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Comptroller labels Marketing’s payment system “arbitrary and self-serving”

Comptroller William C. Thompson, Jr. today called on the City to strengthen its oversight of the New York City Marketing Development Corporation, charging in a new audit that the corporation has established a payment system that is “arbitrary and self-serving.”

The audit, which covered July 10, 2003 to June 30, 2005, reviewed NYC Marketing’s system of reporting revenue and expenses and remitting excess revenues to the City and found that NYC Marketing owes the City nearly $236,000 in underpaid commissions from the sale of Snapple beverages on City property.

“NYC Marketing was created to generate additional revenue and resources for the City,” Comptroller Thompson said. Yet, “the City has failed to establish effective controls that would allow closer scrutiny of NYC Marketing’s cash position and operating needs. The absence of formal procedures and methodology constitutes a lack of effective oversight that would provide proper accountability of City funds.”

The City established NYC Marketing in July 2003. In March 2004, the City entered into a contract to retain NYC Marketing as the City’s exclusive marketing and licensing consultant.

From July 10, 2003 to June 30, 2005, NYC Marketing received a loan of about $1.2 million from the New York City Economic Development Corporation to cover expenses associated with its development and organization. During that period, NYC Marketing generated about $8.4 million in revenue and expended about $8.3 million.

From April 23, 2004 to June 30, 2005, NYC Marketing entered into marketing and licensing agreements with a potential value of about $159.1 million, including $76.1 million of cash payments (including $36 million in commissions from Snapple sales) and $83 million in other benefits, such as media and promotional advertising.

Recently, New York City Marketing scheduled a public hearing before the City’s Franchise and Concession Review Committee to request an amendment to its agreement with the Snapple Beverage Corporation. That amendment includes Snapple’s agreement to reduce the yearly case sale goal, which will result in a revised payment schedule for NYC Marketing. Accordingly, the City will receive approximately $33 million in potential revenue and other benefits.

The audit found that NYC Marketing has accurately reported its revenues and expenses, and that its expenses were valid. However, auditors noted several issues of concern.

For one, the City has not established formal procedures and a methodology that would allow it to closely monitor NYC Marketing’s financial activities to ensure that funds in excess of NYC Marketing’s cash operating requirements are paid to the City.

During the audit period, NYC Marketing had about $9.6 million available to fund its operation and expended about $8.3 million. NYC Marketing ended FY 2005 with a cash surplus of about $1.6 million. But OMB did not direct NYC Marketing to make any payment to the City.

Additionally, NYC Marketing did not fully compensate the City from the sale of Snapple beverages sold on City property and owes the City $235,834 in additional commission payments.

The Comptroller’s review of NYC Marketing’s financial reports found that from April 23, 2004 to June 30, 2005, NYC Marketing received $507,171 in commissions from Snapple, paid $35,502 to Octagon, Inc., a company retained to develop a vending machine program, and paid the City $235,835.

The Snapple agreement clearly states that NYC Marketing will receive the commission from Snapple “on behalf of the City.” But, according to NYC Marketing officials, once a payment of seven percent is paid to Octagon, the remaining amount is divided evenly between NYC Marketing and the City.

“This payment structure was not established under any agreements among the City, Snapple, or NYC Marketing,” Thompson said. “This method of compensation was determined by NYC Marketing and is arbitrary and self-serving.”

The audit recommended that New York City Marketing pay the City the full commission received as of June 30, 2005 (less the seven percent paid to Octagon) and remit the additional commission of $235,834 to the City, and pay all subsequent commissions it receives from Snapple to the City.

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