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NEXT GENERATION AIR TRANSPORTATION SYSTEM FINANCING OPTIONS

(109–100)

HEARING

BEFORE THE

SUBCOMMITTEE ON

AVIATION

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 27, 2006

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

JEAN SCHMIDT, Ohio

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

(II)
SUBCOMMITTEE ON AVIATION

JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

ROBIN HAYES, North Carolina

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

CHARLES W. DENT, Pennsylvania

TED POE, Texas

JOHN R. ‘RANDY’ KUHL, JR., New York,

Vice-Chair

LYNN A. WESTMORELAND, Georgia

DON YOUNG, Alaska

(Ex Officio)

JERRY F. COSTELLO, Illinois

LEONARD L. BOSWELL, Iowa

PETER A. DEFAZIO, Oregon

ELEANOR HOLMES NORTON, District of

Columbia

CORRINE BROWN, Florida

EDDIE BERNICE JOHNSON, Texas

JUANITA MILLENDER-MCDONALD,

California

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

TIM HOLDEN, Pennsylvania

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

BEN CHANDLER, Kentucky

RUSS CARNAHAN, Missouri

JOHN T. SALAZAR, Colorado

NICK J. RAHALL II, West Virginia

BOB FILNER, California

JAMES L. OBERSTAR, Minnesota

(Ex Officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Dillingham, Gerald, Director, Physical Infrastructure Issues, U.S. Government Accountability Office, accompanied by Susan Irving, Director, Federal

Budget Issues, U.S. Government Accountability Office .................................... 6

Hansman, R. John, Jr., Director, MIT International Center for Air Transportation, Massachusetts Institute of Technology, and Chairman, FAA’S Research and Development Advisory Committee (REDAC) ................................. 6

Jewett, Ellen, Vice President and Manager, Transportation Group, Infrastructure Investment Banking, Goldman, Sachs & Co. ............................................ 6

Marron, Donald B., Acting Director, Congressional Budget Office ..................... 6

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri ......................................................................... 28

Costello, Hon. Jerry F., of Illinois .......................................................................... 29

Oberstar, Hon. James L., of Minnesota ................................................................. 88

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Dillingham, Gerald .................................................................................................. 32

Hansman, R. John, Jr ............................................................................................. 62

Irving, Susan ............................................................................................................ 32

Jewett, Ellen ............................................................................................................ 70

Marron, Donald B .................................................................................................... 73

SUBMISSIONS FOR THE RECORD

Dillingham, Gerald, Director, Physical Infrastructure Issues, U.S. Government Accountability Office, reponses to questions from Rep. Costello ............ 51

Hansman, R. John, Jr., Director, MIT International Center for Air Transportation, Massachusetts Institute of Technology, and Chairman, FAA’s Research and Development Advisory Committee (REDAC), response to a question from Rep. Costello ........................................................................................ 69

Irving, Susan, Director, Federal Budget Issues, U.S. Government Accountability Office, responses to questions from Rep. Costello ........................................ 56

Marron, Donald B., Acting Director, Congressional Budget Office, responses

to questions from Rep. Costello ........................................................................... 85

(1)

NEXT GENERATION AIR TRANSPORTATION

SYSTEM FINANCING OPTIONS

Wednesday, September 27, 2006,

HOUSE OF REPRESENTATIVES, COMMITTEE ON TRANSPOR- TATION ANDINFRASTRUCTURE,SUBCOMMITTEE ON AVIA- TION,WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 2:00 p.m., in room

2167, Rayburn House Office Building, the Honorable John L. Mica

[Chairman of the subcommittee] presiding.

Mr. MICA. I would like to call this hearing of the House Aviation

Subcommittee to order and welcome everyone today.

The subject of today’s hearing is the Next Generation Air Transportation System Financing Options.

The order of business will be as follows: we will have opening

statements by members and, after that, we have one panel of witnesses, and I understand one of our witnesses is not able to be with

us because he is ill, and that is Gerald L. Thompson of Jerry

Thompson & Associates. So that is the only change in the order of

business.

With that, welcome, everyone, again, and I will start with an

opening statement, and then I will yield to other members.

As I said, today’s hearing is going to focus on our options for financing our Federal Aviation Administration and, more specifically, the next Generation Air Transportation System, which is

commonly referred to as NGATS. This topic, of course, will be the

major issue in next year’s reauthorization of our Federal aviation

programs.

As discussed at the Subcommittee’s hearing on air traffic control

modernization in June, NGATS involves a major redesign of our air

transportation system. It will move much of the existing air traffic

control infrastructure from earth to sky by replacing antiquated,

costly ground infrastructure with a system of orbiting satellites, onboard automation, and digital data link communications.

While we do not yet have an official cost estimate for NGATS,

preliminary information indicates that FAA may need, on average,

an additional $1 billion a year, probably for the next 20 years, to

implement NGATS, and, at the same time, keep our existing air

traffic control system running.

One issue that I hope to address today is whether or not the

Aviation Trust Fund can in fact afford to provide this increased

level of investment.

And that is in light of the Trust Fund revenues being down significantly from the levels that were projected prior to the terrorist

attacks of September 11th, 2001. The 9/11 attacks, combined with

weak economic condition and also the element of, on average, lower
2

airfares, have resulted in three consecutive years of declining Trust

Fund revenues. They have gone from $10.5 billion in fiscal year

2000 to $9.3 billion in just the time to 2003.

Although revenues have since been on an upward trend, they are

still below what was once expected, and the uncommitted cash balance in the Trust Fund has been dramatically reduced, from $7.3

billion at the end of fiscal year 2001 to $1.9 billion at the end of

2005.

Even if the Aviation Trust Fund revenues are sufficient to pay for NGATS, achieving a $1 billion annual increase in FAA’s budget

would still be difficult under our current set of budget rules.

This is because the aviation user charges are currently subject

to a split budget treatment whereby the revenues from aviation

system users come in on the mandatory side of the budget, but

they must be spent, unfortunately, on the discretionary side of the

budget, where they are also subject to some of the discretionary

spending limits. Therefore, under current budget rules, spending

from the Trust Fund must compete with all other discretionary

spending in the Federal budget. That makes it very difficult to

achieve the substantial budget increases that we are going to need

for a huge program like NGATS.

Rather than focusing solely on the cost of implementing NGATS,

it is also important to recognize the cost of not doing so. According

to the JPDO, the Joint Planning Development Office, by the year

2020, the cost to our economy of not implementing NGATS could

reach as much as $40 billion a year.

In addition to this enormous economic loss, a failure to implement NGATS would also have a huge price tag in terms of foregone

productivity savings. According to some estimates, a failure to implement NGATS would result in FAA operating losses that are $29

billion to $49 billion higher over the period from 2006 to 2025.

Viewed in these terms, the cost of not implementing NGATS

clearly far exceeds the cost of implementing NGATS by possibly

more than $400 billion through 2025, a pretty dramatic amount.

Unfortunately, in today’s constrained budget environment, the

immediate need to finance everyday operations often takes precedent over longer term capital investments.

We have the same problem if you look at inline explosive detection systems. Despite the fact that these systems more than pay for

themselves in productivity savings in just a few years, we have

been unable to adopt a common sense solution that would provide

up-front capital investment that is required to deploy these systems in a timely manner, realize the savings by eliminating personnel and antiquated systems. So this is sometimes a penny wise

and pound foolish approach.

In the face of budget constraints, Federal agencies have used a

variety of methods to finance big capital asset projects. Two such

methods that have been mentioned in the context of NGATS are

leasing and also bonding. In addition, cost-based user fees that

could be spent outside the discretionary spending limits have also

been discussed.

In preparation for next year’s FAA reauthorization bill, when our

current aviation excise taxes must either be extended or replaced,

the FAA has called for a dialog on alternative ways to finance the
3

aviation system in the future. And that dialog, as you know, has

gone on for some months now, and at some point we are going to

have to conclude that and take some action, hopefully as we begin

the next session of Congress.

The FAA believes that certain industry trends, such as lower airfares and the use of smaller aircraft, will also exacerbate the mismatch between its workload and its revenues in the future.

Cost-based user fees are often mentioned as one way to link aviation revenues more closely to FAA’s cost and potentially also to

deal with funding. To the extent such fees can be linked to FAA’s

funding, they could provide a way to fund needed investments in

our aviation system.

Of course, today we will hear from a panel of witnesses that I

believe is uniquely qualified to help us look at some of the pros and

cons of each of these approaches to financing both the FAA and

NGATS, its expensive capital requirements, so I look forward to

hearing the testimony of our witnesses. I have made no commitments to any plan, and now I am pleased to yield to the Ranking

Member, Mr. Costello.

Mr. COSTELLO. Mr. Chairman, thank you. And I thank you for

calling this hearing today. I think all of us understand that the information that we are reviewing is very preliminary.

