[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
NEXT GENERATION AIR TRANSPORTATION SYSTEM FINANCING OPTIONS
=======================================================================
(109-100)
HEARING
BEFORE THE
SUBCOMMITTEE ON
AVIATION
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 27, 2006
__________
Printed for the use of the
Committee on Transportation and Infrastructure
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
DON YOUNG, Alaska, Chairman
THOMAS E. PETRI, Wisconsin, Vice- JAMES L. OBERSTAR, Minnesota
Chair NICK J. RAHALL, II, West Virginia
SHERWOOD L. BOEHLERT, New York PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee ELEANOR HOLMES NORTON, District of
WAYNE T. GILCHREST, Maryland Columbia
JOHN L. MICA, Florida JERROLD NADLER, New York
PETER HOEKSTRA, Michigan CORRINE BROWN, Florida
VERNON J. EHLERS, Michigan BOB FILNER, California
SPENCER BACHUS, Alabama EDDIE BERNICE JOHNSON, Texas
STEVEN C. LaTOURETTE, Ohio GENE TAYLOR, Mississippi
SUE W. KELLY, New York JUANITA MILLENDER-McDONALD,
RICHARD H. BAKER, Louisiana California
ROBERT W. NEY, Ohio ELIJAH E. CUMMINGS, Maryland
FRANK A. LoBIONDO, New Jersey EARL BLUMENAUER, Oregon
JERRY MORAN, Kansas ELLEN O. TAUSCHER, California
GARY G. MILLER, California BILL PASCRELL, Jr., New Jersey
ROBIN HAYES, North Carolina LEONARD L. BOSWELL, Iowa
ROB SIMMONS, Connecticut TIM HOLDEN, Pennsylvania
HENRY E. BROWN, Jr., South Carolina BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois SHELLEY BERKLEY, Nevada
TODD RUSSELL PLATTS, Pennsylvania JIM MATHESON, Utah
SAM GRAVES, Missouri MICHAEL M. HONDA, California
MARK R. KENNEDY, Minnesota RICK LARSEN, Washington
BILL SHUSTER, Pennsylvania MICHAEL E. CAPUANO, Massachusetts
JOHN BOOZMAN, Arkansas ANTHONY D. WEINER, New York
JIM GERLACH, Pennsylvania JULIA CARSON, Indiana
MARIO DIAZ-BALART, Florida TIMOTHY H. BISHOP, New York
JON C. PORTER, Nevada MICHAEL H. MICHAUD, Maine
TOM OSBORNE, Nebraska LINCOLN DAVIS, Tennessee
KENNY MARCHANT, Texas BEN CHANDLER, Kentucky
MICHAEL E. SODREL, Indiana BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania RUSS CARNAHAN, Missouri
TED POE, Texas ALLYSON Y. SCHWARTZ, Pennsylvania
DAVID G. REICHERT, Washington JOHN T. SALAZAR, Colorado
CONNIE MACK, Florida JOHN BARROW, Georgia
JOHN R. `RANDY' KUHL, Jr., New York
LUIS G. FORTUNO, Puerto Rico
LYNN A. WESTMORELAND, Georgia
CHARLES W. BOUSTANY, Jr., Louisiana
JEAN SCHMIDT, Ohio
(ii)
SUBCOMMITTEE ON AVIATION
JOHN L. MICA, Florida, Chairman
THOMAS E. PETRI, Wisconsin JERRY F. COSTELLO, Illinois
HOWARD COBLE, North Carolina LEONARD L. BOSWELL, Iowa
JOHN J. DUNCAN, Jr., Tennessee PETER A. DeFAZIO, Oregon
VERNON J. EHLERS, Michigan ELEANOR HOLMES NORTON, District of
SPENCER BACHUS, Alabama Columbia
SUE W. KELLY, New York CORRINE BROWN, Florida
RICHARD H. BAKER, Louisiana EDDIE BERNICE JOHNSON, Texas
ROBERT W. NEY, Ohio JUANITA MILLENDER-McDONALD,
FRANK A. LoBIONDO, New Jersey California
JERRY MORAN, Kansas ELLEN O. TAUSCHER, California
ROBIN HAYES, North Carolina BILL PASCRELL, JR., New Jersey
HENRY E. BROWN, Jr., South Carolina TIM HOLDEN, Pennsylvania
TIMOTHY V. JOHNSON, Illinois SHELLEY BERKLEY, Nevada
SAM GRAVES, Missouri JIM MATHESON, Utah
MARK R. KENNEDY, Minnesota MICHAEL M. HONDA, California
JOHN BOOZMAN, Arkansas RICK LARSEN, Washington
JIM GERLACH, Pennsylvania MICHAEL E. CAPUANO, Massachusetts
MARIO DIAZ-BALART, Florida ANTHONY D. WEINER, New York
JON C. PORTER, Nevada BEN CHANDLER, Kentucky
KENNY MARCHANT, Texas RUSS CARNAHAN, Missouri
CHARLES W. DENT, Pennsylvania JOHN T. SALAZAR, Colorado
TED POE, Texas NICK J. RAHALL II, West Virginia
JOHN R. `RANDY' KUHL, Jr., New BOB FILNER, California
York, Vice-Chair JAMES L. OBERSTAR, Minnesota
LYNN A. WESTMORELAND, Georgia (Ex Officio)
DON YOUNG, Alaska
(Ex Officio)
(iii)
CONTENTS
TESTIMONY
Page
Dillingham, Gerald, Director, Physical Infrastructure Issues,
U.S. Government Accountability Office, accompanied by Susan
Irving, Director, Federal Budget Issues, U.S. Government
Accountability Office.......................................... 6
Hansman, R. John, Jr., Director, MIT International Center for
Air Transportation, Massachusetts Institute of Technology, and
Chairman, FAA'S Research and Development Advisory Committee
(REDAC)........................................................ 6
Jewett, Ellen, Vice President and Manager, Transportation Group,
Infrastructure Investment Banking, Goldman, Sachs & Co......... 6
Marron, Donald B., Acting Director, Congressional Budget Office. 6
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Carnahan, Hon. Russ, of Missouri................................. 28
Costello, Hon. Jerry F., of Illinois............................. 29
Oberstar, Hon. James L., of Minnesota............................ 88
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Dillingham, Gerald.............................................. 32
Hansman, R. John, Jr............................................ 62
Irving, Susan................................................... 32
Jewett, Ellen................................................... 70
Marron, Donald B................................................ 73
SUBMISSIONS FOR THE RECORD
Dillingham, Gerald, Director, Physical Infrastructure Issues,
U.S. Government Accountability Office, reponses to questions
from Rep. Costello............................................. 51
Hansman, R. John, Jr., Director, MIT International Center for
Air Transportation, Massachusetts Institute of Technology, and
Chairman, FAA's Research and Development Advisory Committee
(REDAC), response to a question from Rep. Costello............. 69
Irving, Susan, Director, Federal Budget Issues, U.S. Government
Accountability Office, responses to questions from Rep.
Costello....................................................... 56
Marron, Donald B., Acting Director, Congressional Budget Office,
responses to questions from Rep. Costello...................... 85
NEXT GENERATION AIR TRANSPORTATION SYSTEM FINANCING OPTIONS
Wednesday, September 27, 2006,
House of Representatives, Committee on
Transportation andInfrastructure,Subcommittee
on Aviation,Washington, D.C.
The subcommittee met, pursuant to call, at 2:00 p.m., in
room 2167, Rayburn House Office Building, the Honorable John L.
Mica [Chairman of the subcommittee] presiding.
Mr. Mica. I would like to call this hearing of the House
Aviation Subcommittee to order and welcome everyone today.
The subject of today's hearing is the Next Generation Air
Transportation System Financing Options.
The order of business will be as follows: we will have
opening statements by members and, after that, we have one
panel of witnesses, and I understand one of our witnesses is
not able to be with us because he is ill, and that is Gerald L.
Thompson of Jerry Thompson & Associates. So that is the only
change in the order of business.
With that, welcome, everyone, again, and I will start with
an opening statement, and then I will yield to other members.
As I said, today's hearing is going to focus on our options
for financing our Federal Aviation Administration and, more
specifically, the next Generation Air Transportation System,
which is commonly referred to as NGATS. This topic, of course,
will be the major issue in next year's reauthorization of our
Federal aviation programs.
As discussed at the Subcommittee's hearing on air traffic
control modernization in June, NGATS involves a major redesign
of our air transportation system. It will move much of the
existing air traffic control infrastructure from earth to sky
by replacing antiquated, costly ground infrastructure with a
system of orbiting satellites, onboard automation, and digital
data link communications.
While we do not yet have an official cost estimate for
NGATS, preliminary information indicates that FAA may need, on
average, an additional $1 billion a year, probably for the next
20 years, to implement NGATS, and, at the same time, keep our
existing air traffic control system running.
One issue that I hope to address today is whether or not
the Aviation Trust Fund can in fact afford to provide this
increased level of investment.
And that is in light of the Trust Fund revenues being down
significantly from the levels that were projected prior to the
terrorist attacks of September 11th, 2001. The 9/11 attacks,
combined with weak economic condition and also the element of,
on average, lower airfares, have resulted in three consecutive
years of declining Trust Fund revenues. They have gone from
$10.5 billion in fiscal year 2000 to $9.3 billion in just the
time to 2003.
