Grand Jury Disputes San Bernardino Airport Board

8/3/2019 Grand Jury Disputes San Bernardino Airport Board

http://slidepdf.com/reader/full/grand-jury-disputes-san-bernardino-airport-board 1/15

November 3, 2011

Mayor Patrick J. Morris, PresidentMembers of the Commission

San Bernardino International Airport Authority294 South Leland Way

San Bernardino, CA 92408

Dear Mayor Morris and Members of the Commission:

At the request of the 2010-2011 San Bernardino County Grand Jury and in accordance with State

law, the San Bernardino International Airport Authority (SBIAA) was required to formallyrespond to the Grand Jury’s Final Report entitled Performance Audit of San Bernardino

International Airport Operations, Development and Construction Activities by no later thanAugust 30, 2011. On August 17, 2011 the SBIAA Commission released its formal response to

the Grand Jury report. In the transmittal letter of your response, you noted that the Commission“is prepared to implement the recommendations contained in the Grand Jury report.” However,

you further asserted that the Commission had “identified a number of significant factual errorsand misstatements” in the Grand Jury Report” and stated that “it is essential that the foundational

errors be addressed to ensure the integrity of this process.”

These claims of factual or foundational errors within the grand jury report by the SBIAACommission are unsupported by the material and documentation provided in the Commission’sformal response and the grand jury strongly disagrees with your representation of the audit. The

Commission’s written response to our audit report consistently misrepresents our findings and provides vast amounts of information that is superfluous to the audit topics. In many instances,

the Commission has relied upon erroneous information when formulating its response and, basedon comments made by the previous Interim Executive Director, clearly has been provided with

erroneous information regarding the basic principles of a performance auditing.

It is highly unusual for a Grand Jury to respond to public criticisms of its reports. However, after

the review of the Commission’s response and an analysis of the evidence supporting the

allegations of factual or foundational error, this Grand Jury feels that it is critically important to“ensure the integrity of the process” by responding to these claims.

Summary of Our Response

Throughout the period when the Commission was holding public hearings on the Grand Jury

report and deliberating on its response, the Interim Executive Director, Mr. Donald Rogers, madethe assertion that the Grand Jury did not conduct a performance audit. Mr. Rogers stated that past



Mayor Morris November 3, 2011

Page 2

accomplishments and performance improvements were not discussed, and that meaningfulcomparisons with other agencies were not conducted.

This response from Mr. Rogers, a Certified Public Accountant, misstates the purpose and scopeof a performance audit. According to the United States Government Accountability Office

(USGAO), which publishes the paramount standards on performance auditing in the country,

Performance audits are defined as engagements that provide assurance or conclusions based on an

evaluation of sufficient, appropriate evidence against stated criteria, such as specific requirements,

measures, or defined business practices. Performance audits provide objective analysis so that

management and those charged with governance and oversight can use the information to improve

program performance and operations, reduce costs, facilitate decision making by parties with

responsibility to oversee or initiate corrective action, and contribute to public accountability.1

In other words, these guidelines – also known as Generally Accepted Government AuditingStandards (GAGAS) - state that the purpose of a performance audit is to assess the efficiency,

effectiveness and economy of an organization. While past accomplishments and performanceimprovements should be, and were, acknowledged in the report,

2the main purpose is to identify

what is needed to improve operations. This was precisely the objective of the Grand Jury audit,and we found many opportunities for improvement at SBIAA.

Misrepresentations: You claim that SBIAA staff had “identified a number of significantfactual errors and misstatements” in the audit report. However, we never received an itemized

list of such errors. Instead, we received a 583 page response that includes, among other things,several instances when the findings of our report were misrepresented or the findings and

conclusions were challenged based on erroneous information. In all such instances, this letter andattachment describes the misrepresentations made by SBIAA staff and consultants and directs

the Commission to the relevant pages in the report, so that you can independently compare thestatement made in the SBIAA response with the actual content of the Grand Jury report.

As an example, SBIAA attributes comments regarding the justification for extended jet bridgewalkways to the Grand Jury’s auditors when, in fact, our auditors were merely reporting

assertions made by multiple SBIAA staff and Mr. Scott Spencer, your developer, during fieldwork. As will be discussed more fully later in this letter, the auditors went to great lengths to

obtain evidence of SBIAA management claims that the walkways were installed for fire safety purposes. Our auditors independently researched the matter and, ultimately, rejected SBIAA’s

claim that the walkways were installed for this reason. The credibility of the Commission’sresponse is undermined by the use of misrepresented facts to support the allegations of error

within the audit report.

