HomeMy WebLinkAboutStaff Report 247-08City of Palo Alto
City Manager’s Report
TO:
FROM:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
JUNE 2, 2008 CMR: 247:08
PROGRESS REPORT ON NEGOTIATIONS WITH SANTA CLARA
COUNTY AND OTHER STEPS TO FACILITATE CITY OVERSIGHT OF
THE PALO ALTO AIRPORT
This is an informational report and no Council action is required.
BACKGROUND
The 50-year lease between the City and the County of Santa Clara for the Palo Alto Airport
(PAO) terminates in 2017. On December 12, 2006, County staff presented to the County Board
of Supervisors a business plan (Plan) for PAO, including an analysis of the lease; an overview of
the County Airport Enterprise Fund; an analysis of PAO’s finances; identification of 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
PAO; that 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 PAO in 2017 or earlier if desired by the City,
2) Limit future County capital investment in PAO to the local matching funds 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 al! future AIP grant applications; and
4) Raise tie-down rates and fuel flowage fees to help make PAO financially self-sustaining and
recover as much of the County’s original investment in PAO (Outstanding Advance) as possible
prior to the lease expiration.
The County Board of Supervisors approved the Plan, but delayed action on the disposition of
PAO for six months in order to provide the City an opportunity to present the County with viable
development options for PAO and time to negotiate those options.
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
CMR: 247:08 Page 1 of 12
PAO. The PAAWG included representatives from the City Council, City staff, the Palo Alto
Airport Association, Stanford Hospital, the Joint Community Relations Committee for the Palo
Alto Airport and representatives of stakeholder groups with an interest in PAO use and
operations. On June 4, 2007, the PAAWG presented its report to the City Council.
Principal findings from the PAAWG report included:
1) that airport operations were profitable;
2) that, based on PAAWG’s own financial analysis and the City Auditor’s review, the PAO has
the economic potential to be self-sustaining, fund necessary improvements, and cover the cost of
City administrative overhead;
3) that the airport was an essential community asset; and
4) that the County ignored numerous economic and social benefits the airport provided. These
benefits included: tax revenues generated by the airport that support local jurisdictions;
transportation for businesses and their employees; transport for hospital patients and transplant
organs; pilot training and certification; recreation space for the local community; emergency
support activities; and PAO’s part in the Bay Area airport and transportation system.
The PAAWG concluded:
PAO is an important transportation, business, economic, recreational and emergency
preparedness asset for the City and its residents;
o PAO can be operated on a self-sustaining, economical basis and be cash positive without
requiring any financial support from the City; and
The continued operation of 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 Manager to negotiate an early termination of the existing PAO lease
with the County;
2) Appoint an interim manager for PAO; and
3) Issue an RFP for the tong-term management of PAO, which will ensure its asset value to
the community is maintained and will preserve its economic value into the future.
On September 18, 2007 (CMR 361:07), the Finance Committee discussed staff’s response to the
PAAWG recommendations and three options related to the future of PAO: 1) do nothing and
wait until the lease expires in 2017; 2) assume responsibility for PAO immediately; or 3) plan for
an orderly transition to City oversight and take a more active, immediate role in PAO operation.
The Committee split on the recommendation and agreed to forward the report to the full Council
for its review along with staff’s response to a list of questions to be researched. On November
13, 2007 (CMR 418:07), Council directed staff to begin negotiations with the County on an early
termination of the lease and to commence work on the items set forth in the November 13, 2007
staff report. Council also directed staff to provide progress reports to the City Council every six
months beginning in May 2008.
CMR: 247:08 Page 2 of 12
DISCUSSION
As directed by Council on November 13, 2007, this is the first biannual progress report. Included
in this first report is an update on staff’s progress towards completing PAO action items as well
as other information updates. The action items are a combination of two lists of progressive
steps taken from prior staff reports (Attached C - CMR 418:07 and 361:07)
Progress on Steps
1. City/County negotiations regarding the "outstanding advance"
The outstanding advance is the difference between the County’s total capital investment,
including grant matching fees, and the net revenue generated over the term of the PAO lease.
The offer by the Director of the Santa Clara County Roads and Airports Department to waive
any remaining "outstanding advance" when the City takes over PAO will require the approval of
the County Board of Supervisors. This offer has been made during the course of several public
meetings including during a presentation to the County Airports Commission. The outstanding
advance as of June 30, 2007 was $773,408. In a City Auditor’s report to the Council on June 6,
2006, the auditor disputed the County’s claim that PAO was losing money and needed to
increase fees to recoup the outstanding advance. The audit claimed PAO was paying for more
than its fair share of overhead cost and questioned historic costs that were paid by a County
General Fund loan. In fact, the auditor felt that it was a grant not a loan since it was not
documented or paid back to the General Fund. The audit leads to the possible conclusion that if
pooled overhead cost had been proportioned correctly and historic costs had been properly
attributed to the County General Fund and not the airport, there would not be an outstanding
advance. It is staff’s position that the airport and the City do not have a legal obligation to repay
the advance unless a written agreement or contract can be produced by the County.
2. Federal Aviation Administration (FAA) Grant Proposal Review
FAA grant funding is based on a five-year airport improvement plan (AIP). Eligible projects
include those improvements related to enhancing airport safety, capacity, security, and
environmental concerns. AIP funds are not eligible for terminal buildings and non-aviation
development. Each year, the airport manager submits a five-year airport improvement plan to the
local branch of the FAA. The County AIP projects, their costs, and the year for which FAA
grant funds are requested for PAO are, as follows, for the next five years:
PROJECT
1) Signage, Runway/Taxiway
Marking Changes IAW FAA RSAT
Recommendations
2) Purchase FOD Sweeper and
Portable Runway Closure Lighting
COST
$150,000
$60,000
YEAR
2009
2009
CMR: 247:08 Page 3 of 12
3) Reconfigure Taxiways G and Z $400,000 2010
to comply with FAA Standards
4) Construct Helicopter Landing $250,000 2010
Pad and Parking
5) Construct Exit Taxiway D $120,000 2010
6) Pavement Maintenance for $300,000 2011
Existing Runway, Taxiways and
Aircraft parking
7) Overlay Existing Runway and $2,000,000 2012
Taxiways
Ideally, the FAA funds 95% of the cost, the State funds 2.5% and the local match is 2.5%. Based
on this calculation, the local match for the next five years of projects would be $82,000.
Federal and State funds are never guaranteed, however. An example is the last major paving
overlay project completed by the County in 2000. The local match was initially estimated to be
$50,000 but by the time the projected was completed the County local match was $620,000.
The County gave staff three reasons for the cost over-run: 1) bids were higher than the estimate;
2) the lack of State funding available at the time the project was ready to be funded; and 3) the
unanticipated time and cost to obtain permit approval from the City. These costs added
$479,929 to the County’s outstanding advance in the 1999-2000 fiscal year report.
Federal Funding for 2008-09 Airport Improvement Grants has not been authorized by Congress
and it has been suggested that due to budget constraints Congress will reduce the grant match
from 95% to 90% of the project cost.
A major concern in taking back PAO is that it does not become a burden on the City’s General
Fund. The County claims that PAO is losing money, and without additional hangars, there is no
opportunity to generate more income. The 2007 PAAWG Report included a Projected Pro-
Forma Income Statement for 2007. When the PAAWG Income Statement is compared to the
County annual report for fiscal year 2006-07 (Exhibit B), it shows approximately the same
amount of net revenue ($42,100) but the PAAWG report includes a $100,000 Maintenance
Reserve. The County applied the $43,533 net revenue to the outstanding advance leaving no
funding for the projected AIP, FAA grant matching funds.
There are many variables in the grant process and a business plan would help the City better
understand the associated risks.
Staff is preparing a scope of services for the contractor providing the business plan response that
would include the following:
CMR: 247:08 Page 4 of 12
Determine the long-range (20 year) financial strength of PAO
How to maximize current income potential and the income potential beginning in 2017
when the current contracts expire.
The time required to amortize the cost of constructing new hangars
Future viability of airports and aviation in general
Identify the airport’s future capital investment needs
Staff anticipates that the business plan will be available for the next 6 month update in
November, 2008.
3. Current agreement and grant review
Staff has reviewed the current Fixed Base Operator (FBO) agreements and compared them to
more contemporary agreements. In today’s environment, airport managers negotiate leases based
on the capital the lessee is willing to invest in the airport. Lessee’s who simply rent space, with
little or no capital investment, have shorter term leases than those who risk a capital investment.
The two current FBO leases at PAO are long-term, and have no incentives for capital investment.
The leases do not include CPI, adjustments and do not remit a percent of gross revenue with the
exception of the north half of Roy Areo’s lease where the County receives 6% of the hangar
rental. These leases, which are in effect until 2017, favor the FBO and do not adequately serve
the revenue/growth needs of the airport. Current FAA grants will be reviewed by staff from the
Public Works Department and the City Attorney’s office. However, due to workload issues,
neither department has undertaken the review process to date.
4. Airport comparisons
Staff is in the process of collecting data from several airports on operations, management, the
number of tie-downs, hangars and based aircraft, runway length, type of airport, and other
pertinent information in order to assess the most viable management arrangement for PAO. Data
so far indicates that most California municipal airports are operated by the respective city public
~vorks departments as an enterprise fund. However, City operation and management may not be
the best solution for PAO. Staff has been cautioned that no two airports are alike and that to
determine the best management for PAO, its unique features must be considered. Given that
PAO is going to need an infusion of funds from the beginning to either provide for matching
grant funds, or to provide funding for non-grant applicable projects, staff is considering a third
party operator for the airport. A third party would be required to have access to revenue to meet
matching funds for federal and state grants, or to make improvements in the situation where
grant funding is not available. The downside of having a third party manage the airport is that
the City would lose direct control. Staff research has also revealed that there are several different
types of third party management, which will be described and discussed in future reports. It is
also clear that someone within the City will have to oversee the third party manager and prepare
the grant requests. In the next few months, staff will concentrate on finding out more
information on airports operated by third parties.
It is important to note that City responsibility cannot be reassigned. As a sponsor, the City is
ultimately responsible for airport operations regardless of who manages PAO.
CMR: 247:08 Page 5 of 12
5. Staffing needs assessment
Currently, PAO on-site staffing consists of two full-time airport operations workers and a part-
time supervisor. Future staffing needs may change based on PAO’s hours of operation. In
addition, regardless of whether the City assumes management of PAO or if it is run by a third
party, there wil! always is a need for City staff to write grants and manage/monitor airport
operations. The FAA is clear that, as an "airport sponsor," the City will have full liability for
operations regardless of who oversees management operations.
6. USGS topographical maps and global warming
The San Francisco Bay Conservation and Development Commission (BCDC) has produced a
map using USGS information that depicts a potential global warming inundation scenario. In
2100, the water level in San Francisco Bay would rise by one meter should current trends
continue. If this were to happen, all the land within the Palo Alto city limits east of 101, with the
exception of portions of Bixby Park, would be underwater. This would include all of the airport,
golf course, water treatment plant and the businesses along Embarcadero Road. The Army Corp
of Engineers and the Santa Clara Valley Water District are taking this information into account
as part of their levee analysis due in 2010. The actual USGS topographical map is anticipated to
be completed in September of this year.
7. Comprehensive economic study & hazardous materials analysis
Staff is proposing to have outside contractors prepare a Comprehensive Economic Study (CES)
and a Hazardous Materials Analysis (HMA). The CES will include an analysis to determine the
long-term viability of PAO, providing assurance that sufficient funds can be generated to offset
annual expenses and capital work. The combined estimated cost of both the CES and HMA is
about $50,000, which is being proposed in the Fiscal Year 2008-09 ASD budget.
8. Metropolitan Transportation Commission general aviation review
The MTC has been holding meetings to see if there is some way the °Con-time" performances can
be improved at all three International Bay Area airports. One thought is to remove or reduce the
non-commercial traffic from the three airports. This would have little effect on PAO, because its
runway is too short to accept jet traffic, and there is very little space to accept additional aircraft.
It may, however, help focus on opening Moffett Field to general aviation. Staff will continue to
monitor these meetings and discussions for potential impacts on PAO.
9. US Army Corp. of Engineers levee report
In an effort to expedite the levee report, the Santa Clara Valley Water District announced
recently that they will contribute $3.5 million to the study. The announcement claimed the Am~y
Corp of Engineers money was due to run out in July of 2008. The report is currently scheduled
to be completed in 2010, and it will respond to the USGS 2100 global warming prediction.
CMR: 247:08 Page 6 of 12
10.Review of County Financial Statements
The City Auditor’s June 2006 report on the Airport’s financial condition was discussed in the
September 18, 2007 staff report (CMR 361:07). Staff recommends that a periodic review of
PAO financials should be an on-going activity. Therefore, the Comprehensive Economic Study
discussed above will include an update on the projected PAO financial position.
11.Council consideration and development of the Airport mission statement
The Palo Alto Airport Joint Community Relations Committee is assisting staff in drafting a
proposed mission statement to be considered by the Council. Staff anticipates that the Mission
Statement draft will be available for Council review and approval in the November 2008 Airport
update.
12.Outline of City obligations and responsibilities for PAO
An outline of City obligations and responsibilities for PAO, whether it operates PAO or contracts
out, the management, will be done as part of the Comprehensive Economic Study referred to
above.
Information Updates
In addition to the 12 action item updates above, there are three information updates:
1. Transition Timing
Previous staff reports estimated that the transition of PAO from County to City oversight could
occur in approximately 3 years; however, this time-line now appears too short. As staff comes to
understand more about the parameters of PAO project, the scope increases in size and
complexity. In addition, the PAO project and its various components must be integrated into an
already heavy staff workload.
2. Tie-Down fee increase
The County will increase tie-down fees by 8% per month on July 1, 2008, which would increase
the cost of the average plane at PAO to $150 per month. There are currently 361 tie-down spaces
w-ith 30 vacancies. Staff is concerned that if the County continues to raise the tie-down fee, pilots
will seek other local airports, which; in turn, will decrease PAO’s revenue stream. The County
claims only one pilot has stated he was moving due to the upcoming fee increase, that the
vacancy rate is similar to the other two County airports and is not unusual given the current
economy. In July, the tie-down rates for Reid Hillview will be increased to $140 per month and
for South County to $100 per month for the same type of aircraft used in PAO quote above. San
Carlos does not have any tie down vacancy at the moment due to a hangar construction project
but their tie down rate is only $115 per month and they are only 10 miles from PAO.
Additionally, West Valley Flying club is a tenant of both airports and they currently have 25
planes in the County tie-down area of PAO. West Valley has indicated that they would move
their planes from PAO if the rates continue to increase.
CMR: 247:08 Page 7 of 12
3. County reasons for terminating the lease
In the first monthly meeting in January between City and County staff, the County outlined the
following three main reasons for terminating its lease for PAO:
A. Inability to generate additional revenue to keep up with expenses.
PAO generates its income from 3 main sources of revenue: fuel fees, tie-downs and Fixed Base
Operator (FBO) rentals. These sources are limited by the amount of fuel pumped, the number of
tie down spaces available and terms of the FBO lease agreements. PAO is the only airport not
generating revenue from public agency-provided hangars. At all other Bay Area airports, hangar
rentals are another major source of revenue. It is the County’s position that constructing hangars
is not feasible because there is insufficient time remaining on its lease to amortize the cost of
construction. The County also contends that the City would not approve construction of hangars
because of the potential conflict with the City’s Baylands Master Plan which does not anticipate
expansion of the airport.
As an FAA designated "Reliever Airport," PAO is eligible for FAA grant each year in an amount
of $150,000. However, the use of the funds is limited, and must be thoroughly justified as not
being diverted from basic airport payment maintenance needs. These FAA grant funds also
require local matching funds. (A ~Reliever Airport" is a high capacity general aviation airport in
a major metropolitan area which provides pilots with an attractive alternative to using congested
commercial service airports.)
B.FEMA flood control requirements.
The County’s position is that the Federal Emergency Management Agency (FEMA) wil! require
all the buildings at PAO to be elevated to eight feet above sea-level, cresting significant cost
implications. The majority of the airport is currently at about four feet above sea-level. Staff’s
investigation has determined that only new buildings occupied by personnel would have to be
elevated. Existing buildings and new hangars would not require elevation.
