BOARD OF SUPERVISORS:

The Airport’s Investment in SFO

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

FINANCIAL AUDITS

January 22, 2007

 City and County of San Francisco
Office of the Controller – City Services Auditor
Board of Supervisors:
The Airport’s Investment in SFO Enterprises, Inc. Will Result in Losses of January 22, 2007
$667,000 and May Increase Up to $1.5 Million

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 City’s investment in SFO Enterprises, Inc.

Highlights Recommendations

The Airport’s Investment in SFOE Will Result in a Loss The audit report includes six
recommendations for the
The San Francisco Airport Department (Airport) will lose at least Airport to properly account for
$667,000 from its investments in the private, for-profit corporation, SFO the closure of SFOE, and to
Enterprises, Inc., (SFOE). The Airport is now closing the operations of manage outside contracts,
SFOE, and SFOE’s financial position consists of the following: including the following:
• Recorded assets of $1,523,732, including a receivable of $787,200, • Retain SFOE’s liability of
which is contingent upon future events, from the sale of SFO $1,087,559, plus interest,
Honduras, a subsidiary of SFOE. on the Airport’s books
until SFOE receives the
• Recorded and unrecorded liabilities of $2,190,719. Recorded remaining proceeds of the
liabilities include $1,087,559 owed to the Airport for prior consulting sale of SFO Honduras or
services to SFOE. Unrecorded liabilities consist of unbilled costs of the receivable becomes
$760,673 that the Airport did not allocate to SFOE. uncollectible.

If SFOE does not collect the receivable from the sale of its subsidiary, • Collect from SFOE any
the Airport’s loss will increase to $1.5 million. amounts received from
the proceeds of the sale
The Airport Could Have Better Managed Its Relationship With SFOE of SFO Honduras, in
addition to any remaining
The Airport did not consider potential internal control weaknesses when cash in its bank accounts
it assigned some of its upper management staff as officers of SFOE and to reduce the debt owed
then assigned some of the same staff to manage the agreement on to the Airport.
behalf of the Airport. This may have resulted in such questionable
actions where the Airport: • Formally enter
agreements with outside
• Provided services to SFOE before it had any formal agreements with agencies before providing
SFOE and was 18 months late in formalizing the repayment any services.
agreement with SFOE to pay for past services.
• Ensure that its employees
• Did not consistently identify all its costs related to SFOE, as well as adhere to the Controller’s
its other international services projects. travel policies even when
they are working as
• Did not always follow city rules in conducting work for SFOE. consultants for private
companies.
 CITY AND COUNTY OF SAN FRANCISCO
OFFICE OF THE CONTROLLER Ed Harrington
Controller
Monique Zmuda
Deputy Controller

January 22, 2007

Supervisor Aaron Peskin, President

Board of Supervisors
City Hall, Room 244
1 Dr. Carlton B. Goodlett Place
San Francisco, CA 94102

Dear President Peskin:

The Office of the Controller (Controller) presents its report on the audit of SFO
Enterprises, Inc., (SFOE) a private, for-profit corporation, of which the City and County of
San Francisco (City) is the sole shareholder. This corporation was formed in 1999 to allow
city staff at the San Francisco Airport Department (Airport) to provide airport management
consulting services through the corporation to other international airports. SFOE has been
awarded only one contract to manage a foreign airport. The Airport is in the process of
terminating the operations of SFOE, and SFOE has completed the sale of its only
subsidiary, SFO Honduras, LLP. The fiscal year 2003-04 Annual Appropriation Ordinance
directed 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 $667,000
growing to almost $1.5 million depending on whether the sale of SFO Honduras ever
produces enough income to offset the costs of the venture. The actual cost of this venture
is clouded by the interaction of the Airport’s 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 provide
management and advisory services to international airports. Accordingly, we identified
additional costs that we believe could be attributed to the venture.

The Airport’s response is attached to this report. The City Services Auditor-Financial
Audits will be working with the Airport to follow up on the status of the recommendations
made in this report.

