of privatizing the Coliseum's management and operations.
During its 1993 Sunset review of the Agency, the House Government Operations and
Senate Government Committee of Reference required the Board to produce a report
regarding the feasibility and consequences of privatizing all or part of the Coliseum's
activities and operations. In response, the Board issued a request for proposal ( RFP) to
determine private sector interest in operating the Coliseum. However, the Board was
unsuccessful in this effort. As a result, the Board began discussing options for closing the
facility. The options discussed included closing the Coliseum for three months, six
months, or full- time, except during the State Fair. Based on an analysis of these options,
the Board decided to close the Coliseum from May 20 through September 4,1996, with the
option of extending the closure period if tentatively scheduled events did not occur.
By taking this action, agency management expected to produce a cost savings of over
$ 300,000 through layoffs of all temporary coliseum maintenance staff, and an 80 percent
reduction in utility requirements. Permanent staff who normally work on coliseum- related
activities would have shifted to fairgrounds maintenance activities or worked on tasks
related to the State Fair. Through this temporary closure, the Board had planned to
determine actual cost savings attributable to the closure and opportunities for future
closures.
Lease Agreement Provides
Opportunity to Reduce Losses
A recent agreement to lease the Coliseum offers hope for its continued operation. During
the Coliseum's temporary closure, a private group approached the Board with a proposal
to lease the Coliseum and significantly reduce the Agency's losses associated with the
facility. While this new arrangement improves the outlook for the Coliseum, prior private
sector reviews of the Coliseum suggest the Board should be prepared to reconsider options
for closing the Coliseum in the event the lessee defaults on the lease agreement.
Lease agreement should reverse losses - During the temporary closure period and while
the Board was contemplating permanent closure of the Coliseum, Valley Iceplex
Professionals ( VIP) approached the Board proposing to lease the Coliseum. Since permanent
closure of the Coliseum would still yield losses and this lease agreement with VIP would
significantly reduce such losses, the Board entered into a contractual agreement with VIP.
Through this five- year contract, effective September 1,1996, the lessee will assume complete
financial and operational control of the Coliseum. Therefore, the lessee will schedule and
oversee all events, pay for all coliseum expenses such as utilities, insurance, and personnel,
and remit a nominal lease fee to the Agency. The contract also provides for the Agency's
exclusive use of the Coliseum during the State Fair period. During this time, the Agency
will be responsible for coliseum expenses as they relate to the activities and events of the
Fair. Finally, the Agency will benefit from clauses in its contract with the lessee requiring
VIP to establish a $ 300,000 security deposit account for the Agency's exclusive use should
the lessee default under terms of the contract, and an irrevocable letter of credit in the
amount of $ 525,000 issued to the Agency. The contract requires VIP to establish the security
deposit account within 30 days of the execution of the lease. Additionally, the letter of
credit, to be issued by a major bank, reflects the total amount of lease payments over the
life of the lease and will be issued prior to the commencement of the lease term. Should
the lessee default, the Agency will receive the balance of unpaid lease payments through
the letter of credit.
This contract may reduce the financial losses the Agency has historically incurred for the
Coliseum's operation. Under the terms of the contract, the Agency will derive revenues
from the lease fee, an additional annual fee for the right to sell concessions at the Coliseum,
and parking at coliseum events. However, the Agency will still incur expenses for its office
space, certain maintenance, and parking at coliseum events. Most important, the Agency
will still incur a cash outlay of $ 251,000 annually for the next three fiscal years since it must
honor two lease agreements for cooling equipment and an electronic scoreboard.
Board should be prepared to close Coliseum- While the lease agreement with VIP should
reduce the Agency's financial burden posed by the Coliseum, the Board should be prepared
to reconsider options for closing the Coliseum if the lessee defaults under terms of the lease
agreement. As previously mentioned, other private management firms reviewed the
Coliseum's ability to successfully compete with other venues and were unwilling to enter
into a contract for its management and operation. In fact, the Board received five responses
to the RFP, only two of which merited further consideration by the Board. When the two
private management companies performed an analysis of the Coliseum's operations and
financial data and the Phoenix area's competitive environment, both found that the financial
risk of assuming the Coliseum's operating expenses outweighed its profit- generating
potential. In a letter to agency management, one RFP respondent stated that the
privatization agreement sought by the Agency was '' not practical - and probably not possible."
