Assigning Air Traffic Control Costs to Users: Elements of FAA's  
Methodology Are Generally Consistent with Standards but Certain  
Assumptions and Methods Need Additional Support (19-OCT-07,	 
GAO-08-76).							 
                                                                 
In January 2007 Federal Aviation Administration (FAA) reported	 
the results of its study that assigned the fiscal year 2005 costs
of its Air Traffic Organization (ATO) to users. FAA used this	 
study to support the President's proposal to replace many current
excise taxes with cost-based fees for commercial aviation users  
and higher fuel taxes for general aviation users. GAO assessed	 
(1) the consistency of FAA's cost assignment methodology with	 
established standards and guidance, (2) the support for selected 
cost assignment assumptions and methods, and (3) the impact of	 
including budgeted capital costs in the cost baseline. GAO	 
compared FAA's methodology to federal accounting standards and	 
international guidance, reviewed available documents and analyses
supporting FAA's assumptions and methods, and interviewed FAA	 
officials and consultants.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-76						        
    ACCNO:   A77452						        
  TITLE:     Assigning Air Traffic Control Costs to Users: Elements of
FAA's Methodology Are Generally Consistent with Standards but	 
Certain Assumptions and Methods Need Additional Support 	 
     DATE:   10/19/2007 
  SUBJECT:   Air traffic control systems			 
	     Allocation (Government accounting) 		 
	     Budget outlays					 
	     Commercial aviation				 
	     Cost accounting					 
	     Cost analysis					 
	     Cost control					 
	     Documentation					 
	     Federal funds					 
	     Funds management					 
	     Future budget projections				 
	     Policy evaluation					 
	     Program evaluation 				 
	     Standards						 
	     User fees						 
	     Policies and procedures				 

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GAO-08-76

   

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GAO: 

October 2007: 

Assigning Air Traffic Control Costs To Users: 

Elements of FAA's Methodology Are Generally Consistent with Standards 
but Certain Assumptions and Methods Need Additional Support Air Traffic 
Control Costs: 

GAO-08-76: 

GAO Highlights: 

Highlights of GAO-08-76, a report to congressional committees. 

Why GAO Did This Study: 

In January 2007 FAA reported the results of its study that assigned the 
fiscal year 2005 costs of its Air Traffic Organization (ATO) to users. 
FAA used this study to support the Presidentï¿½s proposal to replace many 
current excise taxes with cost-based fees for commercial aviation users 
and higher fuel taxes for general aviation users. GAO assessed (1) the 
consistency of FAAï¿½s cost assignment methodology with established 
standards and guidance, (2) the support for selected cost assignment 
assumptions and methods, and (3) the impact of including budgeted 
capital costs in the cost baseline. GAO compared FAAï¿½s methodology to 
federal accounting standards and international guidance, reviewed 
available documents and analyses supporting FAAï¿½s assumptions and 
methods, and interviewed FAA officials and consultants. 

What GAO Found: 

With the federal government preparing for the next generation of air 
travel, the President, Congress, and users of the national airspace are 
considering alternative methods for funding air traffic control in the 
national airspace. To support a cost-based funding structure such as 
the current proposal from the President, FAA developed a methodology 
for assigning costs to users. Federal cost accounting standards and 
international guidance establish flexible principles for assigning 
costs and recognize that the selection of methods involves making 
choices that require balancing the cost of development and 
implementation with the benefit of precision in the resulting cost 
assignments. GAO found that the design of key elements of FAAï¿½s 
methodology was generally consistent with federal standards and 
international guidance. But GAO also identified matters related to the 
application of certain assumptions and cost assignment methods that 
need additional documentation and analysis. 

Because building a methodology for assigning costs to users involves 
standards, alternative methodologies, and choices, documenting the 
decisions made and how they were made is important to allow users and 
others to assess whether the methodology and the structure of cost 
assignment is reasonable. FAA provided adequate support for its 
decision to assign costs based on whether the aircraft using air 
traffic control services are powered by turbine engines, such as jets, 
or piston engines, such as propeller-driven airplanes. However, FAA did 
not adequately document the basis on which it assigned costs to the 
aircraft groups or support its assumption that all types of aircraft 
with the same engine type affect costs in the same manner, leaving open 
the possibility that costs should be assigned to users differently. GAO 
also found that FAAï¿½s methodology does not take advantage of 
allocations already made in its cost accounting system, but instead 
aggregates the costs and then allocates them to aircraft groups. For 
some of these costs, such as employee benefit costs, a different method 
of allocation could have produced a more precise distribution between 
the groups. 

A user fee designed to fund new facilities and equipment expenditures 
must provide funds equal to the annual budget for those expenditures. 
FAAï¿½s methodology includes adjusting current-year actual expenses to 
equal the budgeted amount for facilities and equipment costs. These 
adjustments are then assigned to users in the same proportion as are 
current acquisition, implementation, and depreciation expenses. But 
users of future facilities and equipment may be different from users of 
existing facilities and equipment. The manner in which the costs of 
facilities and equipment are assigned may, over time, result in 
assigning costs to users who are different from the ultimate users of 
future facilities and equipment once they become operational. 
Consequently, the implementation of this method warrants careful 
monitoring to avoid unintentional cross-subsidization among users. 

What GAO Recommends: 

GAO recommends that FAA provide additional analysis and documentation 
of the basis on which it assigns costs to users. GAO also recommends 
that FAA monitor any difference between original and actual cost 
assignments for facilities and equipment. In commenting on a draft of 
this report, the Department of Transportation neither agreed nor 
disagreed with its findings, conclusions, or recommendations while 
stating that FAAï¿½s fiscal year 2006 cost allocation will address 
several of the issues identified in our report. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://GAO-08-76]. For more information, contact Jeanette 
Franzel at (202) 512-9471 or [email protected]. 

[End of section] 

Report to Congressional Committees: 

United States Government Accountability Office: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Elements of FAA's Cost Assignment Methodology Design Are Generally 
Consistent with Federal Cost Accounting Standards and International 
Guidance: 

Further Documentation and Analysis Is Needed to Justify Key Assumptions 
and Methods: 

Use of Facilities and Equipment Budget Authority in the Cost Base Needs 
to be Monitored: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Comments from the Department of Transportation: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: FY 2005 ATO-Related Facilities and Equipment Budgets and 
Expenses (Actual and Adjusted), by Service Type and in Total: 

Figure: 

Figure 1: Overview of the CAMERA Process as Applied to Fiscal Year 2005 
Data (Using the Oceanic Services Pool as an Example): 

United States Government Accountability Office: 

Washington, DC 20548: 

October 19, 2007: 

Congressional Committees: 

In January 2007, the Federal Aviation Administration (FAA) released the 
results of its study on the fiscal year 2005 costs of air traffic 
services provided by its Air Traffic Organization (ATO) to commercial, 
general aviation, and exempt users[Footnote 1] of the National Airspace 
System (NAS).[Footnote 2] FAA used this study to support the 
President's proposal to eliminate many of the current excise taxes and 
replace them with a combination of cost-based fees to commercial users 
and higher fuel taxes for general aviation users. With this proposed 
change, the President also sought to better align funding with the 
factors that drive ATO's costs. Many stakeholders in NAS funding have 
also questioned whether the current structure fairly and equitably 
distributes the burden of air traffic control costs between commercial 
and general aviation users and whether this structure should continue 
in its current form to fund the next generation of air traffic control. 

To make informed judgments about a cost-based fee funding structure for 
FAA, Congress, the users, and other stakeholders need to understand how 
FAA's cost assignment assumptions and methods affect the distribution 
of costs and the potential funding burden among users. At your request, 
we reviewed FAA's methodology to determine how it assigns costs to 
users of air traffic services. We agreed to report to you matters that 
came to our attention during our review that we considered important 
for Congress to understand as it moves toward reauthorizing FAA and 
evaluates alternative funding approaches. Specifically, this report 
assesses (1) the consistency of FAA's methodology with federal cost 
accounting standards and international guidance, (2) the support for 
selected assumptions and methods, and (3) the potential impact of using 
budgeted facilities and equipment costs in the cost base for developing 
user fees. 

