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Overall ACO Recommendation

We recommend the PAC reimburse the Commonwealth $4,511,153 and pursue all reasonable steps to recover funds (state, local, airport) used to satisfy the default obligation of PEX.

I am available at your convenience to discuss the report. Bradley W. Gales, Director Assurance and Compliance Office Virginia Department of Transportation Bradley.gales@vdot.virginia.gov (804) 786-2825

COMMONWEALTH OF VIRGINIA DEPARTMENT OF TRANSPORTATION

ASSURANCE AND COMPLIANCE OFFICE

SPECIAL REVIEW

PENINSULA AIRPORT COMMISSION

REPORT NUMBER 2017-165

June 2, 2017

TABLE OF CONTENTS

SECTION PAGE

EXECUTIVE SUMMARY .......................................................................................................... 2 

VIRGINIA DEPARTMENT OF AVIATION - BACKGROUND ........................................... 3 

PENINSULA AIRPORT COMMISSION - BACKGROUND ................................................. 7 

PEOPLE EXPRESS AIRLINE - BACKGROUND ................................................................... 9 

SCOPE AND OBJECTIVES ..................................................................................................... 10 

GENERAL BACKGROUND INFORMATION ...................................................................... 11 

FINDINGS AND RECOMMENDATIONS ............................................................................. 15 

USE OF ENTITLEMENT FUNDS ........................................................................................... 15 

FREEDOM OF INFORMATION ACT - TRANSPARENCY ............................................... 32 

POTENTIAL AND/OR PERCEIVED CONFLICTS OF INTEREST ................................. 39 

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EXECUTIVE SUMMARY The Peninsula Airport Commission (“PAC”) was created pursuant to the 1946 Acts of Assembly, as amended, for the purpose of establishing and operating the Newport News/Williamsburg International Airport (“PHF”). The PAC consist of six (6) members, four (4) of which are appointed by the governing body of the City of Newport News, and two (2) by the governing body of the City of Hampton, Virginia. The PAC has an appointed Executive Director with delegated authority to oversee the day to day operation of the Airport.

Our review of the PAC included agreed upon procedures with objectives to review and evaluate the following:

The PAC Loan Guarantee Authority and the

Payment Funding Source

The PAC Due Diligence regarding People Express

Airlines The Loan Guarantee

Authority regarding Other Airports

Why this Review was Performed

The VDOT Assurance and Compliance Office (“ACO”) performed this review at the request of the Commonwealth’s Secretary of Transportation, the Honorable Aubrey L. Layne, subsequent to media reports publicly disclosing a $5 million commercial loan default involving People Express Airlines, Inc. (“PEX”) that was guaranteed by the Peninsula Airport Commission (“PAC”) and satisfied using collateralized PAC bank account proceeds consisting of state, local and airport funds.

Overall Conclusions Overall, we conclude the PAC was not transparent in providing public disclosure detailing the terms and conditions of a material financial transaction that effectively provided People Express Airlines, Inc., (“PEX”) with unrestricted access to in excess of $5 million of state, local and airport funding. Our review confirmed the following:

Commonwealth Airport Entitlement Funds were used for unauthorized purposes.

Commonwealth Airport Entitlement Funds were used as collateral to guarantee a TowneBank “Draw Down Line of Credit” issued to PEX, a private corporate business.

Commonwealth Entitlements Funds were expended to satisfy the default obligation of PEX at TowneBank.

PAC administrative staff, including the Executive Director, did not always provide complete, open, and timely disclosure of key and/or material interests to the Commission.

Conflicts of interest, either real or perceived were not disclosed.

Overall Recommendation We recommend the PAC reimburse the Commonwealth the unauthorized expenditures of public funds totaling $4,511,153 and that they pursue all reasonable steps to recover the public funds (state, local, airport) used to satisfy the default obligation of PEX.

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VIRGINIA DEPARTMENT OF AVIATION BACKGROUND

Virginia Department of Aviation, Virginia Aviation Board, and State Funding Virginia Department of Aviation On July 1, 1979, legislation transferred the Virginia Department of Aviation to the Executive Branch of State Government reporting directly to the Secretary of Transportation. From 1928, through July 1, 1979, the former Virginia Division of Aeronautics was a Legislative Branch Agency under the State Corporation Commission. The Virginia Department of Aviation (“DOAV”) is a state transportation agency along with the Department of Transportation, the Department of Motor Vehicles, the Department of Rail and Public Transportation, the Motor Vehicle Dealer Board, the Commercial Space Flight Authority and the Virginia Port Authority. DOAV consists of the Director’s Office and the four divisions: Airport Services Division; Communications and Education Division; Flight Operations and Safety Division; and Finance and Administration Division. DOAV provides financial and technical assistance to eligible airport sponsors for the planning, development, promotion, construction, and operation of airports and aviation facilities. DOAV also administers applicable provisions of the Code of Virginia, plans for the development of the state aviation system, licenses airports and aircraft, and promotes aviation activities within the state. The duties and responsibilities of DOAV are set in Code of Virginia §5.1-1.1 et seq. Virginia Aviation Board The Virginia Aviation Board (“VAB”) administers financial assistance programs and allocates funds for capital improvement projects. The VAB sets policies to guide the funding programs and to promote and develop safe aviation practices and operations in Virginia. The VAB hears airport sponsor and citizen concerns on matters pertaining to aviation and acts as a liaison to the department in an effort to be responsive to local jurisdictions, users of the system and citizens. The duties and responsibilities of the VAB are set in Code of Virginia §5.1-2.1 et seq. State Funding for Airport Projects The Commonwealth Airport Fund (“CAF”) and the Aviation Special Fund (“ASF”) provide the financial resources for the programs established and administered by the VAB and the DOAV. Commonwealth Airport Fund - The CAF receives its revenue from statutorily prescribed annual allocations made by the Commonwealth Transportation Board from the Transportation Trust Fund to the Virginia Aviation Board. The Code of Virginia specifies that CAF resources shall be allocated to airports on the basis of their service role as identified in the Virginia Transportation System Plan (“VATSP”). Entitlement and discretionary funds are made available from the CAF and are used under the Airport Capital Program. Aviation Special Fund - The ASF is used for facilities and equipment, general aviation security, maintenance, aviation promotion, and air service development programs.

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Source: Virginia Airport Operators Council Airport Program Manual The Airport Program Manual contains the following information: The Virginia Aviation Board has developed funding programs to assist sponsors of public-use airports. The funding programs are the:

Airport Capital Program Facilities and Equipment Program Voluntary Security Program Maintenance Program Aviation Promotion Program Air Service Development and Enhancement Program

For each of these programs, the Airport Program Manual provides information on eligible projects, state participation, and processes from project request submissions to reimbursements. Airport sponsors are also encouraged to contact the department when they have questions on the programs, policies, and processes described in the manual. 3.1.1.1 State Entitlement Funds - From the CAF, state entitlement funds are allocated annually to sponsors of airports that have scheduled air carrier service in accordance with the Code of Virginia §58.1–638.A3, which specifies that no air carrier airport shall receive less than $50,000 or more than $2 million per fiscal year in state entitlement funds.

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Sponsors eligible for state entitlement funds must submit a Commonwealth Airport Fund Entitlement Utilization Report for VAB approval each year in order to qualify for state discretionary funding. These reports provide an annual accounting of the previous fiscal year’s state entitlement fund expenditures. Utilization reports shall be filed within 30 calendar days after the close of the fiscal year. 3.1.1.3 Air Carrier Utilization of State Entitlement and Discretionary Funds - It is the expressed intent of the VAB that an air carrier airport sponsor totally obligates its state entitlement funds prior to that sponsor receiving any state discretionary fund allocations. The sponsor determines the expenditure of state entitlement funds; however, it is the VAB’s intent that these funds be used as the state’s share of costs for eligible federally funded projects. As the VAB approves state entitlement utilization reports each fiscal year, the VAB’s actions regarding the expenditure and commitment of an airport’s state entitlement funds will be used by DOAV as a basis for recommendations to approve or disapprove allocations of state discretionary funds for eligible projects. State entitlement funds can be used for any project eligible under the Airport Capital Program, Facilities and Equipment Program, and Maintenance Program. Operational costs are not eligible under any of those state funding programs. 3.1.1.3.1 Entitlement Only Projects - Certain projects have been determined to be eligible only for the expenditure of state entitlement funds, referred to as entitlement only projects. Sponsors cannot request state discretionary funds for these projects. Most of these projects relate to expanded maintenance projects and purchases, or are directly related to meeting safety and performance standards established by FAR Part 139 and TSAR 1542. Projects that are eligible for state entitlement funds include, but are not limited to:

debt service retirement for eligible entitlement fund expenditures aircraft removal systems construction of Aircraft Rescue and Fire Fighting (ARFF) simulator facilities and the

provision of their related equipment, such as a simulator pad, airfield access, and propane ignition equipment

maintenance contracts and repairs related to physical systems and equipment purchase of equipment for snow and ice removal and treatment that exceeds a snow removal

equipment plan for a FAR Part 139 airport purchase of firearms and body armor for law enforcement officers employed by the airport procurement of equipment, videos, and consultant services used to meet FAR Part 139 and

TSAR 1542 training requirements improvements and training needed for OSHA compliance

3.1.1.3.2 Projects Outside of Normal Expenditures - Certain projects not listed or generally described in this manual have been determined to be outside of normal project expenditures.  Projects that are considered outside of normal project expenditures include, but are not limited to:

aviation promotion projects air service development projects landside passenger shuttles recurring operational costs airport personnel salaries and benefits

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3.4.1 Master Agreement on Terms and Conditions for Accepting State Aviation Funding Resources contains the terms and conditions for accepting state aviation funding from the Commonwealth of Virginia for capital projects, facilities and equipment, security, maintenance, aviation promotion, and air service development projects. These terms and conditions identify sponsor responsibilities during and after the implementation of a project. The terms and conditions apply to funding awarded under grants and allocations. 6.0 Airport Capital Program - The Airport Capital Program provides funding for planning and engineering projects that focus on airport facility development. In general, these projects include master plan and airport layout plan studies, environmental studies, land acquisition, airside facility design and construction, and terminal building design and construction. 6.1 Aviation Special Fund Project Eligibility - Projects related to equipment, general aviation security, maintenance, promotion, and air service development are not considered to be Airport Capital Program projects, as these programs are funded through the Aviation Special Fund. 6.2.1 State Airport Entitlement Funds - State airport entitlement funds can be used for any eligible project under the Airport Capital Program. 11.0 Air Service Development and Enhancement Program - The Air Service Development and Enhancement Program provides funding to assist airport sponsors attract new air service and maintain or improve existing air service. This air service includes scheduled air service under FAR Part 135 and cargo service. … The Virginia Aviation Board has delegated the authority to review and approve funding requests for the Air Service Development and Enhancement Program to the Virginia Department of Aviation. 11.1 Air Service Development and Enhancement Project Eligibility The following are examples of items or projects that are eligible for funding under this program to assist sponsors in attracting, enhancing, or retaining commercial passenger or cargo services:

air service studies and reports airline visits, including presentation preparation; consultant services; travel and lodging for

airport sponsors; and administrative, legal, and incidental costs consulting services air service data subscriptions component market research services such as surveys and data analysis flight information display systems including data subscriptions marketing and advertising for new or enhanced air service for the first calendar year Ineligible items or projects include, but are not limited to: cash incentives items or projects eligible under the Aviation Promotion Program planning, engineering, or construction of capital projects

11.2 State Participation The state’s funding participation is based on the Federal Aviation Administration airport

classifications. The maximum state participation rates and amounts are shown in Table 6 Development and Enhancement Funding Levels. The VAB has established a $20,000 annual ceiling

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per airport on state participation. After January 1, fund ceiling is removed for the remainder of the fiscal year.

