[Federal Register Volume 61, Number 38 (Monday, February 26, 1996)]
[Notices]
[Pages 7134-7144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4270]



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DEPARTMENT OF TRANSPORTATION
[Docket No. 28472]


Policy and Procedures Concerning the Use of Airport Revenue

AGENCY: Federal Aviation Administration (FAA), Transportation.

ACTION: Notice of proposed policy; request for comments.

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SUMMARY: This document proposes a statement of policy and procedures 
concerning the use of airport revenue. This document discusses in 
detail the requirement that revenue at public airports that have 
received Federal grants generally be used only for airport purposes. 
The document proposes definitions of ``airport revenue'' and ``revenue 
diversion,'' and discusses the permitted and prohibited uses of airport 
revenue, and the procedures for monitoring compliance with the revenue 
use requirement. A statement of policy is required by the Federal 
Aviation Administration Authorization Act of 1994. The FAA is issuing a 
proposed policy and requesting public comment because of substantial 
public and industry interest in the subject matter. While the policy 
statement proposed is not made effective at this time, statutory 
requirements relating to the use of airport revenue remain in effect 
and will be enforced by the FAA. Airport sponsors may assume that the 
FAA would act consistently with the views expressed in this document in 
any enforcement action for revenue diversion taken before a final 
policy statement is issued.

DATES: Comments must be received by April 26, 1996.

ADDRESSES: Comments should be mailed, in quadruplicate, to: Federal 
Aviation Administration, Office of Chief Counsel, Attention: Rules 
Docket (AGC-200), Docket No. 28472, 800 Independence Avenue, SW., 
Washington, DC 20591. All comments must be marked: ``Docket No. 
28472.'' Commenters wishing the FAA to acknowledge receipt of their 
comments must include a pre-addressed, stamped postcard on which the 
following statement is made: ``Comments to Docket No. 28472.'' The 
postcard will be date stamped and mailed to the commenter.
    Comments on this Notice may be examined in room 915G on weekdays, 
except on Federal holidays, between 8:30 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT:
Benedict D. Castellano, Manager, Airport Safety and Compliance Branch, 
AAS-310, Federal Aviation Administration, 800 Independence Ave. SW., 
Washington, DC 20591, telephone (202) 267-8728; or Jonathan W. Cross, 
Airports Law Branch, AGC-610, Office of the Chief Counsel, Federal 
Aviation Administration, 800 Independence Avenue, SW., Washington, DC 
20591, telephone (202) 267-3473.

SUPPLEMENTARY INFORMATION: This proposed statement of policy and 
related procedures is being published pursuant to section 112(a) of the 
Federal Aviation Administration Authorization Act of 1994, Pub. L. No. 
103-305 (August 23, 1994) (1994 Authorization Act). That section 
requires the Secretary 

[[Page 7135]]
to establish policies and procedures assuring the ``prompt and 
effective enforcement'' of the requirement relating to the use of 
airport revenue (also called the ``revenue retention requirement'') (49 
U.S.C. 47107(b)) and the requirement that airports be as self-
sustaining as possible (49 U.S.C. 47107(a)(13)), and of the Airport 
Improvement Program (AIP) sponsor assurances made under these sections. 
Section 112 includes specific guidance and requirements for the 
mandated policies and procedures.
    For convenience, the term ``sponsor'' is used throughout this 
document to mean the state or local government body obligated under an 
airport grant agreement. For purposes of the proposed policy statement 
the term is generally interchangeable with the term ``airport owner or 
operator'' used in some statutes. A sponsor may be an entity that 
exists only to operate the airport, such as an airport authority 
established by state law. Other airports are owned by a state, county, 
or city government and operated by an agency of that government, in 
which case the state, county, or city is the sponsor, rather than the 
subordinate agency.

The Airport and Airway Improvement Act of 1982

    Under the Airport and Airway Improvement Act of 1982, as amended 
(AAIA), part of title V of the Tax Equity and Fiscal Responsibility 
Act, Public Law 97-248, repealed and reenacted without substantive 
change, Public Law 103-272 (July 5, 1994), 49 U.S.C. 47101, et seq., as 
amended by Public Law 103-305 (August 23, 1994), public agencies 
receiving Federal grants for airport development since September 3, 
1982, are required to comply with the revenue retention requirement, 
section 511(a)(12) of the AAIA, now codified at 49 U.S.C. 47107(b).
    As originally enacted in 1982, the revenue retention assurance 
required airport owners to use ``* * * all revenues generated by the 
airport * * * for the capital or operating costs of the airport, the 
local airport system, or other local facilities which are owned or 
operated by the owner or operator of the airport and directly related 
to the actual transportation of passengers or property.'' The plain 
purpose of section 511(a)(12) was to prevent an airport owner or 
operator who receives Federal assistance from using airport revenues 
for expenditures unrelated to the airport. Thus, according to the 
requirement, a grant recipient could not use airport revenues to pay 
for ``capital or operating costs'' that were not airport-related. 
According to a recent House Report,

    The rationale for [the revenue retention requirement] is that 
the Federal AIP program can underwrite only about 20% to 30% of the 
total capital development needed by airports. To ensure the maximum 
effectiveness of the AIP program, airports should also spend all of 
the money they generate to operate and develop the airport. A 
federal grant should not furnish an opportunity for an airport to 
use federal funds to replace other airport generated funds, and then 
use the latter for general governmental purposes, resulting in no 
net capital improvements for the federal grant dollars expended.

    H.R. Rep. No. 103-240, 103d Cong., 1st Sess. 14 (1993).

    The original revenue retention requirement also contained an 
exception, or ``grandfather'' provision, permitting the use of airport 
revenue for non-airport purposes in certain cases in which the use 
predates the AAIA. Specifically, revenue use restrictions did not apply 
where pre-September 3, 1982, covenants or assurances in debt 
obligations previously issued by the airport owner or operator, or 
provisions in governing statutes enacted before September 3, 1982, that 
control the owner's or operator's financing, provided for the use of 
revenues from any of the airport owner's or operator's facilities, 
including the airport, to support not only the airport but also the 
airport owner's or operator's general debt obligations or other 
facilities.
    The House and Senate Conference Reports on the AAIA describe the 
revenue retention requirement in section 511(a)(12) as follows:

    One [requirement] is that airports receiving assistance under 
this program must dedicate all revenues generated by the airport for 
the capital [and] operating costs of that airport, the local airport 
system, or other local facilities which are owned by the owner or 
operator of the airport and used for the transportation of 
passengers or property. The provision is designed to ensure that 
airport systems which are receiving Federal assistance are utilizing 
all locally generated revenue for the systems which they operate. 
Airports that are part of a unified ports authority are exempt from 
this requirement if covenants or assurances in previously issued 
debt obligations or controlling statutes require that these funds 
are available for use at other port facilities.

    However, airport users should not be burdened with ``hidden 
taxation'' for unrelated municipal services.
    This provision is not intended to apply to revenue generated by 
facilities which are located on airport property but are unrelated to 
air operations or services which support or facilitate air 
transportation. It would accordingly not apply to revenue generated by 
such facilities as a water reservoir or a convention center which 
happen to be located on airport property, but which serve neither the 
airport nor any air transportation purpose. It would apply to such 
facilities as terminal concessions and parking lots serving the 
terminal or other air transportation purposes.

    H.R. Conf. Rep. No. 97-760, 97th Cong., 2d Sess. pt. 3,697,712 
(1982); see also, S. Rep. No. 97-494, vol. 2, 97th Cong., 2d Sess. 
28 (1982).

