Agenda Item: 3 A Date: 7/25/2013

FRESNO CITY COUNCIL

Supplemental Information Packet

Supplemental Packet Date: July 22, 2013 Item(s}

Recommend that the approve the engagement of the Council Finance and Audit Committee to review and evaluate the Fresno Convention and Entertainment Center operations and financing. Request City Manager and staff work with Finance and Audit Committee to provide information as requested - Councilmember Brand

Supplemental Information: Any agenda related public documents received and distributed to a majority of the City Council after the Agenda Packet is printed are included in Supplemental Packets. Supplemental Packets are produced as needed. The Supplemental Packet is available for public inspection in the City Clerk's Office, 2600 Fresno Street, during normal business hours (main location pursuant to the Brown Act, G.c. 54957.5(2). In addition, Supplemental Packets are available for public review at the City Council meeting in the City Council Chambers, 2600 Fresno Street. Supplemental Packets are also available on-line on the City Clerk's website.

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2013 JUL 22 PH 12: 10 CITY CLERK. FR(SI~1 CA LEE BRAND COUNCILMEMBER

Review and EvalUation of Fresno Convention Center Complex

July 21, 2013

TO: Fresno City Council Members, Mayor, City Manager, City Clerk and City Attorney

FROM: Councilmember Lee Brand, Chair of Finance and Audit Committee

Agenda Item Recommend that the Fresno City Council approve the engagement of the Council Finance and Audit Committee to review and evaluate the Fresno Convention Center Complex operations and financing. Request City Manager and staff work with Finance and Audit Committee to provide information requested herein. Relevant documents and financial data are presented in this report.

Disclosure: Due to the difficulty in obtaining consistent, reliable financial data, some of the financial data presented in this report will need to be verified by the Finance and Audit Committee.

Preface To better understand the current level of service and finances with the Convention Center Complex, we must first examine past events to determine the rationale and background that shaped key policy decisions. Understanding the impact of those decisions, both good and bad, will help guide future policy making.

The information presented in this report is the culmination of many hours of research and review of numerous documents going back 15 years. I have the advantage of hindsight to objectively review and evaluate decisions that, viewed in the present perspective, appear to be short-sighted or wrong. After spending 4 Y2 years on the Council, I fully appreciate the extreme scrutiny on some issues and the intensity of lobbying efforts by individuals or groups with a vested interest in the outcome of the issue. The higher the stakes, the more intense the debate will be. In divisive debates, facts and figures are often over stated by both sides. An issue can be framed to become "make or break" decisions (Le. this will save Downtown) compelling Council members to vote in support without sufficient documentation or verification of facts.

Economic and political forces at a given point in time bear a strong influence on the decision making process. It is not the purpose of this report to lay blame on past mistakes. Rather, my goal is to learn from past practices and find solutions for the future. Purpose The intent ofthe Council Finance and Audit Committee review and evaluation ofthe Fresno Convention Center operations and finances, is to determine if there are potential remedies or alternatives to reduce the General Fund subsidy ofthe operations. General Fund subsidies have averaged approximately $1.8 million per year for the past six years and General Fund debt service has averaged approximately $6.3 million per year, for a combined General Fund cost exceeding $8 million per year. It is estimated that over the past 14 years, the total cost to the City General Fund, including debt service, has been over $100 million.

Remedies or alternatives may include one or more of the following:

1. Explore revenue enhancement opportunities for all venues; 2. Explore ways to improve bookings and profitability at Chukchansi Stadium; 3. Explore naming rights opportunities (from overall venue name to as specific as naming seats in Saroyan Theater) to generate ongoing funding; 4. Explore alternative uses for each venue that may be more profitable; 5. Explore grant funding opportunities for capital improvements; 6. Explore private fund raising to pay for capital improvements; 7. Explore reduction of operating expenses; 8. Consider limited engagement of consultant to evaluate operations from third party perspective; 9. Consider modification of contract terms with SMG; 10. Temporary or permanent suspension of venue operations; 11. Refunding of bonds (if feasible) to lower debt costs; 12. Sale of real property assets (assumes market value exceeds encumbrances); 13. Change of business model (Le. revenue and risk sharing per event); and 14. Other options discovered during the Committee review and evaluation.

Re-assessing and Prioritizing General Fund Support On November 27, 2006, published an Op Ed written by former City Manager Andy Souza regarding SMG's management of the Convention Center Complex. In the Op Ed Mr. Souza said, " The Convention Center facilities do not operate at a profit. The shortfall is subsidized by the City's general fund, the same fund that pays for the keeping of police officers and firefighters in our community, as well as maintaining parks and streets."

Those words were written at the peak of a once in a lifetime real estate/economic bubble when City coffers were flush with revenues. Seven years later, a different fiscal reality exists for all municipal governments. Given a choice of which City services to support in the financially challenged world of 2013, would City taxpayers continue to support enhancement of community cultural and entertainment experiences at the Convention Center at the expense of dramatic service cuts in public safety and other City core services? Background and Description of Complexes Most cities in California and across the country developed downtown convention centers over 50 years ago to provide entertainment to City residents and promote business for the City. The Fresno Convention Center was opened in 1966. Originally the complex consisted of three separate buildings that were constructed under one roofline and were separated by 90 foot mall ways. The three buildings included the William Saroyan Theatre, the Ernest Valdez Exhibit Hall with 12 meeting rooms and the Selland Arena. Later additions included the Robert A. Schoettler Conference Center and Conference Center garage. The original Selland Arena had a seating capacity of 6,500 and the seating capacity was expanded to 11,300 in 1981 and funded by issuance of debt.

In 1999, the City issued $32.6 million in debt and a new 77,000 square foot exhibit hall was completed named the "New Exhibit Hall". The New Exhibit Hall included 25 meeting rooms in addition to housing the Center's administration and operation divisions.

In 2004, the City issued approximately $40 million in debt and the City constructed the 1,573 space Convention Center Parking Garage directly behind the Saroyan Theater and other capital improvements. The garage was designed to handle the General Administrative Services (GSA) MOU with the City for 500 space parking requirements for the proposed Federal Courthouse Building. The garage would also provide expanded parking capacity for weekend events at the Convention Center Complex and overflow parking for existing land uses.

Purchase of Land for Proposed Downtown Hote! In 2005, the Council debated a proposal by the Mayor to purchase property at 800-808 M Street lot (See Exhibit 'G') adjacent to the New Exhibit Hall for $3.0 million. The plan was to purchase the lot and issue approximately $80 million in bonds to finance the construction of a 4 star 300-400 room hotel that the City would own and engage a private contractor to manage. The Mayor argued that a 4 star hotel would help the Convention Center book more events and stimulate economic activity for the City. This was a very controversial debate with the Hotel Association opposed to the plan.

The improved property (including buildings) was appraised for $1.9 million and the City was offering $3.0 million. On 4-19-2005 the Council approved the purchase of the land but did not have a super majority vote to approve appropriating bond proceeds. In the FY2006 budget, $3.0 million was appropriated from the General Fund to purchase the land. Eight years later, the City still owns this vacant parcel (structures were demolished). Based on recent sales comps of vacant land downtown at $10 per square foot, the estimated value of the land is approximately $320,000.