PENINSULA AIRPORT COMMISSION BACKGROUND

The Peninsula Airport Commission (“PAC”) and Executive Director/Staff Information The PAC was created by the 1946 Acts of Assembly, as amended, and is responsible for economic development and the day-to-day affairs of Newport News-Williamsburg International Airport. The PAC By-laws, amended February 9, 2004 contain the following information:

The Commission shall consist of six (6) members, four (4) of which are appointed by the governing body of the City of Newport News, and two (2) by the governing body of the City of Hampton, Virginia. All appointments shall be for four (4) year terms except appointments to fill the vacancies which shall be for the unexpired terms. The governing body appointing any member may remove such member at any time and appoint his/her successor. The Chairman of the Commission shall be paid two hundred dollars ($200.00) per month for attendance at meetings and other activities as chairman, and members of the Commission shall be paid one hundred seventy five dollars ($175.00) for attendance at meetings and other activities.

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The Commissioners shall annually elect a chairman and a vice-chairman from their

membership, a secretary and a treasurer, assistant secretary and assistant treasurer from their membership as they deem appropriate.

The Commission from time to time may employ an Executive Director, who shall not be a

member of the Commission, who shall exercise such powers and duties as may be delegated to him by the Commission, including powers and duties involving the exercise of discretion.

PAC Members 2013 to February 2017 July 1, 2013 – October 1, 2013 LaDonna Finch (Chair), Aubrey Fitzgerald (Vice Chair), Edgar Maroney (Secretary), Herbert Bateman, Jr. (Treasurer), Stephen Mallon (Assistant Secretary), George Wallace (Assistant Treasurer). October 1, 2013 – June 30, 2014 LaDonna Finch (Chair), Aubrey Fitzgerald (Vice Chair), James Bourey (Secretary), Herbert Bateman, Jr. (Treasurer), Stephen Mallon (Assistant Secretary), George Wallace (Assistant Treasurer). July 1, 2014 – June 30, 2015 James Bourey (Chair), Aubrey Fitzgerald (Vice Chair), LaDonna Finch (Secretary), Herbert Bateman, Jr. (Treasurer), Stephen Mallon (Assistant Secretary), George Wallace (Assistant Treasurer). July 1, 2015 – June 30, 2016 James Bourey (Chair), Aubrey Fitzgerald (Vice Chair), LaDonna Finch (Secretary), Herbert Bateman, Jr. (Treasurer), Stephen Mallon (Assistant Secretary), George Wallace (Assistant Treasurer). (Note: Mr. Bateman’s last meeting was in March 2016 and he was replaced by Sharon Scott in April/May 2016.) July 1, 2016 – February 2017 George Wallace (Chair), Aubrey Fitzgerald (Vice Chair), James Bourey (Secretary), Steve Mallon (Assistant Secretary), Sharon Scott (Treasurer), Rob Coleman (Assistant Treasurer). Kenneth R. Spirito was employed as Executive Director during the period of January 5, 2009 through May 15, 2017. Herbert Kelly, Jr. served as Legal Counsel to the PAC during the period of July 1, 2013 to March 1, 2017.

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PEOPLE EXPRESS AIRLINE - BACKGROUND

PEX was issued a Charter as a Delaware domestic corporation on August 10, 2011. PEX was issued a Certificate of Authority to operate in Virginia on February 28, 2012. The name “People Express, Airlines, Inc.” was previously used by an unrelated airline corporation. Michael Morisi, a former employee of the unrelated airline corporation was the initial Chief Executive Officer (“CEO”) of the “new” PEX. Mr. Morisi stated that the PEX name retained significant goodwill that could be used in part to leverage the operation of a low cost-no frills commercial airline. On July 19, 2011, Mr. Morisi contacted the former Virginia Lieutenant Governor via email regarding the potential operation of PEX in the Commonwealth. In the email, Mr. Morisi states:

“I am part of a group of current and former airline executives who are in confidential discussions with the leadership of Norfolk International Airport about the possibility of launching a regional airline with a hub at ORF. We are in talks with two other airports in other states as well. This business is in the early stages planning to incorporate in August and launch our administrative offices and begin the FAA approval process in September with a targeted airline launch in April 2012, however will make the decision about where we establish our corporate headquarters/hub within the next 2-3 weeks…I would be interested in speaking with you or your representative about the availability of programs, grants and subsidies for our firm…”

Subsequent to the initial contact discussed above, Mr. Morisi continued pursuing options to operate PEX from a hub in Virginia. On or about February 13, 2012, a lease agreement for terminal space was negotiated between the PAC and PEX. On October 2, 2013, Mr. Morisi became the PEX Secretary and Jeffrey Erickson, a former airline executive, was appointed as the CEO. PEX subsequently entered into a “wet lease” agreement (A wet lease is a leasing arrangement whereby one airline (the lessor) provides an aircraft, complete crew with pilot, maintenance, and insurance to another airline or other type of business acting as a broker of air travel (the lessee), which pays by hours operated.) with Las Vegas-based Vision Airlines (“Vision”). Vision was an integral component required to support PEX operation because they maintained the required Federal Aviation Administration (“FAA”) license and aircraft to support passenger flight operations. The

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leasing agreement consisted of an initial fleet of two Boeing 737-400 aircraft configured with 150 seats and a third spare backup aircraft. Vision thereafter signed a “Airlines Air Service Agreement” with PAC on June 26, 2014, to provide scheduled air service at PHF in accordance with the terms of that agreement. The terms of that agreement regarding payments to Vision were tied to funds to be received from PEX by the TowneBank $5 million “Draw Down Line of Credit; and later the release of collateral securing the TowneBank $5 million Line of Credit. On June 18, 2014, PEX closed on a TowneBank $5 million “Draw Down Line of Credit to fund initial operations”, the performance of which was guaranteed by the PAC. On June 30, 2014, PEX/Vision airline service was initially launched from PHF to three destinations (Newark, Pittsburgh and Boston). On September 19, 2014, a vendor truck at PHF collided with a PEX/Vision aircraft. With a second aircraft in the maintenance shop for an engine change, and a third spare aircraft unavailable, the decision was reached on September 26, 2014 to temporarily suspend all PEX operations. On September 29, 2014, the City of Newport News announced plans to put PEX and its wet leasing vendor Vision on notice that they would need to repay a portion of the grant funding they had received if service was not restored quickly. PEX and Vision had received $650,000 out of a total of 1.65 million in federal and regional grants to provide daily nonstop service to Newark and Boston for one year. On November 12, 2014, PEX was evicted from the PHF airline terminal. On January 22, 2015, PEX was evicted from its business offices at PHF.

SCOPE AND OBJECTIVES

Our review of the PAC included agreed upon procedures with objectives designed to review and evaluate the following for the period January 1, 2014 through the current date:

PAC Loan Guarantee Authority and Payment Funding Source - Review and evaluate the terms and conditions of a financial guarantee executed by and between the Peninsula Airport Commission and TowneBank during the scope period for compliance with applicable State laws and regulations, including the Virginia Department of Aviation Airport Program Manual, Review and evaluate the loan guarantee payment authorized by the Peninsula Airport Commission to TowneBank during the scope period for compliance with applicable State laws and regulations, including the Virginia Department of Aviation Airport Program Manual.

PAC Due Diligence of PEX - Review and evaluate the steps taken by the Peninsula Airport Commission to evaluate the solvency of PEX, to include the financial ability of PEX to meet contractual obligations when due.

Loan Guarantee Authority - Other Airports - Identify and evaluate any other financial guarantees executed by other Virginia Airport Commissions/Authorities, etc. that resulted in payments to satisfy financial obligations of airline entities.

ACKNOWLEDGEMENTS

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We would like to acknowledge all the people/organizations that assisted in this review. Those included: the PAC, its Board members, and staff; former PAC Counsel Bert Kelley, Jr. and Robyn Hansen of Jones Blechman, Woltz & Kelley; new PAC Counsel James S. McNider III; Towne Bank and its staff; Michael Morisi, former CEO/COO of People Express, and Jeffrey H. Erickson, former CEO of People Express. We also would note that LaDonna Finch, former PAC Chairperson and Aubrey Fitzgerald, former PAC Board member, chose not to be interviewed. OBSTACLES THAT DELAYED OR LIMITED OUR REVIEW

Timely access to various privileged and/or proprietary documents, records and information Access to accounts and records of PEX PAC documents and records that may have been destroyed and not retained

GENERAL BACKGROUND INFORMATION

In March 2012, AirTran Airlines ceased operation at PHF. As a result, the former PAC Executive Director (“PAC-ED”) and others pursued options for a replacement air carrier. During the same period, PEX, a startup airline domiciled in Delaware and operating in Virginia under a Certificate of Authority had been pursuing funding necessary to initiate operations. PEX initially sought funding from the Virginia Economic Develop Partnership (“VEDP”) and the Norfolk International Airport (“ORF”) in 2011. After careful review, neither entity committed to the level of funding requested by PEX to initiate operations. Both determined that PEX would not be successful without the infusion of substantial funding, among other things. In addition, in early 2013, a recognized airline professional provided oral advice during a presentation to the PAC Commissioners and PAC-ED that highlighted the risks associated with PEX, which included the need for substantial levels of funding. PEX approached the PAC-ED with a concept to initiate operations at PHF that included funding demands similar to those discussed with the VEDP and ORF. By all accounts, the PAC-ED with the active support of the Newport News City Manager/PAC Commissioner, championed the effort to secure local funding to support PEX operations at PHF. Those efforts included seeking private investment from a local business. On or about March 5, 2013, John Lawson, President and CEO of W.M. Jordan Company (“WMJ”), was contacted by the PAC-ED to discuss investing in PEX. Mr. Lawson realized that investing in PEX was risky, but decided to proceed due to the potential community benefit to be realized from PEX operations at PHF. During the period from March 5, 2013 through September 13, 2013, WMJ invested approximately $1 million in PEX. Jeffrey Erickson took over as the Chief Executive Officer of PEX (“PEX-CEO”) in October of 2013. According to the PEX CEO, funding provided by WMJ, was quickly exhausted by airline start-up costs and operating expenses. An initial public offering (“IPO”) of PEX stock required commencement of operations, which was unlikely without additional funding. During this time period, the PEX CEO, indicated he received a telephone call from the PAC-ED with an “idea of how to get $5 million” in funding for PEX operations and that he would “work something through TowneBank to guarantee a loan” which would be subsequently repaid through the proceeds anticipated from the IPO. Former PAC Commissioner and TowneBank Vice President, Herbert Bateman Jr. (“PAC-Bateman”)

