[Audit Report on Procurement Activities, Port Authority of Guam, Government of Guam]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 98-I-14

Title: Audit Report on Procurement Activities, Port Authority of
       Guam, Government of Guam

Date: October 7, 1997

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N-IN-GUA-008-96

United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
   Washington, D.C. 20240

The Honorable Carl T.C. Gutierrez
Governor of Guam
Office of the Governor
Agana, Guam 96910


Subject: Audit Report on Procurement Activities, Port Authority of Guam, Government
of Guam (No. 98-I-14)

Dear Governor Gutierrez:

This report presents the results of our review of the Port Authority's procurement practices
that occurred during fiscal years 1994 and 1995. The objective of the audit was to
determine whether the Port Authority's procurement activities: (1) were efficient and
economical and were in compliance with applicable procurement laws and regulations and
(2) enabled the Port Authority to obtain the best prices based on competitive procurement.

We found that the Port Authority did not conduct its procurement activities in compliance
with procurement regulations or in an efficient and economical manner. It also did not
ensure that me best prices were obtained for competitive procurements. Specifically, the
Port Authority: (1) did not provide documentation to support whether appropriate
competitive procurement methods had been used; (2) split requisitions to obtain large
dollar procurements without competitive sealed bids; (3) did not obtain the required
number of price quotations for small purchases; and (4) inappropriately procured services
for social events. In addition, the Port Authority did not adequately maintain procurement
records for all purchase orders issued and contracts awarded.

These conditions occurred because the Port Authority had not developed adequate written
procedures to ensure compliance with procurement regulations and had not developed
procurement plans to facilitate the competitive procurement of goods and services. In
addition, the Port Authority had not developed written procedures to ensure that the
Procurement Unit filed all purchase orders and contracts in a central and secure location
and maintained accurate and complete logs for all purchase orders issued and contracts
awarded. As a result, the Port Authority did not have assurance that full value was
received for about $1.6 million of the estimated $6.3 million expended for goods and
services during fiscal years 1994 and 1995, and, in our opinion, it improperly expended
$42,641 of public funds for social events. In addition, since the Port Authority did not
have adequate controls over its purchase orders and contracts, there was little assurance
that expenditures made for the purchase of goods and services were valid.

To correct the conditions noted, we made five recommendations to the Chairman of the
Port Authority Board of Directors. Specifically, we recommended that the Chairman
direct the General Manager to: (1) develop and implement written procedures to ensure
that noncompetitive procurement actions totaling $5,000 or more are processed in

 
accordance with Guam procurement laws and regulations, including the requirement for
written justification; (2) develop and implement written procedures to ensure that purchase
requests are consolidated to the maximum extent possible; (3) enforce the Port Authority's
Policy Memorandum 09-88, "Standard Operating Procedures for Procurement of
Materials , " which requires three price quotations for small purchases; (4) develop and
implement procurement plans to ensure that the Procurement Unit has sufficient lead time
to process procurement requests in a competitive manner; and (5) develop and implement
written policies and procedures to ensure that purchase orders and contracts are logged in
promptly and properly and all procurement documents are filed and safeguarded.  We also
recommended that you, as the Governor of Guam, direct the Attorney General of Guam
to take appropriate action for the Port Authority's improper use of government funds to
pay for social functions.

On April 18, 1997, we transmitted a draft of this report to you, as Governor of Guam,
requesting your comments by May 21, 1997. However, no request for an extension was
received, and a response to the draft report has not been provided. Accordingly, this final
report is being issued without the benefit of your comments, and Recommendation AS,
which was addressed to you, is considered unresolved (see Appendix 3).

In its May 20, 1997, response (Appendix 2) to the draft report, the Port Authority
indicated concurrence with all five recommendations addressed to that agency.  Based on
its response, we consider Recommendation A.3 resolved and implemented and request that
the Port Authority provide additional information for Recommendations A. 1, A.2, A.4,
and B. 1 (see Appendix 3).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit findings (Appendix l), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by November 10, 1997. The response should be addressed to our North Pacific
Region, 238 Archbishop F.C. Flores Street, Suite 807, Pacific News Building, Agana,
Guam 96910. The response should include the information requested in Appendix 3.

We appreciate the assistance of Port Authority personnel in the conduct of our audit.

Inspector General

cc: Acting Director, Bureau of Budget and Management Research

 
United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
   Washington, DC. 20240

Mr. Paul Souder              OCT 7 f-997

Chairman, Board of Directors
Port Authority of Guam
1026 Cabras Highway, Suite 201
Piti, Guam 96925

Subject: Audit Report on Procurement Activities, Port Authority of Guam, Government
   of Guam (No. 98-I-14)

Dear Mr. Souder:

This report presents the results of our review of the Port Authority's procurement practices
that occurred during fiscal years 1994 and 1995. The objective of the audit was to
determine whether the Port Authority's procurement activities: (1) were efficient and
economical and were in compliance with applicable procurement laws and regulations and
(2) enabled the Port Authority to obtain the best prices based on competitive procurement.

We found that the Port Authority did not conduct its procurement activities in compliance
with procurement regulations or in an efficient and economical manner. It also did not
ensure that the best prices were obtained for competitive procurements. Specifically, the
Port Authority: (1) did not provide documentation to support whether appropriate
competitive procurement methods had been used; (2) split requisitions to obtain large
dollar procurements without competitive sealed bids; (3) did not obtain the required
number of price quotations for small purchases; and (4) inappropriately procured services
for social events. In addition, the Port Authority did not adequately maintain procurement
records for all purchase orders issued and contracts awarded.

These conditions occurred because the Port Authority had not developed adequate written
procedures to ensure compliance with procurement regulations and had not developed
procurement plans to facilitate the competitive procurement of goods and services. In
addition, the Port Authority had not developed written procedures to ensure that the
Procurement Unit filed all purchase orders and contracts in a central and secure location
and maintained accurate and complete logs for ail purchase orders issued and contracts
awarded. As a result, the Port Authority did not have assurance that full value was
received for about $1.6 million of the estimated $6.3 million expended for goods and
services during fiscal years 1994 and 1995, and, in our opinion, it improperly expended
$42,641 of public funds for social events. In addition, since the Port Authority did not
have adequate controls over its purchase orders and contracts, there was little assurance
that expenditures made for the purchase of goods and services were valid.

To correct the conditions noted, we made five recommendations to you as Chairman of the
Port Authority Board of Directors. Specifically, we recommended that you direct the
General Manager to: (1) develop and implement written procedures to ensure that

 
noncompetitive procurement actions totaling $5,000 or more are processed in accordance
with Guam procurement laws and regulations, including the requirement for written
justification; (2) develop and implement written procedures to ensure that purchase
requests are consolidated to the maximum extent possible; (3) enforce the Port Authority's
Policy Memorandum 09-88, `Standard Operating Procedures for Procurement of
Materials, " which requires three price quotations for small purchases; (4) develop and
implement procurement plans to ensure that the Procurement Unit has sufficient lead time
to process procurement requests in a competitive manner; and (5) develop and implement
written policies and procedures to ensure that purchase orders and contracts are logged in
promptly and properly and all procurement documents are filed and safeguarded.  We also
recommended that the Governor of Guam direct the Attorney General of Guam to take
appropriate action for the Port Authority's improper use of government funds to pay for
social functions.

In its May 20, 1997, response (Appendix 2) to the draft report, the Port Authority
indicated concurrence with the five recommendations addressed to that agency.  Based on
the response, we consider Recommendation A.3 resolved and implemented and request
that the Port Authority provide additional information for Recommendations A. 1, A.2,
A.4, and B. 1 (see Appendix 3). Since the Governor of Guam did not respond to the draft
report, Recommendation A.5, which was addressed to the Governor, is considered
unresolved.

