Aviation Finance: Observations on Potential FAA Funding Options  
(29-SEP-06, GAO-06-973).					 
                                                                 
The Federal Aviation Administration (FAA), the Airport and Airway
Trust Fund (Trust Fund), and the excise taxes that support the	 
Trust Fund are scheduled for reauthorization at the end of fiscal
year 2007. FAA is primarily supported by the Trust Fund, which	 
receives revenues from a series of excise taxes paid by users of 
the national airspace system (NAS). The Trust Fund's uncommitted 
balance decreased by more than 70 percent from the end of fiscal 
year 2001 through the end of fiscal year 2005. The remaining	 
funding is derived from the General Fund. This report focuses on 
the portion of revenues generated from users of the NAS and	 
addresses the following key questions: (1) What advantages and	 
concerns have been raised about the current approach to 	 
collecting revenues from NAS users to fund FAA, and to what	 
extent does available evidence support the concerns? (2) What are
the implications of adopting alternative funding options to	 
collect the revenues contributed by users that fund FAA's budget?
(3) What are the advantages and disadvantages of authorizing FAA 
to use debt financing for capital projects? This report is based 
on interviews with relevant federal agencies, including FAA, the 
Office of Management and Budget, and the Congressional Budget	 
Office. GAO also obtained relevant documents from these agencies,
other key stakeholders, and academic and financial experts.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-973 					        
    ACCNO:   A61724						        
  TITLE:     Aviation Finance: Observations on Potential FAA Funding  
Options 							 
     DATE:   09/29/2006 
  SUBJECT:   Aviation						 
	     Cost analysis					 
	     Excise taxes					 
	     Federal funds					 
	     Financial analysis 				 
	     Policy evaluation					 
	     Strategic planning 				 
	     User fees						 
	     Airport and Airway Trust Fund			 

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GAO-06-973

     

     * Results in Brief
     * Background
          * FAA Funding
          * Congressionally Authorized Commission Recommended Changes in
     * Some Stakeholders Favor the Current Funding System, but Othe
          * Stakeholders Who Favor Maintaining the Current Funding Struc
          * Disconnect between Trust Fund Revenues and FAA Costs Raises
          * Some Stakeholders Have Raised Equity Concerns with the Curre
          * Current Funding System Lacks Strong Incentives to Encourage
     * Alternative Funding Options Present Both Advantages and Disa
          * Modifications to the Current System
               * Fuel Taxes
               * Passenger Segment Tax
          * Direct Charges
               * Weight/Distance Charges
               * En-route Charges
               * Flight Segment Charges
               * Certification Charges
          * Combining Funding Options Might Best Address Concerns
          * Cost-Based Charges Can Be Imposed under FAA's Current Govern
     * Alternative Capital Financing Methods Have Advantages and Di
          * Some Stakeholders Believe Debt Financing Offers Advantages
          * FAA Could Borrow from the Treasury or the Private Capital Ma
          * Debt Financing Raises Budgetary Concerns
     * Agency Comments
     * Appendix I: Scope and Methodology
     * Appendix II: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Staff Acknowledgments
               * Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

September 2006

AVIATION FINANCE

Observations on Potential FAA Funding Options

GAO-06-973

Contents

Letter 1

Results in Brief 2
Background 4
Some Stakeholders Favor the Current Funding System, but Others Raise
Revenue Adequacy, Equity, and Efficiency Concerns 11
Alternative Funding Options Present Both Advantages and Disadvantages 22
Alternative Capital Financing Methods Have Advantages and Disadvantages 32
Agency Comments 39
Appendix I Scope and Methodology 43
Appendix II GAO Contact and Staff Acknowledgments 45

Tables

Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet Flight
Compared with Three Regional Jet Flights 14
Table 2: Estimated Excise Tax Contribution by Flight Type 18
Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet Flight
Compared with One Regional Jet Flight 21

Figures

Figure 1: FAA Activities 5
Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005 8
Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years
1971-2005 9
Figure 4: General Fund and Trust Fund Contributions to FAA's Budget 10
Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005 12
Figure 6: Average Domestic Fares, 1981-2005 16
Figure 7: Average Available Seats per Domestic Aircraft 17
Figure 8: Potential FAA Process for Borrowing from the Treasury 34
Figure 9: Potential FAA Process for Borrowing from the Private Capital
Market 35

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Abbreviations

AIP Airport Improvement Program

AOPA Aircraft Owners and Pilots Association

ARTCC air route traffic control center

ATC air traffic control

BPA Bonneville Power Administration

CBO Congressional Budget Office

DOT Department of Transportation

FAA Federal Aviation Administration

GA general aviation

GO general obligation bond

GR general revenue bond

GAO Government Accountability Office

GARVEE Grant Anticipation Revenue Vehicle

IRS Internal Revenue Service

NAS National Airspace System

OMB Office of Management and Budget

SARS Severe Acute Respiratory Syndrome

TRACON terminal radar approach control center

TVA Tennessee Valley Authority

United States Government Accountability Office

Washington, DC 20548

September 29, 2006

Congressional Committees

The Federal Aviation Administration (FAA), the Airport and Airway Trust
Fund (Trust Fund), and the excise taxes that support the Trust Fund are
scheduled for reauthorization at the end of fiscal year 2007. Although
there have been fluctuations in its funding sources, FAA is primarily
supported by the Trust Fund (82 percent),1 which receives revenues from a
series of excise taxes paid by users of the National Airspace System
(NAS). The Trust Fund's uncommitted balance decreased by more than 70
percent from the end of fiscal year 2001 through the end of fiscal year
2005. These excise taxes apply to purchases of airline tickets and
aviation fuel, as well as the shipment of cargo. FAA's remaining funding
comes from the General Fund of the U.S. Treasury (General Fund) (18
percent). The policy debate over the reauthorization of FAA, the Trust
Fund, and the excise taxes that fund it encompasses a host of critical and
complex issues, including the modernization of the nation's air traffic
control (ATC) infrastructure and FAA's efforts to improve cost control and
internal management practices. The agency's reliance on revenues from both
users and the General Fund recognizes that FAA produces direct benefits
for NAS users and substantial public benefits, including safety, security,
and economic benefits. Stakeholders we talked with all agreed that these
public benefits justify a continued General Fund contribution to FAA's
budget. However, a key issue raised in the debate over FAA funding, and
the focus of this report, is how the revenues generated from users of the
NAS might be collected.2 Stakeholders are divided over whether Congress
should continue to rely on the current excise tax structure or adopt an
alternative structure to collect the funding contributed by users.

You requested that we examine FAA's current funding system and alternative
funding options. Accordingly, we addressed the following key questions:
(1) What advantages and concerns have been raised about the current
approach to collecting revenues from NAS users to fund FAA, and to what
extent does the available evidence support the concerns? (2) What are the
implications of adopting alternative funding options to collect the
revenues contributed by users that fund FAA's budget? (3) What are the
advantages and disadvantages of authorizing FAA to use debt financing for
capital projects?

1These percentages reflect FAA's revenue composition in fiscal year 2006;
from fiscal year 1997, the year the current tax structure became
effective, through fiscal year 2006, the Trust Fund has contributed an
average of 80 percent of FAA's budget, while General Fund contributions
have averaged 20 percent.

2This report does not address the question of what proportion of FAA's
budget should be derived from the General Fund because of the public
benefits created by FAA activities.

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, 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, Trust Fund
revenue data, FAA forecasts, and aviation activity data. We reviewed the
reliability of these data and concluded that they were sufficiently
reliable for our purposes. We conducted our work from May 2005 through
August of 2006 in accordance with generally accepted government auditing
standards. Details of our scope and methodology are provided in appendix
1.

                                Results in Brief

Some stakeholders4 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,5
including FAA, state that under the current system there is a disconnect
between the revenues contributed by users and the costs they impose on the
NAS. In their view, this disconnect raises revenue adequacy, equity, and
efficiency concerns. Trends over the past 25 years in, and FAA 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.
However, the extent to which revenues and costs are linked depends
critically on how costs 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 techniques6 to assign costs to
the various NAS users.

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.

5Stakeholders that have expressed concerns about current funding system
include the Air Transport Association and the FAA.

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. This report
reviews both modifications to the current excise tax system and more
direct charges based on the use of FAA's services. 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 developing the administrative capacity to implement new
charges. 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.