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indicated during our interview that he received a telephone call from former PAC Commissioner/Chairman Jim Bourey (“PAC-Bourey”) requesting that a meeting be scheduled with TowneBank to discuss a PEX loan. Mr. Bateman indicated that he facilitated an initial meeting, but then recused himself due to an apparent conflict of interest. Action to bring the TowneBank PEX $5 million loan and PAC Guarantee concept to fruition was initiated on or about May 28, 2014. Active participants included, the PAC-ED, PAC Bourey, PAC Legal Counsel and TowneBank Director Herbert Kelly Jr. (“PAC-Legal”), PAC Commissioner/Chairperson LaDonna Finch (“PAC-Finch”) and PAC-Bateman on behalf of TowneBank. Based on our review, the PAC public session meeting minutes during the critical period prior and subsequent to June 18th, 2014 do not contain any information regarding actions being pursued to perfect the TowneBank Loan and/or PAC Guarantee. TowneBank issued a Commitment Letter, dated June 4, 2014, to PEX. The first event that seemingly relates to the PAC Guarantee of the PEX loan is reflected in a PAC resolution dated June 9, 2014. The resolution contained the following language applicable to PAC-Finch, as PAC Chairperson at the time:

“BE IT RESOLVED, that the Peninsula Airport Commission does hereby empower its Chairperson to do and commit any act in furtherance…which the Chair deems necessary to provide for the adequate, economical, and efficient provisions of air service and general business…”

There is nothing inherent in the above language that would lead a reasonable person to conclude the PAC was in the final stages of guaranteeing and collateralizing a $5 million PEX loan. In addition, the PAC authorizing legislation contained in the Acts of Assembly of 1946, as amended does not contain language that authorizes the PAC to guarantee a commercial bank loan extended to a private corporation. The $5 million TowneBank PEX loan and related PAC Guarantee closed on June 18, 2014, with PAC-Finch executing the following, with applicable legal/loan documents on behalf of the PAC:

1. Commitment Letter, dated June 4, 2014, to PEX. 2. Line of Credit Agreement, dated as of June 18, 2014, among PEX, PAC and TowneBank. 3. Line of Credit Note, dated June 18, 2014, from PEX. 4. Commercial Guaranty, whereby the PAC guaranteed the full payment and performance by

PEX of the credit facility. 5. Assignment of Deposit Account, dated June 18, 2014, whereby the PAC assigned to

TowneBank three deposit accounts as collateral for the credit facility. 6. The borrower’s certificate from PEX. 7. Indemnity Agreement, dated as of June 18, 2014, between PEX and the PAC. 8. Legal opinion from Jones, Blechman, Woltz & Kelly, counsel to the PAC. 9. Legal opinion from Kaufman & Canoles, counsel to PEX. 10. Legal opinion from Patten, Wornom, Hatten & Diamonstein, L.C., counsel to TowneBank.

PAC-Legal costs associated with the PEX TowneBank Loan and PAC Guarantee for the period May 28, 2014 through June 25, 2015, were $43,208.73. In connection with the “Assignment of Deposit Account” noted as item 5 above, the PAC was required to establish and fund 3 separate collateral accounts at TowneBank to support the $5 million

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PEX guarantee. As of June 18, 2014, the PAC only maintained $3,533,090 of the $5 million required to guarantee PEX Line of Credit (“LOC”). However, none of the funds in these accounts were authorized to be used to guarantee the LOC. On June 18, 2014, TowneBank financial records showed the PAC had $7,388,244 on-hand in cash and investments. The PAC determined that $3,855,154 was not available leaving $3,533,090 available for the Line of Credit Agreement guaranty. However, the amount considered available consisted of $2,267,455 of DOAV state entitlement funds which cannot be used to guarantee a loan, $565,000 of the United States Department of Transportation (“USDOT”) Small Community Air Service Development (“SCASD”) grant funds which were already committed to a revenue guarantee with Vision Airlines, and $700,635 of Regional Airport Service Enhancement Committee (“RAISE”) grant funds, also committed to the revenue guarantee with Vision Airlines. Accordingly, the PAC did not have any cash and investments available that could actually be used for the $5,000,000 loan guaranty. On September 26, 2014, PEX announced that it was temporarily suspending service effective immediately and planned to resume service on or about October 16 citing recent aircraft and crew availability and maintenance issues making it challenging to operate a full schedule. James Bourey held discussions with TowneBank that day and Jeff Erickson, PEX, informed Ken Spirito they intended to make their next interest payment on the loan, which was due on October 15, 2014. The PAC issued a letter dated October 2, 2014, to PEX stating the termination of air service effective September 26, 2014, constitutes a breach of the Vision Airlines Air Service Agreement and directed PEX to cure Vision’s breach by contracting with an air transportation provider to perform the agreed air service on or before October 6, 2014. PEX subsequently issued a press release stating they could not commit to their previously announced date, of October 16, to resume service. Ken Spirito issued a letter to Jeff Erickson on October 10, 2014, that served as formal written notice providing PEX with thirty (30) days to remit Passenger Facility Charges (“PFC’s”) collected on behalf of the PAC for the months of July and August 2014 or the PAC will exercise its right to terminate this Permit and right of PEX to occupy the premises. As of November 10, 2014, the PAC had not received a payment and Ken Spirito issued a letter to PEX exercising its right to evict PEX from the terminal building. Also on November 10, 2014, TowneBank exercised their right to offset and apply remaining funds, in the amount of $545,541.32, from the Letter of Credit with The Port Authority of New York and New Jersey to the existing Line of Credit. This action reduced the outstanding balance on this credit facility to $4,454,458.68. On November 19, 2014 TowneBank inquired of PEX as to whether they would be making the interest payment on the line of credit that was due on November 15th. PEX responded they had no funds. TowneBank then turned to PAC to bring the past due interest payment current. Below is a schedule of interest payments made to TowneBank on behalf of PEX:

Due Date Payment Date Amount November 15, 2014 December 8, 2014 $13,996 December 15, 2014 December 17, 2014 $11,917 January 15, 2014 January 20, 2015 $12,972

On December 10, 2014, the PAC through legal counsel sent a letter to PEX to demand repayment of interest payment on Line of Credit Note due on November 15, 2014 in the amount of $13,996.06.

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A Notice of Default letter, dated January 27, 2015, regarding the Line of Credit Note and Line of Credit Agreement dated June 18, 2014, in the sum of $5,000,000 in favor of TowneBank, was sent to PEX, with a copy to the PAC legal counsel, Herbert V. Kelly, Jr. On February 1, 2017, PAC stated to the FAA that $4,511,153 was paid for the $5,000,000 loan guaranty consisting of $3,510,642 in DOAV state entitlement funds, $299,513 in USDOT SCASD grant funds, and $700,998 in RAISE funds. The audit confirmed that $4,511,153 had been paid for the $5,000,000 loan guaranty but funding consisted of $3,510,642 in state entitlement funds, $50,023 in RAISE funds, $385,177 in Capital Cash, and $565,311 in Operating Cash.

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FINDINGS AND RECOMMENDATIONS The following is a summary of the Findings and Recommendations noted during the review. USE OF ENTITLEMENT FUNDS ITEM 1 – PAC Financial Guarantee Authority On June 18, 2014, PAC Chairperson LaDonna Finch executed various legal/contractual documents on behalf of the PAC to guaranty performance of a $5 million TowneBank commercial “Draw Down Line of Credit” (“LOC”) issued to PEX. PEX, a privately held Delaware domestic stock corporation operated in the Commonwealth under a Virginia Certificate of Authority dated February 28, 2012. The stated purpose of the PEX loan was to “…fund initial operations...” The PAC guarantee was required by TowneBank in order to commit and disburse the proceeds of the $5 million loan to PEX. In addition, the PAC was required to establish and fund 3 separate accounts at TowneBank to be used as collateral to secure the PEX LOC. TowneBank would not issue the LOC to PEX without the secured PAC guarantee. The 1946 Acts of Assembly, as amended, provides the statutory authority for the operation of the PAC. Based on a review of the Acts of Assembly, there is no language authorizing the PAC to guarantee performance of a private entity with state funds relative to obligations stemming from a commercial loan. There is no indication that the PAC obtained an opinion from independent legal counsel regarding whether or not any legal authority existed to guarantee the performance of PEX utilizing state funds. On January 27, 2015, TowneBank issued a “Notice of Default” to PEX, which required performance by the PAC in the amount of $5 million. Recommendation 1 We recommend that the PAC develop and implement an appropriate risk strategy to evaluate the propriety and risk associated with transactions involving the potential impairment of material PAC assets, particularly involving state funds. Such strategy should include, but not be limited to seeking opinions and guidance from independent outside legal counsel, financial advisers and/or other subject matter experts, necessary to develop proper authority for the utilization of state funds and an appropriate risk mitigation plan for eligible funding. In addition, we recommend that the PAC initiate all reasonable steps to pursue recovery of amounts due from the PEX LOC default. ITEM 2 – Funds Used For The Guarantee

On June 18, 2014, a Line of Credit Agreement for $5,000,000, evidenced by a $5,000,000 Line of Credit Note, was established by an between PEX. (“Borrower”), the PAC (“Guarantor”), and TowneBank (“Lender”). Pursuant to the provisions of the Line of Credit Agreement, the Line of Credit Note was secured by a first security interest in certain PAC accounts and an unconditional guaranty by the PAC.

In an email dated June 5, 2014, titled “Titles for Accounts”, the PAC Executive Director provided instructions to the TowneBank representative about establishing three escrow accounts for this

16

$5,000,000 Line of Credit Agreement. The general ledger accounts (“Account”) were #11400 State Entitlements, #11500 USDOT SCASD Grant, and #11600 RAISE Funds.

On June 18, 2014, TowneBank financial records showed the PAC having on-hand $7,388,244 in cash and investments. The PAC determined that $3,855,154 was not available, leaving $3,533,090 available for the Line of Credit Agreement guaranty. PAC Cash and Investment Accounts (06/18/2014)

PAC # PAC Title On-Hand PAC

Determined Unavailable

PAC Determined Available

Allowable Funding for

Loan Guaranty 10100 Change Fund $2,800 $2,800 $0 10200 Operating $880,297 $880,297 $0 10300 Capital $1,095,847 $828,471 $267,376 $0 10400 Payroll $12,193 $12,193 $0 10700 E-share $4,015 $4,015 $0 10800 Parking Lot Fund $1,665 $1,665 $0 11200 Passenger Facility

Charge Funds $547,582 $547,582 $0

11300 Cash Flow Money Market

$1,578,210 $1,578,131 $79 $0

11400 State Entitlements $2,000,000 $2,000,000 $0

11500 USDOT SCASD Grant

$565,000 $565,000 $0

11600 RAISE Funds $700,635 $700,635 $0   Total $7,388,244 $3,855,154 $3,533,090 $0

The PAC determination of available funding for the Line of Credit Agreement guaranty was discussed with the PAC Director of Finance and Administration who explained that, “[d]uring discussions with the PAC Executive Director, the intent was never to use PAC unrestricted or restricted cash other than state entitlements. Restricted balances of PFC funds and the E-share account could not be used.” In addition to the state entitlement funds, the PAC considered U.S. DOT SCASD grant and RAISE grant funds available for the Line of Credit Agreement guaranty. However, our review determined that the DOAV did not consider the Line of Credit Agreement guaranty eligible for state entitlement funding and the U.S. DOT SCASD grant and RAISE grant had been pledged as a revenue guarantee to Vision Airlines Inc. in accordance with the Vision Airlines Air Service Agreement.

