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Annual Action Status Report
July 1, 2011
SAO 2010 Performance Audit
Port of Seattle
SAO Audit Report No. 1004635
This action status report addresses 10 recommendations submitted to the Port of Seattle
following the Washington State Auditor’s Office performance audit report that focused on the
Port of Seattle’s Real Estate management and selected programs.
ITEM NO. 7a_Attach 1
DATE OF
MEETING 5/24/2011
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SAO AUDIT RECOMMENDATION 1: We recommend the Port complete its Century Agenda
as soon as possible and include the following elements:
Specific goals and objectives to use real estate holdings to achieve financial security and
promote economic development and community stewardship. The Port needs to set
priorities and clarify the sometimes conflicting direction of Strategy 21's guiding principles.
For example, the importance of generating revenue may conflict with the need to provide
financial incentives to attract job-creating industries. The absence of priorities can create
inconsistent and unclear decisions that do not align with long-term goals. These conditions
may have contributed to the unexplained inconsistencies in lease rates and rate hikes
discussed in Section 3.
Identification of the specific types of businesses and industries –outside of traditional air-and
sea-related companies–that the Port wants to secure and maintain as short-and long-term
tenants.
Goals and objectives that describe how the Port can best use its real estate to compete with
other West Coast ports for tenants, industries and importers/exporters.
Port of Seattle Action Status to Recommendation 1:
The Port Commission is making excellent progress on the Century Agenda effort. The
Commission has reviewed the SAO recommendations and, where possible, incorporated them
into the ongoing Century Agenda process.
The port began the Century Agenda strategic planning process in 2008, with the goal of crafting
a comprehensive vision and strategic plan for the port’s next quarter-century. The strategic
planning process reflects upon the accomplishments of the organization’s first 100 years and
will develop a new set of goals and objectives that reflect the challenges and opportunities of
the 21st century.
On August 4, 2009, the commission adopted the “Century Agenda: Expert Panels’
Recommended Guiding Principles.” Since that time, both the commissioners and port staff have
engaged in iterative discussions to transform the principles into measurable goals and
objectives. On January 4, 2011, the Century Agenda Committee, chaired by Commissioner
Albro, and joined by Commissioner Creighton, was approved by the commission and tasked
with completing the strategic plan.
The Century Agenda Committee has held numerous meetings thus far in 2011. The committee
will host at least one public panel discussion each month from March until October. Panels will
be composed of members of the public who have particular expertise in areas such as strategic
planning, economic development, movement of cargo and people, and environmental and
financial policies.
At the time this report is published, four panels will have occurred: a media roundtable, which
included area journalists who reflected on the challenges they see facing the region in the
coming 25 years; an economic development panel, which focused on emerging opportunities;
efficient movement of cargo by sea, rail, and air; and efficient movement of people through
airport and cruise facilities. Future panel topics include: the port’s real estate portfolio; ,
community environmental values; and funding the port’s operations.
Commissioners will develop a preliminary strategic goal after each roundtable, and that goal will
be presented to the Commission for approval. By late September, a short list of strategic goals
should be reviewed and approved by the commission. Port staff will then determine the five-year
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objectives necessary to achieve those goals. Final approval of both the strategic goals and their
objectives will be completed by December 2011.
SAO AUDIT RECOMMENDATION 2: To ensure clear and consistent real estate
management, we recommend the Port clarify the responsibilities of the Real Estate and
Seaport divisions and improve the enforcement of its policies and procedures.
It is equally critical for senior managers to improve oversight of Port property transactions and
to monitor employees' compliance with new policies and procedures.
Port of Seattle Action Status to Recommendation 2:
CEO Tay Yoshitani established the Real Estate division in 2008 to bring more focus to
managing the port’s real estate portfolio, and responsibilities within the relatively new division
continue to evolve. The Managing Directors of the Seaport and Real Estate Divisions have
reviewed their respective real estate portfolios in order to determine if any of the properties
should be managed by the other division. The criteria used were the following:
1. Is the facility a marine cargo or passenger facility?;
2. Does the facility or property provide necessary support for businesses in category one?;
3. Is the property strategically important for future growth of seaport terminals?;
4. Is the leased property located in the middle of a seaport terminal where having two
divisions involved would be cumbersome and inefficient?
