Assigning Air Traffic Control Costs to Users: Elements of FAA's Methodology Are Generally Consistent with Standards but Certain Assumptions and Methods Need Additional Support
Published: 2007-10-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In January 2007 Federal Aviation Administration (FAA) reported the results of its study that assigned the fiscal year 2005 costs of its Air Traffic Organization (ATO) to users. FAA used this study to support the President's proposal to replace many current excise taxes with cost-based fees for commercial aviation users and higher fuel taxes for general aviation users. GAO assessed (1) the consistency of FAA's cost assignment methodology with established standards and guidance, (2) the support for selected cost assignment assumptions and methods, and (3) the impact of including budgeted capital costs in the cost baseline. GAO compared FAA's methodology to federal accounting standards and international guidance, reviewed available documents and analyses supporting FAA's assumptions and methods, and interviewed FAA officials and consultants.
section_title: What GAO Found
paragraphs: With the federal government preparing for the next generation of air travel, the President, Congress, and users of the national airspace are considering alternative methods for funding air traffic control in the national airspace. To support a cost-based funding structure such as the current proposal from the President, FAA developed a methodology for assigning costs to users. Federal cost accounting standards and international guidance establish flexible principles for assigning costs and recognize that the selection of methods involves making choices that require balancing the cost of development and implementation with the benefit of precision in the resulting cost assignments. GAO found that the design of key elements of FAA's methodology was generally consistent with federal standards and international guidance. But GAO also identified matters related to the application of certain assumptions and cost assignment methods that need additional documentation and analysis. Because building a methodology for assigning costs to users involves standards, alternative methodologies, and choices, documenting the decisions made and how they were made is important to allow users and others to assess whether the methodology and the structure of cost assignment is reasonable. FAA provided adequate support for its decision to assign costs based on whether the aircraft using air traffic control services are powered by turbine engines, such as jets, or piston engines, such as propeller-driven airplanes. However, FAA did not adequately document the basis on which it assigned costs to the aircraft groups or support its assumption that all types of aircraft with the same engine type affect costs in the same manner, leaving open the possibility that costs should be assigned to users differently. GAO also found that FAA's methodology does not take advantage of allocations already made in its cost accounting system, but instead aggregates the costs and then allocates them to aircraft groups. For some of these costs, such as employee benefit costs, a different method of allocation could have produced a more precise distribution between the groups. A user fee designed to fund new facilities and equipment expenditures must provide funds equal to the annual budget for those expenditures. FAA's methodology includes adjusting current-year actual expenses to equal the budgeted amount for facilities and equipment costs. These adjustments are then assigned to users in the same proportion as are current acquisition, implementation, and depreciation expenses. But users of future facilities and equipment may be different from users of existing facilities and equipment. The manner in which the costs of facilities and equipment are assigned may, over time, result in assigning costs to users who are different from the ultimate users of future facilities and equipment once they become operational. Consequently, the implementation of this method warrants careful monitoring to avoid unintentional cross-subsidization among users.

section_title: Letter
paragraphs: In January 2007, the Federal Aviation Administration (FAA) released the  results of its study on the fiscal year 2005 costs of air traffic services  provided by its Air Traffic Organization (ATO) to commercial, general  aviation, and exempt users of the National Airspace System (NAS). FAA  used this study to support the President’s proposal to eliminate many of  the current excise taxes and replace them with a combination of cost- based fees to commercial users and higher fuel taxes for general aviation  users. With this proposed change, the President also sought to better align  funding with the factors that drive ATO’s costs. Many stakeholders in NAS  funding have also questioned whether the current structure fairly and  equitably distributes the burden of air traffic control costs between  commercial and general aviation users and whether this structure should  continue in its current form to fund the next generation of air traffic  control.
To make informed judgments about a cost-based fee funding structure for  FAA, Congress, the users, and other stakeholders need to understand how  FAA’s cost assignment assumptions and methods affect the distribution of  costs and the potential funding burden among users. At your request, we  reviewed FAA’s methodology to determine how it assigns costs to users of  air traffic services. We agreed to report to you matters that came to our  attention during our review that we considered important for Congress to  understand as it moves toward reauthorizing FAA and evaluates  alternative funding approaches. Specifically, this report assesses (1) the  consistency of FAA’s methodology with federal cost accounting standards  and international guidance, (2) the support for selected assumptions and  methods, and (3) the potential impact of using budgeted facilities and  equipment costs in the cost base for developing user fees.
To meet these objectives we reviewed federal cost accounting standards,  international policies, and guidance on setting fees for air traffic services,  and other reference sources to identify acceptable methods for assigning  costs to services and products for the purpose of setting fees and prices.  We reviewed FAA’s 2007 report on fiscal year 2005 cost allocation and the  draft report from FAA’s consultant on the design and application of the  cost assignment methodology using fiscal year 2004 data, which provided  the base methodology used for the fiscal year 2005 cost allocation. We also  reviewed supporting documents and selected analyses prepared by FAA  and its consultants to support the methodology’s underlying key  assumptions and methods. To gain an understanding of how FAA  classified and assigned costs to users, we analyzed a nonrepresentative  selection of seven operations and capital projects from FAA’s report on  the results of applying its Cost Assignment Methodology for Estimating  Resource Allocation (CAMERA) to fiscal year 2005 cost data.
