Aviation Finance: Observations on Potential FAA Funding Options
Published: 2006-09-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Aviation Administration (FAA), the Airport and Airway Trust Fund (Trust Fund), and the excise taxes that support the Trust Fund are scheduled for reauthorization at the end of fiscal year 2007. FAA is primarily supported by the Trust Fund, which receives revenues from a series of excise taxes paid by users of the national airspace system (NAS). The Trust Fund's uncommitted balance decreased by more than 70 percent from the end of fiscal year 2001 through the end of fiscal year 2005. The remaining funding is derived from the General Fund. This report focuses on the portion of revenues generated from users of the NAS and addresses the following key questions: (1) What advantages and concerns have been raised about the current approach to collecting revenues from NAS users to fund FAA, and to what extent does available evidence support the concerns? (2) What are the implications of adopting alternative funding options to collect the revenues contributed by users that fund FAA's budget? (3) What are the advantages and disadvantages of authorizing FAA to use debt financing for capital projects? This report is based on interviews with relevant federal agencies, including FAA, the Office of Management and Budget, and the Congressional Budget Office. GAO also obtained relevant documents from these agencies, other key stakeholders, and academic and financial experts.
section_title: What GAO Found
paragraphs: Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system there is a disconnect between revenues contributed by users and the costs they impose on the NAS that raises revenue adequacy, equity, and efficiency concerns. Trends and FAA projections in both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA's workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. The extent to which revenues and costs are linked, however, depends critically on how costs are allocated. Thus, to assess the extent to which the current approach or other approaches aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to assign costs to NAS users. The implications of adopting alternative funding options to collect revenue from NAS users and address concerns about the current excise tax system vary depending on the extent to which users' revenue contributions reflect the costs those users impose on FAA. This report considers six selected funding options, including two that modify the current excise tax structure and four that adopt more direct charges to users. Given the diverse nature of FAA's activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. Some stakeholders who support the adoption of direct user charges also support a change in FAA's governance structure, but GAO found no evidence adoption of direct charges requires this. Authorizing FAA to use debt financing for capital projects would have advantages and disadvantages. Some stakeholders identify debt financing as attractive because it could provide FAA with a stable source of revenue to fund capital developments, while at the same time spreading the costs out over the life of a capital project as its benefits are realized. Debt financing raises significant concerns, however, because it encumbers future resources, and expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. Concerns regarding borrowing costs, oversight, and encumbering future resources are particularly important in light of the federal government's long-term structural fiscal imbalance. The Departments of Transportation and Treasury provided comments and technical clarifications on a draft of this report which we have incorporated or responded to as appropriate. DOT's comments focused on governance reforms required to adopt a user fee approach, and whether we accurately described the status of FAA's accounting system. Treasury's raised concerns about the level of analytical development for the options and associated issues. Data was not available to conduct the analysis Treasury suggested, and we agree necessary. However, we believe the report provides useful information to facilitate debate on the options.

section_title: Letter
paragraphs: The Federal Aviation Administration (FAA), the Airport and Airway Trust  Fund (Trust Fund), and the excise taxes that support the Trust Fund are  scheduled for reauthorization at the end of fiscal year 2007. 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 National Airspace System (NAS). The  Trust Fund’s uncommitted balance decreased by more than 70 percent  from the end of fiscal year 2001 through the end of fiscal year 2005. These  excise taxes apply to purchases of airline tickets and aviation fuel, as well  as the shipment of cargo. FAA’s remaining funding comes from the  General Fund of the U.S. Treasury (General Fund) (18 percent). The policy  debate over the reauthorization of FAA, the Trust Fund, and the excise  taxes that fund it encompasses a host of critical and complex issues,  including the modernization of the nation’s air traffic control (ATC)  infrastructure and FAA’s efforts to improve cost control and internal  management practices. The agency’s reliance on revenues from both users  and the General Fund recognizes that FAA produces direct benefits for  NAS users and substantial public benefits, including safety, security, and  economic benefits. Stakeholders we talked with all agreed that these  public benefits justify a continued General Fund contribution to FAA’s  budget. However, a key issue raised in the debate over FAA funding, and  the focus of this report, is how the revenues generated from users of the  NAS might be collected. Stakeholders are divided over whether Congress  should continue to rely on the current excise tax structure or adopt an  alternative structure to collect the funding contributed by users.