Further, the respondent stated, " we are unwilling to place ourselves in a risk position fm the
private management contract. "
Given the Board's inability to operate the Coliseum at a profit, and the unfavorable
evaluations offered by two other arena management groups, the lessee may have difficulty
improving the Coliseum's financial outlook. While the Board will have financial remedies
available to it should the lessee default on the lease agreement, the Board should also
reconsider options for closing the Coliseum.
In addition, the Board should take steps to develop a mechanism to identify and track its
costs associated with the Coliseum. As the lessor of the facility, ACEC will continue to have
some involvement in the activities and events held in the Coliseum. For example, the lessee
may require the assistance of ACEC staff for event setup. Even though the contract includes
a schedule for employee and equipment costs, to date, ACEC has lacked a mechanism to
track such costs as employee hours, utilities, maintenance, and other direct and indirect
costs per event. While some event costs, such as security and ushering, are known because
they are paid per event and charged back to the event promoter, most costs, including event
staff time, are unknown.
RECOMMENDATIONS
1, Should the contract with the lessee prematurely terminate, the Board should again
consider options for closing the Coliseum.
2. The Board should develop a mechanism to identify and track all costs for the services
it may provide to the lessee. Specific costs it should capture include employee hours,
maintenance, and equipment usage.
FINDING II
INCREASED FAIR PROFITS
COULD HELP THE BOARD ACHIEVE
ITS MANDATES AND GOALS
By enhancing State Fair revenues and decreasing costs, the Board could potentially generate
additional profits of approximately $ 1.2 million, thereby allowing it to better meet statutory
mandates and realize future plans. Due to rising costs, State Fair profits have decreased
49 percent in the last 6 years, from $ 2.26 million in 1990 to $ 1.14 million in 1995. As a result,
the Agency's ability to maintain self- sufficiency and promote state interests may be
jeopardized. Therefore, to allow the Board to continue to meet its mandates and fulfill its
objectives, it should consider several opportunities to increase fair revenues and decrease
costs.
According to its strategic plan, the Board intends to take steps to better enable it to meet
statutory mandates for conducting the Fair. This plan calls for either the relocation or
restructuring of the current fairgrounds. However, both options would require a significant
amount of money. A study commissioned by the Board in 1986 estimated that relocating
the fairgrounds would cost between $ 97 and $ 107 million. Accounting for inflation, the
cost of relocation has grown to an estimated $ 136 to $ 150 million. Recent relocation cost
estimates provided by an architectural firm place the costs for construction between $ 50
and $ 95 million, excluding land acquisition costs. While a variety of sources, including
proceeds from the sale of the existing site, legislative appropriations, and revenue bonds
could be used to finance either option the Board selects, ACEC could decrease the taxpayers'
burden by contributing fair proceeds toward the cost.
Decreasing Profits Jeopardize
Board's Mandates
Declining fair profits ultimately threaten the Board's ability to meet current mandates and
reahze future goals. While the State Fair has enjoyed significant profits in the past, these
have decreased 49 percent within the last few years, due to increasing costs and revenues
that have not kept pace. As a result, the Board may have difficulty meeting its statutory
mandates for self- sufficiency and promotion of state interests.
Fair's profitability has decreased- While still maintaining a profit, ACEC's costs to conduct
the State Fair are rising at a faster rate than revenues, thus reducing overall profit. For
example, the 1990 State Fair generated $ 9.6 million in revenue and incurred $ 7.34 million
in expenses for a net profit of $ 2.26 million. However, for the 1995 State Fair, revenue only
increased to $ 10.24 million while expenses increased to $ 9.1 million, for a net profit of $ 1.14
million. Overall, this represents an approximate 24 percent increase in expenses and only
a 7 percent increase in revenue.
Increased personnel and contractual entertainment expenses, which account for 55 percent
of the Fair's total costs, have been the main reasons for profit decline,
Personnel Costs - Personnel costs, which include wages, salary, and employee- related
expenses for ACEC permanent staff and the approximately 1,500 to 1,650 temporary
staff hired for the Fair, account for 32 percent of total operating costs. These costs have
increased 30 percent, from $ 2.26 million for the 1990 State Fair to $ 2.94 million for the
1995 State Fair. ACEC incurred a large portion of that increase last year when personnel
costs increased 16 percent, from $ 2.53 million in 1994 to $ 2.94 million in 1995. The
Agency attributes these rising personnel costs to a tight labor market, forcing
management to pay higher wages to attract temporary fair personnel.
