HomeMy WebLinkAbout04-Announcement GRAND JURY f
`� COUNTY OF SAN BERNARDINO
sAM euMAaoi�o
351 North Arrowhead Avenue,Room 200, Courthouse
San Bernardino, CA 92415-0243 - (909) 387-3820
Fax (909) 387-4170
June 28,2011
San Bemardino International Airport Authority
294 S. Leland Norton Way
San Bernardino, CA 92408
Dear Sirs/Madams:
Your attention is directed to Penal Code Section 933.05, 'Responses to Findings"
(attached). In compliance with subsection (f) of this code section, enclosed is a copy of the
portions)of the 2010-2011 Grand Jury Final Report that pertains to your department(s).
Your attention is directed to the sentence in subsection (f) which states: "NO OFFICER,
AGENCY, DEPARTMENT OR GOVERNING BODY OF A PUBLIC AGENCY SHALL
DISCLOSE ANY CONTENTS OF THE REPORT PRIOR TO THE PUBLIC RELEASE
OF THE FINAL REPORT." The San Bernardino County Grand Jury Final Report for 2010-
2011 will be released to the public on or about June 30,2011.
Sincerely,
MELONEE A. VARTAMAN
Grand Jury Assistant
/mav
Enclosures
Entered Into Rec. at MCC/CDC Mt9: '7 6 /i l
by:
Agen m No:iy
by: 17 .71
City Cler DC Secretary
City of San Bernardino
PC 933.05 RESPONSES TO FINDINGS
(a) For purposes of subdivision (b) of Section 933, as to each grand jury finding, the
responding person or entity shall indicate one of the following:
(1) The respondent agrees with the finding.
(2) The respondent disagrees wholly or partially with the finding, in which case
the response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefor.
(b) For purposes of subdivision (b) of Section 933, as to each grand jury
recommendation, the responding person or entity shall report of the following actions.
(1) The recommendation has been implemented, with a summary regarding the
implemented action.
(2) The recommendation has not yet been implemented, but will be implemented
in the future, with a timeframe for implementation.
(3) The recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a timeframe for the matter to be
prepared for discussion by the officer or head of the agency or department being
investigated or reviewed, including the governing body of the public agency when applicable.
The timeframe shall not exceed six months from the date of publication of the grand jury
report.
(4) The recommendation will not be implemented because it is not warranted or
is not reasonable, with an explanation therefore.
(c) However, if a finding or recommendation of the grand jury addresses budgetary or
personnel matters of a county agency or department headed by an elected officer, both the
agency or department head and the board of supervisors shall respond if requested by the
grand jury, but the response of the board of supervisors shall address only those budgetary
or personnel matters over which it has some decision-making authority. The response of the
elected agency or department head shall address all aspects of the findings or
recommendation affecting his or her agency or department.
(d) A grand jury may request a subject person or entity to come before the grand jury for
the purpose of reading and discussing the findings of the grand jury report that relates to
that person or entity in order to verify the accuracy of the findings prior to their release.
(e) During an investigation, the grand jury shall meet with the subject of that
investigation regarding the investigation, unless the court, either on its own determination or
upon request of the foreperson of the grand jury, determines that such a meeting would be
detrimental.
(f) A grand jury shall provide to the affected agency a copy of the portion of the grand
jury report relating to that person or entity two working days prior to its public release and
after the approval of the presiding judge. No officer, agency, department or governing body
of a public agency shall disclose any contents of the report prior to the public release of the
final report.
2010-2011 San Bemardino County Grand Jury Final Re-
SAN BERNARDINO INTERNATIONAL AIRPORT
BACKGROUND
The Norton Air Force Base was closed in 1994 and was converted to civilian and
commercial use. The conversion and subsequent redevelopment of the base property and
surrounding areas is governed by two Joint Power Authorities(JPA's):
1. The Inland Valley Development Agency (IVDA) was established in 1990 to
handle the redevelopment of the non-aviation portion of the former air base.
This includes approximately 600 acres on the former base and about 13,000
acres surrounding the base. IVDA board members are from San Bernardino
County, and the cities of San Bernardino, Colton and Loma Linda.
2. The San Bernardino International Airport Authority (SBIAA) was formed in
1992 to oversee the approximately 1,300 acres of the aviation property of the
former Air Force Base. SBIAA board members are representatives of San
Bernardino County, and the cities of San Bernardino, Colton, Loma Linda,
and Highland.
In 2002, the IVDA entered into a Master Disposition & Development Agreement (DDA)
with Hillwood Investment Properties, a Texas-based development company to serve as
the Master Developer of the project known as Alliance California. Several large
companies are current tenants, including Stater Bros Market, Kohl's, Mattel, and Pep
Boys.
In July of 2009, the Grand Jury received a complaint regarding alleged irregularities
occurring at SBIA. An investigation was undertaken and after a number of interviews
were conducted and many documents reviewed, it was determined that a Performance.
Audit should be initiated. The auditing firm of Harvey M. Rose Associates, LLC was
hired. In December of 2010, the auditing team and members of the Grand Jury met with
63
2010-2011 San Bernardino County Grand Jury Final Report
SBIA management to explain the purpose and scope of the audit; to answer any questions
they had; to solicit their cooperation in setting up interviews, and providing the necessary
documents necessary to complete the audit.
The audit evaluated a number of topics, including:
• The overall management structure and authority
• Internal control mechanisms
• Construction management policies
• Procedures and practices
• Leasing of hangars and terminal facilities
• Contractual and financial relationships between SBIA.A and the various
vendors and contractors
The audit report and recommendations (see Attachment#1) are incorporated by reference
into the final report.
Responding Aeency Recommendations Date Due
San Bernardino International Section 1: 1.1 through 1.5 August 30,2011
Airport Authority Board Section 2: 2.1
Section 3: 3.1 through 3.5
Section 4: 4.1
Section 5: 5.1
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Performance Audit of
San Bernardino International Airport
Operations, Development and
Construction Activities
Prepared for the
2010-2011 San Bernardino County Grand Jury
By
Harvey M. Rose Associates, L,LC
1390 Market Street, Suite 1150
San Francisco, CA 94102
(415) 552-9292
http://www.harveyrose.com
June 6, 2011
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June 6, 2011
Bob Dunlap, Forman and Members of the
2010-11 San Bernardino County Grand Jury
35I North Arrowhead Avenue, Room 200
San Bernardino, CA 92415-0243
Dear Mr. Dunlap and Members of the 2010-11 San Bernardino County Grand Jury:
Harvey M. Rose Associates, LLC is pleased to present this Performance Auclit of San
Bernardino International Airport Operations, Development and Construction Activities. The
audit includes a review of activities performed by the San Bernardino International Airport
Authority (SBIAA), the Airport's contract managers and related support provided by the Inland
Valley Development Agency(IVDA).
This performance audit was conducted in accordance with Government Auditing Standards, July
2007 Revision, by the U.S. Government Accountability Office, Comptroller General of the
United States, as modified by directives from the Grand Jury to ensure investigative integrity. It
contains five principal findings with recommendations to improve internal controls, construction
management processes and equipment acquisition methods; strengthen due diligence processes
related to potential litigation; and, reevaluate contractor relations.
We appreciate being provided with the opportunity to serve the Grand Jury during your term. We
are available to assist you further on this matter or any other investigation that you might find
appropriate.
Respectfully submitted,
r122
Stephen Foti
Principal
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Table of Contents
ExecutiveSummary....................................................................................................i
Introduction............................................................................................................I-1
1. Internal Controls.................................................................................................... 1-1
2. Construction Management............................................................................I........ 2-1
3. Equipment Acquisition .......................................................................................... 3-1
4. Lawsuit Settlement ................................................................................................ 4-1
5. Contractor Relations .............................................................................................. 5-1
Attachment3.1 .................................................................................................A3.1-1
Executive Summary
Harvey M. Rose Associates, LLC was retained by the 2010-2011 San Bernardino County Grand
Jury to conduct this Performance Audit of San Bernardino International Airport Operations,
Development and Conduction Activities. The audit included a review of activities performed by
the San Bernardino International Airport Authority (SBIAA), the Airport's contract managers
and related support provided by the Inland Valley Development Agency (IVDA).
To accomplish these objectives, Harvey M. Associates, LLC interviewed SBIAA management
personnel, staff, and contractors; reviewed and analyzed SBIAA financial, planning, staffing,
contract, and organizational documentation; reviewed SBIAA Commission and IVDA Board
public records pertaining to Airport operations; and, reviewed data and documentation from the
County of San Bernardino, the U.S. Department of Transportation, SBIAA contractors, and
public record searches. Based on our research and analysis, we developed the findings and
recommendations that are the subject of this report.
This performance audit was conducted in accordance with Government Auditing Standards, July
2007 Revision, by the U.S. Government Accountabiiity Office, Comptroller General of the
United States, as modified by directives from the Grand Jury to ensure investigative integrity.
Specifically, the draft report received internal quality assurance review and was presented to the
Grand Jury to obtain the member comments. However, at the direction of the Grand Jury, no exit
conferences were held with SBIAA management prior to the release of the final report.
A summary of the findings and recommendations contained in this report are presented on the
pages that follow, by report section number.
Section 1. Internal Controls
SBIAA has not established effective internal controls over financial management activities. The
internal control foundation is weak, policies and procedures are neither current nor effective and
business processes are poorly documented. The Commission should direct management to
strengthen this internal control foundation over the next 12 months by establishing appropriate
policies, procedures and business processes that protect the Authority's assets.
Although most major financial matters are brought before the Commission for consideration, the
analysis supporting decision-making is often incomplete or vaguely stated. Authority for
approving individual financial and contract transactions has been delegated to mid-level
managers within the organization. In critical areas, the Authority's Chief Financial Officer has
limited involvement in the initial review and approval of such transactions.
The Authority has secured the services of a local accounting Pima to conduct its annual audit and
various special compliance reviews. In some instances, the scope definitions for these reviews
have been narrowed by management to exclude major areas of exposure. In addition, although
we found no evidence of impropriety, the Interim Executive Director was a founding partner of
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the accounting firm with which the Authority contracts. The Commission should adopt a policy
requiring rotation of auditing firms every five years and solicit the services of other accounting;
firms through a competitive bid process to remove any appearance of an impairment to auditor
independence.
Based on these findings, the SBIAA Commission should:
1. 1 Direct management to develop comprehensive policies and procedures within 12-months
of the receipt of this report.
1.2 Direct management to refine processes for ensuring the comprehensive documentation of
business processes and transactions.
1.3 Convene a workshop to evaluate approaches to improving the quality and
understandability of management reports to the governing board.
1.4 Adopt a policy to rotate financial auditing firms every five years.
1.5 Solicit proposals from qualified auditing firms to provide financial audit services for the
next five year audit cycle.
There would be no cost to implement these recommendations.
If implemented, these recommendations would strengthen the SBIAA internal control
environment. Documentation of internal control business processes and financial transactions
would be improved. The SBIAA Commission would be provided with better information upon
which to base their decisions. In addition, the appearance of impaired auditor independence
would be reduced.
Section 2. Construction Management
SBIAA management proceeded with the Terminal Development and Fired Based Operation
(FBO) projects in a manner contrary to industry standards for large public infrastructure projects.
Specifically, SBIAA management did not (1) conduct competitive bidding for general contractor
services; (2) adhere to a clearly stated compensation structure for Norton Development
Company, LLC (Norton Development) and SBD Properties, LLC (SBD Properties); (3) base the
Terminal Building design substantially on transparent and methodical analysis of anticipated
passenger traffic, (4) report a clearly defined budget to the SBIAA Commission throuv7hout the
project; and, (5) utilize clear and effective policies and procedures.
SBIAA management expedited and substantially increased the scope of the Terminal
Development Project. These changes were based on assertions from the contractor with whom
management intended to hire as the project developer through a sole source contract. This
created a clear conflict of interest, since the developer has been paid on a percentage-of-prcject-
cost basis and any increases in project cost leads directly to increased compensation for the
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developer. Such changes were largely based on assertions by the contractor of (1) major
commercial passenger air carrier interest in SBIA, (2) prospective air carrier infrastructure
requirements; and, (3) more aggressive passenger traffic projections. The validity of these
updated projections, interest, and demands are unclear and unsubstantiated. Further, the updated
projections and resulting schematic design led to significantly higher costs, including $9 million
for a two-story concourse, over $4 million for major aviation equipment, and $2.7 million to fast
track the project. Notably, the scope and cost of the Terminal Development Project grew
incrementally from approximately $22 million, based on an initial design in January 2006, to
over $100 million budgeted as of January 2011 with work and costs continuing to escalate.
Similar to the Terminal Project, SBIAA management allowed the same development contractor
(through a separate company) to define the design and scale of the FBO project, leading to
substantially higher costs. Likewise, the scope and cost of the FBO Project grew incrementally
from $5 million in March 2007 to over $33 million as of January 2011, with approximately $30
million actually expended as of that date.
SBIAA management has managed the Terminal Development and FBO Projects with
insufficient controls. These control weaknesses have included: (1) the absence of sufficient
policies and procedures; (2)the lack of an independent audit for either project; (3) poorly written
leases that provide for little contractor oversight; and, (4) an opaquely written and implemented
compensation structure for the two development companies.
Further, the projects' fund control process has (1) alienated the Chief Financial Officer from day
to day financial oversight of major construction projects, and (2) resulted in poor budgetary
controls.
Based on these findings, the SBIAA Commission should:
2.1. Immediately require SBIAA management to strengthen controls and reporting to the
Commission including:
a. Implementing procedures for the use of contingency funds for existing and future
capital projects.
b. Requiring Chief Financial Officer review and approval of all expenses prior to
disbursement of capital project funds.
c. Enforcing all provisions in the Terminal and FBO leases requiring the developer to
provide detailed monthly progress reports. The Commission should also require the
developer to provide and present such reports at Commission meetings.
d. Engage the services of a reputable, independent auditing firm to examine all expenses
incurred as a result of the Terminal Development and FBO Projects. The scope of
such an audit should include a review of construction meeting minutes to determine if
the developer purposely inflated costs.
There would be no cost to implement these recommendations.
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A'xecutive Summon
If these recommendations were fully implemented it is more likely that Capital construction
projects would be appropriately scoped, costs would be contained and transparently reported, and
projects would be more economically implemented. Without immediate implementation of the
recommendations, Norton Development and SBD Properties will likely continue to spend
taxpayer funds without being subject to proper controls.
Section 3. Equipment Acquisition
SBIA-A management did not conduct proper due diligence prior to purchasing used major
aviation equipment from Norton Development for the terminal building. SBIAA management
did not assess its equipment needs, determine whether the used equipment was appropriate, or
send staff to visually inspect the equipment prior to authorization by the Commission. Further,
SBIAA management did not consider or analyze the long term costs of purchasing used
equipment versus the alternative of purchasing new equipment prior to proceeding with the
acquisition.
The Interim Executive Director never executed a Sale and Purchase Agreement with Norton
Development despite multiple assertions to the Commission that he would do so and several
references in the authorizing resolution indicating that such an agreement would be executed. In
lieu of an executed contract, the terms of the agreement were later stated in a series of two letters
from the Manager of Norton Development to the Interim Executive Director. The terms of these
letters were substantially different from the representations made to the Commission by the
Interim Executive Director.
SBIAA has insufficient controls, including policies, procedures, and audits for use when
acquiring aviation equipment. SBIAA management has not set up an internal process for
verifying price, quantity, or condition of the used aviation equipment that is being acquired from
Norton Development. Further, the fund control process is inadequate for ensuring that SBIAA
receives a fair and accurate price for the used equipment. Additionally, there have been no audits
conducted of the used aviation equipment.
Based on these findings, the SBIAA Commission should:
3. 1 Make a formal policy decision to only authorize contracts after they have been signed, on
condition of Commission approval, so that it can properly review such contracts and to
ensure that all major agreements are accompanied by signed and executed contracts.
3.2 Formally approve a purchasing policy that includes revisions to address the deficiencies
identified in our review. In particular, eliminate the Negolialed Purchases section of the
purchasing policy and require that all purchases above $25,000 (or a different threshold
deemed more appropriate by the Commission), regardless of purpose, require a formal
contract to be approved by the Commission.
3.3 Set a regular schedule for reviewing, revising, and formally approving updates to the
purchasing policy.
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3.4 Engage the services of a reputable, independent auditing firm to examine the
representations and warranties made by Norton Development management and SBIAA
management in connection to the purchase of used aviation equipment as well as the
amount actually spent on such equipment, and the estimated useful life and/or resale
potential of the equipment.
3.5 Formally direct the Interim Executive Director and Assistant Director to cease from
approving any further fund payments to Norton Development or any third parties with
agreements to provide services in connection to the used aviation equipment, which was
originally authorized on July 3, 2007.
There would be no cost to implement these recommendations.
The SBIAA Commission could save taxpayers at least an additional $134,689 if the Commission
were to refuse to fund the I I'h jet bridge currently being refurbished out of state. Taxpayers
would also not have to pay for the developer and construction management fees as well as
offloading and installation costs associated with this jet bridge.
Section 4. Lawsuit Settlement
On July 23, 2008, SBIAA entered into a lease agreement with Norton Aircraft Maintenance
Services, Inc. (NAMS) for Hangar Bay No. 695. However, this hangar had previously been
leased to another company pursuant to an agreement dated June 3, 2008, which was extended
through August 23 on a day-to-day basis. This resulted in conflicting occupancy rights that led to
a dispute between the tenants and a claim for damages against SBIAA by NAMS and SBD
Aircraft Services, LLC (SBD). The latter company had contracted with NAMS for a Federal
Aviation Administration(FAA) inspection and maintenance service on a Boeing 727 aircraft that
it intended to lease to a third party. In response to the claim for damages, SBIAA agreed to a
monetary settlement with the two companies amounting to approximately $1 million.
The Settlement and Mutual Release Agreement between SBIAA and Norton Aircraft
Maintenance Services (HAMS)jointly with SBD Aircraft Services was executed less than seven
weeks after the lease between SBIAA and NAMS had been signed, and only 18 days after the
claim for damages was submitted to the Airport by NAMS and SBD. SBIAA management did
not compel either NAMS or SBD to submit documentation to objectively assess the
appropriateness of the claim for damages or challenge the original amount of the claim in any
meaningful way. Notably, this settlement was amicably reached in a short time period, even
though the lease agreement with NAMS included language intended to completely indemnify
SBIAA from "consequential or punitive damages' in the event of default.
Further, SBIAA did not require an independent appraisal of the aircraft, including the airframe
and jet engines, which were pledged as collateral for the loan prior to disbursing funds. By
failing to conduct an appraisal, SBIAA can not be assured that SBD will have financial resources
that are sufficient to repay the loan amount of$550,000.
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GXecu iiv Summaiv
At the very least, the expedited nature of this agreement and the lack of due diligence by SBIAA
to verify the existence or extent of damages or independently obtain an opinion of value of the
collateral pledged for the loan make the appropriateness of the settlement questionable. In
addition, the settlement resulted in substantial cost to the taxpayer, which may be greater if SBD
defaults on the loan and the market value of the aircraft used as collateral is not sufficient to
repay the balance of the debt owed to SBIAA.
Based on these findings, the SBIAA Commission should:
4.1. Engage the services of a reputable, independent auditing firm to examine the
representations and warranties made by NAMS and SBD management in connection with
the Settlement and Mutual Release Agreement and, if found to be false or untrue, demand
immediate repayment of the Insurance Loan, Rent Credit and Temporary Aircraft
Rehabilitation Loan balance.
If the representations made by NAMS and SBD are found to be false or untrue, taxpayers would
be reimbursed the cost of the Settlement and Mutual Release Agreement, amounting to $440,000
in loan forgiveness and rent credits, and would receive immediate repayment of the balance due
on the $550,000 loan to NAMS and SBD.
Section j. Contractor Relations
SBIAA has entered into multiple contracts with companies managed by a single individual, Scot
Spencer. Mr. Spencer is a convicted felon who served rime for bankruptcy fraud in a federal
penitentiary and, in a separate matter stemming from businesses he managed at San Bernardino
International Airport, was ordered by the United States Department of Transportation (DOT) to
"permanently cease and desist from further marketing or other involvement in air transportation
operations so that he is banned from the aviation industry." Mr. Spencer was ordered to pay civil
penalties of$1.0 million, which remain unpaid.
Mr. Spencer's history at SBIAA began in approximately 2003 as a manager of KCP Leasing &
Services, LLC, which was leasing space for the storage of Boeing 727 aircraft. Over the years,
his involvement with SBIAA has grown, until Norton Development Company, LLC and SBD
Properties, LLC (SBD) — two other companies that he manages — were granted development
contracts to construct a new Terminal and a Fixed Base Operator (FBO) facility at the airport.
The initial combined cost estimate for these two projects was about $43 million, but through
January 2011, SBIAA had spent over $125 million on the projects. Companies affiliated with
Mr. Spencer received payments of$7.4 million in developer fees, based on a percentage of total
costs, and reimbursement of nearly all of their direct and indirect costs through that date.
As the development projects progressed, Mr. Spencer's companies were given responsibility for
managing major aspects of airport operations. After approaching the Interim Executive Director
with an informal proposal, Mr. Spencer was able to obtain agreement from a nationally
recognized company to participate in FBO services at the airport. Mr. Spencer then gathered
investors to open a franchise of that company, which he now manages, named Ahllion�.4ir .San
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Bernardino, LLC. Subsequently, SBD was then a,,varded a 25-year lease to provide FBO sen-ices
and run the airport fuel farm through Million Air San Bernardino, LLC.
SBIAA had also solicited proposals for a nationally recognized airport management company to
operate the airport, but no responses were received. As an alternative, the Interim Executive
Director negotiated a sole source contract with Mr. Spencer through San Bernardino Airport
Management, LLC (SBAM), which Mr. Spencer formed for that purpose and now manages.
Compensation for SBAM under a 25-year agreement with SBIAA guarantees payments of
$500,000 per year, reimbursement of most major operating costs, and the receipt of 50 0/'0 of net
operating income. SBLAA absorbs all financial risk.
The evolution of these sole source relationships between SBIAA and Mr. Spencer, and the
growth in the involvement of the companies he manages, raises serious questions. Further, Mr.
Spencer's activities at SBIAA.are in direct violation of the DOT order,which states he should be
"banned from the aviation industry."
Based on these findings, the SBIAA Commission should:
5.1. Direct staff to review current contracts for construction services and Airport operations
with the companies he manages to identify modifications that may be necessary to protect
the WDA and SBIAA from potential future risk.
There would be no cost to implement this recommendation.
SBIAA would limit exposure to the types of difficulties described throughout this report and
would no longer be party to Mr. Spencer's apparent violation of the DOT order banning him
from the aviation industry.
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Introduction
Harvey M. Rose Associates, LLC is pleased to present this Performance Audit of Satz
Bernardino International Airport Operations, Development and Construction Activities. This
performance audit was conducted for the San Bernardino County Grand Jury pursuant to its
authorities defined in California Penal Code Section 925, et seq.t
Study Purpose and Scope
The Grand Jury requested this performance audit to evaluate the efficiency, effectiveness and
economy of the San Bernardino International Airport Authority (SBIAA), focusing on
governance and general management, as well as development, construction, contracting and
related activities performed by SBIAA managers and their contractors. Specifically, the Grand
Jury asked that the following topics be evaluated at SBIAA.
I. The management structure and authorities, including governance and staffing levels,
decision making authorities and processes, as well as performance and financial
management.
I Internal control mechanisms established by SBIAA to determine whether appropriate
monetary safeguards have been established and are followed, and whether the
organization complies with generally accepted accounting practices in regards to
recording and reporting on certain financial transactions.
3. Construction management policies, procedures and practices, to ensure that they comply
with federal and State laws and regulations; incorporate fair and transparent bidding and
contractor selection processes; and appropriately safeguard the financial interests of the
organization and taxpayers.
4. The leasing of hangar and terminal facilities, and the process for awarding service
contracts, including the master lease and operating agreements.
5. The contractual and financial relationships between SBIAA and their contractors to
determine the role of each; examine ownership and management composition; and,
investigate how each was selected or became involved with airport construction and/or
management activities.
6. The master lease agreement, including the responsibilities of the lessee (e.g., operations
and development, airport promotion, etc.) and compliance with lease terms.
California Penal Code Section 925 states,-The Band jury shall investigate and report on the operations. accounts.
and records of the officers, departments.or functions of the county including those operations,accounts.and records
of any special legislative district or other district in the county created pursuant to state law for which the officers of
the county are sen-ing in their ex officio capacity as officers of the districts."
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Introduction �.
Methodology
We conducted the performance audit in accordance with Government Auditing Standards, July
?007 Revision, by the U.S. Government Accountability Office, Comptroller General of the
United States, as modified by directives from the Grand Jury to ensure investigative integrity. In
accordance with these modified standards, we performed the following key activities and tasks:
• We held an entrance conference with the executive staff from the San Bernardino
International Airport Authority to introduce HNIR staff, describe the performance audit
process and protocol, and request general information on the organization, development and
operations of the airport.
• We conducted an initial assessment of SBIAA administration and operations in accordance
with project goals defined in our initial work plan and subsequent communications with the
Grand Jury. During this initial assessment phase, we interviewed SBIAA management staff,
including the Interim Executive Director, the Assistant Director, the Chief Financial Officer,
the Aviation Director, the Redevelopment and Transportation Director, the Clerk of the
Board/Director of Information Services, and SBIAA's legal counsel. Four formal information
requests were submitted to SBIAA management and documentation was provided through an
File Transfer Protocol (FTP) web site established to transmit materials. In addition, a tour of
the redevelopment area and airport property was conducted to gain perspective on the project
and development. At the conclusion of these activities, we met with the Grand Jury and
developed a more detailed plan for conducting our subsequent performance audit activities.
• We conducted field work to further refine our understanding of the topics under review. The
field work involved additional interviews of SBIAA managers and other individuals with
knowledge about SBIAA operations, including the contractor who has been involved in
many of the development and operations activities at the airport. Additional information and
documentation was collected and analyzed. At the conclusion of field work activities, we
developed preliminary findings, conclusions, and recommendations.
• We produced a draft report for internal quality assurance review purposes and presented the
draft report to the Grand Jury. At the direction of the Grand Jury, no exit conferences were
held with SBIAA management prior to the release of the final report.
Background
The San Bernardino International Airport was formed in 1992 after the closure of Norton Air
Force Base and converted to civilian and commercial use. The conversion and subsequent
redevelopment of base property and surrounding areas is overseen by two joint power authorities
(JPAs):
• The Inland Valley Redevelopment Agency (IVDA) and,
• The San Bernardino International Airport Authority (SBIAA).
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The two JPA governing boards include representatives from five area jurisdictions, including: (1)
the County of San Bernardino, (2)the City of San Bernardino, (3)the City of Colton, (4) the City
of Loma Linda, and (5) the City of Highland. With the exception of Highland, all of these
entities are represented on both of the JPA governing boards. The City of Highland is a member
of SBIAA but not IVDA.
The stated objectives of the two JPAs is to "replace the jobs lost in the community when the base
I closed, improve the infrastructure, landscape and aesthetics of the local and surrounding areas,
and promote economic and aviation related activities to increase the tax base of the region."
SBIAA is responsible for the aviation portion of the Norton Air Force Base (approximately
1,300 acres). IVDA is responsible for the redevelopment of the non-aviation portion of the
former Norton Air Force Base (approximately 600 acres) and a surrounding redevelopment
project area (approximately 13,000 acres). The land use designations within the project area
include light and heavy industrial, office, commercial and residential uses.
Organization and Staffing
The Inland Valley Development Agency and the San Bernardino International Airport Authority
have a merged organization that includes the following major divisions:
■ The Executive Office, which is staffed by the Interim Executive Director and the
Assistant Director. The Agency Counsel, which is provided by contract through Lewis,
Brisbois, Bisgaard & Smith, LLP, reports to the IVDA Board and SBIAA Commission
through the Executive Director.
Aviation, which is staffed by an Aviation Director who oversees Marketing and Leasing;
Airport Security, which is staffed with officers from the San Bernardino Police
Department and Security Officers; and, the San Bernardino Airport Management
(SBAM) contract for airport operations.
• Information Systems and Clerk of the Board, which is staffed by the Board Clerk as well
as secretarial, records clerk and staff analyst positions.
• Redevelopment and Transportation, which is staffed by a division director, project
management and grant specialist personnel.
• Finance, which is staffed with a Chief Financial Officer, accounting and human resource
personnel.
In FY 2010-11, the IVDA Board and SBIAA Commission authorized a total personnel budget of
$4,970,467 to fund a total of 59.3 positions. All of these personnel were hired through third party
contracts with other organizations (Le., the Interim Executive Director and the Aviation Director,
through companies they had formed; Agency Counsel, through an established law firm; and
personnel hired under the San Bernardino Police Department and San Bernardino Airport
Management, LLC), or on individual contracts. All personnel, whether hired through third party
contracts or individual contracts are at-will employees, exempt from civil service. An
organization chart for the combined IVDA and SBIAA is provided on the next page.
Han,ev U Rose.issociates, LLC
I-3
Introduction
Exhibit 1
Combined IVDA and SBIAA Organization Chart
Inland Valley IVDA/SBIAA San Bernardino
Development Agency Board/Commission International
Airport Authority
Executive
Director
Assistant Agency
Director Counsel
Aviation Director Director of Chief Manager
IS/Clerk Strate Director Redevelopment& Financial is
BoarclAnter Transportation Officer Programs
Governmental
Coordinator—
Airport Adm.
Administrative Coordinator- Coordinator—
Assistant IS Project Business Development
Coordinator- Manager Programs
Records Project/Grant
Adm. Specialist
Police Staff Analyst
Sergeant Secretary I Auditor
(SBPD) Accountant
Accounting/HR
Specialist
Patrolman Safety Officer
(SBPD)(6)
Security
Officer
(10 FTE)
i HR
I Consultant
i
i
SBAM, ----L.L.C.
4/2011
Source: SBIA.A Accounting Policy and Procedures
Harnev.11. Rose Associates, LLC
I-4
Introduction
Airport Development Activities
In 2002, IVDA entered into a Master Disposition and Development Agreement (DDA) with
Hillwood/San Bernardino LLC, which "serves as the master developer of the project commonly
known as Alliance California." Under this DDA and separately on individual projects, IVDA
successfully developed large warehouse and business centers occupied by Stater Bros., Mattel,
Pep Boys, Kohls, and other commercial enterprises, generating local job opportunities for the
community and substantial property tax increment for IVDA. Once the property tax increment
began to be generated, the IVDA Board directed funding toward the development of the airport
properties deeded over from the federal government. The property tax increment revenues, as
well as certain grant and other funding, were also used to develop basic infrastructure in the
redevelopment area, such as streets, sidewalks and sewers.
In the initial years, most activities at the airport involved efforts to secure title to the property,
remove waste and hazards, and conduct other similar activities. According to SBIAA
management, development plans produced in the late 1990s focused on a primary goal of
developing international air cargo services, with some charter airline and general aviation
services being offered at the airport. Over time, the conceptual framework for the airport
changed, and in the mid-2000's decisions were made to focus on commercial airline services and
general aviation, with some air cargo services. As a result, SBIAA decided to engage in two
major development projects: (1) The development and construction of Fixed Base Operator
(FBO) facilities with the goal of attracting a nationally recognized FBO operator to the airport;'`
and, (2) the development and construction of a commercial passenger terminal with the goal of
attracting regional, national and international airlines to the airport.
