SPECIAL REPORT: Ra'Iroad, Inc. dHyanms Cape Cod an . fan 03 Account Anatomyo JUNE 1989 ,,
w
(, !;'tOBERT A. CERASOLI I' REPRESENTATIVE Zir4e Qlommnnuecxltq n #ffetHletc4usetts of Committee on Post Audit and Oversight STATE HOUSE, BOSTON, MA 02133 Chairman 3RD NORFOLK DISTRICT , 54 RUSSELL PARK I QUINCY, MA 02169 I HOME TEL.,: 471-3859 STATE HOUSE OFFICE ROOM 146 BOSTON. MA 02 t 33 TEL..: 722-2560 TO: REPRESENTATIVE GEORGE KEVERIAN, SPEAKER OF THE HOUSE, AND THE HONORABLE MEMBERS OF THE GENERAL COURT As Chairman of the House Committee on Post Audit and Oversight, I recently requested an examination of a specific 03 account listed in the Post Audit Bureau's PRELIMINARY REVIEW: CONSULTANT EXPENDITURES/Fiscal Year 1987. The reason for undertaking this special project stemmed from a review of the 03 listings in the section titled -- Companies Paid Over $1,000,000. There were 45 listings in this category, the largest amount totaling more than $15,000,000. Although not without precedent, it seemed extraordinary that some of these agencies, organizations and firms were being funded through the 03 account. The Cape Cod and Hyannis Railroad, Inc. (CC&HRR) was selected for addi tiona! review since it appeared to stand out as an unusual 'recipient of more than $2.5 million from an 03 account during 1987. A closer inspection of this railroad operation indicated that this was no ordinary commuter transportation facility. I want to extend my appreciation to the House Post Audit and Oversight Bureau staff for its prompt response to this request and especially Administrative Aide Frank Falacci and Committee Counsel Wade M. Welch, under whose direction this report was completed. ROBERT A. CERASOLI Chairman
A.lrrost entirely funded in its operation by the Commonwealth of Massachusetts, the CC&HRR represents what can happen when government ventures into the field. of private enterprise. The 1983 and 1985 transportation bond issues provided some $51. 8 million dollars in state and federal funds intended for restoration of rail service in this region. The various rehabilitation projects included the proposed return of Cape Cod Passenger Service, comprising technical studies and track rejuvenation at a combined state and federal cost of $42 million dollars. Actual passenger operations began when a newly incorporated entity, the Cape Cod and Hyannis Railroad, Inc., initiated a tourist excursion service for the 1981 sumner season between Hyannis and East Sandwich, a distance of 17 miles. In the surrmers of 1984 and 1985, the Commonwealth provided limited funding ($148 ,805) to enable CC&HRR to begin a seasonal passenger rail service demonstration from the. of the MBTA' s .Red Line in Braintree to Hyannis. As,parf of his state fiscal year 1986 supplementary budget request, Governor Dukakis included financial resources for the operation of the passenger rail dem:mstration program. An appropriation of $5. 5 million dollars was approved in June of that year. Due to spiraling liability insurance costs for the 1986 season, additional funding was necessary for 1987. The CC&HRR had agreements with the Commonwealth of Massachusetts, through the Executive Office of Transportation and Construction (EOTC) to provide subsidized passenger rail service 2 between the Greater Boston area (Braintree) and Cape Cod. The service to be provided by CC&HRR under the terms of these agreements was "a seasonal intercity and scenic passenger train service to and from the Cape Cod Region and within the Cape Cod Region. " Contracts for 1986, 1987 and 1988 provided for the Commonwealth to pay CC&HRR subsidies of $1, 778, 350, $2, 048, 894 and $3, 053, 309, respectively, to pay for total Allowable Expenses including but not limited to, direct transportation, equipment maintenance, facility maintenance, general and administrative expense, education and prom:::>tion, equipment leasing and liability insurance expense for the railroad company. In addition, the agreements provided the CC&HRR, management fees, and a revenue sharing formula. A House Post Audit Bureau report in December, 1988, identifying 03 fund recipients, lists the CC&HRR as receiving $2,556,404 in 03 funding during Fiscal Year 1987. The CC&HRR ceased operations last winter when it became apparent the state's current fiscal situation would no longer subsidize the seasonal service, primarily the run from the. Cape to Braintree during May through October. However, in a relatively short period of tirne, 1986-1988, preliminary review indicates the family owners and CC&HRR received approximately $2,000,000 through 03 funding for salaries, benefits and management fees and were. permitted to retain the major portion of ticket revenues with minimal requirements for invoice documentation or other financial controls, while the Comnonweal th expended m:::>re than $6, 000, 000 financing the bulk of the operation. The latter figure does not include earlier costs of rehabilitating 3 the railtrack bed or right-of-way payments to Bay Colony Railroad, Conrail and Amtrak. In retrospect, the state paid the owners their wages and benefits, management fees, allowed them to keep a major share of incoming revenue and then reimbursed the company for