Airport Improvement Program: Better Management Needed for Funds Provided
Under Letters of Intent (Letter Report, 02/02/94, GAO/RCED-94-100).

Under the Airport Improvement Program, the Federal Aviation
Administration (FAA) funds airport improvement projects. FAA can provide
either grants or letters of intent, which document FAA's intent to
obligate the money in future years, subject to authorization and
appropriations. Between fiscal years 1988 and 1993, FAA issued letters
of intent worth more than $2 billion, including nearly $1.5 billion that
FAA plans to obligate in fiscal years 1994-2005. FAA is required to
limit letters of intent to projects that significantly enhance
systemwide airport capacity. FAA must also plan disbursements under
letters of intent so that enough funds are available for other necessary
airport improvements. This report (1) provides a profile of the letters
of intent that FAA has issued and (2) discusses whether FAA has
effectively managed the use of letters of intent.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-100
     TITLE:  Airport Improvement Program: Better Management Needed for 
             Funds Provided Under Letters of Intent
      DATE:  02/02/94
   SUBJECT:  Commercial aviation
             Federal aid for transportation
             Funds management
             Grant administration
             Discretionary grants
             Future budget projections
             Airports
             Regulatory agencies
IDENTIFIER:  FAA Airport Improvement Program
             Military Airport Program
             Denver International Airport (CO)
             Steamboat Springs Airport (CO)
             Chess-Lamberton Airport (PA)
             Detroit Metropolitan Wayne County Airport (Detroit, MI)
             Cincinnati-Northern Kentucky International Airport
             Theodore F. Green State Airport (RI)
             FAA Aviation System Capacity Plan
             Nashville International Airport (TN)
             Raleigh-Durham Airport (Raleigh-Durham, NC)
             Golden Triangle Regional Airport (MS)
             Reno Cannon International Airport (NV)
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Transportation and Related
Agencies, Committee on Appropriations, U.S.  Senate

February 1994

AIRPORT IMPROVEMENT PROGRAM -
BETTER MANAGEMENT NEEDED FOR FUNDS
PROVIDED UNDER
LETTERS OF INTENT

GAO/RCED-94-100

AIP Letters of Intent


Abbreviations
=============================================================== ABBREV

  AIP - Airport Improvement Program
  FAA - Federal Aviation Administration
  GAO - General Accounting Office
  LOI - letter of intent

Letter
=============================================================== LETTER


B-256001

February 2, 1994

The Honorable Frank R.  Lautenberg
Chairman, Subcommittee on Transportation
 and Related Agencies
Committee on Appropriations
United States Senate

Dear Mr.  Chairman: 

Under the Airport Improvement Program, the Federal Aviation
Administration (FAA) funds projects to improve the nation's airport
system.  FAA can provide program funds under either grants or letters
of intent, which document FAA's intent to obligate the funds in
future years, subject to authorization and appropriations.  Between
fiscal years 1988 and 1993, FAA issued letters of intent worth over
$2 billion, including about $1.43 billion that FAA plans to obligate
in fiscal years 1994-2005.  Letters of intent provide attractive
options not available with grants, such as the ability to draw
multiyear funding from all three of the program's funding categories
(entitlement, set-aside, and discretionary funds) and to schedule
disbursements beyond the program's current authorization period.  In
fiscal year 1993, the program's authorization period was 1 year, so
airports have come to rely more on letters of intent. 

FAA is required by statute to limit letters of intent to projects
that significantly enhance systemwide airport capacity.  The statute
also requires FAA to plan disbursements under letters of intent so
that enough funds are available for other necessary airport
improvements.  Your Subcommittee wished to know whether FAA had met
these requirements and asked us to evaluate how FAA has used letters
of intent.  As agreed with the Subcommittee, this report (1) provides
a profile of the letters of intent that FAA has issued and (2)
discusses whether FAA has effectively managed the use of letters of
intent. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

FAA has increasingly used letters of intent to provide funding under
the Airport Improvement Program.  Of the 49 letters of intent issued
between fiscal years 1988 and 1993, one-third were awarded in fiscal
year 1993.  Also, in each fiscal year from 1988 through 1993, both
the total amount of program funds and the percentage of total
obligations used for disbursements under letters of intent increased. 
For example, letter-of-intent disbursements as a percentage of total
program obligations jumped from 2 percent in fiscal year 1988 to 12
percent in fiscal year 1993.  Furthermore, comparing 6-year periods,
letter-of-intent disbursements are scheduled to increase from the
$628 million actually paid in fiscal years 1988-93 to $1.28 billion
in fiscal years 1994-99.  The total amount could increase if FAA
awards additional letters of intent.  Even after accounting for
anticipated inflation, the scheduled letter-of-intent disbursements
represent a substantial increase in real funding. 

