Aviation Finance: Observations on the Current FAA Funding Structure's Support for Aviation Activities, Issues Affecting Future Costs, and Proposed Funding Changes
Published: 2007-08-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Aviation Administration (FAA) operates one of the safest air transportation systems in the world, but this system is under growing strain as the demand for air travel increases. Recognizing the need to transform this system, Congress created the Joint Planning and Development Office (JPDO), housed within FAA, to plan and develop the Next Generation Air Transportation System (NextGen). The current authorization for FAA, the Airport and Airway Trust Fund (Trust Fund), and most of the excise taxes that support the Trust Fund will expire September 30, 2007. Several proposals, including two reauthorization bills--H.R. 2881 and S. 1300--identify various funding sources for FAA activities, including NextGen. Among these are current excise taxes, fees, and flight surcharges. Concerned about the need for stable, sustainable financing for the nation's multibillion-dollar transportation infrastructure investments, including NextGen, GAO has designated transportation financing as high risk. GAO's statement addresses (1) the extent to which the current funding structure can support FAA's activities, including NextGen, (2) issues that could affect the overall cost of NextGen, and (3) the implications of selected proposals to fund aviation activities. The statement is based on recent GAO reports and testimonies.
section_title: What GAO Found
paragraphs: Recent estimates indicate that FAA's current funding structure--consisting primarily of Trust Fund revenues plus a contribution from the General Fund of the U.S. Treasury--can potentially support FAA's activities, including NextGen. The current structure has provided sufficient funding for FAA's activities to date, and both FAA and the Congressional Budget Office (CBO) have estimated that revenues will continue to increase. According to CBO projections through 2017, the current structure, if maintained, could support about $22 billion in additional spending over current spending levels (adjusted for inflation). Congress could also raise more revenue for FAA by raising excise tax rates or by increasing the General Fund contribution. However, contributions from the General Fund may be limited by the federal government's long-term fiscal imbalance, and policy choices, structural changes in the aviation industry, and external events could affect Trust Fund revenues. Furthermore, the current funding structure raises concerns about equity and efficiency because users may pay more or less than the costs of the air traffic control services they receive, and therefore they may lack incentives to use the national airspace system as efficiently as possible. Issues that could affect the overall cost of NextGen are primarily related to the content and cost of its infrastructure and research and development. JPDO is developing and has issued some key planning documents that will provide more insights into some of these issues, but questions remain over which entities will perform activities such as research and development. Other issues include the cost savings that could result from more efficient FAA operations and acquisition processes, which could reduce the need for new NextGen funding, and the extent to which public-private partnerships and leasing can be used to acquire NextGen infrastructure as flexibly and cost-effectively as possible. Selected proposals for funding aviation activities could generate more revenue, but could also lead to unintended consequences. For example, a House committee recommendation to raise general aviation fuel tax rates could increase Trust fund revenue, but might reduce fuel purchases, which would limit the amount of the revenue increase. H.R. 2881 would raise airport passenger facility charges, mainly benefiting larger airports, and would establish or increase fees for certain FAA certification and registration activities. However, when fees are imposed for aviation activities, care must be taken to ensure that efforts to avoid the fees do not compromise safety. S. 1300 would authorize a surcharge of $25 per flight on many flights to help pay for NextGen capital projects. While a surcharge would create an incentive for efficient use of air traffic services, some stakeholders raise the possibility that such a fee could lead to reduced air service for small communities. S. 1300 would also allow FAA to seek debt financing for capital projects in the private capital market--a proposal designed to create a stable revenue source but resulting in higher interest costs than borrowing from the U.S. Treasury.

