NPRI’s Transparency Project on the LVCVA: Detailed Report
The Nevada Policy Research Institute has made the issue of government transparency a top priority in 2008, as the issue has grown in prominence nationally and as the need for more transparency here in Nevada has become clear.
As a result of the issue's growing prominence, state-based think tanks all over the country – including NPRI – have been able to obtain national funding to pursue transparency initiatives at state and local levels.
The Las Vegas Convention & Visitors Authority is the recipient of approximately $227 million a year in hotel taxes generated in Clark County. The revenue is projected to increase to more than $305 million annually by 2012 as thousands of new hotel rooms are completed.
While the growth rate in tax collections will be tempered by the recession that is already impacting Las Vegas, the taxing mechanism is in place for the LVCVA to receive hundreds of millions of dollars in additional revenue over the next decade.
The hotel tax revenue dedicated to the LVCVA has triggered vigorous policy debate about whether a portion of future LVCVA revenue should be reallocated to other public uses. The ballot initiatives that were rejected by the Nevada Supreme Court on technical grounds are likely to be the first in a series of attempts to tap into this revenue.
Given the central role the LVCVA plays in Southern Nevada's economy, the Nevada Policy Research Institute decided to take a close look at the LVCVA's finances and operations. NPRI hired investigative reporter John Dougherty (InvestigativeMedia.com) to obtain and conduct an analysis of LVCVA internal records. Over the course of eight months, NPRI filed 16 public records requests seeking more than 60 different items. More than 10,000 pages of internal LVCVA documents have been reviewed, including line-item expenditures, internal audit reports and working papers, e-mails, travel expense reports, bonding documents and correspondence.
The investigation to date has focused exclusively on the acquisition and review of public documents. No interviews with LVCVA personnel have been conducted, beyond cursory discussions with LVCVA's attorney over the scope of the records requests. The LVCVA has provided most, but not all of the records requested. The LVCVA has not charged NPRI for the documents or for the time it has allocated to gathering, and in some cases, heavily redacting records.
LVCVA records that have been obtained reveal a pattern of extravagant spending, lax accounting, shoddy oversight and a disturbingly cozy relationship with major contractors. Internal LVCVA documents also raise serious doubt about the overall effectiveness of the $123 million-a-year advertising and marketing campaign. There is also evidence that state "Ethics in Government" laws have been violated on several occasions, and there is evidence of violations of the Advertising Agreement between R&R Partners and the LVCVA.
The LVCVA is a political subdivision of Clark County but operates as if it is a Fortune 500 corporation. LVCVA top officers travel in first-class luxury and its president, Mr. Rossi Ralenkotter, is paid $320,000 in salary and bonus incentives. State and county travel regulations require employees to minimize travel costs – a policy that is ignored by the LVCVA for its top executives. For example, LVCVA Vice President of Marketing Terry Jicinsky in April spent more than $11,500 for a weeklong trip to Dubai, including $9,000 in first-class airfare.#
Mr. Ralenkotter also enjoys frequent first-class travel, including a trip last spring to Maui. Of greater concern is Mr. Ralenkotter's willingness to accept free travel from companies that have business with the LVCVA. For example, Mr. Ralenkotter may have accepted airfare and hotel expenses from HNTB, a Kansas City design and construction company that has a contract to remodel the convention center. Accepting travel expenses from a company that has business with a public agency violates the state Ethics in Government law.
Extravagant spending and cozy relationships with contractors set the stage for more serious issues, particularly in the LVCVA's relationship with its largest subcontractor, R&R Partners. The powerful public affairs and advertising firm has received $398 million from the LVCVA over the last five fiscal years. R&R Partners' five-year contract expires June 30, 2009. The contract can be extended by five years on written approval by the LVCVA prior to March 1, 2009. R&R Partners has had the LVCVA advertising contract since 1980.