Authorizing FAA to use debt financing for capital projects would have
advantages and disadvantages. The use of debt financing-such as bonds-has
been identified by some stakeholders as a means of funding FAA capital
projects, such as components of the Next Generation Air Transportation
System (NGATS) or existing ATC facilities and equipment.7 Some
stakeholders believe debt financing is attractive because it could provide
FAA with a stable source of revenue to fund capital development and, at
the same time, spread 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 congressional oversight that
appropriations receive. In addition, debt financing is subject to federal
budget scoring rules and raises issues regarding borrowing costs that are
particularly important in light of the federal government's long-term
structural fiscal imbalance.

6Cost finding techniques produce cost data by analytical or sampling
methods and typically involve analyses of available cost data using
spreadsheet applications or manual calculations.

7In 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 report.

We provided a draft of this report to the Departments of Transportation
(DOT) and the Treasury for review and received comments from both
agencies. Neither DOT nor Treasury explicitly agreed or disagreed with our
observations, and both departments raised a number of concerns and
provided technical clarifications. We incorporated these comments and
technical clarifications throughout the report as appropriate, or
responded to them in the agency comments section at the end of the report.

                                   Background

FAA engages in three primary activities: aviation safety oversight, ATC,
and airport infrastructure development (see fig. 1).8 The costs associated
with each of these activities generally depend on the nature and usage of
the specific service FAA provides. 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.
According to FAA, the costs associated with these safety activities are
primarily driven by the volume of each (e.g., the number of licenses and
inspections).

8FAA is also responsible for commercial space licensing and oversight;
this line of business is beyond the scope of this report.

Figure 1: FAA Activities

ATC includes a variety of complex activities that guide and control the
flow of aircraft through the NAS. Generally, commercial aircraft fly under
instrument flight rules (IFR) that require ATC services throughout a
flight. Such flights rely on FAA staff in control towers to guide them
from the terminal to the runway, and through takeoff. Once in the air and
beyond the immediate vicinity of the airport, they rely on terminal radar
approach control centers (TRACONs) to guide them out of the airspace in a
broader area surrounding the airport.9 Services provided by control towers
and TRACONs are referred to as terminal services. The TRACONs then pass
flights off to air route traffic control centers (ARTCC), which provide
en-

9Depending on the airport's location, the approach control facilities may
be located within the airport's control tower or at separate facilities.

route control until the flights near their destinations; services provided
by ARTCCs are referred to as en-route services. When a flight nears its
destination, control is passed back to a TRACON, and then to tower
guidance, to land and proceed to an airport gate. General aviation's (GA)
use of these services varies greatly. Nearly all business jet flights file
flight plans for IFR services, as do roughly half of GA piston flights.
Many GA flights operate entirely under visual flight rules (VFR) and may
not require any ATC services at all if they do not fly to airports that
have towers. These other GA flights may require ground control, or rely on
beacons or flight service stations en route. FAA states that the costs
imposed by each flight are influenced by the amount and nature of the
specific services it uses, and by whether the flight operates at peak
periods.

FAA funds airport infrastructure development through the Airport
Improvement Program (AIP). AIP is a multibillion-dollar grant program that
provides funding for the airports included in FAA's National Plan of
Integrated Airport Systems, which includes airports that range from the
largest commercial service airports in the United States to small GA
airports. Unlike safety and ATC services, AIP expenditures are not the
direct result of costs imposed by users of the NAS. FAA distributes AIP
funding based on congressional priorities established in authorizing and
appropriation legislation. Accordingly, apart from some relatively small
administrative expenses, FAA's spending for AIP does not represent a
"cost" of providing services to users. Therefore, it is not possible to
establish a direct link between AIP expenditures and taxes or charges paid
by system users based on their use of FAA services.

FAA Funding

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. The Trust Fund provides funding for FAA's two capital
accounts, AIP and the Facilities and Equipment account, which funds
technological improvements to the ATC system. The Trust Fund also provides
funding for 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 ticket tax on domestic airline tickets

           o  $3.30 domestic passenger segment tax (excluding flights to or
           from rural airports)10

           o  6.25 percent tax on the price paid for transportation of
           domestic cargo or mail11

           o  $0.043/gallon tax on domestic commercial aviation fuel

           o  $0.193/gallon tax on domestic GA gasoline

           o  $0.218/gallon tax on domestic GA jet fuel

           o  $14.5012/person tax on international arrivals and departures,
           indexed to inflation

           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 inflation13

           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 passenger 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 2 shows the shares received from each source in
           fiscal year 2005.

           Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005

           Since the Trust Fund's creation in 1970, revenues have, in
           aggregate, exceeded spending commitments, resulting in a surplus
           or an uncommitted balance, although expenditures from the Trust
           Fund exceeded revenues in 2005.14 The Trust Fund's uncommitted
           balance, which was about $1.9 billion at the end of fiscal year
           2005, depends on the revenues flowing into the fund and the
           appropriations made available from the fund for various spending
           accounts. Policy choices, structural changes in the aviation
           industry, and external events have affected revenues flowing into
           and out of the fund. For example, the uncommitted balance has been
           declining in recent years because Trust Fund revenues for the last
           5 years have been less than FAA's forecasted levels.15 Figure 3
           shows the fluctuations in the Trust Fund's uncommitted balance
           since its inception.

10The 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 rate was $3.30 in 2006; this tax rate changes
annually as it is indexed to the Consumer Price Index.

11This is also known as the waybill tax.

12The international arrival and departure tax rates are $14.50 in 2006;
both rates change annually because they are indexed to the Consumer Price
Index.

13The per passenger tax on flights between the continental United States
and Alaska or Hawaii (or between Alaska and Hawaii) is $7.30 in 2006; this
rate changes annually because it is indexed to the Consumer Price Index.

14The Trust Fund's uncommitted balance represents money against which
there is no outstanding budget commitment or budget authority to spend.

15For a more complete discussion of the Trust Fund, see GAO, Federal
Aviation Administration: An Analysis of the Financial Viability of the
Airport and Airway Trust Fund, GAO-06-562T (Washington, D.C.: Mar. 28,
2006).

Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years
1971-2005

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 (see fig.
4). 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.

Figure 4: General Fund and Trust Fund Contributions to FAA's Budget

Congressionally Authorized Commission Recommended Changes in FAA's Funding
Structure

The National Civil Aviation Review Commission (Commission) issued a
Congressional report in 1997 analyzing several issues, including
alternative funding means to meet the needs of the nation's aviation
system. The Commission's report16 identified a number of concerns with
FAA's funding structure as it existed at the time the Commission began its
work.17 To address these concerns, the Commission made several unanimous
recommendations, including that FAA's revenues be more closely linked to
the costs of services provided to support ATC activities, including
capital investments. The Commission also recommended that General Fund
revenues be used to fund aviation security and safety activities and
government use of the air traffic system, and that GA operators continue
to pay a fuel tax, although perhaps at a higher rate.

16National Civil Aviation Review Commission, Avoiding Aviation Gridlock
and Reducing the Accident Rate: A Consensus for Change (Washington, D.C.:
Dec. 1997).

17 The following changes were made after the Commission began its work but
before it issued its final report: the passenger segment tax was added;
the passenger ticket tax was reduced from 10 percent to 7.5 percent; the
international departure tax was increased from $6 to $12 and was also
applied to international arrivals; the frequent flyer tax was added; and
the Hawaii/Alaska passenger taxes were added.

  Some Stakeholders Favor the Current Funding System, but Others Raise Revenue
                   Adequacy, Equity, and Efficiency Concerns

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, the disconnect between
the revenues contributed by users and the costs they impose on the NAS
raises revenue adequacy, equity, and efficiency concerns. Trends 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. However, the extent to which revenue and costs are
linked depends critically on how the costs of FAA's services are assigned
to NAS users. Thus, assessing 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. FAA stated that
it has made substantial progress in designing a cost accounting system,
implementing it throughout its lines of business, and modifying it to
determine costs by user group.

Stakeholders Who Favor Maintaining the Current Funding Structure Cite Its
Success and Reasonable Allocation of Funding Burden

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
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 fiscal year 2004 (see fig. 5); FAA estimates that
revenues will continue to increase. In addition, these stakeholders state
that administrative costs of the current system are relatively low.

Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005

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

Another argument put forward by some industry stakeholders and analysts
for maintaining the current funding structure is that this structure
provides a reasonable allocation of the funding burden between commercial
aviation and GA. With the current funding structure, system users who are
subject to the 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, including those who operate 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 ATC 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 from providing services to GA aircraft.
According to FAA, all cost studies to date concluded that GA users pay
less than the costs they impose on the system, while commercial aviation
users pay more than the costs they impose on the system.

Disconnect between Trust Fund Revenues and FAA Costs Raises Concerns That
Revenues Will Not Keep Pace with Workload Increases under the Current System

The disconnect between sources of Trust Fund revenues and FAA costs under
the current funding system raises concerns that the current system 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
commensurate with workload changes over time. However, under FAA's 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 of these factors are directly related to workload,
which is driven by flight control 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.18

To illustrate the disconnect between revenues and costs, table 1 provides
an example of 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 FAA's additional costs associated with the workload
increase. This example 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.

18In addition to revenue adequacy, a criterion that economists often use
to compare funding methods is year-to-year revenue stability, which
generally refers to the degree to which both short-term fluctuations in
economic activity and other factors not directly linked to the business
cycle affect the level of revenue collected from a funding source. Revenue
stability has been an important concern for FAA's funding because of the
impact of the September 11, 2001, terrorist attacks, the war in Iraq and
associated security concerns, the Severe Acute Respiratory Syndrome (SARS)
outbreak, and global recessions on the demand for air travel, and,
therefore, on the revenues flowing into the Trust Fund (see GAO-06-562T ).
However, the revenue stability concern will likely exist in a roughly
similar way under each of the options we reviewed because significant
decreases in demand are likely to decrease revenues whether they are
derived from excise taxes on aviation-related activities or from direct
user charges. Thus, in this report, we do not address revenue stability
because it is not likely to vary much across options, including the
current funding system.

Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet Flight
Compared with Three Regional Jet Flights

Approximately 300-mile flight from Los Angeles to San Francisco
Plane type                 One 737 flight Three CRJ-200 flights 
Number of seats                       132                   144 
Number of passengers                  105                   105 
Average fare                         $100                  $100 
Gallons of fuel consumed              937                 1,797 
Ticket tax                           $788                  $789 
Passenger segment tax                $348                  $348 
Waybill tax                            $2                    $0 
Fuel tax                              $40                   $78 
Total revenue                      $1,178                $1,215 

Source: GAO analysis of FAA data.

As the table shows, differences in FAA's workload are not reflected in
revenues. FAA states, all other factors being equal (e.g., time of
flight), that the total ATC costs of the three regional jet flights would
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.

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
factors19) 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.

19A load factor is the percentage of a flight's total available seat miles
actually used to transport passengers.

Trends in average fares suggest that the Trust Fund is collecting less
revenue relative to workload than in the past, and FAA's projections
suggest that this decline will continue. Since the passenger ticket tax is
a percentage of the ticket price, reductions in the average ticket price
result in lower ticket tax revenues relative to FAA's workload. Domestic
airfares, adjusted for inflation, have steadily declined over the past 25
years, from an average of $233 in 1981 to $148 in 2005 (see fig. 6).20
This reduction represents an average decline of about 1.9 percent per
year.21 Even though there have been increases in fares over the past year,
FAA projects 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.22

20We have adjusted airfare data to 2005 dollars.

21This is the annual compounded rate of decline.

22Yield is the amount of revenue airlines collect for every mile a
passenger travels.

Figure 6: Average Domestic Fares, 1981-2005

Trends in the average size of airplanes also suggest that the Trust Fund
is collecting less revenue relative to workload than in the past, and
FAA's projections suggest that this decline will continue (see fig. 7).
Since smaller planes carry fewer passengers and burn less fuel, reductions
in average plane size mean lower ticket tax, segment tax, and fuel tax
revenue accrues to the Trust Fund relative to FAA's workload.

Figure 7: Average Available Seats per Domestic Aircraft

This decline in the average number of seats per aircraft is the result of
airlines' moving toward a substantially greater reliance on regional and
narrow-body jets.23 Scheduled capacity (available seat miles) increased 29
percent from 1996 through 2005. During this time, wide-body jet capacity
fell 42 percent, narrow-body jet capacity grew 35 percent, and regional
jet capacity grew over 2900 percent. As a result, regional jets accounted
for nearly 10 percent of scheduled capacity in 2005, up from less than 1
percent in 1995. In addition to projecting growth in commercial flights,
FAA is projecting substantial growth in GA traffic, which will also add to
FAA's workload.

23Generally speaking, wide-body jets are the largest jets, with the
capacity to transport approximately 200 or more passengers; narrow-body
jets are smaller, with the capacity to transport approximately 100 to 200
passengers; regional jets are the smallest of these three plane types,
with the capacity to transport approximately 50 to 90 passengers.

Some Stakeholders Have Raised Equity Concerns with the Current Funding System

Some aviation stakeholders have expressed concerns that the current
approach to collecting funds from users through excise taxes creates
inequities because the revenue contributions of different flights are not
directly linked to the costs of the services that these flights receive
from FAA. As noted, factors that influence the revenue contribution that a
commercial flight makes to the Trust Fund are the number of passengers,
the average price of tickets, and the amount of fuel used. None of these
factors, however, are directly related to the cost of the ATC services
that a flight receives from FAA. Table 2 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 equity issue is that similar commercial flights may
contribute very different amounts of revenue. As shown in this example, a
767 flight contributes more than twice as much as two similar 737 flights.
There is also a difference between the contributions for the two similar
737 flights; one flight contributes 14 percent more than the other flight.

Table 2: Estimated Excise Tax Contribution by Flight Type

Approximately 300-mile flight from Los Angeles to San Francisco
                         Commercial flights        GA business flights
Plane type                767   737  737  Citation V Fractional Learjet 35 
Number of seats           231   132  132                      9          a 
Number of passengers      180    89   89                      5          a 
Average fare              $82   $84  $67                   $235          a 
Gallons of fuel         1,646   937  808                    442        190 
Ticket tax             $1,100  $565 $449                    $86         $0 
Passenger segment tax    $544  $270 $270                    $15         $0 
Cargo/Mail tax            $27    $2   $2                     $0         $0 
Fuel tax                  $71   $40  $35                    $19        $41 
Total revenue          $1,742  $877 $756                   $120        $41 

Source: GAO analysis of FAA data.

aNot applicable.

Concerns also exist about the fairness of the distribution of the funding
burden between commercial airlines and GA operators. Domestic commercial
passenger flights, and some flights typically considered GA flights that
carry commercial passengers,24 are subject to, among other potential
excise taxes, the passenger ticket tax, the passenger segment tax, the
cargo/mail tax, and the 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 GA flights may be
substantially different. For example, the taxes that the Trust Fund would
receive from two different types of business jet flights would be
substantially less than the taxes received from similar commercial flights
(see table 2).

Although the commercial and GA flights might receive the same services
from FAA, raising equity concerns because of the large difference in
revenue contribution, there is debate over whether GA and commercial
flights should be assigned the same costs for similar flights because
parties disagree on how to assign the fixed costs associated with the ATC
system. Representatives of the commercial aviation industry favor
assigning those costs to all system users in proportion to their use of
the system. Representatives of GA, 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 of serving GA (i.e., those costs that would not otherwise exist).
Without a consensus on how to assign ATC costs to 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.

Current Funding System Lacks Strong Incentives to Encourage Efficient Use of the
NAS

Some stakeholders have also raised concerns that the current funding
system does not provide aircraft operators with incentives to use FAA
services in the most efficient manner. 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. These prices, along with other factors
influencing supply and demand, will influence users' decisions about the
type, size, and number of aircraft to operate, and when and where to
operate them.25 Given the importance of some of these other factors to
users' decisions about using the NAS, the influence of prices charged for
FAA's services on these decisions may be comparatively small for some
users.

24This includes some flights typically considered GA flights, such as
those by air taxis and some fractional ownership operations.

25Supply factors that influence users' decisions include other costs of
operating aircraft, such as labor, fuel, and capital costs. Demand factors
include the state of the economy and the price and convenience of flying
compared with using other modes of transportation.

As discussed previously, FAA states that under the current funding system
the taxes collected from users do not accurately reflect the costs those
users impose on the system; some flights likely pay more than the costs
they impose, while others likely pay less. These 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
make less than optimal use of the system, while those who pay less than
the costs they impose may make more than optimal use of the system.