Co Strong likelihood that Moffett Field may open to relieve the three major Bay Area
airports.
The San Francisco Bay Conservation and Development Commission (BCDC) is looking at ways
to relieve the Bay Area’s 3 international airports from congestion. One option being considered
is to move all non-commercial carrier airplanes to the various reliever airports. BCDC may look
to Moffett Field as a reliever airport because, unlike PAO, it can accommodate a much greater
level of traffic, or number of aircraft operations, including jet aircraft. However, a number of
people in the industry feel any proposed additional use of Moffett Field is a long way off. Also,
staff has been assured by the State Division of Aeronautics that even if Moffett Field were to
reopen, the State and the FAA would prefer that PAO remain open as a Reliever Airport.
CMR: 247:08 Page 8 of 12
RESOURCE IMPACT
The resource impacts of the transition of PAO operations and management from the
County to the City will be considered as part of the Comprehensive Economic Study (CES)
discussed above. The estimated cost ($50,000) of the CES and the Hazardous Materials
Analysis will be considered by Council during the Fiscal Year 2008-09 budget process.
POLICY IMPLICATIONS
This progress report is consistent with previous Council direction.
ENVIRONMENTAL REVIEW
An environmental impact assessment (EIA) may be required by the California
Environmental Quality Act (CEQA) and will be performed in connection with future
Council decisions regarding PAO.
ATTACHMENTS
Attachment A:
Attachment B:
Attachment C:
Progress Report Items
PAO Revenue and Expense Comparison
CMR 418:07 and 361:07
PREPARED BY:
WILLIAM W. FELLMAN
Manager, Real Propert~~
DEPARTMENT HEAD APPROVAL:
LALO P EF~_~-~
Director, Adm!.~istrative Services
CITY MANAGER APPROVAL: ~"
STEVE EMSLIE and iLELLY MORARIU
Deputy City Managers
cc~County of Santa Clara
JCRC
.Chair of the PAAWG
CMR: 247:08 Page 9 of 12
ATTACHMENT A
PROGRESS REPORT ITEMS
From November 13, 2007 staff report (CMR 418.’07).
1. City/County Negotiations
2.FAA Grant Proposal Review
3.Current Agreement and Grant Reviews
4.Airport Comparisons
5.Staffing Needs Assessment
6.USGS Topographical Maps
7.Comprehensive Economic Study
8.Metropolitan Transportation commission General Aviation Review
9.U.S. Army Corp. of Engineers Levee Report
10. Review of County Financial Statements
From September 18, 2007 staff report (CMR 361.’07).
11. Council consideration and development of the airport’s mission.
12. An outline of all City obligations and responsibilities for PAO
the PAO or contracts it out.
whether it operates
CMR: 247:08 Page 10 of 12
ATTACHMENT B
PAO REVENUE AND EXPENSE COMPARISON
PAAWG (2007)
Projected Income
& Expense Statement
County (2006-07)
Actual Revenue
& Expense Statement
Revenue
Lease Revenue $134,000
Aircraft Tie Down $561,600
Fuel Flowage $ 50,000
Transient & Other $ 60.000
$129,000
$506,122
$ 82,000
$ 42.000
Total Revenue $805,600 $761,000
Operating Expenses
Salaries & Benefits $364,000
General & Admin.$169,000
Aviation Services $100,000
Maintenance/City Reserve $100,000
PAO Capital Expense $ 30,000
Depreciation $-0-
Levee Maintenance $-0-
Contract Services $-0-
$377,014
$159,281
$148,382
$ -0-
$ -0-
$214,001"
$ 20,788
$ 2.636
Total Expenses $736,500 $922,102
Net Gain or Loss $ 42,100 <$160,650>
Non-Operating Revenue Expense
Master Plan Development
Airport Calif. Monitoring Group
State Water Permit Fee
($7,013)
($1,975)
($ 830)
Total Non-Operating Expenses ($9,818)
Net Income before Adjustment
Add Back Depreciation on Capital Improvements
Net Income
($170,468)
$214~001"
$ 43,533
CMR: 247:08 Page 11 of 12
* The $214,001 is highlighted to show the County depreciates Grant Funding. It does not
affect the calculation but it can mischaracterize the Airport’s current cash flow position.
CMR: 247:08 Page 12 of 12
ATTACHMENT C
TO:HONORABLE CITY COUNCIL 6
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
NOVEMBER 13, 2007 CMR: 418:07
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 RECOMMENDATIONS
At the September 18, 2007 Finance Committee meeting, the Committee discussed staffs
response to the Palo Alto Airport Working 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, Ndministrative Services
CITY MANAGER APPROVAL:
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 l
ATTACHMENT A
Questions from the Finance Committee Meeting:
1)What is the current status of establishing Safety Zones at Palo Alto Airport
"PAO" and do the safety zones have any 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 County 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 will not restrict development in San
Mateo County, but this will be verified.
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 of the creek is changed, would the County boundary line change?
The Army 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 original 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 Army 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 realignment 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. Wiswell 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 Federal or State grants. He
strongly recommends that the construction of additional hangars be considered to
create a new revenue source.
4) Will the new light 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 services. 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 Estimated
to complete Completion
Date
Current Agreement & Grant Reviews 6 months July 2008
Airport Comparisons 9 months Sept 2008
Staffing Needs Assessment 9 months Sept 2008
USGS Topo Maps 9 months 2008
Comprehensive Economic Study 12 months 2009
Metropolitan Transportation Commission 18 months 2009
General Aviation Review
US Army Corp. of Engineers 3 years 2010
Levee Report
MTC General Aviation Review 18 months 2009
City/County Negotiations 3 years 2010
FAA Grant Proposal review Annually
Review of County Financial Annually
Statements
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 run a
general aviation airport. Moreover, both the Cities of Sunnyvale 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 vita! asset for many years to come.
8) Who will 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 18th, staff responded that it was
too early to tell if increased rates have caused an increase in the vacancy rate for
tie downs. Mr. Wiswe!l 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 below. 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 and 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%167
6) South County 79%63
7) Liverrnore 60%200
10)How are the master plans for the Baylands and the Airport in conflict? And the
lease?
The Cou~aty 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 down 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-down areas closer to the FAA tower, reducing the total
number of airplanes and not being in potential conflict with the Baylands Master
Plan. An analysis of the revenue consequences of such a plan would have to be
conducted.
11) Why 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 Supervisors 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.
o 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
(ALP) 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 plan
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
(SCVWD) 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 future 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 Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTN:FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
SEPTEMBER 18, 2007 CMR: 361:07
STAFF RESPONSE TO THE PALO ALTO AIRPORT WORKING
GROUP REPORT AND OPTIONS REGARDING THE FUTURE OF THE
PALO ALTO AIRPORT
RECOMMENDATION
This report responds to the June 4, 2007 Palo Alto Airport Working Group Report; presents
options regarding the t\~ture of the Palo Alto Airport; and requests Council direction on which
option to explore.
BACKGROUND
The 50-year lease between the City and the County of Santa Clara for the Palo Alto Airport
(PAO) terminates in 2017. On December 12, 2006, County staff presented to the County Board
of Supervisors a business plan (Plan) for the PAO, which included an analysis of the lease; an
overview of the County Airport Enterprise Fund; an analysis of the PAO’s finances; identified
future capital investment needs; and recommended County action in anticipation of the lease
expiration in 2017.
The Plan noted that the County has assumed all of the business risk associated with operating the
PAO; that the PAO has historically operated at a deficit; and that opportunities to generate
additional revenue were extremely limited due to physical, environmental, and policy
constraints. The Plan recommended that the County:
1) terminate its involvement in the PAO in 2017 or earlier if desired by the City
2) limit future County capital investment in the PAO to the local match necessary for
essential, non-deferrable, Airport Improvement Project (AIP)-eligible maintenance
projects or security related projects mandated by Federal agencies
3) require the City to submit all future AlP grant applications
4) raise tie-down rates and t\~el flowage fees to help make the PAO financially self-
sustaining and recover as much of the County’s original investment in the PAO
(Outstanding Advance) as possible prior to the lease expiration.
CMR:361:07 Page 1 of 8
The County Board of Supervisors approved the Plan, but delayed action on the disposition of the
PAO for six months in order to provide the City an opportunity to present the County with viable
development options for the PAO and time for the County staff to negotiate those options.
PAAWG Report
On December 18, 2006, Council authorized the creation of the Palo Alto Working Group
(PAAWG) to analyze PAO operations and develop one or more viable business models for the
PAO. The PAAWG was appointed by then-Mayor Kleinberg and included representatives from
the City Council, City stafg the Palo Alto Airport Association, Stanford Hospital, the Joint
Community Relations Committee for the Palo Alto Airport and representatives of stakeholder
groups with an interest in PAO use and operations. On June 4, 2007, the PAAWG presented its
report to the City Council.
One of the principal conclusions from the PAAWG report (Attachment A) was that airport
operations were profitable. Citing the CiD Auditor’s review (Attachment B) of the County’s Plan
and its own financial analysis, the PAAWG reported that the "PAO has the economic potential to
be self-sustaining, fund necessary improvements, and cover the City management overhead
associated with the required functions such as Federal grant management." The Auditor found
that airport operations generated $400,000 in adjusted net income over 37 years and the PAAWG
report stated the airport had the capacity to generate a positive bottom line plus a $100,000 "set-
aside" for capital improvements.
Another principal PAAWG finding was that the airport was an essential community asset and
that the County ignored numerous economic and social benefits the airport provided. These
included: tax revenues generated by the airport that support local jurisdictions; transportation for
businesses and their employees; transport for hospital patients and transplant organs; pilot
training and certification; recreation space for the local community; emergency support
activities; and the PAO’s part in the Bay Area airport and transportation system. To prove these
benefits, the PAAWG cites a variety of statistics on airport employment, sales and property
taxes, fees generated, and business activity.
The PAAWG concluded:
The PAO is an important transportation, business, economic, recreational and emergency
preparedness asset for the City and its residents;
o 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.
Count,/Action
Following the PAAWG report, County staff reported to the Board of Supervisors on June 19,
2007 that the City had agreed to consider, as long as the County followed the City’s land
development application process, a County proposal to develop 30 hangars on the vacant parcel
along Embarcadero Road (this parcel is part of the PAO lease). The County indicated it would
proceed with the preliminary work necessary to prepare such an application, but would most
likely not proceed to final design because of project costs and until the City Council made a
decision on recommendations contained in the PAAWG report.A formal request from the
County has not yet been received.
DISCUSSION
City Consultant 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. Wiswe!l 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 commitnaents 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.
Wiswe!l’s first report ends with a fundamental observation, "...being the owner-sponsor of an
airport is a business matter; a property management business task .... the safe use of the
’property’ is task number one." The theme of running the airport as a business that is financially
solvent and capable of meeting operating and capital requirements is basic and runs throughout
Mr. Wiswell’s recommendations.
On July 6, 2007, the consultant submitted his observations and recommendations on the County
and PAAWG reports. His most penetrating and insightful question for the City to consider is
"what does the City want the airport to be." In other words, ~vhat mission or purpose does the
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
community. Management of a City-owned transportation and economic asset can
produce value.
Before assuming control of the PAO, however, the report strongly recommends that the
City needs to thoroughly’ educate itself on Federal and State obligations, risk exposures,
and the liabilities it would assume with oversight. The City must notify both the State of
California Aeronautics Division and the FAA of its intent to assume control from the
County and to ensure that all past financial obligations and compliance requirements
incurred by the County are -known, resolved, and properly transferred.
Interim Manager: It is important to distinguish between a "Manager," who has policy
setting or contracting authority, and an ’~Operations Supervisor," who does not detem~ine
policy or enter into contracts, but who has authority to negotiate lease/rental agreements,
collect payments, and authorize disbursements. Mr. Wiswell recommends initially hiring
an Operations Supervisor who can eventually be promoted to an Airport Manager after
the City evaluates their progress and success.
Request for Proposal: Prior to issuing an RFP for a contractor for management of the
PAO, the City should acquire more information from other airports concerning contractor
operation of a publicly-owned general aviation airport, whether it be a for-profit or not-
for-profit operator, an airport FBO, or a City-chartered entity. Specifically, the consultant
recommends contacting representatives of three other airport operations. One is the City
of Oceanside, which has struggled for years as to how its airport, currently run by the
City’s Public Works Department, should be managed. Although the County of San Diego
has offered to take over Oceanside’s airport given its regional importance, the City of
Oceanside has decided to send out an RFP.
The other airports are county-owned airports: one that is run by a for-profit organization
and one that is not. The latter believes a not-for-profit entity, run by itself, provides more
control over perso~mel 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, !ong-term leases
provided to the FBO operators severely restrict additional revenue opportunities. Specifically,
the consultant states PAO has a revenue generation base which favors the tenants rather than
PAO needs. He advocates creating a revenue generation system of many sources equitably
applied across all PAO tenants, users, and uses. While recognizing PAAWG’s model for
determining the broad economic benefits the airport bestows, the report recommends engaging
an experienced professional entity to conduct a comprehensive economic impact survey and
assessment of the PAO’s value to the community and its businesses. It is essential that the City
develop a long-term revenue model that keeps the airport solvent and is able to meet Federal and
State matching requirements for capital projects as well as infrastructure improvements not
funded by Federal or State jurisdictions.
As stated, the 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 intensify. Moreover, he states that there
have been architectural modifications to hangars that make them aesthetically less intrusive. He
recommends the City re-examine its Baylands Master Plan to determine if an accommodation
can be made for additional hangars and relocation of the terminal facility. 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 former location, which would cut across the golf course
and run down Embarcadero Road to the Bay. At the very least, staff anticipates that the
recommendations will include extensive repairs to the current levees, including the levee the
County built on the easterly edge of the airport and for which it now wants to terminate any
maintenance responsibility.
Another issue is hazardous materials. In anticipation of a return to City control of the PAO in
2017 or earlier, City staff from Plam~ing, 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 "knowledge base.
Staff acknowledges the PAAWG’s concerns about the County’s steep increases in fees and the
potential for deterioration in airport infrastructure. To ensure the latter does not occur, City staff
believes it necessary to ~vork more closely and cooperatively with the County on Federal and
State grants. This would enhance staff’s kmowledge, fulfill a basic City obligation to understand
the implications and terms of receiving a grant, and provide a realistic transition into eventual
oversight of the airport. Based on government requirements and the County’s work to (e.g., a
complete repaying of the airport in 2001, repaying a portion of the access road, installing
perimeter fencing gates, and implementing a noise implementation program), it is unlikely the
County will ignore basic improvements. The County has a good record with the State on
correcting safety issues, and the users of the PAO appear to approve of current on-site staffing
levels. In addition, the County has been cooperative in meeting fire and storm water run-off
regulations. Although the County is focused on recapturing its Outstanding Advance, it is likely
to meet its minimal operating and capital commitments.
The City has three options:
do nothing and wait until the lease expires in 2017;
assume responsibility for the PAO immediately; or,
plan for an orderly transition to City oversight and taking a more active, immediate 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 ~lear picture of the tests it faces. He
notes, for example, that the number of active pilots is reaching a plateau; that the Federal
Aviation Administration is considering imposing fees on general aviation activity; and that the
Page
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 realigrm~ent to more adequately reimburse the City for its risks.
The County is realizing a modest profit ($11,000 per year over 37 years), but staff believes that
the long-term operational and capital needs require a stronger revenue base. By including
depreciation in its public statements about the airport’s financial condition, the County does bend
the picture of its cash position. Nevertheless, staff agrees it is necessary to set aside monies, as
the PAAWG notes, for capital matching requirements and projects that are not funded by the
F’ederal or State goverlm’~ent.
Staff finds option 3 the most viable. It would provide for a gradual, ~open-eyed" transition to
City airport oversight. The transition could occur in approximately 3 years. This will allow time
for:
Council consideration and development of the airport’s mission.
Staff work with the County to master basic information and requirements.
An outline of all City obligations and responsibilities for the PAO whether it
operates the PAO or contracts it out.
An economic analysis to determine the long-term viability of the PAO and
providing assurance that sufficient funds can be generated to offset annual
expenses and capital work.
A thorough Hazardous Materials analysis.
Obtaining written confirmation from the County on a ~vaiver of re-payment of the
’~Outstanding Advance."
Assessing and seeking the most viable management arrangement for the airport.