Although revenues have since been on an upward trend, they
are still below what was once expected, and the uncommitted
cash balance in the Trust Fund has been dramatically reduced,
from $7.3 billion at the end of fiscal year 2001 to $1.9
billion at the end of 2005.
Even if the Aviation Trust Fund revenues are sufficient to
pay for NGATS, achieving a $1 billion annual increase in FAA's
budget would still be difficult under our current set of budget
rules.
This is because the aviation user charges are currently
subject to a split budget treatment whereby the revenues from
aviation system users come in on the mandatory side of the
budget, but they must be spent, unfortunately, on the
discretionary side of the budget, where they are also subject
to some of the discretionary spending limits. Therefore, under
current budget rules, spending from the Trust Fund must compete
with all other discretionary spending in the Federal budget.
That makes it very difficult to achieve the substantial budget
increases that we are going to need for a huge program like
NGATS.
Rather than focusing solely on the cost of implementing
NGATS, it is also important to recognize the cost of not doing
so. According to the JPDO, the Joint Planning Development
Office, by the year 2020, the cost to our economy of not
implementing NGATS could reach as much as $40 billion a year.
In addition to this enormous economic loss, a failure to
implement NGATS would also have a huge price tag in terms of
foregone productivity savings. According to some estimates, a
failure to implement NGATS would result in FAA operating losses
that are $29 billion to $49 billion higher over the period from
2006 to 2025.
Viewed in these terms, the cost of not implementing NGATS
clearly far exceeds the cost of implementing NGATS by possibly
more than $400 billion through 2025, a pretty dramatic amount.
Unfortunately, in today's constrained budget environment,
the immediate need to finance everyday operations often takes
precedent over longer term capital investments.
We have the same problem if you look at inline explosive
detection systems. Despite the fact that these systems more
than pay for themselves in productivity savings in just a few
years, we have been unable to adopt a common sense solution
that would provide up-front capital investment that is required
to deploy these systems in a timely manner, realize the savings
by eliminating personnel and antiquated systems. So this is
sometimes a penny wise and pound foolish approach.
In the face of budget constraints, Federal agencies have
used a variety of methods to finance big capital asset
projects. Two such methods that have been mentioned in the
context of NGATS are leasing and also bonding. In addition,
cost-based user fees that could be spent outside the
discretionary spending limits have also been discussed.
In preparation for next year's FAA reauthorization bill,
when our current aviation excise taxes must either be extended
or replaced, the FAA has called for a dialog on alternative
ways to finance the aviation system in the future. And that
dialog, as you know, has gone on for some months now, and at
some point we are going to have to conclude that and take some
action, hopefully as we begin the next session of Congress.
The FAA believes that certain industry trends, such as
lower airfares and the use of smaller aircraft, will also
exacerbate the mismatch between its workload and its revenues
in the future.
Cost-based user fees are often mentioned as one way to link
aviation revenues more closely to FAA's cost and potentially
also to deal with funding. To the extent such fees can be
linked to FAA's funding, they could provide a way to fund
needed investments in our aviation system.
Of course, today we will hear from a panel of witnesses
that I believe is uniquely qualified to help us look at some of
the pros and cons of each of these approaches to financing both
the FAA and NGATS, its expensive capital requirements, so I
look forward to hearing the testimony of our witnesses. I have
made no commitments to any plan, and now I am pleased to yield
to the Ranking Member, Mr. Costello.
Mr. Costello. Mr. Chairman, thank you. And I thank you for
calling this hearing today. I think all of us understand that
the information that we are reviewing is very preliminary.
While we have some idea of what capabilities will likely
comprise the Next Generation Air Transportation System, such as
precision satellite-based navigation, we do not yet have an
enterprise architecture that fully explains the Next Generation
System. And while we have an unofficial Administration NGATS
capital cost estimate of approximately $15 billion, between $1
billion and $2 billion a year for the next 10 to 15 years, we
do not have an Administration witness here today to explain how
they arrived at their cost estimates.
As the Subcommittee prepares to take up the FAA
reauthorization bill, we will need to find out whether or not
the Aviation Trust Fund can support the Next Generation System.
The information before us today suggests that it can. For
fiscal year 2006, CBO estimates that receipts plus interest
into the Trust Fund will total about $11.2 billion. The CBO
also projects that the Trust Fund revenue will increase almost
32 percent, to $14.8 billion in 2011, and over 71 percent, to
$19.2 billion in 2016.
Based on these projections, it appears that the preliminary
$15 billion capital cost estimate for NGATS could be absorbed
by the existing FAA financing structure, with a General Fund
contribution that is consistent with, or even smaller than,
recent General Fund contributions.
This new information raises questions about the
Administration's claims that there is a revenue crisis at the
FAA. The Administrator, Administrator Blakey, has said that
there is a gap between revenue going into the Trust Fund and
FAA's cost, and that this so-called gap caused a $5.4 billion
decline in the Trust Fund's uncommitted balance since fiscal
year 2002. I disagree.
First, what the Administrator calls a gap between Trust
Fund revenues and FAA cost is actually the General Fund
contribution. Historically, the General Fund contribution has
been relatively low in recent years. Over the past 20 years,
the General Fund contribution has averaged 27 percent of FAA's
total budget. However, over the past 10 years, it has averaged
only 20 percent.
The American people clearly receive a tremendous benefit
from a safe and efficient air transportation system. Therefore,
any discussion of financing the Next Generation system must
include a contribution from the General Fund.
Second, the shrinking uncommitted balance is not the result
of inadequate revenue, but inadequate revenue forecasting by
the FAA. Under the current statutory formula, the amount drawn
from the Trust Fund must equal FAA's forecasted receipts and
interest into the Trust Fund for that year. For the last few
years, FAA's forecasts have been overly optimistic and the
discrepancy between what is drawn from the Trust Fund's
uncommitted balance. Congress could fix this problem by
changing the formula to link the amount appropriated from the
Trust Fund to actual, rather than forecasted, revenue. The GAO
has suggested this approach, and I look forward to hearing from
the GAO witness on this issue.
That said, I believe Congress should also review the FAA's
tax and financing structure in the FAA's upcoming
reauthorization bill. However, I have serious reservations with
imposing a direct user fee. If we accept that the policy goal
of the Congress should be to better align FAA's revenue with
user activity, there are ways that this can be accomplished
within the existing tax structure. By working within the
existing tax structure, we will avoid the costly administrative
burdens of implementing a user fee based system. Some have
suggested that Congress should consider alternative financing
mechanisms such as leasing or bonding. I agree that all options
should be examined and be on the table.
With that, Mr. Chairman, I will submit my full statement
for the record, and I look forward to hearing from our
witnesses today.
Mr. Mica. Without objection, the entire statement of the
Ranking Member will be made part of the record.
Next we will hear from Mr. Coble.
Mr. Coble. Mr. Chairman, I will not take the full five
minutes.
You indicated financing options is the order of the day.
Every issue discussed--well, strike that. Practically every
issue discussed on this Hill, sooner or later, involves
financing options, today being no exception. And I appreciate
the interest that you and the distinguished gentleman from
Illinois have directed to the issue of Next General Air
Transportation System's financing, and I share that interest,
and I appreciate your all having called the hearing.
I have two other meetings, Mr. Chairman, so I may be
circuitously coming and going, but I think it will be a good
hearing, and I thank you for it.
Mr. Mica. I thank the gentleman, and thank you for the
brevity of your statement. In fact, high above the future NGAT
System, somewhere in the heavens there will be a special place
for you.
Mr. Coble. I thank you for that.
Mr. Mica. Thank you.
Ms. Berkley.
Ms. Berkley. Thank you, Mr. Mica.
Mr. Chairman, Ranking Member Costello, I thank you for
holding this hearing on what I consider a very important topic.
The FAA's plan for the Next General Air Transportation System
is very ambitious. I am anxious to hear both how we could pay
for it and how it would be integrated into our current system.
The district that I represent is uniquely dependent on a
safe and efficient air transportation system. McCarran
International Airport in Las Vegas handled almost 44 million
passengers last year, and I have no doubt that we will exceed
that number in 2006. I am concerned about the ability of the
FAA to handle the current volume of air traffic, which
continues to increase yearly.
I look forward to hearing the views of our witnesses about
whether the FAA's plan to keep up with growth in the system is
affordable and feasible, and I am anxious to hear your funding
suggestions. And I thank you very much for being here.
Thank you very much, Mr. Chairman.
Mr. Mica. I thank the gentlelady also for her brevity.
Mr. LoBiondo.
Mr. LoBiondo. Thank you, Mr. Chairman, for calling the
hearing. I think we can all agree it is critical for us to get
started developing and testing and fielding the NGAT System as
soon as possible. The system will improve safety and reduce
operating costs for the FAA and industry. But, as you pointed
out, it is extremely expensive and it will be very difficult
and put a strain on our current system with an already
overextended Trust Fund. I hope we can find a creative way to
reauthorize the Trust Fund that will ensure sufficient
resources to keep the current system running while we develop
and deploy NGATS.
And I am looking forward to hearing what our witnesses have
to say.
And thank you again, Mr. Chairman.
Mr. Mica. Thank the gentleman.
Mr. DeFazio?
Mr. DeFazio. Thank you, Mr. Chairman.
