Schedule of Audit Findings and Responses

Port of Seattle King County February 9, 2012

1. The Port did not adequately document compliance with state procurement laws for use of Port labor. Description of Condition
Port employees worked on public works projects totaling approximately $4.7 million during 2010. We reviewed five public works projects that used Port employees and found the Port did not adequately document compliance with state law. State law (RCW 53.08.135) requires the Port to determine whether any construction project exceeding $40,000 can be accomplished less expensively by contracting out rather than using day labor. For the five projects we examined, the Port was unable to provide us with documentation showing that it did this evaluation. While the Port is not required to contract the work out even if it is more expensive to perform the work inhouse, it should maintain documentation on why it awarded projects to Port labor crews.

Cause of Condition
The Port was not aware of the requirements to evaluate whether it is less costly to contract the work out instead of using Port crews.

Effect of Condition
Without evaluating whether it is less costly to contract the work out than performing the work in-house, the Port is at risk of over-paying for public works projects.

Recommendation
We recommend the Port establish operating policies and procedures to ensure that the Port complies with state law regarding the use of Port labor on public works projects.

Ports Response
RCW 53.08.135 states Port districts shall determine if any construction project over forty thousand dollars can be accomplished less expensively by contracting out. If contracting out is less expensive, the port district may contract out such project. This statue applies to every construction project over $40 ,000.00. The statute does not call for or require a specific form of written documentation to support said determination. The Port believes it has complied fully with this statute and disagrees with the finding that failing to do an unspecified type of written documentation implies otherwise. The Port maintains that a side-by side comparison of cost estimates does not reflect all of the actual expenses of a project. When determining whether to perform a
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construction project in-house or with a contractor, the Port takes into account tangible and intangible costs associated with factors such as: (1) crew capability and availability; (2) the ability to adjust work flow on the construction project to address tenant and customer needs, (3) ability to mobilize and demobilize the work with minimal notice to accommodate airport/seaport functions and security; (4) construction schedules and phasing in order to preserve operations during construction; (5) in-house knowledge of facilities and operations; and (6) whether detailed plans and specifications have been prepared and the cost and time associated with preparing those plans and specifications. The Port believes it complies with the obligations of RCW 53.08.135 when construction projects are evaluated and staff members and/or commissioners determine how best to proceed. That process was formalized in 2009 when the Port instituted acquisition planning, a formalized process that determines how each aspect of a project will be accomplished. Analysis is further honed when placed before commissioners for project approval. In commission memos, it is clearly stated when port crews will be used on a project with the rationale for that decision. Port Construction Services has also created a flow chart which guides the decision-making process. This flow chart accounts for all expenses, including those described above. The Port believes that this statute is more properly interpreted as permission to contract out specific construction projects. Since 1999, the Port averages 20 major construction contracts a year with an average awarded contract price of $8.7 million. It would not be feasible or efficient to use in-house crews for all of those projects; RCW. 53.08.135 provides statutory authority to utilize contractor services when doing so is cost-effective. The State Auditor has interpreted the statute to conclude that documented cost analysis is required for every construction project exceeding $40,000 that uses port crews. The State Auditor does not require any documented analysis if the project is contracted out.

Auditors Remarks
We considered the Ports response and we reaffirm our finding. We will review this area in our next audit.

Applicable Laws and Regulations

RCW 53.08.135, Port Districts, states in part: Port Districts may use employees for all public works, but must determine whether any construction project exceeding $40,000 can be accomplished less expensively by contracting out rather than using day labor.

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Schedule of Audit Findings and Responses

