[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Notices]
[Pages 66735-66741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32019]


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DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
[Docket No. 28472]


Policy and Procedures Concerning the Use of Airport Revenue

AGENCY: Federal Aviation Administration (FAA), Department of 
Transportation (DOT).

ACTION: Supplemental notice of proposed policy; request for comments.

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SUMMARY: On February 26, 1996, the FAA published for public comment, a 
comprehensive statement of policy and procedures concerning the use of 
airport revenue, based on the requirement that revenue at public 
airports have received Federal grants generally be used only for 
airport purposes. Comments received on the notice included comments on 
four issues not discussed in detail in the February notice: (1) The use 
of airport property and funds for community or charitable purposes; (2) 
the extent to which airport funds may be used for marketing and 
promotional activities; (3) guidance on the accounting and cost 
allocation practices that the FAA considers acceptable for purposes of 
compliance with the revenue retention requirement; and (4) the use of 
airport

[[Page 66736]]

property for public transportation facilities. This supplemental notice 
proposes additions to the policy proposed in February 1996 to include 
specific policies and guidance on these four issues, based on comments 
received. The final policy will reflect comments received on this 
supplemental notice as well as the general notice published in 
February. 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 February 18, 1997.

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. 103-305 (August 23, 
1994) (1994 Authorization Act). That section requires the Secretary 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, or may be an authority established to operate 
a variety of transportation facilities including an airport. 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 Revenue Retention Requirement

    Under the Airport and Airway Improvement Act of 1982, as amended 
(AAIA), part of title V of the Tax Equity and Fiscal Responsibility 
Act, Pub. L. 97-248, repealed and reenacted without substantive change, 
Pub. L. 103-272 (July 5, 1994), 49 U.S.C. 47101, et seq., as amended by 
Pub. L. 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). The revenue retention 
assurance requires 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 air transportation of passengers or property.''

The Requirement To Be as Self-Sustaining as Possible

    A related requirement of the AAIA with respect to airport revenue 
is the requirement that an airport have a rate structure that makes the 
airport as self-sustaining as possible under the circumstances existing 
at the airport. 49 U.S.C. 47101(a)(13). The reason for this requirement 
is to minimize an airport's reliance on Federal funds, and also to 
minimize the need for the airport to be supported by local taxation. 
Many of the OIG audits of airport revenue have found instances of a 
rate structure in which the airport apparently could have charged more 
for the non-aeronautical use of property than it has. Several of these 
findings related specifically to the use of property for community-
relations purposes, such as for parks. In another case, the OIG found 
that the airport operator did not charge a sufficient rate for the use 
of airport property for a local public bus terminal.
    In general, the FAA interprets the self-sustaining assurance to 
require that a sponsor charge a fair-market commercial rate for non-
aeronautical leases and activities on an airport. The FAA has not 
insisted on the airport's standard commercial rate for uses of property 
for which it is unreasonable to expect a commercial rent, and has 
permitted temporary uses of property at below-market rates pending 
future commercial use.

Notice of Proposed Policy

    On February 26, 1996, the FAA published a Notice of Proposed Policy 
entitled ``Policy and Procedures Concerning the Use of Airport 
Revenue'' (61 FR 7134). The period for public comment closed on April 
26, 1996. The FAA received comments from 34 commenters on all aspects 
of the proposed policy. Comments were received from various nonprofit 
and trade organizations including the Air Transport Association and 
International Air Transport Association, the American Association of 
Airport Executives (AAAE) and the Airports Council International-North 
America (ACI-NA), and the Aircraft Owners and Pilots Association; from 
individual airport operators and state and local governments; and from 
an automobile rental firm. The comments will be addressed in the final 
policy statement to be issued in this docket.
    The February notice listed several examples of uses of airport 
revenue that respectively are or are not considered appropriate 
expenditures under the terms of section 47107(b). The lists were not 
exhaustive, however, and not all possible uses of airport revenue were 
included. Many of the commenters submitted comments on issues that they 
believed should be included in the final policy, but which were not 
addressed in detail in the February proposal. In consideration of the 
comments, the FAA believes that several of these issues are 
sufficiently significant that supplemental guidance should be proposed 
for public comment before the adoption of a final policy. In summary, 
these issues are (1) The use of airport