To meet these objectives we reviewed federal cost accounting standards, 
international policies, and guidance on setting fees for air traffic 
services,[Footnote 3] and other reference sources to identify 
acceptable methods for assigning costs to services and products for the 
purpose of setting fees and prices. We reviewed FAA's 2007 report on 
fiscal year 2005 cost allocation and the draft report from FAA's 
consultant on the design and application of the cost assignment 
methodology using fiscal year 2004 data, which provided the base 
methodology used for the fiscal year 2005 cost allocation. We also 
reviewed supporting documents and selected analyses prepared by FAA and 
its consultants to support the methodology's underlying key assumptions 
and methods. To gain an understanding of how FAA classified and 
assigned costs to users, we analyzed a nonrepresentative selection of 
seven operations and capital projects[Footnote 4] from FAA's report on 
the results of applying its Cost Assignment Methodology for Estimating 
Resource Allocation (CAMERA) to fiscal year 2005 cost data. 

We also interviewed officials from FAA's Cost Accounting System (CAS) 
and CAMERA teams and FAA consultants to gain an understanding of the 
cost assignment process, including how FAA developed the CAMERA cost 
base. We also reviewed relevant reports of the Department of 
Transportation Office of Inspector General, the audit reports of FAA's 
external auditor, and reports of FAA consultants to identify issues 
that could have an impact on the assignment of costs to users. 

Our review was not designed to determine whether CAS and CAMERA 
assumptions and methods for fiscal year 2005 were sufficient overall to 
support a cost-based user fee approach to finance FAA's ATO or to 
assess the reliability of FAA's fiscal year 2005 cost allocation 
results. With respect to the issues we identified during our review, we 
did not determine the dollar effect that these issues could have on the 
assignment of costs to user groups and aircraft operators. Also, it was 
beyond the scope of this review to assess alternatives to funding 
capital project budget authority with user fees, such as borrowing or 
special appropriations. 

We conducted our work from October 2006 through October 2007 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

FAA developed a methodology for assigning costs to users, CAMERA, to 
support a cost-based funding structure such as the President's proposal 
to eliminate many of the current excise taxes and replace them with 
cost-based user fees for commercial users and higher fuel taxes for 
general aviation users based on their use of air traffic control 
services. FAA's objectives in designing CAMERA included simplicity and 
transparency to achieve results that could be easily understood by 
stakeholders, while also adhering to established policies, standards, 
and guidance for assigning costs and developing user fees including 
federal cost accounting standards and applicable international 
guidance. Federal cost accounting standards and international guidance 
establish flexible principles for assigning costs, not a specific 
methodology that agency management must follow. The federal standards 
further recognize that agency management should select costing methods 
that best meet their needs, while considering the costs and benefits of 
reasonable alternatives. We found that the design of key elements of 
FAA's CAMERA methodology used cost assignment methods that are 
generally consistent with federal cost accounting standards and the 
principles set forth in international policies and related guidance. 
However, we identified matters related to the application of certain 
CAMERA assumptions and cost assignment methods that needed better 
support through additional documentation and analysis. 

Cost accounting should associate an entity's incurred costs with its 
products, services, or activities. When associating costs with users of 
services as a basis for determining user fees, assigning costs to the 
appropriate users avoids unintentional cross-subsidization from users 
who pay more to users who pay less than the cost of services they 
receive. To associate the costs of its air traffic control services 
with the commercial, general aviation, and exempt operators that use 
those services, FAA initially identified two user groups based on 
engine type--turbine[Footnote 5] or piston[Footnote 6]--that are either 
the primary or secondary driver of the related costs. Using CAMERA, the 
costs from CAS were categorized by type of service to which they 
pertain and then were assigned to users based on key assumptions. We 
found that FAA adequately justified its decision to assign air traffic 
control costs based on whether the aircraft use turbine or piston 
engines, but it did not (1) adequately document the basis on which it 
assigned costs to these user groups or (2) support its assumption that 
all types of aircraft with the same engine type affect costs in the 
same manner. Documentation of key input from internal subject matter 
experts and the rationale linking this information and related analyses 
with the final cost assignments was not well established. Also, FAA did 
not conduct sufficient analysis (e.g., econometric analysis) to 
quantify the extent to which different users of one engine type (e.g., 
smaller jet aircraft versus commercial jets) impose costs differently 
on the air traffic control system, although FAA stated this was one of 
the issues discussed with its internal subject matter experts. 

Further, the precision of FAA's approach to allocating overhead, 
indirect, and other miscellaneous costs might be improved by using 
allocations previously entered into CAS and, for certain of these 
costs, by using more appropriate allocation methods. CAMERA did not use 
the allocations of overhead and indirect costs from CAS and instead 
aggregated these costs and then allocated them to the turbine and 
piston user groups. In addition, FAA could have allocated some of these 
costs in a manner that resulted in a more precise distribution between 
the user groups, such as allocating employee benefit costs based on 
labor costs rather than the total of labor and nonlabor costs. 

In order to provide funds sufficient to acquire new air traffic control 
assets authorized by its 2005 budget, FAA adjusted acquisition, 
implementation, and depreciation expenses recognized in accordance with 
generally accepted accounting principles (GAAP) upward to equal budget 
authority received for the Facilities and Equipment (F&E) account. The 
manner in which the adjusted costs are assigned to users may, over 
time, result in a difference between users who are assigned costs for 
F&E acquisitions and the ultimate users of those assets and 
unintentional cross-subsidization among users. These differences occur 
because of uncertainties in the actual nature, timing, and cost of 
future projects in comparison with cost estimates included in current 
cost assignments. Further, the long-term nature of these capital 
projects is such that some F&E purchases may be funded several years 
before the expenditures are made and the related improvements become 
operational. Accordingly, it can take many years before FAA knows the 
actual distribution of any single year's F&E budget across service 
types and to users. These issues are inherent with a system that pre- 
funds long-lived capital projects in general, and the next generation 
of air traffic control systems (NextGen) in particular, with revenues 
generated from current users. 

To provide additional support for the reasonableness of its cost 
methodology, we are making recommendations that FAA perform additional 
analysis and document the basis for certain assumptions and methods 
underlying its cost assignment methodology and that it monitor cost 
assignments for budgeted F&E expenditures in relation to actual 
expenditures and users. 

We requested comments on a draft of this report from the Secretary of 
Transportation. The Department of Transportation provided technical 
comments, which we incorporated in our report as appropriate, and a 
comment letter from the Assistant Secretary for Administration, which 
is attached as Appendix I. While the Department expressed general 
concurrence with our recommendations in its technical comments, it 
neither explicitly agreed nor disagreed with our findings, conclusions, 
and recommendations in its letter. The Assistant Secretary stated that 
FAA's fiscal year 2006 cost allocation will address several of the 
issues identified in our report, including improved documentation of 
subject matter expert input to the assumptions and better assignment of 
indirect labor costs. We believe that FAA must follow through with all 
of our recommendations to support its assertions that its cost study 
results are reasonable. 

Background: 

FAA fulfills its mission of maintaining the NAS by providing services 
through four lines of business: Air Traffic Organization, Aviation 
Safety, Airports, and Commercial Space Transportation. The Air Traffic 
Organization (ATO) is the business line that provides air traffic 
control (ATC) services to users of the NAS through a network of towers, 
control centers, and flight service stations. ATC includes a variety of 
activities that guide and control the flow of aircraft through the NAS. 
ATO groups these activities into four types of services--oceanic en 
route (oceanic), domestic en route (en route), terminal, and flight 
services. The costs to operate and maintain this network and to make 
improvements to the ATC system are currently funded through excise 
taxes deposited into the Airport and Airway Trust Fund and 
contributions from the General Fund of the U.S. Treasury.[Footnote 7] 

FAA is subject to various laws that have an effect on agencies' 
development and use of cost information. These laws were enacted after 
the Comptroller General's 1985 report which provided the framework for 
the reforms needed to improve federal financial management and manage 
the cost of government.[Footnote 8] The earliest of these laws--the 
Chief Financial Officers Act (CFO Act) of 1990[Footnote 9]--applied to 
24 federal departments and agencies, including the Department of 
Transportation, of which FAA is a part. Another of these laws is the 
Federal Financial Management Improvement Act of 1996[Footnote 10] 
(FFMIA), which required, among other things, that agencies covered by 
the CFO Act have systems that comply substantially with federal 
accounting standards. One such standard is Statement of Federal 
Financial Accounting Standards (SFFAS) No. 4, Managerial Cost 
Accounting Standards and Concepts, which states that essential uses of 
cost information include controlling costs, measuring performance, 
setting fees, evaluating program costs and benefits, and making 
economic choice decisions. In plain language, the principal purpose of 
cost accounting is to assess how much it costs to do whatever is being 
measured, thus allowing agency management, Congress, and others to 
analyze that cost information when making decisions. When cost 
accounting is used as a basis for setting fees or recovering costs, the 
objective is to ensure that users who receive the related services or 
products are assigned costs appropriately to avoid unintentional cross- 
subsidization among users who would then pay more or pay less than the 
cost of the services they use. 

