Airport Financing: Annual Funding As Much As $3 Billion Less Than Planned
Development (Testimony, 02/10/99, GAO/T-RCED-99-84).

Pursuant to a congressional request, GAO discussed airport funding
issues, focusing on: (1) the amount airports are spending on capital
development and the sources of those funds; (2) comparing airports'
plans for development with current funding levels; and (3) what effect
will various proposals to increase or make better use of existing
funding have on airports' ability to fulfill their capital development
plans.

GAO noted that: (1) 3,304 airports that make up the federally supported
national airport system obtained about $7 billion from federal and
private sources for capital development; (2) more than 90 percent of
this funding came from three sources: tax-exempt bonds issued by states
and local airport authorities, federal grants from the Federal Aviation
Administration (FAA) Airport Improvement Program (AIP), and passenger
facility charges paid on airline tickets; (3) the magnitude and type of
funding varies with airports' size; (4) the nation's 71 largest airports
accounted for nearly 80 percent of the total funding; (5) airports
planned to spend as much as $10 billion per year for capital development
for the years 1997 through 2001, or $3 billion per year more than they
were able to fund in 1996; (6) the difference between funding and the
costs of planned development is greater for smaller commercial and
general aviation airports than for their larger counterparts; (7)
smaller airports' funding would cover only about half the costs of their
planned development, while larger airports' funding would cover about
4/5 of their planned development; (8) airports' planned development can
be divided into four main categories based on the funding priorities of
AIP; (9) about $1.4 billion per year was planned for safety, security,
environmental, and reconstruction projects, FAA's highest priorities for
AIP funding; (10) another $1.4 billion per year was planned for projects
FAA regards as the next highest priority, primarily adding airport
capacity; (11) other projects FAA considers to be lower in priority,
such as bringing airports up to FAA's design standards, add another $3.3
billion per year; (12) airports anticipated spending another $3.9
billion per year on projects that are not eligible for AIP funding, such
as expanding commercial space in terminals and constructing parking
garages; (13) several proposals to increase or make better use of
existing funding have emerged in recent years, including the amount of
AIP funding and raising the maximum amount airports can levy in
passenger facility charges; (14) under current formulas, increasing the
amount of AIP funding would help small airports more than larger
airports, while raising passenger facility charges would help larger
airports more; and (15) other initiatives, such as AIP block grants to
states, have had varied success, but none appears to offer a major
breakthrough in reducing the shortfall between funding and airports'
plans for development.

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

 REPORTNUM:  T-RCED-99-84
     TITLE:  Airport Financing: Annual Funding As Much As $3 Billion 
             Less Than Planned Development
      DATE:  02/10/99
   SUBJECT:  Airports
             Federal aid for transportation
             Air transportation operations
             Facility construction
             Funds management
             Federal grants
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
Wednesday
February 10, 1999

AIRPORT FINANCING - ANNUAL FUNDING
AS MUCH AS $3 BILLION LESS THAN
PLANNED DEVELOPMENT

Statement of Gerald L.  Dillingham, Associate Director,
Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-99-84

GAO/RCED-99-84T


(348152)


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

  AIP -
  ATA -
  FAA -
  PFC -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are here today to discuss airport funding issues.  Over the last
few years, your Committee and others have asked us to study these
issues in considerable depth.  Today's testimony focuses on three
questions:  (1) how much are airports spending on capital development
and what are the sources of these funds?  (2) if current funding
levels continue, how do they compare with airports' plans for
development?  and (3) what effect will various proposals to increase
or make better use of existing funding have on airports' ability to
fulfill their capital development plans? 

In summary,

  -- In 1998, we reported that the 3,304 airports that make up the
     federally supported national airport system obtained about $7
     billion from federal and private sources for capital
     development.\1 More than 90 percent of this funding came from
     three sources:  tax-exempt bonds issued by states and local
     airport authorities ($4.1 billion), federal grants from the
     Airport Improvement Program ($1.4 billion), and passenger
     facility charges paid on airline tickets ($1.1 billion).\2 The
     magnitude and type of funding varies with airports' size.  The
     nation's 71 largest airports accounted for nearly 80 percent of
     the total funding.  As a group, these airports are less
     dependent on federal grants:  They received only about 10
     percent of their funding from the Airport Improvement Program. 
     By contrast, the 3,233 smaller airports in the national airport
     system relied on the Airport Improvement Program for half of
     their funding. 