The Airport and Airway Safety and Capacity Expansion Act of 1987

    The Airport and Airway Safety and Capacity Expansion Act of 1987, 
Public Law 100-223 (December 30, 1987), amended the revenue retention 
requirement by requiring that such local facilities be ``directly and 
substantially related to actual air transportation of passengers or 
property.'' This amendment narrowed the permissible uses of airport 
revenues to expenditures that are not only ``directly'' but also 
``substantially'' related to actual air transportation, to further 
assure that such revenues are not diverted for general expenses. The 
1987 Act also required local taxes on aviation fuel enacted after 
December 30, 1987, to be spent on the airport, and slightly modified 
the grandfathering language to clarify its application only to pre-
September 3, 1982, debt obligations or legislation controlling 
financing. The 1987 Act's legislative history reaffirms the earlier 
statement that Sec. 511(a)(12) is not intended to apply to revenue 
generated by facilities located on airport property but unrelated to 
air operations or services that support or facilitate air 
transportation. H.R. Conf. Rep. No. 100-484, 100th Cong., 2d Sess. 63 
(1987), reprinted in 1987 U.S.C.C.A.N. 2638; see also, H.R. Rep. No. 
100-123 (II), 100th Cong., 2d Sess. 14, reprinted in 1987 U.S.C.C.A.N. 
2601, 2613.

The Federal Aviation Administration Authorization Act of 1994

    Several provisions of the Federal Aviation Administration 
Authorization Act of 1994, Public Law 103-305 (August 23, 1994), 
address revenue diversion. Section 110 adds a policy statement to Title 
49, Chapter 471, ``Airport Development,'' concerning the requirement 
that airports be as self-sustaining as possible. That section restates 
the requirement and also states that in establishing new fees, rates, 
and charges, and generating revenues from all sources, airport owners 
and operators should not seek to create revenue surpluses that exceed 
the amounts to be used for airport system 

[[Page 7136]]
purposes and for other purposes for which airport revenues may be spent 
under section 47107(b) of this title, including reasonable reserves and 
other funds to facilitate financing and cover contingencies.
    Section 111 adds a new sponsor assurance. Airport owners or 
operators will now be required to submit to the Secretary and make 
available to the public an annual report listing all amounts paid by 
the airport to other units of government and the purposes for the 
payments. Airport owners or operators must also make available a 
listing of all services and property provided to other units of 
government and the amount of compensation received for provision of 
each such service and property. Section 111 also requires the Secretary 
to issue a simplified format for reporting applicable to airports to 
assist in public understanding of airport finances and to provide 
information concerning the amount of any revenue surplus, the amount of 
concession-generated revenue, and other information required by the 
Secretary. The Secretary is also required to provide an annual summary 
of the financial reports to various Congressional committees. See, H.R. 
Conf. Rep. No. 103-677, 103d Cong., 2d Sess. 68 (1994).
    Section 112(a) requires the Secretary to establish policies and 
procedures that will assure the prompt and effective enforcement of the 
statutory provisions in 49 U.S.C. 47107, subsections (a)(13) (the 
requirement that airports be as self-sustaining as possible) and (b) 
(the revenue retention requirement) and the sponsor assurances made 
under such subsections. Section 112(a) also sets forth four prohibited 
forms of revenue diversion, which are included in the proposed policy 
statement.
    Section 112(b) amends 49 U.S.C. 47111, ``Payments under project 
grant agreements,'' and requires the Secretary to withhold approval of 
any new grant application, or any proposed modification that would 
increase funding, and withhold approval of any new application to 
impose a Passenger Facility Charge (PFC), if after notice and 
opportunity for hearing, the Secretary has found a violation of 49 
U.S.C. 47107(b), as further defined by 49 U.S.C. 47107(l), or a 
violation of the assurance made under 49 U.S.C. 47107(b), and the 
sponsor has not taken corrective action to cure the violation. Section 
112(b) also authorizes the Secretary to seek enforcement through writ 
of injunction in United States district court for any violation of 
Title 49, Chapter 471, or the sponsor assurances made under that 
Chapter.
    Section 112(c) authorizes the Secretary to impose civil penalties 
up to a maximum of $50,000 on airport sponsors for violations of the 
revenue retention requirement. Civil penalties may not be imposed on 
any individual and the Secretary has the authority to compromise the 
penalties. See, H.R. Conf. Rep. No. 103-677, 103d Cong., 2d Sess. 67-68 
(1994).
    Section 112(d) requires the Secretary, in administering the 1994 
Authorization Act's revenue diversion provisions and the AIP 
discretionary grants, to consider the amount being lawfully diverted 
pursuant to the grandfathering provision by the sponsor compared to the 
amount being sought in discretionary grants in reviewing the grant 
application. Consequently, in addition to the prohibition against 
awarding grants to airport sponsors that have illegally diverted 
revenue, the Secretary must now consider the lawful-diversion of 
airport revenues by airport sponsors under the grandfather provision as 
a factor militating against the distribution of discretionary grants to 
the airport, if the amounts being lawfully diverted exceed the amounts 
so lawfully diverted in the first year after enactment of section 112, 
adjusted for inflation.
    Section 112(e), which amends the Anti-Head Tax Act, 49 U.S.C. 
40116(d)(2)(A), prohibits a State, political subdivision, or an 
authority acting for a State or political subdivision from collecting a 
new tax, fee, or charge which is imposed exclusively upon any business 
located at an airport or operating as a permittee of the airport, other 
than a tax, fee, or charge utilized for airport or aeronautical 
purposes.

Investigation by the House Committee on Appropriations

    In December 1993, the Surveys and Investigations Staff of the 
United States House of Representatives presented a report to the 
Committee on Appropriations concerning the diversion of airport 
revenues from commercial air service airports in the United States. The 
staff stated in the report that out of 30 airports investigated, 
airport revenue was being diverted at 17 airports. The staff 
recognized, however, that most of the revenue was being diverted 
lawfully under the grandfather provision. The report stated that of the 
approximately $900 million that was diverted, $641.3 million was 
lawfully diverted under the grandfather exception (according to the DOT 
General Counsel's Office), and $140.8 million was diverted under the 
grandfather exception where the sponsors themselves proclaimed the 
exception. The report stated that $111.7 million of the $900 million 
total was diverted at airports where the sponsors did not appear to 
meet the statutory exception. The report stated that more FAA oversight 
was needed to assure that sponsors comply with the conditions required 
by Federal law on the use of airport revenue. The DOT Office of the 
Inspector General (OIG) has conducted audits of 13 of the 30 airports 
investigated by the committee staff.

Investigation by the Department of Transportation's Office of the 
Inspector General

    On March 7, 1994, the DOT OIG released a report concerning the 
FAA's monitoring of the use of airport revenues at 22 airports 
throughout the United States. That report concluded that FAA monitoring 
was not adequate to ensure fee and rental structures were maintained 
that made airports as self-sustaining as possible, or that airport 
revenues were used only for the capital and operating costs of the 
airports. Where the OIG report indicated actual cases of potential 
revenue diversion, the FAA has investigated and taken action to restore 
the sponsor to compliance. At airports where the OIG cited the failure 
to charge fair market value for aeronautical facilities, the FAA finds 
this latter practice consistent with the Policy Regarding Airport Rates 
and Charges issued in February 1995, which limits a sponsor's total 
charges to aeronautical users to the total cost of services provided, 
and the proposed revision of the policy issued in September 1995. The 
self-sustaining obligation does not require a sponsor to charge 
aeronautical users more than its aeronautical costs. The OIG 
recommended that the FAA increase its monitoring of airport sponsors. 
It should be noted that more than 2,500 airports are subject to such 
monitoring. The FAA expects to continue to work with the OIG on these 
issues.