In two respects, FAA could have more effectively managed the use of
letters of intent.  First, while most letter-of-intent commitments
were for projects to improve capacity, FAA did not ensure that
letters of intent were used only to significantly enhance systemwide
capacity, as required by statute.  FAA did not establish criteria
defining a "significant" enhancement by which to evaluate and approve
letter-of-intent proposals.  Nor has the agency, as requested by the
Congress in 1987, established goals and performance measures for the
program, including a goal for improving systemwide capacity on which
to base criteria for letters of intent.  Furthermore, although agency
officials stated that they considered effects on capacity at
individual airports and regional airport systems when reviewing
letter-of-intent proposals, we found only one case in which they
analyzed how a project funded under a letter of intent would affect
the national airport system.  FAA also issued letters of intent for
some projects that clearly could not significantly enhance systemwide
capacity.  For example, FAA approved letters of intent for projects
to construct water treatment facilities and access roads at two major
airports and for projects at eight small airports where fewer than
one-tenth of 1 percent of all U.S.  passengers are enplaned annually. 
Agency officials told us that they expanded the use of letters of
intent in these cases because the program's authorization period was
nearing expiration and multiyear grants could not be used.  However,
FAA did not seek congressional approval to use letters of intent in
this manner. 

Second, while FAA carried out the statutory planning requirement, the
agency made incorrect assumptions about the program's future funding
levels.  In 1992, FAA determined that letter-of-intent commitments
should be limited to half of the discretionary funds available for
letters of intent at the beginning of each fiscal year.  This
approach would, in the view of FAA officials, preserve a reasonable
level of discretionary funds for other airport improvement needs. 
FAA had met earlier planning goals and met the current goal in fiscal
years 1992 and 1993.  However, the agency may not meet its goal in
fiscal years 1994 and 1995.  The discretionary funds available for
letter-of-intent disbursements at the beginning of the fiscal year
decreased from fiscal year 1992 to fiscal year 1993 and may decrease
further.  At the same time, the commitments under letters of intent
are at a higher level.  Under these circumstances, FAA may have fewer
discretionary funds available to meet the immediate needs of the
national airport system.  More conservative assumptions about the
program's future funding levels could help the agency better plan
commitments under letters of intent. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Airport and Airway Improvement Act of 1982 created the Airport
Improvement Program (AIP) to provide grants for airport improvement
projects, including projects that would increase airport capacity. 
Increasing airport capacity is one way to reduce aircraft delays and
better accommodate passenger and cargo traffic.  According to FAA,
aircraft delays exceeded 20,000 hours at each of 23 major airports in
1991.  FAA estimates that 33 major airports could experience delays
at this level by the year 2002 if no improvements in capacity are
made. 

Depending on the project approved, single-year grants and funding for
the initial year of multiyear grants can be made from all three AIP
funding categories:  entitlement, set-aside, and discretionary funds. 
After the initial year, multiyear grants can be made only with
entitlement funds.  In addition, grants cannot extend beyond the
AIP's authorization period.  FAA distributes entitlement funds by
formula to specific airports and states.  Set-aside and discretionary
funds are distributed by type of project to any eligible airport
sponsor.\1 Set-aside subcategories include reliever airports,
nonprimary commercial service airports, airport noise compatibility
programs, integrated airport system plans, and the Military Airport
Program.  A congressionally mandated percentage of total AIP funds is
allocated to each set-aside subcategory.  The remaining AIP funds are
discretionary.  At the level authorized for fiscal year 1993,
entitlement funds accounted for 56 percent, set-aside funds for 28
percent, and discretionary funds for 16 percent of the total $1.8
billion in AIP funds. 

The Airport and Airway Safety and Capacity Expansion Act of 1987
established letters of intent (LOI) to support projects at primary
and reliever airports that would significantly enhance systemwide
airport capacity.\2 While airport sponsors must promise to comply
with all AIP grant requirements while working on the projects, LOIs
allow them to begin project development sooner and receive multiyear
funding from all of the program's funding categories.  Thus, instead
of waiting to receive a grant before beginning a project, an airport
sponsor with an LOI can begin work using other funding sources, such
as bonds or short-term loans, and receive reimbursement as the
project progresses or after it is completed.  And because LOIs can
draw multiyear funding from all three funding categories, more funds
can be provided to some eligible projects.\3 Additionally, in 1988
the Congress authorized FAA to issue LOIs with commitments scheduled
beyond the date when the program's authorization expired so that
funds could be spread out over longer periods.  As noted above,
single-year and multiyear AIP grants do not provide these options. 
Under the 1987 act, FAA began issuing LOIs in fiscal year 1988. 

An LOI documents FAA's intent to obligate AIP funds on an established
schedule.  However, an LOI is not an obligation of federal funds and
is subject to authorization and appropriations.  LOIs also state that
FAA may adjust the LOI disbursement schedule, disbursement amount, or
both following consultation with the airport sponsor.  Such
adjustments may be made if the project's actual allowable costs or
completion time changes, FAA's actual or estimated future authority
to obligate funds changes, or the FAA Administrator determines such
changes to be in the best interest of the United States. 


--------------------
\1 The airport sponsor is the public agency or private entity that
owns or operates the airport. 

\2 Primary airports are publicly owned airports that enplane more
than 10,000 passengers annually and receive scheduled air
transportation service.  Reliever airports are airports that FAA has
designated to reduce congestion at primary airports.  According to
FAA, as of January 1994 there were 423 primary airports and 290
reliever airports out of a total of 3,294 public-use airports
eligible for AIP funds. 

\3 Set-aside funds committed under LOIs must be used for their
intended purpose (e.g., airport noise compatibility programs). 


