Airport and Airway Trust Fund: Factors Affecting Revenue Forecast Accuracy and Realizing Future FAA Expenditures
Published: 2012-01-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Established in 1970, the Airport and Airway Trust Fund (trust fund) is the primary source of funding for the Federal Aviation Administrations (FAA) investments in the airport and airway system. Trust-fund revenues come largely from taxes on airline tickets and aviation fuel. The financial health of the trust fund is important to ensure sustainable funding for FAA without increasing demands on general revenues. Current law authorizes appropriations from the trust fund equal to forecast trust-fund revenues. However, if forecasts overestimate actual revenues and Congress appropriates the forecast level, the trust funds uncommitted balancethat is, the balance in excess of what has been appropriated from the fund or authorized as contract authorityis drawn down.
Among its objectives, GAO was asked to examine (1) the accuracy of the trust-fund revenue forecasts and factors affecting forecast accuracy, (2) different options for determining appropriations from the trust fund that would reduce the risk of overcommitting the fund, and (3) the extent to which trust-fund revenues might cover planned FAA expenditures through fiscal year 2021. GAO reviewed the Department of the Treasurys (Treasury) and FAAs forecasting methods, analyzed trust-fund revenue and forecast data, and interviewed federal officials and aviation-industry and forecasting experts. The Departments of Transportation and Treasury and the Office of Management and Budget provided technical comments, which GAO incorporated into the report as appropriate.
section_title: What GAO Found
paragraphs: Actual trust-fund revenues fell short of FAAs revenue forecasts for 9 of the past 11 years, contributing to a decline in the trust funds uncommitted balance from over $7 billion in fiscal year 2000 to $770 million in fiscal year 2010. Inaccurate forecasts for the taxes related to domestic passenger tickets, which account for over 70 percent of trust-fund revenues, drove the aggregate overforecast, but inaccurate forecasts for other taxes also had an effect. This inaccuracy is largely attributable to unexpected events affecting aviation, such as the terrorist attacks of September 11, 2001, and the recession in 2009; the budget process requiring the forecasts to be developed over a year in advance of the fiscal year; and lags in recognizing structural changes in the airline industry, such as airlines increased reliance on ancillary fees for which excise taxes for the trust fund are not collected. Changes in the methodology for forecasting trust-fund revenues and the assumption of forecasting responsibility by Treasury, begun in fiscal year 2011, may also affect the future accuracy of forecasts, but it is too soon to tell what effect the changes will have after just 1 fiscal year.
Alternative options for how Congress determines available resources for appropriation from the trust fund could provide for substantially greater protection against overcommitting trust-fund resourcesthat is, help ensure that trust-fund revenues would be sufficient to cover FAAs expendituresor requiring additional general-revenue contributions than the current approach outlined in law. To this end, Congress could limit budget resources available for appropriation from the trust fund to less than the forecast revenuesfor example, the current House FAA Reauthorization bill has a provision that would make only 90 percent of forecast revenues available for appropriation from the trust fund as well as any prior year differences between actual trust-fund revenues and appropriations from the trust fund. Other options would make only actual revenues from the prior year available, or base appropriations on the maintenance of a target level for the trust funds balance. However, unless a sufficiently large minimum balance is established, there would still be some risk of overcommitting trust-fund resources under these options. The alternatives could also result in greater swings in trust-fund appropriations, requiring varying levels of general revenues to maintain overall stable spending levels for FAA.
The extent to which trust-fund revenues might cover FAAs future expenditures will depend on whether trust-fund revenue and FAA expenditure forecasts are realized. Under current revenue and expenditure forecasts, between 8 percent and 32 percent of FAAs annual expenditures for fiscal years 2013 through 2021 could have to be paid for by general revenues unless spending is reduced or additional taxes are paid into the trust fund. However, congressional decisions, including the level of FAAs appropriations; unexpected events affecting trust-fund revenues and FAA expenditures; and FAAs implementation and management of programs could significantly change forecast revenues and expenditures in future years. For example, FAAs modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen), is currently estimated to cost FAA $15 billion to $22 billion, and an additional $5 billion to $7 billion for equipping aircraft with NextGen technology, but those costs could change depending upon the speed of implementation and other factors.

section_title: Letter
paragraphs: Established in 1970, the Airport and Airway Trust Fund (trust fund)  finances nearly all of the Federal Aviation Administration’s (FAA) capital  investments in the airport and airway system, such as construction and  safety improvements at airports and technological upgrades to the air  traffic control system. The trust fund also provides a substantial portion— between 43 and 84 percent over the last 10 years—of FAA’s operations  spending, which includes the maintenance and operation of the air traffic  control system and safety inspections. The trust fund is principally funded  by a variety of excise taxes paid by users of the national airspace system,  and its financial health is important to ensure sustainable funding for a  safe and efficient aviation system without increasing demands on general  revenues. Current law requires that all of the forecast trust-fund  revenues—that is, the projected amount contained in the President’s  annual budget request—be made available each fiscal year for  appropriation. However, in recent years, forecasting errors—particularly,  several years of overestimated revenues—have contributed to a  drawdown of the trust fund’s uncommitted balance. As the uncommitted  balance approaches zero, the trust fund could become overcommited— that is, revenues could be insufficient to cover all of the funding that  Congress has committed. This risk of overcommitting funds could create  budgetary challenges for FAA and require larger general-revenue  appropriations to fund FAA’s operations spending.  For example, as we  have previously reported to this committee, Congress increased the  general-revenue appropriation for FAA’s operations by nearly $1 billion in  fiscal years 2009 and 2010. If these actions had not occurred, the trust  fund would have been overcommitted.