Mr. Chairman, if we look over time, we find that basically
the General Fund contribution, that is, the support to
aviation, the issue before us, has gone from about 48 percent
down to 18 in 2006. I guess, one question I hope the panel
would address is, what is an appropriate level for general
public investment versus whatever new ideas or iteration of
user fees or targeted taxes you are going to propose.
Because I think there are some strong arguments to be made
regarding the national interest here on the national airspace,
the efficiency of the Air Transportation System and the safety
in this Country, and particularly some new issues in that area
post-9/11. So I would question whether 18 percent is adequate.
And, of course, that somewhat sets the stage for what other and
how many other revenues we are looking for, given the needs.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Mr. Graves?
Mr. Graves. Thank you, Mr. Chairman. I too will be brief.
I do look forward to this hearing, and all the hearings we
are going to have, obviously, when it comes to reauthorization,
and how we are going to fund the Next Generation System and
modernization in general. I know there are still a lot of
different options out there, but I do think we ought to proceed
with some caution and figure out what it is we are going to do
before we figure out how to fund it. I think it is a little bit
at least getting the cart ahead of the horse, when we don't
know exactly how much money it is that we are going to need, or
exactly what it is that we are going to use it on.
I think we just need to be careful as we move forward, and
I look forward to hearing what the panelists have to say. Thank
you.
Mr. Mica. Thank you.
Mr. Kuhl? Any other members with opening statements or
remarks?
[No response.]
Mr. Mica. If there are no other members with opening
statements, we will turn to our panel of witnesses and welcome
back Dr. Gerald Dillingham, Director of Civil Aviation Issues
with the U.S. Government Accountability Office. He is
accompanied by Dr. Susan Irving, Director of Federal Budget
Issues of the same office.
We have also Dr. Donald Marron, Acting Director of the
Congressional Budget Office; Professor John Hansman, Director
of MIT International Center for Air Transportation and Co-
Chairman of FAA's Research, Engineering & Development Advisory
Committee; and then Ms. Ellen Jewett, Vice President and
Manager of the Transportation Group of Infrastructure
Investment Banking with Goldman, Sachs.
I would like to welcome all of our witnesses. If you have
any additional information other than your statement, or
lengthy information that you would like added to the record,
just a request of the Chair would be appropriate.
So, with that, we will welcome back Dr. Dillingham with
GAO. Welcome, and you are recognized, sir.
TESTIMONY OF GERALD DILLINGHAM, DIRECTOR, CIVIL AVIATION
ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; ACCOMPANIED BY
SUSAN IRVING, DIRECTOR, FEDERAL BUDGET ISSUES, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE; DONALD B. MARRON, ACTING DIRECTOR,
CONGRESSIONAL BUDGET OFFICE; R. JOHN HANSMAN, JR., DIRECTOR,
MIT INTERNATIONAL CENTER FOR AIR TRANSPORTATION, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY, AND CHAIRMAN, FAA'S RESEARCH,
ENGINEERING & DEVELOPMENT ADVISORY COMMITTEE (REDAC); ELLEN
JEWETT, VICE PRESIDENT AND MANAGER, TRANSPORTATION GROUP,
INFRASTRUCTURE INVESTMENT BANKING, GOLDMAN, SACHS & CO.
Mr. Dillingham. Thank you, Chairman Mica, Mr. Costello,
members of the Subcommittee.
As you know, GAO has been reviewing FAA's ATC modernization
program for this Committee for many years. Because of its size,
complexity, and the history of schedule delays and cost
overruns, it has been on our high-risk list since 1995. Over
the last two years we have reported considerable improvement in
the modernization program's ability to acquire major systems on
time and on budget. We have also seen the effects of a cyclical
nature of the aviation industry on the ATC system, from the
major delays experienced throughout the system through the
downturns just prior to and after 9/11. Today, we see a return
of significant delays and a system under increasing stress.
Through all of this, aviation continues to be an important
part of the U.S. economy. Recent aviation forecasts predict up
to a billion passengers in the system by 2015. These forecasts
also predict that not only will there be more traditional
aircraft entering the system, there will also be hundreds of
very light jets, greater civil use of unmanned aerial vehicles,
and mega aircraft such as the Airbus A380.
The consensus of opinion is that the Nation's current ATC
system cannot handle this predicted growth and cannot be scaled
up to meet a possible tripling of traffic by 2025. As Chairman
Mica stated, the JPDO has estimated that as soon as two years
from now the difference the total flights that people want to
fly and those that can be delivered with no new investment in
the system would be worth about $12 billion to the economy. By
2020, these economic losses will increase to about $40 billion
a year.
These are the kinds of predictions that contributed to the
Congress establishing the JPDO to plan for the transformation
of the ATC system to the Next Generation System. The NGATS
transformation will be one of the Federal Government's most
comprehensive and technically complex undertakings, and a
preliminary estimate indicates it will also be an expensive
undertaking.
Regarding the cost of NGATS, Mr. Chairman, the bottom line
here is that, at present, there is no comprehensive estimate of
the cost of NGATS. Instead, what we have is a limited
preliminary cost estimate developed by FAA's Research,
Engineering & Development Advisory Committee, an estimate that
has not been endorsed by FAA and only provides a point of
reference.
As the Chairman indicated in his opening remarks, the REDAC
estimate suggests that FAA will need an average of at least $1
billion more annually over the next 20 years than FAA's 2006
appropriation.
Mr. Chairman, Mr. Costello, and members of the
Subcommittee, this estimate must be viewed within the context
of a number of limiting factors. First, JPDO has yet to
complete the system's enterprise architecture, which is
critical to the development of a reliable cost estimate.
Second, many costs, such as the cost of early technology
development, training, and the cost that other JPDO partner
agencies might incur, are not included. And, finally, the
estimate is in today's dollars and does not take into account
the effect of inflation.
Regardless of what the final costs turn out to be, any
discussion of how to pay for NGATS must also take into account
the funding of near term sustainment of the current air traffic
control system. These discussions should also consider the
Federal Government's long-term fiscal imbalance.
My written statement discusses the details of funding the
current system and the transition to NGATS through the existing
system of excise taxes and the contributions of the General
Fund. The statement also discusses alternative funding options
to collect revenues from the users of the system and
implications for allowing FAA to use debt financing for capital
projects.
Regarding alternative options, our work indicates that the
degree to which alternative funding options could address
concerns about the existing system ultimately depends on the
extent to which the contributions required from the users
actually reflect the costs they impose on the system. Given the
diverse nature of FAA's activities, and if Congress decides
that an alternative is needed, we think that a combination of
options may offer the most promise for linking revenues and
costs. It is also true that switching to any alternative
funding option would raise the administrative and transition
issues, such as developing the administrative capacity to
implement the new system.
Regarding debt financing, although some have suggested that
debt financing offers some advantages, there are also some
serious implications that should be recognized. For example,
debt financing encumbers future resources and may raise
questions about congressional oversight. In addition, debt
financing raises issues regarding barring costs that are
particularly important in light of the Federal Government's
long-term structural physical imbalance.
Mr. Chairman, we think that all options, with their
advantages and disadvantages, should be on the table for
consideration. We also think that the cost side of the ledger
should continue to be a major consideration in the discussion
of funding ATC modernization. FAA's recent contracting out of
flight service stations and its exploration of sharing the
risks and costs of the development of ADSB system with the
private sector are positive developments. GAO has also
previously recommended that FAA needs to complete and
institutionalize those business processes that allow it to meet
its acquisition goals for the last two years.
Additionally, we recommended that FAA work with Congress
and other stakeholders to develop and implement a comprehensive
modernization and consolidation plan for its facilities. GAO
continues to think that actions such as these must be part of
the funding discussion in the transformation of the FAA for the
21st century.
Mr. Chairman, Dr. Irving and I will be pleased to answer
any questions that you and members of the Subcommittee may
have.
Mr. Mica. Thank you. We will hold questions until we have
heard from all of the witnesses.
I guess Susan Irving is not making a statement, but she is
available for questions.
Our next witness will be Donald Marron, Acting Director of
the Congressional Budget Office.
Welcome, and you are recognized.
Mr. Marron. Thank you, Mr. Chairman, Congressman Costello,
members of the Subcommittee. It is a pleasure to be here today
to discuss the financing of new investments in the air traffic
control system and the way spending on such investments would
be recorded in the budget.
Developing and deploying a new air traffic control system
would likely require significant investments by the Federal
Government or by entities acting on its behalf. The potential
for such investments raises a number of important questions.
First, to what extent might such spending fit within the
potential resources of the airport and airway trust fund? To
address that question, my written testimony describes one
scenario that reflects CBO's most recent baseline budget
estimates.
Following rules that are established in budget law, those
estimates assume that existing Trust Fund revenue sources are
extended over the next 10 years, that appropriations for the
FAA grow with inflation from the level appropriated for 2006,
and that the share of funding from general revenues remains at
roughly 19 percent, approximately the same level as in 2006.
Under those assumptions, CBO estimates that uncommitted
balances in the Trust Fund would increase from slightly less
than $2 billion at the end of 2006 to about $19 billion at the
end of 2016, with most of that increase occurring after 2010.
By themselves, those projections suggest that the Trust Fund
may have room for an additional $19 billion in spending over
the next 10 years. Of course, whether those balances actually
materialize will depend on the accuracy of the revenue
estimates and the levels of funding that Congress actually
chooses to provide.
