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    Aquarium Wants Council Rent Freeze, 29-Yr Lease Extension; Could Consume $5+ Million In LB Public Money Starting in FY07 & Beyond ($4+ Million In FY06)...While Aquarium Mgmt. Pursues Expansion Plan

    [Note: In the interest of full disclosure, in 2004 the publisher's family purchased at our expense an annual Aquarium family membership. We renewed it in 2005. Our kids love the Aquarium.]

    (September 18, 2005) -- The Aquarium of the Pacific, which City Hall assured the public would likely pay for itself, could instead consume an estimated $5.1 million in LB public money in FY 07 and beyond ($4.3 mil already budgeted in FY 06) as part of a plan (details below) floated by Aquarium management that asks the City Council to freeze the Aquarium's base rent at a sum less than half its annual bond debt payments and extend the Aquarium's lease to 2060 (currently expires in 2031) so Aquarium leadership can pursue an expansion plan.

    Although the Sept. 20 Council item is agendized as a way to "facilitate privately-funded expansion efforts," the substance of item asks the Council to agree to what amounts to an annual taxpayer bailout formula enabling Aquarium expansion...despite its inability to perform as a basically self-supporting entity originally marketed to LB taxpayers.

    In a memo presenting the proposal as a Sept. 20 City Council agenda item, City Manager Jerry Miller stops short of saying the Aquarium's latest request will make it self-sufficient:

    "It is our belief that the proposed Implementation Agreement and lease extension would greatly enhance the AoP's [Aquarium of the Pacific's] ability to conduct needed private fundraising activities which will ultimately result in the implementation of the Campus Master Plan [expansion of the Aquarium]," Mr. Miller writes, adding "It is also our belief that the implementation of the Campus Master Plan is the greatest opportunity available to increase attendance at, and provide ongoing support for the AoP, thus leading to the renewal of and reinvestment in the facility at a critical juncture in the AoP's evolution."

    City management's memo indicates the Aquarium's Board of Directors approved the terms of the "Implementation Agreement" in concept on August 25, 2005. An Aquarium spokesperson told that the board's August 25 decision was unanimous but refused to make the Aquarium's minutes available (so we don't know exactly which Boardmembers attended and what, if any, discussion(s) ensued).

    A request by us to see the Aquarium Board's minutes for the past six months was likewise refused through the spokesperson (so we don't know what discussions in previous meetings may have preceded the Aquarium's request). Despite its consumption of public money, the Aquarium, a private non-profit entity, chooses not to make its Board meetings open to the public.

    The Aquarium's Board of Directors currently includes (among others listed in full below) LB Mayoral candidate Bob Foster and 3d district Council candidate Gary DeLong.

    Responding to a request by us, Mr. Foster indicated through a campaign operative, and Mr. DeLong told us personally, that they were present at the Aug. 25 Aquarium board meeting at which the decision was made to approve the terms of the Implementation Agreement in concept.

    Mr DeLong, who joined the Board in June 2002, added: "The goal of the Board is to increase the Aquarium's financial contribution to the City and reduce the taxpayer burden."

    According to City Manager Miller's memo, Aquarium management indicates the expansion will be funded from sources other than City-issued bonds (which could mean private sources but doesn't explicitly rule out taxpayer money from state or federal sources.)

    Based on figures cited in Mr. Miller's memo, Aquarium management is now focusing on growing average annual attendance to levels that barely reach or are lower than what some originally told Councilmembers the Aquarium could expect.

    In 1995, then-Councilman, now Mayoral candidate, Doug Drummond was part of the City Council which approved selling Aquarium bonds backed by public money. The Council vote came after a City Hall-retained firm forecast that the Aquarium would likely be able to pay its debt service without a taxpayer bailout.

    In an August 1, 1995 memo to Councilmembers, signed as approved by then-City Manager James C. Hankla (subsequently appointed to the Aquarium board and LB Harbor Commission), then-Director of Financial Management Robert Torrez wrote in pertinent part:

    Construction of the proposed aquarium will be...financed by revenue bonds to be issued by the Aquarium Foundation...

    The bond issue is currently scheduled to take place in September of this year. The successful sale of bonds will depend on several critical factors including projected attendance, admission charges, market rates at the time of the bond sale and the ability to secure an investment grade credit rating. A financial feasibility report being prepared by Coopers and Lybrand addresses the first two issues. Although not complete, all indications are that revenues from operations will be sufficient to pay operating costs, annual debt service on the bonds and contributions towards a Capital Reserve Fund...

    Although bonds are solely an obligation of the Foundation, to assist the aquarium with the required debt service coverage ratio, the Redevelopment Agency has committed to provide a backup pledge of the Agency's portion of the Transient Occupancy Tax (TOT) [hotel room tax] generated within the Downtown Project Area. To achieve this, the Board of Harbor Commissioners has agreed to subordinate their claim against the TOT as called for in the Cooperation Agreement between the Redevelopment Agency and the Board.

    Given the importance of the project to the City, the importance of timely payment of the bonds to the City's general credit rating and to further enhance the marketability and credit of the bonds, the City Council is being asked to provide an additional backup pledge of the Tidelands Operating Fund (TOF)...