1, United States Government Accountability Office, by the Comptroller General of the United States, Government

Auditing Standards, Standard 1.25

2 Performance Audit of San Bernardino International Airport Operations, Development and Construction Activities,

Page 5



Mayor Morris November 3, 2011Page 3

Reliance on Contracted Profit-Making Entities: The SBIAA response to our report reliesheavily on the efforts of third-party contractors retained by SBIAA. It is clear from the analysis presented that these contractors were often asked to respond to narrowly defined questions, using

only the information and data provided by Airport staff. As we will demonstrate, in someinstances, these contractors reported their conclusions based on erroneous information. Thisletter responds to and articulates our disagreements to the assertions made by these contractors.However, we also note that the independence of the contractor’s analysis is questionable, giventheir financial relationship with SBIAA.

Inclusion of Superfluous Material: While our report of the performance audit totaled 120 pages, the response from SBIAA, at 583 pages, was nearly five times as long. A close inspectionof the SBIAA response shows that much of it is superfluous to the findings contained in thereport, or contains documentation that has been produced since the Grand Jury’s audit report wasreleased. For example, 236 pages or 40 percent of the response consists of policies and

procedures adopted after the audit was completed. Another 43 pages, or approximately seven percent, consists of a university economic impact analysis that appears to have beencommissioned by SBIAA management and is premised substantially on commercial airport passenger projection assumptions produced by SBIAA, which are heavily critiqued in our auditreport. Further, the university study does not directly or indirectly address our findings oninternal controls, construction management, the acquisition of used aviation equipment, a $1million settlement made with Mr. Spencer, or the Authority’s relationship with contractors, andis thus irrelevant for purposes of evaluating the audit findings.

Audit objectives

GAGAS defines audit scope as, “the boundary of the audit and is directly tied to the auditobjectives. The scope defines the subject matter that the auditors will assess and report on, suchas a particular program or aspect of a program, the necessary documents or records, the period of time reviewed, and the locations that will be included.” In this instance, the scope was defined bythe Grand Jury to obtain information in support of its investigations and providerecommendations for improvements in some key management areas.

Specifically, the purpose of the audit was to evaluate the efficiency and effectiveness of theAirport’s operations, development and construction activities. As stated in the report, the auditobjectives were to:

• Evaluate the management structure and authorities, including governance and staffing levels,

decision making authorities and processes, as well as performance and financialmanagement;

• Review internal control mechanisms established by SBIAA to determine whether appropriatemonetary safeguards have been established and are followed, and whether the organizationcomplies with generally accepted accounting practices in regards to recording and reportingon certain financial transactions;




Page 4

• Assess construction management policies, procedures and practices, to ensure that theycomply with federal and State laws and regulations; incorporate fair and transparent bidding

and contractor selection processes; and appropriately safeguard the financial interests of the

organization and taxpayers;

• Review the leasing of hangar and terminal facilities, and the process for awarding servicecontracts, including the master lease and operating agreements;

• Evaluate the contractual and financial relationships between SBIAA and their contractors todetermine the role of each; examine ownership and management composition; and,

investigate how each was selected or became involved with airport construction and/or management activities; and

• Assess the master lease agreement, including the responsibilities of the lessee (e.g.,operations and development, airport promotion, etc.) and compliance with lease terms.

In short, the scope of the performance audit was defined by the Grand Jury to supplement theresults of its own investigations and provide meaningful recommendations for consideration by

SBIAA.

Audit Methods

We conducted the audit in accordance with Government Auditing Standards, July 2007 Revision, by the Comptroller General of the United States, as modified by the San Bernardino County

Grand Jury. Specifically, the Grand Jury requested that an exit conference, or final meeting withSBIAA, not be conducted.

Under the modified approach, the following audit tasks included:

• An entrance conference in December 2010 with the Interim Executive Director 3, the

Assistant Director, the Aviation Director, the Director of Information Services/Clerk of theBoard, and SBIAA’s legal counsel (Mr. Timothy Sabo).

• Field work during the four-month period from January 2011 through April 2011. Field work included (1) an initial assessment, including interviews with SBIAA management, of

administration and operations; (2) four formal information requests; (3) tours of theredevelopment area, airport property, and used aviation equipment acquired from Norton

Development Company; and (4) additional interviews with SBIAA managers and other individuals with knowledge about SBIAA operations, including the contractor who has been

involved in many of the development and operations activities at the airport.

3The Grand Jury’s auditors met with the Interim Executive Director, Mr. Don Rogers, who has since resigned from

his duties at SBIAA.




Page 5

• Internal quality assurance review.

• Publication of the final report on June 30, 2011.

