Management Audit of the Airports Division: Section 1

As shown in Table 1.1 below, the Airport Enterprise Fund has produced net income of between $92,952 and $162,860 for the four fiscal years reviewed. However, only Reid-Hillview Airport has operated at a profit and generated significant profits. Therefore, without subsidies from the Reid-Hillview profits, the Palo Alto and South County Airports would require a subsidy from the General Fund or some other source. This reflects the business arrangements and lower level of activity at Palo Alto and South County Airports discussed throughout this report.

The Department projects that the Airport Enterprise Fund will again earn a profit in FY 1999-00 although it is likely that, as in previous years, this will be due to the performance at Reid-Hillview and that the Palo Alto and South County Airports will both incur losses.

Table 1.1

Adjusted Actual Revenues, Expenditures and Net Profit or Loss, by Airport

FY 1995-96 through FY 1998-99

1995-96

1996-97

1997-98

1998-99

Totals

Revenues

Palo Alto

Reid-Hillview

South County

Total Revenues

438,722

1,060,635

77,040

1,576,397

430,238

1,079,567

101,001

1,610,806

439,377

1,163,296

107,173

1,709,846

484,466

1,269,274

115,318

1,869,058

1,792,803

4,572,772

400,532

6,766,107

Expenditures

Palo Alto

Reid-Hillview

South County

Total Expenditures

394,103

911,799

165,989

1,471,871

426,341

863,044

158,561

1,447,946

499,881

912,520

204,493

1,616,894

545,026

1,028,568

135,308

1,708,902

1,865,352

3,715,911

664,352

5,573,722

Net Income

Palo Alto

Reid-Hillview

South County

Net Income

44,619

148,856

(88,949)

$104,526

3,897

216,523

(57,560)

$162,860

(60,504)

250,766

(97,320)

$92,952

(60,560)

240,706

(19,990)

$160,156

(72,548)

856,851

(263,819)

$520,494

Table 1.2 presents the breakdown of budgeted adjusted Airports Division revenue by source and airport. As shown, aircraft storage rentals are the key source of revenue for the airports, comprising 69.6 percent of the Division’s total revenues. However, current business arrangements and practices at the three airports do not result in the airports maximizing this source of revenue.

An analysis of the mix of aircraft rental facilities and occupancy rates, or percentage of facilities leased at each airport, reveals some of the weakness with the current business arrangements at the County airports. The main problem is that many of the aircraft storage rental facilities at the County airports are operated and leased out by the FBOs, not the Department. As a result, the FBOs collect aircraft storage rent but pay only a small percentage of this rental income to the Department. The rent basis for the two major FBOs that lease hangars is 8.5 percent of the value of the land occupied plus only 6 percent of their hangar lease revenue. An FBO leasing hangars and tie-downs can earn substantial income and pay little additional rent compared to FBOs that do not rent out aircraft storage facilities. All other FBOs pay 8.5 percent of the value of the land they occupy regardless of their income from the services they provide such as airplane repair, and flying lessons. Hangars and tie-downs owned and operated by the Department, on the other hand, generate substantial revenue directly for the Department. Of course the FBOs or the County renting hangars or tie-downs have incurred the costs of constructing these facilities.

Table 1.2

FY 1999-00 Adjusted Budgeted Revenues*

By Source and Airport

	$ Amount				% Total
Revenue Source	PAO	RHV	SC	Total	PAO	RHV	SC	Total

Aircraft storage	336,600	946,200	7,800	1,290,600	71.9%	75.1%	6.2%	69.6%
FBO leases	92,171	206,000	68,340	366,511	19.7%	16.3%	54.1%	19.8%
Fuel Flowage Fees	25,500	17,000	5,150	47,650	5.5%	1.3%	4.1%	2.6%
Transient	11,500	8,000	75	19,575	2.5%	0.6%	0.1%	1.1%
Other	2,090	83,250	45,030	130,370	0.4%	6.6%	35.6%	7.0%
Total	467,861	1,260,450	126,395	1,854,706	100.0%	100.0%	100.0%	100.0%

PAO= Palo Alto Airport
RHV= Reid-Hillview Airport
SC= South County Airport

*Excludes FAA capital project funding and other unusual one-time revenues.

Table 1.3 presents aircraft storage space occupancy data. As shown, 1,106 aircraft rental sites, or 76 percent of the total available, are occupied. All 626 of the occupied sites are County managed and the remaining 480 are under the control of FBOs, resulting in a total occupancy rate of 83 percent for the FBOs and 71 percent for the County. Total countywide occupancy rates are 95 percent for hangars, 68 percent for tie-downs, and 100 percent for shelters.