    The financial feasibility report, prepared by an independent firm with input from city staff, forecast (subject to a number of caveats and qualifications) roughly 1.98 to 2.1 million Aquarium visitors a year.

    Some LB residents disputed the prediction as overly optimistic, noting that Aquaria elsewhere were losing money and if LB's Aquarium really expected to be self-supporting, investors (bond purchasers) shouldn't require a taxpayer guarantee.Aquarium, Nov. 21/04
    Thanksgiving Holiday weekend, Nov. 2004. No, the Aquarium isn't always like this; we've seen it bustling...and there were people inside, a decent crowd although fewer than we expected.

    Their concerns were dismissed as negativism by naysayers.

    The Council approved marketing bonds that financed the Aquarium's construction with a City Hall pledge to, in effect, pay their debt service with public money if Aquarium revenue didn't do so. That would be done by tapping LB's hotel room tax within the downtown Redevelopment area and all revenue within the Tidelands Operating Fund (excluding existing obligations). In addition, City Hall agreed to transfer the first $1.5 million in net profit from a City Aquarium Garage to the Aquarium each year.

    Within a few years, when visitors and revenue failed to attain predicted levels and the Aquarium began threatening City Hall budgets, then-city management asked the Council to authorize refunding the original bonds by issuing new bonds. In an April 3, 2001 agendized memo, city management said the Aquarium had 1.8 million visitors in its first year of operation but "[s]imilar to the experience of all major aquariums, attendance has steadily dropped since the first year of operation. The Aquarium had 1.5 million visitors in FY 99 and 1.1 million visitors in FY 00. Recent studies concluded that the Aquarium's capacity is 1.1 to 1.4 million visitors per year. The reduction in attendance led to a corresponding reduction in Aquarium revenues."

    The primary objective of restructuring the bonds, Councilmembers were told, was to "reduce annual debt service payments" which will "defer all or a portion of principal payments for the first five years, thereby significantly reducing annual bond payments during that period...After five years, the annual debt service for the new issue will increase ($8.3 to $8.8 million)..."

    The Council approved the plan and new bonds were sold. Tucked away in the small print of the Preliminary Official Statement for the new bonds were further details: an analysis performed for the Aquarium after its original bonds were sold and visitors and revenue didn't attain predicted levels indicated that "the maximum capacity of the Aquarium may be 1.4 million visitors annually" and "to maintain a positive guest experience, the Aquarium may comfortably accommodate 1.1 to 1.4 million visitors a year." This differed from the original estimate "because it takes into account the actual floor plan of the Aquarium, traffic flow and length of guest stay and other factors to achieve a quality guest appearance."

    Exactly how this happened wasn't publicly discussed or pursued.

    City Manager Miller, who wasn't City Manager in 2001, acknowledges this scenario in his current memo to Councilmembers in less specific terms. "It became apparent at that time that the physical layout of the Aquarium could not accommodate the 2.2 million visitors it was projected to draw. Since that time, an operational and capacity analysis has been conducted which determined that the Aquarium could reasonably accommodate 1.46 million visitors annually. The capacity analysis revealed that the AoP could not achieve attendance levels necessary to generate sufficient revenues to cover operating costs and the bond payments," Mr. Miller writes.

    In his Sept. 20, 2005 memo, Mr. Miller tells the Council "it was anticipated [in April 2001] that the City would likely have to participate in the bond payments to an undetermined level, depending upon attendance and projected increases in unrestricted donations" and the subsequent 9/11/01 terrorist attacks "severely impacted both attendance and donations, resulting in the need for immediate participation by the City to cover the debt service payments."

    But both before and after 9/11/01, LB City Hall was pursuing a tidelands trust land swap of major commercial footprints at the Pike to facilitate that development, claiming publicly that the Pike would create a "critical mass" to support the Aquarium (which wasn't meant to be a stand alone attraction, LB officials said).

    Four years after the terrorist attacks, neither city management nor current Aquarium management suggest "critical mass" from the "Pike @ Rainbow Harbor" will enable the Aquarium to become self-sufficient as originally marketed to LB taxpayers.

    Instead, City Hall and Aquarium management turned to federal taxpayers to facilitate Aquarium expansion, seeking U.S. Economic Development Administration assistance for a feasibility analysis and conceptual plan. The result is a "Campus Master Plan," Aquarium management's reason for seeking the rent freeze, lease extension and an annual taxpayer bailout formula. The new rent, fixed at roughly $3.5 million/year, is believed higher than what the Aquarium pays now but (because it's proposed to be frozen) would amount to annual rent decreases in real terms over time...and doesn't come close to servicing the bond debt that City Hall originally said the operation was expected to cover.

    What if the Council says "no"? City Manager Miller's memo says the Aquarium has "developed assumptions and projections which revealed that, without expansion, AoPís financial condition would deteriorate, possibly increasing the level of the Cityís participation in debt service payments."

    Aquarium management's plans include the following, as described in the City Manager's memo:

    "Two major expansion projects were identified and modeled to determine their prospective impact on attendance and revenues. Both proposed expansion projects, Pacific Visions and Channel Islands Experience, are designed to provide the additional capacity and generate the additional attendance needed to achieve the goal of long-term financial stability. Any such expansion is to be funded from sources other than City-issued bonds."

