City Auditor says nonprofit misused $1.4 million in funds; Media Center disputes finding

by Gennady Sheyner / Palo Alto Weekly May 6, 2016

Midpeninsula Community Media Center, a Palo Alto-based nonprofit that produces educational shows, hosts video classes and broadcasts government meetings, inappropriately used $1.4 million in cable fees between 2010 and 2014, according to a scathing audit from the office of City Auditor Harriet Richardson.

The finding, which could reshape the longstanding relationship between the city and its “public, education and government” (PEG) access provider, has touched off a heated exchange between Media Center officials, who strongly dispute the audit’s conclusion, and the auditor, who believes that the organization knew years ago it was using the funds unlawfully yet continued that practice anyway.
Media Center officials claim the audit ignored key pieces of information, misinterpreted the law and ran afoul of Government Auditing Standards, an accusation that Richardson has strongly objected to. Richardson’s audit, for its part, questions whether PEG-access channels are even useful in this day and age and asserts that the “idea that PEG channels offer unique choices to viewers is outdated” — a claim that Media Center Executive Director Annie Folger has called “upsetting” and untrue.

The rancorous dispute revolves around what’s known as “PEG fees,” which Palo Alto collects from the area’s two cable franchise holders — Comcast and AT&T — and then remits to the Media Center. The fees, Richardson’s audit states, are required by federal law to be used for capital expenditures. The Media Center used them for operating expenses, including salaries and benefits, professional services, janitorial services, maintenance and insurance.

The Media Center doesn’t deny that it used PEG fees for operating expenses, but it maintains that it has not violated the Federal Cable Communications Policy Act of 1984. To make its case, the Media Center included a letter from the law firm Best, Best & Krieger that disagrees with the audit’s conclusion and asserts that the Cable Act “does not require that PEG fees be limited to capital expenditures.” The auditor, meanwhile, had consulted with the City Attorney’s Office and a consulting attorney and determined that the restrictions are legally binding. The consulting attorney’s assessment was not available as of Thursday morning.

Richardson told the Weekly that the initial purpose of the audit was to make sure that AT&T and Comcast paid what they owed in cable fees. In addition to paying these PEG fees, the two cable companies are also to pay franchise fees to each of the jurisdictions they serve. This includes Palo Alto and its partners in what is known as the Joint Powers Authority (JPA): Menlo Park, East Palo Alto, Atherton and unincorporated portions of Santa Clara and San Mateo counties.

The California Digital Infrastructure and Video Competition Act of 2006 requires a franchise holder to pay 5 percent of its gross revenues to each jurisdiction served, unless the jurisdiction approves a lower fee. The PEG fee, meanwhile, is set at 0.88 cents per cable subscriber per month.

In reviewing the payments, the audit found that the two cable-service providers underpaid about $216,000 during the four years of the auditing period. Comcast underpaid the Cable Joint Powers about $128,000 in franchise fees and $13,000 in PEG fees, while AT&T underpaid about $48,000 in franchise fees and $27,000 in PEG fees.

Yet over the course of the review, as the auditors researched PEG fees, they decided to also see how these funds are being spent, Richardson said. They took a closer look at Media Center’s expenditures and concluded in the audit that the organization “inappropriately used an annual average of $340,000 of public, education, and government (PEG) fees, or $1.4 million during the audit period.”

The audit, which the council’s Policy and Services Committee will discuss Tuesday night, recommends that the city reconsider the need to continue collecting these fees. And if it does continue to collect them, these fees should be “based on a demonstrated need for future capital expenses related to public, education and government access,” the audit states.

Furthermore, if the council elects to continue the fee, it should halt the existing practice of passing these fees through to the Media Center and instead place them in a “restricted account” for distribution based on city-approved capital expenditures that comply with the Cable Act, the audit states. It also recommends semi-annual documentation of expenditures and procedures for ensuring that the PEG fees are lawfully spent.

But the Media Center, in a long and strongly worded response, argued that JPA officials and the Media Center’s board of directors (which ultimately approves the budget) were fully aware of and fully supported the use of PEG fees for operating expenses. In fact, the Media Center’s partners preferred that the organization pay for capital expenditures like facilities improvements and equipment needs using its investment fund, the response states.

The Media Center also maintains that its existing voluntary agreement with the cities it serves allows it to use PEG fees for operations. The auditor countered that the latest agreement, reached in 2011, explicitly states that the Media Center only use PEG fees “in a manner consistent with the DIVCA and Cable Act” — which is to say, restricted to capital costs.

Folger also told the Weekly in an interview that the Media Center has already taken actions to address the auditor’s concerns about the PEG fees. Earlier this year, its board adopted a policy calling for the Media Center to use its investment funds for operations and PEG fees for capital expenditures.

