Airport Financing: Comparing Funding Sources With Planned Development
(Testimony, 03/19/98, GAO/T-RCED-98-129).
GAO discussed airport funding issues, focusing on: (1) how much airports
are spending on capital development, and where the money is coming from;
(2) whether current funding levels will be sufficient to meet airports'
planned development; and (3) what effect will various proposals to
increase airport funding have on airports' ability to fulfill capital
development plans.
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: (a) airport and special facility bonds; (b) the Airport
Improvement Program (AIP); and (c) passenger facility charges paid on
each airline ticket; (3) the magnitude and type of funding varies with
each airport's size; (4) the nation's 71 largest airports accounted for
nearly 80 percent of this funding; (5) as a group, these airports
received only about 10 percent of their funding from AIP; (6) by
contrast, the remaining 3,233 smaller airports that complete the
national system rely on AIP for half of their funding; (7) airports
planned as much as $10 billion per year in development for the years
1997 through 2001, or $3 billion per year more than they spent in 1996;
(8) about $1.4 billion per year of that development is planned for
safety, security, environmental, and reconstruction projects--the
Federal Aviation Administration's highest priorities; (9) another $1.4
billion per year of that development is planned for other high-priority
projects, primarily adding airport capacity; (10) other projects of a
relatively lower priority, such as bringing airports up to FAA's design
standards, add another $3.3 billion per year; (11) airports anticipate
another $3.9 billion per year for projects that are not eligible for
funding from AIP, such as expanding commercial space in terminals and
constructing parking garages; (12) the difference between current
funding and planned development is especially acute for smaller
commercial and general aviation airports; (13) their 1996 funding would
cover only about half of their total planned development; (14) several
proposals to increase airport funding have emerged in recent years; (15)
these include increasing the amount of funding for AIP, raising or
eliminating the ceiling on passenger facility charges, and better
leveraging of existing funding sources; and (16) these proposals vary in
the degree to which they help specific types of airports.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-RCED-98-129
TITLE: Airport Financing: Comparing Funding Sources With Planned
Development
DATE: 03/19/98
SUBJECT: Airports
Federal aid for transportation
Facility construction
Future budget projections
Air transportation operations
Privatization
Financial management
IDENTIFIER: FAA Airport Improvement Program
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Cover
================================================================ COVER
Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives
For Release
on Delivery
Expected at
9:30 a.m. EST
Thursday
March 19, 1998
AIRPORT FINANCING - COMPARING
FUNDING SOURCES WITH PLANNED
DEVELOPMENT
Statement of Gerald L. Dillingham,
Associate Director, Transportation Issues,
Resources, Community, and Economic
Development Division
GAO/T-RCED-98-129
GAO/RCED-98-129T
(348079)
Abbreviations
=============================================================== ABBREV
AIP -
FAA -
PFC -
ATA -
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss airport funding issues.
Over the last 2 years, since the Airport Improvement Program (AIP)\1
was last reauthorized in October 1996, your Committee and others have
asked us to study these issues in considerable depth. My testimony
today, which is drawn from our study of these issues,\2 focuses on
three questions: (1) How much are airports spending on capital
development, and where is the money coming from? (2) If current
funding levels continue, will they be sufficient to meet airports'
planned development? (3) What effect will various proposals to
increase airport funding have on airports' ability to fulfill capital
development plans?
In summary, our answers to these questions are as follows:
-- 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), the Airport
Improvement Program ($1.4 billion), and passenger facility
charges paid on each airline ticket ($1.1 billion). The
magnitude and type of funding varies with each airport's size.
The nation's 71 largest airports accounted for nearly 80 percent
of this funding. As a group, these airports received only about
10 percent of their funding from the Airport Improvement
Program. By contrast, the remaining 3,233 smaller airports that
complete the national system rely on the Airport Improvement
Program for half of their funding.
