HomeMy WebLinkAboutStaff Report 431-10TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER
DATE: Dl~CEMBER 6, 2010
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 431:10
SUBJECT: Review and Acceptance of R.A. Wiedemann & Associates, Inc. Airport
Business Plan; Adoption of Budget Amendment Ordinance to Fund
Transition of Palo Alto Airp0l1 control from the County to the City; and
Responses to the Finance Committee's Motion on Information and Action
Items from October 19, 2010 Meeting
RECOMMENDATION
Staff recommends that the Council:
1) Approve the Finance Committee's acceptance of the R.A. Wiedemann & Associates,
Inc, Airport Business Plan
2) Upon acceptance of Airport Business Plan, approve creation of a new Airport Enterprise
Fund and the attached BAO for $300,000 to facilitate the transition of Palo Alto airport
control from Santa Clara County to the City
3) Provide direction to staff on utilizing remaining funds of $14,100 in CIP AS09000 for
additional transition work by R.A. Wiedemann & Associates
4) Provide feedback on information and other items requested by the Finance Committee
on October 19, 2010
BACKGROUND
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 County's
50 year lease expires, The intent is for the City to have operational control of PAO earlier than
2017. On October 19,2010, R.A. Wiedemann and Associates (Wiedemal1ll) presented the City
of Palo Alto Airport Business Plan and Comm'unity Value Analysis to the City's Finance
Committee (Attachment B: CMR: 379:10).
Staff continues moving forward with the Council direetion of assuming control over PAO
operations earlier than 2017, but before the City can proceed it is important to fully understand
the costs and implieations 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
CMR:43 1:10 Page 1 of6
hiring aU 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?
According to R. A. Wiedemaun, the City does not have the option of closing the airport given
prior acceptance of FAA grants. In his report, Mr. Wiedemann describes a lengthy and complex
process for closing the airport and stated that the FAA would likely oppose such a decision given
its investments and need for regional facilities. When the City assumes control, the FAA expects
it will maintain a safe and fully functional facility.
The Business Plan laid out several management options as well as pro-formas showing their
results. Overall, each option shows solid net revenues could be realized over the long-term. In
the consultant report, the amount of "profit" the City could achieve is dependent upon the
business model selected and negotiations with the various parties that would operate or run the
airport. A key component of the City realizing "profit," especially prior to a 2017 takeover, is
the re-negotiation of existing Fi*ed Base Operator (FBO) contracts or the selection of new FBOs
if this business model is pursued. During his presentation to the Finance Committee,
Wiedemann was optimistic that given the volume of activity at the airport, the fee structure, and
the demographics of the region, the airport could support itself financially and be a vital resource
to the overall l)ommunity. Only under dire economic conditions such as a sharp increase in gas
prices or a severe decline in infrasuucture, would the airport face significant financial
challenges.
After listening to Wiedemann's presentation, discussing the Business Plan and the City
Manager's Report, the Finance Committee (FC) gave the following direction in its motion:
• Accept the Palo Alto Business Plan and Airport Community Value reports by
Wiedemann
• Direct staff to return to Council on December 6 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
• Direct Staff to return with a precise timetable of events with a schedule as accelerated as
reasonably as possible
• Provide the Council with the means of creating an Airport Commission
• Advise the City on which of the 3 models to move forward with
• Explore the methodology for the maximum charges the City's General Fund may legally
collect from the Airport Enterprise Fund
• Provide an organizational chart as to who will be doing the Staff work and reporting to
whom; and
• Authorize moving forward expeditiously with Phase II on the Enviromnental Report on
the airport.
This report u'ansmits the Airport Business Plan for Council consideration and responds to the
FC's motion.
CMR:431:10 Page 2 of6
DISCUSSION
Budget Amendment Ordinance
The attached BAO establishes an Airport Enterprise Fund (AEF) and provides the funds to move
forward with the transition of the airport to City control. These include:
• a Phase II Hazardous Material Analysis estimated at $150,000
• estimated legal expenses of $50,000
• $100,000 for expert support either through a consultant or a temporary staff person to
guide the City through the transition process to City control of the airport
This seed money will be loaned by the General Fund (GF) to the new AEF. It should be noted
that the ' FAA allows a six-year reimbursement window for funds loaned for airport purposes.
Thus, repayment of the GF loan depends upon when the City takes over the airport and when it
generates a profit. Moreover, City staff believes it is advisable to obtain outside legal counsel on
a number of issues including whieh of the above expenses can be reimbursed based on FAA
guidelines. Depending upon a variety of factors, staff may need return to Council for additional
funding.
