[Federal Register Volume 64, Number 30 (Tuesday, February 16, 1999)]
[Notices]
[Pages 7696-7723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3529]



[[Page 7695]]

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Part II





Department of Transportation





_______________________________________________________________________



Federal Aviation Administration



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Policy and Procedures Concerning the Use of Airport Revenue; Notice

  Federal Register / Vol. 64, No. 30 / Tuesday, February 16, 1999 / 
Notices  

[[Page 7696]]



DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration
[Docket No. 28472]


Policy and Procedures Concerning the Use of Airport Revenue

AGENCY: Federal Aviation Administration (FAA) DoT

ACTION: Policy statement.

-----------------------------------------------------------------------

SUMMARY: This document announces the final publication of the Federal 
Aviation Administration policy on the use of airport revenue and 
maintenance of a self-sustaining rate structure by Federally-assisted 
airports. This statement of policy (``Final Policy'') was required by 
the Federal Aviation Administration Authorization Act of 1994, and 
incorporates provisions of the Federal Aviation Administration 
Reauthorization Act of 1996. The Final Policy is also based on 
consideration of comments received on two notices of proposed policy 
issued by the FAA in February 1996, and December 1996, which were 
published in the Federal Register for public comment. The Final Policy 
describes the scope of airport revenue that is subject to the Federal 
requirements on airport revenue use and lists those requirements. The 
Final Policy also describes prohibited and permitted uses of airport 
revenue and outlines the FAA's enforcement policies and procedures. The 
Final Policy includes an outline of applicable record-keeping and 
reporting requirements for the use of airport revenue. Finally, the 
Final Policy includes the FAA's interpretation of the obligation of an 
airport sponsor to maintain a self-sustaining rate structure to the 
extent possible under the circumstances existing at each airport.

DATES: This Final Policy is effective February 16, 1999.

FOR FURTHER INFORMATION CONTACT: J. Kevin Kennedy, Airport Compliance 
Specialist, Airport Compliance Division, AAS-400, Office of Airport 
Safety and Standards, 800 Independence Avenue, SW., Washington, DC 
20591, telephone (202) 267-8725; Barry L. Molar, Manager, Airport 
Compliance Division, AAS-400, Office of Airport Safety and Standards, 
800 Independence Avenue, SW., Washington, DC 20591, telephone (202) 
267-3446.

SUPPLEMENTARY INFORMATION:

Outline of Final Policy

    The Final Policy implements the statutory requirements that pertain 
to the use of airport revenue and the maintenance of an airport rate 
structure that makes the airport as self-sustaining as possible. The 
Final Policy generally represents a continuation of basic FAA policy on 
airport revenue use that has been in effect since enactment of the 
Airport and Airway Improvement Act of 1982 (AAIA), currently codified 
at 49 U.S.C. Sec. 47107(b). The FAA issued a comprehensive statement of 
this policy in the Notice of Proposed Policy dated February 26, 1996 
(Proposed Policy), and addressed four particular issues in more detail 
in the Supplemental Notice of Proposed Policy dated December 18, 1996 
(Supplemental Notice). The Final Policy includes provisions required by 
the Federal Aviation Administration Authorization Act of 1994, Public 
Law 103-305 (August 23, 1994) (FAA Authorization Act of 1994), and the 
Airport Revenue Protection Act of 1996, Title VIII of the Federal 
Aviation Administration Reauthorization Act of 1996, Public Law 104-264 
(October 9, 1996), 110 Stat. 3269 (FAA Reauthorization Act of 1996). 
The Final Policy also includes changes adopted in response to comments 
on the Proposed Policy and Supplemental Notice.
    The Final Policy contains nine sections. Section I is the 
Introduction, which explains the purpose for issuing the Final Policy 
and lists the statutory authorities under which the FAA is acting.
    Section II, ``Definitions,'' defines federal financial assistance, 
airport revenue and unlawful revenue diversion.
    Section III, ``Applicability of the Policy,'' describes the 
circumstances that make an airport owner or operator subject to this 
Final Policy.
    Section IV, ``Statutory Requirements for the Use of Airport 
Revenue,'' discusses the statutes that govern the use of airport 
revenue.
    Section V, ``Permitted Uses of Airport Revenue,'' describes 
categories and examples of uses of airport revenue that are considered 
to be permitted under 49 U.S.C. 47107(b). The discussion is not 
intended to be a complete list of all permitted uses but is intended to 
provide examples for practical guidance.
    Section VI, ``Prohibited Uses of Airport Revenue,'' describes 
categories and examples of uses of airport revenue not considered to be 
permitted under 49 U.S.C. 47107(b). The discussion is not intended to 
be a complete list of all prohibited uses but is intended to provide 
examples for practical guidance.
    Section VII, ``Policies Regarding Requirement for a Self-Sustaining 
Airport Rate Structure,'' describes policies regarding the requirement 
that an airport maintain a self-sustaining airport rate structure. This 
is a new section of the policy, which provides more complete guidance 
on the subject than appeared in either the Proposed Policy or 
Supplemental Notice.
    Section VIII, ``Reporting and Audit Requirements,'' addresses the 
requirement for the filing of annual airport financial reports and the 
requirement for a review and opinion on airport revenue use in a single 
audit conducted under the Single Audit Act, 31 U.S.C. Secs. 7501-7505.
    Section IX, ``Monitoring and Compliance,'' describes the FAA's 
activities for monitoring airport sponsor compliance with the revenue-
use requirements and the requirement for a self-sustaining airport rate 
structure and the range of actions that the FAA may take to assure 
compliance with those requirements. Section IX also describes the 
sanctions available to FAA when a sponsor has failed to take corrective 
action to cure a violation of the revenue-use requirement.

Background

Governing Statutes

    Four statutes govern the use of airport revenue: the AAIA; the 
Airport and Airway Safety and Capacity Expansion Act of 1987; the FAA 
Authorization Act of 1994; and the FAA Reauthorization Act of 1996. 
These statutes are codified at 49 USC 47101, et seq.
    Section 511(a)(12) of the AAIA, part of title V of the Tax Equity 
and Fiscal Responsibility Act, Public Law 97-248, (now codified at 49 
USC 47107(b)) established the general requirement for use of airport 
revenue. As originally enacted, the revenue-use requirement directed 
public airport owners and operators 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 original revenue-use requirement also contained an exception, 
or ``grandfather'' provision, permitting certain uses of airport 
revenue for non-airport purposes that predate the AAIA.
    The Airport and Airway Safety and Capacity Expansion Act of 1987, 
Public Law 100-223 (December 30, 1987), narrowed the permitted uses of 
airport revenues to nonairport facilities that are ``substantially'' as 
well as directly related to actual air transportation; required local 
taxes on aviation fuel enacted after December 30, 1987, to be

[[Page 7697]]

spent on the airport or, in the case of state taxes on aviation fuel, 
state aviation programs or noise mitigation on or off the airport; and 
slightly modified the grandfather provision.
    The FAA Authorization Act of 1994 Act included three sections 
regarding airport revenue.
    Section 110 added a policy statement to Title 49, Chapter 471, 
``Airport Development,'' concerning the preexisting requirement that 
airports be as self-sustaining as possible, 49 USC Sec. 47101(a)(13).
    Section 111 added a new sponsor assurance requiring airport owners 
or operators to submit to the Secretary and to 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, and a 
listing of all services and property provided to other units of 
government and the amount of compensation received. Section 111 also 
requires an annual report to the Secretary containing information on 
airport finances, including the amount of any revenue surplus and the 
amount of concession-generated revenue.
    Section 112(a) requires the Secretary to establish policies and 
procedures that will assure the prompt and effective enforcement of the 
revenue-use requirement and the requirement that airports be as self-
sustaining as possible.
    Section 112(b) amends 49 USC Sec. 47111, ``Payments under project 
grant agreements,'' to provide the Secretary, with certain limitations, 
to withhold approval of a grant application or a new application to 
impose a Passenger Facility Charge (PFC) for violation of the revenue-
use requirement. 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. 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 FAA 
considers 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 
airport's first year after August 23, 1994.
    Section 112(e), which amended the Anti-Head Tax Act, 49 USC 
Sec. 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 a commercial service airport or operating as a permittee of 
the airport, other than a tax, fee, or charge utilized for airport or 
aeronautical purposes.
    Title VIII of the FAA Reauthorization Act of 1996 included new 
provisions on the use of airport revenue. Among other things, section 
804 codifies the preexisting grant-assurance based revenue-use 
requirement as 49 U.S.C. Sec. 47133. Section 804 also expands the 
application of the revenue-use restriction to any airport that is the 
subject of Federal assistance.
    Section 805, codified as 49 U.S.C. Sec. 47107(m) et seq., requires 
recipients of Federal assistance for airports who are subject to the 
Single Audit Act to include a review and opinion on airport revenue use 
in single audit reports.
    Under section 47107(n), the Secretary, acting through the 
Administrator of the FAA, will perform fact finding and conduct 
hearings in certain cases; may withhold funds that would have otherwise 
been made available under Title 49 of the U.S. Code to a sponsor 
including another public entity of which the sponsor is a member 
entity, and may initiate a civil action under which the sponsor shall 
be liable for a civil penalty, if the Secretary receives a report 
disclosing unlawful use of airport revenue. Section 47107(n) also 
includes a statute of limitations that prevents the recovery of funds 
illegally diverted more than six years after the illegal diversion 
occurs. The Secretary is also authorized to recover civil penalties in 
the amount of three times the unlawfully diverted airport revenue under 
49 U.S.C. Sec. 46301(n)(5).
    Section 47107(o) requires the Secretary to charge a minimum annual 
rate of interest on the amount of any illegal diversion of revenues. 
Interest is due from the date of the illegal diversion.
    Section 47107(l)(5) imposes a statute of limitation of six years 
after the date on which the expense is incurred for repayment of 
sponsor claims for reimbursement of past expenditures and contributions 
on behalf of the airport. A sponsor may claim interest on the amount 
due for reimbursement, but only from the date the Secretary determines 
that the airport owes a sponsor.

Procedural History

    In response to provisions in the 1994 Authorization Act, the FAA 
issued the Proposed Policy. (61 FR 7134, February 26, 1996) After 
reviewing all comments received in response to the notice, the FAA 
issued the Supplemental Notice on December 11, 1996, and requested 
further public comment. (61 FR 66735, December 18, 1996) Although the 
FAA published both documents as proposed policies, both notices stated 
that the FAA would apply the policies in reviewing revenue-use issues 
pending publication of a final policy.
    The Department received 32 comments on the Proposed Policy and 
received 50 comments on the Supplemental Notice. Comments were received 
from airport owners and operators, airline organizations, transit 
authorities, and affected businesses and organizations. Most of the 
commenters were airport owners and operators. The Airport Council 
International-North America and the American Association of Airport 
Executives also provided comments supporting the sponsor/operator 
positions. Two major groups commented on behalf of the airlines--the 
Air Transport Association of America and the International Air 
Transport Association.
    The Aircraft Owners and Pilots Association and the National Air 
Transportation Association commented on behalf of the general aviation 
and private aircraft owners. AOPA was primarily concerned with sponsor/
airport accountability and the prompt and effective enforcement of the 
revenue diversion prohibitions.
    Several port authorities, transit authorities, environmental 
groups, other public interest groups, trade associations, private 
businesses and individuals commented on a variety of specific issues.
    The following discussion of comments is organized by issue rather 
than by commenter. Issues are discussed in the order they arise in the 
Final Policy. Airport proprietors and their representatives who took 
similar positions on an issue are collectively referred to as ``airport 
operators.'' Airlines and airline trade associations are referred to as 
``air carriers'' when the organizations took common positions. The 
summary of comments is intended to represent the general divergence or 
correspondence in commenters' views on various issues. It is not 
intended to be an exhaustive restatement of the comments received.
    In addition, many comments on the original notice of proposed 
policy were addressed in the supplemental notice.

[[Page 7698]]

Those comments are not addressed again in this discussion.
    The FAA considered all comments received, even if they are not 
specifically identified in this summary.

Discussion of Comments by Issue

1. Applicability

a. Applicability of Policy to Privately Owned Airports
    In accordance with the statutes in effect at the time it was 
published, the Proposed Policy applied only to public agencies that had 
received AIP grants for airport development. The Proposed Policy 
included a specific statement that it did not apply to privately owned 
airports that had taken AIP grants while under private ownership. The 
Supplemental Notice did not modify these provisions.
    The Comments: A public interest group concerned about reducing 
airport noise and mitigating its impacts recommended that the policy 
should apply to operators of privately owned airports.
    Final Policy: The new statutory provision added by the 
Reauthorization Act of 1996, governing the restriction on the use 
airport revenue, 49 U.S.C. Sec. 47133, does not differentiate between 
publicly or privately owned airports. The statute applies to all 
airports that have received Federal assistance. Under the AAIA certain 
privately-owned airports that are available for public use are eligible 
to receive airport development grants. As a result, any privately owned 
airport that receives an AIP grant after October 1, 1996, (the 
effective date of the FAA Reauthorization Act of 1996), is subject to 
the revenue use requirements. The applicability section of the Final 
Policy, Section III, is modified to reflect the expansion of the 
revenue-use requirement to include privately-owned airports.
b. Applicability of Policy to Publicly and Privately Owned Airports 
Subject to Federal Assistance
    As a result of the same change in the law, recipients of Federal 
assistance provided after October 1, 1996, other than AIP grants, are 
also subject to the revenue-use restrictions. However, the 
Reauthorization Act of 1996 did not define Federal assistance, and the 
legislative history does not provide guidance on the meaning of this 
term. In addition, it did not explicitly address the status of airports 
that received Federal assistance other than AIP airport development 
grants before October 1, 1996, and therefore were not already bound by 
the revenue use restrictions. These issues are addressed in the Final 
Policy, based on the FAA's review of the statute, its legislative 
history and relevant judicial decisions.
    Applicability of the revenue-use requirement under Sec. 47133 
depends on the definition of the term ``Federal assistance.'' In the 
absence of guidance in the statute and legislative history, the FAA has 
relied on the interpretation given to the similar term ``Federal 
financial assistance'' in Federal regulations and court decisions. 28 
CFR part 41, ``Implementation of Executive Order 12250, Non-
discrimination on the Basis of Handicap in Federally Assisted 
Programs,'' section 41.4(e) establishes the definition of ``Federal 
financial assistance'' for all Federal agencies implementing Sec. 504 
of the Rehabilitation Act of 1973, 29 U.S.C. Sec. 794. That definition 
is in turn subject to the limitation of the Department of 
Transportation v. Paralyzed Veterans, 477 U.S. 597 (1986) (Paralyzed 
Veterans), which specifically addressed the issue of whether certain 
facilities and services provided by the FAA in managing the national 
airspace system constituted federal assistance. That decision held that 
the provision of air navigation services and facilities to airlines by 
the FAA did not make the commercial airline passenger service a 
Federally assisted program within the meaning of Sec. 504.
    The FAA's interpretation of the term ``Federal assistance'' is 
included in Section II of the Final Policy, Definitions. The Final 
Policy's definition of ``Federal assistance'' adapts the generalized 
language of 28 CFR Sec. 41.4(e) to the specific circumstances of 
airports receiving Federal support and reflects the holding of the 
Paralyzed Veterans decision. The definition lists as Federal Assistance 
the following:
    (1) Airport development and noise mitigation grants;
    (2) Transfers, under various statutory provisions, of Federal 
property at no cost to the airport sponsors; and
    (3) Planning grants related to a specific airport.
    Under this definition, FAA installation and operation of 
navigational aids and FAA operation of control towers are not 
considered Federal assistance, based on the Supreme Court decision in 
Paralyzed Veterans. Similarly, the FAA does not consider passenger 
facility charges (PFCs) to be Federal assistance even though PFCs may 
be collected only with approval of the FAA.
    Airport development and noise mitigation grants are considered 
Federal assistance because they apply to a specific airport, and that 
airport is, therefore, ``subject to Federal assistance'' under the 
statute. Transfers of Federal property to an airport are considered 
Federal assistance because they also apply to a specific airport. 
Planning grants may apply to a specific airport or may be more general 
in nature. Under Sec. 47133, the FAA considers only planning grants 
related to a specific airport to be Federal assistance.
    However, not all airports that are the subject of Federal 
assistance are necessarily bound to the revenue-use assurance simply by 
the passage of Sec. 47133. Established Federal grant law prevents a 
statute from being construed to modify unilaterally the terms of 
preexisting grant agreements absent a clear showing of legislative 
intent to do so. Bennett v. New Jersey 470 U.S. 632 (1985), 84 L.Ed 2d 
572, 105 S.Ct. 1555. Neither the statutory language nor its legislative 
history indicates an intent by Congress to apply Sec. 47133 to impose 
the revenue-use requirement on airports that were not already subject 
to it. By contrast, a recent example of Congressional intent to modify 
preexisting grant agreements exists in Sec. 511(a)(14) of the Airport 
and Airway Improvement Act of 1982, 49 USC App. 2210(a)(14), which was 
recodified at 49 USC 47107(c)(2)(B). That subsection, which was added 
to the AAIA in 1987, established requirements for the disposal of land 
acquired with Federal grants that is no longer needed for airport 
purposes. The statute by its terms applied to an ``airport owner or 
operator [who] receives a grant before on or after December 31, 1987'' 
for the purchase of land for airport development purposes. This 
language demonstrated a clear Congressional intent to modify 
preexisting grant agreements. The language of Sec. 47133 and its 
legislative history lacks any such express direction.
    Therefore, the FAA does not interpret Sec. 47133 to impose the 
revenue-use requirements on an airport that was not already subject to 
the revenue-use assurance on October 1, 1996. An airport that had 
accepted Surplus Property from the Federal government, but did not have 
an AIP grant in place on October 1, 1996, would not be subject to the 
revenue-use requirement by operation of Sec. 47133. If that airport 
accepted additional Federal property or accepted an AIP grant on or 
after October 1, 1996, the airport would be subject to the revenue-use 
requirement. As discussed below, by operation of Sec. 47133, the 
revenue-use requirement would remain in effect as long as the airport 
functioned as an airport.

