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Staff Report 361-07
City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL ATTN: FROM: FINANCE COMMITTEE CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: SEPTEMBER 18, 2007 CMR: 361:07 STAFF RESPONSE TO THE PALO ALTO AIRPORT WORKING GROUP REPORT AND OPTIONS REGARDING THE FUTURE OF THE PALO ALTO AIRPORT RECOMMENDATION This report responds to the June 4, 2007 Palo Alto Airport Working Group Report; presents options regarding the future of the Palo Alto Airport; and requests Council direction on which option to explore. BACKGROUND The 50-year lease between the City and the County of Santa Clara for the Palo Alto Airport (PAO) terminates in 2017. On December 12, 2006, County staff presented to the County Board of Supervisors a business plan (Plan) for the PAO, which included an analysis of the lease; an overview of the County Airport Enterprise Fund; an analysis of the PAO’s finances; identified future capital investment needs; and recommended County action in anticipation of the lease expiration in 2017. The Plan noted that the County has assumed all of the business risk associated with operating the PAO; that the PAO has historically operated at a deficit; and that opportunities to generate additional revenue were extremely limited due to physical, environmental, and policy constraints. The Plan recommended that the County: 1) terminate its involvement in the PAO in 2017 or earlier if desired by the City 2) limit future County capital investment in the PAO to the local match necessary for essential, non-deferrable, Airport Improvement Project (AIP)-eligible maintenance projects or security related projects mandated by Federal agencies 3) require the City to submit all future AIP grant applications 4) raise tie-down rates and fuel flowage fees to help make the PAO financially self- sustaining and recover as much of the County’s original investment in the PAO (Outstanding Advance) as possible prior to the lease expiration. CMR:361:07 Page 1 of 8 The County Board of Supervisors approved the Plan, but delayed action on the disposition of the PAO for six months in order to provide the City an opportunity to present the County with viable development options for the PAO and time for the County staff to negotiate those options. PAAWG Report On December 18, 2006, Council authorized the creation of the Palo Alto Working Group (PAAWG) to analyze PAO operations and develop one or more viable business models for the PAO. The PAAWG was appointed by then-Mayor Kleinberg and included representatives from the City Council, City staff, the Palo Alto Airport Association, Stanford Hospital, the Joint Community Relations Committee for the Palo Alto Airport and representatives of stakeholder groups with an interest in PAO use and operations. On June 4, 2007, the PAAWG presented its report to the City Council. One of the principal conclusions from the PAAWG report (Attachment A) was that airport operations were profitable. Citing the City Auditor’s review (Attachment B) of the County’s Plan and its own financial analysis, the PAAWG reported that the "PAO has the economic potential to be self-sustaining, fund necessary improvements, and cover the City management overhead associated with the required functions such as Federal grant management." The Auditor found that airport operations generated $400,000 in adjusted net income over 37 years and the PAAWG report stated the airport had the capacity to generate a positive bottom line plus a $100,000 ;~set- aside" for capital improvements. Another principal PAAWG finding was that the airport was an essential community asset and that the County ignored numerous economic and social benefits the airport provided. These included: tax revenues generated by the airport that support local jurisdictions; transportation for businesses and their employees; transport for hospital patients and transplant organs; pilot training and certification; recreation space for the local community; emergency support activities; and the PAO’s part in the Bay Area airport and transportation system. To prove these benefits, the PAAWG cites a variety of statistics on airport employment, sales and property taxes, fees generated, and business activity. The PAAWG concluded: ¯The PAO is an important transportation, business, economic, recreational and emergency preparedness asset for the City and its residents; ¯The PAO can be operated on a self-sustaining economical basis and be cash positive without requiring any financial support from the City; ¯The continued operation of the PAO by the County will both diminish the resource value of the airport and threaten its long-term economic viability. These conclusions led the PAAWG to recommend that the City Council: 1. Direct the City Manger to negotiate an early termination of the existing PAO lease with the County; 2.Appoint an interim manager for the PAO; and 3.Issue an RFP for the long-term management of the PAO, which will ensure its asset value to the community is maintained and will preserve its economic value into the future. CM R:361:07 Page 2 of 8 County Action Following the PAAWG report, County staff reported to the Board of Supervisors on June 19, 2007 that the City had agreed to consider, as long as the County followed the City’s land development application process, a County proposal to develop 30 hangars on the vacant parcel along Embarcadero Road (this parcel is part of the PAO lease). The County indicated it would proceed with the preliminary work necessary to prepare such an application, but would most likely not proceed to final design because of project costs and until the City Council made a decision on recommendations contained in the PAAWG report.A formal request from the County has not yet been received. DISCUSSION City Consultant Anal,!sis and Comments To assess the County’s findings, the PAAWG’s recommendations, and the significant responsibilities of running a municipal airport, the City retained the services of an experienced airport manager. The consultant, R. Austin Wiswell, is the former Chief of the Division of Aeronautics for the State of California Department of Transportation, where he was responsible for administering the state’s airport grant and loan programs; permitting and safety compliance inspections of 243 public use airports and 140 hospital heliports; evaluating environmental issues; and conducting statewide aviation system planning to ensure integration of a regional, state, and national air transportation system. Prior to working for the State, Mr. Wiswell was the general manager of an airport management company that operated a county-owned airport in Sedona, Arizona; managed the Yolo County Airport for 4 years; worked for Allied-Signal Aerospace Company; and served for 23 years in the U.S. Air Force as a fighter pilot and headquarters staff officer. Mr. Wiswell prepared two reports: one focusing on Federal and State requirements for operating an airport (Attachment C); and the second commenting on the County and PAAWG reports (Attachment D). In the June 14, 2007 report, Mr. Wiswell outlines the obligations and responsibilities of the City as owner of the PAO. These commitments apply to the City whether the airport is leased to the County or run by the City. Citing Federal and State circulars and regulations, the consultant states, "It is a Federal obligation to have revenues exceed expenses such that the airport is financially self-sufficient and ... self-sustaining." This requirement is a direct consequence of accepting Federal and State grants for airport improvements. In addition, the use of grant money obligates the owner/lessee to maintain airport pavements, runways, taxiways, parking aprons and ramps. It should be noted that the City has already formally accepted the obligation to continue the airport usage to the year 2025 or reimburse the FAA for the unamortized portion of the two previous grants submitted and accepted by the County. Mr. Wiswell’s first report ends with a fundamental observation, "...being the owner-sponsor of an airport is a business matter; a property management business task .... the safe use of the ’property’ is task number one." The theme of running the airport as a business that is financially solvent and capable of meeting operating and capital requirements is basic and runs throughout Mr. Wiswell’s recommendations. On July 6, 2007, the consultant submitted his observations and recommendations on the County and PAAWG reports. His most penetrating and insightful question for the City to consider is "what does the City want the airport to be." In other words, what mission or purpose does the CMR:361:07 Page 3 of 8 City want the airport to serve in light of Federal and State mandates. A clear vision of a municipal airport’s role is needed before assuming operations. Such a vision would guide the timing of City control of the airport and how it will manage it. In Mr. Wiswell’s view, the airport’s primary value and overall purpose is as a "transportation node," a departure and arrival point. He compares this to the predominant, current use of the airport as a recreational and training facility despite its use by Stanford hospital and business travelers and its potential use for emergencies. While the airport has constraints, physical and master plan-wise, that prohibit it from becoming a commercial facility, there are opportunities to consider that will ensure long- term financial solvency. After making the essential point on a City vision or business plan for the airport, the Consultant COlnmented on PAAWG recommendations and statements: Early termination: The consultant supports exploring direct operational control by the City and to begin negotiating earlier termination of the lease. In his view, City operation of its airport as a public-entity responsibility will better serve its users and the community. Management of a City-owned transportation and economic asset can produce value. Before assuming control of the PAO, however, the report strongly recommends that the City needs to thoroughly educate itself on Federal and State obligations, risk exposures, and the liabilities it would assume with oversight. The City must notify both the State of California Aeronautics Division and the FAA of its intent to assume control from the County and to ensure that all past financial obligations and compliance requirements incurred by the County are known, resolved, and properly transferred. Interim Manager: It is important to distinguish between a "Manager," who has policy setting or contracting authority, and an "Operations Supervisor," who does not determine policy or enter into contracts, but who has authority to negotiate lease/rental agreements, collect payments, and authorize disbursements. Mr. Wiswell recommends initially hiring an Operations Supervisor who can eventually be promoted to an Airport Manager after the City evaluates their progress and success. Request for Proposal: Prior to issuing an RFP for a contractor for management of the PAO, the City should acquire more information from other airports concerning contractor operation of a publicly-owned general aviation airport, whether it be a for-profit or not- for-profit operator, an airport FBO, or a City-chartered entity. Specifically, the consultant recommends contacting representatives of three other airport operations. One is the City of Oceanside, which has struggled for years as to how its airport, currently run by the City’s Public Works Department, should be managed. Although the County of San Diego has offered to take over Oceanside’s airport given its regional importance, the City of Oceanside has decided to send out an RFP. The other airports are county-owned airports: one that is run by a for-profit organization and one that is not. The latter believes a not-for-profit entity, run by itself, provides more control over personnel issues. It is interesting to note that of the 243 state-inspected airports, only 20 are operated by an entity other than a County or City. CMR:361:07 Page 4 of 8 The consultant does not delve deeply into the points made by the County, Auditor, or PAAWG on the financial performance of the PAO. He does note, however, that the increases in tie-down and fuel flowage fees by the County are its only options to enhance revenue and recoup its investment even though attempts to increase revenue could have been implemented earlier. In his view, the fees may be somewhat high, but this is offset by what he regards as a seller’s rather than a buyer’s market for local airport facilities. He notes that currently interpreted restrictions placed on hangar expansion by the Baylands Master Plan and the non-indexed, long-term leases provided to the FBO operators severely restrict additional revenue opportunities. Specifically, the consultant states PAO has a revenue generation base which favors the tenants rather than PAO needs. He advocates creating a revenue generation system of many sources equitably applied across all PAO tenants, users, and uses. While recognizing PAAWG’s model for determining the broad economic benefits the airport bestows, the report recommends engaging an experienced professional entity to conduct a comprehensive economic impact survey and assessment of the PAO’s value to the community and its businesses. It is essential that the City develop a long-term revenue model that keeps the airport solvent and is able to meet Federal and State matching requirements for capital projects as well as infrastructure improvements not funded by Federal or State jurisdictions. As stated, the t3aylands Master Plan prohibits an increase in the intensity of use of the PAO. Mr. Wiswell argues that building additional hangars does not necessarily translate into more intense use. A short, single runway and demographic and economic factors may affect the number of future airplane flights, and it is not certain that use will intensify. Moreover, he states that there have been architectural modifications to hangars that make them aesthetically less intrusive. He recommends the City re-examine its Baylands Master Plan to determine if an accommodation can be made for additional hangars and relocation of the terminal facility. Additiona! hangars represent an enhanced and steady revenue base. One FBO operator has noted that hangers are in strong demand by airplane owners. Additional Issues One issue not considered in the PAAWG or consultant reports that will have a significant bearing on the future of PAO is the anticipated improvements to San Francisquito Creek. The Army Corp of Engineers will complete its report in 2010. One of the alternatives being considered is to return the creek to its former location, which would cut across the golf course and run down Embarcadero Road to the Bay. At the very least, staff anticipates that the recommendations will include extensive repairs to the current levees, including the levee the County built on the easterly edge of the airport and for which it now wants to terminate any maintenance responsibility. Another issue is hazardous materials. In anticipation of a return to City control of the PAO in 2017 or earlier, City staff from Pla~ming, Public Works, Administrative Services and the Attorney’s office performed a cursory inspection of the PAO including the FBO buildings. In addition, the Fire Department regularly inspects the airport. Overall, the PAO is in good condition, especially with the improvements on the Roy Aero FBO property. The hangars are in remarkable condition considering their age. Due to the age of the buildings, however, and prior use of the PAO by the military in World War II, staff is concerned about the presence of CMR:361:07 Page 5 of 8 hazardous materials. Staff is recommending a hazardous materials investigation be undertaken as one of the steps in determining the future of the PAO. Staff Response to the County and PAAWG Reports and Consideration of Options The County staff’s proposal to terminate the lease in 2017 and offer to terminate even earlier places the City in a perplexing situation. By belatedly trying to recapture the Outstanding Advance (a term the County coined for the difference between the County’s total capital investment, including grant matching fees, and the net revenue generated over the life of the lease) and building cash for future grant funding matches, the County has alienated its customers with higher fees than surrounding airports and is forcing the City to make some untimely and difficult decisions. City staff does not have the County’s expertise in overseeing or running an airport and it will take time to build a viable knowledge base. Staff acknowledges the PAAWG’s concerns about the County’s steep increases in fees and the potential for deterioration in airport infrastructure. To ensure the latter does not occur, City staff believes it necessary to work more closely and cooperatively with the County on Federal and State grants. This would enhance staff’s knowledge, fulfill a basic City obligation to understand the implications and terms of receiving a grant, and provide a realistic transition into eventual oversight of the airport. Based on government requirements and the County’s work to (e.g., a complete repaying of the airport in 2001, repaving a portion of the access road, installing perimeter fencing gates, and implementing a noise implementation program), it is unlikely the County will ignore basic improvements. The County has a good record with the State on correcting safety issues, and the users of the PAO appear to approve of current on-site staffing levels. In addition, the County has been cooperative in meeting fire and storm water run-off regulations. Although the County is focused on recapturing its Outstanding Advance, it is likely to meet its minimal operating and capital commitments. The City has three options: ¯do nothing and wait until the lease expires in 2017; ¯assume responsibility for the PAO immediately; or, ¯plan for an orderly transition to City oversight and taking a more active, immediate rote in the PAO operation. Doing nothing exposes the City to short and long-term uncertainties. Deterioration of the facility is a possibility that could increase future capital costs and impose further burdens on users and the City. Moreover, the review of Federal requirements indicates the City should assume a more knowledgeable role as owner of the airport. In staff’s view, the PAAWG’s recommendation to take over the airport immediately is far too aggressive and ignores the City’s lack of expertise in overseeing airport and the necessary due diligence in preparing to run a business operation. Mr. Wiswell does not recommend an immediate takeover and staff believes the City is not in a position to assume the responsibilities this action engenders. Staff agrees with Mr. Wiswell’s suggestion, that before undertaking the responsibilities of the PAO, the City must have a clear mission for the PAO and a clear picture of the tests it faces. He notes, for example, that the number of active pilots is reaching a plateau; that the Federal Aviation