Airport Financing: Funding Sources for Airport Development (Letter
Report, 03/12/98, GAO/RCED-98-71).

Pursuant to a congressional request, GAO assessed airports' capacity to
finance their future development, focusing on: (1) how much airports of
various sizes are spending on capital development and where the money is
coming from; (2) whether current funding levels will be sufficient to
meet capital development planned for the 5-year period from 1997 through
2001; and (3) the potential effect of various proposals to increase
airport funding, if a difference exists between current funding and
planned development.

GAO noted that: (1) in 1996, the 3,304 airports that make up the
national airport system obtained about $7 billion for capital
development; (2) more than 90 percent of this funding came from three
sources: airport and special facility bonds ($4.1 billion), funding made
available from the Airport and Airway Trust Fund ($1.4 billion), and
passenger facility charges paid on each airline ticket ($1.1 billion);
(3) capital funding more than doubled from 1982 through 1992 and has
since declined; (4) airports' 1996 capital funding of about $7 billion
is less that the $10 billion per year that airports anticipate will be
needed to fund the development planned for 1997 through 2001; (5) while
this difference is not an absolute predictor of future funding
shortfalls--both funding and planned development may change in the
future--it does provide a useful indication of where funding differences
may be the greatest; (6) the difference between past funding and planned
development is especially acute for smaller commercial and general
aviation airports, whose 1996 funding was a little over half of the
estimated costs of their planned development; (7) the picture is
somewhat brighter if the categories of planned development are narrowed
to just those the Federal Aviation Administration (FAA) gives highest
priority--that is, safety, security, and noise-mitigation projects and
the maintenance of existing airfields; (8) with the exception of the
small commercial airports, federal grants in 1996 matched or exceeded
the planned development for such projects; (9) several proposals to
increase funding for airports have emerged in recent years; (10) these
include increasing the size of the federal grant program, raising the
ceiling on passenger facility charges, and leveraging existing funding
sources; (11) each proposal varies in its magnitude and in its effect on
airports and their users; (12) increasing the size of the federal grant
program would mostly help smaller airports, while raising passenger
facility charges would mostly help larger airports; (13) GAO believes
that the FAA's current pilot programs to use grants in more innovative
ways and to privatize airports are likely to yield only marginal
benefits; (14) however, another means to expand airport investment would
be to use federal airport grants to capitalize state revolving funds;
and (15) while not a currently permitted use for federal airport grants
according to FAA officials, state revolving funds have proved successful
in other infrastructure sectors.

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

 REPORTNUM:  RCED-98-71
     TITLE:  Airport Financing: Funding Sources for Airport Development
      DATE:  03/12/98
   SUBJECT:  Airports
             Future budget projections
             Federal aid for transportation
             Revolving funds
             Financial management
             Air transportation operations
             Federal grants
             Intergovernmental fiscal relations
             Privatization
IDENTIFIER:  FAA Airport Improvement Program
             FAA Passenger Facility Charge Program
             DOT State Infrastructure Bank Pilot Program
             Airport and Airway Trust Fund
             Chicago-O'Hare International Airport (Chicago, IL)
             
******************************************************************
** 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.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


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


Report to Congressional Committees

March 1998

AIRPORT FINANCING - FUNDING
SOURCES FOR AIRPORT DEVELOPMENT

GAO/RCED-98-71

Funding for Airport Development

(341532)


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

  AAAE - American Association of Airport Executives
  ACI-NA - Airports Council International-North America
  AIP - Airport Improvement Program
  ATA - Air Transport Association
  FAA - Federal Aviation Administration
  GAO - General Accounting Office
  GARB - general airport revenue bond
  PFC - passenger facility charge
  SIB - state infrastructure bank

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


B-276931

March 12, 1998

Congressional Committees

More than 3,300 U.S.  airports, ranging from large passenger airports
like Chicago O'Hare to small general aviation airports, are part of
the national airport system and therefore are eligible for federal
assistance.  To ensure their continued safe and efficient operations,
these airports plan a wide range of capital development projects,
including new runways, passenger terminals, navigational aids, and
roadway access.  Within the past year, several studies, including one
of ours, have examined airports' capital development needs.\1

However, assessing airports' capacity to finance their future
development has been constrained by incomplete financial information
about airports. 

To help clarify this issue, you asked us to answer the following
questions: 

  -- How much are airports of various sizes spending on capital
     development and where is the money coming from? 

  -- If current funding levels continue, will they be sufficient to
     meet capital development planned for the 5-year period from 1997
     through 2001? 

  -- If a difference exists between current funding and planned
     development, what is the potential effect of various proposals
     to increase airport funding? 

To overcome past limitations in assessing the extent and variance of
airports' financial capacity, we developed an extensive database of
airport funding information linked to each airport and its level of
activity.  These data and our analytical methodology are discussed in
appendix III.  Building the data from the ground up allowed us to
ensure more accurate totals and, in particular, to assess the varying
capabilities of airports on the basis of their size.  It also enabled
us to better examine the possible effects of various proposals to
increase airport funding. 


--------------------
\1 Avoiding Aviation Gridlock and Reducing the Accident Rate:  A
Consensus for Change, National Civil Aviation Review Commission (Dec. 
1997); Federal Aviation Administration:  Independent Financial
Assessment, Coopers & Lybrand (Feb.  1997); and Airport Development
Needs:  Estimating Future Costs (GAO/RCED-97-99, Apr.  7, 1997). 


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

In 1996, the 3,304 airports that make up the national airport system
obtained about $7 billion for capital development.  More than 90
percent of this funding came from three sources:  airport and special
facility bonds ($4.1 billion), funding made available from the
Airport and Airway Trust Fund ($1.4 billion), and passenger facility
charges paid on each airline ticket ($1.1 billion).  Capital funding
(adjusted for inflation) more than doubled from 1982 through 1992 and
has since declined.  The amount and source of funding varies with the
size of airports.  The nation's 71 largest airports, which handled
almost 90 percent of the passenger traffic in 1996, accounted for 79
percent of all funding in 1996, while the 3,233 other smaller
commercial and general aviation airports that make up the national
system accounted for the other 21 percent, or $1.5 billion.\2
However, airports' reliance on federal grants is inversely related to
their size.  For example, federal grants contributed a little over 10
percent of the funding for the nation's 71 largest airports but
accounted for 50 percent of the funding for the other 3,233 national
system airports. 

Airports' 1996 capital funding of about $7 billion is less than the
$10 billion per year that airports anticipate will be needed to fund
the development planned for 1997 through 2001.  While this difference
is not an absolute predictor of future funding shortfalls--both
funding and planned development may change in the future--it does
provide a useful indication of where funding differences may be the
greatest.  The difference between past funding and planned
development is especially acute for smaller commercial and general
aviation airports, whose 1996 funding was a little over half of the
estimated costs of their planned development.  The picture is
somewhat brighter if the categories of planned development are
narrowed to just those the Federal Aviation Administration gives
highest priority--that is, safety, security, and noise-mitigation
projects and the maintenance of existing airfields.  With the
exception of the small commercial airports, federal grants in 1996
matched or exceeded the planned development for such projects. 

Several proposals to increase funding for airports have emerged in
recent years.  These include increasing the size of the federal grant
program, raising the ceiling on passenger facility charges, and
leveraging existing funding sources.  Each proposal varies in its
magnitude and in its effect on airports and their users.  For
example, increasing the size of the federal grant program would
mostly help small airports, while raising passenger facility charges
would mostly help larger airports.  We believe that the Federal
Aviation Administration's current pilot programs to use grants in
more innovative ways and to privatize airports are likely to yield
only marginal benefits because of limited participation by airports. 
However, another means to expand airport investment, which may be
more successful, would be to use federal airport grants to capitalize
state revolving funds.  While not a currently permitted use for
federal airport grants according to Federal Aviation Administration
officials, state revolving funds have proved very successful in other
infrastructure sectors, such as waste water and surface
transportation, and could expand airport investment, especially at
smaller airports that face the greatest potential funding shortages. 