Entertainment Costs - Contractual and entertainment fees, which include big- name
entertainer fees and expenses, small band and various show fees, safety engineer fees,
and staging personnel expenses, have increased 40 percent since the 1990 State Fair.
Specifically, ACEC incurred $ 2.32 million in contractual and entertainment expenses
for the 1995 State Fair, an increase of 42 percent from 1990 fair expenses of $ 1.63 million.
ACEC attributes the rise in this expense to the increased cost of booking big- name
entertainment*
Coupled with increased expenses, ACEC has encountered declining revenues in some areas
and has not taken advantage of opportunities to increase certain other revenues to offset
its rising costs. These revenues include:
Sponsorship Revenue - ACEC has not focused on the revenue- generating potential
of sponsorship solicitation for the Fair. In fact, due to management's inability to devote
the necessary resources to sponsorship solicitation, revenue has declined 33 percent,
from $ 240,100 for the 1990 State Fair to $ 160,200 for the 1995 State Fair. According to
the Marketing Manager, he and his assistant devote approximately 25 to 30 percent of
their time to soliciting sponsors.
Carnival Revenue - For the past two years ( 1994 and 1995 fairs), the Board has elected
to decrease its share of revenues from rides. The ACEC contracts with individual ride
owners based on a percentage of total revenue derived from rides. For the 1993 State
Fair, the Board set this percentage at 55/ 45, with the ACEC receiving 55 percent of ride
revenue. However, the Board reduced this percentage to 53/ 47 in 1994 and 52/ 48 in
1995. In 1994 and 1995, rides generated approximately $ 3.87 million and $ 4.2 million,
respectively, which was then divided between ACEC and ride operators according to
the percentage split. Therefore, due to ACEC's reduced share in each year, it has
forsaken revenues of approximately $ 77,500 and $ 126,000 in 1994 and 1995, respectively.
ACEC management cites increased costs to ride owners and the need to ensure ride
safety as primary reasons for decreasing revenue shares.
Food Vendors' Revenue- Unlike its agreement to share in the revenues earned from
rides, ACEC's method of charging food vendors a flat fee for space at the Fair does not
allow it to benefit from the food sales it helps generate. Each year, ACEC contracts with
approximately 125 vendors to sell food at the Fair. Management assesses vendors a flat
fee of $ 200 per front trailer foot for space at the Fair. For the 1995 Fair, ACEC received
approximately $ 510,000 in fee revenue, or an estimated 16 to 18 percent of the $ 2.78 to
$ 3.18 million in gross revenue earned by food vendors during the 1995 Fair. In contrast,
most state and county fairs surveyed indicated they charge food vendors between 20
to 25 percent of their gross revenue for space at fairs. This allows those states to share
in the revenues they help create for food vendors by conducting the fair and attracting
fair attendance.
The State Fair's rising costs and declining revenues will likely continue for the next few
years. Based on its own projections, ACEC expects the gap between revenues and expenses
to continue to narrow. In budget requests submitted to the Joint Legislative Budget
Committee, ACEC management estimates that by fiscal year 1997- 98, profits will decline
another 39 percent, to approximately $ 690,000.
Continued self- suficiency in question- While the Board has met its financial obligations
in the past, continued reductions in profitability combined with losses from non- fair
activities may affect its ability to defray operating expenses. According to statute, the Board
should be self- sufficient; however, the Board has incurred losses totaling over $ 1.9 million
since fiscal year 1992- 93. As stated previously, leasing the Coliseum offers an opportunity
to significantly reduce its losses. However, based on average losses of $ 535,000 annually
since fiscal year 1991- 92 from other non- fair activities, and the Fa2s declining profitability,
the Board's continued self- sufficiency will be jeopardized if it does not take steps to
improve fair profits ( see Finding I, pages 7 through 12, for further information regarding
coliseum losses).
Fair's mission has not been fully achieved- Similar to the impact on the Agency's self-sufficiency,
decreasing profits hamper the Board's ability to meet the State Fair's mission
and goals. Through the State Fair, the Board should advance Arizona's interests, including
agriculture, livestock, and mining. However, ACEC management has focused more on the
Fair's entertainment aspects, rather than showcasing and promoting state industries and
products. The decrease in state fair entries over the last six years illustrates this situation.
