National Airspace System Modernization: Observations on Potential
Funding Options for FAA and the Next Generation Airspace System  
(27-SEP-06, GAO-06-1114T).					 
                                                                 
The transition to the Next Generation Air Transportation System  
(NGATS)--a system intended to safely accommodate a possible	 
tripling of air traffic by 2025--will become one of the federal  
government's most comprehensive and technically complex 	 
undertakings, and a preliminary estimate indicates it will also  
be expensive. However, the current approach to managing air	 
transportation is becoming increasingly inefficient and 	 
operationally obsolete. In 2003, Congress authorized the creation
of the Joint Planning and Development Office (JPDO) to coordinate
the efforts of several federal partner agencies--including the	 
Federal Aviation Administration (FAA), in which JPDO is 	 
housed--to plan for and develop NGATS. GAO's testimony addresses 
(1) the current estimate and uncertainties over NGATS costs, (2) 
advantages and concerns that stakeholders have raised about the  
current approach to collecting revenues from national airspace	 
users to fund FAA, (3) the advantages and disadvantages of	 
adopting alternative funding options for FAA, and (4) the	 
advantages and disadvantages of authorizing FAA to use debt	 
financing for capital projects. This testimony is based in part  
on GAO's analysis of FAA and JPDO documents and interviews with  
officials of those two agencies.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1114T					        
    ACCNO:   A61585						        
  TITLE:     National Airspace System Modernization: Observations on  
Potential Funding Options for FAA and the Next Generation	 
Airspace System 						 
     DATE:   09/27/2006 
  SUBJECT:   Air traffic control systems			 
	     Air transportation 				 
	     Cost analysis					 
	     Cost control					 
	     Excise taxes					 
	     Federal funds					 
	     Funds management					 
	     Interagency relations				 
	     Policy evaluation					 
	     Transportation costs				 
	     Financial analysis 				 
	     Cost estimates					 
	     FAA National Airspace System Plan			 
	     Next Generation Air Transportation 		 
	     System						 
                                                                 

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GAO-06-1114T

     

     * Background
     * There is Currently No Comprehensive Estimate of NGATS Costs
     * Some Stakeholders Favor FAA's Current Funding System, but Ot
     * Alternative Funding Options for FAA Present Both Advantages
     * Debt Financing for FAA Raises Budgetary Concerns
     * Contact and Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs
     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

Testimony

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

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:00 p.m. EDT

Wednesday, September 27, 2006

NATIONAL AIRSPACE SYSTEM MODERNIZATION

Observations on Potential Funding Options for FAA and the Next Generation
Airspace System

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

Susan J. Irving Ph.D. Director, Federal Budget Analysis Strategic Issues

GAO-06-1114T

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to testify at today's hearing on potential
options for funding the transition to the next generation air
transportation system (NGATS)-a system intended to safely accommodate a
possible tripling of air traffic by 2025. As you know, in 2003, Congress
authorized the creation of the Joint Planning and Development Office
(JPDO) to coordinate efforts by several federal partner agencies
(including the Federal Aviation Administration (FAA), in which JPDO is
housed) to plan for and develop NGATS. NGATS is envisioned as a major
redesign of the air transportation system that will include precision
satellite navigation; digital, networked communications; an integrated
weather system; and layered, adaptive security. The NGATS transformation
effort will be an enormously complex undertaking, and a preliminary
estimate indicates it will also be expensive. However, the current
approach to managing air transportation is becoming increasingly
inefficient and operationally obsolete. In fact, JPDO has estimated that
failing to modernize to meet future demand for air transportation could
result in billions of dollars in economic losses to the nation.

Although JPDO is responsible for planning the transformation to NGATS and
coordinating the efforts of its partner agencies, FAA will be largely
responsible for implementing the policies and systems necessary for NGATS.
Considering how to fund the near-term sustainment or modernization of our
air transportation system takes on added importance given competing
funding demands and the federal government's long term fiscal outlook. Our
recent work, contained in a report that will be released to the public
soon,1 analyzed the current funding structure, which relies mainly on
revenues collected from national airspace system (NAS) users, and
alternative funding options.

We and others have pointed out that the federal budget is on an
unsustainable path. Although the drivers in this outlook are federal
health and retirement programs, we have also said that a fundamental
reexamination of the base of federal programs and activities is important
to create a sustainable government appropriate for the 21st century.2
Given the uncertain fiscal environment in which the air transportation
system operates, and will likely continue to operate during the
transformation to NGATS, my testimony today is designed to provide this
committee with information on a preliminary cost estimate for the NGATS
transformation and potential options for funding FAA. Specifically, my
statement today will briefly address the (1) current estimate and
uncertainties over NGATS costs, (2) advantages and concerns that
stakeholders have raised about the current approach to collecting revenues
from national airspace users to fund FAA, (3) advantages and disadvantages
of adopting alternative funding options for FAA, and (4) advantages and
disadvantages of authorizing FAA to use debt financing for capital
projects.

1GAO, Aviation Finance: Observations on Potential FAA Funding Options,
GAO-06-973 (Washington, D.C.: September 2006).

2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

To answer these questions, we reviewed relevant economic literature,
policy analysis, congressional testimony, industry group publications, and
stakeholders' responses to questions FAA asked them about its funding and
alternative options.3 We also interviewed key stakeholders, including
officials from FAA, JPDO, the Office of Management and Budget (OMB), the
Congressional Budget Office (CBO), and the Department of the Treasury
(Treasury); representatives of aviation industry groups; and academic and
financial experts. In addition, we examined FAA budget data, Airport and
Airway Trust Fund (Trust Fund) revenue data, FAA and JPDO forecasts, and
aviation activity data. We also obtained information on an estimate of
FAA's future costs under NGATS but did not review in detail the
methodology or assumptions used to develop this estimate. We conducted our
work between May 2005 and August 2006 in accordance with generally
accepted government auditing standards.