You requested that we examine FAA’s current funding system and  alternative funding options. Accordingly, we addressed the following key  questions: (1) What advantages and concerns have been raised about the  current approach to collecting revenues from NAS users to fund FAA, and  to what extent does the available evidence support the concerns? (2) What  are the implications of adopting alternative funding options to collect the  revenues contributed by users that fund FAA’s budget? (3) What are the  advantages and disadvantages of authorizing FAA to use debt financing for  capital projects?
To answer these questions, we reviewed relevant economic literature,  policy analysis, congressional testimony, industry group publications, and  stakeholders’ responses to questions FAA asked them about its funding  and alternative options. We also interviewed key stakeholders, including  officials from FAA, the Office of Management and Budget (OMB), the  Congressional Budget Office (CBO), and the Department of the Treasury  (Treasury); representatives of aviation industry groups; and academic and  financial experts. In addition, we examined FAA budget data, Trust Fund  revenue data, FAA forecasts, and aviation activity data. We reviewed the  reliability of these data and concluded that they were sufficiently reliable  for our purposes. We conducted our work from May 2005 through August  of 2006 in accordance with generally accepted government auditing  standards. Details of our scope and methodology are provided in appendix  1.
subsections: section_title: Background
paragraphs: FAA engages in three primary activities: aviation safety oversight, ATC,  and airport infrastructure development (see fig. 1). The costs associated  with each of these activities generally depend on the nature and usage of  the specific service FAA provides. FAA safety activities include the  licensing of pilots and mechanics, as well as the inspection of various  aspects of the aviation system, such as aircraft and airline operations.  According to FAA, the costs associated with these safety activities are  primarily driven by the volume of each (e.g., the number of licenses and  inspections).
ATC includes a variety of complex activities that guide and control the  flow of aircraft through the NAS. Generally, commercial aircraft fly under  instrument flight rules (IFR) that require ATC services throughout a flight.  Such flights rely on FAA staff in control towers to guide them from the  terminal to the runway, and through takeoff. Once in the air and beyond  the immediate vicinity of the airport, they rely on terminal radar approach  control centers (TRACONs) to guide them out of the airspace in a broader  area surrounding the airport. Services provided by control towers and  TRACONs are referred to as terminal services. The TRACONs then pass  flights off to air route traffic control centers (ARTCC), which provide en-  route control until the flights near their destinations; services provided by  ARTCCs are referred to as en-route services. When a flight nears its  destination, control is passed back to a TRACON, and then to tower  guidance, to land and proceed to an airport gate. General aviation’s (GA)  use of these services varies greatly. Nearly all business jet flights file flight  plans for IFR services, as do roughly half of GA piston flights. Many GA  flights operate entirely under visual flight rules (VFR) and may not require  any ATC services at all if they do not fly to airports that have towers.  These other GA flights may require ground control, or rely on beacons or  flight service stations en route. FAA states that the costs imposed by each  flight are influenced by the amount and nature of the specific services it  uses, and by whether the flight operates at peak periods.
FAA funds airport infrastructure development through the Airport  Improvement Program (AIP). AIP is a multibillion-dollar grant program  that provides funding for the airports included in FAA’s National Plan of  Integrated Airport Systems, which includes airports that range from the  largest commercial service airports in the United States to small GA  airports. Unlike safety and ATC services, AIP expenditures are not the  direct result of costs imposed by users of the NAS. FAA distributes AIP  funding based on congressional priorities established in authorizing and  appropriation legislation. Accordingly, apart from some relatively small  administrative expenses, FAA’s spending for AIP does not represent a  “cost” of providing services to users. Therefore, it is not possible to  establish a direct link between AIP expenditures and taxes or charges paid  by system users based on their use of FAA services.
subsections: section_title: FAA Funding
paragraphs: 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, AIP and the Facilities and Equipment account, which funds  technological improvements to the ATC system. The Trust Fund also  provides funding for the Research, Engineering, and Development  account, which funds continued research on aviation safety, mobility, and  environmental issues. In addition, the Trust Fund supports part of FAA’s  operations.