Based on the PAC cash and investments on-hand and considered available for the Line of Credit Agreement guaranty, the PAC Executive Director provided handwritten instructions to the PAC Director of Finance and Administration and e-mailed TowneBank on the accounts and funding necessary for the Line of Credit Agreement guaranty.

In an email dated May 24, 2014, titled “Revised Deposit Schedule”, from the Executive Director to the Chair of the PAC (“Chair”), the Executive Director stated, “We can get PAC/RAISE/EDA authorization in Aug or Sept to grant the Small Community Air Service funds and matching funds and deposit it in the restricted account. Then release the funds to PEX when they pay up to that amount (they should, in theory, get investments after the announcement). We can talk through the details, but this makes the loan stronger. Thoughts?”

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Minutes later the Executive Director sent another email to the Chair, entitled “RE: Revised Deposit Schedule” stating “Sorry, this is a better one…”. Within that email was a Revised Deposit Schedule which includes estimated future State Entitlements amounts. The revised deposit schedule depicts additional $608,000 deposits in September 2014, December 2014, and March 2015. In September and December 2015, the actual scheduled deposits were $608,000 and $568,000, respectively. Other emails document plans for the escrow accounts.

The Peninsula Airport Commission Executive Director’s handwritten notes instructing the Director of Finance and Administration on how to fund the accounts is described below:

18

19

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e of Credit Aents availablenfunded LinC subsequeng accounts; Agrant of $56

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d $3,265,3651400 State EnAccount #116nty of $1,734n of the Line

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20

s for $5,000greement guaguaranty of $5 to the Linntitlement of600 RAISE 4,635. Addie of Credit A

dger Accoun

0,000 and tharanty was $3$1,466,910.ne of Creditf $2,000,000funds of $70itional reviewAgreement g

nt #11400 –

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ermined cashAccordingly,

t guaranty i#11500 U.S. s left an unfuaccounts andund the follo

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n the DOT

unded d their owing

21

The PAC did not have on-hand sufficient state entitlement funds for the initial $2,000,000 funding of PAC general ledger Account #11400 State Entitlement. On June 10, 2014, a TowneBank representative e-mailed the PAC Executive Director with, “…a gentle reminder that my loan approval is contingent upon having $2,000,000 in the State Entitlement account before closing.” On this date, the PAC only had $1,011,140 in state entitlement funds on-hand with the next payment of state entitlement funds not scheduled to be received until September 2014. On June 11, 2014 the PAC Executive Director decided to reclassify funding participation on an existing project, Concourse B, adding $1,280,000 of PAC unrestricted funds from Account #11300 Cash Flow Money Market in substitution of $1,280,000 previously applied state entitlement funding. This “released” state entitlement funding that could then be moved to general ledger Account #11400 State Entitlement. Subsequently, on June 11, 2014, Account #11400 State Entitlement was funded with $720,000 of on-hand state entitlement funds from Account #10300 Capital Cash and the $1,280,000 of funds reclassified as state entitlement funds, meeting TowneBank’s required funding balance of $2,000,000.

Peninsula Airport Commission General Ledger Account #11500 USDOT SCASD Grant

The Grant Award and Agreement between the U.S. Department of Transportation and Peninsula Airport Commission, Acting for the Community of Newport News, Virginia, under the Small Community Air Service Development Program provides the terms and conditions for the use of the USDOT SCASD grant. The August 29, 2013, executed USDOT SCASD grant, was provided for, “Revenue guarantees and associated marketing programs to (a) recruit, initiate, and support new nonstop air service…”

The USDOT SCASD grant was committed in its entirety as a revenue guarantee payable to Vision Airlines, Inc. and was not technically available for use as part of the Line of Credit Agreement guaranty. On June 26, 2014, the PAC and Vision Airlines, Inc. entered into the Vision Airlines Air Service Agreement which committed $950,000 through a SCASD, awarded to PAC by the USDOT. The USDOT SCASD grant is paid on a reimbursement basis; therefore, there were no SCASD funds actually available for use as part of the Line of Credit Agreement guaranty.

PAC Account #11500 USDOT SCASD grant had a balance of $565,000 on June 18, 2014. That account consisted of unrestricted funds from PAC general ledger Account #10200 Operating Cash and conflicts with the earlier stated intent to never to use PAC unrestricted cash or restricted cash other than state entitlement funds on the Line of Credit Agreement guaranty. On June 27, 2013, the PAC advanced a revenue guarantee to PEX of $565,000 drawn from PAC general ledger account #10200 operating Cash. That amount of money was later contemplated for payment to Vision under the Vision Airlines Air Service Agreement. However, at the time of the advance, PEX/Vision had not commenced flights where (1) the revenue advance would have been appropriate and (2) reimbursement of the advance could be requested from the USDOT SCASD grant. This condition persisted up to and included development of the Line of Credit Agreement.

The Line of Credit Agreement terms and conditions included the return of the $565,000 advance to the PAC; however, the $565,000 was not used to appropriately reimburse PAC Account #10200 Operating Cash. On June 18, 2014, a TowneBank Representative emailed the PAC Executive Director stating, “I just want to confirm after closing, you still want me to take the $565,000 check and deposit it into the collateral account with the $2MM [State Entitlement Account] already in it. If that has changed, please let me know.” The PAC Executive Director responded back on the same date, “No, deposit it in the DOT grant account.” When asked about the PAC accounting for the return of the $565,000 advance, the PAC Director of Finance and Administration stated that,

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“Instead of putting it [$565,000 advance] back into the operating account, I was instructed to deposit it into the USDOT account in June 2014.”

The Line of Credit Agreement documentation showing the “payment” of $565,000 from PEX to the PAC is misleading. Per the Line of Credit Agreement, Section 6, Representations and Warrants (a)(ix), “Advances on the Note will be used to provide working capital for the Borrower and the amounts drawn thereunder will not exceed the amount necessary for such purpose, except for $565,000 from the initial Advance(s) which will be used to pay debt owed to Guarantor (“Peninsula Airport Commission”)...” The Line of Credit Agreement provided the PAC a methodology to recover a previous $565,000 revenue guarantee advance to PEX. An actual payment was not made since the PAC, as the Guarantor of the Line of Credit Agreement, still retained the risk of default by PEX on the $565,000 debt.

Peninsula Airport Commission General Ledger Account #11600 RAISE funds

The Regional Air Service Enhancement (“RAISE”) Cooperation Agreement governs the funding and allocation of the Regional Air Service Enhancement Fund (“RAISE Fund”). The stated purpose of the RAISE fund is, “To be used to induce existing air carriers at the Newport News/Williamsburg International Airport to increase and expand flights to destinations deemed beneficial to the economy of the Virginia Peninsula and to induce new air carriers to bring flights to and initiate flights from the Airport….” The PAC committed the entire RAISE grant amount as a revenue guarantee payable to Vision Airlines, Inc. Accordingly, the RAISE grant was technically not available for use as part of the Line of Credit Agreement guaranty.

The RAISE Committee provided the grant as a local match for the USDOT SCASD grant being used as a revenue guarantee for Vision Airlines, Inc., not for use as part of the Line of Credit Agreement guaranty According to the RAISE Committee June 5, 2014 Meeting Minutes, the Committee approved a recommendation, “That the Economic Development Authority of the City of Newport News, Virginia (EDA), as fiscal agent for RAISE, approve a grant of $700,650 to serve as the required matching funds for a $950,000 grant from the USDOT Small Community Air Service Development Fund, relative to a Transportation Services Agreement (“TSA”) anticipated to be executed by the PAC with Vision Air, for air service to be provided by PEX to Newark and Boston with terms specified in the TSA and in accordance with all DOT grant terms and conditions.”

Funding Used To Satisfy the Line of Credit Loan Guaranty

On February 1, 2017, in response to a FAA request for information on the loan guaranty the PAC Executive Director provided the FAA the total amount paid on the Line of Credit Agreement guaranty and the type of funds used to make the payment.

The Line to the FAenvisioneAdditionFinance aaccounts with 80%grant and

The tablreported.reimburs Also, onlthis granexecutedused. Sta

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ly $50,023 innt ($650,000d. $950,488 ate Entitlem

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ents and fundr generally aof Credit Ainstructions

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Type of Funds Funding Sources and

Amounts Provided to FAA

Actual Funding Sources

State Entitlement Funds $3,510,642 $3,510,642

RAISE Funds $700,998 $50,023

USDOT SCASD Funds $299,513

Capital Account- Unrestricted Funds

$385,177

Operating Account- Unrestricted Funds

$565,311

$4,511,153 $4,511,153

Review of the Line of Credit Agreement guaranty payments and the funding used to make those payments found that significant differences existed between the funding reported to the FAA by the PAC Executive Director and funding reported in the PAC’s financial records:

11400 State Entitlement

Restricted Capital Account  (On‐hand State Entitlement) 1,972,718.30$         

Restricted Capital Account (Concourse B SE replacement) 1,280,000.00$         

Restricted Capital Account (RWY 7.25 PFC SE replacement) 252,261.72$             

Interest earned on State Entitlement Funds from Towne Bank 5,662.58$                 

3,510,642.60$         

11500 SCASD

Interest earned on SCASD Funds from Towne Bank 188.72$                     

RAISE $565K / Operating Account Funds 299,323.84$             

299,512.56$             

11600 RAISE

RAISE Funds provided by Newport News (SCASD local contribution) 50,000.00$               

Interest earned on RAISE Funds from Towne Bank 322.41$                     

Unrestricted Capital Account funds 385,000.00$             

RAISE $565K / Operating Account Funds 265,676.16$             

700,998.57$             

Total Payments to Towne Bank 4,511,153.73$         

Funding Make‐up of Loan Guarantee Payment:

Funding Make‐up of Loan Guarantee Payment:

Funding Make‐up of Loan Guarantee Payment:

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Peninsula Airport Commission General Ledger Account #11400 – State Entitlements

The PAC Executive Director reported using $3,510,642 in state entitlement funds on the Line of Credit Agreement guaranty. Review of the PAC financial records and discussion with the PAC Director of Finance and Administration confirmed that $3,510,642 in state entitlements funds had been used on the Line of Credit Agreement guaranty.