   USE OF LOI COMMITMENTS HAS
   INCREASED
------------------------------------------------------------ Letter :3

FAA issued 49 LOIs worth over $2 billion for projects at 39 primary
and 5 reliever airports between fiscal years 1988 and 1993.  Three
primary airports each received two LOIs and one received three. 
One-third of the LOIs were awarded in fiscal year 1993--most drawing
only on entitlement funds.  Of the 49 LOIs, 23 (47 percent) were
issued in FAA's Southern Region and 22 (45 percent) were issued in
four regions--the Eastern, Great Lakes, Southwest, and
Western-Pacific.  At least one LOI was issued in eight of FAA's nine
regions; none was issued in the Alaskan Region. 

Funding amounts and disbursement schedules for LOIs vary widely. 
Specifically, LOI commitments ranged from a high of $351 million in
entitlement and discretionary funds for the new Denver International
Airport to a low of about $400,000 in entitlement funds for the
Steamboat Springs (Colorado) Airport and for the Chess-Lamberton
(Pennsylvania) Airport.  LOI disbursement schedules ranged from 1 to
15 years.  Through fiscal year 1993, FAA had paid all LOI commitments
in full as scheduled, including final disbursements for nine LOIs. 
Final disbursements are scheduled for seven LOIs in fiscal year 1994
and eight LOIs in fiscal year 1995 if funding is appropriated. 
Appendix I lists the 49 LOIs by airport, funding amount, and years of
disbursements. 

LOI disbursements have increased significantly, growing nearly
eightfold from $27.7 million in fiscal year 1988 ($34.1 million in
fiscal year 1993 constant dollars) to $218.3 million in fiscal year
1993.  Also, as of January 1994, LOI disbursements were scheduled to
double from a total of $628 million in the 6 fiscal years 1988-93 to
a total of about $1.28 billion in the 6 fiscal years 1994-99.  After
expected inflation is taken into account, this represents an increase
of 77 percent.  Furthermore, FAA can issue additional LOIs that could
increase the total amount of scheduled disbursements.  Figure 1 shows
the total actual and scheduled LOI disbursements by fiscal year. 

   Figure 1:  Total Actual and
   Scheduled LOI Disbursements by
   Fiscal Year, as of January 1994

   (See figure in printed
   edition.)

Source:  FAA. 

LOI disbursements constitute an increasing percentage of total AIP
obligations.  For example, LOI disbursements jumped from 2 percent of
total AIP obligations in fiscal year 1988 to 12 percent in fiscal
year 1993.  Cumulatively, LOI disbursements account for $628 million
(6 percent) of the total $9.8 billion in AIP funds obligated during
fiscal years 1988-93.  Figure 2 shows the percentage of total AIP
obligations used for LOI disbursements by fiscal year. 

   Figure 2:  LOI Disbursements as
   a Percentage of Total AIP
   Obligations by Fiscal Year

   (See figure in printed
   edition.)

Note:  The projection of the percentage for 1994 is based on FAA's
estimate of $1.75 billion in total AIP obligations in that fiscal
year. 

Source:  FAA. 

We believe there are two main reasons for the increased use of LOIs. 
First, LOIs allow sponsors to receive commitments for set-aside and
discretionary funds and avoid having to compete with other sponsors
for these funds in future years.  Second, LOIs are more flexible than
AIP single-year or multiyear grants.  The flexibility in disbursement
periods and funding sources is particularly important in facilitating
project development.  This flexibility allows sponsors to plan and
arrange financing for a project and either borrow funds or use bond
financing, with the expectation that federal funds will be made
available. 

Of the 49 LOIs, 41 (84 percent) included disbursements scheduled
beyond the AIP's authorization period.  Additionally, 16 (33 percent)
included disbursements scheduled over 6 or more years.  Such
disbursement schedules would not have been possible with a multiyear
grant because the AIP's authorization period was 5 years when FAA
first began issuing LOIs in 1988 and 1 year in fiscal year 1993.\4

In contrast, the longest disbursement schedule for an LOI extends
over a 15-year period, through the year 2005, for the Detroit
Metropolitan-Wayne County Airport. 

Of the 49 LOIs, 27 (55 percent) were funded from more than one AIP
funding category.  For example, the LOI for $88.5 million to the
sponsor of the Cincinnati/Northern Kentucky International Airport
included $51.8 million in discretionary funds, $22 million in
set-aside funds for the airport noise compatibility program, and
$14.7 million in entitlement funds.  Appendix II lists the total
actual and scheduled LOI disbursements by fiscal year and funding
category. 

The LOIs issued to primary airports total about $1.85 billion and
include entitlement funds, set-aside funds for airport noise
compatibility programs, and discretionary funds.  The LOIs issued to
reliever airports total about $200 million and include entitlement
funds and set-aside funds for reliever airports and the Military
Airport Program.  Figure 3 shows the percentage of total LOI
commitments by funding category. 

   Figure 3:  Percentage of Total
   LOI Commitments by AIP Funding
   Category

   (See figure in printed
   edition.)

Note:  The percentages are based on $2.054 billion in LOI commitments
as of January 1994. 

Source:  FAA. 


--------------------
\4 The AIP expired on September 30, 1993.  As of January 1994, the
Congress had not reauthorized the program. 


