Our Money Flies Out of SFO

Imagine a place where bureaucrats cause millions of public dollars to disappear into a private company, mislead the people of an impoverished Third World country, expose that same employer to billions of dollars in potential liability, attempt to cover up funds diversion through accounting maneuvers, and somehow keep their jobs.

This is San Francisco, Valhalla for incompetent or malfeasant bureaucrats, a remote utopia where public mismanagement seems to go unpunished for all eternity.

In the latest example, the city office responsible for checking employee expenses just released a report documenting how managers at San Francisco's airport apparently violated laws that prohibit putting public money into private hands without proper authorization, squandering at least $1.5 million in the process.

The private hands in this case belonged to SFO Enterprises LLC, a for-profit company that put staffers to work in an unusual line of business: managing the national airports of Honduras.

Explaining how San Francisco got into such a highly peculiar line of work and then turned the business into an improper private kitty swallowing up city funds has been the subject of several columns in this space.

As of last week, a summation of my accounts of public wrongdoing associated with a bizarre scheme to manage private airports in Honduras is now part of the official city record.

According to the new audit, top airport officials dreamed up this idea in 1997 as a supposed moneymaking scheme for the city, made a horrible mess of it, then tried to fix the mess by taking piles of city money without permission, attempting to cover their tracks through accounting maneuvers.

"This is a systematic failure at virtually every level of government, under a number of mayoral administrations, a number of Boards of Supervisors, allowing an operation that looked like Ollie North and the secret operations team," said Aaron Peskin, who in 2002 sponsored an ordinance prohibiting that city funds be used by the operation, only to see airport managers divert more city money to Honduras by routing it through a consulting contract. Peskin added: "How it went on so long, and with so many people being complicit, is a shame upon the city."

I asked an airport spokesman if John Martin would comment on the audit. He told me Martin was not giving interviews on the subject, but that "as far as Mr. Martin is concerned, the issue is now closed, and that is the end of discussions."

Airport managers in 1999 created SFO Enterprises after they'd gotten the Board of Supervisors to pass legislation two years earlier authorizing them to set up a private company with $10,000 in city start-up capital — as long as they didn't divert an additional penny of city or airport money on private airport-management business. A City Attorney memo accompanying the 1997 legislation was specific on this point: The company, and its finances, had to be kept absolutely separate from city accounts, or San Francisco might face huge liability from possible disasters at overseas airports managed by SFO employees.

The idea was to turn SFO into a profit center for the city — any net revenue would go to San Francisco's general fund, the airport managers said. Under normal circumstances, it's against FAA rules for a city to move money to its own general fund from a federally subsidized airport such as SFO, which obtains income from airlines' landing fees. But airport managers argued in 1997 that they could make money for the general fund by creating a private corporation that was kept separate from the airport's budget.

"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," SFO deputy director John Costas wrote in a memo urging the Board of Supervisors' permission for such a scheme.

According to the audit report, airport director John Martin and his deputies Costas and special assistant Leo Fermin disregarded this separateness principle from the get-go. They did not separate "public assets and funds from the private enterprise" — they spent at the very least $1.5 million in city funds. They did, however, avoid "multiple layers of approvals" by simply taking city funds for use by the private company without proper permission.

In so doing, they created a private company that became the equivalent of an airport executive slush fund, which they used to spend city money on lavish travel, and lodging and meals at places such as Oman, Paris, and Australia, under the pretext of ginning up private consulting business.

After numerous failures at winning consulting contracts, airport deputy director Costas hired an expert in managing private infrastructure projects, and put him on the city's payroll, with the aim of successfully winning management contracts for the private SFO Enterprises.

In the end, they put together a single business deal, assembling a consortium in 2000 to run Honduras' just-privatized airports. They severely botched the Honduras deal. They quarreled with their consortium partners, failed to perform basic tasks outlined in their airport management contracts, and lost money from the moment the contract period began. The losses had to be covered somehow. And Fermin, acting as both SFO's business manager and SFO Enterprises' chief financial officer, generated receipts and accounting ledgers attributing money spent on the Honduras project to the airport's Bureau of Planning, its marketing department, its Airfield Development Bureau, and the chief of staff's office.