Report 2012-117 Summary - March 2013
State Athletic Commission:
Its Ongoing Administrative Struggles Call Its Future Into Question
Our audit of the State Athletic Commission (commission) and the Department of Consumer Affairs (Consumer Affairs) highlighted the following:
- Because the commission's former executive officer did not promptly inform the commissioners of the commission's revenue deficiencies and the commissioners did not take prompt action, the commission ended fiscal year 2011-12 with a fund balance of just $23,000—enough to cover only three days of operating costs.
- The commission has no long-term plan to guide it into solvency. Its July 2012 solvency plan—intended to be a short-term effort to control costs—includes changes that may be impractical and too drastic.
- The commission failed in its responsibility to manage its financial and administrative operations.
- It did not adequately track information critical to develop and adhere to an annual budget and was likely not fully aware of how events it regulated affected its financial condition.
- It failed to ensure it receives all the revenue that it is due from taxes, assessments, and fees it assesses on event promoters and athletes.
- The commission lacks assurance that it has consistently protected the health, safety, and welfare of athletes as the law requires—many of the 12 event files we reviewed could not demonstrate that inspectors performed necessary regulatory functions at events.
- The commission has not effectively managed the Boxers' Pension Plan (pension plan).
- It has not ensured that the vast majority of boxers receive the benefits to which they are entitled.
- For at least the last five fiscal years, it failed to transfer pension plan revenue from the Boxers' Pension Fund into its higher-earning investment account.
- It spent nearly 88 percent of annual contributions on its administration from 2009 through 2011 when state law limits the administrative expenses to 20 percent of the prior two years' average annual contributions.
RESULTS IN BRIEF
The State Athletic Commission (commission) is one of 40 regulatory boards, committees, and bureaus within the Department of Consumer Affairs (Consumer Affairs). Generally, these entities regulate and license professional and vocational occupations to protect the health, safety, and welfare of the people of California. The commission has various responsibilities, including setting standards for amateur and professional boxing, kickboxing, and mixed martial arts, and issuing licenses to promoters, managers, referees, trainers, and athletes. However, its primary duty is to protect the health and safety of athletes by regulating approximately 200 combat events annually. The commission is also responsible for administering the Boxers' Pension Plan (pension plan). The commission is intended to be self-supporting—paying for its operations using taxes, assessments, and fees collected from the events it regulates.
Recently, the commission came perilously close to insolvency as a result of multiple factors, the most notable of which was a lack of effective management and communication on the part of the former executive officer. Not only did the former executive officer fail to accurately budget the commission's funds, he also did not promptly communicate with the commissioners about the commission's financial situation. Specifically, although Consumer Affairs stated that it notified the former executive officer of the commission's unstable financial condition as early as December 2011, he did not inform the commissioners of the commission's revenue deficiencies until April 2012. In part, as a result of his delay and of the commissioners not taking prompt action, the commission ended the fiscal year with a fund balance of just $23,000, enough to cover only three days of operating costs. Thus, the commission's lack of procedures delineating the role of the executive officer in communicating with the commissioners about critical administrative processes unquestionably contributed to its financial crisis.
In July 2012 the commission completed a solvency plan that detailed the steps it would take to avoid insolvency and create a healthy fund reserve through fiscal years 2012-13 and 2013-14. According to the director of Consumer Affairs, the commission intended the plan to be a short-term effort to control costs; however, the commission has no other plan that includes realistic actions to guide it into solvency over the long term. We are concerned that many of the changes the plan outlines may prove impractical and too drastic to sustain over time. For instance, the plan relies solely on the commission's ability to dramatically reduce its spending from approximately $1.83 million in fiscal year 2011-12 to nearly $1.2 million in fiscal year 2012-13. This represents a decrease of $635,000, or 35 percent—a drastic reduction.