In summary:

           o  Understanding the costs involved in the transition to NGATS is
           critical to its planning and implementation, yet no comprehensive
           estimate of these costs currently exists. An FAA advisory
           committee has developed a limited, preliminary cost estimate,
           which officials have emphasized is not yet endorsed by any agency.
           This estimate suggests that with NGATS, FAA's costs would average
           about $1 billion more per year (in today's dollars) over the next
           20 years than FAA's appropriations for fiscal year 2006. However,
           the NGATS enterprise architecture (a blueprint for the systems and
           integration required under NGATS) has not yet been developed.
           Consequently, the estimate should be seen as providing only a
           sense of the order of magnitude of the potential increased costs
           to FAA. In addition, this estimate does not include the costs that
           the other partner agencies or the industry might incur in their
           implementation of NGATS systems and technologies. A more precise
           estimate of the total NGATS cost should emerge following the
           development of the NGATS enterprise architecture.
           o  Some stakeholders support the current excise tax system because
           they believe it has been successful in funding FAA, has low
           administrative costs, and distributes the tax burden in a
           reasonable manner. Others, including FAA, state that under the
           current system, there is a disconnect between the revenues
           contributed by users and the costs those users impose on the NAS
           that raises revenue adequacy, equity, and efficiency concerns.4
           Trends over the past 25 years in, and FAA's projections of, both
           inflation-adjusted fares and average plane size suggest that the
           revenue collected under the current funding system has fallen and
           will continue to fall relative to FAA's workload and costs,
           supporting revenue adequacy concerns. Comparisons of revenue
           contributed and costs imposed by different flights provide support
           for equity and efficiency concerns.
           o  Adopting alternative funding options to collect revenues from
           NAS users would have advantages and disadvantages. The degree to
           which alternative funding options could address concerns about the
           current excise tax system ultimately depends on the extent to
           which the contributions required from users actually reflect the
           costs they impose on the system. Given the diverse nature of FAA's
           activities, a combination of alternative options may offer the
           most promise for linking revenues and costs. Switching to any
           alternative funding option would raise administrative and
           transition issues, such as the need to develop the administrative
           capacity to implement new charges.
           o  Allowing FAA to use debt-financing for capital projects, such
           as the replacement of facilities and equipment associated with the
           transition to NGATS, also presents advantages and disadvantages.5
           Some stakeholders have suggested that debt-financing-such as
           bonds-could be a means of funding FAA capital projects. These
           stakeholders argue that debt-financing is attractive because an
           agency could obtain capital assets without first having to secure
           funding through the appropriation process, while at the same time
           spreading the costs out over the life of a capital project as the
           project's benefits are realized. Debt-financing raises significant
           concerns, however, because it encumbers future resources, and
           expenditures from debt proceeds may not be subject to the same
           congressional oversight as expenditures from appropriations. In
           addition, debt-financing raises issues regarding federal borrowing
           costs that are particularly important in light of the federal
           government's long-term structural fiscal imbalance.

           Background
			  
			  NGATS is envisioned as a system that will meet the needs of the
           year 2025. Planning for NGATS began in 2003, when Congress passed
           Vision 100,6 the legislation that authorized JPDO. Vision 100
           requires the office to operate in conjunction with multiple
           government agencies, including the Departments of Commerce,
           Defense, Homeland Security, and Transportation; FAA; the National
           Aeronautics and Space Administration; and the White House Office
           of Science and Technology Policy. JPDO submitted an integrated
           plan for NGATS to Congress in December 2004. In developing the
           integrated plan, the partner agencies agreed on a vision statement
           for the future system and on eight strategies that broadly address
           the goals and objectives for NGATS.

           Among its efforts, JPDO has begun developing an enterprise
           architecture-one of the most critical planning documents in the
           NGATS effort. An enterprise architecture is akin to blueprints for
           a building. It is meant to provide a common tool for planning and
           understanding the complex, interrelated systems that will make up
           NGATS. JPDO intends for the enterprise architecture to describe
           FAA's operation of the current NAS, JPDO's plans for NGATS, and
           the sequence of steps needed for the transformation to NGATS. JPDO
           expects that the enterprise architecture will provide the means
           for facilitating coordination among the partner agencies and
           private sector manufacturers, the alignment of relevant research
           and development activities, the integration of equipment, and the
           development of a more reliable cost estimate for NGATS. JPDO
           officials expect the first complete draft of the enterprise
           architecture to be issued in 2007.

           FAA, which will bear much of the responsibility for implementing
           NGATS, engages in three primary activities: aviation safety
           oversight, air traffic control (ATC), and airport infrastructure
           development.7 The costs associated with each of these activities
           generally depend on the nature of the specific service FAA
           provides and how it is used. FAA safety activities include the
           licensing of pilots and mechanics, as well as the inspection of
           various aspects of the aviation system, such as aircraft and
           airline operations. FAA states that the costs associated with
           these safety activities are primarily driven by the volume of each
           (e.g., the number of licenses and inspections). ATC includes a
           variety of complex activities to guide and control the flow of
           aircraft through the NAS. According to FAA, the costs imposed by
           each flight are influenced by the amount and nature of the
           specific services that a flight uses, and whether a flight
           operates at peak periods. FAA supports airport infrastructure
           development through the Airport Improvement Program (AIP). Unlike
           safety and ATC services, AIP expenditures are not the direct
           result of costs imposed by users of the NAS. FAA distributes AIP
           funding according to congressional priorities established in
           authorizing and appropriating legislation.