In addition to the BAO, staff is requesting COlincil approval to utilize remaining funds of
$14, I 00 in CIP AS09000 for transition work by Wiedemann. Additional tasks identified by
Wiedemann include:
• Updated financials for the airport (consultant report is based on data through June 30,
2008)
• Information on normal charges (franchise fees, etc.) for enterprise funds.
• Further examination of any of the performance options or new variables within any
option
At a minimum, staff recommends that funds be used for to update Wiedemann's financial
analysis and for further examination of the options based on potential new variables or scenarios.
Council may wish to provide guidance to staff on new variables or scenarios this evening. Staff
believes the additional work suggested by Wiedemann can be most helpful.
Timeline
It is difficult at this time to develop a "precise" timeline for an airport takeover, especially
without the results of the Phase II environmental study, a person with expertise in general
aviation airport operations and management on board to guide staff through this complex
process, and outside legal advice on moving forward. The following timeline is staff's best and
preliminary effort at establishing a timelines. This is subject to change as the process moves
forward.
January/Feb. 2011 Hire airport expertise either through temporary staffing or consultancy
February 20 II Establishment of an Airport Advisory Commission
CMR:43 1:10 Page 3 of6
February 20 II
March 2011
Apri12011
August 2011
Septembcr 20 II
December 2011
Mat'ch 2012
July 2012
Airport Commission
Identification of outside legal expertise
Begin discussions with county and current FBOs for City control prior to
2017
Phase II Environmental Report completed
Present to Council staff" s recommended option for operating the Airport
Send out Request for Proposals (if FBO or Third Patty option for
management of airport selected) depending upon progress with County
negotiations
Complete negotiations with County and discussions with FBOs and
establish date for City control
Completion of hiring of airpOlt personnel if City runs airport or selection
of FBO/Third Party to operate airport
City assumes control of AiI'port based on successful negotiations
Establishing an Airpolt Commission requires, as with all City commissions, the adoption of an
ordillance. The ordinance would be codified in the Palo Alto Municipal Code, for example, in
Title 2, as Chapter 2.27 "Airport Commission." Staff proposes bringing this ordinance to the
Council in February 2011 so the Commission can work with staff on the takeover process. It
appears appropriate for the new Mayor and the Council to begin identifying candidates in
JanuarylFebruary.
Advise the City on Whieh of 3 Business Models to Pursue
At this time, staff believes it does not have the knowledge or expertise to recommend one of the
3 models in the Wiedemann report. Although the pros and cons of eaeh model are identified in
the Business Plan, it is critical to hire an airpolt expelt who can assist in identifying the optimal
model. Staff needs assistance in implementing any of the 3 models such as: evaluating and
selecting future airport personnel under the City-run model; assessing the capabilities of FBOs
and developing a contract; and selecting a Third Party operator and developing an agreement.
Under any of these options, the City would be committed to a long-term operation or contract
and it is important to evaluate the best choice with expert advice. Staff recognizes that there are
many municipally-run airports, but it proposes to move purposefully to acquire experience ill and
knowledge of the general aviation airport business.
Explore Methodology for Maximum Charges the City's General Fund Can Legally Mai(c to the
Airport Enterprise Fund
Until the City Attorney's Office has funding to hire outside legal counsel on this matter, the
feasibility of "maximum charges" cannot be determined at this time. Both direct and indirect
CMR:431;JO Page 4 Qf6
(e.g., City overhead such as payroll, legal, and human resource support) ean be eharged to the
new AEF based on FAA rules.
Provide an Organizational Chart Displaying Staffing and Reporting Relationships for Airport
Transition Work
Currently, the City has numerous and key vacancies in its senior management structure making it
difficult to provide the requested chart. The responsibility for managing airports typically lies in
a Public Works or an Airport Department. While key positions have been filled on an interim
basis, vaeancies and the number of projeets underway in Public Works (e.g., library construction,
Infrastructure Blue Ribbon Committee support, Refuse Fund work) do not allow taking on
further assignments at this time. In staff's opinion, the primary staffing concern is to hire the
expert consultant or personnel needed to move forward with a well-managed takeover. In the
meantime, ASD staff will continue to lead the projeet coordinating closely with the City
Manager and Attorney's Offices, Public Works and other City departments.
