HomeMy WebLinkAboutStaff Report 417-10TO:
ATTN:
FROM:
DATE:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
NOVEMBER 22, 2010
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 417:10
SUBJECT: Approval of Increase in R. A. Wiedemann & Associates Contract with the
City of Palo Alto from $105,000 to $110,000 for a Presentation to the Council
of the "Palo Alto Airport Business Plan" Plus a Contingency of Up to $14,100
for Any Additional Work after Receiving Council Direction
RECOMMENDATION
Staff recommends that the Council: approve an increase of $5,000 or from $105,000 to
$110,000 in the contract of R.A. Wiedemann & Associates to present the "Palo Alto Airport
Business Plan" report to Council on December 6, 20 I O. In addition, staff recommends approval
of contingency funding of an additional $14, I 00 should Council direct staff on December 6,
20 I 0 to move forward with transition of airport operations to the City of Palo Alto.
BACKGROUND
The Council directed staff and provided the resources to develop business plan options for
tennination of the Palo Alto Airport (PAO) lease prior to 2017, the time at which the County's
50 year lease expires. The intent was for the City to have operational control of PAO earlier than
2017. On October 19, 2010, R.A. Wiedemann and Associates presented the City of Palo Alto
AirpOlt Business Plan and Community Value Analysis (CMR: 379:10, Attachment B) to the
City's Finance Committee. The options developed in the business plan showed potential, solid
net revenues over the long-term.
The Finance Committee reviewed the repOlt and recommended forwarding it to the full Council
for consideration. The Committee's motion included direction to come back to the Council with
a Budget Amendment Ordinance (BAa) to request the necessary resources to: transition the
Airport from County to City control as expeditiously as possible; to return with a timeline to
establish an AirpOlt Advisory Group; recommend an option that maximizes airport profit; and
provide an organizational chart showing airport staff reporting relationships.
CMR:417:10 Page I of3
DISCUSSION· .
In order for R.A. Wiedemann and Associates to present the Business Plan to the full Council on
December 6, the current contract with the company must be increased to accommodate the
presentation, travel, an overnight stay, and other associated expenses. Since the current contract
of $105,000 has been fuJly expended, staff recommends inereasing the current contract by
$5,000 to $110,000 (Attachment A). Funding for the contract increase is available in a Capital
Improvement Project (CIP) created for the airport transition. There is $19,100 remaining in this
CIP, so by adding $5,000 to the consultant's contract a balance of $14,100 will remain in, the
project.
Depending on Council's direction, staff will retum on December 6, 2010 with a Budget
Amendment Ordinance, deliverables requested by the Finance Committee on October 19, and a
request to utilize $14,100 in contingency funding for tasks the Council deems appropriate for the
consultant to cOlilplete. Wiedemann and Associates have identified the following work that
would be of value in the airport transition process:
• updated financials for the airport (County financial statement data used in Business Plan
were through June 30, 2008)
•. expertise on the implementation of the airport takeover
• information on allowable charges (franchise fees, etc.) for the enterprise fund. This
would include discussions with the Federal Aviation Administration
• information on the formation and make up of Airport Commission
• additional analysis of the performance options or new variables within any option
Again, remaining funding in the CIP could be utilized for the above work.
Providing Council gives approval to move forward, staff would return on Decenlber 6 with a
BAO to fund:
• a Phase II Hazardous Material Analysis estimated at $150,000
• estimated legal expenses of $50,000
• expert support estimated at $100,000 either through a consultant or a temporary stafI
person to guide the City through the transition process to City control ofthe airport
The total of the BAO would be $300,000 with funds being advanced by the General Fund to be
repaid if sufficient profits are generated within 6 years of the date of expenditures.
As stated in the CMR to the Finance Committee, extensive, existing staff time and resources that
would otherwise be devoted to existing priorities will be required to facilitate this transition.
Staff recommends that the Council approve a $5,000 increase in the contract of R.A. Wiedemann
and. Associates from $105,000 to $110,000 for the December 6, 2010 presentation. In addition,
staff recommends contingency funding of $14,100 for potential work by the consultant that
Council believes important.
CMR:417:10 Page 2 00
RESOURCE IMPACT
Funding for a $5,000 increase in the R.A. Wiedemann and Associates contract is available in a
City CIP. An additional $14,100 is available in the City ClP, but staff would not expend these
funds without explicit direction from Council
POLICY IMPLICATIONS
Aetions recommended in this report are consistent with previous Council direction.
ENVIRONMENTAL REVIEW
This contract amendment is exempt from the California Environmental Quality Act (CEQA)
pW'suan! to section 15262 of the CEQA Guidelines.