Based on the above criteria, all leases were reviewed, and leases at Terminal 91 uplands, Pier
69 and Terminal 115 were considered for transferring between divisions. While a number of
leases at these facilities could be shifted to the other division based on the first two criteria
above, criteria four was the deciding factor in keeping the lease assignments as is. One lease
at Terminal 107 was moved to the Real Estate Division.
Oversight over compliance with policies and procedures is critical and the procedures
developed in response to Recommendation 6 address this issue.
SAO AUDIT RECOMMENDATION 3: We recommend the Commission assert the same level
of authority over real estate transactions that it established in Resolution 3605 for construction
management. In this audit, we identify conditions in which Port managers do not always
provide complete and accurate information that the Commission needs to make sound real
estate decisions. The Commission needs to ensure staff collect, track and convey key
information related to the cost and benefits of the leases to the Commission.
In the long-term, an updated strategic management plan approach may call for further
reorganization of these divisions to ensure that policies, procedures and daily operations
contribute to achieving the Port's vision and goals. As the Port updates its strategic plan, it may
want to reassess its division of responsibilities over real estate property management.
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Port of Seattle Action Status to Recommendation 3:
In adopting Resolutions 3605 and 3628, the Port Commission considered its role and oversight
in both the Port’s construction management and real estate property management practices.
These are two very distinct functions. As such, these resolutions apply two different, yet
appropriate, approaches to commission versus staff authority for these activities. The
Commission is currently reviewing Resolution 3628 and will consider advisable changes as part
of this process, including any revisions to sections two and three related to real estate
agreements. The Commission expects to act on the proposed changes to Resolution 3628 this
fall. Port staff members will communicate those changes to the SAO when they have been
implemented.
As addressed in the response to Recommendation 2, the Seaport and Real Estate Divisions
have reviewed property assignments to ensure the properties that support each divisions
strategic goals is assigned to that division. Both Divisions also will use consistent procedures
when managing real estate assets.
SAO AUDIT RECOMMENDATION 4: To strengthen its oversight of property sales and
purchases, we recommend the Port Commission adopt and enforce policies that require staff
to perform and document the following efforts:
Regularly and thoroughly analyze the Port's current and future property needs in the context of
the goals and objectives of a long-term strategic plan. These ongoing analyses should clearly
describe the justification for all purchases and sales. Properties with no current or future need
should be declared surplus and made available for sale. The Port should not declare property
surplus simply to expedite a sale.
Review in detail all property value appraisals and determinations by Port staff involved in the
property sale or purchase. This should also include a concurrent review by the Port's chief
financial officer to ensure the appraisal is fully understood. When it buys and sells property,
the Port should use current appraisals to establish and negotiate a good fair market price.
Perform complete financial and risk analyses of the purchase that include remediation costs,
potential ownership costs and environmental conditions.
Scrutinize information from staff to ensure it is adequate and complete and decide on
purchases and sales in an open public meeting.
Effectively market and advertise the availability of Port property to allow multiple purchasers
an equal opportunity to buy it in order to achieve the best purchase price.
Port of Seattle Action Status to Recommendation 4:
The port’s current policies RE-1 through RE-6 address various aspects of real estate
acquisitions and sales. In addition, section three of Resolutions 3605/3628 outlines staff’s
authority in acquiring and selling port-owned property. The Commission is currently reviewing
Resolution 3628 and will consider advisable changes as part of this process, including any
revisions to section three related to real property acquisitions and sales. The Commission
expects to act on the proposed changes to Resolution 3628 this fall. Port staff members will
communicate those changes to the SAO when they have been implemented.
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SAO AUDIT RECOMMENDATION 5: Port Commissioners should establish a comprehensive
strategy for each real estate asset and operating procedures to ensure prospective
transactions are evaluated against those strategies. Specifically, the staff should:
Develop a written asset management plan and strategies for each real property consistent
with the Port's overall real estate strategy.
Establish and document its desired business terms before negotiations are initiated for large
complex transactions.
Measure, evaluate and document the proposed business terms against whether the property
use, lease terms, property improvements and tenant incentives are consistent with the Port's
long-term interests.
Use standardized analytical tools to assess the degree to which the proposed tenancy fits in
with the Port's asset management plan.
Port of Seattle Action Status to Recommendation 5:
As noted under Recommendation 1, the Century Agenda process will be completed in 2011, but
commissioners adopted the recommended land use and real estate guiding principles in 2009
and currently use those to evaluate real estate transactions. In addition, plans for the port’s real
estate portfolio are evaluated and approved annually during the budget process. The Port has
also evaluated the property assignments between Real Estate and Seaport Divisions, as
discussed in response to Recommendation 2, and ensured that properties that support each
division’s strategic goals are assigned to that division.
