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Robert Layton, City Manager Laurie Wolf, Internal Auditor Special Audit National Baseball Congress (NBC) Operations 2012 and 2011 Tournaments including Ancillary Activities May 3, 2013

Background Information
WB, LLC was selected as the preferred operator for professional baseball at Lawrence Dumont Stadium (Stadium) in August 2007. The associated, fifteen year lease agreement, effective March 18, 2008, provided that revenues received from the operation of the stadium for professional baseball be divided to fund an annual stadium operations budget and other professional baseball related expenses of the team. In addition, under the terms of the lease agreement, WB, LLC was given the right to manage and operate the NBC and its Midwest Regional and World Series tournaments in exchange for annual lease payments of $27,500. The City purchased the NBC and related activities from the Rich family in 2007 subsequent to their decision to move the Wranglers to a different city. The NBC has always been held in Wichita and the purchase was made to ensure that the tournaments would continue to be played here. Revenues of the NBC in excess of operational expenses were to be retained by WB, LLC. The lease agreement obligated the City to provide and maintain certain equipment required to properly operate the stadium for baseball operations and other events. WB, LLC was to provide concession equipment, office equipment, ticketing equipment, scoreboards, video equipment and all necessary sporting goods and equipment for operation of the stadium and the baseball team. In January 2009, WB, LLC requested forgiveness of the first NBC lease payment due to significant financial losses incurred during its inaugural season resulting from start-up expenses. City Council agreed to defer the payment and spread it over the next five years. Lease payments would increase to $33,000 during the second through sixth year of the agreement and revert back to $27,500 for the remaining years of the lease. The Wichita Wingnuts professional baseball team (Wingnuts) experienced a change in ownership after the 2009 season. WIB, LLC d/b/a Wichita Wingnuts became the new owner of the team and thus operator of the NBC. WIB, LLC inherited all existing contracts and agreements of the former ownership group.

Audit Objectives
Interviews were conducted with City of Wichita staff from Public Works & Utilities and Law as well as staff of WIB, LLC (Operator) to gain information about NBC tournament operations. The Operators financial information for 2012 and 2011, along with related supporting documentation, was reviewed to extract revenues and expenses of the NBC and its ancillary activities. Information obtained during the interview and review processes was also used to reach conclusions about whether payments had been made timely to employees, vendors and contractors of the NBC.

Audit Results
Combined Financial Reporting and Bank Account Activity It was noted during the audit that the Operator has one bank account that is used for both Wingnuts and NBC transactions. Cash flow is managed overall rather than by actual receipts and expenditures of each operation. Some transactions are recorded separately in the financial statements but many are combined and at least initially reported as Wingnuts activity. Year-end adjustments are made for certain revenue/expense categories to split activity between the Wingnuts and NBC. Operator Response: Financial transactions and related reporting for NBC operations are in the process of being separated. The separation will require use and management of intra-company accounts. In addition, a separate bank account will be established for the NBC so that monies are not co-mingled with Wingnuts operations. Reconciliation of Ticket Revenue The Operator utilizes ticketing equipment and software provided by a third party vendor for ticket sales initiated at the Stadium. Tickets are also sold directly by that vendor via telephone, internet and from various vendor authorized outlets. Ticket revenue collected by the vendor is offset with ticket printing and other fees assessed to the Operator for use of the system. System reporting is available detailing the volume of sales by ticket type and the associated revenue by ticketing method/location. It was noted during the audit that 2012 NBC ticket revenue recorded in the financial statements ($81,345) did not reconcile with ticket system reporting ($142,276) for the event. Operator Response: Ticketing revenue could not easily be reconciled with ticket system reporting primarily because of how season tickets were set-up in the system and the fact that not all ticket options were set-up and available in the system. If a certain ticket option was not properly set-up in the system, it would be necessary to print a higher value ticket option upon sale even though revenue collected was less. All available ticket options will be set-up in the system going forward and a process will be developed to ensure tickets sales and revenue can be reconciled daily.

