Report of the Audit Committee of the ZMD Preamble

In August 2012, the Metropolitan Zoological Park and Museum District engaged Kerber, Eck & Braeckel LLP (KEB) to perform certain Agreed-Upon Procedures related to the Missouri History Museum and the Missouri History Museum Subdistrict. An Agreed-Upon Procedures engagement is an attestation service in which a practitioner reports procedures and findings without expressing an opinion. The Audit Committee met several times and seven of the eight Board Members were present. As a result of the findings by KEB, the Committee asked for additional information, or independently followed up on the information from the report, and some of that information which is not contained within the audit report, but is covered in the Committees report. KEBs Report on Agreed-upon Procedures and Advisory Comments included several noteworthy findings that are examples of departures from the best practices utilized by nonprofit and governmental organizations. The findings and other Board concerns are discussed below.

I.

Property Acquisitions

Findings: 1. May 2, 2005, notes of a meeting with Dan Feinberg to discuss possible purchase of property for a new building for the MHS. Included in the discussion under Area 3 was Big Jakes, a property on Delmar owned by Trustee Freeman Bosley, Jr. While no prices were stated in the notes, Dan Feinberg, when reached by telephone, advised that he had estimated a price of approximately $10.00/foot. 2. June 15, 2005, Board of Trustees discussion of a new Center for Community and Family Stories was brought before the Trustees of the MHS as a conceptual idea. Gloria Wessels and Odester Saunders, Subdistrict Commissioners, were in attendance. The ZMD Board was advised that while these Subdistrict Commissioners were present they were not provided with a copy of the committee report. Attached reports of the Strategic Planning Committee and the President outlined the plan. 3. August 17, 2005, minutes of the Executive Committee of MHS reflect that MHS was looking to acquire property for the proposed Center for Community and Family Stories on three different sites on Delmar. The Executive Committee approved a budget of $1,500,000.00 for the acquisition of the Center for Community and Family Stories. 4. September 6, 2005, Real Estate Meeting with Karen Goering recites a meeting earlier with Elizabeth Robb and Dave Hoffmann to look at properties. One of the two sites indicated was Big Jakes. Dave Hoffmann was hired at this time, although no contract has 1

ever been produced by the MHS. The September 21, 2012 letter from Ray Stranghoener states that. The Museum retained an outside real estate expert who advised us on the search, selection and valuation of a suitable property... Further investigation has revealed that David Hoffmann has never been a licensed realtor, but was a newly licensed (May 29, 2005) real estate salesman, and was not a licensed MAI appraiser. In fact, he is not known to the real estate industry as inquiries by board members and the Executive Director revealed. 5. January 12, 2006, check to David Hoffmann in the amount of $10,000 for real estate consultation. There is no evidence that Mr. Hoffmann ever dealt with Freeman Bosley. 6. June 28, 2006, meeting of the Trustees. Report of the Strategic Planning Committee stated: The Committee has been discussing real estate options for the third space initiative and is close to securing a location Gloria Wessels, Odester Saunders and Veryl Riddle, Subdistrict Commissioners, were in attendance. The ZMD Board was advised that while these Commissioners were present they were not provided with a copy of the committee report. 7. July 11 and 12, 2006, formal Purchase and Sale Agreement entered into with the MHS and Freeman Bosley, Jr. and his partner, James Armstrong to acquire three lots referred to as the Delmar property for $875,000. 8. August 17, 2006, Phase I Environmental Site Assessment performed by Herlacher Angleton Associates, LLC (Herlacher) found the site at 5845-5873 Delmar to have a significant potential to be a source of resdiual contamination. 9. August 23, 2006, minutes of the Executive Committee. The President reported that the MHS had placed an offer on property at Delmar and DeBaliviere (the former McDonalds restaurant) for $375,000 (sic) and the closing is set for Septemer 20. 10. August 25, 2006, First Amendment to Purchase and Sale Agreement extending the closing date until Septemebr 20, 2006. 11. August 26, 2006, minutes of Board of Trustees indicates an offer was made for property at Delmar and DeBaliviere. Letter from Ray Stranghoener, dated September 21, 2012, indicates that initially the MHS offered $750,000, it was rejected, the MHS then countered with $875,000,which was accepted. Despite requests for the documents from the MHS none were proffered and no explanation was offered for the large jump in price for the counter offer. 12. September 8, 2006, Second Amendment to Purchase and Sale Agreement extending the closing date to November 9, 2006.

