Airport and Airway Trust Fund: Preliminary Observations on Past, 
Present, and Future (04-MAY-05, GAO-05-657T).			 
                                                                 
The Airport and Airway Trust Fund (Trust Fund) was established in
1970 to help fund the development of a nationwide airport and	 
airway system and to fund investments in air traffic control	 
facilities. It provides all of the funding for FAA's accounts	 
such as the Airport Improvement Program (AIP), which provides	 
grants for construction and safety projects at airports, the	 
Facilities and Equipment (F&E),which funds technological	 
improvements to the air traffic control system, and the Research,
Engineering, and Development (RE&D). In addition, the Trust Fund 
provides some funding for FAA's operations account. To fund these
accounts, the Trust Fund relies on a number of taxes for revenue,
including passenger ticket, fuel, and cargo taxes that are paid  
by passengers and airlines. Since 1970, revenues have generally  
exceeded expenditures--resulting in a surplus or an uncommitted  
balance. In 2004, the Trust Fund's year end uncommitted balance  
was about $2 billion. A number of structural changes in the	 
aviation industry and external events have affected revenues	 
flowing into and out of the Fund and have caused some aviation	 
stakeholders to speculate about the Fund's financial condition.  
The various taxes that accrue to the Trust Fund are scheduled to 
expire in 2007. GAO was asked to provide information and analysis
about the financial outlook of the Trust Fund.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-657T					        
    ACCNO:   A23377						        
  TITLE:     Airport and Airway Trust Fund: Preliminary Observations  
on Past, Present, and Future					 
     DATE:   05/04/2005 
  SUBJECT:   Budget administration				 
	     Budget controllability				 
	     Budget surplus					 
	     Federal aid for transportation			 
	     Federal funds					 
	     Funds management					 
	     Future budget projections				 
	     Trust funds					 
	     Unexpended budget balances 			 
	     Unobligated budget balances			 
	     Air traffic control systems			 
	     Airport and Airway Trust Fund			 

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GAO-05-657T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives

For Release on Delivery

Expected at 10:00 a.m. EDT AIRPORT AND AIRWAY

Wednesday, May 4, 2005

TRUST FUND

             Preliminary Observations on Past, Present, and Future

Statement of Gerald L. Dillingham, Ph.D. Director, Physical Infrastructure
Issues

GAO-05-657T

[IMG]

May 4, 2005

AIRPORT AND AIRWAY TRUST FUND

Preliminary Observations on Past, Present, and Future

What GAO Found

With the exception of its first four years, the Trust Fund has ended each
year with an uncommitted balance; however, the amount of the uncommitted
balance has fluctuated and is currently trending downward. In 1991 and
1999, the Trust Fund's uncommitted balance totaled over $7 billion-its
highest level. However, in several years, the Trust Fund's balance
experienced dramatic decreases resulting in a lower uncommitted balance,
in part, because of lapses in the taxes that accrue to the Fund or
reductions in demand for air travel. The Trust Fund's uncommitted balance
decreased from $7.3 billion in 2001 to $4.8 billion in 2002 and has
continued

to decrease by about $1 billion each year since. This declining
uncommitted balance has been caused by a number of underlying factors,
such as reductions in the demand for air travel.

Over the next 3 years, the Trust Fund is projected to have sufficient
revenue to fund authorized spending and end each year with an uncommitted
balance under the current law, referred to as Vision 100, and the
President's 2006 budget proposal, as shown below. However, this financial
outlook depends on the realization of FAA's forecasted commercial
passenger traffic levels and airfares. If revenues are 5 percent lower
than projected, as they were in 2001, the Trust Fund's uncommitted balance
would be $1.5 billion or lower under both Vision 100 and the President's
budget proposal in 2006 and 2007. If the revenues were 10 percent lower
than projected, as they were in 2004, the uncommitted balance would reach
zero in 2006 under the President's proposal and in 2007 under Vision 100.
FAA officials told GAO that if the uncommitted balance reached zero, FAA
would still fund air traffic control services but would have to suspend
some AIP and F&E activities.

Trust Fund's Projected Year End Uncommitted Balance Under Vision 100 and
President's

2006 Budget Proposal

3 Dollars in billions

President's proposal

Vision 100

2

1

0 2005 2006 2007

Fiscal year

Source: FAA.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the financial condition of the
Airport and Airway Trust Fund (Trust Fund). The Trust Fund was established
by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund
the development of a nationwide airport and airway system and to fund
investments in air traffic control facilities. It provides all or some of
the funding for FAA's accounts which include the

o  	Airport Improvement Program (AIP), that provides grants for
construction and safety projects at airports,

o  	Facilities and Equipment (F&E) account that funds technological
improvements to the air traffic control system,

o  the Research, Engineering, and Development (RE&D) account, and

o  Operations account.