While we have some idea of what capabilities will likely comprise

the Next Generation Air Transportation System, such as precision

satellite-based navigation, we do not yet have an enterprise architecture that fully explains the Next Generation System. And while

we have an unofficial Administration NGATS capital cost estimate

of approximately $15 billion, between $1 billion and $2 billion a

year for the next 10 to 15 years, we do not have an Administration

witness here today to explain how they arrived at their cost estimates.

As the Subcommittee prepares to take up the FAA reauthorization bill, we will need to find out whether or not the Aviation Trust

Fund can support the Next Generation System. The information

before us today suggests that it can. For fiscal year 2006, CBO estimates that receipts plus interest into the Trust Fund will total

about $11.2 billion. The CBO also projects that the Trust Fund revenue will increase almost 32 percent, to $14.8 billion in 2011, and

over 71 percent, to $19.2 billion in 2016. Based on these projections, it appears that the preliminary $15

billion capital cost estimate for NGATS could be absorbed by the

existing FAA financing structure, with a General Fund contribution that is consistent with, or even smaller than, recent General

Fund contributions.

This new information raises questions about the Administration’s

claims that there is a revenue crisis at the FAA. The Administrator, Administrator Blakey, has said that there is a gap between

revenue going into the Trust Fund and FAA’s cost, and that this

so-called gap caused a $5.4 billion decline in the Trust Fund’s uncommitted balance since fiscal year 2002. I disagree.

First, what the Administrator calls a gap between Trust Fund

revenues and FAA cost is actually the General Fund contribution.

Historically, the General Fund contribution has been relatively low

in recent years. Over the past 20 years, the General Fund contribu-
4

tion has averaged 27 percent of FAA’s total budget. However, over

the past 10 years, it has averaged only 20 percent.

The American people clearly receive a tremendous benefit from

a safe and efficient air transportation system. Therefore, any discussion of financing the Next Generation system must include a

contribution from the General Fund.

Second, the shrinking uncommitted balance is not the result of

inadequate revenue, but inadequate revenue forecasting by the

FAA. Under the current statutory formula, the amount drawn from

the Trust Fund must equal FAA’s forecasted receipts and interest

into the Trust Fund for that year. For the last few years, FAA’s

forecasts have been overly optimistic and the discrepancy between

what is drawn from the Trust Fund’s uncommitted balance. Congress could fix this problem by changing the formula to link the

amount appropriated from the Trust Fund to actual, rather than

forecasted, revenue. The GAO has suggested this approach, and I

look forward to hearing from the GAO witness on this issue.

That said, I believe Congress should also review the FAA’s tax

and financing structure in the FAA’s upcoming reauthorization bill.

However, I have serious reservations with imposing a direct user

fee. If we accept that the policy goal of the Congress should be to

better align FAA’s revenue with user activity, there are ways that

this can be accomplished within the existing tax structure. By

working within the existing tax structure, we will avoid the costly

administrative burdens of implementing a user fee based system.

Some have suggested that Congress should consider alternative financing mechanisms such as leasing or bonding. I agree that all

options should be examined and be on the table.

With that, Mr. Chairman, I will submit my full statement for the

record, and I look forward to hearing from our witnesses today.

Mr. MICA. Without objection, the entire statement of the Ranking

Member will be made part of the record.

Next we will hear from Mr. Coble.

Mr. COBLE. Mr. Chairman, I will not take the full five minutes.

You indicated financing options is the order of the day. Every

issue discussed—well, strike that. Practically every issue discussed

on this Hill, sooner or later, involves financing options, today being

no exception. And I appreciate the interest that you and the distinguished gentleman from Illinois have directed to the issue of Next

General Air Transportation System’s financing, and I share that interest, and I appreciate your all having called the hearing.

I have two other meetings, Mr. Chairman, so I may be circuitously coming and going, but I think it will be a good hearing, and

I thank you for it.

Mr. MICA. I thank the gentleman, and thank you for the brevity

of your statement. In fact, high above the future NGAT System,

somewhere in the heavens there will be a special place for you.

Mr. COBLE. I thank you for that.

Mr. MICA. Thank you.

Ms. Berkley.

Ms. BERKLEY. Thank you, Mr. Mica.

Mr. Chairman, Ranking Member Costello, I thank you for holding this hearing on what I consider a very important topic. The

FAA’s plan for the Next General Air Transportation System is very
5

ambitious. I am anxious to hear both how we could pay for it and

how it would be integrated into our current system.

The district that I represent is uniquely dependent on a safe and

efficient air transportation system. McCarran International Airport

in Las Vegas handled almost 44 million passengers last year, and

I have no doubt that we will exceed that number in 2006. I am concerned about the ability of the FAA to handle the current volume

of air traffic, which continues to increase yearly.

I look forward to hearing the views of our witnesses about

whether the FAA’s plan to keep up with growth in the system is

affordable and feasible, and I am anxious to hear your funding suggestions. And I thank you very much for being here.

Thank you very much, Mr. Chairman.

Mr. MICA. I thank the gentlelady also for her brevity.

Mr. LoBiondo.

Mr. LOBIONDO. Thank you, Mr. Chairman, for calling the hearing. I think we can all agree it is critical for us to get started developing and testing and fielding the NGAT System as soon as possible. The system will improve safety and reduce operating costs for

the FAA and industry. But, as you pointed out, it is extremely expensive and it will be very difficult and put a strain on our current

system with an already overextended Trust Fund. I hope we can

find a creative way to reauthorize the Trust Fund that will ensure

sufficient resources to keep the current system running while we

develop and deploy NGATS.

And I am looking forward to hearing what our witnesses have to

say.

And thank you again, Mr. Chairman.

Mr. MICA. Thank the gentleman.

Mr. DeFazio?

Mr. DEFAZIO. Thank you, Mr. Chairman.

Mr. Chairman, if we look over time, we find that basically the

General Fund contribution, that is, the support to aviation, the

issue before us, has gone from about 48 percent down to 18 in

2006. I guess, one question I hope the panel would address is, what

is an appropriate level for general public investment versus whatever new ideas or iteration of user fees or targeted taxes you are

going to propose.

Because I think there are some strong arguments to be made regarding the national interest here on the national airspace, the efficiency of the Air Transportation System and the safety in this

Country, and particularly some new issues in that area post–9/11.

So I would question whether 18 percent is adequate. And, of

course, that somewhat sets the stage for what other and how many

other revenues we are looking for, given the needs.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. Graves?

Mr. GRAVES. Thank you, Mr. Chairman. I too will be brief.

I do look forward to this hearing, and all the hearings we are

going to have, obviously, when it comes to reauthorization, and how

we are going to fund the Next Generation System and modernization in general. I know there are still a lot of different options out

there, but I do think we ought to proceed with some caution and
6

figure out what it is we are going to do before we figure out how

to fund it. I think it is a little bit at least getting the cart ahead

of the horse, when we don’t know exactly how much money it is

that we are going to need, or exactly what it is that we are going

to use it on.

I think we just need to be careful as we move forward, and I look

forward to hearing what the panelists have to say. Thank you.

Mr. MICA. Thank you.

Mr. Kuhl? Any other members with opening statements or remarks?

[No response.]

Mr. MICA. If there are no other members with opening statements, we will turn to our panel of witnesses and welcome back Dr.

Gerald Dillingham, Director of Civil Aviation Issues with the U.S.

Government Accountability Office. He is accompanied by Dr. Susan

Irving, Director of Federal Budget Issues of the same office.

We have also Dr. Donald Marron, Acting Director of the Congressional Budget Office; Professor John Hansman, Director of MIT

International Center for Air Transportation and Co-Chairman of

FAA’s Research, Engineering & Development Advisory Committee;

and then Ms. Ellen Jewett, Vice President and Manager of the

Transportation Group of Infrastructure Investment Banking with

Goldman, Sachs.

I would like to welcome all of our witnesses. If you have any additional information other than your statement, or lengthy information that you would like added to the record, just a request of the

Chair would be appropriate.

So, with that, we will welcome back Dr. Dillingham with GAO.

Welcome, and you are recognized, sir.

TESTIMONY OF GERALD DILLINGHAM, DIRECTOR, CIVIL AVIATION ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE;

ACCOMPANIED BY SUSAN IRVING, DIRECTOR, FEDERAL

BUDGET ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL BUDGET OFFICE; R. JOHN HANSMAN, JR., DIRECTOR, MIT INTERNATIONAL CENTER FOR AIR TRANSPORTATION, MASSACHUSETTS INSTITUTE OF TECHNOLOGY,

AND CHAIRMAN, FAA’S RESEARCH, ENGINEERING & DEVELOPMENT ADVISORY COMMITTEE (REDAC); ELLEN JEWETT,

VICE PRESIDENT AND MANAGER, TRANSPORTATION GROUP,

INFRASTRUCTURE INVESTMENT BANKING, GOLDMAN,

SACHS & CO.