section_title: Letter
paragraphs: We appreciate the opportunity to participate in today’s hearing on the  future funding of the Federal Aviation Administration (FAA). As you  know, FAA operates one of the safest air transportation systems in the  world, but this system is under growing strain as the demand for air travel  increases. According to FAA, over 740 million passengers flew in fiscal  year 2006, and 1 billion passengers per year are expected to fly in 2015.  FAA also predicts that 10,000 corporate aircraft, including traditional  business jets, turboprops, and very light jets, will be added to the fleet  between 2007 and 2017. To accommodate this increased traffic, instrument  flight rule operations—the most significant source of demand on the air  traffic control system—are projected to rise by 36 percent, from roughly  45,000 per day to 61,000 per day over the same decade. Yet even at today’s  flight levels, flight arrival delays are approaching the record levels set in  2000, when one in four flights reached its destination late. The consensus  is that the current air traffic control system cannot be expanded to meet  this expected growth. According to an analysis of future demand and  system capacity that was conducted by the Joint Planning and  Development Office (JPDO), the estimated cost to the U.S. economy of  failing to meet future airspace demands could be $22 billion annually by  2023.
In 2003, recognizing the need for a new and different type of air traffic  control system to deal with the expected growth, Congress authorized the  creation of JPDO to lead a collaborative effort of federal and nonfederal  aviation stakeholders to conceptualize and plan the Next Generation Air  Transportation System (NextGen). The transformation to NextGen will  involve the acquisition of numerous systems to support precision satellite  navigation; digital, networked communications; integrated weather  information; and layered, adaptive security. The President’s budget  proposes to spend $4.6 billion over the next 5 years for NextGen, including  both capital costs and research and development costs.
As you know, the current authorization for FAA, the Airport and Airway  Trust Fund (Trust Fund), and most of the excise taxes that provide  revenue for the Trust Fund will expire at the end of this fiscal year. Several  proposals, including two reauthorization bills—H.R. 2881 and S. 1300— specify various revenue sources to fund FAA, including NextGen. Among  these sources are the current excise taxes, including fuel taxes;  certification and registration fees; and flight surcharges. As requested, my  statement today will address the following questions: (1) To what extent  can the current funding structure support FAA’s activities, including  NextGen? (2) What issues could affect the overall cost of NextGen? (3)  What are the implications of selected provisions of proposals to fund  aviation activities? My remarks are based on recent GAO reports and  testimonies on FAA’s current funding structure, NextGen, and funding  options that might address concerns about FAA’s current funding  structure. For these reports and testimonies, we reviewed relevant  literature, examined FAA data and forecasts, and interviewed FAA and  other government agency officials, aviation industry group  representatives, and academic and financial experts.  We conducted our  work during July 2007 in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: Although there have been fluctuations in its funding sources, FAA has  been supported by the current structure for decades. The agency is funded  primarily by the Trust Fund (82 percent)—which receives revenues from a  series of excise taxes paid by users of the national airspace system—and  by the General Fund. The excise taxes are associated with purchases of  airline tickets and aviation fuel, as well as the shipment of cargo, and most  are scheduled to expire September 30, 2007. Trust Fund revenues are  available for use subject to appropriation. Including interest earned on its  balances, the Trust Fund received about $11.2 billion in 2006. In addition,  about $2.6 billion was appropriated for fiscal year 2006 from the General  Fund for FAA operations. Table 1 shows the distribution of Trust Fund  revenues for fiscal year 2005 by source.
The Trust Fund was established by the Airport and Airway Revenue Act of  1970 to help fund the development of a nationwide airport and airway  system and to fund investments in air traffic control facilities. It provides  all of the funding for three of FAA’s four accounts, including (1) the  Facilities and Equipment (F&E) account, which funds technological  improvements to the air traffic control system; (2) the Research,  Engineering, and Development (RE&D) account, which funds research on  issues related to aviation safety, mobility, and the environment as well as  most of FAA’s contribution to JPDO; and (3) the Airport Improvement  Program (AIP), which provides grants for construction and safety projects  at airports. In addition, at various times during its history, the Trust Fund  has provided all or some portion of the funding for FAA’s Operations  account. In fiscal year 2006, expenditures from the Trust Fund totaling  $11.2 billion were made among the four accounts as shown in figure 1.
