RON GALPERIN

CONTROLLER

June 16,2014

City Councilc/o City ClerkRoom 395, City Hall

Dear Honorable Members of the City Council:

Attached, please find follow up correspondence to the Controller's report entitled "Auditof the Los Angeles Department of Cultural Affairs 1% for Arts Program," released earlierthis year (C.F. 14-0464).

Sincerely,

(ia;.R BuJ:dCLAIRE BARTELSChief Deputy Controller

AN EQUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

200 N. MAIN STREET, SUITE 300, LOS ANGELES, CA 90012· (213) 978-7200' CONTROLLER.LACITY.ORG

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RON GALPERIN

CONTROLLER

June 13, 2014

Matthew RudnickInterim General ManagerDepartment of Cultural Affairs201 N. Figueroa Street, Suite 1400Los Angeles, CA 90012

Dear Mr. Rudnick:

SUBJECT: EVALUATION OF ACTION PLAN- AUDIT OF THE LOS ANGELESDEPARTMENT OF CULTURAL AFFAIRS' 1% FOR ART PROGRAMS

In connection with the report entitled, "Audit of the Los Angeles Department of CulturalAffairs' 1% for Art Programs" issued on April 11, 2014, we have evaluated theDepartment's action plan for the report's 19 recommendations. We are pleased that theDepartment agrees with all of the recommendations and has taken actions to implementthem.

Based on the responses and timelines, we consider four recommendations (#9, #13,#14, and #17) to be Implemented, nine (#1, #2, #3, #4, #6, #7, #8, #11, and #12) to bePartially Implemented, and six (#5, #10, #15, #16, #18 and #19) to be Not YetImplemented. We accept the statuses. However, we have comments onRecommendations #11 and #12.

AN EQUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

Recommendations #11 and #12

The recommendations state:

#11 Cultural Affairs Management should comply with the Municipal Code and providethe updated fee rates to City Council for consideration.

#12 Cultural Affairs Management should work with the City Administrative Officer andCity Council to evaluate whether the 1% cap should be reassessed.

200 N. MAIN STREET. SUITE 300, LOS ANGELES, CA 90012 • (213) 978-7200 • CONTROLLER.LACITY.ORG

Matthew Rudnick, Interim General ManagerJune 13,2014Page 2 of 3

We made these recommendations because the Department has not updated the ArtDevelopment Fee rates in the Municipal Code to reflect the changes in the ConsumerPrice Index (CPI), which has increased 58% since 1992. Adjusting these amountscould potentially increase the amount of Art Development Fee revenues the Cityreceives.

Impact Analysis Data Source

Your response states that the Department completed an analysis of the updated CPI,which is currently being considered by the City Attorney's Office. We reviewed theanalysis and noted that the "construction cost for building use type" is based on ReedConstruction Data. Since the City's Department of Building and Safety (DBS) isresponsible for maintaining construction cost data and periodically updating its ratesbased on the CPI, we encourage you to obtain these amounts from DBS to ensure theyare consistent with City data.

Consumer Price Index and 1% Valuation Cap

Your response also indicates that updating the CPI rate would not "necessarily generatesubstantially more revenues for public art programs because in most cases, the 1% caprate would be lower than the higher per-square-foot rate" (the fee charged is the lowerof a per-square-foot amount or 1% of the valuation of the property). However, theDepartment's analysis shows that for three of the five examples, the CPI adjusted feeper-square-foot rate would actually be less than the 1% cap rate. The manufacturing,warehouse and hotel building use type examples would each be lower by significantamounts.

Impact Analysis Conducted by the Department of Cultural Affairs

Office or Retail Manufacturing Warehouse HotelResearch

Construction Cost in LA $180.89 $131.24 $136.90 $112.39 $190.83for Building Use Type

Sample Sq. Footage for 91,750 8,000 60,000 30,000 292,500Building Use Type

Sample Valuation $16,596,658 $1,049,920 $8,214,000 $3,371,700 $55,817,775

Fee Based on 1% $165,967 $10,499 $82,140 $33,717 $558,178

Fee Based on 2% $331,933 $20,998 $164,280 $67,434 $1,116,356

Non-CPI Adjusted Fee $144,048 $10,480 $30,600 $11,700 $152,100per Sq. Ft. (1992)

CPI-Adjusted Fee per Sq. $235,203 $17,112 $49,964 $19,104 $248,351Ft. (2013)

As shown below, the analysis also illustrates that adjusting the per-square-foot ratewould increase Art Development Fee revenues, in some cases by 63%. For example,

Matthew Rudnick, Interim General ManagerJune 13, 2014Page 3 of 3

in the Hotel Building Use Type example, the fee based on 1% of the valuation would be$558,178. However, the non-CPI adjusted fee would be $152,100, which would be thefee charged, since it is the lower of the two. If the City had adjusted the fee each yearby the CPI, the fee would be $248,351 or 63% higher.