Administration is considering imposing fees on general aviation activity; and that the CMR:361:07 Page 6 of 8 costs of insuring and maintaining airplanes may have a substantial dampening effect on the number of plane owners and their flights. Before the City enters into the airport business, the financial impact of these trends requires evaluation. As stated, due diligence is required in any new business venture. Being self-sustaining is not only a Federal and State requirement, but a necessity given the financial challenges the General Fund faces. To assure the financial viability of the airport, the City will need to explore future financial relationships with the two FBO’s, carefully weigh the Baylands Master Plan guidelines, and seek a better balance between the current recreational model, the FBO role, and any additional business potential the airport may have. For example, the PAAWG’s revenue analysis for the past 4 years (page 5 of its report) indicates that the County is receiving a relatively low 22.6 percent of airport total net earnings with the remainder going to the two FBOs. This relationship, while understandable from an historical perspective, requires realignment to more adequately reimburse the City for its risks. The County is realizing a modest profit ($11,000 per year over 37 years), but staff believes that the long-term operational and capital needs require a stronger revenue base. By including depreciation in its public statements about the airport’s financial condition, the County does bend the picture of its cash position. Nevertheless, staff agrees it is necessary to set aside monies, as the PAAWG notes, for capital matching requirements and projects that are not funded by the Federal or State government. Staff finds option 3 the most viable. It would provide for a gradual, "open-eyed" transition to City airport oversight. The transition could occur in approximately 3 years. This will allow time for: Council consideration and development of the airport’s mission. Staff work with the County to master basic information and requirements. An outline of all City obligations and responsibilities for the PAO whether it operates the PAO or contracts it out. An economic analysis to determine the long-term viability of the PAO and providing assurance that sufficient funds can be generated to offset annual expenses and capital work. A thorough Hazardous Materials analysis. Obtaining written confirmation from the County on a waiver of re-payment of the "Outstanding Advance." Assessing and seeking the most viable management arrangement for the airport. Consideration of the Army Corp of Engineer’s recommendation on San Francisquito Creek A complete legal analysis of the County/City PAO lease and examination of all the airport contractual agreements. In conclusion, staff recognizes the many benefits the airport currently provides and can provide to the greater community. Staff does not support the PAAWG recommendations to appoint an interim manager or to issue an RFP for the long-term management of the PAO at this time. Running the airport is a major responsibility and must be approached with careful planning. A gradual transition period that addresses the issues identified in this report is recommended. CMR:361:07 Page 7 of 8 RESOURCE IMPACT Staff will return to Council with estimates and a budget request for the option chosen by Council. POLICY IMPLICATIONS StafFs recommendations are consistent with City policy and based on information included in the reports by the City Auditor, the PAAWG, and the Consultant. ENVIRONMENTAL REVIEW An environmental impact assessment (EIA) as may be required by the California Environmental Quality Act (CEQA) will be performed in connection with future Council decisions regarding the PAO. PREPARED BY: / WILLIAM W. FEIfLMAN Manager, Real Property DEPARTMENT HEAD APPROVAL: CARL Director Services CITY MANAGER APPROVAL: ATTACHMENTS Attachment A: Attachment B: Attachment C: Attachment D: PAAWG report Auditor’s Report June 14, 2007 Consultant Report July 6, 2007 Consultant Report County of Santa Clara JCRC Chair of the PAAWG EMILY HARRISON Assistant City Manager CMR:361:07 Page 8 of 8 ATTACHMENT A (Without Appendices) Palo Alto Airport Working Group (PAAWG) Report to Palo Alto City Council: The Communi,O; Value, Economic Viabili~ and Future Management of Palo Alto Airport May 2007 Palo Alto Airport Working Group (PAAWG) Concluding Report and Recommendations to Palo Alto City Council PAAWG Resolution: The PAAWG, having carefully reviewed the operation of the Palo Alto Airport resolves: 1 - The Palo Alto Airport is an important transportation, business, economic, recreational and emergency, preparedness asset and resource for the Ci~’ of Palo Alto and its residents. 2 - The Palo Alto Airport can be operated on a self-sustaining economical basis and be cash positive without requiring any financial support from the Ci~’. 3 - The continued operation of the Palo Alto Airport by the Count}.,’ will both diminish the resource value of the Airport and will threaten its long-term economic viability. The PAAWG hereby recommends that the City Council direct the City Manager to negotiate an early termination of the existing Palo Alto Airport lease with the Coun~~, appoint an interim manager for the Airport, and issue an RFP for the long- term management of the Airport, which will ensure its asset value to the community is maintained and will preserve its economic value into the future. >>> Passed unanimously by, PAAWG (with Larry Klein, City of Paio Alto, Vice Mayor, Bill Fellman, and Chris Mogensen not voting). Executive Summary In late 2006, the City Council authorized the creation of the Palo Alto Airport Working Group (PAAWG) to advise the Council on two basic questions: ¯Is the Palo Alto airport an important community asset? ¯Can the Palo Alto airport be run on a profitable basis? The PAAWG was tasked with providing this assessment to the City, Council within 6 months. The information contained in these pages represents the output from the PAAWG efforts and hopefully provides the Palo Alto City, Council with an independent assessment of the Palo Alto Airport as an important community asset, to both the city and the region, as well as a perspective on the economic value and other benefits of the airport to the City of Palo Alto and its residents. Purpose: This report is the PAAWG response to the City, Council’s request for information and a recommendation to the City, Council about Palo Airport management vis-i~-vis Santa Clara County (the current lessee), regarding the impact and timing of a structural change in the operations lease. This report addresses: ¯The airport’s value as an essential community asset ¯The airport’s actual and derived economic contribution ¯The airport’s operations and management ¯The airport’s future alternatives and management recommendations. Notwithstanding its very interesting and profitable history, the Palo Alto Airport has recently been judged by the Santa Clara County Airports Division as a target for divestiture due to County reported negative financial performance. This inaccurate judgment appears to be more representative of a political decision than a carefully considered economic analysis. The County has ignored the Palo Alto City Auditor’s audit of County finances, which proved the economic viability of the Palo Alto Airport (which earned more than $400,000 over the past several years), and it also ignores the value of many other economic benefits such as tax revenue and the economic value of emergency support activities at the airport, many of which have enormous value to the City: of Palo Alto as well as the entire Bay Ar, ea. Herein lies the principal issue and the reason for this report - the Palo Alto CiU Council wishes to have a concise and independent evaluation of the airport’s economic value to the community in order to make a judicious decision on the future of this essential resource. -2- Palo Alto Airport Working Group Findings Palo Alto Airport (PAO is the FAA airport identifier code) is a vital component of the local transportation net~vork and has many important community benefits: 1.Support for local business travel requirements 2.Transportation of patients and transplant organs to Stanford Hospital 3.Initial pilot training, certification, and bi-annual reviews 4.Recreation space for the local commtinity 5.Serves as an important link to vital services and supplies in the event of an earthquake or other major emergency incident 6.Part of the overall Bay Area airport system and transportation infrastructure See Appen-dix 1 -A: Palo Alto Airport - Essential Community Asset Pa!o Alto Airport is a significant part of the local economy, directly employing some 275 full and part-time flight instructors, maintenance technicians, administrators, and various other workers. The total annual revenue is $12.5 million dollars and total payroll is approximately $5.3M. Property and sales taxes amount to over $2 Million annually, supporting the local schools and communiD, colleges as well as the City and County general funds. The Paio Alto Airport is an essential communiU’ asset, addressing many communil3~ needs and interests, as well as, providing an array of important economic benefits to the Ci~ of Palo Alto. PAO has the economic potential to be self-sustaining, fund necessary improvements, and cover the City. management overhead associated with the required City oversight for functions such as Federal grant management. Palo Alto has had an airport since 1928 and now boasts the busiest single runway airport of its size in the country with around 200,000 operations annually. It also is host to the country’s largest flying club, West Valley Flying Club (a non-profit organization), and to four smaller flying clubs. In addition, the Palo Alto Airport is a pilot training resource for a broad variety of people, from celebrities such as Joe Montana and several US astronauts to ordinary people like \’Ok, me, allCl lrl;:lrtv Ol t_n.iv lll~l~llOOl-b. -3- Summary Economic Overview of Paio Alto Airport (PAO) today - Actual airport revenues total about $1.75M, of which 94% are sourced from rental and lease income, with the remaining income from fees received for transient parking and airport fuel flowage (a common source of revenue for an airport operator). The total direct expenses are for personnel, totaling $442,000 at the Count?;, and an additional amount, totaling $438,000 for employees of the two Fixed Base Operators (FBOs) at PAO. An FBO is an independent (non- governmental) entit?, associated with airport services, operations or maintenance. This provides a ~ross martin of nearly 50% - a positive cash flow from current airport operations. Most of the major infrastructure expenses (i.e., runway and taxiway resurfacing, automated weather reporting, runway lighting, security fencing, etc.) for airports throughout the counto, are applied for and covered under the FAA Federal grant system. Staffing and operational costs for the FAA Tower at PAO are not paid by Santa Clara County or the City of Palo Alto, but are separate and also covered by the Federal Budget. The PAO tower facility and the professionalism of its ATC (Air Traffic Control) staff are what make the number of annual flight operations at this airport possible. PAO is part of the regional and national transportation system. It is simply the "on-ramp" to the vast network of airports and airways leading throughout the nation and the world. As such, it supports the business, medical, emergency, and personal transportation needs for the community. But, there are direct local benefits as well, such as pilot training and providing jobs doing the essential work of the airport. Airport businesses have a combined payroll of $5.3 Million, a significant percentage of which is spent in the local community. The PAAWG notes that the scale of flight operations at PAO is a direct indicator of this regional value. Palo Alto Airport (PAO) SC County FBO-I FBO-2 PAO Total Revenue (Income) Lease Income $_ 6.~,M4 $946,168 $274.500 $1,784,012 Transient income $57,402 $0 $0 $57,402 Fuel Flowage $49.750 $O $__Q0 $49.750 Total Revenue $670,496 $946,168 $274,500 $1,891,164 Operating Expense (Salaries,Benefits, And Maintenance) Net Earnings (Loss) % Rev. 94.3% 3.0% 2.6% 100.0% ¢___.~__~499 ~ $338,048 $100,000 $880,303 46.5% $228,241 5;608,120 $174,500 $1,010,861 53.5% -5- Current State of the City/County relationship The County of Santa Clara Roads and Airports Department operates the Palo Alto Airport (PAO) under a lease agreement with the City of Palo Alto which expires in 2017. Moneys collected by the County at the airport flow into an enterprise f~and which is independent of the tax-supported general fund. The County has clearly stated that it does not want to continue operating the airport after 2017. The County asserts that it loses money at PAO, but the City auditor’s report disputes this view and also notes that CounD, overhead charges amount to 40% of revenues collected by, the County at the airport (this does not include tax revenue). A bulk of the total revenue at PAO is collected by the two FBO sub-lessees who have long-term lease agreements with the County., which also expire in 2017. After 2017, these sub-leases will also expire and all property at PAO will revert to the City’. Also after 2017, the combined revenue for all facilities at PAO should be expected to be much larger than what the County. collects today. All of the hangars at PAO were built by and are further sub-leased by the FBOs to - aircraft own.ers, as agreed under the County. to FBO sub-leases. Hangars are rented at market rates and produce a very large profit because there is a strong demand and a shortage of available units. Reid-Hillview (RHV) Airport, which the County, o~vns and operates, shows a veD, satisfactory profit due to its hangar rentals, which the Count), rents directly to aircraft owners and operators. At PAO, the County’s lease agreement with the two FBO’s generates only modest revenue for the County; with most of the cash flow from the rental of hangar space flowing to the FBO sub-lease holders. Recognize that the lease agreement between the Count), and the FBO’s was completed many years ago and the terms were made attractive to encourage the private investment necessary to fund hanger construction. Current FBOs, like most local real estate investors of the period, are now simply reaping the reward from their earlier private investment. -6- Some Sources of Conflict- Split Ownership and Management with Conflicting Decision Making In 1978, the City adopted a Baylands Plan which stated, relative to the airport, that "no changes are planned which would take over a significant amount of the airport, and that a second runway would not be built. The Airport will have two Fixed-Base Operators, but a third will not be built." There is no included definition of"Fixed Base Operator," thus the exact meaning and intent of this last statement is unclear. The lease with the County was amended so that a second runway could not be added and no expansion of tie-down space beyond 510 spaces could occur without the concurrence of the Ci~,. In October of 2005, the County produced a Master Plan for PAO. It included some changes required to the airport layout to bring the taxiways more into line with FAA guidelines and move the heliport to comply with FAA Heliport guidelines. It also proposed a Baylands Welcoming Center and a new terminal, moving the terminal bey.ond the FAA defined "runway safety zone." Recognizing the need for more hangars to provide protection for some (typically more valuable) aircraft and their associated income generating potential, the plan also calls for adding 18 hangars adjacent the taxiway North of Embarcadero Road. It also raised the possibility of additional hangars closer to Embarcadero Road, but made no recommendation in this regard. If these hangars were built, it would raise the total number of new hangars to 29. Significantly, the plan did not call for any increase in runway length or width. The design and location of the terminal are thought to be highly negotiable. The current terminal is in an old "temporary" building and cannot be significantly modified in its present location as it lies within the runway protection zone and is a non-conforming use. During the development of the PAO Master Plan, the County’s consultants were aware of the City Baylands Plan and as a result showed only modest changes to the Airport. However, one particularly important point for the County was the construction of additional hangars, as these would have generated additional income to further increase the County Airport Enterprise Fund. The County’s PAO Master Plan was in conflict with the City Baylands Plan, which would have required some modification to permit the improvements envisioned by the County plan. Ostensibly, the County, improvements would have been done with FAA funding, but hangars are not eligible for Federal Airport Improvement (ALP) Program grants. It was at this point in time that the County Roads and Airports Director decided that the County should abandon the airport at the end of the lease. Clearly the Roads and Airports Department is frustrated by constraints placed on PAO, which are not under CounD’ control. Without the potential income from the new hangars and due to the perceived constraints, the County argues that the Airport will likely lose money in the furore and cited various -7- other "business risks" in continuing to operate PAO. The County’s Business Plan states: "The airport is severely constrained from physical, environmental and policy standpoints; existing City policies specifically prohibit physical expansion of the airport into open space areas [on the airport property], significantly increasing the intensity of operations, or adding a third FBO. In light of these constraints, only minor changes to the Airport’s airfield area were identified in the Master Plan." Oddly, the Roads and Airports Department paints a much rosier picture for South County Airport (El6), which has always required a subsidy from the Enterprise Fund and has been far more costly to manage in terms of land acquisition and facility improvement expense - South County revenues have not covered these costs to this day. Without the constraints posed by the PAO location, the County., hopes the South County., Airport may prosper sometime in the future. Once the County decision for non-renewal was taken, the Roads and Airports Department decided to try to maximize its revenue and minimize expenses as it says in the business plan: "The loss of PAO would not present any operational impacts to the County airport system because each airport’s aeronautical activities are independent." With this view, the Roads and Airports Department is imposing a 7.5% increase peryear, co~lpozmded in tie-down rates paid o~, at PAO and doubli~g PAO fuel flowage fees (again, not at other County airports). These rates are thus higher than surrounding airports and the gap will widen further over time, but the long-term effects on PAO can only be speculated upon at this point. The County’s PAO Business Plan also states that it seeks to "Limit future County capital investment in the airport to the local match necessary for essential, ~o~- deferrable, (emphasis added) AIP eligible maintenance projects or security related projects.. 