[[Page 7699]]

    For airports that were already subject to the revenue-use 
requirement on October 1, 1996, and those that become subject to the 
requirement after that date, the effect of Sec. 47133 is to extend the 
duration of the requirement indefinitely. This application is not 
explicit in the statute and reference to the legislative history of the 
statute is necessary to determine congressional intent and the specific 
meaning and application of the statutory language. The legislative 
history of Sec. 47133 makes it clear that Congress enacted Sec. 47133 
to extend the duration of the revenue-use requirement for airports that 
are already subject to it. In describing an earlier version of 
Sec. 47133, the Committee on Transportation and Infrastructure of the 
House of Representatives stated that the reason for the change was 
because ``revenue diversion burdens interstate commerce even if the 
airport is no longer receiving grants. In recognition of this fact, the 
bill applies the exact same revenue diversion prohibition to airports 
that have a FAA certificate [modified to airports that are subject to 
Federal assistance in conference] as now applied to airports that 
receive AIP grants. For the most part, these will be the same 
airports.'' H.R. Rep. 104-714 (July 26, 1996) at 38, reprinted at 1996 
US Code, Congressional and Administrative News at 3675. The report 
further stated that broadening the prohibition would ``make it clear 
that an airport cannot escape this prohibition [on revenue diversion] 
by refusing to accept AIP grants[;]'' remove ``this perverse incentive 
to refuse AIP grants * * *[;].'' and ``once again [encourage] all 
airports to use available Federal money to increase safety, capacity, 
and reduce noise.'' Id.
    Any airport that had an outstanding AIP grant agreement in effect 
on October 1, 1996, was already bound to the same revenue use assurance 
that is contained in Sec. 47133. Because Sec. 47133 is extending the 
duration of an existing obligation, there is no conflict with the 
principle of Federal grant law outlined above.
c. Relationship of Final Policy to Airport Privatization
    In the applicability and definition section of the Proposed Policy, 
the FAA stated that proceeds from the sale of the entire airport as 
well as from individual parcels of land would be considered as airport 
revenue. The FAA also stated that it did not intend ``to effectively 
bar airport privatization initiatives,'' and that the FAA would take 
into account ``the special conditions and constraints imposed by the 
fact of a change in ownership of the airport.'' 61 Fed. Reg. at 7140. 
The FAA proposed to 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 Sec. 47107(b) without unnecessarily 
interfering with the appropriate privatization of airport 
infrastructure.'' Id.
    Airport operators: A number of airport operators expressed concern 
that the guidance in the Proposed Policy was too ambiguous to encourage 
privatization and might discourage privatization initiatives. One 
operator suggested that the FAA should take a flexible approach to the 
proceeds of a privatization transaction when an airport's concession 
revenues are sufficient to allow a public owner to use some sales 
proceeds for nonairport purposes without increasing fees charged to 
aeronautical users and without continuing a need for Federal subsidy. 
Another airport operator suggested that the financial terms of a 
transaction would reflect the local circumstances in which the 
transaction was negotiated and recommended that the FAA account for 
this fact in reviewing revenue diversion claims.
    Air carriers: ATA adamantly opposed the sale or transfer of a 
public use airport in a situation when such an action would cause 
airport revenue to be taken off the airport. ATA believes that the FAA 
does not have the flexibility or the statutory authority to require 
anything less than 100% compliance under 49 USC Sec. 47107(b).
    General aviation: The AOPA is concerned that the policy gives the 
impression that airport privatization is a fully resolved issue. The 
AOPA believes that the policy must avoid any implication that the issue 
is resolved or that the FAA endorses privatization.
    Other commenters: Three public interest organizations addressed the 
issue of privatization from different perspectives. A group concerned 
with preventing and mitigating airport noise suggests that the FAA must 
ensure that adequate funds remain available to meet current and future 
airport noise mitigation needs. This group recommended that, before 
approving a transfer, the FAA should conduct a thorough audit of the 
airport's compliance with noise compatibility requirements, plans, and 
promises, and that the FAA should assess the adequacy of resources to 
address noise compatibility problems. The FAA should also require 
enforcement mechanisms to ensure implementation of noise compatibility 
and mitigation measures as a condition of the sale or transfer.
    Two other groups supported a policy that does not discourage 
airport privatization. One of these suggested that the FAA consider 
defederalization of airports. The comments regarding defederalization 
are beyond the scope of this proceeding, because they would require 
statutory changes.
    Final Policy: The Final Policy adopts the basic approach of the 
Proposed Policy toward privatization, with some language changes for 
clarity and readability. In addition, the Final Policy explicitly 
acknowledges the Airport Privatization Pilot Program.
    Guidance on the process for obtaining FAA approval of the sale or 
lease of an airport is contained in FAA Order 5190.6a, Airport 
Compliance Requirements. The Final Policy is not intended to modify the 
process in any way. FAA approval is required for any transfer, 
including those between government entities. The Final Policy makes 
clear, however, that in processing an application for approval the FAA 
will: (a) treat proceeds from the sale or lease as airport revenue; and 
(b) apply the revenue-use requirement flexibly, taking into 
consideration the special conditions and constraints imposed by a 
change in ownership of the airport. For example, as is noted in the 
Final Policy, if the owner of a single airport is selling the airport, 
it may be inappropriate to require the seller to simply return the 
proceeds to the private buyer to use for operation of the airport.
    The FAA requires the transfer document to bind the new operator to 
all the terms and grant assurances in the sponsor's grant agreement. 
The FAA retains sufficient authority and power through its grant 
assurances to ensure compliance by the new owner with all of its 
obligations, including any grant-based obligations relating to 
mitigation of environmental impacts of the airport; to conduct sponsor 
audits and to take other appropriate action to ensure that the airport 
is self-sustaining.
    The Final Policy's approach to privatization does not represent, as 
ATA suggests, less than 100 percent compliance with the revenue-use 
requirement. The FAA agrees with the ATA that we cannot waive that 
requirement. Rather, the FAA has committed to exercise its authority to 
interpret the requirement in a flexible way to account for the unique 
circumstances presented by a change of ownership.
    The Final Policy is not an endorsement of privatization and it does 
not resolve the policy debate about privatization. FAA will continue to 
review the sale or lease of an airport on

[[Page 7700]]

a case-by-case basis, including transfers proposed under the Airport 
Privatization Pilot Program, 49 U.S.C. 47134, created by Sec. 149 of 
the FAA Reauthorization Act of 1996. The demonstration program 
authorizes the FAA to exempt five airports from Federal statutory and 
regulatory requirements governing the use of airport revenue. Under the 
program, the FAA can exempt an airport sponsor from its obligations to 
repay Federal grants, to return property acquired with Federal 
assistance, and to use the proceeds of the sale or lease exclusively 
for airport purposes. The latter exemption is also subject to approval 
by the air carriers serving the airport.
    The FAA notes the concerns that the revenue-use requirement may 
discourage privatization. Congress addressed this prospect by enacting 
the Privatization Pilot Program, which authorizes the FAA to grant 
exemptions from sections 47107(b) and 47133 to permit the sponsor to 
use sales or lease proceeds for nonairport purposes, on certain 
conditions. That exemption would not be required unless sales or lease 
proceeds were airport revenue. In addition, the FAA will consider the 
unique circumstances--financial and otherwise--of individual 
transactions in determining compliance with section 47107(b), and this 
should address to some degree the commenters' concerns about 
privatization.
d. Effect of Sec. 47133 on Return on Investment for Private Airport 
Owners or Operators That Accept Federal Assistance
    By extending the revenue-use requirement to privately-owned 
airports, Sec. 47133 requires the FAA to consider a new issue--the 
extent to which a private owner that assumes the revenue-use obligation 
may be compensated from airport revenue for the ownership of the 
airport. Section 47133 prohibits all such private airport owners or 
operators from using airport revenue for any purpose other than the 
capital and operating costs of the airport. However, the FAA does not 
consider section 47133 to preclude private owners or operators from 
being paid or reimbursed reasonable compensation for providing airport 
management services. Private operators, presently, provide airport 
management services at a number of airports. In many cases, these 
airports are publicly owned and subject to the revenue-use requirement. 
The private operator is providing these services under some form of 
contract with the public owner. These services are considered part of 
the operating cost of the airport owner, and the fees can be paid from 
airport revenue.
    It is reasonable to equate private operators managing publicly 
owned airports with private owner/operators managing privately owned or 
leased airports. To avoid any confusion of the issue, reasonable 
compensation for management services provided by the owner of a 
privately-owned airport is identified as a permitted use of airport 
revenue in the Final Policy.
    Private airport owners may typically expect a return on their 
capital investment. Such investment could be considered a capital cost 
of the airport. In the case of private owners or operators of airports 
who have assumed the revenue-use obligation, that obligation would 
limit the ability to use the return on capital invested in the airport 
for nonairport purposes. In particular, the FAA expects private owners 
to be subject to the same requirements governing a self-sustaining 
airport rate structure and the recovery of unreimbursed capital 
contributions and operating expenses from airport revenue as public 
sponsors. Under section 47107(l)(5), private sponsors--like public 
sponsors--may recover their original investment within the six-year 
statute of limitation. In addition, they are entitled to claim interest 
from the date the FAA determines that the sponsor is entitled to 
reimbursement under section 47107(p). Any other profits generated by a 
privately-owned airport subject to section 47133 (after compensating 
the owner for reasonable costs of providing management services) must 
be applied to the capital and operating costs of the airport.
    This interpretation is required by provisions of 49 U.S.C. 47134, 
the airport privatization pilot program. Section 47134 authorizes the 
FAA to grant exemptions from the revenue-use requirement to permit the 
private operator to ``earn compensation from the operations of the 
airport.'' This exemption would not be necessary if section 47133 did 
not restrict the freedom of the private owner of a Federally-assisted 
airport to use the profits from the investment in the airport for 
nonairport purposes. This interpretation does not unreasonably burden 
private owners, because they receive a benefit (in the form of either 
Federal property added to the airport or Federal grant funds) in 
exchange for assuming the restrictions on the use of their profit.
e. Grandfather Provisions
    The Proposed Policy included a discussion of the grandfather 
provisions of section 47107(b) in the section on permitted uses of 
airport revenue. That discussion included a list of examples of 
financing obligations and statutory provisions that had been previously 
found by the Department of Transportation to confer grandfather status.
    The Comments: Two airport operators commented on this issue. One is 
an airport operator whose status under the grandfather provisions was 
under consideration by the FAA when the Proposed Policy was published. 
Its concerns were addressed by the FAA's consideration of its 
individual situation.
    The second commenter is airport operator already established as a 
grandfathered airport operator. This commenter recommends that the 
Final Policy continue to recognize the rights of grandfathered 
airports.
    Final Policy: The Final Policy continues to recognize the rights of 
grandfathered airport owners set forth at title 49 U.S.C. 47107(b)(2) 
and 47133. To qualify an airport for grandfathered status, the statute 
requires that local covenants, assurances or governing laws pre-dating 
September 2, 1982, must specifically pledge the use of airport 
generated revenues to support not only the airport but also the general 
debt obligations or other facilities of the owner or operator. However, 
the Final Policy is modified to reflect the requirement in the 1996 FAA 
Reauthorization Act that the FAA consider the increase in grandfathered 
payments of airport revenue as a factor militating against the award of 
discretionary grants.
f. Applicability to Non-municipal Airport Authorities
    Lehigh-Northampton Airport Authority (LNAA): LNAA asserted that the 
airport revenue-use requirement does not allow FAA to regulate airport 
transactions with non-governmental parties and does not empower FAA to 
override state and local laws governing the use of airport revenue for 
airport marketing and promotional activities. The commenter advanced a 
number of arguments as to why FAA does not have authority to restrict 
such transactions. First, Congress has shaped the revenue diversion 
statute to identify financial irregularities in dealings between an 
airport enterprise account and another unit of government. The statute 
does not contemplate FAA regulation of airport financial relationships 
with non-government parties. Second, Congress did not intend the 
``capital or operating costs'' language in the revenue diversion 
statute to authorize a new Federal regulatory scheme to narrow the 
types or levels of airport expenditures beyond

[[Page 7701]]

what is legal under applicable state and local law. Third, there is not 
a statutory requirement for FAA to regulate airport expenditures for 
community events or charitable contributions in the absence of facts 
suggesting that such expenditures are the result of undue influence by 
a governmental unit.
    The LNAA currently has a case pending before the FAA under FAR Part 
13, in which certain expenditures that LNAA characterizes as marketing 
and promotional expenses are being examined for consistency with the 
revenue-use requirement. LNAA's assertions with respect to its own 
promotional activities will be addressed by the FAA in that proceeding. 
To the extent that LNAA's practices were inconsistent with this Final 
Policy, LNAA will have an opportunity to argue that the Final Policy 
should not be applied to its situation.
    The general issues of the use of airport revenue for marketing and 
promotional expenses and charitable donations are discussed separately 
below.
    The FAA is not modifying the applicability of the Final Policy 
based on LNAA's other concerns. The language of section 47107(b) 
explicitly states that revenue generated by the airport may only be 
expended for the capital or operating costs of the airport or local 
airport system; it contains no limiting language concerning ``financial 
irregularities.'' The statute further defines expenditures for general 
economic development and promotion as unlawful use of airport revenue, 
providing specific authority over transactions that do not involve 
transfers of airport revenue to other governmental entities. See 49 
U.S.C. 47107(l)(2). This provision grants authority for regulation of 
expenditures for charitable and community-use purposes.
    In addition, the Congressional mandate to establish policies and 
procedures to ``assure the prompt and effective enforcement'' of the 
revenue use and self-sustainability requirements (49 U.S.C. 
47107(l)(1)) provides statutory authority to adopt more detailed 
guidance on permitted and prohibited uses of airport revenue. Many 
airport operators have expressed concern over the difficulty of 
responding to OIG findings of unlawful revenue use without clear and 
specific FAA guidance on permitted and prohibited practices.
    Finally, the grandfathering provision establishes Congressional 
intent to prohibit certain airport revenue practices authorized by 
state or local law that do not satisfy the specific requirements of the 
grandfather provisions of the AAIA.

2. Definition of Airport Revenue

a. Proceeds From Sale of Airport Property
    The Proposed Policy included proceeds from the sale of airport 
property in the proposed definition of airport revenue. No distinction 
was made between property acquired with airport revenue and property 
acquired with other funds provided by the sponsor. In the explanatory 
statement, the FAA discussed alternatives it had considered, including 
limiting the definition to property acquired with airport revenue. (61 
FR 7138) The FAA also stated that a sponsor would be able to recoup any 
funds it contributed to finance the acquisition of airport property as 
an unreimbursed capital contribution.
    Airport operators: Airport operators objected to defining proceeds 
from the sale of airport property as airport revenue. ACI/AAAE argued 
that the definition would reduce incentives for airport sponsors to 
pursue legitimate airport endeavors. One airport operator argued that 
the definition constitutes a transfer of wealth from the taxpayers to 
the airport users, and that cities would be less willing to contribute 
to future airport projects. Another individual operator argued that the 
policy should not apply to property acquired with the sponsor's own 
funds and to property acquired with airport revenue before 1982. This 
airport operator further argues that application of the policy to 
property acquired before 1982 amounts to a taking of airport property 
without just compensation and without Congressional authorization. 
Finally, this operator argued that the proposed definition appears to 
contradict a portion of the FAA Compliance Handbook, Order 5190.6A 
(October 2, 1989), Paragraph 7-18, that states there is no required 
disposition of net revenues from sale or disposal of land not acquired 
with Federal assistance.
    Air carriers: The ATA commented that the use of airport revenue for 
repayment of contributions from prior years should be limited. 
According to ATA, reimbursements should be permitted only when the 
sponsor and airport enter into a written agreement concerning the terms 
of reimbursement before the service or expenditure is provided.
    Other commenters: A public interest organization opposed the 
treatment of proceeds from the sale of airport property as airport 
revenue. This commenter argued that the sponsor, as the principal 
provider of airport's land and capital, has a legitimate claim to cash-
out the value of its investments and to use the proceeds for other 
purposes.
    The Final Policy: The Final Policy does not modify the treatment of 
proceeds from the sale, lease or other disposal of airport property. 
Proceeds from the sale lease or other disposal of all airport property 
are considered airport revenue subject to the revenue-use requirement 
and this policy, unless the property was acquired with Federal funds or 
donated by the Federal government. While proceeds from disposal of 
Federally-funded and Federally-donated property are also airport 
revenue, these proceeds are subject to separate legal requirements that 
are even more restrictive than the revenue-use requirement.
    As discussed in the Proposed Policy, this definition is consistent 
with the language of the original version of section 47107(b), which 
applies to ``all revenues generated by the airport.''
    In addition, the Airport Privatization Pilot Program, 49 U.S.C. 
47134, permits the FAA to grant exemptions from the revenue-use 
requirements to permit a sponsor to keep the proceeds from a sale or 
lease transaction, but only to the extent approved by 65 percent of the 
air carriers. An exemption would not be required unless the proceeds 
from the sale or lease of the entire airport were airport revenue 
within the meaning of section 47107(b) and 47133. Since the proceeds 
from the sale of an entire airport are airport revenue, it follows that 
the proceeds from the sale of individual pieces of airport property are 
also airport revenue.
    Further, section 47107(l)(5)(A) establishes a six-year period 
during which sponsors may claim reimbursement for their capital and 
operating contributions. This limitation on seeking reimbursement could 
be avoided through the process of disposing of airport property, if the 
proceeds of sales were not themselves considered airport revenue. 
Through section 47107(l)(5)(A) Congress has defined the rights of 
airport owners and operators to recover their investments in airport 
property for use for nonairport purposes. Subject to the six-year 
statute of limitations, the sponsor is entitled to use airport revenues 
for reimbursement of such contributions. Section 47107(p) provides that 
a sponsor may also claim interest if the FAA determines that a sponsor 
is entitled to reimbursement, but interest runs only from the date on 
which the FAA makes the determination. As discussed below, the Final 
Policy provides flexibility to

