November 3, 2011

Mayor Patrick J. Morris, President Members of the Commission San Bernardino International Airport Authority 294 South Leland Way San Bernardino, CA 92408 Dear Mayor Morris and Members of the Commission: At the request of the 2010-2011 San Bernardino County Grand Jury and in accordance with State law, the San Bernardino International Airport Authority (SBIAA) was required to formally respond to the Grand Jurys Final Report entitled Performance Audit of San Bernardino International Airport Operations, Development and Construction Activities by no later than August 30, 2011. On August 17, 2011 the SBIAA Commission released its formal response to the Grand Jury report. In the transmittal letter of your response, you noted that the Commission is prepared to implement the recommendations contained in the Grand Jury report. However, you further asserted that the Commission had identified a number of significant factual errors and misstatements in the Grand Jury Report and stated that it is essential that the foundational errors be addressed to ensure the integrity of this process. These claims of factual or foundational errors within the grand jury report by the SBIAA Commission are unsupported by the material and documentation provided in the Commissions formal response and the grand jury strongly disagrees with your representation of the audit. The Commissions written response to our audit report consistently misrepresents our findings and provides vast amounts of information that is superfluous to the audit topics. In many instances, the Commission has relied upon erroneous information when formulating its response and, based on comments made by the previous Interim Executive Director, clearly has been provided with erroneous information regarding the basic principles of a performance auditing. It is highly unusual for a Grand Jury to respond to public criticisms of its reports. However, after the review of the Commissions response and an analysis of the evidence supporting the allegations of factual or foundational error, this Grand Jury feels that it is critically important to ensure the integrity of the process by responding to these claims. Summary of Our Response Throughout the period when the Commission was holding public hearings on the Grand Jury report and deliberating on its response, the Interim Executive Director, Mr. Donald Rogers, made the assertion that the Grand Jury did not conduct a performance audit. Mr. Rogers stated that past

Mayor Morris November 3, 2011 Page 2 accomplishments and performance improvements were not discussed, and that meaningful comparisons with other agencies were not conducted. This response from Mr. Rogers, a Certified Public Accountant, misstates the purpose and scope of a performance audit. According to the United States Government Accountability Office (USGAO), which publishes the paramount standards on performance auditing in the country,
Performance audits are defined as engagements that provide assurance or conclusions based on an evaluation of sufficient, appropriate evidence against stated criteria, such as specific requirements, measures, or defined business practices. Performance audits provide objective analysis so that management and those charged with governance and oversight can use the information to improve program performance and operations, reduce costs, facilitate decision making by parties with responsibility to oversee or initiate corrective action, and contribute to public accountability.1

In other words, these guidelines also known as Generally Accepted Government Auditing Standards (GAGAS) - state that the purpose of a performance audit is to assess the efficiency, effectiveness and economy of an organization. While past accomplishments and performance improvements should be, and were, acknowledged in the report,2 the main purpose is to identify what is needed to improve operations. This was precisely the objective of the Grand Jury audit, and we found many opportunities for improvement at SBIAA. Misrepresentations: You claim that SBIAA staff had identified a number of significant factual errors and misstatements in the audit report. However, we never received an itemized list of such errors. Instead, we received a 583 page response that includes, among other things, several instances when the findings of our report were misrepresented or the findings and conclusions were challenged based on erroneous information. In all such instances, this letter and attachment describes the misrepresentations made by SBIAA staff and consultants and directs the Commission to the relevant pages in the report, so that you can independently compare the statement made in the SBIAA response with the actual content of the Grand Jury report. As an example, SBIAA attributes comments regarding the justification for extended jet bridge walkways to the Grand Jurys auditors when, in fact, our auditors were merely reporting assertions made by multiple SBIAA staff and Mr. Scott Spencer, your developer, during field work. As will be discussed more fully later in this letter, the auditors went to great lengths to obtain evidence of SBIAA management claims that the walkways were installed for fire safety purposes. Our auditors independently researched the matter and, ultimately, rejected SBIAAs claim that the walkways were installed for this reason. The credibility of the Commissions response is undermined by the use of misrepresented facts to support the allegations of error within the audit report.

