Federal Aviation Administration: Observations on Selected Changes to FAA's Funding and Budget Structure in the Administration's Reauthorization Proposal
Published: 2007-03-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Recently, the administration submitted a proposal for reauthorizing the Federal Aviation Administration (FAA) and the excise taxes that fund most of its budget. FAA's current authorization expires in 6 months. The proposal calls for major changes to FAA's funding and budget structure that are intended to address concerns about the long-term revenue adequacy, equity, and efficiency of FAA's current funding structure and to provide a more stable, reliable basis for funding a new air traffic control system that FAA is developing (at an estimated cost of $15 billion to 22 billion through 2025) to meet forecasted increases in air travel demand. The proposal would introduce cost-based charges for commercial users of air traffic control services, eliminate many current taxes, substantially raise fuel taxes for general aviation users, charge commercial and general aviation users a fuel tax to pay primarily for airport capital improvements, modify FAA's budget accounts to align with specific FAA activities, and link the portion of FAA's budget that comes from the Treasury's General Fund with public benefits FAA provides. This statement offers GAO's observations on the proposed changes in FAA's (1) funding and (2) budget structure and is based on GAO's analysis of FAA's proposal and a recent GAO report on FAA funding options.
section_title: What GAO Found
paragraphs: Funding Structure: The current funding structure has supported FAA as FAA's budget has grown, and it can continue to do so to fund planned modernization. Excise tax revenues are forecasted to increase if the current taxes are reauthorized without change and thus could support additional spending. If necessary, Congress can obtain more revenue by increasing the excise tax rates or the General Fund contribution to FAA's budget, although the nation's fiscal imbalance could make such an increase difficult. FAA is concerned because revenues from the current funding structure depend primarily on ticket prices and passenger numbers, which are not well linked to FAA's workload and costs. The proposed new funding structure would link revenues more closely with costs to ensure that revenues rise with increases in FAA's air traffic control and safety activities. According to FAA, cost-based user charges would also be more equitable and could create incentives for more efficient use of the system by aircraft operators. How well FAA's proposed funding structure, if enacted, would achieve these goals is uncertain because it depends on two unknowns--the soundness of a new FAA cost allocation methodology and the extent to which the proposed structure links revenues to costs. Also uncertain are the adequacy of FAA's proposed fuel tax rate to collect anticipated revenues, the implications of a proposed advisory board, and the impact of a proposal to give FAA limited debt-financing authority. Furthermore, GAO notes, user charges would reduce Congress's role in setting revenues. Budget Structure: Modifying FAA's budget accounts is consistent with FAA's emphasis on aligning revenues and costs, but may present implementation issues, in that some FAA activities may be difficult to categorize. More specifically, the proposed restructuring could allow FAA to better identify funding options that link revenues and costs and may improve transparency by showing how much is being spent on specific FAA activities. However, some activities, such as those related to safety, may not lend themselves to placement in discrete categories. Linking the General Fund contribution to public benefits is appropriate, but since some activities may provide both public and private benefits, judgment rather than a precise calculation may determine the contribution. Concluding Observations: The administration has introduced a complex proposal for funding FAA that GAO believes deserves serious and thoughtful consideration. While not necessary to provide more money for FAA, the proposed structure may address some of the concerns raised by the current structure if its cost allocation is sound. Because FAA's cost allocation model is new, further analysis and more time may be needed to determine whether it can adequately support a cost-based funding structure for FAA. Timely reauthorization of funding for FAA for at least the next year is, however, critical to prevent a lapse in funding for most FAA activities, regardless of the action taken on the proposed changes.

section_title: Letter
paragraphs: We appreciate the opportunity to participate in this hearing today to  present GAO’s observations on major changes to the Federal Aviation  Administration’s (FAA) funding and budget structure that are included in  the administration’s recently submitted reauthorization proposal. FAA  operates one of the safest air transportation systems in the world. This  system is, however, under growing strain as the skies over America  become more crowded. Demand for air travel has increased in recent  years, with over 740 million passengers flying in fiscal year 2006 and 1  billion passengers expected to fly in 2015, according to FAA estimates.  Already, this increasing demand for air travel has led to an increase in  flight arrival delays, which are now approaching the record levels set in  2000, when one in four flights reached its destination behind schedule. The  system is also expected to absorb a growing variety of aircraft, from the  jumbo Airbus A380, which can hold more than 500 passengers, to very  light jets, which might greatly increase the number of aircraft in the sky  while transporting six or fewer passengers on any given flight. FAA is  therefore developing a modernized air traffic control system, called the  Next Generation Air Transportation System (NextGen), to meet the  forecasted increases in air travel demand. The administration’s  reauthorization proposal serves as a blueprint for funding FAA as it begins  its transformation to NextGen.