Respectfully submitted,

Original signed by:

Ed Harrington
Controller

415-554-7500 City Hall • 1 Dr. Carlton B. Goodlett Place • Room 316 • San Francisco CA 94102-4694 FAX 415-554-7466
INTRODUCTION

BACKGROUND

Over the past 10 years, the San Francisco Board of Supervisors

and the Airport Commission, through a series of resolutions and
ordinances, approved the concept of the Airport Department
(Airport) offering management services of Airport staff to assist
managing other international airports. This culminated in the
Airport forming SFO Enterprises, Inc. (SFOE), of which the City
and County of San Francisco (City) is the sole shareholder, in
September 1999, to provide international airport management and
other advisory services.

In February 2000, SFOE organized SFO Honduras LLC as a

subsidiary to participate in the consortium that eventually won the
concession to operate four airports in the Republic of Honduras. In
connection with its bid, the consortium organized InterAirports,
S.A. (InterAirports), a Honduran company, to act as the actual
operator of the airports. SFO Honduras and InterAirports entered
a contract in May 2000 for SFO Honduras to provide operation
and management services to InterAirports for an annual fixed fee
of $750,000, adjusted annually by the consumer price index,
together with a variable fee. The appendix shows the relationships
of the various parties.

Because SFOE did not have sufficient initial capital to hire its own
employees and to pay for other services, SFOE planned to use
the Airport’s employees to perform the corporation’s services. In
return, SFOE agreed to reimburse the Airport for payroll costs,
travel expenses, and other services performed by Airport staff and
other vendors.

In March 2001, critical articles concerning SFOE began appearing

in the press. When the Board of Supervisors (Board) approved the
Airport’s fiscal year 2002-03 budget, it placed on reserve 75
percent of the budget for the International Services Division.
According to a letter from the City’s Office of the City Attorney
(City Attorney), the Board decided to impose the reserve due to
policy concerns about SFOE’s operations. By this time, SFOE was
already exploring the possibility of selling its interest in SFO
Honduras. According to the letter, throughout fiscal year 2002-03,
the Airport director asked the chair of the Board’s finance
committee to calendar the release of the funds on reserve.
Subsequently, the Board included an administrative provision to
the Airport’s fiscal year 2003-04 Annual Appropriation Ordinance
which stated that the Airport could expend up to $115,000 of
already appropriated funds in the Airport’s budget to complete the
termination and/or disposition of SFOE no later than January 1,
2004. The administrative provision also required the City’s Office

1
of the Controller (Controller) to complete an audit of SFOE upon
termination of its operations.

SCOPE AND METHODOLOGY

The purpose of our audit was to identify the Airport’s costs of

operating SFOE from its inception in September 1999, and the
revenues and expenses related to the termination and sale of
SFOE’s subsidiary, SFO Honduras in December 2004. We
focused our review on the financial results of operations of SFOE,
and its subsidiary SFO Honduras. We did not perform financial
audits of SFOE, or its subsidiary, because both entities are
audited annually by an independent certified public accounting
firm, and the firm has submitted to the Airport audited financial
statements for each of the calendar years 2000 through 2004.

To perform our audit, we inventoried and reviewed all of SFOE’s

records made available to us at the Airport’s offices in South San
Francisco. Although we reviewed these records, which included
other international services ventures and projects which we make
reference to in our report, we did not perform an audit of these
other ventures and projects. We tested on a sample basis payroll
records, travel reimbursement records, and professional services
records for SFOE. We examined all relevant contracts entered
into by SFOE, including its contracts with the Airport for
repayment of services. Finally, we reviewed the relevant
provisions of the sale of SFO Honduras to determine the proceeds
due to SFOE.