In this context, you asked us to examine the trust-fund revenue- forecasting process. To address your request, we examined (1) how trust- fund revenues are forecast for the budget year; (2) the accuracy of past  trust-fund revenue forecasts and the factors affecting forecast accuracy;  (3) how different options for estimating appropriations from the trust fund  might reduce the risk of overcommitting the trust fund; and (4) the extent  to which trust-fund revenues might cover planned FAA expenditures in  fiscal years 2012 through 2021.
To determine how trust-fund revenues are forecast for the President’s  budget, we interviewed FAA and Department of the Treasury (Treasury)  officials on the forecasting methods used and the forecasts developed for  fiscal years 2000 through 2011. To determine the accuracy of trust-fund  revenue forecasts, we obtained FAA’s forecasts of excise tax receipts  and interest revenue for fiscal years 2000 through 2010, which we  compared to the sum of trust-fund tax receipts, as certified by the Internal  Revenue Service (IRS), and interest revenue data from FAA. We  reviewed academic literature and interviewed aviation-industry and  forecasting experts to identify factors affecting forecast accuracy. To  evaluate different options for estimating appropriations from the trust  fund, we identified four options based on our previous trust-fund work  and analyzed these options using actual and forecast trust-fund tax- receipt data for fiscal years 2000 through 2010. One of these options  includes a provision in the current House FAA reauthorization bill that  would limit the budget resources made available for appropriation from  the trust fund to 90 percent, rather than 100 percent, of forecast revenues  and apply any differences between actual trust-fund revenues and  appropriations from the trust fund to a subsequent year. The other  options include using a prior year’s actual trust-fund revenue amount as  the basis for the appropriation and setting a target level for the trust fund’s  uncommitted balance—such as $2 billion or $3 billion. Through analyzing  these options, we determined how they might have affected the total  amount of budget resources made available from the trust fund for  appropriation and the trust fund’s uncommitted balance, if the options had  been followed in fiscal years 2000 through 2010. For this report, our  analysis assumes that obligations against the trust fund will equal the  amounts authorized and that FAA’s outlays in a given year to liquidate  obligations equal the amounts appropriated for that purpose.
To determine the extent to which trust-fund revenues might cover FAA  expenditures in fiscal years 2012 through 2021, we examined Treasury’s  trust-fund revenue forecasts and the Office of Management and Budget’s  (OMB) budget authority forecasts for FAA for fiscal years 2012 through  2021 from the President’s fiscal year 2012 budget request and mid- session review (the latest available forecast). We reviewed OMB budget  guidance and interviewed OMB, Treasury, and FAA officials to  understand the basis of these forecasts and potential factors affecting  forecast accuracy. We also reviewed FAA’s fiscal year 2012  appropriation and the House and Senate FAA reauthorization bills and  drew from our previous work on FAA’s program and acquisition  management to identify potential factors affecting forecast accuracy. We  assessed the reliability of the FAA, IRS, OMB, and Treasury data by (1)  performing electronic testing of required data elements, (2) reviewing  existing information about the data and the systems that produced them,  and (3) interviewing agency officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purposes of this  report. We conducted this performance audit from April 2011 to January  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Source of Trust-Fund Revenues
paragraphs: In 1970, almost a decade before airline deregulation, Congress created  the trust fund to provide a dedicated source of funding for the aviation  system. The trust fund is funded principally by a variety of excise taxes  paid by users of the national airspace system, as well as by interest  revenue. The excise taxes are imposed on airline ticket purchases and  aviation fuel, as well as the shipment of cargo. Disbursement of revenues  deposited in the trust fund is subject to congressional appropriations.  These taxes are classified in six categories or “tax lines,” as shown in  table 1.
The trust fund finances capital improvements of the airport and airway  system, and to the extent funds are made available, it funds the  government’s operation and maintenance of that system. Figure 1 shows  how trust-fund revenues were appropriated to FAA’s operations and capital  accounts for fiscal year 2010, which generally represents the breakout of  trust-fund revenue use for recent years. FAA’s three capital accounts  include (1) the Facilities and Equipment account, which funds technological  improvements to the air traffic control system, including the modernization of  the air traffic control system called the Next Generation Air Transportation  System (NextGen); (2) the Research, Engineering, and Development  account, which funds research on issues related to aviation safety, mobility,  and NextGen technologies; and (3) the Airport Improvement Program (AIP),  which provides grants for airport planning and development. In addition, the  trust fund has provided all or some portion of the funding for FAA’s  operations account, which funds the operation of the air traffic control system  and safety inspections, among other activities. General revenues from the  U.S. Treasury have been used to supplement trust-fund revenues for  operations and have funded about 16 to 57 percent of FAA’s operation  appropriation—or 8 to 33 percent of FAA’s total appropriation—during fiscal  years 2001 through 2010.
From the trust fund’s creation in 1970 through the late 1990s,  appropriations from the trust fund were consistently lower than revenues  deposited into the trust fund, resulting in a growing uncommitted balance.  To ensure that revenue collected from persons and businesses paying  taxes into the trust fund are used for aviation purposes, AIR-21 and  Vision 100, which reauthorized FAA investments in the airport and airway  system, added certain provisions. These provisions require that the total  budget resources made available each fiscal year from the trust fund— that is, the appropriation from the trust fund—equal the President’s  baseline budget projection, or forecast, for excise taxes and interest  credited to the trust fund for the coming fiscal year (budget year).2000, appropriations from the trust fund have generally followed the  forecast amounts, but they can, and have, varied—a point we discuss in  more detail later in this report.
