Federal Aviation Administration: An Analysis of the Financial Viability of the Airport and Airway Trust Fund
Published: 2006-03-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Airport and Airway Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system and to fund investments in air traffic control facilities. It provides all of the funding for the Federal Aviation Administration's (FAA) capital accounts, including: (1) the Airport Improvement Program, which provides grants for construction and safety projects at airports; (2) the Facilities and Equipment account, which funds technological improvements to the air traffic control system; and (3) the Research, Engineering, and Development account, which funds continued research on aviation safety, mobility, and environment issues. In addition, at various times during its history, the Trust Fund has funded all or some portion of FAA's operations. To fund these accounts, the Trust Fund is credited with revenues from a variety of excise taxes related to passenger tickets, passenger flight segments, international arrivals/departures, cargo waybills, and aviation fuels. Including interest earned on its balances, the Trust Fund received $10.8 billion in fiscal year 2005. The various taxes that accrue to the Trust Fund are scheduled to expire at the end of fiscal year 2007. GAO was asked to provide information and analysis about the financial condition and future viability of the Trust Fund.
section_title: What GAO Found
paragraphs: The Trust Fund's uncommitted balance decreased from $7.3 billion at the end of fiscal year 2001 to about $1.9 billion at the end of fiscal year 2005. In 3 of the last 4 fiscal years, the Trust Fund's uncommitted balance has fallen by over $1 billion because revenues were lower than FAA forecasted due to the impact of unanticipated events such as the September 11, 2001, terrorist attacks. However, the rate of decrease has slowed; during fiscal year 2005, the uncommitted balance decreased by about $500 million. Under FAA's current authorization, appropriations from the Trust Fund are based on forecasted revenues. Thus, if actual revenues approximate forecasted revenues, there should be no substantial change in the uncommitted balance. However, for each fiscal year since 2001, because actual revenues have been less than forecasted, the uncommitted balance has fallen. Based on its revenue forecast and appropriation for fiscal year 2006, FAA forecasts that the Trust Fund's uncommitted balance will fall by the end of 2006 to about $1.7 billion. If the Congress continues to follow the formula from Vision 100--FAA's current authorizing legislation that links appropriations made available from the fund to revenue forecasts--then FAA expects there will be little change in the uncommitted balance for fiscal year 2007. If, instead, the Congress adopts the President's budget for FAA for fiscal year 2007, FAA forecasts that the fund's uncommitted balance by the end of 2007 will rise to about $2.7 billion. This higher forecasted uncommitted balance occurs because the President's budget calls for an appropriation to FAA from the Trust Fund that is about $1 billion lower than the Vision 100 formula. If revenues in fiscal years 2006 and 2007 are below forecasted levels, the Trust Fund's uncommitted balance will be less than forecasted and, in one scenario we analyzed, will reach zero by the end of 2007. This scenario raises concerns because, in the past, the Trust Fund's uncommitted balance was used to offset lower-than-expected Trust Fund revenues and decreased general fund contributions. FAA could help address these concerns by continuing to look for ways to improve efficiency and reduce costs. However, the zero-balance scenario would most likely have implications for the Congress in funding FAA programs.

section_title: Letter
paragraphs: We are pleased to be here today to discuss the financial viability of the  Airport and Airway Trust Fund (Trust Fund) and the President’s proposed  2007 budget for the Federal Aviation Administration (FAA). Over the  course of FAA’s last two authorizations, FAA’s appropriations increased  from $9.8 billion in fiscal year 1999 to $14.3 billion this fiscal year (2006),  and fiscal year 2007 is projected to be $15.2 billion. In this testimony, we  will present the results of our analysis of the uncommitted balance of the  Trust Fund and related issues as requested by this committee.
FAA is currently funded by a combination of Trust Fund revenues derived  from excise taxes levied on a variety of aviation activities and from general  fund revenues. The Trust Fund’s uncommitted balance depends on the  revenues flowing into the fund and the appropriations made available from  the fund for various spending accounts. Policy choices, structural changes  in the aviation industry, and external events have affected revenues  flowing into and out of the fund. For example, the uncommitted balance  has been declining in recent years because Trust Fund revenues for the  last 5 years have been less than FAA’s forecasted levels. Our analysis  includes scenarios in which Trust Fund revenues continue to fall short of  forecasted levels. Under these scenarios, the Trust Fund balance  continues to decline, and in one scenario, the balance reaches zero by the  end of 2007. We believe these scenarios raise concerns because in the past  the Trust Fund’s uncommitted balance was used to offset lower-than- expected Trust Fund revenues and decreased general fund contributions.  FAA could help address these concerns by continuing to look for ways to  improve efficiency and reduce costs. However, the zero-balance scenario  would most likely have implications for the Congress in funding FAA  programs. In addition, we believe that the information about the financial  viability of the Trust Fund will be critical to congressional decision making  regarding appropriations for FAA’s 2007 budget.