Consideration of the Army Corp of Engineer’s recommendation on San
Francisquito Creek
A complete legal analysis of the County/City PAO lease and examination of all
the airport contractual agreements.
In conclusion, staff recognizes the many benefits the airport currently provides and can provide
to the greater conmmnity. Staff does not support the PAAWG recommendations to appoint an
interim manager or to issue an RFP for the long-term management of the PAO at this time.
Running the airport is a major responsibility and must be approached with careful planning. A
gradual transition period that addresses the issues identified in this report is recommended.
Page /u~8
RESOURCE IMPACT
Staff will 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 may be required by the California Envirormaental
Quality Act (CEQA) will be performed in connection with future Council decisions regarding
the PAO.
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
/
--ii -/ I
" ’ ’ ’ ’ ~",T’/1(. ~ ~-~ ....
WILLIAM W. FEI~LMAN
Manager, Real Property
CARL Y~!a.TS
Director,j~dmin!strative Services
Assistant City Manager
ATTACHMENTS
Attact~nent A: PAAWG report
Attachment B: Auditor’s Report
Attackment C: June 14, 2007 Consultant Report
Attachment D: July 6, 2007 Consultant Report
cc:County of Santa Clara
JCRC
Chair of the PAAWG
i-age
ATTACHMENT A
(Without Appendices)
Palo Alto Airport Working Group (PAAWG)
Report to Palo Alto City Council:
The Community,,,,,,Value,,
Economic Viabili~
and
Future Management of Palo Alto Airport
May 2007
Palo Alto Airport Working Group (PAAWG)
Concluding Report and Recommendations to
Palo Alto City Council
PAAWG Resolution:
¯ The PAAWG, having carefully reviewed the operation of the Palo Alto Airport resolves:
! - The Palo Alto Airport is an important transportation, business, economic, recreational
and emergency preparedness asset and resource for the City of Palo Alto and its
residents.
2 - The Palo Alto Airport can be operated on a self-sustaining economical basis and be
cash positive without requiring any, financial support from the Cib’.
3 - The continued operation of the Palo Alto Airport by,’ the County will both diminish
the resource value of the Airport and will threaten its long-term economic viability.
The PAAWG hereby recommends that the City Council direct the City. Manager to
negotiate an early termination of the existing Palo Alto Airport lease with the
Count,, 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 PAA\VG (with Larry.’ Klein, City of Palo Alto, Vice Mayor,
Bill Fellman, and Chris Mogensen not voting).
Executive Summary
In late 2006, the City Council authorized the creation of the Palo Alto Airport Working
Group (PAAWG) to advise the Council on two basic questions:
,Is the Palo Alto airport an important community asset?
Can the Palo Alto airport be run on a profitable basis?
The PAAWG was tasked with providing this assessment to the City Council within 6
months.
The information contained in these pages represents the output from the PAAWG efforts
and hopefully provides the Palo Alto City Council with an independent assessment of the
Palo Alto Airport as an important community asset, to both the city and the region, as
well as a perspective on the economic value and other benefits of the airport to the City
of Palo Alto and its residents.
Purpose: This report is the PAAWG response to the City Council’s request for
information and a recommendation to the City Council about Palo Airport management
vis-i~-vis Santa Clara CounD, (the current lessee), regarding the impact and timing of a
structural change in the operations lease.
This report addresses:
*The airport’s value as an essential community asset
*The airport’s actual and derived economic contribution
~The airport’s operations and management
,The airport’s future alternatives and management recommendations.
Notwithstanding its very interesting and profitable history, the Palo Alto Airport has
recently been judged by the Santa Clara County Airports Division as a target for
divestiture due to County’ reported negative financial performance. This inaccurate
judgment appears to be more representative of a political decision than a carefully
considered economic analysis. The County has ignored the Palo Alto City Auditor’s
audit of County finances, which proved the economic viability of the Palo Alto Airport
(which earned more than $400,000 over the past several years), and it also ignores the
value of many other economic benefits such as tax revenue and the economic value of
emergency support activities at the airport, many of which have enormous value to the
CiP:~ of Palo Alto as well as the entire Bay Area.
Herein lies the principal issue and the reason for this report - the Palo Alto City
Council wishes to have a concise and independent evaluation of the airport’s
economic value to the community in order to make a judicious decision on the
future of this essential resource.
-2-
Palo Alto Airport Working Group Findings
Palo Alto Airport (PAO is the F~4 airport identifier code) is a vital component of the
local transportation network and has many important community benefits:
1.Support for local business travel requirements
2.Transportation of patients and transplant organs to Stanford Hospital
3.Initial pilot training, certification, and bi-annual reviews
4.Recreation space for the local 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 Appendix 1 -A: Polo 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 ~vorkers. 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 community colleges as ~vell as the City and County
general funds.
The Polo Alto Airport is an essential communi~ asset, addressing many communiD’
needs and interests, as well as, providing an array of important economic benefits to
the City of Polo Alto. PAO has the economic potential to be self-sustaining, fund
necessa~ improvements, and cover the City management overhead associated with
the required City oversight for functions such as Federal grant management.
Polo Alto has had an airport since 1928 and now boasts the busiest single runway airport
of its size in the country with around 200,000 operations annually. It also is host to the
country’s largest flying club, West Valley Flying Club (a non-profit organization), and to
four smaller flying clubs.
In addition, the Palo Alto Airport is a pilot training resource for a broad variety of people,
from celebrities such as Joe Montana and several US astronauts to ordinary people like
5,ou, me, and many ~ "- ........o~ our n~gnours.
Summary Economic Overview of PaIo Alto Airport (PAO) today -
Actual airport revenues tota! about $1.75M, of which 94% are sourced from rental
and lease income, with the remaining income from fees received for transient
parking and airport fuel flowage (a common source of revenue for an airport
operator). The total direct expenses are for personnel, totaling $442,000 at the
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) entiD, associated with airport services, operations or maintenance.
This provides a gross mar~in ofnearls~ 50°/; - a positive cash flow from current
airport operations.
Most of the major infrastructure expenses (i.e., runway and taxiway resurfacing,
automated weather reporting, runway lighting, security’ fencing, etc.) for airports
throughout the countoi are applied for and covered under the FAA Federal grant
system.
Staffing and operational costs for the FAA Tower at PAO are not paid by Santa
Clara County or the City., of Palo Alto, but are separate and also covered by the
Federal Budget. The PAO tower facility, and the professionalism of its ATC (Air
Traffic Control) staff are what make the number of annual flight operations at this
airport possible.
PAO is part of the regional and national transportation system. It is simply the
"on-ramp" to the vast network of airports and airways leading throughout the
nation and the world. As such, it supports the business, medical, emergency, and
personal transportation needs for the community’. But, there are direct local
benefits as well, such as pilot training and providing jobs doing the essential work
of the airport. Airport businesses have a combined payroll of $5.3 Million, a
significant percentage of which is spent in the local community’. The PAAWG
notes that the scale of flight operations at PAO is a direct indicator of this regional
value.
]Palo Alto A~rport (PAO)
Estimated Average Annual Composite
Pro-Forma ~n~o~ ..e S~atemen~
m~!iars, averaged over the p~r~,,d 2000-2004)
SC County FBO-1 FBO-2 PAO Total
Revenue (Income)
Lease Income $563,344 $946,168 $274,500 $1,784,012
Transient income $_ 7,40z $0 $0 $57,402
Fuel Flowage $4%750 $O $__Q0 $49.750
Total Revenue $670,496 $946,168 $274,500 $1,891,164
OperatingExpense
(Salaries,Benefits,
And Maintenance)
Net Earnings (Loss)
/o Rev.
94.3%
3.0%
2.6%
100.0%
$422.255 $338.048 $100,000 $880.303 46.5%
$228,241 $608,120 $174,500 $1,010,861 53.5%
-5-
Current State of the City/County relationship
The County, of Santa Clara Roads and Airports Department operates the Palo Alto
Airport (PAO) under a lease agreement with the City of Palo Alto which expires in 2017.
Moneys collected by the County.’ at the airport flow into an enterprise fund which is
independent of the tax-supported general fund. The County.. has clearly stated that it does
not want to continue operating the airport after 2017. The County asserts that it loses
money at PAO, but the City auditor’s report disputes this view and also notes that 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 revenue for all facilities at PAO should be expected to be much
larger than what the Coun .ty 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 Count), owns and
operates, shows a very satisfactory profit due to its hangar rentals, which the County rents
directly to aircraft owners and operators. At PAO, the County’s lease agreement with the
two FBO’s generates only modest revenue for the Count?,’ with most of the cash flow
from the rental of hangar space flowing to the FBO sub-lease holders. Recognize that the
lease agreement between the County, and the FBO’s was completed man?, years ago and
the terms were made attractive to encourage the private investment necessary to fund
hanger construction. Current FBOs, like most local real estate investors of the period, are
now simply reaping the reward from their earlier private investment.
-6-
Some Sources of Conflict-
Split Ownership and Management with Conflicting Decision Making
In 1978, the City, adopted a Baylands Plan which stated, relative to the airport, that "no
changes are planned which would take over a significant amount of the airport, and that a
second runway would not be built. The Airport will have two Fixed-Base Operators, but
a third will not be built." There is no included definition of"Fixed Base Operator," thus
the exact meaning and intent of this last statement is unclear. The lease with the County
was amended so that a second runway could not be added and no expansion of tie-down
space beyond 510 spaces could occur without the concurrence of the Cit?’.
in October of 2005, the County produced a Master Plan for PAO. It included some
changes required to the airport layout to bring the taxiways more into line with FAA
guidelines and move the heliport to comply with FAA Heliport guidelines. It also
proposed a Baylands Welcoming Center and a new terminal, moving the terminal bey.ond
the FAA defined "runway safer), 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 an3’ 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 Count?, was the construction of
additional hangars, as these would have generated additional income to further increase
the County Airport Enterprise Fund. The County’s PAO Master Plan was in conflict with
the City Baylands Plan, which would have required some modification to permit the
improvements envisioned by the County plan. Ostensibly, the County improvements
would have been done with FAA funding, but hangars are not eligible for Federal Airport
Improvement (ALP) Program grants. It was at this point in time that the County Roads
and Airports Director decided that the County should abandon the airport at the end of
the lease.
Clearly the Roads and Airports Department is frustrated by constraints placed on PAO,
which are not under Coun~ 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 County’s Business Plan states:
"The airport is severely constrained from physical, environmental and policy standpoints;
existing City policies specifically prohibit physical expansion of the airport into open
space areas [on the airport property], significantly increasing the intensity of operations,
or adding a third FBO. In light of these constraints, only minor changes to the Airport’s
airfield area were identified in the Master Plan."
Oddly, the Roads and Airports Department paints a much rosier picture for South County
Airport (El6), which has always required a subsidy from the Enterprise Fund and has
been far more costly to manage in terms of land acquisition and facility, improvement
expense - South County revenues have not covered these costs to this day. Without the
constraints posed by the PAO location, the County., hopes the South County Airport may
prosper sometime in the future.
Once the County decision for non-renewal was taken, the Roads and Airports Department
decided to try to maximize its revenue and minimize expenses as it says in the business
plan: "The loss of PAO would not present any operational impacts to the County" airport
system because each airport’s aeronautical activities are independent." With this view,
the Roads and Airports Department is imposing a 7.5% increase peryear, compounded in
tie-down rates paid onl.v at PAO and doubling PAO fuel flowage fees (again, not at other
County, airports). These rates are thus higher than surrounding airports and the gap will
widen further over time, but the long-term effects on PAO can only be speculated upon at
this point. The County’s PAO Business Plan also states that it seeks to "Limit future
County capital investment in the airport to the local match necessao, 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 flowage 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 County returns to City’ control in 2017.
The County Board of Supervisors will, in the next few months, be asked to make a policy
determination allowing The Roads and Airports Department to abandon its involvement
in PAO in 2017 or sooner by agreement with the City’. Absent a Board of Supervisors
decision compelling the Roads and Airports Department to operate its three airports as a
Countywide system and spread the cost burden in a balanced manner, the Board of
Supervisors will likely vote to uphold the Roads & Airports Department program for
exiting in 2017. In the meantime, the Roads & Airports Department is proposing a
temporary hangar project to generate additional revenue during the remaining period of
the lease. If this new construction is not approved by the City, it is possible that the
Roads and Airports Department will consider this ’:cause"’ 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 County and the City of
Palo Alto in 2017. The two major FBO leases would likely continue until term in
2017. The County would likely continue its demonstrated reduction of Staff
commitment and shift funding to support South County Airport (El6) and Reid
Hillview Airport (RHV), at the ’expense’ of Palo Alto Airport (PAO) via ignored
grants and deferred maintenance. The Palo Alto Airport would likely revert to
The City of Palo Alto in a condition further deteriorated than it is at present.
Implications of continuing the lease with the CounW until 2017.
Under this scenario, the Count}, 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 County airports will be at an estimated
$154/month by that date.
Only "non-deferrable;" maintenance will be performed which will likely result
in a maintenance backlog and a further deterioration of PAO airport facilities.
The increased tie-down rates, coupled with the disinvestment in the airport,
wilt probably cause some reduction in flight training and flying club activity
and the consequent loss of some jobs at the airport. Personal property taxes
collected at the airport could also be somewhat reduced, due to aircraft
leaving PAO. Past experience with County errors confirms this price
elasticity.
If the County constructs the proposed temporary hangars it wilt derive
additional income, but there will be no corresponding benefit to the City.
In any event, in 2017, the City must be prepared to take over airport
operations. Although income potential will be much greater in 2017, if the
City inherits and assumes responsibility for the operation of considerably
depreciated PAO facilities, it could be many years before profitable rental and
service activities are realized.
An alternztive i a for the City., to request 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.
-9-
Act now - grant the County wish to end their management responsibility for
the Palo Alto Airport. Negotiate terms favorable for a balanced reversion back
to City control. Manage the financial transition well, including capital accounts
and claimed accruals. Manage the transition pursuant to a specific City
designated Pato Alto Airport management authorit)~ which would receive policy
guidance from Palo Alto City, Council. Under this scenario, there are two
alternative paths, either at the option of the City or because the County’ feels it has
legal grounds for earl}.’ termination:
Implications of endin~o the lease with the Count?/ early where the Cits, of Palo
Alto operates the airport.
Under this option, PAO airport revenues would flow to the City. The City
would need to establish an Enterprise Fund in order to accurately account for
revenues and expenditures. This would be in accordance with the FAA
requirements for airports accepting Federal 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 Count?’ FBO sub-leases are
o_bligations running until 2017 and would accrue intact to the City. (If the
sub-leases were to be cancelled, the FBOs would likely expect compensation
corresponding to the benefit they derive from their business through 2017.)
An analysis (see Appendix l-D) shows that the airport could be run profitably
by the City’ until 2017, while honoring the existing Count?, FBO sub-leases
and yielding income of $100,000 which could defray City management costs
and/or create a maintenance reserve needed for deferred maintenance and
code upgrades when the leaseholds revert to the City. After 2017, the airport
would generate sufficient cash to provide for any contingency.
Implications of endin~ the lease with the Counts, earls.’ where the Cit~, of Palo
Alto contracts operation to an outside airport mana__.ement firm or entits,
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 airpo~. The work of preparing grant requests, filing documentation,
and required repoKs would be done by PAO airpoK staffwith minimal City
the "bandwidth" to operate the airpod directly.
It may prove antithetical to the community service oriented facility as the profit
expectations of an FBO may not allow for adequate reinvestmen~ in the airport.
Wait, study, deliberate for 3 to 5 years. The costs of transition will continue to
increase over time. Uncertainty of operating expense management will continue
(i.e., fuel flowage, tenant charges, collections). A Sinking Fund or other
allowances for capital improvements are difficult to arrange, so they remain
deferred. Quality of service and property will continue to deteriorate during this
period.
There are other management considerations necessary for effective control assuming a
transition from County 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 of a FBO.-
Consequently, in the event of aggressive behavior being exhibited by the County, the
PAAWG recommends contracting with the West Valley Flying Club and using their
facilities, equipment, and personnel to facilitate transition to City control.
A second alternative would be for the Palo Alto City Council to form a special district,
although this may create additional, complex control issues for the City of Palo Alto.