The lowest occupancy rate for all types of aircraft rental facilities is found at South County Airport, at 48 percent. The occupancy rate for County-owned facilities at South County is particularly low at 10 percent. There are 55 hangars and 107 tie-downs available for rent at South County Airport. Of the 107 tie-downs, 70 are owned and operated by the County and could potentially be a source of rental revenue. Unfortunately, only seven of those 70 tie-downs, or ten percent, are currently leased. The other 37 tie-downs at South County Airport are operated by the FBO tenant at the airport. Of those, 22, or 59 percent, are leased. The Department has pointed out that its tie-downs are more costly and not as conveniently located as those operated by the FBO at South County Airport. While this is true, the Department has done little to promote or improve its tie-down sites or proposed lowering its rental rates to increase the number rented.

Table 1.3

Number and Percentage of Aircraft Storage Facilities Occupied

at County Airports by Airport and Type of Storage

	Shelter	Tie-downs	Hangars	Total
Palo Alto
Occupied – FBO	0	84	82	166
Total Available – FBO	0	100	82	182
% Occupied – FBO	0%	84%	100%	91%
Occupied -County	0	283	0	283
Total Available – County	0	371	0	371
% Occupied – County	0%	76%	0%	76%
Occupied-Total	0	367	82	449
Total Available-Total	0	471	82	553
% Occupied -Total	0%	78%	100%	81%
Reid-Hillview
Occupied – FBO	0	207	36	243
Total Available – FBO	0	253	49	302
% Occupied – FBO	0%	82%	73%	80%
Occupied – County	52	100	184	336
Total Available – County	52	209	184	445
% Occupied – County	100%	48%	100%	76%
Occupied -Total	52	307	220	579
Total Available-Total	52	462	233	747
% Occupied -Total	100%	66%	94%	78%
South County
Occupied – FBO	0	22	49	71
Total Available – FBO	0	37	55	92
% Occupied – FBO	0%	59%	89%	77%
Occupied – County	0	7	0	7
Total Available – County	0	70	0	70
% Occupied – County	0%	10%	0%	10%
Occupied -Total	0	29	49	78
Total Available-Total	0	107	55	162
% Occupied -Total	0%	27%	89%	48%
Total
Occupied – FBO	0	313	167	480
Total Available – FBO	0	390	186	576
% Occupied – FBO	0%	80%	90%	83%
Occupied – County	52	390	184	626
Total Available – County	52	650	184	886
% Occupied – County	100%	60%	100%	71%
Grand Total
Occupied	52	703	351	1,106
Total Available	52	1040	370	1,462
% Occupied	100%	68%	95%	76%

All of the 55 hangars available at the South County Airport are operated and leased by the FBO. Reflecting the greater popularity among aircraft owners of hangars over tie-downs, 49 of the 55 hangars, or 89 percent, are leased. Compared to tie-downs, hangars produce relatively more rental revenue per aircraft and are in greater demand by airplane owners. Since most of the rent paid to the County by the FBO is based on the appraised value of the land, the County benefits little from the 55 FBO hangars at South County Airport. To offset its low aviation-related revenue, the Department is currently leasing approximately 5 acres of South County Airport land to a private company for storage of modular trailer facilities. Income from this source amounted to $18,000 in FY 1998-99 and is budgeted at $45,000 for FY 1999-00 due to an increase in the number of trailers stored.

As presented in Table 1.2 earlier in this section, Reid-Hillview Airport generated $1,206,450 in revenue in FY 1998-99, the greatest amount of revenue of all three airports. At Reid-Hillview, the Department controls and rents 184 of the hangars at the facility and 100 percent of these are rented. The Department owning and leasing hangars at Reid-Hillview and the high occupancy rate of those facilities is the chief explanation for the relatively higher revenues generated at that facility. As mentioned above, Reid-Hillview is the only one of the County’s three airports to have sustained an operating profit for each fiscal year between 1995-96 and 1998-99.

Table 1.4 shows facility rental income per aircraft stored in County facilities at the three airports. As shown, annual aircraft storage income per aircraft stored is highest at Reid-Hillview at $2,732 per unit, the only facility of the three where the County owns and leases hangars. Revenue per aircraft stored is lower at both Palo Alto and the South County airports at $1,118 and $1,035 per unit, respectively. The County operates and directly rents tie-downs and shelters only at those two airports. The rental rates charged to the tenants are the same at all three facilities for each type of storage.

