Performance & financial analysis of the Rio Nuevo Multipurpose Facilities District

              Performance & Financial Analysis of the
Rio Nuevo Multipurpose Facilities District
Submitted to:
Debbie Davenport, Auditor General
Office of the Auditor General
State of Arizona
2910 North 44th Street
Suite 410
Phoenix, Arizona 85018
Submitted by:
Kevin W. Smith
Crowe Horwath LLP
400 Las Colinas Boulevard East, Suite 200
Irving, TX 75039-6292
Direct 214.574.1008
Main 214.574.1000
Fax 214.574.1002
kevin.w.smith@crowehorwath.com
October 29, 2010
October 29, 2010
The Honorable Robert Burns, President
Arizona State Senate
The Honorable Kirk Adams, Speaker
Arizona House of Representatives
Members of the Arizona Legislature
The Honorable Janice K. Brewer, Governor
State of Arizona
Ms. Jodi A. Bain, Chairperson
Rio Nuevo Multipurpose Facilities
District Board of Directors
Transmitted herewith is a report of the Auditor General, a performance and financial analysis of the
Rio Nuevo Multipurpose Facilities District. This analysis was conducted by the consulting firm of
Crowe Horwath, LLP., under contract with the Auditor General and was in response to the
requirements of A.R.S. §48-4231.01.
This analysis focused on evaluating: (1) compliance with Arizona Revised Statutes and the
District’s intergovernmental agreement with the City of Tucson; (2) district policies and procedures
for prioritizing and managing construction and financing activities; (3) the District’s financial
solvency; (4) the District’s capital and operating costs; and (5) the District’s multipurpose facility,
the Tucson Convention Center. The District’s response to the issues noted in this analysis must be
adopted by its Board of Directors within 45 days of the release of this report.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on October 29, 2010.
Sincerely,
Debbie Davenport
Auditor General
Attachment
Crowe Horwath LLP
Independent Member Crowe Horwath International
400 Las Colinas Boulveard East, Suite 200
Irving, Texas 75039-6292
Tel 214.574.1000
Fax 214.574.1002
www.crowehorwath.com
October 29, 2010
Debbie Davenport, Auditor General
Office of the Auditor General
State of Arizona
2910 North 44th Street
Suite 410
Phoenix, Arizona 85018
Rio Nuevo Multipurpose Facilities District
Ms. Davenport:
Transmitted herewith is a report of Crowe Horwath LLP, a performance and financial analysis of
the Rio Nuevo Multipurpose Facilities District. This report is in response to the ARS §48-
4231.01. The review commenced on July 14, 2010 and this report represents the results of our
analysis as of October 28, 2010. The Rio Nuevo Multipurpose Facilities District (District) is
responsible for holding a public hearing and providing its responses to the report within 45 days
of this report’s issuance.
We received valuable assistance from the District Board members, the Board’s attorney’s and
the City of Tucson’s accounting staff.
Crowe Horwath LLP will be pleased to discuss or clarify items in the report.
Sincerely,
Kevin W. Smith
Partner
Table of Contents
Executive Summary .................................................................................................................... 1
Results in Brief ...................................................................................................................... 1
Scope & Purpose .................................................................................................................. 5
Rio Nuevo Overview ................................................................................................................... 8
Introduction and Background ................................................................................................ 8
Original Enabling Statutes ..................................................................................................... 9
Provisions of Proposition 400 .............................................................................................. 10
Intergovernmental Agreement Between the District and City of Tucson ............................. 12
Recent Legislative Changes Impacting the District (2006 and 2009) .................................. 13
District Funding and Projects Undertaken ............................................................................. 14
District’s Focus Far Broader than the Statutory Multipurpose Facility ................................. 14
District Operated More Like a Redevelopment Agency/Department of the City .................. 18
The District Assessed Its Progress at June 2009 ................................................................ 20
The District Board Exercised Only Marginal Control and Management Over TIF
Funds or Related Projects ............................................................................................. 22
The District Generated Significant TIF Funds but Spending Was Broad and
Without Assurances of Essential Outside Funding ........................................................ 26
Spreading the Funding Thin and to Public Works Type Projects Has Not Brought
the District Anticipated Results ...................................................................................... 34
Financial Viability of the District ............................................................................................. 38
Rio Nuevo District has not developed the Tucson Convention Center as an
Adequate Catalyst for Increasing Sales Taxes .............................................................. 38
Many projects incomplete .................................................................................................... 43
The District’s Can Meet its Existing Financial Obligations, but its Longer-Term
Decisions and Challenges are Significant ...................................................................... 45
Compliance Issues ................................................................................................................... 47
While Minor Individually, Various Compliance Issues Indicate a Weak Structure
and Control Environment ............................................................................................... 47
Conclusion and Recommendations ........................................................................................ 52
Recommendations .............................................................................................................. 53
Attachment A ............................................................................................................................. 54
Attachment B ............................................................................................................................. 55
Attachment C ............................................................................................................................. 56
Attachment D ............................................................................................................................. 57
Attachment E ............................................................................................................................. 58
Attachment F ............................................................................................................................. 59
Attachment G ............................................................................................................................ 60
Attachment H ............................................................................................................................. 61
Attachment I .............................................................................................................................. 62
Performance & Financial Analysis of the Rio
Nuevo Multipurpose Facilities District
1
Executive Summary
Pursuant to ARS §48-4231.01, the Arizona Auditor General contracted with Crowe Horwath LLP
(“Crowe” or “we”) to conduct a financial and performance analysis of the Rio Nuevo
Multipurpose Facilities District (the “District”) as a Multipurpose Facilities District (“MFD”) which
provides the boundaries for a Tax Increment Financing (“TIF”) district. The District was created
in 1999 with the passage of Proposition 400 as more fully described below. The original, pre-
2010 District Board (“Pre-2010 District Board”) was comprised of four members as appointed
and selected by the City of Tucson and the City of South Tucson with weighted voting applying
to the City of Tucson appointments. It was later extended by amendment in 2006 and
extensively reconstituted in 2009 by Senate Bill 1003. As of March 16, 2010, the new
reconstituted District Board (“Reconstituted District Board”) was seated and met for the first
time.
The objectives of the analysis were to evaluate the District’s:
 Compliance with significant statutory provisions regarding allowable expenditures of
District revenues
 Intergovernmental agreement with the City of Tucson
 Policies and procedures for prioritizing and managing construction projects and
financing activities
 Board of directors’ role and the City of Tucson’s role in prioritizing and managing
construction projects and financing activities
 Solvency, including its ability to pay operating costs, meet its debt obligations and
complete current projects
 Success at supporting and achieving its purposes, including analyzing infrastructure
projects and funding for those projects
 Plans for using unexpended bond proceeds and whether these plans provide for the
most effective use of the remaining proceeds
 Success at supporting and achieving its purposes through the expenditures made in
fiscal year 2009-2010
 Financing and lease of the Tucson Convention Center (TCC)
The review commenced on July 14, 2010 and this report represents the results of our analysis.
Results in Brief
The District was established in 1999 with the passage of Proposition 400 by the voters in the
cities of Tucson and South Tucson. Under applicable Arizona Revised Statutes (“ARS”), this
vote created a MFD in an area within the boundaries of the City of Tucson. This allows the
District to keep one-half of the incremental growth in State transaction privilege tax revenue
(sales tax or TIF revenue) on a 1999 base generated within the District boundaries and to use
the funds for projects within that area to support a “primary component” of the District, which is
the TCC and those other secondary projects that are “necessary or beneficial” to the support of
this primary component. Since its inception, the District has received more than $74 million in
sales tax revenues and issued more than $131.9 million in revenue bonds and certificates of
participation (“COPS”).
Performance & Financial Analysis of the Rio
Nuevo Multipurpose Facilities District
2
Although the District expenditures generally comply with most of the underlying statutory
provisions, which are vague at times, the District has focused its spending more toward
redeveloping its downtown area rather than funding projects directly benefiting and in support of
its primary component, the TCC, that could have provided an economic catalyst to stimulate
additional sales and other taxes, and leverage the tax increment financing (“TIF”) funds it
receives from the State.
Under the operative Arizona Statutes, a MFD must have a primary component, which for the
District is the TCC, to meet provisions that allow the redirection of the State’s portion of certain
incremental sales taxes into the District. From the outset, project elements and visions set forth
in the Proposition 400 voter pamphlet reflected that the expected use of TIF funds were
divergent from the State’s legislative intent as outlined in the statutes. In fact, the TCC was
mentioned only briefly in the voter information and no funds were earmarked for its purchase or
improvement.
Despite the District’s purchase of the TCC in 2002 from the City of Tucson (the “City”), the vast
majority of the more than $74 million in TIF funds received over the eight years of eligibility has
been spent broadly across the District through paying debt service on more than $131.9 million
in bonds and COPS, and directly funding projects such as building infrastructure, improving
streetscape, renovating of historic theatres, planning or constructing parking garages, and
widening underpasses. Although most of the projects are located within the District’s
boundaries, many of these projects we do not believe directly relate to the primary component
and certainly stretch the definition of being necessary or beneficial to the TCC. Yet the TCC, the
primary component of the District, remains an outdated complex. Although modest
improvements to the facility have been made, it still lacks sufficient and updated meeting and
facility space and technological improvements, and a convention center hotel, a critical
component to be competitive. Currently, the plans to expand the TCC and build a convention
center style hotel and parking garage are in the final pre-construction stages. Given the costs to
complete the facility and the District’s future funding challenges, it is arguably unable to fund
such a large project on its own without a financial partner.
The District’s initial approach to spending its funds on citywide projects was holistic and
inclusive; the Rio Nuevo Master Plan study, commissioned by the District considered renovation
and regeneration of the entire downtown region, not just the TCC area and its contiguous
environs. This Master Plan, adopted not only by the Board in 2001, but also the City included
over $757 million in projects with the District TIF revenue funding comprising approximately $70
million of those endeavors, or less than 10 percent. It appears from the earliest meetings of the
Pre-2010 District Board that no clear distinction existed between District projects and Rio Nuevo
Master Plan projects. The Pre-2010 District Board minutes indicate that projects beyond the
scope and intent of the Rio Nuevo Master Plan were discussed such as large residential
developments for which District TIF funds cannot be used, and that decisions were made
supporting the whole of the Rio Nuevo area. Further, the District embraced a multiple
destination approach, rather than a focused and measured methodology to deliver the intended
role and responsibilities of a multipurpose facility within the District.
As a result of this broad view perspective, the District has funded approximately $121 million in
land acquisitions, engineering, archeological and feasibility studies, parking garages,
Performance & Financial Analysis of the Rio
Nuevo Multipurpose Facilities District
3
roundabouts, culverts, underpasses, and environmental remediation, in addition to purchasing
the TCC for approximately $35 million. However, there are few of the Proposition 400 and
Master Plan projects completed. Yet, before the underlying statute was amended in 2006, the
majority of the District project elements were to be completed within its initial 10-year life. By
spending a significant portion of its funds on far ranging planning and public works-type projects
- infrastructure, planning and feasibility projects - and not focusing on, and completing the few
key components that would leverage these dollars into major incremental tax revenue
generation, most of the projects on which District funds were expended remain unfinished
and/or incomplete at the time this report was issued. Consequently, the residents of Tucson
see little improvement to the area overall, a lack of generation of additional incremental sales
tax revenues, few needed enhancements to the TCC (the primary component of the District), or
the construction of a convention center hotel that would create destination interest for infusing
the area with additional sales taxes and tourist dollars.
Specifically, our analysis reveals that the District:
 Focused far broader than the statutory defined primary multipurpose facility;
 Decisions suggest the District operated more like a redevelopment agency than a
multipurpose facility district for much of it’s existence;
 Pre-2010 Board appears to have exercised only marginal control and management over
TIF funds and District funded projects;
 Generated significant TIF funds, but mostly due to the issuance of debt and its spending
was broad and without assurances of essential outside funding;
 Spread the funding thin and to public works-type projects that have not brought the
District anticipated economic results;
 Had not developed the TCC as an adequate catalyst for increasing incremental sales
taxes;
 Can meet its existing financial obligations, but its longer term decisions and challenges
are significant; and
 Showed various compliance issues that indicate a weak internal control environment and
structure.
In November 2009, Arizona House Bill 1003 revised the statutes pertaining to the District, which
restructured the District Board with additional direction to the Board as to spending of TIF funds.
