UNITED STATES DEPARTMENT OF TRANSPORTATION

FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C.

Friends of the East Hampton Airport, Inc. et al.

,

Complainants,

v.

Town of East Hampton, NY

Respondent. FAA Docket No. 16-15-02

________________________________________

DECLARATION OF ARTHUR B. MALMAN IN SUPPORT OF THE ANSWER OF THE

TOWN OF EAST HAMPTON, NEW YORK TO THE COMPLAINT BY FRIENDS OF

THE EAST HAMPTON AIRPORT ET AL.

________________________________________

I, Arthur B. Malman, being competent to make this statemen t and having personal knowledge of the matters set forth herein, do swear and affirm the following:

BFAC Airport Finance Subcommittee Overview

1. My name is Arthur Malman. I am the Ch air of the Town of East Hampton (Town) Budget and Financial Advisory Committee (B FAC), a position I have held since 2011.

2. The BFAC is a standing advisory committee with the stated purpose of examining “ways in which the Town can reduce costs and spending so as to reduce property taxes and ways to improve the budgeting process for capital projects as we ll as track and account for existing projects.” The BFAC has six member s drawn from the public ; a member of the

Town Board acts as liaison to the Committ ee. Councilwoman Kathee Burke-Gonzalez has been the Board liaison to the BFAC since January, 2014.

3. At the February 4, 2014, Town Work Session, Councilwoman Burke-Gonzalez

announced the intent of the Boar d to direct the BFAC to c onduct a financial analysis of the East Hampton Town Airport (Airport) incl uding Airport income and expenses as well

as new revenue. See Exhibit 1 (February 4, 2014, Town Work Session Minutes). The purpose of the analysis was to enable th e Town to determine how much funding wasDECLARATION OF ARTHUR B. MALMAN

2 available to meet anticipated Airport e xpenses, including debt service on bonding for Airport capital improvements. A copy of Councilwoman Bu rke-Gonzalez’s remarks is

attached as Exhibit 2

.

4. On February 6, 2014, the Town passed Resolution 2014-147 ( Exhibit 3 ) directing the BFAC to “undertak[e] a financ ial analysis of the East Ha mpton Town Airport including airport income and expenses as well as ne w revenue streams, which can serve as a baseline of agreed upon data for further disc ussions and policy decisions by the Board.”

5. The Town identified additional community me mbers who had been previously involved with airport matters to assist the BFAC in this process. Collectively, this group is known as the BFAC Airport Finance Subcomm ittee (Subcommittee). The Subcommittee meetings are open to the public , albeit sparsely attended.

6. The mission of the Subcommittee is to anal yze existing Airport operating expenses and foreseeable capital and maintenance needs in order to determine whether the Airport could generate sufficient cash flow to fund neces sary capital projects without resorting to federal funding. The Subcommittee was not di rected to examine what those capital projects should be.

7. As one of its first steps, the Subcommitt ee gathered information about the Airport’s existing finances, including existing revenue st reams, in order to conduct a debt capacity analysis that would determine how much mone y the Airport could raise to pay for capital improvements and other foreseeable expenses. The Subcommittee focused on the past five years of Airport financial data.

8. The Subcommittee also reviewed informa tion about anticipated future expenses, primarily capital expenses, as determined by the Town Board. This information included, for example, the 2014 Airpor t budget approved by the Town Board in

November 2013. See Exhibit 4 (Resolution 2013-1216, adopting 2014 Budget); Exhibit

5 (Approved 2014 Budget).

9. The Town Board had also approved, on December 3, 2013, the 2014-2018 Airport Capital Improvement Plan (ACIP) ( Exhibit 6 ), which identifies capital projects that are reflected in the current Airport Layout Plan and have completed environmental review pursuant to the New York State Environmenta l Quality Review Act (SEQRA). The total projected cost of th e projects included in the approve d ACIP is approximately $5.26

million.

10. In addition to the ACIP, an additional $5.19 m illion in capital costs were contemplated by the Town for the Airport. Those projects ha d been initially included in the draft ACIP, but were ultimately withdrawn because they we re not yet contained in the Airport Master Plan and had not yet undergone environmen tal review under SEQR A. Those projects were listed on an expanded Airport Maintena nce Plan (AMP) that totaled almost $5.2

million. See Exhibit 7 (December 3, 2013, Town Work Session Minutes, ACIP and AMP).DECLARATION OF ARTHUR B. MALMAN

3 11. During the time the BFAC performed its analys is of the Airport’s finances and made its initial recommendations, the Town was moving forward to approve many of the projects on the ACIP and AMP. These projects included the following:

a. The Town completed rehabilitation of th e lighting on Taxiway “A,” which was funded with a bond in the amount of $353,600.

b. The Town completed repair work on Runway 4-22 for use as a taxiway, which was funded with bonds totaling $360,000.

c. The Town hired an engineering firm to review all of the airport’s capital projects.

d. The Town began moving forward with a project to resolve airspace obstructions that have been identified by the FAA as posi ng problems for aircraft on instrument landings.

