HomeMy WebLinkAboutStaff Report 418-07TO:
City of Palo Alto
City Manager’s Report
HONORABLE CITY COUNCIL 6
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:NOVEMBER 13, 2007 CMR: 418:07
SUBJECT:FROM FINANCE COMMITTEE: REQUEST FOR COUNCIL
DIRECTION CONCERNING RESPONSE TO THE PALO ALTO
AIRPORT WORKING GROUP REPORT AND OPTIONS REGARDING
THE FUTURE OF THE PALO ALTO AIRPORT
RECOMMENDATION
Staff requests Council direction regarding options for the future of the Palo Alto airport.
COMMITTEE REVIEW AND RECOM.MENDATIONS
At the September 18, 2007 Finance Committee meeting, the Committee discussed staff’s
response to the Palo Alto Airport WorEng Group Report (PAAWG) and also discussed options
related to the future of the Palo Alto Airport. The Committee was split on the recommendation
and agreed to forward the report to the full Council for its review. The Committee also had a list
of questions that required additional research by staff and directed that responses to these
questions be forwarded to Council with the report. See Attachment A.
PREPARED BY:
WILLIAM W. FELLMAN
Manager, Real Property
DEPARTMENT HEAD:
Director, Administrative Services
CITY MANAGER APPROVAL: ~" ~’~"
E~IILY HARRISON
Assistant City Manager
ATTACHMENTS
Attachment A: Questions from the 9/18/07 Finance Committee Meeting
Attachment B: CMR:361:07
CMR:418:07 Page 1 of 1
ATTACHMENT A
Questions from the Finance Colrmfittee Meeting:
1)What is the current status of establislfing Safety Zones at Palo Alto Airport
"PAO" and do the safety zones have an?, bearing on future development in San
Mateo County and East Palo Alto?
The safety zones at PAO are currently being created to recent FAA requirements.
Walter Windus, a County of Santa Clara Airport Land Use Commissioner is
working with the City Surveyor to establish the safety zones for the PAO. Once
the safety zones have been created, they will be shared with surrounding
jurisdictions. The north safety zone will be submitted to San Mateo Count3, and
East Palo Alto for adoption. The south safety zone will be adopted by the Santa
Clara Airport Land Commission and the City of Palo Alto. The safety zones at
both ends of the airport are over property owned by the City of Palo Alto. Staff
believes that the proposed safety zones wil! not restrict development in San
Mateo County, but this will be ~.,erified.
2)Will the Army Corps of Engineers levee report recommend a realignment of San
Francisquito Creek? Will the Army Corps buy any required right of way? Is the
Army Corps considering the effects of global warming in its report?If the
location 0fthe creek is changed, would the County boundary line change?
The At-my Corps. of Engineers Levee Report is underway but will not be available
for review until the year 2010. One proposal that is still being considered is to
return San Francisquito Creek to its origin!l location. Another alternative would
create a ponding area on the golf course. Staff was reminded by the Army Corps
of Engineers that, at this point, these are suggested proposals still under review.
Typically, the Army Corps leaves the purchase of any required right of way up to
the lead agency. In this case that would be the San Francisquito Creek Joint
Powers Authority, of which the City is a member. The At-my Corps is taking into
consideration the effects of Global Warming as part of its study. Staff does not
believe that the boundary line between the two counties would change as a result
of any realigmnent of the creek.
3)What did Mr. Wiswell mean when he indicated that PAO should be run as a
"business node" and not a recreational facility?
Staff asked Mr. Wiswe!l to explain the concept of running the airport as a
business node. His response was that "all airports are "business node" airports to
a varying degree. Businesses locate in the community and operate into and out of
the community because the community has an airport. Having a local airport is a
factor in a business deciding to locate in that community. Central to a public
agency owning a business-use airport are community employment and the
resulting tax base. An airport that is supportive of business provides good
accommodations and services such as a pilot lounge, small meeting rooms, rental
car access, timely fueling etc.
A business node airport should also be run like a business. PAO is a desirable
location in the heart of Silicon Valley since it is close to Stanford and several
large corporations. Given this fact, PAO is desirable for local airport access and it
is reasonable if fees are higher than at other local airports. Mr. Wiswell
recommends that a comprehensive economic impact survey and assessment of
PAO be conducted to help develop a long-term revenue model that will not only
meet Federal and State requirements but also provide the revenue for
infrastructure requirements not funded by the Federa! or State grants. He
strongly recommends that the construction of additional hangars be considered to
create a new revenue source.
4) Will the new tight jets and the short single runway make PAO obsolete?
No, it is estimated that 95 % of the current general aviation aircraft can land at
PAO and, given the rapid pace of technological advancements being made in
aircraft engines, the need for a 3,500 foot runway could likely change. The State
claims that what will make PAO obsolete or unattractive to a business flyer is a
lack of se~a~ices. Business aviation is the fastest growing segment of air travel at
local airports because of convenient access and the travel and congestion
difficulties at commercial airports. Easy access to Silicon Valley and Stanford
makes PAO an extremely attractive location for businesses.
5) If the City were to take back PAO, what does staff estimate the time line to be?
Staff believes that before there is change in management, including potential third
party management of PAO, a closer relationship with the County and a full
understanding of airport operations is necessary. This includes staff thoroughly
investigating how other public agency airports are managed. Staff believes that it
will take at least three years to transfer management responsibilities from the
County to the City.
Estimated Timelines for Eventual Airport Transfer to City
Estimated Time
Current Agreement & Grant Reviews
Airport Comparisons
Staffing Needs Assessment
USGS Topo Maps
Comprehensive Economic Study
Metropolitan Transportation
General Aviation Review
US Army Corp. of Engineers
Levee Report
MTC General Aviation Review
City!County Negotiations
FAA Grant Proposal review
Review of Count-}, Financial
Statements
to complete
6 months
9 months
9 months
9 months
12 months
18 monthsCommission
3 years 2010
18 months 2009
3 years 2010
Annually
Annually
Estimated
Completion
Date
July 2008
Sept 2008
Sept 2008
2008
2009
2009
6) What would happen to PAO if Moffett Field became a general aviation airfield?
The State is unaware of any plans for NASA to transfer ownership or to mna
general aviation airport. Moreover, both the Cities of Smmyvale and Santa Clara
are opposed to Moffett being used for general aviation. PAO remained open
when Moffett was an operating military airport, so there would be no reason for
the FAA to close PAO if Moffett Field became a general aviation airport. Staff
was also told that if local authorities were to close PAO, the FAA would require
prorated payment of any outstanding FAA grant monies.
7) What is the State’s vision for PAO?
The State believes that PAO is an important reliever airport. Due to its central
location to the SilconValley businesses, Stanford University, and the Stanford
hospitals, it will continue to be vital asset for many years to come.
8) Who wilt be responsible for the County levee?
The Board of Supervisors voted to discontinue maintenance of the current airport
levee. The City of Palo Alto will now be responsible for the levee. This levee is
included in the Army Corps of Engineers levee evaluation due in 2010.
9)PAO has a 10% tie down vacancy rate. Is that a trend or spike and does it have
any relationship to the County’s increase in tie down fees?
At the Finance Committee meeting on September 18t~, staff responded that it was
too early to tell if increased rates have caused an increase in the vacancy rate for
tie downs. Mr. Wiswell suggests that due to PAO’s desirable location, higher fees
can be charged. This appears to be true given the higher tie down vacancy rate at
other Bay Area airports as shown in the table be!ow. The County does plan to
increase the rate again in the summer of 2008. If the County continues to increase
the rate annually until the end of its lease in 2017, it is possible that the vacancy
rate could increase to the point where revenue generation would be affected. Fee
increases will need to be evaluated carefully.
When staff polled other Bay Area airports, it was interesting to note the extremely
high demand for hangar space (shown in the following table). One of the PAO
FBO’s asserts that if one of their hangars became vacant, it could be rented again
in an hour.
The following is a sample of other public-run Bay Area Airports tie down
vacancy rates a~d hangar wait lists:
Location Tie-Down Vacancy Rate Hangar Wait List
1) Palo Alto 10%No Hangars Available
2) Nut Tree 15%38
3) Hayward 30%333
4) Livermore 43%270
5) Reidhillview 50%!67
6) South County 79%63
7) Livermore 60%200
10)How are the master plans for the Baylands and the Airport in conflict? And the
lease?
The Coufity would like to construct hangars at PAO in order to generate more
revenue. The 1990 Baylands Master Plan states "In general, make no changes in
the airport activities that will increase the intensity of-the airport use or will
significantly intrude into open space". The word "intensity" is a key term, but it
is not defined. The County’s proposal to add hangars in the open space adjacent
to Embarcadero Road could be considered a visual intrusion into open.space and
an intensification of use. The vacant acreage the County has selected, space
adjacent to Embarcadero Road, is considered the entrance to the Baylands.
Adding hangar space in place of tie dov~n space, however, could reduce the
number of planes at PAO since an individual hangar would take up more square
footage than a single tie down space. It has been suggested that hangar space can
be located in existing tie-dov, aa areas closer to the FAA tower, reducing the total
number of airplanes and not being in potential conflict with the Baytands Master
Plan. An analysis of the revenue consequences of such a plan would have to be
conducted.
