Probe of Airport Funds Puts Pena Under Scrutiny : Inquiry: While he was mayor of Denver, city may have diverted money from federally subsidized facility.

The Transportation Department’s inspector general is conducting an inquiry of special sensitivity for the agency’s secretary, Federico Pena: Investigators are eyeing whether officials in Denver, where Pena was mayor for eight years, improperly diverted revenue from the city’s federally subsidized airport to pay for other civic services.

Interviews and public records show that the expenditures being reviewed include city payments to the firm of Ronald H. Brown, the current commerce secretary who in the late 1980s and early 1990s was then-Mayor Pena’s lobbyist in Washington.

Brown and his firm--Patton, Boggs & Blow--were paid $240,000 during 1991 and 1992 from airport funds, according to records provided last month to the inspector general by city auditors in Denver. Copies of the records were obtained by The Times.

“They asked for several documents that went back into the middle of Pena’s (mayoral) Administration,” said a Denver auditing official who spoke on condition of anonymity.

This official and others familiar with aspects of the inspector general’s inquiry said millions of dollars in spending for legal services and lobbying under Pena’s successor as mayor, Wellington Webb, also are under review.

Federal law generally holds that, as a condition of accepting aviation funds from the government, cities are prohibited from using revenue generated by their airports for anything other than the airports’ “capital or operating costs.”

An intent of the law, according to experts, is to prevent local governments from drawing on the federal government for an airport’s costs while directing the money the airport actually earns, from landing fees or other rentals, to unrelated civic projects.

The federal government provided funding during the 1980s and 1990s for Denver’s Stapleton International Airport. It also helped pay for the new $4.9-billion Denver International Airport, which opened on Feb. 28 to replace Stapleton.

Denver’s contract with Brown’s firm was for general-purpose lobbying for the city “under the directive of the mayor.”

Pena, through a spokesman, said that he “was not specifically aware” of how city funds were used to pay for the lobbying services while he was mayor.

The question about use of the funds in Denver is delicate, if only because of Pena and Brown’s ascension to prominence in the Clinton Administration. But the matter is further complicated by the ramifications it could pose for Pena’s department in Washington:

If Transportation Department Inspector General A. Mary Schiavo concludes that airport revenue in Denver has been diverted in violation of federal law, the department will have the option of withholding part or all of the remaining $117 million of federal money that otherwise has been pledged for further expansion of the city’s new airport.

Thus, Pena’s department would be weighing action against a project that most defined his tenure as mayor, from 1983 to mid-1991. Indeed, President Clinton cited Pena’s championing of the airport--the first such facility to be built in North America in 20 years--when he nominated the former mayor as his top transportation policy-maker.

Pena, according to a spokesman, has and will continue to recuse himself from participating in decisions directly affecting the Denver airport.

According to people familiar with the matter, preliminary findings by the inspector general’s staff threatened to postpone delivery late last month of $35.7 million in federal funding for Denver International Airport. The money was delivered days before the controversial airport opened.

If delivery of the money had been delayed just another few days--until after the airport opened--by law the funds could have been spent only to repay the facility’s bond debt. Instead, the city was able to use the money for urgent expenses, including paying contractors for paving and grading at the 53-square-mile complex.

“The inspector general’s office did say that (withholding at least part of the $35.7 million) was something that they would certainly, I won’t say recommend, but they would understand if I wanted to do something like that,” said Cynthia Rich, an associate administrator of the Federal Aviation Administration. “This was a preliminary discussion of a revenue-diversion audit. This was not something where we were getting to final conclusions.”

Rich said she apprised “the office” of Pena’s chief of staff, Ann Bormolini, of the decision last month, but did not confer with Pena.

Rich, a presidential appointee, said she has applied a consistent policy regarding alleged diversions of airport revenue during her one year in office: She will not consider withholding any airport’s grant money until the inspector general’s findings are in final form and the airport has been given time to repay any money spent inappropriately.

Pena’s spokesman, Bill Schulz, said the secretary did not participate in the decision to send the $35.7 million to Denver. Schulz said Bormolini, who was also Pena’s chief of staff as mayor, is recusing herself from decisions affecting the airport, as is Stephen H. Kaplan, the Transportation Department’s general counsel who earlier served as Pena’s city attorney in Denver.

