Federal Aviation Administration: Viability of Current Funding Structure for Aviation Activities and Observations on Funding Provisions of Reauthorization Proposals

Federal Aviation Administration: Viability of Current Funding
Structure for Aviation Activities and Observations on Funding
Provisions of Reauthorization Proposals (12-JUL-07,
GAO-07-1104T).

The Federal Aviation Administration (FAA) operates one of the
safest air transportation systems in the world, but this system
is under growing strain as the demand for air travel increases.
Recognizing the need to transform this system, Congress created
the Joint Planning and Development Office (JPDO), housed within
FAA, to plan and develop the Next Generation Air Transportation
System (NextGen). The current authorization for FAA, the Airport
and Airway Trust Fund (Trust Fund), and the excise taxes that
support the Trust Fund will expire September 30, 2007.
Reauthorization bills in the Senate (S. 1300) and the House (H.R.
2881) identify various revenue sources, including flight
surcharges and certain fees, to fund FAA, including NextGen.
Concerned about the need for stable, sustainable financing for
the nation's multibillion-dollar transportation infrastructure
investments, including NextGen, GAO has designated transportation
financing as high risk. GAO's statement addresses (1) the extent
to which the current funding structure can support FAA's
activities, including NextGen, (2) the implications of selected
provisions of proposals to fund aviation activities, and (3)
issues that could affect the overall cost of NextGen. The
statement is based on recent GAO reports and testimonies, updated
through interviews with FAA officials and stakeholder
representatives.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-1104T
ACCNO: A72566
TITLE: Federal Aviation Administration: Viability of Current
Funding Structure for Aviation Activities and Observations on
Funding Provisions of Reauthorization Proposals
DATE: 07/12/2007
SUBJECT: Air traffic control systems
Air transportation
Airports
Aviation
Cost analysis
Financial analysis
Program management
Trust funds
Next Generation Air Transportation
System

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GAO-07-1104T

* [1]Summary
* [2]Background
* [3]Estimates Indicate That Current Funding Structure Can Suppor
* [4]Selected Provisions of Proposals for Funding Aviation Activi
* [5]Resource Requirements for NextGen and Other Issues Could Aff
* [6]Contacts and Acknowledgments

* [7]Order by Mail or Phone

Testimony

Before the Committee on Finance, U.S. Senate

United States Government Accountability Office
GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, July 12, 2007

FEDERAL AVIATION ADMINISTRATION

Viability of Current Funding Structure for Aviation Activities and
Observations on Funding Provisions of Reauthorization Proposals

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

GAO-07-1104T

Mr. Chairman and Members of the Committee:

We appreciate the opportunity to participate in today's hearing on the
future funding of the Federal Aviation Administration (FAA). As you know,
FAA operates one of the safest air transportation systems in the world,
but this system is under growing strain as the demand for air travel
increases. According to FAA, over 740 million passengers flew in fiscal
year 2006, and 1 billion passengers per year are expected to fly in 2015.
FAA also predicts that 10,000 corporate aircraft, including traditional
business jets, turboprops, and very light jets, will be added to the fleet
between 2007 and 2017. To accommodate this increased traffic, instrument
flight rule operations--the most significant source of demand on the air
traffic control system--are projected to rise by 36 percent, from roughly
45,000 per day to 61,000 per day over the same decade. Yet even at today's
flight levels, flight arrival delays are approaching the record levels set
in 2000, when one in four flights reached its destination late. The
consensus is that the current air traffic control system cannot be
expanded to meet this expected growth. According to a federal analysis of
future demand and system capacity, the estimated cost to the U.S. economy
of failing to meet future airspace demands could be $22 billion annually
by 2023.

In 2003, recognizing the need for a new and different type of air traffic
control system to deal with the expected growth, Congress authorized the
creation of the Joint Planning and Development Office (JPDO),^1 housed
within FAA, to lead a collaborative effort of federal and nonfederal
aviation stakeholders to conceptualize and plan the Next Generation Air
Transportation System (NextGen). The transformation to NextGen will
involve the acquisition of numerous systems to support precision satellite
navigation; digital, networked communications; integrated weather
information; and layered, adaptive security. The total estimated
expenditures for NextGen--for both capital costs and research and
development costs--is $4.3 billion over the next 5 years.