Airport Revenue

Background

    In addressing the requirement that airport revenue be used for 
certain purposes, it is first necessary to make clear which funds 
received by an airport sponsor ``* * * all revenues generated by the 
airport,'' within the meaning of 49 U.S.C. 47107(b). Airports generate 
revenues for the sponsor, for air carriers, and for commercial tenants. 
While the income received by air carriers and tenants for sales and 
business activity on the airport is not ``airport revenue,'' within the 
meaning of section 47107(b), most revenue received by the sponsor as 
airport owner and operator is 

[[Page 7137]]
considered airport revenue. the airport sponsor receives payments for 
the use of the airport in the form of landing fees, land and facility 
rental, and, in some cases, a share of the gross receipts or profit 
(e.g., concession fees or royalties) from the commercial tenant. The 
sponsor may receive revenue from the sale of real or personal airport 
property. A sponsor may also receive income from an airport-related 
facility that is not on the airport property map, commonly referred to 
as ``Exhibit A,'' but that supports the operation of the airport, such 
as a remote parking lot or downtown terminal funded from airport 
revenues. Sometimes, the airport sponsor directly engages in a 
commercial activity and thus receives all of the gross receipts of the 
commercial activity rather than just the rental it would receive as 
landlord.

FAA Internal Orders

    The FAA routinely issues internal guidance to its employees in the 
form of nonregulatory directives, including handbooks. Orders do not 
seek to prescribe conduct for persons outside the agency, and they 
incorporate provisions for deviation from the stated guidance by agency 
personnel.
    The Airport Improvement Program (AIP) Handbook, FAA Order 5100.38A 
(October 24, 1989), and Airport Compliance Requirements, FAA Order 
5190.6A (October 2, 1989), both contain provisions that address the use 
of airport revenue. The agency believes in most cases that the 
statements in these orders are consistent with the proposed policy; 
however, to the extent that there is any apparent inconsistency, the 
final policy statement will take precedence and the orders will be 
revised to reflect the policies adopted. The final policy would also 
supersede any other inconsistent statements of agency policy appearing 
in correspondence or other form.

Definition of Airport Revenue

    Under this proposed policy, the following types of fees, charges, 
rents, or other payments received by or accruing to the sponsor 
(revenue) are considered to be ``airport revenue:''
    (1) Revenue from air carriers, tenants, transferees, and other 
parties. Airport revenue includes all revenue received by the sponsor 
for the activities of others or the transfer of rights to others 
relating to the airport, including revenue received:
    (a) for the right to conduct an activity on the airport or to use 
or occupy airport property;
    (b) for the sale, transfer, or disposition of real airport property 
not acquired with Federal assistance or personal airport property not 
acquired with Federal assistance, or any interest in that property, 
including sale through a condemnation proceeding;
    (c) for the sale of (or sale or lease of rights in) sponsor-owned 
mineral, natural, or agricultural products or water to be taken from 
the airport; or
    (d) for the right to conduct an activity on, or for the use or 
disposition of, real or personal property or any interest therein owned 
or controlled by the sponsor and used for an airport-related purpose 
but not located on the airport;
    (2) Revenue from sponsor activities. Airport revenue generally 
includes all revenue received by the sponsor for activities conducted 
by the sponsor itself as airport owner and operator, including revenue 
received:
    (a) from any activity conducted by the sponsor on airport property 
acquired with Federal assistance;
    (b) from any aeronautical activity conducted by the sponsor; or
    (c) from any nonaeronautical activity conducted by the sponsor on 
airport property not acquired with Federal assistance, up to an amount 
appropriately attributable to the use of the property (such as the 
amount of rent that would be charged a commercial tenant).
    In general, revenue received by the sponsor for an airport activity 
is ``airport revenue.'' However, in consideration of legislative 
history, a distinction is made where the sponsor itself undertakes an 
activity on airport property not acquired with Federal assistance, if 
the activity is not related to air operations or services that support 
or facilitate air transportation. In that case, as represented in 
subparagraph (2)(c) of the definition, only an amount properly 
attributable for the use of airport property, such as the rent that a 
commercial tenant would pay, would be considered airport revenue. 
Subparagraph (2)(c) of the definition of ``airport revenue'' results 
from legislative history that indicates the revenue retention 
requirement is not intended to apply to all revenue generated by 
facilities that are located on airport property but are ``* * * 
unrelated to air operations or services which support or facilitate air 
transportation.'' H.R. Conf. Rep. No. 97-760, 97th Cong., 2d Sess. pt. 
3, 697,712 (1982). The language states that the requirement would 
therefore not apply to revenue generated by facilities such as a ``* * 
* water reservoir or a convention center which happen to be located on 
airport property, but which serve neither the airport nor any air 
transportation purpose.'' Id.
    In a typical airport situation, a commercial enterprise earns gross 
income on the airport and then makes a payment to the airport sponsor 
for the use of the facility and the right to conduct business on the 
airport. The gross income to the enterprise is not airport revenue, but 
the payments to the sponsor are. We read the report language concerning 
the conference center and reservoir to apply not to this typical 
situation, which would result in free use of airport property, but 
rather to the special case in which a local government is the airport 
sponsor and is at the same time conducting a nonaeronautical enterprise 
on the airport (such as a convention center). In this latter case the 
sponsor is technically receiving all of the gross receipts of the 
enterprise. Since the report language indicates that such gross 
receipts should not be considered airport revenue, we read the 
legislative history to mean that only the amount properly attributable 
for the use of the airport property (such as the amount of facility or 
land rental a commercial tenant would pay) would be considered to 
constitute airport revenue. The remaining gross receipts would not be 
airport revenue and could be used for non-airport purposes. This 
interpretation is consistent with the report language, and ensures that 
the airport receives an equivalent amount for the commercial use of 
property whether the property is used by a private tenant or by the 
sponsor itself. If the sponsor activity is related to air 
transportation, then the entire amount of gross receipts would be 
airport revenue, as represented in subparagraphs (2)(a) and (2)(b) of 
the definition.
    Airport revenue does not include Passenger Facility Charges 
received by a sponsor as public agency in accordance with 49 U.S.C. 
40117 and 14 C.F.R. part 158. Also, the disposition of land acquired by 
Federal donation or with Federal assistance is governed by specific 
requirements included in the agreement between the United States and 
the sponsor relating to such land. Specific provisions applying in both 
cases are more restrictive than the general restrictions on use of 
airport revenue under section 47107(b).

Use of Proceeds From the Sale of Airport Land

Background

    An airport sponsor that acquires real property for airport purposes 
may do so through any of four methods. First, the airport sponsor may 
receive a Federal grant which will typically pay a percentage of the 
project costs. Second, 

