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

More specifically, the corporation would be able to avoid the "extended process" of responding to public information requests. Private corporations aren't subject to laws guaranteeing public access to information about government entities -- even when the corporations are owned by the government. By having the ability to keep its operations secret from the public, this new corporation would not be forced to reveal trade secrets, airport officials said. Indeed, secrecy was described by proponents as one of the main benefits to forming the new, private corporation.

Another touted benefit of Costas' operation dealt with federal laws that prohibit municipalities from looting the budgets of their city-owned airports toward other municipal ends. Like other major airports, SFO receives millions of dollars annually in federal subsidies. According to federal law, all revenues generated by an airport -- airline landing fees, federal grants, bond funds, etc. -- should stay at the airport.

If Costas and his subordinates at the International Services Division were to turn out to be entrepreneurial wizards in the field of international infrastructure privatization, federal law would prohibit the city from using any profits for non-airport activities. And a violation of these laws could ultimately lead federal regulators to deprive the airport of federal funds; airports all over the country are routinely sued and penalized for this sort of fund diversion.

Costas suggested to city officials that his new private firm could create the bureaucratic version of a miracle: He would turn the airport into a cash cow that drained its milk into the city's General Fund -- without violating federal law. Despite the unlikeliness of the spectacle -- after all, an airport bureaucrat was promoting the idea of moving money from the airport into the city's General Fund, rather than vice versa -- the Board of Supervisors, then dominated by appointees and allies of Mayor Brown, bought Costas' idea.

There were catches, though, small print on the back of the box, if you will. The new corporation simply, absolutely, positively could not use airport funds.

Melba Yee, a deputy city attorney who works at the airport, came up with the following explanation in an official memo: "If structured as a separate legal entity with its own source of funds separate from the monies generated from ongoing airport activities, this line of business could produce a long-term source of revenue which lawfully could be provided to the general fund. ... Under this structure, no airport revenues would be used for the corporation, nor would revenues from the corporation be used to operate the airport."

In proposing their new private corporation to city officials, Costas and airport director John Martin were likewise charming in their scrupulousness. Martin, for his part, insisted that the city specifically allocate $10,000 for start-up funding of the corporation, rather than obtaining this money from the budget of the airport itself, because use of airport money "would be considered improper revenue diversion and thus violate federal regulations," a 1997 budget analyst's memo quoted Martin as saying.

Costas, for his part, told the budget analyst that "all costs incurred by the corporation would be funded by the revenues to be realized by the corporation," according to the budget analyst's memo.

Keeping the new corporation's accounts separate from the city's was important for reasons beyond obeying federal law, Deputy City Attorney Yee opined. Maintaining a fire wall between city funds and the accounts of the newly formed private corporation was also essential to protecting the city from civil liability under California law. "As long as the city acts solely as a shareholder, the corporate formalities are observed ... and the corporation is properly capitalized for the business in which it engages, the protection of the city as a shareholder will be preserved. If, on the other hand, the city intervenes in the day-to-day affairs of the corporation or ignores the separate legal identity of the corporation, then the city may lose the protection that is otherwise provided by California law."

In other words, according to the City Attorney's Office, the Budget Analyst's Office, and the airport bureaucrats who were the proposed private corporation's main protagonists, the city's venture into international private entrepreneurship possessed a third rail: If it were somehow to become a conduit for diverting city funds beyond the initial $10,000 investment, San Francisco would run the risk of violating federal law and/or exposing itself to the huge financial liability connected to running international airports.

There was a third crucial reason for keeping taxpayer resources away from the new corporation that went unmentioned in Costas' 1997 sales pitch to the Board of Supervisors: Unless the firm's accounts were kept unerringly separate from the city's, it would be impossible to determine whether the city was making or losing money on its new venture -- particularly because details of the operation of the new venture were to be kept secret from city officials.

In the world of private corporations the city contemplated entering in 1997, the ability to keep a strict accounting of a company's bottom line is the hub from which all other decisions emanate: which business opportunities to pursue, whether to retain or fire the company's chief executive, whether it is financially wise to continue or discontinue a business enterprise. Unless the city scrupulously divorced its accounts from those of this new enterprise, it ran the risk of creating a financial black hole. Unless the accounts were kept separate, public officials assigned to the new corporation -- such as Costas, who was the corporation's chief executive, and Fermin, the corporation's chief financial officer -- would be able to spend hundreds of thousands of taxpayer dollars without telling anybody how they used it.

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