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit findings (Appendix 1), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by November 10, 1997. The response should be addressed to our North Pacific
Region, 238 Archbishop F.C. Flores Street, Suite 807, Pacific News Building, Agana,
Guam 96910. The response should include the information requested in Appendix 3.

We appreciate the assistance of Port Authority personnel in the conduct of our audit.

Inspector General

cc: General Manager, Port Authority of Guam

 
CONTENTS

INTRODUCTION

Page

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

BACKGROUND  .....................................   1
OBJECTIVE AND SCOPE  ...............................  1
PRIOR AUDIT COVERAGE  ..............................  2

FINDINGS AND RECOMMENDATIONS  .........................  4

A. PROCUREMENT ACTMTIES  .........................  4
B. PROCUREMENT RECORDS  ..........................  13

APPENDICES

1. CLASSIFICATION OF MONETARY AMOUNTS   ............  15
2. PORT AUTHORITY RESPONSE   .......................  16
3. STATUS OF AUDIT REPORT RECOMMENDATIONS   ........  29

 
INTRODUCTION

BACKGROUND

On October 31, 1975, the Port Authority of Guam was established as a public corporation
and an autonomous instrumentality of the Government of Guam by Title 12, Chapter 10,
of the Guam Code Annotated. The Port Authority was established to provide for the needs
of ocean commerce, shipping, recreational and commercial boating, and navigation for the
Territory of Guam. The Port Authority is governed by a five-member Board of Directors,
appointed by the Governor with the advice and consent of the Legislature. The Board is
responsible for appointing a General Manager, who serves as the chief executive officer
and is responsible for the Port Authority's maintenance, operations, and business affairs.

In accordance with Title 5, Part 1, Division 1, Chapter 5, of the Guam Code Annotated,
the Department of Administration, General Services Agency, is responsible for procuring
supplies and services for the Government of Guam and the Department of Public Works
is responsible for procuring design and construction services. However, in accordance
with Title 5, Section 5114, of the Guam Code Annotated, the Chief Procurement Officer
of the General Services Agency authorized the General Manager of the Port Authority to
purchase equipment, materials, and supplies directly from vendors, and the Director of
Public Works authorized the General Manager to purchase design and construction
services on a project-by-project basis.

The Supply Management Section of the Port Authority's Financial Affairs Department is
responsible for executing procurements, maintaining supplies and inventories, and
disposing of surplus property. The Supply Management Administrator heads the Section,
which consists of three units: (1) the Procurement Unit, which is responsible for ensuring
that the General Manager's delegation of procurement authority is safeguarded and for
ensuring compliance with all applicable Federal and local procurement rules and
regulations; (2) the Supply Unit, which is responsible for operating and maintaining the
parts and supply warehouse; and (3) the Property Control Unit, which is responsible for
establishing and maintaining fixed asset property inventory records.

OBJECTIVE AND SCOPE

The objective of the audit was to determine whether the Port Authority's procurement
activities: (1) were efficient and economical and were in compliance with applicable
procurement laws and regulations and (2) enabled the Port Authority to obtain the best
prices based on competitive procurement. The scope of the audit included a review of the

Port Authority's procurement activities that occurred during fiscal years 1994 and 1995.
If a problem was noted, we expanded our review to other periods as necessary. However,
we could not determine the full extent of procurement activities for the audit period

 
because the Port Authority's records were not adequate to identify all purchase orders

Audit work was performed at the Port Authority's Financial Affairs Department from
November 1995 through August 1996. We obtained information regarding procurement
activities and laws from Government of Guam officials at the Port Authority's Financial
Affairs Department, Supply Management Section; the Department of Administration's
General Services Agency; the Office of the Attorney General; the Bureau of Budget and
Management Research; and the Office of the Public Auditor. To accomplish our
objective, we reviewed purchase orders, contracts, procurements, correspondence, and
accounting records maintained by the Supply Management Section of the Port Authority.
We also reviewed applicable laws, regulations, circulars, and operating procedures related
to procuring goods and contractual services.

The audit was made, as applicable, in accordance with the "Government Auditing
Standards, " issued by the Comptroller General of the United States. Accordingly, we
included such tests of records and other auditing procedures that were considered
necessary under the circumstances -

As part of the audit, we evaluated the Port Authority's internal controls related to
procurement activities to the extent that we considered necessary to accomplish the audit
objective. Significant internal control weaknesses were identified and are discussed in the
Findings and Recommendations section of this report. Our recommendations, if
implemented, should improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the U.S. General Accounting Office nor the Office of
Inspector General has issued any audit reports concerning procurement activities of the
Port Authority of Guam. A certified public accountant's audits of the Port Authority's
financial statements for fiscal years 1990, 1991, 1992, and 1993 did not identify any
internal control weaknesses. However, another certified public accountant's report on the
Port Authority's financial statements for fiscal year 1994 included three internal control
findings related to the Port Authority's procurement activities. Specifically, the report
noted that: (1) one sole source procurement was not supported by a written justification;
(2) receiving reports were not on file; and (3) small purchases did not have the required
quotations from three vendors. The report did not contain a response from the Port
Authority to these fmdings.

In addition, in July 1994, the Office of Internal Audit, Bureau of Budget and Management
Research, issued the audit report entitled "Audit of the General Services Agency
Delegation of Procurement Authority, Port Authority of Guam, October 1, 1989 to

`See Finding B, "Procurement Records. "

 
September 30, 1990. " The report stated that the Port Authority: (1) made duplicate
payments on purchase orders; (2) allowed cumulative purchase amounts to exceed
originally approved purchase order amounts; (3) did not adequately maintain the purchase
order control logbook; (4) did not adequately maintain the vendor files; (5) did not cite the
appropriate procurement authority on purchase orders; (6) did not conduct procurements
competitively; (7) did not justify sole source procurements; and (8) did not submit required
documentation to the General Services Agency for review prior to the issuance of notice
of awards on bids exceeding $10,000.

Our current audit disclosed deficiencies similar to those reported by the certified public
accountant in the 1994 report on the Port Authority's financial statements and by the
Office of Internal Audit, as discussed in the Findings and Recommendations section of this
report.

 
FINDINGS AND RECOMMENDATIONS

A. PROCUREMENT ACTIVITIES

The Port Authority of Guam did not conduct its procurement activities in accordance with
procurement regulations or in an efficient and economical manner. It also did not ensure
that the best prices were obtained from competitive procurements. Specifically, the Port
Authority: (1) did not provide documentation to support whether appropriate competitive
procurement methods had been used; (2) split requisitions to obtain large dollar
procurements without competitive sealed bids; and (3) did not obtain the required number
of price quotations for small purchases. In addition, the Port Authority inappropriately
procured services for social events.  These deficiencies occurred because the Port
Authority had not developed adequate written procedures to ensure compliance with
procurement regulations and had not developed procurement plans to ensure that the
Procurement Unit had sufficient lead time to procure goods and services competitively.
As a result, the Port Authority did not have full assurance that the best price was received
for about $1.6 million of the estimated $6.3 million expended for goods and services
during fiscal years 1994 and 1995, and public funds of $42,641 were, in our opinion,
spent improperly for social events.

Contracts and Purchase Orders

Title 5, Section 5001, of the Guam Code Annotated requires agencies "to maxim& to the
fullest extent practicable the purchasing value of public funds" and "to foster broad-based
competition. " In addition, Title 5, Section 5210, of the Code states that "all territorial
contracts shall be awarded by competitive sealed bidding" with only specifically stated
exceptions, such as small purchases, sole source, emergency, professional services, and
nonprofit corporations. Section 5216(c) of the Code states that purchasing agencies may
use requests for proposals when procuring professional services, including architectural
and engineering services. However, Section 5216(e) states, "The award shall be made to
the offeror determined in writing by the head of the purchasing agency or a designee of
such officer to be best qualified based on the evaluation factors set forth in the Request for
Proposals, and negotiation of compensation determined to be fair and reasonable. " Section
3-202.02 of the Guam Procurement Regulations states, "Competitive sealed bidding is the
preferred method for the procurement of supplies, services, or construction. " However,
during the audit, the Port Authority did not provide written documentation to support that
purchase orders and contracts were awarded in accordance with these requirements.  This
condition occurred because the Port Authority had not developed and implemented written
procedures to ensure that the Port Authority complied with Guam procurement laws and
regulations when making procurements. As a result, the Port Authority did not have full
assurance that the best price was received for over $1.4 million in purchases of $5,000 or

more.