, United States Government Accountability Office, by the Comptroller General of the United States, Government Auditing Standards, Standard 1.25 Performance Audit of San Bernardino International Airport Operations, Development and Construction Activities, Page 5
2

Mayor Morris November 3, 2011 Page 3 Reliance on Contracted Profit-Making Entities: The SBIAA response to our report relies heavily on the efforts of third-party contractors retained by SBIAA. It is clear from the analysis presented that these contractors were often asked to respond to narrowly defined questions, using only the information and data provided by Airport staff. As we will demonstrate, in some instances, these contractors reported their conclusions based on erroneous information. This letter responds to and articulates our disagreements to the assertions made by these contractors. However, we also note that the independence of the contractors analysis is questionable, given their financial relationship with SBIAA. Inclusion of Superfluous Material: While our report of the performance audit totaled 120 pages, the response from SBIAA, at 583 pages, was nearly five times as long. A close inspection of the SBIAA response shows that much of it is superfluous to the findings contained in the report, or contains documentation that has been produced since the Grand Jurys audit report was released. For example, 236 pages or 40 percent of the response consists of policies and procedures adopted after the audit was completed. Another 43 pages, or approximately seven percent, consists of a university economic impact analysis that appears to have been commissioned by SBIAA management and is premised substantially on commercial airport passenger projection assumptions produced by SBIAA, which are heavily critiqued in our audit report. Further, the university study does not directly or indirectly address our findings on internal controls, construction management, the acquisition of used aviation equipment, a $1 million settlement made with Mr. Spencer, or the Authoritys relationship with contractors, and is thus irrelevant for purposes of evaluating the audit findings. Audit objectives GAGAS defines audit scope as, the boundary of the audit and is directly tied to the audit objectives. The scope defines the subject matter that the auditors will assess and report on, such as a particular program or aspect of a program, the necessary documents or records, the period of time reviewed, and the locations that will be included. In this instance, the scope was defined by the Grand Jury to obtain information in support of its investigations and provide recommendations for improvements in some key management areas. Specifically, the purpose of the audit was to evaluate the efficiency and effectiveness of the Airports operations, development and construction activities. As stated in the report, the audit objectives were to: Evaluate the management structure and authorities, including governance and staffing levels, decision making authorities and processes, as well as performance and financial management; Review 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;

Mayor Morris November 3, 2011 Page 4 Assess 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; Review the leasing of hangar and terminal facilities, and the process for awarding service contracts, including the master lease and operating agreements; Evaluate 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; and Assess the master lease agreement, including the responsibilities of the lessee (e.g., operations and development, airport promotion, etc.) and compliance with lease terms.

In short, the scope of the performance audit was defined by the Grand Jury to supplement the results of its own investigations and provide meaningful recommendations for consideration by SBIAA. Audit Methods We conducted the audit in accordance with Government Auditing Standards, July 2007 Revision, by the Comptroller General of the United States, as modified by the San Bernardino County Grand Jury. Specifically, the Grand Jury requested that an exit conference, or final meeting with SBIAA, not be conducted. Under the modified approach, the following audit tasks included: An entrance conference in December 2010 with the Interim Executive Director3, the Assistant Director, the Aviation Director, the Director of Information Services/Clerk of the Board, and SBIAAs legal counsel (Mr. Timothy Sabo). Field work during the four-month period from January 2011 through April 2011. Field work included (1) an initial assessment, including interviews with SBIAA management, of administration and operations; (2) four formal information requests; (3) tours of the redevelopment area, airport property, and used aviation equipment acquired from Norton Development Company; and (4) additional interviews with 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.

The Grand Jurys auditors met with the Interim Executive Director, Mr. Don Rogers, who has since resigned from his duties at SBIAA.

Mayor Morris November 3, 2011 Page 5 Internal quality assurance review. Publication of the final report on June 30, 2011.