  -- Airports planned to spend as much as $10 billion per year for
     capital development for the years 1997 through 2001, or $3
     billion per year more than they were able to fund in 1996.  The
     difference between funding and the costs of planned development
     is greater for smaller commercial and general aviation airports
     than for their larger counterparts.  Smaller airports' funding
     would cover only about half the costs of their planned
     development, while larger airports' funding would cover about
     4/5 of their planned development.  Airports' planned development
     can be divided into four main categories based on the funding
     priorities of the Federal Aviation Administration's (FAA)
     Airport Improvement Program.  About $1.4 billion per year was
     planned for safety, security, environmental, and reconstruction
     projects, FAA's highest priorities for Airport Improvement
     Program funding.  Another $1.4 billion per year was planned for
     projects FAA regards as the next highest priority, primarily
     adding airport capacity.  Other projects FAA considers to be
     lower in priority, such as bringing airports up to FAA's design
     standards, add another $3.3 billion per year.  Finally, airports
     anticipated spending another $3.9 billion per year on projects
     that are not eligible for Airport Improvement Program funding,
     such as expanding commercial space in terminals and constructing
     parking garages. 

  -- Several proposals to increase or make better use of existing
     funding have emerged in recent years, including increasing the
     amount of Airport Improvement Program funding and raising the
     maximum amount airports can levy in passenger facility charges. 
     Under current formulas, increasing the amount of Airport
     Improvement Program funding would help small airports more than
     larger airports, while raising passenger facility charges would
     help larger airports more.  Other initiatives for making better
     use of existing funding, such as Airport Improvement Program
     block grants to states, have had varied success, but none
     appears to offer a major breakthrough in reducing the shortfall
     between funding and airports' plans for development. 


--------------------
\1 Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998).  This report was based on airport
funding in 1996, the most recent year for which we have conducted an
analysis. 

\2 Passenger facility charges are fees paid by passengers to an
airport.  Airports may currently impose a fee of $1, $2, or $3 per
flight segment, up to a maximum of four segments per round trip to
finance eligible airport-related projects, subject to FAA's approval. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Airports are a linchpin in the nation's air transportation system. 
Adequate and predictable funding is needed for airport development. 
The National Civil Aviation Review Commissionï¿½established by Congress
to determine how to fund U.S.  civil aviation--reported in December
1997 that more funding is needed to develop the national airport
system's capacity, preserve small airports' infrastructure, and fund
new safety and security initiatives.\3 Funding is also needed to
mitigate the noise and other negative environmental effects of
airports on nearby communities. 

Airports provide important economic benefits to the nation and their
communities.  Air transportation accounted for $63.2 billion, or 0.8
percent, of U.S.  Gross Domestic Product in 1996, according to the
Department of Transportation's statistics.  1.6 million people are
employed at airports in 1998, according to the Airports Council
International-North America.  In our own study of airport
privatization in 1996, we found that the 69 largest U.S.  airports
had 766,500 employees (686,000 private and 80,500 public
employees).\4


--------------------
\3 <>Avoiding Aviation Gridlock and Reducing the Accident Rate:  A
Consensus for Change, National Civil Aviation Review Commission (Dec. 
1997). 

\4 Airport Privatization:  Issues Related to the Sale or Lease of
U.S.  Commercial Airports (GAO/RCED-97-3, Nov.  7, 1996). 


   FUNDING SOURCES VARY DEPENDING
   ON AIRPORTS' SIZE
---------------------------------------------------------- Chapter 0:2

In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and
passenger facility charges (PFC) together 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 Funding for Airports

                         (Dollars in billions)

                                Percenta
                          1996     ge of  Source
Funding source          amount     total  of funds
--------------------  --------  --------  ----------------------------
Tax-exempt bonds      $3.690\a        53  State and local governments
                                           or airport authorities
                                           issue tax-exempt bonds.
Airport Improvement     $1.372        20  The Congress makes funds
 Program (AIP)                             available 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 1       6 F  unds come from passenger
 charges                                   fees of $1, $2, or $3 per
                                           trip segment at commercial
                                           airports, up to a maximum
                                           of four trip segments per
                                           round trip.
Special facility         $.414         6  Issued on the behalf of
 bonds                                     beneficiaries other than
                                           airports, such as airlines.
State contributions    $.285\b         4  Funds come from such sources
                                           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        $.153\c         2  Funds are generated from (1)
                                           revenues derived from the
                                           operation and landing of
                                           aircraft, passengers, or
                                           freight and (2) revenues
                                           derived from concessions
                                           and leases.
======================================================================
Total                   $7.028     100\d
----------------------------------------------------------------------
\a Net of refinancing. 