The Federal Aviation Reauthorization Act of 1996 requires that FAA 
develop a cost accounting system that accurately reflects the 
investment, operating and overhead costs, revenues, and other financial 
measurement and reporting aspects of its operations.[Footnote 11] One 
of the stated purposes of the act was also to authorize FAA to recover 
the costs of services from those who benefit from, but do not 
contribute to, the national aviation system and the services provided 
by FAA. Specifically, FAA was required to collect overflight 
fees[Footnote 12] and to ensure that the fees were directly related to 
FAA's costs of providing the services rendered.[Footnote 13] In 1997, 
the National Civil Aviation Review Commission (the "Mineta Commission") 
recommended that FAA establish a cost accounting system to support the 
objective of FAA operating in a more performance-based, business-like 
manner. These legislative requirements and recommendations provided the 
impetus for FAA's decade-long development and deployment of its cost 
accounting system to all of its lines of business. 

The International Civil Aviation Organization (ICAO), an advisory 
organization affiliated with the United Nations, aims to promote the 
establishment of international civil aviation standards and recommended 
practices and procedures. As such, ICAO has issued policies and 
guidance on assigning costs and the establishment of charges for air 
navigation services. The United States is a member of the governing 
Council of ICAO. 

The previous FAA study of air traffic control service costs issued in 
1997 allocated fixed costs (those that do not vary with the level of 
activity or output) and common costs (such as general and 
administrative overhead, which cannot be traced to a particular product 
or service) of air traffic control services to user types based on an 
economic pricing method that assigns more of these costs to users that 
have a greater willingness to pay them. This pricing method takes into 
consideration the demand for services and how the pricing of those 
services may impact demand.[Footnote 14] However, in its January 2007 
report on its study of 2005 costs, FAA assigned costs to users without 
using this pricing method, an approach which is consistent with the 
statutory requirement for setting overflight fees and the federal 
government's policies on establishing user fees.[Footnote 15] 

In designing its cost assignment methodology, simplicity and 
transparency were among FAA's objectives to facilitate stakeholder 
understanding and acceptance. The methodology, known as CAMERA (Cost 
Assignment Methodology for Estimating Resource Allocation), assigns air 
traffic control service costs to user groups by type of aircraft-- 
turbine and piston--and to aircraft operators--commercial, general 
aviation, and exempt. 

After developing six cost pools for air traffic control services, 
CAMERA assigns costs to Tiers 1, 2, and 3 depending on whether the cost 
can be directly assigned to a single user group (Tier 1), can be 
assigned to both user groups (Tier 2), or is overhead, indirect, or 
other miscellaneous cost allocated to both groups (Tier 3). The total 
of the three tiers for each user group is allocated to aircraft 
operators: commercial, general aviation, and exempt. Figure 1 
illustrates the CAMERA process. 

Figure 1: Overview of the CAMERA Process as Applied to Fiscal Year 2005 
CAS Data (Using the Oceanic Services Pool as an Example): 

[See PDF for image] 

Source: GAO analysis of FAA methodology. 

[End of figure] 

FAA's CAS is the source for the cost data used to develop a cost base 
for CAMERA. CAS captures cost data from FAA's financial accounting 
system as those costs are recognized as expenses incurred in accordance 
with generally accepted accounting principles (GAAP). CAS classifies 
costs by ATO's four types of air traffic services--oceanic, en route, 
terminals, and flight services--by assigning direct costs and 
allocating overhead and other indirect costs to services and facilities 
that provide those services. 

CAMERA classifies the CAS data, as adjusted,[Footnote 16] into six cost 
pools, namely, oceanic, en route, large hubs, middle terminals, low- 
activity towers,[Footnote 17] and flight services. Once the CAMERA 
costs are classified into the six cost pools, the costs for distinct 
operations and capital projects within five of the pools (excluding 
flight services) are put into one of three tiers for assignment to 
users--turbine or piston.[Footnote 18] The three tiers of costs are: 

1. costs exclusively assigned to a single user group, either because 
the project in question principally benefits a single user group or 
because the other user group does not drive material or measurable 
incremental costs (Tier 1); 

2. costs assigned to both user groups because the projects benefit both 
user groups and use by the secondary user group drives measurable 
incremental costs (Tier 2); and: 

3. overhead costs, costs indirectly related to the delivery of 
services, and other miscellaneous costs that could not be directly 
assigned to the user groups, which were allocated based on each user 
group's proportional share of the total costs assigned to the first two 
tiers (Tier 3). 

Once all costs are assigned by type of service, tier, and user group, 
total costs for turbine and piston user groups within each of the five 
service pools (excluding flight services) are further allocated to 
subgroups representing the types of aircraft operators--commercial, 
general aviation, and exempt--based on the proportion of each 
operator's share of total activity at facilities in the pool.[Footnote 
19] The allocations by type of aircraft operator within the turbine and 
piston user groups are then combined and serve as the basis on which 
the proposed user fees, fuel taxes, or general fund appropriations are 
determined. 

Designing a costing methodology requires, within the parameters of 
applicable cost accounting principles, that management make judgments 
about how precise the resulting cost information needs to be and 
whether the benefits of achieving a higher level of precision justify 
the additional resources required to refine its cost methodology and 
related systems. These judgments will in turn influence management's 
choice of assumptions and cost assignment methods. Different sets of 
assumptions and methods applied to the same pool of costs can yield 
different results. 

Elements of FAA's Cost Assignment Methodology Design Are Generally 
Consistent with Federal Cost Accounting Standards and International 
Guidance: 

FAA designed its CAMERA cost methodology so that the resulting cost 
assignments would be consistent with federal policies on the 
establishment of user fees, and, to the extent practicable, with 
international guidance for air navigation service providers on setting 
fees. Federal cost accounting standards[Footnote 20] recognize that one 
of the purposes of cost information is to set fees, and both the 
federal standards and the ICAO guidance for implementing its policy on 
user fees[Footnote 21] provide direction on allocating these costs. We 
found that, as designed, key elements of CAMERA used methods that are 
generally consistent with federal accounting standards and ICAO 
guidance. However, as discussed subsequently, we identified matters 
related to the application of certain assumptions and cost assignment 
methods underlying FAA's methodology that needed better support through 
additional documentation and analysis to demonstrate that the resulting 
cost assignments to users are reasonable. 

Federal cost accounting standards establish a flexible principle for 
assigning costs, not a specific methodology that agency management must 
follow. The standards recognize that agency management should select 
costing methods that best meet their needs, taking into consideration 
the costs and benefits of reasonable alternatives, and once selected, 
follow those methods consistently. Further, the standards require that 
cost information developed for different purposes should be drawn from 
a common data source, such as consistently using information from an 
entity's financial management system to prepare all cost analyses. 

To attribute costs to services or products, the federal standards list 
three categories of cost assignment methods in order of preference: (1) 
direct tracing of costs to, in this case, a specifically identifiable 
user wherever feasible and economically practicable, (2) assigning 
costs on a cause-and-effect basis, or (3) allocating costs on a 
reasonable and consistent basis. The standards provide that when 
seeking to assign costs of resources that are shared by, for example, 
activities, services, or customers, agency management may find it 
useful to classify these activities, services, or customers as either 
primary or secondary. If this method is used, management can then 
determine which costs are (1) necessary to support (in this case) the 
primary customer and are therefore unavoidable even without the 
secondary customer and (2) incurred for the secondary customer and, 
therefore, are incremental to the costs of the primary customer. The 
standards also state that management should maintain and use activity 
information, as appropriate, to allocate costs as necessary, such as 
accumulating and using data on miles flown as the basis for allocating 
certain costs of en route services that are not directly assignable to 
users. 

As designed, elements of FAA's methodology are consistent with 
principles and methods set forth in federal cost accounting standards. 
FAA's common data source for CAMERA is costs by service type reported 
in CAS, which FAA also uses for operational analysis. FAA used the 
three categories of costing methods found in the federal standards to 
assign costs to users. To facilitate these cost assignments, FAA 
identified the turbine and piston user groups as either primary or 
secondary. FAA sought to determine the amount of each Tier 1 and Tier 2 
project's costs that did not change with the level of services provided 
or other relevant activity, and assigned that amount entirely to a 
primary group of users. FAA used a two-step process for determining the 
Tier 2 incremental costs for both groups of users. First, FAA 
determined the amount of a project's total cost that was incremental 
and varied with the activity of all users. Second, FAA allocated these 
incremental costs to the primary and secondary user groups based on 
each group's proportional share of total activity, such as miles flown 
or number of terminal operations. 