The budget-year trust-fund revenue forecast, and accordingly FAA’s  appropriation, is based on information available in the first quarter of the  preceding fiscal year and more than 2 years before the final accounting  for the forecast year is certified by IRS. Figure 2 shows the timeline for  the fiscal year 2010 budget process, which generally reflects a typical  budget cycle for recent years. Because the President’s budget is released about 8 months before the beginning of the fiscal year, the  revenue forecast for the fiscal year 2010 budget submission to Congress  was developed in the first quarter of fiscal year 2009—October through  December of calendar year 2008—or about a year before the start of the  fiscal year. Furthermore, the most recent available data on actual trust- fund revenues (IRS-certified tax-receipt data) for preparing this forecast  were from the first three quarters of fiscal year 2008, or through June 30,  2008. Likewise, the accuracy of the fiscal year 2010 revenue forecasts  could not be assessed against IRS-certified data until February 2011,  which was 5 months after the end of the fiscal year. In addition to the  budget-year forecast, the President’s budget includes revenue forecasts  for the 9 years beyond the budget year (referred to as out-year forecasts),  which are then updated during roughly the middle of the calendar year as  part of the mid-session review.
Through fiscal year 2010, FAA generated the trust-fund revenue forecast  for the President’s annual budget request. Starting with fiscal year 2011,  the responsibility for forecasting trust-fund revenues shifted from FAA to  Treasury. According to Treasury officials, Treasury assumed this  responsibility so that it would have responsibility for all federal excise-tax  forecasts, including the revenues for other trust funds such as the  Highway Trust Fund.
In addition to budget-year and out-year revenue forecasts, the President’s  annual budget request includes forecasts of FAA’s budget authority for the  same period. Budget authority forecasts represent the estimated amount  that may be requested for FAA to enter into obligations that will result in  outlays of federal funds; in this report, we refer to FAA’s forecast budget  authority as its forecast expenditures. According to OMB budget guidance,  OMB forecasts the out-year budget-authority levels for agencies based on  proposed changes in legislation along with the administration’s overall  policy goals and forecasts of economic growth. As this guidance indicates,  these forecasts are developed to allow an analysis of the long-term  consequences of proposed program or tax-policy initiatives. FAA works  with OMB to develop the proposed expenditures for a given budget year  and then works to align its programs and plans with OMB’s out-year  budget-authority targets. After the President submits his budget to  Congress, Congress begins deliberations on the appropriate level of  federal revenues and expenditures for a given fiscal year.
section_title: Status of the Trust Fund
paragraphs: Since the AIR-21 spending provisions were introduced in 2000, the trust  fund’s uncommitted balance—that is, the revenues in the trust fund that  remain after funds have been appropriated from the trust fund and a  limitation on obligations established—has generally declined because it  has been used to offset shortfalls in forecast trust-fund revenues. As we  previously reported, the trust fund’s uncommitted balance, which  exceeded $7 billion at the end of fiscal year 2001, declined to $299 million  at the end of fiscal year 2009—the lowest balance over the past  decade—before slightly rebounding in fiscal year 2010 (fig. 3).
The largest decline in the uncommitted balance in the past decade  occurred in 2002 following the sudden drop-off in aviation activity after the  terrorist attacks of September 11, 2001. This decline occurred because  revenue forecasts, which had been developed many months before the  September 11 attacks and the subsequent decline in air travel, were  considered in determining the level of appropriations from the trust fund.  In addition, declines in passenger traffic, aircraft operations, and fuel  consumption in 2009 resulted in actual revenues to the trust fund that fell  well below forecast levels and an uncommitted trust-fund balance that  approached zero. As previously reported, if the trust fund’s uncommitted  balance approaches zero, FAA officials noted that they might be required  to delay obligations for capital programs if they do not have adequate  revenues in the trust fund to cover them—unless additional general  revenues are first authorized and appropriated.
section_title: Planned NextGen Costs
paragraphs: As we have previously reported, NextGen will transform the way in which  the air transportation system operates today, in part by using satellite-based surveillance as opposed to ground-based radar, using performance-based navigation instead of cumbersome step-by- replacing routine voice communications with data transmissions, and organizing and merging the disjointed data that pilots, controllers,  airports, airlines, and others currently rely on to operate the system.
Because of the potential benefits of modernizing the air transportation  system and the substantial costs of modernization, NextGen implementation  has been a top congressional priority. FAA has been planning and  developing NextGen since 2003 and is now implementing near-term  (through 2012) and midterm (through 2018) capabilities. According to FAA,  approximately $2.9 billion was appropriated for NextGen for fiscal years  2004 through 2011—most of which was funded from the trust fund. FAA  recently estimated the cost for NextGen for the agency to be between $15  billion and $22 billion, and another $5 billion to $7 billion for equipping aircraft  with NextGen technology, for fiscal years 2012 through 2025—much of  which will be funded from the trust fund. In FAA’s latest Capital  Improvement Plan—which outlines FAA’s planned facilities and equipment  expenditures for the next 5 years—about one-third, or $4.8 billion of the  $14.3 billion, in planned capital improvements for fiscal years 2012 through  2016 is for NextGen or NextGen-related projects. In addition, given the  incremental rollout of NextGen technology, FAA has stated that significant  levels of investment—including those that rely on trust-fund revenues—will  continue to be allocated to sustaining current infrastructure to prevent failures  and maintain the reliability and efficiency of current operations.
section_title: Treasury’s Demand- Based Approach to Forecasting Revenues Somewhat Differs from FAA’s Previous Approach
subsections: section_title: Revenue Forecasts Now Used for Trust-Fund Budgeting Are Based on Treasury’s Model Estimates of Aviation Demand
paragraphs: Beginning in fiscal year 2011, when the administration transferred the  responsibility for developing trust-fund revenue forecasts from FAA to  Treasury, Treasury has been forecasting trust-fund revenues (tax  receipts) for both the budget year and out-years using a demand-based  econometric model. Specifically, according to Treasury officials,  Treasury begins its forecast by estimating activity measures that reflect  aviation demand, such as domestic enplanements, international  enplanements, revenue-ton miles, and purchased gallons of fuel and   gasoline. For example, in estimating aviation demand as measured by  domestic enplanements, Treasury assumes these enplanements grow  with the economy and population and are a function of ticket prices and  certain other factors, which is consistent with economic theory. Similarly,  according to Treasury officials, Treasury forecasts all other aviation  activity measures for future years based on elements of the economy that  are likely to affect growth in those activities. In addition, Treasury  estimates average ticket prices. Treasury uses these activity and pricing  estimates, along with applicable tax rates, to forecast revenues for seven  of the nine trust-fund-related tax sources listed in table 1 on page 5.
