Airport Finance: Preliminary Analysis Indicates Proposed Changes
in the Airport Improvement Program May Not Resolve Funding Needs
for Smaller Airports (28-MAR-07, GAO-07-617T).
To address the strain on the aviation system, the Federal
Aviation Administration (FAA) has proposed transitioning to the
Next Generation Air Transportation System (NextGen). To finance
this system and to make its costs to users more equitable, the
administration has proposed fundamental changes in the way that
FAA is financed. As part of the reauthorization, the
administration proposes major changes in the way that grants
through the Airport Improvement Program (AIP) are funded and
allocated to the 3,400 airports in the national airport system.
In response, GAO was asked for an update on current funding
levels for airport development and the sufficiency of those
levels to meet planned development costs. This testimony
comprises capital development estimates made by FAA and Airports
Council International (ACI), the chief industry association;
analyzes how much airports have received for capital development
and whether this is sufficient to meet future planned
development; and summarizes the effects of proposed changes in
funding for airport development. This testimony is based on
ongoing GAO work. Airport funding and planned development data
are drawn from the best available sources and have been assessed
for their reliability. This testimony does not contain
recommendations.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-617T
ACCNO: A67391
TITLE: Airport Finance: Preliminary Analysis Indicates Proposed
Changes in the Airport Improvement Program May Not Resolve
Funding Needs for Smaller Airports
DATE: 03/28/2007
SUBJECT: Airports
Cost analysis
Federal funds
Fuel taxes
Fund audits
Future budget projections
Program evaluation
Strategic planning
Funds management
Capital improvements
Capital investment planning
Cost estimates
FAA Airport Improvement Program
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-07-617T
* [1]The Size and Scope of FAA and ACI Airport Capital Estimates
* [2]Attempts to Reconcile ACI and FAA Estimates of Planned Devel
* [3]Airports Have Averaged About $13 Billion Annually in Capital
* [4]Total Planned Development Exceeds Past Funding Levels by Abo
* [5]Larger Airports--Planned Development Costs Exceed Past Fundi
* [6]Smaller Airports---Planned Development Costs Exceed Past Fund
* [7]Financial Health of Airports Has Improved for Larger Airport
* [8]Administration's FAA Reauthorization Proposal Would Increase
* [9]Administration's FAA Reauthorization Proposal Would Make Fun
* [10]Increasing the PFC Would More Than Offset Loss of AIP Entitl
* [11]Airport Privatization
* [12]Proposed Fuel Tax Rates May Not Yield the Revenue Anticipate
* [13]GAO Contacts and Staff Acknowledgements
* [14]GAO's Mission
* [15]Obtaining Copies of GAO Reports and Testimony
* [16]Order by Mail or Phone
* [17]To Report Fraud, Waste, and Abuse in Federal Programs
* [18]Congressional Relations
* [19]Public Affairs
Testimony
Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 10:00 a.m. EDT
Wednesday, March 28, 2007
AIRPORTFINANCE
Preliminary Analysis Indicates Proposed Changes in the Airport Improvement
Program May Not Resolve Funding Needs for Smaller Airports
Statement of Gerald L. Dillingham, Ph.D
Director, Physical Infrastructure
GAO-07-617T
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to testify before you today as you consider
the Federal Aviation Administration's (FAA) reauthorization proposal
including the Airport Improvement Program (AIP) for fiscal years
2008-2010.^1
Once again, the nation's airports are having to cope with capacity issues.
Air traffic has risen back above pre-September 11 levels, as has the level
of delays. FAA operates one of the safest air transportation systems in
the world, but it is also a system under strain. Already last year, one in
four flights was subject to flight delays. In addition, the system is
expected to absorb a variety of new and differing aircraft in the future,
ranging from the jumbo Airbus A380, which can hold more than 500
passengers, to very light jets, which carry only a few passengers and
could greatly increase the number of aircraft in the air. Demand for air
travel is expected to reach 1 billion passengers by 2015, according to FAA
estimates. The consensus of opinion is that the current aviation system
cannot expand to meet this projected growth. FAA is developing a
modernization program for its air traffic control system called the Next
Generation Air Transportation System (NextGen) to accommodate this growth.
To fund this system, FAA has proposed relying on a cost-based system using
airline user fees and fuel taxes instead of passenger ticket taxes and
other excise taxes that are due to expire at the end of September 2007. In
regard to airports, the administration is proposing $2.75 billion to fund
the AIP program--which is substantially less than the current level--and
changing the way that grants to the 3,400 airports in the national airport
system are funded and allocated under AIP. The administration's proposal
would also allow commercial airports to impose higher passenger facility
charges (PFC) to pay for capital projects.^2
1The FAA administers federal funds for airport capital improvements
through grants awarded from the Airport and Airway Trust Fund under the
AIP.
^2The 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.
In anticipation of this year's reauthorization of FAA, you asked for an
update on airports' current funding levels from our previous reports,^3
the sufficiency of those levels to meet planned development, and how the
administration's proposed reauthorization will affect airports. For this
update, we are providing preliminary responses to these key questions:
o How do FAA and Airports Council International (ACI) estimates of
capital development compare?
o How much have airports received for capital development and
where is the money coming from?
o If current funding levels continue, will they be sufficient to
meet planned capital development costs for 2007 through 2011?
o What are some of the potential effects of changes in how airport
development will be funded as part of the administration's FAA
reauthorization legislation?