[[Page 66737]]

property and funds for community or charitable purposes; (2) the extent 
to which airport funds may be used for marketing and promotional 
activities; (3) guidance on the accounting and cost allocation 
practices that the FAA considers acceptable for purposes of compliance 
with the revenue retention requirement; and (4) the use of airport 
property for public transportation facilities. This notice proposes to 
add new language to the policy statement published in the February 
notice to address each of these issues. Each issue is discussed 
separately below.
    As with the practices specifically discussed in the proposed policy 
published in February, the four practices discussed below are not new 
requirements, but rather are an articulation of the FAA's proposed 
implementation of a statute that has been in effect since 1982.
    It should be noted that the use of airport property for community 
purposes and public transit at less-than-market rates generally 
involves the self-sustaining requirement rather than the revenue 
retention requirement. The revenue retention requirement and the self-
sustaining requirement often arise in the same circumstances at an 
airport, and both requirements are cited frequently in audits of 
airport revenue by the Office of the DOT Inspector General (OIG). In 
order to provide comprehensive guidance on the use of airport revenue 
and property consistent with the airport's grant assurances, the FAA is 
proposing to include more specific guidance on the self-sustaining 
requirement in the final revenue diversion policy to the extent 
necessary to address the use of airport property for community ``good-
will'' and public transit purposes.

1. Use of Airport Property for Community Charitable Purposes; Donation 
of Airport Funds for Community Charitable Purposes

Discussion of Comments.

    The OIG has found either revenue diversion or failure to obtain 
fair rental value for airport property, or both, in 38 audits. In 
several of those cases the OIG has cited the practice of leasing 
airport property for charitable or community purposes, such as a park 
or ball field, at no cost or at a below-market rental rate. The OIG 
considers this practice to be a violation of the grant assurance 
obligating the airport to maintain a fee and rental structure which 
will make the airport as self-sustaining as possible under the 
circumstances. Where the property is made available to an agency of the 
sponsor, such as a parks department, the below-market lease could also 
be considered a violation of the revenue retention requirement, since 
the sponsor is choosing to subsidize its own non-aeronautical 
activities with airport resources and could modify the arrangement at 
any time.
    Similarly, in an audit of revenues at airports operated by the City 
of Los Angeles, the OIG found the donation of airport funds (as opposed 
to no-cost use of land) to non-profit and community groups to be an 
unlawful diversion of airport revenue.
    The February notice of proposed policy does not discuss an 
exception for community-purpose use of property, but in practice the 
FAA has in limited circumstances permitted use of property at less than 
fair market rental without finding a violation of the self-sustaining 
or revenue use requirements. For example, in Arlington, Washington, the 
FAA permitted the City of Arlington to maintain a park on airport 
property for which there was no current commercial demand, if the 
property remained available for commercial use, permanent improvements 
for the park were not made, and no airport funds were used for the 
park. In the comments on the proposed policy, a substantial number of 
commenters requested a policy permitting practices of the kind found by 
the OIG at Los Angeles airports. Specifically, commenters used various 
terms to argue that the policy should permit: Use of airport land for 
non-profit, public service agencies for a nominal fee; de minimis 
support for a community purpose; use of property which is not otherwise 
productive at less than FMV for local government, parks and recreation, 
or other community purposes; use of airport property by community 
groups, with limits; de minimis community participation expenditures; 
goodwill community events; community involvement; minor community 
goodwill expenses, etc. Supporting commenters argue that an airport 
operator needs some flexibility to maintain positive relations with 
surrounding communities, in consideration of the adverse impacts of the 
airport (e.g., noise, commercial zoning), to ensure that the airport is 
accepted as much as possible and that present and future airport 
development is not restricted by local political action.
    On the basis of the substantial number of similar comments received 
on this issue, and the fact that similar practices have been found in 
several OIG audits, the FAA believes that some form of below-market 
contribution of the use of property for community use is a common and 
long-standing practice at U.S. airports. In consideration of the 
apparent prevalence of this practice and the comments received on the 
issue, and of the FAA's past practice, the FAA is proposing to adopt a 
policy that would permit the limited use of airport property for 
certain community-related purposes as a legitimate cost of operating 
the airport.
    In specifying the permissible use of airport property for 
`community' purposes and appropriate limits on such use to maintain 
consistency with the requirements of 49 U.S.C. 47107(b) or 
47101(a)(13), the FAA has considered the following issues raised by the 
OIG audits and the public comments received:
    Should the airport's need to ``be a good neighbor'' to the local 
community be considered a ``circumstance existing at the airport'' 
under section 47107(a)(13(A) that would justify permitting use of 
airport land for public purposes, at below-market or zero rent, by 
local governments and non-profit organizations?
    How should the commercial desirability of the property, or the 
availability of the property for unrestricted development, affect the 
determination of whether its lease at below-fair-market rent is 
consistent with the self-sustaining requirement? I.e., should it be 
easier to find justifying circumstances for the below-market lease of 
property that is subject to some airport-related impairment on use? 
Examples of impairments of commercial land use could be, for example, 
part 77 surfaces close to the surface, location of the land in a runway 
protection zone, or location of the land within a noise contour that is 
not compatible with the prevailing land uses in the area.
    Should expenditure of airport funds for purposes of community 
goodwill be considered an ``operating cost of the airport'' for 
purposes of section 47107(b)?
    If so, should some limit be established on ``community goodwill'' 
expenditures? E.g., ACI-NA and AAAE have proposed a ``safe harbor'' for 
community participation expenditures at a de minimis level.