[[Page 7702]]

structure future contributions to permit reimbursement over a longer 
period of time in order to promote the financial stability of the 
airport. The six-year limitation, which is incorporated in the Final 
Policy, also addresses ATA's request for a time limit on the airport 
owner or operator's ability to claim recoupment for past unreimbursed 
requests.
    The FAA does not accept the suggestion that the definition is an 
unauthorized taking of sponsor property without just compensation. 
First, as noted, the definition is supported by the 1996 FAA 
Reauthorization Act, which included an express provision for an 
exemption from the revenue use restriction for sale and lease proceeds. 
Second, all airport sponsors, including the airport commenters, 
voluntarily agreed to their restrictions on the use of airport revenue 
when they accepted grants-in-aid under the AIP program. Finally, the 
definition does not deprive the commenter of its property. The proceeds 
from the disposal will still flow to the commenter sponsor to be used 
for a legitimate local public purpose--operation and development of the 
commenter's airport.
    The FAA acknowledged in the Proposed Policy that existing FAA 
internal orders contain provisions on the status of proceeds from the 
disposal of airport property that are inconsistent with this Final 
Policy. As stated in the Proposed Policy, this inconsistency does not 
preclude the FAA from defining proceeds from the disposal of airport 
property as airport revenue in this Final Policy. Rather, ``the Policy 
takes precedence, and the orders will be revised to reflect the 
policies in this statement.'' 61 FR 7138. In addition, the provisions 
in the FAA internal orders are in conflict with the 1996 FAA 
Reauthorization Act. Because of this statutory conflict, the FAA cannot 
continue to apply them.
b. Revenue Generated by Off-airport Property
    The Proposed Policy defined as airport revenue the revenue received 
for the use of property owned and controlled by a sponsor and used for 
airport-related purposes, but not located on the airport.
    Airport operators: The ACI-NA/AAAE and two individual airport 
operators objected to this definition of airport revenue. The ACI-NA/
AAAE stated that revenues received from off-airport activities should 
ordinarily not be counted as airport revenue. One airport operator 
argued that this definition is inconsistent with the statutory 
definition of airport in the AAIA. The other airport operator (the 
State of Hawaii) is especially concerned about revenue generated by 
off-airport duty fee shops.
    No other comments were received.
    Final Policy: The Final Policy does not modify the definition of 
airport revenue as it pertains to off-airport revenue. This definition 
is consistent with FAA's prior interpretation, which has defined as 
airport revenue the revenues received by the airport owner or operator 
from remote airport parking lots, downtown airport terminals, and off-
airport duty free shops.
    After enactment of the original revenue-use requirement, the FAA 
initiated an administrative action to require the State of Hawaii to 
use its revenue from off-airport duty free sales in a manner consistent 
with section 47107(b). In response, Congress amended the revenue-use 
requirement to provide a specific and limited exemption to the State of 
Hawaii to permit up to $250 million in off-airport duty-free sales 
revenue to be used for construction of highways that are part of the 
Federal-Aid highway system and that are located in the vicinity of an 
airport. See, 49 U.S.C. Sec. 47107(j). The statutory exemption would 
only be necessary if the revenue from off-airport duty free shops is 
airport revenue within the meaning of the statute.
c. Royalties From Mineral Extraction
    The Proposed Policy included royalties from mineral extraction on 
airport property earned by a sponsor as airport revenue.
    Airport operators: One airport operator objected to including 
revenue from the sale of sponsor-owned mineral, natural, or 
agricultural products or water to be taken from the airport in the 
definition of airport revenue. The operator stated that the retention 
of mineral rights as airport property would represent a windfall to the 
airport at the sponsor's expense; that the Proposed Policy is contrary 
to congressional intent and that it would take, without compensation, 
valuable property rights from the sponsor. The operator also cited a 
prior decision where FAA concluded the production of natural gas at 
Erie, Pennsylvania, does not serve either the airport or any air 
transportation purpose. The royalties generated by such production were 
determined to be outside the scope of the revenue-use requirement.
    Final Policy: The Final Policy retains the proposed definition of 
airport revenue to include the sale of sponsor-owned mineral, natural, 
agricultural products or water to be taken from the airport. On further 
review of the Erie interpretation in this proceeding, the FAA no longer 
considers the analogy drawn in that interpretation--between mineral 
extraction and operation of a convention center or water treatment 
plant--to be appropriate. Rather, mineral and water rights represent a 
part of the airport property and its value. Just as proceeds from the 
sale or lease of airport property constitute airport revenue, proceeds 
from the sale or lease of a partial interest in the property--i.e. 
water or mineral rights--should also be considered airport revenue. The 
FAA will not require an airport owner or operator to reimburse the 
airport for past mineral royalty payments used for nonairport purposes 
based on the Erie interpretation. However, all airport owners and 
operators will be required to treat these payments as airport revenue 
prospectively, starting on the publication date of the Final Policy.
    With respect to agricultural products, the FAA has always treated 
lease revenue from agricultural use of airport property as airport 
revenue, even if that revenue is calculated as a portion of the revenue 
generated by the crops grown on the airport property. The definition in 
the Final Policy will assure that the airport gets the full benefit of 
agricultural leases of airport property, regardless of the form of 
compensation it receives for agricultural use of airport property.
    The FAA does not consider this interpretation to create a taking of 
airport owner or operator property. As discussed in other contexts, the 
limitation on the use of airport revenue was voluntarily undertaken by 
the airport operator upon receiving AIP grants. In addition, the 
revenues generated by these activities will still flow to the sponsor 
for its use for a legitimate local governmental activity, the operation 
and development of its airport.
d. Other Issues
    The Final Policy includes a discussion of the requirement of 49 
U.S.C. Sec. 40116(d)(2)(A). This provision requires that taxes, fees or 
charges first taking effect after August 23, 1994, assessed by a 
governmental body exclusively upon businesses at a commercial service 
airport or upon businesses operating as a permittee of the airport be 
used for aeronautical, as well as airport purposes. This addition is 
included, at the suggestion of a commenter, to comply with the 
statutory provision, which was enacted as section 112(d) of the 1994 
FAA Authorization Act.

[[Page 7703]]

3. Permitted Uses of Airport Revenue

a. Promotion/marketing of the Airport
    Congress, in the FAA Authorization Act of 1994, permitted the use 
of airport revenues for promotion of the airport by expressly 
prohibiting ``use of airport revenues for general economic development, 
marketing, and promotional activities unrelated to airports or airport 
systems.'' The Supplemental Proposed Policy cited this law and 
recognized that many airport sponsors engage in some form of 
promotional effort, to encourage use of the airport and increase the 
level of service. Accordingly, the Supplemental Notice provided that 
``[a]irport revenue may be used for * * * [c]osts 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.'' 61 FR 66470.
    However, the preamble to the Supplemental Notice stated that 
promotional/marketing expenditures directed toward regional economic 
development, rather than specifically toward promotion of the airport, 
would not be considered a permitted use of airport revenue. In 
addition, the FAA proposed to prohibit the use of airport revenue for a 
direct purchase of air service or subsidy payment to air carriers 
because the FAA does not consider these payments to be capital or 
operating costs of the airport.
    Airport operators: In their comments to the original proposed 
policy, ACI-NA/AAAE requested that FAA establish a ``safe harbor,'' or 
a maximum dollar amount (perhaps based on a percentage of airport 
costs), under which an airport could spend airport revenue on certain 
promotional and marketing activities. Greater percentage amounts would 
be allowed for the costs of airport-specific activities, while lower 
amounts would be allowed for joint efforts for campaigns and 
organizations that have broader, regional marketing missions.
    Several airport operators supported this ``safe harbor'' concept in 
their comments to the docket for the original Proposed Policy. One such 
commenter, without reference to ACI/AAAE's remarks, suggested a cap of 
5% of an airport's budget as a ``safe harbor'' for marketing expenses 
that are not directly related to the airport or airport system. 
Furthermore, this commenter would limit the use of airport revenue to a 
maximum share of 20 percent of the overall cost of any joint-project 
budget.
    ACI/AAAE did not pursue the concept of ``safe harbor'' in their 
comments to the docket for the Supplemental Policy, focusing instead on 
the discretion of the airport operator to use reasonable business 
judgment to determine potential benefits to the airport. Several 
airports concurred with the ACI-NA/AAAE position, and one airport 
operator added that joint-marketing expenses, if reasonable and clearly 
related to aviation, should be considered an operating cost of the 
airport.
    The ACI/AAAE and several individual airport operators commented 
that an airport cannot be distinguished from the region served by the 
airport. ACI/AAAE commented that the policy should permit reasonable 
spending for marketing of communities and regions because airports are 
not ultimate destinations of passengers. Therefore, airport operators 
must be free to make a reasonable attempt to increase revenues by 
investing in the promotion of their community as a destination.
    Some airports specifically opposed the ATA's suggestion of a cap, 
described below.
    Air carriers: In its comments to the Supplemental Notice, the ATA 
mentioned the concept of a maximum or ``cap'' under which expenditures 
would be considered reasonable, but would apply it to efforts to 
promote the services of the airport itself. The ATA would have the 
policy prohibit entirely the use of airport revenue for the promotion 
of regional development, because ``expenditures by an airport to 
promote local or regional economic development--as opposed to the 
services and functionality of an airport--should not be considered 
legitimate airport costs.'' In regard to cooperative or joint-marketing 
expenses, the ATA focused on airport participation in joint-marketing 
of new airline services, suggesting that these activities be limited to 
a 60-day promotional period. ATA also warned against abuses of 
cooperative marketing, in particular programs that result in promotion 
of a particular airline.
    The ATA rejected the airport position that use of airport revenue 
to fund regional promotional activities is acceptable, because airports 
themselves are not destinations. They stated, ``[l]ocal governments 
that are also airport sponsors should not be permitted to pass off 
local and regional promotional activities in order to charge such costs 
to an airport. Indeed, many civic organizations and chambers of 
commerce undertake such activities directly, since continued economic 
development directly benefits the local businesses that constitute such 
organizations.''
    The Final Policy: The FAA has modified the provisions on permitted 
uses of airport revenue in regard to promotion and marketing in the 
Final Policy. The FAA has applied the sections 47107(b) and 47107(l) to 
determine to what extent various kinds and amounts of promotional and 
marketing activities can be considered legitimate operating costs of 
the airport. The permitted uses of airport revenue for marketing and 
promotion are split into two paragraphs, V.A.2 and V.A.3., in the Final 
Policy--one addressing costs that may be fully paid with airport 
revenue, and one addressing costs that may be shared. The issues of 
general economic development, direct subsidies of air carriers, the 
waiving of fees to airport users and airport participation in airline 
marketing and promotion is further addressed in Section VI.
    The Final Policy provides, under V.A.2, that expenditures for the 
promotion of an airport, promotion of new air service and competition 
at the airport, and marketing of airport services are legitimate costs 
of an airport's operation. These expenditures may be financed entirely 
with airport revenue, and the expenditures may include the costs of 
employees engaged in the promotion of airport services. In addition, 
cooperative airport-airline advertising of air service at the airport 
may be financed with airport revenue, with or without matching funds. 
The FAA is prepared to rely on airport management to assure that the 
level of expenditures for such purposes would be reasonable in relation 
to the airport's specific financial situation. In addition, cooperative 
airport-airline advertising of air service must be conducted in 
compliance with applicable grant assurances prohibiting unjust 
discrimination in providing access to the airport.
    For other advertising and promotional activities, such as regional 
or destination marketing, airport revenue may be used to pay a share of 
the costs only if the advertising or promotional material includes a 
specific reference to the airport. The share must be reasonable, based 
on the benefits to the airport of participation in the activity. The 
FAA construes the prohibition on ``use of airport revenues for general 
economic development, marketing, and promotional activities unrelated 
to airports or airport systems' to preclude the reliance on airport 
management judgment to support the use of airport revenue for general 
destination advertising containing no references to the airport. 
Likewise, the prohibition precludes adoption of a safe-harbor

[[Page 7704]]

provision for general promotional expenses.
    Except as discussed above, the Final Policy does not limit the 
amounts of airport revenue that can be spent for all permitted 
promotional marketing and advertising activities. The FAA expects that 
expenditure of airport revenues for these purposes would be reasonable 
in relation to the airport's specific financial situation. 
Disproportionately high expenditures for these activities may cause a 
review of the expenditures on an ad hoc basis to verify that all 
expenditures actually qualify as legitimate airport costs. Examples of 
permissible and prohibited expenditures are included in the Final 
Policy itself.
b. Reimbursement of Past Contributions
    The Proposed Policy permitted airport revenue to be used to 
reimburse a sponsor for past unreimbursed capital or operating costs of 
the airport. The Proposed Policy did not include a limit on how far 
back in time a sponsor could go to claim reimbursement, in accordance 
with the law in effect at the time. In addition, the Preamble noted 
that the FAA had not to date permitted a sponsor to claim reimbursement 
for more than the principal amount actually contributed to the airport. 
The FAA requested comment on whether the FAA should permit recoupment 
of interest or an inflationary adjustment or whether, in the case of 
contributed land, recoupment should be based on current land values.
    Airport operators: ACI-NA/AAAE and a number of individual airport 
operators supported recoupment of interest or inflation adjustment on 
previous contributions or subsidies to the airport.
    Air carriers: The ATA objected to the Proposed Policy and commented 
that recoupment should be subject to a number of requirements to 
prevent abuses.
    The Final Policy: After the proposed policy was issued, Congress 
enacted legislation to limit the use of airport revenue for 
reimbursement of past contributions, and to limit claims for interest 
on past contributions. 49 U.S.C. Secs. 47107(l)(5), 47107(p). The Final 
Policy incorporates these statutory provisions. Based on Congressional 
intent evidenced by the legislative history of these provisions, 
airport revenue may be used to reimburse a sponsor only for 
contributions or expenditures for a claim made after October 1, 1996, 
when the claim is made within six years of the contribution or 
expenditure. In addition, a sponsor may claim interest only from the 
date the FAA determines that the sponsor is entitled to reimbursement, 
pursuant to section 47107(p). The FAA interprets these statutory 
provisions to apply to contributions or expenditures made before 
October 1, 1996, so long as the claim is made after that date.
    If an airport is unable to generate sufficient funds to repay the 
airport owner or operator within six years, the Final Policy permits 
repayment over a longer period, with interest, if the contribution is 
structured and documented as an interest bearing loan to the airport 
when it is made. The interest rate charged to the airport should not 
exceed a rate that the sponsor received for other investments at the 
time of the contribution.
c. Donations of Airport Revenue to Charitable/Community Service 
Organizations
    The Supplemental Proposed Policy addressed the use of airport 
property for public recreational purposes, and addressed the use of 
airport funds to support community activities and for participation in 
community events. The FAA proposed that the use of airport revenue for 
such donations would not be considered a cost of operating the airport, 
unless the expenditure is directly related to the operation of the 
airport. For example, expenditures 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. In contrast, expenditures to support a 
sponsor's participation in a community parade would not be considered 
to be directly related to the operation of the airport.
    Airport operators: ACI-NA/AAAE contended that the expenditure of 
airport revenue for community or charitable purposes is appropriate and 
should be recognized as legitimate. Airports, regardless of their size, 
type, and certification or lack thereof, are important members of their 
local communities and, therefore, must be able to maintain their 
prominent, highly visible roles in their respective communities. 
Airports are regarded by their communities as local business 
enterprises and, consequently, are expected to contribute to local non-
profit charitable concerns in the same manner as other local business 
enterprises.
    Individual airport operators generally supported the position of 
ACI-NA/AAAE, although some individual operators acknowledged that some 
limitation on the expenditures may be appropriate. One suggested a de 
minimis standard; another proposed a ``safe harbor'' based on a 
percentage of the airport's total budget. Another urged that airport 
owners/operators be allowed leeway to make contributions of airport 
funds, in reasonable amounts and consistent with the local 
circumstances, and to use airport property for charitable purposes on 
the same basis.
    Other airport operators commented that the Final Policy should give 
comparable treatment to the use of airport funds and airport property 
for community goodwill by recognizing the limited use of airport 
revenue to support charitable and community organizations as a 
legitimate operating cost of the airport.
    Air carriers: Air carriers did not comment specifically on 
charitable contributions, although they commented extensively on the 
use of airport property for community or charitable purposes. Generally 
the air carriers suggested that use of airport property should be 
subject to strict conditions to avoid abuse.
    Other commenters: An advocacy group in support of a particular 
airport commented that, in order for an airport to be as self-
sustaining as possible, the use of each income dollar is critical, and 
that federally assisted airports must be fully responsive to the 
citizens of the community by providing information on the use of 
airport funds.
    Final Policy: The Final Policy generally follows the approach of 
the Supplemental Notice. Airport funds may be used to support community 
activities, or community organizations, if the expenditures are 
directly and substantially related to the operation of the airport. In 
addition, the policy provides explicitly that where the amount of the 
contribution is minimal, the airport operator may consider the 
``directly and substantially related to air transportation'' standard 
to be met if the contribution has the intangible benefit of enhancing 
the airport's acceptance in local communities impacted by the airport.
    Expenditures that are directly and substantially related to the 
operation of the airport qualify inherently as operating costs of the 
airport. The FAA recognizes that contributions for community or 
charitable purposes can provide a direct benefit to the airport through 
enhanced community acceptance, but that benefit is intangible and not 
quantifiable. Where the amount of the contribution is minimal, the 
value of the benefit will not be questioned as long as there is a 
reasonable connection between the recipient organization and

[[Page 7705]]

the benefit of community acceptance for the airport.
    However, if there is no clear relationship between the charitable 
or community expenditure and airport operations, the use of airport 
revenue may be an expenditure for the benefit of the community, rather 
than an operating cost of the airport. The different treatment of the 
use of airport funds (direct payments to charitable and community 
organizations) and the use of airport property (less than FMV leases 
for charitable or community purposes) is grounded in the applicable 
laws: the revenue-use requirement (section 47107(b)), which governs the 
use of airport funds, provides far less flexibility than the 
requirement for a self-sustaining rate structure (section 
47107(a)(13)), which applies to the use of airport property.
    Examples of permitted and prohibited expenditures are included in 
the Final Policy.
d. Use of Airport Revenue to Fund Mass Transit Airport Access Projects
    The Supplemental Proposed Policy addressed in Part VII.C., the 
circumstances in which an airport sponsor could provide airport 
property at less than fair market value to a transit operator. The 
Supplemental Proposed Policy did not address the use of airport revenue 
to finance the construction of transit facilities. That issue, however, 
was raised in the comments.
    Airport Operators: Two airport operators supported the use of 
airport revenue for the construction of transit facilities. One 
commenter stated that an airport should be permitted to use airport 
revenues and assets to provide mass transit service to on-airport 
commercial uses. Another commenter referred to the AIP Handbook, FAA 
Order 5100.38A Sec. 555, which provides AIP project eligibility for 
rapid transit facilities.
    Air carriers: Air carriers did not specifically discuss the use of 
airport revenue to finance transit facilities. However, as discussed 
below, they objected to providing airport property for transit 
facilities at nominal lease rates.
    Other Commenters: Two commenters representing transit operator 
interests supported the expenditure of airport revenues to finance 
transit facilities. A transit operator stated that in order to create a 
better balance between transit and highway interests, transit 
facilities should be totally eligible expenses, paid for in the same 
manner as other road and parking enhancements. A transit trade 
association urged the FAA to take appropriate actions to ensure that 
passenger fees and other airport revenues are widely eligible to fund a 
range of airport surface transportation modes, including public 
transportation.
    The FAA also received extensive comments on providing airport 
property for use by transit providers at less than FMV rents. These 
comments are addressed separately below.
    Final Policy: The Final Policy has been modified to provide 
guidance on the use of airport revenues to finance airport ground 
access projects. The Final Policy states that airport revenue may be 
used for the capital or operating costs of such a project if it can be 
considered an airport capital project, or is part of a facility owned 
or operated by the airport sponsor and directly and substantially 
related to air transportation of passengers or property, relying 
directly on the statutory language of Sec. 47107(b).
    As an example, the Final Policy summarizes the FAA's decision on 
the use of airport revenue to finance construction of the rail link 
between San Francisco International Airport and the Bay Area Rapid 
Transit (BART) rail system extension running past the airport. In that 
decision, the FAA approved the use of airport revenues to pay for the 
actual costs incurred for structures and equipment associated with an 
airport terminal building station and a connector between the airport 
station and the BART line. The structures and equipment were located 
entirely on airport property, and were designed and intended 
exclusively for use of airport passengers. The BART extension was 
intended for the exclusive use of people travelling to or from the 
airport and included design features to discourage use by through 
passengers. Based on these considerations, the FAA determined that the 
possibility of incidental use by nonairport passengers did not preclude 
airport revenues from being used to finance 100 percent of the 
otherwise eligible cost items. For purposes of this analysis, the FAA 
considered ``airport passengers'' to include airport visitors and 
employees working at the airport.