Although the international guidance does not specify particular methods 
for assigning costs, FAA's cost assignment methodology is generally 
consistent with the principles outlined in the ICAO guidance. ICAO 
members are not legally required to follow these principles and may 
apply the guidance differently depending on the circumstances.[Footnote 
22] Further, the ICAO guidance provides that it is essential that all 
costs be determined in accordance with GAAP and appropriate costing 
principles[Footnote 23] so that costs can be analyzed and users are not 
assigned costs not properly attributable to them. In designing CAMERA, 
FAA relied on federal cost accounting standards to address these 
criteria. 

FAA's CAS provides information by facility and defines air traffic 
control services in a manner consistent with the ICAO guidance. 
Further, for en route services, FAA's cost assignment methodology 
allocates costs among user groups and aircraft operators using the type 
of activity metric the ICAO guidance suggests is likely to be the most 
appropriate, namely distance flown. For terminal services, ICAO's 
guidance states that the number of flights meets the basic requirement 
for allocating costs. FAA used a more detailed metric--operations-- 
which includes both takeoffs and landings and which represents a 
reasonable basis on which to allocate ATO's terminal costs among user 
groups and aircraft operators. 

ICAO guidance on pre-funding capital projects states this funding 
method should be used subject to appropriate safeguards and when other 
funding sources are not sufficient or available. The safeguards ICAO 
cites are focused on ensuring that the pre-funding charges link to 
users that will ultimately benefit from the projects, encouraging 
advance consultation with users, and that accounting for the pre- 
funding will be transparent. FAA's use of pre-funding capital projects, 
as discussed later in this report, is limited to the excess of current- 
year budget authority for (F&E) expenditures over the GAAP-based 
current-year expense related to F&E. Also, FAA's F&E budget is 
authorized and user fees proposed under the safeguard of public 
transparency and congressional oversight. Consistent with ICAO 
guidance, this limited pre-funding was incorporated into FAA's 
methodology because other permanent financing for budgeted capital 
projects is not currently available to FAA and was not provided in the 
President's proposal.[Footnote 24] 

Further Documentation and Analysis Is Needed to Justify Key Assumptions 
and Methods: 

While elements of FAA's cost assignment methodology design comply with 
pertinent guidance, we identified matters related to the application of 
certain assumptions and cost assignment methods underlying the 
methodology that need further justification to demonstrate that the 
resulting cost assignments to users are reasonable. 

Cost accounting is intended to associate an entity's costs with its 
products, services, or activities. The processes and procedures for 
making these cost associations must be documented according to federal 
cost accounting standards. Further, federal internal control standards 
require that significant events, which can include key decisions, be 
clearly documented. CAMERA uses certain key assumptions about factors 
that affect the costs of providing air traffic control services and how 
to assign those costs to particular users. We found that FAA justified 
its assumption that turbine and piston aircraft drive costs 
differently. However, FAA did not (1) adequately document the basis on 
which it assigned costs to turbine and piston user groups or (2) 
conduct sufficient analysis (e.g., econometric analysis) to support its 
assumption that all types of aircraft with the same type of engine 
(e.g., smaller jet aircraft versus larger commercial jets) affect costs 
in the same manner. Further, the precision of FAA's approach to 
allocating overhead, indirect, and other miscellaneous costs might be 
improved by using allocations previously entered into CAS and, for 
certain of these costs, by using more appropriate allocation methods. 

Because FAA has not adequately supported certain assumptions and 
methods, it is not able to demonstrate conclusively whether the 
resulting cost assignments are reasonable. 

FAA Justified Assigning Costs to Turbine and Piston User Groups, but 
the Basis of Cost Assignments Was Not Adequately Justified: 

FAA analyzed the activities related to the delivery of air traffic 
control services and found that different types of aircraft and 
aircraft operations have different effects on FAA's workload and the 
associated costs to provide its services. FAA determined that the 
principal indicator of the differences between aircraft and aircraft 
operations--in terms of the air traffic control workload they represent 
and as cost drivers--is whether the aircraft operate with turbine or 
piston engines. Turbine aircraft fly at higher cruising altitudes, 
higher speeds, and normally under instrument flight rules (IFR), which 
require they be "controlled" by air traffic controllers through en 
route airspace and for takeoffs and landings. Turbine aircraft are also 
more likely to fly in all weather conditions, which can affect the 
capacity of the NAS. Factors such as aircraft speed and weight also 
affect which airports turbine aircraft can use. Piston aircraft, as a 
group, fly more often under visual flight rules (VFR) than IFR and fly 
at lower cruising altitudes and lower speeds. Aircraft flying under VFR 
may not require air traffic control services if they do not fly to 
airports that have control towers. 

Having appropriately identified types of aircraft and aircraft 
operations as cost drivers, FAA placed each project into one of three 
cost tiers depending on whether and to what extent the costs were 
related to the delivery of services to user groups. The costs of 
projects placed into the first two tiers were then assigned to the 
turbine and piston user groups, based primarily on the input of 
internal subject matter experts (SME) and, as discussed later, the 
costs of Tier 3 were allocated proportionally to user groups based on 
the total costs assigned through the Tier 1 and Tier 2 processes. 
According to FAA, these SMEs were selected from a cross-section of en 
route and terminal facilities and air traffic service units and were 
collectively knowledgeable in the delivery of air traffic control 
services; airspace usage; and FAA's financial, cost, and activity data 
systems. FAA officials told us that they obtained input from the SMEs 
on matters such as the specific activities necessary to deliver 
services; differences in the services provided to different user groups 
and the resources consumed to provide those services; and how factors 
such as traffic volume, mix of operators and aircraft type, weather, 
and congestion affect FAA's workload. Further, to help quantify the 
amount of incremental costs, FAA asked the SMEs how ATC services and 
costs would be affected if a group of users ceased operations 
altogether or if a user group permanently increased its operations by a 
certain percentage. 

FAA also performed regression analyses to corroborate the input 
received from the SMEs on the percentage of a project's costs that 
varied with volume of activity. We noted that the results of some of 
the analyses were either different from the cost assignment decisions 
based upon SME input or were inconclusive. When such differences arose, 
FAA relied on the judgment of the SMEs rather than the results of the 
regression analyses. FAA officials said they chose to rely on SME input 
over the results of the regression analyses because their past 
experience had been that regressions would produce results that were 
indicative, but not conclusive, and that performing more complex 
regressions would make the cost assignments less transparent and more 
difficult for external stakeholders to understand.[Footnote 25] FAA 
also explained that the aggregation of certain related but different 
projects and their costs was necessary to facilitate the SMEs' 
evaluation of these costs. This aggregation, however, may have 
contributed to some regression results implying different cost 
assignment decisions than the cost assignment decisions based on SME 
input and may also have contributed to other regression results being 
inconclusive. 

Although the final decisions as to the percentage of total costs 
attributable to the user groups were documented, the key input from 
SMEs and the rationale linking this key information and related 
regression analyses with the final cost assignments were not well 
documented. FAA officials believe that the agency adequately analyzed 
the SME information in preparing its cost study and explained that the 
agency lacked sufficient documentation of SME input and the rationale 
linking that input to the final cost assignment decisions because the 
meetings with the SMEs were part of the early development of the 
methodology, which at that point was essentially a work-in-progress. 

We acknowledge that the development of a cost assignment methodology is 
an iterative process and that the judgment of those individuals-- 
including the SMEs--most knowledgeable of the business, its customers, 
and the factors that drive costs is essential to this process. However, 
the effects of the SME input and related regression analyses on the 
final cost assignments are critical for explaining decisions about the 
resulting cost assignments. Therefore, documentation of the input and 
rationale is needed to provide a basis for justifying current decisions 
as well as for evaluating any future changes to the assumptions that 
drive cost assignment decisions. Further, we acknowledge the challenges 
faced when trying to perform regression analyses to quantify the 
relationship between costs and the activity presumed to drive those 
costs. Improving the reliability of these regressions may involve 
further analysis of the cost drivers and improving the quality of the 
underlying data. Performing more detailed statistical analysis to 
support or corroborate its conclusions may assist FAA in effectively 
demonstrating to stakeholders that its cost assignment methodology is a 
reasonable basis on which to recover costs. 

