United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Aviation, 

Committee on Transportation and 

Infrastructure, House of Representatives

NATIONAL AIRSPACE 

SYSTEM MODERNIZATION

Observations on Potential 

Funding Options for FAA 

and the Next Generation 

Airspace System 

Statement of Gerald L. Dillingham, Ph.D, 

Director, Physical Infrastructure Issues 

Susan J. Irving Ph.D. Director, 

Federal Budget Analysis Strategic Issues 

For Release on Delivery

Expected at 2:00 p.m. EDT

Wednesday, September 27, 2006

 

GAO-06-1114T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 27, 2006

NATIONAL AIRSPACE SYSTEM 

MODERNIZATION 

Observations on Potential Funding 

Options for FAA and the Next Generation 

System 

Highlights of GAO-06-1114T, a testimony 

before the Subcommittee on Aviation, 

Committee on Transportation and

Infrastructure, House of Representatives 

The transition to the Next

Generation Air Transportation 

System (NGATS)—a system

intended to safely accommodate a 

possible tripling of air traffic by

2025—will become one of the

federal government’s most 

comprehensive and technically 

complex undertakings, and a 

preliminary estimate indicates it 

will also be expensive. However, 

the current approach to managing

air transportation is becoming 

increasingly inefficient and

operationally obsolete. In 2003,

Congress authorized the creation of 

the Joint Planning and 

Development Office (JPDO) to

coordinate the efforts of several

federal partner agencies—including

the Federal Aviation 

Administration (FAA), in which 

JPDO is housed—to plan for and 

develop NGATS. 

GAO’s testimony addresses (1) the 

current estimate and uncertainties 

over NGATS costs, (2) advantages 

and concerns that stakeholders

have raised about the current 

approach to collecting revenues 

from national airspace users to

fund FAA, (3) the advantages and

disadvantages of adopting 

alternative funding options for

FAA, and (4) the advantages and 

disadvantages of authorizing FAA 

to use debt financing for capital 

projects. 

This testimony is based in part on 

GAO’s analysis of FAA and JPDO

documents and interviews with 

officials of those two agencies. 

No comprehensive estimate of NGATS costs has been developed. However, 

an advisory committee to FAA has developed a limited, preliminary cost 

estimate, which has not yet been endorsed by any agency. This estimate 

suggests that with NGATS, FAA’s costs would average about $1 billion more 

per year (in today’s dollars) over the next 20 years than FAA’s

appropriations for fiscal year 2006. The estimate is preliminary in part 

because JPDO has not yet completed its enterprise architecture, (a blueprint 

for NGATS) which will be needed to inform a reliable cost estimate. 

Some stakeholders support the current excise tax system because they 

believe it has been successful in funding FAA, has low administrative costs, 

and distributes the tax burden in a reasonable manner. Others, including 

FAA, state that under the current system, there is a disconnect between the 

revenues contributed by users and the costs those users impose on the 

national airspace system (NAS) that raises revenue adequacy, equity, and 

efficiency concerns. Trends over the past 25 years in, and FAA’s projections 

of, both inflation-adjusted fares and average plane size suggest that the 

revenue collected under the current funding system has fallen and will 

continue to fall relative to FAA’s workload, supporting revenue adequacy 

concerns. 

Adopting alternative funding options to collect revenues from NAS users 

would have advantages and disadvantages. The degree to which alternative 

funding options could address concerns about the current excise tax system 

ultimately depends on the extent to which the contributions required from 

users actually reflect the costs they impose on the system. Given the diverse 

nature of FAA’s activities, a combination of alternative options may offer the 

most promise for linking revenues and costs. 

Allowing FAA to use debt-financing for capital projects, such as the 

replacement of facilities and equipment associated with the transition to 

NGATS, also presents advantages and disadvantages. Some stakeholders 

see debt financing as attractive because they believe it could provide FAA 

with a stable source of revenue to fund capital developments, while at the 

same time spreading the costs out over the life of a capital project as its 

benefits are realized. Debt-financing raises significant concerns, however, 

because it encumbers future resources, and expenditures from debt 

proceeds may not be subject to the same congressional oversight as 

expenditures from appropriations. Concerns about borrowing costs, 

oversight, and encumbering future resources are particularly important in 

light of the federal government’s long-term structural fiscal imbalance. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1114T.

To view the full product, click on the link 

above. For more information, contact Gerald 

L. Dillingham, PhD, (202) 512-2834, 

dillinghamg@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify at today’s hearing on potential 

options for funding the transition to the next generation air transportation 

system (NGATS)—a system intended to safely accommodate a possible 

tripling of air traffic by 2025. As you know, in 2003, Congress authorized 

the creation of the Joint Planning and Development Office (JPDO) to 

coordinate efforts by several federal partner agencies (including the 

Federal Aviation Administration (FAA), in which JPDO is housed) to plan 

for and develop NGATS. NGATS is envisioned as a major redesign of the 

air transportation system that will include precision satellite navigation; 

digital, networked communications; an integrated weather system; and 

layered, adaptive security. The NGATS transformation effort will be an 

enormously complex undertaking, and a preliminary estimate indicates it 

will also be expensive. However, the current approach to managing air 

transportation is becoming increasingly inefficient and operationally 

obsolete. In fact, JPDO has estimated that failing to modernize to meet 

future demand for air transportation could result in billions of dollars in 

economic losses to the nation. 

Although JPDO is responsible for planning the transformation to NGATS 

and coordinating the efforts of its partner agencies, FAA will be largely 

responsible for implementing the policies and systems necessary for 

NGATS. Considering how to fund the near-term sustainment or 

modernization of our air transportation system takes on added importance 

given competing funding demands and the federal government’s long term 

fiscal outlook. Our recent work, contained in a report that will be released

to the public soon,1

 analyzed the current funding structure, which relies 

mainly on revenues collected from national airspace system (NAS) users, 

and alternative funding options. 