section_title: Estimates Indicate That Current Funding Structure Can Support FAA Activities, Including NextGen, but Structure Raises Concerns about Equity and Efficiency
paragraphs: The current funding structure—excise taxes plus a General Fund  contribution—has funded FAA for many years, and estimates indicate that  this structure can potentially provide sufficient funds for the next several  years to support the transition to NextGen. As the number of air travelers  has grown, so have excise tax revenues. Even though revenues fell with  the decline in air travel following the terrorist attacks of September 11,  2001, 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 and has  appropriated different amounts from the General Fund to offset Trust  Fund fluctuations. 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  amount of the General Fund contribution fluctuates 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, and RE&D accounts. Therefore,  fluctuations in Trust Fund revenues and FAA expenditures require  different levels of General Fund contributions.
Since the Trust Fund’s creation in 1970, revenues have in the aggregate  exceeded spending commitments, resulting in an uncommitted balance, or  surplus. As of the end of fiscal year 2006, the Trust Fund’s uncommitted  balance was about $1.8 billion. The Trust Fund’s uncommitted balance  depends on the revenues flowing into the fund and the appropriations  made available from the fund for various spending accounts. Policy  choices, structural changes in the aviation industry, and external events  have affected revenues flowing into and out of the fund. For the last 6  years, for example, the uncommitted balance has been declining because  expenditures from the fund are based on projected revenues and actual  revenues have been less than FAA forecasted.
In prior work, we ran scenarios in which Trust Fund revenues continued  to fall short of forecasted levels and the Trust Fund balance continued to  decline, eventually falling to zero. We believe these scenarios raise  concerns because in the past the Trust Fund’s uncommitted balance has  been used to offset lower-than-expected Trust Fund revenues and  decreased General Fund contributions. The zero-balance scenario would  most likely have implications for Congress in funding FAA programs,  including NextGen. To address this concern, H.R. 2881 proposes to base  expenditures from the Trust Fund on 95 percent, rather than 100 percent,  of estimated Trust Fund revenues, which would reduce the likelihood of  running the Trust Fund balance to zero.
According to projections prepared by the Congressional Budget Office  (CBO), the existing funding structure, if maintained, will generate  substantially increasing revenues over the next decade. Assuming that the  General Fund provides about 19 percent of FAA’s budget, CBO estimates  that through 2017 the Trust Fund can support about $22 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. According to FAA,  the majority of the funding for NextGen will take place after 2010.
Moreover, if the desired level of spending exceeded what was likely to be  available from the Trust Fund at current tax rates, Congress could make  changes within the current structure that would provide FAA with  additional revenue. For example, Congress could raise more revenue from  airspace system users for 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.
Although the current funding structure may produce enough revenue to  fund FAA, including NextGen, this structure presents equity and efficiency  concerns. FAA and others have stated that the current approach to  collecting funds from users through excise taxes creates inequities  because the revenue contributions of different flights are not directly  linked to the costs of the services that these flights receive from FAA.  Some stakeholders have also raised concerns that the current funding  system does not provide aircraft operators with incentives to use FAA  services in the most efficient manner. For users to make efficient  decisions about their use of the national airspace system, their price for  using the system (the taxes or charges they pay) should accurately reflect  the costs their use imposes on the system. These prices, along with other  factors influencing supply and demand, will influence users’ decisions  about the type, size, and number of aircraft to operate, and when and  where to operate them.
section_title: Technology Requirements and Other Issues Could Affect NextGen’s Overall Cost
paragraphs: While revenue estimates indicate that the current funding structure can  potentially fund NextGen, a number of issues could affect NextGen’s  overall cost, especially its technology requirements, which have not yet  been fully determined. The specific systems and associated costs of  NextGen infrastructure and research and development are not fully  known, nor are the resources that will be contributed by other federal  agencies. Other issues include the cost savings that might result from more  efficient FAA operations and acquisition processes, which could reduce  the need for new NextGen funding, and the extent to which FAA uses  public-private partnerships or leasing arrangements to acquire NextGen  infrastructure as flexibly and cost-effectively as possible.