We have responded below to major assertions made in the SBIAA response that conflict with the findings of our report: SBIAA Commission Response to Recommendation 3.5 SBIAA Commission Resolution 2011-04, passed on August 10, 2011, provides an official response to our recommendations. While the Commission stated its agreement with 15 of the 16 recommendations in Resolution 2011-04, it disagreed with Recommendation 3.5, which relates to the purchase of used aviation equipment from Norton Development Company, LLC. Recommendation 3.5 advised the SBIAA Commission to 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. SBIAA Resolution 2011-04 states that: The referenced agreement has been implemented, and there are no similar agreements pending at this time. The SBIAA Commission will enforce all conditions precedent in the applicable development agreements to ensure full compliance by the developer prior to consideration by the SBIAA Commission of acquisition of any ownership interest in the improvements. Additional reviews will be requested by the SBIAA Commission as appropriate. We stand by our recommendation that the Commission direct SBIAA management to cease from approving further construction funds for the following reasons: 1. The Airport currently owns six unrefurbished jet bridges and other miscellaneous equipment that is in unusable condition. Since the previous acquisition was accomplished without a contract, the Grand Jury continues to have a concern that Norton Development Company, LLC will be asked to perform further repair and refurbishment services on such equipment through its third party vendors. Such activity should be immediately ceased and no further requests should be made to Norton Development Company, LLC related to the acquisition. 2. As noted in Section 3 of our report, due diligence has not been conducted on the usefulness of the equipment that has been purchased. Specifically, the equipment may be near the end of its useful life, even with a refurbishment, and its specifications may not be appropriate for its location at the customs building or future gates without further costly construction modifications;

Mayor Morris November 3, 2011 Page 6 3. As noted in Section 3 of the report, SBIAA management never executed the purchase agreement for the acquisition of used aviation equipment from Norton Development Company and has more informally proceeded with the acquisition under its existing agency-developer agreement; 4. According to the auditors analysis (see page 3-7 of our report), it is likely that SBIAA management has already exceeded the amount stated in the purchase agreement ($4,060,000); and, 5. No airline has publicly signaled its intention to provide a level of service necessitating jet bridge access to a customs or other facility. Therefore, the Commission should strongly consider directing management to cease from approving all further fund payments for used aviation equipment from Norton Development Company, LLC. Policies and Procedures The response from SBIAA included four separate policies and procedures covering: (1) construction management; (2) accounting; (3) purchasing; and, (4) investments. As stated in our report, only two policies and procedures were made available immediately at the outset of the performance audit. These were for (1) Personnel and (2) Purchasing. Despite the auditors written request on December 15, 2010 for all policies and procedures, SBIAA did not provide a copy of the Investment Policy, which is dated August 1993 .Further, although the Construction Policies are dated February 2011, they were not provided to auditors during their fieldwork phase and were not officially approved by the Commission until June 2011. TranSystems Assertions on Used Aviation Equipment The SBIAA response to our report included 17 pages of PowerPoint slides from a presentation conducted by TranSystems at the SBIAA Commission meeting on July 27, 2011 entitled SBD Airport Jetbridges. Incidentally, TranSystems is a subcontractor under Norton Development Company, LLC for the Terminal Development Project. This PowerPoint presentation included two assertions that we consider misrepresentations of the findings contained in our report. TranSystems Assertion- Appropriateness of Purchased Jet Bridges The first assertion put forward by TranSystems was that we were incorrect to assert that jet bridges that were refurbished and installed at the Terminal Building by Norton Development Company, LLC appear to be inadequate for use with some regional jet aircraft without fitting the terminal with additional expensive equipment. On page 3-4 of the report, the auditors assert that 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. (emphasis added) This assertion was based on (1) the length of the purchased jet bridges; (2) the vertical distance between the floor of the terminal building and the