For example, while 1,224 people entered livestock in the 1990 State Fair, this number
dropped to 615 in 1995. Additionally, the total number of exhibitors ( people or
organizations that display agricultural goods, industry items, homemaking items, hobbies,
ek.) at the State Fair dropped from 9,095 in 1990 to 7,738 in 1995. According to the Board
Chairman, in order to reverse this trend and improve the State Fair, agency management
needs to put more effort into providing a fair rather than a carnival. To do this,
management plans to implement a county outreach program among county fairs by
traveling to these fairs and picking up entries for the State Fair. Management hopes this
plan will enable more Arizona citizens to showcase their hobbies and interests at the Fair.
In addition to showcasing the agricultural and other state interests, the Board's ability to
maintain an affordable fair is somewhat dependent on the Fair's profitability. Currently,
admission prices for the Fair compare favorably to admission prices charged by other state
fairs; however, continued reductions in profits could require higher- priced admission and
ride coupons. To retain affordable admission rates and maintain fair facilities for the
public's use and enjoyment, the Board should explore opportunities to increase the Fair's
profitability.
Board Should Consider
Revenue Enhancement and
Cost Reduction Options
To ensure continued compliance with statutory mandates and to support future goals, the
Board can take several steps to improve the Fair's profitability. As demonstrated by other
states, opportunities exist to increase total entertainment, food vendor, and sponsorship
revenues by approximately $ 1.2 million. Additionally, ACEC should analyze opportunities
to reduce personnel costs.
The Fair can increase mtertaimnent revenue- ACEC can potentially generate an additional
$ 900,000 in revenue by charging more for entertainment. Currently, ACEC books
approximately 25 " big- name" entertainment events for the Fair each year and holds these
events in the Coliseum. For each event, ACEC reserves approximately 5,000 ( 35 percent)
of the 14,500 seats in the Coliseum and charges either $ 5 per seat for a matinee show or
$ 7 per seat for a night show. The remaining 9,500 Coliseum seats ( 65 percent) are free to
fair patrons. The ACEC provides low- cost and free entertainment in an effort to attract more
fair patrons and increase revenue from other areas, such as admission, rides, and food. As
a result, only a small portion of the entertainment costs are covered by those in attendance,
with the remaining costs subsidized by all fair patrons. For example, in 1995, the State Fair
sold, on average, 2,274 ( 45 percent) of its available reserved seats per show and generated
$ 322,923 in revenue, covering only 21 percent of its $ 1.5 million in entertainment costs.
In contrast, other state and county fairs charge more for big- name entertainment and base
ticket prices on event costs. Seventeen of 22 ( 77 percent) fairs we surveyed charged for big-name
entertainment, and all but two states reserved all seating for those events. In addition,
14 of the 17 states ( 82 percent) that charged for entertainment adjust ticket prices depending
on the event's cost For example, the New York State Fair fluctuated entertainment prices
to recover costs or even generate additional revenue. During its 1995 fair, it charged $ 17
and $ 19 for Beach Boys concert tickets, whereas Bon Jovi concert tickets cost $ 19, $ 24, and
$ 28.
Similar to other states, ACEC could set event ticket prices based on the percentages of costs
it wishes to recover. Table 2 ( see page 18) illustrates two potential options that include
moderate ticket prices, yet allow ACEC to recover a greater percentage of its entertainment
costs. Ticket prices for the two options vary depending on the cost of a particular event.
As reflected in Option 1, if ACEC decided to continue with its current pricing policy of
providing free admission for many of its 14,500 seats, reserved seat ticket prices could range
from $ 10 to $ 20 depending on an event's cost. For example, if an event cost $ 113,000, ACEC
could charge $ 20 per reserved seat and recover approximately 40 percent of the event's
costs. Option 2 presents sample ticket prices and potential revenues if ACEC charged a
moderate ticket price for its reserved seating and a nominal fee for general admission.
Based on the pricing options indicated in Table 2, average attendance at 1995 State Fair
entertainment events, and adjusting ticket prices depending on the cost of each
entertainment event, ACEC could potentially generate between $ 530,000 to $ 950,000 in
additional entertainment revenue from all its events. However, the amount of additional
revenues generated will depend on the ticket pricing option ACEC chooses for each event,
which should be dictated by the event's costs.