We have responded below to major assertions made in the SBIAA response that conflict with thefindings of our report:

SBIAA Commission Response to Recommendation 3.5

SBIAA Commission Resolution 2011-04, passed on August 10, 2011, provides an official

response to our recommendations. While the Commission stated its agreement with 15 of the 16recommendations in Resolution 2011-04, it disagreed with Recommendation 3.5, which relates

to the purchase of used aviation equipment from Norton Development Company, LLC.

Recommendation 3.5 advised the SBIAA Commission to formally direct the Interim Executive Director and Assistant Director to cease from approving any further fund payments to Norton Development or any third parties with agreements to provide services in connection to the used

aviation equipment, which was originally authorized on July 3, 2007.

SBIAA Resolution 2011-04 states that:

The referenced agreement has been implemented, and there are no similar agreements pending at this time. The SBIAA Commission will enforce all

conditions precedent in the applicable development agreements to ensure fullcompliance by the developer prior to consideration by the SBIAA Commission of

acquisition of any ownership interest in the improvements. Additional reviewswill be requested by the SBIAA Commission as appropriate.

We stand by our recommendation that the Commission direct SBIAA management to cease fromapproving further construction funds for the following reasons:

1. The Airport currently owns six unrefurbished jet bridges and other miscellaneousequipment that is in unusable condition. Since the previous acquisition was accomplished

without a contract, the Grand Jury continues to have a concern that Norton DevelopmentCompany, LLC will be asked to perform further repair and refurbishment services on

such equipment through its third party vendors. Such activity should be immediately

ceased and no further requests should be made to Norton Development Company, LLCrelated to the acquisition.

2. As noted in Section 3 of our report, due diligence has not been conducted on the

usefulness of the equipment that has been purchased. Specifically, the equipment may benear the end of its useful life, even with a refurbishment, and its specifications may not be

appropriate for its location at the customs building or future gates without further costlyconstruction modifications;




3. As noted in Section 3 of the report, SBIAA management never executed the purchaseagreement for the acquisition of used aviation equipment from Norton DevelopmentCompany and has more informally proceeded with the acquisition under its existing

agency-developer agreement;

4. According to the auditors’ analysis (see page 3-7 of our report), it is likely that SBIAAmanagement has already exceeded the amount stated in the purchase agreement($4,060,000); and,

5. No airline has publicly signaled its intention to provide a level of service necessitating jet bridge access to a customs or other facility.

Therefore, the Commission should strongly consider directing management to cease fromapproving all further fund payments for used aviation equipment from Norton DevelopmentCompany, LLC.

Policies and Procedures

The response from SBIAA included four separate policies and procedures covering: (1)construction management; (2) accounting; (3) purchasing; and, (4) investments. As stated in our report, only two policies and procedures were made available immediately at the outset of the performance audit. These were for (1) Personnel and (2) Purchasing. Despite the auditors’written request on December 15, 2010 for all policies and procedures, SBIAA did not provide acopy of the Investment Policy, which is dated August 1993 .Further, although the ConstructionPolicies are dated February 2011, they were not provided to auditors during their fieldwork phase and were not officially approved by the Commission until June 2011.

TranSystems Assertions on Used Aviation Equipment

The SBIAA response to our report included 17 pages of PowerPoint slides from a presentationconducted by TranSystems at the SBIAA Commission meeting on July 27, 2011 entitled “SBDAirport Jetbridges.” Incidentally, TranSystems is a subcontractor under Norton DevelopmentCompany, LLC for the Terminal Development Project. This PowerPoint presentation includedtwo assertions that we consider misrepresentations of the findings contained in our report.

TranSystems Assertion- Appropriateness of Purchased Jet Bridges

The first assertion put forward by TranSystems was that we were “incorrect” to assert that jet bridges that were refurbished and installed at the Terminal Building by Norton DevelopmentCompany, LLC appear to be inadequate for use with some regional jet aircraft without fittingthe terminal with additional expensive equipment. On page 3-4 of the report, the auditors assertthat the jet bridges that were refurbished and installed at the Terminal Building by Norton Development appear to be inadequate for use with some regional jet aircraft without the aid of

other expensive equipment . (emphasis added) This assertion was based on (1) the length of the purchased jet bridges; (2) the vertical distance between the floor of the terminal building and the




door floor (“sill”) height for various regional jet aircraft4, which is approximately 10 feet; and,(3) the Federally mandated maximum slope of 8.33% per the Americans with Disabilities Act.

