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The Invisible Government


Controversies plaguing the San Diego Unified Port District—including an FBI inquiry into massive airport-expansion cost overruns—seem to bolster critics, who decry the Port’s history of acrimony, scandal and back-room dealing. But defenders say that was the old Port. Is there a new Port?

"This is Exhibit A," says Larry Killeen, pulling back the blinds on the window of his top-floor office in the Port District’s fortress-like office building, reavealing a panoramic view of San Diego Bay. He points to the demolished General Dynamics facility across the street, piles of rubble strewn across 90 acres next to Lindbergh Field. "Welcome to Beirut," he says with a laugh.

From Killeen’s corner window—in a mostly windowless building some call "The Rock"—almost everything visible for 180 degrees falls under the direct influence of the agency he heads, the San Diego Unified Port District, arguably the most powerful government entity in the county. Its realm includes the airport, San Diego Bay, the waterfront hotels, the docks and tidelands stretching down through National City, Chula Vista and Imperial Beach.

Everything to do with this vast expanse comes through Killeen’s office and the Port, sometimes called the area’s "invisible government." For most of 35 years the Port has governed in an atmosphere of acrimony, scandal and back-room intrigue, fostering its image as a secretive body of "good ol’ boys" running San Diego.

But that’s the old Port, says Killeen, who has been the Port’s executive director for just two years. Major changes are taking place. This is the new Port—"new in outlook, new in philosophy, new in cooperation and new in outreach," Port literature assures us.

Except the image of the old Port continues to haunt Killeen and his staff. There’s the move to build new hotels on the downtown waterfront, a move that exploded into charges of back-room dealings and favoritism. There’s the Port’s sputtering attempts to enter into the world of maritime trade, where San Diego is barely a player. And then, most ominous, there’s the controversial airport-expansion project, tens of millions of dollars over budget and described by an auditor’s report as mismanaged. In mid-March, sources told San Diego Magazine, the FBI had begun interviewing Port management and others involved in the airport project regarding questionable contracts and cost overruns.

Sure sounds like the old Port, critics scoff. "Right now the Port is probably perceived as the best it’s ever been," says Port Commissioner David Malcolm. "Yet in reality, I think it’s probably the worst it’s ever been." A veteran of bureaucracies, after stints on the California Coastal Commission and the Chula Vista City Council, Malcolm expresses amazement at the secrecy and entrenched officialism he’s found in the halls of the Port.

"We’ve made some great changes," he says. "But we’ve not been willing to bite the bullet and tell the whole story to the public."

Malcolm is part of the seven-member commission that governs the Port and serves as Killeen’s boss. Three members are appointed to four-year terms by the city council of San Diego; one each comes from Chula Vista, National City, Coronado and Imperial Beach, chosen by those city’s councils.

A seat on the commission is strictly an unpaid, volunteer position. However, there are benefits to the job—beyond getting the chance to make decisions on multimillion-dollar projects.

Some of the benefits are modest, at best. For example, in 1995 (the most recent reporting period available in the gifts category), several commissioners received free concert tickets from companies that do business with the Port and "honorary commodore" cards, good for valet parking and special privileges at the Marriott Hotel & Marina, a Port tenant. One commissioner accepted a 25 percent discount card from the Fish Market restaurant, another Port tenant. (Last year, commissioners stopped taking the discount cards, after a Port attorney said the gifts represented a conflict of interest.)

But there are other perks. Last year, commissioners received reimbursement for hundreds of dollars in lunches and miscellaneous expenses, records show, including the $34 receipt that Malcolm submitted for new chairman Mike McDade’s birthday cake. The Port also pays for outside-the-office phone lines and computer equipment for commissioners.
Port Executive Director Larry Killeen describes an independent auditor's report criticizing Port management of the runaway airport expansion as a "painful experience."

In the early ’80s, after reports surfaced of lavish spending, the Port made a public display of instituting tighter travel guidelines. But commissioners still travel in the front of the plane—either business class or first class—when flying around the world on Port business. In 1996, Port records show, Malcolm spent more than $9,000 on a five-day trip to Nice, France, for a transportation conference, including $7,870 in airfare. (Malcolm notes that the Port provides for first-class travel on foreign flights, and says he saved two days of travel time on the flight.) The Port paid more than $1,600 each for round-trip tickets to Washington, D.C., when commissioners traveled to a conference there. Figuring in $5,800 each for plane tickets, the Port paid more than $21,000 to send three commissioners on a week-long trade mission to Chile and Argentina. The same three commissioners flew first-class to Australia and New Zealand on another fact-finding mission. Commissioners spent an estimated $90,000 on travel in 1996.