Funding the Convention Visitors Bureau Prior to FY2009, the Fresno Convention and Entertainment Center Complex funded the Convention and Visitors Bureau (CVB), the Sports Council, and the Film Commission. The Convention Center Complex no longer funds these functions. Update on Facilities The Robert A. Schoettler Conference Center and adjacent parking garage has been sold to the owners of the Radisson Hotel. The Council approved the sale at their June 6, 2013 meeting.

Management of the Convention Center The City of Fresno managed the Convention Center operations from its inception in 1966 through 2003. From 2002 through 2003, the Mayor and Council engaged in a very contentious debate to outsource the management ofthe Convention Center Complex. The two primary bidders for outsourcing were SMG and Global Spectrum. With many twists and turns, including a Mayoral veto, the Council finally voted to select SMG to manage the operations and marketing beginning January 1, 2004. It was a three-year contract with an option for a two year extension that was exercised by the City. The Council approved a new contract with a 10 year extension for the period 1-1-2009 through 6-30-2019.

SMG also signed a subcontract with the Convention Visitors Bureau (CVB) on 2-1-2004. CVB's role was to help SMG promote, solicit and advertise all events at the Convention Center Complex and provide opportunities for local businesses to be associated with convention activities. The term of the subcontract was coterminous with SMG's management contract with the City.

Conflict of Interest Issue Section 13.1 of the original 2004 Management Contract was a Non-Competition clause that prohibited SMG from engaging in similar management services for current and future Indian gaming centers within Kings, Madera and Fresno Counties, City of Clovis Center and theater, Fresno State University proposed hotel conference center and any convention center facility with exhibition, meeting or banquet space. At the signing of the contract, SMG was the management agent for the Savemart Center. Consequently, Savemart was excluded in the Non­ Competition clause ofthe contract. The Finance and Audit Committee will examine the potential conflict of interest with SMG managing the Convention Center and Savemart.

Were Predictions of General Fund Savings Realized By Outsourcing to SMG? In the June 10, 2003 City Staff Report (See Exhibit 'A'), the Executive Summary claimed that outsourcing the Convention Center operations to SMG would increase the number of events and reduce the General Fund subsidy by $5.4 million (with Sports Commission) over a 5 year period. The Report went on to say that the savings realized from SMG's management would cover the additional debt service costs projected at $3.17 million (over 5 years) needed for necessary capital improvements and still generate a General Fund surplus of at least $2.24 million (as shown in Attachment A of the 6-10-2003 report).

Based on Convention Center capital improvement bond financing issuances from 2004 to 2008, it appears that the additional debt service far exceeding the $3.17 million estimate. It is difficult to determine the specific amount because some of the bond issuances included other City properties and refunding of existing bonds. A more detailed review of bond documents will answer this question conclusively. After over four years of SMG management at the Convention Center, the City brought a 10-year contract extension to the Council on November 4, 2008. The November 4, 2008 City Staff Report (See Exhibit 'B') regarding the SMG contract extension states on the cover page/'.....The contract resulted in over $5 million of General Fund savings that have been used to provide funding for the significant capital improvements that have been made to the FCEC facilities." In the absence of City records to the contrary, this statement appears to be inconsistent with other financial data for the first five years of the SMG contract.

Comparing Budget and Performance Contract Benchmarks with Actual Data:2004 to 2008 The original contract between the City and SMG included budget net operating expense and revenue benchmarks as well as benchmarks for the number of room nights and number of conventions brought to Fresno. A preliminary examination of budget benchmark data compared to actual budget data disclosed that SMG was apparently not meeting the benchmarks established in their contract. It is difficult to objectively evaluate the financial data because adopted budget figures often vary from the actual budget figures at the end of the fiscal year.

If, in fact, there were unforeseen cost overruns that resulted in the actual budget data under­ performing budget benchmarks, the proper recourse for SMG was to submit a resolution to the City Council to amend the budget (Section 7.5 of contract). I have found no record of any resolutions submitted by SMG to amend the approved budget for the period FY2005 through FY 2008. The Finance and Audit Committee will more closely examine the actual approved budget numbers versus the actual year-end budget numbers to determine if contractual benchmarks were met.

Dispute Between SMG and City Over $2.0 Million When the City brought the 10-year SMG contract extension forward there was a claim by SMG that the City owed them $2.0 million. On page 4 of the City 11-4-2008 Staff Report it states that SMG claimed the City owed them $2.0 million for employee benefit costs. Section 2.4 (Transition Plan) clearly states that the Operator (SMG) is responsible for all personnel related matters including compensation. During the years the budget exceeded the contract benchmarks both the City and SMG appear to have acquiesced on apparent cost overruns. In other words, I have found no record that SMG ever formally requested reimbursement for the additional employee benefit costs or any other costs as they occurred each year and the City never presented the cost overruns to the Council to approve the cost overruns or potentially terminate the contract. There are no public documents that explain, in detail, how SMG accrued $2.0 million in employee benefit costs. With approximately 36 employees and an annual payroll of about $1.3 million, it is difficult to fathom how SMG incurred $2 million or an average of about $440,000 per year (4 Y2 years) in additional employee benefit costs.

Ultimately, the City and SMG agreed to a $1.0 million settlement that the City was to pay back at $100,000 per year over a lO-year period. The Finance and Audit Committee will examine the $2.0 million SMG claim and the $1.0 million paid to SMG to determine if the City should have taken a different course with SMG. Comparing Budget and Performance Contract Benchmarks with Actual Data:2009 to 2013 Under Section 10.2 ofthe new contract extension with SMG effective 1-1-2009, the City can terminate the contract if SMG was not meeting its Net Operating Profit/Loss benchmark. If SMG was not meeting their benchmarks, this information should have been presented to the Council for review and action including possible termination of the contract. Failure to meet budget benchmarks would also impact the incentive fees (Section 4.2 of 2009 contract) that were paid out in FY2013 and FY2014 recently adopted budget. No public documents were found that confirm whether this information was ever presented to the Council for review. Information requested in this report will clarify whether or not SMG met Net Operating Profit/Loss benchmarks.

Managing and Promoting Events at Grizzly Stadium Under Section 2.8 (Booking and Event Sales) of the 2004 SMG contract, they were to use reasonable commercial efforts to book Stadium Event Days. They were to also use reasonable commercial efforts to book the seven "non-concession using events (Stadium City-Event Days") available to the City at the Stadium, subject to the Contract Administrator (City Manager). SMG was responsible to schedule and book events at the Stadium in accordance with a priority booking policy to be developed by SMG, subject to the approval of the City. When the Fresno Baseball Club lease was renegotiated with the City in 2009, the City was given more days to use the Stadium in off-season.

Based on a cursory review of available financial records there appears to be a limited number of events booked at the Stadium, with no apparent financial success. The Finance and Audit Committee will complete a more thorough analysis of the specific events and finances associated with these events.