-- Airports planned as much as $10 billion per year in development
for the years 1997 through 2001, or $3 billion per year more
than they spent in 1996. About $1.4 billion per year of that
development is planned for safety, security, environmental, and
reconstruction projects--the Federal Aviation Administration's
(FAA) highest priorities. Another $1.4 billion per year of that
development is planned for other high-priority projects,
primarily adding airport capacity. Other projects of a
relatively lower priority, such as bringing airports up to the
Federal Aviation Administration's design standards, add another
$3.3 billion per year. Airports anticipate another $3.9 billion
per year for projects that are not eligible for funding from the
Airport Improvement Program, such as expanding commercial space
in terminals and constructing parking garages. The difference
between current funding and planned development is especially
acute for smaller commercial and general aviation airports.
Their 1996 funding would cover only about half of their total
planned development.
-- Several proposals to increase airport funding have emerged in
recent years. These include increasing the amount of funding
for the Airport Improvement Program, raising or eliminating the
ceiling on passenger facility charges, and better leveraging of
existing funding sources. These proposals vary in the degree to
which they help specific types of airports. For example,
increasing the amount of funding for the Airport Improvement
Program would help small airports more, while raising passenger
facility charges would help larger airports more.
--------------------
\1 AIP provides federal funding for airport capital development.
\2 Airport Development Needs: Estimating Future Costs
(GAO/RCED-97-99, Apr. 7, 1997) and Airport Financing: Funding
Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998)
AIRPORTS' FUNDING SOURCES VARY
---------------------------------------------------------- Chapter 0:1
In 1996, bonds, AIP, and passenger facility charges provided about
$6.6 billion of the $7 billion in airport funding. State grants and
airport revenue contributed the remaining funding for airports.
Table 1 lists these sources of funding and their amounts in 1996.
Table 1
Sources of Airport Funding
1996
amount
(dolla
rs in Percen
billio t of
Funding source ns) total Source of funds
------------------------ ------ ------ ----------------------------
Tax-exempt bonds $4.104 58 Tax-exempt bonds are issued
\a by state and local
governments or airport
authorities.
Airport Improvement $1.372 20 Funds are made available by
Program (AIP) Congress from the 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 4 Funds come from such sources
contributions \b 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 2 Funds are generated from (1)
\c revenues derived from the
operation and landing of
aircraft, passengers, or
freight and (2) 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. The amounts for local capital subsidies are
unknown, but we believe that they are minimal.
\c Net operating revenue in excess of a minimum coverage ratio of 125
percent of debt service (principal and interest payments).
The amount and type of funding vary considerably by the type of
airport. The nation's 71 largest (large and medium hub) airports,
which accounted for almost 90 percent of all passenger traffic, had
more than $5.5 billion in funding in 1996, while the 3,233 other
national system airports had about $1.5 billion. As shown in figure
1, large and medium hub airports rely most heavily on airport bonds,
which account for roughly 62 percent of their total funding. By
contrast, the other 3,233 smaller national system airports obtained
just 14 percent of their funding from bonds. For these smaller
airports, AIP funding constitutes a much larger portion of their
overall funding--about half.
Figure 1: Distribution of 1996
Funding Sources for Large and
Medium Hub and Other National
System Airports
(See figure in printed
edition.)
PAST FUNDING LEVELS ARE LESS
THAN PLANNED DEVELOPMENT
---------------------------------------------------------- Chapter 0:2
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.\3 Figure 2 compares airports' total capital
development funding in 1996 with their annual planned development
over the next 5 years. Funding for 1996 is shown by source. Planned
spending for future years is shown by the relative priority of the
projects, as follows:
-- FAA's highest priorities (shown as reconstruction and mandates)
total $1.4 billion per year and are for projects to meet safety,
security, and environmental requirements, including noise
mitigation, and for projects that maintain the existing
infrastructure (reconstruction).
-- Other high-priority projects--primarily, those adding
capacity--add another $1.4 billion per year.