   FAA COULD HAVE BETTER MANAGED
   LOI COMMITMENTS
------------------------------------------------------------ Letter :4

Although most LOI commitments were for capacity projects, FAA did not
ensure that LOIs were used only to significantly enhance systemwide
capacity, as the 1987 act requires.  FAA did not establish criteria
defining a "significant" enhancement and evaluate LOI proposals
against such criteria.  Without a measurable way to evaluate LOI
proposals, it is not clear how LOI-funded projects affect the
national airport system. 

In compliance with the statutory planning requirement, FAA set goals
to ensure that a reasonable level of funds would be available for
other needs after meeting LOI commitments.  FAA's current goal, set
in 1992, limits LOI commitments to 50 percent of the AIP
discretionary funds available at the beginning of the fiscal year. 
FAA met its planning goals before fiscal year 1994.  However, FAA
officials assumed that discretionary funding would not decrease and
scheduled LOI commitments accordingly.  As a result, lower funding
levels in fiscal years 1994 and 1995 may cause the agency to exceed
its goal.  Anticipating lower funding levels in fiscal year 1994, FAA
officials made adjustments to decrease the LOI commitments that draw
on discretionary funds. 


      FAA DID NOT ENSURE THAT
      LOI-FUNDED PROJECTS
      SIGNIFICANTLY ENHANCE
      SYSTEMWIDE CAPACITY
---------------------------------------------------------- Letter :4.1

Most LOI commitments were for projects directly related to capacity. 
According to FAA's selection criteria for these projects, the only
ones that may directly affect system capacity are those to construct
or acquire new airports, or to construct, alter, or repair runways,
taxiways, and aprons at existing airports.  FAA provided about $1.81
billion in LOI commitments, generally with discretionary and
set-aside funds, for such projects.  FAA also provided about $206
million in LOI commitments, generally with entitlement funds, for
associated projects such as constructing terminal buildings, access
roads, and drainage ditches; purchasing rescue, firefighting, and
snow removal equipment; and installing taxiway signs and fencing,
among others.  For example, the LOI issued for improvements at
Theodore F.  Green State Airport in Rhode Island included
discretionary funds to construct taxiways and aprons and entitlement
funds to construct a new terminal building, among other improvements. 
Of the 49 LOIs, 30 (61 percent) were issued to airports ranked in the
top 100 of all primary airports for passenger enplanements in 1992
and included projects directly related to capacity enhancement.\5

While most LOI commitments were for capacity projects, FAA did not
ensure that LOIs were used only to significantly enhance systemwide
capacity, as the 1987 act requires, for three reasons.  First,
although the Congress allowed FAA to define significant enhancement,
the agency has not done so.  Nor have FAA officials established goals
for the AIP, as requested by the Congress in 1987, including a goal
for improving the nation's airport system capacity.  Such a goal
could provide a basis for defining a "significant" enhancement of
systemwide capacity.\6 For example, FAA could set a goal of reducing
aircraft delays nationally by 50,000 hours and, for the purpose of
awarding LOIs, define a significant capacity enhancement as one that
reduces aircraft delays nationally by at least 1,000 hours annually. 

Second, FAA officials did not use the agency's selection criteria for
capacity projects or any other criteria to analyze a project's
potential effect on systemwide capacity, with the exception of the
new Denver International Airport.\7

Generally, in determining which projects should receive LOIs, agency
officials relied on information provided by airport system and master
plans and FAA's Aviation System Capacity Plan.\8 These plans consider
a project's potential to enhance the capacity of an individual
airport or a regional airport system. 

Third, FAA issued 10 LOIs worth over $35 million, using entitlement
funds, for projects that clearly could not significantly enhance
systemwide capacity.  FAA officials told us that these LOIs were
issued because the AIP authorization period was nearing expiration
and multiyear grants, which provide multiyear funding using only
entitlement funds, could not be used.  These LOIs were for projects
at (1) two major airports that were only undertaking improvements not
related to capacity and (2) eight primary airports too small to have
a significant effect on the national system regardless of the
improvements.  For example, Nashville International Airport received
an LOI to construct water quality and drainage treatment facilities. 
Additionally, Raleigh-Durham International Airport received an LOI to
connect airport access roads with nearby interstate highways.  The
eight small primary airports were not ranked in the nation's top 150
airports for passenger enplanements.  Furthermore, each of the
airports accounted for fewer than one-tenth of 1 percent of all
annual passenger enplanements in the United States.  For example, FAA
issued LOIs to Chess-Lamberton Airport in Pennsylvania and Golden
Triangle Regional Airport in Mississippi; Chess-Lamberton had 10,165
enplanements in 1992 and ranked 416th among 423 primary airports, and
in the same year, Golden Triangle Regional Airport had about 50,000
enplanements and ranked 269th among primary airports.  In contrast,
over 250,000 passengers were enplaned at the airport ranked 150th for
enplanements among the nation's airports in 1992. 

FAA officials recognize that the agency could better manage how LOIs
are used and acknowledge that some LOIs have been issued for projects
that do not significantly enhance systemwide capacity.  These
officials stated that both FAA headquarters and field officials view
their role as that of advocates for airport development who have used
LOIs when, in their judgment, it was the best way to provide funding. 
FAA officials also acknowledged that awarding LOIs for projects that
do not enhance systemwide capacity sets a precedent and makes it
difficult for FAA to deny LOIs for the same types of projects to
other airport sponsors. 