Peninsula Airport Commission General Ledger Account #11500 USDOT SCASD Grant

The PAC Executive Director reported using $299,513 in USDOT SCASD grant funds on the Line of Credit Agreement guaranty. Review of the PAC financial records and discussion with the PAC Director of Finance and Administration determined that no USDOT SCASD grant funds were used on the Line of Credit Agreement guaranty.

The PAC Account #11500 USDOT SCASD Grant $299,513 balance reported to the FAA was determined to consist of $299,513 in funds and earned interest from PAC Account #10200 Operating Cash. Originally, these funds were part of a $565,000 revenue guarantee advance made to PEX on June 27, 2013. The advance was restructured as part of the Line of Credit Agreement and, on June 18, 2014, the $565,000 was returned to the PAC. However, on instruction of the PAC Executive Director, the $565,000 was inappropriately placed in PAC Account #11500 USDOT SCASD grant rather than properly reimbursing PAC Account #10200 Operating Cash.

PAC Account #10200 Operating Cash can contain airport revenue, use of which is subject to the Federal Aviation Authority’s (“FAA”) Policy and Procedures Concerning the Use of Airport Revenue (64 Fed. Reg. 7696, February 16, 1999). The PAC Director of Finance and Administration was not aware of any research/communication with the FAA as to whether the use of airport revenue would be allowed for use on the Line of Credit Agreement guaranty. We have concerns that the use of funding from PAC Account #10200 Operating Cash on the Line of Credit Agreement guaranty could be an issue with the PAC’s compliance with the Federal Aviation Authority’s (FAA) Policy and Procedures Concerning the Use of Airport Revenue (64 Fed. Reg. 7696, February 16, 1999). However, we make no findings regarding the use of the Federal Funds and leave that to the Federal authorities to determine.

Peninsula Airport Commission General Ledger Account #11600 RAISE funds

The PAC Executive Director reported using $700,998 in RAISE grant funds on the Line of Credit Agreement guaranty. Review of the PAC financial records and discussion with the PAC Director of Finance and Administration determined that only $50,023 of the RAISE grant had been used on the Line of Credit Agreement guaranty. The remaining balance was made up of $385,177 in unrestricted cash from PAC Account #10300 Capital Cash and $265,798 from PAC Account #10200 Operating Cash.

On June 12, 2014, PAC Account #11600 RAISE funds were funded with a $700,650 RAISE grant. On June 18, 2014, when the PAC entered into the Line of Credit Agreement guaranty, PAC Account #11600 RAISE funds still had a balance of $700,650. However, on June 27, 2014, in accordance with the Vision Airlines Air Service Agreement, $650,650 was wired from PAC Account #11600 RAISE funds to Vision Airlines, Inc. The remaining balance of $50,000 and allocated interest revenue of $23 was used to fund the Line of Credit Agreement Guaranty.

On July 31, 2014, $385,000 of unrestricted cash was transferred in from PAC Account #10300 Capital Cash. PAC Account #10300 restricted cash consists of DOAV state entitlement funds with unrestricted cash all other funding sources. Per the PAC Director of Finance and Administration, the

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transfer was made per instruction of the Peninsula Airport Commission Executive Director. The transfer of $385,000 and allocated interest revenue of $177 was used to fund the Line of Credit Agreement Guaranty.

On July 31, 2014, $265,676 was transferred in from PAC Account #11500 USDOT SCASD grant. Per the PAC Director of Finance and Administration, “…In July 2014, when the Peninsula Airport Commission Executive Director saw that the RAISE account did not have the $700,000 balance required due to the out-going wire to Vision, he instructed me to transfer the difference of $565,000 and the $300,000 needed in the USDOT SCASD account to the RAISE account.”

The $265,676 was originally part of a $565,000 revenue guarantee advance from PAC Account #10200 Operating Cash made to PEX on June 27, 2013. The advance was restructured as part of the Line of Credit Agreement, and, on June 18, 2014, the $565,000 was returned to the PAC. However, on instruction of the PAC Executive Director, the $565,000 was inappropriately placed in PAC Account #11500 USDOT SCASD grant rather than properly reimbursing PAC Account #10200 Operating Cash. The $265,676 and allocated earned interest of $122 was used to fund the Line of Credit Agreement Guaranty.

PAC Account #10200 Operating Cash and PAC Account #10300 Capital Cash can contain airport revenue, use of which is subject to the Federal Aviation Authority’s (FAA) Policy and Procedures Concerning the Use of Airport Revenue (64 Fed. Reg 7696, February 16, 1999). The PAC Director of Finance and Administration was not aware of any research/communication with the FAA as to whether the use of airport revenue would be allowed for use on the Line of Credit Agreement guaranty. We have concerns that the use of funding from PAC Account #10200 Operating Cash and PAC Account #10300 Capital Cash on the Line of Credit Agreement guaranty could be an issue with the PAC’s compliance with the Federal Aviation Authority’s (FAA) Policy and Procedures Concerning the Use of Airport Revenue (64 Fed. Reg 7696, February 16, 1999). However, we make no findings regarding the use of the Federal Funds and leave that to the Federal authorities to determine.

Legal Bills On March 9, 2017, we were provided with copies of the Jones, Blechman, Woltz and Kelly (“JBW&K”) legal invoices. According to interviews held with the Executive Director and the PAC attorney, there was no contract or retainer between the airport and the law firm. Various attorneys were used and various rates were billed to the PAC. We requested copies of the documentation from the PAC to support the charges made to the PAC for legal services and were told there was no documentation. According to one of the Executive Director’s emails dated August 5, 2014, he indicated $18,554 was spent by the PAC for legal fees involving the agreements and closing between PEX and TowneBank. According to an email dated August 5, 2014, from the former PAC Chair and Newport News City Manager, his response to the Executive Director’s email was “Read and weep! This is a lot!!!” Our review indicated that JBW&K was paid $43,208.73 in fees related to the PEX loan guarantee (loan documents, discussions to recover funds and forbearance agreement). Recommendation 2 We recommend the PAC reimburse the Commonwealth $4,511,153 and pursue all reasonable steps to recover funds (state, local and airport) used to satisfy the default obligation of PEX.

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ITEM 3 – Lack of Due Diligence - Loan Guarantee:

The PAC did not demonstrate adequate due diligence was performed prior to entering into an agreement to become guarantor on a $5 million loan to PEX. Information obtained during our review supports that PAC personnel, at a minimum, did not have a clear understanding as to the agreement, or lack thereof, in place between PEX and Vision Air. This is particularly concerning given the loan was to PEX who was merely a marketing company attempting to offer flights via an agreement (the “Wet Lease”) with a hired airline. PAC personnel were unable to contact Vision Air for a period of time after the PEX loan closing, and after PEX had drawn down $3 million dollars on the line of credit. The initial correspondence from Vision Air came through their attorney and included the following:

“Mark, As discussed – Vision wants to move forward but only subject to the following conditions…As of this moment, PEX no longer has authority to sell air transportation as Vision’s agent until there are written agreements in place between (i) Vision and PEX; and (ii) Vision and PAC…This message having been delivered, Vision will reach out to PEX to discuss next steps…”

James Bourey reached out to Jeff Erickson regarding the response from Vision Air’s attorney and inquired “Doesn’t Vision and PEOPLExpress have an existing contract?” Mr. Erickson replied that they have the aircraft, complete crew, maintenance, and insurance (“ACMI)” contract but agreed to revise it to change us to a ‘general sales agent’ agreement. PEX and Vision Air subsequently entered into a General Sales Agency Agreement, dated June 26, 2014. However, PAC did not bother to obtain and review the terms of the agreement in a timely manner. It was not until August 4, 2014 that Ken Spirito requested to obtain a copy of the agreement. Upon reviewing the contract Mr. Spirito sent an email to Bert Kelly Jr. copying James Bourey stating:

“Bert, I do believe we were lied to by Mike and Jeff. Based on Appendix B, I would have not recommended the guarantee of the loan. All along it was required that PEx was to provide an additional $5M…”

Ken Spirito also forwarded a copy of the agreement to the PAC Committee members stating, “Please take some time and read this agreement (especially Appendix B). From what I can read, we have not been told the entire story as to why the airplanes are not here and branded.” Steve Mallon sent the following reply to Ken Spirito:

“…First, the PEX/VISION document appears to provide for the delivery of a third airplane subject to PEX obtaining an additional $5.0 million in secure funding. Has, or will this happen?…Third, PAC was advised to provide a guarantee on a $5.0 million loan at Town Bank, and based on Jim’s email, apparently this counsel was given without our attorneys having full and complete access to the PEX/Vision Agreement, thereby making their recommendation to approve the guarantee agreement without a full and complete understanding of how the PEX/VISION Agreement could potentially impact PAC’s loan guarantee… So, considering these points, as well as others I may be unaware, I believe it is important for the PAC to better understand any potential negative consequences or increased risk to PAC’s

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guarantee position that may exist from this newly shared information regarding the terms and conditions of the PEX/Vision Agreement…”

There was also no agreement in place between PAC and Vision Air, the entity actually providing air service to the airport (i.e., the planes and pilots), when PAC entered into an agreement to guarantee the loan of PEX. The rationale for aggressively pushing for closing on the loan without having this agreement in place is concerning given it presented significant risk to PAC since PEX was allowed to drawdown $3 million at loan closing. Emails that support the aggressive push to close on the loan include the following:

Hunter Old, Kaufman & Canoles - attorney for PEX, in an email dated June 17, 2014 to

Raymond Suttle, Jr. and Bert Kelly, Jr. at 1:53 pm states, “I would like to finalize the PAC/PEX agreement…Also, I saw Ray’s e-mail to Vision’s counsel and Vision’s response, regarding the air services agreement. Where does that leave you all and Vision as to a final agreement?”

Ken Spirito writes to Bert Kelly Jr. on June 17, 2014 at 6:06 pm stating, “What time can

closing be set for tomorrow? It must be done tomorrow to meet deadlines.”

Ken Spirito in an email dated June 18, 2014 to Bert Kelly Jr. at 8:20 am copying several individuals to include James Bourey and Jeff Erickson states, “Just talked with Jeff and several pieces of the operation are on hold due to the closing push. No bag tag technology (hand print will be required) and the second airplane is not in paint until deposits are in…Please let’s close this afternoon. It’s critical at this point.”

Other examples where due diligence was lacking includes failing to identify and/or ignoring that the Commonwealth of Virginia State Corporation Commission listed the status of Vision Airlines, Inc. as revoked, as of February 28, 2013 and not analyzing and considering the financial wherewithal of Vision Airlines prior to entering into an agreement on June 18, 2014, to guarantee a $5 million loan of PEX. Recommendation 3 We recommend the PAC establish clear policies and procedures to ensure appropriate due diligence is performed prior to entering into material contractual obligations. ITEM 4 – DOAV Commonwealth Airport Fund Entitlement Utilization Reports According to the Virginia Department of Aviation (“DOAV”) Airport Program Manual, Section 3.1.1.1 State Entitlement Funds, “…state entitlement funds are allocated annually to sponsors of airports that have scheduled air carrier service in accordance with Code of Virginia §58.1-638.A.3…Code of Virginia §58.1-638.A.3a specifies that no air carrier airport shall receive less than $50,000 or more than $2 million per fiscal year in state entitlement funds.... Sponsors eligible for state entitlement funds must submit a Commonwealth Airport Fund Entitlement Utilization Report for VAB [Virginia Aviation Board] approval each year in order to qualify for state discretionary funding. These reports provide an annual accounting of the previous year’s state entitlement fund expenditures. Utilization reports shall be filed within 30 calendar days after the close of the fiscal year.”