According to FAA, the changes to its funding and budget accounts that the  administration has proposed are intended to provide a more stable and  reliable funding structure to pay for NextGen. FAA also says that the  proposed changes would improve the revenue adequacy, equity, and  efficiency of its funding and better link revenues with the costs that users  of the National Airspace System (NAS) impose on the system. These  funding changes include introducing user charges for commercial aircraft  based on the cost of the air traffic control services they receive;  eliminating many current taxes; substantially increasing the fuel taxes  general aviation operators pay; charging both commercial and general  aviation a fuel tax to pay for airport capital improvements, the Essential  Air Service (EAS) program, and air traffic system research and  development; modifying FAA’s budget accounts to align with FAA’s  activities or lines of business; and linking the contribution to FAA’s budget  from the General Fund of the U.S. Treasury to the public benefits FAA  provides. These changes would begin in fiscal year 2009. If implemented,  the changes would alter the basis for funding FAA, in part by recovering  the costs of services provided by FAA’s Air Traffic Organization (ATO) in  accordance with the cost assignments in a recently issued FAA cost  allocation study. These changes would also redistribute the funding  burden among user groups, increasing the share general aviation would  contribute. FAA has stated that currently general aviation is not paying its  fair share of the costs for services that it uses. Some stakeholders, such as  general aviation, question whether all of the proposed changes are  necessary, or even desirable, saying that the current funding structure has  supported FAA adequately in the past and can generate more revenue in  the future if Congress chooses to increase appropriations for aviation.  These stakeholders also state that the current distribution of funding for  FAA costs among aviation users is reasonable.
The current authorization for FAA and for the excise taxes that fund most  of FAA’s budget expires at the end of September of this year. Regardless of  the action taken on the proposed changes, timely reauthorization of  funding for FAA for at least the next year is critical, because the  uncommitted balance in FAA’s principal funding source, the Airport and  Airway Trust Fund (Trust Fund), is low relative to recent levels.
In my statement today, I will present GAO’s observations on the proposed  changes in FAA’s (1) funding and (2) budget structure, including the  proposed method of determining the General Fund contribution to FAA’s  budget.
My remarks are based in part on work we did for a report we issued last  year that analyzed (1) FAA’s current funding structure—both its  advantages and the concerns that FAA and others had identified about its  long-term revenue adequacy, equity, and efficiency—and (2) several  funding options to assess how those options might address those  concerns. For that report, we reviewed relevant literature, examined FAA  data and forecasts, and interviewed officials from FAA and other  government agencies, representatives of aviation industry groups, and  academic and financial experts. In addition, for this statement, we  analyzed selected funding and budget elements of the administration’s  reauthorization proposal and FAA’s newly released cost allocation study,  focusing on their implications for revenue adequacy, equity, and  efficiency, and discussed them with FAA officials and representatives of  aviation industry groups. We conducted our work from February to March  2007 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Although there have been fluctuations in its funding sources, FAA is  primarily supported by the Trust Fund (82 percent), which receives  revenues from a series of excise taxes paid by users of the NAS. These  excise taxes are associated with purchases of airline tickets and aviation  fuel, as well as the shipment of cargo. These Trust Fund revenues are then  available for use subject to appropriations. In addition to these revenues,  in most years, General Fund revenues have been used to fund FAA. About  $2.6 billion was appropriated for fiscal year 2006 from the General Fund  for FAA’s operations. This amount represents about 18 percent of FAA’s  total appropriation.