4. Accounting Issues

a. Principles for Allocation of Indirect Costs
    Based on the comments to the Proposed Policy, the FAA addressed the 
principles of indirect cost allocation in its Supplemental Notice. The 
Supplemental Notice made clear that the allocation of indirect costs is 
allowable under 49 USC Sec. 47107(b), and that no particular method of 
cost allocation will be required, including OMB Circular A-87. To 
ensure, however, that indirect costs are limited to allowable capital 
and operating costs, the FAA proposed to apply certain general 
principles and prohibitions to the allocation of costs. The 
Supplemental Notice did not limit significantly the development of 
local cost allocation methodologies, or interfere with the application 
of Generally Accepted Accounting Principles (GAAP) and other accounting 
industry recognized standards.
    In the Supplemental Notice, the FAA stated that it 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 allowable under that guidance would be in 
violation of the airport revenue retention requirement if allocated to 
the airport.
    The Supplemental Notice also required specifically that indirect 
cost allocations be applied consistently across departments to the 
sponsoring government agency, and not unfairly burden the airport 
account. The general sponsor cost allocation plan could not result in 
an over-allocation to an enterprise fund. In addition, the sponsor 
would have to charge comparable users, such as enterprise accounts, for 
indirect costs on a comparable basis.
    Lastly, the Supplemental Notice proposed to prohibit the allocation 
of general costs of the sponsoring government to the airport. However, 
this prohibition would not affect direct or indirect billing for actual 
services provided to the airport by local government.
    Airport Operators: Generally, airport operators agreed with the 
proposal to acknowledge that the allocation of indirect costs as 
allowable under 49 USC Sec. 47107(b), and to provide that no particular 
allocation methodology, including OMB Circular A-87, be required.
    One airport operator requested the FAA to further clarify that it 
is not imposing on airport sponsors all of the specific elements of OMB 
CircularA-87. The operator was concerned that the statement in the 
Supplemental Notice that the FAA ``believe[s] the specific principles 
identified by the OIG are an appropriate construction of the revenue 
retention requirement'' may lead to confusion over whether adherence to 
OMB Circular A-87 is mandatory for

[[Page 7706]]

allocating costs to be paid by airport revenue.
    Several airport operators were concerned that the FAA would not 
accept the allocation of costs in accordance with a Federally-approved 
cost allocation plan, but could review the plan to ensure that 
allocation of specific cost items meet the special revenue retention 
requirements. For example, one airport operator commented that the 
FAA's approach would impose on airport sponsors burdens and 
requirements in excess of the detailed requirements of OMB-Circular A-
87, which are designed to ensure a reasonable and consistent cost 
allocation system. The airport proprietor proposed that such compliance 
with a federally-approved cost allocation plan be considered sufficient 
to satisfy the revenue retention requirement.
    Another airport operator proposed that the FAA revise the policy to 
clarify that a specific cost, as opposed to a type of cost, cannot be 
treated as both a direct and an indirect cost. The airport operator 
offered as an example a city-owned and operated airport at which some 
police services are provided by officers assigned exclusively to the 
airport and other services are provided by general duty police 
officers. The commenter suggested that it should be permissible to 
charge the airport for the officers assigned exclusively to the airport 
as a direct cost and to charge for the general duty officers as an 
indirect cost allocation.
    Additionally, this commenter proposed revising the policy to 
clarify that costs that are chargeable to one city department on a 
direct basis may be charged to other city departments on an indirect 
basis. The airport operator offered an example in which police are 
exclusively assigned to a city-owned airport, but are not exclusively 
assigned to other city departments. The commenter argued that it would 
be reasonable to charge the airport for police services as a direct 
cost, and to charge the other departments as an indirect cost 
allocation.
    Several airport operators were also concerned that the supplemental 
policy implied that a local cost allocation plan must provide that all 
users for a service be billed equally. For example, ACI-NA and AAAE 
suggested that the requirement for consistent application should be 
interpreted to require the local government to go through the exercise 
of assessing indirect costs against all governmental departments, 
including those wholly funded by that governmental entity. Likewise, an 
airport operator requested that the FAA clarify that the supplemental 
policy does not mean that an airport sponsor must actually bill all of 
its General Fund agencies for certain municipal costs in order to be 
able to charge such costs to its airports. All of those airport 
proprietors that expressed concern over this proposed policy generally 
commented that this issue was considered and rejected by the Department 
of Transportation in the Second Los Angeles International Airport Rates 
Proceeding, Docket OST-95-474. According to the airport proprietors, 
the DOT recognized that in many cases sponsor agency operations are 
paid from a common General Fund. Under those circumstances, it is 
illogical and unnecessary for one General Fund agency to bill another 
General Fund agency for municipal services.
    One airport operator proposed that the word ``equally'' be removed 
from VII.B.4 of the proposed policy. The commenter urged that the FAA 
allow airport sponsors the flexibility to allocate costs to various 
users on a reasonable, equitable basis relative to the benefits 
received, even though specific users may sometimes be treated 
differently. Returning to its example of police services, the commenter 
suggested that if the sponsor chooses not to charge a housing authority 
for costs of a special police unit assigned to that authority, it 
should be of no concern to the FAA as long as those costs are not then 
charged to the airport.
    Another airport operator argued that each of its proprietary 
departments are unique and governed by different City Charter 
provisions; that they make different uses of city services; and have 
different financial arrangements with the sponsor's general fund. This 
commenter argued that treating the departments the same for cost 
allocation purposes because the departments are enterprise funds would, 
therefore, serve no valid purpose.
    Several airport operators disagreed with FAA's proposed policy to 
prohibit the indirect cost allocation of general costs of government. 
Several commenters stated that the proposed policy would reverse 
longstanding practice at many airports and could be inconsistent with 
federally-approved cost allocation plans, which provide for the 
allocation of a share of indirect costs of various local government 
functions. One airport operator argued that there is no statutory basis 
for prohibiting the allocation of general costs of government, other 
than costs for particular identified services.
    Finally, one airport operator commented that the proposed policy 
does not sufficiently clarify the appropriate allocations for fire and 
police stations that do not serve the airport exclusively. The airport 
operator proposed that policy explicitly permit a sponsor to allocate 
costs based on the intended purpose and value of the station to the 
airport, not its actual use. The airport operator argues that a more 
flexible approach could better implement the applicable statutory 
provision that prohibits ``direct payments or indirect payments, other 
than payments reflecting the value of services and facilities provided 
to the airport.''
    Airlines: ATA supports the proposed policy clarification that no 
particular cost allocation methodology for indirect costs is preferred.
    The Final Policy: The Final Policy reflects a different and 
simplified approach to indirect cost allocation that is intended to 
facilitate development of permissible cost allocation plans and the 
review of those plans in the single audit process. The Final Policy 
specifies that the cost allocation plans must be consistent with 
Attachment A of OMB Circular A-87. Attachment A sets forth general 
principles for developing cost allocation plans. Those principles are 
essentially a restatement of the principles proposed in the 
Supplemental Policy. By referring to Attachment A, the Final Policy 
establishes a standard that is well understood by airport cost 
accountants and by airport operators' independent auditors. The Final 
Policy does not require compliance with the other attachments to OMB 
Circular A-87, which include more rigid requirements and defines 
categories of grant recipient costs that are eligible and ineligible 
for reimbursement with Federal grant funds.
    The Final Policy continues to specify that the costs allocated must 
themselves be eligible for expenditure of airport revenue under section 
47107(b). Attachment A to OMB Circular A-87 provides principles for 
cost allocation methodologies. The cost items that may be charged to 
airport revenue are determined by the requirements of section 47107(b). 
Therefore, sponsors, and the FAA, cannot rely solely on compliance with 
OMB Circular A-87 to assure that the costs items charged to the airport 
in a Federally approved cost allocation plan are consistent with 
section 47107(b).
    The Final Policy continues to specify that the airport must not be 
charged directly and indirectly for the same costs. The FAA is not 
persuaded that the example of police services offered by an airport 
sponsor requires a modification of this requirement. This

[[Page 7707]]

provision is not intended to preclude both the direct and indirect 
billing in the situation cited by the commenter--where police services 
are provided to the airport on both an exclusive-use and a shared-use 
basis. In the cited example, it would be preferable to bill for police 
exclusively assigned to the Airport on a direct cost basis. It would be 
impossible, however, to bill for the shared-use police without engaging 
in some form of indirect cost allocation. The FAA did not intend the 
supplemental policy to preclude treatment of police services as both 
direct and indirect costs in these circumstances, only to preclude 
double billing on both a direct and indirect basis, for the same police 
costs.
    Similarly, with respect to the second example of police services 
where the airport receives exclusive-use police services and other 
sponsor departments receive shared-use police services, the FAA did not 
intend the Supplemental Notice to preclude disparate billing 
methodologies. Inherent in Attachment A is that comparable units of a 
sponsoring government making comparable uses of the sponsor's services 
should have costs allocated and billed in a comparable fashion. The 
clarification noted above should address this situation as well. In the 
second example sited, the FAA would consider the sponsor departments 
receiving shared-use police services not to be comparable to the 
airport receiving exclusive use police services.
    The Final Policy also provides that the allocation plan must not 
burden the airport with a disproportionate share of allocated costs, 
and requires that all comparable units of the airport owner or operator 
be billed for indirect costs billed to the airport. The FAA is 
unwilling to accept the suggestion that comparable users of a service 
may sometimes be treated differently for billing purposes, so long as 
the costs attributed to one unit of government are not then charged to 
the airport. The FAA believes that such practices would result in an 
unfair burden being placed upon the airport simply because of the 
airport's ability to pay.
    This provision, however, is not intended to require a sponsor's 
General Fund activities to bill other General Fund activities for 
indirect costs that are properly allocable to those activities, if the 
airport is billed. The policy is clear that comparable billing for 
services is required only for comparable users.
    Enterprise funds need not be treated as comparable to units of a 
sponsoring government financed from the sponsor's general fund, and 
comparable billing between enterprise funds and other units of 
government is not required. While the FAA may presume that enterprise 
funds are comparable to each other, an airport sponsor is free to 
demonstrate that particular enterprise funds are sufficiently different 
in material ways--such as the way they consume sponsor services or 
their overall financial relationships with the sponsor--to justify 
different practices in charging for indirect costs. The Final Policy 
does not further define comparability because decisions on 
comparability will depend on the specific circumstances of a sponsor. 
The Final Policy also explicitly permits the allocation of general 
costs of government and central services costs to the airport, if the 
cost allocation plans meets the Final Policy's requirements. As 
specified in the Final Policy, however, the allocation of these costs 
to the airport may require special scrutiny to assure that the airport 
is not being burdened with a disproportionate share of the allocated 
costs.
    In addition, the FAA continues to recognize that use of airport 
revenue to pay some expenses not normally considered to be allowable 
pursuant to OMB Circular A-87, such as fire and police services, is 
consistent with the revenue retention requirement. If such costs are 
allocated as an indirect cost in accordance with the Final Policy, they 
will be considered by the FAA as acceptable charges.
    The Final Policy is modified to permit the allocation of certain 
categories of a sponsor's general cost of government as an indirect 
charge to the airport. Such charges include indirect expenses of the 
Office of Governor of a State, State legislatures, offices of mayors, 
county supervisors, city councils, etc. An airport owner's or 
operator's central service costs may also be allocated to the airport. 
The Final Policy specifies that allocation of these categories of costs 
to the airport may require special scrutiny to assure that the airport 
is not being burdened with a disproportionate share of the costs.
    The FAA proposed to prohibit the allocation of all general costs to 
the airport on the grounds that the payment of such costs with airport 
revenue would be inconsistent with the purpose of the revenue use 
restriction--to avoid subsidy of general sponsor governmental activity. 
It is clear from the comments that airports routinely pay for a share 
of the general costs the legislative and executive branches of the 
governmental unit of which the airport is a part under cost allocation 
plans prepared in accordance with GAAP. Further, the comments 
demonstrate that the payment of legislative and executive branch costs 
by airport revenue can be justified as a cost of the airport because 
the legislative and executive branches have direct, tangible oversight 
and control responsibilities for the airport, and their activities 
provide direct benefits to the airport, such as in the areas of 
funding, capital development, and marketing.
    In addition, under the Final Policy, the costs of shared-use 
facilities must be allocated to all users of the facility, even if the 
original purpose of constructing the facility was to provide exclusive 
use or benefit to the airport. While a sponsor-owned facility may have 
originally been established for the benefit of the airport, the FAA 
believes that the purpose of the facility can change from time to time 
based on local circumstances and that allocation of costs should be 
based on current purpose, as well as use. The FAA may consider a number 
of factors in determining current purpose, including current use, 
design and functionality.
b. Standard of Documentation for the Reimbursement of Cost of Services 
and Contributions to Government Entities
    In its administration of airport agreements, the FAA is not 
normally concerned with the internal management or accounting 
procedures used by airport owners. As a matter of policy and procedure, 
the FAA has consistently required that reimbursement of capital and 
operating costs of an airport made by a government entity must be 
clearly supportable and documented.
    Neither the Proposed Policy nor the Supplemental Notice explicitly 
discussed a standard of documentation that must be achieved for a 
sponsor to claim reimbursement for services and/or contributions it 
provided to the airport. However, events subsequent to the issuance of 
both documents indicate a need for FAA to provide specific guidance on 
the standard of documentation that will support the expenditure of 
airport revenues.
    In the examination of a possible diversion of airport revenue by 
the City of Los Angeles at Los Angeles International, Ontario, Van Nuys 
and Palmdale Airports (FAA Docket No. 16-01-96), the FAA reviewed the 
underlying documentation which the City of Los Angeles offered to 
support the payment of approximately $31 million in airport revenue to 
the Los Angeles' general fund as the reimbursement of sponsor 
contributions and services provided to the airport. In the Director's 
Determination dated March 17, 1997, the FAA stated its standard of 
documentation to justify such reimbursements. Accordingly, the

[[Page 7708]]

FAA is including that standard in the Final Policy.
    The Final Policy requires that reimbursements for capital and 
operating costs of the airport made by a government entity, both direct 
and indirect, be supported by adequate documentary evidence. Adequate 
documentation consists of underlying accounting records and 
corroborating evidence, such as invoices, vouchers and cost allocation 
plans, to support all payments of airport revenues to other government 
entities. If this underlying accounting data is not available, the 
Final Policy allows reimbursement to a government entity based on 
audited financial statements, if such statements clearly identify the 
expenses as having been incurred for airport purposes consistent with 
the Final Policy statement. In addition, the Final Policy provides that 
budget estimates are not a sufficient basis for reimbursement of 
government entities. Budget estimates are just that--estimates of 
projected expenditures, not records of actual expenditures. Therefore, 
budget estimates cannot be relied on as documentary evidence to show 
that the funds claimed for reimbursement were actually expended for the 
benefit of the airport.
    Indirect cost allocation plans, however, may use budget estimates 
to establish pre-determined indirect cost allocation rates. Such 
estimated rates must, however, be adjusted to actual expenses in the 
subsequent accounting period.

5. Prohibited Uses of Airport Revenue

a. Impact Fees/Contingency Fees
    The Proposed Policy prohibited the payment of 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. The Supplemental Notice did not modify 
this provision. The term ``impact fees'' was not defined in the 
Proposed Policy.
    Airport operators: One Florida airport sponsor stated that impact 
fees should be allowable to either a sponsoring or non-sponsoring 
governmental body. Another commented that the language referring to a 
``non-sponsoring'' governmental body was vague and confusing. Within 
the state of Florida, impact fees are typically administered by a non-
sponsoring government body. It was stated that the wording did not seem 
to prohibit impact fee payments when assessed by a ``sponsoring'' 
agency, or impact fees that an airport sponsor is obligated to pay.
    The Final Policy: For clarity, the Final Policy is modified to 
delete the reference to ``non-sponsoring'' governmental body and to 
delete the reference to fees the sponsor is not obligated to pay. In 
addition, the FAA is adding a statement that in appropriate 
circumstances, airport revenue may be used to reimburse a governmental 
body for expenditures that the imposing government will incur as a 
result of on-airport development, based on actual expenses incurred.
    The effect of the deletions is to broaden the prohibition to all 
impact fees, within the meaning of the term used in the policy 
statement. As such, the deletions are consistent with the statutory 
prohibition on payment of airport revenues that do not reflect the 
value of services or facilities actually provided to the airport. Until 
a governmental unit undertakes the activity for which the impact fee is 
intended to compensate, it is impossible to know with certainty whether 
the impact fee is an accurate reflection of the cost of the activity 
attributable to the airport or its value to the airport, or even that 
the activity will occur. This situation is true regardless of both the 
status of the governmental unit as airport sponsor and the status of 
the fee as discretionary. The FAA understands that many local laws or 
regulations authorizing impact fees do not require the fees to be spent 
to mitigate or accommodate the results of the airport action that 
triggers the fee. The FAA has no basis for assuring the payment of 
impact fees would be consistent with the purpose of section 47107(b)--
to prevent an airport sponsor who received Federal assistance from 
using airport revenues for expenditures unrelated to the airports.
    The broader prohibition is consistent with applicable FAA policies. 
Longstanding FAA policy has permitted a sponsor to claim reimbursement 
from airport revenue only for ``clearly supportable and documented 
charges, * * * supported by documented evidence.'' FAA Order 5190.6A, 
par. 4-20.a(2)(c)(ii). An impact fee assessed before the imposing 
government incurred any expenses to accommodate airport growth would 
not meet this standard.
    In addition, a standard of documentation required by the Final 
Policy applies to all expenditures of airport revenues subject to 
section 47107(b), including impact fee payments. That standard requires 
that expenditures of airport revenues be supported by data on the 
actual costs incurred for the benefit of the airport, not by budget or 
other estimates, which impact fees essentially are. The Final Policy 
will allow submission of those assessed fees resulting from the 
proposed development when the amount of the fees become fully 
quantifiable, as provided for in Section IV of the Final Policy, 
following implementation by the imposing government of the mitigation 
measures for which the impact fee is assessed. At that time, the FAA 
can best determine whether the fees assessed against airport revenue 
satisfy the requirements of section 47107(b) and this policy. In 
unusual circumstances, the FAA may permit a prepayment of estimated 
impact fees at the commencement of a mitigation project, if the funds 
are necessary to permit the mitigation project to go forward, so long 
as there is a reconciliation process that assures the airport is 
reimbursed for any overpayments, based on actual project costs, plus 
interest.
    However, the Final Policy does take into account the potential that 
an airport operator may be required by state or local law to finance 
the costs of mitigating the impact of certain airport development 
projects undertaken by the airport sponsor. Therefore, where airport 
development causes a government agency to take an action, such as 
constructing a new highway interchange in the vicinity of the airport, 
airport revenues may be used equal to the prorated share of the cost. 
In all cases, the action must be shown to be necessitated by the 
airport development. In the case of infrastructure projects, such 
impact mitigation must also be located in the vicinity of the airport. 
This proximity requirement is not being applied to all mitigation 
measures because some mitigation measures--especially certain 
environmental mitigation measures--may not occur in the vicinity of the 
airport.
    The Final Policy also acknowledges the possibility that an airport 
operator may be bound by local or state law to use airport revenue to 
pay an impact fee that is prohibited by this policy. The Final Policy 
states that the FAA will consider any such local circumstances in 
determining appropriate corrective action.
b. Subsidy of Air Carriers
    As discussed in Section V ``Permitted Uses,'' the Supplemental 
Notice acknowledged the fact that Congress, in the 1994 FAA 
Authorization Act, effectively authorized the use of airport revenue 
for promotion of the airport by expressly prohibiting ``use of airport 
revenues for general economic development, marketing, and