Finally, there are a few externa!., 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 Workin~ Group does not recommend formin~ a special district, or
assi~nin~ management responsibiliW to one of the FBO’s. or hirin~ an outside
commercial airport (i.e.. real estate development) management compan,/.
The Palo Alto Airport Working Group recommends the Palo Alto City Council:
Form a non-profit management company to manage PAO airport. Staff
requirement is small (5-6), would live locally, and there are many skilled
people to consider. They are paid from airport operations. A local non-
profit management company would be best to keep employment and
direct costs low in keeping with the size of the airport. This serves as
the focal point to prepare grant requests to the Federal government.
Or, a non-profit corporation could be contracted to run PAO airport. The airport
community includes many people with the interest, commitment, and ability to form and
operate a non-profit organization which could respond to a 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. oversight. Airport
finances would be essentially run as an enterprise fund with all money needed for airport
operation collected from users with no burden on Palo Alto taxpayers. Taxes collected at
the airport would flow to the City, County, and schools as the?, do nov,,, 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, staffat Palo Alto beyond what the?, would currently, do in conjunction
with managing via the Count)., to sustain the federal grant application process.
This decision will determine the future of our airport.
-]2-
Glossary
Tie-down - A place on a paved or other designated spot on the airport property with
secure attachment points where airplanes are secured by ropes or chains to prevent
movement.
Hangar- An enclosed building for storage of aircraft, with a 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 s*rucmre for aircraft storage which provides shade for
parked aircraft. Generally considered inferior to hangars, yet preferable to tie-downs,
since it does provide some protection from the elements. There are currently no shelters
at PAO Airport.
Sub-lessors - At an airport, these are usually aircraft owners who rent or lease tie-downs
or hangar spaces. They include any business on airport property that does not own its
properts~, this includes FBO’s (below).
FBO - Fixed Base Operator - These are businesses critical to airport operations with
responsibilities defined under FAA regulations. At a minimum, these are fuel service
operators and 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 these 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 Alto’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.
-_13-
ATTACHMENT B
City of Palo Alto
June 6, 2006
Honorable City Council
Palo Alto, California
cc: Joint Community Relations Commission
Review of Palo Alto Airport’s Financial Condition and Comments on
Santa Clara County’s Proposed Business Plan for the Airport
SUMMARY
Santa Clara County’s proposed business plan for the Palo Alto Airport (Airport) highlights
Airport deficits and proposes to dramatically increase tie-down fees1 to recoup the
outstanding advance used by the County to construct, maintain, and support the airport. Our
analysis of the financial statements, County documents, and City records indicates that Palo
Alto Airport operations have generated more than $400,000 in adjusted net income2 over the
last 37 years that has been used to offset the County’s original investment of $!,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 Pato Alto revenue.
The proposed tie-down fees would be higher than nearby airports. We question whether
current Airport users should bear the burden of historical deficits from the 1960’s and 1970’s
(especially since recent years have been profitable), and specifically whether current Airport
users should bear the full cost of 1973 Embarcadero Road improvements and 2005 Baylands
levee repairs. Our analysis also indicates depreciation calculations should be cited with
caution because depreciation expense does not affect the County’s annual calculation of the
outstanding advance. In addition, we suggest that the allocation of County overhead to the
Airport be trued-up at the end of each year. Given the recent profitability of the Airport, we
estimate’the County’s remaining outstanding advance of $681,349 may be settled before the
lease expires in 2017, even without the proposed 30% increase in tie-down fees. Before
2017, the viability of the Airport may be impacted by: developments in the San Francisquito
Creek project; implementation of some of the more feasible aspects of the County’s proposed
1 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), less operating expenses (not including depreciation), plus net non-operating
revenue/expense (including capital expenditures net of federal and state reimbursements).
-1-
master plan; and/or the advent of new very light .let aircraft After 2017, opportunities exist to
~ncrease revenue after the County’s subleases with the two fixed based operators (FBOs)
expire.
RECOMMENDATION: Authorize the City Manager to notify the Santa Clara County
Board of Supervisors that:
!) The City of Palo Alto supports moderate increases in tie-down fees at the Polo
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 ofPaloAIto(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 repaid by future revenue.
Deloitte & Touche audit. In 1997, the City and County jointly funded a Deloitte & Touche
audit of the County’s financial statements for the Palo Alto Airport to settle questions about
the appropriate accounting for Polo Alto Airport and the outstanding advance.
Proposed Airport business plan (Attachment 3): in FY 2005-06, the Airports Division3 hired a
consultant to update the 1982 Master Plan for the County’s three airports, and prepare
business plans for the three airports. The proposed Palo Alto Airport business plan
recommends that the County terminate its involvement in the Airport after the lease expires in
2017. The recommendation is based on the premise that the Airport has historically operated
at a deficit and that costs will continue to exceed revenues; that the loss of the Airport would
not have any operational impact on the County system or its other two airports; and that
future opportunities to generate additional revenues are extremely limited. The business plan
further recommends that future capital investments be limited to those projects mandated
and/or funded by the federal or state governments, and that the City should be required to
provide any assurances that exceed the 2017 expiration date on the lease (i.e. the 20-year
assurances needed for future airport improvement project grants), Finally, the proposed
business plan recommends that the County raise tie-down fees to help make 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 A~rport Master Plan: The proposed Airport Master Plan identifies minor changes to
the Airport’s airfield area, and raises substantive questions about the extent to which the
vacant8-acre parcel fronting Embarcadero Road should be developed. City Planning staff
The Airports Diwsion is part of Santa Clara County’s Roads and Airports Department
-2-
indicates that ~mprovements consistent with current AirpoFt operations are within the scope of
the City’s Comprehensive Plan and the Baylands Master Plan. However, parts of the plan
~ntensifying use or intruding into open space areas would not.be consistent. A response letter
from the Planning Director is attached (Attachment 2).
Purpose, Scope and Methodology Because of Santa Clara County’s recent release of a
proposed business plan for the Airport, the Palo Alto City Auditor’s Office was asked to review
the Palo Alto Airport’s financial statements, and evaluate the County’s allocation of expenses
and overhead to the Palo Alto Airport and the financial viability of the airport operations. We
conducted our review in March and April 2006 in compliance with government auditing
standards.4
DISCUSSION OF AUDIT RESULTS
The Palo Alto Airport has generated more than $400,000 in adjusted net income over
the last 37 years. Table 1 summarizes the financial history of the Airport since 1969,
including the County’s more recent investments in the Airport’s infrastructure (net of federal
reimbursements). The County has used the Airport’s adjusted net income to offset its original
$1 million investment in start-up and capital costs at the Airport (the outstanding advance)
"~ For our review, we compiled the history, of profits, losses and outstanding advances; reviewed the
financial statements and accounting data provided by the County and City from 1969 to 2005;
analyzed the method for assigning County costs and overhead to the three County airports; and
compared the operating revenues, expenses, and income for the three County airports. We
analyzed the depreciation schedules used by the County; pedormed a detailed review of the
accou~-~ti~-,g records provided by the County for FY 2002-03, 2003-04. and 2004-05; reviewed the
Airport and FBO leases and the joint agreement for the levee repaired by the County. We
recalculated the direct and pooled charges assigned to the Palo Alto Airport and to the two other
County airports; reviewed the proposed master and business plans for the Airport; and examined
previous consultant reports and County-City agreements We compared the proposed rate
~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 Commit-tee for the Palo Alto Airport (JCRC)
Table 1 of Palo Alto Air iusted net income and advance
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
Prior
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1993-84
I984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1 990-9i
1991-92
1992-93
!993-94
FY 1994-95
FY 1995-96
FY 1996-978
FY 1997-98
FY 1998-99
FY i 999-00s
FY 2000-01
FY 2001-02~°
FY 2002-03
FY 2003-04
FY 2004-05
TOTAL !
$61.830
63,786!
93,338
100,9611
103,152
115,493
119,201
!35,612
157 571
! 76,944
197,881
231,470
288,678
313,807
346,267
343,626
369,880
364,268
366 #68
392,868
378,027
sq7
426,542
505,30643o,1_o8 i
385,542
438,722
430,238
439,377
488,062
474,680
647,857
752,760
727,657 !
723,065 I
725,478 1
$12,788,443
($69,949)
!78,384)
(88,525) I
.(97,353) }
(105,903)!
(124,276) I
(120,79@!
(153,142}t
(183,606) I
(201,432) I
(209,553)i
(244,835) I
(302,663) I
(238,752) 1
(246,570) I
!268,681) I
(327,483) l
(338, ! 07)
(340,129)
(363.634)
(302,721)
(358,667}
(289~294)
(376,650)
(435,563)
(341,695)
(360,617)
(374,867)
(381,060}
(473,818)
(548,411 )
(583,1!6)
(548,914) t
(834,677)
(663,106)
(617,646}
(735,448)
(S12,330,037)I
(6.007~
5,358
(t ,000)
47,863
27,864
19,578
26,871
27,964
64,222
(15,785)
(26,112)
(479,929)
(445)
207,705
(649)
(1,166)
49,047
(S54,621)
($8,119)
(!4,598) I
(9,889) 1/4,o151 !
(4,942) t
(21,124) }
(33,941) l
(47,994)!
(48,861) II(32,609)
@6,954)
(71,193) 149,926 !
67,237 I
77,586
16,143
31,773
24,i39
3,334 1
84,140
24,718
!07,494
97,755
97,607
107,988
51,796
91,819
113,400
(50,226)
(86,461)_ 1
(588,365) i
98,498 1
125,788 1
63,902 I
104,253 i
39,077 I
$403,785 I
Source: Compiled by Palo Alto City Auditor’s Office from various County reports
$1,085,134
1.093,253
1,107,851
1,117,740
1,121,755
,1~6,69,
1,147,82!
1,153,118
1 ,i87,059
1,235,053
1,283,914
1,316,523
1,363,477
1,434,670
1,384,744
! ,317,507
1,239,921
1,223,778
! ,192,005
1,i67,866
1,164,532J
1,080,392 I
1,055,674
948,180 -1850,425
752,818~
593,034
501,215
387,815t438,04!
.~24,50z
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 $2.5 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 some costs directly to the Airport, and allocates itspoo!ed
costs based on .a formula. Over the last three years, the County’s direct costs at the Palo Alto
Airport, averaged $391,791 per year.~ As shown in Table 2, the County’s pooled and
overhead costs at the Palo Alto Airport averaged $280,561 per year- or about 41.7% of Pa!o
Alto Airport operating expenses. ~2
Table 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
i Airport
Total (not includinq depreciation)
Percent County pooled and overhead
costs
$378,345 $436,285$360,744
$257,759
S618,5031
41.7%
$391,791
$284,761 $299,163 $280,561
$663,106I $735,4481 $672,352
429%40.7%417%
Pooled County expenses for salaries, benefits, and general administration overhead have
increased ~n recent years., reducing Palo Alto Airport operating income. For example, general
and administrative County expenses increased 85.6%, from $94,031 in FY 1997-1998 to
$1 74,533 in FY 2004-2005, and averaged $153,761 per year between FY 1997-98 to 2004-
05. In contrast, direct Airport expenses for aviation services increased 45% from $81,766 in
FY 199%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
~s~.~-~--’-~:~.~.:A ~ -o~.~:~’:~-:~,:~.~.-" >--’~F~’200~0-’-3~,:::~-:F:¥:,:2003~0~~-’- ~~2004’~05~:.
Palo Alto I 32.5%31.3%31.3%
Reid-Hillview i 58.6%56.6%56.6%
South County I 8.9%121%12.1%
Allocated costs should be trued up at the end of each year. The County allocates pooled and
overhead costs based on estimates. Actual percentages may vary. Using actual figures, we
estimate Palo Alto paid almost $16,000 more than its share of allocated costs as follows:~4
~’ 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 theFAA
~,2 The Palo Alto Airport’s share of pooled County costs and overhead included $! 25,500 in salaries
and benefits, and $174,500 ~n insurance, professional services, internal departmental charges (eg
legal expense), tools and instruments, transportation, and other general administration costs.
~ 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 $17 1,655 credit to adjust overhead rates applied to intra-departmental
charges at all three County airports
-5-
Table 4: Estimated versus actual pooled and overhead cost allocation ges
FY 2002-03
FY 2003-04
FY 2004-05
TOTAL I
$2,588
$13,278
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 Alto 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 Paio 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. Ahhough 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 allthe projects.~6 Depreciation
expense (including depreciation on projects funded by FederaJ End State grants) fluctuated
from $417,321 to $184,426 to $312,974 in FY 2002-03, 2003-04, and 2004-05, respectively.17
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 stad up
costs, which totaled $1,085,134, was advanced by the General Fund to the Airport Enterprise
~5 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 increasePaloAIto
and Reid-Hillview’s share of costs, and reduce South County’s share of costs. We agree that using
the actual number of aircraft from the annual assessment roll is appropriate.
16 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.~8 However, if the lease were to be terminated, there is, to our knowledge, no formal
loan agreement for repaying the amount, and the City is not required to repay the outstanding
advance to the County. As of June 30, 2005, the Outstanding Advance balance was
$681,349, and the $403,785 in adjusted net income (shown in Table 1) remains in theAirport
Enterprise Fund.
The outstanding advance amount is increased or decreased according to whether the Airport
generates a profit or loss each year. No interest accrues on the balance. As shown earlier
(in Table 1), after incurring losses in its start-up years, the Airport generated positive adjusted
net income in 21 of the last 24 years (1982-2005). The Airport has reduced the outstanding
advance by over $403,000. Losses in 1998-2000, 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 $125,454 (for construction contracts, consultant payments, and
reimbursements for work done by the Roads Division) was charged to the Palo Alto
Airport.s° According to the 1979 agreement for maintenance of levees in the
Baylands21, 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 Paio Alto Airport users may be questionable. 22
Proposed tie-down fees would be significantly higher than nearby general aviation
airports. The business plan proposes 30% tie-down fee increases atPaloAIto-compared
to proposed 3% fee increases proposed at the other two County airports, Reid-Hillview and
South County. This would put Palo Alto fees significantly above other nearby general aviation
airports, and could jeopardize Palo Alto revenues if users chose to move their aircraft to other
airports. Table 5 compares the present and proposed fees for aircraft tie-downs.
~ 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
~S The county share of the $2.8 million m capital ~mprovement projects was $550,900. Federal and
State grants covered the remaining $2.3 million used for electrical rehabilitation and upgrades,
slurry sealing the pavement, adding safety fencing, rehabilitating the apron, and repaving the
runway
20 Up to $50,000 in additional expense recurred by the Santa Clara Valley Water District for the
project is stilt pending.
2~ An agreement between the County of Santa Clara, the City of Palo Alto, and the Santa Clara
Vailey Water District.
22 Apparently pedestrians have had access to the levee for many years, and the levee appears as
part of the regional Bay Trail on the Bay Conservation and Development Commission’s current
maps However, there does not appear to be any written agreement on the part of the City or the
County for that access
-7-
Table 5: Current versus )osed tie-down fees at nearby airports2;
Santa Clara County Airports
Palo Alto
Reid-Hillview
[ South County
Nearby Airports
San CarlosHalf Moon Bay
Hayward
$111.56 t $144.95 (+30%)
$111.50 I $11485(+3%)
$79.50 $81 89 (+3%)
$115.00 I
$5900 t
$6000 I
Justification for increases: The business plan justifies the proposed fee increases by stating
that the PaloAItoAirport has historically operated at a financial loss and that the deficits
arising from operations at the Palo Alto Airport are being subsidized by surplus revenues
generated by Reid-HillviewAirport. In our opinion, these statements mischaracterizethe
operating results of thePaloAItoAirport. As shown above, the Palo AIto Airport generated
more than $400,000 in adjusted net income over the last 37 years, while covering a sizable
share of countywide airport operations.2s We estimate that if various adjustments to the
outstanding advance were implemented (as discussed above), moderate fee increases were
proposed, and operating and pooled costs were reviewed, the County’s entire outstanding
advance may be settled before the end of the lease without need for such dramatic increases
in tie-down fees.26
Future viability of the Palo Alto Airport. Between now and 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 improdements to taxi-ways and runway
that are suggested in the master plan could be implemented. Moderate increases to user
fees would help the cash flow picture without the need for the dramatic increase in the tie-
down fee.
