Music Center refuses to turn over most of its records for county audit

An audit of the Music Center ordered by the Los Angeles County Board of Supervisors -- after financial difficulties at the downtown performing arts center -- was able to examine less than half of the center's spending because its leaders refused to turn over most of its financial records. 

The 16-page report issued Tuesday by John Naimo, the county’s auditor-controller, included a heading titled “limited access to records.” It said the Music Center parried a request for financial records of its fundraising, arts education programs and performances.

Instead, it allowed auditors to examine only books pertaining to the landlord-type functions such as maintenance and security at the performing arts campus, which the county funds with an annual allocation of about $25 million.

That position by the Music Center conflicts with written operating agreements between the Music Center’s private, nonprofit board and the county government, the audit report states. Those agreements give the county “the right to audit all transactions relating to the Music Center," report continued.

The supervisors called for the audit after reports earlier this year that the Music Center was struggling financially. A 50th-anniversary gala celebration in December 2014 had fallen short of fundraising goals, and subsequently the Music Center began to cut staff, slashed a much-praised program that sent teaching artists into public schools and saw most of its department heads depart.

Rachel Moore took office this month as the Music Center's new president after winding up her previous job as chief executive of American Ballet Theatre, succeeding Stephen Rountree, who left in January for a job with tenant Center Theater Group. Other top posts remain vacant, including vice presidents for programming, fundraising, education and marketing and communications.

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FOR THE RECORD

Oct. 21, 9:09 a.m.: An earlier version of this article referred to the former Music Center president as Richard Rountree.

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The auditor-controller’s recommendations to the Board of Supervisors include "requiring compliance with ... financial accountability provisions" in the operating agreements.

In a five-page written response issued along with the audit report, Howard Sherman, the Music Center’s chief operating officer, ignored Naimo’s assertion that the Music Center did not provide all of its financial records instead of just the ones involving county appropriations.

Absent those requested documents, the auditors focused on 40% of the Music Center's spending that is paid for by the county, out of $62.4 million in overall expenses for the fiscal year that ended June 30.

Within the narrowed scope, county auditors found several instances in which the Music Center couldn’t fully document how it had spent county money. The audit covered the Music Center’s three most recent fiscal years.

Though it pointed out flawed record-keeping and some questionable purchasing procedures by the Music Center, the audit also identified loose oversight by the county’s own administration.

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Auditors found that over the three years the audit covered, $2.3 million in county money was used for “administrative overhead” expenses that the county may not be obligated to pay under its written agreements.

Among the overhead expenditures that “appear questionable,” the report said, were $746,800 for legal fees, $332,000 for audit fees, $234,000 for search firms, $102,000 for business and employee meetings and $53,000 for catering -- none of which appeared to fall within the county's responsibility of paying for maintenance and security.

The report recommended that the Board of Supervisors decide whether the county wants to cover those kinds of costs and, if it’s willing to pay them, it should set up ways to clearly account for how “overhead” funds are spent.

The report questioned some of the Music Center's purchasing practices, including a failure to seek competitive bids. It said that the contract for custodial services has been awarded to the same provider since 1999, and that no other bids have been solicited since 2002.

The Music Center "does not have written procurement or contract solicitation policies and procedures," the audit report said, and the county government has not insisted that it submit its contracts for review "as required."

Sherman’s response to the audit report welcomed many of the recommendations but noted that factors “unique to our industry” require special flexibility. For example, he wrote, the Music Center can’t solicit competitive bids to get the lowest price when stage equipment suddenly fails and new gear has to be bought in time for a performance.

The county audit paid special attention to government funding of “administrative overhead” expenses and the Music Center’s use of a 5% “facility fee” that all ticket-buyers pay. The fees total about $3 million a year.

The audit said that written agreements call for the county to have “budgetary control” over how the facility fees are spent, but that it's unclear whether county officials signed off on such major policy decisions as devoting $13 million in past and future facility fees to retire construction bonds from a 2007 renovation of the Mark Taper Forum.

The audit said that going forward, the Music Center should seek county approval of its plans for spending the facility fees.

The audit covered the Music Center’s three most recent fiscal years, ending June 30, 2015.

In his letter responding to the audit report, Sherman acknowledged that “there are multiple areas where current practice differs from terms in the [written] agreements.”

But he suggested that the agreements, signed in 1963 and updated in the late 1970s, should be changed in ways that don't penalize the Music Center for addressing new operating realities that county officials have acknowledged.

“Our complex operating structure has changed significantly over the years….These agreements do not reflect additional services requested since then by the county,” Sherman wrote. “We look forward to working with the county to update our [agreements] to reflect…current budgeting and funding practice.”

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