While cushy seats on international flights are part of the Port’s travel policy, commissioner Susan Lew realized another benefit from her Port travels. On at least six trips last year, Port records show that Lew used the travel agency she owns to book her Port trips. "The travel agency is right next to my office," she says. "I find it convenient. It doesn’t make a difference where I ticket it." (According to the Fair Political Practices Commission, the practice "doesn’t in itself constitute a conflict," as long as it doesn’t violate the Port’s internal policies.) Killeen, informed of Lew’s practice of giving her Port travel business to her own agency, says he’ll "look into it."

Although spouses occasionally accompany commissioners on trips, at their own expense, commissioners are quick to note that the trips are usually all business. The South American trip was a "killer," McDade says, and resulted in a new fruit shipment from Chile. The trips are "much more dedicated to benefiting the Port than they used to be," says commissioner Jess Van Deventer. "It’s not a vacation."

What: Formed in 1962 by the state, the San Diego Unified Port District is an independent government agency established to manage the harbor, operate Lindbergh Field and administer the tidelands from San Diego Bay to Imperial Beach. It generates revenue by collecting fees from hotels, restaurants and other businesses operating on Port land and from airport operations and cargo handling. It has the authority to levy property taxes, a power it currently does not use.

How: The Port is governed by a seven-member commission. Three members are appointed by the San Diego City Council; one each comes from National City, Chula Vista, Coronado and Imperial Beach. The commission sets Port policies; day-to-day operations are supervised by an executive director, to whom staff reports.

Port Commissioners:

Michael McDade, chairman: Longtime adviser to many of San Diego’s top politicians, including San Diego Mayor Susan Golding. Partner in law firm of Sullivan, Cummins, Wertz, McDade & Wallace. Represents: San Diego.

David Malcolm, vice chairman: Businessman with strong ties to Golding and politicians throughout the state. Served on the California Coastal Commission and the Chula Vista City Council. Represents: Chula Vista.

Patricia McQuater, secretary: Senior attorney for Solar Turbines Inc. Serves on boards of San Diego Urban League, Children’s Hospital and USD Law School Alumni. Represents: San Diego.

Susan Lew, commissioner: Owner of S. Lew & Associates, the largest Asian-owned real estate company in San Diego. Chaired the Port Commission in 1995. Represents: San Diego.

Paul Speer, commissioner: Retired Navy admiral. Worked for several aerospace and defense-related companies in civilian life. Represents: Coronado.

Frank Urtasun, commissioner: Works for San Diego Gas & Electric, in addition to owning a glass- and screen-installation company. The longest-serving member of the commission, he was reappointed for a second term in 1996. Represents: Imperial Beach.

Jess Van Deventer, commissioner: Owns a construction company and an investment firm. Entrenched politico in his home city. Represents: National City.

Larry Killeen, executive director: Longtime director of the Port of Tacoma. Came to San Diego in 1995. Considered an expert on developing maritime trade operations.

Even critics acknowledge that this commission is different from past ones, particularly in the way commissioners interact with staff members, who report directly to the Port director, not the commissioners. In the past, the typical commissioner was

a longtime civil servant close to retirement age. Commissioners were rarely involved in the day-to-day operations of the Port, preferring to set broad policy and let the executive director handle the nuts and bolts.

Killeen’s predecessor, Don Nay, who for 28 years ran the Port like his personal fiefdom, told his staff members not to talk directly to commissioners, mandating that all communication and information flow straight from him. Nay’s style of management "made him the hub and everyone else was a spoke," says McDade, who took over as Port Commission chairman in January.

The new commissioners are younger, more aggressive and nowhere near retirement age. "The people on this board are activists," says McDade. "There’s not one who sits passively on the board."

In the last year, political observers have witnessed open conflict between the staff and the commission, something that would have been unthinkable a few years ago. In the past, the commissioners rarely bucked staff recommendations.