[[Page 7138]]
the property may be conveyed to the airport sponsor by the Federal 
Government for no consideration through the Surplus Property Act or 
through cost-free transfers pursuant to airport aid statutes. Third, 
the airport sponsor may acquire property for the airport paid for by 
the general governmental or municipality funds or donated privately. 
Fourth, the airport sponsor may utilize airport revenues to acquire the 
property or to reimburse its general funds for an acquisition.
    Use of proceeds resulting from the sale of real property acquired 
through the first and second methods described above is generally 
straightforward. In those examples, the use of sales proceeds is likely 
to be governed by special provisions contained in the agreement between 
the United States and the sponsor. As a general rule, such proceeds 
must be applied to the airport and be used for aeronautical purposes 
or, in the case of grant-acquired land, returned to the Aviation Trust 
Fund.
    Use of sale proceeds resulting from the sale of real property 
acquired with government or municipal funds, airport revenues, or by 
private donation, requires greater discussion. The paramount issue is 
whether the sales proceeds from airport real property fall within the 
scope of the revenue retention requirement's language, ``* * * all 
revenues generated by the airport,'' 49 U.S.C. 47107(b), where the 
property was not donated by the United States or acquired with Federal 
assistance. This language is not defined in the AAIA or subsequent 
statutes. Thus, the Secretary has the authority to define airport 
revenue in a manner consistent with the purposes of 511(a)(12) of the 
AAIA and 49 U.S.C. 47107(b). As stated in the proposed policy, we 
propose that the term ``* * * all revenues generated by the airport * * 
*'' should include proceeds from the sale of all property donated by 
the United States or acquired with Federal financial assistance.
    The revenue retention requirement should be read in the overall 
context of the statute and underlying Federal policy--i.e., that users 
of the airport system should pay for the cost of that system, and that 
airports should be self-sustaining (see, 49 U.S.C. 47107(a)(13)), and 
that users should not be forced to pay ``hidden taxes'' to finance 
other state and municipal programs. If sales proceeds from parcels of 
realty are treated as airport revenue, the goal of self-sustainability 
is furthered; more resources are available to fund the capital and 
operating costs of the airport system; and airport users are not 
indirectly providing financial support for other state and municipal 
programs. Finally, this interpretation alleviates the potential need 
for Federal discretionary grants to fund capital improvements that 
could be funded from the proceeds from the sale.
    This treatment is especially appropriate in the context of the 
fourth method--property purchased with airport revenue, including the 
case where airport revenues are used to reimburse the sponsor's general 
(nonairport) fund--to assure that the sale does not lead to the use of 
airport revenue indirectly for non-airport purposes.
    For several reasons, the proposed policy draws no distinction 
between property acquired with airport revenue (directly or indirectly) 
and property acquired with sponsor general funds or by donation. First, 
the inclusion of the proceeds from the sale of all airport property is 
most consistent with the purposes of the revenue retention and self-
sustaining grant assurances. Second, in practice it may be difficult to 
determine whether a particular parcel of property was acquired with 
airport revenue, directly or indirectly. Finally, in the case of 
property acquired for the airport with general funds, an airport 
sponsor may in any event recoup its unreimbursed capital contributions 
and operating expenses from airport revenues, and it may do so 
regardless of when the expenses were incurred. This interpretation 
results from a February 1991, opinion from the United States Department 
of Justice (DOJ), Office of Legal Counsel, concerning a proposed long-
term lease of the Albany Airport, Albany County, New York. The DOJ 
opinion is discussed further below. While an airport sponsor could not 
recoup from airport revenues the value of privately donated land under 
this policy, it could recoup its own capital contribution.

FAA Internal Orders

    To avoid possible ambiguity regarding our policy concerning sales 
proceeds, relevant portions of FAA Order 5190.6A, ``Airport Compliance 
Requirements,'' (October 2, 1989), and FAA Order 5100.38A, ``Airport 
Improvement Handbook'' (October 24, 1989), are discussed below. To the 
extent that there is any inconsistency between the provisions of these 
orders and this Policy, the Policy takes precedence and the orders will 
be revised to reflect the policies adopted in this statement.
    Paragraph 7-18 of the Compliance Handbook states that in the 
context of land not acquired with Federal assistance (appearing on 
Exhibit A), * * * there is no required disposition of net revenues from 
sale or disposal. However, in view of the ADAP [Airport Development Aid 
Program]/AIP requirement that airports become as financially self-
sustaining as possible, the FAA should encourage the owner to use any 
net revenues for needed airport development and to consider an exchange 
of released property for needed property.
    As written, this statement did not fully reflect the FAA's 
operational implementation of Sec. 511(a)(12) on a day-to-day basis, 
and is facially inconsistent with the policy being proposed in this 
document. As stated above, the Compliance Handbook will be modified to 
conform to the final policy adopted.
    In actual past practice, the FAA discouraged the use of sale 
proceeds for non-airport purposes, even for property acquired through 
private capital or sponsor donation. While paragraph 7-18 states, 
``* * * there is no required disposition of net revenues from sale or 
disposal * * *,'' that paragraph also provides that FAA should 
encourage the sponsor to devote the proceeds to the airport. Thus, the 
agency routinely encouraged sponsors to apply sales proceeds for the 
capital and operating costs of the airport. Sale approvals were not 
generally provided without such a promise by the sponsor.
    In short, although the statement ``* * * there is no required 
disposition of net revenues from sale or disposal * * *'' appears in 
the Compliance Handbook, the agency did not traditionally allow 
sponsors to exercise the implied discretion. Rather, the agency 
actively promoted the policy of strongly encouraging the sponsor to 
devote the proceeds to the airport, through its power to grant 
releases.
    Paragraph 630 of the AIP Handbook provides that, ``[a]irport 
revenue does not include proceeds from the sale of real property owned 
by the sponsor.'' This statement is correct in context because it 
refers to real property acquired with AIP funds. In the case of such 
land, specific statutory provisions governing proceeds of sale take 
precedence over the general requirement of Sec. 511(a)(12). Those 
statutory provisions are incorporated into AIP grant agreements. Again, 
as a general rule, such proceeds must be applied to the airport and be 
used for aeronautical purposes. Thus, while the statement indicates 
that proceeds in this context are not airport revenue, it does not mean 
that the use of those proceeds is not restricted. 

[[Page 7139]]


How the Proposed Policy Addresses Use of Sale Proceeds

    Proceeds from the sale of airport real property are considered 
airport revenue, and are addressed in the ``Definitions'' and 
``Examples of Airport Revenue'' sections of the proposed policy, as 
discussed above.
    Paragraph C of the Applicability section in the proposed policy 
addresses the sale, or other transfer of ownership or control, of a 
publicly owned airport. Paragraph C states that such a transfer would 
require FAA approval in accordance with the AIP sponsor assurances and 
general government contract law principles. Because the proceeds of a 
sale or other transfer of airport property are considered airport 
revenue, the FAA would condition its approval of the transfer on the 
parties' assurance that the proceeds of sale will be dedicated to 
airport use. However, the FAA would take into consideration the 
specific elements of the proposed transfer, in determining what action 
would represent appropriate and sufficient compliance with the revenue 
use requirements of 49 U.S.C. 47107(b) under the circumstances. The FAA 
also invites the parties to a prospective transfer of airport property 
to discuss with the FAA, as early as possible in the planning stages, 
the effect of Federal requirements on the proposed transaction. There 
is no intent to hinder or prevent additional private participation in 
the ownership, operation, or financing of airports. The FAA welcomes 
proposals to do so and is committed to working with interested parties 
to ensure compliance with Federal laws and regulations.

