Aviation Finance: Observations on the Current FAA Funding	 
Structure's Support for Aviation Activities, Issues Affecting	 
Future Costs, and Proposed Funding Changes (01-AUG-07,		 
GAO-07-1163T).							 
                                                                 
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 most of the excise taxes 
that support the Trust Fund will expire September 30, 2007.	 
Several proposals, including two reauthorization bills--H.R. 2881
and S. 1300--identify various funding sources for FAA activities,
including NextGen. Among these are current excise taxes, fees,	 
and flight surcharges. 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)	 
issues that could affect the overall cost of NextGen, and (3) the
implications of selected proposals to fund aviation activities.  
The statement is based on recent GAO reports and testimonies.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1163T					        
    ACCNO:   A73748						        
  TITLE:     Aviation Finance: Observations on the Current FAA Funding
Structure's Support for Aviation Activities, Issues Affecting	 
Future Costs, and Proposed Funding Changes			 
     DATE:   08/01/2007 
  SUBJECT:   Air traffic control systems			 
	     Air transportation 				 
	     Aviation						 
	     Cost analysis					 
	     Cost effectiveness analysis			 
	     Excise taxes					 
	     Federal funds					 
	     Financial analysis 				 
	     Fuel taxes 					 
	     Transportation legislation 			 
	     Trust funds					 
	     Cost estimates					 
	     Program implementation				 
	     Next Generation Air Transportation 		 
	     System						 
                                                                 
	     Treasury General Fund				 

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GAO-07-1163T

   

     * [1]Summary
     * [2]Background
     * [3]Estimates Indicate That Current Funding Structure Can Suppor
     * [4]Technology Requirements and Other Issues Could Affect NextGe
     * [5]Selected Proposals for Funding Aviation Activities Could Gen
     * [6]GAO Contact and Staff Acknowledgments
     * [7]GAO's Mission

          * [8]Order by Mail or Phone

Testimony

Before the Subcommittee on Select Revenue Measures, Committee on Ways and
Means, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 2:00 p.m. EDT
Wednesday, August 1, 2007

AVIATION FINANCE

Observations on the Current FAA Funding Structure's Support for Aviation
Activities, Issues Affecting Future Costs, and Proposed Funding Changes

Statement of Gerald L. Dillingham, Director
Physical Infrastructure Issues

GAO-07-1163T

Mr. Chairman and Members of the Subcommittee:

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 an analysis of future
demand and system capacity that was conducted by the Joint Planning and
Development Office (JPDO),1 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 JPDO 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 President's budget
proposes to spend $4.6 billion over the next 5 years for NextGen,
including both capital costs and research and development costs.

As you know, the current authorization for FAA, the Airport and Airway
Trust Fund (Trust Fund), and most of the excise taxes that provide revenue
for the Trust Fund will expire at the end of this fiscal year. Several
proposals, including two reauthorization bills--H.R. 28812 and S.
13003--specify various revenue sources to fund FAA, including NextGen.4
Among these sources are the current excise taxes, including fuel taxes;
certification and registration fees; and flight surcharges. 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 issues could affect the overall cost of
NextGen? (3) What are the implications of selected provisions of proposals
to fund aviation activities? My remarks are based on recent GAO reports
and testimonies5 on FAA's current funding structure, NextGen, and funding
options that might address concerns about FAA's current funding structure.
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. 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).

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 the
           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 drawn down funds when actual
           revenues have fallen short of projected 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.

2H.R.2881, 110th Cong., 1st Sess. (June 27, 2007).

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

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

5Airport Finance: Observations on Planned Airport Development Costs and
Funding Levels and the Administration's Proposed Changes in the Airport
Improvement Fund, GAO-07-885 (Washington, D.C.: June 2007); Federal
Aviation Administration: Observations on Selected Changes to FAA's Funding
and Budget Structure in the Administration's Reauthorization Proposal,
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,  GAO-07-25 (Washington,
D.C.: Nov. 13, 2006); Aviation Finance: Observations on Potential FAA
Funding Options, 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, 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, GAO-06-562T
(Washington, D.C.: Mar. 28, 2006).

           o Although revenue estimates indicate that the current funding
           structure can potentially support FAA's activities, including
           NextGen, a number of issues could affect the overall cost of
           NextGen, especially those related to its technology requirements.
           A major issue is the specific systems and associated costs of
           NextGen infrastructure and research and development. 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, some of which
           are still being developed, 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 might 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 cost-effectively as
           possible.
           o Selected proposals for funding aviation activities could
           generate additional revenues, but in some cases could also lead to
           unintended consequences. For example, a recommendation from the
           House Committee on Transportation and Infrastructure to increase
           the tax rates for general aviation jet fuel and aviation gasoline
           would increase Trust Fund revenue, but could reduce fuel
           purchases, which would limit the amount of the revenue increase.
           In addition, a provision of H.R. 2881 would allow airports to
           raise their passenger facility charges (PFC).6 This action would
           provide additional revenues for aviation infrastructure,
           especially for larger airports. However, it could also reduce the
           demand for air travel. Another provision of H.R. 2881 would
           establish new or increased fees for certain FAA certification and
           registration activities, and such fees would provide additional
           revenues. In general, though, when fees are imposed for aviation
           activities, care must be taken to ensure that efforts to avoid the
           fees do not compromise safety. An S. 1300 provision 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 other stakeholders are concerned that
           such a fee could lead to reduced air service for small
           communities. Another S. 1300 provision would allow FAA to seek
           debt financing for capital projects in the private capital
           market--a proposal that, according to proponents, would provide a
           stable funding source, but would result in higher interest costs
           for the government than borrowing from the Treasury.
   