When a dispute over land previously occupied by the Naval Training Center developed into open hostility between the city of San Diego and the Port, San Diego city representatives increasingly came to distrust Port staffers once the city began talking with commissioners. "A lot of things the staff of the Port would report to us [at the city], they wouldn’t report to the commissioners," says Johnnie Perkins, chief of staff for San Diego City Councilman Byron Wear. Negotiations began to bear fruit only when the city began to deal directly with commissioners, he says.

McDade knows how the game is played on both sides of the table. He was Roger Hedgecock’s chief of staff when the talk-show host was mayor of San Diego. McDade also is a top adviser to current San Diego Mayor Susan Golding and a partner in the influential downtown law firm of Sullivan, Cummins, Wertz, McDade & Wallace. "Once inside [the Port], you comprehend that it’s an intensely complicated organization," McDade says.

NEVER WAS THE RIFT between the staff and the commission more evident than late last year, when it became clear there were big problems with the airport-expansion project.

At first, Port staff announced that the plan to build a new terminal and change the roadway system would cost $165 million. Dan Wilkens, the Port’s senior director of community and government relations, now calls that a mistake, a "miscommunication" with the commission. That number didn’t include so-called soft costs, things like consultant fees. That’s just the way the old Port announced construction costs, Wilkens says. "In the best case, [Port staff was] deliberately misleading the public," Malcolm says.

In his State of the Port address in January, McDade said the expansion would cost $219 million. Just two weeks later a report was issued by an independent auditor hired by the Port. It put the cost at $232 million. Insiders expect it to go even higher.

Couched in gentle terms like "problematic" and "inadequate," the report prepared by Deloitte & Touche Consulting Group describes a project out of control, specifically citing the Port’s management. While some cost overruns were unavoidable, the report found that money paid to consultants accounted for a whopping 23 percent of construction costs —a figure the report characterized, perhaps charitably, as "high." It also noted that more than $1.2 million was spent on clerical and finance staff. Architects and other site planners received open-ended contracts with few spending caps, sources say.

Killeen, a burly man with a penchant for large gestures, says the report was "a painful experience." At the commissioners’ behest, a project manager has been hired to specifically oversee future construction costs, and the project’s management structure has been revamped to follow the report’s recommendations.

But some argue that the airport-expansion plan itself raises a larger issue. Regardless of when it’s finished, unless some miracle occurs, Lindbergh Field will still be a one-runway airport with limited access. The Port made the decision to embark on the expansion at a time when many in the region still hoped to find a place to build a new airport. Although business leaders rallied to support the Port’s move to annex portions of the Naval Training Center for the airport, many still believe the Port was looking after its own interests, not the region’s, by spending millions to fix up the old airport.

The Port, all agree, has not always been a good neighbor. In fact, it often seems to operate as an island. Until recently, it didn’t even keep its money in local banks, which is not a small deal: The Port has been called the "Daddy Warbucks of local governments." It paid for the construction of the $208 million convention center in cash.

But to the annoyance of many of its neighbor governments, the Port is fickle with its funds, although it often leaves the impression it has money to burn. In generous fashion, the Port this year is dedicating $1.9 million for public art on Port lands, after years of traumatic squabbles with the arts community.

In a move reminiscent of the Port’s good-old-boy reputation, the commission stepped up again just last summer. When the Republican National Convention needed some last-minute funding help, the Port Commission quickly authorized a $250,000 donation, even though there was no written request for funds and no specific details provided on how the money would be spent. Representatives of the Republican Host Committee didn’t even bother to show up at the meeting.

Port managers are among the best-paid government officials in the county. Killeen earns $160,000 a year, which is pretty much in line with port director salaries

in Seattle and Los Angeles. But the annual operating revenue from ports in those cities is about double that of the Port of San Diego. And locally, Killeen makes substantially more than San Diego City Manager Jack McGrory, who earns $137,000. San Diego Mayor Susan Golding makes $68,000 a year.

On the ledger, the Port—a $102-million-a-year operation—makes about $17.5 million a year after it pays its bills. It also has an unallocated cash reserve of about $12 million, Wilkens says. In the early ’90s, the Federal Aviation Administration curtailed the Port’s ability to use airport revenues for other projects. That act, coupled with the expense of building the convention center, instilled in the Port an enthusiasm for finding new revenue streams. In his 1997 State of the Port address, McDade called the Port "government with a profit motive."