As you know, the current authorization for FAA, the Airport and Airway
Trust Fund (Trust Fund), and the excise taxes that provide revenue for the
Trust Fund will expire at the end of this fiscal year. Reauthorization
proposals have been introduced in both the Senate^2 (S. 1300) and the
House^3 (H.R. 2881), which identify various revenue sources to fund FAA,
including NextGen.^4 These sources include the current excise taxes,
flight surcharges, and certification and registration fees. As requested,
my statement today will address the following questions: (1) To what
extent can the current funding structure support FAA's activities,
including NextGen? (2) What are the implications of selected provisions of
proposals to fund aviation activities? (3) What issues could affect the
overall cost of NextGen? My remarks are based on recent GAO reports and
testimonies^5 on FAA's current funding structure, funding options that
might address those concerns, and NextGen. For these reports and
testimonies, we reviewed relevant literature, examined FAA data and
forecasts, and interviewed FAA and other government agency officials,
aviation industry group representatives, and academic and financial
experts. In addition, for this statement, we analyzed provisions of the
reauthorization proposals dealing with funding FAA and NextGen and
discussed them with FAA officials and aviation industry group
representatives. We conducted our work during July 2007 in accordance with
generally accepted government auditing standards.

^1JPDO was authorized by the Vision 100--Century of Aviation
Reauthorization Act (Pub. L. No. 108-176).

^2S.1300, 110th Cong., 1st Sess. (May 3, 2007).

Summary

o Recent estimates indicate that FAA's current funding
structure--consisting primarily of Trust Fund revenues plus a
contribution from the General Fund of the U.S. Treasury--can
potentially support FAA's activities, including NextGen. In
aggregate, since the Trust Fund was created in 1970, revenues to
the fund have exceeded appropriations from it, resulting in an
uncommitted balance, or surplus. This balance has declined in
recent years, from about $7.3 billion at the end of fiscal year
2001 to about $1.8 billion at the end of fiscal year 2006. This
decline has occurred because expenditures from the fund are based
on projected revenues and FAA has had to draw down funds when
actual revenues have fallen short of projections and have not been
sufficient to cover expenditures. To help ensure that revenues are
sufficient to cover expenditures, H.R. 2881 proposes that Congress
base expenditures from the Trust Fund on 95 percent, rather than
100 percent, of estimated Trust Fund revenues. Notwithstanding
these recent shortfalls, both FAA and the Congressional Budget
Office (CBO) have estimated that FAA's revenues will continue to
grow over the next decade under the current structure. For
example, CBO has projected that at current tax rates, the current
structure could support about $22 billion in additional spending
over current spending levels (adjusted for inflation) through
2017. Moreover, should Congress wish to provide additional funding
for FAA activities, it could raise additional revenue under the
current structure by raising the rates on one or more of the
current excise taxes or by increasing the General Fund
contribution. This contribution may, however, be limited by the
federal government's long-term fiscal imbalance, and policy
choices, structural changes in the aviation industry, and external
events could affect revenues to the Trust Fund. Furthermore, the
current funding structure raises concerns about equity and
efficiency because users may pay more or less than the costs of
the air traffic control services they receive, and therefore they
may lack incentives to use the national airspace system as
efficiently as possible.

^3H.R.2881, 110th Cong., 1st Sess. (June 27, 2007).

^4In addition, H.R. 2698 would authorize appropriations for FAA's civil
aviation research and development projects.

^5Airport Finance: Preliminary Analysis Indicates Proposed Changes in the
Airport Improvement Program May Not Resolve Funding Needs for Smaller
Airports, [14]GAO-07-617T (Washington, D.C.: Mar. 28, 2007); Federal
Aviation Administration: Observations on Selected Changes to FAA's Funding
and Budget Structure in the Administration's Reauthorization Proposal,
[15]GAO-07-625T (Washington, D.C.: Mar. 21, 2007); Next Generation Air
Transportation System: Progress and Challenges Associated with the
Transformation of the National Airspace System, [16]GAO-07-25 (Washington,
D.C.: Nov. 13, 2006); Aviation Finance: Observations on Potential FAA
Funding Options, [17]GAO-06-973 (Washington, D.C.: Sept. 29, 2006);
National Airspace System Modernization: Observations on Potential Funding
Options for FAA and the Next Generation Airspace System, [18]GAO-06-1114T
(Washington, D.C.: Sept. 27, 2006); and Federal Aviation Administration:
An Analysis of the Financial Viability of the Airport and Airway Trust
Fund, [19]GAO-06-562T (Washington, D.C.: Mar. 28, 2006).