 
We estimated that during fiscal years 1994 and 1995, the Port Authority processed at least

Based on our review of the Port Authority's procurement records for the 110 purchase
orders and contracts, we determined that 38 procurements, totaling over $1.4 million,
were awarded without adequate documentation to support whether competitive
procurement methods had been used. For example, on February 14, 1994, the Port
Authority awarded, without adequate written justification of procurement methods, a
contract totaling over $709,000 to a local engineering firm to assist the prime consultant
in the design of repairs to piers and wharfs damaged by an earthquake on August 8, 1993.
In our opinion, the 6-month period from the date of the award of the prime contract
(August 21, 1993) to the date of the award of the contract to the engineering firm would
have afforded the Port Authority ample lead time to have awarded this contract
competitively in accordance with Sections 5216(c) and 5216(e) of the Guam Code
Annotated.

During the audit, neither the Port Authority's General Manager nor the Controller was
able to provide written documentation of the procurement methods used for the 38
procurements. The Controller stated that for most contracts for professional services, such
as engineering, the General Manager and the Board determined which consultants were
qualified and awarded the contracts without going through any bidding process.

Small Purchases

Title 5, Section 5213, of the Guam Code Annotated states that "procurement requirements
shall not be artificially divided so as to constitute a small purchase," and Port Authority
Policy Memorandum No. 0988, "Standard Operating Procedures for Procurement of
Materials," requires procurement personnel to "obtain three price quotations" for small
purchases under $5,000. However, the Port Authority split procurement requisitions, we
believe, to circumvent the requirement for competitive sealed bidding on large dollar
procurements, and it processed small purchases without obtaining the required number of
price quotations. These conditions occurred because: (1) the Port Authority had not
developed written policies and procedures to ensure that requisitions were not artificially
divided to avoid the bidding process and (2) the Procurement Unit did not comply with
written operating policies that require three price quotations for small purchases (less than
$5,000). As a result, the Port Authority had little assurance that it received the best price
for small purchases totaling $164,000.

Based on our review of the purchase order logbooks maintained by the Procurement Unit,
we determined that the Port Authority, during fiscal years 1994 and 1995, processed
2,823 purchase orders, each under $5,000, totaling $2,896,052. Of these purchase orders,

we were unable to determine the actual number and dollar amount of purchase orders and contracts
issued
because of the poor condition of the Port Authority's procurement records (see Finding B,
"Procurement

Records"). We reconstructed the number of purchase orders issued and contracts awarded from the
purchase
orders and sealed bid fties and from listings of contracts that were provided by Port Authority
officials.

5

 
we judgmentally selected and reviewed 57 purchase orders (from $500 to $5,000), totaling
$168,540, and determined that 42 purchase orders, totaling $149,788, had been split,
apparently to avoid the requirement to obtain competitive sealed bids for procurements of
$5,000 or more.

For example, on June 12, 1995, the Fleet Maintenance Section submitted a requisition to
the Procurement Unit to purchase various replacement parts to repair a forklift. However,
the Procurement Unit had split the $14,53 1 requisition into four purchase orders. The
former buyer acknowledged splitting the requisition and processing four purchase orders
based on the justification that all of the items were not needed at the same time. However,
we found that two purchase orders totaling $3,848 and $3,163 were dated June 22, 1995,
and that the other two purchase orders totaling $2,818 and $4,702 were dated
July 14, 1995. Therefore, we believe that one purchase order using competitive bidding
procedures should have been processed.

We also found that the Port Authority did not obtain three price quotations when it made
small purchases. Of the 57 purchase orders, totaling $168,540, that we reviewed, we
found that 1 purchase order, for $1,200, was correctly processed as a sole source
procurement and 19 purchase orders, totaling $68,056, were processed with the required
three price quotations. However, 2 1 purchase orders, totaling $58,772, were processed
with only two price quotations, and 16 purchase orders, totaling $40,512, were processed
with only one price quotation. The Procurement Unit's three buyers and a former buyer
told us that they normally contacted three vendors for small purchases but that all three
vendors did not necessarily provide price quotations. They stated that as long as one of
the three vendors provided a quotation, the vendor with the lowest or the only quotation
was awarded the purchase order. However, there was no documentation to support the
efforts to obtain three quotations. Moreover, Port Authority Policy Memorandum
No. 09-88 requires procurement personnel to "obtain" three price quotations, not simply
to "contact" three vendors.

The Supply Management Administrator told us that the lack of procurement planning by
the requesting sections resulted in many small purchases which could have been
consolidated. The Supply Management Administrator further stated that the Procurement
Unit did not have any system in place to detect and consolidate requisitions for like items.
For example, the Port Authority issued three purchase orders on July 14, 1995,
July 25, 1995, and July 27, 1995, to purchase three desktop computers for $1,850,
$3,558, and $2,584, respectively. In addition, two of these purchase orders were issued
to the same vendor within a 3day period. In our opinion, these procurements could have
been consolidated and processed using competitive methods if the Port Authority had
developed and used annual procurement plans. 3 These procurement plans would have

3Procurement plans should be prepared as part of the annual budget cycle and include a summary
of the types
and estimated quantities of goods and services that each branch of the Port Authority is expected to
procure
during the next fiscal year, thus allowing the Procurement Unit to prepare and process consolidated
requisitions
in sufficient time to allow for the use of competitive procurement methods.

6

 
provided the Procurement Unit sufficient lead time to process procurement requests, which
would have fostered full and open competition and resulted in lower costs.

Social Events

During fiscal years 1994, 1995, and 1996, the Port Authority used public funds to pay for
social events primarily for the benefit of its employees. The social events included
Christmas parties and Labor Day picnics.  This condition occurred because the Port
Authority's management said that it believed it was within the Port Authority's purview
to authorize expenditures for such events. As a result, public funds of at least $42,641
were improperly spent for social events.

During its audit of the General Services Agency delegation of procurement authority to the
Guam Airport Authority, the Office of Internal Audit, Bureau of Budget and Management
Research, determined that the Guam Airport Authority had used public funds to pay for
a yearend party for Airport Authority employees. Consequently, in an April 23, 1991,
memorandum, the Director of the Bureau of Budget and Management Research requested
that the Guam Attorney General provide an opinion on whether the expenditures were
valid.  The Director also attached a November 18, 1987, letter from the Airport
Authority's legal counsel rendering an opinion that the Airport may sponsor such a party
for employees and guests based on the powers delegated by the Legislature. In response
to the Director's memorandum, the Guam Attorney General issued Informational
Memorandum No. BBMR 91-0672 on July 1, 1991, which stated that the Airport's
enabling legislation "does not support the proposition that such expenditures from public
funds are legal" and that "without an expressed or implied grant of power from the
Legislature, the costs of sponsoring such functions should not be paid from public funds. "4
The memorandum concluded that "office parties and celebrations should be supported, if
at all, by employees' personal funds, not by public monies. "

The Supply Management Administrator and the Controller said that the General Manager
was made aware of the Attorney General's memorandum but that he still approved the use
of public funds for social events. We informed the General Services Agency's Chief
Procurement Officer of the procurements made by the Port Authority for social events.
The Chief Procurement Officer stated that these expenditures were "not proper" and that
had he reviewed the transactions, he would not have approved them.

Recommendations

We recommend that the Chairman, Board of Directors, Port Authority of Guam, direct the
General Manager to:

%e enabling legislation for the Port Authority of Guam does not contain any provisions that
authorize the
Port Authority to use public f&is to sponsor social events.

