FAA Finds Santa Monica in Violation of Grant Agreements

 - November 26, 2019, 10:04 AM

In a decision welcomed by industry, the FAA has found the city of Santa Monica in violation of grant assurances surrounding economic nondiscrimination and airport revenues. The agency further determined that the city could not establish compliance with a grant assurance covering reasonable rates and fees.

Specifically, the November 8 decision finds the city has not adequately documented interest-bearing loans made to the airport, its landing fees and rates do not reflect actual use of the airport, and that it needs to supplement a corrective plan surrounding the below-market rates assessed on Santa Monica College that uses airport property.

These FAA findings come in response to a formal Part 16 complaint that AOPA, NBAA, and local tenants filed against the city in 2016. That complaint alleged that the city was diverting revenues by charging principal and interest on loans to the airport without valid documentation. In addition, the interest on those loans exceeded allowable rates, it said.

The Part 16 complaint questioned the validity and amount of $16 million of loans from the city to SMO, along with the length of time surrounding the loans, as well as the interest rates. Further, the complaint called the documentation and interest computations “inconsistent with federal requirements.”

Santa Monica claimed "it is legally entitled…to be repaid for the millions of dollars it has loaned to the airport." It also claimed the loans were documented at the time they were made. The city said it would “implement a corrective action plan to recalculate the accumulated interest on its loans."

However, the FAA said, “A review of the record concerning the alleged loans made by the city show numerous instances of insufficient documentation. This includes 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.” The FAA called on the city to stop repayment of certain amounts, stop collecting on loans pre-dating 2010, and furnish documentation that the interest rates match those of other loans.

Further, the complaint cited the imposition of excessive and unreasonable landing fees on both based and transient aircraft without reasonable notice. Santa Monica contended it is permitted to charge compensatory fees and that the rates dating back to 2013 meet legal standards.

But the FAA found that the city’s justification for its landing fee methodology and rates do not reflect current and actual costs and use of the airport in light of the fact that the more recently shortened runway has changed the use and types of aircraft accessing the airport. The methodology for these charges is unclear, the FAA said, directing to the city to update its fees to reflect actual costs in the use of the airport.

Also, the industry groups alleged the city was permitting a non-aeronautical tenant—the college—to pay less than fair market rent. Conceding that the rent was below market rate, the city said it had a plan to remedy the situation. The FAA directed the city to supplement that plan with further documentation.

While the FAA largely agreed with some of the industry’s contentions, the agency did not find the city’s new leases and month-to-month structure in violation, saying that the structure is generally consistent with a 2017 “Settlement Agreement." Further, that agreement released the city from certain obligations, the agency added.

AOPA said the decision provides local tenants and operators a “morsel of good news.” The industry had faced a series of setbacks both on the administrative front through the FAA and in the courts in the myriad challenges filed in an effort to preserve the airport long-term. Most recently, the FAA determined that the city could use airport revenues to pulverize extended runway areas. 

The 2017 agreement permitted the airport to shorten the runway and ultimately close it in 2028. The Part 16 findings do not change that agreement. However, a separate lawsuit is pending before the federal district court challenging that agreement.