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 sale by die U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington. DC 20402

ISBN 0-16-053837-8
SENATE 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, Chief of Staff

KEVIN G. CuirFIN, Democratic Chief Counsel and Staff Director

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

H earning held on M ay 1, 1996 ................................................................................. 1

Opening statement of Senator McCain .................................................................. 1

Prepared statem ent .......................................................................................... 3

Concluding rem arks ....................................................................................... 81

Statement of Senator Pressler ............................................................................. 3

Prepared statem ent .......................................................................................... 4

Statem ent of Senator Ford ...................................................................................... 5

Statement of Senator Burns ................................................................................... 34

Statem ent of Senator Gorton .................................................................................. 37

LIsT OF WrrNESSES

Frassett, James Service Coordinator, Demaria Electric, 311 West D Street,

Wilmington, dalifornia 92647 (on behalf of Citizens for a Strong LAX) ......... 7 i

Prepared statement ............................................. 74

Garaufis, Nicholas G., Chief Counsel, Federal Aviation Administration ............ 26

McFadden, Nancy E., General Counsel, Department of Transportation; accom- panied by Nicholas G. Garaufis, Chief Counsel, and David Bennett, Director, Office of Airport Safety and Standards, Federal Aviation Administration ........................................................................................................................ 2 1

Prepared statem ent .......................................................................................... 23

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

Transport Association of America ....................................................................... 46

Prepared statem ent .......................................................................................... 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 of Transportation ........... 6

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

APPENDIX

Questions Asked by Senator Pressler %nd Answers Thereto by:

N ancy M cFadden .............................................................................................. 83

E dw ard A . M erlis ............................................................................................. 84

M ary Schiavo .................................................................................................... 85

Other Material Submitted for the Hearing Record Follows:

Statement of the Airports Council International, North America (ACIN A ) ................................................................................................................ . 86

Statement of Daniel P. Garcia and John J. Driscoll, City of Los Angeles

D epartm ent of Airports ................................................................................ 101

Statement of the Port Authority of New 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 of the subcommittee, presiding. Staff members assigned to this hearing: Mike Reynolds, counsel;

Michael Korens, counsel; and Samuel E. Whitehorn, minority senior counsel.

OPENING STATEMENT OF HON. JOHN MCCAIN, U.S. SENATOR

FROM ARIZONA

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 of airport 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 Chief Counsel at the FAA; Ed Merlis, 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 discussing your recommendations for addressing the

revenue diversion dilemma.

The current disturbing trend of unlawful airport revenue diversion must stop. Recent audits conducted by the Inspector General's

Office of the Department of Transportation, finding more than $170 million in revenue diversion from 1992 to 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 coun-
ties control airports, then politics on all levels play a major role in

encouraging revenue diversion.

The Inspector General audit shows that many city and county

governments blatantly disregard Federal law that prohibits airport

revenue diversion to pay for city services on the backs of air 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 golf tournaments, purchase tickets for State legislators to

attend the Orange 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 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. I could go on, but I think it is clear that it is 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 bringing to the Inspector General's attention the situation involving the possible diversion of revenues at Los Angeles Airport, relating to the disposition of proceeds from the condemnation of land needed to build the New Century Freeway. Because of

Congressman Clinger's effort, the Inspector General released an

important report 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 of Los 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 of Los Angeles, the Executive Director of the Los Angeles

Department of Airports, Mr. John Driscoll, and the President of the

Los Angeles Board of Airport Commissioners, Mr. Daniel Garcia, to

testify today, but they declined to testify at any time before the

committee on this issue.

Today we will look at the seemingly ongoing revenue diversion

problems involving the city of Los Angeles and Los Angeles Airport.

We also will fully examine the Department of Transportation'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 of illegal 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 of Senator McCain follows:]
STATEMENT OF SENATOR MCCAIN

Good afternoon. Today, we will examine the serious and, unfortunately, persistent problem of airport 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 for non-airport purposes is illegal. I want to thank our witnesses, Ma Schiavo the Inspector General of the Department of Transportation; Nancy McFadden, the General Counsel at DOT; Nicholas Garaufis, the Chief Counsel at the FAA; Ed Merlis, Senior Vice President of

the Air Transport 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 discussing your recommendations for addressing the revenue diversion dilemma.

The current, disturbing trend of unlawful 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 for city services on the backs of air travelers.

For example, airport revenue (that is, 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 to an airport, construct an activity center and develop a community park not related

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's time to address this situation.

I would also like to thank my friend Congressman Bill Clinger (R-PA), the es- teemed Chairman of the 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 of land 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 to divert

airport revenue, particularly those involving the City of Los 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 of the L.A. Department of Airports John Driscoll, and the President

of the L.A. Board of Airport Commissioners Daniel Garcia to testify today, but they declined to testif at any time before the Committee on this issue.)

in Today, we wil look at the seemingly ongoing revenue diversion problems Involvg the City of Los 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 of illegal 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 of AIP funds, and we are
trying very, very hard to meet the requirements of airports. If the

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 put that 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 of AIP 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 of a law cannot be tolerated. The intent

of Congress 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 of Congress 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 of Senator Pressler follows:]

STATEMENT OF SENATOR 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 of this country's airport grant program. Illegal diversion of airport revenues represents a potential threat to that 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 ensure A money is truly used for airport improvement. Since 1982, Congress has reaffirmed this prohibition on airport revenue diversion.

In fact, we have taken additional steps to 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

grandfather provision applies to about eight airports in the country. I know the Inspector General of the Department of Transportation (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 of revenue at a disturbing number of the audited airports. I will be interested to hear more about

the breadth and scope of these 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 of AIP funding continues to decline, it is imperative that re- maining AIP funds are used to improve our airport infrastructure. Violations of the

law cannot be tolerated. The intent of Congress should be strictly enforced. Although many municipalities are experiencing budgetary difficulties, this is no ex- cuse for violating the law and frustrating the national commitment to the air transportation system.
As a Senator from a state whose small, non-hub airports already suffer as a result

of the unfair division of ALP 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 funding for small airports is a very seri- ous problem in small communities across America. In 1983, small airports such as those in my home state of South Dakota, received 40 percent of the AIP funds. In

1991, the small airports' share had gone down to 31 percent. In 1996, it plummeted

to 21 percent of the total.

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

non-airport related local projects. Mr. Chairman, thank you again for holding this important hearing. I look forward

to hearing from our witnesses today.

Senator McCAIN. Senator Ford.

STATEMENT OF HON. WENDELL H. FORD, U.S. SENATOR FROM

KENTUCKY

Senator FORD. Thank you, Mr. Chairman.

Once again, we are confronted with the issue of revenue diversion and, in particular, the attempts by the city of Los 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 system has worked and it has worked well.

We are reexamining airport funding needs this year. I know that

the airports estimate that they will need about $10 billion per year for expansion. PFC's and AIP funding is critical 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 not want 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 of Los Angeles has announced its desire to divert revenues derived

from the airport for use 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 of commerce."

Los Angeles also had decided to change its method of calculating landing fees. As a result, the fees went from 51 cents to $1.56 cents

per thousand pounds of land weight. LAX later increased the fees
to $2.06. DOT had ruled twice now that portions of the fee increase

were not reasonable.

As part of the 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 of L.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 of us to work on approaches to airport funding. The city of Los Angeles, as part of its budget proposal, wants

to use about $60 million in airport-generated revenues to supplement its City's budget. The Cit4 has gone back to the 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 nor helpful to what we are

attempting to do.

I want to thank the Chairman for holding this hearing, and I will

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 of how

difficult this issue has been for such a long period of time and how,

under your leadership, this subcommittee attempted to address

this issue. I thank 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 OF TRANSPORTATION

Ms. SCHIAVO. Yes, thank you, Mr. Chairman. With your permis- sion, I will simply submit my entire written statement for the

record and I will briefly summarize it here.

Senator MCCAIN. Good, your complete statement will be made

part of the record without objection. Ms. SCHIAVO. Tiank you. With me today I have 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. Of those 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 at just those 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, to use 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 of transportation and, by its

very nature, 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 of this country if something is 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 of audits, 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 being looted to pay for city purposes. Unfortunately, from our perspective, 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 of reports. In fact, a congressional committee passed laws ordering the FAA

to take action to stop the hemorrhaging of divested funds. But still

almost nothing happened report after report. 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 it to 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 not had 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 a few of them. In one case as you mentioned,

Los Angeles is looking back to 1928 to claim moneys that they allege are owed by the airport to the City. Let us 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: I find it very 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, if you 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

of time 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 of the diversions. All of this is aided

in many cases by city lobbyists paid with airport funds, who, in

many instances are lobbying to divert.

Even if you run out of excuses, we have been very frustrated because there is no action to recover the funds. In response to most

of our reports finding airport diversion, there has been no action,

no recovery. So even if you do have active looting-where you are

out concocting reasons to loot money from the airport-but, if you

admit you have diverted yet you do not pay it back, nothing seems

to happen. So now we also have looting by 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. If you are found to divert and you do

not pay it back, there must be a deadline. At this point, this just

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 of the

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 if that is the case.

There should be a multiplier. If you 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 of a 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 if you had

a qui tam provision, where a citizen finding diversion could bring it fore the adjudicatory board or before the government, like in

a qui tam case, they could recoup a percentage of the diversion that

they find.

Otherwise, without some additional measures, we think it is 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 it is 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

at the airports. Thank you. [The prepared statement of Ms. Schiavo follows:]
Statement

of

A. MARY SCHIAVO

Inspector General

U.S. Department of Transportation

Before the

Subcommittee on Aviation

Committee on Commerce, Science, and Transportation

U.S. Senate

Office of Inspector General

Department of Transportation

400 7th Street, SW., Room 9210

Wauhington, D.C. 20590

Telephone: (202) 366-1959 May 1, 1996
Statement of A. Mary Schiavo

Inspector General

Mr. Chairman and Members of the Subcommittee, it is my

pleasure to meet with you today to discuss the diversion of airport

revenue.- ....

Over the past 4 years, we have audited the effectiveness of the

Federal Aviation Administration's (FAA) oversight of airport revenue and

use of these revenues by 65 airports and their 43 sponsors. During

these audits, we identified prohibited diversions of airport 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 of diverted funds at 8 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 do intend to followup on this 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, a government 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 they planned 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 I get into a discussion of our findings, I would 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 of public-use

airports, requesfng and receiving grnt funds under provisions of the AAIA. D Ike IpdeGmi I~ IS i, Pt
Statement of A. Mary Schiavo

Inspector General

The Secretary of Transportation may approve a project grant

application.., for an airport development project only if the

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 for the capital or operating costs of -

(A) the airport;

(B) the local airport system; or

(C) other local facilities owned or operated by the 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 to be available for other 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 a case-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 for violations of grant 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 a provision 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.

O@WTNso .6 m B MW 1, to" raw a
Statement of A. 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 of Inspector 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

DOT grant funds.

FAA has interpreted the provision to withhold grant funds to only

apply if a diversion of airport 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. If the commitment is met, rent is cheap. If the 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:

DOT DUfloed Iaspsd.~ Oswd, Mq 1,1966 ',~. a INWl onmof Ie lw d Am l -a MW 1, IN Frs 3
Statement of A. Mary Schiavo

Inspector General

However, airports users should not be burdened with

'hidden taxation' for unrelated municipal services.

Clearly jobs in the city is a municipal 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 its June 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 of these actions occur by the end of FY 95, the FAA

will take steps to find the sponsor in noncompliance.

The FAA will notify the grantor agencies within DOT if the

sponsor is found to be in noncompliance.

Since their reply, FAA has discussed the problem with Westchester

officials, but it remains unresolved. It is not clear if a 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 of diversion.

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

001' OIlke d I-640Oesw MaI I 1,019 raw
Statement of A. 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 of compensation 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 of airport 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 of the 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 of money. Again, for months, cognizant FAA representatives agreed.

AG I n. mpdrGmd Map1, O • r a

Do 01 Ol k a lllqw Aqm l M i " 1,10ION
Statement of A. 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 of bonds will be sold to achieve the revenue

needed to pay the $64.4 million. Furthermore, there are no indications

when the sale of bonds will begin, or when 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 if FAA insists on Hawaii

paying interest on the $64.4 million, the sponsor will not repay either the

money diverted or interest.

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 of June 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, that if they 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 its desire 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 of the diversion. That was how we calculated interest for

those reports where we discussed interest. While that rate may be

OCT OUke @1 ImIpedif Owe, M 1.196 rq.. DOT' Oite of lliplldw G$*W% ikly 1, Iwo) raw 0
Statement of A. Mary Schiavo

Inspector General

higher or lower than typical or prevailing interest rates, it is exactly what

they were 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, of the 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 off airport 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 of the end of February 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 of FAA'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 no AAIA, 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 of debts, 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 of airport

revenue. At both Los Angeles and Denver, considerable amounts of

airport revenue were used for lobbying expenses. In fact, Los Angeles

row # =00106 lof al lu0d r! w - 11O" lil 1 
Statement of A. Mary Schiavo

Inspector General

used airport funds to lobby for legislation that would allow airport

revenues to be used for city expenses.

Diverting funds for lobbyist expenses is a circuitous problem.

Airports and their sponsors need airport-improvement grants to maintain

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 its grant management responsibilities. Effectively,

FAA has thrown its hands up and proclaimed there is nothing 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 of withholding 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 Air Transport Association of America 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 the adjudicator 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 if the Inspector General determines

the FAA has not obtained satisfactory compliance. Similarly, it proposed

that nongovernmental parties who have rate or revenue diversion

disputes with airports, be afforded the opportunity to bring those matters

to the board.

bet 0MWo oflmpeew OueiAdl Mqr 1, iwo r2 X
Statement of A. 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 of funds 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 other than 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 off funds, must be applied, or the problem of revenue

diversions will rapidly escalate as financially strapped local governments

look for cash cows. FAA's current lack of enforcement effectively results

in an interest free loan that may never have to be repaid.

Mr. Chairman, this concludes my statement. I would be happy to

answer your questions.

M1 Gm d mtm- G~, t i 100 rawV
Statement of A. Mary Schlavo

Inspector General

AIRPORT REN1XUE AUDITS

DIVERSIONS OF AIRPORT REVENUE

FISCAL YARS 1992 TO 1995

AzuFOa?/TOMn ftazov AVoas DfVaXMs

1 Pompano Beach, Florida $1,204,000

FYs 1985 through 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. San Antonio, 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

5 yrs. 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 of Hawaii 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. Los Angeles, CA 22,801,000

FYs 1992, 1993, 1994

22. Stutt .rt Airport, AR 46,000

FYs 1991, 1992, 1993, 1994

23. Stapleton Airport, CO 6,500,000

C Ys 1993, 1994 .. ..

Total Revenue Ivgeraoms *lI6O,

DOT -nb o If me 6~4 MW 10 Im "w
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, FEDERAL AVIATION ADMINISTRATION

Ms. MCFADDEN. Thank you, 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 of the Office

of Airport Safety and Standards. I have submitted a statement for

the record, and, like our Inspector General, let me summarize the

main points of my written statement for you today.

Senator MCCAIN. Without objection, your complete statement

will be made part of the 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 which you, the Congress, has given us will assist

us in ensuring compliance with the revenue diversion policy.

You are well aware of the 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.

But let 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 of the Secretary work together to address, as much as feasible, issues identified in air ort audits conducted by Department

of Transportation 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 of the sanctions that the Congress

has deemed appropriate for revenue diversion, and lay out a history of the evolution of the 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 of the 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 of course 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 of revenue diversion.

First, adoption of a clear policy and set of principles regarding

the permissible and the prohibited uses of airport 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 if they 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 of June. 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 of the 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 of our resources.

We will be expediting the issuance of rules 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 to present our views.

[The prepared statement of Ms. McFadden follows:]

STATEMENT OF NANCY E. MCFADDEN

Mr. Chairman and Members of the Subcommittee: I am Nancy McFadden, the

General Counsel of the Department of Transportation. I welcome the opportunity to

appear before you to discuss the issue of revenue diversion. Accompanying me today are Nicholas Garaufis, Chief Counsel of the Federal Aviation Administration and

David Bennett, FAA's Director of the Office of Airport 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 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. We expect them to

fulll this promise. Our recent proposed policy on revenue diversion, new airport financial reports, and the range of enforcement 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 of the 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 of this 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 ai report 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 in place prior

to passage of the 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 of this year, we published for comment a draft policy on airport revenue diversion. The public comment period recently closed and, of course 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

of both 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 has examined in the past. The proposed policy would explicitly prohibit-

(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 not properly 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 whose jurisdictions happen to include an airport;

(4)airport-subsidized loans of airport 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 of passengers 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 of cash or land.