FBO Development Project -
The FBO project was initiated in 2007 by SBIAA through an agreement with SBD Properties,
LLC, a company managed by Scot Spencer, a lessee who occupied a portion of Hangar No. 763
through another company he managed at the time. As a condition of being awarded the FBO
development project, SBD Properties, LLC was required to secure a contract with a nationally
recognized FBO operator who would provide aircraft services at the airport. To meet this
condition, Mr. Spencer formed Million Air San Bernardino, LLC, a franchise of Million Air
Interlink, which is a nationally recognized FBO operator based in Houston, Texas.
Initial estimates made to the SBIAA Board of Commissioners in a March 14, 2007 staff report
indicated that the total project cost for "a new FBO building to include executive offices, pilot
lounges and other amenities" would cost SBD Properties, LLC an estimated $5 million "at its
own expense,,.3 Short ly thereafter, on March 23, 2007, SBL4A entered into an Agreement for
FBO services include: aircraft fueling, large aircraft maintenance. indoor and outdoor long-term parking for
general aviation aircraft, ground handling, flight school, passenger services (including catering), gratuitous
passenger transportation services, emergency services for disabled aircraft, aircraft parking and landing-fee
collections. and ground and building maintenance.
3 March 14.2007, Item No. 10,adopt Resolution No 2007-0, etc., Michael Burrows, Assistant Director.
Nan,ev.k1 Rose.Issociates, LLC
I-5
1
Introduction �.
Acquisition of Improved Building with SBD Properties, LLC to purchase the FBO facility after
construction was completed, for an amount "equal to or less than $9,000,000."
At the beginning of this project, the Afillion Air Interlink website described the San Bernardino
project, as follows:
This new facility contains 40,000 square feet that not only consists of standard Million Air amenities, but
also executive office space, hangers (sic) space and more. Million Air San Bernardino will provide
exceptional senice with unprecedented luxury and offers onsite customs for passengers traveling abroad.
Million Air San Bernardino is on schedule to be open June 2010.
Beyond the standard Million Air amenities, this location has much more to offer. Hangar#I features 6,747
Square feet of executive office space. This hangar has a 28 foot high door and offers a total of 29,000
square feet. Hangar#2 features 30,000 square feet with a 50 foot high hangar door and offers 7,000 square
feet of executive office space along with 40 secured tenant parking spaces. All executive space can be built
to suit as needed and tivith plenty of land and space available, we are sure that we can accommodate your
business needs. On top of everything else Million Air has to offer, there is also a brand new 150,000 gallon
fuel farm, state of the art technology,and high security. With a 10 acre ramp, Million Air San Bernardino is
ideal for a single private client or a corporate flight group.
After construction was underway, SBIAA expanded the contract scope to include the
development of various other facility improvements, including improvements to Hangar No. 674
for use by Million Air San Bernardino and the construction of a United States Customs Building.
The Customs Building was still under construction at the time of this performance audit.
Because the project cost escalated and other capital improvements were added, the initial project
cost estimate rose substantially. Based on financial documents reviewed for this performance
audit, the total disbursements for the FBO project amounted to approximately $29.7 million, as
of January 25, 2011, including $1,233,621 in payments to SBD Properties, LLC. This amount
included developer fees paid to SBD Properties, LLC of 2-0%, of total project costs, or
approximately $580,000.
Terminal Development Project
A Terminal Lease agreement was also entered into in 2007 between SBIAA and Norton
Development Company, LLC, another company managed by Scot Spencer. This agreement
established the terms and conditions of constructing the passenger terminal building at the
airport, which included the renovation of an existing terminal building that had been used by the
Air Force and new construction on three acres of surrounding land area. The lease agreement
estimated that the total project cost would amount to approximately $38 million for the
construction of a terminal with three gates and jetways, one hardstand ground level passenger
boarding area, passenger lounges and other features. The actual agreement capped costs at $45
million, stating that if costs exceeded this amount, the "Seller and Purchaser" would meet in
good faith to reduce the amount.
In March 2009, the scope of the agreement was amended with additional improvements,
including: a parking
In
lot with landscaping,, a flight kitchen, an airline food handling and
maintenance area, equipment, roadway and entry monument signs, airport security fencing And
[Yarve ,11 Rvse.].c.cocinres, f.l.<.'
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introciu-,:tc,t
gates, security systems and devices, apron and taxiway striping and other mist.,llaneous projects.
With this addition, the maximum project cost was capped at $61,000,000.
Based on a review of disbursements for the terminal project through January 2011, SBIAA had
already expended approximately $96 million on the project, including approximately $4.4
million that had been paid to Norton Development Company, LLC. Of this amount, 1.35% of the
$96 million in construction costs was paid to Norton Development Company, LLC as a
developer fee, amounting to approximately $1.3 million.
Airport Operations
In December 2009, SBIAA entered into an Airport Management and Development Agreement
with San Bernardino Airport Management, LLC (SBAM), a company managed by Scot Spencer.
Under the terms of this agreement, SBAM is required to develop business plans and budgets for
airport operations, and manage and operate the airport. Management and operations
responsibilities are broad, and include: (1) employing a person designated as "Airport
i Manager;' (2) developing opportunities and managing leases of airport property; (3) promoting
and marketing commercial air service operations; (4) recommending regulations and operating
standards to SBIAA management; (5)providing finance and accounting services; (6) maintaining
and repairing facilities and equipment; (7) overseeing airport support functions and contracts
with third parties; and, (8) performing other related functions.
i
In exchange for these services, SBAM is to be reimbursed the direct and indirect cost of
operating the airport and receive the following compensation:
a Payment for the "Airport Manager" at a rate of$250,000 per year, increased annually for
inflation at a rate of three percent;
■ Payment for "Management Compensation" at a minimum of$250,000 per year, or 50%
of Net Income, as defined in the agreement; and,
■ Payment of a "Commercial Airline Start-Up Fee," to be paid within 30 days after a
commercial passenger airline announces service at the airport.
As of the date of this report, no commercial passenger airline has announced an intention to
operate out of San Bernardino International Airport.
I
i
i
' Amendment No. 1 to the agreement requires SBAM to retain the services of a "nationally or internationally
recognized airport management company," which is presently named as AFCO/AvPorts. The current Airport
Manager is an emplo}ee of this company.
i
i
Hamev H Rose Associates, LLC
z
I-7
Introduction
Acknowledgements
Harvey M. Rose Associates, LLC would like to thank the Grand Jury for their participation and
counsel during this performance audit. In addition, we would like to thank personnel from
SBIAA and others for their insight into airport development and operations. In particular, we
would like to thank the Clerk of the Board and her staff for their extraordinary effort compiling
and indexing the many documents required for this review.
I
Harrev:IL i?o.ceAssociates, LL(-'
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j
L Internal Controls
• The San Bernardino International Airport Authority has not established
effective internal controls over financial management activities. The internal
control foundation is weak, policies and procedures are neither current nor
effective and business processes are poorly documented. The Authority's
Commission should direct management to strengthen this internal control
foundation over the next 12 months by establishing appropriate policies,
procedures and business processes that protect the Authority's assets.
• Although most major financial matters are brought before the Commission for
consideration, the analysis supporting decision-making is often incomplete or
vaguely stated. Authority for approving individual financial and contract
transactions has been delegated to mid-level managers within the organization.
In critical areas, the Authority's Chief Financial Officer has limited involvement
in the initial review and approval of such transactions.
• The Authority has secured the services of a local accounting firm to conduct its
annual audit and various special compliance reviews. In some instances, the
scope definitions for these reviews have been narrowed by management to
exclude major areas of exposure. In addition, although we found no evidence of
impropriety, the Interim Executive Director was a founding partner of the
accounting firm with which the Authority contracts. The Commission should
adopt a policy requiring rotation of auditing firms every five years and solicit
the services of other accounting firms through a competitive bid process to
remove any appearance of an impairment to auditor independence.
Internal control is comprised of the "plans, policies, methods, and procedures used to meet the
organization's mission, goals, and objectives. Internal control includes the processes and
procedures for planning, organizing, directing and controlling program operations, and
management's system for measuring, reporting, and monitoring program performance."t
There are accepted standards of internal control for any organization, as described by the U.S.
Government Accountability Office from guidance that it obtained from Internal Control
Integrated Framework, published by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).2 Three key standards are described below,
i
i
' July 2007, Government Auditing Standards, United States General Accounting Office by the Comptroller General
of the United States, Standard 1.30.
November 1999, .Standards for Internal Control in the Federal Government, United States General Accounting
Office(renamed General Accountability Office since publication)
Kanvv. 1.Rose.Associates, LLC
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Section 1: Internal Controls '
1. Control Environment: The organizational principles, policy expectations and
approaches to core business activities.
2. Control Activities: Ensures that management's directives are carried out.
3. Control Monitoring: Assesses the quality of performance over time.'
Throughout this report, the audit discusses circumstances that point to weak internal controls
within the SBIAA organization. Although the internal control review was limited in scope,
efforts were made to focus on the fundamentals of maintaining a strong internal control
environment and protecting taxpayer assets with effective control processes, procedures and
monitoring systems. This section discusses aspects of the internal control environment, control
activities and SBIAA's principal monitoring mechanisms that are not addressed elsewhere.
Policy and Procedure Foundation
Fundamental to an effective internal control system is the communication of management
policies and a procedural foundation that describes how business is to be conducted. This
performance audit found the state of policies and procedures within SBIAA to be variable, but
generally poor. Only two policies and procedures were made available immediately at the outset
of the performance audit. These were for: (1) Personnel, and (2) Purchasing. Other policies and
procedures emerged as the audit progressed, while still others were never produced.
Personnel Policies and Procedures
The most comprehensive policy and procedure provided by SBIAA relates to Personnel
management, which was approved by the IVDA Board for both entities in early 2010. This
document is better constructed and contains more detail than other policies and procedures
documents provided by SBIAA for this performance audit. The document appears well
researched, is well organized, and addresses most basic areas of personnel management within
organizations with the characteristics of IVDA and SBIAA.
Notably, the Personnel Policy and Procedure Manual was prepared for purposes of defining a
new relationship between the IVDA and SBIAA organizations and employees, who became at-
will contract personnel during the period of implementation. Policy III, Section 1 states, "All
IVDAISBIAA positions are filled on a contract basis. All employees shall be considered at-will
and serve at the pleasure of the Executive Director." Due to this major shift in the organizations'
relationship with its workforce, management reportedly felt that policies and procedures needed
to be well defined to ensure that this relationship was clearly communicated to staff. Should the
structure and approach to staffing evolve, these policies and procedures should be revised to
reflect any changes in the organizations' relationship to personnel.
[bid
flanei.-AL Rose.4ssociage.v.
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a JE CtK)il 1: 111ti11701 COWMIS
Purchasing Policies and Procedures
The Purchasing policies and procedures were last updated in May 2003, approximately eight
years ago, before major development at the airport and the acquisition of expensive fixed assets
occurred. The document provided for this assessment appeared to be undergoing modifications at
the outset of this audit, since the version that was provided contains many underlined additions
and strike-through deletions.
Even with the modifications, the Purchasing policy and procedures are vague and incomplete.
For g
example, the section on neotiated purchases states,
p s
Negotiated purchases must be authorized by the Executive Director. This method will be used
only when most advantageous to the Agency. A written report will be submitted to the Executive
Director describing the circumstances and terms of the contract.
As described extensively in Section 3 of this report, SBIAA has used the negotiation process to
acquire expensive equipment for the Terminal and Fixed Base Operator (FBO) construction
projects, which have raised several questions regarding whether the purchases were
"advantageous" to the Authority. In this example, the criteria and methodologies to be used for
measuring the appropriateness of a negotiated purchase should be better defined.
Accountins and Financial Reporrin-Policies and Procedures
As stated by the Government Finance Officers Association (GFOA) when describing best
practices, "Communication is an essential component of a comprehensive framework of internal
controls. One method of communication that is particularly effective for controls over
accounting and financial reporting is the formal documentation of accounting policies and
procedures. . . . Every government should document its accounting policies and procedures.";
At the beginning of this performance audit, management was asked to provide copies or access
to all of the SBIAA policies and procedures. At the time, no accounting policies and procedures
were provided, but the auditors were advised by the Chief Financial Officer on December 29,
2010 that such policies and procedures were under development in anticipation of the audit and
would be provided to the auditors in draft form within a week. Auditors were advised that the
policies and procedure documents would address Accounts Payable, Accounts Receivable,
Payroll and Bank Account Reconciliation processes. On January 4, 2011, SBIAA posted
Accounts Receivable, "Cash, Receivable & Revenue," "Financial Accounting System," and
Payroll policies on the File Transfer Protocol (FTP) web site established for the performance
audit. No Bank Account Reconciliation policies and procedures were posted.
In sharp contrast to the Personnel Policies and Procedures discussed previously, these
documents were brief, incomplete or unclear in some areas, and undated and unsigned by
management. For example, the full text of the procedure contained in the Financial Accounting
System Policy states the following:
' March 2. 2007,Best Praciice Documentation of.lccounting Policies and Procedures(2002 and 2007) (C.-UFR)
((an-ev.1L Rose.lssociates, LLC
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Section 1:Internal Controls
The Agencies use MASS90 (sic). MAS90: is a commercially available program sinular to
Quickbooks. The user cannot modif}, the source code. The controls in MAS90 are tighter than
Quickbooks. The user cannot delete transactions after they are recorded.or modify them.
The Agencies use the San Bernardino County Payroll System to process pavToll, thus controls
used by the County have a significant influence on the Payroll Transaction Class.
The Agencies use a third party payroll service(Apple One) for part time employees.
These procedures do not provide information on how to access the system, or references that
would effectively incorporate system manuals or other critical documentation into the procedure
(e.g., in the case of the payroll system, a statement is made that the Agencies use the County
payroll system, but there is no reference to the County's policies and procedures, how
IVDA/SBIAA interfaces or applies the County system, or how the County system may be used
to deal with the unique relationship between IVDA/SBIAA and its personnel). The policy and
procedure document provided for the performance audit is undated and unsigned, and provides
no evidence of management review or approval.
Understanding that these were draft, on April 12, 2011, the auditors were provided with a more
formal Accounting Policy and Procedure Manual that appears to have been completed in March
of this year. This document has several of the same deficiencies found in the January drafts, but
includes additional sections on General Policies, Purchasing, Human Resources, Budget,
Financial Reporting, Grants, Risk Management and other topics not previously shown. Notably,
this document focuses on statements of the organizations' policies and provides only general
overview descriptions of related procedures. Exhibit A (Purchasing Policies) and Exhibit B
(Investment Policies) are missing, and thus the document provided for the performance audit was
incomplete.
Other Policies and Procedures Do Not Exist
There are several other areas where comprehensive policies and procedures would enhance the
airport's internal control foundation, but which do not exist, according to individuals interviewed
for this performance audit. One critical area involves the safeguarding of physical assets.
Since the airport has constructed major facilities and acquired expensive equipment in the last
several years, it is important that policies and procedures for inventory and fixed asset control be
developed, be comprehensive and clear, and be fully implemented by the Authority. However,
these policies and procedures do not exist and, based on fieldwork activities related to the
acquisition of equipment for the Terminal and FBO facilities, inventories appear to be neither
comprehensive nor routine. In addition, SBIAA has not established effective policies and
procedures related to the security of assets. The Authority instead relies upon general safety and
security policies and procedures established by the City of San Bernardino Police Department in
its role as contract security for the facility.5 These policies and procedures are dated May 1996,
' The Aviation Director stated that security procedures are being reviewed b�, the federal Transportation Security
Agency (TSA) and are confidential. However, the Authority has not established interim security policies and
procedures or procedures regarding the safeguarding of assets owned by the airport and its tenants.
l(nrver:IL Rose Associaies, LLC
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�ecrron 1: Internal controls
prior to the terrorist attacks of September 11, 2001 and before increased airport security became
a national priority. No emergency preparedness plan, which would contain policies and
procedures regarding the safeguarding of persons and property in the event of a disaster or other
emergency, was provided for the audit.
Further, various operational policies and procedures affecting internal control at the airport have
not been developed or were not provided by management. Vehicle management, vehicle fuel
dispensing, contract management, contractor monitoring, and other similar policies and
procedures were not provided for this audit, even though requests were made for SBIAA to
provide copies of or access to all policies and procedures that govern its operations. To ensure
that SBIAA has a strong internal control foundation, the Commission should direct management
to develop comprehensive policies and procedures within 12-months, or as quickly as possible,
but certainly before commercial airline passenger service is initiated at the facility.
Business and Financial Process Documentation
Procedures provide a general framework for how business should be conducted. It is also
important that specific business processes and transactions be well documented to provide a
basis for monitoring employee and contractor compliance with established policies and
procedures, Board authorizations, and management directives. As discussed throughout this
report, the audit of a limited number of major transactions illustrates the weaknesses in SBIAA's
current systems. Some examples are described, below.
Adherence to Contracting Policies: As discussed in Section 5, IVDA and SBIAA have entered
into sole source contracts with private companies, managed by a single individual named Scot
Spencer, to construct nearly every major facility and other improvements at the airport. The cost
of the projects awarded to Mr. Spencer's companies amounted to over $125 million through
January 2011. Of this amount, $7.4 million was paid directly to the companies affiliated with Mr.
Spencer in management fees and for direct reimbursement of costs.G
The two projects for which Spencer affiliated companies were retained, were the Terminal
Project, for which Norton Development Company, LLC charged developer fees of 1.35% of total
project costs; and, the FBO Project, for which SBD Properties, LLC charged developer fees of
2.0% of total project costs. Total developer fees of approximately $1.9 million were paid for the
two projects. The remaining amount of approximately $5.5 million was paid as direct
reimbursement of costs incurred by these and other Spencer affiliated companies, including
reimbursements for actual staff time spent by Mr. Spencer and his other employees.
6 The construction of the FBO and customs building, as well as improvements to other areas of the airport. were
awarded to SBD Properties. LLC for total project costs of$29.7 million through January 2011. The construction of
the Terminal and projects for various other improvements at the airport were awarded to Norton Development
Company,LLC for total project costs of$96.1 million through January 2011. Both of these companies are managed
by Scot Spencer, who had limited experience in capital project airport development prior to being selected for these
functions on a sole source basis.
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Section 1: Intei-nal Conh•ols
Although SBIAA is not prohibited by law from contracting on a sole source basis for
professional services, these contracts have been extremely profitable for the involved companies.
As described in Section 5 of this report, efforts to broadly solicit interest in these projects from
experienced companies were limited. In every instance, it appears that the contracts were
awarded after direct negotiations between the Interim Executive Director and Mr. Spencer.
Although each of these contracts were approved by the SBIAA Commission in accordance with
the Interim Executive Director'srecommendations, there was no meaningful discussion of other
alternatives made by the Commission as the contracts came forward.
Other public agencies establish policies that allow sole source contracting to be used only in
certain specific instances, and not only when there is a vague perception that the contract will be
"advantageous" to the agency. Even if only this broad criteria had been used, we found no
substantive analysis or justification for proceeding with sole source management contracts in
either of these instances. The SBIAA Commission should direct management to examine
practices in other public agencies and adopt more robust policies that limit sole source
contracting and require substantive justification when recommendations are presented by
management to proceed in this direction.
Equipment Acquisition: As discussed in Section 3, Mr. Spencer also managed a company that
was awarded a $4.1 million contract for the purchase of jet bridges and other equipment for the
terminal project. Many of the same questions apply regarding sole source contracting for major
equipment acquisitions, and these questions are examined more fully in Section 3 and Section 5
of this report. However, other questions became apparent as this matter was examined as part of
this performance audit.
As described fully in Section 3, a listing of the equipment to be purchased was attached to the
purchase agreement that was approved by the SBIAA Commission. However, the purchase
agreement was never exercised by SBIAA management and, instead, the equipment was
purchased using more general authority as part of the Ternunal Project. Although total costs of
the purchase were only slightly above the appropriation amount approved by the Board, the
amount expended exceeded the $4.1 million original purchase order estimate and required the
10% contingency approved by the Board to be used (for total costs exceeding $4.5 million). In
addition, it is not clear that SBIAA received all of the equipment management had told the
Commission it would be receiving or that it was in the condition that had been described when
received. No evidence could be produced by SBIAA management showing that a condition
assessment of the equipment was prepared prior to the purchase, and management could not
produce a comprehensive inventory that satisfactorily demonstrates that all of the purchased
equipment has been or will be received. These are basic documentation requirements for any
effective internal control environment. The absence of such documentation speaks to the
weaknesses in SBIAA's overall internal control management systems.
Legal Settlement: As discussed in Section 4, SBIAA entered into an expedited settlement
agreement with Norton Aircraft Maintenance Services, LLC (NAIVIS) and SBD Aircraft
Services, LLC (SBD) for a claim involving dual occupancy of Hangar No. 695. The hangar.had
already been leased to Aeros Aeronautical Systems Corporation, which was occupying the
hangar on a day to day basis pursuant to a lease agreement previously executed with the airport.
((arvev lL RoseAssociates, LLC
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Section 1: Internal Controls
Although Section 4 e::amines this incident and the resulting settlement of nearly $1 million in
detail, there are aspects of the circumstances that speak to the lack of formalized policies and
procedures, and the need to fully document critical business processes_
During the period when a short term lease was being negotiated with Aeros, the Director of
Economic Development and Marketing had been in communication with the Assistant Director
regarding the proposed terms of the lease and other related matters. In an email from the SBIAA
Assistant Director prior to the execution of the lease with Aeros, the Director of Economic
Development and Marketing was instructed that the lease "needs to be a revocable license,"
which would allow SBIAA to evict the tenant, Aeros, with a short notice of 24-hours. Instead,
the document executed with Aeros was a standard lease that required SBIAA to give Aeros 30-
days notice before eviction.
Because the Assistant Director asserts that he did not know that his instructions were not
followed, he separately entered into a standard lease agreement with NAMS for a period of six
months that created an overlap period for the two leases. This served as the basis for the claim by
NAMS and SBD that resulted in the $1 million settlement agreement.
An examination of documentation provided by SBIAA indicates that there are no policies or
procedures related to the short- or long-term leasing of facilities at the airport, or any formalized
documentation that defines the circumstances when the use of revocable license agreements
would be preferred over a standard lease. Further, the two lease agreements were executed
separately by two different managers in the SBIAA organization, suggesting that approval
processes were not centralized. The lack of communication between the two managers clearly
led to the misunderstanding and the costly consequences of the claim settlement.
After the errors were made known and the claim was submitted to SBIAA., a memorandum from
the Assistant Director was circulated to management staff that stated, "Effective immediately, all
contracts, leases, and other agreements involving the IVDA and/or SBIAA with outside parties
should be prepared for execution by either Don Rogers or myself" There is no evidence that
more specific policies and procedures or documentation of business processes are being
considered or developed at this time.
Authority of the Governing Boards Has Been Diluted
The IVDA and SBIAA boards' have delegated considerable authority to the Interim Executive
Director and the bodies' oversight of the airport could be strengthened. Based on interviews and
a review of a sample of public meetings, discussions of matters with significant impact on the
organization are often brief, with each body meeting less than one hour on average. The boards
generally support staff recommendations and, according to the Interim Executive Director, make
"near unanimous decisions" on virtually all matters.
In interviews, management staff stated that preparatory briefings are conducted with the co-
chairs and, depending on interest, one other board member on a routine basis. There are. no
The governing board of SBIAA is technically a commission.
Kan,evA1.Rose Associates,LL
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Section 1:Internal Controls
standing committees, except the "Finance and Budget Committee," which meets quarterly and
seasonally, and only considers matters referred to it by the full Board. There is no audit
committee or other standing committee for either body that routinely examines the organizations'
financial statements or focuses on financial matters, which is central to the GFOA's best practice
standards for sound financial management.
A review of staff reports indicates that explanations are often vague and critical information
changes without a full written explanation. For example, staff reports submitted to the SBIAA
Commission for the contract to construct the FBO facility began with a project cost estimate of
$5.0 million (3/14/2007 Item 10) and rose to $9.0 million within four months(7/18/2007 Item 7).
Over time, the scope of services with the contractor, SBD Properties, LLC, was expanded to
include the buyout of leaseholder interest from Blue's Aviation, the renovation of Building No.
674, the acquisition of equipment and furnishings, and the renovation of the airport fuel farm.
While the financial transactions were generally described in a series of staff reports to the
Commission, the auditors were not provided with documents that clearly or succinctly displayed
the project amendments, the budget and actual costs for each component of the project, or full
descriptions of the purpose, scope and justification for added improvements.
In addition, the combined IVDA and SBIAA organization has aggressively changed its approach
to staffing in the past several years. The organization has no civil service staff positions and
fulfills all major functions through contracts with third party companies (i.e., the Interim
Executive Director and the Aviation Director, through third party companies they formed for the
purpose; Agency Counsel, through an established law firm; and personnel hired under the San
Bernardino Police Department and San Bernardino Airport Management) or at-will employment
contracts with individuals. Although contracting is not necessarily inappropriate, the extent to
which it is used at IVDA and SBIAA is unusual for a publically owned enterprise. According to
some individuals interviewed for this audit, in part, the extensive contracting and delegation of
authority has occurred to circumvent certain civil service and internal control processes that
would otherwise be required if the organizations were operated by public employees. In addition,
these changes clearly centralize authority and control under the Interim Executive Director, who
now has authority to unilaterally make significant decisions and tenninate employees, who have
sacrificed civil service protections with the change in status to at-will employee contractors.
Accounting Services
IVDA and SBIAA have retained the services of Rogers, Anderson, Malody & Scott, LLP
(RAMS), based in San Bernardino, to audit the financial statements of the two organizations and
conduct certain performance reviews. Don Rogers, the Interim Executive Director of the two
organizations, was a founding partner in the firm and an active manager prior to his retirement.
In 2002, the federal government passed the Sarbanes-Oxley Act (SOX), which examined several
matters related to ensuring auditor independence in the wake of the Enron scandal. Although
SOX applied principally to publically traded companies that are registered with the Securities
and Exchange Commission (SEC), many public agencies incorporated some of the Ivey
provisions of the legislation in an attempt to increase transparency and ensure auditor
independence. Notably, several jurisdictions decided to rotate financial auditing firms every five
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Section i: Lternal Controls
years as a best rractice. _although the Government Finance Officers ,_-sociatioa (GFOA)
irecommends that audit firms be retained for a minimum of five years, it also recommends that
the auditing firm be selected using a competitive processes
i
The Interim Executive Director states that he has no financial interest in RAMS, despite being a
founding partner of the firm. Nonetheless, there could be the appearance of a conflict of interest.
Specifically, Government Auditing Standards(GAS), Chapter 3, Section 3.02 states,
In all matters related to the audit work, the audit organization and the indiNidual auditor, whether
government or public, must be free from personal external, and organizational impairments to
independence,and must avoid the appearance of such impairments of independence. (Emphasis added).
This performance audit did not include a detailed review of the audits or compliance reviews
performed by RAMS, and therefore did not identify any actual conflict. However, given that the
firm has already performed audit services for at least five years, IVDA and SBIAA should (1)
adopt a policy to rotate financial auditing firms every five years and (2) solicit proposals from
alternative qualified firms through a formal Request for Proposal (RFP), competitive process for
the next five year audit cycle. Firms that bid on the project should be required to declare any
actual or perceived conflicts of interest as part of the proposal submission process.
I
Conclusions
The San Bernardino International Airport Authority has not established effective internal
controls over financial management activities. The internal control foundation is weak, policies
and procedures are neither current nor effective and business processes are poorly documented.
The Commission should direct management to strengthen this internal control foundation over
the next 12 months by establishing appropriate policies, procedures and business processes that
protect the Authority's assets.
Although most major financial matters are brought before the Commission for consideration, the
analysis supporting decision-making is often incomplete or vaguely stated. Authority for
approving individual financial and contract transactions has been delegated to mid-level
managers within the organization. In critical areas, the Authority's Chief Financial Officer has
limited involvement in the initial review and approval of such transactions.
The Authority has secured the services of a local accounting firm to conduct its annual audit and
various special compliance reviews. In some instances, the scope definitions for these reviews
have been narrowed by management to exclude major areas of exposure. In addition, although
we found no evidence of impropriety, the Interim Executive Director was a founding partner of
the accounting firm with which the Authority contracts. The Commission should adopt a policy
requiring rotation of auditing firms every five years and solicit the services of other accounting
firms through a competitive bid process to remove any appearance of an impairment to auditor
independence.
Government Finance officers Association. Best Practice_lug:it Pro-•rement(1996 and 2002)
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Section 1: Internal C'0)117Y)IS
Recommendations
The SBIAA Commission should:
1.1 Direct management to develop comprehensive policies and procedures within 12-months
of the receipt of this report.
1.2 Direct management to refine processes for ensuring the comprehensive documentation of
business processes and transactions.
1.3 Convene a workshop to evaluate approaches to improving the quality and
understandability of management reports to the governing board.
1.4 Adopt a policy to rotate financial auditing firms every five years.
1.5 Solicit proposals from qualified auditing firms to provide financial audit services for the
next five year audit cycle.
Costs and Benefits
There would be no cost to implement these recommendations.
The SBIAA internal control environment would be strengthened. Documentation of internal
control business processes and financial transactions would be improved. The SBIAA
Commission would be provided with better information upon which to base their decisions.
The appearance of impaired auditor independence would be reduced.
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2. Construction Management
• SBIAA management proceeded with the Terminal Development and Fixed
Based Operation (FBO) projects in a manner contrary to industry standards for
large public infrastructure projects. Specifically, SBIAA management did not
(1) conduct competitive bidding for general contractor services; (2) adhere to a
clearly stated compensation structure for development contractors; (3) base the
Terminal Building design substantially on transparent and methodical analysis
of anticipated passenger traffic; (4) report a clearly defined budget to the
SBIAA Commission throughout the project; or, (5) utilize clear and effective
policies and procedures.
• SBIAA management made alterations to the timelines and scale of the Terminal
Development Project based on more aggressive passenger traffic projections and
assertions of prospective air carrier requirements provided by the contractor
with whom management intended to hire as the project developer through a sole
source contract. This created a clear conflict of interest, since the developer has
been paid on a percentage-of-project-cost basis and any increases in project cost
leads directly to increased compensation for the developer. Further, the updated
projection of passenger demand is highly questionable, since the bases for the
projections are unclear and unsubstantiated. Project design decisions advocated
by the developer led to changes in schematic design and significantly higher
costs, including: (a) $9 million for a two-story concourse, (b) over $4 million for
major aviation equipment, and (c) $2.7 million to fast-track the project.
Similarly, SBI:AA management allowed the same development contractor to
define the FBO project design and scale, leading to substantially higher costs.
• The scope and cost of the Terminal Development Project grew incrementally
from approximately $22 million based on an initial design in January 2006, to
$38 million based on a revised conceptual design in May 2007, to over $100
million budgeted as of January 2011 with work and costs continuing to be
incurred. Likewise, the scope and cost of the FBO Project grew incrementally
from a reported $5 million in March 2007 to over $33 million as of January
2011. The combined compensation paid to date to developer affiliated companies
has amounted to $7.4 million as of January 2011.
• SBIAA has managed the Terminal Development and FBO projects with
insufficient controls. These control weaknesses have included: (1) the absence of
sufficient policies and procedures; (2) the lack of an independent audit for either
project; (3) poorly written leases that provide for little contractor oversight;
and, (4) an opaquely written and implemented compensation structure for the
two development companies. The fund control process set up for the Terminal
Development and FBO projects has not prevented waste of taxpayer funds. The
fund control process (1) alienates the Chief Financial Officer from day to day.
financial oversight of major construction projects and (2) results in poor
budgetary controls.