\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 debt service (principal and interest payments). 

\d May not total 100 due to rounding. 

The amount and type of funding varies with airports' size.  The
nation's 71 largest airports (classified by FAA as large hubs and
medium hubs), which accounted for almost 90 percent of all passenger
traffic, received more than $5.5 billion in funding in 1996, while
the 3,233 other national system airports received about $1.5 billion. 
As shown in figure 1, large and medium hub airports rely most heavily
on private airport bonds, which account for roughly 62 percent of
their total funding.  By contrast, the 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.)


   FUNDING LEVELS FALL SHORT OF
   PLANS FOR DEVELOPMENT
---------------------------------------------------------- Chapter 0:3

Airports' planned capital development over the period 1997 through
2001 may cost as much as $10 billion per year, or $3 billion more per
year than in 1996.  Figure 2 compares airports' total funding for
capital development in 1996 with their annual planned spending for
development.  Funding for 1996, the bar on the left, is shown by
source (AIP, PFCs, state grants, and operating revenues).  Planned
spending for future years, the bar on the right, is shown by the
relative priority FAA has assigned to the projects, as follows:\5

  -- Reconstruction and mandated projects, FAA's highest priorities,
     total $1.4 billion per year and are for projects to maintain
     existing infrastructure (reconstruction) or to meet federal
     mandates, including safety, security, and environmental
     requirements, including noise mitigation requirements.\6

  -- Other high-priority projects, primarily adding capacity, account
     for another $1.4 billion per year.

  -- Other AIP-eligible projects, a lower priority for FAA, such as
     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 spending another $3.9 billion per
     year on projects that are not eligible for AIP funding, such as
     expanding commercial space in terminals and constructing parking
     garages. 

   Figure 2:  1996 Funding
   Compared With Planned Annual
   Development Costs

   (See figure in printed
   edition.)

Within this overall picture of funding and planned spending for
development, it is difficult to develop accurate estimates of the
extent to which AIP-eligible projects are deferred or canceled
because some form of funding cannot be found for them.  FAA does not
maintain information on whether eligible projects that do not receive
AIP funding are funded from other sources, deferred, or canceled.  We
were not successful in developing an estimate from other information
sources, mainly because comprehensive data are not kept on the uses
to which airport and special facility bonds are put.  But even if the
entire bond financing available to smaller airports were spent on
AIP-eligible projects, these airports would have, at a minimum, about
$945 million a year in AIP-eligible projects that are not funded. 
Conversely, if none of the financing from bonds were applied to
AIP-eligible projects, then the full $3 billion funding shortfall
would apply to these projects. 


--------------------
\5 Estimates of planned development costs are based on our report
entitled Airport Development Needs:  Estimating Future Costs
(GAO/RCED-97-99, Apr.  7, 1997).  As that report noted, estimating
future development is fraught with complications.  Unanticipated
needs and political and financial feasibility affect actual airport
development, and the estimates themselves are subject to problems
with data accuracy. 

\6 These estimates of planned development costs generally do not
include the costs of maintaining the nation's airport runways in good
condition beyond the next few years.  We recently reported that the
cost of maintaining just one-third of these runways could reach $1.38
billion over 10 years.  See Airfield Pavement:  Keeping Nation's
Runways in Good Condition Could Require Substantially Higher Spending
(GAO/RCED-98-226 Jul.  31, 1998). 


      FUNDING DIFFERENCE AT
      SMALLER AIRPORTS IS MORE
      SIGNIFICANT THAN AT LARGER
      AIRPORTS
-------------------------------------------------------- Chapter 0:3.1

The difference between current and planned funding for development is
bigger, in percentage terms, for smaller airports than for larger
ones.  Funding for the 3,233 smaller airports in 1996 was a little
over half of the estimated cost of their planned development,
producing a difference of about $1.4 billion (see fig.  3).  This
difference would 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
funding exceeds the annual estimate of $750 million for FAA's
highest-priority projectsï¿½those involving reconstruction, noise
mitigation, and compliance with federal mandates.  However, there is
no guarantee that the full amount of AIP funding will go only to the
highest-priority projects, because one-third of AIP funds are awarded
to airports on the basis of the number of passengers boarding
commercial flights and not necessarily on the basis of projects'
priority. 

   Figure 3:  1996 Funding
   Compared to Annual Planned
   Development Costs for Smaller
   Airports

   (See figure in printed
   edition.)