2’ The plan further predicts that the tie-down rate and fuel flowage increases will recover an additional $1 Million during the remaining period of the lease. Without other action, these policies will severely impact the quality of Palo Alto Airport facilities the County returns to City control in 2017. The County Board of Supervisors will, in the next few months, be asked to make a policy determination allowing The Roads and Airports Department to abandon its involvement in PAO in 2017 or sooner by agreement with the City. Absent a Board of Supervisors decision compelling the Roads and Airports Department to operate its three airports as a Countywide system and spread the cost burden in a balanced manner, the Board of Supervisors will likely vote to uphold the Roads & Airports Department program for exiting in 2017. In the meantime, the Roads & Airports Department is proposing a temporary hangar project to generate additional revenue during the remaining period of the lease. If this new construction is not approved by the City, it is possible that the Roads and Airports Department will consider this %ause" for early termination of the lease and exit sooner than 2017. -8- Action Scenarios Contemplated and Transition Control: There are three reasonable courses of action which have been contemplated for the City: Do nothing. The lease will expire between Santa Clara Count?, and the City of Palo Alto in 2017. The two major FBO leases would likely continue until term in 2017. The Count?; would likely continue its demonstrated reduction of Staff commitment and shift funding to support South County Airport (El6) and Reid Hillview Airport (RHV), at the ’expense’ of Palo Alto Airport (PAO) via ignored grants and deferred maintenance. The Palo Alto Airport would likely revert to The City of Palo Alto in a condition further deteriorated than it is at present. Implications ofcontinuin~ the lease with the CounW until 2017. Under this scenario, the County Will collect an additional $1 Million in excess of expenses due to increased tie-down and fuel flowage fees. Fuel flowagq dropped precipitously with the County increase in flowage rates, and it is not clear that this will produce any extra revenue. Planned tie-down rates at PAO will have increased by a factor of 2.06 by 2017, with the smallest (and typical) rate then being $248/month. Other CounD’ airports will be at an estimated $154/month by that date. Only "non-deferrable" maintenance will be performed which will likely result in a maintenance backlog and a l\mher deterioration of PAO airport facilities. The increased tie-down rates, coupled with the disinvestment in the airport, will probably cause some reduction in flight training and flying club activity and the consequent loss of some jobs at the airport. Personal property taxes collected at the airport could also be somewhat reduced, due to aircraft leaving PAO. Past experience with County errors confirms this price elasticity. If the Count}.., constructs the proposed temporary hangars it will derive additional income, but there will be no corresponding benefit to the City.. In any event, in 2017, the City must be prepared to take over airport operations. Although income potential will be much greater in 2017, if the City inherits and assumes responsibility for the operation of considerably depreciated PAO facilities, it could be many years before profitable rental and service activities are realized. An alternative, i~; for the. (~it\, In reqn~qt the ~n~mtv P~onrd nf gh~pervi¢or~ to reject its Roads and Airports Department recommendation to terminate the lease in 2017 and force renegotiation of terms acceptable to both parties. Act no~v- grant the CounlT wish to end their management responsibilit3, for the Palo Alto Airport. Negotiate terms favorable for a balanced reversion back to City control. Manage the financial transition well, including capital accounts and claimed accruals. Manage the transition pursuant to a specific City designated Palo Alto Airport management authority which would receive policy guidance from Palo Alto City Council. Under this scenario, there are two alternative paths, either at the option of the City or because the County feels it has legal grounds for early termination: Implications ofendin~ the lease with the County early where the City of Palo Alto operates the airport. Under this option, PAO airport revenues would flow to the City,’. The City would need to establish an Enterprise Fund in order to accurately account for revenues and expenditures. This would be in accordance with the FAA requirements for airports accepting Federal AlP funds. The City. could determine what tie-down rates should be charged on the basis of what is the best balance for the City and the airport in the long-run. The City.; could schedule maintenance and apply for the corresponding FAA grants at its option, thus insuring timely repairs. The County FBO sub-leases are o.bligations running until 2017 and would accrue intact to the City. (If the sub-leases were to be cancelled, the FBOs would likely expect compensation corresponding to the benefit they derive from their business through 2017.) An analysis (see Appendix l-D) shows that the airport could be run profitably by the City., until 2017, while honoring the existing County FBO sub-leases and yielding income of $100,000 which could defray City., management costs and/or create a maintenance reserve needed for deferred maintenance and code upgrades when the leaseholds revert to the City. After 2017, the airport would generate sufficient cash to provide for any contingency. Implications of endin~ the lease with the County early where the Ci>, of Palo Alto contracts operation to an outside airport manauement firm or entity< The City could, at its option, contract PAO operation to an independent airport management organization. There are alternatives under this option which are more fully described below. Basically, PAO would be run independently and the City would have minimal responsibility for it. Nevertheless, the City would have oversight responsibili~ as it does with any independent contractor working for the City. The Ci~ would also have responsibility for signing off on and complying with Federal grants which fund most of the capital projects at the airpo~. The work of preparing grant requests, filing documentation, and required repots would be done by PAO airport staffwith minimal City the "bandwidth" to operate the airport directly. It may prove antithetical to the community service oriented facility as the profit expectations of an FBO may not allow for adequate reinvestment in the airport. -]0- Wait, study, deliberate for 3 to 5 years. The costs of transition will continue to increase over time. Uncertainty of operating expense management will continue (i.e., fuel flowage, tenant charges, collections). A Sinking Fund or other allowances for capital improvements are difficult to arrange, so they remain deferred. Quality of service and property will continue to deteriorate during this period. There are other management considerations necessary for effective control assuming a transition from Count3, to City control. Should the County act in a way to force a City decision, the City could consider asking one of the present Fixed Base Operators at the airport or the West Valley Flying Club to manage short-term operations at the airport. These organizations have the capability and computer power to facilitate such an interim transition. They have been approached and are willing to support the transition from County to City in whatever way the City deems desirable. This approach may present a conflict of interest condition were the City to use a FBO. While choosing a FBO may represent a management expedient, it may contrast the community-service aspect of the airport with the inherent profit motive of a FBO.- Consequently, in the event of aggressive behavior being exhibited by the County, the PAAWG recommends contracting with the West Valley Flying Club and using their facilities, equipment, and personnel to facilitate transition to City control. A second alternative would be for the Palo Alto City Council to form a special district, although this may create additional, complex control issues for the City of Palo Alto. Finally, there are a few external, independent airport management companies, but their work is often linked to an adjacent or significant real estate developlnent mission and their profit expectations lead to a problem similar to using a FBO to run the airport. The Palo Alto Airport Workin~ Group does not recommend tbrmino_ a special district, or assianing management responsibilit-,, to one of the FBO’s. or hirin~ an outside commercial airport (i.e.. real estate development) management compan?~. The Palo Alto Airport Working Group recommends the Palo Alto City Council: Form a non-profit management company to manage PAO airport. Staff requirement is small (5-6), would live locally, and there are many skilled people to consider. They are paid from airport operations. A local non- profit management company wonld be best to keep employment and direct costs low in keeping with the size of the airport. This serves as the !bca! ,~,~,~ ~ ~ ..............*¯ ~u ......to the ~n ....~ -]]- Or, a non-profit corporation could be contracted to run PAO airport. The airport community includes many people with the interest, commitment, and ability to form and operate a non-profit organization which could respond to a City RFP to make this happen. The organization would be responsive to City, requirements, take care of all administrative tasks, and do all the grant administration with City oversight. Airport finances would be essentially run as an enterprise fund with all money needed for airport operation collected from users with no burden on Palo Alto taxpayers. Taxes collected at the airport would flow to the City, County, and schools as they do now, with none of these funds used to support the airport. The City would be paid for management functions required and reimbursed for expenses incurred by the City Attorney, Auditor, City, Clerk, etc. The PAAWG did note that a local non-profit management company eliminates the need to add direct Cityl staff at Palo Alto beyond what they would currently do in conjunction with managing via the County to sustain the federal grant application process. This decision will determine the future of our airport. -]2- Glossaw Tie-down - A place on a paved or other designated spot on the airport property with secure attachment points where airplanes are secured by ropes or chains to prevent movement. Hangar - An enclosed building for storage of aircraft, with a roof, walls and a door. Sizes vary depending on the aircraft stored. Larger hangars are tTpically also used for the commercial service of aircraft, from mechanical to electronics work, including partial tear-down for annual inspections and sometimes for major repairs. Shelter - An open-sided, covered structure for aircraft storage which provides shade for parked aircraft. Generally considered inferior to hangars, yet preferable to tie-downs, since it does provide some protection from the elements. There are currently no shelters at PAO Airport. Sub-lessors - At an airport, these are usually aircraft owners who rent or lease tie-downs or hangar spaces. They include any business on airport proper-t3, that does not own its properb,, this includes FBO’s (below). FBO - Fixed Base Operator - These are businesses critical to airport operations with responsibilities defined under FAA regulations. At a minimum, these are fuel service operators and primao, maintenance facilities. The term does not include eateries, car rental businesses, service companies who only, clean airplanes, or airplane rental organizations. Part 135 Operator - This term refers to a part of the Federal Aviation Regulations (FARs), under which they operate. Most "air taxi" and other "for hire" operations (except for flight instruction) fall under these rules, which are generally more restrictive than Part 9t (see below). They must meet the highest level of preventive maintenance inspections. Part 91 Operator - This term also refers to a part of the FARs, under which these organizations operate. Most not-for-compensation, personal, and business flying are governed by the rules stipulated here. Flight instruction is included under Part 91. This class of operations is typically non-scheduled flying. General Aviation - All flying other than commercial airlines and military aviation operations is considered Generai Aviation, which represents 75% of all US flying. Terminal - A place, often a building, through which passengers pass to access aircraft. Palo Alto has a terminal on the San Francisco Bay side of the airport. Flying Club - A group of people who organize to share the usage and operations cost of aircraft. A club can be a few individuals sharing ownership of a single aircraft, or like several of the larger clubs at PAO, can provide professional full-time management, scheduling, maintenance, and other ancillary services such as flight instruction. Tower - Palo Alto’s Federal Air Traffic Contro! Tower (ATCT) is staffed by Federal employees from 7 AM until 9 PM, providing radio communications, assisted by radar, to aircraft flying in the 5 mile vicinity and on the ground. The ATCT staff interacts constantly and intensely with flight operations at nearby airports from San Francisco to San Jose to provide safe and timely aircraft flight control and advisory, services. -]3- ATTACHMENT B City of P alo Alto June 6, 2006 Honorable City Council Palo Alto, California cc: Joint Community Relations Commission Review of Palo Alto Airport’s Financial Condition and Comments on Santa Clara County’s Proposed Business Plan for the Airport SUMMARY Santa Clara County’s proposed business plan for the Palo Alto Airport (Airport) highlights Airport deficits and proposes to dramatically increase tie-down fees1 to recoup the outstanding advance used by the County to construct, maintain, and support the airport. Our analysis of the financial statements, County documents, and City records indicates that Palo Alto Airport operations have generated more than $400,000 in adjusted net income2 over the last 37 years that has been used to offset the County’s original investment of $1,085,134 ($681,349 as of 6/30/05). In recent years, the Airport has remained profitable although County pooled and overhead costs total over 40% of the Airport’s operating expenses. Because the Palo Alto Airport is bearing more than 30% of the County’s pooled airport costs for its three airports, the operating income for the remaining two County airports would be adversely affected if the Palo Alto Airport lease were to be terminated However, County staff indicates that significant budget reductions would offset the loss of Palo Alto revenue. The proposed tie-down fees would be higher than nearby airports. We question whether current Airport users should bear the burden of historical deficits from the 1960’s and 1970’s (especially since recent years have been profitable), and specifically whether current Airport users should bear the full cost of 1973 Embarcadero Road improvements and 2005 Baylands levee repairs. Our analysis also indicates depreciation calculations should be cited with caution because depreciation expense does not affect the County’s annual calculation of the outstanding advance. In addition, we suggest that the allocation of County overhead to the Airport be trued-up at the end of each year. Given the recent profitability of the Airport, we estimate’the County’s remaining outstanding advance of $681,349 may be settled before the lease expires in 2017, even without the proposed 30% increase in tie-down fees. Before 2017, the viability of the Airport may be impacted by: developments in the San Francis~quito Creek project; implementation of some of the more feasible aspects of the County’s proposed i Tie-down fees are charged to aircraft tenants for outdoor storage of their aircraft. The County operates 362 of the 468 tie-down spaces at the Palo Alto Airport. The other tie-downs and all of the hangars at the Palo A!to Airport are owned and operated by the FBOs. 2 We are using the term "adjusted net income" to mean operating revenues (not including federal and state grants), tess operating expenses (not including depreciation), plus net non-operating revenue/expense (including capital expenditures net of federal and state reimbursements) -1- master plan; and/or the advent of new very light jet aircraft. After 2017, opportunities exist to increase revenue after the County’s subleases with the two fixed based operators (FBOs) expire. RECOMMENDATION: Authorize the City Manager to notify the Santa Clara County Board of Supervisors that: 1) The City of Pato Alto supports moderate increases in tie-down fees at the Palo Alto Airport, but the fees should be competitive with fees at nearby airports. 2) Because it is a regional resource, the City expects and encourages the County to continue operating the Airport per the terms of the lease through at least 2017. 