Hame- .IL RoseAssociates. LLC
Section ?: Consd•rrctiorr,',farragenrent
Due to resource and time constraints, the audit team focused the scope of the construction
management review on the Terminal Development Project because of its relative size and risk to
the Authority. However, a limited scope review of the Fixed Based Operations (FBO) Project
was conducted and the findings from that review are included in this section.
SBIAA Management Has Disregarded Standard Practices
San Bernardino International Airport .Authority (SBIAA) management circumvented many
standard project management processes for the Terminal Development Project and the (FBO)
Project. Generally, public infrastructure projects are structured with certain controls and
processes in an effort to ensure that the project is designed appropriately, stays within the allotted
budget, is completed on schedule, and that project funds are not used inappropriately. Further,
SBIAA has had established processes used by experienced in-house development staff for capital
projects from the design phase to construction and project completion. However, these processes
were not followed for the Terminal Development and FBO projects. Rather, SBIAA
management set up a separate process that was largely managed by outside contractors and had
limited involvement from SBIAA staff.
Some precautions that public agencies use for major capital projects include the following:
■ Public agencies tend to favor using a competitive process for awarding major
development contracts. Competitive methods are generally used for construction
contractors as well as the acquisition of materials, supplies, and equipment on large
public infrastructure projects. While local public agencies in California are not required
by law to use a competitive process for professional services, such as architectural
services, many agencies, including the County of San Bernardino, will do so based on
internal policies and require reasonable, written justification for exceptions.
■ When drafting and executing contracts, prudent public agencies make sure to clearly
structure the compensation arrangement in the contract and, when necessary,
transparently report the "compensation arrangement to the pertinent legislative or
oversight body before approval of such contracts.
■ Public agencies generally proceed with capital and construction projects based on a
methodical process that includes design specifications, which are produced by architects
with demonstrated competence and professional qualifications. Further, design
specifications for major public buildings are largely based on transparent, comprehensive,
and sound analysis of the forecasted needs for the project.
• Senior officials of public agencies are generally required to clearly state the proposed
budget for major infrastructure projects to the relevant governing body. Further, public
agency management officials are also required to regularly report to the relevant
oversight body on the agency's ability to complete the project within that budget.
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•` Section 2: CJllsi!'1lcllon.a .%IC7 e1176'Ilt
■ Prudent public agencies utilize clear and effective controls, policies, and procedures to
ensure that (1) project funds are only used for the designated project, (2) capital projects
are undertaken and completed within the allotted budget; (3) the project stays within
scope or that changes to scope have been made consistent with an established process; (4)
executive leadership, citizens and the media are well informed of project progress; and,
(5) capital projects are completed on schedule.
SBIAA management generally did not follow these practices when implementing the Terminal
Development Project and the FBO Project. Specifically:
■ SBIAA management awarded development contracts to Norton Development Company,
LLC (Norton Development) and SBD Properties, LLC (SBD Properties), both managed
by the same individual, Scot Spencer, on a non-competitive basis. Also, SBIAA
management did not provide the Commission with justification of why it was not using a
competitive method for selecting the two contractors. Further, only one, unjustified,
argument was given for why the construction management and development functions
were to be contracted out rather than managed by experienced in-house staff.
■ SBIAA management did not ensure that the compensation arrangements in the Terminal
Development Lease and the FBO Lease were clear. Further, SBIAA management did not
clearly report to the Commission on the structure and approximate level of compensation
to be provided to Norton Development and SBD Properties.
■ SBIAA management altered the initial plans and specifications for the Terminal Building
renovations based on assertions of air carrier interest, assertions of these air carriers'
requirements to provide service, and aggressive projections of passenger traffic provided
by Scot Spencer, the eventual developer of the building. These projections do not appear
to be based on sound analysis. Further, these changes led to about $30 million in
additional project costs. The changes also led to the purchase of over $4 million in used
major aviation equipment, in a deal arranged by Mr.Spencer.
• SBIAA management did not fully represent the proposed budget to the Commission
when it was considering a resolution to approve the Terminal Lease between SBIAA and
Norton Development. Further, SBIAA management did not regularly apprise the
Commission of the Authority's inability to complete the project within budget.
• SBIAA management failed to set up and maintain appropriate and effective controls,
policies, and procedures for the Terminal Development and the FBO projects.
Specifically, SBIAA has not (1) put in place a policy on professional services contracts;
(2) consistently followed its purchasing policy for the acquisition of materials, supplies,
and equipment for the Terminal Development and FBO projects, (3) conducted
comprehensive audits of the Terminal Development and FBO projects even as project
costs rose dramatically; (4) adhered to compensation and reimbursable cost structures as
stated in the leases; (5) set up effective fund controls; or, (6) transparently monitored and
reported on project status and activities.
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Section 2: Construction tl�fanagement
The failure of SBIAA management to adhere to standard and prudent practices has been
detrimental to the Authority and to the Inland Valley Development Agency (IVDA). The
consequences of these actions have included: (1) a substantially higher cost and scope of work
than originally authorized or anticipated; (2) a terminal building constructed for passenger traffic
that has not materialized and is unlikely to occur in the foreseeable future; and (3) questionable
and, in some cases, highly inappropriate contractor expenses under the Terminal Development
and FBO projects.
Timelines, Scale, and Design of Terminal Development Heavily
Influenced by Developer
The Manager of Norton Development, which SBIAA non-competitively awarded the Terminal
Development agreement, significantly influenced the timelines, design, and construction of the
terminal building. SBIAA management set aggressive project timelines based on assertions by
the Manager of Norton Development of imminent major air carrier service that has not
materialized. Moreover, the design of the terminal building was altered from its initial design to
service significantly more passenger traffic based on projections provided by the Manager of
Norton Development. Further, the scope and cost of the Terminal Development project grew
substantially after Norton Development was awarded a sole source lease for development of the
Terminal building.
SBIAA Management Expedited Project Timelines Based on Expectation of
Imminent Major Air Carrier Service
SBIAA management proceeded swiftly with the construction of the Terminal Development
Project, resulting in at least $2.7 million in additional costs. The decision to proceed quickly was
based on an expectation that major air carrier service was imminent. This expectation was based
on assertions made by Mr. Spencer, the Manager of Norton Development, which was awarded a
sole source lease to develop and manage construction for the terminal building in May 2007.
Toward the end of the planning and design stage of the Terminal Project, in the fall of 2006,
SBIAA management had planned to open the terminal to scheduled air passenger service within
approximately 18 months. According to terminal planning meeting minutes from November
2006, SBIAA management set this timeframe in response to the Manager of Norton
Development's assertions that two air carriers were on the verge of signing agreements to
imminently begin providing commercial air passenger service at the San Bernardino
International Airport(SBIA).
According to minutes from the November 28, 2006 terminal planning meeting, the Manager of
Norton Development stated to SBIAA management and the architectural and engineering
consultants that "one of the air carriers may sign an agreement as early as January [2007] and the
other shortly thereafter, in March [2007]." By late December of 2006, according to planning
meeting minutes, SBIAA management had set a target date of June 2008 for completion of
construction and permitting.
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Section 2: C'orrstritctiotr Nlarta,ement
In late May 2007, when the SBIAA Assistant Director and the Manager of Norton Development
signed and executed the Terminal Lease, SBIAA management was still expecting an imminent
commitment from at least one major air carrier. The Schedule of Performance under the
Terminal Lease between SBIAA and Norton Development states that passenger air carrier
operations at the remodeled terminal would commence within 390 days of the Lease Agreement
effective date. Given that the Terminal Lease effective date was May 29, 2007, SBIAA
anticipated commencing air carrier operations by June 22, 2008. Moreover, the Schedule of
Performance under the lease states that a signed letter of commitment from a passenger air
carrier would be obtained within 60 days of the effective date (by July 28, 2007). The lease
further states that a signed letter of commitment from an air carrier was "Expected to occur by
June 15, 2007." To date, nearly three years after the expected commencement of operations, no
air carrier has agreed to provide scheduled passenger service at SBIA; and, as recently as March
a 2011, auditors had been advised that such contracts would be in place within six weeks. The
Interim Executive Director stated that he had been advised by the contractor that such contracts
would certainly "be in place before the Grand Jury issues its report."
The construction phase of the Terminal Project was fast tracked to meet the air carrier service
commitments being portrayed as imminent, resulting in higher costs and risk to SBIAA. The
final terminal schematic design cost estimate, dated April 24, 2007, included a ten percent
premium for "Fast Track" timelines. This fast track premium was estimated to cost SBIAA
approximately $2.7 million and was put in place to account for higher costs associated with the
expedited construction phase. According to contractors who worked on the Terminal
Development Project, costs associated with an expedited construction phase could include higher
labor costs, such as having to hire additional prime contractors and certain materials and supplies
that are more expensive when needed immediately.
' Terminal Design Altered by Developer's Aggressive Passenger Projections
and Assertions of Prospective Air Carrier Requirements
SBIAA contracted with an architectural and engineering firm in September 2005 for a space-
, needs analysis, conceptual design, and cost estimate for the terminal building. This work,
completed in late 2005, resulted in a cost estimate of about $22 million based on data and
projections contained in the airport's Master Plan.
In July 2006, SBIAA management contracted with the same firm to conduct a second space
needs study and a revised conceptual design. On this second contract, SBIAA management
directed the architectural and engineering firm to alter the assumptions and parameters for the
design of the terminal building based on air passenger projections and prospective air carrier
demands provided by the soon to be Manager of Norton Development.' These changes became
the basis for two terminal designs in late 2006 and early 2007. The first of these designs,
completed in December 2006 and based on the altered projections, had a cost estimate of about
S 104 million. In early 2007, at the direction of SBIAA management and in consultation with Mr.
' At this point in the project. Norton Development Company, LLC had not vet been established bi Scot Spencer.
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Section 2: Construction 1fanagement
Scot Spencer,2 the architecture and engineering contractor reduced this cost estimate to about
$51 million based on a second design. This final design and cost estimate still included
alterations from the first conceptual design, which were based on the developer's assertions. In
May 2007 the Interim Executive Director asserted to the Commission that the total cost of the
project would be about $38 million. The Interim Executive Director made this assertion in a staff
report, which recommended approval of the terminal lease and acquisition agreement with
Norton Development.
Initial SBIA Terminal Space-Needs Study and Conceptual Design Based on SBIA Master Plan
The initial space-needs study, completed by SBIAA's architectural and engineering contractor
in January 2006, was based on data contained in the SBIA Master Plan. This study resulted in a
conceptual design for the terminal that was estimated to cost approximately $22 million. The
purpose of the space-needs study was to determine the adequacy of the existing facilities to meet
current activity and to determine what building alterations would be necessary to meet forecasted
activity. The overall conclusion of the study recommended that SBIAA consider renovation of
the existing terminal to support activity forecasted to at least five years of operations. This was
recommended by the architectural and engineering contractor because, in their view, a brand new
terminal would take a number of years to design and construct.
The contractors used the SBIA Master Plan to estimate terminal facility requirements including
gate demands, baggage loading, concessions, public space, and other areas. The SBIA Master
Plan contains calculated passenger volumes based on activity data from (1) former metro area
Air Force bases that were converted to commercial airports; (2) airports of similar size; and, (3)
air traffic in the Los Angeles Basin. The Space Needs Study used schedule patterns from Santa
Barbara, as historical airline schedule information was not available from the SBIA Master Plan.
Table 2.1 on the next page summarizes the passenger activity forecast used in the Terminal
Space Needs Study, which was based on the SBIA Master Plan.
All of the evidence that we have been able to collect suggests that the architecture and engineering contractor
conducted all of the necessary analysis to reduce the scope and cost of the design while sticking to the demands that
Mr. Spencer represented as those of the prospective air carriers. It appears drat Mr. Spencer simply approved or
disapproved cost reduction options provided to lum by the contractor. Although Mr. Spencer and SBIAA
management have asserted that Mr. Spencer had a more active and analytical role in the reduction of costs. Oiese
assertions have no documented support.
3 GKK Works, Inc.
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Section 2: Construction Management
Table 2.1
Passenger Activity Forecasted from SBIA Master Plan
Passengers Phase 1 Phase 2 Phase 3
(2008) (2013) (2023)
Annual En lanements 198,000 460,000 1,253,000
Peak Month Enplanements 18,600 43,200 117,800
Peak Hour Passengers (Enplaned and Deplaned) 168 390 1,064
Source: SBIA Terminal Space Needs Study(January 2006)
The SBIA Space Needs Study found that the projected activity, as based on the SBIA Master
Plan, did not warrant the use of jet bridges. Rather, the study found that aircrafts could be
boarded with air stairs, commute-a-walks, and lift ramps from ground level using the existing
building structure. The study reviewed and forecasted the need for aircraft gates and departure
lounges based on the SBIA Master Plan passenger fleet mix forecast. This forecast, as
summarized in Table 2.2 on the next page, projected that initial SBIA traffic would consist of an
equal mix of turboprop and regional jets. The study projected a fleet primarily consisting of
regional jets with some limited use of narrow body aircraft by Phase 3 (in approximately 2023 or
after 15 years of air carrier service).
The Space Needs Study used these projections to conclude that the terminal would need five
gates for Phase 1 (in approximately 2008), seven gates for Phase 2 (in approximately 2013), and
15 gates for Phase 3 (in approximately 2023). The study estimated the square footage of
departure lounges needed for each phase of terminal operations to be 3,200 sq ft in Phase 1;
4,480 sq ft in Phase 2; and 12,640 sq ft in Phase 3.
SBIAA management established in the Space Needs Study that the level of service that the
terminal would support would be at a Level of Service "C" per International Air Transport
Association (IATA) standards. Table 2.3, shown on page 2-9, lists the IATA ratings for terminal
congestion standards.
Discussions with the initial project architects indicate that a Level C rating is equivalent to
service levels presently provided by Burbank Airport and others of a similar character. As the
design capacity of airports increases, so do passenger services and amenities. A Level A airport
would be equivalent to the International Terminal at Los Angeles International Airport.
a Commute-a-walks are retractable passenger walkNvays that can be placed on airport tumacs and provide some
cover from the elements_ Although the walkway is "fixed" in design, the sections are still mobile and can be
instantly unpinned and reconfigured should the operation change. The sections are on wheels and can be moved
without any motorized equipment.
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Section 2: C'onsiruction Afanacemenl
Table 2.2
Passenger Fleet Mix Forecasted from SBIA Master Plan
Average Percent of Total Aircraft Departures
Aircraft Aircraft Type Seats Per
Aircraft 2008 2013 2023
Embraer 120 Turboprop 30 3 50 0 - -
Saab 340 Turboprop 34 15% - -
Canadair CRJ 200 Regional Jet 50 25% 30% 15%
Embraer ERJ 145 Regional Jet 50 25°'o 30% .3 /0
Canadair CRJ 700 Regional Jet 70 - 20% 200/;
Embraer ERJ 170 Regional Jet 70 - 20% 20%
Canadair CRJ 900 Regional Jet 90 - - 1000
Embraer ERJ 195 Regional Jet 106 - - 100/0
Boeing 737-700 Narrow-Body Jet 137 - - 5%
Airbus 320 Narrow-Body Jet 150 - - 5 0.'o
Total 100% 100% 100%
Source: SBIA Terminal Space Needs Study(January 2006)
SBIA Terminal Design Significantly Altered by Projections and Prospective Air Carrier
Requirements Provided by Scot Spencer
Prior to the formation of Norton Development for purposes of constructing the terminal, the
individual instrumental in the company's formation and its eventual Manager (Scot Spencer)
provided flight schedule and enplanements data that sharply altered the SBIA terminal
conceptual design in the fall of 2006, a few months after the terminal Space Needs Study was
completed. This data was represented to the architectural and engineering contractors and
subsequently in the SBIA Schematic Design Report, completed in April 2007, as the airline
schedule information of"the intended air carriers." While the basis and origins of this data were
not transparent or verifiable, SBIAA management directed the architectural and engineering
contractor to use it to alter important conclusions and recommendations for the terminal design.
These changes included alterations to assumptions and parameters, which were the basis for
calculations used to develop the conceptual designs for the passenger terminal, airport signage,
airport monument, and terminal short term parking area. Additionally, the IATA standard. for
terminal congestion was altered from a previously approved "C" level of service to a 13" level of
service based on Mr. Spencer's assertion of prospective air carrier requirements.
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Section ?: Cot:struction Management
Table 2.3
IATA Terminal Congestion Standard Ratings
Rating Rating Description
A Excellent level of service; condition of free flow; excellent level of comfort.
B High level of service; condition of stable flow; very few delays, high level of comfort.
C Good level of service; condition of stable flow; acceptable delays; good level of
comfort.
D Adequate level of service; condition of unstable flow; acceptable delays; inadequate.
E Inadequate level of service; condition of unstable flow; unacceptable delays; inadequate
level of comfort.
F Unacceptable level of service; condition of cross-flows, system breakdown and
unacceptable delays; unacceptable level of comfort.
Source: SBIA Terminal Conceptual Design, Appendix B (December 2006)
The data provided by Mr. Spencer projected significantly higher passenger figures on a
considerably faster timetable. While the SBIA Master Plan projected 460,000 annual
enplanements within five years of initial operations (approximately by 2013), the data supplied
by Mr. Spencer projected 945,498 annual enplanements within two years of initial operations
(approximately by 2009). Table 2.4 below summarizes the passenger activity forecast used in the
SBIA Terminal Schematic Design, which was based on flight schedule and enplanements data
provided by Mr. Spencer and used for the final design and construction of the terminal building.
Table 2.4
Passenger Activity Forecasted from Developer's Data
Passengers Phase Z 2007 Phase 2 2008 Phase 3 2009
Annual En lanements 108,129 552,954 945,498
Peak Month 263588 64,558 97,425
En lanements
Peak Hour Passengers
(Enplaned and 858 2,082 3,143
Deplaned)
Source: SBIA Terminal Schematic Design Report (April 2007)
The Schematic Design was based on an altered projection of serviced fleet. Specifically, the
design assumptions were revised from an initial fleet mix consisting of 50 percent turboprop
aircraft (seating 30 to 34 passengers) and 50 percent regional jets (seating 50 passengers) to an
initial fleet mix consisting of 50 percent regional jets (seating up to an average of 106
passengers) and 50 percent narrow body jets (seating up to an average of 150 passengers). The
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Section 2: Construction A Yarn gene►►t '
Schematic Design Report also newly assumed that the regional jet operations would eventually
be replaced with main line jet aircraft.
The developer's revised passenger projections and assertions of prospective air carrier demands
led to the construction of an expensive two-story concourse as well as the purchase of several jet
bridges (see Section 3). Mr. Spencer asserted that prospective air carriers he was negotiating with
refused to provide service to SBIA unless the airport had jet bridges. The requirement that only
jet bridges be used for boarding aircraft led to the need for the new two story concourse, which
was estimated in April 2007 to cost approximately $9 million in additional funds to constrict.
Previously, the January 2006 SBIA Space Needs Study concluded that, based on the projected
fleet mix, all aircraft would be boarded from ground level using air-stairs and lift ramps when
necessary. The December 2006 terminal design assumptions and parameters and the April 2007
Schematic Design Report, based on the developer's projections, assumed that only jet bridges
would be used to board aircraft. As detailed in Section 3 of this report, Norton Development was
awarded an agreement totaling approximately $4.2 million in July 2007 for the acquisition,
transport, and refurbishment of used major aviation equipment, including 12 jet bridges.
The Terminal Schematic Design Report also forecasted a higher gate demand based on the
updated projections. The Terminal Schematic Design recommended three gates for initial
operations, six gates after one year of operations (Phase 2), and nine gates after two years of
operations (Phase 3). Table 2.5 below contrasts the projected passenger activity and gate
requirements of the Space Needs Study from January 2006 versus the Terminal Schematic
Design Report from April 2007.
Table 2.5
SBIA Passenger and Gate Requirement Projections
Phase Annual Enplanement Enplanement
(Base Year) Enplanements Operations Passengers/ Passengers/ Gates
Departure Gate
January 2006 Terminal Space-Needs Study based primarily on SBIA Master Plan
Phase 1 (2008) 198,000 14,987 26.4 39,600 5
Phase 2 (2013) 460,000 23,508 39.1 58,653 7
Phase 3 (2023) 1,253,000 46,523 53.9 80.729 15
April 2007 SBLA, Schematic Design Report based in part on Developer's Data
Phase 1 (2007) 108,129 2,328 92.9 43,252 3
Phase 2 (2008) 552,954 10,020 110.4 94,640 6
Phase 3 (2009) 945,498 16,260 116.3 99,722 9
Source: SBIA Space Needs Studv(Januan, 2006)and Terminal Schematic Design Report(April 2007)
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Section 2: Construction AIanagen►ent
Norton Development Received Substantial Financial Benefit from Terminal Design Revisions
Norton Development received considerable financial benefit from the alterations made in the
terminal design by its Manager, Scot Spencer. Specifically, under the Terminal Lease, Norton
Development received a 1.35% developer fee on all construction costs. Therefore, as costs for
the project rose, so did the compensation to Norton Development. In particular,
• According to the cost estimate provided to the Commission by the Interim Executive
Director in May 2007, the total estimated cost of the Terminal Development Project was
$38 million. Given the initial conceptual design estimate of $22 million, the revised
design represented an increased cost of$16 million. This cost increase resulted in at least
$216,000 in additional developer fee payments to Norton Development.
• While the Interim Executive Director asserted in May 2007 that the project cost estimate
was $38 million, the Schematic Design Estimate dated April 24, 2007 shows a total
estimated cost of$51.3 million, a difference of $29 million from the initial conceptual
design. Given this cost estimate, Norton Development stood to receive $391,500 in
additional developer fee payments, representing the difference between the $22 million
initial estimate and the $51.3 million estimated in April 2007.
' Terminal and FBO Project Costs and Budgets Increased Dramatically with
Little Substantiation or Transparency
The scope and cost of the Terminal Development Project grew considerably from about $22
million based on an initial design in January 2006, to $38 million represented to the Commission
in May 2007, to over $100 million budgeted as of January 2011 with work and costs continuing
to incur. Similarly, the FBO Project grew from an initial estimate of$5 million in March 2007 to
over $30 million budgeted and expended as of January 2011, with costs continuing to incur.
Interim Executive Director Inaccurately Reported Initial Cost Estimate on Terminal
Development Project to the Commission
The Interim Executive Director inaccurately reported and gave very limited details on the costs
to undertake the Terminal Development Project to the Commission when it approved the
Terminal Lease with Norton Development. Specifically, in a staff report dated May 23, 2007, the
Interim Executive Director asserted that through a lease and buy-back arrangement, "it is
expected that the purchase price to be paid [by SBIA.A] in approximately one year, once
completed, will be approximately $38 million." The Interim Executive Director refers to the
figure of$38 million three more times in the staff report with no other dollar figure presented
and without a single breakdown of costs. In one such reference the staff report states that "the
Architect's current estimated cost" is $38 million. In fact, the architecture and engineering firm
had provided a cost estimate of $51.3 million a month earlier, on April 24`x', based on the
schematic design. Even this estimate appears to be understated as, at the direction of SBIAA
management, it excluded substantial costs such as hazardous waste abatement and remediation,
construction of parking lots, and offsite construction.
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Section 2: Construction Uatiagement
While the Interim Executive Director asserted to the Commission that the Terminal Development
Project would cost $38 million, the terminal lease' obligated SBIAA to purchase the property
back at a higher cost, as determined by Norton Development. While the May 2007 staff report
simply stated that "the final price will be based on actual costs incurred," the terminal lease
bounded SBIAA to pay the price determined by Norton Development as long as the final project
costs were "equal to or less than $45,000,000." This amount is well above the quoted cost
estimate of$38 million as well as the customary 10 percent contingency amount ($3.8 million),
which would have totaled $41.8 million.
Table 2.6 below details the April 24, 2007 cost estimate provided to SBIAA management by the
architecture and engineering contractor. While SBIAA management used this estimate to move
forward with the Terminal Development Project, no such cost breakdown was provided to the
Commission prior to approval of the terminal lease.
Table 2.6
SBIA. Terminal Development Project Cost Estimate as of April 2007
Cost Item Schematic Design Cost Estimate
Terminal Building (Excludes two story Concourse) $11,572,400
Concourse 9,114,200
Site Improvements 4,061,000
Subtotal 24,747,600
General Conditions 1,484,856
Bonds& Insurance 524,649
Subtotal 26,757,105
Design Contingency 4,013,566
Escalation 1,605,426
Fast Track 2,675,711
Subtotal 35,051,808
Contingency 3,505,181
Total Hard Cost 38,556,988
Furniture, Fixtures, & Equipment 3,847,800
Construction Mgmt./ Design/Testing%Permitting 8,892,884
Total $51,297,672
Source: GKK Works SBIAA Schcmatic Design Estimate(April 24. 2007)
Exhibit A. Section 2.7
Han-ev.1 t. Rose.Lsxnx vies. UC
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r
Seclion ?: Collsi:;'lfC1i0/T l�i:illlJe/1lelle
As previously mentioned, the $51 million estimate provided by the architecture and engineering
contractor, as illustrated by Table 2.6 above, appears to have been a purposeful understatement
of the estimated costs to complete the Terminal Development Project. Specifically, SBIAA
management directed the contractor to omit significant costs, including hazardous waste
abatement and remediation, and parking lot and certain off-site construction; and, the estimate
omitted amounts for specialized communications, security, information and surveillance systems.
Terminal Project Costs and Budget Steadily Increased During Construction
The Terminal Development Project costs and budget grew dramatically during construction from
the Interim Executive Director's initial estimate of $38 million in May 2007. As of January
2011, over $100 million had been budgeted for the project, an increase of over 160 percent.
j Although a detailed breakdown of budgeted and actual costs has not been provided by SBIAA
management, an IVDA staff report from December 2010 presented by the Aviation Director
provides a superficial itemization of previously approved amounts. Table 2.7 on page 2-14
summarizes these budgeted amounts.
FBO Project Costs Increased Substantially From Initial
Authorization
A review of the FBO Project found many similarities to the Terminal Development Project.
These similarities include: (1) the lease was awarded to a company managed by Mr. Spencer
without the use of a competitive process; (2) SBIAA provided vague and limited information to
the Commission and IVDA Board on the project scope and costs, especially in the initial phases;
(3) the developer, in this case SBD Properties, was allowed to heavily influence the scale and
design of the project; (4) the lease was structured in such a way that SBIAA accepted all
financial risk and the developer took on no financial risk; and, (5) the scope of the project grew
incrementally, but substantially, over time.
The FBO Project has grown from an initial estimate of$5 million in March 20076 to over $33
million budgeted as of January 2011 with costs continuing to be incurred. Further, while the
Assistant Director asserted to the Commission that SBIAA staff would "maintain control over
design and costs incurred," it appears that the developer had significant control over the design,
scale, and costs of the project. Table 2.8 on Page 2-15 summarizes the evolution of the estimated
and budgeted costs of the FBO Project.
6 In March 2007 the Assistant Executive Director asserted to the Commission that the FBO building would cost an
estimated$5 million to constrict.
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Section 2: Construction Management
Table 2.7
Terminal Project Budgeted Amounts as of January 2011
Date IVDA Purpose Amount Budgeted
Resolution #
May 23, 2007 2007-017 Terminal Funding per Lease Agreement $38,000,000
Parking Lot Phase I; Acquisition&
July 23, 2008 2008-08 Installation of Communications. Security, 19,000,000
Information& Surveillance Systems
Parking Lot Phase I1; Rental Car Lot.
March 11, 2009 2009-03 Renovation of Building 675 for fliglmt 9,275,000
kitchens&ground service equipment
maintenance;Monument Signs
April 8, 2009 2009-06 Ramp Pavement Rehabilitation and 14,513,100
Replacement Phase L 10%Contingency
October 14, 2009 2009-15 Ramp Pavement Rehabilitation and 3,800,000
Replacement Phase II
Initial terminal equipment maintenance;
December 9, 2009 2009-19 relocation of impacted utilities;security 1,900,000
enhancements;construction of cargo facility
May 12, 2010 2010-03 As Needed Additional Project Requirements; 5,950,000
Changes to Security and Customer Service.
September 8, 2010 2010-07 Additional Ramp Rehabilitation and 1,095,000
Replacement Costs
Air Cargo Facility; Airfield Security and
Communications;Ramp Improvements.
December 21, 2010 2010-12 Flight Kitchen;Parking Lot Costs, 7,135,769
Additional Improvements&Equipment for
Terminal Building;
Total $100,668,769
Source: IVDA Staff Report prepared by SB1AA Aviation Director(December 21. 20 10)
Note that all of the amounts displayed in Table 2.7 above also included administrative and project management costs
including fund control fees, project management costs. and developer fees. Norton Development has received
substantial financial benefit from the increases since the original $38 million was approved. totaling approximately
$846,000 in additional developer fees alone.
IVDA Resolution 2007 4)1 and die accompaming IVDA Resolution 2008-03. approved in Februan 2008.
audmorized a total of$38 million for the Terminal Development Project.
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Sectiotr 2: Conswitction Management
Table 2.8
FBO Project Cost Estimates and
Approved Funding Amounts as of May 2010
Date Resolution Purpose and Comments Amount
Approved
Approval of FBO Lease. Assistant Director states in
staff report that estimated cost for FBO Building is $5 March 14 2007 SBIAA 2007-03 None
million. No other costs mentioned in the staff report.
Actual lease obligates SBIAA up to$9 million.
June 13, 2007 SBIAA 2007-04 FBO public improvements. No details or breakdowns $7,000,000
provided on cost items.
September 26, 2007 SBIAA 2007-08 To assist in the funding of construction for the 2,000,000
Airport Fuel Farm.
Approval of Amendment 1 of the FBO Lease
September 26, 2007 SBIAA 2007-09 Agreement.One of the major modifications is the use 2,300,000
of$2,300,000 by SBD Properties for the acquisition
of Don Blue Aviation Facilities' leasehold interest
Common use improvements including roadway,taxi
May 28, 2008 SBIAA 2008-04 lane,and utility infrastructure extensions. SBIA.A is 3,500,000
responsible for costs under FBO Lease.
As part of the annual budget process, IVDA budgeted
Unknown Unknown an additional$16,000,000 for fiscal year 2008-09 for 16,000,000
the FBO Project
Approval of Amendment 2 of the FBO Lease
Agreement. Amendment 2 contained major changes
to the scope and cost of the FBO Project. Major
changes(later codified in Amendment 2)included:
(1)transfer of offices from Building 674(the
"washrack")to the FBO Building;(2)"significant
August 13, 2008 SBIAA 2008-10 enhancement"to the level of service at the FBO Unknown
building, (3)two-story building to house U.S.
Customs operations and additional corporate office
space(no square footage provided);(4)additional
FBO equipment;and,(5)the acquisition of three fuel
trucks. Amendment 2 was restated and reapproved on
January 28,2009.
December 10, 2008 SBIAA 2008-13 Acquisition of three fuel trucks. 1,000,000
Approval of Restated Amendment 2. Size of Customs
January 28, 2009 SBIAA 2009-03 facilities increased to three-story, 35,288 square feet 1,000,000
structure to accommodate potential use by larger
international aircraft.
Total $33,800,000
Source: Timeline provided by SBIAAAVDA Clerk of the Board and SBIAA and lVDA Staff Reports
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Section 2: Construction Management "
As seen in Table 2.8 on the previous page, there were several increases in the scope and cost of
the FBO project following the initial lease approval in March 2007, Moreover, the costs as
represented to the Commission by the Assistant Director were $5.0 million. However, the actual
lease executed with SBD Properties obligated SBIAA to finance the FBO improvements up to a
cost of$9.0 million.
