San Francisco City Government Controller - SFO Enterprises Report

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FINANCIAL AUDITS

January 22, 2007

BOARD OF SUPERVISORS:

The Airports Investment in SFO

Enterprises, Inc. Will Result inLosses of $667,000 and MayIncrease Up to $1.5 Million


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City and County of San FranciscoOffice of the Controller City Services Auditor

Board of Supervisors:

The Airports Investment in SFO Enterprises, Inc. Will Result in Losses of$667,000 and May Increase Up to $1.5 Million

January 22, 2007

Purpose of the Audit

At the request of the Board of Supervisors of the City and County of San Francisco, we conducted a

financial review of the Citys investment in SFO Enterprises, Inc.

Highlights

The Airports Investment in SFOE Will Result in a Loss

The San Francisco Airport Department (Airport) will lose at least

$667,000 from its investments in the private, for-profit corporation, SFOEnterprises, Inc., (SFOE). The Airport is now closing the operations ofSFOE, and SFOEs financial position consists of the following:

Recorded assets of $1,523,732, including a receivable of $787,200,which is contingent upon future events, from the sale of SFOHonduras, a subsidiary of SFOE.

Recorded and unrecorded liabilities of $2,190,719. Recordedliabilities include $1,087,559 owed to the Airport for prior consultingservices to SFOE. Unrecorded liabilities consist of unbilled costs of$760,673 that the Airport did not allocate to SFOE.

If SFOE does not collect the receivable from the sale of its subsidiary,the Airports loss will increase to $1.5 million.

The Airport Could Have Better Managed Its Relationship With SFOE

The Airport did not consider potential internal control weaknesses whenit assigned some of its upper management staff as officers of SFOE andthen assigned some of the same staff to manage the agreement onbehalf of the Airport. This may have resulted in such questionableactions where the Airport:

Provided services to SFOE before it had any formal agreements withSFOE and was 18 months late in formalizing the repayment

agreement with SFOE to pay for past services.

Did not consistently identify all its costs related to SFOE, as well asits other international services projects.

Did not always follow city rules in conducting work for SFOE.

Recommendations

The audit report includes six

recommendations for the

Airport to properly account for

the closure of SFOE, and to

manage outside contracts,

including the following:

Retain SFOEs liability of$1,087,559, plus interest,on the Airports booksuntil SFOE receives theremaining proceeds of thesale of SFO Honduras orthe receivable becomesuncollectible.

Collect from SFOE anyamounts received fromthe proceeds of the saleof SFO Honduras, inaddition to any remainingcash in its bank accountsto reduce the debt owedto the Airport.

Formally enteragreements with outsideagencies before providingany services.

Ensure that its employeesadhere to the Controllerstravel policies even whenthey are working asconsultants for private

companies.


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CITY AND COUNTY OF SAN FRANCISCO

OFFICE OF THE CONTROLLER Ed Harringt

Contro

Monique Zm

Deputy Contro

5-554-7500 City Hall 1 Dr. Carlton B. Goodlett Place Room 316 San Francisco CA 94102-4694 FAX 415-554-

January 22, 2007

Supervisor Aaron Peskin, PresidentBoard of SupervisorsCity Hall, Room 2441 Dr. Carlton B. Goodlett PlaceSan Francisco, CA 94102

Dear President Peskin:

The Office of the Controller (Controller) presents its report on the audit of SFOEnterprises, Inc., (SFOE) a private, for-profit corporation, of which the City and County ofSan Francisco (City) is the sole shareholder. This corporation was formed in 1999 to allowcity staff at the San Francisco Airport Department (Airport) to provide airport management

consulting services through the corporation to other international airports. SFOE has beenawarded only one contract to manage a foreign airport. The Airport is in the process ofterminating the operations of SFOE, and SFOE has completed the sale of its onlysubsidiary, SFO Honduras, LLP. The fiscal year 2003-04 Annual Appropriation Ordinancedirected the Controller to conduct this audit upon the termination of operations of SFOE.