We and others have pointed out that the federal budget is on an

unsustainable path. Although the drivers in this outlook are federal health

and retirement programs, we have also said that a fundamental 

reexamination of the base of federal programs and activities is important 

to create a sustainable government appropriate for the 21st century.2

 Given

 1

GAO, Aviation Finance: Observations on Potential FAA Funding Options, GAO-06-973 

(Washington, D.C.: September 2006). 

2

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 1 GAO-06-1114T 
the uncertain fiscal environment in which the air transportation system 

operates, and will likely continue to operate during the transformation to 

NGATS, my testimony today is designed to provide this committee with 

information on a preliminary cost estimate for the NGATS transformation

and potential options for funding FAA. Specifically, my statement today 

will briefly address the (1) current estimate and uncertainties over NGATS 

costs, (2) advantages and concerns that stakeholders have raised about 

the current approach to collecting revenues from national airspace users 

to fund FAA, (3) advantages and disadvantages of adopting alternative 

funding options for FAA, and (4) advantages and disadvantages of 

authorizing FAA to use debt financing for capital projects. 

To answer these questions, we reviewed relevant economic literature, 

policy analysis, congressional testimony, industry group publications, and

stakeholders’ responses to questions FAA asked them about its funding 

and alternative options.3

 We also interviewed key stakeholders, including 

officials from FAA, JPDO, the Office of Management and Budget (OMB), 

the Congressional Budget Office (CBO), and the Department of the 

Treasury (Treasury); representatives of aviation industry groups; and 

academic and financial experts. In addition, we examined FAA budget 

data, Airport and Airway Trust Fund (Trust Fund) revenue data, FAA and 

JPDO forecasts, and aviation activity data. We also obtained information 

on an estimate of FAA’s future costs under NGATS but did not review in 

detail the methodology or assumptions used to develop this estimate. We 

conducted our work between May 2005 and August 2006 in accordance 

with generally accepted government auditing standards. 

In summary: 

• Understanding the costs involved in the transition to NGATS is critical to 

its planning and implementation, yet no comprehensive estimate of these 

costs currently exists. An FAA advisory committee has developed a 

limited, preliminary cost estimate, which officials have emphasized is not 

yet endorsed by any agency. This estimate suggests that with NGATS, 

FAA’s costs would average about $1 billion more per year (in today’s 

dollars) over the next 20 years than FAA’s appropriations for fiscal year 

2006. However, the NGATS enterprise architecture (a blueprint for the 

systems and integration required under NGATS) has not yet been 

developed. Consequently, the estimate should be seen as providing only a 

 3

In September 2005, FAA provided stakeholders with information on its operations and

costs and asked for responses to questions about how to fund the agency.

Page 2 GAO-06-1114T 
sense of the order of magnitude of the potential increased costs to FAA. In 

addition, this estimate does not include the costs that the other partner 

agencies or the industry might incur in their implementation of NGATS 

systems and technologies. A more precise estimate of the total NGATS 

cost should emerge following the development of the NGATS enterprise 

architecture.

• Some stakeholders support the current excise tax system because they 

believe it has been successful in funding FAA, has low administrative 

costs, and distributes the tax burden in a reasonable manner. Others, 

including FAA, state that under the current system, there is a disconnect 

between the revenues contributed by users and the costs those users 

impose on the NAS that raises revenue adequacy, equity, and efficiency

concerns.4

 Trends over the past 25 years in, and FAA’s projections of, both 

inflation-adjusted fares and average plane size suggest that the revenue

collected under the current funding system has fallen and will continue to 

fall relative to FAA’s workload and costs, supporting revenue adequacy 

concerns. Comparisons of revenue contributed and costs imposed by 

different flights provide support for equity and efficiency concerns. 

• Adopting alternative funding options to collect revenues from NAS users 

would have advantages and disadvantages. The degree to which 

alternative funding options could address concerns about the current 

excise tax system ultimately depends on the extent to which the 

contributions required from users actually reflect the costs they impose on 

the system. Given the diverse nature of FAA’s activities, a combination of 

alternative options may offer the most promise for linking revenues and

costs. Switching to any alternative funding option would raise 

administrative and transition issues, such as the need to develop the 

administrative capacity to implement new charges. 

• Allowing FAA to use debt-financing for capital projects, such as the 

replacement of facilities and equipment associated with the transition to 

NGATS, also presents advantages and disadvantages.5

 Some stakeholders 

have suggested that debt-financing—such as bonds—could be a means of 

 4

Stakeholders that support the current funding system include the Aircraft Owners and

Pilots Association and the National Business Aviation Association; stakeholders that have 

expressed concerns about the current funding system include the Air Transport 

Association and the FAA. 

5

In addition to debt-financing, some stakeholders have identified other methods of funding 

capital investments, such as leasing or contracting out services (e.g., flight service 

stations). An analysis of these other methods was beyond the scope of this testimony. 

Page 3 GAO-06-1114T 
funding FAA capital projects. These stakeholders argue that debt-financing

is attractive because an agency could obtain capital assets without first 

having to secure funding through the appropriation process, while at the 

same time spreading the costs out over the life of a capital project as the 

project’s benefits are realized. Debt-financing raises significant concerns,

however, because it encumbers future resources, and expenditures from 

debt proceeds may not be subject to the same congressional oversight as

expenditures from appropriations. In addition, debt-financing raises issues 

regarding federal borrowing costs that are particularly important in light

of the federal government’s long-term structural fiscal imbalance. 

NGATS is envisioned as a system that will meet the needs of the year 2025. 