It should be noted that considemble in-house staff time is required to move toward City control
of the airpOlt. Efforts from tIle 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 Works Director, and other administrative support will be
needed. This is time and effort that would otherwise be devoted to existing priorities.
Authorize Moving Expeditiously with the Phase II Airport Environmental Report
The existing Phase I professional services contract with Northgate Environmental Management
Inc. stated that if a Phase II study had to be conducted it could be added to the existing contract.
In 2008, the original Request for Proposals (RFP) to procure environmental assessment services
included Phase II work at the airport. The Phase II work was removed from the final contmct
scope, but it is appropriate to add it back via a contract amendment. To expedite the process as
requested by the FC, staff will retum to Council in January to propose a contract amendment and
not to conduct an RFP process. If Council approves ilie anlendment, Phase II results can be
delivered in April 2011. .
RESOURCE IMPACT
The attached BAO establishcs a new AEF and includes $300,000 in funding for services (cited
above) needed to transition the Airport from Cmmty to City control. A loan will be established
from the General Fund to the AEF. The Phase II funding request is for a one-time study, but the
consulting/staffing and legal fUnding requestcd in the BAO is for estimated annual expenses.
Staff will return to Council in thc annual budget process to identifY any additional or base
resources necessary to continue thc airport transition. At tllis time, there is uncertainty as to
whether all funds loaned by tlle GF can be repaid with Airport net revenues and, moreover,
whether "reimbursable" expenses can be paid within tlle 6 year timeframe required by tlle FAA.
POLICY IMPLICA nONS
Actions recommended in this report are consistent with previous Council direction.
CMR:431:10 Page 5 of6
ENVIRONMENTAL REVIEW
A Phase I Environmental Site Assessment has been conducted. The assessment was done 10
detelmine if any hazardous material spills have impacted soil and/or groundwater at PAO. The
report concludes that there is sufficient eause to reeommend a Phase II site investigation to
evaluate potential soil and groundwater contamination at the Palo Alto AirpOit.
ATTACHMENTS
Attachment A:
Atmchment B:
PREPARED BY
Approval of a Budget Amendment Ordinance to Fund Transition of
Airport Control from the County to the City and Review oflnformation
Requested by the Finance Committee
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.cityofpaloalto.orgfcivicaffilebankiblobdload.asp?BIQbID=249
16 )
ty Dire tor, Administrative Serviees
CITY MANAGER APPROVAL; I . ,;~fA .• (;.p
(~ JAMES KEENE >\.v/ Cily Managel'~' ,., ;
CMR:431:10 Page 6 ofG
Attachment A
ORDINANCE NO.XXXX
Approval of a Budget Amendment Ordinance to Fund
Transi tion of Airport Control from the County to the
City and Review of Information Requested by the Finance
Committee
The Council of the City of Palo Alto does ordain as follows:
SECTION 1. The Council of the City of Palo Alto finds
and determines as follows:
A. Pursuant to the provisions of Section 12 of Article III of
the Charter of the City of Palo Alto, the Council on June 28, 2010
did adopt a budget for fiscal year 2011; and
B., On November 13, 2007 (CMR: 418:07), the Council directed
staff to begin negotiations with the Santa Clara County on an
early termination of the lease between the City and the County for
the Palo Alto Airport and to commence work on the items set forth
in the staff report (CMR: 418:07), including an airport business
plan or evaluation of City options for operating the airport; and
C. On October 19, 2010, the Finance Committee was provided
with an airport business plan which outlined airport management
options (CMR: 379:10); and
D. 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 project;
and
E. The establishment of an Airport Enterprise Fund and the
resources necessary to move forward with a City takeover of the
Palo Alto Airport are required; and
F. A loan from the General Fund to the Airport Enterprise
Fund is needed to provide the necessary funding to transition the
airport from county control; and
F. Staff has identified an initial need of $300,000 for
environmental analysis, legal and other expert support, and
personnel costs for the airport transition process; and
G. City Council authorization is needed to establish a loan
from the General Fund to the Airport Enterprise Fund.
H. City Council authorization is needed to establish an
Airport Enterprise Fund, and to amend the fiscal year 2011 budget
to make an additional appropriation of $300,000 for environmental
analysis, legal and other expert support, and personnel costs for
the airport transition process; and
SECTION 2. The Airport Enterprise Fund is hereby established
to account for all financial transactions relating to the Palo
Alto Airport.