Proposed Policy

    The FAA proposes to recognize that making airport property 
available for general, public community purposes such as parks and 
recreation areas, for the purpose of maintaining positive airport-
community relations, can be a legitimate function of an airport 
proprietor in operating the airport. Accordingly, in certain 
circumstances providing airport land for such purposes will not be 
considered a violation of the

[[Page 66738]]

self-sustaining requirement. Generally, below-market use of airport 
land for community purposes will be considered consistent with the 
assurance if the community use of the property can be justified as 
benefiting the airport and the property involved is not expected to 
produce substantial income at the time the community use is 
contemplated. Benefit to the airport can be tangible, in the form of 
action to maintain the condition or security of the airport property 
used, or intangible, such as the contribution to good relations with 
surrounding communities. The greater the difference between the fair 
rental value of the property and the actual amount of the lease, the 
greater the burden of showing an airport-related benefit. Some 
indications that the property would not be expected to produce 
commercial income at the time would be that (1) The property is subject 
to airport-related restrictions on use and structures, (2) the property 
is subject to terrain, access limitations, or other factors that make 
it unsuitable for commercial use, or (3) there is no apparent 
commercial demand for the property due to general market conditions in 
the area. In any event the above conditions would be considered in 
determining the fair rental value of the property in question.
    The use of airport funds to support community activities and 
participation in community events would not be considered an airport 
cost unless the expenditure is directly related to the operation of the 
airport. For example, expenditure to support participation in the 
Airport's Federally approved disadvantaged business enterprise program 
would be considered permissible as supporting a use directly related to 
the operation of the airport.
    Use of airport property for community purposes by other departments 
of the sponsoring government agency with park, recreational, or similar 
responsibilities could meet the test of this policy, but would be 
subject to special scrutiny for evidence that the use was beneficial to 
the airport. This exception would not apply where the sponsor was using 
airport property simply as a source of inexpensive land for the 
sponsor's general governmental purposes.