JPDO recently estimated that the total federal cost for NextGen  infrastructure through 2025 will range between $15 billion and $22 billion.  JPDO also reported that a preliminary estimate of the corresponding cost  to system users, who will have to equip with the advanced avionics that  are necessary to realize the full benefits of some NextGen technologies,  ranges between $14 billion and $20 billion. Thus, according to JPDO, the  total costs for NextGen could be anywhere between $29 billion and $42  billion. We consider $13 billion to be a significantly wide range and believe  there is a need to better define the costs of NextGen.
According to JPDO officials, more precise cost estimates will depend on  information contained in several key planning documents, some of which  have been released and some of which are still being developed. In June  2007, JPDO released both the latest version of the NextGen Concept of  Operations and the first version of the NextGen Enterprise Architecture.  JPDO is developing an Integrated Work Plan that will describe the  capabilities needed to transition to NextGen from the current system and  provide the research and development, policy and regulation, and  acquisition time lines necessary to achieve NextGen by 2025. The  Integrated Work Plan, scheduled for release at the end of this month, is  akin to a project plan and will be critical for planning the partner agencies’  fiscal year 2009 budgets and programs. JPDO is also developing an Office  of Management and Budget (OMB) Exhibit 300 for NextGen that will be  used as input to funding decisions for NextGen research and development  and acquisitions across JPDO’s partner agencies. This Exhibit 300 will be  due to OMB in September 2007 and will inform decisions about the partner  agencies’ 2009 budget submissions. It will be important that these various  documents be used in the near term to develop more refined cost  estimates for NextGen.
Although JPDO has released estimates for NextGen, questions remain over  how much it will cost and which entities will fund and conduct some of  the necessary research, development, demonstration projects, and training  that will be key to achieving certain NextGen capabilities. In the past, the  National Aeronautics and Space Administration (NASA) has performed a  significant portion of federal aeronautics research and development,  including intermediate technology development. However, NASA’s  aeronautics research budget and proposed funding show a 30-percent  decline in real terms (i.e., constant 2005 dollars) from fiscal year 2005  through fiscal year 2011. To its credit, NASA plans to focus its research on  the needs of NextGen. However, NASA is also moving toward an emphasis  on fundamental research and away from developmental work and  demonstration projects, which could negatively affect NextGen if other  agencies do not assume these efforts. According to FAA and JPDO  officials, they are currently studying these issues and trying to assess how  much research and development work FAA can assume. FAA has  proposed increasing its research and development funding by $280 million  over the next 5 years. However, a draft report by an advisory committee to  FAA stated that FAA would need at least $100 million annually in  increased funding to assume NASA’s research and development work.  Furthermore, according to the draft report, establishing the necessary  infrastructure within FAA could delay the implementation of NextGen by 5  years.
The overall cost of NextGen could be reduced to the extent that FAA  realizes cost savings from improved operations and acquisition processes.  We have reported that, over the past few years, FAA has made significant  progress in moving to more businesslike and cost-effective operations,  which should better position the agency for the complex implementation  of NextGen. Cost savings could come about by, for example,  consolidating facilities or outsourcing services, should Congress choose to  approve such measures. In addition, FAA has reported improvements in its  management of major system acquisitions. To the extent that FAA can  keep NextGen systems on schedule, FAA may be able to avoid the  escalation in acquisition costs that plagued its past modernization efforts.  Keeping acquisitions on schedule will also mean realizing more quickly the  increased efficiencies or safety benefits of new systems and technologies,  as well as avoiding the costs and inefficiencies of maintaining existing  systems.