A second question is how investment in a new system would
be recorded in the budget in the congressional budget process.
Under the accounting principles that govern the Federal budget,
budget authority and outlays should generally be recorded up
front, when the asset is acquired and investments are made,
regardless of how the new investments are financed. That is how
funding for the Air Traffic Control System is currently
handled; budget authority is recorded when appropriation laws
are enacted and outlays are recorded when the Government makes
actual cash payments. Outlays for capital goods, for example,
computer systems and radar, thus occur when they are paid for,
not over their useful life.
Most of the Government's capital investments are recorded
in the budget in that way because that approach provides the
Congress with the most direct ongoing control over spending. Of
course, that approach also requires that the full cost of
investment projects must compete against other budgetary
priorities.
An issue sometimes arises as to whether that budgetary
treatment would be different if agencies could procure capital
assets using special financing approaches such as capital
leases, lease purchases, or public-private partnerships in
which non-Federal entities provide finance on behalf of the
government. The short answer is no.
Under such arrangements, an agency might make annual
payments over a period of years rather than disbursing the full
cost of the investment when it is required. Nevertheless,
established budgetary principles require that the full cost be
recorded up front if the Federal Government is the sole or
dominant user of the asset. In such cases, the arrangements are
actually a form of purchase by the Government. To ensure that
all such purchases are treated the same way, budgetary
principles require that all be recorded in the same manner,
regardless of the method of financing. The only exception is
for routine operating leases, for example, for commercial
office space that is not constructed specifically for the
Government.
In considering alternative financing methods, it should
also be noted that the least expensive form of financing is
through the U.S. Treasury. Conventional Treasury securities are
the goal standard of bonds because they are free from the risk
of default and are highly liquid. Other means of borrowing
funds, whether by creating new types of Federal bonds or
working through private entities, all involve greater costs,
since investors will demand higher returns and intermediaries
will require fees.
A third question is how Congress should allocate cost among
taxpayers and various users of the system. From an economic
perspective, it is generally desirable to require users of a
system to pay for it. That way, the choices they make will take
into account the cost of providing the service. Users of air
traffic control services currently pay a substantial portion of
the cost of providing those services, mostly through the ticket
and other taxes, reflecting the fact that a large portion of
the benefits of the system accrue to them.
Allocating those costs or the costs of a new system
efficiently and fairly among different types of users presents
challenges, however. Quantifying how individual aircraft impose
cost on air traffic control system may be difficult. Also, the
provision of air traffic control services may entail
substantial costs that cannot readily be allocated to a
particular user, but that must be incurred to provide the
services at all. The resolution of those and related issues
will determine how efficiently air traffic control systems and
the national airspace are used.
Thank you. I look forward to any questions.
Mr. Mica. Thank you.
We will hear now from Professor John Hansman, who is
Director of MIT International Center for Air Transportation.
Welcome, and you are recognized.
Mr. Hansman. Thank you, Chairman Mica and Mr. Costello and
the rest of the members. I am a Professor of Aeronautics and
Astronautics at MIT and also co-chair of the FAA Research &
Development Advisory Committee.
There is a general consensus, as has already been
discussed, that the current air traffic control paradigm and
the air transportation paradigm will not scale to meet future
demands, and the next Generation Air Transportation System
offers a coordinated national response to that. Recognizing the
importance of NGATS, the REDAC established a working group on
financing the Next Generation Air Transportation System,
chaired by Mr. Jerry Thompson, who, unfortunately, is ill and
couldn't be here today.
The approach the working group took was to compare a
referenced status quo scenario, basically, if we kept with the
existing paradigm, to an NGATS scenario and considered best,
worst, and baseline cases in a parametric analysis.
The analysis of the NGATS scenario required the working
group to create a model of the rollout of NGATS capabilities
based on the best available knowledge of that system as it
existed at the time of the analysis. The details of the report
are in my written comments and in the working group report, but
the bottom line can be seen in Figure 6 of my written report,
which has already been referred to earlier today.
In both the status quo and NGATS scenarios, the annual
average cost over the 20 year period are in the order of $15.5
billion for the median case. However, as an investment in the
future, the NGATS scenario requires an up-front investment
higher cost in the early and is expected to have cost savings
in the out years.
In order to estimate the FAA NGATS funding requirements,
the working group also compared the cost estimates with the
model of the FAA Aviation Trust Fund revenue. Assuming recent
levels of General Fund contributions on the order of 20
percent, as has already been mentioned by others, the model for
the mid case has an expected shortfall of approximately $1
billion over the next several years, until the NGATS
operational improvements yield cost savings.
The working group explored a number of alternatives for
closing the near-term funding gap, including increasing the
General Fund contribution, reduction of FAA costs. The working
group identified approximately $500 million of potential costs,
but they would not be realized immediately. There is an
increase in user taxes and fees, and then financing options
that bridge the near-term gap.
The working group also made preliminary assessment of user
taxes and fee approaches. No one approach was identified as
optimal; a hybrid approach is likely. And more details are
included in the working group report.
Thank you.
Mr. Mica. Thank you.
Our last witness is Ellen Jewett. She is Vice President and
Manager of the Transportation Group of Goldman, Sachs.
Welcome, and you are recognized.
Ms. Jewett. Good afternoon, Chairman Mica, Congressman
Costello, and members of the Subcommittee. I appreciate the
opportunity to testify before the Subcommittee today on the
Next Generation Air Transportation System financing options.
The NGATS initiative is a worthwhile and necessary step towards
securing our Nation's future development in aviation, and I am
pleased to be part of the discussion on how to properly fund
it.
Historically, the FAA has relied on approximately 80
percent of its funding from the Aviation Trust Fund, which is
set to expire by this time next year. As the FAA embarks on its
ambitious NGATS program, as well as restructuring the Trust
Fund, this is an optimal time to explore alternative funding
sources.
There are three primary capital markets options that the
FAA could evaluate to fund NGATS. On the traditional end of the
spectrum, the FAA could borrow from the U.S. Treasury, which
would provide the lowest cost of capital. However, from a
capital markets perspective, borrowing Treasuries is expensive
in its lack of flexibility, particularly as they cannot be
called or refinanced.
The debt capital markets offer another solution for the
program's funding gap. In 2005, more than $450 billion of
municipal bonds were issued, to the total market size of $2.3
trillion. Of the total issued last year, more than 60 percent
were revenue bonds, or bonds that are backed by the revenues of
a project or asset, as opposed to the taxing power of the
Government. This robust market provides an opportunity for
issuers to borrow against any type of revenue, including any
user fee, without recourse, back to the governmental entities.
A particular approach that is widely used and ensures the
highest security to a bondholder is a securitized revenue
structure. Under this structure, the FAA or a conduit issuer
levies a charge which is then passed through a special purpose
entity and is irrevocably pledged to the bondholders.
How might this revenue securitization model be applicable
to the NGATS program? One example is through a securitization
of FAA revenue or user fees. How the fee is levied--ticket tax,
passenger levy, airline charge--is less important to the
capital markets than whether it is a stable revenue stream. A
portion of this charge would be irrevocably pledged to a
special purpose vehicle that would issue bonds backed by the
expected regular collections of those fees. These collections
would be to pay principal, interest, and other related cost.
The special purpose vehicle would remain legally remote from
the FAA.
In order to ensure the involvement of all users of the
system, a capital policy board could be set up to determine the
scope of the capital financing plan and to enact it on behalf
of the FAA. It is envisioned that members from all interested
parties--airlines, airports, labor--would be represented, along
with members of the FAA. This board would ultimately determine
the size and strategies governing the financing and set rules
to ensure accountability.
There are a number of benefits to this financing structure.
The most important to note is neither the FAA nor the U.S.
Government is obligated to pay anything. Should the revenue
collections fall short of necessary debt payments, there is no
recourse back to the FAA or the Government. Additionally, there
is no FAA operational risk. Thus, the FAA is able to transfer
its risk and collect money up front to fund a significant
investment in aviation infrastructure.
The public policy implications are important. Under the
proposed securitization structure, the FAA could separate the
public policy determination of financing needs and capital plan
from the execution of the financing by granting a legally
separate oversight board the authority to control the amount
and timing of the issuance of securities. The board would have
the right to review and/or reject the proposed financing plan.
Thus, users of the system who would be impacted by the
financing decisions would have a direct role in determining if
such a financing is necessary.
The third and more radical alternative to solve the funding
gap would be to explore the burgeoning public-private
partnership market which result in effectively transferring
assets to private operators. With a large demand for projects
that produce long-term, steady revenue streams and, thus, long-
term, steady revenue returns from a wide variety of pension
funds, insurance companies, and private equity funds, this
market could provide an additional or alternative source of
funds for the FAA.
It is not unusual for governments to tap private investors
for funding assistance. In fact, there are numerous examples of
the Army or Navy leasing all of the housing on its bases to
private developers. In the United Kingdom and Canada, private
partnerships form the basis for management of the air traffic
control system
The FAA has already enacted such a program under the Pilot
Privatization Act whereby a private entity can own and operate
airports in the U.S. through a long-term performance based
concession. Currently, there is one small airport in New York
that has been privatized under this approach and, additionally,
Chicago Midway Airport has just submitted an application to
seek privatization under the act. This recent surge in interest
in privatizing airports could signal that the public-private
partnership market may be a very real and viable alternative to
a debt financing.