Mayor Morris November 3, 2011 Page 7 door floor (sill) height for various regional jet aircraft4, which is approximately 10 feet; and, (3) the Federally mandated maximum slope of 8.33% per the Americans with Disabilities Act. We disagree with TranSystems assertion and stand by our finding for the following reasons: 1. TranSystems presentation misrepresents our finding. The focus of our finding on page 3-4 is on the ability of jet bridges to reach various regional jets unaided. The focus is on jet bridges, as opposed to the combination of jet bridges and walkways; because the former Interim Executive Director (Mr. Don Rogers) made a representation to the Commission on July 3, 2007 that the jet bridges would meet the Airports needs. Despite the clear focus of our finding on jet bridges, the TransSystems presentation states that Engineered Walkways were installed with permissible slopes and All jet bridges with walkways are within tolerance and serve all aircraft in Table 3.1. In fact, our finding states on page 3-4 that walkways would be required to reach the regional aircraft. The finding further states on page 3-5 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. 2. The evidence provided by SBIAA management to the auditors supports our conclusions. The SBIAA Commission approved the Sale and Purchase Agreement with the understanding that the jet bridges would be sufficient for use at the airport without additional expensive equipment to connect passengers between aircraft and the terminal building. Specifically, the former Interim Executive Directors July 3, 2007 staff report to the SBIAA Commission made no mention of walkways. It only mentioned Sky Bridges. We stand by our finding that SBIAA management did not conduct proper due diligence on the used aviation equipment purchased from Norton Development Company, particularly in regards to the jet bridges. As discussed in Section 3 of our report, the jet bridges: Would not be able to reach the relatively lower sill heights of regional jets without the additional aid of expensive walkways, which in effect extend the length of the passenger boarding bridge to the aircraft; and Were built for large jet aircraft that were commonplace in the 1970s, 1980s, and 1990s at New Yorks John F. Kennedy International Airport, not the regional jet aircraft that were forecasted to be 50% or more of the fleet mix at San Bernardino International Airport until at least 2023. Further, evidence collected by auditors, including a photograph on page A-3.1-8 of Attachment 3.1 of our report, supports this fact.

According to the January 2006 Terminal Space Needs Study commissioned by SBIAA, the forecasted passenger fleet mix consisted of 50% regional jets at the outset of anticipated operations in 2008 rising to 90% of the fleet mix by 2023.

Mayor Morris November 3, 2011 Page 8

TranSystems Assertion- Purpose of Walkways The second assertion put forward by TranSystems was that the audit report claims that the walkways were required to assure 100ft separation between fuel vent and unprotected exterior building skin. On page 3-5 of our report, our finding states that the audit team was told by the Manager of Norton 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 firethis reasoning was also asserted by the Interim Executive Director and the Assistant Director of SBIAA. (emphasis added) As noted, the use of fire standards as justification for purchase of the walkways is attributed to the Manager of Norton Development (Mr. Scot Spencer), the former Interim Executive Director (Mr. Don Rogers), and the Assistant Director (Mr. Michael Burrows). We disagree with TranSystems assertion and stand by our finding for the following reasons: 1. TranSystems presentation misrepresents our finding. Our finding clearly states on page 3-5 of our report that the Manager of Norton Development, the former Interim Executive Director, and the Assistant Director made unsubstantiated assertions to the auditors that the walkways were purchased for the purpose of fire protection. The report also provides details on page 3-5 explaining why the assertions made by these three individuals were erroneous. The TranSystems presentation incorrectly attributes this assertion to the auditors. 2. Audit work papers provide evidence that challenges TranSystems assertion. After the Manager of Norton Development, the former Interim Executive Director, and the Assistant Director asserted to the auditors that the walkways were purchased for fire protection purposes, the audit team followed up with requests for the relevant law, regulation, or code that these individuals had vaguely referenced. A review of audit workpapers has uncovered the following evidence to support our finding: On March 9, 2011 the audit team emailed the SBIAA Director of Information Services/Clerk of the Board requesting copies of the referenced fire codes. On March 15, 2011 the Director of Information Services/Clerk of the Board set up a folder on the File Transfer Protocol (FTP) site set up to transmit documents, but failed to respond to our request for the referenced fire codes. On March 16, 2011, the auditors asked Mr. Scot Spencer for copies of the fire code that he and SBIAA management used to justify the expense of the walkways. Mr. Spencer indicated that he could provide those to the audit team. The audit team followed up with Mr. Spencer on March 25, 2011 by sending a request for information via email. That written request was subsequently followed up with a subpoena. Mr. Spencers response to the subpoena did not include a fire code section to back up the claim made by him, the former Interim Executive Director, and the Assistant Director that the walkways were purchased for fire protection.. Also, the