Mr. DILLINGHAM. Thank you, Chairman Mica, Mr. Costello,

members of the Subcommittee.

As you know, GAO has been reviewing FAA’s ATC modernization

program for this Committee for many years. Because of its size,

complexity, and the history of schedule delays and cost overruns,

it has been on our high-risk list since 1995. Over the last two years

we have reported considerable improvement in the modernization

program’s ability to acquire major systems on time and on budget.

We have also seen the effects of a cyclical nature of the aviation

industry on the ATC system, from the major delays experienced

throughout the system through the downturns just prior to and
7

after 9/11. Today, we see a return of significant delays and a system under increasing stress.

Through all of this, aviation continues to be an important part

of the U.S. economy. Recent aviation forecasts predict up to a billion passengers in the system by 2015. These forecasts also predict

that not only will there be more traditional aircraft entering the

system, there will also be hundreds of very light jets, greater civil

use of unmanned aerial vehicles, and mega aircraft such as the

Airbus A380.

The consensus of opinion is that the Nation’s current ATC system cannot handle this predicted growth and cannot be scaled up

to meet a possible tripling of traffic by 2025. As Chairman Mica

stated, the JPDO has estimated that as soon as two years from

now the difference the total flights that people want to fly and

those that can be delivered with no new investment in the system

would be worth about $12 billion to the economy. By 2020, these

economic losses will increase to about $40 billion a year.

These are the kinds of predictions that contributed to the Congress establishing the JPDO to plan for the transformation of the

ATC system to the Next Generation System. The NGATS transformation will be one of the Federal Government’s most comprehensive and technically complex undertakings, and a preliminary estimate indicates it will also be an expensive undertaking.

Regarding the cost of NGATS, Mr. Chairman, the bottom line

here is that, at present, there is no comprehensive estimate of the

cost of NGATS. Instead, what we have is a limited preliminary cost

estimate developed by FAA’s Research, Engineering & Development Advisory Committee, an estimate that has not been endorsed

by FAA and only provides a point of reference.

As the Chairman indicated in his opening remarks, the REDAC

estimate suggests that FAA will need an average of at least $1 billion more annually over the next 20 years than FAA’s 2006 appropriation.

Mr. Chairman, Mr. Costello, and members of the Subcommittee,

this estimate must be viewed within the context of a number of

limiting factors. First, JPDO has yet to complete the system’s enterprise architecture, which is critical to the development of a reliable cost estimate. Second, many costs, such as the cost of early

technology development, training, and the cost that other JPDO

partner agencies might incur, are not included. And, finally, the estimate is in today’s dollars and does not take into account the effect

of inflation.

Regardless of what the final costs turn out to be, any discussion

of how to pay for NGATS must also take into account the funding

of near term sustainment of the current air traffic control system.

These discussions should also consider the Federal Government’s

long-term fiscal imbalance.

My written statement discusses the details of funding the current system and the transition to NGATS through the existing system of excise taxes and the contributions of the General Fund. The

statement also discusses alternative funding options to collect revenues from the users of the system and implications for allowing

FAA to use debt financing for capital projects.
8

Regarding alternative options, our work indicates that the degree

to which alternative funding options could address concerns about

the existing system ultimately depends on the extent to which the

contributions required from the users actually reflect the costs they

impose on the system. Given the diverse nature of FAA’s activities,

and if Congress decides that an alternative is needed, we think

that a combination of options may offer the most promise for linking revenues and costs. It is also true that switching to any alternative funding option would raise the administrative and transition

issues, such as developing the administrative capacity to implement the new system.

Regarding debt financing, although some have suggested that

debt financing offers some advantages, there are also some serious

implications that should be recognized. For example, debt financing

encumbers future resources and may raise questions about congressional oversight. In addition, debt financing raises issues regarding

barring costs that are particularly important in light of the Federal

Government’s long-term structural physical imbalance.

Mr. Chairman, we think that all options, with their advantages

and disadvantages, should be on the table for consideration. We

also think that the cost side of the ledger should continue to be a

major consideration in the discussion of funding ATC modernization. FAA’s recent contracting out of flight service stations and its

exploration of sharing the risks and costs of the development of

ADSB system with the private sector are positive developments.

GAO has also previously recommended that FAA needs to complete

and institutionalize those business processes that allow it to meet

its acquisition goals for the last two years.

Additionally, we recommended that FAA work with Congress and

other stakeholders to develop and implement a comprehensive

modernization and consolidation plan for its facilities. GAO continues to think that actions such as these must be part of the funding

discussion in the transformation of the FAA for the 21st century.

Mr. Chairman, Dr. Irving and I will be pleased to answer any

questions that you and members of the Subcommittee may have.

Mr. MICA. Thank you. We will hold questions until we have

heard from all of the witnesses.

I guess Susan Irving is not making a statement, but she is available for questions.

Our next witness will be Donald Marron, Acting Director of the

Congressional Budget Office.

Welcome, and you are recognized.

Mr. MARRON. Thank you, Mr. Chairman, Congressman Costello,

members of the Subcommittee. It is a pleasure to be here today to

discuss the financing of new investments in the air traffic control

system and the way spending on such investments would be recorded in the budget.

Developing and deploying a new air traffic control system would

likely require significant investments by the Federal Government

or by entities acting on its behalf. The potential for such investments raises a number of important questions. First, to what extent might such spending fit within the potential resources of the

airport and airway trust fund? To address that question, my writ-
9

ten testimony describes one scenario that reflects CBO’s most recent baseline budget estimates.

Following rules that are established in budget law, those estimates assume that existing Trust Fund revenue sources are extended over the next 10 years, that appropriations for the FAA

grow with inflation from the level appropriated for 2006, and that

the share of funding from general revenues remains at roughly 19

percent, approximately the same level as in 2006.

Under those assumptions, CBO estimates that uncommitted bal- ances in the Trust Fund would increase from slightly less than $2

billion at the end of 2006 to about $19 billion at the end of 2016,

with most of that increase occurring after 2010. By themselves,

those projections suggest that the Trust Fund may have room for

an additional $19 billion in spending over the next 10 years. Of

course, whether those balances actually materialize will depend on

the accuracy of the revenue estimates and the levels of funding

that Congress actually chooses to provide.

A second question is how investment in a new system would be

recorded in the budget in the congressional budget process. Under

the accounting principles that govern the Federal budget, budget

authority and outlays should generally be recorded up front, when

the asset is acquired and investments are made, regardless of how

the new investments are financed. That is how funding for the Air

Traffic Control System is currently handled; budget authority is recorded when appropriation laws are enacted and outlays are recorded when the Government makes actual cash payments. Outlays for capital goods, for example, computer systems and radar,

thus occur when they are paid for, not over their useful life.

Most of the Government’s capital investments are recorded in the

budget in that way because that approach provides the Congress

with the most direct ongoing control over spending. Of course, that

approach also requires that the full cost of investment projects

must compete against other budgetary priorities.

An issue sometimes arises as to whether that budgetary treatment would be different if agencies could procure capital assets

using special financing approaches such as capital leases, lease

purchases, or public-private partnerships in which non-Federal entities provide finance on behalf of the government. The short answer is no.

Under such arrangements, an agency might make annual payments over a period of years rather than disbursing the full cost

of the investment when it is required. Nevertheless, established

budgetary principles require that the full cost be recorded up front

if the Federal Government is the sole or dominant user of the

asset. In such cases, the arrangements are actually a form of purchase by the Government. To ensure that all such purchases are

treated the same way, budgetary principles require that all be recorded in the same manner, regardless of the method of financing.

The only exception is for routine operating leases, for example, for

commercial office space that is not constructed specifically for the

Government.

In considering alternative financing methods, it should also be

noted that the least expensive form of financing is through the U.S.

Treasury. Conventional Treasury securities are the goal standard
10

of bonds because they are free from the risk of default and are

highly liquid. Other means of borrowing funds, whether by creating

new types of Federal bonds or working through private entities, all

involve greater costs, since investors will demand higher returns

and intermediaries will require fees.

A third question is how Congress should allocate cost among taxpayers and various users of the system. From an economic perspective, it is generally desirable to require users of a system to pay

for it. That way, the choices they make will take into account the

cost of providing the service. Users of air traffic control services

currently pay a substantial portion of the cost of providing those

services, mostly through the ticket and other taxes, reflecting the

fact that a large portion of the benefits of the system accrue to

them.

Allocating those costs or the costs of a new system efficiently and

fairly among different types of users presents challenges, however.

Quantifying how individual aircraft impose cost on air traffic control system may be difficult. Also, the provision of air traffic control

services may entail substantial costs that cannot readily be allocated to a particular user, but that must be incurred to provide the

services at all. The resolution of those and related issues will determine how efficiently air traffic control systems and the national

airspace are used.