As part of the new development mode, the Port is moving to rezone property in Chula Vista to allow different commercial and industrial uses. It’s also trying to raise the rental rates on all its marinas, a move sure to meet stiff opposition. Vacancy rates in marinas already are close to 20 percent, and the Port is building 250 more slips in National City. "We think their primary function is to create economic opportunity, not to maximize their income," says Richard Cloward, executive director of the San Diego Port Tenants Association.

If there is a symbol of the trials and tribulations of the Port’s business operations, it’s the now infamous cold-storage facility—an elaborate refrigerator designed to house fruit on 10th Avenue. It represents the Port’s brave foray into a new business, an attempt to build San Diego as a destination port for fruit companies. The Port’s capital expenditures for the facility have exceeded $15 million.

The facility is open now, and publicly the Port trumpets its "record-setting quantities" of fruit imports. In reality, according to Port records, the facility brought in only $200,000 in business in 1996, and posted an operating loss of $900,000 after sitting empty for more than half the year. The Port spent $400,000 on a "recapture unit" for the facility, after environmentalists and the San Diego Unified School District sued to stop use of a fumigant. But the unit designed to recapture the fumigant discharge doesn’t work. It will probably cost another $600,000 to get it to work. In February, the Port brought in an outside firm to help find new business for the facility.

The cold-storage facility is part of the Port’s big new push to develop the region’s long-dormant maritime-trade business, a top priority. Killeen was hired, in part, because after many years as executive director of the Port of Tacoma he’s a veteran at developing sea trade.

As far as the shipping world is concerned, the Port of San Diego was "Rip Van Winkle for 30 years," says UCSD political science professor Steve Erie, who analyzes transportation issues. "Now they’re trying to play catch-up, and it’s a very difficult thing to do."

From 1985 to 1995, maritime activity at the Port declined by nearly 50 percent, according to a study prepared last year for the Port by Booz-Allen & Hamilton Inc. From 1990 to 1995, the maritime operations lost $46 million, the study found. Among other problems, San Diego has little to export.

"Ships go back empty, and that’s always been the problem," says former Port commissioner Lou Wolfsheimer. The Booz-Allen & Hamilton study concluded that the Port "has not effectively marketed its seaport, and the maritime capabilities are largely unknown in the marketplace."

In 1996, the Port took what staffers call a major step forward. Honda agreed to ship 80,000 cars a year through National City, aided by $22 million in rail improvements paid for by Burlington Northern–Santa Fe Railroad. In return, the Port spent $6 million on improvements—including $2 million to pave part of a 100-acre site to park the cars.

"In anybody’s league, that’s not a bad deal," Killeen says, noting that the arrangement created 168 "real" jobs. "It supports our contention that we can play in international trade."

However, Malcolm notes, Santa Fe kept rights to use the new rail line—leaving open the possibility they could charge other companies to use the rails. And Killeen acknowledges that the deal will actually lose money, at least in the short term.

"They were so eager for business they grabbed the first deal that came along," says Erie.

But the new Port initiatives are having an impact. The tonnage handled by the Port grew by about 34 percent in 1996; the annual loss from trade operations was cut from $11 million to about $5.5 million, Killeen says.

To become a serious "niche" market, though, the Port is "going to have to belly up to the bar and put down some money," Killeen says. Some parts of the bay will need to be dredged. Most freighters are too big for San Diego Bay.

The Port is also counting on the resurrection of the San Diego rail line to Imperial Valley, San Diego’s only direct rail link to Mexico and the east. It will be a costly project, requiring the support of the Mexican government and the clearing of miles of tunnels and bridges. But the project is bogged down. San Diego Congressman Duncan Hunter has blocked federal support, saying the rail line would spark crime and drug smuggling from the Mexico side of the border.

IN THE SHORT TERM, hotels remain the Port’s single best hope for future revenue. One high-rise hotel alone can generate $4 million a year for the Port.

That’s one reason the Port was eager to move ahead with plans to develop hotels near the convention center. But there’s another reason. In a deal that has some commissioners rolling their eyes, as part of the arrangement to expand the convention center the Port agreed to build a 500-room hotel near the center by the time the expansion is completed, late in 1999. The city needs the hotel-tax revenue. If the hotel is not completed on time, the Port agreed to loan the city $2.25 million a year to make up for the shortfall.