2
Chapter 1

THE AIRPORT WILL LOSE $667,000 AND ITS LOSSES MAY

INCREASE TO ALMOST $1.5 MILLION

SFO Enterprises, Inc., has assets of about $1,523,732, which

includes the proceeds from the sale of its subsidiary, SFO
Honduras, LLC. However, the likelihood of SFOE collecting
outstanding sale proceeds of $787,200 is unknown and is
dependent upon contingent events. SFOE’s assets are offset by
outstanding recorded debts of about $1,430,046 for consulting
services it provided to SFOE in prior years and outstanding
attorney fees. Moreover, SFOE has additional unrecorded
expenses 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 as
additional charges for not consistently charging SFOE for the cost
of Airport employee benefit and service charges. If SFOE collects
its outstanding receivable, the Airport’s loss will be reduced to
about $667,000. However, if SFOE’s receivable of $787,200 is
uncollectible, then the Airport is at risk of losing almost $1.5
million. The following table summarizes SFOE’s recorded and
unrecorded assets and liabilities we identified in our audit.

TABLE 1

SFOE Recorded and Unrecorded Assets and Liabilities

As of September 30, 2005

Recorded Unrecorded Total

Assets
Cash in Bank Accounts (Note 1) $736,532 $736,532
Receivable from Sale of SFO Honduras (Note 1) 787,200 787,200
Total Assets 1,523,732 1,523,732

Liabilities (Note 2)
Due to Airport
Consulting Services 1,087,559 1,087,559
Costs Incurred After Incorporation $357,919 357,919
Costs Incurred Before Incorporation 402,754 402,754
Due to Others
Outside 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.

3
 SFOE May Not Receive All the Proceeds
From the Sale of Its Subsidiary

Following the direction of the City and County of San Francisco’s

Board of Supervisors, the Airport started closing the operations of
SFOE by selling the corporation’s sole subsidiary, SFO Honduras
in December 2004 for a total consideration of $1,482,836. As of
April 4, 2006, the Airport had not received most of the sale
proceeds from the sale to YVR General Services in British
Columbia, Canada. According to the Airport’s deputy director of
business and finance, SFOE had received $15,000 cash, and
relief from liability associated with InterAirports’ equity calls
totaling $232,836, and $447,800 in the par value of the transferred
shares of InterAirports stock. Approximately $787,200 of the sale
proceeds is still contingent upon future events. According to the
Airport’s deputy director of business and finance, these payments
are contingent upon InterAirports’ future profitability and dividends
to shareholders. When asked of the likelihood of receiving the
contingent payments, the Airport’s staff directly associated with
SFOE could not give us an estimate.

The Airport Has Not Recovered

All Its Invoiced Costs for Providing
Consulting Services to SFOE

In providing Airport staff to conduct work for the corporation, the

Airport and SFOE agreed that SFOE would reimburse the Airport
SFOE owes the Airport
for payroll costs, travel expenses, and professional services
$1 million in past due
charges. provided to SFOE by Airport staff, plus interest. During the five
years SFOE conducted its business, the corporation and its
subsidiary experienced a net loss of more than $863,000 and as a
result did not pay the Airport for all the services its staff provided
to SFOE. Although the Airport billed SFOE $1,938,619 during the
five years, SFOE has paid the Airport only $851,060, and still
owes the Airport $1,087,559, plus interest.

The Airport Did Not Charge

SFOE for Several Costs

The Airport incurred a number of costs on behalf of SFOE that the

Airport 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.

4
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 us

that it has not invoiced SFOE for services provided by the Airport
from January 1, 2004, through June 30, 2004.

(2) Staff Benefit and Service Charges. The Airport was not
consistent in charging SFOE for the use of its staff. The Airport,
while including a provision for the payment of staff benefits, did
not charge the same benefit rates throughout the period it was
providing staff services to SFOE. From September 1999, through
June 2000, the Airport charged SFOE for staff benefits ranging
from 7 percent to 40 percent of staff hourly rates. In subsequent
years, the Airport charged staff benefits rates ranging from 36
percent to 41 percent of the hourly rates. We believe the higher
rates to be more representative of the benefits paid to employees,
and that the Airport could have recovered an additional $29,501 in
staff benefit costs.

The Airport also was not consistent in requiring the payment of a

service charge. Although the Airport agreed to charge SFOE for
service charges of 10 percent for July 2000 and after,1 the Airport
did not require any payment of service charges prior to July 2000.2
Since the two agreements were signed on the same date, it
appears reasonable for the Airport to have charged the same rate
for both periods. We estimate that the Airport could have
recovered an additional collected $25,136 in service charges.

