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Cable Franchise Fees """',, '- 1"". <" '..... CITY OF MIAMI BEACH INTERNAL A UDIT REPORT DATE: March 6, 2000 TO: u:' C, -1"; ..,., C) Mayra Diaz Buttacavoli, Assistant City ManagerrJr.:fflCl'_tLf/ ~~~06'[Cr:~ James J. Sutter, Internal Auditor ~ AUDIT OF CABLE FRANCHISE FEEl! October 1, 1997 through September 30, 1999 Lawrence A. Levy, City Manager . ~ VIA: FROM: SUBJECT: PERIOD: This is a regularly scheduled audit ofthe revenue received from cable franchise fees and a compliance audit of the cable franchise agreement for the above audit period. INTRODUCTION City Resolution No. 88-19179, which was passed and adopted by the City Commission on March 2, 1988 authorized the assignment of the City's two cable television franchises and non-exclusive licenses from Ultra Com of Dade County, Inc. to Rifkin/Narragansett, South Florida CATV, Limited Partnership d/b/a Gold Coast Cablevision. The licenses -permit Gold Coast to engage in the construction, operation and maintenance of a cable television system. The applicable City ordinances specify that Gold Coast has tht'_ - right to utilize the present and future highways, streets, alleys, rights-of way, easements and public property in the City of Miami Beach for the purpose of maintaining and operating a CATV system for the interception, sale, transmission, distribution and receipt of television programs and other audio-visual electrical signals and the right to transmit the same to residents of the City. Under the terms of one 15-year franchise ordinance and license expiring on September 14, 1994, referred to as the Ultra Com franchise authorized under City Ordinance No's. 79-2164 and 79-2172, the City receives 3 % of the gross revenues of the grantee. Under the terms of a second 15-year franchise ordinance and license expiring on February 4, 2001, referred to as the All-Rite Satellite, Inc. ("TV- Ticket") franchise authorized under City Ordinance 86-2500, the City was to receive 4% of the gross revenues of the grantee. At the May 5, 1993 Commission Meeting, the City of Miami Beach adopted Resolution No. 93-20796 and Ordinance No. 93-2851 whereby the City and Gold Coast mutually agreed to voluntarily terminate 1 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 the Ultra Com of Dade County, Inc. non-exclusive franchise, originally established by Ordinance No. 79- 2172, and to negotiate in good faith mutually agreeable modifications to the existing All-Rite Satellite, Inc. non-exclusive franchise as originally established by Ordinance No. 86-2500. As a result of the termination of the 3 % Ultra Com Franchise, the City charged Gold Coast a 4 % franchise fee on an amended all inclusive definition of gross revenues under Ordinance No. 93-2876. Consequently, Dade County started litigation claiming that they were entitled to receive the increased franchise fee percentage and not the City. Therefore, Gold Coast placed the 1 % in dispute into escrow (Bienstock and Clark Trust Account) until the litigation is resolved and the City began receiving 3 % of gross revenues from Gold Coast Cablevision on a quarterly basis. The Judge initially ruled in Dade County's favor in the lawsuit concerning the disputed 1 % franchise fee percentage. However, the City has appealed the Judge's decision and is currently waiting for the appeal to be heard as of the conclusion of this audit. Meanwhile, the Rifkin/Narragansett, South Florida CATV, Limited Partnership was purchased on 07/01199 by InterLink Communications Partnership, L.L.C.. Shortly thereafter on 09/15/99 Interlink was purchased by Charter Communications who also changed the cable television company's d/b/a name from Gold Coast Cablevision to Charter Communications. The City has begun preliminary negotiations with Charter Communications regarding the next cable television franchise agreement as the current fifteen year contract expires in February 2001. City Financial records show that the City received the following cable franchise fees since the fiscal year ending 09/30/98: FY 97/98* $409,935.08 FY 98/99 $487,427.29 * This figure was adjusted for year end accruals. OVERALL OPINION In our opinion, Charter Communications correctly calculated and paid in full their quarterly franchise fees, and was essentially in compliance with the requirements stated in the City ordinances. However, there were several items which could be improved prior to the next agreement to be executed in 2001. 2 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 A summary of findings is as follows: ..[ A late payment penalty and interest provision should be included in the next cable television agreement to protect the Ci~. .{ The cable operator did not submit the required CPA Statement of Gross Revenues. In addition, the contract requirement for this item should be amended to facilitate the usefulness of the comparison of the quarterly reported revenues. ..[ In the future, an updated copy of the required $50,000 indemnity bond must be furnished annually to the City for their approval. ..[ Charter Communications' insurance policy did not list the City as an additional insured. Also, the next cable television contract should require that the insured's company achieve at least a desired minimum rating and that a copy is furnished to the Ci~' s Risk Manager for approval. ..[ The hours of operation for the Miami Beach cable outlet were not in compliance to the cable agreement. This was immediately corrected by the cable operator during the course of our audit. ..[ The franchise areas in which addresses are placed should be reviewed for accuracy by Charter Communications since it can have an impact on the amount of revenues paid to the corresponding municipalities. .{ The next cable television franchise agreement should contain a provision requiring the franchise cable television operator to make all future payments on a monthly rather than quarterly basis. . ..