State Library of Massachusetts . State House, Boston

SPECIAL REPORT:

· Ra•'Iroad, Inc. dHyanms · Cape Cod an . fan 03 Account Anatomyo

JUNE 1989

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!;'tOBERT A. CERASOLI I' REPRESENTATIVE

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Committee on Post Audit and ·Oversight

STATE HOUSE, BOSTON, MA 02133

Chairman

~ 3RD NORFOLK DISTRICT , 54 RUSSELL PARK I QUINCY, MA 02169 I HOME TEL.,: 471-3859

STATE HOUSE OFFICE ROOM 146

BOSTON. MA 02 t 33 TEL..: 722-2560

TO: REPRESENTATIVE GEORGE KEVERIAN, SPEAKER OF THE HOUSE, AND THE HONORABLE MEMBERS OF THE GENERAL COURT

As Chairman of the House Committee on Post Audit and Oversight, I recently requested an examination of a specific 03 account listed in the Post Audit Bureau's PRELIMINARY REVIEW: CONSULTANT EXPENDITURES/Fiscal Year 1987.

The reason for undertaking this special project stemmed from a review of the 03 listings in the section titled -­Companies Paid Over $1,000,000. There were 45 listings in this category, the largest amount totaling more than $15,000,000. Although not without precedent, it seemed extraordinary that some of these agencies, organizations and firms were being funded through the 03 account.

The Cape Cod and Hyannis Railroad, Inc. (CC&HRR) was selected for addi tiona! review since it appeared to stand out as an unusual 'recipient of more than $2.5 million from an 03 account during 1987. A closer inspection of this railroad operation indicated that this was no ordinary commuter transportation facility.

I want to extend my appreciation to the House Post Audit and Oversight Bureau staff for its prompt response to this request and especially Administrative Aide Frank Falacci and Committee Counsel Wade M. Welch, under whose direction this report was completed.

ROBERT A. CERASOLI Chairman

BACKGROUND---------------------------------------~-----------

A.lrrost entirely funded in its operation by the Commonwealth of

Massachusetts, the CC&HRR represents what can happen when government

ventures into the· field. of private enterprise. The 1983 and 1985

transportation bond issues provided some $51. 8 million dollars in

state and federal funds intended for restoration of rail service in

this region. The various rehabilitation projects included the

proposed return of Cape Cod Passenger Service, comprising technical

studies and track rejuvenation at a combined state and federal cost

of $42 million dollars.

Actual passenger operations began when a newly incorporated

entity, the Cape Cod and Hyannis Railroad, Inc., initiated a tourist

excursion service for the 1981 sumner season between Hyannis and

East Sandwich, a distance of 17 miles.

In the surrmers of 1984 and 1985, the · Commonwealth provided

limited funding ($148 ,805) to enable CC&HRR to begin a seasonal

passenger rail service demonstration from the.· t~rmim:ts of the MBTA' s

.Red Line in Braintree to Hyannis. As,parf of his state fiscal year

1986 supplementary budget request, Governor Dukakis included

financial resources for the operation of the passenger rail

dem:mstration program. An appropriation of $5. 5 million dollars was

approved in June of that year. Due to spiraling liability insurance

costs for the 1986 season, additional funding was necessary for 1987.

The CC&HRR had agreements with the Commonwealth of

Massachusetts, through the Executive Office of Transportation and

Construction (EOTC) to provide subsidized passenger rail service

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between the Greater Boston area (Braintree) and Cape Cod. The

service to be provided by CC&HRR under the terms of these agreements

was "a seasonal intercity and scenic passenger train service to and

from the Cape Cod Region and within the Cape Cod Region. " Contracts

for 1986, 1987 and 1988 provided for the Commonwealth to pay CC&HRR

subsidies of $1, 778, 350, $2, 048, 894 and $3, 053, 309, respectively,

to pay for total Allowable Expenses including but not limited to,

direct transportation, equipment maintenance, facility maintenance,

general and administrative expense, education and prom:::>tion,

equipment leasing and liability insurance expense for the railroad

company. In addition, the agreements provided the CC&HRR,

management fees, and a revenue sharing formula. A House Post Audit

Bureau report in December, 1988, identifying 03 fund recipients,

lists the CC&HRR as receiving $2,556,404 in 03 funding during Fiscal

Year 1987.