Progress Report No. 1 and the Preliminar y Debt Capacity Analysis (April 26, 2014)

12. On April 26, 2014, the Airport Finance Subc ommittee produced a Preliminary Debt Capacity Analysis and an initial Progress Report. ( Exhibit 8 ). The purpose of this report was to evaluate the financial implications for the status quo ( i.e., without any additional capital expenditures). The Preliminary De bt Analysis focused on both revenue and operating expenses to evaluate how much debt the Airport could take on.

a. The Subcommittee did not independently a ssess how much money the Airport would need. It simply considered how much m oney the Town could raise with existing

revenue streams.

b. The Subcommittee considered four revenue and expense scenarios based on different assumptions of the number of aircraft ope rations. One scenario was the status quo which assumed no change in revenues due to decreased aircraft operations.

c. The Subcommittee also considered the need for the Airport to retain sufficient fund balances (reserves) to address unfores eeable contingencies and expenses.

d. In preparing the Preliminary Debt Capac ity Analysis, the Subcommittee consulted with all BFAC Airport Finance Subcommittee members, the Town Finance Department, Airport management and othe r Airport stakeholde rs, including both fixed-base operators (FBOs).

13. It is common practice in the financial industr y to base a debt capacity analysis on conservative, i.e ., the least aggressive, assumptions . The Subcommittee followed this practice and used conservative assumptions in creating the April 26 Preliminary Debt Capacity Analysis.DECLARATION OF ARTHUR B. MALMAN

4 14. For example, the Subcommittee assumed that re venue would remain at consistent levels, and would only increase in line with historic trends. Acco rdingly, for purposes of the Preliminary Debt Capacity Analysis, the Subcommittee assumed that the fuel flowage fee, which had remained at $0.15 for almost two decades, would remain at that level.

15. Similarly, the Subcommittee assumed that the landing fee woul d increase at only a

moderate level. After revi ewing historic landing fees, BFAC member Peter Wadsworth recommended that, for the purpose of calculatin g debt capacity on a conservative basis,

the Subcommittee should assume that landi ng fees would increase annually by only 5%.

16. The results of the April 26 Preliminary Debt Capacity Analysis showed that under the four revenue scenarios examined, the exis ting Airport net opera ting revenue could support the debt service on between $5.1 and $8.5 million of tax exempt bonds over the next five years (2014-2018). In the scenarios examined, the Airport fund balance dropped from a starting fund balance of approximately $1.6 million to ending fund balances as of year-end 2018 in the range of $1.25 to $1.4 million. These conclusions were subject to the significant caveat that a dditional fund balances might be required for a variety of contingencies, including “s easonal variations in cash flow, economic downturns, emergencies, consulta nts’ fees and litigation.”

17. Ultimately, the Subcommittee concluded from th e results of the Debt Capacity Analysis that the existing revenue stream would be unlik ely to meet the Town’s goal of making the Airport operationally self-sustain able and supporting a robust capi tal plan to ensure a safe and properly-maintained facility without additional revenues from new and existing sources, as was made clear in the May 20 presentation to th e Town Board. Accordingly,

the Subcommittee announced in the April 26, 2014, Preliminary Debt Capacity Analysis that it already had “begun to explore reve nue enhancement opportuni ties such as paid parking, increased fuel flowage f ees and increased lease revenues.”

18. The Subcommittee transmitted its Progress Report and the Preliminary Debt Capacity Analysis to the Town Board on May 5, 2014 (t he transmittal letter is attached as Exhibit

9 ) and formally reported these findings at the Town Board Work Session on May 20,

2014. See Exhibit 10 (May 20, 2014, Subcommittee Presentation); see also Exhibit 11 (Transcript of May 20, 2014, Town Work Session).