Financing Operations The Convention Center complex was never intended to generate a profit but, rather, to stimulate the local economy and to offer entertainment to the community. Cities in California with convention center complexes subsidize convention center operations.

Originally the funding of the Convention Center operations was to come from local hotel/motel room taxes called Transient Occupancy Taxes (TOT). Later Councils directed TOT taxes away from the Convention Center operations for other General Fund purposes. The current City TOT tax rate is 12%. Other cities in California charge between 4-15%. See Exhibit 'e' for history of Transient Occupancy Tax.

Revenue sources generated from the Convention Center Complex include ticket sales, concessions and parking fees. The General Fund continues to subsidize the operations of the Convention and Entertainment Center Complex. Please see following attached financial data exhibits:

1. Exhibit 'D-l' for a summary ofthe past 5 years operations and debt service and a proposed FY2014 budget; 2. Exhibit 'D-2' for a comparison of the Convention Center General Fund subsidy FY2003 vs. FY2013; 3. Exhibit 'D-3' for a 2012 calendar year profit and loss statement by venue; and 4. Exhibit 'D-4' for a comparison between the SMG benchmark budget and the adopted City budget for the years 2004-2008.

Over the period FY2009 through FY2013, the total General Fund support including debt service averaged approximately $8.4 million per year.

Independent Audit of SMG Operations of Convention Center Since the inception of the contract with SMG in 2004, the City has never engaged the City's independent auditor to audit the overall financial operations of the Convention Center Complex by SMG or smaller scale audits (i.e. collected parking fees). Based on the findings of the Finance and Audit Committee, a recommendation for a comprehensive audit of the operations may be considered.

Economic Impact in Community from Convention Center Events The General Manager of the Fresno Convention and Entertainment Center em ailed out a report to Council members on June 3, 2013, trying to establish the nexus between events held at facilities of the Fresno Convention and Entertainment Center and economic activity in our community. This report covers actual events that were booked between 2008 and 2012. Each event is detailed, with a matrix that correlates event attendance with a matrix including hotel room nights, room credits, use days and estimated economic impact in the community. Please see Exhibit 'F'

The methodology employed in the SMG letter to estimate hotel room night revenues and estimated economic impact on our community will be examined. The economic impact model used by SMG also presumes that 75% of all TOT taxes generated citywide are a direct result of events booked at the Convention Center complex. This presumption will also be examined. Another assumption that should be examined is how much economic activity is generated for Clovis from events emanating from the Convention Center? People attending convention center events will not all stay in Fresno based hotels.

Economic Stimulus By Other Local Venues If other venues such as the promote concerts or other events instead of the Convention Center would they not also generate economic activity in Fresno and Clovis? The Fresno hotels would receive business from some of the events and collect TOT taxes for the City. The Committee will further examine the methodology and statistics to determine more precisely how other venue events economically impact Fresno area business and the City. Financing Capital Improvements for Convention Center Complex Improvements to the Convention Center Complex have been primarily financed through issuance of Lease Revenue Bonds. Below is a summary of bond financing:

1. In 1996, the City issued $11.9 million in Certificates of Participation Bonds to refinance the Conference Center and Parking Garage. Please note that this bond was paid off in 2009. 2. In 1998, the City issued $32.6 million in bonds to finance the construction of the New Exhibit Hall. 3. In 2004, the City issued $52.7 million in bonds for various capital projects including approximately $40 million for the Convention Center Parking Garage 4. In 2006, the City issues $18.7 million in bonds to finance $5.7 million in capital improvements at Ernie Valdez Exhibit Hall and $12.9 million in capital improvements for the Saroyan Theatre. 5. In 2008, the City issued $24.8 million in bonds to refinance the 2006 bonds and to finance capital improvements at Selland Arena.

Should the City have issued bonds f0r capital improvements after 2002? The introduction of the Savemart Center in 2003 and three Indian gaming casinos between 2000 and 2005 forever changed the business model for the Fresno Convention Center and Entertainment Complex. Capital projects financed in 2004, 2006 and 2008 added a substantial debt burden to the City General Fund.

One of the questions that should be examined by the Committee is, was there sufficient evidence available to reconsider decisions to issue bonds for capital improvements during the period 2004 through 2008? Should the City have considered selling some of the Convention Complex buildings as early as 2004 because the market value for the facilities exceeded the debt service at that point in time?

The City Staff Report on June 10, 2003 discusses the consequences of opening the Save Mart Arena on Convention Center operations. At that point in time, the Fresno State Basketball team and the Hockey team had already decided to move to the Save Mart Arena. There is no mention of the impact of Indian gaming casinos on the Convention Center entertainment booking business. The financial viability of the Convention Center Complex was at stake. The only solution offered by the City to reverse the dramatic change in the local area event booking business model was to outsource the Convention Center operations to SMG. There is no evidence to support whether there were serious discussions regarding the downsizing of Convention Center operations or other alternatives to deal with a significant challenge from the private sector.

Hindsight is always 20-20. The City's goal in outsourcing to SMG was to reverse the growing General Fund subsidy of the Convention Center. Ironically, the aggressive move to outsource to SMG and issue bonds to finance capital improvements increased the General Fund subsidy, primarily to cover new bond debt. Scope of Review and Evaluation The Finance and Audit Committee will complete a thorough review and evaluation of the Fresno Convention Center Complex operations and finances. Information will be requested from the qty Manager's office, SMG and other sources that have information relevant to our examination. Key City staff, SMG staff and other people with relevant information about Convention Center operations and finances will be requested to testify before the Committee. Information requested will include but is not limited to:

Operational Issues:

1. A detailed physical description of each facility; 2. A detailed list of deferred maintenance, needed capital projects and the costs of those items per each facility; 3. Any real estate appraisals completed for any of the facilities in the past three years; 4. Provide any current methodology that tracks TOT taxes for Convention Center events used by SMG; 5. Describe how the City could develop or implement a record keeping system that could accurately track TOT tax revenues by venue and by event; 6. Describe alternative site uses for each facility; 7. Provide a list of all SMG staff including job titles and duties in Fresno including those assigned to Save Mart, those assigned to the Convention Center Complex or those staff assigned to both venues; 8. Detail the cost to "moth ball' each separate facility by line item (i.e. security, landscape maintenance, lighting, etc.); 9. Explain the impact of Indian Casino's on event bookings and how a new proposed casino in Madera will further impact the Convention Center Complex operations and revenues; 10. Explain the relationship between SMG/Convention Center Complex and the Grizzly Baseball Stadium and how A.P.E.S. revenues generated from the Fresno Grizzlies are transferred into Convention Center Complex accounts and detail how the funds are used, and; 11. Provide a detailed account of all Stadium events booked by SMG for the past four years including the type of event and the profit or loss of each event (direct benefits and costs only).