To fund these accounts, the Trust Fund relies on a number of taxes for
revenue, including passenger ticket, fuel, and cargo taxes, that are paid
by passengers and airlines. In fiscal year 2004, the Trust Fund received
$9.7 billion in revenue and had expenditures of $10.4 billion.1 Although
Trust Fund expenditures exceeded revenues in 2004, since its creation in
1970, revenues have generally exceeded expenditures -resulting in a
surplus or an uncommitted balance.2 At the end of 2004, the Trust Fund's
uncommitted balance was about $2.4 billion, a decrease of about 67 percent
since 2001.3

A number of structural changes in the aviation industry and external
events have affected revenues flowing into and out of the Trust Fund and
have caused some aviation stakeholders to speculate about the Fund's
financial condition. For example, some aviation stakeholders believe that
there is a reason to be concerned about the financial condition of the
Trust

1For purposes of this report, we are using the expenditure amount rather
than the appropriated amount. The expenditure amount includes the amount
of funding spent on AIP, F&E, RE&D, and operations and does not include
commitments.

2The Trust Fund's uncommitted balance represents money against which there
is no outstanding budget commitment or authority to spend.

3 All dollar amounts in this testimony are in nominal dollars.

Historically, Trust Fund Has Generally Had an Uncommitted Balance but
Recently the Balance Has Started to Trend Downward

Fund because revenues have not recently kept pace with expenditures. In
contrast, other aviation stakeholders state that the Trust Fund is healthy
because revenues are expected to continue increasing. The various taxes
that accrue to the Trust Fund are scheduled to expire in 2007.

My statement today is based on our ongoing work on the Trust Fund and
discusses our preliminary observations on the past, present, and future
financial outlook of the Trust Fund. We plan to issue a final report to
this Subcommittee later this year.

As shown in figure 1, with the exception of its first four years, the
Trust Fund has ended each year with an uncommitted balance; however, the
amount of the uncommitted balance has fluctuated and is currently trending
downward. In 1991 and 1999, the Trust Fund's uncommitted balance totaled
over $7 billion, which represented its highest amount.4 However, in
several years, the Trust Fund's experienced dramatic decreases resulting
in a lower uncommitted balance. For example, in 1982, the end of year
uncommitted balance was $2.1 billion, and in 1997 it was $1.4 billion
because of a lapse in the taxes that accrue to the Trust Fund. The Trust
Fund's uncommitted balance also decreased from $7.3 billion in 2001 to
$4.8 billion in 2002 and has continued to decrease by about $1 billion
each year since. There are a number of reasons for this downward trend,
including changes in the amount of revenue flowing into and out of the
Trust Fund.

4 Because of price level increases that reduced the value of a dollar over
time, in terms of purchasing power, the Trust Fund was larger in 1991 than
in 1999.

Figure 1: Trust Fund's Uncommitted Balance Has Recently Started to Trend
Downward

                             Dollars in billions 8

The amount of revenues flowing into the Trust Fund has fluctuated from
year to year but has generally trended upward, as shown in figure 2. The
Trust Fund relies on a number of taxes for revenue, including passenger
ticket, fuel, and cargo taxes that are paid by passengers and airlines.
During 1981 and 1982 the amount of revenues including interest flowing
into the Trust Fund averaged $629 million which was the lowest amount in
its history because of a lapse in the collection of aviation taxes. In
contrast, in 1999, revenue flowing into the Trust Fund totaled $11.1
billion, which was the largest amount in its history.

                                       7

                                       6

                                       5

                                       4

                                       3

                                       2

                                       1

                                      0 -1

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Year

Source: Congressional Budget Office and FAA budgets.

Revenues Have Generally Increased With Some Fluctuations

     Figure 2: Trust Fund Revenues Have Fluctuated but Generally Increased

Dollars in billions

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Year

              Source: Congressional Budget Office and FAA budgets.

However, after revenues peaked in 1999, the amount of revenue flowing into
the Trust Fund started to trend downward, totaling $9.7 billion in 2004. A
number of factors may have contributed to this decrease. For example,
within the airline industry, the growth of the Internet as a means to sell
and distribute tickets, the growth of the low cost airlines, and fare
reductions by legacy carriers all transformed the industry and led to
lower average fares. These lower fares may have resulted in lower ticket
taxes and less revenue into the Trust Fund.5 In addition, a series of
largely unforeseen events, including the September 11 terrorist attacks,
war in Iraq and associated security concerns, the Severe Acute Respiratory
Syndrome (SARS), global recessions, and a steep decline in business travel
seriously reduced the demand for air travel resulting in a sharp decrease
in airline industry revenue.