ATTACHMENTS
Attachment A: Amendment No.1 to Contract No. C09128288 Between the City of Palo Alto and
R.A. Wiedemann & Associates
Attachment B: CMR:379:10 "Presentation and Discussion of R.A. Wiedemann and Associates,
Inc .... (Excluding Wiedemann Business Plan. For plan please see this link
http://www.cityofpaJoalto.orglciviealfilebanklblobdload.asp?BlobID=24916 )
PREPARED BY
CITY MANAGER APPROVAL:
CMR:417:10
s>='r;;~~
{;tJAMES KEENE
~ity Manager
Page 3 of3
J
k.
ATTACHMENT A
AMENDMEN~ NO. 1 TO CONTRACT NO. C0912B2BB
BETWEEN THE CITY OF PALO ALTO AND
R;A. WIEDEMANN & ASSOCIATES
This Amendment No. 1 to Contract No. C0912B2BB
("Contract") is entered into November 23, 2010, by and between
the CITY OF PALO ALTO, a charter city and a municipal corporation
of the state of California ("CITY"), and R.A. Wiedemann &
Associates, Inc., located at P.O. Box 621 ! Georgetown, KY 40324
(502) 535-6570 ("CONTRACTOR").
R E CIT A L S:
WHEREAS, the Contract was entered into between the
parties for the provision of Airport Consulting Services; and
WHEREAS, the parties wish to amend the Contract;
NOW, THEREFORE, in consideration of the covenants, terms,
conditions, and provisions of this Amendment, the parti~s agree:
SECTION 1. Section 1. SCOPE OF SERVICES, is amended to
read as follows:
CONSULTANT shall perform the Services described in
Exhibit "A" and 'in "Exhibit A-l", in accordance with the terms and
conditions contained in this Agreement. The performance of all
Services shall be to the reasonable satisfaction of CITY.
SECTION 2. Section 4 NOT TO EXCEED COMPENSATION,
paragraphs I and 2~'are hereby amended to read as follows:
"The compensation to be paid to CONTRACTOR for
performance of the Services described in Exhibit "A" and "Exhibit
A-l", including both payment for professional services and
reimbursable expenses, shall not exceed One Hundred Ten Thousand
Dollars ($110,000.00).
Additional Services, if any, shall be authorized in accordance
with and subject to the provisions of Exhibit "C" and shall not
exceed a total of $14,100. CONSULTANT shall not receive any
compensation for Additional Services performed without the prior
written authorization of CITY. Additional Services shall mean any
work that is determined by CITY to be necessary for the proper
completion of the Project, but which is not included within the
Scope of Services described in Exhibit "AU or "Exhibit A-I".
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101116 sm 010
SECTION 3. The following exh,ibi t (s) to the .Contract
i.s/are hereby amended to read as set forth in the attachment(s) to
this Amendment, which are incorporated in full by this reference:
a. Exhibi t "c,r entitled "Compensation".
Except as herein modified, all other provisions of the
Contract, including any exhibits and subsequent amendments thereto,
shall remain i.n full force and effect.
IN WITNESS WHEREOF, the parties have by their duly
authorized representatives executed this Amendment on ·the date
first above written.
CITY OF PALO ALTO . R.A. WIEDEMANN ~ ~SOCIATES
By: 14JJ ~~~_ APPROVED AS TO FORM:
--.. -~ ...... :---... ~~~ ... ~~~ Senior Assistant City Attorney
Name: __ R_an_d_al Wiedemann __ _
Title: Presidec:.n:.:t,--_ ... _~ .. _ ... ~_
-;----;---;-;--.. --.--... ~ ..•
Purchasing Manager
Attachments:
EXHIBIT "A-I": SCOPE OF SERVICES
EXHIBIT "e": Cm1PENSATION
2
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EXHIBIT "A-1"
Scope of Work
Randal Wiedemann will prepare for a presentation to the Palo Alto
City Council for December 6th,2010. The presentation will cover
the Airport Business Plan and any questions regarding the
recommendations therein. It is anticipated that up to 25 hours
could be expended for the preparation" presentation, and travel
for this trip. In addition, actual travel costs were estimated to
total up to $1,250.
Therefore, the total cost of this work effort is estimated at
$5,000.
Signed:~, ____ ~ __________ ~~~ __ ~ __ ~~~ ________ _
Title: President
Date: November 10, 2010
Company: R.A. Wiedemann & Associates, Inc.
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101116 sm 010
EXHIBIT "c"
COMPENSATION
(REVISED)
The CITY agrees to compensate the CONSUI,TANT· for professional
services performed in accordance with the terms and conditions of
Agreement, and completed to the reasonable satisfaction of the
CITY.
The compensation to be paid to CONSur,TANT under this Agreement for
all services described in Exhibit "A" and. Exhibit "A-l" ("Basic
Services") and reimbursable expenses shall not exceed $110,000.00.