We disagree with TranSystems’ assertion and stand by our finding for the following reasons:

1. TranSystems’ presentation misrepresents our finding. The focus of our finding on page 3-4 is on the ability of jet bridges to reach various regional jets unaided. The focusis on jet bridges, as opposed to the combination of jet bridges and walkways; because theformer Interim Executive Director (Mr. Don Rogers) made a representation to theCommission on July 3, 2007 that the jet bridges would meet the Airport’s needs. Despitethe clear focus of our finding on jet bridges, the TransSystems presentation states that“Engineered Walkways were installed with permissible slopes” and “All jet bridges withwalkways are within tolerance and serve all aircraft in Table 3.1.” In fact, our findingstates on page 3-4 that “walkways would be required to reach the regional aircraft.” The

finding further states on page 3-5 that, “the walkways cost SBIAA at least an additional$217,267, or $72,422.21 per installed jet bridge, as the walkways were not part of theinitial acquisition authorization.”

2. The evidence provided by SBIAA management to the auditors supports our

conclusions. The SBIAA Commission approved the Sale and Purchase Agreement withthe understanding that the jet bridges would be sufficient for use at the airport withoutadditional expensive equipment to connect passengers between aircraft and the terminal building. Specifically, the former Interim Executive Director’s July 3, 2007 staff reportto the SBIAA Commission made no mention of walkways. It only mentioned “SkyBridges.”

We stand by our finding that SBIAA management did not conduct proper due diligence on theused aviation equipment purchased from Norton Development Company, particularly in regardsto the jet bridges. As discussed in Section 3 of our report, the jet bridges:

• Would not be able to reach the relatively lower sill heights of regional jets without theadditional aid of expensive walkways, which in effect extend the length of the passenger boarding bridge to the aircraft; and

• Were built for large jet aircraft that were commonplace in the 1970s, 1980s, and 1990s at New York’s John F. Kennedy International Airport, not the regional jet aircraft that were

forecasted to be 50% or more of the fleet mix at San Bernardino International Airportuntil at least 2023. Further, evidence collected by auditors, including a photograph on page A-3.1-8 of Attachment 3.1 of our report, supports this fact.

4 According to the January 2006 Terminal Space Needs Study commissioned by SBIAA, the forecasted passenger

fleet mix consisted of 50% regional jets at the outset of anticipated operations in 2008 rising to 90% of the fleet mix

by 2023.




Page 8

TranSystems Assertion- Purpose of Walkways

The second assertion put forward by TranSystems was that “the audit report claims that thewalkways were required to assure 100ft separation between fuel vent and unprotected exterior building skin.” On page 3-5 of our report, our finding states that the audit team was told by the

Manager of Norton Development that the walkways were acquired to meet certain fire code standards established to minimize fire risk to the occupants of the terminal building in the event

of a fuel fire…this reasoning was also asserted by the Interim Executive Director and the Assistant Director of SBIAA. (emphasis added) As noted, the use of fire standards as

justification for purchase of the walkways is attributed to the Manager of Norton Development(Mr. Scot Spencer), the former Interim Executive Director (Mr. Don Rogers), and the Assistant

Director (Mr. Michael Burrows).

We disagree with TranSystems’ assertion and stand by our finding for the following reasons:

1. TranSystems’ presentation misrepresents our finding. Our finding clearly states on page 3-5 of our report that the Manager of Norton Development, the former Interim

Executive Director, and the Assistant Director made unsubstantiated assertions to theauditors that the walkways were purchased for the purpose of fire protection. The report

also provides details on page 3-5 explaining why the assertions made by these threeindividuals were erroneous. The TranSystems presentation incorrectly attributes this

assertion to the auditors. 2. Audit work papers provide evidence that challenges TranSystems’ assertion. After

the Manager of Norton Development, the former Interim Executive Director, and the

Assistant Director asserted to the auditors that the walkways were purchased for fire protection purposes, the audit team followed up with requests for the relevant law,regulation, or code that these individuals had vaguely referenced. A review of audit

workpapers has uncovered the following evidence to support our finding:

• On March 9, 2011 the audit team emailed the SBIAA Director of InformationServices/Clerk of the Board requesting copies of the referenced fire codes. On March

15, 2011 the Director of Information Services/Clerk of the Board set up a folder onthe File Transfer Protocol (FTP) site set up to transmit documents, but failed to

respond to our request for the referenced fire codes.

• On March 16, 2011, the auditors asked Mr. Scot Spencer for copies of the fire codethat he and SBIAA management used to justify the expense of the walkways. Mr.

Spencer indicated that he could provide those to the audit team. The audit teamfollowed up with Mr. Spencer on March 25, 2011 by sending a request for

information via email. That written request was subsequently followed up with asubpoena. Mr. Spencer’s response to the subpoena did not include a fire code section

to back up the claim made by him, the former Interim Executive Director, and theAssistant Director that the walkways were purchased for fire protection.. Also, the




auditors reviewed national fire safety regulations and standards for airports that donot require the set back distance claimed by the Airport officials and developers.

