INTERNAL AUDIT REPORT
OPERATIONAL AUDIT
CRUISE RELATED INVESTMENTS
APRIL 2017 – JUNE 2018
ISSUE DATE: SEPTEMBER 18, 2018
REPORT NO. 2018-09
Revised October 1, 2018
INTERNAL AUDIT
Cruise Related Investments
April 2017 – June 2018
2
TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................................................................. 3
BACKGROUND .............................................................................................................................................................. 4
AUDIT SCOPE AND METHODOLOGY ........................................................................................................................... 6
SCHEDULE OF FINDINGS AND RECOMMENDATIONS............................................................................................... 7
APPENDIX A: RISK RATINGS ........................................................................................................................................ 9
Cruise Related Investments
April 2017 – June 2018
3
EXECUTIVE SUMMARY
Internal Audit (IA) completed an audit of Cruise Related Investments for the period April 1, 2017 through
June 30, 2018. The objectives of the audit were to assess the accuracy of financial and operational
results presented to the Commission, to assess the reasonableness of assumptions used in the economic
impact models and to evaluate the cost of cruise programs and the impacts to cruise profitability and
operating results.
Financial results are audited on an annual basis, by Moss Adams LLP, our external auditor. Accordingly,
our work placed dependence on work performed by Moss Adams. With the exception of the issue noted
below, we concluded that financial and operational results presented to the Commission, were accurate in
all material respects. We also concluded that the economic models used were reasonable.
Port management is committed to providing Seattle cruise passengers with a “Best in Class” experience
and challenges themselves to be the leader within the cruise industry. Consistent with this vision, the
Cruise Luggage Valet Program (program) was introduced as a complimentary service to cruise
passengers disembarking from Seattle. The program delivers cruise passenger luggage directly to the
airport, and provides them with opportunities to enjoy the city without their luggage, while bringing
economic benefit to Seattle. The program also provides benefit to the airlines and to the cruise terminal
area, by potentially reducing congestion.
The Port’s Cruise Luggage Valet Program, while innovative, does not generate revenue. As participation
in the program increases, expenses also rise. Therefore, when requesting funding authorization from the
Commission, information should be accurate and assumptions refined to reflect an accurate
measurement of economic impact. We identified the following issue that, as the program evolves, will
facilitate informed and sound decisions.
1) Port Management did not correctly utilize all data available when presenting the economic benefit of
the Baggage Valet Program to the Commission. This resulted in a potential overstatement of the
economic benefit to the Seattle area.
This issue is discussed in more detail on page seven.
We extend our appreciation to Port management and staff of Maritime Operations and Finance for their
assistance and cooperation during the audit.
Glenn Fernandes, CPA
Director, Internal Audit
RESPONSIBLE MANAGEMENT TEAM
Stephanie Jones Stebbins, Managing Director, Maritime
Michael McLaughlin, Director, Cruise Development and Maritime Marketing
Cruise Related Investments
April 2017 – June 2018
4
Seattle cruise business hosts more passengers than any other Port on the West Coast of the United
States with 11 different ships offering Alaska cruise itineraries. In June 2018, the Norwegian Cruise Line
Bliss, a mega-ship capable of carrying 4,200 passengers, began offering port calls from Seattle to Alaska.
In 2019, a larger ship, the Royal Caribbean Ovation of the Sea, capable of carrying 4,800 passengers,
will provide service from Seattle to Alaska.
Revenue from the cruise industry in 2008 was approximately $9.4 million and has grown to $17.6 million
in 2017. In 2017, Seattle hosted over one million cruise passengers which generated approximately $17.6
million of revenue. Net operating income, before depreciation, was $8.6 million, with approximately $9
million in operating expenses (see table below).
Description
2014
2015
2016
2017
YTD*
8/31/2018
Total Revenues $12,993,430 $14,413,620 $15,421,861 $17,595,810 $15,355,398
Operating Expenses (6,379,375) (6,676,782) (7,095,636) (8,996,721) (6,506,822)
NOI (before Depreciation) 6,614,055 7,736,838 8,326,225 8,599,089 8,848,576
Depreciation (5,435,699) (5,305,601) (5,243,861) (5,923,932) (4,259,674)
Net Operating Income (NOI) $1,178,356 $2,431,237 $3,082,364 $2,675,157 $4,588,902
* YTD Revenues & Expenses do not include accruals and are not reflective of year-end results. Cruise revenues taper off significantly after cruise
season, whereas expenses continue to be incurred.
The Port operates cruise terminals at Pier 66 and Pier 91. Pier 66 was recently renovated and included
expanded space for processing cruise passengers from 44,000 square feet to 151,000 square feet,
installation of two new passenger-boarding gangways, and an automated conveyor system that moves
passenger luggage from curbside to ship. The facility now accommodates 4,500 passengers, both
embarking and disembarking, from a single vessel. Pier 91 is located north of the Seattle waterfront and
is approximately 2 miles from the Space Needle and the city’s retail core.
In 2017, the Port offered complimentary valet service to cruise passengers disembarking in Seattle. The
cruise lines had previously provided this service to their passengers for a fee. Cruise passengers place
their luggage outside the cabin door and it is delivered directly to the airport, thus giving passengers
opportunities to enjoy the city without their luggage.
In 2017, actual costs of the program were approximately $545,000 and as of August 2018, actual costs
were approximately $700,000. As participation increases, costs also increase with no impact to Port
revenue.