To determine how much planned development would cost over the next
5 years, we obtained planned capital development data from FAA and
ACI, a key industry association. To determine the sources of
airport funding, we obtained capital funding data from FAA, the
National Association of State Aviation Officials (NASAO) and
Thomson Financial, a firm that tracks all municipal bond issues.
We obtained funding data from 2001 through 2005 because these were
the most recent years for which consistent data were available and
then adjusted the amounts for inflation to 2006 dollars so that
they could be compared to planned development amounts, which are
also expressed in 2006 dollars. We screened the planned
development and funding data for accuracy and compared funding
streams across databases where possible. We did not, however,
audit how the databases were compiled. To compare the estimates
between FAA and industry, we reconciled survey data and identified
areas where the largest differences occur. We reviewed the
reliability of these data and concluded that they were
sufficiently reliable for our purposes.
We conducted our work from August 2006 to March 2007 in accordance
with generally accepted government auditing standards. More
details about the scope and the methodology of our work are
presented in appendix II.
In summary:
o ACI's estimate of planned development costs is considerably
larger than FAA's, reflecting the broader range of projects
included as well as differences in when and how the estimates are
reported. For 2007 through 2011, FAA estimated annual planned
capital development costs at $8.2 billion, while ACI estimated
annual costs at $15.6 billion, a difference of $7.4 billion
annually. The estimates differ primarily because FAA's estimate
includes only projects that are eligible for federal airport
improvement grants, while ACI's includes all projects, including
those that may not be eligible for federal grants. Types of
projects not eligible for federal grants include parking garages
and commercial space in terminals. However, even when comparing
only AIP-eligible projects, ACI's estimate exceeds FAA's by $1.6
billion annually because of differences in the definition,
measurement, and timing of projects.
o From 2001 through 2005, airports received an average of about
$13 billion a year for planned capital development from a variety
of funding sources. This includes funding for all types of
projects, including those not eligible for AIP grants. The primary
source of this funding was municipal bond proceeds (backed
primarily by airport revenues), which averaged almost $6.5 billion
per year, followed by AIP and PFCs which accounted for $3.6
billion and $2.2 billion, respectively. The 67 larger airports,
which account for 90 percent of passengers, rely more heavily on
bond financing to fund their development, while the other
approximately 3,300 smaller airports in the national system are
more reliant on federal grants.^4
o The total of FAA and ACI estimates of planned development for
2007 through 2011 exceeds historical funding levels by about $1
billion annually. The difference between past funding and future
development plans is not the same for larger and smaller airports.
The 67 larger airports averaged $9.4 billion annually in funding,
as compared to $10 billion annually in AIP-eligible and ineligible
projects--a difference of $600 million annually. All other
airports, including general aviation airports, averaged $3.6
billion annually in funding, as compared to $4 billion annually in
AIP-eligible and ineligible project, a difference of $400 million
annually.
o The administration's reauthorization proposal would provide more
money to larger airports through an increase in PFCs, but its
impact on smaller airports is uncertain because these airports are
more reliant on AIP, whose funding level is being reduced and
whose allocation is being changed. The proposal would reduce the
AIP grants program by $750 million (or more than 20 percent of its
current level) but increase the amount that airports can collect
from PFCs from $4.50 per passenger to $6.00 per passenger,
potentially increasing larger airports' collections by $1.1
billion. For smaller airports that collect far less from PFCs, the
increase in PFCs may not compensate for the overall reduction in
AIP, especially for general aviation airports that have no ability
to collect PFCs. As a separate issue, the administration's
reauthorization proposal would also change the way that AIP and
other FAA programs are funded. The new fuel taxes that have been
proposed to fund AIP and other programs may not generate the
amount of revenue that is anticipated and additional sources of
revenue may have to be found.
The Size and Scope of FAA and ACI Airport Capital Estimates Differ
ACI's estimate of planned capital development costs is
considerably larger than FAA's because it reported a broader base
of projects. According to FAA's estimate, which includes only
projects that are eligible for AIP grants, the total cost of
airport development will be about $41 billion, or about $8.2
billion per year for 2007 through 2011. (See table 1.) ACI
estimates annual costs of about $78 billion, or about $15.6
billion per year, for the same period. These estimates differ
mainly because ACI's estimate includes all future projects that
may or may not have an identified funding source or be eligible
for federal funding and also because they are based on different
estimating approaches. Projects that are eligible for AIP grants
include runways, taxiways, and noise mitigation and reduction
efforts; projects that are not eligible for AIP funding include
parking garages, hangars, and expansions of commercial space in
terminals.
Table 1: Average Annual Planned Development Costs Estimated by FAA
and ACI, by Airport Type, 2007-2011
Source: GAO analysis of FAA and ACI data
aACI's estimate for these categories of airports is drawn directly
from FAA's estimate.
Attempts to Reconcile ACI and FAA Estimates of Planned Development
Costs Illustrate Differences
Several factors account for the differences between the FAA and
ACI estimates of future development costs. The biggest difference
stems from ACI's inclusion of projects that are not eligible for
AIP grants, while FAA's estimate includes only AIP-eligible
projects (see table 2). However, even when comparing just the
AIP-eligible portions of the respective estimates, ACI's estimate
is 20 percent ($8 billion in total or $1.6 billion annually)
greater. This points to differences in how the two estimates are
formed.