The appointment of Board members is now within the control of State elected officials, rather
than the local municipalities.
This newly Reconstituted District Board faces considerable structural and management
challenges to address and remediate. Thus, although currently projected TIF funds appear to be
sufficient to meet existing current obligations related to certain projects and to meet debt service
requirements, the vast majority of District funds are spent or committed, thus for the near term,
flexibility is limited and the Reconstituted Board must make difficult decisions. Nonetheless, the
Reconstituted District Board has the opportunity to significantly improve its financial, operational
and compliance responsibilities. In part, we recommend that the Reconstituted District Board
consider the following recommendations.
Performance & Financial Analysis of the Rio
Nuevo Multipurpose Facilities District
4
 Recover overpaid interest on the City’s loan to the District—work with the City to
determine the accurate loan period and assign to each period the appropriate interest
rate for the balance outstanding. Our general calculation of the interest owed the District
at approximately $442,000.
 Assure that a new Intergovernmental Agreement with the City (and any associated
Administrative Rules) conveys the appropriate powers and responsibilities of the District
and fulfills the 2009 ARS mandates.
 Develop policies and procedures outlining the District’s management and oversight of
future projects, including funding decisions, debt issuance and statutory mandates.
 Analyze and more fully review and complete the Capital Improvement Plan document
recently developed by the City for the District and include all projects that have District
participation on-going or expected in the future and require that this report be updated
and discussed on a regular basis, at least once a month, at a Board meeting.
 Develop a short-term strategy for the use of available funds, including remaining bond
proceeds and tax increment revenues.
 Establish a District staffing plan to assure adequate support for the Board, including key
positions of executive director, chair, treasurer and secretary. Under current statutes,
City employees cannot be paid or reimbursed for any of these services.
 Establish a District Fund account with an approved bank or banks for the deposit of all
revenues and expenditure of all funds. Assure that monthly reconciliations are
conducted and reported to the Board.
 Ascertain the District’s cash flow needs and arrange for investing available funds in
investment vehicles with appropriate durations, safety, liquidity and yield.
 Create a District website that fulfills the official reporting requirements of the ARS
mandates.
 Prepare, approve and submit District budgets annually to the Pima County Clerk
containing all budget information required by ARS code sections.
 Engage an independent CPA to annually audit the District Fund and submit a certified
copy of the audit report to the Auditor General within 120 days of the end of the fiscal
year.
5
Scope & Purpose
Crowe Horwath LLP and Sjoberg Evashenk Consulting have conducted a performance and
financial analysis of the Rio Nuevo Multipurpose Facilities District (the “District”) that includes
evaluations and certain required information described below. In order to conduct this analysis
the engagement team performed the following tasks:
 Met with the Arizona Auditor General’s office to discuss and clarify the scope and period
of the audit work to be completed and confirmed communication and reporting protocols.
 From the District and/or City, we obtained or requested relevant documents, including,
but not limited to:
o District formation documents
o IGA executed between the City and the District
o Strategic plans and other planning materials used to define projects and
determine priorities
o Where available, the individual project proposals, plans and materials with
timeframes and cost projections
o Annual approved budgets, and funding for each year since District formation
o Organization charts and contacts for the District
o Policies, procedures or other guidance or materials related to the District, its
operations, projects, revenues, or expenditures
o Any collateral materials, guidance, studies, reviews, or other reports relevant to
the District or affiliated projects
o District Board meeting minutes and associated documents
 We conducted interviews with City officials and managers (when available) and relevant
District officials and managers, where available, to obtain an in-depth understanding of
the environment, events, and activities that have occurred since the formation of the
District. The new Reconstituted District Board has relied heavily on information
maintained by the City due to the lack of separate management (as outlined in the IGA)
and internal control prior to the reconstitution of the District Board which had its first
meeting on March 16, 2010.
 Prepared fiscal and status information by individual project, i.e. schedules to determine
where funding was appropriated, spent, and outstanding, and whether funds spent
reasonably align with project progress.
Based upon the procedures enumerated above, we have evaluated the District’s compliance
with significant statutory provisions including ARS §48-4204, which prescribes allowable
expenditures of District revenues. (See Compliance Issues section)
We have also evaluated:
 The 1999 and 2000 Intergovernmental Agreement (“IGA”) between the District and the
City to ensure that the agreement is consistent with State statutes and that both parties
have complied with significant provision of the agreement.1 (See Rio Nuevo Overview
and Compliance Issues sections)
1 However, the compliance evaluation does not include a legal opinion or any other legal assurance of the
District’s or the City’s compliance with the applicable State Statutes.
6
 The policies and procedures that have been in place by the District in managing
construction projects and financing activities. (See District Funding and Projects
Undertaken section)
 The Pre-2010 and Reconstituted District’s board of directors’ role and the City’s role in
prioritizing and managing construction projects and financing activities. (See District
Funding and Projects Undertaken section)
 The District’s solvency, including its ability to pay operating costs, meet its debt
obligations and complete projects that are currently under construction. (See Financial
Viability of the District Section)
 Whether the District’s construction projects have been successful in supporting and
achieving the District’s purpose as legislated, including an analysis of infrastructure
projects and whether those projects should have been paid for by the City rather than
the District. (See Financial Viability of the District Section)
 The District’s plans in place as of June 1, 2009 for using unexpended bond proceeds
and determined whether these plans provide for the most effective use of the remaining
proceeds. (See Financial Viability of the District Section)
 Whether the 2009-2010 District expenditures were successful in supporting and
achieving the District’s purposes. It should be noted that the new District Board was
appointed and first met in March 2010 which was unable to fully function until Directors
and Officer’s insurance was obtained in late May 2010. (See Financial Viability of the
District Section)
Additionally, this report includes the following schedules:
‘
 The District’s capital costs as of June 30, 2010, including the debt service, of the TCC
and other assets of the District. (see Attachment A)
 The level of the District’s indebtedness, the amount of principal, interest and other debt
service expenditures paid in fiscal year 2009-2010 and remaining term to maturity with
respect to each. (See Attachment F)
 The District’s projects that are currently under construction and that are to be included in
the District’s plans for capital improvements and investments. This schedule includes
costs-to-date and estimated costs-to-complete, as of June 30, 2010. (See Attachment
D)
 A description of the amount of municipal payments, pursuant to ARS §42-5031,
subsection D during the fiscal year 2009-2010, the cumulative amount of those
payments through the end of fiscal year 2009-2010, and the municipal payments that will
be required by the City in the future, if any, based on the District’s costs as of June 30,
2010. These municipal payments by the City represent the matching funds required to
be made by the City. (See Attachment B)
7
 Fiscal year 2009-2010 District expenditures that include the level of expenses for
administration, planning, travel and entertainment. (See Attachment A)
Further, we have evaluated the financing and lease of the TCC. As discussed previously, the
TCC is the District’s primary multipurpose facility which was purchased from the City and
qualified the District to receive the TIF sales tax funds from the State of Arizona. The City
leases the facility from the District under a triple net lease and is responsible for managing and
operating the facility. A triple net lease is a lease in which the lessee (City) pays rent to the
lessor (District), as well as all taxes, insurance, and maintenance expenses that arise from the
use of the property. Since this is a triple net lease, The City pays for the operation and
maintenance of the TCC. Therefore, a schedule of the fiscal year 2009-2010 operation and
maintenance costs of the TCC was not applicable to the District. We have evaluated whether
the facility exceeds, meets, or fails to meet nationally recognized standards. In connection with
this evaluation we have included the following schedule:
 Fiscal year 2009-2010 District revenues derived from each component of the TCC and
other District revenues by source. (See Attachment E)
 The public use of each component of the TCC and any other multipurpose facility of the
District. (See Attachment I)
Additionally, for evaluated the applicable of the following schedule, however due to the terms of
the lease agreement with the City, this schedule was deemed not applicable to the District.
 Fiscal year 2009-2010 operation and maintenance costs of the TCC and other assets of
the District incurred by the District. This schedule is not applicable to the District as
the City pays all operation and maintenance costs related to the TCC.
8
Rio Nuevo Overview
Introduction and Background
Under provisions of Arizona law, the District was formed in July 1999 through an IGA by and
among the cities of Tucson and South Tucson and the Sahuarita Township with the purpose of
seeking passage of Proposition 400 by the voters from within these three municipalities and the
construction or acquisition of a qualifying primary component. Upon passage of this measure
by each of the three municipalities and the construction or acquisition of a qualifying primary
component, the District would be eligible to capture, for 10 years (original term of the TIF
District, later extended to 25 years as discussed in this report), one-half of the State’s share of
incremental sales taxes generated within the stipulated boundaries of the District.
On November 1999, Proposition 400 was passed by the voters of only the cities of Tucson and
South Tucson. With passage of the measure in these two cities, the District became a “tax
levying public improvement district and political taxing subdivision of the State” and a legally
separate entity from either City. As a result, the District was allowed to keep one-half of the
incremental State sales tax or TIF revenue generated within the District’s boundaries and to use
the funds for projects within that area under provisions of ARS § 48-4202 and ARS § 42-5031.
Below is a map of the District:
9
Original Enabling Statutes
The ARS outlines the type and range of projects for which a MFD can use its share of the
incremental sales tax revenues generated from within its boundaries. At the time of the
District’s formation, ARS 42-5031 (F) 4 (a) and (b) categorized these projects in two ways – 1)
the primary component, and 2) secondary components. However, along with the privilege of
receiving the additional sales tax, the State of Arizona has imposed a set of mandates on MFDs
as a condition of receiving the funds. Specifically, the statute provided that a multipurpose
facility means any facility or facilities that include a primary component and secondary
component(s) as described in the following.
Primary Component
A primary component is located in the MFD on the multipurpose facility site and on lands that
are adjacent to each other or separated by public rights-of-way, that the district owns or leases
and that is used to accommodate sporting events and entertainment, cultural, civic, meeting,
trade show or convention events or activities (ARS 42-5031(F)4(a)). Moreover, ARS §42-
5031(C), in effect August 6, 1999, required that a MFD must construct or acquire the Primary
Component within the first phase of the project.
Secondary Components
Secondary components that are located in the MFD and that the board determines are
necessary or beneficial (emphasis added) to the primary component, and are limited to the
following:
 on-site infrastructure,
 artistic components,
 parking garages and lots, and
 public parks and plazas.
In addition, secondary components may include related commercial facilities that are located
within the multipurpose facility site (which means the geographic area within the District which is
depicted in the publicity pamphlet for an election held pursuant to section 48-4237), as per ARS
42-5031 (F) 4 (b).
10
Provisions of Proposition 400
At the time of passage, the Rio Nuevo Project, as proposed in proposition 400 was a planned
multi-faceted development project, including cultural and recreational amenities and
improvements, unique historic re-creations, new and expanded museums, and mixed-use
developments. The multipurpose facilities district project site included the existing TCC area,
which was a necessary component of the District. The projects envisioned in the original 10-
year District lifespan were estimated to cost $320 million in total. Through the TIF funds, the
District would contribute approximately $60 million of the total with Tucson City sales tax
generated within the Rio Nuevo District boundaries to match that amount and other public and
private funds would contribute the remainder. Proposition 400 included the following project
elements:
 Historical: The re-creation of the Mission San Agustin Cultural Center and
Settlement Area. Located at the base of “A” Mountain and first inhabited during
the Archaic Period (1000 BCE), this area includes the Convento, a chapel, a
granary and the Carrillo House. To the west are Mission Gardens and Solomon
Warner’s Mill. Calle del la Mission River, the first European road constructed in
Tucson, will again be established to connect the two sides of the river. It was also
to include a historically accurate acequia, or irrigation canal. Across the Santa
Cruz River in downtown, the Tucson Presidio Historic Park, located at the corner
of Church and Washington Streets, was to include portions of Tucson’s original
Presidio Wall.
 Cultural/Retail/Mixed-Use: A mixture of carefully designed new construction.
The area just south of Congress Street and west of the Santa Cruz River was to
include mixed-use space, a community plaza and natural open space and a
museum complex. For the area east of Interstate 10, the plans included an
International Visitors & Trade Center, the Sonoran Sea Aquarium, a new hotel,
and an IMAX theater. All new development was to reflect the historic and cultural
foundation established for the project. Additionally, the plans called for several
historic buildings in downtown Tucson to be improved, including the Carnegie
Library building that now houses the Tucson Children’s Museum, the Tucson
Museum of Art’s La Cas Cordova (Tucson’s oldest surviving structure), and the
historic C.O. Brown House.
