Casa Loma Governance and Operations

Report - Casa Loma Governance and Operations
(http://www.toronto.ca/legdocs/mmis/2010/ex/bgrd/backgroundfile-31430.pdf)

Casa Loma Governance and Operations - Attachment 1
(http://www.toronto.ca/legdocs/mmis/2010/ex/bgrd/backgroundfile-31435.pdf))

EX45.54

ACTION 

Ward: All 

Confidential Attachment - 1 Litigation or potential litigation, including matters before administrative tribunals, affecting the municipality or local board

Origin

(June 11, 2010) Report from the City Manager

Recommendations

The City Manager recommends that:

1.            The General Manager of Economic Development and Culture initiate the dispute resolution process under the Management Agreement respecting all matters where the Kiwanis Club of Casa Loma has not met its obligations, including the requirements to submit by the dates currently agreed to by the City, all payments, reports, and interior restoration plans satisfactory to the City's Chief Corporate Officer.

2.            The General Manager of Economic Development and Culture notify the Kiwanis Club of Casa Loma that the City requires a written commitment by the end of July 2010 that the following actions will be undertaken:

i.              a joint staff working group be established, meet regularly and work with a management consultant as necessary to resolve the operational and financial issues outlined in this report;

ii.             the Board meet monthly for the balance of their term;

iii.            a financial plan satisfactory to the Deputy City Manager and Chief Financial Officer be developed by the Kiwanis Club of Casa Loma by September 30, 2010 demonstrating its ability to meet the obligations of the Management Agreement; and

iv.           the further actions outlined in the Confidential Attachment be agreed to;

3.            The Deputy City Manager and Chief Financial Officer undertake  an audit of Casa Loma operations and finances including how the Casa Loma Improvement Fund is managed to ensure that funds are being used as anticipated by the Management Agreement and that Casa Loma has the organizational and financial capacity to fulfill the terms of the Agreement; and

4.            If the General Manager of Economic Development and Culture is not satisfied that progress on Recommendations 1, 2, and 3 will result in moving toward implementation of the Strategic Vision, the appropriate City staff, in consultation with the City Solicitor, take steps to terminate the Management Agreement and recommend an alternative way of managing Casa Loma.

Summary

Casa Loma is a key asset of the City of Toronto and was managed for 70 years by the Kiwanis Club of Casa Loma (KCCL). The castle needed a facelift, new programming, and a new approach to integrating this grand estate into the surrounding neighborhood. The City began a 10-year restoration plan for the Casa Loma main building exterior in 2003. When its previous license was about to expire, KCCL proposed and Council adopted a Strategic Vision for Casa Loma, that included renovating the interior, rejuvenating the visitor experience, and introducing new programming and visitor amenities including food services. In the spring of 2008 Council approved the Management Agreement between KCCL and the City. The Agreement took effect on July 1, 2008 and requires KCCL to implement the Strategic Vision and to meet certain financial, planning and physical improvement obligations.

A joint Casa Loma Board was established in accordance with the Management Agreement to direct the operations of the estate administered by staff who are employees of KCCL (Board and staff together referred to as Casa Loma). The City appoints half of the voting members of the Board and 4 ex officio non-voting members. The Mayor appoints the Chair of the Board from among the members on the advice and recommendation of the President of KCCL. The Board is not a City board nor is it a separate legal entity from KCCL, but rather a committee of KCCL as KCCL retains the responsibility for meeting the terms of the Agreement. This is a unique governance model that is a hybrid between a private enterprise and a public sector board and is not subject to the usual requirements of a public sector entity. Council's objectives are met through the terms of the Agreement rather than any direct authority over the Board.

Entering into the Management Agreement, it was understood and expected that implementing the Strategic Vision would require a higher level of activity and a higher standard of performance than in the past. Nevertheless, in its first 2 years of operation, Casa Loma has missed a number of important deadlines, has not been able to make all of the required payments due to the City, and is far behind the schedule outlined in the Management Agreement for implementing the Strategic Vision. Casa Loma has advised that the recession and changes to tourist visits to the City have had an adverse impact on its operations and finances and therefore Casa Loma has had to draw from funds intended for enhancement of the estate to meet operating obligations. However, this situation was well known at the time that KCCL developed the Strategic Vision and committed to these financial obligations.