Contract Issues:

1. Provide copies of SMG contract amendments (if any); 2. Provide copies of all exclusive vender services contracts; 3. Explain how business practices of SMG prevent conflict of interest issues between the management of the Savemart Center and the Convention Center Complex; 4. Explain the current annual management fee bonuses paid for the period 2004-2013; 5. Explain if annual plans are presented to the Council each year pursuant to the management contract requirements; 6. Explain how $2.0 million in additional costs was accrued during the contract period 2004 through 2008 by SMG and what role, if any, the Council had in reviewing the cost overruns; and 7. Explain business practices with vendors providing services for the Convention Center Complex including exclusive contracts to provide certain services such as concessions.

Debt Issues:

1. Detail of all existing debt service related to the Convention Center including all bonds with original issuance dates and principal amount, current annual principal and interest costs, current principal balance, maturity dates, and allocation of the principal and interest costs per each specific building of the Convention Center Complex; and 2. Provide a detailed itemization of the Convention Center net debt service per year and net General Fund subsidy costs per year for the period FY2001 through FY2008.

Financial Issues:

1. Detail all bookings by venue for the past five years (through 6-30-2013) and detail the profit or loss per event and the annual profit or loss per each venue for each year; 2. Provide current financial statements showing combined profit and loss statement; balance sheet, general ledger, aged accounts payable and aged accounts receivable; 3. Provide a detailed itemization of the approved annual net operating budget for the Convention Center Complex and the final actual expenditures from FY2004 through FY2013 to determine if actual year end net operating budget data was more than or less than the approved budgeted figures; 4. Provide copies of mid-year budget amendment resolutions submitted to the City between FY2004 through FY2013; 5. Explain who has the liquor license for facilities events, what kind of license it is and how much annual revenue is generated by liquor sales; 6. List the current outstanding balance the Convention Center Complex owes to PG&E and any re-payment plan; and 7. list the current outstanding balance the Convention Center Complex owes to the City of Fresno Department of Public Utilities and any re-payment plan;

Budget Decision During the Council budget hearings a motion was approved to hold Convention Center funding for FY2014 in contingency except those operating expenses and debt service payments necessary to continue normal operations. The Finance and Audit Committee meetings on the Convention Center operations could have an impact on the Convention Center final budget decision for FY2014. The findings and recommendations of the Finance and Audit Committee will be presented to the entire Council no later than the August 29, 2013 scheduled meeting.

Recommendation It is recommended that the Council vote affirmatively to engage the Council Finance and Audit Committee to conduct hearings on the Fresno Convention and Entertainment Center operations and financing. EXHIBIT 'A' FRESNO CITY STAFF REPORT 6-10-2003 "-'--'~"""'"" ~NN.-~.J ~.=r.= ,~.~~.~ ...."'._••••• ....."J••• - ."_•• _ ..... '.n ••• ....

~ l " I Attachment 8 j' r Cirt 01 '. ~I . ('.: FRESNO REPORT TO THE CITY COUNCIL AGENDA ITEM NO. COUNCfL MEETING • Al'tRO\lEOBY

CfTY MANAGER

June 10, 2003 .

FROM;' ANqREW T. SOUZA, A~sjstant CitY'M~

SUBJECT:· . AUTHORIZE CITY MANAGER TO EXECUTE A CONTRACT WITH SMG, SUBJECT TO CITY ATTORNEY APPROVAL, TO .OPERATE AND MARKET THE FRESNO. CONVENTION CENTER 'FACI LlTIES

RECDMMENOAnON

Stafhecom.01ends that the City Council dIrect the City Manager, or his designee, to execute a contract with SMG, to oper.ate and market the Fresno Convention Center facilities, consistent with the terms and conditions'J;r.esenfed in this staff reRort, and subjectto City Attorney approval.· .'

~ ., . ( EXECUTIVE SUMMARY

The November 2003 opening of the Save Mart Arena (Save Mart)', which resulted in the loss of Fresno . State Basketball and Fresno Falcons hockey and along with the fiscal strains facing the City's General Fund have prompted staff to review alternatives for the ongoing viability ofthe Fresno Conventilm Center facilities (FCC). The alternatives were analyzed for their ability to aI/ow the City to aohieve .the following four key goals vyhlch are necessmy for the ongoIng Viability at FCC:' .

~ Reduction ~f the General Fund sUb~jdy to FCC of over $6 million per year;

~ .' lncrease event activity at FCC and the Downtown Stadium;,' - . .. .Identify ongoing funding sources for the renovation ofFCC which are anticipated to range from $10 10$12 million; and

.. Improve marketing and operations through increased accountabnity and pe'rformance measurement.

Additionally, any recommended alternative must assure the preservation of opportunities for local businesses and remain sensitive to the value, experience and future of existing ,FCC emproyee$. .

The alternative staff .Is recommending is to contract with a private company for the operation and m~rketing ofthe FCC facilities, Inclu9ing·the marketing of convention and community related events. The .. ' (. : City has receivet;f proposals -from two compa.nies, SMG aAd Global Spectrum, to provide these services. \. Based upon the assessment of the proposals by the evaluation- committee and staff's review of l~e proposals. staff is recommending the execution of a contract with SMG to provide the above referenced services. ·-.-_~_"N_·.-".-_~.·.·,·., ··h.~._ "_·"~,,·.·"",·,_~·'v ,,~ ~~, ~,""_ ~-, ,.~."= -. 'Yo' .·_,·.'·'-'·r__ '·" '" "w.-.. - _. - -.•.• _-.__ ·.__.-<.-.,,_-.-._••._•• '" c··,·,.• •._.·.-_ .,-•. ,. '"'''' ." .•.-- - " .. ····'-r· " '.• 'C_-'.-'-" "-.'<'" "'.. r... " _._'-.' ..l

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Report to the City Council June 16, 2003 . Page 2 ( \ .

. BACKG~OUND

For the first lime in its history, the FCC is facfn~ direct, ~ocal competition for event services. The November 2003 opening of the Save Mart Arena will mark the l:ieginning of a ne~ era of entertainment competition in Fresno. The large size and state of the art amenities at Save Mart, when compared to the lesser size, aged facilities, and lack of amenities at FCC, place FCC at a signifjcant competitive disadvantage. This disadvantage is magnified due to the fact Save Mart will be-operated and marketed by'SMG, the largest facility operating and marketing company in the world. This competition, couplea -with the Center's unfunded 'need for $10 to $12 million of renovations. places the continuing operations of FCC at significant risk, This situation also places the General Fund at risk for the potential need to increase ,the annual subsidy to FCC, which was '$6.4 million in fiscal year 2003, thereby reducing the funds available for police and fire services, neighborhood improvert'!ehts, and Job creation initiatives. A reduction in the number of events at FCC would also be detrimental to the City's ongoing commitment to revitalization of downtown,

Since'the.release of the Mayor's Propose~ FY 04 BUdget there have been a significant number of questions asked and concerns raised abElut contrflcting for private operation and marketing of FCC facilities, which other alternatives mayor may not be·avallable tQ address the ongoing viability of FCC facilities, and the companies which have submitted proposals to prOVide these services. .Because of tllis situation, -this staff report has been structlired to address the following iss~es: 1) Why contract with-a private company to operate and market the FCC faeilities?; 2) Why was SMG recommended by City ( .. staff?; and 3) What safeguar.ds are in place for existing employees, local vendors, and to assure SMG is able to perform?