II. Use of Airport Revenue for Economic Development, Airport Marketing, 
and Airport Promotion

Discussion

    Many if not most sponsors of commercial airports engage in some 
form of promotional effort, to encourage use of the airport and 
increase the level of scheduled service for passengers and cargo 
shippers. Congress, in the FY 94 Authorization Act, effectively 
affirmed the legitimacy of some promotion for airport purposes by 
expressly prohibiting ``use of airport revenues for general economic 
development, marketing, and promotional activities unrelated to 
airports or airport systems;'' and the notice of proposed policy 
reflects this distinction.
    A number of commenters on the notice of proposed policy expressed 
the opinion that some kinds of promotion should be considered a 
legitimate use of airport revenue. ACI-NA/AAAE requested that FAA 
establish a ``safe harbor'' for certain promotional and marketing 
activities, perhaps based on a percentage of costs. Specific issues 
raised by the audits and the comments are:
    What kinds of promotional and marketing activities are and are not 
considered legitimate operating costs of the airport under section 
47107(b)?
    Should the amount of expenditures on legitimate promotional and 
marketing activities be limited, as a matter of policy?

Proposed Policy

    The FAA proposes to adopt a policy that expenditures for the 
promotion of an airport and marketing of the general services available 
at the airport are legitimate costs of airport operation. Promotion and 
marketing of the community or region, or promotional/marketing 
expenditures directed toward regional economic development rather than 
specifically toward promotion of the airport would not be considered an 
airport cost. Under the policy proposed, procurement of air 
transportation or air service by payment or direct subsidy, as opposed 
to promotional activities to encourage such service, would be 
considered regional economic promotion and would not be considered a 
cost of operating the airport. The FAA understands that the purpose of 
such a subsidy is essentially the same as the purpose of other 
promotional activities directed toward air service development. 
However, a distinction may be made between encouraging use of the 
airport, through advertising and other promotional activities or even 
through fee incentives, and simply buying increased use of the airport 
by paying an air carrier to operate aircraft. The FAA proposes to 
clarify in the final policy that this latter activity is ineligible for 
the use of airport revenues, because it cannot be considered a capital 
or operating cost of the airport.
    Direct payments to carriers to provide service from a community's 
general funds or from a local chamber of commerce, for example, would 
not involve airport revenue and would not be subject to the revenue 
retention requirement.
    The policy would not define specific limits on spending for 
promotional purpso9es, but would state that the FAA assumes that any 
expenditures for promotional and marketing costs would be reasonable in 
relation to the airport's financial situation. Disproportionately high 
costs for promotion and marketing could be reviewed to see if the 
expenditures actually qualified as ``airport costs'' under section 
47107(b). The FAA could also consider whether excessive promotional 
expenditures should be taken into account in the award of discretionary 
grants.
    Generally, the following would be considered costs of operating the 
airport:
    (1) Costs of activities directed toward promoting public and 
industry awareness and use of airport facilities and services.
    (2) Salary and expenses of persons engaged in efforts to promote 
air service at the airport.
    The following practices would not be considered costs of operating 
the airport under section 47107(b):
    (1) Expenditures for promotion of general economic development that 
is not specifically related to the airport.
    (2) Direct subsidy of airline operations. For this purpose direct 
subsidies would be considered to be payments of airport funds to 
carriers for air service, and would not include waivers of fees or 
discounted landing or other fees during a promotional period or support 
for airline expenditures for advertising or marketing of service in 
specific markets.
    The issue concerning direct subsidies to air carriers is one of 
several issues currently being addressed in a formal investigation, 
``Investigation into Lehigh-Northampton Airport Authority's Air Service 
Development Program,'' FAA Docket No. 13-93-30, being conducted by the 
FAA under the procedures set forth in 14 CFR part 13, subpart F.
    Formal complaints filed by Delta Air Lines, Inc., Northwest 
Airlines, Inc., United Air Lines, Inc., USAir, Inc., Atlantic Coast 
Airlines, Inc., Allegheny Airlines, Inc., Piedmont Airlines, Inc., and 
Midway Airlines, Inc., allege that the subsidization by the Authority 
of certain air service, in exchange for air carrier's agreement to 
provide service on certain schedules and at certain fares, constitutes 
unlawful diversion of airport revenue in violation of Federal law. The 
Authority asserts that it is traditional