But from Richardson’s perspective, this change should have been adopted long ago. In addressing the Media Center’s response, Richardson included a link to a YouTube clip from a November 2013 panel discussion in which Folger talked about the use of PEG fees. Folger said that the Media Center’s local franchise agreement included language stating the fee could be used for any “PEG purpose.”

“So we have been telling ourselves that because our local franchise allowed us to spend that $0.88 per subscriber for operations, we would continue to do so until challenged otherwise, and that’s exactly what we’ve been doing,” Folger said. “It’s essentially about $327,000 annually now that we get in PEG fees as a result of this pass-through fee. … We’d be hard-pressed to say it’s being spent on capital each year.”

Are access channels still needed?

In addition to the legal dispute over PEG fees, the auditor and the Media Center are also at odds over the the broader issue about the usefulness of PEG-access channels. In discussing the changing media landscape, Richardson pointed to a 2008 report from the Mackinac Center for Public Policy, which makes an argument that the “idea that PEG channels offer unique choices to viewers is out-of-date.” (The report acknowledges, however, that “broadcasts of local government meetings increase transparency of government functions and help inform interested viewers about local issues.”)

“Cable television viewers now have many channels available to them on their cable system,” the Mackinac brief states. “Much of the programming and local information is available on the Internet through such web sites as YouTube and through email groups, rendering PEG channels increasingly redundant. Furthermore, only a small portion of cable subscribers actually watch the programming on PEG channels.”

The Mackinac report wasn’t the only source of information Richardson cites. The auditor also pointed to the most recent National Citizen Survey, which showed the percentage of Palo Alto respondents reporting that they had watched a government meeting during the prior year dropping from 31 percent in 2006 to 15 percent in 2014.

But the Media Center in its formal response took issue with the auditor’s reliance on the Mackinac report, noting that it was funded by the Koch Brothers, the Bradley and Scaife foundations and “other hard-right supporters of what some claim is an agenda to undermine public education, destroy unions, suppress minority and deny public access to communication media.”

The Media Center pointed to a separate study, from University of Texas in Austin, which concluded that PEG channels “retain their importance, and are of particular importance to minorities and to segments of a community with lower income.”

The value of PEG channels, the Media Center’s response states, “is measured not just by viewership, but by participation in the process of creating the programming, and its contribution to creation of social capital and civic engagement.”

The audit, the response argued, accepts the premise from the Mackinac Center that sources of digital content, such as YouTube, are “equivalent to, and a substitute for, PEG channels.” In fact, the Media Center claims, they are complementary.

“In the JPA area, for example, the existence of a PEG channel and PEG equipment allows producers to create programming that can be distributed via cable but then also distributed via other digital media, including public-access-center websites and YouTube,” the Media Center’s response states. “The PEG funding thus provides resources that allow citizens who would otherwise be unable to produce quality programming to develop free-speech content that is then available across platforms — and allows those who rely on television as the main source of information to obtain community-specific information.”

The City Council acknowledged the value that the Media Center provides last September, when it passed a special proclamation honoring the Media Center and declared Sept. 13 to be “Midpen Media Center Day in Palo Alto.” The proclamation celebrated the organization as one that “envisions a community that explores and uses video and other electronic communication technologies to tell its stories, learns about the diversity of the community and engages in a dialogue and crosses political and cultural boundaries.”

Now, with the auditor recommending significant reforms, it will be up to the same council to consider whether the organization still warrants public subsidies and, if so, whether new restrictions should be added to the city’s agreement with the organization.

Folger, for her part, called the audit’s recommendations “unreasonable” and said that they would turn annual funding for the organization into a “political football.”

City Manager James Keene, in his response to the audit, wrote that staff agrees to “develop and implement criteria for the use of PEG fees to ensure compliance with the federal Cable Act, and to set fees at a level that is consistent with future capital needs.”

Keene also wrote in his response that the new audit “raises an important policy question about the ongoing value of PEG channels in our community and the desire to invest in and maintain the current model for the provision of local community media.”

Richardson told the Weekly that the report doesn’t suggest abolishing the PEG channels but merely to reconsider the best and most cost-effective way to offer the services that the Media Center provides.

“We raise the question so people can think about it,” Richardson said.

She also took issue with the Media Center’s implication that her office strayed from ethical guidelines for auditors, as stated in Government Auditing Standards. Richardson, who was recently appointed by the Comptroller General of the United States to the Government Auditing Standards Advisory Council, said that the standards require auditors to “exercise professional skepticism in the work they do, which includes being alert to, for example, audit evidence that contradicts other audit evidence obtained or information that brings into question the reliability of responses to inquiries.”

“Exercising our professional skepticism led us to provide multiple opportunities for the Media Center to provide reliable responses to our inquiries,” Richardson wrote in her response to the Media Center’s response. “However, during the audit, they changed the reasons they provided for why they used the PEG fees for operating expenses, which led us to take extra care toward providing assurance regarding our conclusions.”

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