An internal audit by the city's audit department found several discrepancies in a contract between the city and Friends of the Festival:
• The Friends of the Festival management contract was not competitively bid.
• Some events were not approved by the City Council and lacked contracts.
• Some events did not have license agreements.
• Some Riverbend Festival contract terms were not enforced.
Friends of the Festival is in the midst of contract talks with Chattanooga after an audit found its old contract had not been bid properly.
The new contract also may lead to an increase in annuall payments to Friends of the Festival, which manages such events as Riverbend and Head of the Hooch for the city.
"We proposed a gradual increase over three years," said Chip Baker, executive director of Friends of the Festival. "But that's all part of the negotiations."
Friends of the Festival was contracted to handle all city events on the 21st Century Waterfront in 2008.
The new contract negotiations started after a city audit for the period between Jan. 1 and Dec. 31, 2011, showed several discrepancies.
But Larry Zehnder, director of Parks and Recreation, said the city did conduct a public bid for the waterfront contract. Friends of the Festival and Chattanooga Presents put in bids and Friends of the Festival won the bid, he said.
Auditor Lisa Culver wrote in her report that she found a contract for Friends of the Festival had not been bid properly and instead had been handed over to the group. She also found that, in some instances, there were no contracts between the Friends of the Festival and other parties using the waterfront.
In several instances, the festival group waived fees for organizations and the City Council never approved the waivers, the audit states.
Zehnder said he was told his department was to oversee the contracts with Friends of the Festival, but he was never given any directive to do so in some cases.
The Friends of the Festival contract had been handled by the mayor's office with little input from him, he said. He also said he was unaware his department was supposed to be overseeing the Riverbend festival contract.
"No one from the mayor's office told me," he said.
There is also confusion concerning the waiving of fees and contracts that should be given to those parties who use the waterfront, Zehnder said.
"We have a difference of opinion in what is a city event," he said.
He said he defines a city event as one that the city sponsors while also partnering with other organizations.
Stan Sewell, the city's director of audit, said on Friday that city events would have to be defined as those paid, managed and operated by the city.
In March, Zehnder and the auditors met with City Attorney Mike McMahan about how fee structures should be handled. According to city records, McMahan told Zehnder that certain criteria should be put into the city's fee structure to grant waivers, including the sponsor being a nonprofit agency, the event being free to the public and being a benefit to the community, McMahan said.
Zehnder said Friday that his department is clearing up everything.
Friends of the Festival is paid $40,000 a year and, over the past three years, never asked for an increase, Baker said. The increase sought in the new contract negotiations won't be substantial, he said, and Friends of the Festival has managed the property well with the money it has received in the past, he said.
"It's cost effective for the city," he said.