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. The Trust Fund provides funding for FAA’s two capital  accounts—the Airport Improvement Program (AIP) and the Facilities and  Equipment (F&E) account—which provide grants to airports and funds for  modernizing the air traffic control system, respectively. The Trust Fund  also provides funding for the Research, Engineering, and Development  (RE&D) account and supports part of FAA’s Operations account. To fund  these accounts, the Trust Fund is credited with revenues collected from  system users through the dedicated excise taxes. In fiscal year 2005, the  ticket tax was the largest single source of Trust Fund revenue, followed by  the international departure and arrival tax, the passenger segment tax, and  fuel taxes (see table 1 for a description of current taxes).
The administration’s reauthorization proposal would change FAA’s  financing system from one based mainly on excise taxes to one based  more on cost-based charges. Under the proposed system, funding for ATO  would come primarily from user charges on commercial aircraft and fuel  taxes on general aviation aircraft. In addition, contributions from the  General Fund would be appropriated to FAA to cover ATO costs of  providing services to military and other public aircraft, flight service  stations, and a few other services. Funding for AIP, EAS, and part of  RE&D would come from an equal fuel tax on both general and commercial  aviation and a tax on arriving and departing international passengers.  Funding for Safety and Operations would include some fees, but mostly  General Fund contributions. The reauthorization proposal would also  create an advisory board and give FAA limited borrowing authority.   Table 1 compares elements of the current and proposed funding structure  for FAA.
The administration’s proposal also calls for changing FAA’s budget  structure by establishing two new budget accounts—(1) Air Traffic  Organization and (2) Safety and Operations—to align with FAA’s lines of  business and proposed funding. These two new accounts would replace  the Operations and F&E accounts. The proposal retains the AIP and RE&D  accounts. See table 2 for a comparison of the current and proposed FAA  budget structure.
In January 2007, FAA released a new cost allocation study. This report  sets forth a methodology for assigning air traffic costs to user groups on  the basis of aircraft type. The two principal user groups are the high- performance group, which includes all fixed-wing turbine engine aircraft  operations, and the piston aircraft group, which includes piston engine  fixed-wing aircraft operations and helicopters. According to FAA, this cost  allocation methodology is based on the assumption that high-performance  users generally compete for the same air traffic control resources and  their operations are more time-sensitive than piston aircraft operations,  requiring more complex air traffic equipment and procedures. Piston  aircraft operations, on the other hand, tend to be less time-sensitive and  typically rely on less complex equipment. Differences in the speed and  cruising altitudes of the two aircraft types also affect their en route costs.
section_title: Observations on Proposed Changes to FAA’s Funding Structure
paragraphs: The current funding structure, with some modifications to the excise taxes  and tax rates and changes in the levels of General Fund contributions, has  successfully funded a growing FAA budget. Trust Fund revenues are  projected to increase substantially at current excise tax rates. If, to fund  the additional costs of NextGen or for other reasons, Congress chooses to  increase spending on aviation beyond what can be paid for at current  excise tax rates, it can obtain additional revenue through the current  funding structure by increasing excise tax rates, the General Fund  contribution, or both, although the nation’s fiscal imbalance could make  such an increase difficult. Nonetheless, because some factors that drive  tax revenues, such as ticket prices, are not well linked to FAA’s workload  and costs, FAA has been concerned about the long-run revenue adequacy,  equity, and efficiency of its funding.
Some of the administration’s proposed changes for funding FAA, such as  establishing direct user charges for commercial aviation and substantially  increasing fuel taxes for general aviation are intended to link FAA’s  revenues more closely with its costs. For other elements of FAA’s budget,  however, it is not possible to establish a direct link between revenues and  costs. For example, because AIP expenditures are not the direct result of  costs imposed by users of the NAS, the proposal to fund AIP through equal  fuel taxes on all aircraft operators can best be evaluated on equity  grounds. Better alignment of FAA’s revenues and costs can address some  of the concerns about the current funding system that derive from the lack  of connection between some key drivers of current FAA revenues, such as  ticket prices, and FAA’s workload and costs. However, the effectiveness of  the proposed funding structure in linking costs with revenues depends  critically on how well FAA’s new cost allocation method assigns costs to  users and on how closely the proposed funding structure adheres to the  principle of cost-based funding, and questions remain about both  considerations. Furthermore, FAA’s method for estimating the fuel tax  rates needed to collect its intended level of fuel tax revenue may have  underestimated the tax rates needed by not accounting for possible  reductions in fuel consumption due to the higher tax rates. The  implications of some of the other proposed changes, including one  creating an advisory board that can make recommendations on fee setting  and another authorizing limited authority for FAA to use debt financing,  are uncertain.