We believe this venture will ultimately result in a loss to the Airport of at least $667,000growing to almost $1.5 million depending on whether the sale of SFO Honduras everproduces enough income to offset the costs of the venture. The actual cost of this ventureis clouded by the interaction of the Airports International Services Division and SFOE.The Airport contends that the two entities are separate and while there is legal separation,their reason for existence, management, and staffing are virtually identical so we often

viewed them as one entity for this audit. Both entities were created to providemanagement and advisory services to international airports. Accordingly, we identifiedadditional costs that we believe could be attributed to the venture.

The Airports response is attached to this report. The City Services Auditor-FinancialAudits will be working with the Airport to follow up on the status of the recommendationsmade in this report.

Respectfully submitted,

Original signed by:

Ed HarringtonController


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INTRODUCTION

BACKGROUND

Over the past 10 years, the San Francisco Board of Supervisorsand the Airport Commission, through a series of resolutions andordinances, approved the concept of the Airport Department(Airport) offering management services of Airport staff to assistmanaging other international airports. This culminated in theAirport forming SFO Enterprises, Inc. (SFOE), of which the Cityand County of San Francisco (City) is the sole shareholder, inSeptember 1999, to provide international airport management andother advisory services.

In February 2000, SFOE organized SFO Honduras LLC as asubsidiary to participate in the consortium that eventually won the

concession to operate four airports in the Republic of Honduras. Inconnection with its bid, the consortium organized InterAirports,S.A. (InterAirports), a Honduran company, to act as the actualoperator of the airports. SFO Honduras and InterAirports entereda contract in May 2000 for SFO Honduras to provide operationand management services to InterAirports for an annual fixed feeof $750,000, adjusted annually by the consumer price index,together with a variable fee. The appendix shows the relationshipsof the various parties.

Because SFOE did not have sufficient initial capital to hire its ownemployees and to pay for other services, SFOE planned to use

the Airports employees to perform the corporations services. Inreturn, SFOE agreed to reimburse the Airport for payroll costs,travel expenses, and other services performed by Airport staff andother vendors.

In March 2001, critical articles concerning SFOE began appearingin the press. When the Board of Supervisors (Board) approved theAirports fiscal year 2002-03 budget, it placed on reserve 75percent of the budget for the International Services Division.According to a letter from the Citys Office of the City Attorney(City Attorney), the Board decided to impose the reserve due topolicy concerns about SFOEs operations. By this time, SFOE was

already exploring the possibility of selling its interest in SFOHonduras. According to the letter, throughout fiscal year 2002-03,the Airport director asked the chair of the Boards financecommittee to calendar the release of the funds on reserve.Subsequently, the Board included an administrative provision tothe Airports fiscal year 2003-04 Annual Appropriation Ordinancewhich stated that the Airport could expend up to $115,000 ofalready appropriated funds in the Airports budget to complete thetermination and/or disposition of SFOE no later than January 1,2004. The administrative provision also required the Citys Office


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of the Controller (Controller) to complete an audit of SFOE upontermination of its operations.

SCOPE AND METHODOLOGY

The purpose of our audit was to identify the Airports costs ofoperating SFOE from its inception in September 1999, and therevenues and expenses related to the termination and sale ofSFOEs subsidiary, SFO Honduras in December 2004. Wefocused our review on the financial results of operations of SFOE,and its subsidiary SFO Honduras. We did not perform financialaudits of SFOE, or its subsidiary, because both entities areaudited annually by an independent certified public accountingfirm, and the firm has submitted to the Airport audited financialstatements for each of the calendar years 2000 through 2004.

To perform our audit, we inventoried and reviewed all of SFOEs

records made available to us at the Airports offices in South SanFrancisco. Although we reviewed these records, which includedother international services ventures and projects which we makereference to in our report, we did not perform an audit of theseother ventures and projects. We tested on a sample basis payrollrecords, travel reimbursement records, and professional servicesrecords for SFOE. We examined all relevant contracts enteredinto by SFOE, including its contracts with the Airport forrepayment of services. Finally, we reviewed the relevantprovisions of the sale of SFO Honduras to determine the proceedsdue to SFOE.


