Pinocchio and SFO

Once upon a time, there were airport officials who wanted to spin tall tales, spend $745,000 on Honduran boondoggling, and not explain very much

Meanwhile, SFO Enterprises and, by reasonable extension, the city are facing new financial challenges in Honduras.

During his testimony before the Board of Supervisors budget committee last month, Martin suggested that SFO Enterprises represented a valuable investment for the city, citing the firm's investment of $36,000 for equity in the Interairports consortium. What he didn't say is that SFO Enterprises' relationship with Interairports includes side agreements that could put SFO Enterprises -- and, because of its continued connection to the firm, the city of San Francisco -- in debt to the consortium.

The privatization contract with the Honduran government requires that the consortium make some $60 million in infrastructure investments during the 20 years of its contract. According to travel receipts produced in response to a public records request, airport employee Steve Zehr has met with officials of the International Finance Corp., a World Bank investment banking subsidiary. IFC officials did not return calls for comment, but the Superintendencia de Concesiones said the IFC is currently studying whether to loan money to the Interairports consortium.

According to Interairports contractual agreements, SFO Enterprises would be responsible, along with other members of the consortium, for making an equity contribution that the IFC would require for approving a loan. Presumably, SFO Enterprises' debt would be erased as the consortium became profitable, but this theoretical eventuality is still years off, sources in Honduras say.


That SFO Enterprises is asking for $745,000 in city money would certainly seem to make San Francisco indirectly liable for the risk involved in running the international airports of Honduras. Either that, or the San Francisco City Attorney's Office is remarkably incompetent.

In an official 1997 memo, Deputy City Attorney Melba Yee opined that San Francisco would be protected from liability that SFO Enterprises might create only if the city's finances were kept strictly separate from the private firm's.

"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," she wrote. This need for separation, according to airport officials' arguments at the time, was a core reason for creating the private corporation in the first place.

Back when the private firm was created, John Martin, the airport director, suggested that commingling airport money with SFO Enterprises money could run afoul of federal regulations. The city should allocate $10,000 of its own funds for the start-up 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. Yet the $745,000 in SFO Enterprises funding would, if approved, come from the airport's budget.

For Yee, the crucial issue was liability for the city, which would be avoided by keeping the two entities' finances separate: "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," Yee wrote. "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 formally asking that $745,000 of city money be allocated to SFO Enterprises, Martin, Costas, et al., appear to have abandoned the ruse that SFO Enterprises is separate, in any meaningful way, from city government, and to be opening the city to enormous potential liability.

When I tried to ask about this amazing and apparently dangerous U-turn in policy, airport officials went quiet. Three weeks ago, I asked airport Public Information Officer Ron Wilson for an interview with Costas. Costas refused to be interviewed. I asked to interview Martin -- nothing. I actually got Leo Fermin, the airport official the city Controller's Office says is responsible for SFO Enterprises' finances, on the phone. He refused to answer questions.

Instead, Wilson subsequently insisted that airport officials would respond only to written questions.

Now, in my previous experience with SFO, I have found that submitting written questions has translated into 10 days of fax warfare, at the end of which time I have amassed a pile of paper full of nonresponsive bromides. In my experience as a journalist, I have discovered that explanations of anything as complex as SFO Enterprises and its operations in Honduras are useless unless an opportunity to ask follow-up questions is provided.

Still, if Wilson insists on written questions, I guess I'll have to play.

Here's my question:

Isn't it time to include money in the SFO budget to pay for the kind of comprehensive financial audit that other city departments obtain on a regular schedule, and the airport hasn't had for 31 years?

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