Section 1
· The Airport has expended approximately $75.5 million on its Runway Reconfiguration Program. However, only $14.4 million was specifically appropriated, including the $5.0 million currently on reserve, for Runway Reconfiguration Program funding by the Board of Supervisors prior to the expenditure of such funds. The remaining $61.1 million was expended from Commercial Paper proceeds without specific Board of Supervisors appropriations to the Runway Reconfiguration Program. The Airport initially contended that the legislation authorizing the use of commercial paper to fund capital improvement projects is so broad that any capital improvement project may be funded regardless of whether the Board of Supervisors has appropriated funds for a particular capital improvement project. The Airport is currently attempting to locate and provide to the Budget Analyst specific Board of Supervisors legislation establishing appropriation authority.
· Before May of 2002, the Airport did not submit its construction-related professional services contracts having a term in excess of ten years, or anticipated expenditures of $10 million or more, to the Board of Supervisors for approval because it relied on the oral advice of the City Attorney's Office that such approval by the Board of Supervisors was not required under the Charter. The Charter excludes construction contracts from the requirement for Board of Supervisors approval, but the Airport also excluded professional services contracts related to such construction contracts. In May of 2002, the City Attorney issued an opinion clarifying the intent of the Charter, providing that prospectively, all professional services contracts meeting the monetary and duration provisions of Charter Section 9.118 require approval by the Board of Supervisors. The Airport has complied with the City's Attorney's opinion. Two contracts, one with URS Corporation for the EIR/EIS and one with ADEC for geotechnical studies, incurred expenditures in excess of $12.5 million and $27.6 million, respectively, without Board of Supervisors approval of such contracts.
· The current outstanding principal balance on the 29 bond issuances authorized under the 1991 Bond Resolution is $4,967,410,000, and the total debt service payments, including interest and principal on a debt retirement schedule ending in 2032, is $8,025,323,961. The Budgeted Debt Service payment for FY 2002-2003 is $290,000,000, or 54.4 percent of the Airport's Operating Budget of $533,315,225.
· The Airport has not presented to the Board of Supervisors a comprehensive project plan or Long-term Capital Plan that includes the Runway Reconfiguration Program, such as would be provided under a Capital Improvement Program. Airport project proposal for the Runway Reconfiguration Program. Despite this omission, Airport staff assumed that funding for the ADB was on a capital project basis, rather than on an annual operating budget basis.
Airport Revenue Bonds
Sections 9.107 and 4.115 of the City Charter provide for the issuance of revenue bonds in general, and Airport revenue bonds specifically, as follows:
Section 9.107: Revenue Bonds
The Board of Supervisors is hereby authorized to provide for the issuance of revenue bonds. Revenue bonds shall be issued only with the assent of a majority of the voters upon any proposition for the issuance of revenue bonds, except that no voter approval shall be required with respect to revenue bonds:
4. Authorized and issued ... for any Airport-related purpose and secured solely by Airport revenues;
Section 4.115: Airport Commission
* * * * * *
Subject to the approval, amendment or rejection of the Board of Supervisors of each issue, the Commission shall have exclusive authority to plan and issue revenue bonds for airport-related purposes.
1991 Revenue Bonds
The Board of Supervisors approved Resolution No. 34-92 in January of 1992, authorizing the first issuance of San Francisco International Airport Second Series Revenue Bonds (the 1991 Bond Resolution) in the not-to-exceed principal amount $225,000,000. Following Issue 1, which was officially dated March 1, 1992, in the original principal amount of $222,620,000, and which has since been refunded, there have been a total of 28 additional revenue bond issuances, including Issue 29. According to the Official Statement for Issue 29, Issue 29 Revenue Bonds in the amount of $156,975,000 were issued on January 22, 2003.
Exhibit 1.1, extracted from the Airport's Official Statement for Issue 29 Bonds, shows that exclusive of the Issue 1 Bonds, which have been refunded, and exclusive of the Issue 29 Bonds, the total original principal amount of the bonds outstanding as of December 1, 2002, was $4,967,410,000, and the outstanding principal as of December 1, 2002, was $4,323,005,000.