13. September 14, 2006, Phase II Environmental Site Assessment performed by Herlacher found that the site contained Residual Solvents, Petroleum,Semi-Volatile Organic Compounds and toxic RCRA metal contaminants. 14. October 13, 2006, second Phase II Environmental Site Assessment by Herlacher estimated the clean-up costs for the site at $94,000 to $300,000. 15. October 25, 2006, minutes of Board of Trustees report by Mr. Stranghoener that the MHS had just completed a contract on a piece of real estate on Delmar. 16. October 26, 2006, letter from Bryan Cave to Harry Rich, MHS, indicating that at the direction of MHS the writer had prepared a waiver of any right to terminate the contract due to environmental conditions on the Delmar property. 17. October 26, 2006, Letter from Robert Archibald to Bosley and Armstrong indicating dissatisfaction with the environmental condition of the Delmar property, but waiving the right to terminate the purchase contract. 18. November 9, 2006, closing on Delmar property takes place. 19. December 13, 2006, minutes of Board of Trustees where Mr. Rainwater announced the purchase of property on Delmar for another facility. 20. February 21, 2007, minutes of Board of Trustees where Mr. Rainwater announced the purchase price for the Delmar property was $875,000. Mr. Archibald described a 30,000 to 40,000 square foot new building called The Third Space. 21. February 22, 2007, minutes of the Subdistrict. The President reported that the MHS had recently acquired a building and lot on Delmar and demolished the building. No details were provided. 22. August 1, 2007, minutes of the Executive Committee. The firm of Mackey Mitchell was retained to design the building called the Third Space. Mackey Mitchell was paid $151,475.17 for its design work. 23. The total cost of the acquisition of the Delmar property had risen to $985,914.19, and with the additional design costs to $1,137,389.36. The costs of David Hoffman and Mackey Mitchell were expensed and $975,914.19 was capitalized. No reserve was established for remediation of environmental contamination. 24. October 27, 2010, special session of Executive Committee. Due to the economic downturn the capital campaign that was to fund the Third Space was cancelled and the plans to add another building [on Delmar] were revised to repurpose the existing space. The Delmar property will be left as is. 3

25. April 2011, Appraisal commissioned by the Forsyth School of Skinker property shows value of $500,000. Undertaken by the Forsyth School. Property was purchased by Forsyth School for $515,000 in April 2001. 26. December 14, 2011, MHS purchases the Skinker site for $400,000. 27. The Assessor for the City of St. Louis currently values the Delmar property at $232,300. 28. September 14, 2012, Bayard Clark from the MHS advised the ZMD Board with respect to the environmental studies of the Delmar site, Nothing unusual was discovered so no remediation costs were incurred. Subsequent disclosure has shown this statement to have been untrue. Conclusions: 1. The purchase of the Delmar site may have involved a conflict of interest for which no action was taken by the Trustees of the MHS to ameliorate the problem by getting an appraisal of the site. This failure was reckless and not in the public interest. Without subpoena power the Board is unable to determine whether the action of the President and the Trustees was just negligent. 2. The purchase price for the property of almost $1,000,000 appears excessive when compared to the valuation of the property by the Assessor, the earlier purchase price of the Delmar property by Bosley and Armstrong, and the acquisition of an adjoining parcel by Joe Edwards shortly before. There appears to be a discrepancy in sales data. David Hoffmann did not possess the qualifications to provide competent advice on valuation. The Board of the ZMD is undertaking an appraisal of the value of the Delmar property both at the time of purchase and today. A contract has been let for that appraisal by the Board and should be completed within a few weeks. 3. As noted in the Advisory comments of the Agreed-Upon Procedures, the Trustees failure to obtain an appraisal, prior to the purchase of the property, deviated from the best practices utilized by nonprofit organizations. A more significant divergence occurred when management, aware that the property was contaminated and conscious of two distinct cost estimates for its remediation, purchased the property for its original contract price. 4. FASB ASC 360-10 requires an appraisal when the property is impaired. The decision of October 27, 2010, was an indication that the property was impaired and the Trustees should have ordered an appraisal at that time. 5. The MHS had insufficient funds available on November 9, 2006, to complete the construction of the Center for Community and Family Stories, and required a capital fund 4

