"Palm Springs Airport future is looking better"

Monday, October 18, 2004

Airport's future is looking better 
Cost cutting helps boosts airport's financial health
By Pat Maio
The Palm Springs (CA) Desert Sun


PALM SPRINGS -- When Richard Walsh reported for his first day on the job as
aviation director at Palm Springs International Airport in February, he must
have wondered if the number crunchers were using smoke and mirrors to make
everything add up. 

After all, on the surface everything looked rosy. 

The year-over-year percentage growth of passengers boarding planes on a
monthly basis at the valley airport is double the national figure, and bed
taxes charged to hotels are hovering at their highest levels in four years
-- a sign that the local $1 billion tourism market was recovering. 

Walsh reckoned things were looking up. But the books showed something
different.

In its fiscal year ending June 30, preliminary reports from the airport
showed a $10.1 million operating budget with a deficit of $120,000. But by
the time preparation for the current $12 million budget was under way, the
deficit had grown an additional several hundred thousands of dollars. 

Among other things, the biggest financial drain has been the airport's
contributions to California's pension fund, the California Public Employees
Retirement System, or CalPERS. Airport contributions have nearly doubled in
the past year to $1.15 million. 

The city, which operates its budget separately, has seen similar
budget-busting problems due to CalPERS, and is a principal reason for its
$2.6 million projected deficit this fiscal year in its general fund, said
Tom Kanarr, finance director for Palm Springs.

CalPERS contributions are expected to rise 86 percent to $7.44 million this
fiscal year versus the just under $4 million last year, Kanarr said. "It's
painful when we get the bill." 

The airport's CalPERS payments are expected to grow 104.2 percent from
$567,018 in its fiscal year ended June 30, to a projected $1,158,014 in the
current fiscal year, according to airport records. 

The rising cost of payouts to shore up pension funds is part of a growing
crisis nationwide. 

In California, pensioners received a windfall in 1999 when a bill sponsored
by CalPERS increased retirement benefits but resulted in ballooning costs to
local governments during the economic downturn. 

Consequently, said Walsh, "We went into a deficit because our expenses were
exceeding our revenues." 

The final airport budget for last fiscal year won't be known for another
month, as the airport usually leaves books open for a few months after the
fiscal year ends to pay bills and accrue revenues. "We simply don't have the
numbers nailed down yet," Kanarr said. To be sure, as things have turned
out, a slight surplus is anticipated due to measures taken by Walsh to turn
things around.

In his first months on the job, Walsh has recommended layoffs, higher
parking fees, selling airport property, refinancing $60 million in bonds,
and revising downward overly optimistic budget forecasts for passenger
traffic this year and next.

Walsh said the revisions won't affect record passenger traffic projections
at the airport of 1.35 million this year and 1.45 million in 2005.

"Some of the forecasts used to develop budgets were out of sync with
reality. Everything is predicated on passenger growth," he explained.
"Emplanements (or the number of passengers boarding planes), were projected
to grow 12 percent in 2004 over the previous year. That's unrealistic,
though we have been growing at a 9.36 percent clip over the first eight
months." 

Emplanements nationally have averaged a 4.6 percent growth rate in the first
eight months compared to the same year-ago period, according to the Air
Transport Association. 

Palm Springs International has dodged the bullet on route cuts by the
struggling major airlines while big city airports have been forced to
stomach the losses.

"We are seeing more permanency in the valley, which should contribute to
increased demand," Walsh said.

Indeed, Palm Springs is seeing resurgence among some airlines wanting to
expand service, including United Air Lines, Horizon and WestJet, Canada's
discount air carrier. The carriers are coming even while security screening
costs are rising.

For instance, the airport spent down its reserve fund on security
improvements required by the Transportation Security Administration
following the 9/11 attacks.

The combined rise in expenses across the board forced Walsh to react quickly
early in his tenure. "The staff had a bead on what was right and wrong. We
had to get our finances in order," he said.

After performing a so-called "SWOT" analysis of the airport's "Strengths,
Weaknesses, Opportunities and Threats," he identified plans to slash nearly
$700,000 in expenses through layoffs and raising fees for short- and
long-term parking. An increase in parking fees is expected to generate an
additional $225,000 annually for airport operations. 

To date, roughly 10 airport workers have been laid off, yielding half of the
targeted savings, and leaving roughly 54 employees working for the city's
aviation department. The jobs eliminated have ranged from secretaries to
that of Richard Strickland, the airport's marketing head who had actively
sought the director's job when it opened up last year with the retirement of
Al Smoot.

There also are plans to replace seven union janitors at the airport with a
private janitorial service, bringing another possible savings of up to
$160,000 in wages and benefits. 

"In today's environment, it's ludicrous to think of taking the lowest paid
workers in the city and laying them off," said Mark Reid, business
representative for the Service Employees International Union, Local 700, and
who is the voice for the janitors and 300 other Palm Springs city workers.

Reid worries an outside janitorial vendor could pose security risks. "Think
what a custodial worker could potentially do. You're adding a security risk.
The workers there now have been there a long time, and they are reliable,"
Reid said. 

Meanwhile, Walsh has raised cash by selling property. 

Several months ago, even before Palm Springs was publicly putting the skids
on plans to sell the wastewater treatment plant to the Desert Water Agency
for $27.5 million, the airport was selling the land underneath the plant to
the city for $5.8 million, its appraised value. 

The money has already changed hands, though the fate of the sale of the
40-year old wastewater plant in east Palm Springs won't be known until the
March vote by Palm Springs residents. 

The airport is losing $400,000-a-year in rental income from the city, but
the proceeds will be spent well, Walsh said. Kanarr agreed.

"If we didn't do something, the numbers would have gotten out of balance
significantly," Kanarr said. "It gave the airport a big slug of desperately
needed cash." 

For instance, the airport is in the process of refinancing the airport's $60
million worth of municipal bonds by the end of the year in order to replace
restrictive bond covenants requiring the airport to keep a $2.1 million
reserve fund -- or operating revenues at 125 percent of total expenses. "The
only way to get there is raise rates to airlines to land here, and that
becomes a downward spiral," Kanarr explained.

In addition, a portion of the land sale proceeds will be used to match
federal grants that the airport is seeking to construct new security
screening checkpoints, doubling the current number, and lessen the amount of
time passengers stand in lines, Walsh explained.

Construction on these checkpoints begins in April thanks to a $6.5 million
grant from the Federal Aviation Administration. Another federal grant of
$6.5 million is expected next summer to transform the airport's central
courtyard into a desert oasis.

The process to refinance the $60 million worth of bonds actually began under
Smoot while interest rates were sinking to 40-year lows, but the trigger to
lock on those rates never got pulled. "We missed that opportunity," Walsh
said.

Smoot, the airport's former director, declined to be interviewed. "I retired
over a year ago. I haven't been involved for over a year and don't know what
they're doing," Smoot said when reached for comment on the financial
condition of the airport.

"Al Smoot was fortunate to be director when there was more revenue. But now
times are more tough in the post-9/11 environment," said David Ready, city
manager of Palm Springs. "He's doing a very good job and making the airport
more efficient," said Ready of Walsh's performance.


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