Recoupment of Unreimbursed Capital or Operating Costs of the 
Airport

    In 1990, the FAA and the Department sought the assistance of the 
United States Department of Justice, Office of Legal Counsel (DOJ) in 
applying section 511(a)(12) to the situation in which an airport 
sponsor seeks to use airport revenue to recoup past unreimbursed 
contributions to the capital and operating costs of the airport. The 
issue arose from a request to the FAA from Albany County, New York to 
transfer the Albany County Airport to a private joint venture. The 
joint venture proposed to lease the airport for 40 years, with an 
option to renew. In exchange for the lease, the County was to receive 
annual lease payments, which would be applied to the airport. In 
addition, it was to receive an initial payment of $30 million, which 
would be applied for general expenditures. The joint venture planned to 
recoup the $30 million payment and lease payment from landing fees or 
other airport generated revenues. Albany County justified the use of 
the $30 million for general expenditures under section 511(a)(12) on 
the grounds that the County had made unreimbursed contributions to the 
airport of equal or greater amounts.
    Prior to the Albany proposal, the FAA had not construed section 
511(a)(12) to permit recoupment in the circumstances described by 
Albany. After reviewing the statute, its legislative history and 
purpose, the DOJ advised, in a memorandum dated February 12, 1991, that 
section 511(a)(12) did not preclude recoupment of a sponsor's past 
unreimbursed contributions to the capital and operating costs of an 
obligated airport. The DOJ also advised that the FAA could oversee the 
rates charged to airport users by the joint venture--including the 
extent to which the rates could reflect the $30 million payment to 
Albany County--to ensure that these rates remained fair and reasonable. 
The DOJ opinion was based on the facts of the Albany County case, where 
the County sought recoupment of the amount originally contributed and 
did not seek interest on that amount. To date, the FAA has not 
permitted recoupment of amounts in excess of the original contribution 
(or the value of land at the time of contribution). That policy 
continues in effect pending issuance of a final policy statement in 
this docket. In developing a final policy on revenue diversion, the FAA 
will consider comments on the current agency policy on recoupment of 
contributions, as well as on the implications of allowing recoupment of 
not only the original contribution but also interest or an inflationary 
adjustment, or, in the case of original contributions in the form of 
land, allowing recoupment of the current market or inflation-adjusted 
value of the contributed land.

Petition for Rulemaking by Lehigh-Northampton Airport Authority

    On April 3, 1995, the FAA received a Petition for Notice and 
Comment rule Making filed by counsel on behalf of Lehigh-Northampton 
Airport Authority, the owner and operator of Lehigh Valley 
International Airport. Petitioner urged the agency to provide for 
``pre-enforcement'' notice and comment procedures prior to the 
promulgation of this policy statement. While styled a petition for 
rulemaking, petition's submission does not urge the adoption of any 
particular rule. Rather, the petition could be more accurately 
described as a legal memo supporting the use of notice and comment 
rulemaking procedures in the promulgation of this policy.
    Technically, the policy statement is not rulemaking and does not 
require advance publication or public comment before issuance. However, 
to the extent the petition requests that the FAA's revenue diversion 
policy statement be issued as a proposal for public comment before 
adoption, the petition is granted. While the proposed policy statement 
is not made effective at this time, it should be recognized that 
longstanding statutory requirements relating to the use of airport 
revenue remain in effect and will be enforced. Airport sponsors may 
assume that the FAA would act consistently with the views expressed in 
this document in any enforcement action for revenue diversion taken 
before a final policy statement is published.

Policy Statement Concerning Airport Revenue

    For the reasons discussed above, the Federal Aviation 
Administration proposes to adopt the following statement of policy 
concerning the use of airport revenue:

Policies and Procedures Concerning the Use of Airport Revenue

I. Introduction

    The Federal Aviation Administration (FAA) issues this document to 
fulfill the statutory provisions in section 112 of the Federal Aviation 
Administration Authorization Act of 1994, Public Law 103-305 (August 
23, 1994), 49 U.S.C. 47107(l), to establish policies and procedures on 
the generation and use of airport revenue. The sponsor assurance 
prohibiting the unlawful diversion of airport revenues, also known as 
the revenue retention requirement, was first mandated by Congress in 
1982. Simply stated, the purpose of that assurance, now codified at 49 
U.S.C. 4710(b), is to prevent an airport owner or operator receiving 
Federal assistance from using airport revenues for expenditures 
unrelated to the airport. The policies outlined in this Policy 
Statement generally reflect the standards that the FAA has 
traditionally applied in determining whether airport revenue use is 
consistent with Federal requirements.

II. Applicability of the Policy

    A. The policy and procedures on the use of airport revenue are 
applicable to all public agencies that have received a grant for 
airport development since September 3, 1982, under the Airport and 
Airway Improvement Act of 1982 

[[Page 7140]]
(AAIA), as amended repealed and recodified without substantive change 
Public Law 103-272 (July 5, 1994), 49 U.S.C. 47101, et seq. Grants 
issued under that statutory authority are commonly referred to as 
Airport Improvement Program (AIP) grants.
    B. The policies and procedures do not apply to:
    1. Operators of privately-owned airports that have received grants 
while under private ownership;
    2. Operators of publicly-owned airports that have received grants 
only for planning (i.e., not for land acquisition or development/
construction of facilities).
    C. FAA approval of the sale, or other transfer of ownership or 
control, of a publicly owned airport is required in accordance with the 
AIP sponsor assurances and general government contract law principles. 
The proceeds of a sale of airport property are considered airport 
revenue (except in the case of property acquired with Federal 
assistance, the sale of which is subject to other restrictions under 
the relevant grant contract or deed). When the sale proposed is the 
sale of an entire airport as an operating entity, the request may 
present the FAA with a complex transaction in which the disposition of 
the proceeds of the transfer is only one of many considerations. In its 
review of such a proposal, the FAA would condition its approval of the 
transfer on the parties' assurances that the proceeds of sale will be 
used for the purposes required under section 4717(b). Because of the 
complexity of an airport sale or privatization, the provisions for 
ensuring that the proceeds are used for the purposes of section 
47107(b) may need to be adapted to the special circumstances of the 
transaction. For example, in the sale of a public airport to a private 
entity, FAA assumes that the public owner could not simply retain all 
proceeds for general use; however, it may also be inappropriate to 
simply return the proceeds to the private buyer to use for operation of 
the airport. Accordingly, the disposition of the proceeds would need to 
be structured to meet the requirements of section 47107(b) given the 
special conditions and constraints imposed by the fact of a change in 
airport ownership. In considering and approving such requests, the FAA 
will remain open and flexible in specifying conditions on the use of 
revenue that will protect the public interest and fulfill the 
requirements and objectives of section 47107(b) without unnecessarily 
interfering with the appropriate privatization of airport 
infrastructure.
    It is not the intention of the FAA to effectively bar airport 
privatization initiatives through application of the statutory 
requirements for use of airport revenue. Proponents of a proposed 
privatization or other sale of airport property clearly will need to 
consider the effects of Federal statutory requirements on the use of 
airport revenue, fair and reasonable fees for airport users, 
disposition of airport property, and other policies incorporated in 
Federal grant agreements. The FAA assumes that the proposals will be 
structured from the outset to comply with all such requirements, and 
this proposed policy is not intended to add to the considerations 
already involved in a transfer of airport property.
    Privatization proposals can be expected to be subject to great 
individual variation, however, and it may be difficult for prospective 
parties to a particular proposal to determine how the proposed 
transaction might be affected by various Federal requirements, 
including restrictions on the use of airport revenue. While any 
transfer of airport property or change of sponsorship at a Federally 
assisted airport will require FAA approval before implementation, the 
FAA invites parties to a prospective proposal for privatization or 
transfer of an entire airport to contact the FAA as early as possible 
in the process. At an early stage in the planning process the FAA could 
discuss the effect of Federal requirements and identify revisions that 
would avoid potential problems for the parties.
    Early contact on prospective transfers would also assist the FAA. 
The FAA has received very few inquiries about specific proposals for 
the privatization of an entire airport, and we would welcome 
discussions on the effects of various requirements on any such 
transaction. (We note that the consideration by Orange County, 
California, of the sale of John Wayne Airport involved a transaction 
between two county agencies and did not involve a transfer to a private 
owner.) Discussion with parties interested in potential airport 
privatization projects will assist the FAA in developing future policy 
that promotes the objectives of Administration policy on public-private 
partnership for infrastructure development.