An airline's decision about how many flights to offer in a given market
illustrates how the current system does not provide incentives for
efficient use of the system. In this example (the same one used for the
revenue adequacy discussion), an airline is deciding how many daily
flights it should provide for the Los Angeles to San Francisco market (see
table 3). It estimates that the market demand at the fare it is charging
totals 105 passengers per day, and it faces the choice of providing the
market with one daily flight with a narrow-body jet (Boeing 737), or three
daily flights with a regional jet (CRJ-200)-all flight choices are assumed
to depart during peak periods. In this scenario, the revenue collected
from the three regional jet flights-$1,215-is about 3 percent more than
the revenue collected from the 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 to handle the three regional
jet flights than to handle the one medium jet flight. In this example,
however, there is little financial incentive ($37) for the airline to
limit its imposition of additional costs on FAA by using one flight
instead of three flights.

Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet Flight
Compared with One Regional Jet Flight

Approximately 300-mile flight from Los Angeles to San Francisco
Plane type                               737-300        CRJ-200 
Number of seats                              132             48 
Number of passengers                         105             35 
Average fare                                $100           $100 
Gallons of fuel consumed                     937            599 
Ticket tax                                  $788           $263 
Passenger segment tax                       $348           $116 
Waybill tax                                   $2             $0 
Fuel tax                                     $40            $26 
Total revenue                             $1,178           $405 

Source: GAO analysis of FAA data.

This situation is made worse during times when the NAS is congested. There
are two issues associated with congestion. The first is plane size; if all
other factors are equal, such as demand for air travel, it is more
efficient to serve congested airspace with larger planes because they can
move more passengers per flight. Second, when congestion is a factor,
efficiency requires consideration of the delay costs imposed on other
system users. Charging similar flights equally, regardless of plane size,
and incorporating congestion costs, would create financial incentives to
improve efficiency.

     Alternative Funding Options Present Both Advantages and Disadvantages

Alternative funding options for collecting revenues from NAS users present
both advantages and disadvantages.26 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 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. 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.

The six funding options considered here include two that would modify the
current excise tax structure and four that would adopt more direct charges
to users. 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.

Modifications to the Current System

The two options we reviewed that would modify the current excise tax
structure are relying solely on a fuel tax and increasing the passenger
segment tax to replace the passenger ticket tax.

26As discussed earlier, some elements of FAA's budget cannot be directly
linked with taxes or charges that system users pay for their use of FAA's
services. One example is money given to airports in grants through the
Airport Improvement Program. Another example might be expenditures
required to control government planes, both military and civilian, unless
other government agencies were treated as system users. As a result, if
any of these options are adopted and the tax or charge rates are based on
the costs of services to users, then the revenue collected will not cover
all of FAA's budget. Contributions from the General Fund or revenues from
other taxes that are not linked to costs would also be needed.

  Fuel Taxes

One 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 the revenue lost by eliminating the remaining excise taxes
and charges. Advocates of reliance on a fuel tax funding system state that
it is appealing compared to the current system because there is a
correlation between the time a plane spends in the system and the amount
of fuel a plane uses. To the extent that time in the system is related to
cost, this relationship creates at least a partial link between revenues
and costs, which could partially address the revenue adequacy, equity, and
efficiency concerns about the current system. In addition, advocates of
the fuel tax state that a fuel tax is inexpensive and simple to
administer. Under the current system the Internal Revenue Service (IRS) is
responsible for collecting fuel taxes at the point of sale, and these
funds are then deposited to the Treasury, which then credits the Trust
Fund. FAA has no responsibility for collecting the revenue. Thus,
transitioning to an all-fuel-tax funding system would be relatively easy,
since the administrative system is already in place. Furthermore, the tax
is easy for consumers to understand, and compliance is simple and
inexpensive.

From a revenue adequacy perspective, fuel taxes compare favorably with
other existing excise taxes because they are more directly linked to
workload. Thus, all things being equal, increases in workload over time
would likely result in fuel tax revenue increases. Nonetheless, two
factors that lead to lower fuel consumption will erode the ability of a
fuel tax to generate revenue over time. First, while the incentive created
through the tax to conserve fuel will promote more efficient use of the
system, it will lead to lower fuel consumption, which will reduce
revenues. Second, technological advances that increase the fuel efficiency
of airplanes will reduce fuel consumption relative to FAA's workload,
leading to lower revenues relative to FAA's workload; the new 787
aircraft27 and a recent effort to outfit planes with winglets28 are
examples of these advances. Thus, it is likely that the fuel tax rate
would have to be raised from time to time to be adequate 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 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.

27The 787 aircraft is a new plane under development by Boeing that
emphasizes fuel efficiency through the use of lightweight composite
material and more fuel-efficient engines.

28Winglets are attachments to the wings of planes that reduce fuel
consumption.

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 (e.g., by flying at off-peak times to
avoid congestion delays) 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.

  Passenger Segment Tax

A second option that represents a modification of the current system is to
increase the current passenger segment tax to replace revenues lost by
eliminating the current passenger ticket tax. Under this option, all other
current excise taxes would remain unchanged, implying no change to
revenues collected from cargo carriers and GA operators. This option would
likely increase the tax differential between passengers traveling on
one-stop (or more than one-stop) flights and those traveling on nonstop
flights on the same route. As a result, there might be a shift in
travelers' demand toward more nonstop service, which might, in turn, lead
airlines to operate more nonstop service. Because there is a partial link
between the number of segments an airline operates and the cost of the
services FAA provides to that carrier, this option might have some
advantages over the present tax structure in terms of revenue adequacy,
efficiency and equity. However, because there is no link to the cost of
some of the other services that FAA provides, these advantages are
limited.

Compared to the present funding structure, this option might address
concerns about revenue adequacy over time, but many of the concerns
associated with the current system would likely remain. One way in which a
passenger segment tax might better correlate to FAA's workload is that
commercial flights that include a stop require more terminal services from
FAA than nonstop flights, and taxes based on the number of passenger
segments traveled will increase as the number of stops increases. In
addition, the current passenger segment tax is indexed to the Consumer
Price Index so that it is adjusted each year to account for inflation,
which preserves the purchasing power of the revenues collected. However,
other services that FAA provides could increase without any increase in
passenger segment tax revenues. For example, if the average distance of
commercial flights increases, the cost of providing en-route services will
rise, but the passenger segment taxes paid will not rise because they are
not based on distance traveled or time in controlled airspace.
Furthermore, passenger segment taxes apply only to commercial flights, so
they have no advantage over ticket taxes in providing revenue adequate to
fund cost increases associated with providing services to cargo and GA
aircraft. In addition, there would be no improvement in providing adequate
revenue for safety and security expenditures.

Compared to ticket taxes, higher flight passenger segment taxes have the
potential to increase equity by better aligning revenues with costs, and
they create some additional incentives for efficient use of FAA services.
However, these effects are likely to be limited because the tax revenues
are aligned only to some cost elements and the tax applies only to
commercial aircraft. With increased passenger segment taxes, the
difference in the amount of taxes commercial airlines would have to pay
for one-stop service compared with nonstop service would be greater. This
greater difference in taxes might represent an improvement in equity
compared to the present funding system because one-stop flights require
more terminal and approach services from FAA than nonstop flights. This
greater difference in taxes could also create an incentive to provide more
nonstop service. Substituting nonstop for one-stop service could reduce
the airlines' need for FAA's terminal and approach services. However, this
incentive could be quite small relative to other factors that influence
airlines' service-offering decisions, so the effect on efficiency could
also be quite small. In addition, airlines would have no additional
incentive to be efficient in their use of en-route services because the
passenger segment tax is not linked to time in controlled airspace, and
there would be no change from the current structure in incentives for
cargo and GA operators.

Administrative and transition issues would be minimal, since this option
would require only a change in the current tax per flight segment and the
elimination of the passenger ticket tax.

Direct Charges

The four funding options we reviewed that would involve more direct
charges to users include weight/distance charges, en-route charges, flight
segment charges, and certification charges.

  Weight/Distance Charges

Charges based on weight and distance traveled are used by a number of
foreign air navigation service providers and are supported by the
International Civil Aviation Organization. As suggested by the name, this
option would base charges to users on the weight of the plane and the
distance it travels within the NAS. According to their advocates,
weight/distance charges are more appealing than the current system because
they would establish a more direct relationship between revenues and costs
by incorporating distance into the formula, thereby creating an incentive
to limit excess use of FAA's ATC en-route services. In addition, advocates
say, weight/distance charges would strike a balance between basing charges
on the ability-to-pay principle29 and more directly linking costs and
revenues by incorporating both weight and distance in the distribution of
costs among users.