    City Manager Miller's memo says the Aquarium:

    "[a]pproached the City and requested lease modifications, which would serve to strengthen AoP's ability to secure donations. These requests included, among other things, a fixed lease-payment, a predicable parking revenue income stream, a predicable operations and maintenance budget and additional program reinvestment funds to be used to refresh and enhance exhibits and related programming.

    City staff and AoP staff and Board representatives have been meeting diligently over the past few months to better understand, analyze, verify and support the basis, findings and recommendations of the CMP ("Campus Master Plan" [expansion plan]). To that end, the City Manager hired an independent consultant to assist staff in comparing the AoP to industry standards. The Cityís consultant determined that the AoP operates within the range of operational ratios of its peers in many of the comparative categories. Among its peers, the AoP has the second highest number of visitors per square foot and the highest earned income ratio.

    City management's memo says that on August 25, 2005, the Aquarium's Board of Directors approved the terms of the Implementation Agreement in concept, the significant terms of which are:

    • AoP shall pay $3,528,000 in annual base rent, applied to the bond payments. In the event that actual parking revenues are less than the amount budgeted by AoP, AoP may utilize the budgeted amount, as approved by the City, in its calculation of rent.

    • Pre-expansion: City has first priority on net revenue, after annual base rent, in an amount equal to any shortfall in parking revenue. .

    • Post-expansion: City has first priority on net revenue as above. AoP has second priority on remaining net revenue, up to $500,000, adjusted for inflation, for Program Reinvestment. The remaining net revenue is to be shared equally between City and AoP.

    • The Lease is proposed to be extended to 55 years to 2060, from its current expiration in 2031.

    • City Hall, at its option, may require performance and material bonds on all phases of construction.

    • No phase of construction shall begin until 75 percent of the dollars have been received, to the satisfaction of the City.

    • The City agrees to an Operating and Maintenance annual budget of 5 percent of revenues through 2015, 6 percent from 2016 through 2024, and 7 percent from 2025 through at least 2030.

    • All construction projects shall be subject to the Cityís standard permitting process.

    • The AoP will develop an Investment Policy for Restricted Funds. The City Manager will participate in the selection of future Presidents or Chief Executive Officers, and be briefed on the annual performance review of the President or Chief Executive Officer.

    City Manager Miller's memo concludes:

    It is our belief that the proposed Implementation Agreement and lease extension would greatly enhance the AoPís ability to conduct needed private fundraising activities which will ultimately result in the implementation of the Campus Master Plan. It is also our belief that the implementation of the Campus Master Plan is the greatest opportunity available to increase attendance at, and provide ongoing support for the AoP, thus leading to the renewal of and reinvestment in the facility at a critical juncture in the AoPís evolution.

    Fiscal impact:

    With the approval of the Implementation Agreement, it is estimated that the Cityís portion of the debt service payments will be $4,382,000 (net bond payment of $7,910,000 less $3,528,000 paid by AoP) in FY 06 and $5,196,000 (net bond payment of $8,724,000 less $3,528,000 paid by AoP) in FY 07 and beyond. This amount is included in the FY 06 budget in the Tideland Fund (TF)...

    The Sept. 20 agenda item is not designated time sensitive. "City Council action is requested on September 20, 2005 to allow AoP to start its capital campaign to raise revenue for its first expansion," City Manager Miller's memo says.

    Reaction is pending as we post. Developing.


    Listed below from the Aquarium's website is its Board of Directors, indicated current as of July 21, 2005. Because the Aquarium has refused to make the minutes of its August 25 board meeting public, we do not know who among the individuals below (with the exception of Messrs. Foster and DeLong who confirmed their attendance) were present or what they may have said at the August 25 meeting that approved in concept the terms of the "Implementation Agreement" that has now reached the City Council.

    The Aquarium website doesn't indicate the years in which the individuals below joined the Aquarium board. We know (because we asked him) that Mr. DeLong joined the board in June 2002.

    Mr. Howard Chambers, Chairman
    Mr. Josť Collazo
    Mr. Stephen Conley
    Mr. Gary DeLong
    Mr. Edwin Feo
    Mr. Bob Foster
    Mr. Ronald Gastelum
    Mr. Gerald L. Good
    Mr. James Gray* [honorary Board member]
    Ms. Jennifer Hagle, Board Secretary
    Mr. James Hankla
    Mr. Roy Hearrean
    Mr. Russell T. Hill
    Dr. E. Jan Kehoe, Co-Vice Chairman
    Mr. Samuel King
    Mr. Steven Mayer
    Dr. Mario Molina
    Mr. Luther Nussbaum
    Mr. Stephen Olson, Former Chairman
    Mr. Douglas Otto
    Ms. Carmen O. Perez
    Mr. Dennis Poulson
    Ms. Lynne M. Preslo, R.G.
    Mr. Christopher Rommel
    Dr. Jerry R. Schubel
    Mr. Marvin J. Suomi
    Mr. Thomas Turney, Co-Vice Chairman

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