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Chapter 1

THE AIRPORT WILL LOSE $667,000 AND ITS LOSSES MAYINCREASE TO ALMOST $1.5 MILLION

SFO Enterprises, Inc., has assets of about $1,523,732, whichincludes the proceeds from the sale of its subsidiary, SFOHonduras, LLC. However, the likelihood of SFOE collectingoutstanding sale proceeds of $787,200 is unknown and isdependent upon contingent events. SFOEs assets are offset byoutstanding recorded debts of about $1,430,046 for consultingservices it provided to SFOE in prior years and outstandingattorney fees. Moreover, SFOE has additional unrecordedexpenses of $760,673, which the Airport did not charge to SFOE.These include unbilled consulting services, attorney fees,expenses incurred in its efforts to obtain international airport

management contracts prior to the creation of SFOE, as well asadditional charges for not consistently charging SFOE for the costof Airport employee benefit and service charges. If SFOE collectsits outstanding receivable, the Airports loss will be reduced toabout $667,000. However, if SFOEs receivable of $787,200 isuncollectible, then the Airport is at risk of losing almost $1.5million. The following table summarizes SFOEs recorded andunrecorded assets and liabilities we identified in our audit.

TABLE 1

SFOE Recorded and Unrecorded Assets and Liabilities

As of September 30, 2005

Recorded Unrecorded TotalAssets

Cash in Bank Accounts (Note 1) $736,532 $736,532Receivable from Sale of SFO Honduras (Note 1) 787,200 787,200

Total Assets 1,523,732 1,523,732

Liabilities (Note 2)Due to AirportConsulting Services 1,087,559 1,087,559Costs Incurred After Incorporation $357,919 357,919Costs Incurred Before Incorporation 402,754 402,754

Due to OthersOutside Attorney Fees 342,487 342,487

Total Liabilities $1,430,046 $760,673 2,190,719

NET ASSETS (666,987)Additional Loss if Above Receivable Not Paid (787,200)TOTAL POTENTIAL LOSS ($1,454,187)

Note 1: Includes the payment of $447,800 on April 4, 2006 for a portion of the receivable.Note 2: The Airport has advised us that SFOE has other insignificant liabilities that we have not included

in this table.


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SFOE May Not Receive All the ProceedsFrom the Sale of Its Subsidiary

Following the direction of the City and County of San FranciscosBoard of Supervisors, the Airport started closing the operations ofSFOE by selling the corporations sole subsidiary, SFO Honduras

in December 2004 for a total consideration of $1,482,836. As ofApril 4, 2006, the Airport had not received most of the saleproceeds from the sale to YVR General Services in BritishColumbia, Canada. According to the Airports deputy director ofbusiness and finance, SFOE had received $15,000 cash, andrelief from liability associated with InterAirports equity callstotaling $232,836, and $447,800 in the par value of the transferredshares of InterAirports stock. Approximately $787,200 of the saleproceeds is still contingent upon future events. According to theAirports deputy director of business and finance, these paymentsare contingent upon InterAirports future profitability and dividendsto shareholders. When asked of the likelihood of receiving the

contingent payments, the Airports staff directly associated withSFOE could not give us an estimate.

The Airport Has Not RecoveredAll Its Invoiced Costs for ProvidingConsulting Services to SFOE

In providing Airport staff to conduct work for the corporation, theAirport and SFOE agreed that SFOE would reimburse the Airportfor payroll costs, travel expenses, and professional servicesprovided to SFOE by Airport staff, plus interest. During the fiveyears SFOE conducted its business, the corporation and its

subsidiary experienced a net loss of more than $863,000 and as aresult did not pay the Airport for all the services its staff providedto SFOE. Although the Airport billed SFOE $1,938,619 during thefive years, SFOE has paid the Airport only $851,060, and stillowes the Airport $1,087,559, plus interest.

The Airport Did Not ChargeSFOE for Several Costs

The Airport incurred a number of costs on behalf of SFOE that theAirport did not charge to SFOE. As shown in Table 2, we identified$357,919 in payroll, benefit, and service charges that the Airport

could have billed SFOE, as well as several attorney charges.

SFOE owes the Airport$1 million in past duecharges.