Increasing the number of hangar and tie-down spaces would generate additional revenues for
the Palo Alto Airport in the near term. However, it is unlikely that major capital investments
would happen prior to lease negotiations/expiration in 2017. Meanwhile, in the next 5-7
23 Tie-down fees for comparable aircraft at the San Jose International Airport are $1 85 00 a month
However, San Jose is primarily a commercial airport and in a different category from the general
aviation airports. Fees at Oakland (in the same category as San Jose) are $75.00 per month for
comparable aircraft. San Jose is reducing space dedicated to general aviation. However, Oakland
currently has space available.
24 Tie-down fees for aircraft weighing 0 - 3,500 Ibs.
25 It should be noted that County staff expect the Palo Alto Airport to end FY 2005-06 at a loss, due
to $125,500 in levee repair related expenses.
........~,~,,,,~ expenses grown t~,, a~erage of, .~-~o per year
than operating revenues (an average of 7.6% per year). Airpod expenses may belessthan
predicted for FY 2005-06 due to an unfilled vacancy, and staff is assessing the feasibility of
curia!ling terminal operating hours for FY 2006-07. Additional cost savings could result from
reducing operating costs such as oveGime ($22,600 ~n FY 2004-05), or contracting with one of the
FBOs to provide terminal sewices (now pedormed by County staff at the County terminal). Onthe
revenue side, a 3% tie-down fee increase would generate about $15,000 per year, compared to a
moderate 10% fee increase generating about $48.000 per year, or about $145,000 per year
generated from a 30% tie-down fee increase)
-8-
years, the advent of air taxi services and the introduction of very light jets (VLJ) capable of
operating on 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 2017~ FBO leases could generate higher revenues. Palo Alto Airport has two fixed base
operators who have 30-year ground leases with the County. The leases allow the lessors to
extend the original leases for additional 5-year periods until the County-City lease expires in
2017.27 These leases did not contain clauses that based rent on inflation indexes such as the
consumer price index, or require set dollar amounts for rent increases; and only one lease
included a percentage of gross revenues generated from other sources. As a result, the
lease revenues, which totaled $123,000 in FY 2003-04 and $131,000 in FY 2004-05, totaled
only 17 to 18% of the total Airport revenues. Once the leases expire in 2017, these types of
clauses could be incorporated into the lease terms to ensure higher revenues from lease
rents.
Palo Alto is a regional resource: Our analysis indicates the Palo Alto Airport is truly a
regional resource. Palo Alto residents compose only 23.3% (78 tenants) ofthe airport’s 335
aircraft tenants.28 Regional Civil Air Patrol and Stanford Life Flight operations use the Airport,
along with flying clubs and other aviation-related tenants. According to the General Aviation
Element of the Regional Airport System Plan, Palo Alto is one of 20 publicly owned and
operated general aviation airports that provide services to personal and business aircraft
owners and users. Pato Alto is designated by the FA.A as a "reliever" airport, providing an
~mportant "safety valve" for activity that would otherwise consume runway and airspace
needed by the airlines using the three major commercial airports.
The mission of the County’s Airports Division is to "promote the economic and socJa! vitality of
the County by meettng the needs of the General Aviation 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 20!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 $9!0 per month ($1 0,920 per year) and was also set at 85% 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 Airports
County of Santa Clara
Roads and Airporls Depar~rnem
101 Skypor! Drive,
{408) S 73-2,100
June 6, 2006
Ms. Sharon Winslow Erickson, Cit-y Auditor
City of Pale Alto
250 Hamilton Ave.
Pale Alto, CA 94301
Subj:Review of the Pale Alto Ai_rporffs Financial Condition
Dear Ms. Erickson,
Thank you for the opportunity,- to rexdew the draft report regarding your analysis of the
financial condil2on of Pale Alto Airport (PAO). The following comments are provided:
I)ODeratin~ income
The data presented support the Counb~’s conclusion stated in the draft Business
Plan that since inception of the airport lease, the Count2vs investment in the
airport has exceeded net revenue by $681,000 despite the fact that the great
maj0ri ,ty of capital project costs have been funded by others and the fact that the
Coun~/s unrecovered investment (the "Outstanding Advance") does not accrue
interest. These facts are compelling indications of the financial subsidies
required to operate the airport.
Nearly half of the meager $400;000 in total net operating income generated ever
the last 37 years will be wiped out by the projected FY 2006 operating loss, due in
large part to the levee project. An operating loss is also.proiected for FY 2007.
The record clearly demonstrates that operating profits generated in years when
no additional capital ~nvestments were made .are inevitably offset by the infusion
of additional capital required to maintain and improve the airport. Because these
additional investments do not occur ever.}, year, the), tend to be overlooked by
some even though they have the same effect, dollar for dollar, as an .operating
loss. The Outstanding Advance (OA) is quite hand)’ in this regard as a melric of
the airport’s long-term financial performance because it repPesents the difference
behveen the Coun~,"s in:,’es-.~n.ent in the airport o~A the ~’
income.
-10-
2)
3)
4)
Overhead
The overhead costs allocated to PAO are the overhead costs generated by PAO.
These costs would not be incurred by the County if the County did not operate
the airport and will be eliminated when the County ceases to operate the airport.
Some costs, such as intra-departmenta! charges, County Counsel charges,
insurance, etc. will shrink immediately upon expiration of the lease.
Management staff costs will be reduced as the management structure is adjusted
to reflect the reduced scope of responsibility. Any allocated overhead not
eliminated as a result of the lease expiration would be small and offset many
times over by the elimination of the business risk associated with running the
airport.
It is important to note that no adjustment is made in the overhead allocation to
reflect the additional administrative burden imposed on staff due to the lease
arrangement with the City of Palo ~Mto, a burden which is not present with
respect to the two airports owned and operated by the County,’.
Deprecia gon
We agree with the report’s conclusion that the County is correctly excluding
deprecialion from the calculation of the Outstanding Advance, but not for the
reason suggested i.e. because d~preciation is not a cash transaction. Depreciation
related to the grant-funded portion of capital projects is not included in the
calculation of the OA because the OA is a benchmark of the Coun _~. s financial
exposure resulting from its involvement in the airport; the pass-through of
ou~ide grant funding does not impact the Coun ,ty’s financial stake in the airport.
The AEF-funded.portion of capital projects 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 improvemenes being depreciated.
Depreciation is the mechanism by which costs for long4ife assets are allocated
over time and, of course, are enkireIy relevant to any discussion about the
airport’s financial position and performance. The fact that the 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 majority of capital project
costs were funded by okhers highlight’s airport’s reliance on subsidies to fund
maintenance and improvements.
Embarcadero Road improvements and levee ret)airs
There seems to be continuing confusion over references to "County’’ expenses in
the airpor[ lease, with the implication that these expenses should somehow be
-11 -
5)
funded by some County fund source other than the AE~F. As we have discussed
a number of times, the Airport Enterprise Fund is not a legal entity in. and of
itself and therefore cannot be a party to an agreement. The County of Santa
Clara is the legal enl:ity that is the party to agreements regardless of which
County department or fund source iSinvo]ved. The fact that the County - and
not the Airport Enterprise Fund - is specified in the lease and the levee
maintenance agreement as the responsible party for funding the Embarcadero
Road improvements and the levee repairs, respectively, simply reflects this basic
legal concept.
The report states that the Embarcadero IRoad improvements benefited both the
Yacht Harbor and the airport but does not establish the basis to support this
claim. The Yacht Harbor was accessed from Embarcadero Road prior to the
improvements, so the improvements were not essential to provide access to the
Yacht Harbor. "Ehe salient issue is that the Embarcadero Road improvements
were made because they were required to be made by the airport lease. Since the
improvements were performed to fulfill a requirement of tee airport lease, it is
entirely reasonable to conclude that the improvem.ents would not have been
made had the County not been a parD, to the lease. Therefore, even if the
improvements provided some seconda~° benefit to tee Yacht Harbor, it is
appropriate tha{ the full cost of the improvements be charged to the AEF.
Finally, the 1998 Deloitte-Touche audit included the cost of the Embarcadero
Road improvements in the calculation of the OA that both the Ci~° and the
County agreed to use on a go-fopa’ard basis.
The same reasoning applies to the levee repairs. Because the Coun~ is a parV to
the levee maintenance agreement due solely te its involvement in fire airport, it is
appropriate that the Count~,’s costs of complying with the agreement be charged
to the Airport Enterprise Fund. No case can be made to charge those cost~ to any
other County fund source. Issues related to whether it is appropriate for the
County to be a par ~W to the levee maintenance agreement inthe first place and
how part of the leasehold came to be usedfor other..purposes without the
Count’s consent as required by the lease will be addressed under separate
cover.
Tiedown rates and the future viability of PAO
The report does not proxdde any calculations to support the conclusion that ff, e
airport can generate sufficient revenue to coven- expenses (~ncluding modest
capital improvements) and reduce tee OA to zero prior to expiration of the lease
v~, .~.~LU~ uJuy ot~ta~ %~c~eases ~nu~uvvn ......... fees.
-12-
No accounting adjustments to reduce the existing OA are warran~ad as discussed
above, nor is there evidence presented that overhead costs are unreasonable,
unnecessary or misallocate& As mentioned earlier, Lhe OA is projected to
increase substantially in YY 06 and FY 07 as escalation in operating costs
outstrips growth in.revenue. An increase in tiedown fees is the only viable
opporfunity to generate additional revenue.
The draft letter from the Director of Planning a~nd Communit3," Development
attached to the repor~ indicates that no increase in aircraft basing capacity or
intensity of airport use will be allowed. The letter is troubling because Exhibit C
to the lease sets forth the plan for development of the airport and shows hangars
and a FBO on the parcel fronting Embarcadero Road. The adopted Cib~ policies
referenced in the letter appear to aniiaterally restrict the County’s abiliD" to
develop the airport as agreed upon in the lease.
Thank you again for the opportumty to review and comment on your draft report.
Sincerely,
Mic -~.~,Iurd ter
Director
-i3-
ATTACHMENT 2
Draft letter from Palo Alto’s Director of Planning and Community
Environment to Santa Clara County’s Director Roads and Airports
April 24, 2006
DRAFT
Michae] J. Murtder
Director, Roads & Airports
Counb’ of Santa C]ara
101 Skyport Drive
San Jose, California 95110-1302
Dear Mr. Murdter:
This is in response to the County’s Airport Master Plan for the Palo Alto Airport. The Master Plan
provides long-range policies relative to the County’s continued operation of the Palo Alto Airport.
Physical or operational changes are governed by the City’s Baylands Master Plan, which is
attached for your future reference.
In general the City’s Baylands Master Plan supports the continued operation of the airport in its
current configuration. Al! aspects of the County’s Master Plan related to the m aintenance of the
e>:isting facilities as well as some of the proposed new construction activities are compatible ,~,ith
the City’s plan. These include the additional aircraft wash rack, the replacement of the existing
helipad with a new heliport., a new Taxiway D and reconfiguration ofTaxiway G. The Baylands
Master Plan, however, does not allow changes in airport activities that will increase the intensity of
airport use or will significantiy intrude into open space. Specifically, the expansion of permanent
aircra~ is in conflict with the Bayiands Master Plan.
] hope this clarifies the application of existing City land use policies applicable 1o the Airport.
Please feel free to contact me if you have any additiona] questions. I can be reached at
steve.emslie(g:~cityofpaloalto.or~_ or 329-2354.
Veo’ Truly Yours,
Steve Emslie
Director of Planning & Community Environment
City ofPa]o Aho
CC:Frank Benest, CiW. Manager
City Council
JCRC
-i4-
ATTACHMENT 3
Draft Palo Alto Airport Business Plan provided by Santa Clara County
PAO Business P!an.
INTRODUCTION
As ~’he p~:ope,"ty owner,-~he City has .sole discretion over t-he ~u*:~re
o~ d~e airport. The M.aste~ P.lan J~ a~ ob}ecdve, s~and-alone docu-
eacnt ~hat ~etogmzes the CiW’s sovereign.D, with ~espec~ to {he M~-
port ~ega~dl~ss of whether the Com~w i.s :iuvolved in .its opera, on
~fve.r 20~ 7.
A co:~p~anion dc, cu:.ner~t to the Pa[o Alto Aicpo~t Mas~ci- Plan
this Business ?tan, w:hich -addresses the Couau’s ~:atu~e involve-
ment m .the ogeration of the ai~ort. ’~e Besiness Plan is ~ sepa-
u{>on by ~he Count.- Bo:~t~! of Supe:viso~.
DRAFT dan,daG’5--I
This docamcnt:
Presents an ove~-Jew ~nd ~_nat},si~ of th~ zirpo;rt le~s~
the Counb, and the
>Identifies the ~i~rt’s Future capita! investment
>Recommends CountF, ~ctions in anUcJpadon ~,[ the
Ciu/Counw lease e~:piradon in 2017.
CITY/COUNTY LEASE OVERVIEW
TERM, & RENT
The ]e~:se speci{]tss ~ ~rm of 50 y,e~.~s ~nd expires on June 1 ~, 2017
acco~mn~ to Ci~, "~$25oocu.mcnL. The ~ent ~<[o.t~ the cn~}~e tc~m
o[ the .lease.
US:EAND DEVELOPMENT OF AIRPORT REAL PROPERTY
The Co-unry’~ use o:[ d~.e i’eased p~em;.ses Js [imit-ed to constructing.
avignon indu~,na o~ m~nn~act~udng u~es ~re p~ohibJted. A~ h
provemen~s m~st conform [o the CiU’.s bu~Idjng codes ~nd
s.ab~ect to City p~an approval. A devdopmen{ plan was included as
an e~hib~t to theo~j~nai lease; execution of £ne deveJopment pl~:n
was conUngent upo~ av~abilig og funds .and ".vhethc~ %he avia-~
don needs-and economic ~sdfica~on waEam such d.ev:e[opmenL’~
The development plan was sobsequen0y mo~0ed nvice and Jnco>
po.tated-imo ~e lease by lease amendment nnmber one in October
~968 aod zmendme~t numbe~ two i~ Degembet 1969. The Ci~
reqnJ[ed to sup~xt ~he Coun~ in a~ app~c~fions to ~na:ncia] assis-
tance agencies conccr~ng .the 8e~opment and opera,on of the
Federa] Av:~a~on .Adminisrt~tioo
power~ anthod~. and cespc)nsibi~,
management and maintenance of ihe ai~or{ "as ~hough it ’a, ere the
sole owne~
The Ci:y is p,.,’~,h~b.ited fi:om enee~hng ~n~o agcccements, exec0.ting
any leases o~ ]iccnses, o~ ~ndng any tiers ~o the airpo.~t premisc:s
5-2 DRAFT Januan/ 2005
-16-
PAO BUSINESS PL,~N
~he H.t;pc}rt s,q[cry zones.
In ~ddidon :o the two base :~.mcndmei~.s discussed above that
amendment nombc~ three in May 1980 esr~b~sbcd a requiremen~
~or ~he County to obtain CJV concu~eace to apply to ~he RAA
zpp~o:val of a second runway or exp~esJoa oF I)c~manem aircraft
6edo,x’ns abov.c 510 space~, The four[h and rio-a[ amendment
the lease in 1983 clarified the Cou~’s respop.sibi~V with respect
VO "adliw chacges ~clzted to the storn~w~c< pumping pl2nt.
USE OF REVE~UE
b~c~ ope;afing rcwznue generated at :he air.po.rt, }[ anL i< ~rst ap-
plied against t:he running b~lance of the Coung,’s un~ecovcted m-
vesrmam in the ~{:i)ort.. wl~].cb is ~ermed the "()u~smnding
vance.’" A~ remaining ~evenue, if any, is {o be u~ed
hence, ope=ation o~ capJtai impcovcmenr of the aiH~ort premises.
