Flight Capital

How SFO officials used city employees and money -- in apparent violation of state and federal law -- in a very odd attempt to privatize the airports of Honduras

Costas, Fermin, and other airport bureaucrats were able to make these diversions under the gaze of city officials expressly tasked with protecting the San Francisco treasury.

City Treasurer Susan Leal was, until recently, a director of SFO Enterprises. To this day, Leal defends Costas' operation, claiming it is a sound investment for the city despite documentation to the contrary.

Deputy City Attorney Mara Rosales served as corporate secretary for SFO Enterprises while simultaneously holding down her city job. As a result, the City Attorney's Office appears to have actively enabled a type of misconduct -- the diversion of public resources to private benefit -- that it is ordinarily expected, even required, to advise against.

Deputy City Attorney Nathan Ballard says his office does not believe Rosales' dual roles conflict. The office asked for a state attorney general's opinion on exactly this matter in 1998, he says. The response: no conflict.

"We view the city's concerns to be the same [as SFO Enterprises']. Their interests are the same. The city owns the for-profit corporation in its entirety, and the city is the beneficiary of all the corporation's profits," Ballard says.

Rosales insists that the city received top-notch legal advice from her.

"There has been no laundering, if you will -- no washing of money, as you say it. There has been no violation of federal law; there has been no violation of the City Charter," Rosales offers. "If you follow the paper trail, with the agreements between the entities, they are arm's-length agreements."

By "agreements," Rosales appears to be making reference to a letter from Airport Deputy Director John Costas to his boss, Airport Director John Martin, saying SFO Enterprises Inc. planned to pay back part of the airport resources it had used. It is dated March 12, 2001, more than three years after Costas and Martin had begun to oversee the diversion of funds from the airport into this private corporation -- a corporation they had jointly promoted.

The Office of the Mayor, at the time held by Willie Brown, was listed as the sole shareholder of SFO Enterprises, and therefore Brown was in a position to monitor the debacle. But he contended through a spokesman that he had no information about the company, its activities, or the activities of the people charged to run it.

The City Controller's Office, the ultimate overseer of San Francisco's purse strings, appears to have approved unusual funding requests wholesale, glossing over inappropriate travel expenses and authorizing legal bills that included payments for obviously nonlegal spending. The $40,000 cash advance that was to be used on a Tegucigalpa car and apartment, for example, was "verbally approved by Remy Nelly of the Controller's Office," according to an internal memo.

City Controller Edward Harrington says the diversion of airport funds to SFO Enterprises appeared to be a lawful use of city funds, because the airport's budget included funding for an International Services Division, and this division was related to SFO Enterprises Inc. "My recollection was that it was anticipated, or at least discussed, that there would need to be some upfront spending to be done. There was discussion that there was going to need to be trips. Clearly the airport has advanced money to the corporation, at least on a cash basis," says Harrington. "We asked questions, and it seemed to fit within the pattern of how it was originally proposed, and so we approved it."

On Monday, Assistant Deputy Airport Director Mike McCarron said San Francisco International Airport management would not be available to comment on this story.

San Francisco's Honduran adventure finds its beginnings in November 1996, when Airport Director John Martin and SFO Deputy Director John Costas founded a unit at the airport called the International Services Division. It had the express purpose of earning profits for San Francisco by selling consulting services to foreign airports. Judging from memos, meeting minutes, and other documents, the logic of the new division went something like this: As an entity that generates nearly $300 million in annual revenues, the San Francisco International Airport is the equivalent of a major corporation; the bureaucrats who collect fees from airlines, run the parking lots, etc., are therefore close facsimiles of major international business executives. And, by way of a final leap of logic, the expertise of these bureaucrats could be profitably leveraged in the management of foreign, for-profit airports.

With Costas as its director, the International Services Division participated in consortia that bid on the privatization of airports in Santiago, Chile, and Perth, Australia. The groups that included SFO lost both contracts, but the Costas group did earn a $380,000 fee, paid by other members of the losing Perth consortium. Thus emboldened, in 1997 Costas and Martin urged San Francisco's city fathers to allow them to turn the new division into a private, for-profit, city-owned corporation. Such an entity would be unfettered by public access laws that govern -- and, supposedly, hamper -- city agencies, Costas argued.

"A private for-profit corporation will provide for rapid response necessary in a competitive business environment," Costas wrote in a 1997 memo to the city budget analyst. "Through a private, for-profit corporation that separates public assets and funds from the private enterprise, the necessity for multiple layers of approvals and extended processes can be eliminated and more timely decisions can be made."

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