Thank you. I look forward to any questions.

Mr. MICA. Thank you.

We will hear now from Professor John Hansman, who is Director

of MIT International Center for Air Transportation.

Welcome, and you are recognized.

Mr. HANSMAN. Thank you, Chairman Mica and Mr. Costello and

the rest of the members. I am a Professor of Aeronautics and Astronautics at MIT and also co-chair of the FAA Research & Development Advisory Committee.

There is a general consensus, as has already been discussed, that

the current air traffic control paradigm and the air transportation

paradigm will not scale to meet future demands, and the next Generation Air Transportation System offers a coordinated national response to that. Recognizing the importance of NGATS, the REDAC

established a working group on financing the Next Generation Air

Transportation System, chaired by Mr. Jerry Thompson, who, unfortunately, is ill and couldn’t be here today.

The approach the working group took was to compare a referenced status quo scenario, basically, if we kept with the existing

paradigm, to an NGATS scenario and considered best, worst, and

baseline cases in a parametric analysis.

The analysis of the NGATS scenario required the working group

to create a model of the rollout of NGATS capabilities based on the

best available knowledge of that system as it existed at the time

of the analysis. The details of the report are in my written comments and in the working group report, but the bottom line can be

seen in Figure 6 of my written report, which has already been referred to earlier today.

In both the status quo and NGATS scenarios, the annual average

cost over the 20 year period are in the order of $15.5 billion for the

median case. However, as an investment in the future, the NGATS
11

scenario requires an up-front investment higher cost in the early

and is expected to have cost savings in the out years.

In order to estimate the FAA NGATS funding requirements, the

working group also compared the cost estimates with the model of

the FAA Aviation Trust Fund revenue. Assuming recent levels of

General Fund contributions on the order of 20 percent, as has already been mentioned by others, the model for the mid case has an

expected shortfall of approximately $1 billion over the next several

years, until the NGATS operational improvements yield cost savings.

The working group explored a number of alternatives for closing

the near-term funding gap, including increasing the General Fund

contribution, reduction of FAA costs. The working group identified

approximately $500 million of potential costs, but they would not

be realized immediately. There is an increase in user taxes and

fees, and then financing options that bridge the near-term gap.

The working group also made preliminary assessment of user

taxes and fee approaches. No one approach was identified as optimal; a hybrid approach is likely. And more details are included in

the working group report.

Thank you.

Mr. MICA. Thank you.

Our last witness is Ellen Jewett. She is Vice President and Manager of the Transportation Group of Goldman, Sachs.

Welcome, and you are recognized.

Ms. JEWETT. Good afternoon, Chairman Mica, Congressman

Costello, and members of the Subcommittee. I appreciate the opportunity to testify before the Subcommittee today on the Next

Generation Air Transportation System financing options. The

NGATS initiative is a worthwhile and necessary step towards securing our Nation’s future development in aviation, and I am

pleased to be part of the discussion on how to properly fund it.

Historically, the FAA has relied on approximately 80 percent of

its funding from the Aviation Trust Fund, which is set to expire by

this time next year. As the FAA embarks on its ambitious NGATS

program, as well as restructuring the Trust Fund, this is an optimal time to explore alternative funding sources.

There are three primary capital markets options that the FAA

could evaluate to fund NGATS. On the traditional end of the spectrum, the FAA could borrow from the U.S. Treasury, which would

provide the lowest cost of capital. However, from a capital markets

perspective, borrowing Treasuries is expensive in its lack of flexibility, particularly as they cannot be called or refinanced.

The debt capital markets offer another solution for the program’s

funding gap. In 2005, more than $450 billion of municipal bonds

were issued, to the total market size of $2.3 trillion. Of the total

issued last year, more than 60 percent were revenue bonds, or

bonds that are backed by the revenues of a project or asset, as opposed to the taxing power of the Government. This robust market

provides an opportunity for issuers to borrow against any type of

revenue, including any user fee, without recourse, back to the governmental entities.

A particular approach that is widely used and ensures the highest security to a bondholder is a securitized revenue structure.
12

Under this structure, the FAA or a conduit issuer levies a charge

which is then passed through a special purpose entity and is irrevocably pledged to the bondholders.

How might this revenue securitization model be applicable to the

NGATS program? One example is through a securitization of FAA

revenue or user fees. How the fee is levied—ticket tax, passenger

levy, airline charge—is less important to the capital markets than

whether it is a stable revenue stream. A portion of this charge

would be irrevocably pledged to a special purpose vehicle that

would issue bonds backed by the expected regular collections of

those fees. These collections would be to pay principal, interest,

and other related cost. The special purpose vehicle would remain

legally remote from the FAA.

In order to ensure the involvement of all users of the system, a

capital policy board could be set up to determine the scope of the

capital financing plan and to enact it on behalf of the FAA. It is

envisioned that members from all interested parties—airlines, airports, labor—would be represented, along with members of the

FAA. This board would ultimately determine the size and strategies governing the financing and set rules to ensure accountability.

There are a number of benefits to this financing structure. The

most important to note is neither the FAA nor the U.S. Government is obligated to pay anything. Should the revenue collections

fall short of necessary debt payments, there is no recourse back to

the FAA or the Government. Additionally, there is no FAA operational risk. Thus, the FAA is able to transfer its risk and collect

money up front to fund a significant investment in aviation infrastructure.

The public policy implications are important. Under the proposed

securitization structure, the FAA could separate the public policy

determination of financing needs and capital plan from the execution of the financing by granting a legally separate oversight board

the authority to control the amount and timing of the issuance of

securities. The board would have the right to review and/or reject

the proposed financing plan. Thus, users of the system who would

be impacted by the financing decisions would have a direct role in

determining if such a financing is necessary.

The third and more radical alternative to solve the funding gap

would be to explore the burgeoning public-private partnership market which result in effectively transferring assets to private operators. With a large demand for projects that produce long-term,

steady revenue streams and, thus, long-term, steady revenue returns from a wide variety of pension funds, insurance companies,

and private equity funds, this market could provide an additional

or alternative source of funds for the FAA.

It is not unusual for governments to tap private investors for

funding assistance. In fact, there are numerous examples of the

Army or Navy leasing all of the housing on its bases to private developers. In the United Kingdom and Canada, private partnerships

form the basis for management of the air traffic control system

The FAA has already enacted such a program under the Pilot

Privatization Act whereby a private entity can own and operate

airports in the U.S. through a long-term performance based concession. Currently, there is one small airport in New York that has
13

been privatized under this approach and, additionally, Chicago

Midway Airport has just submitted an application to seek privatization under the act. This recent surge in interest in privatizing

airports could signal that the public-private partnership market

may be a very real and viable alternative to a debt financing.

That concludes my statement, Chairman Mica. Thank you. I appreciate the opportunity to speak here today. I would be pleased to

address questions you may have.

Mr. MICA. Well, thank you all.

We will turn to some questions, and I will start out with the first

question for the GAO. How confident are you that either the FAA

or the FAA’s Research, Engineering & Development Advisory Committee has come up with NGATS costs that are realistic?

Mr. DILLINGHAM. Chairman Mica, we are not very confident for

a number of reasons, particularly the fact that that critical document, that enterprise architecture, is missing. Additionally, there

are many, many costs that are not accounted for——

Mr. MICA. That enterprise architecture that you spoke about, it

is my understanding that won’t be available until the middle of

next year. Is that your understanding?

Mr. DILLINGHAM. Yes, sir, that is our understanding. And in addition to that architecture, even though I would say that it is necessary, it is certainly not going to be sufficient. There are going to

be costs associated with technology development which it hasn’t

been determined who is going to pay for it, how much is it going

to be. There are going to be costs associated with training air traffic controllers and pilots for the transformation. There will be all

kinds of costs for other partner agencies that have not been accounted for. So it is necessary, but certainly not sufficient. More

work will certainly have to be done even when that architecture is

available.

Mr. MICA. One of the problems, too, that we have had is the estimated revenues versus the actual revenues, which the Ranking

Member spoke about, have been sort of off base seriously, I guess,

since 2001. They have gotten a little bit better this past year. What

do we do about that and what do you attribute that to, Dillingham

and then Hansman?

Mr. DILLINGHAM. Chairman Mica, we reported to you about that

problem of the underestimation of forecasted resources, and since

that time—well, a couple of things. One is part of that was attributed to some unforeseen external circumstances—post–9/11,

SARS—those kinds of things, but also because, as it turns out,

their forecasting model had some problems that contributed to it

being off to that degree. We know that they have attempted to address those problems. The more recent forecasts have been closer.

Mr. MICA. Mr. Marron or Mr. Hansman?

Mr. HANSMAN. Yes. After the forecasts went low or the projections went high starting really in 2001, after the attacks. This was

partly the attacks, partly due to underlying changes in the air

transportation industry: lower yields, use of small aircraft, higher

frequency of service. And as Mr. Dillingham pointed out, the forecasts have been better in the past year.