Over the past two years City staff have sought to provide assistance to Casa Loma including authorizing extensions to deadline dates; suggesting that Casa Loma look at alternative income opportunities, including recommending grant opportunities, and offering to assist with preparation and submission of applications; proposing the establishment of a staff work group to help Casa Loma address the challenges; and attempting to arrange governance training for the Board. The Mayor has also advised KCCL of the City's concerns over the slow progress toward achieving the Strategic Vision, concerns that governance practices do not meet the standard that the public would expect in operating a City facility, and the City's growing lack of confidence that Casa Loma can improve the situation. KCCL has not acknowledged that any significant action is necessary.

The Management Agreement lays out a process for conducting a review of the governance model at the end of 3 years of operation (July 1, 2011). The mechanisms for monitoring progress and holding the Casa Loma Board and KCCL accountable for implementing the Strategic Vision have worked effectively in bringing these problems to light at an early stage. After 2 years it is evident that the current model is not working to enhance Casa Loma as an attraction and there are indications that KCCL is not able to deliver the full extent of the obligations laid out in the Agreement. This report recommends a course of action to be undertaken immediately to prevent the situation from growing worse.

Financial Impact

Prior to establishing this new model for Casa Loma, the City received a share of the revenue from operations and also received property taxes. The new financial arrangement recognizes the need to put additional funding back into Casa Loma to bring it into a state of good repair and to implement the new Strategic Vision. The City contributes to this in 3 ways – first, by capping the payments to the City; second, by committing to use the funds for exterior restoration; and third, by forgoing property tax revenue and retaining that money in Casa Loma for implementing the Strategic Vision.

Under the terms of the Agreement, KCCL is to pay $800,000 to the City annually payable quarterly as a share of Casa Loma revenues. Council has committed to using these funds from Casa Loma toward the exterior restoration work. These funds are deposited into the City's Casa Loma Capital Reserve Fund (CLCRF) and used to pay for the exterior restoration work. The City's capital program totals $33 million, funded partially from the CLCRF and partially from debt.

In addition, the City applied for a tax exemption for Casa Loma and no longer receives property tax payments. Capping the City's share of Casa Loma revenue at $800,000 and foregoing the property tax revenue results in approximately $375 thousand less revenue for the City than in an average year prior to the Agreement. The City intended that these forgone revenues would be retained by Casa Loma and used toward the interior restoration work to implement the Strategic Vision. The Management Agreement requires that all Casa Loma net revenues, all ticket surcharges, and the property tax equivalent be deposited into the Casa Loma Improvement Fund (CLIF). The CLIF is to be used each year for the much-needed interior restoration to implement the Strategic Vision.

City's Exterior Restoration to Casa Loma

From the $800,000 due to the City for 2009, Casa Loma still owes the City $160,000. At the request of Casa Loma, the City agreed to defer this payment until July 2010. The first quarter 2010 payment of $120,000 has been received and another $200,000 is due at the end of June 2010.

The City has spent over $16 million from 2003 to 2009 for exterior restoration work on the main building. The Economic Development and Culture 10 Year Capital Plan (2010 to 2019) includes another $17.35 million gross for Casa Loma, funded by $9.193 million or 53% debt and $8.157 million or 47% from the CLCRF. This includes another $4 million to complete the restoration of the main building and funding to restore the remaining buildings and structures such as the stables. Completion of this work is dependent on securing $6.430 million in future contributions from Casa Loma ($800,000 per year). If these contributions are not made, the City's ability to complete the planned restoration work will be threatened and the ongoing integrity of the castle and other buildings affected.

Casa Loma's Strategic Vision

The Management Agreement outlines the interior restoration work that KCCL has committed to completing in the first 5 years. The plan is that KCCL will invest approximately $4.4 million in 2 phases - $1.6 million by July 1, 2010 and another $2.8 million by 2013. The intent was that Casa Loma would draw from the CLIF each year the funds necessary to complete the planned interior restoration.

However, in the first 2 years of operation, Casa Loma has had to use these funds to supplement shortfalls in operating revenue. Current budget projections show that a total of approximately $1 million should have been accumulated and used for improvements by the end of 2010 and $1.5 million by the end of 2011. Because the CLIF is being used to support operating shortfalls, the desired improvements are not being carried out and the balance available for improvements will only be $335,000 by the end of 2011. Although these shortfalls do not affect the City directly, they will affect the future maintenance and attractiveness of the site, and resultant financial viability.

Thus, the City has committed to its plan for exterior restoration, whereas KCCL's Strategic Vision is not being implemented due to financial and management difficulties.

As a result of the present financial situation and projected revenue shortfalls, it is recommended that the Deputy city Manager and Chief Financial Officer undertake an audit of Casa Loma operations and finances.

The Deputy City Manager and Chief Financial Officer has reviewed this report and agrees with the financial impact information.

Background Information