III. Related Requirements

A. Policy on Airport Rates and Charges

    Before receiving an AIP grant for airport development, the sponsor 
must assure, pursuant to 49 U.S.C. 47107(a)(1), that the airport will 
be made available on fair and reasonable terms without unjust 
discrimination. Title 49 of the U.S.C. 47107(a)(13), similarly 
obligates the sponsor to maintain a fee and rental structure that will 
make the airport as self-sustaining as possible under the circumstances 
existing at the airport.
    Pursuant to section 113 of the Federal Aviation Administration 
Authorization Act of 1994, the Federal Aviation Administration, in 
conjunction with the Office of the Secretary of Transportation, has 
established a ``Policy Regarding Airport Rates and Charges,'' for use 
in determining whether an airport fee is reasonable. This policy lists 
and explains the principles that the Department of Transportation (DOT) 
and the FAA use in defining Federal policy with respect to fair and 
reasonable, and not unjustly discriminatory airport fees charged by 
Federally-assisted airports to air carriers and other aeronautical 
users. See, 60 FR 6906 (February 3, 1995); 60 FR 47012 (September 8, 
1995). The policy also addresses the obligation to make the airport as 
self-sustaining as possible.

B. The 1994 and 1995 DOT Appropriations Acts

    Section 328 of the 1994 DOT Appropriations Act and section 325 of 
the 1995 DOT Appropriations Act included provisions mandating that no 
funds provided by the Acts (i.e., all transportation funding) be made 
available to any State, municipality, or subdivision ``* * * that 
[unlawfully] diverts revenue generated by a public airport.'' See, 
Public Law 103-122, 107 Stat. 1223 (October 27, 1993), and Public Law 
103-331, 108 Stat. 2492 (September 30, 1994).

C. Rulemaking Proceedings

1. 14 C.F.R. Part 302, Subpart F--Rules Applicable to Proceedings 
Concerning Airport Fees

    Also pursuant to section 113, the DOT recently published procedural 
rules for handling complaints by air carriers and foreign air carriers 
seeking a determination of the reasonableness of certain airport fees. 
It also establishes rules that would apply to requests by the owner or 
operator of an airport for such a determination. See, 60 FR 6919 
(February 3, 1995).

2. Proposed 14 C.F.R. Part 16, ``Rules of Practice for Federally 
Assisted Airport Proceedings

    On June 9, 1994, a notice of proposed rulemaking was issued to 
establish rules of practice for the filing of complaints and 
adjudication of compliance matters 

[[Page 7141]]
involving Federally assisted airports. Pending completion of that 
rulemaking, FAA continues to employ existing 14 C.F.R. Part 13. See, 
section on ``Sanctions for Noncompliance,'' below. See also, 59 FR 
29880 (June 9, 1994); 59 FR 47568 (September 16, 1994).

D. Reporting Airport Financial Data

    The format to be used in reporting certain financial data in 
accordance with section 111(a)(4) of the 1994 Authorization Act, 49 
U.S.C. 47107(a), is currently being developed.

E. Compliance Supplement for Single Audits of State and Local 
Governments

    In an effort to augment FAA's revenue monitoring capabilities, the 
agency intends to review and amend, as necessary, the audit procedures 
set forth in the Compliance Supplement for Single Audits of State and 
Local Governments to address the use of airport revenue. The FAA 
believes that the inclusion of appropriate indicators of revenue 
diversion in the suggested procedures for independent financial audits 
will enhance the effectiveness of agency compliance efforts.

IV. Statutory Requirements for the Use of Airport Revenue

A. The General Requirement, 49 U.S.C. Sec. 47107(b)

    The current provisions restricting the use of airport revenue are 
found at 49 U.S.C. 47107(b), as amended by Public Law 103-305. These 
provisions require the Secretary, prior to approving a project grant 
application for airport development, to obtain written assurances. 
Subsection (b)(1) requires the airport owner or operator to assure 
that:

    * * * local taxes on aviation fuel (except taxes in effect on 
December 30, 1987) and the revenues generated by a public airport 
will be expended for the capital or operating costs of--
    (A) the airport;
    (B) the local airport system; or
    (C) other local facilities owned or operated by the airport 
owner or operator and directly and substantially related to the air 
transportation of passengers or property.

    49 U.S.C. 47107(b)(1).

Subsection (b)(2) provides an exception to the requirements of 
Subsection (b)(1) for airport owners or operators having certain 
financial arrangements in effect prior to the enactment of the AAIA. 
This provision is commonly referred to as the ``grandfather'' 
provision. It states:

    Paragraph (1) of this subsection does not apply if a provision 
enacted not later than September 2, 1982, in a law controlling 
financing by the airport owner or operator, or a covenant or 
assurance in a debt obligation issued not later than September 2, 
1982, by the owner or operator, provides that the revenues, 
including local taxes on aviation fuel at public airports, from any 
of the facilities of the owner or operator, including the airport, 
be used to support not only the airport but also the general debt 
obligations or other facilities of the owner or operator.

    49 U.S.C. 47107(b)(2).

B. New Statutory Revenue Diversion Prohibitions

    In section 112 of the FAA Authorization Act of 1994, 49 U.S.C. 
Sec. 47107(l)(2) (A-D), Congress expressly prohibited the diversion of 
airport revenues through:
    1. Direct payments or indirect payments, other than payments 
reflecting the value of services and facilities provided to the 
airport;
    2. Use of airport revenues for general economic development, 
marketing, and promotional activities unrelated to airports or airport 
systems;
    3. Payments in lieu of taxes or other assessments that exceed the 
value of services provided; or
    4. Payments to compensate non-sponsoring governmental bodies for 
lost tax revenues exceeding stated tax rates.

C. Passenger Facility Charges and Revenue Diversion

    The Aviation Safety and Capacity Expansion Act of 1990 authorized 
the imposition of a passenger facility charge (PFC) of up to $3 per 
enplaned passenger, with the approval of the Secretary.
    While PFC revenue is not characterized as ``airport revenue'' for 
purposes of this policy, specific statutory and regulatory guidelines 
govern the use of PFC revenue, as set forth at 49 U.S.C. 40117, 
``Passenger Facility Fees,'' and 14 CFR Part 158, ``Passenger Facility 
Charges'' (for purposes of this policy, the terms ``passenger facility 
fees'' and ``passenger facility charges'' are synonymous). These 
provisions are more restrictive than 49 U.S.C. 47107(b), in that they 
provide that PFC revenue may only be used to finance the allowable 
costs of approved projects. The PFC regulation specifies the kinds of 
projects that can be funded by PFC revenue and the objectives these 
projects must achieve to receive FAA approval for use of PFC revenue. 
They prohibit expenditure of PFC revenue for other than approved 
projects, or collection of PFC revenue in excess of approved amounts.

V. Definitions

A. Airport Revenue

    All fees, charges, rents, or other payments received by or accruing 
to the sponsor (revenue) for any one of the following reasons are 
considered to be ``airport revenue:''
    (1) Revenue from air carriers, tenants, transferees, and other 
parties. Airport revenue includes all revenue received by the sponsor 
for the activities of others or the transfer of rights to others 
relating to the airport, including revenue received:
    (a) for the right to conduct an activity on the airport or to use 
or occupy airport property;
    (b) for the sale, transfer, or disposition of real airport property 
not acquired with Federal assistance or personal airport property not 
acquired with Federal assistance, or any interest in that property, 
including sale through a condemnation proceeding;
    (c) for the sale of (or sale or lease of rights in) sponsor-owned 
mineral, natural, or agricultural products or water to be taken from 
the airport; or
    (d) for the right to conduct an activity on, or for the use or 
disposition of, real or personal property or any interest therein owned 
or controlled by the sponsor and used for an airport-related purpose 
but not located on the airport;
    (2) Revenue from sponsor activities. Airport revenue generally 
includes all revenue received by the sponsor for activities conducted 
by the sponsor itself as airport owner and operator, including revenue 
received:
    (a) from any activity conducted by the sponsor on airport property 
acquired with Federal assistance;
    (b) from any aeronautical activity conducted by the sponsor; or
    (c) from any nonaeronautical activity conducted by the sponsor on 
airport property not acquired with Federal assistance, up to an amount 
appropriately attributable to the use of the property (such as the 
amount of rent that would be charged a commercial tenant).