Planning for NGATS began in 2003, when Congress passed Vision 100,6

 the 

legislation that authorized JPDO. Vision 100 requires the office to operate 

in conjunction with multiple government agencies, including the 

Departments of Commerce, Defense, Homeland Security, and 

Transportation; FAA; the National Aeronautics and Space Administration; 

and the White House Office of Science and Technology Policy. JPDO 

submitted an integrated plan for NGATS to Congress in December 2004. In

developing the integrated plan, the partner agencies agreed on a vision 

statement for the future system and on eight strategies that broadly 

address the goals and objectives for NGATS. 

Among its efforts, JPDO has begun developing an enterprise 

architecture—one of the most critical planning documents in the NGATS 

effort. An enterprise architecture is akin to blueprints for a building. It is

meant to provide a common tool for planning and understanding the 

complex, interrelated systems that will make up NGATS. JPDO intends for 

the enterprise architecture to describe FAA’s operation of the current 

NAS, JPDO’s plans for NGATS, and the sequence of steps needed for the 

transformation to NGATS. JPDO expects that the enterprise architecture 

will provide the means for facilitating coordination among the partner 

agencies and private sector manufacturers, the alignment of relevant

research and development activities, the integration of equipment, and the 

development of a more reliable cost estimate for NGATS. JPDO officials 

expect the first complete draft of the enterprise architecture to be issued 

in 2007. 

Background 

 6

Pub. L. No. 108-176, Vision 100—Century of Aviation Reauthorization Act, December 12, 

2003. 

Page 4 GAO-06-1114T 
FAA, which will bear much of the responsibility for implementing NGATS, 

engages in three primary activities: aviation safety oversight, air traffic 

control (ATC), and airport infrastructure development.7

 The costs 

associated with each of these activities generally depend on the nature of 

the specific service FAA provides and how it is used. FAA safety activities

include the licensing of pilots and mechanics, as well as the inspection of

various aspects of the aviation system, such as aircraft and airline 

operations. FAA states that the costs associated with these safety 

activities are primarily driven by the volume of each (e.g., the number of 

licenses and inspections). ATC includes a variety of complex activities to 

guide and control the flow of aircraft through the NAS. According to FAA, 

the costs imposed by each flight are influenced by the amount and nature 

of the specific services that a flight uses, and whether a flight operates at 

peak periods. FAA supports airport infrastructure development through 

the Airport Improvement Program (AIP). Unlike safety and ATC services, 

AIP expenditures are not the direct result of costs imposed by users of the 

NAS. FAA distributes AIP funding according to congressional priorities 

established in authorizing and appropriating legislation. 

FAA is funded through appropriations from both the Trust Fund and the 

General Fund of the U.S. Treasury (General Fund). The Trust Fund was 

established by the Airport and Airway Revenue Act of 19708

 to help fund 

the development of a nationwide airport and airway system. It provides 

funding for FAA’s capital accounts, including the AIP, which is a 

multibillion dollar grant program that provides funding for airports; the 

Facilities and Equipment account, which funds technological

improvements to the air traffic control system; and the Research, 

Engineering, and Development account, which funds continued research 

on aviation safety, mobility, and environmental issues. In addition, the 

Trust Fund supports part of FAA’s operations. 

To fund these accounts, the Trust Fund is credited with revenues collected 

from system users through the following dedicated excise taxes: 

• 7.5 percent tax on domestic airline tickets 

 7

FAA is also responsible for commercial space licensing and oversight; this line of business

is beyond the scope of this testimony. 

8

Pub. L. No. 91-258. 

Page 5 GAO-06-1114T 
• $3.30 domestic passenger segment tax (excluding flights to or from rural 

airports)9

• 6.25 percent tax on the price paid for transportation of domestic cargo or 

mail10

• $0.043/gallon tax on domestic commercial aviation jet fuel

• $0.193/gallon tax on domestic general aviation gasoline 

• $0.218/gallon tax on domestic general aviation jet fuel 

• $14.50/person tax on international arrivals and departures, indexed to 

inflation11

• 7.5 percent tax on mileage awards (frequent flyer awards tax) 

• $7.30 per passenger tax on flights between the continental United States 

and Alaska or Hawaii (or between Alaska and Hawaii), indexed to 

inflation.12

Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The ticket tax

was the largest single source of Trust Fund revenue in fiscal year 2005, 

totaling about $5.2 billion, or about 48 percent of all Trust Fund receipts. 

The ticket tax was followed by the passenger segment tax and the 

international departure/arrival taxes, which each totaled about $1.9 billion; 

fuel taxes, which totaled $870 million; the cargo/mail tax, which totaled 

$461 million; and interest income, which totaled $430 million. Figure 1 

shows the shares received from each source during fiscal year 2005. 

 9

The domestic segment tax is levied on each domestic segment a passenger travels on a

flight. For example, a passenger traveling on a flight from New York to Seattle, with a 

connection in Chicago, travels two segments—one from New York to Chicago, and a 

second from Chicago to Seattle. The segment tax is $3.30 in 2006; this tax rate changes 

annually because it is indexed to the Consumer Price Index.

10This is also known as the waybill tax.

11The international arrival and departure taxes are $14.50 in 2006; both rates change 

annually because they are indexed to the Consumer Price Index.

12The per passenger tax on flights between the continental United States and Alaska or 

Hawaii (or between Alaska and Hawaii) is $7.30 in 2006; the rate changes annually because 

it is indexed to the Consumer Price Index.

Page 6 GAO-06-1114T 
Figure 1: Trust Fund Revenues by Source, Fiscal Year 2005 

48% 17.7%

17.9%

8.1%

International departure/arrival

Fuel tax

4.3%

Cargo/mail tax

4%

Interest on cash balance

Passenger ticket tax

Passenger segment tax

Source: GAO analysis of FAA data. 