Because FAA officials are concerned with better focusing limited
resources, the agency has chartered a task force to review the
process used to evaluate and approve LOI proposals and to recommend
changes.  In March 1994, FAA plans to publish proposed new LOI
requirements in the Federal Register, with a 60-day comment period. 
FAA plans to issue the final new requirements by June 1994. 

Despite the eligibility requirements in the 1987 act, FAA did not
propose legislative changes to the AIP that would allow the agency to
issue LOIs for projects with objectives other than significantly
enhancing systemwide capacity.  While systemwide capacity development
was viewed as a top priority to be facilitated with LOIs in 1987, FAA
may now believe that other types of projects need to be facilitated
with LOIs.  However, FAA is not in the best position to advise the
Congress on possible changes in the program, including changes to
when LOIs can be used, because the agency has not developed goals and
performance measures for the AIP, as requested by the Congress in
1987.  Such goals and performance measures could provide focus and
direction for the AIP and form a basis for tracking the program's
accomplishments.  Furthermore, clear goals and information about
progress in meeting these goals could help FAA justify expanding the
use of LOIs. 


--------------------
\5 Enplaned passengers are the revenue-producing passengers boarding
aircraft. 

\6 We discussed the need for FAA to establish goals in our testimony
Airport Improvement Program:  Opportunity to Consider FAA's Role in
Meeting Airport System Needs (GAO/T-RCED-93-43, May 26, 1993). 

\7 The selection criteria for capacity projects are identified in
FAA's AIP Handbook (Order 5100.38A, app.  25).  These are the
criteria developed for selecting capacity projects under section
507(c)(3) of the Airport and Airway Improvement Act of 1982.  That
section was incorporated by reference and made a part of the 1987
act's provision on LOIs. 

\8 Airport system plans identify the aviation facilities required to
meet the air transportation needs of a state, region, or metropolitan
area.  Airport master plans identify the development necessary at
individual airports on the basis of 5-, 10-, and 20-year forecasts of
aviation activity, environmental and community compatibility, and
financial feasibility.  FAA's Aviation System Capacity Plan shows the
magnitude of delays at the nation's top 100 airports for
enplanements.  It also catalogs and summarizes programs that have the
potential to enhance capacity and reduce delays at each airport. 


      LOI PLANNING ASSUMPTIONS MAY
      LIMIT FAA'S FUTURE
      FLEXIBILITY WITH
      DISCRETIONARY FUNDS
---------------------------------------------------------- Letter :4.2

To provide funding flexibility, the 1987 act requires FAA to plan LOI
disbursements on the basis of its estimate of (1) the total AIP funds
in future years and (2) the amount of these funds that FAA determines
will be needed for projects not funded under LOIs.  Such planning is
critical because there are always more eligible projects than the
available AIP funding can support.  Also, FAA must be prepared to
meet unanticipated airport funding needs.  For example, following
fatal airplane crashes, airports have been required to install
additional security systems and new runway signs. 

In 1992, FAA set an internal planning goal of limiting LOI
commitments to no more than 50 percent of the discretionary funds
available at the beginning of the fiscal year.  This approach would,
in the view of FAA officials, preserve a reasonable level of AIP
funds for other airport improvement needs.  FAA set a limit only on
the use of discretionary funds because (1) LOI disbursements do not
constitute a significant portion of set-aside funds and (2) the
allocation of entitlement funds is determined by formula.  FAA met
earlier planning goals and the current goal in fiscal years 1992 and
1993. 

On the basis of historical AIP funding levels and budget projections
for the future, FAA officials assumed that discretionary funding
levels would not decrease.  Authorized funding levels for the AIP
quadrupled from $450 million in fiscal year 1982 to $1.9 billion in
fiscal year 1992, with corresponding increases in discretionary
funds.  Although there was substantial inflation during this period,
even in constant dollars this represents an increase of about 183
percent.  At the 1992 AIP funding level, the percentage of
discretionary funds available for LOI disbursements in fiscal years
1994 and 1995 would be below the goal FAA set. 

However, fiscal year 1993 discretionary funds decreased sharply from
the 1992 level.  Specifically, from fiscal year 1992 to 1993, the
discretionary funds available for LOI disbursements at the beginning
of the fiscal year dropped 25 percent, from $411 million to $307
million.\9 This decrease occurred for two reasons.  First, the fiscal
year 1993 AIP appropriation set the total funding level at $100
million below the fiscal year 1992 level.  Second, the AIP
authorization allocated a greater proportion of total funds to
entitlements for cargo airports and set-asides for airport noise
compatibility programs and the Military Airport Program.  According
to FAA officials, such changes in AIP funding make long-term planning
for LOI commitments difficult. 

From fiscal year 1993 to 1994, the discretionary funding decreased
again when AIP's total funding level dropped from $1.8 billion to
$1.69 billion, as set by the Congress in the 1994 appropriation act. 
At this level, fiscal year 1994 LOI commitments will take 70 percent
of the $227 million in discretionary funds available for LOI
disbursements at the beginning of the fiscal year, assuming that the
program is not amended during the pending AIP reauthorization
process.\10 Figure 4 shows the percentage of discretionary funds
available for LOI disbursements at the beginning of the fiscal year. 