--------------------
\2 See fig.  1 for a description of airport categories. 


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

The United States, which possesses the largest, most extensive
aviation system in the world, has more than 18,000 airports.  U.S. 
airports range from large commercial transportation centers enplaning
more than 30 million passengers annually to small grass strips
serving only a few aircraft each year.  Of these, 3,304 are
designated as part of the national airport system and are therefore
eligible for federal assistance.  The federal interest in capital
investment for airports has been guided by several objectives, most
notably ensuring safety and security, preserving and enlarging the
system's capacity, helping small commercial and general aviation
airports, funding noise mitigation, and environmental protection. 

National system airports are of two types--commercial service
airports, of which there are 540, and general aviation airports, of
which there are 2,764.  The Federal Aviation Administration further
divides commercial service airports, defined as those publicly owned
airports that enplane 2,500 or more passengers and have scheduled
service--into primary airports (enplaning more than 10,000 passengers
annually) and other commercial service airports.  The 413 designated
primary airports are arranged into various classes of hub
airports--large, medium, small, and nonhub--as explained in figure 1. 
Statutorily, large and medium hub airports are designated as large
primary airports and must contribute a larger share to projects
funded under the Airport Improvement Program (AIP) as well as forgo a
portion of their AIP grants if they collect passenger facility
charges (PFC).\3 This report follows that convention in grouping
large and medium hub airports together separate from all other
national system airports in considering airports' financial
capabilities.  In addition, financial information on each category of
airport is presented in appendix II. 

   Figure 1:  Categories of U.S. 
   Airports

   (See figure in printed
   edition.)

Note:  These figures are based on FAA's 1996 enplanements, which
totaled 621,613,161. 

Airports, airlines, FAA, and a congressionally commissioned study
have made various estimates of the future financing requirements
needed to meet airports' future development plans.  These estimated
requirements have varied widely, ranging from $4 billion to $10
billion annually over the next several years.  In our April 1997
report, we concluded that these estimates varied so widely because of
differing views about what kinds of projects and airports to include
as part of an estimate.  In that report, we provided four estimates
of future development, varying upon how many categories of projects
are included.  Our estimates ranged from $1.4 billion per year to
fund safety, security, noise mitigation, and reconstruction projects;
$2.8 billion if other high-priority projects, primarily
capacity-related projects, are added; $6.1 billion for all
AIP-eligible projects; and $10.1 billion per year to fund all types
of projects, including those not eligible for AIP funding. 


--------------------
\3 See 49 U.S.C.  ï¿½ï¿½47109(a) and 47114(f). 


   AIRPORTS' FUNDING SOURCES VARY
------------------------------------------------------------ Letter :3

Airports rely on a variety of funding sources, some public and some
private, to finance their capital development.  The major funding
sources, listed in further detail in table 1, are federal and state
grants, PFCs airport and special facility bonds, and
airport-generated income.  In 1996, U.S.  airports raised an
estimated $7 billion from these sources.\4

Additional information on each of these funding sources and their
distribution among various categories of airports is contained in
appendix I. 



                                Table 1
                
                       Sources of Airport Funding

                          1996
                        amount
                      (dollars
                            in
                      billions   Percent
Funding source               )  of total  Source of funds
--------------------  --------  --------  ----------------------------
Tax-exempt bonds      $4.104\a        58  Tax-exempt bonds are issued
                                           by state and local
                                           governments or airport
                                           authorities.
Airport Improvement     $1.372        20  Funds are made available by
 Program (AIP)                             the Congress from the
 grants                                    Airport and Airway Trust
                                           Fund, which receives
                                           revenues from taxes on
                                           domestic and international
                                           travel, domestic cargo
                                           transported by air, and
                                           noncommercial aviation
                                           fuel.
Passenger facility      $1.114        16  Funds come from passenger
 charges (PFC)                             fees of $1, $2, or $3 per
                                           trip segment at commercial
                                           airports, up to a maximum
                                           of four trip segments per
                                           round trip.
State and local       $0.285\b         4  Funds come from such sources
 contributions                             as state aviation fuel and
                                           airline property taxes,
                                           aircraft registration fees,
                                           state bonds, and state
                                           general fund
                                           appropriations. The extent
                                           to which these sources are
                                           used varies by state.
Airport revenue       $0.153\c         2  Funds are generated from (1)
                                           "airside" revenues derived
                                           from the operation and
                                           landing of aircraft,
                                           passengers, or freight and
                                           (2) "landside" revenues
                                           derived from concessions
                                           and leases.
======================================================================
Total                   $7.028       100
----------------------------------------------------------------------
\a Net of refinancing.  Of this total, a little over $400 million is
special facility bonds issued on the behalf of nonairport
beneficiaries, such as airlines. 

\b State grants only.  Amounts for local capital subsidies are
unknown but, we believe, are minimal. 

\c Net operating revenue in excess of a minimum coverage ratio of 125
percent of the debt service (principal and interest payments). 

As figure 2 shows, total airport funding varies year to year.  For
example, funding in 1993 declined by 45 percent from 1992.  This
variability results primarily from year-to-year changes in the amount
of funding from bonds, which in turn is affected by changing interest
rates, the demand for air travel, and airlines' agreements with
airports. 

   Figure 2:  Airport Funding: 
   Primary Sources, 1982 Through
   1996

   (See figure in printed
   edition.)

Note:  State grant and airport revenue funding data were available
for 1996 only. 

The amount and type of funding varies considerably by the type of
airport.  The 71 large and medium hub airports, which accounted for
almost 90 percent of all passenger traffic, also obtained 79 percent
of all funding in 1996, while the 3,233 other national system
airports accounted for the remaining 21 percent of the funding.  In
addition, as shown in figure 3, large and medium hub airports rely
most heavily on private airport bonds, which constitute roughly 62
percent of their total funding, while the other airports rely on
federal grants for about half of their funding.  Additional
information on each of these funding sources and their distribution
among various categories of airports is contained in appendix I. 

   Figure 3:  Distribution of 1996
   Funding Sources for Large and
   Medium Hub and Other National
   System Airports

   (See figure in printed
   edition.)

To test the strength of the relationship between the size of an
airport and its reliance on the various funding sources, we analyzed
the correlation between size, as measured by passenger enplanements,
and funding sources, as measured by the proportion that each source
contributes to the total funding for the 300 commercial airports for
which we had complete financial data.  We found that as an airport's
size increases, both within and across airport categories, an
airport's reliance on AIP diminishes, while the use of other funding
sources, such as bonds and PFCs, increases. 


--------------------
\4 Airport and special facility bonds are reported as net of bonds
sold to refinance outstanding bonds, unless otherwise noted. 
Airports' revenue is estimated on the basis of airports' net
operating revenue in excess of 1.25 times the debt service
requirements (the minimum required in most bond agreements).  In
addition, some development may have been funded by local communities
or through third parties; however, we found no data to document the
amount from these sources, although we believe they are relatively
isolated and small.  For additional discussion of these and other
funding sources, refer to app.  I. 


   FUNDING IS LESS THAN PLANNED
   DEVELOPMENT
------------------------------------------------------------ Letter :4

Airports' planned capital development over the next 5 years may total
as much as $10 billion per year, or $3 billion more per year than
their 1996 funding.\5 Figure 4 compares airports' total capital
development funding in 1996 to their annual planned development over
the next 5 years.  Funding for 1996 is shown by source; planned
spending is shown by the relative priority of the projects.  FAA's
highest priorities are for projects to meet safety, security, and
environmental requirements, including noise mitigation, and for
projects that maintain existing infrastructure (reconstruction). 
Other high-priority projects are primarily for adding capacity, while
other AIP-eligible projects are a relatively lower priority, such as
projects aimed at helping airports better meet FAA's design
standards.  Some projects, such as expanding commercial space in
terminals and parking garages, are typically not eligible for funding
from FAA.  Although a difference may exist between funding and
planned spending in total, there is a much closer match between
funding from AIP and planned spending on FAA's highest-priority
projects (reconstruction and mandates).  In the aggregate, the $1.372
billion in AIP grants in 1996 roughly equates to the $1.414 billion
in estimated development planned for the highest-priority projects. 
However, because about one-third of AIP grants are awarded to
airports on the basis of the number of passengers enplaned and not
necessarily projects' priority, the full amount of AIP grants may not
be going to the highest-priority projects. 