In addition to Trust Fund revenues, in most years General Fund revenues 

have been used to fund FAA. The General Fund contribution has varied 

greatly, ranging from 0 percent to 59 percent of FAA’s budget. From fiscal 

year 1997, the year when existing Trust Fund excise taxes were 

authorized, through fiscal year 2006, the General Fund contribution has 

averaged 20 percent of FAA’s total budget. About $2.6 billion was 

appropriated for fiscal year 2006 from the General Fund for FAA’s 

operations. This amount represents about 18 percent of FAA’s total 

appropriation. 

Page 7 GAO-06-1114T 
Understanding the costs involved in the transition to NGATS is critical to 

the NGATS planning effort, yet no comprehensive estimate of these costs 

has been developed. This cost information is particularly important to 

Congress, which will have the authority to make NGATS funding 

decisions. To begin estimating NGATS costs, JPDO is holding a series of 

investment analysis workshops with stakeholders,13 including 

representatives from commercial and business aviation; general aviation

(GA); equipment manufacturers; ATC systems developers; airports; and 

regional, state, and local planning bodies. According to JPDO, participants

in these workshops are asked to discuss and comment on the 

appropriateness of JPDO’s current assumptions about factors that drive 

private sector costs. 

Although JPDO expects that these workshops will provide information to 

be used in developing a range of potential costs for NGATS, an enterprise 

architecture is needed to further define and better understand how a 

number of factors will drive NGATS costs. One of these drivers is the 

technologies expected to be included in NGATS. Some of these 

technologies are more complex and thus more expensive to implement 

than others. A second driver is the sequence for replacing current 

technologies with NGATS technologies. A third driver is the length of time 

required for the transformation to NGATS, since, according to JPDO, a 

longer period would impose higher costs. JPDO’s first draft of its 

enterprise architecture could reduce some of these variables, thereby 

allowing improved estimates of NGATS costs. 

While JPDO is beginning to explore the issue of cost estimates for NGATS, 

an advisory committee to FAA—the Research, Engineering and 

Development Advisory Committee (REDAC)—has developed a limited, 

preliminary cost estimate, which officials have emphasized is not yet 

endorsed by any agency.14 REDAC estimated that FAA’s budget under the 

NGATS scenario would average about $15 billion per year through 2025, or

about $1 billion more annually (in today’s dollars) than FAA’s fiscal year 

2006 appropriation. REDAC estimated that the cost for a status quo (i.e., 

There is Currently No 

Comprehensive 

Estimate of NGATS 

Costs 

 13JPDO held its first workshop in April 2006 and its second workshop in August 2006. No

date has been announced at this time for the third workshop. 

14 In developing their estimate, REDAC used FAA’s projected facilities and equipment costs 

under an NGATS scenario as well as REDAC’s own estimates for the costs of operations; 

airport improvements; and research engineering and development—the remaining three

components of FAA’s appropriation. 

Page 8 GAO-06-1114T 
no NGATS) scenario would also be about $15 billion per year through 

2025.

15 These estimates came out roughly equal, on average, because future

FAA spending would be higher under NGATS than under the status quo in 

the early years but lower than under the status quo toward 2025. This 

relationship is due primarily to the expectation that, under the NGATS 

scenario, capital expenditures would be higher than under the status quo 

scenario in the near term, but operations costs would be lower because of

productivity improvements in the longer term. Moreover, the NGATS cost 

estimate assumes that capital costs decrease sharply toward 2025. 

Officials who developed this estimate explained that the estimate treats 

NGATS as an isolated event. In reality, these officials acknowledge that 

planning for the subsequent “next generation” system will likely be 

underway as 2025 approaches and the actual modernization costs could 

therefore be higher in this time frame than the estimate indicates. 

In addition, this estimate should be viewed within the context of a number 

of factors. First, REDAC does not believe that maintaining the status quo is

a viable option because it would provide insufficient capacity to meet 

projected future demand. REDAC stated that it presented the status quo 

option “for analytical purposes only since the current approach to air 

traffic control and management in use in the United States cannot be 

scaled up to handle the projected growth in traffic.” In fact, JPDO has 

estimated the annual economic cost of not meeting future demand; by 

2020, JPDO estimates this cost at $40 billion per year. Second, the REDAC 

estimate does not include the costs of the intermediate technology 

development work—a key step in developing NGATS. 

Last, and most important, this estimate was developed before JPDO 

completed important planning documents and does not include estimates 

of the other partner agencies’ costs of implementing NGATS. For example, 

the estimate does not include costs that the Department of Homeland 

Security might incur to develop and implement new security technologies. 

JPDO’s first complete enterprise architecture, which would include 

security, is not expected until the middle of 2007. Additional partner 

agency costs, along with other costs such as those for training of 

 15In this testimony, we describe REDAC’s “base case” scenarios, which assumed that FAA’s 

operations costs would increase between 2006 and 2010, but then remain constant through 

2025 (except for inflation), as productivity increases offset the higher cost of increased 

demand. The working group also developed estimates for lower-cost “best case” and

higher-cost “worst case” scenarios using differing assumptions of productivity gains. 

Page 9 GAO-06-1114T 
personnel in new technologies, must be explored to have a complete 

picture of NGATS costs. 

Our report on potential FAA funding options outlines several concerns 

stakeholders have raised about the current funding structure that supports 

the Trust Fund.16 Our observations from that report bear directly on 

questions about funding NGATS, because the bulk of the NGATS 

implementation—and, presumably, the costs of that implementation—will 

fall to FAA. Some stakeholders support the current excise tax system, 

stating that it has been successful in funding FAA, has low administrative 

costs, and distributes the tax burden in a reasonable manner. Other 

stakeholders, including FAA, state that under the current system there is a 

disconnect between the revenues contributed by users and the costs those 

users impose on the NAS that raises revenue adequacy, equity, and 

efficiency concerns. Aviation trend data, FAA projections, and FAA cost 

estimates support revenue adequacy, equity, and efficiency concerns. 