[[Page 66739]]

and accepted industry practice for airport sponsors to expend airport 
revenues for air service marketing and promotion purposes, including 
direct subsidies of airline operations, and to pass some or all of 
those costs through to the airlines by allocation to various cost 
centers. It also argues that providing start-up carrier service 
reflects a legitimate business judgment by an airport operator to 
enhance air service and represents an appropriate airport operating 
cost.
    To the extent that the supplemental notice of proposed policy would 
affect the Subpart F investigation, any issues considering those 
effects and the question of retroactive application of the policy would 
best be addressed within the context of the formal investigation.

III. Principles for Allocation of Indirect Costs

Discussion

    The Notice of Proposed Policy did not discuss acceptable principles 
of indirect cost allocation, but several commenters requested guidance 
on cost allocation. Specifically, guidance was requested on approval of 
indirect sponsor charges calculated according to a federally approved 
cost allocation plan; allocation of shared costs; and the use of 
generally accepted accounting principles in lieu of Office of 
Management and Budget (OMB) Circular A-87, as recommended by the OIG.
    Capital and operating costs of the airport under section 4710(b) 
may include indirect costs allocated to the airport. Local governments 
have great flexibility under generally accepted accounting principles 
(GAAP) to develop a plan for allocation of indirect costs among 
government departments, and the propriety of particular allocations has 
been a subject of OIG audits of airport revenue.
    In several audits, the OIG has recommended that the FAA require 
that sponsors comply with OMB Circular A-87 in the allocation of 
indirect costs of airport operation. In response, the FAA has noted 
that A-87 applies by its terms only to the expenditure of funds on 
federally funded projects, and sponsors are under no legal obligation 
to use A-87 for cost allocation involving locally generated funds. FAA 
has agreed with the OIG that cost allocation by a sponsor should be 
applied consistently, and in compliance with the GAAP that apply to 
local government enterprise funds.
    A-87 is apparently the only set of guidelines that provides 
specific guidance on indirect cost allocation for local government 
accounting systems. In the Denver audit, the OIG listed several 
principles derived from A-87 that the OIG believes ought to apply to 
the allocation of indirect costs by an airport. First, the general 
costs of government, such as costs of the city council, may not be 
allocated to the airport. Second, each item of cost must be treated 
consistently either as a direct or an indirect cost. Third, a local 
cost allocation plan must provide that all users of a service must be 
billed equally. This last is consistent with FAA Order 5190A, Sec. 4-
20(c)(ii), which states:

    If an indirect charge is levied against the airport in support 
of capital or operating expenses, the indirect charge must also be 
levied against other governmental cost centers in accordance with 
generally accepted accounting procedures and practices.

While the FAA continues to believe that the FAA cannot require A-87 in 
its entirety as a strict guide to the allowability of expenditures for 
capital and operating costs of an airport, we do believe the specific 
principles identified by the OIG are an appropriate construction of the 
revenue retention requirement.