Mr. MICA. Mr. Marron?
14

Mr. MARRON. And just to round it out, we observed the same

thing, that the FAA revenue misses were due to 9/11, various

shocks to the industry, greater penetration of low cost carriers.

I should say, from CBO’s point of view, we also make projections

of revenues. Until about a year ago, we based our projections—we,

in essence, went to the FAA, gave them our own economic assumptions, and asked them what the projection would be, so we relied

very heavily on their model. In the last year or so we have ben developing our own separate independent model for forecasting these

revenues. At the moment, the projections we have look relatively

similar to what the FAA has; we are a little lower than what they

are. Over time, I suspect that process of having two independent

cracks at this will shed light for both sides about the best way to

estimate these revenues going forward.

Mr. MICA. In May of 2005, Mr. Dillingham, you testified before

this Subcommittee that a zero uncommitted cash balance in the

Trust Fund would require the FAA to make significant spending

cuts to aviation programs currently supported by the Trust Fund

unless additional funding were appropriated from the General

Fund. Specifically, you stated that FAA officials told GAO that if

the uncommitted balance reaches zero, in order to fund the air traffic control service, FAA would have to suspend activities like AIP

facilities and equipment and research accounts. Is this still your

understanding about what would happen if we reached uncommitted balance of zero?

Mr. DILLINGHAM. Chairman Mica, that is still our understanding.

FAA states that the safe movement of traffic would be their primary objective and all other things would have to fall in behind

that in terms of available funding.

Mr. MICA. Well, it is my understanding that the Highway Trust

Fund has been allowed to operate in the negative uncommitted

cash balance area for a number of years now without impacting

highway programs. Anyone like to speak to sort of the inequity

treatment of the two funds?

Ms. IRVING. Mr. Chairman?

Mr. MICA. Yes.

Ms. IRVING. Part of that is essentially a function of how the Congress has set up the two trust funds. No agency can commit funds

without budget authority. And you have set up the Aviation Trust

Fund in a certain way, and then it requires appropriations to commit general revenues. The Highway Trust Fund cannot commit

funds without budget authority either.

The Highway Trust Fund’s budget authority comes in the form

of contract authority, which is then subject to obligation limits imposed by the appropriations acts. Under the SAFETEA legislation,

that authority is adjusted to reflect actual receipts. You have all

lived through the ROBA adjustments. Because of the way the program was set up, the obligations for these projects for which money

is outlaid over a number of years, can be met using future tax revenues; it is a function of the way the two funds were set up.

Mr. MICA. Any recommendation towards adopting a similar

mechanism?

Ms. IRVING. No. I think there are a number of things you would

need to consider. Fundamentally, as you know, the U.S. Govern-
15

ment handles highways differently than aviation. The Highway

Trust Fund collects revenues from users and distributes them to

States and to projects, which are then not run or owned by the

Federal Government. We have chosen, as a Nation, to have the air

traffic control system be a national activity and to have those people be Federal employees and run by the Federal Government. I

think that it is essentially a policy decision for the Congress to

make.

Mr. MICA. If we want to change that out, yes. Well, there are a

number of questions that are raised, too, in the highway finance

system and equity in those decisions. We now have a deficit of

about—well, I shouldn’t say a deficit, but we have a general revenue contribution of about $2 billion a year. And if we add in an

average of $1 billion for NGATS, we are looking at substantial additional cost. And also the question is raised as to who should pay

for that, should it be those who benefit from the system on some

user basis or does the general taxpayer have the responsibility,

even though they may never fly, some guy out in the middle of Podunk, U.S.A. be responsible for paying the existing cost and then

a little bit more for this new system.

Mr. Dillingham, any thoughts, or any of the other panelists?

Mr. DILLINGHAM. Chairman Mica, the point we are now, of

course, the bottom line, of course, is it is a Congressional policy decision. But after having said that, there are probably lots of options, and what we have said is that probably a combination of

things should be looked at, the pros and cons of a combination of

things, to see how to fund the aviation system.

But we also believe that there is a public interest in the aviation

system and that that public interest should be supported by a contribution from the General Fund, because the contributions of the

aviation system, it is not only for those who fly, but it is also for

those in Podunk that also benefit from the system.

Mr. MICA. One final question. I probably can’t answer this. I

looked at the chart that shows basically the cost of implementing

the NGATS, and I guess without the system architecture and some

of those costs we really can’t tell if there are any—I mean, we have

some estimates that we have been given, but you can’t tell if there

is considerable spikes at any point or if that billion is going to turn

into a $3 billion at one point because of heavy equipment costs or

whatever facilities expansion. So we really don’t know, do we, the

flow of the money that is going to be required?

Mr. DILLINGHAM. I think Professor Hansman probably can add to

this, but our understanding, based on the estimates that we see,

is that we talk about an average annual expenditure of about $1

billion, meaning—or at least we are interpreting that to mean that

there will be probably higher costs early on in terms of capital development and subsequently that leveling out as the equipment is

in fact acquired. But a point also is that air traffic control modernization is probably going to be with us for as long as we are

around, because as soon as we get to the Next Generation, we are

going to be talking about the next generation as well.

Mr. MICA. Mr. Costello, I may have some more questions, but we

will yield to other members.

Mr. COSTELLO. Mr. Chairman, thank you.
16

Dr. Dillingham, thank you for speaking up for Podunk, America,

but let me say that in my opening statement I agree with you that

there are a number of people in this Country who may never fly,

but the fact of the matter is that a safe and efficient aviation system is good for our economy and our Country, and everyone benefits from it. So I appreciate your comments and strongly feel that

there has to be a contribution from the General Fund as we proceed to implement NGATS.

Dr. Marron, let me ask a couple of questions, if I can. CBO projected rate of growth for the Aviation Trust Fund. What is the annual rate of growth above inflation, what are you projecting?

Mr. MARRON. Sir, it is roughly—I won’t give you a specific number but, in essence, the flows into the Trust Fund are rising a little

bit faster than the overall growth rate of the economy, so a little

bit faster than inflation plus real GDP growth. That is primarily

driven by an observation historically that air travel and related

things seem to grow somewhat faster than the economy historically.

Mr. COSTELLO. So it would be between 2 percent and 5 percent?

Mr. MARRON. Yes, it would be inflation plus, I think, somewhere

in the 3-ish range.

Mr. COSTELLO. OK. And you attribute that to?

Mr. MARRON. Growing economy, which generates growing air

traffic, and then the fact that historically it appears that air travel

actually grows a little bit faster than the economy.

Mr. COSTELLO. CBO completed a ten-year Trust Fund projection

and you base that—that was in April of 2006, based upon the

FAA’s F&E cost for the Next Generation System, as well as Vision

100, the statutory formula, as well as looking at the other three

major accounts adjusted for inflation. And it is my understanding

that, based upon that review, that CBO has estimated that the

Trust Fund in fact could absorb the capital cost of NGATS for a

general fund with the General Fund contribution of about 21 percent. Is that correct?

Mr. MARRON. That is correct. Let me describe a little bit, sort of

qualitatively, how that comes about.

Mr. COSTELLO. Please.

Mr. MARRON. In essence we have a system which, if the various

tax components get extended—many of them are scheduled to expire, but if they get extended, you have a revenue stream which is

in essence growing with the rate of the economy and a little bit

more. Under the conventional assumptions we use in constructing

a baseline, the spending is assumed to grow just with inflation, so

without real growth in it, and then you, in essence, have over time

that the revenues are larger than the spending, there is room to

add on some spending for, say, some NGATS investments—obviously, the estimates on that front are extremely preliminary—and

there is room then, also, either to do more of that or to reduce what

comes in from the General Fund or, as you described, sort of hold

the General Fund contribution relatively constant and have that

additional investment.

Mr. COSTELLO. So is that a long answer to saying that it is about

21 percent?
17

Mr. MARRON. Yes, those numbers work, but not forget the additional cost elements that were put in there are obviously very preliminary.

Mr. COSTELLO. Very good.

Dr. Dillingham, actually, for you or Ms. Irving, either one, I understand that CBO has stated that third-party financing, which

may include leasing and other types of financing, that there are

some negative consequences, and I wonder if you might comment

as to your views. Are there negative consequences of financing arrangements which include leasing and privatization?

Mr. DILLINGHAM. Mr. Costello, I think it is always good to know

what your limits are. And since I know what my limits are, I am

going to ask Dr. Irving to respond to that.

Ms. IRVING. My colleague is much too modest.

Yes, as a number of the witnesses and as a number of you have

stated, Treasury securities are the gold standard in the world. The

Federal Government borrows more cheaply than any other enterprise. It is the least cost option to have the Federal Government

borrow this money than to have the Federal Government pay someone else to borrow at their borrowing rates.