The plan proposes to achieve these savings primarily through cuts to the wages and travel expenses the commission pays to the athletic inspectors (inspectors) who regulate events. To achieve these cuts, the commission does not intend to reduce the number of events that it regulates; rather, it plans to significantly decrease the number of inspectors at each event. According to the plan, whereas the commission previously assigned six to 12 inspectors per event, the plan now requires it to assign just three to five. However, the current executive officer believes that a minimum of five inspectors at each event is necessary to ensure athletes' safety, leading us to question whether the commission can provide an adequate level of oversight of events if it follows the plan. In addition, the plan completely eliminates training for inspectors, even though state law requires that inspectors receive such training six months prior to every event they regulate. Because of these and numerous other concerns, we do not believe that the commission can use the plan as a long-term solution to ensure its future financial stability.
The commission's near insolvency was undoubtedly in part the result of its failure to adequately track information critical to its ability to develop and adhere to an annual budget. For instance, the commission did not begin to consistently track the events it regulated and the associated revenue and expenditures until January 2013, leaving us to question how it could ever have developed reliable budgets. Moreover, because it lacked these data, the commission was likely not fully aware of how the events it regulated affected its financial condition, contributing to its expenditures exceeding its revenues. In fact, our estimates suggest that a significant number of the smaller events in the past may have cost the commission more to regulate than they generated in revenues. It is therefore critical that the commission track the information necessary to determine whether regulating certain events may cause it to exceed its available revenues.
Moreover, although the commission primarily generates its revenues from taxes, assessments, and fees it assesses on event promoters and athletes, it has failed to ensure that it receives all the revenue that it is due. In fact, our review of 12 event files for fiscal years 2010-11 and 2011-12 found that the commission failed to perform one or more critical functions related to each event, resulting in the potential loss of nearly $4,600. For example, although one of the inspectors' key functions at events is to calculate the revenue that promoters must remit to the commission, we noted a number of instances in which the inspectors either failed to perform necessary calculations entirely or performed them incorrectly. In addition, in some instances, the commission may have left itself vulnerable to human error or fraud. Specifically, the commission did not ensure that promoters submitted documentation supporting the information used to determine the amount of revenue the promoters should remit. Further, the commission did not appropriately track or handle the revenues it received.
Not only has the commission failed in its responsibility to manage its financial and administrative operations, it also lacks assurance that it has consistently protected the health, safety, and welfare of athletes as the law requires. Many of the 12 event files we reviewed lacked documentation critical to demonstrating that the commission's inspectors had performed necessary regulatory functions at events. For example, one file lacked evidence that an athlete had received a prefight physical. Further, more than half the files lacked documentation that inspectors had checked the athletes' equipment and gear and the safety of the cage or ring. Finally, the commission could not adequately demonstrate that it had consistently provided training to inspectors as required by state law until the current executive officer offered training in December 2012 and January 2013. As a result, the commission cannot be sure that its inspectors had the necessary knowledge to properly regulate events.
The commission has also failed to adequately administer its Neurological Examination Account (neurological account), which the Legislature established in 1986 to pay for neurological examinations that might detect physical conditions that could place athletes at risk for serious or permanent injury. Although the fund balance in the neurological account reached $712,000 as of June 30, 2012, the commission has not used the account to pay for examinations since at least 1998, stating that it could not do so because of the excessive cost of the examinations. Instead, it has used the neurological account only to pay for state operations, such as a portion of the salary and benefits of the staff person who is responsible for verifying the accuracy of the neurological assessment calculation. The commission is considering requesting legislation that would change its responsibilities related to paying for these examinations. However, until the Legislature makes such a change, the commission is failing to use the funds to fulfill the intent of the law.
Further, the commission has not effectively managed the pension plan, which the Legislature established to provide a modest amount of financial security to retired boxers. Specifically, the commission has not ensured that the vast majority of boxers receive the benefits to which they are entitled. From fiscal years 2002-03 through 2008-09, the commission failed to make any pension payments to eligible boxers or their beneficiaries, in part because it lacked a policy for locating these boxers. In 2009 it began to distribute payments; however, only 46 boxers' pension accounts were distributed, or 14 percent of those eligible, during 2009 through 2011. Moreover, for at least the last five fiscal years, the commission failed to transfer pension plan revenue from the Boxers' Pension Fund (pension fund) into its higher-earning investment account, resulting in potential lost earnings of about $20,000. Finally, although state law limits the amount the commission can spend on the pension plan's annual administrative expenses to 20 percent of the prior two years' average annual contributions, the commission spent nearly $256,000—about 88 percent of annual contributions—on its administration from 2009 through 2011. As a result of the commission's poor management, the pension plan is not fully meeting its intended purpose.