subsections: section_title: FAA’s Current Funding Structure Has Kept Up with Demand for Many Years and Can Provide Funding to Cover the Development and Implementation of NextGen
paragraphs: Congress has used the current funding structure—excise taxes plus a  General Fund contribution—to fund FAA for many years. As the number  of air travelers has grown, so have excise tax revenues. Even though  revenues fell during the early years of this decade as the demand for air  travel fell, they began to rise again in fiscal year 2004, and FAA estimates  that if the current taxes remain in effect at their current rates, revenues  will continue to increase. While retaining the basic structure for funding  FAA, Congress has at times changed the mix of excise taxes and some of  the tax rates. For example, when the taxes were most recently  reauthorized in 1997, Congress added the passenger segment tax while  reducing the passenger ticket tax rate from 10 percent to 7.5 percent.  Congress has also appropriated varying amounts of General Fund  revenues for FAA during the past 25 years, ranging from 0 to 59 percent of  FAA’s budget and averaging around 20 percent since fiscal year 1997. The  fluctuation in the amount of the General Fund contribution occurs  because the contribution is based on the incoming Trust Fund revenues  that are available to fund the Operations account after revenues have been  allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in  the Trust Fund revenues and FAA expenditures require different levels of  General Fund contributions.
As air traffic grows and FAA embarks on modernization through NextGen,  Congress may appropriate additional funds to FAA to fund new  investment and to maintain a safe and efficient airspace system, although  there is considerable uncertainty about how much NextGen will cost. FAA  estimates that NextGen will cost between $15 billion to $22 billion through  2025. However, funding NextGen does not mean that the current funding  structure needs to be changed. According to projections prepared by the  Congressional Budget Office (CBO), revenues obtained from the existing  funding structure are projected to increase substantially. Assuming that  the General Fund provides about 19 percent of FAA’s budget, CBO  estimates that through 2016 the Trust Fund can support about $19 billion  in additional spending over the baseline FAA spending levels CBO has  calculated for FAA (the 2006 funding level, growing with inflation)  provided that most of that spending occurs after 2010. How far this money  will go to fund modernization is subject to a number of uncertainties— including the future cost of NextGen investments, the volume of air traffic,  the future costs of operating the NAS, and the levels of future  appropriations for AIP, all of which may influence funding for FAA.
However, if the desired level of spending exceeded what was likely to be  available from the Trust Fund at current tax rates, Congress could make  further changes within the current structure that would provide FAA with  additional revenue if Congress believed that larger FAA appropriations  were appropriate—for example, if FAA experienced increased workload  demands as a result of increased demand for air traffic services. Congress  could raise more revenue from airspace system users for NAS  modernization or for other purposes by raising the rates on one or more of  the current excise taxes. Congress could also provide more General Fund  revenues for FAA, although the nation’s fiscal imbalance may make a  larger contribution from this source difficult. Thus, it is necessary to look  at factors other than a need for more revenues to justify a major change in  FAA’s funding structure.
section_title: Funding Changes in Reauthorization Proposal Are Intended to Address Concerns about Long-term Revenue Adequacy, Equity, and Efficiency of Current Funding Structure
paragraphs: FAA has expressed concern that revenues from the current funding  structure depend heavily on factors, such as ticket prices, that are not  connected to FAA’s workload and costs. According to FAA, under the  current structure, increases in the agency’s workload may not be  accompanied by revenue increases because users are not directly charged  for the costs that they impose on FAA for their use of the NAS. Revenues  collected from excise taxes are primarily dependent on the price of tickets  and the number of passengers on planes, while workload is driven by flight  control and safety activities. This disconnect raises three key concerns  about the current funding structure—its long-term revenue adequacy,  equity, and efficiency. Moreover, these three concerns are supported by  long-term industry trends and FAA forecasts of declines in inflation- adjusted air fares, the growing use of smaller aircraft, and FAA’s 2007 cost  allocation study. The administration has used these concerns as its  rationale for proposing major changes in FAA’s funding.