Mayor Morris November 3, 2011 Page 9 auditors reviewed national fire safety regulations and standards for airports that do not require the set back distance claimed by the Airport officials and developers. Faithful & Gould Assertions on Used Aviation Equipment The SBIAA response to our report included 142 pages of PowerPoint slides and a Summary Report from Faithful and Gould, a consulting firm that specializes in construction and project management. SBIAA management commissioned Faithful and Gould to conduct two cost comparisons including: (1) a comparison of costs to purchase new aviation equipment versus the price that SBIAA paid Norton Development for used aviation equipment and (2) a comparison of terminal construction costs between San Bernardino International Airport and other airports. We have found considerable faults in the analyses conducted by Faithful and Gould that we believe invalidates their conclusions. Faithful and Gould Equipment Cost Comparison The first cost comparison presented by Faithful and Gould in the response related to the acquisition of used aviation equipment from Norton Development Company, LLC. According to the PowerPoint slide on page 290, SBIAA commissioned Faithful and Gould to compare the costs of new equipment to the cost that SBIAA paid Norton Development for used equipment. According to the Faithful and Gould study, SBIAA saved approximately $4.8 million. We have found considerable flaws in the Faithful and Gould analysis, which we believe invalidates their conclusion. We disagree with the assertion made by Faithful and Gould and stand by our finding for the following reasons: 1. Faithful and Gould did not analyze the value of the used aviation equipment. We recommended in Section 3 of our report that SBIAA Commission 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. (emphasis added) The Faithful and Gould study simply accepted the prices provided by SBIAA management for the used equipment and compared them to new equipment, as specified by SBIAA. 2. Faithful and Gould provided no evidence to dispute our finding that the used equipment acquired from Norton Development is likely to have a shortened lifespan. As noted on page 3-6 of our report, the used jet bridges purchased range in age from 20 years to 36 years. According to representatives from one jet bridge manufacturer, jet bridges generally have a lifespan of 20 years, but this could be extended if proper maintenance is conducted throughout the life of the equipmentthere is little evidence to suggest that SBIAA management conducted a thorough inspection of the condition of the

Mayor Morris November 3, 2011 Page 10 used equipment. Specifically, staff from SBIAA did not conduct a visual inspection of the equipment until after the Commission approved the authorization and the equipment was acquired by Norton Development. 3. The Faithful and Gould study disregards SBIAA documentation showing that gate seating provided by Norton Development Company is significantly less than the amount presented to Commission by management at a significantly higher cost. As noted on page 3-12 of our report, the former Interim Executive Director (Mr. Don Rogers) informed the SBIAA Commission on July 3, 2007 that Norton Development Company would be supplying approximately 2,500 seats that would be sufficient for 12 gates. However, as noted on page 3-12 of our report, auditors review of funding documents show that only 820 seats, or about a third of what was represented to the Commission have been provided. Further, although SBIAA documents assembled just before Commission approval showed that purchasing new chairs would have cost about $130 per seat, funding documents show that SBIAA paid Norton Development Company over $300 per chair. The Faithful and Gould study does not acknowledge or address this evidence. Faithful and Gould Construction Cost Comparison In its slide presentation, Faithful and Gould compared the cost for construction of the terminal at San Bernardino International Airport with the cost of other construction projects at seven other terminal construction projects at airports throughout the United States. Although such a comparison was not presented in the Grand Jury audit report, we believe the Commission should view the representations made by Faithful and Gould with skepticism. In its analysis, Faithful and Gould reported that the average cost per gate at the San Bernardino International Airport was $14,576,142, compared with $42,037,249 at the other airports. This comparison was based on total reported costs at SBIA of $58,304,568 for the construction of four gates. We requested our auditors to test the assertions being made by Faithful and Gould. The auditors found that: (1) the reported SBIA cost of $58,304,568 only included the cost construction of the terminal building and not additional project elements, such as the construction of a car rental area, parking lots and other support areas; and, (2) in at least one instance, the reported cost for terminal construction at the other airports was inflated. Our auditors selected the terminal project at Mineta San Jose International Airport for detailed analysis of the cost comparison. In its slide presentation, Faithful and Gould reported total costs of $342,000,000 for the construction of 12 gates. This amount grossly overstates the cost for the Mineta San Jose International Airport project, which has multiple components unrelated to the construction of the 12 gates at Terminal B. These other components include: (1) renovation of Terminal A; (2) the demolition and reconstruction of a new Terminal C; and, (3) construction of new roadways, a multi-level parking structure and other surface parking, While Faithful and

Mayor Morris November 3, 2011 Page 11 Gould excluded roadway and parking costs, it appears to have included the cost of Terminal A renovation, which nearly doubled the reported costs when compared with actual amounts. The following table shows the cost for Terminal B construction, with and without the demolition of the old Terminal C building, which was required to accommodate the full Terminal B footprint. As shown, the average cost for constructing a gate at Mineta San Jose International Airport was actually less than the reported cost per gate at SBIA of $14,576,142 (coming in at $12,611,820), when excluding the demolition cost for Terminal C. Even when the full Terminal C demolition cost is included, the average cost rises to only $15,172,871, which is merely $596,729 more than the reported SBIA cost or 4.1%.