[[Page 7709]]

promotional activities unrelated to airports or airport systems.'' At 
the same time, that statutory provision also limited the scope of 
acceptable promotional activity.
    In the Supplemental Notice, the FAA proposed new policy language 
that more clearly addressed the kinds of promotional and marketing 
activities that are and are not legitimate operating costs of the 
airport under 47107(b). In the Supplemental Notice, Section VIII(I), 
the FAA proposed that ``[d]irect subsidy of air carrier operations'' is 
a prohibited use of airport revenue because it is not considered a cost 
of operating the airport. The FAA drew a distinction between methods of 
encouraging new service. Supplemental Notice proposed to allow the use 
of airport revenue to encourage passengers to use the airport through 
promotional activities, including cooperative promotional activities 
with airlines and to allow airport operators to enhance the viability 
of new service through fee incentives, on the one hand. As noted, the 
FAA proposed to prohibit the use of airport revenue to simply buy 
increased use of the airport by paying an air carrier to operate 
aircraft, on the other. The FAA considered the former activities to be 
a permitted expenditure for the promotion and marketing of the airport 
and the latter to be a prohibited expenditure for general economic 
development. The FAA explained in the preamble to the Supplemental 
Notice that neither promotional activities nor promotional fee 
discounts would be considered a prohibited direct subsidy of airline 
operations. 61 FR at 66738.
    Airport operators: In their comments on the Supplemental Notice, 
ACI-NA/AAAE state that, generally, an expenditure or activity should 
not be considered revenue diversion if there is a reasonable 
expectation that such an expenditure or activity will benefit the 
airport. Furthermore, they note that the law does not single out direct 
air carrier subsidy or fee waivers for more stringent scrutiny than 
other marketing activities. This argument in favor of the reasonable 
business judgement of the airport management should be applied to the 
use of airport revenue for promotion and marketing not unrelated to the 
airport, including direct air carrier subsidies and fee waivers. ACI/
AAAE stated ``both forms of financial assistance should be permitted, 
if an airport has a reasonable expectation that the subsidy will 
benefit the airport and the subsidy or discount is made available on a 
non-discriminatory basis.''
    ACI/AAAE further stated that there is no real distinction between 
direct subsidy and fee waivers, as well as none between direct subsidy 
and the residual airport costing methodologies, making the distinction 
in the policy illogical. They predicted that the proposed policy is 
likely to promote detrimental effects, including eliminating air 
service to some small airports, increasing congestion at dominant hubs 
at the expense of medium-sized airports, reducing potential competition 
and raising fares.
    Several individual airport operators concurred with the ACI-NA/AAAE 
position. One operator commented that any subsidies should be 
permitted, as long as the airport remains self-sustaining and the 
subsidies are not included in airline costs in calculating landing 
fees, terminal rents and other user charges.
    Another airport operator, the LNAA, which is engaged as a party in 
a 14 CFR Part 13 investigation regarding its former air carrier subsidy 
program, commented that there is no real difference between an airport 
making a direct subsidy to an air carrier or waiving fees.
    Two airport operators expressed different views. One operator 
agreed that airport revenues should not be used to subsidize new air 
carrier service because the practice of subsidization could lead to 
destructive competition for air service among airports. Another airport 
operator stated that it ``does not currently engage in nor does it 
contemplate any form of direct subsidy to air carriers in exchange for 
air service.'' This operator considers the Supplemental Notice to 
provide adequate flexibility to airport operators to foster and promote 
air service development.
    Air carriers: The ATA strongly opposed the assertion that direct 
subsidies of airline operations with airport revenue may be considered 
to be operating costs of the airport and would extend the prohibition 
to indirect subsidies. They argued that the distinction in the proposed 
policy that allows fee waivers under certain circumstances, but 
prohibits direct subsidy is illogical. Both result in revenue 
diversion, whether the beneficiary is ``a start up carrier, a new 
entrant in a market, or an existing carrier at an airport.'' The ATA 
further commented, in connection with joint marketing endeavors, that 
the permissible ``promotional period'' should be defined, as should the 
scope of permissible marketing activities.
    The Final Policy: The FAA has clarified the policy provision on the 
direct subsidy of air carriers with airport revenue; however, the 
prohibition remains, as does the distinction between direct subsidy and 
the waiving of fees and the joint promotion of new service. The FAA has 
applied the test of section 47107(b) to determine to what extent 
various kinds and amounts of promotional and marketing activities can 
be considered legitimate operating costs of the airport.
    In pursuit of uniformity, the FAA has integrated references to the 
section on the permitted uses of airport revenue, as well as to the 
section on self-sustainability, to assist airport operators in pursuing 
reasonable strategies to promote the airport and provide incentives to 
encourage new air service. Among other things, marketing of air service 
to the airport, and expenditures to promote the airport to potential 
air service providers can be treated as operating costs of the airport. 
Of course, support for marketing of air service to the airport must be 
provided consistently with grant assurances prohibiting unjust 
discrimination.
    The setting of fees is a recognized management task, based on a 
number of considerations, including the airport management's assessment 
of the services needed by airport consumers, and the airport 
management's assessment of the financial arrangements necessary to 
secure that service. The FAA has consistently maintained that fee 
waivers or discounts involving no expenditure of airport funds raise 
issues of compliance with the self-sustaining rate structure 
requirement, not the revenue-use requirement. The Final Policy 
therefore, permits fee waivers and discounts during a promotional 
period. The waiver or discount must be offered to all users that are 
willing to provide the type and level of new service that qualifies for 
the promotional period. The Policy limits the fee waiver or discount to 
promotional periods because of the requirement that the airport 
maintain a self-sustaining airport rate structure. In addition, 
indefinite fee waivers or discounts could raise questions of compliance 
with grant assurances prohibiting unjust discrimination. The Final 
Policy does not define a permitted promotional period. There is too 
much variation in the circumstances of individual airports throughout 
the country to permit adoption of a single national definition of a 
suitable promotional period.
    In contrast, the direct payment of subsidies to airline involves 
the expenditure of airport funds and hence raises questions under the 
revenue-use requirements. The FAA continues to believe that the costs 
of operating aircraft, or payments to air carriers to

[[Page 7710]]

operate certain flights, are not reasonably considered an operating 
cost of an airport. In addition, payment of subsidy for air service can 
be viewed as general regional economic development and promotion, 
rather than airport promotion. Use of airport revenue for these 
purposes is expressly prohibited under the terms of the 1994 FAA 
Authorization Act. The Final Policy does not preclude a sponsor from 
using funds other than airport revenue to pay airline subsidies for new 
service, and it does not preclude other community organizations-- such 
as chambers of commerce or regional economic development agencies--from 
funding a program to support new air service. Therefore, the Final 
Policy maintains the distinction between direct subsidy of air carriers 
and the waiving of fees, and prohibits the former.

6. Policies Regarding the Requirement for a Self-Sustaining Rate 
Structure

    As noted in the summary, the Final Policy contains a separate 
section on the requirement that an airport maintain a rate structure 
that makes the airport as self-sustaining as possible under the 
circumstances at the airport, to provide more comprehensive guidance in 
a single document. The 1994 FAA Authorization Act directed the FAA to 
adopt policies and procedures to assure compliance with both the 
revenue uses and self-sustaining airport rate structure requirement. 
The general guidance repeats the guidance appearing in the Department 
of Transportation Policy Statement Regarding Airport Rates and Charges, 
61 FR 31994 (June 21, 1996). The Final Policy interprets the basic 
requirement and addresses exceptions to the basic rule for leases of 
airport property at nominal or less-than fair market value (FMV) to 
specific categories of users.
    Each federally assisted airport owner/operator is required by 
statute and grant assurance to have an airport fee and rental structure 
that will make the airport as self-sustaining as possible under the 
particular airport circumstances, in order to minimize the airport's 
reliance on Federal funds and local tax revenues. The FAA has generally 
interpreted the self-sustaining assurance to require airport sponsors 
to charge FMV commercial rates for nonaeronautical uses of airport 
property. However, in the case of aeronautical uses, user charges are 
also subject to the standard of reasonableness. In applying the two 
standards together for aeronautical property, the FAA has considered it 
acceptable for an airport operator to charge fees to aeronautical users 
that are less than FMV, but more than nominal charges. The FAA defines 
``aeronautical use'' as any activity which involves, makes possible, or 
is required for the operation of aircraft, or which contributes to or 
is required for the safety of such operations. Policy Statement 
Regarding Airport Fees, Statement of Applicability, 61 FR at 32017.
    Many entities lease airport property for aeronautical and 
nonaeronautical uses at nominal lease rates. The FAA has determined 
that nominal leases to many of these entities is consistent with the 
requirement to maintain a self-sustaining airport rate structure. The 
Final Policy provides specific guidance regarding nominal leases for 
six categories of users. This guidance is discussed below.
a. Use of Property at Less Than FMV for Community/Charitable/
Recreational Use
    Airport operators: The ACI-NA/AAAE agree with the general 
conclusion that use of airport property for community and charitable 
purposes at less than FMV should be permissible. However, they argued 
that the criteria listed in the Supplemental Notice are too narrow. 
Other criteria should be considered, and an airport should be required 
to provide no more than one justification. The ACI-NA/AAAE specifically 
mentioned aeronautical higher education institutions and not-for-profit 
air and space museums as additional permitted uses, based on H.R. Rep. 
104-714, 104th Cong. 2nd Sess. at 39 (1996) reprinted in 1996 USCC.A.N. 
3676.
    Individual airport operators also requested more flexibility in 
various forms. One operator suggested that the Supplemental Notice 
establishes an unnecessary two-part test which many community uses of 
airport property will fail to satisfy. Another operator argued that 
such airport property use should not be limited to temporary 
arrangements, e.g., parks and baseball fields, which indicates that 
only uses that allow property to be returned rather quickly to the 
airport inventory would be permitted.
    In contrast, another airport operator suggested that, in order to 
place less burden on the airport operator, such uses should be limited 
in scope and that the below-market value amount that an airport 
operator could charge for such usage should be established as some 
percentage of the appraised value of the property.
    Air carriers: The ATA agrees in principle with the concept of 
limited use of airport property for certain specified community 
purposes at less than FMV. However, ATA stated that the Supplemental 
Notice lacks specificity and that its application would consequently be 
inconsistent with the self-sustaining and revenue-use requirements. The 
ATA proposed to narrow the first element of the standard to permit 
contribution of property if the property is put to a general public use 
desired by the local community and the use does not adversely affect 
the capacity, safety or operations of the airport. The ATA would narrow 
the second test by permitting the use of property that is expected to 
generate no more than minimal revenue, which the ATA would define as 
minimal revenue equal to or less than 20 percent of revenue that could 
be earned by similar airport property in commercial or air carrier use. 
When the property could be expected to earn more than this defined 
minimal amount, the ATA would permit less than FMV rental if the 
revenue earned by the community use approximates the revenue that would 
otherwise be generated.
    The ATA would also require that the community use be subject to 
periodic review and renewed justification and that the airport 
proprietor retain absolute discretion to reclaim the property for 
airport use.
    Other commenters: A member of the United States House of 
Representatives expressed concern that the policy, if adopted as 
proposed, does not provide sufficient flexibility to airport operators 
to be good neighbors within their community. This commenter suggested 
that in rural areas, requiring community organizations to pay FMV could 
reduce airport revenue as paying community organizations are forced off 
of the airport by higher rents and no new tenants are found.
    Final Policy: The Final Policy generally permits below-FMV-rental 
of airport property for community uses, but generally limits the uses 
to property that is not potentially capable of producing substantial 
income and not needed for aeronautical use. Consistent with the 
suggestions of the ATA, the permitted community uses of such property 
will be limited to those that are compatible with the safe and 
efficient operation of the airport and which are for general local use. 
In addition, the community use should not preclude reuse of the 
property for airport purposes, if the airport operator determines that 
such reuse will provide greater benefits to the airport than the 
continued community use. Leases to private, non-profit organizations 
generally will be required to be at market rates unless the sponsor can 
demonstrate a ``community goodwill''

[[Page 7711]]

purpose to the lease, or can demonstrate a benefit to aviation and the 
airport, as discussed below.
    While the Final Policy states that property provided for community 
use at no charge should be expected to produce no more than minimal 
revenue, we are not adopting a definition of minimal. For property that 
is capable of generating more than minimal revenue, a sponsor could 
charge less than FMV rental rates for community use, if the revenue 
earned from the community use approximates that revenue that could 
otherwise be generated. Providing such property for community use at no 
charge would not be appropriate.
    The FAA has determined that this approach to community use strikes 
an appropriate balance between the needs of the airport to be a good 
neighbor and the Federal requirements on the use of airport revenue and 
property. This formulation provides substantial flexibility to airport 
operators. At the same time, the self-sustaining requirement and the 
policy goal of the revenue-use requirement justify some limitation on 
local discretion in this area.
    The requirement that community use not preclude reversion to 
airport use is based on both the self-sustaining requirement and the 
airport sponsor's basic AIP obligation to operate a grant-obligated 
airport as an airport.
    Under the Final Policy, the lease of airport property to a unit of 
the sponsoring government for nonaeronautical use at less than fair 
market value is considered a prohibited revenue diversion unless one of 
the specific exceptions permitting below-market rental rates applies. 
If a sponsor's use of airport property qualifies as community use, and 
the other requirements for community-use leases are satisfied, the FAA 
would not object to a lease at less than fair market value. Qualified 
uses could include park or recreational uses or other public service 
functions. However, such use would be subject to special scrutiny to 
ensure that the requirements for below-FMV community use is satisfied. 
The community use provision of the Final Policy does not apply to 
airport property used by a department or subsidiary agency of the 
sponsoring government seeking an alternative site for the sponsor's 
general governmental purposes at less-than-commercial value. For 
example, a city cannot claim the community use exception for a nominal 
value lease of airport property for a municipal vehicle maintenance 
garage. Such usage, while beneficial to the taxpaying citizens of the 
sponsoring government, would be difficult to justify as benefiting the 
airport by improving the airport's acceptance in the community.
b. Not for Profit Aviation Museums
    The DOT OIG has cited instances in which an aviation museum at a 
federally assisted airport is leasing airport property at less than a 
fair market rental rate. In clarifying the revenue diversion 
prohibitions recommended for inclusion in the FAA Authorization Act of 
1996, the House Transportation and Infrastructure Committee urged the 
FAA to take a flexible approach to the lease of airport property at 
below-market rates to not-for-profit air and space museums located on 
airport property. H.R. Rep. No. 104-714, 104th Cong. 2nd Sess. at 39 
(1996) reprinted in 1996 U.S.C.C.A.N. 3676 (House Report). The 
Committee recommended that this type of rental arrangement should not 
be considered revenue diversion because of the contribution that such 
museums make to the understanding and support of aviation.
    One airport operator commented that long-term, less-than-market 
value rental arrangements, particularly for leaseholds encompassing 
permanent facilities, should be permitted when such arrangements serve 
a clear and valuable aviation-related purpose. This comment could 
include aviation museums.
    One operator of a not-for-profit aviation museum urged the FAA to 
permit nominal rate leases. This operator stated that a FMV-based lease 
for its museum property would double its current operating budget.
    The Final Policy: The Final Policy permits airport operators to 
charge reduced rental rates and fees, including nominal rates, to not-
for-profit aviation museums, to the extent that the reduction is 
reasonably justified by the tangible and intangible benefits to the 
airport or civil aviation. This provision recognizes the potential for 
aviation museums to provide benefits to the airport by stimulating 
understanding and support of aviation, consistent with the suggestion 
contained in the House Report, U.S.C.C.A.N. 3676. Benefits to the 
airport may include any in-kind services provided to the airport and 
airport users by the aviation museum. The limitation to not-for profit 
museums is consistent with the requirement for a self-sustaining 
airport rate structure, because there is no reason to give for-profit 
aviation museums preferential treatment over other commercial 
aeronautical activities. All for-profit aeronautical activities provide 
some benefit to the airport, by making it more attractive for potential 
airport users. If this benefit were a sufficient reason to permit 
reduced rental rates to commercial aviation businesses on a routine 
basis, the requirement for a self-sustaining airport rate structure 
would be virtually unenforceable.
    The Final Policy permits but does not require below-market rental 
rates, including nominal rates. The airport operator is free to treat a 
qualified aviation museum as it would any other aeronautical activity 
in setting rental rates and other fees to be paid by the museum.
c. Aeronautical Higher Education Programs
    The DOT OIG has cited instances in which aeronautical secondary and 
post-secondary education programs at federally assisted airports are 
leasing airport property at less than a fair market rental rate.
    In the House Report, 1996 U.S.C.C.A.N. 3676, the House 
Transportation and Infrastructure Committee also urged the FAA to take 
a flexible approach to aeronautical higher education programs located 
on airports. The Committee recognized that some federally obligated 
airports have leased property to non-profit, accredited collegiate 
aviation programs, and that facilitating these programs will help build 
a base of support for airport operations by giving students, who will 
be the future users of the national airspace system, easy access to 
aviation facilities.
    The Final Policy: The Final Policy permits reduced rental rates, 
including nominal rates, to not-for-profit aeronautical secondary and 
post-secondary education programs conducted by accredited educational 
institutions, to the extent that the reduction is justified by tangible 
or intangible benefits to the airport or to civil aviation. This 
treatment is justified for the same reason that reduced rental rates 
and fees to certain aviation museums are permitted. Again, the benefits 
may include in-kind services provided to the airport and airport users. 
As with aviation museums, the educational institution and education 
program must be not-for-profit. For-profit aviation education, such as 
flight-training, is a standard commercial aeronautical activity at many 
airports. Permitting reduced rental rates and fees to for-profit 
aviation education programs would seriously undermine compliance with 
the self-sustaining requirement and could raise questions of compliance 
with the grant assurances prohibiting unjust discrimination.

