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HomeMy WebLinkAbout1997-09-08 City Council (25)City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES AGENDA DATE: SUBJECT: SEPTEMBER 8, 1997 CMR:371:97 REQUEST FOR DIRECTION ON WHETHER THE CITY SHOULD FUND AN AUDIT OF THE COUNTY OF SANTA CLARA TRANSPORTATION AUTHORITY AIRPORT ENTERPRISE FUND WITH REGARD TO THE PALO ALTO AIRPORT, 1901 EMBARCADERO ROAD REQUEST: This report requests Council direction on whether or not to undertake an audit of the Santa Clara County Transportation Authority Airport Enterprise Fund to determine if the County is in compliance with the terms and conditions of its tease of the City-owned Palo Alto Airport. RECOMMENDATIONS: The request for direction on whether or not tO proceed with an audit is being brought before the Council at the request of the Joint Community Relations Committee for the Palo Alto Airport and the Palo Alto Airport Association (Attachments A & B), which represent the tenants and users of the Palo Alto Airport. Staff supports the need for an audit and seeks Council direction regarding the extent of City funding, if any, to accomplish the audit. POLICYJMELIg~kTJ£!~: " The Palo Alto Airport is a City-owned facility which is leased to the County. As such, the City has the responsibility tO ensure that the County is in compliance with the terms and conditions of the lease, which includes proper accounting for revenues and expendituxes. The requested audit would help the City to ascertain whether or not the County has complied with the lease. The policy decision to be made is the extent to which the City funds an audit, which will benefit a limited number of Palo Alto residents (airport users). CMR:371:97 Page 1 of 6 BACKGROUND: On April 5, 1967, the City, as lessor, and County as lessee, entered into an agreement wherein the County would manage the Palo Alto Airport at a cost of $25 for a 50-year lease term. Contained in the lease are the following clauses: 6 (d) County will utilize revenues accruing to the County from the airport operation to reimburse General Fund of County for expenditures made for airport construction and maintenance at the Palo Alto Airport. 6 (e) County shall utilize all remaining revenues accruing to the County from the airport operation, after repayment per 6 (d) above, for maintenance, operation, or capital improvement of the premises. The lease implies, but does not require, that the County provide records to account for the revenues and expenses at the Airport. Accounting for the financial activities of the Palo Alto Airport is also complicated by the fact that the County owns and manages two other airports (Reid-Hillview and South County). For a number of years the tenants at the airport, the various airport organizations and the City have requested that the County provide documentation to show the amount to be reimbursed to the County General Fund and the revenues and expenses incurred at the Palo Alto Airport. In 1989, the County produeedreeords for the years.1969-1988 indicating the following: 1) County General Funds in the amount of $1,085~000 were used for capital improvements at the Palo Alto Airport and the County General Fund had not been reimbursed; 2) the County calculated Accumulated Depreciation of $819,000 related to the $1,085,000 in capital improvements; and 3) the Airport operated at a deficit of $79,000 in total for the period from 1969-1988. In 1989, the City and the County met to discuss these records. After the meeting, the City issued a letter to the County that summarized the discussion (Attachment C). The letter included the following information: O The County has procedures in place for separately tracking revenues, expenditures, depreciation, and net changes for each of the three airports to assure the proper accounting for all accounts. O The Courity committed to produce an annual report to the Palo Alto Airport community, which will present the airport’s finances in terms readily understandable to the airport users. CMR:371:97 P~e 2 of 6 O The County clarified that the County’s General Fund advance of $1,085,000 and the Palo Alto Airport’s net loss of $79,000 over the past twenty years is the extent of the County’s "deficit financing" of the Airport. O The County interprets the $819,000 of accumulated depreciation as a.fund for replacing Palo Alto Airport assets. In 1990, the County contracted with Harvey M. Rose Accountancy Corporation to provide an analysis of the Airport revenues and expenditures from fiscal years 