To fund these accounts, the Trust Fund is credited with revenues collected  from system users through the following dedicated excise taxes:    7.5 percent ticket tax on domestic airline tickets    $3.30 domestic passenger segment tax (excluding flights to or from rural  airports)   6.25 percent tax on the price paid for transportation of domestic cargo or    $0.043/gallon tax on domestic commercial aviation fuel    $0.193/gallon tax on domestic GA gasoline    $0.218/gallon tax on domestic GA jet fuel    $14.50/person tax on international arrivals and departures, indexed to    7.5 percent tax on mileage awards (frequent flyer awards tax)    $7.30 per passenger tax on flights between the continental United States  and Alaska or Hawaii (or between Alaska and Hawaii), indexed to  inflation Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The ticket tax  was the largest single source of Trust Fund revenue in fiscal year 2005,  totaling about $5.2 billion, or about 48 percent of all Trust Fund receipts.  The passenger ticket tax was followed by the passenger segment tax and  the international departure/arrival taxes, which each totaled about $1.9  billion; fuel taxes, which totaled $870 million; the cargo/mail tax, which  totaled $461 million; and interest income, which totaled $430 million.  Figure 2 shows the shares received  from each source in fiscal year 2005.
Since the Trust Fund’s creation in 1970, revenues have, in aggregate,  exceeded spending commitments, resulting in a surplus or an  uncommitted balance, although expenditures from the Trust Fund  exceeded revenues in 2005. The Trust Fund’s uncommitted balance,  which was about $1.9 billion at the end of fiscal year 2005, depends on the  revenues flowing into the fund and the appropriations made available from  the fund for various spending accounts. Policy choices, structural changes  in the aviation industry, and external events have affected revenues  flowing into and out of the fund. For example, the uncommitted balance  has been declining in recent years because Trust Fund revenues for the  last 5 years have been less than FAA’s forecasted levels. Figure 3 shows  the fluctuations in the Trust Fund’s uncommitted balance since its  inception.
In addition to Trust Fund revenues, in most years General Fund revenues  have been used to fund FAA. The General Fund contribution has varied  greatly, ranging from 0 percent to 59 percent of FAA’s budget (see fig. 4).  From fiscal year 1997, the year when existing Trust Fund excise taxes  were authorized, through fiscal year 2006, the General Fund contribution  has averaged 20 percent of FAA’s total budget. 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.
section_title: Congressionally Authorized Commission Recommended Changes in FAA’s Funding Structure
paragraphs: The National Civil Aviation Review Commission (Commission) issued a  Congressional report in 1997 analyzing several issues, including alternative  funding means to meet the needs of the nation’s aviation system. The  Commission’s report identified a number of concerns with FAA’s funding  structure as it existed at the time the Commission began its work. To  address these concerns, the Commission made several unanimous  recommendations, including that FAA’s revenues be more closely linked  to the costs of services provided to support ATC activities, including  capital investments. The Commission also recommended that General  Fund revenues be used to fund aviation security and safety activities and  government use of the air traffic system, and that GA operators continue  to pay a fuel tax, although perhaps at a higher rate.
section_title: Some Stakeholders Favor the Current Funding System, but Others Raise Revenue Adequacy, Equity, and Efficiency Concerns
paragraphs: Some stakeholders support the current excise tax system, stating that it  has been successful in funding FAA, has low administrative costs, and  distributes the tax burden in a reasonable manner. Other stakeholders,  including FAA, state that under the current system, the disconnect  between the revenues contributed by users and the costs they impose on  the NAS raises revenue adequacy, equity, and efficiency concerns. Trends  in, and FAA’s projections of, both inflation-adjusted fares and average  plane size suggest that the revenue collected under the current funding  system has fallen and will continue to fall relative to FAA’s workload and  costs, supporting revenue adequacy concerns. Comparisons of revenue  contributed and costs imposed by different flights provide support for  equity and efficiency concerns. However, the extent to which revenue and  costs are linked depends critically on how the costs of FAA’s services are  assigned to NAS users. Thus, assessing the extent to which the current  approach or any other approach aligns costs with revenues would require  completing an analysis of costs, using either a cost accounting system or  cost finding techniques to distribute costs to the various NAS users. FAA  stated that it has made substantial progress in designing a cost accounting  system, implementing it throughout its lines of business, and modifying it  to determine costs by user group.