Methods for Allocating Overhead, Indirect, and Other Miscellaneous 
Costs Could Be Improved: 

CAMERA aggregated (pooled) certain facility; service; ATO; and 
allocated FAA headquarters, regional, and accrued expenses together 
(classified as Tier 3 costs) before allocating those costs to the 
turbine and piston user groups. The Tier 3 costs were allocated based 
on each group's proportional share, by service, of total costs directly 
assigned or allocated through the Tier 1 and Tier 2 processes.[Footnote 
26] CAMERA pooled these costs because FAA determined that (1) the costs 
were not directly related to the delivery of services and, therefore, 
did not vary with the volume of user activity, (2) the inherent nature 
of the costs did not allow for a direct assignment to either of the two 
user groups, or (3) the underlying transactions did not have sufficient 
data in CAS to directly assign the costs to a particular facility and 
service that would permit further analysis and allocation to the user 
groups in Tier 1 or Tier 2. However, we found that FAA's CAS had 
already associated some like costs to specific services and projects. 
The CAS assignments to services and projects could have been retained, 
avoiding CAMERA's aggregation and reallocation among all types of 
services, which affects the ultimate allocation of these costs to user 
groups. 

We also found that certain costs could have been allocated in a manner 
that resulted in a more precise distribution between the user groups, 
for example: 

* certain telecommunication and flight inspection costs were allocated 
to all services, even though they related only to terminal services; 

* indirect labor costs of equipment maintenance personnel were 
allocated to both turbine and piston user groups even though some of 
the related equipment and direct labor costs were assigned to a single 
user group in Tier 1; and: 

* annual leave, workers compensation, pension, and postretirement 
health costs were allocated to all user groups based on each group's 
share of direct labor and other nonlabor costs instead of basing the 
allocation only on the labor costs to which these benefit costs more 
closely relate. 

These cost allocation processes are examples of the CAMERA 
methodology's underlying objectives that it be simple and transparent. 
The 2006 draft report of the contractor who assisted FAA in developing 
the cost methodology states that the benefit of the cost allocation 
approach is the simplicity and transparency achieved by virtue of not 
having to rely on a highly complex system for allocating costs. FAA 
designed CAMERA to avoid the CAS process of allocating the same costs 
more than once. However, the report further notes that FAA's CAS was 
"designed to support the management of costs for highly detailed 
activities at individual locations, so a more complex allocation system 
is required"[Footnote 27] than the contractor considered necessary for 
purposes of assigning costs to users. 

CAS was designed to allocate costs to the facilities that provide 
services to users so that managers could use this cost information in 
making operational decisions. FAA also uses CAS information to prepare 
its external statement of net costs, which is audited by an independent 
public accounting firm. Despite FAA's reliance on CAS for these and 
other purposes and despite the fact that in fiscal year 2005 CAS 
associated about 34 percent of Tier 3 costs with specific services, 
CAMERA's method for allocating overhead, indirect, and other 
miscellaneous costs did not retain the preexisting allocations in 
CAS.[Footnote 28] Consequently, aggregating these costs and then 
allocating them to the turbine and piston user groups resulted in 
shifting some costs between service types compared to the CAS 
allocations, which affects the ultimate allocation of these costs to 
user groups. 

According to FAA officials, in fiscal year 2006 the agency addressed 
some of these issues related to how transactions had previously been 
recorded in CAS, notably requiring that technical support personnel 
charge their time to specific facilities where maintenance is performed 
and allocating a portion of ATO's annual leave expenses to the 
facilities based on direct labor charges. While these changes should 
help improve the precision of some cost assignments, until FAA has 
resolved the issues noted above concerning the allocation of 
telecommunication and flight inspection costs, indirect labor costs of 
maintenance personnel, and worker benefits, we believe that retaining 
the service and project allocations already established by CAS may 
provide a more precise cost assignment to turbine and piston user 
groups. FAA officials told us that, although retaining the preexisting 
CAS allocations would not likely have a significant effect on the 
CAMERA allocations to user groups, FAA is considering increasing 
reliance on the CAS cost distributions for future user group cost 
studies. Further, FAA officials stated that CAS is continuing to evolve 
and CAMERA is designed to adapt to changes in data quality. 

FAA Did Not Conduct Sufficient Analysis to Support Its Assumption That 
Different Aircraft with the Same Engine Type Drive Costs in the Same 
Manner: 

CAMERA allocated the turbine and piston pools to commercial, general 
aviation, and exempt operators based on each operator's proportional 
share of total activity within each service. This allocation assumed 
that all types of aircraft operators with the same type of engine 
(e.g., smaller jet aircraft versus larger commercial jets) contributed 
to their respective group's costs in the same proportion as their share 
of distance flown (for en route services) and number of terminal 
operations (for terminal area services in each of three subgroups based 
on airport size). However, FAA did not conduct sufficient analysis 
(e.g., econometric analysis) to support this assumption. 

CAMERA assigned Tier 1 and a portion of Tier 2 costs to the group that 
is the primary user of the air traffic control services that generate 
those costs. The turbine group was determined to be the primary user 
for Tier 1 costs of oceanic, en route, and all terminal services and 
Tier 2 costs of oceanic, en route, and terminal services at large hubs 
and middle terminals in FAA's analysis of 2005 data. Because general 
aviation jet aircraft are included in the turbine user group, FAA's 
methodology allocated a portion of these costs, such as those for 
navigational aids and other equipment, to the general aviation aircraft 
operators. Thus, the general aviation jet users receive the benefit of 
the air traffic control personnel and equipment, and allocating a 
portion of costs in this manner is acceptable when there is sufficient 
commonality between the activity and the driver of the related costs. 
However, FAA did not sufficiently justify its assumption that 
allocating costs on an average basis to all types of operators of one 
engine type would produce results similar to determining whether 
particular costs principally benefit a single group of operators. For 
example, FAA did not sufficiently support its assumption that 
individuals or companies that fly smaller jet aircraft drive terminal 
costs in the same way as commercial airlines that fly larger jets when 
they fly to the same airport. FAA stated that it considered aircraft 
characteristics (such as the speed at which small jets fly compared to 
large jets, and the percentage of flight hours flown under IFR plans) 
and discussed this issue with SMEs. However, FAA did not quantify the 
extent to which commercial, general aviation, and exempt users of 
either type of aircraft impose costs differently on the air traffic 
control system. 

The contractor FAA retained to assist it in developing this methodology 
reported that, while variations in cost pools could have been 
developed, the simplicity and transparency of the turbine and piston 
pools provides an easily defined test that is also easy to administer. 
We agree that the benefits in terms of greater precision from a more 
detailed analysis need to outweigh the additional costs of that 
analysis. However, we believe that additional analysis of how different 
types of operators drive costs associated with each aircraft type would 
help identify how much precision is sacrificed to ensure simplicity and 
is needed to justify and support FAA's simpler approach. 

Use of Facilities and Equipment Budget Authority in the Cost Base Needs 
to be Monitored: 

Because the total of ATO's fiscal year 2005 GAAP-based acquisition, 
implementation, and depreciation expenses taken from CAS were less than 
ATO's budget authority[Footnote 29] for the F&E account, a user fee 
based on GAAP expenses would be insufficient to fund the budgeted costs 
for facilities and equipment. Therefore, to have the funds that would 
be needed to acquire budgeted air traffic control assets, FAA's CAMERA 
methodology adjusted ATO's GAAP-based expenses upward to equal total 
ATO budget authority for F&E. CAMERA then assigned those adjustments to 
the services and users of services in proportion to the historical, 
GAAP-based expenses. The manner in which these adjustments are assigned 
may, over time, result in costs being assigned to users who differ from 
the ultimate users of the new F&E when it becomes operational, leading 
to unintentional cross-subsidization among users. This can occur 
because of uncertainties related to the nature, timing, and cost of 
future F&E acquisitions and the volume and distribution of future 
flights that will use those assets. Also, because the budget includes 
multiyear spending authority, some F&E purchases may be funded several 
years before the expenditures are made and the related improvements 
become operational. 

It can take many years before FAA knows the actual distribution of any 
single year's F&E budget across service types and to users. The long- 
term nature of these capital projects is such that FAA typically has 3 
years to obligate F&E funds and another 5 years beyond that to expend 
these funds from the Airport and Airway Trust Fund. Further, more than 
40 percent of the fiscal year 2005 F&E budget was related to projects 
that support more than one type of service.[Footnote 30] Consequently, 
FAA will not know for many years how the actual distributions of a 
particular year's F&E budget to each service compare to each service's 
adjusted expenses for that same year. FAA officials explained that 
CAMERA is designed to accommodate process changes to address the issues 
associated with recovering portions of the future costs of capital 
projects from current users. However, FAA had not yet designed a 
mechanism to monitor, identify, and adjust for those potential 
differences. 