11) \Vhy did staff feel that the County use of depreciation was misleading?
The City Auditor stated in her report that "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 Airport’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. 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 profit 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."
12)What was the actual wording by the Board of Supervisors on December 16, 2006
with regard to its interest in the PAO?
The Board of Supelwisors voted to:
1. Approve the continuing fulfillment of the County’s obligations under the
lease with the City of Palo Alto for the airport property until expiration of
the lease in 2017 provided the City does the same, including allowing the
County to develop the airport as agreed upon in the lease.
In 6 months, reconsider termination of involvement in the airport upon
expiration of the lease with the City of Palo Alto, or earlier if desired by
the City. In addition, direct the Administration to collaborate with the
City" of Palo Alto in an effort to resolve developmental issues relating to
the Palo Alto Airport for report to the Board in June 2007. In June, the
Board postponed the reconsideration of termination of the lease until the
Palo Alto City Council determined if it was going to take back the airport
early.
Approve limitation on future County capital investment in the airport to
the following: 1) revenue-generating projects that will produce an
acceptable rate-of-return prior to expiration of the lease; 2) the local match
necessary for essential, non-deferrable, grant-eligible maintenance projects
or security-related projects mandated by the Federal Aviation
Administration (FAA) or Transportation Security Administration (TSA).
Non-revenue projects ineligible for grant funding should not be
undertaken.
Direct Administration to forward all future Airport Improvement Program
(AIP) grant applications to the City of Palo Alto for signature and
submission to the FAA.
Approve increase in tie-down rates by 7.6% and increase in the fuel
flowage fee from 10 cents per gallon to 20 cents per gallon effective
January 1, 2007 to help ensure the airport is financially self-sustaining on
a full-cost basis.
o Direct Administration to pursue revenue-generating uses of the
Embarcadero Road parcel in accordance with the development plm~
currently in force under the County’s lease with the City of Palo Alto.
Approve termination of involvement in the levee maintenance agreement
with the City of Palo Alto and the Santa Clara Valley Water District
(SCVgq2)) and pursue an amendment to the lease between the County and
the City of Palo Alto to remove from the leasehold the levee parallel to the
runway.
13)If the City decided to close the PAO how much money would be due to pay off
the outstanding FAA Grants?
Staff estimates that the total amount due if PAO were to close in 3 years would be
$1,251,322. If PAO were to close in 2017, the amount due the FAA would be
$448,367. The County is proposing to apply for furore grants.
14)If the City took back PAO, how would the rental rate be established? Would
there be any compensation to the General Fund?
Airports that receive FAA grant funds are required to be self-funding with any
money generated at airports to be used by the airport. Staff has not determined the
rental rate but the transition process would include a study of other airports’ rental
rates. The few General Aviation Airports run by public agencies that staff has
spoken with have established an enterprise account in lieu of charging rent.
ATTACHMENT B
City of PaSo ALto
City Manager’s Repor
TO:HONORABLE CITY COUNCIL
ATTN:FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:SEPTEMBER 18, 2007 CMR: 361:07
SUBJECT: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) temainates 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 I 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
Conm~unity 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 loca! 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.
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 folTnal request from the
County has not yet been received.
DISCUSSION
City Consultant Analysis 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 ow-ner-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
Page 3 ol 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. Wiswetl’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
commented 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
con~nunity. 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 disbm’sements. 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.
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-tern~ 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 Baylands 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 intensi~. 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 accormnodation
can be made for additional hangars and relocation of the terminal facility. Additional 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 forn~er 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.
_~aother issue is hazardous materials. In anticipation of a return to City control of the PAO in
2017 or earlier, City staff from Planning, 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 rmming an
airport and it will take time to build a viable ta~owledge 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 200!, 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 f~re 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 role
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 nmnber of active pilots is reaching a plateau; that the Federal
Aviation Administration is considering imposing fees on general aviation activity; and that the
Page 6~,~ 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 realignmem 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 necessa~, 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 gradua!, "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 Arm?’ Corp of Engineer’s recormnendation on San
Francisquito Creek
A complete lega! 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 recon~mendations to appoint an
interim manager or to issue an RFP for the long-term management of the PAO at this time.
Rmming 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 reconm~ended.
Page / u~ o
RESOURCE IMPACT
Staff wilt return to Council with estimates and a budget request for the option chosen by Council.
POLICY IMPLICATIONS
Staff’s 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 mat’ be required by the California Envirormaental
Quality Act (CEQA) wil! be performed in connection with future Council decisions regarding
the PAO.
PREPARED BY:
¯
WILLIAM W. FE~LMAN
Manager, Real Prope~y
DEPARTMENT HEAD APPROVAL:
CITY M.~qAGER APPROVAL:
ATTACHMENTS
Attachment A: PAAWG report
Attaclmnent B: Auditor’s Report
Attachment C: June 14, 2007 Consultant Report
Attact~-nent D: July 6, 2007 Consultant Report
County of Santa Clara
JCRC
Chair of the PAAWG
CARL
Director .dministrative Services
EMILY HARRISON
Assistant City Manager
Page 8 ol 8
ATTACHMENT A
(Without Appendices)
Palo Alto Airport Working Group (PAAWG)
Report to Palo Alto City Council:
Th e. _~o m m u nitv..._Vaiue,.
Economic Viability
and
Euture Management of Palo.__A. ltooAirport
May 2007
~al~ A]!t~ A~rp~rt Werkfing Group (~AAWG)
C~nclud~ng Report and Recommendations t~
Palo Alto City Council
PAAWG Resolution:
¯ The PAAWG, having carefully reviewed the operation of the Pato Alto Airport resolves:
] - The Palo Alto Airport is an important transportation, business, economic, recreational
and emergency preparedness asset and resource for tlae City. of PaloAlto 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 CiW.
3 - The continued operation of the Palo Alto Airport by the Coun~ will both diminish
the resource value of the Airport and will threaten its long-term economic viability.
The PAAV~G hereby recommends that the City" Council direct the City Manager to
negotiate an early termination of the existing Palo Alto Airport lease with the
Count3~, 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 Klean, City of Paio Alto, Vice Mayor,
Bill Fellman, and Chris Mogensen not voting).
Executive Summary
In late 2006, the CiD, 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 Pato 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 Cib, Council about Palo Airport management
vis-i~-vis Sa.nta 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 managemen~ recommendations.
Notwithstanding its very interesting and profitable history, the Palo Alto Airport has
recently been judged by the Santa Clara Count); 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 Area.
Herein lies the principal issue and the reason for this report - the Palo Alto Cit3~
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.
Pa!o Alto Airport Working Group Findings
Palo Alto Airport (PAO is the FAA airport identifier code) is a vital component of the
local transportation ne>vork and has many important community benefits:
].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 community
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 l-A: Palo Alto Airport - Essential Community Asset
Palo 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 annuaI 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 communib’ colleges as well as the Cib’ and County.’
general funds.
The Paio Alto Airport is an essential communiD’ asset, addressing many community
needs and interests, as well as, providing an array of important economic benefits to
the CiU of Palo Alto. PAO has the economic potential to be self-sustaining, fund
necessary improvements, and cover the CiD* management overhead associated with
the required CiD’ 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
count~"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
you, me.. and man), of our n~noor~.-:L’ ’ -
Summary Economic Over~’iew of Pa!o A!~o Airpor~ (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 tota! direct expenses are for personnel, totaling $442..000 at the
County, 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) entity associated with airport services, operations or maintenance.
This provides a _.oross mar~in 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, securi~ fencing, etc.) for airports
throughout the country are applied for and covered under the F~a. Federal grant
system.
Staffing and operational costs for the FAA Tower at PAO are not paid by Santa
Clara County or the Cib, of Palo Alto, but are separate and also covered by the
Federal Budget. The PAO tower facili~ 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.
SC County FBO-1 FBO-2 PA 0 Total
Revenue (Income)
Lease Income $563..344 $946,168 $274..500 $1~784,012
Transient income $57,402 $0 $0 $57,402
Fuel Flowage $49.750 $O $O $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%
$422.255 $338.048 $100.000 $880.303 46.5%
$~8,~41 $608,120 $174,50~ $1,010,861 53.5%
-5-
Current State (~f the City/County re~ati(~nship
The Coun~ 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 Counb, at the airport flow into an enterprise fund which is
independent of the tax-supported general fund. The Coun~ has clearly stated that it does
not want to continue operating ~he 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 County
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 re’~,enue for all facilities a, PAO should be expected to be much
larger than what the Coun~ 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 owns and
operates, shows a very. satisfactory profit due to its hangar rentals, which the County. rents
directly to aircraft owners and operators. A* PAO, the County’s lease agreement with the
two FBO’s generates only modest revenue for the Counb,’ with most of the cash flow
from the rental of hangar space flowing to the FBO sub-lease holders. Recognize that ~he
lease agreement between the Counb, 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 thai 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 Count?,
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 City.