subsections: section_title: Stakeholders Who Favor Maintaining the Current Funding Structure Cite Its Success and Reasonable Allocation of Funding Burden
paragraphs: Some stakeholders believe that maintaining the current funding structure  for FAA is appropriate because it has been successful in funding FAA for  many years, suggesting that there is no urgent reason to change it.  According to these stakeholders, the revenues collected from users under  the current funding system, along with General Fund revenues provided by  Congress, have been sufficient for the United States to develop a safe and  efficient aviation system. As the number of air travelers grew, so did  revenues going into the Trust Fund. 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 (see fig. 5); FAA estimates that revenues will  continue to increase. In addition, these stakeholders state that  administrative costs of the current system are relatively low.
Another argument put forward by some industry stakeholders and analysts  for maintaining the current funding structure is that this structure provides  a reasonable allocation of the funding burden between commercial  aviation and GA. With the current funding structure, system users who are  subject to the commercial taxes—including commercial airlines, air taxis,  and many fractional ownership operations—contribute about 97 percent  of the tax revenue that accrues to the Trust Fund. The remaining GA  operators, including those who operate purely private corporate and  individual aircraft, contribute about 3 percent. Representatives of the GA  segment of the industry contend that collecting the bulk of the user- contributed revenues from the commercial segment is appropriate  because the ATC system exists at its current size to accommodate the  demands of commercial aviation and GA users should not be asked to  contribute more than the incremental costs that result from also providing  services to GA aircraft. Although the incremental costs are not precisely  known, GA representatives have told us that they believe that the revenues  currently collected from fuel taxes are a rough approximation of the  incremental costs that FAA incurs from providing services to GA aircraft.  According to FAA, all cost studies to date concluded that GA users pay  less than the costs they impose on the system, while commercial aviation  users pay more than the costs they impose on the system.
section_title: Disconnect between Trust Fund Revenues and FAA Costs Raises Concerns That Revenues Will Not Keep Pace with Workload Increases under the Current System
paragraphs: The disconnect between sources of Trust Fund revenues and FAA costs  under the current funding system raises concerns that the current system  will not produce adequate revenue in the future to keep pace with FAA’s  workload increases and, consequently, FAA’s costs. The principle of  revenue adequacy requires a funding system to produce revenues  commensurate with workload changes over time. However, under FAA’s  current funding system, increases in FAA’s workload will not necessarily  be accompanied by revenue increases because users are not directly  charged for the costs they impose on FAA from their use of the NAS.  Rather, Trust Fund revenues are primarily dependent on the prices of  tickets (the domestic ticket tax) and the number of passengers on a plane  (the domestic ticket tax, the domestic passenger segment tax, and the  international passenger tax); neither of these factors are directly related to  workload, which is driven by flight control and safety activities. Long-term  industry trends and FAA forecasts of declines in air fares and the growing  use of smaller aircraft support revenue adequacy concerns.
To illustrate the disconnect between revenues and costs, table 1 provides  an example of revenues generated by different aircraft making similar  flights. The use of multiple flights by smaller aircraft to carry the same  number of travelers as one larger aircraft increases FAA’s workload, but  will not necessarily be accompanied by increased revenues from system  users to fund FAA’s additional costs associated with the workload  increase. This example shows the taxes that would be generated from  transporting 105 passengers from Los Angeles to San Francisco by (1) one  flight using a common narrow-body jet (Boeing 737), and (2) three flights  using a common regional jet (CRJ-200). In this case, the narrow-body jet  has the capacity to carry 132 passengers, while each regional jet has the  capacity to carry 48 passengers.