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TABLE 2

Other SFOE Expenses Not Billed to Airport

Expenses Incurred Amount

1. Outstanding, Unbilled Charges $45,623

2. Staff Benefit and Service Charges for FY 1999/00 54,637

3. Staff Payroll Not Billed for FY 2001 through 2003 25,409

4. Outside Attorney Fees Paid By Airport 80,717

5. Outside Attorney Fees Split With Airport 91,671

6. City Attorney Fees Paid by Airport 33,560

7. International Services Development Costs (Travel) 26,302

Total $357,919

(1) Outstanding Unbilled Charges. The Airport has advised usthat it has not invoiced SFOE for services provided by the Airportfrom January 1, 2004, through June 30, 2004.

(2) Staff Benefit and Service Charges.The Airport was notconsistent in charging SFOE for the use of its staff. The Airport,while including a provision for the payment of staff benefits, didnot charge the same benefit rates throughout the period it wasproviding staff services to SFOE. From September 1999, throughJune 2000, the Airport charged SFOE for staff benefits rangingfrom 7 percent to 40 percent of staff hourly rates. In subsequentyears, the Airport charged staff benefits rates ranging from 36percent to 41 percent of the hourly rates. We believe the higherrates to be more representative of the benefits paid to employees,and that the Airport could have recovered an additional $29,501 instaff benefit costs.

The Airport also was not consistent in requiring the payment of aservice charge. Although the Airport agreed to charge SFOE forservice charges of 10 percent for July 2000 and after,1 the Airportdid not require any payment of service charges prior to July 2000.2Since the two agreements were signed on the same date, itappears reasonable for the Airport to have charged the same ratefor both periods. We estimate that the Airport could haverecovered an additional collected $25,136 in service charges.

1Letter Agreement Regarding Services Provided by SFO to SFOE, dated March12, 2001.2Letter Agreement Regarding Repayment of Expenses, dated March 12, 2001.


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(3) Staff Payroll Costs.The Airport did not charge SFOE for allthe time its employees spent conducting work for the corporation.In reviewing a sample of timesheets, we found that the Airport didnot charge SFOE the following:

115 hours spent by the Airports chief of staff when he also

acted as SFOEs chief executive officer from 2000 through2003 ($12,703 in unbilled payroll, benefits, and servicecharges).

64 hours charged as Airport-related business when travelreimbursement vouchers showed the employee was inHonduras conducting work for SFOE, and attending aconference for which the Airport charged the travel expensesto SFOE ($5,105 in unbilled payroll costs).

81 hours spent by the Airports director of the InternationalServices Division3 when he also acted as SFOEs chief

financial officer. This includes time spent attending SFOEboard of directors meetings, attending meetings discussingSFOE matters, and conducting preliminary work for the sale ofSFO Honduras ($7,601 in payroll costs and benefits).

(4) Outside Attorney Costs Incurred by the Airport.The Airportengaged the services of a law firm, Morrison & Foerster, LLP, toprovide it outside counsel. The services specifically related toadvice regarding SFOE incorporation costs and advice to Airportemployees who also served as SFOEs officers, and could becharged as an expense to SFOE.

(5) Outside Attorney Costs Incurred by SFOE.The Airportunnecessarily agreed to pay for some of the legal services directlyprovided to SFOE. The corporation had also engaged the servicesof Morrison & Foerster to provide SFOE legal counsel. Althoughthe law firm provided and billed for the services it provided SFOEin 2003, most of the law firms invoices remained unpaid. Althoughthe law firm initially charged only SFOE for the legal services thatwere primarily related to the negotiations for the sale of SFOHonduras, Morrison & Foerster in December 2003 reissued newinvoices, totaling $189,110, that split the amounts due and billedapproximately 50 percent to SFOE and 50 percent to the Airport.

In its letter accompanying the invoices, the firm noted that thisallocation of costs to SFOE and the Airport reflects SFOEs boardof directors judgment as to the reasonable allocation of costs ofthis activity in light of the need to protect the Airport from potentialclaims (however unfounded they might be) in connection with thetermination of these activities. Further, Morrison & Foersteracknowledged in its letter that the law firm was reissuing theinvoices in accordance with the Airports direction. Nevertheless,

3Now deputy director of business and finance.

The Airport unnecessarilyagreed to pay more than$91,000 of SFOEsattorney expenses.


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since SFOE was created as a separate corporation to avoidliability to the City, we believe that SFOE should pay for theseattorney fees.

