State Library of Massachusetts

. State House, Boston

SPECIAL REPORT:
Ra'Iroad, Inc. dHyanms
Cape Cod an . fan 03 Account
Anatomyo
JUNE 1989
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!;'tOBERT A. CERASOLI
I' REPRESENTATIVE
Zir4e Qlommnnuecxltq n #ffetHletc4usetts
of
Committee on Post Audit and Oversight
STATE HOUSE, BOSTON, MA 02133
Chairman
3RD NORFOLK DISTRICT
, 54 RUSSELL PARK
I QUINCY, MA 02169
I HOME TEL.,: 471-3859
STATE HOUSE OFFICE
ROOM 146
BOSTON. MA 02 t 33
TEL..: 722-2560
TO: REPRESENTATIVE GEORGE KEVERIAN, SPEAKER OF THE HOUSE,
AND THE HONORABLE MEMBERS OF THE GENERAL COURT
As Chairman of the House Committee on Post Audit and
Oversight, I recently requested an examination of a specific 03
account listed in the Post Audit Bureau's PRELIMINARY REVIEW:
CONSULTANT EXPENDITURES/Fiscal Year 1987.
The reason for undertaking this special project stemmed
from a review of the 03 listings in the section titled --
Companies Paid Over $1,000,000. There were 45 listings in this
category, the largest amount totaling more than $15,000,000.
Although not without precedent, it seemed extraordinary that
some of these agencies, organizations and firms were being
funded through the 03 account.
The Cape Cod and Hyannis Railroad, Inc. (CC&HRR) was
selected for addi tiona! review since it appeared to stand out
as an unusual 'recipient of more than $2.5 million from an 03
account during 1987. A closer inspection of this railroad
operation indicated that this was no ordinary commuter
transportation facility.
I want to extend my appreciation to the House Post Audit
and Oversight Bureau staff for its prompt response to this
request and especially Administrative Aide Frank Falacci and
Committee Counsel Wade M. Welch, under whose direction this
report was completed.
ROBERT A. CERASOLI
Chairman

A.lrrost entirely funded in its operation by the Commonwealth of
Massachusetts, the CC&HRR represents what can happen when government
ventures into the field. of private enterprise. The 1983 and 1985
transportation bond issues provided some $51. 8 million dollars in
state and federal funds intended for restoration of rail service in
this region. The various rehabilitation projects included the
proposed return of Cape Cod Passenger Service, comprising technical
studies and track rejuvenation at a combined state and federal cost
of $42 million dollars.
Actual passenger operations began when a newly incorporated
entity, the Cape Cod and Hyannis Railroad, Inc., initiated a tourist
excursion service for the 1981 sumner season between Hyannis and
East Sandwich, a distance of 17 miles.
In the surrmers of 1984 and 1985, the Commonwealth provided
limited funding ($148 ,805) to enable CC&HRR to begin a seasonal
passenger rail service demonstration from the. of the MBTA' s
.Red Line in Braintree to Hyannis. As,parf of his state fiscal year
1986 supplementary budget request, Governor Dukakis included
financial resources for the operation of the passenger rail
dem:mstration program. An appropriation of $5. 5 million dollars was
approved in June of that year. Due to spiraling liability insurance
costs for the 1986 season, additional funding was necessary for 1987.
The CC&HRR had agreements with the Commonwealth of
Massachusetts, through the Executive Office of Transportation and
Construction (EOTC) to provide subsidized passenger rail service
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between the Greater Boston area (Braintree) and Cape Cod. The
service to be provided by CC&HRR under the terms of these agreements
was "a seasonal intercity and scenic passenger train service to and
from the Cape Cod Region and within the Cape Cod Region. " Contracts
for 1986, 1987 and 1988 provided for the Commonwealth to pay CC&HRR
subsidies of $1, 778, 350, $2, 048, 894 and $3, 053, 309, respectively,
to pay for total Allowable Expenses including but not limited to,
direct transportation, equipment maintenance, facility maintenance,
general and administrative expense, education and prom:::>tion,
equipment leasing and liability insurance expense for the railroad
company. In addition, the agreements provided the CC&HRR,
management fees, and a revenue sharing formula. A House Post Audit
Bureau report in December, 1988, identifying 03 fund recipients,
lists the CC&HRR as receiving $2,556,404 in 03 funding during Fiscal
Year 1987.
