The city of Sacramento’s bad loan to a troubled nonprofit
A city audit released last week concluded that a nonprofit which defaulted on a $400,000 loan from the city had been losing money for years and lacked strong financial management or internal controls.
The 18-page report took the Sacramento Region Sports Education Foundation to task for not following its own bylaws or the conditions or the city loan, including a requirement that the loan money be kept segregated from the foundation’s general fund and only be used to organize and host the 2011 World Masters Athletics Championships.
The foundation is, in practice, an extension of local government: It is overseen by the Sacramento Sports Commission, a joint city/county body. The executive director of the commission, John McCasey, also runs the foundation.
Apart from the loan, the commission also receives $140,000 annually in funding from the city and another $100,000 from the county, which it passes passed onto the SRSEF. The SRSEF and the commission exists to draw large sporting events to the region, such as the 2004 U.S. Olympic Track & Field Trials or the Amgen Tour of California.
The idea is that bringing these events to the region will draw tourists, boost the economy and increase tax revenues, but that is not the way it worked out last year, when the SRSEF borrowed $400,000 from the city and another $150,000 from the county to organize the masters tournament, a track and field event for athletes over age 35.
According to the audit, the commission initially forecast that the event would bring in $76,974 from sources such as registration fees and revenue sharing agreements with hotels. Instead, the commission actually lost $253,000.
In an interview conducted in May, McCasey indicated that while the event drew about the number of athletes the commission had estimated, that attendance did not translate into the anticipated revenue.
“That’s what fell short,” McCasey said. “Once they got here, they didn’t spend what we expected.”
The audit found instances of poor financial management, shoddy bookkeepings and a general lack of established financial procedures, but no evidence of fraud.
"I’m not suggesting, nor is the audit suggesting, that anyone pocketed money. It’s just lack of proper accounting as to the public dollars, and that’s not acceptable," said Councilman Steve Cohn, the chair of the city’s audit committee.
HISTORY REPEATS ITSELF
This is not the first time the SRSEF has been audited after it had trouble repaying loans from the city and the county. The report indicates that an independent auditor reviewed the SRSEF’s books in 2000, after the organization "incurred significant losses" and entered into a period of debt forgiveness with its major creditors, including the city and the county.
The audit was blunt in its appraisal of the SRSEF’s history of financial management.
"The history indicated that SRSEF could not pay past obligations to the City, County and other creditors when obligations were due more than a decade ago," the report states. "While organizations can have shortfalls in some years, the pattern of losses and failing to clearly account for them indicates a lack of financial planning and effective organizational management."
When asked if he thought that McCasey should resign, Cohn said that he is focused on a broader issue – whether or not the commission and the foundation should exist at all in their present form.
"This is just an audit. It’s pretty strong, so one could certainly argue that it’s strong enough to call for resignation, but to me the more important issue is, would it even matter if it were someone else besides McCasey?" Cohn said. "Is this even the right structure, or if somebody else comes in are we going to have similar problems with this setup? That’s really my bigger concern – could any one individual run that as a separate entity, or is it time to look at bringing in another organization that has more accountability?"
Cohn suggested that the Sacramento Convention and Visitors Bureau might be well positioned to take over the role currently played by the commission and the foundation.
The city’s auditor, Jorge Oseguera, will present the report’s findings to the City Council during Tuesday’s City Council meeting.
"The lesson for the city, I think, is that when they choose to make a loan of this magnitude to an entity like this, that the risks associated with those loans need to be weighed carefully, because this isn’t the first time that the city has lost money on an event like this,” Oseguera said. "If this is really going to be a recurring issue, the city needs to really consider whether or not that’s the wisest use of its money."
The report included a response from SRSEF indicating that the foundation agreed with the audit’s findings, and that a task force comprised of staff from the city, county and the SRSEF was working to evaluate structural changes to address the audit’s recommendations, and to evaluate the nonprofit’s capacity to continue operating.
Messages left with the commission Thursday were not returned by publication time.
Cohn said the foundation would still be obligated to repay the city, despite its current financial predicament.
"We do expect to get paid back and we will work with them on a loan repayment, and that’s tough for them to do because they aren’t able to make money right now, but they’re going to have to figure something out," he said.