           FAA is funded through appropriations from both the Trust Fund and
           the General Fund of the U.S. Treasury (General Fund). The Trust
           Fund was established by the Airport and Airway Revenue Act of
           19708 to help fund the development of a nationwide airport and
           airway system. It provides funding for FAA's capital accounts,
           including the AIP, which is a multibillion dollar grant program
           that provides funding for airports; the Facilities and Equipment
           account, which funds technological improvements to the air traffic
           control system; and the Research, Engineering, and Development
           account, which funds continued research on aviation safety,
           mobility, and environmental issues. In addition, the Trust Fund
           supports part of FAA's operations.

           To fund these accounts, the Trust Fund is credited with revenues
           collected from system users through the following dedicated excise
           taxes:

           o  7.5 percent tax on domestic airline tickets
           o  $3.30 domestic passenger segment tax (excluding flights to or
           from rural airports)9 
           o  6.25 percent tax on the price paid for transportation of
           domestic cargo or mail10 
           o  $0.043/gallon tax on domestic commercial aviation jet fuel
           o  $0.193/gallon tax on domestic general aviation gasoline
           o  $0.218/gallon tax on domestic general aviation jet fuel
           o  $14.50/person tax on international arrivals and departures,
           indexed to inflation11 
           o  7.5 percent tax on mileage awards (frequent flyer awards tax)
           o  $7.30 per passenger tax on flights between the continental
           United States and Alaska or Hawaii (or between Alaska and Hawaii),
           indexed to inflation.12

           Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The
           ticket tax was the largest single source of Trust Fund revenue in
           fiscal year 2005, totaling about $5.2 billion, or about 48 percent
           of all Trust Fund receipts. The ticket tax was followed by the
           passenger segment tax and the international departure/arrival
           taxes, which each totaled about $1.9 billion; fuel taxes, which
           totaled $870 million; the cargo/mail tax, which totaled $461
           million; and interest income, which totaled $430 million. Figure 1
           shows the shares received from each source during fiscal year
           2005.

           Figure 1: Trust Fund Revenues by Source, Fiscal Year 2005

           In addition to Trust Fund revenues, in most years General Fund
           revenues have been used to fund FAA. The General Fund contribution
           has varied greatly, ranging from 0 percent to 59 percent of FAA's
           budget. From fiscal year 1997, the year when existing Trust Fund
           excise taxes were authorized, through fiscal year 2006, the
           General Fund contribution has averaged 20 percent of FAA's total
           budget. About $2.6 billion was appropriated for fiscal year 2006
           from the General Fund for FAA's operations. This amount represents
           about 18 percent of FAA's total appropriation.

           There is Currently No Comprehensive Estimate of NGATS Costs
			  
			  Understanding the costs involved in the transition to NGATS is
           critical to the NGATS planning effort, yet no comprehensive
           estimate of these costs has been developed. This cost information
           is particularly important to Congress, which will have the
           authority to make NGATS funding decisions. To begin estimating
           NGATS costs, JPDO is holding a series of investment analysis
           workshops with stakeholders,13 including representatives from
           commercial and business aviation; general aviation (GA); equipment
           manufacturers; ATC systems developers; airports; and regional,
           state, and local planning bodies. According to JPDO, participants
           in these workshops are asked to discuss and comment on the
           appropriateness of JPDO's current assumptions about factors that
           drive private sector costs.

           Although JPDO expects that these workshops will provide
           information to be used in developing a range of potential costs
           for NGATS, an enterprise architecture is needed to further define
           and better understand how a number of factors will drive NGATS
           costs. One of these drivers is the technologies expected to be
           included in NGATS. Some of these technologies are more complex and
           thus more expensive to implement than others. A second driver is
           the sequence for replacing current technologies with NGATS
           technologies. A third driver is the length of time required for
           the transformation to NGATS, since, according to JPDO, a longer
           period would impose higher costs. JPDO's first draft of its
           enterprise architecture could reduce some of these variables,
           thereby allowing improved estimates of NGATS costs.

           While JPDO is beginning to explore the issue of cost estimates for
           NGATS, an advisory committee to FAA-the Research, Engineering and
           Development Advisory Committee (REDAC)-has developed a limited,
           preliminary cost estimate, which officials have emphasized is not
           yet endorsed by any agency.14 REDAC estimated that FAA's budget
           under the NGATS scenario would average about $15 billion per year
           through 2025, or about $1 billion more annually (in today's
           dollars) than FAA's fiscal year 2006 appropriation. REDAC
           estimated that the cost for a status quo (i.e., no NGATS) scenario
           would also be about $15 billion per year through 2025.15 These
           estimates came out roughly equal, on average, because future FAA
           spending would be higher under NGATS than under the status quo in
           the early years but lower than under the status quo toward 2025.
           This relationship is due primarily to the expectation that, under
           the NGATS scenario, capital expenditures would be higher than
           under the status quo scenario in the near term, but operations
           costs would be lower because of productivity improvements in the
           longer term. Moreover, the NGATS cost estimate assumes that
           capital costs decrease sharply toward 2025. Officials who
           developed this estimate explained that the estimate treats NGATS
           as an isolated event. In reality, these officials acknowledge that
           planning for the subsequent "next generation" system will likely
           be underway as 2025 approaches and the actual modernization costs
           could therefore be higher in this time frame than the estimate
           indicates.

           In addition, this estimate should be viewed within the context of
           a number of factors. First, REDAC does not believe that
           maintaining the status quo is a viable option because it would
           provide insufficient capacity to meet projected future demand.
           REDAC stated that it presented the status quo option "for
           analytical purposes only since the current approach to air traffic
           control and management in use in the United States cannot be
           scaled up to handle the projected growth in traffic." In fact,
           JPDO has estimated the annual economic cost of not meeting future
           demand; by 2020, JPDO estimates this cost at $40 billion per year.
           Second, the REDAC estimate does not include the costs of the
           intermediate technology development work-a key step in developing
           NGATS.

