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CITY AND COUNTY OF SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 1390 Market Street, Suite 1150, San Francisco, CA 94102 (415) 552-9292 FAX (415) 252-0461 May 8, 2026 TO: Budget and Finance Committee FROM: Budget and Legislative Analyst SUBJECT: May 13, 2026 Budget and Finance Committee Meeting Item File Page 2 26-0393 Loan Agreement -San Francisco Zoological Society -Operations and Long-Term Financial Sustainability -Up to $8,500,000 ................................ 1 5 26-0417 Airline and Airport 2023 Lease and Use Agreement -Airzeta Co., Ltd........................................................................................................................ 9 TABLE OF CONTENTS BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 1 Item 2 File 26-0393 (Continued from May 6 meeting) Department: Recreation and Park Department (RPD) EXECUTIVE SUMMARY Legislative Objectives • The proposed resolution would authorize the Recreation and Park Department (RPD) General Manager to execute an agreement to loan the San Francisco Zoological Society (SFZS), the nonprofit organization that manages the San Francisco Zoo, for up to $8.5 million. Key Points • SFZS is projecting a two-year net operating cash deficit of $11.89 million between January 2026 and December 2027. As of June 2025, the Zoo had $9.2 million in net assets without donor restrictions and that figure is lower as of this writing due to an ongoing draw on that balance. Beginning in calendar year 2028, SFZS is projecting a net operating cash surplus due primarily to the anticipated arrival of two giant pandas and corresponding revenue increases. To cover its projected operating cash deficit between January 2026 and December 2027, SFZS has requested a loan from the City. • According to the draft loan agreement, the loan is expected to be executed in FY 2025-26 with an initial disbursement of $2.5 million. The remaining loan amounts will be disbursed in FY 2026-27 as SFZS meets various milestones, including completion of a financial sustainability plan and strategic plan. Fiscal Impact • RPD anticipates the loan will be entirely General Fund supported. Policy Consideration • No collateral secures the loan. SFZS’s ability to repay the loan will be compromised if it is not able to execute the plan to bring pandas to the Zoo, if the plan is substantially delayed, or if its actual resulting revenues are not sufficient to generate an operating cash surplus. Recommendation • Approval of the proposed resolution is a policy matter for the Board of Supervisors. BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 2 MANDATE STATEMENT City Charter Section 9.118(b) states that any contract entered into by a department, board or commission that (1) has a term of more than ten years, (2) requires expenditures of $10 million or more, or (3) any modification of such contracts of more than $500,000 is subject to Board of Supervisors approval. Charter Section 9.105 states that amendments to the Annual Appropriation Ordinance are subject to Board of Supervisors approval by ordinance, after the Controller certifies the availability of funds. BACKGROUND The San Francisco Zoological Society (SFZS), a nonprofit, has managed and operated the San Francisco Zoo since 1993 under a Lease and Management Agreement between SFZS and the City, acting through the Recreation and Park Commission. The City leases the Zoo premises, including all permanent structures, facilities, and animals, to SFZS for a term not to exceed 99 years. Under the terms of the agreement, SFZS is responsible for Zoo operations and management, all required permits and accreditations, and maintaining the Zoo in a clean, safe, and attractive condition. In exchange for these services, the City pays SFZS a management fee of $4 million annually, disbursed in monthly installments. The City remains the owner of Zoo land, improvements, and animals. The agreement is automatically extended every five years. The City and SFZS have never renewed or amended the 1993 agreement in any way, and the $4 million management fee has not increased since it was established in 1993. The Recreation and Park Commission is the City’s representative party in the agreement and is responsible for reviewing and approving certain Zoo matters such as admission fee increases, SFZS’s annual budgets, and major capital improvements to the Zoo. The Joint Zoo Committee, an advisory subcommittee of the Recreation and Park Commission made up of three Commission members, three members of the SFZS Board of Directors, and one to two animal welfare advisors, reviews Zoo matters, receives public comment, and elevates issues and actionable items to the Recreation and Park Commission. Through a motion (M24-125) passed on December 10, 2024, the Board of Supervisors directed the Budget and Legislative Analyst’s Office to conduct a comprehensive performance