Part 5: The loss

5.1
On 19 February 2009, the Council announced that its loss associated with the LA Galaxy event was $1.79 million. Some costs have been finalised since then, and the amount of the loss has been adjusted to $1.88 million. Our audit work, which we outline below, confirms that figure.

Our audit work

5.2
We have reviewed the financial records for the event to provide assurance that the records are accurate, comprehensive, and complete. This work involved:

• reviewing a transaction report of revenue and expenditure for the cost code for the event for accuracy and completeness;
• reviewing revenue and expenditure against the budget for the event to identify significant variances, then analysing the reasons for those variations;
• getting independent confirmation of selected revenue and expenditure items from the ticketing agency and suppliers;
• reviewing the Council's work to identify any potential under- or over-expenditure through miscoding to other cost codes;
• detailed testing of a sample of expenditure items to verify the amounts recorded; and
• verifying with the ticketing agent actual ticket sales and the amount received by the Council.

5.3
Our appointed auditor reviewed the major variances in revenue and expenditure. We note these in paragraphs 5.4-5.13.

Reasons for the loss

Revenue was significantly less than expected

5.4
The success of the event depended on selling a significant number of tickets,⁶ with a large number of those being the higher-priced tickets, and keeping expenditure within budgeted amounts. The budget anticipated that a high proportion of seats in the East and West stands (the more expensive tickets with the highest yield) would be sold.

5.5
However, as noted in paragraph 3.80, the Council sold significantly fewer tickets than the number required to break even, and people tended to buy the cheaper tickets.

5.6
The result was that ticket revenue was $1,806,589 less than budgeted.

5.7
In line with the overall trend of fewer ticket sales than expected, income from sales of corporate suites and associated food and beverage packages was $180,954 less than the forecast revenue for those sales.

5.8
Cash revenue from sponsorship income was $210,000, which was $110,000 less than forecast. However, actual sponsorship was higher, because the $210,000 does not include "in-kind" sponsorships received, which offset expenses that the Council would otherwise have incurred.

5.9
Revenue for the event was $1,285,558 against an expected amount of $3,390,900. The overall result was that revenue was $2.105 million less than expected.

Expenditure was more than expected

5.10
Expenditure was much closer to the budgeted amount than revenue, but over by $257,059.

5.11
Expenditure associated with the match and the event for schools the day before the match was less than forecast. However, expenditure for other items was more than had been budgeted.

5.12
Expenditure on LA Galaxy's travel and accommodation was $186,344 more than budgeted, even with in-kind sponsorship for most of the accommodation costs. A contributing factor was the cancellation of the proposed match in Brisbane for LA Galaxy. Had that match proceeded, the Council would have shared LA Galaxy's airfares with the Brisbane hosts.

5.13
Expenditure on marketing, promotion, and public relations was $130,266 more than budgeted, because of the additional marketing effort to boost sales near the match day and to promote the offer of two tickets for the price of one.

Our audit conclusion

5.14
As a result of our audit work to quantify the loss, we concluded that the revenue and expenditure recorded in the Council's accounting records for the LA Galaxy event was materially complete, accurate, and valid.

Other contributing factors

5.15
The Council attributes the low ticket sales and consequent loss to these critical factors:

• ticket prices were too high;
• the marketing of the event did not achieve "cut-through" in the market place; and
• the Oceania "All Stars" included players who were not well known and the team was not considered a credible opponent for LA Galaxy.

5.16
Everyone we spoke to during the inquiry agreed that the ticket prices were too high and most agreed that the opposition team lacked appeal. There was some difference of opinion on the effectiveness of the marketing of the event, but we did not see it as necessary to consider that aspect.

5.17
Other contributing factors mentioned by those we spoke to were:

• the event was not novel – it had been done before in Wellington;
• the timing of the event was not ideal – it was too close to Christmas, and there were other major events in Auckland around the same time;
• there was less interest in corporate hospitality packages than expected because corporate entertainment budgets had already been committed for end-of-year events; and
• the downturn in the economy.

5.18
When putting the proposal to the Council in April 2008, council officers identified the main risks for the event as being lack of appeal to the public and tickets being too expensive. This proved an accurate assessment. Despite the efforts of the council officers involved, the Council did not manage to overcome these risks and run a successful event.

5.19
We conclude that the loss occurred because the LA Galaxy event lacked appeal to the public and took place at the wrong time for the wrong price. That view largely accords with the Council's assessment of the reasons for the loss.

Effect of the loss on ratepayers

5.20
In announcing the loss, the Council said that, because Mount Smart Stadium is a business unit of the Council, the loss would be "ring fenced" from ratepayers as a trading loss. This comment implies that the loss will not affect the Council's ratepayers.

5.21
We have considered this assertion in the context of the financial arrangements between the Council and Mount Smart Stadium, as described in Part 2.

5.22
Mount Smart Stadium's primary source of revenue is its commercial activities. It also receives an annual payment from the Council for its "public good" activities, which are therefore funded from rates. The Council told us that Mount Smart Stadium usually operates with positive cash flow. Although it made annual operating profits in the past, it has been unable to operate at a profit since the completion of the East Stand early in 2005.

5.23
The construction of the East Stand was funded by an internal loan to be repaid over 15 years (a term since extended to better reflect the expected life of the East Stand). Essentially, the Mount Smart Stadium business unit borrowed from the Council. The business case for the East Stand development envisaged that the improved facilities would generate extra revenue that would fund loan repayments. Mount Smart Stadium does not make regular loan repayments to the Council, but when it produces an annual operating surplus the loan balance decreases by that amount. When there is a net operating deficit, or there is capital expenditure, the outstanding balance increases.

5.24
Therefore, the loss arising from the LA Galaxy event is able to be "ring fenced" from ratepayers only to the extent that Mount Smart Stadium can recover the loss from its ongoing commercial activities.

5.25
However the loss is accounted for, in essence the net worth of the Council has decreased by $1.88 million. The loss affects ratepayers at least indirectly, even if it does not translate into a rates increase.

6: As noted in earlier in this report, council officers initially estimated a break-even point of 25,000 tickets, but at the time the USD currency options were purchased this had increased to 28,500 tickets. We have not calculated the break-even point based on actual expenditure.