Audit Finds SFO Spent City Funds on a Honduras Venture

Imagine a place where bureaucrats cause millions of public dollars to disappear into a private company mislead the people of an impoverished Third World country, expose that same employer to billions of dollars in potential liability, attempt to cover up funds diversion through accounting maneuvers, and somehow keep their jobs. This is San Francisco, Valhalla for incompetent or malfeasant bureaucrats, a remote utopia where public mismanagement seems to go unpunished for all eternity.

In the latest example the city office responsible for checking employee expenses just released a report documenting how managers at San Francisco's airport apparently violated laws that prohibit putting public money into private hands without proper authorization, squandering at least $1.5 million in the process.

The private hands in this case belonged to SFO Enterprises LLC a for-profit company that put staffers to work in an unusual line of business: managing the national airports of Honduras.

Explaining how San Francisco got into such a highly peculiar line of work and then turned the business into an improper private kitty swallowing up city funds has been the subject of several columns in this space.

As of last week a summation of my accounts of public wrongdoing associated with a bizarre scheme to manage private airports in Honduras is now part of the official city record.

According to the new audit top airport officials dreamed up this idea in 1997 as a supposed moneymaking scheme for the city made a horrible mess of it, then tried to fix the mess by taking piles of city money without permission, attempting to cover their tracks through accounting maneuvers.

"This is a systematic failure at virtually every level of government under a number of mayoral administrations, a number of Boards of Supervisors, allowing an operation that looked like Ollie North and the secret operations team," said Aaron Peskin, who in 2002 sponsored an ordinance prohibiting that city funds be used by the operation only to see airport managers divert more city money to Honduras by routing it through a consulting contract. Peskin added: "How it went on so long, and with so many people being complicit, is a shame upon the city."

I asked an airport spokesman if John Martin would comment on the audit. He told me Martin was not giving interviews on the subject but that "as far as Mr. Martin is concerned, the issue is now closed, and that is the end of discussions." Airport managers in 1999 created SFO Enterprises after they'd gotten the Board of Supervisors to pass legislation two years earlier authorizing them to set up a private company with $10,000 in city start-up capital - as long as they didn't divert an additional penny of city or airport money on private airport-management business. A City Attorney memo accompanying the 1997 legislation was specific on this point: The company and its finances, had to be kept absolutely separate from city accounts, or San Francisco might face huge liability from possible disasters at overseas airports managed by SFO employees. The idea was to turn SFO into a profit center for the city - any net revenue would go to San Francisco's general fund the airport managers said. Under normal circumstances, it's against FAA rules for a city to move money to its own general fund from a federally subsidized airport such as SFO, which obtains income from airlines' landing fees. But airport managers argued in 1997 that they could make money for the general fund by creating a private corporation that was kept separate from the airport's budget.

"Through a private for-profit corporation that separates public assets and funds from the private enterprise, the necessity for multiple layers of approvals and extended processes can be eliminated," SFO deputy director John Costas wrote in a memo urging the Board of Supervisors' permission for such a scheme.

According to the audit report airport director John Martin and his deputies Costas and special assistant Leo Fermin disregarded this separateness principle from the get-go. They did not separate "public assets and funds from the private enterprise" - they spent at the very least $1.5 million in city funds. They did however, avoid "multiple layers of approvals" by simply taking city funds for use by the private company without proper permission.

In so doing they created a private company that became the equivalent of an airport executive slush fund, which they used to spend city money on lavish travel, and lodging and meals at places such as Oman, Paris, and Australia, under the pretext of ginning up private consulting business.

After numerous failures at winning consulting contracts airport deputy director Costas hired an expert in managing private infrastructure projects, and put him on the city's payroll, with the aim of successfully winning management contracts for the private SFO Enterprises.

In the end they put together a single business deal, assembling a consortium in 2000 to run Honduras' just-privatized airports. They severely botched the Honduras deal. They quarreled with their consortium partners failed to perform basic tasks outlined in their airport management contracts, and lost money from the moment the contract period began. The losses had to be covered somehow. And Fermin, acting as both SFO's business manager and SFO Enterprises' chief financial officer, generated receipts and accounting ledgers attributing money spent on the Honduras project to the airport's Bureau of Planning, its marketing department, its Airfield Development Bureau, and the chief of staff's office.

"The airport's accounting section did not track the expenses," the audit report said. "The airport's inconsistent recording of SFOE-related expenses allowed the airport to bypass budgetary spending restrictions."

