Table of Contents

Introduction

Section 1

Section 2

Section 3

Section 4

Section 5

Section 6

Section 7

Section 7c

Section 8

Appendix

Letter

Management Audit of the Airports Division

Airport Division Audit
12/11/99

4. Fuel Flowage Revenue

• By adhering to the policies, procedures and audit requirements recently adopted by the Roads & Airports Department, the Airports Division can maintain adequate oversight and control to ensure the accuracy and timeliness of the collection of fuel flowage fees. Hampering these efforts is the absence of language in the fuel permits detailing how payment requirements will be enforced by the Department and specifying remedies in the event of non-payment or a disputed payment.

Background

Seven of the fixed-base operators at the County’s airports have been issued permits by the County in conjunction with their lease agreements that allows them to store and sell fuel to aircraft at the three County airports. For this right, the fixed-base operators (FBOs) are required to pay a fuel flowage fee to the County based on fees included in their permits and codified in the County’s Airport Ordinances. Airport Ordinance Section B2-25, adopted by the County Board of Supervisors in March 1979, specifies the flowage fees for fuel sales to be paid by the fixed-based operators (FBO’s) as follows:

(a) Fixed-base operators or others who are lawfully permitted by the county to bring onto the airport fuel or lubricants for storage, sale, use or other distribution, shall pay the following annual flowage fees for all such fuel sold or distributed for use during the calendar year.

1. Six cents ($0.06) per gallon for the first one hundred and fifty thousand (150,000) gallons of fuel during the year

2. Five cents ($0.05) per gallon for the next one hundred and fifty thousand (150,000) gallons of fuel during the year

3. Four cents ($0.04) per gallon for each and every gallon of fuel thereafter to the end of the year

(b) All fuel pumps, whether stationary or portable shall be equipped with inspected metering devices.

Actual fuel flowage fees revenue for the three County airports, as recorded by the County Treasurer-Controller for Fiscal Years 1995-96 through 1998-99, are shown in Table 4.1.

Table 4.1

Fuel Flowage Fee Revenue at All County Airports

FY 1995-96 through 1998-99

Payment Procedures

The payment requirements specified in the FBO fuel selling permits vary. Some are required to pay the Department monthly, some quarterly, and others annually. All of the permits include language to the following effect:

"At the time of the payment of fuel flowage fees, County may require Permittee to furnish all copies of invoices, sales receipts and other records showing the amount of fuel Permittee purchased from his supplier for the requested period. County may also view all pertinent records to show the amount of fuel sold to customers during the period." (emphasis added)

Starting in 1992, FBOs began making their fuel flowage fee payments to the Roads & Airports Department’s Fiscal division to cover the number of gallons of fuel they claimed they sold in accordance with the payment schedules specified in their permits. The payment checks were deposited by the Department’s Fiscal Resources division and recorded in the County accounting system. While most reported the number of gallons sold, this information was not reported in a consistent format and was not checked by Fiscal Resources division staff. Fiscal Resources staff report that their responsibility during this time was to deposit the payments with the County Treasurer-Controller only and that the former Airport Business Manager was responsible for monitoring the accuracy of FBO payments. Prior to 1992, fuel flow payments were made directly to the Airports division.

The fuel service permits include language stating that the County may audit the books, records, and accounts of the FBOs as far as they pertain to the storage, sale, or other distribution of fuel at the airport, at any time upon request by the County, provided that the request does not unreasonably interfere with the FBO’s business. No such audits or reviews have been conducted by the Department since payments began being sent to the Fiscal Resources division in 1992. Further, summary accounting reports for management to determine if appropriate fuel flowage payments had been made were not prepared between 1992 and 1998.

In 1998, at the request of the Airports division, the Department’s Fiscal division began preparing a management report for fuel flowage showing the number of gallons reported sold and the amount received from each FBO. The Department discovered the following as a result of its 1998 report:

• One FBO had not sent a payment to the County for fuel sold for a three year period from December 1995 through December 1998. Total payments for this time period from this FBO were estimated to be $43,967.41. In March 1999 the FBO paid the County this amount plus interest.