section_title: FAA’s Previous Revenue Forecasts Were Based on Estimates of Aviation Capacity
paragraphs: Prior to the fiscal year 2011 budget, FAA was responsible for developing  the trust-fund revenue forecasts used in the budget process. According to  FAA officials, FAA developed its budget-year revenue forecast using  airlines’ schedules for the upcoming several months to estimate airline  capacity—most notably, available seat miles (the number of available  seats and scheduled distance). These capacity measures, along with  historical and economic data and professional judgment, enabled FAA to  forecast several activity measures, such as revenue passenger miles  and enplanements for both mainline and commuter carriers, as well as  cargo and mail revenue-ton miles. For example, FAA used its estimate of  available seat miles together with its estimate of average load factors (the  percentage of seats that are filled) to forecast revenue passenger miles.  Other capacity measures, such as available seat miles on international  flights and the size and usage patterns of the general aviation fleet,  enabled FAA to develop other aviation activity forecasts, such as  international enplanements and gallons of purchased aviation fuels,  respectively. In addition, FAA forecast pricing factors—such as mainline  and commuter passenger yields as well as cargo yields—based largely  on recent fares, cargo transport prices, trends, and professional  judgment. In forecasting activity measures for the out-years (the 9 years  beyond the budget year)—which are not used to determine the budget  year’s appropriation—FAA used a demand-based econometric approach  similar to Treasury’s current approach, both of which assume no limits on  capacity that would prevent demand from being met. FAA officials told  us they used a capacity-based approach for the budget-year forecast  because they viewed the airlines’ recent and near-term planned capacity  as a more accurate basis for projecting aviation activity in the near term  than the demand-based econometric model they used for out-year  forecasts.
FAA used these activity and pricing forecasts to calculate its revenue  forecasts for all nine trust-fund-related individual tax sources listed in  table 1. One notable difference from Treasury’s current approach is that  FAA separately forecast enplanements involving an airport in Alaska or  Hawaii, which are taxed at a different rate from other enplanements.
Additionally, because tickets sold through frequent-flyer programs are not  assessed passenger ticket taxes, FAA used estimates of the sales of  frequent-flyer mileage awards to augment its forecast for the domestic  passenger ticket tax for these sales and reduce estimates of all segment  taxes.
section_title: It Is Too Soon to Compare the Accuracy of FAA’s and Treasury’s Budget Year Forecasting Approaches
paragraphs: After just 1 year and without certified receipts for the fourth quarter of  2011, it is too soon to tell whether Treasury’s demand-based econometric  approach will provide more accurate revenue forecasts for the budget  year than FAA’s more detailed, capacity-based approach. According to  forecasting experts that we interviewed, neither approach is necessarily  better given the inherent uncertainty associated with forecasting. Despite  these differences in Treasury’s and FAA’s approaches, several years of  Treasury forecasts and corresponding actual revenues would be needed  to meaningfully compare the results of the two agencies’ methodologies  and gauge the efficacy of their approaches. Furthermore, comparing  forecast methods, even with several years of data, can be inconclusive.  Forecasting is inherently uncertain, and, as one forecasting expert noted,  luck can be a factor in accurate forecasting. Specifically, if forecasts for  model components err, even slightly, in the same direction, the aggregate  error can be considerable. However, if forecasts for model components  err in opposite directions, even forecasts that are wildly inaccurate for  individual components can be accurate in the aggregate.
section_title: Overforecasting of Revenues Due to Aviation Shocks and Other Factors Has Contributed to a Significant Decline in the Trust Fund’s Uncommitted Balance
subsections: section_title: Overforecasting of Revenues for 9 of the Past 11 Years Has Contributed to a Decline in the Trust Fund’s Uncommitted Balance
paragraphs: During the past 11 years, FAA overforecasted trust-fund revenues by a  net total of $9.34 billion, with overforecasts in 9 of the 11 years. Because  Congress considers forecast trust-fund revenues in its appropriation from  the trust fund, this overforecasting has contributed to the decline in the  trust fund’s uncommitted balance. However, the effect of this inaccuracy  on the overall difference between appropriations and actual revenues— and ultimately, the trust fund’s uncommitted balance—was smaller than it  would otherwise have been because, for fiscal years 2000 through 2010,  Congress appropriated $2.4 billion less from the trust fund than the  forecast revenues (fig. 4). More specifically, Congress can choose to  appropriate more or less than the forecast trust-fund revenues—which  include forecasts of tax receipts and interest revenue and serve as the  basis for the authorized level of funding—and actual revenues may be  higher or lower than forecast. For example, for fiscal year 2005,   Congress appropriated $59 million less than the forecast revenues, and  the revenue forecast was $414 million higher than the actual revenues.  Together, these effects netted a $355 million decline in the trust fund’s  uncommitted balance. For fiscal years 2009 and 2010, the amount  Congress appropriated from the trust fund was substantially less than the  forecast revenues—$2.7 billion—which prevented the trust fund’s balance  from being overcommitted. To help offset declining revenues in 2009 and  2010, Congress increased FAA’s appropriations from general revenues in  these years. The net outcome of these two effects varied during fiscal  years 2000 through 2010, but together, appropriations from the trust fund  were $6.9 billion greater than actual revenues over this period.