R&R Partners is the largest non-governmental beneficiary from the room tax. The LVCVA will pay R&R Partners approximately $87 million in FY2009 for its advertising campaign and other services. This is equal to the combined room tax revenue received by Clark County, Las Vegas, Boulder City, Henderson, North Las Vegas and Mesquite and significantly more than the $76 million received by the Clark County School District. A September 2007 LVCVA internal audit discovered R&R Partners breached its contract by having a subsidiary, R&R Live, bill the LVCVA outside of the terms of R&R Partners' 1999 agreement. The internal audit found widespread billing problems and concluded that R&R Live was operating without oversight. The LVCVA did not expand the audit to determine how much money R&R Live had overcharged the LVCVA since it was founded in 2000.
The failure to review R&R Live's billing practices is not surprising given the overall relationship between the LVCVA and R&R Partners. The LVCVA appears to have turned over the keys to the safe to R&R Partners. Indeed, literally, the LVCVA provided the rubber stamp of its finance director to R&R Partners to approve expenses above $500 without review by the LVCVA – another violation of the LVCVA's contract with R&R Partners.
Mr. Ralenkotter has also steered questionable work to R&R Live – work that could have been handled in-house. For example, Mr. Ralenkotter had R&R Live prepare his comments and a presentation to the LVCVA board of directors at a cost of nearly $142,000.
The LVCVA has also quietly entered into no-bid contracts for R&R Partners to provide a host of additional services paid through a monthly retainer that has nearly doubled since 2000 to $46,000. Meanwhile, William Vassiliadis, R&R Partners CEO, is steering millions of dollars of LVCVA-related business, including television advertisement production, to a company he owns called Airwave Productions. In December 2005, the LVCVA issued a $424,130 payment to R&R Partners based on a one-page invoice submitted by Airwave Productions seeking "Partial Advance Billing."
The troublesome nature of the intertwined relationship between LVCVA executives and subcontractors, particularly R&R Partners, is amplified by the extraordinary contract between R&R Partners and its largest subcontractor, Initiative Worldwide Media. This relationship appears to be in direct violation of the Advertising Agreement between the LVCVA and R&R Partners because of its secretive nature.
R&R Partners pays IWM approximately $40 million a year to purchase airtime on broadcast and cable television and radio stations. R&R Partners adds a 17.65 percent commission to IWM's cost when R&R Partners submits its invoice to the LVCVA. The troublesome part of this scenario is that IWM redacts its actual costs on invoices provided to LVCVA, making it impossible for LVCVA to know if R&R Partners is properly charging its commission.
Section 3.07 of the Advertising Agreement requires that "copies of all outside production invoices to Agency will accompany the bill to the Client. Each invoice will itemize time spent and charged during the month by agency function, media cost, production cost, taxes and all other items being charged against each project."
In addition, R&R Partners has other corporate clients that do business with IWM, posing a potential conflict of interest for R&R Partners when it represents the LVCVA's interests with IWM.
Properly charging commissions on invoices submitted to the LVCVA has been an ongoing problem for R&R Partners. LVCVA internal auditors discovered that R&R had been overcharging commissions for outdoor advertising – for years. R&R Partners was using the improper commission rate – a higher rate that had been lowered – and was basing the commission on gross rather than net. It is unknown how much money R&R Partners overcharged the LVCVA.
NPRI's review of the 2007 LVCVA internal audit of R&R Partners discovered problems with the audit itself. The audit stated it took a sample of R&R Partners' invoices greater than $500,000 from July 2005 through mid-March 2006. However, NPRI discovered that the audit excluded invoices from mid-December through mid-January. The LVCVA on Nov. 21 provided documentation of $978,000 in billings for December 2005 in response to NPRI public records request. The documentation included Airwave Productions' $424,130 invoice for future work cited above.
Problems at the LVCVA extend beyond its relationship with R&R Partners. The LVCVA's decision to purchase commercial real estate in 2006 and 2007 at the height of the real estate market raises questions of judgment. But setting aside the crystal ball on the direction of real estate values, there is clear evidence that the LVCVA paid well above market value on at least two purchases, including a $50 million deal to buy property that had sold for $33 million 18 months earlier.
In addition to the free trips and expensive travel cited above, Mr. Ralenkotter also appears to have used LVCVA funds for a banquet that had no direct connection to the LVCVA beyond bestowing an honor on Mr. Ralenkotter. A Denver research hospital selected Mr. Ralenkotter as the 2008 "Humanitarian" of the year.