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
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 beygnd
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 furflaer 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 (AIP) 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 County 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 future and cited various
-7-
other "business risks" in continuing to operate PAO. The Count),’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 intensi~ 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 CounO,
Airport (El 6), 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 CounD, hopes the South County Airport may
prosper sometime in the future.
Once the CounD’ 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 Count), airport
system because each airport’s aeronautical activities are independent." With this view,
the Roads and Airports Department is imposing a 7.5% increase per year, compounded in
tie-down rates paid only at PAO and doz¢bling 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 °%imit future
County capital investment in the airport to the local match necessa~, for essential, non-
deferrable, (emphasis added) AIP eligible maintenance projects or security related
projects..." The plan further predicts that the tie-down rate and fuel fiowage increases
will recover an additional $1 Million during the remaining period of the lease. Without
other action, these policies will severely impact the quali% of Palo Alto Airport facilities
the Count), returns to Cit)’ 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
Count)~ide 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.
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
Pa!o Alto in 20!7. The two major FBO leases would likely continue until term in
2017. The Count?, would likely continue its demonstrated reduction of ~taff
commitment and shift funding to support South County Airport (El 6) 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 of continuin~ the lease with the Countw 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 flowag~
dropped precipitously with the County increase in flowage rates, and it is not
c_lear 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 $248imonth. Other Count?, airports will be at an estimated
$154/month by that date.
Only "non-deferrable" maintenance will be performed which will likely result
in a maimenance backlog and a further deterioration of PAO airport facilities.
The increased tie-down rates, coupled with the disinvestment in the airport,
will probably cause some r.eduction 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 County.. 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 Cit?, must be prepared to take over airport
operations. Although income potential will be much greater in 2017, if the
City inherits and assumes responsibilib, for the operation of considerably
depreciated PAO facilities, it could be many years before profitable rental and
service activities are realized.
An alternative in fc~r the (2i~ ta raquest the County Board of Supervisors to
reject its Roads and Airports Department recommendation to terminate the
lease in 2017 and force renegotiation of terms acceptable to both parties.
Act now - grant the Coun~7 wish to end their management responsibili~, for
the Polo 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
alternative paths, either at the option of the City or because the County feels it has
legal grounds for early termination:
Implications of endina the lease with the Counta, early where the Cirv of Pato
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 AIP 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
obligations 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 CiU; 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 Cir. After 2017, the airport
would generate sufficient cash to provide for any contingency.
Implications of endins the lease with the Count’s’ earb, where the CiW of Polo
Alto contracts operation to an outside airport mana_~ement 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 responsibility as it does with any independent contractor
working for the City. The City would also have responsibility for signing off
on and complying with Federal grants which fund most of the capital projects
at the airport. The work of preparing grant requests, filing documentation,
and required reports would be done by PAO airport staff with 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 reinvestmeni 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 an-ange0 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 Count), 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 Count?, 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 ofa 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.
lCinally’, there are a few external, independent airport management companies, but their
work is often linked to an adjacent or significant real estate development mission and
their profit expectations lead to a problem similar to using a FBO to run the airport.
The Palo Alto Airport Working Group does not recommend forming a special district, or
assigning management responsibility to one of the FBO’s. or hirin2 an outside
commercial airport (i.e.. real estate development) management company.
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 !oca!ly, and there are many skilled
people to consider. They are paid from airport operations. A local non-
profit management company would be best to keep employment and
direct costs low in keeping with the size of the airport. This serves as
the foca! ~,,i.~ " " ~the Federal ~ .........~v .....to vrevm ~ grantr~u~sts--,,~ to
Or, a non-profit corporation could be contracted to run PAO airport. The airpor~
community includes many people with the interest, commitment, and ability to form and
operate a non-profit organization which could respond to a Ci~ 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 o~,ersight. 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 City 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-
Glo~sa~
Tie-down - A place on a paved or other designated spot on the airport properb~~ 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 root~ walls and a door.
Sizes vary depending on the aircraft stored. Larger hangars are typically 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 slructure for aircraf~ 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 propert), that does not own its
property, this includes FBO’s (below).
FBO - Fixed Base Operator - These are businesses critical to airport operations with
responsibilities defined under F.<A regulations. At a minimum, these are fuel service
operators and primary maintenance facilities. The term does not include eateries, car
renta] 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 ~ese rules, which are generally more restrictive
than Part 91 (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 General 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 A1to’s Federal Air Traffic Control 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.
City of
June 6, 2006
Honorable City Council
Palo Alto, California
cc: Joint Community Relations Commission
Review of PaSo Alto Airport’s Financia~ 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 feesI to recoup the
outstanding advance used by the County to construct, maintain, and support the airport. Ou~
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 income"~ 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 !970’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 Francisquito
Creek project; implementation of some of the more feasible aspects of the County’s proposed
~ 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), hess operating expenses (not including depreciation), plus net non-operating
revenue/expense (including capital expenditures net of federal and state reimbursements).
-I-
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 Supewisors that:
1) The City of Palo 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. In
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 rep aid by future revenue.
Deloitte & Touche audit. In 1997, the City and County jointly funded a Detoitte & Touche
audit of the County’s financial statements for the Palo Alto Airport to settle questions about
the appropriate accounting for Paio 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
andlor 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 th.e Airport
financially self-sustainin~, 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 aiflield area, and raises substantive questions about the extent to which the
vacantS-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 retease 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 Pato 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
$! million investment in start-up and capital costs at the Airport (the outstanding ad.vance).
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 I969 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
accouF~ting records provided by the County for FY 2002-03, 2003-04, and 2004-05; reviewed the
Airport and FBQ leases and the joint agreement for the levee repaired by the County. We
recalculated the direct and pooled charges assigned to the Palo Alto Airport and to the two other
Cour)ty 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
~ncreases 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: Summan of PaloAItoAir usted net income and outstanding advance
FV i968-6~’I $61,830 i ($~9,949)i ($8 119) i 11093.253
FV 1969-70}63,786 !(78,384)j (14,598) I 1.107,851
FY 1970-71
FY 1971-72
FY 1972-73
FY 1973-74
FY 1974-75
FY !975-76
FY 1976-77
FY 1977-78
FY 1978-79
FY 1979-80
FY 1980-81
FY 1981-82
~FY ! 982-83
FY 1993-84
FY 1984:85
FY 1985-86
FY 1986-87
FY 1987-88
FY 1988-89
FY 1989-90
FY 1990-91
FY 1991-92
FY 1992-93
FY ! 993-94
FY 1994-95
FY 1995-96
FY 1996-97e
FY 1997-98
FY 1998-99
FY 1999-00s
FY 2000-0!
FY 2001-021°
FY 2002-03
FY 2003-O4
FY2004-05 I
TOTAL}
78,636
93,338
100,961
I03,152
1i5.493
1t9,201
135,612
152,571
176,944
197,881
231,470
288,678
313,807
346,267
343.626
369,880
364,268
366,968
392,868
378,027
397,788
426,542
505.306
430,105
385,542
438,722
430,238
439,377
488,062
474,680
647,857
752,760
727,657
723,065
725,478
$12,788,443
(88,625)!
.(97,353) I
(!05 903t t
(124,276) 1
(120,790)!
(153,142) t
(183,6o6) i
!209,553) I
(244,835)
{302,663)
(238,752)
(246,570)
(268,681)
(327,483~
(338,107)
~340, ! 29)
(363,634)
i302,721)
(358~667)
(289~294)
(376,66o) i
(435,563) t
(341,695} i
(374,867) I
(381,060) i
(473,8i8) I
(548,411)}
(583,i16) I
(548,914~ I
(834,677} t
(663,106) I
(617,646) 1
(735,448) I
(S12,330,037) }
(9,889)
(4,015)
(4,942)
(21,124)
t (6,297)
!~33,941)
i (47,994) I
(48,861)}
(32.609) !
(46,954) I
(71,193) i
49,926
67,237
77,586
16,143
31,773
3,334
f6007}84.t40
5.358 24,718
(i.000~!07,49~
47 863 c7 ~R~
27,864 97,607 1
19,578 107,988
26,871 51,796
37 064 91 819
64 222 113,400
(!5,785)(50,226)
(26,112} ! (86,461) I
(4,~,9~ i (~88,365)
(445) i 98,4982o7,7o51 125, 88!
(649)63,902 {
(1,166)104,253i49,047 39,077 1
{$54,621)$403,785!
County repotsSource: Compiled by Palo Alto City Auditor’s Office from vanous
1,i17,740 ~
1,121,755
1,1~6,~9~
1,i47,821
1,153,118
1,187,059
1,3i6,523
1 ~ -
1,434,670
1,584,744
!,317~507
1.223,7781
!,192,005 !
1,167,866 I
1,164,532 i
1,080,392 1
1,05~,b,, i
948,180 i
850,425 1
752,818
644,830!