The CC&HRR ceased operations last winter when it became

apparent the state's current fiscal situation would no longer

subsidize the seasonal service, primarily the run from the. Cape to

Braintree during May through October.

However, in a relatively short period of tirne, 1986-1988,

preliminary review indicates the family owners and CC&HRR received

approximately $2,000,000 through 03 funding for salaries, benefits

and management fees and were. permitted to retain the major portion

of ticket revenues with minimal requirements for invoice

documentation or other financial controls, while the Comnonweal th

expended m:::>re than $6, 000, 000 financing the bulk of the operation.

The latter figure does not include earlier costs of rehabilitating

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the railtrack bed or right-of-way payments to Bay Colony Railroad,

Conrail and Amtrak.

In retrospect, the state paid the owners their wages and

benefits, management fees, allowed them to keep a major share of

incoming revenue and then reimbursed the company for its operating

expenses. Since this was a seasonal operation, the passenger

service program was available to the general public for 14 months,

extended over a three year period. During the initial sumner of

1986, the service did not begin until the second week of July.

THE ORGANIZATION OF CC&HRR--------------------------------~--

At the time of its organization in 1981, Mark A. Snider of 3583

Main Street, Barnstable, Massachusetts, was the President of the

Cape Cod and Hyannis Railroad, Inc. Stanley W. Snider of 291

Goddard Avenue, Brookline, Massachusetts, Mark's father, was listed

as Treasurer. Both were listed as directors. In annual reports

filed with the State Secretary's office in 1986, 1987 and 1988, Mark

A. Snider is listed as President and Treasurer of the cape railroad.

In 1986, the state Executive Office of Transportation, which

negotiated the contract with the railroad, agreed to salaries of

$50,000 and $35,000 respectively for Mark Snider and Gwenn E.

Snider, Mark's wife, for what ostensibly anounts to a six m::>nth

operation. Gwenn Snider, according to ECYl'C, was responsible for the

· education and promotion of the rail passenger service, an item paid

for by the state subsidy 1 for which $765 1 606 was budgeted during

the program's three years.

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The following year, ooth were given cost of living increases,

bringing their salaries to $51,900 and $36,330. Prior to that

however, in a letter responding to a limited audit review, dated May

22, 1987, Mark Snider related that the Cape Cod & Hyannis Railroad,

Inc., detennined in December, 1986 to ccmpensate Gwenn Snider an

additional $10,000 and Mark Snider an additional $25,000 to bring

ooth salaries up to ••• "an anount deemed appropriate for the work

perfonned during the year." According to EOTC, this was done by

transferring $35,000 from the ticket sales revenue, apparently with

the approval of financial personnel in Transportation. Corporate

documents .filed at the State Secretary's office, lists Gwenn Snider

as a director of the CC&HRR.

WAGES AND BENEFITS------------------~----------------------~--

Consequently, in 1986, payroll and tax records list Mark

Snider's salary as $75,731.36 and Gwenn Snider's, $45,586.92. They

were also allowed retirement plans and paid vacations, benefits

generally prohibited under 03 contracts. Additionally, the Sniders,

through Cape Cod & Hyannis Railroad, along with their annual

salaries and benefits, were paid management fees totaling $512,000

by the state during the three seasons of operation. Payments were

i.n the amount of $160,000 for each of 1986 and 1987, and in 1988,

EOTC increased the management fee to $192,000.

