How airport officials let Hertz drive off with nearly $1 million

If progressive morality can be measured in piss-into-the-wind proclamations such as last week's proposal to boycott Arizona, San Francisco is Mecca. Gauged in terms of actually running a city, however, San Francisco is a Gomorrah of sleaze and impunity. The latest manifestation is a new audit report from the controller's office showing how airport officials inappropriately gave the Hertz Corporation $813,965.

In an age of $1 trillion economic meltdowns and allegations of $1 billion Goldman Sachs ripoffs, it's easy to pooh-pooh local bureaucrats giving away taxpayer money by the mere suitcaseful. The details of this apparent corporate giveaway are complicated, making it even harder to raise hackles.

But trust me: The deal stinks.

It seems that officials working under San Francisco International Airport director John Martin gave Hertz an extraordinarily generous deal to use the airport's car rental center adjacent to the runways. And they did this in apparent defiance of a Hertz-SFO agreement that forbade just such giveaways.

I have no evidence of any sort of quid pro quo from Hertz to airport employees. But the airport is taxpayer owned, and there's no reason we shouldn't collect money owed from corporations that profit by using it.

A close reading of that contract, the controller's audit report, and events surrounding a decision by the San Francisco City Attorney's office to sign off on this wrong-headed deal suggest bureaucrats gave away the store instead of looking out for our interests.

Hertz spokesman Rich Broome said his company and airport officials disagree with the controller's analysis. "The San Francisco concession agreement was written so that all the parties understood" Hertz didn't owe money controller's auditors said it did, he said.

Airport representatives had not responded to questions about this matter by press time. A spokesman for City Attorney Dennis Herrera said his office had no comment.

According to a 10-year rental agreement SFO and Hertz signed in 1998, the car rental company was to pay a minimum flat fee or 10 percent of gross revenues, whichever was greater. To ensure Hertz didn't fudge those definitions, the original contract was highly specific. Revenue was money "received without deduction or offset from all vehicles rented at the airport." The contract took pains to nail down the concept of which rented cars were considered "airport-based" to prevent Hertz from playing tricks in the way it counted them.

A vehicle would be deemed rented at the airport, according to the contract, if "1. Vehicle is delivered to the customer at Airport; 2. The rental contract is negotiated and signed at the airport but the vehicle is delivered elsewhere; 3. The rental car customer is an air passenger who rents a vehicle within 24 hours of arrival at the Airport; 4. The vehicle delivered to a customer at Airport or negotiated for whole or in part by a customer at Airport is exchanged for another vehicle, except where such exchange takes place at another airport a fee is paid at such other airport; 5. There are further exchanges."

Airport officials interpreted this to mean that if Hertz rented to a local customer — who came to the rental center from outside the airport, and therefore is not "an air passenger who rents a vehicle within 24 hours of arrival" — that income didn't count toward Hertz's 10 percent fee.

According to this reading, all five conditions had to be satisfied, rather than just one, for a rental to count as "at the airport."

In 2008, city auditors studied the contract and airport income accounts and called this interpretation bogus. This was no niggling discrepancy. Over a three-year period sampled by auditors, this interpretation had saved Hertz $518,371.

I showed the contract and the city auditor's report to Jon H. Sylvester, a commercial arbitrator who is also a professor at Golden Gate School of Law, specializing in contracts. He said that airport officials' interpretation that a rental counted as "at the airport" only if it satisfied all five of the qualifications was logically impossible. "Based on the fact some of the items are mutually exclusive, we can conclude you can't need to meet all these tests," he said. "Just reading the agreement, I would think the auditor's interpretation makes a lot of sense. If the airport had made that interpretation, they would have had a stronger position than Hertz."

But that's not what happened. Instead, deputy city attorney David Serrano-Sewell was brought in to assess the disagreement. And, despite the fact that the city attorney is supposed to be looking out for the city's interests, rather than those of errant airport employees, he endorsed the discount.

Apparently, airport and Hertz officials had a long-running, seemingly off-contract understanding that local rentals didn't count in revenue. And that informal agreement made the discount stick.

Poring over airport records, Controller's Office audit director Elisa Sullivan caught even more missing money. Martin's deputies had let slide an additional $295,594 in collectible fees. The rationale: Hertz gave special lump-sum discounts to corporations after cars had already been rented.

The contract was clear, Sullivan maintained: Rental revenues were to be calculated "without deduction or offset." She was again overruled by the city attorney. Airport and Hertz officials had yet another apparent off-contract understanding. And Serrano-Sewell seems to have signed off on it.

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