Mr. DILLINGHAM. But on the leasing side, if we are talking about

an operating lease versus a capital lease, there are some advantages for the Government to be involved in an operating lease in

terms of the budget scoring and the money needed up front and a

whole lot of other issues. This is the kind of lease that the Government was involved in when they procured the WAH satellite system. It is the same kind of discussions that are going on now with

regard to ADSB, where the Government would purchase a service

and not be obligated to, or assume the risk of the development of

the infrastructure and so forth. As long as the circumstances are

such that they meet CBO, OMB, and congressional guidelines for

an operating lease, it is something that we think ought to be on

the table to be considered where appropriate.

Mr. COSTELLO. Dr. Dillingham, as I mentioned in my opening remarks, the Trust Fund’s uncommitted balance has shrunk significantly, and due largely because of the over-optimistic revenue forecast. You testified before the Senate, I think, in March of this year

and suggested a solution as to how that can be corrected. I wonder

if you might elaborate just for the record.

Mr. DILLINGHAM. Yes, sir. At that time we suggested since the

forecast had been off so much based on forecasting, we suggested

that one thing that Congress could consider would be to look at actual revenues, as opposed to forecasted revenues. We also said at

that point in time that that could very well mean less immediate

available spending for FAA because the actuals are often smaller

than the forecast and the statutes at this point in time say you

spend what is forecasted as such.

Mr. COSTELLO. Very good. Last question in this round.

Professor Hansman, is it your opinion that NGATS will increase

productivity and drive down the FAA’s operating cost?

Mr. HANSMAN. I think that NGATS, if it is implemented and well

designed—remember, this is a system which is still being designed

and prototyped. One of the clear objectives is to increase the productivity. One of the reasons why the system doesn’t scale over
18

time is that we can’t continue to cut sectors into smaller and smaller chunks, because we are limited by controller workload capability. So we will find a way to get more productivity out of the system. In all likelihood, it will be shifting some of the operational responsibility to the cockpits and things like that. So I think it will

be more efficient. And if it is not more efficient, we shouldn’t do

it.

Mr. MICA. Thank you.

Mr. Ehlers?

Mr. EHLERS. Thank you, Mr. Chairman.

First of all, I also have to join with Mr. Costello in thanking Dr.

Dillingham with his concern about Podunk, since Podunk happens

to be in my district. The irony is only a mile and a half away from

Podunk is Harvard. So, as you can see, I have quite a diverse district.

A couple of different questions. And I appreciate, incidentally,

Dr. Dillingham, your comments about there is a definite public interest in aviation and that substantial part of it has to be financed

out of the General Fund. And I am puzzled about the constant talk

about user fees and so forth. It seems to me that is the wrong way

to go; it makes it very cumbersome, it gets more expensive.

And the best analogy I have is just our ordinary automobile traffic. We don’t charge user fees. Everyone goes through an intersection and has the benefit of a traffic signal. Or when you put up a

stop sign at the end of the street, you don’t charge a user fee to

all the people who live on that street. I think that analogy holds

for aviation. It is a bit silly to get that specific about the cost. And

I think, because of the public interest, we should finance that part

of the General Fund or out of the fuel taxes.

A question for Mr. Hansman. In your best case NGATS scenario,

REDAC assumes that after 2011 FAA operating costs will be reduced about 2 percent per year, resulting in a 25 percent cost savings by 2025, which sounds wonderful. Just what assumptions go

into this and how much confidence can we all place in these estimates of productivity savings?

Mr. HANSMAN. The reason why this was done as a parametric

analysis is because it is so preliminary. We are basically scoping

the problem. So that is why it is the best case. So what we felt was

that 2 percent was reasonable as a best case productivity improvement. We assumed that in the baseline case it would essentially

hold operations costs constant, and the worst case was that the operations costs would remain at the current levels per flight or per

operation.

Mr. EHLERS. And are you reasonably confident that we can increase the productivity by that amount?

Mr. HANSMAN. I am confident we can increase the productivity.

The U.S. actually has one of the highest productivity air traffic control systems in the world, but there are clearly inefficiencies in the

system and the way we do it is very labor intensive. So it is clear

that there are opportunities for improvement. And if that is an objective of the system, it is clear to me that we can get improvements. Whether they will be at a 1 percent level, 2 percent level,

or 10 percent level is tough to say at this point.
19

Mr. EHLERS. Actually, I agree with you. The difficulty comes

when there is an aircraft accident with a number of fatalities. Immediately the outcry will be you have cut the staff too much. And

so it is hard to judge what impact that is going to have.

Mr. HANSMAN. But I think we have to recognize that air traffic

controllers don’t fly the airplanes. That is one of the notions within

NGATS, is to move more of the responsibility to the cockpit, where

you actually have better information and are quicker. So I think

you are right, there is always political pressure after an accident,

but we really have to think about a system which is scalable for

the future and is efficient.

Mr. EHLERS. Well, that can easily be done with the right electronic equipment and interfacing.

Mr. HANSMAN. Yes.

Mr. EHLERS. A question for Ms. Jewett. You gave a convincing

case for using the public bond approach, but can you just tell me

why it is better to do that than borrow from the United States

Treasury?

Ms. JEWETT. I will give you one reason why it might be better.

As we have all talked about U.S. Treasury being the lowest cost,

one issue on the Treasury side, though, is the inability to be able

to refund the bonds. If the interest costs became lower, in the bond

market you could issue variable rate bonds, which are always lower

cost than fixed rate, and you could structure a bond financing that

would have possibly increasing debt service if there was a sense

that the fees were going to increase.

So there is more flexibility in the other options. A securitized

model in today’s market would really only cost a quarter of a point

in the market relative to a U.S. Treasury, so I am not suggesting

looking at a model that would be dramatically different or more expensive than what we have today. But Treasuries are great too.

Mr. EHLERS. All right, thank you very much.

I yield back the balance of my time.

Mr. MICA. Thank you.

Mr. DeFazio?

Mr. DEFAZIO. Thank you, Mr. Chairman.

This is an important subject, but just to get back to Podunk for

a second, I took the liberty of Googling Podunk, and on Wikipedia

Mr. Ehlers may want to edit it, because they don’t list one in

Michigan. They have New York, Massachusetts, a couple others.

So, Vern, you ought to get in there and edit that.

[Laughter.]

Mr. DEFAZIO. I have a couple of questions that relate to this. I

know it is hard to say, and I guess no one wants to put a number

on what would be the appropriate level of General Fund contribution. Do any of you have any ideas on how we might go about, if

we wanted to reach that conclusion, sort of methodologically looking at that which accrues generally to the society in terms of economic activity?

For instance, in my hometown of Eugene, we have companies

who have come there, rather large companies, who say, well in part

we are here because we have very good access to San Francisco,

you know we have, down in the Silicon Valley, another branch and,

therefore, we need to be moving people back and forth. So, obvi-
20

ously, there are some pretty interesting second and third level sorts

of benefits that accrue to a national integrated system that is efficient.

So does anybody have any ideas— I mean, since we are going to

have this debate—next year we are going to be having some significant portion of debate on how much we are going to leave on the

table for the General Fund or how much are we going to try and

fight with the appropriators? Anybody want to give us an idea of

how we might get there?

Mr. MARRON. Sir, I will start off so that I can be the first to give

the weasely answer, which, of course, in part it is a political——

Mr. DEFAZIO. You did very well with Mr. Costello, too.

Mr. MARRON.—about distribution. But that said, as a starting

point, I would start at the other end and just point out that it is

clear that a lot of the benefits of the system accrue to the people

and cargo that fly. And so the starting point, I think, purely as an

economist—leaving aside kind of political judgments and distributional judgments—is that clearly a significant portion should be

borne by those direct beneficiaries of the system, just as we do for

other types of products that we are able to produce in the economy

without government intervention. And then it becomes, as you say,

sort of a line drawing exercise of how far do you go.

I haven’t seen any good studies, myself, that would try to parse

that out and give you ratios, I am afraid, so weasely answer.

Mr. DEFAZIO. OK.

Ms. Irving?

Ms. IRVING. I will give you another version, I guess, of a weasely

answer, but also starting at the other end, one of the things that

improved cost accounting can do is help you figure out something

about the allocation of who imposes costs, which then can be—

which is not the same as who benefits, but it will provide input as

you begin to think of this balance between the costs imposed and

the benefits received.

The other thing you might want, when you all are talking among

yourselves, is this is not actually a unique argument in the Government. When we think about funding drug approvals, it is not only

drug manufacturers who benefit from a strong FDA, but those of

us—I am old—who did not take thalidomide. It is not only meat

producers who benefit from meat inspection, but me when I grocery

shop. So there is some balancing, I think, between, but if you can

learn what costs are imposed by whom and then start from there,

you may have a head start in your discussion about how much you

believe should be taken from the collective to be used for the safety.