Auditor Observations of Impact Analysis

Office or Retail Manufacturing Warehouse HotelResearch

Additional PotentialRevenue $21,919 $19 $19,364 $7,404 $96,251

wI Adjusted CPI

% 15% 0.2% 63% 63% 63%

Based on our review of the impact analysis, we encourage you to reconsider the dataused, as well as the potential revenue increases that could result by adjusting the per-square-foot rates by the CPI. In addition, updating the rates is required by the MunicipalCode, and it would take minimal resources to calculate the new rates.

Also, since the Nexus Study conducted in 1991 concluded that the City would bejustified in using a rate as high as 3.74% of the valuation, we encourage you tocomplete the assessment of the current 1% valuation cap to determine if it is stillreasonable.

Our evaluation was based solely on assertions made by your Department. The resultsof our evaluation may have been different if we had applied more extensive procedures,such as detailed audit tests. As part of my Office's follow-up program, we may requestfuture status reports to ensure that the outstanding recommendations continue to beaddressed.

If you have any questions, please contact Farid Saffar, Director of Auditing atfarid.saffar@lacity.org or at (213) 978-7392.

Sincerely,

CLAIRE BARTELSChief Deputy Controller

cc: Felicia Filer, Director of Public Art

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FORM GEN. 160 (Rev. 6-80) CITY OF LOS ANGELESINTER-DEPARTMENTAL CORRESPONDENCE

Date: May 12, 2014

To: Ron Galprin, Controller200 N. Main StreetCity Hall, Suite 300Los Angeles, CA 90012

From: Joe Smoke, Acting General ManagerDepartment of Cultural Affairs

Subject: Report Back on the Controllers Audit of the Department of Cultural Affairs 1%for Art Programs

The Department of Cultural Affairs has reviewed the Controllers Audit of thedepartment's 1% for Art Programs and welcomes the report. The report correctlycharacterizes the challenges the Department has faced since 2007 to specificallydeploy the arts-dedicated development fees.

The department appreciates the Controller's collaborative approach in working withDCA, the City Attorney's Office and Chief Legislative Analyst to develop a path touse the arts development fees with greater flexibility for the public benefit. Thisincreased flexibility will expand the department's ability to support publicallyaccessible art and cultural programming in Los Angeles.

DCA looks forward to implementing the Controller's five (5) key recommendations,which are:

1) The Department of Cultural Affairs should solicit feedback from developers - andfrom local stakeholders and arts community representatives to better improveassessment, collection, and programming;

2) The method used to calculate the Arts Development Fee (ADF) rate per squarefoot is supposed to be adjusted annually based on the Consumer Price Index(CPI), but has not been updated since the program's inception more than 22years ago. The CPI has risen 58% in that time.' Adjusting the fees couldgenerate substantially more revenues for public art programs.

3) For developer-led projects, the Department of Cultural Affairs requires either aletter of credit of a certificate of deposit, with the City as beneficiary, to essentiallyguarantee the developer's promise to incorporate 1% of a project's permitvaluation as on-site art. This process, along with the forms used, needs to beevaluated and more consistently applied.

4) The Department of Cultural Affairs should submit regular plans for the use of allPWIAP and ADF funds to the Cultural Affairs Commission, the Mayor and theCity Council for review and approval.

5) An accounting system must be put in place to properly allocate interest earnings.

Below is a brief summary of the actions the department has taken or will take toimplement these recommendations. The summary is provided as an Audit ActionPlan that describes the actions the department has taken or will take to implementboth the 5 key recommendations and the other key findings presented in theController's Accountability Plan.

Recommendation No.1: The Department of Cultural Affairs should solicitfeedback from developers - and from local stakeholders and arts communityrepresentatives to better improve assessment, collection, and programming.

The Department understands there are many different stakeholders relative to theArts Development Fee Program. Since the release of the Controller's report on April11, 2014, the department has met twice with the Office of the City Attorney to concuron a new legal interpretation of the way ADF funds can be deployed. One of thosemeetings included representatives from the Chief Legislative Analyst's Office. TheCity Attorney's new determination for the use of the fees provides more flexibility forhow the department can use the fees to support publicly accessible art and culturalprogramming. The City Attorney has also recommended that a larger, intra-departmental working group be established to further develop the ADF Programparameters ..