Faithful & Gould Assertions on Used Aviation Equipment

The SBIAA response to our report included 142 pages of PowerPoint slides and a SummaryReport from Faithful and Gould, a consulting firm that specializes in construction and projectmanagement. SBIAA management commissioned Faithful and Gould to conduct two costcomparisons including: (1) a comparison of costs to purchase new aviation equipment versus the price that SBIAA paid Norton Development for used aviation equipment and (2) a comparison of terminal construction costs between San Bernardino International Airport and other airports. Wehave found considerable faults in the analyses conducted by Faithful and Gould that we believeinvalidates their conclusions.

Faithful and Gould Equipment Cost Comparison

The first cost comparison presented by Faithful and Gould in the response related to theacquisition of used aviation equipment from Norton Development Company, LLC. According tothe PowerPoint slide on page 290, SBIAA commissioned Faithful and Gould to compare thecosts of new equipment to the cost that SBIAA paid Norton Development for used equipment.According to the Faithful and Gould study, SBIAA saved approximately $4.8 million. We havefound considerable flaws in the Faithful and Gould analysis, which we believe invalidates their conclusion.

We disagree with the assertion made by Faithful and Gould and stand by our finding for the

following reasons:

1. Faithful and Gould did not analyze the value of the used aviation equipment. Werecommended in Section 3 of our report that SBIAA Commission engage the services of

a reputable, independent auditing firm to examine the representations and warrantiesmade by Norton Development management and SBIAA management in connection to the

purchase of used aviation equipment as well as the amount actually spent on suchequipment, and the estimated useful life and/or resale potential of the equipment.

(emphasis added) The Faithful and Gould study simply accepted the prices provided bySBIAA management for the used equipment and compared them to new equipment, asspecified by SBIAA.

2. Faithful and Gould provided no evidence to dispute our finding that the used

equipment acquired from Norton Development is likely to have a shortened lifespan .As noted on page 3-6 of our report, the used jet bridges purchased range in age from 20 years to 36 years. According to representatives from one jet bridge manufacturer, jet

bridges generally have a lifespan of 20 years, but this could be extended if proper maintenance is conducted throughout the life of the equipment…there is little evidence to

suggest that SBIAA management conducted a thorough inspection of the condition of the




used equipment. Specifically, staff from SBIAA did not conduct a visual inspection of theequipment until after the Commission approved the authorization and the equipment was

acquired by Norton Development.

3. The Faithful and Gould study disregards SBIAA documentation showing that gate

seating provided by Norton Development Company is significantly less than the

amount presented to Commission by management at a significantly higher cost. Asnoted on page 3-12 of our report, the former Interim Executive Director (Mr. DonRogers) informed the SBIAA Commission on July 3, 2007 that Norton DevelopmentCompany would be supplying approximately 2,500 seats that would be sufficient for 12gates. However, as noted on page 3-12 of our report, auditors’ review of fundingdocuments show that only 820 seats, or about a third of what was represented to theCommission have been provided. Further, although SBIAA documents assembled just before Commission approval showed that purchasing new chairs would have cost about

$130 per seat, funding documents show that SBIAA paid Norton Development Companyover $300 per chair. The Faithful and Gould study does not acknowledge or address thisevidence.

Faithful and Gould Construction Cost Comparison

In its slide presentation, Faithful and Gould compared the cost for construction of the terminal atSan Bernardino International Airport with the cost of other construction projects at seven other terminal construction projects at airports throughout the United States. Although such acomparison was not presented in the Grand Jury audit report, we believe the Commission should

view the representations made by Faithful and Gould with skepticism.

In its analysis, Faithful and Gould reported that the average cost per gate at the San BernardinoInternational Airport was $14,576,142, compared with $42,037,249 at the other airports. Thiscomparison was based on total reported costs at SBIA of $58,304,568 for the construction of four gates.

We requested our auditors to test the assertions being made by Faithful and Gould. The auditorsfound that: (1) the reported SBIA cost of $58,304,568 only included the cost construction of theterminal building and not additional project elements, such as the construction of a car rentalarea, parking lots and other support areas; and, (2) in at least one instance, the reported cost for terminal construction at the other airports was inflated.

Our auditors selected the terminal project at Mineta San Jose International Airport for detailedanalysis of the cost comparison. In its slide presentation, Faithful and Gould reported total costsof $342,000,000 for the construction of 12 gates. This amount grossly overstates the cost for theMineta San Jose International Airport project, which has multiple components unrelated to theconstruction of the 12 gates at Terminal B. These other components include: (1) renovation of Terminal A; (2) the demolition and reconstruction of a new Terminal C; and, (3) construction of new roadways, a multi-level parking structure and other surface parking, While Faithful and




Gould excluded roadway and parking costs, it appears to have included the cost of Terminal Arenovation, which nearly doubled the reported costs when compared with actual amounts. Thefollowing table shows the cost for Terminal B construction, with and without the demolition of

the old Terminal C building, which was required to accommodate the full Terminal B footprint.