Port of Seattle King County February 9, 2012
2. The Port exceeded its authority by providing $13.6 million to Highline School District for construction and operation of Aviation High School. Description of Condition
A 2002 agreement between the Port, the Federal Aviation Administration and Highline School District provided $150 million for noise mitigation at 15 schools in the District. In 2004, a separate agreement between the Port and the District provided an additional $15 million for capital improvement and noise mitigation. Most of the funding was to be used for noise mitigation at the 15 schools; however, the agreement provided up to $6.5 million in funding for capital construction and operating costs at Aviation High School. Aviation High School is a college preparatory, aviation-themed high school located in the Highline School District. It specializes in science, technology, engineering and math instruction and is located in the old Olympic Elementary School. Construction is under way for a permanent facility at the privately owned Museum of Flight. It is scheduled to open in 2013. The parties amended the agreement in 2007 to increase the Ports contribution to Aviation High School to $14.9 million by shifting all available resources not spent on work at the other schools. The remaining $75,000 was used toward an apprenticeship program in the District. The amended agreement stated the money could be applied towards the construction, operation and any other costs associated with the Districts Aviation High School. None of the $15 million provided under the 2004 agreement was used for noise mitigation. The Port provided the funds at least 18 months in advance of their use by the District. As of September 2011, the Port had paid $13.6 million to the District. It has spent $6.7 million as follows: $2.2 million on remodeling at South Seattle Community College, the original location of the school. $674,020 in lease payments to South Seattle Community College. $1.3 million for renovations to the former Olympic Elementary School, where the High School was moved in 2007. $2.4 million on the design of a permanent facility for the High School at the Museum of Flight, which is owned by a non-profit. $74,262 on instructional supplies.

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The Port is not authorized to contribute funding to construct and operate public schools. The District provides progress reports on the use of the funds to the Manager of Noise Programs. The Port does no other monitoring to ensure that the funds are used in accordance with the agreement. It did not review original invoices to ensure expenses are related to Aviation High School.

Cause of Condition
Prior to entering into the agreement, the Port did not conduct a legal analysis to determine if the payments were within its authority. The Port views the payments to Highline School District as contributions rather than payment for specific activities and did not attempt to align the timing of the payments with the Districts funding requirements.

Effect of Condition
The Port used $13.6 million in levied tax revenues, which are dedicated to funding Port operations, to assist a school districts construction and operation. Providing funding far in advance of its use increases the risk that the resources will be used for other than intended purposes. In addition, the Port loses the interest it would receive had the Port maintained control of the funds until they are needed. We estimate the loss of interest was at least $532,000. Also, the Port cannot ensure that the funds are used for their intended purpose.

Recommendation
We recommend the Port ensure its activities are within its Ports statutory authority. We also recommend the Port refrain from providing funds until those funds will be used. The Port should adequately monitor agreements to ensure the funds are properly spent.

Ports Response
The Port of Seattles support of the Highline School District (HSD) represents a strong commitment to mitigating the impacts of a successful international airport on the surrounding community. As noted in the report, the initial agreement with HSD and the Federal Aviation Administration provided funding for noise mitigation in 15 schools throughout the district, so that students learning environment is protected from noise disruption. Following that initial agreement, during conversations with community leaders and state legislators, the need for additional funds both for noise mitigation and to support Aviation High School became apparent. AHS is one of the states highest-performing schools academically, despite operating in a very old facility and within a financially-strapped school district. It is a highly diverse school in which 22% of the students are on the freeor reduced-lunch program. The schools curriculum focuses directly on the airports core business, providing excellent science, technology, engineering, and math instruction within the framework of preparing students for careers in the aviation industry. Sea-Tac Airport has a vested

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interest in ensuring that future generations are trained to perform the highly-skilled jobs available throughout the airport and supporting businesses. The port entered into the agreement with the support of state legislators; in fact, the agreement states that the state must match the ports investment. Port staff is in regular contact with AHS staff members and, as noted in the report, has received regular reports detailing how the ports investment was used. That said, the port agrees that reporting should be increased and will work with the school district for a more detailed oversight methodology. Aircraft operations impact the surrounding communities and the port is committed to mitigating those impacts where possible. The agreement to invest in Aviation High School offered an excellent opportunity to both provide that mitigation and support a highly successful academic program open to any student in Washington that trains young men and women for careers in aviation. Men and women trained for careers in aviation, maritime industry, and skilled trades are crucial to the future of the port. Because of that, workforce development is specifically called out in the recently adopted preliminary Century Agenda, the ports 25-year strategic plan. Commissioners adopted the goal to use our influence as an institution to promote small business growth and workforce development. There is a significant need for regional partnerships that invest in training for jobs in the skilled trades that support the aviation and maritime industries. The port is committed to clarifying its authority to support workforce development.

Auditors Remarks
We have considered the Port's response and reiterate that no funds under this agreement were or will be used for noise mitigation. The new location of Aviation High School is adjacent to King County International Airport, which is not owned or managed by the Port of Seattle. We reaffirm our finding.