SECTION 3. The sum of Three Hundred Thousand Dollars
($300,000) is hereby loaned and appropriated from the General Fund
to the Airport Enterprise Fund for environmental analysis, legal
and other expert support, and personnel costs for the airport
transition process. The General Fund Budget Stabilization Reserve
is only affected to the extent to which the Airport Enterprise
Fund is unable to repay the loan.
SECTION 4. As specified in Section 2.2S.0S0(a) of the Palo
Alto Municipal Code, a two-thirds vote of the City Council is
required to adopt this ordinance.
SECTI0l>L~. As provided in Section 2.04.330 of the Palo Al to
Municipal Code, this ordinance shall become effective upon
adoption.
SECTION 6. 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 the Palo Alto Airport.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST: APPROVED:
City Clerk Mayor
APPROVED AS TO E'ORM:
Senior Asst. City Attorney
City Manager
Director of Administrative
Services
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 lind Community Valuation Analysis;
Request for Council Input and Direction on Options; and Formation of an
Airport 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 County's
50 year lease expires. The intent is for the City to have operational control of PAO earlier than
2017. The attached report from R. A. Wiedemann and Associates (Report) lays 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 over PAO
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 whieh staff wants
to explore fUIther and for which Council input is requested.
To begin the complex process of pursuing any of the airport options in the Report, there will he 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 resources are needed to hire such experts. In
addition, considerable in-house staff time is required to set the process in motion and to guide it
to fruition. Based on Council input, staff proposes to return with a Budget Amendment
CMR:379:10 Page I of II
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 AirpOlt 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:
1) 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
BACKGROUND
In 1967 the City and the County entered into a 50-year lease for management of the Palo Alto
Airport (P AO). 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 Airport Working Group (PAA WG), which
contested the financial and other conclusions by the County, Couneil 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 business plan or evaluation of City options for operating
the airport
• Preparation of a community valuation analysis to determine economic value of
airpOit 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 to 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 (Repo11); outline the airport community valuation analysis;
provide staff's 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 report.
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 project. 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:
1. Phase II Environmental Site Investigation estimated at $150,000
2. AitpOlt, legal and other expert support at an estimated cost of $3 50,000
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 management options in this report and to start a transition process. It is staff's 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 ofPAO from the County to the City carly or upon expiration of the
airport lease in 2017. Understanding the City'S concern about potentially a~suming 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 20]7. 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 Page3 of 1l
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 ofPAO relative to other airports in the area.
The Rep0l1'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 Ihat all assumptions or variables in the report come to fruition. R. A.
Wiedemann and Associates (Wiedemann) was asked to detennine 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 notG 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. 3S of Report,
Table ll)
Based on relatively conservative revenue and expense gro'Nth 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." TIle 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-entiy 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 of P AO 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 FHO leases expiring. In 2008, the current, two
FBO's only paid $134,900 in aJillual rent, but it is estimated, based on the revenue and expenses
of FBO's at other airports, that the FHO's netted more than $1 million in revenue from their
subtenants. Wiedemarm 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:379:10 Page 4 of II
projects that limn 2018 through 2037, the PAO could generate $13.7 million in sUll'lus 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 funneled 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 cannot "profit" from airport operations. This guideline applies to all of the options
discussed below.
This option basically represents the City and its staff running the airport. It presumes City staff
will have future managerial, fixed base operator, and maintenance expertise to run the aill'ort
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 evaluating the City run "baseline" scenarios pre and post 2017, the report considers several
different operational and management structures for PAO. Allhough the report does discuss a
scenario where the County continue's to manage the airport after 2017 that could result in
additional City revenues, this CMR focuses on those alternatives where the City takes a
proaetive 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 aill'ort, 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 hired when the 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 orthe 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 management, 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 tal<e 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
CMR:379:10 Page 5 of 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 Party is performing as expected. The consultant says the four main
benefits of this option include: capital infusion, efficiency gains, revenue gains for the
Airport Enterprise Fund, and an oppoliunity 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:
I·=-~~~~~m~able 18 -Summal), of Pros and Cons for All Options mm' __ '
1-'1 P::.::.ro:...:s ___ ---:"'~'" ' I Cons """'--:-_,---__
City Ollcration of the Airport (Baseline City Manal!ement Options) "' __
I) Greater control of all factors, relative to I) Responsibility for all finances and management of
County control of Airport the Airport
2) Positive net revenues over long term 2) Must deal with all staffing issues.
