Report 2001-107 Summary - October 2001

Port of Oakland: Despite Its Overall Financial Success, Recent Events May Hamper Expansion Plans That Would Likely Benefit the Port and the Public

HIGHLIGHTS

Our review of the Port of Oakland's (Port) financial statements for the past 10 years and its past and future capital improvement projects revealed that:

RESULTS IN BRIEF

The Port of Oakland (Port) is an independent, self-supporting department of the city of Oakland charged with managing and operating a seaport, a passenger and cargo airport, and the waterfront real estate in and around the Oakland Estuary. Over the past decade, its effective administration of these properties resulted in an increase of its overall operating income from $4.4 million in fiscal year 1990-91 to $47 million in fiscal year 1999-2000.1 It is now in the process of planning and implementing a $1.7 billion capital improvement program that includes substantial expansions of both its seaport and airport. This program should not only enable the Port to remain financially competitive but also benefit the public.

Separate revenue divisions are responsible for managing the Port's maritime, aviation, and commercial real estate activities. In recent years the maritime and aviation divisions have contributed to the Port's successful performance, but the real estate division has struggled. The maritime division's management of its resources has been particularly effective: Over the past 10 years it almost doubled its revenues, while its operating expenses increased by slightly more than half. The maritime division's implementation of two important capital improvements-renovating one of its terminals and deepening the channel accessing the port-contributed to its ability to remain competitive with comparable seaports. Although significant delays did occur in the regulatory approval process of the dredging project, the maritime division consistently maintained a reasonable amount of revenue to cover its debt service during the construction. To continue to ensure its competitive position, the maritime division recently implemented its capital improvement program, which includes constructing two new ship terminals, new roads, a rail-freight transfer terminal, and a waterfront recreational park as well as deepening the channel from 42 feet to 50 feet. A feasibility study suggests that projected revenues should be adequate to cover the debt associated with funding these projects.

Similar to the maritime division, the aviation division has significantly increased its operating revenues during the past 10 years, and it has nearly doubled the number of passengers using the Oakland airport. This growth is particularly noteworthy considering that the number of scheduled flights serving Oakland has often fluctuated during this period. Although its past capital improvements have been relatively small projects, the aviation division is in the process of planning a substantial expansion of its facilities, including new terminal buildings, roads, and a parking structure. This expansion should benefit the public by relieving traffic congestion and enabling the airport to better serve an increasing number of passengers. Yet, despite the variety of funding sources identified in the initial feasibility study, the aviation division has recently met with a number of setbacks. A new internal review determined that it had significantly underestimated the cost of the expansion, a problem that may be compounded by a recent court decision ordering it to prepare a new supplemental environmental impact report before beginning construction on affected capital improvement projects. Moreover, the terrorist attacks on September 11, 2001, will almost certainly have a significant impact on the airline industry, the consequences of which are difficult to predict.

As mentioned, the Port's real estate division has not shown the same financial growth as the other two. Together, the maritime and aviation divisions have generated roughly 89 percent of the Port's revenues over the past 10 years, while the real estate division generated the remaining 11 percent. In fact, the real estate division has consistently operated at a deficit during this time. Its losses appear to be the result of the real estate division's inability to control high maintenance costs for its properties in Jack London Square, some business decisions that turned out badly, and the Port's decision to use the real estate division to provide benefits to the public that has further exacerbated the division's poor financial situation. In effect, the real estate division has subsidized nine public benefit projects by leasing eight properties for $1 a year and one property for $490 per year. The real estate division plans to improve its profitability but has not yet taken significant action. Although it is currently proposing several large capital improvement projects, the division does not intend to move forward with these plans unless the developers are willing to provide the necessary funding, thus ensuring that the real estate division will not acquire more debt.

RECOMMENDATIONS

To reduce the effect of the commercial real estate division's losses on the Port's operations as a whole, the division should do the following:

AGENCY COMMENTS

The Port feels that our report will provide the State with the critical information needed to evaluate its value and impact. The Port also feels that it is taking steps to implement our recommendations.