^3In 2003 and 1998, GAO reported on airport financing. See Airport
Finance: Past Funding Levels May Not Be Sufficient to Meet Airports'
Planned Capital Development, [20]GAO-03-497T (Washington D.C.: Feb. 25,
2003) and Airport Financing: Funding Sources for Airport Development,
[21]GAO/RCED-98-71 (Washington D.C.: Mar. 12, 1998).
^4We will follow conventions established in GAO's prior report on airport
finance in differentiating between larger (large and medium hub airports)
and smaller (all other categories of commercial and general aviation
airports). See Airport Finance: Past Funding Levels May Not Be Sufficient
to Meet Airports' Planned Capital Development, [22]GAO-03-497T (Washington
D.C.: Feb. 25, 2003).
The Size and Scope of FAA and ACI Airport Capital Estimates Differ
Dollars in millions
Estimated average annual costs
Airport Type Number of Airports FAA ACI
Larger Airports
Large hub 30 $3,414 $8,280
Medium hub 37 933 3,066
Subtotal 67 4,347 11,346
Smaller airports
Small hub 72 629 1,146
Non hub 243 840 840^a
Other commercial
service 135 146 146^a
Reliever 274 579 579^a
General aviation 2574 1,528 1,528^a
New airports 67 111 -
Subtotal 3,365 3,833 4,239
Total 3,432 $8,180 $15,585
Table 2: Comparison of ACI and FAA Estimates of Planned Development for
2007-2011 (Dollars in billions)
For all For large For medium For small
airports hubs hubs hubs
Source Total surveyed surveyed surveyed surveyed
ACI total estimate $78 $51 $36 $11.3 $2.0
Less: AIP-ineligible or
unknown 29 23 15.2 6.6 .8
ACI AIP-eligible portion 49 28^a 21.2 4.6 1.2
FAA Estimate of AIP-eligible 41 21 15.7 3.4 1.3
Difference $8 $7 $5.5 $1.2 $.6
Source: GAO analysis of FAA and ACI data.
aTotal for large, medium, and small hub airports does not equal all
airports surveyed because ACI also surveyed a few GA and nonhub airports.
One difference is the estimating approach. FAA's estimates cover projects
for every airport in the national system, while ACI surveyed the 100
largest airports (mostly large and medium hub airports) and then
extrapolated a total based on cost per enplanement calculations for small,
medium, and large hub airports that did not respond.
Further analysis on a project-by-project level shows variances related to
three other factors:
o Definition--FAA data are based on planned project information
taken from airport master plans and state system plans, minus
projects that already have an identified funding source, while ACI
includes all projects, whether funding has been identified or not.
For example, ACI's estimate for Washington Dulles airport includes
$278 million for an automated people mover, but FAA's estimate
does not because it is being funded by a PFC approved in 2006.
o Measurement--FAA data include only the portion of a project that
is eligible for AIP, while ACI estimates the total value project
cost. On a terminal construction project at Dulles International
Airport, ACI estimated total costs of $1.6 billion for
construction; however, only a small portion is eligible for AIP
funding. FAA did not report any amount because under FAA AIP rules
only a small portion ($20 million) was eligible for AIP funding
and the airport had exhausted the AIP funds that could be used for
this type of project.
o Timing--The ACI and FAA estimated planned development costs for
the same five year time period, but the estimates were made at
different times--the ACI survey was completed in early 2007, while
FAA's estimate is based on information collected in early 2006.
Further, the ACI estimate includes projects that FAA does not
believe will be commissioned during the next 5 years. At Fort
Lauderdale International Airport, for example, ACI reported a $700
million runway project but FAA reports less than $200 million for
the same project. According to FAA, the remaining costs are beyond
2011.
FAA and ACI estimates do not consider cost increases such as
rising construction costs. Going forward these costs may increase,
especially construction costs which have jumped 26 percent in 30
major U.S. cities over the past three years. Industry experts
predict that construction costs will continue to increase project
costs. FAA acknowledges that development estimates may or may not
include increase in costs based on construction uncertainty and
that annual costs increases are not captured.
Airports Have Averaged About $13 Billion Annually in Capital
Financing over the Last 5 Years and Use a Variety of Funding
Sources
From 2001 to 2005, the 3,364 active airports that make up the
national airport system received an average of about $13 billion
per year for planned capital development from a variety of funding
sources. These funds are used for both AIP-eligible and ineligible
projects. The single largest source of these funds was bond
proceeds, backed primarily by airport revenues, followed by AIP
grants, PFCs, and state and local contributions (see table 3).
Table 3: Sources of Airport Funding, 2001- 2005
2006 Dollars in billions
2001-2005
average annual Percent of
Funding Source funding total Source of funds
Airport bonds $6.5^a 50 State and local governments
or airport authorities issue
tax-exempt debt
AIP grants 3.6^b 29 The Congress makes funds
available from the Airport
and Airway Trust Fund, which
receives revenue from
various aviation-related
taxes
Passenger facility 2.2^c 17 Funds come from passenger
charges fees of up to $4.50 per trip
segment at commercial
airports
State and local .7 4 Funds include state and
contributions local grants, loans, and
matching funds for AIP
grants
Total $13 100
Source: GAO analysis of FAA, Thomson Financial, and state grant
data
Note: Totals may not add because of rounding.
aNet of refinancing.
bAIP totaled on a fiscal year basis.
cSome airports use their PFCs to finance bond issues, as much as
30 percent of PFC collections by some estimates. As a result, the
total amount of funds available to airports may be overstated by
as much as $660 million (30 percent of $2.2 billion).
