Smith et al. v. City of Santa Monica, California – No. 16-16-02
FAA Docket No:
16-16-02
Author:
Shannetta R. Griffin, Associate Administrator for Airports
Complainant(s):
Mark Smith; Kim Davidson Aviation, Inc.; Bill’s Air Center, Inc.; Justice Aviation, Inc.; National Business Aviation Association, Inc. (“NBAA”); Aircraft Owners and Pilots Association, Inc. (“AOPA”)Respondent(s):
City of Santa MonicaAirport(s):
Santa Monica Airport (SMO)
History:
Director’s Determination (11/8/19)
Holding:
Reversed as to Finding of Violation of Grant Assurance 25 (Revenue Use Policy); Affirmed in All Other RespectsAbstract:
Complainants—airport tenants and organizations with members who were aviation users of the airport—argued that (1) airport revenue had been diverted through insufficiently documented alleged loans totaling $16 million from the City to the airport and that the City charged excessive interest thereon in contravention of 49 U.S.C. § 47133 and Grant Assurance 25; (2) the landing fee structure at the airport was flawed, resulting in excessive and unjustified fees; (3) a non-aeronautical user, Santa Monica College (“SMC”), paid below-market rent for non-aeronautical property; and (4) the City refused to extend the leases of aeronautical tenants beyond month-to-month holdover terms and adopted short-term leasing policies. (Director’s Determination, p. 1.)
In response, the City asserted that the loans made to the airport were “valid, enforceable and adequately documented,” the landing fees met “legal standards,” and its “New Leasing Policy” mooted Complainant’s claims concerning short-term leases. (Director’s Determination, p. 1.) The City “acknowledges that the FAA could find … that the City has charged SMC less than [fair market value (FMV)] for its use” of airport property but proposed a corrective action plan on this one matter. (Director’s Determination, p. 1.)
Airport Revenue and Loan Documentation
As to the first issue relating to airport revenue and loan documentation, the Director noted that the FAA Revenue Use Policy requires loans to airports to be clearly documented and that the record in this case showed numerous instances of insufficient documentation. (Director’s Determination, p. 6.) This included agreements lacking signatures, no stated or documented interest rate, no substantive terms to validate the transaction, backdating, no loan instrument for claimed transactions, and recent documentation “superseding” earlier documentation. (Director’s Determination, p. 6.) The Director also found changes in interest rate on entire balances without adequate justification, together with a lack of information on principal repayments. (Director’s Determination, p. 6.) In addition, some agreements were characterized as grants and were not clearly documented as interest-bearing loans as required. (Director’s Determination, p. 6.) In other cases, “reimbursement” of contributed funds on loans was inappropriately sought on loans entered into more than 6 years earlier in violation of the FAA Revenue Use Policy which states that “an airport owner or operator can seek reimbursement of contributed funds only if the request is made within 6 years of the date the contribution took place.” (Director’s Determination, p. 6.)
The City claimed that its independent auditor prepared annual financial reports that showed that advances were loans from the City’s general fund to the airport fund. (Director’s Determination, p. 6.) The City further argued that the Comprehensive Annual Financial Reports evidenced loans because they showed a “payable” item to the airport and that “formal loan agreements” were not required and that “contemporaneous documentary evidence of an expectation of repayment” is enough documentation to show the advances were loans. (Director’s Determination, pp. 6-7.)
These arguments were rejected by the Director, however. The Director concluded that the Annual Reports did not show the advances were interest-bearing loans at the time they were made nor did they show any terms of the loans. (Director’s Determination, p. 7.) The Report, standing alone, simply did not satisfy the “clearly supportable and documented” standard required to establish loans, according to the Director. (p. 7.) In all, the Director found that the alleged loans to the airport were insufficiently and improperly documented and failed to satisfy the requirements of loans under the Revenue Use Policy. (Director’s Determination, p. 7.)
In all, the Director found that (1) the City’s documentation concerning certain contributions and loans made to the airport were inadequate to establish they were interest-bearing loans and thus the City was in noncompliance with respect to those loans; (2) the City’s landing fees methodology and rates did not reflect the actual use of the airport and thus compliance with Grant Assurance 22 and Grant Assurance 24 could not be established; and (3) the corrective action plan concerning charges below FMV rents to the college needed to be supplemented. (Director’s Determination, p. 8.)