CONSULTANT agrees to complete all Basic Services, including
reimbursable expenses, within this amount.
Any work performed or expenses incurred for which payment would
result in a total exceeding the maximwn amount of compensation set
forth herein shall be at no cost to the CITY.
REIMBURSABLE EXPENSES
The admiriistrative, overhead, secretarial time or secretarial
overtime, word processing, photocopying, in-house printing,
insurance and other ordinary business expenses are included within
the scope of payment for services and are not reimbursable
expenses. CITY shall reimburse CONSULTANT for the following
reimbursable expenses at cost:
A. Travel outside the San Francisco Bay area, including
transportation and meals, will be reimbursed at actual cost subject
to the City of Palo Alto's policy for reimbursement of travel and
meal expenses for City of Palo Alto employees.
B. Long distance telephone cellular phone, facsimile transmission
and postage charges are reimbursable at actual cost.
All requests payment of expenses shall be accompanied by
appropriate backup information. Any expense anticipated to be more
than $500.00 shall be approved in advance by the CITY's project
manager.
ADDITIONAL SERVICES
The CONSULTANT shall provide additional services only by
advanced, written authorization from the CITY. The CONSULTANT,
at the CITY's project manager's request, shall submit a detailed
written proposal including a description of the scope of
services, schedule, of effort, and CONSULTANT's proposed
maximum compensation, including reimbursable expense, for such
services based on the rates set forth below. The additional
services scope, schedule and maximum compensation shall be
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101116 om 010
negotiated and agreed to in writing by the CITY's Project Manager
and CONSULTANT prior to commencement of the services. Payment
for additional services is subject to all requirements and
restrictions in this Agreement
SCHEDULE OF FEES
HOURLY Rate Schedule
~--------...... ~~------
Person/Title Hourly Rate
Principal/Officer $143.94
Senior Associate $104.78
Associate $43.62 to $64.73
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IOll16smOlD
TO:
ATTN:
FROM:
DATE:
ATTACHMENTB
City of Palo Alto
City Manager's Report
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
OCTOBER 19,2010
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 379:10
SUBJECT: Presentation and Discussion of R. A. Wiedemann & Associates City of Palo
Alto Airport Business Plan Options and Community Valuation Analysis;
Request for Council Input and Direction on Options; and Formation of all
Air[lort Advisory Committee
EXECUTIVE SUMMARY
The Council directed staff and provided the resources to develop business plan options for
termination of the Palo Alto Airport (PAO) lease prior to 2017, the time at which the Co'unty's
50 year lease expires. The intent is for the City to have operational control of P AO earlier than
2017. The attached report from R. A Wiedemann and Associates (Report) Jays out several
management options as well as pro-formas showing their results. Overall, each option shows
solid net revenues over the long-term. The results show the potential to pay back some or all of
General Fund "seed" money necessary to transition the airport from county control and to
reinvest in the airport's infrastructure.'
Staff continues moving forward with the Council direction of assuming control overPAO
operations earlier than 2017, but before the City can proceed it is important to fully understand
the costs and implications of each option before deciding which option to pursue. On a
fundamental policy level, does the City want any direct role in operating the airport either by
hiring all airport management and operations staff or by managing a Fixed Base Operator who
operates the airport? Or, does the City desire to contract with a Third Party Operator who, with
minimal City oversight, basically runs the airport? This is a critical question which staff wants
to explore further and for which Council input is requested.
To begin the complex process of pursuing any of the airport options in the Report, there will be a
need for expertise to evaluate each option further and to chart a prudent course of action. At this
time, it is estimated roughly that $500,000 in resourees are needed to hire such expelts. In
addition, considerable in-house staff time is required to set the process in motion and to guid~ it
to fruition. Based on Council input, staff proposes to return with a Budget Amendment
CMR:379:10 Page I ofll
Ordinance (BAO) for funding and to establish an Airport Enterprise Fund. Among other costs,
. the BAO will fund an environmental site investigation to determine if there is any contaminated
soil or groundwater at the Airport that requires clean-up prior to the County and FBO lease
expirations. In addition, establishment of an Airport Advisory Committee is recommended as the
City moves toward managing the airport. Staff estimates that the process could take a minimum
of two to three years based on discussions with other agencies and feedback from R. A.
Wiedemann and Associates.
RECOMMENDATION
Staff recommends that the Council:
I) Provide input on and accept the "Palo Alto Airport Business Plan" and "Airport
Community Value" reports by R.A. Wiedemann & Associates
2) Provide input on airport management options outlined in the Business Plan and direction on
which options to further evaluate in order to continue with Council direction to take over
the airport early.
3) Direct staff to return to Council with a Budget Amendment Ordinance that establishes a
new Airport Enterprise Fund and the resources necessary to progress with finalizing a
business plan and a takeover of the Palo Alto airport. The BAO would reflect a loan from
the General Fund to the new Enterprise Fund.