its operating expenses. Since this was a seasonal operation, the passenger service program was available to the general public for 14 months, extended over a three year period. During the initial sumner of 1986, the service did not begin until the second week of July. THE ORGANIZATION OF C C & H R R - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ - - At the time of its organization in 1981, Mark A. Snider of 3583 Main Street, Barnstable, Massachusetts, was the President of the Cape Cod and Hyannis Railroad, Inc. Stanley W. Snider of 291 Goddard Avenue, Brookline, Massachusetts, Mark's father, was listed as Treasurer. Both were listed as directors. In annual reports filed with the State Secretary's office in 1986, 1987 and 1988, Mark A. Snider is listed as President and Treasurer of the cape railroad. In 1986, the state Executive Office of Transportation, which negotiated the contract with the railroad, agreed to salaries of $50,000 and $35,000 respectively for Mark Snider and Gwenn E. Snider, Mark's wife, for what ostensibly anounts to a six m::>nth operation. Gwenn Snider, according to ECYl'C, was responsible for the education and promotion of the rail passenger service, an item paid for by the state subsidy 1 for which $765 1 606 was budgeted during the program's three years. 4 The following year, ooth were given cost of living increases, bringing their salaries to $51,900 and $36,330. Prior to that however, in a letter responding to a limited audit review, dated May 22, 1987, Mark Snider related that the Cape Cod & Hyannis Railroad, Inc., detennined in December, 1986 to ccmpensate Gwenn Snider an additional $10,000 and Mark Snider an additional $25,000 to bring ooth salaries up to "an anount deemed appropriate for the work perfonned during the year." According to EOTC, this was done by transferring $35,000 from the ticket sales revenue, apparently with the approval of financial personnel in Transportation. Corporate documents .filed at the State Secretary's office, lists Gwenn Snider as a director of the CC&HRR. WAGES AND Consequently, in 1986, payroll and tax records list Mark Snider's salary as $75,731.36 and Gwenn Snider's, $45,586.92. They were also allowed retirement plans and paid vacations, benefits generally prohibited under 03 contracts. Additionally, the Sniders, through Cape Cod & Hyannis Railroad, along with their annual salaries and benefits, were paid management fees totaling $512,000 by the state during the three seasons of operation. Payments were i.n the amount of $160,000 for each of 1986 and 1987, and in 1988, EOTC increased the management fee to $192,000. 5 REVENUE SHARING/FEES----------------------------------------- Executive Office of Transportation reported Cape Cod and Hyannis Railroad ticket revenues for the 1988 Season equaled $646,020. Per agreement with EOTC, the railroad company was permitted to. keep $463,010 as its share. Net revenue credited to the Corrm::mwealth under the revenue sharing plan, amounted to $183,010. In 1987, an EOTC report to House Ways and Means Committee, states sales totaled $563,449 with revenue sharing figures indicating CC&HRR retained $392,690 and the state credited with $170,759. Ticket revenue for 1986 reflects the passenger derronstration program's late start with total sales of $343,390. The state was credited with $58,717, the amount, as agreed, to be deducted fran the operating subsidy paid the railroad, which was allowed to retain $284,673. Invoice by CC&HRR was required only for "reimbursable expenses" according to papers from the Executive Office of Transportation. Accordingly, how CC&HRR disbursed the substantial sums it received in ticket sales revenue and management fees was not required to be reported. This is an area Post Audit believes should have been more vigorously pursued by the authorizing agency. EOTC disclosed that during contract negotiations in the Spring of 1988, Mark Snider, when asked what he did with the management fees, replied that in the sumner of 1987 he began a ferry service running between Martha's Vineyard and the State Pier at the Cape Cod Canal, a short distqnce from the train station at Buzzards Bay. He, 6 or his newly organized firm, Vineyard Express Line, Inc., according to the Woods Hole, Martha' s Vineyard and Nantucket Steamship Authority, leased a 600-passenger shuttle boat, the Comronwealth, from the Bay State-Spray & Provincetown Steamship Company, a company in which Joseph G. Pallotta is a principal and during the following year operated its own high-speed ferry service from Boston to the Vineyard. Snider declared to EOI'C that although his ferry venture increased train passengers by 9, 000, the operation lost $40, 000, paid for out of his management fee since EOTC considered the Snider-initiated ferry service a non-reimbursable expense. Snider did not resume the ferry operation the following summer. Other expenses considered non-reimbursable by the Eai'C were taxes, reserves to cover insurance deductibles and food and beverages sold to train passengers by CC&HRR employees. But financial statements credit CC&HRR with doing $111,843 in the food and beverage business in 1986, $281,689 the following season and $158,097 