o Selected provisions of proposals for funding aviation activities
have implications for revenue generation, but in some cases could
have unintended consequences. For example, S. 1300 would authorize
the FAA Administrator to impose a surcharge of $25 per flight on
many aircraft owners and operators to help pay for NextGen capital
projects. While a surcharge would create an incentive for
efficient use of air traffic services, some stakeholders question
the equity of charging the same fee for aircraft of all sizes, and
raise the possibility that such a fee could lead to reduced air
service for small communities. S. 1300 would also allow FAA to
seek debt financing for capital projects in the private capital
market--a proposal that could possibly create a stable revenue
source, but would cost the government more than paying for its
investments with appropriations or borrowing from the Treasury.
H.R. 2881 would allow airports to raise their passenger facility
charges (PFC).^6 This action would provide additional revenues for
aviation infrastructure and likely benefit larger airports more
than smaller airports. However, it could also have a limited
effect on the demand for air travel. H.R. 2881 would also
establish increased fees for certain FAA certification and
registration activities, and such fees would provide additional
revenues. However, in general, when fees are imposed for aviation
activities, care must be taken to prevent them from contributing
to a situation in which safety might be compromised.
o While revenue estimates indicate that the current funding
structure could adequately support NextGen, a number of issues
could affect its overall cost, especially those related to its
resource requirements. A major issue is the precise content and
associated costs of NextGen infrastructure and research. JPDO is
developing and has already released some key planning documents
that describe the capabilities needed to transition to NextGen,
establish time lines for completing essential tasks, and identify
the responsibilities of the JPDO partner agencies for these tasks,
together with the required funding. These documents should provide
more insight into NextGen's requirements and costs. Additionally,
questions remain over which entities will fund and conduct some of
the necessary research, development, demonstration projects, and
training that will be needed to achieve certain NextGen
capabilities. Other issues include the cost savings that could
result from improvements in FAA operations and acquisition
processes, which could reduce the need for new NextGen funding,
and the extent to which FAA uses public-private partnerships and
leasing to acquire NextGen infrastructure as flexibly and as
cost-effectively as possible.

Background

Although there have been fluctuations in its funding sources, FAA
has been supported by the current structure for decades. The
agency is primarily funded by the Trust Fund (82 percent)--which
receives revenues from a series of excise taxes paid by users of
the national airspace system--and by General Fund revenues. These
excise taxes are associated with purchases of airline tickets and
aviation fuel, as well as the shipment of cargo, and are scheduled
to expire September 30, 2007. Trust Fund revenues are available
for use subject to appropriation. Including interest earned on its
balances, the Trust Fund received about $11.2 billion in 2006. In
addition, about $2.6 billion was appropriated for fiscal year 2006
from the General Fund for FAA operations. Table 1 shows the
distribution of Trust Fund revenues for 2005 by source.^7

^6The PFC program allows the collection of PFC fees up to $4.50 for every
enplaned passenger at commercial airports controlled by public agencies.
Airports use these fees to fund FAA-approved projects that enhance safety,
security, or capacity; reduce noise; or increase air carrier competition.

^7As recommended by FAA, we are using 2005 data to show the breakdown of
Trust Fund revenue by source because of uncertainty in the available 2006
data regarding the distribution of fuel tax revenues between commercial
and general aviation.

Table 1: Sources of Trust Fund Revenue, Fiscal Year 2005

Dollars in millions
Revenue source Amount Percent
Passenger ticket tax $5,161 48
Passenger flight segment tax 1,900 18
Cargo tax 461 4
Fuel tax 971 9
International departure and arrival tax 1,922 18
Interest 440 4
Refunds^a (101) (1)
Total $10,754 100

Source: GAO analysis of FAA data.

aRefunds include: refund of aviation fuel other than gas
(noncommercial), refund of aviation gasoline (noncommercial), and
other refunds/credits.

The Trust Fund was established by the Airport and Airway Revenue
Act of 1970^8 to help fund the development of a nationwide airport
and airway system and to fund investments in air traffic control
facilities. It provides all of the funding for three of FAA's four
accounts, including (1) the Facilities and Equipment (F&E)
account, which funds technological improvements to the air traffic
control system; (2) the Research, Engineering, and Development
(RE&D) account, which funds research on issues related to aviation
safety, mobility, and the environment as well as most of FAA's
contribution to JPDO;^9 and (3) the Airport Improvement Program
(AIP), which provides grants for construction and safety projects
at airports. In addition, at various times during its history, the
Trust Fund has provided all or some portion of the funding for
FAA's Operations account. In 2006, expenditures from the Trust
Fund totaling $11.2 billion were made among the four accounts as
shown in figure 1.

^8Pub. L. No. 91-258.

^9For the past few years, FAA and NASA have been the primary supporters of
JPDO activities. The administration's proposed budget for fiscal year 2008
for FAA includes $17.8 million to support JPDO activities. NASA is
planning to contribute about $18 million to JPDO in fiscal year 2008.