The amount and source of funding vary with the size of airports.
The nation's 67 larger airports, which handled almost 90 percent
of the passenger traffic in 2005, accounted for 72 percent of all
funding ($9.4 billion annually), while the 3,297 other smaller
commercial and general aviation airports that make up the rest of
the national system accounted for the other 28 percent ($3.5
billion annually).^5 As shown in figure 1, airports' reliance on
federal grants is inversely related to their size---federal grants
contributed a little over $1.3 billion annually to larger airports
(14 percent of their total funding) and $2.3 billion annually to
smaller airports (64 percent of their total funding).
^5As noted in Table 3, the total amount of funds may be somewhat
overstated because as much as 30 percent of PFCs are used to finance bond
issues. This would particularly affect the total for larger airports,
which collect most of the PFCs.
Figure 1: Funding Sources by Size of Airport, 2001-2005
Note: Totals may not add up due to rounding
Total Planned Development Exceeds Past Funding Levels by About
$1 Billion Annually
Based on past funding levels, airports' funding is about $1
billion per year less than estimated planned capital development
costs. If the $13 billion annual average funding continues over
the next 5 years and were applied only to AIP-eligible projects,
it would cover all of the projects in FAA's estimate. However,
much of the funding available to airports is for AIP-ineligible
projects that can attract private bond financing. We could not
determine how much of this financing is directed to AIP-eligible
versus ineligible projects. Figure 2 compares the $13 billion
average annual funding airports received from 2001 through 2005
(adjusted for inflation to 2006 dollars) with the $14 billion in
annual planned development costs for 2007 through 2011. The $14
billion is the sum of FAA's estimated AIP-eligible costs of $8.2
billion annually and ACI's estimated ineligible costs of $5.8
billion annually. The overall difference of about $1 billion
annually is not an absolute predictor of future funding
shortfalls; both funding and planned development may change in the
future.
Figure 2: Comparison of Historical Airport Funding to Future
Development Costs
Note: Totals may not add up due to rounding
Larger Airports�-Planned Development Costs Exceed Past Funding
by About $600 Million Annually
The difference between current funding and planned development
costs for larger airports is about $600 million if both
AIP-eligible and ineligible projects are considered. From 2001
through 2005, larger airports collected an average of about $9.4
billion a year for capital development, as compared to over $10
billion in annual planned development costs. Figure 3 shows the
comparison of average annual funding versus planned development
costs for larger airports. At $5.7 billion annually, the
ineligible portion of costs is 57 percent of the total planned
development costs.
Figure 3: Comparison of Larger Airports' Historical Funding to
Future Development Costs
Note: Totals may not add up due to rounding
Smaller Airports�-Planned Development Costs Exceed Past Funding
by About $400 Million Annually
The difference between past funding and planned development costs
for smaller airports is roughly $400 million annually. At smaller
airports, average annual funding from 2001 through 2005 was about
$3.6 billion a year (expressed in 2006 dollars). Annual planned
development costs for smaller airports from 2007 through 2011 is
estimated at about $4 billion. Figure 4 compares average annual
funding to planned development costs. As the figure shows, the
portion of smaller airports' project costs not eligible for AIP
funding is relatively small--about $75 million annually, or about
2 percent of total planned development costs.
Figure 4: Comparison of Smaller Airports' Historical Funding to
Future Development Costs
Note: Totals may not add up due to rounding
Financial Health of Airports Has Improved for Larger Airports
The financial health of airports is strong and has generally
improved since September 11, 2001, especially for larger airports.
Passenger traffic has rebounded to 2000 levels and bond ratings
have improved. Following September 11, many airports cut back on
their costs and deferred capital projects. However, credit rating
agencies and financial experts now agree that larger airports are
generally financially strong and have ready access to capital
markets. A good indicator of airports' financial strength is the
number and scale of underlying bond ratings provided by bond
rating agencies. More bonds were rated in 2007 than 2002, and more
bonds are rated at the higher end of the rating scale in 2007,
meaning that the rating agencies consider them less of a risk
today. Furthermore, larger airports tended to have higher ratings
than smaller airports.
Administration�s FAA Reauthorization Proposal Would Increase
Funding for Larger Airports, while the Effect on Smaller Airports
is Uncertain
The administration's reauthorization proposal for AIP would
increase funding for larger airports, but its effect on smaller
airports is uncertain because of the overall reduction in AIP and
the proposed changes in how AIP grants are allocated between
larger and smaller airports. The 2008 fiscal year budget reduces
AIP funding from its past level of $3.5 billion in fiscal years
2006 and 2007 to $2.75 billion in 2008. The proposal also would
eliminate entitlement, otherwise known as apportionment, grants
for larger airports while increasing the PFC ceiling from $4.50 to
$6 per passenger.^6 While larger airports that account for 90
percent of all passengers will come out ahead, an increased PFC
may not compensate smaller airports for the overall reduction in
AIP, even with the proposed changes in how AIP is allocated
between larger and smaller airports. As a separate issue, the
administration's reauthorization proposal would change the way
that AIP and other FAA programs are funded and may not provide
enough monies for these programs, even at the reduced levels
proposed by the administration.