1
Letter Agreement Regarding Services Provided by SFO to SFOE, dated March
12, 2001.
2
Letter Agreement Regarding Repayment of Expenses, dated March 12, 2001.

5
 (3) Staff Payroll Costs. The Airport did not charge SFOE for all
the time its employees spent conducting work for the corporation.
In reviewing a sample of timesheets, we found that the Airport did
not charge SFOE the following:

• 115 hours spent by the Airport’s chief of staff when he also

acted as SFOE’s chief executive officer from 2000 through
2003 ($12,703 in unbilled payroll, benefits, and service
charges).

• 64 hours charged as Airport-related business when travel

reimbursement vouchers showed the employee was in
Honduras conducting work for SFOE, and attending a
conference for which the Airport charged the travel expenses
to SFOE ($5,105 in unbilled payroll costs).

• 81 hours spent by the Airport’s director of the International

Services Division3 when he also acted as SFOE’s chief
financial officer. This includes time spent attending SFOE
board of directors’ meetings, attending meetings discussing
SFOE matters, and conducting preliminary work for the sale of
SFO Honduras ($7,601 in payroll costs and benefits).

(4) Outside Attorney Costs Incurred by the Airport. The Airport

engaged the services of a law firm, Morrison & Foerster, LLP, to
provide it outside counsel. The services specifically related to
advice regarding SFOE incorporation costs and advice to Airport
employees who also served as SFOE’s officers, and could be
charged as an expense to SFOE.

(5) Outside Attorney Costs Incurred by SFOE. The Airport

unnecessarily agreed to pay for some of the legal services directly
provided to SFOE. The corporation had also engaged the services
of Morrison & Foerster to provide SFOE legal counsel. Although
the law firm provided and billed for the services it provided SFOE
in 2003, most of the law firm’s invoices remained unpaid. Although
The Airport unnecessarily the law firm initially charged only SFOE for the legal services that
agreed to pay more than were primarily related to the negotiations for the sale of SFO
$91,000 of SFOE’s Honduras, Morrison & Foerster in December 2003 reissued new
attorney expenses.
invoices, totaling $189,110, that split the amounts due and billed
approximately 50 percent to SFOE and 50 percent to the Airport.

In its letter accompanying the invoices, the firm noted that this
allocation of costs to SFOE and the Airport reflects SFOE’s board
of “directors’ judgment as to the reasonable allocation of costs of
this activity in light of the need to protect the Airport from potential
claims (however unfounded they might be) in connection with the
termination of these activities.” Further, Morrison & Foerster
acknowledged in its letter that the law firm was reissuing the
invoices in accordance with the Airport’s direction. Nevertheless,

3
Now deputy director of business and finance.

6
 since SFOE was created as a separate corporation to avoid
liability to the City, we believe that SFOE should pay for these
attorney fees.

(6) City Attorney Costs. The Airport’s assigned deputy city

attorneys provided legal services to the Airport’s International
Services Division, but the Airport did not charge SFOE for any of
the city attorney charges. According to one of the International
Services Division managers, who also worked as a consultant for
SFOE, the great majority of work done by the Airport’s legal team
was performed to represent the Airport’s interests as opposed to
SFOE, and for this reason the Airport generally did not charge
SFOE for costs associated with the Airport’s legal counsel.
However, since the Airport’s management agreement with SFOE
allowed it to charge SFOE for professional services, the Airport’s
costs for SFOE-related legal services could be included as a
charge to SFOE.

(7) Travel Costs. The Airport did not include in its invoices to
SFOE any travel costs to conferences and other places for
business activities related to privatization efforts, but not directly
related to SFOE. According to the Airport’s assistant deputy
airport director of capital planning, these amounts were
considered development costs of the Airport. However, in the
absence of an agreement that the Airport pay for development
costs, we believe that the expenses paid after the incorporation
date are development costs of the corporation and therefore could
be 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 before

the creation of SFOE that we believe could be charged to SFOE
since the charges were related to international airport
management services. Table 3 summarizes the costs we believe
could be charged to SFOE.