Furthermore, as new projects are included in the authorized budget for 
F&E, the differences that can arise due to the use of historical GAAP- 
based expenses to allocate costs become greater. For example, the 
difference between total ATO-related F&E budgets and actual expenses 
may increase as funding for the next generation (NextGen) of air 
traffic control increases. FAA expects NextGen to cost between $15 
billion and $22 billion before 2025. However, the actual nature, 
timing, and cost of NextGen are not yet known, nor are the total volume 
and distribution of future flights by aircraft type. These 
uncertainties increase the risk that relying on the GAAP-based 
historical costs of a predominately ground-based system to allocate 
portions of the prospective, budgeted costs of a satellite-based 
NextGen system may result in a distribution of these prospective costs 
among user groups and types of aircraft operators that does not reflect 
the actual future use by these groups. Accordingly, in accordance with 
ICAO guidance, FAA needs to monitor these differences in future years 
and provide a basis for making appropriate adjustments. 

In 2005, ATO's GAAP-based expenses were $2,253.6 million while its F&E 
budget authority was $2,428.2 million, representing a difference of 
$174.6 million. In order to adjust GAAP-based expenses to total budget 
authority, FAA increased the amounts for each project within each 
service proportionally using the ratios of budget authority to expenses 
calculated for total nonterminal services and total terminal services. 
For example, the expenses of each en route project were increased by 
marking them up 2 percent, using the ratio of total nonterminal budget 
authority to total non-terminal expenses of 1.02. The resulting marked 
up GAAP-based project expenses within each service were then assigned 
to the turbine and piston user groups. These markup adjustments could 
accumulate over several years. Table 1 shows the distribution of the 
ATO-related F&E budget, expenses, and the difference by service and in 
total. Table 1 also shows how this method increased the expenses 
associated with each service and the portion of the en route and flight 
services F&E budgets that would be assigned to users of oceanic 
services. 

Table 1: Fiscal Year 2005 ATO-Related Facilities and Equipment Budgets 
and Expenses (Actual and Adjusted), by Service Type and in Total: 

(Dollars in millions). 

Budget[A]; 
Nonterminal services: Oceanic: $33.3; 
Nonterminal services: En route: $1,116.5; 
Nonterminal services: Flight services: $84.1; 
Nonterminal services: Total Nonterminal: $1,233.9; 
Nonterminal services: Terminal: $1,194.3; 
Nonterminal services: Total: $2,428.2. 

Expenses; 
Nonterminal services: Oceanic: 76.8; 
Nonterminal services: En route: 1,069.1; 
Nonterminal services: Flight services: 63.7; 
Nonterminal services: Total Nonterminal: $1,209.6; 
Nonterminal services: Terminal: 1,044.0; 
Nonterminal services: Total: 2,253.6. 

Dollar difference; 
Nonterminal services: Oceanic: $(43.5); 
Nonterminal services: En route: $47.4; 
Nonterminal services: Flight services: $20.4; 
Nonterminal services: Total Nonterminal: $24.3; 
Nonterminal services: Terminal: $150.3; 
Nonterminal services: Total: $174.6. 

Ratio of budget to expense; 
Nonterminal services: Oceanic: 0.43; 
Nonterminal services: En route: 1.04; 
Nonterminal services: Flight services: 1.32; 
Nonterminal services: Total Nonterminal: 1.02; 
Nonterminal services: Terminal: 1.14; 
Nonterminal services: Total: 1.08. 

Ratio used for markup; 
Nonterminal services: Oceanic: 1.02; 
Nonterminal services: En route: 1.02; 
Nonterminal services: Flight services: 1.02; 
Nonterminal services: Total Nonterminal: 1.02; 
Nonterminal services: Terminal: 1.81[B]; 
Nonterminal services: Total: [Empty]. 

Adjusted expenses; 
Nonterminal services: Oceanic: $78.3; 
Nonterminal services: En route: $1,090.6; 
Nonterminal services: Flight services: $65.0; 
Nonterminal services: Total Nonterminal: $1,233.9; 
Nonterminal services: Terminal: $1,194.3; 
Nonterminal services: Total: [Empty]. 

Difference between budget and adjusted expenses; 
Nonterminal services: Oceanic: $(45.0); 
Nonterminal services: En route: $25.9; 
Nonterminal services: Flight services: $19.1; 
Nonterminal services: Total Nonterminal: $0; 
Nonterminal services: Terminal: $0; 
Nonterminal services: Total: [Empty]. 

Source: GAO analysis of FAA data. 

Note: Amounts may not calculate because of rounding. 

[A] Because the ATO-related F&E budget is not appropriated according to 
service type, FAA estimated how much of the budget will be expended in 
support of each type of service. 

[B] FAA adjusted upward the F&E expenses separately for terminal and 
nonterminal services in fiscal year 2005 to avoid categorizing $384.2 
million in terminal-only project expenses as Tier 3 costs because these 
expenses did not have sufficient data in CAS to associate them with 
specific terminals. To restrict this $384.2 million, it was subtracted 
from total terminal expenses of $1,044.0 million (resulting in adjusted 
expenses of $659.8 million) before calculating the ratio of total 
budget authority to total expenses. Therefore, the markup of terminal 
expenses distributed to other terminal projects was higher than if the 
$384.2 million had not been subtracted. The ratio of budget to actual 
expenses increased from 1.14 to 1.81. 

[End of table] 

FAA explained that the cyclical nature of funding projects means that 
the relative distribution of the F&E budget among service types may 
change over time and that the distribution of historical costs (GAAP- 
based expenses) by service type represented a stable means of 
allocating the funding of long-lived assets. FAA reasoned that this 
approach can smooth out sharp year-to-year fluctuations in user fees 
that might otherwise occur if each service's F&E budget authority were 
used to adjust the service's expenses instead of using an overall 
markup based on total nonterminal and total terminal ratios of budget 
authority to expenses. FAA's reasoning has merit; however, we have 
concerns that using this method introduces risk that costs for F&E 
acquisitions may be assigned to users that differ from the users of 
those assets once they become operational. 

Lastly, although we did not audit FAA's CAS data, it is important to 
note that FAA's external auditor has for the past 2 years reported an 
internal control weakness on the lack of timely processing and 
accounting for construction in progress. This weakness affects the GAAP-
based expenses for assets and depreciation of certain capital projects 
and has required that FAA record significant year-end adjustments to 
its financial statements. Although FAA's auditors do not indicate in 
their report that this problem is limited to a particular line of 
business or category of facility or service, the impact of using 
depreciation figures that may not be accurate to allocate the F&E 
budget to user groups is not known. 

Together these issues highlight the inherent and potential difficulties 
of pre-funding long-lived capital projects in general, and NextGen in 
particular, with revenues generated from current users. However, to 
avoid these challenges, FAA would have to seek other alternatives to 
fund its F&E budget, such as borrowing authority with a repayment 
period that closely matches the useful lives of acquired assets or 
special appropriations. 

Conclusions: 

FAA's methodology for assigning costs to users is intended to link the 
costs that different user groups impose on the air traffic control 
system to fees that would be charged to users. Developing this type of 
methodology involves developing key assumptions and making decisions 
about the level of precision needed to achieve the objectives and the 
associated costs and benefits. 

The design of FAA's methodology is generally consistent with the 
principles and methods set forth in federal cost accounting standards 
and international guidance. However, the lack of sufficient support for 
certain of the methodology's underlying assumptions and methods leaves 
open the possibility that the study should assign costs to commercial, 
general aviation, and exempt users differently. Notwithstanding the 
need to balance precision with simplicity and transparency, FAA, 
Congress, and users of air traffic control services would benefit from 
additional documentation and analysis for key assumptions impacting the 
assignment of costs to the different user groups and further evaluation 
of the reasonableness of FAA's method of allocating overhead, indirect, 
and other miscellaneous costs. This additional documentation and 
analysis for FAA's cost assignment methodology is critical to help 
justify the results in order to promote user acceptance. In addition, 
because FAA's methodology for allocating cost adjustments for FAA's 
budgeted facilities and equipment projects can allow unintentional 
cross-subsidization among users, careful monitoring of actual project 
costs and users compared to original cost allocations is needed to 
identify and adjust for any significant differences. 