Figure 1: Trust Fund Expenditures for Fiscal Year 2006

Estimates Indicate That Current Funding Structure Can Support FAA
Activities, Including NextGen, but Structure Raises Concerns about
Equity and Efficiency

The current funding structure--excise taxes plus a General Fund
contribution--has funded FAA for many years, and estimates
indicate that this structure can potentially provide sufficient
funds for the next several years to support the transition to
NextGen. As the number of air travelers has grown, so have excise
tax revenues. Even though revenues fell with the decline in air
travel following the terrorist attacks of September 11, 2001, they
began to rise again in fiscal year 2004, and FAA estimates that if
the current taxes remain in effect at their current rates,
revenues will continue to increase.

While retaining the basic structure for funding FAA, Congress has
at times changed the mix of excise taxes and some of the tax rates
and has appropriated different amounts from the General Fund to
offset Trust Fund fluctuations. For example, when the taxes were
most recently reauthorized in 1997, Congress added the passenger
segment tax while reducing the passenger ticket tax rate from 10
percent to 7.5 percent. Congress has also appropriated varying
amounts of General Fund revenues for FAA during the past 25 years,
ranging from 0 to 59 percent of FAA's budget and averaging around
20 percent since fiscal year 1997. The amount of the General Fund
contribution fluctuates because the contribution is based on the
incoming Trust Fund revenues that are available to fund the
Operations account after revenues have been allocated to fund the
F&E, AIP, and RE&D accounts. Therefore, fluctuations in Trust Fund
revenues and FAA expenditures require different levels of General
Fund contributions.

Since the Trust Fund's creation in 1970, revenues have in
aggregate exceeded spending commitments, resulting in an
uncommitted balance, or surplus.^10 As of the end of fiscal year
2006, the Trust Fund's uncommitted balance was about $1.8 billion.
The Trust Fund's uncommitted balance 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 the last 6
years, for example, the uncommitted balance has been declining
because expenditures from the fund are based on projected revenues
and actual revenues have been less than FAA forecasted.^11

^10The Trust Fund's uncommitted balance represents money against which
there is no outstanding budget commitment or budget authority to spend.

^11In recent years, the difference between forecasted and actual Trust
Fund revenues has been smaller than it was earlier in the decade, in part
because the external demand shocks have been smaller and in part because
of efforts by FAA to improve its forecasting models. However, the actual
balance at the end of fiscal year 2007 will likely be lower than
forecasted, according to FAA.

Figure 2: Airport and Airway Trust Fund End-of-Year Uncommitted
Balance, Fiscal Years 1999-2007

Note: Amount for end of fiscal year 2007 is estimated.

In prior work, we ran scenarios in which Trust Fund revenues
continued to fall short of forecasted levels and the Trust Fund
balance continued to decline, eventually falling to zero. We
believe these scenarios raise concerns because in the past the
Trust Fund's uncommitted balance has been used to offset
lower-than-expected Trust Fund revenues and decreased General Fund
contributions. The zero-balance scenario would most likely have
implications for Congress in funding FAA programs, including
NextGen. To address this concern, H.R. 2881 proposes to base
expenditures from the Trust Fund on 95 percent, rather than 100
percent, of estimated Trust Fund revenues, which would reduce the
likelihood of running the Trust Fund balance to zero.

According to projections prepared by the Congressional Budget
Office (CBO),^12 the existing funding structure, if maintained,
will generate substantially increasing revenues over the next
decade. Assuming that the General Fund provides about 19 percent
of FAA's budget, CBO estimates that through 2017 the Trust Fund
can support about $22 billion in additional spending over the
baseline FAA spending levels CBO has calculated for FAA (the 2006
funding level, growing with inflation) provided that most of that
spending occurs after 2010.^13 According to FAA, the majority of
the funding for NextGen will take place after 2010.

^12CBO, Financing Investment in the Air Traffic Control System
(Washington, D.C.: Sept. 27, 2006).

Moreover, if the desired level of spending exceeded what was
likely to be available from the Trust Fund at current tax rates,
Congress could make changes within the current structure that
would provide FAA with additional revenue. For example, Congress
could raise more revenue from airspace system users for
modernization or for other purposes by raising the rates on one or
more of the current excise taxes. Congress could also provide more
General Fund revenues for FAA, although the nation's fiscal
imbalance may make a larger contribution from this source
difficult.

While the current funding structure can produce enough revenue to
fund FAA, including NextGen, this structure presents equity and
efficiency concerns. FAA and others have stated 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. 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 national airspace system, their price for using
the system (the taxes or charges they pay) should accurately
reflect the costs their use imposes on the system.^14 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.^15

^13This estimate takes into account expected increases in air travel in
estimating revenues, but, by law, it does not take into account any
possible increases in expenditures for FAA's Operations account due to
these increases in air travel because increases in expenditures are based
on a baseline figure adjusted for inflation.