   Figure 4:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

Note:  Planned development excludes $447 million over 5 years, cited
in our April 1997 report, for the development of state system
airports that are not part of the national system. 


--------------------
\5 Estimates of planned development are based on our April 1997
report (Airport Development Needs:  Estimating Future Costs,
GAO/RCED-97-99, Apr.  7, 1997).  As that report noted, estimating
future development is fraught with complications.  Data accuracy
problems, unanticipated needs, and political and financial
feasibility affect actual development. 


      POTENTIAL FUNDING DIFFERENCE
      AT SMALLER AIRPORTS IS MORE
      SIGNIFICANT THAN AT LARGER
      AIRPORTS
---------------------------------------------------------- Letter :4.1

The difference between current funding and planned development for
smaller airports represents a greater proportion of their total
planned development than for large and medium hub airports.  Current
funding at the 3,233 small, nonhub, other commercial service, and
general aviation airports is a little over half of the estimated cost
of their total planned development, producing a difference of more
than $1.4 billion (see fig.  5).  The difference may actually be even
greater if it were not for $250 million in special facility bonding
for a single cargo/general aviation airport.\6 For this group of
airports, the $782 million in 1996 AIP grants surpasses the annual
estimate of $750 million for reconstruction, noise mitigation, and
federally mandated projects. 

   Figure 5:  1996 Funding
   Compared to Planned Development
   for Smaller Airports

   (See figure in printed
   edition.)

As a portion of total funding, the potential funding difference for
the 71 large and medium hub airports is comparatively less than for
their smaller counterparts (see fig.  6).  However, because total
expenditures for capital projects are so much greater for these
airports, this smaller portion represents a potential shortfall of
$1.5 billion, or $87 million greater than smaller airports'
collective shortfall.  Figure 6 also indicates that $590 million in
AIP grants falls $74 million short of the estimated cost to meet
FAA's highest-priority development--meeting federal mandates and
maintaining current infrastructure. 

   Figure 6:  1996 Funding
   Compared to Planned Development
   for Large and Medium Hub
   Airports

   (See figure in printed
   edition.)

For a more detailed analysis that shows the difference between
current funding and planned development for each of the six
categories of airports, see appendix II. 


--------------------
\6 Fort Worth Alliance Airport, a general aviation-cargo airport,
issued $250 million in special facility bonds in 1996. 


   EFFECT OF PROPOSALS TO INCREASE
   AIRPORT FUNDING VARIES
------------------------------------------------------------ Letter :5

Evaluating the various proposals to provide additional funding for
airport development involves the consideration of the trade-offs
among the various funding types as well as the potential effect each
proposal would have on airports.  Initiatives to increase funding for
airport development include increasing AIP funding, raising the
ceiling on PFCs, and other initiatives, such as FAA's pilot programs
for innovative financing and privatization.  In addition, we examined
the potential benefits of state-administered revolving funds. 


      EMPHASIZING ONE FUNDING
      SOURCE OVER ANOTHER REQUIRES
      TRADE-OFFS
---------------------------------------------------------- Letter :5.1

Choosing to increase one source of funding instead of another
involves making trade-offs because the current funding sources differ
in several key characteristics, as shown in table 2.  For example,
increasing funding through grant programs will increase the extent to
which the government can specify the recipient, the project, and the
amount of funds that will be awarded because grant programs
facilitate such targeting better than other funding mechanisms. 
However, because grant programs in general are relatively costly to
administer, increasing funding through grants would increase
administrative costs more than a similar amount from bonds or airport
revenues. 

The funding mechanisms also differ with respect to who bears the cost
of airport financing.  These differences affect the extent to which
beneficiaries pay in proportion to the benefits they receive--a
measure of economic efficiency and equity.  In choosing, for example,
between bonds and grants, it is useful to consider that they may have
different efficiency and equity effects because of differences in the
share of costs borne by users and nonusers of airports under each
funding mechanism.  Grants are funded through AIP, which is, in turn,
funded primarily by the ticket tax.  Thus, users pay for grants to
airports.  In contrast, part of the cost of tax-exempt bonds is borne
by nonusers of airports because the interest earned by bondholders is
exempt from federal income taxation.  As a result, more of the cost
of bond financing is borne by nonusers of airports than in the case
of grants.  Even so, it is uncertain whether using bonds to increase
funding would improve or worsen the overall efficiency and equity of
airport financing.  This uncertainty arises because of the
uncertainty in determining how much nonusers benefit from airport
development that may stimulate economic development in the community
surrounding any given airport.  As a result, it is difficult to
compare such benefits with the costs that nonusers currently bear. 
If, as some believe, these benefits are small, then increasing the
use of bonds could reduce the overall efficiency and equity of
airport financing.  But this decrease in equity and efficiency might
be justified because bonds have lower administrative costs than
grants. 



                                                                                       Table 2
                                                                       
                                                                         Trade-Off Characteristics of Airport
                                                                                   Funding Sources

                        AIP                                  PFC                           Tax-exempt bonds               State and local funds         Airport revenue
======================  -----------------------------------  ----------------------------  -----------------------------  ----------------------------  ----------------------------
To what extent is       Collectively, airport users are the  Unlike funds collected and    While direct beneficiaries     While direct beneficiaries    Because airport users appear
economic efficiency     primary payers and beneficiaries,    made available for AIP,       bear much of the cost,         bear much of the cost,        to constitute most, if not
promoted by             but the linkage between payments     there is, in general, a       nonusers of airports also      nonusers also bear some       all, of the immediate payers
beneficiaries paying    and benefits is loose because funds  strong linkage between those  bear some direct cost through  direct cost to the extent     and beneficiaries, there is
in proportion to the    collected for the trust fund are     who pay and those who         the tax-exempt subsidy but     state grants come from        a strong linkage between
benefits they           redistributed among airports of      benefit because airports      may benefit only indirectly,   general funds. Because about  those who pay and those who
receive?\a              different sizes rather than          retain PFC funds they         if at all. Nonusers may bear   90 percent of the funds come  benefit.
                        retained in the same proportion as   generate. However, some       more of the direct cost of     from user taxes and fees,
                        generated by each airport.           beneficiaries do not pay for  this financing mechanism than  there is a stronger link
                                                             their benefits.               of any other financing         between those who pay and
                                                                                           source. Thus, although         those who benefit than is
                                                                                           airports retain use of the     the case with bonds but less
                                                                                           bonds they issue, there may    of a link than is the case
                                                                                           be less linkage between those  with airport revenues and
                                                                                           who pay and those who benefit  PFCs.
                                                                                           directly than under other
                                                                                           financing mechanisms.

To what extent are      Only direct beneficiaries pay the    Some beneficiaries do not     All users of airport services  Only direct beneficiaries     Only airport users pay.
airports' capital       costs. While larger airports         pay--for example, some        repay the cost of bond         pay the taxes and fees.       Airlines and concessionaires
costs equitably         provide more funds because almost    classes of carriers and       financing through the          While nonusers, as well as    pay directly, while their
distributed among       9/10 of the revenue comes from the   passengers are exempted from  revenues collected by          airport users that reside     customers pay indirectly
those who benefit?\a    passenger ticket tax, the            paying PFCs. Also, airports   airports. However, all         within the respective state,  through the prices of the
                        disbursement of the funds results    that collect PFCs must        taxpayers, who may benefit     sustain general fund          services or goods they buy.
                        in some redistribution from large    return a portion of their     from the national airport      appropriations, they may
                        to small airports. Also, those who   AIP moneys to benefit         system, even if they do not    benefit only to the extent
                        pay higher costs for tickets pay a   smaller airports.             use the airports, help         the general public benefits
                        higher dollar amount in tax than                                   support tax-exempt bonds       from the states airport
                        purchasers of lower-cost tickets.                                  through an estimated $560      investment.
                                                                                           million in forgone tax
                                                                                           revenue annually.