Thepo licy 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 of more 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 of either 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 of aeronautical 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 of new PFC applications for violation of the revenue diversion assurance; to seek civil penalties for violation of the revenue diversion assurance; and to seek judicial enforcement of all grant assurances. The 1994

Act reaffirms the authority to withhold approval of new 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 of unlawful 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 "a reasonable period of time, 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 of information 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 of the 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 of government. It will also require the sponsor to explain

the basis for claiming a "grandfather" exception. The second report will require

sponsors of commercial 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 of State 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 of airports. I should note here that the Inspector General is better

equipped that the FAA to conduct these audits in terms of available staff and tech.

nical auditing expertise. To sum up, we have attempted to fashion, with your guidance, a coherent, balanced, and effective approach to deal with the issue of revenue diversion.

First, adoption of a clear policy and set of principles regarding the permissible

and prohibited uses of airport 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 if they 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 action is 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 the joint FAA/OST work-

...ing group which 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 of our resources. We will be expediting the issuance of rules establishing expedited enforcement procedures for airport grant compliance.

This then, Mr. Chairman, is where we stand on the issue of revenue 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 of policy and the adjudication of revenue 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 itself in 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 of revenue 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

its role as a legal advisor on resolution of significant 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 is just now coming into place. Inter.

preting the new policy and applying enforcement action in appropriate cases properly resides with the FAA and DOT.

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 may have 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 of the revenue from the sale of
an entire airport in the context of the transaction before us and in accordance with

protecting the public interest. Additionally, all of these issues were proposed for

comment and we will be carefully reviewing the 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 a rea- 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 of the 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 of the re- ports. The task force will also work to refine the Compliance Supplement for Single Audits, referenced in the proposed policy, to help auditors flag potential problems. This

will improve and fine-tune for our purposes an audit that is already being conducted

on behalf of an airport, thus making the most effective use of limited 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 our rates and char policy, which assures air carriers 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 seeing how the new policy will be implemented and enforced. The framework to support

enforcement of the revenue diversion provisions is just 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 of overseeing 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 be happy 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 of the reasons we have

been critical about the inaction. For so many of the 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 of it; but then

nothing happened. That is why we are in a position today of having returned only $4.8 million of the $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 doing your job according to the law. Do you have any response

to that?

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 at the FAA-we have the obligation to give the party being audited the opportunity to--of course, 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 they feel that the uses of the funds are appropriate. I can give you an example of one-although I am not in the pol- icy office that handles this-in the case of Westchester 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 their legal 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

of grandfathering unless and until the issue of diversion arises. In

the case of Westchester, it arose in the context of a 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 of these matters? I assume

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 we have the obliga- tion to consider their views.

Senator MCCAIN. Perhaps you can help me out here. Is there any question in your mind that $33,000 for a Tournament of Roses 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 Golf Tournament?

Does that require a lot of scrutiny on your part if they are diverting airport funds for those 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. I would be glad to hear his answer.
Mr. BENNEMr. Mr. Chairman, of course, we have the Los Angeles

report, and there is a long list of issues in there. I think 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 the City to have 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 of costs 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 of the easy ones initially. Senator McCAIN. So you get no money back because you want to

go to the hardest ones rather than just say this is wrong and get the money back? That does not make a lot of sense 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 not talking about a few months or a year. Senator MCCAIN. You are talking about 4 years, and we have not

gotten any money back yet 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 of these 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 condemnation for the Century Freeway, there is a claim that all funds belong

to the City. But we have recently learned that 50 percent of the

principal-even if you 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 if you ignore that,

we have recently learned that 50 percent of the principal was paid

for severance damages for impaired access and reduced utility to

existing use of airport 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

of the Pope. Senator McCAN. Ms. McFadden, do you want to respond to that?

It is a pretty damning statement about the way that you and Mr.

Garaufis have been doingyour job.

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

Los Angeles 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. But as Mr. Garaufis tried to explain before when you mention something like the Rose Bowl Parade, it is a clear indication of something that is clearly not permitted, and we would all

agree with that. There are a lot of complex 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 right judgments for both the airport sponsors and for the

airport users.

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 am hearing 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 of Transportation, and we have

had correspondence in the years past. It is not as if this 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 of Transportation 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 for the Proposition K effort, and improper

charges and payments for indirect city expenses, including an $8.7-

million payment. We are talking about fairly significant amounts

of money here.

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

25-859 0 - 96 - 2
controversy surrounding that airport, its relations with the airlines--which we will hear about from another witness-and other

areas. I yield to my colleague from Kentucky. Senator FORD. I would yield to the Chairman of the full committee.

The CHAIRMAN. I would just 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 of Westchester County had

been harmed, what business is it of the 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 of aviation; we are talking about airplanes, runways, ramps, aprons, and safety measures. We are not talking

about anything that the city wants to use it for, whether it be good

or not.

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 not good. 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 of aviation. The people who pay the ticket taxes 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 off these funds and making our airports a cash

cow, everybody else is getting the idea and before long the whole

purpose of this law, AAIA, is going to be 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 I just follow up on that?

I think that if we were just talking about a few de minimis contributions for the purposes of being 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 of airport revenues off the airport, and as the administrator of the 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 not generate 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 of retaining

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 the baby 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 of the auditing for us-we no longer have auditors for this

purpose. They were taken away from us at the time that the Inspector General of the Department was created, and we think that

is where the auditing function ought to be.

Also, the ability of third 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,

alt of these areas are going to provide 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 we just 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 off the airport property to be used for general city purposes. Purposes other

than those related to the airport. I So in other words, the airport is generating revenue, and the revenue is being taken off the airport to pay for something else, i.e.,

being used as a cash cow.

Senator FORD. Whatever that might be.

Ms. SCHIAVO. Whatever that might be.

Senator FORD. I believe in your testimony, and I have 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 get into that, but that is a part of it.

Now, that was-once it was brought to their attention, they

agreed to pay that back, so that is part of your $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 lot better

than putting a fine on them and taking them to court.

You got an agreement.

Ms. SCHLAVO. If they pay it back plus interest.

Senator FORD. Well, lots of times we forgive interest around

here, you know, or we give lots of things. If we do not forgive any

more than a little interest on that, based on what we forgive on foreign aid and that sort of thing, we are not hurting'anything.

Ms. SCHIAVO. But that is the problem. Then you have got an interest-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 is why 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? We go 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 of the money that you have agreed that you found has been

agreed to be repaid, subject to appropriations by a State, 1), and

the rest of them 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 of the $170 million, and you got $5

million, so we are getting close to $100 million of the $171 million

you found, and then they are trying to work out the rest.

But what I am trying to say, we are trying to work this out, rather than fine anybody, and that was what this committee said we

ought to do.
Now we are being critical of Ms. McFadden and her Department, and I am not trying to defend them. If they are wrong I will get

on them just as fast as I was otherwise, and you know that, do you

not?

Ms. MCFADDEN. I do, Senator.

Senator FORD. But that is the direction. Now, is it true that you just finished up your report in 1995 as Ms. McFadden said?

Ms. SCHIAVO. On L.A., one of the 23, that is 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 of your reports that I understand,

you suggested the lease or sale of airport land for less than market

value constitutes a revenue diversion.

Ms. SCHIAVO. In some of our reports we said that, yes.

Senator FORD. Is that in all cases?

Ms. SCHIAVO. At first, 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, or the airport sells a piece of property for less than market value, 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 of the 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

of thing, and that bothers me.

I just 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, by the 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 market value is, is that revenue-diversion?

Ms. SCHLAVO. No. It is not included in our figures.

Senator FORD. So you would not say that?

Ms. SCHIAVO. At this point, no.

Senator FORD. So your judgment, then, that would not be revenue diversion?

Ms. SCHIAVO. To be clear, our original judgment was that it was

revenue diversion, and that the law required the market rate return on the sale of airport property. But once we issued that opin- ion we were overruled by the FAA, so none of our figures included

in our total here today include any amounts related to that issue.

Senator FORD. Well, let me ask you this, then, what if-and I am

trying to get clear between the two entities here. Air parks 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 of a 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. Is that because you have been overruled?

Ms. SCHIAVO. Yes.

Senator FORD. If you 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 of landings, things of that nature.

I think that is a good sale, and I would not say that would be revenue diversion.

One last question. As a part of the 1994 act, we required specific

financial information from airports. Do you believe the information

will make enforcement of revenue diversion easier?

Ms. SCHiAVO. If it 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. If the 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 of the record.

[The prepared statement of Senator 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 it has been solved through statutory and regulatory 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 of Transportation to take adequate steps to end

this practice and wrap up all the lingering concerns about airport revenue diversion.

Airports are nothing short of a 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 of this 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 of the airport. Unfortunately,

airports still act unlawfully to divert funds to non-airport related projects despite the changes in the law meant to end this practice. I encourage the FAA to look closely at the issue of revenue diversion and establish 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 in policy.

Senator BURNS. I have been sitting here hearing all of these big numbers and figures and everything, and listening to my friend

from Kentucky. I am not going to get into this idea of selling 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 of the Inspector General issues its audit

report, reporting the diversion to the 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 of the IG audit report at the FAA, to go through exactly

what we do when we receive those IG reports. 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 of payments and so forth, but it does

not include defenses or maybe explanations that the airport might have.

So we would provide that to the airport operator at that 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 of them 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 year just 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 2 years say- ing that if diversion is uncovered they will not receive any of the

DOT funds for those years in question. Senator BURNS. Well, Mr. Bennett, have you got a different view

of that?

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
to go back to the airport account. Cutting off, taking that out of the

AIPgrants in the year does not get them to the ri ht place.

What we really want is just to get the funds back in the local

account and, of course, deducting it from the AIP would hurt the

airport even more. We do have 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, of course, they are the recipients of the AIP

funds the next year, right?

Mr. BENNETT. Yes, they are, Senator, but of course those funds

have to go to a very specific airport project. They are not just available to the city.

Senator BURNS. I guess I am up a wall here on, if you 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 of all Federal airport grants

to the sponsor.

Senator BURNS. Has that ever been done?

Mr. BENNETT. It has not been for revenue diversion, because first

of all 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 it back, and to 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 of open 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 that has simply refused 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 of it, otherwise we could not withhold

the funds. It is just a provision in the law.

Senator McCAIN. Senator Gorton.

Senator GORTON. Mr. Chairman, I thank Senator Ford for some

of his questions. I am reminded in my staff memo here that he and I had a conversation on one particular matter relating to the Seattle Tacoma

Airport, and that he, as Chairman of this 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, but it is not 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 of the problem and the controversy that we are

looking at here can be split into 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 of airport

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 of the Inspector General at that point, and

perhaps the entire Department of Transportation, 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 of some

money that is due you 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 of any 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 of value judgment, I think, Mr. Chairman. At one level the people who are really penalized by all of this are not so much the airlines or the airport agencies, but

the ordinary citizens who fly in and out of particular 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 of money for a particular purpose is, in fact, a diversion. Once we have decided that, I believe that we ought to be pret- 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 brief comments on the different dynamics of those 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 is the 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

off the top of my head it would seem to me that when you are taking care of the clear impact of an airport that that is not or should

not be considered to be 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 I was 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 of law.

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, I guess it is two and two. [Laughter.] Senator GORTON. But the point is I can say to Senator McCain, if we 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 answer from the Chairman.

Senator MCCAIN. I would just say to my friend that there are

areas that are questionable. I agree with you 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 is just no doubt. For example, consultant and lobbying fees for Proposition K of $1.4 million.

We would not have 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. I just would like your 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. 1 just wanted to know if any of you wanted to comment

on that.

Ms. SCHIAvo. To finish 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 of the handful of airports 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 of a development. The good news is they have already anteed up and done what was

required of them under the audit.
So the responses of the airports and the airport sponsors are also

different and also play into effect here. Some sponsors concoct all

sorts of fantastic 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 a valid 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 of the 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 of these instances we have recovered money from the

airport sponsors. The example that I know troubles all of you 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 of sums that we believe 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 it right 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 of jobs, 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 of opinion.

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 of legislation 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, of diversion 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 of pleadings 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 of the parties.

Senator MCCAIN. Do you 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 of cases 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 of Airports 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 of Los 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 of funds?

Ms. SCHIAVO. Yes. Our investigation answered specific questions

for the chairman of the Committee on Government Reform and

Oversight for the House of Representatives and we did confirm the

statement that you just made. First of all, Webster Hubbell was

hired by the city of Los Angeles to lobby, the purpose of which 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 of the chronology of that, if you would like, but we did confirm the statement

you just made.

Senator McCAiN. Based on your review of this land sale proceeds

transfer and Mr. Hubbell's involvement, how would you assess the

Department of Transportation and FAA's consideration of the 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 at hand?

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 of all 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 to go back for airport use.

In that initial draft, and this is my take on it, they offered a consolation 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 of the interested parties, and not even one of the interested parties but to

a lobbyist, a hired lobbyist, for that organization? Is that standard

procedure in the Department of Transportation? 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 about my predecessor, first of all.

Second of all, 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 rationale for doing so.

Senator MCCAIN. In a nonspecific case that is before the Department of Transportation, is it standard procedure to fax a proposed decision to a lobbyist representing that group? Would that be your standard procedure if a 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 it is to reach a result.

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 of the 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 a preliminary decision. It was a discussion

draft. very preliminary. There was a lot of talk about it, and then

we shared the discussion, and it turned out to be unworkable in

several ways. Senator MCCAIN. I have to tell you, Mr. Bennett and Ms. McFadden, I have only been up here 14 years. I have never heard of that

kind of a situation where you fax a draft decision to a person that

is a lobbyist 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 of way we address these issues. I do not know

if it 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 of Los Angeles in airport revenue diversion matters?

Ms. MCFADDEN. No, Mr. Chairman. Not at all. I did not know

Mr. Hubbell was representing the city of Los Angeles. I have never

had a discussion with him about this matter.

Senator MCCAIN. Are matters like this usually decided by the

FAA or by the Department of Transportation, Ms. McFadden?

Ms. MCFADDEN. I do not know, in the case of this matter. I think

in general these kinds of matters 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 of Transportation, on an issue such as this, in your 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 of the airport fund and transfer it to the city fund, and we are

not going to do anything. If somebody 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 your judgment 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: if the 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 what behind 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 you just got?Ms. SCHIAVO. Yes. I got that this morning. Senator FORD. You got that this morning. Well, Senator McCain

apparently knew about it, and I did not.

Senator MCCAIN. I did not.

Senator FORD. That was a surprise wo you that in 1994 Mayor Riordan and his staff was 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 am just trying to get caught up, Mr. Chairman,

and I cannot 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 morning we 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 we know.

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 of thing? If you 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 of thing, but they are still going

to be subject to suit.

Ms. SCHLAVO. That is right. The FAA saidSenator FORD. That was a pretty good warning, was it not?

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 of the facts.

It said a Washington D.C.-based attorney's group-and I will not

get into names. I do not think I should-representing L.A., but that

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't you attorneys kind of swap agreements and try to work out

something? But I do not-you are representing me, and somebody else represents somebody else, and you swap papers to try to work

out an agreement. Is there anything unholy about that?

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. But their 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 in Washington?

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 up here either, does it?

Ms. SCHiAVO. Nothing prohibits the airports from having rep- resentation here and even, under the new guidelines, using airport

revenue to do it.

Senator FORD. So really what they did was perfectly legal. Ms. SCHLAVO. What they did was legal.

Senator FORD. OK, fine. I have no further questions. Senator MCCAIN. Is it not appropriate to notify other interested

parties of proposed settlements, rather than just 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 of Transportation, and we did

not find ethical violations on that.

We reported the facts that we found, and if things are unusual,

then things are unusual. Our task was to find if he 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 at Justice, not Transportation, so he could be hired as a lobbyist to lobby the Department of Transportation. 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. I really do not have

anything to add about this particular situation.

Senator MCCAIN. Thank you very much. Senator Ford.

Senator FORD. I have nothing.

Senator MCCAIN. Thank you. I thank the witnesses very much

for being here.

I would like to call the second panel and begin. We will probably

have to break for a vote.

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 of votes here, but please proceed.

STATEMENT OF EDWARD A. MERLIS, SENIOR VICE PRESI.

DENT, FEDERAL AFFAIRS AND AIRPORTS, AIR TRANSPORT

ASSOCIATION OF AMERICA

Mr. MERLIS. Thank you, Mr. Chairman and members of the subcommittee. I am Edward Merlis, senior vice president of the Air

Transport Association of America. We appreciate the opportunity to

appear before you today to explore an issue of great importance,

airport revenue 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 part of the 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 to take unfair advantage of their monopoly status.