Many of the proposed changes for funding FAA contained in the  administration’s reauthorization proposal are intended to address the  concerns about revenue adequacy, equity, and efficiency by linking FAA’s  revenues more closely with its costs. The proposal calls for a combination  of methods for funding FAA, which we previously reported might best  address concerns with the current system by providing a better link  between revenues and costs than any option used separately. For  example, the proposal would eliminate all the excise taxes except the  taxes on fuel and the tax on arriving and departing international  passengers. The ATO, the largest part of FAA’s budget, would then be  funded by direct user charges on commercial aircraft—including air taxis,  fractionally owned aircraft, and aircraft providing charter service—that  use the NAS, fuel taxes paid by general aviation users of the NAS (both  turbine and piston), and General Fund revenues to cover the costs of  exempt aircraft such as military and other state aircraft and flight service  stations.
The proposal would also allow FAA to establish a fee for all aircraft using  the nation’s most congested airports. Based on the time of day or day of  the week, the fee would be designed to increase efficient use of the NAS  by discouraging peak-period traffic at congested airports and, thus,  reducing delays. Under such a fee, cargo carriers could pay lower fees by  operating at night than they would pay by operating at peak periods of the  day, creating an incentive for some cargo carriers to switch daytime  operations to nighttime. The fee could also create incentives for general  aviation aircraft flying to and from metropolitan areas with congested  airports to use other nearby airports instead.
The shares of ATO costs to be recovered from commercial and general  aviation aircraft, respectively, and the General Fund contribution to cover  the costs of exempt aircraft would be based on the results of FAA’s cost  allocation study. In addition, the proposal would authorize FAA to impose  fees to pay for costs related to certain aircraft certification and  registration activities that it conducts.
Basing cost recovery for ATO only on cost allocation is a policy choice. In  many other countries, cost recovery is based in part on cost allocation and  in part on other principles, such as ability to pay. For example, some  countries charge a fee for en route services based on weight and distance;  weight is included as a factor in charging formulas because many believe  that it reflects an aircraft operator’s ability to pay. Using additional  principles for cost recovery could result in different distributions of the  funding burden among user groups.
For one large area of FAA’s budget, AIP, it is not possible to establish a  direct link between revenues and costs because AIP expenditures are not  the direct result of costs imposed by users of the NAS. FAA distributes AIP  grants on the basis of congressional priorities established in authorizations  and appropriations. Accordingly, equity would appear to be the best  criterion to use in evaluating the administration’s proposal to fund AIP  through a fuel tax of 13.6 cents per gallon on commercial and general  aviation operators and a tax of $6.39 per passenger on the use of  international travel facilities.
According to an FAA official, the decision to establish equal tax rates for  commercial and general aviation operators was made to achieve fairness  and simplicity. One way to evaluate the fairness or equity of funding AIP in  this way would be to compare the distribution of the funding burden  among user groups with the distribution of the grants funded by AIP.  With all aircraft being charged the same fuel tax rate, according to FAA  forecasts for fiscal year 2009, commercial aircraft operators would pay  about 88 percent of the fuel tax revenues collected primarily to fund AIP,  while general aviation operators would pay 12 percent. However, under  the current AIP program, about one-third of AIP grants would go to  airports with no commercial service, and some additional grants would go  to airports where general aviation traffic makes up a substantial share of  the aircraft operations. Thus, under the administration’s proposal,  commercial aviation users would appear to be paying for a large share of  the benefits that come from capital spending at general aviation airports.  This result is no different from what happens today; commercial aviation  users currently pay for a large share of these benefits, since the largest  share of the Trust Fund comes from passenger ticket taxes.