We also interviewed officials from FAA’s Cost Accounting System (CAS)  and CAMERA teams and FAA consultants to gain an understanding of the  cost assignment process, including how FAA developed the CAMERA cost  base. We also reviewed relevant reports of the Department of  Transportation Office of Inspector General, the audit reports of FAA’s  external auditor, and reports of FAA consultants to identify issues that  could have an impact on the assignment of costs to users.
Our review was not designed to determine whether CAS and CAMERA  assumptions and methods for fiscal year 2005 were sufficient overall to  support a cost-based user fee approach to finance FAA’s ATO or to assess  the reliability of FAA’s fiscal year 2005 cost allocation results. With respect  to the issues we identified during our review, we did not determine the  dollar effect that these issues could have on the assignment of costs to  user groups and aircraft operators. Also, it was beyond the scope of this  review to assess alternatives to funding capital project budget authority  with user fees, such as borrowing or special appropriations.
We conducted our work from October 2006 through October 2007 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: FAA fulfills its mission of maintaining the NAS by providing services  through four lines of business: Air Traffic Organization, Aviation Safety,  Airports, and Commercial Space Transportation. The Air Traffic  Organization (ATO) is the business line that provides air traffic control  (ATC) services to users of the NAS through a network of towers, control  centers, and flight service stations. ATC includes a variety of activities that  guide and control the flow of aircraft through the NAS. ATO groups these  activities into four types of services—oceanic en route (oceanic), domestic  en route (en route), terminal, and flight services. The costs to operate and  maintain this network and to make improvements to the ATC system are  currently funded through excise taxes deposited into the Airport and  Airway Trust Fund and contributions from the General Fund of the U.S.  Treasury.
FAA is subject to various laws that have an effect on agencies’  development and use of cost information. These laws were enacted after  the Comptroller General’s 1985 report which provided the framework for  the reforms needed to improve federal financial management and manage  the cost of government. The earliest of these laws—the Chief Financial  Officers Act (CFO Act) of 1990—applied to 24 federal departments and  agencies, including the Department of Transportation, of which FAA is a  part. Another of these laws is the Federal Financial Management  Improvement Act of 1996 (FFMIA), which required, among other things,  that agencies covered by the CFO Act have systems that comply  substantially with federal accounting standards. One such standard is  Statement of Federal Financial Accounting Standards (SFFAS) No. 4,  Managerial Cost Accounting Standards and Concepts, which states that  essential uses of cost information include controlling costs, measuring  performance, setting fees, evaluating program costs and benefits, and  making economic choice decisions. In plain language, the principal  purpose of cost accounting is to assess how much it costs to do whatever  is being measured, thus allowing agency management, Congress, and  others to analyze that cost information when making decisions. When cost  accounting is used as a basis for setting fees or recovering costs, the  objective is to ensure that users who receive the related services or  products are assigned costs appropriately to avoid unintentional cross- subsidization among users who would then pay more or pay less than the  cost of the services they use.
The Federal Aviation Reauthorization Act of 1996 requires that FAA  develop a cost accounting system that accurately reflects the investment,  operating and overhead costs, revenues, and other financial measurement  and reporting aspects of its operations. One of the stated purposes of the  act was also to authorize FAA to recover the costs of services from those  who benefit from, but do not contribute to, the national aviation system  and the services provided by FAA. Specifically, FAA was required to  collect overflight fees and to ensure that the fees were directly related to  FAA’s costs of providing the services rendered. In 1997, the National Civil  Aviation Review Commission (the “Mineta Commission”) recommended  that FAA establish a cost accounting system to support the objective of  FAA operating in a more performance-based, business-like manner. These  legislative requirements and recommendations provided the impetus for  FAA’s decade-long development and deployment of its cost accounting  system to all of its lines of business.
The International Civil Aviation Organization (ICAO), an advisory  organization affiliated with the United Nations, aims to promote the  establishment of international civil aviation standards and recommended  practices and procedures. As such, ICAO has issued policies and guidance  on assigning costs and the establishment of charges for air navigation  services. The United States is a member of the governing Council of ICAO.
The previous FAA study of air traffic control service costs issued in 1997  allocated fixed costs (those that do not vary with the level of activity or  output) and common costs (such as general and administrative overhead,  which cannot be traced to a particular product or service) of air traffic  control services to user types based on an economic pricing method that  assigns more of these costs to users that have a greater willingness to pay  them. This pricing method takes into consideration the demand for  services and how the pricing of those services may impact demand.  However, in its January 2007 report on its study of 2005 costs, FAA  assigned costs to users without using this pricing method, an approach  which is consistent with the statutory requirement for setting overflight  fees and the federal government’s policies on establishing user fees.
In designing its cost assignment methodology, simplicity and transparency  were among FAA’s objectives to facilitate stakeholder understanding and  acceptance. The methodology, known as CAMERA (Cost Assignment  Methodology for Estimating Resource Allocation), assigns air traffic  control service costs to user groups by type of aircraft—turbine and  piston—and to aircraft operators—commercial, general aviation, and  exempt.
After developing six cost pools for air traffic control services, CAMERA  assigns costs to Tiers 1, 2, and 3 depending on whether the cost can be  directly assigned to a single user group (Tier 1), can be assigned to both  user groups (Tier 2), or is overhead, indirect, or other miscellaneous cost  allocated to both groups (Tier 3). The total of the three tiers for each user  group is allocated to aircraft operators: commercial, general aviation, and  exempt. Figure 1 illustrates the CAMERA process.