The CC&HRR ceased operations last winter when it became
apparent the state's current fiscal situation would no longer
subsidize the seasonal service, primarily the run from the. Cape to
Braintree during May through October.
However, in a relatively short period of tirne, 1986-1988,
preliminary review indicates the family owners and CC&HRR received
approximately $2,000,000 through 03 funding for salaries, benefits
and management fees and were. permitted to retain the major portion
of ticket revenues with minimal requirements for invoice
documentation or other financial controls, while the Comnonweal th
expended m:::>re than $6, 000, 000 financing the bulk of the operation.
The latter figure does not include earlier costs of rehabilitating
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the railtrack bed or right-of-way payments to Bay Colony Railroad,
Conrail and Amtrak.
In retrospect, the state paid the owners their wages and
benefits, management fees, allowed them to keep a major share of
incoming revenue and then reimbursed the company for its operating
expenses. Since this was a seasonal operation, the passenger
service program was available to the general public for 14 months,
extended over a three year period. During the initial sumner of
1986, the service did not begin until the second week of July.
THE ORGANIZATION OF C C & H R R - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ - -
At the time of its organization in 1981, Mark A. Snider of 3583
Main Street, Barnstable, Massachusetts, was the President of the
Cape Cod and Hyannis Railroad, Inc. Stanley W. Snider of 291
Goddard Avenue, Brookline, Massachusetts, Mark's father, was listed
as Treasurer. Both were listed as directors. In annual reports
filed with the State Secretary's office in 1986, 1987 and 1988, Mark
A. Snider is listed as President and Treasurer of the cape railroad.
In 1986, the state Executive Office of Transportation, which
negotiated the contract with the railroad, agreed to salaries of
$50,000 and $35,000 respectively for Mark Snider and Gwenn E.
Snider, Mark's wife, for what ostensibly anounts to a six m::>nth
operation. Gwenn Snider, according to ECYl'C, was responsible for the
education and promotion of the rail passenger service, an item paid
for by the state subsidy
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for which $765
1
606 was budgeted during
the program's three years.
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The following year, ooth were given cost of living increases,
bringing their salaries to $51,900 and $36,330. Prior to that
however, in a letter responding to a limited audit review, dated May
22, 1987, Mark Snider related that the Cape Cod & Hyannis Railroad,
Inc., detennined in December, 1986 to ccmpensate Gwenn Snider an
additional $10,000 and Mark Snider an additional $25,000 to bring
ooth salaries up to "an anount deemed appropriate for the work
perfonned during the year." According to EOTC, this was done by
transferring $35,000 from the ticket sales revenue, apparently with
the approval of financial personnel in Transportation. Corporate
documents .filed at the State Secretary's office, lists Gwenn Snider
as a director of the CC&HRR.
WAGES AND
Consequently, in 1986, payroll and tax records list Mark
Snider's salary as $75,731.36 and Gwenn Snider's, $45,586.92. They
were also allowed retirement plans and paid vacations, benefits
generally prohibited under 03 contracts. Additionally, the Sniders,
through Cape Cod & Hyannis Railroad, along with their annual
salaries and benefits, were paid management fees totaling $512,000
by the state during the three seasons of operation. Payments were
i.n the amount of $160,000 for each of 1986 and 1987, and in 1988,
EOTC increased the management fee to $192,000.
