Taxpayers missed out on millions in revenue from L.A. County Fairgrounds, audits find

Taxpayers have been denied millions of dollars in revenue from the Los Angeles County Fair Assn. because the private nonprofit did not pay enough rent for the publicly owned land it operates on, even as it granted its executives rich compensation packages, state and county audits have found.

The separate, critical reviews determined that the county has been losing as much as $1 million a year in unpaid rent from a hotel and conference center and other enterprises the nonprofit association runs at the Fairplex property in Pomona.

The auditors said the county, which leases the land to the association, should seek payment of back rent from the organization. State auditors said the county likely gave up more than $6 million in total rent that it should have received since 2005 under a lease agreement approved by the Los Angeles County Board of Supervisors.

“Failure to collect all rent due under the terms of the lease allowed the association to retain revenue it otherwise would have owed the county and thus potentially contributed to the association’s ability to pay its executives such high salaries,” the state audit said.

Both audits grew out of a Times investigation last year that reported the association had paid its executives far more than other fair managers in California earn, while showing annual losses on its federal tax returns and drifting from its mission to promote local agriculture.

In 2014, the association’s chief executive, James Henwood Jr., received more than $1 million in salary, bonuses and benefits, tax records showed. Four of his managers received total compensation that year ranging from about $313,000 to $455,000, according to the records.

Henwood and other fair representatives defended the pay levels, saying they reflected the executives’ duties in running a collection of businesses in addition to the annual county fair.

Amid mounting criticism from elected officials, and after the audits began, Henwood resigned last March, saying he had “become a distraction.” He had led the organization for two decades.

Assemblyman Freddie Rodriguez (D-Pomona), who called for the state audit that was released Thursday, said in an interview that he was shocked by the findings.

“I practically fell out of my chair,” said Rodriguez, pointing to the conclusions that the association has received $15 million in public funding and other assistance for the past decade.

Rodriguez said the compensation practices show the executives “pay themselves what they want. I’m just — wow. It just comes back to this organization operating in a way that’s obviously quite clear and evident that they’re in it for themselves.”

The fair association said in a statement that it was pleased that auditors found that its finances were healthy, despite the several years of losses reported on its tax returns. The association said any conclusion that it paid too little rent under the terms of its lease with the county was “demonstrably wrong.”

The organization also said it continued to believe its salaries were appropriate but “had taken steps to reduce the compensation package of the CEO.” The statement did not provide specifics.

In written responses to the audits, an attorney for the association said auditors were wrong to conclude that the organization had not paid reasonable rents. The attorney, George Kieffer, noted that the association once owned the roughly 500-acre property and deeded most of it to the county in the 1940s so that it could serve the public interest. He said the rent payments were based on long-standing agreements with the county.

Renee Hernandez, an association spokeswoman, said in an email, “The state auditor’s attempt to reinterpret the lease at this point is not only wrongheaded, but grossly unfair.”

In a statement, State Auditor Elaine Howle said the county bears some of the blame for the loss of revenue from the fair operation.

“The county has exercised weak oversight of its lease with the association,” Howle said. “… Although the association owns a hotel that operates on county-owned land, the county allowed the association to exclude its hotel’s revenue from its rent calculation for reasons that the county cannot adequately explain.”

According to the state audit, the county’s failure to actively monitor its lease allowed the association to exclude from the calculation of rent payments revenues from the hotel, which opened in 1992.

The state auditors said the fair association has avoided paying any rent by repeatedly restructuring the debt on its hotel. The state also found that the county has not received rent for the 4-year-old conference center next to the hotel. The county has awarded the fairgrounds $12 million in rent credits to help cover construction costs of the center.

The fairgrounds said it restructured the debt to obtain lower interest rates.

County Auditor-Controller John Naimo said in his report the current way the rent payments are calculated for the fairgrounds “could also be perceived as a public subsidy” to the association.

On top of that, Naimo wrote that the association gives its members and board of directors thousands of dollars in meals and entertainment. Based on a review of one month of expenses, county auditors estimated the annual amount for those expenses was about $360,000 — a sum greater than the annual rent payments the county has received in each of the last several years. The fair association said the expenses were justified in making business connections and that the actual amount of expenses actually averaged $250,000 each year between 2012 and 2014.

Members of the board of directors also receive a $6,000 annual stipend, tickets to the fair and concerts held at the fairgrounds, and access to a private dining room and lounge where food and drinks are provided for guests. The county auditor said new, reasonable guidelines should be adopted for such expenses and executive compensation, given the fairgrounds’ status as a nonprofit and a county partner.

County Supervisor Hilda Solis, whose district includes the fairgrounds, said in a statement that the county audit showed “oversight of the lease agreement with the Fair Association was poor.”

“Moving forward, it will be important for the county and the fair to work together and consider reasonable guidelines for the compensation of the fair’s executives.”

Rep. Norma Torres (D-Pomona) said in an email to The Times that the audit findings were “disheartening but not surprising.”

“While the Fair Association is receiving tax breaks and preferential tax status, it is also getting out of paying millions that are rightfully owed to L.A. County,” she said. Torres said the findings show the association’s “focus on enriching itself comes at the expense of taxpayers and the well-being of surrounding communities.”

Torres has called for an Internal Revenue Service audit of the association. IRS spokespersons have declined to say if the agency is conducting such an audit.

Auditors also rebuked the fair association for its poor oversight of a trailer park, which received $3.3 million from the city of Pomona to reserve spaces for affordable housing. The auditors took the fair association to task for several violations identified by the state, including those that posed an imminent hazard to the health and safety of residents at several spaces. It took seven months for the fair association to correct the violations, auditors wrote.

DOCUMENTS: State audit | County audit | Fair letter and response

ron.lin@latimes.com

paul.pringle@latimes.com

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UPDATES:

4:30 p.m.: This article was updated throughout, and includes more comments from the Los Angeles County Fair Assn., as well as reaction from elected officials, and more detail from the audits.

This article was originally published at 10:35 a.m.