3) The County has benefited from operating the Palo Alto Airport, and should continue to maintain and improve Airport facilities per Federal Aviation Administration (FAA) regulations. The City has agreed to provide grant assurances when necessary. BACKGROUND Lease agreement: The City of Palo Alto (City) owns the land where the Airport is located, tn April 1967, the County of Santa Clara (County) and the City entered into an agreement under which the County leased the Palo Alto Airport property from the City for a term of 50 years (through 2017) for a payment of $25 for the entire term of the lease. Under the terms of the lease, all revenue from the Airport was to be used to reimburse the County for expenditures made to construct and maintain the Palo Alto Airport, and for continuing operations. maintenancel and capital improvements on the airport premises. The County also agreed to pay the expense of relocating Embarcadero Road. Operating deficits in the first years of operations were added to the outstanding advance that was used to fund the initial construction at the Airport, and were expected to be repaid by future revenue. Deloitte & Touche audit: In 1997, the City and County jointly funded a Deloitte & Touche audit of the County’s financial statements for the Palo Alto Airport to settle questions about the appropriate accounting for Palo Alto Airport and the outstanding advance. Proposed Airport business plan (Attachment 3). In FY 2005-06, the Airports Division3 hired a consultant to update the 1982 Master Plan for the County’s three airports, and prepare business plans for the three airports. The proposed Palo Alto Airport business plan recommends that the County terminate its involvement in the Airport after the lease expires in 2017. The recommendation is based on the premise that the Airport has historically operated at a deficit and that costs will continue to exceed revenues; that the loss of the Airport would not have any operational impact on the County system or its other two airports; and that future opportunities to generate additional revenues are extremely limited. The business plan further recommends that future capital investments be limited to those projects mandated and/or funded by the federal or state governments, and that the City should be required to provide any assurances that exceed the 2017 expiration date on the lease (i.e. the 20-year assurances needed for future airport improvement project grants), Finally, the proposed business plan recommends that the County raise tie-down fees to help make the Airport financially self-sustaining, and to help recover as much of the outstanding advance as possible prior to the lease expiration in 2017. Proposed Airport Master Plan: The proposed Airport Master Plan identifies minor changes to the Airport’s airfield area, and raises substantive questions about the extent to which the vacant 8-acre parcel fronting Embarcadero Road should be developed. City Planning staff The Airports Division is part of Santa Clara County’s Roads and Airports Department -2- indicates that improvements consistent with current Airport operations are within the scope of the City’s Comprehensive Plan and theBaylands Master Plan. However, parts of the plan intensifying use or intruding into open space areas would not.be consistent. A response letter from the Planning Director is attached (Attachment 2). Purpose, Scope and Methodology: Because of Santa Clara County’s recent release of a proposed business plan for the Airport, the Palo Alto City Auditor’s Office was asked to review the Palo Alto Airport’s financial statements, and evaluate the County’s allocation of expenses and overhead to the Palo Alto Airport and the financial viability of the airport operations. We conducted our review in March and April 2006 in compliance with government auditing standards.4 DISCUSSION OF AUDIT RESULTS The Palo Alto Airport has generated more than $400,000 in adjusted net income over the last 37 years. Table 1 summarizes the financial history of the Airport since 1969, including the County’s more recent investments in the Airport’s infrastructure (net of federal reimbursements). The County has used the Airport’s adjusted net income to offset its original $1 million investment in start-up and capital costs at the Airport (the outstanding advance). 4 For our review, we compiled the history of profits, losses and outstanding advances; reviewed the financial statements and accounting data provided by the County and City from 1969 to 2005: analyzed the method for assigning County costs and overhead to the three County airports; and compared the operating revenues, expenses, and income for the three County airports. We analyzed the depreciation schedules used by the County; performed a detailed review of the ,~,u~nti~y ~u~ds provided by the County for FY 2002-03, 2003-04, and 2004-05; reviewed the Airport and FBO leases and the joint agreement for the levee repaired by the County. We recalculated the direct and pooled charges assigned to the Paio Alto Airport and to the two other County airports; reviewed the proposed master and business plans for the Airport; and examined previous consultant reports and County-City agreements. We compared the proposed rate increases with the rates charged by other airports, and physically observed the operations at all the County airports. We interviewed County airport staff and executives, an Airport FBO executive, and representatives from the County Airport Land Use Commission, the County Airports Commission, and the Joint Community Relations Committee for the Palo Alto Airport (JCRC) -3- Table 1: Summary ofPaloAItoAirf ,rtadjusted net income and outstanding advance Prior I !$1,085,134’ FY 1968-69 $61,830 ($69,949)($8,119) I 1,093,253 FY 1969-70 I 63,786 (78,384) I I (14,598) {1,107,851 .... FY 1970-71 !78,636 (88,525)(9,889) I I 1,117,740 FY 1971-72 93,338 (97,353)(4,015) I FY 1972-73 t 100,961 (105,903)(4,942)1,126,697 FY 1973-74 !103,!52 (124,276)(21,!24)1,147,821 FY 1974-75 !115,493 (120,790)(5,297)I 1,153,!18 FY !975-76 !119,201 (!53,142i t (33,941) FY 1976-77 135,612 (183,606) f I (47,994)1,235,053 FY 1977-78 152,571 (201,432)I (48,861) ~1,283,9i4 FY 1978-79 176,944 I (209,553)i {32,609) I 1,316,523 I t FY 1979-80 197,881 t (244,835)1 i46,954i I 1,363,477 i i FY 1980-81 t 231,470 t (302,663)I i71,193i 1,434,670 i FY 1981-82 I 288,678 (238,752)49,926 I 1,384,744 FY 1982-83 313,807 (246,570) !67,237 1,317,507 FY ! 993-84 346,267 (268,681 ) i 77,586 1,239,921 FY 1984z85 343,626 (327.483) I 16,143 1,223,778 FY 1985-86 369,880 (338,107) t 31,773 1,192,005 FY 1986-87 364,268 (340,129)24,139 I 1,167,866 FY 1987-88 366,968 (363,634)3,334 1,164,532 rY 1988-89 392,868 (302,721)(6007)84,140 1,080,392 FY ! 989-90 378,027 (358,667)5,358 24,718 1,055~674 FY 1990-9i 397,788 (289,294)(1,000)107,494 948,180 FY 1991-92 426,542 (376,650)47,863 97,755 850,425 FY 1992-93 505,306 (435 563)27,864 97,607 !752,818 FY 1993-94 430,105 (341,695)19,578 107,988 644,830 FY 1994-95 385,542 !360,617)26,871 51,796 593,034 FY 1995-96 438,722 (374 867/27,964 91,819 50! ,215 FY 1996-978 430,238 (381,060)64,222 113,400 387,815 FY 1997-98 439,377 (473,818) ,(15 785) I (50,226)i 438,041 FY 1998-99 488,062 (548,411) 1 (26,112)(86,461) I 524,502 FY 1999-00~474,680 (583,116)!(479,929)(588,365)t t 1,112,867 FY2000-01 647,857 !(548,914) I (445)98,498 I 1,014,369 FY 2001-021°752,760 !(834,677) I 207,705{125,788 i 858,581 FY 2002-03 727,657 I (663,106) I (649) !63,902I 824,679 !FY 2003-04 723,065 !(617,646) I (1,166) I 104,253 I 720,426IFY2004-05i 725,478 I /735,448) {49,047 39,077 i "S681,349i’ TOTAL I $12,788,4431 ($12,330,037) I ($54,621) $403,785! Source: Compiled by Palo Alto City Auditor’s Office from various County reports Does not include federal or state reimbursements for capital projects Data not available prior to 1989 $2,186,793 in improvements, less $1,101,659 federal and state reimbursements Deioitte & Touche LLP audited the financial statements for the year ended June 30, 1997 Includes $25 million improvements, less $2 million federal reimbursement ~o Includes $204,539 prior year construction in progress reclassified to maintenance expense -4- County pooled and overhead charges now average more than 40% of Palo Alto Airport expense. The County charges some costs directly to the Airport, and allocates its poo!ed costs based on a formula. Over the last three years, the County’s direct costs at the Palo Alto Airport, averaged $391,791 per year.~1 As shown in Table 2, the County’s pooled and overhead costs at the Palo Alto Airport averaged $280,561 per year- or about 41.7% of Palo Alto Airport operating expenses. 12 Table 2: Percent County pooled and overhead expenses allocated to Palo A Ito Airport Direct County costs to operate Palo Alto Airport Pooled County operating costs and overhead charged to the Palo Alto Airport Total (not including depreciation) Percent County pooled and overhead costs $378,345 $360,744 $436,285 $391,791 $284,761 $257,759 $299,163 $280,561 $663,106 $618,503 ! $735,448 $672,352~ 42.9%41.7%40.7%41.7% , Pooled County expenses for salaries, benefits, and general administration overhead have increased in recent years, reducing Palo Alto Airport operating income. For example, general and administrative County expenses increased 85.6%, from $94,031 in FY 1997-1998 to $174,533 in FY 2004-2005, and averaged $153,761 per year between FY 1997-98 to 2004- 05. In contrast, direct Airport expenses for aviation services increased 45% from $81,766 in FY 1997-98 to $118,667 in FY 2004-05, for an average of $103,466 during the same period. The County allocates pooled operating costs and overhead through a formula. The County allocates pooled costs to each airport according to a formula that uses four factors: (1) the number of operations staff, (2) aircraft operations (rake-offs and landings), (3) aircraft based at the airport, and (4) number of principal tenants (or FBOs).~3 The percentages change each year as shown below: Table 3: Percent of pooled County costs allocated to each airport Pai0 Aito .....I 32.5% .... Reid-Hillview i 58.6%56.6% South County I 8.9%12.1% Allocated costs should be trued up at the end of each year. The County allocates pooled and overhead costs based on estimates. Actual percentages may vary. Using actual figures, we estimate Palo Alto paid almost $16,000 more than its share of allocated costs as follows:14 ~ Direct Airport costs included about $299,500 in salaries and benefits for 4.2 full-time equivalent employees at the Airport, and $136,000 in other direct costs. These employees staff the terminal at . the airport. This does not include airport tower expenses which are borne entirely by the FAA 12 The Palo Alto Airport’s share of pooled County costs and overhead included $125,500 in salaries and benefits, and $174,500 in insurance, professional services, internal departmental charges (e g legal expense), tools and instruments, transportation, and other general administration costs. ~3 The percentage of each factor for each airport is combined in an overall percentage that is used to allocate the pooled County expenses to each airport.~4 In addition, County staff reports a credit of $53,728 will be issued in FY 2005-06 to reflect Pa!o Alto Airport’s share of a $17 1,655 credit to adjust overhead rates apptied to intra-departmental charges at all three County airports. -5- Table 4: Estimated versus actual pooled and overhead cost allocation )ercentages FY 2002-03 I 33%32.5%t $2,588 FY 2003-04 I 33%t 31.3%I $13,278FY 2oo4-05 i 31.3o/oI 31.3O/o!0 TOTAL{I I S15,866 If the Palo Alto Airport lease were terminated, the operating income for the remaining two County airports would be adversely affected. In FY 2004-05, Palo A!to paid $299,163, or 31.3%, of the County’s pooled Airports Division operating costs and overhead. This included $125,000 in salaries and benef its for Airports Division employees, and about $174,500 in other general administration costs. Unless County expenses were reduced, the two remaining County airports would have to absorb some portion of Palo Alto’s share of Airports Division expenses if the Palo Alto Airport lease were terminated. To illustrate, the Reid-Hillview and South County Airports would have had to absorb $245,000 and $55,000 in pooled and allocated costs, respectively, if the Palo Alto Airport had not contributed toward Airports Division expenses in FY 2004-05. County staff has indicated that County expenses would be dramatically reduced if the lease were terminated, offsetting the loss of revenue from Palo Alto. Depreciation expense does not affect the outstanding advance. Although depreciation expense does not affect the County’s annual calculation of the outstanding advance, it has sometimes been included in public discussion in a way that can mischaracterize the Airpod’s current cash flow position. The County’s depreciation schedules amortize capital improvements and other projects completed at the Airport between 1966 and 2001. The schedules list improvements costing over $4,965,000, of which $3,383,000 was funded by Federal and State grants. Federal and State grants covered as much as 81% of the cost of some projects, and averaged over 68% of the total cost of all the projects.16 Depreciation expense (including depreciation on projects funded by Federal and State grants) fluctuated from $417,321 to $184,426 to $312,974 in FY 2002-03, 2003-04, and 2004-05, respectively.~ This can dramatically impact the appearance of profitability (or loss) at the Airport in any given year. However, depreciation is not a flow of cash, and is irrelevant to the calculation of the outstanding advance. The County (correctly, in our opinion) does not include depreciation in its annual calculation of the outstanding advance. The outstanding advance is important because, in accordance with the lease, the County is to be repaid for its investment in the Airport, but must use any additional revenue to im prove and maintain the Airport. While the lease requires Airport revenues be reinvested in the Airport or applied against the outstanding advance, there is no formal loan agreement requiring repayment of the advance. The capital improvements and start-up costs for the Airport totaled over $2,187,000 in Federal, State and County funds. The County share of the start up costs, which totaled $1,085,134, was advanced by the General Fund to the Airport Enterprise ~’s County staff reports that the actual number of aircraft based at South County was significantly less than had been projected. If the County also makes that correction, it would increase Palo Alto and Reid-Hillview’s share of costs, and reduce South County’s share of costs. We agree that using the actua! number of aircraft from the annual assessment roll is appropriate. ~e As of June 30, 2005, the depreciation schedules listed $1,582,085 in County-funded facility improvements, with a book value of $377,601 net of accumulated depreciation. ~7 At that rate, the remaining $1,883,000 book value could be fully depreciated in 6 years. -6- Fund. ~ However, if the lease were to be terminated, there is, to our knowledge, no formal loan agreement for repaying the amount, and the City is not required to repay the outstanding advance to the County. As of June 30, 2005. the Outstanding Advance balance was $681,349, and the $403,785 in adjusted net income (shown in Table 1 ) remains in the Airport Enterprise Fund. The outstanding advance amount is increased or decreased according to whether the Airport generates a profit or loss each year. No interest accrues on the balance. As shown earlier (in Table 1 ), after incurring losses in its start-up years, the Airport generated positive adjusted net income in 21 of the last 24 years (1982-2005). The Airport has reduced the outstanding advance by over $403,000. Losses in 1998-2090, which increased the outstanding advance after years of declines, were the result of $2.8 million in capital improvement projects.~9 Embarcadero Road improvements in 1973 were charged to Airport users. Our analysis of the outstanding advance indicated the County charged the Airport $194,500 for realigning Embarcadero Road and moving its related utilities. The Airport lease specifically states these were to be County expenses. It should be noted that the Embarcadero Road improvements benefited both the County-run yacht harbor and the County-run airport. Levee repairs were charged to Airport users. In FY 2005-06, levee maintenance and repairs totaling $125,454 (for construction contracts, consultant payments, and reimbursements for work done by the Roads Division) was charged to the Palo Alto A~rport.~ According to the 1979 agreement for maintenance of levees in the Baytands2~, the obligation to repair the levees appears to be an obligation of the County. The agreement does not mention the Palo Alto Airport. Therefore, the allocation of levee repair costs to Palo Alto Airport users may be questionable.22 Proposed tie-down fees would be significantly higher than nearby general aviation airports. The business plan proposes 30% tie-down fee increases at Palo Alto - compared to proposed 3% fee increases proposed at the other two County airports, Reid-Hillview and South County. This would put Palo Alto fees significantly above other nearby general aviation airports, and could jeopardize Palo Alto revenues if users chose to move their aircraft to other airports. Table 5 compares the present and proposed fees for aircraft tie-downs. 18 Under generally accepted governmental accounting standards, the advance would technically be considered a transfer, not a loan, since it has not been reported as an interfund receivable or payable. ~e The county share of the $2.8 million in capital improvement projects was $550,900. Federal and State grants covered the remaining $2.3 million used for electrical rehabilitation and upgrades, slurry sealing the pavement, adding safety fencing, rehabilitating the apron, and repavin9 the runway. 20 Up t.o $50,000 in additional expense incurred by the Santa Clara Valley Water District for the project is still pending. 2~ An agreement between the County of Santa Clara, the City of Palo Alto, and the Santa Clara Valley Water District. 22 Apparently pedestrians have had access to the levee for many years, and the levee appears as part of the regional Bay Trail on the Bay Conservation and Development Commission’s current maps. However, there does not appear to be any written agreement on the part of the City or the County for that access -7- Santa Clara County Airports Palo Alto !$111.50 Reid-Hiltview !$111.50 South County I $79.50 Nearby Airports San Carlos !$115.00 Half Moon Bay I $59.00 Hayward 1 $60.00 S144.95 (+30%) $114.85 (+3%) $81.89 (+3%) Justification for increases: The business plan justifies the proposed fee increases by stating that the Palo Alto Airport has historically operated at a financial loss and that the deficits arising from operations at the Palo Alto Airport are being subsidized by surplus revenues generated by Reid-Hillview Airport. In our opinion, these statements mischaracterize the operating results of the Palo Alto Airport. As shown above, the Palo Alto Airport generated more than $400,000 in adjusted net income over the last 37 years, while covering a sizable share of countywide airport operations.2s We estimate that if various adjustments to the outstanding advance were implemented (as discussed above), moderate fee increases were proposed, and operating and pooled costs were reviewed, the County’s entire outstanding advance may be settled before the end of the lease without need for such dramatic increases in tie-down fees.26 Future viability of the Palo Alto Airport. Between now and 201 7, the Airport should be able to continue to generate revenue sufficient to cover expenses and reduce the outstanding advance to zero (assuming that only modest capital improvements are needed in the next few years). In the recent past, the Airport has generated sufficient revenue to cover the required match for federal grants so that some of the modest improvements to taxi-ways and runway that are suggested in the master plan could be implemented. Moderate increases to user fees would help the cash flow picture without the need for the dramatic increase in the tie- down fee. Increasing the number of hangar and tie-down spaces would generate additional revenues for the Palo Alto Airport in the near term. However, it is unlikely that major capital investments would happen prior to lease negotiations/expiration in 2017. Meanwhile, in the next 5-7 ~ Tie-down fees for comparable aircraft at the San Jose International Airport are $185.00 a month However, San Jose is primarily a commercial airport and in a different category from the general aviation airports. Fees at Oakland (in the same category as San Jose) are $75.00 per month for comparable aiEcraft. San Jose is reducing space dedicated to general aviation. However, Oakland currently has space available. 