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

7. Palo Alto Airport Agreement

• The County is not well positioned to enhance its revenues from the Palo Alto Airport. The agreement with the City of Palo Alto, which expires in approximately 17 years, restricts non-aviation development, caps the number of tie-downs allowed, and requires City approval and conditions on any development. County financing of new hangar construction is not a prudent option either as the agreement allows the City to take possession of all airport assets at the end of the 17-year term. This means that if the County financed construction of new hangars, the City would have the right to take possession of them and their revenue after the County incurred the full costs of constructing them.

• The Department should attempt to renegotiate the lease with the City of Palo Alto to allow for revenue-enhancing development at Palo Alto Airport or cost sharing for new hangar construction. The Department should explore terminating the lease and transferring the Palo Alto Airport back to the City of Palo Alto if the City of Palo Alto will not renegotiate the lease. If neither of these options seems feasible, the Department should consider reducing staffing at the Airport to lower costs and eliminate the deficit.

Palo Alto Lease History and Provisions

In June 1967 the County and the City of Palo Alto entered into an agreement under which the County leased the Palo Alto Airport property from the City of Palo Alto. The lease provides for a term of 50 years, through 2017, and a payment of $25 for the entire term of the lease. Under the provisions of the lease, the City of Palo Alto retains architectural control over all projects at the Palo Alto Airport, and must approve all development. Further, all revenue from the Palo Alto Airport must be utilized for the operation, maintenance and capital improvement of Palo Alto Airport only, with the exception that the County may use net revenues from the Palo Alto Airport to reimburse the County for expenditures made for construction and maintenance at Palo Alto Airport. If the Airport operates at a deficit, on the other hand, it is the County’s responsibility to make up the difference from moneys in the Airport Enterprise Fund.

Financial Performance of Palo Alto Airport

Palo Alto Airport operated at a loss in Fiscal Years 1997-98 and 1998-1999 and the losses were covered by the Airport Enterprise Fund. Table 7.1 details the financial performance of the Palo Alto Airport over the past four years:

Table 7.1

Palo Alto Airport

Adjusted Revenues and Expenditures*

						FY	FY	FY	FY
						1995-1996	1996-1997	1997-1998	1998-1999
Revenues
	Aircraft Storage					$288,688	$298,178	$316,097	$316,280
	Lease Revenue (FBOs)					114,077	92,188	92,870	88,096
	Fuel Flowage					24,742	22,541	15,897	62,921
	Transient					7,548	11,769	11,837	13,983
	Other Facility Revenue					3,667	5,562	2,676	3,186
Total Operating Revenue						$438,722	$430,238	$439,377	$484,466
Expenditures
	Salaries & Benefits					$223,508	$271,206	$298,021	$282,076
	General Administration					165,730	76,936	94,031	100,703
	Aviation Services					46,336	41,618	81,766	124,497
	County Overhead					18,500	18,500	18,500	18,500
	County Overhead					(79,206)	(1,089)	(11,688)
	Depreciation					19,236	19,170	19,251	19,251
Total Operating Expenditures						$394,104	$426,341	$499,881	$545,026
Net Operating Income (loss)						$44,618	$3,897	($60,504)	($60,560)

*Excludes one-time Federal and State funding and unusual, one-time adjustments to County overhead. Includes County depreciation and other minor adjustments to expenditures.

Aggregating Palo Alto Airport’s Net Operating Income for the last four fiscal years shows that the Airport has lost a total of $72,549 over the past four years. Given the opposition by the City of Palo Alto to aircraft storage or commercial development at Palo Alto Airport reported by Department staff, it is difficult to see how its revenues can be increased to alleviate the burden on the Airport Enterprise Fund and to provide funds to compensate the Airport Enterprise Fund for past obligations.

It is not clear what advantage for the County, or the Department of Roads & Airports, exists in leasing and operating the Palo Alto Airport. By the terms of the lease, detailed above, the Palo Alto Airport cannot contribute to the revenues of the Airport Enterprise Fund, because all revenues must be retained at Palo Alto Airport. At best Palo Alto Airport contributes nothing, and in years in which Palo Alto Airport loses money, the Airport Enterprise Fund must make up the deficit. For the past two years, this has meant using surplus revenues generated at Reid-Hillview Airport.