That concludes my statement, Chairman Mica. Thank you. I
appreciate the opportunity to speak here today. I would be
pleased to address questions you may have.
Mr. Mica. Well, thank you all.
We will turn to some questions, and I will start out with
the first question for the GAO. How confident are you that
either the FAA or the FAA's Research, Engineering & Development
Advisory Committee has come up with NGATS costs that are
realistic?
Mr. Dillingham. Chairman Mica, we are not very confident
for a number of reasons, particularly the fact that that
critical document, that enterprise architecture, is missing.
Additionally, there are many, many costs that are not accounted
for----
Mr. Mica. That enterprise architecture that you spoke
about, it is my understanding that won't be available until the
middle of next year. Is that your understanding?
Mr. Dillingham. Yes, sir, that is our understanding. And in
addition to that architecture, even though I would say that it
is necessary, it is certainly not going to be sufficient. There
are going to be costs associated with technology development
which it hasn't been determined who is going to pay for it, how
much is it going to be. There are going to be costs associated
with training air traffic controllers and pilots for the
transformation. There will be all kinds of costs for other
partner agencies that have not been accounted for. So it is
necessary, but certainly not sufficient. More work will
certainly have to be done even when that architecture is
available.
Mr. Mica. One of the problems, too, that we have had is the
estimated revenues versus the actual revenues, which the
Ranking Member spoke about, have been sort of off base
seriously, I guess, since 2001. They have gotten a little bit
better this past year. What do we do about that and what do you
attribute that to, Dillingham and then Hansman?
Mr. Dillingham. Chairman Mica, we reported to you about
that problem of the underestimation of forecasted resources,
and since that time--well, a couple of things. One is part of
that was attributed to some unforeseen external circumstances--
post-9/11, SARS--those kinds of things, but also because, as it
turns out, their forecasting model had some problems that
contributed to it being off to that degree. We know that they
have attempted to address those problems. The more recent
forecasts have been closer.
Mr. Mica. Mr. Marron or Mr. Hansman?
Mr. Hansman. Yes. After the forecasts went low or the
projections went high starting really in 2001, after the
attacks. This was partly the attacks, partly due to underlying
changes in the air transportation industry: lower yields, use
of small aircraft, higher frequency of service. And as Mr.
Dillingham pointed out, the forecasts have been better in the
past year.
Mr. Mica. Mr. Marron?
Mr. Marron. And just to round it out, we observed the same
thing, that the FAA revenue misses were due to 9/11, various
shocks to the industry, greater penetration of low cost
carriers.
I should say, from CBO's point of view, we also make
projections of revenues. Until about a year ago, we based our
projections--we, in essence, went to the FAA, gave them our own
economic assumptions, and asked them what the projection would
be, so we relied very heavily on their model. In the last year
or so we have ben developing our own separate independent model
for forecasting these revenues. At the moment, the projections
we have look relatively similar to what the FAA has; we are a
little lower than what they are. Over time, I suspect that
process of having two independent cracks at this will shed
light for both sides about the best way to estimate these
revenues going forward.
Mr. Mica. In May of 2005, Mr. Dillingham, you testified
before this Subcommittee that a zero uncommitted cash balance
in the Trust Fund would require the FAA to make significant
spending cuts to aviation programs currently supported by the
Trust Fund unless additional funding were appropriated from the
General Fund. Specifically, you stated that FAA officials told
GAO that if the uncommitted balance reaches zero, in order to
fund the air traffic control service, FAA would have to suspend
activities like AIP facilities and equipment and research
accounts. Is this still your understanding about what would
happen if we reached uncommitted balance of zero?
Mr. Dillingham. Chairman Mica, that is still our
understanding. FAA states that the safe movement of traffic
would be their primary objective and all other things would
have to fall in behind that in terms of available funding.
Mr. Mica. Well, it is my understanding that the Highway
Trust Fund has been allowed to operate in the negative
uncommitted cash balance area for a number of years now without
impacting highway programs. Anyone like to speak to sort of the
inequity treatment of the two funds?
Ms. Irving. Mr. Chairman?
Mr. Mica. Yes.
Ms. Irving. Part of that is essentially a function of how
the Congress has set up the two trust funds. No agency can
commit funds without budget authority. And you have set up the
Aviation Trust Fund in a certain way, and then it requires
appropriations to commit general revenues. The Highway Trust
Fund cannot commit funds without budget authority either.
The Highway Trust Fund's budget authority comes in the form
of contract authority, which is then subject to obligation
limits imposed by the appropriations acts. Under the SAFETEA
legislation, that authority is adjusted to reflect actual
receipts. You have all lived through the ROBA adjustments.
Because of the way the program was set up, the obligations for
these projects for which money is outlaid over a number of
years, can be met using future tax revenues; it is a function
of the way the two funds were set up.
Mr. Mica. Any recommendation towards adopting a similar
mechanism?
Ms. Irving. No. I think there are a number of things you
would need to consider. Fundamentally, as you know, the U.S.
Government handles highways differently than aviation. The
Highway Trust Fund collects revenues from users and distributes
them to States and to projects, which are then not run or owned
by the Federal Government. We have chosen, as a Nation, to have
the air traffic control system be a national activity and to
have those people be Federal employees and run by the Federal
Government. I think that it is essentially a policy decision
for the Congress to make.
Mr. Mica. If we want to change that out, yes. Well, there
are a number of questions that are raised, too, in the highway
finance system and equity in those decisions. We now have a
deficit of about--well, I shouldn't say a deficit, but we have
a general revenue contribution of about $2 billion a year. And
if we add in an average of $1 billion for NGATS, we are looking
at substantial additional cost. And also the question is raised
as to who should pay for that, should it be those who benefit
from the system on some user basis or does the general taxpayer
have the responsibility, even though they may never fly, some
guy out in the middle of Podunk, U.S.A. be responsible for
paying the existing cost and then a little bit more for this
new system.
Mr. Dillingham, any thoughts, or any of the other
panelists?
Mr. Dillingham. Chairman Mica, the point we are now, of
course, the bottom line, of course, is it is a Congressional
policy decision. But after having said that, there are probably
lots of options, and what we have said is that probably a
combination of things should be looked at, the pros and cons of
a combination of things, to see how to fund the aviation
system.
But we also believe that there is a public interest in the
aviation system and that that public interest should be
supported by a contribution from the General Fund, because the
contributions of the aviation system, it is not only for those
who fly, but it is also for those in Podunk that also benefit
from the system.
Mr. Mica. One final question. I probably can't answer this.
I looked at the chart that shows basically the cost of
implementing the NGATS, and I guess without the system
architecture and some of those costs we really can't tell if
there are any--I mean, we have some estimates that we have been
given, but you can't tell if there is considerable spikes at
any point or if that billion is going to turn into a $3 billion
at one point because of heavy equipment costs or whatever
facilities expansion. So we really don't know, do we, the flow
of the money that is going to be required?
Mr. Dillingham. I think Professor Hansman probably can add
to this, but our understanding, based on the estimates that we
see, is that we talk about an average annual expenditure of
about $1 billion, meaning--or at least we are interpreting that
to mean that there will be probably higher costs early on in
terms of capital development and subsequently that leveling out
as the equipment is in fact acquired. But a point also is that
air traffic control modernization is probably going to be with
us for as long as we are around, because as soon as we get to
the Next Generation, we are going to be talking about the next
generation as well.
Mr. Mica. Mr. Costello, I may have some more questions, but
we will yield to other members.
Mr. Costello. Mr. Chairman, thank you.
Dr. Dillingham, thank you for speaking up for Podunk,
America, but let me say that in my opening statement I agree
with you that there are a number of people in this Country who
may never fly, but the fact of the matter is that a safe and
efficient aviation system is good for our economy and our
Country, and everyone benefits from it. So I appreciate your
comments and strongly feel that there has to be a contribution
from the General Fund as we proceed to implement NGATS.
Dr. Marron, let me ask a couple of questions, if I can. CBO
projected rate of growth for the Aviation Trust Fund. What is
the annual rate of growth above inflation, what are you
projecting?
Mr. Marron. Sir, it is roughly--I won't give you a specific
number but, in essence, the flows into the Trust Fund are
rising a little bit faster than the overall growth rate of the
economy, so a little bit faster than inflation plus real GDP
growth. That is primarily driven by an observation historically
that air travel and related things seem to grow somewhat faster
than the economy historically.
Mr. Costello. So it would be between 2 percent and 5
percent?
Mr. Marron. Yes, it would be inflation plus, I think,
somewhere in the 3-ish range.
Mr. Costello. OK. And you attribute that to?
Mr. Marron. Growing economy, which generates growing air
traffic, and then the fact that historically it appears that
air travel actually grows a little bit faster than the economy.
Mr. Costello. CBO completed a ten-year Trust Fund
projection and you base that--that was in April of 2006, based
upon the FAA's F&E cost for the Next Generation System, as well
as Vision 100, the statutory formula, as well as looking at the
other three major accounts adjusted for inflation. And it is my
understanding that, based upon that review, that CBO has
estimated that the Trust Fund in fact could absorb the capital
cost of NGATS for a general fund with the General Fund
contribution of about 21 percent. Is that correct?
Mr. Marron. That is correct. Let me describe a little bit,
sort of qualitatively, how that comes about.
Mr. Costello. Please.