Some portion of these benefits may accrue to commercial aviation users if  capital spending at general aviation airports keeps general aviation traffic  from using congested commercial airports. However, most of the benefits  from capital spending at general aviation airports would likely go to users  of those airports or their surrounding communities—or to the general  public to the extent a national system of airports that includes general  aviation airports creates public benefits. In that case, funding those  benefits by fuel taxes paid by commercial aircraft may raise equity issues.  An alternative approach that would be consistent with a policy choice to  charge general aviation users less than the cost of the benefits they receive  from AIP grants would be to use General Fund revenues to fund part of  AIP.
section_title: Concerns about the Soundness of the Cost Allocation Methodology and Adherence to Principle of Cost-Based Funding May Limit Proposal’s Ability to Address FAA’s Key Concerns
paragraphs: A better alignment of FAA’s revenues and costs can address revenue  adequacy, equity and efficiency concerns, but the ability of the proposed  funding structure to link revenues and costs to address these concerns  depends critically on two things—first, the soundness of FAA’s cost  allocation system in allocating costs to users and, second, how closely the  proposed funding structure adheres to the principle of cost-based funding.
FAA’s new cost allocation study was released at the end of January, so we  and others have had only a short time to review it. However, we, as well as  industry stakeholders, have raised a number of concerns about the study  and its cost allocation methodology. For example, FAA divides NAS users  into two groups: high-performance aircraft, such as jets and turboprop  aircraft, and piston aircraft. According to FAA, dividing users this way  creates two principal groups whose flights impose substantially different  costs on FAA. High-performance aircraft which fly at higher altitudes and  speeds, and normally use Instrument Flight Rules, are “controlled” through  en route airspace and for landings and takeoffs by air traffic controllers.  Therefore, they impose higher costs on FAA than piston aircraft which fly  at lower altitudes and often use Visual Flight Rules, under which they are  not “controlled” through en route airspace but can use air traffic control  services for landings and takeoffs.
However, FAA did not conduct a statistical cost analysis to determine  whether high-performance aircraft of different types might impose  sufficiently different costs on the system to warrant dividing NAS users  into more than two groups. For example, differences in aircraft weight  could affect terminal airspace costs even though they may not affect en  route costs. Although there may be no effect of aircraft weight on en route  costs, FAA officials told us that the administration’s reauthorization  proposal requests authority to set terminal airspace user fees based in part  on weight because they believe that larger aircraft require greater  separation, thus imposing greater terminal airspace costs. Under FAA’s  cost allocation methodology, fixed costs are assigned to the group that is  the primary user of the air traffic control services that generate those  costs. Accordingly, it might be more consistent to divide high-performance  aircraft into subgroups before FAA allocated the fixed costs of air traffic  control services used by aircraft in all groups to the group that is the  primary user of that service.
Creating only two principal groups resulted in the allocation of some  portion of the fixed costs to general aviation jet aircraft, because the high- performance group, which FAA defines to include general aviation jet  aircraft, is the primary user of services that are responsible for most fixed  costs. If instead, for example, FAA had created three principal aircraft  groups—piston, heavy high-performance, and light high-performance— and if the heavy high-performance group was the primary user of services  that are responsible for most fixed costs, then the fixed costs would have  been allocated only to that group. The effect of this change in  methodology would likely have been that general aviation turbine users  would have been allocated a smaller share of total ATO costs and a lower  fuel tax rate would have been needed to collect their share of FAA’s  revenues.
Because a sound cost allocation methodology is central to the successful  application of cost-based funding, more time may be needed for FAA to  further analyze the differences among aircraft types that lead to  differences in the costs they impose on the NAS. More time may also be  needed for a fuller analysis and discussion of FAA’s cost allocation  methodology, after which, perhaps, a wider consensus might be reached  on FAA’s cost allocation methodology. At the request of this Committee,  we are continuing to review FAA’s cost allocation methodology.
In addition to our concerns about the cost allocation methodology, we  have identified some instances in which the reauthorization proposal does  not strictly adhere to the principle of cost-based funding. For example,  FAA has made what it terms a policy decision to not apply the congestion  charge for using terminal airspace near large, busy airports to all aircraft  that fly through that airspace. Aircraft flying near busy airports and using  the same airspace but not taking off or landing at these airports would not  be charged, even though such flights would use air traffic control services  provided by the same approach control centers. FAA officials told us that  they made this decision because the approach control centers would not  exist if they were not serving traffic at the busy airports. In addition, they  said, FAA wanted to create incentives for general aviation aircraft to avoid  flying to or from the busy airports and to use other nearby airports  instead. Although that rationale could provide a justification for allocating  the fixed costs of such centers to users of the busy airports, allocating all  of the variable costs to users at those airports is a deviation from a cost- based approach. While such policy decisions on pricing may be  appropriate in some instances for various reasons, but they create  deviations from the principle of cost-based funding that may limit the  ability of the administration’s proposal to address concerns about the  disconnect between revenues and costs associated with the current  funding structure.