How easily or cheaply   Grant programs are more costly to    Application for use of the    Provided bonds are properly    Taxes on products are         Collection and use of
are funds managed?      administer. Administration of grant  fee at an airport is a one-   secured by future revenue or   generally collected at the    airport revenue represent a
                        programs is a relatively labor       time process for the amount   taxing authority, they are     time of sale. General fund    simpler process than that
                        intensive process that generally     and duration approved.        relatively easy to issue.      appropriations require no     associated with a grant
                        involves application for the         Collections may occur over    Bond issuers must pay up-      special collection process.   program.
                        grants, review of applications and   several years, but once the   front consulting and legal     Grant programs are generally
                        award of the grants, and monitoring  approved maximum is           costs as well as underwriting  costly to administer.
                        of compliance with grant program     obtained, a new application   costs between 0.6 and 1
                        requirements.                        is required to continue       percent of the proceeds. Use
                                                             collection. Once airlines     of the funds is a simpler
                                                             turn collections over to the  process than that associated
                                                             airport, the airport may use  with a grant program.
                                                             the funds for the projects
                                                             approved in their
                                                             application.

To what extent can the  The federal government (FAA)         The federal government (FAA)  The federal government cannot  The federal government        Federal law requires
federal government      specifies the airport and project    must approve an airport's     specify what development is    cannot specify what           airports to retain all
specify the recipient/  through the award of annual grants.  PFC application for a         funded, but it can influence   development is funded. But    revenue for airport
project and the amount  Federal grant shares are set at 75   specified amount and for a    the distribution of some of    about 1/5 of state grants     purposes, but the federal
of funds provided?      or 90 percent, with some             specific project or projects  the funds through matching     fund federal grant matching   government cannot specify
                        experimentation at other levels.     that meet statutory goals     share requirements on          requirements.                 what development is funded.
                        Primary airports are guaranteed a    and are adequately            federally funded projects.                                   However, federal matching
                        minimum amount of money on the       justified.                    The bond issuer chooses what                                 requirements influence the
                        basis of a statutory disbursement                                  development is funded.                                       distribution of some of the
                        formula.                                                                                                                        funds.

To what extent do       Generally, federal funds provided    Most PFCs are collected by    Not applicable.                Not applicable.               Not applicable.
federally authorized    through a grant program have been    larger airports, which are
funding sources         found to result in about a 60-       less likely to receive state
substitute for state    percent substitution for state       assistance. Where airports
or local funds?         funds, leaving 40 percent of         using PFCs do receive state
                        federal funds as a net increase in   assistance, the substitution
                        financing. The substitution rate     rate is likely to be similar
                        that applies to AIP may be           to that for grant programs
                        different.                           in general.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a Equity and efficiency issues are discussed for each financing
mechanism individually in this table, but the issues must also be
assessed from the perspective of all of the financing mechanisms used
collectively.  While a single mechanism may be more or less equitable
or efficient than another mechanism, collectively the financing
sources may produce more or less equity or efficiency than any one
financing approach.  While airport users are the primary
beneficiaries of airports, the general public and individual
localities may also benefit even if they do not use the airports.  In
addition, some funding sources collect funds only from airport users,
while others result in payments by nonusers.  It is not known whether
the funding sources collectively match payments made in proportion to
the benefits received by airport users, the general public, and
localities. 


      INCREASING AIP WOULD HELP
      SMALLER AIRPORTS
---------------------------------------------------------- Letter :5.2

Increasing the total AIP funding would benefit smaller airports more
than hub airports under the existing distribution formula. 
Increasing the level of AIP under the existing distribution formula
provides a slightly increasing share of AIP funds to the smaller
airports, with a concomitant decrease for the large and medium hub
airports.  The Congress increased AIP funding for fiscal year 1998 by
$240 million to $1.7 billion, but $647 million less than the 1998
authorized level of $2.347 billion, a funding level supported by the
airport groups--the American Association of Airport Executives (AAAE)
and Airports Council International-North America (ACI-NA).  Both the
National Civil Aviation Review Commission and the Air Transport
Association (ATA), the commercial airline trade association, have
recommended that future AIP funding levels be stabilized at a minimum
of $2 billion annually.  Table 3 provides the amount and share of
funds that may go to hub airports and other smaller airports if AIP
funding were made available at the current ($1.7 billion), proposed
($2.0 billion), and authorized ($2.347 billion) levels under the
existing distribution formula. 



                                Table 3
                
                 Estimated Distribution of AIP Funds at
                        Different Funding Levels

                         (Dollars in millions)

                                                  Small hub, nonhub,
                                                   other commercial
                         Large and medium hub    service, and general
                              airports\a         aviation airports\ a
                        ----------------------  ----------------------
                                    Percent of              Percent of
AIP funding level         Amount\b       total    Amount\b       total
----------------------  ----------  ----------  ----------  ----------
$1,700.0                    $628.9       39.44      $965.8       60.56
$2,000.0                    $718.1       37.90    $1,176.7       62.10
$2,347.0                    $821.2       36.63    $1,420.6       63.37
----------------------------------------------------------------------
\a Dollar amounts are based on 1996 enplanements and exclude about
$105.2 million in estimated carryover amounts. 

\b The distribution of funds for the cargo entitlement, the noise
set-aside, and remaining discretionary funds (discretionary funds
other than those for the noise set-aside, the general
aviation/reliever/other commercial service set-aside, the small hub
set-aside, and letters of intent), is based on the proportional
distribution of those funds during fiscal year 1997, the first year
under the revised distribution formula established in the 1996
reauthorization. 

Smaller airports' increasing share of AIP under higher funding levels
is due primarily to higher levels of state apportionment funds and
higher levels of discretionary funding if AIP funding increases.\7
State apportionment funds constitute 18.5 percent of the total
program funding, and those funds are for general aviation airports. 
As AIP increases, state entitlement funds increase from $314.5
million (at a $1.7 billion level of AIP), to $370 million (at $2.0
billion of AIP), and finally to $434.2 million (at $2.347 billion of
AIP).  Under the current formula, the amount of apportionment funds
for primary airports remains constant and, therefore, increasing
total funding causes discretionary funding to account for an
increasing proportion of the total funds.  Greater discretionary
funding, in turn, means more funding for smaller airports because
one-third of discretionary funding in excess of $300 million is
directed to general aviation and other commercial service airports. 
For example, the one-third set-aside for general aviation and other
commercial service airports increases from $29.9 million at the $1.7
billion level, to $81.3 million at the $2.0 billion level, and
finally to $140.7 million at the $2.347 billion level. 

While the National Civil Aviation Review Commission and the ATA have
recommended a minimum funding level of $2.0 billion for AIP, the ATA
also has recommended redefining airport categories and the
distribution formula for AIP.  The ATA proposes that national system
airports be grouped into four categories and that a specified portion
of AIP funds be distributed to airports in each category.  As table 4
shows, a slightly higher portion of a $2.0 billion AIP would go to
the larger airports and a slightly smaller portion to the smaller
airports under the ATA's proposal than under the current approach. 