19. Ultimately, the Subcommittee identified a numbe r of potential ways to increase revenues, including parking fees, increased rents, deve lopment of Airport property, and increasing existing fees. The Subcommittee decided to focus initially on increasing existing fuel flowage and landing fees because the fee increase would increase revenues almost immediately with no initial expenses while the other measures would not yield revenues for many months or even years and/or would require initial investments:

a. The Subcommittee had been studying the entire issue of fuel operations at the Airport and, as part of that study, realized that th e fuel flowage fee had not increased for over 20 years while fuel prices tripled and that the Airport fuel flowage fees were lowerDECLARATION OF ARTHUR B. MALMAN

5 than several other airports where the Air port both owned and operated the fuel farm and bought and inventoried the fuel.

b. The Subcommittee also reviewed prior landing fee increases at th e Airport. In the period from 2006 to 2008 (when Airport mana gement realized that revenues to maintain the Airport needed to be increased to maintain the Airport if FAA grants were not being sought) the land ing fees were substantially increased at the Airport, especially for the larger aircraft. However from 2008 to 2013, with the national

economic turmoil and discussion in the Town about possibly seeking FAA grants, the increases for certain larger aircraft were more modest. For example:

% increase Type of Aircraft 2006 2008 2013 ’06-08 ’08-13 Corp/Rev Multi Engine Turbine over 12,500lbs $100 $200 $250 100% 25% Corp/Rev Multi Engine Turbine over 25,000lbs $150 $300 $375 100% 25% Large Cabin Class Helicopters * $100 $350 $400 250% 25%

*In 2006 these were classified as either Mult i-Engine Turbine-$50 or Multi-Engine Turbine 12,500 lbs or more-$100

Fuel Flowage Fee Increase

20. As part of its work, the Subcommittee analyzed fu el flowage fees at the Airport. Fuel is a major expense at the Airport, but with a fuel flowage fee of 15 cents a gallon, is only a minor source of income for the Airport. The Airport owns and operates the fuel farm and purchases all aviation fuel. The two FBOs buy aviation fuel from the Town. The FBOs

then resell the fuel to their customers at reta il prices they set, and pay the Town for the cost of the fuel plus the Town’s fuel flowage fee.

21. We were not given information about the FBO’ s profits from fuel and had no information on their actual costs. However, we could compute their estimated gross profit margins from prices they paid the town for fuel and sales at full retail. We then assumed an average discount of 50 cents pe r gallon to reflect the $1 pe r gallon discounts for based aircraft and information we got from out side sources on the probable discount arrangements on national acc ounts sales and direct sales to larger users. Finally we compared this with the information we were assembling from outside sources on the fully loaded average costs of delivering fuel from the farm to the ultimate customer.

22. We have been studying not only possible increase s to the fixed fuel flowage fee but also if it should be replaced by other formulas ba sed on a fixed percentage of gross profit and alternative operating arrangements for fu el operation and these studies continue

23. When we began our work, the fuel flowage f ee at the Airport was 15 cents per gallon, a level first set over 20 years ago in 1992.DECLARATION OF ARTHUR B. MALMAN

6 24. While the Subcommittee assumed a fuel flowage fee of 15 cents for purposes of conservatively calculating debt capacity, it also began assessing a future increase in the fuel flowage fee as a means of ge nerating additional needed revenue

25. One of our subcommittee members, Munir Sa ltoun conducted substantia l on-line research on other airports and talking with vari ous airport managers and other industry professionals about fueling, landi ng fees and other aspects of airport operations. One of the people he contacted was Steve Tibbets, who was then a senior manager of Eastern Fuel, but also had managed several airports in Rhode Island and provided to us much operational information and contac ts with other industry people.

26. On March 27 th , we had a meeting at the Airport with various stakeholde rs including Steve Tibbets, Cindy Herbst of Sound Aircraft and Dave Peterson (representing the two FBOs), Jim Brundige, the then Airport Manager, and Subcommittee members Munir Saltoun,

Peter Wadsworth and me.

27. At the March 27 meeting, we discussed ma ny of the items Cindy Herbst and I had previously discussed at a one -on-one meeting, but the discus sion was focused on fuel and the fuel farm. Tibbets thought his company might supply fuel somewhat cheaper to the Airport and suggested that th e fuel contract be sent out for competitive bidding through an RFP—and such savings could be passed on to aircraft owners in whole or in part. Cindy Herbst was adamant that she wanted the Town to stay with the Airport’s present supplier, AvFuel. We explained that Easter n had substantially the same FBO and Airport incentives as AvFuel. I believe that during this meeting (someone, it may have been our Airport Manager) said something to the effect of: Rather than fighting about AvFuel and fueling operations that the Town should just increase the fuel flowage fee by 15 cents.