ACEC can increase food vendor fees- In addition to generating more entertainment
revenue, ACEC could increase its food vendor fee revenues by $ 46,000 to $ 285,000. As
mentioned earlier, most states earn anywhere from 20 to 25 percent of food vendors' gross
sales, while ACEC earns the equivalent of 16 to 18 percent. Based on an estimated $ 2.78
to $ 3.18 million in total revenue earned by food vendors at the Fair, if ACEC assessed fees
to capture 20 percent of these revenues, it could generate an additional $ 46,000 to $ 126,000.
These revenues could potentially increase to $ 285,000 if the Agency assessed fees to capture
25 percent of food vendors' gross revenue. ACEC could consider two different methods
to capture a larger percentage share of food vendor revenue.
Charge a percentage of gross revenue- While ACEC could still require an up- front
fee to secure space at the Fair, the final charge for vendor space could consist of a
percentage of the vendor's gross sales. Fourteen of 21 ( 67 percent) states surveyed use
the percentage of vendor gross sales method to determine vendor space charges. One
other state plans to adopt this approach for its next state fair. Many states that use this
method rely on daily reporting of revenues and a team of auditors to ensure accurate
reporting. For example, in Minnesota, each vendor is audited a minimum of 4 times
during the 12- day fair. Ths requires estimating what revenue the food vendors should
be reporting and then comparing the estimates with the vendors' self- reported gross .
revenue. During its 1995 fair, Minnesota hired 4 auditors and spent approximately
$ 2,880 for auditing services, but earned over $ 1 million in food vendor revenues.
Table 2
Arizona Coliseum and Exposition Center
Entertainment Event Cost Recovery Options
a Event costs illustrate the range of entertainment costs incurred by the Arizona Coliseum and Exposition
Center, and were developed by grouping the costs of 25 events at the 1995 Arizona State Fair into 3 ranges
and selecting the median amount in each range.
b Ticket prices shown reflect a pricing strategy of charging higher ticket prices for high- cost entertainment
events and lower ticket prices for less costly events, a strategy employed by several other states.
c Under Option 1, revenue amounts were determined by multiplying the reserved seat ticket price by the
average number of reserved seats ( 2,274) at 1995 State Fair entertainment events. In addition to revenues
calculated under Option 1, Option 2 includes revenues determined by multiplying the nominal ticket price
by the average number of general admission seats ( 5,926) at 1995 State Fair entertainment events.
Source: Auditor General analysis of cost recovery options, based on average attendance levels at 1995 Arizona
State Fair entertainment events and indicated ticket prices.
While this option would be more difficult to administer than ACEC's current flat fee,
vendors would receive more equitable treatment, since this method would account
for varying levels of sales among vendors that result from location and product
differences.
Raise current fees- In keeping with its current approach, the ACEC could raise its
current food vendor fees to an amount equal to 20 to 25 percent of estimated gross
revenues. Based on 1995 estimated food vendor gross revenues, our analysis shows
that the Agency would have to raise the current $ 200 per front trailer foot fee to
between $ 218 and $ 251 if it wished to capture 20 percent of the food vendors' gross
revenue. Likewise, to capture 25 percent, vendor fees would have to be raised to rates
between $ 275 and $ 316.
This option has the advantage of easy administration, a benefit preferred by ACEC
management, However, it disregards the vendors' sales level and does not differentiate
between good and bad sites at the Fair.
Charge flat fee against a percentage of gross revenue - A final option combines the
benefits achieved by charging vendors a flat fee and a percentage of the vendor's gross
sales. ACEC could establish a flat front foot trailer fee similar to its current fees that
all vendors would pay to secure space at the Fair. This would protect the Agency if
food vendor sales are negatively affected by low attendance, rainy days, or other
unforeseeable events, whle still allowing it earn significant revenues. Against this flat
fee, ACEC could charge 20 to 25 percent of vendors' gross sales to take advantage of
sales that the Agency helps generate by conducting the Fair. ACEC would retain the
greater of the flat front footage fee or the fee received from charging vendors 20 to
25 percent of their gross sales.
Increasing food vendors' fees should not negatively affect demand for space at the Fair,
nor should it necessarily translate into increased food prices for fair patrons. Each year,
ACEC receives more food vendor applications than can be filled by the limited available
space. For example, in 1995 the ACEC accepted 123 vendors, and turned away 64. Based
on interviews with 6 rejected applicants, 5 indicated a willingness to pay higher rates to
secure space at the Fair. However, to reduce the effect of a fee increase on food vendors,
ACEC might consider gradually increasing fees over a period of a few years.