                                     Table 4
                     
                         Comparison of the Air Transport
                      Association's Proposed Distribution of
                     AIP Funds With the Current Distribution

         ATA's
         criteri
ATA's    a for                                           ATA's           Current
airport  airport                               distribution of   distribution of
categor  categor  Airports included in the           AIP funds       AIP funds\b
y        y        category\a                         (percent)         (percent)
-------  -------  --------------------------  ----------------  ----------------
Primary  Over 5   29 large hubs and 5 medium                55             52.68
commerc  million  hubs
ial      enplane
service  ments

Seconda  250,000  37 medium hubs, 70 small
ry       to 4.9   hubs, and 7 nonhubs
commerc  million
ial      enplane
service  ments

Other    10,000   265 nonhubs                               45             47.32
commerc  to
ial      249,999
service  enplane
         ments

General  All      127 nonprimary commercial
aviatio  other    service and 2,764 general
n        nationa  aviation
         l
         system
         airport
         s
--------------------------------------------------------------------------------
\a Based on 1996 enplanements.  Comparative groupings differ from
elsewhere in the report owing to the availability of data. 

\b These percentages are estimated on the basis of a $2.0 billion for
AIP level and the current distribution formula and were not adjusted
to incorporate funds for the seven nonhubs in ATA's secondary
commercial service category into the totals for the hub airports. 
Thus, the differences between ATA's and the current distributions for
the airport categories may be slightly narrower than depicted. 

Under the ATA's proposal, the 55/45 percent distribution would remain
constant at higher levels of AIP funding.  With the increasing share
of AIP funds that might go to the smaller airports at higher funding
levels, the disparity between the ATA's proposal and the current
distribution would increase. 


--------------------
\7 There are two categories of AIP grants--apportionment and
discretionary.  Apportionment grants are distributed by formula to
primary airports (on the basis of enplanements) and states (on the
basis of population).  Discretionary grants can generally be used for
any eligible airport development project, although the Congress has
earmarked or "set aside" some discretionary funding for certain types
of airports or projects, such as for smaller airports and noise
mitigation. 


      INCREASING PFC-BASED FUNDING
      WOULD AID LARGER AIRPORTS
---------------------------------------------------------- Letter :5.3

Increasing PFC-based funding would help larger airports that have a
large passenger base, while only minimally aiding smaller airports. 
Airport groups have actively supported increasing the amount of
funding airports can raise through PFCs by eliminating the current $3
per passenger ceiling.\8 Meanwhile, the ATA actively opposes any
increase in PFCs because it would increase passenger costs and, the
association believes, reduce passenger traffic.  The National Civil
Aviation Review Commission stated that the PFC ceiling will need to
be raised if AIP funding is not substantially greater than $2 billion
per year, but the Commission has also recommended that airlines have
a greater voice than they currently do in deciding whether an airport
needs a PFC. 

According to airport groups, airports require more PFC funding to
reduce congestion at airports, especially for passengers trying to
access the airport and moving through the terminal.  For some
airports, roadside and terminal congestion may be more severe than
that on the airfield\9 and harder to finance, according to airport
groups, because airlines are not as supportive of nonairfield
projects, and these projects are ineligible for or a low priority for
AIP grants.  As a result, a majority of past and future PFC
collections are dedicated to terminal and airport access projects and
interest payments on debt.\10

As of January 1, 1998, 264 commercial service airports--almost half
of all such airports--imposed a PFC.  The larger the airport, the
greater the likelihood that a PFC is in place (see fig.  7).  About
three-quarters of large and medium hub airports impose a PFC, while
only 45 percent of nonhub and less than 10 percent of other
commercial service airports impose a PFC. 

   Figure 7:  Incidence of PFCs at
   Commercial Service Airports,
   January 1998

   (See figure in printed
   edition.)

If the airports currently charging PFCs were to increase them to $4,
$5, or $6 per passenger instead of the current $3 limit, total
collections would increase to $1.5 billion, $1.9 billion, and $2.2
billion, respectively, on the basis of 1996 enplanements and
collection rates.  On the basis of 1996 passenger levels, PFC
collections could increase to $2.9 billion, but only if all
commercial airports imposed a $6 PFC.  Figure 8 shows the estimates
by airport category.  If enplanements continue to grow as expected,
then future collections will be proportionally greater. 

   Figure 8:  Current and Maximum
   PFC Collections Under $3, $4,
   $5, and $6 PFCs, January 1998

   (See figure in printed
   edition.)

Note:  The estimates are based on current collection rates and 1996
passenger enplanements. 

Increasing the PFC ceiling would not substantially benefit smaller
commercial airports.  Because smaller airports have relatively few
enplanements, PFCs do not generate much funding.  In addition, while
the PFC program requires large and medium hub airports that impose a
PFC to forgo a portion of their AIP grants so that these funds can be
redirected to smaller airports,\11 most of these larger airports are
already returning their maximum amount, according to FAA officials. 

When PFCs were first introduced, airport groups hoped that PFCs would
provide airports with additional cash flow that could be used to
support more airport bonds and, therefore, capital development. 
However, the issuance of PFC-backed bonds has been limited, in part,
by the Department of Transportation's authority to terminate a PFC if
the airport does not use its collections as agreed or if it violates
the Airport Noise and Capacity Act.  Since 1995, FAA has worked to
lessen the likelihood of termination by instituting a lengthy review
and termination process, and, as a result, in 1996, two airports
issued bonds secured by future PFC collections, and other airports
are currently considering following suit.\12 Airports are also using
their PFC collections as additional security in bonding arrangements,
thereby expanding their overall debt capacity. 


--------------------
\8 PFCs are fees paid by passengers to airports.  Airports may
currently impose a $1, $2, or $3 fee per flight segment, up to a
maximum of four segments per round trip, subject to FAA's approval. 
For more information on PFCs, refer to app.  I. 

\9 FAA measures airside congestion and delays but does not gather
information on the extent of landside congestion. 

\10 Airport Improvement Program:  Update of Allocation of Funds and
Passenger Facility Charges, 1992-94 (GAO/RCED-95-225FS, July 1995). 

\11 Legislation requires that the yearly grants to large and medium
hub airports be reduced by 50 percent of their annual collections or
up to 50 percent of their annual apportionment, whichever is less. 
The forgone grants are redistributed as discretionary grants,
primarily to smaller airports--one-half to nonhub airports,
one-quarter to general aviation airports, one-eighth to small hubs,
and the final one-eighth is available to any airport.  Since this
provision was first implemented, $647 million in AIP grants has been
redistributed under it. 

\12 In 1996, Little Rock and Chicago O'Hare issued bonds backed by
future PFC collections. 


      INNOVATIVE FINANCING
      INITIATIVES DEMONSTRATE
      LIMITED SUCCESS
---------------------------------------------------------- Letter :5.4

In recent years, FAA, with congressional urging and direction, has
sought to expand airports' available capital funding through more
innovative methods, including more flexibly applying AIP grants and
attracting more private capital.  The 1996 Federal Aviation
Reauthorization Act gave FAA the authority to test three innovative
approaches to financing airport development.  In addition, the act
authorized a pilot to privatize a limited number of airports.  Thus
far, these two innovative methods have attracted only limited
interest among airports.  Finally, another innovative
alternative--funding state-administered loan funds for smaller
airports--while not currently permitted, may hold some promise for
increasing funding for smaller airports. 


         FAA'S PILOT PROGRAM FOR
         INNOVATIVE FINANCING
-------------------------------------------------------- Letter :5.4.1

Interest in alternative financing approaches was initially spurred by
declining AIP funding and progress in establishing innovative
approaches to finance surface transportation and other infrastructure
improvements.  In the FAA Authorization Act of 1994, the Congress
directed FAA to study innovative approaches to using federal funds to
finance airport development.\13 FAA's study, released in March 1996,
determined that investment at large and medium hub airports has kept
pace with aviation growth and that therefore these airports generally
do not face systemic financial constraints.\14 However, the study
also found that small hub airports may be financially constrained,
particularly in connection with terminal and other nonairfield
projects.  FAA's study examined four alternatives--a federal
guarantee for airport loans; using AIP to fund reserve accounts that
act as a safety margin for future interest and principal payments;
using AIP to pay for bond insurance; and using AIP to capitalize an
airport loan fund--as innovative means to increase airport
investment.  The study concluded that these options offered modest
potential gains but possibly greater benefits in certain
circumstances if directed to smaller airports and properly targeted
to avoid crowding out current investment. 