Exhibit 1.2, also extracted from the Official Statement for Issue 29 Bonds, shows the Airport's Debt Service Schedule. As depicted, subsequent to issuing the Issue 29 Bonds, which were used to refund Issues 2, 3, and 4, the Total Scheduled Debt Service is $8,025,323,961.
Prior to the enactment of the 1991 Bond Resolution, the City had authorized and issued $544,375,000 of Airport revenue bonds (the "1973 Resolution Bonds") for capital project purposes. The last series of the 1973 Resolution Bonds was retired in 1993. According to Airport Commission documents, the 1991 Bond Resolution was proposed and enacted to obviate some of the restrictions included in the 1973 Bond Resolution.
Subordinate Obligations: Commercial Paper Issuances
Section 2.13 of the 1991 Bond Resolution, entitled "Subordinate Obligations," permits the Airport Commission to issue bonds, commercial paper, certificates of participation, or other obligations with a pledge and security interest in the Airport "Net Revenues1" that are junior and subordinate to Issue 1 and the additional 28 issues of the 1991 Bond Resolution.
The Airport Commission, by its Resolution No. 97-146, dated May 20, 1997, (the "Master Subordinate Bond Resolution") authorized the issuance of Airport Second Series Subordinate Revenue Bonds. On the same date by its Resolution No. 97-147, the Airport Commission supplemented the Master Subordinate Bond Resolution to authorize the issuance of up to $400,000,000 aggregate principal amount outstanding at any one time of San Francisco International Airport Subordinate Commercial Paper Notes for the purpose of financing and refinancing the acquisition, construction, and development of approved Airport capital improvements, as well as paying costs of issuance and other incidental costs. The Airport Commission also authorized the issuance of a Letter of Credit of up to $435,506,850 aggregate principal amount outstanding at any one time as security for the Commercial Paper.
The Board of Supervisors approved the foregoing actions effective June 27, 1997, by its Resolution No. 620-97. On February 19, 2002, the Board of Supervisors approved a second Letter of Credit with a term from April 12, 2002 through March 31, 2006, for up to $400,000,000 aggregate principal amount outstanding for Commercial Paper to replace the previous Letter of Credit, which expired April 12, 2002, by its Resolution No. 113-02. At that time the Board of Supervisors also approved the issuance of up to $400,000,000 additional aggregate principal amount of San Francisco International Airport Second Series Revenue Refunding Bonds for the purpose of refinancing 1991 Resolution Bonds and Subordinate Bonds of the Airport Commission.
Runway Reconfiguration Program Appropriations
Table 1.1 below shows that the Airport expended $75.5 million on the Runway Reconfiguration Program during the period of program inception in April of 1999 through December of 2002. However, the Airport first requested appropriation authority specifically for the Runway Reconfiguration Program in the FY 1999-2000 Operating Budget, which commenced approximately three months after the Airport began incurring Runway Reconfiguration Program expenses. The Board of Supervisors approved the requested sums of $2,412,317 in the FY 1999-2000 Operating Budget under Project PACA47, Runway 2020, and $753,393 in the FY 2000-2001 Budget, for a total of $3,165,710. However, as shown in Table 1.1 below, the Airport expended a total of $21,565,893 in FY 1999-2000 and $34,680,321 in FY 2000-2001 when only $3,165,710 had been specifically appropriated for the project.
Table 1.1
Runway Reconfiguration Program Expenditures
Program | April 1999 - June 2000 | FY 2000-01 | FY 2001-02 | Jul - Dec 2002 | Total | Percent of Total |
Planning Studies | $4,106,396 | $3,756,120 | $1,913,665 | $148,010 | $9,924,191 | 13.1% |
Environmental Studies | 3,094,322 | 8,919,839 | 6,410,343 | 1,755,047 | 20,179,551 | 26.7% |
Marine Structures | 10,893,845 | 15,705,888 | 2,977,611 | 139,695 | 29,717,039 | 39.3% |
Pavement & Utilities | 256,890 | 598,963 | 347,164 | 37,084 | 1,240,101 | 1.6% |
Administration/ Management | 2,281,582 | 5,000,323 | 3,987,883 | 986,861 | 12,256,649 | 16.2% |
Public Information | 932,858 | 699,188 | 418,588 | 172,255 | 2,222,889 | 2.9% |
Total | $21,565,893 | $34,680,321 | $16,055,254 | $3,238,952 | $75,540,420 | 100.% |
The Airport budgeted $60,000,000 in Passenger Facility Charges (PFC1) in the FY 2001-2002 Budget (June of 2001) to provide reimbursement funding pertaining to runway reconfiguration studies. However, as shown in Table 1.1, the Airfield Development Bureau had already expended a total of $56,246,214 ($21,565,893 plus $34,680,321) prior to the effective date of the FY 2001-2002 Budget, although the amount previously appropriated by the Board of Supervisors specifically for the Runway Reconfiguration Program was a total of $3,165,710. The Board of Supervisors approved the appropriation request, but reserved the $60,000,000 "pending identification of specific projects and submission to the Finance Committee of detailed budgets for each project, including identification of contractors, estimated hours, and hourly rates."