24 Tie-down fees for aircraft weighing 0 - 3,500 Ibs. 25 It should be noted that County staff expect the Palo Alto Airport to end FY 2005-06 at a loss, due to $125,500 in levee repair related expenses ,~,,,~;~,~ expenses ,,o~ ~" ........... ~, ,-,~,, ’^-’--, o~,~, to,,’--, average u,-~ -~, .~-~o’~’ per year) than operating revenues (an average of 7.6% per year). Airport expenses may be less than ,~r~d~t~d~, ,= ," ~ for FY 2005-06 due to an unfilled vacancy, and staff is assessing the feasibility of curtailing terminal operating hours for FY 2006-07. Additional cost savings could result from reducing operating costs such as overtime ($22,600 in FY 2004-05), or contracting with one of the FBQs to provide terminal services (now performed by County staff at the County terminal). On the revenue side, a 3% tie-down fee increase would generate about $15,000 per year, compared to a moderate 10% fee increase generating about $48,000 per year, or about $145,000 per year generated from a 30% tie-down fee increase) -8- years, the advent of air taxi services and the introduction of very light jets (VLJ) capable of operating on shod runways, could change the general aviation marketplace. Furthermore, actions by the San Francisquito Creek Joint Powers Authority, working with the Army Corps of Engineers to address flooding from the creek, could impact the Palo Alto Airport. After 2017, FBO leases could generate higher revenues. Palo Alto Airport has two fixed base operators who have 30-year ground leases with the County. The leases allow the lessors to extend the original leases for additional 5-year periods until the County-City lease expires in 2017.27 These leases did not contain clauses that based rent on inflation indexes such as the consumer price index, or require set dollar amounts for rent increases; and only one lease included a percentage of gross revenues generated from other sources. As a result, the lease revenues, which totaled $123,000 in FY 2003-04 and $131,000 in FY 2004-05, totaled only 17 to 18% of the total Airport revenues. Once the leases expire in 2017, these types of clauses could be incorporated into the lease terms to ensure higher revenues from lease rents. Palo Alto is a regional resource: Our analysis indicates the Palo Alto Airport is truly a regional resource. Pato Alto residents compose only 23.3% (78 tenants) of the airport’s 335 aircraft tenants.28 Regional Civil Air Patrol and Stanford Life Flight operations use the Airport, along with flying clubs and other aviation-related tenants. According to the General Aviation Element of the Regional Airport System Plan, Palo Alto is one of 20 publicly owned and operated general aviation airports that provide services to personal and business aircraft owners and users. Palo Alto is designated by the FAA as a "reliever" airport, providing an important "safety valve" for activity that would otherwise consume runway and airspace needed by the airlines using the three major commercial airports. The mission of the County’s Airports Division is to "promote the economic and social vitality of the County by meeting the needs of the General Aviation community and the traveling public." Thidy-seven years ago, the City agreed to lease the Airport to the County for a nominal sum; the County agreed to operate the Airport and to maintain and invest in Airport facilities. During our review, City staff indicated that they expect and encourage the County to continue operating and maintaining the Airport until at least 201 7. Our recommendation is shown on page 2. I would like to express my appreciation to County and City staff for their cooperation and assistance during our review. A response from Santa Clara County’s Director of Roads and Airports is attached Attachment 1). Respectfully submitted, Sharon W. Erickson, City Auditor Audit staff: Edwin Young 27 The lease for one FBO (AMG) was signed in 1973 and assigned to another lessee in 1985. The original lease rent was $3.384 a year and, from the 11~h year onwards, was set at 8.5% of the fair market value of the premises, excluding the buildings and improvements made by the FBO. The lease for the second FBO (Roy-Aero) was signed in 1969 and assigned to a replacement lessor in 1970 The original lease rent was $910 per month ($10,920 per year) and was also set at 8.5% of the fair market value of the premises from the 11th year forward, plus additional rent of 6% of the gross revenues derived from individual tenants who rented aircraft storage spaces known as "tie- downs" 28 Statistics on transient and day-user aircraft are not readily available, and would require a manual count of County records ATTACHMENT 1 Response from Director Roads and Airports ," [ ÷ ~Cot n,y of Santa Clara Roads and AJrporls l)cparlmerlt ! 01 Sky|)orl Drive, San .Iosl~. CalJlornia 951 l O- 1302 (408) 573-2400 June6,2006 Ms. Sharon Winslow Erickson, Cib, Auditor Cib,/of Palo Alto 250 Hamilton Ave. Palo Alto, CA 94301 Subj:Review of the Palo Alto Airport’s Financial Condition Dear Ms. Erickson, Thank you for the opportunity to review the draft report regarding your analysis of the financial condition of Palo Alto Airport (PAO). The following comments are provided: 1)ODeral:in~ income The data presented support the Counbis conclusion stated in fl~e draft Business Plan that since inception of the airport lease, the County’s invesLment in the airport has exceeded net revenue by $681,000 despite the fact that the great majority of capital project costs have been funded by oLhers and fl~e fact that the Counb/s unrecovered investment (the "Outstanding Advance") does not accrue interest. These facts are compelling indications of the financial subsidies required to operate the airport. Nearly half of the meager $400,000 in total net operating income generated over the last 37 years will be wiped outby the projected FY 2006 operating loss, due in large part to the levee project. An operating loss is also projected for FY 2007. The record clearly demonsLTates that operating profits generated in years when no additional capital investments were made are inevitably offset by the tnfusio~ of additional capital required to maintain and ~mprove the airport. Because these additional investments do not occur every year, Lhey tend to be overlooked by some even though they have the same effect, dollar for dollar, as an operating loss. The OuLManding Advance (OA) Js qui~ handy in this regard as a metric of the airport’s long-term financial performance because it represents the difference income. Board ot SuperviSorS: Donald F. Oag~, Blanca Alvafado, Polo McHugh, damcs T. Bcall. Jr., LiZ KnJs.£ COl. ll/ly E, xCculivc: Polor Kulras. Jr. -10- 2) 3) Overhead The overhead costs allocated to PAO are the overhead costs generated by PAO. These costs would not be incurred by the County if the County did not operate the airport and will be eliminated when the County" ceases to operate the airport. Some costs, such as intra-departmental charges, County Counsel charges, insurance, etc. will shrink immediately upon expiration of the lease. Management staff costs wil! be reduced as the management structure is adjusted to reflect the reduced scope of responsibility. Any allocated overhead not eliminated as a result of the lease expiration would be small and offset many times over by the elimination of the business risk associated with running the airport. It is important to note that no adjustment is made in the overhead allocation to reflect the additional administrative burden imposed on staff due to the lease arrangement with the Ci~ of Palo Alto, a burden which is not present with respect to the two airports owned and operated by the County. Depreciation We agree with the report’s conclusion that the County is correctly excluding depreciation from the calculation of t!~e Outstanding Advance, but not for the reason suggested i.e. because depreciation is not a cash tTansact~on. Depreciation related to the grant-funded portion of capital projects is not included in the calculation of the OA because the OA is a benchmark of the Coun _ty’s financial exposure resulting from its involvement in the airport; the pass-through of ou~ide grant funding does not impact the County’s financial stake in the airport. The AEF-funded portion of capital projects is appropriately included in the calculation of the OA. In other words, the relevant issue is the source of capital that was used to fund the improvements being depreciated. Depreciation is the mechanism by which costs for long-life assets are allocated over time and, of course, are entirely relevant to any discussion about the airport’s financial position and performance. The fact that the County’s inveshnent in the airport has exceeded net revenue by $681,000 over 37 years (not including interest) despite the fact that the great majorib, of capital project costs were funded by others highlight’s airport’s reliance on subsidies to fund maintenance and improvements. Embarcadero Road improvements and levee repairs There seems to be continuing confusion over references to "Count"’ expenses in the airport lease, with the implication that these expenses should somehow be funded by some Count, fund source other than the AEF. As we have discussed a number of times, the Airport Enterprise Fund is not a legal entity in and of itself and therefore cannot be a party to an agreement. The Counb, of Santa Clara is the legal en~ity that is the party to agreements regardless of which County department or fund source is involved. The fact that the Count, - and not the Airport Enterprise Fund - is specified in the lease and the levee maintenance agreement as the responsible party, for funding the Embarcadero Road improvements and the levee repairs, respectively, simply reflects this basic legal concept. The report states that the Embarcadero Road improvements benefited both the Yacht Harbor and the airport but does not establish the basis to support this claim. The Yacht Harbor was accessed from Embarcadero Road prior to the improvements, so the improvements were not essential to provide access to the Yacht Harbor. "]’he salient issue is that the Embarcadero Road improvements were made because they were required to be made by the airport lease. Since the improvements were performed to fulfill a requirement of the airport lease, it is entirely reasonable to conclude that the improvem.ents would not have been made had the County. not been a party to the lease. Therefore, even if the improvements provided some seconda~; benefit to the Yacht Harbor, it is appropriate that the full cost of the improvements be charged to the AEF. Finally, the !998 Deloitte-Touche audit included the cost of the Embarcadero Road improvements in the calculation of the OA that bo~ the City and the County agreed to use on a go-forward basis. The same reasoning apphes to the levee repairs. Because tlie CounD: is a party to the levee maintenance agreement due solely to its involvement in the airport, it is appropriate that the County’s costs of complying with the agreement be charged to the Airport Enterprise Fund. No case can be made to charge tliose costs to any other County fund source. Issues related to whether it is appropriate for the County to be a party to the levee maintenance agreement inthe first place and how part of the leasehold came to be used for other.purposes without the County’s consent-as required by the lease will be addressed under separate cover. Tiedown rates and the future viability of PAO The report does not proxdde any calculations to support the conclusion that the airport can generate sufficient revenue to cover expenses (~ncluding modest capital improvements) and reduce the OA to zero prior to expiration of the lease -12- No accounting adjustmenk~ to reduce the existing OA are warran~d as discussed above, nor is there evidence presented that overhead costs are unreasonable, unnecessary or misallocated. As mentioned earlier, the OA is projected to increase substanSally in I~Y 06 and FY 07 as escalation in operating costs outstrips growth in.revenue. An increase in tiedown fees is the only viable opportunity to generate additional revenue. The draft letter from the Director of Pla~ming and Community Development attached to the report indicates that no increase in aircraft basing capaci~, or intensity of airport use will be allowed. The letter is troubling because Exhibit C to the lease sets forth the plan for development of the airport and shows hangars and a FBO on the parcel fronting Embarcadero Road. The adopted City policies referenced in the letter appear to unilaterally restrict the Coun~,’s ability to develop the airport as agreed upon in the lease. Thank you again for the opportundty to review and comment on },our draft report. Sincerety, Mict~Iurd ter Director -13- ATTACHMENT 2 Draft letter from Palo Alto’s Director of Planning and Community Environment to Santa Clara County’s Director Roads and Airports April 24, 2006 DRAFT Michael 1. Murlder Director, Roads & Airports County of Santa Clara 101 Skyport Drive San Jose, California 95110-1302 Dear Mr. Murdter: This is in response to the County’s Airport Master Plan for the Palo Alto Airport. The Mas~er Plan provides long-range policies relative to the CounW~s continued operation of the Palo Alto Airport. Physical or operational changes are governed by the City’s Baylands Master Plan, which is attached for your fl_~ture reference. in general the City’s Baylands Master Plan supports the continued operation of the airport in its current conl~iguratic~n. All aspects oflhe County’s Master Plan related to the maintenance of the existing facilities as well as some of the proposed new construction activities are compatible with the City’s plan. These include the additional aircraft wash rack, the replacement of the existing helipad with a new heliport, a new Taxiway D and reconfiguration ofTaxiway G. The Baylands Master Plan, however, does not allow changes in airport activities that will increase the intensity of airpor~ use or will significantly intrude into open space. Specifically, the expansion of permanent aircraft is in conflict with the Baylands Master Plan. 1 hope this clarifies the application of existing City land use policies applicable to the Airport. Please feel free to contact me if you have any additional ques*ions. I can be reached at s~eve.emslie~.,citvofpaloalto.ora or 329-2354. Ve~’ Truly Yours, Steve Emslie Director of Planning & Communib’ Environment City of Palo Alto Frank Benest, Ci~ Manager City, Council JCRC -14- ATTACHMENT 3 Draft Palo Alto Airport Business Plan provided by Santa Clara County PAO Business Plan INTRODUCTION The Pdo Jadto Ai.q.~c,~tl (q)AO) Master Plan is parl of an update so, the I 982 M~stc~ .Plan for the three ~neral ~via~on a~rpo~ts in the County 0f Santo Clara. However, unlike the other wvo airports - Rdd Hitiview ~ott and Somh Coun~ Jdrport - w]~id~ are owned and ~pcrated by th~ County, PAO is c, wncd by the CiV of Palo Alto but operated by the CounD’ putsuam m a 50-year lease executed in 1967 and expiring in 2017. As the properO, owner,-the City has sole discretion over the future of tile airport. The Master Plan is an obiecuve, stand-alone docu- ment that ~ecogrdzes the City’s sovercign.t:y with ~espect to the air- port ~ega~dlcss of whether t!le County is invol,;,cd in its operation after 20~ 7. A compamon document to the Palo Alto Airport Master Plan is this Business Plan, which .addresses the Coun%~’s furore involve- ment in the operation o[ the ai~ort. ~c Business Plan is a sepa- rate documet~t because, u~ke fi~c Master P!an, J~ wiU be-ac{cd upon by the Count Board of Supea,,iso~. DRAFT January 2005 5-1 -15- PAO BUSINESS PLAN This document: >Presents an ove.~-iew ~nd analysis of the a~rpor~ lease be~,ccn the Co~n~, ~nd the ~Presems ~n ove~iew o£ ~}~e ~ort E~e~rise Fund >Presems ~a ove~,.iew ~nfl ~m~Jysis of the ~irpor~’s finances; >Iden~fies ~he drD~rt’s ~umre capDal invesm~en~ needs; >Recommends County actions in anucJp:uion ~[ the Ci~’iCounW lease explra~on in 20~ 7. CITY/COUNTY LEASE OVERVIEW TERI~ & RENT The lease speci.fies .a term of S0 yea~s and cxpices on June 1 I, 2017 accordinu to Ci7 documents. The rentis ~q,..~:. fo.r the entire term o[ ~hc ieasc. USE AND DEVELOPMENT OF AIRPORT REAL PROPERTY The County’s use of the based prem{ses is limited to constructing. operating ~nd maintaining an ai~ort and airpo.rt ff~cili~cs; non- avJa~on industr~a! o~ manufacturing uses are prohibited. ;~H pro~,ements must conform to the Ci~,’s building codes and are subject to City plan apprbval. A devdopment plan was included as an exhibit to the oriNnal lease; execution of the development was consngent upon avNlability of funds and wheiimr ’khe avia~ rion needs and economic iusdfica~on ~,armn~ such development." The development plan was sabsequen0y mo&~ed avice and incor- porated imo the lease by lease amendment numbm- one in October 1968 and amendment number two in December 1969. The Ci~’ ¯ equired to sup~xt the Coune~ in aR app~cn6o.ns to financial assis- tance agencies concer~ng the devdopment and opera’on of the ~ort. The Cotmry is reqr~ired ~c, operate d~e airport in accordance with Federal .A,:~{ation Adr,ni.qistrador~ (FAA) .regulatiox~s and bus full pov,~er, anthoriw and respo~sibi~U in reg-a.~d to the ~)peza~ion, management and maintenance of the ai~ort "as though k ,,~.’ere ~he soie owner thereofl" The City is protgbhed from entering into agreements, executing an}, leases or licenses, or ~ndng nny rights ~o the airport p~em~scs without 0~c express written consen~ of ~he Connu,. The CiU, ]s zc- 5-2 DRAFT JanuaW 2005 -16- PAO BUSINESS PLAN quired to prevent off-airport devdopment Dora inter~cring the airport s,q[eD, zones. In addJdon to the vc¢o lease :amendments discussed above co.orated the revised dcvdopmen~ pl~s ~nto ~he amendmcm number d~rec in May i980 established a requiremem for ~he CounV to obtain CiV concurrence ~c, apply m approval of ~ second rm~way or expansdon of pcrmanem aircraf~ dedowns above 510 spaces. The fourth and final amcndmen~ to the lease in. I983 clar[~ed ~he Coun~,’s responsibi~, wid~ respec~ ~o udl]~ charges related ~o the sto~mw~cr pumping plant USE OF REVENUE Net operating revenue generated at the :~irporq if.any~ .is first phed against the running balance of the Coun~.,’s umecowred vestment in ~hc ~rporL which is termed ~he "Outstancfing vance." AS remaining revenue, ff any, ~s ~o bc u~ed liar maimc~ nance, opc~a~ion or capkat imp~ovcmen~ o£ ~hc airport I.n o~her words, once sufficient ne~ rcven~c has been generated recoup the Counv’s investment in ~hc airporq nny ~dditiona! net revenue must be reinvested in ~h~ :airport and cannm be used fired opcrntion~ or improvements at ~h~ other n~orts. The lease is silent w~th ze~:pect ro wh~d~cr the C)u~sranding Advance accrues ASSIGNMENT AND SUBLETTING ~he leas~ m,qy not be assigned without the City’s wr).ten consent but the CourtV may sublet the premises without the City’s consent. TERMINATION The lease may be rermknared by either par.U, in d~c cve,,x of breach by the other part;,;, The party in de~mh bus 30 days re remedy the breach from the d~e of notice by d~e other par~,. There ~s no pro- vision for unilateral termination breach by the other SUMMARY -i-he lease ci~ar!y pk~ces all business risk :~elated ro c,p~:radon of the airport on the County. The C17 has no financial obligation or risk with respec~ to ~he ai~orr’s operation..Mo~eoveq if the were m generate positive net operating revenue at the airport after DRAFT January 2006 5-3 -17- recouping its initial invcstment~ it must- be reinvested in ti~e airporl and could not be exported to ~he other Count,.,, airports. AIRPORT ENTERPRISE FUND OVERVIEW The Board adopted the fo!lowing policy rcgardir~g the AEF: .slate and.