Sponsmhip revenue can be inmeased- Finally, ACEC could generate an estimated additional
$ 40,000 to $ 50,000 in profits by dedicating more resources to soliciting sponsors. As mentioned
earlier, sponsorship revenue has decreased over 33 percent since 1990 to approximately
$ 160,000. By contrast, other states have generated more revenue from Chis fundion. For example,
other state and county fairs, similar in size and attendance to the Arizona State Fair, generated
an average of $ 417,000 in sponsorship revenue during the 1995 fair season, over $ 250,000 more
than was generated by the Arizona State Fair.
However, to achieve greater sponsorship revenue, ACEC needs to dedicate more resources
to this function. While ACEC does not have any full- time employees seeking sponsors, other
fairs dedicate one or more full- time employees to sponsorship solicitation. For example, in 1993,
the Del Mar County Fair in California hired a full- time employee to solicit sponsors and
increased its sponsorship revenue by $ 160,000 the first year, and a total of over $ 500,000 in 1995.
In addition, the Kentucky State Fair's four full- time employees dedicated to soliciting sponsors
generated over $ 1 miUion in revenue in 1995. To encourage this level of sponsorship revenue,
some fairs pay their staff commissions based on the amount of revenue raised.' While ACEC
has attempted to create a commissioned sales position in the past, current statutes do not
provide for the employment of commission- based personnel.
Personnel costs need analysis- In addition to considering various revenue enhancement
options, ACEC should also analyze the Fair's personnel expenses to determine if opportunities
exist to decrease costs. As previously mentioned, personnel costs have increased over 30 percent
in the last 6 years and currently account for over 32 percent of total operating costs, thus
representing a sigruficant opportunity for cost reduction. To date, no such analysis has been
performed.
RECOMMENDATIONS
1, ACEC should consider hiring a full- time employee to solicit sponsorship revenue.
2. The Board should consider a variety of options to increase the State Fair's profitability,
including:
Increasing e n k m e n t ticket prices to cover a greater portion of entertainment costs.
Increasing the fees charged to food vendors at the Fair.
Analyzing the State Fair's personnel needs to determine if and where reductions are
possible.
1 Two of the 22 fairs we contaded use commissioned personnel. One was a county fair designated as a non- profit
corporation and one was a state agency.
SUNSET FACTORS
In accordance with A. R. S. 541- 2954, the Legislature should consider the following 12 factors
in determining whether the Arizona Coliseum and Exposition Center Board should be
continued or terminated.
The objective and purpose in establishing the agency.
Since 1905, the State of Arizona, through the Arizona Coliseum and Exposition Center,
has sought to provide its citizens with an outlet to showcase its industries and provide
various other events for overall public enjoyment Specifically, the five- member
Coliseum and Exposition Center Board is required by statute to " direct and conduct
state fairs, contests and entertainment for the purposes of promoting and advancing
the pursuits and interests of the several counties of the State, and of providing sufficient
revenue to defray the expenses incurred by the Board in conducting such events."
In addition to conducting the annual State Fair, ACEC hosts a variety of other events,
including ice hockey games, trade shows, family shows, merchandise sales, and,
occasionally, concerts. It also hosts an annual livestock fair as required by statute, to
further promote the State's livestock resources. For almost 50 years, the Board has
contracted with the Arizona National Livestock Show, Inc. ( ANLS), which plans and
conducts the livestock fair. The Board's involvement with the ANLS is limited to
oversight activities such as approving the show's budget, planned events, and building
requirements, and providing ACEC facilities at reduced rental rates.
The effectiveness with which the agency has met its objective and purpose
and the efficiency with which it has operated.
The Board has generally been effective in meeting its overall purpose by operating and
maintaining its facilities in a safe and serviceable manner to conduct the a. nnua1 State
Fair and other events. In doing so, it has been able to operate without legislative
appropriations since fiscal year 1981- 82 and has actually contributed a total of $ 3 million
to the State's General Fund. Additionally, through its successes in conducting the State
Fair and other events, the Board was able to repay a fiscal year 1980- 81 legislative loan
20 years early.