Among the most important of these restrictions is the revenue retention grant assurance, requiring that all revenues generated by

the airport will be spent on the capital or operating cost of the 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 of the city of Los 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 during the 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 of the 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. It is the intended use of the 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 of the Federal Aviation Administration Authorization Act of 1994's restatement of revenue 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 of Los Angeles, claiming that this

amount, representing the roceeds plus interest of the 1989 condemnation of airport land or the Century Freeway, was incorrectly paid to the airport account, 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 5 years.

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 of the 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 half of the $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 of the 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 of these 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

of a new sewage treatment fee.

If LAX 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 of the fact you are holding this hearing, so we are very patient. I will continue on with my oral comments where I left 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

of a new sewage treatment fee.

If LAX 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 L.A.'s public consumption rhetoric for its own justification. For old adage, lack of enforcement breeds contempt, LAX is the

case in point. I would be remiss, however, if I did not extend the sincerest ap- preciation of the air carrier industry and our passengers and shippers for the letter which you and Senator Ford sent to Mayor Riordan 10 days ago upon the release of his budget proposals for fiscal

year 1996-1997. We want to thank both of you for your commitment to seeing that the revenue retention requirements of Federal

law are fully enforced.

Mr. Chairman, my written statement covers a number of enforcement-related issues, and of course, I would be happy to respond to

any questions on the LAX matter, the enforcement issues, or other

comments which I made.

I just 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 I would be pleased to respond to any of your questions. [The prepared statement of Mr. Merlis follows:]

STATEMENT OF EDWARD A. MERLIS

Mr. Chairman and Members of the Subcommittee, I am Edward A. Merlis, Senior

Vice President of the Air rransport Association of America. We appreciate the op- portunity to appear before you today to explore the issue of airport revenue diversion-a subject of great importance to the airlines, our passengers and shippers, and

to this committee.

ATA represents the major commercial passenger and cargo air carriers in the

United States.1 Collectively our members account for over 95 percent of all revenue passenger and cargo ton miles that scheduled air carriers operate in this country.

Airport Finance

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, Polar Air Cargo, 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 of their 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 of which is an integral part of a national system. Generafly speaking these restrictions are related to the use of airport revenues in the following ways: * Revenue generated by an airport is to remain on the airport to cover capital and operating costs. 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 of services 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 with generally accepted

government accounting principles and DOT's policy on rates and charges.

Airport Improvement Program

ALP funding is a key component of this 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. In order for an airport sponsor to receive

ALP grants, the sponsor must agree to various grant assurances first enumerated

in section 511 of the Airport and Airway 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 pro quo for receipt of the 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 of the 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 of this condition, AIP funds could be used for non-aviation purposes, thereby undermining the important goal of establishing and maintaining a national system of airports. The revenue retention requirement serves to underpin our national system of funding 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 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.

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 if all 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 the conduct

which you set out to prevent, and there are a range of enforcement 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

the enforcement mechanisms and related sanctions in the law are sufficient to fulfill

the public policy goals I have just described.

"Legal" Revenue Diversion

In 1993, the Surveys and Investigations Staff of the Committee on Appropriations in the other body found revenue diversion going on at 56% of the airports which

it examined. While most of that diversion was "legal" pursuant to the grandfather provisions of the 1982 Act, 12% of the 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 of the 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?

Findings of the DOT Inspector General

The DOT Office of Inspector General also investigated the problem of airport revenue 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 of the scope of the problem.

The report notes that a substantial sum ($4.7 million) of non-airport related indirect costs were charged to the airport during FY 1992 and 1993. Among the 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 of the mayor's office and city council. The IG claims that the FAA has

done little, if anything, 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 of the nationalsystem of airports may

well be undermined by an extensive a pattern of revenue diversion.

Other Revenue Diversion Schemes

Revenue diversion is not merely an accounting gimmick which only the trained

work force of the 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 of Manhattan Islandmore than 20 miles--exclusively for the purpose of using 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.

If the 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 attempts to flaunt the law on revenue diversion brings home the point. It is this situation which gave rise to the passage of the revenue diversion amendments in 1994,

arid it is this situation which remains with us today.

Los Angeles

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 LAX
to the general fund of the 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 of the lawfulness of the fees.

It was this dispute that led to the passage of the 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 of airport 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 in a ten-page letter, detailed the reasons why the transfer should not occur. But

inexplicably, 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. (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 of informal 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 of fees 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

ruled that we were due a refund. He said:

[Tihe facts of this case on the issue of the provision of city services show so vividly how badly needed is a general rea rIrmation of the 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 the bud.

In its final Decision in the Second LAX Rate Case, DOT ruled in favor of the airlines on most of the 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 of the 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 pushed back with respect to the 1992 pay ment 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 half of the $ 8.7 million on summary judgment, with the judge expressing serious doubt that the jury would

sustain any of the City's claim. This case is to tried before a jury 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 of its capital

program. In October, the DOT Inspector General issued a report that details instances of illegal 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 of dollars in illegal diversion found by 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 of the 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 and jerry-rigged claim that is not sup- ported by accepted government (or any recognized) accounting practices. Notwithstanding the obvious defects of the "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 has embraced 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 of these "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 of a new sewage treatment fee. If LAX 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 own justification. Remember the old adage "lack of enforcement breeds contempt?" LAX is THE case in

point.

At this point I would be remiss, however, if I did not extend the sincerest appre- ciation of the 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

of his budget proposals for fiscal year 1996-1997. We want to thank both of you for

your commitment to seeing that the revenue retention requirements of Federal 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, if the economic activity and tax revenues which an airport brings

to a local community are not "dividends' and if the city of Los Angles can get away with this revenue diversion scheme, billions may be flowing off of 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 Aviation Administration Authorization Act of 1994

As part of a review of the revenue diversion issue, I would like to discuss the status and effect of the 1994 Act's attempt to deal with the revenue diversion problem since attention to this matter originated in this committee.

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" of the prohibition. It specifically prohibited airport payments for City services unrelated to the operation of the 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 a rule which was to have been issued in final form before the end of 1994.

And, DOt just 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 on how airports are spending their

users' money. Similarly, the Department has yet to issue its final policy on how it will assess the "reasonableness of airport rates and charges. Neither air carriers nor airports

are certain of what DOT, if anything, 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

step backward. Issued for comment in September, 1995, it affords air carriers and

airport users with virtually no protection against the exercise of monopoly 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 off of airports before meaningful action is taken.

The only regulatory requirement of the 1994 Act that DOT has completed relates

to the promulgation of a final rule establishing procedures for the filing and processing of a rates and charges complaint. You might be 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 of cases being filed at DOT.

Unfortunately even here DOT has resisted the opportunity to rationalize airport

rate making-including the ability of the 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.

Enforcement Issues

Mr. Chairman, this brings us to the problem of enforcement of the 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, if enforcement were adequate, would the Inspector General be finding as much

diversion as is now the case? We think the answer is self-evident.

Enforcement of the 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, if a sponsor does not take corrective action after a finding of a violation. If that 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 of the day, if the 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 seems completely

appropriate that your trust should be vested in the expert agency. However, neither

the Department nor the FAA has demonstrated a capacity for rate 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 of monopoly 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 of services expected by the traveling and shipping public. Therefore, we suggest you consider further expanding the

role of this Board to include other kinds of adjudications, such as airport rates and

charges and revenue diversion cases. Additionally, more needs to be 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 a duty on the Inspector General to bring revenue diversion cases to this rate

adjudicatory board if the IG determines that the FAA has not obtained satisfactory

compliance with Federal law. In this type of proceeding, 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, should be 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 of crimes 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 of cases occur most often in the defense con- tracting industry.

Violations of the 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 a qui 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 of whether 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 of those 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 if restitution is not made within a limited period of time after a final ruling by the rate adjudicatory board.

As the IG has documented andas we have documented, there appears to be little

appetite or sense of urgency at the Department of Trans port 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 of law 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 Senator Ford have demonstrated on this important matter.

[Airport Revenue Audits as of February 1, 1996 report follows:]
56 -

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-6-002
Draft 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 first 3

qtrs of 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 Shelby County, Tennessee

FYs 1988, 1989, 1990

Nashville, Tennessee,

FYs 1988, 1989, 1990

Dade County, Florida

FYs 1989, 1990. 1991

Hillsborough County, 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

San Antonio, 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

Good News Report

Good News 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"14
22.

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-Sky Haror. Arizona

FYs 1991, 1992

Albuquerque, NM

FYs 1992. 1993

Kansas City International, Downtown

Municipal, and Rlchads-Gebauer

Airports

FYs 1992, 1993

San Francisco. California

FYs 1990 through 1993

Maiden, MO

FYs 1992,1993

Meacham Airport. Ft. Worth, Texas

18 months ended 3/31/93

JFK International, 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

Hot Springs, Arkansas

5 yrs. ended 12/31/93

Philadelphia International and

Northeast Philadelphia Airports

711/89 through 6/39/91

Des Moines, lowa

7/1/91 through 6/30/93

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 through 9/30/94

Love Field/Redbird, TX

21 months ended 6/30/94

Chicago OHare, 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 00

$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 00

$2,741,000 00

$883,60C

$3,000,000 00

$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

Honorable Theodore 0. Stein

President, Bowrd of Airpot Commissoners

City of Los Angeles

Los Angeles, CA 90012

Dear Mr. Stein:

This lewt responds to you request regarding the disposition of proceeds &am the

condemnation of a portion of the Los Angeles Iaternaiowd Airport (Airport) for the

Century Freeway. We bae this response on your February 25. 1994 letter to the

Secretay of the Deparamm of Trasportution (DOT) end subsequent corespondence

and documents from your le co nsel to the Omm Counsel, Office of the Secretary,

DOT, and the Chief Counse Federal Aviion Admnimuon (FAA including

cot.epoadec date Februxy 13, 1995. We ha also considerd the discussions we

have had with you, reesatives ofthe City of Los Angels (City) and of the City's

Depatment of Aiports. Additionally, the Air Trnsport Association (ATA) has

submitted legal memorud ad materials pertinent to this issue, which we have

examined in ow prqpetioo 6f this lawt. We appreim the City's cooperation in

providing the informaion requested in connection with this response.

For the reasons set falh below, and based oan the information submitted to dat, the FAA

does not presently nd to initiM action to prevent or reverse the trufr of the

condemnasion proceeds to the City's Sgneral ftmd under the provisions of section

S I l(aXl2) ofd the foe Ahport and Airway Improvemnt Act of 192, as amended

(AAIA), meaeted ad ncod1ed as 49 U.S.C. 47107(b). We understand the amount at

issue to be approximnasy S53,000,000 as of the dat of te City's request to the FAA.

We reach this position only afer lengthy consideration of the unusual combination of

particular factors, discussed below, that appeal to make this situation unique aad

exceedingly unlily to be repared. In addition, in staying ow inlmntion not to proceed,

we must make clear that out position includes several import quafih nations.

25-859 0 - 96 - 3
Fit, vn if the disposition of the condemnation proceeds is not considered as the basis

for agency action regarding revenue diversion, the agency is prepared to consider

separately any future effect of this transfer of funds on te rates thai can reasonably be

charged to aeronautical user at the aport. If the City's decision to use the proceeds

from the condemnation of airport property for non-airport purposes resulted in a fee

increan at the airport, carriers serving the airport could file a complaint with DOT under,

49 U.S.C. section 47129 to challenge the increase. While the agency would review any

complaint on its mints, and we cannot predict the disposition of auy pa rcular complaint,

a claim that-such a fee increase would be unreasonable under the City's pant assurances

can be anticipated Nothing in this letter precludes a finding on the reasonableness of the

fee in such a cue if otherwise supported by the facts.

Second, we do not consider any expenses tht the City incurs to facilitate the t-ansfe of

the condemnation proceeds to be a capital or operating cost of the airport% and such

expenses could not, therefore, be paid with airport revenue. The FAA would not consider

expenses associated with efforts to direct airport Auds to non4iTpo t purposes, even if

consistent with section 511(aXl2), to be airport costs. Such expenses may include, for

example, any associated legal fee, or the costs of refinancing bonds, if such a refinancing

is necessary to avoid breach of outstanding bond covenms.

Third, in awading disctonary AIP fuds for capacity projects, the Secretary is directed

to consider, uer oati, the financial commitment from non-United States Government

sources to preserve or enhance airpon capacity. See, 49 USC f 4711 5(dX3). The City's

decision to transfer the condemnation proceeds to its lnal fAd, rathr than maintain

the proceeds on the airport for development purposes, would be considered a negative

factor in evaluating ay application by the City for a discretionary capacity pant. We

recognize, however, thai th City is not now tdan entitlement pants or applying; for

discretionary funds.

Fourth. this letter is directed only to the appLication of Federal law and policy, and does

not address the effect of state or local laws, the City Charter, airport regulaions, or City

and airport bond covmuns that may apply to the City's ability or inwtion to use the

condemamdon proceeds fo non-airport purposes. Fifth, we emphasis that the views

expressed in this leuer apply only to the particular condemnaton action that is the subject

of the City's requewa the City can ccp close scrutiny of any new request or action

involving the off-akport use of funds considered to be airport reveue.

Finally, we are conmrained to note that this letter is pmdicae on the Accuracy of the

fatua representations provided to DOT by the City and the ATA. We note that the

agency has not had the benefit'of a formal or adversarial process that might more fully

develop the factual record in this case. In the event these same issues are raised in such a
proceding before the agency, a final determination would be made on the basis of the

full record before the agency at d ume.

As noted, the process of responding to your request has proven to be a difficult one for

the agency. We fuly support the retenton of ail airport revenue for use in the auport

system where the revenue is generated, and we are reluctant to reach a conclusion that the

proceeds of any sale of airport property could be used for other purposes. The FAA

ordinarily would consider the proceeds fom the ele of parcels of airport propey to be

revenue genrated by the airport, which must be used foe th purposes set forth in section

51 l(aXl2). However, we acknowledge the unusual circumstances d exist in this cae

and the ambiguous nature of past agency policy statements that bea on the issues at hand.

The FAA's forthcoming policy on the generadon and use of airport revenue will make

clear proceeds fom the sale ofa parel of real property on the a port, owned by the

airport sponsor constitutle airprt revenue, within the meming ofdie slatto'y grant asurance.

Backpound

The information the City has provided shows that on Novembr 4,19185, the Stm of

California (Stm) took possession of a strip of lend Ct the south ed of the Airport for the

constuion of du Cemuny FmMway. This property consists of 1,461,720 Square feet610,443 square feet in fee simple ad 8 51,277 squm feet in air rilhts. On December 14,

1988, an interlocutor y judgment in condemnation for this property was entered for the

State. The State acquired title to that property as a result of th condemaon.

In December 1989, a Compensation for d Prncipal am0ta dw to the City, pursuant to

the judgment, the State wired the Citys genal fund approximately S31,400,000. In

November 1990, S11400,000, r ending iawt owed purat to the judgment was wued by the State to the same lena frd ccotL Upon eeipt of the proceeds by the

City, the heds wee mwsfered to the airport revenue m d. The City popose to Uasfer

these amounts phu wamed intest to the Citys general ftud, claiming tha the funds

were matakenly deposited in the arport reveu fAd rath than the gen al fumd.

The condemned prpery is p t of six separte paceb of land acquired by the City for

the airpon between 1937 and 1947. The City indices that the sources of fimd. for the

purchases were fit Citys pamanent improvement fAid and municipal bond ftids. The

bond proceeds we used to fud various airport cptal invetmenM addition to the

acquuition of the six parcels. It appeM that City general fhmds paid some of the

principal and interest on the bonds (issued in 1941 and 1945). md that the CitYs general

fund was rembused by the airport for at least pr ipal amounts of the 1941 and 1945
4

bond issues. The condemned propertY represents ApproxMately 4.6 percent of the

origil property. Federal Ards were nor used for the acquisit on or improvement of te

condemned property.

The City has advanced a number of legal theories in support of its position that the City is

entitled to the condemnaion proceeds. It argues that the condemned property is not

subject to the airpo revenue retention gant assurance, (which was effective September 30, 1982), since the property was not considered "airport" property. This argument was

based on documents and materials purpordn to demowrme that the property had been

designated and set aside by the City, on airport layout plans and otherwise, to be utilized

solely for the Century Freeway, and had been so acknowledged by the FAA.