FAA’s CAS is the source for the cost data used to develop a cost base for  CAMERA. CAS captures cost data from FAA’s financial accounting system  as those costs are recognized as expenses incurred in accordance with  generally accepted accounting principles (GAAP). CAS classifies costs by  ATO’s four types of air traffic services—oceanic, en route, terminals, and  flight services—by assigning direct costs and allocating overhead and  other indirect costs to services and facilities that provide those services.
CAMERA classifies the CAS data, as adjusted, into six cost pools, namely,  oceanic, en route, large hubs, middle terminals, low-activity towers, and  flight services. Once the CAMERA costs are classified into the six cost  pools, the costs for distinct operations and capital projects within five of  the pools (excluding flight services) are put into one of three tiers for  assignment to users—turbine or piston. The three tiers of costs are  1.  costs exclusively assigned to a single user group, either because  the project in question principally benefits a single user group or  because the other user group does not drive material or  measurable incremental costs (Tier 1);  2.  costs assigned to both user groups because the projects benefit  both user groups and use by the secondary user group drives  measurable incremental costs (Tier 2); and  3.  overhead costs, costs indirectly related to the delivery of services,  and other miscellaneous costs that could not be directly assigned  to the user groups, which were allocated based on each user  group’s proportional share of the total costs assigned to the first  two tiers (Tier 3).
Once all costs are assigned by type of service, tier, and user group, total  costs for turbine and piston user groups within each of the five service  pools (excluding flight services) are further allocated to subgroups  representing the types of aircraft operators—commercial, general aviation,  and exempt—based on the proportion of each operator’s share of total  activity at facilities in the pool. The allocations by type of aircraft  operator within the turbine and piston user groups are then combined and  serve as the basis on which the proposed user fees, fuel taxes, or general  fund appropriations are determined.
Designing a costing methodology requires, within the parameters of  applicable cost accounting principles, that management make judgments  about how precise the resulting cost information needs to be and whether  the benefits of achieving a higher level of precision justify the additional  resources required to refine its cost methodology and related systems.  These judgments will in turn influence management’s choice of  assumptions and cost assignment methods. Different sets of assumptions  and methods applied to the same pool of costs can yield different results.
section_title: Elements of FAA’s Cost Assignment Methodology Design Are Generally Consistent with Federal Cost Accounting Standards and International Guidance
paragraphs: FAA designed its CAMERA cost methodology so that the resulting cost  assignments would be consistent with federal policies on the  establishment of user fees, and, to the extent practicable, with  international guidance for air navigation service providers on setting fees.  Federal cost accounting standards recognize that one of the purposes of  cost information is to set fees, and both the federal standards and the  ICAO guidance for implementing its policy on user fees provide direction  on allocating these costs. We found that, as designed, key elements of  CAMERA used methods that are generally consistent with federal  accounting standards and ICAO guidance. However, as discussed  subsequently, we identified matters related to the application of certain  assumptions and cost assignment methods underlying FAA’s methodology  that needed better support through additional documentation and analysis  to demonstrate that the resulting cost assignments to users are reasonable.
Federal cost accounting standards establish a flexible principle for  assigning costs, not a specific methodology that agency management must  follow. The standards recognize that agency management should select  costing methods that best meet their needs, taking into consideration the  costs and benefits of reasonable alternatives, and once selected, follow  those methods consistently. Further, the standards require that cost  information developed for different purposes should be drawn from a  common data source, such as consistently using information from an  entity’s financial management system to prepare all cost analyses.
To attribute costs to services or products, the federal standards list three  categories of cost assignment methods in order of preference: (1) direct  tracing of costs to, in this case, a specifically identifiable user wherever  feasible and economically practicable, (2) assigning costs on a cause-and- effect basis, or (3) allocating costs on a reasonable and consistent basis.  The standards provide that when seeking to assign costs of resources that  are shared by, for example, activities, services, or customers, agency  management may find it useful to classify these activities, services, or  customers as either primary or secondary. If this method is used,  management can then determine which costs are (1) necessary to support  (in this case) the primary customer and are therefore unavoidable even  without the secondary customer and (2) incurred for the secondary  customer and, therefore, are incremental to the costs of the primary  customer. The standards also state that management should maintain and  use activity information, as appropriate, to allocate costs as necessary,  such as accumulating and using data on miles flown as the basis for  allocating certain costs of en route services that are not directly assignable  to users.
As designed, elements of FAA’s methodology are consistent with  principles and methods set forth in federal cost accounting standards.  FAA’s common data source for CAMERA is costs by service type reported  in CAS, which FAA also uses for operational analysis. FAA used the three  categories of costing methods found in the federal standards to assign  costs to users. To facilitate these cost assignments, FAA identified the  turbine and piston user groups as either primary or secondary. FAA sought  to determine the amount of each Tier 1 and Tier 2 project’s costs that did  not change with the level of services provided or other relevant activity,  and assigned that amount entirely to a primary group of users. FAA used a  two-step process for determining the Tier 2 incremental costs for both  groups of users. First, FAA determined the amount of a project’s total cost  that was incremental and varied with the activity of all users. Second, FAA  allocated these incremental costs to the primary and secondary user  groups based on each group’s proportional share of total activity, such as  miles flown or number of terminal operations.