^14Assessing both the equity and the efficiency of a funding structure
requires knowledge of how costs are divided among users. FAA recently
completed a cost allocation study that assigns air traffic control costs
to user groups based on aircraft type. However, we determined that FAA's
methodology lacked certain analyses and documentation that would be
important in determining whether costs as assigned reasonably reflect the
services received by various users.

Selected Provisions of Proposals for Funding Aviation Activities
Have Implications for Revenue Generation and Could Have Unintended
Consequences

Provisions of the Senate and House reauthorization bills propose
different types of revenue sources to fund FAA and NextGen. These
provisions have implications for revenue generation, but could
also have unintended consequences.

S. 1300 includes a provision requiring the FAA Administrator to
impose a surcharge of $25 per flight to be available to pay the
costs of NextGen capital projects. All owners or operators of
aircraft in the national airspace system would be required to pay
this surcharge except those that fall into certain exempt
categories.^16 FAA estimates that this fee could yield $400
million a year by 2011. We estimate, on the basis of 2006
operations, that commercial airlines would contribute 36 percent
of the fees; regional airlines would contribute 31 percent, though
carrying far fewer passengers; and general aviation would
contribute 11 percent (see fig. 3).

^15Supply 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. Given the importance of
some of these other factors to users' decisions about using the national
airspace system, the influence on these decisions of the prices charged
for FAA services may be comparatively small for some users.

^16These exempt categories include military and public aircraft, piston
engine aircraft, and turboprop aircraft operating outside of controlled
airspace, among others.

Figure 3: Distribution of Surcharge by User, Based on 2006
Operations

One potential advantage of this type of charge is that it would
establish a more direct relationship between revenue and costs
compared with the current excise taxes. Advocates of this approach
say that funding FAA in part through such a charge would do more
than the current structure to ensure that revenues are adequate to
cover costs over time and to create incentives for efficient use
of the national airspace system by directly connecting charges
with the costs imposed by users. On the other hand, although this
connection would appear to exist for FAA's costs of providing
terminal control services--the more flights, the more charges an
operator pays--there is no obvious connection with the costs of en
route services because the charge would be the same for short and
long flights. In addition, concerns have been raised about the
equity of a charge that would apply equally to all jet aircraft
regardless of size. Another concern has been raised that the fee
might lead to reduced air service by turboprop operators providing
regular service to small communities as well as reduced service
provided through the Essential Air Service program to small
communities because of the increased expense that the fee would
represent.

Another S. 1300 provision would grant FAA the authority to seek
debt financing by issuing bonds directly to the private capital
market. Supporters of this bonding proposal for FAA claim a number
of advantages to this financing approach. One claim is that debt
financing could provide FAA with a stable and predictable revenue
source for funding capital development. FAA officials state that
the uncertainty associated with the appropriation process makes
planning for a large, complex, and expensive air traffic control
system like NextGen difficult. Over the years, federal agencies
have used a variety of financing approaches to acquire capital
assets. However, from a governmentwide perspective, some
approaches, such as bonding, raise serious concerns because they
ultimately will result in higher overall costs. Moreover, if FAA
were granted borrowing authority, the associated costs would be
higher by borrowing directly from the private capital market
instead of through the Treasury. According to Treasury officials
and representatives of investment firms, this occurs because the
Treasury is charged a lower interest rate to borrow money. The
costs of borrowing may also be higher if the revenue option--such
as taxes or user charges--used to pay back the bond is subject to
appropriations because there would most likely be a risk premium
added to the credit rating to compensate for the risk that
appropriations may not be provided. We have reported that given
the federal government's long-term structural fiscal imbalance,
any action that may increase the government's costs requires sound
justification and careful consideration before it is adopted.^17

^17 [20]GAO-06-1114T .

A provision of H.R. 2881 would allow airports to increase PFCs to
a maximum of $7, while an S. 1300 provision would retain the cap
at $4.50. Increasing the cap on PFCs would generate more revenue,
especially for larger airports. A $7 PFC could generate nearly $2
billion in additional revenues for airports assuming all airports
imposed the maximum PFC (see table 2).

Table 2: Projected Maximum PFC Collections for 2007 with a $7 PFC

Dollars in millions
2007 PFC
2007 PFC collections if only collections if
2007 PFC airports currently at $4.50 all airports had
Airport size collections^a increased to $7 a $7 PFC
Large hub $1,869 $2,831 $3,152
Medium hub 487 706 914
Subtotal $2,356 $3,537 $4,066
Small hub 184 262 354
Nonhub 71 108 144
Nonprimary
Commercial
Service 1 1 5
Subtotal $256 $371 $503
Total^b $2,612 $3,907 $4,569

Source: GAO analysis of FAA data.

aThere are currently 517 commercial service airports eligible to
apply for a PFC. These are airports with more than 2,500 annual
enplanements.

bMay not total due to rounding.