Port staff members evaluate management plans for specific assets regularly, through the annual
budget planning process, during lease negotiations, and when vacancies occur. As discussed
with auditors, the port has specific competitive process and financial analysis expectations for
long-term (more than ten years) lease negotiations. Real estate staff members have developed
additional policy guidelines for these leases. These guidelines are part of the updated
procedures discussed in response to Recommendation 6.
SAO AUDIT RECOMMENDATION 6: Port Commissioners should establish policies and
procedures designed to ensure:
1) Rental rates reflect fair market value and consistent lease pricing.
2) Financial analyses enable the Commission to negotiate acceptable rates of return.
Procedures to set rental rates should require staff members to:
Treat similar properties consistently and follow the private sector practice of adjusting rental
rates over the term of the leases.
Obtain Commission approval for any lease whose rent does not reflect the prevailing market
rate and provide a rationale consistent with the Port's strategic goals and mission.
Obtain Commission approval for leases that are extended or renewed for combined periods
that exceed five years.
Establish methods to formalize and document the type and frequency of market analyses
required for each lease. These methods should address the risks associated with changes in
market conditions and over-reliance on third-party brokers.
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Establish a comprehensive marketing strategy that exposes properties to the greatest
number of potential tenants.
Suspend negotiations with a prospective tenant who is unwilling to pay fair market rent, and
aggressively market the property to other potential tenants.
Fully document all lease decisions.
Financial analysis procedures should require Port staff to:
Prepare financial analyses of leases and capital projects early in the process when internal
discussions begin. The financial analyses should consider all costs associated with a given
asset so the Port can measure its performance against the asset management plan. The
Port should continue to develop, improve and use rigorous, standardized financial analysis
tools.
Prepare a written narrative that describes all relevant facts and assumptions used in the
analysis, including the basis for revenue assumptions, tenant selection, land and asset
values and evaluation of alternatives.
Require property managers and analysts to discuss and evaluate alternatives for the use
of the land/assets.
Calculate the projected benefits of the lease using both an "all in" approach (includes new
capital expenditures, fair market value of all land and all existing assets, and all lease
revenue) and an operational costs-and-revenue approach.
Develop an independent review system that reports to the Commission. The individual who
does this should review and verify information provided to the Commission regarding
property transactions. This party would provide in writing:
o A narrative describing all its relevant facts and assumptions, the method of evaluation,
alternatives studied, and the overall conclusion of the financial analysis.
o An independent review of the financial data prepared by the Division and verification as
to its completeness and accuracy for major transactions.
o A recommendation to approve or reject the proposal.
Port of Seattle Action Status to Recommendation 6:
Rental and lease rates: The direction to establish lease rates that are both consistent and
pegged to fair market value seems contradictory; by its nature, fair market value changes often
and if lease rates are to be pegged to those fluctuating values, they will not be consistent.
Current policy is to consider first, how use of a facility contributes to the port’s overall mission of
job generation and economic development; and second, how best to achieve the greatest short-
and long-term value to the organization for specific properties.
Staff has updated procedures and guidelines to address issues brought up by SAO audit in this
area. A copy of the updated procedures is attached. (Attachment 2)
Financial analysis: The port will continue to improve documentation of financial analysis
performed for leases that do not require commission approval and of evaluations considered by
property management staff, as reflected in the updated procedures referenced above. The port
will consistently adhere to policies that provide for written details, reviews, and
recommendations of the financial analysis performed. The port will also ensure that
commission memos contain a summary of the key components of the analysis performed, while
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making more detailed information available to commissioners when requested, as is current
practice.
The Port has considered the auditors’ recommendation to include an “all in” approach in
addition to the current incremental cash flow analysis approach and has elected to continue with
its current practice for the following reasons: 1) the incremental cash flow approach is a well-
established financial model used widely across both the public and private sectors; 2) the
incremental cash flow approach accurately captures all of the relevant costs and benefits of
proposed transactions; 3) the evaluation of fair market value is not relevant unless a sale of the
property is an alternative under consideration (which is rare under current port policy); and 4)
providing more than one financial return calculation would likely cause confusion rather than aid
in decision making.