Administration�s FAA Reauthorization Proposal Would Make
Fundamental Changes in AIP
The administration's 2008 FAA reauthorization proposal would
reduce AIP, change how AIP is allocated, and increase the PFC
available to commercial airports. (Key changes in the proposal's
many elements are outlined in appendix I.) Unlike previous
reauthorization proposals, which made relatively modest changes in
the structure of the AIP program, this proposal contains some
fundamental changes in the funding and structure of the AIP
program. Notably, following the pattern set by the 2000 FAA
reauthorization,^7 which required larger airports to return a
certain percentage of their entitlement funding in exchange for an
increase in the PFC, the administration proposes eliminating
entitlement grants for larger airports altogether and at the same
time allowing those airports to charge a higher PFC.
The reauthorization proposal would eliminate some set-aside
programs and increase the proportion of discretionary grant funds
available to FAA at higher AIP funding levels. Table 4 compares
AIP funding allocations under the current funding formulas to the
proposed reauthorization allocations at both the current $3.5
billion level and at the proposed $2.75 billion level. Another
change is to the entitlement formulas--for example, removing the
funding trigger in current law that doubles the amount of
entitlement funds airports receive if the overall AIP funding
level is above $3.2 billion--is intended to make more
discretionary funding available. According to FAA officials, their
objective is to increase the amount of discretionary funding for
airports so that higher priority projects can be funded; however,
that is only achieved when total AIP funds are greater than the
$2.75 billion budgeted by the administration. For example, at
$2.75 billion in AIP, the current law would generate $967 million
in discretionary grants versus $866 million under the proposed
reauthorization. This reverses at $3.5 billion in AIP funding, for
which the proposal generates $1.328 billion in discretionary
grants versus $845 million under current law.
Table 4: Estimated Distribution of AIP Funds at $2.75 and $3.5
Billion Funding Levels under Current and Proposed Authorization
Formulas
Dollars in millions
AIP allocations under current law compared to
proposed reauthorization
Current FY2008 as FY2008 as
law proposed Current law proposed
$2.75 Billion $3.5 Billion
AIP funding (after
administrative and other
costs) $2,636 $2,636 $3,386 $3,386
Entitlements
Primary airports
Large 92 81 $184 $92
Medium 56 49 111 56
Small 131 230 262 262
Nonhub 154 269 307 307
Subtotal primary airports 433 629 864 717
Cargo 92 81 118 118
Alaska supplemental 11 19 21 21
Nonprimary entitlements 0 309 385 431
State apportionment 488 300 292 339
Carryover entitlements 432 432 432 432
Subtotal entitlements 1,455 1,769 2,113 2,058
Small airport fund
Nonhub commercial service 123 245
Nonprimary airports 61 122
Small hub 31 61
Subtotal entitlements and
nondiscretionary 1,669 1,769 2,541 2,058
Discretionary
Noise set-aside 338 211 296 271
Reliever set-aside 0 6
Military Airports (MAP)
set-aside 39 34
Subtotal disc set-asides 377 211 336 271
Small airport discretionary
fund 136 266
Capacity, safety, security,
noise 442 389 382 594
Remaining discretionary 147 130 127 198
Subtotal discretionary 967 866 845 1,328
Total AIP available for
grants $2,636 $2,636 $3,386 $3,386
Source: FAA
Increasing the PFC Would More Than Offset Loss of AIP Entitlements
For Larger Airports but Impact on Smaller Airports Is Uncertain
The administration's proposed reauthorization would allow airports
to increase their PFC to a maximum of $6 and allow airports to use
their collections for any airport projects while forgoing their
entitlement funds. A $6 PFC could generate an additional $1.1
billion for larger airports that currently have a PFC in place,
far exceeding the $247 million in entitlements that FAA estimates
they would forego under this reauthorization proposal (see table
5).^8 However, the impact on smaller airports is uncertain because
they collect far less in PFCs and are more reliant on AIP for
funding. A change to a $6 PFC would yield an additional $110
million for small hub airports based on airports that currently
have a PFC in place and $132 million if every one of the small hub
airports had a $6 PFC. It is uncertain whether the proposed
allocation of AIP under the administration's proposal would shift
a greater proportion of funds to smaller airports to compensate
for the overall reduction in AIP. The reauthorization proposal
would also relax project eligibility criteria to allow airports to
use their collections in the same way as they use internally
generated revenue, including off-airport intermodal transportation
projects. The application and review process would also be
streamlined; as a result, FAA would no longer approve collections
but rather ensure compliance with PFC and airport revenue rules.