   Figure 4:  LOI Disbursements as
   a Percentage of Discretionary
   Funds Available at the
   Beginning of the Fiscal Year

   (See figure in printed
   edition.)

Note:  The projections of the percentages for fiscal years 1994 and
1995 are based on a $1.69 billion funding level and no amendments to
the program. 

Source:  FAA. 

If all of the LOI commitments scheduled for fiscal year 1994 are
paid, fewer discretionary funds will be available for new grants than
FAA had anticipated.  As a result, FAA has less flexibility to use
AIP funds to meet other immediate needs of the nation's airport
system.  FAA has taken steps to decrease LOI commitments for
discretionary funds in fiscal year 1994, including (1) paying $8
million in fiscal year 1994 discretionary commitments with fiscal
year 1993 funds, (2) negotiating with a sponsor to provide no
discretionary funds in fiscal year 1994 and few funds in fiscal year
1995, and (3) not approving two LOIs that would have drawn on
discretionary funds.  According to FAA officials, the agency also has
the option of deferring all or a portion of scheduled LOI
disbursements in order to free up more discretionary funds. 

Most airport sponsors are not prepared for shortfalls in LOI
disbursements.  Although an LOI is not an obligation of federal
funds, airport officials told us that they expect LOI commitments to
be paid in full as scheduled.  These officials told us that,
generally, they had three options for covering a decrease in
scheduled LOI disbursements in order to meet LOI-funded commitments: 
(1) stop the project, (2) delay the project, or (3) obtain
replacement financing, which could increase development costs. 

Bond underwriters at a major firm told us that the investment
community's confidence in using LOI disbursements exclusively to
leverage investment-grade bonds would be undermined if the
disbursements are not made in full as scheduled.  In part, bond
rating agencies provided an investment-grade rating to LOI-backed
bonds for the Reno Cannon International Airport's sponsor because FAA
had established a record of meeting LOI disbursements in full as
scheduled.\11

The retirement of principal on the Reno Cannon International
Airport's LOI-backed bonds is matched to its LOI disbursement
schedule.  Bond underwriters told us that if FAA fails to provide LOI
disbursements in full as scheduled, additional LOI-backed bonds would
probably not receive an investment-grade rating, resulting in less
favorable financing. 


--------------------
\9 Generally, any unused entitlement funds are returned to FAA in the
last quarter of the fiscal year and converted to discretionary
funding that may be used for LOI commitments.  However, FAA does not
schedule LOI disbursements that would be paid with those returned
entitlement funds because (1) FAA does not know the amount of unused
entitlement funds that will be returned and (2) LOI disbursements may
be needed before the last quarter of the fiscal year. 

\10 As of January 1994, pending AIP reauthorization, the Congress had
agreed to a funding level of $1.69 billion.  However, the Congress is
considering two amendments to the program.  One amendment would
increase discretionary funds; the other would increase entitlement
funds and set-aside funds for integrated airport system plans. 
According to FAA's analysis, the discretionary funding level would
range from about $206 million to $280 million, depending on whether
the Congress declines to adopt the amendments, adopts only one of the
amendments, or adopts both amendments.  At these levels, LOI
commitments as a percentage of discretionary funding would range from
57 to 77 percent. 

\11 As of January 1994, the Reno Cannon International Airport's
sponsor is the only airport sponsor that has used LOI commitments
exclusively to back bonds. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

FAA's increasing use of letters of intent underscores their
importance as a tool for facilitating improvements to the nation's
airport system.  However, FAA needs to better manage its use of
letters of intent in two respects.  First, to clearly establish that
it is complying with the 1987 act, FAA must analyze projects proposed
for letters of intent on the basis of a definition of what
constitutes a significant capacity enhancement.  Furthermore, despite
a long-standing congressional request, FAA has not established goals
and performance measures for the Airport Improvement Program. 
Program goals would help provide a clearer overview of the
development needed to best improve the overall airport system. 
Performance measures would provide a method for reviewing the extent
to which goals were being achieved.  Such information could also form
a basis for considering the expanded use of letters of intent. 

Second, the agency made additional commitments under letters of
intent expecting no decrease in funding levels.  But AIP funding
decreased in fiscal year 1993 and may be set at a lower level in
fiscal years 1994 and 1995.  As a result, fewer discretionary funds
are available for projects not funded with letters of intent than FAA
had anticipated.  Although future funding levels are difficult to
predict, it would be prudent for FAA to make commitments under
letters of intent on the basis of conservative assumptions about the
program's discretionary funding levels--such as the lowest level in
the last 5 years.  This conservative approach would give FAA greater
assurance that any future cuts in discretionary funding would not
affect (1) existing commitments under letters of intent or (2) FAA's
ability to meet other airport improvement needs. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

To ensure that letters of intent are used in accordance with
congressional direction, we recommend that the Secretary of
Transportation direct the FAA Administrator to

  set a timetable to establish a goal for improving systemwide
     capacity and a definition of a significant capacity enhancement
     in relation to this goal, and analyze projects proposed for
     letters of intent against this goal and definition;

  provide justification and obtain approval from the Congress if the
     agency wants to expand the statutory criteria for the use of
     letters of intent beyond projects that significantly enhance
     systemwide capacity; and

  plan commitments under letters of intent for each fiscal year on
     the basis of more conservative assumptions about future
     discretionary funding levels in the Airport Improvement Program. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