 
  1. Develop and implement written procedures to ensure that noncompetitive
procurement actions totaling $5,000 or more are processed in accordance with the
requirements provided in Guam procurement laws and regulations, including the
requirement for a written justification.

   2. Develop and implement written procedures to ensure that purchase requests,
including purchases of less than $5,000, are consolidated to the maximum extent possible.

  3. Enforce the Port Authority's Policy Memorandum 09-88, "Standard Operating
Procedures for Procurement of Materials," which requires three price quotations for smalI
purchases, and require documentation in support of efforts to obtain such.

  4. Develop and implement procurement plans to ensure that the Procurement Unit
has sufficient lead time to process procurement requests in a competitive manner.

We recommend that the Governor of Guam:

  5. Direct the Attorney General of Guam to issue a formal legal opinion as to whether
or not the use of Port Authority funds for employee social events is permitted by Guam law
and, if it is found that such use of public funds is improper, to take appropriate legal action.

Port Authority of Guam Response and Offke of Inspector General Reply

In its May 20, 1997, response (Appendix 2) to the draft report, the Port Authority
concurred with Recommendations 14 and, although Recommendation 5 was addressed to
the Governor, it disagreed with that recommendation. Based on the response, we consider
Recommendation 3 resolved and implemented and request additional information for
Recommendations 1, 2, and 4 (see Appendix 3).

Recommendation 1. Concurrence.

  Port Authority of Guam Response. The Port Authority stated, "In general, [it]
awards all contracts over $5,000.00 either through sealed bids or request for proposals as
authorized by statute." The Port Authority also stated that, for the specific example cited in
the finding, it used competitive procurement methods when it procured engineering
services for the design of repairs to piers and wharfs damaged by an earthquake on
August 8, 1993. To support its claim, the Port Authority provided copies of the request
for proposal and correspondence relating to the selection of the engineering firm.  The
correspondence indicated that 14 firms had submitted bids to provide engineering services.
Regarding the recommendation, the Port Authority stated that it would "review current
policies and procedures to ensure that it is continuing to comply with all Guam laws and
regulations applicable to the procurement of services pursuant to requests for proposals. "
Finally, the Port Authority stated that personnel involved in the procurement process "wilI
be indoctrinated to the updated policies and procedures. "

8

 
Offke of Inspector General Reply. During the audit, we made numerous requests to
Port Authority officials, including the General Manager, for the documentation relating to the
procurement of engineering services and the other 37 procurements discussed in the finding.
However, the documentation was not provided to us during the audit. On May 23, 1997, we
contacted the Port Authority's Supply Management Administrator and again requested copies
of the proposals, referred to in the response, submitted by the 14 engineering firms and the
rating sheets prepared by the selection committee. The Supply Management Administrator
stated that he would provide us the 14 proposals and rating sheets during a May 28, 1997,
meeting at our office. However, during the meeting, the Supply Management Administrator
did not provide us with any of the requested documents, stating that he "did not have the time
to get the files from the CIP [Capital Improvement Projects] Coordinator." He also stated,
"Sufficient information for what [we] need to know had been provided as attachments to the
Port Authority's response to the draft report." However, in our opinion, the Port Authority
has not provided sufficient information for us to determine whether or not proper
procurement procedures were used. As of August 15, 1997, we had not received copies of
the 14 proposals that the Port Authority said were submitted by engineering firms or the
rating sheets used by the selection committee to select the firm that was awarded the contract.
The Port Authority also had not provided us with documentation necessary for us to
determine whether or not the other 37 procurements mentioned in the finding were conducted
in accordance with competitive procurement requirements.

In its response to the draft report, the Port Authority also stated that in an April 25, 1997,
letter to the Office of Inspector General, the Port Authority requested from our office "the
specifics of [our] allegations" regarding the 38 contracts and purchase orders that were
awarded noncompetitively but that "there has been no response to date. " However, on
May 20, 1997, our Freedom of Information Act Officer, located in Washington, D.C.,
provided clearance to our Guam field office for it to provide information from our audit
working papers to the Port Authority. Accordingly, we invited Port Authority officials
to our office in Guam to review the audit working papers for the 38 contracts and purchase
orders. On May 28, 1997, the officials visited our office, reviewed the audit working
papers related to the 38 procurements that were questioned in the finding, and made a list
of the 38 transactions. We believe that the information made available was sufficient to
allow them to research the related procurement files at the Port Authority's offices.
Moreover, we received no further requests for information.

Based on the Port Authority's response, we have made revisions to the report that we
believe will clarify the issues regarding the 38 contracts and purchase orders which were
processed without adequate supporting documentation of the procurement methods used.

Regarding the recommendation, the Port Authority needs to develop and implement
written procedures to ensure that it complies with all applicable Guam laws and regulations
when it processes procurement actions. Since the Port Authority indicated that its key
procurement personnel would be " indoctrinated to the updated policies and procedures, "
we believe that the Port Authority has recognized the need to improve controls over its

 
procurement activities. Therefore, the Port Authority needs to provide the information
requested in Appendix 3.

Recommendation 2. Concurrence.

  Port Authority of Guam Response. The Port Authority stated that it will develop
written procedures for "consolidating procurement[s] to avoid split procurement[s] and to
ensure that written determinations justifying the necessity of split requisitions are made."

  Office of Inspector General Reply. Neither the Guam Code nor the Procurement
Regulations authorize the splitting of requisitions, even if a written justification is
provided. Therefore, the Port Authority needs to develop written procedures which ensure
that requisitions are not artificially divided, under any circumstances, to avoid the use of
competitive procurement methods. In addition, the Port Authority may want to consider
developing the written procedures before it conducts the scheduled training mentioned in
its response (page 7 of Appendix 2) so that Port Authority personnel can be made aware
of the proper procedures. The Port Authority needs to provide the information requested
in Appendix 3.

Recommendation 3. Concurrence.

  Port Authority of Guam Response. The Port Authority said that, in accordance
with applicable law, it routinely attempted to obtain three price quotations "insofar as it
is practical for small purchases of supplies and services" but that it was not always possible
for procurement personnel to obtain three price quotes "because of the lack of available
vendors on Guam. " The Port Authority also stated that in some instances, it was necessary
to accept the "first reasonable quotation in order to keep equipment operational. "

Regarding the recommendation, the Port Authority stated that procurement personnel will
prepare written documentation when they are unable to obtain three quotations for small
purchases.

  Office of Inspector General Reply. We agree with the Port Authority's statement
that the Guam procurement regulations require only quotations from three businesses
' insofar as it is practical. " However, during the audit, we identified instances in which
documentation was not prepared to show whether or not attempts had been made to obtain
three quotations. Based on the Port Authority's response that procurement personnel will
prepare such documentation for future small purchases, we consider the recommendation
resolved and implemented.

Recommendation 4. Concurrence.

  Port Authority of Guam Response.  The Port Authority concurred with the
recommendation.

10

 
  Office of Inspector General Reply. Although the Port Authority concurred with
the recommendation, it needs to provide the information requested in Appendix 3.

Recommendation 5. Nonconcurrence.