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REVENUE SHARING/FEES-----------------------------------------
Executive Office of Transportation reported Cape Cod and
Hyannis Railroad ticket revenues for the 1988 Season equaled
$646,020. Per agreement with EOTC, the railroad company was
permitted to. keep $463,010 as its share. Net revenue credited to
the Corrm::mwealth under the revenue sharing plan, amounted to
$183,010. In 1987, an EOTC report to House Ways and Means
Committee, states sales totaled $563,449 with revenue sharing
figures indicating CC&HRR retained $392,690 and the state credited
with $170,759. Ticket revenue for 1986 reflects the passenger
derronstration program's late start with total sales of $343,390.
The state was credited with $58,717, the amount, as agreed, to be
deducted fran the operating subsidy paid the railroad, which was
allowed to retain $284,673.
Invoice by CC&HRR was required only for
"reimbursable expenses" according to papers from the Executive
Office of Transportation. Accordingly, how CC&HRR disbursed the
substantial sums it received in ticket sales revenue and management
fees was not required to be reported. This is an area Post Audit
believes should have been more vigorously pursued by the authorizing
agency.
EOTC disclosed that during contract negotiations in the Spring
of 1988, Mark Snider, when asked what he did with the management
fees, replied that in the sumner of 1987 he began a ferry service
running between Martha's Vineyard and the State Pier at the Cape Cod
Canal, a short distqnce from the train station at Buzzards Bay. He,
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or his newly organized firm, Vineyard Express Line, Inc., according
to the Woods Hole, Martha' s Vineyard and Nantucket Steamship
Authority, leased a 600-passenger shuttle boat, the Comronwealth,
from the Bay State-Spray & Provincetown Steamship Company, a company
in which Joseph G. Pallotta is a principal and during the following
year operated its own high-speed ferry service from Boston to the
Vineyard. Snider declared to EOI'C that although his ferry venture
increased train passengers by 9, 000, the operation lost $40, 000,
paid for out of his management fee since EOTC considered the
Snider-initiated ferry service a non-reimbursable expense. Snider
did not resume the ferry operation the following summer.
Other expenses considered non-reimbursable by the Eai'C were
taxes, reserves to cover insurance deductibles and food and
beverages sold to train passengers by CC&HRR employees. But
financial statements credit CC&HRR with doing $111,843 in the food
and beverage business in 1986, $281,689 the following season and
$158,097 during 1988.
LIMITED AUDIT REQUESTED--------------------------------------
A limited audit review of EOTC's 1986 agreement with CC&HRR was
perfonned by the Massachusetts Bay Transportation Authority (MBTA)
during the Spring of 1987 at the request of EOTC's Financial Affairs
Office. It focused "on areas of concern to EOTC" and asked a number
of questions as to certain CC&HRR' s practices and costs, not the
least . being the accounting services perfonned for the railroad
canpany by Stanmar,. Inc., of Boston Post Road, Sudbury, MA.
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President and Treasurer of Stanmar, Inc. is Stanley W. Snider,
who, according to :roTC, is the father of Mark Snider. As per its
annual report filed with the State Secretary's office for fiscal
year ending December 31, 1988, Mark Snider is listed as a director
of Stanmar, Inc. Official papers shOW" that Stanley Snider was
instnnnental in the legislative incorporation proceedings of the
CC&HRR in 1981. The post office address of the then newly organized
railroad company was given as Boston Post Road, Sudbury, MA.
A1 though the MBTA review found the Cape railroad's accounting
system to be "alequate under the circumstances", it apparently was
not able to satisfy itself as to the reasonableness of the fees paid
to Stanrnar, Inc. Based on information provided it, the MBTA review
learned that CC&HRR paid same 100 employees per week and processed
about 300 to 400 accounts payable transactions each month during the
peak performance period.
Since computer accounting services are provided by n\lll'erous
service bureaus and CPA finns, MBTA audit personnel checked the
"reasonableness" of the Stanmar fees by calling Accounting
Corporation of America. and talking with two CPA firms. They
discovered that the going rate for services comparable to those
provided by Stanmar was approximately $250 a week. In
correspondence to the railroad, the MBTA noted the competitive rate
was significantly less than the $4,000 to $5,000 weekly fee paid to
Stanmar, and reimbursed by the state, during the peak performance
period.