Below FMV Rents
As to the second issue relating to below FMV rents to Santa Monica College in violation of Grant Assurance 25, the Director concurred with the Respondent that the leasing agreement between the City and the college was not consistent with the City’s federal obligations but found that the City took proactive steps to correct the situation by submitting a corrective action plan, which was generally consistent with correcting the situation. (Director’s Determination, p. 10.) That said, the Director ordered the City to provide additional information showing (1) whether any similar occurrences had taken place with non-aeronautical users at the airport and (2) how to prevent any future occurrences. (Director’s Determination, p. 10.)
Next, the Director evaluated the Complainant’s allegation that in 2013, “with virtually no opportunity for public review or input, and with constantly changing supporting materials, the City adopted a resolution nearly tripling Airport landing fees and imposing them for the first time on both based and transient aircraft.” (Director’s Determination, p. 11.) Complainants added that “the justification for the imposition of these landing fees stems primarily from artificial Airport deficits created by the revenue diversion alleged supra, as well as by... additional financial manipulation.” Complainants assert that “the landing fees are ...facially unreasonable” and “contrary to Grant Assurance 22.” (Director’s Determination, p. 11.)
In response, the City argued that it had the right to establish by ordinance a compensatory landing fee that recovered from the operators of aircraft using the airport and for the capital and operating costs of building, improving, maintaining, and operating the airport. (Director’s Determination, p. 10.) The City added that the 2013 landing fees “meet[] applicable legal standards,” and that they were calculated in accordance with well-accepted principles of compensatory rate-setting. (Director’s Determination, p. 10.) The City explained that the landing fees were “calculated to recover all of the City’s capital and operating costs allocable to the airfield cost center after crediting the airfield rate base with certain airfield revenue,” and that the “net airfield costs were then divided by total landed weight, yielding a landing fee rate (per thousand pound unit) to be paid by each aircraft operator using the airfield.” (Director’s Determination, p. 11.) As variables, the City referred to its Cost Allocation Plan, cross-crediting, airfield cost center elements (other aviation revenues), amortization charges, area square footage, project useful life, and landing weights, among others. (Director’s Determination, p. 11.)
According to the Director, the City’s explanation for its landing fee structure and rate-setting methodology was now obsolete. (Director’s Determination, p. 11.) Following a 2017 Settlement Agreement, significant changes had occurred at the airport, including changes to the airport’s infrastructure, use, planning and funding requirements. (Director’s Determination, p. 11.) This had a significant effect on how the airport was used, in terms of number of and types of aircraft. (Director’s Determination, p. 11.) Relevant factors include the reduction of the runway length from 5,000 feet to 3,500 feet, expanding non-aviation uses and related revenues (and how these are applied), changes in the airport’s fleet mix, distinctions between based v. transient users, changes in budgets and forecasts, and an 80% reduction in jet operations. These direct and indirect changes impact many of the variables presented by the City as justification in its methodology. (Director’s Determination, p. 11.) Consequently, the City’s original justifications for an increase in landing fee from $2.07 to $5.48 per 1,000 lbs. landing weight (an increase of 264%) or, as the City documented, a 500%+ increase in landing fees revenues from 2012 into 2013 and beyond, were based upon obsolete baselines and calculations. (Director’s Determination, p. 11.)
In all, it was unclear to the Director (1) how some non-airfield costs (i.e., certain amortization charges, non-aviation improvements) appear to have been improperly bundled as part of the cost recovery justification for the landing fees; (2) how some non-landing fee revenues were accounted for; (3) how substantial amounts of interest costs on debt were incorrectly charged; and (4) how other charges had been allocated, raising additional issues that now require further consideration in setting landing fees. (Director’s Determination, p. 11.) Because the City’s justification for its landing fee methodology and rates did not reflect current and actual costs and use of the airport, and some of the methodology was unclear, compliance with Grant Assurances 22 and 24 could not be established. (Director’s Determination, p. 11.) Therefore, the Director ordered the City to update its methodology and fees to reflect current and actual costs in the use of the Airport and in accordance with FAA guidance. (Director’s Determination, p. 11.)
Lease Renewals and New Leases
Finally, Complainants argued that lease renewals and new leases had been delayed unreasonably and without justification and that “the City’s proposed short-term leases are unjustified and plainly illegal.” (Director’s Determination, p. 11.) Complainants argued that the City had established “short-term leases of less than three years’ duration for commercial aeronautical tenants, without any cognizable justification” and that the City has denied new leases and imposed month-to-month lease terms on aeronautical airport tenants, also without any cognizable justification. (Director’s Determination, p. 11.)