-- Other projects of a relatively lower priority--such as those
bringing airports up to FAA's design standards--add another $3.3
billion per year, for a total of $6.1 billion per year.
-- Finally, airports anticipate another $3.9 billion per year in
projects that are not eligible for AIP--such as those expanding
commercial space in terminals and constructing parking garages.
Figure 2: 1996 Funding
Compared to Planned Development
(See figure in printed
edition.)
Although a sizable difference may exist in total, when a comparison
of 1996 funding to planned future development is made, there is a
much closer match if the comparison is restricted to comparing AIP
funding and planned spending on FAA's highest-priority projects
(reconstruction and mandates). In the aggregate, the $1.372 billion
in AIP funding 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 funds are awarded to airports
on the basis of the number of passengers enplaned and not necessarily
on the basis of the project's priority, the full amount of AIP funds
may not be going to the highest-priority projects.
--------------------
\3 Estimates of planned development are based on our April 1997
report on airport capital development (Airport Development Needs:
Estimating Future Costs, GAO/RCED-97-99, Apr. 7, 1997). As that
report noted, estimating future development is fraught with
complications. Problems with the data's accuracy, unanticipated
needs, and political and financial feasibility affect the actual cost
of development.
POTENTIAL FUNDING DIFFERENCE
AT SMALLER AIRPORTS IS MORE
SIGNIFICANT THAN AT LARGER
AIRPORTS
-------------------------------------------------------- Chapter 0:2.1
The funding difference between current funding and planned
development for smaller airports is bigger, in percentage terms, than
for larger airports. Current funding at the 3,233 small, nonhub,
other commercial service and at general aviation airports is a little
over half of the estimated cost of their planned development, thus
producing a difference of about $1.4 billion. (See fig. 3.) The
difference might actually be even greater if it were not for $250
million in special facility bonding for a single cargo/general
aviation airport.\4
For this group of airports, the $782 million in 1996 AIP funding
surpasses the annual estimate of $750 million for reconstruction,
noise, and federally mandated projects.
Figure 3: 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 it is
for their smaller counterparts. (See fig. 4.) However, because
total expenditures for capital projects are so much greater for these
airports, this potential dollar shortfall is $1.5 billion, or $87
million greater than other airports' collective shortfall. Figure 4
also indicates that $590 million in AIP funding falls $74 million
short of the estimated cost to meet FAA's highest-priority
development--meeting federal mandates and maintaining the current
infrastructure.
Figure 4: 1996 Funding
Compared to Planned Development
for Large and Medium Hub
Airports
(See figure in printed
edition.)
--------------------
\4 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
---------------------------------------------------------- Chapter 0:3
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 that
each proposal would have on airports. Initiatives to increase
funding for airport development include increasing AIP funding,
raising the ceiling on PFCs, and other less conventional steps, such
as FAA's innovative finance and privatization pilot programs. In
addition, we examined the potential benefits of state-administered
revolving funds.
EMPHASIZING ONE FUNDING
SOURCE OVER ANOTHER REQUIRES
TRADE-OFFS
-------------------------------------------------------- Chapter 0:3.1
Choosing to increase one source of airport funding instead of another
involves making trade-offs because the current funding sources differ
in several key characteristics. For example, increasing AIP funding
increases the extent to which the government can specify the
recipient, the project, and the amount of funds that will be awarded.
However, because grant programs in general are relatively costly to
administer, increasing funding in this manner would increase
administrative costs more than some other funding mechanisms.
Conversely, increasing PFCs reduces the extent to which the
government or airlines can specify how funds are used. Finally,
compelling airports to raise more funding through the bond markets
limits governmental control over investments.
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. For
example, 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. However, it is uncertain whether using bonds to increase
funding would improve or worsen the overall efficiency and equity of
airport financing because nonusers may benefit from the local economy
stimulated by airport development.