section_title: Proposed Fuel Tax Rates May Not Yield the Revenue to Produce Anticipated Fuel Tax Revenues
paragraphs: The proposed fuel tax rates, although much higher than current rates, may  not yield the revenue that FAA expects to collect from fuel taxes. FAA  estimated the tax rates necessary to collect from general aviation  operators the share of ATO costs allocated to them and from both  commercial and general aviation operators the revenue needed to fund the  proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D  account to be funded through fuel taxes (less the share paid by  international passengers). FAA officials confirmed for us that in  performing these estimates they did not take into account possible  reductions in fuel purchases due to the increase in the tax rates. Although  we do not know by how much such purchases would decline,  conventional economic reasoning, supported by the opinions of industry  stakeholders, suggests that some decline would take place. Therefore, the  tax rate should be set taking into consideration effects on use and the  resulting impact on revenue. FAA officials told us that they believe that  these effects would be small because the increased tax burden is a small  share of aircraft operating costs and therefore there was no need to take  its impact into account. Representatives of general aviation, however, have  said that the impact could be more substantial.
Even if there is no change in fuel purchases due to higher tax rates, FAA’s  forecasts suggest that fuel tax revenues might be less than the proposed  spending to be funded by those tax revenues. Furthermore, we observe  that the administration’s proposed spending for AIP is substantially below  the levels at which Congress funded the program in recent years. If  Congress were to adopt the proposed funding structure but fund AIP at  the same level as this year, fuel tax rates would need to be raised above  the proposed level to obtain enough revenue to fully fund AIP without  resorting to alternative funding sources, such as the General Fund or  drawing down the Trust Fund balance.
section_title: Proposal to Create an Advisory Board Has Uncertain Implications While Proposal Authorizing Limited Borrowing Authority Is Unlikely to Have a Major Impact
paragraphs: The proposed creation of an advisory board raises questions about the  influence that NAS users would have on fee setting and the impact that  such a board would have on congressional oversight. According to the  reauthorization proposal, the advisory board would be able to recommend  user fee amounts to the FAA Administrator, who would have the final  decision in setting fees. If the advisory board objected to the fee, the  Administrator would be required to publish a written explanation in the  Federal Register. Aviation stakeholders could appeal the fee to the  Secretary of Transportation but there would be no judicial review of the  Secretary’s appeal decision. According to a recent report by the  Congressional Research Service, the FAA Administrator would have  substantial discretion in how much to use the advisory board’s expertise.  Congress would have no role in setting fees, whereas under the current  system, Congress sets the tax rates. The combination of these elements  raises the issue of how to ensure the appropriate level of congressional  oversight. With a user fee, Congress would set the total amount to collect  and spend from the fees through the appropriations process.
The authorization of limited borrowing authority (up to $5 billion) for FAA  in the administration’s proposal seems unlikely to have a major effect on  FAA’s ability to pay for capital investment associated with moving to  NextGen, because the payback period is relatively short. With a maximum  payback period of 5 years, the advantage of matching the time period for  paying for a capital investment with the time period in which the benefits  of that investment are realized is unlikely to be achieved. As a result, the  advantage of this type of borrowing compared to appropriations also  funded by Treasury debt is less clear. In either case, user fee collections  could offset the borrowing. However, it is possible that having FAA  borrow from the Treasury with a relatively short time period for  repayment could serve as a way to tighten and make more explicit the link  between the borrowing and the fees that are the source of repayment— and could ensure that the fees were set at a level sufficient to provide the  needed funds.