28. On April 11, 2014, I participated in a tele phone conference with Subcommittee members Munir Saltoun and Bonnie Krupinski, Jim Brundige, Dean Hornig from Avfuel Corporation (the current fuel supplier at the Airport), and Ci ndy Herbst to address fueling operations and the fuel farm at the Airport. During the call, we discussed many options, including increasing the fuel flowage fee. Because the FBOs resell fuel purchased by the Airport, often at a mark-up, we also discusse d ways that the FBOs and the Airport might share in the profits of fuel sales. AvFu el would not discuss pricing on its national contracts but we subsequently got most of the FBO averages from other industry sources.

29. We attempted to gather information about the FBOs’ margins and profits to understand how we might structure a profit sharing system, but the FBOs were reticent to divulge proprietary information.

30. The Subcommittee was already discussing an increase to 30 cents in April 2014. Ultimately, the Subcommittee concluded that the increase would be a conservative revenue enhancement. Among the reasons for recommending this specific increase, the Subcommittee considered the following:DECLARATION OF ARTHUR B. MALMAN

7 a. The fuel flowage fee had not been increased in over 20 years, although the FBO leases clearly stated that the Town could change the fee at any time.

b. An economic analysis prepared for the Town in 2002 already recommended raising the $0.15 fuel flowage fee. See Exhibit 12 (2002 Economic Analysis).

c. The Subcommittee reviewed fuel flowage fees at other east coast airports and concluded that a $0.30 fee was comparable with existing rates at those facilities which also had the relatively unusual syst em of the airport paying to build and operate the fuel farm and buying a nd carrying the fuel inventory.

31. At the May 17, 2014, Subcommittee meeting, Peter Wadsworth presented a draft supplemental debt capacity analysis that exam ined the effects of revenue enhancements not already included in the Preliminary Debt Capacity Analysis, including increasing the fuel flowage fee from 15 to 30 cents a gallon. See Exhibit 13 (BFAC Subcommittee Minutes, May 17, 2014). That analysis demonstrat ed that increasing the fuel flowage fee together with $500,000 of revenue enhancem ent from 2015-18 would provide sufficient debt capacity to fund approximately $6.957 millio n of capital projects and maintain at least $2.4 million in reserves as of year-e nd 2018. The draft Repor t concludes: “While the committee has not expressed an opinion on wh at would constitute an adequate level of fund balances, the resulting $2 to $3 milli on is clearly preferable to the $1.2 million under most scenarios in the Preliminary Debt Capacity Analysis, which included no

revenue enhancements and maxed out debt.” Exhibit 14 at 2 (May 17, 2014, Draft Debt Capacity Analysis).

32. At its June 2, 2014, meeting, the Subcommitt ee formally agreed to recommend an increase in the fuel flowage fee to 30 cents. See Exhibit 15 (June 2, 2014, BFAC Subcommittee Minutes).

33. At the June 3 Town Work Session, Airpor t Director Jim Brundige discussed two proposed resolutions: Resolution 2014-672 (raising the landing fees by 10%) and Resolution 2014-673 (raising the fuel flowage fee to $0.30 per gallon. Exhibit 16 (June 3, 2014, Work Session Minutes).

34. At the June 5, 2014 Town Meeting, the Town ag reed to table a Resolu tion to increase the fuel flowage fee to permit additional comment, in large part to res pond to concerns raised by Cindy Herbst of Sound Aircraft. See Exhibit 17 (Transcript of June 5, 2014, Town Board Meeting).

35. At the June 17, 2014, Town Work Session, the Subcommittee pr esented a detailed discussion on the fuel flowage fee issue to explain the basis for its recommendation to increase fuel flowage fees; I could not atte nd but saw the presentation on the video of the meeting. The Subcommittee’s presentation from that meeting is attached as Exhibit 18. A complete transcript of the June 17 meeting is attached as Exhibit 19. (Transcript of June 17, 2014, Town Work Session). Because the underlying financial basis for the proposal had been presented in the Draft De bt Capacity Analysis , the SubcommitteeDECLARATION OF ARTHUR B. MALMAN

8 focused its presentation on the reasons for: (1 ) increasing the fuel flowage fee as opposed to other revenue enhancement measures; and (2) increasing the fuel flowage fee to 30 cents. The goal of the presentation was to expl ain why that particular increase was fair to both the Town and the FBOs, who remained able to make a reasonable profit on fuel sales. This was particularly important in lig ht of the concerns raised by Sound Aircraft. Cindy Herbst also presented co mments at that meeting.

36. At the June 19, 2014, Town Meeting, the Town approved Resolution 2014-673 increasing the fuel flowage fee to 30 cents effective on July 1, 2014. The Resolution is

attached as Exhibit 20 . The full transcript of the meeting is attached as Exhibit 21

.