The 1996 FAA Reauthorization Act gave the FAA the authority to test
three innovative uses for AIP grants--(1) permitting greater
percentages of local matching for AIP grants, (2) paying interest
costs on debt, and (3) purchasing bond insurance--for up to 10
projects.\15 Thus far, FAA has received 30 applications and approved
5 projects with grants totaling $15.36 million.  All five projects
test the first innovative use of grants--allowing local contributions
in excess of standard grant matching amounts, which for most airports
and projects are otherwise fixed at 10 percent.\16 FAA and state
aviation representatives generally support the concept of flexible
matching because it means that projects that otherwise might not get
under way because of a lack of funding from FAA, can get started
sooner; in addition, flexible funding may ultimately increase funding
to airports.  Applicants have shown less interest in the other two
options, which, according to FAA and investment banking officials, do
not offer new or substantial benefits for airports. 


--------------------
\13 Section 520 of the Federal Aviation Administration Authorization
Act of 1994 (P.L.  103-305). 

\14 Based on econometric analysis of airports' investment in airfield
and landside facilities and of aviation growth (as measured by
aircraft operations) for 1986 through 1994. 

\15 Section 148 of the Federal Aviation Reauthorization Act of 1996
(P.L.  104-264). 

\16 Except terminal development, which is fixed at a 25-percent local
share; airport planning and development for large and medium hub
airports, fixed at 25 percent; and noise compatibility programs for
large and medium hub airports, fixed at 20 percent. 


         FAA'S PILOT PROGRAM FOR
         PRIVATIZATION
-------------------------------------------------------- Letter :5.4.2

Declining airport grants and broader government privatization efforts
spurred interest in airport privatization as another innovative means
to bring more capital to airport development, but thus far efforts
have shown only limited results.  As we previously reported, the sale
or lease of airports in the United States faces many hurdles,
including legal and economic constraints.\17 As a way to test
privatization's potential, the Congress directed FAA to establish a
limited pilot program under which some of these constraints would be
eased.\18 Starting December 1, 1997, FAA began accepting applications
from airports to participate in the pilot program on a first-come,
first-served basis for up to five airports.  Thus far, two airports
have applied to be part of the program.\19


--------------------
\17 Airport Privatization:  Issues Related to the Sale or Lease of
U.S.  Commercial Airports (GAO/RCED-97-3, Nov.  1996). 

\18 Section 149 of the Federal Aviation Reauthorization Act of 1996
(P.L.  104-264). 

\19 These airports are Brown Field near San Diego, a general aviation
airport, and Stewart International in New York, a nonhub airport. 


         STATE REVOLVING FUNDS
-------------------------------------------------------- Letter :5.4.3

Allowing FAA to capitalize states' revolving airport loan funds with
AIP grants is an innovative concept that some federal transportation,
state aviation, and airport bond rating and underwriting officials
believe would help smaller airports obtain additional financing. 
State revolving loan funds have been successfully employed to finance
other types of infrastructure projects, such as waste water projects
and, more recently, drinking water and surface transportation
projects.  While loan funds can be structured in various ways,
basically they use federal and state moneys to capitalize the funds,
from which loans are then made.  Interest and principal payments are
recycled to provide additional loans.  Once established, loan funds
can more quickly expand by issuing bonds using the funds' capital and
loan portfolio as collateral.  These revolving funds would not create
any contingent liability for the U.S.  government because they would
be under state control.  Some officials of bond rating agencies,
underwriting firms, and federal and state transportation agencies
believe that revolving loan funds would help smaller airports that
have trouble obtaining affordable debt financing.  Loan funds could
also help speed construction and lower construction costs by
providing financing up front, instead of incrementally, as is the
case with AIP grants, according to a rating agency official. 

FAA cannot use AIP grants to capitalize state loan funds because AIP
construction grants can go only to a designated airport and project. 
Recently, FAA received an application from a state for an AIP grant
to help establish a revolving fund as part of FAA's pilot program for
innovative financing.  However, the application was denied because
FAA officials determined that such a grant could be construed as a
guarantee of airport debt, which is expressly prohibited under the
program.  Currently, Florida is the only state with an established
revolving loan program.  Since 1985, the state has provided $75
million in loans to airports for land acquisition and capital
projects.  While some of the loans are later reimbursed through AIP
grants for eligible projects, the state funds the loan program
itself.  In addition, 39 states have established state infrastructure
banks (SIB) using federal and state grant money to fund surface
transportation projects.\20 This same SIB structure could also be
used to fund aviation projects, and at least one state--Ohio--has
already authorized its SIB to fund aviation projects using state
funds. 


--------------------
\20 For additional information, refer to State Infrastructure Banks: 
A Mechanism to Expand Federal Transportation Financing
(GAO/RCED-97-9, Oct.  1996). 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The total funding for airport development peaked in 1992 in real
terms and declined to about $7 billion in 1996.  Meanwhile, planned
development at airports may total as much as $10 billion per year
over the next 5 years.  Most of this amount--perhaps as much as $7
billion per year--is attributable to the potential costs of
development at large and medium hub airports, which enplane 9 of
every 10 passengers.  Continued funding for these airports will be
critical to ensuring adequate capacity for the national airport
system and avoiding congestion and delays.  However, while the need
for funding at hub airports may be considerable, these airports also
have access to many funding sources, particularly tax-exempt bonds. 
The more difficult problem may rest with meeting the funding demands
of smaller airports. 

Smaller airports, especially small, nonhub, other commercial service,
and general aviation airports, confront a potential funding shortfall
that in percentage terms is far greater than for larger airports. 
These airports have the fewest funding options, relying on federal
grants for half of their funding, which is sufficient to fund FAA's
highest priorities but little else.  Protecting the financial
viability of these smaller airports will require adequate funding
from existing federal and state grant programs, but also more
innovative applications of existing funding.  FAA has been testing
several innovative approaches authorized by the Congress and expects
to report to the Congress on the results of this testing later this
year.  However, a state revolving loan fund was not among those
tested, and while not a panacea, state loan funds may offer some
potential for helping smaller airports fund their development.  FAA
has determined that it does not currently have the legal authority to
use Airport Improvement Program grants to fund state revolving loan
funds.  Nevertheless, state revolving loan funds have the support of
some federal transportation, state aviation, and airport bond rating
and underwriting officials because they believe that the funds could
provide loans to airports that otherwise might not have access to
debt financing.  In addition to expanding available financing, these
loans could also speed construction and lower costs by providing
funding up front. 


   RECOMMENDATION
------------------------------------------------------------ Letter :7

To help smaller airports fund some of the cost of their capital
development, but to avoid undermining the level of federal support
for larger airports, we recommend that the Secretary of
Transportation seek authority from the Congress to use Airport
Improvement Program grants to capitalize state revolving funds in
those circumstances where states have a demonstrated capability and
desire to manage a revolving fund. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided the Department of Transportation, FAA, the American
Association of Airport Executives, the Airports Council
International-North America, the Air Transport Association, and the
National Association of State Aviation Officials with a copy of our
draft report for review and comment.  We met with agency and
association officials, including the Director of FAA's Office of
Airport Planning and Programming; the Senior Vice President, Federal
Affairs, of the American Association of Airport Executives; the
Executive Vice President of the Airports Council International-North
America; the Senior Vice President, Federal Affairs and Airports, of
the Air Transport Association; and the Vice President of the National
Association of State Aviation Officials.  The agency and associations
generally agreed with the facts presented and provided some
clarifying comments and information, which we included in the report
as appropriate.  Regarding our recommendation for state revolving
loan funds, FAA stated that there is strong interest in revolving
loan funds among the states and noted that FAA has received inquiries
from states interested in pursuing creation of such funds. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To develop estimates of various airport funding, we analyzed five
different databases maintained by FAA, industry organizations, and
private data vendors.  We did not audit the accuracy of the databases
but did perform some limited cross-checking of information to assess
their reasonableness.  We then compared these estimates to planned
development as reported in our April 1997 report.  A more detailed
discussion of our data sources and analytical methodology is
contained in appendix III.  We conducted our work from June 1997
through February 1998 in accordance with generally accepted
government auditing standards. 


