S. HRo. 104-629 

# AIRPORT REVENUE DIVERSION

HEARING

BEFORE THE 

# SUBCOMMITTEE ON AVIATION OF THE 

# COMMITTEE ON COMMERCE, 

# SCIENCE, AND TRANSPORTATION UNITED STATES SENATE
ONE HUNDRED FOURTH CONGRESS

SECOND SESSION

MAY 1, 1996

Printed for the use of the Committee on Commerce, Science, and Transportation

25-859 CC U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1996

For salebydie U.S. Government Printing Office Superintendent ofDocuments, Congressional SalesOffice, Washington. DC 20402 ISBN 0-16-053837-8SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

LARRY PRESSLER, South Dakota, Chairman TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina JOHN MCCAIN, Arizona DANIEL K. INOUYE, Hawaii CONRAD BURNS, Montana WENDELL H. FORD, Kentucky SLADE GORTON, Washington J. JAMES EXON, Nebraska TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West Virginia KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota SPENCER ABRAHAM, Michigan RON WYDEN, Oregon PAic G. LINK, ChiefofStaff KEVIN G. CuirFIN, DemocraticChiefCounseland StaffDirector

SUBCOMMITTEE ON AVIATION JOHN McCAIN, LARRY PRESSLER, South Dakota TED STEVENS, Alaska SLADE GORTON, Washington CONRAD BURNS, Montana TRENT LOTT, Mississippi KAY BAILEY HUTCHISON, Texas JOHN ASHCROFT, Missouri BILL FRIST, Tennessee ARIZONA, Chairman WENDELL H. FORD, Kentucky ERNEST F. HOLLINGS, South Carolina J.JAMES EXON, Nebraska DANIEL K. INOUYE, Hawaii RICHARD H. BRYAN, Nevada JOHN D. ROCKEFELLER IV, West Virginia JOHN B. BREAUX, Louisiana BYRON L. DORGAN, North Dakota

## CONTENTS

Page Hearning held on May 1, 1996

................................................................................. 1 Opening statement ofSenator McCain

.................................................................. 1 Prepared statement .......................................................................................... 3 Concluding remarks

....................................................................................... 81 Statement ofSenator Pressler

............................................................................. 3 Prepared statem ent .......................................................................................... 4 Statement ofSenator Ford

...................................................................................... 5 Statement of Senator Burns
................................................................................... 34 Statement of Senator Gorton
.................................................................................. 37
LIsT OF WrrNESSES Frassett, James Service Coordinator, Demaria Electric, 311 West D Street,

Wilmington, dalifornia 92647 (on behalfofCitizens for a Strong LAX) ......... 7i

Prepared statement

............................................. 74 Garaufis, Nicholas G., ChiefCounsel, Federal Aviation Administration

............ 26 McFadden, Nancy E., General Counsel, Department ofTransportation; accom-

panied by Nicholas G. Garaufis, Chief Counsel, and David Bennett, Director, Office ofAirport Safety and Standards, Federal Aviation Administration

........................................................................................................................ 21

Prepared statement .......................................................................................... 23 Merlis, Edward A., Senior Vice President, Federal Affairs and Airports, Air

Transport Association ofAmerica

....................................................................... 46

Prepared statement .......................................................................................... 48 Schiavo, A. Mary, Inspector General; accompanied by Lawrence H. Weintrob,

Deputy Assistant Inspector General, Auditing, and Todd J. Zinser, Assistant Inspector General, Investigations, Department ofTransportation
........... 6

Prepared statem ent .......................................................................................... 10

APPENDIX Questions Asked by SenatorPressler %nd Answers Thereto by: Nancy McFadden

.............................................................................................. 83 Edward A

. Merlis
............................................................................................. 84 MarySchiavo

.................................................................................................... 85 Other Material Submitted for the HearingRecord Follows: Statement of the Airports Council International, North America (ACINA)

................................................................................................................ . 86 Statement ofDaniel P. Garcia and John J. Driscoll, City ofLos Angeles

Department ofAirports
................................................................................ 101 Statement ofthe Port Authority ofNew York and New Jersey

................... 167 [NOTE: Other material submitted for the record will be retained in 

### committee fides.)

(1I1)

## HEARING ON AIRPORT REVENUE DIVERSION

WEDNESDAY, MAY 1, 1996

U.S. SENATE, SUBCOMMITTEE ON AVIATIoN COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

## Washington,DC. The subcommittee met, pursuant to notice, at 2:35 p.m., in room SR-253, Russell Senate Office Building, Hon. John McCain, chairman ofthe subcommittee, presiding. Staffmembers assigned to this hearing: Mike Reynolds, counsel; Michael Korens, counsel; and Samuel E. Whitehorn, minority senior counsel.

OPENING STATEMENT OFHON.JOHNMCCAIN,U.S. SENATOR FROMARIZONA Senator MCCAIN. Good afternoon. 

## Today we will examine the serious and unfortunately persistent problem of airport revenue diversion. I think it is important to remind everyone that the Senate Commerce Committee, and this Subcommittee in particular, have direct oversight for matters involving the Nation's airports, including airport funding issues. Because airports are meant to be self-sustaining and because it is intended that Federal grant money to airports must be used for airport purposes, Congress has had a longstanding policy that diversion ofairport revenues to local governments or non-airport purposes is illegal. I want to thank our witnesses, Mary Schiavo, the Inspector General of the Department of Transportation; Nancy McFadden, the General Counsel at the Department of Transportation; Nicholas Garaufis, the ChiefCounsel at the FAA; EdMerlis, the Senior Vice President of the Air Transportation Association; and James Frassett, who is here on behalf of Citizens for a Strong LAX, for participating in the hearing today. I look forward to hearing your testimony and discussingyour recommendations for addressing the revenue diversion dilemma. The current disturbing trend ofunlawful airport revenue diversion must stop. Recent audits conducted by the Inspector General's Office ofthe Department ofTransportation, finding more than $170 million in revenue diversion from 1992 to 1995, have revealed that fartoo many local governments are attempting to solve their fiscal problems by taking money away from their airports and using it for non-airport purposes. Significantly, it appears that when airports answer to a political body, some revenue diversion generally occurs. When cities or coun-

### ties control airports, then politics on all levels play a major role in 

## encouragingrevenue diversion.

The Inspector General audit shows that many city and county governments blatantly disregard Federal law that prohibits airport revenue diversion topay for city services on the backs ofair travelers.

For example, airport revenue-that is, money that air carriers, the traveling public and others pay when using airport facilitieshas been wrongfully used to sponsor an Orange Bowl party, cosponsor local golftournaments, purchase tickets for State legislators to attend the Orange Bowl and a Miami Dolphins game, support local softball teams, fund floats for the Tournament ofRoses Parade, acquire land not needed for airport purposes, pay for highway projects that do not facilitate access to an airport, construct an activity center and develop a community park not related to an airport, and reimburse lobbyist fees for work on issues contrary to the airport's interest. Icould go on,but Ithink it isclear that itis time to address this situation. I would also like to thank Congressman Bill Clinger, the esteemed chairman of the House Government Reform and Oversight Committee for bringingto the Inspector General's attention the situation involving the possible diversion ofrevenues at Los Angeles Airport, relating to the disposition ofproceeds from the condemnation ofland needed to build the New Century Freeway. Because of Congressman Clinger's effort, the Inspector General released an importantreport today on that issue. The results of the Inspector General's various audits and other recent flagrant attempts to divert airport revenue, particularly those involving the city ofLos Angeles and Los Angeles Airport, indicate that it may be time to seriously consider further legislative solutions to this problem. I would like to note that we invited the Mayor ofLos Angeles, the Executive Director of the Los Angeles Department ofAirports, Mr. John Driscoll, and the President ofthe Los Angeles Board ofAirport Commissioners, Mr. Daniel Garcia, to testify today, but they declined to testify at any time before the committee onthis issue.

Today we will look at the seemingly ongoing revenue diversion problems involving the city ofLos Angeles and Los Angeles Airport. We also will fully examine the Department ofTransportation's and FAA's efforts to enforce the laws prohibiting airport revenue diversion and the way that politics seems to be taking precedence over good public policy. In addition, we will evaluate the rationale for grandfathering certain airports, thereby allowing them to legally divert airport revenue. We also will address the significant cost to air carriers and the traveling public ofillegal airport revenue diversion. Finally, I hope we will discuss what can and should be done to eliminate once and for all airport revenue diversion. With that, I would like to turn to the distinguished Chairman of the full committee, Senator Pressler. [Prepared statement ofSenator McCain follows:]STATEMENT OF SENATOR MCCAIN Good afternoon. Today, we will examine the serious and,unfortunately, persistent problem ofairport revenue diversion. I think it's important to remind everyone that the Senate Commerce Committee and this Subcommittee in particular, have direct oversight for matters involving the nation's airrts, including airport funding is. sues. Because airports are meant to be self-sustaining, and because it is intended that federal grant money to airports must be used for airport purposes, Congress has had a long-standing policy that diversion of airport revenues to local governments fornon-airportpurposes is illegal.

I want to thank our witnesses, Ma Schiavo the Inspector General of the Department ofTransportation; Nancy McFadden, the General Counsel at DOT; Nicholas Garaufis, the Chief Counsel at the FAA; Ed Merlis, Senior Vice President of theAir Transport Association; andJames Frassett, who is here on behalfofCitizens for a Strong LAX, for participating in the hearing today. I look forward to hearing yourtestimony and discussing your recommendations for addressing the revenue diversion dilemma.

The current, disturbingtrend ofunlawful airport revenue diversion must stop. Recent audits, conducted by the Inspector General's office of DOT finding more than $170 million in revenue diversion from 1992-1995, have revealed that far too many local governments are attempting to solve their fiscal problems by taking money away from their airports and using it for non-airport purposes. Significantly, it appears that when airports answer to a political body, some revenue diversion generally occurs. When cities or counties cool airports, then politics on all levels play a major role In encouraging revenue diversion. The IG audits show that many city and county governments blatantly disregard federal law that prohibits airport reve- nue diversion, to pay forcity services on the backs ofairtravelers.

Forexample, airportrevenue (thatis, money that air carriers, the traveling public, and others pay when using airport facilities) has been wrongfully used to spon- sor an Orange Bowl party, co-sponsor local golf tournaments, purchase tickets for State legislators to attend the Orang Bowl and a Miami Dolphins game, support local softball teams, fund floats for the Tournament of Roses parade, acquire land not needed for airport purposes, pay for highway projects that don't facilitate access toan airport, construct an activitycenter and develop a community park notrelated to an airport, and reimburse lob yist fees for work on issues contrary to the airport's interest. I could go on, but I think it's clear that it'stime to address this situation.

I would also like to thank my friend Congressman Bill Clinger (R-PA), the es- teemed Chairman ofthe House Government Reform and Oversight Committee for bringing to the Inspector General's attention the situation involving the possible diversion of revenues at LAX relating to the disposition of proceeds from the con- demnation ofland needed to build the new Century Freeway. Because of Chairman Clinger's efforts the IG will release an important report today on that issue.

The results o?the IG's various audits and other recent flagrant attempts todivert airport revenue, particularly those involving the City ofLos Angeles and LAX, Indicate that it may be time to seriously consider further legislative solutions to this problem. (I would like to note that we invited L.A. Mayor Richard Riordan, the Executive Director ofthe L.A. Department ofAirports John Driscoll, and the President ofthe L.A. Board ofAirport Commissioners Daniel Garcia to testify today, but they declined to testif at any time before the Committee on this issue.) inToday, we wil look at the seemingly ongoing revenue diversionproblems Involvg the City ofLos Angeles and LAX. We will also fully examine OT's and FAA's efforts to enforce the laws prohibiting airport revenue diversion, and the way that politics seems to be taking precedence over good public policy. In addition, we will evaluate the rationale for grandfathering" certain airports, thereby allowing them to "legally" divert airport revenue. We will also address the significant cost to air carriers and the traveling public ofillegal airport revenue diversion. Finally, I hope we will discuss what can and should be done to eliminate, once-and-for-all, airport revenue diversion.

STATEMENT OF HON. LARRY PRESSLER, U.S. SENATOR FROM SOUTH DAKOTA 

### The CHAIRMAN. Mr. Chairman, I shall put my full statement in the record, because I want to yield to you and the distinguished ranking member. But let me say I agree with everything you have said. I think that we are already short ofAIP funds, and we are

### trying very, very hard to meet the requirements ofairports. Ifthe funds weprovide are being diverted, they should not be. In particu- lar, this is important in smaller-city America. I represent a smaller-city State, where we have especially difficult problems in our AIP funding. If some airports are receiving AIP funds but truly do not need them for airortprojects, I know of several airports in my State, such as the Aberdeen Regional Airport, that could putthat money to very good airport-related use. I am deeply troubled that while small airports are struggling due to insufficient airport funding other airports are collecting AIP funds under false pretenses and using them for non-airport-related local pro ects. Mr. Chairman, thank you again for holding this important hearing. I look forward to hearing from our witnesses, because this is a problem that affects my State a great deal. Our small-city airports are short ofAIP funds. As far as I know, they are all using them very carefully for airport functions, and we want to know if they are not. But violations ofa law cannot be tolerated. The intent ofCongress should be strictly enforced. I remember years ago in law school the words "intent of Congress." That is what the agencies are supposed to follow. I do not see it done too often. But the intent ofCongress is that the airport improvement program funds are supposed to be used for airports, and that is what we are to find out about here today.

Thank you, Mr. Chairman. [The prepared statement ofSenator Pressler follows:]

STATEMENT OFSENATOR PRESSLER Thank you, Mr. Chairman. I am pleased to participate in today's hearing regard. ing the troubling issue of airport revenue diversion. I have long been very concerned with the integrity ofthis country's airport grant program. Illegal diversion ofairport revenues represents a potential threat tothat integrity.

In 1982, Congress first established a prohibition against airport revenue diversion for any airport receiving federal grants under the Airport Improvement Program (AIP). This prohibition was designed to revent airports from overchargino their users and diverting the surpluses to unrelated local programs. The bar against diversion also was imposed to ensure federal funds remained at airports. Because money is extremely fungible, an airport could receive an AIP grant for a specific project and then simply divert that or a like amount of other money for a non-airport related project. Simply put, the prohibition on revenue diversion was intended by Congress to ensureA money is truly used for airport improvement.

Since 1982, Congress has reaffirmed this prohibition on airport revenue diversion. In fact, we have taken additional stepsto ensure airport revenue and federal grants are used for their intended purposes.

At the same time most airport revenue diversion became illegal, Congress made an exception for those airports already diverting funds because-of local laws. This grandfatherprovision applies to about eight airports in the country.

Iknow the Inspector General ofthe Department ofTransportation (DOT) who is here to testify today, has performed numerous audits of airports over the last few years.

It is my understanding the Inspector General has found diversion ofrevenue at a disturbing number ofthe audited airports. I will be interested to hear more about the breadth and scope ofthese cases.I also will be interested in hearing from the DOT and Federal Aviation Administration (FAA), which are charged with enforcing the revenue diversion prohibition.

As the availability ofAIP funding continues to decline, it is imperative that re- maining AIP funds are used to improve our airport infrastructure. Violations ofthe law cannot be tolerated. The intent of Congress should be strictly enforced. Although many municipalities are experiencing budgetary difficulties, this is no ex- cuse forviolating the law and frustrating the national commitment to the airtransportation system.As aSenator from a state whose small, non-hub airports already suffer as a result ofthe unfair division ofALP funding between large and small airports I am very concerned that AlP funds are not being used solely for the purpose congress intended they be used. Lack of adequate AlP fundingfor small airports is a very seri- ous problem in small communities across America. In 1983, small airports such as those in my home state ofSouth Dakota, received 40 percent ofthe AIP funds. In 1991, the small airports' share had gone down to 31 percent. In 1996, it plummeted to 21 percent ofthe total.

If some airports are receiving ALP funds but truly do not need them for airport projects, Iknow of several airports in South Dakota-such as theAberdeen Regional Airport-that could put that money to very good airport-related use. I am deeply troubled that while small airports are struggng due toinsufficient airport funding, other airports are collecting ALP funds under false pretenses and using them for non-airport related localprojects.

Mr. Chairman, thank you again forholding this important hearing. Ilook forward tohearing fromourwitnesses today. 

## Senator McCAIN. Senator Ford. STATEMENT OFHON. WENDELL H.FORD, U.S. SENATOR FROM 

## KENTUCKY Senator FORD. Thank you, Mr. Chairman. 

## Once again, we are confronted with the issue ofrevenue diversion and, in particular, the attempts by the city ofLos Angeles to use airport revenues to pay for city services. Under the existing Federal aviation laws, airports are supposed to be self-sufficient to the maximum extent possible. In addition, they are authorized to charge reasonable fees to use the airports. All funds generated from the facility must be used to support the airport.

When we created the airport grant program, it was decided that if we are going to provide Federal funds, moneys collected from landing fees and other sources should be used to build and expand the facilities. We did not want to give Federal grants to airports and then have those airports write checks to pay for non-airport services. For the most part, and at almost every airport in the country, the systemhas worked and ithas worked well.

We are reexamining airport fundingneeds this year. I know that the airports estimate thatthey will need about $10 billion peryear for expansion. PFC's and AIPfunding iscritical to growing our system. Airports and airlines need to be able to work together-let me underscore that-need to be able to work together on development issues. Revenue diversion can eliminate that ability. I saw it firsthand in 1994, during the contentious fight over the 1994 FAA reauthorization. I do notwant to revisit those issues this year, but recognize we may be forced to because of the actions of one airport. In 1993, the report accompanying S. 1491, the FAA Reauthorization Act, stated and I quote, "The committee is aware that the city ofLos Angeles has announced its desire to divert revenues derived from the airport foruse downtown. Additionally, the committee understands that Los Angeles may intend to lock out air carriers. Such a lock out would constitute a major interference with the free flow ofcommerce." Los Angeles also had decided to change its method ofcalculating landingfees. As a result,the fees wentfrom 51 cents to $1.56 cents per thousand pounds ofland weight. LAX later increased the fees

## to $2.06. DOThad ruled twice now thatportions ofthe fee increase were notreasonable.

As part ofthe 1994 FAA reauthorization, we held up all airport grants until May 1994. We passed a short-term reauthorization of the AiP program and froze fees in L.A. I spent many hours on the floor, as my colleagues know, discussing this issue with members, trying to explain that the airport funding program was at risk because ofL.A.'s decisions.

Two years later, we are still forced to focus on L.A. It is regret- table and unfortunate. The entire airport community recognizes that airport revenue diversion is illegal. L.A. continues to make it more difficult for all ofus to work on approaches to airport funding. The city ofLos Angeles, as part ofits budget proposal, wants to use about $60 million in airport-generated revenues to supplement its City's budget.The Cit 4 

## has gone back tothe 1920's-think about this--back to the 1920 s to claim that it did not receive enough money for land from the airport. The City went back and looked at property issues and other payments from 1941 to 1971 to claim that LAX owes the City money-none of which is relevant. L.A. has been extremely creative, however, in attempting to find loopholes. It has not proven productive norhelpful to what we are attempting to do.

I wantto thank the Chairman for holdingthis hearing, and Iwill look forward to the testimony. Hopefully, we can get some answers to some tough questions, Mr.Chairman. Thank you. Senator MCCAIN. Thank you very much, Senator Ford. I appre- 

## ciate your statement, giving a little history for the record ofhow difficult this issue has been for such a long period oftime and how, under your leadership, this subcommittee attempted to address this issue. Ithank you, Senator FORD. 

## Inspector General Mary Schiavo. STATEMENT OF A.MARY SCHIAVO, INSPECTOR GENERAL; ACCOMPANIED BY LAWRENCE H. WEINTROB, DEPUTY ASSIST. ANT INSPECTOR GENERAL, AUDITING, AND TODD J. ZINSER, ASSISTANT INSPECTOR GENERAL, INVESTIGATIONS, DEPARTMENT OFTRANSPORTATION Ms. SCHIAVO. Yes, thank you, Mr. Chairman. With your permis- 

## sion, I will simply submit my entire written statement for the record and Iwill briefly summarize it here. Senator MCCAIN. Good, your complete statement will be made part ofthe record without objection. Ms. SCHIAVO. 

## Tiank you. With me today Ihave Mr. Lawrence Weintrob, who is the Deputy Assistant Inspector General for Auditing, and to my right, Mr. Todd Zinser, who is the Assistant Inspector General for Investiga- tions. As you are aware, from fiscal years 1992 through 1995, my office audited 43 airport sponsors and FAA's oversight of those airport sponsors in the use of airport revenue. Ofthose audits, we found prohibited revenue diversion totaling $171 million at 23 air orts.

y the way, there are over 2,500 airports in this country. So we have audited only a small percentage of airports and have found $171 million atjustthose 23 airports.

## Now, let me explain what that means very briefly. Under the Airport and Airway Improvement Act, airports get their trust fund money, which is paid by the passengers and the airlines, touse for aviation purposes. Why is that? Because aviation is special. Aviation has special safety concerns. Aviation has special needs. Aviation is very different from other forms oftransportation and, by its verynature, aviation is interstate and international.

Mr. Ford was very correct in noting the diversion problems that are encountered now will soon increase interference with the interstate transportation and international transportation ofthis country ifsomethingis not done soon. Now, the law did not want these special user taxes to be looted to pay for non-aviation purposes. The law was very clear, and that is why we did this series ofaudits, because we too were curious as to where the airline ticket tax was going-what the trust fund was being used for. Yet that is exactly what is happening. The funds are beinglooted to payfor city purposes.

Unfortunately, from ourperspective, we have seen that FAA certainly has not done enough to stop revenue diversion. Airport revenue is being used for city politics, mayors offices, dinners, country clubs, lobbyists, lawyers, Rose Bowl Parade floats, and a visit by the Pope, to name only a few. Yet local governments run to the Federal Government to get money from the aviation trust fund to keep the airport going and to make needed airport improvements. Thus, you are robbing the aviation users who pay into the trust fund to pay for those city functions that the city political leaders and the city taxpayers do not have the fortitude to tax and pay for themselves. Airports have become this country's latest cash cow, and the victims are the flying public, once again, and also the airlines who pay additional fees and taxes. Since 1982, it is the FAA that is supposed to ensure that the airports are not looted. They provide the safety oversight. We told the FAA about the diversions as we were issuing our series ofreports. In fact, a congressional committee passed laws ordering the FAA to take action to stop the hemorrhaging ofdivested funds. But still almost nothinghappened report afterreport. In some cases, we were dismayed because the agreement par- roted the lame excuses we heard from the airport sponsors who were diverting the money. To this date, by the way, of the $171 million in diversion, only $4.8, almost $5 million has been repaid. That is itto date. Senator MCCAIN. Any back from Los Angeles? Ms. SCHIAVO. No. 

## Thus, we have had to conclude, unfortunately, that, at least to date the FAA has nothad the necessary fortitude for enforcement on tbis issue. We do not see an end in sight. In fact, we see the floodgates have been opened by many reasons-by FAA inaction, by bizarre non-opinions that have been issued by the Department of Transportation, and by the approval of more and more diversion schemes. Let me run through afew ofthem. In one case as you mentioned, Los Angeles is looking back to 1928 to claim moneys that they allege are owed by the airport tothe City. Letus get a little perspective on 1928. In 1928, Orville Wright signed the Nation's pilots' li-

### censes. There are actually a few of those pilots still living. There
was no FAA. There was no AIP. There was no AAIA. Yet the City is attempting to go back to the 1928 to concoct a reason now to obtain some $350 million they claim the airport owes. Senator FORD. 

### Is that mostly interest? Ms. SCHIAVO. Yes. Senator FORD. 

### Over the many years it is all interest? Ms. SCHIAVO. I think the principal amount they are claiming is somewhere between $5 million andpossibly as high as $30 million, but all the rest is computed interest. An aside on that: Ifind itvery interesting that it has been interpreted that there is no limit on how far you can go back to recoup the supposed city investment, when, ifyou sued the government for something the government owed you or the government sued you for a contract claim that you owed the government, the statute of limitations is 6 years. Yet there is no statute here for the amount oftime you can go back and attempt to recoup funds. Funds from the sale of airport property have been allowed by the FAA to be diverted to the City. The number of grandfathering claims is increasing, and many have been approved. Remember, grandfathering was supposed to be limited to those situations where there was an existing bond or other written contract or agreement requiring the funding back in 1982. FAA is not charging
or recovering interest in many ofthe diversions. All ofthis is aided in many cases by city lobbyists paid with airport funds, who, in many instances are lobbying to divert.

Even ifyou run out of excuses, we have been very frustrated because there is no action to recover the funds. In response to most ofour reports finding airport diversion, there has been no action, no recovery. So even ifyou do have active looting-where you are out concocting reasons to loot money from the airport-but, ifyou admit you have diverted yet you do not pay it back, nothing seems tohappen. So now we also have lootingby default.

We think that there needs to be additional enforcement mechanisms, at least at this juncture, because we have not seen necessary enforcement. We think there has to be time deadlines on payback of divested funds. Ifyou are found to divert and you do not pay it back, there must be a deadline. At this point, thisjust
runs on in perpetuity. There has to be a statute of limitations on recoupment. We are going back now to 1928. It will not be long before other airports concoct reasons to go even further back. I am quite concerned, because after all, Leonardo da Vinci came up with the first flying aircraft. There has to be a sundown on grandfathering. Everybody is
now claiming to be grandfathered. That was not the intent ofthe law. There has to be a time deadline for the FAA to act to recoup the diverted amounts. There should be a special certification by airport auditors. Under the new guidelines, the airport has to be audited. The auditors should certify that there has been no diversion ifthat is the case. There should be a multiplier. Ifyou have diverted, you should pay back the amount diverted, plus a multiplier, such as is common in civil proceedings where there has been willful misbehavior-i.e., treble damages.

## 9 We agree with the ATA suggestion of a special adudicator board where agreed parties can take the issues for resolution. We also think the idea ofa situation, such as a "qui tam" case would be a good idea. We are a small organization. We cannot audit and find all the revenue diversion in the United States. But ifyou had a qui tam provision, where a citizen finding diversion could bring it fore the adjudicatory board or before the government, like in aqui tam case, they could recoup a percentage ofthe diversion that theyfind. Otherwise, without some additional measures, we think itis like telling would-be bank robbers that if you rob the bank and get caught, the only penalty is you will have to pay it back. Except in this case itis worse, because we have the FAAbeing in a situation which is comparable to the FDIC saying, "...and by the way, the vault is open and there are not any guards." So we think it is time to do something more and stop the looting and the hemorrhaging atthe airports.

Thankyou. [The prepared statement ofMs. Schiavo follows:]

# Statement of A.MARY SCHIAVO Inspector General U.S. Department ofTransportation

Before the Subcommittee onAviation Committee on Commerce, Science, andTransportation U.S. Senate

Office ofInspector General Department ofTransportation 4007th Street, SW., Room 9210 Wauhington, D.C. 20590 Telephone: (202)366-1959 May 1, 1996

## Statement ofA.Mary Schiavo Inspector General

Mr. Chairman and Members of the Subcommittee, it is my pleasure to meet with you today to discuss the diversion ofairport revenue.-
.... Over the past 4 years, we have audited the effectiveness ofthe Federal Aviation Administration's (FAA) oversight ofairport revenue and use of these revenues by 65 airports and their 43 sponsors. During these audits, we identified prohibited diversions ofairport revenue by 23 of the 43 airport sponsors totaling more than $170 million. A schedule showing the airport diversions we identified is attached. FAA does not track, and hence could not provide, information relating to how much of diverted funds have been returned. In preparation for this hearing, we attempted to collect that information. We were able to determine that at least $4.8 million ofdiverted funds at8 airports has been returned. With exceptions, the amount returned was significantly lower than the amount we reported. FAA has not provided details or rationale for the reduced amount. We dointend to followup onthis issue.
An obvious observation from our work is that airports operated as independent authorities, not under the jurisdiction of a government body,generally do not have revenue diversion problems. Those airports where the airport board, or airport managers, are appointed by, and report to, agovernment body, experience diversion problems. Officials at these airports often find it difficult to convince the local government leaders, who are usually experiencing problems balancing their budgets, not to use airport-generated revenue for nonairport-related purposes. Several airport managers have called us asking for copies of our audit reports and said theyplanned to use them to try to dissuade their bosses from using airport-generated funds to pay for services that did not benefit the airport.
Before Iget into adiscussion ofour findings, Iwould like to briefly review applicable regulatory criteria.
As a condition for receiving construction or improvement grants from FAA, the Airport and Airway Improvement Act of 1982, as amended (AAIA), requires the airport sponsor 1 

### to agree to comply with specific assurances. AAIA Section 511(a)(12) codified at 49 United States Code (U.S.C.)Section 47107(b) specifically states that:

'Airpon "sponsors" are defined by FAA as public agencies, or private owners ofpublic-use 

### airports,requesfngandreceiving grntfundsunderprovisionsoftheAAIA.

D Ike IpdeGmi I~i, IS Pt

## Statement ofA.MarySchiavo Inspector General

The Secretary ofTransportation may approve a project grant application.., for an airport development project only ifthe Secretary receives written assurances

... that local taxes on aviation fuel (except taxes in effect on December 30, 1987) and the revenues generated by a public airport will be expended forthe capital or operating costs of

- (A) the airport; (B) the local airport system; or (C) other local facilities owned or operated bythe airport owner or operator and directly and substantially related to the air transportation of passengers or property.
Prior to AAIA, some government organizations had covenants or assurances in previously issued debt obligations or controlling statutes that required airport funds tobe available forother use. When the AAIA
was enacted in 1982, it contained a "grandfathering" provision that allowed these preexisting funding arrangements to continue. Therefore, not all airports or airport authorities have the same limitations in using airport-generated revenues for nonairport purposes. Circumstances at each airport must be reviewed on acase-by-case basis, and an extensive analysis is frequently required, to determine the legality of airport funding transfers.
Under 49 U.S.C. Section 47106, the Secretary has authority to withhold grant funds forviolations ofgrant assurances. Furthermore, in 1993, as a result of several of our reports, Congress recognized the growing trend of states, cities, and other municipalities diverting, or attempting to divert, airport revenue. To counter that trend, and to preclude airports from becoming "cash cows" for their sponsors, Congress included a special provision in the Department of Transportation (DOT) Fiscal Years (FY) 1994 and 1995 Appropriations Acts and the FAA Reauthorization Act of 1994. The 1994 and 1995 Appropriations Acts included aprovision that stated:

None of the funds provided by this Act shall be made available to any State, municipality or subdivision thereof that diverts revenue generated by a public airport in violation of the provisions of the Airport and Airway Improvement Act of 1982, as amended.

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## Statement ofA.Mary Schiavo Inspector General

Effectively, any identified prohibited diversions should have resulted in the withholding of all assistance and grants that would otherwise be available to that state or municipality through the FYs 1994 and 1995 Appropriations Acts. The withholding applied not only to FAA grants and assistance, but also to every grantor of the DOT except the Maritime Administration. The special provision was highlighted to all departmental Operating Administrators in a memorandum from the Secretary.

The Office ofInspector General (OIG)identified 13 sponsors making prohibited diversions during the effective dates of the special provision. However, neither FAA nor the Department notified other DOT Operating Administrations to withhold grant funds from a sponsor. In other words, sponsors prohibited by the Appropriations Acts from receiving DOT grant funds because they were diverting airport revenues, continued to receive DOTgrant funds.

FAA has interpreted the provision to withhold grant funds to only apply ifa diversion ofairport revenues is identified and the sponsor does not return the diverted funds. Furthermore, FAA acts very slowly and reluctantly in determining that diverted funds must be returned. For example, in an April 19, 1991, OIG report regarding airport revenue issues in FAA's Western Pacific Region, we reported airport revenue diversions at Phoenix Sky Harbor Airport. During our audit of airport
revenue issues at Phoenix Sky Harbor Airport in 1993, we found FAA had not taken action to ensure compliance with grant assurances and that, in fact, revenue diversions continued. An obvious example of revenue diversion relates to a rental agreement with the Bank of America. Bank of America has a lease in the Sky Harbor Center. The lease terms, rates, and adjustments are dependent on the Bank of America filling 800 nonairport related full-time employment positions by July 1996. Ifthe commitment is met, rent is cheap. Ifthe commitment is not met, rent goes up. While this may very well be an excellent approach towards creating a job market in Phoenix, it is a municipal program and has nothing to do with the airport and the traveling public. In fact, the reduced revenue to the airport almost makes a mockery of the Senate's intent when it placed restrictions on airport revenue in 1982. In Senate Report 97-530, 1982, regarding the AAIA, the following statement is made:

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## Statement ofA.Mary Schiavo Inspector General

However, airports users should not be burdened with 'hidden taxation' forunrelated municipal services.

Clearlyjobsin the city is amunicipal issue, not an airport issue
Another example is our July 1995 report on Accountability and Use of Airport Revenue at Westchester County Airport disclosed airport
revenues generated in excess of airport expenditures were transferred into the sponsor's general funds and commingled with other nonspecial
revenues. The sponsor used these funds for nonairport-related purposes. During Calendar Years (CY) 1990 through 1993, the sponsor diverted approximately $23.7 million in airport revenues, and continues to divert $5 to $6 million annually. In itsJune 23, 1995, response to our draft report, FAA stated:

The FAA has no authority to withhold grant funds until after the sponsor has been given a chance to return any diverted funds and to make the recommended changes to its operations
... the sponsor will be given until the end of the 

### Federal Government's FY 95 to return the funds or demonstrate that county funds, at least equivalent to "diverted" funds have been used for airport purposes. If neither ofthese actions occur by the end of FY 95, the FAA will take steps to find the sponsor innoncompliance.
The FAA will notify the grantor agencies within DOT if the sponsor is found to be in noncompliance.
Since theirreply, FAA has discussed the problem withWestchester officials, but it remainsunresolved. It is not clear ifa sponsor refuses to return the airport revenues, how FAA and DOT will rescind DOT grants already distributed to the sponsor, since it could be a couple of years before this determination is made. Without effective enforcement procedures by FAA, the special provision enacted by Congress has not and cannot achieve its intended results. Furthermore, in the relatively few instances where the sponsor did actually return diverted funds, FAA required the payment of interest in only one case, even though many airports lost interest revenue during the periods ofdiversion.
The special provision was not included in the FY 1996 Appropriations Act. However, the FAA Reauthorization Act of 1994 did address the airport revenue diversion issue. Section 111 of the Act

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## Statement ofA.Mary Schiavo Inspector General

requires airport owners or operators to submit to the Secretary an annual report listing, in detail, all amounts paid to other units of government and the purpose for the payments, and all services provided to other units of government and the amount ofcompensation received. Section 112 requires the Secretary to establish policies and procedures that will assure the prompt and effective enforcement of subsections (a)(13) and (b). As enacted, these policies and procedures clearly were intended to prohibit the diversion ofairport revenues. The FAA has developed new procedures for implementing the airport revenue diversion requirements in FAA's Reauthorization Act. The proposed procedures were published in the Federal Register on February 26, 1996, almost 2 years after Congress placed the requirement on FkA. Except for FYs 1994 and 1995, where the Appropriations Acts specified loss of all grant funds as a consequence of diversions, the proposed rule does not subject sponsors who divert airport revenue to any punitive actions if the funds are returned. Furthermore, the proposed rule contains no deadlines for returning funds. FAA will continue to rely on sponsor self-certifications, single audits, third-party complaints and 010 audits to ensure airport revenues are used only for airport purposes. It should also be noted that none ofthe sponsors we reviewed submitted a report to FAA specifically disclosing the amount paid by the airport to other units of government and the purpose for which each payment was made. Single audit reports, however, continue to disclose related-party transactions. In general, it is fair to say that FAA has been reluctant to--aggressively stop revenue diversions, and diversions are continuing.
I will cite a few examples of revenue diversions from our recent reports and FAA's reluctance to aggressively pursue thorough corrective actions. One example involves our April 1995 review of the State of Hawaii Department of Transportation's Use of Airport Revenues. We reported $64.4 million in airport revenue was used in November 1991 to purchase land not used, or actually needed, for airport purposes. We started discussing this issue with cognizant FAA representatives in September 1994. For months, FAA, the airport, and its sponsor steadfastly maintained the land was originally required for airport purposes, and that requirement was obviated by changing events. When the sponsor finally agreed to reimburse the airport $64.4 million, it proposed to give the airport land, supposedly needed by the airport in lieu ofmoney. Again, for months, cognizant FAA representatives agreed.

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## Statement ofA.Mary Schiavo Inspector General

with the airport and its sponsor that the land offered for reimbursement was actually needed by the airport. Ultimately, OIG convinced the FAA Associate Administrator for Airports there was no documented airport need for this land. As a result, the sponsor agreed to establish a schedule to repay the $64.4 million. The sponsor stated it would need a special appropriation from the state legislature to enable it to submit a repayment schedule. We have recently been advised the sponsor now intends to raise the $64.4 million by selling bonds. No one knows whether sufficient numbers ofbonds will be sold to achieve the revenue needed to pay the $64.4 million. Furthermore, there are no indications when the sale ofbonds will begin, orwhen the sponsor expects to be able to return the $64.4 million. We have also been advised that some managers within the sponsor have stated that ifFAA insists on Hawaii paying interest on the $64.4 million, the sponsor will not repay either the money diverted orinterest.
Since documented evidence showed that at the time of purchase, the land was not needed by the airport, OIG concluded the sponsor should pay interest to the airport on the $64.4 million of airport funds used for the purchase. As ofJune 30, 1994, the interest was about $6.5 million. The amount is much greater today. Typical of FAA's attitude relating to revenue diversion, in its June 30, 1995, reply to our final report, FAA stated it would not require the sponsor to pay interest. FAA officials stated it was inappropriate since if the land had been used by the airport it would not be a revenue diversion. FAA appears to be endorsing a policy that encourages diversions. There is never a penalty for diverting funds, provided that the airport repays the diverted funds after it is caught. The FAA's enforcement position is like telling bank robbers, or would be bank robbers, thatifthey are caught, the penalty is they will have to return the money. In a hearing on March 7, 1996, before the U.S. House of Representatives, Committee on Transportation and Infrastructure, Subcommittee on Aviation, FAA testified its policy was to insist on the payment of interest when a determination of diversion has been made. Since that position is contradictory to FAA's written determination with. regards to interest on the Hawaii diversion,
we have since met with FAA program managers to discuss interest. At that meeting, FAA reaffirmed itsdesire to have interest paid, maybe even in the case of Hawaii. FAA was searching for a basis upon which to calculate an appropriate and equitable interest rate. We suggested that the most conservative and incontrovertible approach was to use the actual average interest rate being earned by the airport or the sponsor, for the period ofthe diversion. That was how we calculated interest for those reports where we discussed interest. While that rate may be

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### Statement of A.Mary Schiavo Inspector General

higher or lower than typical or prevailing interest rates, it is exactly what theywere earning and what the airport lost.

Another good example is our October 1995 report addressing
revenue issues at Los Angeles International Airport. We reported the sponsor paid $6.4 million, or 100 percent, ofthe sponsor's FYs 1993 and 1994 costs for a police substation located at the airport, even though 81 percent of the patrol calls were located offairport property and were not airport related. The sponsor also kept approximately $2.3 million in airport revenues derived from parking and traffic citations issued by airport police from January 1992 through August 1994. These citations
were issued by airport police whose salaries and expenses were paid with airport revenues. The $2.3 million was the amount the sponsor received after deducting county and city administrative and court expenses. In its reply to our May 1995 draft report, FAA agreed to work with the sponsor and Department of Airports to determine how much of the police substation costs were not airport related and, therefore, should not be paid by the airport. As ofthe end ofFebruary 1996, that determination still had not been made. Furthermore, FAA disagreed and stated it would not require the sponsor to return the excess revenue generated by traffic citations. We are working with FAA to resolve these issues. However, the 4 months it took FAA to respond to our draft report, even though we had been discussing the issues with FAA for several months before we issued our draft report, is indicative ofFAA's reluctance to take
a stand on revenue diversion issues.

For several years, city officials of Los Angeles have led a public campaign to divert money from the Los Angeles airport to help finance the city's budgetary shortfall. The most recent approach was to "audit" city and airport records dated back to the 1920's, when Orville Wright signed the Nation's pilots' licenses. There was noAAIA, no trust fund, no DOT, and no FAA. In an attempt to come up with debts the airport is alleged to owe the city, during that "audit," the city claimed it had identified between $5 and $30 million ofdebts, which, with compounded interest, leaves a current "debt" of between $250 and $350 million. There is no indication that the city looked for debts, including past
revenue diversions and interest, the city owes the airports. Those debts, and interest, may even exceed those questionable and ancient debts the city claims the airport owes. Finally, we identified a rather unique twist relating to use ofairport

revenue. At both Los Angeles and Denver, considerable amounts of airport revenue were used for lobbying expenses. In fact, Los Angeles

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## Statement ofA.Mary Schiavo Inspector General

used airport funds to lobby for legislation that would allow airport 

### revenues to be used forcity expenses. Diverting funds for lobbyist expenses is a circuitous problem. Airports and their sponsors need airport-improvement grants tomaintain and improve the airports. They need these grants primarily because airport revenues are not sufficient to accomplish all necessary maintenance and improvements. Therefore, they take scarce airport revenue to lobby both the executive and legislative branches of the Federal Government to obtain airport-improvement grants, some of which they would get even without expensive lobbyists. FAA's proposed rules prohibit airport revenue diversion for marketingoand promotional activities unrelated to airport systems. However, thEre is no ban on using airport revenue to pay for lobbyists working on airport issues. As
we have seen in the case of Los Angeles Airport, that includes using airport funds to lobby to convince officials that the city can divert airport money.
It is clear FAA has been reluctant to act expeditiously, aggressively,
or reasonably in bringing grantees into compliance, in getting diverted funds returned, or in penalizing grantees for illegal diversions. The Hawaii diversion discussed earlier is a perfect example of FAA's unwillingness to fulfil itsgrant management responsibilities. Effectively, FAA has thrown itshands up and proclaimed there isnothing else it can do. Mr. Chairman, FAA has the ultimate leverage--withholding additional grants. Long ago, FAA should have started the clock on the formal process ofwithholding grants at Hawaii and other locations. FAA has not done so, but should do immediately.
At the March 7, 1996, hearing of the House Aviation Subcommittee, the AirTransport Association ofAmerica proposed several ways of addressing revenue diversion and an adjudicative process. It suggested that an independent body, such as the Surface Transportation Board, become designated as theadjudicator in revenue diversion issues, including the applicability and calculation of interest. Further, it proposed placing a requirement on the Inspector General to bring
revenue diversion cases to the board ifthe Inspector General determines the FAA hasnot obtained satisfactory compliance. Similarly, it proposed that nongovernmental parties who have rate or revenue diversion disputeswith airports, be afforded theopportunity to bring those matters to the board.

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## Statement ofA.Mary Schiavo Inspector General

An independent adjudicative process could also include an incentive approach similar to Qui Tam cases. In Qui Tam cases, individuals uncovering fraud and presenting the case to the U.S. Department of Justice, receive a percentage of the amounts recovered. Similarly, persons bringing diversion issues to the board, could receive a percentage offunds returned to the airport or to the trust fund. FAA has not demonstrated, by action, it will enforce revenue diversion prohibitions. Until FAA insists on compliance with the laws and obligations required of those receiving AAIA grants--money paid into the trust fund by passengers and airlines, and will take swift, aggressive, and effective corrective action when diversions occurs, enforcement mechanisms otherthan FAA are necessary. Finally, as discussed above, there must be time deadlines, such as statutes of limitations, on ancient alleged debt which airport sponsors attempt to charge against the airport to offset diverted funds. Phaseout or "sundown"provisions on grandfathering claims are needed. Absolute deadlines or "drop dead" dates are needed to establish cut-off dates by which diverted funds plus interest must be repaid. Furthermore, other punitive measures, such as treble damages paid into the trust fund, in addition to cutting offfunds, must be applied, or the problem ofrevenue diversions will rapidly escalate as financially strapped local governments look for cash cows. FAA's current lack ofenforcement effectively results in an interest freeloan that may never have to be repaid.
Mr. Chairman, this concludes my statement. I would be happy to answer your questions.

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## Statement ofA.Mary Schlavo Inspector General

AIRPORT REN1XUE AUDITS DIVERSIONS OFAIRPORT REVENUE FISCAL YARS 1992 TO 1995

AzuFOa?/TOMn ftazov AVoas DfVaXMs 1 Pompano Beach, Florida $1,204,000 FYs 1985through 1990 2. Broward County. Florida 597,000 FYs 1988.1989. 1990 3. Houston, Texas 610,000 FYs 1990. 1991 4. Dade County, Florida 30,354,000 FYs 1989. 1990. 1991 5. Palm Springs, California 183,000 F'Ys 1990. 1991 6. St. Louis, Missoui 2,100.000 FYs 1990. 1991. 1992 ,, 7. Oakland, California 486,000 FYs 1990, 1991, 1992 8. SanAntonio, TX 1,072,000 FYs 1991, 1992 9. Phoenix-Sky Harbor, Arizona 578,000 FYs 1991, 1992 10. San Francisco, California 4,300,000 FYs 1990 through 1993 I1. Hayward. CA 237,000 FYs 1992, 1993 12. Baltlmore/ Washington, Maryland 4,400,000 71189 throu h 6/30/91 13. Hot Springs, Arkansas 545,000 5yrs. ended 12/31/93 14. Philadelphia International and 982,000 Northeast Philadelphia Airports 7/1189 through 6/39/91 ,. 15. Des Moines, Iowa 626,000 7/1/91 through 6130/93 16. Bremerton, Washington 1,640,000 FYs 1990, 1991, 1992 17, State ofHawaii DOT 64,600,000 7/1/91 through 9/30/94 18. Love Field/Redbird, TX 364,000 21 months ended 6/30/94 19. Westchester County, NY 23,725,000 CYs 1990, 1991, 1992, 1993 20. Seattle-Tacoma, Washington 2,900,000 IYs 1992, 1993, 21. LosAngeles, CA 22,801,000 FYs 1992, 1993, 1994 22. Stutt .rtAirport, AR 46,000 FYs 1991, 1992, 1993, 1994 23. Stapleton Airport, CO 6,500,000 CYs 1993, 1994

.. .. Total Revenue Ivgeraoms *lI6O,

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### -nb

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### Senator McCAIN. Thank you very much. Ms. McFadden, welcome. STATEMENT OF NANCY E. MCFADDEN, GENERAL COUNSEL,

DEPARTMENT OF TRANSPORTATION; ACCOMPANIED BY NICHOLAS G. GARAUFIS, CHIEF COUNSEL, AND DAVID BEN. NETT, DIRECTOR, OFFICE OF AIRPORT SAFETY AND STANDARDS, FEDERALAVIATION ADMINISTRATION Ms. MCFADDEN. Thankyou, Mr. Chairman.I welcome the opportunity to be here today to discuss the issue of revenue diversion. Accompanying me today are, as you indicated, Nick Garaufis, the Chief Counsel of the Federal Aviation Administration and to Nick's left, Dave Bennett, who is the FAA's Director ofthe Office ofAirport Safety and Standards. I have submitted a statement for the record, and, like our Inspector General, let me summarize the main points ofmy written statement for youtoday. Senator MCCAIN. Without objection, your complete statement will be made part ofthe record. Ms. MCFADDEN. 