However, the extent to which revenue and costs are linked depends 

critically on how the costs of FAA services are assigned to NAS users. 

Thus, to assess the extent to which the current approach or any other 

approach aligns costs with revenues would require completing an analysis 

of costs, using either a cost accounting system or cost finding techniques 

to distribute costs to the various NAS users. 

Some stakeholders believe that maintaining the current funding structure 

for FAA is appropriate because it has been successful in funding FAA for 

many years, suggesting that there is no urgent reason to change it. 

According to these stakeholders, the revenues collected from users under 

the current funding system, along with General Fund revenues provided by

the Congress, have been sufficient for the United States to develop a safe 

and efficient aviation system. As the number of air travelers grew, so did 

revenues going into the Trust Fund. Even though revenues fell during the 

early years of this decade as the demand for air travel fell, they began to

rise again in 2004 (see fig. 2) and FAA estimates they will continue to 

increase. In addition, according to these stakeholders, the administrative

costs are relatively low. 

Some Stakeholders 

Favor FAA’s Current 

Funding System, but 

Others Raise 

Concerns about 

Revenue Adequacy, 

Equity, and Efficiency 

 16GAO-06-973

Page 10 GAO-06-1114T 
Figure 2: Trust Fund Revenues and Passenger Enplanements, 1971 through 2005 

Notes: Trust Fund revenue is presented by fiscal year and is adjusted to 2005 constant dollars. 

Lapses in tax authorizations were the cause of significant revenue decreases in 1981-1982 and 1996-

1997. Enplanements are presented by calendar year and are total system scheduled enplanements

for the United States. 

Another argument for maintaining the current funding structure advanced 

by some industry stakeholders and analysts is that this structure 

reasonably allocates the funding burden between commercial aviation and 

GA. Under the current funding structure, system users who are subject to

commercial taxes—including commercial airlines, air taxis, and many 

fractional ownership operations—contribute about 97 percent of the tax 

revenue that accrues to the Trust Fund. The remaining GA operators, 

which include operators of purely private corporate and individual 

aircraft, contribute about 3 percent. Representatives of the GA segment of 

the industry contend that collecting the bulk of the user-contributed 

revenues from the commercial segment is appropriate because the air 

traffic control system exists at its current size to accommodate the 

demands of commercial aviation and GA users should not be asked to 

contribute more than the incremental costs that result from also providing 

services to GA aircraft. Although the incremental costs are not precisely

known, GA representatives have told us that they believe that the revenues 

currently collected from fuel taxes are a rough approximation of the 

incremental costs that FAA incurs to provide services to GA aircraft. 

Page 11 GAO-06-1114T 
According to FAA, all of the agency’s cost studies to date have concluded 

that GA users pay less than the costs they impose on the system, while 

commercial operators pay more than the costs they impose on the system. 

The disconnect between sources of Trust Fund revenues and FAA costs 

under the current funding system raises concerns that it will not produce 

adequate revenue in the future to keep pace with FAA’s workload 

increases and, consequently, FAA’s costs. The principle of revenue 

adequacy requires a funding system to produce revenues that keep pace 

with costs over time. Costs for FAA are largely driven by FAA’s workload. 

However, under the current funding system, increases in FAA’s workload

will not necessarily be accompanied by revenue increases because users 

are not directly charged for the costs they impose on FAA from their use 

of the NAS. Rather, Trust Fund revenues are primarily dependent on the 

prices of tickets (the domestic ticket tax) and the number of passengers 

on a plane (the domestic ticket tax, the domestic passenger segment tax, 

and the international passenger tax); neither is related to workload, which 

includes controlling flights and safety activities. Long-term industry trends 

and FAA forecasts of declines in air fares and the growing use of smaller 

aircraft support revenue adequacy concerns. 

To illustrate the disconnect between revenues and costs, table 1 provides 

an example of the revenues generated by different aircraft making similar 

flights. The use of multiple flights by smaller aircraft to carry the same 

number of travelers as one larger aircraft increases FAA’s workload, but 

will not necessarily be accompanied by increased revenues from system

users to fund the additional costs associated with the additional workload. 

Example 1 shows the taxes that would be generated from transporting 105 

passengers from Los Angeles to San Francisco by (1) one flight using a 

common narrow-body jet (Boeing 737), and (2) three flights using a 

common regional jet (CRJ-200). In this case, the narrow-body jet has the 

capacity to carry 132 passengers, while each regional jet has the capacity 

to carry 48 passengers. As the table shows, differences in FAA’s workload

are not reflected in the revenues. According to FAA, if all other factors are 

equal (e.g., time of flight), the total ATC costs of the three regional jet 

flights will be about three times the cost of one narrow-body flight. 

Revenues from the three regional jet flights, however, total only about $37, 

or 3 percent, more than the revenue generated by the one narrow-body jet 

flight. Revenue increases are not linked to cost increases because under 

the current system, revenues are primarily influenced by the number of 

passengers, the average price of tickets, and the amount of fuel used—not 

the costs imposed on FAA through the use of its services. 

Page 12 GAO-06-1114T 
Table 1: Estimated Excise Tax Contributions from Various Flights

Approximately 300 mile flight from Los Angeles to San Francisco 

Example #1 Example #2 

Plane type

One 737 

flight

Three 

CRJ-200 

flights

One 767 

flight 

One 737 

flight

One

Learjet 35 

flight

Number of 

seats 132 144 231 132 a

Number of 

passengers 105 105 180 89 a

Average

fare ($) $100 $100 $82 $84 a

Fuel 

consumed 

(gallons) 937 1,797 1,646 937 190

Ticket tax $788 $789 $1,100 $565 $0

Passenger 

segment tax $348 $348 $544 $270 $0

Waybill tax $2 $0 $27 $2 $0

Fuel tax $40 $78 $71 $40 $41

Total

Revenue $1,178 $1,215 $1,742 $877 $41

Source: GAO analysis of FAA data. 

a

Not applicable. 