  Port Authority of Guam Response. Although the recommendation was addressed
to the Governor, the Port Authority indicated nonconcurrence with the recommendation
and commented on the finding. The Port Authority's comments included various citations
from the Guam Code Annotated regarding budgets, the expenditure of public funds, and
case law from jurisdictions on the U.S. mainland. The Port Authority also stated that the
current General Manager was provided with legal opinions of the legal counsel of the Port
Authority's predecessor organization which "advised that [expenditures for employee
social events] were valid" and "criticized the correctness of the Attorney General
memorandum" we cite in the finding. The Port Authority also said that the Attorney
General memorandum cited in the finding "was informational only and was not issued as
an opinion of the Attorney General. "

However, the Port Authority stated that any employee of the Government of Guam "stands
in a fiduciary relationship to the people of Guam in regard to the management of public
money" and that employees "shall discharge their duties with respect to the management
of public money solely in the interest of the people of the territory of Guam. " The Port
Authority further stated, "Based on the applicable statutory and case law, it appears that
there is no specific statute or case law which either allows or prohibits the expenditure of
Port Authority funds for employee social events. " Finally, the Port Authority stated,
"Arguably, as a self sustaining autonomous instrumentality of the government of Guam,
the Port Authority is vested with more discretion than typical government entities which
depend solely on legislative appropriation. "

With regard to the recommendation, which was addressed to the Governor, the Port
Authority stated that it would "seek legislative clarification that the use of Port Authority
funds for employee social events is an authorized expenditure. "

  Office of Inspector General Reply. We do not agree that the Attorney General's
memorandum cited in the finding is of no consequence because it was "informational
only." The memorandum was issued as a formal document from the Attorney General's
office and labeled as "Informational Memorandum No. BBMR 91-0672. " It stated that
the then-Airport Authority's enabling legislation "does not support the proposition that
[expenditures for employee social events] from public funds are legal" and that "without
an expressed or implied grant of power from the Legislature, the costs of sponsoring such
functions should not be paid from public funds." The Memorandum also indicates that
there is no specific statute which allows or prohibits the Port Authority from using public
funds to pay for social events.

We agree with the Port Authority that it has a fiduciary responsibility to the people of
Guam to ensure that public funds are spent properly. After reviewing the various citations

11

 
B. PROCUREMENT RECORDS

The Port Authority did not adequately maintain procurement records for all purchase
orders issued and contracts awarded. Title 5, Section 5249, of the Guam Code Annotated
requires each procurement officer to maintain a complete record of each procurement.
However, the central file for purchase orders did not have all of the purchase orders
issued, and no central files were maintained for contracts awarded. In addition, we found
that the manual logbooks maintained by the Procurement Unit did not have complete
information on the purchase orders issued and that no logbook was maintained on contracts
awarded. These conditions occurred because the Port Authority had not developed written
procedures to: (1) ensure that the Procurement Unit filed all purchase orders and contracts
in a central and secure location and (2) maintain accurate and complete logbooks for all
purchase orders issued and contracts awarded. As a result, there was little assurance that
expenditures for goods and services were accurately recorded and accounted for.

Purchase Orders

The Procurement Unit recorded purchase order data in a logbook and used a central filing
system in an unsecured area to store purchase orders and related supporting documents.
Based on our comparison of entries made in the purchase order logbook and purchase
orders stored in the central filing system, we determined that at least 143 purchase order
files for fiscal year 1994 and 123 purchase order files for fiscal year 1995 were missing
from the central files. In addition, the dollar amounts for these missing purchase orders
had not been entered into the logbook in 135 instances for fiscal year 1994 and in 90
instances for fiscal year 1995. Port Authority officials could neither locate the missing
purchase orders nor provide an explanation as to why the dollar amounts were not entered
into the logbooks.

Contracts

During the audit, we requested a complete listing of contracts awarded during fiscal years
1994 and 1995 because the Port Authority did not maintain a logbook and central file for
contracts. Initially, the Port Authority Controller provided a list showing cumulative
payments of $5,463,205 made to 36 contractors in fiscal year 1995 only. However, we
found that the list was not accurate or complete. For example, at least nine payments,
totaling $1,455$X3, were for prior year contracts, and five payments, totaling $310,145,
were for payments made on purchase orders and not contracts. Subsequently, the Port
Authority's General Manager provided another list of 43 contracts, totaling $2,630,497,
for fiscal years 1994 and 1995. However, this list contained no dollar amounts for five
contracts, and one contract ($24,ooO) was a prior year (fiscal year 1991) contract.

13

 
Recommendation

We recommend that the Chairman, Board of Directors, Port Authority of Guam, direct the
General Manager to develop and implement written policies and procedures to ensure that
purchase orders and contracts are entered into logbooks promptly and accurately and that
all procurement documents are filed centrally and are safeguarded.

Port Authority of Guam Response and Offke of Inspector General Reply

In its May 20, 1997, response (Appendix 2) to the draft report, the Port Authority
concurred with the recommendation, stating that "all security measures have been taken
and completed to ensure that all files are safeguarded and protected. " However, the
response did not: (1) address the development and implementation of written procedures
to ensure that purchase orders and contracts are entered into the logbooks promptly and
accurately and (2) provide written procedures showing the "security measures" that have
been implemented. Accordingly, additional information is needed for the recommendation
(see Appendix 3).

14

 
APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

.   .
mdmg Areas

Funds To Be Put
To Better Use*

A. Procurement Activities
   Contracts and Purchase Orders
   Small Purchases
   Social Events

$1,429,275
164,ooo
  42.641

Total                          $1.635.916

*Amounts represent local funds.

15

 
PORT AUTHORITY OF GUAM
ATURIDAT I PUETTON GUAHAN
       GOVERNMENT OF GUAM
       1026 Cabras Highway
             suite 201
         Piti, Guam 96925

APPENDIX 2
Page 1 of 13



Telephone: (671) 47?- 5 3 i 135
     (671) 47?`-sil&:_:,185
Telex: (721) 6689 PAGGUM
Facsimile: (671) 477-2589

May 20, 1997

VIA HAND DELIVERY

Mr. Waiter 8. Haught
Senior Auditor

North Pacific Region
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF INSPECTOR GENERAL
238 Archbishop F.C. Flores Street
Pacific Daily News Building, Suite 807
Agana, Guam 96910

Re .
  .  Draft Audit Report Regarding Procurement Activities
   of the Port Authority of Guam; Assignment No. N-IN-GUA-008-96

Dear Mr. Haught:

   At the request of Mr. Inspector General William A. Lewis, this letter is
forwarded to you to provide you with the Port Authority of Guam's response to the
draft audit report dated April 1997 submitted by the United States Department of the
Interior Office of Inspector General regarding the procurement activities of the Port
Authority of Guam for the fiscal years 1994 and 1995.

I. COMPETITIVE SELECTION

A. Audit Report Findinq

   According to the draft audit report, the Port Authority failed to justify the use
of noncompetitive procurement methods.  As an example, the audit report cites a
contract dated February 14, 1994 entered into between the Port Authority and
Winzler & Kelly, a local engineering firm, to provide consulting services for the design
of repairs to piers and other Port Authority facilities damaged by the August 8, 1993
earthquake.

16

Commonwealth Now!

 
APPENDIX 2
Page 2 of 13

Mr. Walter 6. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 2

8. Port Authority Response

   While competitive sealed bidding is the "preferred" method of procurement
source selection by government of Guam agencies, the Guam procurement law and
regulations specify several exceptions to the general rule that competitive sealed
bidding is the preferred method of procurement source selection. See, 5 G.C.A.
5210; Guam Procurement Regulations Section 3-202.02.

   Government of Guam agencies are afforded more discretion in the procurement
of professional services such as engineering services. For, example, 5 G.C.A. 95124
provides in pertinent part:

Unless otherwise ordered by regulation of the Policy Office,
with approval of the Governor, the following supplies and
services need not be procured through the General Services
Agency or the Department of Public Works, but shall
nevertheless be procured by the appropriate Purchasing
Agency subject to the requirements of this Chapter and the
regulations promulgated by the Policy Office:

(c) architect, engineering and land surveying services as
defined in 05301 of this Chapter.

   The Guam procurement statute also provides that certain services specified in
5 G.C.A. 95121 (a), including services for accountants, physicians, lawyers, dentists
and  "other professionals" are exempt from the competitive sealed bidding
requirements.  The services specified in 5 G.C.A. 95121 (a) are to be procured
pursuant to the procedures for Request for Proposals as set forth in 5 G.C.A.
95216(b)-(e). 5 G.C.A. 05216(a).