As shown, the average cost for constructing a gate at Mineta San Jose International Airport wasactually less than the reported cost per gate at SBIA of $14,576,142 (coming in at $12,611,820),when excluding the demolition cost for Terminal C. Even when the full Terminal C demolitioncost is included, the average cost rises to only $15,172,871, which is merely $596,729 more thanthe reported SBIA cost or 4.1%.

Computation of Average Construction Cost Per Gate Based on Actual

Financial Data Reported by Mineta San Jose International Airport

Estimated Actual as Reported by Mineta San Jose International Airport - without Terminal C Demolition:

Airport Description Gates Project Cost Cost/Gate

Mineta San Jose Terminal B Terminal B/Utility Phase 2 12 141,894,109$ 11,824,509$

Mineta San Jose Terminal B Terminal B, Phase 2 12 4,835,342$ 402,945$

Mineta San Jose Terminal B Terminal B, Concourse 12 4,612,389$ 384,366$

Mineta San Jose Terminal C Demolition for Terminal B - -$ -$

Mineta San Jose Terminal B All Project Components 12 151,341,840$ 12,611,820$

Estimated Actual as Reported by Mineta San Jose International Airport - with Terminal C Demolition:

Airport Description Gates Project Cost Cost/Gate

Mineta San Jose Terminal B Terminal B/Utility Phase 2 12 141,894,109$ 11,824,509$

Mineta San Jose Terminal B Terminal B, Phase 2 12 4,835,342$ 402,945$

Mineta San Jose Terminal B Terminal B, Concourse 12 4,612,389$ 384,366$

Mineta San Jose Terminal C Demolition for Terminal B 12 30,732,607$ 2,561,051$

Mineta San Jose Terminal B All Project Components 12 182,074,447$ 15,172,871$

Legal Analysis Submitted by Hogan Lovells US, LLP

We have no opinion regarding the legal analysis submitted by Hogan Lovells US, LLP pursuantto a request from SBIAA management in response to the Grand Jury report. In our report, we

merely make the point that,The Interim Executive Director also stated that he had inquired with DOT officials regarding the intent of

the order that ‘banned’ Mr. Spencer from the ‘aviation industry’ and that he was advised that ‘as long as he

does not sell airline tickets,’ Mr. Spencer could continue to be involved in other aviation activities. This

interpretation runs counter to a plain language understanding of the judge’s order and is not documented in

any fashion.




Page 12

In other words, our auditors did not seek an independent legal interpretation of the administrativeorder, nor did the Grand Jury request them to do so. Instead, our auditors sought evidence that

the Interim Executive Director had thoroughly researched this matter when examining the

conditions under which Mr. Spencer could be involved with Airport construction and operationsactivities. When competent evidence was not provided, our auditors questioned thereasonableness of the Interim Executive Director’s interpretation.

More importantly, these comments were made in the context of a broader question regarding theevolution of the Airport’s contract relationship with Mr. Spencer. As you will note when reading

Section 5 of our report, we strongly questioned the judgment of the SBIAA Board of Commissioners and management regarding decisions to increase Mr. Spencer’s involvement in

the construction of Airport facilities and the eventual assignment of nearly all aspects of Airportoperations, given Mr. Spencer’s clear lack of directly related experience and criminal

background. By not seeking competent legal counsel on the administrative ruling before

expanding Mr. Spencer’s role, and by doing so only after a critical Grand Jury report wasreleased to the public, SBIAA once again demonstrated an inability or unwillingness to exercisedue diligence in such matters.

California State University Study

The SBIAA response to our report included a 43 page study conducted jointly by researchers

from the Institute of Applied Research and Policy Analysis at California State University-SanBernardino in partnership with researchers at California State University-Fullerton. The study

focused on the economic and social impacts of the development of SBIA property. We do notconsider the subject and conclusions of the study to be well-founded or germane to the findings

contained in our report. In particular, our observations include:

1. The study appears to have been commissioned and influenced by SBIAA

management. While the researchers do not acknowledge sponsorship or a source of

funding for the study, it appears as though it was provided as a service to SBIAAmanagement. According to its website, The Institute of Applied Research and Policy

Analysis at California State University-San Bernardino, is a full-service consulting and applied research organization. The purpose of the institute is to provide a variety of

research and consulting services to public agencies, business organizations, and individuals within the university's service area. Further, the cover of the report states that

it was submitted on June 1, 2011 to San Bernardino Airport Agency [sic]. Additionally,

three of the five sources listed under “References” at the back of the report are fromSBIAA. These include a presentation that was made to California State University-SanBernardino researchers by SBIAA/IVDA staff, as well as reviews of SBIAA and IVDA

audit reports from 2004 to 2010, authored by Rogers Anderson Malody and Scott, LLP,the accounting firm founded by the former Interim Executive Director.