Landing Fee Increase

37. As part of its background research on Air port finances, the Subcom mittee also reviewed landing fee rates at East Hamp ton Airport. The Town char ges a range of landing fees based on the category and charact eristic of the particular aircraft. Historically, landing fees were increased at relatively low levels somewhat regularly. In recent history, landing fees were increased si gnificantly in 2006 and then again 2008. After a pause due to the economic downturn, landing f ees were increased again in 2013. Exhibit 22 (HTO Landing Fees, 2006, 2008, 2013).

38. Subcommittee member Munir Saltoun was task ed with analyzing landing fee data and began immediately reviewing how landing fees are calculated at similar airports. For example, Munir found that ai rports like Martha’s Vineya rd and Nantucket charged landing fees in the range of $400 to $500. As part of that research, I secured from Anthony (Tony) Ceglio, the Airport Director at Suffolk County Francis S. Gabreski Airport (Westhampton), a comparison chart of landing fees at regional general aviation airports. Exhibit 23 (Email exchanges with A. Ceglio).

39. While the Subcommittee used a conservative assumption ( i. e., 5% annual increase in landing fees) for the Preliminary Debt Capac ity Analysis, it also began, early on, to consider additional increases in landing fees as a source of additional revenue. For example:

a. In early March, we received from the Town’s consultant, DY Consultants, a comparison of future landing fee options according to “conservative, moderate and aggressive” scenarios for increasin g landing fees. This provided the

Subcommittee with a better understanding of the range of options, and suggested that there was room to raise the landing fees. See Exhibit 24 (DY Consultants future landing fee forecasts). It is im portant to note the term “aggressive” was used in a comparative sense only; we did not understand that term to mean that the higher range of land fee increases were inappropriate in any manner.

b. The Subcommittee also reviewed the eff ect on operations of past increases in landing fees. We concluded that those increases had essentially no effect on

traffic.DECLARATION OF ARTHUR B. MALMAN

9 c. At its June 2, 2014, meeting, the Subcommitt ee agreed that it was appropriate to raise landing fees by 10% annually as a revenue enhancement measure. See

Exhibit 15 (June 2, 2014, BFAC Subcommittee Minutes).

40. At the June 5, 2014 Town Board Meeting, th e Town passed a Resolution amending the landing fees. A copy of Resolu tion 2014-672 is attached as Exhibit 25

.

41. The Subcommittee has also reviewed the landing fee increases to test their effect on the ultimate consumer: the passenger in the aircra ft. The result of that analysis has been surprising in that we determin ed that it would take more than a doubling of landing fees

to have the customer see a 10% increase in the cost of his charter. To reach these

conclusions we reviewed the fees char ged by BLADE for the Manhattan to East Hampton trip, and the fee of $5-6,000 for six person jet charter from Richmond, Virginia, to East Hampton for our comparisons.

Further Revenue Enhancement Measures

42. The Subcommittee has monitored the effect of the 2014 fuel flowage fee and landing fee increases, and we conclude that the 2014 fee increases were reason able as evidenced by the fact that both operations and fuel sa les increased in 2014 over 2013 despite these

increases.

43. Furthermore, although we have not completed our day by day analysis, it appears that, at least on the days tested so far (after the To wn increased it fuel flowage fees by 15 cents a gallon), the FBOs increased their own gross margins (based on the prices charged by the

Town to the FBOs for fuel and their published re tail prices on AirNav ) by more than 15 cents per gallon. This raises a question as to whether the Town's increase (amounting to only about 2 1/2 % of the published retail pric e to aircraft operators) had any material effect on aircraft customers – who may have actually seen a greater increase by the FBOs than called for by the fuel flowage fee increase.

44. Since the Town Board approved the fuel flowage fee and landing fee increases, the Subcommittee has continued its work to explore additional revenue enhancement measures to assure the Airport will be self -sustaining. The Subcommittee has updated its Debt Capacity Analysis sin ce the fee increases were inst ituted, and to account for the higher than projected volume of operations at the Airport. It also took into account the

substantial increases in costs for im plementing noise measures and for ongoing development of a 2015-2019 capital plan. The upda ted analysis increases the estimate of debt capacity during the 5 year forecast peri od (now rolled forward by one year to 2015- 19) for the most pessimistic scenario, wit hout considering revenu e enhancements, to about $5.6 million and predicts 2019 year end fund balances to be approximately the same as expected at the end of 2014. Thus, even with the recent fee increases, we conclude that the Airport must still pursue additional revenue enhancements to remain self-sustaining.