Alternatively, the City claims that the FAA effectively has released the condemned

property by approving the 1983 airport layout plan (ALP), which had the effect of

dedicating that property for the Cenrwy Freeway.

The City has supplied information indicating dt the general aign of the freeway nr the airport was set by the State u early u 1969; that the City had agreed to allow the

State to condo= soil te diln in the area of the condemned property in 196& and

began to disclose the proposed right-of.way for the fremay on ALPs submitted to amd

approved by the FAA continuosly since a: least 1961. The documentation indicate that

the City and Stare originally plmoed to have construction of the freeway in the vicinity of

the airport completed by 1975.

A lawsuit challenging the project un the National Evironmentl Policy Act of 1969

and the C aliforia Environmenta Quality Act of 1970 (Keith v. Volpe 352 F. Supp. 1324

(C.D. Cal. 1972)] delayed conowsiction of the freeway. As a result of that lawsuit, the

Sue and DOT, tough the Federal Highway Admigiisueao (FIWA), prepared an environmental impact smet (EIS) for the freewsy project. Both the draft and final

EISs showed the alignmeat of the freeway in the am of the condemned property.

The documentation pvided by the City Rther indices ta the FAA pmtcipated in the

EIS process and concled in 1975 th the project would not present any environmenW

problems for presan or fnmg FAA facilities. The documentation submitted by the City indicams that the Secretary of Transportaon at that time toured the site of the proposed

freway in Augus 1978, in the context of his review of the fnal EIS. The FHWA

approved the finel IS for the freeway in OcuR 1978 and the Secretary of

Transportation approved ube freeway project in the same month.

The City also indicated that in 1976, the City Council, by resoluton. determined tat the

condemned property should be held for freeway use and dat the City anticipated

construction of the beeway in executing airport leases as early u 1979. Among other

things, the City required the design of the Imperi Cargo Complex to be modified to
avoid encroaching on the freeway nght.of.way. Further, the documentation indicates that

the right-of-way was idendtied u freeway use land in City planni 8 documents u early

as 1974 and in airport plannln documents before 1983

In fmher support of its legal view that the condemnation proceeds properly belong to the

general fund rather than the airport uids, the City contends that the condemnation

proceeds do not constitute "airport revenue" within th meaning of the sue or the FAA

Order 5100.38A, A import mprovement Prooram (ALP) Handbook (October 24, 1989)

(AlP Handbook). It relies on 630 of the ALP Hodbook which defie the tam

airport revenue" and specifically excludes "proceeds from the sale of real property

owned by the sponsor." The City regads the condemnation proceeds as a "return on a

capital invesuent" by the City, not as revenue generated by the airport. As fifther

support for this view, it claims the property was largely used for non.aeronaudcal

activities, no federal Ainds were used to pumha the property, and no airport revenue

was used to buy the property. The City concedes that it was at lea partially reimbused

for its cost of the property from airport revnue, and documentation supplied by the City

suggests that all but S2 million of the City's actual expenditures was mimbursed. To

require the condemnation proceeds to be used solely for Airport pwuposs, the City

aserts would result in a windfall to th. Airport usem Additionally, the City reMers to

FAA Ord r 1 90.6A, A rport Compliance equlirments (October 2, 1989) (Complimce

Mamal), 17-1S, which provides that "them is no required disposition of not revenues

from a sale or disposal" of land not acquired with Federal financial asistnce.

The City also conwnds that the condemnation proceeds should not be deemed subject to

the requirements of section 5 1(aX12) because, it assess the condemned property was

not used for aviation or aeronatcal purpom. The City alleges that, except for 600

square feet, the property was either vacant land or used fbr nonmvenue automobile

paknlg for tenants' customers and employees. The City alues tha under the terms of

Appendix 5 of the Complia e Mewal, to FAA Order 5190.6A, automobile putins is

not an "aronm al activity," and that, deefore, the reverus associated with such

property am not to be considered revenues ga rated by the airport.

The Citys final pound is that it is entitled to receive from the Airpot an amount at least

equal to the Condemaion proceeds, u reimbsemn of the City's investment in the

AirpoL It relies on a 1991 opinion from the Office of Lega Counsel, Deperwent of

Justice (Doj), inteprtiVg section Sl I(&X12) as permitng an airport owner or operator

to recover its unmimbursed capital and operating expenses from Wport revenues,

regardless of when the expems c wre incurred. It also requests that we intepret the DO]

opinion to allow the City to recover the cost of capit for contributions the City made

before they wer repaid by the Airport. Beas the City does not consider itself to be

fMty repaid, the City believes that it is acouing riMbusblo cost of capital.
6

The Air Transport Association, on behalf of member airlines tha serve the Airprt,

expressed its concern tha transfer of the condemntion proceeds would result un a further

increase in airport fees to fund the loss of revenue required for needed capital

improvements. The ATA believes that it is inconsistent with the statutory intent of the

revenue retention requirement to exempt proceeds from airport property ales from

airport use requirements.

The ATA disputes the City's contention that the transfer of the proceeds itQ the airport

revenue fund was a mistake. The ATA alees thai the transfer reflected a conscious

decision on the pan of City officials and board counsel, and it requests an opprtnity to

use compulsory process to establish a factual record to support this allegation.

The ATA also disputes the City's reliance on the ALP Hodook for claiming that the

condeuation proceeds do not consdute "airport revenue." The ATA would have us

regard these proceeds as resulting from the us of property, rather than the d&f4ulon of

property. It interprets 1630 of the ALP H/book as defining airport revmues" to

include those revenues produced from the use of property, such as rentals and lease

payments. Further, while recogning that 7.11 of theAirpor Comp anc manual does

not restrict sales proceeds from deletion of landot acVi with Federal fin=cial

assistawe, the ATA take issue with the haracteriation of this transition as a

"deleton." It ccnsides th proceeds a reeipt of revenue from an easement right" in the

land, which the ATA considers analoous to a use. It hth notes that the FAA

finacially assisted the Airport as a whole over the Yeos.

The ATA also disputes the City's coaon that the inclusion of the proposed Century

Freeway on an FAA-apprved ALP resulted in a constuctive release or deletion of the

condemned propery fom the sponsor oblipons. Te ATA nots that the ALPs showed

the freeway as a possible fAm use of property within the boundary of the airport, and it

alleges that the City continued to te the property s airport property, by losing it to

airport users, until the tirm of the condemnation.

Alternatively, the ATA a es da the requirement to be MInacially se.

implicitly oblipM the Airport to use all property and revenue gerated thereby for

airport pwposus. Asking the condemnation is consideed a "deletion" for purposes of

7-18 of the Airport Conopwmw manual, the ATA notes that the manual directs the FAA

to 'enc.ura" the owner to use net revenues for needed airport development in actions

involving deletions of land.

Finaly, regarding the City's mlance on the DOI opinion to support reimbursement of

past expes, the ATA claims that the City hs recovered it expense for this property.

The ATA argues that the DOI opinion was clear that recoupment applied only to the

unreimbursed airport costs actually ucwred by the City, and that most of the S9S Mlon
67

claimed by the City is for the City's cost of capital. The ATA alus that earlier

document prepared by the City and its coasultants establish tk the City considered

iuelf to be virtually f&Uy reimbursed in 1911 and that the City's cost of capiul claim

rcflecu a ew theory developed by the City's consultants for the exprss purpose of

justifying unlawt diversion of the codemn=tion proceeds.

Analysu

As a preliminary maner, we wish to take issue with the City's sugestion ta the original

deposit of the condemnation proceeds in the Airport's capital fund was a mistake. The

information available to us indicates that senior officials of the Airport knew of the

deposit and represented to carirs during negotiations over airport. rates and ckges that

the funds were already earmarked for use for airport purposes. While those aements

may not be legally binding on the City, such statements are inconsistent with the view

that the deposit of the ftmds was a mistake. In addition, specific authoriwion by the

Airport Commissioners or City Council may well not have been a prerequisite to the

transfer, since it appears that local ordinances or bond coveasau in effect through the

date of the coadmnaon payments required that the proceeds be applied for airport

purposes.

without crediting this "mistske" theory, our position o the City's request turns largely

on the inteprtation of the statutory am "m ues generated by a public sirpor" As

this term is not further defined in the AMA, the Sertary bas authority to define airport

revenue in a manner consistent with the purposes of section 31 1(&Xl2) ad the AAIA.

The restriction on use of airport revue contained in section 11 l(aXl2) wae included as

a require for airport sponsor for the fti time with the ensacuent of the AAIA in

1982. No corresponding provision appeal in the predecessor statutes to the AAA -

the Federal Aid Airport Act and the Airport and Away DcvelopmUN Act Therefore,

until a sponsor executed its fir grant agreem under the AMIA it was free to use

airport revenue for my lxU purpose, subject to the requiremn that the airport be as

self-sustaining as possible.

In responding to the City's request, it is fir necessary to consider whether the proceeds

from the sale of irposrt property consn airport revenue within the meaning of section

51 1(&Xl2) when the property was not donated by the United States or acquired with

Federal ftIcia UistnceM . If the proceeds fI the sale of such property generally are

airport revenue, it is necessary to consider whether, in the circuistances relating to the

Century Freeway, the condemned pret & the proceeds from the condmnaion

should be rated as subject to the limitations on the use of airport revenue, which were

fi assumed by the City in 1933.
68

Where a parcel of property is determined to be airport property, we ae MAking clear in

this letter, and will reaffirm in our anticipated policy statement on revenue use, that we

consider "revenues generated by the airport" to include the proceeds from the sale of that

property, including proceeds generated by a condemnation. In out view,

section 511 (aXl2) must be read in the overall context of the statute and underlying

Federal policy - I.e., that users of the airport system should pay for the costs of that

s'zem, and that airports should be self.suaining (see, section 5 1 l(aX9) of the AAIA,

49 U.S.C. § 47107(aXl3)), but thst users should not be forced to pay "hidden taxes" to

finance other awe and municipal programs. If sales proceeds a treed as airport

revenue, the goal of sef-sustud bly is furthered, more resources are available to fund

the capital and operating costs of the airport system; and airport users are not indirectly

providing financial support for other state and municipal programs. Finally, this

interpretation would alleviate the potential need for Federal discretionary grants to fund

capital improvements that may be funded from the proceeds from the sale.

The City commented that at least ons suftoent in FAA orders, 17-It of the Airport Compliance manual, indicates that past agency policy was that sale proceeds are not

airport revenue. While differing policy views have b expressed on this iss in the

pa the , FAA's practice in regionsl and district office hAs been to seek to retain the

proceeds of sale for airport use, in compliance with the addzional provision in the manual

to "encourage" use of sale proceeds for airport purpose ALrporr Compliance manual

7-13. It is stndd pracce for sponsors to request from the FAA .4 release from AlP

obligations when the sponsor stils airport property. The FAA routimly seeks, as a condition for release, to obtain the sponsor's agreement to devote the proceeds to the

airport. Here, had the City fomally requested a release for the condemned property, the

FAA's standard practice would have been to seek the Cihis express agreement to use the

proceeds for airport purposes.

The FAA's forthcoming policy on gemation and use of airport revenue will clarify the

agency's interpretion of the stattory provimon and legsative in as reflected in this

letter and in the FAAs actual practice. In light of this lack of cl guidance, the

discussions of this ism in the ALP Handbook and Comtplia ce Manul will also be

appropriately modified, and tha will be no groumds for fatha misupretation or zrusundertading.

We have as considered the City's contention ta the condemnation proceeds in this

particular instance should not be considered airport revenue because, the City awrts, the

property was not being used for aeronautical purposes prior to condemnation. and

bca the FAA.4pproved ALP reflected the planned fi way long before 1983. While

not critical to our position, we note that the City misunderstands the purpose of the

definition of aeronautical use in Orde 5190.6A. Tht definition is intended not to

establish the scope of activity that generates revenue subject to section 51 I(aX12), but

raher to esutbLish the scope of activity that is benefited by the sponsor's obLigabon to
69

9

make the airpot available for public use on fair and reasonable terms v thout unjust

discrnmiato. The FAA oidialrdy considers revenue generated by on-airpon parking

lots, ather thrOugh p ki" fees or lease payments, to be airport revenue. This is in

addition to revenue generated by such other on-airport facilities as terminal concessions,

f'ir example. It is especially appropriate to tUat the use of condemned land for

automobile parking to be an airport use in this case, because the tenants who used the

parking lots were air carriers, the FAA, and aviation businesses. The provision of

employee and customer parkng is sufficiently tied to the tenants' core aviation business

to bring the condemned property within the ambit of section 51 I(X12).

With respect to the issue of which map is used to determine sponsor obliptions, we

consideMd the City's contentiona rearding whetha the condemned property must be

heated as subject to the limitations of the revenue use amurance. Ordinaly, the FAA

lo-ks to the boundaries of the airport a depicted on the Exhibit A, to define the property

that is subject to the AlP assuwancs in accordance with ALP H4ook, 1009;

Complice Menia, 17.18. The Exhubit A sulbmied by the City with its first gra

application unde the AAIA, as wll as the ALP submitted with that application, each

showed the area encompassin the ,ight-of-way for the feeway (and hence the

condemned property) to be within the boundary of the airpom Indeed the Exhibit A and

ALP maps submitted after the condemnaton do not show my chae in airport

boudary, em though the Stau has held tide to th condemned property since 1981.

Accordingly, we do not consider the City's views regading the we of the condeamned

property or the eptesentatn of the freeway ona official maps as deteraminatve of whether

the property was not 'airport propaaty' a of 1983.

Summary

Nonthles, in consideration of all the circ 0stes sMrounding this particular

condemnation action, ad at view of the pIVIoUS agec policy stMes ta may

bear on the issue in this cae, we am not in a position to inate action compel the City

to use the proceeds of the cdemnation on the sirpo pursat to wtion 51 1(aXl2).

Then arsea reasons for this position. Fire, aftugh the FAA may not be bound by

the prison in the Orden relied on by the City - and in fac tends. in actual practice to

trest proceeds of sle U tevem - the provisins have at the vary least created ambiguity

about how the FAA imrprs the term ren"ue generated by the airport." We wre not

prepared to say that the City would have been Unreasonable in relying on those provisions

to transfer the condemnation proceeds. The FAA will clar' ts policy on this issue in

the forth~oaMng policy stm ent on revenue diverMoI.

Second, the documentation submitted by the City with its Jnuary 9,1995.

correspondence and summized above indicates that intesud paries - the State, the
City, the Airport Commission, the Depam nd Whe FAA - al recognized the

conde=ned property as the site of the Century Freeway, and that in many ways the City

treated the property u dedicated freeway proper wU in advance of 1933 when the City

executed its first AIP grant.

Third, he application of agency policy in the case ofa condemnation of airport property, as opposed to a volmuay sae, is novel. FAA typicaly responds to a request by an airport proprietor for deletion of property from the airport, and in that context is able to

condition the transfer on the proprietor's commitmet to retain the proceeds of se for

airport use. The agecy has not developed guidance on the approprisa hadlLng of an involuwry disposition of airport property, e.g, condemnaion by the srte goverazent. We are not prepared to say that the City ated correctly in assuming tha: formal FAA

approval was not required for the deletion of the property from the airport in this isMtance,

when the FAA had knowledge of the condemnaon for many years prior to the transfer.

In consideration of aU the eircumstaaces of this particuLr action, the FAA is not in a position to find that section 5 11(aX12) requied that the proceeds of the Century Freeway

condemnation remain avilable for airport me. A"crngly, the FAA does not at this

time inrs to init action regarding the transfer of the condemnon proceedsto the

City's genual fund, subjecM to the qualifications stayed eai in this atter.

I must cuton yo, however, to t ves exprse in this lower we advisory only.

Under the AALA, air cners and other airport usm may file administrative complaints seeking invesugation oftled violations, and a find deutminaton would be made only

after a fUl airing of the issue and evidence in an appropriate proceeding. Consis=t

with the agency view that w camer and airport sponsors should work together to

resolve issues at the local Ivel with=ut Federal intervention, if possible, we would urge

you to aaen ap to resolve directly any diagrements ove the us of the proceeds ad. the

potential effect on airport fees

Sincerely,

/'~socisraAdainisatawo for Airports

cc: James Landry

Air Transport Mesociazoc
Senator MCCAIN. Thank you very much. Mr. Frassett, did you

come all the way from Los Angeles to be 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 of Citizens for a Strong LAX,

a broadbased coalition of more 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 of the 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 of the business

climate in Los Angeles, and really all of Southern 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 that you 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 that have 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 on jet 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 of millions of dollars in new interest charges to

World War II bonds. The alleged multimillion 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 exist until 1947.