The scope of the improvements covered under the lease changed substantially three times
between March 2007 and May 2010. The first lease amendment, approved by the Commission in
September 2007, included the use of $2.3 million in FBO funding for the acquisition of the
former FBO Operator's leasehold interest_
Amendment 2, approved by the Commission on August 13, 2009, included several major
changes to the design and scope of the FBO Project. These changes included:
1. The construction of a major two-story U.S. Customs facility, which was designed and
approved by Million Air San Bernardino, LLC, a company managed by Mr. Spencer.
2. Significant enhancements to the level of service to be provided at the FBO Building.
While the specific changes as to the level of service were not detailed in the staff report
to the Commission, it appears that this is when it was determined that the FBO would
provide an executive level of services.
3. The determination that the office areas originally proposed to be constructed inside
Building 674 (the "washrack") would instead be incorporated as part of a larger FBO
Building. This alteration moved the office construction from a project that was supported
by U.S. Department of Commerce Economic Development Administration grant funds to
a project that was entirely supported by SBIAA/IVDA funding.
4. The acquisition of additional equipment to "properly equip the FBO for providing a high
level of service to the general aviation community." According to the staff report, the cost
of the equipment was estimated at $135,174. As listed in Exhibit A to Amendment 2 of
the FBO lease, the equipment included (a) three aircraft tugs; (b) three ground power
units; (c) two service carts; and, (d) four tow bars.
5. The acquisition of new general aviation fuel trucks to supplement the older equipment
acquired through the purchase of the remaining leaseholder interest and assets of the
former FBO, Blue's Aviation Service. The staff report states that the three fuel trucks are
estimated to cost a total of$515,000. However, another staff report presented on August
13, 2008 asked the Commission to "approve solicitation of bids and the purchase of Fuel
Trucks from the lowest responsible bidder in an amount not to exceed S1,200,000 to
support Commercial Aviation Service, and authorize the Interim Executive Director or
his designee to execute all necessary documents." (emphasis added) In December 2008
the Commission approved the use of up to $1,000,000 for the purchase of the three fuel
s Blues Aviation
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Section ': Construction iVidnagemaitt
trucks. While the cost of the trucks was later reduced to $490,000 in January 2009, it is
unclear if the authorized FBO funding was reduced to reflect the lower actual cost.
Five months after the Commission approved Amendment 2 to the FBO Lease, it approved a
"restated" Amendment 2. This "restated" Amendment 2, approved on January 28, 2009,
represented the third major change of scope for the FBO Project. The scope changes primarily
consisted of an increase in the size of the Customs Facility from a two-story building to a three-
story building. According to the staff report prepared by the Aviation Director, the purpose of the
Customs Facility expansion was to "facilitate potential use by larger international aircra-ft."
Terminal and FBO Projects Managed With Insufficient Controls
SBIAA did not establish effective policies, procedures, and controls for the Terminal
Development and FBO projects given the level of financial risk that the Authority had taken on.
The purchasing policies have been inadequate and have, by and large, been ignored by SBIAA
for the purposes of these two projects. Also, there have been no truly independent audits of the
Terminal Development or FBO projects. In addition, the controls set up in the Terminal Lease
Agreement have not been enforced by SBIAA management. Moreover, the independent fund
control process frequently referred to by SBIAA management and the developer as a laborious
and detailed check is inadequate to prevent waste or abuse of taxpayer funds.
The failure to establish effective controls for the Terminal Development and FBO projects has
resulted in, at the very least, inappropriate expenses from SBIAA funds.
Purchasing Policies Inadequate for Terminal and FBO Projects
The purchasing policy for IVDA and SBIAA, entitled Purchasing Policies and Change Order
Procedures is inadequate for general procurement and specifically for the use of contractual
services. The Purchasing Policy is outdated, lacks evidence of Board or Commission approval,
appears unfinished, and lacks sufficient controls for professional services agreements.
Specifically, the SBIAA/IVDA Purchasing Policy lacks provisions that directly address service
contracts and provides no requirement to justify the use of non-competitive methods for selecting
outside contractors.
No SBIAA Policy Directly Addresses Contractual Services or Non-Competitive Selection
There is no section in the SBIAA and IVDA Purchasing Policy that directly addresses
contractual services or the use of non-competitive methods for major contracts. Although there is
language in the Open Market - Competitive Bids Required section suggesting that a formal
competitive process may be required for service contracts above$25,000, there is no requirement
under the policy to do so. In contrast, the County of San Bernardino Administrative Code and the
County's Policy Manual include specific procedures for selecting outside service providers and
for the use of non-competitive methods for awarding service contracts.
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Section 2: Construction-Wanagement "
Unlike the SBIAA/IVDA Purchasing Policy, the County's Administrative Code includes specific
provisions for awarding contracts for services. The County Administrative Code9 requires a
competitive process for all service contracts. Further, the Code requires a formal request for
proposal (RFP) process for service contracts above $150,000. The Code additionally requires
approval from the County Administrative Officer prior to issuing the RFP. The County
Administrative Code1' allows for non-competitive awarding of service contracts where the
annual aggregate cost exceeds $1<00,000 per scope of services per vendor, but requires Board of
Supervisors approval.
Contrary to the SBIAA/IVDA Purchasing Policy, the County of San Bernardino Policy Manual
contains provisions for the selection of outside service providers. Specifically, the Policy
Manual`t states that the "selection of outside service providers shall be conducted through a
competitive process based upon demonstrated competence, and on the prgfessional qualifications
and capabilities necessary for the performance of services required at a fair and reasonable price
to the County." (emphasis added) Further,the Policy Manual states that,
If a department maintains that it is in the best interest of the County to obtain services Szithout a
competitive process, the agency, department or Board-governed special district must provide the
Purchasing Agent with detailed written evidence to support a non-competitive determination.
Further, the Policy Manual provides a list of general justifications for the use of outside service
providers. These are to be included when:
• There is a need for special expertise or experience beyond the capability of County staff;
• There is a need for review of work performed by County staff to ensure that such work
represents the best possible solution;
• County staff is unable to perform the needed work within the time required and the public
interest requires such work to be done; or,
• Use of outside service providers is more cost-effective.
Weak Justification Provided to Commission for Contracting Construction Manatrement and
Development Services
SBIAA management only briefly addresses the Commission, in writing, as to why the Authority
contracted with an outside developer rather than utilizing in-house staff for the Terminal
Development and FBO projects. The only reference in the Interim Executive Director's May 23,
2007 staff report to the Commission justifying the decision states that SBIAA staff had,
Count} of San Bernardino Code of Ordinances. Title 1,Division 4_ Chapter I.Section 14.0 115
County of Stu►Bernardino Code of Ordinances.Title 1. Division 4. Chapter 1. Section 14.0109
" Count} of San Bernardino Policy Manual.Procurement of Sen•ices.No. 11-05
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Jeciioii 2: Construction Management
determined that the fastest wav to complete the [Terminal Developmentl project was through a lease
arrangement wherein a Developer will lease the building, construct the facilities and then turn the
completed building back to SBIAA. (emphasis added)
The Interim Executive Director provides no specific reasoning or analysis to support the
determination that leasing the building to an outside developer would be the fastest way to
complete the project.
In addition, the Manager of Norton Development'Z stated to our audit team that SBIAA
management felt that it would be faster and less costly to contract with his company rather than
through in-house staff When questioned as to how specifically Norton Development would be
faster than in-house staff, the Manager stated that SBIAA is required to follow specific timelines
for advertising public bids and for hearing and responding to bid protests when they occur.
Contrary to these claims, the Terminal Lease Agreement contains detailed requirements for the
awarding of subcontracts on a competitive basis. Specifically, Section 2.4 of Exhibit A specifies
that Norton Development shall "obtain bona fide bids for each and every aspect of construction
of the various components of the Improvements." The Lease further states that Norton
Development "shall cause the General Contractor to obtain no less than three bona fide bids for
every `major subcontract."' In addition, the Terminal Development project is not exempt from
the bid protest process involving the Commission. In fact, a bid protest for one aspect of the
Terminal Development Project went before the Commission in July 2010.
When questioned as to how specifically Norton Development would be more cost effective than
in-house staff, the Manager replied that the bidding process would be more streamlined.
Specifically, the Manager stated that Norton Development could re-bid jobs or ask that the
lowest bidder to modify their bid if it wasn't satisfactory. Contrary to these claims, there is no
law or impediment preventing SBIAA in-house staff from taking such actions with bids.
Terminal and FBO Projects Non-Competitively Contracted to Companies with No Demonstrated
Competence
SBIAA awarded the major contracts for the development of the Terminal Building and the FBO
Facility on a sole source, non-competitive basis to Norton Development Company, LLC (Norton
Development) and SBD Properties, LLC (SBD Properties) respectively. In addition, SBIAA did
not conduct a competitive process for selecting the general contractor for the Terminal
Development or FBO projects. While SBIAA is not required by law or by its own purchasing
policy to conduct a competitive or formal bid process for these contracts, prudent risk
management would dictate that a competitive process be used, or at the very least, reasonable
justification would be provided for not doing so.
SBIAA management never directly addressed the Commission in writing as to why the
Commissioners should award the Terminal Lease or the 25 year FBO Lease on a non-
competitive basis. Neither the March 14, 2007 staff report from the Assistant Director on the
Scot Spencer
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Section Z: Construction Management
approval of the FBO Development Lease nor the May 23, 2007 staff report from the Interim
Executive Director on the approval of the Terminal Development Lease addresses this issue. The
reports are silent as to the demonstrated competence, professional qualifications, or capabilities
of Norton Development and SBD Properties. In fact, Norton Development was founded the same
day as the Terminal Lease was approved by the Commission (May 23, 2007) and SBD Properties
was founded less than a year before the FBO Lease was approved. It is therefore highly unlikely
that these companies had demonstrated professional qualifications, competence, or
development/construction management capabilities prior to being awarded the two contracts.
Furthermore, the staff reports do not mention the demonstrated professional qualifications,
competence or development/construction management capabilities of the Manager13 of these
companies, who is the signor on the agreements and has been intimately involved in both
projects. A review of the experience and qualifications of the Manager conducted for this audit
suggest that he has never been involved in a major airport construction project until retained for
that purpose by SBIAA.
SBIAA Purchasing Policy Not Followed for Procurement of Materials and Supplies
While the SBIAA Purchasing Policy is not strong, there are certain provisions for the purchase of
materials and supplies, which could have provided some basic controls for the Terminal
Development and FBO projects. However, SBIAA management instead circumvented normal
purchasing policies by establishing an outside control fund to review and approve project
expenses. Specifically, the SBIAA Purchasing Policy requires that all purchases over $2,500
require the approval by a Department Head, the Chief Financial Officer, and the Executive
Director. Further, the Purchasing Policy requires that all contracts and purchase orders of
$25,000 and greater to be signed by the Co-Chair or President of the Agency involved and
approved by the Executive Director and Chief Financial Officer.
Rather than follow the procedures prescribed by the Purchasing Policy, SBIAA management set
up a new process involving an outside fund control agency. As will be discussed in greater detail,
this process alienated and circumvented the Chief Financial Officer and SBIAA Development
staff and provided for more involvement by the developer, Chair of the Commission, Interim
Executive Director, and Assistant Director,with controls being dependent an outside third party.
No Audits Have Been Conducted of the Terminal and FBO Projects
SBIAA management has not engaged an independent certified firm to conduct an audit of the
Terminal Development or FBO project. Given the weak purchasing policy and the disregard of
standard procurement procedures, an independent audit could have served as a valuable tool for
identifying internal control weaknesses and risk exposure, as well as recommending steps to
reduce risk and/or resolve identified issues.
Scot Spencer
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Section ?: Construction Management
The one review that has been conducted'` covering costs associated with the Terminal
Development Project was not an audit and its scope did not include a review of the General
Contractor contract or specialized equipment contracts. As noted in the firm's report, they were
"engaged to perform a special compliance review of the Terminal Building Construction Project"
(emphasis added). The firm never refers to their report as an audit or their procedures as audit
procedures. Further, the firm states in their report that they "were not engaged to, and did not
conduct an audit, the objective of which would be the expression of an opinion, on the
information described above" (the information referenced are the findings of the special
compliance review). The report goes on to state that, "Accordingly, we do not express such an
opinion. Had we performed additional procedures, other matters might have come to our
attention that would have been reported to you."
Terminal Lease and FBO Lease Contain Ineffective Controls
The controls embedded in the Terminal and FBO leases have been ineffective for proper
management oversight. As discussed below, none of the controls contained in the leases have
ensured that SBIAA has had the ability to adequately monitor project costs or to prevent
inappropriate compensation or reimbursements to the developer.
Developer Did Not Provide Periodic Reports as Required in the Leases
Although the Terminal and FBO Leases require the developer (Norton Development and SBD
Properties respectively) to deliver a monthly status report to SBIAA, no such reports have been
provided. Specifically, the Terminal Lease15 and the FBO Lease16 require Norton Development
and SBD Properties respectively to deliver monthly reports on the status of the construction to
SBIAA. The Lease requires that these reports include:
• Norton Development/SBD Properties' and the General Contractor's good-faith estimate
of the Completion Date;
• Updated and accurate construction schedules;
• The cost of improvements; and,
■ Whether construction costs are within budget.
SBIAA management, specifically the Interim Executive Director and the Assistant Director,
asserted to our audit team that these requirements were not enforced because they felt SBIAA
was fully informed of the project status through periodic construction management meetings.
Although limited time and resources have not allowed for a thorough review of these
A special compliance review was completed in February?010 by Rogers,Anderson.Malody, and Scott.LLP.
Exhibit A. Section 10.Item 10.1(b).
15 Exhibit A. Section 10,Item 10.l(b).
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Section 3: Construction tlllanagement
construction management meeting minutes, our understanding is that SBIAA management did
not regularly attend such meetings.
Terminal and FBO Compensation Structure Opaquely Worded and
Inappropriately Implemented
The compensation to be provided to Norton Development under the Terminal Lease and SBD
Properties under the FBO Lease are vaguely structured, were not clearly represented to the
Commission by the Interim Executive Director and the Assistant Director, and were
implemented in a way that was highly favorable to the developer.
Terminal Lease Vaguely Structured Compensation to be Paid to Contractors
The Terminal Lease provides for at least two fees to be paid by SBIAA to contractors: a
"developer fee" and a "construction management fee." Although the lease reads as if these two
fees would be provided to different parties, in practice both fees provided compensation to
companies managed by Mr. Spencer (Norton Development and SBD Aircraft Services, LLC).
The Terminal Lease states that the developer fee is to cover"the overhead and profit" of Norton
Development. The lease further states that,
the Developer Fee shall be calculated as follows: 1.35%of that portion of the Construction Costs
which represent the cost of construction for labor, materials.services and supplies including those
of the General Contractor and of each subcontractor.
A review of a sample of payment vouchers from the Terminal Development Project has found
that 100% of the costs submitted have been subject to this developer fee. SBIAA, Norton
Development, and the third party fund control agency have made no distinction between costs
that are eligible for the 1.35% charge and those that are not eligible. Further, although this fee
was to cover the overhead and profit of the developer, our review of project payment vouchers
found that many expenses that could be considered overhead, such as electric utility, telephone,
and cable television bills were reimbursed as direct expenses by SBIAA.
The Terminal Lease defines the construction management fee as
a fixed fee paid to the Construction Manager in such amount as shall be negotiated by the Seller,
[Norton Development-1 and subject to written approval by the Executive Director of the
Purchaser, 1SBIAA.1 to pay for Construction Management.
Further, the Lease defines "Construction Manager" as "such person or firm that is selected by the
Seller, [Norton Development,] as the Construction Manager." It is apparent from Our review of
the Terminal Development Project expense vouchers that Norton Development chose itself and
SBD Aircraft Services, LLC, companies that are both managed by Mr. Spencer, as the
Construction Managers. Further, the amount paid to Norton Development for construction
management was never approved by the Interim Executive Director in writing even though the
lease states that the amount is "subject to written approval by the Executive Director."
llan,e.v.1 L Ro.ce.1smiciatcs, LLC
Seezion 2: l Jiis`i'iictioti�tfaiiage nietit
Interviews with the Interim Executive Director, Assistant Director, and Manager of Norton
Development revealed conflicting accounts of the agreement that ultimately allowed for Norton
Development and SBD Aircraft Services, LLC (SBD Aircraft) to receive over $735,000 in
compensation via construction management fees. The Interim Executive Director and Assistant
Director stated that a verbal agreement was made between the Interim Executive Director and the
Manager of Norton Development. The Interim Executive Director stated that he verbally told the
Manager of Norton Development.that the Manager could bill SBIAA for staff time spent on the
project as long as it was documented. The Interim Executive Director further stated that he told
the Manager of Norton Development that the amount billed under construction management had
to be limited to $13,000 per month and then immediately stated to our audit team that it was
`'maybe $15,000 to $20,000 [per month], all told."
Mr. Spencer's account of the agreement for receiving construction management fees conflicts
with the account provided by the Interim Executive Director and the Assistant Director. Mr.
Spencer stated to our audit team that Mr. Bob Christman, a former SBIAA Commissioner, told
him that Norton Development could receive reimbursement of staff time via construction
management fees. When asked if a cap was ever placed on the amount of compensation received
through construction management fees, Mr. Spencer stated that there was nothing binding on the
reimbursement level. Mr. Spencer also stated that SBIAA management agreed with this
arrangement, but that it was never put in writing.
Compensation Under FBO Lease Similar to Terminal Lease
The compensation provided to SBD Properties under the FBO Lease is very similar to the
compensation provided to Norton Development under the Terminal Lease. In particular, the FBO
Lease provided for a developer fee and a construction management fee using virtually the same
language as in the Terminal Lease. The Terminal Lease defined construction management fee
using the exact same language and defined construction manager as "such person or firm that is
selected by the Seller, [SBD Properties]." It is apparent from a review the FBO Project that SBD
Properties chose itself to be the construction manager and therefore receive construction
management fees. As of January 2011, SBD Properties had received approximately $185,000 in
construction management fees from FBO Project funds.
The developer fee in the FBO Lease, while defined with more restrictive language than in the
Terminal Lease, was implemented in virtually the same manner. Specifically, the FBO Lease
defined the developer fee as,
a fixed fee that covers the overhead and profit of the Seller. The Developer Fee[shall]be equal to
two percent (2%) of that portion of the Construction Costs which represent the Hard Costs of
construction for labor, materials and supplies of the general contractor and each subcontractor.
(emphasis added)
A review of a sample of FBO payment vouchers found that SBIAA management, SBD
Properties, and the third party fund control agent have made no distinction between hard costs
and soft costs even though the FBO Lease states that only hard costs are eligible for calculating
the two percent developer fee. SBIAA is therefore compensating SBD Properties for more than
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what it is owed under the FBO Lease. When our audit team questioned the Interim Executive
Director and Assistant Director as to what costs would be eligible for the two percent developer
fee, both officials stated that there was no distinction between hard costs and soft costs, despite
the very clear wording in the FBO Lease.
Terminal and FBO Compensation and Costs Not Clearly Reported to the Commission
SBIA-A management did not clearly report the compensation amounts to be provided to Norton
Development and SBD Properties under the Terminal and FBO leases to the Commission.
Specifically, in the Interim Executive Director's May 23, 2007 staff report to the Commission
there is only a brief and somewhat vague reference to the compensation to be paid to Norton
Development under the Terminal Lease. Specifically, the staff report states that,
All costs are subject to audit verification and only direct costs, financing costs, and a
Development fee of 1.35%are reimbursable. There is also an incentive pavntent of 1.7%for anv
cost sm,ings achieved. This percentage will be applied to the difference between actual costs and
the Architect's current estimated cost of$38 million.(emphasis added)
The Interim Executive Director did not detail compensation that Norton Development or SBD
Aircraft was to receive through "construction management fees." Further, the Interim Executive
Director never gave an estimate of the total amount of compensation that Norton Development
would receive as a result of the Terminal Lease.
In the May 23, 2007 staff report to the Commission, the Interim Executive Director makes
contradictory statements on the costs borne by Norton Development. Under the Background and
Comments Section, the report states that"Norton Development Company shall be responsible for
completing all improvements, currently estimated at $38 million, at its sole cost and expense." In
fact, Norton Development Company expended almost no costs or expenses of its own for the
Terminal Development Project. In the same paragraph, as in the previous statement, the Director
notes that, "It is anticipated that Norton Development Company shall procure a construction loan
for such work, which may be secured by a construction loan guarantee from the Inland Talley
Development Agency." (emphasis added) The construction loan was in fact secured by the Inland
Valley Development Agency. Moreover, Norton Development and its subcontractors were
reimbursed for all costs expended as the project proceeded.
SBIAA management provided an opaque presentation to the Commission on the compensation to
be provided to SBD Properties under the FBO Lease. In the Assistant Director's staff report to
the Commission on March 14, 2007, there is no mention of compensation to be provided to SBD
Properties. Rather, the staff report presents the FBO Lease as a revenue generator for the airport.
Moreover, the Assistant Director asserts in the staff report that "as a requirement of the lease
agreement SBD [Properties] will construct a new FBO building to include executive offices,
pilot lounges, and other amenities at its own expense and will provide financing thereof." In
practice, the funding for the FBO building was provided by a loan guaranteed by SBIAA and
IVDA. The Commission adopted Resolution 2007-03 approving the FBO lease agreement with
SBD Properties on March 14, 2007.
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Section 2: ('oilstnictlon Management
Fund Control Process Inadequate to Prevent Waste
The fund control process set up by SBIAA management for the Terminal and FBO projects has
been wholly inadequate for preventing waste of taxpayer monies. A review of a judgmental
sample of Terminal and FBO fund vouchers and checks has found: (1) the Chief Financial
Officer and SBIAA development staff have not been involved in the day to day approval of
major expenses; (2) the Chair of the Commission has been given day to day approval authority
for project expenditures; (3) project funding has been used for non-project purposes; and, (4) the
fund control agency's controls and standards have not been consistently applied.
Fund Control Process Circumvented Standard Practices
In July 2007, SBIAA management executed an agreement with Orange County-based California
Fund Control, Inc. (the company later changed its name to First American Fund Control) in order
to control the disbursement of SBIAA/IVDA funds to Norton Development for the Terminal
Development Project. A second similar agreement was also established with the same company
for the disbursement of FBO Project funds. The establishment of this fund control process was a
circumvention of standard practices. IVDA/SBIAA Development staff as well as the Chief
Financial Officer had been responsible for the management of construction and funding on
previous capital projects. Established procedures for managing internal and grant funds were not
followed for the Terminal Development and FBO projects.
Neither SBIAA nor IVDA had utilized an outside fund control agent previous to these
agreements. Further, the legal structure approved by SBIAA/IVDA legal counsel, had never been
used by SBIAA or IVDA. Specifically, SBIAA management and legal counsel established a
"lease-buy back" arrangement for the Terminal Project wherein SBIAA leases the building to the
developer, which is required to make certain improvements. The lease then sets certain
conditions for the purchase of the leasehold back from the developer. SBIAA management and
legal counsel established a "lease-lease back" arrangement for the FBO Project, wherein the
property is leased to the developer, which is required to obtain an executed agreement with a
National FBO company and make certain improvements. Once the FBO building is complete,
the developer is then to lease the FBO building from SBIAA for 25 years.
Chief Financial Officer Alienated from Detailed Oversight
Although public agency Chief Financial Officers (CFO) typically oversee or directly perform
capital project monitoring and reporting, the SBIAA/IVDA CFO has played a very negligible
role in the Terminal Development and FBO projects. Rather, senior SBIAA management (the
Interim Executive Director, Assistant Director, and Aviation Director) together with select
Commissioners, the developer, and the third party fund control agency, have been charged with
reviewing and authorizing the bulk of the financial transactions.
Generally, public agency CFOs are tasked with various responsibilities related to capital projects
to help manage the significant financial risk involved. The Government Finance Officers
Association (GFOA) recommends that CFOs' responsibilities relating to capital projects include,
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among others, ensuring that legal and fiduciary requirements are incorporated into capital
monitoring and reporting and that the project stays within scope. Table 2.9 on the next page
compares the GFOA best practices recommendations for finance officer involvement in capital
project monitoring and reporting versus the SBIAA CFO's role in the Terminal Development
Project.
Commission Chair's Level of Involvement in Fundine Process Unusual
The Chair of the Commission has been given an active role in the approval of Terminal
Development and FBO project expenses, normally reserved for staff-level positions who had
substantial capital project experience and knowledge of the details of the project. Under the fund
control process set up for the two projects, three signatures are required before the fund control
agency can issue checks to the payees. One of these signatures must be from a representative of
the developer, a second signature must be from IVDA/SBIAA (the Interim Executive Director,
Assistant Director, or Chief Financial Officer), and a third signature must come from a Chair of
the SBIAA Commission/IVDA Board or from the Vice-Chair of the Commission. A review of a
sample of Terminal and FBO project payment vouchers has found that the Chair of the SBIAA
Commission has approved the vast majority of expenses submitted. Further, there is no evidence
that the Chief Financial Officer approved any of the expense vouchers for either project.
Project Funding Used for Non-Project Purposes
Another standard practice not followed for the Terminal Development Project by SBIAA
management was to control finances so that project funding was not used for non-project
purposes. Specifically, we found a Terminal Project payment voucher to fund rent credits for
SBD Aircraft, which is a company that is not party to the Terminal Lease. The payment was
made to SBIAA in the amount of$137,527 and listed under the category "Airfield Pavement."
The documentation attached to the voucher includes a letter from the Manager of SBD Aircraft"
to the Interim Executive Director. The letter states that under the Lease for Hangar 763, SBD
Aircraft was restricted from accessing the Airfield Area and adjacent public streets due to
pavement rehabilitation work.
No Controls Specific to Use of Contingency Funds
No specific procedures have been set up between SBIAA and the fund control agency to control
the use of contingency funds. Although the Assistant Director asserted to our audit team in an
interview that a "budget adjustment form" is required prior to the disbursement of continency
funds, we found no evidence of such requirement. Fund control agency staff asserted to our audit
team that contingency funds are disbursed directly to the vendor. Additionally, there are no
specifications in the fund control agreement with SBIAA requiring or even suggesting such a
form. Further, in a review of a sample of Terminal Development and FBO project vouchers, %ve
found no evidence of specific control procedures for the disbursement of contingency funds.
Scot Spencer
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• JeCllon 2: 1.O17SP-11C6011It al7agemenl
Table 2.9
GFOA Capital Project Best Practices vs. SBIAA Terminal Project
GFOA Finance Officials Best Practices for SBIAA Implementation of Terminal
Capital Project Monitoring and Reporting Development Project
■ All reviews handled by Rogers, Anderson,
Malody, & Scott LLP (RAMS) in consultation
with Interim Executive Director. No audits
Identify and incorporate legal and fiduciary conducted and CFO not involved in financial
requirements into capital monitoring and reporting. auditing or reporting of Terminal Project.
■ No evidence that financial reporting was
consistent with generally accepted accounting
principles(GAAP).
■ Performance measures included in terminal
lease,but not reported to Commission.
Identify internal and external stakeholder information ■ Project updates not provided to Conunission or
needs.Establish project performance measures. Senior Management by CFO.
■ Project management handled by Norton
Development.
Project financial data given to fund control
agency, but its only obligation is to provide a
Plan and design systems to collect, store, and analyze report summarizing disbursements and
available funds.
project data and to report results.
® No evidence that CFO or SBIAA management
organized or analyzed project data from fund
control agency during the project.
Project scope and costs repeatedly supported by
SBb A management with little justification
provided to Commission.
Regularly monitor capital projects' financial and project ■ No evidence of a project plan.
activity information. ■ CFO had limited involvement in reviewing
project transactions. Primary expense approval
by Interim Executive Director, Assistant
Director,Commission Chair,and Developer.
■ Terminal lease required developer to provide
status reports, but SBIAA management never
Report on project status and activities. enforced these provisions.
■ No status reports provided to citizens or media
by SBIAA management.
• Project close-out activities handled by SBIAA
Ensure that actions are taken to finalize project activity management in consultation with RAMS.
at project close-out.
No CFO involvement in project close-out.
Source: GFOA Best Practice: Capital Project Monitoring and Reporting; Interviews with SBIAA management and
staff_Review of Terminal Project Expense Vouchers and Reports
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In our review of a sample of Terminal Development Project vouchers, we found disbursements
of contingency funds for the following items:
■ For the hire of a consulting firm to market SBIA to major commercial air passen<,ers;
■ For payments to Smarte Carte, Inc. for the lease of equipment;
■ For payments to PHC, Inc. for work related to the refurbishment of gate Furnishings,
■ For the polishing of the airport monument (metal globe);
• For janitorial services; and,
■ For fees associated with permits received from the City of San Bernardino.
In our review of a sample of FBO Project vouchers, we found disbursements of contingency
funds for the following items:
• State of California flag and patio furniture;
• Over $205,000 based on a vague description of project management including, "FBO
completion, service implementation and administrative costs, ground equipment
acquisition and activation, grand opening oversight and administration, scheduled service
planning."
Project Contingency Funds Used by Norton Development to Market Airport to Air Carriers
SBIAA management, including the Interim Executive Director and Assistant Director, has made
multiple assertions to our audit team and others that Mr. Spencer has brought a unique and
valuable set of aviation experience, knowledge, and contacts. Further, SBIAA management has
asserted that much of the impetus to move forward with the Terminal Development Project came
from Mr. Spencer's assertions that he could attract a major commercial passenger air carrier.
Despite SBIAA management's assertions of Mr. Spencer's contacts and expertise in the aviation
industry, a review of fund control vouchers has uncovered evidence to show that Mr. Spencer
relied on an outside consulting firm to market the airport to major air carriers. Specifically, we
found that Norton Development expended approximately $37,000, possibly more, in Terminal
Development Project contingency funds to utilize the services of a San Diego-based marketing
firm. This fir►n was contracted to conduct market analysis, define a strategy for the airport,
prepare air carrier presentations, and, if necessary, assist with delivery of presentations to air
carriers. Invoices reviewed by our audit team indicate that an air carrier presentation was
prepared for Hawaiian Air and that Air Tran was contacted to gauge interest. Further, this
marketing firm was promised an incentive bonus if it attracted an air carrier to SBIA. These
expenses occurred in December 2009 and July ?010.
Fund Control Standards Not Consistently Followed
Our review of Terminal Development and FBO Project expense vouchers have found several
instances of payments made without the requisite signatures and payments made based on weak
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Section 2: CotistT7ictiol7 AlfQiia,-c 77eiiI
documentation. In an interview with the fund control manager we learned that the fund control
agency is unable to inspect soft costs as diligently as hard costs, which generally require an
inspection of the building premises before fund dispersal. Fund control staff generally review the
soft cost payment requests for (1) sufficient funds; (2) an invoice listing the amount requested
and fund category as well as some documentation, such as a contract,to support the invoice; and,
(3)the required three signatures.
Three Signatures Not Always Present Before Approval
Although the agreement between the fund control agency and IVDA required at least three
signatures on each request for advance, we found several vouchers that did not have the requisite
approvals. According to the agreement between IVDA and the fund control agency, "each
request for Advance shall also be accompanied by an IVDA approval of the Request for
Advance executed by either one of three authorized elected officials and any one of three
authorized staff members of the IVDA." The three authorized elected officials on the original
agreement were Patrick Moms, Dennis Hansberger, and Robert Christman. The three authorized
IVDA staff members on the original agreement were the Interim Executive Director, the
Assistant Director, and the Chief Financial Officer.