[ The City's Finance Department needs to improve documenting the timely receipt of cable franchise payments. PURPOSE The purpose of this audit is to determine whether gross revenues, as defined by Ordinance No. 93-2876, were correctly reported for the computation of franchise fees, whether Charter Communications is remitting correct and timely franchise fees to the Ci~, whether sufficient records and insurance is maintained; determine their level of compliance with the terms of the applicable City ordinances, and whether revenues were correctly and timely recorded in the City Financial System. SCOPE 1. To confirm by examination of Charter Communications' books and records that they correctly 3 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 reported and timely paid all franchise fees to the City in compliance with the City ordinances. 2. To confirm that Charter Communications is maintaining the required records to support their quarterly payments to the City. 3. To confirm that Charter Communications has complied with all the insurance requirements. 4. To confirm that Charter Communications has maintained the required $50,000 Indemnity Bond. 5. To confirm those various customer protection provisions listed in the ordinance are satisfied. 6. To confIrm that all franchise fees were timely and correctly recorded in the City Financial System. SUMMARY OF FINDINGS AND RECOMMENDATIONS 1. Finding - Lack of Late Payment Penalty and Interest Provision None of the cable franchise ordinances provided contained a late payment penalty and interest provision, which is generally included in ordinances or agreements, to protect the City in the event that the remittances are received late. This issue was previously addressed in our prior internal audit report issued on 07/26/93. Our testing indicated that Charter Communications usually paid in a timely manner but in lieu of the large amounts paid quarterly, we believe that a late payment penalty and interest provision should be implemented. Recommendation It is recommended that the City include in the next franchise agreement to be implemented in 2001, a late payment statement detailing the applicable percentage of penalties and/or interest to be assessed. 2. Finding - Failure to Provide Annual C.P.A. Approved Statement of Gross Revenues Page 14, section 21 of Ordinance 86-2500 states that "A Company (Charter Communications) shall file with the City Manager, within ninety days after the expiration of its fiscal year or portion thereof during which its license is in force, a statement certified by a certified public accountant, showing the gross revenues, as defined herein, of the Company during the preceding fiscal year or portion thereof It shall be the duty of the Company to pay the City within fifteen days after the time for filing such statement, the sum prescribed above or any unpaid balance thereof for the fiscal year covered by such statements. An overpayment, if any, shall be credited toward the first quarter payment of the succeeding fiscal year." 4 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 Charter Communications claimed that they were unaware that this requirement was in the ordinance and that they had not complied with it. However, this issue was previously addressed in our prior internal audit report issued on 07/26/93 and the same response was received. Copies of Charter Communications' Consolidated Financial Statements were made available to us covering our audit period to compensate for this requirement. Yet the revenue totals included therein could not be used since they included revenues for all of Charter Communication's locations and operations and it was not possible to differentiate the gross revenues collected only on Miami Beach. Therefore, we were not able to ascertain whether the amount of gross revenues reported by the CPA was in agreement with the amounts reported directly by Charter Communications on the Miami Beach franchise tax returns. Recommendation It is recommended that this requirement, for the City to receive a Statement of Gross Revenues, be amended to require the cable company operator's certified revenues be broken out separately from the consolidated statements, that a quarterly breakdown of gross revenues be attached to facilitate review and audit, and that these statements be sent to the City on an annual basis. This requirement will also enable the Finance Department to easily ascertain the correctness of the amounts received to determine if a City Bill needs to be issued for any shortage. 3. Finding - Failure to Provide Indemnity Bond Page 12, section 18 of Ordinance No. 86-2500 states the following "Concurrently with the acceptance of its franchise, Company (Charter Communications) shall file with the City Manager, a bond with an acceptable surety or other guarantee acceptable to the City Manager in the amount of fifty thousand dollars to indemnify the City against any losses it may suffer in the event the _ Company fails to comply with one or more of the provisions of this franchise and to insurE- performance by Company of the terms of this franchise, specifically including the Service Standards which are set forth in Section 13 hereof The bond or guarantee shall be obtained at the sole expense of the Company and remain in effect for the full term of the franchise or any renewal thereof plus an additional twelve months thereof" Our research showed that the City had no knowledge of the existence of a $50,000 indemnity bond. Charter Communications furnished the required indemnity bond upon request and Internal Audit forwarded a copy to the City's Claims Coordinator. Recommendation In the future, an updated copy of the $50,000 indemnity bond must be sent to the City for their approval annually. 