Applicable Laws and Regulations

RCW 53.08.020, Acquisition and operation of facilities, states: A port district may construct, condemn, purchase, acquire, add to, maintain, conduct, and operate sea walls, jetties, piers, wharves, docks, boat landings, and other harbor improvements, warehouses, storehouses, elevators, grain-bins, cold storage plants, terminal icing plants, bunkers, oil tanks, ferries, canals, locks, tidal basins, bridges, subways, tramways, cableways, conveyors, administration buildings, fishing terminals, together with modern appliances and buildings for the economical handling, packaging, storing, and transporting of freight and handling of passenger traffic, rail and motor vehicle transfer and terminal facilities, water transfer and terminal facilities, air transfer and terminal facilities, and any combination of such transfer and terminal facilities, commercial transportation, transfer, handling, storage and terminal facilities, and improvements relating to industrial and manufacturing activities within the district, and in connection with the operation of the facilities and
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improvements of the district, it may perform all customary services including the handling, weighing, measuring and reconditioning of all commodities received. A port district may also construct, condemn, purchase, acquire, add to and maintain facilities for the freezing or processing of goods, agricultural products, meats or perishable commodities. A port district may also construct, purchase and operate belt line railways, but shall not acquire the same by condemnation. RCW 53.08.245, Economic development programs authorized, states: It shall be in the public purpose for all port districts to engage in economic development programs. In addition, port districts may contract with nonprofit corporations in furtherance of this and other acts relating to economic development.

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Schedule of Audit Findings and Responses

Port of Seattle King County February 9, 2012
3. Port Commissioners paid personal expenses and unallowable business expenses with Port credit cards. Description of Condition
Port of Seattle policy allows Port Commissioners to use Port credit cards for businessrelated purposes. All five Commissioners have these cards. Between January 1, 2010 and August 31, 2011, their credit card charges totaled $74,816. Our audit identified 52 transactions totaling $2,990 that were not related to Port business. Charges included personal meals, other personal charges, and expenses to extend Port- sponsored trips or to modify the itinerary to accommodate non-Port activities. The Port was reimbursed for these charges. This violates state law (RCW 43.09.2855) and is an unconstitutional lending of credit. In late 2010, Port management became aware of unsupported and unallowable charges on commissioner credit cards. In June 2011, the Port hired an external consultant to examine these charges. The Port did not notify our Office of this issue. State law (RCW 43.09.185) requires entities to immediately report known or suspected losses of public funds or assets or other illegal activity to our Office. Each Port credit card user, including commissioners, signs the following certification prior to being issued a Port credit card: As a corporate cardholder, I agree to comply with the in the [sic] Port of Seattle's policies and procedures related to corporate credit cards. I agree to use this card for Port of Seattle approved purchases only, and agree not to charge personal purchases to the Corporate Card. I understand that the Port of Seattle will audit the use of this card and report any discrepancies. I further understand that improper use of this card may result in disciplinary action, up to and including termination of employment. Should I fail to use this card properly, I understand that the Port of Seattle may deduct, from my salary, an amount equal to the total of any discrepancy. I also understand the Port of Seattle may elect to collect such amounts, even if I am no longer employed by the Port. I understand that the Port of Seattle may terminate my right to use this card at any time, for any reason. I agree to return the card to the Port of Seattle immediately upon request or upon my termination of employment.

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The details of the charges, by Commissioner, are as follows:

Commissioner Amount Credit Card $2,961.82 $8,525.99 $24,438.26 $24,961.22 $13,928.30 $74,815.59 Charges Questioned Transactions 2 1 8 38 3 52 Questioned Costs $102.85 $88.45 $748.06 $1,209.91 $ 841.00 $2,990.27 Reimbursed to the Port $102.85 $88.45 $748.06 $1,209.91 $841.00 $2,990.27

Tom Albro Bill Bryant John Creighton Rob Holland Gael Tarleton

24 35 196 188 99 542

As noted above, a single commissioner was responsible for 38 of the questioned charges, totaling $1,210. This Commissioner stated to a newspaper that he was "not aware" of Port policies prohibiting such spending. A check this Commissioner used to repay the Port was returned as non-sufficient funds (NSF). He later paid the amount with a money order. The bank charged the Port an NSF fee of $40, but the Ports Chief Executive Officer waived a requirement that the Commissioner pay this fee to the Port. The Commissioner voluntarily turned in his card, but it was returned to him when the Port CEO assumed responsibility for collecting reimbursement for any personal charges made in the future. We identified one international study mission a Port Commissioner was unable to attend due to a scheduling conflict. The Port received a refund for the registration, less a $1,500 deposit. Emails indicated that another Commissioner would frequently cancel events at the last minute. Port employees were unable to provide a list of events the commissioner cancelled, or the amount of registration fees involved. These amounts were not reimbursed to the Port, and are not included in the table above.