Finally, the extent to which FAA employs public-private partnerships or  leasing arrangements as part of its acquisition strategy for NextGen could  affect the system’s overall cost. FAA is currently exploring these types of  options for its future nationwide rollout of Automatic Dependent  Surveillance-Broadcast, a surveillance system that FAA considers a  cornerstone technology of NextGen. We believe that these types of  arrangements could produce significant cost savings and lessen some risks  for FAA. However, such arrangements must be carefully structured to  protect the interests of the public and the federal government, and to  ensure proper governmental oversight.
section_title: Selected Proposals for Funding Aviation Activities Could Generate More Revenue but Could Also Lead to Unintended Consequences
paragraphs: Several proposals, including a recommendation from a House committee  and selected provisions of the House and Senate reauthorization bills,  specify different types of revenue sources to fund FAA and NextGen.  These proposals have implications for revenue generation, but could also  lead to unintended consequences.
The House Committee on Transportation and Infrastructure has  recommended to the House Committee on Ways and Means that it  increase the tax rates for general aviation jet fuel and aviation gasoline. If  these rate increases are enacted, the fuel taxes would provide additional  revenue to the Trust Fund. However, the increases, although relatively  small, might also lead to reductions in fuel purchases by general aviation  aircraft operators. Any estimate of the revenue gain from the higher tax  rates should take into account these possible reductions in fuel purchases.  Other factors that could be considered in setting general aviation fuel tax  rates are the extent to which the rates should be set to make FAA’s  funding more cost-based and how much users are able to pay.
A provision of H.R. 2881 would allow airports to increase PFCs to a  maximum of $7, while an S. 1300 provision would retain the cap at $4.50.  Increasing the cap on PFCs would generate more revenue, especially for  larger airports. A $7 PFC could generate nearly $2 billion in additional  revenues for airports assuming all airports imposed the maximum PFC  (see table 2).
However, not all airports are expected to move to the maximum ceiling  right away because many airports have a lesser or no PFC in place  currently. If only those airports with a PFC at the current maximum of  $4.50 increased their PFC to $7.00 and the others made no change, the  proposed fee increase would yield approximately $1.3 billion per year in  additional revenues. These calculations assume that the increased PFC  would not affect passenger demand for air travel. We have previously  calculated that a PFC increase could reduce passenger demand, which  would reduce the PFC revenue collected at the higher rate. Nevertheless,  our previous work suggests the revenue reduction due to demand effects  would likely be small. Smaller airports (small and nonhub) would not  benefit directly as much from this ability to increase PFCs because smaller  airports have fewer passengers from whom to collect PFCs. However,  smaller airports, which rely primarily on AIP grants for capital funding,  would benefit indirectly from an increased cap on PFCs. AIP’s Small  Airport Fund, which totaled $428 million in 2006, is funded by the  turnback of up to 75 percent of large and medium hub airports’  entitlements. H.R. 2881 would increase the turnback to 100 percent of  entitlements for large hub airports that impose a PFC above $4.50. While S.  1300 does not include an increase in PFCs, it does include a pilot program  for up to six airports to impose unlimited PFCs if the airports collect the  fee directly from passengers.
H.R. 2881 includes new and increased user fees to pay for the costs of  certain certification and registration activities of FAA. Such fees would  provide additional revenue and more directly link revenue contributions to  the cost of the services. These fees cover services and activities for issuing  certain certificates, registering aircraft and airmen, issuing airmen medical  certificates, and providing legal opinions pertaining to aircraft registration  or recordation. In some cases, such as the registration of aircraft, FAA  already charges a modest fee ($5), but this fee has not been raised since  1964. We have reported that this fee does not cover the cost of reviewing  and processing a registration application and have recommended that FAA  increase it. The proposal would raise the fee to $130 and allow FAA to  periodically adjust this and other fees based on the cost of providing the  service. However, in general, when fees are imposed for aviation activities,  care must be taken to ensure that efforts to avoid the fees do not  compromise safety.