The department has begun drafting new administrative guidelines, in concurrencewith the City Attorney's Office. The new guidelines yvill codify how the paid-in ADFfunds may be spent, including resolving any discrepancies in the relevant sections ofthe Administrative Code and Municipal Code related to the type of arts services andprograms for which the ADF funds can be used, as well as the cultural-geographicparameters of usage.

Once the new guidelines have been drafted, the department will survey each CouncilOffice to determine how or if ADF funds might be used for arts-related districtpriorities. DCA has already sent letters to each Council Office anticipating thisprocess.

The department is also committed to convening at least one focus group withdevelopers experienced with the Arts Development Fee program, local stakeholdersand representatives from the arts community. The department would prefer to beginthis effort once the new guidelines are drafted and a new General Manager for theDepartment is on board.

Recommendation No.2: The method used to calculate the Arts DevelopmentFee (ADF) rate per square foot is supposed to be adjusted annually based onthe Consumer Price Index (CPI), but has not been updated since the program'sinception more than 22 years ago. The CPI has risen 58% in that time.Adjusting the fees could generate substantially more revenues for public artprograms.

The department acknowledges that the ADF rate per square foot calculation has notbeen adjusted annually based on the Consumer Price Index (CPI). To comply withthe Municipal Code, that department recently performed an impact analysis of

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updated ADF fee rates. The ordinance requires that a developer pay an arts feeequal to 1% of the projects permit valuation, or a set per-square-foot-rate, whicheveris less. The impact analysis revealed that adjusting "the per-square-foot rate by anupdated CPI rate would not necessarily generate substantially more revenues forpublic art programs because, in most cases, the 1% cap rate would be lower thanthe higher per-square-foot rate. '

The department presented these findings to the City Attorney's Office and the ChiefLegislative Analyst at a recent meeting. The City Attorney's Office is considering theappropriate methodology for updating the ADF rate structure. DCA will present thisinformation and associated recommendations to City Council and the CityAdministrative Officer to evaluate whether the 1% cap should be reassessed.

Recommendation No.3: For developer-led projects, the Department of CulturalAffairs requires either a letter of credit of a certificate of deposit, with the Cityas beneficiary, to essentially guarantee the developer's promise to incorporate1% of a project's permit valuation as on-site art. This process, along with theforms used, needs to be evaluated and more consistently applied.

The department has reviewed the language in the developer-led Arts DevelopmentFee Introduction and Sample Documents, including the template for the financialcollateral instruments provided by developers, and the Letter of Agreement enteredinto with developers to begin a developer-led art project.

The department is proposing to update project deliverable and project completiondates and terms in the Letter of Agreement template to ensure developer-led artproject deadlines and requirements are met and enforced. Additionally, thedepartment proposes to update the language in the" standard template for the Letterof Credit and Certificate of Deposit to state: "Payable to the City of Los AngelesDepartment of Cultural Affairs". DCA will present these proposed changes to the CityAttorney for review and approval.

Recommendation No.4: The Department of Cultural Affairs should submitregular plans for the use of all PWIAP and ADF funds to the Cultural AffairsCommission, the Mayor and the City Council for review and approval.

The Department has been working with the City Attorney's Office to expand the useof the paid-in fees. Once the expanded uses have been framed, the department willsurvey each Council Office to determine how or if district arts priorities may besupported. From this research, citywide, regional and neighborhood expenditureplans will be developed and presented to City Council for consideration.

The Public Works Improvements Arts Program funds are retained and spent directlyby the originating department on the public art projects administered by theDepartment. Accordingly, expenditure reports for the PWIAP projects are generallyincluded in the overall construction project reports prepared by the initiatingdepartment However, DCA will prepare an annual "status report" on the public artprojects underway for the Cultural Affairs Commission, Mayor's Office, and CityCouncil to review. The Department will work with the Chief Administrative Officer todetermine the appropriate methodology for presenting this information to CityCouncil.

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Recommendation NO.5: An accounting system must be put in place toproperly allocate interest earnings.

The department is working with the City Attorney's Office to determine how toallocate the interest income earned on the fund balance. The City Attorney will alsoprovide legal advice on the eligible uses and restrictions associated with the interestincome. Once a determination has been made, the department will present theinformation and associated recommendations to City Council and the CityAdministrative Officer.

Please contact Felicia Filer at (213) 202-5547 if you have any questions or requireadditional information.

Attachments: Audit Action Plan Chart

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