### Thank you, Mr. Chairman. At the outset, let me stress that we are committed to ensuring that airport revenues are used for airport purposes as required by law. We take seriously, as I know that you do, any allegation of unlawful airport revenue diversion. Airport sponsors that take Federal grants assure us that they will not use airport funds for municipal purposes or otherwise improperly divert their airport revenues, and we expect them to fulfill this promise. Our recent proposed policy on revenue diversion, new airport financial reports-which we will be requiring soon-and the range of enforcement tools whichyou, the Congress, has given us will assist us in ensuring compliance with the revenue diversion policy. You are well aware ofthe statutory framework within which we operate with respect to revenue diversion. So I need not go through that here today. In February of this year, we published for comment a draft policy on airport revenue diversion. The public comment period recently closed on this. We are expeditiously but carefully reviewin the comments that we have received. We expect to be able to finalize that policy soon. Because it is not a final policy, of course, our discussion is, by necessity, somewhat constrained. Butlet me briefly outline the proposed guidance we have developed for airport sponsors. In drafting this guidance, let me note that both the FAA and the Office ofthe Secretary work together to address, as much as feasible, issues identified in air ort audits conducted by Department ofTransportation Inspector General Schiavo over the past several years, as well as issues that the agency identified by virtue of its experience with airport grant compliance. The proposed policy describes and explains permissible as well as prohibited uses of airport revenue, and specifically alerts the airport community to possible types of diversion. These de-rive from the statutory provisions which you have laid out, as well as from airport situations that the FAA has examined in the past. To achieve compliance with the prohibition against revenue diversion, our proposed policy also sets forth our existing and expected new monitoring tools, our enforcement procedures and the

### sanctions for noncompliance. Mr. Chairman, in my written state-7-- ment I elaborate on the history ofthe sanctions that the Congress has deemed appropriate for revenue diversion, and lay out a history ofthe evolution ofthe sanctions you have provided for in statute. Let me not go through that whole history, but let me make a point. Congress, in setting out the sanctions for revenue diversion, clearly contemplated an enforcement regime which stressed the need to seek corrective action more than up-front penalties. This reflects, we believe, a recognition that we are typically dealing with State and local government officials who, in most instances, are trying their best to follow the law. In cases of possible violation ofthe revenue use provisions, the law requires us to give the airport notice and requires us to.ive them an opportunity to refute the charges. Once a violation is identified, we are also required by your statutes to provide the airport an opportunity to take corrective action voluntarily, before we begin enforcement action. Now, we agree with Senator Ford that although most cases of unlawful revenue diversion can be resolved through negotiation and discussion, as you anticipated, let me state clearly that we will not hesitate to use the tools available to us to ensure that airport revenue is used in accordance with law. We anticipate that the guidance contained in our policy will make it easier for airport sponsors to do this, and we will ofcourse respond to inquiries and claims regarding permissible and prohibited uses of airport revenue.

To sum up, Mr. Chairman, we have attempted to fashion, with your guidance, a coherent balanced and effective approach to deal with the issue ofrevenue diversion. First, adoption of a clear policy and set of principles regarding the permissible and the prohibited uses ofairport revenues. Second, putting in place reporting, auditing and investigative tools to ensure that airport sponsors comply with the new policy and that we will know ifthey do not.

Third, a commitment to an efficient and fair enforcement mechanism that provides an opportunity to voluntary correct action found to violate revenue diversion restrictions and also ensures that action will be taken when noncompliance is found and voluntary action is refused. Our task ahead, Mr. Chairman and members of the subcommittee, as we see it: First, we will finalize the revenue diversion policy as soon as we possibly can once the comments are fully reviewed. In addition, we will have in place the new reporting formats by the end ofJune. Mr. Garaufis and I commit to you that we will work together to close the remaining cases resulting from the Inspector General's audits as expeditiously as possible. I have asked the FAA and Office ofthe Secretary's staff,who has been working diligently on both the revenue diversion and the rates and charges policies, to turn their attention next to reviewing our enforcement policy and procedures, paying particular attention to possible expedited procedures and the best use ofour resources. We will be expediting the issuance ofrules establishing expedited enforcement procedures for airport compliance.

## In closing, Mr. Chairman, I would like to acknowledge the subcommittee's longstanding interest in this area, thank you for your guidance, and emphasize our commitment to ensuring that airport revenues are usedin accordance with the law. We will continue to work in cooperation with you and the aviation community to see that airport revenues are used for airport purposes, as the law requires. We are happy to answer your questions, and thank you for the time topresent our views. [The prepared statement ofMs. McFadden follows:]

STATEMENT OF NANCY E. MCFADDEN Mr. Chairman and Members of the Subcommittee: I am Nancy McFadden, the General Counsel ofthe Department ofTransportation. Iwelcome the opportunity to appearbefore you to discuss the issue ofrevenue diversion. Accompanying me today are Nicholas Garaufis, Chief Counsel of the Federal Aviation Administration and David Bennett, FAA's Director ofthe Office ofAirport Safety and Standards.

At the outset, let me stress that we are committed to ensuring that airport reve- nues are used for airport purposes, as required by law. We take seriously-as I know you do-any allegation ofunlawful airport revenue diversion. Airport sponsors that take federal grants assure us that they will notuse airport funds for municipal purposes, or otherwise improperly divert their airport revenues. We expect them to fulll this promise. Our recent proposed policy on revenue diversion, new airport financial reports, and the range ofenforcement tools Congress has given us will assist us in ensuring compliance with the revenue diversion policy. Congress and DOT have a history of recognizing the principle that airport reve- nue must be used for airport purposes. The Airport and Airway Improvement Act of 1982, as amended, requires an airport that receives airport grants from the FAA to use all airport-generated revenues (such as rent, landing fees, and the like) for the capital or operating costs ofthe airport, the local airport system, or other local facilities owned or operated by the airport sponsor that are directly and substantially related to air transportation. The purpose ofthis provision is to ensure that airport sponsors receiving Federal assistance are using all airport revenues for airport systems and to ensure that air travelers--who pay Federal ticket taxes for airport improvement programs-are not also paying hidden taxes for local municipal purposes.

The statutory prohibition against revenue diversion is included in the assurances the aireport sponsor submits in its application for a Federal grant and is incorporated into the grant agreement between the FAA and the sponsor. The law provides a limited exception to this rule for certain airport arrangements inplace prior to passage ofthe 1982 Act-the so-called "grandfathered" airports. The law grand- fathers those financing arrangements, which existed either in legislation or in the airport's debt instruments and which provided for the use of airport revenues to support the airport as well as its debts or other facilities of the airport owner or operator. Congress made the determination that these arrangements should be permitted to continue. Another provision of the 1982 Act requires that airports maintain a fee and rental structure that makes them as self-sustaining as possible, and 46 this is also included in grant agreements. In February ofthis year, we published for comment a draft policy on airport revenue diversion. The public comment period recently closed and, ofcourse we will be carefully reviewing the comments we received. Our discussion today will, therefore, by necessity be constrained. However, let me briefly outline the proposed guidance we have developed for airport sponsors. In drafting this guidance, a working group ofboth FAA and OST staff attempted to address, as much as feasible, issues identified in airport audits conducted by the DOT Inspector General over the past several years, as well as issues that the agency identified by virtue of its experience with airport grant compliance.

The proposed policy describes permissible as well as prohibited uses of airport revenue and specifically alerts the airport community to possible types of diversion. These derive from the statutory provisions as well as from airport situations the FAA hasexamined in the past. The proposed policy would explicitlyprohibit-

(1)direct or indirect payments to the municipal sponsor, or in.lieu of tax payments, which do not reflect services or facilities actually provided the airport and
are notproperly allocated;

(2)use of airport revenues for general economic development, marketing and promotional activities not airport.related;

### 24

certainn tax payments or impact fees assessed by nonsponsoring governmental bodies whosejurisdictions happen to include an airport;

(4)airport-subsidized loans ofairport funds to state or local agencies; and (5)below-market rate airport land rental by the sponsor for non-aviation users, such as a municipal garage.

The proposed policy permits airport sponsors to use airport revenues for capital and operating costs of the airport, the local airport system, or other local facilities owned or operated by the airport owner or operator and directly and substantially related to the air transportation ofpassengers or property. It also clarifies the circumstances under which an airport sponsor's use of funds would be grandfathered under the law, and provides some specific examples. In such cases we are required, pursuant to a 1994 change to the airport grant statute, to take into account the fact that airport revenue is used for off-airport purposes as a factor militating against distribution of future discretionary grants to an airport under the Airport Improve. ment Program (AIP). That is our current practice, and that requirement is specified in the proposed policy.

The proposed policy addresses some issues which have generated divergent views-for example, charging imputed interest for past contributions ofcash orland. Thepolicy restates our view that a local government can be reimbursed by a sponsor for past contributions of cash or land to the airport, but cannot recoup any imputed interest on the original amount. That issue is of particular significance at LAX, where the City is seeking imputed interest ofmore than $150 million, as noted in your recent letter to Mayor Riordan. While we have stated our view in the proposed policy, we are, I should note, taking comments on the implications of allowing recovery of reasonable interest or an inflationary adjustment, in addition to the original contribution.

Our proposed policy also notes that it is not a violation ofeither the revenue diversion or the self-sustaining assurance for a sponsor to charge a reasonable fee that may be less than fair market value for use ofaeronautical facilities. Our former disagreement on this issue with the Inspector General has been resolved.

To achieve compliance with the prohibition against revenue diversion, our pro- posed policy sets forth our monitoring tools, enforcement procedures, and sanctions
for noncompliance. In the 1982 Act, Congress did not expressly provide for sanctions for non-compliance with grant assurances. However, the FAA interpreted the grant
assurance program to permit it to withhold approval of new grants for airports in noncompliance. In the 1987 amendments to the 1982 Act Congress provided explicit authority to withhold approval of new grants and to withhold payments under outstanding grants, with notice and opportunity for hearing required in some cases. In the 1994 Authorization Act, Congress strengthened our enforcement capability by authorizing us to withhold approval ofnew PFC applications for violation of the revenue diversion assurance; to seek civil penalties for violation ofthe revenue diversion assurance; and to seek judicial enforcement ofall grant assurances. The 1994 Act reaffirms the authority to withhold approval ofnew grants for violation of the
revenue diversion assurance. The 1994 Act also requires us to provide the airport proprietor with an opportunity to take corrective action before withholding approval of new grants or new PFC applications. In addition, we may terminate transportation finding in accordance with the 1994 and 1995 DOT Appropriations Acts upon a finding ofunlawful revenue diversion in those years.

Congress clearly contemplated an enforcement regime which stressed the need to seek corrective action more than up-front penalties. This reflects a recognition that
we are typically dealing with state and local government officials, who are trying their best to follow the law in most instances. In cases of possible violation of the
revenue use provisions, the law requires us to give the airport notice and an opportunity to refute the charges. Once a violation is identified, we are also required by law to provide the airport an opportunity to take corrective action voluntarily before
we begin enforcement action. In adopting civil penalty authority for revenue diversion, the conferees expressly stated their intent that this authority be used "only
as a last resort after all other means of correcting violations have failed and the airport sponsor willfully continues to violate the law." They went on to say that the airport sponsor should be provided "areasonable period oftime, after a violation has been clearly identified to the airport sponsor, to take corrective action,to restore the funds or otherwise come into compliance before a penalty is assessed."

Although we believe that most cases of unlawful revenue diversion can be resolved through negotiation and discussion as Congress anticipated, let me state clearly that we will not hesitate to use the tools available to us to ensure that airport revenue is used in accordance with the law. We anticipate that the guidance contained in our policy will make it easier for them to do so and we will, of course, respond to inquiries regarding permissible and prohibited uses of airport revenue.The 1994 Authorization Act also provided us with additional sources ofinformation to assist us in our monitoring and enforcement efforts, namely, new annual ft. nancial reports to be submitted by airport sponsors. Two months ago we published notice that a standard format for airports to use in preparing these annual reports is now available. Effective with the beginning ofthe sponsors next fiscal year, the first report will require the sponsor to report the amounts it paid and the services it provided to other units ofgovernment. It will also require the sponsor to explain the basis for claiming a "grandfather" exception. The second report will require sponsors ofcommercial service airports to detail the total revenue and expenditures at the airport, including revenue surplus. These reports will provide us-as well as the publio-with invaluable monitoring tools.

In addition to the new annual reports on revenue use by airport sponsors, we will draw upon three other sources of information to assist us in uncovering potential revenue diversion: first, annual audits of airport sponsors will be conducted in ac- cordance with OMB Circular A-128, "Audits ofState and Local Governments"; sec- ond, any third-party complaints, such as from air carriers will be pursued; and third,the DOT Office of Inspector General will, I am confident, continue to conduct selective audits ofairports. I should note here that the Inspector General is better equipped that the FAA to conduct these audits in terms ofavailable staffand tech. nicalauditing expertise.

To sum up, we have attempted to fashion, with your guidance, a coherent, balanced, and effective approach to deal with the issue ofrevenue diversion.

First, adoption of a clear policy and set of principles regarding the permissible andprohibited uses ofairport revenues;

Second, putting in place reporting, auditing, and investigatory tools to ensure that airport sponsors comply with the new policy and that we will know ifthey do not;

Third, commitment to an efficient and fair enforcement mechanism that provides an opportunity to voluntarily correct action found to violate revenue diversion re- strictions and ensures that action will be taken when noncompliance is found and voluntary actionis refused.

Our task ahead? We will finalize the revenue diversion policy as soon as we possibly can once the comments are fully reviewed. In addition, we will have in place the new reporting formats by the end of June. Mr. Garaufis and I commit to you that we will all work to close the remaining cases resulting from the Inspector General's audits as expeditiously as possible. And I have asked thejoint FAA/OST work-

... ing group which hasbeen working diligently on both the revenue diversion and the rates and charges policies to turn their attention next to reviewing our enforcement policy and procedures, paying particular attention to possible expedited procedures and the best use ofour resources. We will be expediting the issuance ofrules establishing expedited enforcement procedures for airportgrant compliance.

This then, Mr. Chairman, is where we stand on the issue ofrevenue diversion. Before I conclude, let me address directly a proposal that we have heard floated by those who are not satisfied with our efforts to date in this area-namely the suggestion that we should turn over the setting ofpolicy and the adjudication ofrevenue diversion issues to some board independent of the FAA and DOT. We believe it would be unworkable, inefficient, and disruptive for a separate board to involve itselfin revenue diversion matters. In my view, the Department is doing an excellent job in resolving rates and charges cases, a subject closely interconnected to revenue diversion, and it would be both sensible and efficient to leave resolutions in the case ofrevenue diversion to the officials charged with the basic statutory responsibility for both areas, especially in an era of downsizing government. The FAA, in its role as investigator and enforcer of the grant assurances, and the Secretary's Office, in itsrole as a legal advisor on resolution ofsignificant Inspector General audit issues, have developed expertise in this area. It would be unwise to transfer these responsibilities to an entity without this expertise. The FAA is charged with the statutory responsibility of overseeing revenue diversion policy. The framework to support en. forcement of the revenue diversion provisions isjust now coming into place. Inter. preting the new policy and applying enforcement action in appropriate cases properly resides with the FAA andDOT.

In closing, Mr. Chairman, I would like to acknowledge the Subcommittee's longstanding interest in this area, thank you for your guidance, and emphasize our com- mitment to ensuring that airport revenues are used in accordance with the law. We will continue to work in cooperation with you and the aviation community to see that airport revenues are used for airport purposes, as the law requires.

That completes my prepared statement. We would be pleased to respond to any questions you mayhave at this time.

While we consider proceeds from the sale of airport real property to be airport revenues, we are willing to examine the treatment ofthe revenue from the sale ofan entire airport in the context ofthe transaction before us and in accordance with protecting the public interest. Additionally, all of these issues were proposed for comment and we willbe carefully reviewingthe comments we receive.

The issue of an adequate, efficient and fair enforcement mechanism is of great concern to me. I have tasked a joint OST/FAA working group with reviewing the enforcement policy on revenue diversion to answer questions such as: Is there area- sonable way to streamline procedures so that a complaint is brought to completion substantially faster? So that corrective actions may be accomplished in a quicker fashion? Are the current resources adequate to maintain an aggressive enforcement stance?

The task force will also address the uses ofthe annual revenue diversion report. In the meantime, we anticipate that users, especially air carriers, will carefully review the form and notify the FAA of any possible unlawful revenue diversion. The FAA has committed to fully investigating any report that is the subject of a thirdparty complaint, in addition to conducting its own random spot checks ofthe re- ports.

The task force will also work to refine the Compliance Supplement for Single Audits, referenced in the proposed policy, tohelp auditors flag potential problems. This will improve and fine-tune forour purposes an audit thatis already being conducted
onbehalfof an airport, thus making the most effective use oflimited state and local government resources.

My goals in this area are first to finalize the revenue diversion policy once the comments are fully reviewed. Second, to ensure the FAA closes the remaining cases resulting from the IG's audits as expeditiously as possible.

By assuring that airport revenues do not flow outside the airport, our proposed policy will work in tandem with ourrates and char policy, which assures aircarriers that their airport fees will be "reasonable. Fiten months ago we implemented Congress' 1994 mandate on "rates and charges" by adopting procedures for handling expedited complaints on fee reasonableness and a policy on fee reasonable- ness. That rates and charges policy has undergone some revision; a proposed policy was also issued and we are finalizing the policy at present. We have handled six complaints under the new expedited procedures. Two cases have concerned the fees at LAX. While many persons interested in this area sought expedited procedures,
some of the parties involved may actually be heard to say that we move too fast
on these cases. Before making changes in these procedures, we suggest giving the Department and the parties an adequate opportunity to assess the new procedures. Since the first cases have not even completed judicial review, any changes would be premature.

It also has been proposed that a rate adjudication board separate from the FAA hear revenue diversion cases. We believe this suggestion would be unworkable, and, in any event, that it would be premature to institute any major changes before seeinghow the new policy will be implemented and enforced. The framework to support enforcement ofthe revenue diversion provisions isjust now coming into place. The FAA should retain its role of interpreting the new policy and applying enforcement action in appropriate cases. It would be inefficient and disruptive for a separate adjudication board to hear these cases when the FAA is charged with the statutory responsibility ofoverseeing revenue diversion policy. 

### Senator MCCAIN. 

### Thank you very much. Mr. Garaufis, would you help me with the pronunciation one more time. Mr. GARAUFIS. 

### Yes, it is Garaufis. Senator MCCAiN. Thank you, Mr. Garaufis, please proceed. Mr. GARAUFIS. That completes our prepared statement, sir. We would behappy to answer any questions you have. Senator MCCAIN. Thank you very much. Inspector General Schiavo, is there a rationale that you can give me why they have not enforced the law in the past, why we are waiting for proposed policy? Should not action have been taken in the past on these diversions? Ms. SCHIAVO. 

### We thought so. That is one ofthe reasons we have been critical about the inaction. For so many ofthe reports that we put forth, we got either no answer back from the FAA or they responded with a response similar to what the airport sponsor said. In some cases, FAA refused to collect the funds from the diverter.

## In many cases FAA said, OK, we will collect some ofit; but then nothing happened. Thatis why we are in a position today ofhaving returned only $4.8 million ofthe $170.8 million that has been diverted. Senator McCAIN. Mr. Garaufis, Inspector General Schiavo says that they sent you numerous requests and reports that you were not doingyourjob according to the law. Do you have any response tothat? Mr. GARAUFIS. Yes, sir. The fact is that when we receive one of these audit reports, we have an obligation to give the party being audited-and there are various audit reports that are under review now atthe FAA-we have the obligation togive theparty beingaudited the opportunity to--ofcourse, we comment, but we also give them the opportunity to comment as to whether they believe that they are in some way exempted from the revenue diversion policy or that theyfeel that the uses ofthe funds are appropriate. I can give you an example ofone-although I am not in the pol- icy office thathandles this-in the case ofWestchester County Airport in New York, the airport sponsor, which is the county, has taken the position that they are grandfathered under the 1982 statute. We have afforded them the opportunity to provide us with legal argument on that, and we are reviewing theirlegal argument. We are not unwilling to enforce the clear intent ofthe law, but we also afford the party who is claimed to have diverted the funds the opportunity to provide us with their reason why they feel that they are not subject to the law. We do not in the case of grandfathering, for instance, review every airport's status in terms ofgrandfathering unless and until the issue ofdiversion arises. In the case ofWestchester, it arose in the contextofa final OIG audit.

We are reviewing the matter with the county. That is where that particular matter stands. Could we move more quickly on some ofthese matters? Iassume that yes, we could move more quickly. But Congress established a protocol for dealing with these local governments, and part of the protocol is to afford them this opportunity. While I am sure you could point to cases where we have not moved as quickly as we should, I feel that I have an obligation to make sure that a local government has the opportunity to respond and wehave the obliga- tion to consider their views. Senator MCCAIN. Perhaps you can help me out here. Isthere any question in your mind that $33,000 for a Tournament ofRoses Parade 'float is a revenue diversion? Does that require a lot of response and questioning? How about a Rebuild Los Angeles City Hall fundraiser, another Tournament of Roses float, the Asian-Pacific American Heritage Committee Awards banquet, Flight-Test Historical Foundation Tribute, CalPoly Associates fundraiser to benefit CalPoly athletes, or Friends of Ontario International Airport GolfTournament? Does that require a lotofscrutiny on your part if they are diverting airport funds forthose purposes, Mr. Garaufis? Mr! GARAFus. Well, let me ask Mr. Bennett, who has reviewed those matters, from the policy office, to respond to that specifically. Senator McCAIN. Iwould be glad to hear his answer.

### Mr. BENNEMr. Mr. Chairman, ofcourse, we have the Los Angeles 

## report, and there is along list ofissues in there. Ithink there are many in which we would agree with the Inspector General's Office that they do in fact constitute a revenue diversion. I would not expect theCity tohave any quarrel, when we give them a final determination, and they would be willing to pay the money back. There are some other items in there that are not quite as clear, having to do with the allocation ofcosts and whether or not certain police services or fire services provide some benefit to the airport or not.

So there are some more complex issues in there. On that one, we have chosen to answer all of them at once, rather than go after some oftheeasy ones initially.

Senator McCAIN. Soyou get no money back because you want to go to the hardest ones rather thanjust say this is wrong and get the money back? That does not make a lotofsense to me, Mr. Bennett. Perhaps Ms. Schiavo would like to respond there, and also maybe provide some additional information about Westchester Airport. Ms. SCHIAVO. Yes, the Westchester Airport audit was issued over a year ago. By the way, I should mention that our first audit reports came out in 1992. So when we are talking about inaction, we are nottalking abouta fewmonths or a year. Senator MCCAIN. You are talking about4years, and wehave not gotten any money backyet from Los Angeles Airport? Ms. ScHAvo. In some cases, yes, it is 4 years or more. The other thing we need to mention is that while the clock runs, interest has not been demanded by the FAA of these places, so far, except in certain instances. Only one airport has paid interest, and that is St. Louis, who also, did pay their revenue diversion back. So there are many issues that are compounded by the delay, including the interest and the escalation ofthese claims by other airports. So the delay is causing even greater problems.

We have time and time again tried to hold their feet to the fire on that. For example, the L.A. issues are especially confusing because the initial draft on L.A., which came out from the General Counsel's office, answered a number of these issues. Then, only later, for reasons which are not entirely clear but after a number of intervening events, those reasons put forth in the initial draft answering some of these issues basically went away and a whole new opinion was issued. But many things are clear. For example, on the one issue that is pending on the condemnationfor the Century Freeway, there is a claim that allfunds belong to the City. But we have recently learned that 50 percent ofthe principal-even ifyou are not going to argue about who owns the land, at least from the documents we reviewed, it said it was paid for by airport bonds, with airport money-even ifyou ignore that, we have recently learned that 50 percent ofthe principal was paid for severance damages for impaired access and reduced utility to existing use ofairport property. Now, how could that not be an airport use if 50 percent of the principal was paid for damages to impaired use to the airport prop- erty?

## So opinions like that have us mystified, because some issues seem amazingly clear, Such as the Rose Bowl floats and the visit ofthe Pope. Senator McCAN. Ms. McFadden, doyou want to respond to that? It is a pretty damning statement about the way that you and Mr. Garaufis have been doingyourjob. Ms. MCFADDEN. 

### Mr. 

## Chairman, let me say a couple of things. One, to make sure that the record is clear, the Inspector General's report on Los Angeles was not issued until, as I recall, October 1995. So there was some, misunderstanding or implication that the LosAngeles report was around for 4 years. Basically, I believe and I think Mr. Garaufis agrees with me, that we need to increase our efforts to deal with these outstanding audit reports. Butas Mr. Garaufis tried to explain before when you mention something like the Rose Bowl Parade, it is a clear indication ofsomething that is clearly not permitted, and we would all agree with that.There are a lot ofcomplex issues in these revenue diversion cases and claims. Some things that the Inspector General would tally as revenue diversion we, and I believe you, would not really agree is revenue diversion. We have the responsibility to make the rightjudgments for both the airport sponsors and for the airportusers. Now, could we make the easy decisions and leave the more complex decisions for a later time? Maybe. Maybe we should look at that.I amhearing from you that that might be something that we should do. I think that that is something that we will consider to try to clear this docket. We will be happy to look at that. But I do think it is important-the Inspector General used the word "per- spective," and I do think that that is an important word for this hearing-it is important to have some perspective on these issues. As I get deeper and deeper into the issue of revenue diversion, knowing your concern, knowing the Secretary s concern and the FAA Administrator's concern, I am learning how complex some of these issues are. Senator MCCAIN. Well, thank you, Ms. McFadden. My response to that, I will leave, frankly, to my colleague from Kentucky, who mentioned in his opening statement that we have surfaced this issue before, with the Department ofTransportation, and we have had correspondence in the years past. It is not as ifthis is a newly emerging issue. I am gratified to know that you are going to focus on it,but we have tried to get your attention or the attention of the Department ofTransportation and the FAA for the past several years. flWe are not just talking about the $30,000 for the Rose Bowl float. We are talking about improper payments for direct city services-such as $10 million for police services, $1.4 million for consultant and lobbying fees forthe Proposition Keffort, and improper charges and payments forindirect city expenses, including an $8.7- million payment. We are talking about fairly significant amounts ofmoneyhere. So I am pleased to know that you are beginning or intending to focus on this issue. I do believe it raises a legitimate question as to why it was not focused on in the past, especially in the case of the Los Angeles Airport, because there are a number of issues of

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## controversy surrounding that airport, its relations with the airlines--which we will hear about from another witness-and other areas. Iyield to my colleague from Kentucky. Senator FORD. I would yield to the Chairman ofthe full committee. The CHAIRMAN. I wouldjust ask one question. Who gets hurt? Is it the small, nonhub airports? Who suffers because of this diversion?

Ms. SCHIAVO. Well, we all do. Primarily, of course, the people who pay the special taxes, the special fees. People forget-and we have actually heard this argument in response to the House hearings we had on this about a month ago when a representative covering the Westchester area was attempting to argue that since we did not specifically find that the people ofWestchester County had been harmed, what business is it ofthe Federal Government's. The people that are harmed are the people who pay the taxes into the special trust fund, which is why we have special taxes. It is a taxation in addition to the local taxes that you pay for your police and fire departments Again, we cannot forget, this is not a general revenue fund to be used for the better common good.

This was a special fund set up to handle and to take care of these special needs ofaviation; we are talking about airplanes, runways, ramps, aprons, and safety measures. We are not talking about anything that the city wants to use itfor, whether itbe good ornot.

I actually had at the last hearing a representative take me to task because he thought that the Boy Scouts were a good organization and L.A. had made a payment to the By Scouts. He asked if that was notgood. Yes, it is good. The Boy Scouts are not harmed by the payment. L.A. was not harmed by the payment. But the purpose of the law is to take care ofaviation. The people who pay the tickettaxes and the airlines who supplement those taxes have paid those with the trust and reliance that the money will be used for aviation purposes. By siphoning offthese funds and making our airports a cash cow, everybody else is getting the idea and before long the whole purpose ofthis law, AAIA, is going tobe a hollow shell. There will be no teeth, and there will be no point in saying that you are going to sign agreements that airport revenue will be used for airport purposes, again, because there is simply no teeth. There will be no point in bothering with these agreements. Mr. GARAUFIS. 

## Senator, if I may, may Ijust follow up on that? I think that if we were just talking about a few de minimis contributions for the purposes ofbeing a good neighbor, I do not think there would be an issue here. What we are talking about are potentially and actually real major takings ofairport revenues offthe airport, and as the administrator ofthe FAA has made very clear, we are facing a major increase in airport capacity demand over the next 20 years, and so it is in everyone's interest for us to enforce these rules. We intend to enforce these rules because we must have the capacity in the large airports and also the funds to enhance the smaller airports which do notgenerate the profit, and we understand that.

### So if you hear anything from the Department and the agency in this regard, it is that we understand the importance ofretaining the revenues of the airport for appropriate airport purposes, and we are going to utilize the tools at our disposal. But I would not want to throw out thebaby with the bath water in this situation because we only have about-maybe it is 100, maybe it is 200 airports in the country which generate the kind of funds which make the possible diversion of funds to the airport owner attractive, potentially, and with regard to those airports we have to be particularly vigilant, and we think that we have the tools to do so. There are several different ways that we are going to be able to do this. In terms of reporting requirement, the annual reports of the payments to local government and the use of local government of airport resources, the ability of the Inspector General who does the bulk ofthe auditing for us-we no longer have auditors for this purpose. They were taken away from us at the time that the Inspector General ofthe Department was created, and we think that is where the auditingfunction ought to be. Also, the ability ofthird parties to bring us complaints after reviewing the documents that the airports are going to have to file regarding their finances and their payments to local governments, altofthese areas are going toprovide us and also individual audits that will be done by the FAA-we are augmenting our auditing staff-all of these areas are going to provide us with the kinds of data that we need to enforce the rules, and we indicate to you that is our commitment. Senator MCCAIN. Senator Ford. Senator FORD. 

### Thank you, Mr. Chairman. Ms. Schiavo, tell me what you meant by cash cow? I come from the country, and wejust get milk, we do not get cash. [Laughter.] Senator FORD. Could you give me what you mean by cash cow? Ms. SCHIAVO. It means the cities are milking their airports and 

### are getting cash. As we mentioned, we found a pattern. In situations where airports answer to the municipal or city or political body, is where we often find airport funds being taken offthe airport property to be used for general city purposes. Purposes other than those related tothe airport. I So in other words, the airport is generating revenue, and the revenue is being taken offthe airport to pay for something else, i.e., being used as a cash cow. Senator FORD. 

### Whatever that mightbe. Ms. SCHIAVO. Whatever that might be. Senator FORD. 

### I believe in your testimony, and Ihave had a hard time reading everything this week, and I have tried to listen to you, but as a part of your testimony you suggested that the FAA must impose sanctions on revenue diversions, am I correct?

Ms. SCHLAVO. Yes. Senator FORD. Having been around here for a while, you remember a little bit. How long have you been IG? When were you appointed? Ms. SCHIAVO. Pardon? Senator FORD. When were you appointed? Ms. SCHIAVO. 1990.

### Senator FORD. 1990, so you have been here 6 years. Then you ought to remember that in this room, during the consideration of the $50,000 civil fine provision in the 1994 FAA reauthorization act, it was explicitly agreed to in this room, right here, that our first priority, and we were very emphatic about that, should be to recoup the moneys rather than impose fines on public entities, because in essence you are still taking taxes-if they pay the fine, you are taking taxpayers' dollars, and so I think what we were try- ing to do was to find a way to work out an agreement to get the money back without imposing the fine, and that was the legislative history. Is there anything wrong with that? Ms. SCHIAVO. The problem with that is our audits in some cases have found diversions in amounts significantly greater than the fines suggested of$50,000. For example, in some cases we have diversions of$64.6 million. Senator FORD. Yes, but that has been agreed to be paid back, and we will not getinto that,but that is a partofit.

Now, that was-once it was brought to their attention, they agreed to pay thatback, so that is part ofyour $170-some-odd million that you did not give them credit for the $65 million repayment, so I understand where that is coming from. Now give me something else.

Ms. SCHIAVO. They agreed to pay that back if and when the State legislature passes legislation. Senator FORD. You got an agreement. That is a whole lotbetter than putting a fine on them and taking them to court. You got an agreement. Ms. SCHLAVO. Ifthey pay itback plus interest. Senator FORD. Well, lots of times we forgive interest around here, you know, or we give lots ofthings. Ifwe do not forgive any more than a little interest on that,based on what we forgive on foreign aid and that sort ofthing, we are not hurting'anything.

Ms. SCHIAVO. But that is the problem. Then you have got an in

### terest-free loan for a loan fee of$50,000, and there is not sufficient deterrence. That is the problem here. We do not have a deterrent effect and that iswhy the L.A. problem continues. Senator FORD. How do you suppose we do it,just charge them, what a percen age of what we find that-or think they owe us back? Wego to dourt, the court says they do not owe anything, and we get beat then. That is the reason you settle it before you go to A 

### court,or while the trial is on. I am not a lawyer, so I can be on the jury, you know, and I can decide whether you are right or wrong. That is my long suit here. So I have a hard time getting with that. All the money-I mean, most ofthe money that you have agreed that you found has been agreed to be repaid, subject to appropriations by a State, 1), and the rest ofthem you have one-Westcheste.r County, I guess, is $25 million to $30 million, so you are talking about almost-you are talking about $90 million there ofthe $170 million, and you got $5 million, so we are getting close to $100 million ofthe $171 million you found, and then they are trying to work outthe rest. Butwhat I am tryingto say, we are trying to work this out, rather than fine anybody, and that was what this committee said we oughtto do.

## Now we are being critical ofMs. McFadden and her Department, and I am not trying to defend them. If they are wrong I will get on themjust as fast as I was otherwise, and you know that, do you not?

Ms. MCFADDEN. Ido, Senator. Senator FORD. Butthat is the direction. Now, is it true thatyou justfinished upyour report in 1995 as Ms. McFadden said? Ms. SCHIAVO. On L.A., one ofthe 23, thatis correct. Senator FORD. 

## So there is not too long ago, so that is not really a long delay that L.A. has been out there and has been a problem for a long time, but in a number ofyour reports that I understand, you suggested the lease or sale ofairport land for less than market value constitutes arevenue diversion. Ms. SCHIAVO. In some of ourreports we said that,yes. Senator FORD. Is that in all cases? Ms. SCHIAVO. Atfirst, we did consider it diversion, until the FAA overruled us on that. So our $170.8 million figure does not include those amounts. Senator FORD. OK. So you are saying that if we sell a piece of property, orthe airport sells a piece ofproperty for less than marketvalue, then that is revenue diversion? Ms. SCHLWVO. That was our original position. But we were overruled, and so we did not include those figures in the $170.8 million. That is now out ofthe calculation. Senator FORD. Many times,property development around an airport is dependent upon many factors. I have trouble with being a good citizen and participating in what is good for the community, what is good for bringing in passengers or tourists, and that sort ofthing, and thatbothers me.

Ijust do not think you ought to get after the pope here. I think you are making a mistake getting after the pope now, and I am Baptist, bythe way. [Laughter.] Senator FORD. 

## But sometimes an airport provides land cheap for a Little League group, and they buy it, and that is noise-impacted land. Now, are you saying that when they do that for the Little League and it is noise-impacted and probably nobody else would want it, and they let them have it at less than what you would say marketvalue is, is thatrevenue-diversion?

Ms. SCHLAVO. No. It isnot included in our figures. Senator FORD. 

## Soyou would not say that? Ms. SCHIAVO. Atthis point, no. Senator FORD. So yourjudgment, then, that would not be revenue diversion? Ms. SCHIAVO. Tobe clear, our originaljudgment was that it was revenue diversion, and that the law required the market rate return on the sale ofairport property. But once we issued that opin- ion we were overruled by the FAA, so none ofour figures included in our total here today include any amounts related to that issue. Senator FORD. Well, letme ask youthis, then, what if-and I am trying toget clear between the two entities here. Airparks are pop- ular around the country at smaller airports, not as large, maybe, and maybe they are, at LAX, but what if the airport sells some property at somewhat ofa bargain, but it puts a business into the

### airport that increases their revenue. Now, do you count that as revenue diversion?

Ms. SCHiAVO. No. Senator FORD. You would not count that? Ms. SCHIAVO. No. 

### Senator FORD. Isthat because you have been overruled? Ms. SCHIAVO. Yes. Senator FORD. Ifyou had your decision, you would say it would be? Ms. SCHIAVO. It would depend upon the uses. Senator FORD. Now, there you go. That is the problem Ms. McFadden is in. Ms. SCHIAVO. The law makes a distinction between aviation uses and nonaviation uses in the property, but we have considered that all moot. Once the FAA opined and ruled on that, we said, fine and proceeded without it. Senator FORD. Well, I do not see anything wrong with trying to generate business for your airport. I do not see anything wrong with that long-term lease, a lot oflandings, things ofthat nature. I think that is a good sale, and I would not say that would be revenue diversion. One last question. As a part ofthe 1994 act, we required specific financial information from airports. Do you believe the information will make enforcement ofrevenue diversion easier?

Ms. SCHiAVO. Ifit comes to fruition and those guidelines are put out and airports start filing. In addition, one of the things I suggested was a special certification by the airport auditors. Ifthe airport auditors had to specifically certify that they reviewed the records for diversion and did not find any diversion, that would be a very useful tool for the FAA and for the Department to have, and that is why we have suggested a special certification be included. Senator FORD. 

### Thank you, Mr. Chairman. I have other questions, but I have taken too much time. Senator MCCAIN. Senator Burns. Senator BURNS. Thank you very much, Mr. Chairman. I have a statement, and I would ask unanimous consent that it be made a part ofthe record. [The prepared statement ofSenator Burns follows:]

STATEMENT OF SENATOR BURNS Mr. Chairman, thank you for holding this hearing today to further explore the issue of airport revenue diversion. I will keep my remarks short, and ask that my statement be placed in the record at the appropriate place. I look forward to hearing from the witnesses today.

The issue of airport revenue diversion is a serious concern to airport users and to Congress. If nothing else it is time to determine once and for all whether the problem exists, whether ithas been solved through statutory andregulatory means, or whether more needs to be done. I am pleased that this subcommittee will exam- ine this issue to ensure that this situation is corrected. I urge the Federal Aviation Administration and the Department ofTransportation to take adequate steps to end this practice and wrap up all the lingering concerns about airport revenue diversion.

Airports are nothing short ofa monopoly with the ability to charge fees and con. trol aviation traffic. Diverting funds while charging fees and receiving federal grants through the ALP funds is nothing short of double-dipping and taxpayers pay the brunt ofthis practice. Air carriers and air travelers pay a heavy price for airport revenue diversion.

The 1994 FAA Authorization Act was intended toput an end to this practice. Current law requires airports receiving airport grants from the FAA to use all airport-generated revenues for the capital or operating costs ofthe airport. Unfortunately, airports still act unlawfully to divert funds to non-airport related projects despite the changes in the lawmeant to end thispractice.

Iencourage the FAA to look closely at the issue ofrevenue diversion andestablish a policy that will take all parties' concerns into consideration. The FAA should prevent airports from intentional and inadvertent revenue diversions and protect airports from the threat of diversion. In today's budget environment every penny of revenue should be used solely to build and maintain aviation infrastructure.

I urge the Department of Transportation Inspector General to monitor non-com- pliance with the use of revenue and grants. The IG should be given the tools to crackdown on diverting airport funds to non-airport-related projects.

The FAA proposed policy should determine how to make the system work and keep airports from operating outside the system. There are several ideas on the table for ways to monitor the roughly 2500 airports who have grant agreements. A standard format for airport financial reports would make audits easier.

Again, I want to emphasize the importance of enforcing and protecting against revenue diversion. I understand that the discussion will be hindered by the open comment period for the FAA proposed rulemaking. but I look forward to an open debate on the current federal statutory and regulatory policies on ai,-port funding and suggested changes inpolicy. 

## Senator BURNS. I have been sittinghere hearing all ofthese big numbers and figures and everything, and listening to my friend from Kentucky. I am not going to get into this idea ofselling land, or selling an asset below market value, nr for other purposes. I want to deal with floats in the Rosebow "arade, OK, and when you see a diversion and you think it is an illegal diversion, OK, straighten me out. What action do you take then? Ms. SCHIAVO. The Office ofthe Inspector General issues its audit report, reporting the diversion tothe FAA to take corrective action. Senator BURNS. Now, Ms. McFadden, what does the FAA do? Ms. MCFADDEN. 

## Senator, let me ask Dave Bennett who is the recipient ofthe IG audit report at the FAA, to go through exactly what we do when we receive those IGreports.

Mr. BENNETT. Senator, we would receive a draft audit, not a final, and we have-it is a fairly one-sided presentation usually very accurate, in the findin ofpayments and so forth, but it does not include defenses or maybe explanations that the airport might have. So we would provide thatto the airport operator atthat time and kind of get their position on those findings, and sometimes they agree with them. When we have that, then we file comments on the draft audit, and that goes back to the Inspector General's Office. Senator BURNS. Now, clearly this has been an illegal diversion. One ofthem is worrying about getting their money back until the legislature appropriates the money in that particular State.

Why would it not be a lot simpler, the next yearjust deduct that amount from the monies that they are supposed to receive out of the fund? Ms. SCHIAVO. It would be, and that is why the House of Rep- resentatives put language in the appropriations bill for 2years say- ing that if diversion is uncovered they will not receive any ofthe DOTfunds for thoseyears in question. Senator BURNS. Well, Mr. Bennett, have you got a different view ofthat? Mr. BENNETT. 

## Well, these are not Federal funds that are being diverted. These are the local funds that should be in the airport account but are in a general account, and what we want is for them

## togo back to the airport account. Cuttingoff,taking that outofthe AIPgrants in the year does not get them tothe ri htplace. What we really want isjust to get the funds back in the local account and, of course, deducting it from the AIP would hurt the airport even more. We dohave a sanction. Senator BURNS. Well, who is the sinner? Mr. BENNETT. The sinner is-well, we would consider the sponsor-we have an agreement with the sponsor who signs our grant agreement, and that is generally the city, not the airport manager. Senator BURNS. And, ofcourse, they are the recipients ofthe AIP funds the next year, right? Mr. BENNETT. Yes, they are, Senator, but ofcourse those funds have to go to a very specific airport project.They are notjust available to the city. Senator BURNS. I guess I am up a wall here on, ifyou cannot get the money back, there has to be some way that people have to pay the price for an illegal diversion, or it goes on all the time. I do not understand that. I mean, enlghten me some way or another.

Mr. BENNETT. Senator, there are a number of sanctions, and the key one is, eventually the withholding ofall Federal airport grants tothe sponsor. Senator BURNS. Has that ever been done? Mr. BENNETT. It has not been for revenue diversion, because first ofall we have an obligation, as is made clear in the 1994 FAA Authorization Act, to give the airport an opportunity to correct the diversion and to pay itback, andto work with them to do that. Senator BURNS. Is there a time limit on that? Mr. BENNETT. There is no time limit in the law, and we do not currently have one in our regulations. Senator FORD. The law is only 2 years old. Mr. BENNETT. That is correct Senator, and it is difficult to have a uniform procedure that applies to local governments, because they are so different. The other is that we have not to date had a challenge from an airport when we have issued a final determination. We have had cooperation in paying back. We have a lot ofopen cases, I would concede and we would like to get on with them and close them, but we have not had to go into an enforcement posture with an airport thathas simplyrefused to correct an ultimate finding. Senator BURNS. I guess that is all the questions. That is all I know how to ask. I cannot believe that once you determine it is an illegal diversion, then why we would keep sending the money, I just cannot figure that out. I mean, there is probably more to this than I realize. I live a pretty simple life. It sounds like you have a faulty accounting system. Could that be the case? Mr. BENNETT. Well, I think whatever our accounting system, it can always be improved, and I think we will generally be looking at our program.

One of the considerations and sanctions under this program is under the Airport Improvement Act provision that provides for withholding grants. FAA can only withhold grants for 6 months, until we reach a final determination and complete a hearing, so we

## are reluctant to withhold those funds until we are ready to proceed with the hearing, because 6 months is a very tight timeframe to conduct a full administrative hearing and complete a final determination. So once we commit to that, to an enforcement action, we have to be prepared to go to the end ofit,otherwise we could not withhold the funds. It isjust aprovision in the law. SenatorMcCAIN. Senator Gorton. Senator GORTON. 

## Mr. Chairman, I thank Senator Ford for some ofhis questions. I am reminded in my staffmemo here that he and I had a conversation on one particular matter relating to the Seattle Tacoma Airport, and that he, as Chairman ofthis subcommittee, assured me on the basis of a set of questions that what the airport was doing was not a diversion, and the Inspector General has disagreed with that. I think in this particular case a settlement has been reached that is better than litigation, as far as the airport is concerned, butit isnot satisfactory. I guess in reflecting on the questions and answers that I have heard since I have been here for the last few minutes, it seems to me that the nature ofthe problem and the controversy that we are looking athere can be splitinto two distinct questions.

The first is, is a particular activity in fact a diversion and there are obviously serious differences of opinion over that subject, some of which may be specious, many of which are honest. When you deal, as I must in my own community, with the tremendous furor over noise and noise abatement, to what extent is noise abatement a proper airport function and to what extent is the use ofairport money for it a diversion? The second question, it seems to me, is, when there is a clear diversion, what should the sanction be? I think, at least prelimi- narily, I fall on the side ofthe Inspector General atthat point, and perhaps the entire Department ofTransportation, that when it is clear that an illegal diversion has taken place, it is inappropriate just to say well, do not do it again, and we will take it out ofsome money that is dueyou a few years from now. The Inspector General has pointed out that that is an interestfree loan, and that is better than you can get out ofany bank, so there is a great temptation to go ahead with diversions and then, 5 years later,perhaps, pay them back in depreciated dollars.