drive to do so. Purchasing the Delmar property at that time was imprudent on the part of the Trustees, and has resulted in a loss by the MHS that may exceed $1,000,000. 6. Commissioners of the Subdistrict were advised of the plans by the President, not of the purchase of the Delmar site, prior to its purchase. The President and the Trustees simply ignored their governing body. Further recommendations may be found in the section on Governance. 7. In Ray Stranghoeners letter of September 21, 2012, he stated that the purchase of the Delmar property was not made with public funds. That is a distinction without a difference since all moneys received by the MHS are fungible and many of the revenues received by the History Museum, such as admission charges, gift shop sales, grants, etc. are directly attributable to the public moneys emanating from the ZMD tax receipts. 8. The same letter of September 21, 2012, stated that the audit (sic) did not criticize the transaction. In fact, on page 40 of the Independant Accoutants Report on Agreed-Upon Procedures and Advisory Comments the transaction was criticized. Recommendation: 1. Remediation of the property at 5863 Delmar would be the responsible next step to be undertaken by the Trutees. The appraisal report may alter this recommendation.

II.

Conflict of Interest

Findings: 1. Freeman Bosley, Jr. was a trustee of the Missouri Historical Society (MHS) from 1999 to October 16, 2005. Mr. Bosleys attendance at meetings during his tenure was very limited, almost nonexistent, however, as a trustee he was furnished the minutes of each meeting. 2. MHS adopted a Trustees Ethics Statement April 28, 1988, which required Trustees to comply with it and to sign a disclosure statement. MHS also adopted an Employees Ethics Statement which states: Employees must refrain from any private or public activity, which might be in conflict with, or appear to be in conflict with, the mission and interests of the Missouri History Museum. 3. Freeman Bosley, Jr. signed such a trustees disclosure statement in December 2004. It provided, in part, as follows: I understand that I am responsible for updating this statement whenever significant changes occur. 4. June 15, 2005, a discussion of a new Center for Community and Family Stories was considered by the Trustees of the MHS. Attached reports of the Strategic Planning Committee and the President outlined the plan. 5. August 17, 2005, minutes of the Executive Committee of MHS reflect that MHS was considering acquiring property for the proposed Center for Community and Family 5

Stories on three different sites on Delmar. The Executive Committee approved a budget of $1,500,000.00 for the acquisition of the Center for Community and Family Stories. 6. In August 2005 Melanie Adams met with Freeman Bosley, Jr. about property at 58455873 Delmar. 7. No amendment to the Ethics statement of either Freeman Bosley, Jr. or Melanie Adams was filed with the MHS, or disclosure made to anyone concerning the conflict of a Trustee and employee discussing the sale of private property owned by the Trustee to the MHS. The statement signed by Freeman Bosley, Jr. required the filing of an amendment. These negotiations were specifically prohibited by the MHS Ethics Statement. 8. October 19, 2005, the Trustees of MHS authorized a budget of $1,500,000.00 to purchase a site on Delmar for the Center for Community and Family Stories. Conclusions: 1. A conflict of interest appears to have arisen in August 2005 concerning the purchase of property owned by a Trustee in conflict with the Ethics Statements for either Trustees or employees of the MHS. 2. Freeman Bosley, Jr., by virtue of his position as a Trustee of MHS, was privy to the budget established by MHS for purchasing his property. No other land owner on Delmar, in the area where MHS was looking, was privy to this information. Recommendations: 1. The Trustees and Commissioners of the Subdistrict must establish policies for the disclosure and enforcement of conflicts, for Trustees and/or employees that violate their Ethics Statements, including the authority to remove a Trustee, dismiss an employee, and void any prohibited or non-disclosed transaction. 2. The ethics statements of the Subdistrict Commissioners and Trustees differ materially and should be reconciled to provide for stronger prohibitions on the activities of the Trustees. The Ethics Statement Policy needs to be updated as it appears to be directed mainly at a situation where an employee took artifacts belonging to MHS, which occurred at the time of their adoption.

