Auditors flag financial math at Lansdowne
`We disagree with some of the accounting done' on complex `waterfall' arrangement
The auditor general's office found lapses in the city's oversight of the Lansdowne Park “waterfall” financial scheme on Tuesday before council considers extending the deal with the Ottawa Sports and Entertainment Group by 10 years.
Council was originally scheduled to consider the contract extension Wednesday, but Mayor Jim Watson has proposed pushing the decision to Dec. 9, giving councillors more time to reflect on the proposal and the audit on the financial scheme.
If there's one thing everyone at city hall seems be in agreement with when it comes to Lansdowne, it's that the waterfall is soaked with complexity. Auditor general Ken Hughes even brought in external auditors to help pick through the financial arrangement.
The waterfall describes the cash flow priorities in the Lansdowne partnership. Money pours into the waterfall and accounts fill up across six levels. One level can't receive a contribution until the previous level receives the required contribution.
The audit warns that the city needs to have close oversight of the financial framework to make sure OSEG can continue meeting its contractual obligations.
Auditors found a few anomalies in how the waterfall funds were being calculated.
OSEG's additional equity was overstated by $6.5 million in the scheme, which on paper could bring an additional $14 million to the company over the agreement since there's eight-per-cent interest earned on the equity, auditors discovered.
Auditors, who tied the discrepancy to the accounting of a loan related to repairing the steel in TD Place arena, concluded “there is currently no cash outflow consequence to this error,” but leaving the mistake unchanged could create a barrier to correcting it in the future.
The audit also found that the interest on OSEG's minimum equity for 2012 and 2013 were overstated by a total of $944,022.
Hughes characterized the anomalies as differences in interpretation of the Lansdowne agreement.
“We are not saying that OSEG is not performing to the contract,” Hughes said, noting that auditors looked into the numbers in greater depth than others have done. “We are saying we disagree with some of the accounting done on the waterfall.”
City finance managers defended their oversight of the Lansdowne agreement, pointing out that the city hired Ernst & Young for its own study of the numbers covering the years between 2012 and 2017, and the firm already made findings.
On the other hand, Hughes was quick to point out that Ernst & Young didn't do a full-blown audit.
City management agreed with all 11 recommendations that were in the audit by Hughes's team. They largely relate to closer monitoring and better verifications of the financial data.
The city isn't projected to make any money on the 30-year agreement. OSEG has been paying millions more than originally thought when it signed the Lansdowne deal with the city in 2012, which is why it wants a longer contract term in an attempt to recoup some of its investment, which is closing in on $200 million.
The company is projected to receive a return of $216.5 million over the 30-year agreement. A 10-year extension pushes OSEG's expected return to $468.4 million over 40 years.
OSEG also wants access to $4.7 million in an account reserved for asset maintenance, which is the first priority level of the waterfall. OSEG wants the money to help offset operational losses during the COVID-19 pandemic.
The current expiry date for the Lansdowne agreement is Dec. 31, 2044.
OSEG has said it's under financial pressure during the pandemic since, with sports not happening at TD Place, revenues have dropped off. The company, however, flagged fiscal concerns before the pandemic.
If council agrees to help OSEG, a new round of consultations would be launched in the coming months as the city and OSEG consider other ways to restructure the contract and plot the future of Lansdowne.
City chief financial officer Wendy Stephanson said there's a “very large team across the city” that manages the oversight of various aspects of the Lansdowne agreement.
“Yes, it's complicated, but we have processes in place to deal with that,” Stephanson said.
The complexity of the Lansdowne deal wasn't lost on councillors.
Quipped Kavanagh, “I'll never think about waterfalls the same way again.”
Coun. Shawn Menard, who represents the Lansdowne area and has been highly skeptical of the public-private partnership, said the city should pause before considering an additional 10 years on the contract since auditors have identified deficiencies in the oversight of the waterfall scheme.