 Environmental: Significant improvements to the Santa Cruz River, including the
re-vegetation and improved recreational pathways. Improved parking, pedestrian
amenities and bike pathways were to be made, including new linkages under I-10
and over the Santa Cruz River. Rancho Chul-Shon, a 15-acre site immediately
south of Mission Gardens, was to be re-created to reflect both the natural
environment and cultural legacy of Tucson’s early inhabitants.
Most of the maintenance and operational costs relating to completed projects were expected to
be paid, either directly or indirectly, by tenants, owners and/or operators of the specific project
elements (e.g. museums, retail, etc). Costs for the operation and maintenance of publicly
owned and/or operated projects such as the proposed International Visitors Trade Center, was
to be paid by the City and other tenants. The anticipated operating costs for such facilities were
expected to be paid from the future collection of City sales and/or hotel occupancy taxes
generated within the District boundaries and from other funds available to the City. Based upon
estimates at the time proposition 400 was passed, the average annual amount of future City
“sales” and hotel occupancy tax revenues, which were expected to be received by the City for
the proposed improvements, was $2 million per year.
11
Table 1 provides an analysis of the projects and estimated costs for those projects that were
included in Proposition 400, as compared to the actual costs, and status of those projects at
June 30, 2010.
Project Estimated Cost Actual Cost Status
Development of Mission San Agustin
Cultural Center
$ 9,500,000 $ 18,219,648 Design Completed
Rio Nuevo preparatory site improvements 6,100,000 979,182 Partially Completed
Enhancements to multi-modal linkages &
crossings
6,000,000 18,027,752 Partially Completed
Construction of Sonoran Sea Aquarium 10,000,000 - Cancelled-infeasible
Construction of International Visitors and
Trade Center
2,500,000 1,208 Cancelled-due to funding
Construction of new Convention Hotel* 8,000,000 1 0,050,380 In design
Construction of mixed-use
residential/commercial developments
2,000,000 5,523,863 Some homes built-Mercado District;
available financing holding
Development of Multi-Cultural Facilities 700,000 1,580 Part of Tucson Origins Heritage Park
Enhancements to Children's Museum 300,000 - On Hold
Construction of New Museums:
Arizona Historical Society 12,000,000 1,467,183 On Hold
Universe of Discovery and Others 10,000,000 - On Hold
Completion of Santa Cruz River restoration 3,000,000 - On Hold
Construction of Presidio Historic Park 3,000,000 4,375,370 Completed
Restoration of Fox Theatre 4,200,000 1 1,519,702 Completed
Enhancements to Tucson Museum of Art,
El Centro Cultural & Others
2,000,000 - On Hold
Total Costs $ 79,300,000 $ 70,165,868
* - Estimated District costs for possible construction of public areas, parking and other public improvements.
Table 1 - Proposition 400
Status of Original Elements with Actual Costs from Inception Through June 30, 2010
Source - Proposition 400 and District's general ledger maintained by the City of Tucson.
12
Intergovernmental Agreement Between the District and City of Tucson
In July 1999 and March 2000, the District adopted an IGA with the City for the purpose of
developing a multipurpose facility as defined by ARS §48-4201.4. A key provision of the IGA
required that District decisions regarding zoning, planning, intensity and density of development
or with respect to facilities or sites must first be approved by the City’s Mayor and Council and
further stipulated that the District shall not own, operate, undertake, or take any formal action
with regard to any project, facilities or site within the District boundaries, except with consent of
the City. Provisions also envisioned establishing a Citizens Advisory Committee and included
general provisions that the City would lend the District money until TIF funds became available
and required the repayment of any such loans. In addition, the IGA in part stipulated:
 District shall construct the primary component of the Rio Nuevo Project during the first
phase of the construction.
 City will provide payments to the District or expend monies for land, infrastructure or
other improvements an amount equal to the amount the District receives by the end of
10 years as required by ARS §42-5031(D)2.
 District construction costs of all public and District owned components of the
multipurpose facilities site is or will be not less than $200 million, and the City will
provide the District with a listing confirming this amount.
 Upon termination of the District, its assets (less indebtedness and contractual
obligations) shall be distributed to the City of Tucson in proportion of the City’s revenue
contributions to the District.
The District also adopted on July 19, 1999, Rio Nuevo District Resolution #1999-001. This
resolution formally adopted Administrative Rules, appointed officers, called for the special
election to be held on November 2, 1999, and agreed to make certain payments to participating
municipalities. Section 9 of Resolution #1999-001 describes contributions to participating
municipalities, subject to passage of the special election, as follows:
 City of Tucson: Reimbursed for the actual cost of the special election.
 To the City of South Tucson: $500,000 upon issuance of bonds for the Rio Nuevo
Project; plus, an additional $500,000 from revenues received by the District from
developer or developers involved in Rio Nuevo Project.
On October 22, 2010, the Reconstituted Board of the Rio Nuevo Multi-purpose Facilities District
adopted a new set of Administrative Rules to address the provisions of ARS §48-4203(A)(4) and
(5). These new rules govern the administration and operation of the District. Among its articles
are rules, procedures and processes addressing the following:
1. Name, Operation and Office
2. Organization and Termination
3. District Powers
4. Board of Directors
5. Voting
6. Officers and Staff
7. Indemnification and Liability Insurance
8. Conduct of Meetings
9. Contracts and Official Records
10. Amendments
2 In 2006, the period of time for the City of Tucson to complete the match of the District’s expenditures
was extended to 25 years by amendment to the Arizona Revised Statutes.
13
Recent Legislative Changes Impacting the District (2006 and 2009)
House Bill 2702, enacted in 2006, included provisions that extended from 10 years to 25 years
the term of the District to allow for the capture of the incremental sales tax generated in the
District. Further, on November 23, 2009, the State Legislature passed Senate Bill 1003 which
changed the configuration of the District Board but also added certain significant restrictions on
the District’s activities. Specifically, the new provisions expanded the District’s Board of
Directors from four members to nine members, requiring that five members are to be appointed
by the Governor, at least three of whom must reside in Tucson and each of whom must have
experience in Commercial Real Estate, Construction, Redevelopment, Real Estate Law,
Architecture, Economic Development or Commercial or Public Finance. Further, two members
are appointed by the President of the Senate, at least one of whom must reside in the City of
Tucson and two members are appointed by the Speaker of the House of Representatives at
least one of whom must reside in the City of Tucson. Each Board member serves at the
pleasure of their appointer. The remaining Pre-2010 District Board members have been
allowed to complete their terms, which expire in May 2011.
This new legislation set limitations as to the activities of the District in allocating or using TIF
revenues as specified in ARS 48-4204 (B):
From the taxes and charges levied or identified pursuant to section 48-4237 for use
with respect to multipurpose facilities and from other monies lawfully available to the
district, the district may acquire land and construct, finance, furnish, maintain,
improve, operate, market and promote the use of multipurpose facilities and other
structures, utilities, roads, parking areas or buildings necessary for full use of the
multipurpose facilities and do all things necessary or convenient to accomplish those
purposes. Public funds identified in section 48-4237, including funds distributed
pursuant to section 42-5031, may only be used for the component for a multipurpose
facility which are owned by the district or which are publicly owned, Except that
monies paid to the District pursuant to Section 42-5031 may only be used for the
following purposes until a notice to proceed is issued for a hotel and convention
center located on the multipurpose facility site:
 Debt service for bonds issued by the district before January 1, 2009.
 Contractual obligations incurred by district before June 1, 2009.
 Fiduciary, reasonable legal and administrative expenses of the district.
 The design and construction of the hotel and convention center located on the
multipurpose facility site.
In essence these provisions stipulate that no new projects be undertaken by the District Board
until a notice to proceed is issued for a hotel and convention center. At the October 7, 2010
District Board meeting, the District passed a motion issuing a notice to proceed subject to
specific parameters. The motion is composed of eight amendments and passed with a vote of 8-
2 with one abstention. The District issued this notice to proceed to address the City’s specific
request regarding various term sheets prepared by the City for District reply, rebuttal and/or
concurrence. The City represented to the District that a clear response was in order to move
forward with the proposed project’s many contracting requirements (preparation, negotiation
and drafting of the design build agreement, room block agreement, hotel operating/flag
agreement with owner, etc.) and to prepare for a bond issuance prior to end of year 2010 to
take advantage of the Build America Bonds. The motion was later revised on October 20, 2010
to allow the (to be created) owning entity of the proposed hotel project to issue the Bonds.
14
District Funding and Projects Undertaken
District’s Focus Far Broader than the Statutory Multipurpose Facility
From its inception through early 2009, it appears the District's priorities were to foster and
improve the City's cultural, civic, artistic and related features to enhance downtown Tucson
rather than concentrating on statutorily-intended catalyst projects that would spur economic
growth, leverage private development dollars, and generate higher levels of sales and other tax
revenues. Documents suggest that in establishing the District, the City was seeking to
reenergize two decades of redevelopment efforts to restore historic neighborhoods, reestablish
a retail core, emphasize downtown’s role as the community governmental and cultural center,
attract residential and mixed use development, improve transportation and parking, and
preserve and celebrate Tucson’s heritage. In fact, memoranda and notes from a number of
discussions reveal that the District’s formation would facilitate a new source of funds to the City,
the State’s portion of the incremental sales taxes (TIF), for downtown/Rio Nuevo South
improvements that, without the approval of Proposition 400, such improvement projects would
“stay in a plan on the shelf.” The City’s intent to use a MFD as a funding vehicle for downtown
redevelopment is evident in the plans for the November 1999 election to decide Proposition
400, in the ballot measure language and pamphlet, and in subsequent actions taken by the
Board.
We found no indication that the City recognized or viewed the broad-scoped redevelopment
approach for the downtown and Rio Nuevo areas as contrary or in discordance with the State’s
statutory provisions. The City leadership encouraged a holistic and all-inclusive approach to
using the TIF funds and the expectations were that these funds would be used for the direct
benefit of all Tucsonans. The vision presented in the September 7, 1999 Mayor and Council
Memorandum reflects Tucson’s intent for these funds. This memorandum states in part:
Ten community forums have been held to generate the plan and the specific
projects to be accomplished through the use of Rio Nuevo Multipurpose Facilities
District (RNMFD) funds….
With broad community input, the attached plan has been developed and includes
a prioritized listing of projects to be funded through District revenues. The plan
represents a consensus of the appropriate locations and priorities for
entertainment venues, museums, retail establishments, residential opportunities,
hotels, and key multi-modal transportation corridors within the Downtown and Rio
Nuevo South….
It is important to note that some of the projects listed here may be eligible for
State, Federal and foundation grant funds. Any obligations made by the District
to fund these ventures would be available to apply as a match requirement under
such a scenario. Therefore, this action plan seeks to not only leverage private
investment in Downtown and Rio Nuevo, but also leverages grant monies that
will be aggressively pursued.
15
The Mayor and Council Memorandum set forth specific projects, classified them by nature of the
project, and listed them in priority order, as follows:
 Development of Mission San Agustin Cultural Center
 Completion of Rio Nuevo South preparatory site improvements
 Enhancements to multi-modal linkages and crossings
 Construction of the Sonoran Sea Aquarium
 Construction of the International Visitor’s and Trade Center
 Construction of new convention hotel within one of the targeted locations
 Construction of residential units within the targeted locations…(mixed use)
 Development of multi-cultural facilities at southern end of Rio Nuevo
 Enhancements to the Children’s Museum
 Construction of additional museums within Rio Nuevo South
 Completion of Santa Cruz River restoration (…in collaboration with Pima County)
 Construction of Presidio Historic Park
 Restoration of Fox Theatre
 Enhancements to Tucson Museum of Art and El Centro Cultural
As this Memorandum conveys through the priority and allocation of funds, the City’s intent for
the new TIF funds were fundamentally to provide to the residents of Tucson a redeveloped,
beautified, and culturally rich living environment. While the plan included many tourist-friendly
attractions, few of these elements would generate sales or use taxes (with the exception of the
“convention hotel”—number 6 in priority of 14 listed items) and most would require significant
additional funding to reach fruition and also necessitate ongoing public funds or philanthropic
support for operations and maintenance. Important is the absence of discussion or inclusion of
the purchase or improvements to the TCC—the stated primary component of the District.