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The Commonwealth Airport Fund Entitlement Utilization Report contains the following sections that provide the DOAV information on relevant activities during the fiscal year:

I. Entitlement Funds Available For Expenditure and Commitment II. Passenger Facility Charge Funds Used to Reimburse Entitlement Funds In Fiscal Year

III. Entitlement Expenditures For Projects Completed in Fiscal Year IV. Commitments For Ongoing and/or Future Projects V. Certification

For FY2014 and FY2015 the PAC received State Entitlement funds as follows:

Entitlement for FY 2014 and FY 2015

State Entitlement Funds Distributed Annual

Distribution Date

EUR Due Date

EUR Submitted FY2014 State Entitlement Funds Distribution:

$2,000,000 7-30-2014 7-16-2014

September 2013 $666,667 December 2013 $666,667 March 2014 $666,667 FY2015 State Entitlement Funds Distribution:

$1,512,857 7-30-2015 10-13-2016

September 2014 $504,460 December 2014 $504,286 March 2015 $504,111

The PAC did not list on the FY2014 DOAV Commonwealth Airport Fund Entitlement Utilization Report, under Section IV Commitments for Ongoing and/or Future Projects, the $5,000,000 loan guaranty. The loan guaranty was executed on June 18, 2014, prior to the fiscal year end. Additionally, as part of review of an earlier FY2014 submittal, on July 18, 2014 the DOAV Manager, Airport Engineering Section, reminded the PAC Director of Finance and Administration, “Once an airport requests state discretionary funds ‘all’ projects for which the airport desires to expend state entitlement funds ‘in the future’ must be approved by the Virginia Aviation Board during the fiscal year of approving state discretionary funds.” The PAC Director of Finance and Administration did not recall why the loan guaranty was not listed on the Commonwealth Airport Fund Entitlement Utilization Report. Had the $5,000,000 loan guaranty been listed on the FY2014 Commonwealth Airport Fund Entitlement Utilization Report, it is possible that DOAV would have questioned and disallowed this use of state entitlement funds in July 2014, possibly allowing recovery of unexpended funding from PEX.

The PAC submitted the FY2015 DOAV Commonwealth Airport Fund Entitlement Utilization Report, on October 13, 2016. Listed within section III, Expenditures for Completed Projects in FY 2015, was a project titled “Air Service Development” for $3,552,341.25. That project title did not include any informative description as seen on other projects on the Entitlement Utilization Report(EUR).

The PAC submitted the FY2015 DOAV Commonwealth Airport Fund Entitlement Utilization Report on October 13, 2016, or 441 days late. Per the PAC Director of Finance and Administration, “As with many airports it is common practice that if you were not requesting discretionary funds the reports are not submitted or not submitted timely. During a discussion with the Executive Director,

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Missy and myself, when we received the letter from the Department of Aviation, the Executive Director made the decision that we did not have to submit the report.” Late submittal of the FY2015 Commonwealth Airport Fund Entitlement Utilization Report substantially delayed DOAV identification and questioning of the $5,000,000 loan guaranty, listed as an “Air Service Development” project on the EUR. Once e DOAV had completed review of the submittal, on 01/24/2017, DOAV requested the PAC explain the Air Service Development project (loan guaranty) and on 01/26/2017 DOAV notified the PAC that the Air Service Development project (loan guaranty) was not eligible for state entitlement funding. Per the DOAV Airport Program Manual, Section 3.1.1.3, Air Carrier Utilization of State Entitlement and Discretionary Funds, “It is the expressed intent of the Virginia Aviation Board that an air carrier airport sponsor totally obligates its state entitlement funds prior to that sponsor receiving any state discretionary fund allocations. These funds include unexpended state entitlement funds from previous fiscal years, interest earned on state entitlement funds, and passenger facility charges used to reimburse state entitlement fund accounts. DOAV encourages sponsors to use other available federal, state, and local funding options, such as passenger facility charges, before applying for state discretionary funds. If a sponsor uses state entitlement funds for a project and later receives reimbursement for the project from passenger facility charges (PFC’s), the sponsor must credit its state entitlement balance with the reimbursement amount. The passenger facility charge reimbursement must be recorded on the annual Entitlement Utilization Report.” The PAC did not list $916,516 of PFC’s on DOAV Commonwealth Airport Fund Entitlement Utilization Reports. $358,000 of PFC’s omitted in FY2015 was identified during our review of the $5,000,000 loan guaranty. Subsequent research by the PAC Director of Finance and Administration identified another $558,516 omitted in FY2011. Per the PAC Director of Finance and Administration, these errors were not intentional. The PAC Director of Finance and Administration has prepared and submitted a corrected FY2015 DOAV Commonwealth Airport Fund Entitlement Utilization Report. Impact of the omission of the PFC’s on the Commonwealth Airport Fund Entitlement Utilization Reports on PAC requests for DOAV discretionary funding is unknown at this time. Recommendation 4

We recommend that the PAC ensure proper completion and timely submission of the Commonwealth Airport Fund Entitlement Utilization Report, allowing the PAC and DOAV to proactively identify and resolve issues with proposed expenditures of state entitlement funds prior to expenditures occurring. Recommendation 5 We recommend that the PAC work with DOAV to determine what, if any, impact the omission of PFC’s on the Commonwealth Airport Fund Entitlement Utilization Report, had on the award of DOAV discretionary funding. PAC DUE DILIGENCE Although competition was generally sought for solicitations of higher dollar value service contracts, procurement files reviewed were generally incomplete, did not always establish that an impartial and

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comprehensive evaluation of the offerors’ proposals occurred and/or that pricing was considered as an evaluation criteria. Webster defines due diligence as the care that a reasonable person exercises to avoid harm to other persons or their property. A conference call was held on February 1, 2017 at 11:00 a.m. with Department of Aviation officials, PAC employees, PAC’s legal counsel, PAC’s CPA firm, Virginia’s Attorney General Office and ACO employees. The ACO asked if any due diligence had been performed by the PAC on PEX and after a period of silence, Mr. Spirito said no. According to a review of Mr. Bourey’s email, Mr. Spirito sent an email entitled, “Draft Due Diligence Statement” to Mr. Bourey on February 9, 2017. Mr. Spirito stated in the email that “this is a draft and not for others to read until final.” We accessed Mr. Spirito’s desktop computer and noted that the “due diligence” document had been created on 2/7/17 at 12:48 p.m. and modified on 2/13/17 at 9:19 a.m. This “due diligence” document was provided to the ACO by Bert Kelly on 2/13/17 at 9:42 a.m. Obviously, whatever “due diligence” was reduced to writing occurred well after the fact.

Recommendation 6 We recommend the PAC perform written due diligence including but not limited to, financial review, background check on principals, etc. for any material transaction that plays a significant part in the operations of the airport. LOAN GUARANTEE AUTHORITY - OTHER AIRPORTS We contacted other Virginia Airport Commissions/Authorities to identify and evaluate any other financial guarantees that resulted in payments to financial obligations of airline entities. There are 66 airports in the Commonwealth of Virginia. Nine of these airports are air carrier airports that have airline service. Eight of the nine air carrier airports are eligible to receive Commonwealth Airport Funds (Entitlement Funds). They are:

1. Charlottesville-Albemarle 2. Lynchburg Regional 3. Newport News/Williamsburg 4. Norfolk International 5. Richmond International 6. Roanoke-Blacksburg Regional 7. Shenandoah Valley Regional 8. Washington Dulles International

We contacted the other 7 airports by email and informed them we were performing a review of matters relating to the Newport News/Williamsburg Airport at the request of the Virginia Secretary of Transportation, and requested a response to the following questions:

Has your Authority/Commission/City ever entered into a financial guarantee with a commercial bank to indemnify an airline proposing and/or maintaining operations at your associated airport? If so, please provide any documents and information regarding the

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guarantee including, date, name of financial institution, contact information, amount, parties, etc.

Has your Authority/Commission/City used “Entitlement Funds” to satisfy a financial guarantee with a commercial bank that did not involve non-income producing airport capital improvements? If so, please provide any documents and information regarding the guarantee including, date, name of financial institution, contact information, amount, parties, etc.

The chart below compiles the responses we received to our survey questions:

Based on the results of our survey, no other airport in the Commonwealth of Virginia has ever entered into a financial guarantee with a commercial bank to indemnify an airline proposing and/or maintaining operations at their airport. Also, no other airport in the Commonwealth of Virginia has ever used Entitlement Funds to satisfy a financial guarantee with a commercial bank that did not involve non-income producing airport capital improvements. FREEDOM OF INFORMATION ACT - TRANSPARENCY ITEM 5 – Lack of Transparency Involving Loan Guarantee: Our review of the PAC Loan Guaranty disclosed steps and actions were taken that severely limited the transparency around the disclosure of the loan guarantee. Examples of such steps and actions include the following:

Not inquiring of the DOAV as to whether the use of State entitlement funds as collateral to back a $5 million loan of a private entity, PEX, was an appropriate use of State funds. Especially given other inquires to DOAV around that timeframe, specifically 4/15/2014 and 5/27/2014, involving the allowed use of State funding for Self Contained Breathing Apparatus (“SCBA”) equipment and security cameras respectively that are immaterial in comparison to the backing of a $5 million loan to an entity heavily in debt and on the verge of demise. Suggestive of discussions as to the appropriateness of the use of State funds for this purpose, an email dated 5/23/2014 from Ken Spirito to James Bourey at 8:19 pm with the subject heading ‘VA State Guidance for Airport Funding’ includes excerpts from DOAV Airport Program Manual 3-3.

AIRPORT QUESTION 1

QUESTION2

RESPONDER

Charlottesville-Albemarle No No Melinda Crawford Lynchburg Regional No No Mark Courtney Norfolk International No No Robert Bowen Richmond International No No Jon Mathiasen Roanoke-Blacksburg Regional No No Ernie McLeod Shenandoah Valley Regional No No Greg Campbell Washington Dulles International No No Mickey Hilty

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James Bourey, City Manager and PAC member, on June 3, 2014, provided instruction in

relation to a draft Motion for the RAISE Committee, recommending that the Economic Development Authority of the City of Newport News, as fiscal agent for RAISE funds, approve a grant of $700,650 to the PAC, to not be as specific on how the money will be used.