According to a recent independent economic analysis, this sup- posed debtias been repaid in full, and over 95 percent of this sup- posed debt consists of never before contemplated or charged interest.

The fact is, the city's own records confirm these debts have been

repaid, both according to the Department of Airports' 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 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 for goods shipped through LAX.

It could also mean more jobs 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 it harms all of us.

Increasing the cost of doing 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 of the 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 and jeopardizes all of Los 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 of a multimillion old debt that never existed.

No matter how you add it up, it is the citizens and businesses

of Los Angeles that pay and lose, and that is 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 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

revenue jeopardize all ofour futures.

In closing, on behalf of the 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 of Mr. Frassett follows:]
'74

CITIZENS for a STRONG 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

11444 West Olymptc Boulevard, Suite 1018, Los Angclis, CA 90064 (310) 445-8857; (310) 445-8870FAX

Funding proudly provided by members of the Air Transort Associaton of Amerca
the 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 which
means 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 through
higher 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 Nicole.

Senator MCCAIN. Nice to see you, Rebecca, and welcome.

How did you get involved, Mr. Frassett?

Mr. FRASSETT. Initially it was the proposed jet fuel tax. I have

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 of that business out of the Los Angeles/Long Beach

Harbor area, and I was extremely concerned that a new jet fuel 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 5 percent more?

Senator MCCAIN. And your 17,000 members are mostly composed of people that have to do business at the airport, in one way or another?

Mr. FRASSETT. That is correct. Most of this coalition has been

garnished and gathered by word of mouth. I think most of the 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 meeting and I know one of the city councilmen up there. Interestingly

enough,. the city council has never seen any of these 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 him to.

Senator MCCAIN. I see. So basically you have not gotten responses to your 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, or how that is supposed to come

out.

Senator McCAIN. I see. Thank you.
Mr. Merlis, what do you think the remedy is for this airport revenue diversion issue. If you 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. I think 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 of political will or for a lack of judg- ment on the part of a 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 of the Federal money, you might have a transit system which

is the recipient of the money, but it is the city where the airport is that is diverting. So such a provision does not work. However, if you 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 of the 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.

I am 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 Secretary 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 of problem that Mr. Wolf was 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

it out. Maybe you have found the answer.

Senator MCCAIN. Briefly, let us chronicle your problems with

LAX. One of them was an increase in landing fees, right?
Mr. MERLIS. For the purpose of creating 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 of the 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 golf course, things of that 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 to it.

Senator MCCAIN. Well, you have got to hand it to them.

Also, I guess the reality, seriously, is that in such a huge facility such as that they have got you over the barrel.

Mr. MERLIS. Clearly.

Senator McCAIN. The airlines just cannot afford to bypass Los

Angeles. I mean, you just 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 for your 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 of these 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 of this 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 of the 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 of law. 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 of taxation 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 of in-
terest on the diverted amount will reimburse the treasury for lost revenue, and the

fee will help offset the cost of investigating and controlling illegal diversions.

Also the IG's suggestion about placing time limits on recoupment and reimburse.

meant, as well as the issue of grandathering should 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 and its 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 of thiq 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

for any purpose other than the public interest.

Senator McCAIN. I appreciate both of you being here. This is an

important issue, not just 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 of what we just 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, that Mr. Frassett talked about, and the additional

terminal and all the safety improvements that we all know need

to be 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 pursued reports of revenue 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 i unlawful revenue diversion.

We are implementing the provisions of the 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 of airport revenue (Notice of proposed policy and procedures concerning

the use of airport revenue, 61 Fed. Reg. 7134, February 26, 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 of the revenue use grant assurance. Congress has been concerned that an airport proprietor should have an opportunity to take corrective action before DOT/FAA pursuit of enforcement 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

their best to follow the law in most instances.

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 of time, 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 with the law. These tools include the withholding of: • approval of new AIP grants

" payments under outstanding AlP grants; and

" approval of new PFC applications.

They also include seeking:

(83)
84

* civil penalties for violations of the revenue use assurance; and

* judicial enforcement of all grant assurances. Question 2. What is the Administration's view of the 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 of compliance 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, if necessary. We will

not hesitate to use these sanctions if the sponsor refuses to cooperate. We do not believe it is appropriate to enhance the civil penalty sanctions since

it is ultimately the taxpaying citizens of the 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 of airport-generated revenue?

Answer:

Airports and airlines get along quite well for the most part. It is important to

keep in mind though that in the final analysis airports are monopolies which, if left

unchecked, can and will exercise monopoly pricing power. Over the course of many

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.)h as also begun to evolve with modest

changes to contain the "creep" of monopoly powers.

This "evolutionary" series of changes 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 of this 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

airport revenues 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 if Los 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 of your reports and

audits. They maintain there is no widespread pattern of revenue diversion, but rath- er a few extreme and unusual cases of abuse. What is your reaction to the views

of the 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 of our 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 of the airport revenue provisions of grant

agreements at only 65 airports. At more than one-third of those 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. If OIG 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 of these 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 of Airport Executives

on

AIRPORT REVENUE DIVERSION

AMERICAN ASSOCIATION

OF AIRPORT EXECUTIVES

422 Kg StrW

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Fax 701IM1395

Before the Subcommittee on Aviation

Senate Committee on Commerce, Science and Transportation

May 8, 1996

Auprt COMM 1.01 AWm

A.POAI COUNCIL

"NT10AONALNORrH AMEICA

S771( St., NW.

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87

Mr. Chairman and Members of the Subcommittee:

The Airports Council International - North America (ACI-NA) and the American

Association of Airport 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 90 percent of the 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:

It has been a longstanding policy of the Airports Council International- North

America that airport operators have b.cen -- and continue to be -- staunchly

opposed to diversion of airport revenues. Consistent with Congress' intent, and

respecting the grandfathered rights previously provided, airport operators
88

reaffirm their commitment to the dedication of user charges and fees, and

other revenues derived from airport activities, to be used only for 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 of airport 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 of that 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 of the

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 to just 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 of the $22.8 million corresponding to the audit of the City of Los

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 of airport 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 of the $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 of diverted revenue, on an annual basis, is small in the context of the 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 of the airport, the local airport system, or 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". (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 of the

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

(August 23, 1994).

Section Il1 of 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
92

report listing all amounts paid by the airport to other units of government, 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 of compensation

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 of the 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

7
new grant applications or proposed modifications that would increase funding;

withholding of approval of any new application to impose a Passenger Facility Charge

(after notice and opportunity for a hearing); the possibility of an 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 of alleged 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 to promote 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 of airport 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 of view, 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 of our 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 staff report, an airport was

alleged to be "diverting revenues" simply because it expended funds to remove homeless

and transient people from the airport terminal and to transfer 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 think
these types of charitable actions and civic responsibilities should be condemned and held

up as "egregious" examples of revenue diversion.

Throughout the debate over revenue diversion, some parties have sought to embroil

Congress in the local issue of airport 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 of widespread 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 of reductions 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 of unlawful 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 of diminishing

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 of unfunded 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 of airport 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 of necessity 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 of airport 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

Richard J. Riordan. Mayor

Board of Airport Commissioners

ODail P. Garcia Preadent

Patricia Mary Schne% Vice Preertet

Martha Brown-Hicks

W tarm H Ds!

Warren W, Valdry

John J Drico1 Exscuve Drector

Senator John McCain

Chairman

Subcommittee on Aviation

Committee on Conmerce, Science and

Transportation

U.S. Senate

SR-241 Russell Senate Office Building

Washington, DC 205 10

Senator Wendell H. Ford

Ranking Minority Member

Subcommittee on Aviation

Committee on Commerce, Science and

Transportation

U.S. Senate

SR- 173A Russell Senate Office Building

Washington, DC 20510

Dear Senators McCain & Ford:

We appreciate the opportunity to submit the attached statement. We hope that it is responsive

to your concerns and helpful to you. Please do not hesitate to contact us if me can be of further

assistance.

DANIEL P. GARCIA, President

Board of Airport Commissioners - /iOHN J. DOSCOLL

Executive Director

DPG:JJD:aa

cc: All Members of the Subcommittee on 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 OF AIRPORT COMMISSIONERS AND

JOHN J. DRISCOLL, EXECUTIVE DIRECTOR

DEPARTMENT OF AIRPORTS

CITY OF LOS ANGELES

BEFORE THE SUBCOMMITTEE ON AVIATION OF THE

SENATE COMMITTEE ON COMMERCE, SCIENCE

AND TRANSPORTATION ON AIRPORT REVENUE DIVERSION

May 10, 1996

Mr. Chairman and Members of the Subcommittee,

On behalf of the City of Los Angeles Department of Airports, we would like to

thank you for the opportunity to present a written statement regarding the use of airport

revenues. Los Angeles has always recognized and abided by the federal restrictions on

revenue diversion, including the assurances provided for by the Airport and Airway

Improvement Act of 1982 ("AAIA"), as amended, and the Federal Surplus Property Act

of 1944. However, much of what the airlines and their allies label "diversion" is in fact

lawful and appropriate recovery of the full costs of services and facilities provided at

LAX. Certain statements presented at this Subcommittee's hearing on May 1, 1996

contained inaccurate and inflammatory allegations concerning Los Angeles. We regret

that we were unable to appear and refute those allegations in person. However, we

appreciate the opportunity to address them here. In particular, we wish to emphasize the

following:

The City of Los Angeles does not engage in unlawful diversion of airport

revenues, nor does it intend to do so;

The Department of Transportation ("DOT") has upheld the vast majority

of charges for police protection at LAX, because the DOT has recognized

that the cost of maintaining the safety of airport passengers and cargo is

essential to maintaining a secure air transportation system;

The Department of Justice has determined that federal law permits an

airport sponsor to recoup the investments it has made in its airport system;

The City charges the airports only reasonable fees for legislative services

actually provided to represent airports;
108

The City is entitled to recover the Century Freeway condemnation

proceeds which related to land it purchased no later than 1947 and which

was condemned by the State of California for use as an interstate highway

at a time when the applicable FAA order stated that the proceeds of airport

land sales were not deemed airport revenues;

Congress has not regulated state charges on aviation fuel or local charges

on aviation fuel that are not imposed by airport sponsors. With respect to

airport sponsors, Congress has only prohibited the use of taxes on aviation

fuel imposed after 1987 for non-airport purposes; and

The allegations of the Air Transport Association ("ATA") concerning

revenue diversion in Los Angeles are in part rehashed claims that were

rejected last year by two administrative lawjudges and the Secretary of

Transportation.

On October 30, 1995 the DOT's Inspector General ("IG") issued a report entitled.

"FAA Monitoring of Accountability and Use of Airport Revenues by the City of Los

Angeles, Department of Airports." The report covered the fiscal years 1992-94, and

therefore all of the policies that were covered in the report (and most of the specific

activities in question) took place prior to the present City administration, which took

office in July 1993.

It bears emphasis that the FAA has concurred with only five of the IG's

recommendations, partially concurred with one, and did not concur with five of the

recommendations. After the report was issued, the City was given an opportunity to

provide a detailed response to the IG's report. (Only a limited opportunity for City input

had been provided earlier when a draft report had been prepared.) A copy of the City's

December 15, 1995 response is enclosed. The FAA is currently considering the City's

response and has not yet reached any final conclusions based upon the City's response.

We will address below the specific allegations which have been most emphasized

by the IG and the City's airline critics.

I. Allegations of Revenue Diversion at Los Angeles

The public record demonstrates a continuing effort by the City to comply with

federal aviation law. Los Angeles has not diverted, nor does it intend to divert, any

airport revenue in an unlawful manner. The Subcommittee has heard testimony

concerning the City's efforts to recover costs incurred in providing services such as

police protection, advertising and legislative representation. These are all necessary,

appropriate and well-documented airport-related services, for which reimbursement is fair

and lawful. As in any large organization, minor accounting and/or operating oversights
104

can occur. However, such discrepancies in no way support the allegations of revenue

diversion which have been presented to this Subcommittee.

Federal law imposes two basic restrictions on an airport's fees and revenues:

(1) under 49 U.S.C. §§ 40116(b) and 47129, and the regulations issued thereunder, airport

fees must be "reasonable" - i.e., the fees must not exceed the value of benefits provided;

and (2) airports which receive federal Airport Improvement Project ("ALP") grants must

assure the Secretary of Transportation that they will use "airport revenues" 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' attempt to oversimplify the restrictions on the

use of airport revenue is the source of at least some of the disagreements between

Los Angeles and the ATA.

The policy requiring recipients of AIP grants to use airport revenues only for

aviation-related purposes was first imposed upon the enactment of AAIA in 1982. As

was recently acknowledged, the purpose of Congress in adding this restriction in the

AAIA was to prevent airports from using "federal funds to replace airport generated

funds, and then us[ing] the latter for general governmental purposes." H.R. Rep.

No. 240, 103d Cong., 2d Sess. 14 (1993), reprinted in 1994 U.S.C.C.A.N. 1676, 1683.

Because of the airlines' desire to minimize amounts they pay to airports, the ATA has

sought to expand the scope of the restrictions in federal law beyond Congress' intent. For

example, the-airlines argued for years that this restriction (and others) prohibited an

airport from establishing a compensatory methodology. In 1994. their position was

rejected unanimously by the U.S. Supreme Court. Undaunted, the ATA has made

"revenue diversion" its code word for any airport costs that the airlines would like to

avoid paying.

A. Police protection

The IG challenged certain of the City's charges for the reasonable cost of

providing police protection at LAX. It should be obvious that police protection is vitally

important for the safe operation of any airport. This is particularly true at LAX, which

handles an enormous volume of domestic and international passengers and freight and is

the world's fourth largest airport in terms of passengers and cargo handled. The public

expects a high level of security in airports, since air travelers and their property are

particularly vulnerable to criminals and terrorists. Because the LAPD has primary

responsibility for all serious crimes at LAX, LAPD has located a separate police

substation at LAX solely for the purpose of protecting passengers and other users of

LAX.

All of the substation's activities, except for rare emergency responses off the

airport, are airport-related and occur on airport property. These activities include, among

other things, the investigation and deterrence of violent and non-violent crimes against

passengers, gang activity, hostage-kidnap situations, politically motivated criminal
105

activity, narcotics and vice enforcement, bomb/explosive searches and disposal, death

investigations on inbound flights, and the detention of fugitives in transit to LAX.

The LAPD has also found it necessary to station a narcotics squad at LAX, which

serves as a principal port of entry into the United States for narcotics, laundered money

and other contraband. The narcotics unit consists of 13 LAPD personnel who are

assigned to LAX on a full-time basis. This unit assists in narcotics arrests and seizures.

working in conjunction with the FBI, the Federal Drug Enforcement Administration, the

Los Angeles County Sheriff and other international and local law enforcement agencies

throughout the world. Nearly every day, this unit conducts a significant number of

narcotics seizures at LAX. The City's decision to provide this service at LAX is an

important one, because LAX is, unfortunately, used for international drug shipments.

The IG has criticized the City for charging the airport for 100% of the costs of the

LAPD substation located at LAX, "even though 81 percent of the patrol calls were

located off airport property and were not airport related." Respectfully, the IG's

information is factually wrong. After the IG revealed the basis of its 81% calculation, we

informed the IG in writing of the precise reasons why the calculation was in error. LAPD

records indicate that personnel from the LAX LAPD Substation (the only 24 hour

substation in the City) have historically spent less than 20 percent of their time

responding to incidents off Airport property. The City has already taken steps to reduce

prior charges attributable to off-Airport responses. Furthermore, since June 1, 1995,

Substation personnel have been ordered to remain on Airport property, except in critical

emergency situations.

As a matter of common sense, it is entirely appropriate for the City to provide a

high level of airport-related police services and to ask airport users who benefit from

these services to cover the costs. The airlines are charged for only approximately one

third of the police costs. These police services are intended to minimize the risks of

criminal activity against passengers and ensure that LAX can serve as the gateway to the

City of Los Angeles and the Nation. Spending airport revenue on such services does not

amount to a "revenue diversion" that is barred by grant assurances.

Moreover, the DOT has already reviewed this issue and approved as reasonable

most of the charges for police services provided at LAX. The ATA, in the Second LAX

Rates Proceeding, vigorously challenged these charges. After a thorough administrative

adjudication, the Secretary of Transportation upheld the vast majority of the City's

charges for police services. For the Subcommittee's assistance, we enclose the portion of

the Secretary of Transportation's decision in LAX II dealing with city services charges.