The specific irregularities we found in our sample relating to signatures include:
■ One voucher in our sample which lacks a signature from a designated IVDA staff person.
While the voucher is signed by the Commission Chair and the developer (Scot Spencer),
the line where a designated IVDA staff person is supposed to sign simply states "see
attached." The voucher was for a payment of$103,338.50 to PHC Industries, Inc. for the
refurbishment of gate seating.
■ Three vouchers in our sample which lack a signature from a designated staff member of
Norton Development. Two of these vouchers simply do not include a signature from
Norton Development while the third voucher states "see attached." The documentation
attached to the third voucher consists of a list of expenses and a calculation of the
developer fee (1.35%). The documentation is signed by the accountant for Norton
Development, who is not listed as a designated signer for payment requests.
• Two vouchers from our sample which lacked any signatures. One of these vouchers was
for a payment request of $6,145.20 in construction management fees. The second
voucher was for a payment request of$21,752.41 in developer fees.
Weak Documentation Provided for Some Expenses
The agreement between IVDA and the fund control agency specifies that "each request for
advance shall be accompanied by a Contractor certification to California Fund Control [(now
First American Fund Control)] that all information included within a Request for advance shall
be true, accurate and not subject to qualification." Although not required by the agreement, fund
control agency staff often requested backup documentation, such as a contract, to support'the
release of funds.
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Section 2: Construction tlllanagement
In the sample of payment vouchers we reviewed, we found several vouchers that were
accompanied by weak or erroneous documentation. These instances include:
■ A payment request submitted in May 2009 for $17,600 to be paid to "Better Books and
Payroll." The payment request is accompanied by invoices from Better Books and
Payroll, but does not include a contract between Better Books and Payroll and SBD
Aircraft Services (a company that is not party to the Terminal Lease) and does not
include a Tax ID number. Further, it is unclear why SBD Aircraft Services hired the
services of an outside accountant when there was a full time accountant on staff with
Norton Development.
• A payment request submitted in December 2009 in the amount of $400. The attached
documentation consists of an image of a Norton Development check made out to "Petty
Cash" for $400.
• Several payment requests submitted for payment of developer fees that do not include
either a list of expenses or the calculation of the 1.35% fee. Several payment requests
include a list of expenses with the developer fee calculated, but do not contain a signature
of the staff member who made the calculations.
• Two payment requests submitted for payment to Norton Aircraft Maintenance Services
(NAMS), another company with ties to Mr. Spencer. The first of these vouchers was
submitted in June 2010 for an amount of$18,665.47. This voucher includes an invoice
from NAMS for various materials and supplies, as well as a list of employees with
number of hours worked, but does not include timesheets or a detailed description of the
work completed. The second request submitted for payment to NAMS was in August
2010 for an amount of $21,078.32. This voucher includes invoices from NAMS which
state the amount of hours worked and list various materials and supplies. This second
voucher does not include a list of employees with hours worked, any timesheets, or a
detailed description of the work completed.
• Several payment requests for construction management which include timesheets for staff
time that don't match the dates listed on invoices. These instances include:
• Voucher 69567, which includes an invoice for construction management hours by
Norton Development staff for the time period between December 29, 2008 and
February 20, 2009. The timesheets attached are for the period between February 2
and February 20, 2009.
• Voucher 69566, which includes an invoice for construction management hours by
the Norton Development accountant for the time period between December 28,
2008 and February 20, 2009. The timesheets attached are for the period between
February 1 and February 21, 2009.
• Vouchers 69776 and 69777, which have similar inconsistencies as Vouchers
69567 and 69566. These vouchers include invoices that list time periods (and
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Section 2: ('onstruction 1fanagemewu
therefore amount requested) that conflicts with timesheets submitted for
construction management fees by Norton Development staff.
• At least one instance of a double billing for construction management fees. Specifically,
on July 17, 2008, a request was submitted for payment to SBD Aircraft Services for
$15,440 for construction management fees based on hours worked. Subsequently, on
August 14, 2008 Norton Development submitted a request for payment of $34,540 for
construction management fees. One month of time, or about $1,200, was double charged
for the Executive Assistant of Norton Development. Further, duplicative timesheets were
submitted for the Manager of Norton Development for a month (from June 16, 2008 to
July 13, 2008). Both the SBD Aircraft Services request and the Norton Development
request list the Manager as an employee of Norton Development.
• Several payment requests for construction management fees include timesheets with
identical allotment of hours to each day of the week. The duplicative timesheets suggest
that the developer might not have accurately reported actual hours worked.
Conclusions
SBIAA management proceeded with the Terminal Development and Fixed Based Operation
(FBO) projects in a manner contrary to industry standards for large public infrastructure projects.
Specifically, SBIAA management did not(1) conduct competitive bidding for general contractor
services, (2) adhere to a clearly stated compensation structure for Norton Development
Company, LLC (Norton Development) and SBD Properties, LLC (SBD Properties); (3) base the
Terminal Building design substantially on transparent and methodical analysis of anticipated
passenger traffic; (4) report a clearly defined budget to the SBIAA Commission throughout the
project; and, (5) utilize clear and effective policies and procedures.
SBIAA management expedited and substantially increased the scope of the Terminal
Development Project. These changes were based on assertions from the contractor with whom
management intended to hire as the project developer through a sole source contract. This
created a clear conflict of interest, since the developer has been paid on a percentage-of-project-
cost basis and any increases in project cost leads directly to increased compensation for the
developer_ Such changes were largely based on assertions by the contractor of (1) major
commercial passenger air carrier interest in SBIA, (2) prospective air carrier infrastructure
requirements; and, (3) more aggressive passenger traffic projections. The validity of these
updated projections, interest, and demands are unclear and unsubstantiated. Further, the updated
projections and resulting schematic design led to significantly higher costs, including $9 mi Ilion
for a two-story concourse, over$4 million for major aviation equipment, and $2.7 million to fast
track the project. Notably, the scope and cost of the Terminal Development Project grew
incrementally from approximately $22 million, based on an initial design in January 2006, to
over 5100 million budgeted as of January 2011 with work and costs continuing to escalate.
Similar to the Terminal Project, SBIAA management allowed the same development contractor
(through a separate company) to define the design and scale of the FBO project, leading to
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Section 2: ('onstruction!L4anagemernl
substantially higher costs. Likewise, the scope and cost of the FBO Project grew incrementally
from $5 million in March 2007 to over $33 million as of January 2011, with approximately S30
million actually expended as of that date.
SBIAA management has managed the Terminal Development and FBO Projects with
insufficient controls. These control weaknesses have included: (1) the absence of sufficient
policies and procedures; (2) the lack of an independent audit for either project; (3) poorly written
leases that provide for little contractor oversight; and, (4) an opaquely written and implemented
compensation structure for the two development companies.
The fund control process has (1) alienated the Chief Financial Officer from day to day financial
oversight of major construction projects, and (2) resulted in poor budgetary controls.
Recommendations
The SBIAA Commission should:
2.1. Immediately require SBIAA management to strengthen controls and reporting to the
Commission including:
a. Implementing procedures for the use of contingency funds for existing and future
capital projects.
b. Requiring Chief Financial Officer review and approval of all expenses prior to
disbursement of capital project funds.
c. Enforcing all provisions in the Terminal and FBO leases requiring the developer to
provide detailed monthly progress reports. The Commission should also require the
developer to provide and present such reports at Commission meetings.
d. Engage the services of a reputable, independent auditing firm to examine all expenses
incurred as a result of the Terminal Development and FBO Projects. The scope of
such an audit should include a review of construction meeting minutes to determine if
the developer purposely inflated costs.
Costs and Benefits
There would be no cost to implement these recommendations.
Capital construction projects will be appropriately scoped, costs will be contained and
transparently reported, and projects will be more economically implemented. Without immediate
implementation of the recommendations, Norton Development and SBD Properties will likely
continue to spend taxpayer funds without being subject to proper controls,
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• SBIAA management did not conduct proper due diligence prior to purchasing
major aviation equipment for the new terminal building. SBIAA management
did not fully assess its terminal building equipment needs, determine whether
the used equipment that it purchased was appropriate given specifications
driven by the terminal building design, or consider long term costs when
deciding whether to purchase used instead of new equipment.
• In addition, the SBIAA Interim Executive Director made multiple
representations to the SBIAA Commission regarding the terms of the aviation
equipment purchase agreement with Norton Development Company. However,
the acquisition approach, as well as the number and pricing of the equipment
items changed substantially after the Commission's approval of the purchase.
• SBIAA management never signed or executed a contract with Norton
Development Company for the purchase, refurbishment, delivery, or installation
of the used aviation equipment. Rather, the terms of the agreement were later
stated in a letter from the Manager of Norton Development to the Interim
Executive Director in February 2008. The terms of this letter are substantially
different from those described to the Commission by the Interim Executive
Director in July 2007. A subsequent letter to the Interim Executive Director in
August 2008 stated that the terms, as discussed with the Director, had been
altered. These further changes resulted in higher costs to SBIAA.
• SBIAA has insufficient internal controls, including policies, procedures, and
audits for acquiring aviation equipment. There is no internal process for
verifying price, quantity, or condition of aviation equipment. Further, the fund
control process does not ensure that SBIAA receives a fair and accurate price
for the used equipment. Additionally, the review conducted of the Terminal
Development Project was not an audit and did not review the acquisition of the
used aviation equipment.
Rather than proactively and comprehensively assessing its equipment needs and conducting a
formal procurement proc::ss as part of the Terminal Development Project, SBIAA management
entertained an offer from the Manager of Norton Development Company, LLC (Norton
Development) to acquire, transport, and refurbish used aviation equipment from American
.Airlines and Fixed based operations equipment from Blue's Aviation.' SBIAA management
responded to the offer from the Manager of Norton Development by quickly preparing a staff
report and resolution supporting the purchase. There is little evidence to suggest that proper due
diligence was conducted prior to the authorization by the Commission. In addition, it appears
that pressure was placed on the Commission to make a decision quickly. The staff report was
Blues AN iation was contacted bv SBIAA to manage fixed based operations at the .Airport until the company %N'as
sold in 2007 to SBD Aircraft Sen•ices. LLC. the Airport's mastcr tenant at the time.
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presented at a special meeting of the Commission on the afternoon of July 3, 2007 (one day
before a national holiday), after which Resolution 2007-05 was approved, authorizing the
purchase. Further, under Backgrounul and Comn7eilLY, the staff report on Resolution 2007-05
states,
The reason for this special opportunity ret,ues to the timely closing of a major tcm-iin.d in Ncw fork
coincidental to our needs in San Benutrdino.The seller of that equipment is anxious to have the equipment
removed from the New York facility so that their demolition and remodel of thult facility can be-in. Thcy
are under some pressure to sell quickl .
SBIAA Management Did Not Conduct Proper Due Diligence
SBIAA management did not conduct proper due diligence prior to purchasing several pieces of
major aviation equipment for the new terminal building. SBIAA management did not Fully assess
its terminal building equipment needs, determine whether the used equipment that it purchased
was appropriate given the specifications of terminal building design, or consider future costs
when deciding whether to purchase used equipment instead of new equipment.
Vague Representations Made to SBIAA Commission on Due Diligence
Althott,Yh the Interim Executive Director made certain representations to the SBIAA
Commission as to the level of due diligence conducted when considering the purchase of the
used aviation equipment, these representations were vague and lacked sufficient supporting
documentation. The staff report the interim Executive Director presented to the Commission at
the special meeting held July 3, 2007 included three vague references that suggested that due
diligence had been conducted prior to recommending the purchase of the equipment. The first
reference stated that, "Staff has made significant inquiries to assure that the prices being paid are
very low compared to any available alternatives for procuring such equipment." However,
SBIAA management did not provide the Commission or our audit team with documentation
demonstrating the full findings or depth of such inquiries beyond a spreadsheet. This
spreadsheet, which was attached to the invoice from Norton Development and placed on file
with the Clerk of the Board, merely lists the estimated new cost and used value for some, but not
all, of the equipment to be purchased. Without supporting documentation from a manufacturer or
distributor, it is not possible to verify the basis for the estimates or the comparison of costs for
new equipment.
The second reference to due diligence in the staff report states that, "The manufacturers have
been contacted to verify the condition as operable prior to delivery to San Bernardino."
However, the report does not specify who contacted the manufacturers (either SBIAA staff or
Norton Development staff) and, more importantly, does not provide information on the condition
of the jet bridges beyond that they are "operable." Further, representatives from SBiAA, Norton
Development, and GKK Works (the Architectural and Engineering Contractor For the Terminal
Development Project) did not conduct visual inspections of the equipment until three weeks after
the Commission authorized the acquisition agreement.
The third reference to due diligence states that '`Representatives of BAA, consultants to Norton
Development Company, have inspected the equipment in New York and they have determined
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,'iat th- juipment is me fly suitable for our needs in S,n Bernardino." This ::.pre_2ntation h:
not been verified, and no documentation had peen provided to the Commission, or subsequentl%
to our audit team, to substantiate this assertion. When questioned about the relationship between.
Norton Development and BAA, the Manager of Norton Development commented that BAA is an
airport management firm, based in the United Kingdom, that '-did a preliminary look" at the used
equipment located at New York's John F. Kennedy International Airport. This determination
should not be considered proper due diligence by SBIAA, since the consultants would have been
representing the interests of the seller, Norton Development, and not the buyer, SBIAA. Further,
no written documentation of the results of the inspection has been made available.
SBIAA Management Did Not Fully Assess its Terminal Equipment Needs
Prior to Acquisition
SBIAA management did not conduct a comprehensive assessment of its Terminal Building
equipment needs prior to requesting that the SBIAA Commission authorize over S4 million to be
used for the purchase of used aviation equipment from Norton Development.` The absence of
this formal assessment may have led to the purchase of excess and inappropriate equipment and
unnecessary additional costs to SBIAA.
As discussed in more detail in Section 2 of this report, at the most basic level, it is questionable
whether SBIAA needed to even purchase jet bridges at this stage of airport development. In fact,
the initial Terminal Space-Needs Study found that such equipment would not be necessary for
the first 15 years of terminal operations. This initial study was subsequently updated with more
aggressive passenger traffic projections supplied by the Manager of Norton Development, which
resulted in the assumption that jet bridges would be needed for the terminal. While it may be
appropriate to consider the purchase or installation of jet bridges at some future time, the airport
could have operated with mobile stairways during an interim period, until passenger traffic levels
justified such expenditures. Mobile stairways are used at multiple airports in the West, including
Burbank and Long Beach. Had mobile stairways been used instead of jet bridges, SBIAA could
have saved several million dollars that was instead paid to the contractor.
There is little evidence to suggest that SBIAA management verified that the jet bridges
purchased from Norton Development would meet two basic specifications at San Bernardino
International Airport. Two of the specifications generally considered when purchasing passenger
boarding bridges (jet bridges) are (1) the height of the terminal floor where the jet bridge will
connect to the building and (2) the types of aircraft to be serviced by the jet bridges (to ascertain
the height of the aircraft passenger door floor from the ground). These two specifications are
used to determine the length of the jet bridge ramp required to reach from the terminal floor to
aircraft door floor and maintain a federally mandated slope of 8.33% or less.' Further, the used
jet bnd`ues that were purchased were originally designed for use by American Airlines at New
York's John F. Kennedy International Airport (JFK) in the 1970s, 1980s, and early 1990s, before
the widespread use of regional jet aircraft. The April 2007 SBI) Termilrctl Schematic Ue.si-gii
Norton Development Company. LLC is a limited liabilitri compam that «as created in Mai ?tx17 b} the N1 tnagcr
of SBD Aircraft Sew ices.LLC in order to develop dic Scut Bernardino International Airport Terminal Buitding.
The Federal Government requires a slope of 4.331.' or less under the Americans�%ith Disabilities .Act.
Hnnei .l 1. Ru.re.l.csnci�ur.�, (_f_c'
3 3
Seclion 3: Isgllilmle 1.4cejuisilion
Rel-)oi•t, .which was used for the Terminal Development Project, projects an equal mix of red=ional
jets and main jet aircraft at the gates planned for the first two operational phases of the terminal
building. This report should have influenced design and equipment purchasing decisions by
SBIAA. but the evidence we have collected suggests it was disregarded.
The jet bridges that were refurbished and installed at the Terminal Building by Norton
Development appear to be inadequate for use with some regional jet aircraft without the aid of
other expensive equipment. Specifically, the door floor ("sill") heights of some regional jet
aircraft are as low as five feet and four inches (5'4") from the around. In order for a jet bridge
ramp to reach from the SBIA Terminal Building; floor (15 feet) to the sill of these regional jets
(5' 4") and maintain a slope of 8.33% or less, the jet bridge would have to be at least 109 feet
and 5 inches long.' The three jet brid-es that have been refurbished and installed at the SBIA
terminal gates have a maximum extended length of 80 feet. 84 feet, and 85 feet, thereby making
them inadequate, without additional equipment, to reach some regional jets, as illustrated in
Table 3.1 below. Walkways would be required to reach the regional aircraft with sill heights of
less than 7 feet and 4 inches for the 85 foot extended length jet bridge, or 7 feet and q inches for
the 80 foot extended length jet brid-e.
Table 3.1
Installed Jet Bridge .-ability to Service Various aircraft
Required Ramp Reached Unaided
Aircraft aircraft Type Sill Height Length with Installed
Bridges?
Canadair Regional Jet 5 ft & 4 in 109 ft& 43 in No
Regional Jet 200
Canadair Regional Jet 5 ft& 8 in 105 ft & 3.3 in No
Regional Jet 700
Canadair Regional Jet 5 ft & 8 in 105 ft& 33 in No
Regional Jet 705
Canadair Regional Jet 5 ft& 8 in 105 ft& .3 in No
Regional Jet 900
Embraer Regional Jet 4 ft& 10 in 115 ft& 4.3 in No
ERJ 145
Embraer Regional Jet 8 ft& 4 in 7J ft & 4.2 in Yes
ERJ 170
Embraer Regional Jet 8 ft & 4 in 73 ft R 4.2 in Yes
ERJ 195
Source: Canadair and Embraer
'Tile ramp length requirement Was calculated b} subtracting the sill height and 0.56 feet(to account fora step inside
the jet bridge) from the height of the Tenninal floor. The remainder N%as divided b\ 0.081., to account for the
Fedemlh na.uadntcd slope of 831`0 or less.
I c
3-4
? ':l �: j111S1llon
tours of the terminal faciiiti s and terminal equip,ien_ on JUUai 4, 201 1 and March ?, ,Ol 1
respectively, our audit team was told by the Manager of;Notion Development' that the walkways
were acquired to meet certain fire code standards established to minimize fire risk to the
occupants of the terminal building in the event of a fuel fire. Specifically, our audit team was
told that the walkways extended the distance between the planes and the terminal building during
the fueling process, thereby negating the need to acquire additional costly fire suppression
materials. This reasoning was also asserted by the Interim Executive Director and the Assistant
Director of SBIAA. Our research indicates that these distances could have been accommodated
by even the shortest purchased jet bridge, without additional costly equipment or fire suppression
systems. National Fire Protection Association (NFPA) Section 407, Subsection 5.10.2 states that,
`'Aircraft being fueled shall be positioned so that aircraft fuel system vents or fuel tank openings
are not closer than 7.6 m (25 ft.) to any terminal building, hangar, service building, or enclosed
passenger concourse other than a loading walkway." The two shortest purchased jet bridges have
a minimal length of 21 feet and 41 feet respectively and can extent to 29 feet and 56 feet. The
other purchased jet bridges have maximum extensions between 85 and 99 feet. Since we are not
experts regarding tire safety standards at airports, we requested the applicable Fire code citation
used to justify the walkways in writing from the Manager of Norton Development, as well as
from SBIA1-. management. However, our audit team never received a response to either request.
From the review of documentation provided by SBIAA and a sample of project vouchers we
estimate that the walkways cost SBIAA at least an additional $217,267, or $72,422.21 per
installed jet bridge, as the walkways were not part of the initial acquisition authorization. The
walkways were never mentioned by the Interim Executive Director in the July 3, 2007 staff
report to the Commission and they were not included in the list of Anurtloti hquipment to be
Acquired on file with the Clerk of the Board, which was referenced in the staff report. The
additional costs that we were able to confirm were for the transport and refurbishment of such
walkways. Further, none of the remaining jet bridges yet to be installed are able to be lowered
sufficiently to reach these regional jet aircraft without the aid of a walkway. The cost of
outfitting the remaining jet bridges, at the same cost, would total an additional $619,378.
SBIAA Management Did Not Conduct Life-Cycle Cost Analysis Prior to
Purchasing Used Aviation Equipment
SBIAA management did not conduct a life-cycle cost analysis before proceeding with the
purchase of major aviation equipment, some of which is more than 35 years old. The use of life-
cycle cost analysis could have provided a clear and complete assessment, by considering short
and long-term costs, of the alternatives available to SBIAA for purchasing aviation equipment.
Life cycle cost analysis is an evaluation technique that considers all of the costs incurred during
the period over which the alternatives are being compared. Since large transportation
investments, such as the Terminal Building equipment, will provide service to the public for
many years, the investment decisions should consider not only the initial cost, but also the future
costs. Future costs in this case would include maintenance and replacement of weathered and
outdated equipment. Life cycle cost analysis is relatively simple and could have been completed
Scot Spencer
,Vnnei Al. Rose.lssocintes, 1,1A
3-5
sec iion 3: Feluilmieiii.l c-qui'ilioti
by SBIAA In a short period of time. Further, there are resources made available online for free
from the U.S. Department of Transportation to assist in conducting life cycle cost analysis.
Unfortunately, SBIAA management did not consider the future costs of maintenance and
replacement of equipment before proceeding with the purchase of used aviation equipment from
Norton Development.
Acquired Equipment Likely to Have a Short Lifespan
The used aviation equipment acquired through Norton Development, in particular the jet bridges.
are likely to have a shortened useful Lifespan for SBIAA as compared to their modern
counterparts, which could have been purchased new. The used jet bridges purchased range in age
from 1-0 vears to 36 vears. According to representatives from one jet bridge manufacturer, jet
bridges generally have a Lifespan of 1-0 years, but this could be extended if proper maintenance is
conducted throu;hout the life of the equipment. As previously mentioned, there is little evidence
to suggest that SBIAA management conducted a thorough inspection of the condition of the used
equipment. Specifically, staff from SBIAA and GKK Works (the Architectural and Engineering
contractor) did not conduct a visual inspection of the equipment until after the Commission
approved the authorization and the equipment was acquired by Norton Development. Prior to
being acquired by SBIAA through Norton Development, tills equipment was installed at New
York's JFK Airport, located less than two miles from the Atlantic Ocean in an area with a
relatively high level of inclement weather conditions. Additionally, the ground power units are
very old. At least two of the ground power units were manufactured more than 30 vears ago.
On a visual inspection of the un-refurbished jet bridges and ground power units by our audit
team, we found that the majority of such equipment is in very poor condition and is being stored
outside without sufficient protection from the elements. Attachment 3.1 to this report contains
photos of the un-refurbished equipment as seen on this visual inspection.
Substantial Changes in Acquisition Approach and Terms Vlade
Without Subsequent approval by Commission
Following Commission approval on July 3, 2007, substantial changes occurred in the terms and
acquisition approach of the used aviation equipment from Norton Development. Further, these
changes were not subsequently approved by the Commission. Specifically, the Sale and Purchase
A-reement was never executed by SBIAA management and the number and pricing of such
equipment changed from what was presented to the Commission
No Sale and Purchase .-agreement Signed or Executed
No Sale and Purchase Agreement was executed between SBIAA and Norton Development
despite representations made to the Commission by the Interim Executive Director as well as
several references in SBIAA Commission Resolution 007-0i suguesting that such an agreement
would be executed. The failure to execute the Sale and Purchase Agreement with Norton
Development has left SBIAA with little, if any, contractual protections and Norton Development
%pith little to no legal obligation and no official list of equipment, condition, or purchase price for
which it can be held accountable.
3-6
7!S11!O"
the absence :)f an exeCUted Sale and Purchase Agr°ement, SBIAA mana«ernent -nd Norton
Development have treated the authorization from the Commission for the acquisition not to
exceed $4,060,000 (a ten percent contingency brings the total not to exceed amount to
$4,466,000) as the de facto purchase price for all of the equipment. There is little evidence to
suggest that SBIAA management or Norton Development made serious efforts to contain the
costs within that authorization. To date, the total amount spent on equipment acquisition has
exceeded $4.3 million. This amount does not include the costs to purchase, transport, or install a
sixth refurbished jet bridge (I la'jet bridge overall to be delivered to SBIA) nor does it include
the cost of purchasing escalators and public address systems, which were to be acquired within
the authorized amount. Further, this amount does not include soft costs such as developer fees,
construction management fees, or travel costs.
The Interim Executive Director made at least two representations to the SBIAA Commission that
a Sale and Purchase Agreement would be executed between SBIAA and Norton Development
for the purchase of used aviation equipment. These representations were made in a staff report to
the SBIAA Commission at a special meeting held on July 3, 2007. Specifically, the first
reference to the agreement in the staff report, under the heading Financial Impact, states "The
initial deposit often percent (10%) or $406,000, will be paid upon signing the Sale and Purchase
,Agreement..." The second reference to the agreement in the staff report, under the subtitle
Background and Comments, states "A Sale and Purchase Agreement is on file with the Secretary
of the Commission which Agreement will be executed between SBIAA and Norton
Development Company."
Resolution 2007-05, approved by the SBIAA Commission at a special meeting on July 3, 2007,
clearly states in several instances that the Commission's intention is to enter into a written,
executed Sale and Purchase Agreement with Norton Development for the acquisition of used
aviation equipment. The Resolution has over 15 references to the agreement including in its title,
which states, in part, "authorize execution of a sale and purchase agreement for the acquisition of
said equipment." Shortly thereafter, the preamble of the resolution states that "the Commission
intends to enter into a Sale and Purchase Agreement with the Developer." Further, Section 4 of
the resolution states "The Commission hereby authorizes either the President or the Vice-
President together with the Executive Director or his designee to approve each expenditure for
the Aviation Equipment pursuant to the Sale and Purchase Agreement on behalf of SBIAA in
accordance with the Sale and Purchase Agreement."
Terms of Equipment Purchase Defined in Letters to Executive Director
February 22, 3008 Letter
In lieu of an executed Sale and Purchase Agreement, SBIAA management and Norton
Development have relied on two letters written by the Manager of Norton Development to the
Interim Executive Director of SBIAA as the basis of the agreement. The first letter, dated
February 22, 3008 and included as Attachment 4.2 to this report, states that it:
confirms the understanding of San Bernardino International Airport Authority and Norton Dc%,elopment
Company. LLC regarding the purchase of certain equipment from American Airlines. Inc. by Norton at the
1/nnei .IL Rose.Issociares. 11C
3-7
Sc'c/in►►.i: 1;gni/�i►►�'»l:Icrjni.�ilinir --
request of SBIAA in connection Nrith the rfurbislunent of the Tcmtinal at the Airport. and the use of the
proceeds under the Loan A,reement...to pa} for that equipment.
The letter lists the"equipment in question" as
cloven fI1) Mx%ay Loading Bddgcs (six (h) of ahicli %%ill be refurbished before deliven to the Airport).
ten (1O) Ground PoNter Units'. ten(lo) Potable water Cabinets. five 0) B.io.-mge Carousels. the Terminal
Public Address S%stem and Gate Furniturc as furilier sct forth in Exhibit A.
Noticeably absent from this list, but listed in the July 3. '_007 staff report (see Table 4.2 and
Table 4.3 for a full comparison) are the 12i11 jet bridge, I Irt'and 1201 ground power units, I I'll and
12i11 potable water cabinets, four escalators, and 10 individual gate public address systems. Each
of these absent items were listed as major items of equipment to be acquired in the Interim
Executive Director's staff report to the SB1A-;k Commission at its special meeting held on Jule
2007.
Norton Development's responsibilities, as stated in the February 2008 letter, were to "supply
and construct the Improvements(as defined in the Terminal Lease) in compliance with the Plans
and Specifications (as defined in the Terminal Lease)." The letter also states that Norton
Development will refurbish six Jetway loading bridges in Texas. The letter further states that
"Norton is responsible to arrange for any required disassembly of the aviation equipment. the
packaging, loading, insuring and shippingg of same from the current location or locations of the
aviation equipment and shall cause the same to be transported via truck or other suitable
shipping method to the Airport and delivered to a location on the Airport as may be designated
by SBIAA."
The purchase prices for the jet bridges, as stated in the February 2008 letter, were $1 19,910 for
each jet bridge. The letter states that this amount "includes all removal, packing and shipping
costs cincl►vhei1 cippl►ccrhle re trbishment cast" (emphasis added). The letter further states that
this amount"does not include the cost of unloading, placement into storage or installation in San
Bernardino.' Despite this language, our audit team was able to confirm that at least $90,862 was
charged to SBIAA for transport of walkways and jet bridges. Of this amount, $55,562 was
charged for transport of walkways and at least $35,300 was charged for transport of jet bridges.
The purchase prices, as listed in the February 3008 letter, for each ba,.gage carousel system was
5235,000. The letter states that this price "includes all removal, packing, shipping, and
refurbishment costs, however, it does not include installation costs."
August 4, 2008 Letter
The second letter, dated Auaust 4, 2008 and included as :attachment 4.3 to this report, states that
it reflects a "revised understanding of SBIAA and Notion Development Company. LLC and
supersedes" the previous understanding regarding the purchase of the used aviation equipment.
'Ground power units are equipment used for supplying electric power io an aircraft on the ground to sustain interior
Ii.-hting,.v entilation. and other requirements before starting of the main engines or the aircrtll auxilian- po%�cr unit.
a-8
actin;; ': Egrr ,)trier:. !cgr,;;irion
The Au ,:_;t 3008 letter from the Manager of Norton Development to the SBIAA Interim
L�:ecunv,: Director contains o significant changes from tho February 2003 letter. i he First
change is inclusion of the statement that "SBIAA acknowledges that it is in the best interest of
SBIAA and the project for Norton [Development] to accomplish the Additional Scope Items
described in Exhibit B." Exhibit B, which is introduced in the August 2008 letter, includes a list
of items accompanied by prices totaling $14,779. These include:
■ New Cab Curtains $6,500
■ New Cab Curtain Flashing $800
■ New Tires and Tubes S 1,200
• Repair Transition Ramp and Replace Handrails $1,779
• Elastomeric Roof Coating 5500
■ New Rotunda Curtain $4,000
The purchase prices for the jet bridges, as stated in the August 2008 letter were '1119,910 for
each Jetway which has not been refurbished" and "$134,689 for each refurbished Jetway." The
total additional cost under the revised price is $88,674, or $14,779 per jet bridge. The letter
states that these payments (S 119,910 for un-refurbished jet bridges and $134,689 for refurbished
jet bridges) includes `all removal, packing and shipping costs and when applicable
refurbishment cost, however, it does not include the cost of unloading, placement into stora<,e or
installation in San Bernardino."
In addition to the $88,674 spent on "additional scope items" as noted in the August 4, 2008
letter, SBIAA spent approximately $53,000 on items noted as "extra work" on six fund control
vouchers. The majority of the"extra work" was for jet bridge and walkway refurbishment.