However, despite its success and profitability in past years, the Board is currently faced
with a decreasingly profitable State Fair and overall agency losses in the last three fiscal
years. Particularly, the losses incurred by the Coliseum, averaging $ 1.3 million per year
for the past four fiscal years, have placed the Agencfs self- sufficiency in jeopardy. The
Board has recently taken action to address this problem by signing a lease agreement
for the Coliseum with Valley Iceplex Professionals ( VIP). Through a five- year contract,
the lessee will assume complete financial and operational control of the Coliseum. This
contract should effectively reverse the Agency's history of financial losses for its
operation of the Coliseum. However, the Board should reconsider options for closing
the Coliseum if the lessee fails to fulfill its obligations under the contract. ( See Finding
I, pages 7 through 12.) Additionally, although the Board produces a successful,
nationally recogruzed state fair, it can do more to achieve its overall mission as well as
realize future plans by considering several revenue- increasing options ( see Finding II,
pages 13 through 20).
3. The extent to which the agency has operated within the public interest.
The Board generally operates in the public interest by providing affordable
entertainment for the enjoyment of all Arizona citizens without the benefit of taxpayer
support. Specifically, it conducts a nationally recogruzed state fair and is host to a variety
of other events, including ice hockey games, trade shows, family shows, merchandise
sales, and concerts. However, as ACEC has focused on conducting successful state fairs
each year, it has somewhat diverged from achieving its overall mission of " promoting
and advancing the pursuits and interests of several counties'' by showcasing the State's
agricultural, livestock, and other industries. Generally, space restrictions inhibit the
Board's ability to fully achieve this mission. As such, the Board would like to
reemphasize this mission and is currently considering relocating to another site or
restructuring the current site.
4. The extent to which rules adopted by the agency are consistent with the
legislative mandate.
The Board has established rules that are consistent with its legislative mandate,
Specifically, in response to gaming legislation passed in 1987, the Board adopted rules
regulating certain state fair amusement games. These rules detail how the games of skill
are to be played at the State Fair midway.
5. The extent to which the agency has encouraged input from the public before
adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
The Board followed procedures set forth by the Secretary of State before officially
adopting the rules discussed in Sunset Factor 4. In addition, Board meetings are held
in accordance with all open meeting laws as defined in A. R. S. 938- 431.
6. The extent to which the agency has been able to investigate and resolve
complaints that are within its jurisdiction.
While the Board has no statutory authority to investigate complaints, it handles any
complaints regarding its operations or policies through the Executive Director or his
designee.
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.
The Board enabling legislation does not establish such authority.
8. The extent to which the agency has addressed deficiencies in its enabling
statutes which prevent it from fulfilling its statutory mandate.
Our review did not identify any deficiencies in the Board's enabling statutes which
prevent it from fulfilling its statutory mandate.
9. The extent to which changes are necessary in the agency's laws to adequately
comply with the factors listed in the subsection.
The Legislahue should assess the continuing need for the Board to conduct a livestock
fair as mandated by A. R. S. $ 5- 113. C.
10. The extent to which termination of the agency would significantly harm the
public health, safety, or welfare.
Termination of the Board would not significantly harm the public's safety, health, or
welfare. However, without ACEC facilities, Arizona's citizens would lose a valuable
entertainment and educational resource. Through its multi- purpose facilities, ACEC
has become home to many events that serve to promote the interests of many Arizona
citizens. For example, the Agency has been a source for civic groups, such as the
Goodwill Women's Auxiliary and the Phoenix Jaycees, to hold events such as
merchandise sales and rodeos at affordable rates. In addition, agriculture and other
interests of our State are generally served by the State Fair, ANLS, and the Maricopa
County Fair, all held at ACEC's facilities.
The extent to which the level of regulation exercised by the agency is
appropriate and whether less stringent levels of regulation would be
appropriate.
This factor does not apply as the Board has no regulatory authority.
The extent to which the agency has used private contractors in the
performance of its duties and how the effective use of private contractors
could be accomplished.
The Board extensively uses private contractors in conducting the many events it hosts
throughout the year. For example, the Board contracts with a private food and beverage
concessionaire to manage the public food stands within the Coliseum and on the
grounds during non- fair events. For the State Fair, ACEC has implemented an
independent midway concept in which it individually contracts with many different
carnival ride and game vendors instead of just one, as many fairs around the country
do. The independent midway concept, pioneered by ACEC in the early 1970s, has
proven to be highly successful and has since been adopted by several other states. In
order to produce a state fair with an independent midway and an excellent variety of
food and entertainment, ACEC contracts with over 750 ride, game, food, and
commercial vendors as well as the various entertainers who perform during the Fair.