We would hope and expect the Subcommittee would not adopt policies that would

encourage airport owners to decrease their current levels of police protection at major

airports. We believe that would not only disserve the national interest, but would also

adversely impact the air passengers and shippers that ATA purports to represent.
1 06

B. Reimbursement for past contributions to airport costs

The IG has strongly implied that it would be illegal, and certainly

"unprecedented." for Los Angeles to recoup its outstanding contributions to the capital

and operating costs of the airport. Regrettably, the IG's testimony did not mention two

critical points: (1) Los Angeles is not the first city to seek reimbursement for its

investment in an airport, and (2) the Department of Justice has determined that

reimbursement of such an investment is permissible under federal aviation law.

The idea of seeking reimbursement from an airport which is financially indebted

to its municipal sponsor is not new. Over six years ago, Albany County, New York

sought reimbursement for airport debts extending back thirty years. The Federal Aviation

Administration ("FAA") initially took the position that the federal statute prohibiting

revenue diversion did not permit repayment of such debts. Following this initial

assessment, the Department of Transportation sought further legal advice relating to the

lawfulness of such repayments from the Office of Legal Counsel of the U.S. Department

of Justice ("DOJ"). In a February 1991 memorandum, the DOJ concluded that federal

aviation law did not prohibit airports from repaying long-standing debts to airport

sponsors. The FAA subsequently adopted the DOJ's position that reimbursement of a

sponsor's contributions is permissible under federal law. As indicated in the recently

proposed revenue diversion policy, the FAA continues to view such reimbursement as

lawful. 61 Fed. Reg. 7139. Los Angeles is, therefore, seeking reimbursement of airport

debts based upon the opinions of two federal agencies that such reimbursement is lawful

and consistent with the airport grant assurances.

With respect to the particular debts owed by LAX to the City of Los Angeles. the

IG has incorrectly asserted that the City has not accounted for offsetting payments made

by the airport to the City. The initial report of the City's consultant on this matter

analyzed the net obligations of the airport. The consultant concluded that the City had

made over $20 million in contributions to airport costs but that the City had received far

less in payments from the airport. Overall, the consultant found that over $5 million in

advances to the airport from the City had not been repaid. Thus, contrary to the IG's

speculation, it is simply not the case that the debts owed by the City to the airport exceed

the debts owed by the airport to the City.

Quite apart from this factual error, the IG has ignored the legal and policy reasons

that support repayment of an airport's debts to its sponsor. The comprehensive federal

policy requiring AlP grant recipients to use airport revenues only for airport purposes

originated with the AAIA in 1982. The revenue diversion policy was thus superimposed

on preexisting financial relationships between airports and their municipal owners. The

policy was adopted to prevent airport sponsors from substituting federal grants for airport

revenues; it was not intended to extinguish all debts owed by airports to their sponsors.

The IG's claim that reimbursement of airport debts constitutes revenue diversion is.

however, premised on the erroneous assumption that the AAIA retroactively terminated

all financial obligations between airports and their owners. The AAIA never imposed an
107

expost moratorium on any debts oed by airports, nor is there any reason for Congress to

impose such a moratorium now.

The goal of ensuring that AlP grants are used efficiently requires a forwardlooking policy that prohibits airports which receive AIP funds from substituting those

funds for airport revenues. A successful revenue diversion policy does not, however,

require interference with the capital structure of an airport, and in particular does not

require an airport's debts to its sponsor or to other providers of funds to be extinguished.

Moreover, LAX has sought no AlP grant funds since 1994. Thus, new AlP grants will

not be used, in effect, to pay back the airport's outstanding debts to the City.

Finally, the IG and ATA have implied that Los Angeles should not be permitted

to recoup interest on its contributions to the airport. For the record, we reiterate that the

Los Angeles Department of Airports is not currently proposing to pay the interest on its

past capital contributions to LAX, pending the FAA's promulgation of a final 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 that there is no legal

justification for a policy which denies airport sponsors the time value of municipal funds

invested in local airports. Indeed, denying interest on a sponsor's capital contributions to

an airport would be at odds with the current structure of federal rates and charges policy.

Under the Airport Rates and Charges Policy, airports may make interest payments

to fund capital or operating expenses. Policy Regarding Airport Rates and Charges,

§ 2.3.4 (1995). Likewise, under 49 U.S.C. § 47129, if an airline successfully establishes

that an 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 of law that adequate compensation for the use of funds requires that interest be

paid. For example, where the FAA determines that airport revenues have been diverted.

the proposed policy requires that the airport be reimbursed for the "diverted amount and

associated interest." See Proposed Policy and Procedures Concerning Use of Airport

Revenue, § IX(B)(1), 61 Fed. Reg. 7143 (1996). Airport sponsors should not be singled

out as the only group under federal aviation law that is not entitled to the time value of its

money. Such a policy would amount to a mandator)' municipal subsidy to airports.

C. Lobbyist fees

The IG has also described the City's expenditure of funds for legislative services

as a "diversion" of airport revenue. The City charges the airport for the cost of

representing the airport's interests in Washington, D.C. This expenditure is fully

consistent with federal aviation law. The IG and the ATA apparently believe that only

the interests of airlines should be represented in Washington, not those of airports. There

is simply no basis for the position that Congress should receive a one-sided perspective

on airport issues and that the views of airport owners should not be heard. If the airlines

may charge their customers (as they most certainly do) for the cost of representing their

position before Congress, airports should be allowed the same rights.
108

D. Aviation fuel charges

Both the ATA and its alter ego organization, Citizens for a Strong LAX, have

singled out Los Angeles for criticism concerning its charge on aviation fuel. This

testimony is misleading, in large part because it fails (o inform the Subcommittee of the

basic facts about the lawfulness generally of charges on aviation fuel and about the

specific nature of the Los Angeles aviation fuel flowage charge. First, state and local

aviation fuel charges are widespread in this country. In many cases, the revenues from

these charges are used outside the airports where they are collected. Second. Congress

has not imposed broad categorical restrictions oh the use of charges on aviation fuel.

State charges on aviation fuel are largely exempt from federal restrictions unless the state

in question is also an airport sponsor. Likewise, local charges on aviation fuel are not

restricted unless the municipality is also an airport sponsor. 49 U.S.C. § 47107(b)(l).

Indeed, only airport sponsors which adopt aviation fuel taxes for the first time after 1987

are required to use them solely for airport purposes. Id. Thus, federal law does not

impose any broad per se prohibition on the use of revenues from aviation fuel charges

outside an airport from which the revenue is derived. In the case of Los Angeles, its

aviation fuel flowage charge at LAX was adopted long before 1987. While the City

refrained from collecting these charges for many years, pursuant to contractual

agreements with the airlines, most of these agreements have now expired.

E. The Century Freeway condemnation proceeds

The City has also been criticized for transferring the Century Freeway

condemnation proceeds from the Airport Revenue Fund to the City's General Fund. This

fund, amounting to roughly $58 million, consists of the proceeds of the condemnation of

a thin strip of land at the southern edge of the LAX property by the State of California for

the construction of the Century Freeway. plus certain interest.

The planning of the Century Freeway actually dates back to 1958. Every LAX

Airport Layout Plan approved by the FAA since 1968 notes the location of the Century

Freeway and indicates that the condemned property would be taken for that purpose.

Likewise, almost all of the leases which LAX executed between 1982 and the 1987

condemnation had special provisions relating to the planned condemnation. It is only

because of lengthy bureaucratic and litigation-related delays that the State did not actually

take possession of the property until 1985, pending issuance of a condemnation

judgment. Accordingly, at the time the City's grant assurances concerning the use of

airport revenues took effect in 1983, it had long been recognized that this property was

subject to impending use for the Century Freeway and would, at most, be temporarily

under the control of the Department of Airports.

Moreover, the Airport Improvement Program Handbook explains that airportot

revenue is revenue generated by facilities and activities on or off airport. ... Airport

revenue does not include proceeds from the sale of real property owned by the sponsor."
109

(Emphasis added.) Section 4, 630 of FAA Order 5100.38A. This basic point is also

confirmed by FAA Order 5190.6A 7-18, which states, with respect to land not acquired

with Federal assistance, that "there is no required disposition of net revenues from sale or

disposal." The~reason for the FAA's policy on this issue is apparent. If a sponsor

dedicates land to its airport for airport purposes, and the land cannot be used for airport

purposes any longer, there is no valid reason why the proceeds of the sale of the land

should be paid to the airport. In the case of a forced sale by condemnation, the airport

would receive a windfall at City expense if the sponsor did not receive the value of its

land, which it had provided to the airport only so long as it could be used for airport

purposes.

Despite its entitlement to these condemnation proceeds, the City acted with

utmost caution before shifting the funds into its General Fund. The City sought FAA

approval prior to transferring the funds. The City and the ATA submitted comprehensive

briefing to the FAA on the proposed transfer of funds. After more than a year had passed,

the FAA finally informed the City that it would not object to the proposed transfer. Thus.

there is simply no basis for the suggestion that the City has acted with anything less than

complete respect for federal law with respect to the Century Freeway condemnation

proceeds.

F. The Rose Bowl float

Finally, it has been alleged that the Department of Airports violated federal

revenue diversion rules by contributing to the cost of a float displayed in the Tournament

of Roses Parade. The Department contributed only about thirty thousand dollars to the

cost of the float in each of three years. As most of the audience at the Rose Bowl Game

and the Rose Bowl Parade had traveled to attend the events, the Department believed that

this relatively small expenditure would be reasonable for public relations purposes.

However, the Department has not continued to support the Rose Bowl float since the

FAA indicated that it was not consistent with grant assurances. The Department is

currently working with the City on a repayment plan for the approximately $90,000

associated with this matter.

!i. Landing Fees at LAX

We are aware that the airlines, acting in concert through the ATA, have testified

that the landing fees at LAX are unreasonable. The airlines and their allies have repeated

this allegation for the last three years in any forum which would hear them. Despite this,

two administrative law judges and the Secretary of Transportation have found the vast

majority of the City's landing fees for the period in question to be reasonable. The

airlines' old allegation, repeated yet again to this Subcommittee, is no more valid today

than it was when those impartial adjudicators rejected it.

8

25-859 0 - 96 - 5
110

A. The residual system

For decades prior to 1993, long-term operating agreements compelled the use of a

residual methodology at LAX. A residual methodology subtracts total airport expenses

from total airport revenues (excluding landing fees), and then sets landing fees to cover

the amount by which total airport expenses exceed total airport revenues. While the

compensatory methodology requires the airlines to pay the true and actual costs of the

facilities and services which they use, the residual methodology provides the airlines with

cross-crediting from non-aeronautical revenue sources such as concessions and parking.

B. Adoption of a compensatory methodology at LAX

After considerable review and a lengthy study by outside experts, Los Angeles

decided that air carriers at LAX would finally be required to pay the true costs of

aeronautical operations. Accordingly, effective July 1, 1993, Los Angeles adopted

landing fees based on a pure compensatory methodology (the "1993 Fees"), which

included a charge for the airlines' use of airfield and apron land based on its appraised

fair market value. The compensatory rate-making methodology enables airports to

recover the true costs of facilities and services which they provide to airlines for their

aeronautical operations. Under this methodology, airline landing fees increased from 51 ¢

to $1.56 per thousand pounds of landed weight. (This 51¢ figure was artificially low

because it reflects a special $16.5 million credit from FY 1991-92. If not for this credit,

the rate would have been 840.) Despite this increase, landing fees at many other airports

were still significantly higher than at LAX. See the attachments comparing landing fees

at other airports during fiscal year 1995/96.

Several airlines immediately challenged this new rate and compensatory

methodology by Los Angeles. Thes. .rlines (and the ATA) initially filed a complaint in

federal court challenging the 1993 Fees. The airlines' effort to perpetuate compulsory

cross-crediting of concessionary revenues was frustrated when, six months after they filed

suit, the U.S. Supreme Court decided Northwest Airlines, Inc. v. County of Kent, 114

S. Ct. 855 (1994), which held that an airport's landing fees were reasonable even though

the fees were not cross-credited from concession revenues.

C. LAX's landing fees were largely upheld as reasonable

in two DOT Proceedings

After their challenge to the 1993 Fees was dismissed by the U.S. District Court,

the ATA and the airlines changed strategy and filed an expedited administrative

proceeding ("LAX I") under Section 113 of the FAA Authorization Act of 1994. DOT's

Final Decision in LAX I approved all major portions of the 1993 Fees at LAX, except for

the charges for the use of airfield and apron land based on appraised fair market value.

This decision, which largely affirmed the Recommended Decision of Chief

Administrative Law Judge Mathias, vindicated the 1993 Fees in the following respects:

(1) it upheld the City's inclusion in the rate base of amortization charges for capital
111

expenses; (2) it upheld the City's allocation of 31% of access and road costs to the

airfield and apron cost centers; and (3) it found that the airlines had failed to demonstrate

that LAX had accumulated excess aeronautical revenues. Los Angeles has sought

judicial review of DOT's decision that landing fees may not include any return on the

value of the airfield and apron land, and the airlines have filed a cross-petition for review

on issues in which their position was rejected. The cases are currently being briefed

before the United States Court of Appeals for the District of Columbia Circuit and will be

argued in September 1996.

Shortly before DOT issued its Final Decision in LAX I, Los Angeles set its fees

for 1995-1996 (the "1995 Fees"). For this period, Los Angeles set its landing fees at

$2.06 per thousand pounds of landed weight, using the same methodology employed in

calculating the 1993 Fees. Last August, the airlines filed a second complaint with the

DOT requesting expedited review of the 1995 Fees. In the Second LAX Rates

Proceeding ("LAX I1"), Los Angeles once again successfully defended the vast majority

of its landing fees against airline allegations that the fees were unreasonable. While the

ATA quotes Administrative Law Judge Kolko's Recommended Decision in LAX II at

length, it fails to inform the Subcommittee that even Judge Kolko approved most of the

1995 Fees. Moreover, DOT's Final Decision rejected much of Judge Kolko's criticism of

LAX and approved an even great,-r portion of the 1995 Fees, including all but 90 of the

increased landing fees. The City has repaid, with interest, this portion of the fees found

to be unreasonable. Significantly, the Secretary expressly approved the charges for most

of the police services provided at LAX.

Nothing in this history suggests an effort on the part of Los Angeles "to flaunt the

law." Rather, the ATA's continuing attacks on LAX merely reflect the airlines'

disappointment that Los Angeles no longer doles out the huge subsidies from which the

airlines benefited for many years. Like the airlines' unsupported claims that landing fees

at LAX were unreasonable, their allegations of revenue diversion mainly reflect a desire

to minimize their own costs, not a concern about the efficient use of AIP grants.

Il. Airport Ownership

Finally, we believe it is essential to set the record straight as to the basic legal

principles that govern airport rates and charges and restrictions on the use of airport

revenue. The written testimony of the ATA begins with a fundamental and telling

misstatement about airport ownership. The ATA claims that "virtually all commercial

airports have been bought and paid for by the airlines, their customers, and other users."

In fact, the airlines do not own commercial airports: most commercial airports are owned

by local governments or local airport authorities. In particular, the City of Los Angeles

owns LAX, not the airlines. The airlines have no more "bought and paid for" LAX

through payment of landing fees than our local baseball fans have "bought and paid for"

Dodger Stadium by purchasing billions of dollars in tickets. In each case, the customers

have paid for the privilege of using a facility without acquiring ownership rights.
112

As a matter of simple fairness. local governments and taxpayers should be able to

enjoy the benefits of their capital investments. Specifically, the taxpayers should exercise

control over local airports and should enjoy the benefits of the operation of those airports,

just as would any investor. The airlines' erroneous claim of ownership of commercial

airports reflects their strong desire to exercise as much control as possible over airport

facilities. The City of Los Angeles has been singled out by the airline industry first and

foremost because it has asserted on behalf of its citizens its right to manage and direct the

destiny of LAX and has refused to perpetuate a system in which the true costs of airline

operations are paid by others. The City recognizes that the airline business is highly

competitive; airlines dislike increases in the cost of airport services just as they dislike

increases in the cost of labor or the cost of commercial aircraft. Nevertheless, the airlines

must recognize that the citizens of Los Angeles would not permit a continuation of the

cross-crediting which the airlines enjoyed for decades at LAX.