A weight/distance charge, relative to the current funding system, would be
likely to improve the revenue adequacy of the system. Revenue adequacy is
addressed by the incorporation of a cost component into the
weight/distance formula. Generally, air navigation service providers that
use a weight/distance formula regularly adjust the cost component to
ensure that revenues match costs. For example, FAA's counterpart in
France-la Direction Generale de l'Aviation Civile-annually adjusts the
cost component of its weight/distance formula on the basis of en-route
charges. This adjustment ensures that revenues not only cover costs, but
also do not exceed costs.

As with the fuel tax, the extent to which a weight/distance charge would
address equity issues appears to be limited. While there may be a
relationship between the distance a plane travels in the NAS and the costs
it imposes, the introduction of the weight component into the formula
weakens any such connection. For example, since heavier planes would be
charged more than lighter planes, they would be required to contribute
more for traveling the same distance in the system, even though they may
not impose greater costs on the ATC system. If a relationship between
weight and distance in the system and costs imposed can be established, it
is likely to be limited to en-route control costs. There is no obvious
relationship between the weight/distance formula and other FAA
activities-terminal control services and safety activities.

29The ability-to-pay principle is a concept of tax fairness that states
that those individuals with a greater financial capacity-measured by
wealth, income, or other levels of well-being-to bear a tax burden should
pay more in taxes than those individuals with a lesser financial capacity.

Since the connection between revenues and costs is incomplete because of
the weight component, the potential for a weight/distance charge to
address efficiency issues also appears limited. The distance component of
a weight/distance charge creates an incentive for operators to minimize
their use of the NAS. To the extent that distance in the system correlates
with costs imposed, this incentive could improve efficiency. However, the
correlation between distance and costs imposed is limited by the
introduction of the weight component. Furthermore, the relationship
between distance in the system and the costs imposed on FAA is likely to
be limited to en-route control costs, excluding consideration of the costs
associated with terminal control and safety activities.

Implementing a weight/distance charge would also involve significant
administrative and transition issues. FAA would have to determine how to
administer a weight/distance charging system for which it does not
currently have the organizational capacity. FAA stated that one option
would be to contract the billing out to a private party, much as European
Union countries such as France contract out their billing to
Eurocontrol.30

  En-route Charges

En-route charges would be based on the time users spend in the NAS or the
distance they travel through the NAS. According to their advocates,
en-route charges are more appealing than the current system because they
would create a more direct relationship between revenues and costs.
Therefore, compared to the current system, advocates say en-route charges
would (1) better ensure that revenues are adequate to cover costs over
time, (2) address equity issues, and (3) create incentives for efficient
use of the current system.

An en-route charge, relative to the current funding system, would be
likely to improve the revenue adequacy of the system. As with
weight/distance charges, en-route charges could address revenue adequacy
concerns by incorporating a cost component into the charging formula that
could be regularly adjusted to reflect any changes in costs. This approach
could ensure, over time, that revenues match costs.

30Eurocontrol is the European Organisation for the Safety of Air
Navigation. Eurocontrol's core activities span the entire range of
gate-to-gate air navigation service operations-from strategic and tactical
flow management to controller training; from regional control of airspace
to development of leading-edge, safety-proofed technologies and
procedures, and the collection of air navigation charges.

As with other funding options discussed here, 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 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.

Implementing en-route charges would also involve significant
administrative and transition issues. FAA would have to develop the
organizational capacity to administer and collect en-route charges, which
would include completing the appropriate cost analysis using either a cost
accounting system or cost finding techniques.

  Flight Segment Charges

Flight segment charges to users would be based on the departures and
landings that aircraft make at various airports throughout the NAS.
According to their advocates, flight segment charges are more appealing
than the current system because they would establish a more direct
relationship between revenues and costs. Therefore, compared to the
current system, advocates say that flight segment charges would (1) better
ensure that revenues are adequate to cover costs over time, (2) address
equity issues, and (3) create incentives for efficient use of the current
system by directly connecting charges with costs imposed by users.

A flight segment charge, relative to the current funding system, would be
likely to improve the revenue adequacy of the system. As with
weight/distance charges, flight segment charges could address revenue
adequacy concerns by incorporating a cost component into the charging
formula that could be adjusted regularly to reflect any changes in costs.
This approach could ensure that, over time, revenues match costs.

As with other funding options discussed here, the ability of flight
segment charges to address equity and efficiency issues raised by the
current system appears to be limited. FAA states that there is a strong
relationship between departures and landings in the system and costs
imposed by flights for terminal control handled by TRACONs. Thus, if
flight segment charges were limited to funding terminal control costs,
they might address equity issues raised by the current system by equating
charges to costs imposed, depending on how costs were assigned.
Furthermore, flight segment charges for terminal 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 flight segments and other FAA
activities-en-route control and safety activities. As a result, if flight
segment charges were used to fund all FAA activities, their ability to
address equity and efficiency issues would be limited.

Implementing flight segment charges would involve administrative and
transition issues similar to those associated with en-route charges. FAA
would have to develop the organizational capacity to administer and
collect flight segment charges and complete the appropriate cost analysis
using either a cost accounting system or cost finding techniques.

  Certification Charges

Certification charges to users would cover specific safety services
provided by FAA, such as certificates for air worthiness, air operators,
and air agencies; registration for air personnel, aircraft, and medical
personnel; designees and delegations; and international training.
According to their advocates, certification charges would be more
appealing than the current system because they would establish a direct
relationship between revenues and costs, which would address the revenue
adequacy, equity, and efficiency concerns associated with the current
system.

Certification charges have the potential to fulfill revenue adequacy
requirements for safety costs over time because they are directly linked
to workload; charges would be assessed for each certificate issued. Thus,
as workload changed over time (increasing or decreasing), so would the
revenue from certification charges. In addition, any certification system
would likely have the flexibility to adjust charges as costs changed.
Certification charges, however, could not support all of FAA's funding
requirements, so this option would have to be used in combination with
other revenue sources. According to FAA officials, there is a clear
relationship between certification charges and the specific safety
activities for which users would be charged. Thus, if certification
charges were limited to funding the associated safety costs, they would
address equity issues raised by the current system by equating charges to
costs imposed; this equity improvement, however, would be limited to
funding for safety activities. Furthermore, certification charges would
likely create financial incentives to use the system efficiently, since
charges would increase in proportion to use.

FAA raises the concern that imposing certification charges for safety
services would adversely affect safety because such charges would create
incentives to avoid the use of safety services and, in some cases, ATC
services. Our review of available data from five air navigation service
providers in other countries found that since their air traffic control
services were commercialized and charges were implemented, the safety of
the services remained the same or improved. For example, data from New
Zealand and Canada show fewer incidents of loss of separation (the
distance required between planes) since commercialization.31

Implementing certification charges would involve administrative and
transition issues similar to those associated with en-route and flight
segment charges. FAA would have to develop the organizational capacity to
administer and collect certification charges and complete the appropriate
cost analysis using either a cost accounting system or cost finding
techniques.32

Combining Funding Options Might Best Address Concerns

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, 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.

31See GAO, Air Traffic Control: Characteristics and Performance of
Selected International Air Navigation Service Providers and Lessons
Learned from Their Commercialization, GAO-05-769 (Washington, D.C.: July
29, 2005).

32FAA is currently prohibited from charging certain certification and
registration fees under 49 U.S.C. S:45302 until several specific
regulations have been promulgated.

Cost-Based Charges Can Be Imposed under FAA's Current Governance System

In discussing alternative funding options, some stakeholders have stated
that if user charges are adopted, users should have more input into FAA's
operation, citing the "user pays, user says" principle. To many
stakeholders, this principle implies that the adoption of direct user
charges would require a change in FAA's governance structure that could
limit congressional influence on the agency while expanding the influence
of airlines and other users. Many stakeholders support such a change,
pointing out that many countries that rely on direct charges to fund
aviation activities have commercialized their air navigation service
providers.