In addition, the Board has recently entered into a lease agreement for the operation and
management of the Coliseum. Through this five- year contract the Board should
significantly reduce its losses associated with the facility.
Agency Response
( This Page Intentionally Left Blank)
August 2, 1996
Mr. Douglas R. Norton
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix. AZ 85018
Re: Response to Draft Sunset Audit Report
Dear Mr. Norton,
Please consider this the Arizona Coliseum and Exposition Center Board's (" Board") response to the
July 23, 1996, draft Sunset audit report (" report"). On behalf of the Board I would like to thank
the Auditor Generals Office ( AGO) and staff for its analysis and recommendations concerning
agency operations. The Board has benefited from the AGO'S input and sincerely appreciates its
help. The report has come at a most opportune time as we prepare the agency for the challenges
ahead. As the AGO has discovered during its review of the agency, the Board was already in the
process of implementing many of the recommendations ultimately suggested by the AGO.
Regarding each of the AGO's recommendations, the Board's comments and observations are as
follows:
Coliseum Recommendations ( P. 12)
1. Should the contract with the lessee prematurely terminate, the Board should again consider
options for closing the Coliseum.
The Board entered into a lease with the Arizona Sports and Entertainment Group ( ASEG) with
the expectation that ASEG would fulfill all of its obligations under the lease. The Board
negotiated for and received various and substantial monetary protections in the event of
ASEG's default under the lease. To the extent that another Lessee cannot be found to lease the
Coliseum under the same or similar conditions and terms, the Board agrees with the AGO'S
recommendation for closure of the Coliseum during the non- fair period.
2. The Board should develop a mechanism to identify and track costs for the services it may
provide to the lessee. Specific costs it should capture include employee hours, maintenance,
and equipment usage.
Prior to signing the lease with ASEG, the Board analyzed many of the costs associated with
ASEG's use of the Board's staff and equipment. The Board attached to the lease as an exhibit
hourly rates for staff and equipment that cover the Board's costs. The Board agrees with
AGO's recommendation and will continue to refine the system by which it tracks costs
associated with the lease.
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Fair Recommendations ( P. 20)
I . ACEC should consider hiring a full- time employee to solicit sponsorship revenue.
The Board agrees with the AGO'S recommendation concerning a sponsorship person, and has
hired a full- time person to pursue sponsorship opportunities for the fair. However, to maximize
the number of sponsorships received, the ability to pay the sponsorship person a percentage of
sponsorship dollars generated is of paramount importance. An example is the Puyallup Fair in
Western Washington. Puyallup has watched its sponsorship revenues nearly double over the
past several years since hiring and paying a sponsorship salesperson a percentage of the overall
sponsorship dollars generated. Many industries pay salespersons a percentage of gross dollars
generated which in turn offers a tremendous incentive to sell. The agency would undoubtedly
benefit from the ability to pay a percentage of the sponsorship dollars generated.
2. The Board should consider a variety of options to increase the State Fair's profitability,
including:
Increasing entertainment ticket prices to cover a greaterportion of
entertainment costs.
Over the past several years, staff has increased both the number
and cost of reserved seats in the Coliseum for entertainment. A critical
balance exists, however, in recovering some dollars to offset the cost of
the entertainment and driving attendance through the gates to see free
entertainment. The fair is already criticized for its cost to patrons.
Consequently, any change in the cost of entertainment must be
accomplished gradually, taking into account the price sensitivity of fair
guests.
Increasing fees charged to food vendors at the Fair.
Presently, management is increasing the cost per foot for all food vendors
at the fair. This is another area where management must be careful to
balance the need to earn sufficient income from the fair with the need to
keep the fair affordable for patrons. Any substantial increase in footage
cost will find its way to increased product cost for all food items. The
agency believes, of the three options proposed by the Auditor General, the
second option of raising footage costs ( gradually) is the most viable. The
other suggested options have been studied by the Board and staff and
should a system be found that ensures the fair is receiving a true
percentage of a vendor's actual sales, the Board will revisit this issue.
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8/ 2/ 96
Analyzing the State Fair's personnel needs to determine ifand
where reductions are possible.
The Board has analyzed and continues to analyze personnel usage during
the State Fair. The Board has directed staff to aggressively investigate
staffing needs and where possible, recommend reductions for the Board's
consideration during the first part of 1997.
If the Board or management can supply you with any additional information or answer any further
questions, please do not hesitate to call.
Sincerely,