TABLE 3

Other Costs Incurred Prior to the Creation of SFOE

Expenses Incurred Amount

1. 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

7
(1) International Service Costs. Although the Airport did not
allocate a budget for the International Services Division until fiscal
year 1999-2000, the Airport had taken steps prior to this time to
attempt to obtain airport management contracts and to perform
other services. According to the Airport’s records, it spent about
$636,914 from 1996 through 1999 in payroll, travel, and
professional services costs related to research, technical, and bid
preparation services that Airport staff and city vendors had
performed in their attempts to win airport management and other
contracts in such countries as Panama, Peru, Mexico, Uruguay,
Jamaica, Australia, and Chile. According to the Airport, the only
related income received during this period, was $327,191 for
services rendered to the Perth Airport Consortium in Australia.
Therefore, the Airport’s net expenses before the incorporation of
SFOE totaled $309,723.

The Airport disagrees with the auditors as to which activities are

correctly billed to SFOE and what could be billed to the Airport’s
International Services Division. According to the Airport’s deputy
director of business and finance, staff costs and other expenses
are charged to the International Services Division as these are
Airport employees and their costs are covered by the rates and
charges set to recover all residual Airport expenses from the
airlines. Then if time is spent on SFOE work, which is done to
provide the services specified in the Technical and Management
Services Agreement between the Airport and SFOE, then that time
is charged to SFOE.

However, many of the expenditures incurred by the International

Services Division were related to developing international airport
management contacts. Since SFOE was specifically created to
manage foreign airports, we believe these costs of the
International Services Division could be added together with SFOE
to establish the ultimate loss on the Airport’s venture to use its
staff to provide management services to other airports.

Moreover, although the Board of Supervisors authorized the

creation of a private, for-profit corporation to provide international
management consulting services in 1997, the Airport did not
create the corporation, SFOE, Inc., until September 1999. If the
Airport had established the for-profit corporation in July 1997, then
clearly the costs would have been the corporation’s costs.
According to the director of the International Services Division, the
Airport deferred the creation of the corporation because there
were no engagements immediately at hand that required that a
corporation be in place to receive revenues for the City.

(2) City Attorney Costs. According to city attorney records, the

Airport deputy city attorneys incurred costs related to international
services activities prior to the incorporation of SFOE in 1999. We
believe that the Airport could charge these costs to SFOE since

8
they are related to the primary business of SFOE to secure
international airport management contracts.

(3) International Services Development Travel Costs. The

Airport incurred travel costs related to international services
activities prior to the incorporation of SFOE. These costs could
also be appropriately charged to SFOE since the Board approved
the creation of the corporation two years before the Airport
created SFOE.

The Airport Did Not Fully Recover

All Its Indirect Costs

The Airport’s 10 percent service charge was insufficient to recover

all of the Airport’s indirect administrative costs to manage the
agreement with SFOE. While the Airport billed SFOE a 10 percent
service charge for the period from July 2000 through December
31, 2003, this amount does not sufficiently reimburse the Airport
for all indirect costs for managing the SFOE agreement.

According to the Airport’s management services manager, during

the five years that the Airport provided staff and services to SFOE,
the indirect cost rates were between 300 and 350 percent of
actual charges.4 Notwithstanding these rates, the Airport has also
contracted with other outside entities, and has used an overhead
rate for those contracts with a ceiling of 255 percent of actual
charges. However, we did not include any additional indirect costs
in calculating the final costs of the Airport’s venture with SFOE.

RECOMMENDATIONS

To ensure that the Airport Department properly accounts for the

closure of SFO Enterprises, Inc., including the subsidiary, SFO
Honduras, LLP, it should take the following actions:

1. Retain SFOE’s liability to the Airport of $1,087,559, plus

interest, on the Airport’s books until SFOE receives the
remaining proceeds of the sale of SFO Honduras or the
receivable becomes uncollectible.

2. Collect from SFOE any amounts received from the

proceeds of the sale of SFO Honduras, in addition to any
remaining cash in its bank accounts, to reduce the debt
owed to the Airport.