Table 1.4

Annual Aircraft Storage Income per Aircraft

FY 1998-99 by Airport

	FY 1998-99 Aircraft Storage Income	# Aircraft Stored in County Facilities	Aircraft Storage Income/Aircraft
Palo Alto	$316,280	283	$1,118
Reid-Hillview	$917,997	336	$2,732
South County	$7,244	7	$1,035
TOTAL	$1,241,521	626	$1,983

A total of $336,367 in Reid-Hillview profits has been used to cover losses at the Palo Alto and South County Airports. These funds could have otherwise been used for capital improvements, General Fund repayment, or building up Airport Enterprise Fund reserves if Palo Alto and South County were recovering their costs through their own revenues. Since general aviation airports are not a County-mandated service and are of primary benefit to their users, each airport should be recovering its costs through its user fees and charges. This will enable the Airports Division to maximize its services and to avoid any dependence on the General Fund.

Other Obligations

Besides its ongoing operating expenses, the Airports Division faces a number of confirmed and potential financial obligations that will require additional cash beyond annual operating revenues. These obligations consist of planned and potential capital projects and repayment of past General Fund contributions to the airports.

Capital Projects

In February 1999, the Airports Division submitted its annual ten-year maintenance and repair program for the three County Airports to the State Department of Transportation (Caltrans). This report, required by Caltrans for State funding of projects, details all planned projects, their costs, and their primary funding sources.

The majority of Airports Division capital projects are funded with Federal or State monies with some local funding required. For FY 1999-00, the Department has planned and the Board of Supervisors has approved projects totaling $420,000 in cost. Though some Federal or state reimbursement might be forthcoming, at this time the source of funding for these projects is the Airport Enterprise Fund. Besides these projects, Roads & Airports Department staff report other potential projects that may require funding from the Airport Enterprise Fund. However, at the time of this report, those other projects had not yet been approved by the Board of Supervisors.

General Fund Contributions

In September 1990, the Santa Clara County Board of Supervisors directed its management audit staff to update its previous analysis of County General Fund contributions to the County’s airports. This analysis disclosed that $3,576,824 had been appropriated by the General Fund for the acquisition and development of the three County airports through FY 1987-88.

A review of County accounting records, financial reports, audit reports and budget documents from FY 1989-90 through FY 1998-99 conducted as part of this management audit determined that no payments have been made by the Roads & Airports Department since the 1990 review. Therefore, the balance of $3,576,824 remains owed to the General Fund by the Airport Enterprise Fund.

It should be noted that this $3,576,824 balance is separate from the Airport Enterprise Fund’s two outstanding loans from the General Fund. Repayment of those two loans, which amount to $168,000 annually, is included in the Airports Division’s annual budget. As of June 30,1999, the outstanding loans are as follows:

$483,693 for the Airport Toothman leasehold purchase in 1992 at Reid-Hillview Airport. Annual payments are $48,188 and the last payment is June 30, 2014. This loan accrues interest at a rate of 5.5 percent.

$746,777 for the purchase of Nunno & Port-A-Port leases at Reid-Hillview Airport. Annual payments are $119,788 and the last payment is June 30, 2007. This loan accrues interest at a rate of 8.0 percent.

Analysis of Airport Enterprise Fund Balance

Table 1.5 presents some of the major elements of the Airport Enterprise Fund included in the Comprehensive Annual Financial Report (CAFR) issued by the County Treasurer-Controller annually and audited by the County’s outside independent auditor. As shown, the Fund had a cash balance of over $2 million as of June 30, 1999 and has averaged approximately $1.3 million in unrestricted cash over the last four fiscal years. Total liabilities were approximately $1.6 million as of June 30, 1999, including approximately $1.2 million owed to the General Fund for the loans discussed above. Liabilities have averaged approximately $1.8 million over the last four fiscal years.

Table 1.5 also shows that the Department’s retained earnings have changed significantly over the past four years from ($426,000) in June 1996 to a positive $772,561 as of June 30, 1999, prior to year-end adjustments by the County’s independent outside auditors. These monies can be used for any purpose designated by the Board of Supervisors. Unrestricted cash has increased from $822,000 in June 1996 to just over $2 million in June 1999.

Table 1.5

County of Santa Clara

Independent Audit of Airport Enterprise Fund*

	June 1996	June 1997	June 1998	June 1999
Unrestricted Cash	$822,000	$816,000	$1,583,000	$2,043,000
Total Liabilities	1,839,000	2,025,000	1,786,000	1,578,250
Retained Earnings (Deficit)**	(426,000)	(280,000)	89,000	772,561

* Audit performed by County outside independent auditor annually and shown in Comprehensive Annual Financial Report issued by the County Treasurer-Controller.