III.

COMPENSATION

Findings: 1. The Executive Compensation for the President for 2011 includes a base compensation of $356,720; housing allowance of $33,000, and $12,000 car allowance, aggregating $401,720, with other compensation, retirement and deferred compensation and nontaxable benefits totaling $503,087. For 2013 base compensation will increase to $375,000 and $420,000 with housing allowance and automobile provided him. 2. Benefits include an automobile for both business & personal use; a housing allowance of $33,000; a fax line, fax machine and computer for the Presidents personal 6

residence; an annual contribution to a 457(f) deferred compensation plan by the Missouri Historical Society in the amount of 17.5% of annual base compensation; and a cash settlement upon retirement for 410 unused vacation days accumulated through Dec 31, 2007 when the plan was frozen. 3. The liability for the unused vacations days is calculated to be $571,483 at December 31, 2011. 4. The methodology for determining accrued vacation days was calculated by the Presidents assistant and vacation time taken and that time was reported annually to the Executive Compensation Committee prior to 2008. 5. The President received 40 vacation days (eight (8) calendar weeks) per year, however, he claimed not to use any vacation days in ten (10) years between 1997 and 2007, with no days being accrued during a sabbatical year in 1998. Time taken off during a sabbatical year more than compensated for any unused vacation time. 6. The President also received six (6) weeks per year for research and writing time, thus aggregating 14 calendar weeks of time off granted each year through 2007. 7. In each of the four years ending December 31, 2011, the President earned 4 weeks of vacation and six weeks of writing and research time, for an aggregate 10 weeks of time off in those years. No other employee earned as generous a credit for unused vacation. 8. The Missouri Historical Society has no policy of mandatory vacation time off each year as is common for positions involving a fiduciary responsibility. 9. The President also received two bonuses during his employment with the Museum. A bonus of $37,015 was paid in 1988 and a $35,000 bonus was paid in 2004. If the contract had been entered into with Dr. Archibald by the Subdistrict Commission, it would not have been prudent as a Political Subdivision to pay bonuses with funds from public sources due to the prohibition in the Missouri Constitution, Article III, Section 39(3) 10. The Executive Compensation Committee, comprised of four members of the Board of Trustees, meets two times per year and recommends the package to the full Board of Trustees for final approval. The Chairman of the Executive Compensation Committee, since December 2009 has disclosed that he had a conflict of interest, as defined in Treasury Regulation 53-4958-6. He is an officer of a financial institution, which provides financial services to the Museum for a fee. Accordingly, he did not participate in the discussion and approval of the Presidents compensation 11. The Executive Compensation Committee engaged the services of the law firm, which served as the general counsel for the Trustees, to conduct a compensation survey each year for the purpose of determining the Presidents compensation. That report is attached. 12. In comparing the Missouri History Museum with 10 comparable organizations the accountants, KEB, found from the minutes of the Executive Compensation Committee of the Trustees as reported by Bryan Cave, (see attached) the revenue and 7

number of employees each rank 11th, volunteers rank 9th, however, the CEO compensation ranked 5th. In comparing 32 organizations the revenue of the MHS ranks 30th, employees -28th, volunteers - 26th and CEO compensation - 15th. The Post-Dispatch found that Dr. Archibald was paid more than the head of any history museum in the country, except the Smithsonian Institute in Washington. Attached is an informal study conducted recently by the Executive Director of the ZMD of salaries of heads of History Museums. 13. The Executive Compensation Committee is responsible for reviewing and approving the Presidents compensation recommendations for six other Museum executives, which range from $115,000 to $171,745. 14. The Executive Compensation Committee and Trustees are not transparent in sharing the Presidents compensation package. Specifically, the Presidents compensation was withheld from the Subdistricts Commissioners. 15. Subdistrict Commissioners have been prohibited from serving on this Committee. The recently amended agreement between the Subdistrict Commission and the MHS gives Subdistrict Commission members representation on the Executive Compensation Committee. However, it retains for the MHS the sole authority to enter into an employment contract with the President of the History Museum. 16. No records exist to substantiate Robert Archibalds claim for 410 days of unused vacation as they have been destroyed.