Drafting of a PAC resolution on June 6, 2014, that did not disclose to the public that the PAC

was authorizing their Chairperson, LaDonna Finch, to enter into an agreement with People Express (“Borrower”) and Townebank (“Lender”) as Guarantor on a $5 million Line of Credit for a private enterprise. There was nothing in the PAC resolution or the Minutes of the June 9, 2014, Special meeting that would have lead one to understand the PAC was about to sign as Guarantor on a $5 million loan. The PAC resolution dated June 9, 2014 includes the following: “BE IT RESOLVED, that the Peninsula Airport Commission does hereby empower its Chairperson to do and commit any act in furtherance…which the Chair deems necessary to provide for the adequate, economical, and efficient provisions of air service and general business…” The PAC resolution was provided to TowneBank’s attorney prior to the PAC Board Meeting and the attorney stated in an email dated June 4, 2014 that “The Bank will accept the proposed Resolution…”

Providing inaccurate and/or incomplete information to news organizations. For example,

James Bourey in a July 14, 2014, email to Kim Lee, Coordinator of Public Information and Media Relations, states, “Kim: I need to be in the loop on the incentives for PEOPLExpress. The Southside has been playing a game with this in support of Norfolk. This is a very complicated and tricky issue and a lot of opportunity for public misunderstanding. There is a great deal happening statewide with the Governor and airports and there is a lot of jealousy on our success. We need to be treating this very sensitively.”

Jessica Wharton in a July 31, 2014 email exchange with the Virginia Pilot states, “Our

policy echoes Norfolk, this is universal for all airports based on FAA policy guidelines. We received a 2012 USDOT Small Community Air Service Development Grant that assist in operating/marketing/ advertising expenses for the New York and Boston routes. The grant was for $950,000…” This response was in relation to the inquiry, “…The new ORF policy (which actually kind of mirrors one they had before it expired in 2009) says the incentives may include fee waivers, fee abatements and reductions in facility charges, as well as assistance with promotional expenses related to marketing and advertising the new service. It prohibits direct subsidies. Doesn’t PHF have a policy that allows it to help market new service? Could you give me a round figure of how much has been spent on PeoplExpress? I saw something in the DP about that…” Mr. Spirito, who may have been blind copied on Ms. Wharton’s response, forwarded the email to Florence Kingston and James Bourey.

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Kim Lee in a September 17, 2014 email to James Bourey with the subject heading

‘media contacts’ states, “…Florence Kingston and Sam Workman spoke with…Inside Business today. The conversation centered around RAISE (who’s a member, funds raised, funds dispersed, etc.) and went into incentives for PEOPLExpress…” James Bourey wrote, “Florence: What was the range of things talked about on incentives for PEOPLExpress?” Ms. Kingston replies, “Airport got a Federal Small Community Air Service grant, Raise provided the grant match (amounts)…She did ask whether PEOPLEXPRESS asked for other incentives, but we differentiated grant for Air Service vs any EZ/HQ type consideration. We told her we didn’t know specifics of any EZ job grants they may qualify for.” Mr. Bourey replies, “So she did not ask about the loan info and, of course, you did not volunteer it.” Ms. Kingston replies, “Heck no and no. She got into Raise detail more (which we accommodated). We kept it high level…”

Not submitting the FY 2015 EUR to the DOAV in calendar year 2015. This is the one covering the period from July 1, 2014 – June 30, 2015, which included the PAC use of $3.5 million in State entitlement funds to pay their obligation as guarantor under PEX line of credit with TowneBank. Only after receiving an email dated September 9, 2016, from the Department of Aviation stating, “We still have not received a FY2015 EUR from you guys”, did the PAC eventually provide the FY2015 Entitlement Utilization Report. They submitted it on October 13, 2016 along with the FY2016 report. The Virginia Department of Aviation Airport Program Manual states, “…2.4.5 Entitlement Utilization Report…Sponsors eligible for state entitlement funds must submit a Commonwealth Airport Fund Entitlement Utilization Report for VAB approval each year. These reports provide an annual accounting of the previous fiscal year’s state entitlement fund expenditures. Utilization reports shall be filed within 30 calendar days after the close of the fiscal year…” See chart below for recent submittal history of the PAC’s EUR’s:

EUR Submittal Date Days Late FY 2012 September 10, 2012 42 days FY 2013 September 13, 2013 45 days FY 2014 July 16, 2014 0 days FY 2015 October 13, 2016 441 days FY 2016 October 13, 2016 75 days

Seeking to exclude the PAC’s financial statements from the City’s 2014 Comprehensive

Annual Financial Report (“CAFR”). Specifically, following a Special meeting of the Peninsula Airport Commission Board on October 9, 2014 that lasted 56 minutes with 51 minutes (91%) being in closed session Renee Ford sent an email to an individual at the City of Newport News stating, “Hello Lisa, We had our board meeting today and the question regarding whether we were supposed to consolidate our audit into yours anymore. It was stated that the reason we had to do so in

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the past was due to the bond that was paid off last year. Can you check on your end to see why we are still required to submit our audited financial statements to the city?” Lisa replies, “Hi Renee, We did an analysis last year to see if we were still required to include PAC in our financials and the result was yes. Let me see what we have so that we can provide you with more information.” Ms. Ford later replies, “Lisa, Here is the Peninsula Airport Commission’s Acts of Assembly. Take note of §6 through §8 on pages 6-8 and let me know your thoughts.” An email from Lisa to Cherry Bekaert on 10/14/2014 states, “…I am forwarding you an email that I sent to Renee last Friday in regards to the question of whether PAC should be reported in our financials or not. From the attachments to this email, we went through this exercise back in July of 2013 and provided Renee our assessment that they should. This year, they are raising the question. Our suggestion on how to proceed at this point is outlined below and the expectation was their auditors was going to contact our auditors to discuss. I did talk to Renee Friday and she contacted her auditors on the matter. I’m not sure if you have been contacted yet but I wanted to forward the email and support so that we can get your opinion on the matter. As I mentioned previously, we thought this was taken care of last year but now at this stage in the game we have not received any financials from PAC and are under the gun to get this resolved as soon as possible…” Ms. Ford eventually received an email stating, “Hey Renee, Based on the attached, my view is the Airport SHOULD be included in the City CAFR…If we are not able to get the financials soon, I will need to advise the City Manager that the City CAFR will not be completed in the agreed timeframe.”

Resistance to accepting the accounting entry recommended by their external auditors to

record a liability associated with the loan guarantee for PEX. Identified correspondence includes the following: Email from the City of Newport News Director of Finance to James Bourey with the subject heading ‘Heads up on our CAFR’ states, “…HOWEVER, we will not be able to make that date UNLESS we have the financial statements from Schools and the Airport. I think we will get Schools today, but not the Airport…I understand that Ken is struggling with the entry recommended by their auditors to record a liability associated with PeoplExpress. Until that decision and entry are finalized, we will not be able to incorporate their numbers and complete our CAFR…” James Bourey writes, “Ken: Where are we with the Airport Audit and the PEOPLExpress statement. The City is pressing me as it is the last piece to wrap up the City’s CAFR…” Ken Spirito replies, “I need to talk to Renee (our Fin dir) and auditors. Since Towne has not defaulted, I’m not sure if we need to include the loan as a liability yet…”

Attempts to delay PEX’s loan with TowneBank from going into default. Related

correspondence includes the following:

Sue Ivy, TowneBank, in an email dated November 25, 2014 to Ken Spirito at 10:43 am with the subject heading ‘PEX’ states, “I wanted to follow-up and see if any decisions

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were made at PAC meeting on Friday about paying the interest due of $13,993.06? The interest is now 10 days past due…” Ken Spirito forwards the email to James Bourey who replies, “Let’s visit about this. I can call this afternoon.” Mr. Bourey later states, “Ken: We really need to pay this at this time.” Later in the email chain Mr. Spirito states, “I would think once we pay it, it is in default.”

Ken Spirito in an email dated November 26, 2014 to James Bourey and Bert Kelly Jr. states, “I cannot feel comfortable paying the loan without a default being issued.” Mr. Bourey replied, “If they default then we get nothing. This was discussed at length.” Mr. Spirito then states “I know, but I was never given authority by the board to make P&I payments on the loan. I only have authority to make the collateral payments.” Mr. Kelly then replied, “Not paying the interest payment forces TowneBank to accelerate the principle and demand from Px immediate payment in full, PAC as the backstop guarantor. I share your frustrations but we need to do this. As Executive Director you have authority to pay our obligations. No approval by the Commission is necessary. We can send a demand for reimbursement and declare another default if they fail to cure upon payment.”

Bert Kelly, Jr. in an email dated December 1, 2014 to Aubrey Fitzgerald, James

Bourey, LaDonna Finch, George Wallace, Stephen Mallon and Herbert Bateman copying Ken Spirito, Debbie Cowan and Robyn Hansen states “Jim and Ken asked that I inform you the Px’s interest payment due for November has not been paid and TowneBank has issued a request for payment by the Commission. It continues to accrue daily but is currently in the $14,000 range. Last Wednesday Jim asked Erickson to confirm the default and the answer was obvious, no money to satisfy their obligation. I have advised Ken to pay this. Otherwise, it would trigger a default and TowneBank would have no option other than to call the entire principal balance due…”

Sue Ivy, TowneBank, in an email dated December 5, 2014 to Ken Spirito copying Bert Kelly Jr. and Brian Skinner with the subject heading ‘PEX’ states, “Are you going to make the interest payment today? The loan is now over 20 days past due and we need to bring it current right away…” Ken Spirito forwards the email to James Bourey stating, “FYI”

Sue Ivy in an email dated December 9, 2014 to undisclosed recipients states, “Ken and Renee, We posted the payment to the account last night and the line is now current. The next payment of $11,916.71 is due on December 15th.

Not discussing at the Peninsula Airport Commission Board meetings material financial transactions and information associated with PEX in Open Session or Closed Session Resolution items. Examples include the following:

As disclosed and discussed above, there was nothing in the Minutes of the June 9, 2014

Special meeting or the PAC resolution that would have lead one to understand the PAC was about to sign as Guarantor on a $5 million loan to PEX.

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Sue Ivy, TowneBank, in an email dated December 16, 2014 to Renee Ford includes the following: “Did you want me to make the payment on the PEX line that was due Dec. 15th?…” Ms. Ford replied “…We have our board meeting tomorrow morning. This will be discussed, and I will let you know tomorrow.” (Emphasis Added) Ms. Ford replied on December 17, 2014 at 1:06 pm stating, “…It is okay to pull the December interest payment out of our account.” The Minutes of the December 17, 2014 Peninsula Airport Commission Board meeting scheduled for 10:30 am makes no mention or reference to discussions regarding payment on the PEX line of credit during Open Session or as action to be taken based on Closed Session discussions. The meeting minutes reflect a reporter from the Daily Press was in attendance at the meeting and that the meeting lasted 1 hour 23 minutes with 1 hour 18 minutes (94%) being in closed session.

Ken Spirito on January 21, 2015 provided instruction to Renee Ford in relation to the December Financials stating, “Thank you. Please delete the reference to the interest against the loan in the executive summary,”

A Notice of Default letter, dated January 27, 2015, regarding the Line of Credit Note

and Line of Credit Agreement dated June 18, 2014 in the sum of $5,000,000 in favor of TowneBank, was sent to PEX, with a copy to the PAC legal counsel, Herbert V. Kelly, Jr.