S. 1300 includes a provision requiring the FAA Administrator to impose a  surcharge of $25 per flight to be available to pay the costs of NextGen  capital projects. All owners or operators of aircraft in the national airspace  system would be required to pay this surcharge except those that fall into  certain exempt categories. FAA estimates that this fee could yield $400  million a year by 2011. We estimate, on the basis of 2006 operations, that  commercial airlines would contribute 36 percent of the fees; regional  airlines would contribute 31 percent, though carrying far fewer  passengers; and general aviation would contribute 11 percent (see fig. 3).
One potential advantage of this type of charge is that it would establish a  more direct relationship between revenue and costs compared with the  current excise taxes. Advocates of this approach say that funding FAA in  part through such a charge would do more than the current structure to  ensure that revenues are adequate to cover costs over time and to create  incentives for efficient use of the national airspace system by directly  connecting charges with the costs imposed by users. On the other hand,  although this connection would appear to exist for FAA’s costs of  providing terminal control services—the more flights, the more charges an  operator pays—there is no obvious connection with the costs of en route  services because the charge would be the same for short and long flights.  In addition, concerns have been raised about the equity of a charge that  would apply equally to all jet aircraft regardless of size. Another concern  has been raised that the fee might lead to reduced air service by turboprop  operators providing regular service to small communities as well as  reduced service provided through the Essential Air Service program to  small communities because of the increased expense that the fee would  represent.
Another S. 1300 provision would grant FAA the authority to seek debt  financing by issuing bonds directly to the private capital market.  Supporters of this bonding proposal for FAA claim a number of  advantages to this financing approach. One claim is that debt financing  could provide FAA with a stable and predictable revenue source for  funding capital development. FAA officials state that the uncertainty  associated with the appropriation process makes planning for a large,  complex, and expensive air traffic control system like NextGen difficult.  Over the years, federal agencies have used a variety of financing  approaches to acquire capital assets. However, from a governmentwide  perspective, some approaches, such as bonding, raise serious concerns  because they ultimately will result in higher overall costs. Moreover, if  FAA were granted borrowing authority, the associated costs would be  higher by borrowing directly from the private capital market instead of  through the Treasury. According to Treasury officials and representatives  of investment firms, this occurs because the Treasury is charged a lower  interest rate to borrow money. The costs of borrowing may also be higher  if the revenue option—such as taxes or user charges—used to pay back  the bond is subject to appropriations because there would most likely be a  risk premium added to the credit rating to compensate for the risk that  appropriations may not be provided. We have reported that given the  federal government’s long-term structural fiscal imbalance, any action that  may increase the government’s costs requires sound justification and  careful consideration before it is adopted.
With most of the excise taxes that largely fund FAA’s budget scheduled to  expire at the end of September 2007, Congress will need to act to avoid a  lapse in revenue to the Trust Fund. FAA estimates that two previous  lapses in 1996 and 1997 resulted in the Trust Fund not receiving about $5  billion in taxes and fees that were never recovered.
FAA estimates that the uncommitted balance in the Trust Fund at the end  of fiscal year 2007 will be about $1.8 billion dollars. At current monthly  spending levels, a 2- to 3-month lapse in fiscal year 2008 could reduce the  revenue in the Trust Fund enough to cause the uncommitted balance to  fall to zero. If the Trust Fund balance falls to zero, the continuation of  FAA’s programs—including the development of NextGen and grants to  airports—would depend on providing additional revenues from the  General Fund.
Thank you, Mr. Chairman, that concludes my statement. I will be pleased  to answer any questions that you or other Members of the Subcommittee  might have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Gerald L.  Dillingham at (202) 512-2834. Other key contributors to this testimony  include Paul Aussendorf, Jay Cherlow, Bess Eisenstadt, Carol Henn,  Maureen Luna-Long, Faye Morrison, Teresa Spisak, and Tristan To.
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