Mr. Marron. In essence we have a system which, if the
various tax components get extended--many of them are scheduled
to expire, but if they get extended, you have a revenue stream
which is in essence growing with the rate of the economy and a
little bit more. Under the conventional assumptions we use in
constructing a baseline, the spending is assumed to grow just
with inflation, so without real growth in it, and then you, in
essence, have over time that the revenues are larger than the
spending, there is room to add on some spending for, say, some
NGATS investments--obviously, the estimates on that front are
extremely preliminary--and there is room then, also, either to
do more of that or to reduce what comes in from the General
Fund or, as you described, sort of hold the General Fund
contribution relatively constant and have that additional
investment.
Mr. Costello. So is that a long answer to saying that it is
about 21 percent?
Mr. Marron. Yes, those numbers work, but not forget the
additional cost elements that were put in there are obviously
very preliminary.
Mr. Costello. Very good.
Dr. Dillingham, actually, for you or Ms. Irving, either
one, I understand that CBO has stated that third-party
financing, which may include leasing and other types of
financing, that there are some negative consequences, and I
wonder if you might comment as to your views. Are there
negative consequences of financing arrangements which include
leasing and privatization?
Mr. Dillingham. Mr. Costello, I think it is always good to
know what your limits are. And since I know what my limits are,
I am going to ask Dr. Irving to respond to that.
Ms. Irving. My colleague is much too modest.
Yes, as a number of the witnesses and as a number of you
have stated, Treasury securities are the gold standard in the
world. The Federal Government borrows more cheaply than any
other enterprise. It is the least cost option to have the
Federal Government borrow this money than to have the Federal
Government pay someone else to borrow at their borrowing rates.
Mr. Dillingham. But on the leasing side, if we are talking
about an operating lease versus a capital lease, there are some
advantages for the Government to be involved in an operating
lease in terms of the budget scoring and the money needed up
front and a whole lot of other issues. This is the kind of
lease that the Government was involved in when they procured
the WAH satellite system. It is the same kind of discussions
that are going on now with regard to ADSB, where the Government
would purchase a service and not be obligated to, or assume the
risk of the development of the infrastructure and so forth. As
long as the circumstances are such that they meet CBO, OMB, and
congressional guidelines for an operating lease, it is
something that we think ought to be on the table to be
considered where appropriate.
Mr. Costello. Dr. Dillingham, as I mentioned in my opening
remarks, the Trust Fund's uncommitted balance has shrunk
significantly, and due largely because of the over-optimistic
revenue forecast. You testified before the Senate, I think, in
March of this year and suggested a solution as to how that can
be corrected. I wonder if you might elaborate just for the
record.
Mr. Dillingham. Yes, sir. At that time we suggested since
the forecast had been off so much based on forecasting, we
suggested that one thing that Congress could consider would be
to look at actual revenues, as opposed to forecasted revenues.
We also said at that point in time that that could very well
mean less immediate available spending for FAA because the
actuals are often smaller than the forecast and the statutes at
this point in time say you spend what is forecasted as such.
Mr. Costello. Very good. Last question in this round.
Professor Hansman, is it your opinion that NGATS will
increase productivity and drive down the FAA's operating cost?
Mr. Hansman. I think that NGATS, if it is implemented and
well designed--remember, this is a system which is still being
designed and prototyped. One of the clear objectives is to
increase the productivity. One of the reasons why the system
doesn't scale over time is that we can't continue to cut
sectors into smaller and smaller chunks, because we are limited
by controller workload capability. So we will find a way to get
more productivity out of the system. In all likelihood, it will
be shifting some of the operational responsibility to the
cockpits and things like that. So I think it will be more
efficient. And if it is not more efficient, we shouldn't do it.
Mr. Mica. Thank you.
Mr. Ehlers?
Mr. Ehlers. Thank you, Mr. Chairman.
First of all, I also have to join with Mr. Costello in
thanking Dr. Dillingham with his concern about Podunk, since
Podunk happens to be in my district. The irony is only a mile
and a half away from Podunk is Harvard. So, as you can see, I
have quite a diverse district.
A couple of different questions. And I appreciate,
incidentally, Dr. Dillingham, your comments about there is a
definite public interest in aviation and that substantial part
of it has to be financed out of the General Fund. And I am
puzzled about the constant talk about user fees and so forth.
It seems to me that is the wrong way to go; it makes it very
cumbersome, it gets more expensive.
And the best analogy I have is just our ordinary automobile
traffic. We don't charge user fees. Everyone goes through an
intersection and has the benefit of a traffic signal. Or when
you put up a stop sign at the end of the street, you don't
charge a user fee to all the people who live on that street. I
think that analogy holds for aviation. It is a bit silly to get
that specific about the cost. And I think, because of the
public interest, we should finance that part of the General
Fund or out of the fuel taxes.
A question for Mr. Hansman. In your best case NGATS
scenario, REDAC assumes that after 2011 FAA operating costs
will be reduced about 2 percent per year, resulting in a 25
percent cost savings by 2025, which sounds wonderful. Just what
assumptions go into this and how much confidence can we all
place in these estimates of productivity savings?
Mr. Hansman. The reason why this was done as a parametric
analysis is because it is so preliminary. We are basically
scoping the problem. So that is why it is the best case. So
what we felt was that 2 percent was reasonable as a best case
productivity improvement. We assumed that in the baseline case
it would essentially hold operations costs constant, and the
worst case was that the operations costs would remain at the
current levels per flight or per operation.
Mr. Ehlers. And are you reasonably confident that we can
increase the productivity by that amount?
Mr. Hansman. I am confident we can increase the
productivity. The U.S. actually has one of the highest
productivity air traffic control systems in the world, but
there are clearly inefficiencies in the system and the way we
do it is very labor intensive. So it is clear that there are
opportunities for improvement. And if that is an objective of
the system, it is clear to me that we can get improvements.
Whether they will be at a 1 percent level, 2 percent level, or
10 percent level is tough to say at this point.
Mr. Ehlers. Actually, I agree with you. The difficulty
comes when there is an aircraft accident with a number of
fatalities. Immediately the outcry will be you have cut the
staff too much. And so it is hard to judge what impact that is
going to have.
Mr. Hansman. But I think we have to recognize that air
traffic controllers don't fly the airplanes. That is one of the
notions within NGATS, is to move more of the responsibility to
the cockpit, where you actually have better information and are
quicker. So I think you are right, there is always political
pressure after an accident, but we really have to think about a
system which is scalable for the future and is efficient.
Mr. Ehlers. Well, that can easily be done with the right
electronic equipment and interfacing.
Mr. Hansman. Yes.
Mr. Ehlers. A question for Ms. Jewett. You gave a
convincing case for using the public bond approach, but can you
just tell me why it is better to do that than borrow from the
United States Treasury?
Ms. Jewett. I will give you one reason why it might be
better. As we have all talked about U.S. Treasury being the
lowest cost, one issue on the Treasury side, though, is the
inability to be able to refund the bonds. If the interest costs
became lower, in the bond market you could issue variable rate
bonds, which are always lower cost than fixed rate, and you
could structure a bond financing that would have possibly
increasing debt service if there was a sense that the fees were
going to increase.
So there is more flexibility in the other options. A
securitized model in today's market would really only cost a
quarter of a point in the market relative to a U.S. Treasury,
so I am not suggesting looking at a model that would be
dramatically different or more expensive than what we have
today. But Treasuries are great too.
Mr. Ehlers. All right, thank you very much.
I yield back the balance of my time.
Mr. Mica. Thank you.
Mr. DeFazio?
Mr. DeFazio. Thank you, Mr. Chairman.
This is an important subject, but just to get back to
Podunk for a second, I took the liberty of Googling Podunk, and
on Wikipedia Mr. Ehlers may want to edit it, because they don't
list one in Michigan. They have New York, Massachusetts, a
couple others.
So, Vern, you ought to get in there and edit that.
[Laughter.]
Mr. DeFazio. I have a couple of questions that relate to
this. I know it is hard to say, and I guess no one wants to put
a number on what would be the appropriate level of General Fund
contribution. Do any of you have any ideas on how we might go
about, if we wanted to reach that conclusion, sort of
methodologically looking at that which accrues generally to the
society in terms of economic activity?
For instance, in my hometown of Eugene, we have companies
who have come there, rather large companies, who say, well in
part we are here because we have very good access to San
Francisco, you know we have, down in the Silicon Valley,
another branch and, therefore, we need to be moving people back
and forth. So, obviously, there are some pretty interesting
second and third level sorts of benefits that accrue to a
national integrated system that is efficient.
So does anybody have any ideas-- I mean, since we are going
to have this debate--next year we are going to be having some
significant portion of debate on how much we are going to leave
on the table for the General Fund or how much are we going to
try and fight with the appropriators? Anybody want to give us
an idea of how we might get there?
Mr. Marron. Sir, I will start off so that I can be the
first to give the weasely answer, which, of course, in part it
is a political----
Mr. DeFazio. You did very well with Mr. Costello, too.
Mr. Marron.--about distribution. But that said, as a
starting point, I would start at the other end and just point
out that it is clear that a lot of the benefits of the system
accrue to the people and cargo that fly. And so the starting
point, I think, purely as an economist--leaving aside kind of
political judgments and distributional judgments--is that
clearly a significant portion should be borne by those direct
beneficiaries of the system, just as we do for other types of
products that we are able to produce in the economy without
government intervention. And then it becomes, as you say, sort
of a line drawing exercise of how far do you go.