---------------------------------------------------------- Letter :9.1

As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 7 days from the date of this letter.  At that time, we will
send copies of this report to the Secretary of Transportation and the
Administrator, Federal Aviation Administration.  We will also make
copies available to others on request.  Please call me at (202)
512-3650 if you have any questions about this report.  Major
contributors to this report are listed in appendix IV. 

Gerald L.  Dillingham
Associate Director, Transportation Issues


List of Committees

The Honorable John McCain
Chairman
The Honorable Ernest F.  Hollings
Ranking Minority Member
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Slade Gorton
Chairman
The Honorable Wendell H.  Ford
Ranking Minority Member
Subcommittee on Aviation
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Bud Shuster
Chairman
The Honorable James L.  Oberstar
Ranking Democratic Member
Committee on Transportation and Infrastructure
House of Representatives

The Honorable John J.  Duncan, Jr.
Chairman
The Honorable William O.  Lipinski
Ranking Democratic Member
Subcommittee on Aviation
Committee on Transportation and Infrastructure
House of Representatives


SOURCES OF AIRPORTS' CAPITAL
FUNDING
=========================================================== Appendix I

Funding for airport development comes from five primary sources: 
federal Airport Improvement Program (AIP) grants, passenger facility
charges (PFC), airport and special facility bonds, state grants, and
airport revenue.  Airports vary in their reliance on these sources of
funds. 


      FEDERAL GRANTS
------------------------------------------------------- Appendix I:0.1

AIP grants are made available from the Airport and Airway Trust
Fund.\21 The Federal Aviation Administration (FAA) allocates most AIP
grants on the basis of (1) a legislated apportionment formula, tied
to the number of passengers an airport enplanes, and (2) set-aside
categories earmarked for specific types of airports and projects. 
FAA has discretionary authority to allocate the remaining
funds--about $300 million out of the $1.46 billion made available for
fiscal year 1997--on the basis of needs identified by airports. 

AIP grants peaked in 1992 at $2.264 billion, as measured in 1996
dollars, and declined to $1.372 billion in 1996, as shown in figure
I.1. 

   Figure I.1:  AIP Grants by
   Category of Airport, 1982
   Through 1996

   (See figure in printed
   edition.)

Note:  Represents obligated amounts.  System planning and state block
grants are included with general aviation, where most of the benefit
is derived. 

While total AIP funding grew during the program's first decade and
then declined since 1992, the allocation of funds among the various
airport categories has been fairly consistent.  Over the 15-year
period, large hub airports garnered 27 percent of the grants,
followed closely by general aviation airports (26 percent) and, to a
lesser extent, medium hubs (17 percent), small hubs (14 percent),
nonhubs (11 percent), and other commercial service airports (4
percent).  Figure I.2 shows the percentage of AIP funding that each
category of airport received in each of the last 15 years. 

   Figure I.2:  Allocation of AIP
   Funds by Category of Airport,
   1982 Through 1996

   (See figure in printed
   edition.)

Note:  In 1987, the Congress expanded the number of primary (nonhub)
airports and conversely reduced the number of, and funding for, other
commercial service airports. 

AIP funding for hub airports has ranged between 51 and 66 percent of
the total.  Meanwhile, the funding share for nonhubs has consistently
grown, while general aviation airports' share has generally stayed
between 21 and 33 percent of the total. 


--------------------
\21 The Trust Fund is financed by taxes on domestic and international
airline travel, domestic cargo transported by air, and noncommercial
aviation fuel. 


      PASSENGER FACILITY CHARGES
------------------------------------------------------- Appendix I:0.2

In 1990, the Congress gave commercial airports the option to impose a
PFC as an additional means to raise funds for development.  Beginning
in 1992, authorized airports were able to collect up to $3 per
enplaned passenger to use for projects that are eligible for AIP and
for certain other types of costs that are not, such as debt financing
costs.  Airports must apply to FAA for the authority to collect the
charges. 

Large hub airports accounted for two-thirds of all PFC collections in
1996, while medium hub airports accounted for another 24 percent of
total collections.  Figure I.3 shows PFC collections by category of
airport. 

   Figure I.3:  PFC Collections by
   Category of Airport, 1992
   Through 1996

   (See figure in printed
   edition.)


      AIRPORT BONDS
------------------------------------------------------- Appendix I:0.3

The single largest category of airport funding is bonds.  Even before
1982, airports were fairly sophisticated in their use of debt to
finance future development.  From 1982 through 1996, airports issued
$53.6 billion worth of bonds.  Roughly $17.3 billion, or one-third of
this total, was to refinance existing debt, while the other $36.3
billion, or two-thirds, was new financing for airports' capital
development.  As figure I.4 shows, the total amount of bonding, as
well as the split between "refinance" and "new finance," varies from
year to year.  For example, when interest rates fell in 1992 and
1993, many airports refinanced their outstanding bonds.  The figure
also shows that the amount of new finance for airport development
increased from less than $1.5 billion in 1982 to more than $3.7
billion in 1996. 

   Figure I.4:  Airport Bonding,
   Total and New Finance, 1982
   Through 1996

   (See figure in printed
   edition.)

Since 1982, the vast majority of airport bonds have been issued by
large and medium hub airports, nearly $33 billion of a total $36
billion.  Figure I.5 shows the distribution of new finance from
airport bonds by the category of issuing airport.\22

   Figure I.5:  Airport Bonds, Net
   Refinancing, by Category of
   Airport, 1982 Through 1996

   (See figure in printed
   edition.)

Despite the $25 billion in new bonds issued by large hub airports
from 1982 through 1996, their capacity to issue new debt has not been
harmed.  As we reported in 1996, large hub airports' operating ratios
did not decline between 1988 and 1994, indicating that revenue kept
pace with increased debt service costs.\23

More than 95 percent of all airport debt issued since 1982 has been
in the form of general airport revenue bonds (GARB), which are
secured by an airport's future revenue.  Thirty years ago, general
obligation bonds, which are backed by the taxing power of a
governmental unit, were far more common because of their stronger
credit standing and therefore lower financing costs.  The decline in
general obligation bonds reflects the improved acceptance of GARBs by
investors.  Today, general aviation airports have been the most
common issuer of general obligation bonds for airport development. 


--------------------
\22 Some bonds are issued by airport systems for use by more than one
airport.  For large systems, such as Hawaii's and Alaska's, we
allocated the bonds on the basis of how the proceeds were
distributed.  For smaller systems, we allocated funds to the largest
airport in the system, which may have created a small bias in favor
of larger airports. 

\23 AIP Funding for the Nation's Largest Airports (GAO/RCED-96-219R,
July 31, 1996). 


      SPECIAL FACILITY BONDS
------------------------------------------------------- Appendix I:0.4

A special category of airport bonds is special facility bonds.  While
still issued by the airports' sponsors in order to obtain tax-exempt
status, the special facility bonds are secured by the revenue from
the indebted facility, such as a terminal, hangar, or maintenance
facility, rather than the airports' general revenue.  As figure I.6
shows, the amount of special facility bonds is especially volatile
from year to year; they have tended to be issued by large hub
airports. 

   Figure I.6:  Airport Special
   Facility Bonds, net
   refinancing, by Category of
   Airport, 1982 Through 1996

   (See figure in printed
   edition.)

The annual amount of special facility bonds is more volatile than
that for regular airport bonds because fewer special facility bonds
are issued for larger amounts than regular airport bonds; since 1982,
158 special facility bonds averaging $64.7 million have been issued
versus 1,181 airport bonds averaging $38.8 million per issue. 


