Office of the City Controller Interoffice To: Mayor Bill White From: Anise D, Parker City Council City Controller Date: 7130109 Subject: HASDC (follow-up to memo of 7/27/09) My office has concluded that the Houston Airport System Development Corporation (HASDC) need ‘not be included as a “Component Unit” in the City’s Fiscal Year 2009 Comprehensive Annual Financial Report (CAFR) or the Houston Airport System's Comprehensive Annual Financial Report ‘This decision was based on an extensive comparison of HASDC’s available financial records with the Financial reporting requirements mandated by the Governmental Accounting Standatds Board (GASB) and Generally Accepted Accounting Principles (GAAP). ‘The City's independent auditors coneur with this conclusion, tis clear thatthe City hes no financial liability for any of the activities in which HASDC is engaged. We have never disputed this fact. However, ths is not one of the tests applied in determining whether the organization is a “Component Unit” of the City. One of the main considerations is whether ‘excluding a potential component units financial statements might result inthe primary government's Financial satements being misleading or incomplete, At this time, we have concluded that this is not the ease and are excluding the financial statements in question from the City’s CAFR and Aviation’s annual report. We will continue to monitor this and at some point that may change. Finally, out review has uncovered some possible violations of Sections 7 and 11 of the Technical Services Agreement (TSA) between the City and HASDC. Section 7 specifies: 11 is understood and agreed that each of the partes hereto is independent of the other tnd that neither party is, nor shall be considered to be an agent, distributor, or representative of the other. Neither party shall act or represent itself, directly or by implication, as an agent ofthe other or in any manner assume or create any obligation ‘on behalf of, or inthe name of, the other ‘As noted above, HASDC is abiding by the requirement that it not create any obligation on behalf of the ts marketing materials, employee business cards, corporate logo and web site clearly ‘SDC is “aflilated with the Houston Airport System,” which ereates the perception that HASDC is a represenative of the City (examples attached),Section 11 specifies: ‘This Agreement is subject to the laws of the State of Texas, the City Charter and (Ordinances, the iaws of the federal government of the United States, and all rules and regulations of any regulatory body or officer having jurisdiction. Venue from any litigation related to this Agreement is Harris County, Texas. ‘This would seem to indicate HASDC must follow GASB and GAAP in preparation of its annual financial statements. ASDC, instead, adheres to the financial reporting standards of the various foreign countries in which its for-profit afitiates operate. These foreign reporting standards are cited by HASDC as the reasorit has been unable to obtain “unqualified” audit reports, If the TSA is to remair in effect as originally approved by City Council, and for the purposes of ensuring the transparency and independence City Council envisioned in creating HASDC. Sections 7 and 11 should be enforced, ‘The Controller's Office has an obligation co conduct its due diligence in preparation of the City’s Annual financial report. This task could have been quickly resolved had HASDC cooperated and released the information we needed when it was roquested. Instead, we were met with resistance and, ultimately, forced to get information from HASDC’s attomey. It was only after the issuance of my. ‘memo dated 7/27/09 that we obtained all ofthe information needed to fulfill our duties, I you have questions or concerns, please don't hesitate to contact me, Sincerely, Quechee Annise D. Parker City Controller Ce: Michelle Mitchell, Director, Finance Anthony Hall, Chie? Administrative Officer Michael Moore, Chief of Staff, Mayor's Office