during 1988. LIMITED AUDIT REQUESTED-------------------------------------- A limited audit review of EOTC's 1986 agreement with CC&HRR was perfonned by the Massachusetts Bay Transportation Authority (MBTA) during the Spring of 1987 at the request of EOTC's Financial Affairs Office. It focused "on areas of concern to EOTC" and asked a number of questions as to certain CC&HRR' s practices and costs, not the least . being the accounting services perfonned for the railroad canpany by Stanmar,. Inc., of Boston Post Road, Sudbury, MA. 7 President and Treasurer of Stanmar, Inc. is Stanley W. Snider, who, according to :roTC, is the father of Mark Snider. As per its annual report filed with the State Secretary's office for fiscal year ending December 31, 1988, Mark Snider is listed as a director of Stanmar, Inc. Official papers shOW" that Stanley Snider was instnnnental in the legislative incorporation proceedings of the CC&HRR in 1981. The post office address of the then newly organized railroad company was given as Boston Post Road, Sudbury, MA. A1 though the MBTA review found the Cape railroad's accounting system to be "alequate under the circumstances", it apparently was not able to satisfy itself as to the reasonableness of the fees paid to Stanrnar, Inc. Based on information provided it, the MBTA review learned that CC&HRR paid same 100 employees per week and processed about 300 to 400 accounts payable transactions each month during the peak performance period. Since computer accounting services are provided by n\lll'erous service bureaus and CPA finns, MBTA audit personnel checked the "reasonableness" of the Stanmar fees by calling Accounting Corporation of America. and talking with two CPA firms. They discovered that the going rate for services comparable to those provided by Stanmar was approximately $250 a week. In correspondence to the railroad, the MBTA noted the competitive rate was significantly less than the $4,000 to $5,000 weekly fee paid to Stanmar, and reimbursed by the state, during the peak performance period. In response to the audit review, Mark Snider submitted to EOTC a proposal . from an independent accounting firm, estimating that an 8 in-house accounting staff for CC&HRR would cost in excess of $63,000. In a letter to E<YI'C, Snider replied, "We believe Stanmar's $59,000 charge is reasonable in comparison. " Stanrnar, Inc. , continued to do the accounting/rookkeeping for CC&HRR in 1987 and 1988 and the anount budgeted for Stamnar, Inc., during the . passenger service's final season of operation, was increased to $66,000. Corporate financial records for 1986, 1987 and 1988 show that Stanley Snider, Stanmar's president, held a note from CC&HRR, payable to Stamnar, Inc., anounting to $749,968, The MBTA's limited review also raised questions concerning: * the costs of fringe benefits CC&HRR was paying its employees and subsequently billing the state; * Rent of an a ~ n t for the superintendent of maintenance charged to the s t a t e ~ * Within the premises in Hyannis for which the railroad charged lease payments to the EOTC was also located an office used to conduct a business "not related to the purposes of the contract"; * Although telephone and microcarnputer costs were consistent with the types of costs allowed under terms of the contract, the procurement of these items at the end of the contract period raised concerns about their being of benefit during the term of the contract. PAID FOR BY COMMONWEALTH------------------------------------- Invoices fran CC&HRR included the following classification of !i wages as allowable .expenses billed to the state: General and t 9 Administrative; Train Crew; Buildings and Grounds; Train Servicing; Equip:rent Maintenance; Equip:nent Maintenance (facility); Education and Praroc>tions; Falnouth Bus. approximately 100 employees, Benefits, including vacations, to equaled 20 percent of gross pay, according to CC&HRR payroll invoices. Fuel, repairs, cleaning, utilities, supplies, security, uniforms, painting, tickets, legal fees, insurance costs, advertising, 11ewsclip service, taxi fares for train crews, public relations, crew training costs, membership fees and convention attendance as well as numerous other expenses of the railroad were all billed to ECYI'C and paid for by the Conrronwealth of Massachusetts. CONCLUSION--------------------------------------------------- Whatever merit, if any, there may have been in the Commonwealth's demonstration program in attempting to restore passenger rail service between Cape Cod and Greater Boston, it was. negated by the exploitation of the 03 consultant account. A preliminary investigation by Post Audit and OVersight detennined that after three years and more than $6,000 ;000 in 03 expenditures, all that the state can presently account for of this much publicized program, is used machinery, used office equi:pnent, and rusting rails. Instead of providing what was believed a necessary alternative mode of transportation for daily cormnlters traveling between the Cape and Boston, the CC&HRR remained essentially an excursion operation for visiting tourists, replete with expenditure driven 10 costs. The uncontrolled rise of 03 employment by various