1) Why Contract With a ~rivate CQmpany?

For over a year, City staff has been looking at alternatives to address the goals stated above for assuring the ongoing viability of FCC. "Fhe alternatives staff reylewed w~re: the contracting for only the' marketing, of FCC; contracting for the operation and marketing of FCC; formation of a JPA between the City and RDA to oversee the FCC operations; recent dlscus~ions regarding the formation of a 501 (C)3 corporation to ov"ersee the FCC operations; and maintaining the status quo. Of these alternatives, only contracting for· operations and marketIng met the .go.als for .niaintaln~ng the .ongolng viability of F~C.

.' . . In June 2002, City staff issued an RFP for marketing only of FCC facilities. No companies responded to the RFP: Staffcontacted the companies who received the RFP and they informed staffthat they would not mark~t facilities that they did hot also ·operate.

City staff also reviewed the formation Qf a JPA between the City and RDA, as requested by City Council direction. Recent analysis found that the City/RDA struct~re would face significi'lnt legal challenges..

Recent discussions have taken pla'ce regarding the possibility oHorming a501 (C)3 corporation that could serve as a FC'C governing body. Recent dlsclJssions have taken place regarding the possibility of forming a 501'(C)3 corporation that could serve as a FCC governing ·body. While this option does not

provide. a proven. means of fully apdresslng three of the four established goals for FCC's viability: ( , reducing the General Fund subsidy; increasing event' activity; or increasing accountability and \... .. perform~nce measures, it does have potential as a possible financing option, ther-eby Impacting the goal Report to 'the City Council June 16, 2003 to.- Page 3

to fund th~ renovation of FCC facilities.- 'AdditionallY, the advantage of contracting with a private company can take place without delay while further research is done on the subject.

As to the current structure. FCC f;taff have identified some incremental changes in the submission of this year's budget.. The changes have slightly reduced· the General Fund subsidy, but in an amount insufficient to meet the resources needed to fund the renovations. Additionally, maintaining the status quo does not provide the essential marketing and o,perating strength necessary to compete with Save Mart Arena. '

Only contracting with a private company to operate and market the FCC facilities provides an alternative with a proven track record of meeting each of th~ City's four goals. The validity of this track record Is iIIust~ted by the increasing nun:tber ofcities"and authorities that are contracting forthe private operations and mark~ting 'of their facilities. There are'currently 190.facilities In 94 cities which have contracts with SMG (158 faoilities In 75 cities). and Global Spectrum (32 facillt/es in 19 cities) for the,operations ~nd marketing of their facilities, .Including 19 facilities which have contracted in the last 'eighteen months.

The propo~als received by the City have,addressed each of the goals identified. Both proposals provided operating b1J9gets that VViIJ sign!ficantly reduce the General Fur'ld SUbsidy, ranging from $5.4 million to $6.4 milli~m::~ver th~ next five years (Attachment A). Th.e proposals also include Inc:reasing the number of events at'FCC facilities as performance measures they will be reqUired to meet. DUring each of the ( five years of the proposals, the savings provided exceed the amount ~f funding necess~ry, to meet tbe debt service. ~.or the needed reflovations, thereby making additional money available for other General

P, Fund services: The total amounts range from $2.2 million to $3.2 million over the five years, and are also -: included on)Htachment A. The proposers have also committed to increased accountability by placing all or a portion of their management iree at'risk ifthey·fail to meet the subsidy reduction goals. . . . A tabJ~, showing how each of the.se alternatives relates to the go-als for ongoing viability is provided as ' Attachment B.

, - , 2} Why was SMG Recommended 'by City Staff? . . . . In Janl:1ary 2a03 staff rsslied ReQu~stsfor Proposals (RFP) to contract for the operations'and'marketing, of the FCC facilities. On April 11 the City received proposals from SMG and Global Spectrum. An evaluation commi~fe~ .was selected to review the proposals anti to Interview the companies. The committee members a{e: Bruce Rudd from the Transportatioll Department; Tim Lynch from the Hnance Department; L~nce FHchak, Retirt:'d Plant CFO for Fresno Operati,ons of PPG Industries; and Stebbins Dean, EX~cutive Director of the F're~mo Chamber of Commerce. The-commlttee rev!ewe'~.the proposals, intervIewed the companies; requested additional information frG>m each of the companies an~ provided the City Manager's Office w!th an assessment of the two companies. ,A copy of the assessment is prOVided as Attac~ment C. After the committee interviewed and prepared the additiol)al questions, each company presented their answers during an interview with the Assistant City Mariag~r, the Deputy Mayor, . and Stebbins Dean. After the meetings ea,ch company submitted its Jast, best, and final offer to the City.

The process noted above resulted In the staff re'commendation of SMG. The fol/owlng are some of the ( major points for'the recommendation of SMG: '

~ SMG is significantly larger than Global (156 facilities versus 32 facilities) which provides broader management and marketing experience and resources; Report to the City Council June 16, 2003 Page 4 ,.'. f ' \

~ SMG is placing their whole man~gement fee at risk if they fail to reach subsidy reduction targets, while Global Is placing only half of its fee at risk; " . , : ~ SMG provided the more detailed plan for marketing and operating the FCC facilities;

~ SMG's oper~fing structure of two ~eparate divisions (Convention Center and Arena/Stadium) will provide dedicated services to each area of FCC operations;

~ SMG has direct experience providing convention sales and marketing services. while Global does not; , ,,

.. SMG has a stronger Califo~nia presence (10 facilities) than Global (0 facilities), allowing more cross marketing opportunities; , ,.' .

.. SMG wilf cap its otherwise eamed incentive fee at the amount of improvement to the opera,ting ~ubsidy;

~ SMG will provide event marketing synergy between FCC and Save Mart Arena; , "

.. SMG's proposal contained a documented plan to engage the' community as partners. i \, SMG will use their natlon~1 saleS' office, as well as local staff, ,to perform. their sales' and marketing activities of .all FCC facilities. including the downtown .stadium. The. issue of SMG also operating and marketing Save M~rt Arena was conslc;lered during .this evaluaOon.' Th~l sel~ction o'f'SMG'wili, allow 'it to present all of the facilities as paJ:t of an overall Fresno mark~t. rh1s opportunity, coupled with SMG's natronal marketing strength and Industry partnerships, will result in compl,imentary ev~nts coming to·all of the Fresno facilities, thereby offering more entertainment activity for all of Fresno. SMG will also provide 'booking synergy with the other teD SMG managed facilities in CalifornIa. Due to the structure of the contracts with CSUF and the City, SMG will have the opportunity.to earn a higber percentage of its fees as incentives at FCC. This, coupled with the SMG's compensation package for its facility managers, will give: the SMG 'management team at FCC a greater financial incentive to exceed its ,performance goals. . .