Table 2 – Proposed Rio Nuevo Projects
The ballot and required public
information package to accompany
the ballot measure generally reflect
these 14 project elements stating,
“The Rio Nuevo Project is a planned
multi-faceted development project,
including cultural and recreational
amenities and improvements, unique
historic re-creations, new and
expanded museums, and mixed-use
developments” and iterates that the
“Project Site includes the existing
TCC arena” stating it is a “necessary
component of the project.” The
funding estimates provided within the
ballot packet for the 14 project
elements were consistent with the
Mayor and Council Memorandum
figures and established project-wide
anticipated costs of $320 million with $60 million generated from the TIF and another $60 million
City of Tucson
Mayor and Council Memorandum
Summary of TIF Allocation by Category
Proposed Rio Nuevo Projects
September 7, 1999
In millions
 New Museums and Aquarium $ 28 - 30
 Cultural $ 18 - 22
 Infrastructure $ 15 - 17
 Commercial/Residential $ 9 - 11
Total $ 70 - 80
16
from the City by “Tucson City business privilege (“sales”) taxes generated within the Rio Nuevo
Site” (the City considered this to be part of their match), with the remainder of the funding
expected from other public and private sources. Also of note in the ballot package are
comments about the “Project’s maintenance and operational costs” that were expected to be
paid either directly or indirectly by tenants, owners, and operators of “specific Project elements
(e.g. museums, retail, etc.)” and costs related to publicly owned facilities to be borne by the City
and other tenants.
The visionary disconnect between the statutory intent of a MFD and the City’s regional
redevelopment is further reflected in public forums and meetings that took place subsequent to
the passage of Proposition 400, which were intended to solicit public views of how the District
should use the TIF funds. In ranking the desires for using these funds, participants in the
forums rated “no new Tucson Convention Center” at the top of the scale and ranked “motivate
additional economic development” and “integrated convention center” at the bottom. Further,
during public forums general vision statements were developed for project evaluation criteria in
the areas of economic sustainability, being “Tucson Centric”—specifically, honor, interpret and
restore Tucson’s history, environmental compatibility, and housing. While these elements are
important aspects in evaluating potential Rio Nuevo projects, the absence of including TCC
related projects or economic catalyst projects as key criteria reflects the discordant perspectives
related to the District’s initial intent and subsequent decisions. In particular, the visions
statement for “Economic Sustainability” includes “enhancing businesses/activities that provide
appropriate compensation for employees, revitalize downtown, and motivate additional
economic and social development” but makes no mention of creating projects to generate
additional revenue from outside sources or leveraging TIF economic benefits.
Further, the District Board, prior to its recent reconstitution, embraced and supported the region-wide
perspective that is evident in its approach and process for approving projects. One of the
District Board’s earliest actions was approving a contract with Hunter Interests Incorporated to
prepare a comprehensive Rio Nuevo Master Plan. Although stated within the text of Master
Plan that the approach of the development process was to be such that it could “realistically be
implemented during a 10-year period given the funding mechanism established with the tax
increment district and the current economic realities of the metropolitan Tucson markets” and
that the “planning objective from the start was always to include only those public and private
development projects which could be realistically implemented during the next 10 years” the
plan encompassed the entire Rio Nuevo and downtown areas, projects well beyond the assets
to be allocated by the District, and timeframes that would not be reached during the 10 year
funding window.
The $600,000 Master Plan, funded by the District and completed in February 2001, provided a
single document reflecting drawings and visions for the full project build-out, and was
accompanied by 28 Technical Memoranda comprising 400 pages of details involving a variety of
planning aspects including economic modeling, project phasing, and capital project cost
estimates. Similar to the approach used in the ballot language, the Master Plan classified
projects as cultural, residential, commercial, and infrastructure and clearly demonstrated the
broad-scope approach embraced by the Board. The far reaching focus of the Board can be
illustrated in the fact that the Master Plan sets forth 47 projects with a total cost of approximately
$757 million—only $70 million, or just 10 percent, of this amount coming from projected TIF
funds. This represented a $437 million or 137% increase from the original plan outlined in
Proposition 400 published only 15 months prior to this plan. Projects include wholly private
sector developments, wholly public sector projects (all public sources of funds), and a number of
others to be completed with public/private partnerships. Overall, under the Master Plan, 20
projects would be allocated the estimated $70 million in TIF funds—18 projects classified as
17
cultural and one specifically designated as “infrastructure” (Santa Cruz River Restoration). The
other project, deemed “commercial,” was the Conference Center/TCC Lobby/Parking project -
$14.5 million in costs to be funded with $10 million in TIF funds and $4.5 million in public funds.
Both the Conference Center/TCC Lobby/Parking and the Santa Cruz River Restoration was
included in the 32 Phase I projects.
18
District Operated More Like a Redevelopment Agency/Department of the
City
Both the Rio Nuevo Citizen’s Advisory Committee and the District Board approved the Master
Plan in 2001 as a general concept and design vision with the caveat that particular budgets and
projects would be individually approved by District Board actions. Although the Board chose to
deliberate projects and approve District funds accordingly, we did not locate within the Board’s
records any formal policies and procedures or criteria for selecting, prioritizing, or managing the
capital projects to be funded with TIF funds. Within Citizens Advisory Committee records we
found general guidelines that it developed for its deliberative processes but we did not identify
that such principles were entertained or adopted by the District Board. Alternatively, it appears
that projects were brought forth to the District Board through presentations, and approval and
funding decisions were made as a result of subsequent discussions; these deliberations do not
convey that Board members applied any certain set criteria or measures in approving a project,
contract, agreement, or giving direction to City staff for action. As a result of recent legislation
and the reconstituted District Board, actions now appear to follow much more structured
processes.
The provisions of Proposition 400 set forth 14 project elements for funding with the voter
approved reallocation of incremental sales taxes. Not included within these projects is the
purchase of the TCC. Nonetheless, to fulfill the enabling state legislation facilitating the creation
of the District and triggering the flow of TIF funds to the District, in September 2001, the District
Board passed a resolution to acquire from the Business Finance Development Corporation
(usually referred to as city-owned) the TCC. The District issued approximately $33.6 million in
Certificates of Participation (COPS) to pay for the required “primary component” and
immediately leased the multipurpose facility back to the City in a “Triple Net Lease” at a rate
equal to the District’s debt service requirements on the COPS.
The Board’s resolution stated that with its acquisition of the TCC, it would make improvements,
renovations, and modifications to enhance its ability to function as a multipurpose facility.
Nonetheless, little attention was given to the Convention Center for several years. Instead, the
District focused on the Rio Nuevo region-wide initiatives with significant attention to the
“Westside” and the cultural projects related to Tucson Origins Heritage Park and the related
environmental remediation and infrastructure efforts, as well as the various museums and
centers to populate the area; the “East End” including the significant renovation efforts related to
the Rialto and Fox theatres, the Thrifty Block, Depot Plaza Garage (and associated housing and
retail), various streetscape and infrastructure projects; and the excavation of Presidio and
Heritage Park in the heart of downtown Tucson. The attention given to the TCC was focused on
associated projects including allocating more than $20 million to the University of Arizona
Science Center and the planning of a civic center plaza and garage with the only significant
attention to the TCC being the relocation of the ticket office, a change of carpeting, and
improved signage.
19
Table 3 – 2007 Use of District Funds
Additionally, the District’s attention to citywide
redevelopment is reflected in the information that
supported the legislative efforts to extend the life of
the District to 25 years. In the summer of 2006, the
Arizona Governor signed the legislation that
extended the TIF duration for the Rio Nuevo
Multipurpose Facilities District from the initial 10
years to 25 years. At that time, the City Manager
stated that without this additional revenue stream the
“downtown revitalization efforts would be grossly
undercapitalized.” What is more telling is that the
intent of the local leaders was to use these funds to
develop many diverse projects believing that “without
which our overall multiple destinations strategy would
surely have failed.” Additionally, the City Manager’s comment that “it has always been my goal
and that of the Mayor and Council Members, to provide an equitable distribution of Rio Nuevo
funds” and he described the proposed allocation for the anticipated $875 million in additional
TIF funds would be generated during the fifteen year extension of the District throughout the
area. Although he stated that “in today’s dollars this is approximately $581 million,” he did not
cite the underlying basis for such a significant increase in the related incremental sales tax
revenue. Even considering the District’s increase in TIF revenues over the first several years of
its existence, the future revenue projections appear overly ambitious and have not materialized
to date and in fact have decreased since fiscal year 2007.
The City Manager also provided the statistics, referenced in Table 2, as evidence of the intent to
equitably allocate TIF funds throughout Tucson. As of 2007, the District continued to target the
major cultural attractions included in the voter approved ballot measure and Master Plan as well
as the redevelopment of the entertainment districts. At this point, the City Manager also noted
the “need to fund investments in parking facilities and infrastructure essential for the private
sector to flourish.” Thus, he provided justification for the District Board’s intensive investment in
infrastructure, environmental remediation, and parking lots rather than economic catalyst
projects that would attract new sources of tax revenue.
During the mid-2000s, the District did periodically evaluate a variety of options to enhance the
TCC including building a new arena and considering a convention center hotel. With the
booming economy and related growth of the TIF revenue over the period, the concept of
developing the primary component gradually garnered greater attention. In his May 22, 2007
presentation before the Rio Nuevo Citizens Advisory Committee, the former City Manager
spoke of the City’s “series of investments in cultural and entertainment attractions that are
expected to have spin-off economic benefits.” As an example, he cited the proposed new arena
and convention center expansion and noted that together “such projects could bring nearly one
million people downtown and have direct and indirect economic impacts of over $275 million
annually.” He spoke of these projects as catalysts for “major mixed-use, higher density urban
scale redevelopment in and around the TCC area.” It should be noted that the plans of the City
for an arena have been discontinued as of the date of this report.
Distribution Across Tucson of District
Funds 2007
Prior Capital Project Costs and
Allocations to Date
35.9% West Side
19.6% East Side
35.7% Infrastructure
8.7% Unallocated
Source – City Manager’s Report to the Rio
Nuevo Citizen’s Advisory Committee, May
22, 2007.
20
The District Assessed Its Progress at June 2009
Our review of financial data shows that over the 10 plus years of the District’s existence, more
than 50 projects were funded in total or in part with District resources. The priority of these
projects appeared to have changed from both the provisions of Proposition 400 as well as the
February 2001 Master Plan. As of 2009, records show that the District purchased property—10
separate transactions totaling nearly $40 million. Included in these purchase is the District’s
acquisition of the TCC from the City which was immediately leased back to the city for the cost
of the debt service on the $33.6 million in 10-year COPS. Also funded in part or in total using
TIF funds at this point in time were infrastructure improvements—20 projects costing more than
$47.8 million; three landfill and environmental projects supported with over $3 million;
approximately $3.1 million spent on the TCC - at that point comprised primarily of the new ticket
office and the planning of other stages; and historical and archaeological research and other
historical-related initiatives undertaken for $7.3 million. How the Board viewed that these
projects were to come to full fruition and to fit into the “multi-destination” vision and still meet the
intent of the MFD statute requiring that such projects were necessary or beneficial to the TCC or
revenue generating is unclear. Also, unknown was how far along any of these projects were
when discontinued and how much more funding would be needed for completion, and the
sources of such funds.
In 2009, the District Board issued a 2009 Annual Report that presented a brief update of the
status of the “voter-approved Project Elements (with current status)” affording a comparison of
what was first envisioned and presented to the voters and the results of the District’s efforts at
the end of nearly 10 years in existence. As Table 4 reveals, the District Board report links the
14 Proposition 400 project elements to outcomes almost 10 years later. Of note is that the
original provisions of the District allowed only a 10-year window to collect the tax increment
revenues and complete the projects; similar time frames were included in the Master Plan.
Clearly, the broad approach taken by the District in funding this wide variety of disjointed
projects proved to be unsuccessful. As a result of the changes in project priorities, broad
redevelopment focus, and intensive investment in infrastructure and other public works type
efforts, only two of the Proposition 400 projects are complete at mid-2009. The Annual Report
shows that the remaining projects are in various stages, ranging from cancellation to being on
hold or in some state of partial completion.