[[Page 7712]]

    The Final Policy permits but does not require below-market rental 
rates, including nominal rates. The airport operator is free to treat a 
qualified not-for-profit aeronautical education program as it would any 
other aeronautical activity in setting rental rates and other fees to 
be paid by the education program.
d. Civil Air Patrol Leases
    Reduced-rental leases, including nominal leases, to the Civil Air 
Patrol/United States Air Force Auxiliary (CAP) at a number of airports 
have also been criticized in OIG audits. As a result of this criticism, 
some airport operators have been seeking higher rents from the CAP when 
leases have come up for renewal.
    In its comments, the CAP contends that the current standard airport 
industry practice of permitting CAP use of airport property for a 
nominal rent confers substantial benefits to the airport and, in 
general, to the aviation community. The CAP, therefore, requests that a 
policy be adopted which would formally permit CAP units to continue to 
occupy facilities on federally obligated airports at a nominal rent, 
whether under formal lease arrangements, or otherwise, at the 
discretion of the airport owner/operator.
    The Final Policy: The Final Policy permits reduced rental rates and 
fees to CAP units operating at the airport, in recognition of the 
benefits to the airport and benefits to aviation similar to those 
provided by not-for-profit aviation museums and aeronautical secondary 
education programs. As with other not-for profit-aviation entities, the 
reduction must be reasonably justified by benefits to the airport or to 
civil aviation. In-kind services to the airport and airport users may 
be considered in determining the benefits that the CAP unit provides. 
In addition, this treatment of the CAP, which has been conferred with 
the status of an auxiliary to the United States Air Force, is not 
identical to the treatment provided to military units in the Final 
Policy, as discussed below, but is consistent with that treatment.
    The reduced rental rates and fees are available only to those CAP 
units operating aircraft at the airport. For CAP units without 
aircraft, a presence at the airport is not critical. The airport 
operator can accommodate those CAP units with property that is not 
subject to Federal requirements on maintaining a self-sustaining rate 
structure, without compromising the effectiveness of the CAP units. Of 
course, if such units provide in-kind services that benefit the 
airport, the value of those services may be recognized as an offset to 
FMV rates.
    The Final Policy permits but does not require nominal rental rates. 
The airport operator is free to treat a qualified not-for-profit 
aeronautical CAP lease as it would any other aeronautical activity in 
setting rental rates and other fees to be paid by the education 
program.
e. Police/Firefighting Units Operating Aircraft at the Airport
    Many airports host police or fire-fighting units operating aircraft 
(often helicopters). The OIG has frequently criticized reduced rate or 
no-cost leases to these units of government as inconsistent with the 
self-sustaining and revenue-use requirements.
    The Final Policy requires the airport operator to charge reasonable 
rental rates and fees to these units of government. In effect, these 
units of government must be treated the same as other aeronautical 
tenants of the airport. This treatment is consistent with the policy's 
general approach toward dealings between units of government--fees 
should be set at the level that would be produced by arm's-length 
bargaining. The treatment is also justified because police and fire-
fighting aircraft units provide benefits to the community as a whole, 
and not necessarily to the airport. However, as with other police and 
fire-fighting units located at an airport, the policy does allow rental 
payments to be offset to reflect the value of services actually 
provided to the airport by the police and fire-fighting aircraft units.
f. Use of Property by Military Units
    The US Air Force Reserve and the Air National Guard both have 
numerous flying units located on federally obligated, public-use 
airports. The majority of these aircraft-operating units are located on 
leased property at civilian airports established on former military 
airport land transferred by the US Government to the airport owner/
operator under the Surplus Property Act of 1944, as amended, or under 
other statutes authorizing the conveyance of surplus Federal property 
for use as a public airport. Frequently, the favorable lease terms were 
contemplated in connection with the transfer of the former military 
property and may have been incorporated in property conveyance 
documents as obligations of the civilian airport sponsor. As with other 
reduced-rate leases, these arrangements have been criticized in 
individual OIG audits.
    The Final Policy: The Final Policy provides that leasing of airport 
property at nominal lease rates to military units with aeronautical 
missions is not inconsistent with the requirement for a self-sustaining 
rate structure. The Department of Defense (DOD) has a substantial 
investment in facilities and infrastructure at these locations, and its 
operating budgets are based on the existence of these leases. Moving 
those facilities upon expiration of a lease or the payment of FMV rent 
for facilities to support military aeronautical activities required for 
national defense and public safety would be beyond the capability of 
the DOD without additional legislation and enlargement of the DOD 
operating budget. In all of the enactments on the self-sustaining rate 
structure requirement and use of airport revenue and the accompanying 
legislative history, the FAA can find no indication that Congress 
intended the airport revenue requirements to be applied in a way to 
disrupt the United States' defense capabilities or add significantly to 
the cost of maintaining those capabilities. Moreover, Congress 
specifically charged the FAA, in 49 U.S.C. Sec. 47103, with developing 
a national plan of integrated airport systems (NPIAS) to meet, among 
other things, the country's national defense needs. Inclusion in the 
NPIAS is a prerequisite for eligibility for AIP funding. Thus, Congress 
clearly contemplated a military presence at civil airports. Therefore, 
the FAA will not construe the requirement for a self-sustaining airport 
rate structure to prohibit nominal leases to military units operating 
aircraft at an airport.
    The Final Policy permits but does not require nominal rental rates. 
The airport operator is free to treat a qualified military unit as it 
would any other aeronautical activity in setting rental rates and other 
fees to be paid by the military unit.

7. Lease of Airport Property at Less Than FMV for Mass Transit Access 
to Airports

    The Supplemental Notice proposed that airport property could be 
made available at less than fair rental value for public transit 
terminals, rights-of-way, and related facilities, without being 
considered in violation of the requirements governing airport finances, 
under certain conditions. The transit system would have to be publicly 
owned and operated (or privately operated by contract on behalf of the 
public owner) and the transit facilities directly related to the 
transportation of air passengers and airport visitors and employees to 
and from the airport. Twenty-one responses addressed this issue.
    Airport commenters: The airport operators concur with the principle 
of making airport land available for mass

[[Page 7713]]

transit at rates below fair market value. ACI-NA/AAAE stated that the 
determination to use airport property for a transit terminal, transit 
right-of-way, or related facilities at less than fair rental value is 
consistent with the grant assurance requiring airports to be self-
sustaining.
    Air carriers: The ATA asserted that FAA has exceeded its statutory 
authority in the proposal. ATA's considers transit facilities to be 
like commercial business enterprises, because they occupy airport 
property and charge their customers for their services. ATA also 
stressed that airport transit facilities are non-aeronautical 
facilities which are not ``directly and substantially related to the 
air transportation of passengers or property.''
    Other commenters: Transit operators, including a transit operator 
trade association generally supported the position in the Supplemental 
Notice.
    Another commenter stated that making airport property available at 
less than fair market rental value or making airport revenue available 
for transit facilities equates to the airport paying a hidden taxation. 
This commenter argued that it was not the intention of Congress, when 
it passed the AAIA, to have grant funds used to subsidize, either 
directly or indirectly, any activity that provides no benefit to air 
travel.
    The Final Policy: The Final Policy incorporates the provision 
proposed in the Supplemental Notice, with a technical correction to 
include transit facilities use for the transportation of property to or 
from the airport. The FAA does not consider public transit terminals to 
be the equivalent of commercial business enterprises. Rather, they are 
more like public and airport roadways providing ground access to the 
airport. Generally speaking, the FAA does not construe the self-
sustaining assurance to require an airport owner or operator to charge 
for roadways and roadway rights-of-way at FMV.
    Moreover, even though publicly-owned transit systems charge 
passengers for their services, they generally operate at a loss and are 
subsidized by general taxpayer revenue. Charging fair market value for 
on airport facilities would thus burden general taxpayers with the 
costs of providing facilities used exclusively by transit passengers 
visiting the airport. Therefore, a requirement to charge FMV would not 
further the purpose of the self-sustaining assurance--to avoid 
burdening local taxpayers with the cost of operating the airport 
system.
a. Private Transit
    ACI-NA/AAAE and four airport operators commented that private 
transit operators should have treatment equal to public transit 
operators. They argued that the concepts of public-private 
partnerships, and privatization of transportation facilities, may be 
realities in the not-too-distant future. Moreover, private ownership 
would not detract in the least from the functions identified in the 
Notice for these facilities, such as bringing passengers to and from 
the airport. They also noted that the language in the AIP Handbook 
(Order 5100.38A, Section 6) does not specifically exclude private 
operators. The language states transit facilities will be allowable 
provided they will primarily serve the airport.
    One state Department of Transportation also urged that reduced 
rental rates should be offered to privately-owned and operated transit 
systems on the same basis as publicly-owned systems.
    Final Policy. The Final Policy retains some distinctions between 
privately and publicly owned systems. In general, privately-owned 
systems are more analogous to other ground transportation providers--
private taxis and limousine services, rental car companies--and even 
private parking lot operators. These entities are commercial 
enterprises that operate for profit and are a significant source of 
revenue for the airport. Most importantly, they are not supported by 
general taxpayer funds, and charging FMV would not raise questions of 
burdening local taxpayers with the cost of the airport.
    However, the FAA is aware that, in many communities with no 
publicly-owned bus systems or very limited systems, privately-owned bus 
systems fulfill the role of providing public transit services to the 
airport. Accordingly, the FAA is revising the Final Policy to permit an 
airport operator to provide airport property at less than FMV rates to 
privately-owned systems in these limited circumstances.
b. Airport Passengers
    Nine airport commenters addressed the proposed requirement that 
transit facilities be directly related to the transportation of air 
passengers and airport visitors and employees to and from the airport 
to qualify for less-than-FMV rentals. The commenters argue that the 
provision is too narrow by restricting the transit service to air-
passengers and airport visitors and employees. One airport operator 
states that airport sponsors must have the flexibility to build airport 
transit systems that principally serve airport passengers, employees 
and other users but which may also secondarily transport some 
nonairport users. Two airport operators with general-use rail transit 
systems planned or operating on or near their airports argue that the 
airport benefits from improved ground access, reduced traffic 
congestion and improved air quality of general use systems and that 
rent-free property should, therefore, be provided to general use 
systems.
    Final Policy: The Final Policy incorporates the language of the 
Supplemental Notice. That language does not preclude any use of transit 
facilities constructed on airport property by nonairport passengers if 
the property is to be leased at less-than-FMV. The requirement that the 
facilities be ``directly related'' to the airport does not equate to a 
requirement that the facilities be ``exclusively used'' for airport 
purposes. However, if the intended use of a facility is not exclusive 
airport use, some rental charge may be necessary to reflect the 
benefits provided to the general public. The determination on whether 
the facilities are ``directly related'' will be made on a case-by-case 
basis.
    It appears that some of the concern about this issue was generated 
by the language in the preamble, which referred to transit facilities 
``necessary for the transportation of air passengers, airport visitors 
and airport employees to and from the airport.'' The preamble offered a 
maintenance/repair facility as an example of facilities that would not 
qualify. The FAA is not convinced that the benefits to the airport of 
having such facilities on the airport is sufficient to justify less-
than-FMV rental rates. However, as noted, the FAA does not construe the 
policy language ``facilities directly related the transportation of 
[airport passengers]'' to require that the facilities be used 
exclusively by airport passengers.

8. Military Base Conversions Issues

    In its comments to the Proposed Policy, one airport operator argued 
that using airport revenue to assist in development of revenue-
generating properties on former military bases that are converted to 
civil airports should not be considered a prohibited use of revenue.
    In addition, ACI-NA/AAAE state that a base closure and conversion 
to civilian use often results in the existence of significant 
recreational facilities on property owned by an airport. In regard to 
these facilities on converted military bases, ACI/AAAE stated, ``[a] 
leasing

[[Page 7714]]

arrangement whereby a municipality assumes all liability and operating 
expenses in exchange for a no-revenue lease is beneficial to the 
airport and should not be prohibited.''
    Final Policy: The Final Policy provides for no special treatment of 
converted military bases with respect to airport revenue use, and no 
special provisions are included in the final policy.
    The FAA policy on the use of public and recreational use of 
property will be consistently applied to airports whether or not they 
are former military bases. Ordinarily, airport revenue may not be used 
to finance the costs of public and recreational facilities at the 
airport, just as airport revenue may not be used to develop other 
facilities not needed for the airport, even if those facilities will 
generate revenue for the airport. In addition, unless the recreational 
facilities qualify under the community-use exception, the airport 
operator would be expected to receive FMV-based rental payments for the 
recreational or public property. Operational costs borne by a 
municipality as a result of a base conversion can be considered in the 
analysis of whether a reduced rent is justified by tangible or 
intangible benefits to the airport.

9. Enforcement Policy, Whether to Impose Civil Penalty Even if Funds 
are Returned

    The Proposed Policy provided that if the FAA received information 
that improper use of airport revenue had occurred, the FAA would 
investigate the matter and attempt to resolve the issue informally. The 
matter could be resolved if the sponsor persuaded the FAA that the use 
of airport revenue was not improper, or if the sponsor took corrective 
action (which usually would involve crediting the diverted amount to 
the airport account with interest). The proposed policy provided that 
the FAA would propose enforcement action only if the FAA made a 
preliminary finding of noncompliance and the sponsor had failed to take 
corrective action. The Proposed Policy outlined the enforcement actions 
available to the FAA as of the date of publication. The actions 
included: (1) withholding of new AIP grants and payments under existing 
grants (49 USC Secs. 47111(e) and (d), respectively); (2) withholding 
of new authority to impose PFCs (49 USC 47111(e)); (3) withholding of 
all Federal transportation funds appropriated in Fiscal Years 1994 and 
1995 (as provided in the Department of Transportation appropriation 
legislation for those years); (4) assessment of civil penalties not to 
exceed $50,000 (49 USC Sec. 46301); and (5) initiation of a civil 
action to compel compliance with the grant assurances (49 USC 
Sec. 47111(f)).
    The Proposed Policy outlined the administrative procedural rules 
applicable to airport compliance matters at the time of publication, 14 
C.F.R., Part 13 ``Investigation and Enforcement Procedures.''
    Airport operators: ACI-NA and AAAE strongly urged the FAA to 
provide in the final policy that remittance of any diverted amounts, 
together with associated interest, should be sufficient to ``cure'' 
instances of revenue diversion, regardless of how those instances come 
to the attention of the FAA. In particular, a non-airport party should 
not be given the capacity, through the filing of a formal compliant, to 
eliminate an airport's ability to cure the problem.
    Air carriers: ATA suggested that the proposed policy should be 
strengthened, backed up by a stronger enforcement policy and aggressive 
monitoring and vigorous enforcement action. ATA additionally argued 
that FAA should promulgate one rule that sets forth in detail the 
substantive requirements regarding revenue retention and diversion and 
a separate compliance and enforcement policy document.
    ATA objected that the proposed policy continues to provide a 
passive monitoring procedure and this approach is not sufficient to 
provide prompt and efficient enforcement. IATA objected that the 
Proposed Policy does not promote prompt or effective enforcement.
    ATA suggested that the FAA establish a formal compliance monitoring 
and inspection program that includes compliance monitoring and audits/
inspections similar to those it conducts at certificated airlines, such 
as for drug and alcohol testing. Further, ATA stated that FAA's 
enforcement policy should result in civil penalties being assessed with 
the same vigor with which they are assessed against airlines for 
alleged regulatory violations. In addition, ATA urged that FAA should 
maintain the threat of assessing civil penalties for each day an 
airport or sponsor is in violation of the revenue-use requirement and 
for each day a sponsor fails to repay amounts determined to have been 
diverted unlawfully. IATA similarly supported assessment of the maximum 
civil penalty for each instance of unlawful revenue use.
    The Final Policy: After publication of the Proposed Policy, the FAA 
Reauthorization Act of 1996 mandated new remedies for improper use of 
airport revenues and new compliance monitoring programs. The Final 
Policy has been modified to reflect the new requirements. 
Implementation of the requirements will result in more active and 
systematic monitoring of airport revenue use and more systematic 
resolution of questionable airport practices, as requested by the ATA 
and the IATA. It should be noted that the FAA had already assumed a 
more active role in monitoring through the implementation of the 
financial reporting requirements of the 1994 FAA Authorization Act.
    In accordance with the requirements of the 1996 FAA Reauthorization 
Act, the Final Policy reflects the clear congressional intent that the 
FAA focus compliance efforts on the lawful use of airport revenue. The 
FAA will use all means at its disposal to monitor and enforce the 
revenue-use requirements and will take appropriate action when a 
potential violation is brought to the FAA's attention by any means. To 
detect whether airport revenue has been diverted from an airport, the 
FAA will use four primary sources of information: (1) the annual 
airport financial reports submitted by the sponsor; (2) findings from a 
single audit conducted in accordance with OMB Circular A-133 (including 
the audit review and opinion required by the 1996 Reauthorization Act); 
(3) investigation following a third-party complaint, and, (4) DOT 
Office of Inspector General audits.
    The FAA will seek penalties for the diversion of airport funds if 
the airport sponsor is not willing to correct the diversion and make 
restitution, with interest, in a timely manner. This approach is 
consistent with the FAA's objective of achieving compliance with a 
sponsor's obligations. Moreover, it is consistent with section 805 of 
the 1996 Reauthorization Act, which provides for imposition of 
administrative and civil penalties only after a sponsor has been given 
an opportunity to take corrective action and failed to do so.

10. Form of Policy

    As is reflected in the Proposed Policy and Supplemental Notice, the 
FAA proposed to implement section 112 of the 1994 Act by publishing a 
policy statement, rather than adopting a regulation.
    The Comments: The ATA argued that the FAA should promulgate a 
regulation establishing substantive requirements for use of airport 
revenue and a separate enforcement policy. The ATA argued that a 
substantive regulation will provide more clarity on prohibited and 
permitted practices and be less

[[Page 7715]]

susceptible to conflicts over interpretation.
    The AOPA also raised concerns over the prompt and effective 
enforcement of airport revenue diversion within the terms of this 
Proposed Policy.
    The Final Policy: The FAA will publish policy guidance on airport 
revenue use and enforcement as a policy rather than as a regulation. 
Section 112 of the 1994 FAA Authorization Act directs the Secretary to 
``establish policies and procedures'' to assure ``prompt and effective 
enforcement'' of the revenue retention grant assurances, which clearly 
contemplates the issuance of a policy statement for this purpose.
    As discussed in connection with specific issues, the wide variation 
in airport situations makes it impractical for the FAA to promulgate 
standards with the specificity and inflexibility urged by ATA. 
Moreover, a regulation is not required to obtain compliance with the 
revenue-use requirement. Airports are obligated by the statutory 
assurance in AIP grant agreements pursuant to Sec. 47107(b)(2), or 
directly under Sec. 47133, and rulemaking is not required to implement 
those statutes.
    On the issue raised by ATA and AOPA concerning the prompt and 
effective enforcement mechanism to address specific revenue diversion 
issues, the FAA had been using 14 CFR Part 13. However, on December 16, 
1996, 14 CFR Part 16, Rules of Practice for Federally Assisted Airport 
Proceedings, took effect. Part 16 established new investigation and 
enforcement procedures for airport compliance matters, including 
compliance with the revenue-use requirement. Part 16 includes time 
deadlines and processes to assure that FAA promptly and effectively 
investigates and adjudicates specific airport compliance matters 
involving Federally Assisted Airports. The FAA considers the procedural 
requirements of the Reauthorization Act of 1996 to be self-executing 
and will apply the statutory provisions in the case of any conflict 
with Part 16. However, the FAA is in the process of revising Part 16 to 
incorporate those new procedural requirements.

Paperwork Reduction Act Requirements

    The Office of Management and Budget (OMB) has previously approved, 
pursuant to the Paperwork Reduction Act, the annual airport financial 
reports described in Section VIII.A of the Final Policy under OMB 
Number 2120-0569.

Policy Statement

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

Policies and Procedures Concerning the Use of Airport Revenue

Table of Contents

Section I--Introduction
Section II--Definitions
    A. Federal Financial Assistance
    B. Airport Revenue
    C. Unlawful Revenue Diversion
    D. Airport Sponsor
Section III--Applicability of the Policy
    A. Policy and Procedures on the Use of Airport Revenue and State 
or Local Taxes on Aviation Fuel
    B. Policies and Procedures on the Requirement for a Self-
Sustaining Airport Rate Structure
    C. Application of the Policy to Airport Privatization
Section IV--Statutory Requirements for the Use of Airport Revenue
    A. General Requirements, 49 USC Secs. 47107(b) and 47133
    B. Exception for Certain Preexisting Arrangements (Grandfather 
Provisions)
    C. Application of 49 USC Sec. 47133
    D. Specific Statutory Requirements for the Use of Airport 
Revenue
    E. Passenger Facility Charges and Revenue Diversion
Section V--Permitted Uses of Airport Revenue
    A. Permitted Uses of Airport Revenue
    B. Allocation of Indirect Costs
    C. Standard of Documentation for the Reimbursement to Government 
Entities of Costs of Services and Contributions Provided to Airports
    D. Expenditures of Airport Revenue by Grandfathered Airports
Section VI--Prohibited Uses of Airport Revenue
    A. Lawful and Unlawful Revenue Diversion
    B. Prohibited Uses of Airport Revenue
Section VII--Policies Regarding Requirement for a Self-Sustaining 
Airport Rate Structure
    A. Statutory Requirements
    B. General Policies Governing the Self-Sustaining Rate Structure 
Assurance
    C. Policy on Charges for Nonaeronautical Facilities and Services
    D. Providing Property for Public Community Purposes
    E. Use of Property by Not-for-Profit Aviation Organizations
    F. Use of Property by Military Units
    G. Use of Property for Transit Projects
    H. Private Transit Systems
Section VIII--Reporting and Audit Requirements
    A. Annual Financial Reports
    B. Single Audit Review and Opinion
Section IX--Monitoring and Compliance
    A. Detection of Airport Revenue Diversion
    B. Investigation of Revenue Diversion Initiated Without Formal 
Complaint
    C. Investigation of Revenue Diversion Precipitated by Formal 
Complaint
    D. The Administrative Enforcement Process
    E. Sanctions for Noncompliance
    F. Compliance with Reporting and Audit Requirements

Section 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, Pub.L. No. 103-305, 108 Stat. 
1569 (August 23, 1994), 49 USC 47107(l), and Federal Aviation 
Administration Reauthorization Act of 1996, Public Law 104-264, 110 
Stat. 3213 (October 9, 1996), 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-use requirement, was first mandated by Congress in 1982. 
Simply stated, the purpose of that assurance, now codified at 49 USC 
Secs. 47107(b) and 47133, is to provide that an airport owner or 
operator receiving Federal financial assistance will use airport 
revenues only for purposes related to the airport. The Policy Statement 
implements requirements adopted by Congress in the FAA Reauthorization 
Acts of 1994 and 1996, and takes into consideration comments received 
on the interim policy statements issued on February 26, 1996, and 
December 18, 1996.