(6) City Attorney Costs. The Airports assigned deputy cityattorneys provided legal services to the Airports International

Services Division, but the Airport did not charge SFOE for any ofthe city attorney charges. According to one of the InternationalServices Division managers, who also worked as a consultant forSFOE, the great majority of work done by the Airports legal teamwas performed to represent the Airports interests as opposed toSFOE, and for this reason the Airport generally did not chargeSFOE for costs associated with the Airports legal counsel.However, since the Airports management agreement with SFOEallowed it to charge SFOE for professional services, the Airportscosts for SFOE-related legal services could be included as acharge to SFOE.

(7) Travel Costs.The Airport did not include in its invoices toSFOE any travel costs to conferences and other places forbusiness activities related to privatization efforts, but not directlyrelated to SFOE. According to the Airports assistant deputyairport director of capital planning, these amounts wereconsidered development costs of the Airport. However, in theabsence of an agreement that the Airport pay for developmentcosts, we believe that the expenses paid after the incorporationdate are development costs of the corporation and therefore couldbe charged to the corporation.

The Airport Could Also Charge SFOE for Costs

of Other International Airport Management Efforts

We identified $402,574 in charges incurred by the Airport beforethe creation of SFOE that we believe could be charged to SFOEsince the charges were related to international airportmanagement services. Table 3 summarizes the costs we believecould be charged to SFOE.

TABLE 3

Other Costs Incurred Prior to the Creation of SFOE

Expenses Incurred Amount1. International Services Charges (net) $309,723

2. City Attorney Costs Paid by Airport 53,631

3. International Services Development Travel Costs 39,400

Total $402,754


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(1) International Service Costs. Although the Airport did notallocate a budget for the International Services Division until fiscalyear 1999-2000, the Airport had taken steps prior to this time toattempt to obtain airport management contracts and to performother services. According to the Airports records, it spent about$636,914 from 1996 through 1999 in payroll, travel, and

professional services costs related to research, technical, and bidpreparation services that Airport staff and city vendors hadperformed in their attempts to win airport management and othercontracts in such countries as Panama, Peru, Mexico, Uruguay,Jamaica, Australia, and Chile. According to the Airport, the onlyrelated income received during this period, was $327,191 forservices rendered to the Perth Airport Consortium in Australia.Therefore, the Airports net expenses before the incorporation ofSFOE totaled $309,723.

The Airport disagrees with the auditors as to which activities arecorrectly billed to SFOE and what could be billed to the Airports

International Services Division. According to the Airports deputydirector of business and finance, staff costs and other expensesare charged to the International Services Division as these areAirport employees and their costs are covered by the rates andcharges set to recover all residual Airport expenses from theairlines. Then if time is spent on SFOE work, which is done toprovide the services specified in the Technical and ManagementServices Agreement between the Airport and SFOE, then that timeis charged to SFOE.

However, many of the expenditures incurred by the InternationalServices Division were related to developing international airport

management contacts. Since SFOE was specifically created tomanage foreign airports, we believe these costs of theInternational Services Division could be added together with SFOEto establish the ultimate loss on the Airports venture to use itsstaff to provide management services to other airports.

Moreover, although the Board of Supervisors authorized thecreation of a private, for-profit corporation to provide internationalmanagement consulting services in 1997, the Airport did notcreate the corporation, SFOE, Inc., until September 1999.If theAirport had established the for-profit corporation in July 1997, thenclearly the costs would have been the corporations costs.

According to the director of the International Services Division, theAirport deferred the creation of the corporation because therewere no engagements immediately at hand that required that acorporation be in place to receive revenues for the City.

(2)City Attorney Costs. According to city attorney records, theAirport deputy city attorneys incurred costs related to internationalservices activities prior to the incorporation of SFOE in 1999. Webelieve that the Airport could charge these costs to SFOE since


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they are related to the primary business of SFOE to secureinternational airport management contracts.

(3) International Services Development Travel Costs. TheAirport incurred travel costs related to international servicesactivities prior to the incorporation of SFOE. These costs could

also be appropriately charged to SFOE since the Board approvedthe creation of the corporation two years before the Airportcreated SFOE.