      STATE GRANTS
------------------------------------------------------- Appendix I:0.5

Nearly all states provide financial assistance to airports, primarily
in the form of grants as matching funds for AIP grants or as separate
state grants.  States fund their grant programs through a variety of
sources, including aviation fuel and aircraft sales taxes, highway
taxes, bonds, and general fund appropriations.  State funding data
have been aggregated periodically by the National Association of
State Aviation Officials, which began its current annual reporting of
state data in 1996.  States provided about $285 million to national
system airports in the states' fiscal year 1996.\24 Figure I.7 shows
the distribution of those grants by airport category. 

   Figure I.7:  State Grants to
   Airports by Category of
   Airport, States' Fiscal Year
   1996

   (See figure in printed
   edition.)

About 20 percent of state grants, or $57.3 million, was used to
supplement AIP grants; the other 80 percent of grants, or $227.4
million, was provided as separate grants.  In addition, states
provided some funds to airports that are not part of the national
system. 

Total state funding levels vary by state and by year.  In the states'
fiscal year 1996, two states--Florida and Maryland--accounted for 45
percent of state grants, while six states provided no grants to
national system airports.  Also, states offer a slightly greater
share of their grants to smaller airports than does the federal
government grant program.  In 1996, about 56 percent of state grants
went to nonhub, other commercial service, and general aviation
airports, while only about 42 percent of federal grants went to these
same airports. 


--------------------
\24 Data for Washington state include some state grants to general
aviation airports that are not in the national system. 


      AIRPORT REVENUE
------------------------------------------------------- Appendix I:0.6

Airports generate revenue from landing fees and terminal leases (both
paid by airlines), concessions (such as parking fees), and other
income (such as advertising and fuel sales).  Airports' operating
revenue supports airports' operating expenses, debt service costs,
and, to the extent available, other nonoperating expenditures, such
as capital development.  Using airports' operating revenue to fund
development is sometimes referred to as "pay-as-you-go" financing, as
opposed to leveraging future revenue to obtain bonds.  In addition,
to satisfy bond covenants and rating agencies, airports must reserve
some portion of their operating revenue to ensure their ability to
meet future debt service costs. 

Beginning in 1996, FAA required commercial airports receiving grants
to report financial statement information.\25 Of the 355 commercial
airports, 63 percent reported audited financial information, from
which we calculated airports' net operating revenue (operating
revenue minus operating expenses) and, in consideration of airports'
debt service and coverage requirements, any portion of net operating
revenue in excess of 125 percent of debt service costs (the minimum
coverage required by most bond agreements).  While not an exact
figure for revenue used to support capital development, it is a
reasonable estimate of the revenue available for that purpose,
according to rating agency officials.  Figure I.8 compares airports'
mean net operating revenue in excess of 1.25 times debt service. 

   Figure I.8:  Airports'
   Available Net Operating Revenue
   and Operating Ratios, 1996

   (See figure in printed
   edition.)

Note:  Data are unavailable for general aviation airports. 

As figure I.8 shows, on average, large and medium hub airports
generated modest revenue that can be used for capital development. 
In addition, large and medium hub airports produced a mean operating
ratio, a measure of operational liquidity, twice that of nonhubs and
other commercial service airports, which generally operate at or
below the break-even point.  While operating revenue data for general
aviation airports were not available, a recent study for FAA by
Gellman Research Associates found that most general aviation airports
operate at less than the break-even point, often having to rely on
the local municipality for operating subsidies. 


--------------------
\25 Section 111 of Federal Aviation Administration Authorization Act
of 1994 (P.L.  103-305). 


      OTHER CAPITAL SOURCES
------------------------------------------------------- Appendix I:0.7

According to rating agency officials, federal and state grants, PFCs,
bonds, and airport revenue make up the vast majority of capital
funding sources for airports.  Although some local municipalities and
outside developers may help finance airport development, little
information exists that documents the magnitude or prevalence of
these sources.  According to FAA officials, local municipalities
occasionally provide funding to airports, primarily to smaller
airports and primarily as operating rather than capital subsidies. 
We found only one example of local financing for development.\26


--------------------
\26 Allegheny County, which owns and operates Pittsburgh
International, provided a loan of $42.5 million dollars to the
airport to help finance construction of airport roadway projects in
the early 1990s. 


CURRENT FUNDING AND PLANNED
DEVELOPMENT
========================================================== Appendix II

   Figure II.1:  Large Hub
   Airports:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

   Figure II.2:  Medium Hub
   Airports:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

Note:  Medium hub airport bonds in 1996 more than doubled the prior
5-year average. 

   Figure II.3:  Small Hub
   Airports:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

   Figure II.4:  Nonhub Airports: 
   1996 Funding Compared to
   Planned Development

   (See figure in printed
   edition.)

   Figure II.5:  Other Commercial
   Service Airports:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

   Figure II.6:  General Aviation
   Airports:  1996 Funding
   Compared to Planned Development

   (See figure in printed
   edition.)

Data on general aviation airports' revenue are unavailable.  Special
facility bonding was $250 million for one airport. 


SCOPE AND METHODOLOGY
========================================================= Appendix III

To determine how much airports of various sizes are spending on
capital development and from which sources, we sought data on
airports' capital funding because comprehensive airport spending data
are limited and because, over time, funding and spending should
roughly equate.  We obtained capital funding data from the FAA, the
National Association of State Aviation Officials, the Securities Data
Company, the Airports Council International-North America, and the
American Association of Airport Executives.  We screened each of
these databases for their accuracy to ensure that airports were
correctly classified and compared funding streams across databases
where possible.  We did not, however, audit how the databases were
compiled or test their overall accuracy, except in the case of state
grant data from the National Association of State Aviation Officials,
which we independently confirmed.  We subtotaled each funding stream
by year and airport category and added to other funding streams to
determine the total funding.  With FAA, bond rating agencies, bond
underwriters, airport financial consultants, and airport and airline
industry associations, we then discussed the data and our conclusions
to verify their reasonableness and accuracy. 

To determine whether current funding is sufficient to meet planned
development for the 5-year period from 1997 through 2001 for each
airport category and overall, we compared total funding to planned
future development as determined in our prior report on airport
development.  We also compared funding from AIP to higher-priority
projects to assess the relative balance between federal funding and
their primary intent.  Additionally, we correlated each funding
stream to the airports' size, as measured by activity, and among
other funding streams to better understand airports' varying reliance
on them and the relationships among sources of finance.  We then
discussed our findings with FAA, bond rating agencies, bond
underwriters, airport financial consultants, and airport and airline
industry associations to determine how our findings compared with
their knowledge and experiences. 

Finally, to evaluate how funding shortages, if they were found to
exist, might be reduced, we examined several proposals and
initiatives for their effect on funding and the relative distribution
among different categories of airports.  To evaluate the effects of
increased AIP funding, we applied the current AIP formula and 1997
distribution percentages to larger funding levels.  To evaluate the
Air Transport Association's proposal, we categorized airports and
distributions on the basis of 1996 enplanements and operational data. 
To evaluate the effects of raising the PFC ceiling, we estimated
potential PFC collections under $4, $5, and $6 PFCs on the basis of
1996 enplanements and collection rates under two scenarios:  (1) with
only those airports currently with a PFC imposing one and (2) all
airports imposing a PFC.  To evaluate various innovative financing
proposals, we first identified various proposals and initiatives from
discussions with aviation industry associations and FAA and a review
of prior studies and legislation.  Specifically, the results of FAA's
March 1996 report to the Congress on innovative approaches to the use
of federal funds formed the basis for the primary alternatives we
considered.  We discussed the potential for each of these
alternatives with FAA, bond rating agencies, bond underwriters,
airport financial consultants, and airport and airline industry
associations.  We also determined the status of FAA's pilot programs
for innovative financing and privatization. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

R.  Jerry Aiken
Paul Aussendorf
Beverly Ann Bendekgey
Jay R.  Cherlow
Lynne L.  Goldfarb
David K.  Hooper
Joseph D.  Kile
Kirsten Landeryou
Sara Ann Moessbauer
Stanley G.  Stenersen
Randall B.  Williamson


*** End of document. ***