The Minutes of the next PAC Board meeting makes no mention or reference to discussions regarding PEX default on their loan with TowneBank during Open Session or as action to be taken based on Closed Session discussions.

ACO staff determined from September 26, 2013 to April 23, 2015, the PAC held 25 Commission meetings (19 regular and 6 special). The average time span of the meetings was 1 hour 32 minutes with 1 hour 4 minutes spent in Closed Session (70%). Only 5 of the 25 meeting minutes reflect any discussion or reference to PEX or Vision Air. None of these five meeting minutes support open and public discussion on such things as: the guarantee on the PEX $5 million loan with TowneBank, PAC decision to make interest payments on the PEX loan, PEX default on the loan and discussions regarding how PAC obligations under the guarantee was to be paid. The 5 discussions and/or references to PEX during this timeframe are as follows: June 9, 2014 (Special meeting) - There was no discussion or reference to PEX.

There was a motion to approve the Air Service Agreement with Vision Air in support of the USDOT Small Community Air Service grant.

June 12, 2014 (Regular meeting) - The meeting minutes support an

announcement by the Assistant Airport Director of Operations/Maintenance that “…we are making preparations in the terminal for PEOPLExpress to begin their service.” The Commission entered into a Closed Meeting at 8:19 am. Upon reconvening in Open meeting at 8:34 am, Mr. Spirito presented several items associated with PEX to include waiver of rates and charges for the first operating

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year and waiver of monthly rent charges retroactive from March 1, 2014 through June 30, 2015.

July 24, 2014 (Regular meeting) - “…PEOPLExpress Marketing and Advertising

is going well…”

August 28, 2014 (Regular meeting) - “…July passenger numbers are increased by 25.5%. This is due to the new operation of PEOPLExpress…”

September 25, 2014 (Regular meeting) - “…August passenger numbers are

increased by 26.8%. This is due to the new PEOPLExpress…”

Given the level of material issues and discussions involving PEX over this timeframe, ACO staff found the level of public discussion and disclosure by the PAC to be less than transparent.

Recommendation 7 We recommend the PAC, with the assistance of legal counsel, review current Airport Commission board policies and procedures regarding public disclosure to ensure the adequacy of said policies and procedures in ensuring disclosure, to greatest extent practical, of material financial transactions affecting the PAC. We further recommend PAC take appropriate action to ensure these policies and procedures are followed. ITEM 6 – Lack of Support - Full and Sufficient Disclosure: Documentation is lacking to support full and sufficient disclosure of material facts to members of the PAC as well as members of the RAISE Committee. Concerning correspondence includes the following:

The former PAC attorney wrote in a June 16, 2014 email to James Bourey copying Ken Spirito, “…I just went through the emails late today and although the three of us want this to happen there are limits to our generosity. This was a good risk until we learned Friday that they could not meet their representation that there were no liens or judgments and they capitulated on who gets paid first as between PAC and WMJ. When I begged the question, PEx, or at least their counsel, have shown no interest in making this a priority. You are running the gauntlet and I would prefer that you not as I do not want PAC to send the message that we will do whatever is necessary, quite to the contrary…I read the suggestion that the loan be increased to 6mil with other terms. I have not talked to my client TowneBank as I am conflicted but as Chairman of its Peninsula loan committee knowing their history, there is no possibility this gets restructured…For now WMJ holds the key. If they are in the picture, as well as the judgment creditors, you need to represent to the Commission.” ACO staff requested all PAC Meeting minutes from calendar year 2014; however, we were not provided any PAC Meeting minutes that supports the occurrence of a meeting from June 16, 2014 up to the PAC entering into an agreement on June 18, 2014 to guarantee a $5 million loan to PEX.

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James Bourey, City Manager and PAC member, on June 3, 2014 provided instruction in relation to a draft Motion for the RAISE Committee, recommending that the Economic Development Authority of the City of Newport News, as fiscal agent for RAISE funds, approve a grant of $700,650 to the PAC, to not be as specific on how the money will be used.

Recommendation 9 We recommend the PAC develop adequate Airport Commission board policies and procedures to ensure full disclosure of relevant information requiring any PAC vote and compliance with the Virginia Freedom of Information Act. POTENTIAL AND/OR PERCEIVED CONFLICTS OF INTEREST ITEM 7 – Conflict of Interest – Personnel Involved During Time of Loan Agreement TOWNEBANK AND RELATED PARTIES Our review of events relating to the People Express Airlines, Inc., (“PEX”) operation at the Newport News/Williamsburg International Airport (“PHF”) and interaction with the Peninsula Airport Commission (“PAC”) Commissioners and Executive Director, identified considerable involvement by individuals with direct and/or indirect interest in the operation of TowneBank. Many of the potentially conflicting relationships appeared to be unknown to the PAC Commissioners at the time. The following table summarizes the various individuals and their respective affiliation with TowneBank, PAC/PHF and PEX: Name TowneBank Affiliation PAC/PHF Affiliation PEX Affiliation John Lawson, President and CEO of WM Jordan

-Hampton Roads Board of Directors, TowneBank -TowneBank Hampton Roads Executive Committee -Major Investor in TowneBank (as of 4/28/16, owned 3.72% of TowneBank’s common stock)

Contracts with PAC/PHF

Investor/Creditor

Herbert Kelly -Chairman of Executive Loan Committee -Board of Directors-TowneBank Peninsula

Former PAC Legal Counsel

N/A

Bert Bateman TowneBank-Executive Vice President for Business and Professional Banking and Newport News City Council Member

Former PAC Commissioner

N/A

Ken Spirito N/A Former PAC Executive N/A

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Name TowneBank Affiliation PAC/PHF Affiliation PEX Affiliation Director

Jim Bourey N/A Former PAC Commissioner/Commission Chairman

N/A

Dixon, Hughes Goodman

TowneBank CPA Firm PAC CPA Firm N/A

Recommendation 10 We recommend that the PAC consider reviewing the Virginia Conflict of Interest Act and the Ethics in Public Contracting Act.

Recommendation 11 We recommend the PAC, with the assistance of legal counsel, review current Airport Commission board policies and procedures concerning the Virginia Conflict of Interest Act, and the Virginia Ethics in Public Contracting Act to determine if said policies and procedures are adequate and are adhered to. ITEM 8 – Conflict of Interest - Gifts

The State and Local Government Conflict of Interests Act (§§2.2-3100 et seq.), the Virginia Ethics in Public Contracting Act (§§2.2-4367 et seq.) and the Virginia Conflict of Interest and Ethics Advisory Council statutes (§§30-355 et seq.) contain requirements regarding the disclosure of personal economic interests as well as acceptance of Gifts. In addition, the Governor’s Executive Order No. 2 provides information on the topics.

The following table summarizes some of the incidents involving the distribution of airline tickets to individuals either directly or indirectly related to PAC members, administrative staff and/or employees of entities transacting business and/or involved with the PAC. The list includes only those situations that came to our attention during the review and is not intended to be all inclusive. In addition, there is no indication that the value of the airline tickets was reported for income tax purposes or any requirements under the Virginia Conflict of Interest Act.

Ticket Recipient

Airline/Number of Tickets

Ticket Used by Recipient

PAC Commissioner/Hampton Mayor Elite Airlines/3 No PAC Commissioner/Newport News City Manager

Elite Airlines/1 No

PAC Commissioner/Newport News City Manager’s Wife

Elite Airlines/1 No

Director, City of Newport News Engineering Director (wife)

Elite Airlines/2 No

PAC Commissioner/Newport News City Manager

People Express Airlines/1

?

Director, City of Newport News Department of Development

People Express Airlines, Inc./2

Yes

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Ticket Recipient

Airline/Number of Tickets

Ticket Used by Recipient

Towne Bank, President, Newport News/Williamsburg

People Express Airlines/1

?

PAC Administrative Staff (Children) People Express Airlines, Inc./2

Yes

NOTE: PAC Commissioners received 6 Elite tickets at the retreat according to the Director of Finance and Administration.

Along with the 2 complimentary roundtrip Elite tickets, the PAC Chairman and his wife also were offered 2 nights lodging at a hotel of their choice, ground transportation and meals for 1 by the Executive Director.

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Recommendation 12 We recommend that the PAC review and comply with the Virginia Conflicts of Interest Act and the Virginia Ethics in Public Contracting Act.. ITEM 9 – Internal Controls - Record Retention Policies and Procedures Our review indicated that the PAC did not have a formal record retention policy. Section 11 of the Acts of Assembly makes specific reference to maintaining minutes of its proceedings and suitable records of all its financial transactions. At the beginning of our review, we requested backup email and server file records for all PAC employees and PAC Commissioners. We were provided with only limited information. The PAC was unable to produce key records to reflect the disposition of the TowneBank loan proceeds, as required by the Indemnity Agreement. This has already been widely publicized. The ACO made a request to the former PAC attorney to provide all of the support for the $5 million loan guarantee. The former PAC attorney only provided 3 documents to the ACO. Other instances noted are as follows: Email The PAC did not maintain sufficient backup procedures for email. The ACO asked for all email accounts for the PAC employees and PAC Commissioners. Most of the Commissioners had personal email accounts. Once email was deleted, it was only backed up for approximately 30 days. We had to go to outside sources (i.e., City of Newport News, PAC attorney, TowneBank) for emails. Our comparison of the Executive Director’s email that was provided to us as being “everything” to what we were provided from other outside sources indicated that many of the emails that should have been located in the Executive Director’s email were no longer there. Video Video recordings are only maintained for approximately 30 days. Some of the cameras we reviewed appear to be outdated. Shredding There were two separate accounts in which the Executive Director was observed destroying documents within the PAC office.

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During our review, we were also provided information that the Executive Director was observed removing records from the airport. Recommendation 13 We recommend that the PAC create and implement a Record Retention policy. ITEM 10 – Internal Controls - Travel Policy Our testwork indicated that the Executive Director’s travel expenditures were approved by the Director of Finance and Administration, and not the Board. The Executive Director would also pay for other PAC staff and Board members travel expenditures using his PAC or personal credit card. The PAC Personnel Policies, Benefits, and Procedures Manual states, “Prior to making any travel arrangements, the employee must complete a travel request form and submit it to his/her immediate supervisor for approval.” We question the Executive Director’s usage of his personal credit card to not only pay for his travel, but other PAC staff, when the PAC Credit Card, Club Memberships and Travel policy states, “an employee cannot take advantage of any reward programs associated with their credit card(s).” Additionally, our review did not indicate that the Executive Director was getting prior approval from the Board for upcoming travel. The Board may also want to consider approving all travel that exceeds a certain dollar amount and perform periodic reviews of all expenditures. Although a recent PAC travel policy was adopted, we would suggest adopting a policy that references and follows the Federal Travel Guidelines. Recommendation 14 We recommend that the PAC establish an Internal Audit function to ensure that internal controls are implemented and followed. We recommend this function report directly to the PAC for independence.