The annual award is used as an excuse to host a fundraising dinner for the hospital, which included a Las Vegas showgirl paid for by the LVCVA. Mr. Ralenkotter used thousands of dollars of LVCVA funds to prepare for the dinner and allocated $25,000 in LVCVA funds as a sponsor for the event that benefited an out-of-state organization. At the very least this appears to be a serious ethical lapse, if not a violation of the state Ethics in Government law.
There also is evidence the LVCVA board of directors held a meeting outside of normally posted public meetings when a conference call was scheduled in March to discuss the hotel tax initiatives. Mr. Ralenkotter invited six of the 14 board members as well as one alternate to participate in the March 20 conference call. The LVCVA has not provided records related to who participated in the call and what was discussed.*
Finally, there is substantial evidence that the LVCVA's much ballyhooed marketing campaign (What Happens Here, Stays Here) has had little impact on increasing tourism to Las Vegas. While the slogan has gained national fame, R&R Partners' internal monthly tracking surveys show it has had virtually no impact since 2005 – and in fact, appears to leave more people with a negative impression of Las Vegas than a positive one.
The findings above need to be placed in the overall context of the LVCVA's spending. The LVCVA spent $123 million on marketing and advertising in FY 2008, approximately 40 percent of its budget. Of this, $87.2 million was funneled through R&R Partners. LVCVA's operation of the convention center and the Cashman Center accounts for only 16 percent of the LVCVA's expenditures at $45.2 million.
Declining revenue projections have already forced the LVCVA to scale back its $890 million remodeling project for the convention center. The LVCVA has also been forced to curtail capital projects because of the impact of the $300 million in state transportation projects the LVCVA must fund at a rate of about $20 million a year.
A detailed outline of NPRI's major findings follows this introduction. Each chapter of the outline is supported by links to documentation obtained from the LVCVA. The outline and records provide a solid foundation to continue an investigation into the LVCVA's operations.
The inquiry could profitably be expanded to look at the relationships between R&R Partners and the municipalities that also receive funding from the room tax. That would allow the public to more fully understand the political structure that now controls the collection and allocation of a tax that will soon reach $500 million a year.
LVCVA’s Relationship with R&R Partners
1. LVCVA Audit uncovers breach of contract
LVCVA Operational Issues
|1. $60 million in land deals as market peaks
2. Free trips, Dubai and Shanghai
3. Humanitarian spends lavishly on his award
4. Calling the board into secret session
5. Who needs studies on how we’re doing?
6. What is not going on here, stays here
NPRI’s Public Records Requests
|A look at the record||
About Investigative Media
John Dougherty's resume
NOTE: By clicking any of the blue links below, you can access supporting documentation for that particular itemized topic.
LVCVA’s relationship with R&R Partners
1. LVCVA Internal Audit Department’s September 12, 2007 report on the “R&R Advertising Agreement” finds that R&R Partners subsidiary, R&R Live, operated for more than seven years in “breach of contract”.
R&R Live submitted bills to the LVCVA outside the terms of the May 11, 1999 Advertising Agreement between LVCVA and R&R Partners. The advertising agreement was entered into between the authority and R&R Advertising or any related company or subsidiary. R&R Live is two-thirds owned by R&R Partners and one-third by Julie Gilday-Shaffer.
The LVCVA internal audit report concludes that the breach in the contract constitutes an “actual or likely violation of laws, regulations or control deficiencies that could result in significant loss to the Authority or result in bad publicity.” R&R Live violated numerous provisions of the Advertising Agreement and operated without LVCVA oversight. The audit found:
• R&R Live services and rates were not included in the advertising agreement.
• Commissions were charged on “estimated” cost of an event, not the actual cost of the event.
• Commissions ranged from 17.65 percent to 1,505 percent in the four R&R Live events that were audited by the LVCVA.
• R&R Live charged a commission on travel of 17.65 percent. Under the R&R Partners’ advertising contract, no commission is to be charged for travel.
• The daily rates for R&R Live personnel ranged from $286 to $1,144 and were not approved by the LVCVA. The majority of the daily rates exceeded the $70/hour rate normally charged by R&R Partners.