Just how far we go is still a question ofvaluejudgment, I think, Mr. Chairman. At one level the people who are really penalized by all ofthis are not so much the airlines or the airport agencies, but the ordinary citizens who fly in and out ofparticular cities through airports. Senator BURNs. I think our little airports are hurt. Senator GORTON. I guess I am more troubled about taking arbitrary action when there is a clear, good-faith dispute over whether or not the use ofmoney for a particular purpose is, in fact, a diversion. Once we have decided that,I believe that we ought to bepret- ty tough on them. These are sort of stream of consciousness thoughts. Maybe both the Department and the Inspector General and the FAA would make briefcomments on the different dynamics ofthose two questions.Ms. SCHIAVO. 

## In your 

## area, on the Seattle airport,just to clear it up for the record, there were two issues. One issue concerned spending $2.9 million to construct a community activity centeragain, not related to the airport or on the airport property-and the second one wasSenator GORTON. 

## But that isthe point.When I

## had my conversation with Senator Ford, it was our thrust that it was very much airport-related, that it was the airport that had made the present situation with such a center untenable underneath it,and at least offthe top ofmy head it would seem to me that when you are taking care ofthe clear impact ofan airport that that is not or should notbe considered tobe a diversion. Ms. SCHIAVO. The second issue concerned $3 million spent for the 

## public park on the airport. Is that the one you are referring to, the public park? The $3 million was for the public park on the airport property. Senator GORTON. 

### I 

## think the reference that Iwas making was to the community center. That is the one that we discussed where I got an answer from the Chairman that I thought was both good sense and correct as a matter oflaw.

Senator MCCAIN. 

## You would have gotten a different answer from me. Senator BURNS. You would have gotten a different answer from me, too. Senator FORD. 

## Well, Iguess itis two and two. [Laughter.] Senator GORTON. 

## But the point is I can say to Senator McCain, ifwe had gotten a different answer I suspect a different course of action might have been undertaken by the airport, but it is hard to say that the airport was not engaged in a good-faith activity when they got that answerfrom the Chairman. Senator MCCAIN. 

### I 

## wouldjust say to my friend that there are areas that are questionable. Iagree withyou in that there are gray areas. But I also would like to show my friend here case after case where there is no doubt-I mean, there isjust no doubt. For example, consultant and lobbying fees for Proposition K of$1.4 million. We would nothave to have a colloquy on that. Senator GORTON. 

## I do not think we would, and that was the distinction I was trying to make. I do not need from you-from the Inspector Genera1M do not need to go over these particular matters at Sea-Tac airport. Ijust would likeyour reaction to the propo- sition as to whether or not there is a distinct difference between over a good-faith debate over whether or not the diversion has taken place, and then thereafter the sanction when it is clear that one has. 1just wanted to know if any of you wanted to comment on that. Ms. SCHIAvo. Tofinish up,yes, there are differences, because the second thing I was going to point out was that in Bremerton Washington, they had a similar situation of $1.6 million diverted for construction of an industrial development park, and they are one ofthe handful ofairports that have already anteed up andpaid back the diversion amount. So it is a slightly different situation, but it also concerned diversion for another kind ofa development. The good news is they have already anteed up and done what was required ofthem under the audit.

### So the responses ofthe airports and the airport sponsors are also different and also play into effect here. Some sponsors concoct all sorts offantastic excuses like we have seen in Los Angeles. Others are stepping up to the plate, making the correction, and getting on with it. Senator GORTON. That is avalid distinction, as well. Ms. MCFADDEN. 

### Senator, thank you for your question, and thank you for the colloquy between you and your colleagues, because I think, it points out that the difficulty in grappling with some of these issues when you who helped to craft the prohibition against revenue diversion can have healthy disagreement over what exactly is revenue diversion. I think that is what we struggle with in terms ofthe complex and complicated "on the margin" questions. But let us talk about the "not on the margin" questions, the things that we, the Inspector General, and you would all agree constitute revenue diversion. We have had a number of instances of that. In many ofthese instances we have recovered money from the airport sponsors. The example that I know troubles all ofyou is, not surprisingly, the city of Los Angeles. That is a full and complete audit report that we received in the fall of 1985 and are dealing with now. We wanted to deal with Los Angeles in a comprehensive way and go back to the city and give them a total amount in terms ofsums that webelieve were diverted. I think it is easy to point to some particular item in a list, and we agree, Mr. Chairman, that there are some egregious examples on that list. We are not in disagreement with you. But I would not want the impression to be left that we have not acted upon things that we believe have been revenue diversion, or that we do not intend to act upon things that we believe and agree are revenue diversion. Senator MCCAIN. Thank you very much. Ms. Schiavo, at one point you also found diversions at the Phoenix Sky Harbor airport? Ms. SCHIAVO. Correct. Senator McCAIN. And what was that? And maybe you can just provide that for the record. Ms. SCHIAVO. We have itright here. Senator MCCAIN. Was it corrected? Ms. SCHIAVO. That has not been corrected in its entirety, no. Mr. WEINTROB. A total of$578,000, is what we reported. Ms. SCHIAVO. It is pending Office of the Secretary resolution. That situation concerned an agreement with a bank, where if a bank would bring in a certain number ofjobs, then the rent would be reduced. If the bank did not bring in the promised amount of jobs, then the rent would be a different amount. There was a discussion over that difference ofopinion. Senator MCCAIN. Let me again point out a salient fact, especially to my friend here from Washington. These diversions take place where a city or municipality owns the airport. They do-not take place where the airport is an entity in itself. I do not think that is a coincidence. That is a very important factor in our discussions in our view oflegislation and what needs to be done here. I am not saying we need to sever all connections, but there is not a single case, is there, ofdiversion by a nonmunicipal or city-owned airport?

### Ms. ScL Avo. No, that is correct. Those were all clean, good-news reports. Senator McCAN. I take it, Ms. McFadden, that the reason why there has not yet been a response to a complaint lodged about LAX 13 months ago by the airlines. Well, are we expecting a response on that?Maybe I should ask Mr. Garaufis. Mr. GARAUFis. Mr. Bennett is handling that. Mr. BENNETT. That is the revenue diversion complaint? Yes, we received that. We docketed it under our Part 13 procedural regulations and treated it as we do other complaints. It was immediately served on the city, and there were several rounds ofpleadings back and forth, so that both sides had several opportunities to provide comments, and then there was also some delay in the proceedings at the request ofthe parties. Senator MCCAIN. Doyou expect a resolution anytime soon? Mr. BENNETT. Yes. It has been forwarded to my office now from the counsel's office, and we will begin the investigation and proceed with it. Senator MCCAIN. You have no target date as to when? Mr. BENNETT. It is-we have a number ofcases we are working on, so it is difficult to give an exact date, but I think this one could be handled relatively expeditiously. Senator McCAIN. Ms. Schiavo, I understand that Webster Hubbell was hired by the Los Angeles Department ofAirports to lobby the Federal Government, including officials in the administration and DOT and FAA for approval to transfer more than $53 million in State land condemnation proceeds relating to the Century freeway from the airport fund to the city's general fund. It has been asserted that this effort is part ofLos Angeles' ongoing effort to divert airport revenues for nonairport sources. Given the release of your office's report on the issue today, what has your office learned about Mr. Hubbell's arrangement? Specifically, what impact did Mr. Hubbell's involvement have on the Department of Transportation's February 1995 decision to allow the transfer offunds? Ms. SCHIAVO. Yes. Our investigation answered specific questions for the chairman of the Committee on Government Reform and Oversight for the House ofRepresentatives and we did confirm the statement that you just made. First of all, Webster Hubbell was hired by the city ofLos Angeles to lobby, the purpose ofwhich was to get a determination from the Department concerning the use of revenue from the Century Freeway condemnation. We did a substantial report. I can go through some ofthe chronology ofthat, ifyou would like, but we did confirm the statement youjust made. Senator McCAiN. Based on your review ofthis land sale proceeds transfer and Mr. Hubbell's involvement, how would you assess the Department ofTransportation and FAA's consideration ofthe city's request to move this money to the city's general fund? In other words, do you believe that they made a legitimate decision, based
on the facts athand?

Ms. SCHIAVO. We did not consider that specific point. We were examining Mr. Hubbell's involvement in this and if there were any improper activities by Department personnel.

## We concluded, for example, that he was hired by LA and that he did lobby certain persons at the Department, including the General Counsel, who first ofall issued a draft opinion to Mr. Hubbell via fax at Thanksgiving time. The initial opitiion was that the land condemned for the freeway was airport property and the proceeds had togo back for airport use. In that initial draft, and this is my take on it,they offered aconsolation prize, that LA could use imputed interests to attempt to offset funds and to attempt to keep funds in the city revenue. In other words, they could come up with imputed interests for alleged investment by the city-unfortunately, we have learned that the time was unlimited-to attempt to offset this $58 million which this initial draft concluded was airport revenue. Senator McCAmN. In your view, is it standard procedure to fax a proposed settlement to a lobbyist involved in a case, and to no one else?

Ms. SCHIAVO. We do not know what Mr. Kaplan's standard proce- dure was. We can only note, as our fact-finding disclosed, that it was only faxed to Los Angeles and not to other interested parties. Senator MCCAIN. Ms. McFadden, is that standard procedure, to fax a proposed decision, not even a final decision, to one ofthe interested parties, and not even one ofthe interested parties but to a lobbyist, a hired lobbyist, for that organization? Is that standard procedure in the Department ofTransportation? Ms. MCFADDEN. Mr. Chairman, Ms. Schiavo used the term General Counsel, and let me make sure it is clear for the record that she is talking aboutmy predecessor, first ofall.

Second ofall, I am not sure of the context or, because I was not there and I do not know what the facts show, have not seen Ms. Schiavo's report, I could not comment on the context or the rationalefor doing so. Senator MCCAIN. In a nonspecific case that is before the Department ofTransportation, is it standard procedure to fax a proposed decision to a lobbyist representing that group? Would that be your standard procedure ifa case were before you?

Ms. MCFADDEN. 

### Well, Mr. Chairman, let me answer 

## your ques- 

## tion, and then also let me ask Mr. Bennett, who was at the Department at the time and was involved, and who may be able to speak specifically to it, but I would say no, it's not standard procedure, but maybe a reason to do itis toreach aresult. Senator McCAIN. Mr. Bennett? Mr. BENNET. Mr. Chairman, it was not a rulemaking, so we were not under a formal prohibition on disclosing drafts. I think that while maybe not standard, I think it is probably not uncommon, where we are dealing with one party, to let them see a draft of something that might turn into an action. This was relatively preliminary. Senator MCCAiN. And common to say, "Webb, a blessed Thanksgiving present" as you fax it?

Mr. BENNETT. I do not know anything about that, Senator. Senator MCCAIN. I do. I have a copy ofthe fax right here, a very cozy relationship, to say the least. Then, of course, that decision was later modified to a significant degree, is that correct? The original draft decision, after it was sent?

### Mr. BENNETT. The final decision did not look much like that 

## draft, but that was not apreliminary decision. It was a discussion draft. very preliminary. There was a lot oftalk about it, and then we shared the discussion, and it turned out to be unworkable in several ways.

Senator MCCAIN. Ihave to tell you, Mr. Bennett and Ms. McFadden, Ihave only been up here 14 years. I have neverheard ofthat kind ofa situation where you fax a draft decision to a person that is alobbyist and no one else, not even a party that is involved, and say a blessed Thanksgiving present along with it. I do not believe that that is the kind ofway we address these issues. Ido not know ifit is illegal or not. I do not even know if it is unethical. But I sure do not think that the American people expect business to be conducted that way. Ms. McFadden, according to Mr. Hubbell's records you met with him on at least two separate occasions between September and December 1994. During this time period did you have any contact with Mr. Hubbell regarding his representation of Los Angeles and airport revenue diversion matters, and if so, what was your involvement?

Ms. MCFADDEN. I am sorry, Mr. Chairman-I am not sure that you were talking aboutSenator MCCAIN. According to Mr. Hubbell's records, which we would be glad to provide you, you met with him on at least two separate occasions between September and December 1994. During this time period, did you have any contact with Mr. Hubbell regarding his representation ofLos Angeles in airport revenue diversion matters?

Ms. MCFADDEN. No, Mr. Chairman. Not at all. I did not know Mr. Hubbell was representing the city ofLos Angeles. Ihave never had a discussion with him about this matter. Senator MCCAIN. Are matters like this usually decided by the FAA or by the Department ofTransportation, Ms. McFadden?

Ms. MCFADDEN. Ido not know, in the case ofthis matter. Ithink in general these kinds ofmatters begin at the FAA, and the FAA is the primary decisionmaker. But many matters, particularly an issue like this, which I believe was raised to the Secretarial level for a Secretarial decision, would involve the General Counsel's Office. We try to work collaboratively and cooperatively on matters as much as possible. Senator MCCAIN. Thank you. Ms. Schiavo, is it normalfor the FAA to handle this, or the Department ofTransportation, on an issue such as this, inyour view? Ms. SCHIAVo. Limiting it to revenue diversion issues, most of 

### those issues have, yes, been handled by the FAA. But LA is different, as we have seen in many respects. They certainly have taken diversion to new heights and also they to ver high levels, which we learned later in the investigation. They aRso took it to very high levels within the government, which is something, at least to our knowledge, other diverters have not done. Senator MCCAiN. They have taken it to the White House? Ms. SCHIAVO. From information that I learned this morning, yes. Senator MCCAIN. And they then, over time, received a favorable 

## decision?

### Ms. ScmLVO. Yes. Let me finish our chronology here. After the 

## faxed draft of this proposed opinion went to Mr. Hubbell fromagain, it was not Ms. McFadden, it was her predecessor, Mr.KaplanSenator McCAIN. By the way, Mr. Kaplan was invited to testify 

## here today, and chose not to. Go ahead, please. Ms. SCHIAVO. It was Mr. Kaplan who faxed this opinion. So our 

## investigation did support that Mr. Bennett did not know. That is consistent with our investigation, because it was Mr. Kaplan that faxed it. After that,there were several meetings with Mr. Kaplan, LA, the FAA, and a Senator's staff member at DOT. Then there was a meeting which we learned about this morning through notes and internal memos from LA, not, unfortunately, from our interviews in the Department-at which the mayor addressed the issue with the President during a visit to LA on the anniversary of the earthquake, which was November 16, 1995. Again, this is according to LA, not according to the White House. Thereafter, on January 18 there was another meeting with General Counsel at FAA concerning the issue, and again on January 27. There were additional meetings at the White House, and finally on February 28th the Department's response was sent to LA by the FAA. But as was noted by Mr. Bennett, the final decision did not look like the draft.

The final decision basically said-and it is a long decision and I will summarize it, so please forgive the summary we are not going to act. The initial decision opined that this was an airport revenue diversion, but at this point you can go ahead and take the money out ofthe airport fund and transfer it to the city fund, and we are not going to do anything. Ifsomebody chooses to challenge it,then you will have to litigate it. That is a very brief summary. This is a long document. Senator McCAIN. Does this decision have any precedent in your 

## experience since 1990?

Ms. SCHIAVO. I have not seen anything like it on airport revenue 

## diversion cases. But again, LA's activity in airport revenue diversion is unprecedented.

Senator McCAIN. Do you believe that in yourjudgment there is 

## the rationale for the decision that was made, either in law or in custom, allowing them to transfer this $53 million? Ms. SCHIAVO. 

### I was not involved in the discussions that they 

## had. Our audit did not cover this particular piece-what we looked at concerned the lobbying activities, and we read the documents in relation to that. From my government experience, it is unusual to issue an opinion saying: ifthe facts are as you say, go ahead and do it and we are not going to take any action, but we are not going to independently find the facts or we are not going to independently opined. That is unusual for the government. But again, our investigation did not cover that exact opinion and whether it was right or wrong. We were looking at who was doing whatbehind the scenes.

Senator FORD. 

### I 

## am getting a little bit confused. The Inspector General gave information about the White House which you just

## mentioned is not in the report. Is that new information youjust got?

Ms. SCHIAVO. Yes. I gotthat this morning. Senator FORD. You got that this morning. Well, Senator McCain apparently knew about it,and Idid not. Senator MCCAIN. I did not. Senator FORD. That was a surprise wo you that in 1994 Mayor Riordan and his staffwas here for the FAA reauthorizationSenator McCAwi. Senator Ford, could I interrupt? I may have told you something wrong. I did have information that-we did have some information that Mr. Hubbell had contacted the White House, but I did not have the information I believe that Ms. Schiavo is referring to. Senator FORD. I amjust trying to get caught up, Mr. Chairman, and Icannot get caught up when I do not have it all put together, but you talked about the mayor meeting with the President. Did Sou investigate the meeting of the mayor with Majority Leader

ole? 

## Ms. SCHIAVO. No. I said this morningwe found this out, and this was according to notes of L.A. That is why I mentioned that L.A. may be exaggerating for all weknow. Senator FORD. 

## I do not know what they are doing, either, but I do know when he was here and he was fighting the 1994 FAA reauthorization, that he had a long conversation in the Majority Leader's office. Now, that is not in your report at all, but you have the notes about the meeting with the President.

Ms. SCHiuvo. Right, because we were provided those notes this morning as an explanation, apparently by L.A. Senator FORD. L.A. sent this information to you? Ms. SCHiAvo. No. Senator FORD. In the letter of transfer, agreement to transfer, and I am reading-I have Halfzeimer's. I can only remember the letter, and you can help me with the details. In the transfer, or the agreement transferring the $53 million, was there not a caveat on there that you are subject to suit, and all that sort ofthing? Ifyou want to do it, you go ahead, but you are liable to be in court?

Ms. ScHLAvo. Yes. That was the ultimate opinion. That is right. Senator FORD. So the warning was there. They did not say it was free and open, and all that sort ofthing, but they are still going tobe subject to suit. Ms. SCHLAVO. That is right.The FAA saidSenator FORD. That was apretty good warning, was itnot? Ms. SCHIAVO. Oh, sure. 

## Senator FORD. OK, now, as far as the fax is concerned, I am reading from your report, your questions here, I think, and it says, we were saying to Los Angeles we are working on this, here is a draft. Those are his words. We want your input based upon your sense ofthe facts. It said aWashington D.C.-based attorney's group-and I will not get into names. I do notthink I should-representing L.A., butthat they have-that he may have been asked by them to send it and so there was not anything-this was a document trying to work out an agreement.

## Don'tyou attorneys kind ofswap agreements and try towork out something? But I do not-you are representing me, and somebody else represents somebody else, andyou swap papers to try to work out an agreement. Is there anythingunholy aboutthat?

Ms. ScHAvo. No. We reported exactly what Mr. Kaplan said he was doing. Senator FORD. There was really nothing unethical about it, was there?

Ms. SCHiAVO. No. Our report did not make any findings on ethicality. Senator FORD. 

## Buttheir report says that you never fax-anything like that. Well, my grandkids fax things to me, so you fax every- thing, so it is a little bit frustrating that you are using the man's problems here apparently to bring up a red flag as it relates-I mean, was there anything wrong with L.A. hiring somebody to represent them inWashington? Ms. SCHIAVO. No. 

## Senator FORD. It was perfectly legal, was it not? Ms. SCHIAVO. That is correct. Senator FORD. There is nothing that prohibits the airports from having representation uphere either, doesit? Ms. SCHiAVO. Nothing prohibits the airports from having rep- resentation here and even, under the new guidelines, using airport revenue to doit. Senator FORD. Soreally whatthey did was perfectly legal. Ms. SCHLAVO. What they did was legal. Senator FORD. OK,fine. Ihave no further questions. Senator MCCAIN. Is it not appropriate to notify other interested parties of proposed settlements, rather thanjust one lobbyist? MS. SCHIAVO. Certainly, it is appropriate to notify other parties. Our task was to find out if there were ethical violations by Mr. Hubbell contacting the Department ofTransportation, and we did not find ethical violations on that. We reported the facts that we found, and ifthings are unusual, then things are unusual. Our task was to find ifhe violated ethical laws, and he did not. He was free to contact the Department of Transportation because the post employment ban applies to the agency where you previously worked. He previously worked atJustice, not Transportation, so he could be hired as a lobbyist to lobby the Department ofTransportation. Senator MCCAIN. Thank you very much. Ms. McFadden, would you like to add anything to this discussion that would help the record? Ms. MCFADDEN. Actually not,Mr. Chairman. Ireally do not have anythingto add about this particular situation. Senator MCCAIN. Thankyou very much. Senator Ford. Senator FORD. I have nothing. 

## Senator MCCAIN. Thank you. I thank the witnesses very much forbeinghere. Iwould like to call the second panel and begin. We will probably have tobreakfor avote. Mr. Edward Merlis and Mr. James Frassett, please come forward. Mr. Merlis, why don't you begin, and then we will proceed

### 46



### to Mr. Frassett, and then we will probably have to take a break for a couple ofvotes here, but please proceed. STATEMENT OF EDWARD A. MERLIS, SENIOR VICE PRESI.

DENT, FEDERAL AFFAIRS AND AIRPORTS, AIR TRANSPORT ASSOCIATION OFAMERICA Mr. MERLIS. Thank you, Mr. Chairman and members ofthe subcommittee. I am Edward Merlis, senior vice president of the Air Transport Association ofAmerica. We appreciate the opportunity to appear before you today to explore an issue ofgreat importance, airportrevenue diversion.

Revenue diversion is a burden on interstate commerce, an unfair tax on airline passengers and shippers not unlike forced tribute charged in ancient times for safe passage through foreign lands.

My entire statement would go on for quite some time, so I am just going to excerpt from it the 5 minutes I was given.

. Senator MCCAIN. Without objection, your entire statement will be made a partofthe record. Mr. MERLIS. Thank you. Because airports are local monopolies, as well as having been significantly funded by the airport improvement program, Federal law places significant restrictions on airports' ability totake unfair advantage oftheir monopoly status. Among themost important ofthese restrictions is the revenue retention grant assurance, requiring that all revenues generated by the airport will be spent on the capital or operating cost ofthe airport. Diverting revenue from an airport is a way for local officials, who do not have the political will to attack their local budgets as you have the Federal budget, to try to pass some of the responsibility on to you, the members of this committee. This brings us to Los Angeles, the focus of this hearing and the focus of revenue diversion efforts since 1988, when LAX retained a consultant whose mission, among others, was to assist in devising ways to transfer revenues from LAX to the general fund ofthe city ofLos Angeles. Beginning in 1992, when the airline operating agreements expired, the city started to act on its plan. First a referendum was passed known as Proposition K, which eliminated the prohibition on revenue diversion contained in the city charter.

The city demanded and the airport paid $8.7 million as purported reimbursement for newly recalculated indirect city service costs duringthe years 1983 to 1992, notwithstanding the fact that those costs had already been calculated by the city and paid in the appropriate years. In April 1993, a new mayor whose campaign platform called for the use of LAX revenues to fund an expansion ofthe city's police force came into office. 2 months later, LAX landing fees tripled. The air carriers balked. LAX threatened to lock them out. But let me note here that landing fees is not the issue which gives rise to the carrier's concerns. Itis the intended use ofthe proceeds of those landing fee increases to build surpluses which the city could then divert from the airport. It was this dispute and the lockout threat that led to the passage ofthe Federal Aviation Administration Authorization Act of 1994's restatement ofrevenue diversion restrictions and important procedural reforms.

### In February 1995, the Los Angeles City Council eliminated the covenants against revenue diversion that were contained in its airport bonds through a refinancing. Later that month, LAX transferred $53 million to the city ofLos Angeles, claiming that this amount, representing the roceeds plus interest of the 1989 condemnation ofairportland or the Century Freeway, was incorrectly paid to the airport account, despite repeated prior acknowledgement thatthese were airport funds.

We should all be so flush notto notice a $50 million error in our checkbooks for 5years.

Acting on our protest, the FAA examined the proposed transaction informally, and in a 10-page letter detailed the reasons why the transfer should not occur, but curiously, and inexplicably, at least until this afternoon's testimony by the Inspector General, it chose not to take a stand in support of its very own findings, instead advising the city it would permit the transaction to occur, but noting it could be subject to a formal challenge.

Mr. Bennett referred to that formal challenge, which we filed on March 25, 1995. It is now more than 13 months later, and other than an acknowledgement, nothing has been done about that pursuant to the part 13 rules ofthe FAA.

The airlines also have pushed back with respect to the 1992 payment of $8.7 million for the recalculated charges for city services from 1983 to 1992. However, this time, because the airlines were in Federal court, they were able to obtain meaningful discovery. The court has already wiped out more than halfofthe $8.7 million on summary judgment. Finally, two recent reports prepared by a San Francisco accounting firm make the fantastic claim that LAX owes the city more than $350 million dating back to the twenties and thirties. This claim that the airport never repaid ancient loans represents another creative scheme to divert huge sums from the airport to the city. Notwithstanding the obvious defects ofthe grand jury claim, the mayor has submitted a proposed fiscal 1997 budget which includes a line item of$30 million apparently as the first installment payment on the basis ofthese ancient loans. The Nation's air carriers are facing even more taxes and fees at LAX. Under consideration are proposals to increase cargo and maintenance facility rents, and a new fuel tax. There is also talk ofa new sewage treatment fee.

IfLAX is permitted to continue to flaunt the law, soon other airports will follow suit. Senator McCAIN. I apologize, I have to interrupt you. I have only 3 minutes left to vote. It is going to be about a half-hour before I can be back. I would ask for your patience. Your testimony is important, and I hope I am not keeping you from a plane back to LAX. Mr. FRASSETT. No. I am leaving tomorrow. Senator MCCAIN. Thank you. We will temporarily recess this hearing. They will tell you when I can get back. Thank you. [Recess.] Senator MCCAIN. Mr. Merlis, would you proceed? Mr. MERLIS. Mr. Chairman, there is no need for apology. I spent many years on the staff of this committee and in this institution,

## and I understand full well the nature of the problem. We deeply appreciate ofthe fact you are holding this hearing, so we are very patient. Iwill continue on with my oral comments where Ileft off.

- 

## The Nation's air carriers are facing even more taxes and fees at

LAX. Under consideration are proposals to increase cargo and maintenance facility rents and a new fuel tax. There is also talk ofanew sewage treatment fee. IfLAX ispermitted to continue to flaunt the law, soon other airportswill follow suit. Indeed, El Paso, Texas, recently increased its landing fees several hundred percent, and has lifted virtually word forword L.A.'s public consumption rhetoric forits ownjustification. For old adage, lack of enforcement breeds contempt, LAX is the case in point. Iwould be remiss, however, ifI did not extend the sincerest ap- preciation ofthe air carrier industry and ourpassengers and shippers for the letter which you and Senator Ford sent to Mayor Riordan 10 days ago upon the release ofhis budget proposals for fiscal year 1996-1997. We want to thank both ofyou for your commitment to seeing that the revenue retention requirements ofFederal law are fully enforced. Mr. Chairman, my written statement covers a number ofenforcement-related issues, and ofcourse, I would be happy to respond to any questions on the LAXmatter, the enforcement issues, or other comments which Imade.

Ijust want to add, it is a personal honor to appear before this subcommittee today. The entire air carrier industry appreciates the leadership which you and Senator Ford have demonstrated on this very, very critical matter, and Iwould be pleased to respond to any ofyour questions. [The prepared statement ofMr.Merlis follows:]

STATEMENT OF EDWARD A. MERLIS Mr. Chairman and Members ofthe Subcommittee, I am Edward A. Merlis, Senior Vice President ofthe Air rransportAssociation ofAmerica. We appreciate the op- portunity to appear before you today to explore the issue ofairport revenue diversion-a subject ofgreat importance to the airlines, our passengers and shippers, and to thiscommittee.

ATA represents the major commercial passenger and cargo air carriers in the United States.1 Collectively our members account for over 95 percent ofall revenue passenger and cargo ton miles that scheduled air carriers operate in this country. 

### AirportFinance In order to understand our concerns with airport re enue diversion, we think it is important to review the mechanism by which commercial service airports in this country are financed. Fundamentally, our airport system is based upon a closed-loop financing system in which virtually all commercial airports have been bought and paid for by the airlines, their customers, and other users. Local tax revenues did not and do not support our national system of airports. In addition to grants from the user-funded aviation trust fund, airports are paid for by landing fees and by rental charges, and since 1992, Passenger Facility Charges--not general fund reve- nues. As a result, the U.S. airport system is a hybrid ofrcompeting and cooperating interests in which airports are self-sufficient contributors to local economies.

'U.S. flag members are: Alaska Airlines, Aloha Airlines, AmeTican Airlines, American Trans Air, America West Airlini-s, Continental Airlines, Delta Air Lines, DHL Airways, Evergreen International Airlines, Federal Express, Hawaiian Airlines, KIWI Airlines, Midwest Express, Northwest Airlines, PolarAirCargo, Reeve Aleutian Airways, Southwest Airlines, Trans World Airlines, United Airlines, United Parcel Service and USAir. Our associate members include: Air Canada, Canadian Airlines International, and LM.Royal Dutch Airlines.Additionally, because airports are local monopolies, Federal law also places sig- nificant restrictions on airports' ability to take unfair advantage oftheir monopoly status. We view these restrictions, which are contained in the Airport and Airway Improvement Act, the Federal Aviation Administration Authorization Act of 1994 and the Anti-Head Tax Act, as common sense policies for dealing with individual airports, each ofwhich is an integral part ofa national system.

Generafly speaking these restrictions are related to the use of airport revenues inthe following ways:

* Revenue generated by an airport is to remain on the airport to cover capital and operatingcosts. 1

* Airport revenues are not to be used for general economic development, market. ing, and promotion activities unrelated to the individual airport or airport system.

* Airports should make payments reflecting only the value ofservices and facili. ties provided to the airport, only for such services and facilities that are truly needed by the airport, are related to the movement of passengers and cargo through the airport, and only if such charges are assessed consistently with charges paid by other agencies or departments and calibrated in accordance withgenerally accepted government accounting principles and DOT's policy on rates and charges. AirportImprovementProgram

ALP funding is a key component ofthis closed loop financing system, and by all measures is one of the reasons for its success. In the last 15 years, AIP funding, which is derived in its entirety from the user-funded Aviation Trust Fund, has pro- vided approximately $17.2 billion in capital financing and fulfilled a major role in building our national system of airports-a system, for which you and your colleagues on this committee should be proud. Inorder for an airport sponsor to receive ALP grants, the sponsor must agree to various grant assurances first enumerated in section 511 ofthe Airport andAirway Improvement Act of 1982. The grant assur- ances prescribe important public policy objectives which AIP financing is intended to fulfill. Thus a recipient's agreement to comply with the grant assurances is the quid proquo forreceipt ofthe AIP funding.

From any perspective, one of the grant assurances most critical to the success of AlP is a requirement--commonly known as the revenue retention grant assurance- that all revenues generated by the airport will be spent on the capital or operating costs ofthe airport. Since money is fungible, it is only reasonable and prudent for Congress to insist that all revenues generated by the airport are spent on the air. port. In the absence ofthis condition, AIP funds could be used for non-aviation purposes, thereby undermining the important goal of establishing and maintaining a national system ofairports. The revenue retention requirement serves to underpin our national system offunding airports.

Furthermore, it is clear to us that revenue diversion is a burden on interstate commerce -an unfair tax on airlines passengers and shippers, not unlike forced "tribute" charged in ancient times for safe passage through foreign lands. Diverting revenue from an airport is a way for local officials, who do not have the political will to attack theirlocal budgets asyou have the Federal budget, to tryto pass some oftheresponsibility onto you, the members ofthiscommittee.

As we read the laws which you have enacted, it is our view that our shared con- cerns with revenue diversion can be characterized as follows:

* Airports could use their monopoly power to gouge airport users in order to fund non-aviation activities, thereby providing community services in excess of those the community is willing to pay for with its tax dollars.

* It makes little sense for Congress, with all of the attendant complexities of reigning in a Federal budget deficit, to provide funds for establishment of a national system of airports ifall the while local officials could extract money from that system for local government needs.

In a perfect world, my testimony would end at this point for there would be no issue to bring to your attention. The law, on its face, appears to prohibit theconduct which you set out to prevent, and there are a range ofenforcement tools available to the FAA to ensure compliance. But this is not a perfect world. Mr. Chairman, simply stated the law is not being adequately enforced, and we question whether theenforcement mechanisms and related sanctions in the law are sufficient to fulfill the public policy goals I havejust described. "Legal"RevenueDiversion

In 1993, the Surveys and Investigations Staffofthe Committee on Appropriations in the other body found revenue diversion going on at 56% of the airports which it examined. While most ofthat diversion was "legal" pursuant to the grandfather provisions ofthe 1982 Act, 12%ofthe revenue analyzed was being illegally diverted.We think it is time to subject this so-called "legal' revenue diversion to closer scrutiny. This subcommittee began that process in the 1994 Act with the adoption of language reing the Secretary, in administering AIP discretionary grants, to consider the amount-being lawfully diverted pursuant to the grandfather provision of the 1982 Act. While in 1982 there may have been a sound rationale for multimodal port authorities, which had co.mingled revenues and debt, to be protected from the revenue diversion requirement ofthe Act, much has changed. Since that time, interest rates have gone down and any prudent enterprise should have refinanced the existing debt. We question whether "legal" revenue diversion, permitted in order to retire debt, should remain "legal" long after the debt has been retired. Why should these governments be permitted to divert revenue when the ostensible purpose for its diversion has ceased? FindingsoftheDOTInspectorGeneral

The DOT Office ofInspector General also investigated the problem ofairportrevenue diversion. Of the 47 airports reviewed between August 1991 and November 1995, the Inspector General found an estimated annual loss of $55 million. (See attached list)

To get a feel for some of the details of revenue diversion and how those funds
are extracted from airports, we think it is instructive to review the Inspector General's recently issued audit report on Stapleton International Airport (Report Number R6.FA-6-006). Perhaps a more in-depth discussion of that report will provide you with a better understanding ofthe scope ofthe problem.

The report notes that a substantial sum ($4.7 million) ofnon-airport related indirect costs were charged to the airport during FY 1992 and 1993. Amongthe inappropriate expenditures the Inspector General found was $541,000 diverted to non-airport related lobbying activities. Airport indirect costs of $2.1 million were rung up for expenses ofthe mayor's office and city council. The IG claims that the FAA has done little, ifanything, to recoup those unlawful charges.

One may get the impression that Denver has treated airport accounts as a slush fund. The IG reports that the city charged the airport $357,000 to defend a lawsuit filed in February 1993 by Concrete Works of Colorado challenging a local ordinance concerning public works projects. But as the IG observed, "the suit did not in any way involve the [Denver] airports. More significantly, we also found Concrete Works had not done any construction work at the sponsor airports and the contracts bid on by Concrete Works were not airport related: On a national basis, these types of airport charges add up to a huge amount lost
on an annual basis. As a result, the integrity ofthe nationalsystem ofairports may well be undermined by an extensive a pattern ofrevenue diversion. OtherRevenue DiversionSchemes

Revenue diversion is not merely an accounting gimmick which only the trained work force ofthe Inspector General's office can ferret out. Because the FAA cannot be relied upon to enforce these laws vigorously, the airlines engage in continuing efforts to persuade iocal officials that their plans and proposals, if not actions they have already taken, violate Federal law. The following are two revenue diversion schemes which we identified.

* In Tampa, newspaper accounts brought to our attention a proposal to expand the Airport Layout Plan (ALP) to include real estate upon which a prposed football stadium would be built. The rationale for this real estate deal is that changing the ALP would enable the stadium to be financed with airport funds and airport tax exempt financing.

* In New York, the Port Authority has proposed extending the airport by the width of a railroad right of way all the way to the East Side ofManhattan Islandmore than 20 miles--exclusively for the purpose ofusing airport funds to build a new subway. This rationale suggests that airp rt revenues could finance a railroad line from New York to Chicago, provided, of course, that the railroad tracks 

### belonged to the airport.

Ifthe foregoing were not sufficient to alert you to the problem, perhaps a review of the recent sordid history of the Los Angeles International Airport and its attemptsto flaunt the law on revenue diversion brings home the point. It is this situation which gave rise to the passage ofthe revenue diversion amendments in 1994, arid it isthis situation which remains with us today. LosAngeles

In 1988, in anticipation of the expiration of the airlines' long term use agreements the City of Los Angeles Department of Airports retained a consultant, the John P. Brown Company, to assist in devising ways to transfer revenues from LAXto the general fund ofthe City of Los Angeles. Then, beginning in 1992 when the operating agreements expired, the City started to act on its plan. It proposed to increase landing fees at LAX, and to establish an airport surplus fund to help finance the City's police, fire and ambulance services. It approved a referendum, known as "Proposition K," which eliminated the prohibition on revenue diversion contained in the City Charter. The City demanded, and the airport paid, $8.7 million as purported "reimbursement" for newly recalculated indirect City service costs during the years 1983-1992, notwithstanding that those costs had already been calculated by the City and paid in the appropriate years.

In April 1993, Los Angeles inaugurated a new Mayor. His campaign platform called or the use of LAX revenues to fund an expansion of the City's police force. Two months later, LAX increased landing fees by 300%. When the air carriers balked, LAX threatened to lock them out. The air carriers filed for a preliminary injunction and Secretary Peiia became directly involved in an effort to prevent that outcome. In December 1993, an agreement was reached by the airport and the affected air carriers. It required the carriers to pay the increased fees under protest, but prohibited the airport from raising the fees beyond 300%, pending a final determination ofthe lawfulness ofthe fees.

It was this dispute that led to the passage ofthe Federal Aviation Authorization Act of 1994's important procedural reforms.

In February 1995 the Los Angeles City Council eliminated the covenants against revenue diversion that were contained in its airport bonds through a refinancing. Later that month, LAX transferred $53 million to the City of Los Angeles, claiming that this amount, representing the proceeds (plus interest) of the 1989 condemnation ofairport land for the Century Freeway, was incorrectly paid to the airport ac. count despite repeated prior acknowledgement that these were airport funds. We should all be so flush not to notice a $50 million error in our checkbooks for five years. Acting on our protest, the FAA examined the proposed transaction informally, and ina ten-page letter, detailedthe reasons why the transfer should not occur. But inexplicably, itchose not to take a stand in support ofits very own findings, instead advising the city it would permit the transaction to occur, but noting it couldbe subjectto a formal challenge. (See attached letter) Since DOT has not issued rules governing adjudication of revenue diversion disputes, the carriers' only avenue in seeking recovery of the $ 53 million was to file a complaint with the FAA, pursuant to catch-all authority known as Part 13. That shouldhave started relatively quick proceedings, given the amount ofinformal brief. ing that occurred beforehand. However, for more tan a year, our complaint has languished at the FAA, with no proceedings or formal investigation having been scheduled.

Furthermore, we are Atill litigating the tripling offees imposed in June of 1993. Only now it's even more. Last June-two years after the fees were first imposedDO issued its final decision on the lawfulness of the fees and found that certain portions were unreasonable. LAX, and the carriers, have appealed. Pending the ap. peal,the carriers must continue to pay-and LAX keeps collecting-the challenged fees. And, to add insult to injury, the day after our vindication by DOT, LAX increased the fees again, requiring us to go right back to DOT to challenge this further increase. On -November 28th, DOT Administrative Law Judge Burton Kolko ruledthat we were due a refund. He said: [Tihe facts ofthis case on the issue ofthe provision of city services show so vividly how badly needed is a general rearIrmation ofthe Anti-Head Tax Act's purpose if we are to avoid open season on reasonable landing fees by airport-owning-cities that are desperate for greater revenues. The Department needs to nip that in thebud. In its final Decision in the Second LAX Rate Case, DOT ruled in favor ofthe airlines on most ofthe issues set for hearing and affirmed its ruling in the initial LAX Rate Case that it is unreasonable to charge the airlines for the purported fair mar. ket value ofthe airfield. Nevertheless, DOT asserted procedural technicalities re- quired it to pare down Judge Kolko's ruling, thus allowing it to avoid dealing with Judge Kolko's analysis head-on.

The airlines also have pushedback with respect to the 1992 payment of$8.7 million for the recalculated charges for City services for 1983-1992. However, this time, because the airlines were in federal court, they were able to obtain meaningful discovery. That, in turn, led the court to wipe out more than halfof the $ 8.7 million on summaryjudgment, with thejudge expressing serious doubt that the jury would sustain any of the City's claim. This case is to tried before ajury later this year.

In an attempt to shed its responsibilities as an important component of the national system of airports, LAX has now refused to accept more than $32 million in federal airport funds because the money comes with strings that forbid revenue di-version. LAX has even foregone the opportunity to use PFCs as part ofits capital program. In October, the DOT Inspector General issued a report that details instances ofillegal revenue diversion 'by LAX. For example, it seems that among the mportant aviation safety initiatives air carriers and their passengers and shippers have funded at LAX are the City's floats for Rose Bowl parades. Again, no meaning- ful action has been taken by FAA to recover the millions ofdollars in illegal diversion foundby the IG.

Finally, two recent "reports" prepared by a San Francisco accounting firm make the fantastic claim that LAX owes the City more than $ 350,000,000 dating back to the 20's and 30's. The basis ofthe first report, prepared for the Los Angeles County Grand Jury, is that LAX never repaid the city approximately $ 5 million the city allegedly made on behalf of the airport between 1928 and 1965 (notwith- standing official City and consultant reports that the City has been repaid in full). The report claims that the airport now owes the City more than $ 100,000,000. The City never billed the airport for these alleged advances, and there was never an agreement for the airport to pay interest on any funds advanced by the City-not just the alleged unreimbursed portion. Consequently, the overwhelming majority of the alleged debt" (specifically, 97%) is for interest on advances that were indisputably repaid long ago. This is an illogical andjerry-rigged claim that is not sup- ported by accepted government (or any recognized) accounting practices.

Notwithstanding the obvious defects ofthe "Grand Jury" claim, the City Controller has indicated he intends to pursue collection, and the airport director, a city ap- pointee, has indicated that he intends to abide by the Controller's wishes. The City Controller also hasembraced the more recent report, prepared at the City's request by the same accounting firm, which claims that the airport owes the City an additional $ 252,000,000. Moreover, the city's proposed fiscal 1997 budget includes a line item of $ 30 million, apparently as the first installment payment on the basis of one or both ofthese "ancient loans." These actions demonstrate that in Los Angeles, revenue diversion has become the latest cottage industry.

The nation's air carriers are facing even more new taxes and fees at LAX. Under consideration are proposals to increase cargo and maintenance facility rents and a new fuel tax. There is also talk ofa new sewage treatment fee. IfLAX is permitted to continue to flaunt the law, soon other airports will follow suit. Indeed, El Paso, Texas recently increased its landing fees several hundred percent and has lifted virtually word for word LA's public consumption rhetoric for its ownjustification. Remember the old adage "lack ofenforcement breeds contempt?" LAX is THE case in point.

At this point I would be remiss, however, ifI did not extend the sincerest appre- ciation ofthe air carrier industry, and our passengers and shippers, for the letter which you and Senator Ford sent to Mayor Riordan ten days ago, upon the release ofhis budget proposals for fiscal year 1996-1997. We want to thank both ofyou for your commitment to seeing that the revenue retention requirements ofFederal law are fully enforced.

I would like to point out, however, that it appears to be the Mayor's intention to go ahead with revenue diversion anyway. The following appeared in an article in a Los Angeles newspaper on Saturday, April 27, "Riordan spokeswoman Noelia Rodriguez said Riordan's effort did not violate federal laws, since it is money owed the city. "The mayor considers the airport to be an asset owned by the taxpaying residents of the city of Los Angeles," Rodriguez said. "They are shareholders and deserve to get a fair dividend.'" Mr. Chairman, ifthe economic activity and tax revenues which an airport brings to a local community are not "dividends' and ifthe city ofLos Angles can get away with this revenue diversion scheme, billions may be flowing offof airports within the next few years and the national system of airports which this Committee cre- ated may be on the road to ruin. Federal AviationAdministrationAuthorization Act of1994 As part of a review ofthe revenue diversion issue, I would like to discuss the status and effect ofthe 1994 Act's attempt to deal with the revenue diversion problem since attention to this matter originated in thiscommittee.

The 1994 statute articulated again the longstanding prohibition against revenue diversion. It directed DOT to establish policies and procedures within 90 days to as- sure "prompt and effective enforcement" ofthe prohibition. It specifically prohibited airport payments for City services unrelated to the operation ofthe airport, imposed new reporting requirements on airports, and authorized civil penalties of up to $50,000. With regard to rates and charges disputes, the Act directed DOT to pro- mulgate final regulations within 90 days that would set forth the procedures govern-

## 53 ing complaints, and the guidelines for determining the "reasonableness" of airport rates.

Only recently, DOT issued a Notice of Proposed Rulemaking on airport revenue diversion arule which was to have been issuedin final formbefore the end of 1994. And, DOtjust proposed the reporting requirements and minimal accounting standards called for in the 1994 Act--requirements which would enable this Committee, the FAA, and airport users to get a better grasp onhow airports are spending their users' money.

Similarly, the Department has yet to issue its final policy on how it will assess the "reasonableness ofairport rates and charges. Neither air carriers nor airports are certain ofwhat DOT, ifanything, will set as its standard. The Department has twice modified its policy statement since first issuing a Notice of Proposed Rulemaking in June 1994. Indeed, the Department's most recent "revision" is a giant stepbackward. Issued for comment in September, 1995, it affords air carriers and airport users with virtually no protection against the exercise ofmonopoly power by airports and the resulting excessive user fees. We suggest you need to ascertain the reasons for DOT's unwillingness (or inability) to define the term "reasonable" in a reliable and economically rational way. Indeed, you may wish to consider enacting into law the specific requirements which were not established in the 1994 Act. The airlines and the American people cannot afford to let more years elapse and more funds to hemorrhage offofairports before meaningful action is taken.

The only regulatory requirement ofthe 1994 Act that DOT has completed relates tothe promulgation ofa final rule establishing procedures for the filing and processingof a rates and charges complaint. You mightbe interested to know that contrary to what opponents charged during consideration of this legislation, the establishment of an administrative procedure by which air carried's can challenge airport rates and charges has not led to scores ofcases being filed at DOT.

Unfortunately even here DOT has resisted the opportunity to rationalize airport rate making-including the ability ofthe airlines to obtain reasonable factual disclo- sures from airports; hiding behind blatant administrative excuses to avoid dealing with serious issues. The process enacted should be revised to require disclosure of relevant economic data so that even the hard cases like LAX might be avoided. And, expanding the 120 day process to accommodate information disclosure would benefit all interested parties and DOT. EnforcementIssues

Mr. Chairman, this brings us to the problem ofenforcement ofthe restrictions on revenue diversion. It appears to us that the enforcement process, not to mention the sanctions for violations, are inadequate to stem the flow of money off-airport. After all, ifenforcement were adequate, would the Inspector General be finding as much diversion as is now the case?We think the answer is self-evident.