By-in-large, the District Board’s 2009 Annual Report provided general governance overviews,
significant actions, and TIF revenue generation and spending information. However, not only
did it provide a “Looking Back” overview, it also broadcasted its forward-looking initiatives noting
the Pre-2010 District Board had approved an update of the hotel market and feasibility analysis
to assess, in relation to the convention center and convention center hotel, the current market
conditions and demands. While the stated purpose of the Annual Report was to comply with
bond underwriter requirements for debt issuance, this study along with the related resolution
reflects the Board’s resolve to refocus its future efforts on the primary component of the MFD.
21
1A project in collaboration with Pima County.
Source: 2009 Annual Report, Rio Nuevo Multipurpose Facilities District, FY 08/09
Project Status
Development of Mission San Agustin Cultural
Center
Design Completed
Rio Nuevo preparatory site improvements Partially Completed
Enhancements to multi-modal linkages & crossings Partially Completed
Construction of Sonoran Sea Aquarium Cancelled-infeasible
Construction of International Visitors and Trade
Center
Cancelled-due to funding
Construction of new Convention Hotel In design
Construction of mixed-use residential/commercial
developments
Some homes built-Mercado District;
available financing holding
Development of Multi-Cultural Facilities Part of Tucson Origins Heritage Park
Enhancements to Children's Museum On Hold
Construction of new museums On Hold
Completion of Santa Cruz River restoration On Hold
Construction of Presidio Historic Park Completed
Restoration of Fox Theatre Completed
Enhancements to Tucson Museum of Art, El Centro
Cultural & Others
On Hold
Table 4 - Proposition 400
Status of Original Elements
22
The District Board Exercised Only Marginal Control and Management Over
TIF Funds or Related Projects
From the District’s inception, TIF monies were to be earmarked for signature cultural and key
projects; however, gradually this finite pool of additional TIF funds was diluted or redirected to
support a wide array of projects, ranging from theatre renovations and cultural parks to a
freeway underpass widening and parking garages. While some of these projects are integral to
those originally earmarked, we found that the lack of strategic oversight and management of the
TIF revenues by the District Board resulted in the disjointed use of these monies for subordinate
projects or for funding non-sustainable major projects only tangentially related to the District’s
mandates. It appears that the Pre-2010 District Board lacked essential fiscal and project-specific
management reports and relied heavily on oral reports from city staff to oversee and
administer funds in which District had fiduciary responsibility.
As noted previously in this report, we did not locate or identify any formal or informal criteria or
guidance adopted by the Board for prioritizing, approving or managing TIF funded projects.
Board minutes convey that members deliberated and considered projects that were presented
for approval or funding but find little documentation that suggests that the Board had set criteria
to be considered. In addition, operationally and in terms of governance, with the intertwined
relationship between the City and the District it is difficult to separate the functions and
responsibilities of each, and actions and activities blended together.
While the 1999 IGA between the District and the City generally delineated respective roles and
responsibilities, in practice, no clear boundaries and responsibilities were in place, other than all
District decisions must ultimately be authorized by the City and/or the Mayor and Council before
actions could be taken. With all Board project approvals requiring consent of the Mayor and
Council, it is unclear what level of control over District funds and related projects the Board
actually retained. Moreover, with the required approval of the Mayor and City Council on all
projects and funding decisions and City staff providing the District’s management, staffing and
other support activities, as well as conducting accounting and contract management functions
for Rio Nuevo projects, it appears that very little was done by the Board without direct or indirect
City involvement. Given that the Board did not establish, require, or maintain its own critical
fiscal records to allow members to track and monitor on an on-going basis funding allocations,
contract or agreement approvals, costs incurred to projected allocation, and other key data, its
ability to exercise control or management over the use of the funds must have been significantly
hampered. In essence, the District was treated as an extension or department of the City.
Unlike operational budgets and funding cycles that are approved and expire within a set period,
usually one fiscal year, the allocation and spending of District funds requires not only planning
and deliberation, but comprehensive long-term project budgets that track obligations, project
expenditures, funding amendments, project delays, and matches these dynamic activities
against cash flows and funding capacities. Government entities involved in capital project
initiatives typically develop and maintain formal budgeting and monitoring documents such as
Capital Improvement Plans (“CIP”) that are rolling planning tools that project out—usually over 5
years—the capital initiatives and are updated as decisions are made, but at a minimum
annually. Based upon our interviews with key City and District Board members and intensive
searches of the records, it appears that until the most recent two years, the Pre-2010 Board did
not maintain nor require such tools for the District activities. As a result, it is likely that the
District Board had only pieces of fiscal and project information related to the use of District funds
and lacked solid, uniform, and complete data reflecting funds committed per project and
subproject, expenses incurred to these elements, the needed funds to complete an initiative,
and the amount of funding capacity remaining.
23
Instead, beginning with the ballot measure and further refined in the Master Plan, it appears that
the Pre-2010 District Board allocated funds at very high or gross levels that earmarked large
sums of money for general project elements. However, the stated policy of the Board was that
projects must be considered and approved individually for funding. Our review of Board
resolutions and minutes reflect inconsistent practices in those efforts—while we can find
approvals for projects either at the project element level through board action, on a fiscal year
appropriation basis as the project was included in the annual budget allocation, or included in
official bond statement language, there does not appear to be uniform approval processes with
documentation tracking these funding allocations back to actual expenditures or project
amendments. Furthermore, it is unclear how or whether the Board was aware of the total
amount of funds it committed over the period to these long-term capital projects. Overseeing
these funds would be difficult under the most organized and rigorous processes due to the
broad reaching vision of the use of the District funds and the literally dozens of contracts,
agreements, and activities required to accomplish even small aspects of a major project.
Board records reflect its activities largely focused on considering and approving projects based
on verbal presentations and initial project proposal packets and received only limited or sporadic
project updates that did not always discuss funding or provide detailed cost elements. Only
infrequently did we find evidence that the Pre-2010 District Board discussions included detailed
financial data, and we found little mention of budget to actual comparisons. Additionally, it
appears that District Board approvals varied at the level of detail and value of project and did
not always include project costs. For example, while in February 2002 the District Board
directed staff to procure a contract not to exceed $358,000 toward the cost of stabilizing 196-
200 N. Court Avenue, in the following month it approved the “acquisition of NE corner of Church
Avenue and Council Street and NW corner of Stone Avenue and Council Street” with little other
data and no cost figures included in the Board minutes or available documents. We did not find
that detail regarding this transaction was subsequently attained and discussed by the Board.
Reviews of the Board minutes show numerous approvals of contracts, development
agreements, and intergovernmental agreements, but we find no monitoring or records that
formally track these decisions back to general allocations for the large projects. With the nature
of capital projects being long-term and long-tailed, it is difficult to know the status of District
funds and its projects without matching the high-level project commitments back to the many
subordinate agreements or contracts.
It appears, however, that general financial updates were prepared by the City from time to time
and presented to the Mayor and Council, Citizens Advisory Committee, and the District Board.
While we can locate within the Mayor and Council and Citizens Advisory Committee records
these documents, we could not locate them within the District records although Board minutes
suggest such documents were likely provided with the bulk of these discussions surrounding
Rio Nuevo-wide project progress. The Mayor and Council records show a variety of reporting
efforts over the years related to Rio Nuevo—considering TIF funds as well as other non-public
funding sources.
In late 2003, it appears that the City Manager discussed instituting a “simple report” process to
inform the District and the Mayor and Council of “where funds have been committed, how that
corresponds with the Master Plan, and what non-Rio Nuevo leverage is occurring Downtown.”
This chart of “Downtown Projects 2003” reflected 28 projects in the three regions—East End,
Civic Plaza, and West Side—and showed commitments of $33,207,802 in TIF funds to 7
projects. Records suggest that beginning in May or June 2004, these reports were provided to
the Board and Citizen’s Advisory Committee. Nonetheless, in the months that follow, District
records do not reflect consistent reporting but rather a variety of fiscal and project update
24
pieces—these reports were not uniform as not all schedules were always included in these
packets. For example, these reports might include a:
 “commitments” report reflecting total dollar commitments to one of the project
classifications updated to include a commitment made during the period;
 TIF revenues received to date by month; projected future TIF fund receipts; a District
“Schedule of Revenues, Expenditures and Changes in Fund Balance” (summary
financial statement) for the period ended;
 and/or a matrix of the status and progress of City Rio Nuevo projects.
For the most part, when the financial statements for the District were included, expenditure
categories were limited and capital projects expenditures were a single line item. When annual
budget allocations and actual expenditures were included, data was at a summary level and not
detailed for any project or initiative.
We found that periodically, once or twice a year, the City provided a worksheet that reflected all
Rio Nuevo projects (noted as Tucson Downtown Investments) and identified funds “committed”
and “expended” by categories such as TIF or District funds, public funds, and private funds.
The data presented in these schedules were abbreviated, incomplete and confusing and, other
than generally using the same project names, the information did not track between one report
and the next. For example, a late May 2004 worksheet shows only “committed funds” and
reflects some expenditure data from TIF funds but in a similar document as of June 30, 2006,
“committed funds” seem to represent promised but not started and unspent whereas “expended
funds” appears to show amounts spent to date with no indication of how much more TIF funds
are committed or needed in the future. The other fiscal schedules we found continue to show
the same deficiency of detail and lack of continuity until August 2008 when more detailed useful
information was included in the District Board records.
The set of information reviewed by the Board in August 2008 does include revenue and
expenditure data from inception of the District through May 31, 2008. The packet also includes
a “Comprehensive TIF Capital Funding Plan” that proposes District funding allocation through
2014 in anticipation of upcoming debt issuance in September 2008 for $72.5 million (Actual
amount of issuance was $80 million), as well as considering second significant round of bond
sales to take place in 2009. While the packet used by the District Board included important
data, as we found in earlier fiscal Board reports, the information did not match expenditure data
against prior commitments (prior allocations or commitments are not even included) nor was
any data presented for the District Board to view outstanding liabilities on contracts and other
agreements already in place and thus should be considered “spent”. Further, although one
worksheet did add expenditures to proposed future allocations of District funds for certain
projects, nowhere could we find discussions of each existing project status and stage, or
estimates of costs to bring projects to completion. Without access to complete data that would
provide the universe of projects underway, contracts and agreements in progress, resources
necessary to bring each venture to a reasonable conclusion, and hard funding commitments
already in place, decisions appear to have been made without full knowledge of conditions.
In addition, statutory provisions require the District Board to formally consider and approve an
annual District budget and submit it to the Pima County Clerk. Within these budgets, was
typically, but not always, some delineation of the allocation for the year of the capital projects
funding. While annual funding appropriations are critical to sound fiscal control and
fundamental to fund accounting, we found that the project descriptors were not tied to
accounting project codes or descriptions to allow the tracking of spending approved to actual
25
expenditures. Further, we found little relationship between annual appropriation amounts for
projects to actual expenditures. In some annual budgets, capital project expenditures greatly
exceeded amounts appropriated. More common, however, was significant capital project
appropriations and far lower spending – from $3.3 million left unspent to more than $35 million.
Given that the nature of capital projects are multi-year and subject to numerous factors such as
planning, permits, designs, contracts and other agreements, and more – delays and long-tailed
spending is expected. However, the District’s budget process should have included an in-depth
discussion of allocations versus actual spending and appropriation amounts and have been
matched to reasonable expectations, near-term projections and contract obligations. Moreover,
this lack of synchronization of appropriations to spending demonstrates the need for not only a
long-term capital planning tool such as a CIP but also demands that as each fiscal year closes,
the year’s appropriations should have been compared to expected actual expenditures and
adjustments made for the upcoming fiscal year.
26
The District Generated Significant TIF Funds but Spending Was Broad and
Without Assurances of Essential Outside Funding
Depending on the type of TIF District created, projects within a TIF district can be financed in a
multitude of methods. The Rio Nuevo District was established as a multipurpose facility sales
tax district and, as such, sales taxes were frozen to create a baseline in the year the District was
created (i.e. 1999) and incremental sales taxes received on transactions in the TIF district would
be deposited into the District to be used to finance future District projects. Another common
mechanism utilized to fund District activity is through debt financing. In a MFD TIF district like
the District, debt is issued to spur economic development either from financing TIF projects or
via outside developers in the hopes that that the economic impact created by the project or
development would produce an increase in TIF funds at a rate significant enough to allow the
District to pay off the debt issued for that project. In addition to these funding sources
generated by the District, the District also had a dollar-for-dollar match on TIF fund expenditures
from the City.