           Last, and most important, this estimate was developed before JPDO
           completed important planning documents and does not include
           estimates of the other partner agencies' costs of implementing
           NGATS. For example, the estimate does not include costs that the
           Department of Homeland Security might incur to develop and
           implement new security technologies. JPDO's first complete
           enterprise architecture, which would include security, is not
           expected until the middle of 2007. Additional partner agency
           costs, along with other costs such as those for training of
           personnel in new technologies, must be explored to have a complete
           picture of NGATS costs.

           Some Stakeholders Favor FAAï¿½s Current Funding System, but Others
			  Raise Concerns about Revenue Adequacy, Equity, and Efficiency
			  
			  Our report on potential FAA funding options outlines several
           concerns stakeholders have raised about the current funding
           structure that supports the Trust Fund.16 Our observations from
           that report bear directly on questions about funding NGATS,
           because the bulk of the NGATS implementation-and, presumably, the
           costs of that implementation-will fall to FAA. Some stakeholders
           support the current excise tax system, stating that it has been
           successful in funding FAA, has low administrative costs, and
           distributes the tax burden in a reasonable manner. Other
           stakeholders, including FAA, state that under the current system
           there is a disconnect between the revenues contributed by users
           and the costs those users impose on the NAS that raises revenue
           adequacy, equity, and efficiency concerns. Aviation trend data,
           FAA projections, and FAA cost estimates support revenue adequacy,
           equity, and efficiency concerns. However, the extent to which
           revenue and costs are linked depends critically on how the costs
           of FAA services are assigned to NAS users. Thus, to assess the
           extent to which the current approach or any other approach aligns
           costs with revenues would require completing an analysis of costs,
           using either a cost accounting system or cost finding techniques
           to distribute costs to the various NAS users.

           Some stakeholders believe that maintaining the current funding
           structure for FAA is appropriate because it has been successful in
           funding FAA for many years, suggesting that there is no urgent
           reason to change it. According to these stakeholders, the revenues
           collected from users under the current funding system, along with
           General Fund revenues provided by the Congress, have been
           sufficient for the United States to develop a safe and efficient
           aviation system. As the number of air travelers grew, so did
           revenues going into the Trust Fund. Even though revenues fell
           during the early years of this decade as the demand for air travel
           fell, they began to rise again in 2004 (see fig. 2) and FAA
           estimates they will continue to increase. In addition, according
           to these stakeholders, the administrative costs are relatively
           low.

3In September 2005, FAA provided stakeholders with information on its
operations and costs and asked for responses to questions about how to
fund the agency.

4Stakeholders that support the current funding system include the Aircraft
Owners and Pilots Association and the National Business Aviation
Association; stakeholders that have expressed concerns about the current
funding system include the Air Transport Association and the FAA.

5In addition to debt-financing, some stakeholders have identified other
methods of funding capital investments, such as leasing or contracting out
services (e.g., flight service stations). An analysis of these other
methods was beyond the scope of this testimony.

6Pub. L. No. 108-176, Vision 100-Century of Aviation Reauthorization Act,
December 12, 2003.

7FAA is also responsible for commercial space licensing and oversight;
this line of business is beyond the scope of this testimony.

8Pub. L. No. 91-258.

9The domestic segment tax is levied on each domestic segment a passenger
travels on a flight. For example, a passenger traveling on a flight from
New York to Seattle, with a connection in Chicago, travels two
segments-one from New York to Chicago, and a second from Chicago to
Seattle. The segment tax is $3.30 in 2006; this tax rate changes annually
because it is indexed to the Consumer Price Index.

10This is also known as the waybill tax.

11The international arrival and departure taxes are $14.50 in 2006; both
rates change annually because they are indexed to the Consumer Price
Index.

12The per passenger tax on flights between the continental United States
and Alaska or Hawaii (or between Alaska and Hawaii) is $7.30 in 2006; the
rate changes annually because it is indexed to the Consumer Price Index.

13JPDO held its first workshop in April 2006 and its second workshop in
August 2006. No date has been announced at this time for the third
workshop.

14 In developing their estimate, REDAC used FAA's projected facilities and
equipment costs under an NGATS scenario as well as REDAC's own estimates
for the costs of operations; airport improvements; and research
engineering and development-the remaining three components of FAA's
appropriation.

15In this testimony, we describe REDAC's "base case" scenarios, which
assumed that FAA's operations costs would increase between 2006 and 2010,
but then remain constant through 2025 (except for inflation), as
productivity increases offset the higher cost of increased demand. The
working group also developed estimates for lower-cost "best case" and
higher-cost "worst case" scenarios using differing assumptions of
productivity gains.

16 GAO-06-973

Figure 2: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005

Notes: Trust Fund revenue is presented by fiscal year and is adjusted to
2005 constant dollars. Lapses in tax authorizations were the cause of
significant revenue decreases in 1981-1982 and 1996-1997. Enplanements are
presented by calendar year and are total system scheduled enplanements for
the United States.

Another argument for maintaining the current funding structure advanced by
some industry stakeholders and analysts is that this structure reasonably
allocates the funding burden between commercial aviation and GA. Under the
current funding structure, system users who are subject to commercial
taxes-including commercial airlines, air taxis, and many fractional
ownership operations-contribute about 97 percent of the tax revenue that
accrues to the Trust Fund. The remaining GA operators, which include
operators of purely private corporate and individual aircraft, contribute
about 3 percent. Representatives of the GA segment of the industry contend
that collecting the bulk of the user-contributed revenues from the
commercial segment is appropriate because the air traffic control system
exists at its current size to accommodate the demands of commercial
aviation and GA users should not be asked to contribute more than the
incremental costs that result from also providing services to GA aircraft.
Although the incremental costs are not precisely known, GA representatives
have told us that they believe that the revenues currently collected from
fuel taxes are a rough approximation of the incremental costs that FAA
incurs to provide services to GA aircraft. According to FAA, all of the
agency's cost studies to date have concluded that GA users pay less than
the costs they impose on the system, while commercial operators pay more
than the costs they impose on the system.