In other words, once s~f~cient net revenue h~s been generated to
~eco~p the Count’s investntem .in d~e 9.irpor~, ~ny ;~ddizo~aI net
revenue must be rdnves~ed in the airl?O~t and canao~ be used ~o
]s silent w;th ~espect co whether t~?e Oucstandiag ~kdvance accrues
AS~qlGNMENT AND SUBLETT!:NG
<Ebe lease may no~ be :assigned wi_tho~ the CJw’s ",~irten coo.sent
but t-_he CounO" may sub!or the premises wkhout .:he Ciu’s consent
TERMINATION
The lease may be {:ermisared 5y either p~g~ in J.~e event of b~each
by d?e o~her pa~cy, The party M de~m]r has 30 days ro ~emedy vke
breach {~om the date of no~ce by z}.~e o~he~ paro,. Thence is c~o .pro-
-vJsJoa fo~ unilateral r.ermJ~adon of the Jease ]n the absence of a
breach by the od~er pa:rey,
.SUMMARY
The k:asc cicar.iy places all business ~isk relamd ro operation of ,.he
airport on the Count?.,,. The City has no. knancial obligation or dsk
whh .~espec~ vo the airport’s operation..Mo~eoveq if th~ Counw
were ~o gener~tc posidve ne~. operating revenue a< ~he ah:port a£~er
DRAFT JanusO, 2006 5--3
PAO BUSINESS PL~,N
and could not be expod_ed to the other Coun
AIRPORT ENTERPRISE FUND OVERVIEW
The t3oard adopted the .%Uox~dng potJc5’ regard{rig the AEF:
Pursuant to Board polJW, the :AEF must pay fo~ atl costs - direct
and mdirec.t -associated with ope:radng iqe ai~o~ts, mdudMg
costs fo~ serv.ices ,ecdved £tom other CourtU departments. Some
of these sea:ices are billed dlrecdy - for eX.ampJe, legal se:twJces a:~e
billed ~rectly to d~c d.epartment based on Courtw Counse!’s estab-
!ished hourly ~te. Other see’ices such ~s Cle:~k of the Board costs
the ?Mrpo~s Commiss}on .am q~stdbut:ed through the Coo~%~ Cost
Plan. The .k]iiF {bereft, re provides fltU cost 9isib~B, for (he myriad
costs - some Obvh~us ~d some t~o>so-ob’viot.:s ~ J~4~ar£ed :~czoss
ment accoungag pn~)oses. Revmme and e~ses di=ec@ at-tzib-
utab~e ~o each d~ort such as FBO ie~.se revenue, a{rc~zft storage
space rents4 revenue, o~radons s~alf salaries, etc. are easily identi-
fied. General -and admiNstra~ve expenses not aitributable dkecOy
~o an ~ndividuaf airport (insurance, managqment s~aff s~laries, Cosl
P~an charges~ etc.) are captured in an expense pool and p~o~ted to
each airport based on a wmghted for~mfla that uses cost d~ix, era
such as the number of based aid{taft, ~v~mbe.r of ~rcrof~ opeatMns
and number of ms}or hdlJgies at each ~ort,
Totat annual projected ~&EF.reve.:me is appro~n.~arely $3.2 mil!ion~;
76% of wNch is gc~e~a~cd f~om County-owned aizc~af{ storage
sp~ces (i.e. h-angazs, shch.e~s and dedo,a<ns).
County-owned .airc.ra~t stor~ge sp~ces
shelters), fad ~_owage ie.es and ~rher
5-4
~ including projected re,,enue t’rom the 300 hang:ms ncadng complesoa a~ Sourl~
County Airport
DRAFT January 2006
-18-
The next largest ~venue componem (11%) is iease ~.even.ue from
~h~ 12 F]~d B~s~ Oper~o.rs~ (FBQ). Mos~ oF rh~ FBO i~ascs
sp~ci.~ ~n ~nnu~! ground ~en~ equal ~o 8,5% o~ ~t~ ~ce simple va~uc
of the Io:seho[d premises (not.inclading imp~ovcmcn@, ~d pro-
vide for adjustments ev~’ five ?,cars pursuant ~o a rcappraisai%f
~he p~emises. Given ~he !ong<erm nature of the FBO leases, fi~c
revenue from this source ~s essentially ~xed -aside ~om ~he occa-
sional minor -~djus~ment m the lease ra~e (d~e reappngsal com-
pleted in December 2004 zesulted in no ta~e increase). A.II orhe~
~evenue categories Mduding pro.pc.~y ren~a.I, fuel ~owage fees,
t~ansie:nt drcmft fees and inrer~t income coBecfively generate only
i3% o~ AEF revenues.
Reid Hill’vi~:,x, &d-rport (RHV) genea~tes appro~ma~dy 56% of d~e
roral A~EF zevenue primn~i!g due ~o r!~e incom~ horn rhc- !45
Coua~,-owned hangars. Prior to t:hc South Counb: Airport (~l@
h~.ngar pzojeck cuczendy nea.dng comple~on, 1~ was the oNy one of
the d~rec-airpor:s to .have County-owned hangars. Xis~oric~.Ry,
KHV ~evenue. has ~xceeded e:~pendi~utes and d-~e su~p]us has been
usec! to s~bsidize opez:ations at PAO :rod El6. Upoa compbfion
PAO REVENUE ANO EXPENDITURES
In November I997, ~hc Cky comr’ac~ed with DdoJ~re. & Touche
[D&T’), as independent au~ting t)rm, ~o a~dit the Counb,’s ~nan-
men~s in response m concerns e-xp~essed by the Palo
Assomation ~,~,A~ ~nd tlne airp~t-ds ]ain~ Community Relations
Committe~ ~CRC) ~e~itN the Coun:~y’s !ccoun~ng for costs
~nd revenues ~ssocia~d with PAO)
Th~ D~T audit, which was f~nded join@ by ~he City and [he
Co~nW .a:r ~ to~al cost.of ~39,000, produced-a set of basal}he finan-
cbJ statements anda~cHamd the concerns raised by the PA.~A a~td
JCRC, Sabsequendy, CourtV staff ~nd Or), staff-agreed on a fob-
mar fo~ the annual financi!l s~a~emen:ts to be pray:}tied by d~c
; Ck:y ?vl~n~gcr"~ P, cpor~ C~ff(:37]:97 io ti~ P~lo Alto C~O’ Couitd] ij~cd $~p-
~cmber 8, 2997.
DRAFT January 2006 5-5
-19-
County to the (’-W~ Tt~c. awached draft finaocial statements for
2t%5 are typical of the &ira provided e~ch year to the
Perhaps the best measut~ of the airporffs !ong-re~:m financial per-
fon’nance is ~:he "Outstanding Adverted’, w~ch .is the difference
be~,een ~he Coon~’s total capulet i~vestment
net ~cvenu~ genc~tcd ovc~ the lJ£e o£~ha ~easc.
c~pital investment ~.nd/o~ net operating ]o~ses i.ncrc~sc ~h~
standing Advance; net operating profits decrease the Outstan~g
Advance. Since 0Ny ~he ~o~al (Le. Coun~-flmded) compon~t
c~pimi .p.~ojects odds to the: Outstanding Advance, the Outstanding
Advance se~es ~s ~ benchmark of the Couno,’s financial exposure
res~fing from its invoivement-wi~ the ~o~.
In the 38 yeats since inception of the lease, the County’s invest-
ment in the a]~o~t has exceeded ~.et revenue by ~668,000. Fiscal
Ye~ 2006 revenue ond expcndimr~ F~urcs ]n~carc ~ projected .net
loss of ~348,0[~ nearly h~!.f o{ which is due ~o a o~e-(ime e~endi-
tu~c for ~. icvee maintenance p~o~cct. ThermTore, ~hc Ou~s~di~g
A,dvan.ce is projected to ~ow to sl~ght!y ovc~ $1 m~illon b7 d~e e>.d
o[ Fiscal Year 2C~6.
A~ men,:ioned earlier, vhc lease i.~ s.i!ent aa to whcthc: E,e Out-
s~a~diag Adw{nce shou]~d accrue jnre~cs~ ~or accounting pmpos-e~
~ecd tba~ the C)ucsr~nd}ng Advance (:rod any snrplns, should one
occur) wo~td not accrue .interest duc to flr~e ]:~ck o£ a~)~ ]aegaagc in
the lease specifically add~.es~ng t~s issue. Therefore, fl~c vatac o[
the Outszar~&~g Advance doe:s not ~e~cct current do~ts
The fact that the Outsranding Advance C[ocs not accn]e interest
makes :ii ",all the monte sig..qificar~t rha.t the Com~tT’~ investments
fl~e airp. oE~ have not been recovered. At RHV and E,16, c~phal in-
vestmem:s financed by loaiq:s .from the Count." G.e~.e~9.1 Fund or
:evenue bonds accrue inmres[ d’..~r mnst be paid for as pP£E of the
operating budge:t. Ifa simih: scenario applied at PAO, the Our-
s[.andL%:A_dwnce would be much higher.
DRA~’T Janu~O’ 2g~6
- 20 -
PAO B US tWES g PLAN
Tiedowns - $480,000 (68%). The County opeta.tes 362 of
468 dedown spaces at PAOt ]Mthough demand for
stor:~ge ~s pm}ee~ed [o re:naln strong in the foieseeable
.the AE.F’s zekiance on Ibis revenue source makes i[ wflnerable
zo downn~rns in ~he gene~z! ,avi~cio~ matken
FBO lease revenue - .$7i 31,000 (I 9%). -i~.e ground zent p~d
by d~e two FBOs at the air~, Roy-Aero Enterprises LLC
and Aviauon Management G~oup, I,~c. (/&MG), is ad}usced
pe~ioNca~y pursuant to ~ reapp~s~ of the ’andedying land
va[ue as specified in the master leases. £n i994 Roy-Ae~o
~puted the ~nnW’.s reapprais~ and the mattc~ w.as b£ought
to binding a:cbitradon. The arbitrator ruled that We EMTV of
d~e ~y-Aero leaseho.ld should be dJscount.ed f~om the
appraisal for ~he AMG and ~HV. FBOs due primarily ~o ks
flooding potcnda~ and soil conditions,
Fuei flowage fees ~::0 c, qn , , --
$0.10 per gabon furl fiow~ge fe~ for -a!l~ f,ad dispensed a~ the
Coun~ airports.
Transient. Adrcraf~ Revenue - $28,000 (4°/0. Transient
aitcraf>(i.e, aircra~ no~ based zt PAO) are reqtd~ed tO pay a fee
when occupying a County dedown.CeEam dedowns a~e
designated fo~ Eansient use.
Mis ceIlaneous $35 000-,D-0 This caregoq, captures all
revenue no~ attrJbamble t:o one of the above c:~tcgories, s’ach as
auto paring chatges, ,e~c.
Revenue generated at the ¢~izport @ore sales taxes a.nd pe~sonai
prope~W ra.xes does .qor accrue ~o the %£F. City docu:me.nts
estimate these amoants as $150,000 and $000 000 r~csl~cdvcly.
P~o]e.cted FY 2006 expenditures to[a] ~o1,052,00( incl0di~g
$170.,000 for d~e a~’c.._~en~entioned levee mainrenance project. The
airpoz~’s ~aa~ces }r~ vhat costs arc r~sing whiJc ~evenue is scagnanc
A!l hangars a: Pi’,O nre owned and op,z~aled b?, rhc FBOs
DRAFT Januao," 2006 5-7
-21 -
FUTURE CAPITAL INVESTM£NT NEEDS
capk~ improvements identified in ~h¢ .Airficl~ Area ~.nd Buil~ng
A~e~ chapters o~the ~i~ste~ Plan
Cu*tently, eligible pro}ects selected .[or fundklg under the
A:irpo~t hnprovement P~o .gram (AtP) recdve 95% federal funding
and quality t’or an additional 4.5% sta~: match Aom Cakrans Aero-
hauntS, subject to availabJJi), or" funds. Therefo~e~ the l.ocal match
requi~ed for AIP projects can be as low as 0.5%. Howe~Ter, the
federal percentage .is subiect to change whenever the AIP is
odica!]y reauthcmzed, Previously, the AtP p_rovid~d 90% funding
and there is ~he possJbjliW that the program may-revert to this
funding Ievel when d~e next zeauthodzadon occurs.
The ~irp_.oE sponsor is responsible fo£ i00% of d~.e costs :elat~ed to
1) the .,cqm-ced march fm~ding; 2) any element of the p;o~e:t ineE-
gible for AD funding; and 3) the difference between ~cnm~ cos~s
and esmm~ted cos*s= wh:inh ~ogether can total a sign.Jficant share of
d~c overa~ pro}oct costs. For cx~mph~ the ~ota] 2~I: ffu~ding
conapo.nent approaci~ed 20% of the g2.8 mi!lion capka.l project
compkted at PAO in 20(1I.
Air-port Improvement Program gr;~..nts ace accompanied b}" .a
for 20 y~rs~ Some of the gxsmt a.ssux~nces relate ~o project ~mpte-
mentadon (coasuhTani selection, p:evai~i~g wages, mspec~on~
.rcqu~remen~ vo keep the a~port open tbr 20 yea~ and the p~ohibi-
tion on ~vetdng "~po~t revenue to non-aizpon pu~p0ses.
AIP £unding:
= Reconfiguzauon o[T-a.’dway G
~A.kcraff w.ash~ack
~Phy£ca.t securig: e~.t:~ncemen~s
==Mrfield~relatcd cepair projects
t’he following dex, etopment op~dons iden~ed in Chapt~ 4, Build-
5-8 DRAFT Janua,T 2{)05
-22 -
FUTURE COUNTY INVOLVEMENT IN PALO ALTO
AIRPORT
Staff cannot ]dcnr~, a compalling reason ~o~ the CourtU to ~ssume
the bu~ines:s risk ODOpe~z~ng the m~ort beyond the c~pi~Oc, n o£
its ]e~se wi~h the Ci~ in 20!7 re~:rd[ess of the changc~ to the ).ease
tha~ the Ci.~ m~} be wi~ag ~o .mnke. Szaff recommends t~rmina!.-
].ng hs :involvement m the ’aiq~ort at d~e evpiradon q[ the
Ciw/Coun~ ]ease in 20i7 to egmJnate rbe possibilJ¢ that ~V
cen~ra~e on e~recuring the B,[as~c~ Pl.~ns fc,~ RI.]V a~d ]~,1.6.
As noted ea~lJer, th~ abpo~:t t:,as histo~ica{iy operated at a deficit.
physical, environmental .and poiiW smndpoinrs; existing Ci
or adding a rhi~d 7FBO ;to tight of chase cons~ai_nts, only :minor
changes ~o the ai~port"s airfield ar-aa were kiennfied in the
P~an. N6 change to tim aic.por£s -cote xv~}~ ~espect to ~he Wpe of
aircra£t ro be accommodamd Js contemplated due to =unway
rions. ![ -a ranway extension ,store feasible> i~ would have tl~e po-
~cnri~i to increase ~cvenae by cateslng to corporate alrc~af~.
W~h ~e.specc to the .airport’s bt~ding a~e.a, the orLy possible a~ea
{or addioonaI ~:eve.oue-gcne~at ng deuelo,pment is on a portion of
ehe vacam eight-acre parcel fronting Embarcadero Road, The City
has the S.nal say regarding the extent to which this parcel is dcvd-
op~d, it at aft. "~e o~?/ devc~pment option h~,ing
generating poeen~al that is identified in the &aft V ,~.
adcUfion of 29 new h-a~ga:rs. Howeve< skyrocketing const:ucdon
costs, dsing interest, rates and the high cost of rhc kkel.y mldgat~on:s
~equbed diminish the economic m[t~ct{veness of
Mozcove< ext~emeJ), atJff opposi~on to any development
~or~ is virtually guai:ant~ed and the approval p~ocess
pared to be lengthy, a~dnous and expensive.
Due to t:hc nonsmnda,~d charancc.s between t-a.~lanes and perked
aircr£% nny co.nve~sion of existing fiedown ~ows ro
would result in a sJ~mfic~nt ~educt]on of available a:kcmft basing
DRAFT January 2006 5-9
5-’~0
cap~c)~:. Moreovo~:, the economics o( building h.aogats ovct
downs a~e inherently poor ~c~use O~e de-downs rh~ wo~k~ be
eUmin~ed currently generate a~u~ one-qua~te~ the
hangars with no addiuoaal capi~ investment required.
As discussed in the ’Master Plan, the akpozt has s~n deva.~on tog
only 4 fee{ above mean se~ {evO (MSL) and is located in
d~ated Speci~ Flood Haza:d Area. ]~e~efo~e, as :he
a~o~ building in~i’as*mcrure reaches ~e end o(its use[u] Ere and
needs :eplaccment, ~n)’ new or substa!ma~y ~ebu]t airport
rare such as :a new Te~in~l B~diag must h~ve its fi:st
r~sed above the 8-foot Base Flood E[eva~on ~EE) or be
floodp~oofed, which will ~dd sabsean~y *o constcucdon costs.