As the table shows, differences in FAA’s workload are not reflected in  revenues. FAA states, all other factors being equal (e.g., time of flight), that  the total ATC costs of the three regional jet flights would be about three  times the cost of one narrow-body flight. Revenues from the three regional  jet flights, however, total only about $37, or 3 percent, more than the  revenue generated by the one narrow-body jet flight. Revenue increases  are not linked to cost increases because, under the current system,  revenues are primarily influenced by the number of passengers, the  average price of tickets, and the amount of fuel used—not the costs  imposed on FAA through the use of its services.
The disconnect between revenues and workload can work both ways;  increases in the number of passengers on planes (e.g., larger planes or  higher load factors) or increases in fares can result in higher revenues  relative to workload. In fact, load factors have increased over the past  several years, and fares have increased over the past year. However, long- term trends and FAA’s projections for both domestic fares and plane size  suggest that Trust Fund revenues have declined relative to FAA’s  workload and will likely continue to do so for the next several years.
Trends in average fares suggest that the Trust Fund is collecting less  revenue relative to workload than in the past, and FAA’s projections  suggest that this decline will continue. Since the passenger ticket tax is a  percentage of the ticket price, reductions in the average ticket price result  in lower ticket tax revenues relative to FAA’s workload. Domestic airfares,  adjusted for inflation, have steadily declined over the past 25 years, from  an average of $233 in 1981 to $148 in 2005 (see fig. 6). This reduction  represents an average decline of about 1.9 percent per year. Even though  there have been increases in fares over the past year, FAA projects  average fares will continue to decline over time. In FAA’s most recent  forecast, inflation-adjusted domestic yields—a proxy measure for fares— are projected to decline approximately 8.5 percent over the next 10 years.
Trends in the average size of airplanes also suggest that the Trust Fund is  collecting less revenue relative to workload than in the past, and FAA’s  projections suggest that this decline will continue (see fig. 7). Since  smaller planes carry fewer passengers and burn less fuel, reductions in  average plane size mean lower ticket tax, segment tax, and fuel tax  revenue accrues to the Trust Fund relative to FAA’s workload.
This decline in the average number of seats per aircraft is the result of  airlines’ moving toward a substantially greater reliance on regional and  narrow-body jets. Scheduled capacity (available seat miles) increased 29  percent from 1996 through 2005. During this time, wide-body jet capacity  fell 42 percent, narrow-body jet capacity grew 35 percent, and regional jet  capacity grew over 2900 percent. As a result, regional jets accounted for  nearly 10 percent of scheduled capacity in 2005, up from less than 1  percent in 1995. In addition to projecting growth in commercial flights,  FAA is projecting substantial growth in GA traffic, which will also add to  FAA’s workload.
section_title: Some Stakeholders Have Raised Equity Concerns with the Current Funding System
paragraphs: Some aviation stakeholders have expressed concerns 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. As noted, factors that influence the revenue contribution that a  commercial flight makes to the Trust Fund are the number of passengers,  the average price of tickets, and the amount of fuel used. None of these  factors, however, are directly related to the cost of the ATC services that a  flight receives from FAA. Table 2 shows FAA’s estimates of the revenue  contributions made by various flights. Since FAA estimates that similar  flights impose similar costs on the agency, the substantial differences in  the revenue contributions of these flights raise issues of fairness. One  equity issue is that similar commercial flights may contribute very  different amounts of revenue. As shown in this example, a 767 flight  contributes more than twice as much as two similar 737 flights. There is  also a difference between the contributions for the two similar 737 flights;  one flight contributes 14 percent more than the other flight.
Concerns also exist about the fairness of the distribution of the funding  burden between commercial airlines and GA operators. Domestic  commercial passenger flights, and some flights typically considered GA  flights that carry commercial passengers, are subject to, among other  potential excise taxes, the passenger ticket tax, the passenger segment  tax, the cargo/mail tax, and the fuel tax. GA flights (excluding those that  carry commercial passengers) are subject only to a fuel tax. As a result,  the revenue contributions of similar commercial and GA flights may be  substantially different. For example, the taxes that the Trust Fund would  receive from two different types of business jet flights would be  substantially less than the taxes received from similar commercial flights  (see table 2).