Airport personnel, when asked to explain why such relatively small sums were budgeted in the Airport's Operating Fund when expenditures were so much larger in the Airport's Capital Budget responded by saying that the Operating Fund allocations were used to get the Runway Reconfiguration Program started. However, as shown in Table 1.1 above, the Airfield Development Bureau had already expended $21,565,893 in the period of April 1999 through June 2000, after the first appropriation request of $2,412,317 in FY 1999-2000 and prior to the second appropriation request of $753,393 for FY 2000-01, and then expended a total of $34,680,321 in FY 2000-2001. The Airport used proceeds from its not-to-exceed $400 million Commercial Paper Program to fund the Runway Reconfiguration Program during the cited periods.
The Airport requested the release of $54,387,447 of the $60,000,000 reserve of PFC1 funds in May of 2002, for the purpose of reimbursing the Airport's Commercial Paper Notes that had been used to finance the Runway Reconfiguration Program and which had been issued under the Master Subordinate Bond Resolution. The Finance Committee released the $54,387,447. The Budget Analyst report to the Finance Committee of May 29, 2002, advised that:
...the $54,387,447 in runway project expenditures from Commercial Paper proceeds was incurred between April of 1999 and March of 2002. Of this total, $12,394,375 was expended during the current FY 2001-02 from Commercial Paper proceeds for purposes the Airport intended to fund from PFC1 revenues which were appropriated but were reserved by the Board of Supervisors in the Airport's FY 2001-2002 budget. Such expenditures were incurred prior to obtaining approval from the Board of Supervisors for the release of such reserved funds.
Based on the foregoing statements, the Airport expended a total of $54,387,447 between April of 1999 and March of 2002, including $41,993,072 during the period of April of 1999 through June of 2001, which was prior to the Board of Supervisors appropriating, but reserving, the $60,000,000 PFC1 budget request for FY 2001-02. Prior to the appropriation and reservation of the $60,000,000 in the FY 2000-2001 Budget, the Board of Supervisors had appropriated a total of only $3,165,710 specifically for the Runway Reconfiguration Program. The Budget Analyst has requested that the Airfield Development Bureau provide the auditors with documentation of the appropriation authority for expending this $54,387,447 in proceeds from issuing the commercial paper notes. The Airport's Capital Finance Manager has responded by stating "The runway reconfiguration project is a capital improvement at the Airport. Therefore, the Commission may use CP [Commercial Paper] to develop and construct this project. Neither the AC [Airport Commission] Resos [Resolutions] nor the B/S [Board of Supervisors] Reso [Resolution] specify that CP may only be used for "certain" capital improvements. CP may be used to finance any capital improvement."
However, the Budget Analyst has verified with the Controller that in addition to obtaining the authority to issue bonds or commercial paper, the proceeds of all bond sales and commercial paper sales must be appropriated. According to the Controller, the ordinances approved in the early- and mid-1990's in the amount of approximately $4 billion for the design and construction of the Master Plan and other capital improvement projects provided the appropriation authority for expending commercial paper proceeds on the Runway Reconfiguration Program.