Enforcement ofthe revenue retention requirements is based upon the provisions of 49 U.S.C. 47111, which includes the amendments made with enactment of the Federal Aviation Administration Authorization Act of 1994. Basically, the enforcement provisions require the Secretary to withhold approval of a new grant applica. tion or modification of existing grants, and withhold approval of a new application for the imposition of a Passenger Facility Charge, ifa sponsor does not take corrective action after a finding of a violation. Ifthat sanction is not sufficient, the Secretary is empowered to seek an injunction in a U.S. District Court or even to impose a civil penalty on the sponsor. For a number of reasons, including that this issue receives little attention compared to safety issues, the present enforcement system just does not work.

Perhaps our greater frustration is knowing that at the end ofthe day, ifthe FAA does act and find, for example, that LA is required to give back the $53 million, the City has an ace in the hole. It thinks it can refuse. For the ultimate remedy, unless the DOT opts to exercise its substantial Aiscretionary power, is only a $50,000 civil penalty. Faced with difficult choices, local governments know down deep that even if they are guilty, they only need pay a $50,000 civil penalty and they can continue to try to keep their ill gotten gains. (Moreover, that penalty goes to the U.S. Treasury general fund, not the airport victimized by the local government.)

The aviation system will be all the weaker for the failure to staunch the hemorrhage. Corrective action is needed and we would like to propose some alternatives for our consideration.



### We do not 

### question Congress' 1994 determination that the DOT/FAA should issue the policy guidance on revenue diversion and rates and charges. It seemscompletely appropriate that your trust should be vested in the expert agency. However, neither the Department nor the FAAhas demonstrated a capacity forrate adjudication.We suggest you consider looking at these airport adjudications in a manner similar to that which you followed just a few months ago with respect to the issue of captive rail shippers. In that instance you vested adjudicatory authority not in the Secretary of Transportation or the Federal Railroad Administration, but rather in the independent Surface Transportation Board. We understand that next year there is some likelihood that this Board's rate adjudicatory authority will be expanded to include ocean shipping.

Airlines operate in an environment not unlike the ca tive shipper-airlines are captives ofmonopoly airports. For example, when LAX threatened a lockout in December 1993, there was no other Los Angeles airport to which airlines could fly their passengers and cargos and maintain the level ofservices expected by the traveling and shipping public. Therefore, we suggest you consider further expanding the role ofthis Board to include other kinds ofadjudications, such as airport rates and charges and revenue diversion cases.

Additionally, more needs tobe done to insure vigilance on revenue diversion. The Inspector General's commendable rule in ferreting out revenue diversion is undermined by the FAA's failure to obtain meaningful recovery. We suggest you consider placing aduty on the Inspector General to bring revenue diversion cases to this rate adjudicatory board ifthe IG determines that the FAA has not obtained satisfactory compliance with Federal law. In this type ofproceeding, the Board would evaluate the evidence placed on the record by the IG against the policy established by the Secretary. Furthermore, because the IG cannotbe everywhere at all times, we suggest that non-governmental parties who have rate or revenue diversion disputes with airports similarly be afforded the opportunity to bring those matters to the rate adjudicatory board.

Alternatively, or even in addition to the above, private persons, including corporations, shouldbe authorized to prosecute unlawful airport revenue diversion cases on behalf of the FAA by means ofra "qui tam" proceeding. Historically, qui tam actions have been considered an important adjunct to the prosecution ofcrimes of fraud on the government. Qui tam actions have their roots in the early common law in England and then were enacted into law under the False Claims Act, 31 U.S.C. 3729(a). They developed in large part because the government could not always adequately protect its interests. Today, these types ofcases occur most often in the defense con- tracting industry.

Violations ofthe revenue retention requirement are similar to defense industry fraud matters in many respects. Both involve essentially the same conduct: conversion of taxpayer dollars to an unlawful use through unlawful means. Both have a direct impact on government finances. And in both situations, the government does not have adequate resources to enforce the law and protect the public interest. Establishing aqui tam proceeding that permits the prosecuting person to retain a portion of the recovery would greatly enhance the monitoring and enforcement of the
revenue retention requirement and undoubtedly lead to greater compliance. This, of course, would have the salutary effect of vindicating Congressional policy and, at the same time, preserving the government investment in an area where traditionally government enforcement has proven difficult.

Lastly, regardless ofwhether the final determination on these matters rests with the Secretary, the Administrator, or the rate adjudicatory body, the current remedy, a 

### $50,000 civil penalty, is clearly insufficient in light of the vast sums which could and are being taken illegally. We have suggested to FAA that it exercise its authority to assess a civil penalty for each day a sponsor fails to cure a violation. FAA's response remains to be seen. We suggest the Committee consider a remedy similar to the one contained in the Transportation Appropriations Acts for Fiscal Year 1994 and 1995. Both ofthose Acts prohibited all Federal transportation funds from flowing to airport sponsors (i.e., local governments) who had violated the revenue retention requirements of Federal aviation law. We suggest that this remedy be reinstituted and made self-enforcing ifrestitution is not made within a limited period oftime after a final rulingby the rate adjudicatory board.

As the IG has documented andas we have documented, there appears to be little appetite or sense ofurgency at the Department of Transport tion for enforcing the law. Therefore, we suggest you find another venue, develop lternative compliance mechanisms, and seriously lay down the law. When you adopted the restrictions on revenue diversion you did the right thing. Unfortunately we now live in tougher times-times in which local governments will stretch to the limits the tolerance of the Executive Branch. We urge you to assist the Executive Branch by stiffening its backbone, facilitating the process oflaw enforcement, and creating meaningful sanc- tions.

## 55 Again, Mr. Chairman, it has been an honor for me to appear before the Sub. committee today. The entire air carrier industry appreciates the leadership which you and SenatorFord have demonstrated on this important matter.

[Airport Revenue Audits asofFebruary 1, 1996 report follows:]

### 56

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AIRPORT REVENUE AUDITS AS OF FEBRUARY 1. 1996

Final Revorts Issued (45) Date Issued Report No.

1. 2. 3. 4. 5. 6. 7. 8. 9. 1o. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 38. 37. 38. 39. 40. 41. 42. 43. 44. 45. El Paso, Texas Oahu, Hawaii Palm Beach County, Florida Pompano Beach, Florida Broward County, Florida Houston, Texas Dallas/Ft. Worth, Texas Memphis Shelby County, Tennessee Nashville, Tennessee Dade County, Florida** Hillsborough County, Florida Hartsfield/Atlanta, Georgia Salt Lake City, Utah Logan, Massachusetts* Orlando, Florida New Orleans, Louisiana Palm Springs, California* St. Louis, Missouri* Oakland, California San Antonio, Texas Venice, Florida Phoenix, Arizona Albuquerque, New Mexico Kansas City, Missouri San Francisco, California* Maiden, Missouri Meacham, Ft. Worth, Texas JFK International, New York Hayward, California Orange County, California Baltlmore/Washington, Maryland* Hot Springs, Arkansas" Philadelphia, Pennsylvania Des Moines, Iowa Pittsburgh Int'l Airport, Pennsylvania McCarran Int'l Airport, Nevada Bremerton Nat'l Airport, Washington State of Hawaii DOT* Love Field/Redbird, Texas Chicago O'Hare, Illinois Westchester County, New York* Seattle-Tacoma, Washington Burbank, California Los Angeles, California Stuttgart Airport, Arkansas Interim Summary Report, No. R9-FA-4-004 8/21191 3/6/92 3/31/92 4/3/92 4/24/92 6/4/92 7/30/92 8/12/92 8/20/92 10/26/92 11/17/92 11/17/92 11/17/92 12/18/92 12/29/92 2/11/93 3/4/93 4/12/93 5/13/93 7/1/93 7/22/93 10/18/93 3/25/94 6/27/94 7/6/94 7/20/94 8/12/94 9/2/94 9/12/94 9/15/94 9/22/94 9/28/94 11/25/94 12/20/94 12/23/94 3/21/95 4/20/95 4/28/95 6/9/95 6/16/95 7/6/95 8/7/95 9/14/95 10/30/95 11/2/95
was issued on 3/7/94. R6-FA-1-161 R9-FA-2-070 R4-FA-2-109 R4-FA-2-118 R4-FA-2-139 R6-FA-2-090 R9-FA-2-157 R4-FA-2-223 R4-FA-2-226 R4-FA-3-034 R4-FA-3-060 R4-FA-3-067 R9-FA-3-020 R9-FA-3-033 R4-FA-3-158 R9-FA-3-050 R9-FA-3-061 R9-FA-3-070 R9-FA-3-095 R6-FA-3-080 R4-FA-3-724 R9-FA-4-001 R6-FA-4-005 R7-FA-4-006 R9-FA-4-008 R9-FA-4-010 R6-FA-4-019 R2-FA-4-028 R9-FA-4-011 R9-FA-4-012 R9-FA-4-014 R6-FA-4-025 R3-FA-5-003 R7-FA-5-001 R3-FA-5-006 R9-FA-5-005 RO-FA-5-011 R9-FA-5-007 R6-FA-5-016 R5-FA-5-011 R2-FA-5-018 RO-FA-5-015 R9-FA-5-015 R9-FA-6-001 R6-FA-6-002Draft Reports Issued (1) Date Issued ProJect No.
Stapleton Airport, Colorado 8/11/95 564-006-6001
Wrting Draft (1)
Arlington Airport, Washington

Note: The following final reports include language concerning airport
revenue diversion as stated in the DOT and Related Agencies Appropriations Act (Public Law 103-122, October 27, 1993), Title III, General Provisions, Section 328, and the 1995 DOT and Related Agencies Appropriations Act, Section 325.
Baltimore/Washington, Maryland Hot Springs, Arkansas Philadelphia, Pennsylvania Des Moines, Iowa Love Field/Redbird, Texas Westchester County, New York Seattle-Tacoma, Washington

* General Counsel opinion reflected in report ** FAA Regional Counsel opinion reflected in report

## 58

SCHEDULE OF ESTIMATED ANNUAL REVENUE DIVERSION AND ANNUAL LOST RENT
Airport revenue audits are ongoing or have been completed at the following airports. Some reports reflect strict compliance with grant
assurances relating to airport revenue. Most reports reflect one or both of the following conditions. Rental income does not reflect market values and is less than sound business practices would dictate. Airport
revenue is diverted to nonaviation related use. Airport Time Period Status EslImated Estimated Annual Annual nlu. mdblA 6 ae

El Paso, Texas FYs 1988. 1989, 1990. 1991 Oahu, Hawaii FYs 1989. 1990, and first3 qtrsof 1991 Palm Beach County, Florida FY$ 1988. 1989.1990 Pompano Beach, Florida FYs 1985 through 1990 Broward County. Florida FYs 1988,1989. 190 Houston,Texas FYs 1990,1991 Dallas/Ft.Worth, Texas, FYs 1990,1991 Memphis ShelbyCounty, Tennessee FYs 1988, 1989, 1990 Nashville, Tennessee, FYs 1988, 1989, 1990 Dade County, Florida FYs 1989, 1990. 1991 HillsboroughCounty, Florida FYs 1988. 1989. 1990 Hartsfield/Atlanta, Georgia FYs 1988,1989. 1990 Salt Lake City,Utah FYs 1990,1991 Logan, Massachusetts FYs 1990,1991 Orlando, Florlda FY 198, 1989, 1990 New Orleans, Louisiana FYs 1990. 1991 Palm Springs. Caiornia FYs 1990,1991 St Louis, Missouri FYS 1990, 1991. 1992 Oakland, California FYs 1990, 1991, 1992 SanAntonio, TX FYs 1991, 1992 Venice, Florida FYs 1989 through 1992 $675.000 0

Good News Report $200,000 $1,033,000 $100.000 $2.100,000 $300.000 0 Good News Report
0 $630,000
Good News Report $4,800.000 0
0 $1,300,000
Procedural
GoodNews Report
GoodNews Report
0 $760.000
0 $93,000 $91,000 $800,000 $700,000 0 $359.000 $229.000 $247,000 0
3 $2,400,000 Estimated Annual Lose"

$675,000

0

$1,233,000 $2,200.000

$300,000

$630.000

$4,800,000 $1,300.000

$760,000 $93.000 $891,000 $700,000 $588,000 $247,000 $2,400.000 TV14"WIN We% 4"1422.
23
24.

25.
26.
27.
28.
29.
30.
31.
32.
33.

34.
35.

36. 37,
38.
39.
40.
41.
42.
43.
44. 4S. A $108.400 $4.300,000
A Good News Report
A 0 $76,90 Phoenix-SkyHaror.Arizona FYs 1991, 1992 Albuquerque, NM FYs 1992. 1993 Kansas City International, Downtown Municipal, and Rlchads-Gebauer AirportsFYs 1992, 1993 San Francisco.California FYs 1990through 1993 Maiden, MO FYs 1992,1993 Meacham Airport. Ft. Worth, Texas 18 monthsended 3/31/93 JFKInternational,New York CYs 1992, 1993 Hayward, CA FYs 1992,1993 John Wayne Airport,Orange County, CA, FYS 1992, 1993 Baltimore/Washington, Maryland 7/1/89 through 6/30/91 HotSprings, Arkansas 5yrs. ended 12/31/93 PhiladelphiaInternational and Northeast Philadelphia Airports 711/89 through6/39/91 Des Moines, lowa 7/1/91 through6/30/93 Pittsburgh International and Allegheny County Airports CYs 1992, 1993 McCarran Airport, NV FYs 1992, 1993, 1994 Bremerton, Washington FYs 1990, 1991, 1992 State of Hawaii DOT 7/1/91 through9/30/94 Love Field/Redbird, TX 21monthsended6/30/94 ChicagoOHare, Illinois CYs 1992, 1993 Westchester County,NY CYs 1990, 1991, 1992, 1993 Seattle-Tacoma. Washington FYs 1992,1993 Burbank, CA 7/11/91 rough 6/30/94 Los Angele, CA FY$ 1992, 1993, 1994. Stuttgart Airport.AR FY$ 1991. 1992,1993, 1994 Stapleton Airport, CO CYs 1993, 1994 Arlington Airport, WA
Total $157,000
0

0 $240,000
See Note 2 $363,900
0 $5,931,000 $1,450,000
0 $7,800,000

$43,000 $3,059,000
0 $4.408.400

$76,900

$1,260,000 $9.500 $137,000

$169,600

$102,000 $119,000 $2,490,000

$877,000 $1,034,000 $1,83,000 $1,863,000

$535,000

$9,800
0
0 $2,741,000
0
0 $883,60C $3,000,000
0
0 $535,000 $249,800
0 $363,900 $2,741,000 $5.931,000 $1,450,000

$883,600 $10,800,00 $43,000 $3.059,000
0 $7,332,300 $27,210,400 $54,542,700 0 $1,260,000
0 $9.500
0 $137,000 Good News Report $109.000 $60,600
Good News Report
See Note 1 $102,000 $109,000 $10,000 $490,000 $2,000,000

## 60

A Final report issued B Draft report Issued C Writing Draft ** Before corrective action taken as a result of audit

Note 1. Baltimore/Washington International
- The airport contributed
a total of $7.4 million of net income to the Maryland Department of Transportation Trust Fund in FYs 1990 and 1991. During the same FYs, the Trust Fund transferred $70 million to the Maryland general fund to cover budget shortfalls.

Note 2. State of Hawaii Department of Transportation (HDOT) used $64.4 million of airport revenues for nonairport purposes; the Airports Division lost $6.5 million in interest income on the airport revenues need for nonairport purposes; at least $6.9 million in airport revenues were used on ineligible highway projects; and Airport Improvement Program discretionary grants totaling $7 million were inappropriately awarded to HDOT.

# 0
%Ls0DO"..5 0 "'50O~ c At .$Ao



### FE3 2 8 i5

HonorableTheodore 0.Stein President, BowrdofAirpotCommissoners City ofLosAngeles LosAngeles, CA 90012

DearMr. Stein:

This lewt responds toyou requestregarding thedispositionofproceeds&amthe condemnation ofaportionoftheLosAngeles Iaternaiowd Airport (Airport)for the CenturyFreeway. We baethisresponse onyourFebruary25. 1994lettertothe SecretayoftheDeparammofTrasportution(DOT) endsubsequent corespondence anddocuments fromyour le co nsel totheOmm Counsel, OfficeoftheSecretary, DOT,andtheChiefCounse FederalAviionAdmnimuon (FAA including cot.epoadec date Februxy 13, 1995. Weha also considerdthediscussions we have hadwith you,reesatives ofthe CityofLosAngels (City)andoftheCity's Depatment of Aiports. Additionally, the AirTrnsport Association (ATA)has submitted legal memorud admaterialspertinent tothisissue,which wehave examinedinowprqpetioo6fthislawt. We appreim the City'scooperation in providingtheinformaionrequested inconnection withthisresponse.

Forthereasons setfalhbelow,andbasedoan the information submitted todat, theFAA does notpresently ndtoinitiMactiontoprevent orreverse thetrufrofthe condemnasionproceedstotheCity'sSgneralftmdundertheprovisions ofsection S Il(aXl2)ofd thefoe AhportandAirwayImprovemnt Actof192, as amended (AAIA), meaeted adncod1ed as49U.S.C. 47107(b). We understandthe amount at issuetobeapproximnasy S53,000,000 as ofthe dat ofteCity'srequesttotheFAA.

Wereach thispositiononly aferlengthy consideration ofthe unusualcombination of particularfactors, discussed below,thatappeal tomakethis situationuniqueaad exceedinglyunlily toberepared. Inaddition, instayingow inlmntionnottoproceed,
we mustmake clearthatoutpositionincludes severalimport quafih nations.

25-859 0 - 96
- 3Fit, vn ifthedispositionofthe condemnation proceeds isnot consideredas the basis for agency actionregarding revenue diversion, the agencyisprepared toconsider separately anyfuture effectofthistransferoffunds onte rates thai can reasonably be charged

### toaeronautical user atthe aport. IftheCity'sdecision touse theproceeds fromthecondemnationofairportproperty fornon-airport purposesresulted inafee increan atthe airport,carriers servingthe airport couldfile acomplaint with DOTunder, 49U.S.C. section47129 to challenge theincrease. While the agencywouldreview any complaint onits mints,andwe cannotpredictthe dispositionofauypa rcularcomplaint,
aclaimthat-such afee increase wouldbe unreasonable underthe City's pant assurances canbe anticipated Nothing in this letterprecludes afinding onthereasonableness ofthe fee insuch a cue ifotherwise supportedbythe facts.

Second, wedonot consider anyexpensesthttheCity incurstofacilitate thet-ansfe of the condemnationproceedsto beacapital oroperating costoftheairport% and such expenses couldnot,therefore, bepaidwithairportrevenue. TheFAA wouldnotconsider expenses associatedwith effortstodirect airportAuds tonon4iTpo tpurposes,even if consistentwith section511(aXl2), tobe airport costs. Suchexpenses mayinclude, for example, anyassociated legal fee, or thecosts ofrefinancingbonds, ifsucharefinancing isnecessarytoavoid breachofoutstandingbondcovenms.
Third,in awadingdisctonaryAIP fudsforcapacityprojects, the Secretaryis directed toconsider, ueroati, thefinancialcommitment fromnon-United States Government
sourcestopreserve or enhance airponcapacity. See, 49USC f47115(dX3). TheCity's decisiontotransfer thecondemnationproceedsto itslnalfAd, rathrthan maintain theproceeds ontheairportfordevelopment purposes,wouldbeconsidered anegative factorinevaluating ay applicationbytheCity foradiscretionary capacity pant. We recognize,however, thai th Cityis notnowtdan entitlement pantsorapplying; for discretionary funds.

Fourth.thisletteris directedonlytothe appLicationofFederallawandpolicy,anddoes notaddressthe effectofstateorlocal laws, the CityCharter,airportregulaions, orCity and airportbondcovmunsthatmay applytotheCity'sabilityorinwtion tousethe condemamdonproceeds fo non-airportpurposes. Fifth,we emphasis that theviews expressed inthisleuerapply onlytotheparticular condemnaton actionthatis thesubject oftheCity's requewa the City canccp close scrutinyofanynewrequestoraction involvingtheoff-akport useoffundsconsidered tobeairport reveue.
Finally, weareconmrained to note thatthisletteris pmdicae ontheAccuracyofthe fatua representations providedto DOTbytheCityand theATA. Wenotethat the agency hasnot hadthe benefit'ofaformalor adversarial processthatmightmore fully develop the factualrecord

### inthiscase. Inthe eventthese same issues areraisedin such aproceding before the agency,afinaldetermination would bemade onthebasisofthe fullrecord beforethe agencyatd ume.

As noted,the processofresponding toyour requesthas proventobe adifficult onefor the agency. Wefuly supportthe retentonofail airportrevenue foruse inthe auport system wheretherevenueisgenerated, andwe arereluctanttoreach aconclusionthatthe proceeds ofany saleofairportpropertycouldbe usedforother purposes. TheFAA ordinarilywould considertheproceeds fomthe ele ofparcels ofairportpropeytobe
revenue genratedbythe airport,whichmustbeusedfoeth purposessetforthin section 51l(aXl2). However,

### we acknowledge theunusual circumstances d exist inthiscae andthe ambiguousnature ofpastagencypolicy statementsthatbea ontheissues 

### athand.

TheFAA's forthcoming policy onthe generadon anduseofairportrevenue will make clearproceeds fomthe saleofaparelof real propertyonthea port, ownedbythe airportsponsor constitutleairprt revenue, withinthe memingofdieslatto'ygrant asurance.
Backpound

The informationthe Cityhasprovidedshows thatonNovembr 4,19185,the Stm of California (Stm)took possessionofastripoflend Ctthesouthedofthe Airport forthe constuion ofduCemuny FmMway.This property consistsof1,461,720 Square feet610,443 square

### feet infee simplead8 51,277squm feetinairrilhts. On December 14, 1988, aninterlocutor yjudgment incondemnation forthisproperty wasenteredforthe State. TheState acquiredtitletothatpropertyas aresultofth condemaon.

InDecember 1989,a Compensationford Prncipal am0ta dw tothe City,pursuant to thejudgment,the StatewiredtheCitysgenal fundapproximately S31,400,000. In November 1990, S11400,000, r ending iawt owedpurattothejudgmentwas wuedbythe Statetothesamelena frd 

### ccotL Upon 

### eeiptofthe

### proceeds by the City,theheds wee mwsferedtothe airportrevenue m d. TheCity popose toUasfer these

### amountsphu wamed intesttotheCitysgeneralftud, claiming tha the funds
were matakenly depositedinthearport reveu fAdrath than thegen alfumd.

The condemned prperyisp tofsixsepartepacebofland acquiredbythe Cityfor the airponbetween 1937and1947. TheCityindices thatthesourcesoffimd. forthe purchases were fitCityspamanent improvement fAidandmunicipal bondftids. The bond proceeds we usedtofud variousairportcptal invetmenM 

### additionto the acquuition ofthesix parcels. ItappeMthatCity generalfhmdspaid someofthe principal andintereston thebonds (issuedin 1941 and 1945).md that the CitYs general fundwasrembused bytheairportforatleastpr ipalamounts ofthe 1941 and 19454 bond issues. The

### condemned propertY represents ApproxMately4.6percent ofthe origil property. FederalArds werenor usedfortheacquisiton orimprovement of te condemned property.

TheCityhas advanced anumber oflegal theories insupport ofits positionthatthe Cityis entitled tothecondemnaion proceeds. Itargues thatthecondemnedproperty isnot subjectto the airpo revenue retentiongantassurance, (whichwaseffectiveSeptember 30, 1982),sincethepropertywas notconsidered "airport" property. This argumentwas basedon documents and materialspurpordn todemowrme thattheproperty hadbeen designated and set asidebythe City,on airportlayoutplans andotherwise, to be utilized solely forthe CenturyFreeway,andhadbeen soacknowledgedbytheFAA. Alternatively, the City claimsthatthe FAA effectively hasreleased thecondemned property byapproving the 1983 airportlayoutplan (ALP), whichhadtheeffect of dedicating that propertyfor theCenrwy Freeway.

The Cityhassuppliedinformation indicating dt thegeneral 

### aign ofthe freeway nr theairport wassetbythe State u early u 1969;thattheCityhadagreedto allow the State tocondo=soil te diln inthe

### areaofthecondemned property in 196&and begantodisclose theproposedright-of.wayforthe fremayonALPs submitted toamd approved bytheFAA continuosly sincea:least 1961. Thedocumentation indicate that theCityandStare originallyplmoed tohave constructionofthefreeway inthevicinity of the airport completedby 1975.

Alawsuit challenging theprojectun theNationalEvironmentl Policy Actof1969 andthe

### C aliforiaEnvironmenta QualityActof1970

### (Keithv. Volpe 352F.Supp. 1324 (C.D.Cal. 1972)] delayedconowsiction ofthefreeway. Asaresult ofthatlawsuit, the Sue andDOT, toughthe Federal HighwayAdmigiisueao (FIWA),prepared an environmental impact smet (EIS) forthefreewsyproject. Boththedraftandfinal EISs showedthealignmeat ofthefreeway intheam ofthecondemned property.

The documentation pvidedby theCity Rther indices ta theFAApmtcipated inthe EIS processand

### concled in 1975th theproject wouldnotpresent anyenvironmenW problems for

### presan orfnmg FAA facilities. Thedocumentation submitted bytheCity indicamsthat theSecretaryofTransportaon atthattimetouredthe siteoftheproposed freway inAugus 1978, inthe context ofhis reviewofthefnalEIS. The FHWA approved thefinel ISfor thefreeway inOcuR 1978 andthe Secretary of Transportationapproved ube freewayproject inthesamemonth.

The Cityalsoindicated that in1976, theCity Council,by resoluton.determined tatthe condemned property shouldbe heldforfreewayuse anddatthe Cityanticipated constructionofthebeeway inexecuting airportleases as earlyu 1979. Among other things,theCity required thedesign oftheImperi CargoComplexto be modified toavoid encroachingonthe freeway nght.of.way. Further,the documentation indicatesthat theright-of-way was idendtied u freeway use land inCity planni 8 documents u early
as 1974 and in airportplannln documents before 1983

Infmher support ofits legal view thatthe condemnation proceeds properlybelong tothe general fund ratherthanthe airport uids, the City contendsthatthe condemnation proceedsdo not constitute "airport revenue" within th meaning ofthe sue orthe FAA Order 5100.38A, Aimport mprovementProoram(ALP)Handbook(October 24, 1989) (AlPHandbook). Itrelieson 630oftheALPHodbook whichdefie the tam airport revenue" and specificallyexcludes "proceeds fromthe saleofrealproperty owned bythe sponsor." The City regadsthe condemnationproceeds asa"returnona capital invesuent"by theCity,not as revenue generated bythe airport. Asfifther supportforthis view,it claimsthe propertywas largely usedfor non.aeronaudcal activities, nofederal Aindswereused topumha the property, andnoairport revenue was usedto buy the property. TheCity concedesthatit wasatlea partially reimbused forits costoftheproperty from airportrevnue, and documentation supplied bythe City suggests thatall but S2million ofthe City's actual expenditures was mimbursed. To requirethe condemnationproceeds to be used solelyforAirportpwuposs, theCity aserts would resultin awindfall to th. Airport usem Additionally,the CityreMersto FAA Ord r 190.6A, A rportCompliance equlirments(October2, 1989) (Complimce Mamal), 17-1S, which providesthat"them isno required dispositionofnot revenues fromasaleordisposal" ofland notacquiredwith Federalfinancialasistnce.

TheCity also conwndsthatthe condemnationproceeds shouldnotbedeemed subjectto the requirements ofsection 5 1(aX12) because, itassess thecondemned property was notused for aviationor aeronatcal purpom. The Cityallegesthat,except for600 squarefeet, theproperty waseithervacantland orused fbrnonmvenue automobile paknlg fortenants' customers andemployees. The City aluestha underthe terms of Appendix 5ofthe Complia eMewal, to FAAOrder 5190.6A, automobile putins is notan "aronm al activity," andthat,deefore, the reverus associatedwith such property am nottobe considered revenues ga rated bythe airport.

The Citysfinal pound isthat it isentitledtoreceive fromtheAirpotan amount atleast equal tothe Condemaion proceeds, u reimbsemn ofthe City'sinvestment inthe AirpoL Itrelieson a1991 opinionfrom the Office ofLega Counsel, Deperwent of Justice (Doj), inteprtiVgsectionSlI(&X12) aspermitng an airportowneroroperator to recoveritsunmimbursed capitalandoperating expensesfromWportrevenues, regardless ofwhenthe expems c wre incurred. Italso requests thatwe intepretthe DO] opinionto allowthe Cityto recoverthe costofcapit for contributionsthe City made before they wer repaid bythe Airport. Beas the City doesnot consideritselftobe fMty repaid,the City believes thatitisacouingriMbusblocostofcapital.

### 6

TheAirTransport Association,on behalfofmember airlinestha servethe Airprt, expresseditsconcerntha transfer ofthecondemntion proceeds wouldresult un afurther increase inairport fees to fund the loss ofrevenuerequired forneeded capital improvements. TheATAbelievesthatitis inconsistent withthe statutory intent ofthe revenue retention requirementto exempt proceeds fromairportproperty ales from 

### airportuserequirements.

TheATAdisputes theCity'scontention thatthetransferoftheproceeds itQthe airport
revenue fund was amistake. TheATA alees thaithetransferreflected aconscious decision onthepanofCityofficialsandboardcounsel, and itrequests anopprtnity to use compulsory process toestablish afactual record tosupport this allegation.

TheATA alsodisputestheCity's reliance ontheALPHodook forclaiming thatthe condeuationproceeds donot consdute "airportrevenue." TheATA wouldhaveus regardtheseproceedsasresulting fromtheus ofproperty, rather thanthed&f4ulonof property. Itinterprets 1630oftheALPH/bookasdefining airport revmues"to includethoserevenues producedfrom the use ofproperty,such asrentals andlease payments. Further,whilerecogning that 7.11 oftheAirporCompanc manual does notrestrictsales proceeds fromdeletionoflandotacVi withFederal fin=cial assistawe, theATA take issuewiththe haracteriation ofthistransitionasa "deleton." Itccnsides th proceedsareeiptofrevenue froman easementright"inthe land,whichtheATA considersanaloous toause. Ithth notes thattheFAA finaciallyassisted theAirport asawhole overtheYeos.

TheATA alsodisputestheCity'scoaon thattheinclusionofthe proposed Century Freewayon anFAA-apprved ALPresulted inaconstuctive releaseordeletion ofthe condemned propery fomthe sponsoroblipons. TeATA notsthat theALPs showed thefreeway asapossiblefAm useofpropertywithintheboundary oftheairport, and it alleges thatthe City continued tote the property sairportproperty,bylosing it to airport users, untilthetirm ofthe condemnation.
Alternatively, theATAa esda therequirementtobe MInacially se. implicitly oblipM theAirporttouse allpropertyandrevenuegeratedthereby for airportpwposus. Asking thecondemnation isconsideed a"deletion"forpurposes of 7-18 oftheAirportConopwmw manual, the ATA notes that the manualdirects theFAA to 'enc.ura" theowner touse netrevenues forneeded airport development in actions involving deletionsofland.
Finaly, regarding the City'smlance ontheDOIopinionto supportreimbursement of pastexpes, theATAclaims thattheCityhs recoveredit expense for thisproperty. TheATA arguesthatthe DOIopinionwas clearthatrecoupment applied onlyto the unreimbursed airportcosts actually ucwredbythe City, andthatmostoftheS9S Mlon

## 67

claimed bytheCityis forthe City'scostofcapital.TheATA alusthat earlier document prepared by theCityandits coasultants establish tk theCityconsidered iuelftobe virtuallyf&Uy reimbursed in 1911 andthattheCity's costofcapiulclaim rcflecu a ew theorydeveloped by the City'sconsultantsforthe exprsspurpose of justifyingunlawt diversionofthe codemn=tion proceeds.
Analysu

Asapreliminary maner,we wishtotake issuewiththeCity's sugestionta theoriginal depositofthecondemnation proceeds intheAirport'scapitalfundwas amistake. The information available tousindicates thatsenior officials oftheAirport knewofthe deposit andrepresented tocarirs duringnegotiations overairport.rates and ckges that thefundswere already earmarkedforuseforairport purposes. Whilethose aements maynotbe legallybinding onthe City, suchstatementsareinconsistentwiththeview thatthe depositoftheftmds wasamistake. In addition,specific authoriwionby the AirportCommissioners orCityCouncilmay well nothavebeenaprerequisite tothe transfer,since itappears thatlocalordinancesorbondcoveasau ineffectthrough the date ofthecoadmnaon paymentsrequired thattheproceedsbe applied forairport purposes.

withoutcreditingthis "mistske"theory,ourposition o theCity'srequestturnslargely

ontheinteprtation ofthe statutory 

### am "m ues generated byapublic sirpor" As thistermisnotfurtherdefinedinthe AMA, the Sertary bas authorityto define airport
revenue in amannerconsistent withthepurposesofsection 311(&Xl2) 

### adtheAAIA. The restriction onuse ofairportrevue containedin section 11 l(aXl2) waeincluded as
arequire forairportsponsor forthe fti timewiththeensacuent oftheAAIAin 1982. No correspondingprovision appeal inthepredecessorstatutes to theAAA - theFederal AidAirport ActandtheAirportand Away DcvelopmUN Act Therefore, until asponsor executed itsfir grantagreem undertheAMIA itwas freetouse airportrevenue formy lxU purpose,subject totherequiremn thattheairport beas self-sustaining aspossible.

InrespondingtotheCity'srequest,itis fir necessary toconsiderwhethertheproceeds fromthe saleof irposrtproperty consn airportrevenue withinthemeaning ofsection 51 1(&Xl2)whenthe property wasnotdonatedbytheUnited Statesoracquiredwith FederalftIcia UistnceM

. If theproceeds fI thesaleofsuchproperty generally are airportrevenue, itisnecessary to considerwhether, inthe

### circuistances relating tothe CenturyFreeway,thecondemned pret & theproceeds fromthecondmnaion shouldbe rated as subjectto thelimitations onthe useofairportrevenue, whichwere fi assumedbytheCity in 1933.

## 68

Where aparcel ofproperty isdetermined to beairportproperty, we ae MAking clear in thisletter, andwillreaffirm in our anticipatedpolicystatement on revenue use,thatwe consider "revenues generatedbythe airport" to includethe proceeds from the saleofthat property, including proceeds generatedbyacondemnation. Inoutview, section 511 (aXl2) mustbereadintheoverallcontextofthe statuteandunderlying Federal policy

- I.e., thatusersofthe airportsystem shouldpay for thecosts ofthat s'zem, and that airports shouldbe self.suaining (see,section 5 1l(aX9)oftheAAIA, 49 U.S.C. §47107(aXl3)), butthst users shouldnotbe forcedtopay "hiddentaxes"to finance other awe andmunicipal programs. Ifsalesproceeds a treedas airport revenue, the goalofsef-sustud blyisfurthered, moreresources areavailabletofund thecapitalandoperating costsofthe airport system;and airportusersarenot indirectly providing financial support forotherstate and municipal programs. Finally,this interpretation would alleviate thepotential needforFederal discretionary grantstofund capital improvementsthatmaybe fundedfromtheproceeds from the sale.

TheCity commentedthat atleastons suftoent inFAAorders, 17-ItoftheAirport Compliancemanual, indicates thatpastagencypolicywasthat saleproceeds arenot airportrevenue. While differingpolicyviewshave b expressedon thisiss inthe pa , theFAA'spractice inregionsl anddistrictoffice hAsbeento seek toretainthe proceeds ofsale forairportuse, incompliance withthe addzionalprovisioninthemanual to"encourage" useofsaleproceeds forairport purpose ALrporrCompliancemanual 7-13. Itis stndd pracce forsponsorsto requestfromtheFAA .4 release fromAlP obligationswhenthesponsor stils airportproperty. TheFAA routimlyseeks, asa conditionfor release,toobtain the sponsor's agreementtodevote theproceeds to the airport. Here, had theCity fomally requestedarelease forthecondemnedproperty, the FAA'sstandard practice wouldhavebeen toseek the Cihisexpressagreement to usethe proceeds forairportpurposes.

The FAA's forthcomingpolicy ongemation anduseofairport revenue will clarify the agency's interpretionofthestattoryprovimon andlegsative in as reflected inthis letterandinthe FAAs actual practice. Inlightofthis lackofcl guidance, the discussionsofthis ism intheALPHandbookand Comtplia ceManulwill alsobe appropriately modified, andtha willbeno groumds forfatha misupretation or 

### zrusundertading.

We have as considered theCity's contentionta the condemnation proceeds inthis particular instance shouldnot beconsidered airport revenue because,theCityawrts, the propertywasnotbeingused foraeronautical purposespriortocondemnation. and bca the FAA.4pproved ALPreflectedthe plannedfi way longbefore 1983. While notcriticalto ourposition, wenotethattheCitymisunderstandsthe purpose ofthe definitionofaeronautical use inOrde 5190.6A. Thtdefinitionisintended notto establishthe scope ofactivity that generates revenue subjectto section 51I(aX12), but raherto esutbLishthescope ofactivity thatis benefitedbythe sponsor's obLigabonto

## 69

9

make the airpot available forpublic useonfairandreasonable terms v thoutunjust discrnmiato. TheFAA oidialrdyconsidersrevenue generatedbyon-airpon parking lots,atherthrOughp ki" fees orleasepayments, to beairport revenue. This isin additionto revenue generated by suchotheron-airport facilities asterminal concessions, f'irexample. Itisespecially appropriate totUattheuseofcondemnedlandfor automobile parkingtobeanairportusein thiscase, because thetenants whousedthe parkinglots were aircarriers, theFAA, andaviationbusinesses.The provisionof employee and customer parkngissufficiently tiedtothetenants' core aviationbusiness tobring the condemned propertywithinthe ambit ofsection 51I(X12).

With respecttotheissueof whichmapisusedto determine sponsor obliptions, we consideMd theCity'scontentiona reardingwhetha thecondemned propertymustbe heated assubjecttothe limitationsofthe revenueuseamurance. Ordinaly,theFAA lo-kstothe boundariesoftheairport a depictedontheExhibitA,todefinethe property thatis subjecttotheAlPassuwancs in accordance withALPH4ook, 1009; Complice Menia, 17.18. The ExhubitAsulbmiedbytheCitywith itsfirstgra application unde theAAIA, aswll as theALP submittedwiththatapplication, each showedthe areaencompassin the ,ight-of-way forthe feeway (and hencethe condemned property)tobe withintheboundaryoftheairpom Indeed theExhibitAand ALPmapssubmitted afterthecondemnaton donotshowmychae inairport boudary,em thoughtheStauhasheldtideto th condemned propertysince 1981. Accordingly,wedonot considertheCity'sviews regadingthe we ofthecondeamned propertyorthe eptesentatn ofthefreewayona officialmaps asdeteraminatveofwhether thepropertywasnot 'airport propaaty'a of1983.
Summary

Nonthles, in considerationof allthecirc 0stes sMrounding thisparticular condemnation action, adat view ofthe pIVIoUS agec policy stMes ta may bearon the issue inthiscae, weam notinapositionto inateaction compeltheCity touse the proceedsofthecdemnation on thesirpo pursatto wtion 51 1(aXl2).

Thenarsea reasons forthisposition. Fire, aftugh theFAA maynotbeboundby theprison intheOrden reliedonbytheCity
- andinfac tends.in actualpractice to trestproceeds of sle Utevem - theprovisinshave at thevary leastcreated ambiguity abouthowthe FAAimrprstheterm ren"ue generated bytheairport." We wrenot prepared tosaythat theCitywould havebeenUnreasonable inrelying onthoseprovisions totransfer thecondemnation proceeds. The FAA willclar' tspolicy onthisissuein theforth~oaMng policy stm entonrevenuediverMoI.

Second,thedocumentation submittedbythe Citywithits Jnuary 9,1995. correspondence and summized above indicatesthatintesudparies - the State,

### theCity,the AirportCommission, theDepam nd WheFAA
- al recognizedthe conde=ned property asthesiteoftheCenturyFreeway, andthatinmany waysthe City treatedtheproperty udedicated freeway proper wU in advance of1933 when theCity executeditsfirstAIPgrant.

Third, heapplication ofagency policyinthe caseofa condemnation ofairportproperty, asopposed toavolmuay sae,isnovel. FAA typicalyrespondsto arequestby an airportproprietor fordeletionofpropertyfromthe airport, andin thatcontextisable to conditionthe transfer ontheproprietor's commitmettoretainthe proceedsofse for airportuse. The agecyhasnotdeveloped guidance ontheapproprisa hadlLngofan involuwry disposition ofairport property,e.g, condemnaion bythe srte goverazent. We arenotpreparedto saythatthe Cityated correctly inassumingtha: formal FAA approvalwasnotrequired forthedeletionofthe property fromtheairportinthisisMtance, whenthe FAAhadknowledgeofthe condemnaon formanyyearspriortothetransfer.

Inconsideration ofaUtheeircumstaaces ofthisparticuLr action,theFAA isnotina position to findthatsection 511(aX12)requied thatthe proceeds oftheCenturyFreeway condemnation remain avilablefor airport me. A"crngly,theFAA doesnot atthis timeinrs to init action regardingthe transferofthe condemnonproceedsto the City's genual fund,subjecM to thequalifications stayed eai inthis atter.

Imustcutonyo, however,to t ves exprse inthislower weadvisory only. Under theAALA, aircners andother airport usm mayfile administrative complaints seeking invesugation oftled violations,andafinddeutminatonwould bemadeonly afterafUl airingoftheissue andevidence inanappropriate proceeding. Consis=t withthe agency viewthatw camer andairportsponsors should worktogetherto resolve issues at thelocalIvel with=ut Federalintervention, ifpossible, we wouldurge youtoaaen ap toresolve directly anydiagrementsove theus oftheproceeds ad. the potentialeffect onairportfees
Sincerely,



### /'~socisraAdainisatawo for Airports

cc: James Landry AirTransportMesociazoc

### Senator MCCAIN. 

## Thank you very much. Mr. Frassett, did you come all the way from Los Angeles tobe here?

Mr. FRASSETT. Yes, I did. 

## Senator McCAIN. Well, welcome, and again, I appreciate your pa- tience. STATEMENT OF JAMES FRASSETT, SERVICE COORDINATOR,

DEMARIA ELECTRIC, ON BEHALF OF CITIZENS FOR A 

## STRONG LAX Mr. FRASSTT. I am very honored to be here. My name is Jim Frassett, and I am the service coordinator for Demaria Electric Motor Services, a small business located in Los Angles that repairs 

## electric motors. I am also here today as a member ofCitizens for a Strong LAX, a broadbased coalition ofmore than 17,000 Ls Angeles businesses, labor unions, organizations, and individuals that is dedicated to keeping LAX as a strong economic engine, and opposed to the diversion ofthe airport dollars to the city s general fund.

I am very pleased to be here to share our community's concerns on this issue, an issue that is critical to the future ofthe business climate in Los Angeles, and really all ofSouthern California.

Mr. Chairman, in the past, the Congress has made it law that it is illegal for local governments to divert revenue from airports. I would urge this committee to take all necessary and immediate action to stop the city of Los Angeles from moving forward with their illegal scheme. Mayor Riordan's budget is currently before the City Council, which includes $30 million to be diverted from LAX to the city's general fund. The city council has begun the deliberations, and the Budget Committee meets this Friday. Anything thatyou can do to reinforce Congress' opposition and the illegality of diverting LAX dollars to the city's general fund would be greatly appreciated.

LAX is vital to our company, all southern California businesses and our community. Although our economy is still lagging behind the rest of the State and the Nation, LAX has been an economic pillar for the city and for the entire region. LAX is directly responsible for 32,000 jobs, is the catalyst for at least 400,000 additional jobs, and generates more than $42 billion in economic activity annually. When we heard about Mayor Richard Riordan's airport revenue diversion plans, plans thathave been going on for the past 2 years to raise taxes and fees at LAX, we naturally were concerned. Raising taxes in order to illegally divert them to the city's general fund harms everyone, and yet that is exactly what has happened. Landing fees have been quadrupled, higher rents for hangars and cargo and maintenance facilities have been proposed, and millions have been spent trying to overturn the Federal law that prohibits any transfer of airport dollars to the city's general fund, and now they are still considering another tax onjet fuel that will cost millions more. This tax would only apply to U.S. airlines, putting them at a competitive disadvantage to the foreign airline carriers. Unbelievably there is more. As part of the city's crusade, they have now recalculated a 70-year-old fully paid airport debt and

## added hundreds ofmillions ofdollars in new interest charges to World War II bonds. The alleged multimillion dollar debt started as a supposed $5 million advance from the city tothe "Department ofAirports" in 1928, even though the Department ofAirports did not exist until 1947. According to a recent independent economic analysis, this sup- posed debtias been repaid in full, and over 95 percent ofthis sup- posed debt consists ofnever before contemplated or charged interest.

The fact is, the city's own records confirm these debts have been repaid, both according to the Department ofAirports' information and to City Attorney documents. Even their own outside consultant, the John Brown Company, concluded after years ofstudy that the airport hadrepaid in full all the money that was advanced. Who pays for all these grand schemes? We do, businesses, shippers, consumers, and travelers. Higher taxes and fees could mean higher ticket prices, higher parking fees, higher concession fees, and higher prices forgoods shipped through LAX. It could also mean morejobs being driven out of our city, which means more lost revenue. Businesses in Los Angeles rely on costeffective air transportation. Businesses depend on a safe and economically healthy airport. We have built our companies and rep- utations on the knowledge that we have a cost-effective airport, and taking dollars from itharms all ofus. Increasing the costofdoing business with LAX is an obvious detriment to any of the businesses that depend on its services. City hall's actions also undermine LAX's position as it competes to be the American trading and tourism hub for the Pacific rim into the next century. From San Diego to Seattle, cities are fighting for their share of the trade and the jobs and businesses that will go along with it. LAX currently is known as one ofthe finest airports in the world, but it needs expansion-a new runway, additional offsite parking facilities, and continued maintenance to keep it in world class condition.