Inaccurate forecasts of taxes on the transportation of persons by air—the  tax line composed of the domestic passenger ticket tax, the domestic  segment tax, and the mileage award tax—was the major factor affecting  the aggregate forecast inaccuracy, as shown in figure 5. These taxes  account for 70 percent of trust-fund tax receipts and 73 percent of FAA’s  forecast error for fiscal years 2000 through 2010. Inaccuracy in  forecasting both gasoline and fuel taxes and taxes on the transportation  of property by air accounted for a disproportionate amount of the  aggregate forecast inaccuracy. Taxes on gasoline and fuel accounted for  7 percent of total tax receipts for fiscal years 2000 through 2010, yet  forecasts for them accounted for 20 percent of the total forecast  inaccuracy. Similarly, taxes on the transportation of property by air  accounted for 5 percent of total tax receipts for the same period, but  forecasts for them accounted for 13 percent of the total forecast  inaccuracy. Furthermore, the effects of these overforecasts were offset  somewhat by underforecasts of taxes on the use of international air  facilities. For fiscal years 2000 through 2010, these taxes accounted for  18 percent of total trust-fund tax receipts, yet the forecasts for these taxes  were less than the actual revenues.
Several factors make forecasting trust-fund revenues a challenge  including: (1) unexpected events that rapidly shift the demand for aviation  services, (2) the timing of the forecasts, and (3) the difficulty of  recognizing when apparent changes in the industry are transitory or  permanent. These factors can affect the accuracy of both activity and  pricing forecasts used to generate the revenue forecasts.
Unexpected events causing changes in aviation demand or airline  capacity can considerably affect trust-fund revenues and the accuracy  of trust-fund revenue forecasts. For example, geopolitical events,  such as the terrorist attacks of September 11, 2001, which  substantially reduced the demand for air travel and led to lower trust- fund revenues, could not have been foreseen. In fiscal year 2002,  when the attacks had their greatest effect on aviation activity, revenue  forecasts exceeded actual revenues by $2.7 billion, or 22 percent.  Additionally, rapid changes in the economy can lead to forecast  inaccuracy. In fiscal year 2009, when the effects of the recent  recession were greatest, revenues were overforecast by nearly $2.2  billion, or 17 percent. In response to high fuel prices and a weakening  economy, the airline industry reduced its domestic capacity (the  number of scheduled seats) in 2008, mostly by removing older, less- fuel-efficient aircraft from service. In fiscal year 2009, fuel and  gasoline tax receipts were overforecast by 37 percent as the reduction  in capacity led to a 13 percent decrease in fuel consumption from  fiscal year 2008 to fiscal year 2009.
According to an industry expert, the effects of certain exogenous  events—events caused by factors outside the aviation industry—on  demand for air travel are such that it is common for demand to drop  much more quickly in response to a negative shock than it will build in  response to overall good economic conditions. Thus, the likelihood  that there will be years when revenues are considerably overforecast  may be higher than the likelihood that there will be years when  revenues are considerably underforecast. This pattern held for fiscal  years 2000 through 2010. In fiscal years 2000 and 2007, revenues  were underforecast by $399 million and $154 million respectively. In  all other years during that decade, yearly revenues were overforecast  by between $321 million and $2.7 billion. Similarly, other factors  external to the industry and economy—such as health issues like an  outbreak of a contagious virus—can cause rapid shifts in demand.
The timing of budget forecasts exacerbates the potential for  inaccurate trust-fund revenue forecasts, particularly in the face of  unexpected events. Developed over a year in advance, the forecasts  often cannot account for the effects of unexpected events, such as the  September 11 attacks or changes in economic conditions. For  example, the revenue forecast for fiscal year 2002 was developed in  the final months of calendar year 2000, almost a full year before  September 11, 2001. Additionally, because of the timing of the budget  process, the revenue forecasts incorporate early forecasts of changes  in gross domestic product (GDP), which is a critical exogenous factor  affecting airline revenues and thus forecasts. Studies have found that  predictions of, for example, recessions, are not very accurate more  than a year in advance, and so the sharp drops in demand that occur  as a result of rapidly changing macroeconomic conditions are likely to  be missed in the relevant forecast. For example, OMB’s fiscal year  2009 forecast for real GDP growth from February 2008 was 3.0  percent, but real GDP actually declined by 3.5 percent, according to  the Bureau of Economic Analysis.
The difficulty of recognizing when apparent changes in the  industry are transitory or permanent affects forecast accuracy  because long-term structural changes require adjustments to forecast  models. As we have previously reported, the airline industry has  experienced significant structural changes over the last decade, but  they were not usually apparent until well after they had occurred. Examples of apparent structural changes include the following:
Short-distance markets (less than 250 miles between airports)  have lost a large share of passenger traffic, likely because of the  increased time required for aviation security measures  implemented since September 11, 2001, has made driving a more  viable option for short-distance routes.
GAO, Commercial Aviation: Consumers Could Benefit from Better Information about  Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees,  GAO-10-785 (Washington, D.C.: July 14, 2010) and Airline Deregulation: Reregulating the  Airline Industry Would Likely Reverse Consumer Benefits and Not Save Airline Pensions,  GAO-06-630 (Washington, D.C.: June 9, 2006).
Over the past 10 years the use of the Internet for ticket purchases  has became ubiquitous and appears to have contributed to a  reduction in fare dispersion and helped to suppress average fares.  In particular, there appear to be fewer tickets that are high-priced  tickets compared to average-priced tickets on a given route.
Passenger load factors (the percentage of seats that are filled)  have risen to levels previously thought not possible, according to  industry experts.