I haven't seen any good studies, myself, that would try to
parse that out and give you ratios, I am afraid, so weasely
answer.
Mr. DeFazio. OK.
Ms. Irving?
Ms. Irving. I will give you another version, I guess, of a
weasely answer, but also starting at the other end, one of the
things that improved cost accounting can do is help you figure
out something about the allocation of who imposes costs, which
then can be--which is not the same as who benefits, but it will
provide input as you begin to think of this balance between the
costs imposed and the benefits received.
The other thing you might want, when you all are talking
among yourselves, is this is not actually a unique argument in
the Government. When we think about funding drug approvals, it
is not only drug manufacturers who benefit from a strong FDA,
but those of us--I am old--who did not take thalidomide. It is
not only meat producers who benefit from meat inspection, but
me when I grocery shop. So there is some balancing, I think,
between, but if you can learn what costs are imposed by whom
and then start from there, you may have a head start in your
discussion about how much you believe should be taken from the
collective to be used for the safety.
Mr. DeFazio. Of course, you have just opened a bit of
another issue there, which is how we attribute the benefits
received. Mr. Lapinski and I went through an exercise four or
five years ago where we invited a whole host of experts in to
breakfast meetings from different sectors to talk about that,
and you get a different answer from a point-to-point carrier
than a hubbed carrier in terms of how one should assess certain
costs on passengers and, I mean, what the benefits are, I mean,
is it harder for an air traffic controller to deal with a
commuter flight at lower elevations and that has frequent
landings or a longer transcontinental flight, those sorts of
things.
Ms. Irving. It is interesting, because I think of that as
part of the costs imposed, and that is some of the stuff my
colleague talked about. Benefits is that I would suggest that
the safety improvements on the airlines, for instance, benefit
not only those on the airline, but those into whose homes the
airlines do not crash.
Mr. DeFazio. Right.
Ms. Irving. So that is part of the balancing act I think
you are dealing with.
Mr. DeFazio. Right.
Mr. Dillingham. Mr. DeFazio, maybe not helpful immediately,
but certainly an issue that comes up continuously, the last
time the Committee had a hearing on small community air
service, it comes up constantly in terms of the economic
benefit that airline service brings to the communities, and
each time we are asked to go out and try and quantify that, we
find the studies don't hold up. We find that the information is
just not there. So something in the future for almost every
district that has a small air service is to really work towards
developing that kind of information that will add up to and
support the notion of the economic benefits of having an
airline come to those small communities, and medium-sized
communities.
Mr. DeFazio. Yes, sir.
Mr. Hansman. These are just a few thoughts. I actually have
a doctoral student who is attempting to correlate the economic
effect of air transportation sort of in the general sense. We
know that there is a correlation. We actually don't know what
is cause and what is effect. I think that when you think about
this air transportation system, it is important to separate out
the air traffic control functions from the infrastructure
functions, because the air traffic control benefit is really
the traffic cop, OK? It is organizing the traffic; it is an
efficiency benefit versus the access issue.
The other thing is if you look at the U.S. in general, we
have a society which has clearly become dependent on air
transportation, and that is why you touch Podunk, because it is
not just the travel, but it is the just-in-time inventory, it
is all kinds of things that permeate through the system. And
you can actually see diffusion of the U.S. population into
regions which have good air service. So I think that there is
clearly a benefit to the population at large, and it is
important not to overly think about the intermediates or the
operators who really think about who is getting the real
benefit of having that infrastructure.
Mr. DeFazio. And if the Chairman is successful in doing
away with Amtrak, then we will be even more dependent upon--no,
I didn't mean that, Mr. Chairman.
Mr. Chairman, one more question here.
I am a bit puzzled by the JPDO projections on the costs to
the economy, and if anybody here can sort of--because it says
here $12 billion in 2008, so on and so on, in terms of foregone
opportunity, I guess. I mean, it says difference between demand
for air travel and the total flights that could be delivered
with no new investment.
I am just puzzled by that number. I mean, if we are looking
at $12 billion in 2008, that would imply that we probably are
seeing foregone revenues today, or economic activity. I mean, I
am not aware that the system is that constrained today. Can
anybody speak to how JPDO came up with these numbers, and how
they seem so large and go up so quickly?
Mr. Hansman. I don't remember the details, so I will just
give you my impression. We have an infrastructure which is
starting to get to capacity limitations. I believe a lot of
that effect are capacity constraints. I think there are also
environmental and other costs that are put into it.
And the way I believe they modeled it was to project the
unconstrained demand, to look at the impact of the constraints,
and then to value, by some measure, the travel that wasn't
accomplished or the economic activity that wasn't accomplished.
Mr. DeFazio. OK, so it is kind of a blue sky thing, like if
everybody could just take off and fly whatever route they
wanted to get wherever they wanted to go without any
interference by air traffic control----
Mr. Hansman. I believe it is a projection. And then if you
start looking at the fact that we can't basically fly more
airplanes into LaGuardia then we currently enable, that becomes
a constraint. And there is an interesting question because does
that activity not exist or does it deflect to other regions?
And the real issue may not be a loss of overall activity, but a
deflection to other places either in the U.S. economy or, more
worringly, to other nations. So as our system becomes
inefficient, then people will start locating in other locations
because they are more efficient.
Mr. DeFazio. OK, thank you.
Thank you, Mr. Chairman.
Mr. Mica. Just for the record, the Chairman is a strong
advocate of long distance national rail service and an
extremely strong advocate of high-speed rail service. He is,
however, in opposite of the Soviet style current Amtrak
operation.
[Laughter.]
Mr. Mica. Ms. Norton.
Ms. Norton. No questions.
Mr. Mica. Thank you for your brevity, Ms. Norton.
A second round.
I just want to follow up on the savings issue. Right now I
understand the cost is $14 billion to run our FAA system, full
system, about $2 billion general revenue. Just project this out
and we say it was going to cost us about $20 billion to run it
we will just say by 2025. And I have heard that there could be
as much as a 20 percent cost savings by 2025. Does that mean
that the cost to operate, just taking those ballpark figures,
could be as low as $15 billion? Would that be a net savings in
dollars or would it just be in operational efficiencies, or
what? Mr. Hansman?
Mr. Hansman. Yes. It would be net savings in dollars. And,
again, I apologize. I took a heat. I didn't do the calculation,
but they are in 2005 dollar, so they are not inflated dollars.
But the NGATS projection out in 2025 would be--the total NGATS
cost to the FAA would be----
Mr. Mica. Would it be your estimate also that we can either
be level or reducing the number of personnel? Now, this system
is based on the highest technology. We are going to be able to
sight planes with unprecedented precision. We will have
technology both on the ground, in the plane, and satellite-
based that will give us unprecedented ability to track, to
locate with redundant systems. So we could end up with net
fewer personnel.
Mr. Hansman. There would clearly be fewer personnel per
operation. Remember, the number of flights goes up too, so you
have to look at which dominates.
Mr. Mica. Right. We are going to have more flights, but
greater efficiencies in operation, greater accuracy, too, in
pinpointing the location of the aircraft, both on the ground,
en route, etc.
Mr. Hansman. And, hypothetically, because of that, you get
some environmental benefits; you can reduce the noise impact
around airports, so you get benefits from there----
Mr. Mica. Fuel.
Mr. Hansman. You will get fuel benefits. One of the things
that is probably under-representative--it is implicit in
efficiency--is within NGATS the things that you get in terms of
efficiency in environmental efficiency are also a fuel savings.
So, hypothetically, you will get some benefit.
Mr. Mica. And what about some ground-based systems now that
are necessary to bring planes in in bad weather or inclement
conditions? With this new technology, it won't be as necessary
to be putting all those bucks into some of those system as
opposed to this system, or will it be necessary for redundant
system to continue building both those and having this in
place?
Mr. Hansman. You will need some level of redundancy. You
will clearly be able to reduce the level of ground redundancy.
One of the problems with a lot of our ground facilities, and
one of the reasons why we have high costs is because they are
expensive to keep calibrated. If they are miscalibrated--if you
have an ILS that is miscalibrated, you have people flying into
hills. So you can't allow that.
So we spend a lot of money calibrating that. Some of these
systems will be more cost effective from a maintenance
standpoint. There will still be costs on the ground, so even if
you have a GPS-based approach system, you are still going to
have lights on the airport and communications facilities, and
things like that.
Mr. Mica. In addition to its ineptness in running passenger
rail system in the United States through a quasi-governmental
entity, I found, in my short 13.9 years on this Committee, that
one thing the Government doesn't do very well is R&D of high
tech systems, at least through FAA. It is just a horrendous
record of cost overruns, inability to procure next generation
anything.
Mr. Dillingham, and maybe Mr. Hansman, how do we avoid
that? Now, we are looking at anew high tech system. Again, I
sat on this Committee as a freshman somewhere down on that
bottom pew, and heard people telling us that this next
development project is right around the corner, just give us a
few more billion. Then they would come back in two years: just
give us a few more billion, it is around the corner.
And the private sector, in the meantime, because they
changed the specs, they tweaked the acquisition, the ineptness
and the time period it takes to procure anything through the
FAA system in the past just ended up having the private sector
would develop technologies that would be far and above what we
had even come close to achieving. And I have helped stop some
of that. I call it the dog chasing its tail.