   Architect, engineering and land surveying services are defined in 5 G.C.A.
85301 as "those professional services within the scope of the practice of
architecture, engineering or land surveying as defined by the laws of Guam. In 5
G.C.A. 95302, the Policy Office is directed to promulgate regulations "providing for
as many alternative methods of construction management as it may determine to be
feasible." Further, such regulations must "grant the Director of Public Works or the
head of the purchasing agency responsible for carrying out the construction project,
the discretion to select the appropriate method of construction contracting

17

 
APPEMIIX 2
Page 3 of 13

Mr. Walter B. Haught
UNITED STATES DEPARTMENT OF THE tNTERlOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 3

management for a particular project." 5 G.C.A. 5302(b)

   Section 5-201 .01.2 of the Guam procurement regul
Office, entitled "Flexibility," states that:

ations adopted by the Policy

It is intended that the Director of Public Works or the head
of the Purchasing Agency, acting through the Procurement
Officer, have sufficient flexibility in formulating the project
delivery approach in a particular project to fulfill the
territory's needs.

   The Guam procurement statute specifically exempts the procurement of
engineering services from the competitive bidding requirements of 5 G.C.A. 5210 by
providing in 5 G.C.A. _5216(a) that "[slervices for architecture, engineering,
construction, land surveying, environmental assessments and other such services shall
be procured in accordance with Article 5 of this Chapter."

   According to 5 G.C.A. _52116(b), persons engaged in providing the types of
services specified in 5 G.C.A. _5121 may submit statements of qualifications and
expressions of interest in providing the services in response to requests for proposals.
See, also, Procurement Regulations Section 3-207.04.  A purchasing agency is
required to provide notice of the need for such services at least ten days prior to the
date on which the proposals are due. Procurement Regulations Section 3207.05.
The request for proposal must describe the services required, list the type of
information and data required of each offeror, and state the relative importance of
particular qualifications.  5 G.C.A. 05116(c); Procurement Regulations Section 3-
207.06.1. The head of a purchasing agency may conduct discussions with any
offeror who has submitted a proposal to determine such offeror's qualification for
further consideration. 5 G.C.A. _5116(d). Award of a contract for services shall be
made to the offeror determined in writing by the head of the purchasing agency to be
the best qualified based on the evaluation factors set forth in the request for proposal
and negotiation of compensation determined to be fair and reasonable. 5 G.C.A.
85116(e); Procurement Regulations Section 3-207.06.2.

   Please be assured that the Port Authority actively encourages all Port Authority
staff and management to expend Port Authority funds in the most efficient and
economical manner.  The Port Authority also attempts to acquire all supplies and
services at the best price and in compliance with all Guam procurement laws and

18

 
APPENDIX 2
Page 4 of 13

Mr. Walter B. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE 1NSPECTOR GENERAL

May 20, 1997
Page 4

regulations.

   The Port Authority believes that the procurement and award of the architectural
and engineering consulting services contract to Winzler & Kelly was in compliance
with all of the above described procurement laws and regulations.  The Guam
procurement law and regulations specifically exempt the procurement of certain
services from the competitive sealed bidding requirements.  Services such as
architectural and engineering consulting services may be procured through requests
for proposals rather than competitive sealed bidding. The Port Authority is also aware
that the procedures used to procure these services are typical of other government
of Guam agencies.

   The contract awarded to the local engineering firm for architectural and
engineering consulting services for the design of the repairs to the piers and other Port
Authority facilities damaged by the earthquake was in fact procured through a validly
issued Request for Proposal. Attached is the Request for Proposal issued by the Port
Authority in October of 1993 for the architectural and engineering consulting services.
Also attached is a memorandum dated October 26, 1993 to the "A/E Selection
Committee Members" from the CIP Coordinator which states that no fewer than
fourteen (14) companies submitted responses to the Request for Proposal. Also
attached is a memorandum dated December 13, 1993, in which the General Manager
is informed that the A/E Selection Committee using a five criteria rating system
selected the three top companies out of the total of fourteen companies that had
responded to the Request for Proposal.

   Only after months of evaluation by the A/E Selection Committee and months
of negotiation with the best qualified offeror, did the Port Authority enter into the
contract with THE best qualified offeror for the architectural/engineering services.
Quite significantly, the final contract was also reviewed and executed as to form by
the territory of Guam Attorney General's office. Thus, the Port Authority believes that
it not only followed applicable requirements of the Guam procurement law and
regulations, but also that the entire process was conducted in the spirit of competition
to assure that the Port Authority received the best price for the services needed.

   In reference to the other "38 procurements", you failed to cite how the Port
awarded the contracts "noncompetitively" o On April 25, 1997, I sent you a letter
requesting the specifics of your allegations. To date, as I understand, this request was
forwarded to your head office and there has been no response as of yet. The one

19

 
APPENDIX 2
Page 5 of 13

Mr. Walter 8. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 5

example cited concerning Winzler & Kelly was clearly wrong. We are therefore unable
to reply specifically to the allegation.

   In general, the Port Authority awards all contracts over $5,000.00 either
through sealed bids or request for proposals as authorized by statute.

   In reference to your footnote No. 2, pertaining to the poor record keeping of the
Port, the procurement records are kept in accordance with 06707 of P.L. 6-64.

C. Port Authority Plan of Action

   The Port Authority will review current policies and procedures to ensure that
the Port Authority is continuing to comply with all Guam laws and regulations
applicable to the procurement of services pursuant to requests for proposals. Key
personnel involved in the procurement process will be indoctrinated to the updated
policies and procedures. To the extent required by applicable Guam procurement laws
and regulations, the Port Authority will ensure that all Port Authority procurement
personnel make written determinations justifying the use of competitive requests for
proposals.

   For your information, the General Services Agency conducted procurement
training on February 20, 1997. Key personnel involved in procurement attended the
training session. Attached is a copy of the agenda.

   The Port employee who will be responsible for monitoring this area is Mr. David
Baleto, Supply Management Administrator.

Il. SMALL PURCHASES

A. Audit Report Findinq

   The Inspector General's draft audit report stated that the Port Authority split
procurement requisitions to circumvent the requirements for competitive sealed
bidding on large dollar procurement acquisitions and processed small purchase
procurement acquisitions without obtaining the required number of price quotations.

20

 
APPENDIX 2
Page 6 of 13

Mr. Walter 8. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 6

B. Port Authority Response

   The Port Authority recognizes that the procurement of small purchases,
established at $5,000.00 for supplies and services and $15,000.00 for construction,
must be made pursuant to Guam Procurement Regulations Section 3-204. The Port
Authority also acknowledges that the procurement requirements for small purchases
"shall not be artificially divided so as to constitute a small purchase." 5 G.C.A.
95213; Guam Procurement Regulation 93-204.02.5. The Port Authority also
recognizes that if a small purchases is available from only one vendor then the sole
source procurement method is required. Guam Procurement Regulation _3-204.02.4.
Also, the head of a purchasing agency shall adopt operational procedures for making
small purchases of $500.00 or less.  Guam Procurement Regulation Section 3-
204.03.05. Finally, such operational procedures shall provide for obtaining adequate
and reasonable competition and for making records to properly account for funds and
to facilitate auditing of the purchasing agency. Id.

   While the Port Authority's Policy Memorandum 09-88 may state that three price
quotations should be obtained for small purchases, it is notable that Guam
Procurement Regulation 03-204.03.1 provides:

Insofar as it is practical for small purchases of supplies or
services between $500 and $5,000, no less than three
businesses shall be solicited to submit written quotations or
oral quotations that are recorded and placed in the
procurement file.  Awards shall be made to the business
offering the lowest acceptable quotations.  (Emphasis
added).