The disconnect between sources of Trust Fund revenues and FAA costs under
the current funding system raises concerns that it will not produce
adequate revenue in the future to keep pace with FAA's workload increases
and, consequently, FAA's costs. The principle of revenue adequacy requires
a funding system to produce revenues that keep pace with costs over time.
Costs for FAA are largely driven by FAA's workload. However, under the
current funding system, increases in FAA's workload will not necessarily
be accompanied by revenue increases because users are not directly charged
for the costs they impose on FAA from their use of the NAS. Rather, Trust
Fund revenues are primarily dependent on the prices of tickets (the
domestic ticket tax) and the number of passengers on a plane (the domestic
ticket tax, the domestic passenger segment tax, and the international
passenger tax); neither is related to workload, which includes controlling
flights and safety activities. Long-term industry trends and FAA forecasts
of declines in air fares and the growing use of smaller aircraft support
revenue adequacy concerns.

To illustrate the disconnect between revenues and costs, table 1 provides
an example of the revenues generated by different aircraft making similar
flights. The use of multiple flights by smaller aircraft to carry the same
number of travelers as one larger aircraft increases FAA's workload, but
will not necessarily be accompanied by increased revenues from system
users to fund the additional costs associated with the additional
workload. Example 1 shows the taxes that would be generated from
transporting 105 passengers from Los Angeles to San Francisco by (1) one
flight using a common narrow-body jet (Boeing 737), and (2) three flights
using a common regional jet (CRJ-200). In this case, the narrow-body jet
has the capacity to carry 132 passengers, while each regional jet has the
capacity to carry 48 passengers. As the table shows, differences in FAA's
workload are not reflected in the revenues. According to FAA, if all other
factors are equal (e.g., time of flight), the total ATC costs of the three
regional jet flights will be about three times the cost of one narrow-body
flight. Revenues from the three regional jet flights, however, total only
about $37, or 3 percent, more than the revenue generated by the one
narrow-body jet flight. Revenue increases are not linked to cost increases
because under the current system, revenues are primarily influenced by the
number of passengers, the average price of tickets, and the amount of fuel
used-not the costs imposed on FAA through the use of its services.

Table 1: Estimated Excise Tax Contributions from Various Flights

Approximately 300 mile flight from Los Angeles to San Francisco
                          Example #1                    Example #2
                                      Three                                   
                       One 737      CRJ-200     One 767   One 737 One Learjet 
Plane type           flight      flights      flight    flight   35 flight
Number of seats         132          144         231       132           a 
Number of                                                                  
passengers              105          105         180        89           a
Average                                                                    
                                                                  
fare ($)               $100         $100         $82       $84           a
Fuel consumed                                                              
(gallons)               937        1,797       1,646       937         190
Ticket tax             $788         $789      $1,100      $565          $0 
Passenger                                                                  
segment tax            $348         $348        $544      $270          $0
Waybill tax              $2           $0         $27        $2          $0 
Fuel tax                $40          $78         $71       $40         $41 
Total Revenue        $1,178       $1,215      $1,742      $877         $41 

Source: GAO analysis of FAA data.

aNot applicable.

The disconnect between revenues and workload can work both ways; increases
in the number of passengers on planes (e.g., larger planes or higher load
factors17) or increases in fares can result in higher revenues relative to
workload. In fact, load factors have increased over the past several
years, and fares have increased over the past year. However, long-term
trends and FAA's projections for both domestic fares and plane size
suggest that Trust Fund revenues have declined relative to FAA's workload,
and will likely continue to do so for the next several years.

Domestic airfares, adjusted for inflation, have steadily declined over the
past 25 years, from an average of $233 in 1981 to $148 in 2005.18 This
reduction represents an average decline of about 1.9 percent per year.19
Even though there have been increases in fares over the past year, FAA
projects that average fares will continue to decline over time. In FAA's
most recent forecast, inflation-adjusted domestic yields-a proxy measure
for fares-are projected to decline approximately 8.5 percent over the next
10 years.20 Trends in the average size of airplanes also suggest the Trust
Fund is collecting less revenue relative to workload than in the past, and
FAA projections suggest this decline will continue. Since smaller planes
carry fewer passengers and burn less fuel, reductions in average plane
size mean that lower ticket tax, segment tax, and fuel tax revenue accrues
to the Trust Fund relative to FAA's workload.

17A load factor is the percentage of a flight's total available seat miles
used to transport passengers.

18We have adjusted airfare data to 2005 dollars.

In addition to revenue adequacy issues, the disconnect between revenues
contributed and costs imposed also raises equity issues. Example 2 in
table 1 shows FAA's estimates of the revenue contributions made by various
flights. Since FAA estimates that similar flights impose similar costs on
the agency, the substantial differences in the revenue contributions of
these flights raise issues of fairness. One such issue is that similar
commercial flights may contribute very different amounts of revenue. In
this example, a 767 flight contributes nearly twice as much as the 737
flight. A second equity issue is the fairness of the distribution of the
funding burden between commercial airlines and GA operators. Domestic
commercial passenger flights21 are subject to, among other potential
excise taxes, the passenger ticket tax, the passenger segment tax, the
cargo waybill tax, and the jet fuel tax. GA flights (excluding those that
carry commercial passengers) are subject only to a fuel tax. As a result,
the revenue contributions of similar commercial and private GA flights may
be substantially different. In this example, a private Learjet flight
contributes approximately $40, while the commercial flights of a 767 and a
737 contribute $1,742 and $877, respectively.