1960-61 through 1987-88. The analysis confmued that between 1966 and 1986, the County advanced $1,085,000 from its General Fund for construction and maintenance at the Palo Alto Airport and revenues were not adequate to reimburse the General Fund. The analysis corrected the County’s 1989 report, establishing that for fiscal years 1960-61 through 1987-88, the Airport actually generated a net profit of $13,512 and accumulated depreciation totaled $758,504. From fiscal years I987-88 to 1994-95 the County provided an accounting analysis that indicated that during those seven years, the Palo Alto Airport generated a net profit of $401,984, no new monies were borrowed from the County General Fund, and the funds set aside for capital needs (accumulated depreciation) totaled $394,575. The County has not provided records for the Palo Alto Airport for fiscal years 1995-96 and 1996-97. A summary of the net profits and accumulated ttepreciation follows: Fiscal Years Net Profit Accumulated Depreciation 1960-61 - 1987-88 $13,512 $ 758,504 1988-89- 1994-95 $401~984 $ 394,575 Totals $415,496 $1,153,079 In December of 1995, the County raised the issue that "the County General Fund had lost a considerable amount of interest on the original loan of $1,085,000 over the years." The County further statedthat in order to determine how much interest was owed, it would have to identify when the loan took place and what the prevailing interest rate was at the time. Since the County raised this issue, the City has made repeated requests for documentation of the alleged loan. County staff responded that no written loan agreement exists. It was at this point that City staff began to discuss the possibility of jointly funding an audit to ensure that the accounting for airport revenues and expenditures was accurate. Early_.this CMR:371:97 P~ge 3 o~’ 6 year the City Auditor, City staff and a representative from the accounting firm ofDeloitte & Touche LLP (D&T) met with County representatives to discuss the possibility of an audit. Staffrequested D&T’s participation since it is under contract to the City for its external audit requirements. For a fee of $39,000, D&T offered to provide the following: 1)separate audited financial statements oftheAirport for FY 1995-96, including ¯ opening balance sheet audit as of J~ne 30, 1995, and including footnotes; 2)recommendations for revisions to the lease, including target reserves; and 3)list of facts gathered during the project related to the amount owed by the Airport to the County, as well as issues to be resolved and their recommendations. The County verbally indicated it would provide the information requested by the auditor but it would not participate in the cost of preparing the audit. The airport community initiated its request for an audit because they feel the County has been remiss in’its duty to provide funding for Airport security, maintenance and replacement of assets. Their concerns relate to security, since there have been three major fly-in burglaries in the last five years, and the lack 6f attention to infrastructure at the Airport, which has deteriorated to a point where airplanes have been damaged. Although the County has indicated it is planning to complete runway and other Airport capital improvements using Federal Aviation Authority (FAA) funds, the approval process has already taken several years. In the interim, there are potholes and tippled paving in need of immediate repair. The County has continued to tell the Airport users that there are no funds available. The Airport users also suspect that, contrary to the terms of the. lease, monies generated at the Airport are being spent at the other two County-owned airports. Based on the information received from the County through July 1995, there is $415,496 in profits generated from the Palo Alto Airport that could be applied to reimburse the County General Fund for its advance of $1,085,000. In addition, the County has set aside funds of $1,153,079 for replacing Palo .Alto Airport assets. In spite of this, County funding for maintenance and for capital replacement at the Palo Alto Airport has been minimal and the Airport’s infrastructure is rapidly deteriorating. In order to ascertain the current financial condition of the Palo Alto Airport and to facilitate the resolution of the financial issues described in this report, staff believes an audit by an independent third party is necessary. Due to the specialized nature of this assignment, the City Auditor and staff reeornmend that the