The Airport Did Not Fully RecoverAll Its Indirect Costs

The Airports 10 percent service charge was insufficient to recoverall of the Airports indirect administrative costs to manage theagreement with SFOE. While the Airport billed SFOE a 10 percentservice charge for the period from July 2000 through December31, 2003, this amount does not sufficiently reimburse the Airport

for all indirect costs for managing the SFOE agreement.

According to the Airports management services manager, duringthe five years that the Airport provided staff and services to SFOE,the indirect cost rates were between 300 and 350 percent ofactual charges.4 Notwithstanding these rates, the Airport has alsocontracted with other outside entities, and has used an overheadrate for those contracts with a ceiling of 255 percent of actualcharges. However, we did not include any additional indirect costsin calculating the final costs of the Airports venture with SFOE.

RECOMMENDATIONS

To ensure that the Airport Department properly accounts for theclosure of SFO Enterprises, Inc., including the subsidiary, SFOHonduras, LLP, it should take the following actions:

1. Retain SFOEs liability to the Airport of $1,087,559, plusinterest, on the Airports books until SFOE receives theremaining proceeds of the sale of SFO Honduras or thereceivable becomes uncollectible.

2. Collect from SFOE any amounts received from the

proceeds of the sale of SFO Honduras, in addition to anyremaining cash in its bank accounts, to reduce the debtowed to the Airport.

4These rates are based on the Airports annual Cost Allocation Plan prepared in

accordance with the Office of Management and Budget, Circular A-87, whichpromulgates cost principles for state and local government units. They are usedin conjunction with federal grant-funded projects.


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3. Consult with the Controller and the City Attorney on theproper treatment of any unpaid debt remaining on theAirports books.


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Chapter 2

THE AIRPORT COULD HAVE BETTER MANAGED ITSRELATIONSHIP WITH SFOE

The City and County of San Francisco established SFOEnterprises, Inc., as a separate, private, for-profit corporation toprovide technical, management advisory, and other servicesrelated to the operation of international airports. In providing boththe staff to manage SFOE, as well as staff to consult part-time andto conduct their regular Airport responsibilities part-time, theAirport increased the likelihood of potential internal controlweaknesses where the employees were both representing theinterests of SFOE and the interests of the Airport. These conflictsmay have resulted in some misreporting of staff payroll costsdetailed in Chapter 1 and in some questionable actions we

discuss in the following sections.

Reimbursement Agreement Signed Late

The Airport provided services to SFOE without a valid, signedagreement that detailed how SFOE would reimburse the Airportfor the consulting services provided by Airport staff. The Airportincurred costs on behalf of SFOE for 18 months before it finallyexecuted three letter agreements detailing how SFOE would paythe Airport. As a general practice, city departments should notprovide any services to an outside agency without having a writtenagreement in place before providing the services. According to

SFOEs chief executive officer, the fundamental basis for payingthe Airport was approved in the year 2000 but the agreementswere finalized later, as extensive legal research was necessary toensure that the structure of the business arrangements compliedwith all applicable laws.

No Arms-Length Relationship

Airport staff both represented the Airport and SFOE in enteringagreements for the Airport to provide consulting services to SFOE.Representing the Airport, the Airport director executed theagreements and an Airport deputy city attorney initialed theagreements. Representing SFOE, the Airports chief of staffsigned the agreements, and the Airports assistant deputy directorof business and finance initialed these agreements, in theircapacities as SFOEs chief executive officer and chief financialofficer, respectively. A contract is an agreement between two ormore parties, but in this case the two parties are employees of thesame department the Airport. This creates a potential conflictbecause it may become confusing as to whose interest the partiesare protecting if the parties are not separate.

Payment agreementssigned 18 months late.


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the Airport charged other budgeted cost centers, such as the chiefof staff, bureau of planning, directors office, and marketing costcenters.

The Airports deputy director of business and finance respondedthat the expenditures were not charged to the International

Services Division since the payroll and expenses for those peopleworking on international services projects in other divisions werealready budgeted in those respective divisions. As such, we couldnot produce from FAMIS a report or record of all internationalservices or SFOE expenses because many of those expenseswere recorded in different cost centers.