4) Begin exploration of forming an Airport Commission comprised of users, businesspeople,
and other appropriate members to advise Council.
BACKGROUNJ>
In 1967 the City and the County entered into a 50-year lease for management of the Palo Alto
Airport (PAO). The lease agreement both with the County and the current Fixed Base Operators
(FBO) expires in 2017,
In 2006, a County consultant recommended returning airport management back to the City
before the lease expired in 2017. At that time, it was believed the PAO was a drain on County
resources and the County was not recouping the costs of its capital investments. Indications
from the County that it would only perform basic, safety related maintenance improvements was
of considerable concern given the condition of the Airport's aging infrastructure. Following
reports by the City Auditor and the Palo Alto Airp0I1 Working Group (PAA WG), which
contested the financial and other conclusions by the County, Council directed staff to begin
negotiations with the County of Santa Clara (County) to terminate its lease earlier than 2017 and
to commence work on the action and information items raised by Council on November 13,
2007. These included:
• Preparation of an airport husiness plan or evaluation of City options for operating
the airport
• Preparation of a community valuation analysis to determine economic value of
airport to the City and community
CMR:379: I 0 Page 2 of II
• Preparation of semi-annual progress reports on negotiation status with County
On December 8, 2008 (CMR: 440:08), the Council adopted a PAO Mission Statement proposed
by the Palo Alto Airport Joint Community Relations Committee (PAAJCRC) and reviewed and
accepted a proposal from R.A. Wiedemann & Associates for preparation of a Palo Alto Airport
Business Plan and Community Value Analysis. Council passed a Budget Amendment Ordinance
which, together with a prior appropriation, authorized the City Manager 10 execute a $105,000
contract with R.A. Wiedemann to develop a PAO business plan and community valuation
analysis.
DISCUSSION
The primary objectives of this City Manager Report (CMR) is to: summarize the business plan
options in the Wiedemann report (Rep0l1); outline the airport community valuation analysis;
provide staffs recommendation on next steps; obtain Council feedback and direction both on
next steps and airport management options; and to update Council on any other progress on
negotiations with the County since the last progress reporl.
As staff continues to follow Council direction on an early takeover of the airport, it has identified
preliminary and substantial financial and staffing commitments for this proj eel. These costs
would be advanced by a financially challenged General Fund. Although staff believes advanced
funds can be repaid, outside legal advice will be required to determine which costs can be
reimbursed as the airport operation generates net revenues over time. The transition and startup
expenses identified thus far include:
I. Phase II Environmental Site Investigation estimated at $150,000
2. Airport, legal and other expert support at an estimated cost of$350,000
3. Potential expenses to address unknown but urgent airport operational or capital needs
In addition to the above, extensive staff time and resources that would otherwise be devoted to
existing priorities will be required. Efforts and involvement from the City Manager, Deputy City
Manager, Economic Development Manager, City Attorney staff, ASD Director, Deputy ASD
Director, a Senior Financial Analyst, Public Works Director, Assistant Public Director, other
Public Works staff, and other administrative support are needed to implement a takeover. The
City staff has no expertise in this arena, so knowledgeable support to staff is a necessity both to
evaluate the managemcnt options in this report and to start a transition process. It is staffs intent
to return to Council with a BAO that establishes an Airport Enterprise Fund and provides
funding to move forward with control of airport operations.
Wiedemann Business Plan Options Report
The Report examines the feasibility and potential options for transferring the direct control,
management, and operation of P AO from the County to the City early or upon expiration of the
airport lease in 2017. Understanding the City's concern about potentially assuming an asset that
could absorb significant City resources, the report considers potential management structure
options and their projected pro-forma financial performance prior to and following the lease
expiration in 2017. Key issues are addressed including: potential financial outcomes, a lack of
City staff resources and expertise to operate PAO, the environmental sensitivity of the airport's
CMR:379:10 Page 3 of II
location, construction constraints due to the Baylands Master Plan, existing subleases, aging
facilities, Palo Alto community relations and economic impact, and the competitive market
position of P AO relative to other airports in the area.
The Report's financial projections verifies, to varying extents, the conclusions in both the City
Auditor and PAA WG reports that the PAO has the potential to support itself financially over the
long-term, presuming that all assumptions or variables in the report come to fruition. R. A.
Wiedemann and Associates .(WiedemmID) was asked to determine the financial viability of the
airport from 2012 to 2017 and to determine if it could remain profitable, under varying
management. structures, for 20 years thereafter. Using historical revenue and expense
information dating back to 2000, the consultant developed several "baseline" forecasts for
operation of the airport through 2017. These forecasts assume staffing levels that are consistent
with those currently maintained by the county. The report then builds upon these "baseline
forecasts" to evaluate alternative business models for operating the airport. Because there are
multiple and detailed scenarios that build on a previous scenario, readers of this CMR are
encouraged to examine the consultant report (Attachment A). A brief synopsis of each relevant
scenario follows.