The Trust Fund was established by the Airport and Airway Revenue Act of  1970 (P.L. 91-258) to help fund the development of a nationwide airport  and airway system and to fund investments in air traffic control facilities.
It provides all of the funding for FAA’s capital accounts, including: the  Airport Improvement Program (AIP), which provides grants for  construction and safety projects at airports; the Facilities and Equipment  (F&E) account, which funds technological improvements to the air traffic  control system; and the Research, Engineering, and Development (RE&D)  account, which funds continued research on aviation safety, mobility, and  environment issues as well as the FAA’s portion of the Joint Planning and  Development Office. In addition, at various times during its history, the  Trust Fund has funded all or some portion of FAA’s operations. In 2005,  expenditures from the Trust Fund were made among the four accounts  shown in figure 1.
To fund these accounts, the Trust Fund is credited with revenues from a  variety of excise taxes related to passenger tickets, passenger flight  segments, international arrivals/departures, cargo waybills, and aviation  fuels. These taxes are scheduled to expire at the end of 2007. Including  interest earned on its balances, the Trust Fund received $10.8 billion in  2005. Table 1 shows the distribution of Trust Fund revenues for 2005 by  source.
Although expenditures from the Trust Fund exceeded revenues in 2005,  since the Trust Fund’s creation in 1970, revenues have in aggregate  exceeded spending commitments, resulting in a surplus or an  uncommitted balance. At the end of 2005, the Trust Fund’s uncommitted  balance was about $1.9 billion.
Policy choices, structural changes in the aviation industry, and external  events have affected revenues flowing into and out of the fund and have  caused some aviation stakeholders to speculate about the fund’s financial  status. Some aviation stakeholders have said that there is a reason to be  concerned about the financial condition of the Trust Fund because in  recent years, revenues have not kept pace with funding commitments and  the uncommitted balance has been used to close the gap. Other aviation  stakeholders state that the fund is healthy because revenues are currently  increasing and are expected to continue to increase.
The focus today is the Trust Fund’s revenues and balances over the past  few years; the projected near-term future of the Trust Fund, considering  the President’s 2007 budget request for FAA; and policy decisions that may  affect longer-term Trust Fund balances. The scope of our work and the  specific methodology are discussed at the end of my statement.
subsections: section_title: Recent Trends of the Trust Fund and the Effect on the Fund’s Uncommitted Balance
subsections: section_title: Revenues Have Generally Increased with Some Fluctuations
paragraphs: The Trust Fund’s uncommitted balance depends on the revenues flowing  into the fund and the appropriations made available from the fund for  various spending accounts. The amount of revenue flowing into the Trust  Fund has fluctuated from year to year but has generally trended upward,  as shown in figure 2. Some of the fluctuation has resulted from changes in  economic conditions, but some has been due to other factors. For  example, during 1981 and 1982, revenues (including interest) flowing into  the fund averaged about $629 million—the lowest amount in the fund’s  history—because of a lapse in the collection of aviation taxes. In 1999,  revenue flowing into the fund totaled about $11.1 billion, the largest  amount in the fund’s history.
However, after revenues peaked in 1999, the amount of revenue flowing  into the Trust Fund decreased in each of the next 4 years, reaching a level  of about $9.3 billion in 2003. A number of factors contributed to this  decrease. For example, within the airline industry, the growth of the  Internet as a means to sell and distribute tickets, the growth of low-cost  airlines, and fare reductions by legacy carriers all transformed the  industry and led to lower average fares. These lower fares have resulted in  lower ticket taxes and less revenue going into the Trust Fund. In addition,  in the same time period, a series of largely unforeseen events, including  the September 11, 2001, terrorist attacks, war in Iraq and associated  security concerns, the Severe Acute Respiratory Syndrome (SARS), and  global recessions seriously affected demand for air travel, resulting in a  decrease in airline industry and Trust Fund revenue.