The BF£ for ~he. airport is anddpared to rise upon c.onclu.sion
.FE~ study of ~be S~n P~ndsco Bay levee ~ystem, The hJg!~e~
~’he BFE, the highe~ -the ad~go:n~ cons*~uc~on costs,
In addition, a large-scale pro}ec~ ~o m~p.rove floc, d pvotec.tior~ ~c~ .the
Ci~" by r~sing the elevation of the e~sring levees sur,oundJng the
ai~I~cr is inevitable .:and ~t i.s likely zhat the. ~{rpor~, as a bc.ncficiaUof the m~pn:,vcmen.ts, wJ.[l be c~pected to p~y n sh~a o~ *he pto-
jecCs construction and mainmnance costs.
-i’h~ basic bu:sincss r~sk ~a,, costs c,_~u]d conduce to exceed ~ev’,~:no.e
~o~ could expe~Jance :educ:ed demand fc.om ai~cra~ ow::e.t:s due to
a downr~rn in gen-~<ai aviadon caused bv. high ~u.c~4 ..Prices or some
c, thc~: {xcto> AitThough t~he Ma~ter Plan assumes that Mogfett F’ed-
era! 2Mrfield wiU not become ava~bbte for civilian gencr:,~ aviadon
use, the possibility ex.s~s t~at it couid become a~,ailab]e ~or such
use, wMch would have a ~evere negadve impac{ on the demand fo~
PAO. Other .possibig~es inctu,de reduced fede~ai gmn~ ~eve.~ue,
unanticipated expenses or even a natural disaster such as a flood o~
earthCuakm
The !oss of PAO would not present any op~’adonal imp~.cts to tlhc
County, aivpo.r~ sys.tem because each ai~O~t’s aeronautical .~.cdvi~es
are iodependent. Financi~y:, e~mina~n:g PAO from the AEF
would ~esult in the .loss of the ~iD~orr’s rewenue, wt~ich ~’outd be
more t~an offset by the £e.ducdon in direct ope.radng costs, cap.{tal
possibl~D’ that ~IV w[[t need m subsid .ze PAO m. t.be future a.~d
allow Coue¢ airpo~t~ staf~ ~c~ ~oct~s on execu~ng the master plans
fo~ RHV and El 6.
Reg-atclie~s oE v.,J~er~l~e~ ~he CJ’£v opetams the ai,po~ i~sdf-wJ.~-h City,
Re0~cm:a~ng some of.the buslne~s risk from the Jes~e-e
DRAFT Januar’/ 2006
- 24 -
PLAN
~ouJd help ;trr~ct potc.ntiat :lessees but would not .addr+ss the.
dedying problem. Fer ~xnmp!~, i~ d:~ C{7 wc~ to ~ssum~
risk by ~mim~g the Jessie’s respons]bi.~ry bz ce~n costs such
c~pJt~] Jnvesm~en~s, k rosy Be possible to ~r~mc~ ~ lessee wiling ~o
F~y ~enr bu~ ~hc overall ri~k would no~ cMnge - it wo,~ld merely
~c~]ioc~ted don~ whh some o~ the compensation 2ssods.~cd with
Ope~atiuf! costs could be !ay erec~ b~,’ hiring ~ contractor ha’ring
Lower hbor ~nd overhead costs ~h~n the Counb, o~ the
the ~r~rr on ~ d~y-~o-d~y b2sh.
RECOMMENDED ACTIONS
The ComqU’ s "~ouid:
C.c..¢dnue ~o [alined ks [case obl~gaUOnS enci! c~.ph-ado.n
the lease with the CiU’ i~ 20i7 buy ~crminate ks invMvc-
me.at in the airport at cba~ dine, or ca4br i~ desired
Lhnir [um~e County capital invesu:~ent ]n the airport to the
local ma~ch .nscess.~W Lot essentia!, non-deferrabie, AJI]<
e~gible msiatenance p:mjec.~:s er secndU-~ehted p~ojects
mand.qted by vbe F/M& or T=anspo~ta~on Secudw Admim-
st~adon ~S&. Projects ]ne~gibte. got A~~ {unding should
not be nnde~take.n.
>-Requine ~.[~e CJ~, to submit a.ff furore AlP gr~_nr appLica-
tions. Since fl~e 20-yea~ g~an~ ~ssn.r~nces will ~cmaM
~o:rce well beyond the ezpkodon of the lease in 2017,
City mus[ dcmmnJne ~’he(he~ to at)ply ff~r and. accept the
surances after cxpkagon of d~c leas{,
The (’oum7 wodld rct.a-la, f~]] *:c~i)or!sib{~t3~ {5r cc, mpJi~nce
with d~e ~L;~ ghm~ assu~nc~s urlm ex.pir~_do~, ofthe lease
(consultant selection construction contcacts,
spection, ~cco~d keeping, ¢nvkonn~en~ compl~.ance,
DRAFT Januao" 2006 5-11
PAO BUS N~SS
the ~)rport open ~nd the prohibition on,
the ~r ~ssu~ces.
self-stlstaimng; ~nd 2) heip r~co~,¢~ as much of the Ot~r-
sty.halting Advnnce ~s possibic p~ior ~o ~i~e le~,se expirations.
in 20t7.
5-12 DRAFT Janua,T 2006
- 26 -
ATTACHMENT C
William W. Fellman
Manager, Real Property.
Real Property. Division
City of Palo Alto
P.O. Box 10250
Pato alto, CA 94303
June 14, 2007
Dear Mr. Fellman:
As you requested, this constitutes my report to you on the obligations and responsibilities
the City, of Palo Alto (hereinafter "City") incurs as the owner (also known as the
"sponsor") of the Palo Alto Municipal Airport (hereinafter "Airport").
There are two fundamental "obligations" incurred by the City as the airport’s owner-
sponsor: to the federal government, specifically the Federal Aviation Administration
(FAA), and to the State of California, specifically the Aeronautics Division of the
Department of Transportation (Caltrans). As long as the City is "federally obligated", by
virtue of having, within the past twenty years, accepted Federal Aviation Administration
Airport Improvement Program (A£P) grant assistance funds for projects, the City will
have to comply with the Grant Assurances that are made part of any FAA AIP grant
acceptance. This obtains even though, in the past, the County of Santa Clara (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 entity airport sponsor incurs by accepting AD 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, ~4inimum Standards for Commercial Aeronautical Activities;
150/5200-18C, A irport Sqfety Self-Inspection; 150/5370-2D, Operational Safety On
Airports During Construction; 150/5050-7, Establishment of Airport Action Groups;
150/5050-4, Citizen f~artictpation in Airport _Planning; and there are many, many more.
Copies of these few are attached hereto. The above covers a variety of owner-sponsor
obligations that, while "advisory", often turn into "non-compliance" issues unless a good
faith effort has been exerted by the airport owner-sponsor to comply.
Airport pavements, runways, taxiways, and parking aprons/ramps are a major owner-
sponsor and federal investment, and are, literally, the heart and soul of an airport.
Maintaining or repairing pavement is a compliance requirement for federally obligated
airports where AIP funds have been used to lay-down runway, taxiway, and parking
apron/ramp pavements,
As an example of the FAA interest in, and expectation of owner-sponsor compliance, and
accountabilit?" that can’t be assigned away, there is a library of Advisory Circulars to be
followed: 150/5380-6B, Guidelines and Procedures for Maintenance of Airport
Pavements," 150/5380-7A, Airport Pavement Management Program; 150/5380-7B,
Pavement Management System; and 150/5335-5A, Standard Method of Reporting Airport
Pavement Strength. These detail the key elements of a Pavement Management &
Maintenance Program as is required by the FA_A for having accepted ~ grant funds for
pavement projects. A Pavement Management & Maintenance Program starts with a
simple daily observation and documenting of pavement condition and quality across the
airport. The Program requires a plan for periodic maintenance, from crack sealing, to
widespread rejuvenating slurry sealing, to full pavement overlay. In conjunction with
pavement condition & quality observation is the requirement to look for and remove
"foreign object debris" that could damage airplane tires, damage propellers, or be
ingested into jet engines. Fundamentally, the airport owner-sponsor is obligated to, and
responsible for the safe use of the runway and taxiways, and parking apron/ramp.
The above is intended to demonstrate a major area of owner-sponsor obligation that can
not be dismissed as perpetual owner-sponsor involvement.
Then there are State obligations that accrue to the City due to 1) being a State "~’permitted"
airport (focused on the safe ingress and egress, and use of the runway by aircraft), and 2)
stemming from accepting State grant assistance funds. While the State does not, at this
time, have "grant assurances" per se, like the FAA does, nor does the State have its own,
or has supplemented or augmented FAA "advisory circulars", there are State obligations.
The California Public Utilities Code, Sections 21001 et seq, the State Aeronautics Act,
and the California Code of Regulations, Title 21, Sections 3525 through3560, Airports
and Heliports, serve as State "advisory circulars" (copies of both attached hereto).
Additionally, the California Code of Regulations, Title 21, Division 2.5, Chapters 4 & 5,
California Aid to Airports Program and Airport Loan Program, provide "compliance
requirements" for applying for and for accepting State grant funding assistance (copy
attached hereto).
There are two FAA requirements that the State has adopted as airport owner-sponsor
obligations, both bearing on holding a State operating permit.
One is the Advisory Circular 150/5300 -13, Airport Design, and Federal Aviation
Regulations Part 77, Objects Affecting Nm, igable Airspace. The State expects
compliance with the guidelines of each of these, and can suspend, or even revoke, a
previously issued State operating permit- thus shutting down an airport. FYI: There is a
fqel¢port Design FAA Advisory Circular adopted by the State pertaining to establishing
and operating a heliport, whether on- or off-airport that could come to bear on the Palo
Alto Airport if an on-airport heliport is eventually constructed.
The bottom line here is that no matter who "runs"’ the airport, the airport owner-sponsor
is ultimately and always obligated to comply with federal and state requirements. An
entity contracted by the airport owner-sponsor to conduct day-to-day operation of the
airport can be made accountable to the owner-sponsor by the form of contract for
compliance with federal and state requirements, but the ox~mer-sponsor is obligated, thus
responsible, thus accountable in the final analysis.
There is an area that combines owner-sponsor obligation and responsibility.: liability
insurance. The owner-sponsor obligation is to have adequate coverage, as a
responsibility to the rest of the City,. An entityy 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 liabilityr 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 solvency, in the near-term as well as for the
longer-term, is to set the airport’s ~°rates, fees, and charges" scheme. Everything that is
rented, leased, or used should have some charge or fee assigned to it. Property should be
leased!rented on a cents-per-square foot basis (whole buildings or spaces inside
buildings; tie-down spaces; raw dirt; even large paved apron/ramp areas leased to an
FBO). Common areas (such as grass/open space that needs maintenance by the airport;
motor vehicle parking lots with dedicated/reserved spaces; etc.) should have
proportionate charges assessed to those fronting or using them. Rental/lease agreements
should have stated %scalation" para~aphs so rents can be increased periodically without
major tenant or user upheaval. The FAA strongly suggests escalators of some type. Most
common and defensible is to review the Consumer Price Index annually and decide at the
City’s option to increase rents and leases by that percent, or not. And if not escalated
annually it should be policy to at least escalate biennially.
While the FAA does not conduct regular, periodic safety, inspections of the runway
environment, as does the State through its own permitting process, a further orher-
sponsor obligation is to expeditiously correct discrepancies the State identifies in its
inspections. Failure to do so can result in permit "suspension", or even permit revocation
- essentially shutting the airport down. State permit safety requirements are easily met if
the airport conducts its own daily self-inspections, which will cover State requirements in
addition to FAA suggestions.
Finally, the airport owner-sponsor has the responsibility to ensure compliance, by itself
and its tenants and users, with environmental protection requirements stemming from the
National Environmental Protection Act (NEPA) and the California Environmental
Quality Act (CEQA) for projects and activities on the 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 with on a daily basis.
The preceding not an e.xhaustive "primer" of what to do, and how to do it. This paper is
intended to Nve a mere glimpse at the myriad, ~,aried obligations and responsibilities that
accrue to an airport owner-sponsor no matter whom, or what type of entity, under what
D~pe of contract,/agreement operates the airport. The responsibilities of airport ownership
are to meet the obligations, and institute good business practices.
In closing, being the owner-sponsor of an airport is a business matter; a property
management business task. Certainly the safe use of the "property" by tenants and
visitors is task Number One. Beyond that, maintaining financi!l solvency is imperative
to allow for emergency and contingency recovery; repairs and maintenance of pavements
and facilities necessitated by normal wear and tear; and improvements and replacements,
and additions of facilities and pavements prompted by increased use, or changes in use
of the airport. Third, environmental protection and compliance with laws to that effect
must be an everyday practice.
Should you desire more explanation, please feel free to contact me.
Sincerely,
R. Austin Wiswell
Attachments:
1. Federal Aviation Administration Airport Improvement Program Grant Assurances
for Airport Sponsors, 03/2005.
2.Advisory, Circular 150/5190-6, 01/04/07, Exclusive Rights At Federally Obligated
Airports.
Advisory Circular 150/5190-7, 08/28/06, Minimum Standards for Commercial
Aeronautical Activities.
4.Advisory Circular 150/5200-18C, 4’ ~’0 ,2.~/04, Airport Safety, Self-Inspection.
5.Advisory Circular 150/5370-2D, 05/31/02, Operational Safeb’ On airports During
Construction.
6.Advisory Circular 150/5050-7, 06,/23/87, Establishment of Airport Action Groups.
7.Advisory Circular 150/5050-4, 09/26/75, Citizen Participation In airport Planning.
8.California Public Utilities code, Sections 21001 et seq relating to the State
Aeronautics Act, 02/2006.
9.California Code of Regulations, Title 21, Sections 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 of Palo Alto Purchasing Department
Bill Fellman
Manager, Real Property
Real Property Division
City of Palo Alto
P.O. Box 10250
Palo Alto, CA 94303
July 6, 2007
Dear Mr. Fellman:
ATTACHMENT D
As requested by you, i’ve reviewed the Palo Alto Airport Working Group’s (PAAWG) May
2007 report to the Palo Alto City Council that purports to advocate the City expeditiously regain
operational authority, responsibility, and control of the City-owned airport.
My specific task relative to the PAAWG’s report was to comment on their recommendation(s)
that:
1. The City Council direct the City Manager to negotiate the early termination of the
existing Palo Alto Airport lease with the County of Santa Clara;
2. The City Council appoint an interim manager for the airport; and
3. The City Council issue an RFP (Request for Proposal) for the long-term management of
the Airport, which will ensure its asset value to the community is maintained and will
preserve its economic value into the future.
The PAAWG report is long on optimism and naivet~, but that is not condemning of the effort. It
may be an indication of thoughtful and confident consideration of the responsibilities for the
variety of operating tasks. Or it may reflect a lack of understanding of the business aspects of
running an airport of any size. Most of the 292 page report is attachments without substantive
comment of their respective importance, purpose, and utility in reaching any conclusions, or in
making any recommendations. I will later comment on specific statements, assertions,
allegations, and suggestions made by the PAAWG. First, I will address the three elements of the
operative PAAWG recommendations, as I was tasked to do.
As regards the first PAAWG recommendation that the City of Palo Alto negotiate an early
termination of the current lease with the County of Santa Clara (earlier than the present 20i 7
lease termination year), which now has the County operating the City’s airport. I believe th~
course of actio~ should be fully explored as soon as possible° It may welt take a few years to
settle all of the "minor" details, such as the disposition of the County’s Outstanding Advance of,
now, some $681,000+; past and future levee maintenance; future shared responsibilities for
maintenance of Embarcadero Road; and other issues of probable disagreement between the
County and the City. It does seem that the County is desirous of extricating itself from operating
the Palo Alto Municipal Airport, especially, it may be, since the County’s South County Airport
is growing in use and tenancy, and County management workload. The PAAWG report offers
little in the way of enumerating the benefits to the City, and the airport, of City operational
control; nor any informative discussion of the authorities, obligations, and responsibilities
incumbent on the City for assuming operational control of the airport; or any meaningful
discussion of any "downside" to the City assuming operational control of their airport. ![ do
believe, even at ~his early tin~e, ~ha~ direc~ operationM con~r~)~ by ~he City of PaSo A~¢o of ~s
~)wn a~irp~rt has meri!o The proposition has merit from the standpoint of operational control of
its own airport being considered a public-entity responsibility; to directly better serving City
constituents, both airport supporters and detractors; and having direct hands-on management of a
City-owned transportation and economic engine asset. Further, both the State of California’s
Aeronautics Division and the Federal Aviation Administration should be apprised of the
mutually agreed to intent of the County to relinquish, and the City to assume operational
authority and responsibilities for the Pal, Alto Municipal Airport. This would ensure that past
financial obligations and compliance requirements (e.g. FAA Grant Assurances; accounting
records of past State and federal grants; etc.) incurred by the County on behalf of the airport, and
the City, are known, resolved, and properly transferred.