The disconnect between revenues and workload can work both ways; 

increases in the number of passengers on planes (e.g., larger planes or 

higher load factors17) or increases in fares can result in higher revenues 

relative to workload. In fact, load factors have increased over the past 

several years, and fares have increased over the past year. However, longterm trends and FAA’s projections for both domestic fares and plane size 

suggest that Trust Fund revenues have declined relative to FAA’s 

workload, and will likely continue to do so for the next several years. 

Domestic airfares, adjusted for inflation, have steadily declined over the 

past 25 years, from an average of $233 in 1981 to $148 in 2005.

18 This 

 17A load factor is the percentage of a flight’s total available seat miles used to transport

passengers.

18We have adjusted airfare data to 2005 dollars. 

Page 13 GAO-06-1114T 
reduction represents an average decline of about 1.9 percent per year.19

Even though there have been increases in fares over the past year, FAA 

projects that average fares will continue to decline over time. In FAA’s 

most recent forecast, inflation-adjusted domestic yields—a proxy measure 

for fares—are projected to decline approximately 8.5 percent over the 

next 10 years.20 Trends in the average size of airplanes also suggest the 

Trust Fund is collecting less revenue relative to workload than in the past, 

and FAA projections suggest this decline will continue. Since smaller 

planes carry fewer passengers and burn less fuel, reductions in average 

plane size mean that lower ticket tax, segment tax, and fuel tax revenue

accrues to the Trust Fund relative to FAA’s workload. 

In addition to revenue adequacy issues, the disconnect between revenues 

contributed and costs imposed also raises equity issues. Example 2 in 

table 1 shows FAA’s estimates of the revenue contributions made by 

various flights. Since FAA estimates that similar flights impose similar 

costs on the agency, the substantial differences in the revenue 

contributions of these flights raise issues of fairness. One such issue is that 

similar commercial flights may contribute very different amounts of 

revenue. In this example, a 767 flight contributes nearly twice as much as 

the 737 flight. A second equity issue is the fairness of the distribution of 

the funding burden between commercial airlines and GA operators. 

Domestic commercial passenger flights21 are subject to, among other 

potential excise taxes, the passenger ticket tax, the passenger segment 

tax, the cargo waybill tax, and the jet fuel tax. GA flights (excluding those 

that carry commercial passengers) are subject only to a fuel tax. As a 

result, the revenue contributions of similar commercial and private GA 

flights may be substantially different. In this example, a private Learjet 

flight contributes approximately $40, while the commercial flights of a 767 

and a 737 contribute $1,742 and $877, respectively.

Although commercial and GA flights might receive the same services from 

FAA, suggesting that the large difference in revenue contribution raises 

equity concerns, there is debate over whether commercial and GA flights 

should be assigned the same costs for similar flights because of 

 19This is the annual compounded rate of decline. 

20Yield is the amount of money an airline collects for every mile a passenger travels. 

21 This includes some flights typically considered GA flights, such as air taxis and some

fractional ownership operations. 

Page 14 GAO-06-1114T 
disagreements about how to assign the fixed costs associated with the 

ATC system. Commercial aviation industry representatives favor assigning 

those costs among all system users in proportion to their use of the 

system. GA representatives, on the other hand, state that the system exists 

at its present size to serve the needs of the commercial aviation industry, 

and that GA should be assigned only the incremental costs that would not 

exist apart from the need to serve GA. Without a consensus on how to 

assign ATC costs among users, it is not possible to assess the extent to 

which the current approach or any other results in a distribution of the 

funding burden between commercial airlines and GA operators that 

approximates the distribution of costs attributable to those groups. 

Finally, the disconnect between revenues contributed and costs imposed 

raises efficiency issues. For users to make efficient decisions about their 

use of the NAS, their price for using the system (the taxes or charges they

pay) should accurately reflect the costs their use imposes on the system. 

Existing price differences suggest that the current funding structure 

creates incentives for inefficient use of the NAS. Users who pay more in 

taxes than the costs they impose may use the system less than is optimal, 

while those who pay less than the costs they impose may use the system 

more than is optimal. An airline’s decision about how many flights to 

operate to serve a market illustrates how the current system does not 

provide incentives for efficient use of the system. In example 1 from table 

1 (the same one used for the revenue adequacy discussion), an airline is 

deciding how many daily flights to operate for the Los Angeles to San 

Francisco market. It estimates that the market demand at the fare it is 

charging totals 105 passengers per day, and faces the choice of providing 

one daily flight with a narrow-body jet (Boeing 737), or three daily flights 

with a regional jet (CRJ-200)—assuming all flights depart during peak 

periods. In this scenario, the revenue collected from three regional jet 

flights—$1,215—is about 3 percent more than the revenue collected from 

one narrow-body jet flight—$1,178. FAA states however, that each flight 

would impose similar costs on the agency, so FAA’s costs would be 

roughly 3-times more for the three regional jet flights than for the one 

medium jet flight. In this example, however, there is little financial 

incentive ($37) for the airline to avoid imposing additional costs on FAA 

by using one flight instead of three flights. 