Conclusions and Recommendations: 1. The compensation package for the President compared to similar organizations and the other members of the Zoo Museum District appears to be excessive. Other institutions in the ZMD have grown in size and endowment from private sources to a far greater degree than the History Museum. The responsibility for this practice lies with the trustees of the MHS, who are unresponsive to and unrepresentative of the taxpayers. 2. The executive compensation package for the Museum should be more in line with similar institutions of similar size around the country 3. The benefits appear out of line for a non-profit organization that is dependent for over 70% of its revenue from public tax sources. 4. Accrued vacation days for the President, who had 14 weeks of time off awarded him are not appropriate and should be rescinded. No Compensation for unused vacation days should be paid by the Missouri Historical Society until the time can be independently verified. At base salary in excess of $400,000 the President should be expected to devote his full time to the job without receiving extra compensation. No other institution in the ZMD has allowed its President to accrue this amount of accrued vacation. 8

5. The President and any officer with fiduciary responsibility at MHS should be required to take, at least two consecutive weeks off each year to prevent fraud. 6. There is no requirement as to where the President should reside. A housing allowance is unnecessary and inappropriate. 7. The Executive Compensation Committee should meet more than twice a year and be comprised of a majority of members of the publicly appointed Subdistrict Commission. The Executive Compensation Committee should engage a reputable firm with knowledge and expertise in the same industry as the Missouri History Museum; the Executive Compensation Committee should also engage a firm that is independent of the general or special counsel retained by the Missouri History Museum, which is not in the position of protecting its employment as general counsel, in its compensation decisions. 8. It is inappropriate for a member of the Executive Compensation Committee, who has a conflict of interest, to serve on the Executive Compensation Committee. 9. The Presidents salary and compensation benefits must be fully transparent. Further, both the Trustees and the Subdistrict Commissioners must present the Executive Compensation Committees recommendation before their boards for discussion and approval each year. 10. The present contact with Dr. Archibald, executed in 2012, but not effective until 2013, must be withdrawn. 11. The President should report to the Subdistrict Commission, not the trustees of the MHS.

IV.

Governance

Findings:
1. The purchases of properties on Delmar (2006) and Skinker (2011) were completed without the knowledge and prior consent of the Subdistrict Commissioners, and without appraisals to verify fair value. 2. The pledge of $1,000,000 to the development of the trolley from the Delmar Loop to the Museum was made by the President without the approval or knowledge of the Subdistrict Commissioners. 3. The Executive Compensation Committee is composed only of MHS Trustees, to the exclusion of the Subdistrict Commissioners. 4. Despite repeated requests from Subdistrict Commissioners, they were denied information concerning the compensation of the President. 5. The President of the History Museum publicly stated with respect to the Subdistrict Commissioners, I do not report to them. This displayed a total disregard to the publicly appointed Subdistrict Commission charged with appropriating the tax dollars that constitute almost 80% of the revenues of the Museum and, with the related revenues, admission charges, grants and gift shop revenues that flow from the public funds, 90% of operating revenues. 9

6. Employees of the Museum have stated publicly that the Missouri Historical Society (MHS) is a private non-profit corporation that is not subject to public accountability under the Missouri open meetings and open records law. 7. A former Chairman of the Subdistrict Commissioners stated to the ZMD board that his only duty was to sign vouchers for payment prepared by the Trustees for presentation to the ZMD. 8. Legal Counsel for the Subdistrict Commissioners controlled the preparation of the agenda for the Subdistrict Commission thus limiting the matters that would come before the Subdistrict Commission. 9. The contract with the MHS and the Subdistrict Commission fails to establish any standards for the Trustees, contrary to the requirements of Missouri law. 10. The Subdistrict Commission has failed to renew the contract with the MHS, yet the contract renews automatically, because it has an evergreen provision. 11. The Trustees failed to inform the Subdistrict Commissioners of the conflict of interest that arose when an employee of MHS began negotiating with a Trustee to acquire land owned by that Trustee. 12. The Board of Trustees is comprised of up to 45 members, and is self-perpetuating. See Bylaws, Article IV.