   Thus, the Guam procurement regulations require quotations from three
businesses only "[iInsofar as it is practical for small purchases of supplies and
services." The Port Authority believes that attempts to obtain three quotations for
small purchases are routinely made by Port Authority procurement personnel.
However, because of the lack of available vendors on Guam, it is quite common that
the Port Authority is unable to obtain three quotations from acceptable vendors.
Further, although the supply or service is for a small dollar amount, occasionally the
Port Authority is forced by necessity to respond to the first reasonable quotation in
order to keep equipment operational.  If equipment is non-operational the Port
Authority ultimately incurs greater losses in public funds than it otherwise would incur

21

 
APPENDIX 2
Page 7 of 13

Mr. Walter B. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 7

if delays were required in order to obtain three price quotations.

C. Port Authority Plan of Action

   Port Authority procurement personnel have been advised to maintain adequate
written documentation to support procurement of small purchases. Specifically, Port
Authority procurement personnel  will develop procedures for consolidating
procurement to avoid split procurement and to ensure that written determinations
justifying the necessity of split requisitions are made. If procurement personnel are
unable to obtain three quotations for small purchases then written documentation shall
also be made. Finally, if only one vendor is available for a small purchase, then the
sole source procurement method procedures are required.

  The training of all key personnel in the procurement process will be conducted
and completed by August 29, 1997.  The responsible Port employee is Mr. David
Baleto, Supply Management Administrator.

  The safeguarding of all procurements documents has always been a concern
of the Port. This has been corrected and all security measures have been taken and
completed to ensure all files are safeguarded and protected. The area is now secured
and only authorized personnel are permitted.

III. SOCIAL EVENTS

A. Audit Report Finding

  The Inspector General's draft audit report states that the Port Authority
inappropriately procured services for social events primarily for the benefit of Port
Authority employees.

B. Port Authority Response

1. The Executive Budget Law

   The Executive Budget Law,  4 G.C.A. __4101-4115 establishes a
comprehensive system for government agency programs and financial management.
However, under 4 G.C.A. _4115, the Port Authority is specifically exempted from the
provisions of 4 G.C.A. _4113 and 4 G.C.A. 94114. 4 G.C.A. _4113 restricts the

22

 
APPENDIX 2
Page 8 of 13

Mr. Walter 8. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 8

funding of new programs without funding appropriation. 4 G.C.A. 94114 states that
".[f]unds other than appropriated funds may be used for the operation of a government
program and activity provided, that the Legislature, by resolution, shall first give its
approval to said programs or activity."

2. Other Statutes Relating to Government Expenditures

   In 1985, the Guam Legislature enacted Public Law 18-09 entitled "Enforcement
of Proper Government Spending" which was subsequently recodified as 5 G.C.A.
__7101-7117.  The Guam Legislature stated that it is the intent of the Guam
Legislature that the government of Guam practice fiscal responsibility, and that the
persons who spend the taxpayer's money follow the mandates of law in expending
government funds. 5 G.C.A. 97101. Entities included within the scope of 5 G.C.A.
37 101-7 117 include "autonomous boards, agencies and authorities of the government
of Guam, the Guam Visitors' Bureau to the extent that funds contributed or
appropriated by the government of Guam are involved, and any other instrumentality,
agency, bureau, or department of the government of Guam. 5 G.C.A. 97107.

In 5 G.C.A. 97102, entitled Standards Estab

provided that:

Any officer, agent, contractor, or  employee of the
Executive Branch of the government of Guam who is

ished for Handling Money, it is

charged with or assumes responsibility for the certification
of availability of funds or the spending of money belonging
to the territory of Guam, including the Governor and Lt.
Governor of Guam, stands in a fiduciary relationship to the
people of Guam in regard to the management of public
money. Any such officer, agent, contractor, or employee
of the Executive Branch shall discharge their duties with
respect to the management of public money solely in the
interest of the people of the territory of Guam. Any officer,
agent, contractor, or employee shall discharge his duties
with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in
the conduct of an enterprise of like character and with like
aims.

23

 
APPENDIX 2

Page 9 of 13

Mr. Walter B, Haught
UNITED STATES DEPARTMENT OF THE INTERlOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 9

   In 5 G.C.A. 022401 (a)(l), no officer or employee of the government of Guam,
including the Governor of Guam, shall "[mlake or authorize any expenditure from, or
create or authorize any obligation under, any appropriation or fund in excess of the
amount available thereon, or for other than an authorized purpose." For purposes of
this statute,  "government of Guam"  includes all three branches, Executive,
Legislature, and Judicial and "officer" includes, but is not limited to, directors and
agency heads, judges, and members and attaches of the Legislature.  5 G.C.A.
_22401 (d). Notably, the statute contemplates that government agencies will make
expenditures for entertainment by stating that "[wlhenever the terms *`contingent
expenses or contingent fund are used in any appropriation act, they shall include, but
not be limited to, entertainment expenses for official purposes." 5 G.C.A. 022407.

C. Procurement Laws and Regulations

   The Guam Procurement Law applies "to every expenditure of public funds
irrespective of their source . o . by this Territory, acting through a government body, as
defined herein, under any contract." 5 G.C.A. _5004(b). The term "procurement"
means "buying, purchasing, renting, leasing or otherwise acquiring any supplies,
services or construction. " 5 G.C.A. _5030(0). The Chief Procurement Officer of the
General Service Agency shall serve as the central procurement officer and is vested
with all rights, powers, duties and authority relating to the procurement of supplies
and services. 5 G.C.A. 95113(a); 5 G.C.A. 95120. However, the Chief Procurement
Officer may delegate authority for procurement of supplies and services to designees
or to any governmental body or official. 5 G.C.A. 05114.

D. Case Law Regarding Government Expenditures

   There were no Guam court cases relating to the specific issue of whether the
Port Authority or other Government of Guam agencies are authorized to expend funds
for employee social events. However, case law from other jurisdictions does provide
general guidance on this issue.

  In general, the power to incur indebtedness or expenditures is a legislative
power which is customarily delegated by the legislature to an executive branch
agency. Seward Counm v. Aetna Life Insurance Co., 90 F. 222 (8th Cir 1898). The
courts typically construe powers relating to incurring expenditures of public funds
strictly so that only such powers as are expressly or impliedly granted by law are
valid. CamPbell v. Joint District 28-J, 704 F.2d 501 (10th Cir. 1993); In te Sims, 40

24

 
APPENDIX 2
Page 10 of 13

Mr. Walter 8. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 10

Fla 432, 25 So. 280 (1898).

   Expenditures incurred by a government entity must be for an authorized
purpose.  Hodges v. Kauffman, 95 Cal.App 598, 273 P. 125 (1929); Joint
Consolidated School District No. 2 v. iohnson, 163 Kan 202, 181 P.2d 504 (1947).
All expenditures of public money must be for a public purpose as distinguished from
a private purpose, unless the powers of a government entity are enlarged by law, The
Libem Bell, 23 F. 843 (1885). If the primary object of the expenditure of pu%
funds is to promote a private end, the expenditure is illegal. Peacock v. Georgia
Municipal Association, Inc., 247 Ga. 740, 279 S.E.2d 434 (8119 ); Castner v.
Minneapolis, 92 Minn. 84, 99 N.VV. 361 (1904). On the other hand, if the primary
object is to advance a public purpose, it is immaterial that, incidentally, private ends
may be advanced. Id.

   A public purpose has for its objective the promotion of the public health, safety,
morals, general welfare, security, prosperity and contentment of all or a substantial
part of the public. Opinion of the Justices, 349 Mass. 794, 208 N.E. 2d 823 (1965);
United States v. Town of North Bonneville, 94 Wash. 26 827, 621 P.2d 127 (1980)
Thus, the test for whether an expenditure is for a public purpose should be whether
the expenditure confers a direct benefit of reasonably general character to a significant
part of the public as distinguished from a remote or theoretical benefit. Id. A
particular case must be decided with reference to the object sought G be
accomplished and to the degree and manner in which that object affects the public
welfare. Anderson v. Baehr, 265 SC 153, 217 S.E.2d 453 (1975); Pipestone v.
Madsen, 287 Minn. 357, 178 N,W, 2d 594 (1980).