firm of Deloitte and Touche be hired to perform this audit. This recommendation is CMR:371:97 Page 4 of 6 based on the fn’rn’s extensive experience with the County, and the Transportation Authority in particular, and its understanding of the agency’s unique operations. Since the County has indicated that it will not participate in funding this audit, staff is seeking Council direction regarding the extent, if any, of City participation in funding an audit. If Council directs staffto proceed with the audit, staffrecommends that the scope of the audit include: the preparation of an integrated set of ffnaneial statements that would provide the City wi~ the financial condition of the Palo Alto Airport as of July 31, 1997 (income statement and balance sheet); the identification of any amounts owed by the Airport to the County; recommendations for revisions to the lease; and information regarding any issues to be resolved along with recommendations. The City Auditor’s Office will continue to participate as part of the team overseeing the work of preparing the financial statements. Staff anticipates that, after the audit is complete, the County would have an integrated set of financial statements that would be easy to maintain on an ongoing basis. Staff would return to Council with a Budget Amendment Ordinance to fund the audit. Alternatives to the City funding 100 percent of the audit are: 1) continue to allow the County to maintain City of Palo Alto airport records without specific fund integrity; 2) continue to attempt to negotiate with the County to jointly fund the audit; or 3) initiate discussions with the tenants of the Airport regarding jointly funding the audit. D&T offered to prepare audited financial statements for FY 1995-96 for a fee of $39,000 (audit scope described above). Should Council direct staff to undertake the audit, staff recommends that D&T be selected to perform the assignment, and the scope of the audit be expanded to include FY 1996-97. Staffwould return to council with a Budget Amendment Ordinance to fund the audit. ATTACHMENT: Attachment A Attaehment B Attaehrnent C Joint Community Relations Committee.for the Palo Alto ,Airport letter Palo Airport Association Letter 1984 Letter to County CMR:371:97 Page 5 of 6 PREPARED BY: William W. Fellman, Manager, Real Property DEPARTMENT HEAD APPROVAL:""~ .~ (_~ ~ ~ ~.. Meliss~a Cavallo Acting Director Administrative Services CITY MANAGER APPROVAL: Assistant City Manager CC:Santa Clara Valley Transportation Authority/Airport Division Joint Community Relations Committee for the Palo Alto Airport Palo Alto Airport Association County of Santa Clara Airport Commission ATTACHMENT A Joint Community Relations Con~ittee for the Palo Alto Airport ~polntments Nicholas P. Petredis, Chair Frank L, Briski, Past-Chalr Peter Carpenter Glynn Falcon Curtis Weft William W. Pellman, City Staff Co~Ap~pointments Nadine Grundy Ann El~bach Pat Roy John Stern ~ames P. Thurber June 16, 1997 William W. Fellman Manager, Real Property City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94303 Re: Enterprise Fund Dear Bill: I write to report that our Committee ha~ voted unanimously to request that the City Council authorize and direct your department to undertake an audit of the Airports Enterprise Fund. We believe that in order to properly assess the distribution of funds in the past and to insure that Palo Alto’s airport receives its fair share of monies in the future, the fund must be audited. Moreo~ we recommend that regular financial reporfs be made by the County that set forth precisely the finandal condition of the fund. We hope the Council agrees that an audit will prove to be a worthwhile investment and a small price to pay for insurance that the fund is operated in accordance with sound accounting practices. Best ~g~ards, Chair NPP:ys cc: Committee Members Palo Alto Airport Association ATTACHMENT B August 1, 1997 Honorable Mayor and City Council Members City of Pale Alto City Hall 250 Hamilton Ave. Pale Alto, CA. 94301 RE: AUDIT OF AIRPORT ENTERPRISE FUND Dear Mr. Mayor and Council Members: On behalf of the members of the Pale Alto Airport Association, I would like to request that the City fund an audit of the Santa Clara County Airport Division Enterprise Fund. The Fund has a very murky past, and all previous attempts to shine a clarifying light have been futile. By way of background, the City leased the Pale Alto Airport to the County in 1967. The lease period was set at 50 years, and the City received $25.00 as rental for