Although the international guidance does not specify particular methods  for assigning costs, FAA’s cost assignment methodology is generally  consistent with the principles outlined in the ICAO guidance. ICAO  members are not legally required to follow these principles and may apply  the guidance differently depending on the circumstances. Further, the  ICAO guidance provides that it is essential that all costs be determined in  accordance with GAAP and appropriate costing principles so that costs  can be analyzed and users are not assigned costs not properly attributable  to them. In designing CAMERA, FAA relied on federal cost accounting  standards to address these criteria.
FAA’s CAS provides information by facility and defines air traffic control  services in a manner consistent with the ICAO guidance. Further, for en  route services, FAA’s cost assignment methodology allocates costs among  user groups and aircraft operators using the type of activity metric the  ICAO guidance suggests is likely to be the most appropriate, namely  distance flown. For terminal services, ICAO’s guidance states that the  number of flights meets the basic requirement for allocating costs. FAA  used a more detailed metric—operations—which includes both takeoffs  and landings and which represents a reasonable basis on which to allocate  ATO’s terminal costs among user groups and aircraft operators.
ICAO guidance on pre-funding capital projects states this funding method  should be used subject to appropriate safeguards and when other funding  sources are not sufficient or available. The safeguards ICAO cites are  focused on ensuring that the pre-funding charges link to users that will  ultimately benefit from the projects, encouraging advance consultation  with users, and that accounting for the pre-funding will be transparent.  FAA’s use of pre-funding capital projects, as discussed later in this report,  is limited to the excess of current-year budget authority for (F&E)  expenditures over the GAAP-based current-year expense related to F&E.  Also, FAA’s F&E budget is authorized and user fees proposed under the  safeguard of public transparency and congressional oversight. Consistent  with ICAO guidance, this limited pre-funding was incorporated into FAA’s  methodology because other permanent financing for budgeted capital  projects is not currently available to FAA and was not provided in the  President’s proposal.
section_title: Further Documentation and Analysis Is Needed to Justify Key Assumptions and Methods
paragraphs: While elements of FAA’s cost assignment methodology design comply with  pertinent guidance, we identified matters related to the application of  certain assumptions and cost assignment methods underlying the  methodology that need further justification to demonstrate that the  resulting cost assignments to users are reasonable.
Cost accounting is intended to associate an entity’s costs with its products,  services, or activities. The processes and procedures for making these cost  associations must be documented according to federal cost accounting  standards. Further, federal internal control standards require that  significant events, which can include key decisions, be clearly  documented. CAMERA uses certain key assumptions about factors that  affect the costs of providing air traffic control services and how to assign  those costs to particular users. We found that FAA justified its assumption  that turbine and piston aircraft drive costs differently. However, FAA did  not (1) adequately document the basis on which it assigned costs to  turbine and piston user groups or (2) conduct sufficient analysis (e.g.,  econometric analysis) to support its assumption that all types of aircraft  with the same type of engine (e.g., smaller jet aircraft versus larger  commercial jets) affect costs in the same manner. Further, the precision of  FAA's approach to allocating overhead, indirect, and other miscellaneous  costs might be improved by using allocations previously entered into CAS  and, for certain of these costs, by using more appropriate allocation  methods.
Because FAA has not adequately supported certain assumptions and  methods, it is not able to demonstrate conclusively whether the resulting  cost assignments are reasonable.
subsections: section_title: FAA Justified Assigning Costs to Turbine and Piston User Groups, but the Basis of Cost Assignments Was Not Adequately Justified
paragraphs: FAA analyzed the activities related to the delivery of air traffic control  services and found that different types of aircraft and aircraft operations  have different effects on FAA’s workload and the associated costs to  provide its services. FAA determined that the principal indicator of the  differences between aircraft and aircraft operations—in terms of the air  traffic control workload they represent and as cost drivers—is whether the  aircraft operate with turbine or piston engines. Turbine aircraft fly at  higher cruising altitudes, higher speeds, and normally under instrument  flight rules (IFR), which require they be “controlled” by air traffic  controllers through en route airspace and for takeoffs and landings.  Turbine aircraft are also more likely to fly in all weather conditions, which  can affect the capacity of the NAS. Factors such as aircraft speed and  weight also affect which airports turbine aircraft can use. Piston aircraft,  as a group, fly more often under visual flight rules (VFR) than IFR and fly  at lower cruising altitudes and lower speeds. Aircraft flying under VFR  may not require air traffic control services if they do not fly to airports that  have control towers.
Having appropriately identified types of aircraft and aircraft operations as  cost drivers, FAA placed each project into one of three cost tiers  depending on whether and to what extent the costs were related to the  delivery of services to user groups. The costs of projects placed into the  first two tiers were then assigned to the turbine and piston user groups,  based primarily on the input of internal subject matter experts (SME) and,  as discussed later, the costs of Tier 3 were allocated proportionally to user  groups based on the total costs assigned through the Tier 1 and Tier 2  processes. According to FAA, these SMEs were selected from a cross- section of en route and terminal facilities and air traffic service units and  were collectively knowledgeable in the delivery of air traffic control  services; airspace usage; and FAA’s financial, cost, and activity data  systems. FAA officials told us that they obtained input from the SMEs on  matters such as the specific activities necessary to deliver services;  differences in the services provided to different user groups and the  resources consumed to provide those services; and how factors such as  traffic volume, mix of operators and aircraft type, weather, and congestion  affect FAA’s workload. Further, to help quantify the amount of  incremental costs, FAA asked the SMEs how ATC services and costs  would be affected if a group of users ceased operations altogether or if a  user group permanently increased its operations by a certain percentage.