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REVENUE SHARING/FEES-----------------------------------------

Executive Office of Transportation reported Cape Cod and

Hyannis Railroad ticket revenues for the 1988 Season equaled

$646,020. Per agreement with EOTC, the railroad company was

permitted to. keep $463,010 as its share. Net revenue credited to

the Corrm::mwealth under the revenue sharing plan, amounted to

$183,010. In 1987, an EOTC report to House Ways and Means

Committee, states ticke~ sales totaled $563,449 with revenue sharing

figures indicating CC&HRR retained $392,690 and the state credited

with $170,759. Ticket revenue for 1986 reflects the passenger

derronstration program's late start with total sales of $343,390.

The state was credited with $58,717, the amount, as agreed, to be

deducted fran the operating subsidy paid the railroad, which was

allowed to retain $284,673.

Invoice d~ntation by CC&HRR was required only for

"reimbursable expenses" according to papers from the Executive

Office of Transportation. Accordingly, how CC&HRR disbursed the

substantial sums it received in ticket sales revenue and management

fees was not required to be reported. This is an area Post Audit

believes should have been more vigorously pursued by the authorizing

agency.

EOTC disclosed that during contract negotiations in the Spring

of 1988, Mark Snider, when asked what he did with the management

fees, replied that in the sumner of 1987 he began a ferry service

running between Martha's Vineyard and the State Pier at the Cape Cod

Canal, a short distqnce from the train station at Buzzards Bay. He,

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or his newly organized firm, Vineyard Express Line, Inc., according

to the Woods Hole, Martha' s Vineyard and Nantucket Steamship

Authority, leased a 600-passenger shuttle boat, the Comronwealth,

from the Bay State-Spray & Provincetown Steamship Company, a company

in which Joseph G. Pallotta is a principal and during the following

year operated its own high-speed ferry service from Boston to the

Vineyard. Snider declared to EOI'C that although his ferry venture

increased train passengers by 9, 000, the operation lost $40, 000,

paid for out of his management fee since EOTC considered the

Snider-initiated ferry service a non-reimbursable expense. Snider

did not resume the ferry operation the following summer.

Other expenses considered non-reimbursable by the Eai'C were

taxes, reserves to cover insurance deductibles and food and

beverages sold to train passengers by CC&HRR employees. But

financial statements credit CC&HRR with doing $111,843 in the food

and beverage business in 1986, $281,689 the following season and

$158,097 during 1988.

LIMITED AUDIT REQUESTED--------------------------------------

A limited audit review of EOTC's 1986 agreement with CC&HRR was

perfonned by the Massachusetts Bay Transportation Authority (MBTA)

during the Spring of 1987 at the request of EOTC's Financial Affairs

Office. It focused "on areas of concern to EOTC" and asked a number

of questions as to certain CC&HRR' s practices and costs, not the

least . being the accounting services perfonned for the railroad

canpany by Stanmar,. Inc., of Boston Post Road, Sudbury, MA.

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President and Treasurer of Stanmar, Inc. is Stanley W. Snider,

who, according to :roTC, is the father of Mark Snider. As per its

annual report filed with the State Secretary's office for fiscal

year ending December 31, 1988, Mark Snider is listed as a director

of Stanmar, Inc. Official papers shOW" that Stanley Snider was

instnnnental in the legislative incorporation proceedings of the

CC&HRR in 1981. The post office address of the then newly organized

railroad company was given as Boston Post Road, Sudbury, MA.

A1 though the MBTA review found the Cape railroad's accounting

system to be "a¢lequate under the circumstances", it apparently was

not able to satisfy itself as to the reasonableness of the fees paid

to · Stanrnar, Inc. Based on information provided it, the MBTA review

learned that CC&HRR paid same 100 employees per week and processed

about 300 to 400 accounts payable transactions each month during the

peak performance period.

Since computer accounting services are provided by n\lll'erous

service bureaus and CPA finns, MBTA audit personnel checked the

"reasonableness" of the Stanmar fees by calling Accounting

Corporation of America. and talking with two CPA firms. They

discovered that the going rate for services comparable to those

provided by Stanmar was approximately $250 a week. In

correspondence to the railroad, the MBTA noted the competitive rate

was significantly less than the $4,000 to $5,000 weekly fee paid to

Stanmar, and reimbursed by the state, during the peak performance

period.