We did not find any evidence that a change in FAA's governance structure
would be required if direct charges were adopted. Federal law provides
general authority for federal agencies to institute user charges except
when otherwise prohibited.33 In FAA's case, Congress has specifically
prohibited the agency from instituting any new user charges under this
general authority in every DOT appropriation act since 1998. Furthermore,
under the current funding system, users already provide most of the
revenue used to fund FAA programs through excise taxes. Adopting direct
charges would change the manner in which revenues are collected from
users, but would not necessarily change the aggregate contribution from
users. Since users pay most of FAA's program costs now, it is unclear what
additional role users should play in FAA's decision-making under an
alternative system.

3331 U.S.C. 9701.

Recent reforms in France's Direction Generale de l'Aviation Civile
illustrate how a government agency has moved toward a cost-based system of
charges to fund the air navigation services it provides without changing
the underlying governance structure. The French organization's activities
fall into two broad divisions -safety and regulation, and ATC.34 Safety
and regulation are funded through a combination of general government
support and specific user charges. For example, there are charges for
pilots' licenses, medical certificates, inspections, and aircraft
registration. ATC activities are split into two categories-en-route
control and terminal control. For en-route control, France must abide by
the European Union's regulations, which are based on principles
established by the International Civil Aviation Organization. This
approach incorporates a weight/distance formula that is used to determine
charges for specific aircraft based on their activity. Although the
formula distributes charges across aircraft differently by incorporating
weight as a factor, the amount of the charges is based on cost data that
are verified by the European Union. Eurocontrol actually bills users of
the system; all European Union countries collect en-route charges through
this organization. Terminal control charges are not directly based on cost
factors, but are billed along with the en-route control charges through
Eurocontrol.

    Alternative Capital Financing Methods Have Advantages and Disadvantages

Allowing FAA to use debt financing for capital projects have advantages
and disadvantages. Many stakeholders have identified the use of debt
financing-such as bonds-as a means of funding FAA capital projects, such
as components of NGATS or existing ATC facilities and equipment. Some
stakeholders believe debt financing is attractive because it could provide
FAA with a stable source of revenue to fund capital development and, at
the same time, spread the costs out over the life of a capital project as
its benefits are realized. If Congress approved the use of debt financing
for FAA, the agency could borrow through the Treasury or directly from the
private capital market, depending on what authority Congress provided.
Debt-financing raises significant concerns, however, because it encumbers
future resources and because expenditures from debt proceeds may not be
subject to the congressional oversight that appropriations receive. In
addition, debt financing is subject to federal budget scoring rules35 and
raises issues associated with borrowing costs that are particularly
important in light of the federal government's long-term fiscal imbalance.

34Most airports in France are independent from the national government,
and their infrastructure is funded through charges levied by individual
airports.

Some Stakeholders Believe Debt Financing Offers Advantages

According to its supporters, debt financing has a number of advantages,
one of which is that it could provide FAA with a stable source of revenue
to fund capital development. FAA officials state that the uncertainty
associated with the appropriation process makes planning for large,
complex, and expensive ATC systems difficult. Another advantage cited 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 an investment firm, state that the
private capital market may offer disciplinary mechanisms that may
encourage FAA to manage itself more efficiently. The discipline occurs
because, to receive funding for projects, FAA would need to adhere to bond
covenants, which are rules that govern how FAA will pay obligations. One
investment firm noted, however, that projects could be overcapitalized, or
"gold plated," if FAA were given the authority to borrow without caps on
the number and costs of projects it funds. For example, a significant
amount of debt could be issued for projects with minimal marginal benefits
to users. As a result, an investment firm noted, there may need to be a
governing board with multiple aviation stakeholders, including airlines,
airports, and air traffic controllers, to determine which capital projects
are needed and how they will be funded. Treasury officials also question
whether the private capital market will 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.
Treasury officials further noted that they could perform credit analyses
similar to those done by private investment firms, which, when combined
with statutory borrowing caps and other credit terms and conditions, would
serve to protect the financial interests of the general taxpayer.

35Budget scorekeeping rules or guidelines are developed by the House and
Senate Budget Committees, CBO, and OMB (the scorekeepers). The purpose of
the guidelines is to ensure that the scorekeepers measure the effects of
legislation on the deficit consistent with established scorekeeping
conventions and with the specific requirements of the Congressional Budget
Act of 1974 and the Balanced Budget and Emergency Deficit Control Act of
1985. Budget scorekeeping rules are published in OMB Circular A-11.

FAA Could Borrow from the Treasury or the Private Capital Market

To borrow from the Treasury, FAA would need borrowing authority from
Congress. There are various ways Congress can provide borrowing
authority, each with different legal, financial, and structural implications.
For example, some government entities generate their own revenue to pay
for borrowing costs, whereas others pay with appropriations.36 Some
government entities with borrowing authority are federal agencies, such
as the Bonneville Power Administration (BPA), while others are independent
establishments, such as the U.S. Postal Service.37 Once borrowing
authority is granted, the Treasury sets the terms and conditions for
borrowing. FAA could borrow from the Treasury, using revenue options
such as taxes, user fees, or appropriations to repay the debt, depending
on the type of bond. Figure 8 describes the process for borrowing from the
Treasury.

Figure 8: Potential FAA Process for Borrowing from the Treasury

Source: GAO analysis of Treasury documents and interviews.

In borrowing from the private capital market, FAA could issue general
revenue (GR) or general obligation (GO) bonds. Both types of bonds
would require FAA to pay interest and principal to bond holders, but the
revenue sources used to make these payments would differ. A GR bond
36GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More
Selectively, GAO/AFMD-89-4 (Washington, D.C.: Sept. 15, 1989).

37BPA is a self-supporting agency in the Department of Energy that
borrows from the Treasury 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. Since BPA 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.

requires taxes or user fees to pay the interest and principal, while a GO
bond uses expected appropriations. Several nonfederal government entities
currently borrow from the private capital market using GR and GO bonds. In
aviation, most commercial airports issue GR bonds for airport capital
improvements that are backed by general revenues from the airport,
including aircraft landing fees, concessions, and parking fees, for
airport capital improvements. In surface transportation, some states issue
grant anticipation revenue vehicle (GARVEE) bonds backed by anticipated
federal apportionments to fund highways. However, the eligibility of a
GARVEE bond for reimbursement with federal apportionments does not
constitute a commitment by the federal government to provide for paying
the principal or interest on the bond. The Department of Transportation,
which oversees the GARVEE program, reimburses the state for debt service
expenses as part of the annual federal-aid obligation authority. Figure 9
describes the process for borrowing from the private capital market.

Figure 9: Potential FAA Process for Borrowing from the Private Capital
Market

For FAA to borrow from the private capital market, Congress would need to
give the agency statutory authority. Depending on how Congress writes the
statute, FAA could use any revenue option-taxes, user fees, or
appropriations-to secure the bond. According to some representatives of
investment banks and Treasury officials, no organizational changes for
FAA, such as a change to a government corporation or corporate entity,
would be needed.

Currently, some government corporations borrow from the private capital
market, including the Tennessee Valley Authority (TVA). TVA is an
independent, wholly owned federal corporation established by the Tennessee
Valley Authority Act of 1933 that sells bonds in the private capital
market to finance its capital improvements for power programs. TVA pays
for its operations and debt service with revenues from its energy sales.
Since TVA first issued bonds, Moody's Investors Service and Standard &
Poor's have assigned TVA's bonds their highest credit rating-Aaa/AAA.38
TVA does not receive a direct federal guarantee, although the interest
rate charged by the private capital market suggests that there is an
implied federal guarantee.39

Debt Financing Raises Budgetary Concerns

Debt financing is subject to federal budget scoring rules and raises
issues regarding borrowing costs that are particularly important in light
of the federal government's long term structural fiscal imbalance. How the
borrowing authority is carried out will affect both budget scoring and
costs. When an agency uses borrowing authority to finance a capital
project, budget authority and obligations are recorded in the budget when
the investments are made. Current budget scoring rules require that budget
authority and obligations for the full cost of capital projects be scored
upfront in the year that the obligations are made. Over time, the outlays
will equal the budget authority and obligations that were scored upfront.
As an example, if FAA borrowed $5 million with a 10 year bond to purchase
air traffic control equipment, the $5 million would be scored as budget
authority and obligations in the year or years in which FAA signed the
contract or contracts to purchase the equipment, and not distributed
annually over 10 years. Since this budget treatment is the same as if
appropriations were obtained, there is little scoring incentive for an
agency to borrow.