As a proportion of total funding, the potential funding difference
between 1996 funding and planned development for the 71 large and
medium hub airports is comparatively less than for their smaller
counterparts (see fig.  3 and fig.  4).  Larger airports potential
shortfall of $1.5 billion represents 21 percent of their planned
development costs, while smaller airports' potential shortfall of
$1.4 billion represents 48 percent of their development costs. 
Therefore, while larger and smaller airports' respective shortfalls
are similar in size, the greater scale of larger airports' planned
development causes them to differ considerably in proportion.  Figure
4 also indicates that $590 million in AIP funding falls $74 million
short of the estimated cost to meet FAA's highest priorities for
development--reconstruction, noise mitigation, and compliance with
federal mandates. 

   Figure 4:  1996 Funding
   Compared to Annual Planned
   Development Costs for Large and
   Medium Hub Airports

   (See figure in printed
   edition.)


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


   EFFECT OF PROPOSALS TO INCREASE
   AND BETTER USE AIRPORT FUNDING
   IS MIXED
---------------------------------------------------------- Chapter 0:4

Proposals to increase airport funding or make better use of existing
funding vary in the extent to which they would help different types
of airports and close the gap between funding and the costs of
planned development.  For example, increasing AIP funding would help
smaller airports more because current funding formulas would channel
an increasing proportion of AIP to smaller airports.  Conversely, any
increase in PFC funding would help larger airports almost exclusively
because they handle more passengers and are more likely to have a PFC
in place.  Changes to the current design of AIP or PFCs could,
however, lessen the concentration of benefits to one group of
airports.  FAA has also used other mechanisms to better use and
extend existing funding sources, such as letters of intent, state
block grants, and pilot projects to test innovative financing.  So
far, these mechanisms have had mixed success. 


      INCREASING AIP WOULD HELP
      SMALLER AIRPORTS MOST
-------------------------------------------------------- Chapter 0:4.1

Under the existing distribution formula, increasing total AIP funding
would proportionately help smaller airports more than large and
medium hub airports.  Appropriated AIP funding for fiscal year 1998
was $1.7 billion; large and medium hub airports received nearly 40
percent and all other airports about 60 percent of the total.\7 We
calculated how much funding each group would receive under the
existing formula, at funding levels of $2 billion and $2.347 billion. 
We chose these funding levels because 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,
while two airport trade groupsï¿½the American Association of Airport
Executives and the Airports Council International-North Americaï¿½have
recommended a higher funding level, such as AIP's authorized funding
level of $2.347 billion for fiscal year 1998.  Table 2 shows the
results.  As indicated, smaller airports' share of AIP would increase
under higher funding levels if the current distribution formula were
used to apportion the additional funds. 



                                Table 2
                
                 Estimated Distribution of AIP Funds at
                        Different Funding Levels

                         (Dollars in millions)

                                                      Small, nonhub,
                                                     other commercial
                                 Large and medium      service, and
                                  hub airports\a    general aviation\a
                                ------------------  ------------------
                                          Percenta            Percenta
AIP funding                                  ge of               ge of
level                           Amount\b     total  Amount\b     total
------------------------------  --------  --------  --------  --------
$1,700.0                          $628.9      39.4    $965.8      60.6
$2,000.0                          $718.1      37.9  $1,176.7      62.1
$2,347.0                          $821.2      36.6  $1,420.6      63.4
----------------------------------------------------------------------
\a Dollar amounts are based on the number of passengers boarding
commercial flights in 1996 and exclude about $105.2 million in
estimated carryover amounts. 

\b The distribution of funds 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. 


--------------------
\7 Fiscal year 1999 AIP funding is $1.95 billion, though AIP is
authorized only through Mar.  31, 1999, and, therefore, not more than
$975 million may be obligated until AIP is further extended.  (Title
I, section 101(g) of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 (P.L.  105-277, Oct.  21,
1998)). 