2. The study does not address any issues related to the findings in our report. The

purpose of the study was to provide an analysis of the economic and social impacts of the




redevelopment of the former Norton Air Force Base. The study does not address anyissues relating to the findings of our performance audit of SBIAA, namely: (1) that wefound serious internal control breakdowns; (2) SBIAA management has disregarded

standard practices for public infrastructure projects; (3) SBIAA management did notconduct proper due diligence in proceeding with the acquisition of used aviationequipment from Norton Development Company; and, (4) SBIAA management was quick to agree to a monetary settlement with two companies associated with Scot Spencer amounting to approximately $1 million under questionable circumstances.

Former Interim Executive Director’s Assertions to Commission on 7/13/11 & 7/27/11

The SBIAA response to our report included PowerPoint slides from two presentations given bythe former Interim Executive Director. The former Interim Executive Director made severalassertions in his presentation that challenge the methodology and conclusions of our performance

audit. The attached tables list these assertions and our response to them.

Former Interim Executive Director Assertions to SBIAA Commission on July 13, 2011

See the table on page 14.


See the table on page 15.

Please contact us if you have any further questions or concerns about this letter or statements

made by others about our SBIAA performance audit report.

Sincerely,

Edward Burgnon, Foreperson2011-2012 Grand Jury




Page 14

Page Document Assertion/Disagreement Grand Jury Response

(1) Though entitled "performance audit," no tests of performance

were ever conducted….the HMR report states the opinion of its

authors which are not substantiated with quantifiable data

The U.S. GAO definition of performance audit includes

the following language: "Performance audits

encompass a wide variety of object ives, including

objectives related to assessing program effectiveness

and results; economy and efficiency; internal control;

compliance with legal or other

requirements...Performance audits may entail a broad

or narrow scope of work and apply a variety of

methodologies; involve various levels of analysis,

research or evaluation..." This is precisely what

was done by HMR, in accordance with the scope

defined by the Grand Jury. We only produce evidence

based f indings. The evidence for this audit includes

documents provided by SBIAA management as well

as f rom other part ies, such as aircraf t equipment

manufacturers.

(2) HMR Report questions the overall investment in the Airportthrough SBIAA and IVDA funding efforts and use of federal grants

Our audit report does not question the overallinvestment in the Airport nor does it quesiton the use

of federal grants. Rather, our report analyzes the

procurement process for the design and construction

of the airport terminal and FBO facility. For example,

we did not question SBIAA's decision to build a

commercial passenger terminal, but rather we

analyzed the process that led to the design and

construct ion of the terminal building in its present

form. As detailed in Section 2 of our report, we found,

based on collected evidence, that SBIAA management

made alterations to the timelines and scale of the

Terminal Development Project based on more

agressive passenger traffic projections and assertions

of prosepective air carrier requirements provided by

Mr. Scot Spencer- a contractor whom management

intended to hire as the project developer through a

sole source contract.

(3) Although the HMR Report reviews certain Airport capital

improvement projects of the IVDA, recommendations are being

made to the SBIAA Commission

The power point slide does not detail which capital

improvement projects they are referring to. However,

the scope ofour audit was to review the performance

of the San Bernardino International Airport. While the

IVDA has a role in capital projects on land

surrounding the airport , SBIAA is responsible f or

developing and maintaing the airport f acilities.

Therefore, we found it appropriate to direct our

recommendations to the SBIAA Commission. Further,

the SBIAA Commission accepted 15 of the 16

recommendations included in our report.

(4) There are multiple misstatements and factual errors that must

be corrected...

We can not provide a direct response to this assertion

as it is not sufficiently detailed.

493-494"Sample of Specific Errors &

Misstatements of Fact"

"HMR Report, page 2-5 - 'Terminal Design Altered by Developer's

Aggressive Passenger Projections and Assertions of Prospective Air

Carrier Requirements' Our reponse…"

The evidence we collected f rom SBIAA and outside

sources contradicts the assertion that the Terminal

Renovation Project was formulated in June 2006.

496-497 "Sample of Specific Errors & Misstatements of Fact"

"HMR Report, page 2-1 - 'The fund control process (1) alienates

the Chief Financial Officer from day to day financial oversight of

major construction projects and (2) results in poor budgetary

controls.' Our response…"

Although SBIAA management claims the fund control

process provides a "greater level of oversight" over

project funds, the evidence we collected shows that

this process supplants established controls. Further,based on collected evidence, the fund control process

has resulted in poor budgetary controls, particularly

for soft costs.