Section II--Definitions

A. Federal Financial Assistance

    Title 49 USC Sec. 47133, which took effect on October 1, 1996, 
applies the airport revenue-use requirements of Sec. 47107(b) to any 
airport that has received ``Federal assistance.'' The FAA considers the 
term ``Federal assistance'' in Sec. 47133 to apply to the following 
Federal actions:
    1. Airport development grants issued under the Airport Improvement 
Program and predecessor Federal grant programs;
    2. Airport planning grants that relate to a specific airport;
    3. Airport noise mitigation grants received by an airport operator;
    4. The transfer of Federal property under the Surplus Property Act, 
now codified at 49 USC Sec. 47151 et seq.; and
    5. Deeds of conveyance issued under Section 16 of the Federal 
Airport Act of 1946, under Section 23 of the Airport and Airway 
Improvement Act of 1970, or under Section 516 of the Airport and Airway 
Improvement Act of 1982 (AAIA).

[[Page 7716]]

B. Airport Revenue

    1. All fees, charges, rents, or other payments received by or 
accruing to the sponsor for any one of the following reasons are 
considered to be airport revenue:
    a. Revenue from air carriers, tenants, lessees, purchasers of 
airport properties, airport permittees making use of airport property 
and services, 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:
    i. For the right to conduct an activity on the airport or to use or 
occupy airport property;
    ii. For the sale, transfer, or disposition of airport real property 
(as specified in the applicability section of this policy statement) 
not acquired with Federal assistance or personal airport property not 
acquired with Federal assistance, or any interest in that property, 
including transfer through a condemnation proceeding;
    iii. 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
    iv. 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 (e.g., a downtown duty-free shop).
    b. Revenue from sponsor activities on the airport. 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:
    i. From any activity conducted by the sponsor on airport property 
acquired with Federal assistance;
    ii. From any aeronautical activity conducted by the sponsor which 
is directly connected to a sponsor's ownership of an airport subject to 
49 U.S.C. Secs. 47107(b) or 47133; or
    iii. From any nonaeronautical activity conducted by the sponsor on 
airport property not acquired with Federal assistance, but only to the 
extent of the fair rental value of the airport property. The fair 
rental value will be based on the fair market value.
    2. State or local taxes on aviation fuel (except taxes in effect on 
December 30, 1987) are considered to be airport revenue subject to the 
revenue-use requirement. However, revenues from state taxes on aviation 
fuel may be used to support state aviation programs or for noise 
mitigation purposes, on or off the airport.
    3. 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.

C. 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, when the use is not 
``grandfathered'' under 49 U.S.C. Sec. 47107(b)(2). When a use would be 
diversion of revenue but is grandfathered, the use is considered lawful 
revenue diversion. See Section VI, Prohibited Uses of Airport Revenue.

D. Airport Sponsor

    The airport sponsor is the owner or operator of the airport that 
accepts Federal assistance and executes grant agreements or other 
documents required for the receipt of Federal assistance.

Section III--Applicability of the Policy

A. Policy and Procedures on the Use of Airport Revenue and State or 
Local Taxes on Aviation Fuel

    1. With respect to the use of airport revenue, the policies and 
procedures in the Policy Statement 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 
(AAIA), as amended, recodified without substantive change by Public Law 
103-272 (July 5, 1994) at 49 Sec. U.S.C. 47101, et seq., and which had 
grant obligations regarding the use of airport revenue in effect on 
October 1, 1996 (the effective date of the FAA Authorization Act of 
1996). Grants issued under that statutory authority are commonly 
referred to as Airport Improvement Program (AIP) grants. The Policy 
Statement applies to revenue uses at such airports even if the sponsor 
has not received an AIP grant since October 1, 1996.
    2. With respect to the use of state and local taxes on aviation 
fuel, this Policy Statement is applicable to all public agencies that 
have received an AIP development grant since December 30, 1987, and 
which had grant obligations regarding the use of state and local taxes 
on aviation fuel in effect of October 1, 1996.
    3. Pursuant to 49 U.S.C. Sec. 47133, this Policy Statement applies 
to any airport for which Federal assistance has been received after 
October 1, 1996, whether or not the airport owner is subject to the 
airport revenue-use grant assurance, and applies to any airport for 
which the airport revenue-use grant obligation is in effect on or after 
October 1, 1996. Section 47133 does not apply to an airport that has 
received Federal assistance prior to October 1, 1996, and does not have 
AIP airport development grant assurances in effect on that date.
    4. Requirements regarding the use of airport revenue applicable to 
a particular airport or airport operator on or after October 1, 1996, 
as a result of the provisions of 49 U.S.C. Sec. 47133, do not expire.
    5. The FAA will not reconsider agency determinations and 
adjudications dated prior to the date of this Policy Statement, based 
on the issuance of this Policy Statement.

B. Policies and Procedures on the Requirement for a Self-Sustaining 
Airport Rate Structure

    1. These policies and procedures apply to the operators of publicly 
owned airports that have received an AIP development grant and that 
have grant obligations in effect on or after the effective date of this 
policy.
    2. Grant assurance obligations regarding maintenance of a self-
sustaining airport rate structure in effect on or after the effective 
date of this policy apply until the end of the useful life of each 
airport development project or 20 years, whichever is less, except 
obligations under a grant for land acquisition, which do not expire.

C. Application of the Policy to Airport Privatization

    1. The Airport Privatization Pilot Program, codified at 49 U.S.C. 
Sec. 47134, provides for the sale or lease of general aviation airports 
and the lease of air carrier airports. Under the program, the FAA is 
authorized to exempt up to five airports from Federal statutory and 
regulatory requirements governing the use of airport revenue. The FAA 
can exempt an airport sponsor from its obligations to repay Federal 
grants, in the event of a sale, to return property acquired with 
Federal assistance and to use the proceeds of the sale or lease 
exclusively for airport purposes. The exemptions are subject to a 
number of conditions.
    2. Except as specifically provided by the terms of an exemption 
granted under the Airport Privatization Pilot

[[Page 7717]]

Program, this policy statement applies to a privatization of airport 
property and/or operations.
    3. For airport privatization transactions not subject to an 
exemption under the Pilot Program:
    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 permitted by the revenue-use requirements of 49 U.S.C. 
Secs. 47107(b) and 47133. Because of the complexity of an airport sale 
or privatization, the provisions for ensuring that the proceeds are 
used for the purposes permitted by the revenue-use requirements may 
need to be adapted to the special circumstances of the transaction. 
Accordingly, the disposition of the proceeds would need to be 
structured to meet the revenue-use requirements, 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 objectives and 
obligations of revenue-use requirements, without unnecessarily 
interfering with the appropriate privatization of airport 
infrastructure.
    4. It is not the intention of the FAA to effectively bar airport 
privatization initiatives outside of the pilot program through 
application of the statutory requirements for use of airport revenue. 
Proponents of a proposed privatization or other sale or lease of 
airport property clearly will need to consider the effects of Federal 
statutory requirements on the use of airport revenue, 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.

Section IV--Statutory Requirements for the Use of Airport Revenue

A. General Requirements, 49 U.S.C. Secs. 47107(b) and 47133

    1. The current provisions restricting the use of airport revenue 
are found at 49 U.S.C. Secs. 47107(b), and 47133. Section 47107(b) 
requires the Secretary, prior to approving a project grant application 
for airport development, to obtain written assurances regarding the use 
of airport revenue and state and local taxes on aviation fuel. Section 
47107(b)(1) requires the airport owner or operator to provide 
assurances 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.

B. Exception for Certain Preexisting Arrangements (Grandfather 
Provisions)

    Section 47107(b)(2) provides an exception to the requirements of 
Section 47107(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.

C. Application of 49 U.S.C. Sec. 47133

    1. Section 47133 imposes the same requirements on all airports, 
privately-owned or publicly-owned, that are the subject of Federal 
assistance. Subsection 47133(a) states that:
    Local taxes on aviation fuel (except taxes in effect on December 
30, 1987) or the revenues generated by an airport that is the subject 
of Federal assistance may not be expended for any purpose other than 
the capital or operating costs of--
    (a) the airport;
    (b) The local airport system; or
    (c) Other local facilities owned or operated by the person or 
entity that owns or operates the airport that is directly and 
substantially related to the air transportation of persons or property.
    2. Section 47133(b) contains the same grandfather provisions as 
section 47107(b).
    3. Enactment of section 47133 resulted in three fundamental changes 
to the revenue-use obligation, as reflected in the applicability 
section of this policy statement.
    a. Privately owned airports receiving Federal assistance (as 
defined in this policy statement) after October 1, 1996, are subject to 
the revenue-use requirement.
    b. In addition to airports receiving AIP grants, airports receiving 
Federal assistance in the form of gifts of property after October 1, 
1996, are subject to the revenue-use requirement.
    c. For any airport or airport operator that is subject to the 
revenue-use requirement on or after October 1, 1996, the revenue-use 
requirement applies indefinitely.
    4. This section of the policy refers to the date of October 1, 
1996, because the FAA Authorization Act of 1996 is by its terms 
effective on that date.

D. Specific Statutory Requirements for the Use of Airport Revenue

    1. 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:
    a. Direct payments or indirect payments, other than payments 
reflecting the value of services and facilities provided to the 
airport;
    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
    d. Payments to compensate non-sponsoring governmental bodies for 
lost tax revenues exceeding stated tax rates.
    2. Section 47107(l)(5), enacted as part of the FAA Authorization 
Act of 1996, provides that:
    (A) Any request by a sponsor to any airport for additional payments 
for services conducted off of the airport or for reimbursement for 
capital contributions or operating expenses shall be filed not later 
than 6 years after the date on which the expense is incurred; and
    (B) Any amount of airport funds that are used to make a payment or

[[Page 7718]]

reimbursement as described in subparagraph (a) after the date specified 
in that subparagraph shall be considered to be an illegal diversion of 
airport revenues that is subject to subsection (n).
    3. 49 U.S.C. Sec. 40116(d)(2)(A) provides, among other things, that 
a State, political subdivision of a State or authority acting for a 
State or a political subdivision may not: ``(iv) levy or collect a tax, 
fee or charge, first taking effect after August 23, 1994, exclusively 
upon any business located at a commercial service airport or operating 
as a permittee of such an airport other than a tax, fee or charge 
wholly utilized for airport or aeronautical purposes.''

E. Passenger Facility Charges and Revenue Diversion

    The Aviation Safety and Capacity Expansion Act of 1990 authorized 
the imposition of a passenger facility charge (PFC) with the approval 
of the Secretary.
    1. While PFC revenue is not characterized as ``airport revenue'' 
for purposes of this Policy Statement, 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 the 
requirements for the use of airport revenue in 49 U.S.C. 47107(b), in 
that the PFC requirements provide that PFC collections 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.
    2. The statute and regulations prohibit expenditure of PFC revenue 
for other than approved projects, or collection of PFC revenue in 
excess of approved amounts.
    3. As explained more fully below under enforcement policies and 
procedures in Section IX, ``Monitoring and Compliance,'' a final FAA 
determination that a public agency has violated the revenue-use 
provision prevents the FAA from approving new authority to impose a PFC 
until corrective action is taken.

Section V--Permitted 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 full costs of activities directed toward promoting 
competition at an airport, public and industry awareness of airport 
facilities and services, new air service and competition at the airport 
(other than direct subsidy of air carrier operations prohibited by 
paragraph VI.B.12 of this policy), and salary and expenses of employees 
engaged in efforts to promote air service at the airport, subject to 
the terms of this policy statement. Other permissible expenditures 
include cooperative advertising, where the airport advertises new 
services with or without matching funds, and advertising of general or 
specific airline services to the airport. Examples of permitted 
expenditures in this category include: (a) a Superbowl hospitality tent 
for corporate aircraft crews at a sponsor-owned general aviation 
terminal intended to promote the use of that airport by corporate 
aircraft; and (b) the cost of promotional items bearing airport logos 
distributed at various aviation industry events.
    3. A share of promotional expenses, which may include marketing 
efforts, advertising, and related activities designed to increase 
travel using the airport, to the extent the airport share of the 
promotional materials or efforts meets the requirements of V.A.2. above 
and includes specific information about the airport.
    4. The repayment of the airport owner or sponsor of funds 
contributed by such owner or sponsor for capital and operating costs of 
the airport and not heretofore reimbursed. An airport owner or operator 
can seek reimbursement of contributed funds only if the request is made 
within 6 years of the date the contribution took place. 49 U.S.C. 
47107(l).
    a. If the contribution was a loan to the airport, and clearly 
documented as an interest-bearing loan at the time it was made, the 
sponsor may repay the loan principal and interest from airport funds. 
Interest should not exceed a rate which the sponsor received for other 
investments for that period of time.
    b. For other contributions to the airport, the airport owner or 
operator may seek reimbursement of interest only if the FAA determines 
that the airport owes the sponsor funds as a result of activities 
conducted by the sponsor or expenditures by the sponsor for the benefit 
of the airport. Interest shall be determined in the manner provided in 
49 U.S.C. 47107(o), but may be assessed only from the date of the FAA's 
determination.
    5. Lobbying fees and attorney fees to the extent these fees are for 
services in support of any activity or project for which airport 
revenues may be used under this Policy Statement. See Section VI: 
Prohibited Uses of Airport Revenue.
    6. Costs incurred by government officials, such as city council 
members, to the extent that such costs are for services to the airport 
actually received and documented. An example of such costs would be the 
costs of travel for city council members to meet with FAA officials 
regarding AIP funding for an airport project.
    7. A portion of the general costs of government, including 
executive offices and the legislative branches, may be allocated to the 
airport indirectly under a cost allocation plan in accordance with 
V.B.3. of this Policy Statement.
    8. Expenditure of airport funds for support of community 
activities, participation in community events, or support of community-
purpose uses of airport property if such expenditures are directly and 
substantially related to the operation of the airport. Examples of 
permitted expenditures in this category include: (a) the purchase of 
tickets for an annual community luncheon at which the Airport director 
delivers a speech reviewing the state of the airport; and (b) 
contribution to a golf tournament sponsored by a ``friends of the 
airport'' committee. The FAA recognizes that contributions for 
community or charitable purposes can provide a direct benefit to the 
airport through enhanced community acceptance, but that a benefit of 
that nature is intangible and not quantifiable. Where the amount of 
contribution is minimal, the value of the benefit will not be 
questioned as long as there is a reasonable connection between the 
recipient organization and the benefit of local community acceptance 
for the airport. An example of a permitted expenditure in this category 
was participation in a local school fair with a booth focusing on 
operation of the airport and career opportunities in aviation. The 
expenditure in this example was $250.
    9. Airport revenue may be used for the capital or operating costs 
of those

[[Page 7719]]

portions of an airport ground access project that can be considered an 
airport capital project, or of that part of a local facility that is 
owned or operated by the airport owner or operator and directly and 
substantially related to the air transportation of passengers or 
property, including use by airport visitors and employees. The FAA has 
approved the use of airport revenue for the actual costs incurred for 
structures and equipment associated with an airport terminal building 
station and a rail connector between the airport station and the 
nearest mass transit rail line, where the structures and equipment were 
(1) located entirely on airport property, and (2) designed and intended 
exclusively for the use of airport passengers.

B. Allocation of Indirect Costs

    1. Indirect costs of sponsor services may be allocated to the 
airport in accordance with this policy, but the allocation must result 
in an allocation to the airport only of those costs that would 
otherwise be allowable under 49 U.S.C. Sec. 47107(b). In addition, the 
documentation for the costs must meet the standards of documentation 
stated in this policy.
    2. The costs must be allocated under a cost allocation plan that 
meets the following requirements:
    a. The cost is allocated under a cost allocation plan that is 
consistent with Attachment A to OMB Circular A-87, except that the 
phrase ``airport revenue'' should be substituted for the phrase ``grant 
award,'' wherever the latter phrase occurs in Attachment A;
    b. The allocation method does not result in a disproportionate 
allocation of general government costs to the airport in consideration 
of the benefits received by the airport;
    c. Costs allocated indirectly under the cost allocation plan are 
not billed directly to the airport; and
    d. Costs billed to the airport under the cost allocation plan must 
be similarly billed to other comparable units of the airport owner or 
operator.
    3. A portion of the general costs of government, such as the costs 
of the legislative branch and executive offices, may be allocated to 
the airport as an indirect cost under a cost allocation plan satisfying 
the requirements set forth above. However, the allocation of these 
costs may require special scrutiny to assure that the airport is not 
paying a disproportionate share of these costs.
    4. Central service costs, such as accounting, budgeting, data 
processing, procurement, legal services, disbursing and payroll 
services, may also be allocated to the airport as indirect costs under 
a cost allocation plan satisfying the requirements set forth above. 
However, the allocation of these costs may require special scrutiny to 
assure that the airport is not paying a disproportionate share of these 
costs.

C. Standard of Documentation for the Reimbursement to Government 
Entities of Costs of Services and Contributions Provided to Airports

    1. Reimbursements for capital and operating costs of the airport 
made by a government entity, both direct and indirect, must be 
supported by adequate documentary evidence. Documentary evidence 
includes, but is not limited to:
    a. Underlying accounting data such as general and specialized 
journals, ledgers, manuals, and supporting worksheets and other 
analyses; and corroborating evidence such as invoices, vouchers and 
indirect cost allocation plans, or
    b. Audited financial statements which show the specific 
expenditures to be reimbursed by the airport. Such expenditures should 
be clearly identifiable on the audited financial statements as being 
consistent with section VIII of this policy statement.
    2. Documentary evidence to support direct and indirect charges to 
the airport must show that the amounts claimed were actually expended. 
Budget estimates are not sufficient to establish a claim for 
reimbursement. Indirect cost allocation plans, however, may use budget 
estimates to establish pre-determined indirect cost allocation rates. 
Such estimated rates should, however, be adjusted to actual expenses in 
the subsequent accounting period.

D. Expenditures of Airport Revenue by Grandfathered Airports

    1. Airport revenue may be used for 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. 
Sec. 47107(b)(2) are applicable to the sponsor and the particular use. 
Based on previous DOT interpretations, examples of grandfathered 
airport sponsors may include, but are not limited to the following:
    a. 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:
    b. 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.
    c. 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.
    d. 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.
    e. 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.
    f. 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.
    2. Under the authority of 49 U.S.C. Sec. 47115(f), the FAA 
considers as a factor militating against the approval of an application 
for AIP discretionary funds, the fact that a sponsor has exercised its 
rights to use airport revenue for nonairport purposes under the 
grandfather clause, when in the airport's fiscal year preceding the 
date of application for discretionary funds, the FAA finds that the 
amount of airport revenues used for nonairport purposes 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

[[Page 7720]]

Consumers published by the Bureau of Labor Statistics of the Department 
of Labor.