Although the commercial and GA flights might receive the same services  from FAA, raising equity concerns because of the large difference in  revenue contribution, there is debate over whether GA and commercial  flights should be assigned the same costs for similar flights because  parties disagree on how to assign the fixed costs associated with the ATC  system. Representatives of the commercial aviation industry favor  assigning those costs to all system users in proportion to their use of the  system. Representatives of GA, on the other hand, state that the system  exists at its present size to serve the needs of the commercial aviation  industry and that GA should be assigned only the incremental costs of  serving GA (i.e., those costs that would not otherwise exist). Without a  consensus on how to assign ATC costs to users, it is not possible to assess  the extent to which the current approach or any other results in a  distribution of the funding burden between commercial airlines and GA  operators that approximates the distribution of costs attributable to those  groups.
section_title: Current Funding System Lacks Strong Incentives to Encourage Efficient Use of the NAS
paragraphs: 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 NAS, 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.
Given the importance of some of these other factors to users’ decisions  about using the NAS, the influence of prices charged for FAA’s services on  these decisions may be comparatively small for some users.
As discussed previously, FAA states that under the current funding system  the taxes collected from users do not accurately reflect the costs those  users impose on the system; some flights likely pay more than the costs  they impose, while others likely pay less. These price differences suggest  that the current funding structure creates incentives for inefficient use of  the NAS. Users who pay more in taxes than the costs they impose may  make less than optimal use of the system, while those who pay less than  the costs they impose may make more than optimal use of the system.
An airline’s decision about how many flights to offer in a given market  illustrates how the current system does not provide incentives for efficient  use of the system. In this example (the same one used for the revenue  adequacy discussion), an airline is deciding how many daily flights it  should provide for the Los Angeles to San Francisco market (see table 3).  It estimates that the market demand at the fare it is charging totals 105  passengers per day, and it faces the choice of providing the market with  one daily flight with a narrow-body jet (Boeing 737), or three daily flights  with a regional jet (CRJ-200)—all flight choices are assumed to depart  during peak periods. In this scenario, the revenue collected from the three  regional jet flights—$1,215—is about 3 percent more than the revenue  collected from the one narrow-body jet flight—$1,178. FAA states  however, that each flight would impose similar costs on the agency, so  FAA’s costs would be roughly 3 times more to handle the three regional jet  flights than to handle the one medium jet flight. In this example, however,  there is little financial incentive ($37) for the airline to limit its imposition  of additional costs on FAA by using one flight instead of three flights.
This situation is made worse during times when the NAS is congested.  There are two issues associated with congestion. The first is plane size; if  all other factors are equal, such as demand for air travel, it is more  efficient to serve congested airspace with larger planes because they can  move more passengers per flight. Second, when congestion is a factor,  efficiency requires consideration of the delay costs imposed on other  system users. Charging similar flights equally, regardless of plane size, and  incorporating congestion costs, would create financial incentives to  improve efficiency.
section_title: Alternative Funding Options Present Both Advantages and Disadvantages
paragraphs: Alternative funding options for collecting revenues from NAS users  present both advantages and disadvantages. The degree to which  alternative funding options could address concerns about the current  excise system ultimately depends on the extent to which the contributions  required from users actually reflect the costs they impose on the system.  Given the diverse nature of FAA’s activities, a combination of alternative  options may offer the most promise for linking revenues and costs.  Switching to any alternative funding option would raise administrative and  transition issues. For example, any cost-based funding system would  require FAA to complete the appropriate cost analysis using either a cost  accounting system or cost finding techniques. Some stakeholders who  support the adoption of direct user charges also support a change in FAA’s  governance structure—for example, commercializing air navigation  services—but we found no evidence that the adoption of direct charges  would require a governance change.