Recommendations for Executive Action: 

To provide additional support for the reasonableness of FAA's cost 
assignment methodology and to monitor F&E cost assignments to users, we 
recommend that the Secretary of Transportation direct the Administrator 
of FAA to: 

* adequately document the basis on which costs are assigned to user 
groups; 

* evaluate the methods and basis upon which various overhead, indirect, 
and other miscellaneous costs are assigned to user groups and document 
the effect of any changes thereto; 

* determine whether and quantify the extent to which commercial, 
general aviation, and exempt users who use either single type of 
aircraft--turbine or piston--impose costs differently on the air 
traffic control system; and: 

* establish a mechanism for monitoring, by user group, any cumulative 
difference between original cost allocations for budgeted facilities 
and equipment project costs and actual usage of those assets, and 
adjusting prospective cost assignments accordingly. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Secretary of Transportation 
for review and comment. The Department's comment letter is attached as 
Appendix I. While the Department expressed general concurrence with our 
recommendations in the technical comments it provided separately, it 
neither explicitly agreed nor disagreed with our findings, conclusions, 
and recommendations in its letter. The Assistant Secretary for 
Administration stated that the fiscal year 2006 allocation will address 
several of the issues identified in our report, including improved 
documentation of subject matter expert (SME) input to the assumptions 
and better assignment of indirect labor costs. However, these actions 
specified in the Department's letter appear to address only narrow 
elements of two of our four recommendations. The Department's letter is 
unclear about FAA's and the Department's position on the broader scope 
of our recommendations. For the Department to be able to support its 
assertions that CAMERA provides reasonable estimates of costs and is 
well supported, we believe that FAA must follow through with all of our 
recommendations. 

The first three of our recommendations each relate to how well the 
results of FAA's methodology are supported and the extent to which the 
reasonableness of those results can be assessed. FAA's agreement to 
improve documentation of key source input from its internal SMEs, which 
provided the basis for FAA's cost assignments, is a good first step in 
completing the methodology documentation process. At the same time it 
represents only part of the input and methods FAA used to assign costs. 
As we reported, the effects of the SME input on costs assigned to the 
turbine and piston user groups as well as the related regression 
analyses of those costs are critical to the final cost assignments. 
Accordingly, documentation of the rationale linking the SME input to 
cost assignment decisions is also needed to justify those decisions. 

The Department also stated that FAA concluded that more analysis of how 
turbine and piston users drive air traffic control costs had the 
potential for only marginal, if any, gain. While the value of more 
detailed analysis with respect to the accuracy of related cost 
assignments can be determined only upon completion of that analysis, 
there is intrinsic value in performing such analysis in terms of 
demonstrating to stakeholders that FAA's cost assignment methodology is 
a reasonable basis on which to recover costs. We believe more detailed 
analysis, at least regarding the most significant costs, would help 
achieve this primary goal. This is particularly important considering 
that, as we reported, the results of some regression analyses 
undertaken by FAA to support SME-based cost assignment decisions 
implied different cost assignments and others were inconclusive. 

Concerning our recommendation that FAA evaluate the methods and basis 
upon which various overhead, indirect, and other miscellaneous costs 
are assigned to user groups, the Department commented that using the 
allocations of FAA's Cost Accounting System (CAS), an option suggested 
in our report, would not necessarily produce more precise cost 
allocations to users. However, as we reported, the method FAA used to 
allocate these costs to users resulted in shifting some costs between 
service types as compared to the allocations in CAS, which ultimately 
affects the allocation of these costs to user groups. CAS allocates 
costs to the facilities that provide services to users, and FAA 
managers rely on that information to make operational decisions. 
Accordingly, we believe that the CAS allocations may provide a more 
precise way of assigning these costs to users. 

The Department did not specifically comment on our recommendation to 
determine and quantify the extent to which commercial, general 
aviation, and exempt users of either engine type--turbine or piston-- 
impose costs differently on the air traffic control system. FAA's 
allocation method assumes, for example, that smaller jet aircraft drive 
terminal costs in the same way as commercial airlines that fly larger 
jets when they fly to the same airport. We believe that further 
analysis is needed to sufficiently justify FAA's assumption that 
allocating costs to all types of operators of one engine type produces 
results similar to determining whether particular costs principally 
benefit a single group of operators and would help identify to what 
extent precision is sacrificed using FAA's simpler method. 

The Department also did not comment on our recommendation that a 
mechanism be established to monitor any cumulative difference between 
original cost allocations for budgeted facilities and equipment (F&E) 
project costs and actual usage of those assets. FAA's method for 
allocating the costs of budgeted F&E to users may, over time, result in 
costs being assigned to users who differ from the ultimate users of the 
new F&E when it becomes operational. We believe that in an environment 
with a cost-based revenue structure that incorporates funding for the 
costs of budgeted F&E, monitoring cumulative differences would help 
identify unintentional cross-subsidization among users. 

While the Department recognized our concerns with respect to adequacy 
of the support for the methodology's underlying methods and 
assumptions, it stated that we did not offer quantitative evidence of 
fundamental flaws in FAA's methodology. Our objective was to determine 
the extent to which FAA had supported its assumptions and methods, not 
to demonstrate through quantitative analysis that the resulting cost 
assignments to users are or are not reasonable. It is the 
responsibility of the agency to adequately support the assumptions and 
methods underlying its own methodology and the reasonableness of the 
results using quantitative analysis where appropriate. We found this 
support to be insufficient. 

We are sending electronic copies of this report to the Secretary of 
Transportation, the Administrator of FAA, and other interested parties. 
This report will be available at no cost on GAO's Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions on matters discussed in this 
report, please contact me at (202) 512-9471 or [email protected]. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made major contributions to this report are listed in appendix II. 

Signed by: 

Jeanette Franzel: 

Director, Financial Management and Assurance: 

List of Committees: 

The Honorable James L. Oberstar: 
Chairman: 
The Honorable John L. Mica: 
Ranking Member: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Jerry F. Costello: 
Chairman: 
The Honorable Thomas E. Petri: 
Ranking Member: 
Subcommittee on Aviation: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

[End of section] 

Appendix I: Comments from the Department of Transportation: 

U.S. Department of Transportation: 
Assistant Secretary for Administration: 
1200 New Jersey Avenue, SE: 
Washington, DC 20590: 

October 12, 2007: 

Ms. Jeanette Franzel: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G. St, NW: 
Washington, DC 20548: 

Dear Ms. Franzel, 

The Department is pleased that the Government Accountability Office 
(GAO) recognizes the extensive progress the Federal Aviation 
Administration (FAA) has achieved in building a logical, data-driven 
methodology for allocating Air Traffic Control (ATC) costs to users. In 
particular, DOT appreciates the draft reports verification that key 
design aspects of the cost allocation methodology are generally 
consistent with Federal standards and the principles set forth in 
international policies and guidance. Further, we welcome the draft 
reports recognition that FAA adequately justified its decision to 
assign air traffic control costs based on aircraft engine type. These 
successes result from extensive efforts by staff throughout the agency, 
applying their respective expertise, to help ensure FAA presents a fair 
and appropriate allocation of costs users impose on the ATC system. 

The objective of FAA's cost allocation effort is to assign both direct 
and indirect costs to users in a way that is equitable and transparent. 
FAA believes it has achieved this objective. FAA believes it has 
achieved this objective. The Cost Assignment Methodology for Estimating 
Resource Allocation (CAMERA), like any data-driven analytical tool 
functioning in a dynamic environment, requires continual testing and 
review; however, CAMERA, provides reasonable estimates of costs users 
impose on the ATC system. These estimates are in line with previous 
cost allocation studies, while taking advantage of the unprecedented 
level of detailed cost and activity data now available. FAA recognizes 
that further refinement and fine-tuning are possible and has activities 
underway to continue those efforts, including some along the lines 
identified in the GAO draft report. CAMERA will continue to evolve 
based on continually improving data and stakeholder feedback, and the 
FY 2006 allocation will address several of the issues the GAO draft 
report identified relating to the FY 2005 allocation. In addition to 
improved documentation of subject matter expert (SME) input, these 
changes will include better assignments of indirect labor of indirect 
maintenance labor costs and indirect labor costs such as annual leave, 
which are possible due to improved fidelity in the FY 2006 cost 
accounting data. 

FAA has already gone to great measure to ensure that CAMERA yields cost 
allocation results that are logical, data-driven, and well supported, 
while equitable meeting the needs of the Agency and ATC system users. 
As the GAO draft report points out, allocating costs in a large, 
complex environment such as FAA and its ATC system necessarily involves 
a degree of art and judgment along with the science. FAA made 
appropriate use of both. Recognizing the limits of regression analysis 
in a complex environment, FAA made extensive use of both resident 
expertize and recognized experts in the field, to ensure it achieved a 
reasonable outcome. For example, FAA studied aircraft operating 
characteristics, interviewed staff at a variety of air traffic control 
facilities, and completed an exhaustive analysis of activity data at 
the individual flight and facility level. Thanks to these and other 
efforts over more than two years, CAMERA has demonstrated the 
capability to provide a reasonable allocation of costs among ATC system 
end-users. Though more analysis is always possible--and will continue 
to occur to occur as CAMERA evolves--FAA concluded it would result in 
further delay with the potential for only marginal, if any, gain at 
this point. In addition, getting the cost allocation information out to 
the user community will provide valuable feedback to FAA on this most 
important subject. 