Since the beginning of 2004, however, Trust Fund revenues have been  increasing. In fact, revenues from tax sources in 2005 were nearly as high  as in 1999, although total revenues were still below peak level because less  interest was earned due to a lower Trust Fund balance.
section_title: Expenditures from the Trust Fund Have Also Generally Increased
paragraphs: Similar to the revenue picture, the annual amount of expenditures from  the Trust Fund also has generally increased since the fund’s inception, but  with some fluctuation. One source of fluctuation has been that the share of  FAA operations paid by the Trust Fund has varied over time. Figure 3  shows how expenditures from the fund have changed over time and how  they have compared with revenues. In some years, they have exceeded  revenues, but in other years they have been less than revenues.
section_title: Appropriations from Trust Fund Are Now Linked to Projected Revenues
paragraphs: In the Wendell H. Ford Aviation Investment and Reform Act for the 21st  Century (AIR-21), the Congress created a link between Trust Fund  revenues and appropriations from the fund to try to ensure that all fund  receipts, including interest, were committed to spending for aviation  purposes on an annual basis. According to a provision of AIR-21, which  was continued in the Century of Aviation Reauthorization Act (Vision  100)—FAA’s current authorizing legislation—total appropriations made  available from the fund in each fiscal year shall equal the level of receipts  plus interest in that year, and these appropriations can be used only for  aviation investment programs, which are defined as FAA’s capital  accounts plus the Trust Fund’s share of FAA operations. Further, the level  of receipts was specified to be the level of excise taxes plus interest  credited to the fund for a fiscal year as set forth in the President’s budget  baseline projection for that year.
section_title: Trust Fund’s Uncommitted Balance Has Been Declining in Recent Years
paragraphs: As shown in figure 4, with the exception of its first four years, the Trust  Fund has ended each year with an uncommitted balance; however, the  amount of the uncommitted balance has fluctuated substantially over time,  generally increasing when Trust Fund revenues exceed appropriations  from the fund and decreasing when they are less than appropriations. As  noted in the figure, the uncommitted balance has decreased substantially  in recent years. The Trust Fund’s uncommitted balance peaked at over $7  billion in 1991, 1999, and 2001. In contrast, because of lapses in the taxes  that accrue to the fund, at the end of 1982, the uncommitted balance was  about $2.1 billion, and at the end of 1997, it was about $1.4 billion.  Specifically, the Trust Fund’s uncommitted balance decreased from $7.3  billion at the end of 2001 to $4.8 billion at the end of 2002 and has  continued to decrease since then, reaching about $1.9 billion at the end of  2005. However, the rate of decrease has slowed; in 2005, the uncommitted  balance decreased by about $500 million, after falling by at least $900  million in each of the previous 3 years.
The uncommitted balance has fallen in recent years because Trust Fund  revenues have fallen short of forecasted levels by over $1 billion in 3 out of  the last 4 fiscal years. For example, in 2001, the difference between  forecasted revenue and actual revenue coming in to the Trust Fund was  $383 million less than expected. In 2002, the difference jumped to $2.3  billion due to the impact that unanticipated external events such as the  September 11, 2001, terrorist attacks had on the aviation industry.  Residual effects and other factors such as the war in Iraq and the SARS  outbreak lasted through 2003 and 2004, with each year’s actual revenues  coming in at least $1 billion below forecasted revenues.
As mentioned above, under Vision 100 and its predecessor, AIR-21,  appropriations made available from the Trust Fund are based on  forecasted revenues. Thus, if actual revenues approximate forecasted  revenues, there should be no substantial change in the uncommitted  balance. However, as shown in figure 5, for each year beginning with 2001,  actual revenues, including interest, have been less than forecasted, so that  in each year since then, the uncommitted balance has fallen.
section_title: Fund’s Uncommitted Balance Is Projected to Be Positive through 2007 but Depends on Realization of Forecasted Passenger Traffic Levels and Airfares
paragraphs: Based on its revenue forecast and appropriations for 2006, FAA forecasts  that the Trust Fund’s uncommitted balance will decrease by the end of  2006 to about $1.7 billion. FAA forecasts that if, for 2007, the Congress  continues to follow the Vision 100 formula for linking budget resources  made available from the fund to expected revenues, then there will be  little change in the uncommitted balance—$1.7 billion—during that year.  If, instead, the Congress adopts the President’s budget request for FAA for  2007, FAA forecasts that the fund’s uncommitted balance by the end of  2007 will rise to about $2.7 billion. This higher forecasted uncommitted  balance occurs because the President’s budget calls for an appropriation  from the Trust Fund that is about $1 billion lower than the Vision 100  formula. In addition, compared with Vision 100, the President’s budget  calls for a reduction in the appropriation to FAA from the general fund of  about $500 million. Thus, in total, compared with Vision 100, the  President’s budget calls for a reduction of about $1.5 billion in FAA’s  appropriation. Figure 6 shows the forecasted year-end uncommitted  balance under both scenarios through 2007.