Table 5: Projected PFC Collections with a $6 PFC
Dollars in Billions
2005 Collections if $6 PFC
If all
Current Increase over airports Increase
2005 incidence 2005 had a $6 over 2005
Collections of PFCs collections PFC collections
Large hub $1.769 $2.594 $.825 $2.695 $.925
Medium .442 .725 .283 .781 .339
hub
Subtotal 2.211 3.319 1.108 3.476 1.265
Small hub .170 .281 .110 .302 .132
Total $2.381 $3.599 $1.218 $3.778 $1.397
Source: GAO analysis of FAA data
Airport Privatization
The administration's proposal would modify the current pilot
program on private ownership of airports in two key ways. First,
the proposed modifications will expand eligibility beyond the
current statutory limit of 5 to 15 airports. Restrictions limiting
participation in the pilot program to specific airport size
categories would also be eliminated. Second, the pilot program
would be amended to eliminate the veto power that airlines can
exercise under current law to prevent privatization transactions
at commercial airports. Under current law, the sale of an airport
to private interests may only proceed if a super-majority of the
airlines at that airport approve of the sale or lease.^9
Additionally, the airline veto power to prevent fee increases
higher than inflation rates would be repealed. In place of these
veto powers, the airport sponsor would need to demonstrate to the
Secretary of Transportation that the airlines using that airport
were consulted prior to the transaction proceeding.^10
Congress established the Airport Privatization Pilot Program in
October 1996 to determine if privatization could produce
alternative sources of capital for airport development and provide
benefits such as improvements in customer service. It also hoped
to determine if new investment and capital from the private sector
could be attracted through innovative financial arrangements.
Proponents of privatization believe that the privatization of
airports can lead to capacity-increasing investment in airports
through the commitment of private capital, lower operating costs,
and greater efficiency and that privatization can increase
customer satisfaction.
Overall, there has been relatively little interest in the current
pilot program. Six airports have applied for participation in the
program and three of those airports withdrew their applications in
2001. To date, Stewart International Airport, located in Newburgh,
New York, is the only airport accepted into the pilot program. The
airport received this exemption in March 2005, but is currently
being purchased back by a public owner, the Port Authority of New
York and New Jersey. In September 2006, the City of Chicago
submitted a preliminary application for Chicago Midway
International Airport. FAA completed its review of the Midway
preliminary application and determined that it meets the
procedural requirements for participation in the pilot program.
Consequently, the City of Chicago can now proceed to select a
private operator, negotiate an agreement, and submit a final
application to FAA for exemption.
Proposed Fuel Tax Rates May Not Yield the Revenue Anticipated
to Fund AIP
In addition to concerns about the level and allocation of AIP
funds, another concern is that the fuel tax revenues that the
administration's reauthorization proposal has designated to
largely fund AIP after 2009 may not be as great as anticipated.
Currently, AIP and other FAA programs are principally funded by
the Airport and Airway Trust Fund (trust fund), which receives
revenue from passenger ticket taxes and segment taxes, airline and
general aviation fuel taxes, and other taxes. The administration's
reauthorization proposal would fund air traffic control through
user fees for commercial aircraft and fuel taxes for general
aviation while limiting the sources of revenue for the trust fund
and its uses. Under the proposal, beginning in 2009, the trust
fund would continue but only to fund three programs--AIP,
Research, Engineering and Development (RE&D), and Essential Air
Service (EAS)--and would be funded solely by an equal fuel tax on
commercial and general aviation fuel purchases and an
international arrival and departure tax.
FAA officials confirmed for us that in estimating fuel tax
revenues they did not take into account possible reductions in
fuel purchases due to the increase in the tax rates. Although we
do not know by how much such purchases would decline, conventional
economic reasoning, supported by the opinions of industry
stakeholders, suggests that some decline would take place.
Therefore, the tax rate should be set taking into consideration
effects on use and the resulting impact on revenue. FAA officials
told us that they believe that these effects would be small
because the increased tax burden is a small share of aircraft
operating costs and therefore there was no need to take its impact
into account. Representatives of general aviation, however, have
said that the impact could be more substantial. If consumption
possibly falls short of projections or Congress appropriates more
funds for AIP, RE&D, or EAS than currently proposed, then fuel tax
rates and the international arrival and departure tax would
correspondingly have to be increased or additional funding from
another source, such as the trust fund's uncommitted balance or
the General Fund, would be needed.
^6AIP grants generally consist of two types--(1) entitlement funds that
are apportioned to airports or states by formula each year based on the
number of airport passengers or state population and (2) discretionary
funds that FAA approves based on a project's priority.
^7The Wendell H. Ford Aviation Investment and Reform Act for the 21st
Century, Pub. L. No. 106-81 (Apr. 5, 2000).
^8This calculation assumes that the increased PFC would not affect
passenger demand for air travel. GAO has previously calculated that a PFC
increase could reduce passenger demand. See Passenger Facility Charges:
Program Implementation and the Potential Effects of Proposed Changes,
[30]GAO/RCED-99-138 (Washington D.C.: May 19, 1999).
^9The law defines super-majority as at least 65 percent of the scheduled
air carriers at a primary airport.
^10At non-primary airports, the exemption would continue to be based on
consultation with at least 65% of the based-aircraft owners.
In conclusion, Mr. Chairman, airports have rebounded financially
from the September 2001 terrorist attacks. We expect the demand
for air travel to continue to increase, the system capacity to be
stretched, and airports to increase their demand for capital
improvements to relieve congestion and improve their services. As
Congress moves forward with reauthorizing FAA, it will have to
decide on several key issues, including how it wants to fund and
distribute grants under the AIP. While some elements of the
administration's proposal are to be commended--for example,
simplifying the funding formulas and giving FAA more discretion to
fund high priority projects--other parts of the proposal raise
concerns. For example, the extent to which the administration's
proposed cuts in AIP funding will affect development at smaller
airports is unclear.