IV. Conclusion

The Los Angeles Department of Airports does not engage in unlawful diversion of

airport revenues and does not intend to do so. Further, we do not believe that any major

changes in current law are necessary at this time. However, Los Angeles remains willing

to cooperate with the Subcommittee in any way it can. In particular, Los Angeles is

prepared to respond further to any questions or requests which the Subcommittee might

have concerning the issue of revenue diversion generally or as it may apply to

Los Angeles.
113

Attachments to

Statement of Daniel P. Garcia, President

Board of Airport Commissioners and

John J. Driscoll, Executive Director

Department of Airports

City of Los Angeles

DOCUMENT TAB

I- Landing Fees and Airline Charges Per Passenger A

2 Comments of the City of Los Angeles Department of Airports B

to the Final Audit Report of the Office of the Inspector

General, December 15, 1995

3. Excerpts from the Final Decision in the Second LAX Rates C

Case, Issued by the Department of Transportation, December

22, 1995

4. Memorandum from J Michael Lqttig, Assistant Attorney D

General, Office of Legal Counsel,2 Department of Justice to

C. Dean McGrath, Jr., Acting General Counsel, Department of

Transportation, February 12, 1991
LANDING FEES AND AIRUNE CHARGES PER PASSENGER

(nnked bond ain.&argea)

Total

Lmdin drAlde Cbhge.

Rank Akwit Fee Rala Pe asEe

1 KMndy $2950 520,41

2 Denver Inlkaaonra 53.310 516.55

3 Newk & 62.500 31531

4 IoGuaria S4.200 $12.09

5 OrangaeCJb Wayne 31.400 S0.80

6 WuaNngtm DuVe $1.630 59.82

7 NNWli $1.150 $9.18

a LMunpms $0.720 $9.06

9 sasJose $1.260 $&22

10 Chkcago 52 020 $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 Las Vegas 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 Houston Hoy $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 fee is based on takooffwaigM
b 6

LANDING FEES AND AIRUNE 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 Houston Hobby $2.140 3&21

9 Boston $2.040 S5.93

10 Chicago 52020 $1.34 1 o a Amoeba S1.970 or 12 Oagasfi~t Wosti 51.650 W4.1

13 WashMnon Oade 51630 59.82

14 Washingtn Ndnst Si-600 NA

15 OregeC onWayne 31.400 58.86

1e BafmmWehimqba 31.330 55.03

1~1 Houston Intercongketa $1.310 56.01

Ie San Jose 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

*Laudig fee is based ontakeoff woogl
116

City of Los Angel0q.0prtMeffl of Airport "Richard J. Riordan, Mayor

December 15, 1995 S.ai orAhVM C rmanha)..

Theodore Stsn, Jr.

PGaIl Mary SedW4g VW*s Presid

Mr. John P. Milligan Ma"Is LPoWn

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€f its 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, LOS Ag,,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.
118

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 a permissible 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.
119

Mr. John P. Milligan

December 15, 1995

Page 4

This subsurface sanitary sewer operates based on gravity. As such, the Department of Airports is able 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 it has 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
120

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
121

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
122

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 a heart

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.
123

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 -
124

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
125

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 2 acres of unpaved land located across from Lot A at ONT. That Piel contains

a middle marker beacon navigational aid. No improvements or obje ts whioh would act as an interfawcsou r.e

are allowed within l00 feet of the makar and above a 20.dogree angle. For security purpose . the FAA erected

a tenc around the entire penmeter of tho 2 acre parcel. Thus, the property cannot be leased Until and unless the

fcnc is removed by the F A, the Deparutment is unable to make any use of this property.
126

Mr. John P. Milligan

December il, 1995

Page 11

Motorcycle Training Unit is under 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
127

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 a mile 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 in the 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 and Attempts 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 &ppropriate measure 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 al so 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
132

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
133

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 a million 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-
135

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 is willing 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 Awards

BauqI-lT4. National Association of Women Business Owners

Awards Banquet

5. Black Business Association Fundraiser'

6. NAACP Legal Defense Fund Lawyer of the Year

Fundraiser
136

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 California Business 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
137

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 is prepared 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 this recommendAtion- A

The FAA has determuxd that irsts collected from legal infractions arc admitustercd by th-e municipal courts. The

violator pays the fine to the court or the City in accordance with municipal court procedure. Therefore, such fiies arc not considered airport revenues.
139

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.
140

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
141

Order 95-12-33

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

WASHINGTON, D.C.

Issued by the Department of Transportation

on the 22nd day of December, 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 "
142

Such a result would be different from the ALI's proposal, which would allocate

the cost of the unit solely on the basis of use, in part on the basis of his reasoning

that the rational method of determining purpose is to look at use. We do not

agree. First, as shown, the City presented undisputed evidence that the unit's

purpose was the protection of the airfield-and that the City would not maintain

the unit but for the need to provide additional protection for the airfield. In

addition, the Policy Statement specifically states that purpose as well as use

should be considered in allocating the cost of shared capital facilities. The ALI's

result would essentially eliminate purpose as a basis for allocating costs, since his

approach assumes a facility's purpose is the same as its use. We are unwilling to

equate purpose and use, as the ALI did, since doing so gives too little weight to

the City's representation that its purpose for maintaining Engine Company 51 is

to provide additional protection on the airfield. On the other hand, the ALI

correctly stressed that use must be a major consideration in the allocation of the

unit's costs.

We cannot agree with the Complainants' argument that the unit's purpose must

be ignored since the purpose is not quantifiable and only quantifiable factors

may properly be used in allocating costs. Airlines' Brief to DOT at 11. Despite

the difficulty of quantifying purpose, the Policy Statement expressly allows

airports to take a facility's purpose into consideration when calculating a fee. We

have no basis for eliminating purpose as a cost allocation factor when the Policy

Statement expressly allows its use. We also note that our decision does not

prevent the City from allocating the cost of Engine Company 51 to other

appropriate airport cost centers.

b. Police Department Expenses

Police protection services at LAX are provided both by the airport'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 provide complete protection to airport

users. The services of the Los 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.

The rate base for the current landing fees includes a charge for the budgeted cost

of services provided by the Los Angeles Police Department. The police

department expects to bill the airport S9.7 million for police protection in the

1995-1996 fiscal year. In calculating the landing fee, the City assigned all of that

cost to the General Administratve Cost Center, an indirect cost center. Under

the formula used for allocating that cost center's expenses to the direct cost

centers, thirty-one percent of the estimated police cost will be allocated in the

landing fee rate base.

While the Complainants do not object to the charge for the cost of the airport's

own police force, Airlines' Brief to ALJ at 28, they object to virtually all of the
143

charge for the Los Angeles Police department'ss services. The Complainants

further argue that, assuming any charge for police services may be included in

the landing fee rate base, the City has unreasonably allocated the police expense

to the indirect cost center rather than allocating the cost of particular police

services to specific direct cost centers (for example, the Complainants claim that

the police costs caused by car theft ihould be allocated to the commercial cost

center, which includes the parking lots). The Complainants have also attacked

specific items included in the airport's bill for police services, such as the charge for the police department's work for areas neighboring the airport but outside its

boundaries.

The ALJ invalidated almost all of the police department charge on the ground

that the City could not charge the airlines for police protection services when

other businesses and persons in the City were not similarly charged for police

service. He allowed the inclusion in tfie landing fee rate base of only one element

of the police charge, the cost of the K-9 unit of the Bomb Squad, because that unit

is required by FAA regulations. R.D. Et 16-18. The ALI also invalidated the

allocation of all police costs to the indirect cost center. He assumed that the

allocation of the costs to the appropriate direct cost centers would eliminate

virtually all of the allocation to the landing fee rate base. R.D. at 9, n. 8.

The Complainants support the ALI's decision - they claim he correctly

concluded that the City may not charge the airlines "for general enforcement of

the criminal law." Airlines" Brief to DOT at 13. The City, on the other hand,

argues that the ALI's decision is wrong on every issue except for the acceptance

of the charge for the K-9 unit. ACI agrees with the City.

We have determined that the ALJ's disallowance of the police department

charges on the principle that airlines should only pay for police services when

other businesses and persons were charged for police service was procedurally

improper. The Complainants failed to include that issue in their complaint, so the ALU should not have considered it. We also disagree with his finding that the

allocation of police costs to the indirect cost center was unreasonable. On the

other hand, we cannot agree with the City that all of the police costs charged the

airport were reasonable. In particular, it was unreasonable for the City to charge

the airport with the cost of protecting areas outside airport boundaries.

Before explaining our reasoning on these issues, we will summarize our findings

on the City's proposed police cost allocations in the 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 for police services to the landing fee rate

base when it established the compensatory fees in 1993. The police department

only began billing the airport for its services after the City adopted the landing
144

fee at issue. The City planned to include those charges in the final landing iee

calculation when it reconciled the budgeted airport expenses with the actual

expenses. We and the Chief Judge therefore discussed the City's tentanve

allocation, but we made no final decision on the matter.

One of the issues addressed at the hearing was the City's ability to charge the

entire cost of a police substation to the airport, when the substation at that time

also served neighborhoods outside the airport. The Chief Judge concluded that

the City could not charge the entire cost of the substation to the airport when the

substation provided police protection to other areas. First LAX Case, R.D. at 32-

33. He suggested as well that some of the expenses that the City proposed to

charge to the airport and the landing fee rate base, such as the cost of the

Organized Crime Intelligence Division, could not properly be charged to the

airfield and perhaps should not be charged to the airport at all. On the other

hand, he found reasonable the City's plan to charge the airfield for the cost of the

narcotics squad officers at the airport. I. at 30, 32-33.

We made no rulings on the City's potential charges for police costs, because the

City had made no final allocation of police expenses and because the Chief Judge

had excluded some of the evidence offered by the City in defense of its proposed

allocation. We reminded the Citv that any allocation of police costs would have

to be justifiable and transparent, and we further stated, ITIhe City's charges for

services provided the airport must be consistent with its practices on charging

other City departments for services." Order 95-6-36 at 43, 44.

While we and the Chief Judge questioned the reasonableness of the cost

allocation then proposed by the City, neither we nor the Chief Judge suggested

that the City could not properly include the cost of police department operations

in the landing fee rate base. The complainant airlines in that proceeding.

moreover, had not asserted that police department costs could only be included

in the rate base if other businesses and persons within Los Angeles were subject

to comparable charges for police protection or if the police work was specifically

required by FAA regulations.

The Police Department Operations Included in the Airport Charge

The basic level of police service provided areas throughout Los Angeles is a basic

patrol car. The police department provides such basic patrol car service in the

airport area but does not include the cost of that service (or the cost of personnel

related to that level of service) in its bill to the airport. The police department

charges instead consist of services beyond the basic patrol car level of service.

R.D. at 9.

The largest single element in the police department bill is the $3.3 million cost of

the airport detail, which consists of the staff at a police substation located in one

of the LAX terminal buildings. The airport detail officers do general police work
145

and, since June 1, 1995, do not work outside the airport except on emergency

calls' The calls off the airport account for less than one percent of the detail s patrol time, and are probably offset by the amount of time spent on LAX calls b%

Pacific Area officers stationed outside the airport. R.D. at 9-10.

The police department charges also include $1.6 million for a portion of the cost

of the Pacific Area Detective Division, which is generally responsible for

investigating all crimes in the Pacific Area, an area which includes the airport.

The airport's share of the division's total cost is 29 percent, a percentage based on

the proportion of Pacific Area crimes occurring at or near the airport. 16 The

airport also bears the cost of the Airport Theft Detail, about $120,000. R.D. at 10.

The police department charge includes almost $146,000 for the cost of property

booking and prisoner custody based on the number of property bookings and

arrests occurring at or near the airport. R.D. at 10.

The police department also billed the airport SI.7 million for the Narcotics

Group, which focuses on the smuggling of drugs at LAX. R.D. at 10-11.

The police department charge includes S158,000 for the airport's share of the

criminal conspiracy section, which investigates bomb threats; $126,000 for the

airport's share of the anti-terrorist division, which investigates terrorist activity

throughout Los Angeles; and $279,000 for the bomb squad, most of which covers

the costs of the K-9 units that search for explosives at LAX 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

forgery involving airline tickets; $227,000 for the West Los Angeles Forgery Unit,

which investigates fraudulent credit card use at car rental agencies at LAX and

nearby; and $49,000 for the Burglary Auto Theft Division-Organized Theft Unit,

which operates at the airport at times of unusually high criminal activity at the

airport due from a major event or other unusual occurrence in Los Angeles, such

as the World Cup Soccer matches. RD. at 12-13.

Part of the cost of the West Traffic Division is billed to the airport - $266,000

relating to incidents occurring at the airport a.. 5373,000 relating to incidents

near the airport. R.D. at 13.

Finally, the S million cost of the organized crime intelligence division officers

assigned to LAX is included in the police department's billing. This division

16 As descnbed below, the charge for police deparnnt work performed outside the airport

that does not involve incidents at the airport - a charge which we are disallowing - amounts to

approximately $260,000, based on the Complainants estimates. Airlines' Proposed Findings 118.

The Pacific Area Detective Division is one of the uruts whose charge includes such work off the

airport.
146

maintains officers at LAX since the airport is used by organized crime members

to enter Los Angeles. R.D. at 1I.

As the basis for charging the airport for the cost of police department services

involving the airport, the City alleges that protecting travellers and other persons

using the airport requires an extraordinary amount of police department servicedue to the high level of crime at LAX. The City notes in that regard that the

substation maintained at the airport is the onlv substation in Los Angeles that

operates every hour of the day. The City contends that it is reasonable for it to

bill the airport for the extraordinary level of police department work created by

the airport. City's Brief to DOT at i2-13.

The City's Ability to Charge the Airport for Any Police Department Services

The first issue involving the police charge is the Complainants' argument - an

argument accepted bv the ALJ - that the City may not charge the airlines for

police protection services which are of the same type as the services provided

other businesses and persons in Los Angeles, unless the City also charges those

businesses and persons for police protection. The AL accordingly ruled that the

only police department expenses that could be deemed "aeronautical" and

permitted by the Policy Siatement were the police services required by the FAA.

The City and ACI complain that the ALI could not properly accept this

argument, which they claim is erroneous in any event, because the Complainants

did not include this argument in their complaint and accordingly could not make

the argument at the hearing. The City represents, moreover, that the

Complainants' belated introduction of this argument into the case has severely

prejudiced it, because it would have introduced evidence rebutting the argument

if the Complainants had raised it earlier as required by our Rules of Practice.

City's Brief to DOT at 11. Se als ACI Brief to DOT at 13, n. 6.

We find that the claim was not properly raised by Complainants and should not

have been considered by the ALI (as discussed below, however, other objections

made by the Complainants to the police department expenses were properly

raised).

As we stated when we set this case for heanng, our procedural rules require

airline complainants to set forth their case in their complaint and the

accompanying briefs and evidence submissions: "Carriers filing complaints ....

will generally be expected to submit documentation that contains the filing

party's entire position and supporting evidence," 60 Fed. Reg. 6923. The rule

thus states, 'The complaint... shall set forth the entire grounds for requesting a

determination of the reasonableness of the airport fee." 14 C.F.R. 302.605(a). We

adopted that rule to enable us to decide cases under 49 U.S.C. 47129 within the

strict time limits set by Congress. As a result, we stated, the hearing in this
147

proceeding could consider only the specific issues raised by the complaint and

supported by the evidentiary filings already submitted. Order 95-9-24 at 19..7

In this case the Complainants' complaint asserted that the police department

charges were unreasonable in three respects: the charges imposed on the airport were inconsistent with the City's treatment of other city departments, the charges

should not have been allocated to the indirect cost center, and the airport was being charged for police services that could not properly be charged to the

airport. Complaint, para. 117, 135-130. The Complainants' accompanying.nAef

made arguments supporting these objections but did not assert that the police

department charges were unreasonable because the City charged no other

private persons in Los Angeles for police protection. Airlines' Brief at 29-34. 1

The testimony submitted by Complainants' witnesses, moreover, asserted that

the police department charges were invalid on the grounds named in the

complaint, but not on the ground that the City could only charge the airlines if it

charged other businesses for police protection. 5=, .&, Exhibit ATA-BI, para.

13.

Needless to say, when the City submitted its answer to the complaint and its

evidence supporting the answer, it responded to the arguments actually made by

the Complainants. Se, .. , Bostic Decl. Since the Complainants had not

asserted that the police charges were improper because other private persons

were not being charged for police protection or because the police department

services were not required by FAA rules, the City's evidence did not address that

issue.

Although the issue was not included in the complaint, the ALI nonetheless

allowed the Complainants to add this issue on the eve of the hearing. The

belated introduction of this issue did not give the City a reasonable opportunity

to present responsive evidence.