498"Sample of Specific Errors &


HMR Report, page 1-8 - "'…the combined IVDA and SBIAA

organization has aggressively changed its approach to staffing in

the past several years. The organization has no civil service staff

positions…According to some individuals interviewed for this audit,

in part, the extensive contracting and delegation of authority has

occurred to circumvent certain civil service and internal control

processes that would otherwise be required if the organizations

were operated by public employees,' Our response..."

While the statements made by the former Interim

Executive Director are accurate, he misses the major

point of the statement. Af ter being placed on third-

party contracts, SBIAA employees were no longer

offered civ il serv ice protections and became at-will

employees. This led to a greater concentration of

power under the Executive Director.

491-492 "Initial SBIAA Observations"

"SBIAA staff and consultants have identified numerous issues and irregulatiries with the HMR Report. Key points for

consideration are: (1) Though entitled "performance audit," no tests of performance were ever conducted….the HMR

report states the opinion of its authors which are not substantiated with quantifiable data; (2) HMR Report questions the

overall investment in the Airport through SBIAA and IVDA funding efforts and use of federal grants; (3) Although the HMR Report reviews certain Airport capital improvement projects of the IVDA, recommendations are being made to the

SBIAA Commission; (4) There are multiple misstatements and factual errors that must be corrected..."





Page 15

Page Document Assertion/Disagreement Grand Jury Response

523-526"Sample of Specific Errors &


"HMR Report, page 2-1 - 'The scope and cost of the Terminal

Development Project grew incrementally from approximately $22

million based on an initial design in January 2006, to $38 million

based on a revised conceptual design in May 2007, to over $100

million budge d as o f January 2011..."

As noted on page 2-5 of our report, SBIAA contracted with an

architectural and engineering firm in September 2005 for a

space-needs analysis, conceptual design, and cost estimate for

the terminal building. This work, completed in late 2005,

resulted in a cost estimate of about $22 million based on data

and projections contained in the airport's master plan. The

Executive Director asserted to the Commission on May 23, 2007

that a $38 million investment by IVDA/SBIAA was needed to

enable the airport to accommodate commercial air service at

SBIA. Basic improvements such as parking lots for airport

passengers and workers were not included in this scope and

were later used to justify expanding the project budget.

527-530

"Additional Topics/Inaccuracies and

Misstatements in the HMR Report

(7/27/11): Interpretation of DOT

judgment [sic] against Scot Spencer

and what constitutes a ban from the

'aviation industry' within the DOT

jurisdiction."

The PP slides include supposed due diligence in 2005 and a 2011

legal opinion from Hogan Lovells

Our auditors did not seek an independent legal interpretation of

the administrative order, nor did the Grand Jury request them to

do so. Instead, our auditors sought evidence that the Interim

Executive Director had thoroughly researched this matter when

examining the conditions under which Mr. Spencer could be

involved with Airport construction and operations activities.

When competent evidence was not provided, our auditors

questioned the reasonableness of the Interim Executive

Director’s interpretation.

531



(7/27/11): HMR page 5-6, first full

paragraph states: '…in 2005 Mr.

Spencer was convicted of violations

of DOT regulations…'and' …the

administrative law conviction

occurred..."

The Executive Director disagrees with the auditor's use of the

words "convicted" and "conviction."

No response. This criticism is immaterial.

532-535



(7/27/11): HMR page 5-6, end of

second full paragraph…"

The Executive Director disagrees with the auditors' "plain language

understanding" and lack of a legal analysis of the DOT

administrative order within the GJ report.

Irrelevant criticism. By not seeking competent legal counsel on

the administrative ruling before expanding Mr. Spencer’s role a t

the Airport, and by doing so only after a critical Grand Jury

report was released to the public, SBIAA demonstrated an

inability or unwillingness to exercise due diligence in such

matters.

536



(7/27/11): The HMR report indicates

that SBIAA management did not

conduct proper due diligence"

The Executive Director disagrees with the a uditors' assertion that

management did not conduct proper due diligence with regards to

the purchase of used aviation equipment.

The tour of the used equipment in New York took place AFTER

the Executive Director had obtained approval from the

Commission to enter into an agreement. There is no evidence

that any due diligence occurred BEFORE the Executive Director

recommended such acquisition to the Commission. Further,

SBIAA management did not conduct life cycle analysis thatwould have taken into account the anticipated lifespan of the

equipment.


Documents

Grand Jury Disputes San Bernardino Airport Board