Although commercial and GA flights might receive the same services from
FAA, suggesting that the large difference in revenue contribution raises
equity concerns, there is debate over whether commercial and GA flights
should be assigned the same costs for similar flights because of
disagreements about how to assign the fixed costs associated with the ATC
system. Commercial aviation industry representatives favor assigning those
costs among all system users in proportion to their use of the system. GA
representatives, on the other hand, state that the system exists at its
present size to serve the needs of the commercial aviation industry, and
that GA should be assigned only the incremental costs that would not exist
apart from the need to serve GA. Without a consensus on how to assign ATC
costs among users, it is not possible to assess the extent to which the
current approach or any other results in a distribution of the funding
burden between commercial airlines and GA operators that approximates the
distribution of costs attributable to those groups.

19This is the annual compounded rate of decline.

20Yield is the amount of money an airline collects for every mile a
passenger travels.

21 This includes some flights typically considered GA flights, such as air
taxis and some fractional ownership operations.

Finally, the disconnect between revenues contributed and costs imposed
raises efficiency issues. For users to make efficient decisions about
their use of the NAS, their price for using the system (the taxes or
charges they pay) should accurately reflect the costs their use imposes on
the system. Existing price differences suggest that the current funding
structure creates incentives for inefficient use of the NAS. Users who pay
more in taxes than the costs they impose may use the system less than is
optimal, while those who pay less than the costs they impose may use the
system more than is optimal. An airline's decision about how many flights
to operate to serve a market illustrates how the current system does not
provide incentives for efficient use of the system. In example 1 from
table 1 (the same one used for the revenue adequacy discussion), an
airline is deciding how many daily flights to operate for the Los Angeles
to San Francisco market. It estimates that the market demand at the fare
it is charging totals 105 passengers per day, and faces the choice of
providing one daily flight with a narrow-body jet (Boeing 737), or three
daily flights with a regional jet (CRJ-200)-assuming all flights depart
during peak periods. In this scenario, the revenue collected from three
regional jet flights-$1,215-is about 3 percent more than the revenue
collected from one narrow-body jet flight-$1,178. FAA states however, that
each flight would impose similar costs on the agency, so FAA's costs would
be roughly 3-times more for the three regional jet flights than for the
one medium jet flight. In this example, however, there is little financial
incentive ($37) for the airline to avoid imposing additional costs on FAA
by using one flight instead of three flights.

 Alternative Funding Options for FAA Present Both Advantages and Disadvantages

Alternative options for funding FAA-which includes funding NGATS because
the bulk of its implementation (and, presumably, its costs) will fall on
FAA-have advantages and disadvantages. The degree to which alternative
funding options could address concerns about the current excise system
ultimately depends on the extent to which the contributions required from
users reflect the costs they actually impose on the system.22 Our
forthcoming report on options for funding FAA will examine six options,
including two that would modify the current excise tax structure and four
that would adopt more direct charges to users. This testimony briefly
summarizes our observations for two of those six options.23

One example of a possible modification to the current system would be to
increase the current aviation fuel taxes-which levy a specific amount per
gallon of fuel-to replace revenue lost by eliminating the remaining excise
taxes and charges. Fuel taxes compare favorably with other existing excise
taxes from a revenue adequacy perspective because they are more directly
linked to workload; all things being equal, increases in workload over
time would likely result in fuel tax revenue increases. Over time,
however, the incentive a fuel tax creates to conserve fuel and make
technological advances-while beneficial-is likely to erode the fuel tax's
ability to generate revenue. Thus, it is likely the fuel tax rate would
have to be raised from time to time to ensure adequate revenue in the long
run. The extent to which a fuel tax would address equity issues appears to
be limited. Although FAA states that there is a correlation between the
time a plane spends in the NAS and fuel consumption, the extent to which
fuel consumption correlates with the costs imposed on FAA has not been
established. First, there may be a relationship between time in the system
and en-route control costs, but the relationship between time in the
system and the costs of other FAA activities, such as terminal costs, is
not obvious. Second, even if the fuel tax were limited to funding en-route
costs, the connection between fuel consumption and those costs appears to
be incomplete. For example, since heavier planes burn more fuel per mile
than lighter planes, they would be required to contribute more for
spending the same amount of time in the system. As with equity issues, the
potential for a fuel tax to address efficiency issues appears limited
because the connection between revenues and costs is incomplete. A fuel
tax can create an incentive for operators to minimize their fuel
consumption, and therefore their time in the NAS. To the extent that time
in the system correlates with costs imposed, this incentive can lead to
improved efficiency. However, any relationship between time in the system
and costs imposed on FAA appears to be limited to en-route control costs.

22It is important to note that without more detailed information and an
understanding of the costs different flights impose on the NAS, any
assessment of the current system or alternative funding options is only
preliminary. The degree to which alternative funding options could address
revenue adequacy, equity, and efficiency concerns, relative to the current
system, ultimately depends on the extent to which the contributions
required from users actually reflect the costs they impose on the system.
More precise assessments of the current or alternative funding options are
possible only if cost finding techniques are used throughout FAA.

23 The other four funding options considered in the forthcoming report are
(1) weight/distance fees, (2) flight segment fees, (3) certification fees,
and (4) increasing the passenger segment tax to replace revenues lost from
the elimination of the passenger ticket tax.