Amount of Aviation Equipment Purchased Was Not Consistent with Plans and SpeciFcations, as
Defined in the Terminal Lease
The amount of aviation equipment purchased from Norton Development was significantly more
than what was called for in the Terminal Lease. Althou`ah the February 2008 and August 3008
letters both state that Norton Development has acquired the aviation equipment in accordance
with the Terminal Lease, the lease calls for significantly less aviation equipment than what was
acquired. Specifically, all references to improvements or aviation equipment state that three
terminal gates are to have jet bridges with one hardstand7 ground passenger boarding area.
While the April 2007 SBD Terminal Schematic Design, updated with more aggressive
passenger projections provided by the Manager of Norton Development, called for three gates in
the first year, six gates in the second year, and nine gates in the third year of operation. the
Terminal Lease only called for three gates with jet bridges for Phase 1 of the project.
Hardstand boarding areas consist of a sUinVay from the Termimil Building to the ground. Passengers typically
%%ilk do"n the stairs to hoard turboprop aircraft or to board a plane using mobile staircases.
Harve r.1[ Rose.Issocinres. UC
i-9
1'tclion 3: T,(jrulmlew.-1 cquisilioll
The Terminal Lease has at least two references stating that 1hreejet bridges are to be installed at
the Terminal Building. Under Definitions in article 1 of the Lease (Definitions).
"Improvements" includes:
(i) three (1) terminal gates%%ithiewa%s to be located in an clevatcd concourse and one (1) hardstand -,round
k�el passenger boarding nrca.
(ii) corresponding departure lounges. restrooms, access stain%,aNs, escalators. ele\,ators. operational support
racilitics. baggage claim and comvy or belt systems. security screening areas. concessions areas. office
support areas and hardstand gates as may be required b\ SBIAA,and
(iii) the first phase of the concourse constnrction. remodeling and renovation project .:oniprisinu the
lmpro\cnrents.
The Terminal Lease again calls for three terminal gates with jet bridges by repeating this
language under ,article 4 (Leuc ve tintl l!se uj'Denrise4l Premises) and Exhibit A (_,,,reemenl fr)r
Acynivilion nf'/mprot,etf Terinincr! h'tri/clin . Further, Amendment No. 3 to the Terminal Lease
again calls for"three (3) terminal gates with jetways."
.mount of Equipment Items Reduced, but Price Never .adjusted to Reflect
Such Changes
As previously mentioned, the amount of equipment items presented to the Commission by the
Interim Executive Director at the Commission's special meeting on July 3, 2007 does not reflect
the amount of items actually acquired from Norton Development. Further, the price of acquiring
such equipment was never adjusted by Norton Development to reflect these differences.
Specifically, according to the Interim Executive Director's July 3, 2007 staff report to the
Commission, the initial payment of $406,000 was to be an initial deposit of ten percent.
However, there has been no corresponding reduction of this deposit to reflect the reduced
amount of equipment. Further, expenditures to date have exceeded the original not to exceed
amount of $4,060,000 authorized by the Commission despite the reduction in the number of
equipment provided. Further, the cost of purchasing the sixth refurbished jet bridge ( l 1`t' jet
bridge overall), which is still being refurbished in Texas, will bring the total amount spent on
used equipment from Norton Development in excess of$4.5 million and therefore above the sum
of the not to exceed amount plus the ten percent contingency ($4,466,000). It is unclear whether
SBIAA management intends to formally address this issue with the Commission.
Table 3.2 below lists the items to be acquired from Norton Development Company as listed in
the July 3, 2007 staff report presented to the SBIAA Commission by the Interim Executive
Director.
ffarvel A1.
3-10
..T'a I 3.
List of Major Items of Equipment to be Acquired
According to Staff Report to Commission
Equipment Tv a Number of Units Purpose
Sky Brides 12 Terminal Building
Ground Power Units 12 Terminal Building
Baggage Handling
Equipment and 3 Terminal Building
Carousel
Escalators 4 Terminal Buildin
Passenger Furniture 12 rates
(Chairs) (-216 chairs per gate) Terminal Building
Terminal Master
Public Address 1 Terminal Building
Svstem
Individual Gate Public 10 Terminal Building
Address Systems
Main Deck Cargo I Fixed Based
Loader Operations
Electric Generators 2 Fixed Based
Operations
Lift Trucks 4 Fixed Based
Operations
Fuel Tank Farm- Fixed Based
12,000 gallons 1 Operations
Jet A Fuel Tank T Fixed Based
Farm- 12,000 gallons Operations
Jet A Fuel Truck 1 Fixed Based
Operations
Fuel Trucks 4 Fixed Based
Operations
Portable Water Carts 12 Terminal Building:
Source: Interim Executive Director Staff Report to SBIAA Conunission dated Jul}' .;. 2007
Table 3.3 on the next page lists the equipment provided or to be provided according to the two
letters sent to the Interim Executive Director from the Manager of Norton Development.
Notably, the staff report lists 12 Sky Bridges, but only 10 have been provided (Norton is still
arranging for off-site refurbishment of an 11`h bridge). Additionally, the staff report lists 12
Ground Power Units and 12 portable water cabinets, but Norton Development states that it will
only provide 10 of each. Further, four escalators and 10 individual ;ate public address systems
are listed, but neither are mentioned as equipment to be provided in the letters from Norton
Development.
llcm c _I(. Kuxr,l . uciutes. LL('
3-I 1
,ti,ec liolr -3.- /(Pliimic'rrl.-1 c clrri.tiilio)l
Table 3.3
Aviation Equipment to be Acquired
According to Letters from Norton Development
Equipment Tv a Number of units Notes
Jet bridge Loading 6 to be refurbished
Bridues I I before delivery to the
Airport
Ground Power Units 10 -
Potable Water 10
Cabinets
BaggagT Carousels 5 4 to be refurbished
Tenninal Public I
.Address Svstem
Gate Furniture I Not s ecified I -
Source: Februan 22, 2008 and August 4. 2008 letters from Norton Development to
SBIAA Interim Executive Director
Gate Seatini, Provided is Slanificantly Less than Amount Presented to Commission at a
Si,niticantly Hieher Cost
There is sufficient evidence to suggest that Norton Development has supplied less than half the
number of passenger seating than was represented to the SBIAA Commission by the Interim
Executive Director. In the July 3, 2007 stair report to the SBIAA Commission, the Interim
Executive Director noted that the equipment to be acquired [through Norton Development]
included 'Passenger furniture (chairs) sufficient for 12 gates (approximately 2,600 chairs)."
Further, a review of the list of Aviation Is*laipment to he Acquirecl on file with the Clerk of the
Board shows that 2,520 seats (or 210 seats per gate for 12 gates) were to be acquired. However, a
review of funding documents show only 820 seats, or about 32 percent of what was represented
in the Staff Report, have been provided. Additionally, an extra 132 upholstered shells (%vithout
bases) have been provided for replacement inventory.
SBIAA has paid well over twice the amount originally estimated in the list of .-lt-iation
F;quil lent to he Acquirecl referred to in the July 3, 2007 staff report to the Commission and on
file %with the Clerk of the Board. While the list of.-I t-iutin1r LgWj)1?tew to he Ac•quirecl lists the
used estimated value of 3.520 chairs at $100,000, SBIAA has paid out over 5273,000 in funds
related to the acquisition of such chairs as detailed in Table 3.4 on the next pap. Given these
costs, SBIAA has spent over $308 per chair.' Purchasing the same number of chairs new,
estimated by SBIAA at $130 per seat, would come to a total cost of approximately ,I i 5,000.
Therefore, according to SBIAA calculations, it would have cost less than half to purchase the
chairs new compared to what was paid through the arrangement with Norton Development
This amount x�as calculated b� dh-iding the total seatin<,cost ($27+.141) bN the number of assembled scars (820)
and half the number of replacement shells (66 is iO4„of the total number of replacement shells).
t. :?o.ce.1.%v)i:..f"s. 1.t.f .
3-12
'
1 n�t)1e 1
Gate Seating Costs
Cost Type Amount
Disassemble Chairs $9,241
Transport of Chairs from JFK to Camden, NJ 20,000
Refurbishment & Materials 199,275
Stcra,e Fees 44,625
Total $273,141
Source: Junurnnn,of f.'secl Equipment.l cquisiiion.v fronr\-ortol7 Developmew('ompan.v
fia
Original& horized,fulv,3, _'007(provided b}- SBIAA) and Terminal Development
Project Fund Control Vouchers
Soft Costs Not Included in Cost Estimate of Equipment Acquisition
In addition to the hard costs reimbursed by SBIAA for the acquisition, transport and
refurbishment of used aviation equipment, several thousand dollars of soft costs were submitted
by Norton Development Company for coverage under Terminal Development Project funding.
These costs include approximately $55,000 in developer fees to Norton Development, which is
calculated as 135°o of the total cost. In addition, approximately $6,650 was spent on travel to
New York to view the equipment at JFK Airport. Of this $6,650, approximately $2,500 went to
cover travel expenses for Norton Development Company staff, including the Manager, and an
additional $2,500 went to cover travel expenses for GKK Works (the Architectural and
Engineering contractor) staff.
SBIAA Lacks Adequate Policies and Procedures, Internal Controls
for the Acquisition of Aviation Equipment
SBIAA lacks adequate controls, including policies and procedures, for purchase of major
equipment for the Terminal Development Project. Policies and procedures, which are inadequate,
have been ignored for the purchase of major aviation equipment. Further, the internal control
structure set up by SBIAA management for the purchase of major aviation equipment is not
sufficient to protect the interests of the Authority and has not ensured that the Authority receives
quality products at competitive prices.
Policies and Procedures are Inadequate for High Dollar Value Procurement
The purchasing policy for the Inland Valley Development Agency (I`"DA) and SBIAA, entitled
Purc.-hashia- Policle.S crtul Change Orcler Procechtres is inadequate for general procurement and
specifically for procurement of major aviation equipment. The Purchasing Policy is outdated,
lacks evidence of Board or Commission approval, appears unfinished, and lacks sufficient detail
for certain types of purchases. Despite these inadequacies, the purchasing policy includes certain
procedures which could have been followed for the procurement of major aviation equipment,
but were ignored by SBIAA management. These procedures would have provided some basic
Harrei-.1/. Rose.Issociates. I.LC
i-lj
,Yec Lion 3: Lgrlipalenl.l c c/nisiliun
controls to reduce the risk of purchasing products above market rates, below acceptable qualit-
conditions, or beyond the budgetary constraints of SBIAA.
Existinux Procedures Not Followed for Purchase of Maior Aviation Equipment
At least five sections of the purchasing policy could have been utilized for the purchase of major
aviation equipment including (1) Construction Contracts, (2) Formal Contracts; (3) Purchase
.authorization Levels, ( l) Open Ylarket Purchases-, and (5) Negotiated Purchases. According to
the ('0n.0-11LllO/l ('01111UCIS cull Chcr/lge Or lens section of the SBIAA/iVDA purchasing, policy:
All construction contracts in excess of$5.000 inust meet the requirements of the Formal Contracts Section
unless other procedures are pennitted and/or required by the Federal or State A,cnc% prop idin- the project
funding for the construction.
Whether or not SBIAA management considered the acquisition of major aviation equipment as
pan of a construction contract, it appears that the F01-nlul Conlruc.•1s section of the purchasing
policy would apply. The Normal Contracts section states, "Formal Contracts will be used when
purchasing supplies, materials and/or equipment of a value in excess of 525,000." "the section
describes procedures for a competitive bidding process and states that, "The Executive Director
will sign such contracts on behalf of the iVDA or SBiAA." Further, the P1u•cha.se .-1 uthorizatirnl
Levels section requires stricter controls, stating that:
All contracts and purchase orders of$25.000 and greater will be signed by the Co-Chair or President of the
Agent involved and approved by the Executive Director and Chief Financial Of icer.
Additionally, the Open tirket- Competitive Bit-Is Required section of the purchasing policy
would have also required the use of a formal contract. The section states:
Open Market Competitive bids will be obtained when purchasing supplies_ materials. equipment and/or
contractual services under the following midelines:
$5,000-$10,000: phone bids(at least 3 bids)
$10.010425.000:written bids(at least 3 bids)
Above$25.000: fornkil contract-Board matt' require Format RFQ/RFP
The contract will be awarded to the lowest qualified responsible bidder, or the Board or Commission mac
reject ari and call bids.
SBiAA management ignored the procedural controls put in place by the Construction Contracts,
Formal Contracts, Purchase Authorization Levels, and Open Market Purchase sections of the
purchasing= policy. The failure to adhere to these procedures likely contributed to the acquisition
of major aviation equipment at higher cost and at a lower quality than could have otherwise been
procured. instead, according to comments made in interviews over the course of our audit
Fieldwork, SBIAA management followed the legal advice provided by the authority's legal
counsel to procure major aviation equipment through the Terminal Development Project funding
process. This process, as discussed in Section 3 of this report entitled t'nn.cn/1c1io1r:1/crna�,em�1u,
as well as later in this section, does not provide adequate controls.
A fifth section of the purchasing policy, Negolicrtecl Mirchases, while lacking sufficiently written
procedures, could have been utilized to better inform the Commission as well as SBIAA
-1-I
ianagoti�ent and staff prior :o ;roving torvYard with, Norton Development iOr th,; acglltSltlOil of
:uJ r, 'lail0:: e;illlpmeil . l i.:s section s tbvC lauseS
■ Negotiated purchases must be authorized b� the Executive Director. This method i%ill be used onlN
i%lien Most advantagcous to tic Agcncv.
■ a� ritten report%%-ill be submitted to the Executive Director describing the circumstances and terns of
the contrtct.
To our knowledge, no written report was submitted to the Interim Executive Director describing
the circumstances and terms of the contract. Further, the Interim Executive Director did not refer
to any such report in the July 3, 3007 staff report to the Commission and no contract was ever
executed detailing the circumstances and terms for acquiring major aviation equipment.
Policies and Procedures are Weak Outdated and Look Unofficial
The SBIAA/IVDA Purchasing Policy is inadequate for general procurement purposes and
especially for high dollar value procurement such as for major aviation equipment. The
purchasing policy is weak, outdated, and appears unofficial. The procedures contained in the
Negotiated Purchases section of the purchasing policy are insufficient to provide a reasonable
control over the use of SBIAA and IVDA funds. Specifically, the policy states that the Executive
Director may authorize negotiated purchases, but only when "most advantageous to the Agency."
However, the policy does not define "most advantageous" and does not institute standards for
showing that negotiated purchases are most advantageous to the Agency. While the section states
that a written report should be submitted to the Executive Director describing the circl.tmstances
and terms of the contract, the policy does not stipulate what should be included in the written
report and does not require the Executive Director to share that report with the Chief Financial
Officer, Commission, or Board prior to authorization. Further, no dollar limit is set on negotiated
purchases, which leaves SBIAA and IVDA with significant financial risk exposure.
Another procedural weakness of the purchasing policy is the lack of a clause addressing the
purchase of used equipment, materials, or supplies. As previously mentioned in this section, life
cycle cost analysis can be an effective method for assessing the complete costs and value of
various purchasing options. The lack of a requirement to conduct life cycle cost analysis raises
the financial risk exposure of SBIAA and IVDA when used equipment, supplies, and materials
are purchased.
In addition to procedural weaknesses, the purchasing policy is outdated and appears unofficial.
The SBIAA/IVDA Purchasing Policy was last updated nearly eight years ago on May 28, 3003.
It is clear that SBIAA and IVDA have not utilized procedures for periodically reviewing and
approving updates to this policy. It is very likely that developments over the last eight years in
technology, software utilized, and in the structure and needs of the agencies has rendered some
procedures outdated or insufficient for current use.
The purchasing policy has an unofficial appearance, which could contribute to an organizational
attitude that it can be ignored. Specifically, all nine pages of the policy include edited changes
that appear as "tracked changes" including old clauses that are crossed out and new language that
is underlined. In some sections, these edit changes make the procedures difficult to read and
Ihr�er I/. RaNe.Iss7ctales. Ll.('
3-I5
Section 3: h.'grtiInne t Acquisition
follow. Further, it is not apparent that the IVDA Board or the SBIAA Commission has approved
this policy, which contributes to its non-official appearance and the likelihood of being ignored.
SBIAA Management Failed to Establish Sufficient Controls for Purchase of
Aviation Equipment
SBIAA management has failed to construct a sufficient internal control structure for the
acquisition of major aviation equipment for the Terminal Development Project. Specifically,
SBIAA management has not set up basic controls such as the execution of a contract agreement
and an internal monitoring system for verifying price, quantity, delivery, and condition of
equipment. As previously mentioned, the Interim Executive Director did not execute a Sale and
Purchase Agreement with Norton Development despite representations to the Commission that
he would do so. The lack of an executed contract leaves SBI.AA management and staff with little
to no framework for verifying compliance with the agreement, including the quantity, cost, and
condition of such equipment. The lack of an executed agreement also leaves SBIAA with
substantially weakened legal standing if a dispute were to occur with Norton Development.
No Internal Monitoring Established for Acquisition of Aviation Equipment
SBIAA management never established a monitoring system for verifying the price, quantity,
delivery, and condition of the used aviation equipment acquired from Norton Development. The
lack of a basic internal monitoring system has left SBIAA exposed to the risk of being
overcharged for equipment, receiving more or less equipment than agreed to, and receiving
equipment in unacceptable condition.
During our fieldwork we were told that the Interim Executive Director and Assistant Director
maintain a worksheet for verifying the delivery and cost of aviation equipment acquired from
Norton Development. We were subsequently informed, however, that this worksheet was
prepared as part of a special compliance review and not as part of an ongoing system for
monitoring the acquisition of used aviation equipment. Further, a review of this document found
that multiple used equipment expenditures are missing from the worksheet. The inclusion of
these missing expenditures places the total amount expended above $4,060,000, which is the
'`not to exceed" amount established by the Commission in Resolution 2007-05. Further, as
previously mentioned, the anticipated purchase of an 11`t'jet bridge would raise the total amount
expended on used equipment above $4,466,000,' the absolute maximum set by the Commission.
We were also provided with a list of expenditures for Terminal fumishings (primarily gate
seating), which we were originally inf-'ormed was part of the equipment verification process. This
list of expenditures simply lists the check number, date, payee, and amount for each payment
made for Terminal furnishings with a check mark next to each row. There is no evidence that the
staff member who made the checks on the listing conducted any due diligence to ensure that
SBIAA received the furnishings according to the correct price, quantity,and condition.
The absolute maxinnim is the sum of the not to exceed amount (54.060.000) plus a tcn percent contingcncN
($406.000).
3-16
outside Control -und is Not an Effective Method for Reducing Risk
As previously described in Section 2 of this report, entitled Consu-uctiotr Maira,Cement, the
external control fund set up for the Terminal Development and Fixed Based Operations
construction projects is an inadequate control. The fund control process is set up with certain
procedures including: (1) the requirement of three signatures (one from Norton Development,
one from an IVDA Board Member, and one from SBIAA/IVDA staff), (2) documentation
supporting the purchase; and (3) verification of available funds and final approval by First
American Fund Control, Inc. Despite these procedures, the fund control process has several
weaknesses including (a) the Chief Financial Officer is not required to sign off on fund request
vouchers; (b) there is not always sufficient documentation to verify the appropriateness of the
expenditure, and (c) the vouchers require a signature of a member of the Commission, even
though the Commission members are not intimately familiar with the various budget allocations,
line item authorizations or agreements.
Our findings, discussed previously in this section, that SBIAA ended up paying more for gate
seating than originally anticipated illustrates the weaknesses of the fund control mechanism.
Specifically, the vouchers for the gate seating included signatures from the Manager of Norton
Development, the Assistant Director of SBIAA, and the President of the Commission as required
by the Authority's agreement with the fund control agency. Additionally, the vouchers included
attached contract information and/or invoices between Norton Development and PHC Industries
(the company contracted to ship and refurbish the gate seating). Although these procedures were
followed for the purchase of gate seating, SBIAA paid significantly more For the gate seating and
ID
received significantly less seating than anticipated.
The fund control ,mechanism has also not prevented SBIAA from exceeding the previously
authorized not to exceed amount of$4,060,000.
No Audits Have Been Conducted of Aviation Equipment Purchases
SBIAA management has not engaged an independent certified firm to conduct an audit of the
procurement of used aviation equipment. Given the weak and seemingly ignored purchasing
policy and weak or absent controls, an independent audit could have served as a valuable tool for
identifying issues and risk exposure as well as recommending steps to reduce risk and/or resolve
identified issues.
The one review that has been conducted") covering costs associated with the Terminal
Development Project was not an audit and its scope did not include the acquisition of used
aviation equipment. As noted in the firm's report, they were 'engaged to perform a .s-pecla/
COMI)liancc: reivei+, of the Terminal Building Construction Project" (emphasis added). The Firm
never refers to their report as an audit or their procedures as audit procedures. Further, the firm
states in their report that they `were not engaged to, and did not conduct an audit, the objective
Of which would be the expression of an opinion, on the information described above" (the
information referenced are the findings of the special compliance review). The report goes on to
A special compliance re-ien leas completed in February 2010 by Rogers. Anderson- Malody. and Scott. LLP.
llc�ri�r_I!. Ru.,E.L�•.a,cinres. i.i.(
3-17
,Section 3: lyrripmc�rrl.acgrri.rilir,rr
state that, 'Accordingly, we do not express such an opinion. Had we performed additional
procedures, other matters might have come to our attention that would have been reported to
you.
'The firm's report includes t-wo references indicating that the scope of their review did not cover
the purchase of specialized equipment installed in the Terminal building. The report states that
certain costs, including specialized equipment installed in the Terminal Building, were not
subject to their review. The report further states that the Finn was"advised by the management of
the IVDA/SBIAA that certain contracts did not lend themselves to competitive bidding,
including...certain equipment contracts where the specialized nature of the equipment made
competitive bids inappropriate, or where only a single source of a particular item existed." As the
Finn was en,aged to review construction contracts including for the purpose of ensuring, that
competitive bids were received on all construction contracts, the exclusion of the specialized
equipment contracts is an exception to their scope of review as directed by SBIAA management.
Conclusions
SBIAA management did not conduct proper due diligence prior to purchasing used major
aviation equipment from Norton Development for the terminal building. SBIAA management
did not assess its equipment needs, determine whether the used equipment was appropriate, or
send staff to visually inspect the equipment prior to authorization by the Commission. Further,
S81AA management did not consider or analyze the long term costs of purchasing used
equipment versus the alternative of purchasing new equipment prior to proceeding with the
acquisition.
The Interim Executive Director never executed a Sale and Purchase Agreement with Norton
Development despite multiple assertions to the Commission that he would do so and several
references in the authorizing resolution indicating that such an agreement would be executed. In
lieu of an executed contract, the terms of the agreement were later stated in a series of two letters
from the Manager of Norton Development to the Interim Executive Director. The terms of these
letters were substantially different from the representations made to the Commission by the
Interim Executive Director.
SBIAA has insufficient controls, including policies, procedures. and audits for use 1�,hen
acquiring aviation equipment. SBIAA management has not set up an internal process for
verifying price, quantity, or condition of the used aviation equipment that is acquired from
Norton Development. Further, the fund control process is inadequate for ensuring that SBLAA
receives a fair and accurate price for the used equipment. .Additionally_ , there have been no audits
conducted of the used aviation equipment.
-IS
_I ell
The SBIAA Commission should:
3 1 Make a formal policy decision to only authorize contracts after they have been signed, on
condition of Commission approval, so that it can properly review such contracts and to
ensure that all major agreements are accompanied by signed and executed contracts.
3.2 Formally approve a purchasing policy that includes revisions to address the deficiencies
identified in our review. In particular, eliminate the :Negotiated Purchases section of the
purchasing policy and require that all purchases above $25,000 (or a different threshold
deemed more appropriate by the Commission), regardless of purpose, require a formal
contract to be approved by the Commission.
3.3 Set a regular schedule for reviewing, revising, and formally approving updates to the
Purchasing policy.
34 Engage the services of a reputable, independent auditing firm to examine the
representations and warranties made by Norton Development management and SBIAA
management in connection to the purchase of used aviation equipment as well as the
amount actually spent on such equipment, and the estimated useful life and/or resale
potential of the equipment.
3.5 Formally direct the Interim Executive Director and Assistant Director to cease from
approving any further fund payments to Norton Development or any third parties with
agreements to provide services in connection to the used aviation equipment, which was
originally authorized on July 3, 2007.
Costs and Benefits
There would be no cost to implement these recommendations.
Taxpayers could save at least an additional $134,689 if the Commission were to refuse to fund
the 1 1`l'jet bridge currently being refurbished out of state. Taxpayers would also not have to pay
for the developer and construction management fees as well as offloading and installation costs
associated with this jet bridge.
Nn� ei if Ros .k-.`ociaio. LL(
3-19
me
• On July 23, 2008, the San Bernardino International ,Airport Authority (SBLAA)
entered into a lease agreement with Norton Aircraft Maintenance Services, Inc.
(HAMS) for Hangar Bay No. 695. However, this hangar had previously been
leased to another company pursuant to an agreement dated June 3, 2008, which
was extended through August 23 on a day-to-day basis. This resulted in
conflicting occupancy rights that led to a dispute between the tenants and a
claim for damages against SBIAA by NAibIS and SBD aircraft Services, LLC
(SBD). The latter company had contracted with NAMS for a Federal aviation
Administration (FAA) inspection and maintenance service on a Boeing 727
aircraft that it intended to lease to a third party. In response to the claim for
damages, SBIAA agreed to a monetary settlement with the two companies
amounting to approximately SI million.
• The Settlement and Mutual Release Agreement was executed by the three
parties less than seven weeks after the lease between SBIAA and NAMS had
been signed, and only 18 days after the claim for damages was submitted to the
Airport by HAMS and SBD. SBIAA management did not compel either NAMS
or SBD to submit documentation to objectively assess the appropriateness of the
claim for damages or challenge the original amount of the claim in any
meaningful way. Importantly, this settlement was amicably reached in a short
time period, even though the lease agreement with NAMS included language
intended to completely indemnify SBIAA from "consequential or punitive
damages" in the event of default.
• Further, SBIAA did not require an independent appraisal of the aircraft,
including the airframe and jet engines, which were pledged as collateral for the
loan prior to disbursing funds. By failing to conduct an appraisal, SBIAA can
not be assured that SBD will have financial resources that are sufficient to repay
a loan amount of$550,000 at the end of five years.
• The expedited nature of this agreement and the lack of due diligence by SBIAA
to verify or determine the extent of damages, or independently obtain an opinion
of value of the collateral pledged for the loan, make the appropriateness of the
settlement questionable. The settlement resulted in substantial cost to the
taxpayer, which may be greater if SBD defaults on the loan and the market
value of the aircraft used as collateral is not sufficient to repay the balance of the
debt owed to SBLAA.
On June 2, 2008, the San Bernardino International Airport Authority (SBIAA) entered into a
lease agreement with Aeros Aeronautical Systems Corporation (Aeros), a tenant at the airport
that was in the process of assembling a helium airship and preparing for the airship's flight
certification from the Federal .Aviation Administration (FAA). This was a short-term lease for
the period June 3, 2008 through June 12, 2008 for space in Hangar No. 69-5, being; char`;
,1;ec.•tion 4: Lani•suit Settlelnem
However, because Aeros was unable to complete the assembly and obtain the airship
certification from the FAA within the leasing period, the company entered into a second
agreement with SBIAA that formally extended the lease through June 30, 3005. This second
a,,reement included an option for a lease extension beyond June 30, "on a day-to-day basis at the
discretion of the Authority" and established an increased rental rate of$500 per day in the event
the lease was extended. Aeros continued to have difficulty completing, the airship assembly and
obtalmn`f the FAA certification within the period of this second lease, so the company remained
in Hangar No. 695 into July 3008, with SB1AA's tacit agreement.
On .July 23, 2008, SBIAA entered into a lease agreement with Norton .aircraft 'Maintenance
Services (NAMS) for space in Hangar No. 61'5 For a period of six months. At the time, NAMS
wanted to lease the space to perform a FAA mandated inspection of a Boeing 727-227 aircraft
owned by SBD. The lease required payment to the Authority of 56,500 per month and included
provisions for NAMS to terminate the lease in the event it declared SBIAA to be in default, by
giving 10-days written notice to the Authoritv. .As will be discussed below. the lease aureement
with NAMS included language intended to completely indemnify SBIAA from "consequential or
punitive damages" in the event of default.
During the period between approximately mid-June and the execution of the July 23 Lase
agreement with NAMS, it became clear to the lessees and SBIAA that there could be a problem
with dual occupancy of the hangar once the lease with NAMS was executed Accordint, to
individuals interviewed for this audit, as well as a review of email documentation, a series of
informal discussions occurred in an attempt to resolve the conflicting needs of both lessees.
Alternatives that included subleases, dual occupancy of the hangar during the certification
processes, and the movement of one or the other of the lessees to other space on the Airport
property were all explored. However, SBIAA determined that these alternatives were
unworkable and agreement between the parties could not be reached. During this period,
escalating conflict arose between the lessees that allegedly included aggressive actions by
NAMS personnel, such as premature movement of materials and equipment into the hangar,
parking; aircraft in front of hangar doors to prevent the return of the airship after completing a
test flight, and threats against Aeros managers and staff. Aeros management also suspected that
vandalism to the airship had occurred while it was being stored in the hangar.
On July 24, 2008 — a day after the NAPVIS lease was executed — SBIAA served Aeros with a 30-
day notice to vacate the premises, consistent with California State unlawful detainer law.
Although Aeros was occupying the space on a day-to-day basis as of this date, the notice
etfectively extended the Aeros lease and occupancy period through August 23, 2008, which was
one month into the lease period agreed to between SBIAA and NAMS-
Claim laim for Damages
NAMS asserted at the time that immediate occupancy of Hangar No. 695 was necessary in order
to complete a Code of Federal Regulations Title 14, Section 145 —C—Check— on the Boeim, 727-
California Cis it Code of Procedure Section I 1 e,I. �;t scq.
4-2
rirrtr ;: f-t.ru.i;w.) (i/ewi ,,w
2=7 aircrai ow led by SBD, which is an inspection of an aircraft to ensure airworthiness, prior to
August 23, 2008. According to managers and the attorney for SBD, this inspection was
necessary to fulfill a lease obligation "between SBD Aircraft Services and the Democratic
National Committee for the lease of the Boeing 727, which was to have been used solely for the
Democratic National Convention and the Obama for President Campaign."`
At the time. the actual lease between SBD and the Democratic National Committee (DNC),
allegedly through an intermediary aircraft leasing company named Unique Aviation Properties,
Inc., was not produced by SBD due to assertions by the company that the contract document
contained non-disclosure provisions. However, in a summary of the lease prepared by SBD's
attorney, it was stated that the contract required the Aircraft to be "delivered to Lessee at the
Denver International Airport no later than August 23, 2008, with all maintenance checks current,
including a fresh '`C" check. ,3 Because SBD was unable to occupy Hangar No. 69-5 at the San
Bernardino International Airport, and no other space was considered to be available, the attorney
asserted that this critical deliverable date would be missed and that SBD would suffer monetary
losses as a result of an inability to complete FAA mandated inspections on schedule.
On August 22, 2008, a claim was submitted to SBIAA by NAMS and SBD, which alleged
'`wrongful conduct by the San Bernardino Airport Authority (`SBIAA') which induced (by
negligent and/or intentional misrepresentation or concealment of material facts) NAMS to enter
into that certain Hangar Lease entered into on July 23, 2008 between SBIAA, as 'Lessor' and
NAMS, as 'Lessee' . . . Such negligence and/or intentional misrepresentation were also made to
and/or concealed from SBD. With SBIAA's knowledge, SBD also relied on SBIAA's
misrepresentation and/or concealment, which resulted in SBD losing the benefit of a separate
aircraft lease it entered into with the Democratic National Party ('DNP') for the use of a B-727
aircraft."4 Less than three weeks later, on September 9, 2008, SBIAA entered into a Settlement
and Mutual Release Agreement with NAMS and SBD to settle the dispute.'