			  Background

           Although there have been fluctuations in its funding sources, FAA
           has been supported by the current structure for decades. The
           agency is funded primarily 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 the General Fund. The excise
           taxes are associated with purchases of airline tickets and
           aviation fuel, as well as the shipment of cargo, and most 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 fiscal
           year 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 
Refundsa                                  (101)     (1) 
Total                                   $10,754     100 

           Source: GAO analysis of FAA data.

           aIncludes refunds of taxes on aviation fuel other than gas
           (noncommercial) and on aviation gasoline (noncommercial) as well
           as other refunds or credits.

           The Trust Fund was established by the Airport and Airway Revenue
           Act of 19708 to help fund the development of a nationwide airport
           and airway system 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 fiscal year 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 the National Aeronautics and Space
Administration 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. The National Aeronautics and
Space Administration 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 the
           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.

           Although the current funding structure may 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.

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.

           Technology Requirements and Other Issues Could Affect NextGen's 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 technology
           requirements, which have not yet been fully determined. The
           specific systems and associated costs of NextGen infrastructure
           and research and development are not fully known, nor are the
           resources that will be contributed by other federal agencies.
           Other issues include the cost savings that might 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 cost-effectively as
           possible.

           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.16 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. In June 2007, JPDO released both the latest version of
           the NextGen Concept of Operations17 and the first version of the
           NextGen Enterprise Architecture.18 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 and development, 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 development and acquisitions across JPDO's
           partner agencies.19 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.

16JPDO 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.

17The 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 development 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.

18The 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.

19Section 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.

           Although 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
           real terms (i.e., 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.
           Furthermore, according to the draft report, 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.20 Cost savings could
           come about by, for example, consolidating facilities or
           outsourcing services, should Congress choose to approve such
           measures. 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.

           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.
			  
20GAO, 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).

Selected Proposals for Funding Aviation Activities Could Generate More Revenue
but Could Also Lead to Unintended Consequences

           Several proposals, including a recommendation from a House
           committee and selected provisions of the House and Senate
           reauthorization bills, specify different types of revenue sources
           to fund FAA and NextGen. These proposals have implications for
           revenue generation, but could also lead to unintended
           consequences.

           The House Committee on Transportation and Infrastructure has
           recommended to the House Committee on Ways and Means that it
           increase the tax rates for general aviation jet fuel and aviation
           gasoline. If these rate increases are enacted, the fuel taxes
           would provide additional revenue to the Trust Fund. However, the
           increases, although relatively small, might also lead to
           reductions in fuel purchases by general aviation aircraft
           operators. Any estimate of the revenue gain from the higher tax
           rates should take into account these possible reductions in fuel
           purchases. Other factors that could be considered in setting
           general aviation fuel tax rates are the extent to which the rates
           should be set to make FAA's funding more cost-based and how much
           users are able to pay.

           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 all 
                    2007 PFC   airports currently at $4.50  airports had a $7 
Airport size collectionsa               increased to $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 
Totalb             $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. These
           calculations assume 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.21 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.22 However, smaller airports, which rely
           primarily on AIP grants for capital funding, would 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.23 H.R. 2881 would increase the turnback to 100
           percent of entitlements for large 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.
			  
21GAO, Passenger Facility Charges: Program Implementation and the
Potential Effects of Proposed Changes, [15]GAO/RCED-99-138  (Washington,
D.C.: May 19, 1999).

22General aviation airports are excluded since they do not have passengers
that would pay a PFC.

           H.R. 2881 includes new and 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 legal opinions pertaining to aircraft
           registration or recordation. In some cases, such as the
           registration of aircraft, FAA already charges a modest fee ($5),
           but this fee 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
           it.24 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 to ensure that efforts
           to avoid the fees do not compromise safety.

           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.25 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).
			  
23Entitlements are AIP funds apportioned to airport sponsors and states
for eligible projects based on formulas.

24GAO, Aviation Safety: Unresolved Issues Involving U.S.-Registered
Aircraft, GAO/RCED-93-135 (Washington, D.C.: June 18, 1993).

25These 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

           Note: Regional airlines include jets with 60 or fewer seats (18
           percent), jets with 61 or more seats (4 percent), and turbo/piston
           aircraft (9 percent).

           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.26

           With most of the excise taxes that largely fund 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. 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-06-1114T.

           Thank you, Mr. Chairman, that concludes my statement. I will be
           pleased to answer any questions that you or other Members of the
           Subcommittee might have.
			  
			  GAO Contact and Staff 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, Teresa
           Spisak, and Tristan To.
			  
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