Chart 1 represents the TIF revenues and other financing sources by source received by the
District from inception to June 30, 2010.
Source – The District’s general ledger, which is maintained by the City
As noted in Chart 1, 57% of District’s revenues/other sources have been derived from debt
financing while only 28% of total District revenue was generated by incremental sales tax
revenue. An additional 14% of District receipts were derived from rental income. The following
is an analysis and breakdown of each of the three major District revenue sources.
Incremental Sales Tax Revenues
Incremental sales tax revenue did not start flowing into the District until 2004. From 2004
through 2010, the District sales tax revenue generated ranged from $6.2 million (fiscal year
2004) to $16.2 million (fiscal year 2007).
28%
57%
14%
1%
Chart 1 - District Revenue by Type
Sales Tax
Bond/Loan Proceeds
Rental Income
Interest and Other
Income
27
Source – The District’s general ledger which is maintained by the City
As noted in Chart 2, sales tax revenue for the District peaked in fiscal year 2007 at just over $16
million and has been declining since with just over $9.3 being received in fiscal year 2010.
Rental Income
The majority of the District’s rental revenue, or more specifically $34.9 million out of a total of
$35.2 million generated since its inception, is derived from the TCC. The District purchased the
TCC from the City in the Fiscal Year 2002 for $32.9 million. In order to purchase the TCC, the
District issued Certificates of Participation (COPS) in the amount of $33.6 million. The TCC was
then leased back to the City in a triple net lease. The original lease term for this agreement was
set to expire in 2012. The lease payments under the original arrangement were set to equal the
debt payment schedule on the COPs. In addition, the City is responsible for the operation and
maintenance costs of the TCC. Therefore, the original purchase of the TCC was a breakeven
investment whereas the District is and will continue to receive payments from the City in the
exact amount of the debt payments through the lease back through 2012 when the TCC debt is
paid off. In other words, the revenue generated each year by the TCC equals the amount of
expenses incurred each year and the TCC has no net income or loss through 2012.
In 2009, the lease term for the TCC was extended to 2025. This amendment to the lease term
also included an amendment to the payment terms on the lease; starting 2013 the City is
scheduled to pay between $1.2 million and $1.3 million to the District each year until 2025.
Additionally, since the TCC debt will be paid off in 2012, these payments can be utilized by the
District for other expenditures.
Another source of rental income is the Rialto Theatre. The Rialto Theatre project included the
purchase of the theatre and a development agreement for restoration, operation and
management of the theatre. The Theatre is operated by Congress Street Historic Theatre
Foundation. The project was supported by the Rio Nuevo Citizens Advisory committee and was
approved by the Rio Nuevo Multipurpose Facilities District Board on June 9, 2004 and then
approved by the City of Tucson Mayor & Council on September 7, 2004. The Theatre
Foundation is required to pay to the District $3,690/month for operation of concessions. Though,
these rental payments were not part of the scope of this engagement, the District should ensure
that the Theatre management group is properly making these monthly payments.
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
$18,000,000
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Chart 2 - Sales Tax Revenue by Fiscal Year
28
Bond/Loan Proceeds
The Bond/Loan Proceeds category is comprised of the following:
Source – The District’s general ledger, which is maintained by the City
As discussed under the rental income section, the 2002 series COPS in the amount of
approximately $33.6 million were issued to purchase the TCC from the City. The 2006 Series
Bonds in the amount of $5.8 million were issued for the purchase and renovation of the Fox
Theatre. The 2009 COPS were issued for design of a convention center hotel. Approximately
$8 million of the 2008 Series Bonds was put into a subordinate lien reserve account,
approximately $5 million into the capitalized interest subaccount and the remainder of the
proceeds was to be spent as shown in Table 6.
Description Amount
2002 Series COPs $ 33,575,000
2006 Series Bonds $ 5,800,000
2008 Series Bonds $ 80,000,000
2009 Series COPs $ 12,560,000
Loan from the City of Tucson $ 14,577,549
Total Debt Financing $ 146,512,549
Table 5 – Bond/Loan Proceeds by Category
Title Estimated Amount Actual Cost
Mission San Agustin Gardens Project $ 3,000 $ 2,051
Mission Landfill 5,400 2,229
Civic Center Projects 10,000 8,623
Downtown Infrastructure Projects 6,000 8,670
Depot Plaza Parking Garage 11,600 13,213
Depot Plaza Public Improvements 1,400 208
UA Science Center/ AZ State Museum 2,000 -
Arizona History Museum 3,000 1,467
Tucson Children's Museum (Design) 1,200 -
Cushing Street Bridge & Roadways 1,600 1,237
Clark Street Underpass Repayment 9,000 9,000
Barrio Viejo 2,000 226
Barrio Sin Nombre 2,000 123
Partial Repayment of City Loan 6,800 6,800
Greenway Multiuse Path - 200
Total Estimated Cost $ 65,000 $ 54,047
Source - District general ledger maintained by the City of Tucson
Table 6 - Series 2008 Revenue Bond Uses
with Actual Expenditures Through June 30, 2010
($ in thousands)
29
Another revenue source for the District was a $14.6 million loan from the City to fund operations
and capital expenditures of the District for fiscal years 1999 through 2004. As stated, the
incremental sales tax revenue did not start flowing into the TIF District until 2004; therefore the
District did not have any significant sources of revenues (outside of debt issuances) since its
inception until fiscal year 2004. The City of Tucson provided a schedule of District expenditures
from its inception to June 30, 2010. The amount of the expenditures on this schedule from 1999
through 2004 equaled to the total amount of the loan and tied to the City’s audited
Comprehensive Annual Financial Report. The IGA between the District and the City does not
include an amortization or repayment schedule for this loan. The IGA with the City simply states
that the amount would be repaid when funds are available; however the City created a de facto
amortization schedule as shown in Table 7.
Source – City, Finance Department
Principal 14,577,549
Term in Years 22
Interest 4.50% *
Total Interest Standard Principal
Year Payment Expense Principal Balance
2006 - - $ 14,577,549
2007 $ 3,125,535 $ 2,623,960 $ 501,575 14,075,974 (a)
2008 1,157,565 633,419 524,146 13,551,828
2009 1,157,565 609,833 547,732 13,004,096
2010 1,157,565 585,185 572,380 12,431,716
2011 1,157,565 559,428 598,137 11,833,579
2012 1,157,565 532,512 625,053 11,208,526
2013 1,157,565 504,384 653,181 10,555,345
2014 1,157,565 474,991 682,574 9,872,771
2015 1,157,565 444,275 713,290 9,159,481
2016 1,157,565 412,177 745,388 8,414,093
2017 1,157,565 378,635 778,930 7,635,163
2018 1,157,565 343,583 813,982 6,821,181
2019 1,157,565 306,954 850,611 5,970,570
2020 1,157,565 268,676 888,889 5,081,681
2021 1,157,565 228,676 928,889 4,152,792
2022 1,157,565 186,876 970,689 3,182,103
2023 1,157,565 143,195 1,014,370 2,167,733
2024 1,157,565 97,549 1,060,016 1,107,717
2025 1,157,565 49,848 1,107,717 -
Total $ 23,961,705 $ 9,384,156 $ 14,577,549
*Provided by the Treasury Division (10 Yr Treasury Rate on 12/2/05).
(a) The interest for 2007 is a catchup amount as determined by management.
Table 7 - RIO NUEVO MULTIPURPOSE FACILITIES DISTRICT
GENERAL FUND LOAN - PAYBACK SCHEDULE
AS OF 1/8/07
Terms of Loan
30
As reflected in Table 7, the City expected the District to make a $3.1 million payment in fiscal
year 2007 and payments each subsequent fiscal year in the amount of $1.2 million until the loan
was fully paid in 2025. Additionally, it should be noted that it was not clear for many years
whether the City intended to use these amounts as a part of the City’s match or would seek
reimbursement. The District made the 2007 and 2008 payments as shown in the payment
schedule above however, in fiscal year 2009 and 2010, the City began drawing additional funds
from the District accounts to repay this loan. Specifically, the City made withdrawals of $7.3 and
$5.2 million in fiscal year 2009 and 2010, respectively. The fiscal year 2009 payment included a
$6.8 million anticipated principal payment from the series 2008 bonds that were issued by the
District (as reflected in table 6). In fiscal year 2010, the City began withdrawing approximately
$500,000 per month to pay the loan until the Re-Constituted District Board discovered this was
occurring and requested that the City stop withdrawing funds in April 2010. As of June 30, 2010,
the District had repaid $12.8 million of principal on this loan. We were told that these $500,000
monthly payments were included in the adopted annual budget of the District. However, based
upon the lack of detail included in the budget document it is difficult to ascertain whether the
District truly understood this transaction. Additionally, it would appear that not only are these
amounts in excess of the previously disclosed amortization schedule it considering the financial
condition of the District likely does not meet the definition included in the IGA which states loans
would be repaid “from the first moneys otherwise available to the District for such purpose”.
In addition, we analyzed all projects financed by the District from inception in 1999 through June
30, 2010. Charts 3 and 4 provide a graphical representation of dollars spent by the District over
the period by type of project. Chart 3 includes the purchase of the TCC (approximately $35
million) from the City, while in Chart 4, we remove this significant transaction.
In Charts 3 and 4, items marked Purchase of Land are instances where the District purchased
land for future development, but no such development had occurred as of June 30, 2010. Civic
projects are related to improvements to improve the capacity of the downtown Tucson area and
include such structures as parking garages. Commercial/Entertainment projects include concert
venues and other mixed-use developments as an example the purchase and renovation of the
Fox Theatre. Historical/Cultural projects were related to promoting the proud history and culture
of Tucson through museums and exhibits such as The Mission Gardens. Land Remediation
projects prepared previously unusable land for use by the district on future projects, such as the
Mission Landfill. Infrastructure projects include roadway construction, streetscapes and other
improvements to building sites for the benefit of Rio Nuevo developments like the Cushing
Street Bridge project. Convention Center Projects include the purchase of the TCC and other
improvements to that facility.
31
Source – Attachment H – Project Status Matrix
Source – Attachment H – Project Status Matrix
$16,076,664
$13,798,029
$16,582,114
$3,011,180
$47,282,688
$34,429,742
$20,259,624
$5,242,119
Chart 3 - Project Expenditures by Project Type
($156.7 Million Inception through June 30, 2010
Including TCC Purchase)
Civic
Commerical/Entertainment
Historical/Cultural
Land remediation
Inf rastructure
TCC Purchase
TCC Improvements
Purchase of Land
$16,076,664
$13,798,029
$16,582,114
$47,282,688
$3,011,180
$5,242,119
$20,259,624
Chart 4 - Project Expenditures by Project Type
($122.2 Million Inception through June 30, 2010
Excluding TCC Purchase)
Civic
Commerical/Entertainment
Historical/Cultural
Infrastructure
Land remediation
Purchase of Land
TCC Improvements
32
Based on our analysis, infrastructure projects resulted in the highest and most significant level
of District expenditures with the amounts incurred exceeding $47 million, or just over 30% of the
total capital expenditures. Further, expenditure figures reveal that Civic and Historical/Cultural
projects comprise another 21% or $32.5 million of the District’s spending and projects classified
as Commercial/Entertainment comprise only 9%, or just under $14 million of District funds.
Additionally, improvements to the TCC comprise 13%, or just over $20 million of total
expenditures to date.
Charts 3 and 4 show that the majority of District project expenditures ($47.3 million) were for
infrastructure type projects and Historical/Cultural projects incurred another $16.6 million of
District expenditures. Whether these types of projects should have been funded by the City as
oppose to the District is a difficult question to answer as the majority of the projects were
compliant with the ARS except for the projects noted in the Compliance Issues section of this
report. However, it can be stated that the majority of these projects did not directly generate
sales tax which is a key factor to ensuring the viability of a MFD. Another factor that plays into
this analysis is the City’s dollar for dollar required match. Attachment B of this report provides
a listing of all projects completed by the City from the inception of the District to June 30, 2010
in which they are considering matching funds. As of June 30, 2010, the City is stating that they
spent just over $163 million in matching funds for the District. However, the majority of the
projects the City is claiming as their match were also Infrastructure or Civic related projects
which again do not directly generate sales tax. In this type of arrangement, whereas a MFD
and a municipality are splitting the costs to redevelop an area, we would most likely see the
municipality cover the majority of the infrastructure and civic type projects and the MFD fund
commercial or entertainment type projects that would directly spur economic development or
generate sales tax. Whereas, in the case of the District and the City, both parties appear to
have spent the majority of the funds on Infrastructure, Civic and other Historical/Cultural type
projects.