4
These rates are based on the Airport’s annual Cost Allocation Plan prepared in
accordance with the Office of Management and Budget, Circular A-87, which
promulgates cost principles for state and local government units. They are used
in conjunction with federal grant-funded projects.

9
3. Consult with the Controller and the City Attorney on the
proper treatment of any unpaid debt remaining on the
Airport’s books.

10
Chapter 2

THE AIRPORT COULD HAVE BETTER MANAGED ITS

RELATIONSHIP WITH SFOE

The City and County of San Francisco established SFO

Enterprises, Inc., as a separate, private, for-profit corporation to
provide technical, management advisory, and other services
related to the operation of international airports. In providing both
the staff to manage SFOE, as well as staff to consult part-time and
to conduct their regular Airport responsibilities part-time, the
Airport increased the likelihood of potential internal control
weaknesses where the employees were both representing the
interests of SFOE and the interests of the Airport. These conflicts
may have resulted in some misreporting of staff payroll costs
detailed 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, signed

agreement that detailed how SFOE would reimburse the Airport
for the consulting services provided by Airport staff. The Airport
Payment agreements incurred costs on behalf of SFOE for 18 months before it finally
signed 18 months late. executed three letter agreements detailing how SFOE would pay
the Airport. As a general practice, city departments should not
provide any services to an outside agency without having a written
agreement in place before providing the services. According to
SFOE’s chief executive officer, the fundamental basis for paying
the Airport was approved in the year 2000 but the agreements
were finalized later, as extensive legal research was necessary to
ensure that the structure of the business arrangements complied
with all applicable laws.

No Arms-Length Relationship

Airport staff both represented the Airport and SFOE in entering

agreements for the Airport to provide consulting services to SFOE.
Representing the Airport, the Airport director executed the
agreements and an Airport deputy city attorney initialed the
agreements. Representing SFOE, the Airport’s chief of staff
signed the agreements, and the Airport’s assistant deputy director
of business and finance initialed these agreements, in their
capacities as SFOE’s chief executive officer and chief financial
officer, respectively. A contract is an agreement between two or
more parties, but in this case the two parties are employees of the
same department – the Airport. This creates a potential conflict
because it may become confusing as to whose interest the parties
are protecting if the parties are not separate.

11
Furthermore, we found no evidence that these agreements were
ever brought before the City’s Board of Supervisors, Budget
Analyst, or Controller for comment or approval by an independent
city representative. While there is no requirement to have the
agreements reviewed by an impartial party, a review might have
uncovered, for example, the fact that the Airport did not include
adequate reimbursement of its indirect charges in its letter
agreements as we discussed in the previous chapter.

No Separation of Duties in Preparing Bills

According to an Airport accountant, an Airport employee working

as an SFOE consultant prepared the summaries of expenses,
including payroll, to be reimbursed to the Airport and submitted
these to the Airport accounting section so that Airport accounting
staff could send invoices to SFOE. This represents an internal
control weakness in that the Airport’s accounting section could
have independently compiled and summarized the expenses for
the invoices. According to an Airport accountant, the Airport’s
accounting section did not track the expenses or initiate the
invoices; it only recorded in the City’s Financial Accounting and
Management Information System (FAMIS) what the SFOE
consultant had invoiced, but did not review the expenses for
accuracy or for completeness.

THE AIRPORT DID NOT CONSISTENTLY IDENTIFY COSTS

ATTRIBUTABLE TO SFOE AND OVERSPENT ITS BUDGET

Although the Board of Supervisors on January 1997 authorized

the Airport’s new International Services Division to promote and
market the services of Airport staff to manage international
airports, the Airport did not record any significant expenditures for
the division’s efforts in this endeavor for two years, and did not
always consistently record expenditures related to SFOE and
other international service projects in later years. Further, after it
had created SFOE in 1999, the Airport still did not consistently
record the amounts it spent for activities related to SFOE into one
cost center in FAMIS. A comparison of the Airport’s budget for
international services projects to the Airport’s costs incurred for
SFOE shows that the Airport overspent its budget by over
$800,000 for a five-year period.