In the case of new hangars, the cost of their construction would be the sole responsibility of the County under the terms of the agreement with the City. But at termination of the agreement in 2017, the City has the right to take possession of all airport assets. This could mean that if the County financed new hangars at Palo Alto Airport, it could bear the full costs of their construction and related debt service and then the City could take possession of these assets and enjoy the revenues from them without having contributed to their costs.

A previous audit determined that the Palo Alto Airport owed money to the Airport Enterprise Fund for past overages. The balance owed by the Palo Alto Airport to the Airport Enterprise Fund currently stands at approximately $1 million, and is not being paid.

In addition, the Department is currently accepting bids on a capital improvement project at Palo Alto Airport to make upgrades to the runway, taxiways and other aviation facilities. According to Department staff, the Department’s share of this project, after a contribution from the Federal Aviation Administration, will be $275,000. These funds are not available from the net revenues of Palo Alto Airport, and therefore must most likely be financed by the Airport Enterprise Fund, reserves or the General Fund. In theory these funds can be reimbursed from future net revenues at Palo Alto Airport, but given that the City of Palo Alto has not allowed further development at the Palo Alto Airport, it is difficult to see how the revenue generation of Palo Alto Airport will improve to the extent necessary to provide this funding.

Lease Renegotiation or Termination

The Department should examine possibilities for re-negotiating the lease with the City of Palo Alto to provide a more flexible scheme for commercial development or other forms of revenue enhancement (such as new hangars) and the possibility that positive financial results at Palo Alto Airport would benefit the Airport Enterprise Fund as a whole. Cost and/or revenue sharing for new hangar construction should also be considered. In the absence of such an adjustment to the lease governing operation of Palo Alto Airport, it is difficult to find a reason why the Department should not explore the possibility of turning the airport back over to the City to allow the City to operate it directly.

Another possibility is to terminate the lease. County Counsel has reported that terminating the lease and returning the airport to the City of Palo Alto has a number of potential legal ramifications, some of which could result in legal liability of the County to the Fixed Base Operators at Palo Alto Airport. In addition, it is not clear whether the Airport Enterprise Fund would be able to collect funds provided previously for the Palo Alto Airport, including past deficits and capital improvement projects.

Therefore, it appears that a renegotiation of the lease, allowing the Department greater scope for development and revenue enhancement, would be a preferable course of action. It may not be possible, however, to do anything until the Palo Alto Airport lease expires in 2017.

Cost Reduction

An alternative to modifying or terminating the lease would be to reduce costs at Palo Alto Airport by reducing staff. Currently there are three Airport Operations Workers at Palo Alto Airport. Elimination of one of these positions would save between $59,490 and $63,455 per year in salaries and benefits, depending on the seniority of the Airport Operations Worker in question. This amount would alleviate the deficit at Palo Alto Airport based on the amount over the past four years. Another option for reducing costs would be for the Department to discontinue its use of overtime. In Fiscal Year 1998-1999 the Department spent $13,696 on overtime to cover shifts left vacant by workers on vacation, calling in sick, or otherwise absent. Not covering empty shifts could alleviate some of the deficit at Palo Alto Airport.

Either of the alternatives would result in some shifts at Palo Alto Airport remaining unstaffed. Because there are no hangars to maintain at Palo Alto, however, it appears that fewer staff are required there than at Reid-Hillview Airport.

Recommendations

It is recommended that the Roads and Airports Department:

7.1 Attempt to renegotiate the lease with the City of Palo Alto to allow for revenue-enhancing development at Palo Alto Airport, including cost and revenue sharing for new hangars;

7.2 Determine the advantages and disadvantages of terminating the lease and transferring the Palo Alto Airport back to the City of Palo Alto if the City is unwilling to renegotiate the lease;

7.3 Reduce the staffing level at Palo Alto Airport, by eliminating one Airport Operations Worker position at the Airport and/or no longer covering empty shifts using overtime.

Costs and Benefits

Renegotiating or terminating the lease could result in stemming further draws on the Airport Enterprise Fund to cover shortfalls at Palo Alto Airport. As discussed above, however, terminating the lease could result in legal liability to the Fixed Base Operators at Palo Alto Airport and the loss of any claim to repayment of funds paid in the past by the Airport Enterprise Fund to cover budget shortfalls and capital projects at Palo Alto Airport. The elimination of an Airport Operations Worker position at Palo Alto Airport would result in annual savings of between $59,490 and $63,455. Not using overtime to cover empty shifts at the Airport would result in annual savings of approximately $13,696.

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Last updated on 3/26/02