** Retained Earnings is the cumulative change of profit and loss resulting from operations.

As discussed above, the Airports Division will need $420,000 this fiscal year for capital projects. Barring any future reimbursement from Federal or state sources, the Airport Enterprise Fund’s cash balance will be the funding source for these projects. If all $420,000 is used for these projects, the Airport Enterprise Fund would still have approximately $1,623,000 left in its unrestricted cash balance available for other purposes ($2,043,000 - $420,000). With this level of unrestricted cash, the Airports Division is in a position to provide a one-time immediate payment to the General Fund in excess of the payment amount already scheduled for FY 1999-00 for the Department’s loans from the General Fund. This would reduce the Airports Division’s loan interest expenses and it would provide more cash than anticipated this year for the General Fund. Beyond FY 1999-00, the Division is in a financial position where it could appropriate an amount annually to complete accelerated pay off of its General Fund loans and then begin repaying the contributed capital from the General Fund.

A payment amount of $400,000 in FY 1999-00 would substantially reduce the Airport Division’s General Fund loan debt and could be made without adverse consequences to the Airport Enterprise Fund or Division operations. Since the Division is recovering its operating costs through its operating revenues, none of the $2,043,000 in unrestricted cash is needed for operations. For capital projects, $420,000 worth of projects have been approved so far by the Board of Supervisors for FY 1999-00. If any additional projects are approved by the Board of Supervisors this year, they could still be funded out of the remaining $1.6 million in unrestricted cash. For future years, the Airport Division’s financial position would allow for annual payments of at least $75,000 per year for accelerated loan pay off and repayment of contributed capital.

A $400,000 payment would accelerate repayment of the Department’s loan from the General Fund that is being paid back with 8.0 percent interest. This would save the Department interest expense, since the Department is accruing 5.5 percent interest in the County commingled account or 2.5 percent less than the interest owed on the loan.

It should be noted that other outstanding monies are expected to be collected by the Department in the near future, including:

$56,000 for fuel flowage payments that have not been collected as discussed in Section 4 Fuel Flowage Revenues.
An undetermined amount in disputed gross hangar revenues from an FBO.
Lease revenue of an undetermined amount from the Roads Fund for the South County Yard property located on the South County Airport as further discussed in Section 5.

Further, if the recommendations contained in this report are adopted, the Airport Enterprise Fund should increase its net profits potentially allowing increased annual payments to the General Fund. Therefore, the $400,000 recommended one-time payment and ongoing annual payments of $75,000 should have relatively less impact over time as the Airports Division increases its revenues based on implementation of the recommendations in this report.

Conclusion

In August 1989, the Santa Clara County Board of Supervisors directed the Administration to develop recommendations for the Airport Enterprise Fund that would eliminate losses and repay the General Fund an estimated $3.6 million for General Fund capital and operating contributions to the Airports. As of June 30, 1999 the Airports Division has eliminated reliance on the General Fund but has not repaid any monies owed to the General Fund.

The Airport Enterprise Fund is annually achieving net profits and has an unrestricted cash balance of over $2 million. Setting aside $420,000 in funds for capital projects that have been approved by the Board of Supervisors for this fiscal year, the Airport Enterprise Fund could still make a one-time payment of $400,000 to accelerate repayment of the Department loan from the General Fund and have unrestricted cash left over. Additionally, a payment plan could be established for the Airport Enterprise Fund to annually fund a budget appropriation to repay the General Fund for its contributions to the Airports.

Recommendations

It is recommended that the Board of Supervisors:

Adopt a policy directing the Roads & Airports Director to take the steps necessary to achieve operating profits at Palo Alto and South County Airports;
Direct the Director of Roads and Airports to make a one-time lump sum payment amount to the General Fund of $400,000 for accelerated loan repayment and to begin repayment to the General Fund of the $3,576,824 owed for contributions made between FY 1960-61 and 1973-74 and never repaid;
Direct the Director of Roads & Airports to prepare an annual payment plan starting in FY 2000-01 of at least $75,000 per year to complete an accelerated loan pay off and for repayment of the $3,576,824 in General Fund contributions in the Division’s annual budget.

Costs and Savings

The implementation of these recommendations would result in the Airport Enterprise Fund saving interest expenses by accelerating payment of its loan from the General Fund and would begin the return of the contributed capital to General Fund for prior year capital and operating subsidies.