The international business community and climate within which we operate demands an effective airport that delivers the essential services efficiently, safely, and cost-effectively. Raising and divert- ing vital dollars from LAX strikes directly at its operation andjeopardizes all ofLos Angeles businesses in the process. City hall wants to get its hands on LAX revenues whether through higher taxes, fees, or even going so far as reinventing history to support claims ofa multimillion old debt that never existed. No matter how you add it up, it is the citizens and businesses ofLos Angeles that pay and lose, and that is why our 17,000 member coalition ofbusiness and labor, Citizens for a Strong LAX, is working hard to halt additional taxes, fees, and revenue diversions, but we need your help, sir. Our livelihoods are at stake. Our future relies on a healthy and economically sound ai ort. These political maneuvers to divert revenuejeopardize all ofour futures. In closing, on behalfofthe 17,000 coalition members, I thank you very much, Mr. Chairman, for inviting me to testify. It truly has

## 73
been an honor to appear here today, and I would be happy to answer any questions you may have,sir. [The prepared statement ofMr. Frassett follows:]

## '74 

# CITIZENS foraSTRONG LAX

IT'S NOT BROKEN DON'T LET CITY HALL 'FIX' IT!

TESTIMONY JIM FRASSETT SERVICE COORDINATOR

DEMARIA ELECTRIC BEFORE THE SUBCOMMITTEE ON AVIATION MAY 1, 1996

Good afternoon.
My name is Jim Frassett and I am the Service Coordinator for
Demaria Electric, a small business located in Los Angeles, that repairs electric motors.

I am also here today as a member of CITIZENS for a STRONG LAX -- a
broad-based coalition of more than 17,000 Los Angeles businesses,

labor unions, organizations and individuals -- that is dedicated to keeping LAX as a strong economic engine for our area and opposed to
the diversion of airport dollars to the city's general fund.

I am very pleased to be here to share our community's concerns on
this issue that is critical to the future of the business climate

of Los Angeles and all of Southern California.

Mr. Chairman, in the past, the Congress has made it clear that it
is illegal for local governments to divert revenue from airports.

I would urge this committee to take all necessary and immediate
action to stop the city of Los Angeles from moving forward with

their illegal scheme. Mayor Riordan's budget is currently before

11444West Olymptc Boulevard, Suite 1018, LosAngclis, CA 90064 (310) 445-8857; (310) 445-8870FAX
Funding proudly provided bymembers ofthe Air Transort Associaton ofAmercathe City Council which includes $30 million to be diverted from

LAX. The City Council has begun their deliberations and the Budget Committee meets this Friday. Anything you can do to re-enforce Congress' opposition and the illegality of diverting LAX dollars to
the city's general fund would be greatly appreciated.

LAX is vital to our company, all businesses and our community. Although our economy is still lagging behind the rest of the state
and the nation, LAX has been an economic pillar for the city and
the entire region. LAX is directly responsible for 32,000 jobs, is
the catalyst for at least 400,000 additional jobs, and generates

more than $42 billion in economic activity annually.

When we heard about Mayor Richard Riordan's airport revenue diversion plans -- that have been going on for the past two years
to raise taxes and fees at LAX -- we naturally became concerned. Raising taxes in order to illegally divert them to the city's general fund harms everyone.

And, yet that is exactly what has happened. Landing fees have been quadrupled, higher rents for hangars and cargo and maintenance
facilities have been proposed, and millions have been spent trying

to overturn the federal law that prohibits any transfer of airport
dollars to the city's general fund. And they are still considering
another tax -- on jet fuel -- that will cost millions more. This

tax would only apply to U.S. airlines, putting them at a

## 76

competitive disadvantage to foreign airlines.

And there's more. As part of the City's crusade they have now
recalculated a seventy-year old, fully paid Airport debt and added
hundreds of millions of dollars in new interest charges to World

War II bonds. -.

The alleged multi-million dollar debt started as a supposed $5
million advance from the city to the Department of Airports in

1928. Even though the Department of Airports did not even exist
until 1947.

According to a recent independent economic analysis, this supposeddebt has been repaid-in-fwl. and over 95 percent of the supposed
debt consists of never-before contemplated or charged interest. In
fact, the City's own records confirm these debts have been repaid -

- both according to Department of Airport's information and to city
attorney documents. Even their own outside consultant -- the John

Brown Company -- concluded after years of study that the airport

had repaid in full all the money advanced.

And you know who pays for all these grand schemes? We do! Businesses, shippers, consumers and travelers. Higher taxes and

fees could mean higher ticket prices, higher parking fees, higher
concession fees and higher prices for goods shipped through LAX.

It could also mean more jobs being driven out of our city whichmeans more lost revenue.

Businesses in Los Angeles rely on cost effective air transportation. Businesses depend on a safe and economically healthy airport. We have built our companies and reputations on the knowledge that we have a cost effective airport. And taking
dollars from it harms all of us.

City Hall's actions also undermine LAX's position as it competes to
be the American trading and tourism hub for the Pacific Rim into
the next century. From San Diego to Seattle -- cities are fighting
for their share of the trade -- and the jobs and business that will

go along with it.

LAX is known as one of the finest airports in the world, but it needs expansion -- a new runway -- additional off-site parking
facilities -- and continued maintenance to keep it in world class
condition.

The international business community and climate within which we
operate demands an effective airport, that delivers the essential
services efficiently, safely and cost effectively. Raising and diverting vital dollars from LAX strikes directly at its operations
and jeopardizes all of Lo.. Angeles businesses in the process.

City Hall wants to get its hands on LAX revenues whether throughhigher taxes, fees or even going so far as re-inventing history to support claims of a multi-million dollar old debt that never existed.

And no matter how you add it up -- it is the citizens and businesses of Los Angeles that pay -- and lose. And that's why our 17,000 member coalition of business and labor -- CITIZENS for a STRONG LAX -- is working hard to halt additional taxes, fees and

revenue diversion at LAX. But we could use your help too.

Our livelihoods are at stake. Our future relies on a healthy and economically sound airport. These political maneuvers to divert

revenue jeopardize all of our futures.

Again, on behalf of 17,000 coalition members, I thank you very much
Mr. Chairman for inviting me to testify. It truly has been an honor appearing before you today and I would be happy to answer any questions you may have.
000

## Senator McCAIN. I understand that you brought your daughter with you today to observe these hearings?

Mr. FRASSETr. Yes, this is my daughter back here, Rebecca Ni

## cole. SenatorMCCAIN. Nice to see you, Rebecca, and welcome. How did you get involved, Mr. Frassett? Mr. FRASSETT. 

## Initially it was the proposed jet fuel tax. Ihave worked in the harbor for the last 17 years of my life. I watched what the State tax did to the bunker fuel industry when it completely drove all ofthatbusiness out ofthe Los Angeles/Long Beach Harbor area, and I was extremely concerned that a newjetfuel tax proposed by the ci,y for the city's coffers at LAX would do exactly the same thing to the airport industry and the airline industry. Why would you want to refuel a plane in Los Angeles and pay 3 or 5percent more? Senator MCCAIN. Andyour 17,000 members are mostly composed ofpeople that have to do business at the airport, in one way or another? Mr. FRASSETT. That is correct. Most ofthis coalition has been 

## garnished and gathered by word ofmouth. Ithink most ofthe peo- ple that are members here understand these issues. They are angered. Senator MCCAIN. Did you ever have a meeting with the mayor and city council? Mr. FRASSETT. No, sir, I have not, however I did attend a meet

## ing and I know one ofthe city councilmen up there. Interestingly enough,. the city council has never seen any ofthese documents on the unpaid debt up until this point, and I do not know-there are 15 city councilmen in the city of Los Angeles, so I do not know where each and every individual stands, just the district we work in.Senator MCCAIN. Your organization has petitioned the mayor and ity council-the city-to do something about these problems, is that correct? Mr. FRASSETT. Yes, sir. In fact, I have a letter here from Mayor 

## Riordan, but he, as nicely as it is written, does not address any of the things we asked himto. Senator MCCAIN. I see. So basically you have not gotten responses toyour inquiries, at least substantively speaking?

Mr. FRASSETT. Not yet, no sir. 

## Senator McCAIN. How long has your coalition been in existence? Mr. FRASSETT. It began in November 1995. 

## Senator MCCAIN. Thank you. Do you plan to try to meet with the mayor and city council? What other activities does your organization engage in? Mr. FRASSETT. 

## At this point we were waiting for the budget to be released last week, so we really have not had an opportunity at this time to fully talk through the problems that are out there. That $30 million that is in that budget, we do not really know what they are asking for there yet, orhow thatis supposed to come out. Senator McCAIN. I see. Thank you.

## Mr. Merlis, what doyou think the remedy isfor this airport revenue diversion issue. Ifyou had a magic wand, what would be the ATA's remedy? Mr. MERLIS. 

## Mr. Chairman, in my written statement I cover a variety of different remedies, and I heard the dialog at the dais today. Ithink if one were to focus on the real egregious problems and the concerns that Senators expressed about civil penalties or penalizing others for a lack ofpolitical will or for a lack ofjudg- ment on the part ofa local government official, it suggests a remedy from the Transportation Appropriations Acts of 1994 and 1995 which precluded any transportation funds, any transportation ap- propriations, whether it be for highways or transit projects or airports, from going to a community which diverted revenue from an airport in violation of these airport revenue-retention require- ments. Since there are some kinds of multimodal transportation agencies or regional transit authorities which are really the recipients ofthe Federal money, you might have a transit system which is the recipient ofthe money, but it is the city where the airport is that is diverting. So such a provision does not work. However, ifyou were to address that issue by precluding funding from the whole transportation appropriation for a municipal member or a municipality which diverts money from an airport, you would create peer pressure and community pressure so that that local government could not continue that activity. Senator MCCAIN. 

## But do you not also worry, though, that that result is so Draconian that agencies-i.e., the Federal Government-would be reluctant to enact such severe punishment?

Mr. MERLIS. 

## Well, I think that is the reason it was not included in the fiscal 1996 budget. Mr. Wolf,the new chairman ofthe House committee where this arose originally, was concerned that it was too Draconian. The fact is also, as the Inspector General indicated, the Department has not used the provisions from 1994 and 1995. Iam inclined to believe, though, that a city council, when faced with that potential, might put up-a city council such as Los Ange- les-might put up its hand and say enough is enough. We do not want to lose this other transportation funding. Senator McCAIN. What about a provision that says it is at the 

## discretion of the Secretary of Transportation or the head of the FAA, depending upon the severity of the diversion? I mean, if it was $500 for the Boy Scouts, it is one thing. If it is $1.4 million to lobby for Proposition K,then it is something else. So what about something like that? Mr. MERLIS. 

### I think that makes far more sense, in that the Sec

## retary has a bully pulpit that he can use. He could use this enforcement power because it is discretionary, and maybe what you have done is come up with the solution which differentiate so that the Draconian kind ofproblem that Mr. Wolfwas concerned about in the House last year is removed. Maybe you have the answer there, so that when you have a $50 million diversion there will be severe consequences and when you have a $500 diversion you try to work itout. Maybe you have found the answer. Senator MCCAIN. Briefly, let us chronicle your problems with LAX. One ofthem was an increase in landing fees, right?

### Mr. MERLIS. 

### For the purpose ofcreating a surplus to divert revenue. We are fully willing to pay the increases for the costs we drive. Senator McCAIN. OK, what was another one? Mr. MERLIS. A recomputation ofthe budgets from 1983 to 1992 long after they had been reconciled. That was an $8.7 million matter. Senator McCAIN. What else? Mr. MERLIS. We have, in addition to that, the several landing fee increases; we have the $53 million Century freeway matter, where that money was taken off the airport; we have a variety of expenses which the Inspector General has identified as revenue diverion expenses which include some of this revenue foregone in leasing, the golfcourse, things ofthat sort; as well as the questionable or inappropriate expenses, things such as the Rose Bowl floats. We also have pending right now both this potential for a fuel tax as well as something which is as blatant as can be. The mayor's budget specifically says the proposed budget anticipates that the city will receive $30 million from DOA in addition to the normal reimbursements for cost. The law says you can pay reimbursements for cost.They have added 30 million toit. Senator MCCAIN. Well, youhave got to hand it to them. Also, I guess the reality, seriously, is that in such a huge facility such as that they have gotyou over the barrel.

Mr. MERLIS. Clearly. Senator McCAIN. The airlines just cannot afford to bypass Los Angeles. I mean, youjust simply cannot do that. You might be able to bypass Tucson, Arizona, but certainly not LAX, I would think. So all the leverage really is with them, I would think-except foryour being able to resort to legal recourse. Mr. MERLIS. 

### Yes, sir. The issue is, and I think that is the underlying principal of a variety ofthese provisions in law, airports are monopoly facilities. They serve as portions of a national transportation system. No one airport is an island, as it were, and they have to work together, and that is what the guidance ofthis committee and the Congress has been as to how to use the revenues in order to create this national transportation system. Senator MCCAIN. Well, I have some concluding remarks that I am going to make a part ofthe record. [The information-referred to follows:]
CONCLUDING REMARKS I'd like to thank all of the witnesses for participating today. The IG's report and today's testimony makes clear several disturbing facts.

First, illegal revenue diversions continue to deplete the airport trust fund. This activity occurs predominantly where airports are controlled by municipalities and politics is allowed to take precedence over fairness, good public policy and the dictates oflaw.

we must examine ways to toughen the revenue diversion statutes to insulate the process from "politics" and to protect air travelers from becoming a "voiceless" source oftaxation for big city mayors. we must also realize that policing revenue diversion is time consuming and costly. It'S unfair to ask federal taxpayers to foot the bill for policing the program.

One step we should consider is to assess an administrative fee, as well as an interest obligation, on cities that engage in revenue diversion. The assessment ofin-terest on the diverted amount will reimburse the treasury for lost revenue, and the fee will help offset thecost ofinvestigating and controlling illegal diversions.

Also the IG's suggestion about placing time limits on recoupment and reimburse. meant,as well as the issue ofgrandatheringshould be seriously considered.

We have also learned today that the political influences which are contributing to revenue diversion are not confined to local government. The record shows that this administration has been complicit in permitting diversions and playing fast and loose with the applicable law andits own administrative responsibilities in order to curry favor in a state that administration officials stress is the lynchpin to their political future.

The Los Angeles situation is an unseemly demonstration of achieving political ends through creative legal interpretations and the incestual influences that helped make it happen.

The obligations ofthiq committee are to ensure that the aviation laws are properly administered, that airport trust funds are not diverted for non-aviation purposes and that air travelers are not treated as cashcows who can be soaked to fi- nance city needs. That is a responsibility this committee takes very seriously and we will not tolerate a situation in which the laws are interpreted or implemented forany purpose otherthan the public interest. 

### Senator McCAIN. I appreciate both ofyou being here. This is an important issue, notjust because you focused our attentions on Los Angeles, which is, I think, appropriate, but the Inspector General, as you know, identified 23 airports that this has the same problem, including Phoenix Sky Harbor airport in Arizona. So clearly, we are not going to act, I do not thin , in a punitive fashion just for Los Angeles airport. I think we have to act in an overall policy change that willperhaps, along the lines ofwhat wejust discusse try to install a disincentive to divert these revenues, or Congress should make the decision that perhaps airport revenues can be used to build community centers and finance floats in the Rose Bowl Parade. I do not think so, but if we are going to adhere to the present law a lot of this has to come to a stop. It is my constituents, as well as those that travel through that airport, who deserve the additional runway, thatMr. Frassett talked about, and the additional terminal and all the safety improvements that we all know need tobe made at every airport in America, including LAX. So I want to thank you for being here, and I believe that we will act. I do not know if it is on an appropriations bill or what, but we intend to try to remedy this serious problem. We thank you for being here today, and this hearing is adjourned. [Whereupon, at 5:30 p.m., the hearing was adjourned.]

# APPENDIX

QUESTIONS ASKED BY SENATOR PRESSLER AND ANSWERS THERETO BY NANCY MCFADDEN, GENERAL COUNSEL Question 1.How do you respond to criticism by the Inspector General that the DOT and FAA have not vigorously pursuedreports ofrevenue diversion?

Answer: The Department and the FAA are committed to ensuring that airport revenues are used C-r airport purposes, as required by law. We have taken very seriously any allegation iunlawful revenue diversion.

We are implementing the provisions ofthe Federal Aviation Administration Authorization Act of 1994 in order to fashion a coherent, balanced,-and effective approach to dealing with the revenue diversion prohibition. We have recently accom. plished the following:

* Adopting a clear policy and set of principles regarding the permissible and prohibited uses ofairport revenue (Notice ofproposed policy and procedures concerning the use ofairport revenue, 61 Fed. Reg. 7134, February26, 1996); and

; Requiring commercial airport sponsors to file annual reports on airport revenue use by sponsors and to file annual operating and financial summaries (61 Fed. Reg. 11077, March 18, 1996).

We acknowledge that we have not resolved airport revenue diversion issues, including OIG audits, as promptly as we would prefer. This delay, however, is attributable in part to the statutory framework for enforcement ofthe revenue use grant assurance. Congress has been concerned that an airport proprietor should have an opportunity to take corrective action before DOT/FAA pursuit ofenforcement action
or invoking sanctions for unlawful revenue diversion. This reflects a recognition that we are typically dealing with state and local government officials, who are.trying theirbest to follow the law in mostinstances.

In cases of possible violation of the revenue use assurance, the law requires us to give the airport notice and an opportunity to refute the charges. 49 U.S.C. 471 1(d). Once a violation is identified, we are also required by law to provide the airport an opportunity to take corrective action voluntarily before we begin enforcement action. 49 U.S.C. 47111(e). In adopting civil penalty authority for revenue di. version, the conferees expressly stated their intent that this authority be used "only
as a last resort after all other means of correcting violations have failed and the airport sponsor willfully continues to violate the law." They went on to say that the airport sponsor should be provided 'reasonable period oftime, after a violation has been clearly idenaW to the airport sponsor, to take corrective action to restore the funds or otherwise come into compliance before a penalty is assessed." (H. Rept. 103-677, August 5, 1994 Cong. Rec. H7067).

Although we believe that most cases of unlawful revenue diversion can be re- solved through negotiation and discussion as Congress anticipated, we will not hesitate to use stricter enforcement tools to ensure that airport revenue is used in ac- cordance withthe law. These tools include the withholding of:

• approval ofnew AIP grants " payments under outstanding AlP grants; and " approval ofnew PFC applications. They also include seeking: (83)

### 84
* civil penalties for violations ofthe revenue use assurance; and *judicial enforcement ofall grant assurances. Question 2. What is the Administration's view ofthe Inspector General's sugges- tion that airports should have to pay a penalty for diverting revenue in addition to returning any diverted funds with interest?

Answer: Our preference is to work cooperatively with the state and local governments to assure that they repay the amounts necessary to make the airport account whole. Our experience shows that most lack ofcompliance is unintentional and we do not believe penalties are necessary to assure compliance with the lawful revenue use. Further, we currently have the tools to invoke civil penalties, ifnecessary. We will nothesitate to use these sanctions ifthe sponsor refuses to cooperate.

We do not believe it is appropriate to enhance the civil penalty sanctions since it is ultimately the taxpaying citizens ofthe state or local governmental sponsor who will have to bear the burden of paying the penalties. Unlike enforcement actions taken against private businesses, where civil penalties may be assessed, public airports are owned and operated by state and local governments aid funded by the local taxpayers.

QUESTIONS ASKED BY SENATOR PRESSLER AND ANSWERS TIIERRTO BY EDWARD A. MERLIS, AIR TRANSPORT AssocIATION Question 1. In most instances, do airports and airlines have good relations, particularly with regard to the use ofairport-generated revenue?

Answer: Airports and airlines get along quite well for the most part. It is important to keep in mind though that in thefinal analysis airports are monopolies which, ifleft unchecked, can and will exercise monopoly pricing power. Over the course ofmany years these checks came to be imposed by law and solid business practices-and they worked quite well. Fundamentally there was a de facto partnership in which airports and airlines shared risks and responsibilities.

In the post-deregulation years, however, this relationship began to change. This has occurred gradually as long-term leases and contracts began to expire andoverall relations were reassessed. The underlying legal framework (an amalgamation of laws, FAA policy, congressional guidance, etc.)has also begun to evolve with modest changes to contain the "creep" ofmonopoly powers.

This "evolutionary" series ofchanges has been influenced by pressures imposed upon certain airports to take advantage of their market position and then divert "excess" collections to support non-aviation governmental purposes. This process-is continuing-"leaks" are plugged as they are identified but it is a slow process.Because many airport operators serve at the will of their politically appointed or elected bosses, however, they are often reluctant to publicize these issues.

Fundamentally what all ofthis comes down to is a question of how best to keep aviation revenues invested in the aviation system-and how best to make aviation investment decisions. As to the first point we would suggest that further and con- tinuing oversight is required as Congress fine tunes the law. As to the second, the airlines do not believe that either they or the airports are well position to make these investment decisions unilaterally. We do believe, however, that collectively the airlines and the airports are in the best possible position to make prudent, shared decisions. We would urge the Committee to continue its effort to help restore the balance necessary to make these decisions.

Question 2. Do cases of airport revenue diversion seem to be occurring more frequently in recent years?

Answer: Yes. As documented by the Inspector General, this problem is extensive and growing. Increasingly airports are being asked to provide funds for local public boosterism, e.g. promotional activities, support for sporting events, parades, and air service marketing agreements. In the latter case, airports have attempted to use airportrevenues to provide subsidies for competing airline service. As local budgets feel pressures and local government officials resist raising taxes, or paring their budgets, the revenues generated on airports become an inviting target. As the City of Los Angeles proceeded in its attempts to divert money, for example, a least a dozen other cities' leaders indicated that ifLos Angeles were successful they would immediately follow suit.QUESTIONS ASKED BY SENATOR PRESSLER AND ANSWERS TiiERETO BY MARY SCHIAVO, INSPECTOR GENERAL, U.S. DOT question 1.The airport community has been somewhat critical ofyour reports and audits. They maintain there is no widespread pattern ofrevenue diversion, but rath- er a few extreme and unusual cases ofabuse. What is your reaction to the views ofthe airports in this regard?

Answer. Our experience is that, for the most part, it is not the airport community that has been critical of our work and reports. On the contrary, it is the municipality, the city, or the state that control the airports that have been critical ofour reports, conclusions, and recommendations to recover diverted funds. They do so because for many years they have successfully, but inappropriately, diverted significant amounts of airport revenue to pay for unrelated city and state activities and services. In fact, we still receive phone calls from airport managers across the country seeking our assistance in convincing those city or state authorities to cease such di. versions. We have audited FAA's oversight ofthe airport revenue provisions ofgrant agreements at only 65 airports. At more than one-third ofthose airports, we identified prohibited revenue diversions. During those audits we calculated diversions for relatively short periods of time. However, we did identify approximately $171 million of prohibited diversions during those limited periods. While $171 million may appear "limited," "insignificant," or even as "isolated cases" to some, it does not to OIG.If one were to calculate prohibited diversions for a decade, or more, there can be no doubt the amount diverted would be staggering. Furthermore, considering the fact that there are over 2,000 additional airports that we did not audit, there is no legitimate comparison between the $171 million and the entire airport community, and there is no way to reach a conclusion or offer an opinion regarding those airports not included in our audits.

Question 2. What is your view of the FAA position that the Inspector General's Office is better equipped than the FAA to conduct audits of airports? And, is this
a role you feel comfortable having your office play?

Answer. FAA has chosen not to place the resources necessary to oversee this program in its office that awards and manages grants. OIG is working with FAA to establish
a mechanism for FAA to assume a greater role. IfOIG were to continue to perform the work for the FAA, it would quickly consume a disproportionate amount of OIG resources. FAA must take on this responsibility, and it must start enforcing the airport revenue related grant assurances when prohibited diversion is identified. Once airports and airport sponsors (cities and states) realize FAA is serious regarding enforcement ofthese grant assurances, it is likely the level of diversions will decline.

Question 3. Do cases of airport revenue diversion seem to be occurring more frequently in recent years?

Answer. We do not know whether the occurrences of prohibited diversions are more frequent in recent years than in the past. There is little data available to make that evaluation. All we can address are the 65 airports we visited. What is definitely
more pronounced in recent years is the assertiveness and aggressiveness of big city and state governments explicitly campaigning to divert revenue.

OTHER MATERIAL SUBMIrrED FOR TIE HEARING RECORD FOLLOWS:STATEMENT OF

Airports Council International
- North America

and

American Association ofAirport Executives

on

AIRPORT REVENUE DIVERSION

AMERICAN ASSOCIATION
OFAIRPORT EXECUTIVES

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Before the Subcommittee on Aviation Senate Committee on Commerce, Science and Transportation

May 8, 1996 Auprt COMM 1.01 AWm

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## 87

Mr. Chairman and Members ofthe Subcommittee:

The Airports Council International

- North America (ACI-NA) and the American

Association ofAirport Executives (AAAE) appreciate the opportunity to submit written

comments for the record of the hearing held May 1, 1996.

ACI-NA's Members are the local, state and regional governing bodies that own and
operate commercial service airports in the United States, Canada and the Virgin Islands.

ACI-NA member airports serve more than 90percent ofthe U.S. domestic scheduled air

passenger and cargo traffic and virtually all U.S. scheduled international travel. AAAE

is the professional organization representing the men and women who manage the
primary, commercial service, reliever and general aviation airports which enplane 99
percent of the passengers in the United States.

First and foremost, ACI-NA and AAAE want to highlight our long-standing opposition

to the unlawful diversion of airport revenue. We share the subcommittee's concern that

funds generated by airports, except for grandfathered rights, should remain on the airport

to be used for airport-related purposes. To reinforce this point, the ACI-NA Board of

Directors at its most recent meeting in January, 1996, adopted the following statement of

ACI-NA policy:

Ithasbeena longstandingpolicyoftheAirports CouncilInternational-North America thatairportoperatorshave b.cen --andcontinueto be -- staunchly opposedto diversionofairportrevenues. Consistentwith Congress'intent, and respectingthegrandfathered rightspreviouslyprovided,airportoperators

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reaffirm theircommitment to the dedicationofuser chargesand fees, and otherrevenues derived from airportactivities,tobe usedonlyfor airport purposes.

ACI-NA and AAAE believe that the many existing federal statutory and regulatory prohibitions against revenue diversion and enforcement mechanisms are more than adequate to deter parties that may wish to consider diverting revenues, to prevent such
diversions from occurring, and to take actions against any incidence of diversion, whether

intentional or inadvertent. In a time of declining federal funding for airport development and rapidly growing airport capital development reeds and operations and

maintenance costs, it is not in the interest of any airport to allow its revenues to be

diverted by local officials or other entities. Airports today need every possible dollar they can generate to build and rebuild their facilities and to operate efficiently.

While it is important to protect against the diversion ofairport revenues and help airports protect themselves against diversion threats. ACI-NA and AAAE believe that

the level of attention and concern over diversion is excessive in proportion to the actual
incidence, or potential incidence, of diversion itself.

Clearly, much of the debate over revenue diversion has arisen because of the airlines'

concerns about the alleged intent of one local elected official to find legal means by

which to use some portion of airport revenues for other city services. We offer no

comment on the specific facts and circumstances ofthat case. We do suggest that the

## "89

airlines' fear that Los Angeles' past stated interest in using some airport revenues for

other purposes would quickly spread around the country, has not materialized. That is

because the law is clear -- DIVERSION IS ILLEGAL.

Another factor in the recent focus of attention on revenue diversion is the series of DOT
Inspector General Reports, issued since 1991, concerning the FAA's supe-vision and

enforcement of the grant assurances against diversion and promoting airport selfsufficiency. These reports have been cited as evidence that numerous violations of the

assurances, particularly the assurance concerning revenue diversion, are occurring around

the country. Careful analysis of these reports, however, leads to the conc.usion that

there is no widespread pattern of diversion, or even (with the exception of a few unrepresentative cases) that large dollar amounts are involved. On the contrary, the majority of the reports identify relatively small amounts of money, and many ofthe
reports address practices which were, until the Inspector General focused on them,

considered to be legitimate activities or transactions and were not even thought of as

revenue diversion. Furthermore, at least half of the "diversion" identified in the
Inspector General reports is no longer considered diversion, because the Transportation
Secretary has determined officially that airports are not required to charge fair market

value for leases of aeronautical assets. Of the $170.8 million cited by the [nspector

General in her testimony to this subcommittee, over 80 percent of the alleged diversion

can be attributed tojust four sponsors. Each of the four situations is unique, and
unlikely to be repeated. For example, one of the four. Westchester County, is engaged

## 90

in a legitimate debate with the FAA as to whether it qualifies for the "grandfather" exception contained in 49 U.S.C. 47107(b), which permits a small number of airports to

transfer revenues under one of the very the limited exceptions described in that provision. And ofthe $22.8 million corresponding to the audit ofthe City ofLos Angeles, $2.5 million is due to parking tickets and traffic fines which the FAA has not

considered to be revenue diversion, and another $9.8 million, for police services, has

been found by the Department of Transportation, after a hearing, to be permissible.

Similarly, the December 1993 report of the Surveys and Investigations Staff of the House

of Representatives, concerning diversion ofairport revenues, overstated the extent of airport revenue diversion. Of the approximately $900 million that report alleged had

been diverted, $641.3 million was lawfully used under the grandfather exception (49

U.S.C. §47107(b)(2)) according to the DOT General Counsel's Office, and an additional
$140.8 million was identified by the respective airport sponsors as subject to the grandfather exception. The report claimed that $111.7 million ofthe $900 million total

was diverted at airports where the sponsors did not appear to meet the statutory
exception. Bearing in mind that the report-examined a 10-year period, the actual

amount ofdiverted revenue, on an annual basis, is small in the context ofthe magnitude

of total airport spending nationally.

The statutory prohibitions against airport revenue diversion arn longstanding. The
original provision dates from the Airport and Airway Improvement Act of 1982, which

5

## 91

required public agencies receiving Federal grants for airport development since September 3, 1982, to use "...all revenues generated by the airport
... for the capital or operating costs ofthe airport, the local airport system, or other local facilities which are
owned or operated by the owner or operator ofthe airport and directly related to the

actual transportation ofpassengers or property". (The 1982 provision also contained the "grandfather"provision, referenced above, permitting the use of airport revenue for nonairport purposes in certain cases which predated passage of the 1982 Act.) The Airport

and Airway Safety and Capacity Expansion Act of 1987 amended the 1982 provision by requiring.that local facilities be "directly and substantially related to actual air transportation of passengers or property." The 1987 Act also required local taxes on
aviation fuel enacted after December 30, 1987, to be spent on the airport. Further, in

the Fiscal 1994 and 1995 Department of Transportation Appropriations laws, Congress imposed additional penalties that required DOT to terminate all federal transportation

funds to any local or state government that illegally diverts airport revenues.

More stringent provisions were added in 1994, when Congress enacted even tougher statutory prohibitions and enforcement actions, including civil penalties, as part ofthe

Federal Aviation Administration Authorization Act (FAAAA), Pub. L. No. 103-305 (August 23, 1994).

Section Il1of that Act adds a rew sponsor assurance, requiring airport owners or
operators to submit to the DOT Secretary and make available to the public an annual

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report listing all amounts paid by the airport to other units ofgovernment, and the

purposes for the payments. Airports must also make available a listing of all services

and property provided to other units of government and the amount ofcompensation

received for provision of each such service and property. In addition, the section requires the Secretary to issue a simplified reporting format, for use by airports, to provide financial information regarding airport finances. On March 18, 1996, the FAA
published a Notice of Availability of the required financial reporting forms. The format requires each commercial service airport to report the amount of any revenue surplus,

the amount of concession-generated revenue, and other information as required by the
Secretary. On May 2, 1996, ACI-NA and AAAE filed joint comments concerning the
reporting format; those comments were largely complimentary of the FAA's effort. ACINA and AAAE1_ members covered by the reporting requirement will begin filing the
reports with the first airport fiscal year ending after March 18, 1996.

Section 112 ofthe Act also addresses revenue diversion, by requiring the Secretary to establish policies and procedures that will assure the prompt and effective enforcement

of the grant assurances that prohibit airport revenue diversion and require airports to impose fees and rental charges which will make the airport as self-sufficient as possible.

This section also identified four possible means by which revenue diversion may occur

and directed DOT/FAA to establish effective procedures to prevent diversions. Section

112 also provides for a variety of sanctions against an airport sponsor found to have

violated the prohibitions against revenue diversion, including, withholding of approval of

7new grant applications or proposed modifications that would increase funding; withholding of approval ofany new application to impose a Passenger Facility Charge
(after notice and opportunity for a hearing); the possibility ofan injunction from a
federal district court enjoining the prohibited revenue diversion; and civil penalties up to

a maximum of $50,000. In addition a new provision (Section 112(d)) requires the Secretary to take into account the amounts being lawfully diverted by grandfathered airports, in reviewing Airport Improvement Program discretionary grant applications. Finally, Section 112(e), another new provision, prohibits a State, political subdivision, or authority from collecting a new tax, fee, or charge which is imposed exclusively upon any
business located at an airport or operating as a permittee of the airport (other than a
tax, fee, or charge utilized for airport or aeronautical purposes.)

Although ACI-NA and AAAE did not believe these amendments were necessary, given

the existing prohibitions, we do that believe the Proposed Policy Concerning Revenue
Diversion, issued on February 26, 1996 as part of the implementation of the FAAAA, provides welcome guidance and clarification as to how the legal prohibitions will be

enforced. ACI-NA and AAAE submit formal comments to the docket, making the
following points:

0 ACI-NA and AAAE support the Secretary's resolution of the question of appropriate pricing for aeronautical facilities; under the policy, it is clear that airports reed not charge aeronautical users more than the users' aeronautical costs. ACI-NA and AAAE continue to emphasize the need to eliminate the broad requirement that airports value aeronautical assets on the basis of their historic costs to the airport proprietor or else subsidize other aeronautical fees.

8

25-859 0
- 96 - 4

## 94

* FAA should identify in the final policy any existing agency guidance which would be supplanted by the final policy;

* In cases ofalleged revenue diversion, the airport should be given the opportunity to "cure" the diversion by remitting any diverted amounts, together with interest;

0 "Safe harbors" should be established to permit airports to contribute to joint marketing efforts at reasonable levels;

* Modest contributions to local community organizations, made in order topromote the airport, should be permissible, as should the practice of making airport land or facilities available for free or for nominal amounts where no prospective tenant is standing by to lease the property at commercial rates;

* Airports should be permitted to reimburse states or local agencies based on the value of services provided;

* The definition ofairport revenue should be narrowed with respect to revenue generated by facilities not physically located at the airport-

* Airport sponsors should be able to recoup past subsidies of airports, together with interest or inflationary adjustments on such funds;

* Proceeds from the disposition of land no longer used for airport purposes should not be considered "airport revenue"; and

* Nonsponsoring governmental entities should not be entitled to more latitude than sponsoring entities with respect to their entitlement to payments from airports.

To summarize, the proposed policy needs minor adjustment, but in the main provides the

kind of guidance that airports need to ensure they are in compliance and are not inadvertently permitting revenues to be diverted, and is sufficient to protect against potential diversion of airport revenue. In view of the added restrictions and sanctions

now in effect against revenue diversion, we feel that DOT and the FAA now have more
than adequate tools to prevent airport revenue diversion and take enforcement actions to

## 95

the extent it may occur. ACI-NA and AAAE believe that any possible violations of the
statutory prohibitions against revenue diversion are few and far between -- and will

remain so. As a result, ACI-NA and AAAE opposed the enactment of any additional sanctions, beyond those currently provided by law, against illegal revenue diversion.

It is important to recognize that each airport operates in a unique situation and local
circumstance, which requires complex business relationships with airlines, concessions,

contractors and the city, county or state it serves. These relationships necessarily involve negotiations and transactions for payment of services, whether it be lease payments for

the airport to use city property for operations, or for airlines to lease gates and other

facilities from the airport for their exclusive use, or for the airport to utilize a city or county's police and fire services as a means of reducing costs of operation and achieving
greater efficiency. Airport operators should not be condemned in the crusade against

revenue diversion for these legitimate, traditional and very necessary "doing-business" practices and arrangements. Nor should the federal government or other interested parties, without sufficient knowledge about local conditions such as real estate markets,

air service and airline competition, or demand for general aviation facilities, issue
pronouncements as to whether an airport is receiving sufficient revenues for leasehold rights. It would be hypocritical for the federal government to fault airports in this

manner when the federal government is gutty of "diverting" airport revenues we know as
the passenger ticket tax and other aviation trust fund taxes from important airport
development and FAA programs that depend on these funds.Surely the airlines would not argue that the reduced landing fees and rental rates from
which they benefit at some airports under certain types of lease-and-use agreements

constitute taking money off the airport -- yet that is exactly where those revenues go:
under the "revenue diversion" standard some would apply, those revenues would have to
be considered "diverted" from the airport to airline profits. We do not agree with that point ofview, but we raise it to help put this issue in perspective and make the point

that critics should not become overzealous in looking for revenue diversion in ways that

will undercut the efficient and cost-effective operation ofour nation's airports or harm

an airport's ability to engage in business and civic relationships that enable it to better

serve air travelers, shippers and its community.

In one example cited by the House Surveys and Investigations staffreport, an airport was alleged to be "diverting revenues" simply because it expended funds to remove homeless

and transient people from the airport terminal and totransfer them to other charitable organizations that can care for their needs, in order to keep the terminal operating efficiently and smoothly for passengers. We suggest that a program of this kind provides

demonstrable benefits to the airport and its passengers, as well as the local community,

and does not deserve to be lumped into the category of "revenue diversion." Should it really be considered a crime for an airport to permit a charitable or non-profit organization, such as the Boy Scouts or Girl Scouts, or a Little League organization, to

use airport facilities if the use does not interfere with the airport's operation, and, in
fact, helps make the airport a better neighbor within its community? We hardly thinkthese types ofcharitable actions and civic responsibilities should be condemned and held

up as "egregious" examples ofrevenue diversion.

Throughout the debate over revenue diversion, some parties have sought to embroil Congress in the local issue ofairport rates and charges. As a result of the airlines'

concentrated efforts in 1994, legislation was enacted to require DOT and the FAA to

establish a policy and new, expedited procedures for determining the "reasonableness"of airport fees and for quickly resolving complaints brought before the Department of Transportation. During the legislative debate, airports argued strenuously that their

rates were not unreasonable by any definition, and that additional substantive standards

were unnecessary. The past year's experience under the new expedited procedures and

the DOT/FAA Policy Regarding Airport Rates and Charges bears out ACI-NA and

AAAE's position. Of the six complaints filed to date concerning the reasonableness of
airport fees, one was settled by the parties, three were dismissed by DOT, and only two proceeded through the hearing stage to final decisions by DOT. Those two cases

focused on specific elements of a compensatory ratemaking system; the airline complainants prevailed on some counts, and the airport prevailed on the remainder.
However, neither these cases, nor the other four which did riot reach the hearing stage,

can be read as evidence ofwidespread attempts by airports to escalate user fees to

exorbitant or unreasonable levels.

To the contrary, airport/airline relations at individual airports continue to be reported as

## 98

"amicable", and a healthy tension continues to exist in airport-airline negotiations over
fees and charges, as one would expect. Airports have strong incentives to keep user fee

levels as low as possible. Airport operators recognize that they must make their facilities

as attractive and cost-effective as possible to air carriers, which can choose from among

several airports in a particular region and/or choose to serve only certain markets. In

the majority of cases, airports have very good relations with their air carriers (and other

aeronautical users) and work with them to help keep airport costs down, while meeting the development and operational needs of the airport. For example, within the past two

years at least three major airports have, in fact, voluntarily given aeronautical users the

benefit ofreductions in financing charges or increases in non-aeronautical revenues.

It is important to recognize that much of the recent criticism of certain airports on the grounds ofunlawful revenue diversion, or regarding the rates and charges to airlines, are
not based in fact. but are instead intended to obscure the real issues: i.e., the growing

pressure on airports to generate more revenues and on airlines and other airport users to

pay more for necessary airport capital improvements, as a direct result ofdiminishing Airport Improvement Program grants; and the airlines' interest in gaining a competitive
advantage over their competitors by seeking greater control over airport development
and funding decisions.

As this Subcommittee is aware, our periodic airport capital development needs surveys
have consistently demonstrated a need for a minimum of $10 billion annually over a five-

## 99.

year period for capital improvement and capacity projects. Our newest study, conducted
earlier this year, confirms that capital needs of this magnitude continue. The capital
needs surveys have also identified the growing cost ofunfunded federal mandates on airport operators, which inevitably become direct higher costs to airlines and other

- airport users.

We can expect that airlines and other airport users will not be excited at the prospect of paying increasingly higher fees for the use of airport facilities. We also predict that
tension over the issue ofairport revenue sufficiency is likely to increase. At the same
time that airport facilities are wearing out, and unmet airport capital needs are escalating, older airline-airport agreements, which have provided for moderate rates and charges, are expiring. The new arrangements which will replace them will necessarily require airlines and other aeronautical users to bear a greater share of the costs of airport capital and operating costs. This is a fact of life given the increasing costs the federal government imposes on local airport operators and the declining AlP grant funds
it provides under current budget constraints. Unless federal funding is increased to meet airport needs and unfunded mandates, airport users will ofnecessity pay the increased

costs for airport capital improvement, maintenance and operation. This will not result
from either airport revenue diversion or from unreasonably high rates and charges, but
from the simple fact that while airports' capital funding needs remain largely unmet and

are increasing, the federal government continues to make available inadequate funds
from the aviation trust fund and limits the ability of airports to maximize existing

### 100

revenue sources and generate greater capital funds on their own.

In sum, ACI-NA and AAAE believe the current laws and prohibitions against revenue
diversion and the procedures to enforce them are more than sufficient. As we have
stated earlier, this issue, and the issue ofairport rates and charges, have been overblown.
We urge the Congress to focus attention on the other critically important issues facing airports and the air transportation system, especially ensuring adequate funding to keep pace with growing air travel demand and airport capital improvement needs. Thank you.City of Los Angeles Department of Airports RichardJ. Riordan. Mayor Board of Airport Commissioners
ODailP.Garcia Preadent Patricia Mary Schne% Vice Preertet Martha Brown-Hicks

W tarm H Ds! Warren W,Valdry

John J Drico1 Exscuve Drector

SenatorJohnMcCain Chairman Subcommittee onAviation Committee onConmerce, Scienceand Transportation U.S. Senate SR-241 Russell Senate Office Building Washington, DC 20510 Senator Wendell H.Ford Ranking Minority Member Subcommittee on Aviation Committee onCommerce, Science and Transportation U.S. Senate SR-173A RussellSenate Office Building Washington, DC20510

Dear Senators McCain &Ford:
We appreciate theopportunityto submittheattached statement. Wehope that itisresponsive toyourconcerns andhelpful toyou. Please donothesitate tocontactus ifme canbeoffurther assistance.

DANIEL P.GARCIA, President BoardofAirport Commissioners - /iOHNJ.DOSCOLL Executive Director

DPG:JJD:aa

cc: All Members ofthe Subcommitteeon Aviation

P 0. Box 9W26, Los Angeles, California 0000-2216
. (310) 648-252
. FAX (310) 648-0523 

### 101

By Messenger

May 10, 1996

## 102

STATEMENT OF DANIEL P. GARCIA, PRESIDENT BOARD OFAIRPORT COMMISSIONERS AND JOHN J.DRISCOLL, EXECUTIVE DIRECTOR DEPARTMENT OFAIRPORTS CITYOF LOSANGELES

BEFORE THE SUBCOMMITTEE ON AVIATION OFTHE SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION ON AIRPORT REVENUE DIVERSION
May 10, 1996

Mr.Chairman and Members oftheSubcommittee,
On behalfofthe City ofLosAngeles Department ofAirports, wewould like to thank youfor theopportunity topresent awritten statement regardingthe use ofairport revenues. Los Angeles has always recognized and abided bythe federal restrictions on revenue diversion, including the assurances provided forby the Airport and Airway Improvement Actof 1982("AAIA"), asamended, and the Federal Surplus PropertyAct of1944. However, much ofwhat the airlines andtheir allies label "diversion" is in fact lawful and appropriaterecovery ofthefull costs ofservices and facilities provided at LAX. Certain statements presented atthis Subcommittee's hearing onMay 1, 1996 contained inaccurate and inflammatory allegations concerning Los Angeles. Weregret thatwewere unableto appear and refute thoseallegations in person. However, we appreciate the opportunity toaddress them here. In particular, wewish toemphasize the following: The City ofLosAngeles doesnot engage in unlawful diversion ofairport revenues,nor doesit intend todo so;
The Department ofTransportation ("DOT") has upheld the vastmajority ofcharges forpolice protection at LAX, because the DOT has recognized that the costofmaintaining the safety ofairport passengers and cargo is essential to maintaining a secure airtransportation system;
The DepartmentofJustice hasdetermined that federal law permitsan airport sponsorto recoup theinvestments ithas madein its airport system;
The Citycharges the airports only reasonable fees forlegislative services actually providedto represent airports;

### 108

The Cityisentitled to recoverthe Century Freeway condemnation proceeds which related to land itpurchased no laterthan 1947 and which
wascondemned bythe State ofCalifornia for use as an interstate highway at a timewhen the applicable FAA order stated that the proceeds ofairport land sales were notdeemed airport revenues; Congress hasnotregulated state charges on aviation fuel orlocal charges
on aviation fuelthatare not imposed by airport sponsors. With respect to airport sponsors, Congress has only prohibited theuse oftaxes on aviation fuelimposed after 1987 fornon-airport purposes; and The allegations ofthe AirTransport Association ("ATA") concerning
revenue diversion in Los Angeles are inpartrehashed claims that were rejected lastyearby two administrative lawjudges andthe Secretary of Transportation.

On October 30, 1995 theDOT's Inspector General ("IG") issueda report entitled. "FAA Monitoring ofAccountability andUse ofAirport Revenues by the CityofLos Angeles, Department ofAirports." The report covered the fiscalyears 1992-94, and thereforeall ofthepolicies thatwere covered inthe report (and most ofthe specific activities inquestion) tookplace prior tothe present Cityadministration, which took office in July 1993.

Itbears emphasis that theFAA hasconcurred with only five ofthe IG's recommendations, partially concurredwith one, and didnot concur withfive ofthe recommendations. After the reportwas issued, the City was givenan opportunity to provide adetailedresponse to theIG's report. (Only a limited opportunity forCity input had been providedearlier when adraft report had been prepared.) A copyofthe City's December 15, 1995 response isenclosed. The FAA iscurrently considering the City's responseand hasnotyet reached any final conclusions based upon theCity's response.
We will address below the specific allegations which have beenmostemphasized bythe IG and theCity's airline critics.

I. Allegations ofRevenue Diversion at Los Angeles

The public record demonstrates acontinuing effort by theCity tocomply with federal aviation law. Los Angeles has notdiverted, nordoes itintendtodivert, any airport revenue inanunlawful manner. The Subcommittee hasheard testimony concerningthe City's efforts torecover costs incurred inproviding services such as policeprotection, advertising and legislative representation. These areall necessary, appropriate andwell-documented airport-related services, for which reimbursement is fair and lawful. Asin any large organization, minor accounting and/or operating oversights

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can occur. However, suchdiscrepancies in no way supportthe allegations ofrevenue diversion whichhave been presented to this Subcommittee.