While the President’s budget calls for making a smaller appropriation  available from the Trust Fund than under Vision 100, largely due to  reductions in the AIP, it calls for greater reliance on the Trust Fund to  fund FAA’s operations. Vision 100 uses the formula created in AIR-21 to  determine how much funding for FAA operations should come from the  Trust Fund, but the President’s budget proposal does not use this formula.  Under Vision 100, the formula makes the amount of Trust Fund revenue  that will be authorized for FAA operations and RE&D in a given year equal  to projected Trust Fund revenues (as specified in the President’s budget)  minus the authorizations for the capital accounts (AIP and F&E) in that  year. Thus, under Vision 100, the Trust Fund is projected to support $4.6  billion of FAA’s operations, or 57 percent. In contrast, the President’s  budget specifies a set amount of Trust Fund revenue to be used for FAA  operations. Therefore, if Congress enacts the President’s budget request  for FAA, the Trust Fund would provide $5.4 billion for FAA’s operations in  2007, or 65 percent of its total estimated cost for operations.
Although the Trust Fund is projected to have a surplus at the end of 2007  under each of the expenditure proposals, this projection depends to a  significant extent on achieving forecasted commercial passenger traffic  levels and airfares, as they have the largest impact on the amount of  revenues flowing into the Trust Fund. We recognize that it is difficult to  anticipate future events that may significantly affect the demand for air  travel, particularly since FAA makes a forecast that is contained in the  President’s budget based on information available in the first quarter of  the preceding fiscal year. However, our analysis shows that for each of the  last 5 years, FAA’s projected revenue forecast for the President’s budget  was higher than the actual amount of revenue received, as shown in   figure 5.
Given the differences in recent years between the forecasted revenue and  actual amount of revenue received, we conducted sensitivity analyses to  estimate what would happen to the Trust Fund’s uncommitted balance if  Trust Fund revenues in 2006 and 2007 fall below the levels that FAA  projected in March 2006. For example, table 2 shows the projected Trust  Fund balances under Vision 100 and the President’s proposal and the  impact if revenues, for whatever reason, are 5 percent or 10 percent less  than currently projected. If revenues are 5 percent lower than projected,  which they were in 2001, the Trust Fund would have a small but positive  uncommitted balance under both expenditure proposals—Vision 100 and  the President’s budget proposal. However, if the revenues were 10 percent  lower than projected, as they were in 2004, the uncommitted balance  would drop below half a billion dollars under the President’s proposal and  would fall to zero by the end of 2007 under Vision 100.
We believe these scenarios raise concerns because, in the past, the Trust  Fund’s uncommitted balance was used to offset lower-than-expected Trust  Fund revenues and decreased general fund contributions. FAA could help  address these concerns by continuing to look for ways to improve  efficiency and reduce costs. However, the zero-balance scenario would  most likely have implications for Congress in funding FAA programs.
To keep the Trust Fund from declining, the Congress could use an  alternate basis for authorizing and appropriating money out of the Trust  Fund that does not rely on the revenue forecast in the President’s budget.  One alternative that would still maintain the link between revenues and  spending would be for appropriations from the Trust Fund to be based on  the actual Trust Fund revenues from the most recent year for which data  are available. That would mean, for example, that the Congress would  appropriate for 2007 the Trust Fund revenues received in 2005. Although  that would make it less likely that the Trust Fund balance would decline  further, it could also mean that a smaller appropriation would be made  available for aviation. Whereas Trust Fund revenues in 2005 were about  $10.8 billion, the President’s budget for 2007 forecasts Trust Fund  revenues of about $11.8 billion.
section_title: Future Policy Decisions Will Affect the Trust Fund Balance beyond 2007
paragraphs: Future policy decisions concerning spending for aviation will affect the  Trust Fund balances beyond 2007. If general fund appropriations for FAA’s  operations are maintained at recent levels, future projected Trust Fund  revenues under the current tax structure may be insufficient to pay for the  expenditures that FAA says are needed to maintain and modernize the  current system. According to FAA, its aviation infrastructure is aging, and  replacing it will cost $32 billion. Even more, Trust Fund revenues would  be needed to pay for those expenses if general fund appropriations for  operations are reduced. Insufficient Trust Fund revenues could result in  critically needed capacity-enhancing air traffic control modernization  investments being deferred or canceled at a time when commercial  activity is returning to or exceeding pre-September 11 levels.