The table below shows the days that elapsed between execution of the hangar lease, the submittal
of the claim for damages and the execution of the Settlement Agreement. As illustrated, the time
period that elapsed between these key events was very short. The settlement was negotiated and
agreed upon within 48 days after the date the hangar lease was First executed and only 18 days
after the date the claim for damages was submitted to SBIAA management. During this period,
the settlement a( reement was reportedly approved by the SBIAA Commission."
Auuust 26. 2008, email from Zane Gresham. SBD legal counsel. to Tim Sabo. SBIAA legal counsel. transrnittin-,
sununanv of aircraft lease agrccrnenl.
Undated Summar �of/,ease nf'.1 ircrnfl fr>r Obmnn ('anrpa�gn. Item 12. UansmiUCd via email from Zane Gresham.
SBD legal counsel to Tim Sabo, SBIAA legal counsel.transmitted to SBIAA legal counsel on August 26. 2008
' Auszust 22. 2008, (7a nrs:laninsi San Benmrdino lnternational_lirport.luthru•rtt-
'October 13,2008.Settlement and:l fit tual Release.1 reenrent
Assertion made b\ Donald Rogers. SBIAA hiterint Executive Director. Evidence of Board,action not pro\ided.
llan-ec It Rase.f`sncicrt1!s. l.L(
4-3
Section 4: Lau-suil Settlellicttl
Table 4.1
Days Elapsed Between the NANIS Hangar Lease, the Claim for Damages and
the Settlement Agreement Between SBIAA, NAMS and SBD
Han'ar Claim for Settlement Day s Elapsed
Lease Damages Agreement From Lease From Claun
Date of Action 7/23/2008 8/22/2008 9/9/2008 48 18
Source: Lease for Hangar No. 695 between SBIAA and NAMS. Claim for Damages submitted to SBIAA
be N.ANTS and SBD. and Settlement and:Mutual Release.I mvemenl
A more complete timeline illustrating the relationship between each of the key events described
previously is provided as Exhibit 4.1 on the next page.
Monetary Settlement
The claim for damages stated that, "NAMS seeks damages of not less than Seven Hundred Fifty
Thousand Dollars ($750,000.00) for SBIAA's misrepresentation and concealment and other
wrongful acts, as well as consequential and incidental damages, including out-of-pocket
expenses and attorney fees." Similarly stated, SBD was seeking "damages of not less than One
Million Dollars ($1,000,000.00) for SBIAA's misrepresentation and concealment and other
wrongful acts, as well as consequential and incidental damages, including out-of-pocket
expenses and attorney fees." Combined, these two companies were demanding a minimum of
$1.75 million in compensation as a result of NAMS inability to use the hangar when promised
and the subsequent cancellation of contracts with each other and between SBD and Unique
Aviation Properties, Inc.
The Mutual Release and Settlement Agreement was for a lower settlement amount. However,
according to the executed document, NAMS and SBD received combined monetary benefits that
amounted to approximately $1 million, as shown in the table, below.
Table 4.2
Components of the Settlement agreement
Between SBIAA, NANIS and SBD
Terms of Settlement and Mutual Release NAMS SDI) TO rAL
For_iv eness of Insurance Loan Balance* S 135,000 $ - $ I'•5.t)UU
Forgiveness of I langar 763 Rent - 31 .)Uo 15.()()1)
Collateralized Aircraft Rehabilitation Loan °* '* 5501 0110
TOTAL, S 125,00() 315.000 s 09O.Wo
' latimatc based on original loem value ui$1�5.i)(1(1,less a$3r),(rrii p;n muit.
**Loan made to both companies"ioind, and scverall."
Source: .\;eulemew and:1/usual Release I;reemetu
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As shown in Table 4.2, NANIS received direct monetary compensation of approximately
$125,000, which was provided by SBIAA by forgiving the balance due on an Insurance loan
provided to the company. The original loan amount had been for S 155,000, with a net amount
remaining, after NAZIS made a payment of 330,000 prior to the dispute. SBD received direct
monetary compensation of$31-5,000, which was provided by SBIAA by crediting, rent due from
SBD for Hangar No. 763 for the months of January, February and tMarch of 2009. The total
compensation received by these two companies from loan forgiveness and rent credits %vas
approximately S440,000.
Collateralized Aircraft Rehabilitation Loan
The final component of the settlement was agreement by SBIAA to loan the two companies
$550,000 for "Aircraft Rehabilitation." The loan was to be repaid at the end of a five year term,
accruin<, interest at the rate of P10 per annum. It was collateralized with a Boeing 727-227
airframe and three jet engines.
Under the terms of the Viutual Release and Settlement Agreement, the loan balance becomes due
and payable with the sale of the airframe or engines, or is to be accelerated in the event the
aircraft is leased, with SBIAA receiving 50 9.'0 of the lease revenue as payment on the loan.
However, the agreement also states that, "SBD, Inc. shall have no obligation to repay the . . .
Loan except from the proceeds received upon a sale or lease of the Airframe, the 727 Aircraft
and the three (3) jet engines and upon any foreclosure of the collateral by SBIAA."' In other
words, based on the Settlement Agreement, repayment of the loan appears to be entirely
dependent on the ability of SBD to lease or sell the aircraft for an amount sufficient to pay the
principal and interest due at the end of the Five year tertn.
Lack of Due Diligence
It is clear From the record that the decision to settle with the claimants in this matter Nvas
expedited by SBIAA. Apparently, in the Interim Executive Director's judgment, the alleged
errors that led to double occupancy of the hangar had resulted in the inability of the lessees to
complete the work required to fulfill contractual obligations they had with each other and with
the DNC, through Unique Aviation Properties, Inc. In a July 28, 2003 letter from the Interim
Executive Director to a representative of the two companies, he stated:
SBIAA acknowledges that, contrary to its represcnlations to NAMS and SBD. on which both of
them relied . . . SBIAA was unable to deliver the leased space in Building No. 695 until ;after
August 23, 2001s. SBIAA also reco-riics that dais prc%cnts SBD's performance of the lease that
was entered into bN- SBD in reliance on the SBIAA representation. . . . The actions of this other
tenant to intentionally N-iolatc the terms of the short-term (case a-rcemcnt hale precluded your use
of Building No. 695 for modifications and nlainten.uace to die B-727 aircraft in accordance «ith
the pre iousl* executed agreement i�ith (he DNP. It is equalh unfortunate that SBD was forced to
ternainate the agreement for the use of(he B-727 aircraft and NAMMS to furlough '4 maintenance
employees spceifically hired by NAMS for this assignment. . . . SBIAA N%-ill meet all or its lc_a
obli-ations.as theN tnaN-be determined.
October 11. 2008.Seulem m[aaul.11umal Release.1-1-eenwill
!!canea _1!. Rose.Issn(:-ac,.
4-0
With i;iese statements, the Interim E-:--cutive Director was essentially admitting responsibility for
misleading HAMS and SBD, which lie accepted had resulted in the need for MAMS to furlough
employees and the inability of SBD to fulfill its contractual obligations to the Democratic
National Party through Unique Aviation Properties, Inc. With these admissions, the Interim
Executive Director also committed to have SBIAA meet "all of its legal obligations, as they may
be determined-, suo-esting a willingness to negotiate and agree to a settlement.
Further, it is important to note that this letter admitting responsibility was dated only five days
after the date the lease was executed with NAMS and appears to address most of the key points
included in the claim for damages that would be submitted by the claimants' attorney
approximately 25 days later. This fast turnaround occurred during a period when the issue
regarding double occupancy and possible remedies appear to have been under consideration by
the parties, suggesting that a decision to settle the forthcoming claim h:_d been made prior to
exploring alternatives that may have reduced the Airport's liability.
Table 4.3 on the next page compares the Interim Executive Director's admissions, included in his
July 28 letter, with the claimants' points of argument included in their August 22 claim. Based
on these and other observations described below, it is our opinion that the SBIAA did not
conduct due diligence when determining its liability in this matter or the appropriateness of the
settlement amount being requested by or offered to the claimants.
Opportunities to Resolve Conflicting Leases Dismissed as Unworkable
During this audit, interviews were conducted with SBIAA management, contractors and other
individuals with direct knowledge of the circumstances surrounding this leasing dispute.
According to several persons interviewed, various opportunities may have permitted the
occupancy conflicts to be resolved during the overlapping period of the leases. These included
the following:
■ Hangar No. 695 space could possibly have been shared by Aeros and NA-MS. According
to various individuals, Hangar No. 695 had sufficient space to allow both companies to
work in protected areas simultaneously and progress with their FAA certification
processes on schedule. According to these individuals, discussions had taken place
between Aeros and representatives of NAMS and SBD for a subleasing arrangement to
allow Aeros work to continue, while allowing SBD to also occupy the space. However,
these discussions reportedly stalled and SBIAA did not actively intervene.
• Aeros was preparing to vacate Hangar No. 695 as early as June 17, but resumed FAA
certification activities when led to believe by representatives of NAN1S and SBD that
NMVIS would be willing to share space in the hangar. Had clear direction been provided
at that time, Aeros indicates it would have been willing to vacate the premises.
• Other hangar space at the airport possibly could have been made available to either Aeros
or SBD. Suggestions were made to equip other hangars on an emergency basis, and at
least one tenant at the Airport approached the parties with an offer to allow one of the
two companies to occupy other space that he was leasing at the time.
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NA%MS Lease Agreement Indemnified SBIAA
Even if the basis for the claim was considered legitimate, SBIAA had included language in the
lease agreement with NAZIS that indemnified the Authority from any dama<,es related to
defaulting on the lease. Specifically, the July 23, 2008 lease stated the following:
9.0.1 (B) if NANIS declares the Audioritv to be in default of tNs Lease and the Authority fails to
cure such default «ithin die time periods prodded in this Lease, NANIS shall have the right to
terminate this Lease nithin ten(10)calendar dais iiritten notice to die Audiorirv,
9.06 NANIS REMEDIES—If the Audiority material!}'breaches its obligation under this Lease, the
sole remedy of NAMS shall be the tcrinination of this Lease and NAMS shall not be entitled to
receive am compensation from die Audioriri'. NANIS mites am claim for consequential or
pruiitive damages as a result of any act of the Authority. the Interim Executive Director or their
officers. employees. attomevs or agents.
With the Settlement and Mutual Release Agreement, the Authority dismissed these terms,
making them null and void. Had the matter been fully litigated, it is likely that this language
would have minimized or eliminated the Authority's liability to NANIS. Further, SBD's claim
against SBIAA should rightfully have been directed toward NAIMS, since SBD had no
contractual relationship with SBIAA. NAMS would have been prohibited from seeking
consequential" damages from SBIAA for claims made against it by SBD.
Obfuscation of Contract Relationship Involving the DNC
Documentation produced for purposes of reaching a settlement, including the July 28 letter from
the SBIAA Interim Executive Director, the claimant's August 22 claim for damages, the August
26 summary of the '`agreement between SBD Aircraft Services and the Democratic National
Party" prepared by the claimants' attorney, and the September 9, 2008 Settlement and Mutual
Release Agreement, consistently reference a contractual relationship between SBD Aircraft
Services and the Democratic National Committee (DNC). However, these assertions materially
misrepresent the facts, since there is no evidence that a contractual relationship between SBD
and the DNC ever existed.
The fact that there was no contract between SBD and the DNC was first suggested in the August
26 email communication from SBD's attorney to legal counsel for SBIAA, which summarized
the aircraft leasing contract. In that communication, SBD's attorney stated that, "At the request
of SBD Aircraft Services. I have reviewed the lease between SBD Aircraft Services and the
Democratic National Committee for the lease of a Boeing 727, which was to have been used
solely for the Democratic National Convention and the Obama for President Campai,n".
However, in the summary of that lease, the attorney stated that the Lessee was the "Democratic
National Committee through Unique Aviation." (Emphasis added). This is the first
acknowledgement of a party other than the DNC that was actually leasing the aircraft.
However, even this assertion that the aircraft was to be leased by the DNC throw-,h Unique
Aviation Properties, Inc. appears to be a misrepresentation of the facts, since the statement made
by the attorney is inconsistent with the actual aircraft lease agreement submitted to the Grand
Jury at a later date. The aircraft lease agreement clearly identifies the Lessee as Unique Aviation
Properties, Inc., and makes the statement
Hori•ei -1[ Rr ce.lssoclatcs, i.LC
-1-9
.''!c/ion 4: l.cnrsuil Se tllemcltl
Section 5(e) Lessor(SPM) acknowicdges that Lessee (Uln(pie.h•iotion i'ronerries) man consider
Ieasin2 or donatim�.,the use of the Aircraft to the Democratic National Conuauttee or the Obanaa
for President Campaign.(Emphasis added).. . .
Section 15. Representations and Warranties of Lessee . . . tm) Lessee plans to donate the use of
the Aircraft to the Democratic national Committee and the Obanla for President Campaign and the
Aircraft i%ill be used for no other purpose without the prior �%ritten approval of the Lessor.
(Emphasis added).
While the contract references the DNC and the Obama campaign, by the use of the %\ord
"consider" in Section 5(e) there is a question whether a formal contractual relationship between
Unique Aviation Properties, inc. and the DNC ever existed. Further, Section 1 5(m) drops the
reference to "leasing" the aircraft to the DNC altogether. An actual agreement between Unique
Aviation Properties, Inc. and the DNC or Obama for President Campaign has never been
produced, and, the agreement between SBD and Unique .aviation Properties, Inc., that was
provided after the Grand Jury demanded a copy, is undated. Further, documentation obtained
toward the end of this performance audit shows that Unique Aviation Properties is an investor in
multiple Spencer affiliated companies, including SBD Properties, LLC (the FBO developer and
lessee, discussed in other sections of this report). On the SBD Properties, LLC investment listin�T,
it shows that Unique Aviation partners as an owner with SBD Aircraft Services, which was party
to this claim. The financial linkage of these companies and the other factors, described above,
make the legitimacy of the claim that there had been a contractual relationship �%-Ith the DNC
questionable, and raise doubts about whether SBD actually suffered any monetary loss as a result
of having to default on its agreement with Unique Aviation Properties, Inc.
Despite being mentioned repeatedly in the aforementioned documents, the President of SBD'
stated during an interview on March 16, 2011, that the use of the aircraft was "never intended"
for use by the Obama for President campaign. Yet these assertions were central to the claim for
damages being sought by NAMS and SBD, since it was claimed that contractual obligations to
deliver the aircraft to the DNC by August 23, 2008 could not be met due to delays in gaining
access to Hangar no. 695. In addition, the term of the agreement with Unique Aviation
Properties, Inc. corresponded roughly with the period of the presidential campaign.
Further, prior to the execution of the Settlement and Mutual Release Agreement. the contract
between SBD and Unique Aviation Properties, Inc. was never produced by the claimants because
the claimants stated that there was a confidentiality provision in the contract that prohibited
disclosure. Although Section I6(a) requires the parties to -unconditionally" agree that all of the
terms and conditions of the agreement be confidential, the parties could permit disclosure with
prior written consent." This possibility was never mentioned to SBIAA by the claimants.
Instead, SBIAA was required to assess the circumstances using an inaccurate representation of
the agreement prepared by a third party.
The .�'ettlement an(l.khat rl Release.1,yreenrent states that --the Aircraft Lease was in full force and iTect as of
June ?. 2008.through and including on or about Jul} 24. 30118.
Scot Spencer
/(:n•�'ct .I 1. Rn.ce.l.+snctu .. l.l,('
4-10
Impo:-antly, the lease agreement sates that the -Lessor may terminate the Lease no later than
thirty (30) days prior to the Commencement Date, without penalty, if unforeseen maintenance
issues on the Aircraft arise." In fact, documentation that the lease was terminated by SBD with
Unique Aviation Properties, Inc. on July 23, 2008 was submitted with a copy of the executed
contract between SBD and Unique Aviation Properties, Inc. in response to the Grand Jury's
demand. This was 31 days before the contract commencement date of August 23 and, notably,
was the same date the Hangar No. 695 lease agreement between NAMS and SBIAA was
executed. The timing of these events raises questions of possible intent to create a condition that
would permit a claim to move forward.
Actual Lessee Dama�_,es Never Quantified or Verified
The Settlement and Mutual Release Agreement claimed damages based on two primary
premises: (1) that NAAMS had incurred expenses for personnel and lost potential income by the
cancellation of the contract to perform inspection and maintenance services on the aircraft:. and,
(2) that SBD had lost income by being unable to meet the contractual obligations it had with the
DNC through Unique Aviation Properties. Neither of these assertions were objectively verified
or quantified by SBIAA before agreeing to the settlement.
Market Value of Boeing 727 Aircraft Not Determined
The aircraft rehabilitation loan of $550,000 was collateralized with a Boeing 727 (B-727)
airframe and three jet engines. Depending on the condition of this equipment, market value can
vary dramatically. The value of a fully refurbished 1973 B-727 aircraft configured for long-range
executive transport can reportedly exceed several million dollars. However, the value of other
equipment that may have a different configuration, has not been fully refurbished, has defective
or non-operational components, and has not cleared FAA airworthiness certification processes
can have a much lower value and may even be considered salvage. While Airport personnel used
their own professional judgment regarding the value of the collateralized equipment, registered
liens with the U.S. Department of Transportation to prohibit sale or transfer of the equipment to
another owner before settlement of the debt obligations, and required that the aircraft clear a
Section 145 "C-Check" before all funds would be disbursed, no appraisal of the equipment was
conducted in advance of accepting the equipment as collateral for the loan.
Repor(ecl Aircraft l alite Po.s.cihly Ir fateei
A review of title records maintained by the FAA indicates that the aircraft value rnay be in
question. Although the sales price for the original 2002 acquisition by KCP Leasing and Services
was not recorded with the FAA, through June of 2005, the owner companies never had debt on
the aircraft of more than $125,000. The FAA title history is summarized on the next page.
As sho%�n, the original purchase price of the aircraft was not shown on the bill of sale from
American Airlines. However, debt secured by the aircraft never exceeded $135,000 between
October 2002 and July 2005, when it was owned by KCP Leasing Services(a company managed
by Scot Spencer). In July 2005, the aircraft was sold by KCP Leasing Services to SBD Aircraft
Services, LLC — both reportedly owned by some of the same investors and both managed by
Scot Spencer — for $1,000,000. As will be discussed below, the recorded value with the San
Hari'rt H Rose 1s.snciates, [1
4-11
,S'ecvion 4: Lcnr.v it ,Yellltrtnew
Bernardino County Assessor is only 5463,323. This clearly was not an arms length transaction
arid, given the age, model and history of the aircraft, it is highly probable that the sales
transaction was inflated by the seller and the buyer.
Table 4.4
"title History on B-727-227 Used as Collateral
Date Tide l Imor% ('nm'epnr of Interest Recipient aInterest kmount Notes
,u=1 'tnC I?dl ol';iale American Atrhnes.Inc ,Signature F:,.11 I easing iervwcs by ;A i hua rc d I:aht Is:,u.tnc••,I' htl•;
lllectblel :Garda sI_;, +,
:+ rm:—Ir;::.Ae :'.,m':ur.;.ta;;cr..;:;:;.:•c:tc.i.Inc 1.'!'I:.ImnL...r.,: N '• t 5 ,. ,, ,...
_,„.� .. •mr,;,,n, —'W 'cruticd...tauon Scntce...Inc k,'I'Lea.img:icr:t.-;,, :c.. I i'r.:::i .,,.... �ll.,lc::ri i:�ia
,Signature not Karytrcd) :;pencer Rcicase.m•1 , (,nc
.I `nu5 Ancratl:;ectuity Apeemcnt F:!_'1'Ixasmg Service::h% Sent t'rmied lciation S:r:we!%Inc I ,inn !<.c.,nled:'.,'Ldcral I}rht
5i,cncer ,Summure not Requtr:J, F;:Ie:::.ca tkcc•r±e,l
;.: •+ai ,Y:;.ile :,'1'Ixas:n,.;er:resM S,:.a :;I:ii.\trcnftrer.-wcs.:.(. '`., ..•, r.ilr. :'::n:aenn
';peneer ..mot:;percer
311;8 '.,m..-Vance if.'Aht r.tl iil)Aircraft ayes.Inc by.icot 3111AA i No Signature, :a,1 Rccordcd• •ilatcnd I:tht
:;pcnccr
itdl -I 3;AIc 3 131)Atrcraft:;cretccs.I1.i'hv$cnl SIMAircratt 5cr:wcr<Inc :Sales lr,n::acwm
:i renccr `.Idt:,rd I(arm—n
Source: Documents tiled«'ith[lie FAA.
Contractors Property Taxes Are Delinquent and Evidence of Prior Lien Release Not Evident
I'am Hisloty(�f Nfechumc•.s Lien .4,gains1 kCI)Leusint, yen•ice.v
In addition, since the aircraft was originally purchased by KCP Leasing Services and
subsequently sold to SBD Aircraft Services, a number of liens have been tiled. These are briefly
described, below:
• May 22, 2003 — A $20,000 mechanics lien was filed against KCP Leasing & Services.
LLC by Aero Pro for non payment of charges for aircraft maintenance painting services.
No evidence that the lien was released was evident in the FAA record.
• March 9, 200=1 — A $112,299 mechanics lien was tiled a(,ainst KCP Leasing & Services,
LLC by Certified Aviation Services, Inc. for non payment of charges for aircraft
maintenance services. A release on this lien was filed with the FAA on April 6, 2005.
Although we did not find evidence of any current liens outstanding on the aircraft against SBD
Aircraft Services. there does not appear to have been any effort by SBIAA to fully research this
question before accepting the aircraft as collateral. To the extent that preexisting liens may exist,
the net value of the aircraft would be diminished.
t 'nntructnt.� 'PrnE�ert v I ay'e's.41-e Delinquent
As part of this review, we also researched property tax records for NAMS and SBD to determine
if payments were current or if there are any outstanding balances that have not been paid bv' the
two contractors. Records from the San Bernardino County Tax Collector indicate that both
companies are delinquent with their payments.
.I '('6.71L!x /.j
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ozably, ;i;D has not paid property taxes for tlhe aircraft that was intended for lease to Unique
Aviation Properties, Inc., and which was offered as collateral for the $550,000 loan. The
delinquent amounts, plus penalties and interest, include $9,002.15 that was delinquent 11/2/2009
and $7,758.48 that was delinquent 11/1/2010, for total delinquencies of$16,760.63. In addition,
the Property Tat Roll Value for the aircraft, as of January 1, 2010, was $463,325, which is less
than the amount of the loan for which it was offered as collateral.
Total delinquent property taxes owed by the two companies equaled $40,704.13 as of April 27,
2011, not including other aircraft owned by the company for which we did not have FAA
Registry Numbers. Although tax liens are not recorded until five years after the delinquency
date, the balances due plus penalties and interest, represent additional obligations of the
companies that diminish their net worth.
The components of the property tax delinquencies are shown in Table 4.5, below.
Table 4.5
Schedule of Delinquent Property Taxes Owed By
SBD and HAMS as of April 27, 2011
Company Type Tax Due Delinquent Amount Subtotal
SBD Aircraft Services Secured Property 12/10/10 $ 6,885.53
SBD Aircraft Services Secured Property 04/11/11 6,915.51
SBD Aircraft Services Unsecured Property 06/30/10 7,052.34
SBD Aircraft Services Unsecured Aircraft' 11/02/09 9,002.15
SBD Aircraft Services Unsecured Aircraft' 11/01/10 7,758.48
Subtotal $37,614.01
Norton Aircraft Maintenance Unsecured Property 11/01/10 $ 3,090.12
Subtotal $ 3,090.12
Total Delinquent Taxes $40,704.13
*Delinquent taxes for the B-727 used as collateral for the $550.000 loan, only. Status of tax pa}ments on other
aircraft oN ned be SBD not researched because information on die FAA Registry Numbers Ni-cre not known at the
time of this report.
Source: San Bernardino County Tax Collector records.
Possible Remedies
Because the Settlement and Mutual release Agreement is a binding document, there is little that
SBIAA can do to remedy the consequences of the premature decision to settle the claim, unless
the .authority can find material factual errors in the assertions made by the claimants. The
,S'calemeut arncll iaual Release Asn-eemenf states, "in the event any representation and warranties
are later proven to be false or untrue to the detriment of SBIAA, this settlement agreement shall
be null and void only as to SBIAA's financial obligations, and NA,y1S shall immediately repay
the Insurance Loan, and SBD shall immediately repay the three (3) months rent credit for Han`rar
flanvev.1/.Rose.lscociates. LL('
4-1a
.1eclioii 4: Lmrsuit Jelllenieiu
No. 761 and the remaining unpaid principal balance of the Temporary Secured Loan, plus
accrued and unpaid interest thereon." Should any of the assertions and warranties made by
NAMS or SBD be found to be false or untrue, SBIAA should demand repayment as specified in
the.Yenletnelu and&haual Relecrse Aggreement.
Conclusions
The Settlement and Mutual Release Agreement was executed less than seven weeks after the
lease between SBIAA and NAMS had been signed, and only 15 days after the claim for damages
was submitted to the Airport by NAMS and SBD. SBIAA management did not compel either
NAMS or SBD to submit documentation to objectively assess the appropriateness of the claim
for dama,es or challenge the original amount of the claim in any meaningful way. Importantly,
this settlement was amicably reached in a short time period, even though the lease agreement
with NAMS included language intended to completely indemnify SBIAA from"consequential or
punitive damages' in the event of default.
Further, SBIAA did not require an independent appraisal of the aircraft, including the airframe
and jet engines, which were pledged as collateral for the loan prior to disbursing funds. By
failing to conduct an appraisal, SBIAA can not be assured that SBD will have financial resources
that are sufficient to repay the loan amount of$550,000.
At the very least, the expedited nature of this agreement and the lack of due diligence by SBIAA
to verify the existence or extent of damages, or independently obtain an opinion of value of the
collateral pledged for the loan, make the appropriateness of the settlement questionable. In
addition, the settlement resulted in substantial cost to the taxpayer, which may be greater if SBD
defaults on the loan and the market value of the aircraft used as collateral is not sufficient to
repay the balance of the debt owed to SBIAA.
Recommendations
The SBIAA Board of Commissioners should:
4.1. Engage the services of a reputable, independent auditing firm to examine the
representations and warranties made by NAMS and SBD management in connection with
the Settlement and AMlual Relecrse Agreement and, if found to be false or untrue, demand
immediate repayment of the Insurance Loan, Rent Credit and Temporary Aircraft
Rehabilitation Loan balance.
Costs and Benefits
If the representations made by NAMS and SBD are found to be false or untrue, taxpayers would
be reimbursed the cost of the Selflelnenl and Ahtttrctl Release AgrePmetrt, amounting to S440.000
in loan forgiveness and rent credits, and would receive immediate repayment of the balance.due
on the $550,000 loan to NAMS and SBD.
llomv.v.11. Rose Assocuttes, LL('
4-14
&_ tractor Rein t�� -s
• San Bernardino International Airport Authority (SBLAA) has entered into
multiple contracts with companies managed by a single individual, Scot Spencer.
Mr. Spencer is a convicted felon who served time for bankruptcy fraud in a
federal penitentiary and, in a separate matter stemming from businesses he
managed at San Bernardino International Airport, was ordered by the U.S.
Department of Transportation (DOT) to "permanently cease and desist from
further marketing or other involvement in air transportation operations so that
he is banned from the aviation industry." Mr. Spencer was ordered to pay civil
penalties of$1.0 million, which remain unpaid.
• Mr. Spencer's history at SBIAA began in 2003 as a manager of KCP Leasing &
Services, LLC, which was leasing space for the storage of Boeing 727 aircraft.
Over the years, his involvement with SBIAA has grown, until :Morton
Development Company, LLC and SBD Properties, LLC (SBD) — two other
companies that he manages —were granted development contracts to construct a
new Terminal and a Fixed Base Operator (FBO) facility at the airport. The
initial combined cost estimate for these two projects was about $43 million, but
through January 2011, SBIAA had spent over $125 million on the projects.
Companies affiliated with Mr. Spencer received payments of $7.4 million in
developer fees and reimbursement of nearly all of their costs through that date.
• As the development projects progressed, Mr. Spencer's companies were given
responsibility for major aspects of airport operations. After approaching the
Interim Executive Director with an informal proposal, Mr. Spencer was able to
obtain agreement from a nationally recognized company to participate in FBO
services at the airport. Mr. Spencer then gathered investors to open a franchise
of that company, which he now manages, named Million Air San Bernardino,
LLC. Subsequently, SBD was awarded a 25-year lease to provide FBO services
and run the airport fuel farm through Million Air San Bernardino, LLC.
• SBIAA had also solicited proposals for a nationally recognized airport
management company to operate the airport, but no responses were received. As
an alternative, the Interim Executive Director negotiated a sole source contract
with Mr. Spencer through San Bernardino Airport Management, LLC (SBAM),
which Mr. Spencer formed for that purpose and now manages. Compensation
for SBAM under a 25-year agreement with SBIAA guarantees payments of
$500,000 per year, reimbursement of most major operating costs, and the receipt
of 50% of net operating income. SBIAA absorbs all financial risk.
• The evolution of these sole source relationships between SBIAA and ,Nlr.
Spencer, and the growth in the involvement of the companies he manages, raises
serious questions. Further, Mr. Spencer's activities at SBUA are in direct
violation of the DOT order, which states he should be "banned from the aviation
industry." These matters should be seriously considered by the SBIAA Board
when contemplating proposals to expand Mr. Spencer's influence at the Airport.
Han-et•J/.Rose.tssuciaies.
5-1
i
Secticlll 5.- ('x11111'( for Relations
Throughout this report, we have commented on various airport development and operations
topics that have involved companies managed by a single individual, Scot Spencer, who began
activities at the San Bernardino International Airport in 2002. At the time, he had entered into a
lease agreement for the storage of several Boeing 737-300 aircraft through a company named
Ascend Aviation, LLC. As discussed in this report, this role as a lessee gradually evolved Until,
in 2009, one of the companies he manages was granted a 35-year operating lease with SBIAA
that provides him with significant control over all airport operations. As will be described in this
section, the evolution of the sole source relationships between SBIAA and W. Spencer, and the
growth in the involvement of the companies he manages, raises serious questions.
Record of Criminal .activity
Reportedly, W. Spencer has been involved with the aviation industry since he was a teenacler. At
the time. he was involved with two small companies in an ownership or management capacity.,
(.l ) Southern Exlwess, based out of Texas; and, Air One, based out of \vIlssouri. Both of these
companies went bankrupt soon after formation. In addition, according to court records produced
in connection with a later bankruptcy fraud conviction, (described below), he also has a criminal
history that reaches back into at least the 1980s. A public records search indicates that in 1988
. - Spencer was convicted of knowingly writing bad checks in the State of Florida, and, as of
June 2010, he had at least 21 civil judgments against him in New York, Florida and New Jersey,
which included federal, state and local tax liens. Although related, the following narrative does
not focus on•these events but, instead, discusses his involvement with the airline industry and
related criminal activity since approximately 1990.
