governmental accounting principles and financial statements and knowledge

Additional Recommendations 9

These recommendations are not explicitly linked to specific findings.

• R2
  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, SBIAA 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
• R3
  Responding Agency Recommendations Date Due Board of Supervisors 11-36, 11-37 August 30, 2011 61 O U N T Y OF SAN BERN A R D IN C O G R Q A uae N rite D Ver i J ta U tem R Y INTERNATIONAL AIRPORT AD HOC COMMITTEE – SAN BERNARDINO AD HOC COMMITTEE – SAN BERNARDINO INTERNATIONAL AIRPORT Kent Fogleman, Chair Arnim Belke Becky Fults Bob Mitchell Ever Marie James Melinda O’Connor Allen “Skip” Burt 2010-2011 San Bernardino County Grand Jury Final Report AD HOC COMMITTEE SAN BERNARDINO INTERNATIONAL AIRPORT Introduction In 2009, a complaint was received by the Grand Jury alleging irregularities at the San Bernardino International Airport (SBIA). After some preliminary interviews of airport personnel, it became apparent that an extensive investigation was warranted, and the Ad Hoc Committee – San Bernardino International Airport was formed in August of 2009. Because of the scope of the investigation, the 2009-2010 Grand Jury was unable to complete their investigation of the SBIA during their one year tenure. In order to continue the investigation, and maintain a smooth continuity for the incoming Grand Jury, several 2009-2010 Grand Jury members were selected to be a part of the 2010-2011 Grand Jury by the Presiding Judge, Douglas Elwell. As more interviews were conducted and documents reviewed, the Grand Jury felt an independent Performance Audit was necessary. Bids were solicited and two firms responded. The auditing firm of Harvey M. Rose Associates, LLC was selected and hired with the approval of the Presiding Judge. In December 2010, members of the Grand Jury and representatives of Harvey M. Rose met with SBIA airport officials to introduce the auditors to the airport officials and explain the purpose and scope of the audit. The results of the audit are attached to this report. 62 2010-2011 San Bernardino County Grand Jury Final Report SAN BERNARDINO INTERNATIONAL AIRPORT
• R4
  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.
• R5
  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 $1,200,000 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 8 Blue‟s Aviation Harvey M. Rose Associates, LLC 2-16 Section 2: Construction Management 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 aircraft.” 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. Harvey M. Rose Associates, LLC 2-17 Section 2: Construction Management 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 Code10 allows for non-competitive awarding of service contracts where the annual aggregate cost exceeds $100,000 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 Manual11 states that the “selection of outside service providers shall be conducted through a competitive process based upon demonstrated competence, and on the professional 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 without 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 Management 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, 9 County of San Bernardino Code of Ordinances, Title 1, Division 4, Chapter 1, Section 14.0115 10 County of San Bernardino Code of Ordinances, Title 1, Division 4, Chapter 1, Section 14.0109 11 County of San Bernardino Policy Manual, Procurement of Services, No. 11-05 Harvey M. Rose Associates, LLC 2-18 Section 2: Construction Management determined that the fastest way to complete the [Terminal Development] 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 Development12 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 12 Scot Spencer Harvey M. Rose Associates, LLC 2-19 Section 2: 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 Harvey M. Rose Associates, LLC 2-20 Section 2: Construction Management The one review that has been conducted14 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 14 A special compliance review was completed in February 2010 by Rogers, Anderson, Malody, and Scott, LLP. Exhibit A, Section 10, Item 10.1(b). Exhibit A, Section 10, Item 10.1(b). Harvey M. Rose Associates, LLC 2-21 Section 2: Construction Management 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,] and subject to written approval by the Executive Director of the Purchaser, [SBIAA,] 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.” Harvey M. Rose Associates, LLC 2-22 Section 2: Construction Management 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 Harvey M. Rose Associates, LLC 2-23 Section 2: Construction Management 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 SBIAA 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 payment of 1.7% for any cost savings 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 Valley 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. Harvey M. Rose Associates, LLC 2-24 Section 2: Construction 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, Harvey M. Rose Associates, LLC 2-25 Section 2: Construction Management 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 Funding 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 Aircraft17 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 contingency 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, we found no evidence of specific control procedures for the disbursement of contingency funds. Scot Spencer Harvey M. Rose Associates, LLC 2-26 Section 2: Construction Management 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 Commission 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 report summarizing disbursements and Plan and design systems to collect, store, and analyze 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 SBIAA 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 Harvey M. Rose Associates, LLC 2-27 Section 2: Construction Management 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 passengers;  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 firm 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 2010. 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 Harvey M. Rose Associates, LLC 2-28 Section 2: Construction Management 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 Morris, 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. Harvey M. Rose Associates, LLC 2-29 Section 2: Construction Management 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: o 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. o 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. o Vouchers 69776 and 69777, which have similar inconsistencies as Vouchers 69567 and 69566. These vouchers include invoices that list time periods (and Harvey M. Rose Associates, LLC 2-30 Section 2: Construction Management 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 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 Harvey M. Rose Associates, LLC 2-31 Section 2: Construction Management 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. 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. Harvey M. Rose Associates, LLC 2-32
• R7
  11-42 In Victorville, repair or replace broken workstations and chairs. (Finding
• R8
  Responding Agency Recommendations Date Due Board of Supervisors 11-38 through 11-42 August 30, 2011 68 A copy of this report, or more information on the San Bernardino County Grand Jury, may be obtained by contacting: San Bernardino County Grand Jury San Bernardino Courthouse, Room 200 351 North Arrowhead Avenue San Bernardino, CA 92415-0243 (909) 387-3820 mvartanian@sb-court.org
• R11-33
  The County Code Enforcement Division staffing of code enforcement officers should be increased to adequately respond to the number of complaints. (Finding 2, 3 – Joshua Trees; Finding 1 – Illegal Dumping; Findings 1, 3 - Graffiti)
• R11-34
  The County Land Use Department develop and maintain, for its Code Enforcement Division, a computerized system to properly document, categorize and retrieve information about county code violations by type. (Finding 5 – Joshua Trees; Finding 4 - Graffiti)
• R11-35
  A uniform data exchange system be established between the county and the cities of Victorville, Hesperia, and the Town of Apple Valley in order to provide a more comprehensive picture of how laws are applied in County and local jurisdictions. (Findings 6, 7, 8 - Joshua Trees; Finding 2 - Graffiti)