Over the past 10 years, a number of audits and reviews have noted serious deficiencies in the commission's administration, yet the commission has consistently failed to address these issues. We therefore question whether the commission will promptly and adequately address the serious concerns we raise in this report. Although the current executive officer, who assumed office in November 2012, has taken considerable steps to correct some of its deficiencies, the commission still faces significant obstacles—most notably a lack of sufficient staffing. The Legislature plans to conduct a sunset review of the commission in April 2013 to determine whether it should continue its operations. If the commission, with the assistance of Consumer Affairs, is able to develop and follow a plan to correct the issues we have noted, it may be able to demonstrate that it can operate effectively. However, if the commission is unable to make significant improvements within a specified time frame, we believe the Legislature should consider transferring the commission's responsibilities to Consumer Affairs.
To increase transparency and to ensure that commissioners provide a sufficient level of oversight over the commission's operations and budget process, the executive officer should work with the commissioners to establish written policies and procedures that delineate the executive officer's responsibilities related to communicating with the commissioners.
To ensure its future financial stability, the commission should work with Consumer Affairs to establish a long-term financial plan that sets a reasonable annual budget for expenditures, ensures that it can assign an adequate number of inspectors to each event, and provides sufficient funds for it to conduct required trainings for its inspectors.
To ensure that it adequately tracks the information necessary for it to establish and follow its budget, the commission should do the following:
- Develop and implement procedures and written guidelines for staff to follow so that it consistently tracks information related to all events and their associated revenues and expenditures.
- Once it has developed a reliable listing of the events it regulates, conduct an analysis to determine the manner in which events affect its financial condition. For example, the commission could compile the expenditures related to each event, including inspectors' wages and travel, and compare its expenditures to the revenues it received from each event. Although the commission may need to regulate small events to ensure that it meets its responsibilities, it should still consider the cost of doing so in order to ensure that expenses do not exceed the anticipated revenues.
To ensure that it accurately collects revenues, the commission should formalize policies and procedures directing inspectors to take the necessary steps to make sure they correctly and consistently calculate taxes, assessments, and fees in accordance with state law and regulations. The commission should also continue its efforts to ensure that promoters are aware of their responsibility to submit key documents that substantiate their payments.
To ensure that it maintains adequate documentation demonstrating that it has regulated events in accordance with state law, the commission needs to update its policies and procedures to ensure that inspectors prepare and submit key documents after events.
To ensure that inspectors receive training as required by law, the commission needs to conduct trainings every six months, or at least six months prior to a scheduled event.
To ensure that it uses the neurological account as the Legislature intended, the commission needs to conduct a thorough analysis that identifies the average cost of neurological examinations and the number of athletes whom it licenses. If, after performing such an analysis, the commission believes it cannot comply with the law as it is currently written, it needs to work with its legal counsel and the Legislature to determine a reasonable alternative use of the neurological account and propose statutory changes as necessary.
To operate the pension plan effectively, the commission should create policies and procedures for its administration that include steps for locating boxers and transferring funds into the investment account.
To comply with state law, the commission needs to limit its expenditures for administering the pension plan to 20 percent of the average of the prior two years' contributions to the pension fund.
To ensure that it addresses this report's findings in a timely manner, the commission should work with Consumer Affairs to develop an action plan to prioritize and resolve its most significant deficiencies within a specified time frame. If the commission fails to implement its plan by the time frame specified, the Legislature should consider transferring its responsibilities to Consumer Affairs.
The commission and Consumer Affairs agreed with our recommendations and indicated that they have begun implementing them.