However, not all airports are expected to move to the maximum
ceiling right away because many airports have a lesser or no PFC
in place currently. If only those airports with a PFC at the
current maximum of $4.50 increased their PFC to $7.00 and the
others made no change, the proposed fee increase would yield
approximately $1.3 billion per year in additional revenues. This
calculation assumes that the increased PFC would not affect
passenger demand for air travel. We have previously calculated
that a PFC increase could reduce passenger demand, which would
reduce the PFC revenue collected at the higher rate. Nevertheless,
our previous work suggests the revenue reduction due to demand
effects would likely be small.^18 Smaller airports (small and
nonhub) would not benefit directly as much from this ability to
increase PFCs because smaller airports have fewer passengers from
whom to collect PFCs.^19 However, smaller airports, which rely
primarily on AIP grants for capital funding, may benefit
indirectly from an increased cap on PFCs. AIP's Small Airport
Fund, which totaled $428 million in 2006, is funded by the
turnback of up to 75 percent of large and medium hub airports'
entitlements.^20 H.R. 2881 would increase the turnback to 100
percent of entitlements for large and medium hub airports that
impose a PFC above $4.50. While S. 1300 does not include an
increase in PFCs, it does include a pilot program for up to six
airports to impose unlimited PFCs if the airports collect the fee
directly from passengers.

18GAO, Passenger Facility Charges: Program Implementation and the Potential Effects of Proposed Changes, GAO/RCED-99-138 (Washington, D.C.: May 19, 1999).

19General aviation airports are excluded since they do not have passengers that would pay a PFC.

H.R. 2881 includes increased user fees to pay for the costs of
certain certification and registration activities of FAA. Such
fees would provide additional revenue and more directly link
revenue contributions to the cost of the services. These fees
cover services and activities for issuing certain certificates,
registering aircraft and airmen, issuing airmen medical
certificates, and providing a legal opinion pertaining to aircraft
registration or recordation. In some cases, such as the
registration of aircraft, FAA already charges a modest fee ($5),
which has not been raised since 1964. We have reported that this
fee does not cover the cost of reviewing and processing a
registration application and have recommended that FAA increase
the fee.^21 The proposal would raise the fee to $130 and allow FAA
to periodically adjust this and other fees based on the cost of
providing the service. However, in general, when fees are imposed
for aviation activities, care must be taken that they do not
contribute to a situation in which safety might be compromised.

Resource Requirements for NextGen and Other Issues Could Affect Its
Overall Cost

While revenue estimates indicate that the current funding
structure can potentially fund NextGen, a number of issues could
affect NextGen's overall cost, especially its resource
requirements, which have not yet been fully determined. The
precise content and associated costs of NextGen infrastructure and
research are not fully known, nor are the resources that will be
contributed by other federal agencies. Other issues include the
cost savings that could result from more efficient FAA operations
and acquisition processes, which could reduce the need for new
NextGen funding, and the extent to which FAA uses public-private
partnerships or leasing arrangements to acquire NextGen
infrastructure as flexibly and as cost-effectively as possible.

20Entitlements are AIP funds apportioned to airport sponsors and states for eligible
projects based on formulas.

21GAO, Aviation Safety: Unresolved Issues Involving U.S.-Registered Aircraft,
GAO/RCED-93-135 (Washington, D.C.: June 18, 1993).

JPDO recently estimated that the total federal cost for NextGen
infrastructure through 2025 will range between $15 billion and $22
billion. JPDO also reported that a preliminary estimate of the
corresponding cost to system users, who will have to equip with
the advanced avionics that are necessary to realize the full
benefits of some NextGen technologies, ranges between $14 billion
and $20 billion.^22 Thus, according to JPDO, the total costs for
NextGen could be anywhere between $29 billion and $42 billion. We
consider $13 billion to be a significantly wide range and believe
there is a need to better define the costs of NextGen.

According to JPDO officials, more precise cost estimates will
depend on information contained in several key planning documents,
some of which have been released and some of which are still being
developed. Last month, JPDO released both the latest version of
the NextGen Concept of Operations^23 and the first version of the
NextGen Enterprise Architecture.^24 JPDO is developing an
Integrated Work Plan that will describe the capabilities needed to
transition to NextGen from the current system and provide the
research, policy and regulation, and acquisition time lines
necessary to achieve NextGen by 2025. The Integrated Work Plan,
scheduled for release at the end of this month, is akin to a
project plan and will be critical for planning the partner
agencies' fiscal year 2009 budgets and programs. JPDO is also
developing an Office of Management and Budget (OMB) Exhibit 300
for NextGen that will be used as input to funding decisions for
NextGen research and acquisitions across JPDO's partner
agencies.^25 This Exhibit 300 will be due to OMB in September 2007
and will inform decisions about the partner agencies' 2009 budget
submissions. It will be important that these various documents be
used in the near term to develop more refined cost estimates for
NextGen.