En-route charges represent an option to switch to a more direct user
charge. Such a charge would be based on the time users spend in the NAS or
the distance they travel through the NAS. An en-route charge, relative to
the current funding system, would be likely to improve the system's
revenue adequacy because it could incorporate a cost component into the
charging formula that could be adjusted regularly to reflect any changes
in costs. This approach could ensure, over time, that revenues match
costs. As with the fuel tax, the ability of en-route charges to address
equity and efficiency issues raised by the current system appears to be
limited. According to FAA, there is a strong relationship between time and
distance in the system and the en-route costs imposed by users. Thus, if
en-route charges were limited to funding en-route control costs, they
might address equity issues raised by the current system by equating
charges to costs imposed, depending on how costs are assigned.
Furthermore, en-route charges for en-route control would create clear
financial incentives to use the system more efficiently; less use of the
system would lead to proportionately lower charges. However, there is no
obvious relationship between time or distance in the system and other FAA
activities-terminal control services and safety activities. As a result,
if en-route charges were used to fund all FAA activities, their ability to
address equity and efficiency issues is unclear.

Switching to any alternative funding option would raise administrative and
transition issues. For example, any cost-based funding system would
require FAA to complete the appropriate cost analysis using either a cost
accounting system or cost finding techniques. Some stakeholders who
support the adoption of direct user charges also support a change in FAA's
governance structure-for example, commercializing air navigation
services-but we found no evidence that the adoption of direct charges
would require a governance change. Recent reforms in France show how a
government agency has moved toward a cost-based system to fund the air
navigation services it provides without changing the underlying governance
structure.

Using a combination of workload-related taxes or charges to fund FAA might
best address the revenue adequacy, equity, and efficiency concerns
associated with the current funding structure, given that the costs of
FAA's ATC and safety activities are driven by different factors. No single
option that we reviewed creates a direct link between revenues and all
components of FAA's activity costs. Fuel taxes, weight/distance charges,
or en-route charges based on time or distance spent in the NAS could be
used to create a more direct link with FAA's costs of providing en-route
ATC services. A segment tax for passengers or a flight segment charge
could be used to create a more direct link with the costs of FAA's
terminal services. Certification charges could be used to create a more
direct link with the costs of FAA's various safety-related activities.
Thus, some combination of options, such as en-route charges to fund
en-route costs, flight segment charges to fund terminal control costs, and
certification charges to fund some safety costs, might best address
concerns with the current system by providing a better link between
revenues and costs than any of these options used separately. According to
one stakeholder, however, state that the administrative expense of using
multiple funding options might outweigh the benefits of such an approach.
According to FAA, other air navigation service providers, such as those in
the European Union, have been able to administer direct charges without
incurring excessive administrative costs.

                Debt Financing for FAA Raises Budgetary Concerns

Over the years, agencies have used a variety of financing approaches to
acquire capital assets. All of these approaches have both advantages and
disadvantages. From an agency's perspective, acquiring needed capital
without first having to secure sufficient appropriations to cover the full
cost of the asset is very attractive, especially in an era of limited
resources and growing mission demands. However, from a governmentwide
perspective, such approaches-including debt financing-raise serious
concerns because they ultimately may result in higher overall costs. Given
the federal government's long-term structural fiscal imbalance, any action
that may increase costs requires sound justification and careful
consideration before it is adopted.

Supporters of debt financing for FAA cite a number of advantages. One is
the argument that debt financing could provide FAA with a stable and
predictable revenue source for funding capital developments. FAA officials
state that the uncertainty associated with the appropriation process makes
planning for a large, complex, and expensive air traffic control system
difficult. Another cited advantage is that debt financing would allow the
costs of capital projects to be repaid as the benefits are received,
better aligning costs and benefits. Finally, supporters of debt financing,
including some investment firms, state that the private capital market may
offer disciplinary mechanisms-such as bond covenants-that may encourage
FAA to finance itself more efficiently. Treasury officials question
whether the private capital market would provide any market discipline to
FAA debt obligations because investors may perceive that the obligations
are backed by the federal government and not just agency revenues.

If Congress allowed FAA to use debt financing, it could grant statutory
authority for FAA to borrow either through the Treasury or directly from
the private capital market. In either case, for FAA to use debt financing,
Congress would have to provide the agency with statutory authority to
borrow. There is variation in the legal, financial, and structural ways
borrowing authorities for other government entities have been established.
For example, some government entities produce their own revenue to pay for
borrowing costs, whereas others pay with appropriations.24 Federal
entities that have borrowing authority include the Bonneville Power
Administration (BPA), the U.S. Postal Service, and the Tennessee Valley
Authority.25 If FAA were provided with borrowing authority, all revenue
options to repay the funds-excise taxes, user fees, or
appropriations-could be considered. According to some investment banks and
the Treasury, no organizational changes such as a change to a government
corporation or corporate entity would be needed.

The use of debt financing by FAA to pay for capital projects raises
budgetary concerns. If Congress grants FAA borrowing authority, the
associated costs are likely to be higher if the agency borrows directly
from the private capital market instead of through the Treasury. According
to Treasury and representatives of investment firms, the Treasury would
likely be charged a lower interest rate to borrow money from the private
capital market than FAA and thus could pass along these lower costs to
FAA. Interest rates charged to FAA would likely be higher because bonds
issued by FAA would likely be viewed as a greater credit risk than
Treasury bonds because debt issued by the Treasury is backed by the full
faith and credit of the U.S. government, while FAA debt would not be.
Instead, FAA debt would be backed by specific revenue sources. In
addition, if FAA borrowed directly from the private capital market, the
transaction costs of borrowing would likely be higher than if FAA borrowed
through the Treasury; investment banks that serve as debt underwriters
charge fees for these services, while the Treasury would charge a minimal
administrative fee, if any. Given these advantages, Treasury officials
told us that it is the department's long-standing policy that all debt
issued by federal entities, including FAA, should be issued solely to the
Treasury because centralized financing of all such debt through the
department is the least expensive, most efficient means of financing this
debt. If FAA capital spending is financed through appropriations and
results in an increase to the deficit, the cost to the government is
comparable to the costs of borrowing through the Treasury.26

24GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More
Selectively, GAO-AFMD-89-4 (Washington, D.C.: Sept. 15, 1989).