International Service Project Costs Not Identified

The City’s FAMIS revealed that the Airport did not record any
budgets or charges in the international services project code for
fiscal year 1997-98, and only recorded $21,216 in salaries and
benefits charges for fiscal year 1998-99. However, according to
the Airport’s internal records, it had already spent more than
$630,000 on various international services projects. Instead of
charging these expenditures to the International Services Division,

12
the Airport charged other budgeted cost centers, such as the chief
of staff, bureau of planning, director’s office, and marketing cost
centers.

The Airport’s deputy director of business and finance responded

that the expenditures were not charged to the International
Services Division since the payroll and expenses for those people
working on international services projects in other divisions were
already budgeted in those respective divisions. As such, we could
not produce from FAMIS a report or record of all international
services or SFOE expenses because many of those expenses
were recorded in different cost centers.

SFOE Travel Expenditures Not Consistently Identified

The Airport did not accurately portray the actual expenditures

made on behalf of SFOE. For fiscal year 1999-2000, the Airport
recorded travel expenses for International Services Division staff
in the International Services Division cost center for half of the
year and travel expenses in the cost center for the chief of staff for
the remainder of the year. For fiscal year 2000-01, during the
second half of the fiscal year, the Airport charged all travel
expenses to the chief of staff cost center. The Airport reported at
least $193,718 in travel charges related to SFOE in cost centers
other than the International Services Division; nevertheless, the
Airport did correctly bill these expenses to SFOE.

According to the Airport’s deputy director of business and finance,

expenses were generally charged based on the regular section to
which an employee was budgeted. He further stated that
international services work at the time was handled through the
chief of staff and bureau of planning cost centers.

Airport Overspent Its Budget for International Services

We compared the approved FAMIS budgets for each fiscal year

with the total amounts billed to SFOE for services and other costs
incurred on SFOE’s behalf by the Airport and recorded in different
cost centers in FAMIS. Although we did not separate by fiscal year
the unbilled expenditures we identified in our audit, in total
expenditures for SFOE were higher than the approved budgets by
over $800,000 for the five-year period, most of which were due to
unbilled charges. The FAMIS budgets include all international
services 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 Costs
Incurred for International Services and SFOE

FAMIS Billed or Attributed (Over)/Under

Fiscal Year
Budget to SFOE 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 (from
Tables 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 Airport’s
inconsistent recording of
SFOE-related expenses
allowed the Airport to
bypass budgetary
spending restrictions.
the Board of Supervisor’s finance committee placed a reserve of
$220,189 on the International Services Division’s total budget of
$293,584. This meant that the Airport could only spend $73,395
for payroll, travel, and other expenses for SFOE through June
2003. In fact, although FAMIS records show that the Airport spent
only $73,395 for fiscal year 2002-03 for its International Services
Division, the invoices to the Airport showing SFOE expenses for
reimbursement for the same period reflect $281,697 in expenses.

AIRPORT EMPLOYEES DID NOT ALWAYS

FOLLOW CITY RULES IN WORKING FOR SFOE

In reviewing an 8-month sample of travel expenses, we identified

several instances where Airport employees exceeded limits set for
air travel and hotel stays. Further, one employee received a travel
advance that was used for non-travel related purchases, including
a car. Another employee took a leave of absence from his city job
and carried out similar duties as a subcontractor and received
more in pay.

Travel Rules for Air Travel and Hotel Stays Not Followed

Some of the Airport employees working as SFOE consultants flew

business class, which at times cost more than twice as much as a
regular coach flight. According to the Controller’s Travel and
Official Business Expense Regulations (travel policy), city
employees are to use the lowest published routine fare for travel

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

In addition, many of the hotels at which consultants stayed during

their trips cost more than the government-approved rates. We
noted hotel daily rates that exceeded the government-approved
rates by 32 percent to 112 percent. For travel within the United
States, the Controller’s travel policy states that employees are to
use the federal maximum rates for lodging. For foreign travel,
employees are to use the most economical and practical
accommodations available considering the purpose of the
meeting, transportation costs, time and other relevant factors.