In response to the audit review, Mark Snider submitted to EOTC
a proposal . from an independent accounting firm, estimating that an
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in-house accounting staff for CC&HRR would cost in excess of
$63,000. In a letter to E<YI'C, Snider replied, "We believe Stanmar's
$59,000 charge is reasonable in comparison. "
Stanrnar, Inc. , continued to do the accounting/rookkeeping for
CC&HRR in 1987 and 1988 and the anount budgeted for Stamnar, Inc.,
during the . passenger service's final season of operation, was
increased to $66,000. Corporate financial records for 1986, 1987
and 1988 show that Stanley Snider, Stanmar's president, held a note
from CC&HRR, payable to Stamnar, Inc., anounting to $749,968,
The MBTA's limited review also raised questions concerning:
* the costs of fringe benefits CC&HRR was paying its employees
and subsequently billing the state;
* Rent of an a ~ n t for the superintendent of maintenance
charged to the s t a t e ~
* Within the premises in Hyannis for which the railroad charged
lease payments to the EOTC was also located an office used to
conduct a business "not related to the purposes of the contract";
* Although telephone and microcarnputer costs were consistent
with the types of costs allowed under terms of the contract, the
procurement of these items at the end of the contract period raised
concerns about their being of benefit during the term of the
contract.
PAID FOR BY COMMONWEALTH-------------------------------------
Invoices fran CC&HRR included the following classification of
!i wages as allowable .expenses billed to the state: General and
t
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Administrative; Train Crew; Buildings and Grounds; Train Servicing;
Equip:rent Maintenance; Equip:nent Maintenance (facility); Education
and Praroc>tions; Falnouth Bus.
approximately 100 employees,
Benefits, including vacations, to
equaled 20 percent of gross pay,
according to CC&HRR payroll invoices.
Fuel, repairs, cleaning, utilities, supplies, security,
uniforms, painting, tickets, legal fees, insurance costs,
advertising, 11ewsclip service, taxi fares for train crews, public
relations, crew training costs, membership fees and convention
attendance as well as numerous other expenses of the railroad were
all billed to ECYI'C and paid for by the Conrronwealth of Massachusetts.
CONCLUSION---------------------------------------------------
Whatever merit, if any, there may have been in the
Commonwealth's demonstration program in attempting to restore
passenger rail service between Cape Cod and Greater Boston, it was.
negated by the exploitation of the 03 consultant account. A
preliminary investigation by Post Audit and OVersight detennined
that after three years and more than $6,000 ;000 in 03 expenditures,
all that the state can presently account for of this much publicized
program, is used machinery, used office equi:pnent, and rusting
rails.
Instead of providing what was believed a necessary alternative
mode of transportation for daily cormnlters traveling between the
Cape and Boston, the CC&HRR remained essentially an excursion
operation for visiting tourists, replete with expenditure driven
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costs.
The uncontrolled rise of 03 employment by various agencies in
recent years, is due, in part, to the "hidden" personnel shielded by
the vendor. In this instance, CC&HRR was the designated vendor
under 03 funding. However, state payroll records would fail to
identify the 100 employees of the railroad who received wages and
benefits as 03 recipients. Any paper trail of accountability is
generally diminished by use of the 03 account. Furthermore, payment
of benefits and vacation time to the employees of the railroad,
under the 03 contractual tenns, must be regarded as questionable, if
not unwarranted.
In its desire to establish additional public transportation
from Greater Boston to the Cape, EOTC embarked on a route that
seemingly encouraged irregularities, abuse and imprudent management,
not to mention the giving birth to yet another unnecessary,
bureaucratic appendage.
Those in state government who seek reasons as to why the
Com:ronwealth' s financial position and credit rating has suffered
reversals, need only review the administration's demonstration
project of railroad passenger service in Southeastern Massachusetts
and cape Cod. Use of the 03 account, as was the case here, strongly
attests to a statement made earlier by Chairman Cerasoli, that the
CCll.'lTOC>nwealth can prune more than $300 million dollars from 03
accounts "And not miss a beat!"