501,215
387,815
438,~41
524,502
1,112,867
1,014,369
888,581
824,679
720,426
$681,349
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
Deloitte & Touche LLP audited the financial statements for the year ended June 30, 1997
Includes $25 million improvements, tess $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 sorne 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 $39! ~~,t.,~ per year. As shown in Table 2, the County’s pooled and
overhead costs at the Paio Alto Airport averaged $280,561 per year - or about 41.7% of Pa!o
i2Alto Airport operating expenses
.... ~able 2: Percent County pooled and overhead expenses allocated to Palo AIto 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 i
$284,761 $257,759 $299,!63
$663,106 $618,503 $735,448
42.9%41.7%40.7%
$280,561
$672,352!
4!.7%I
Pooled County expenses for salaries, benefits, and general administration overhead have
increased in recent years., reducing Palo Alto Airport operating/ncome. 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, di.rect 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 (take-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
Palo Alto t 32.5%I 31.3%/3i .3%
Reid-Hillview i 586%I 56.6%i 56.6%
South County I 8-9°/o I 12-!°/o i 12-1°/o
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.
~,2 The Palo Alto Airport’s share of pooled County costs and overhead included $!25,500 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 Palo
Alto Airport’s share of a $171,655 credit to adjust overhead rates applied to intra-departmenta!
charges at all three County airports.
-5-
Table 4: Estimated versus actual and overhead cost allocation ges
FY 2002-03
I FY 2003~04
I FY 2004°05
TOTAL
33%I 32.5%
33%1 31.3%
31.3%I 3! .3%
$2,588
$!3,278
0
$15,866
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 Airport’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 oosting 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,i6 Depreciation
expense (including depreciation on projects funded by Federal ~nd State grants) fluctuated
from $417,32! to $184,426 to $312,974 in FY 2002-03, 2003-04, and 2004-05, respectively.~7
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
15 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 ofaircraft from the annual assessment roll is appropriate.
t~ 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.l~ 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
$68! ,349, and the $403,785 in adjusted net income (shown in Tabte 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 tosses 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 1998-2000, which increased the outstanding advance
after years of declines, were the result of $2.8 million in capital improvement projects.;~
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 $!25,454 (for construction contracts, consultant payments, and
reimbursements for work done by the Roads Division) was charged to the Palo Alto
Airport.2° According to the 1979 agreement for maintenance of levees in the
Baylands2~, 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 P alo Alto Airport users may be questionable. ~_2
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 Pato 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.
~ 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,
slurr!/sealing the pavement, adding safety fencing, rehabilitating the apron, and repaying the
runway
20 Up to $50,000 in additional expense recurred by the Santa Clara Valley Water District for the
project is still pending.
21 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 regi0na! 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
Table 5: Curren~versus used tie-down fees at
Santa Clara County Airports
Pain Alto
!Reid-Hillview
South County
Nearby, .~lrpo.d~
San Carlos
Half [,./loon Bay
Havward
$111.50 $144.95 (+30%)
$1 !1.50 $114.85 (+3%)
$79.50 $81.89 (+3%)
$115.00
$59.00$60.00
Justification for increases. The business plan justifies the proposed fee increases by stating
that the Pain Alto Airport has historically operated at a financial loss and that the deficits
arising from operations at the Pato Alto Airport are being subsidized by surplus revenues
generated by Reid-Hillview Airport. In our opinion, these statements mischaracterize the
operating results of the Pain Alto AirporL As shown above, the Pain 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.25 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.~6
Future viability of the Pain Alto Airport. Between now and 2017, 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 impro~iements 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 Pain 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
23 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 $7500 per month for
comparable ai~:craft. 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 tbs.
2s It should be noted that County staff expect the Pain Alto Airport to end FY 2005-06 at a loss, due
to $125,500 in levee repair related expenses.
26 t-’hv.~. .... m=.,,~ ,,~r~,,~,,,, ~,~’~ ,~=,,,~ lease, ,~, ,~,,, ,~ expenses ,,o~’^ve grown ",~,~, ..... (an average of .... , .~-~o per year)
than operating revenues (an average of 7.6% per year). Airport expenses may be less than
for ~v 2005-06 due to an unfilled ~’acancy, and staff is assessing the ~,e~s~u~,~[y- ~’""" 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
FBOs 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 sewices and the introduction of very light jets (VLJ) capable of
operating on short 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 20i -7, 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 PaloAItoAirport is truly a
regional resource. Pato Alto residents compose only 23.3% (78 tenants) of the airport’s 335
aircraft tenants.2~ 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. Pato 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 ’#romote the economic and social vitahty of
the County by meeting the needs of the General A viation community and the traveling public."
Thirty-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~’~ 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
i970. 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
-9-
ATTACHMENT 1
Response from Director Roads and AirpoRs
County of Santa Clara
RolJdS and Airporls l)(~partme.ni
I O 1 Sk.ypor~
San ~lo.s(~, Calilornia 95 i I O- 1302
June 6, 2006
Ms. Sharon Winslow Erickson, City Auditor
Cib, of Palo Alto
250 Hamilton Ave.
Palo Alto, C,A 94301
Subj:Review of the Palo Alto Airport’s F~ancial Condition
Dear Ms. Erickson,
Thank you for the opportunity,- to review the draft report regarding your analysis of file
financial condi~on of Palo Aito Airport (PAO). The following comments are provided:
The data presented support the County’s conclusion stated in the draft Business
Plan that since inception of the airport lease, tlae County’s investment in the
airport has exceeded net revenue by $681,000 despite the fact that the great
majority of capital project cos~ have been funded by others and the fact that tee
CounD/s unrecovered invesn’nent (the "Outstanding Advance") does not accrue
interest. These facts are compelling indications ofthe financial subsidies
required to operate the airpOrt.
N£arlv half of the meager .$400;000 in total net:operating income generated over
the last 37 years will be wiped out:by the projected FY 2006 ~perafing 10ss, due in
large part to the levee project. An opera~ng loss is also.projected for FY 2007.
The record clearly demonstrates that operating .profits generated in.year[ when
no additional capital investraents were made are inevitably offget by the infusio~
-of additional capital required to maintain and .improve the airport. Because these
additional investments do not occur every year, they tend to. be overlooked by
some:even though they have the same effect, dollar for dollar, as an ,)perat~ng
loss. The Outstanding Advance (OA) is quite handy in this regard as a metric of
the airport’s long-term financia! performance because it represents the difference
Board of SupervisorS: Donald F. OuBe, BlanC;3 AlvaradO. Pea’e, MCHu£{h, James T. BealJ. Jr, LiZ K,a’IiS.q
-10-
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 operat~
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 o# the lease.
Management staff costs will be reduced as the management StTUCture iS adjusted
to reflect the reduced scope of responsibility. Any allocated overhead not
eliminated as a resull of the lease expiration would be small and offset many
times over by the eliminalion-of the business risk associated with running the
airport.
It is important to note that no adjustment is made in the ovOrhead alloca.~on to
reflect the additional administrative burden imposed on staff due ro the lease
arrangement with the Ci~, of Palo Alto, a burden which is not present with
respect to the ~s,o airports owned and operated by the County,
~eprecia iJon
We agree with the report’s conclusion that the Count- is correctly excluding
depreciation from the calculation of t_he Outstanding Advance, but not for t~he
reason suggested i.e. because d~epreciation is not a cash transaction. Depreciation
related to the grant-funded portion of capital proiects is not included in the
cakulation of the OA b~anse the OA is a benchmark of the County’s financial
exposure resulting frdm its involvement in the airport~ the pass-through of
outside grant funding does not impact the Coun~/s financial Stake in the airport.
The AEF-f-anded.por.t~On Of capital proiects is appropriately included in the
calculation of the OA. !n 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 andl of c0~irse, areentirety relevant to any discuss~0n aboul the
airport’s financialposition and performance. The fact that ’-dae County’s
investment 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 projec~
costs were funded by- others highlight’s airport’s reliance on subsidies to fund
maintenance and improvements.
Embarcadero Road improvements and levee re~airs
There seems to be continuing confusion over references to "County" expenses in
the airporf lease, with the implication [ha~ these expenses shouidsomehow be
f-~nded by some County fund source other than the AEF. As we have discussed
a number o5 times, the Airport Enterpr;~se Fund is not a legal entity in. and of
itself and therefore cannot be a party- to an agreement. The Coun~ of Santa
Clara is the legal entity 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 b~s~c
legal concept.
The ~eport states that the Embarcadero ]toad improvements benefited bo~ 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. The salient ~ssue is that the Embarcadero ]load improvements
were made because they were required to be made by the a~rport lease. Since the
improvements were p~rformed to fulfill a requirement of the airport lease, it is
entirely reasonable to conclude t~hat the improvem, ents would not have been
made had the Connty not been a party to the lease. Therefor% even if the
improvements provided some secondary benefit to the Yacht Harbor, it ~s
e~ppropriate that the full cost of the improvements be charged to the AEF.
Finally, the 1998 Deloitte-To~ache audit included the cost of the Embarcadero
Road improvements in the calculation of the OA that both the CiD" and the
County agreed to use on a go-forward basis.