Page 15 GAO-06-1114T 
Alternative options for funding FAA—which includes funding NGATS 

because the bulk of its implementation (and, presumably, its costs) will 

fall on FAA—have advantages and disadvantages. The degree to which 

alternative funding options could address concerns about the current 

excise system ultimately depends on the extent to which the contributions 

required from users reflect the costs they actually impose on the system.22

Our forthcoming report on options for funding FAA will examine six 

options, including two that would modify the current excise tax structure 

and four that would adopt more direct charges to users. This testimony 

briefly summarizes our observations for two of those six options.23

Alternative Funding 

Options for FAA 

Present Both 

Advantages and 

Disadvantages 

One example of a possible modification to the current system would be to

increase the current aviation fuel taxes—which levy a specific amount per 

gallon of fuel—to replace revenue lost by eliminating the remaining excise 

taxes and charges. Fuel taxes compare favorably with other existing 

excise taxes from a revenue adequacy perspective because they are more 

directly linked to workload; all things being equal, increases in workload 

over time would likely result in fuel tax revenue increases. Over time, 

however, the incentive a fuel tax creates to conserve fuel and make 

technological advances—while beneficial—is likely to erode the fuel tax’s 

ability to generate revenue. Thus, it is likely the fuel tax rate would have to 

be raised from time to time to ensure adequate revenue in the long run. 

The extent to which a fuel tax would address equity issues appears to be 

limited. Although FAA states that there is a correlation between the time a 

plane spends in the NAS and fuel consumption, the extent to which fuel 

consumption correlates with the costs imposed on FAA has not been 

established. First, there may be a relationship between time in the system 

and en-route control costs, but the relationship between time in the system 

and the costs of other FAA activities, such as terminal costs, is not 

obvious. Second, even if the fuel tax were limited to funding en-route 

 22It is important to note that without more detailed information and an understanding of the

costs different flights impose on the NAS, any assessment of the current system or 

alternative funding options is only preliminary. The degree to which alternative funding

options could address revenue adequacy, equity, and efficiency concerns, relative to the

current system, ultimately depends on the extent to which the contributions required from 

users actually reflect the costs they impose on the system. More precise assessments of the 

current or alternative funding options are possible only if cost finding techniques are used 

throughout FAA. 

23 The other four funding options considered in the forthcoming report are (1)

weight/distance fees, (2) flight segment fees, (3) certification fees, and (4) increasing the

passenger segment tax to replace revenues lost from the elimination of the passenger ticket 

tax. 

Page 16 GAO-06-1114T 
costs, the connection between fuel consumption and those costs appears 

to be incomplete. For example, since heavier planes burn more fuel per 

mile than lighter planes, they would be required to contribute more for 

spending the same amount of time in the system. As with equity issues, the 

potential for a fuel tax to address efficiency issues appears limited 

because the connection between revenues and costs is incomplete. A fuel 

tax can create an incentive for operators to minimize their fuel 

consumption, and therefore their time in the NAS. To the extent that time 

in the system correlates with costs imposed, this incentive can lead to 

improved efficiency. However, any relationship between time in the 

system and costs imposed on FAA appears to be limited to en-route 

control costs. 

En-route charges represent an option to switch to a more direct user 

charge. Such a charge would be based on the time users spend in the NAS 

or the distance they travel through the NAS. An en-route charge, relative to 

the current funding system, would be likely to improve the system’s 

revenue adequacy because it could incorporate a cost component into the 

charging formula that could be adjusted regularly to reflect any changes in

costs. This approach could ensure, over time, that revenues match costs. 

As with the fuel tax, the ability of en-route charges to address equity and 

efficiency issues raised by the current system appears to be limited. 

According to FAA, there is a strong relationship between time and 

distance in the system and the en-route costs imposed by users. Thus, if 

en-route charges were limited to funding en-route control costs, they 

might address equity issues raised by the current system by equating

charges to costs imposed, depending on how costs are assigned. 

Furthermore, en-route charges for en-route control would create clear 

financial incentives to use the system more efficiently; less use of the 

system would lead to proportionately lower charges. However, there is no 

obvious relationship between time or distance in the system and other 

FAA activities—terminal control services and safety activities. As a result, 

if en-route charges were used to fund all FAA activities, their ability to 

address equity and efficiency issues is unclear. 

Switching to any alternative funding option would raise administrative and 

transition issues. For example, any cost-based funding system would 

require FAA to complete the appropriate cost analysis using either a cost 

accounting system or cost finding techniques. Some stakeholders who 

support the adoption of direct user charges also support a change in FAA’s 

governance structure—for example, commercializing air navigation 

services—but we found no evidence that the adoption of direct charges 

would require a governance change. Recent reforms in France show how a 

Page 17 GAO-06-1114T 
government agency has moved toward a cost-based system to fund the air 

navigation services it provides without changing the underlying 

governance structure. 

Using a combination of workload-related taxes or charges to fund FAA 

might best address the revenue adequacy, equity, and efficiency concerns 

associated with the current funding structure, given that the costs of FAA’s 

ATC and safety activities are driven by different factors. No single option 

that we reviewed creates a direct link between revenues and all 

components of FAA’s activity costs. Fuel taxes, weight/distance charges, 

or en-route charges based on time or distance spent in the NAS could be 

used to create a more direct link with FAA’s costs of providing en-route 

ATC services. A segment tax for passengers or a flight segment charge 

could be used to create a more direct link with the costs of FAA’s terminal 

services. Certification charges could be used to create a more direct link 

with the costs of FAA’s various safety-related activities. Thus, some 

combination of options, such as en-route charges to fund en-route costs, 

flight segment charges to fund terminal control costs, and certification 

charges to fund some safety costs, might best address concerns with the 

current system by providing a better link between revenues and costs than 

any of these options used separately. According to one stakeholder, 

however, state that the administrative expense of using multiple funding 

options might outweigh the benefits of such an approach. According to 

FAA, other air navigation service providers, such as those in the European

Union, have been able to administer direct charges without incurring 

excessive administrative costs. 