Increasingly, airlines are charging fees for a number of optional  services, such as checked baggage, in-flight food and beverages,  and ticket change or cancellation fees, for which separate fees did  not previously exist. This change in pricing structure enables  airlines to keep airfares lower while bringing in additional revenue  through fees, which are not subject to excise taxes for the trust  fund.
These various factors—exogenous shocks, the timing of forecasts, and  lags in recognizing structural changes to the airline industry—affect  forecast accuracy for key activity and pricing measures, such as  enplanements and ticket prices. In particular, experts told us that  estimating how these factors may affect ticket prices is particularly hard  because prices are closely tied to individual airline business decisions as  well as to aggregate demand. For example, one airline’s decision to  reduce fares may easily lead to a fare war, in which competing airlines  attempt to undersell each other. Forecasters are unable to predict when  these fare wars may occur and how they may affect on ticket prices.  Similarly, forecasters are unable to predict changes airlines make to their  business models, such as the addition of baggage checking and other  ancillary fees. FAA’s analysis of forecast accuracy for key activity  measures illustrates this difficulty in forecasting ticket prices. Specifically,  for fiscal years 2003 through 2009, near-term forecasts of average ticket  prices for mainline carriers were in error by an average of 3.4 percent,  compared with errors that averaged 1.6 percent for forecasts of revenue  passenger miles and 1.1 percent for enplanement forecasts.
section_title: Options Exist to Reduce, but Not Eliminate, the Risk of Overcommitting Trust-Fund Resources
paragraphs: Although the trust fund’s uncommitted balance was used to offset lower- than-forecast trust-fund revenues in the past, the current trust-fund  balance provides less protection against overcommitting trust-fund  resources. This means that trust-fund revenues could be insufficient to  cover all of the obligations that FAA has the authority to incur if actual  trust-fund revenues continue to fall below forecast levels and Congress  appropriates funds from the trust fund at the forecast levels. The trust  fund’s uncommitted balance was about $1.4 billion at the end of fiscal  year 2011—up from $770 million at the end of fiscal year 2010. Despite  the lapse in collecting certain taxes from July 23 through August 7, 2011,  according to FAA, the trust fund’s uncommitted balance grew due to  higher-than-expected revenues in fiscal year 2011.
A substantial decline in the trust fund’s uncommitted balance could lead  to budgetary challenges for FAA, if commitments from the trust fund  exceed revenues deposited into the trust fund. As we have previously  reported, a decline in the trust fund’s uncommitted balance toward zero  signals to FAA that revenues available to incur future obligations could be  limited, which could affect FAA’s ability to move forward with planned  projects and programs. OMB, the Department of Transportation (DOT),  and FAA budget officials noted that if the trust fund were to become  overcommitted, there would be some time to determine what actions, if  any, FAA might have to take and to address this issue through the  appropriations process, given capital programs are paid for—or  outlayed—over several years and because the trust fund maintains a  cash balance ($9.4 billion as of the end-of-fiscal-year 2010), for which  revenues are continually paid into the trust fund. However, as we have  previously reported, in the short term, FAA officials have noted a risk of  overcommitting trust-fund resources might require them to delay  obligations for capital programs if they do not have adequate revenues in  the trust fund to cover those obligations—unless additional funding was  authorized and appropriated from general revenues. uncommitted balance, better matching of actual revenues to the  appropriation from the trust fund would better ensure that trust-fund  revenues are sufficient to cover FAA’s expenditures, thus reducing the  potential risk of disruptions in funding for aviation projects and programs.  For our analysis, we considered four alternative options for determining  the amount that would be made available for appropriation from the trust  fund—each of which would require a change in law to implement (table  2). First, the House of Representatives’ current FAA reauthorization bill  (H.R. 658) includes a provision that would limit the budget resources  made available for appropriation from the trust fund to 90 percent, rather  than 100 percent, of forecast revenues and apply any differences  between actual trust-fund revenues and appropriations from the trust fund  to a subsequent year. The second option would use a prior year’s actual  trust-fund revenue amount as the basis for the appropriation since this  revenue amount would represent the level of actual revenues deposited  into the trust fund from a prior year and therefore not make funding  dependent on revenue forecasts. For example, the second preceding  year’s revenue amount could be used, since it would be certified by IRS  in time for the development of FAA’s budget. Finally, the third and fourth  options would target a level for the trust fund’s uncommitted balance— such as $2 billion or $3 billion—and base appropriations on the goal of  maintaining that target level. These options would increase the likelihood  that uncommitted resources would be available to FAA if actual revenues  fell short of forecast revenues.
Our analysis of these options shows that although they provide for  substantially greater protection to the trust fund than the provision in  current law, they do not completely eliminate the risk of overcommitting  revenues from the trust fund (table 3). For our analysis, we applied these  four approaches to the actual and forecast trust-fund revenues for fiscal  years 2000 through 2010, using the trust fund’s end-of-year fiscal year  2010 uncommitted balance of $770 million as the balance for the end of  fiscal year 1999 to analyze how these options might function in starting with  a low uncommitted balance.  On the basis of this analysis, we determined  that the four options provide better protection against overcommitting  resources from the trust fund when it has low uncommitted balance than  the current law (which we refer to as AIR-21 method) would have provided  had it been followed. However, these alternatives could still result in the  trust fund being overcommitted unless Congress appropriated more  general revenues because if the uncommitted balance is close to zero,  there is no margin for error if the actual revenues fall significantly short of  the amounts appropriated. For example, in 2002 when appropriations  exceeded actual revenues by over $3.2 billion (as previously shown in fig.  4), the H.R. 658 option and the $2 billion target option, if in place during  that time, would have been insufficient to protect the trust fund’s  uncommitted balance from being overcommitted.