Federal lawimposes twobasic restrictionson anairport's fees and revenues: (1)under49U.S.C. §§ 40116(b) and 47129, and the regulations issued thereunder, airport feesmustbe "reasonable"
- i.e., the fees mustnotexceed thevalue ofbenefits provided; and (2)airports whichreceive federal Airport Improvement Project ("ALP") grants must assurethe Secretary ofTransportation thatthey will use "airportrevenues" only for certain specified aviation-related purposes. 49 U.S.C. §47107(b). The second restriction,which summarizes the grant assurance against revenue diversion, requires close examination. Indeed, the airlines' attempttooversimplify therestrictions on the
use ofairport revenue isthe source ofat least some ofthe disagreements between LosAngeles and the ATA.

The policyrequiring recipients ofAIPgrants touse airport revenues only for aviation-related purposes was firstimposed upon the enactment ofAAIA in 1982. As
was recently acknowledged, the purpose ofCongress in adding this restriction inthe AAIA wastoprevent airports from using "federal fundstoreplace airport generated funds, andthen us[ing] thelatter forgeneral governmental purposes." H.R. Rep. No. 240, 103d Cong., 2d Sess. 14 (1993), reprintedin 1994 U.S.C.C.A.N. 1676, 1683. Because ofthe airlines' desire tominimize amounts theypay to airports, the ATA has sought to expand the scope oftherestrictions in federal law beyond Congress' intent. For example, the-airlines argued for yearsthat thisrestriction (and others) prohibited an airport from establishing acompensatory methodology. In 1994. their position was rejected unanimously bytheU.S. SupremeCourt. Undaunted, theATA has made "revenue diversion" its code wordforany airport coststhatthe airlines would like to avoid paying.
A. Police protection

The IGchallenged certainofthe City's charges forthe reasonable cost of providing police protection at LAX. Itshould beobvious thatpolice protection is vitally important forthe safe operation ofany airport. This is particularlytrue at LAX, which handles anenormous volume ofdomestic and international passengers and freight and is the world's fourth largest airportin terms ofpassengers and cargo handled. The public expects a high level ofsecurityin airports, sinceair travelersand their property are particularly vulnerable tocriminals andterrorists. Because the LAPD has primary responsibility forall serious crimes at LAX, LAPD haslocated aseparate police substation atLAX solely forthepurpose ofprotecting passengers and otherusers of LAX.

All ofthe substation's activities, except forrare emergency responses offthe airport, are airport-related and occur on airportproperty. These activities include, among other things, theinvestigation and deterrence ofviolent and non-violent crimes against passengers, gangactivity, hostage-kidnap situations, politically motivated criminal

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activity, narcotics and viceenforcement, bomb/explosive searchesand disposal, death investigationson inbound flights, andthe detention offugitives intransit toLAX.

The LAPD hasalso founditnecessary to station anarcotics squad at LAX, which
serves asa principal port ofentry into the United States fornarcotics, laundered money and other contraband. Thenarcotics unitconsists of13LAPD personnel who are assignedto LAXon afull-timebasis. This unitassists in narcotics arrestsand seizures. working in conjunction with the FBI, the Federal Drug Enforcement Administration, the LosAngeles County Sheriffandother international and local lawenforcement agencies throughoutthe world. Nearly every day, this unit conducts a significant numberof narcotics seizures at LAX. The City'sdecisionto provide this serviceat LAX is an important one,because LAX is,unfortunately, used forinternational drug shipments.

The IG has criticized the City for chargingthe airport for 100% ofthecostsofthe LAPDsubstation located at LAX, "even though 81 percent ofthepatrol calls were located offairport property and were not airport related." Respectfully, theIG's information is factually wrong. After the IGrevealed thebasis ofits 81% calculation, we informed the IG in writing oftheprecisereasons why thecalculation was in error. LAPD records indicate that personnel from the LAX LAPD Substation (theonly 24 hour substation inthe City)have historically spent less than20 percent oftheirtime responding to incidents offAirport property. The Cityhasalready taken steps toreduce priorcharges attributable tooff-Airport responses. Furthermore, sinceJune 1,1995, Substationpersonnel havebeen ordered toremain onAirport property, exceptin critical emergency situations.

As amatter ofcommon sense, itisentirely appropriate for theCity toprovide a high level ofairport-related police services and to askairport users who benefitfrom these services tocover the costs. The airlines are charged foronly approximately one thirdofthepolice costs. These police services are intended tominimize the risksof criminal activity against passengers and ensurethatLAX can serve asthe gateway to the CityofLosAngeles and theNation. Spending airport revenue onsuch servicesdoes not amount to a "revenue diversion" that isbarred by grant assurances.
Moreover, theDOT has already reviewed thisissue and approved asreasonable mostofthe charges forpolice services provided at LAX. The ATA, in the Second LAX Rates Proceeding, vigorously challenged these charges. After athorough administrative adjudication, the Secretary ofTransportation upheld the vast majorityofthe City's charges for police services. Forthe Subcommittee's assistance, weenclosethe portion of the Secretary ofTransportation's decision inLAX IIdealingwithcity services charges. We would hopeand expect the Subcommittee would notadoptpolicies thatwould encourage airport ownersto decrease theircurrent levels ofpolice protection atmajor airports. We believe thatwould notonly disserve thenational interest, but would also adversely impacttheair passengersand shippersthat ATA purports to represent.

### 1 

## 06

B. Reimbursement forpast contributionsto airportcosts

TheIG hasstrongly implied that it would beillegal, and certainly "unprecedented." forLos Angeles torecoupits outstanding contributions to the capital and operating costsofthe airport. Regrettably, the IG's testimony did notmention two critical points: (1)LosAngeles isnot the first city to seek reimbursement forits investment inan airport, and (2)the Department ofJustice hasdetermined that reimbursement ofsuchan investment is permissible under federal aviation law.

The ideaofseeking reimbursement from anairport whichisfinancially indebted toitsmunicipal sponsor is not new. Oversix years ago,Albany County, New York sought reimbursement forairport debts extending back thirtyyears. The Federal Aviation Administration ("FAA") initially tookthe position thatthe federal statute prohibiting
revenuediversion didnot permit repayment ofsuch debts. Following this initial assessment, the Department ofTransportation sought further legal advice relating to the lawfulness ofsuchrepayments from theOffice ofLegal Counsel ofthe U.S. Department ofJustice ("DOJ"). Ina February 1991 memorandum, the DOJ concluded thatfederal aviation lawdidnot prohibit airports from repaying long-standing debts to airport sponsors. The FAA subsequently adopted theDOJ'sposition thatreimbursement ofa sponsor's contributionsispermissible under federal law. Asindicated inthe recently proposedrevenue diversion policy, theFAA continues to view such reimbursement as lawful. 61 Fed.Reg. 7139. Los Angeles is, therefore, seeking reimbursement ofairport debts basedupon the opinions oftwo federal agencies that suchreimbursement is lawful and consistent withthe airportgrant assurances.
With respect to the particulardebts owedby LAX tothe City ofLosAngeles. the IG has incorrectly assertedthat the Cityhas notaccounted for offsetting payments made by the airport tothe City. The initial report ofthe City'sconsultant onthis matter analyzed thenetobligations oftheairport. The consultant concluded thatthe Cityhad made over $20 million incontributions to airport costsbutthatthe City had received far less inpayments from the airport. Overall, the consultant found that over $5million in advances to the airport fromthe City had notbeen repaid. Thus, contrary totheIG's speculation, itis simply notthe case thatthe debts owedby the Cityto the airportexceed the debtsowed by the airport tothe City. Quite apart fromthis factualerror,the IG has ignored the legal and policyreasons that support repayment ofan airport's debts toits sponsor. The comprehensive federal policy requiring AlPgrant recipients touse airport revenues only for airport purposes originated with theAAIA in 1982. The revenue diversion policywas thus superimposed on preexisting financial relationships between airports and their municipal owners. The policywas adopted toprevent airport sponsors from substituting federal grants for airport revenues; itwas notintended toextinguish all debts owed by airports totheir sponsors. The IG'sclaim that reimbursement ofairportdebts constitutes revenue diversionis. however, premised onthe erroneous assumption thatthe AAIA retroactively terminated all financial obligations between airports and their owners. The AAIA never imposed an

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expostmoratorium on any debtsoed by airports, nor is there any reason for Congress to impose such amoratorium now.

The goal ofensuring that AlP grants are used efficiently requires a forwardlooking policy thatprohibits airports which receive AIP funds from substituting those fundsfor airport revenues. A successful revenue diversion policy does not, however, require interference withthe capital structure ofan airport, and in particular does not require an airport's debts to its sponsor or to other providers offunds to be extinguished. Moreover, LAX has soughtno AlP grant funds since 1994. Thus, new AlP grants will not beused, in effect, topay back the airport's outstanding debts to the City.
Finally, the IG and ATA have implied that Los Angeles should notbe permitted to recoup interest on its contributions tothe airport. Forthe record, we reiterate that the Los Angeles Department ofAirports is notcurrently proposing to pay the interest on its past capital contributions to LAX, pending the FAA's promulgation ofafinal policy on airport revenue diversion which will address this issue. The Department has stated, in its comments on the proposed revenue diversion policy, that it believes thatthere is no legal justification for a policy which denies airport sponsors the time value ofmunicipal funds invested in local airports. Indeed, denying interest on a sponsor'scapital contributions to
an airport would be at odds with the current structure offederal rates andcharges policy.

Under the Airport Rates and Charges Policy, airports may make interest payments to fund capital or operating expenses. Policy Regarding Airport Rates andCharges, § 2.3.4 (1995). Likewise, under 49 U.S.C. §47129, if anairline successfully establishes thatan airport's landing fees are unreasonable, the airport must return the fees with interest. Further, the FAA's proposed revenue diversion policy follows the general principle oflaw that adequate compensation forthe use offunds requiresthat interest be paid. For example, where the FAA determines that airport revenues have beendiverted. theproposed policy requiresthat the airport bereimbursed for the "diverted amount and associated interest." See Proposed Policy andProcedures Concerning Use ofAirport Revenue, § IX(B)(1), 61 Fed. Reg. 7143 (1996). Airport sponsors should not be singled outas the only groupunder federal aviation lawthat is notentitled to the time value ofits money. Such apolicy would amount to a mandator)' municipal subsidy to airports.

C. Lobbyist fees

The IGhas also described the City's expenditure offundsfor legislative services

as a "diversion" ofairport revenue. The City charges the airport for thecost of representing the airport's interests inWashington, D.C. Thisexpenditure is fully consistent with federal aviation law. The IG and the ATA apparently believe thatonly the interests ofairlines should berepresented in Washington, notthose ofairports. There is simply nobasis for the position that Congress should receive a one-sided perspective

on airport issues and that the views ofairport owners should notbe heard. Ifthe airlines may charge their customers (as they mostcertainly do) forthe cost ofrepresenting their position before Congress, airports shouldbe allowed the same rights.

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D. Aviation fuel charges

Both the ATA and its alterego organization, Citizens for a Strong LAX, have singled out Los Angeles forcriticism concerning itscharge on aviation fuel. This testimony is misleading, in large part because itfails (oinform the Subcommittee ofthe basic facts about thelawfulness generally ofcharges on aviation fuel and about the specific nature oftheLos Angeles aviation fuel flowage charge. First, stateand local aviation fuelcharges are widespread in this country. In many cases, the revenues from thesecharges are usedoutside the airports where they are collected. Second. Congress has notimposed broad categorical restrictions ohthe use ofcharges on aviation fuel. State chargeson aviation fuel are largely exempt from federal restrictions unless thestate inquestion is also an airport sponsor. Likewise, local chargeson aviation fuelare not restrictedunless themunicipality is also an airport sponsor. 49 U.S.C. §47107(b)(l). Indeed, only airportsponsors which adoptaviation fuel taxesforthe first timeafter 1987
are required touse them solely forairport purposes. Id. Thus, federal law does not impose anybroadperse prohibition on theuseofrevenues fromaviation fuelcharges outside anairport from which the revenue is derived. In the case ofLos Angeles, its aviation fuel flowage charge at LAXwas adopted longbefore 1987. Whilethe City refrained from collecting these charges formany years,pursuant tocontractual agreements with the airlines, most ofthese agreements havenowexpired.

E. The Century Freeway condemnation proceeds

The City has also been criticized fortransferring the Century Freeway condemnation proceeds from the Airport Revenue Fund tothe City's General Fund. This fund, amounting toroughly$58 million, consists ofthe proceeds ofthecondemnation of
athin strip ofland at thesouthern edgeofthe LAX property by the State ofCalifornia for the construction ofthe Century Freeway. pluscertain interest.

The planning ofthe Century Freeway actually datesback to 1958. Every LAX Airport Layout Plan approved by theFAA since 1968 notesthe location oftheCentury Freeway and indicates thatthe condemned property would betaken for that purpose. Likewise, almost all oftheleases which LAX executed between 1982and the 1987 condemnation had special provisionsrelating tothe plannedcondemnation. Itisonly because oflengthy bureaucratic and litigation-related delays that the Statedidnot actually take possession oftheproperty until 1985, pending issuance ofacondemnation judgment. Accordingly, atthetime the City'sgrant assurances concerning theuse of airport revenues tookeffect in 1983, ithad long been recognized that thisproperty was subjectto impending use forthe Century Freeway and would, at most, betemporarily underthe controlofthe Department ofAirports.
Moreover, theAirport Improvement Program Handbook explains that airportot
revenue isrevenue generated by facilities andactivities on or offairport.

...Airport
revenuedoesnotinclude proceeds fromthesaleofreal propertyownedby thesponsor."

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(Emphasis added.) Section 4, 630ofFAA Order 5100.38A. Thisbasic point isalso confirmed byFAA Order 5190.6A 7-18, which states,with respectto land notacquired with Federal assistance, that "there is no required disposition ofnet revenues from sale or disposal." The~reason fortheFAA'spolicy onthis issue isapparent. Ifa sponsor dedicates landtoits airport forairport purposes, and theland cannot beused forairport purposes any longer, there is no valid reason why theproceeds ofthe sale ofthe land shouldbe paidtothe airport. Inthe case ofa forced sale by condemnation, theairport would receive a windfall at City expense ifthe sponsordid notreceive the value ofits land, which ithad provided totheairport only so longas it could be usedfor airport purposes. Despiteitsentitlement tothese condemnation proceeds, the City acted with utmost caution before shifting the fundsinto itsGeneral Fund. The City sought FAA approval priorto transferring the funds. TheCity and theATA submittedcomprehensive briefing totheFAA ontheproposed transfer offunds. After more than ayearhad passed, the FAA finally informed the City that itwould not object to the proposed transfer. Thus. there is simply no basis for thesuggestion thatthe Cityhas acted with anything lessthan complete respect forfederal law with respecttothe Century Freeway condemnation proceeds.

F. TheRose Bowl float Finally, ithasbeen allegedthat theDepartment ofAirports violated federal
revenue diversion rulesby contributing to the costofafloat displayed inthe Tournament ofRoses Parade. The Department contributed only about thirtythousand dollarstothe costofthefloat ineachofthree years. Asmost ofthe audience at the Rose Bowl Game andthe Rose Bowl Parade had traveledto attend the events, the Department believed that this relatively small expenditure wouldbe reasonable forpublicrelations purposes. However,the Department has notcontinued tosupport theRose Bowl float sincethe FAA indicated that itwas not consistent with grant assurances. The Department is currently working with the Cityon arepaymentplan forthe approximately $90,000 associated withthis matter.

!i. Landing Fees at LAX

We are aware thatthe airlines, acting in concert through the ATA, havetestified that thelanding feesat LAX are unreasonable. The airlines and their allieshave repeated thisallegation forthe last threeyears inany forum which would hear them. Despitethis, two administrative lawjudgesand the Secretary ofTransportation have found thevast majority ofthe City'slanding fees fortheperiod in question tobe reasonable. The airlines' oldallegation, repeated yet againtothis Subcommittee, is no more valid today than itwaswhen those impartial adjudicators rejected it.

8

25-859 0
- 96
- 5

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A. The residualsystem

Fordecades priorto 1993, long-term operating agreements compelled theuse ofa residualmethodology at LAX. A residual methodology subtractstotal airport expenses from total airport revenues (excluding landing fees), and then sets landing fees to cover the amount bywhich total airport expenses exceed total airport revenues. Whilethe compensatory methodology requires the airlines topay the true and actual costs ofthe facilities and serviceswhich they use, theresidual methodology provides the airlines with cross-crediting from non-aeronautical revenue sources suchas concessions and parking.

B. Adoption ofa compensatory methodology atLAX

After considerable reviewand a lengthy study by outside experts, Los Angeles decidedthat aircarriers at LAX would finallybe requiredto paythe truecosts of aeronautical operations. Accordingly, effective July 1, 1993, Los Angeles adopted landing fees based on apure compensatory methodology (the "1993 Fees"), which included acharge forthe airlines' use ofairfieldand apronland based on itsappraised fairmarket value. The compensatory rate-making methodology enables airports to
recoverthe true costs offacilities and serviceswhich theyprovide to airlines fortheir aeronautical operations. Under thismethodology, airline landing feesincreased from 51¢ to $1.56 perthousand pounds oflanded weight. (This 51¢ figure was artificially low because itreflects aspecial $16.5 million credit from FY 1991-92. Ifnot forthiscredit, the rate wouldhave been 840.) Despite this increase, landing fees at many otherairports
were still significantly higherthan at LAX. See the attachments comparing landing fees at other airports during fiscal year 1995/96.

Several airlines immediately challengedthis newrate andcompensatory methodology by LosAngeles. Thes. .rlines (and theATA) initially filed a complaint in federal courtchallenging the 1993 Fees. The airlines' effort to perpetuate compulsory cross-crediting ofconcessionary revenues was frustrated when, sixmonths after theyfiled suit, the U.S. Supreme Court decided NorthwestAirlines,Inc.v.Countyof Kent, 114 S. Ct. 855 (1994), which held thatan airport's landing fees were reasonable eventhough the fees were not cross-credited from concession revenues.
C. LAX's landing fees were largely upheld as reasonable intwo DOT Proceedings

After theirchallenge to the 1993 Fees was dismissed by theU.S. District Court, theATA and the airlineschanged strategy and filed anexpedited administrative proceeding ("LAX I") underSection 113 oftheFAA Authorization Actof 1994. DOT's Final Decision in LAXI approved all major portions ofthe 1993 Feesat LAX, except for the charges for the useofairfieldand apron landbased onappraised fairmarket value. Thisdecision, which largely affirmed the Recommended DecisionofChief Administrative Law Judge Mathias, vindicated the 1993 Fees in thefollowing respects: (1)itupheld the City's inclusion intheratebase ofamortization charges forcapital

### 111

expenses; (2)itupheld the City's allocation of31% ofaccessand roadcosts to the airfield and apron costcenters; and (3)it found that the airlines had failed to demonstrate that LAXhad accumulatedexcess aeronautical revenues. LosAngeles has sought judicial reviewofDOT's decision that landing fees may not includeany return on the value ofthe airfield and apron land, andthe airlines have filed across-petition forreview

on issues in which their position wasrejected. The cases arecurrently being briefed before the United States Court ofAppeals forthe DistrictofColumbia Circuitand willbe argued in September 1996. Shortlybefore DOT issuedits Final Decision in LAX I,LosAngeles set its fees for 1995-1996 (the "1995 Fees"). Forthisperiod, LosAngeles setitslanding fees at $2.06per thousand pounds oflanded weight, using the samemethodology employed in calculating the 1993 Fees. LastAugust, the airlines filed a secondcomplaint with the DOT requesting expedited reviewofthe 1995 Fees. In the Second LAX Rates Proceeding ("LAX I1"), LosAngeles onceagain successfully defended the vastmajority ofits landing fees against airline allegations that the feeswere unreasonable. While the ATA quotes Administrative Law Judge Kolko's Recommended Decision inLAX IIat length, itfails to informthe Subcommittee thateven Judge Kolko approved most ofthe 1995 Fees. Moreover, DOT's Final Decision rejected much ofJudge Kolko's criticism of LAX and approved an even great,-r portion ofthe 1995 Fees,including all but90 ofthe increased landing fees. The Cityhas repaid, with interest, thisportion ofthe fees found to beunreasonable. Significantly, the Secretaryexpressly approved the charges formost ofthe policeservices provided at LAX. Nothing in thishistory suggests aneffort onthe part ofLosAngeles "to flauntthe law." Rather, theATA's continuing attacks onLAX merely reflect the airlines' disappointment that LosAngeles no longer dolesout the huge subsidies from which the airlines benefited for many years. Likethe airlines' unsupported claimsthat landing fees at LAXwere unreasonable, their allegations ofrevenue diversion mainly reflectadesire tominimize their own costs,not aconcern about the efficient use ofAIPgrants.

Il. AirportOwnership Finally, webelieve itisessential to setthe record straight asto the basic legal principlesthat govern airport rates and charges andrestrictions on theuse ofairport

revenue. Thewritten testimony oftheATA begins with afundamental and telling misstatementabout airport ownership. The ATA claims that "virtually all commercial airports have been bought andpaid for bythe airlines, theircustomers, and otherusers." Infact, the airlines donotowncommercial airports: mostcommercial airports are owned by local governments or localairport authorities. Inparticular, the CityofLosAngeles

owns LAX, nottheairlines.The airlines have nomore "bought andpaid for" LAX through payment oflanding fees thanour local baseball fans have "bought and paid for" Dodger Stadium by purchasing billions ofdollarsintickets. In eachcase, the customers have paid fortheprivilege ofusing a facility without acquiring ownership rights.

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As amatter ofsimple fairness. local governments and taxpayers shouldbe ableto enjoythe benefitsoftheircapital investments. Specifically, thetaxpayers shouldexercise control over local airports and should enjoy the benefits ofthe operation ofthose airports, just as wouldany investor. The airlines' erroneous claim ofownership ofcommercial airports reflects their strong desire to exercise as muchcontrol aspossible over airport facilities. TheCityofLosAngeles has been singled outby the airline industry first and foremostbecause ithas assertedon behalfofitscitizens itsright tomanage and direct the destiny ofLAX and hasrefused to perpetuatea systemin which the true costs ofairline operations are paidby others. The City recognizes that the airlinebusiness ishighly competitive; airlines dislike increases inthe costofairport servicesjust asthey dislike increases inthecost oflabor orthe cost ofcommercial aircraft. Nevertheless, the airlines must recognize thatthecitizens ofLos Angeleswould notpermit acontinuation ofthe cross-crediting which the airlinesenjoyed fordecades atLAX.

IV. Conclusion

The LosAngeles Department ofAirports does not engage in unlawful diversion of airport revenues and does not intend todo so. Further, we donot believe thatany major changes in current law are necessary atthis time. However, Los Angelesremains willing to cooperate withthe Subcommittee in any way itcan. Inparticular, Los Angelesis prepared to respond further to any questionsor requests which the Subcommittee might haveconcerning the issue ofrevenue diversion generally or as itmay apply to Los Angeles.

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Attachments to 

## Statement ofDaniel P.Garcia, President

Board ofAirport Commissioners and John J. Driscoll, Executive Director Department ofAirports

City of LosAngeles

DOCUMENT TAB

I- Landing Fees and AirlineCharges Per Passenger A

2 Comments ofthe City ofLosAngeles Department ofAirports B to the Final Audit Report oftheOffice ofthe Inspector General, December 15, 1995

3. Excerpts from the Final Decision inthe Second LAX Rates C Case, Issuedby the Department ofTransportation, December 22, 1995

4. Memorandum fromJ Michael Lqttig, Assistant Attorney D General, Office ofLegal Counsel,2 Department ofJusticeto C.Dean McGrath, Jr., Acting General Counsel, Department of Transportation, February 12, 1991

## LANDING FEES ANDAIRUNE CHARGES PERPASSENGER

(nnked bond ain.&argea)
Total Lmdin drAlde Cbhge. Rank Akwit Fee Rala Pe asEe

1 KMndy $2950 520,41 2 DenverInlkaaonra 53.310 516.55 3 Newk & 62.500 31531 4 IoGuaria S4.200 $12.09 5 OrangaeCJb Wayne 31.400 S0.80 6 WuaNngtmDuVe $1.630 59.82 7 NNWli $1.150 $9.18 a LMunpms $0.720 $9.06 9 sasJose $1.260 $&22 10 Chkcago 52020 $7.34 11 Odando $2190 $7.31 12 Seatle 1.200 57.31 13 Oakland $1.020 $6.76 I. 14 St Louis $1.170 $6.40 10 15 Houslom lieronlinena S1.310 36.01 "8 Boston 52040 $5.93 17 LasVegas 51.180 $5.79 16 O)trot 52.560 $575 19 BaJlmors Washmn"o 51330 $S.03 20 Los Angeles 51.970 $5.01 21 Phoenix $.600 $4.97 22 DallasdRI. Wt 51.650 $4.31 23 Ssn Fracisco $0.80 $3.50 24 Ontwio $1.190 $3.26 2S mnpoe,%Pau 50.910 $3-25 25 HoustonHoy $2.140 $321 27 Atlnta $0.530 $215 26 Honolu 2230 NA 29 Budmnk 50.740 NA 30 Washhgkbn National $1.600 NA 31 Pouand $1.130 %A

*Lanag feeisbasedontakooffwaigMb 6



## LANDING FEES ANDAIRUNE CHARGES PER PASSENGER (aMbe bm andlabg*ee)

Rank --- Akpot Fme Rate Per pinmew 1 L~uadim* K200 $12.80 2 Denver lnmod 5&310 $16.56 3 Kemedy' 52050 $2041 4 Defrlm 52.550 $6s 5 1Newedc18 52.500 515.31 6 Honoluu 52.230 NA 7 Odtando $2.160 S7.31 8 HoustonHobby $2.140 3&21 9 Boston $2.040 S5.93 10 Chicago 52020 $1.34 a 1 o Amoeba S1.970 or 12 Oagasfi~tWosti 51.650 W4.1 13 WashMnonOade 51630 59.82 14 Washingtn Ndnst Si-600 NA 15 OregeC onWayne 31.400 58.86 1e BafmmWehimqba 31.330 55.03 1~1 HoustonIntercongketa $1.310 56.01 Ie SanJose S1.260 58&22 10 Seae $1.200 $7.31 20 Onta 51.190 53.25 21 Las Vegas $1.100 55.79 22 81 Laubs S1.170 56.40 23 Miuru 51.150 58.18 24 Pantand $1.130 NA 25 Oakland 51.02D $676 26 Mhvmepok.St.Pad 50.910 3.25 27 San Fruidico so.=6 $350 28 Phoen" SO.=0 $4.97 20 9habank $0740 NA 30 Mempis 30720 59.05 31 Affadi S05'C 52I1

*Laudigfee isbased ontakeoffwoogl

### 116

City of Los Angel0q.0prtMeffl of Airport "Richard J. Riordan, Mayor
December 15, 1995 S.ai orAhVM C rmanha).. Theodore Stsn,Jr.

PGaIl MarySedW4g VW*s Presid Mr. John P. Milligan Ma"IsLPoWn Supervisor, Standards Section Warw. W.Vsky John J.OdMO 

### U.S. Department of Transportation J 06,a Federal Aviation Administration
P.O. Box 92007 world Way Postal center Los Angeles, CA 90009
Re: Final Audit Report of the Office of the Inspector General Dated October 30, 1995

Dear Mr. AtlligaM:
This letter is in response to your letter of November 20, 1995, in which you extended the City of Los Angeles ("City"), Department of Airports ("Department") an opportunity to offer
additional information and input to the final audit report issued by the Office of the Inspector General ("OIG") dated October 30, 1995. The final au-it report, Report No. R9-FA-6-001, relates to OIG's recent audit of the Department's operation c€fits four airports (LAX, 0NT, PMD and VNY) for fiscal years 1992 - 1994. The OIG has made numerous recommendations for courses of action to be taken by '- FAA. The FAA has concurred or partially concurred in

a number ;f the recommendations and has not concurred in some others.

As yv'.A know, the Department previously submitted to the FAA its response dated May 26, 1995 to the OIG'$ draft audit report. In the short time period in which we had to respond, we endeavored to provide as much information as possible on each of the items with which the OIG iras concerned. We very much appreciate this opportunity to provide our input and Zurther supplement our earlier response, especially to provide now information which has become available to "u-ssince we prepared that response and to address specific areas which the kA, has requested addiLional Inormation.
-This response will serve to update and further supplement our earlier ;cuponse. Therefore, f.ar a complete and detailed discussion c" each rental arrangement or expenditure in question,

we would" isk that you also rueifL to our earlier response. We will respond t,, those recommendat -n of -. ho OIG with which the FAA has concurre'j or partially concurred in the order presented in the final audit report. They

..rt'. r:,.1.ek&tins lb, lc, id, le, ig

s.10 Ao.922:6, LOSAg,,14I.Cah0rn4AVU92216
- 310)646-.5252

- FAX3i01646OS23

## 117

Mr. John P. Milligan December 15, 1995 Page 2
and lh. Under each of these recommendations, new information or information requested by the FAA on specific items that is available at the present is provided in the discussion below.

1. RECOMMENDATION 29 .- Recommendation lb requires the Department to reimburse the airport account the difference between what was actually charged and the market value for the use of airport property. This recommendation is based on the determination that the Department did not receive fair rental value for three categories of leases of airport property. The three categories of leases are: (1) eleven leases for which no rent was charged, (2) five leases for which below fair rental was charged, and (3) four leases of federal surplus property for which no rent was charged.
As set forth in the Department's respoi.se to the FAA dated May 26, 1995, and as recognized by the FAA with respect to many of the properties at issue, the leases to governmental or non-profit entities for below fair market value or without charge have always been related to the development, improvement, operations or maintenance of the Department's airports. As the FAA also has recognized, because of their locations and restrictions on use, many of the properties are not rentable. Nevertheless, the leases have resulted in direct benefits to the Department. Further, in its September 8, 1995, report to the OIG ("FAA September 1995 Report"), the FAA has stated that uncollected monies cannot be imposed as retroactive collections since the payments were made in accordance with existing leases.'

A. Finding Reuarding Rent Free Leases
I. FAA: -3 Hangar/Office Building and Control-Tower - The FAA has agreed with the Department's position that adequate compensation was received for these leases with the FAA. The grant assurances require that land for federal facilities be furnished without cost to the federal government for use in connection with any air traffic control, navigation activities or weather-reporting and communications activities related to air traffic control.
2. Westchester Youth Foundation at LAX - The -FAA has partially concurred on this item. The FAA has found that the property is not revenue producing.land, rather land used to

'Sce VAA &.picmi 1995 report. pagcs d4 anwt 27.

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Mr. John P. Milligan December 15, 1995 Page 3 protect the approaches to a runway. Therefore the Department has no obligation to lease this land. The FAA seeks further information as to the specific location of the property and any in-kind services received by the Department.
The property encompassed by this lease consists of seven acres of vacant land located at the souhest corner of Yorktown Avenue and Wiley Post Avenue in the East Westchester area of LAX. We have attached for your reference a copy of a map, Airport Engineer's Drawing No. 91003-80, which depicts the location of this property. (See Exhibit "A".) It is located under a noisy and active flight path at LAX and has been designated as a noise sensitive area. Thus, its uses are extremely limited. The immediately adjacent property consisting of more than ten acres formerly leased by Hertz Rent-A-Car has remained vacant for over two years.
In exchange for use of this property at no cost, the Westchester Youth Foundation had paid all expenses associated with the leasehold, including possessory interest taxes, other taxes, utilities, maintenance and insurance. As further consideration, the lessee has maintained the leasehold free and clear of weeds, trash and graffiti at all times.

In view of the fact that its uses are very limited due to its designation as a noise sensitive area, the Department believes that it has received adequate compensation, including in-kind services, in exchange for the rent free use of the property.
The Department has commenced a project for the construction of a child care facility on this property to provide this service to Department employees, as well as tenants of LAX and their employees. It will be constructed on the only portion of the property which has apermissible noise level (65 db community noise equivalent level) that allows the use of the property as a child care facility. The Department has already advertised and solicited proposals for the operation of the child care facility, and has narrowed the selection to several operators. In early 1996, the Department will adve-rte and solicit proposals to select an architect and builder of the facility. The facility will provide a safe, convenient and on-site location for child care for the benefit of Department employees and LAX tenants.
3. City of LA Department of Public Works

- This property was used as a temporary portal for the construction of a subsurface sanitary sewer known as the NORS Project and for the temporary storage of equipment of vehicle parking during the construction of the project.

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Mr. John P. Milligan December 15, 1995 Page 4
This subsurface sanitary sewer operates based on gravity. As such, the Department of Airports isable to remove the old sewage pump. Such removal allows for the future expansion of the Sepulveda Tunnel. Indeed, the FAA has found that the Department of Airports would benefit from this lease arrangement because the project enables the removal of the sewer pump which results in savings 4 eletrical and maintenance costs and provides for possible expansion of the Sepulveda Tunnel.

It is important to note that the subject lease expired in November 1992, and therefore encompassed a period of only five months of the time period covered by this audit. The Department has derived sufficient benefit from this temporary rental arrangement.
4. LAPQ (Driver) Training Unit at ONT - The leasehold is 13.3 acres in size and is located east of 1923 East Avion Street. The FAA has requested specific information regarding the exact location of this property. we have attached a copy of Airport Engineer's Drawing No. 86051-82 which depicts its location. (See Exhibit "B".) The use of this property by the LAPD Driver Training Unit has been under a month-to-month revocable permit, No. ONT 7257, 

### n= a lease. The FAA has indicated that the use of this property should be on a short term lease. In fact, its use has been even more temporary than that since ithas been under a revocable permit.
Due to its location, this property must be retained for Department use such as a future taxiway. A new terminal facility is scheduled to be constructed at ONT. The first stage of grading and ground preparation has already begun. In view of future expansion and development at ONT, no long term use of the property is available. The department has attempted to make some short term use of the property through this arrangement with the LAPD.
The Department has received adequate in-kind services in exchange F6P-the intermittent use of the property by LAPD. The LAPD has incurred between $50,000 to $100,000 to upgrade and repair the roadway to bring it into usable condition, paid all possessory use taxes, utilities and maintenance, and trained personnel from the Department's airports in emergency.vehicle operations. If the Department were to send its employees to a private driving course, it would cost the Department approximately $1,200 per person. The LAPD expects to begin construction of a new driver

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Mr. John P. Milligan December 15., 1995 Page 5 training facility, not on airport property, in early 1996. Upon its completion, they will use the new facility. The LAPD has offered the Department free use of the new facility.
5. City of Palmdale Golf Course - This property was acquired along with approximately 17,000 acres as part of the PMD acquisition project in the 1970s. At-that time, the property was used as a golf course. Due to the lack of market demand for this property, the Department has continued its use as a golf course. The golf course is operated by the City of Palmdale which loses approximately $50,000 to $100,000 annually to operate it. We have attached financial data obtained from the City of Palmdale which show such loss. (See Exhibit "C".) The cost to operate and maintain the golf course for fiscal year 1992-1993 was $557,580($127,120 for operations and $430,460 for: maintenance) and for fiscal year 1993-1994 was $643,790 ($166,250 for operations and $477,540 for maintenance), respectively. The actual revenues received for these years were $507,720 and $551,850, respectively. For each of these years, Palmdale sustained a net loss of $49,860 in 1992-1993, and $91,940 in 1993-1994 to operate this golf course. For the current fiscal year 1995-1996, the year to date (July to November 1995) actual revenues received is $221,346 as compared to the projected revenue of $601,180 for the year. The five months of revenue represent only 37% of the projected revenue for the year. The poor financial performance is reflective of lack of market demand for this and similar properties at PMD. 6. LA Fire Station #51 and£95 at LAX - Fire Stations 51 and 95 are both located on LAX property. As the FAA has recognized, they each play an important role in the LAX crash, fire and rescue plan. They also serve the Airport's need to have the continuing availability of additional fire safety resources on.hand in the event of a major catastrophe such as a fuel explosion.
The- M'ncipal mission of Fire Station 51 (which is located adjacent to the southern runways at LAX, with immediate access to the airfield) is to extinguish fire within the cabin in the event of an aircraft crash, while another LAX crash unit (Crash 80) controls the external fire through the application of foam. Fire Station 51 continues in existence at LAX for the purpose of providing airfield fire protection. If it were not for this specific need, other nearby firs stations could and would adequately serve the vicinity of LAX (including the terminals) without Fire Station 51. Thus, it is

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Mr. John P. Milligan December 15 1995 Page 6 quite clear that the fixed costs of Fire Station 51 are attributable to LAX alone.
Fire Station 95 provides essential support for Crash 80, which doe-not have the capability to hook into the water delivery system. crash 80's foam apparatus requires large quantities of water, which is mixed with the.f am. Crash 80's limited water storage capability must be suPp-Y--ementd by other conventional engine companies. Furthermore, as the Department has explained, the Airport enjoys an enormous benefit from the availability of Fire Station 95 (which is an enhanced "Task Force" station) at the Airport. The unique circumstances of LAX, with the potential for catastrophic loss due to an airplane crash or fuel explosion, for example, necessitates a large concentration of LAFD resources at and around LAX. Fire Station 95 is located on LAX property, and therefore serves this need in a very direct sense. The FAA has requested additional information regarding the use of Fire Stations 51 and 95. Fire Station 51 spends approximately 99.5 of its total time on the Airport. Its offAirport response time accounts for only one-half of one percent of its total time. The rest of Fire Station 51's time is spexat either responding to incidents at the airport, or standing by at the Airport in order to be immediately available in the event of emergency. Fire Station 95, like Fire Station 51, spends the vast bulk of its time (over 97%) either responding to incidents at the Airport or in the station at the Airport.

If one were to consider only response time, in fiscal year 1992-93, Fire Station 51 spent 92% of its actual response hours responding to incidents on Airport property. The fire engines of Fire Station 95 spent over 30% of their response hours responding to incidents at the airport, while the rescue ambulance of Fire Station 95 responded to the Airport 58% of its response time. However, response time alone does not provide a proper indication of the benefit the Airport receives from this necessary concentration of resources at LAX. Accordingly, it is simply not correct that the Department-providCs the use of Fire Station 51 and 95 property to the LAFD for free. It receives a valuable -- and indeed,
an essential -- service in return. As a result,_ the Department believes that it would be inappropriate to charge rent to Fire Stations 51 and 95.

7. Mobile Modular Management Corn. - As noted by the FAA in its September 1995 report, payments made by the Department to Mobile Modular Management Corp. do not present an issue involving rent free use of airport property. Rather, these

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Mr. John P. milligan December 15, 1995 Page 7
payments represent lease payments for mobile office space used by the Department's Telecommunication Bureau and Los Angeles Police Department's dedicated substation at LAX. The actual rent paid by the Department for this trailer is $2,279.85 per month or $27,358.20 per year. Payment of rent for the trailer for such uses are airport related. 8. Metro Neiahborhood Gardens
- This property is located mostly on the North Clear Zone at VNY. Federal law prohibits the construction or maintenance of any buildings or structures in a clear zone within 750 feet of the airfield. Therefore, the property cannot be used for purposes that do not comply with the clear zone requirements. The Department has attempted to derive some use of the land by allowing the community to plant gardens there.

The current lease is scheduled to expire at the end of December 1995. The Department has recently received some interest in the property. The Department intends to negotiate
a new lease at the market rate, taking into account the restrictions on use, if there is any interest by a prospective tenant at that time.

9. Los Angeles County Coroner
- This property consists of a mere 636 square feet at LAX which is utilized as a small satell-,te office for the Los Angeles County Coroner's Office. The immediate availability of the Coroner's Office at LAX makes possible the expeditious removal of deceased passengers from aircraft. The Department was specifically requested by the airlines to provide space at LAX to the Coroner's Office so that the airlines may avoid undue delay and inconvenience to the traveling public. Further, such expeditious removal minimizes health and safety hazards to passengers and the public.
By way of example, several years ago a British Airways plane arrived at lAX carrying a passenger who died of aheart attack during the flight. Since the next of kin was not available, only the coroner could remove the body from the aircraft. Because the Coroner's Office is located in downtown Los Angels-,a one-hour drive during peak traffic hours, there
was a long delay before the coroner arrived, resulting in a cancelled flight for the airline. Consequently, approximately 387 British Airways passengers were required to spend the night at local hotels. The cancellation of the flight resulted in an estimated loss of $150,000 to the airline and great inconvenience and delay to its passengers. As a result of this experience, the airlines requested that the Department provide space to the Coroner's Office to insure that it would be immediately available to them.

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Mr. John P. Milligan December 15, 1995 Page 8
The Department continues to believe that the use is for an airport purpose. 10. City of Palsdale storm Walter Basin At-PMD

- The FAA has determined that this lease is properly related to an airport purpose because the environmental impact statement requires the Department to assure maintenaac--of appropriate storm water controls. Further, the fact that no market demand exists for this property further justifies the use of the subject property as a storm water detention basin.
11. Sky Chefs. Inc. - This leasehold consists of a 1,200 square foot shop building (half of which is enclosed), wash rack and 8,400 square feet of asphalt paving and what was previously believed to be a 20' x 30' shed. OIG had concluded that the Department had not charged rent for the shed. A recent inspection of the site to determine if the shed was currently in use has revealed that the shed was removed at or prior to the expiration of the previous lease. Therefore, the current lease which provides for a monthly rental of $2,088 reflects the full and correct rent for the entire leasehold.

B. Finding Regarding Pronertv Leased Below Fair Rental Value
1. American Golf Cor2.
- As we explained in our earlier response, due to the construction of the Westchester Parkway, the 18 hole golf course was reduced in size to a hybrid 15 hole goif course. The lease required the operator to adjust its operations based on the needs of the Department's Parkway construction and guaranteed only 9 holes. The construction caused inconvenience and disorder to the golf course operation. Further, the construction required the removal of the club house. Due to the extenuating circumstances that directly and severely affected t|.e operation of the golf course, the Department entered into this lease with less favorable terms than those in the previous lease. As requested by the FAA, we have attached financial data which refle gross revenues received for calendar years 1987 to June 1994 for this golf course. The current lease, which contemplate disruptions to the golf course operation, was entered into in 1990 for a two year term which was later extended for an additional two years. The construction of the Westchester Parkway was completed in mid 1993.
The gross revenues for the year 1990 to 1993 (during construction of the Westchester Parkway) are as follows: 1990

- $2,122,848; 1991
- $1,931,d62; 1992 - $2,078,379; and 1993
-

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Mr. John P. Milligan December 154 1995 Page 9 $2,241,399. In comparison, the gross revenues for years 1987 to 1989 (before construction) are as follows: 1987
- $2,359,042; 1988 - $2,581,894; and 1989 - $3,229,301. Further, for first half of 1994, the gross revenues were $1,187,187. As verified by these figures, the construction of the Westchester Parkway significantly reduced gross revenues received from the operation of this golf course. During the first quarter 1996, we anticipate advertising and soliciting proposals to lease the golf course on a concession basis at current fair rental values and at appropriate percentage rates for the various fees (green fees, range fees, cart fees and pro shop fees). The three holes currenty lacking will be added and a club house will be constructed, making the golf course fully operational.
2. Sommer Haven
- This 40 acre parcel at PMD has been occupied by the current tenant since the Department acquired this property along with thousands of others in the 19705. There has been very little market demand for these properties. In the past, the Department has been constrained by relocation laws to relocate the tenant in an attempt to more profitably utilize the property. The lease entered into was residential in nature. However, the tenant has since changed the use of the property. Therefore, the Department is currently in the process of renegotiating the lease at fair market rate, or if this is not possible, to seek relocation of the tenant. 3. Metropolitan Transit Authority
- The leasehold.is utillzod as a bus center. The FAA has determined that as an intermodal facility, the bus center is necessary to accommodate. the movement of airport passengers and has concluded that the rent charged is adequate compensation.
4. Gibe-Wheeler Farms at PMD - As stated in our earlier response, it is impossible to determine whether the OIG is referring to. one or both leases that the Department has with Giba-Wheeler Farms. Both parcels are used for farming
- growing olTri's and other agricultural crops.
The OIG believes that the Department should have received $21,433, instead of $13,851 for the property. However, the rate charged by the Department is the standard agricultural rate. Further, as earlier explained, the lessee had made certain improvements to the land to make them suitable for farming: cleared and leveled the land, repaired the water wells and installed large pumps and irrigation systems. The leases were structured on an escalating scale to allow the

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Mr. John P. Milligan December 1L 1995 Page 10
lessee to offset some of the initial costs incurred. The Department believes that in view of the lack of market demand for this and other similar properties in PMD, we have received adequate compensation for the properties encompassed by these two leases.
5. Beechcraft West at V.. - The FA.=As accepted the business judgment of 'the Department in entering into this lease arrangement.
The leasehold is made up of two parcels totaling 12.6 acres (11.9164 acres and 0.7051 acres), both of which have been improved with ten buildings. The rental amount was initially based on a ground rent of $14,725 per month and $16,266.36 for the buildings. However, because the buildings were functionally obsolete and costly to maintain, the lease provided for the lessee to demolish eight buildings at its own expense. Each time the demolition of a building was completed, the rent was accordingly reduced.

The FAA has also found that since this lease is an aeronautical lease, fair market value is not required. Further, the amount OIG believes the Department should have been received is $2,907 for the entire audit period

- a mere 0.5% differential. The FAA has found that such a minimal variation is acceptable.
C. F i Reaardinu federal Surmlus Propertv Leased Rent 

### Free

1. California Air r-tional Guard at ONT - The FAA has determined that the Department has no legal alternative but to honor an existing lease which was entered into between the United States and City of Ontario over 30 years before the Department acquired the property. The lease is for a term of 49 years or until the year 2001, with an option to renew for an additional 49 years or until the year 2050. The Department has no legal authority to terminate the lease.
2.
--

### APD Motorcycle Training Unit at ONT - The property in question includes 2.7 acres of vacant land located at a remote location at ONT.) The use of the property by LAPDIs

The property also includes 2acres ofunpaved land locatedacross from Lot A at ONT. That Piel contains amiddle marker beacon navigational aid. No improvements or obje tswhioh would actasan interfawcsour.e are allowed within l00 feet ofthe makar and above a20.dogree angle. For security purpose

. the FAA erected
a tenc around theentire penmeter oftho 2acre parcel. Thus, the property cannot beleased Until and unless the fcnc is removed by the F A, the Deparutment is unable tomake any use ofthis property.