22JPDO noted that this range for avionics costs reflects uncertainty about equipage costs for individual aircraft, the number of very light jets that will operate in high-performance airspace, and the amount of out-of-service time required for installation.
23The NextGen Concept of Operations provides written descriptions of how the NextGen system is envisioned to operate in 2025 and beyond, including highlighting key research and policy issues that will need to be addressed. Following an introductory section, the Concept of Operations has eight sections covering air traffic management operations, airport operations and infrastructure services, net-centric infrastructure services, shared situational awareness services, security services, an environmental management framework, safety management services, and performance management services.

24The NextGen Enterprise Architecture is a technical description of the NextGen system, akin to a blueprint for a building. The Enterprise Architecture is meant to provide a common tool for planning and understanding the complex, interrelated systems that will make up NextGen.

While JPDO has released estimates for NextGen, questions remain
over how much it will cost and which entities will fund and
conduct some of the necessary research, development, demonstration
projects, and training that will be key to achieving certain
NextGen capabilities. In the past, the National Aeronautics and
Space Administration (NASA) has performed a significant portion of
federal aeronautics research and development, including
intermediate technology development. However, NASA's aeronautics
research budget and proposed funding show a 30-percent decline, in
constant 2005 dollars, from fiscal year 2005 through fiscal year
2011. To its credit, NASA plans to focus its research on the needs
of NextGen. However, NASA is also moving toward an emphasis on
fundamental research and away from developmental work and
demonstration projects, which could negatively affect NextGen if
other agencies do not assume these efforts. According to FAA and
JPDO officials, they are currently studying these issues and
trying to assess how much research and development work FAA can
assume. FAA has proposed increasing its research and development
funding by $280 million over the next 5 years. However, a draft
report by an advisory committee to FAA stated that FAA would need
at least $100 million annually in increased funding to assume
NASA's research and development work, and establishing the
necessary infrastructure within FAA could delay the implementation
of NextGen by 5 years.

The overall cost of NextGen could be reduced to the extent that
FAA realizes cost savings from improved operations and acquisition
processes. We have reported that, over the past few years, FAA has
made significant progress in moving to more businesslike and
cost-effective operations, which should better position the agency
for the complex implementation of NextGen.^26 Cost savings could
come about in a number of ways. For example, the transformation to
NextGen may present new opportunities for consolidating facilities
or outsourcing services, both of which could bring long-term
savings to FAA. In addition, FAA has reported improvements in its
management of major system acquisitions. To the extent that FAA
can keep NextGen systems on schedule, FAA may be able to avoid the
escalation in acquisition costs that plagued its past
modernization efforts. Keeping acquisitions on schedule will also
mean realizing more quickly the increased efficiencies or safety
benefits of new systems and technologies, as well as avoiding the
costs and inefficiencies of maintaining existing systems.

25Section 300 of OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget (Nov. 2, 2005), sets forth requirements for federal agencies for planning, budgeting, acquiring, and managing information technology capital assets. Exhibit 300 is designed to ensure that the business case for an investment is tied to an agency�s mission statement, long-term goals and objectives, and annual performance plans. It is submitted with an agency�s budget submission to OMB.

Finally, the extent to which FAA employs public-private
partnerships or leasing arrangements as part of its acquisition
strategy for NextGen could affect the system's overall cost. FAA
is currently exploring these types of options for its future
nationwide rollout of Automatic Dependent Surveillance-Broadcast,
a surveillance system that FAA considers a cornerstone technology
of NextGen. We believe that these types of arrangements could
produce significant cost savings and lessen some risks for FAA.
However, such arrangements must be carefully structured to protect
the interests of the public and the federal government, and to
ensure proper governmental oversight.

With the excise taxes that fund most of FAA's budget scheduled to
expire at the end of September 2007, Congress will need to act to
avoid a lapse in revenue to the Trust Fund. If the taxes are not
reauthorized by that time, the only revenues credited to the Trust
Fund will be the interest earned on the fund's cash balance. FAA
estimates that two previous lapses in 1996 and 1997 resulted in
the Trust Fund not receiving about $5 billion in taxes and fees
that were never recovered.