FAA also performed regression analyses to corroborate the input received  from the SMEs on the percentage of a project’s costs that varied with  volume of activity. We noted that the results of some of the analyses were  either different from the cost assignment decisions based upon SME input  or were inconclusive. When such differences arose, FAA relied on the  judgment of the SMEs rather than the results of the regression analyses.  FAA officials said they chose to rely on SME input over the results of the  regression analyses because their past experience had been that  regressions would produce results that were indicative, but not  conclusive, and that performing more complex regressions would make  the cost assignments less transparent and more difficult for external  stakeholders to understand. FAA also explained that the aggregation of  certain related but different projects and their costs was necessary to  facilitate the SMEs’ evaluation of these costs. This aggregation, however,  may have contributed to some regression results implying different cost  assignment decisions than the cost assignment decisions based on SME  input and may also have contributed to other regression results being  inconclusive.
Although the final decisions as to the percentage of total costs attributable  to the user groups were documented, the key input from SMEs and the  rationale linking this key information and related regression analyses with  the final cost assignments were not well documented. FAA officials  believe that the agency adequately analyzed the SME information in  preparing its cost study and explained that the agency lacked sufficient  documentation of SME input and the rationale linking that input to the  final cost assignment decisions because the meetings with the SMEs were  part of the early development of the methodology, which at that point was  essentially a work-in-progress.
We acknowledge that the development of a cost assignment methodology  is an iterative process and that the judgment of those individuals— including the SMEs—most knowledgeable of the business, its customers,  and the factors that drive costs is essential to this process. However, the  effects of the SME input and related regression analyses on the final cost  assignments are critical for explaining decisions about the resulting cost  assignments. Therefore, documentation of the input and rationale is  needed to provide a basis for justifying current decisions as well as for  evaluating any future changes to the assumptions that drive cost  assignment decisions. Further, we acknowledge the challenges faced  when trying to perform regression analyses to quantify the relationship  between costs and the activity presumed to drive those costs. Improving  the reliability of these regressions may involve further analysis of the cost  drivers and improving the quality of the underlying data. Performing more  detailed statistical analysis to support or corroborate its conclusions may  assist FAA in effectively demonstrating to stakeholders that its cost  assignment methodology is a reasonable basis on which to recover costs. )  and, in most cases, using the results of the regressions would have required significant  extrapolation from the observable data to the origin.
section_title: Methods for Allocating Overhead, Indirect, and Other Miscellaneous Costs Could Be Improved
paragraphs: CAMERA aggregated (pooled) certain facility; service; ATO; and allocated  FAA headquarters, regional, and accrued expenses together (classified as  Tier 3 costs) before allocating those costs to the turbine and piston user  groups. The Tier 3 costs were allocated based on each group’s  proportional share, by service, of total costs directly assigned or allocated  through the Tier 1 and Tier 2 processes. CAMERA pooled these costs  because FAA determined that (1) the costs were not directly related to the  delivery of services and, therefore, did not vary with the volume of user  activity, (2) the inherent nature of the costs did not allow for a direct  assignment to either of the two user groups, or (3) the underlying  transactions did not have sufficient data in CAS to directly assign the costs  to a particular facility and service that would permit further analysis and  allocation to the user groups in Tier 1 or Tier 2. However, we found that  FAA’s CAS had already associated some like costs to specific services and  projects. The CAS assignments to services and projects could have been  retained, avoiding CAMERA’s aggregation and reallocation among all types  of services, which affects the ultimate allocation of these costs to user  groups.
We also found that certain costs could have been allocated in a manner  that resulted in a more precise distribution between the user groups, for  example    certain telecommunication and flight inspection costs were allocated to all  services, even though they related only to terminal services; indirect labor costs of equipment maintenance personnel were allocated to  both turbine and piston user groups even though some of the related  equipment and direct labor costs were assigned to a single user group in  Tier 1; and    annual leave, workers compensation, pension, and postretirement health  costs were allocated to all user groups based on each group’s share of  direct labor and other nonlabor costs instead of basing the allocation only  on the labor costs to which these benefit costs more closely relate.
These cost allocation processes are examples of the CAMERA  methodology’s underlying objectives that it be simple and transparent. The  2006 draft report of the contractor who assisted FAA in developing the  cost methodology states that the benefit of the cost allocation approach is  the simplicity and transparency achieved by virtue of not having to rely on  a highly complex system for allocating costs. FAA designed CAMERA to  avoid the CAS process of allocating the same costs more than once.  However, the report further notes that FAA’s CAS was “designed to  support the management of costs for highly detailed activities at individual  locations, so a more complex allocation system is required” than the  contractor considered necessary for purposes of assigning costs to users.
CAS was designed to allocate costs to the facilities that provide services to  users so that managers could use this cost information in making  operational decisions. FAA also uses CAS information to prepare its  external statement of net costs, which is audited by an independent public  accounting firm. Despite FAA’s reliance on CAS for these and other  purposes and despite the fact that in fiscal year 2005 CAS associated about  34 percent of Tier 3 costs with specific services, CAMERA’s method for  allocating overhead, indirect, and other miscellaneous costs did not retain  the preexisting allocations in CAS. Consequently, aggregating these costs  and then allocating them to the turbine and piston user groups resulted in  shifting some costs between service types compared to the CAS  allocations, which affects the ultimate allocation of these costs to user  groups.