It is important to note that the "seed" expenses cited above is not included in the models or
forecasts in the report nor is there any consideration of potential payback of the County's
outstanding advance. It should be noted, however, that the City does not recognize the advance
as a City obligation. Naturally, these expenses would offset the net revenues shown in the
report's pro-formas and the results discussed below.
Baseline Forecast for City or County Operation of PAO -through 2017 (p. 35 of Report,
Table 11)
Based on relatively conservative revenue and expense growth assumptions (page 35) as well as
continuing current FBO leases, the report concludes that between 2012 and 2017, the County or
City would have a net deficit of $129,200. The report shows that operating income would be
positive over this period, but that after an annual $50,000 contribution to matching capital or
other capital needs a cumulative deficit would result. The author states, "This projection can be
considered the worst case scenario for the City or County operation of the Airport -continually
increasing costs and very slow revenue growth." The report then goes on to assess a takeover by
the City by July 2011 and concludes that the City could perform "slightly better" than the County
since it would not have to pay for all of the overhead personnel the County cun'ently allocates.
For example, the County currently allocates and recoups the cost of noise management staff that
Wiedemann states the City would not need to support.
Baseline Forecast for City Operation ofPAO from 2018 -2037 (page 36-37, Table 12)
Addressing the 20 year period following 2017, the report finds potentially more robust net
revenues, especially as a consequence of the FBO leases expiring. In 2008, the current, two
FBO's only paid $134,900 in annual rent, but it is estimated, based on the revenue and expenses
of FBO's at other airports, that the FBO's netted more than $1 million in revenue from their
subtenants. WiedemaJID confirms this estimate by including revenue streams from FBO tie
down spaces and hangar and office rentals as income to the City. The Report does recognize
additional City costs to take the place of current FBO workload. For this scenario, the report
CMR:379:IO Page 4 of II
projects that from 2018 through 2037, the PAO could generate $13.7 million in surplus revenues
after accounting for capital matching and other necessary capital improvements. The Federal
Aviation Administration (FAA) has indicated verbally that the old 50 year lease with the current
FBOs is inappropriate and borders on a gift of public funds. They recommend that leases of
shorter duration, e.g., 15-20 years, be implemented and the FAA intends to monitor these
contracts.
Once again, the financial projections above do not incorporate "seed" expenses, consideration of
County capital "advances," or any exceptional or unexpected major capital expenses. Although
this scenario portrays healthy surpluses that could cover the "seed" loan and other unanticipated
expenses, it is critical to note that as a condition of having accepted FAA grants that all revenue
generated at PAO must be fUllleled back into the PAO with the exception of paying City
overhead and other appropriate expenses (e.g., legal, payroll, and human resource). Hence, the
General Fund carmot "profit" from airport operations .. This guideline applies to all of the options
discussed below.
This option basically represents the City and its staff nUlling the airport. It presumes City staff
will have future managerial, fixed base opcrator, and maintenance expertise to run the airport
personnel. The alternatives that follow are variations on the assumptions for this model or
substitutions for part or the entire City staffing model.
Discussion and Analysis of Alternative Operational and Management Options
After evalnating the City run "baseline" scenarios pre and post 2017, the report considers several
different operational and management structures for PAO. Although the report does discuss a
scenario where the County continues to manage the airport after 2017 that could result in
additional City revenues, this CMR focuses on those alternatives where the City takes a
proactive role in managing or hiring management for the airport. These options include:
A. City Operation of the Airport
In order for the City to operate the airport, the consultant recommends hiring an airport
manager several months in advance of taking possession. Then, an assistant manager and
a part-time City worker would be hircd whcn thc City assumes control. The airport
operation would become an Enterprise Fund and an Advisory Group, comprised of
knowledgeable users, business leaders and community members to the Council, would be
formed
B. Joint FBO and City Operation of the Airport
In this scenario, the City would contract with a Fixed Base Operator to provide day-to
day management of the. airport. Duties would include daily inspections, minor
maintenance, apron and ramp managemcnt, reports to Council, and interaction with FAA
Control Tower operations. Basically, the Operator would substitute for some of the staff
hired by the City under Scenario A (above).
C. Third Party Management
This option could take a variety of forms, but essentially the City would completely turn
over operations and management to a third, for profit party. The City would retain
II
fundamental ownership of the land and would provide, for example, a long-term lease so
that the third party could invest in and profit from operations. The City would have
minimal control over operations other than to ensure quality service to airport users and
make sure the Third Pm1y is performing as expected. The consultant says the four main
benefits of this option include: capital infusion, efficieney gains, revenue gains for the
Airport Enterprise Fund, and an opportunity to reinvent the airport. In addition, the City
would require "measureable performance requirements that can be specified, with
appropriate penalties for failure to meet them."