INCREASING AIP WOULD HELP
SMALLER AIRPORTS MOST
-------------------------------------------------------- Chapter 0:3.2
Increasing total AIP funding would proportionately help smaller
airports more than large and medium hub airports under the existing
distribution formula. Increasing the level of AIP under the existing
distribution formula appears to provide a slightly increasing share
of AIP funds to the smaller airports and a concomitant decrease for
the larger airports. AIP funding for fiscal year 1998 stands at $1.7
billion; large and medium hub airports get nearly 40 percent of this
amount, and all other airports get about 60 percent. We calculated
how this percentage split would be affected at funding levels of $2
billion and $2.347 billion. 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. The level
of $2.347 billion, which is the maximum amount authorized for fiscal
year 1998, is supported by the airport trade groups--American
Association of Airport Executives and Airports Council
International-North America. Table 2 shows the results. Under
existing funding formulas, the proportion of AIP funds going to
smaller airports would rise.
Table 2
Estimated Distribution of AIP Funds at
Different Funding Levels
(Dollars in millions)
Small, nonhub, other
Large and medium hub commercial service,
airports\a and general aviation\a
---------------------- ----------------------
AIP
fundin
g Percent of Percent of
level Amount\b total Amount\b total
------ ---------- ---------- ---------- ----------
$1,700 $628.9 39.4 $965.8 60.6
.0
$2,000 $718.1 37.9 $1,176.7 62.1
.0
$2,347 $821.2 36.6 $1,420.6 63.4
.0
------------------------------------------------------
\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), were 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.
While the ATA has recommended a minimum $2 billion funding level for
AIP, they also recommended redefining airport categories and the
distribution formulas for AIP. 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. Under
ATA's proposal, a slightly higher portion of a $2 billion AIP would
go to the larger airports and a slightly smaller portion to the
smaller airports than under current categories and formulas.
INCREASING PFC-BASED FUNDING
WOULD AID LARGER AIRPORTS
-------------------------------------------------------- Chapter 0:3.3
Increasing PFC-based funding would mainly help larger airports.
-- Large and medium hub airports accounted for nearly 90 percent of
all passengers in 1996.
-- Large and medium hub airports are more likely to have an
approved PFC in place.\5
As of January 1, 1998, 264 commercial service airports--almost half
of all such airports--imposed a PFC, but nearly three-quarters of the
large and medium hub airports have a PFC.
-- Finally, while the PFC program requires large and medium hub
airports that impose a PFC to forgo a portion of their AIP
funding so that these funds can be redirected to smaller
airports,\6 most of these larger airports are already returning
their maximum amount, according to FAA officials, and,
therefore, the amount returned would not appreciably increase if
the PFC ceiling were raised or eliminated.
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 from the current $1.1 billion to $1.5
billion, $1.9 billion, and $2.2 billion, respectively, on the basis
of 1996 enplanements and collection rates. The bulk of the increased
collections would accrue to large and medium hub airports.
Furthermore, if all 540 commercial service airports were to impose a
PFC, collections could climb to as much as $2.9 billion, but again,
most of this would accrue to large and medium airports.
Increased PFC funding is likely to be applied differently than
increased AIP funding. 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\7 and harder to finance,
according to airport groups, because airlines are not as supportive
of nonairfield projects and because these projects are ineligible for
or are a low priority for AIP funding. As a result, a majority of
PFCs are dedicated to terminal and airport access projects and
interest payments on debt.\8
--------------------
\5 PFCs are fees paid by passengers to an airport. 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 approval.
\6 49 U.S.C. � 47114(f) 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 to any airport. Since first
implemented, $647 million in AIP funding has been redistributed under
this provision.
\7 FAA measures airfield congestion and delay but does not gather
information on the extent of congestion on the roads or in the
terminals.
\8 Airport Improvement Program: Update of Allocation of Funds and
Passenger Facility Charges, 1992-1994 (GAO/RCED-95-225FS, July 1995).