According to FAA officials, in fiscal year 2006 the agency addressed some  of these issues related to how transactions had previously been recorded  in CAS, notably requiring that technical support personnel charge their  time to specific facilities where maintenance is performed and allocating a  portion of ATO’s annual leave expenses to the facilities based on direct  labor charges. While these changes should help improve the precision of  some cost assignments, until FAA has resolved the issues noted above  concerning the allocation of telecommunication and flight inspection  costs, indirect labor costs of maintenance personnel, and worker benefits,  we believe that retaining the service and project allocations already  established by CAS may provide a more precise cost assignment to turbine  and piston user groups. FAA officials told us that, although retaining the  preexisting CAS allocations would not likely have a significant effect on  the CAMERA allocations to user groups, FAA is considering increasing  reliance on the CAS cost distributions for future user group cost studies.  Further, FAA officials stated that CAS is continuing to evolve and  CAMERA is designed to adapt to changes in data quality.
section_title: FAA Did Not Conduct Sufficient Analysis to Support Its Assumption That Different Aircraft with the Same Engine Type Drive Costs in the Same Manner
paragraphs: CAMERA allocated the turbine and piston pools to commercial, general  aviation, and exempt operators based on each operator’s proportional  share of total activity within each service. This allocation assumed that all  types of aircraft operators with the same type of engine (e.g., smaller jet  aircraft versus larger commercial jets) contributed to their respective  group’s costs in the same proportion as their share of distance flown (for  en route services) and number of terminal operations (for terminal area  services in each of three subgroups based on airport size). However, FAA  did not conduct sufficient analysis (e.g., econometric analysis) to support  this assumption.
CAMERA assigned Tier 1 and a portion of Tier 2 costs to the group that is  the primary user of the air traffic control services that generate those  costs. The turbine group was determined to be the primary user for Tier 1  costs of oceanic, en route, and all terminal services and Tier 2 costs of  oceanic, en route, and terminal services at large hubs and middle terminals  in FAA’s analysis of 2005 data. Because general aviation jet aircraft are  included in the turbine user group, FAA’s methodology allocated a portion  of these costs, such as those for navigational aids and other equipment, to  the general aviation aircraft operators. Thus, the general aviation jet users  receive the benefit of the air traffic control personnel and equipment, and  allocating a portion of costs in this manner is acceptable when there is  sufficient commonality between the activity and the driver of the related  costs. However, FAA did not sufficiently justify its assumption that  allocating costs on an average basis to all types of operators of one engine  type would produce results similar to determining whether particular  costs principally benefit a single group of operators. For example, FAA did  not sufficiently support its assumption that individuals or companies that  fly smaller jet aircraft drive terminal costs in the same way as commercial  airlines that fly larger jets when they fly to the same airport. FAA stated  that it considered aircraft characteristics (such as the speed at which  small jets fly compared to large jets, and the percentage of flight hours  flown under IFR plans) and discussed this issue with SMEs. However, FAA  did not quantify the extent to which commercial, general aviation, and  exempt users of either type of aircraft impose costs differently on the air  traffic control system.
The contractor FAA retained to assist it in developing this methodology  reported that, while variations in cost pools could have been developed,  the simplicity and transparency of the turbine and piston pools provides  an easily defined test that is also easy to administer. We agree that the  benefits in terms of greater precision from a more detailed analysis need  to outweigh the additional costs of that analysis. However, we believe that  additional analysis of how different types of operators drive costs  associated with each aircraft type would help identify how much precision  is sacrificed to ensure simplicity and is needed to justify and support  FAA’s simpler approach.
section_title: Use of Facilities and Equipment Budget Authority in the Cost Base Needs to be Monitored
paragraphs: Because the total of ATO’s fiscal year 2005 GAAP-based acquisition,  implementation, and depreciation expenses taken from CAS were less  than ATO’s budget authority for the F&E account, a user fee based on  GAAP expenses would be insufficient to fund the budgeted costs for  facilities and equipment. Therefore, to have the funds that would be  needed to acquire budgeted air traffic control assets, FAA’s CAMERA  methodology adjusted ATO’s GAAP-based expenses upward to equal total  ATO budget authority for F&E. CAMERA then assigned those adjustments  to the services and users of services in proportion to the historical, GAAP- based expenses. The manner in which these adjustments are assigned  may, over time, result in costs being assigned to users who differ from the  ultimate users of the new F&E when it becomes operational, leading to  unintentional cross-subsidization among users. This can occur because of  uncertainties related to the nature, timing, and cost of future F&E  acquisitions and the volume and distribution of future flights that will use  those assets. Also, because the budget includes multiyear spending  authority, some F&E purchases may be funded several years before the  expenditures are made and the related improvements become operational.
It can take many years before FAA knows the actual distribution of any  single year’s F&E budget across service types and to users. The long-term  nature of these capital projects is such that FAA typically has 3 years to  obligate F&E funds and another 5 years beyond that to expend these funds  from the Airport and Airway Trust Fund. Further, more than 40 percent of  the fiscal year 2005 F&E budget was related to projects that support more  than one type of service. Consequently, FAA will not know for many  years how the actual distributions of a particular year’s F&E budget to  each service compare to each service’s adjusted expenses for that same  year. FAA officials explained that CAMERA is designed to accommodate  process changes to address the issues associated with recovering portions  of the future costs of capital projects from current users. However, FAA  had not yet designed a mechanism to monitor, identify, and adjust for  those potential differences.