Mr. DEFAZIO. Of course, you have just opened a bit of another

issue there, which is how we attribute the benefits received. Mr.

Lapinski and I went through an exercise four or five years ago

where we invited a whole host of experts in to breakfast meetings

from different sectors to talk about that, and you get a different answer from a point-to-point carrier than a hubbed carrier in terms

of how one should assess certain costs on passengers and, I mean,

what the benefits are, I mean, is it harder for an air traffic controller to deal with a commuter flight at lower elevations and that has
21

frequent landings or a longer transcontinental flight, those sorts of

things.

Ms. IRVING. It is interesting, because I think of that as part of

the costs imposed, and that is some of the stuff my colleague talked

about. Benefits is that I would suggest that the safety improvements on the airlines, for instance, benefit not only those on the

airline, but those into whose homes the airlines do not crash.

Mr. DEFAZIO. Right.

Ms. IRVING. So that is part of the balancing act I think you are

dealing with.

Mr. DEFAZIO. Right.

Mr. DILLINGHAM. Mr. DeFazio, maybe not helpful immediately,

but certainly an issue that comes up continuously, the last time the

Committee had a hearing on small community air service, it comes

up constantly in terms of the economic benefit that airline service

brings to the communities, and each time we are asked to go out

and try and quantify that, we find the studies don’t hold up. We

find that the information is just not there. So something in the future for almost every district that has a small air service is to really work towards developing that kind of information that will add

up to and support the notion of the economic benefits of having an

airline come to those small communities, and medium-sized communities.

Mr. DEFAZIO. Yes, sir.

Mr. HANSMAN. These are just a few thoughts. I actually have a

doctoral student who is attempting to correlate the economic effect

of air transportation sort of in the general sense. We know that

there is a correlation. We actually don’t know what is cause and

what is effect. I think that when you think about this air transportation system, it is important to separate out the air traffic control

functions from the infrastructure functions, because the air traffic

control benefit is really the traffic cop, OK? It is organizing the

traffic; it is an efficiency benefit versus the access issue.

The other thing is if you look at the U.S. in general, we have a

society which has clearly become dependent on air transportation,

and that is why you touch Podunk, because it is not just the travel,

but it is the just-in-time inventory, it is all kinds of things that permeate through the system. And you can actually see diffusion of

the U.S. population into regions which have good air service. So I

think that there is clearly a benefit to the population at large, and

it is important not to overly think about the intermediates or the

operators who really think about who is getting the real benefit of

having that infrastructure.

Mr. DEFAZIO. And if the Chairman is successful in doing away

with Amtrak, then we will be even more dependent upon—no, I

didn’t mean that, Mr. Chairman.

Mr. Chairman, one more question here.

I am a bit puzzled by the JPDO projections on the costs to the

economy, and if anybody here can sort of—because it says here $12

billion in 2008, so on and so on, in terms of foregone opportunity,

I guess. I mean, it says difference between demand for air travel

and the total flights that could be delivered with no new investment.
22

I am just puzzled by that number. I mean, if we are looking at

$12 billion in 2008, that would imply that we probably are seeing

foregone revenues today, or economic activity. I mean, I am not

aware that the system is that constrained today. Can anybody

speak to how JPDO came up with these numbers, and how they

seem so large and go up so quickly?

Mr. HANSMAN. I don’t remember the details, so I will just give

you my impression. We have an infrastructure which is starting to

get to capacity limitations. I believe a lot of that effect are capacity

constraints. I think there are also environmental and other costs

that are put into it.

And the way I believe they modeled it was to project the unconstrained demand, to look at the impact of the constraints, and then

to value, by some measure, the travel that wasn’t accomplished or

the economic activity that wasn’t accomplished.

Mr. DEFAZIO. OK, so it is kind of a blue sky thing, like if everybody could just take off and fly whatever route they wanted to get

wherever they wanted to go without any interference by air traffic

control——

Mr. HANSMAN. I believe it is a projection. And then if you start

looking at the fact that we can’t basically fly more airplanes into

LaGuardia then we currently enable, that becomes a constraint.

And there is an interesting question because does that activity not

exist or does it deflect to other regions? And the real issue may not

be a loss of overall activity, but a deflection to other places either

in the U.S. economy or, more worringly, to other nations. So as our

system becomes inefficient, then people will start locating in other

locations because they are more efficient.

Mr. DEFAZIO. OK, thank you.

Thank you, Mr. Chairman.

Mr. MICA. Just for the record, the Chairman is a strong advocate

of long distance national rail service and an extremely strong advocate of high-speed rail service. He is, however, in opposite of the

Soviet style current Amtrak operation.

[Laughter.]

Mr. MICA. Ms. Norton.

Ms. NORTON. No questions.

Mr. MICA. Thank you for your brevity, Ms. Norton.

A second round.

I just want to follow up on the savings issue. Right now I understand the cost is $14 billion to run our FAA system, full system,

about $2 billion general revenue. Just project this out and we say

it was going to cost us about $20 billion to run it we will just say

by 2025. And I have heard that there could be as much as a 20

percent cost savings by 2025. Does that mean that the cost to operate, just taking those ballpark figures, could be as low as $15 billion? Would that be a net savings in dollars or would it just be in

operational efficiencies, or what? Mr. Hansman?

Mr. HANSMAN. Yes. It would be net savings in dollars. And,

again, I apologize. I took a heat. I didn’t do the calculation, but

they are in 2005 dollar, so they are not inflated dollars. But the

NGATS projection out in 2025 would be—the total NGATS cost to

the FAA would be——
23

Mr. MICA. Would it be your estimate also that we can either be

level or reducing the number of personnel? Now, this system is

based on the highest technology. We are going to be able to sight

planes with unprecedented precision. We will have technology both

on the ground, in the plane, and satellite-based that will give us

unprecedented ability to track, to locate with redundant systems.

So we could end up with net fewer personnel.

Mr. HANSMAN. There would clearly be fewer personnel per operation. Remember, the number of flights goes up too, so you have

to look at which dominates.

Mr. MICA. Right. We are going to have more flights, but greater

efficiencies in operation, greater accuracy, too, in pinpointing the

location of the aircraft, both on the ground, en route, etc.

Mr. HANSMAN. And, hypothetically, because of that, you get some

environmental benefits; you can reduce the noise impact around

airports, so you get benefits from there——

Mr. MICA. Fuel.

Mr. HANSMAN. You will get fuel benefits. One of the things that

is probably under-representative—it is implicit in efficiency—is

within NGATS the things that you get in terms of efficiency in environmental efficiency are also a fuel savings. So, hypothetically,

you will get some benefit.

Mr. MICA. And what about some ground-based systems now that

are necessary to bring planes in in bad weather or inclement conditions? With this new technology, it won’t be as necessary to be putting all those bucks into some of those system as opposed to this

system, or will it be necessary for redundant system to continue

building both those and having this in place?

Mr. HANSMAN. You will need some level of redundancy. You will

clearly be able to reduce the level of ground redundancy. One of the

problems with a lot of our ground facilities, and one of the reasons

why we have high costs is because they are expensive to keep calibrated. If they are miscalibrated—if you have an ILS that is

miscalibrated, you have people flying into hills. So you can’t allow

that.

So we spend a lot of money calibrating that. Some of these systems will be more cost effective from a maintenance standpoint.

There will still be costs on the ground, so even if you have a GPSbased approach system, you are still going to have lights on the

airport and communications facilities, and things like that.

Mr. MICA. In addition to its ineptness in running passenger rail

system in the United States through a quasi-governmental entity,

I found, in my short 13.9 years on this Committee, that one thing

the Government doesn’t do very well is R&D of high tech systems,

at least through FAA. It is just a horrendous record of cost overruns, inability to procure next generation anything.

Mr. Dillingham, and maybe Mr. Hansman, how do we avoid

that? Now, we are looking at anew high tech system. Again, I sat

on this Committee as a freshman somewhere down on that bottom

pew, and heard people telling us that this next development project

is right around the corner, just give us a few more billion. Then

they would come back in two years: just give us a few more billion,

it is around the corner.
24

And the private sector, in the meantime, because they changed

the specs, they tweaked the acquisition, the ineptness and the time

period it takes to procure anything through the FAA system in the

past just ended up having the private sector would develop technologies that would be far and above what we had even come close

to achieving. And I have helped stop some of that. I call it the dog

chasing its tail.

This is an expensive system, it is a next generation. We will have

some technologies we don’t have now. How do we avoid repeating

those same mistakes? Dillingham, Hansman?

Mr. DILLINGHAM. Chairman Mica, the story that you just told is

a story that we have been telling for almost two decades now about

procurement and acquisition at FAA. The other part of the story

is that Congress did act on this project and established the ATO

as a performance-based organization, and as a part of that mandated that it operate in a more business-like fashion, that it in fact

address those issues of cost overruns and schedule delays, and at

least for the last two years, for the first time in recent history, FAA

is in fact meeting its cost and schedule goals for acquisition of

major systems. The question becomes now, was this a flash in the

pan or do we have a way to institutionalize that this continues?