SFOE Travel Expenditures Not Consistently Identified

The Airport did not accurately portray the actual expendituresmade on behalf of SFOE. For fiscal year 1999-2000, the Airportrecorded travel expenses for International Services Division staff

in the International Services Division cost center for half of theyear and travel expenses in the cost center for the chief of staff forthe remainder of the year. For fiscal year 2000-01, during thesecond half of the fiscal year, the Airport charged all travelexpenses to the chief of staff cost center. The Airport reported atleast $193,718 in travel charges related to SFOE in cost centersother than the International Services Division; nevertheless, theAirport did correctly bill these expenses to SFOE.

According to the Airports deputy director of business and finance,expenses were generally charged based on the regular section towhich an employee was budgeted. He further stated that

international services work at the time was handled through thechief of staff and bureau of planning cost centers.

Airport Overspent Its Budget for International Services

We compared the approved FAMIS budgets for each fiscal yearwith the total amounts billed to SFOE for services and other costsincurred on SFOEs behalf by the Airport and recorded in differentcost centers in FAMIS. Although we did not separate by fiscal yearthe unbilled expenditures we identified in our audit, in totalexpenditures for SFOE were higher than the approved budgets byover $800,000 for the five-year period, most of which were due to

unbilled charges. The FAMIS budgets include all internationalservices projects, not just the expenses actually billable to SFOE,and therefore the budget for SFOE is actually less.


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TABLE 4

Budget and Actual Expenditures for Airport CostsIncurred for International Services and SFOE

Fiscal Year

FAMIS

Budget

Billed or Attributed

to SFOE

(Over)/Under

Budget

1999-2000 $537,300 $565,089 $(27,789)

2000-2001 353,479 699,857 (346,378)

2001-2002 810,585 315,093 495,492

2002-2003 73,395 281,697 (208,302)

2003-2004 115,000 76,883 38,117

Total 1,889,759 1,938,619 (48,860)Unbilled (fromTables 2 and 3) 760,673 (760,673)

Adjusted Total $1,889,759 $2,699,292 $(809,533)

Note: The FAMIS budget is for all international services, of which SFOE was only one project.

Board of Supervisors Spending Restrictions By-Passed

In the fiscal year 2002-03 final Annual Appropriation Ordinance,the Board of Supervisors finance committee placed a reserve of$220,189 on the International Services Divisions total budget of$293,584. This meant that the Airport could only spend $73,395for payroll, travel, and other expenses for SFOE through June2003. In fact, although FAMIS records show that the Airport spentonly $73,395 for fiscal year 2002-03 for its International Services

Division, the invoices to the Airport showing SFOE expenses forreimbursement for the same period reflect $281,697 in expenses.

AIRPORT EMPLOYEES DID NOT ALWAYSFOLLOW CITY RULES IN WORKING FOR SFOE

In reviewing an 8-month sample of travel expenses, we identifiedseveral instances where Airport employees exceeded limits set forair travel and hotel stays. Further, one employee received a traveladvance that was used for non-travel related purchases, includinga car. Another employee took a leave of absence from his city job

and carried out similar duties as a subcontractor and receivedmore in pay.

Travel Rules for Air Travel and Hotel Stays Not Followed

Some of the Airport employees working as SFOE consultants flewbusiness class, which at times cost more than twice as much as aregular coach flight. According to the Controllers Travel andOfficial Business Expense Regulations (travel policy), cityemployees are to use the lowest published routine fare for travel

The Airportsinconsistent recording ofSFOE-related expensesallowed the Airport tobypass budgetaryspending restrictions.


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by the most efficient, direct and economical mode oftransportation required by the occasion.

In addition, many of the hotels at which consultants stayed duringtheir trips cost more than the government-approved rates. Wenoted hotel daily rates that exceeded the government-approved

rates by 32 percent to 112 percent. For travel within the UnitedStates, the Controllers travel policy states that employees are touse the federal maximum rates for lodging. For foreign travel,employees are to use the most economical and practicalaccommodations available considering the purpose of themeeting, transportation costs, time and other relevant factors.

Although Airport employees took these trips in their capacity asSFOE consultants, these employees are still City employees andthus subject to city rules. The letter agreement between theAirport and SFOE for reimbursing the Airport states that personnelof the Airport providing the services to SFOE are subject to all of

the rules, regulations, policies, and procedures that arepromulgated by the City and County of San Francisco with respectto its employees. We did not review all travel expenses andtherefore we did not determine the total of excess travel costs.