Furthermore, as new projects are included in the authorized budget for  F&E, the differences that can arise due to the use of historical GAAP- based expenses to allocate costs become greater. For example, the  difference between total ATO-related F&E budgets and actual expenses  may increase as funding for the next generation (NextGen) of air traffic  control increases. FAA expects NextGen to cost between $15 billion and  $22 billion before 2025. However, the actual nature, timing, and cost of  NextGen are not yet known, nor are the total volume and distribution of  future flights by aircraft type. These uncertainties increase the risk that  relying on the GAAP-based historical costs of a predominately ground- based system to allocate portions of the prospective, budgeted costs of a  satellite-based NextGen system may result in a distribution of these  prospective costs among user groups and types of aircraft operators that  does not reflect the actual future use by these groups. Accordingly, in  accordance with ICAO guidance, FAA needs to monitor these differences  in future years and provide a basis for making appropriate adjustments.
In 2005, ATO’s GAAP-based expenses were $2,253.6 million while its F&E  budget authority was $2,428.2 million, representing a difference of   $174.6 million. In order to adjust GAAP-based expenses to total budget  authority, FAA increased the amounts for each project within each service  proportionally using the ratios of budget authority to expenses calculated  for total nonterminal services and total terminal services. For example, the  expenses of each en route project were increased by marking them up   2 percent, using the ratio of total nonterminal budget authority to total  non-terminal expenses of 1.02. The resulting marked up GAAP-based  project expenses within each service were then assigned to the turbine  and piston user groups. These markup adjustments could accumulate over  several years. Table 1 shows the distribution of the ATO-related F&E  budget, expenses, and the difference by service and in total. Table 1 also  shows how this method increased the expenses associated with each  service and the portion of the en route and flight services F&E budgets  that would be assigned to users of oceanic services.
FAA explained that the cyclical nature of funding projects means that the  relative distribution of the F&E budget among service types may change  over time and that the distribution of historical costs (GAAP-based  expenses) by service type represented a stable means of allocating the  funding of long-lived assets. FAA reasoned that this approach can smooth  out sharp year-to-year fluctuations in user fees that might otherwise occur  if each service’s F&E budget authority were used to adjust the service’s  expenses instead of using an overall markup based on total nonterminal  and total terminal ratios of budget authority to expenses. FAA’s reasoning  has merit; however, we have concerns that using this method introduces  risk that costs for F&E acquisitions may be assigned to users that differ  from the users of those assets once they become operational.
Lastly, although we did not audit FAA’s CAS data, it is important to note  that FAA’s external auditor has for the past 2 years reported an internal  control weakness on the lack of timely processing and accounting for  construction in progress. This weakness affects the GAAP-based expenses  for assets and depreciation of certain capital projects and has required  that FAA record significant year-end adjustments to its financial  statements. Although FAA’s auditors do not indicate in their report that  this problem is limited to a particular line of business or category of  facility or service, the impact of using depreciation figures that may not be  accurate to allocate the F&E budget to user groups is not known.
Together these issues highlight the inherent and potential difficulties of  pre-funding long-lived capital projects in general, and NextGen in  particular, with revenues generated from current users. However, to avoid  these challenges, FAA would have to seek other alternatives to fund its  F&E budget, such as borrowing authority with a repayment period that  closely matches the useful lives of acquired assets or special  appropriations.
section_title: Conclusions
paragraphs: FAA’s methodology for assigning costs to users is intended to link the  costs that different user groups impose on the air traffic control system to  fees that would be charged to users. Developing this type of methodology  involves developing key assumptions and making decisions about the level  of precision needed to achieve the objectives and the associated costs and  benefits.
The design of FAA’s methodology is generally consistent with the  principles and methods set forth in federal cost accounting standards and  international guidance. However, the lack of sufficient support for certain  of the methodology’s underlying assumptions and methods leaves open  the possibility that the study should assign costs to commercial, general  aviation, and exempt users differently. Notwithstanding the need to  balance precision with simplicity and transparency, FAA, Congress, and  users of air traffic control services would benefit from additional  documentation and analysis for key assumptions impacting the assignment  of costs to the different user groups and further evaluation of the  reasonableness of FAA’s method of allocating overhead, indirect, and  other miscellaneous costs. This additional documentation and analysis for  FAA’s cost assignment methodology is critical to help justify the results in  order to promote user acceptance. In addition, because FAA’s  methodology for allocating cost adjustments for FAA’s budgeted facilities  and equipment projects can allow unintentional cross-subsidization among  users, careful monitoring of actual project costs and users compared to  original cost allocations is needed to identify and adjust for any significant  differences.