Braniff -airline Bankruptcy and the Formation of"Braniff 111" by BNAir
in 1985 an investment company purchased Braniff Airlines, which had ceased to operate in 198'
and had filed for bankruptcy. A second company was then formed in 19SS and named Braniff,
Inc., and is referred to in legal documents as "Braniff II." This second company ceased
operations and filed for bankruptcy in 1989. In 1990, the same group of investors that had
formed Braniff II formed a third company named BNAir and purchased the Braniff name from
the Braniff II bankruptcy estate. This third company became know as"Braniff III." Mr. Spencer,
in ill's early 30s at the time, had been involved in the Braniff 11 purchase and bankruptcy, and was
later named the President of BNAir, or Braniff III.
To operate the airline, BNAir was required to obtain and applied for a "certificate of public
convenience and necessity" from the United States Department of transportation (DOT).
However, as part of the certification process, DOT concluded that it had significant concerns and
objected to BNAir's proposal to provide airline passenger ser-Vice. :according to court
documents. the "DOT expressed its concern about Spencer's role wwith the company, his
Irn,tht rriminul hisiol:v t7ml 17nru' 1)el;fol-tnance 1'eL'01'C1 WWI HI-cmilf U." (Emphasis added). �
Therefore, the certificate was denied and not issued to BNAir and, consequently, the airline
could not operate.
Find1mv for Leal Professionals. No. 10i I. Docket 96-14o). Unitcd Slates Court of Appcals. Second Circuit.
/ul•r�1'.I/. ;tr�r'.f,t.�r�CVtt1:'�'. !.l.(
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Faced wi-', this obstr. :e, in 1991, BNAir t'. ---i attempted to obtain the requir d c--rtICication by
purchasing Emerald Air, Inc., "an airline in bankruptcy that already possessed the necessary
certificate." Despite continued concerns, the DOT reissued the Emerald Alr certificate in that
year, but only after obtaining sworn affidavits from the BNAir investors and Mr. Spencer that
ylr. Spencer "would hold no position and have no involvement in Braniff" III. The DOT
received those sworn affidavits in May 1991.'
In 1992, BNAir ceased operations and declared bankruptcy and, in 1994, %,It. Spencer and one of
the investors were indicted on four counts related to fraudulent activities surrounding the Braniff
bankruptcy. Mr. Spencer was convicted on two of the counts. Court documents noted that Mfr.
Spencer had remained `heavily involved" in the operations of Braniff 111, despite the DOT
condition of certification through Emerald Air and Mr. Spencer's affidavit swearing that he
would have no involvement." As stated in Court records, "It was Spencer's effort to receive
compensation surreptitiously for his services to Braniff that led to his convictions . . ." According
to the Court, this had been accomplished with a "scheme . . . to launder Braniff s payments to
him and thereby conceal them from the bankruptcy court and Braniff s creditors . . .,'4 through a
third party advertising contractor.
Mr. Spencer was sentenced to a term of 51 months in prison and three years of supervised
release. He appealed the conviction and sentencing in 1997, but the appeals court affirmed both
and he was required to serve his sentence. He was reportedly released from prison in 2002.'
DOT Administrative Law Matter —Republic Air Travel
In the early 1990s, Mr. Spencer was also involved with a company named Republic Air Travel,
LLC, which had a contract with a second company to act as "exclusive retail travel agent . . . to
market, promote and sell tickets to the public for transportation" on charter flights. In 1992, %Mr.
Spencer was serving as the Director and Vice President of Republic Air Travel, but in December
of that year, he removed himself from those positions and began working for the company as a
"consultant." Despite this change in his official relationship with the company, LIr. Spencer was
found by DOT investigators to be involved in "most if not all of the company's significant
Financial decisions" and "many significant operational decisions of the company."
During this period, DOT investigators found that Republic Air Travel sold non-refundable airline
tickets to customers on flights that were known to be overbooked. The company also advertised
low fares in major newspapers that were never honored. It was the DOT investigator's
conclusion that, pursuant to Mr. Spencer's control, Republic Air Travel acted as a Public Charter
Operator, acted as a ticket agent, engaged in deceptive advertising practices, engaged in
- lbid
Ibid. On appeal. Cdr Spencer conceded that he"acted openly and fla(ganth on behalf of Braniff.
Ibid
Tlic year of Mr. Spencers release is uncert,vn since information on the release date NNas pnncipalh obtained from
ncNN spaper accounts and professional journals. It is clear that by 2002. lie had been released and resumed his
im of ement in the aviation industn-.
lhlrrer.11. Rose Associales. Li.('
5-3
.Sec•lioll 5: (,olllraclor Relfitioll.1•
unauthorized "oversales" of charter flights, and tailed to provide timely ticket refunds to
customers, all in violation of the law and DOT re<uulations.
This matter was not concluded prior to the criminal judgment involving the Braniff bankruptcy,
discussed previously, and so the complaint went into suspense. However, knowing the matter
was still pending in 2006, Mfr. Spencer tiled a motion for a Protective Order on the Republic .air
Travel complaint and requested that the complaint be joined with a subsequent DOT
administrative law conviction for purposes of negotiating a settlement. As of June 36, 2001),
DOT reported that NtIr. Spencer had not pursued his request for a settlement conference by tilin<,
required documentation on the Republic :fir Travel matter, and there is no other evidence that
the Republic -fir Travel matter has progressed beyond the 2006 filing."
DOT .Administrative Law Matter — Ascend ,Aviation Group
After being released from prison in connection with the Braniff bankruptcy, and with the
Republic :Air Travel matter still pending before the DOT, N1Ir. Spencer once aeain became
involved in the aviation industry by assisting investors with the formation of KCP Leasing &
Services, LLC and acquiring 13 older Boeing 737-200A aircraft that had been retired by
.American .Airlines after the terrorist attacks of September 11, 2001. \;,/,Ir. Spencer reports that he
was tasked by the investors with identifying an airport where'the planes could be stored and
refurbished for leasing and, in 2003 he entered into a ground lease with SBIAA for the storage of
the planes at San Bernardino International Airport.
Working with the investors, Mr. Spencer also formed two additional companies: (1) ,Ascend
Aviation Group, LLC; and, (2) Ascend Aviation Marketing and Sales, LLC. Because none of
these companies had Federal Aviation Administration (FAA) certificates to operate an airline,
Ascend :Aviation contracted with Ryan International Airlines, Inc., out of Kansas to fly the
aircraft owned by KCP Leasing & Services on flights being booked through :Ascend :Aviation
Marketing and Sales. According to news reports published at the time, these services were being
provided to major entertainment industry executives and celebrities, including television
networks and major league sports teams.
During this short, initial period after being released from prison, Mr. Spencer had therefore been
instrumental in the formation of three aviation companies, purchasing aircraft and managing
charter air services. However, lie immediately began to default on his obligations to both his
customers and vendors. For example, according to news reports, ( 1) Blues .-Aviation Services.
which operated the fuel farm at San Bernardino International Airport at that tune, reportedly
seized one of the aircraft owned by KCP Leasing & Services to obtain compensation for unpaid
jet fuel bills, (2) .Altitude :Aviation sued .Ascend .Aviation for the refund of$71.000 that was paid
for a cancelled charter fllulit that had been scheduled for CBS executives and celebrities-, and, (3)
the Los .Angeles Dodgers sued .Ascend Aviation for S2 20,000 for failing to deliver scheduled
charter fliUhts for the team.'
Docket DOT-OST-1995-272 (Enforccntent Proceeding Status Report). l ..�'. !?el�arrrne,rt
cl u/ lra,rp lrrirl, ,r rtilir�
1!!rr/rilrg.c.I a.'!rl/r�trlr D.C. in the matter /Repuhlic.Ilr /rave/and.4� r��encrl•
Saturday. August 11.2005, Inland airport orr a limb with deed. San Bernardino Press-Enterprise
5-4
Secion 5: k onractor.;r c ;ions
l:t 2004, the U.S. Department of Transportation began regulation enfor--ement proceedings
against :-Ascend Aviation Group, Ascend Marketing and Sales, KCP Leasing & Services and Scot
Spencer, as an individual and the manager of all three companies. In 200-5, ivlr. Spencer was
Found guilty of (1 ) operating as an indirect air carrier without the requisite authority from the
DOT; and, (2) engaging in unfair and deceptive practices and unfair method of competition. He
was ordered to pay a tine of $1.0 million and "to permanently cease and desist from further
marketing or other involvement in air transportation operanotts so that he i.,; hannecl firom the
m,iatiott inclrisn- v . . . " (Emphasis added).' Although Mr. Spencer has appealed the judgment and
sentence, with a request to join the unresolved Republic Air Travel matter as part of a negotiated
revised settlement, neither the judgment nor the sentence has been modified as of the writing of
this report. In addition, N[r. Spencer has not paid the $1.0 million civil penalty associated with
his conviction.
Evolution of Contract Relationships with SBIAA
Through Ascend aviation, Mr. Spencer entered into a lease agreement with SBIAA in 2003 for
the storage of 13 aircraft owned by KCP Leasing & Services, LLC. Mr. Spencer stated during
interviews that he was looking for a location in a dry climate to store the aircraft, but was having
difficulty finding such space in Arizona or Nevada — where many aircraft are stored - due to the
high demand for such space following the terrorist attacks of September 11, 2001 and the
subsequent downsizing of the airlines. It was during this period that KCP Leasing and Services
and Ascend Aviation ran into the difficulties with the DOT that were described previously.
In early 2004, the lease was transferred to KCP Leasing & Services. At approximately the same
time, the Interim Executive Director became aware of Mr. Spencer's criminal history and took
actions that suagested he had concerns, including reporting information he had learned to
members of the San Bernardino County Board of Supervisors and other officials.
The Interim Executive Director research provided information on the Braniff bankruptcy fraud.
However, at the time, no information regarding the difficulties with the DOT were reported and,
presumably, had not been found. The Interim Executive Director reported:
Prior to learning of this prior criminal activity. SBIA entered into a month-to-month [case with KCP
Leasing, LLC.. . . The Airport has not entered into any long term cotruiutments. We can terminate the
lease upon 30 day notice widtout cause.
NcN erthcless. I felt it important to notify cacti of you of this new inforniation. We Nti-ill carefulh watch
to see that all terms of the Lease are complied «itli and also to to learn more about the background of
Mr. Spencer.
I do not recommend any immediate action, but felt it important to advise each of vou of the facts and
assure Nou that Aic will watch ,en- carefully any subsequent dealings Ncith Mr. Spencer or his
companies. Again, u•c ha%-c no long-tenn commitments.
It is clear from this communication that the Interim Executive Director was concerned about
what he had learned, communicated his concerns to responsible officials and reported on.the
1 ran,portariun U1Jc c r/ //em rrr�.c Docket OST 2004-17486 (Enforcement Proceeding). U.S. Deparbnent o/
[Fashia(Von D.C. in the matter of.iscend.-tviation Group, LLC. et al
t lan!e.v.I t. Rose.I ssociates, LLC
j-J
.lectio11 5: t'01111"C1C'101'Rehilio1LC
ability of SBIAA to terminate its relationship with N1r. Spencer with merely 30-days notice, if
necessary. He also reported that Mr. Spencer's companies were appro,,imately $100,000 behind
in their rental payments for the leased space at the time.
As discussed previously, in 2005 Mr. Spencer was convicted of violations of Department of
Transportation regulations through these companies, tined $1.0 million and banned from the
aviation industry. Althou�,h the Interim Executive Director indicated in his communication with
officials that SBIAA would "watch very carefully" and assured these same otricials that the
airport's relationship with Mr. Spencer could be terminated with short notice, the airport's
relationship with Mr. Spencer grew substantially in the ensuing years.
During interviews with the interim Executive Director, he was asked why he chose to continue
his business relationship with Mr. Spencer after learning of the bankruptcy fraud conviction. He
responded that he made that decision after conducting further research on Mr. Spencers
background, including the DOT Administrative Hearing decision, and accepting %ir. Spencer's
representation of the circumstances that led to the convictions. He accepted Mr. Spencer's
assertion that his bankruptcy fraud conviction merely resulted from a decision to defend himself
against the government's charges and a failure to negotiate a more favorable settlement with the
prosecution. He also stated that after speaking with DOT investigators, he accepted Mr.
Spencer's assertion that the administrative law conviction occurred mostly because, by failinv; to
appear as ordered, the Administrative Law judge merely entered a default judgment against Mr.
Spencer. The Interim Executive Director also suggested to the audit team that because the DOT
matter was on appeal, the judgment and order could still be modified. The Interim Executive
Director also stated that he had inquired with DOT officials regarding the intent of the order that
'banned" Mr. Spencer from the "aviation industry" and that he was advised that ` as long as he
does not sell airline tickets," Mr. Spencer could continue to be involved in other aviation
activities. This interpretation runs counter to a plain language understanding of the judge's order
and is not documented in any fashion. We therefore reject the Interim Executive Director's
interpretation and assertion regarding the court's intent.
Subsequent to the Interim Executive Director's inquiries, the record shows that %Ir. Spencer's
involvement with SBIAA grew to the point where he has inordinately influenced all major
development decisions, resulting in his companies being awarded contracts for most major
development projects at the airport. Further. Mr. Spencer's companies now hold 25-year leases
to operate the airport, provide Fixed Base Operator (FBO) services and provide aircraft fueling
services. A close review of the record demonstrates that there are several instances when Mr.
Spencer and his companies have been granted favorable interpretations of contract languaue, had
rental obli`;ations waived, and received favorable resolutions to disputed matters after direct
negotiations with the Interim Executive Director. The orowili in Mr. Spencer's responsibilities
and influence over airport operations is described more fully, belo%%
i Ian's i- 1 I. Rose.i v)ciates. !.I.,-
5-6
,1eciio i J: C(%ihrcictor i?e Liii(i;?.i
Migration of Hangar Leases to Major Construction and ivlanagement Control
SBD Aircraft Services LLC
In 2005, il1r. Spencer paid the outstanding $100,000 in delinquent rent to the airport and was
awarded a new lease for Hangar No. 763 under a newly formed company- he called SBD aircraft
Services, LLC (SBD Aircraft). This lease, executed August 1, 2005, was entered into for two
quadrants of the hangar (Bay 3 and Bay 4) with an option to lease the other two bays, should a
need arise. The agreement provided for a five year term, with three optional extensions for five
vears each, for a total potential term of 20 years. Any and all extensions would be at the option
of SBD Aircraft. The lease permitted SBD Aircraft Services to operate: (1) an aircraft leasing
and/or executive jet business; (2) a Part 145 maintenance, repair, and overhaul facility business
either on its own or on a contract basis, for service of aircraft owned by SBD and third-party
owned aircraft; (3) a spare parts acquisition and sales business; (4) administrative and support
activities related to these businesses; (5) an aircraft leasing business, (6) cargo warehousing and
flight activity; and, (7) other uses approved in writing by the Executive Director.
The lease with SBD Aircraft for Hangar No. 763 was amended three times following the initial
execution in August 2005. All three amendments occurred during the initial Five year term of the
lease. The first amendment to the SBD Aircraft Lease for Hangar 763 was executed on April 12,
2007, about 20 months after the initial lease was signed. Among other seemingly minor changes,
the first amendment increased the amount of space available for lease by SBD Aircraft,
consisting of 11,046 square feet formerly occupied by Riley Super Sky Rocket, located in the
northwest portion of Hangar 763. The first amendment also had a provision that, "on or before
April 13, 2007, SBD [Aircraft Services] shall remit a payment in the amount of$77,473 which
represents payments of rent outstanding and due and payable to SBIAA."
It is unclear when the second amendment to the SBD Aircraft Lease for Hangar 763 was
executed. While Amendment 2 states that it is "made and entered into to be effective as of the
12d' day of August, 2009," Amendment 3 states that Amendment 2 was "effective as of July 1,
2009." Nonetheless, Amendment 2 to the SBD Aircraft Lease is primarily an acknowledgement
of a letter from SBD Aircraft dated June 29, 2007 stating SBD .Aircraft's desire to exercise its
option to lease additional areas. Specifically, SBIAA approved SBD Aircraft's leasing of Bay 1,
Bay 2, and "certain portions of the First Floor of the East Annex." SBIAA also approved the
leasin, of Bay 3 by Norton Aircraft Maintenance Services.
The third amendment to the SBD .Aircraft Lease for Hangar 763 included four provisions. The
first two provisions related to the abatement of three months of rent to SBD Aircraft for the
months of April 2009, May 2009, and June 2009. SBD was also to abate rent to each sub lessee
for the months of February 2009, March 2009, and April 2009. The third provision related to the
urantin�, of a S 150,000 rent credit to SBD Aircraft for the completion of improvements to the
' SBD Aircraft Services. LLC is a Florida Limited Liability Company that �%as created on April 22, 2005. Scot
Spencer and Milford Harrison are listed as managers on the registn_ pro\ided bN the Floricb Secretan of State. No
members arc listed.
LLarret•.tf RoseAssociales. LLC
5-7
Section .i: Cowrticior ReAilioii.v
East Annex portion of Hangar 763. The Fourth prevision related to an additional S 15,000 rent
credit granted for certain Heating Ventilation and Air Conditioning (HVAC) repairs that SBD
Aircraft had undertaken in Hangar 763.
Norton Aircraft Maintenance Services- Inc.
Norton :aircraft Maintenance Services, Inc. (NAMS) is a Delaware Corporation that \%as created
on January 22, 2008.t't NAN-IS became a subtenant of SBD Aircraft Services (now Norton
Property Management, LLC) in 2008. According to the California Secretary of State, the current
status of NAMS is "forfeited," meaning that the business entity's powers, rights and privileges
have been suspended or forfeited in California by (I ) the Franchise Tax Board for failure to File a
return and/or failure to pay taxes, penalties, or interest and/or(3) the Secretary of State for tailure
to File the required Statement of Information and. if applicable- the required Statement by
Common Interest Development Association.
According to Mr. Spencer, NANIS was created as the result of a -'bailout/takeover' of a Cornier
subtenant, SoCal Precision, in December 2007. Mr. Spencer stated that SoCal Precision was
having financial difficulties at the time and that he personally intervened -`on Christmas Eve" of
that year to secure investor contributions to ensure the "bailout/takeover. Further, Mr. Spencer
has stated that this "bailout/takeover" included the transfer of SoCal Precision's FAA license to
operate a Part I45 repair station to the new company, NAMS. Although Mr. Spencer has made
multiple assertions that he has no role in the management or operations of NANIS, his
relationship with the company is unclear. According to iv1r. Spencer, it is -`owned by some of the
same investors" who own the companies that Mr. Spencer manages, and so lie occasionally has
responsibilities related to HAMS matters. Further, Mr. Spencer is commonly recognized by
SBIAA representatives as a spokesperson for NANIS management, as evidenced during
interviews, when no distinction was made by the interviewees, and from certain documents
revievved for this audit."
SBD Properties. LLC
Mr. Spencer created SBD Properties, LLC (SBD Properties), a Florida Limited Liability
Corporation, on July 27, 2006. According to the Florida Department of State, N'Ir. Spencer and
Milford Harrison are listed as managers of the company.
SBIAA awarded SBD Properties a sole source lease agreement for the development of an FBO
building and for the establishment of a national FBO company to operate at San Bernardino
International Airport. When the lease was approved in March 2007, SBIAA management
estimated that the FBO building would cost approximately SS million to complete. As the project
progressed. the scale and design of the FBO facilities grew, so that as of January 2011,
approximately $30 million in costs had been incurred with work and costs continuing; to occur.
California Secretan of State business frlinu.
July 28. 2008. Letter from Interim Executk•c Director. Don Ro,,crs to Scot Spencer as the representative of
NAILS and SBD Aircraft.
rlur+'rt .1/. Rr���.L�.cr�C•;u1�.�'. l.l.�'
-S
ilc,1 5: ( UIlIT[faor j,_,hviolls
of :his a,:,,cunt. :he companies managed by Mr. Spencer 110:' ..-ceived approximately Z2.7
million in developer fees and cost reimbursements.
The expansion in scope and cost of the FBO project included the construction ofa new fuel farm,
the construction of a multi-story customs facility, and the acquisition of fuel trucks and FBO
equipment. In addition, as part of the FBO project, SBIAA financed a buyout of leaseholder
interest and the acquisition of equipment of the former FBO company, Blues Aviation, by SBD
Properties, LLC at a cost of S2.3 million.
Million Air San Bernardino, LLC, another company managed by Mr. Spencer, was created on
July 3, 2008 to operate a franchise of Million Air Interlink, a national FBO company. According
to Mr. Spencer, Million Air San Bernardino is a subsidiary of SBD Airport Services, LLC and is
party to the San Bernardino airport Management, LLC agreement with SBIAA for long term
management and operations of San Bernardino International .Airport.
Norton Development Company, LLC
As noted in detail in Section 2 of this report, Mr. Spencer created Morton Development
Company, LLC (Norton Development) on May 23, 2007 in order to remodel and develop the
San Bernardino International Airport Terminal Building. Norton Development was awarded a
sole source lease and development agreement to construct the terminal building in May 2007 for
an estimated initial cost of $38 million. However, the scale and cost of the Terminal
Development Project has increased substantially over time so that as of January 2011 SBIAA
had expended over $96 million with work and expenses continuing to occur. Of this amount, the
companies managed by Mr. Spencer had received approximately S4.7 million in developer fees
and reimbursements of costs.
Terminal and FBO Equipment Acquisition
As noted in detail in Section 2 and 3 of this report, Mr. Spencer was given responsibility for
acquiring major aviation equipment for the terminal building and for the FBO facility through
Norton Development and SBD Properties respectively.
As described in Section 2, the original conceptual design for the terminal building did not require
the use of expensive major aviation equipment, including jet bridges. However, after the building
design had been revised, based on passenger tragic projections and air carrier specifications
provided by Mr. Spencer, jet bridges were seen as a requirement. As described in Section 3,
SBIAA management made a determination based on limited information and analysis to acquire
used aviation equipment through Norton Development rather than engage in a competitive
process for such equipment. Further, although the Interim Executive Director asserted to the
Commission that a Purchase Agreement would be signed with Norton Development, no such
action was taken and the acquisition was processed under the Interim Executive Director's
general purchasing authority.
Nnnver.l/. Rose.Issociates. LLC'
5-9
.1ection .i: Conn-actor Relations
SBIAA also provided funding to SBD Properties for the lease and acquisition of equipment for
FBO operations. Specifically, approximately $2.3 million in SBIAA funds were spent on the
acquisition of Blue's Aviation leasehold interest, including the purchase of used equipment to be
leased to SBD Properties by SBLkA. Additional l'undst'- were allocated for the purchase of
supplementary equipment, including three fuel trucks.
lvlana�_,ement of FBO and Airport Operations
After approaching the Interim Executive Director with an informal proposal, SBD Properties was
able to obtain agreement from a nationally recognized company to participate in a contract to
provide FBO services at the airport. To obtain a contract with SBIAA, NJr. Spencer gathered
investors to open a franchise of that company, which Ile now manages, named Liillion Air San
Bernardino, LLC. It was throuy-:h this company that Mr. Spencer was awarded the long term FBO
lease as well as a lease to operate the airport's fuel farm. According-ly, the FBO Lease
.fig=reement approved by the SBIAA Commission in March 2007 provided SBD Properties with a
25 year lease of the FBO facilities with two five year extensions for a total potential lease term of
35 years. The option to extend the term is at the discretion of SBD Properties.
Later, in December 2009, the SBIAA Commission approved the execution of an Airport
ManaL(ement and Development Agreement with AFCO/AvPorts San Bernardino, LLC through
its affiliate San Bernardino Airport Management, LLC (SBAtbI) for certain airport management
services. Both companies were formed and are managed by Scot Spencer. Farther, the terms of
the agreement are favorable to SBAM to the point where the contractor has taken on no financial
risk. Specifically, compensation for SBAM under the 25-year agreement with SBIAA ruarantees
payment to SBAM of $500,000 per year, reimbursement of most major operating costs, and
payment of 50% of net operating income. In short, SBIAA absorbs all financial risk.
Relationship Concerns
The relationship that Mr. Spencer has cultivated with the Interim Executive Director and SBIAA
management evolved over the vears, and Mr. Spencer is now relied upon as a prominent advisor
and key member of the management team at the Airport. Given NMr. Spencer's criminal history
and the record of DOT administrative law rulings against him, some major concerns regarding
these relationships should be considered by the SBIAA Board of Commissioners.
Spencer's Experience and Reputation
The Interim Executive Director has stated that Mr, Spencer provides significant benefit to
SBIAA as a result of his extensive experience and number of contacts that lie reportedly has in
the commercial aviation industry. Yet, a close examination of the record shows that these
perceptions may be poorly conceived.
Our audit team uas not able to determine the precise amount of lands that %\ere used for the purchase of FBU
equiplucM due to the lack of an inventory or clear reports to the Commission from SBI AA management.
5-IU
S: C'oii;rcreior Ji'ei tioii.�
There is no evidence that Mr. Spencer's experience ever extended to constructing or operating an
international airport with commercial, freight and general aviation functions. Instead, his
professional activities have involved numerous failed attempts to operate airline related
businesses, each one of which ended in bankruptcy, a criminal conviction or violations of DOT
administrative law. tiIr Spencer's professional reputation is questionable, given his background
of criminal activity, the Braniff bankruptcy fraud matter; his poor relations with the DOT,
including his ban from the aviation industry; and, general criticisms that he receives in aviation
trade publications.13 His professional associations are questionable, since lie has not shared a
comprehensive list of investors in the many companies he forms and manages. Further, Mr.
Spencer is most frequently associated with George Warde, a respected but elderly, retired airline
executive who was admonished by the DOT and assessed civil monetary penalties resulting from
his participation in the unlicensed operation of charter flights out of San Bernardino International
Airport (i.e., the KCP Leasing& Services and ascend Aviation matter).
Promises Not Kept
Mr. Spencer has made numerous promises that he would be able to attract major commercial air
carriers to SBIA, which has been used as a rationale for expediting development projects and
driving airport design attributes that have resulted in major additional costs to the taxpayers. As
recently as March, 2011, assertions were made by both the Interim Executive Director and )"Ir.
Spencer that an agreement with "major" regional or international airlines would be forthcoming
"within six weeks," but that details of the agreement must be kept "confidential." These same
promises were made just prior to initiating the fast-tracked Terminal Development Project, again
in mid-2009 when the Grand Jury began its inquiries, and numerous times in-between. As of the
writing of this report, no contracts with airlines have materialized and it appears that Mr.
Spencer's promises have been baseless.
Contractual and Other Advantages Provided to Mr. Spencer
Collectively, the development and operating agreements entered into between SBIAA and Mr.
Spencer's companies have been designed in a manner that results in SBIAA bearing all or most
of the financial risk. On the Terminal Lease and Development contract, SBIAA reimburses all
costs, including the developer's required insurance, legal costs and other expenses that would
normally be borne directly by a contractor.
As mentioned previously, the Spencer-managed company, SBA I, receives minimum
compensation of $500,000 in operations and management fees, and reimbursement of most
operating costs, and receives 50% of net income from operations. In years when there may be an
operating loss, SBAM has no liability. The FBO development agreement was to be fillly funded
by SBD Properties and sold back to SBIAA at completion, and was presented as such by the
:assistant Director. However, IVDA guaranteed the bank loan and reimbursed costs as they
occurred, so that there was little or no out-of-pocket expense borne by SBD Properties.
" Leeham Company. LLC Commercial A\iation Report. December '_t1O5.
i/nn,ev.V. Ruse:lssocintes. LL('
ti-I1
In another area. the expedited nature of the settlement agreement regarding the dual leasing of
Hangar No. 673 and the lack of due diligence by SBIAA to verifv the existence or extent of
damages, or to independently obtain an opinion of value of collateral pledged for a S550,000
loan, make the appropriateness of the settlement questionable. In addition, the settlement resulted
in substantial cost to the taxpayer, which may be _greater if SBD detaults on the loan and the
market value of the aircraft used as collateral is not sufficient to repay the balance of the debt
owed to SBIAA. The claim for damages arising from the aircraft hangar leasing dispute resulted
in an expedited settlement with Spencer's companies, valued at approximately 31.0 million.
Conclusions
San Bernardino International Airport Authority (SBIAA) has entered into multiple contracts with
companies managed by a single individual, Scot Spencer. Mr. Spencer is a convicted felon N%ho
served time for bankruptcy fraud in a federal penitentiary and, in a separate matter stemming
from businesses he managed at San Bernardino International Airport, was ordered by the United
States Department of Transportation (DOT) to '`permanently cease and desist from further
marketing or other involvement in air transportation operations so that he is banned from the
aviation industry.- Mr. Spencer was ordered to pay civil penalties otS1.0 million, which remain
unpaid.
Mr. Spencer's history at SBIAA began in approximately 3003 as a manager of KCi' Leasing &
Services, LLC, which was leasing space for the storage of Boeing 737 aircraft. Over the vears,
his involvement with SBIAA has grown, until Norton Development Company, LLC and SBD
Properties, LLC (SBD) — two other companies that he manages — were granted development
contracts to construct a new Terminal and a Fixed Base Operator (FBO) facility at the airport.
The initial combined cost estimate for these two projects was about S43 million, but through
January 3011, SBIAA had spent over $125 million on the projects. Companies affiliated with
Mr. Spencer received payments of S7.4 million in developer tees. based on a percentage of total
costs, and reimbursement of nearly all of their direct and indirect costs through that date.
As the development projects progressed, Mr. Spencer's companies were given responsibility For
major aspects of airport operations. After approaching the Interim Executive Director with an
informal proposal, Mr. Spencer was able to obtain agreement trorn a nationally recognized
company to participate in FBO services at the airport. ildr. Spencer then Lathered investors to
open a franchise of that company, which he now manages, named rtlillioll_.4ir &111 8ei-nu'Clnm,
L1.('. Subsequently, SBD was then awarded a 25-year lease to provide FBO sen.ices and run the
airport Biel farm through alillion.4ir Sixll Rerllcn-clillo, LL('.
SBIAA had also solicited proposals for a nationally recognized airport management company to
operate the airport, but no responses were received. As an alternate\e, the Interim Executive
Director negotiated a sole source contract with Mr. Spencer through San Bernardino :Airport
Vlana^ement, LLC (SBAM), which Mr. Spencer formed for that purpose and now manaues.
Compensation for SBAIM under a 25-year agreement with SBiAA g>uarantees payments of
5500,000 per year, reimbursement of most major operating costs, and the receipt of 50%' of net
operating income. SBIAA absorbs all financial risk.
ffoic.ISSOCYl11L'S. f.i,: .
5-12
evol!: ion 'i those sole so,,!-c_- relationships bet'.v',°n 531. .�. :111d S,'2n':cr, and tl'.,.'
<Trowth in the involvement of the companies he manages, raises serious questions. Further, Mr.
Spencer's activities at SBIAA are in direct violation of the DOT order, which states he should be
"banned from the aviation industry."
Recommendations
Given Mr. Spencer's criminal history and Department of Transportation administrative law
rulings against him, the SBIAA Board of Commissioners should-
=
Direct staff to review current contracts for construction services and Airport operations
with the companies he manages, to identify modifications that may be necessary to
protect the IVDA and SBIAA from potential future risk.
Costs and Benefits
There would be no cost to implement this recommendation.
SBIAA would limit exposure to the types of difficulties described throughout this report and
would no longer be party to Mr. Spencer's apparent violation of the DOT order banning, him
from the aviation industry.
i-1,
Attachment 3 . 1
Pictures of Un-Refurbished Jet Bridges
Acquired for San Bernardino International Airport
by Norton Development Company, LLC from American Airlines
Pursuant to SBIAA Resolution 2007-05
Pictures Taken March 2, 2011 at San Bernardino International airport
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