During the 14 months of actual operation extending over a
three-year period, the Sniders, as principals in the Cape Cod and
Hyannis Railroad, were paid nore than $360,000 in wages and benefits
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by the state; received $512,000 in management fees; received
approximately $184,000 for doing CC&HRR acco1.mting work; and were
allowed to retain approximately $1,000,000 in ticket sales revenue.
In exchange, state government funded roughly, the entire operation of
the CC&HRR, including payroll, equipment maintenance, promotion and
education, supplies, maintenance facility, equipment lease, and
insurance.
Restraints and balances within this program appear discursive
since the railroad operated under independent contract and thus not
bound by state statute. For exarrq:>le, according to EOl'C, the CC&HRR
was permitted to select its own agent of preference to handle its
liability insurance, an item involving nore than $1 million dollars
in premium payments. For this a:rrount, a state agency would be
required by law to proceed through a bidding process.
EXYl'C maintains it requested expressions of interest in the
passenger service deroc>nstration program fran Conm:mwealth railroad
companies but only CC&HRR responded to this request, apparently
nullifying the necessity for a bid-award process.
Despite glowing reports by officials as to the progress of the
rail passenger demonstration program, the Cape Cod to Boston
intrastate plan offered marginal assistance or convenience for
ccmnuter traffic between the two points and in reality remained a
day-trip rail excursion for visiting tourists Essentially, once
the State 03 rroney was shut off, the train stopped running.
Discussions are reportedly 1.mderway with the MBTA in an effort
to determine whether it should expand its services to carry
passengers between Cape Cod and its Braintree station. It is Post
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Audit
1
s hope that :roTC will approach the South Shore's alternate
transportation problem in a more prudent and cost efficient manner.
The administration, and particularly EOTC, should stop using 03s' to
fund transportation projects. The taxpayer deserves more
accountability.
Therefore, because of what appears to be :i.rrq:;>roprieties and
irregularities in the :i.rrq:;>leirentation of the 03 arrangeirent between
the Executive Office of Transportation and Construction and the Cape
Cod and Hyannis Railroad, Inc., it is hereby recarrmended that this
matter be referred to the Office of the Inspector General for his
attention.
HOUSE POST AUDIT AND OVERSIGHT COMMITTEE
HOUSE POST AUDIT AND OVERSIGHT BUREAU
The HPAO Committee is composed of eleven members of the House of Representatives whose goal is
to promote more effective management of state government programs through performance evaluations con-
ducted by the Post Audit and Oversight Bureau.
HOUSE POST AUDITand OVERSIGHT COMMITTEE
Robert A. Cerasoli
Chairman
Rep. Denis Lawrence, Vice Chairman
Rep . Alfred E. Saggese, Jr.
Rep. William P. Nagle, Jr.
Rep. Mrujorie A. Clapprood
Rep. Larry Giordano
Rep. Kevin O'Sullivan
Rep. Patrick F. Landers, III
Rep. Arthur Stephen Tobin
Rep. Peter Torkildsen
Rep. John C. Bradford
The HP AO Bureau is headed by a Director and includes a staff of professionals with diversified back-
grounds and skills. The Bureau provides the House of Representatives with a management review team to
assess the impact of public programs
HOUSE POST AUDIT and OVERSIGHT BUREAU
Richard F. Tobin, Jr.
Director
Michael J. DelVecchio, Research-Staff Director
Dennis F. Griffin, Assistant Director
Ronald Mariano, Assistant Director
Fran Brown, Assistant Director
Mary Bono, Assistant Director
David L. Malloy, Senior Researcher
Robert M. Brigham, Senior Researcher
Michael J. Pieroni, Senior Researcher
James Thibodeau, Research Assistant
Bruce J. Tobin, Research Assistant
Anne F. ~ a y e s , Research Assistant
Jacquelyn F. Murphy, Principal Secretary