The Budget Analyst has advised the Airport's Capital Finance Manager of the foregoing facts concerning the Runway Reconfiguration Program and the issuance of commercial paper. The Budget Analyst has requested from the Airport copies of the ordinances appropriating the approximately $4 billion for Airport capital improvements and has thus far been provided with Ordinance No. 371-92, appropriating $2.4 billion for capital improvements. Ordinance No. 371-92 was approved in December of 1992.
According to the Airport's Capital Finance Manager, the Airport currently has no commercial paper debt outstanding. Further, the Capital Finance Manager reports that the Airport's authority to issue up to $400 million aggregate principal amount outstanding at any one time of its San Francisco International Airport Subordinate Commercial Paper Notes will expire on March 31, 2006.
Professional Services Contracts: Failure to Obtain the Approval of the Board of Supervisors
Another factor that limited exposure of the Runway Reconfiguration Program to the review and approval of the Board of Supervisors is that before May of 2002, the Airport did not submit its construction-related professional services contracts having a term in excess of ten years, or anticipated expenditures of $10 million or more, to the Board of Supervisors for approval because it relied on the oral advice of the City Attorney's Office that such approval by the Board of Supervisors was not required under the Charter. The Charter excludes construction contracts from the requirement for Board of Supervisors approval, but the Airport also excluded professional services contracts related to such construction contracts. In May of 2002, the City Attorney issued an opinion clarifying the intent of the Charter, providing that prospectively, all professional services contracts meeting the monetary and duration provisions of Charter Section 9.118 require approval by the Board of Supervisors. The Airport has complied with the City's Attorney's opinion. Two contracts, one with URS Corporation for the EIR/EIS and one with ADEC for geotechnical studies, incurred expenditures in excess of $12.5 million and $27.6 million, respectively, without Board of Supervisors approval of such contracts.
The Airport's Five-Year Capital Plan
The Airport Commission approved a Five-Year Capital Plan ("Capital Plan") on June 5, 2001, covering fiscal years 2000-2001 through 2005-2006. The total cost of the Capital Plan was estimated to be $1,113,013,961, including total planned expenditures of $263,468,135 for the Airfield Development Bureau for the period covered, as shown in Exhibit 1.3. However, the events of September 11, 2001, and the economic impacts on the Airport's financial condition that have occurred since the Airport Commission's approval of the Capital Plan, have caused the Airport Commission to put the Capital Plan on hold, as cited in the statement below, which is an excerpt of the Airport's Official Statement for Issue 29 Bonds:
As a result of the events of September 11, 2001, and current economic conditions, and the resulting decrease in Airport revenues, the Commission has put its Capital Plans on hold indefinitely and has cancelled or postponed all capital projects (including the renovation of Terminal 2, the former international terminal, for domestic use) that are not already in progress with the exception of certain projects related to safety and security at the Airport. Only a limited number of ongoing projects are continuing, including the AirTrain system and planning and environmental review for the potential Airfield Development program (although non-essential elements have been suspended or eliminated). The Commission does not expect the suspension, deferral or termination of any previously planned capital projects to have a material adverse effect on Airport operations.
The Airport Official Statement for Issue 29 Bonds also states "The NTMP [Near Term Master Plan] projects have all been substantially completed." Further, Airport personnel report that the Capital Plan does not include any additional NTMP projects. Therefore, additional funding for NTMP should be minimal.
As previously discussed, Exhibit 1.1 shows the total original principal amount of the Airport's Revenue Bonds outstanding as of December 1, 2002, was $4,967,410,000, and the outstanding principal as of December 1, 2002, was $4,323,005,000. Also, Exhibit 1.2 shows that the Airport's Total Scheduled Debt Service is $8,025,323,961 for the present through 2032.
In the professional judgment of the Budget Analyst, because the Airport has substantially completed its Near Term Master Plan and because of the economic and other uncertainties in the Airport's operating environment and future revenues, a prudent fiscal policy for the Board of Supervisors to implement would be to limit any additional issuances of the Airport's primary bond or subordinate obligation authority to refunding purposes only, until such time as the Airport Commission approves a new Capital Plan that is supported by sound revenue and cost estimates and that Capital Plan is presented to the Board of Supervisors for review and approval.