FAA estimates that the uncommitted balance in the Trust Fund at
the end of fiscal year 2007 will be about $1.8 billion dollars. At
current monthly spending levels, a 2- to 3-month lapse in fiscal
year 2008 could reduce the revenue in the Trust Fund enough to
cause the uncommitted balance to fall to zero. If the Trust Fund
balance falls to zero, the continuation of FAA's
programs--including the development of NextGen and grants to
airports--would depend on providing additional revenues from the
General Fund.

26GAO, Federal Aviation Administration: Key Issues in Ensuring the Efficient Development and Safe Operation of the Next Generation Air Transportation System, GAO-07-636T (Washington, D.C.: Mar. 22, 2007).

Thank you, Mr. Chairman, that concludes my statement. I will be
pleased to answer any questions that you or other Members of the
Committee might have.

Contacts and Acknowledgments

For further information about this testimony, please contact
Gerald L. Dillingham at (202) 512-2834. Other key contributors to
this testimony include Paul Aussendorf, Jay Cherlow, Bess
Eisenstadt, Carol Henn, Maureen Luna-Long, Faye Morrison, Richard
Scott, and Teresa Spisak.

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Highlights of [23]GAO-07-1104T , a testimony before the Committee on
Finance, U.S. Senate

July 12, 2007

FEDERAL AVIATION ADMINISTRATION

Viability of Current Funding Structure for Aviation Activities and
Observations on Funding Provisions of Reauthorization Proposals

GAO's statement addresses (1) the extent to which the current funding
structure can support FAA's activities, including NextGen, (2) the
implications of selected provisions of proposals to fund aviation
activities, and (3) issues that could affect the overall cost of NextGen.
The statement is based on recent GAO reports and testimonies, updated
through interviews with FAA officials and stakeholder representatives.

Recent estimates indicate that FAA's current funding structure--consisting
primarily of Trust Fund revenues plus a contribution from the General Fund
of the U.S. Treasury--can potentially support FAA's activities, including
NextGen. The current structure has provided sufficient funding for FAA's
activities to date, and both FAA and the Congressional Budget Office (CBO)
have estimated that revenues will continue to increase. According to CBO
projections through 2017, the current structure, if maintained, could
support about $22 billion in additional spending over current spending
levels (adjusted for inflation). Congress could also raise more revenue
for FAA by raising excise tax rates or by increasing the General Fund
contribution. However, contributions from the General Fund may be limited
by the federal government's long-term fiscal imbalance, and policy
choices, structural changes in the aviation industry, and external events
could affect Trust Fund revenues. Furthermore, the current funding
structure raises concerns about equity and efficiency because users may
pay more or less than the costs of the air traffic control services they
receive, and therefore they may lack incentives to use the national
airspace system as efficiently as possible.

Selected proposals for funding aviation activities have implications for
revenue generation, but could pose unintended consequences. For example,
S. 1300 would authorize a surcharge of $25 per flight on many flights to
help pay for NextGen capital projects. While a surcharge would create an
incentive for efficient use of air traffic services, some stakeholders
raise the possibility that such a fee could lead to reduced air service
for small communities. S. 1300 would also allow FAA to seek debt financing
for capital projects in the private capital market--a proposal designed to
create a stable revenue source but costlier than using appropriations or
borrowing from the U.S. Treasury. H.R. 2881 would raise airport passenger
facility charges, thereby benefiting larger airports more than smaller
ones, and it would increase fees for certain FAA certification and
registration activities. However, in general, when fees are imposed for
aviation activities, care must be taken that they do not contribute to a
situation in which safety might be compromised.

Issues that could affect the overall cost of NextGen are primarily related
to the content and cost of its infrastructure and research. JPDO is
developing and has issued some key planning documents that will provide
more insights into some of these issues, but questions remain over which
entities will perform activities such as research and development. Other
issues include the cost savings that could result from more efficient FAA
operations and acquisition processes, which could reduce the need for new
NextGen funding, and the extent to which public-private partnerships and
leasing can be used to acquire NextGen infrastructure as flexibly and
cost-effectively as possible.

References

Visible links
8. http://www.gao.gov/
9. http://www.gao.gov/
10. http://www.gao.gov/fraudnet/fraudnet.htm
11. mailto:[email protected]
12. mailto:[email protected]
13. mailto:[email protected]
14. http://www.gao.gov/cgi-bin/getrpt?GAO-07-617T
15. http://www.gao.gov/cgi-bin/getrpt?GAO-07-625T
16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-25
17. http://www.gao.gov/cgi-bin/getrpt?GAO-06-973
18. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1114T
19. http://www.gao.gov/cgi-bin/getrpt?GAO-06-562T
20. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1114T
21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-636T
22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1104T
23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1104T
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