As related to conventions and conferences, SMG wlllimmediately perform a. gap analysis, utilizing their national da'ta base, to identify marketing opportunities for the facilities. SMG will then use'a m'ulti-Iayered . date~ .i approach to anti marKeting, relying on beth thelr'national data base and local activity.· SMG wm. I I also utilize natiohal relationships with trade show promoters, professional associatiohs and other I organizations where leads are generated forconventions, events and entertainment opportunities. SMG : wfll buy advertising in national trade publications and industry media pubficatroris. SMG Will also do custom research to develop new customers, utilizing TradesbowWeek, the industry's weekly publication. l: t. The last, ,best and final offers presef'ted by the companies propose a significant reduction to the General r Fund subsjdy to FCC over the next five years, The savings ~re proposed at $5'.4 million (for SMG with r a Sports Authority). $6.1 million (for SMG without a Sports' 'Autho~ity). and $6.4 million for Global t~ Spectrum. A spreadsheet for each of the proposals is prOVided as Attachment D. While the proposal (~ ~ of Global Spectrum provides forslighfly more'savings, the overall strength of SMG's proposal, as noted ~ ~ ~ ~ ~ ~ ~ ; ~···'··""'-····-·~·'m>~."" ..", "'.....~-,.~....."'••,. -.·....,.·ur.·" ~ """~-"""~"",.>, .••,",",-..-,.""""""",..,,,. ",. " ...,..""...... ~Q'..". .",,·u.. ':wo." ,'ol': "-"--","'-'-"'-~--,--,""---"",;,,,,,,-_,_,,,,,..e, ~'-'-'-;--';'-;';'-"--""'- '-'-"''''''''-~!i

(':', ~~ :;~ Report to the City Council June 16, 2003 PageS

above. will create a better value for the City. All of these savings include the proposed annual base management fe~s of $225,000 for S~G and $144,000 for Global Spectrum. . . The contract with $MG will be'for a three-year period, with the option of two one-year extensions. The . Contract will also contain a 60 day termination clause, should SMG fail to perform under the terms ofthe agreement. It will als~ contain significant performance measures that must be met by SMG. The major contract points and performaoce measures are presented as Attachment E;

3) 'Safegu1i!rds fO'(' Existing Employees. local Vendors. and SMG Performance .. ~~ f'.:'~:~::.:.:. ~..~ ...... Questions and concerns "have ~een raised regarding what the impact of contracting with a private company wil~ have on City em-ployees. locaf' vendors .and the City's position regarding the SMG's performance guarantees. '

There are' currently 37 full time employees at FCC facilities. SMG has agreed to retai[l all of the employees'for aperiod of on~ year, and has agreed to operate under the teims and conditions of the existing union contracts. This will allow the emplQyees to retain their existing pay scales. After siX" , mo'nths the employees wlll trarisfer to SMG's benefit plans. SMG has agreed to provide employees ~ith :(, the choice of entering ~MG's health plan, or having SMG pay the amount of ils health plan cost t\?wards the employe~s COBRA payment to the 'City. Ad9itjonally, should any of the affect~d person·nel.wish to continue as'employees of the Ci~y, during the one year they will have the opportunity tb transfer to vacant 'City posltioD~·for which they qualify. Additionally, SMG has proposed an organizational 'chart in which they will be adding 12 new'full time positions, an incre~se of over 30%.

The'ongoing use of· local vendors is of criticallmportanc~to the City. To the fullest extent poss!ble i SMG will honorthe existing agreements with local vendors who use and supply services to FCC facilities. SMG . wlll also implement Its loceri business outreach program, inclUding a vendors' conference to Introduce business opportunities at the FCC faciJIties. This program has been used with, success in other facilities operated by SMG. The City and SMG will also establish a Marketing Advisory Commltt~e. whIch has been used in other locations to get input from and inforrnatl~n to the local hospitality community. This committee has been used with suCCess in ether SMG facilities. Further, SMG will provide each hotel with Its quarterly lead reports, whioh are generated from their national data base of events and activities. This lead- report Is utilized in EI Paso, Ontario and other lo'cations where SMG operates.

As noted in the previous section, the contract with SMG includes significant performance measures' that will prOVide the City with increased accountability for FCC operations. SMG has agreed to place its fujI management fee at ri~k if it falls to meet the performance measures contained In the agreement. The contract also h~s a 60 day' cancellation clause should SMG fail to perform under the terms of the agreement.

FISCAL-IMPACT OF RECOMMENDATIONS

(- Awarding the contract for services to SMG will result in a reduction of the General Fund subsidy in by -" $929,100 in the first year and es't1mated savings of $6.1 million over the next five years. These savings will p.rovide the resources necessary to fund the needed renovations for FCC facilities, and will also pay for additional General Fund services. _ ~ . ' ~-..' RFP for Sales. Marketing and Operation of Fresno' Convention Center' .~1f~~~~::: : Summary of'Proposed savings In Excess of.Debt Service Requirements t.l l' Description FY04 FYOS FY06 FY07 FYOB Tolal

Global Spectrum Proposal I , GF Subsidy Reduction $ 340,590 $ 1,444,760 $. 1,526,704 $ 1,565,282 $ 1,565,822 $ 13,443,158 I Renovation Debt Service (1) $ .. S '-224900 $ 980,900 $ 982,600' $ 982,900 $. 3,171.300 I· Available for Additional General Fund Use $ 340,590' $ 1,219,860 $ 545.804 $ 582,682 I $ 582.922 $ 3,271,858 I.

SMG Proposal Without Sports CommissIon '.

GF Subsidy Rf:ductJon $ 929.100 $ 855,385 $ 1.239,858 $ '1,437,686 $ 1.639,n3 $ 6.101,802 I Renovation Debt Service (1) ,$ - $ 224,900 $ .980,900 $ . 982,600 $ 982,900 $ 3.171;300 i I Available for Additional General fund Use $ 929.100 I $ 630,485: $ 258,958 $ 455,086 $ 656,873 ' $ 2.930,502 I I i , , SMG Proposal With ,; SRorts Commission I· I , I -I I I I GF Subsidy Reduction 1$ 842,600 is 713.365 1$ 1.092.258 l S 1.284,186 1$,1,480.133 :$ 5,412.562· ( I I . i- Renovation Debt Service (11 $ ~ .$ . 224,900 ! $ 980,900 ~'$ 982,600. $ .982.900 .. $ 3.171.300 I .. t Available for Additional I I I. Gener•., f"lIna !Jse !$ 642,600 $ 488,485 . $ 111,358 $ 301,586 $ 497.233 $ 2,241,262 I I i (1) Provided by Finanj:e Department. ! I I