GAO Contacts and Staff Acknowledgements
For further information on this statement, please contact Dr.
Gerald Dillingham at (202) 512-2834 or [email protected] .
Individuals making key contributions to this testimony were Paul
Aussendorf, Jay Cherlow, Jessica Evans, David Hooper, Nick
Nadarski, Edward Laughlin, Minette Richardson, and Stan Stenersen.
Appendix I: Key Changes Proposed in AIP
Current authorization
Feature for AIP Proposed AIP reauthorization
Funding Trust fund for all Trust fund is funded by fuel
capital programs are tax of 13.6 cents/gallon for
funded by an airline commercial and general
ticket tax, segment tax, aviation and a reduced
international departure international arrival and
and arrival taxes, departure tax. Funding for
varying rates of fuel AIP is appropriated from the
taxes and other taxes. Trust Fund. If AIP is
Funding for AIP is increased, the tax rates
appropriated from the would have to be increased,
trust fund. the trust fund's uncommitted
balance would have to be
drawn down, or another
funding source would have to
found.
Entitlements Up to 75 percent of Entitlements for large and
entitlements for large medium hub airports
and medium hub airports eliminated by 2010.
collecting a PFC are
turned back to the small
airport fund.
If AIP greater than $3.2 $3.2 billion trigger for
billion, primary airport doubling entitlements is
entitlements are eliminated except for small
doubled. and nonhub primary airports.
State apportionment is State apportionment set at
20 percent of AIP (18.5 greater of 10 percent of AIP
percent if AIP is less or $300 million.
than $3.2 billion).
Nonprimary airport The nonprimary airport
entitlement of up to minimum entitlement of
$150,000. $150,000 per airport is
eliminated and replaced by a
tiered system of entitlements
ranging from $400,000 for
large general aviation
airports to $100,000 for
smaller general aviation
airports. The 750 airports
that have less than 10
operational and registered
based aircraft are guaranteed
nothing.
Discretionary Reliever and military The set-aside for reliever
airport set asides and military airports is
minimum discretionary eliminated.
funding set at $148
million.
Small airport fund Minimum discretionary funding
funded by large and set at $520 million.
medium hub airport PFC
turnbacks of up to 75
percent of PFC
collections.
Small airport fund equal to
20 percent of discretionary
funds.
Project eligibility Most types of airfield Expanded to include
projects, excluding additional revenue producing
interest costs, aeronautical support
nonrevenue producing facilities (e.g.,
terminal space and self-service fuel pumps) at
on-airport access general aviation airports.
project costs. General
aviation airports may
use their entitlement
funds for some revenue
producing activities
(e.g., hangars).
Local government Government share set at Eliminates 95 percent
share of project 95 percent for smaller government share except for
cost (local match) airports through 2007, the very smallest airports.
and 75 percent for large Now maximum share will be a
and medium hub airports flexible amount with a
(noise 80 percent). maximum percentage of 90
percent. Airfield
rehabilitation projects
lowered to 50 percent maximum
at large and medium hubs.
PFCs Maximum rate is $4.50 Maximum rate is $6 per
per passenger. passenger.
All applications subject Review and approval is
to FAA review. streamlined.
PFCs can be used for all Eligibility expanded to
AIP eligible projects, include almost any airport
but also interest costs -related project, including
on airport bonds, off-airport intermodal
terminal gates and projects.
related areas, and noise
mitigation can also be
used.
Up to 10 large and medium hub
airports willing to assume
the cost of air navigation
facilities are allowed a $7
PFC.
Privatization Up to five airports, one Up to 15 airports of any
of each size, with size, no limit on rates and
strict limit on rates charges and no airline veto,
and charges and requires but subject to DOT review and
approval by 65 percent approval.
of airlines.
Source: GAO.
Appendix II: Scope and Methodology
To determine how much planned development would cost over the next
5 years, we obtained planned development data from the Federal
Aviation Administration (FAA) and Airports Council
International-North America (ACI). To determine how much airports
of various sizes are spending on capital development and from
which sources, we sought data on airports' capital funding because
comprehensive airport spending data are limited and because, over
time, funding and spending should roughly equate. We obtained
capital funding data from the FAA, ACI, the National Association
of State Aviation Officials (NASAO), and Thomson Financial--a firm
that tracks all municipal bonds. We screened each of these
databases for their accuracy to ensure that airports were
correctly classified and compared funding streams across databases
where possible. We did not, however, audit how the databases were
compiled or test their overall accuracy, except in the case of
state grant data from the NASAO and some of the Thomson Financial
bond data, which we independently confirmed. We determined the
data to be sufficiently reliable for our purposes. We subtotaled
each funding stream by year and airport category and added other
funding streams to determine the total funding. We met with FAA,
bond rating agencies, bond underwriters, airport financial
consultants, and airport and airline industry associations and
discussed the data and our conclusions to verify their
reasonableness and accuracy.