B. Unlawful Revenue Diversion

    Unlawful revenue diversion is the use of airport revenue for 
purposes other than the capital or operating costs of the airport, the 
local airport system, or other local facilities owned or operated by 
the airport owner or operator and directly and substantially related to 
the air transportation of passengers or property, unless that use is 
grandfathered under 49 U.S.C. 47107(b)(2) and the use does not exceed 
the limits of the `grandfather' clause. When such use is so 
grandfathered, it is known as lawful revenue diversion.
    In many cases, in their consideration of the many details of a 
particular airport's financial decisions and use of airport funds, the 
FAA or the OIG may 

[[Page 7142]]
find that the airport could have obtained a higher value for use of 
airport property by the sponsor, or could have paid the sponsor less 
for administrative services to the airport, for example. Technically, 
the difference in actual and ideal amounts could be considered unlawful 
revenue diversion under this policy. However, the FAA will not devote 
enforcement resources to situations in which the amounts involved are 
insignificant.

VI. Examples of Airport Revenue

    A. Airport revenue includes, but is not limited to, revenue from:
    1. service fees, landing fees, usage fees, fuel flowage fees;
    2. proceeds from lease, rental, or other contractual agreements 
relating to the airport;
    3. proceeds from the sale of fuel or other aviation products or 
services by the sponsor;
    4. local taxes on aviation fuel enacted after December 30, 1987;
    5. interest earned on investment of surplus, escrowed, or 
restricted airport funds;
    6. subject to the Applicability provisions and except as provided 
for in subparagraph B., below, sale of airport property shown on the 
airport property map (commonly referred to as the Exhibit A in the 
grant application submission) including condemnation of property for 
another public purpose; and,
    7. net income received from Federal surplus property conveyed to 
the sponsor for the development of income from non-aviation businesses.
    B. While not considered to be airport revenue, the proceeds from 
the sale of land donated by the United States or acquired with Federal 
grants must be used in accordance with the agreement between the FAA 
and the sponsor. Where such an agreement gives the FAA discretion, FAA 
may consider this policy as a relevant factor in specifying the 
permissible use or uses of the proceeds.

VII. Uses of Airport Revenue

A. Permitted Uses of Airport Revenue

    Airport revenue may be used for:
    1. The capital or operating costs of the airport, the local airport 
system, or other local facilities owned or operated by the airport 
owner or operator and directly and substantially related to the air 
transportation of passengers or property. Such costs may include 
reimbursements to a state or local agency for the costs of services 
actually received and documented, subject to the terms of this policy 
statement. Operating costs for an airport may be both direct and 
indirect and may include all of the expenses and costs that are 
recognized under the generally accepted accounting principles and 
practices that apply to the airport enterprise funds of state and local 
government entities.
    2. The repayment to the airport owner (which may or may not be the 
sponsor) of funds contributed by the owner for capital and operating 
costs of the airport and not heretofore reimbursed.
    3. Purposes other than capital and operating costs of the airport, 
the local airport system, or other local facilities owned or operated 
by the sponsor and directly and substantially related to the air 
transportation of passengers or property, if the ``grandfather'' 
provisions of 49 U.S.C. 47107(b)(2) are applicable to the sponsor and 
the particular use. Examples of grandfathered airport sponsors may 
include, but are not limited to, a port authority or state department 
of transportation which owns or operates other transportation 
facilities in addition to airports, and which have pre-September 3, 
1982, debt obligations or legislation governing financing and providing 
for use of airport revenue for non-airport purposes. Such sponsors may 
have obtained legal opinions from their counsel to support a claim of 
grandfathering. Previous DOT interpretations have found the following 
examples of pre-AAIA legislation to provide for the grandfather 
exception:
    (a) Bond obligations and city ordinances requiring a five percent 
``gross receipts'' fee from airport revenues. The payments were 
instituted in 1954 and continued in 1968.
    (b) A 1955 state statute for the assessing of a five percent 
surcharge on all receipts and deposits in an airport revenue fund to 
defray central service expenses of the state.
    (c) City legislation authorizing the transfer of a percentage of 
airport revenues, permitting an airport-air carrier settlement 
agreement providing for annual payments to the city of 15 percent of 
the airport concession revenues.
    (d) A 1957 state statutory transportation program governing the 
financing and operations of a multi-modal transportation authority, 
including airport, highway, port, rail, and transit facilities, wherein 
state revenues, including airport revenues, support the state's 
transportation-related, and other, facilities. The funds flow from the 
airports to a state transportation trust fund, composed of all ``taxes, 
fees, charges, and revenues'' collected or received by the state 
department of transportation.
    (e) A port authority's 1956 enabling act provisions specifically 
permitting it to use port revenue, which includes airport revenue, to 
satisfy debt obligations and to use revenues from each project for the 
expenses of the authority. The act also exempts the authority from 
property taxes but requires annual payments in lieu of taxes to several 
local governments and gives it other corporate powers. A 1978 trust 
agreement recognizes the use of the authority's revenue for debt 
servicing, facilities of the authority, its expenses, reserves, and the 
payment in lieu of taxes fund.

B. Consideration of Lawful Diversion of Revenues in Awarding 
Discretionary Grants

    Airport owners or operators who lawfully divert airport revenue in 
accordance with the ``grandfather'' provision should be aware that 49 
U.S.C. 47115(f) requires the Secretary of Transportation to consider 
such usage as a factor militating against the approval of an 
application for discretionary funds when, in the airport's fiscal year 
preceding the date of application for discretionary funds, the 
Secretary finds that the amount of revenues used by the airport for 
purposes other than capital or operating costs exceeds the amount used 
for such purposes in the airport's first fiscal year ending after 
August 23, 1994, adjusted by the Secretary for changes in the Consumer 
Price Index of All Urban Consumers published by the Bureau of Labor 
Statistics of the Department of Labor.

VIII. Prohibited Uses of Airport Revenue

    Prohibited uses of airport revenue include but are not limited to:
    A. Direct or indirect payments, other than payments that reflect 
the value of services and facilities provided to the airport, that are 
not based on a reasonable, transparent cost allocation formula 
calculated consistently for other units or cost centers of government.
    B. Use of airport revenues for general economic development, 
marketing, and promotional activities unrelated to airports or airport 
systems.
    C. Payments in lieu of taxes, or other assessments, that exceed the 
value of services provided or are not based on a reasonable, 
transparent cost allocation formula calculated consistently for other 
units or cost centers of government.
    D. Payments to compensate nonsponsoring governmental bodies for 
lost tax revenues exceeding stated tax rates.

[[Page 7143]]

    E. Loans of airport funds to a state or local agency at less than 
the prevailing rate of interest.
    F. Land rental to, or use of land by, the sponsor for 
nonaeronautical purposes at less than the amount that would be charged 
a commercial tenant.
    G. Impact fees assessed by a nonsponsoring governmental body that 
the airport sponsor is not obligated to pay or that exceed such fees 
assessed against commercial or other governmental entities.