(

ATTACHMENT A ,~ ~:.~ .~_ -.-~.~""t~:. -~ ~-.~~ .~ ~.~ r.';'''''-'\'\o.:.:;:;:~::i''''''·'-:·.:: ~~,.~ :-:~.~ ~ ".:.~:,._.~ '::-~,"o":" ~ .I~ _;.~.,.~ "":~':"'~"'''''''':'''''' " •• ;:'.' '.,. ,'-'.' z·... •-.-:••'-; -:" ':',-".-. - ':-'l : :;". ::; ..-: .':,-..': '.;;-. •.. ",__r •• ;;..' .-':',- -;:.::: .•·",,,,;;:.::-.,,,·;,;;: <:'• .;.•. ,:.: •._._:...J'.I.:l.:... ••• - ::;..:-:.•.:,._.-:. _••' .. -..:..: _ _._• •..:.-:.:. :-:.. ::"._:",,;""'•••.••••:.;•• ••,=.:..':':.:-_. • ;, II 1,

FCC Viabmty Goal Matrix I,I ( " GOAL PRIVATE CONTRACT 501 (C)(3) STATUS QUO 1 Reduce General Proven track record of Incremental, savings Incremental savings Fund· Subsidy subsidy reductions through ability to proposed in FY2004 through cost savings 'operate as a private budget, but not at level and increased entity, but offset by 'of private contract revenues at. 190 cost of additional facilities administration 2 Increase Event National marketing and Does Iiot address Marketing performed at Activity strategic industry how. marketing of a local level. without partnerships provide facilities will.change, industry partnership~. competitiv~ strength to and how additional Significant cnanenge to . book events and events will be booked compete with Save i Mart Arena and other ,i maximize, use of ; facilities entertainment venues i ..i 3 Generate Savings generated are· Provides a vehicle for Unable to generate i Funding 'for in excess of debt cost effective sufficjent savings to Renovations service for renovations issuance of bonds, fund debt service . ' but does no~ address. payments. Only other. ( how to generate source is General Fund funding to pay for debt serv;ce

.:. '." 4 Improve Contract contains Reduces Currentpenonnance Accountability performance measures accountability by measures (City 'and , and and guarantees against creating an additional eVB) are not supported " Performance their managem.ent fee level of adminil>tration by financial guarantees ,Measurement between City and FCC operations

~nACHM~NTB EXHIBIT 'B' FRESNO CITY STAFF REPORT 11-4-2004 · /' ~

City of ~1et~e....J ~f,-,- - '-"~;"~J REPORT TO THE CITY COUNCIL AGENDA ITEM NO.9: 00 a.m. #1 COUNCIL MEETING 11/04/08 APPROYEDBY

CllY MANAGER

November 4, 2008

FROM: ANDREW T. SOUZA, CITY MANAGER Office of the City Manager

SUBJECT: AWARD CONTRACT TO SMG FOR THE OPERATION AND MARKETING OF THE FRESNO CONVENTION AND ENTERTAINMENT CENTER

KEY RESULT AREA

Economic Development

RECOMMENDATIONS

Staff recommends approval of a ten year Agreement with SMG for the continued operation and marketing of the Fresno Convention and Entertainment Center (FCEC).

EXECUTIVE SUMMARY

In November 2003, the City Council approved a contract with SMG for the operation and marketing of FCEC which will expire in December 2008. The contract resulted in over $5 million of General Fund savings that have been used to provide funding for the significant capital improvements that have been made to the FCEC facilities. Staff from the City Manager's and City Attomey's Offices have worked with SMG to negotiate an agreement for the continued operating and marketing services for the FCEC for the next 10 years. The annual fee to be paid to SMG has remained constant, and provides the City with the right to terminate the agreement if the actual Net Operating LO$SJProfit for any year Is not equal to or better than the Net Operating Loss/Profit .set forth in the Approved BUdget for that year. The agreement also calls for the City to make annual payments of $100,000 during each of the 10 years as a settlement of approximately $2 million of payments made by SMG for the operation of FCEC during the term ofthe previous contract that had not been previously approved by the City (see Employee Benefit Cost Payment section below).

SMG continues to be the dominant leader in the facilities management industry, currently operating 215 venues compared to 70 operated by Global Spectrum. This difference In the number of venues operated by SMG has increased during the last five years. Additionally, SMG continues to maintain a significantly larger national marketing operation, and has annual operations which exceed Global Spectrum by more than $156 million ($168.8 million compared to $12.6 million), The strength of SMG marketing efforts has ·'

resulted in Pollstar magazine ranking the Selland Arena and Saroyan Theater In the top 100 venues worldwide based on ticket sales. BACKGROUND

On November 18, 2003, the City Council awarded the operating and marketing of the Fresno Convention and Entertainment Center (FCEC) to SMG for the period of January 1, 2004 through December 31, 2006, with the option of two one year extensions. SMG has successfully operated the facilities and has booked a multitude of top performers ranging from the Red Hot Chili Peppers to Placido Domingo as well as top Broadway shows. Under the management of SMG, the facility was awarded the PPrime Facilities and Destinations Award' for years 2006 and 2007. During 2007, Pollstar magazine ranked the Selland Arena and Saroyan Theater in the top 100 venues worldwide based on ticket sales.

Since assuming the operating and marketing efforts in 1993, SMG has made significant contributions to the operations and management of the facilities. For example, the Fresno Sports Council, which has been operating since 2005 with SMG, has brought in 108 new events, booked an estimated 65,000 room nights for 2006-2012, and generated an estimated $787,000 in room tax. SMG has also assisted with the reorganization of the structure of the Fresno Convention and Visitors Bureau and governing Board of Directors. In 2005, SMG leveraged its nationwide relationship with Ticketmaster and worked on behalf of the City of Fresno to renegotiate a contract that includes facility fees on all ticketed events.

Over the last two years SMG has effectively managed the facilities during major renovation efforts which began In June of 2006. During this time, 245 event days could not be booked due to the construction. Impressively the facilities were recognized during this time with the Prime Facilities Destination award and ranked In the top 100 faclllties wor1dwlde as referenced above. Phase I of the renovations were completed at a cost of $18.1 million. Renovation work at the Saroyan Theater included a remodeling of the main lobby, theater back of house, plaza area and the replacement of the roof. The Selland Arena remodel entailed remodeling the back of house, locker rooms, new seats, and a new roof..A new complex chiller was also installed to accommodate all facilities. Currently phase II and 1tI are underway Including a roo1 for Selland Arena, boiler system, air handler, domestic hot water, HVAC, stage rigging, Ice floor, scoreboard, sound system, hockey eqUipment and VIP seating. The total cost for both phases is $9.9 million. .

KEY CONTRACT PROVISIONS:

Length of Agreement:

The term ofthe agreement is ten years, which is consistent with the length of the agreements for.other venues operated by SMG including the Save Mart Center, the Gardens in Bakersfield. and The Long Beach Convention Center. The agreement provides the City with the option of terminating the agreement if the actual Net Operating Loss/Profit for any year is not equal to or better than the Net Operating Loss/Profit set forth in the Approved Budget for that year. The right to terminate for failing to meet the financial budget is a new provision which was not Included In the previous agreement.