The same reasoning applies to the levee repairs. Because the CounD~ is a parv to
the levee maintenance agreement due solely t~ its involvement in the airport it is
app~’opriat~ that the County’s costs of complying with the agreement be charged
to the Airport En.t~rpr~se Fund. No case can be made. to charge those costs to any
other County, fund source. Issues related fo whether it. is appropriat~ for the
County to be a .palrWto the levee maintenance agreement inthe first place and
how part of the leasehold came to be usedfor other_purpoSes without the
County’s consent-as required by the lease will be addressed under separate
cover.
Tiedown rates and the future viabildtv of PAO
The report does not pro’~-ide any calculations to support the conclusion that the
airport can generate sufficient reven~ae to cover expenses (Jnclud~ng modest
capital improvements) and reduce the OA to zero prior to expiration of the lease
-12-
No accounting adjustments to reduce the existing OA are warranfad as discussed
above, nor is there evidence presented that overhead costs are unreasonable,
unnecessacy or misallocated. As mentioned earlier, Lhe OA is projected to
increase substantially in FY 06 and YY 07 as escalation in operating costs
outstrips growth in.revenue. An increase in tiedown fees is the only
opportunity to generate additional revenue.
The draft letter from the Director of P]arming and Commttnity Development
attached to the repo’rtindicates that no increase in aircraft basing capaci~ or
intensity of airport use will be allowed. The tetJ:er 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 Cib~ policies
referenced in the letter appear to unitaterally restrict the Count’s ability to
develop the airport as agreed upon in the lease.
Thank you again for the opportunity to review and comment on your dr~ft report.
Sincerely,
¯ "c ~t~ urdte
Director
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
DP ,FT
Michae! J. i~,{urtder
Director, Roads & Airports
Counb" of Santa Clara
101 S~port 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 Master Plan
provides long-range policies relative to the County:s continued operation of the Pa!o .’;~Ito Airport.
Physical or operational changes are governed by’ the City.,’s Baylands _Master Plan.. which is
attached for your future reference.
In general the City’s Baylands Master Plan supports the cont~ued operation of the airport m its
current configuration. A!l aspects of the County:s Master Plan re]ated 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 of Taxiway G. The Baylands
_k, iaster Plan, however, does not allow changes in airport activities that will increase, the intensity of
airport use or wi!l significantly intrude into open space. Specifically, the expansion ofpermanent
aircraft is in conflict with the Baylands Master Plan.
I hope this clarifies the application of existing CiD~ land use policies applicable to the Airpo~.
Please feel free to contact me if you have ~ny additional questions. ] can be reached at
steve.emslie@cit)~ofpaloa!to.0!ig or 329-2354.
Very Truly Yours,
Steve ]ffms!ie
Director of Planning & Community Environment
City of Palo Alto
Frank B enes% City Manager
City Council
JCRC
-14-
ATTACHMENT 3
Draft Palo Alto Airport Business Plan provided by Santa Clara County
PAO Busm..ss Phn
INTRO D~U C:TI 0 N
-,~ vhe 2~ope<t}, -owner, .:h.e City has .sole disc~edo=q aver Lhe fu.v,are
~f fhe airpo~L ~he Maste~ Elan 1~ an ob~ecdvg stand-alone docu-
port ~ega~dlcs~ of whetbe~ zhe Comw is .invabed in .k~ operation
gfter.2-O~ 7.
eomp-aMon docu:.nent to the Pa[o Alto/~dqaort Mastei- PJat-~ ]s
Bu:~ine~s ?hn, ,;v~hJch -add.res~es the Couau’% fh.mxe JnvoNe.-
-the operation o.f the alcott. ’~e B~siness Plan is ~ sepa-
DRAF T Jan’~a,9’ 2005
ClTY/COUNTY LEASE OVERVIEW
TERM, &. :RENT
The Jea:se spe~i]cs ~ ~.c~m of 60 :;,e~rs znd expires on. june i !, 2017
DE the .lease.
USE AND DEVELOPMENT OF ALRPOR7 REAL PROP:ERTY
pr,~vemen~s m~~st confo:m to the Cipis building codes ~nd ate
sab}ec~ to City p].n ~ppr~val, A devdop.me~qv p>n was included as
an e~hi~k to the-o:i~na] leas% execud0n o# &e development
was can~nge~-t upo;~ av~abJ.]ig o~ ~n.ds and >~hdthe~ %he
d~n needs ~nd economk ~sdficagon >~a~anv such
The d~vetopmenz plan was snb~eq~en~y roD&fled nvice and
pomated:imo g~e l~se by .lease amendmen:~ nnmbe~" .one Jn Oc~c, be~
!9~8 a~d amendmen~ numbe~ two in Degembet 1969. The
required ~o papDo~t the CounU, ~ ~H app~ca~o.ns m fimq:adaL assis-
tance a~nmes conceding :the de~opmenz and opera,on of
Fede.ta] .Axffa0on .Adminis:a.tio.0 {~&~) x~gulations :and has
pod:e% an~ofiU and :espm~siBi~U ie :~ga~d to the opezadon,
man~ge;nem" and :naint~a~ce of the ai~.or~ %s though k weresoje owne~ ~hereo£;;
.aBy .te.as:es or ]icc~ses, o:~ ~ndqg any ~i~ t:c, ~e ;~;..-.po.~t premi~e-s
without [he e.>:p~eas ’.vt’itte.<, consem 0£ gr, e CoanD~: The Cky is
5-2
-16-
USE OF REViE~=UE
~qet operating .revenue gene~..~ted a.~ the airpos.% J[ ~m.)t .is .[zst ap-
p!ied ~g~nst J~e ~unnmg balance O{ the Counu,% untecove,~ed
vestmem in 0~c ~iq)ort~ wb}.ch is .tenmed the "Outstanv~ing
~ntetesc
¯ he ie~se may not be :,’msi~ed -,vifbo~t-the C.~tds ,-,v:~i,.-~en cons,ant
but [he Cot:n~- m-~¥ .sublet ~Be pzem{s-es wf0mnt -:he C ty’s cossem.
TERMINATION
by &e o~qez p~cy, T~e pa~ty in de£hu].~ has 30 days go ~medy
b~e.ach ~om the date of nonce by the other parbc T:he~e is r~o pro-
a.i~o.et on ~:e CounU: The. C]~’ ha~ no t~nancia[ ob]igation or ffsk
were to gene~te posiJvc ne~ operating revenne ae ehe .ah:port aft~
DRAFT Janu~ .2006
and could no~ be expo=ted m ~he o:hev. Cma.nU ~i~ons.
AIRPORT ENTERPRISE FUND OVERVIEW
unit, ~:}~e tevent~e ~.nd expenses ~ssocJazed witth.e-;~c~ of the
~irpo:ts ~c ta]a~lated :o~ .fin~nc]~! nepoMng and in~etn~]
:ne~t :accoun.~ag puq~oses. Revmme and e~a~SeS d~ecdy
space rcnt~ revenue, o~adons seaff~a!aeieg eec. are easiIy identi-
fied. Oen~ ~nd =JmiMstra~ve ~x.penges hoe :a*tibu~abk dk¢cdy
Ptan charge% etC.) ~e. captured in a~ expense..poo~ and-pzo~ated
e~ch a~rpom~ based on a wegh.ted form~fla that ~ses cost
.such ~ th.¢. n~.~be~ of based ak{~af% ~v~mbev ofdr~.f~ ope~.d.ons
and number ofm=}o~- ~ad:gties at each
7 6% <)fw~cl~ is g~ner~ed from Counu-owned ~i~c:ak ~toczge
shclte.~S), fuel ~owag~ ~ee~ ~md other ai~o~t-~date~ ~e< anc.
5--4
~ including pmjec~.ed ~’.e,,e~’ae {tom the !00 hang:tr..~ hea~ing ecmp]edon ~ Soud~
Co~m ~y Airport.
DRAFT Janu~o. 2006
-18-
O’~e Board of Sup~dsors b7
Reid Hili’vi:w a~d~o~t (IUqV) gen.er~zes approxlmardy 565"; of the
CounV-owned hangzrs~ Prior to ti~c South CounU AJtpor~ (~i@
~hc ~!a~ac ai@or~ to .ha~: Coun.~:-own.cd hangars. Historica~y,
st~s ~ainJng.
PAO REV~:NUE A.NO EXPENDITURES
In November 1997, ~he C~V conrr~ac~ied wf.@, DdoJ~re & Toache
cb3 ct~ ~ela~ed. ~o ~¢ drpo~ and prepare ~ set of ~an.ciat state-
meats in response.to concerns exptessed by the P-alo
Assoda{ion ~d’~A) and the airport’s Joint Commu~ivy Re!~ons
Committee 0CRC) r~ii!g the Comw’s ~ccounfing fo~ costs
The D~’T audit, "whd). was fn,¢ded join@ by the Gi[y arid the
Courtw .a:r s total cost.of ~59,000, produced-a set of basdine
ci~l s~a~emenrs andageviated the concem~ ~ked by .the
~CRC: Sabsequeat[y, Couaty s<afC and CJt), staff-agreed cm a for-
mar for the a.nnuat ~mandaJ sta~emen:ts m be pcoY:ided by
tcmbe[ 8, 1997.