In these circumstances, the City and ACI are correct in complaining that the ALI's

consideration of the issue was unfair and contrary to our procedural rules. The

ALJ's consideration of this issue - the City's ability to impose any police

department charges without sumultaneously charging other businesses for police

17 Of course, as we recogruzed in our instituting order. arn airline complainant could introduce a

new point late in the proceeding if the airports refusal to provide adequate information on its

fee methodology prevented the airline Torn addressing the point in its complaint. Order 95-9-24

at 19. The Complainants have not alleged that their tardy introduction of the issue stemmed

from their inability to obtain timely iruormaon from the City.

18 The complaint implied that the City could include some police department charges in the

landing lee rate base. 5 e.&. Complaint. para. 148 ( Mlany, if not most, of the LAPD charges

are atmbutable to non-airftield cost centers such as the ternunal or the rental car concessions) and

para. 139 (l[Mlany of the services apparendy performed by the police on LAX premises are City

activities that are unrelated to the operation of LAX*).
148

protection -- was contrary to our rules, since the issue was not raised in the

original complaint. He therefore should not have considered it at the hearing

In addition, the City has alleged that it-would have ,ntroduced relevant evidence

in support of the City's police charges if it had had adequate notice that the issue

would be considered at the hearing. The City asserts that many airports pay the

full cost of police services provided airport users. City s Brief to DOT at 6. The

City alleges that it would have shown that it routinely bills private groups and

firms for extraordinary police expenses. Id. at 20. We note that on this issue, in

contrast to many of the other issues, the evidentiarv record contains no information on the billing practices followed by oter cities that own and operate an airport. Such information would be very relevant to any decision by us on

whether a local government operating an airport may charge airport users for

police services furnished by that government.

Furthermore, the Complainants' reply brief to us essentially admits the accuracy

of the procedural complaint made by the City and ACI. The Complainants point

out that their complaint identified as an issue the consistency of the City's

charges to the airport with its charges to other departments - Complainants do

not claim that they raised the issue of consistency of the airport's bill with the

City's treatment of firms and individuals outside the city government. Airlines'

Reply Brief to DOT at 6.

The airlines are, of course, free to raise the issue in future cases involving

significant disputes over other landing fees, if they present the issue in their

complaint as required by our procedural rules. If they do so, both the airlines

and the airport parties should present evidence on the practices of other airports.

However, while we do not find unreasonable the City's inclusion of police

department costs in the landing fee rate base, we agree with the ALI and the

Complainants on the potential danger that airport owners could use billings for

local government services as a means of diverting airport revenues into a

government's general fund. As shown below, we will carefully examine such

charges in airport fees to ensure that the airport is not imposing unreasonable

and excessive charges on airlines for services unrelated to the airport facilities

and services used by the airlines. Our disallowance in this proceeding of the

City's excessive allocation of fire department costs to the airfield cost center

demonstrates our willingness to prevent excessive charges.

Consistency with Charges to Other City Departments

In their complaint the airlines did raise the issue of whether the City's- charges to

the airport for City services were consistent with its billing practices for other

City departments. Complaint, para. 117. The City does not impose charges for

police department services on the two other "proprietary" departments,

departments with independent budget authority, which are the Department of
149

Water and Power and the Harbor Department. In recent ears the City has not

charged those two departments for police services with one exception. The City

did bill the Department of Water and Power for the cost of the police

department's services during a strike, since the strike created a need for an

unusual amount of police department work on that department s behalf. Supp

Waitman Decl.; Second Supp Bostic Decl. 19

Before the ALI the Complainants had argued that the City's conduct is contrary

to both the Policy Statement and our final decision in the First LAX Case, which

stated that the City's charges to the airport for City services must be consistent

with the charges biUed other users of those services, Order 95-6-36 at 43. Since

the City normally imposes no charge at all for police protection on the other two

proprietary departments, the City assertedly may not charge the airport for the

cost of police services. Airlines' Brief to ALI at 31, n. 1 I.

In response, the City argued that the police charges to the airport are proper even

though the City rarely bills the other proprietary departments for police

protection. The City contends that the airport, unlike the other departments,

requires an extraordinary level of police protection. City's Brief to ALI at 11-12.

ACI agreed with the City that the Policy Statement's requirement of consistency

covers only charges for indirect costs, not direct costs. ACI Brief at 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 crowds of people. ACI Brief to ALJ at 10.

We conclude that there is no inconsistency between the City's charges to the

airport and its lack of regular charges to the other proprietary departments. The

City has shown that the level of police protection required by the airport is far

greater than the level required by the other proprietary departments, which

usually receive only basic patrol car service. Bostic Decl. at 2-3. As noted above,

the City does not charge the airport for basic patrol car service provided the

airport area. The Department of Water and Power and the Harbor Department

have no facilities requiring dedicated police units and so depend on the normal

police patrols provided the neighborhoods within which their facilities are

19 At the heanng the Complainants appeared to suggest that the City does not bill other parts

of the City government for police protection and so may not charge the airport for police

services. As the City points out, except for the proprietary departments like the airport, all

(ity government operations are paid for from the same general fund, so there is no reason

why the pohce department should bill other parts of the government for its services.

Moreover, the City Charter assertedly bars the City from charging one department funded by

the general fund for services provided another departmeent funded by the general fund. City's

8nef to AL at 30. The Complainants seemingly have dropped this claim. Airlines' Bnef to

ALI at 31,n. 11.
150

located. The Department of Water and Power has few facilities which are even open to the public. Waitman Supp. Deci. at 4-6.

In addition, the City points out that it has no incentive to excuse the other

proprietary departments from charges for police services, since payments by

those departments would benefit the City s general fund. City's Brief to ALI at

33; Tr. 629-630. This further supports the Citv s allegation that it does not bill the

other proprietary departments for police services because those departments,

unlike the airport, receive only a basic level of service 20

Allocation of Police Charges to the General Administrative Cost Center

The City has allocated all of the police charges to the airport's General

Administrative Cost Center, an indirect cost center; about 31 percent of that cost

center's costs are allocated to the landing fee rate base. According to the

Complainants, rather than allocate all of the police costs to the indirect-cost

center, the City must use its best efforts to allocate to each individual direct cost

center e.g., the terminal cost center) those police costs fairly attributable to that

cost center, assuming the City is entitled to impose any charge for police services.

Although the Complainants concede that some of the police department costs

would then be allocated to the airfield and apron cost centers, such as the cost of

handling airline ticket fraud, Exhibit ATA-A2 at 15, they contend that the amount

of the police department charges included in the landing fee rate base would be

smaller than it is when all police charges are allocated to the indirect cost center.

Airlines' Brief to ALl at 39.

The City replies that its allocation of the police costs to an indirect cost center is

reasonable, primarily because much of the police department work could not be

assigned to a direct cost center without considerable difficulty and because much

of the police work benefits the overall welfare of the airport, not just the users of

a specific cost center area. City's Brief to ALJ at 19-20. ACI agrees with the City

that airports commonly allocate costs to general indirect cost centers rather than

to specific direct cost centers and that requiring the allocation of all costs to direct

cost centers whenever possible would substantially burden airports. ACI Brief to

ALI at 8-9.

The ALI concluded without any explanation that the City was obligated to

allocate the police costs to the various direct cost centers and could not allocate

them to the indirect cost center. He assumed that requiring an allocation to the

20 Because we find no inconsistency between the City's trearment of the airport and its treatment

of the two other departments, we need not address its contenton that consistency in billing is not

required by the Policy Statement. The City contends that section 2.5.1 of the Policy Statement,

which imposes a consistency requirement, by its terms covers only the billing of indirect services

and thus excludes the billing of police department services, which the City assumes is a direct

cost. City's Bnef to ALJ at 32-33.
151

direct cost centers would eliminate almost of the allocation of police costs to -he

landing fee rate base. R.D. at 9, n. 8.

We find that the City's allocation of all of the costs to the General Administrative

Cost Center, while not perfect, is sufficiently reasonable to be lawful. A portion

of the police department charges relates directly to work benefiting the airlines,

such as part of the work of the bomb squad and the anti-terrorist squad. Most of

the remainder of the police services provide an indirect benefit to overall airport

operations - and thus to a large extent benefit airline customers. Since the

statute gives airports substantial discretion in adopting fees, an airport operator

ought to be allowed to use a reasonable method of allocating costs even if some

other method would produce a more precise result. In other words, the airport

may choose among reasonable methods, so long as the method chosen is

consistent with applicable law and policy.

In addition, allocating the police costs to different direct cost centers would be

difficult in many cases. Brown Decl. at 9-10; Brown Supp. Decl. at 4. While

greater precision in cost allocations is always desirable, requiring greater

exactness is not reasonable when, as here, it would impose a significant burden

on the airport. Furthermore, allocating costs to a general cost center is a common

practice among airports. Brown Decl. at 10.

Specific Police Charges

Having determined that the City may in principle bill some police department

charges to the airport and may allocate that cost to the indirect cost center, we

must decide whether the specific police department functions included in the

airport's bill may be fairly charged the airport. We will examine first the charges

for police department work occurring at the airport or involving incidents at the

airport and thereafter consider the charges for work involving incidents outside

the airport.

As described above, the police department has charged the airport for its share of

the costs of the airport detail (this is the substation detail based on 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 the West Los Angeles forgery

unit; burglary auto theft; the West Traffic Division; and the Organized Crime

Intelligence Division.

The Complainants initially objected to all of these charges, except the cost of the

unit handling airline ticket fraud, but they are willing to accept the ALJ's finding

on the charge for the K-9 unit of the bo ,nb squad. Airlines' Brief to AL at 31-33;

Airlines' Brief to DOT at 22. The City, on the other hand, argues that each of the

charges is reasonable. City s Reply Brief to ALJ at 18-20.
152

The ALI, as indicated, found that all of the charges were unreasonable in

principle, except for the cost of the K-9 unit of the bomb squad. He did not

analyze which charges would be reasonable if the airport were allowed to

include police department costs in the landing fee rate base. The Chief Judge in

the First LAX Case considered two of these charges -- he found the City's

allocation of any of the cost of the Organized Crime Intelligence Division to the

airport unreasonable, but he thought that the cost of the Narcotics Division staff

based at LAX could be considered an aeronautical cost. First LAX Case, R.D at

30, 32.21

We find that each of the charges for work relating to incidents at the airport is

proper, except for the cost of the organized crime intelligence division. The

relevant provision of the Policy Statement is section 2.1, which states that

aeronautical costs are the costs to the airport "of providing airport services and

facilities currently in aeronautical use .... " We think each of the listed police

department costs, except for the organized crime intelligence unit, is a cost of

providing airport services and facilities used by the airlines and their passengers.

For the most part, the listed police services, such as the airport detail, promote

the safety of airline employees and customers. Some of the services, such as the

bomb squad and the anti-terrorist and criminal conspiracy units, are directly

involved in protecting the safety of aircraft and airline passengers. The Narcotics

Division's work is a direct result of the airlines' use of LAX, since the narcotics

smuggling at the airport is made possible due to the flights operated by the

airlines.

In contrast, we think the work of the organized crime intelligence unit is too

remote to be included as a charge to airport users. While airline flights may

make it possible for organized crime members to reach Los Angeles, the unit's

work seems more directly concerned with benefiting the residents of Los Angeles

generally, not with promoting the safety of airport users. We recognize that our

findings on this unit and the Narcotics Division, while consistent with the

tentative findings of the Chief Judge in the First LAX Case, do not seem to be

entirely consistent. Nonetheless, we think the work of the Narcotics Squad is

more directly related with the protection of airport users and a more direct result

of the airlines' operations and may therefore be more appropriately billed to the

airport than the work of the organized crime intelligence unit.

21 The Chef Judge also held thai the City's plan to allocate all of the cost of the police

substation to the airport was unreasonable, since the police station:ed there then served areas

outside the airport. The police department currently bars the police stationed at the substation

from working outside the airport euept for certain emergencies, so the Airlines are not now

challenging the City s assignment ol the cost of the substation force to the airport, assuming

that the airport may be charged any police deparanent costs. Airlines' Reply Bnef to ALI at 14-15.
153

Charges for Police Services in Surrounding Neighborhoods

The final police department cost issue involves the City's charge for part of the

cost of the police protection provided the neighborhoods immediately

surrounding the airport. The Complainants object to the entire charge in

principle (they have not attacked the City's calculation of the share of the cost

that should be charged the airport). The Complainants estimate that the landing

fee rate base has been allocated $260,000 for off-airport police work. Airlines

Proposed Findings 118.

The City argues that the police services charged to the airport reflect the

additional services required due to the presence of the airport. For example, the

large volume of traffic headed to the airport through the sur munding

neighborhoods substantially increases the workload of the traffic police in those areas outside the airport; the main access road, Century Boulevard, lies entirely

outside the airport's boundaries. The City additionally alleges that it has

included such costs only for neighborhoods immediately surrounding LAX - neighborhoods located at most slightly more than one mile from the airport's

boundary. City's Brief to ALI at 15-17.

The Complainants assert that some limit must be placed on the City's ability to

charge the airport for police services, assuming that the airport can be billed for

any police services, and that the airport's boundary must be made the limit.

Airlines' Brief to ALI at 34-36.

ACI urges us to make no ruling barring airports from recovering police

department costs incurred for providing services in areas around an airport,

since ACI argues that additional police services are often required in areas

outside an airport's borders because of the volume of airport traffic passing

through such areas. ACI Brief to ALI at 7-8.

We agree with the Complainants on this issue. In calculating airport fees the City

may include only the cost of services directly or indirectly related to the use of

the airport. In this case the City has included police department expenses for

areas bordering the airport on the ground that persons using the airport cross those areas on their way to and from LAX. The City is not claiming that specific

functions relating to the use of the airport take place outside the airport's

boundaries. City's Brief to AL at 15-17. While the activities of persons using the

airport, such as travellers driving to and from LAX, may create more work for

the police department, we find that the cost of the police department's activities

off the airport is too remotely related to the provision of airport services to be

reasonably charged to the airport. If we allowed such charges in this case, the

result would seem to allow the City to include police charges relating to the

protection of airline travellers (and perhaps employees) located anywhere in Los

Angeles. While we appreciate the City's inclusion of charges only for areas
154

within a short distance of the airport, the underlying theory for the charges

would create too big a loophole for airports to impose unreasonable charges ior

local government services on airports. We must therefore disallow the charges

for off-airport police operations not relating to airport incidents. 22

c. Noise Mitigation Expenses

The airport plans to spend $12 million for noise mitigation during the current

fiscal year. Noise mitigation expenses are allocated entirely to the airfield cost

center under the City's fee methodology. The Complainants are not challenging

the validity of the underlying expense. Instead, they argue that the City may not

properly include the expense in the landing fee rate base at all, because the City

has been collecting passenger facility charges (PFCs) to pay for noise mitigation

and is currently obligated to use those funds for that purpose. The City, on the

other hand, argues that it has no obligation to use its PFC revenues for noise

mitigation rather than other projects because with FAA approval it may

terminate its original plan to use PFC revenues for noise mitigation. As a result,

the City claims that it may charge the airfield cost center wi'h the cost of the

noise mitigation work to be done in the 1995-1996 fiscal year.

We will allow the City to include the noise mitigation expense in the rate base, if

the City obtains FAA approval by the end of the fiscal year (June 30, 1996) for its

plan to use the PFC funds on projects other than noise mitigation. If the City

does not receive FAA approval by that date, it must refund the amount of the

noise mitigation expense to the Complainants.

Our resolution of this issue results from the statutory and regulatory obligations

incurred by airports that obtain permission to charge PFCs. The City is currently

obligated to spend the PFC funds already collected on noise mitigation but has

the right to ask the FAA to approve a new use of those funds.

Factual and Legal Background

Airports may collect PFC funds only in compliance with the statute authorizing

PFCs, 49 U.S.C. 40117, and with the FAA regulations implementing the statute,

14 C.F.R. Part 158. By statute an airport may not charge PFCs without the

Secretary's approval, and the funds collected from a PFC must be spent on

specific projects designated when the FAA approves the PFC charge.

22 We note ACI's concern that we should not rruke any blanket statements in this case that

airports generally may not charge airport users for the cost of police operations that take place off

the airport. ACt Brief to DOT at 2-3. As we stated at the beginnng of our analysis, this decision

is limited to the facts and record of this case. Whether the result would apply to fees charged by

other airports will depend in large part on the specific facts of the other airports' operations.
155

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.
156

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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157

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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158

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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159

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. I 0

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-
160

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-
.161

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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183

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

sneraL d 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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166

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 2 fDenver v. Continental AirLines. Inc., 712 F. Supp. 834,

839 (D. Colo. 1989) ('The enforcement of . . section

(continued...) - 12 -
167

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
169

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, it does 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.
170

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 .L needs 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 in whole 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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