Although Airport employees took these trips in their capacity as

SFOE consultants, these employees are still City employees and
thus subject to city rules. The letter agreement between the
Airport and SFOE for reimbursing the Airport states that personnel
of the Airport providing the services to SFOE are subject to all of
the rules, regulations, policies, and procedures that are
promulgated by the City and County of San Francisco with respect
to its employees. We did not review all travel expenses and
therefore we did not determine the total of excess travel costs.

Travel Advance Used to Purchase a Car

and Other Non-Travel Related Items

In another example of disregarding travel policy, an Airport

employee consulting for SFOE received a $40,000 travel advance
Travel advance used to on August 31, 2000, from the Controller’s Office, but the advance
purchase a car, office was never intended for travel. According to the Airport
furniture, and a Commission’s Fiscal Year 2000/01 Travel and Training
computer.
Guidelines, travel advances usually include lodging, meals and
transportation expense. Upon completion of the travel, a travel
expense voucher is used to list actual expenses and original
receipts must be attached. Although the employee specifically
indicated that the travel advance would be used for non-travel
related expenditures, such as purchasing a car, computer, and
office furniture, the Airport approved using a travel advance to
obtain funds to pay for these items, and the Controller’s
Accounting Operations and Systems Division (AOSD) approved
the payment of the travel advance to the employee.

Moreover, this employee failed to provide the Controller’s AOSD

with the appropriate travel receipts and vouchers within 10 days
after return from travel, as required by the Controller’s travel
policy. On October 2, 2000, the employee, working as a SFOE
consultant, used the travel advance to open a bank account in the
amount of $40,000 in Miami, and proceeded to use the bank
account funds for cash, payments on the purchase of a new
Nissan Pathfinder, office furniture, computer equipment, and
apartment rent in Honduras. Although the Controller’s AOSD had
inappropriately approved the advance for these expenses, when

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Controller’s accounting staff requested an accounting of the travel
advance from the Airport in January 2001, SFOE subsequently
paid the money back in April 2001, or seven months after the
issuance of the advance, and five months after the Airport
employee returned from the travel.

City Employee Worked as a Subcontractor

Finally, an Airport employee earned more in pay by working as a

consultant for a non-city contractor than performing the same work
as a city employee. The employee took a leave of absence from
his employment with the City in October 2004, and worked as a
subcontractor under the Airport’s contracted sale liquidator for
SFOE. He earned approximately $17,600 for 162 hours of work in
two and a half weeks of employment. According to the employee,
this situation resulted from the Board of Supervisors’ direction that
no Airport employees could work on any SFOE activities effective
July 1, 2004 and therefore the Airport asked that he fly to
Honduras as SFO Honduras’ professional representative on site
as an outside consultant to the sale liquidator since SFO
Honduras was still contractually responsible for providing services
to InterAirports and maintaining a professional representative in
Honduras.

The Airport maintains that the $110 hourly rate paid to the Airport
employee as a contractor was agreed to for the purpose of making
the employee whole on an after-tax basis, considering the value of
forgone benefits suffered by the employee. However, this rate
includes the total cost of all of the employee’s legal holidays and
floating holidays for an entire year, in addition to certain benefits,
which the employee would not lose by taking a leave for 11
workdays. Using the methodology and assumptions provided to us
by the Airport’s 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 to

ensure that it protects the City’s interest in contracting with outside
agencies:

4. Formally enter agreement with outside agencies before

providing any services. The agreement should specify
reimbursement rates for providing services and identify the
recovery of sufficient overhead.

5. Reassess its procedures for identifying costs to different

cost centers to give a more comprehesive summary of the
costs involved for specific projects

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 6. Ensure that its employees adhere to the Controller’s travel
policies even when they are working as consultants for
private companies.

We conducted this review according to standards established by

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

Staff: Elisa Sullivan, Audit Manager

Robert Tarsia
Kathy Buckley
Lorita Chung
Helen Vo
Winnie Woo

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SAN FRANCISCO AIRPORT DEPARTMENT
RESPONSE TO THE REPORT

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APPENDIX

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cc: Mayor
Board of Supervisors
Civil Grand Jury
Budget Analyst
Public Library

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