IX. Monitoring and Compliance

A. Detection of Revenue Diversion

    To detect whether airport revenue has been diverted from an 
airport, the FAA will depend primarily upon four sources of 
information:
    1. Annual report on revenue use submitted by the sponsor under the 
provisions of 49 U.S.C. 47107(a)(19), as amended;
    2. Findings of annual single audits conducted in accordance with 
OMB Circular A-128, ``Audits of State and Local Governments;''
    3. Investigation following a third party complaint; and
    4. DOT Office of Inspector General audits.

B. Investigation of Revenue Diversion: No Formal Complaint Filed

    When no formal complaint has been filed, but the FAA has an 
indication from one or more of these sources that airport revenue has 
been or is being diverted unlawfully, the FAA will notify the sponsor 
of the possible diversion and request that it respond to the FAA's 
concerns. The FAA action will depend on the response received from the 
sponsor:
    1. Admission of unlawful revenue diversion. If the sponsor admits 
to unlawful diversion, the FAA will require the diverted amount and 
associated interest to be remitted to the airport account within a 
reasonable period of time. If the sponsor complies, the FAA will take 
no further action.
    2. Denial of revenue diversion or claim that diversion is 
``grandfathered.'' If the sponsor denies that it has diverted airport 
revenue, or asserts that the diversion at issue is lawful under the 
exemption provisions of 49 U.S.C. 47107(b)(2), as amended, the FAA will 
review the information and arguments submitted by the sponsor.
    (a) If the FAA determines that there is no unlawful diversion of 
revenue, the FAA will notify the sponsor and take no further action.
    (b) If the FAA makes a preliminary finding that there has been 
diversion of airport revenue not exempted under Section 47107(b)(2), 
and the sponsor accepts that determination, the FAA will request the 
sponsor to take corrective action. If the sponsor complies, the FAA 
will take no further action.
    3. Continuing dispute. If the FAA makes a preliminary finding that 
there has been diversion of airport revenue not exempted under Section 
47107(b)(2), and the sponsor continues to dispute the FAA preliminary 
determination or does not take the corrective action requested by the 
FAA, the FAA will complete its investigation.
    (a) If the FAA ultimately finds no occurrence of unlawful revenue 
diversion, the FAA will notify the sponsor and take no further 
enforcement action.
    (b) If, after further investigation determined to be necessary, the 
FAA finds that there is reason to believe that there is or has been 
unlawful diversion of airport revenue that the sponsor refuses to 
terminate or correct, the FAA will issue an appropriate order proposing 
enforcement action.
    4. Audit or investigation by the Office of the Inspector General. 
An indication of revenue diversion brought to the attention of the FAA 
in a report of audit or investigation issued by the DOT Office of the 
Inspector General (OIG) will be handled in accordance with paragraphs 
B.1 through B.3 above. However, the FAA will first respond to the OIG 
in accordance with established agency procedures and will resolve 
outstanding issues in the report before notifying the sponsor of the 
contents of the report and seeking corrective action.

C. Complaints Filed Under 14 CFR Part 13

    When a formal complaint is filed against a sponsor for revenue 
diversion, the FAA will follow the procedures in part 13 for service of 
the complaint on the sponsor and investigation of the complaint. After 
review of submissions by the parties, investigation of the complaint, 
and any additional process provided in a particular case, the FAA will 
either dismiss the complaint or issue an appropriate order proposing 
enforcement action.

D. The Administrative Enforcement Process

    Currently, enforcement of the requirements imposed on sponsors as a 
condition of the acceptance of Federal grant funds or property is 
accomplished through the administrative procedures set forth in 14 
C.F.R. part 13, ``Investigation and Enforcement Procedures.'' Under 
part 13, the FAA has the authority to receive complaints, conduct 
informal and formal investigations, compel production of evidence, and 
adjudicate matters of compliance within the jurisdiction of the 
Administrator. If, as a result of the investigative processes described 
in paragraphs B and C above, the FAA finds that there is reason to 
proceed with enforcement action against a sponsor for unlawful revenue 
diversion, an order proposing enforcement action is issued by the FAA 
and under 14 C.F.R. 13.20. That section provides for the opportunity 
for a hearing on the order.

E. Sanctions for Noncompliance

    As explained above, if the FAA makes a preliminary finding that 
airport revenue has been unlawfully diverted and the sponsor declines 
to take the corrective action (which usually would involve crediting 
the diverted amount to the airport account with interest), the FAA will 
propose enforcement action. A decision whether to issue a final order 
making the action effective is made after hearing, if a hearing is 
elected by the respondent. The actions required by or available to the 
agency for enforcement of the prohibitions against unlawful revenue 
diversion are:
    1. Withhold future grants. The Secretary may withhold approval of 
an application in accordance with 49 U.S.C. 47106(e) if the Secretary 
provides the sponsor with an opportunity for a hearing and, not later 
than 180 days after the later of the date of the grant application or 
the date the Secretary discovers the noncompliance, the Secretary finds 
that a violation has occurred. The 180-day period may be extended by 
agreement of the Secretary and the sponsor or in a special case by the 
hearing officer.
    2. Withhold approval of the modification of existing grant 
agreements that would increase the amount of funds available. A 
supplementary provision in section 112 of the 1994 Authorization Act, 
49 U.S.C. 47111(e), makes mandatory not only the withholding of new 
grants but also withholding of a modification to an existing grant that 
would increase the amount of funds made available, if the Secretary 
finds a violation after hearing and opportunity to cure.
    3. Withhold payments under existing grants. The Secretary may 
withhold a payment under a grant agreement for 180 days or less after 
the payment is due without providing for a hearing. However, in 
accordance with 49 U.S.C. 47111(d), the Secretary may withhold a 
payment for more than 180 days only if he or she notifies the sponsor 
and 

[[Page 7144]]
provides an opportunity for a hearing and finds that the sponsor has 
violated the agreement. The 180-day period may be extended by agreement 
of the Secretary and the sponsor or in a special case by the hearing 
officer.
    4. Withhold approval of an application to impose a passenger 
facility charge. Section 112 also makes mandatory the withholding of 
approval of any new application to impose a passenger facility charge 
under 49 U.S.C. 40117. Subsequent to withholding, applications could be 
approved only upon a finding by the Secretary that corrective action 
has been taken and that the violation no longer exists.
    5. Terminate availability of all Federal transportation funds 
appropriated in Fiscal Years 1994 and 1995. Provisions of the DOT 
Appropriations Acts for Fiscal Years 1994 and 1995 prohibit the award 
of funds to a state or local subdivision that diverts revenue generated 
by a public airport. This provision would prohibit payment on any 
Federal transportation grant, including grants for highway and transit 
projects.
    6. File suit in United States district court. Section 112(b) 
provides express authority for the agency to seek enforcement of an 
order in Federal court.
    7. Assess civil penalties. Under section 112(c) of Public Law 103-
305, codified at 49 U.S.C. 46301(a) and (d), the Secretary has 
statutory authority to impose civil penalties up to a maximum of 
$50,000 on airport sponsors for violations of the AIP sponsor assurance 
on revenue diversion. The Secretary intends to use this authority only 
after the airport sponsor has been given a reasonable period of time, 
after a violation has been clearly identified to the airport sponsor, 
to take corrective action to restore the funds or otherwise come into 
compliance before a penalty is assessed, and only after other 
enforcement actions, such as withholding of grants and payments, have 
failed to achieve compliance. Any civil penalty action under this 
section would be adjudicated under 14 C.F.R. part 13, Subpart G.

    Issued in Washington, DC on February 20, 1996.
David L. Bennett,
Director, Office of Airport Safety and Standards.
[FR Doc. 96-4270 Filed 2-23-96; 8:45 am]
BILLING CODE 4910-13-M