As requested, we did not obtain written comments on a draft of this
report.  However, we discussed our findings and recommendations with
FAA's Manager, Airports Financial Assistance Division, and Manager,
Programming Branch, and with other Department of Transportation
officials.  These officials provided us with some clarifying
information, and we revised the text as necessary.  FAA officials
generally agreed with our recommendations.  The agency's task force
to revise LOI policy will address our concerns about ensuring that
(1) LOIs are used only for projects that significantly enhance
systemwide capacity and (2) an adequate level of discretionary funds
is available. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To address our objectives, we performed work at FAA headquarters in
Washington, D.C.; FAA's Central Region in Kansas City, Missouri; and
FAA's Southern Region in Atlanta, Georgia.  We interviewed FAA
headquarters, regional, and field officials about the review and
approval process for LOIs.  We also interviewed officials from the
Airports Council International-North America and Air Transport
Association. 

We reviewed agency regulations, policies, and procedures governing
the use of LOIs.  We analyzed the LOIs that FAA issued in fiscal
years 1988-93 and supporting documentation.  We also analyzed FAA's
data base and other records on LOI funding.  In addition, we reviewed
FAA's proposed new LOI policy.  To better understand the
circumstances surrounding airport sponsors' requests for and use of
LOIs, we interviewed officials from each of the 44 airports that
received LOIs. 

We performed our review between February 1993 and January 1994 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
appropriate congressional committees; the Secretary of
Transportation; the Administrator, FAA; the Director, Office of
Management and Budget; and other interested parties.  We will make
copies available to others on request. 

This report was prepared under the direction of Kenneth M.  Mead,
Director, Transportation Issues, who may be reached at (202)
512-2834.  Other major contributors to this report are listed in
appendix III. 

Sincerely yours,

Keith O.  Fultz
Assistant Comptroller General


LETTERS OF INTENT ISSUED IN FISCAL
YEARS 1988-93
=========================================================== Appendix I

                                      Fisc                   Total
                                        al                  amount
                                                             in FY
                                      year                    1993      Years of
                                      issu       Total    constant  disbursement
Letters of intent (49)                  ed      amount     dollars             s
------------------------------------  ----  ----------  ----------  ------------
Alaskan Region
None
Central Region
Kansas City International Airport     1989           $           $             5
                                            22,353,000  23,775,013
Eastern Region
Stewart International Airport         1989   5,821,700   6,485,241             2
 (reliever)\a
Pittsburgh International Airport      1990  33,000,000  33,344,228             5
Washington Dulles International       1991  24,200,000  23,975,090             5
 Airport
Washington National Airport           1991  106,000,00  100,252,50             7
                                                     0           3
Greater Buffalo International         1991  39,004,356  37,655,159             5
 Airport
Elmira/Corning Regional Airport       1992   1,536,278   1,509,844             3
Chess-Lamberton Airport               1993     399,893     389,380             1
Great Lakes Region
Indianapolis International Airport    1988  23,222,821  26,905,137             4
Dupage Airport (reliever)             1988  45,019,700  49,275,234             5
Detroit Metropolitan-Wayne County     1990  185,000,00  169,966,92            15
 Airport                                             0           3
Toledo Express Airport                1991   5,663,970   5,597,741             3
Scott Air Force Base (reliever)       1992  140,000,00  125,368,20            10
                                                     0           5
Indianapolis International Airport    1993  37,168,101  34,813,214             5
New England Region
Theodore F. Green State Airport       1992  55,700,000  49,500,663             9
Northwest Mountain Region
Denver International Airport          1990  351,000,00  333,495,11             9
                                                     0           4
Steamboat Springs Airport/Bob Adams   1993     400,000     389,484             1
 Field
Southern Region
Nashville International Airport       1988  35,283,559  40,293,499             5
Peachtree City Airport-Falcon Field   1988   6,824,642   7,667,319             4
 (reliever)
Clayton County Airport-Tara Field     1988   2,838,243   3,282,717             2
 (reliever)
Cincinnati/Northern Kentucky          1988  38,419,876  43,484,600             5
 International Airport
Orlando International Airport         1988  33,550,000  37,086,266             5
Orlando International Airport         1991  18,050,480  17,813,205             2
Standiford Field                      1991  126,400,00  118,646,24             8
                                                     0           3
Nashville International Airport       1991  21,000,000  21,023,044             3
Birmingham International Airport      1992  17,358,333  16,914,986             3
Savannah International Airport        1992  15,386,334  14,617,462             6
Cincinnati/Northern Kentucky          1992  88,500,000  83,078,717             8
 International Airport
Raleigh-Durham International Airport  1992  12,913,072  12,605,700             3
Jacksonville International Airport    1992  19,600,000  18,865,791             4
Daytona Beach Regional Airport        1993   7,400,000   6,985,648             5
Golden Triangle Regional Airport      1993   2,682,386   2,436,107             7
Florence Regional Airport             1993     634,665     612,338             2
The William B. Hartsfield Atlanta     1993  20,504,250  19,827,281             2
 International Airport
Nashville International Airport       1993   7,875,000   7,240,019             4
Memphis International Airport         1993  68,280,000  61,984,170             6
Hilton Head Airport                   1993   3,446,069   3,138,139             7
Piedmont Triad International Airport  1993     963,000     937,683             1
Key West International Airport        1993   3,848,616   3,656,392             3
Panama City-Bay County International  1993   1,400,000   1,346,364             2
 Airport
Southwest Region
New Austin Airport                    1988  87,000,000  78,755,793             8
Dallas/Fort Worth International       1989  100,000,00  94,039,492             8
 Airport                                             0
New Orleans International Airport/    1991  82,546,309  78,968,222             7
 Moisant Field
Albuquerque International Airport     1993   7,147,755   6,849,019             3
McAllen-Miller International Airport  1993   2,700,000   2,576,195             3
Western-Pacific Region
John Wayne Airport                    1988  10,191,525  11,563,923             3
McCarran International Airport        1989  42,000,000  44,437,253             7
Reno Cannon International Airport     1992  71,000,000  63,120,178            10
Sacramento Metropolitan Airport       1993  22,700,000  21,105,406             5
--------------------------------------------------------------------------------
\a Stewart International Airport is now a primary airport. 