Secondly, we have testified before you before and suggested that

one of the missing elements for FAA is do they have the expertise

to acquire and manage such a very complicated undertaking as

this. And we have suggested that they consider—and FAA has

agreed to consider—employing a lead systems integrator or employing the expertise that is dedicated to FAA, and not dedicated to its

own ends, to make sure that what you refer to or what we refer

to as requirements creep and things like that are minimized. So we

are hopeful.

Mr. MICA. Well, this is a big concern. Also, everybody has been

polite, sort of working together. At some point some hard decisions

have to be made, and I think somebody has to be in charge with

the ability to bring—now you are going to be dealing with DoD,

NASA, DHS, and other agencies who all have their turf, who all

have their agendas, but somebody has to be in charge of the thing

and make decisions with milestones and deadlines and accountability, as we have learned the hard way through our FAA acquisition.

Would you agree with that?

Mr. DILLINGHAM. Absolutely. And not only somebody has to be

in charge, but whoever is in charge has to transcend the administrations, has to transcend the secretaries that are on the decisionmaking bodies, because this is a multi-year, many year operation.

So, again, that is why we say that cultural shift that is going on

plus whatever systems are in place that have made it work well

for the last two years needs to be attended to, and the buck has

to stop someplace. It is not clear to us that there is an absolute end

in JPDO as to who is in charge right now.

Mr. MICA. Exactly. I mean, I think Marian Blakey and Russ Chu

have done their part, but, again, we are involved in low-hanging

fruit at this stage. But to make this really happen, somebody is

going to have some clout, some teeth, and some ability to transcend

just a limited period in time and space.

Mr. Hansman, did you have anything?
25

Mr. HANSMAN. Yes. I agree. I think this is a tremendous challenge. I have concerns about how you actually do it, particularly as

a multi-agency involvement, how do you manage through this. One

of the reasons why it is hard to do major modernization at the FAA

is it is a big system. We have one of the biggest systems in the

world. It is perceived as a safety critical system, so that, if someone

doesn’t like what is going on, they just raise the safety issue. So

it is a real challenge. It is going to require leadership and a structure that has the type of forcing function that was discussed.

Mr. MICA. Well, the other thing, too, riding on this that we

haven’t even talked about today is our standing in sort of dominating or being the premier airspace aviation system in the world. We

skip a few beats here——

Mr. HANSMAN. So, interestingly——

Mr. MICA. We will be looking at——

Mr. HANSMAN. The Australians are actually moving pretty quick,

because they have a smaller system that they have control over. So

it has been an interesting case that they are often leading the technology. They are the guys putting automatic dependant surveillance in already. So I think that that is a challenge.

Mr. MICA. We haven’t really gotten into the consequences for the

U.S. falling behind, which would be horrible.

Mr. Costello had another question.

Mr. COSTELLO. Final question.

Ms. Jewett, let me ask you. In your testimony you talk about financing options and you talk about the FAA or a conduit. Let me

specifically ask you on page 2 you say that: ‘‘There are a number

of benefits to this financing structure. The most important to note

is that neither the FAA nor the US Government is obligated under

this structure to pay anything other than the transferring the

pledged revenue collections. Should the revenue collections fall

short of the necessary debt payments, there is no recourse back to

the FAA or the Government.’’ It sounds like a deal that no one

could refuse.

Ms. JEWETT. Too good to be true?

Mr. COSTELLO. So there is no obligation on the part of the FAA

or the American taxpayers if we set up this conduit and revenue

falls short?

Ms. JEWETT. If you have created this capital policy board that directs the special purpose vehicle who is receiving, whether it is the

ticket tax, the General Fund money, a user fee, whatever it is, and

the obligation in the securitized model is just on whatever revenues

come in to this box, if you will, of money, if for some reason the

policy board hasn’t directed an increase in user fees, say, or if the

ticket taxes don’t come in at the expected amount, that is the risk

that the bondholder bears, the person who bought the bonds.

Mr. COSTELLO. Well, the person who bought the bonds, but, of

course, we have a system here that, if in fact is implemented, we

have to keep it running. And as I said in my opening comments,

I am not opposed to looking at all financing options and putting

them on the table, but I have had an experience in dealing with

some infrastructure where there were entities who operated and

collected fees, bonds were sold, the revenue did not cover the cost

of operations, and both the State of Illinois and the State of Mis-
26

souri had to step in, pay off the bonds, take over both of these

structures, maintain it, and they continue to run it to this day.

So I just want to be clear on this. We could have closed the

bridges down and said we will shut the bridges between Illinois

and Missouri down because they are going into default on the

bonds, but that, of course, would not be in the interest of the region

or the American taxpayers. And if in fact we set up a system here,

if it is a conduit, if it is some other type of a structure, in the end,

the taxpayer is responsible for it if we intend to keep the system

going.

Ms. JEWETT. I think that you are right in that there may be a

moral obligation. But there wouldn’t be a legal obligation. And I

could sense you were talking about the bridges. I don’t remember

whether there was a moral or a legal obligation in that particular

situation, but——

Mr. COSTELLO. Well, we sure wouldn’t shut the system down

Ms. JEWETT. No, you wouldn’t shut the system down. And presumably, in this case, one, you would collect enough to have a coverage account on the side, possibly; two, if you found that you were

in a position where revenues were falling short, you would restructure the debt. And that is the difference of what you can’t do with

Treasuries. You can’t restructure that debt, but here you can restructure it to meet the revenues. And, third, you would have the

policy board presumably having an ability to raise the fees and

charges if you were getting to that point.

Mr. COSTELLO. Let me ask that question of the GAO or CBO.

Mr. MARRON. I am happy to jump in. I guess the framework I

would say that to the extent that one is successful in setting up

a structure that passes some risk on to private parties, they are

going to ask you to pay for it in advance somehow in the compensation they get through the arrangement. So that, in essence, the

Government will be paying for it through some other form. And

then layer on top of that your concern, which is, after the fact, if

something goes wrong, to the extent that something is a significant

governmental undertaking, as you said, the Government will be on

the hook for providing it anyway.

Mr. COSTELLO. Which brings me to another project that was recently privatized where a lot of money was paid up front for this

company to take over this structure, and the money that was paid

to the governmental entity was not set aside for infrastructure, it

was used for other governmental purposes. I wonder if the GAO

would want to comment, Dr. Irving or Dr. Dillingham?

Mr. IRVING. I think that Ms. Jewett’s answer that there would

be a moral obligation at the end answers that this is in effect the

Government using another vehicle to borrow more expensively for

what the Government could borrow. I actually do not understand

the point about rigidity. I mean, the Treasury borrows at all kinds

of maturities at the lowest rate possible.

If you wanted to do the two-step version, where Treasury borrows from the Federal Financing Bank, the Federal Financing

Bank has the ability to lend to agencies at quite different designs,

in very different ways. It has a fair amount of flexibility. But it is

still the Treasury going to the market. And there is the additional

question of would you really want to hand to some private board
27

the ability to impose what is called a user fee, but is in effect a

tax?

Mr. COSTELLO. Dr. Dillingham?

Mr. DILLINGHAM. Again, that is about as far as I can go with it.

Mr. COSTELLO. Mr. Chairman, thank you. And I want to thank

our witnesses.

Mr. MICA. Well, thank you. Thank you also, Mr. Costello.

I want to thank our witnesses.

Now, we haven’t answered how this is all going to be paid for or

how it is all going to be designed and proposed at this juncture. We

have answered a few questions, but we have raised a bunch of

questions. I think the important thing is that we look at this as

not only a challenge, but a great opportunity to create truly a next

generation air traffic control system and aviation system for this

Country and be on the cutting edge. And there are a lot of representatives in the audience from different organizations.

Well, who is going to pay for it? Well, we are all going to pay

for it. That guy in Podunk, we are going to figure out what his fair

share is, and every one of you who is sitting here that has some

interest in using and access this system are going to help pay for

it.

We are going to figure out a way to do that, stay ahead of the

curve, and see how we can have, again, the very best system in the

world and set the standard. The benefit will not only be for the

United States, but think of the potential of having our system

adopted around the world and again having us continue to keep

and set the standard. So that is what we are going to do with Mr.

Costello’s help and all of you out there. If we have to drag you kicking and screaming across the finish line, we are going to do it.

Mr. Costello moves that the record be left open for a period of

two weeks for additional comments and pledges of your financial

contributions towards this effort, statements, we welcome all of

those.

There being no further business to be before the Subcommittee

today, I thank again our witnesses and everyone for being with us.

This hearing is adjourned.

[Whereupon, at 3:37 p.m., the subcommittee was adjourned.]
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