Base Compensation:

The base compensation to SMG for services is based upon the current fee ofan annual'fixed fee of $177.300.00, whIch amount shall be adjusted upward on the first day of eac~ Fiscal Year foll~ing the first-complete Fiscal Year starting JUly 1, 2009 and ending June 30, 2010 ("Rrst Complete Fiscal Year"). by the percentage change in the Consumer Price Index - All Urban Consumers (CPI-U) - West Region· • All Items, as pUblished by the Bureau of Labor Statistics of.the U.S:Department of Labor (the PBase Fee"), provided that such CPI increase shall not exceed 4.3% in any such Fiscal Year. Incentive Fee:

In addition to the fees described above, SMG shall be entitled to an annual incentive fee With respect to each Fiscal Year hereunder during the Management Term or Renewal Term based upon its performance with respect to the qualitative criteria set forth within the contract In no event shall the qualitative incentive fee exceed an amount equal to twenty percent (20%) ofthe total compensation payable to SMG in such Fiscal Year taking the Base Fee for such year and dividing it by .8, and then subtracting the Base Fee from the result with such resulting number being hereinafter referred to as the uQualitative Fee Cap"):

Client Satisfaction. SMG shall demonstrate quality service to clients ofthe Facility by above average ratings on exit surveys, the form and procedure ofwhich will be mutually agreed upon by SMG and the Contract Administrator. (up to 5 points)

Community Involvement. SMG personnel wJ1l actively participate in programs and organizations within the community on a volunteer basis. (up to 5 points)

Maintenance and Operation. SMG shall demonstrate quality maintenance and operation of the Facility based upon a review by the Owner on a quarterly basis of the condition of the Facility and the equipment therein. (up to 5 points)

Contract Compliance. SMG shall demonstrate compliance with the provls.ions of this Agreement based upon an annual review by the Owner to be completed no later than the end of each Fiscal Year of a mutually agreed upon checklist of compliance Items. (up to 5 point~)

Marketing. SMG shall demonstrate compliance with the marketing objectives ofthe OWner through effective utilization of available resources and shall Elstabllsh a continuing and cooperative relationship with the Fresno ConventIon and VIsitor's Bureau as described in Paragraph 1(h) of Exhibit ~B". (up to 5 points)

At the end ofeach FISCal Year, the Contract Administrator will, in its sale and absolute discretion, evaluate and assign a point value, up to the maximum values set forth above, to SMG's performance under each of the criteria above. The amount of the points assigned for such Fiscal Year will be used to calculate the qualitative incentive fee payable to SMG for such year as described below. The qU~lItative incentive fee for any Fiscal Year shall be an amount equal to the product of (Al the Qualitative Fee Cap for such year, and (8) a ratio whose denominator is 25 and whose numerator equals the number of points earned by SMG for such year in the Owner's discretion as provided above. The p~rties will meet periodically, as the Owner determines to be reasonably necessary, dUring the course of each Rscal Year to provide performance updates and to discuss perfonnance Issues. .

SMG shall not be entitled to be paid an incentive fee in any Fiscal Year as prOVided above, If the actual Net Operating loss/Profit for such year is not equal to or better than the NetOperating Loss/Profit set forth in the Approved Budget for such year.

Annual Budget:

The agreement establishes the budget adopted by the City Council for fiscal Year 200~-2009 as the base budget for the agreement. The followlng annual budgets· that are submitted by·SMG each year shall only contain increases in the Operating Expenses to the extent consistent with Actual Cost In·creases or the percentage increase represented by the percentage change in the Consumer Price Index -~ All Urban Consumers (CPI-U) - West Region - All Items, as published by the Bureau of labor Statistics of the U.S. Department of labor Whichever Is less. Any Operating. Budget sho~ng increases in Operating Revenue shall be sUbstantiated with sufficient documentation. The City Manager shall require a/l relevant data and documentation at his sole discretion to substantiate Revenue or Actual Costs Increases in any submitted budget showing Operating Revenues or Expenses In excess of the Base BUdget. All Budgets submitted are sUbject to approval by the City Manager before their submission to the City Council for Its final approval. Ifthe City Manager elects to modify such bUdgets submitted by SMG, he or she shall notify SMG In writing of such modifications at least ten (10) days prior to his or her submission of such bUdgets to the City Council for approval. In the event that SMG disagrees with the City Manager's modifications of the annual budget, SMG shall have the right to notify the City Council of its concems and request a modification to the annual budget. .. Within thirty days after the end of each Fiscal Year. the City Council shall notify SMG of any changes to . the annual operating bUdget and the annual cash flow budget for the succeeding Fiscal Year proposed by SMG (or provided by the City Manager wIth his or her changes. as the case may be). The bUdgets as finally approved by the City Council shall be the Approved Budget for the follOWing Fiscal Year.

Employee Benefd Cost Payments:

During the current contact term. the City presented the annual budget for FCEC based upon the I benchmarks contained In the agreement Beginning with the second year of operations. SMG submitted I. to the City Managers Office a draft budget which exceeded the benchmarks contained in the agreement. I After discussing the proposal with SMG. City staff Informed SMG that the budget being presented to the City Council. and the cash funding provided to SMG, would be based upon the benchmark amounts which were ultimately adopted by the City Council as per the agreemenl During the follciwing three years, SMG operated the facilities consistent with the bUdget they presented, which resulted in SMG incurring employee benefit costs of approximately $2 million which were not budgeted by the City, nor were reim bursements from the City requested, by SMG during the years that they were incurred.

SMG believes that the City has an obligation to reimburse SMG for these expenses as the funds were spent on the operations of FCEC, that the agreement identifies that SMG is operating FCEC on behalf of the City, and as the expenses were included In financial reports SMG presented to the City, altho.ugh without direct or indirect concurrence from the CIty they would be paid. City staff believes that SMG had a specific obligation to operate FCEC within the amounts of the budget adopted by the City Council, and that they were required to request approval from the City prior to spending any funds beyond that which was bUdgeted. .

Staff from the City Managers and City Attomey's Offices have met numerous times with staff and legal counsel from SMG attempting to resolve this matter without litigation and in such a manner as to retain the services of SMG for the operations of FCEC. The result of these negotiations is a staff recommendation that the City reimburse SMG $1 million of the amount at the rate of $100,000 per year during each of the 10 years of the proposed agreement. The reimbursements will be in monthly payments, and will be in addition to the annual operating fee paid to SMG over the life of the agreement. Staff believes this settlement is in the best interest of the City, and' the most cost effective way to maintain consistency and the quality services provided over the tenn'ofthe previous contract. The net present value of the payments Is estimated to be $781,000.

In the event this Agreement terminates due to CIty's breach, the City shall pay, or cause any successor management company to pay. to SMG the outstanding unpaid amount ofthe Employee Benefit Cost Payments existing as of such termination. In the event that the City tennlnates this Agreement due to SMG's failure to perform or comply with any tenns (If the agreement. the City will continue paying to SMG the Employee Benefit Cost Payments over the remainder ofthe Amortized Period.· .

Attachments: Contract Support Letters

! f I EXHIBIT 'e' TOT TAX HISTORY