Over the years, agencies have used a variety of financing approaches to 

acquire capital assets. All of these approaches have both advantages and 

disadvantages. From an agency’s perspective, acquiring needed capital 

without first having to secure sufficient appropriations to cover the full 

cost of the asset is very attractive, especially in an era of limited resources 

and growing mission demands. However, from a governmentwide 

perspective, such approaches—including debt financing—raise serious 

concerns because they ultimately may result in higher overall costs. Given 

the federal government’s long-term structural fiscal imbalance, any action 

that may increase costs requires sound justification and careful 

consideration before it is adopted. 

Debt Financing for 

FAA Raises Budgetary 

Concerns 

Supporters of debt financing for FAA cite a number of advantages. One is 

the argument that debt financing could provide FAA with a stable and

predictable revenue source for funding capital developments. FAA 

Page 18 GAO-06-1114T 
officials state that the uncertainty associated with the appropriation 

process makes planning for a large, complex, and expensive air traffic 

control system difficult. Another cited advantage is that debt financing 

would allow the costs of capital projects to be repaid as the benefits are 

received, better aligning costs and benefits. Finally, supporters of debt 

financing, including some investment firms, state that the private capital 

market may offer disciplinary mechanisms—such as bond covenants—

that may encourage FAA to finance itself more efficiently. Treasury 

officials question whether the private capital market would provide any

market discipline to FAA debt obligations because investors may perceive

that the obligations are backed by the federal government and not just 

agency revenues. 

If Congress allowed FAA to use debt financing, it could grant statutory 

authority for FAA to borrow either through the Treasury or directly from 

the private capital market. In either case, for FAA to use debt financing,

Congress would have to provide the agency with statutory authority to 

borrow. There is variation in the legal, financial, and structural ways 

borrowing authorities for other government entities have been established. 

For example, some government entities produce their own revenue to pay 

for borrowing costs, whereas others pay with appropriations.24 Federal 

entities that have borrowing authority include the Bonneville Power 

Administration (BPA), the U.S. Postal Service, and the Tennessee Valley 

Authority.25 If FAA were provided with borrowing authority, all revenue 

options to repay the funds—excise taxes, user fees, or appropriations—

could be considered. According to some investment banks and the 

Treasury, no organizational changes such as a change to a government 

corporation or corporate entity would be needed.

The use of debt financing by FAA to pay for capital projects raises 

budgetary concerns. If Congress grants FAA borrowing authority, the 

 24GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More Selectively, 

GAO-AFMD-89-4 (Washington, D.C.: Sept. 15, 1989). 

25BPA is a self-supporting agency in the Department of Energy that borrows from the 

Treasury, which in turn borrows from the public, to finance capital investments, such as 

new transmission facilities that it owns. BPA receives no appropriations and is solely 

funded by revenues from power sales, which it uses to finance its operations and to make 

debt payments. BPA received direct borrowing authority from Congress in 1974 and has a

borrowing cap of $4.5 billion. Because it is a federal agency that is performing a federal 

function, it is borrowing for federal purposes, and its assets are federally owned, the 

interest rate on BPA debt to Treasury is equal to the rate on debt of comparable maturity 

issued by government corporations. 

Page 19 GAO-06-1114T 
associated costs are likely to be higher if the agency borrows directly from

the private capital market instead of through the Treasury. According to 

Treasury and representatives of investment firms, the Treasury would 

likely be charged a lower interest rate to borrow money from the private 

capital market than FAA and thus could pass along these lower costs to 

FAA. Interest rates charged to FAA would likely be higher because bonds 

issued by FAA would likely be viewed as a greater credit risk than 

Treasury bonds because debt issued by the Treasury is backed by the full

faith and credit of the U.S. government, while FAA debt would not be. 

Instead, FAA debt would be backed by specific revenue sources. In 

addition, if FAA borrowed directly from the private capital market, the 

transaction costs of borrowing would likely be higher than if FAA 

borrowed through the Treasury; investment banks that serve as debt 

underwriters charge fees for these services, while the Treasury would 

charge a minimal administrative fee, if any. Given these advantages, 

Treasury officials told us that it is the department’s long-standing policy 

that all debt issued by federal entities, including FAA, should be issued 

solely to the Treasury because centralized financing of all such debt 

through the department is the least expensive, most efficient means of 

financing this debt. If FAA capital spending is financed through 

appropriations and results in an increase to the deficit, the cost to the 

government is comparable to the costs of borrowing through the 

Treasury.26

Borrowing costs are particularly important in light of the federal 

government’s long-term structural fiscal imbalance. Absent a change in

policy, federal health and retirement programs will consume an ever 

increasing share of the nation’s federal budgetary resources and gross 

domestic product, placing severe pressures on all discretionary programs, 

including those that fund defense, education, and transportation. Our 

more optimistic simulations show that by 2040, federal revenues as a share 

of the economy will not be sufficient to cover any discretionary 

programs—and that balancing the budget could require raising taxes by 

almost 60 percent or reducing federal spending by about a third. 

Accordingly, any program or policy change that may increase costs 

requires sound justification and careful consideration before adoption. 

 26Although funding through appropriations might appear less costly to FAA because 

borrowing from the Treasury would require FAA to make interest payments to the

Treasury, from the broader perspective of the federal government as a whole, there is no 

difference if the government is running a deficit. 

Page 20 GAO-06-1114T 
Mr. Chairman, this concludes my statement. I would be pleased to answer 

any questions that you and Members of the Subcommittee may have. 

For further information on this testimony, please contact Gerald 

Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making 

key contributions to this statement include Ashley Alley, Jay Cherlow, 

Maria Edelstein, Colin Fallon, Carol Henn, David Hooper, Andrew 

Huddleston, Edmond Menoche, Faye Morrison, and Rich Swayze. 

Page 21 GAO-06-1114T 

Contact and Staff 

Acknowledgments 

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