~d~ra/ gran~ a~d e~h~r soura~, shm~ld be a~ge,~t re Pursuant to Board pol.i%,, the :AEF must pay for ~ costs - direct and indirect - associated wkh opemdng fhe ai~orts, including costs ~o~ sc.~,ices ,eccived from other CounU departments. Some o{ these se~ices are billed d~recdy - for example, ]egal set~,ices aze billed ~recdy to d~e dcpartmen~ based on CounD’ Connsel’s estab- lished hourly rate. O~her se~aices such as Clerk of rt~e Board costs for processing Board t~ansmJ, tals and providing sta[~ suppc,~t t~:, the ,~rpo~s Con~rniss~on arc ~stril:mted through the County Cos* Plan. The A[EF ~herefore prox, idcs fi~U cost visib~w fo~ the myriad c~)sts - some obvious ~nd st)l]~e ~mt-so-obviot:s - incurred :~c:oss ~hc County to s~ppo~t the airpor.ts. ,’Mtho~gh vhc AEJ? captures ~ airport finances .in a sJng!e budge{ unih the revenue ,~nd expenses assoc.iaIed with c:~.ch of the th~-ce airports arc t:~l.mla:ted {c.,~ financial ,epo~ting and in~erna] manage- ment accounting purposes. Reveame and expenses di~ecdy attrib- utable ~o each ai.m, or{ such as FBO Ic~se revenue, aircraft storage space rcnta! revenue, operations s~aff salaries, etc. are easily identi- fied. General and ~dminisrradve expenses not a~rribumble directly to an indiv.iduat ai.rport (insm:ance, management s~aff salaries, Cos~ P~an charges, etc.) .qre captured in an expense pool and prorated to each airport based on a weighted forrnvda that uses cost drivers such as the number of based ~ircra£t, number of aircraft operations and number of maio~- facilities at each airport. Total annual .projected AEF.revcnue is approximately $3.2 millionS; 76% of whicl~ is get, crated from County-owned aircraft spaces (i.e. hangars, shcliers and dedowns). Ren[a! rares for County-owned airc.rat:t .st:orage sp~ces (~rtangars, tiedowns shclte.rs), fuel fiowage fees and other ai~o~t-relared fees arc 5---4 including projec{ed ~c,.,cnue from ~.hc 100 hangars n<~, ring co, repletion a,, Sou0~ CounD, DRAFT danua~ 2005 -t8- PAO 8US~NESS PLaN est~,blishcd through = Schedule of ~¢es ~sd Charges q~proved by the Board of Supervisors by reso]urJon. The next largest revenue componem (11%) is ;lease revenue from the "i2 Fixed B~se Operators2 (FBO). Most of the F.BO leases specify ar~ annual ground rent equal to 8.5% of the fee simple value of the leasehold premises (not including improvements), and vide for adjustments eve~, five },cars pursuant to a rqappraisal:of the premises. Given the long-term nature of the FBO leases, the revenue from this source is esse~tiaily ~qxed aside ~rorn the occa- sional minor adjustment m the ]ease .rate (the ~;ea.ppr::dsal pJeted in December 2004 resulted in no rate increase). All other revenue categories including property rental, .fuel tqowage :fees, transient aircraft £ees and interest income collectively gener=te 13% of AEF revenues. Reid ~il]view Yirporr {]L[-I\~) generates appro~mately 56% of tb, e total AEF revenue prima.ally due to the income ~-rom t1~c 145 County-owned hangars~ Prior ~o the Somh Cou~U AJq>ort ~t6) Mmgar p:oject cur:early nearing comple~on, h was the oMy one off the three .airports to have Coun~:-owncd h:ngars. Jqistorica~y, ILHV ~evenue has exceeded expenditures and d~e surplus has bec~ used to subsidize operations =t RAO :rod g]6. Upon completion of the hangar p~oject a: E16, that airport wi~ bc financia~y selg sus taming. PAO REVENUE AND EXPENDITURES In November 1997, t:hc City con:r-ac~ed with Ddoi:~e & Touche (]_)&T), an mdepeudent auditing fi~m, zo audi( :he Coun~"s finan- cial dam ~elat~:d to the airport and prepa:e a set oi" ~inancia! state- meats in response to concerns expressed by the P’.alo Alto Airport Associai_ian (P,’YAA~ and the airport’s .]c, int CommunJ,"3, Relr, tions Committee FJCRC) regarding the County’s accounting for costs =rid revenues associated with PAO.~ The D~T audit, which was ~runded joJndy by the City and the Coumy at ~ total cost of ~39,000, produced a set of baseline {inan- cial s*a~emenrs and alleviated ~he concerns raised by -the PAA.A and .JCRC, Subsequently, CounU staff and City staff agreed on a for- mat £or the annual financial stave,:~ents [o bc pcov.ided by the a City Manager’s Report CN~(::371:97 m the Pa{o Alto C~ty Coundi dated Sep- tember 8, ~997. DRAFT Januao’ 2006 5-5 -19- PAO 8USR~SS PLAN County to the (’.it3,’, The attached draft financiai statements 2005 are typmal of the data provided each year to the Cip/. Perhaps the best measure of the airport’s long-term financial per- fonmance is the "Outstanding Advance", which is ti~e difference bem, een the County’s total capital investment in the ai .rport and the net revenue generated over the.life of the lease. Additional CoL, my capita[ investment and/or net oper.adng losses increase the Out- standing Advance; net operating profits decrease the Outstanding Advance. Since 0n]y *he local (Le. Counw-ftmded) component of capital p~:ojects adds to.the Outstanding Advance, the Outstanding Advance serves as a benchmark of the County’s financial exposure resulting from its involvement with the airport. In the 38 years since inception of the lease, the County’s invest- ment 5n the airport has exceeded net revenue by $668,000. Fisca! N’ear 2006 revenue and expenditure fgures indicate a pmiected net ]oss of $348,000, nea@ ha!I of which is due to a one-time expendi- ture for a levee maintenance proicct. Therefore, the O~st-anding .Advance is projected m grow to slightly over $1 mi[iion by the end o~7 Fiscal ~{ear 2(©6. .,is mentioned earlier, thc lease is silent as vo whether the standing Advance should accrue intere~ for accounting proposes given the lease ~cqui~emcnt ~ha~ any ne~ ~cven~c generated at :d~o~r must s~ay at the airport once [he Count/recoups its capiad investment. As part o~ the D&T audit review., ~he County and City a~ccd that the C)uu~anding Advance (and any smplus, should one occur) wouid not acc~c interest-due to d~e lack of any ]angoagc in the lease specifically ad&es~ng t~s issue. Therefore, t:hc vn{ac the Outszan<~:ng Advance does not reflect current do~ars. The fact that the Outstanding Advance does not ac:rvm inheres* m.~kes it ~’d] the mo~e significant that the Counw’s investments in the airport have not been recovered. At R]-tV and El 6, c-~pital in- vestmems financed by loans from the CounD" G.encral Fund or by revenue bonds accrue interest rhst must be paid for as part o/7 the opemiing budget. Ifa similar scenario applied at PAO, the Our- standing Advance would be much higher. The airport’s projected .F3? 2006 ~evenuc is $704,00C’ (approximately 22% of tota! AEF revmme) assuming t1~at ~he ~irpo:t ~emains n~n~ fall ~paci~,. Each ~evenue component i~ dolla~ amount and procourage of torn] PAO revemm is as 5-6 DRAFT Januao, 2&15 - 20 - BUS It~ESS ~L,~N Tiedoxvns - $480~000 (6fl%). The County ope,’ates 362 of the 468 dedown spaces at PAOt 2although demand for aircraf~ stor~ge is pro)erred m rem’a~ strong in ~he foreseeable future, the AEF’s re~ance on this revenue source m~kes i~ vulnerable Io downtn~ns in the ~ene~l aviadon ma~ke~. FBO lease revenue- .$i31,000 (19%). The ground ren~ paid by the two FBOs at the airport, Roy-Aero Enterprises LLC ~tnd Avia6on Management Group, Ii~c. (AMG), is adiusted perio.dicalJy pursuant to a reapp~asal of the underlying land value as specified in the master leases. In 1994 Roy-Aero dispumd the Coung,’s reappraisal and the matter was b.rought ~o binding atSitradon. "/’he arbitrator ruled that the t~LN.IV of d~e Roy-Aero leasehold should be discounted from the .appraisa[ for the AMG and P,.HV FBOs due prim,~rily to its flooding potcndai and soil conditions. At current annual fates of va0..19isqua:e (approximately [~8300iac~e), ground ~ent of $801000 annua~y. ~c Roy-Acro ]ease also cndtles fl~e County to 6% hangars, which meals an ~*d~donai $25,000 per yea~. The current annnaI ground rent for 50.2025/SF (approxim:itely $S8007acrc), which $26,0~’~. ¯Fuel flowage fees - :$50,000 (7%). "/’he (.’..oung,° co]fleers ~. $0.10 per galion fuel flowage £ee t\’)r ati fuel dispensed ai ti’~e CounU airports. Transient Aircraft Revenue - $28,000 (4%). Transient aircrak (i.e. aircraft not :based a*, PAO) are required io pay a fec when occupying a Count)’ tiedown. Certain fiedowns are d.esignated for transient use. Miscellaneous - $~5,000 (2%). This category captures all revenue not amJbutable to one of the ~.bove c:~tcgories, such as auto p.~rking ct~arges, Revenue generared at the ai~por~ ITrom sales taxes and personal prope~W zaxes does not accrue ~o the AEF. City documents estimaie these amounts as $150,000 a~.nd $200,000, ~espectively. Pro]e.ctcd FY 2006 cxpendkures total ~,1,052~000, including $!70,000 for 0~e aforementioned levee inaintenance project. The AEF is experiencing a struCrurpd probiem wkh respect ~o the airport’s i~nanccs ]n ~hat cosvs are rising whilc revenue is stagng.nc All hangars at PAO are owned and oper:i~cd bx.,, the FiBO~ DRAFT Januao, 2006 5-7 -21 - FUTURE CAPITAL INVESTMENT NEEDS This section briefly examines both grant-fm~ded and loc~’&ly-funded capital improvements identified in ~he Airfictd Area and Building Area chapters of the ~iaster Currently, eligible projects selected for funding under the .F;-M’~,. Airport hnprovement Program (ALP) receive 95% federal funding ~nd qualif.v for an addhiona! 4.5% state match from Ca!trans Aero- nautics, subject to availabiIiD, of funds. The:efore~ the focal match required for MP projects can be as low as 0.5%. However, the federa! percentage is subiect ~o change whenever d~c AIP is peri- odical!.v reanthodzed. PreviousJy, the AIP provided 90% funding and there is the possibility that the program may revert to this funding level when 0~e next ,eauthorizadon occurs. The airport sponsor is responsible fo~ 100% of ~l~.e costs ~elated {o 1) the required match funding; 2) any element of tl~e proicct ineli- gible for ALP funding; and 3) the difference between .’-.ct~a! costs and esumated costs, which toge0~er can total a significant share of the overall project costs. For c>:~:nple, d~.e to~a! ~FA: ftmding component ~,ppro.qched 20% of the $2.8 million capi,ai p~ojecr con~pleted at PAO in 200t. I,;~.ilT)Or[ Improvement iProgram gr,qnts :,.~e accon~panied Icng~hy lis~ o~ c<~didons (’.g~anc assurances") ~ha[ rcmah~ ia forcc for 20 years. Some of ~he gran~ ass~;~a~ces ~ela~e to pro~ect menmdon (coasuhan~ sdcction, prcv~iti~g wages, inq~ec~on, cord keepJ.ng, etc0 while od~ers a~e b~oader in scope, such as the .rcQuircmem to keep tZqc ai~por{ ope~ ~r 20 years and the prohibi- tion on ~verdng ~rport revenue to non-aizpo~[ puzposes. The following projects identified in d~e Master Plan are eligible for AIP funding: New Taxiway D " Reconfguradon ofTaxiway G " ¢~ircraft washrack Physical securivy en~hancemenrs ° zMrficld-related repair projects following devetopment options identified in Chapter 4, Build- A~ea, will requi~e !<~c~,! fv, nding: 5-8 DRAFT January 2(?’08 - 22 - BUSINESS G~neral Aviation TermJn:d Baildmg r=p]acemcn~ ~nd park- lot Replacement dedowns N~w hangars FUTURE COUNTY INVOLVEMENT IN PALO ALTO AIRPORT Staff cannot identify ~ compelling reason for the Counpf to .’,ssume the business risk Of operating lhe airport beyond the expiranon of its lease with the City in 2017 regardless of the changek to the lease teat the Ciw may be witiing to make° Staff reco.mmends terminal- ]ng ks in,.,olvenmnt m the airport a~ tt~e e>:piradon of the Ci’.yiCotlnW ]ea.~e in 20i7 to ekimmate the possibilJt), that R~HV will need to subsidize P.AO h~. tl~e h~ture and to a~ow stuff ~,:, con- centratc on executing the Mas~c~ Pl~ns for RI’{IV and ]{A (L As noI:ed earlier, the airport ha~; historically operated a~ a deficit. ¯ However. i:uturc o]~portunides to genemm addifionai revenue physical environmental and pn5W s~andpoi~ts; existin~ G~7cies specifically prohibit physicnl expansion of the airport taro open space zreas~ sig~fic:mdy increasing d~e .intensiU, of opcrati(ms or adding :a d~ird ]:B().. 7In [ight of these consr~ai.nts, on!y minu~ changes to ~he airport’s airfield area were idennfied in thc Masmr P!an. " No; change to the aJ.~por£s ro!e x~qth respect to, the Wpe aircraft to be accommodated is contemplated due to ~unway hmim- tions. ]fa runway extension ,a’e~e feasible, k would have the po- tential to increase ~evcnue by catering to corporate abcraf~. Witt~ ~especr m the airport’s bt~lding as:ca, the ordy possible are:,. ,%r additional revenue-generating development is on a portion of tt~e vacam eight-acre parce! fronting Embarcadero Road. The City has the i]nal say regarding, the extent to which this parcel is devel- oped, if at all "Uhe ordy dexmlopment option h~ving ~evenue- generating potential that is idemified in the draft.N,.~s_er Plan is the addition of 29 new hangars. However. skyrocketing construction costs, .rising interest rates and the high cost of Oar. likdy mitigations required diminish the economic attractiveness of rhc ?w[oreover, extremely stiff opposition to an}, develop.ment at the a.~rport is ",Urmatty guaranteed and the approval process ~s an6ci- pared to be lengthy, a~duous a~d ex:pensive, Duc to the nonstandard clearances between ta.x.ilanes and parked aircraft, any conversion of cxisdng ~cdown rows to T-hangars would result in ~ aigt~fi~ant reduction of available akcmf~ basing DRAFT Januao" 2006 5-9 - 23 - 5-10 capacity. Morenver, the economies of building hangars over tie- downs ::re inherentiy poor because ~he de-downs that wo01d be eliminated currendy generate abot:t one-quarter the revenue hangars with no addLiuo:~.al capital investment required. As discussed in the Master Plan, the airport hg.s an elevation only 4 feet abot, e mean sea .[eve] (MSL) and is located in FENL&- designated Special Flood Hazard Area. Therefore, as the existing a~rport building infras*mcture reaches d~e end of its useful life and needs replacement, a~y new or substandaUy ~ebuilt airport struc- ture such ~s a new Terminal Building n’~nst have its fir:;: .floor rsised above the 8-foot Base Flood Elevation ~EE) or be floodproofed, which will add substantla!ly *o construction costs. The BFE for the airport is anticipated to rise upon conclusion of a FEM.A study of the San Francisco Bay levee system, The higher the BFE, the higher the adcLitional construction costs. In addition, a iargc-scalcproject to improve flood protection to the Ci~- by raising the elevation of the e::Jsring !evees surrounding the airIyort is inevitable and it is likely ~hat the airporq as a beneficia,’)., of the improvements, will be c:~pected to pay ~ sl’,:~re of the ject’s construction and maintenance costs. "]]~c basic business r~;sk tha~ costs could continue i-o exceed over the long ~erm couid mani[es.r itself ir~ myriad way~. The po~ could experience reduced demand f~om aircmk ownm:s due to a downturn in general aviation caused by high furl p~ices (,t some other ~acto~. A~thuugh the NIaster P!an assumes that Moffett Fed- era! .*Mrfieid wi~ ~c,t bccon~c available fo~: civSlian general aviadon use, the possibiliW exists that it could become av~dlable fo~ such use, which would have a severe negative impact on the demand PAO. Other possibigfies include reduced federal gmn{ revenue, unanticipated expenses or even a natural disaster such as a flood ea~thquakm The toss of PAO would not present ~ny operational impacts to the County, airport system because each airport’s aeronautical activities aze independent. Financi’~.dty., eliminating PAO from the AEF would ~:esult in the loss of the airport’s revenue, which .a~’ould be more than offset by the reduction in direct operating costs, capital: project expenditures and overhead costs. This would e]dminate the possibility that RI-tV wilt need to subsidize PAO in the fhmre and allow County airports staff zo k)cns o~.~ executing the master plans fo~ RHV and E16. P, cgardless of whether the City opera{es the aix~port itselfwith Cit), basis or leases fl~c airport 1o a new icsse~ after 2017, the airl!Orl’s s~rucmral .financial problem and business ~isk must be addressed. Ren~ocafing some of the business risk from the lessee t0 the Cib, DRAFT January 2006 - 24 - PAO BUSI.NE SS PLAN Would help attract potential lessees but wouid not address -’.he un- derlying problem. For example, if the City were to assume some risk by limiting the lessee’s responsibility tTor certain costs such as capital investments, it may be possible to attract a lessee vdlling to p~y ~ent but t}~e over-a~l risk would not change - Jt wonld merely be rea]Iocated along w~fl: some of the compensation associated with said risk. Operating costs could be k~wered by hiring ~. contractor hav.ing lower labor and overhead costs than tl~e Count), o: the Cit3,’ to op- erase the airport c,n a d.qy-to-day Basis. The City or a new lessee could ~ake over the FBO facilities t~l)On expiration of the tv]30 leases in order to ge~qe:ate revenue, particu- larly f~om the hangars. Both FBO leases expire simultaneously with the e;:piradon of :he City/Count" lease, and ownership of im- ’provemcn.ts constructed by the FBOs reverts to the airport spon- sor upon expi:auon of the FBO leases. J-~owevcr, ’,he ~evenue wil! be offset to some extent by tee rcinvestment reqnired in the FBO f~citiLies for ma{:~.tcn~nce, major repairs and code npgradcs~ RECOMMENDED ACTtONS The <; .