Annual vs. Multi-year Capital Appropriations
The Airport has requested approval by the Board of Supervisors for components of the Runway Reconfiguration Project, such as approval of a lease for the Spruce Street office space in South San Francisco and approval of FAA Airport Improvement Program grant funds. However, the Airport has not presented to the Board of Supervisors a comprehensive project plan or Long-term Capital Plan that includes the Runway Reconfiguration Project. Also, the Airport has not submitted specific appropriation requests to the Board of Supervisors for the entire $75,540,420 expended through December 31, 2002, as previously noted.
In June of 2002, the Board of Supervisors rescinded all outstanding appropriations for Airport capital projects and re-appropriated the funds for projects approved by the Board of Supervisors (Ordinance 159-02). In addition, at that time, the Board of Supervisors reserved $5.0 million for the Runway Reconfiguration Project for FY 2002-2003. The $5.0 million in reserved funds have not been released as of the writing of this report.
Airport staff assumed that Airfield Development Bureau funding was a capital project budget which remains available for expenditure until the dollars are depleted, whereas Ordinance 159-02 was a one-time appropriation for FY 2002-2003 which can only last beyond the fiscal year if it is explicitly carried forward if a portion of the project funds are encumbered. The Airfield Development Bureau Capital and Operating Budget Manager and former Deputy Director stated that the Airfield Development Bureau budget should be appropriated as a continuing capital project appropriation under which appropriations from one year would roll over into the next year.
The Budget Analyst recommends that the Airport present to the Board of Supervisors a Long-term Capital Plan which includes the Runway Reconfiguration Project. Because the Airport has not yet selected a preferred alternative for the Runway Reconfiguration Project, long term costs through construction are not currently known. Therefore the Budget Analyst recommends the continuation of annual appropriations for the Runway Reconfiguration Project until such time that the final EIR/EIS documents are completed, the preferred alternative is selected and a Long-term Capital Plan has been developed which includes the selected alternative.
Charter Authorizations for Airport Bond Issues
As previously cited, Section 4.115 of the City Charter, Airport Commission, provides for issuance of Airport revenue bonds, as follows:
* * * * * *
Subject to the approval, amendment or rejection of the Board of Supervisors of each issue, the Commission shall have exclusive authority to plan and issue revenue bonds for airport-related purposes.
The Airport's Capital Finance Manager provided the spreadsheet shown as Exhibit 1.4 to the Budget Analyst as a means of attempting to explain the funding for the Runway Reconfiguration Program. The top portion of Exhibit 1.4 shows that the Board of Supervisors approved 11 resolutions authorizing bond issuances under the 1991 Bond Resolution and one resolution under the Master Subordinate Bond Resolution (Resolution No. 620-97). The lower section of Exhibit 1.4 shows that the Airport has executed a total of 29 bond issuances under the 11 authorizing bond resolutions. For example, the Airport issued Bond Issues 2, 3, and 4 in the total amount of $280,380,000 under the authority granted by Board of Supervisors Resolution No. 871-92, adopted on October 21, 1992, in the amount of $305,000,000. Further, Resolution No. 1006-92, authorizing the sale of $2.4 billion resulted in Issues 5, 6, 8, 9, 10, 12, 14, 15, 16, 18, 21, 22, 23, 25, and 26 between April of 1994 and December of 2000.
The City Attorney has advised the Budget Analyst that the Airport's practice for making multiple issuances under a single resolution is acceptable as long as the issuance amount is not exceeded, but that the Board for Supervisors can restrict such authority by requiring, in the enabling legislation, that the Airport obtain the approval for the Board for Supervisors prior to each subsequent issue. In the judgment for the Budget Analyst, such an action may be prudent when the issuance authority is for a significant sum and the duration for the project or projects is lengthy.
An enhanced degree for oversight for Airport bond issuances by the Board for Supervisors would improve the accountability for programs costing significant sums and expose those programs to greater public scrutiny. Therefore the Budget Analyst recommends that the Board of Supervisors amend Resolution No. 34-92 (the 1991 Bond Resolution) to require that the Airport obtain the approval of the Board for Supervisors prior to each subsequent issuance under the authority granted for an initial bond issuance.