Cause of Condition
Port Commissioners did not uniformly believe that Port policies governing credit card use applied to them. The Port relies on supervisors to enforce credit card policies. No one is directly responsible for enforcing Port policies with Commissioners. Port policies also do not stipulate who is responsible for the registration and cancellation fees when Commissioners are unable to attend a Port sponsored event due to scheduling conflicts.

Effect of Condition
Port Commissioners set the tone for the organization. Enforcement of expense policies becomes more difficult when Commissioners violate the policies. Port funds loaned to Commissioners were not available for legitimate Port uses.

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Recommendation
We recommend the Port clarify that all Port policies apply to Port Commissioners. We further recommend that the Port clarify existing policies to determine responsibility for registration and cancellation fees when Commissioners are unable to attend due to scheduling conflicts.

Ports Response
The Port of Seattle has a robust system of internal controls in place that address all financial transactions, and that system flagged the questionable expenses identified in the audit report. The questionable expenses have been fully repaid. Commissioners chose to hire a third party to review commissioner practices associated with credit card use and travel expense reimbursement and to ensure that all questionable expenses had been previously identified and reimbursed. The independent investigator was charged with identifying additional questionable expenses, if any; alerting commissioners to suspected losses, if any; presenting factual findings, and providing recommendations to assist commissioners in determining appropriate next steps. During the course of the review, the Commission alerted the State Auditors Office (SAO) when the independent investigator concluded that certain expenses were not allowable as port expenses. All information collected by the port for that review process was provided to the SAO during the course of the audit. Shortly after notifying the SAO, the ports Audit Committee held a public meeting to discuss the preliminary review findings and recommendations. All expenses identified in the audit report were discovered by the ports processes and thoroughly reviewed by the independent internal investigation. As the audit report notes, those expenses have been reimbursed to the port. The SAO audit team has identified areas where policies could be clarified, particularly those governing travel and expenses. Revision of port travel and business expense policies is nearing completion. Those revisions include amendments to specify circumstances when port representatives are not responsible for costs resulting from a trip cancellation; how expenses should be handled when a port representative chooses to combine non-port-related with port business travel; and several other areas included in the auditors recommendation. The Port of Seattle Commission has created a temporary committee, composed of Commission President Gael Tarleton and Audit Committee Chair Commissioner Tom Albro, to review commission policies and procedures. In addition, commissioners will begin posting all expenses and compensation to the ports website beginning the first quarter of 2012.

Auditors Remarks
We thank the Port for the assistance we received during the audit, and we will review the Ports corrective action during our next audit.

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Applicable Laws and Regulations

RCW 43.09.185, Loss of public funds Illegal activity Report to state auditors office, states in its entirety: State agencies and local governments shall immediately report to the state auditor's office known or suspected loss of public funds or assets or other illegal activity. RCW 43.09.260, Local government accounting--Examination of local governments-Reports--Action by attorney general, states: It shall be unlawful for any local government or the responsible head thereof, to make a settlement or compromise of any claim arising out of such malfeasance, misfeasance, or nonfeasance, or any action commenced therefore, or for any court to enter upon any compromise or settlement of such action, without the written approval and consent of the attorney general and the state auditor. Article VIII, Section 7 Credit Not to be Loaned, states: No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation. RCW 43.09.2855, Local governments Use of credit cards, states in part: (1) Local governments, including counties, cities, towns, special purpose districts, municipal and quasi-municipal corporations, and political subdivisions, are authorized to use credit cards for official government purchases and acquisitions. Informal AG opinion dated June 2, 2011, to Honorable Pam Roach, State Senator: May a local government official or employee use a publically-issued credit card for personal purchases? Brief Answer Under the Washington State Constitution and the laws of this state, including RCW 43.09.2855 and RCW 42.24.115, a local government official or employee may not use a publically-issued credit card for personal purchases, even if the person pays off the card prior to the date that the bill becomes due.

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