~unry should: Continue to fu!fi~ izs ie:ase obligations nntit expiration of rhe lease ",rich tim Ciw in 2017 bm terminate its involve- ment in the airpo~:t at char dine, or earlier if desired by’ the Cig’. Limit future County capital investment in the airport to the loca! match necessary for essenda!, non-deferrable, AIP- eBgible maintenance pxojects or secu~i~,-~elated projects mandated by the F,’~’k or T~ansporta0on SecuriD, Admini-- stration ~SA). Projects ine~gible for AIP funding sbo~*ld not be undertaken- Require the CJg, to submit at1 future AlP grant applica- tions. Since the 20-year g~ant assurances will ~emain in force well beyond the expiration of the lease in 2(!17, t.he City must demrtninc whe~:her to apply for and accept the grants and thereby assume responsibility for the gcant surances after cxpi~adon o~ the The Cou.nD’ would retain-~ ’~u.u with the F2’,_A grant assurancesuntil expiration of the lease. The gt-ant assur.av, ces ~cl{~.d% to prc, iec~ implementation (consultant selection, construction co~]t~acrs, wage rates, in- spection, record keeping., en’dronmental complTiance, etc.) DRAFT January 2005 -25 - wJ~ have been met by the Coum3, prio~ to expirp.don of the lease. Othe~ assurances, such as the zequiremcm to ~cep *he airport open and the prohibit]on On e×porting ~rporv revenue, wil! :~emain operative for the enme 20-year life of the grant assurances. Raise tie-down rates m i) he!p make tI~e airport financially self-sustaining; and 2) help ~ecover as .much of" the Ou,~- standing Advance as possible prior to the lease expiratio~. in 2017. DRAF T Janua,T 2006 - 26 - ATTACHMENT C William W. Fe!lman Manager, Real Property Real Property Division City of Palo Alto P.O. Box 10250 Palo alto, CA 94303 June 14, 2007 Dear Mr. Fellman: As you requested, this constitutes my report to you on the obligations and responsibilities the City of Palo Alto (hereinafter "City") incurs as the owner (also ~known as the "sponsor") of the Palo Alto Municipal Airport (hereinafter "Airport"). There are two fundamental "obligations" incurred by the City as the airport’s owner- sponsor: to the federal government, specifically the Federal Aviation Administration (FAA), and to the State of California, specifically the Aeronautics Division of the Department of Transportation (Caltrans). As long as the City is "federally obligated", by virtue of having, within the past twenty years, accepted Federal Aviation Administration Airport Improvement Program (AIP) grant assistance funds for projects, the City will have to comply with the Grant Assurances that are made part of any FAA AIP grant acceptance. This obtains even though, in the past, the County of Santa Clara (Count),) sought the FAA AIP grants, with the concurrence of the City. The Grant Assurances (copy attached hereto) are part of the compliance requirements (with federal rules and regulations). There is another more expansive document, the FAA’s Order 5190.6A, Airport Compliance Requirements, not attached here due to its size) which details more obligations a public entity airport sponsor incurs by accepting AIP funding grants. Additionally, as examples of other compliance requirements, there is a wide range of subjects covered by FAA Advisory Circulars which impart owner-sponsor obligations for compliance. Examples are: 150/5190-6, Exclusive Rights" At Federally-Obligated Airports; 150/5190-7, A/1inimum Standards for Commercial Aeronautical Activities; 150/5200-18C, Airport Safe& Self-Inspection; 150/5370-2D, Operational SaJOty On Airports During Construction; 150/5050-7, Establishment of Airport Action Groups; 150/5050-4, Citizen Participation in Airport Planning; and there are many, many more. Copies of these few are attached hereto. The above covers a variety of owner-sponsor obligations that, while "advisory", often turn into "non-compliance" issues unless a good faith effort has been exerted by the airport owner-sponsor to comply. Airport pavements, runways, taxiways, and parking aprons/ramps are a major owner- sponsor and federal investment, and are, literally, the heart and soul of an airport. Maintaining or repairing pavement is a compliance requirement for federally obligated airports where AlP funds have been used to lay-down runway, taxiway, and parking apron/ramp pavements. As an example of the FAA interest in, and expectation of owner-sponsor compliance, and accountability that can’t be assigned away, there is a library of Advisory Circulars to be followed: 150/5380-6B, Guidelines and Procedures for Maintenance of Airport Pavements; 150/5380-7A, Airport Pavement Management Program; 150/5380-7B, Pavement Management System; and 150/5335-5A, Standard Method of Reporting Airport Pavement Strength. These detail the key elements of a Pavement Management & Maintenance Program as is required by the FAA for having accepted AIP grant funds for pavement projects. A Pavement Management & Maintenance Program starts with a simple daily observation and documenting of pavement condition and quality across the airport. The Program requires a plan for periodic maintenance, from crack sealing, to widespread rejuvenating slurry sealing, to full pavement overlay. In conjunction with pavement condition & quality observation is the requirement to look for and remove ~’foreign object debris" that could damage airplane tires, damage propellers, or be ingested into jet engines. Fundamentally, the airport owner-sponsor is obligated to, and responsible for the safe use of the runway and taxiways, and parking apron/ramp. The above is intended to demonstrate a major area of owner-sponsor obligation that can not be dismissed as perpetual owner-sponsor involvement. Then there are State obligations that accrue to the City due to 1) being a State "permitted" airport (focused on the safe ingress and egress, and use of the runway by aircraft), and 2) stemming from accepting State grant assistance funds. While the State does not, at this time, have "grant assurances" per se, like the FAA does, nor does the State have its own, or has supplemented or augmented FAA "advisory circulars", there are State obligations. The California Public Utilities Code, Sections 21001 et seq, the State Aeronautics Act, and the California Code of Regulations, Title 21, Sections 3525 through;3560, Airports and Heliports, serve as State "advisory circulars" (copies of both attached hereto). Additionally, the California Code of Regulations, Title 21, Division 2.5, Chapters 4 & 5, California Aid to Airports Program and Airport Loan Program, provide "compliance requirements" for applying for and for accepting State grant funding assistance (copy attached hereto). There are two FAA requirements that the State has adopted as airport owner-sponsor obligations, both bearing on holding a State operating permit. One is the Advisory Circular 150/5300 -13, Airport Design, and Federal Aviation Regulations Part 77, Objects Affecting Nav~gable Airspace. The State expects compliance with the guidelines of each of these, and can suspend, or even revoke, a previously issued State operating permit- thus shutting down an airport. FYI: There is a Heliport Design FAA Advisory Circular adopted by the State pertaining to establishing and operating a heliport, whether on- or off-airport that could come to bear on the Palo Alto Airport if an on-airport heliport is eventually constructed. The bottom line here is that no matter who "runs" the airport, the airport owner-sponsor is ultimately and always obligated to comply with federal and state requirements. An entity contracted by the airport owner-sponsor to conduct day-to-day operation of the airport can be made accountable to the owner-sponsor by the form of contract for compliance with federal and state requirements, but the owner-sponsor is obligated, thus responsible, thus accountable in the final analysis. There is an area that combines owner-sponsor obligation and responsibility: liability insurance. The owner-sponsor obligation is to have adequate coverage, as a responsibility to the rest of the City. An entity contracted to operate the airport on behalf of the owner-sponsor City can be required to obtain adequate liability insurance coverage, naming the City as an additional insured. The city, as a public entity probably can acquire liability insurance at a cheaper rate than can a private entity contracted to operate the airport. The City has a risk exposure as a "deep pocket", even if the airport is operated by a contracted entity. This is clearly an area where the City has to make a "business decision" as to how to handle its risk exposure and liability coverage. Another area that combines obligation and responsibility is airport financial solvency. It is a federal obligation to have revenues exceed expenses such that the airport is financially "self-sufficient" and financially "self-sustaining" It is a requirement at the time of applying for an FAA Airport Improvement Program funding grant, or a State financial assistance grant that the "local match" funds be on-hand, or that there is a plan to acquire them before accepting a grant offer, which may come a year or two after initial application, tbr example. This requires a revenue generation program that covers basic operating expenses, and then also builds, over time, funds in a specific budget line item to Be used as local match funds, and additionally build over time a "contingency reserve" to cover emergency repairs or acquisitions/purchases necessitated by accident or natural disaster. As a central part of achieving financial solvency, in the near-term as well as. for the longer-term, is to set the airport’s "rates, fees, and charges" scheme. Everything that is rented, leased, or used should have some charge or fee assigned to it. Property should be leased!rented on a cents-per-square foot basis (whole buildings or spaces inside buildings; tie-down spaces; raw dirt; even large paved apron/ramp areas leased to an FBO). Common areas (such as grass/open space that needs maintenance by the airport; motor vehicle parking lots with dedicated!reserved spaces; etc.) should have proportionate charges assessed to those fronting or using them. Rental/lease agreements should have stated "escalation" paragraphs so rents can be increased periodically without major tenant or user upheaval. The FAA strongly suggests escalators of some type. Most common and defensible is to review the Consumer Price Index annually and decide at the City’s option to increase rents and leases by that percent, or not. And if not escalated annually it should be policy to at least escalate biennially. While the FAA does not conduct regular, periodic safety inspections of the runway environment, as does the State through its own permitting process, a further owner- sponsor obligation is to expeditiously correct discrepancies the State identifies in its inspections. Failure to do so can result in permit "suspension", or even permit revocation - essentially shutting the airport down. State permit safety requirements are easily met if the airport conducts its own daily self-inspections, which will cover State requirements in addition to FAA suggestions. Finally, the airport owner-sponsor has the responsibility, to ensure compliance, by itself and its tenants and users, with environmental protection requirements stemming from the National Environmental Protection Act (NEPA) and the California Environmental Quality Act (CEQA) for projects and activities on the propen),. Contaminated storm water runoff; tenant disposal of lubricants and fuels; and leakage containment of fuel storage tanks are a few of the major environmental protection issues airport owners- sponsors have to deal with on a daily basis. The preceding not an exhaustive "primer" of what to do, and how" to do it. This paper is intended to give a mere glimpse at the myriad, varied obligations and responsibilities that accrue to an airport owner-sponsor no matter whom, or what type of entity, under what t?~e of contract/agreement operates the airport. The responsibilities of airport ownership are to meet the obligations, and institute good business practices. In closing, being the owner-sponsor of an airport is a business matter; a property management business task. Certainly the safe use of the "property" by tenants and visitors is task Number One. Beyond that, maintaining financial solvency is imperative to allow for emergency and contingency recover,; repairs and maintenance of pavements and facilities necessitated by normal wear and tear; and improvements and replacements, and additions of facilities and pavements prompted by increased use, or changes in use of the airport. Third, environmental protection and compliance with laws to that effect must be an everyday practice. Should you desire more explanation, please feel free to contact me. Sincerely, R. Austin Wiswell Attachments: 1. Federal Aviation Administration Airport Improvement Program Grant Assurances for Airport Sponsors, 03/2005. 2.Advisor}-, Circular 150/5190-6, 01/04/07, Exclusive Rights At Federally Obligated Airports. 3.Advisor}., Circular 150/5190-7, 08/28/06, Minimum Standards for Commercial Aeronautical Activities. 4.Advisory Circular 150/5200-18C, 04/23/04, Airport Safety Self-Inspection. s Advisory Circular 150/5370-2D, 05/.~ 1/0~_, Operational Safety On airports During Construction. 6.Advisory Circular 150/5050-7, 06/23/87, Establishment of Airport Action Groups. 7.Advisory Circular 150/5050-4, 09/26/75, Citizen Participation In airport Planning. 8.California Public Utilities code, Sections 21001 et seq relating to the State Aeronautics Act, 02/2006. 9.California Code of Regulations, Title 21 Sections _~__-_~ou, airports and Heliports, 03/2003. 10. California Code of Regulations, Title 21, Division 2.5, Chapters 4 & %, California Air to airports Program and airport Loan Program, 07/2005. Cc: Chris Mogensen, Assistant to the City Manager w/o attachments Carolyn Bissett, City of Palo Alto Purchasing Department Bill Fellman Manager, Real Property Real Property Division City of Palo Alto P.O. Box 10250 Palo Alto, CA 94303 ATTACHMENT D July 6, 2007 Dear Mr. Fellman: As requested by you, I’ve reviewed the Palo Alto Airport Working Group’s (PAAWG) May 2007 report to the Palo Alto City Council that purports to advocate the City expeditiously regain operational authority, responsibility, and control of the City-owned airport. My specific task relative to the PAAWG’s report was to comment on their recommendation(s) that: 1. The City Council direct the City Manager to negotiate the early termination of the existing Palo Alto Airport lease with the County of Santa Clara; 2. The City Council appoint an interim manager for the airport; and 3. The City Council issue an RFP (Request for Proposal) for the long-term management of the Airport, which will ensure its asset value to the community is maintained and will preserve its economic value into the future. The PAAWG report is long on optimism and naivet~, but that is not condemning of the effort. It may be an indication of thoughtful and confident consideration of the responsibilities for the variety of operating tasks. Or it may reflect a lack of understanding of the business aspects of running an airport of any size. Most of the 292 page report is attachments without substantive comment of their respective importance, purpose, and utility in reaching any conclusions, or in making any recommendations. I will later comment on specific statements, assertions, allegations, and suggestions made by the PAAWG. First, I will address the three elements of the operative PAAWG recommendations, as I was tasked to do. As regards the first PAAWG recommendation that the City of Palo Alto negotiate an early termination of the current lease with the County of Santa Clara (earlier than the present 2017 lease termination year), which now- has the County operating the City’s airport. I believe tha~ course of action should be fully explored as soon as possible. It may well take a few years to settle all of the "minor" details, such as the disposition of the County’s Outstanding Advance of, now, some $681,000+; past and future levee maintenance; future shared responsibilities for maintenance of Embarcadero Road; and other issues of probable disagreement between the County and the City. It does seem that the County is desirous of extricating itself from operating the Palo Alto Municipal Airport, especially, it may be, since the County’s South County Airport is growing in use and tenancy, and County management workload. The PAAWG report offers little in the way of enumerating the benefits to the City, and the airport, of City operational control; nor any informative discussion of the authorities, obligations, and responsibilities incumbent on the City for assuming operational control of the airport; or any meaningful discussion of any "downside" to the City assuming operational control of their airport. I do believe, even at this early time, that direct operational control by the City of Palo A~to of its ow_n airport has ~neri~. The proposition has merit from the standpoint of operational control of its own airport being considered a public-entity responsibility; to directly better serving City constituents, both airport supporters and detractors; and having direct hands-on management of a City-owned transportation and economic engine asset. Further, both the State of California’s Aeronautics Division and the Federal Aviation Administration should be apprised of the mutually agreed to intent of the County to relinquish, and the City to assume operational authority and responsibilities for the Palo Alto Municipal Ah-port. This would ensure that past financial obligations and compliance requirements (e.g. FAA Grant Assurances; accounting records of past State and federal grants; etc.) incurred by the County on behalf of the airport, and the City, are known, resolved, and properly transferred. Finally, the City should expeditiously apprise itself of the full breadth and depth state and federal obligations, and risk exposure and liability obligations and responsibilities it would assume when operational authority is obtained by the City. In a previous submission to you, I discussed the many and varied obligations and responsibilities the City now has as owner of the Palo Alto Municipal Airport regardless of County operating the airport or a contractor operating the airport, and the additional obligations and responsibilities the City would assume if it chooses to be the actual operator of the airport. As to the second of the three PAAWG recommendations, that of appointing an interim airport manager, the City must make the distinction between having a "manager" with the fullest of responsibilities, obligations, and authorities that being a "manager" of anything confers and requires; or having an "operations supervisor", who merely monitors what is happening at the airport, primarily from a safety and maintenance perspective, but has no policy-setting or contracting authority, as examples; or a "business and property administrator", who has authority to negotiate lease/rental agreements, collect payments, authorize disbursements, answer inquiries about airport policies and activities, as example. The term "airport manager" is too often tossed out as the title, but the reality is that each of these levels and types of operational control of airport management, or supervision, or administration is markedly different. The City needs to decide what it wants, in light of what it can afford (financially, as well as benefits burden) and staff assignment, whether new hire from off-the-street or additional duty within current City staffing, and with regard to desired expertise. Assuming operational control of the City’s airport is a "start-up business" proposition that must be well thought-out, taken seriously, and entered into cautiously. I believe that initially an Operations Supervisor is the objective, with future job enrichment and expansion to Airport Manager after the City evaluates progress and success. There are mature, educable, and somewhat knowledgeable individuals available from the ranks of retired military or recent college graduates (e.g. Embry-Riddle; San Jose State University; California State University at Los Angeles