In response to the audit review, Mark Snider submitted to EOTC

a proposal . from an independent accounting firm, estimating that an

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in-house accounting staff for CC&HRR would cost in excess of

$63,000. In a letter to E<YI'C, Snider replied, "We believe Stanmar's

$59,000 charge is reasonable in comparison. "

Stanrnar, Inc. , continued to do the accounting/rookkeeping for

CC&HRR in 1987 and 1988 and the anount budgeted for Stamnar, Inc.,

during the . passenger service's final season of operation, was

increased to $66,000. Corporate financial records for 1986, 1987

and 1988 show that Stanley Snider, Stanmar's president, held a note

from CC&HRR, payable to Stamnar, Inc., anounting to $749,968,

The MBTA's limited review also raised questions concerning:

* the costs of fringe benefits CC&HRR was paying its employees

and subsequently billing the state;

* Rent of an a~nt for the superintendent of maintenance

charged to the state~

· * Within the premises in Hyannis for which the railroad charged

lease payments to the EOTC was also located an office used to

conduct a business "not related to the purposes of the contract";

* Although telephone and microcarnputer costs were consistent

with the types of costs allowed under terms of the contract, the

procurement of these items at the end of the contract period raised

concerns about their being of benefit during the term of the

contract.

PAID FOR BY COMMONWEALTH-------------------------------------

Invoices fran CC&HRR included the following classification of

!i wages as allowable .expenses billed to the state: General and t·

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Administrative; Train Crew; Buildings and Grounds; Train Servicing;

Equip:rent Maintenance; Equip:nent Maintenance (facility); Education

and Praroc>tions; Falnouth Bus.

approximately 100 employees,

Benefits, including vacations, to

equaled 20 percent of gross pay,

according to CC&HRR payroll invoices.

Fuel, repairs, cleaning, utilities, supplies, security,

uniforms, painting, tickets, legal fees, insurance costs,

advertising, 11ewsclip service, taxi fares for train crews, public

relations, crew training costs, membership fees and convention

attendance as well as numerous other expenses of the railroad were

all billed to ECYI'C and paid for by the Conrronwealth of Massachusetts.

CONCLUSION---------------------------------------------------

Whatever merit, if any, there may have been in the

Commonwealth's demonstration program in attempting to restore

passenger rail service between Cape Cod and Greater Boston, it was.

negated by the ·exploitation of the 03 consultant account. A

preliminary investigation by Post Audit and OVersight detennined

that after three years and more than $6,000 ;000 in 03 expenditures,

all that the state can presently account for of this much publicized

program, is used ·machinery, used office equi:pnent, and rusting

rails.

Instead of providing what was believed a necessary alternative

mode of transportation for daily cormnlters traveling between the

Cape and Boston, the CC&HRR remained essentially an excursion

operation for visiting tourists, replete with expenditure driven

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costs.

The uncontrolled rise of 03 employment by various agencies in

recent years, is due, in part, to the "hidden" personnel shielded by

the vendor. In this instance, CC&HRR was the designated vendor

under 03 funding. However, state payroll records would fail to

identify the 100 employees of the railroad who received wages and

benefits as 03 recipients. Any paper trail of accountability is

generally diminished by use of the 03 account. Furthermore, payment

of benefits and vacation time to the employees of the railroad,

under the 03 contractual tenns, must be regarded as questionable, if

not unwarranted.

In its desire to establish additional public transportation

from Greater Boston to the Cape, EOTC embarked on a route that

seemingly encouraged irregularities, abuse and imprudent management,

not· to mention the giving birth to yet another unnecessary,

bureaucratic appendage.

Those in state government who seek reasons as to why the

Com:ronwealth' s financial position and credit rating has suffered

reversals, need only review the administration's demonstration

project of railroad passenger service in Southeastern Massachusetts

and cape Cod. Use of the 03 account, as was the case here, strongly

attests to a statement made earlier by Chairman Cerasoli, that the

CCll.'lTOC>nwealth · can prune more than $300 million dollars from 03

accounts ••• "And not miss a beat!"