25BPA is a self-supporting agency in the Department of Energy that borrows
from the Treasury, which in turn borrows from the public, to finance
capital investments, such as new transmission facilities that it owns. BPA
receives no appropriations and is solely funded by revenues from power
sales, which it uses to finance its operations and to make debt payments.
BPA received direct borrowing authority from Congress in 1974 and has a
borrowing cap of $4.5 billion. Because it is a federal agency that is
performing a federal function, it is borrowing for federal purposes, and
its assets are federally owned, the interest rate on BPA debt to Treasury
is equal to the rate on debt of comparable maturity issued by government
corporations.

Borrowing costs are particularly important in light of the federal
government's long-term structural fiscal imbalance. Absent a change in
policy, federal health and retirement programs will consume an ever
increasing share of the nation's federal budgetary resources and gross
domestic product, placing severe pressures on all discretionary programs,
including those that fund defense, education, and transportation. Our more
optimistic simulations show that by 2040, federal revenues as a share of
the economy will not be sufficient to cover any discretionary programs-and
that balancing the budget could require raising taxes by almost 60 percent
or reducing federal spending by about a third. Accordingly, any program or
policy change that may increase costs requires sound justification and
careful consideration before adoption.

26Although funding through appropriations might appear less costly to FAA
because borrowing from the Treasury would require FAA to make interest
payments to the Treasury, from the broader perspective of the federal
government as a whole, there is no difference if the government is running
a deficit.

Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions that you and Members of the Subcommittee may have.

                       Contact and Staff Acknowledgments

For further information on this testimony, please contact Gerald
Dillingham at (202) 512-2834 or [email protected] . Individuals making
key contributions to this statement include Ashley Alley, Jay Cherlow,
Maria Edelstein, Colin Fallon, Carol Henn, David Hooper, Andrew
Huddleston, Edmond Menoche, Faye Morrison, and Rich Swayze.

(540137)

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www.gao.gov/cgi-bin/getrpt? GAO-06-1114T .

To view the full product, click on the link above. For more information,
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Highlights of GAO-06-1114T , a testimony before the Subcommittee on
Aviation, Committee on Transportation and Infrastructure, House of
Representatives

September 27, 2006

NATIONAL AIRSPACE SYSTEM MODERNIZATION

Observations on Potential Funding Options for FAA and the Next Generation
System

The transition to the Next Generation Air Transportation System (NGATS)-a
system intended to safely accommodate a possible tripling of air traffic
by 2025-will become one of the federal government's most comprehensive and
technically complex undertakings, and a preliminary estimate indicates it
will also be expensive. However, the current approach to managing air
transportation is becoming increasingly inefficient and operationally
obsolete. In 2003, Congress authorized the creation of the Joint Planning
and Development Office (JPDO) to coordinate the efforts of several federal
partner agencies-including the Federal Aviation Administration (FAA), in
which JPDO is housed-to plan for and develop NGATS.

GAO's testimony addresses (1) the current estimate and uncertainties over
NGATS costs, (2) advantages and concerns that stakeholders have raised
about the current approach to collecting revenues from national airspace
users to fund FAA, (3) the advantages and disadvantages of adopting
alternative funding options for FAA, and (4) the advantages and
disadvantages of authorizing FAA to use debt financing for capital
projects.

This testimony is based in part on GAO's analysis of FAA and JPDO
documents and interviews with officials of those two agencies.

No comprehensive estimate of NGATS costs has been developed. However, an
advisory committee to FAA has developed a limited, preliminary cost
estimate, which has not yet been endorsed by any agency. This estimate
suggests that with NGATS, FAA's costs would average about $1 billion more
per year (in today's dollars) over the next 20 years than FAA's
appropriations for fiscal year 2006. The estimate is preliminary in part
because JPDO has not yet completed its enterprise architecture, (a
blueprint for NGATS) which will be needed to inform a reliable cost
estimate.

Some stakeholders support the current excise tax system because they
believe it has been successful in funding FAA, has low administrative
costs, and distributes the tax burden in a reasonable manner. Others,
including FAA, state that under the current system, there is a disconnect
between the revenues contributed by users and the costs those users impose
on the national airspace system (NAS) that raises revenue adequacy,
equity, and efficiency concerns. Trends over the past 25 years in, and
FAA's projections of, both inflation-adjusted fares and average plane size
suggest that the revenue collected under the current funding system has
fallen and will continue to fall relative to FAA's workload, supporting
revenue adequacy concerns.

Adopting alternative funding options to collect revenues from NAS users
would have advantages and disadvantages. The degree to which alternative
funding options could address concerns about the current excise tax system
ultimately depends on the extent to which the contributions required from
users actually reflect the costs they impose on the system. Given the
diverse nature of FAA's activities, a combination of alternative options
may offer the most promise for linking revenues and costs.

Allowing FAA to use debt-financing for capital projects, such as the
replacement of facilities and equipment associated with the transition to
NGATS, also presents advantages and disadvantages. Some stakeholders see
debt financing as attractive because they believe it could provide FAA
with a stable source of revenue to fund capital developments, while at the
same time spreading the costs out over the life of a capital project as
its benefits are realized. Debt-financing raises significant concerns,
however, because it encumbers future resources, and expenditures from debt
proceeds may not be subject to the same congressional oversight as
expenditures from appropriations. Concerns about borrowing costs,
oversight, and encumbering future resources are particularly important in
light of the federal government's long-term structural fiscal imbalance.

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800 U.S.
Government Accountability Office, 441 G Street NW, Room 7149 Washington,
D.C. 20548
*** End of document. ***