the entire period. In exchange, the County was to operate the Airport "as though it was the sole owner thereof", with full "responsibility in regard to the operation, management, and maintenance of the airport". Paragraphs 6. (d) and (e) of the lease are crucial to the long-standing dispute between tenants and airport management: "(d) County will utilize revenues accruing to the County from the airport operation to reimburse General Fund of County for expenditures made for airport construction and maintenance at the Pale Alto Airport. (e) County shall utilize all remaining revenues accruing to the County from the Airport operation, after repayment per 6(d) above, for maintenance, operation, or capital improvement of the premises." As far as we can determine, the ledger for the Airport Division was kept longhand, with all the airports lumped together, until the early 1970%. Therefore, no breakdown, by airport, of revenues versus expenses is possible. Furthermore, the County makes claims for the cost of extending/modifying Embarcadero Road, and constructing a road out to the Control Tower. The County claim is that the Enterprise Fund still owes the County General Fund moneys for these projects. However, no records of these expenditures have ever been produced to substantiate this position, to the best of our knowledge. Thus there is a serious question of whether the Pale Alto Airport is subsidizing the County or vice-versa. 1745 Webster St. " Pale Alto, CA 94301 - Phone 415-326-6699, Fax 415-328-7437 ATTACHMENT C OF’F’IC~OF" CITY_MANAGER (415) 329-2563 P. o. BOX !0,~50 PALO ALTO, CA 9430,3 October 24, 1989 Sally Reed County Executive County of Santa Clara Santa Clara County Government Center 70 W. Hedding Street San Jose, CA 95110 Dear Sally: I want to thank you for the cooperative efforts of the staff of the County Transportation Agency in responding to our many questions about the fiscal picture of the Palo Alto Airport. The recent meeting of County staff with Palo Alto’s city Auditor, our Real Property Manager, and a representative from my office was most productive." We now have a clearer understanding of theratiOnale used by the’ County in attributing expenditures to the Palo Alto Airport. A principal concern of ours, which was addressed at the meeting, was the issue of depreciation of capital assets.<. We have been assured by county staff that the.S2 million figure, ~ich appeared in the Transportation Agency’s August 28th memorandum to the Board of Supervisors, was not meant to imply that the Palo Alto Airport operations were "in deficit" by $2 million. County staff clarified that the County’s General Fund advance of $1.085 million and the Airport’s net loss of $79,000 over the past twenty years is the extent of the County’s "deficit financing" of the Airport°° County staff interprets the $819,000 of accumulated depreciation charges as a fund for replacing Palo Alto airport assets, a fund which your staff feels is necessary to ensure that future capital improvements are not financed from the County’s General Fund. As I understand it, as this fund accumulates, it will be used specifically for Palo Alto Airport facilities. I believe some important agreements came out of the meeting. I am told that the County has committed to produce an annual report to the Palo Alto Airport community. This report will present the airport’s finances in terms readily understandable to the airport Page Two users. The report will address the basic financial issues around which so many questions have arisen this year. The draft of the initial report will be reviewed by City staff and the Joint Community Relations Committee of the Palo Alto Airport to assure that it is what we all have in min@. I understand that procedures are also in place for separately tracking revenues, expenditures, depreciation, and net changes for each of the three airports as well as airport administration to assure the proper crediting of all accounts. WZ/VR/cj i ~ru~~ours ~ city Manlger "- Board of Supervisors Don Flynn, Deputy Director, Aviation Operations Jerry Rosenquist, Finance Director, Transportation Agency, Santa Clara County ,, Michael Rancer, Manager, Budget/Operations Analysis, .Santa Clara County ~ William Fellman, Real Property Manager, City of Palo Alto Mike Northrup, City Auditor, City of Palo Alto Vicci Rudin, Assistant to the City Manager,.City of Palo Alto Robert Whitworth, President, Palo Alto Airport Association Midge. Vaughn, Chair, Joint Community Relations Committeefor the Palo Alto Airport