subsections: section_title: Funding Will Be Needed for the Next Generation Air Transportation System
paragraphs: In addition to costs projected just to maintain FAA’s current system,  additional capital expenses are on the horizon to modernize the system.  Vision 100 directed the administration to develop a comprehensive plan  for a Next Generation Air Transportation System (NGATS) that can  accommodate the changing needs of the aviation industry and meet air  traffic demands by 2025. The act chartered the Joint Planning and  Development Office (JPDO) within FAA to coordinate federal and private- sector research related to air transportation. FAA leads the interagency  effort that leverages expertise and resources within the Departments of  Transportation, Defense, Homeland Security, and Commerce as well as at  the National Aeronautics and Space Administration and the White House  Office of Science and Technology Policy. The Congress appropriated $5  million to FAA in seed money in 2005, and appropriated $18 million to FAA  for JPDO in 2006, while additional funding and in-kind support comes  from the participating agencies. For 2007, the President’s budget requests  $18 million for JPDO critical system engineering and planning efforts for  NGATS, as well as funding for two NGATS systems at a combined cost of  $104 million.
JPDO published the Integrated Plan for the Next Generation Air  Transportation System in December 2004, but the plan did not specify  what new capabilities would be pursued or how much they would cost to  implement and maintain. Vision 100 also directed that an annual progress  report, including any changes to the Integrated Plan, be submitted at the  time of the President’s budget request. In March 2006, JPDO published its  2005 Progress Report to the Next Generation Air Transportation System  Integrated Plan and reported it is working to identify the longer-term  costs. JPDO conducted a financial analysis of the air traffic management  portions of NGATS, including examining the existing 2025 operational  vision, to understand the hardware and software components that may be  required to implement NGATS. However, because of the high level of  uncertainty in some areas and a significant number of assumptions in  others, JPDO reported more work is required before this analysis can be  useful and credible. A clear understanding of proposed future capabilities  for NGATS (and how they will be paid for) will be important as the  Congress prepares to reauthorize FAA programs and explores financing  mechanisms.
section_title: Continued Efforts for Cost Control Are Necessary
paragraphs: While FAA has made great efforts in its cost-control program, cutting costs  will remain a challenge for FAA well into the future. In 2005, FAA  outsourced its flight service stations to a private contractor, resulting in  total savings estimated at $2.2 billion. Also in 2005, FAA put in place a  number of cost-control initiatives that affected smaller programs and that,  if successful, will generate smaller levels of savings. We are reviewing  options to fund FAA, at the request of this subcommittee, and we will  address this issue in detail later this year.
Although FAA has initiated several of these cost-control measures, these  initiatives alone cannot reduce expenses enough to free up sufficient Trust  Fund revenues to pay for the expenditures that FAA says are necessary to  maintain and modernize the current airspace system, let alone finance  future NGATS initiatives. Through the reauthorization process, the  Congress will determine both the level of appropriations for aviation and  the way in which that commitment will be funded. Congressional  decisions pertaining to the link between annual Trust Fund revenues and  appropriations made available for aviation programs, as well as the  method for funding the Trust Fund, will continue to influence future Trust  Fund balances.
To assess the current financial status and projected financial viability of  the Airport and Airway Trust Fund, we obtained financial data from FAA  and interviewed FAA officials familiar with the information. To assess the  comparisons of Vision 100 with the President’s budget, we analyzed the  legislation and the administration’s 2007 budget proposal. We used a  sensitivity analysis to project what would happen if Trust Fund revenues  in fiscal years 2006 and 2007 were 5 percent and 10 percent lower than the  levels projected by FAA in March 2006 under each of these proposals.  Accordingly, our findings on the financial outlook of the Trust Fund are  based on GAO projections, not FAA’s. We performed our work in February  and March 2006 in accordance with generally accepted government  auditing standards.
Mr. Chairman, this concludes my prepared statement. At this time, I would  be pleased to answer any questions that you or other Members of the  Subcommittee may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact Dr. Gerald  Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making  key contributions to this testimony include Chris Bonham, Jay Cherlow,  Tammy Conquest, Colin Fallon, David Hooper, Maureen Luna-Long, Maren  McAvoy, Rich Swayze, and Matt Zisman.
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