Among the negative consequences of not scoring all government activities
in the year in which obligations are made, according to CBO, is that the
federal government's obligations are understated.40 A Treasury official
said the Treasury is supportive of budget scoring, noting that if the
borrowing is for a purely governmental purpose, then that activity should
be scored according to federal budget scoring rules. We have also reported
that up-front budget scoring for capital projects should be maintained,
since the budget should reflect the government's commitments up front.41

38Between 1974 and 1988, TVA borrowed exclusively from the Treasury's
Federal Financing Bank and the debt was not rated.

39GAO, Tennessee Valley Authority: Bond Ratings Based on Ties to the
Federal Government and Other Nonfinancial Factors, GAO-01-540 (Washington,
D.C.: Apr. 30, 2001).

40CBO, Third-Party Financing of Federal Projects (Washington, D.C.: June
2005).

If FAA was granted borrowing authority, the associated costs would likely
be higher if the agency borrowed directly from the private capital market
instead of through the Treasury. According to Treasury and representatives
of investment firms, the federal government's costs associated with debt
financing for FAA's capital projects would likely be lower if FAA borrowed
through the Treasury than if FAA borrowed directly from the private
capital market because the Treasury would likely be charged a lower
interest rate to borrow money. Interest rates charged to FAA would likely
be higher because bonds issued by FAA would likely be viewed as a greater
credit risk compared to Treasury bonds because Treasury's bonds are backed
by the full faith and credit of the U.S. government, whereas FAA debt
would not be. 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. Treasury officials told us
that it is the agency'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 agency is the
least expensive, most efficient means of financing this debt. The costs to
the government associated with funding FAA's capital spending through
appropriations would be comparable to the costs of borrowing through the
Treasury.42

The costs of borrowing from the private sector are based, in part, on how
risky the revenue is that will be used for bond interest payments.
Although all revenue options-taxes, user fees, and appropriations-can be
used to repay borrowings, each option has a different risk profile. The
Treasury noted that if FAA were to borrow from the private capital market
against revenues that were subject to appropriations, there would most
likely be a risk premium added to the credit rating to compensate for the
risk that appropriations may not be provided. This risk premium would make
borrowing more expensive. However, representatives from investment firms
we interviewed noted that FAA may receive a high credit rating given that
ATC services are essential and FAA has a monopoly in providing them.43 If
a capital project has a high degree of "essentiality," then it is assumed
that the government will pay for the project through appropriations if
that is the revenue source. Representatives of an investment firm we
interviewed also noted that FAA may receive an implied federal guarantee
because it is a federal agency. However, representatives of another
investment firm we interviewed also said that many of FAA's assets may
have a low degree of marketability. That is, lenders may have difficulty
selling an asset in the market in case of a bond default because there may
be few willing buyers in the market for it.

41GAO, Capital Financing: Partnerships and Energy Savings Performance
Contracts Raise Budgeting and Monitoring Concerns, GAO-05-55 (Washington,
D.C.: Dec. 16, 2004).

42Although 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.

Borrowing costs are particularly important in light of the federal
government's long-term fiscal imbalance. As the baby boom generation ages,
mandatory federal commitments to health and retirement programs will
consume an ever-increasing share of the nation's gross domestic product
and federal budgetary resources, placing severe pressures on all
discretionary programs, including those that fund defense, education, and
transportation. Our simulations show that by 2040, revenues to the federal
government might barely cover interest on the debt-leaving no money for
either mandatory or discretionary programs-and that balancing the budget
could require cutting federal spending by as much as 60 percent, raising
taxes by up to 2 1/2 times their current level, or some combination of the
two.44 Accordingly, any program or policy change that may increase costs
requires sound justification and careful consideration before adoption. We
previously reported that agencies with authority to borrow were financing
a large portion of their programs with debt and were repaying their debt
with appropriations or new borrowing, rather than through revenue
collections.45 As a result, we recommended that only those agencies that
would, in all likelihood, be able to repay their borrowing through revenue
collections be granted authority to borrow.

43Representatives of investment firms said that "essentiality" is the
importance of a particular government project or service. The
representatives of investment firms we spoke with generally agreed that
FAA's core service, which is to provide ATC services, is highly essential
because the services are a vital part of the national economy.

44GAO, The Nation's Long-Term Fiscal Outlook: September 2006 Update,
GAO-06-1077R (Washington, D.C.: Sept., 15, 2006).

45GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More
Selectively, GAO/AFMD-89-4  (Washington, D.C.: Sept. 15, 1989).

                                Agency Comments

We provided a draft of this report to DOT and Treasury for review and
comment. We received comments from DOT through an e-mail from FAA's
Director of the Office of Aviation Policy and Plans on September 11, 2006,
and from Treasury through an e-mail from the Deputy Assistant Secretary of
Government Financial Policy on September 8, 2006. Neither DOT nor Treasury
explicitly agreed or disagreed with our observations, and both raised a
number of concerns.

DOT stated that, in its opinion, although a change in FAA's governance may
not be statutorily required, it may be important as a matter of policy.
DOT stated that because air navigation service providers are by nature
monopoly providers, users need assurance that their concerns are taken
into account in cost control and investment decisions, particularly under
a system that more closely ties users' contributions to the costs of the
system. DOT stated that an alternative governance mechanism, along with
user fees, could give system users a structured advisory role in how
moneys are spent, costs are allocated, and charges are set to recover
those costs, while still retaining the inherently governmental
decision-making authority within FAA and DOT. In addition, DOT maintained
that a governance mechanism specifically designed to give users input into
investment decisions and cost recovery would add a valuable layer of
discipline in optimizing the system to accommodate users' needs most
efficiently.

In contrast, according to DOT, a system in which FAA/DOT could charge fees
to cover costs with no meaningful stakeholder involvement would be much
less attractive to the stakeholders. Finally, DOT stated, such an
arrangement is fully consistent with the position of the International
Civil Aviation Organization, which calls for user charges to be set in
consultation between the service provider and the user community.

DOT may want to encourage Congress to consider the issue of governance
structure. However, we did not include an analysis of governance issues in
the scope of our review; therefore, we did not provide a more detailed
discussion of the issue in this report.

DOT stated that our discussion of the need to analyze FAA's costs implied
FAA has not developed any cost accounting or cost allocation systems.
Although we agree that FAA has made progress in implementing a cost
accounting system, its current accounting system is not able to provide
the information required for a cost allocation analysis. Therefore, in our
view, our report does not mischaracterize the status of FAA's cost
accounting system by stating that an analysis of the extent to which the
current funding approach, or alternative funding approaches, aligns costs
with revenues would require the completion of a cost accounting system or
the use of cost finding techniques. Our point is that this capability
would be needed to operate under a cost-based user charge system.

DOT stated that it believes user fees would provide greater revenue
stability than taxes because user fees could be set up to be adjusted
periodically without changes in the law, thus providing greater
flexibility in aligning revenues to cover costs. Nonetheless, we continue
to believe that revenue stability is not likely to vary much across the
funding options. Significant decreases in the demand for air travel would
decrease revenue regardless of whether the current funding structure is
maintained or any of the options are adopted. Furthermore, increasing
direct user charges while air travel demand was falling would increase
costs for aircraft operators at the same time as their revenues were
declining and might be no easier than increasing excise taxes.

DOT also provided some clarifying and technical comments, which we
incorporated where appropriate.

According to Treasury, GAO raised several critical issues, but did not
provide any analysis that would help policymakers judge reform options.
Specifically, Treasury expressed concern that we did not (1) provide a
more comprehensive discussion of FAA costs and cost shares, including any
available cost information that provides insight into the issue, (2)
evaluate FAA's efforts to implement cost accounting, and (3) state whether
FAA's cost accounting program is likely, when completed, to generate cost
information that is useful in determining a fair and efficient
distribution of costs among users. We agree with Treasury that a more
detailed analysis of FAA costs and cost shares should be conducted to
inform the FAA reauthorization debate, and that this information would
improve the analysis of specific alternative funding options. FAA's
current accounting system is not able to provide the information required
for a cost allocation analysis. We believe that using partial cost
information, as suggested by Treasury, would not be appropriate. Moreover,
conducting a comprehensive cost analysis was beyond the scope of this
report.

Treasury also said that our report repeats claims made by interest groups
without evaluating them, giving the sense that each argument is equally
valid, even though policymakers need some way to evaluate them. This was
not the objective of the report. We provided a basis for evaluating the
current and alternative funding options by outlining criteria, including
revenue adequacy, equity, and efficiency, and discussing the implications
of these criteria with respect to specific funding options.