Cash Handling Process Internal controls of the cash handling process are not adequate to ensure revenues are recorded completely and accurately. The Operator does not use ticket system reporting to reconcile ticket sales by ticket seller or by event. In addition, certain souvenir shop transactions are not recorded in the POS system provided by a different third party vendor. Operator Response: A nightly revenue reconciliation sheet has been developed and will be utilized to ensure revenue is reconciled with actual ticket sales on a daily basis and to provide a snapshot of activity for future reference. In addition, internal controls will be enhanced related to main office, box office and souvenir shop sales and cash handling. Employee/Vendor/Contractor/Team Payments The Operator ensures employee payroll is given priority and paid timely. Vendor/Contractor/Team payments are managed according to cash flow dynamics of the entire organization. The majority of vendor/contractor/team payments associated with the 2012 Midwest Regional and World Series tournaments were paid within two months of event end. Payments associated with the 2011 tournaments however were significantly delayed with many not being paid until first quarter of the following year. Operator Response: NBC revenue will be deposited into a separate bank account and utilized to pay obligations associated with the NBC tournaments and other activities timely and in accordance with performance standards established and agreed upon with the City. NBC Lease Fees It was noted during the audit that 2012 and 2011 NBC lease fees totaling $66,000 have not been paid to the City in accordance with the lease agreement and amendment. Lease fees are due in December of each lease year. Operator Response: Past due NBC lease fees will be paid on a six-month payment arrangement beginning June 1, 2013 with final payment on or before November 1, 2013. Future lease fees will be paid timely and in accordance with the Lease Agreement for Lawrence-Dumont Stadium and related amendments. Water/Sewer Fees Water and sewer fees totaling $82,706, which includes amounts from both 2012 and 2011, have not been paid to the City. Collection action has not been taken on the past due balance because City staff and the Operator have been working together to assess if there were leaks at the stadium which resulted in higher water usage. Ice machine leaks were identified in the Clubhouse and Pavilion and thus usage adjustments will be made as soon as repair documentation is received. The adjustment may not however significantly reduce the outstanding balance.

Operator Response: A repair invoice for ice machine repair in the Clubhouse and the All American Grill located in the Pavilion were provided for allowable usage adjustments. Water/Sewer fees remaining after the adjustments will be paid on a six-month payment arrangement with final payment on or before November 1, 2013. Future water/sewer fees will be paid timely. Line of Credit A line of credit was used by the Operator in 2009 to pay operational expenses of both the Wingnuts and NBC. The Operator attributed $147,519 of the $197,585 total debt to the NBC. Only interest is paid annually. Operator Response: An interest only payment is made annually on the line of credit along with a small principal reduction. A plan will be developed to ensure the line of credit attributed to the NBC is paid down with future year tournament net income. Ancillary Activities It was noted during the audit that there are several ancillary activities managed by the Operator which are associated with the NBC. One of the activities, the Hap Dumont Youth League (League), is a youth extension of the adult program. The fee based League currently only has a presence in Kansas. Pocket-sized Major League Baseball rulebooks are updated, produced and sold by the Operator each year as well. The NBC is the only source for these small rulebooks. Baseballs, for use during NBC affiliated events, have also historically been purchased and sold however sales in 2012 were limited to stock on hand. Operator Response: The Hap Dumont Youth League and the production/distribution of pocket-sized Major League Baseball rulebooks will be continued in 2013.

Audit Recommendations
The lease agreement between the City and the Operator does not contain performance parameters or expectations for operation of the NBC and its ancillary activities. Performance standards should be developed and the lease agreement amended to include expectations for operation of the events/activities. At a minimum, expectations should be established for financial reporting, cash handling, employee/vendor/contractor payments, subsidiary system reconciliations and line of credit pay down. Application of water rate tiers is based upon winter water consumption. Water consumption during the baseball season is primarily being billed at tier two and tier three rates since water demand at the Stadium during the winter months is nearly non-existent. Application of tier two rates is appropriate based upon the Operators consumption cycle, however, tier three is a penalty tier meant to deter excessive consumption. City staff should determine if water utility guidelines allow and the Operators industry warrants billing at only tier two rates. A change in water rate tier application would significantly reduce stadium water expenses.

Revenues, expenses and operations of the NBCs ancillary activities should be reviewed to determine if the activities should be continued in future seasons as part of the NBC. City staff should work with the Operator to determine a reasonable payment plan for past due NBC lease and water/sewer fees.

Conclusion
The Operator has leased the right to manage the NBC and NBC revenues above operating expenses belong to the Operator, however, the City is the owner of the NBC and therefore has a vested interest in how it is operated and its financial performance. The City should monitor both, without dictating operational decisions, to ensure the NBC is able to retain and grow upon its reputation as premier event.

cc: Cathy Holdeman, Assistant City Manager Alan King, Public Works & Water Utilities Director Joe Pajor, Public Works & Water Utilities Deputy Director