Proposed Policy

    The FAA proposes to make clear that allocation of indirect costs is 
allowable under 49 U.S.C. 47107(b), and that no particular method of 
cost allocation will be required, including OMB Circular A-87. However, 
it remains important that only capital and operating costs of the 
airport, airport system, and facilities directly and substantially 
related to air transportation may be allocated indirectly to the 
airport. To ensure that indirect costs are limited to allowable capital 
and operating costs, the FAA proposes to apply certain general 
principles and prohibitions to the allocation of costs. The proposed 
guidance would not limit significantly (if at all) the development of 
local cost allocation plans under OMB Circular A-87 or other state, 
local, or Federal cost allocation guidance, or interfere with the 
application of GAAP to airport accounting and cost allocation.
    FAA would expect that a Federally approved cost allocation plan 
that complied with OMB Circular A-87 or other Federal guidance and was 
consistent with GAAP would be reasonable and transparent, and would 
generally meet the requirements of section 47107(b). However, the use 
of a Federally approved cost allocation plan does not rule out the 
possibility that a particular cost item allowed under that guidance 
would be in violation of the airport revenue retention requirement if 
allocated to the airport. For example, a local allocation plan may 
allocate general costs of government to various sponsor departments. 
This may not be inherently improper from an accounting standpoint, but 
would be considered by the FAA to be a diversion of airport revenue for 
general, non-airport purposes. Even under a plan developed in 
accordance with A-87, the calculation of depreciation costs or the 
allowance of contributions to or membership fees in charitable 
organizations could be inconsistent with the February 1996 notice of 
proposed policy and this supplemental notice.
    The FAA proposes to require specifically that indirect cost 
allocations be applied consistently across departments to the 
sponsoring government agency, and not unfairly burden the airport 
account. Allocation of costs to comparable users, such as proprietary 
or enterprise accounts, must be applied in the same manner. The general 
sponsor cost allocation plan may not result in an overallocation to 
proprietary or enterprise accounts.
    Also, the allocation of the general costs of the sponsoring 
government could not be allocated to the airport; however, this would 
not affect direct or indirect billing for actual services provided to 
the airport by local government.

IV. Use of Airport Land for Public Transit Facilities

    Many commercial airports have some facility for the accommodation 
of public transit passengers, ranging from curbside terminal bus stops 
to dedicated airport stations for local mass transit systems. These on-
airport facilities that are owned or operated by the airport are 
eligible for the use of airport revenue under section 47107(b). 
Similarly, the capital costs of such on-airport facilities may be 
eligible for the funds from Federal airport grants and passenger 
facility charges as part of an airport development project. The public 
transit systems at issue are publicly owned, not private, and are often 
subsidized by public funds. Terminal facilities at the airport, whether 
a curbside bus stop or a metro station, are generally provided only for 
the use of air passengers and airport visitors and employees traveling 
to and from the airport.
    Public transit facilities are not aeronautical. As a result, the 
general rule of interpretation of the self-sustaining assurance would 
require the sponsor to charge commercial rates for the use of airport 
property by local transit systems. However, in determining the 
sponsor's obligation to develop a rate structure under the self-
sustaining requirement, the FAA does

[[Page 66740]]

not believe that public transit facilities can be grouped either with 
commercial business enterprises or with non-aeronautical uses of the 
airport that have no direct benefit for air travel. Public transit 
facilities provide benefits to the airport by maximizing public access, 
lessening ground traffic congestion, and improving air quality. 
Therefore, the FAA believes that public transit facilities are more 
appropriately analogized to public roadways, which are also public 
facilities for transporting passengers, visitors, and employees to and 
from the airport.

Proposed Policy

    Accordingly, the FAA proposes to consider the use of airport 
property for a public transit terminal, transit right-of-way, or 
related facilities at less than fair rental value to be consistent with 
the self-sustaining assurance. The exception would apply only to 
publicly-owned transit systems, and only to facilities necessary for 
the transportation of air passengers, airport visitors, and airport 
employees to and from the airport. For example, a maintenance/repair 
facility for transit buses would not need to be located at the airport, 
and a commercial lease rate would be required for any airport land used 
for this purpose.
    In some cases the local public transit system may be owned and 
operated by another department of the sponsoring government agency. The 
FAA believes the same policy should apply to sponsor-owned transit 
systems as to systems owned by other jurisdictions, and a sponsor-owned 
transit facility located at the airport for the use of airport 
passengers, visitors, and employees, at a below-market lease rate, 
would not represent a diversion of airport revenue by the sponsor.
    Note that a below-market rate is optional, not required; the policy 
would not prevent the sponsor from charging market rates. However, 
sponsors would have the freedom to charge below-market rates in order 
to derive environmental, mobility, and other benefits achieved through 
public transit to and from airports. Comments are requested on whether 
some compensation for the use of airport property should be required, 
or whether a lease at no cost or only nominal cost would be considered 
consistent with the self-sustaining requirement.