Treasury raised concerns that a number of statements were attributed to
"some stakeholders," rather than the specific groups or individuals that
made the statements, noting that attribution helps the reader evaluate the
statements. In response, we added some attribution as appropriate.

Treasury also noted its long-standing policy that all debt issued by
federal entities, including FAA, should be issued solely to the Treasury,
because centralized Treasury financing of all such debt is the least
expensive, most efficient means of financing this debt. Treasury further
maintained that market discipline would not be applied to FAA debt
obligations issued directly to the private capital market because
investors would perceive the obligations were backed by the federal
government. We added language to the report to clarify Treasury's position
on these issues.

Treasury also provided some clarifying and technical comments, which we
incorporated where appropriate.

As agreed with your offices, unless you announce the contents of this
report earlier, we plan no further distribution until 30 days from the
date of this letter. At that time, we will send copies of this report to
interested congressional committees; the Secretary of Transportation; the
Administrator, FAA; the Secretary of the Treasury; and the Director, OMB.
Copies will also be available to others upon request and at no cost on
GAO's Web site at www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-3834 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made key contributions to this
report are listed in appendix II.

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

List of Committees

The Honorable Ted Stevens Chairman The Honorable Daniel K. Inouye
Co-Chairman Committee on Commerce, Science, and Transportation United
States Senate

The Honorable Conrad Burns Chairman, Subcommittee on Aviation Committee on
Commerce, Science, and Transportation United States Senate

The Honorable John L. Mica Chairman The Honorable Jerry F. Costello
Ranking Democratic Member Subcommittee on Aviation Committee on
Transportation and Infrastructure House of Representatives

Appendix I: Scope and Methodology

To accomplish all of our objectives, we reviewed relevant research,
including GAO products, academic research, congressional testimony,
industry group publications, and stakeholders' responses to questions FAA
asked them about its funding.1 We also interviewed

           o  officials from government agencies, including the Federal
           Aviation Administration (FAA), the Office of Management and Budget
           (OMB), the Congressional Budget Office (CBO), and the Department
           of the Treasury (Treasury);

           o  representatives of aviation industry groups, including the Air
           Transport Association, the Aircraft Owners and Pilots Association
           (AOPA), and the National Business Aviation Association; and

           o  academic and financial experts.

           In addition, as discussed in the following paragraphs, we
           performed further work to accomplish each objective.

           To assess the advantages and concerns that have been raised about
           the current approach to collecting revenues from national airspace
           system (NAS) users to fund FAA and the extent to which the
           available evidence supports the concerns, we examined FAA budget
           data, Airport and Airway Trust Fund (Trust Fund) revenue data, FAA
           forecasts, data reported to the Department of Transportation (DOT)
           on aircraft size and airfares (DOT Form 41 data), and FAA aviation
           activity data. We used data on tax revenues associated with
           different types of flights to assess the link between increases in
           FAA's workload and increases in Trust Fund revenue. We obtained
           the FAA budget, Trust Fund, forecast, and aviation activity data
           from FAA. To assess the reliability of these data, we interviewed
           knowledgeable officials and reviewed the quality control
           procedures FAA applies to these data, and subsequently determined
           that the data were sufficiently reliable for our purposes. We
           obtained the DOT Form 41 data from BACK Aviation Solutions, a
           private contractor that provides these data to interested parties.
           We used these data to examine trends in aircraft size and airfares
           because of their impact on the relationship between Trust Fund
           revenues and FAA's workload.

           To identify potential alternative funding options for FAA and
           criteria for comparing these options, we obtained information on
           the experience of foreign air navigation service providers by
           reviewing relevant GAO reports and other literature and
           interviewing officials at Eurocontrol and France's FAA
           counterpart, la Direction Generale de l'Aviation Civile. We also
           interviewed representatives of Air France, AOPA-France, the
           International Air Transport Association, the Association of
           European Airlines, and Aeroports de Paris. Through our literature
           review and these interviews, we identified longer-run revenue
           adequacy, equity, efficiency, and administrative considerations as
           appropriate criteria for assessing the current and alternative
           funding options. We considered both modifications to the current
           excise tax structure and various forms of direct charges for FAA
           services as possible alternatives to the current tax structure. In
           selecting options for analysis, we considered whether there was a
           link between the option and some element of FAA's workload.

           To identify the advantages and disadvantages of authorizing FAA to
           use debt financing for capital projects, we reviewed the borrowing
           authorities of other U.S. governmental entities, including the
           Tennessee Valley Authority and the Bonneville Power
           Administration.

           We conducted our work from May 2005 through August of 2006 in
           accordance with generally accepted government auditing standards.

           Appendix II: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact
			  
			  Dr. Gerald L. Dillingham, (202) 512-2834

           Staff Acknowledgments
			  
			  In addition to the contact named above, the following individuals
           made key contributions to this report: Ashley Alley, Christine
           Bonham, Jay Cherlow, Tammy Conquest, Colin Fallon, Carol Henn,
           David Hooper, Maureen Luna-Long, Maren McAvoy, Rich Swayze, and
           Matt Zisman.

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           Congressional Relations
			  
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1In September 2005, FAA provided stakeholders with reauthorization
packages (packages of data on its operations and costs) and asked for
responses to questions about how to fund to agency.

(540119)

www.gao.gov/cgi-bin/getrpt? GAO-06-973 .

To view the full product, including the scope 
and methodology, click on the link above.

For more information, contact Gerald Dillingham at (202) 512-4830 or
[email protected].

Highlights of GAO-06-973 , a report to Congressional Committees

September 2006

AVIATION FINANCE

Observations on Potential FAA Funding Options

The Federal Aviation Administration (FAA), the Airport and Airway Trust
Fund (Trust Fund), and the excise taxes that support the Trust Fund are
scheduled for reauthorization at the end of fiscal year 2007. FAA is
primarily supported by the Trust Fund, which receives revenues from a
series of excise taxes paid by users of the national airspace system
(NAS). The Trust Fund's uncommitted balance decreased by more than 70
percent from the end of fiscal year 2001 through the end of fiscal year
2005. The remaining funding is derived from the General Fund. This report
focuses on the portion of revenues generated from users of the NAS and
addresses the following key questions: (1) What advantages and concerns
have been raised about the current approach to collecting revenues from
NAS users to fund FAA, and to what extent does available evidence support
the concerns? (2) What are the implications of adopting alternative
funding options to collect the revenues contributed by users that fund
FAA's budget? (3) What are the advantages and disadvantages of authorizing
FAA to use debt financing for capital projects?

This report is based on interviews with relevant federal agencies,
including FAA, the Office of Management and Budget, and the Congressional
Budget Office. GAO also obtained relevant documents from these agencies,
other key stakeholders, and academic and financial experts.

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 revenues contributed by users and the costs they impose on the NAS
that raises revenue adequacy, equity, and efficiency concerns. Trends and
FAA projections in 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. The extent to which revenues and costs are linked,
however, depends critically on how costs are allocated. Thus, to assess
the extent to which the current approach or other approaches aligns costs
with revenues would require completing an analysis of costs, using either
a cost accounting system or cost finding techniques to assign costs to NAS
users.

The implications of adopting alternative funding options to collect
revenue from NAS users and address concerns about the current excise tax
system vary depending on the extent to which users' revenue contributions
reflect the costs those users impose on FAA. This report considers six
selected funding options, including two that modify the current excise tax
structure and four that adopt more direct charges to users. 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. Some stakeholders who support the adoption of direct user charges
also support a change in FAA's governance structure, but GAO found no
evidence adoption of direct charges requires this.

Authorizing FAA to use debt financing for capital projects would have
advantages and disadvantages. Some stakeholders identify debt financing as
attractive because 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 congressional oversight that appropriations receive. Concerns
regarding borrowing costs, oversight, and encumbering future resources are
particularly important in light of the federal government's long-term
structural fiscal imbalance.

The Departments of Transportation and Treasury provided comments and
technical clarifications on a draft of this report which we have
incorporated or responded to as appropriate. DOT's comments focused on
governance reforms required to adopt a user fee approach, and whether we
accurately described the status of FAA's accounting system. Treasury's
raised concerns about the level of analytical development for the options
and associated issues. Data was not available to conduct the analysis
Treasury suggested, and we agree necessary. However, we believe the report
provides useful information to facilitate debate on the options.
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