agencies in recent years, is due, in part, to the "hidden" personnel shielded by the vendor. In this instance, CC&HRR was the designated vendor under 03 funding. However, state payroll records would fail to identify the 100 employees of the railroad who received wages and benefits as 03 recipients. Any paper trail of accountability is generally diminished by use of the 03 account. Furthermore, payment of benefits and vacation time to the employees of the railroad, under the 03 contractual tenns, must be regarded as questionable, if not unwarranted. In its desire to establish additional public transportation from Greater Boston to the Cape, EOTC embarked on a route that seemingly encouraged irregularities, abuse and imprudent management, not to mention the giving birth to yet another unnecessary, bureaucratic appendage. Those in state government who seek reasons as to why the Com:ronwealth' s financial position and credit rating has suffered reversals, need only review the administration's demonstration project of railroad passenger service in Southeastern Massachusetts and cape Cod. Use of the 03 account, as was the case here, strongly attests to a statement made earlier by Chairman Cerasoli, that the CCll.'lTOC>nwealth can prune more than $300 million dollars from 03 accounts "And not miss a beat!" During the 14 months of actual operation extending over a three-year period, the Sniders, as principals in the Cape Cod and Hyannis Railroad, were paid nore than $360,000 in wages and benefits 11 by the state; received $512,000 in management fees; received approximately $184,000 for doing CC&HRR acco1.mting work; and were allowed to retain approximately $1,000,000 in ticket sales revenue. In exchange, state government funded roughly, the entire operation of the CC&HRR, including payroll, equipment maintenance, promotion and education, supplies, maintenance facility, equipment lease, and insurance. Restraints and balances within this program appear discursive since the railroad operated under independent contract and thus not bound by state statute. For exarrq:>le, according to EOl'C, the CC&HRR was permitted to select its own agent of preference to handle its liability insurance, an item involving nore than $1 million dollars in premium payments. For this a:rrount, a state agency would be required by law to proceed through a bidding process. EXYl'C maintains it requested expressions of interest in the passenger service deroc>nstration program fran Conm:mwealth railroad companies but only CC&HRR responded to this request, apparently nullifying the necessity for a bid-award process. Despite glowing reports by officials as to the progress of the rail passenger demonstration program, the Cape Cod to Boston intrastate plan offered marginal assistance or convenience for ccmnuter traffic between the two points and in reality remained a day-trip rail excursion for visiting tourists Essentially, once the State 03 rroney was shut off, the train stopped running. Discussions are reportedly 1.mderway with the MBTA in an effort to determine whether it should expand its services to carry passengers between Cape Cod and its Braintree station. It is Post 12 Audit 1 s hope that :roTC will approach the South Shore's alternate transportation problem in a more prudent and cost efficient manner. The administration, and particularly EOTC, should stop using 03s' to fund transportation projects. The taxpayer deserves more accountability. Therefore, because of what appears to be :i.rrq:;>roprieties and irregularities in the :i.rrq:;>leirentation of the 03 arrangeirent between the Executive Office of Transportation and Construction and the Cape Cod and Hyannis Railroad, Inc., it is hereby recarrmended that this matter be referred to the Office of the Inspector General for his attention. HOUSE POST AUDIT AND OVERSIGHT COMMITTEE HOUSE POST AUDIT AND OVERSIGHT BUREAU The HPAO Committee is composed of eleven members of the House of Representatives whose goal is to promote more effective management of state government programs through performance evaluations con- ducted by the Post Audit and Oversight Bureau. HOUSE POST AUDITand OVERSIGHT COMMITTEE Robert A. Cerasoli Chairman Rep. Denis Lawrence, Vice Chairman Rep . Alfred E. Saggese, Jr. Rep. William P. Nagle, Jr. Rep. Mrujorie A. Clapprood Rep. Larry Giordano Rep. Kevin O'Sullivan Rep. Patrick F. Landers, III Rep. Arthur Stephen Tobin Rep. Peter Torkildsen Rep. John C. Bradford The HP AO Bureau is headed by a Director and includes a staff of professionals with diversified back- grounds and skills. The Bureau provides the House of Representatives with a management review team to assess the impact of public programs HOUSE POST AUDIT and OVERSIGHT BUREAU Richard F. Tobin, Jr. Director Michael J. DelVecchio, Research-Staff Director Dennis F. Griffin, Assistant Director Ronald Mariano, Assistant Director Fran Brown, Assistant Director Mary Bono, Assistant Director David L. Malloy, Senior Researcher Robert M. Brigham, Senior Researcher Michael J. Pieroni, Senior Researcher James Thibodeau, Research Assistant Bruce J. Tobin, Research Assistant Anne F. ~ a y e s , Research Assistant Jacquelyn F. Murphy, Principal Secretary