and management audit of the San Francisco Zoo based on a recommendation made in an October 10, 2024 report by the Joint Zoo Committee animal welfare advisors. The audit report was released on May 1, 2026 and contains 11 findings related to SFZS’s financial condition, strategic and capital planning, the Lease and Management Agreement, Zoo facilities condition and maintenance, contracting and procurement, SFZS Board of Directors oversight, worker safety, workplace culture, fiscal management and internal controls, animal care and welfare, and organizational impact and guest experience. BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 3 Plans to Bring Giant Pandas to the Zoo SFZS is currently working to bring giant pandas to the Zoo. According to Cassandra Costello, SFZS Chief Executive Officer, the technical agreement with China has not yet been executed. If the panda project is successful, two pandas would be loaned to SFZS for a 10-year period. SFZS is currently projecting the pandas will be on exhibit by the first quarter of calendar year 2028. SFZS Financial Condition and Attendance Decreases SFZS has operated with a structural deficit in its general unrestricted fund since at least FY 2018-19. Between FY 2018-19 and FY 2024-25, SFZS’s total operating revenues decreased from $22.3 million to $19.8 million, by $2.4 million or 11 percent, while operating expenditures increased from $24.5 million to $27.8 million, by $3.3 million or 14 percent. SFZS’s operating deficit grew by $5.8 million, from $2.2 million to $8.0 million, during this period. To cover its annual operating deficits, SFZS has relied on non-operating revenue sources, many of which are highly variable and one-time such as federal COVID-19 relief and estate bequests, and has also drawn on its investment reserves. The primary cause of SFZS’s growing structural deficit is decreasing attendance. Attendance-driven revenue, including admissions, retail commissions, retail sales, and parking, accounts for roughly half of SFZS’s total operating revenue. Exhibit 1 below shows total Zoo attendance between FY 1993-94, when SFZS assumed responsibility for the management and operations of the Zoo, and FY 2024-25. Exhibit 1: San Francsico Zoo Historical Attendance Source: SFZS BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 4 According to an April 23, 2026 financial forecast prepared by SFZS, SFZS is projecting a two-year net operating cash deficit of $11.89 million between January 2026 and December 2027. As of June 2025, the Zoo had $9.2 million in net assets without donor restrictions and that figure is lower as of this writing due to an ongoing draw on that balance. Beginning in calendar year 2028, SFZS is projecting a net operating cash surplus due primarily to the panda exhibit and anticipated higher attendance, with corresponding increases in revenue from admissions, retail, camps, memberships, and contributions. To cover its projected operating cash deficit between January 2026 and December 2027, SFZS has requested a loan from the City. The Performance and Management Audit of the San Francisco Zoo recommends that the Budget and Appropriations Committee consider increasing City support to SFZS on a one-time basis in FY 2026-27 and FY 2027-28, conditional upon SFZS’s demonstrated good-faith efforts to implement the recommendations in the audit report. DETAILS OF PROPOSED LEGISLATION File 26-0393 is a proposed resolution that would authorize the General Manager of the Recreation and Park Department (RPD) to (1) execute a loan agreement with SFZS for $6.5 million, with an additional $2 million in reserve, for a total loan of up to $8.5 million and (2) enter into additions, amendments, or modifications to the loan agreement that the General Manager determines, at their discretion, are necessary, in the best interest of the City, and do not materially affect the City’s obligations, payments, or benefits. The loan agreement must be “substantially similar” to the term sheet included in the legislative file for this item. The proposed resolution states that the Board of Supervisors finds it appropriate and in the public interest for the City to loan funds to SFZS. Loan Terms The proposed resolution summarizes key loan terms and conditions and states that the terms of the loan will be in accordance with a draft loan term sheet negotiated by RPD and SFZS. When the resolution was originally scheduled at the May 6, 2026 Budget & Finance meeting, the loan agreement had not yet been drafted. The resolution was continued one week to allow for the loan to be drafted. Since that time, a draft loan agreement has been added to the legislative file. The draft loan agreement terms are summarized in Exhibit 2 below. BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 5 Exhibit 2: Loan Terms and Conditions Terms and Conditions SFZS Requirements • Engage a specialized zoo strategic and financial planning