SAO AUDIT RECOMMENDATION 7: To better safeguard its assets and income related to the
Seaport's leased cranes, we recommend the Commission revise its procedures to require Port
staff to:
Verify that reported container crane use is accurate. The most practical verification method is
to periodically compare longshoreman/operator use data with data reported by the operator
through the Seaport Division's Crane billing system.
Inspect the cranes annually. The Port should consider hiring or contracting for crane
specialists to do the inspections if it determines that reprioritizing the current staff's workload
will not enable it to do so with current staff.
Audit crane logs, reports and records of maintenance performed.
Port of Seattle Action Status to Recommendation 7,Crane Billing:
The port is currently updating the automated crane billing process and will use that opportunity
to implement additional audit procedures as recommended by the auditors.
Port crane tariffs differ depending on the container terminal. For Terminal 46, the tariff is based
upon reported twenty-foot equivalent (TEU) units. For Terminals 5 and 18, the tariff is based
upon hours of use. As such, two different methods will be employed.
The port is in the final stages of implementing its Marine Terminal Information System (MTIS).
This is a much more robust reporting and customer billing system . A new important feature will
be the assignment of a unique identification number used by the terminal operator for inputting
data. This unique identifier will allow the port to verify when and by whom the data was input.
The port will assign a specific Seaport employee for audit purposes. Each quarter, a randomly
chosen ship at each terminal will be audited. The frequency of the checks may change based
on compliance. Audit files will be kept for SAO review.
Terminals 5 and 18: At Terminals 5 and 18, the port will follow the SAO’s recommendation to
compare longshore data to the terminal operator’s report. During load/unload operations, a
longshore clerk logs the box moves per crane per shift. The log is then handed in to the terminal
operator for entry into the crane billing system.
In that the longshore clerks at these terminals are employed by the Pacific Maritime Association
and not the terminal operator, the port feels that this independent source serves as a good
validity check to the terminal input.
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Terminal 46: At Terminal 46, the port receives daily vessel schedule updates from the terminal.
Within the schedule are anticipated box moves. Loaded and unloaded are aggregated to a
single number. This pre-arrival information is not entirely accurate as requests to accommodate
empty containers are can be made at the last minute. The pre-sail and post-sail data can differ
by 100 TEUs. Post-sailing data includes exact figures.
The port will use the post-sailing data and compare it to reported TEU figures in the crane billing
system.
Port of Seattle Action Status to Recommendation 7, Crane Inspection:
Regulatory Inspections
Annual regulatory inspections of the containers cranes will continue to be conducted by the port,
utilizing an Accredited Crane Certifier in accordance with the Washington Administrate Code
(WAC) 296-56-60093, Certification of Marine Terminal Material Handling Devices. The annual
certifications inspect all major crane systems and components and ensure the cranes are in
satisfactory condition.
The inspections are documented on the Crane/Derricks work sheet (F416-051-001). Any non-
conformance or failures found during the certification inspection are noted on Notice of
Deficiencies form (F416-054-000). Corrections of the deficiencies are required before
certification is issued. A copy of the Crane Certification forms will be maintained in a
centralized location.
Lessee Maintenance
The maintenance procedures for the cranes differ slightly depending upon the manufacturer. As
a general rule, cranes receive routine maintenance at regular intervals ranging from daily,
weekly, monthly, quarterly, semi-annually to annually, depending on the work performed.
Currently, the three individual lessees have separate practices and procedures for performing
and recording these various maintenance functions. A standardized reporting log has been
developed for lessees, and they will update these logs as maintenance and inspections are
preformed. Lessees will be asked to submit an updated log on a quarterly basis. The Lessee
Quarterly Maintenance Log will be filed in the same location as the crane certification reports.
Port Inspection and Maintenance Audit
The port will conduct non-regulatory inspections on the individual cranes on a periodic basis.
These inspections will utilize the Port Inspection Form and focus on items not typically covered
in the annual inspection, such as preventative maintenance, paint, and general housekeeping.
The crane maintenance records and reports will be reviewed and compared to the maintenance
log information at this time as well.
A three-year cycle will be established for crane inspection and records review. For the 17 port
cranes, this schedule means that two cranes will be inspected from each of the three terminals
per year, except for Terminal 46, which has five cranes and will have only one crane inspected
during one of the cycles. These inspections will be documented on the port inspection form.