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Mr. John P. Milligan December il, 1995 Page 11 Motorcycle Training Unit isunder a revocable permit, No. ONT 7256. Its use is on an ad-hoc, temporary and non-exclusive basis. The property is no longer being used by the Training Unit. The FAA believes that use of the property should be on a short term lease. Indeed, the revocable permit issued to the LAPD is even more temporary than a short term lease. In exchange for its use, the LAPD is rE-onsible for all expenses associated with the property. Further, the police presence at- ONT provides greater security and safety for operation of ONT. In view of the fact that no market demand exists for this property, the Department believes that this interim arrangement with the LAPD is justified.
3. LAPD and FD Maintenance Facility at VNY
- The leasehold consists of 2 airas at VNY. It is isolated on the airfield and has only one access by a long, narrow driveway. 

### Because the parcel offers inadequate access, no demand for this property currently exists. Moreover, the Department is unable to change its current use until the Van Nuys Airport Master Plan has been completed, which will be sometime in 1996. Upon its completion, the Department will review the use of the property in relation to the Master Plan and other tenant uses at VNY. The Department may at that time consider terminating this lease and renegu;iating a more profitable lease.
The OIG has referred to this property as also a heliport. However, the heliport is owned by the City's Department of Public Works. Thus, that property is not included in the subject lease.
4. Fire Station #90 at VNY - Fire Station #90 occupies a 1.007 acre parcel at VNY upon which the Fire Department has constructed a 11,037 square foot building at its own cost. Fire Station #90 provides crash and fire rescue services at VNY. In addition to the crash and fire rescue trucks, the station is equipped with other types of fire trucks to respond to emergefdTes at VNY. eased on the number of operations, VNY is the busiest general aviation airport in the United states and the tenth busiest airport in the world. In 1994, the number of operations for the year totaled 490,015 or an average of 1,342 operations per day. Further, it contains approximately 13 fuel storage facilities and is located in a residential community. As such, the presence and availability of Fire Station #90 at VNY provides greater safety for the traveling

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Mr. John P. Milliaan December 154 1995 Page -12 public and nearby residents. The Department believes thil rental arrangement with the Fire Department is directly related to an airport purpose.
IX. RECOM]OXDAToNS 1 AN iD Recommendation ic requires the Department to ensure that airport revenues are used only for airport purposes. Recommendation id requires the airport to reimburse those revenues used for nonairport purposes, including those used to promote the City but which were not specifically airport related.

These recommendations are based on the determination that certain revenues were used for nonairport purposes as follows: $9.8 million for police services; $915,000 for consultant and lobbyist fees; and $182,000 for community events and organizations.

a. Police Services
- The Department strongly disagrees with the 010's conclusion that approximately $9.8 million of the $12 million paid for police services in FY 1993 and 1994 was for services not substantially related to the air transportation of passengers or property. The OIG report devotes less 'than one page to addressing police services and provides almost no information as to how it reached its conclusions regarding each of the three components of the LAPD charges at issue: the LAX Substation, the LAX Narcotics Group, and the LAX Organized Crime Intelligence Division.
Because of the massive volume- of passengers and cargo that pass through LAX and the immediately adjacent areas of the Airport, LAX experiences an extraordinary level of crime. Criminals prey on the passengers and air freight that funnel through a relatively compressed area because they present easy targets. As a result, the level of crime, including grand theft person,, auto theft and burglary, is extremely high at LAX. Reporting District 1494, which consists of the main portion of LAX, has more "Selected Crimes and Attempts" than any other-re-porting district in the City. For example, in

994, Reporting District 1494 alone accounted for more than 64 of all Selected Crimes and Attempts in the Pacific Area, approximately four times more than the next highest reporting district in the Pacific Area. Together with Reporting Districts 1468, 1495 and 1498, which also are comprised7'solely of LAX property, the four reporting districts accounted for over 20% of all Selected crimes and Attempts in the Pacific Area.Mr. John P. Milligan December i, 1995 Page 13 The level of criminal activity that is drawn to and emanates from the Airport does not abruptly end at the Airport boundary. The immediately adjacent reporting districts, 1488- 89, 1496-97 and 1499, are most directly impacted by the Airport. They contain private Airport parking lots, car rental agencies and hotels that serve the Airport, and other Airport-related businesses. At their fuxht point, these reporting districts are no more than slightly over amile from the Airport property. Combined with the four LAX districts, the immediately adjacent reporting districts accounted for approximately 29% of Selected Crimes and Attempts in the Pacific Area in 1994.
1. The LAX Substation.
To address the heightened level of criminal activity that occurs at LAX and to provide for the safety and security of the traveling and shipping public, the LAPD maintains a 24-hour staffed police substation at LAX. It is located in the Central Terminal Area, adjacent to the United Airlines baggage claim. The LAX substation is the only permanent 24-hour staffed substation in the city of Los Angeles. The substation, and its approximately 31 sworn personnel, who are also known as the Airport Detail, exists to serve LAX. Contrary to the conclusion in the OIG's report, the vast majority of the substation's costs are spent on LAX property, directly protecting the passengers and freight that pass through LAX, as well as the people that work at LAX. The single sentence of the OIG report that addresses the LAX Substation states that the sponsor was reimbursed for 100 percent of the substation's fiscal years 1993 and 1994 costs of $6.4 million "even though 81% of the calendar year 1993 patrol calls were located off airport property and were not airport related." Based on this unsupported conclusion, the 01 made a logical leap in arriving at the erroneous determination that $5.2 million of the. $6.4 million cost of the substation was for nonairport related services.
As an initial matter, it should be noted that, since June 1, 1995, pursuant to LAPD directive, substation personnel have been dedicated 100% to policing activities physically on Airport property, with the sole exception of high-level emergency calls in the immediate area of the Airport. The personnel also have been directed to return to the Airport as soon as another Pacific Area unit arrives on the scene. These emergency calls have accounted for an insignificant portion (less than one

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Mr. John P. Milligan December 15 1995 Page 14

- percent) of the patrol units time. As a result, the substation's costs are now entirely airport-related and therefore -- even if the OIG's conclusions were correct (which they were not) -- the OIG's conclusions do not apply on a going forward basis. The Department understands that JhfIG derived its 81* figure from a listing of the number of LAPD's radio dispatch calls for service in the reporting districts that comprise either airport property or property immediately adjacent to the airport. Based on the fact that 81% of the LAPD's radio calls for service were to the immediately adjacent districts, the OIG assumed that 81% of the cost of the substation related to police services provided inthe adjacent districts. The 010's assumptions are in error. First, the OIG erroneously assumed that all of the LAPD's- radio calls for service to the immediately adjacent reporting districts were responded to by substation patrol units. To the contrary, other Pacific Area units responded to a large percentage of the calls to those districts. Under then-existing LAPD policy, the substation's patrol units were not the primary units to respond to calls for service in the adjacent districts, ard were only used secondarily if necessary. Thus the assumption that 81%of the substation's patrol calls were to the adjacent districts is simply wrong. Second, approximately 70% of the total Selected Crimes and Attempts in the combined Airport and immediately adjacent reporting districts came from the reporting districts that comprise solely Airport property. Therefore, even if one were to assume that the substation's costs were spread in proportion to the Selected Crimes and Attempts, 70%of the costs would be applied to the Airport property. Indeed, in light of the Selected Crimes andAttempts statistics, it would make no sense for the LAPD to devote 81%of its LAX substation reso,rces to the crime in the adjacent districts and only 19%'- T the much higher level of crime on Airport property. Third, the location of radio patrol calls plainly is not an &ppropriatemeasure of the substation's costs. The substation handles about 25-30 walk-in customers and approximately 30-50 telephonic requests for service per day. It also receives requests for service from calls to the 911 emergency line, as well as calls from the Airport community. and the Departments own Police

### 180

Mr. John P. Milligan December 15_. 1995 Page 15 Bureau, which are not listed as radio patrOl calls. Substation personnel provide all the non-patrol services necessary to staff the 24-hour walk-in substation. The OIG did not take these services into account. Fourth, radio calls for service account for a relatively small portion of the pea~l units' time, because the officers are primarily patrolling the Airport property and perimeter (as opposed to responding to calls) either in cars or on foot-beat. While on patrol, the units respond on their own initiative to incidents and suspicious activity that they observe. Therefore, the record of patrol calls alone cannot logically serve as a basis for determining the proportion of the substation's costs incurred on and off airport property. At the very least, the activities and occurrences in which substation personnel were involved should be taken into account. Accordingly, even if the patrol call statistics used were those of sulbstation units as opposed to all LAPD units that responded to calls in the area of the airport, they cannot serve as an appropriate basis to determine what portion of the substation's costs pertained to the substation's activities on airport property. The FAA'- concurrence with the OIG's position on police services is therefore appropriately "subject to a final determination of costs incurred to operate the police for &irport related security purposes." Moreover, the OIG apparently assumes that substation service in immediately adjacent reporting districts was not airport related. There is also no basis for this assumption. As noted above, Airport-related crime does not abruptly stop at the Airport boundary. When criminals prey on the traveling public, they do so in the immediately adjacent districts where the traveling public are concentrated. The traveling public need protection in the immediately adjacent districts, just an they do when they are on LAX property. This is not onl'y a matter of c-Mn sense, but it has been expressly endorsed by the FAA. For example, in September 1993, the FAA authorized the Aviation Department of Miami International Airport to increase the staffing and patrol area of the Tourist Police to include an area adjacent to the airport, on which the car rental operations seviing the

.. air traveling public are located. Letter to A. Zuriarrain, Deputy Aviation Director, from C. Blair, Manager, FAA Orlando Airports District Office, dated September 16, 1993.

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Mr. John P. Milligan December 1., 1995 Page 16 Finally, the OG has also ignored the 'fact that Pacific Area officers who are not part of the Airport Detail respond to the Airport at least as often as the Airport Detail officers respond to emergency calls off- Airport. The LAPD has not billed the Department for the Pacific Area's responses to the Airport.
2. The LAX Narcotics 

### Grou

- The OIG' conclusion that the Narcotics Group charge was not related to the transportation of passengers or property is without any supporting rationale and is also wrong. The only other statement the OIG made relating to the Narcotics Group is that it worked with state and Federal authorities. The fact that the Narcotics Group works in cooperation with other authorities has no bearing, on whether the services it provides are airport related. The Narcotics Group is dedicated to LAX, and the OIG does not contend that the services in question are not provided at LAX. The OIG's determination that the Narcotics Group charges, are not airport related is in direct conflict with the decision of the Chief Administrative Law Judge in the LAX Rates Proceeding before the Department of Transportation. In that proceeding, a number of airlines operating at LAX challenged the Department's ability to recover from the airlines certain costs of LAPD services provided to the Airport. With respect to the Narcotics Group charge, Chief Judge Mathias ruled as follows:
Mr. Bushey describes the Narcotics Group activities at the airport as consisting of 13 LAPD personnel assigned to LAX on a full time basis to assist in narcotics arrests and seizures. for the year ending 1994, the LAX detail made 324 narcotics seizures and 257 arrests. (citation omitted] nature of such activities do appear to be directly related to airline activities.
Recorded Decision of Chief Administrative Law Judge John J. Mathias, Los Angeles International Airport Rates Proceeding, U.S. Department of Transportation Office of Hearings, Docket 50176, served May 24, 1995, at 30 (second emphasis added). The reason for the Chief Judge's conclusion is obvious. The airlines lterally provide the vehicle for the smuggling of narcotics. The fact that the narcotics are smuggled on board the airlines requires the presence

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Mr. John P. Milligan December 156 1995: Page 17
of the Narcotics Group at LAX. As a result, not only are the services provided by the Narcotics Group airport related, but they are directly related to the -transportation of passengers and goods on board the airlines that operate at LAX.
Not surprisingly, in light of C 

## ~e~ .Judge Mathias' Recommended Decision, when a group of airlines filed a second complaint challenging certain LAPD charges, they did- not challenge the Narcotics Group charge. See Complaint Requesting Determination Pursuant to 49 U.S.C. S 47129, Docket OST-95-474, at 29-33. Indeed, even the airlines' expert in the Second LAX Rates Proceeding conceded that, in allocating LAPD costs to the various cost centers at LAX, police costs for investigating a shipment of narcotics on an incoming aircraft would properly be allocated to the airlines. Testimony of Charles Horngren, Docket OST 95-474, Transcript at 180. Accordingly, the OIG's conclusion with respect to the Narcotics Group services is incorrect. The OIG's assumption that the Narcotics Group charge should be addressed in the same manner as the organized Crime Intelligence Division (discussed below) ignores the essential fact that the narcotics are illegally smuggled
on board aircraft and therefore the service provided'is unquestionably airport related.

3. organized Crime Intelliaence Division (OCIDI.

The OIG has also determined that the LAPD's charge to the Airport for the services provided by the OCID are not Airport related. Again, there is no contention that the OCID services are not provided at the Airport. Contrary to the OIG's determination, the OCID services
are Airport related because organized criminals use LAX as a convenient entry point to establishing, maintaining
or expanding their illegal activities. Moreover, because of the high volume and dollar value of its air cargo freight operations, LAX Ls a prime target for organized crimracXets.
Unlike the Narcotics Group charge, which the airlines did not challenge in their most recent DOT complaint in the Second LAX Rates Proceeding, the airlines did challenge the OCID charge. The matter is currently before the Secretary of Transportation, who will render a decision on or before December 22, 1995. For this reason, the Department believes it is appropriate to defer further comment and response

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Mr. John P. Milligan December 15, 1995 Page 18 regarding this component of the police charges pending the decision of the Secretary.

b. Consultant and Lobbvina FEes

- The OIG believes that the Department expended approximately $915,000, which is represented by $s39,000 for consultant fe:and $75,000 in lobbyist fees, which were not airport related. 1. Consultant Fees.
Under Contract No. DA-2687 for the term of May 1991 to November 1992, the Department retained the services of a consultant, John F. Brown Company, to research and prepare two financial studies. The cost of these studies totaled $839,000 (including the OIG's calculation for lost interest income). The first study entitled "Financial Support for the General Fund" provided a full analysis and advice on several, issues which included: (1) recommend changes to reimburse the cost of City services to insure that the Department pays the full costs allocated to it; (2) retaining all or a major portion of gross revenues; (3) evaluate strategies for contracting with the City for management of concession operations at the airports; and (4) study the feasibility of removing federal grant assurances. The second completely separate study entitled "Pzeliminary Calculation of Landing Fees Using a Cost of Service Methodology

- September 1992" provided an analysis and advice on establishing landing fees after the expiration of the airline operating agreements. The underlying theme of these studies was the consideration of the Department's financial position. Such financial studies are necessary for a large revenue producing entity such as the Department and enables the Department to mare effectively conduct financial plarin-M-. Therefore, the costs incurred for these studies are airport related.
2. Lobbyist Fees. The OIG believes that the Department expended -approximately $75,000 for lobbyist fees in connection with the implementation of a:ballot measure Proposition K. However, the lobbyist work to be accomplished by the City's office of Chief Legislative Analyst ("CLA") was in

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Mr. John P. Milligan December 15, 1995 Page 19
- fact never performed. For fiscal year 1991-1992 and 1992-1993, the Department was charged and paid a total of $530,820 for anticipated lobbyist work to be performed during these fiscal years. That amount included an estimate in the amount of $75,000 for work to be performed in connection with Proposition K. For fiscal year 1993-1994, by letter dated May 3t=9995, the CLA's office notified the Department that since such work was in fact never performed, the amount of $75,000 was credited to the Department. We have attached all relevant documentation which relate to this charge and credit thereof. tSee Exhbit "E".)

c. Comunity Events and Oraani2ations
- The OIG has determined that the Department expended approximately $182,000 in supporting various community events and organizations for nonairport purposes. Following this determination by the OIG, the Department ceased its support of the following organizations effective fiscal year 1995-1996 beginning July 1, 1995:
1. Los Angeles Giza (Egypt) Sister City Association Fund-raiser
2. Boy Scouts of America Fund-Raiser
3. Cal Poly Associates, Inc. Fund-raiser to Benefit Cal Poly Athletes
4. Black Public Relations Society of California Awards Banquet
However, as discussed below the Department strongly believes that support of other community event and organization is directly airport related and furthers an airport purpose. The Tournament of Roses Parade is considered the most effective annual tourism event in Southern California, attracting nearly amillion tourists and local residents along its parade route. The Los Angeles Convention Center and Visitors Nueau, as well as the Pasadena Chamber of Commerce, characterize the parade as the most successful tourism event in portraying a positive image of Southern California throughout the world. The economic impact for Southern California from tourism, as well as other Rose Parade-pelated activities, is estimated at $57 million. The parade'also is telecast globally with an estimated worldwide viewership of 425 million people in over 90 countries. The Department benefits financially from tourism promotion by increased passenger traffic throAgh LAX, while contributing only one-

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Mr. John P. Milligan December 15, 1995 Page 20

- third of the cost for Los Angeles City's float. Additionally, themes for past L.A. City floats have involved aviation, including 19911s "Snoopy Circles LAX." However, if the FAA wishes the Department to cease support of the Tournament of Roses Parade, the Department iswilling to do so. With respect to the other organizatAg listed by the Inspector General, the Department feels it should continue its support of these organizations. The Department of Transportation's policies require the Department to support the fullest possible participation of firms owned and controlled by minorities and women (49 CFR Subtitle A 10-1-93 edition, Subpart A-General, Section 23.1-5). The Department interprets this to mean involving these organizations as part of its outreach efforts-to encourage minority and women owned business enterprises (MBE/WBE) in its contracts and purchasing practices. The Department of Transportation defines minorities as "a citizen or lawful permanent resident of the United States and who is Black, Hispanic, Portuguese, Asian American, American Indian, Alaskan Native, and members of other groups, or other individuals found to be economically and socially disadvantaged by the Small Business Administration." The Department enhances its exposure to MBE/WBE companies by attending and participating in the events held by the below listed organizations. Since the time the audit was conducted, the Department has developed a system which documents supporting nexus between the Department's various business opportunities and minority and women organizations that it has supported. Based on the nexus developed, the Department believes that the following organizations and other similar organizations are worthy of our continued support:

I. Latin American Management Association Awards Banquet
2. Latin Business Association Awards Banquet and Golf/Tennis Tournament Awards
3. Asian Business Association Annual AwardsBauqI-lT4. National Association of Women Business Owners Awards Banquet
5. Black Business Association Fundraiser'
6. NAACP Legal Defense Fund Lawyer of the Year Fundraiser

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Mr. John P. Milligan December 15F 1995 Page 21
7. Asian American Architects Annual Awairds Banquet 8. National Forum for Black public Administrators Awards Banquet 9. Southern CaliforniaBusiness Association Awards Banquet 10. Japanese American Cultural and Community CenterFundraiser 11. Asian Pacific American Heritage Committee Awards Banquet 12. Los Angeles Beautiful Business and Industry Awards Banquet 13. 100 Black Men of Los Angeles Fundraiser As the Department is part of the City of Los Angeles, which conducts airports-related business at Los Angeles City Hall, the Department believes it should continue to support the Rebuild Los Angeles City Hall Fundraiser.

The Department believes its support of the following two organizations, which are comprised of ardent supporters of aviation history, aeronautics, and specifically airport operations, are directly aviation-related in' their practices:
1. Aero Clubs' Howard Hughes Memorial Awards Banquet 2. Flight Test Historical Foundation Tribute to Aerospace Fundraiser The Depatiment believes that the continued support of the following event is necessary as proceeds from this activity benefit the non-profit Travelers Aid Society, which is comprised of volunteers who serve as information aides to the traveling phlic at Ontario Airport:
1. Friends of Ontario International Airport Golf Tournament.

The Department believes that the continued support of the "Skid Row Development Corporation Fundraiser for Transition House" is necessary because the social workers of the

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Hr. John P. Milligan December 15, 1995 Page 22
Department's "Travelers Aids" and the LAX Airport Police refer indigent and homeless individuals who arrive at LAX without money or local contact to Transition House. In addition, the homeless from the Los Angeles area, who come to LAX because it is viewed as a safe haven, are referred to this facility. This practice is preferable to allowing these individuals to sleep on lawns, public benches or use the.fcilities at LAX.

With respect to Recommendation id, inasmuch as all of the organizations listed above are registered as 501.3c non-profit organizations, they do not have a profit or a treasury at the end of their fiscal years from which to request reimbursements of Departmental funds. Therefore, it would appear that the Department is unable to seek reimbursement of such funds.

II. RECOMMENDATION 12 Recommendation l requires that sponsor charges be based on
one rate, either the sponsor developed rate or CAP rate, and that such rate be uniformly applied to all the sponsor departments of the City.

Recommendation le concerns the use of a common overhead rate for the billing of City service costs to the Department. As the Department indicated in its earlier response, steps have already been taken to ensure that City billings to the Department are based
on a uniform methodology. Since fiscal year 1992, the City has required that all billings to the Department be:based on rates and allocations calculated through the audited and federally-approved Cost Allocation Plan, which isprepared pursuant to OMD Circular A87. Therefore only CAP rate and dollar allocations are being used and in the future will be used by the CAO, in preparing city billings to the Department henceforth. Furthermore, in November 1995 the City Administrative Officer recommended to the City council the use of the CAP in all special service billings, not only between departments of the City, but to members of the public at large as well. The Council Budget and Finance Committee has adopted the .CAO's recommendation, and it is anticipated t-hi" the City Council will approve the CAO'e recommendation before year-end.

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Mr. John P. Milligan December 15; 1995 Page 23

IV. RECOMKEWDATION 1G Recommendation ig requires that the airport receive all net revenues from automobile auctions 

### conducted by-the Department. 3 The OIG is under a misimpression that the Department did not receive approximately $299,000 from the proceed.sof auctions of vehicles abandoned at the airports. The Department in fact received such proceeds. We experienced a minor problem whereby a checks representing the proceeds were not immediately -forwarded to our Accounting Bureau to be deposited into a Department account. Since this incident, the Department has modified its procedure to ensure that such a delay does not recur. AS modified, the private auction company (Bendis) which conducts the auction issues a check to the Department which represents the proceeds of the auto auction from which their fee(16 1/2%) has been deducted for conducting the auction. Within ten days of the auction, that check along with a full accounting of the automobiles sold and their prices are then sent directly to the Department's Accounting Bureau, Revenue Section, which then deposits the check into the appropriate Department account. We are confident that under this new procedure no problems previously experienced will occur again.
V. RECOMMENDATION IR Recommendation lh requires the sponsor to, ensure that all sponsor charges are supported and any unsupported charges are refunded to the airports. This recommendation is based on the determination that the Department expended a total of $556,000 in unsupported sponsor charges which is represented by $456,000 for lobbyist fees and $100,000 in consultant costs for legal advice on the Federal Implementation Plan. The FAA seeks further information regarding charges incurred for lobbying activities and on the Federal Implementation Plan.

a. Lobbyist Fees - The Department pays for a portion of the CLA's legislative representation costs. The remainder is charged "tWthe General Fund and the other proprietary departments. The portion charged to the Department is based on the CLA1s experience and planned work activity. The CLA's

'in recommendation IS.whle the 010 has also rc"omnded that the Deparment rCivO all Det revenues received from airport park g and traffic revenues, the FAA has not concurred thisrecommendAtion- A The FAA has determuxd that irsts collected from legal infractions arc admitustercd by th-e municipal courts. The violatorpays the fine tothe court or the City in accordance with municipal courtprocedure. Therefore, such fiies arc not considered airport revenues.

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24r. John P. Milligan December 15, 1995 Page 24

- total budget for Fy93 was $3,477,000 and for .FY94, was $3,311,000. (The total legislative function budget was $1,713,245 in FY93 and $1,612,756 in FY94.) Of this, the Department of Airports paid $265,400 in FY93 (about 7.6% of the CLA budget and 15.5% of the legislative function) and $207,100 in FY94 (about 6.25%of the CLA budget and 12.8%of the legislative function). The CLA's work for the Department can be characterized as policy development, policy analysis and legislative representation. Unlike other airports which contract with firms in Washington, D.C., the City of Los Angeles, like a few other cities, maintains its own Washington office to represent the City before all federal agencies and bodies.
In its work for the Department, the CLA, for example, represents the Department at monthly meetings of the Airports Council International in Washington, D.C., acts as a liaison for the Department in administrative work with federal agencies, responds to Congressional inquiries to members of the City's Congressional delegation, keeps the Department informed of legislative and administrative proposals and actions affecting its operations and future development and monitors the work of outside contractors hired by the Department who may work with administrative or legislative offices in Washington, D.C. Through this work, the CLA's Washington office has developed valuable on-going relationships with Department of Transportation and Federal Aviation Administration staffs. Several examples of how these relationships have been of value to the Department of Airports would be useful. The CLAworked closely with trade groups, Department of Transportation and FAA staffs and Congressional offices in connection with the rates and charges legislation which was enacted in 1994. The CLA also participated in an analysis of the Federal Implementation Plan (PIP) and explanation of the grave $63 million impact on the City's airports as well as other regional transportation components. The CLA also worked closely with the Department. of Airports and the Harbor Department-7h development the Alameda Corridor project, a massive $1.8 billion expansion and integration of air, rail and other transportation means to serve the regional economy. b. CQnsultant Costs - The amount of $100,000 paid by the Department represents the Department's share of the total costs incurred in obtaining legal advice on the Federal Implementation Plan regarding air quality. Other City departments including the Harbor Department shared in the total costs for this service.

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Mr. John P. Milligan December 15, 1995 Page 25

-
It was necessary to obtain the expertise and assistance of a law firm which specializes in tha environmental law area to advise the Department regarding the Plan's impact on the Department's four airports. As a result of the consultation received, which included air quality evaluation and modeling review, the City was able to effectively develop and present alternative emission control plan strateg~iE during the Air Quality Monitoring ("AQMP") process. These efforts resulted in the Air Quality Management District and State adopting an air quality plan that requires substantially less NOx and VOC emissions reductions than originally proposed by the District. Approximately 34% less reductions in NOX were required than was originally proposed by the District, requiring less stringent control measures to reduce NOx emissions. The substantially lower NOx emission reduction goal has a long- term benefit to commerce, trade and transportation industries, thereby significantly benefiting the Department's airports. The economic savings of the City's recommended alternative strategy was estimated at approximately $3.2 billion in 2010. We believe that the portion of the consultant costs incurred by the Department is directly related to and furthers an airport purpose.

VI. 

### COICLUBIoM

The Department takes very seriously the matters raised in the OIG report and the FAA's response, and appreciates the opportunity to offer its comments and input. The Department has expended a great deal of effort in preparing this response and hopes that the response, which includes additional information requested by the FAA, is nsepful. The Department stands ready to provide any further information that maybe useful and to cooperate fully with the FAA to resolve any outstanding issues. As demonstrated in this and the prior response of the Department to the OIG's draft and final audit reports, the Department's (i) fee and rental structures are and have been maintained in a manner which ensures that its four airports are as self-sustaining as possible, and (ii) its revenues are used for operating qosts and capital costs of its airports, in com-pliance with the Airport and Airway Impcovement Act of 1982, as amended. truly u

JOH J. DRISCOILL 

# &EXe tive Director D614r ment of Airports

JJD:MHC:sn Attachments

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Order95-12-33

UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.
Issued by the Department ofTransportation
on the 22nd day ofDecember, 1995

SERVED DECEMBER 22,1995

SECOND LOS ANGELES INTERNATIONAL AIRPORT RATES PROCEEDING Docket OST-95-474

FINAL DECISION

-. 25-859 0
- 96 - 6 40n

f "

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Such a result would bedifferent from theALI's proposal, which would allocate the costofthe unit solelyonthebasis ofuse,in part on thebasis ofhisreasoning that the rationalmethod ofdetermining purpose is to look atuse. We do not agree. First,as shown, the Citypresented undisputed evidence that the unit's purpose wasthe protection ofthe airfield-and thatthe Citywould not maintain the unitbutfor theneed to provideadditional protection for theairfield. In addition, the PolicyStatement specifically states that purpose as well as use should be considered inallocating the costofshared capital facilities. The ALI's resultwould essentially eliminate purpose as abasis forallocating costs, since his approach assumes a facility's purpose is thesame as itsuse. Weare unwilling to equate purpose anduse, asthe ALI did,since doingso gives toolittle weight to the City's representation that itspurpose for maintaining EngineCompany 51 is
to provide additional protection on the airfield. On the other hand, the ALI correctly stressed that use mustbe amajor consideration in the allocation of the unit's costs.

Wecannot agree with the Complainants' argument that the unit's purpose must be ignored since thepurpose isnot quantifiable andonly quantifiable factors may properly beused in allocating costs. Airlines' BrieftoDOT at 11. Despite the difficulty ofquantifyingpurpose, thePolicy Statement expressly allows airports to take afacility's purpose intoconsideration when calculating a fee. We have nobasis for eliminating purpose asacost allocation factor when the Policy Statement expressly allowsits use. We alsonote that our decision does not prevent the City from allocating thecost ofEngineCompany 51 toother appropriate airport costcenters.

b. Police Department Expenses

Police protection services at LAX are provided bothby theairport's own police force and by the Los Angeles Police Department. The airport's own police force, according to the City, is not intended to providecomplete protection to airport

users. Theservices of theLos Angeles Police Department therefore are also necessary. The police department, for example, provided the task force that worked on the Unabomber threat. Bostic Decl. at 1-2.

Theratebase for the current landing fees includes a charge for thebudgeted cost ofservices provided by theLos Angeles Police Department. Thepolice department expects to bill the airport S9.7 million forpolice protection in the 1995-1996 fiscal year. Incalculating thelanding fee, the Cityassigned all ofthat
cost to the General Administratve Cost Center, an indirect cost center. Under the formula used for allocating thatcost center's expenses to the directcost centers, thirty-one percent ofthe estimated police cost willbeallocated in the landing fee rate base.

While theComplainants donot object to the charge forthe costoftheairport's

own police force, Airlines' Brief toALJ at 28, they object to virtually all ofthe

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charge for the LosAngeles Police department'ss services. TheComplainants further argue that, assuming anycharge forpolice services maybeincluded in the landing feerate base,the Cityhas unreasonably allocated thepolice expense to the indirectcost center rather than allocating the cost ofparticular police services to specificdirect cost centers (forexample, the Complainants claimthat the police costs caused by car theft ihould be allocated to the commercial cost center, which includes theparking lots). TheComplainants have alsoattacked specific items included in theairport's bill for police services, such as the charge forthepolice department's workfor areas neighboring the airport butoutside its boundaries.

The ALJinvalidated almost allof thepolicedepartment charge on the ground that the Citycould not chargethe airlines for policeprotection services when other businesses andpersons in theCity werenot similarly charged for police service. He allowed the inclusion in tfie landing fee rate baseofonlyone element ofthepolice charge, thecost of the K-9unit ofthe Bomb Squad,because thatunit isrequired by FAA regulations. R.D. Et 16-18. The ALI also invalidated the allocation ofallpolice costs to the indirect cost center. He assumed that the allocation ofthe costs tothe appropriate direct costcenters would eliminate virtually all oftheallocation to thelanding feerate base. R.D. at9, n.8.
The Complainants support the ALI's decision
- theyclaim hecorrectly concluded that the City may not chargethe airlines "forgeneral enforcement of the criminal law." Airlines"Briefto DOT at 13. The City, onthe otherhand, argues that theALI's decision is wrong on every issueexcept for the acceptance ofthe charge for the K-9unit. ACI agrees with the City.

Wehave determined that the ALJ's disallowance ofthepolice department charges on theprinciple that airlines should only pay forpolice services when other businesses andpersons were charged for police service was procedurally improper. The Complainants failed toinclude thatissue in their complaint, so the ALU should not have considered it. We alsodisagree withhis finding that the allocation ofpolice costs tothe indirect cost center wasunreasonable. On the other hand,we cannot agree with the Citythat all of thepolice costs charged the airport were reasonable. In particular, itwasunreasonable for the Citytocharge the airport with the costofprotecting areas outside airport boundaries.

Beforeexplaining ourreasoning onthese issues, we will summarize ourfindings
on the City's proposed police cost allocations inthe 1993 fees and then describe the specific police department operations at issue.
The Proposed Police Department Charges in the 1993 Fees The City had not allocated any charge forpolice services to the landing fee rate base when itestablished the compensatory fees in 1993. The police department only began billing the airport for its services after theCity adopted the landing

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feeatissue. The City planned toinclude thosecharges in thefinal landing iee calculation when it reconciled the budgeted airportexpenses with the actual expenses. We and theChiefJudge therefore discussed theCity's tentanve allocation, but wemade no final decisionon the matter.
One oftheissues addressed at the hearing was theCity's ability to charge the entire costofa police substation tothe airport, when the substationat that time also served neighborhoods outside the airport. The ChiefJudgeconcluded that the City could notcharge the entire costofthesubstation tothe airport when the substation provided policeprotection toother areas. First LAXCase, R.D.at32- 33. He suggested as wellthat some ofthe expenses that theCity proposed to charge tothe airport and the landing fee ratebase, such as the costofthe Organized Crime Intelligence Division, couldnot properly be charged to the airfield and perhaps should notbecharged to theairport atall. On the other hand, he found reasonable the City's plan to charge the airfield for the costof the narcotics squad officers at theairport. 

### I.at30, 32-33.
We made no rulingson the City's potential charges for police costs,because the City hadmade no final allocation ofpolice expenses and because the ChiefJudge had excluded someof the evidence offered by the City in defense ofits proposed allocation. We reminded theCitv that anyallocation ofpolice costs wouldhave to bejustifiable and transparent,and wefurther stated, ITIhe City's charges for services provided the airport must be consistent withits practices on charging other City departments for services." Order95-6-36 at 43,44.
While we and theChiefJudge questioned thereasonableness ofthe cost allocation then proposed by theCity, neither wenor the ChiefJudge suggested that theCity could notproperly include thecost ofpolice department operations in the landing fee ratebase. Thecomplainant airlines in that proceeding. moreover, had not asserted thatpolice department costs could only beincluded in therate base ifotherbusinesses and persons within Los Angeles were subject to comparable charges forpoliceprotection or ifthepolice work was specifically required by FAA regulations.
ThePolice Department Operations Included inthe Airport Charge
The basic level ofpolice service provided areas throughout Los Angeles isabasic patrol car. The policedepartment provides such basic patrol car servicein the airport area but doesnotinclude thecostof that service (orthe cost ofpersonnel related to thatlevel ofservice) in its billto the airport. Thepolice department charges instead consist ofservices beyond the basic patrol car levelofservice. R.D. at 9.
The largest single element inthe policedepartment bill isthe $3.3million cost of the airport detail, which consists of the staffat apolice substation located in one of theLAX terminal buildings. The airport detail officersdo general police work

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and, since June 1,1995, donot work outside the airportexcept on emergency calls' Thecalls offthe airport account for less than onepercent ofthe details patrol time, and are probably offset by the amountof time spent onLAX calls b% PacificArea officers stationed outside the airport. R.D. at9-10.
The police department charges also include $1.6 million fora portion of the cost of the PacificArea Detective Division, whichis generally responsible for investigating all crimes inthe Pacific Area, an area which includes the airport. Theairport's share ofthe division's total costis 29 percent, apercentage based on theproportionofPacific Areacrimes occurring ator nearthe airport.16 The airport alsobears the costofthe AirportTheft Detail, about$120,000. R.D.at 10. The police department chargeincludes almost $146,000 forthe costof property booking and prisoner custody based on thenumberofproperty bookings and arrests occurring ator nearthe airport. R.D. at 10.
Thepolice department alsobilled the airport SI.7 million for theNarcotics Group,which focuses on the smuggling ofdrugs at LAX. R.D. at 10-11.
The police department charge includes S158,000 for the airport's share ofthe criminal conspiracy section, which investigates bomb threats; $126,000 for the airport's share of the anti-terrorist division, whichinvestigates terrorist activity throughout Los Angeles; and $279,000 for thebomb squad, most ofwhich covers the costsof theK-9 units that search for explosives atLAX and are required by FAA regulations. R.D. at 11-12.
Other police department costs billed the airport include $292,000 for the Metropolitan Forgery Unit's Airline Detail, which investigates theft, fraud, and forgeryinvolving airline tickets; $227,000 for theWestLos Angeles Forgery Unit, which investigates fraudulentcredit card use atcar rental agencies atLAX and nearby; and $49,000for the Burglary AutoTheft Division-Organized Theft Unit, whichoperates at theairport at times ofunusually highcriminal activity at the airport due from amajor event or other unusual occurrence in Los Angeles, such
as theWorld Cup Soccer matches. RD. at 12-13.

Part of the costof theWest Traffic Division isbilled to the airport
- $266,000 relating to incidents occurring attheairport a.. 5373,000 relating to incidents
near the airport. R.D. at 13. Finally, theS million cost of the organized crime intelligence division officers assigned to LAX isincluded in thepolice department's billing. This division

16 As descnbed below, the charge for police deparnnt work performed outside theairport that does not involve incidents at theairport
- a chargewhich we aredisallowing
- amountsto approximately $260,000, based on theComplainants estimates. Airlines' Proposed Findings 118. The Pacific Area Detective Division is one ofthe urutswhose chargeincludes such work off the airport.

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maintains officers at LAX since the airport isused byorganized crime members toenter Los Angeles. R.D. at 1I.
As thebasis for charging the airportfor the costofpolice department services involving the airport, theCity alleges that protecting travellers andotherpersons using the airport requires anextraordinary amount ofpolice department servicedue to the high level of crime at LAX. TheCity notes in that regard that the substation maintained atthe airport is theonlv substation in Los Angeles that operates every hour oftheday. The City contends that it isreasonable forit to bill the airport for the extraordinary level of police department work created by the airport. City's Brief toDOT at i2-13.
The City'sAbility to Charge theAirport for AnyPolice Department Services
The firstissue involving thepolice charge isthe Complainants' argument
- an argument accepted bvtheALJ
- that theCity may not charge the airlines for police protection services which areof the same typeas the servicesprovided otherbusinesses and persons in Los Angeles, unless the City alsocharges those businesses and persons for policeprotection. The AL accordingly ruled that the only police department expensesthat could be deemed "aeronautical"and permitted by the PolicySiatement were thepolice servicesrequired by theFAA.
The City and ACI complain that the ALI could not properlyaccept this argument, which they claim iserroneous in any event, because the Complainants didnot include this argument intheir complaint andaccordingly could not make the argument at the hearing. The City represents, moreover, thatthe Complainants' belated introduction ofthis argument intothe case has severely prejudiced it,because it would have introduced evidence rebutting the argument iftheComplainants had raised itearlier asrequired by our Rules ofPractice. City's Briefto DOT at 11. Seals ACI Brief toDOT at 13,n.6.

Wefind that the claim was notproperly raisedby Complainants andshould not have been considered bythe ALI(as discussed below,however, other objections made by the Complainants to thepolice department expenses were properly raised).
As we stated when we setthiscase for heanng,our procedural rules require airline complainants to set forth their case in their complaint and the accompanying briefs and evidence submissions: "Carriersfiling complaints

.... will generally beexpected to submitdocumentation that contains the filing party's entire position and supporting evidence," 60Fed. Reg. 6923. The rule thus states, 'The complaint... shall set forth the entire grounds forrequesting a determination ofthe reasonableness of the airport fee." 14C.F.R. 302.605(a). We adopted that ruleto enable us todecide cases under49 U.S.C. 47129 within the stricttimelimits setby Congress. As a result,we stated, the hearingin this

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proceeding could consideronly the specific issues raised by the complaint and supportedby theevidentiary filings already submitted. Order 95-9-24 at 19..7

In thiscase the Complainants' complaint asserted that the policedepartment charges were unreasonable in three respects: the charges imposedon the airport were inconsistent with the City's treatment ofother city departments, the charges should not have been allocated to the indirect cost center,and the airport was being charged for police services thatcould not properly be charged to the airport. Complaint, para. 117, 135-130. The Complainants' accompanying.nAef made arguments supporting these objections butdidnot assert thatthe police department charges were unreasonable because theCity charged noother private persons in Los Angeles for police protection. Airlines' Brief at29-34. 1 The testimony submitted by Complainants'witnesses, moreover, asserted that the police department charges were invalid on the grounds named inthe complaint, but noton the ground that theCity could only charge the airlines ifit charged other businessesfor police protection. 5=, .&, ExhibitATA-BI, para. 13.

Needless to say, when the City submitted its answerto the complaint and its evidence supporting the answer, itresponded to thearguments actually made by theComplainants. Se,

.. ,BosticDecl. Sincethe Complainants had not asserted that the police charges were improper because otherprivate persons were not beingcharged forpolice protection orbecause the police department services were not required by FAA rules, the City's evidence didnot address that issue. Although theissuewas not included in the complaint, the ALI nonetheless allowed theComplainants toadd this issue ontheeve ofthehearing. The belated introduction ofthis issuedidnot give the Citya reasonable opportunity topresent responsiveevidence.

In these circumstances, the Cityand ACI are correct in complaining that the ALI's consideration ofthe issue wasunfair andcontrary toourprocedural rules. The ALJ's consideration ofthis issue
- theCity's ability to impose any police department charges without sumultaneously charging otherbusinesses forpolice

17 Ofcourse,aswe recogruzedinour instituting order. arn airlinecomplainant could introduce a
new pointlate in theproceeding iftheairportsrefusal toprovide adequate informationon its fee methodology prevented theairline Torn addressingthe point inits complaint. Order95-9-24 at 19. TheComplainantshavenotalleged that their tardyintroductionof theissue stemmed fromtheirinability toobtaintimely iruormaon fromthe City. 18 Thecomplaint

### implied thatthe Citycould

### include somepolicedepartment charges inthe landing lee ratebase. 5 e.&. Complaint. para. 148( Mlany,if notmost, ofthe LAPDcharges areatmbutabletonon-airftield cost centerssuch as theternunalortherental carconcessions) and para.139(l[Mlany oftheservices apparendyperformedby thepolice onLAX premises are City activities thatareunrelated tothe operationof LAX*).

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protection --was contrary toour rules, since theissue was notraised in the original complaint. Hetherefore should not have considered itat the hearing
Inaddition, theCityhas alleged that it-would have ,ntroduced relevantevidence insupportof theCity'spolice charges ifit hadhad adequate notice that the issue would beconsidered atthe hearing. TheCity assertsthat many airports paythe full costof police services provided airport users. CitysBriefto DOT at6. The City alleges thatit wouldhave shown that itroutinely bills private groups and firms forextraordinary police expenses. Id. at20. We note that onthis issue, in contrast to many ofthe other issues, theevidentiarv record contains no information on thebillingpractices followed by oter cities thatown andoperate an airport. Such information would bevery relevant toany decision by uson whether alocal government operating an airport may chargeairport users for police services furnished by that government. Furthermore, the Complainants' reply brief tous essentially admits the accuracy ofthe procedural complaint made by theCity andACI. The Complainants point out that theircomplaint identified as anissue theconsistency ofthe City's chargesto the airportwith itscharges tootherdepartments
- Complainants do notclaim that they raised the issueof consistency oftheairport's bill with the City's treatment offirms andindividuals outside the city government. Airlines' Reply Briefto DOTat6.
The airlines are, ofcourse,free toraise the issuein future casesinvolving significant disputes over other landing fees, iftheypresent the issue in their complaint asrequired byour procedural rules. Iftheydo so,boththe airlines and the airport parties should present evidence onthepractices ofother airports.
However, while we donotfind unreasonable theCity's inclusion ofpolice department costs in the landing feeratebase, weagree with theALI and the Complainants onthe potential danger thatairport owners couldusebillings for local government services as ameans ofdiverting airport revenues into a government's general fund. Asshown below, wewill carefully examine such charges in airport fees toensure thatthe airport isnot imposingunreasonable and excessive chargeson airlines for services unrelated to the airport facilities and services used bythe airlines. Our disallowance in this proceeding ofthe City's excessive allocation offiredepartment costs to the airfieldcost center demonstrates our willingness toprevent excessive charges. Consistency with Charges toOther City Departments

In their complaint theairlinesdid raise theissueof whether the City's- charges to the airport forCity services were consistent with itsbilling practices for other City departments. Complaint, para. 117. The City does notimpose charges for police department services on thetwo other "proprietary"departments, departments withindependent budget authority, which are the Department of

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Water and Power and the Harbor Department. In recent ears theCity has not charged those two departments for police services withone exception. The City did bill the Department ofWater and Power for the costofthe police department's services during a strike, since the strike created a need for an unusual amount ofpolice department work on thatdepartment s behalf. Supp Waitman Decl.; Second Supp Bostic Decl.19

Before the ALI theComplainants had argued that the City's conduct is contrary toboth thePolicy Statement and our final decision in the FirstLAX Case, which stated that theCity's charges to the airport for City services must be consistent with the charges biUedother usersof those services, Order 95-6-36 at 43. Since the City normally imposes no charge at all for policeprotection on the other two proprietary departments, theCity assertedly maynot charge the airport for the cost ofpolice services. Airlines' Brief toALI at 31, n. 1I.

In response, theCity argued that the policecharges to the airport are proper even though the City rarely bills the other proprietary departments forpolice protection. The City contends that the airport,unlike theother departments, requires an extraordinary level ofpolice protection. City's Briefto ALI at 11-12.
ACI agreed with the City that the Policy Statement's requirement ofconsistency
covers only charges for indirect costs, not direct costs. ACI Briefat 9-10. ACI also contended that airports have a much greater need for police services than normal governmental operations, since airports are open twenty-four hours a day and attract large crowdsofpeople. ACI Brief toALJ at 10.

We conclude that there is no inconsistency between the City's charges tothe airport and its lack ofregular charges to theother proprietary departments. The City has shown that the level of police protection required by the airport is far greater than the level required by theother proprietary departments, which usually receive only basicpatrol car service. Bostic Decl. at 2-3. As noted above, the City does not charge the airport for basic patrolcar service provided the airport area. The Department of Water and Power and theHarbor Department have no facilities requiring dedicated police units and so depend onthe normal police patrols provided the neighborhoods within which their facilities are

19 At the heanng the Complainants appeared tosuggest that theCitydoes notbill other parts of theCitygovernment forpoliceprotection and so may notcharge the airportforpolice services. As theCity points out,except fortheproprietarydepartments like theairport,all (ity government operations are paid forfromthe samegeneral fund, so there is no reason why the pohce department should billotherpartsof thegovernment forits services. Moreover,the City Charterassertedly bars theCity from charging onedepartment fundedby thegeneral fund forservices provided anotherdepartmeentfunded by thegeneral fund. City's 8neftoAL at 30. TheComplainants seemingly have droppedthis claim. Airlines' Bnefto ALI at 31,n. 11.

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located. TheDepartment ofWater and Power has few facilities which areeven open to the public. Waitman Supp.Deci. at4-6.