DRAFT Jano’ary 2006 5-5
-19-
2~5 are UDical of the dam provided each yc~c ~o d~e Ciw.
Peghaps ~he best measure of the ai~o~’s fong-~e:m financial per-
.Joyance is the "Outstanding Advance", wN.ch is t~e d}ffeze~ce
be~,ee~ the County’s totel capi~t .investment ]n the aimo.:: and the
net revenue generated ovec the ]iA of the {ease. Add[donaJ-Co~nvy
capital invesnmen~ ~nd/o~ net opc=a~ng l.o~ses increase the Our-
standing Advance.; act op=tating profits decrease the O~tstan~g
Advance. SCnce ON.y the local (Le, Counw:-fimded) compon~t of
capimt p.mjects ~ds to.the: Outstandlng Advance, the Outstanding
Advance se~,cs as a benchm~:~k of ~he Counw% Enancia! expo~me
~es~dng from ]is :involvementwid~, the ~o~c.
In the 38 years since inception of ~he .lease, the Counr;!s invest-
meat 5n the ai~o~ has .e.xceeded net revenue by g668,000. Fisc-ai
Yea~ 2006 revenue ~..,’-,d expenditure ~p.ures indi.ca~e a p~ojected net
ioss of $348,0C~3~ neatly half o~ w, hicJh i.s ,due ~o a one-lm_ e expendi-
ture fO.r .~. levee maintenance p~o}ect. The:cfore, the Ou~s.t~.nding
of ~isc~l Yea~ 2~6.
The fact -that ~e Outs.~anding Advance does not aoerue
m~Z~:es ii .".all ~he mcgee significar!t gha~ ~e ConaO~s invesrmems
d~e ~o~t ha~ not been ~ecoyered. Ar P&tV and E] 6, ~:pkN
ve~em:s fiFanced by ioac~ .from ,he Counw G.~erN. Fund or by
:evenne b~nds atcme ]nm~e~ ,hst mns~ be paid riot as p~.n of
opemdng bndge:~, If a slm~!~ scenario apD~ed at PAO, the
s~;an&%:Advgnce woMd be much h{ghc.r,
"The ~k~orFs pmjec.md .FTf 2006 ~evem~e. is ~704,080
(ap.pro~mately 22% of
airporz ~alns nea:r f~[i ~pad7. Each .:evenue componea~ and
ks dolla~ amonnt and ,percem-age of }oral PAO ~.,~nne is as
DRAFT January,
-20 -
Tiedowns - $480,000 (,58%). The Co-anty ope:ztes 362 <.,~-eh.e
468 dedown s.pac~ at PAO< ~}d~houg!~ demand For alrcm,f{
FBO lease rm,e.nt~e - $i 313000 (I 9%) The ground ~:enc p.dd
by d~e echo FBOs at ~e air~, Ko>~Aero £n~erp:ise.~ LLC
~nd Avi~don :Management Gzoup, Inc. (AMG), is .a.d~us~e3
perio~ca~y pu~suam to ~ reapp~as~ o[ ~he underlying land
va~ue as speciged ~n ~che maste~ lg-ases. Yn i994 Roy,Ae:o
to binding .acS]t~a~0n. The a~Skrator a~]ed chat ~h.e ~MV of
d~e ~y-~<ero ]easehold ~bodld be discounted from the
app~ai~a] {o~ ~he AMG and RHV~ FBOs due primarily ~o im
flooding 7potential. and soll c.ond{tion,,
(appro>rimaei9 $8300.iac~d), fi~e F-oy.Ae:o ]ease g:cne:ztes
ai~.c~k.(~.e, >it~a~: no~ ~bascd x: PAO) am ~eqtffzed t0 pay ~ .fee
when occupying a County dedown, Cc::ta~n dedo-~-ns a~e
d.csign~ted foc t:.ansien~ ose.
.Mis.c¢llaneoos - $:~5,000 (2%). This c~.m~o~, capm~e~ all
regen~e not att-Jb~mb]e to one o5 the ~.bove c~tagod~s, such ~
au-m p~r~dng ctSa~ges,
Revenue genera.ted at the Cgzport ~rom sales tv,:es ~.nd pezsomai
’ pmpezff r~x:eS does no: ace,me ~o zh¢ AgF, Cizy docm~e.~t~
P~o]ec~ed ~Y 2006
$!70.,000 for J~e affc,~emendoned levee maintenance p~oject. The
DRAFT Jai~ua,,T 5--7
-21 -
FUTURE CAPITAL INVESTMENT NEEDS
The ~i~o:~ sponsor is ~sponsible foz ~ 00% of
]) d~e ~cq6it~d .m~.rch fimding; 2) -any eIcmem of the pro]ec: ]neE-
gi.ble for AU? [und{.ng; ~od 3) fl~d diffe~0.c~ between ~cn~ co~s
~nd esdm~d cos~, wbjhh together c~n
d~c over~ -r6iecr costs_ .For cx~:npie~
component ~?proache~ 20% of the ~.2.8 rai!!ion
completed at PAO i~ 200].
manic,ion
card keeping, etc:) while ovh~’s ~.~e bxoade: in scope, :uch as the
.:equbamem ~o keep the d=port ope~ fb: 20 yea~s ~nd :he .pmhlbi-
don on
A!P
~N~v Tmxiway D
=Reconfigu~adon of T’a~wa7" G
~PhysLcat secunv/, enB~.n.cemenrs
5-8 DRAFT JanuaW 2006
- 22 -
°R~D],~ae..’n<m ti~downs
~N~w hangz.~s
FUTURE COUNTY iNV.OLVEfVIENT IN PALO ALTO
AIRPORT
the bud, n~s.s risk ofopc~.~dng ~he airp..orx b<vond :he_ c~:~k~.tion of
its l~ss-¢ wirZ~ ~he C-i~ in. 20!7 re~d[ess o£ the changc~ ~o i~e ].ease
Ciq,/Co~’m~ ~case. in 20i7 r.o eHmin~c the poss~bi]Jq;, th~ ~V
w}~ ned ~o subsJdiz~ PAO k~ th~ ~em~e ~d <o ~£ow stuff to con*
c.~nzrz~ on execu-rin$ ~he bD, s.~c= P].~ns fo~ RtdP7 mvJ T£1.6.
or adding a vki~d YBO In t~gh~ of d~ese cons~cd~ts, on]), :mine~
P{a-n, ~c] change ~o u~.c ~].cporgs role xv4~h zesoect to the Wpe o£
d=m~ro be accommod~md ~.s cont:emobted due m ~unvmy ~Jm-
rJons, i[ ~ :anwav e-xzension were fes~.ible~ Jr would have the po-
tcnda! to increase ~cvcnnc ,by c:~ea;ing ~o co~;a~c airc~af.
"Tdi~-h re~pecc ~o the airport’s by.cling a~ca. r.h~ orLy possible area
~br ad~fiokd ze:ven~e--~cncrati~g devdop.mem ~ on a pordon of
the vacanI dgh>acre parcel flouring Smb~cadero Road The City
has d~e ~.n.al say rcg,ardLqg the e:>:tent to which t-h~ parcel is " ,~
opt, [~ at all. "~e o~y de~mbapment option h~v]n~ zevsnue-
gm~erar{ng potenda] that is .~dentti~ed ]n the &aft Ma~te~ Plan is the
adc~don of 29 new hang-ars. Howeve’< skyrocketing constraction
costs, hsing interest rates and th.e high cost O~ #he ~e}:y mi~ga[ion:~
b’fo:eovac, ext=emd.y soft opposition to ~my de~e~o.pment st the
mmor~ is "drt-aaily gua;:ant~ed and vha approval process ~g an:rid-
~ated to be. lengthy ~clnous ~d exoensive,
-airc~d% ~nv co.version of e~:isfing ~edown ~ows ro T-:b~.o~:acs
would zesuk in ~. algr~fi~nt ~educ:ion crf avaiiable aj~c~ basing
DRAFT Jan~a,~" ~C*06 5-9
h~ng~rs wkh no ~ddiUo:m~ c%pk~ ~avestmenr req~~bed.
only 4 ~eet above mean .se~ .[evd (MSL)
needs ~¢plFce~nent, any new or
~sed above the 8-~oot Base Nood ~[evadon ~F.E) or
floodpmofed, whi.c~ >41~ ~dd s~bstan~y *o construction costs.
The BFE for .{he. akport is aa~cipated
.FEM~ study of {be S~n F~aodsco Bay levee sy~em, The higher
over the !ong ~e.~m could manifest i~se].[ in my:lad w;ys. The ~Ar-
,xse, t.he possfbili.ty exists ~ha~ it cocid become a~,afiabie for such
use, whfchwouid have a severe negative impact on {be demand for
PAO, Other pos~!b[gde~ ]nc!u,de ~ednced fed~ai gmn~ ~eveaue,
uaaatidpated expenses or e.ve:a a ~atu~i disaste~ such as a flood ,or
The ioss of PAO Wo~ld not pzesent
are .iodepend~m. Fin=~ci~y:, e~mina~ng PAO {m:m t?~e AEF
wood ~esuk.i~ {he .loss of the ai~0rr’s ;evenu.e~ which ,~’o~[d be
more than o~fset b5 the .~educ:con in direct 0petering costs, ca?it~
.pgoject ~:p~dimxes and ove.thcad cos~6 ~is wovfld ~mJ.nat¢
possibiHV {hat ~tV wi.[1 need to sDgsidlze PAO in. t.be ~atnre a-ad
fo~ RHV and El 6-
Regardless of "whe{b~ex <he Ci:y opemee~-the ~Zpoz~ {~sdfwi.t:h City
basis ........oz leases the aizpozt
~ea~o~a~ng some or.me b’usinegs risk fxom the ’.e~ee b(> ~,.,~’~-~ Ciw.
