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						 
                                                                 

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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 Airportsï¿½-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 Airportsï¿½-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.
			  
			  Administrationï¿½s 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.
			  
			  Administrationï¿½s 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.
			  
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(540133)

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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. ***