Section VI--Prohibited Uses of Airport Revenue

A. Lawful and Unlawful Revenue Diversion

    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. Sec. 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. Unless the 
revenue diversion is grandfathered, the diversion is unlawful and 
prohibited by the revenue-use restrictions.

B. Prohibited Uses of Airport Revenue

    Prohibited uses of airport revenue include but are not limited to:
    1. Direct or indirect payments that exceed the fair and reasonable 
value of those services and facilities provided to the airport. The FAA 
generally considers the cost of providing the services or facilities to 
the airport as a reliable indicator of value.
    2. Direct or indirect payments that are based on a cost allocation 
formula that is not consistent with this policy statement or that is 
not calculated consistently for the airport and other comparable units 
or cost centers of government.
    3. Use of airport revenues for general economic development.
    4. Marketing and promotional activities unrelated to airports or 
airport systems. Examples of prohibited expenses in this category 
include participation in program to provide hospitality training to 
taxi drivers and funding an airport operator's float containing no 
reference to the airport, in a New Years Day parade.
    5. 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;
    6. Payments to compensate non-sponsoring governmental bodies for 
lost tax revenues to the extent the payments exceed the stated tax 
rates applicable to the airport;
    7. Loans to or investment of airport funds in a state or local 
agency at less than the prevailing rate of interest.
    8. Land rental to, or use of land by, the sponsor for 
nonaeronautical purposes at less than fair rental/market value, except 
to the extent permitted by SectionVII.D of this policy.
    9. Use of land by the sponsor for aeronautical purposes rent-free 
or for nominal rental rates, except to the extent permitted by Section 
VII.E of this policy.
    10. Impact fees assessed by any governmental body that exceed the 
value of services or facilities provided to the airport. However, 
airport revenue may be used where airport development requires a 
sponsoring agency to take an action, such as undertaking environmental 
mitigation measures contained in an FAA record of decision approving 
funding for an airport development project, or constructing a ground 
access facility that would otherwise be eligible for the use of airport 
revenue. Payments of impact fees must meet the general requirement that 
airport revenue be expended only for actual documented costs of items 
eligible for use of airport revenue under this Policy Statement. In 
determining appropriate corrective action for an impact fee payment 
that is not consistent with this policy, the FAA will consider whether 
the impact fee was imposed by a non-sponsoring governmental entity and 
the sponsor's ability under local law to avoid paying the fee.
    11. Expenditure of airport funds for support of community 
activities and participation in community events, or for support of 
community-purpose uses of airport property except to the extent 
permitted by this policy. See Section V, Uses of Airport Revenue. 
Examples of prohibited expenditures in this category include 
expenditure of $50,000 to sponsor a local film society's annual film 
festival; and contribution of $6,000 to a community cultural heritage 
festival.
    12. Direct subsidy of air carrier operations. Direct subsidies are 
considered to be payments of airport funds to carriers for air service. 
Prohibited direct subsidies do not include waivers of fees or 
discounted landing or other fees during a promotional period. Any fee 
waiver or discount must be offered to all users of the airport, and 
provided to all users that are willing to provide the same type and 
level of new services consistent with the promotional offering. 
Likewise prohibited direct subsidies do not include support for airline 
advertising or marketing of new services to the extent permitted by 
Section V of this Policy Statement.

Section VII--Policies Regarding Requirement for a Self-Sustaining 
Airport Rate Structure

A. Statutory Requirements

    49 U.S.C. Sec. 47107(a)(13) requires airport operators to maintain 
a schedule of charges for use of the airport: ``(A) that will make the 
airport as self-sustaining as possible under the circumstances existing 
at the airport, including volume of traffic and economy of 
collection.''
    The requirement is generally referred to as the ``self-sustaining 
assurance.''

B. General Policies Governing the Self-Sustaining Rate Structure 
Assurance

    1. Airport proprietors must maintain a fee and rental structure 
that in the circumstances of the airport makes the airport as 
financially self-sustaining as possible. In considering whether a 
particular contract or lease is consistent with this requirement, the 
FAA and the Office of the Inspector General (OIG) generally evaluate 
the individual contract or lease to determine whether the fee or rate 
charged generates sufficient income for the airport property or service 
provided, rather than looking at the financial status of the entire 
airport.
    2. If market conditions or demand for air service do not permit the 
airport to be financially self-sustaining, the airport proprietor 
should establish long-term goals and targets to make the airport as 
financially self-sustaining as possible.
    3. At some airports, market conditions may not permit an airport 
proprietor to establish fees that are sufficiently high to recover 
aeronautical costs and sufficiently low to attract and retain 
commercial aeronautical services. In such circumstances, an airport 
proprietor's decision to charge rates that are below those needed to 
achieve a self-sustaining income in order to assure that services are 
provided to the public is not inherently inconsistent with the 
obligation to make the airport as self-sustaining as possible in the 
circumstances.
    4. Airport proprietors are encouraged, when entering into new or 
revised agreements or otherwise establishing rates, charges, and fees, 
to undertake reasonable efforts to make their particular airports as 
self sustaining as possible in the circumstances existing at such 
airports.
    5. Under 49 U.S.C. Sec. 47107(a)(1) and the implementing grant 
assurance, charges to aeronautical users must be reasonable and not 
unjustly discriminatory. Because of the limiting effect of the 
reasonableness requirement, the FAA does not consider the self-
sustaining requirement to require airport sponsors

[[Page 7721]]

to charge fair market rates to aeronautical users. Rather, for charges 
to aeronautical users, the FAA considers the self-sustaining assurance 
to be satisfied by airport charges that reflect the cost to the sponsor 
of providing aeronautical services and facilities to users. A fee for 
aeronautical users set pursuant to a residual costing methodology 
satisfies the requirement for a self-sustaining airport rate structure.
    6. In establishing new fees, 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 
purposes and for other purposes for which airport revenues may be spent 
under 49 U.S.C. Sec. 47107(b)(1), including reasonable reserves and 
other funds to facilitate financing and to cover contingencies. While 
fees charged to nonaeronautical users are not subject to the 
reasonableness requirement or the Department of Transportation Policy 
on airport rates and charges, the surplus funds accumulated from those 
fees must be used in accordance with 49 U.S.C. Sec. 47107(b).

C. Policy on Charges for Nonaeronautical Facilities and Services

    Subject to the general guidance set forth above and the specific 
exceptions noted below, the FAA interprets the self-sustaining 
assurance to require that the airport receive fair market value for the 
provision of nonaeronautical facilities and services, to the extent 
practicable considering the circumstances at the airport.

D. Providing Property for Public Community Purposes

    Making airport property available at less than fair market rental 
value for public recreational and other 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 will not be considered a violation of the self-sustaining 
requirement. 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 contribution of the airport property enhances public 
acceptance of the airport in a community in the immediate area of the 
airport; the property is put to a general public use desired by the 
local community; and the public use does not adversely affect the 
capacity, security, safety or operations of the airport. Examples of 
acceptable uses include public parks, recreation facilities, and bike 
or jogging paths. Examples of uses that would not be eligible are road 
maintenance equipment storage; and police, fire department, and other 
government facilities if they do not directly support the operation of 
the airport.
    2. The property involved would not reasonably be expected to 
produce more than de minimis revenue at the time the community use is 
contemplated, and the property is not reasonably expected to be used by 
an aeronautical tenant or otherwise be needed for airport operations in 
the foreseeable future. When airport property reasonably may be 
expected to earn more than minimal revenue, it still may be used for 
community purposes at less than FMV if the revenue earned from the 
community use approximates the revenue that could otherwise be 
generated, provided that the other provisions of VII. D. are met.
    3. The community use does not preclude reuse of the property for 
airport purposes if, in the opinion of the airport sponsor, such reuse 
will provide greater benefits to the airport than continuation of the 
community use.
    4. Airport revenue is not to be used to support the capital or 
operating costs associated with the community use.

E. Use of Property by Not-for-Profit Aviation Organizations

    1. An airport operator may charge reduced rental rates and fees to 
the following not-for-profit aviation organizations, to the extent that 
the reduction is reasonably justified by the tangible or intangible 
benefits to the airport or to civil aviation:
    a. Aviation museums;
    b. Aeronautical secondary and post-secondary education programs 
conducted by accredited educational institutions; or
    c. Civil Air Patrol units operating aircraft at the airport;
    2. Police or fire-fighting units operating aircraft at the airport 
generally will be expected to pay a reasonable rate for aeronautical 
use of airport property, but the value of any services provided by the 
unit to the airport may be offset against the applicable reasonable 
rate.

F. Use of Property by Military Units

    The FAA acknowledges that many airports provide facilities to 
military units with aeronautical missions at nominal lease rates. The 
FAA does not consider this practice inconsistent with the requirement 
for a self-sustaining airport rate structure. Military units with 
aeronautical missions may include the Air National Guard, aviation 
units of the Army National Guard, U.S. Air Force Reserve, and Naval 
Reserve air units operating aircraft at the airport. Reserve and Guard 
units typically have an historical presence at the airport that 
precedes the Airport and Airway Improvement Act of 1982, and provide 
services that directly benefit airport operations and safety, such as 
snow removal and supplementary ARFF capability.

G. Use of Property for Transit Projects

    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. Secs. 47107(b), 47133 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 and substantially related to the air transportation of 
passengers or property, including use by airport visitors and 
employees. A lease of nominal value in the circumstances described in 
this section would be considered consistent with the self-sustaining 
requirement.

H. Private Transit Systems

    Generally, private ground transportation services are charged as a 
nonaeronautical use of the airport. In cases where publicly-owned 
transit services are extremely limited and where a private transit 
service (i.e., bus, rail, or ferry) provides the primary source of 
public transportation, making property available at less than fair 
market rental to this private service would not be considered 
inconsistent with 49 U.S.C. Secs. 47107(b), 47133 or 47107(a)(13).

Section VIII--Reporting and Audit Requirements

    The Federal Aviation Administration Authorization Act of 1994 
established a new requirement for airports to submit annual financial 
reports to the Secretary, and the Act required the Secretary to compile 
the reports and to submit a summary report to Congress. The Federal 
Aviation Reauthorization Act of 1996 established a new requirement for 
airports to include, as part of their audits under the Single Audit 
Act, a review and opinion on the use of airport revenue.

A. Annual Financial Reports

    Section 111(a)(4) of the 1994 Authorization Act, 49 U.S.C. 
Sec. 47107(a)(19), requires airport owners or operators to submit to 
the Secretary

[[Page 7722]]

and to make available to the public an annual financial report listing 
in detail (1) all amounts the airport paid to other government units 
and the purposes for which each payment was made, (2) all services and 
property the airport provided to other government units and 
compensation received for each service or unit of property provided. 
Additionally, Section 111(b) of the 1994 Authorization Act requires a 
report, for each fiscal year, in an uniform simplified format, of the 
airport's sources and uses of funds, net surplus/loss and other 
information which the Secretary may require.
    FAA Forms 5100-125 and 126 have been developed to satisfy the above 
reporting requirements. The forms must be filed with the FAA 120 days 
after the end of the sponsor's fiscal year. Extensions of the filing 
date may be granted if audited financial information is not available 
within 120 days of the end of the local fiscal year. Requests for 
extension should be filed in writing with the FAA Airport Compliance 
Division, AAS-400.

B. Single Audit Review and Opinion

    1. General requirement and applicability. The Federal Aviation 
Reauthorization Act of 1996, Section 805; 49 U.S.C. Sec. 47107(m) 
requires public agencies that are subject to the Single Audit Act, 31 
U.S.C. Sec. 7501-7505, and that have received Federal financial 
assistance for airports to include, as part of their single audit, a 
review and opinion of the public agency's funding activities with 
respect to their airport or local airport system.
    2. Federal Financial Assistance. For the purpose of complying with 
49 U.S.C. Sec. 47107(m), Federal financial assistance for airports 
includes any interest in property received, by a public agency since 
October 1, 1996, for the purpose of developing, improving, operating, 
or maintaining a public airport, or an AIP grant which was in force and 
effect on or after October 1, 1996, either directly or through a state 
block grant program.
    3. Frequency. The opinion will be required whenever the auditor 
under OMB Circular A-133 selects an airport improvement program grant 
as a major program. In those cases where the airport improvement 
program grant is selected as a major program the requirements of 49 
U.S.C. Sec. 47107(m) will apply.
    4. Major Program. For the purposes of complying with 49 U.S.C. 
Sec. 47107(m), major program means an airport improvement program grant 
determined to be a major program in accordance with OMB Circular A-133, 
Sec. 520 or an airport improvement program grant identified by FAA as a 
major program in accordance with OMB A-133 Sec. 215(c); except 
additional audit costs resulting from FAA designating an airport 
improvement program grant as a major program are discussed at paragraph 
9 below.
    5. FAA Notification. When FAA designates an airport improvement 
program grant as a major program, FAA will generally notify the sponsor 
in writing at least 180 days prior to the end of the sponsor's fiscal 
year to have the grant included as a major program in its next Single 
Audit.
    6. Audit Findings. The auditor will report audit findings in 
accordance with OMB Circular A-133.
    7. Opinion. The statutory requirement for an opinion will be 
considered to be satisfied by the auditor's reporting under OMB 
Circular A-133. Consequently when an airport improvement program grant 
is designated as a major program, and the audit is conducted in 
accordance with OMB Circular A-133, FAA will accept the audit to meet 
the requirements of 49 USC Sec. 47107(m) and this policy.
    8. Reporting Package. The Single Audit reporting package will be 
distributed in accordance with the requirements of OMB Circular A-133. 
In addition when an airport improvement program grant is a major 
program, the sponsor will supply, within 30 days after receipt by the 
sponsor, a copy of the reporting package directly to the FAA, Airport 
Compliance Division (AAS-400), 800 Independence Ave. SW 20591. The FAA 
regional offices may continue to request the sponsor to provide 
separate copies of the reporting package to support their 
administration of airport improvement program grants.
    9. Audit Cost. When an opinion is issued in accordance with 
47107(m) and this policy, the costs associated with the opinion will be 
allocated in accordance with the sponsor's established practice for 
allocating the cost of its Single Audit, regardless of how the airport 
improvement program grant is selected as a major program.
    10. Compliance Supplement. Additional information about this 
requirement is contained in OMB Circular A-133 Compliance Supplement 
for DOT programs.
    11. Applicability. This requirement is not applicable to (a) 
privately-owned, public-use airports, including airports accepted into 
the airport privatization program (the Single Audit Act governs only 
states, local governments and non-profit organizations receiving 
Federal assistance); (b) public agencies that do not have a requirement 
for the single audit; (c) public agencies that do not satisfy the 
criteria of paragraph B.1 and 2; above; and Public Agencies that did 
not execute an AIP grant agreement on or after June 2, 1997.

Section IX--Monitoring and Compliance

A. Detection of Airport 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. Sec. 47107(a)(19), as amended.
    2. Single audit reports submitted, pursuant to 49 U.S.C. 
Sec. 47107(m), with annual single audits conducted under 31 U.S.C. 
Secs. 7501-7505. The requirement for these reports is discussed in Part 
IX of this policy.
    3. Investigation following a third party complaint filed under 14 
CFR. Part 16, FAA Rules of Practice for Federally Assisted Airport 
Proceedings.
    4. DOT Office of Inspector General audits.

B. Investigation of Revenue Diversion Initiated Without Formal 
Complaint

    1. When no formal complaint has been filed, but the FAA has an 
indication from one or more 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. 
If, after information and arguments submitted by the sponsor, the FAA 
determines that there is no unlawful diversion of revenue, the FAA will 
notify the sponsor and take no further action. If the FAA makes a 
preliminary finding that there has been unlawful diversion of airport 
revenue, and the sponsor has not taken corrective action (or agreed to 
take corrective action), the FAA may issue a notice of investigation 
under 14 CFR Sec. 16.103.
    If, after further investigation, 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 under 14 CFR Sec. 16.109 proposing 
enforcement action. However, such action will cease if the airport 
sponsor agrees to return the diverted amount plus interest.
    2. 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)

[[Page 7723]]

will be handled in accordance with paragraph B.1 above.

C. Investigation of Revenue Diversion Precipitated by Formal Complaint

    When a formal complaint is filed against a sponsor for revenue 
diversion, the FAA will follow the procedures in 14 CFR Part 16 for 
notice to 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.
    If the airport sponsor takes the corrective action specified in the 
order, the complaint will be dismissed.

D. The Administrative Enforcement Process

    1. 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 CFR 
part 16. Under part 16, 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.
    2. 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 CFR 16.109. That section provides for the opportunity for 
a hearing on the order.

E. Sanctions for Noncompliance

    1. 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, the FAA will propose enforcement action. 
A decision whether to issue a final order making the action effective 
is made after a 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:
    a. Withhold future grants. The Secretary may withhold approval of 
an application in accordance with 49 USC Sec. 47106(d) 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.
    b. 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 USC Sec. 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.
    c. 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 USC Sec. 47111(d), the Secretary may withhold a 
payment for more than 180 days only if he or she notifies the sponsor 
and 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.
    d. 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 USC Sec. 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.
    e. 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.
    f. Withhold, under 49 USC Sec. 47107(n)(3), any amount from funds 
that would otherwise be available to a sponsor, including funds that 
would otherwise be made available to a State, municipality, or 
political subdivision thereof (including any multi-modal transportation 
agency or transit agency of which the sponsor is a member entity) as 
part of an apportionment or grant made available pursuant to this 
title, if the sponsor has failed to reimburse the airport after 
receiving notification of the requirement to do so.
    g. Assess civil penalties.
    (1) Under section 112(c) of Public Law 103-305, codified at 49 USC 
Sec. 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. Any civil 
penalty action under this section would be adjudicated under 14 CFR 
Part 13, Subpart G.
    (2) Under section 804 of Public Law 104-264, codified at 49 USC 
Sec. 46301((a)(5), the Secretary has statutory authority to obtain 
civil penalties of up to three times the amount of airport revenues 
that are used in violation of 49 USC Secs. 47107(b) and 47133. An 
action for civil penalties in excess of $50,000 must be brought in a 
United States District Court.
    (3) The Secretary may, under 49 USC Sec. 47107(n)(4), initiate a 
civil action for civil penalties in the amount equal to the illegal 
diversion in question plus interest calculated in accordance with 49 
USC Sec. 47107(o), if the airport sponsor has failed to take corrective 
action specified by the Secretary and the Secretary is unable to 
withhold sufficient grant funds, as set forth above.
    (4) An action for civil penalties under this provision must be 
brought in a United States District Court. 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.

F. Compliance With Reporting and Audit Requirements

    The FAA will monitor airport sponsor compliance with the Airport 
Financial Reporting Requirements and Single Audit Requirements 
described in this Policy Statement. The failure to comply with these 
requirements can result in the withholding of future AIP grant awards 
and further payments under existing AIP grants.

    Issued in Washington, DC on February 8, 1999.
Susan L. Kurland,
Associate Administrator for Airports.
[FR Doc. 99-3529 Filed 2-11-99; 8:45 am]
BILLING CODE 4910-13-P