   Applying these general principles, there is a split of authority in court cases
involving whether a government entity may use public funds for such expenditures as
celebrations, entertainment, sports and games. See,, Commonwealth v. Ginarich,
21 Pa. Super 286,290 (1888)(a public corporation cannot make a contract to provide
entertainment for its citizens and guests); Black V. Detroit, 1 19 Mich. 571, 78 N.W.
660 (1905)(expenditures for banquets and dances not permitted); Sacramento
Chamber of Commerce v. Stephens, 212 Cal. 607, 299 P. 728 (1884)(city charter
provision allowing expenditures for entertainment of public guests, held permissive,
not mandatory, and city was free to adopt any reasonable means therefor);
Schieffelim v. Hvland, 236 N.Y. 254, 140 N.E. 689 (1921 )(Celebration of creation of
greater New York was held a public purpose),

25

 
APPENDIX 2
Page 11 of 13

Mr. Walter B. Haught
UNITED STATES DEPARTMENT OF THE INTERiOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 11

  Based on the applicable statutory and case law, it appears that there is no
specific statute or case law which either allows or prohibits the expenditure of Port
Authority funds for employee social events.  Arguably, as a self sustaining
autonomous instrumentality of the government of Guam, the Port Authority is vested
with more discretion than typical government entities which depend solely on
legislative appropriation.  As a result, the power to use Port Authority funds for
employee social events can be implied from the Port Authority's enabling statute.

  In this case, the "social events" were employee gatherings for Christmas and
Labor Day. During the Christmas events, the evenings were used to recognize the
achievements of employees for the past year.  Awards were presented to the
employees during the event. The events were budgeted by the Port management and
approved by the board of directors.  The management and board felt that the
functions improved employee morale, were in honor of the employees and had a
legitimate public purpose. The same rationale and procedure applied to the Labor Day
events.

  Further, the current General manager was provided with the legal opinions of
the then GIAA legal counsel which advised that such expenditures were valid. The
same GIAA legal counsel also criticized the correctness of the Attorney General
memorandum you cited to. It is noteworthy to point out that the Attorney General
memorandum specifically stated that the memorandum was informational only and
was not issued as an opinion of the Attorney General.

C. Port Author& Plan of Action

  The Port Authority intends to seek legislative clarification that the use of Port
Authority funds for employee social events is an authorized expenditure.

IV. RECOMMENDATIONS

A 0   Procurement Activities

            1    IG Recommendation:  Develop and implement written
procedures to ensure that noncompetitive procurement actions totalling $5,000 or
more are processed in accordance with the requirements provided in Guam
procurement laws and regulations, including the requirement for a written justification.

26

 
APPENDIX 2
Page 12 of 13

Mr. Walter B. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 12

Port Response: Concur

            2    IG Recommendation:  Develop and implement written
procedures to ensure that purchase requests, including purchases of less than $5,000,
are consolidated to the maximum extent possible.

Port Response: Concur

            3    IG Recommendation:  Enforce the Port Authority's Policy
Memorandum 09-88,' "Standard Operating Procedures for Procurement of Materials,"
which requires three price quotations for small purchases, and require documentation
in support of efforts to obtain such.

Port Response: Concur, but see _llB above.

            4   IG Recommendation: Develop and implement procurement
plans to ensure tha; the Procurement Unit has sufficient lead time to process
procurement requests in a competitive manner.

Port Response: Concur

            5    IG Recommendation: Direct the Attorney General to take
appropriate action for the Port Authority's improper use of public funds for social
functions.

above.

Port Response: Do not concur for the reasons cited in Section IIIB

B .   Procurement Records

           IG Recommendation. We recommend that the Chairman, Board
of Directors, Port Authority of Guam, direct the General Manager to develop and
implement written policies and procedures to ensure that purchase orders and
contracts are entered into log books promptly and accurately and that all procurement
documents are filed centrally and are safeguarded.

Port Response: Concur.

27

 
APFENTUX 2
Page 13 of 13

Mr. Waiter 8. Haught
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF THE INSPECTOR GENERAL

May 20, 1997
Page 13

         As is clearly evident, we are in agreement on almost all
recommendations made by your office. Reasons being, we ourselves had discovered
certain deficiencies in policy and the appropriate changes were made subsequent to
those fiscal years examined in your audit.  On those other recommendations made
which have not been addressed, and which we concur, rest assured of the Board
implementing the prescribed guidelines and/or policies.

         Our thanks to your office for bringing these matters to our
attention and the recommended solutions to those items.

         It has always been the Port's position to comply with all
procurement laws and policies not to circumvent or disregard the same.

Should you have any questions, please do not hesitate in contacting me.

Very truly yours,

ER
, BOARD OF DIRECTORS

cc:

Governor of Guam
Senator Cariotta Leon Guerrero
William A. Lewis, IG
Ail Board Members
General Manager

[NOTE: ATTACHMENTS REFERRED ~0 IN THE PORT AUTHORITY'S LETTER HAVE NOT
BEEN
INCLUDED BY THE OFFICE OF INSPECTOR GENERAL.]

 
APPENDIX 3
Page 1 of 2

STATUS OF AUDIT REPORT RECOMh/lENDATIONS

Finding/Recommendation
    Reference

A.1

Managem
concurs;
additional
informatic
needed.

A.2

A.3       Implemented.

A.4

Management
concurs;
additional
information
needed.

A.5

ent

In

Management
concurs;
additional
information
needed.

Unresolved.

           .
Action Required

The Port Authority should provide a target
date for developing and implementing
written  procedures   for  processing
noncompetitive procurement actions in
accordance with Guam laws and regulations.
When completed, a copy of the written
procedures should be provided to our North
Pacific Region.

The Port Authority should provide a target
date for developing and implementing
written  procedures  for consolidating
purchase requests to the maximum extent
possible. When completed, a copy of the
written procedures should be provided to our
North Pacific Region.

No further action is required.

The Port Authority should provide a target
date and the title of the official responsible
for  developing and  implementing
procurement plans.  When completed, a
copy of the procurement plans should be
provided to our North Pacific Region.

The Governor of Guam should provide a
response to the recommendation indicating
concurrence or   nonconcurrence.    If
concurrence is indicated, an action plan
should be provided stating when the
Attorney General will provide an opinion on
the use of public funds for social functions.
If nonconcurrence is indicated, reasons for
the nonconcurrence should be provided.

29

 
APPENDIX `S
Page 2 of 2

Finding/Recommendation
      ference

.         .
loauued

Bl
 

Management
concurs;
additional
information
needed.

The Port Authority should provide a target
date and the title of the offkial responsible
for developing and implementing written
procedures for recording purchase order
and contract data in the logbooks and for
filing and safeguarding all procurement
documents. When completed, a copy of
the written procedures should be provided
to our North Pacific Region.

30

 
  ILLEGAL OR WASTEFUL ACTIVITIES
    SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENE- BYr

Sending written documents to:              Calling:

Within the Continental United States

U.S. Department of the Interior
Office of Inspector General
1849 C Street., N.W.
Mail Stop 5341
Washington, D.C. 20240

Our 24.hour
Telephone HOTLINE
l-800-424-508 1 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
l-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

(703) 235-9221

North Pacific Redon

U.S. Department of the interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. Flares Street
Suite 807, PDN Building
Agana, Guam 96910

(700) 550-7428 or
COMM 9-01 l-671-472-7279

 
Toll Free Numbers:
l-800-424-5081
TDD l-800-354-0996

FTS/Commercial Numbers:
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TDD (202) 208-2420

HOTLINE i

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Mail Stop 5341

5
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t

--  *Aa .A

Washington, II.L`. ZUZ4U