Policy Statement Concerning Airport Revenue

    For the reasons discussed above, the Federal Aviation 
Administration is modifying the proposed policy concerning the use of 
airport revenue, as published in the Federal Register on February 26, 
1996, as follows:

Policies and Procedures Concerning the Use of Airport Revenue

* * * * *

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, as discussed in paragraph VII.B.
    2. Costs of activities directed toward promoting public and 
industry awareness of airport facilities and services, and salary and 
expenses of employees engaged in efforts to promote air service at the 
airport.
    3. The repayment of 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.
    4. 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. Allocation of Indirect Costs

    Indirect costs of sponsor services may be allocated to the airport, 
but the allocation must result in an allocation to the airport only of 
those costs which would otherwise be allowable under 49 U.S.C. 
47107(b).
    In determining whether an indirect cost allocation is allowable, 
the following principles apply:
    1. Each allocation of cost and each procedure or plan for cost 
allocation should be transparent and justifiable and should be a matter 
of public record available to airport users and the general public. 
Allocation of costs is also expected to be consistent with generally 
accepted accounting principles (GAAP) applicable to local government 
and to enterprise funds, although GAAP guidance on cost allocation is 
limited.
    2. Allocation of costs as allowed under OMB Circular A-87 or a

[[Page 66741]]

Federally approved local cost allocation plan will be considered to 
result in a reasonable and transparent cost allocation, but may still 
need to be reviewed to assure that allocation of specific cost items 
meets the special revenue retention requirements applicable to airport 
revenue under 49 U.S.C. 47107(b).
    3. Each item of cost must be treated consistently either as a 
direct or an indirect cost, and the method of allocation must not 
permit a cost item to be charged both directly and indirectly.
    4. A charge to the airport under a local cost allocation plan must 
be charged to all comparable users of a service equally.
    5. The general costs of government, such as costs of the city 
council, may not be allocated to the airport.

C. Permitted Uses of Airport Property

    Making airport property available at less than fair market rental 
for public community uses, for the purpose of maintaining positive 
airport-community relations, can be a legitimate function of an airport 
proprietor in operating the airport. Accordingly, in certain 
circumstances, providing airport land for such purposes (other than to 
the sponsor itself) will not be considered a violation of 49 U.S.C. 
47107(b) or 47107(a)(13), which requires an airport proprietor to 
maintain an airport rate structure that makes the airport as self-
sustaining as possible. Generally, the circumstances in which below-
market use of airport land for community purposes will be considered 
consistent with the grant assurances are:
    1. The community use of the property can be justified as benefiting 
the airport, and
    2. The property involved would not reasonably be expected to 
produce substantial income at the time the community use is 
contemplated. The greater the difference between the fair rental value 
of the property and the actual amount of the lease, the greater the 
burden of showing an airport-related benefit.
    Making airport property available at less than fair market rental 
for public transit terminals, right-of-way, and related facilities will 
not be considered a violation of 49 U.S.C. 47107(b) or 47107(a)(13) if 
the transit system is publicly owned and operated (or operated by 
contract on behalf of the public owner), and the facilities are 
directly related to the transportation of air passengers and airport 
visitors and employees to and from the airport.

D. 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 comparable 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 
comparable units or cost centers of government;
    D. Payments to compensate nonsponsoring governmental bodies for 
lost tax revenues exceeding stated tax rates;
    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, consistent with Paragraph VII.C. of this policy.
    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;
    H. Expenditure of airport funds for support of community activities 
and participation in community events, or for support of community-
purpose uses of airport property, unless the expenditure is directly to 
the operation or marketing of the airport;
    I. Direct subsidy of air carrier operations.
    J. Indirect payment for the general costs of government (but not 
including billing for specific services provided to the airport).

    Issued in Washington, DC, on December 11, 1996.
Susan L. Kurland,
Associate Administrator for Airport.
[FR Doc. 96-32019 Filed 12-17-96; 8:45 am]
BILLING CODE 4910-13-N