Two bus companies owned by Minnesota Transportation Commissioner Charles Zelle received nearly all of the state subsidies for rural bus routes in 2013, the first year the state offered funding for the intercity bus program.

Jefferson Lines, which operates rural bus routes in Minnesota, and Land to Air Express, an airport shuttle service, received $2.3 million in state and federal grant money in 2013, according to a 2014 report by Zelle’s department. Those state and federal subsidies accounted for nearly 60 percent of the companies’ budget to operate the subsidized routes, the report said.

Before 2013, the companies received only federal subsidies, since there were no state subsidies. Instead, bus companies were expected to provide some of their own funding under previous rules for the grant program.

Zelle expressed surprise at learning his two firms received 98 percent, or about $441,000, of the allocated state funding in the first year of state subsidies. Jefferson Lines and Land to Air Express were two of three firms who applied for the state funding that year. The third, Rainbow Rider Transit, received less than $8,000 in state subsidies.

“Quite honestly, that’s news to me,” Zelle said. “I know from my prior experience that there’s a limited number of intercity bus carriers that have the connections and the access to the larger network.” He said Jefferson Lines is one of the leading providers of rural bus service.

Before he was appointed commissioner of the Minnesota Department of Transportation (MnDOT) by Gov. Mark Dayton in 2012, Zelle was president and chief executive of Jefferson Lines. In preparation for the commissioner job, he resigned as CEO, handing over the position to Steve Woelfel, previously the company’s chief financial officer. He then joined the board of directors for Jefferson Lines and Land to Air Express, chairing the board at Jefferson.

Before he took office, the boards of both companies received instructions to exclude Zelle from matters involving the state. He agreed to a one-year cooling-off period after leaving his post as commissioner that will prohibit him from conducting business with the state on behalf of his companies. Zelle did, however, retain ownership and his chairman role at Jefferson. He continues to earn a retainer for his board role with Jefferson Lines but declined to give the amount.

Zelle conceded that “certainly there is an appearance [of conflict of interest], but my sense is that this is a small piece of the overall MnDOT enterprise.

“I believe in the integrity of the management and the programs of this department, that they make prudent decisions for the best interest of citizens,” he said. “I think the programs in the past have been pretty detailed as to what is required [of bus lines] and what benefits are derived from it, so I can’t imagine that would be a concern.”

Governor defends chief

Dayton’s office issued a statement Tuesday that said the governor believes Zelle “is an excellent commissioner of transportation.” Dayton spokesman Matt Swenson said that “the governor was aware of Commissioner Zelle’s role with Jefferson Lines when he appointed him. This was thoroughly vetted and fully disclosed to the Legislature and the public. Commissioner Zelle has made all of the necessary disclosures, and has properly recused himself from any decisions involving the company.”

In 2012, the year before MnDOT began offering a state subsidy, Jefferson Lines and Land to Air Express were already the only two companies to receive federal subsidies. That year they received a total of $1.5 million.

Bus operators are eligible for federal grants in exchange for connecting rural cities and towns with national bus routes. Mike Schadauer, director of MnDOT’s Office of Transit, said that without public subsidy, such routes are unprofitable.

To avoid forfeiting unused federal funding, Schadauer said MnDOT decided in 2013 to start offering state funding for intercity bus service. The state money comes from Minnesota’s motor vehicle sales tax.

Under a previous version of the grant program, bus operators that applied for federal funding were expected to contribute their own funds. That discouraged smaller firms from participating in the federal program, Schadauer said. To stoke more interest in the intercity bus program, MnDOT allowed companies to provide an in-kind match. A bus company, for instance, could receive credit for any capital investment it made on a profitable route and have that count toward the in-kind match.

Since then, only one other company stepped forward to apply for the state funding. Another, Tri-Valley Heartland Express, is currently under consideration for the state grant, Schadauer said. The department’s change, made under existing rules and statutes, was “not enough to make a huge difference, but it did keep routes going that we needed to keep going.”

Schadauer said “there’s absolutely no connection” between the awarding of state funds and the commissioner’s roles as board member at the two transit companies.

Ethical questions raised

Senate Minority Leader David Hann, R-Eden Prairie, said Tuesday that state funding of Zelle’s firms raises ethical questions.

“I think there is an appearance here of maybe some of his companies being given a preference,” Hann said. “The public needs to be reassured that didn’t happen.”

He said that even with Zelle’s disclosure of the conflict of the interest, Hann said it’s possible employees would feel pressure and act in a way that would preserve their jobs.

Chairmen of the Senate and House transportation committees, however, expressed confidence in Zelle.

State Sen. Scott Dibble, DFL-Minneapolis, said he was satisfied with Zelle’s handling of the conflict of interest, saying the recusal procedures he had previously outlined were sufficient.

“Charlie Zelle has unassailable character, and he’s a straight shooter,” said Dibble, chairman of the Senate Transportation and Public Safety Committee. “What you see is what you get. I think his ethics and his standards are unimpeachable.”

Dibble added: “I don’t believe for a second that staff is making any decision on anything other than objective criteria … and I stand in strong support of the program.”

Rep. Tim Kelly, R-Red Wing, chairman of the House Transportation Policy and Finance Committee, noted that Zelle has been transparent about his previous experience in the private sector.

“To me, the most important issue from the start is that he did disclose that,” Kelly said. “When there is a possibility of a conflict of interest, you watch that with a greater amount of detail.”