• R&R Partners approved R&R Live events. No evidence of LVCVA written approval of R&R Live events could be located.
• The LVCVA did not receive detailed backup of R&R Live invoices. In one instance, after reviewing the backup information, it was determined R&R Live had overcharged the LVCVA.
• LVCVA finance director Sue Covey approved R&R Live expenses exceeding $5,000, which is beyond her authority.
Despite the history of at least six years of contract violations, LVCVA did not conduct a complete audit of R&R Live billings to determine how much LVCVA had been overcharged since R&R Live was created in 2000.
• Beginning on July 1, 2007, LVCVA and R&R Partners agreed to process R&R Live hourly staff costs in accordance with the Advertising Agreement.
• LVCVA and R&R Partners agreed that R&R Live expenses for “hard costs” and productions charges would have a 17.65 percent markup – the same markup charged by R&R Partners.
• Backup of R&R Live invoices should be provided to LVCVA.
2. R&R Partners has a confidential contract with its largest subcontractor, Initiative Worldwide Media, which bills R&R approximately $40 million a year for the purchase of broadcast advertising. Initiative Worldwide Media does not disclose the cost of its media buys to R&R and the LVCVA, making it impossible to determine the amount on which R&R basis its 17.65 percent commission on bills submitted to LVCVA.
The omission of IWM’s media buys is in direct conflict with Section 3.07 of the Advertising Agreement between R&R and LVCVA. This section states “copies of all outside production invoices to the Agency (R&R) will accompany the bill to the Client (LVCVA). Each invoice will itemize time spent and charged during the month by agency function, media cost, production cost, taxes and all other items being charged against the project.”
Initiative Worldwide Media purchases domestic network and cable television and radio advertising time for R&R Partners. IWM is R&R Partners’ largest subcontractor, purchasing between $2 million and $4 million/month in advertising time. R&R Partners charges LVCVA a 17.65 percent commission on IWM’s media buys.
According to LVCVA internal auditor’s working documents obtained by NPRI through the Nevada Public Records Law, the contract between R&R Partners and Initiative is proprietary. IWM does not disclose the amount it pays to purchase advertising time on radio and television stations on its invoices submitted to R&R Partners. Nor is this information disclosed to LVCVA when R&R Partners submits its invoice. R&R Partners is paid a commission based on the value of IWM advertising buys.
Since R&R Partners charges LVCVA a negotiated rate with IWM plus a 17.65 percent commission, R&R Partners has a disincentive to make sure it has negotiated the lowest market rate. In addition, since R&R Partners has a proprietary contract with IWM for other clients, there is also the possibility that R&R Partners could shift higher costs to the LVCVA in exchange for more favorable terms with IWM for non-LVCVA clients.
Internal LVCVA audit department documents show:
• May 11, 2006: LVCVA finance director Sue Covey sends an e-mail to LVCVA internal auditors concerning her discussions with R&R Partners’ billing supervisor, Kristi Larsen. “I asked her about the IWM billing amounts that are whited out.”
Ms. Larsen replies, stating IWM “has been doing this for years. Basically, due to their confidential disclosure, they are able to keep LVCVA from knowing what they are paying the station.”
In the same e-mail, Ms. Covey notes: “On the other hand, our international media buyer, CARAT, does disclose their fees.”
• July 7, 2006: LVCVA auditors meet with R&R Partners billing personnel and tell R&R Partners they want to know why there is a “lack of disclosure from the stations on Initiative’s bills.”
• July 31, 2006: Steve Jaffe, R&R Partners director of media, sends an e-mail to the LVCVA’s Ms. Covey stating that he has met with LVCVA senior audit manager Jon Reese to discuss “the non-disclosure contract with Initiative.”
• Aug. 22, 2006: Jim King, R&R Partners chief financial officer, states in a letter to Mr. Reese in reference to R&R Partners’ contract with Initiative Worldwide Media: “I respectfully request that this document be kept confidential. As you know our negotiated rates with Initiative are proprietary and this agreement is not exclusive to the LVCVA but applies to our overall relationship with Initiative.” (Emphasis added)