Source:  FAA. 


TOTAL ACTUAL AND SCHEDULED
LETTER-OF-INTENT DISBURSEMENTS BY
FISCAL YEAR AND AIRPORT
IMPROVEMENT PROGRAM FUNDING
CATEGORY
========================================================== Appendix II

                                                                (Dollars in millions)


Fiscal year
------------------------------------------  ------  ------  -------  -------  -------  -------  -------  --------  -------  -------  -------  -------
1988                                        $ 27.7  (34.1)      $ 0      (0)      $ 0      (0)      $ 0       (0)      $ 0      (0)   $ 27.7   (34.1)
                                                        \a
1989                                          27.4  (32.4)      7.9    (9.4)     13.6   (16.1)        0       (0)        0      (0)     49.0   (57.8)
1990                                          16.7  (18.8)     22.0   (24.9)     19.5   (22.1)        0       (0)        0      (0)     58.2   (65.8)
1991                                          59.5  (64.6)     36.1   (39.2)     11.7   (12.7)        0       (0)        0      (0)    107.4  (116.6)
1992                                         122.5  (125.7     38.1   (39.1)      7.0    (7.2)        0       (0)        0      (0)    167.6  (171.9)
                                                         )
1993                                         137.6  (137.6     52.3   (52.3)     17.5   (17.5)      5.0     (5.0)      6.0    (6.0)    218.3  (218.3)
                                                         )
1994                                         159.1  (155.0    104.5  (101.8)      9.0    (8.8)      5.0     (4.9)      6.0    (5.8)    283.7  (276.2)
                                                         )
1995                                         165.3  (157.0     77.8   (73.9)      9.0    (8.5)      5.0     (4.7)      6.0    (5.7)    263.1  (249.9)
                                                         )
1996                                         152.4  (141.2     59.4   (55.0)      9.0    (8.3)      5.0     (4.6)      4.0    (3.7)    229.8  (213.0)
                                                         )
1997                                         134.4  (121.5     50.5   (45.6)      9.0    (8.1)      5.0     (4.5)        0      (0)    198.8  (179.8)
                                                         )
1998                                         107.9  (95.2)     46.3   (40.9)      9.0    (7.9)      5.0     (4.4)        0      (0)    168.2  (148.5)
1999                                          82.2  (70.7)     38.1   (32.8)      9.0    (7.7)      5.0     (4.3)        0      (0)    134.3  (115.5)
2000                                          18.3  (15.4)     11.7    (9.9)      9.0    (7.6)      5.0     (4.2)        0      (0)     44.0   (37.0)
2001                                          26.6  (21.8)     11.7    (9.5)      9.0    (7.4)      5.0     (4.1)        0      (0)     52.3   (42.8)
2002                                           6.0   (4.8)     11.7    (9.3)      9.0    (7.2)      5.0     (4.0)        0      (0)     31.7   (25.3)
2003                                             0     (0)      7.3    (5.7)        0      (0)        0       (0)        0      (0)      7.3    (5.7)
2004                                             0     (0)      7.5    (5.7)        0      (0)        0       (0)        0      (0)      7.5    (5.7)
2005                                             0     (0)      5.1    (3.7)        0      (0)        0       (0)        0      (0)      5.1    (3.7)
=====================================================================================================================================================
Total                                       $1,243  (1,195   $587.9  (558.7)   $150.3  (147.1)    $50.0    (44.8)    $22.0   (21.2)  $2,053.  (1,967.
                                                .7     .9)                                                                                 9       7)
-----------------------------------------------------------------------------------------------------------------------------------------------------
\a Fiscal year 1993 constant dollars are shown in parentheses. 


Source:  FAA.  MAJOR CONTRIBUTORS
TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Allen Li, Associate Director
Robert E.  Levin, Assistant Director
Charles R.  Chambers, Evaluator-in-Charge
M.  Aaron Casey, Staff Evaluator
Stephanie K.  Gupta, Staff Evaluator
Scott W.  Weaver, Staff Evaluator