      INCREASING PFC-BASED FUNDING
      WOULD AID LARGER AIRPORTS
-------------------------------------------------------- Chapter 0:4.2

Increasing PFC-based funding, as proposed by the Department of
Transportation and backed by airport groups, would mainly help larger
airports, for several reasons.  First, large and medium hub airports,
which accounted for nearly 90 percent of all passengers in 1996, have
the greatest opportunity to levy PFCs.  Second, such airports are
more likely than smaller airports to have an approved PFC in place.\8

Finally, large and medium hub airports would forego little AIP
funding if the PFC ceiling were raised or eliminated.  Most of these
airports already return the maximum amount that must be turned back
for redistribution to smaller airports in exchange for the
opportunity to levy PFCs.\9

If the airports currently charging PFCs were permitted to increase
them beyond the current $3 ceiling, total collections would increase
from the $1.35 billion that FAA estimates was collected during 1998. 
Most of the additional collections would go to larger airports.  For
every $1 increase in the PFC ceiling, we estimate that large and
medium hub airports would collect an additional $432 million, while
smaller airports would collect an additional $46 million (see fig. 
5).  In total, a $4 PFC ceiling would yield $1.9 billion, a $5 PFC
would yield $2.4 billion, and a $6 PFC would yield $2.8 billion in
total estimated collections.\10

   Figure 5:  Projected PFC
   Collections Under $3, $4, $5,
   and $6 PFC Ceilings, January
   1999

   (See figure in printed
   edition.)

Increased PFC funding is likely to be applied to different types of
projects than would increased AIP funding.  Most AIP funding is
applied to ï¿½airsideï¿½ projects like runways and taxiways.  ï¿½Landsideï¿½
projects, such as terminals and access roads, are lower on the AIP
priority list.  However, for some airports, congestion may be more
severe at terminals and on access roads than on airfields, according
to airport groups.\11

The majority of PFCs are currently dedicated to terminal and airport
access projects and interest payments on debt, and any additional
revenue from an increase in PFCs may follow suit. 


--------------------
\8 As of Oct.  1, 1998, 273 commercial service airportsï¿½about 52
percent of eligible airports--imposed a PFC, but 80 percent of all
large and medium hub airports had a PFC. 

\9 49 U.S.C.  ï¿½47114(f) requires that the yearly grants to large and
medium hub airports be reduced by 50 percent of their annual
collections or 50 percent of their annual apportionment, whichever is
less.  The foregone grants are redistributed as discretionary grants,
primarily to smaller airports.  Through fiscal year 1998, $921
million in AIP funding had been redistributed under this provision,
$806 million of it to smaller airports. 

\10 Estimates are based on PFCs in place as of Oct.  1, 1998, 1997
passenger boardings, and median collection rates for each airport
category in 1997.  We are currently studying the effects of a PFC
increase and plan to report our results later this year. 

\11 FAA measures airfield congestion and delays but does not gather
information on congestion on access roads or in terminals. 


      FAA'S EFFORTS TO MAKE BETTER
      USE OF EXISTING AIP GRANTS
      HAVE HAD MIXED RESULTS
-------------------------------------------------------- Chapter 0:4.3

In recent years, the Congress has directed FAA to undertake other
steps designed to allow airports to make better use of existing AIP
funds.  Thus far, some of these efforts, such as letters of intent
and state block grants, have been successful.  Others, such as pilot
projects to test innovative financing and privatization, have
received less interest from airports and are still being tested. 
Finally, one idea, using AIP grants to capitalize state revolving
loan funds, has not been attempted but could help small airports. 
Implementing this idea would require legislative changes. 


         LETTERS OF INTENT ARE AN
         IMPORTANT SOURCE OF
         FUNDING FOR LARGER
         AIRPORTS
------------------------------------------------------ Chapter 0:4.3.1

Letters of intent are an important source of long-term funding for
airport capacity projects, especially for larger airports.  These
letters represent a nonbinding commitment from FAA to provide
multiyear funding to airports beyond the current AIP authorization
period.  Thus, the letters allow airports to proceed with projects
without waiting for future AIP grants and provide assurance that
allowable costs will be reimbursed.  Airports may also be able to
receive more favorable interest rates on bonds that are sold to
finance a project if the federal government has indicated its support
for the project in a letter of intent.  For a period, FAA stopped
issuing letters of intent, but since January 1997, it has issued 10
letters with a total funding commitment of $717.5 million. 
Currently, FAA has 28 open letters committing a total of $1.180
billion through 2010.\12 Letters of intent for large and medium
airports account for $1.057 billion, or 90 percent, of that total. 
Airports' demand for the letters continuesï¿½FAA expects at least 10
airports to apply for new letters of intent in fiscal year 1999. 


--------------------
\12 Airport Improvement Program:  Planned Funding Under Letters of
Intent (GAO/RCED-99-33R) Dec.  9, 1998. 