California law states a public official "may not without authorization, appropriate public funds to his own use, or the use of another." U.S. law, meanwhile, prohibits diversion of funds from federally subsidized airports such as San Francisco's for non-airport purposes.

After reading the report I called a spokeswoman for District Attorney Kamala Harris: Has the controller referred the matter to the district attorney for a possible criminal investigation? Harris' spokeswoman Debbie Mesloh cited her department's policy of neither confirming nor denying the existence of investigations.

FAA spokesman Ian Gregor inquired at my behest about the SFO Enterprises matter with the agency's San Francisco district office and with FAA attorneys. He said he's not aware that the agency has intervened in the matter.

In response to a 2001 inquiry an S.F. city attorney representative told me he viewed the interests of SFO Enterprises and the city as the same.

In an official response to the audit Martin wrote: "I believe the SFOE project was well managed, expenses and revenues were correctly accounted, and costs were attributed to the appropriate cost centers."

In other words Martin simply disavows, without explanation, the facts uncovered in the audit report. In San Francisco, a city where mismanagement and dishonesty are rarely punished, Martin may very well imagine he's within his rights.

But he shouldn't be. The controller's audit describes specific activities that fall nowhere within the broadest possible definition of the terms "well managed" or "correctly accounted." During the first two years airport executives began spending city money on their new business venture they barely bothered accounting for it at all. During 1997, 1998 and 1999 the airport recorded only $21,216 for "international services," the budget line made up for the consulting business. Internal records however, showed they'd actually spent at least $630,000.

In some cases the airport managers took the money and dissembled about where it was going.

The recent audit describes one such situation which I first documented in 2001 where Leo Fermin obtained a $40,000 "travel advance." No travel receipts were forthcoming however, in violation of city accounting rules requiring receipts within 10 days. The report explains why. "The employee working as a SFOE consultant, used the travel advance to open a bank account in Miami, and proceeded to use the bank account funds for cash, payments on the purchase of a new Nissan Pathfinder, office furniture, computer equipment, and apartment rent in Honduras," the new report says.

They repaid the money months later - by shifting money from another city account - but only after I wrote about this unusual use of city money in 2001.

The report documents another instance where Martin sought to end-run the Board of Supervisors' 2004 prohibition against spending more city money or paying city employees, to the benefit of SFO Enterprises. Martin "solved" his funding problem by having an employee take a leave of absence for 16 days then fly to Honduras to attend to the private consortium's business there. He then received $17,600 from the city for work as a "private consultant." Unmentioned in the report are the ways airport managers explored possible methods to put public money into their private slush fund by exploiting city-owned assets. These included possibly using airport-owned land and buildings to generate money for SFO Enterprises money that would no longer be tracked in the same way city expenditures might, because it would go into a private corporation. Documents I reviewed showed city officials went so far as to entertain the idea of involving SFO Enterprises in a proposed scheme to take money from private investors in exchange for letting them use an airport-owned parking garage as a tax shelter. I have no evidence the proposal ever got off the ground.

There's no evidence that Martin Fermin, and Costas used the money they diverted from SFO accounts for their own personal private gain. And SFO Enterprises was chartered as a private company ultimately owned by the city.

But the fact that these employees squandered large sums of money whose total amount may never be known, provides a perfect example for why there exist laws prohibiting government employees from spending public money on private business deals without authorization.

When officials begin imagining public accounts as a private till the new audit report makes clear, bad things happen.

Besides making at least $1.5 million in airport money disappear Martin, Costas, and Fermin's SFO Enterprises adventure left Honduras' airports, known as some of the most dangerous in the world, without many of the upgrades spelled out in the SFO-led consortium's management contract. We can only hope no Honduran airplane crashes ever cause bereaved family members to sue San Francisco.

Thanks to the Honduras debacle SFO International Airport's managers have become known in the international airport business as overreaching bumblers. This reputation for incompetence will likely cling to San Francisco's airport for some time to come.

Notwithstanding Larry Mazzola led the Airport Commission in a resolution thanking John Costas, who'd been listed as chief executive of SFO Enterprises "for his outstanding service and wished him well in his retirement," when Costas retired from the airport in 2004 according to Commission minutes.

Expect the same when Costas' cronies Martin and Fermin are up for retirement here in bad-bureaucrat Shangri-La.

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