Additionally, we reviewed the projects funding during Fiscal Year 2007-2008 when the District
Board did not meet. Our review found that while District funds were used on a number of
projects, some commencing during that period, all had been previously approved by the Board
with the exception of the Downtown Infrastructure Improvement project (DIIP). The DIIP was
not approved by the District Board until July 30, 2008 and the Mayor and Council did not
approve the project until December 19, 2008. Accounting records for the District for the Fiscal
Year 2007-2008 reflect $338,477 in expenditures related to that project.
Another area of focus was on ownership of the assets resulting from investing in these capital
projects. Based on our review of contracts, agreements, financial statements and other
supporting documentation, we attempted to determine the assets the District owned. We found
that various properties or projects that were acquired or utilized District funds with the intent by
motion or resolution for the District to own such assets are not owned by the District at this time
as the title is in the City’s name. Additionally, this task to assign ownership of assets proved
quite difficult as development agreements with the City were poorly written and either were
silent as to ownership or the ownership terms were ambiguous. For example, Section 2.18 –
City/District Parking Garage of the 1st Amendment to the Tucson Development Agreement
references “The City and/or District shall own, operate, and maintain the Garage.” This section
is in reference to the Depot parking garage and the City and District are still working to
determine ownership, responsibility for maintenance and the revenue allocation for this
structure.
Nevertheless, we examined each project at the individual project level and reviewed supporting
documents and agreements to ascertain if ownership could be definitively determined.
33
Generally, projects for infrastructure are deemed owned by the City regardless whether they
were funded by the District or City. Additionally, various properties or projects which were
acquired with or utilized District funds with the intent (by motion or resolution) that the District
would hold title to such assets are not currently owned by the District. While we found that the
TCC and all related building improvements are owned by the District, other capital investments
result in mixed ownership – District, City, Pima County, University of Arizona, and are detailed in
Attachment H.
34
Spreading the Funding Thin and to Public Works Type Projects Has Not
Brought the District Anticipated Results
At the time of the passage of Proposition 400, the Rio Nuevo Project was a planned, multi-faceted
development project that would include cultural and recreational amenities and
improvements, unique historic re-creations, new and expanded museums, and mixed-use
developments. The multipurpose facilities district project included the existing TCC area, which
was a necessary component of the project. Proposition 400 estimated the total cost for the
public and private portions of Rio Nuevo Project was estimated to be $320 million. The publicly
financed portions of the Project were to consist primarily of the Mission San Agustin Cultural
Center and area, the International Visitors and Trade Center, and infrastructure and supporting
facilities associated with or related to the Project. Most of the projects had little direct
connection to the primary component the TCC. The City was responsible for a $60 million dollar
for dollar match to the District of which $24 million was suppose to go directly into the specified
projects listed in prop 400. Additionally, $60 million was to be contributed from the District
through the incremental sales tax revenues comprising, less than 20% of the overall cost of the
various projects. Together, the District and the City would provide approximately $84 million of
the total, or just over a quarter of the needed funding for full implementation of the plan, the
success of the initiative depended significantly on the attraction of third-party investment. It
should be noted that this strategy was consistent with the overall approach discussed in the
original Proposition 400, although such a plan is inconsistent with most successful Tax
Increment Financing Districts throughout the United States that have focused on the primary
component.
However, over the course of the life of the District, these original plans changed and decisions
were ultimately made that further diluted the District’s investments spreading the funding over a
number of projects, including infrastructure, project and feasibility plans, and others that
ultimately did not increase the incremental tax base and many of these projects were left
incomplete (See Many Projects Incomplete Section). Ultimately it cannot be determined if the
recent national recession or the overall approach led to the lack of third-party investment.
However, it is clear that this approach had significant third-party risk that was not proactively
managed, monitored or mitigated by the Pre-2010 Board.
As of June 30, 2010, the implementation of the Rio Nuevo plan has not produced the results
that were envisioned by the Pre-2010 District. We found that the majority of the District
expenditures and projects were deemed to be generally compliant with the Arizona Revised
Statute based upon the technical wording of the Statute, if not the intent of the statute.
However, we noted several projects that may be considered non-compliant. The first category
of potential non-compliance relates to expenditures being required to be spent within the Rio
Nuevo boundaries. We noted three projects where work was done outside District boundaries
and could therefore be considered non-compliant.
Roundabout at Grande Clearwater/Cushing – This Roundabout is located at the intersection
of Grande Avenue and Clearwater. The Roundabout at Grande & Clearwater/Cushing is a
project requested by the Menlo Park neighborhood. The citizens of the neighborhood requested
the roundabout for safety reasons and to encourage traffic to use Clearwater once a planned
bridge over the Santa Cruz River was built. District Board minutes indicate the project was also
viewed as an opportunity to create a gateway at the western entrance to the Tucson Origins
Heritage Park and museum complex. The West half of the roundabout falls outside of the
boundaries of the District. (Project expenses through June 30, 2010 of approximately
$953,000).
35
Barrio Viejo – This project consists of streetscaping and infrastructure in the Barrio Viejo
neighborhood. The boundaries of the project extend from I-10 Frontage Road on the west to
Stone Avenue to the east and from Cushing Street to the north to 18th Street on the south end,
which is outside of the District. This project was a part of the City’s Downtown Infrastructure
Improvement Project. (Project expenses through June 30, 2010 of approximately $226,000).
Barrio Sin Nombre – During the planning for Tucson Origins, drainage issues around Barrio
Sin Nombre were discovered. The Origins project affects drainage through the neighborhood
and drainage from the neighborhood has a negative affect on the Origins/Cultural Plaza areas.
The Barrio Sin Nombre Streetscape project was created to alleviate these drainage issues for
the benefit of future Rio Nuevo Projects and the neighborhood affected. The project boundaries
are Grande Avenue on the West, Clearwater Drive to the North, Melwood Avenue to the East
and Mission Lane to the south—which is just to the west of the boundaries of the District. This
project was also a part of the City’s Downtown Infrastructure Improvement Project (Project
expenses through June 30, 2010 of approximately $122,000).
ARS 48-4201 states Tax Increment Funds may only be spent on “a primary component that is
located on the multipurpose facility site” or “secondary components that are located in the
district.” These three projects are either located completely or partially outside of legal
boundaries established for the District. Thus, it would appear that the monies spent on these
projects would be in direct violation of the statutes.
In regards to spending outside of District boundaries, in 2006 the City Mayor & Council
requested that a legal opinion on whether District TIF funds could be spent on facilities located
outside of the district boundaries. The City’s outside legal counsel rendered an opinion on
October 13, 2006, that cited ARS 48-4204 which states “the district may construct, finance,
furnish, maintain, improve, operate, market and promote the use of multipurpose facilities and
other structures, utilities, roads, parking areas or buildings necessary for full use of the
multipurpose facilities” suggesting that such projects would comply with statute. Even though we
noted these three projects to be located partially or completely outside of the District and could
be considered non-compliant, the District appears to have relied upon the advice of counsel in
approving these projects in essence concluding that they were necessary for the full use of the
multipurpose facilities and appear to have acted in good faith. However, we noted no direct link
to the primary component, the TCC and thus the question remains if the projects financed by
the District outside of its boundaries are necessary for full use of the multipurpose facility.
The second category of potential non-compliance is related to expenditures being potentially
used for purposes not contemplated within the state statute. We noted two projects that appear
questionable in terms of District’s statutory intent.
One potential non-compliance issue is the Thrifty Block, a mixed-use development project,
which commenced with a property purchase within the district. Early in the life of the District, it
purchased from the U.S. General Services Administration, lots 26-76 of East Congress Street
for $36,000. The District incurred approximately $885,000 in project costs (demolition,
surveying and other costs to prepare the property for the Post Development Project) prior to the
sale of the property to the Developer. After incurring these costs, the District sold the property
to the developer, BP Post Investors, for $100 and, as a part of the agreement signed in 2006,
BP Post Investors would develop mixed-use projects within the District. Included in the project
were retail space and 40 residential units that, under the development agreement, must include
3 to 4 units to be sold as affordable housing. These set-aside housing units were to be sold to
households making 80% of the area median income. While affordable housing is an important
public goal, we do not believe that the development of a housing project conforms to ARS § 48-
36
4204. Additionally, it should be noted that the mixed-use residential project has not been
completed as of June 30, 2010, due to feasibility issues, and current discussions for this
property include the potential of a hotel. Although considered complete as it relates to District
involvement, nearly $900,000 of District funds was spent to support the project with little or no
benefit to the District.
A second example related to parcels referred to as “lots at Church and Stone.” In 2002, the
District, after the City’s authorization, acquired surface parking lots from the Arizona Department
of Transportation (“ADOT”). The parcels totaled 35,840 square feet and were purchased by the
District for $750,000 (the northwest lots of Church and Stone and the northeast lots of Stone
and Council). Adjacent to these parcels, the City had previously purchased a 17,169 square
foot parking lot from a third-party limited partnership in November 1997. The City received fee
title to the property under an exchange agreement wherein the City agreed to identify a property
of “equivalent value” within five years to be transferred to the third-party to complete the
exchange. The City’s five-year deadline to obtain an acceptable exchange property was to
expire in November 2002, approximately three months after the District’s purchase of the
adjoining parcels. Prior to the District’s purchase of these lots in 2002, the Board was
presented a memorandum from the City, describing the background of the acquisition and
“motivating factors” behind the purchase at its March 2002 meeting. In this memo, the City
representative states, “A portion of the properties now sought to be acquired by the District
along the north side of Council from Stone to Church provide an excellent opportunity to
consummate the pending obligations of the City.” The obligation referenced is the City’s
pending exchange agreement with the third-party.
In his July 1, 2002, Mayor and Council Communication, the then City Manager describes that
the District’s purchase will be used to satisfy the City’s exchange agreement with the third-party
and that the “Proceeds of the sale will flow from the Arizona Department of Transportation
(ADOT) to the Pima Association of Governments (PAG)”. The “proceeds” mentioned in his
communication are the District’s $750,000 payment acquiring the adjacent properties. The then
City Manager concludes by stating, “The revenues received by PAG will be redistributed to the
region, including the City, according to the allocation procedure agreed upon by the PAG
Regional Council.” Although the City and District can justify the purchase on the basis that the
site is in conformance with the Rio Nuevo Master Plan for structured parking facilities, the
decision making process supporting of the District’s purchase, including fulfilling the City’s
exchange obligation just prior to its expiration and providing potential future City revenue from
PAG, complicate a full understanding of the District’s underlying motivation. Additionally, it is a
further example of the “intertwined” nature of the District and the City during the first eight years
of the District’s history.
The third category of areas of potential non-compliance relates to questionable expenditures in
regards to reimbursements to the University of Arizona in connection with the construction of
the Flandrau Science Center. Specifically, the Science Center museum was planned to be
constructed on the west side of I-10 near the proposed History Museum, and connected to the
east side of I-10 by the Bridge of Knowledge (ultimately each of these projects have been
canceled or placed on hold). The issues stem from District funds being used to purchase items
such as computers, iPhones and travel to Italy for employees of the University. Per ARS § 48-
4201, TIF funds spent on secondary components must be “necessary or beneficial to the
primary component, limited to on-site infrastructure, artistic components, parking garages and
lots and public parks and plazas.”
The expenditures noted do not appear to fit into any of the allowable categories outlined by ARS
§ 48-4201. Additionally, it should be noted that the City’s accounting staff also noted these
37
questionable expenses during 2008; in correspondence, it was stated that the University was
“charging expenditures that the City does not allow on other District projects.” City staff noted in
June and July of 2008 that of the $692,239.09 in invoices received by the district, $186,415.24
were attributed to University of Arizona personnel costs, computers, phone service, food,
professional memberships, subscriptions, conferences, and professional ads to hire the
Development Director position. Ultimately, City management authorized the reimbursement of
these expenditures as they did not believe they were prohibited by the signed IGA.