Regarding the allocation of overhead and indirect costs, FAA 
established indirect cost allocations that feed into CAMERA in a way 
that it--and third part experts--determined to be most appropriate for 
identifying costs to system end-users. While alternative allocations of 
these costs are available, such as in FAA's Cost Accounting System 
(CAS), FAA determined early in the design process that CAS, which was 
designed to provide managers with project and location-specific cost 
information, was not optimized for end-user cost allocation. As a 
result, while FAA recognizes that CAS offers a different approach for 
allocating indirect costs, it would necessarily produce more precise 
end-user cost allocations. 

FAA is continuing to judiciously pursue its fiduciary responsibilities 
with regard to end-user cost allocation. We view the GAO report as 
admiration that FAA is on the right track, particularly as the concerns 
expressed in the report focus on issues of decision documentation and 
alternative methodologies, while offering no specific quantitative 
evidence of fundamental flaws in CAMERA. We appreciate the opprtunity 
to offer comments on the draft report. Please contact Martin Gertel, 
Director of Audit Relations, on 202-366-5145 with any questions. 

Sincerely, 

Signed by: 

Linda J. Washington: 

Assistant Secretary for Administration: 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Jeanette Franzel, (202) 512-9471 or [email protected]: 

Acknowledgments: 

In addition to the contact named above, significant contributions to 
this report were made by Jack Warner (Assistant Director), H. Donald 
Campbell, Jay Cherlow, Gerald Dillingham, Fred Evans, Maxine Hattery, 
Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Scott McNulty, and Meg 
Mills. 

[End of section] 

Footnotes: 

[1] Commercial users are entities that use aircraft in a business of 
transporting persons or property for compensation. General aviation 
users include entities that operate all U.S. registered civil aircraft 
other than (1) those operated under 14 C.F.R. Part 121 (scheduled 
commercial airlines), (2) military operations, and (3) those operated 
under 14 C.F.R. Part 135 (commuter and on-demand operations). In some 
cases users are classified differently for tax and regulatory purposes. 
For example, FAA's cost assignment methodology classifies fractional 
ownership operations as commercial users because such operations pay 
commercial excise taxes, but for regulatory purposes they are treated 
as general aviation because they fly under 14 C.F.R. Part 91. The 
exempt category includes military, public, and air ambulance users that 
are exempt from existing excise taxes. 

[2] Federal Aviation Administration, FY 2005 Cost Allocation Report 
(Washington, D.C.: Jan. 31, 2007). 

[3] The International Civil Aviation Organization (ICAO), an advisory 
organization affiliated with the United Nations, has issued policies 
and guidance on assigning costs and establishing charges for air 
navigation services. 

[4] A project is a mechanism used to recognize, measure, and accumulate 
the costs of a particular set of activities, functions, organizations, 
products, services, or customers. Some of the projects were either 
operations, such as air traffic management, or capital projects, such 
as radar data display, or were a combination of related operations and 
capital projects. 

[5] Turbine aircraft include both turbojet and turboprop aircraft, 
which FAA refers to collectively as the "high-performance" group. 

[6] Piston aircraft include all helicopters, whether turbine or piston, 
because of the similarities in their use of the air traffic control 
system. 

[7] For more information on air traffic control services and how FAA is 
funded, see GAO, Aviation Finance: Observations on Potential FAA 
Funding Options, GAO-06-973 (Washington, D.C.: Sept. 29, 2006). 

[8] GAO, Managing the Cost of Government: Building an Effective 
Financial Management Structure, GAO/AFMD-85-35 and GAO/AFMD-85-35A, 
(Washington, D.C.: February 1985). 

[9] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). 

[10] Pub. L. No. 104-208, ï¿½ 803, Title VIII, 110 Stat. 3009, 3009-389 
(Sept. 30, 1996). 

[11] Pub. L. No. 104-264, 110 Stat. 3213 (Oct. 9, 1996). 

[12] Overflight fees are those charged for air traffic control and 
related services provided to aircraft that neither take off from, nor 
land in, the United States other than military and civilian aircraft of 
the United States government or of a foreign government. 

[13] This "directly related" standard was later amended by Congress in 
2001 to say that the fees must be "reasonably related to the 
Administration's costs, as determined by the Administrator, of 
providing the service rendered." 

[14] This pricing method is usually referred to as Ramsey Pricing. 

[15] The Office of Management and Budget's (OMB) Circular A-25, User 
Charges, requires that user fees be sufficient to recover the full cost 
of providing goods, services, and resources when the government is 
acting in its sovereign capacity. 

[16] For fiscal year 2005 several adjustments were made to the CAS cost 
data to arrive at the CAMERA cost base. The most significant of these 
was the upward adjustment of the facilities and equipment acquisition, 
implementation, and depreciation costs to the Facilities and Equipment 
(F&E) account's fiscal year 2005 budget authority. A further 
explanation of this adjustment is presented in later sections of this 
report. 

[17] Large hubs are defined by statute as those airports with at least 
1 percent of U.S. scheduled enplanements. For fiscal year 2005, FAA 
defined low-activity towers as airports with towers (FAA or FAA 
contract tower) and fewer than 100,000 annual passenger boardings. 
Middle terminals consist of facilities with towers that do not fit the 
criteria for either large hubs or low-activity towers. 

[18] Project costs related to flight service stations, which provide 
services primarily to piston aircraft and are safety related in their 
nature, were not classified by tier or assigned to the two primary user 
groups because under the President's reauthorization proposal these 
costs would be funded from the General Fund instead of through user 
fees or fuel taxes.

[19] Activity was distance flown for oceanic and en route services and 
number of terminal operations (an operation is defined as a takeoff or 
landing) for terminal area services in each of three terminal pools. 
Operations at airports without an FAA tower or FAA contract tower were 
excluded from the total tower activity counts of turbine and piston 
user groups and subgroups of operators because FAA did not incur 
significant terminal costs for those activities. Therefore, costs were 
allocated based only on activity that resulted in FAA incurring costs 
to provide services to end users. 

[19] Statement of Federal Financial Accounting Standards (SFFAS) No. 4, 
Managerial Cost Accounting Standards and Concepts. 

[20] ICAO, Manual on Air Navigation Services Economics, Doc 9161. 

[22] We previously reported that FAA differs from the practices of 
foreign air navigation service providers (ANSP) we reviewed in that 
those foreign ANSPs do not assign en route and terminal costs 
specifically to turbine and piston user groups and subgroups of 
aircraft operators. See GAO, Federal Aviation Administration: Cost 
Allocation Practices and Cost Recovery Proposal Compared with Selected 
International Practices, GAO-07-773R (Washington, D.C.: June 8, 2007). 

[23] Cost accounting principles primarily consist of a body of industry 
practices, economic and finance theory, and guidance issued by 
organizations such as the Institute of Management Accountants that have 
wide acceptance. 

[24] The President's proposal would allow FAA to borrow an aggregate 
amount not to exceed $5 billion beginning in fiscal year 2013, but 
requires repayment by the end of fiscal year 2017. 

[25] According to FAA, many of the regression analyses produced poor 
statistical fits (low R2) and,in most cases, using the results of the 
regressions would have required significant extrapolation from the 
observable data to the origin. 

[26] CAMERA removes the overhead, indirect, and other miscellaneous 
costs associated with flight services from the Tier 3 pool before any 
of the remaining Tier 3 costs are allocated to user groups. 
Consequently, the overhead, indirect and other miscellaneous costs that 
FAA's CAS previously allocated to flight services remain entirely with 
that service. 

[27] PwC, Federal Aviation Administration Air Traffic Organization: 
FY2004 Cost Allocation For Reauthorization: Methodology and 
Application, (McLean, Va.: June 27, 2006) (Discussion Draft). 

[28] Except for that which is allocated to flight services. 

[29] Budget authority represents the current amount of funding 
available for obligations and outlays. 

[30] FAA estimated the allocation of these project budgets to service 
types based on historical data such as direct labor dollars, head 
counts, and pieces of equipment by service. 

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