In addition,the Citypointsoutthat it has no incentiveto excuse theother proprietary departments fromcharges for police services, since payments by those departments would benefit the Citys general fund. City's Briefto ALIat 33;Tr.629-630. This further supports theCitvs allegation that it does not bill the otherproprietary departments for police services because those departments, unlike the airport, receive only abasic level of service20

Allocation ofPolice Charges tothe General Administrative CostCenter

TheCity has allocated all ofthepolice charges to the airport'sGeneral Administrative CostCenter, an indirect cost center;about 31 percent of thatcost center's costs are allocated to the landing feerate base. According to the Complainants, ratherthan allocate all ofthepolice costs totheindirect-cost center, theCity must use itsbestefforts to allocate toeach individual direct cost center e.g., theterminal costcenter) those police costs fairly attributable to that costcenter, assuming the City is entitled to impose any charge forpolice services. Although the Complainants concede that some ofthe police department costs would then beallocated to the airfield and apron costcenters, such as the costof handling airline ticket fraud, Exhibit ATA-A2 at 15, they contend that the amount ofthepolice department charges included in the landing fee ratebasewould be smaller than itis when all police charges are allocated to the indirectcost center. Airlines' Briefto ALl at39.
The Cityreplies thatits allocation ofthe police costs toan indirect cost center is reasonable, primarily because much ofthepolice department workcould notbe assigned toa direct cost center withoutconsiderable difficulty and because much ofthepolice workbenefits the overall welfare of the airport,not justtheusers of
a specific costcenter area. City'sBrief to ALJat 19-20. ACI agrees with the City that airports commonly allocate costs togeneral indirect costcenters rather than to specific directcost centers and that requiring the allocation ofall coststo direct costcenters whenever possible would substantially burden airports. ACI Brief to ALI at8-9.
The ALI concluded without any explanation that theCity was obligated to allocate thepolice coststo the various direct cost centers and couldnot allocate them to the indirectcost center. Heassumed that requiring an allocation to the

20 Because wefindnoinconsistency between theCity's trearment oftheairportand itstreatment of thetwootherdepartments, we neednot address itscontenton thatconsistency inbillingisnot required bythePolicy Statement. TheCitycontends that section2.5.1ofthePolicy Statement, whichimposes aconsistencyrequirement, byitstermscoversonlythebillingof indirect services andthusexcludes thebillingof policedepartment services, whichthe Cityassumes is adirect cost. City's BneftoALJat32-33.

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direct costcenters would eliminate almost of theallocation ofpolice costs to -he landing fee ratebase. R.D. at9, n.8.

We find that the City's allocation ofallofthe costs tothe General Administrative Cost Center, while not perfect, is sufficiently reasonable to belawful. A portion of thepolice department charges relates directly to work benefiting the airlines, such as partof the work ofthe bomb squad and the anti-terrorist squad. Most of the remainder ofthe police services provide an indirectbenefit to overall airport operations
- and thus toa large extent benefit airline customers. Since the statutegives airports substantial discretion inadopting fees, an airport operator ought to be allowed touse areasonable method ofallocating costs evenif some othermethod wouldproduce amore precise result. In other words, theairport maychoose among reasonable methods,so long as the methodchosen is consistent with applicable law and policy.

In addition, allocating thepolice costs todifferentdirect cost centers would be difficult in many cases. Brown Decl. at9-10; BrownSupp. Decl. at 4. While greater precision in cost allocations isalways desirable, requiring greater exactness isnotreasonable when, ashere,it would impose a significant burden
on the airport. Furthermore, allocating costs toa general costcenter is acommon practice among airports. Brown Decl. at 10. Specific Police Charges Having determined that the City may inprinciple billsome policedepartment charges to the airport and may allocate that cost to the indirect cost center,we must decidewhether the specific police department functions included in the airport's bill maybe fairly charged theairport. We will examine first thecharges for police department workoccurring at theairport orinvolving incidents atthe airport and thereafter consider the charges forwork involving incidents outside the airport.

As described above,the police department hascharged theairport for itsshare of the costsofthe airportdetail (thisis the substation detail basedon the airport); the Pacific Area detective, prisoner custody, and property booking units; the narcotics group; the criminal conspiracy section; the anti-terrorist division; the bomb squad; the forgery unit's airline detail and theWest Los Angeles forgery unit; burglary auto theft; theWest Traffic Division; and theOrganized Crime Intelligence Division.

The Complainants initiallyobjected toall of these charges, except the costof the unithandling airline ticketfraud, but they are willing toaccept the ALJ's finding
on the charge for the K-9unit ofthe bo,nbsquad. Airlines' Brief to AL at 31-33; Airlines' Brief toDOTat 22. TheCity, onthe other hand,argues thateach ofthe charges is reasonable. CitysReply Briefto ALJ at 18-20.

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The ALI, asindicated, found that all of thecharges were unreasonable in principle, except forthe costofthe K-9 unit of thebomb squad. Hedid not analyze which charges would bereasonable ifthe airport were allowed to include police department costs in thelanding fee rate base. TheChief Judge in the First LAX Case considered two ofthesecharges --he found theCity's allocation ofany ofthe costofthe Organized Crime Intelligence Division to the airport unreasonable, buthethought that thecost ofthe Narcotics Division staff based at LAX could beconsidered an aeronautical cost. First LAX Case, R.D at 30, 32.21

Wefind thateach of thecharges for work relating toincidents at the airport is proper,except for the costofthe organized crime intelligence division. The relevant provision of the PolicyStatement is section 2.1, which statesthat aeronautical costs are the costs to the airport "ofproviding airport services and facilities currently inaeronautical use.... "We think eachofthe listedpolice department costs, except for the organized crime intelligence unit, isacostof providing airport services and facilities used by theairlines and their passengers. For the mostpart, the listed police services, such as the airport detail, promote the safety ofairline employees andcustomers. Someof the services,such as the bomb squad and the anti-terrorist and criminal conspiracy units, are directly involved in protecting the safety ofaircraft and airline passengers. The Narcotics Division's work isa direct result ofthe airlines' use ofLAX, since thenarcotics smuggling at the airport ismade possible dueto the flights operated by the airlines.

Incontrast, we think the work ofthe organized crimeintelligence unit istoo remote to beincluded as acharge toairport users. While airline flights may make itpossible fororganized crime members toreach Los Angeles, the unit's work seems more directly concerned with benefitingthe residents ofLosAngeles generally, notwith promoting the safety ofairport users. Werecognize that our findings on this unit and the Narcotics Division, while consistent with the tentative findingsof theChief Judge in theFirstLAXCase, donot seem tobe entirely consistent. Nonetheless, we thinkthe work of theNarcotics Squad is
more directly related with the protection ofairportusers and amore direct result oftheairlines' operations and may thereforebe more appropriately billed to the airport than the work ofthe organized crime intelligence unit.

21 The ChefJudgealso heldthai theCity's planto allocateall of the costof the police substationtotheairportwas unreasonable, sincethe policestation:ed there then served areas outsidetheairport. The policedepartment currently bars the policestationedat thesubstation fromworking outsidethe airporteuept forcertainemergencies, sothe Airlinesare not now challenging theCity sassignment ol the cost ofthe substationforce tothe airport,assuming thattheairport may becharged anypolicedeparanent costs. Airlines'Reply Bnefto ALIat 14-15.

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Charges for Police Services in Surrounding Neighborhoods
The final police department cost issue involves theCity's charge forpartofthe costof thepolice protection provided the neighborhoods immediately surrounding the airport. TheComplainants object to the entire chargein principle (theyhave notattacked theCity's calculation of the shareofthe cost thatshould be charged theairport). TheComplainants estimate thatthe landing feerate basehas been allocated $260,000 for off-airport police work. Airlines Proposed Findings 118. The City argues that thepolice services charged to the airport reflect the additional services required due to the presence ofthe airport. For example, the large volume oftrafficheaded to the airportthrough the sur munding neighborhoods substantially increases the workload of thetrafficpolice inthose areas outside the airport; themain accessroad, Century Boulevard, lies entirely outside the airport's boundaries. TheCityadditionally alleges that it has included such costsonly for neighborhoods immediately surrounding LAX
- neighborhoods located atmost slightly morethan one mile from the airport's boundary. City's Briefto ALIat 15-17.

The Complainants assert thatsome limit mustbe placed on theCity's ability to charge the airport forpolice services, assuming that theairport canbe billed for anypolice services, and that the airport'sboundary mustbe made the limit. Airlines' Briefto ALI at34-36.
ACI urges us to make noruling barringairports from recovering police department costs incurred for providing services in areas around an airport, since ACI argues that additional police services are often required inareas outside anairport's borders because of the volume ofairport traffic passing through such areas. ACI Briefto ALIat 7-8.

We agree with theComplainants onthis issue. In calculating airportfees the City may include only the costof services directly orindirectly related to theuseof the airport. In this case theCity has included policedepartment expenses for
areas bordering theairport on theground that persons usingthe airport cross those areas ontheir way toand from LAX. TheCity isnot claiming that specific functions relating to theuseofthe airport take place outside the airport's boundaries. City's Brief to AL at 15-17. While the activities ofpersons using the airport, such as travellers driving to and from LAX, maycreate more work for the police department, we find that thecost of thepolice department's activities offthe airport is tooremotely related to the provision ofairport services to be reasonably charged tothe airport. Ifwe allowed such charges in thiscase, the result would seem to allow theCity toinclude police charges relating to the protection ofairlinetravellers (and perhaps employees) located anywhere in Los Angeles. While we appreciate the City'sinclusion ofcharges only for areas

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within ashort distance ofthe airport, theunderlying theory for the charges wouldcreate too big aloophole forairports to impose unreasonable charges ior local government services on airports. We musttherefore disallow thecharges for off-airport police operations notrelating to airportincidents. 22

c. NoiseMitigation Expenses
The airport plans tospend $12 million for noise mitigation during the current fiscal year. Noise mitigation expenses areallocated entirely tothe airfield cost center underthe City's fee methodology. The Complainants are not challenging the validity oftheunderlying expense. Instead, they argue that the Citymay not properlyinclude theexpense in the landing feerate base at all,because the City hasbeen collecting passenger facility charges (PFCs) topayfor noise mitigation and iscurrently obligated to usethose fundsfor that purpose. The City, on the other hand, argues that ithas noobligation to useits PFCrevenues for noise mitigation rather than otherprojects because with FAA approval it may terminate itsoriginal plan touse PFCrevenues for noise mitigation. As aresult, the City claims thatitmay charge the airfield cost center wi'h thecostof the noise mitigation work tobe done inthe 1995-1996 fiscal year.
We willallow theCity to include the noise mitigationexpense inthe ratebase, if the City obtains FAA approval by the end ofthe fiscal year (June30, 1996) for its plan to usethe PFC funds onprojects other than noise mitigation. Ifthe City does not receive FAA approval by that date, itmust refund theamount of the noise mitigation expense tothe Complainants.
Our resolution ofthis issueresults from thestatutory and regulatory obligations incurred by airports that obtain permission to charge PFCs. The City iscurrently obligated to spend the PFC funds alreadycollected onnoise mitigationbut has the right to asktheFAA toapprove anew use ofthose funds.
Factual and Legal Background Airports maycollect PFC funds only in compliance with the statute authorizing PFCs,49U.S.C. 40117,and with the FAA regulations implementing the statute, 14 C.F.R. Part 158. By statute an airport may notcharge PFCswithout the Secretary's approval, and the funds collected from a PFCmust be spent on specific projects designated when the FAA approves thePFC charge.

22 We noteACI's concern thatwe should notrrukeany blanketstatements inthiscase that airportsgenerally maynotcharge airportusersforthe costof policeoperationsthat takeplaceoff the airport. ACtBrief toDOT at2-3. As we statedatthebeginnng of ouranalysis, thisdecision islimited tothefacts andrecordofthiscase. Whether theresult would apply tofeescharged by otherairports willdepend inlargeparton thespecific factsofthe otherairports' operations.

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O(ftcr ci Ltni Counse!

Oic or LAC .StAtAiriO D C .:5!0
.AIIUi AtIOMIY Geieaai February 12. 1991

MEMORANDUM FOR C. DEAN MCGRATH, JR. Acting General Counsel Department of Transportation

Re: Application of the Airport and Airway Improvement Act to the Proposed Lease of the Albany County Airmort

This memorandum responds to your request for our opinion on a proposed lease arrangement pursuant to which Albany County, New York, the owner of Albany Airport, would lease the Airport to a private joint venture.I You have asked us to address two narrow questions. First, you have asked whether the County's use of an initial lease payment of $30 million for general expenditures unrelated to the Airport would violate section 511(a)(12) of the Airport and Airway Improvement Act of 1982, as amended (the 'AA!A'), 49 U.S.C. app. J 2210(a)(12). That section requires airport owners or operators who receive federal assistance to use all airport-generated revenues 'for the capital or operating costs of the airport, the local airport system, or other local lairport-related) facilities.' Second, you have asked whether zhe AAIA permits the FAA to oversee the lessee's recoupment of

Letter from Phillip D. Brady, General Counsel, Department
of Transportation to William P. Barr, Assistant Attorney General, Office of Legal Counsel (Mar. 5, 1990) (the 'March Letter'). Mr. Brady subsequently provided us with an undated and unsigned memorandum of law prepared by the Federal Aviation Administration ('FAA') (the 'FAA Memorandum') discussing the issues raised by the proposed lease. Letter from Phillip D. Brady, General Counsel, Department of Transportation to J. Michael Luttig, Acting Assistant Attorney General, Office of Legal Counsel (July 27, 1990).

You have also provided us with internal legal memoranda prepared by the Department of Transportation and the FAA, certain correspondence between the FAA and Albany County, and a memorandum presenting the views of USAir, a current user of the Albany Airport. We have also received the written views of Baker, Worthington, Crossley, Stansberry & Wolf, counsel to Lockheed Air Terminal.

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t.e 530 million throucn rates charged to current and future a:r-ort users.'
The C.untv maintains that zts use of the $30 million pavoen-t for general municipal purposes does not violate the revenueretention requirement in the statute because the payment constitutes reimbursement for capital and operating costs that the County has incurred for the Airport over the past three decades. The FAA argues, however, that section 511(a)(12) does not permit an airport owner or operatcr to elect to recoup its capital and operating investments in an airport as long after those investments were made as it has been since Albany County made its investments.

We conclude that section 511(a) (12) of the AAIA permits an airport owner or operator like Albany County to recoup its unreimbursed capital and operating expenses from airport revenues, regardless of when the expenses were incurred. The statute requires only that airport revenues be used 'for the capital or operating costs' of the airport. The use of airport
revenues to reimburse past capital or operating expenses may fairly be characterized as an expenditure 'for the capital or operating costs' of the airport within the meaning of the statute. We also conclude, however, that the FAA has discretion under other provisions of the AAIA to oversee the rates that the private lessee charges airport users. Therefore, whether and to what extent those rates should be permitted to reflect the

2 In his original request, Mr. Brady framed the issue raised by the proposed lease in terms of whether 'recoupment of A private lessee's up-front or periodic payments from airport user cnarlges would be inconsistent with (section 511(a)(12)]' if the private lessee retains() any portion' of such charges for its own use. March Letter at 1, 2 (emphasis added). Mr. Brady thereafter recast the request and asked us to address (1) whether the AAIA permits Albany County to use the $30 million payment for general expenditures; (2) whether the lessee may charge the $30 million payment, as well as certain other expenses, such as management and construction fees, to airport users; and (3) whether, under the proposed lease, the County would retain sufficient control of the Airport to satisfy the contractual
assurance and funding eligibility requirements of the AAIA. FAA Memorandum at 3. As we have discussed with your Office, the only issues we address herein are the two presented by your modified request and set forth in the text above. The remaining issues you have raised turn on policy judgments that must be made in the first instance by the FAA. See discussion infra note 15.

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lessee's investment, including the $30 million payment, is a 4ud:ment that must be made in the first instance by the FAA.-

Albany County has requested the FAA to approve a proposal made by a joint venture, consisting of British American, Ltd. an: Lockheed Air Terminal (OBALLATw), to lease Albany Airport from the County for 40 years, with an option to renew the lease for an additional 40 years, and to manage the Airport either directly or through BALLAT's affiliates. 4 Under the terms of the ptoposal, Albany County would receive an initial payment of $30 million, lease payments of $500,000 per year for the first 20 years, and lease payments of $I million per year thereafter. The County, which will retain title to the Airport, intends to place the annual lease payments in an interest-bearing account for use in airport development and to use the $30 million payment for general expenditures unrelated to the Airport. 5 In turn, BALLAT intends to recoup the $30 million through landing fees or other airport-generated revenues. FAA Memorandum at 2. There is no

3 In his original request, Mr. Brady asked us whether it makes any legal difference if the lessee is a public rather than
a private entity. March Letter at 2. We do not believe that it does.
4 The Secretary of Transportation has delegated to the Administrator of the FAA the authority to carry out the functions vested in the Secretary by the AAIA. Memorandum from Drew Lewis, Secretary of Transportation to the Federal Aviation Administrator (Sept. 15, 1982). The County cannot transfer a property interest in the Airport without the approval of.the FAA because the County has received approximately $24 million in federal assistance under the AAIA and related programs since acquiring the Airport from the City of Albany in 1960. As an AAIA grantee, the County has agreed that [i)t will not sell, lease, encumber or otherwise transfer or dispose of any part of its title or other interests in the (Airport] property

. . . for the duration of the terms, conditions, and assurances in the grant agreement without approval by the Secretary. FAA Advisory Circular No. 150/5100- 16A, app. 1 (Oct. 4, 1988), at 3. Even if the proposed lease is executed, the County would remain subject to the assurance requirements in section 511(a). Id.; see also infra note 11. The County's obligations under the grant assurance requirements do not expire until the year 2010. See FAA Memorandum at 2.

5 The $30 million would be paid by BALLAT to the County as consideration for a 170-acre parcel of land adjacent to the Airport. dALLAT will immediately transfer the parcel back to the County, however, for $1.00 for inclusion in the Airport s layout plan. FAA Memorandum at I.
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dispute that the $30 million payment to the County ccnstitutes Revenuee] generated by the airport within the meaning of section 511(a)(12). See :d. at 3-4.6 Furthermore, the FAA aces not contest that as a general matter section 511(a) (12) permits an airport owner or operator to recoup airport-related capital and operating costs through airport revenues. d. at 5. The narrow questions before us, therefore, are whether the statute imposes a temporal limitation on the recovery of such costs and. if not, whether the FAA can oversee BALLAT's recoupment of its payment to the County through rates charged to airport users. According to the FAA, .= id. at 4, the County contends that it may use the $30 million payment for general municipal purposes without violating the revenue-retention requirement in section 511(a)(12) because the payment represents reimbursement for capital and operating costs that the County has incurred for the Airport over the past three decades. 7 In other words, the County maintains that the lease proposal would merely permit it to recover its earlier airport-related expenses which, consistent with section 511(a) (12), it could have elected to recover from

6 Sj also FAA Order No. S100.38A (Oct. 24, 1989),.at 73 ('Airport revenue is revenue generated by facilities and activities on or off airport. Examples of airport revenue include revenue from service fees, landing fees, lease or rental fees, usage fees, sale of commodities such as agricultural or forest products, proceeds from mineral sales, or other net revenue produced from real property.). When it was originally proposed thlt tnts Airport ne sold to BALLAT rather than leased, proponents of the arrangement argued that the $30 million payment to the County was not airport revenue. Memorandum of Baker, Worthington, Crossley, Stansberry & Woolf (Aug. 3, 1990), at 7-8. To our knowledge, however, none of the parties now contends that the lease payment is not 'revenue(] generated by the airport.'
7 Preliminary information furnished to the FAA by the County indicates that its unreimbursed capital and operating costs consist of (1) $4.437 million in cash paid to the City of Albany in 1960:. (2) $8.62 million in outstanding debt related to the Airport; (3) $9.148 million transferred to the Airport by the County between 1963 and 1985; and (4) $4.194 million in services contributed by the County for the benefit of the Airport, for a total of approximately $26.3 million. FAA Memorandum at 4. We express no view herein on the accuracy of these figures. We note, however, that the AAIA grants the FAA discretion to impose documentation and accounting requirements on'airport owners and operators. See 49 U.S.C. app. J 2210(a)(10) ('the airport operator or owner will submit to the Secretary such . . . airport financial and operations reports as the Secretary may reasonably request'). Thus, the FAA may require the County to produce records sufficient to support the amounts claimed.

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airor-t revenues at the time the expenses were incurred. See

at 5.
The FAA, on the other hand, argues that section 5!1(a) (1Z' "contemplates a timing relationship between the expenditure fcr capital or operating costs (or the commitment to do so) and the actual recoupment of revenues." id. 9 The FAA does not define the time period within which capital or operating expenditures must be recouped. it simply contends that section 511(a)(12) implicitly requires that an airport owner or operator elect to recoup such costs at the time the costs are incurred, or within a relatively short period of time thereafter. Id. I0

8 The permissibility of the County's proposed use of the $30 million payment depends entirely upon the County's unreimbursed capital and operating costs, 

### n= the capital or operating costs of BALLAT. In turn, whether BALLAT can charge the S30 million to airport users depends upon whether, in the FAA's view, the inclusion of the $30 million in BALLAT's rates is consistent with the County's continuing obligation under the AAIA to make the Airport available for public use on fair and reasonable terms. See discussion infXa Part III.

9 In recent years, the FAA appears to have expressed different views on the timing issue. In 1985, the FAA relied upon an argument similar to the one it advances here in rejecting
a proposal by the City of Burlington, Vermont, to use surplus
revenues from Burlington International Airport to reimburse the City for unreimbursed airport subsidies. Letter from J.E. Murdock III, Chief Counsel, FAA to the Honorable Bernard Sanders, Mayor of Burlington, Vermont (Jan. 8, 1985).

In 1989, however, in response to a proposal by the Albany Capital District Transit Agency whereby the Transit Agency would have acquired a long-term lease interest in the Airport for $25.25 million, the FAA Chief Counsel replied that "if the payment to Albany County is limited to payment of the currently outstanding debt incurred for the capital or operating costs of the airport, we would not expect major obstacles to the transfer." Letter from Gregory S. Walden, Chief Counsel, FAA to the Honorable James T. Coyne, Albany County Executive (Dec. 4, 1989), at 2.

For the reasons discussed in Part II below, we believe-that the latter view more accurately reflects the correct interpretation of section 511(a)(12).
10 We do not understand the FAA to argue that once an airport owner or operator has elected to recover capital or operating costs, the recovery must necessarily be accomplished (continued...) -- 5-

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Under the AAIA, both Npublic' and "public-usel airports =av apply for federal grants to help fund airport development projects. 49 U.S.C. app. §§ 2202(a) (22), 2208(a) (1).- If an application for-AAIA assistance is approved, the United States will typically bear 90% of the project costs. I&. § 2209(a). Section 511(a) of the AAIA requires that as a condition to approval of a project grant, the airport owner or operator must provide certain written assurances' to the Secretary of Transportation. I. 5 2210(a). 11 In order to comply with

10(...continued) within a particular period of time. Indeed, section 511(a)(12) itself contemplates the use of airport revenues to retire longterm debt.
11 Section 511 provides in part: (a)Sponsorsh12

As a condition precedent to approval of an airport development project contained in a project grant application submitted under this chapter, the Secretary [of Transportation) shall receive assurances, in writing, satisfactory to the Secretary, that
-- (1) the airport to which the project relates will be available for public use on fair and reasonable terms and without unjust discrimination
....

(12) all revenues generated by the airport, if it is a public airport, and any local taxes on aviation fuel (other than taxes in effect on December 30, 1987) will be expcended for the capital or omeratine costs of the Lirpor,, the local airport system, or other local facilities which are owned or operated by the owner or operator of the airport and directly and substantiallyrelated to the actual air transportation of passengers or property; except that if covenants or assurances in debt obligations issued before September 3, 1982, by the owner or operator of the airport, or provisions enacted before September 3, 1982, in the governing statutes controlling the owner or operator's financing, provide for the use of the revenues from any of the airport owner or operator's facilities, including the airport, to support not only the airport but also the (continued...) -6-

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section 511(a), an airport owner or operator who receives federal: assistance must satisfy all of the contractual assurance requirements enumerated in the statute.
Section 511(a) (12) requires that an airport owner or operator provide the Secretary with assurances that wall revenues generated by the airport' will be expended for 'capital or operating costs' related to the airport. 49 U.S.C. app. § 2210(a)(12). 1 2 The FAA agrees (as it must) that there is no
ll(... continued) airport owner or operator's general debt obligations or other facilities, then this limitation on the use of all other revenues generated by the airport (and, in the case of a public airport, local taxes on aviation fuel) shall not apply.

(b)Compliance

To insure compliance with this section, the Secretary shall prescribe such project sponsorship requirements, consistent with the terms of this chapter, as the Secretary considers necessary.
49 U.S.C. app. § 2210 (emphases added); see also FAA Advisory Circular No. 150/5100-16A, app. 1 (Oct. 4, 1988), at 6, 7 (incorporating language of sections 511(a) (1) and 511(a) (12) into the contractual assurances required of grant recipients).
12 The phrase 'capital or operating costs' in section 511(a)(12) is not defined. The Supreme Court has stated, however, that 'it should be generally assumed that Congress expresses its purposes through the ordinary meaning of the words it uses.' Escondido Mut. Water Co. v. La Jolla Band of Mission Indians, 466 U.S. 765, 772 (1984). 'Capital costs' and 'operating costs' are generally understood as referring, collectively, to all of the costs incurred by a business. Se, e.c., E.L. Kohler, A Dictionary for Accountants at 82, 333 (5th ed. 1975). Consistent with this common meaning, section 511(g) of the AAIA, which permits the use of certain airport-generated
revenues in the State of Hawaii for highway construction projects, broadly defines the phrase 'airport capital and operating costs' as 'costs incurred . •
. for operation of all airports
. . . and costs for debt service incurred
. . . in connection with capital projects for such airports, including interest and amortization of principal costs.' 49 U.S.C. app. § 2210(g)(4)(A). The FAA does not suggest that a different meaning should be ascribed to the phrase 'capital or operating costs' in section 511(a)(12).

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express limitation in section 511(a) (12) on the time within whc-. airport capital and operating costs may be recovered through airport revenues, or any affirmative evidence in the history cf section 511(a)(12) that such a limitation should be implied. FAA Memorandum at 4-5, 6. The FAA argues, however, that the text and history of the AAIA as a whole indicate thot Congress intended to incorporate such a limitation in section 511(a)(12). U. at 5-7. We do not discern any such intent in either the text or the legislative history.
The FAA advances two essentially textual arguments in support of its position. First, the FAA analogizes unreimbursed airport expenses to 'a 'debt' of the airport to the (owner or operator's] general treasury.' Id. at 5. It then reasons from the express eXception to the revenue-retention requirement in section 511(a)(12) for certain non-airport-related debt obligations incurred prior to the effective date of the AAIA that the statute generally does not permit an airport owner or operator to recoup past capital or operating expenses on a reimbursement theory. We do not believe that the exception in section 511(a) (12) supports the 'inference that the FAA would have us draw. The exception merely permits airport owners or operators to use airport revenues to retire certain debt obligations that were incurred for expenditures that were not airport-related. The exception implies nothing about the recoverability of costs that were airport-related, and certainly nothing about a time limitation on the recoverability of airport- related costs. Indeed, if the exception suggests anything about the proper interpretation of section 511(a)(12), it is that when Congress intended to limit or to permit the recovery of costs based upon when the costs were incurred, it did so expressly. Second, the FAA advances a similar textual argument based upon a 1987 amendment to the revenue-retention requirement. As originally enacted in 1982, section 511(a)(12) of the AAIA permitted an airport owner to use airport revenues 'for
. . . other local facilities which are owned or operated by the owner or operator of the airport and directly related to the actual transportation of passengers or property.' Tax Equity and Fiscal Responsibility Act ('TEFRA'), Pub. L. No. 97-248, title V, 5 511(a)(12), 96 Stat. 671, 687. In 1987, section 511(a)(12) was amended by, inter alla, requiring that such local facilities be 'directly and substantially related to the actual air transportation of passengers or property.' Airport and Airway Safety and Capacity Expansion Act of 1987, Pub. L. No. 100-223, title I, § 109, 101 Stat. 1486, 1499. The FAA asserts, without explanation, that thiss limitation is inconsistent with the broad interpretation (of the statute] required for the reimbursement theory.' FAA Memorandum at 6. The 1987 amendment, however, is not inconsistent with the recovery of unreimbursed, airport-related capital or operating

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expenses under the state te. The 1987 amendment simply narrove= the permissible uses of a-rpcr-t revenues to expenditures tnat
were not only "directly" but also substantially' related to actual air transportation, to further ensure that such revenues would not te diverted for general expenses. See1 H.R. Conf. ReD. No. 484, 100th Cong., 1st Sess. 63-64 (1987); H.R. Rep. No. 123. Par-t 2, 100th Cong., 1st Sess. .3 (1987). The amendment thus Is concerned solely with the relationship between expenditures and transportation services provided by the airport (i.e., the relationship must be 'direct(] and substantial[I'); the amendment simply does not bear on whether Congress did or did not intend to limit the recoverability of past capital or operating costs after a certain period of time. 1 3
Apart from its arguments from the text of the AAIA, the FAA asserts that the 'legislative history of the (Act] and predecessor legislation indicates strong congressional concerns about the use of funds generated at (federally financed) facilities.' FAA Memorandum at 6. The FAA, however, does not cite to any particular passage in the legislative record that in any way suggests that Congress intended to impose a temporal limitation on the recoverability of unreimbursed Ocapital or operating costs' through airport revenues, and we have not found any evidence in the legislative history that Congress intended such a limitation.

The AAIA was enacted in 1982 as title V of TEFRA, Pub. L. No. 97-248, 96 Stat. 324, 671. The House and Senate

13 The FAA also submits that an airport owner or operator's recoupment of unreimbursed investments is inconsistent with sections 511(a) (1) and 511(a) (3) of the AAIA, 49 U.S.C. app. §§ 2210(a) (1), 2210(a) (3), which require, respectively, that an airport owner or operator provide assurances to the Secretary that 'the airport

. . • will be available for public use on fair and reasonable terms and without unjust discrimination,* and that 'the airport and all facilities thereon or connected therewith will be suitably operated and maintained.' FAA Memorandum at 5- 6, 8. Although the requirement in section 511(a) (1) that an airport be made available 'on fair and reasonable terms' may, in practical effect, ultimately limit an owner or operator's ability to recoup unreimbursed investments from airport users, section 511(a) (1) cannot be read to %latly prohibit such recoupment. The FAA alternatively suggests that section 511(a) (3) prohibits the contemplated reimbursement because it requires an airport owner or operator 'to spend its own money to keep the airport running." FAA Memorandum at 8 (emphasis added). Neither the text nor the legislative history of section 511(a)(3) in any way supports this assertion.

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Conference Revo-s on TEFRA describe the revenue-rezentin reauirement in section 511(a) (12) as follows:

One (reuirementl is tnat airports receiving assistance under this program must dedicate all revenues generated by the airport for the capital (and) operating costs of that airport, the local airport system, or other local facilities which are owned by the owner or operator of the airpor-t and used for the transportation of passengers or property. This provision is designed to
ensure that airport systems which are receiving Federal assistance are utilizing all locally generated revenue for the systems which they operate. Airports that are part of a unified ports authority are exempt from this requirement if covenants or assurances in previously issued debt obligations or controllog statutes require that these funds are available for use at other port facilities.
However, airports users should not be burdened with 'hidden taxation, for unrelated municipal services.

H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 712 (1982); S. Conf. Rep. No. 530, 97th Cong., 2d Sess. 712 (1982) ; se also S. Rep. No. 494, Vol. 2, 97th Cong., 2d Sess. 28 (1982); S. Rep. No. 97, 97th Cong., ist Sess. 27-28 (1981). 1 4 As the Conference Reports state, section 511(a)(12) is intended to ensure that airport owners or operators who receive federal assistance 'are utilizing all locally generated revenue for the systems which they operate,' and that the users of such airports are 'not . . . burdened with 'hidden taxation' for unrelated municipal services.' The plain purpose of section 511(a)(12) is simply to prevent an airport owner or operator who receives federal assistance from using airport revenues for expenditures unrelated to the airport. Thus, a grant recipient cannot use airport
revenues to pay for 'capital or operating costs' that are not airport-related. There is no suggestion, however, that section 511(a) (12) was intended to limit the time within which an airport
owner or operator may elect to recover *capital or operating costs' that are airport-related.

14 Some legislative materials relevant to the interpretation of the AAIA pre-date its enactment in 1982. The AAIA was originally passed by the Senate in 1980, but failed to receive consideration in the House prior to the end of the 96th Congress. In 1981, the AAIA was reported out of the Senate Committee on Commerce, Science, and Transportation, but was not passed in either chamber. See S. Rep. No. 97, 97th Cong., 1st Sess. 1-2

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The FAA finally argues that construing section 511(a) (!'! :: :nrmit airport owners or operators to recoup their past capita,
:r operating expenses from airport revenues on a reimbursement: t:eory is unwise as a matter of policy, and would raise a host .dministrative difficulties. FAA Memorandum at 7-12. W?:azever "he merits of these policy arguments, they do not support the inclusionn that, as a matter of law, section 511(a) (12) precludes _ie recoupment of such expenses on a reimbursement theory._15

In sum, section 511(a)(12) does not by terms impose a .emporal limitation on the recovery of airport capital or operating costs through airport revenues, nor is there any Evidence that Congress intended to impose such a limitation. .ccordingly, we conclude that, consistent with section :11(a)(12), an airport owner or operator may elect to recoup its .irport-related capital or operating costs when the costs are .ncurred or at any time thereafter.

15 Among other things, the FAA argues that the lease of an .irport may collapse traditional distinctions between airport
.wners and operators, who are required to keep revenues on- -irport, and airport businesses such as service providers and concessionaires , who are permitted to take revenues off-airport, aising issues as to whether various kinds of income received by ne lessee constitute 'revenues generated by the airportO within
ne meaning of section 511(a) (12). FAA Memorandum at 8-10. In ddition, the FAA questions whether a lease arrangement affords
n airport owner or operator sufficient control of the airport to atisfy its assurances of compliance with the requirements of section 511(a) as a whole, and to remain eligible for federal unds. Ud. at 10-13.

These questions call for policy judgments that must be made

- and, in our understanding, traditionally have been made -- in ne first instance by the FAA. 2=, e.g., jd. at 9 ('It would be ossible, applving principles of traditional public utility rate aulation and existing FAA Rolicy, to make judgments about what ategories of 'costs' can be included in the rate base.') emphasis added); id. at 11 ('the [lease] arrangement is inherently inconsistent with the sponsor's obligation to provide deouate assurances' to the Secretary) (emphasis in original).
e therefore do not address which airport receipts received by ALLAT in its capacity as lessee would constitute 'revenues sneraLd by the airport' within the meaning of the statute, or nether the lease of Albany Airport is consistent with the =unty's obligation under the AAIA to maintain control of the

rport. See discussion supra note 2.

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You have additionally asked us whether, assuming that Albany County is permitted to accept and use the $30 million lease payment for general expenditures unrelated to the Airport, the FAA retains authority to oversee the rates that BALLAT charges to airport users. We conclude that the FAA does retain tuch authority. Section S11(a)(1) of the AAXA provides in part that, as a condition to approval of a project grant., an airport owner or operator must assure the Secretary of Transportation that 'the airport to which the project relates will be available for public use on fair and reasonable terms.' 49 U.C. app. § 2210(a) (1).16 Although the FAA does not view the AAIA as having established a *full-scale ratemaking regulatory regime,- FAA Memorandum at 5-6, the FAA acknowledges that under the authority of section 511(a) (1), it currently 'reviev[s] the reasonableness of the level and structure of specific airport charges.' Zd. at 6; M kL.Lo id. at 9. 1 7 Consistent with

16 Section 511(a) (1) continues a provision that originally appeared in the Federal Airport Act of 1946, Pub. L. No 79-377, S 11(l), 60 Stat. 170, 176, and was subsequently reenacted in the Airport and Airway Development Act of 1970, Pub. L. No. 91-258, title I, 1 18(1), 84 Stat. 219, 229. The phrase Ofair and reasonable terms' is not defined in tbe 1946 Act, the 1970 Act, or the AAIA, and the legislative history of this provision is sparse. See, e.g., H.R. Rep. No. 844, 79th Cong., Ist Sess. 4 (1945) ('The Administrator (of Civil Aeronautics] may require project sponsors to enter into agreements insuring, among other things, the continued availability of the airport for public use on fair and reasonable terms

. . . . ); g Also H.R. Rep. No. 601, 91st Cong., Ist Sess. 24 (1969); H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 711-12 (1982). The standard in section 511(a) (1) is comparable to the standard in the Anti-Kead Tax Act, which provides in part that a State or political subdivision thereof that owns or operates an airport may 'levy() or collect[] reasonable rental charges, landing fees, and other service charges from aircraft operators for the use of airport facilities.' 49 U.S.C. app. 5 1513(b).
17 af. 49 U.S.C. app. J 2218(a) ('The Secretary is empowered to perfQrm such acts
. . . pursuant to and 'onsistent with the provisions of this chapter, as the Secretary considers necessary to carry out the provisions of

. . . this chapter.'); few England Legal Found. v. Massachusetts Port Auth., 883 F.2d 157, 169 (ist Cir. 1989) (noting that "Congress has entrusted the administration of 5 S11 to the Secretary' and within the bounds of the statutory framework 'the Secretary has wide discretion'); Citv 2fDenver v. Continental AirLines. Inc., 712 F. Supp. 834, 839 (D. Colo. 1989) ('The enforcement of

. . section (continued...)

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section 5121(a) (1) and the discretion that has traditionally been conferred on administrative bodies that monitor the rates charge: by a regulated industry, we believe that the AAIA grants the Secretary of Transportation substantial discretion to limit the rates charged to airport users oy BALLAT. It would be within the discretion of the FAA, for example, to employ historical cost ratemaking principles or some other approach in determining whether the rates charged by BALLAT are 'fair and reasonable." The methodology imposed by the FAA will in turn determine whether and to what extent the rates BALLAT charges airport users may reflect BALLAT's lump sum payment to the County.

We conclude for the foregoing reasons that section 511(a)(12) of the AAZA doen not limit the time within which an airport owner or operator may recoup unreimbursed capital or operating costs through airport revenues. We also conclude, however, that in the exercise of the discretion conferred upon the Secretary of Transportation by the AAXA, the FAA may oversee the rates charged to airport users by BALLAT -- including the extent to which they may permissibly reflect BALLAT's $30 million payment to Albany County -- to ensure that these rates remain fair and reasonable.
If we can be of further assistance, please let us know.

. Michael Luttig9 Assistant Attorney Geeral Office of Legal Counsel

17(...continued) (511(a)(12)] is exclusively within the administrative authority uf the Secretary of the Department of Transportation.,).

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The Port Authority of New York and New Jersey

Statement on the matter of Airport Revenue Diversion
Submitted to the Aviation Subcommittee Committee on Commerce, Science and Transportation United States Senate

May 1, 1996

The Port Authority of New York & New Jersey appreciates the opportunity to present our views concerning the use of airport revenue. The Port Authority is an agency of the States of New York and New Jersey which provides transportation, terminal and other facilities of commerce within the Port District, an area of about 1,500 square miles in both States centering about New York Harbor. Its aviation business consists of three major airports, two commercial heliports, and a general aviation reliever airport which handle nearly 80 million passengers and
over 2 million tons of cargo annually, making them the world's largest regional airport system. They reflect an investment commitment of $6 billion in facilities which we expect will nearly double by the end of the decade as we expand our existing plant and modernize and rehabilitate our infrastructure to meet the capacity and service level demands of the region's travelers.

In the above context we would like to discuss the airport revenue diversion issue by commenting on the DOT/FAA proposed policy and then by providing this subcommittee with details of our own financial structure which is premised on the idea of combining all our revenues for the benefit of all our facilities, including airports.
We were pleased that on February 26, 1996, DOT/FAA issued its long-awaited proposed policy and procedures concerning use of airport
revenue. We are generally in accord with the major elements of the proposed policy and procedures a d have recommended to DOT/FAA that it be finalized substantially as proposed.

The proposed policy for the most part correctly defines what is airport revenue and the permitted purposes for which it may be used, while at the same time being flexible enough to recognize the unique circumstances existing at individual airports.

We take exception, however, with some of the prohibited uses. In this regard, we believe that the policy statement would benefit from adding
a context statement of what airports are, which, in turn, would help to shape appropriate allowable uses of airport revenues. There may have been a time when the word airport was synonymous with physical facilities using large amounts of acreage, primarily to permit airlines to do their business and serve passengers and cargo. But,.especially today, airports are more than just physical infrastructure and exchange points for passengers and cargo from aircraft to land vehicles. They

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have become complex businesses that have positive and negative consequences for surrounding local communities which, in turn, have implications for airport activity. They also have influence over international transportation policies among governments.
Viewed systematically as a business, allowable airport expenditures should not be limited to bricks and mortar on the airport property. Other expenditures are legitimate including support of local community activities and use of airport revenue for economic development, marketing and promotional activities which may stimulate airport activity. The proposed policy should make clear that such expenditures, as long as they are reasonably related to the airport, do not constitute illegal revenue diversion.
Further, Section VII.A.l of the proposed policy should be amended to allow "reimbursements to a state or local agency for the [value] of services actually received and documented." The present wording of the section limiting reimbursement to the "cost" of services is too restrictive. Also it is inconsistent with 49 U.S.C. Section 47107(l)(2) which prohibits payments "other than payments reflecting the value of services and facilities provided to the airport" (emphasis ad3ea3T_ There is no legitimate reason for requiring states or local agencies to provide services and facilities to airports at a price less than they would charge other entities.

An additional difficulty that ye believe is presented by the proposed policy concerns the obstacles it may present to privatizing airports. In the background discussion on the sale of airport property, FAA contends that the proceeds of a sale or other transfer of property are considered airport revenues and FAA would condition transfer approval on assurances that the proceeds will be dedicated to airport use. In the case of outright sale, itdoes not seem logical that the proceeds of a sale of airport property be considered airport revenues. In keeping with stated federal policies FAA needs to remain open to airport privatization initiatives that include the transfer of property.
The proposed policy appropriately focuses on illegal airport revenue diversion, recognizing that certain multi-modal agencies, such as the Port Authority, may legally combine the revenues from all of their facilities, including airports, to support total agency expenses and general debt obligations. Finally, the proposed policy makes it clear that existing law is more than adequate to deal with any potential for illegal airport revenue diversion whether such diversion be inadvertent or intentional. For example, if after notification of illegal revenue diversion an airport fails to take corrective action, DOT/FAA, following a hearing, may withhold: approval of future AIP grants, increases to existing grants, payments under existing grants and approval of passenger facility charge applications. Additionally, DOT/FAA may impose civil penalties up to $50,000 on airport sponsors guilty of illegal revenue diversion. DOT/FAA are also specifically authorized to seek enforcement in federal court of any order prohibiting illegal revenue diversion.

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We trust that the issuance by DOT/FAA of its proposed policy on revenue diversion, which demonstrates that existing law is more than adequate to deal with any possible potential for illegal diversion by airports, will put an end to purported concerns by airlines and others over such diversion.
The Port Authority would also like to take this opportunity to briefly discuss its development under a unified financial structure. As we have noted in other fora, the whole financial structure of the Port Authority rests on its ability to consolidate the operating revenues of all its facilities, both profitable and unprofitable, In a single pool to meet both its capital needs and to ensure the financial integrity of its bonds. This financial unity is the basis for the provision of the Airport and Airway Improvement Act of 1982 which permits the use of airport revenues by multi-modal agencies for non-airport purposes, the so-called "grandfather" clause.
The Port Authority celebrated its 75th anniversary on April 30, 1996. We are recognized as a major capital manager for the development of transportation and commerce facilities in the New York/New Jersey region. The consolidated pledge of revenues from all of its facilities has been essential to the development of the Port Authority's facilities, including its airports. These airports handled 4 million passengers and less than 100,000 tons of cargo in 1949 compared to nearly 80 million passengers and more than 2 million tons of cargo last year. Early airport investments could not have been made had it not been for the ability to combine funds from ihe profitable facilities like bridges and tunnels and support the c .Lneeds of a growing airport system.

The Port Authority was created by a 1921 c o. between the two states and thereafter consented to by the Congress ol' the United States. Article 6 of the compact states that the Port Authority has the "full power and authority" to undertake a number of functions including the power "to borrow money and secure the same by bonds or by mortgages upon any property held or to be held by it." The Port Authority is mandated to be self supporting since it has neither the power to tax nor the power to pledge the credit of New York or New Jersey.

In 1931 the States turned over the operation and financial control of the Holland Tunnel, which had been constructed by other agencies, to the Port Authority and the legislation also created a General Reserve Fund into which all surplus revenues were to be pooled.

In 1947-48, the States amended the compact to facilitate the financing and effectuation of air terminals by the Port Authority. The States declared and agreed that "each air terminal within the Port District
serves the entire district, and that the problem of furnishing proper and adequate air terminal facilities within the district is a regional and interstate problem, and that it is and shall be the policy of the two States to encourage the integration of such air terminals so far as practicable in a unified system." The legislation authorized the

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pledge inwhole or in part of the Port's General Reserve Fund as security for or for repayment of bonds issued for air terminal purposes. This legislation recognized that the City of New York and the City of Newark, pioneers in the development of Newark, LaGuardia and Kennedy airports, did not have the funds to finance the post-war boom anticipated for air travel. Newark had opened in 1928, LaGuardia in 1939 and Idlewild in 1947.
The Port Authority signed a lease with the City of New York taking over operations of its two airports on June 1, 1947, and entered into a lease for Newark Airport in March 1948. From the outset, the Port Authority's operation of the airports rested on the Port's ability to independently fund their development through its General Reserve fund and the surplus operating revenues of its other facilities as authorized by the compact. In 1952, the Port Authority again revamped its financial structure with the Consolidated Bond resolution which provided that future Port Authority bonds would be secured equally by the combined net revenues of all existing facilities. In 1958, the Port Authority instituted a further restriction on the issuance of new bonds by adopting a resolution that requires a statement that any new bond will not "materially impair the sound credit standing of the Authority of the investment status of Consolidated Bonds." Thus, the general revenue retention provision of the Airport and Airways Improvement Act, and the "grandfathered" exception have come about for good and valid reasons. The consolidated system of financing that the exception recognizes, has allowed the Port Authority to invest $4.5 billion in airport facilities, leveraged by an additional $2.5 billion in estimated airline and other tenant investment, thereby providing aviation and other vital transportation facilities for the people of the New York/New Jersey region.

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