To determine whether current funding is sufficient to meet planned
development for the 5-year period from 2007--2011 for each airport
category and overall, we compared total funding to planned
development. We correlated each funding stream to each airports'
size, as measured by activity, and among other funding streams to
better understand airports' varying reliance on them and the
relationships among sources of finance. We then discussed our
findings with FAA, bond rating agencies, bond underwriters,
airport financial consultants, and airport and airline industry
associations to determine how our findings compared with their
knowledge and experiences.
To determine some of the potential effects from changes to how
airport development is funded under the administration's proposed
FAA reauthorization legislation, we first analyzed the suggested
changes to the Airport Improvement Program's (AIP) funding and
allocation. In particular we analyzed the effect of various
funding levels on how the program funds would be allocated.
Second, we evaluated the effects of raising the passenger facility
charge (PFC) ceiling, as the administration proposal suggests, by
estimating the potential PFC collections under a $6 PFC on the
basis of 2005 enplanements and collection rates assuming all
airports imposed a $6 PFC. Third, we determined the status of
FAA's pilot program for airport privatization. Moreover, we
discussed the impact of all of the proposed changes
(funding/allocation, $6 PFC, and privatization) with FAA, bond
rating agencies, bond underwriters, airport financial consultants,
and airport and airline industry associations.
GAO�s Mission
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in
meeting its constitutional responsibilities and to help improve
the performance and accountability of the federal government for
the American people. GAO examines the use of public funds;
evaluates federal programs and policies; and provides analyses,
recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at
no cost is through GAO's Web site ( www.gao.gov ). Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of
newly posted products every afternoon, go to www.gao.gov and
select "Subscribe to Updates."
Order by Mail or Phone
The first copy of each printed report is free. Additional copies
are $2 each. A check or money order should be made out to the
Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are
discounted 25 percent. Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax:
(202) 512-6061
Order by Mail or Phone
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or
(202) 512-7470
Congressional Relations
Gloria Jarmon, Managing Director, [email protected] (202)
512-4400 U.S. Government Accountability Office, 441 G Street NW,
Room 7125 Washington, D.C. 20548
Public Affairs
Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW,
Room 7149 Washington, D.C. 20548
(540133)
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.
www.gao.gov/cgi-bin/getrpt?GAO-07-617T .
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 [32]GAO-07-617T , a testimony to Before the Subcommittee on
Aviation, House Committee on Transportation and Infrastructure
March 28, 2007
AIRPORT FINANCE
Preliminary Analysis Indicates Proposed Changes in the Airport Improvement
Program May Not Resolve Funding Needs for Smaller Airports
To address the strain on the aviation system, the Federal Aviation
Administration (FAA) has proposed transitioning to the Next Generation Air
Transportation System (NextGen). To finance this system and to make its
costs to users more equitable, the administration has proposed fundamental
changes in the way that FAA is financed.
As part of the reauthorization, the administration proposes major changes
in the way that grants through the Airport Improvement Program (AIP) are
funded and allocated to the 3,400 airports in the national airport system.
In response, GAO was asked for an update on current funding levels for
airport development and the sufficiency of those levels to meet planned
development costs. This testimony comprises capital development estimates
made by FAA and Airports Council International (ACI), the chief industry
association; analyzes how much airports have received for capital
development and whether this is sufficient to meet future planned
development; and summarizes the effects of proposed changes in funding for
airport development.
This testimony is based on ongoing GAO work. Airport funding and planned
development data are drawn from the best available sources and have been
assessed for their reliability.
This testimony does not contain recommendations.
ACI's estimate for planned development costs is considerably larger than
FAA's, reflecting a broader range of projects included as well as
differences in when and how the estimates are made. For 2007 through 2011,
FAA estimated annual planned capital development costs at $8.2 billion,
while ACI estimated annual costs at $15.6 billion. The estimates differ
primarily because FAA's estimate only includes projects that are eligible
for AIP grants, while ACI's covers all projects, including $5.8 billion
for projects not eligible for federal funding, such as parking garages.
From 2001 through 2005, airports received an average of about $13 billion
a year for planned capital development. This amount covers all types of
projects, including those not eligible for federal grants. The primary
source of this funding was bonds, which averaged almost $6.5 billion per
year, followed by federal grants and passenger facility charges (PFC),
which accounted for $3.6 billion and $2.2 billion, respectively (see
figure below). If airports continue to attract this level of funding for
planned capital development, this amount would annually fall about $1
billion short of the $14 billion in total planned development costs (the
sum of FAA's estimated $8.2 billion in eligible costs and the industry's
$5.8 billion in ineligible costs).
Larger airports foresee a shortfall of about $600 million annually, while
smaller airports foresee a shortfall of $400 million annually.
FAA's reauthorization proposal would reduce the size of AIP by $750
million but increase the amount that airports can collect from PFCs.
However, the benefit from increased PFCs would accrue mostly to larger
airports and may not offset a reduced AIP grants program for smaller
airports. The proposal would also change the way that AIP and other FAA
programs are funded. The new fuel taxes that FAA has proposed may not
provide the revenues for AIP that FAA anticipates.
Comparison of Historical Airport Funding to Future Development Costs
References
Visible links
20. http://www.gao.gov/cgi-bin/getrpt?GAO-03-497T
21. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-71
22. http://www.gao.gov/cgi-bin/getrpt?GAO-03-497T
30. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-99-138
32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-617T
*** End of document. ***