Travel Advance Used to Purchase a Carand Other Non-Travel Related Items

In another example of disregarding travel policy, an Airportemployee consulting for SFOE received a $40,000 travel advanceon August 31, 2000, from the Controllers Office, but the advancewas never intended for travel. According to the Airport

Commissions Fiscal Year 2000/01 Travel and TrainingGuidelines, travel advances usually include lodging, meals andtransportation expense. Upon completion of the travel, a travelexpense voucher is used to list actual expenses and originalreceipts must be attached. Although the employee specificallyindicated that the travel advance would be used for non-travelrelated expenditures, such as purchasing a car, computer, andoffice furniture, the Airport approved using a travel advance toobtain funds to pay for these items, and the ControllersAccounting Operations and Systems Division (AOSD) approvedthe payment of the travel advance to the employee.

Moreover, this employee failed to provide the Controllers AOSDwith the appropriate travel receipts and vouchers within 10 daysafter return from travel, as required by the Controllers travelpolicy. On October 2, 2000, the employee, working as a SFOEconsultant, used the travel advance to open a bank account in theamount of $40,000 in Miami, and proceeded to use the bankaccount funds for cash, payments on the purchase of a newNissan Pathfinder, office furniture, computer equipment, andapartment rent in Honduras. Although the Controllers AOSD hadinappropriately approved the advance for these expenses, when

Travel advance used topurchase a car, office

furniture, and acomputer.


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Controllers accounting staff requested an accounting of the traveladvance from the Airport in January 2001, SFOE subsequentlypaid the money back in April 2001, or seven months after theissuance of the advance, and five months after the Airportemployee returned from the travel.

City Employee Worked as a Subcontractor

Finally, an Airport employee earned more in pay by working as aconsultant for a non-city contractor than performing the same workas a city employee. The employee took a leave of absence fromhis employment with the City in October 2004, and worked as asubcontractor under the Airports contracted sale liquidator forSFOE. He earned approximately $17,600 for 162 hours of work intwo and a half weeks of employment. According to the employee,this situation resulted from the Board of Supervisors direction thatno Airport employees could work on any SFOE activities effectiveJuly 1, 2004 and therefore the Airport asked that he fly to

Honduras as SFO Honduras professional representative on siteas an outside consultant to the sale liquidator since SFOHonduras was still contractually responsible for providing servicesto InterAirports and maintaining a professional representative inHonduras.

The Airport maintains that the $110 hourly rate paid to the Airportemployee as a contractor was agreed to for the purpose of makingthe employee whole on an after-tax basis, considering the value offorgone benefits suffered by the employee. However, this rateincludes the total cost of all of the employees legal holidays andfloating holidays for an entire year, in addition to certain benefits,

which the employee would not lose by taking a leave for 11workdays. Using the methodology and assumptions provided to usby the Airports consultant, we calculated that an hourly rate of$85, instead of $110, which is more than fair compensation,resulted in an overpayment of $3,830.

RECOMMENDATIONS

The Airport Department should take the following actions toensure that it protects the Citys interest in contracting with outsideagencies:

4. Formally enter agreement with outside agencies beforeproviding any services. The agreement should specifyreimbursement rates for providing services and identify therecovery of sufficient overhead.

5. Reassess its procedures for identifying costs to differentcost centers to give a more comprehesive summary of thecosts involved for specific projects


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6. Ensure that its employees adhere to the Controllers travelpolicies even when they are working as consultants forprivate companies.

We conducted this review according to standards established by

the Institute of Internal Auditors. We limited our review to thoseareas specified in the scope section of this report.

Staff: Elisa Sullivan, Audit ManagerRobert TarsiaKathy BuckleyLorita ChungHelen VoWinnie Woo


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SAN FRANCISCO AIRPORT DEPARTMENTRESPONSE TO THE REPORT


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APPENDIX


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cc: MayorBoard of SupervisorsCivil Grand JuryBudget AnalystPublic Library

Documents

San Francisco City Government Controller - SFO Enterprises Report