Conclusion
The Airport has expended approximately $75.5 million on its Runway Reconfiguration Program. However, only $14.4 million was specifically appropriated, including the $5.0 million currently on reserve, for Runway Reconfiguration Program funding by the Board of Supervisors prior to the expenditure of such funds. The remaining $61.1 million was expended from Commercial Paper proceeds without specific Board of Supervisors appropriations to the Runway Reconfiguration Program. The Airport initially contended that the legislation authorizing the use of commercial paper to fund capital improvement projects is so broad that any capital improvement project may be funded regardless of whether the Board of Supervisors has appropriated funds for a particular capital improvement project. The Airport is currently attempting to locate and provide to the Budget Analyst specific Board of Supervisors legislation establishing appropriation authority.
Before May of 2002, the Airport did not submit its construction-related professional services contracts having a term in excess of ten years, or anticipated expenditures of $10 million or more, to the Board of Supervisors for approval because it relied on the oral advice of the City Attorney's Office that such approval by the Board of Supervisors was not required under the Charter. The Charter excludes construction contracts from the requirement for Board of Supervisors approval, but the Airport also excluded professional services contracts related to such construction contracts. In May of 2002, the City Attorney issued an opinion clarifying the intent of the Charter, providing that prospectively, all professional services contracts meeting the monetary and duration provisions of Charter Section 9.118 require approval by the Board of Supervisors. The Airport has complied with the City's Attorney's opinion. Two contracts, one with URS Corporation for the EIR/EIS and one with ADEC for geotechnical studies, incurred expenditures in excess of $12.5 million and $27.6 million, respectively, without Board of Supervisors approval of such contracts.
The current outstanding principal balance on the 29 bond issuances authorized under the 1991 Bond Resolution is $4,967,410,000, and the total debt service payments, including interest and principal on a debt retirement schedule ending in 2032, is $8,025,323,961. The Budgeted Debt Service payment for FY 2002-2003 is $290,000,000, or 54.4 percent of the Airport's Operating Budget of $533,315,225
The Airport has not presented to the Board of Supervisors a comprehensive project plan or Long-term Capital Plan that includes the Runway Reconfiguration Program, such as would be provided under a Capital Improvement Program. Despite this omission, Airport staff assumed that funding for the ADB was on a capital project basis, rather than on an annual operating budget basis.
In the professional judgment of the Budget Analyst, because the Airport has substantially completed its Near Term Master Plan and because of the economic and other uncertainties in the Airport's operating environment, a prudent fiscal policy for the Board of Supervisors to implement would be to limit any additional issuances of the Airport bond or subordinate obligation authority to refunding purposes only, until such time as the Airport Commission approves a new Capital Plan that is supported by sound revenue and cost estimates and that Capital Plan is presented to the Board of Supervisors.
Recommendations:
The Board of Supervisors should:
1.1 Restrict appropriations of the Airport's Second Series Revenue Bond Resolution (the 1991 Master Bond Resolution) to refunding purposes only until the Airport Commission presents to the Board of Supervisors with an approved and specific Long-term Capital Program.
1.2 Continue to limit funding for the Runway Reconfiguration Program to annual appropriations in the Airport's annual operating budget until such time that the Airport presents a specific Long-term Capital Program to the Board of Supervisors.
1.3 Amend the 1991 Master Bond Resolution, Resolution No. 34-92, to require the Airport to obtain approval of the Board of Supervisors for each and every bond issuance.
The Airport Commission should:
1.4 Develop a Long-term Capital Plan and submit that plan to the Board of Supervisors for review and approval.
Costs and Benefits
By restricting any future bond issuances of Airport primary or subordinate debt to refunding purposes only until the Airport Commission approves a new Five Year Capital Plan and presents that plan to the Board of Supervisors, the Board of Supervisors would implement policy controls to prevent increases to the existing Airport debt load of approximately $4,323,005,000 without the benefit of a Capital Plan based on the Airport's current operating environment.
None of the recommendations should result in additional costs to the City.
Exhibit 1.1
Airport Revenue Bonds Outstanding (PDF)
Exhibit 1.2
Airport Revenue Bonds -
Debt Service Requirements
Exhibit 1.3
Five Year Capital Plan Summary
Exhibit 1.4
Bond Authorization and Issuance
1 Net Revenues means Revenues less Operation and Maintenance Expenses.