The Report provides the pros and cons of each option as follows:
1--c __ . _______ TabJe 18 -Summary of Pros and Cons for All O=tc:.io;;.;n:;:;s'--______ --I
Pros mmmm_ •••••••••••••••••• I Cons
mmm
_ c:--... -.... -..... -... -::--:--:--------I
Ci Baseline Cit Manag~lt1ellt Options)
1) Greater control of all factors, relative to I) Responsibility for all finances and management of
County control of AirpOlt the Airport
2) Positive net revenues over long term 2) Must deal with all staffing issues.
3) Monitor and control investment in capital i 3) Airport can become political issue
assets. I 4) Potential financial risk
4) ~~;~:t :~i~~:~~d to __ ~~rport u:~r:c-a_n_d--,--I =c_---c--------------............. -i
~c_------_=_~-~Ad:::d:.:.it:.:.jo::;n:::a:--l--:H"'a"'I .. lg"e"'r!'-AC"P"r-"o ... n---=-c-c----:---:---:--__ ----..J
1) H· h fill) P . I I f A I d lll.l est revenue stream 0 a options 1 •........... ()tentJa C lange 0 Ir~ort VieW s 1e
------~
CitYI'llls FHO Management
I ) Lower labor costs I) Less control of day-to-day operation and
2) Higher net revenues relative to 3 ed Party management of Airport.
Management and Baseline Projections
3) FBO responsibility for technical aviation
issues
Third Party Management
I) Indirect responsibility for operating the I} Least amount of control over day·ta·day operation
Airport. and management of Airport.
2) Airport operates as a profit center, 2} Dependent upon financial stability and strength of
providing periodic payments to City. 3,d Party Operator.
3} May represent lowest financial risk of all
---{)ptions.
----~~ ...
City management ofPAO with additional hangars/apron from 2012 -2017 and from 2018-
2037 (Tables 13 and 14 on pages 43 and 44, respectively)
Moving on to the projected financial results for each option, the Report considers building
incremental or new hangars. Wiedemann is acutely aware of the restrictions of the Baylunds
Master Plan on intensification of use and includes this scenario only to assess the "economic
value" future operations could yield. The additional hangars could be built in areas that are not
environmentally sensitive. This model builds upon tbe "Baseline Forecast for City Operation of
P AO from 2018 through 2037" described above, but adds additional revenue and expense
associated with building and maintaining new hangars.
CMR:3?9:IO Page 6 oft 1
To add new tie-downs and hangars in this "Iandside" option, the Enterprise Fund would issue
$4.55 million in revenue bonds for 20 years at an estimated 5% interest rate. Once again using
conservative revenue and expense assumptions, the Report presents pro-formas for the periods
2012 through 2017 and for 2018 through 2037. For the period 2012 through 2017, the projection
shows cumulative net results of negative $43,800, but for the period 2018 through 2037 the
cumulative net results show a robust $20.5 million.
This option departs from the Baylands Master Plan because it assumes additional hangars. The
Master Plan specifically prohibits any intensification of use and would need to be amended to
allow this option to be implemented.
City Plus FBO Management Option: 2018 -2037 (page 45, Table 15)
For this option the Report states it "is only slightly different from the complete City management
of the Airport." Day-to-day operation of the airport would fall to the FBO and the City would
have overall control of the airport and supply the legal and other administrative services that
complement those of the FBO.
This scenario does not contain any new tie-downs or hangars and includes the estimated cost of
an FBO. One assumption for this scenario that will require further analysis is that the FBO flat
management fee is less. than the assumed salaries and benefits for a City run operation. The
author acknowledges that an RFP process and eventual FBO contract could change the assumed
FBO costs. For the period 2018-2037, the pro-forma for this option shows cumulative net
revenues of $22.6 million. Based on the financial results of this scenario, staff believes currently
that further investigation is merited.
Third Party Operation of PAO Option: 2012 -2017 and 2018 -2037 (pages 46-47, Table
16)
There are a number of formats for third party operation of the airport and they can range from
"either management only or an all-inclusive master lease of the entire airport." In the Report, the
former is assumed for the 2012-17 period. The third party would manage airport operations and
procedures, manage property and assets, do maintenance and repairs, do tenant administration,
and other operational tasks. The City would be responsible for making all policy and leasing
decisions. For their work, the third party would likely be paid for their costs as well as a
percentage of gross airport revenues. The percentage, per the RepOli, is likely to be in the 5-10%
range. In this option, the Report estimates that for the years 2012-2018, the cumulative net
revenues would equal $816,200.