BENEFITS OF INNOVATIVE
FINANCE INITIATIVES APPEAR
LIMITED
-------------------------------------------------------- Chapter 0:3.4
The outcome of two FAA experiments, while still uncertain, is not
likely to be far reaching owing to the limited participation of
airports. In recent years, FAA, with congressional urging and
direction, has sought to expand airports' available capital funding
through more innovative methods, including more flexible application
of AIP funding and attracting more private capital. The 1996 Federal
Aviation Reauthorization Act authorized FAA to test three innovative
uses for AIP funding--(1) permitting greater percentages of local
matching for AIP funding, (2) paying interest costs on debt, and (3)
purchasing bond insurance--for up to 10 projects.\9 In addition,
another innovative mechanism--using AIP funding to help fund state
airport revolving funds--is not currently permitted but may hold some
promise. Finally, the 1996 act authorized a pilot to test the
benefits of airport privatization.
Thus far, FAA has received 30 applications and approved 5 projects
totaling $15.36 million for its innovative finance pilot. All five
projects test the first innovative use of AIP funding--allowing local
contributions in excess of standard grant match amounts, which for
most airports and projects is otherwise fixed at 10 percent.\10 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 FAA funding can get started
sooner; in addition, flexible funding may ultimately increase funding
to airports. Applicants, however, 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.
Another innovative concept, not currently permitted, would be to use
AIP funding to help capitalize states' revolving loan funds.
Currently, FAA cannot use AIP funds to capitalize a state's loan fund
because AIP construction grants can go only to a designated airport
and project. However, some federal transportation, state aviation,
and airport bond rating and underwriting officials believe that state
revolving loan funds 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.\11 While loan funds can be structured in
various ways, basically they use federal and state moneys to
capitalize the fund, from which loans are then made. Interest and
principal payments are recycled to provide additional loans. Once
established, a loan fund can expand by issuing bonds using the fund's
capital and loan portfolio as collateral. These revolving funds do
not create any contingent liability for the U.S. government because
they would be under state control.
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.\12 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.\13 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.\14
--------------------
\9 Section 148 of the Federal Aviation Reauthorization Act of 1996
(P.L. 104-264).
\10 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.
\11 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
funding 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. 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.
\12 See Airport Privatization: Issues Related to the Sale or Lease
of U.S. Commercial Airports (GAO/RCED-97-3, Nov. 1996).
\13 Section 149 of the Federal Aviation Reauthorization Act of 1996
(P.L. 104-264).
\14 These airports are Brown Field--a general aviation airport-- near
San Diego, California, and Stewart International--a nonhub
airport--in New York City.
CONCLUSIONS
---------------------------------------------------------- Chapter 0:4
In summary, Mr. Chairman, I would like to reiterate a point that
bears on whether the federal government should take action to
increase or reallocate funding for airports. We believe the
difference between the $10 billion in planned development and the $7
billion in current funding for airports is not as important as the
disparity between larger and smaller airports' capacity to finance
their development. As we have said, current funding for the 71 large
and medium hub airports is more than three-fourths of their planned
development. For the other 3,233 smaller national system airports,
however, current funding is only about half of their planned
development and even less for some categories of these airports.
Moreover, these smaller airports have more limited access to bond
financing and, therefore, mostly rely on federal and state grants.
The Airport Improvement Program is a more significant source of
funding for smaller airports than for larger ones. Therefore, a
decision to increase PFCs to help finance the development of larger
airports, by itself, does little to correct the imbalance between the
financial capacity of larger and smaller airports. Such a move would
need to be coupled with reallocating AIP funding in favor of smaller
airports as well as considering other measures designed to help
smaller airports, such as funding for state revolving funds.
-------------------------------------------------------- Chapter 0:4.1
Mr. Chairman, this concludes our prepared statement. We would be
happy to respond to any questions that you or the members of the
Subcommittee may have.
*** End of document. ***