Conclusions: The Missouri History Museum is principally funded with tax revenues raised by the ZMD, and, thus, must be run as a public institution accountable to the public that provides its tax support. The statute provides for a publicly appointed Commission (the Commissioners) to run the History Museum. Currently, the Missouri Historical Society Trustees (the Trustees) have co-opted the authority of, and dominated the Subdistrict Commission. The Subdistrict Commission has contracted away all its powers contrary to Missouri law. It is critical, for public confidence to be restored in the History Museum that it must become a public institution run by publicly appointed Subdistrict Commissioners appointed by the Mayor and the County Executive. It is unacceptable for the Missouri History Museum to be run by a private non-profit corporation that by law is not accountable to St. Louis taxpayers. To change the present structure and to vest true authority in the Subdistrict Commission, the following steps need to taken. Recommendations: 1. The Board of Trustees is too large and unwieldy to properly govern the operations of the History Museum, and, being chosen by people recruited by the President, has become captive to the President, and thus incapable of prudent oversight and critical judgment. More importantly, when governance breaks down, as it has in this case, there is no person responsible to the taxpayers, who are footing the bill, with authority to remove and replace Trustees. 2. The April 21, 1988 contract with the Missouri Historical Society (the Contract) should be cancelled effective January 1, 2013, or if the parties are unable to so agree, then the Subdistrict Commission shall give notice of cancellation, as provided by the Contract. 10

3. The two Subleases of City owned property (the Subleases), entered into with the Missouri Historical Society, both dated February 1, 1989, should be cancelled effective January 1, 2013, and the Subdistrict Commission should administer the property and buildings sitting on those sites. Or, if the parties are unable to so agree, then the Subdistrict Commission shall give notice of cancellation, as provided by the Subleases. 4. The appointment of the Executive Compensation and Budget Committees should lie exclusively with the Subdistrict Commission. The statute (Mo. Rev. Stat. 184.362) states that the Subdistrict shall have exclusive control of the expenditure of all moneys collected by the district. All employees of the current History Museum will become employees of the Subdistrict, not the Missouri Historical Society. 5. All funds, whether tax receipts or privately raised moneys, should be appropriated by the Subdistrict Commission. Missouri law provides that moneys that are commingled must be treated as public funds. 6. The Trustees may retain the authority to raise private donations to help support the Museum, and shall administer the endowment with the right to recommend the use of funds from the endowment. 7. The Subdistrict Commission and Trustees should establish policies to ensure transparency in the dealings of the Museum. Since the buildings and land of the Museum would be publicly owned by the Subdistrict Commission the Missouri open meetings and open records law will apply. Currently, the law does not apply to a private non-profit corporation, the Missouri Historical Society. 8. The ZMD will undertake to educate the Subdistrict Commission on the fiduciary duties of directors of a public institution and how to rigorously govern the Museum. All Subdistrict Commissioners must attend the training sessions conducted through the auspices of the ZMD. 9. A new contract or loan agreement with the Trustees should be entered into to address the ownership of the Museums collection and how it will be displayed. Ownership of the collection that was donated to the Missouri Historical Society over the years may remain with said institution. 10. The Trustees should cancel and allow the Subdistrict Commission to renegotiate the long term contract (three years) with Robert Archibald that will take effect January 1, 2013. It was entered into with Robert Archibald in July 2012 by the Trustees. It is not appropriate under the Missouri constitution (Article III, Section 39(3) to pay bonuses to managers of public institutions, so the provision of the current contract authorizing payment of a bonus annually must be deleted. Currently, the employment contract with the President is between the Missouri Historical Society, and not the Subdistrict Commission. Hereafter, the employment contract will be between the Subdistrict and the President, and should be approved by the Subdistrict Commission. November 28, 2012

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