5-1"0
- 24 -
lower J~bor ~nd overh.~d costs th~n {he ~onnb, o~ the Gig’ to op-
The CJ~y 0.: ~ new .iessc~ could :ak.e ov.~r th~ FBO :~ci]i6es upon
expil:atJ0~ of ~he ~0 ]e~scs in o:de~ to g~qe~re r~ven~e,
[a~iy from ~be hangars. Bo& FBO lc~ses expi.re simwlmneoas~y wkh
the e~p[radon of the CwiCo’a~D" Jean% and o’~n~sl~ip
’provemc~rs c.onstracted by the ~£Os reyerts to ~he ai.qport spo.n-
~or upon e.xpkadoe~ of ~he F]3O leases. E:owavc~,
RECOMMENDED ACTIONS
The Cc.mq7 sh.ouim
Cocdnue to {u!fig hs ie.:-:.~e obligations
~he lease wkh the C~
me.hi ~ d~e airport at
Ci~,~
Lhnit :fum:e Cou.nty capi:t:] im,;~stment in the dz.port to tl:c
local match n:ecess~:U’ [o.: ms~n:ia!, nc, n-defe~t;~:Bie..A!P-
e:ff~ble m~i~tenznce p::ojec:s or sec~ci~/-Zehtcd projects
m~n0~ted by ~e FtL& or T:a:nspo~t~don Secu.:iW Admini-
~tr-adon WS&. Prc;jec~ Jfie~gfbte. got ’~
not-be nnde:~ake~.
Require d:e CJcS’ to s~bmit aft fiar~’~re A.iP grs_~r app~ca-
dona. Since fire 20-yea~ gz~nt .a~sn:~nces
[~ce well beyond the expl~a~lon of the !~ase
City ~us[: &to:mine whefh.et t9 ~pp~y £o~
suzances after e~pi~adon of Ore leas&
¯ DRAFT January, 2006 5-i I
- 25 -
.RaLse tie-down ;a,~_es co 1)help make the ~i.~por~ financi~lJ7
sts.n~ng Ad~nce as possibie pzior to .the le~,se exojrat~on
5-12 DR,~F T Janus,b, 20’36
- 26 -
ATTACHMENT C
William W. Feilman
Manager, Real Prope~-ty
Real Property. Division
City of Palo Alto
P.O. Box 10250
Palo alto, CA 94303
June 14, 2007
Dear M_r. 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
(FA_A), 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
.aArport Improvement Program (All:’) grant assistance funds for projects, the City will
have to comply w-ith the Grant Assurancesthat are made part of any FAA AIP grant.
acceptance. This obtains even though, in the past, the Count?, of Santa Clara (County)
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 entiw airport sponsor incurs by accepting AlP 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, Minimum Standards for Commercial Aeronautical Activities;
150/5200-18C, Airport Safe& Self-Inspection; 150/5370-2D, Operational Safety On "
Airports During Construction; 150/5050-7, Establishment of A irport A ction 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 bythe airport owner-sponsor to comply.
Ai~o~ pavemems, rm~ways, taxiways, and parking aprons/ramps are a major owner-
sponsor and federa! 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-dov~ 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 Advisouv Circulars to be
followed: 150/5380-6B, Guidelines and Procedures for Maintenance of Airport
Pavements; 150/53 80-7A, Airport Pavement Management Program; ! 50/5380-7B,
_Pavement Management System; and 150/5335-5A, Standard l~vdethod 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 o~,rter-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, Airporrs
and Heliports, sepce 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 ow-ner-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 ..4ffectmg Nm, zgable 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 dowrt 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 w-ith 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 ow-ner-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, for 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 soivency, 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-do~,~ 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 %scalation" 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 ow~ 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, ~vhich 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 Enviroumental Protection Act (NEPA) and the California Environmental
Quality Act (CEQA) for projects and activities on the property. 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 w, ith on a daily basis.
The preceding not an ex.haustive "primer" of what to do, and how to do it. This paper is
intended to Nve 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
type of contracV’agreement operates the airport. The responsibilities of airport ov,~ership
are to meet the obligations, and institute good business practices.
In closing, being the ovmer-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 recovery; repairs and maintenance of pavements
and facilities necessitated by nonnai wear and tear; and improvements and replacements,
and additions of facilities and pavements prompted by increased use, or changes in use
of the airport. THrd, 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.Advisory Circular 150/5190-6, 01/04/07, Exclusive Rights At Federally Obligated
Airports.
3.A&,’isory Circular 150/5 t90-7, 08/28/’06, Minimum Standards for Commercial
Aeronautical Activities.
4.Advisory Circular 150/5200-18C, 04/23/04, Airport Safety" Self-Inspection.
5.Advisoi3; Circular 150/5370-2D, 05/31,/02, 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.
o California Public Utilities code, Sections "~ 1001 et seq relating to the State
Aeronautics Act, 02/2006.
9.California Code of Regulations, Title 21, Sections 3525-3560, 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 ofPalo AJto Purchasing Department
Bill Fellman
Manager, Rea! Property
Real Property Division
City of Palo _Nto
P.O. Box 10250
Palo Alto, CA 94303
July 6, 2007
Dear Mr. Fe!tman:
ATTACHMENT D
As requested by you, i’ve reviewed fl~_e Palo Alto Airport Worldng Group’s (PAAWG) May
2007 report to the Palo Alto City- Council that pro-ports to advocate the City expeditiously regain
operational authority, responsibility, and comrol of the City-o~a~ed ah-port.
My specific task relative to the PAAWG’s report was to co~-rn-nent 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 Count?, of Santa Cia-a;
2. The City Cotmcil appoint an interim manager for the aft-port; and
3. The City Comncil issue an RFP (Request for Proposal) for the long-term management of
the Ah-port, which will ensure its asset value to the community is maintained and wili
preserve its economic value into the fu.rm~e.
The PAAWG report is long on optimism and naivet~, but that is not condem~ng of the effort. !t
may be an indication of thoughtful and co_~dent consideration of the responsibilities for the
variety of operating tasks. Or it may reflect a lack of understanding of the business aspects of
~omn_ing 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 wi!l later comm_ent on specific statements, asse~ions,
allegations, and suggestions made by the PAAWG. First, ! wil! address the three elements oft_he
operative PAAWG recommendations, as ! was tasked to do.
As regards the first PAAWG recommendation that the City of Palo Alto negotiate an early
te~qnination 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 ah-port. 1[ be~e~,e ~ha~
co~rse of ae~io~ should be fu~y explored as s~on as possiMeo 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 futm-e 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 itseK 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 enmmerating the benefits to the City, and the airpo~, 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 "dow-nside" to the City assuming operational control of their airport. I d~
believe, e~e~ a~ this early time, ~ha¢ direc~ ~pera~i~na~ cor~trM by the City ~f PaSo A~ ~f fi~s
~w~ afirp~r~ has merino The proposition has merit ~om the standpoint of operational control of
ks o-v,,.~ airport belong considered a p-abiic-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. Fm-ther, 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
anthority and responsibilities for the Palo Alto Mur~icipal Airport. This would ensure that past
financial obligations and compliance requirements (e.g. FAA Grant Assurances; accounting
records of past State and federa! 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 fut1 breadth and depth state and federN
obligations, and risk exposure and liabilityy- obligations and responsibilities it would assume when
operational authority is obtained by the City. in a previous submission to you, ! discussed the
many and varied obligations and responsibilities the City now has as owner of ~&e Palo Alto
Municipal A_h-port regardless of County operating the airport or a contractor operating the
airport, and the additional obligations and responsibilities the City would assm~e if it chooses to
be tahe actual operator of the airport.
As to the second of the three PA_AWG 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 o~en tossed
out as the title, but the reality is that each of these levels and types of operational control of
airport management, or supe~dsion, or admi~_istration 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 operationa! control of the City’s airport
is a ~start-up busJaness" proposition that must be well thought-out, taken seriously, and entered
imo cautiously. ~ be~ie~e ~hat finitiM~y a~ Olpera~ions Supervisor is the objective, vdth future
~b en~chmen* and expansion t~ Airp~. Manager after the City evaNates progres~ and
s~ccess. 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 P~_AWG 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, hay:rag been General Manager of an airport management entry that leased a small
200+ acre General Aviation ah-port 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 orating County well. The operative term_
2
here is pr@ssional ma;~agement, professional by ex4~erience and educatiordtr .aii~ing, 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.