5Increased traffic from these lower fares may have offset some of the
decline in tax revenue.

Trust Fund Expenditures The amount of funds flowing out of the Trust Fund
also has generally Have Also Increased and increased since the Fund's
inception and has also exceeded revenues in Exceeded Revenue in some
years. For example, as shown in figure 3, from 2002 through 2004, Some
Years expenditures exceeded revenues by an average of about $938 million,
or

about 9 percent.

Figure 3: Expenditures Exceeded Revenues in Some Years

Dollars in billions 12

10

8

6

4

2

0

Source: Congressional Budget Office and FAA budgets.

As mentioned earlier, the Trust Fund provides all the funding for AIP,
F&E, and RE&D and provides some funding for operations. Trust Fund
expenditures have grown because of increases in both spending for these
accounts and in the amount of FAA operations funded by the Trust Fund. For
example, the amount of funding provided for AIP increased from about $1.5
billion in 1998 to $3.5 billion in 2005. In addition, as shown in figure
4, since its inception the Trust Fund has funded some portion of FAA's
operations. In 1972 and 2000, the Trust Fund funded 100 percent of the
cost of FAA operations. In 2004, the Trust Fund funded 60 percent and it
is expected to fund 63 percent in 2005.

Figure 4: FAA Operations Cost Funded By Trust Fund and General Fund

Dollars in billions

                                       8

Over the next 3 years, the Trust Fund is projected to have sufficient
revenue to fund authorized spending and end each year with an uncommitted
balance under Vision 100 and the President's 2006 budget proposal.
However, this financial outlook depends on the realization of FAA's
forecasted commercial passenger traffic levels and airfares. As shown in
figure 5, under the current law-the Century of Aviation Reauthorization
Act (Vision 100)-the Trust Fund's year-end uncommitted balance is
projected to be about $2.6 billion in 2006. Under the President's
proposal, it is projected to be slightly over $1 billion in 2006.

                                       7

                                       6

                                       5

                                       4

                                       3

                                       2

                                       1

            01971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Year

General Fund Trust Fund

                                  Source: FAA.

Projected Trust Fund's Uncommitted Balance Is Positive but Depends on
Realization of Forecasted Passenger Traffic Levels and Airfares

Figure 5: Trust Fund's Projected Uncommitted Balances Under Vision 100 and
President's Budget Proposal

Dollars in billions

3

2

1

0 2005 2006 2007

Fiscal year

President's proposal

Vision 100 Source: FAA.

The primary reason that the Trust Fund's uncommitted balance would be
higher under Vision 100 is that it uses the formula created in the Wendell
H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21)
to determine how much funding for FAA Operations should come from the
Trust Fund, and the President's proposal does not. Under AIR-21, the
formula sets the amount of Trust Fund revenue that will be authorized for
FAA Operations in a given year equal to projected Trust Fund revenues (as
specified in the President's budget) minus the authorizations for AIP,
F&E, and RE&D in that year. Thus, under Vision 100, the Trust Fund is
projected to support almost $15 billion, or 63 percent of FAA Operations
from 2005 through 2007. In contrast, the President's proposal specifies a
set amount of Trust Fund revenue to be used for FAA Operations. Therefore,
if Congress enacts the President's proposal, the Trust Fund would provide
$17.7 billion for FAA Operations from 2005 through 2007, or about 74
percent of its total estimated costs for Operations.

In contrast to 2006, in 2007, the Trust Fund's uncommitted balance would
be about $300 million higher under the President's budget proposal than

under Vision 100. According to FAA officials, this is primarily because of
reduced spending for AIP and F&E under the President's budget proposal.

Although the Trust Fund is projected to have a positive uncommitted
balance from 2005 to 2007 under each of the expenditure proposals, this
projection depends to a significant extent on achieving forecasted
commercial passenger traffic levels and airfares that affect the amount of
revenues flowing into the Trust Fund. We recognize that it is very
difficult to anticipate future events that may significantly affect the
demand for air travel and our analysis shows FAA's projected revenue
forecast exceeds the actual amount of revenue received for four of the
last five years as shown in figure 6. According to FAA officials, the
major reasons why projected revenues were lower than actual revenues is
because forecasted airline yields6 were higher than the actual yields and
aviation activity was below anticipated levels for the last several years.