For the period 2018-2037, the Report assumes in its forecast a third party master lease for the
entire Airport which translates into very little involvement by the City. Building upon the City
plus FBO pro forma, the consultant's third party lease scenario assumes that the Airport
Enterprise Fund could expect between 70 to 80% of net revenues. By assuming a 75% return,
the pro-forma results in total third party payments to the City'S Enterprise Fund of $16.98
million during 2018-2037. The Report states that a lease of around 25 years would be expected
by the third party in order to recoup its investments in the airport. The lease would have to be
approved by the FAA and State Aeronautics. The length of the lease could be an issue for the
FAA given its reservations about long-term leases so this options merits further investigation.
CMR:379:10 Page 7 of II
Summary of Pro-Formas and Consultant Conclusions
Table 17 from the Report (page 48) summarizes the financial forecasts for each of the options
discussed above:
Table 17 -Summary of Financial Performance Options: Total Net Revenues
MANAGEMENT 2012-2017 . 2018-2037 Total Net Revenues
OPTION
Baseline City -$129,200 $13,678,500 $13,549,300
Management
Additional -$43,800 $20,500,700 $20,456,900
Hangar/Apron
City Plus FBO N/A $22,646,400 $22,646,400
Management
Third Party $816,200 $16,984,800 $17,801,000
Management
The Report concludes that the "City Plus FBO Management Option produces the greatest surplus
of net revenues over the entire period" while "the Baseline City Management Option has the
lowest total net revenues of the four options. The reason for the significant revenue differences
between the City Management and City Plus FBO option is that the Consultant projects
considerably less labor cost under the FBO scenario over time. Differences in outcomes
between the FBO and Third Party options result from the Third Party taking a greater share of
revenues to compensate them for costs and risks for assuming the entire airport operation. The
variance between City and Third Party results from lower Third Party labor costs over time.
From the pro-fonmas, it would appear that all options have sufficient revenues to cover the
General Fund "seed" funding/loan as well as any other moderate, unanticipated operating or
capital expenses.
In the "Recommended Options" section, the Rep0l1 proposes two options: City and Third Party
Management. These scenarios provide clear paths: either the City maintains complete control or
delegates responsibility to a third party with relatively minimal oversight. Of the two options
recommended in the report, the Third Party option results in better financial returns than the City
run option. It should be noted that in all scenarios, the City is ultimately held responsible by the
FAA for conditions at the airport.
The FBO option was not recommended because of potential FBO conflict of interest issues and
the fact that the City would be responsible for all capital improvements while the FBO operated
the airport. In addition, this model could lead to overlapping management and potential discord
unless roles and responsibilities were clearly defined. Nonetheless, because this option yields
the highest financial results, staff believes it is worthy of further analysis.
After making the recommendations, the Report describes the implementation steps for each of
the two options. This is important information that sets the stage for a timetable with tasks to
achieve the City'S goal.
CMR:379:10 Page 8 of II
Airport Community Value
In Appendix B of the Report, the consultant goes beyond incomestatcment projections for the
airport management options and studies the economic benefit of the PAO. Using a software
model, IMP LAN, to assess the impacts of expenditures by Airport employees, users, travelers an
estimate of economic value is generated. Using a variety of "inputs" or data such as user
spending onairpJanes and employment at PAO, the IMPLAN model calculates direct and
"induced" economic impacts. It is estimated that the Airport produces $64.3 million (including
$22.4 million in wage income) in economic benefits to Palo Alto and surrounding communities.
The model calculates that the airport supports 307 jobs. The $64.3 million does not include
income, personal property and possessory interest taxes that are paid to the State, County and
local jurisdictions. The Report states that over $3.7 million in State and local taxes is generated
annually.
Semi-annual Progress Report on Negotiation Status with County
City and County staff have had periodic meetings to discuss the transition to City control.
Discussions will continue to a more productive level after the completion of this report and
Council direction is given.
StaffRecommendalion and Comments
Moving toward a takeover of the airport will require a significant effort by staff and reliance on
numerous outside experts such as outside legal counsel. This is the case whether the City
assumes control prior to or when the County lease expires. It also will be the case if the City
hires an FBO or Third Party. A most preliminary and perhaps aggressive estimate is that it will
take a minimum of 2-3 years to implement City oversight. Staffs understanding is that this
process must be thought through carefully and sequentially so as to facilitate the process, work
through existing relationships, and maximize financial return to the Airpolt Enterprise.
Negotiations and a contract with an FBO or a Third Party Operator will take considerable time
and due diligence. It is recommended that an expert staff member Or consultant be hired to work
through the options in the RepOl1 and to guide the City toward an eventual takeover. In all of the
above scenarios, the City will be responsible for submitting funding req uests to the FAA.