This is an expensive system, it is a next generation. We
will have some technologies we don't have now. How do we avoid
repeating those same mistakes? Dillingham, Hansman?
Mr. Dillingham. Chairman Mica, the story that you just told
is a story that we have been telling for almost two decades now
about procurement and acquisition at FAA. The other part of the
story is that Congress did act on this project and established
the ATO as a performance-based organization, and as a part of
that mandated that it operate in a more business-like fashion,
that it in fact address those issues of cost overruns and
schedule delays, and at least for the last two years, for the
first time in recent history, FAA is in fact meeting its cost
and schedule goals for acquisition of major systems. The
question becomes now, was this a flash in the pan or do we have
a way to institutionalize that this continues?
Secondly, we have testified before you before and suggested
that one of the missing elements for FAA is do they have the
expertise to acquire and manage such a very complicated
undertaking as this. And we have suggested that they consider--
and FAA has agreed to consider--employing a lead systems
integrator or employing the expertise that is dedicated to FAA,
and not dedicated to its own ends, to make sure that what you
refer to or what we refer to as requirements creep and things
like that are minimized. So we are hopeful.
Mr. Mica. Well, this is a big concern. Also, everybody has
been polite, sort of working together. At some point some hard
decisions have to be made, and I think somebody has to be in
charge with the ability to bring--now you are going to be
dealing with DoD, NASA, DHS, and other agencies who all have
their turf, who all have their agendas, but somebody has to be
in charge of the thing and make decisions with milestones and
deadlines and accountability, as we have learned the hard way
through our FAA acquisition. Would you agree with that?
Mr. Dillingham. Absolutely. And not only somebody has to be
in charge, but whoever is in charge has to transcend the
administrations, has to transcend the secretaries that are on
the decision-making bodies, because this is a multi-year, many
year operation. So, again, that is why we say that cultural
shift that is going on plus whatever systems are in place that
have made it work well for the last two years needs to be
attended to, and the buck has to stop someplace. It is not
clear to us that there is an absolute end in JPDO as to who is
in charge right now.
Mr. Mica. Exactly. I mean, I think Marian Blakey and Russ
Chu have done their part, but, again, we are involved in low-
hanging fruit at this stage. But to make this really happen,
somebody is going to have some clout, some teeth, and some
ability to transcend just a limited period in time and space.
Mr. Hansman, did you have anything?
Mr. Hansman. Yes. I agree. I think this is a tremendous
challenge. I have concerns about how you actually do it,
particularly as a multi-agency involvement, how do you manage
through this. One of the reasons why it is hard to do major
modernization at the FAA is it is a big system. We have one of
the biggest systems in the world. It is perceived as a safety
critical system, so that, if someone doesn't like what is going
on, they just raise the safety issue. So it is a real
challenge. It is going to require leadership and a structure
that has the type of forcing function that was discussed.
Mr. Mica. Well, the other thing, too, riding on this that
we haven't even talked about today is our standing in sort of
dominating or being the premier airspace aviation system in the
world. We skip a few beats here----
Mr. Hansman. So, interestingly----
Mr. Mica. We will be looking at----
Mr. Hansman. The Australians are actually moving pretty
quick, because they have a smaller system that they have
control over. So it has been an interesting case that they are
often leading the technology. They are the guys putting
automatic dependant surveillance in already. So I think that
that is a challenge.
Mr. Mica. We haven't really gotten into the consequences
for the U.S. falling behind, which would be horrible.
Mr. Costello had another question.
Mr. Costello. Final question.
Ms. Jewett, let me ask you. In your testimony you talk
about financing options and you talk about the FAA or a
conduit. Let me specifically ask you on page 2 you say that:
``There are a number of benefits to this financing structure.
The most important to note is that neither the FAA nor the US
Government is obligated under this structure to pay anything
other than the transferring the pledged revenue collections.
Should the revenue collections fall short of the necessary debt
payments, there is no recourse back to the FAA or the
Government.'' It sounds like a deal that no one could refuse.
Ms. Jewett. Too good to be true?
Mr. Costello. So there is no obligation on the part of the
FAA or the American taxpayers if we set up this conduit and
revenue falls short?
Ms. Jewett. If you have created this capital policy board
that directs the special purpose vehicle who is receiving,
whether it is the ticket tax, the General Fund money, a user
fee, whatever it is, and the obligation in the securitized
model is just on whatever revenues come in to this box, if you
will, of money, if for some reason the policy board hasn't
directed an increase in user fees, say, or if the ticket taxes
don't come in at the expected amount, that is the risk that the
bondholder bears, the person who bought the bonds.
Mr. Costello. Well, the person who bought the bonds, but,
of course, we have a system here that, if in fact is
implemented, we have to keep it running. And as I said in my
opening comments, I am not opposed to looking at all financing
options and putting them on the table, but I have had an
experience in dealing with some infrastructure where there were
entities who operated and collected fees, bonds were sold, the
revenue did not cover the cost of operations, and both the
State of Illinois and the State of Missouri had to step in, pay
off the bonds, take over both of these structures, maintain it,
and they continue to run it to this day.
So I just want to be clear on this. We could have closed
the bridges down and said we will shut the bridges between
Illinois and Missouri down because they are going into default
on the bonds, but that, of course, would not be in the interest
of the region or the American taxpayers. And if in fact we set
up a system here, if it is a conduit, if it is some other type
of a structure, in the end, the taxpayer is responsible for it
if we intend to keep the system going.
Ms. Jewett. I think that you are right in that there may be
a moral obligation. But there wouldn't be a legal obligation.
And I could sense you were talking about the bridges. I don't
remember whether there was a moral or a legal obligation in
that particular situation, but----
Mr. Costello. Well, we sure wouldn't shut the system down
Ms. Jewett. No, you wouldn't shut the system down. And
presumably, in this case, one, you would collect enough to have
a coverage account on the side, possibly; two, if you found
that you were in a position where revenues were falling short,
you would restructure the debt. And that is the difference of
what you can't do with Treasuries. You can't restructure that
debt, but here you can restructure it to meet the revenues.
And, third, you would have the policy board presumably having
an ability to raise the fees and charges if you were getting to
that point.
Mr. Costello. Let me ask that question of the GAO or CBO.
Mr. Marron. I am happy to jump in. I guess the framework I
would say that to the extent that one is successful in setting
up a structure that passes some risk on to private parties,
they are going to ask you to pay for it in advance somehow in
the compensation they get through the arrangement. So that, in
essence, the Government will be paying for it through some
other form. And then layer on top of that your concern, which
is, after the fact, if something goes wrong, to the extent that
something is a significant governmental undertaking, as you
said, the Government will be on the hook for providing it
anyway.
Mr. Costello. Which brings me to another project that was
recently privatized where a lot of money was paid up front for
this company to take over this structure, and the money that
was paid to the governmental entity was not set aside for
infrastructure, it was used for other governmental purposes. I
wonder if the GAO would want to comment, Dr. Irving or Dr.
Dillingham?
Mr. Irving. I think that Ms. Jewett's answer that there
would be a moral obligation at the end answers that this is in
effect the Government using another vehicle to borrow more
expensively for what the Government could borrow. I actually do
not understand the point about rigidity. I mean, the Treasury
borrows at all kinds of maturities at the lowest rate possible.
If you wanted to do the two-step version, where Treasury
borrows from the Federal Financing Bank, the Federal Financing
Bank has the ability to lend to agencies at quite different
designs, in very different ways. It has a fair amount of
flexibility. But it is still the Treasury going to the market.
And there is the additional question of would you really want
to hand to some private board the ability to impose what is
called a user fee, but is in effect a tax?
Mr. Costello. Dr. Dillingham?
Mr. Dillingham. Again, that is about as far as I can go
with it.
Mr. Costello. Mr. Chairman, thank you. And I want to thank
our witnesses.
Mr. Mica. Well, thank you. Thank you also, Mr. Costello.
I want to thank our witnesses.
Now, we haven't answered how this is all going to be paid
for or how it is all going to be designed and proposed at this
juncture. We have answered a few questions, but we have raised
a bunch of questions. I think the important thing is that we
look at this as not only a challenge, but a great opportunity
to create truly a next generation air traffic control system
and aviation system for this Country and be on the cutting
edge. And there are a lot of representatives in the audience
from different organizations.
Well, who is going to pay for it? Well, we are all going to
pay for it. That guy in Podunk, we are going to figure out what
his fair share is, and every one of you who is sitting here
that has some interest in using and access this system are
going to help pay for it.
We are going to figure out a way to do that, stay ahead of
the curve, and see how we can have, again, the very best system
in the world and set the standard. The benefit will not only be
for the United States, but think of the potential of having our
system adopted around the world and again having us continue to
keep and set the standard. So that is what we are going to do
with Mr. Costello's help and all of you out there. If we have
to drag you kicking and screaming across the finish line, we
are going to do it.
Mr. Costello moves that the record be left open for a
period of two weeks for additional comments and pledges of your
financial contributions towards this effort, statements, we
welcome all of those.
There being no further business to be before the
Subcommittee today, I thank again our witnesses and everyone
for being with us. This hearing is adjourned.
[Whereupon, at 3:37 p.m., the subcommittee was adjourned.]
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