consultant • Engage in a long-term visioning process with the City and other partners • Produce the following: o Financial sustainability plan, including a loan repayment strategy o Five-year strategic plan o Quarterly reports on basic outputs (attendance, efficiencies, new members, fundraising), progress on financial sustainability plan, and progress on panda project • Make immediate expense reductions of a minimum of 10 percent3 • Not take on new liabilities or animals, except for pandas, that require habitat or staffing investments unless a dedicated outside funding source is secured1 • Improve the capacity of the SFZS Board of Directors to support the Zoo: o Adequately staff the finance committee3 o Add a Board member with substantial financial management experience o Double the Board’s annual contribution goal each year and eventually reach a goal of 10 percent of SFZS’s annual operating budget3 • Achieve Association of Zoos and Aquariums (AZA) accreditation2 • Address concerns identified in the BLA Performance and Management Audit of the San Francisco Zoo • Meet specific milestones tied to release of loan funds (see Exhibit 3 below) Total Loan Amount $6.5 million, disbursed according to specific milestones (see Exhibit 3 below), with an additional $2 million in reserve. The $2 million in reserve may be loaned to SFZS after a successful AZA accreditation review in 2027 if the City determines that SFZS has made sufficient progress towards financial sustainability and its long-term goals. Loan Source General Fund or debt financing at the City’s discretion, according to the draft loan term sheet. The proposed resolution indicates the source of funds is General Fund. Interest Rate • If General Fund: City’s pooled investment rate (currently 3.7 percent) 3 • If debt financing: rate will match the City’s debt issuance and financing costs (estimated 6.5 percent) 3 Repayment Period 10 years following final disbursement of loan Repayment The City will decrease the management fee paid to SFZS. The repayment schedule will be determined once the final disbursement of the loan has occurred. Termination The City may terminate the loan at any time without cause Allowable Uses Zoo operations and work to achieve Milestones. Loan funds may not be used to acquire animal or for capital improvements Source: File 26-0393; draft loan term sheet and draft loan agreement 1 Requirement applies until SFZS is deemed financially sustainable by the Controller. 2 The San Francisco Zoo is currently AZA accredited. Its next upcoming accreditation visit will occur in spring 2027. 3 These provisions are in the loan term sheet but not in the draft loan agreement. According to the draft loan agreement, funds will be released when SFZS reaches the milestones shown in Exhibit 3 below. Prior to the start of the loan, SFZS must provide its current plans for BUDGET AND FINANCE COMMITTEE MEETING MAY 13, 2026 SAN FRANCISCO BOARD OF SUPERVISORS BUDGET AND LEGISLATIVE ANALYST 6 increasing attendance and fundraising and a loan repayment plan. One year after the start of the loan, SFZS must provide its final financial sustainability plan and five-year strategic plan. Exhibit 3: Loan Milestones Timeline Fiscal Year Funds Released Milestone Actions Prior to loan start 2025-26 $0 • Current plans for attendance and fundraising growth, expenditure reductions • Loan repayment plan Loan start 2025-26 $2.5 million • Begin visioning process with City Loan start + 3 months 2026-27 $0 • Hire consultant • First-quarter data Loan start + 6 months 2026-27 $1.4 million • Draft financial sustainability plan and draft strategic plan submitted to RPD and Controller’s Office • Second-quarter data Loan start + 9 months 2026-27 $1.3 million • Third-quarter data By March 2027 2026-27 $0 • Achieve AZA accreditation Loan start + 12 months 2026-27 $1.3 million • Final financial sustainability plan and strategic plan submitted to Joint Zoo Committee • Fourth quarter data If needed 2027-28 (anticipated) $2 million in reserve • $2 million in reserve may be released if City determines sufficient progress has been made towards financial sustainability and long-term goals As established in audit or with the City varies $0 • Address audit concerns and recommendations Source: Draft loan FISCAL IMPACT As shown in Exhibit 2 above, the loan term document states that the City may use either debt financing or General Fund support to pay for the loan. However, according to Antonio Guerra, RPD Director of Administration of Finance, RPD anticipates the loan will be entirely General Fund supported. An ordinance (File 26-0360) pending Board of Supervisors approval would de-appropriate $2.5 million from the Open Space Acquisition Reserve and appropriate this funding to the Park, Recreation and Open Space Fund in FY 2025-26. This $2.5 million would be used for the initial loan disbursement, anticipated to occur in FY 2025-26, that coincides with the