Computation of Average Construction Cost Per Gate Based on Actual Financial Data Reported by Mineta San Jose International Airport
Estimated Actual as Reported by Mineta San Jose International Airport - without Terminal C Demolition: Airport Mineta San Jose Terminal B Mineta San Jose Terminal B Mineta San Jose Terminal B Mineta San Jose Terminal C Mineta San Jose Terminal B Description Terminal B/Utility Phase 2 Terminal B, Phase 2 Terminal B, Concourse Demolition for Terminal B All Project Components Gates 12 12 12 12 $ $ $ $ $ Project Cost 141,894,109 4,835,342 4,612,389 151,341,840 $ $ $ $ $ Cost/Gate 11,824,509 402,945 384,366 12,611,820

Estimated Actual as Reported by Mineta San Jose International Airport - with Terminal C Demolition: Airport Mineta San Jose Terminal B Mineta San Jose Terminal B Mineta San Jose Terminal B Mineta San Jose Terminal C Mineta San Jose Terminal B Description Terminal B/Utility Phase 2 Terminal B, Phase 2 Terminal B, Concourse Demolition for Terminal B All Project Components Gates 12 12 12 12 12 $ $ $ $ $ Project Cost 141,894,109 4,835,342 4,612,389 30,732,607 182,074,447 $ $ $ $ $ Cost/Gate 11,824,509 402,945 384,366 2,561,051 15,172,871

Legal Analysis Submitted by Hogan Lovells US, LLP We have no opinion regarding the legal analysis submitted by Hogan Lovells US, LLP pursuant to a request from SBIAA management in response to the Grand Jury report. In our report, we merely make the point that,
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 judges order and is not documented in any fashion.

Mayor Morris November 3, 2011 Page 12 In other words, our auditors did not seek an independent legal interpretation of the administrative order, nor did the Grand Jury request them to do so. Instead, our auditors sought evidence that the Interim Executive Director had thoroughly researched this matter when examining the conditions under which Mr. Spencer could be involved with Airport construction and operations activities. When competent evidence was not provided, our auditors questioned the reasonableness of the Interim Executive Directors interpretation. More importantly, these comments were made in the context of a broader question regarding the evolution of the Airports contract relationship with Mr. Spencer. As you will note when reading Section 5 of our report, we strongly questioned the judgment of the SBIAA Board of Commissioners and management regarding decisions to increase Mr. Spencers involvement in the construction of Airport facilities and the eventual assignment of nearly all aspects of Airport operations, given Mr. Spencers clear lack of directly related experience and criminal background. By not seeking competent legal counsel on the administrative ruling before expanding Mr. Spencers role, and by doing so only after a critical Grand Jury report was released to the public, SBIAA once again demonstrated an inability or unwillingness to exercise due diligence in such matters. California State University Study The SBIAA response to our report included a 43 page study conducted jointly by researchers from the Institute of Applied Research and Policy Analysis at California State University-San Bernardino in partnership with researchers at California State University-Fullerton. The study focused on the economic and social impacts of the development of SBIA property. We do not consider the subject and conclusions of the study to be well-founded or germane to the findings contained in our report. In particular, our observations include: 1. The study appears to have been commissioned and influenced by SBIAA management. While the researchers do not acknowledge sponsorship or a source of funding for the study, it appears as though it was provided as a service to SBIAA management. According to its website, The Institute of Applied Research and Policy Analysis at California State University-San Bernardino, is a full-service consulting and applied research organization. The purpose of the institute is to provide a variety of research and consulting services to public agencies, business organizations, and individuals within the university's service area. Further, the cover of the report states that it was submitted on June 1, 2011 to San Bernardino Airport Agency [sic]. Additionally, three of the five sources listed under References at the back of the report are from SBIAA. These include a presentation that was made to California State University-San Bernardino researchers by SBIAA/IVDA staff, as well as reviews of SBIAA and IVDA audit reports from 2004 to 2010, authored by Rogers Anderson Malody and Scott, LLP, the accounting firm founded by the former Interim Executive Director. 2. The study does not address any issues related to the findings in our report. The purpose of the study was to provide an analysis of the economic and social impacts of the