Limiting FAA’s authority to borrow from the Treasury and collecting  revenue from user fees, as proposed, is preferable to giving FAA direct  access to capital markets or repaying debt with appropriations or new  borrowing. The Treasury can borrow at lower interest rates than FAA  could achieve by going to the capital markets because Treasury securities  are considered risk-free, since they are backed by the federal government.  We have recommended that only those agencies that would be able to  repay their borrowing through revenue collections be granted authority to  borrow. In addition, we have reported that debt financing raises issues  about borrowing costs that are particularly important in light of the federal  government’s long-term structural fiscal imbalance. Mandatory federal  commitments to health and retirement programs will consume an ever- increasing share of the nation’s gross domestic product and federal  budgetary resources. Accordingly, any program or policy change that may  increase costs requires sound justification and careful consideration  before adoption.
section_title: Observations on Proposed Changes to the Budget Structure and on the Method for Determining the General Fund Contribution
paragraphs: The reauthorization proposal to align FAA’s budget accounts with FAA’s  lines of business has advantages and disadvantages. Such a restructuring  is consistent with FAA’s emphasis on aligning revenues and costs and  could allow FAA to more specifically distinguish those funding options  that provide a better links between costs and revenues. For example, an  ATO account dedicated to the operation, maintenance, and upgrade of the  NAS could better enable the agency to charge for direct usage of the NAS.  In addition, such a system could show the costs attributable to each line of  business, thereby supporting the agency’s internal financial management.  However, some FAA activities may not be clearly divisible into discrete  categories. For example, one new account—the Safety and Operations  account—includes safety-related activities. Nonetheless, there could be  some ambiguity in how safety activities are defined and in how their costs  should be allocated between aviation users which benefit directly from a  safe air traffic control system and the public which receives general safety  benefits.
Linking the General Fund contribution to FAA’s budget, as the  administration is proposing, would explicitly recognize that users of the  system are not the only beneficiaries of it. Such an approach allows for a  “bottom up” calculation of the General Fund contribution that is based on  the different public benefits that FAA provides, such as safety and use of  the NAS by federal agencies. This approach is different from the current  one, which bases the General Fund contribution on how much money is  left in the Trust Fund to fund the Operations account after Trust Fund  revenues for that particular year have been allocated to fund the F&E, AIP,  and RE&D accounts. An approach that links a General Fund contribution  to public benefits is consistent with the principle of public finance that  public benefits should come from the General Fund and not from user  contributions. This should not, however, be viewed as a precise  determination. Some aviation activities, such as safety, benefit both users  and the nonuser public. Others, such as a national airport system that  includes small airports that receive federal grants, may be seen as a  benefit solely to the users of those airports, to their communities, or to the  broader public. In addition, such a change in the method of determining  the General Fund contribution may result in an increase or a decrease in  that contribution, which would have implications for how aviation  activities are funded.
section_title: Concluding Observations
paragraphs: The administration has introduced a complex proposal for funding FAA,  and we believe that it deserves serious and thoughtful consideration.  Adopting this proposal is not necessary to provide more money to FAA if  Congress thinks that additional spending on aviation is needed to address  air traffic increases and new investment demands, including NextGen,  because additional funding can be provided within the current structure.  However, given the current federal fiscal imbalance, appropriating  additional funds to aviation may be difficult. Furthermore, the proposal  may address some of the concerns that FAA and other stakeholders have  raised with the current funding structure, such as equity, but only if the  cost allocation from which the cost-based funding is derived is sound.  FAA’s cost allocation methodology is new and has raised issues,  suggesting that further analysis and more time may be needed to reach a  consensus as to whether it is sufficiently sound to support a cost-based  funding structure for FAA.
In the meantime, the taxes that currently provide most of the revenue for  FAA are scheduled to expire at the end of the current fiscal year. Given the  relatively low uncommitted balance in the Trust Fund, a lapse in tax  revenues could affect the funding of most FAA activities. Thus, timely  reauthorization of the current tax revenues to avoid a tax lapse is critical  even if Congress chooses to continue its consideration of the  administration’s proposal or other alternatives for funding FAA beyond  this fiscal year.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other Members of the  subcommittee might have.
section_title: Contacts and Acknowledgments
paragraphs: For further information about this testimony, please contact Gerald L.  Dillingham at (202) 512-2834. Other key contributors to this testimony  include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy,  Jennifer Kim, and Elizabeth Eisenstadt.
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