Our analysis of these options further shows that they—particularly the  H.R. 658 provision—could also lead to greater swings in trust-fund  contributions, which in turn would require greater variation in general- revenue appropriations to maintain overall stable appropriation levels for  FAA. As figure 6 shows, the H.R. 658 provision, if in place during fiscal  years 2000 through 2010, would have resulted in a wider variation in the  total amount available for appropriation from the trust fund than the other  options and current law. Because of these variations with the H.R. 658  option, general-revenue appropriations would also have to vary widely  from year to year to maintain the same appropriation levels during that  time frame. In addition, these options could result in the availability of  fewer resources for some period of time than under current law, unless a  general-revenue appropriation made up the difference.
section_title: The Extent to Which Trust-Fund Revenues Might Support Future FAA Expenditures Will Depend on Differing Assumptions and Other Factors
subsections: section_title: The President’s Budget Forecasts Show FAA Expenditures Continuing to Exceed Trust-Fund Revenues
paragraphs: According to the President’s fiscal year 2012 budget request and mid- session review, FAA expenditures (as reflected by OMB’s estimates of  FAA’s budget authority) are expected to continue to exceed forecast trust- fund revenues through fiscal year 2021 (see fig. 7). FAA expenditures  not covered by trust-fund revenues are projected to be paid for by general  revenues.
In the near term, the administration forecasts reductions in FAA’s  expenditures in fiscal years 2013 through 2015, primarily because of the  President’s directive to reduce discretionary spending for non-security  agencies.expenditure levels for these years below fiscal year 2008 levels, primarily  because of the $1 billion proposed reduction to AIP, according to OMB.  OMB uses inflation adjustments and other factors to project out-year   These forecasts, if realized, would reduce total FAA  expenditures, resulting in FAA’s fiscal years 2016 to 2021 expenditures  growing roughly at the forecast rate of GDP growth—around 2.3 percent  to 2.5 percent annually. Under these assumptions, total forecast FAA  expenditures would require $20 billion in general revenues to supplement  trust-fund revenues.
OMB’s forecasts base future years’ general-revenue contribution for FAA  on the current budget year’s (fiscal year 2012) proposed general-revenue  proportion. Specifically, OMB assumes trust-fund revenues cover about  68 percent of FAA’s estimated total expenditures, and general revenues  cover the remaining 32 percent for each year of this same period. This  level of general revenue funding for FAA is among the highest levels  since fiscal year 2000 (see fig. 8). Since the assumptions behind the  President’s budget forecasts keep the general-revenue and trust-fund  contributions constant in the out-years, OMB’s forecasts differ from the  AIR-21 approach in that they assume all forecast trust-fund revenues are  not made available for appropriation. As a result, OMB projects a growing  trust-fund uncommitted balance—from $770 million at the end of fiscal  year 2010 to almost $30 billion at the end of fiscal year 2021. Although  such growth does not reflect what has historically happened under the  AIR-21 method—which makes the forecast level of receipts available for  appropriation—OMB officials noted that this approach aligns with how  OMB forecasts out-year budget authority for other agencies.
By contrast, applying the AIR-21 approach to current revenue and  expenditures forecasts would reduce the amount of additional general  revenues needed to cover forecast expenditures but would maintain the  current uncommitted balance level and still require some level of  additional general revenues or increases in aviation tax levels or sources  into the trust fund to fund FAA expenditures as compared to OMB’s  approach (fig. 9). Specifically, applying the AIR-21 approach would  make approximately $27 billion more in trust revenues available for  appropriation for fiscal years 2013 through 2021 than OMB projects.  Although this approach would reduce the amount of general revenues  needed to cover forecast FAA expenditures, the assumption that all  forecast trust-fund revenues would be appropriated halts the growth in the  trust fund’s uncommitted balance holding it at the most recent estimate of  $1.4 billion for fiscal year 2011 and providing limited protection against  forecast error. Additionally, projected FAA expenditures under the AIR-21  approach would still require some level of general-revenue  appropriation—specifically, 20 percent for fiscal year 2013, respectively,  and then about 8 percent to 16 percent for fiscal years 2014 through  2021.
While these forecasts provide perspectives on future FAA expenditures  and trust-fund revenues, the extent to which these forecasts are more  accurately realized in future years depends on changing economic,  technological, political, industry, and other factors. In particular,  congressional decisions, including the level of FAA’s appropriations or the  trust-fund tax structure; unexpected changes affecting trust-fund  revenues and FAA expenditures; and FAA’s implementation and  management of programs, such as NextGen, could significantly affect  trust-fund revenues and FAA expenditures in future years.
In its deliberations on the appropriate level of federal revenues and  expenditures for a given year, Congress decides on the level of FAA’s  appropriations—which could be more or less than the President’s budget  request—and the level of trust-fund and general revenues to fund FAA.  As previously noted, in fiscal years 2009 and 2010, the level of  appropriations from the trust fund was reduced and the general-revenue  appropriation was increased from the President’s budget request. FAA’s  fiscal year 2012 appropriations generally funded the President’s fiscal  year 2012 request, with the exception of the President’s request for $3.35  billion in general revenues for the AIP and Facilities and Equipment  accounts for a proposed infrastructure initiative (table 4). Additionally,  FAA’s fiscal year 2012 appropriations cover approximately 30 percent of  FAA’s total expenditures from general revenues. As CRS has reported,  the House-passed FAA reauthorization bill calls for reductions to all FAA  accounts, setting flat funding levels for fiscal years 2012 through 2014.
These levels would reduce FAA’s annual budget by about $1 billion  compared with fiscal year 2010 enacted levels and, except for AIP, are  slightly below the OMB’s fiscal year 2012 budget forecasts for these  same years.