BACKGROUND
Cruise Related Investments
April 2017 – June 2018
5
The table below reflects the number of cruise passengers from 2008 through 2018:
Data Source: Port of Seattle Cruise Facts 2018
* Estimate
Note: Passenger volume in the cruise industry is measured in both embarking and disembarking cruise passengers. Disembarking cruise
passengers would be approximately 50% of the numbers provided above.
886
875
932
886
935
871
824
898
984
1,072
1,100*
-
300
600
900
1,200
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ANNUAL CRUISE PASSENGERS (OOO's)
Cruise Related Investments
April 2017 – June 2018
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We conducted this audit in accordance with Generally Accepted Government Auditing Standards and the
International Standards for the Professional Practice of Internal Auditing. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.
The period audited was April 2017 through June 2018 and included the following procedures:
Economic Impact Study
• Reviewed the 2013 Port of Seattle Cruise Economic Impact Report.
• Reviewed the 2014, 2015, and 2016 Annual Economic Impact Updates.
• Obtained an understanding of the assumptions used to develop the Economic Impact Model.
• Reviewed 2017 passenger and crew survey results.
Financial Impact, Reporting, and Governance
• Reviewed 2017 and 2018 Operating Revenues and Expenses.
• Discussed 2018 Budgeted Expenses and Revenues with management.
• Reviewed Commission Presentations and Reports regarding the Port’s Valet Program.
AUDIT SCOPE AND METHODOLOGY
Cruise Related Investments
April 2017 – June 2018
7
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
Port Management did not correctly utilize all data available when presenting the economic benefit
of the Baggage Valet Program to the Commission. This resulted in a potential overstatement of
the economic benefit to the Seattle area.
The Commission memos, dated February 27, 2018 and March 23, 2018, indicated that the program
generated more than $4 million in economic impact to Seattle, before the participants travelled to SeaTac
Airport. The information, as presented, incorrectly concludes that all 63,321 participants stayed in Seattle,
spent $63.64 on average, and generated an economic impact of more than $4 million.
On August 11
th
, 13
th
, 18
th
, and 20
th
of 2017, the Port’s Business Intelligence Team surveyed 1,253
passengers at the Terminal 91 balconies, as they disembarked from Cruise Ships. The survey results
identified that approximately 64 percent of passengers that used the Baggage Valet Program, went
directly to the Airport. While available, Port management did not use the results from this information, in
their presentation to the Commission.
Additionally, the program assumes an individual will spend $63.64 in Seattle. This number comes from a
methodology created by Visit Seattle, utilizing restaurant and retail segment credit card data, to identify
what the average person spends in Seattle during a six hour stay. The methodology also includes an
assumption that the individual will spend approximately $17.63 in transportation costs, from downtown
Seattle to SeaTac Airport. Transportation costs are incurred by cruise passengers, regardless of whether
they participate in the valet program. Therefore showing this as incremental economic benefit to the
region is incorrect. An adjusted economic benefit based on Visit Seattle’s projections would be
approximately $46.01 per passenger.
By adjusting the assumptions to reflect the approximately 36% of participants in the Baggage Valet
Program that stayed in Seattle, and by adjusting the estimated spend in Seattle based on Visit Seattle’s
projections, a more realistic economic benefit to the Seattle area in 2017, would be approximately
$1,059,000.
The program has other benefits including: a benefit to airlines, a potentially reduction in congestion, and a
best in class experience for cruise customers, but these are independent of the economic benefit as
presented to the Commission.
Recommendations
Management should assure that Commission presentations are accurate and that they utilize all relevant
information that is available, to facilitate sound and informed decision making. We also recommend re-
evaluating the assumptions used in future economic benefit models.
1) RATING: MEDIUM
Cruise Related Investments
April 2017 – June 2018
8
Management Response/Action
The Maritime Division and the Cruise team will ensure we use the best available data as we move
forward. As the program matures, we will continue to refine the program as well as refine the ways we
can measure impacts. We are committed to reporting those as accurately as possible and, in the future
will not include transportation costs or the estimates for spending by the portion of passengers that went
to the airport unless we have reliable data showing that they spend incremental money that would not
have been spent without the program. We appreciate the review as we strive to improve our program.
Cruise Related Investments
April 2017 – June 2018
9
Appendix
APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below.
The risk rating is based on the financial, operational, compliance or reputational impact the issue
identified has on the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be
brought to the final report.
Rating Financial Internal Controls Compliance Public
Port
Commission/
Management
HIGH
Large financial
impact
Remiss in
responsibilities
of being a
custodian of
public trust
Missing, or
inadequate key
internal controls
Noncompliance
with applicable
Federal, State,
and Local Laws,
or Port Policies
High probability
for external audit
issues and/or
negative public
perception
Important
Requires
immediate
attention
MEDIUM
Moderate
financial
impact
Partial controls
Not adequate to
identify
noncompliance or
misappropriation
timely
Inconsistent
compliance with
Federal, State,
and Local Laws,
or Port Policies
Potential for
external audit
issues and/or
negative public
perception
Relatively
important
May or may not
require
immediate
attention
LOW/
Exit Items
Low financial
impact
Internal controls in
place but not
consistently
efficient or effective
Implementing/enha
ncing controls
could prevent
future problems
Generally
complies with
Federal, State and
Local Laws or Port
Policies, but some
minor
discrepancies
exist
Low probability
for external audit
issues and/or
negative public
perception
Lower
significance
May not require
immediate
attention
Efficiency
Opportunity
An efficiency opportunity is where controls are functioning as intended; however, a modification
would make the process more efficient