• Another FBO had not paid the County for fuel sold since January 1995. The total payments that had not been received were estimated at $56,000. This payment has not yet been made and has become a legal issue between the Department and the FBO. The Department is working with County Counsel to resolve this issue.

Though the Department has since identified and taken action on these two prolonged cases of non-payment, both instances could have been avoided if the Department’s Airports and Fiscal Resources division staff had been regularly monitoring and reporting each FBO’s payment or had periodically conducted audits of FBO payment. Clearly, payment by two of seven of the FBOs selling fuel at the airports would not have gone unpaid as long as it did if regular tracking of payments or periodic audits were taking place.

While the 1998 review of FBO fuel flowage payments by the Department’s Fiscal Resources division clearly benefited the Department, similar summary reports containing fuel sales and payment information, itemized by FBO, have not been consistently forwarded to the Airports Division for monitoring. The Department should ensure that these reports are regularly produced and that the Airport Operations division receives them monthly to prevent similar recurrences of the above problems.

In May 1999, the Airports Division developed and sent to all FBOs a letter informing them of new reporting procedures for fuel flowage fee payments. We have reviewed these procedures and they appear to be adequate. However, the adequacy of these procedures should be reviewed by County Internal Audit who will soon begin performing FBO fuel flowage audits as discussed below. The Department should formalize these procedures by adding them to the Department’s written policies and procedures manual.

Fuel Fees at Other Airports

To determine if the Roads & Airports Department is maximizing its fuel flowage revenue, a comparison was made of the County’s fuel flowage fees rates to those charged at other regional air carrier and general aviation airports surveyed as part of this audit. The results, presented in Table 4.2 show that the median rate charged is $0.05 per gallon. This is consistent with the rates charged by the Roads & Airports Department, as detailed above, leading to the conclusion that the Department does not need to increase its rates to keep up with the airport on-site fuel sales market.

Table 4.2

Fuel Flowage Rates at Selected

Air Carrier and General Aviation California Airports

Fuel Flowage Audits

As stated above, the Department or County has not independently verified the accuracy of the fuel flowage payments received from the FBOs since 1993. Although the FBO permits give the County the right to audit the books and records for the distribution of fuel, such audits have never been performed since fuel sales were turned over to private sector FBOs at all three airports.

In May 1999 the Department contacted the County’s Internal Audit department and requested that audits be performed of the FBOs. Documents have been requested from the first FBO selected for audit. When the documents are received County Internal Audit will begin this audit. Upon completion of the first audit, County Internal Audit will be able to determine when audits of all seven FBO audits will be completed.

 Enforcement Provisions in Fuel Permits

The permits issued to the FBOs that sell fuel at the County’s airports do not include language detailing what actions the Department or County can take to enforce the payment provisions or what remedies are available in the event of non-payment or a disputed payment. The absence of such language puts the Department at a disadvantage in ensuring that it is collecting all fuel flowage fees to which it is entitled.

In the short term, adding the needed language to the permits as they are renewed is not a viable option as the permits are long term and most will not be expiring for many more years (their terms are consistent with the FBO leases with which they are affiliated). A change in the terms and conditions of these permits before their expiration would most likely require negotiation and agreement by the FBOs. Short of this, the Department will probably have to wait until the permits are up for renewal.

Recommendations:

It is recommended that the Director of the Roads & Airports Department:

1. Produce and forward monthly management reports to the Airports Division that show fuel sold and details on the accounting and collection of fuel flowage payments from the FBOs;

2. Formally adopt written policies and procedures for the accounting and collection of fuel flowage payments from the FBOs;

3. Propose to the FBOs that all fuel sales permits be amended so that all FBOs pay on a monthly basis;

4. Request County Internal Audit to perform regular fuel flowage fee audits of all FBOs;

5. Consult with County Counsel to develop a short- and long-term plan for amending the existing fuel permits to include language detailing how the payment requirements will be enforced by the County and remedies available in the event of non-payment or disputed payment by the FBOs.

Cost and Savings

The implementation of these recommendations would enable management to maintain adequate oversight of collection and accuracy of fuel flowage payments.

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Last updated on 3/26/02