_no_. ~,~ln San Diego County, to askT previously advised you to contact the,~"~" o~° ,Jceax.s.cte, ’~ ~ : -m" "-~- ~
them about their plan, and progress, to seek an airpport management entity- for their City-ow-ned
small General Aviation ak,-pog. Oceanside, and t~he airport users and tenants bokh have become
somew~hat, disenchanted with operating the airport from within the City’s Public Works
Depaa-tment. Further, I apprised you of the Cou_nty of Los .~_n_geies’ !ong-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
s~ronglly recommend c~atae~i~g a~ of ~hese ~ g~ve you a br~ad fla,’or ~f ~he ~ssue: hM~g
so~ae~ne to run your airport for you. Much ~re needs ~ be ~earned by ~he C~ty beNre
cit~oosing any c~urse of action, wheCher ~perafing ~he~ ~w~ a~r!p~rt ~r c~ntrac~i~ag for a~
operator. It should be noted here, and is stated in the PA_~_WG report, that the City of Turlock
emered into an operating a~eement 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 grants-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 ma~ers. There is no easy
solution, and there is no solution clearly better than any other. Before proceeding wihh 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-ch .artered entity or not.
i will now turn my attention to specixfic comments made by the p.a~\WG that warrant my
view-points.
One thing the City- must reconcile before proceeding ~arther to regain, operational control of its
airport, or pursue getting someone other than t_he 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 arriva! point for an aviation transportation leg. Thus, pu~ose #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 w4ll commit to maintain in a safe mad 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 tt’ansportationfacility 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 ftre 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 exaznples, are tangentia! purposes and values to
the City. Once the airport’s vaiue is understood, and its overarching pro-pose accepted, and, then,
the coFanitment to the airport’s long-term welfare is made, the negotiations with the County can
cormnence 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 t_he City? ~ offer that t.he ai.rpor~ is a transportation_ fae~i~- first a~d fore~aosto
The PAAWG report, and the City Auditor’s report both seem to feel the increase in montt~y tie-
down fees and the fuel flowage fee are excessive and without adequate justification. The
monthly tie-dov,~ 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 fmndamentally different. Palo Alto has a revenue generation base now that favors the
tenants, k 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 si~oaificantly increase what
few revenue sources are available, namely monthly tie-down fees and fuel towage fee. The
harsh reality oftie-dow~ 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
famher 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-dov~
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 disco~age 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 towage 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
towage fees. The airport has little choice in the matter since fuel towage is one of the two
available sources of revenue to support airport needs. ! gather that when airport operation reverts
~om the County- to the City all leases and renta! a~eements 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 fie-down spaces; land leases, lease or rent of airport
owned facilities/spaces; percent of gross FBO (and other business tenants) revenues; fuel
towage fees; transient aircraft parking; meeting room rental; etc.; etc. that create a revenue
generation syxtem of many sources equitably applied across all airport tenants, users, and uses.
suggest ~h~s be mo~.-e fu~y e~p~ored by the Cftt-y before eom~ni~ing to assuming
responsibi~i~ for se~i~g re~enue generation policy. The airpor~ must be made
se~f-sufficient, and financially se~f-sustai~ing i~ shor~ order af*er the C~ ~,vou~d assume
operati(~nM
~mother area of comment here that is related to fmancial solvency of the airpog, 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 fin~lcing for private o~a,~led & operated, but wit.h ~om~d lease and percent of gross
coming to City for airport support. ,_~2~e City does not have to accommodate every aircraft
wisl-~ing to be based at the Palo Alto Municipal Airport, nor does it have to accon~-nodate 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 tlhat, h~vever, l~ recommend an in-dep~h~ n~ h~Ms
barred re-think ~f ~he Ci~"s ~ay~ands Master P~a~ relative ~ a~wi~_g c~nsCructi~a ~f
haagars (s~me 29 are proposed "m the recent Airp~r~ Master Pian~ a~d s~e number ~f
that might be p~ssiMe), a~d ~he re~oea~i~ ~f the Termina~ Facility, b~th ~ the 5£ acre si~e
fr~r~t~ng Embarcader~ and Harbor R~adso i recog-rfize, and appreciate the City’s desire to not
have ak~ort operations si~fic~t!y increase in "intensi~" (wNch ! doubt they will, for a
n~ber of reasons) or "in,de" on open space ~eas (if it is N~o~ propeW in ~e fn’st place, !
.don’t see ~ immsion occ~mg it its a~est sense). There is a lot of archRec~al desi~ work
that c~ go ~to ~obtmsive siting ~d ch~acter ofh~g~s~d a new Ten, inN building khat
should be exp!ored. F~er, there should be considerable investigation of cons~ction
requirements to satisfy flood h~d Concerns. AgNn, ~chitec~N design work could mitigate
most concerns - except increased cost of flood hazed mitigation.
The re!atively short single runway, of 2, 433 feet long that can’t be appreciably lengthened, wi11
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 !ong
runway. Other factors that will combine in some fashion to limit Nture "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 regn~larly); 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 ~eat exception to the Cou_nty’s accounting procedures, and phi!osophy. 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.
A second area of P_~,~kWG criticism of the Count2~ has to do with the County’s staffing of the
Palo Alto Mtmicipal Airport, and associated personnel costs. The issue may be systemic, rather
than scurrilous. The County of Santa Clara has its own perso~_nel policies, rates of pay and
benefits, unioNzation to dea! with, al! 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: bare 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 reconm~ended by the PAAWG a base monthly rate but w-ithout pension
cont~bution and health benefits (i.e. medical, dental, and Vision). In either of the above options,
t_he employee "tai!" is absent (e.g. Social Security; 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 ah-port 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, accomating, human resources, gounds
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 ak~ort is a matter of, first, answering the previous two options: how"
to staff (and for what purposes), and how- to cover overhead and se~wices. Then, second,
pursuing a wel! thought out course of action, r~y i~ia~ s~ggestion, based o~ my eari~er
d~scussio~ of ~iri~g a~ airpor~ ma~ager~ whether ~nterim or ~g term, is to start with
persons to oversee the airport: one to dea~ with operationa~ ~a~ers~ s~ch as safe~ and
a~d disb~rsemen~so There is no requirement to smff~e N@Og !2to 16 ho~s per day, or seven
days a week, at least not iNtially. The City c~ add to st~fmg as it becomes more aw~e of the
N!! r~ge of its obligations ~d responsibilities, ~d what ~e of staffing (n~bers of persons
and experience requked) it tN~es to effectively meet them, ~d, of co~se, what ~e a~o~ 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 communi)-.
suggest engaging a more eNperienced professio~a~ entity to co.duct a comprehensive
economic imp~c~ survey and assessment of the airport’s va~ne to the PaSo Alto are~
business a~d commerce cg~mnnityo 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 mad 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/personne! hires due to increased off-airport business and
corpanerce fostered by airport use. The Cit)~ needs to know much more about the value of the
airport off-airport.
In closing, Fil address the validity, and optimism, of the _PAAWG financial projections. One
thing that must always be remembered when making hopeful economic predictions, especially
those that portray revenues barely exceeding expenses: something can go wrong - and it
probabty will. i am not optimistic that ~ow~h in revenue at the PNo Alto Municipal Airpor~ wiil
m~or ~y ~affic (i.e. use) increases projected by "~e FederN Aviation Ad~Nstration, the State
of CNifo~a’s Depm~ent of Tr~spo~ation’s Division of Aeronautics, or ~y affinity or trade
~oup. The Nmre of General Aviation activiV, when compared to what it was in the i970s ~d
1980s, is ve~ much open to question, ~d some doubt. As i stated e~fier in ~s repot,
increased, ~d ~creasing, Nel costs; incre~ed liability rand hul! d~age insurance costs;
increased costs to acqu~e ~d maintain ~e basic aircraft (acquisition plus life-cycle costs for
required periodic. ~spections ~_d replacemem p~s); a relatively sta~mnt active pilot population
(new stm~s do not exceed "retirements" ~om active flying); ~d the specter of"user fees"
imposed on Genera! Aviation Nrcra~ operators ~ ~any combination will slow ~’a~Sc gro,a~h, if
not decade cm~ent ~affic levels. The fixed ~way len~h, the limited space for wNch to place
h~g~s, ~d the limitation on ~e number of apron tie-do~ spaces add to ~e Wospect ~at
increasing revenue projections out ~ough 2017, rand beyond to 2022, need to be tempered. The
~b~ectfive rema~s f~r ~he a~rp~ ~ be fiaa~e~a~y se~f-s~ffieie~ as s~ as p~ss~Me~ and
over ~he ~ger ~erm be financially seff-sus~ainfi~g, i~ ~s ~ibMNg ar~d the edges ~f
approach requfired~ at ~east initially.
I remain readily available to fur~uher clarify and elaborate on my critique of the Palo Alto Airport
Worldng Group’s three recommendations, and my additional continents.
Sincerely,
R. Austin Wiswel!
CC:C~hris Mogensen, Assistant to the City M .anager
Carolynn Bissett, Contract Ach-ninistrator