In response, the City stated that “‘given the unique circumstances,’ the City had struck an appropriate middle-ground by permitting aeronautical tenants to remain on the Airport, but exercising its discretion not to enter into leases that could extend beyond the date that the City was obligated to operate the Airport as an airport.” (Director’s Determination, p. 12.) The City added that its New Leasing Policy, dated March 22, 2016, mooted the claims by Complainants. (Director’s Determination, p. 12.) In 2018, the City updated this leasing policy. (Director’s Determination, p. 12.)
Complainants’ arguments, including the multiple references to the applicable federal requirements and policies, were sound, according to the Director, but only within the context of the conditions which existed before the 2017 Settlement Agreement. (Director’s Determination, p. 12.) For example, short-term leases are generally not reasonable in most cases where lessees have made investments in the facilities, the Director noted. (Director’s Determination, p. 12.) The Director reasoned that the relevant terms and conditions contained in the 2017 Settlement Agreement effectively mooted Complainants’ allegations on this issue. (Director’s Determination, p. 12.) The 2017 Settlement Agreement specifically stated that:
- “leases offered to all tenants providing aeronautical services shall be on reasonable terms and in substantially the same form” and that ... “the City shall offer all current tenants providing aeronautical services leases of no less than three (3) years with reasonable terms appropriate to the aeronautical service” and taking into account tenant investment and financing requirements.
Appeal—Affirmed, in Part, and Reversed, in Part
On appeal, the Associate Administrator affirmed and reversed the Director’s Determination, in part, as follows.
• First, the Associate Administrator agreed that the City transfers from 1988 to 2002 did not qualify as loans or interest-bearing loans under the Revenue Use Policy because they were not clearly documented as loans when the contributions were made. (Final Agency Decision, p. 9.) Moreover, the claims were made after the statute was enacted and the Revenue Use Policy was published, and the transfers were not documented as loans until over 6 years after the publication of the Revenue Use Policy. (Final Agency Decision, p. 9.)
• Next, the Director determined that the relevant loan/grant agreement documentation for each of the three City transfers was made within months of the transfer and therefore “reasonably contemporaneous” to establish the transfers as loans. (Final Agency Decision, p. 10.) However, the Revenue Use Policy does not discuss a “reasonably contemporaneous” standard for documentation, and the Director did not explain the “reasonably contemporaneous” standard or how he arrived at the standard. (Final Agency Decision, pp. 10-11.) Rather, the Revenue Use Policy requires the contribution to be “clearly documented as a loan at the time it was made.” Under the circumstances in this case, then, the Associate Administrator found that documentation completed 3 months after could not be construed to be completed at the time the contribution was made and she reversed the Director’s Determination, finding that certain transfers were not structured as loans at the time the transfers were made; therefore, the City could not seek reimbursement beyond 6 years. (Final Agency Decision, p. 11.)
• Third, the Complainants argued that the Director, in determining the amount of interest owed to the Airport on a $2,414,000 transfer, incorrectly used the City’s proposed recalculation of interest rather than the actual interest paid by the airport. (Final Agency Decision, p. 13.) And, indeed, a review of the pleadings and the determination indicated that while the Director correctly determined these transfers were not loans and that the City improperly charged interest, the Director did inadvertently use the City’s “Recalculation of Balance Due on Loans from the City’s General Fund to the Airport Fund” rather than the actual interest payments made by the Airport to the City. (Final Agency Decision, p. 13.) Therefore, the Associate Administrator found that the Director’s calculation of interest owed on the $2,414,000 transfer to the airport was incorrect and ordered the City to submit to the FAA an accounting of the relevant interest payments and provide a repayment schedule for the interest and principal overpayment plus interest. (Final Agency Decision, p. 13.)
• Finally, both the Complainants and the City appealed the Director’s Determination on the landing fee methodology. According to the Associate Administrator, however, the Director correctly explained in his analysis that due to the significant changes at the airport, the City’s justification for the landing fee structure and rate setting methodology is obsolete, compliance could not be established, and the City must update its methodology. (Final Agency Decision, p. 13.) Additionally, the Director summarized these changes to include, “the reduction of the runway length from 5,000 feet to 3,500 feet, expanding non-aviation uses and related revenues (and how these are applied), changes in the airport’s fleet mix, distinctions between based v. transient users, changes in budgets and forecasts, and an 80% reduction in jet operations.” (Final Agency Decision, p. 15.) As such, the Associate Administrator affirmed the Director’s decision on this and removed the discussion of the landing fee methodology from the corrective action plan. (Final Agency Decision, p. 15.) That said, “[t]he Associate Administrator reminds the City that it has committed to updating its landing fee methodology. Furthermore, failure to do so could result in future action under 14 CFR Part 16.” (Final Agency Decision, p. 15.)