Whatever sparked it, the move to develop hotels in the South Embarcadero area erupted into a series of accusations

of arrogance and back-room deals, as well as another conflict between Port staff and

the commission. It came to a head last May, when the public and local politicians learned the Port was almost ready to approve plans to build three new hotels with more than 2,700 hotel rooms near the convention center. "We didn’t hear about it until it was about two steps from a done deal," says one city of San Diego staffer.

At an unusually crowded and emotional meeting, the commission went against the recommendation of staff and decided to put all plans on hold to allow for a more complete planning process, including more public input. The commission charged a citizens’ committee to study plans and make recommendations. "We have probably forgotten to bring the public in on the planning," commissioner Susan Lew told a reporter.

While the delay was applauded by the public, it angered San Diego–based developer Doug Manchester, who was ready to proceed with plans to build a 715-room addition to his Hyatt Regency Hotel. He said he already had negotiated an "exclusive option" with the Port, which surprised many in the audience who had only recently learned of the plan.

Pete Litrenta, Manchester Resorts’ vice president of corporate relations, says Port staffers specifically asked Manchester to delay executing the plan because they didn’t want it to become an issue with the environmental-impact report being prepared for the convention center expansion. (Port spokesman Wilkens denies that scenario.)

In September, the commission went against the advice of its own staff and approved a different plan developed by the community liaison committee. In an official report, Port staff recommended the commission ignore the advice of that liaison committee "due to potential conflicts of interest among some committee members." In other words, staff was accusing the commission of listening to development interests on the community board.

"I think the commission was great, but I don’t understand the Port staff," says Greg Shannon, a developer who chaired the group, which also included representatives of the Audubon Society, downtown residents, the California Coastal Commission and Citizens Coordinate for Century 3. "I don’t think the staff is in touch with any constituency."

In a particularly scathing newspaper commentary, San Diego Union-Tribune architecture critic Ann Jarmusch scolded the Port for failing to attract competitive bidders for a site, lack of public notification, favoritism and for "planning practices that begin at the goal line and work backward from there."

For a Port trying to change its image, it was a bitter pill. "The way we were approaching hotel development was very much the way the old Port used to do things," McDade says.

Killeen describes the revised South Embarcadero planning process as a "turning point." The process ultimately won an Orchid award from the local chapter of the American Institute of Architects. It will be the model for future planning, he says.

In the weeks ahead, Killeen and the Port will launch into projects that will change the face of the San Diego waterfront. There’s the planning for the North Embarcadero area, which includes Lane Field—oft-mentioned as a potential site for a new San Diego Padres baseball stadium—and the possible expansion of cruise-ship facilities. There’s Shelter Island, which is due for a revamping.

And there’s the continuing effort to expand the airport, which will include planning for the use of the General Dynamics property adjacent to it. The Port has set aside $700,000 for "community outreach" during the airport-planning process.

"We’re all going to have to sit around the table," Killeen says. "It will be interesting to see if we can really all play together."

But which Port will show up at that table? The new Port? Or the old Port, the one that came to embody San Diego’s good ol’ boy political network?

The answer may say a lot about San Diego’s most notorious bureaucracy. And it may say something about Killeen, whose contract is up for renewal in a few months. But it may say much more about San Diego, its future and how things get done here.


Environmental Health Coalition President Laura Hunter had heard the talk about a “new Port.” She wondered if it was true until November, when the Port slapped a lawsuit on her group and San Diego Unified School District officials, seeking to force them to stop publicly attacking the Port’s controversial cold-storage facility.

“They never used to sue a public-interest agency for doing its job,” Hunter says, with more than a touch of sarcasm. “Yeah, that’s new.”

The Port’s relationship with the environmental community has always been, to put it mildly, antagonistic. Environmentalists consistently charge that the Port shirks its responsibility to protect the bays, tidelands and habitats under its control, which they say is the Port’s single most important job.

“They view themselves as a business,” says Craig Sherman, an attorney for Environmental Advocates. “Their approach to natural resources is best characterized as minimal compliance.” His group is involved in two legal actions with the Port, including a suit charging that the Port has ignored its mandate to protect the bay.

Port officials privately bemoan “the extremists” in the environmental community. But they also are wary of the groups. The commissioners recently agreed to do an environmental-impact study of a rezoning proposal in Chula Vista—only after environmental groups threatened to sue.

Commissioners say they get a bad rap, pointing to a new habitat study, a developing mitigation plan and an alliance with the San Diego Zoo as further evidence that they are doing their part to preserve the bay. —K.B.
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