This CMR has primarily concentrated on thc financial results of the Consultant's report. There
are non-financial issues that arc important to consider and address. A fundamental policy
question is how much involvement in and control of the airport does the City want, particularly
since it lacks expertise in this arena and since any net revenues, after paying for any City
overhead support, must be invested in airport improvements? Unless the City is prepared to
repay FAA grant monies and decouple fi'om FAA support (which a complicated process), there
does not appear to be a direct return to the General Fund. The essential question is which
management model is most efficient and effective in serving users, maintaining an important
asset, and minimizing any impact on the General Fund?
A subsidiary question to City staff numing the airport is how nimble and entrepreneurial will
they be in contrast to an FBO or Third Party Manager who is familiar with facility maintenance,
dealing with the FAA, accustomed to delivering a unique customer service, and who has the
incentives to perform well? On the other hand, it should be noted that most California ail]lOl'ts
are managed by public agencies with a few exceptions in southern California that have third
CMR:379:JO Page 9 of II
party management. In fact, there has been one instance in which a public agency had to revoke
third party management of the airport due to performance issues. The challenge in third party
management is that strict specifications, performance measures, and oversight would be
necessary if Palo Alto decides on this course. The City would likely need to hire a manager to
keep vigil over the contract and service to the airport users.
Although the Report recommends two options, a City run airport or Third Party management, al
this time staff believes the Council should also review and comment on the FBO option. Given
the projected net revenues for an FBO model that are higher than the other options, this
alternative merits further consideration and analysis. In addition, it provides the expertise the
City needs to operate the'airport ifit chooses to have a management role short offull control. To
assist with the analysis of management options and a transition to City control, staff recommends
the formation of an advisory body to Council. Based on Council direction, staffwill return with a
Budget Amendment Ordinance (BAO) for required resources and the establishment of an Airport
Enterprise Fund. A specific timeline (see below) for hiring the expertise and perfOlming the
required tasks to move forward would be provided along with the BAO.
In addition to the issue of a management model, there are concerns over the physical condition
and vacancy rate at the airport. The former is a consequence of minimal County work in this
area and the latter is a result of higher fees implemented by the County to recover its prior capital
investments. These are important issues that affect the viability of the airport. In addition, there
is significant community and economic value (see Appendix B) that should be recognized.
TlMELINE
Taking control of the airport will be a complex, step by step process that involves a host of
entities and considerations. Multiple meetings with the County, the FAA, State, and East Palo
Alto will occur over time. Legal, eontractual, and operational issues will need to be worked
through.
Depending on Council input and questions, staff envisions returning to Council with a BAO for
additional resources and a more finalized Business Plan. At that time a more detailed timeline
can be provided. Staff envisions the following, high-level timeline for next steps:
December, 2010 Return to Council with BAO
February, 2011 Formation of Airport Advisory Body
May, 201 I Advisory Board and Staff recommend, jointly or independently, Airport
Management Option and Timeline Steps to Implement AhJlort Transition.
RESOURCE IMPACT
The preliminary costs of taking the first ~ieps toward City control of PAO are $500,000. This
estimate includes:
Phase II Environmental Site Investigation
Airport Manager (annual eost)
CMR:379:IO
$150,000
$220,000
Page 10 of II
Other Expert or Consultant advice .
Legal advice (first year)
Total
$100,000
$ 30,00Q
$500,000
The above costs arc rough estimates and could vary depending on Council input and direction.
Legal costs would be ongoing and would increase· as negotiations with an FBO or Third Party
ensue. In addition to an Airport Manager to help with the transition, other expert or consultant
advice may be required. These expenses would be funded from the Budget Stabilization Reserve
in the General Fund as a loan and repaid by the Airport Enterprise Fund once sufficient funds are
accumulated.
POLICY IMPLICATIONS
This progress report and recommended actions are consistent with previous Council direction.
ENVIRONMENTAL REVIEW
A Phase I Environmental Site Assessment has been conducted and is attached to this CMR
(Attachment C). The assessment was done to determine if any hazardous material spills have
. impacted soil andlor groundwater at PAD. The report concludes that there is sufficient cause to
recommend a Phase II site investigation to evaluate potential soil and groundwater contamination
at the PAD.
A TTACHM.ENTS
Attachment A: Wiedemann and Associates Business Plan and Community Value Analysis
Appendix A: Survey of Airport Users
Appendix B: PAO's Community Value
Attachment B: Environmental Site Assessment
PREPARED BY:
Depu Director,;jA~~~
.~-~
i ve Services
LAL ~~~_-.-~
Director, Administrative Services
CITY MANAGER APPROVAL:
cc: County of Santa Clara
Palo Alto Airport Joint Community Relations Committee
Chair of the P AA WG
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