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						 
                                                                 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
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 agencyï¿½s mission statement, long-term goals and objectives, and annual performance plans. It is submitted with an agencyï¿½s 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.
			  
			  GAOï¿½s Mission

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

           The fastest and easiest way to obtain copies of GAO documents at
           no cost is through GAO's Web site ( [8]www.gao.gov ). Each
           weekday, GAO posts newly released reports, testimony, and
           correspondence on its Web site. To have GAO e-mail you a list of
           newly posted products every afternoon, go to [9]www.gao.gov and
           select "Subscribe to Updates."
			  
			  Order by Mail or Phone

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

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

           To order by Phone: Voice: (202) 512-6000
			  TDD: (202) 512-2537
			  Fax: (202) 512-6061
			  
			  To Report Fraud, Waste, and Abuse in Federal Programs

           Contact:

           Web site: [10]www.gao.gov/fraudnet/fraudnet.htm
			  E-mail: [11][email protected]
			  Automated answering system: (800) 424-5454 or (202) 512-7470
			  
			  Congressional Relations

           Gloria Jarmon, Managing Director, [12][email protected] (202)
           512-4400 U.S. Government Accountability Office, 441 G Street NW,
           Room 7125 Washington, D.C. 20548
			  
			  Public Affairs

           Paul Anderson, Managing Director, [13][email protected] (202)
           512-4800 U.S. Government Accountability Office, 441 G Street NW,
           Room 7149 Washington, D.C. 20548


(540159)

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

[22]www.gao.gov/cgi-bin/getrpt?GAO-07-1104T .

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

For more information, contact Gerald L. Dillingham at (202) 512-2834 or
[email protected].

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

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.

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
*** End of document. ***