During the 14 months of actual operation extending over a

three-year period, the Sniders, as principals in the Cape Cod and

Hyannis Railroad, were paid nore than $360,000 in wages and benefits

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by the state; received $512,000 in management fees; received

approximately $184,000 for doing CC&HRR acco1.mting work; and were

allowed to retain approximately $1,000,000 in ticket sales revenue.

In exchange, state government funded roughly, the entire operation of

the CC&HRR, including payroll, equipment maintenance, promotion and

education, supplies, maintenance facility, equipment lease, and

insurance.

Restraints and balances within this program appear discursive

since the railroad operated under independent contract and thus not

bound by state statute. For exarrq:>le, according to EOl'C, the CC&HRR

was permitted to select its own agent of preference to handle its

liability insurance, an item involving nore than $1 million dollars

in premium payments. For this a:rrount, a state agency would be

required by law to proceed through a bidding process.

· EXYl'C maintains it requested expressions of interest in the

passenger service deroc>nstration program fran Conm:mwealth railroad

companies but only CC&HRR responded to this request, apparently

nullifying the necessity for a bid-award process.

Despite glowing reports by officials as to the progress of the

rail passenger demonstration program, the Cape Cod to Boston

intrastate plan offered marginal assistance or convenience for

ccmnuter traffic between the two points and in reality remained a

day-trip rail excursion for visiting tourists ••• Essentially, once

the State 03 rroney was shut off, the train stopped running.

Discussions are reportedly 1.mderway with the MBTA in an effort

to determine whether it should expand its services to carry

passengers between Cape Cod and its Braintree station. It is Post

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Audit 1 s hope that :roTC will approach the South Shore's alternate

transportation problem in a more prudent and cost efficient manner.

The administration, and particularly EOTC, should stop using 03s' to

fund transportation projects. The taxpayer deserves more

accountability.

Therefore, because of what appears to be :i.rrq:;>roprieties and

irregularities in the :i.rrq:;>leirentation of the 03 arrangeirent between

the Executive Office of Transportation and Construction and the Cape

Cod and Hyannis Railroad, Inc., it is hereby recarrmended that this

matter be referred to the Office of the Inspector General for his

attention.

HOUSE POST AUDIT AND OVERSIGHT COMMITTEE

HOUSE POST AUDIT AND OVERSIGHT BUREAU

The HPAO Committee is composed of eleven members of the House of Representatives whose goal is to promote more effective management of state government programs through performance evaluations con­ducted by the Post Audit and Oversight Bureau.

HOUSE POST AUDITand OVERSIGHT COMMITTEE

Robert A. Cerasoli Chairman

Rep. Denis Lawrence, Vice Chairman Rep . Alfred E. Saggese, Jr. Rep. William P. Nagle, Jr. Rep. Mrujorie A. Clapprood Rep. Larry Giordano

Rep. Kevin O'Sullivan Rep. Patrick F. Landers, III Rep. Arthur Stephen Tobin Rep. Peter Torkildsen Rep. John C. Bradford

The HP AO Bureau is headed by a Director and includes a staff of professionals with diversified back­grounds and skills. The Bureau provides the House of Representatives with a management review team to assess the impact of public programs

HOUSE POST AUDIT and OVERSIGHT BUREAU

Richard F. Tobin, Jr. Director

Michael J. DelVecchio, Research-Staff Director Dennis F. Griffin, Assistant Director Ronald Mariano, Assistant Director Fran Brown, Assistant Director Mary Bono, Assistant Director David L. Malloy, Senior Researcher Robert M. Brigham, Senior Researcher Michael J. Pieroni, Senior Researcher James Thibodeau, Research Assistant Bruce J. Tobin, Research Assistant Anne F. ~ayes, Research Assistant Jacquelyn F. Murphy, Principal Secretary