Changes in trust-fund taxes and fees, if enacted, would also affect trust- fund revenue forecasts. For example, the Senate-passed FAA  reauthorization bill calls for an increase of 14.1 cents per gallon in  general-aviation jet fuel taxes and a new surcharge of 14.1 cents per  gallon surcharge on general-aviation jet fuel purchased for fractionally  owned aircraft.provision could result in about $50 million in additional trust-fund  revenues for fiscal years 2012 through 2014. In addition, the  administration has proposed a fee of $100 per flight as part of the  September 2011 deficit-reduction plan that it submitted to Congress. This  fee would be deposited into the trust fund and, according to  administration estimates, could generate an additional $11 billion in trust- fund revenues over the next 10 years.
The Joint Committee on Taxation estimates that this  Unanticipated changes affecting aviation can affect the realization of  trust-fund revenues and FAA expenditure forecasts. Although Treasury  forecasts continuous growth in trust-fund revenues, actual revenues have  fluctuated considerably from year to year. year change in trust-fund revenues has ranged from a 13 percent  increase to an over 10 percent decline during fiscal years 2000 through  2010. As we previously described, events, such as the economic  recession in 2009 and structural changes in the industry, can cause trust- fund revenues to vary from year to year. For example, in 2007, airline  capacity grew more slowly than air traffic leading to growth in airline  revenues and better-than-expected trust-fund revenues in that year. In  addition, unanticipated events can affect FAA’s expenditures, as well as  trust-fund revenues. For example, major airline accidents and terrorist  actions can create additional resource needs for the agency that cannot  be easily forecast. Additionally, these incidents can cause passenger  demand to fall with airlines responding by lowering fares—with both of  these factors leading to reduced trust-fund revenues.
Treasury forecasts growing trust fund revenues because aviation activity generally  grows with the expected growth in economic activity. Long-term revenue forecasts  generally show a continuous growth even though economic cycles will cause revenues to  fluctuate from year to year. However, long-term forecasts, in aggregate, should reflect the  total effect of economic cycles. expenditures. Much of this proposed reduction is in NextGen and  NextGen-related expenditures that are being scaled back or deferred to  later years. Although FAA also reduced its forecast operations  expenditures because of budget constraints, these forecasts do not  account for potential efficiency gains that may occur from the  implementation of NextGen technology, which could reduce the overall  cost of FAA operations.
GAO-12-141T. programs.NextGen—both in the midterm (through 2018) and in the long term  (beyond 2018)—and FAA’s overall costs will be affected by how well FAA  manages program interdependencies.
Thus, looking more broadly, the implementation of  While FAA’s budget generally identifies the NextGen capabilities that FAA  plans to implement in the near term to midterm (through 2018), the out- year expenditure forecasts are not tied to specific FAA programs and will  be affected by decisions that have yet to be made on the long-term  direction of NextGen. Specifically, although FAA estimates that it will incur  total NextGen costs of between $15 billion and $22 billion for fiscal years  2012 through 2025, two key planning documents—the NextGen  Integrated Work Plan and Enterprise Architecture—contain a wide variety  of possible ideas and approaches for the long-term direction of NextGen  (beyond 2018). approaches will be implemented remain to be made. Additionally, FAA  estimates that the avionics needed on aircraft to realize significant  NextGen capabilities will cost private operators in the range of $5 billion  to $7 billion through 2018. FAA has not determined whether they will  provide financing to help aircraft operators cover these costs.
section_title: Concluding Observations
paragraphs: The Enterprise Architecture, commonly referred to as the “blueprint” for NextGen, is a  technical document that describes the segments, capabilities, operational activities, and  identified relationships to the key target components of NextGen in the year 2025. The  NextGen Integrated Work Plan is a document that describes when NextGen capabilities  and potential improvements will be introduced and who will be responsible for them.  Additionally, FAA’s NextGen cost estimate for 2012 through 2025 is in 2011 constant  dollars. Thus, even though the present value of the cost are represented by this estimate,  the actual dollars needing to be appropriated to cover those expenses in the years that  they are incurred will be higher due to inflation. balance. Deciding on the appropriate mechanism for determining the level  of appropriations from the trust fund requires Congress to weigh trade- offs between the amount available for appropriations from the trust fund,  the amount of general revenues in a given year, and the overall level of  FAA expenditures, all while ensuring stable and sustainable funding for  aviation investment. As we have previously suggested, a better  mechanism may be needed to match actual revenues with trust-fund  appropriations, and thereby help to protect the trust fund’s uncommitted  balance and provide Congress, FAA, and the larger aviation community  with greater certainty about the trust fund’s sustainability.
Congress will determine the future budget resources available to meet  FAA’s operating and capital investments, including NextGen  improvements. Even within the currently constrained federal budget  environment, it appears that based on the President’s budget request  estimates, FAA expenditures will continue to exceed trust-fund revenues  in future years. As federal budget resources continue to be constrained,  Congress may face some difficult choices about whether to reduce FAA’s  appropriations, which could increase FAA’s total costs and delay the  benefits associated with investments such as NextGen, or to either  increase revenues going into the trust fund or increase appropriations  from general revenues.
section_title: Agency Comments
paragraphs: We provided a draft of this report to OMB, Treasury, and DOT for review  and comment. Each entity provided technical comments that we  incorporated, as appropriate.
As arranged with your offices, unless you publicly announce the contents  of this report earlier, we plan no further distribution until 30 days after the  date of this letter. At that time, we will send copies of this report to  interested congressional committees, the Director of OMB, the Secretary  of Transportation, the Acting Administrator of FAA, the Secretary of the  Treasury, and other parties. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or flemings@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, key contributors to this report  were Paul Aussendorf (Assistant Director), Heather Krause (Assistant  Director), Amy Abramowitz, Lauren Calhoun, Bess Eisenstadt, Bert  Japikse, Carol Henn, Hannah Laufe, Sara Ann Moessbauer, Joshua  Ormond, and Rebecca Rygg.