3) Monitor and control investment in capital J) Airport can become political issue
assets. 4) Potential financial risk
4) Ability to respoml to Airport tisers and
resident neigh bors,
~mmmm AdditiolllllHanger/Apron
1 J) Highest revenue stream of all options I l~)~p""ot:;;e:":nt"'ja";lC-'c"'h'-aJ-lg-e-o"Cf:-A-;-,:-'r-po-rt-:-v:-ie-w-s-:'h-e-:'d----~--I
c-::7 ............................ ;-;----:~~~~~-
City Plus FI1QlVIanagement
I) Lower labor costs
2) Higher net revenues relative to 3,d Party
Management and Baseline Projections
3) FBO responsibility for technical aviatinn
_______ issues
I) Less control of day-to-day operation
management of Airport,
and
_~---:=c-~~_~--cTc:h:it:<l PartyJ\llll.::n=ag"'e'-'m.::.e=n"-'t'--~~~c-~-:-_~-c-_--m-
1) Indirect responsibility for operating the: I) Least amount of control over day-to-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'· Party Operator,
3) May represent lowest financial risk of all
OPtions,
City management of PAO 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 ccnsiders building
incremental or new hangars. Wiedemann is acutely aware of the restrictions of the Baylands
Master Plan on intensification of use and includes this scenario only to assess the "eccnomic
value" future operations could yield, The additional hangars could be built in areas that are not
environmentally sensitive, This model builds upon the "Baseline Forecast for City Operation of
PAO from 2018 through 2037" described above, but adds additional revenue and expense
associated with building and maintaining new.hangars.
CMR:379:10 Page 6 of 11
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 Report, 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% retum,
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:IO Page 7 of 11
SummHrY of Pro-FormHs and Consultant Conclusions
Table 17 from the Report (page 48) summarizes the financial forecasts for each of the options
discussed above:
Table 17 -SummHry 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 airpOlt operation. The
variance between City and Third Party results from lower Third Party labor costs over time.
From the pro-formas, 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 Report 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:IO Page 8 of II
Airport Community Value
In Appendix B of the Report, the consultant goes beyond income statement projections for the
airport management options and studies the economic benefit of the PAO, Using a software
model, IMPLAN, 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 on airplanes and employment at PAO, the IMPLAN model calculatcs dircct and
"induced" cconomic 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 caleulates 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
annuaJ] y,
Semi-annual Progress Report on Negotiation Status witb 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,
StaffRec'ommendation and Comments
Moving toward a takeover of the airport will require a significant effort by statT 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. Staff's 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 Airport 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 Report and to guide the City toward an eventual takeover. In all of the
above scenarios, the City will be responsible for submitting funding requests to the FAA.
This CMR has primarily concentrated on the financial results of the Consultant's report, There
are non-financial issues that are important to consider and addrcss. A fundamental policy
question is how much involvement in and control of the airport does thc 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 hom 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 running 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 weI!? On the other hand, it should be noted that most California airports
are managed by public agencies with a few exceptions in southern California that have third
CMR:379;lO Page 9 of 11
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 jf P"lo 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, at
this time staff believes the Council should also review and eomment on the FED 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 if it chooses to have a management role short of full 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, staff will retum 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 performing the
required tasks to move forward would be provided along with the BAD.
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, contractual, 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 time line
can be provided. Staff envisions the following, high-level timeline for next steps:
December, 2010 Retum to Council with BAD
February, 20 II Formation of Airport Advisory Body
May, 20J I Advisory Board and Staff recommend, jointly or independently, Airport
Management Option and Timeline Steps to Implement Airport Transition.
RESOURCE IMPACT
The preliminary costs of taking the first steps toward City control of PAO are $500,000. This
estimate includes:
Phase II Environmental Site Investigation
Airport Manager (annual cost)
CMR:379:10
$150,000
$220,000
Page 10 of II
Other Expert or Consultant advice·
Legal advice (first year)
. Total
$100,000
$ 30,000
$500,000
The above costs are rough estimates and could vary depending on Council input and direction.
Legal costs would be ongoing and would increase' as negotiations with an FHO or Third Pa11y
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 and/or groundwater at PAO. The report concludes that there is sufficient cause to
recommend a Phase II site investigation to evaluate potential soil and groundwater contamination
at the PAO.
ATTACHMENTS
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:
.1.Q~:t;~ive Services
LAL EREZ
Director, Administrative Services
CITY MANAGER APPROVAL:
cc: County of Santa Clara
Palo Alto Airport Joint Community Relations Committee
Chair of the PAAWG
CMR:379:!O Page II of!!
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