5 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 4. Finding - Insurance Shortcomings Ordinance No. 86-2500 section 11, paragraph 3c states that the City of Miami Beach should be named as an additional insured on the insurance policy. Yet the City's Claims Coordinator reviewed the insurance policy and found that it was not included. All the other required items listed in the ordinance were satisfactorily covered in the insurance policy. Also, the ordinance failed to state that Charter Communications' insurance policy should be furnished to and approved by the City's Risk Management Department. In addition, the ordinance fails to contain the standard language that the insured's company must be a B6 rating or better. Recommendation Charter Communications' insurance policy should be immediately amended to include the City of Miami Beach as an additional insured. Charter Communications should send the City an amended insurance policy for their approval. Also, the new cable television ordinance to be implemented in 2001 should address these insurance shortcomings. 5. Finding - Inadequate Hours for Local Outlet Page 6, section 13, paragraph d of Ordinance 93-2876 states that the "Franchisee shall maintain or contract for at least one billing payment and customer equipment location located in the City which will be open for transactions Monday through Friday from 8:30am to 5:00pm; at least one night Monday through Friday until 8:00pm; and on Saturday 9:00am until 12:00pm. " Charter Communications uses Le Parisian located at 1300 Lincoln Road as the local outlet to pay your cable bills and to return equipment. Equipment could only be rented at either Charter Communications' main office in North Bay Village or by calling in advance and making an . appointment. Le Parisian is open from 8:00am to 6:00pm Monday through Friday and closed on weekends. These hours of operation are in violation of the ordinance which states that they should also be open at least one weekday night until 8:00pm and on Saturday between 9:00am and 12:00pm. Charter Communications immediately adjusted their hours to be in compliance with the City Ordinance. Recommendation No further action is required. 6 INTERNAL A UDIT REPORT A UDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 6. Finding - Addresses Placed into Incorrect Franchise Areas Internal Audit reviewed Charter Communications' master listing of active accounts in January 2000. Our objective was to test the accuracy surrounding the placement of addresses into the appropriate franchise areas since it could greatly impact the corresponding franchise fees paid to the various municipalities and/or counties. Our findings revealed 74 Miami Beach addresses that were incorrectly placed into other municipalities' designated franchise areas. We also found a total of 157 addresses that were incorrectly assigned to Miami Beach franchise areas but were located outside the City's boundaries. A listing of the addresses placed into incorrect franchise areas was provided to Charter Communications so that the necessary changes could be implemented. Recommendation The aforementioned problems found during our audit and a thorough review of all franchise area's addresses should be conducted immediately. This will help ensure that the reported gross revenues amount and the corresponding quarterly franchise taxes paid are correct for all municipalities and counties serviced by Charter Communications. Also, a Charter Communications' supervisor should review all future new accounts to verify that their address was correctly coded with the correct franchise areas to prevent similar problems from recurring. 7. Finding - Monthly Remittances Page 14, section 21(a) of Ordinance 86-2500 states that "The franchise fee assessed shall be payable quarterly, on a calendar basis, to the City Finance Director's Office and the Company shall file a complete and accurate, verified statement of all gross revenues within the City during the period for which said quarterly payment is made, and said payment shall be made to the City _ not later than forty-five (45) days after the expiration of the quarter when due. ". Since these quarterly payments usually exceed $100,000, the City would benefit by receiving smaller monthly but more frequent payments from the next cable franchise operator awarded the contract. The increased costs involved in the processing of these additional payments would be outweighed by the interest earned from depositing these funds into the bank sooner. In addition, the City received only $102,078 for an entire year at the inception ofthe contract (FY 86/87) when the quarterly payments were authorized in the ordinance. However, the annual payments from Charter Communications have now grown nearly fivefold, lending credence to position that the City would benefit from receiving monthly rather than quarterly remittances. Recommendation It is recommended that the next franchise agreement require that these aforementioned quarterly payments be remitted on a monthly basis. 7 INTERNAL AUDIT REPORT AUDIT OF CABLE FRANCHISE FEES MARCH 6. 2000 8. Findin~ - Processing and Depositing Cable Franchise Payments The Finance Department's policy requires checks to be deposited into the bank on the same day that the check is received and processed by the cashier. If the checks were received late in the afternoon (after 2:00pm), then they would be deposited into the bank on the next business day. Internal Audit tested the receipt and processing of Charter Communications' quarterly payments and noted that some franchise reports lack proper evidence of time of receipt. As a result, we could not adequately test to determine if the reason that checks were deposited the next business day (following weekends), were because they were received after the 2:00 pm daily cutoff. Recommendations All cable franchise reports received should be initialed by the receiver and stamped with the RapidPrint machine to indicate the time and date received. This practice would allow for improved documentation for receiving and depositing the franchise checks. JJS:mc:lr (audit performed by Mark Coolidge and Laura Rubines) F:\BUDG\$AUD\DOC99-00\REPORliCABLETV.REP cc: Robert Parcher, Liason to the Cable Advisory Ad Hoc Committee Patricia D. Walker, Director, Finance Department Robert Dixon, Deputy City Attorney, Legal Department Clifton Leonard, Claims Coordinator, Risk Management Tony Bello, Gold Coast/Charter Communications General Manager 8