Mayor Morris November 3, 2011 Page 13 redevelopment of the former Norton Air Force Base. The study does not address any issues relating to the findings of our performance audit of SBIAA, namely: (1) that we found serious internal control breakdowns; (2) SBIAA management has disregarded standard practices for public infrastructure projects; (3) SBIAA management did not conduct proper due diligence in proceeding with the acquisition of used aviation equipment from Norton Development Company; and, (4) SBIAA management was quick to agree to a monetary settlement with two companies associated with Scot Spencer amounting to approximately $1 million under questionable circumstances. Former Interim Executive Directors Assertions to Commission on 7/13/11 & 7/27/11 The SBIAA response to our report included PowerPoint slides from two presentations given by the former Interim Executive Director. The former Interim Executive Director made several assertions in his presentation that challenge the methodology and conclusions of our performance audit. The attached tables list these assertions and our response to them. Former Interim Executive Director Assertions to SBIAA Commission on July 13, 2011 See the table on page 14. Former Interim Executive Director Assertions to SBIAA Commission on July 27, 2011 See the table on page 15. Please contact us if you have any further questions or concerns about this letter or statements made by others about our SBIAA performance audit report. Sincerely,

Edward Burgnon, Foreperson 2011-2012 Grand Jury

Mayor Morris November 3, 2011 Page 14

Former Interim Executive Director Assertions to SBIAA Commission on July 13, 2011 Page Document Assertion/Disagreement Grand Jury Response
"SBIAA staff and consultants have identified numerous issues and irregulatiries with the HMR Report. Key points for consideration are: (1) Though entitled "performance audit," no tests of performance were ever conducted.the HMR report states the opinion of its authors which are not substantiated with quantifiable data; (2) HMR Report questions the overall investment in the Airport through SBIAA and IVDA funding efforts and use of federal grants; (3) Although the HMR Report reviews certain Airport capital improvement projects of the IVDA, recommendations are being made to the SBIAA Commission; (4) There are multiple misstatements and factual errors that must be corrected..." (1) Though entitled "performance audit," no tests of performance The U.S. GAO definition of performance audit includes were ever conducted.the HMR report states the opinion of its the following language: "Performance audits authors which are not substantiated with quantifiable data encompass a wide variety of objectives, including objectives related to assessing program effectiveness and results; economy and efficiency; internal control; compliance with legal or other requirements...Performance audits may entail a broad or narrow scope of work and apply a variety of methodologies; involve various levels of analysis, research or evaluation..." This is precisely what was done by HMR, in accordance with the scope defined by the Grand Jury. We only produce evidence based findings. The evidence for this audit includes documents provided by SBIAA management as well as from other parties, such as aircraft equipment manufacturers. (2) HMR Report questions the overall investment in the Airport Our audit report does not question the overall through SBIAA and IVDA funding efforts and use of federal grants investment in the Airport nor does it quesiton the use of federal grants. Rather, our report analyzes the procurement process for the design and construction of the airport terminal and FBO facility. For example, we did not question SBIAA's decision to build a commercial passenger terminal, but rather we analyzed the process that led to the design and construction of the terminal building in its present form. As detailed in Section 2 of our report, we found, based on collected evidence, that SBIAA management made alterations to the timelines and scale of the Terminal Development Project based on more agressive passenger traffic projections and assertions of prosepective air carrier requirements provided by Mr. Scot Spencer- a contractor whom management intended to hire as the project developer through a sole source contract.
(3) Although the HMR Report reviews certain Airport capital improvement projects of the IVDA, recommendations are being made to the SBIAA Commission The power point slide does not detail which capital improvement projects they are referring to. However, the scope of our audit was to review the performance of the San Bernardino International Airport. While the IVDA has a role in capital projects on land surrounding the airport, SBIAA is responsible for developing and maintaing the airport facilities. Therefore, we found it appropriate to direct our recommendations to the SBIAA Commission. Further, the SBIAA Commission accepted recommendations included in our report. (4) There are multiple misstatements and factual errors that must be corrected... 493-494 "Sample of Specific Errors & Misstatements of Fact" "HMR Report, page 2-5 - 'Terminal Design Altered by Developer's Aggressive Passenger Projections and Assertions of Prospective Air Carrier Requirements' Our reponse" "HMR Report, page 2-1 - 'The fund control process (1) alienates "Sample of Specific Errors & Misstatements of Fact" the Chief Financial Officer from day to day financial oversight of major construction projects and (2) results in poor budgetary controls.' Our response" 15 of the 16