Figure 6: Comparison of Forecasted Revenue with Actual Revenue Received

                  Dollars in billions 2000 2001 2002 2003 2004

Year

                                    Forecast

Actual

Source: FAA budgets.

6Yields are commonly measured in cents per revenue passenger mile-with
revenue passenger miles being the number of miles revenue passengers are
transported.

Given the difference between the forecasted revenue and actual amount of
revenue received, we conducted sensitivity analyses to estimate what would
happen to the Trust Fund's uncommitted balance if passenger traffic or
yields fall below the levels that FAA projected in November 2004. For
example, table 1 shows the projected Trust Fund balances under Vision 100
and the President's proposal and the impact if revenues are 5 percent or
10 percent less than currently projected. If revenues are 5 percent lower
than projected, as they were in 2001, the Trust Fund's uncommitted balance
would be $1.5 billion or lower under both Vision 100 and the President's
budget proposal in 2006 and 2007. However, if the revenues are 10 percent
lower than projected, as they were in 2004, the uncommitted balance would
reach zero in 2006 under the President's proposal and in 2007 under Vision
100.

Table 1: Sensitivity Analysis of the Trust Fund's Uncommitted Balance to
Revenue Shortfalls

Source: GAO analysis of FAA data.

A scenario in which the Trust Fund reaches zero is cause for concern.
According to FAA officials, the elimination or reduction of the Trust
Fund's uncommitted balance could also pose budgetary challenges. For
example, if the Trust Fund's uncommitted balance reached zero in 2006 it
might require FAA to make significant spending cuts to aviation programs
currently supported by the Trust Fund unless additional funding were
authorized and appropriated from the General Fund. According to FAA
officials, they would continue to fund air traffic control services
because it is considered an emergency function that involves the safety of
human life. However, to fund air traffic control services, FAA officials
said it would

have to suspend activities for AIP, F&E, and RE&D accounts including some
F&E contracts.

Regarding the long-term financial outlook of the Trust Fund, we believe
that it is difficult to project beyond 2007 because the Trust Fund expires
in 2007 and it is unknown if the current tax schedule will change. In
addition, as mentioned earlier, forecasting aviation activity is difficult
in part because of the complexities and uncertainties associated with
anticipating future events that may affect the demand for air travel.
Projecting the longterm financial outlook of the Trust Fund also requires
some consideration of the planned spending of the programs that it
finances.

According to FAA officials, over the next 4 years, there may be an $8.2
billion dollar gap between costs and revenues, which reflects a $5 billion
shortfall for operations and $3.2 billion shortfall for capital
development. If this projected gap is realized, our past work suggests
that the cost saving initiatives that FAA has identified will not be
sufficient to close this gap.7 Consequently, additional reductions will be
needed. For example, to meet air traffic controller staffing needs FAA
could consider making greater use of the Air Traffic Collegiate Training
Initiative Program which could save millions of dollars annually. In
addition, FAA could save millions of dollars by eliminating redundant
ground based navigational aids.

Deciding what changes may need to be made to the Trust Fund to help ensure
a safe, efficient, and adequately funded national airspace system will
require some tough choices by Congress and FAA. One of the critical
questions that will need to be addressed is not only the amount of the
Trust Fund's uncommitted balance but also whether the government has the
fiscal capacity to fund current and future Trust Fund obligations while
concurrently addressing the needs of other competing programs for scarce
resources.

FAA and Congress will also have to find a way to better align FAA's costs
with revenue and to better address both the cost and revenue sides of the
ledger. In terms of cost savings, our past work suggests that the cost
saving initiatives that FAA has identified will not be sufficient to close
its

Concluding Observations

7 U.S. Government Accountability Office, National Airspace System:
Progress and Ongoing Challenges for the Air Traffic Organization,
GAO-05-485T (Washington, D.C.: April 14, 2005).

projected 4-year cumulative $8.2 billion shortfall. On the revenue side,
this decision-making will include the consideration of a number of
alternatives that have been proposed by various aviation stakeholders-
ranging from increasing the current taxes that accrue to the Trust Fund to
adopting user fees that would be more cost related- and the trade-offs
associated with each. We plan to review these alternatives as part of our
ongoing review of alternative approaches for funding FAA that we are doing
at the request of this Subcommittee.

This concludes my statement. I would be pleased to answer any questions
that you or other members of the Subcommittee may have.

Contacts and Acknowledgments

(540099)

For further information on this testimony, please contact Dr. Gerald
Dillingham at (202) 512-2834 or by email at [email protected].
Individuals making key contributions to this testimony include, Jay
Cherlow, Tammy Conquest, Colin Fallon, David Hooper, Maren McAvoy, and
Nicolas Zitelli.

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