Pena, he said, has not been questioned about the expenditures.

The probe adds to problems related both to the airport and to Pena’s private associations in Denver that are subjecting the transportation secretary to increasing scrutiny:

* The Securities and Exchange Commission is investigating whether Denver officials, during and after Pena’s tenure as mayor, misled buyers of airport bonds by not acknowledging construction problems that would delay opening of the new facility. Pena’s aides have confirmed that SEC lawyers questioned the secretary for 2 1/2 hours earlier this year.

* The bond buyers have filed two lawsuits within the past two weeks, alleging that significant construction problems were deliberately withheld from public view. Pena, although not a named defendant, is referred to in the lawsuits as having pledged timely completion of a functional baggage-handling system at a time when insiders knew that system was fraught with problems.

Those familiar with the litigation said the transportation secretary “absolutely” will be questioned under oath as early as this fall.

* The Justice Department has opened an initial review to determine whether a special prosecutor should be appointed to examine how an investment firm, founded by Pena, won a contract to manage $5 million from a Los Angeles transit pension fund. The Times reported last month that Denver-based Pena Investment Advisors Inc. won the contract 19 days after Pena took federal office. According to pension officials in Los Angeles, Pena Investment Advisors was hired in an effort to curry Pena’s goodwill.

Pena has denied any wrongdoing. He has said he relinquished his role as president and chief executive officer of the firm and sold his stake “for a loss” before the contract was awarded. The federal government is providing about half the funding for the multibillion-dollar Los Angeles subway project.

In Denver, City Atty. Daniel E. Muse denounced the inspector general’s inquiry into the airport funds matter.

Muse called the probe “absurd” and said he is satisfied that all of the payments for lobbying comply with federal law. The services, he said in an interview, were “reasonably related” to airport operations, including lobbying for federal funds for the new airport project.

“This is one of the most ridiculous things I’ve seen in my 24 years in practicing law,” said Muse, who is an appointee of the mayor. “This is an outrageous abuse of federal resources.”

Muse, who said he has been questioned by the inspector general’s staff, added: “We’ve provided documents. We’ve explained the law to these guys. . . . The services we received were valid and appropriate. . . . It’s my understanding that the lobbying went to getting the $501 million (of federal money that was pledged initially) to this project. If we had to pay a half-million to Patton, Boggs & Blow to get $500 million, the money is well-spent.”

The then-Democratic-controlled Congress and the Administration of Republican President George Bush ultimately pledged $437 million for the new Denver airport.

However, there appears to be disagreement as to whether Denver complied with the law. Local officials told The Times that, under Mayors Pena and Webb, when the city received a bill from the lobbying firm, officials tapped various city accounts--including airport operations and maintenance--on a rotating basis, regardless of the precise nature of the lobbying work. Consequently, airport revenue could have paid for lobbying on issues as diverse as waste disposal and highway bridges.

“My understanding is that it is not uncommon to pay from various city (accounts), regardless of whether the particular service was rendered,” said Kathy Selman, an aide to Webb. “I know that it’s just something that’s been in place (in Denver). Mine was not to ask why.”

According to the FAA’s Rich, if airport-generated revenue was used for general-purpose lobbying, “that would be something that would have to be investigated. We would question that, as to whether or not it’s appropriate.”

On the other hand, Rich said, “if it’s lobbying or legal services (for) airport services, that would be appropriate. . . . The law basically states that airport revenues must be used for airport operations and direct airport purposes.”

The city’s former top airport executive said in an interview that Brown’s lobbying firm did little work regarding the airport, compared to the firm’s other, general-purpose advocacy for the city. George F. Doughty, Denver’s director of aviation from 1984 to 1992, said most of the city’s airport-related lobbying was handled by a separate Washington-based firm. Doughty said “it’s possible” that airport revenue was tapped to pay Brown’s firm for work unrelated to the airport.

Carol Hamilton, an aide to Brown at the Commerce Department, said she was unaware of the inspector general’s inquiry. “I don’t know anything about it,” Hamilton said. “Neither does (Brown).” Brown was also chairman of the Democratic National Committee from 1988 to 1992.

Timothy May, managing partner of Patton Boggs, did not return telephone messages seeking his comment.