491-492

"Initial SBIAA Observations"

We can not provide a direct response to this assertion as it is not sufficiently detailed. The evidence we collected from SBIAA and outside sources contradicts the assertion that the Terminal Renovation Project was formulated in June 2006. Although SBIAA management claims the fund control process provides a "greater level of oversight" over project funds, the evidence we collected shows that this process supplants established controls. Further, based on collected evidence, the fund control process has resulted in poor budgetary controls, particularly for soft costs. While the statements made by the former Interim Executive Director are accurate, he misses the major point of the statement. After being placed on thirdparty contracts, SBIAA employees were no longer offered civil service protections and became at-will employees. This led to a greater concentration of power under the Executive Director.

496-497

498

"Sample of Specific Errors & Misstatements of Fact"

HMR Report, page 1-8 - "'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 positionsAccording 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,' Our response..."

Mayor Morris November 3, 2011 Page 15

Former Interim Executive Director Assertions to SBIAA Commission on July 27, 2011 Page Document Assertion/Disagreement
"HMR Report, page 2-1 - '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 budged as of January 2011..." 523-526 "Sample of Specific Errors & Misstatements of Fact"

Grand Jury Response

As noted on page 2-5 of our report, 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. The Executive Director asserted to the Commission on May 23, 2007 that a $38 million investment by IVDA/SBIAA was needed to enable the airport to accommodate commercial air service at SBIA. Basic improvements such as parking lots for airport passengers and workers were not included in this scope and were later used to justify expanding the project budget.

"Additional Topics/Inaccuracies and Misstatements in the HMR Report (7/27/11): Interpretation of DOT 527-530 judgment [sic] against Scot Spencer and what constitutes a ban from the 'aviation industry' within the DOT jurisdiction."

The PP slides include supposed due diligence in 2005 and a 2011 Our auditors did not seek an independent legal interpretation of legal opinion from Hogan Lovells the administrative order, nor did the Grand Jury request them to do so. Instead, our auditors sought evidence that the Interim Executive Director had thoroughly researched this matter when examining the conditions under which Mr. Spencer could be involved with Airport construction and operations activities. When competent evidence was not provided, our auditors questioned the reasonableness of the Interim Executive Directors interpretation. The Executive Director disagrees with words "convicted" and "conviction." the auditor's use of the No response. This criticism is immaterial.

531

"Additional Topics/Inaccuracies and Misstatements in the HMR Report (7/27/11): HMR page 5-6, first full paragraph states: 'in 2005 Mr. Spencer was convicted of violations of DOT regulations'and' the administrative law conviction occurred..."

"Additional Topics/Inaccuracies and Misstatements in the HMR Report 532-535 (7/27/11): HMR page 5-6, end of second full paragraph"

The Executive Director disagrees with the auditors' "plain language Irrelevant criticism. By not seeking competent legal counsel on understanding" and lack of a legal analysis of the DOT the administrative ruling before expanding Mr. Spencers role at administrative order within the GJ report. the Airport, and by doing so only after a critical Grand Jury report was released to the public, SBIAA demonstrated an inability or unwillingness to exercise due diligence in such matters. The Executive Director disagrees with the auditors' assertion that The tour of the used equipment in New York took place AFTER management did not conduct proper due diligence with regards to the Executive Director had obtained approval from the the purchase of used aviation equipment. Commission to enter into an agreement. There is no evidence that any due diligence occurred BEFORE the Executive Director recommended such acquisition to the Commission. Further, SBIAA management did not conduct life cycle analysis that would have taken into account the anticipated lifespan of the equipment.

536

"Additional Topics/Inaccuracies and Misstatements in the HMR Report (7/27/11): The HMR report indicates that SBIAA management did not conduct proper due diligence"