Any deficiencies identified during the inspection or the record review will be documented and
reviewed with the Lessee for correction. The Port Inspection Form and any deficiency
documentation will be filed with the other crane documents.
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SAO AUDIT RECOMMENDATION 8: To better safeguard its billings and receipts at the
Fishermen's Terminal, we recommend the Port:
Segregate duties to ensure the same employees cannot enter customers, make adjustments
to customer accounts, and receipt payments from customers in MMS.
Require supervisory review of adjustments to customer accounts in the MMS that affect
billing rates.
Restrict access to make adjustments and apply payments to customer accounts to
employees who need it as part of their regular job duties. The Port has reports containing
vessel length and moorage classification for use when reviewing billing information for
accuracy.
Port of Seattle Action Status to Recommendation 8:
Completed. Fishermen’s Terminal operates 24 hours a day, seven days a week, and due to the
nature of the commercial fishing business, sometimes customers and tenants need to pay bills
or conduct other business outside of regular business hours. Because of this, several staff
members need to perform key customer service tasks. Nevertheless, in light of auditor
recommendations, and pursuant to a port internal audit of Fishermen’s Terminal for the
operating period 2008 and 2009, the port segregated duties where possible, supervisory review
has been strengthened, and system access has been restricted. All Fishermen’s Terminal staff
will retain the authorization to receive payments due to the nature of the commercial fishing
business.
However, no more than three staff members will have the ability to make adjustments to
accounts in MMS and all changes to customer accounts in MMS, including those that affect
billing rates, are being reviewed manually on a monthly basis by Fishermen’s Terminal
management. Furthermore, only those employees who adjust and apply payments to customer
accounts as part of their regular job duties have access, as well as staff members in the
Accounting & Financial Reporting (AFR) and Information & Communications Technology (ICT)
departments. Vessel length and moorage classification has been added to MMS/billing reports
and is being used when reviewing billing information for accuracy. In addition, possible changes
to the Marina Management System (MMS) will be reviewed by ICT and Fishermen’s Terminal
management.
SAO AUDIT RECOMMENDATION 9: We recommend the Port revise its policies and
procedures to establish and enforce safeguards against inappropriate spending. The revised
procedures should:
Limit funding of Port Jobs to programs that are clearly within its legal authority as stated in
the 2010 legislation.
No longer require construction companies to contribute to Port Jobs as part of their
construction contracts.
Ensure its agreements to clearly identify the scope of work and all related deliverables.
Require Port Jobs and its partners to document all deliverables have been provided
before payments are made.
Disclose to the Port Commission the nature and value of all in-kind support to Port Jobs
or other nonprofit organizations. These amounts should be reflected in the Port's
agreements with these groups.
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Disallow any organization to operate from Port facilities unless an agreement is in place
authorizing them to do so.
Port of Seattle Action Status to Recommendation 9:
Completed. In early 2010, the Washington State Legislature passed legislation clarifying the
port’s ability to participate in programs such as Port Jobs. The new contract with Port Jobs is
clear about the scope of work expected and reflects all in-kind support, and the port’s Office of
Social Responsibility (OSR) is administering the contracts accordingly. On new construction
contracts, companies are no longer required to contribute 20 cents per hour toward the pre-
apprenticeship program which was designed to develop a workforce skilled in the trades.
SAO AUDIT RECOMMENDATION 10: We recommend the Port Commission clarify and
enforce policies on loss reporting to ensure compliance with state law.
Specifically, the Commission should:
Amend current Port policies to require all departments to report all known or suspected losses
to executive management, the Port's internal auditor and the State Auditor's Office. The policy
also should require the Port Police Department to check with these parties to ensure they
have been notified when losses are reported to that Department.
Monitor compliance with Port policies to ensure they are followed.
Use a standard loss reporting form to notify executive management, the internal auditor and
the State Auditor's Office.
Port of Seattle Action Status to Recommendation 10:
Completed. In collaboration with the Port’s Internal Audit, Legal, Risk Management, Information
Technology, and Police departments, the Workplace Responsibility Office has streamlined
reporting, communication and documentation procedures. The procedures have been
implemented and pertinent sections will be incorporated into a revised edition of the Port’s Code
of Conduct, which all Port employees will again be required to read and sign in the fourth
quarter of 2011. The Workplace Responsibility Office will monitor compliance with the
procedures. The Port uses a standard loss reporting form to notify the SAO.