         STATE BLOCK GRANT PROGRAM
         HAS HELPED SMALLER
         AIRPORTS
------------------------------------------------------ Chapter 0:4.3.2

In 1996, we testified before this Subcommittee that FAA's state block
grant pilot program was a success.\13 The program allows FAA to award
AIP funds in the form of block grants to designated states, that, in
turn, select and fund AIP projects at small airports.  States then
decide how to distribute these funds to small airports.  In 1996, the
program was expanded from seven to nine states and made permanent. 
Both FAA and the participating states believe that they are
benefiting from the program. 


--------------------
\13 Airport Improvement Program:  State Block Grant Pilot Program Is
a Success (GAO/RCED-96-86) Mar.  14, 1996. 


         BENEFITS OF INNOVATIVE
         FINANCING ARE BEING
         TESTED
------------------------------------------------------ Chapter 0:4.3.3

In recent years, FAA, with congressional urging and direction, has
sought to expand airports' available capital funding through more
innovative methods, including the more flexible application of AIP
funding and efforts to attract more private capital.  The 1996
Federal Aviation Reauthorization Act gave FAA the authority to test
three new uses for AIP funding--(1) projects with greater percentages
of local matching funds, (2) interest costs on debt, and (3) bond
insurance.  In all, these three innovative uses could be tested on up
to 10 projects.\14

Another innovative financing mechanism that we've recommended--using
AIP funding to help capitalize state airport revolving fundsï¿½while
not currently permitted, may hold some promise.\15

FAA is testing 10 innovative uses of AIP funding totaling $24.16
million, all at smaller airports.  Five projects tested the benefits
of the first innovative use of AIP funding--allowing local
contributions in excess of standard matching amount, which for most
airports and projects is otherwise fixed at 10 percent of the AIP
grant.\16

FAA and state aviation representatives generally support the concept
of flexible matching because it allows projects to begin that
otherwise might be postponed for lack of sufficient FAA funding; in
addition, flexible funding may ultimately increase funding to
airports.  The latter five projects test the other two mechanisms for
innovative financing.  Applicants have generally shown less interest
in the latter two options, which, according to FAA officials, warrant
further study. 


--------------------
\14 Section 148 of the Federal Aviation Reauthorization Act of 1996
(P.L.  104-264). 

\15 Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998). 

\16 There are three exceptions to the 10-percent local matching
requirement, each of which entails a higher local contribution: 
terminal development (25 percent), airport planning and development
for large and medium hub airports (25 percent), and noise
compatibility programs for large and medium hub airports (20
percent). 


         STATE REVOLVING LOAN
         FUNDS COULD EXTEND THE
         USE OF AIP GRANTS FOR
         SMALLER AIRPORTS
------------------------------------------------------ Chapter 0:4.3.4

Some federal transportation, state aviation, and airport bond rating
and underwriting officials believe using AIP funding to capitalize
state revolving loan funds would help smaller airports obtain
additional financing.  Currently, FAA cannot use AIP funds for this
purpose because AIP construction grants can go only to designated
airports and projects.  However, state revolving loan funds have been
successfully employed to finance other types of infrastructure
projects, such as wastewater projects and, more recently, drinking
water and surface transportation projects.\17

While loan funds can be structured in various ways, 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, a loan fund can be expanded
through the issuance of bonds that use the fund's 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. 


--------------------
\17 Florida has an established revolving loan program.  Between 1985
and 1998, 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, the Virginia legislature
is considering establishing a state airport revolving fund.  In
total, 39 states have established state infrastructure banks using
federal and state grant money to fund surface transportation
projects.  This same arrangement could be used if authorized by the
state to fund aviation projects, and at least one state--Ohio--has
already authorized its state infrastructure bank to fund aviation
projects with state funds. 


         INTEREST IN AIRPORT
         PRIVATIZATION PILOT
         PROGRAM IS LIMITED
------------------------------------------------------ Chapter 0:4.3.5

Declining airport grants and broader government privatization efforts
spurred interest in airport privatization as another innovative means
of bringing 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.\18

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.\19

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.\20


--------------------
\18 Airport Privatization:  Issues Related to the Sale or Lease of
U.S.  Commercial Airports (GAO/RCED-97-3, Nov.  7, 1996). 

\19 Section 149 of the Federal Aviation Reauthorization Act of 1996
(P.L.  104-264). 

\20 These airports are Brown Field near San Diego, a general aviation
airport, and Stewart International in New York, a nonhub airport,
which has submitted its final application. 


-------------------------------------------------------- Chapter 0:4.4

Mr.  Chairman, this concludes our prepared statement.  We would be
happy to respond to any questions that you or Members of the
Subcommittee may have. 


*** End of document. ***