Thus we believe that the “holistic and all-inclusive approach to using the TIF monies and the
expectations were that these funds would be used for the direct benefit of all Tucsonans”
approach utilized by the District along with the clear lack of decision making criteria resulted in
an approach that allowed for the potential non-compliance noted above, a lack of sustainable
projects and ultimately a plan that has not had the desired impact as of the date of this report.
38
Financial Viability of the District
Rio Nuevo District has not developed the Tucson Convention Center as an
Adequate Catalyst for Increasing Sales Taxes
Catalyst convention center projects are widely recognized as essential to generating tourist,
conventioneer and local resident traffic and increasing sales tax revenues. Over the years, the
Arizona Legislature has approved legislation that would allow municipalities’ broad authority to
establish multipurpose facility districts to obtain authority to receive a portion of the State’s sales
tax revenues or TIF revenue. As it relates to the District, Arizona law recognizes two types of
catalyst projects to qualify for limited term tax increment funds: stadiums and multipurpose
facilities such to accommodate sporting events and entertainment, cultural, civic, meeting, trade
show or convention events or activities. The state views these two types of districts as worthy
catalysts for redevelopment for good cause as they are intended to provide an anchor project to
leverage public funds to stimulate private development, commerce, and tourism. Cities
throughout the nation have recognized that multipurpose facilities such as convention centers
are most successful when coupled with a related hotel. Examples of successful sales tax
generation centered on these types of projects include San Diego, Baltimore, Portland, and Los
Angeles.
As mentioned previously, from the outset the TCC was not the focus of the District’s attention or
project funding. In 2001, during the District’s Master Planning process and before the District
purchased the TCC designating it as its primary component, significant deficiencies were cited
in the TCC facility in order for it to serve as a catalyst project and be an effective “primary
component”. At the time, it was found that the TCC generated fewer and smaller conventions
and conferences than would be expected for a facility of its size. This was found to be due in
part to the lack of a convention hotel and a “serious deficiency” in hotel rooms in walking
distance to the convention center.
According to Master Plan documents, the TCC did not meet the criteria of a modern,
competitive convention center. The TCC lacked sufficiently large contiguous floor space to
bring in large national conventions and the available space was a hybrid of an arena and
convention center which not only impacted scheduling, but did not fully meet the needs of either
user. Further, its meeting rooms were antiquated and could not meet the high-tech needs of
modern users and, importantly, it lacked not only a “headquarters hotel” but sufficient hotel
rooms within walking distance to both convince large conventions to come to Tucson and to
keep conventioneers in town and spending money in Tucson businesses. In fact, the TCC was
not designed as a true convention center in the first place. Rather, constructed in 1971, the
TCC was billed as a “Community Center for the Citizens of Tucson.” With expansions and
alterations through the ensuing years, the TCC gradually evolved into more of a multipurpose
facility with basic features for civic and convention users.
The 2001 Master Plan identified critical elements required to be addressed for the multipurpose
facility to be considered a competitive and potentially successful convention center and allow
the site to attract large, multi-day, conventions that would bring in a critical mass of individuals
from not only outside Tucson, but also outside the State. In light of this, the 2001 Rio Nuevo
Master Plan also recommended a series of phased improvements to the TCC to help
accomplish objectives of increasing convention and conference business in Tucson. These
included:
 Constructing a “Headquarters Hotel” with a minimum of 300-400 rooms, that would be
functionally integrated with the TCC building and would have the capability to be
expanded to 1,100-1,200 rooms in the future as demand increased. The plan also
39
expected the expansion of other hotels in the immediate vicinity of the TCC, with an
ultimate capacity of approximately 2,200-2,900 rooms.
 Increasing the size of the Exhibit Hall in phases by initially building new east and west
wings of a new exhibit hall to increase the total contiguous exhibit space from 90,000 to
210,000 square feet, a 130 percent increase in prime convention space, with the
potential of future phases reaching as much as 385,000 square feet of contiguous
exhibit space. The plan cited that successful convention centers require large exhibit
halls to accommodate large conventions, rather than “several small exhibit halls that are
scattered around the building, on different levels, and not directly accessible”. At 90,000
square feet the TCC’s largest exhibit hall was noted as being “quite small by most
standards”.
 Constructing a 30,000-60,000 square foot high-tech “Conference Center” to replace the
existing meeting rooms in the North Exhibit Hall – deemed a critical step to transform the
TCC from a civic center to a true convention center.
 Constructing a new arena fit for sporting events, concerts, and other large events, a
facility that will not only expand the capacity of the multipurpose facility but will allow the
District to convert the existing arena space into fully-dedicated, and much needed,
exhibit space.
“Headquarters” hotels, those attached or directly adjacent to convention centers or multipurpose
facilities, are widely recognized a crucial component to the success of such a facility and to fully
complete a catalyst project. Headquarters hotels serve two purposes: first, their convenience is
appealing to conventioneers, and thus make convention centers with such hotels a more
desirable destination, and second they help to keep visitors walking—to and from venues and
hotels and keep them in the immediate area to frequent restaurants, shops, and other various
attractions, all the while passing storefront after storefront. This increased foot traffic, spurs
commerce, and provides an incentive for private investment in the immediate area. The focus is
on the “immediate area” surrounding the convention center, not scattered development where
distances preclude casual walking.
The economic impact of multipurpose facilities extends beyond the direct impact on local
businesses and residents—successfully transitioning the TCC to a competitive convention and
conference center should be intended to increase tax revenue that will benefit the entire Tucson
region. Successfully attracting convention-goers to Tucson contributes to business growth in
the area and corresponding increases in retail activity and property values, contributing to
increases in property taxes and sales taxes. In addition to increased sales tax and property tax
revenues, municipalities typically observe significant revenues from transient occupancy taxes
(taxes on hotel room rentals) and parking occupancy taxes tied directly to the number of visitors
drawn to the City. Without a competitive convention center and multipurpose facility, the District
could exhaust current and future TIF revenues without producing the type of economic catalyst
envisioned by the Arizona State Legislature.
Even though the District purchased the TCC in 2002 from the City, it appears that this purchase
was to meet the statutory provisions to commence the 10-year life of the TIF collection. As
previously stated, the District issued $33.6 million in COPS to acquire the TCC from the
Business Finance Development Corporation, known as the BFDC and referred to as “the City”.
We were unable to locate records and documents that would detail this transaction or the
deliberation around the sale. Therefore could not determine how the value of the TCC was
determined and who was involved in the valuation and negotiations it does appear that values
were based upon the amount of debt outstanding on the TCC at that time as the COPS were
used to pay-off existing debt of the City. However, we found that during 2002-2003, the District
also instituted modest capital improvements to the TCC costing approximately $784,000, most
notably a new ticket office. The new 1,572 square foot ticket office is located on the east side of
40
the Convention Center facing Church Avenue, and included reserved parking for ticket buyers.
The new office offers 10 full service windows, all ADA accessible, and added an electronic
marquee and video display to promote coming events at the TCC and around Downtown. This
project did not impact or resolve the deficiencies in exhibition floor space, high-technology
conference rooms, or nearby hotel rooms, as identified during the District’s master planning
process.
In 2004, the District commissioned an update to the 2001 Rio Nuevo Master Plan. The resulting
update conducted by Planner’s Ink mentions a renovated TCC and headquarters hotel in its
discussion of the “Civic Plaza Experience” that is primarily focused on a central civic plaza that
would become “Tucson’s new Town Square” and include cultural, retail, restaurant, and
underground parking facilities and would be linked to the University of Arizona’s Science Center
and the new arena. The discussions at this time indicated that a new arena would, according to
the District Executive Director at that time “pave the way for a much needed expansion of the
TCC”. The plan was to convert the old TCC arena into “badly needed additional meeting
rooms”. Within this updated master plan, the arena was to be designed, constructed and
operated by the private sector. Of note, the District invested nearly $880,000 in exploring and
supporting design services for a new arena during fiscal years 2008 through 2010.
It was not until later in 2006, half way through the original lifespan of the District, that the TCC
garnered the District’s attention. The District commissioned a feasibility analysis of expansion
scenarios to improve the TCC’s competitive position as well as considering the new arena,
headquarter hotel, and the mixed use redevelopment of surface parking lots around the TCC
expansion, hotel and arena developments. In a May 22, 2007, Mayor & Council Memorandum,
the City noted that:
Although the Mayor & Council in April granted preliminary funding approval for an
expansion of the convention center and construction of a new arena (and
participation in concept in a hotel development project), it is important to again
highlight the significance of that action. Those public facility projects have the
singular importance of improving the business position of the Tucson Convention
Center (TCC). They also are estimated to contribute over $275 million annually
in direct and indirect economic impacts, and, improve financial performance
assumptions for a new hotel project. Of equal if not greater importance is their
ability to be a catalyst for major mixed-use, higher density urban scale
redevelopment in and around the TCC area. …
Furthermore, District Board and Advisory Council minutes reviewed show development and
economic scenarios for a new arena and revamped convention center. As Table 8 indicates,
the expected overall annual economic impact of the two major projects combined was $178
million. Around this same time, the City issued a request for qualifications for a Convention
Center Headquarters Hotel developer offering city land adjacent to Interstate 10 in downtown
Tucson for the site. The intent was to ascertain a short list of qualified firms to work with the
hotel partner who would operate the hotel.
41
Table 8 – Tucson Arena and Convention Center
2007 Scenarios
Facility Cost Economic Impact
Arena $130 million State Sales Tax $2.3 million
City Sales Tax $0.8 million
Hotel Tax $0.122 million
Annual Economic Impact $75 million
Convention Center
Phase I
$63.1 million State Sales Tax
City Sales Tax
Hotel Tax
Annual Economic Impact
City Sales Tax
Hotel Tax
Annual Economic Impact
$6.5 million
$2.3 million
$1.3 million
$103 million
$2.3 million
$1.3 million
$103 million
Meeting Room and Lobby,
East meeting rooms,
Arena area converted to
Exhibit Hall
Phase II $60 million
North Ballroom and Lobby,
Renovate entire facility
Source: Board records: Tucson Arena and Convention Center Analysis
prepared by District Staff, April 2007
In 2008 the District explored financing the headquarters hotel, estimated at a cost of
approximately $130 million, and the TCC renovation and new arena at lower projected costs of
$160 million combined. While we cannot determine the assumptions included in either the cost
or debt service calculations, figures indicate approximately $33.8 million in debt service per year
for the first 15 years paid for with TIF and other taxes and fees generated by the completed
projects. By May 2008, the arena project was officially cancelled by the City, but the City and
the District had chosen Garfield Traub Development for the headquarters hotel and was working
with Starwood Hotels (Sheraton Hotels) to ascertain the optimal configuration of the facility.
Additionally, during 2009, the District Board evaluated the issuance of $250 million in excise tax
bonds or certificates of participation to fund improvements to the TCC and the adjacent hotel.
While the District did not execute the $250 million in debt financing, in 2009 it did authorize $15
million in certificates of participation to construct and equip certain TCC Improvements. With
the proceeds of these funds, the District commenced the following:
 A new Convention Center East Entrance — to design, sign and construct a new
entrance on the east side of the TCC Including 5,000 square feet of registration/lobby
area; 3,300 square feet to enclose and renovate existing east exit galleria; the addition
of two escalators and an elevator adjacent to the existing galleria exit stairs; and a new
4,890 sq. ft. exterior. The project was recently completed with a cost of $4.61 million.
 Expansion of the TCC — Design and construct an expansion of the TCC to include a
35,000 sq. ft. exhibit hall addition and a 25,000 sq. ft. meeting rooms addition along with
HVAC and safety improvements—total additions to 118,000 gross square feet.
Expenditures to date on this project are $2.228 million and projections indicate the full
cost to be $35.78 million.
 Convention Center Hotel – Design and construct a 525-room Sheraton branded full
service Convention Headquarters Hotel with approximately 50,000 sq. ft. of meeting
rooms, fitness center, pool, spa, bar, café, restaurant and business center, totaling
442,000 gross square feet. Expenditures to date on this aspect are approximately
$10.05 million, with the total cost of the project estimated at $168 million.
42
 Convention Center Parking Garage — Design and construct a 975-space (640
minimum) garage to be built south and adjacent to the Hotel, west and adjacent to the
proposed expansion of the Convention Center, along Cushing Street. Expenditures from
inception total $1.62 million and project total costs are $33.69 million.
Certainly, the District demonstrates a focus on the TCC as a catalyst beginning as early as 2007
and with concerted efforts happening 2009 and 2010 – cons