Finally, the City should expeditiously apprise itself of the full breadth and depth state and federal
obligations, and risk exposure and liability obligations and responsibilities it would assume when
operational authority is obtained by the City. In a previous submission to you, I discussed the
many and varied obligations and responsibilities the City now has as owner of the Pal, Alto
Municipal Airport regardless of County operating the airport or a contractor operating the
airport, and the additional obligations and responsibilities the City would assume if it chooses to
be the actual operator of the airport.
As to the second of the three P~_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 supe~dsor", who merely monitors what is happening at the
airport, primarily from a safety and maintenance perspective, but has no policy-setting or
contracting authority, as examples; or a "business and property administrator", who has authority
to negotiate lease/rental agreements, collect payments, authorize disbursements, answer inquiries
about airport policies and activities, as example. The term "airport manager" is too often tossed
out as the title, but the reality is that each of these levels and types of operational control of
airport management, or supervision, or administration is markedly different. The City needs to
decide what it wants, in light of what it can afford (financially, as well as benefits burden) and
staff assignment, whether new hire from off-the-street or additional duty within current City
staffing, and with regard to desired expertise. Assuming operational control of the City’s airport
is a "start-up business" proposition that must be well thought-out, taken seriously, and entered
into cautiously, l[ believe tha~ initiMiy an Operations Supervisor is the objective, w’ith future
job enrichvaen¢ and expansion to Airpor~ Manager after the City evMuates progress and
success, There are mature, educable, and somewhat knowledgeable individuals available from
the ranks of retired military or recent college graduates (e.g. Embry-Riddle; San Jose State
University; California State University at Los Angeles are examples of university-level airport
management programs that I have been associated with, and there are others) who could be
hired-on to staff the City’s initial operational control foray. There are other options to using a
City-employee, which leads to the third PAAWG recommendation, which I will next discuss.
The third PAAWG recommendation is for the City to, in short, issue a Request For Proposal
(RFP) to seek a contractor for long-term management of the airport. I have personal experience
in this arena, having been General Manager of an airport management entity that leased a small
200+ acre General Aviation airport from the County owner. This was not a hired operator, but a
lessee operator. The lessee corporation was a "not-for-profit" entity with a seven-member
volunteer Board of Directors overseeing what I, as corporation General Manager (and daily
Airport Manager) did. This arrangement of professional management by me, and my successor,
serves the airport itself, the users and tenants, and the o~ing County well. The operative term
here is professio,~al ma~agement, professional by experience and education!training, and
involvement in professional airport management organizations. Being an airport manager, or an
operations supe~isor for that matter, is much more that watching airplanes drone by the window
or having morning coffee with pilot friends each day.
i previously advised you to contact the C,i~ of Oceanside, in nort_hem San Diego County, to ask
them about their plan, and progress, to seek an airport management entity for their City-owned
small General Aviation airport. Oceanside, and the airport users and tenants both have become
somewhat disenchanted with operating the airport from within the City’s Public Works
Department. Further, I apprised you of the County of Los Am_geles’ long-standing single
contractor operation of their five County-owned General Aviation airports. I also suggested you
contact Riverside County’s aviation office to find out why they cancelled their five airport
operating contract with the same contractor as Los Angeles County continues to employ, l[
s~rongly recommend contacting a~ of ~hese ~o give yon a broad flavor of the issue: hiring
someone to run your airport for yon. Much more needs to be learned by the City before
choosing any course of action, whether operating ,heir own airport or contracting for an
opera,or. It should be noted here, and is stated in the PAAWG report, that the City of Turlock
entered into an operating agreement with the airport’s pilots association to run the City-owned
airport on behalf of the City. The reason for the pilots association proposing this operating
agreement was their dissatisfaction with the City’s attention to the airport, especially as regards
basic upkeep and maintenance, and applying for federal and State grants-in-aid. Now the pi!ots
association wishes the City would be more involved in what is happening with, and to the
airport, and interact more with the pi!ots association on operational matters. There is no easy
solution, and there is no solution clearly better than any other. Before proceeding with an RFP,
the City of Palo Alto needs to gain more information, at least State-wide, if not nationally, on
contractor operation of a public-owned General Aviation airport, whether a for-profit or not-for-
profit operator; whether on-airport FBO or not; whether City-chartered entity or not.
I will now turn my attention to specific comments made by the PAAWG that warrant my
viewpoints.
One thing the City must reconcile before proceeding further to regain operational control of its
airport, or pursue getting someone other than the County of Santa Clara to run it for the City is
this: What does the city want the airport to be? There is a listing in the PAAWG report at
Appendix 1A, page 5, of the many, commonJy 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 m, iation ~’anspor~ation leg. Thus, purpose #3 for the airport on the
PAAWG listing - "... convenient transport for business and personal needs." is what the City
owns, wishes to operate themselves, and will commit to maintain in a safe and effective
condition. The. airport’s primary value is as a contributor to the local economy in allowing local
businesses to fly out of it in pursuit of business activities; allows businesses outside the local area
to fly in to it to conduct locally beneficial business; and allows tourists and other personal
purpose visitors to have a convenient local aviation transportation facility for arrival and
departure use. Of course, the airport benefits the City’s citizens as a valuable location for
emergency medical evacuation (air ambulance and "life flight" operations) and disaster response
use. it also supports local law enforcement and fire fighting purposes as either a base of
operations or a staging and refueling location. The City is not obligated to assume the
responsibilities and obligations as airport operator for the purposes of flight training and local
pilot "recreational" and hobby flying. Those, as examples, are tangential purposes and values to
the City. Once the airport’s value is understood, and its overarching purpose accepted, and, then,
the commihnaent to the airport’s long-term welfare is made, the negotiations with the County can
commence in earnest and the search for a private-public partnership to operate the airport can be
initiated. First things first: What does the City want the airport to be, as regards clear value and
benefit to the City? ~ offer Chat the airport is a transportation facili~ first and foremost.
The PAAWG report, and the City Auditor’s report both seem to feel the increase in monthly tie-
down fees and the fuel flowage fee are excessive and without adequate justification. The
monthly tie-down fee is a matter of it being a "seller’s market", not a "buyer’s market".
Comparing tie-down fees across several airports is little more than interesting. Each airport is
very fmndamentally different. Pa!o Alto has a revenue generation base now that favors the
tenants. It seems not to be driven by revenue generation for airport needs, and equitably applied
across all airport tenants and users. Past revenue generation decisions, as reflected in airport
income constraining leases, and decisions to restrict expansion of revenue producing facilities
and areas forces the airport (the County of Santa Clara in this case) to significantly increase what
few revenue sources are available, namely monthly tie-down fees and fuel flowage fee. The
harsh reality of tie-down fees is that the tie-down occupants have made a personal convenience
decision to locate their aircraft at the Palo Alto Airport. They, not the airport, have to make a
_further decision as to which of the cost versus convenience lines crosses into the negative area.
That’s not to say the airport can raise fees in an unconstrained manner. Those paying fie-down
fees are, in essence, investors in the upkeep, maintenance, and repair of the airport, and as such
they need to be treated fairly - and fully informed as to what their fees are going to, just like any
business investor. Don’t let fear of comparables, and relatively idle threats of moving to another
airport discourage charging what is needed to support the airport. General Aviation airports are
rarely in competition with other General Aviation airports, unlike commercial service airports
more often are.
As for the dramatic increase in fuel flowage fees from ten cents per gallon to twenty cents per
gallon, that is noteworthy. Even ten cents per gallon is nudging toward the high side of fuel
flowage fees. The airport has little choice in the matter since fuel flowage is one of the two
available sources of revenue to support airport needs, i gather that when airport operation reverts
from the County to the City all leases and rental agreements are subject to renegotiation - on
better terms for the airport and, probably for the tenants and users also. There are better, more
commonly applied methods to fix fees for tie-down spaces; land leases, lease or rent of airport
owned facilities/spaces; percent of gross FBO (and other business tenants) revenues; fuel
flowage fees; transient aircraft parking; meeting room rental; etc.; etc. that create a revenue
generation s~vstem of many sources equitably applied across all airport tenants, users, and uses. ~
suggest th~s be more fully explored by the City before committing ~o assuming
responsibility for setting revenue generation policy. The airpor~ must be made financially
se~f-sufficient, and financially self-sustaining in shor~ order after the City would assume
~pera~iona! con~rok
Amother area of comment here that is related to financial solvency of the airport, and revenue
generation opportunities, is the City policy, expressed in the City’s Baylands Plan, which seems
to be severely constraining the airport as regards, specifically, building revenue producing
hangars. There is always a demand for hangars, and hangars are always revenue producers.
There are several ways to fund construction of revenue producing hangars: State loan; revenue
bond; private financing for private owned & operated, but with gromnd lease and percent of gross
coming to City for airport support. The City does not have to accommodate every aircraft
wishing to be based at the Palo Alto Municipal Airport, nor does it have to accommodate every
entrepreneur who wishes to place their aviation business on the airport. Again, it is a ~’seller’s
market", not a "buyer’s." Having said that, however, I recommend an in-depth~ no holds
barred re-think of the City’s Baylands Master Plan relative to allowing construction of
hangars (some 29 are proposed in the recent Airport Master Plan, and some number of
tha~ migh* be possible), and the relocation of the Terminal Facility, both on the 5.6 acre site
fronting Embarcadero and Harbor Roads. I recognize, and appreciate the City’s desire to not
have airport operations significantly increase in "intensity" (which I doubt they will, for a
number of reasons) or "intrude" on open space areas (if it is airport property in the f~rst place, i
don’t see an intrusion occurring it its truest sense). There is a lot of architectural design -work
that can go into unobtrusive siting and character of hangars and a new Terminal building that
should be explored. Further, there should be considerable investigation of construction
requirements to satisfy" flood hazard concerns. Again, architectural design work could mitigate
most concerns - except increased cost of flood hazard mitigation.
The relatively short single runway, of 2, 433 feet long that can’t be appreciably lengthened, will
always be a limiting factor in how much bigger the airport can get as regards basing of aircraft in
hangars and on tie-dow~ns; and how much more daily traffic the airport can accommodate; and
how much larger the aircraft that routinely operate at the airport can be. Even the much touted
four, six, or maybe eight passenger Very Light Jets, or Microjets, desire a 3,500 foot long
runway. Other factors that will combine in some fashion to limit future "intensity" increase is
the increasing cost of aircraft fuels; the relatively stagnant number of active pilots (lots of
hangared and tied-down aircraft don’t fly regnlarly); 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 PA_AWG takes great exception to the County’s accounting procedures, and philosophy. The
PAAWG seems to feel the County- is overcharging the Palo Alto Airport part of the overa!l
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 t~venty 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.
I~y present inclination is to embrace the City Auditor’s repo~ as regards its conclusions,
criticisms, and revenue a~d expense Ms~y and projections. When ~he City assumes
~pera*fiona~ co~*ro~ of i~s afirpo~ *he Cfi~s a~di~or wi~ be T~ responsfib~e aud~, agency,
a~d the Ju~e 6, 2006, C~ auditor’s rep~ can ~e~e as a baseline a~d depa~ure point Nr
A second area of PAAWG criticism of the County has to do with the County’s staffing of the
Palo Alto Municipal Airport, and associated persoimel costs. The issue may be systemic, rather
than scurrilous. The County of Santa Clara has its own personnel policies, rates of pay and
benefits, unionization to deal with, all in the context of a three airport, rather homogenous
staffing regime. Should the City of Palo Alto assume operational control of their airport, staffing
can be tailored to the situation: hire staff as "independent contractors", not City employees; use
City employees in the context of "additional duties"; or pay a named person, or persons of the
not-for-profit corporation recommended by the PAAWG a base monthly rate but withont pension
contribution and health benefits (i.e. medical, dental, and vision). In either of the above options,
the em_ployee "tat!" is absent (e.g. Socia! 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 airport for "services", the City can treat those differently than
has the County, which would reduce operating costs. The City can use its own administrative
and operating agencies and charge for just time-and-materials; or for time-and-materials and
staff/personnel time. The City’s "overhead" for legal, accounting, human resources, grounds
maintenance, etc. is likely to be somewhat less than the County’s has been. City agencies can be
used for basic maintenance and repairs at the airport and do a charge-back for them.
Finally, the staffing for the airport is a matter of, first, answering the previous two options: how
to staff (and for what purposes), and how to cover overhead and services. Then, second,
pursuing a well thought out course of action. My initial suggestion, based on my earlier
discussion of i~iring an airport manager, whether interim or long term, is to star~ with ~vo
persons to oversee the airport: one to deal with operational matters, such as safety and
maintenance, and one to deal with administrative n~atters, such as grants and collections
and disbursements° There is no requirement to staff the airport 12to 16 hours per day, or seven
days a week, at least not ivdtially. The City can add to staffing as it becomes more aware of the
ful! range of its obligations and responsibilities, and what type of staffing (numbers of persons
and experience required) it takes to effectively meet them, and, of course, what the airport can
afford.
I notice the PAAWG has attempted to accomplish an economic impact survey, or assessment,
using a model developed by the Aircraft Owners and Pilots Association. It is a good tool for
airport supporters to use to get a flavor of the airport’s economic engine role in its community.
suggest engaging a more experienced professional entity to conduct a comprehensive
economic impac~ survey and assessment of the airport’s va~ue to the Pa!~ Alto area
business and commerce c~munityo It is mildly impressive to define the direct economic
impacts of salaries and services at the airport proper. It is more impressive and more important
to define the indirect economic impacts of services and products acquired off-airport because of
the airport’s existence and use. Most impressive and most important, in my mind, are the
indz¢ced 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
commerce fostered by airport use. The City needs to lanow much more about the value of the
airport off-airport.
In closing, i’11 address the validity, and optimism, of the PAAWG financial projections. One
thing that must always be remembered when malting hopeful economic predictions, especially
those that portray revenues barely exceeding expenses: something can go w~rong - and it
probably will. i an~ not optimistic that growth in revenue at the Palo Alto Municipal Airport will
mirror any traffic (i.e. use) increases projected by the Federal Aviation Administration, the State
of California’s Department of Transportation’s Division of Aeronautics, or any affinity or trade
group. The future of General Aviation activity, when compared to what it was in the 1970s and
1980s, is very much open to question, and some doubt. As I stated earlier in this report,
increased, and increasing, fuel costs; increased liability and hull damage insurance costs;
increased costs to acquire and maintain the basic aircraft (acquisition plus life-cycle costs for
required periodic inspections and replacement parts); a relatively stagnant active pi!ot population
(new starts do not exceed "retirements" from active flying); and the specter of "user fees"
imposed on General Aviation aircraft operators in any combination will slow traffic growth, if
not degrade current traffic levels. The fixed runway len~h, the limited space for which to place
hangm-s, and the limitation on the number of apron tie-down spaces add to the prospect that
increasing revenue projections out through 2017, and beyond to 2022, need to be tempered. Tr~e
objectfive re~aains for the airport to be financially self-sufficient as soon as possiMe, and
over the ~onger term be f~nancially serf-sustaining. I[t is nibbling around the edges of
expenses combined with justified revenue generation, in balance, that is the business
approach required, at ~east initiM~y.
I remain readily available to further clarify and elaborate on my critique of the Palo Alto Airport
Worldng Group’s three reconmaendations, and my additional comments.
Sincerely,
R. Austin Wiswell
CC:Chris Mogensen, Assistant to the City Manager
Carolyrm Bissett, Contract Administrator