section_title: Recommendations for Executive Action
paragraphs: To provide additional support for the reasonableness of FAA’s cost  assignment methodology and to monitor F&E cost assignments to users,  we recommend that the Secretary of Transportation direct the  Administrator of FAA to    adequately document the basis on which costs are assigned to user groups;    evaluate the methods and basis upon which various overhead, indirect,  and other miscellaneous costs are assigned to user groups and document  the effect of any changes thereto;   determine whether and quantify the extent to which commercial, general  aviation, and exempt users who use either single type of aircraft—turbine  or piston—impose costs differently on the air traffic control system; and   establish a mechanism for monitoring, by user group, any cumulative  difference between original cost allocations for budgeted facilities and  equipment project costs and actual usage of those assets, and adjusting  prospective cost assignments accordingly.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of Transportation for  review and comment. The Department’s comment letter is attached as  Appendix I. While the Department expressed general concurrence with  our recommendations in the technical comments it provided separately, it  neither explicitly agreed nor disagreed with our findings, conclusions, and  recommendations in its letter.  The Assistant Secretary for Administration  stated that the fiscal year 2006 allocation will address several of the issues  identified in our report, including improved documentation of subject  matter expert (SME) input to the assumptions and better assignment of  indirect labor costs. However, these actions specified in the Department’s  letter appear to address only narrow elements of two of our four  recommendations. The Department’s letter is unclear about FAA’s and the  Department’s position on the broader scope of our recommendations. For  the Department to be able to support its assertions that CAMERA provides  reasonable estimates of costs and is well supported, we believe that FAA  must follow through with all of our recommendations.
The first three of our recommendations each relate to how well the results  of FAA’s methodology are supported and the extent to which the  reasonableness of those results can be assessed. FAA’s agreement to  improve documentation of key source input from its internal SMEs, which  provided the basis for FAA’s cost assignments, is a good first step in  completing the methodology documentation process. At the same time it  represents only part of the input and methods FAA used to assign costs. As  we reported, the effects of the SME input on costs assigned to the turbine  and piston user groups as well as the related regression analyses of those  costs are critical to the final cost assignments. Accordingly,  documentation of the rationale linking the SME input to cost assignment  decisions is also needed to justify those decisions.
The Department also stated that FAA concluded that more analysis of how  turbine and piston users drive air traffic control costs had the potential for  only marginal, if any, gain. While the value of more detailed analysis with  respect to the accuracy of related cost assignments can be determined  only upon completion of that analysis, there is intrinsic value in  performing such analysis in terms of demonstrating to stakeholders that  FAA’s cost assignment methodology is a reasonable basis on which to  recover costs. We believe more detailed analysis, at least regarding the  most significant costs, would help achieve this primary goal. This is  particularly important considering that, as we reported, the results of  some regression analyses undertaken by FAA to support SME-based cost  assignment decisions implied different cost assignments and others were  inconclusive.
Concerning our recommendation that FAA evaluate the methods and basis  upon which various overhead, indirect, and other miscellaneous costs are  assigned to user groups, the Department commented that using the  allocations of FAA’s Cost Accounting System (CAS), an option suggested  in our report, would not necessarily produce more precise cost allocations  to users. However, as we reported, the method FAA used to allocate these  costs to users resulted in shifting some costs between service types as  compared to the allocations in CAS, which ultimately affects the allocation  of these costs to user groups. CAS allocates costs to the facilities that  provide services to users, and FAA managers rely on that information to  make operational decisions. Accordingly, we believe that the CAS  allocations may provide a more precise way of assigning these costs to  users.
The Department did not specifically comment on our recommendation to  determine and quantify the extent to which commercial, general aviation,  and exempt users of either engine type—turbine or piston—impose costs  differently on the air traffic control system. FAA’s allocation method  assumes, for example, that smaller jet aircraft drive terminal costs in the  same way as commercial airlines that fly larger jets when they fly to the  same airport. We believe that further analysis is needed to sufficiently  justify FAA’s assumption that allocating costs to all types of operators of  one engine type produces results similar to determining whether particular  costs principally benefit a single group of operators and would help  identify to what extent precision is sacrificed using FAA’s simpler method.
The Department also did not comment on our recommendation that a  mechanism be established to monitor any cumulative difference between  original cost allocations for budgeted facilities and equipment (F&E)  project costs and actual usage of those assets. FAA’s method for allocating  the costs of budgeted F&E to users may, over time, result in costs being  assigned to users who differ from the ultimate users of the new F&E when  it becomes operational. We believe that in an environment with a cost- based revenue structure that incorporates funding for the costs of  budgeted F&E, monitoring cumulative differences would help identify  unintentional cross-subsidization among users.
While the Department recognized our concerns with respect to adequacy  of the support for the methodology’s underlying methods and  assumptions, it stated that we did not offer quantitative evidence of  fundamental flaws in FAA’s methodology. Our objective was to determine  the extent to which FAA had supported its assumptions and methods, not  to demonstrate through quantitative analysis that the resulting cost  assignments to users are or are not reasonable. It is the responsibility of  the agency to adequately support the assumptions and methods underlying  its own methodology and the reasonableness of the results using  quantitative analysis where appropriate. We found this support to be  insufficient.
We are sending electronic copies of this report to the Secretary of  Transportation, the Administrator of FAA, and other interested parties.  This report will be available at no cost on GAO’s Web site at  http://www.gao.gov. If you or your staff have any questions on matters  discussed in this report, please contact me at (202) 512-9471 or   franzelj@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 II.
section_title: Appendix I: Comments from the Department of Transportation
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, significant contributions to this  report were made by Jack Warner (Assistant Director), H. Donald  Campbell, Jay Cherlow, Gerald Dillingham, Fred Evans, Maxine Hattery,  Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Scott McNulty, and Meg  Mills.