are examples of university-level airport management programs that I have been associated with, and there are others) who could be hired-on to staff the City’s initial operational control foray. There are other options to using a City-employee, which leads to the third PAAWG recommendation, which I will next discuss. The third PAAWG recommendation is for the City to, in short, issue a Request For Proposal (RFP) to seek a contractor for long-term management of the airport. I have personal experience in this arena, having been General Manager of an airport management entity that leased a small 200+ acre General Aviation airport from the County owner. This was not a hired operator, but a lessee operator. The lessee corporation was a "not-for-profit" entity with a seven-member volunteer Board of Directors overseeing what I, as corporation General Manager (and daily Airport Manager) did. This arrangement of professional management by me, and my successor, serves the airport itself, the users and tenants, and the owning County well. The operative term here is professional management, professional by experience and education/training, and involvement in professional airport management organizations. Being an airport manager, or an operations supervisor for that matter, is much more that watching airplanes drone by the window or having morning coffee with pilot friends each day. i previously advised you to contact the City of Oceanside, in nortt’,ern San Diego County, to ask them about their plan, and progress, to seek an airport management entity for their City-owned small General Aviation airport. Oce .anside, and the airport users and tenants both have become somewhat disenchanted with operating the airport from within the City’s Public Worlds Department. Further, I apprised you of the Count~j of Los Angeles’ long-standing single contractor operation of their five County-owned General Aviation airports. I also suggested you contact Riverside County’s aviation office to find out why they cancelled their five airport operating contract with the same contractor as Los Angeles County continues to employ. I strongly recommend contacting all of these ~o give you a broad flavor of the issue: hiring someone to run your airport for you. Much more needs to be learned by the City before choosing any course of action, whether operating their own airport or contracting for an operator. It should be noted here, and is stated in the PAAWG report, that the City of Turlock entered into an operating agreement with the airport’s pilots association to run the City-owned airport on behalf of the City. The reason for the pilots association proposing this operating agreement was their dissatisfaction with the City’s attention to the airport, especially as regards basic upkeep and maintenance, and applying for federal and State ~ants-in-aid. Now the pilots association wishes the City would be more involved in what is happening with, and to the airport, and interact more with the pilots association on operational matters. There is no easy solution, and there is no solution clearly better than any other. Before proceeding with an RFP, the City of Palo Alto needs to gain more information, at least State-wide, if not nationally, on contractor operation of a public-owned General Aviation airport, whether a for-profit or not-for- profit operator; whether on-airport FBO or not; whether City-chartered entity or not. I will now turn my attention to specific comments made by the PAAWG that warrant my viewpoints. One thing the City must reconcile before proceeding further to regain operational control of its airport, or pursue getting someone other than the County of Santa Clara to run it for the City is this: What does the city want the airport to be? There is a listing in the PAAWG report at Appendix 1A, page 5, of the many, commonly recognized uses of the airport. Hopefully the order shown is not that of importance and value to the City. The airport’s primary value to the City, and overarching purpose and use is as a "transportation node", as both a departure point and an arrival point for an aviation transportation leg. Thus, purpose #3 for the airport on the PAAWG listing - "...convenient transport for business and personal needs." is what the City owns, wishes to operate themselves, and will commit to maintain in a safe and effective condition. The. airport’s primary value is as a contributor to the local economy in allowing local businesses to fly out of it in pursuit of business activities; allows businesses outside the local area to fly in to it to conduct locally beneficial business; and allows tourists and other personal purpose visitors to have a convenient local aviation transportation facility for arrival and departure use. Of course, the airport benefits the City’s citizens as a valuable location for emergency medical evacuation (air ambulance and "life flight" operations) and disaster response use. It also supports local law enforcement and fire fighting purposes as either a base of operations or a staging and refueling location. The City is not obligated to assume the responsibilities and obligations as airport operator for the purposes of flight training and local pilot "recreational" and hobby flying. Those, as examples, are tangential purposes and values to the City. Once the airport’s value is understood, and its overarching purpose accepted, and, then, the commitment to the airport’s long-term welfare is made, the negotiations with the County can commence in earnest and the search for a private-public partnership to operate the airport can be initiated. First things first: What does the City want the airport to be, as regards clear value and benefit to the City? I offer that the airport is a transportation facility first and foremost. The PAAWG report, and the City Auditor’s report both seem to feel the increase in monthly tie- down fees and the fuel flowage fee are excessive and without adequate justification. The monthly tie-down fee is a matter of it being a "seller’s market", not a "buyer’s market". Comparing tie-down fees across several airports is little more than interesting. Each airport is very fundamentally different. Palo Alto has a revenue generation base now that favors the tenants. It seems not to be driven by revenue generation for airport needs, and equitably applied across all airport tenants and users. Past revenue generation decisions, as reflected in airport income constraining leases, and decisions to restrict expansion of revenue producing facilities and areas forces the airport (the County of Santa Clara in this case) to significantly increase what few revenue sources are available, namely monthly tie-down fees and fuel flowage fee. The harsh reality of tie-down fees is that the tie-down occupants have made a personal convenience decision to locate their aircraft at the Palo Alto Airport. They, not the airport, have to make a further decision as to which of the cost versus convenience lines crosses into the negative area. That’s not to say the airport can raise fees in an unconstrained manner. Those paying tie-down fees are, in essence, investors in the upkeep, maintenance, and repair of the airport, and as such they need to be treated fairly - and fully informed as to what their fees are going to, just like any business investor. Don’t let fear of comparables, and relatively idle threats of moving to another airport discourage charging what is needed to support the airport. General Aviation airports are rarely in competition with other General Aviation airports, unlike commercial service airports more often are. As for the dramatic increase in fuel flowage fees from ten cents per gallon to twenty cents per gallon, that is noteworthy. Even ten cents per gallon is nudging toward the high side of fuel f!owage fees. The airport has little choice in the matter since fuel flowage is one of the two available sources of revenue to support airport needs. I gather that when airport operation reverts from the County to the City all leases and rental agreements are subject to renegotiation - on better terms for the airport and, probably for the tenants and users also. There are better, more commonly applied methods to fix fees for tie-down spaces; land leases, lease or rent of airport owned facilities/spaces; percent of gross FBO (and other business tenants) revenues; fuel flowage fees; transient aircraft parking; meeting room rental; etc.; etc. that create a revenue generation system of many sources equitably applied across all airport tenants, users, and uses. I suggest this be more fully explored by the City before committing to assuming responsibility for setting revenue generation policy. The airport must be made financially self-sufficient, and financially self-sustaining in short order after the City would assume operational control. ~amother area of comment here that is related to financial solvency of the airport, and revenue generation opportunities, is the City policy, expressed in the City’s Baylands Plan, which seems to be severely constraining the airport as regards, specifically, building revenue producing hangars. There is always a demand for hangars, and hangars are always revenue producers. There are several ways to fund construction of revenue producing hangars: State loan; revenue bond; private financing for private owned & operated, but with ground lease and percent of gross coming to City for airport support. The City does not have to accommodate every aircraft wishing to be based at the Palo Alto Municipal Airport, nor does it have to accommodate every entrepreneur who wishes to place their aviation business on the airport. Again, it is a "seller’s market", not a "buyer’s." Having said that, ho~vever, I recommend an in-depth, no holds barred re-think of the City’s Baylands Master Plan relative to allowing construction of hangars (some 29 are proposed in the recent Airport Master Plan, and some number of that might be possible), and the relocation of the Terminal Facility, both on the 5.6 acre site fronting Embarcadero and Harbor Roads. I recognize, and appreciate the City’s desire to not have airport operations significantly increase in "intensity" (which I doubt they will, for a number of reasons) or "intrude" on open space areas (if it is airport property in the first place, I don’t see an intrusion occurring it its truest sense). There is a lot of architectural design work that can go into unobtrusive siting and character of hangars and a new Terminal building that should be explored. Further, there should be considerable investigation of construction requirements to satisfy flood hazard concerns. Again, architectural design work could mitigate most concerns - except increased cost of flood hazard mitigation. The relatively short single runway, of 2, 433 feet long that can’t be appreciably lengthened, will always be a limiting factor in how much bigger the airport can get as regards basing of aircraft in hangars and on tie-downs; and how much more daily traffic the airport can accommodate; and how much larger the aircraft that routinely operate at the airport can be. Even the much touted four, six, or maybe eight passenger Very Light Jets, or Microjets, desire a 3,500 foot long runway. Other factors that will combine in some fashion to limit future "intensity" increase is the increasing cost of aircraft fuels; the relatively stagnant number of active pilots (lots of hangared and tied-down aircraft don’t fly regularly); and the general cost of insuring and operating an aircraft (especially if some type of "user fee" structure is implemented by the Federal Aviation Administration). Hangared aircraft don’t necessarily increase "intensity" of activity, but they do enhance airport revenue. The PAAWG takes great exception to the County’s accounting procedures, and philosophy. The PAAWG seems to feel the County is overcharging the Palo Alto Airport part of the overall County Airport Enterprise Fund. The City Auditor’s report seems to have minor differences of opinion with the County’s procedures and philosophy. I can’t definitively support either accounting approach, or adamantly disagree with either either. One issue is how to account for depreciation of assets, the basic wearing out of buildings and pavements. For Federal Aviation Administration projects funded by Airport Improvement Program grants (with the exception of "paper projects" like Master Plans) the depreciation schedule is usually a straight line twenty- year amortization. To me this means: set aside money, enhanced by projecting inflation, each year to cover replacement in twenty years. In the public sector depreciation doesn’t mean much more than that since there are no tax implications in play. An accelerated depreciation schedule can be employed with the same funds set-aside commitment to fund replacement at the end of useable life - which still may be based on a twenty-year life span. My present inclination is to embrace the City Auditor’s report as regards its conclusions, criticisms, and revenue and expense history and projections° When the City assumes operational control of its airport, the City’s auditor will be THE responsible audit agency, and the June 6, 2006, City auditor’s repor~ can serve as a baseline and departure point for subsequent audits. A second area of PAAWG criticism of the County has to do with the County’s staffing of the Palo Alto Municipal Airport, and associated personnel costs. The issue may be systemic, rather than scurrilous. The County of Santa Clara has its own personnel policies, rates of pay and benefits, unionization to deal with, all in the context of a three airport, rather homogenous staffing regime. Should the City of Palo Alto assume operational control of their airport, staffing can be tailored to the situation: hire staff as "independent contractors", not City employees; use City employees in the context of"additional duties"; or pay a named person, or persons of the not-for-profit corporation reco_nmaended by the PAAWG a base monthly rate but .without pension contribution and health benefits (i.e. medical, dental, and vision). In either of the above options, the employee "tail" is absent (e.g. Social Sectvity; workmen’s compensation; state and federal tax withholding; post-employment pension; and long-term post-employment health care). In a related matter, in charging the airport for "services", the City can treat those differently than has the County, which would reduce operating costs. The City can use its own administrative and operating agencies and charge for just time-and-materials; or for time-and-materials and staff/personnel time. The City’s "overhead" for legal, accounting, human resources, grounds maintenance, etc. is likely to be somewhat less than the County’s has been. City agencies can be used for basic maintenance and repairs at the airport and do a charge-back for them. Finally, the staffing for the airport is a matter of, first, answering the previous two options: how to staff (and for what purposes), and how to cover overhead and services. Then, second, pursuing a well thought out course of action. My initial suggestion, based on my earlier discussion of hiring an airport manager, whether interim or ~ong term, is to start with two persons to oversee the airport: one to deal with operational matters, such as safety and maintenance, and one to deal with administrative matters, such as grants and collections and disbursements. There is no requirement to staff the airport 12 to 16 hours per day, or seven days a week, at least not initially. The City can add to staffing as it becomes more aware of the ful! range of its obligations and responsibilities, and what type of staffing (numbers of persons and experience required) it takes to effectively meet them, and, of course, what the airport can afford. I notice the PAAWG has attempted to accomplish an economic impact survey, or assessment, using a model developed by the Aircraft Owners and Pilots Association. It is a good tool for airport supporters to use to get a flavor of the airport’s economic engine role in its community. suggest engaging a more experienced professional entity to conduct a comprehensive economic impact survey and assessment of the airport’s value to the Palo Alto area business and commerce community. It is mildly impressive to define the direct economic impacts of salaries and services at the airport proper. It is more impressive and more important to define the indirect economic impacts of services and products acquired off-airport because of the airport’s existence and use. Most impressive and most important, in my mind, are the induced positive economic impacts off-airport due to airport users, especially visitors (tourism and business) in terms of new businesses started or expanded, commerce expansion in general, and additional off-airport staff/personnel hires due to increased off-airport business and commerce fostered by airport use. The City needs to lcnow much more about the value of the airport off-airport. In closing, !’ll address the validity, and optimism, of the PAAWG financial projections. One thing that must always be remembered when malting hopeful economic predictions, especially those that portray revenues barely exceeding expenses: something can go ,~ong - and it probably will. I am not optimistic that growth in revenue at the Palo Alto Municipal Airport will mirror any traffic (i.e. use) increases projected by the Federal Aviation Administration, the State of California’s Department of Transportation’s Division o.f Aeronautics, or any affinity or trade group. The future of General Aviation activity, when compared to what it was in the 1970s and 1980s, is very much open to question, and some doubt. As I stated earlier in this report, increased, and increasing, fuel costs; increased liability and hull damage insurance costs; increased costs to acquire and maintain the basic aircraft (acquisition plus life-cycle costs for required peIiodic inspections and replacement parts); a relatively stagnant active pilot population (new starts do not exceed "retirements" from active flying); and the specter of "user fees" imposed on General Aviation aircraft operators in any combination will slow traffic growth, if not degrade current traffic levels. The fixed runway length, the limited space for which to place hangars, and the limitation on the number of apron tie-down spaces add to the prospect that increasing revenue projections out through 2017, and beyond to 2022, need to be tempered. The objective remains for the airport to be financially self-sufficient as soon as possible, and over the longer term be financially self-sustaining. It is nibbling around the edges of expenses combined with justified revenue generation, in balance, that is the business approach required, at least initially. I remain readily available to further clarify and elaborate on my critique of the Palo Alto Airport Working Group’s three recommendations, and my additional comments. Sincerely, R. Austin Wiswell CC:Chris Mogensen, Assistant to the City Manager Carolynn Bissett, Contract Administrator 7