The six funding options considered here include two that would modify  the current excise tax structure and four that would adopt more direct  charges to users. Without more detailed information and an understanding  of the costs different flights impose on the NAS, any assessment of the  current system or alternative funding options is only preliminary. The  degree to which alternative funding options could address revenue  adequacy, equity, and efficiency concerns, relative to the current system,  ultimately depends on the extent to which the contributions required from  users actually reflect the costs they impose on the system. More precise  assessments of the current or alternative funding options are possible only  if cost finding techniques are used throughout FAA.
subsections: section_title: Modifications to the Current System
paragraphs: The two options we reviewed that would modify the current excise tax  structure are relying solely on a fuel tax and increasing the passenger  segment tax to replace the passenger ticket tax.
subsections: section_title: Fuel Taxes
paragraphs: One possible modification to the current system would be to increase the  current aviation fuel taxes—which levy a specific amount per gallon of  fuel—to replace the revenue lost by eliminating the remaining excise taxes  and charges. Advocates of reliance on a fuel tax funding system state that  it is appealing compared to the current system because there is a  correlation between the time a plane spends in the system and the amount  of fuel a plane uses. To the extent that time in the system is related to cost,  this relationship creates at least a partial link between revenues and costs,  which could partially address the revenue adequacy, equity, and efficiency  concerns about the current system. In addition, advocates of the fuel tax  state that a fuel tax is inexpensive and simple to administer. Under the  current system the Internal Revenue Service (IRS) is responsible for  collecting fuel taxes at the point of sale, and these funds are then  deposited to the Treasury, which then credits the Trust Fund. FAA has no  responsibility for collecting the revenue. Thus, transitioning to an all-fuel- tax funding system would be relatively easy, since the administrative  system is already in place. Furthermore, the tax is easy for consumers to  understand, and compliance is simple and inexpensive.
From a revenue adequacy perspective, fuel taxes compare favorably with  other existing excise taxes because they are more directly linked to  workload. Thus, all things being equal, increases in workload over time  would likely result in fuel tax revenue increases. Nonetheless, two factors  that lead to lower fuel consumption will erode the ability of a fuel tax to  generate revenue over time. First, while the incentive created through the  tax to conserve fuel will promote more efficient use of the system, it will  lead to lower fuel consumption, which will reduce revenues. Second,  technological advances that increase the fuel efficiency of airplanes will  reduce fuel consumption relative to FAA’s workload, leading to lower  revenues relative to FAA’s workload; the new 787 aircraft and a recent  effort to outfit planes with winglets are examples of these advances.  Thus, it is likely that the fuel tax rate would have to be raised from time to  time to be adequate in the long run.
The extent to which a fuel tax would address equity issues appears to be  limited. Although FAA states that there is a correlation between the time a  plane spends in the NAS and fuel consumption, the extent to which fuel  consumption correlates with costs imposed on FAA has not been  established. First, there may be a relationship between time in the system  and en-route control costs, but the relationship between time in the system  and the costs of other FAA activities, such as terminal costs, is not  obvious. Second, even if the fuel tax were limited to funding en-route  costs, the connection between fuel consumption and those costs appears  to be incomplete. For example, since heavier planes burn more fuel per  mile than lighter planes, they would be required to contribute more for  spending the same amount of time in the system.
As with equity issues, the potential for a fuel tax to address efficiency  issues appears limited because the connection between revenues and  costs is incomplete. A fuel tax can create an incentive for operators to  minimize their fuel consumption (e.g., by flying at off-peak times to avoid  congestion delays) and, therefore, their time in the NAS. To the extent that  time in the system correlates with costs imposed, this incentive can lead to  improved efficiency. However, any relationship between time in the  system and costs imposed on FAA appears to be limited to en-route  control costs.
section_title: Passenger Segment Tax
paragraphs: A second option that represents a modification of the current system is to  increase the current passenger segment tax to replace revenues lost by  eliminating the current passenger ticket tax. Under this option, all other  current excise taxes would remain unchanged, implying no change to  revenues collected from cargo carriers and GA operators. This option  would likely increase the tax differential between passengers traveling on  one-stop (or more than one-stop) flights and those traveling on nonstop  flights on the same route. As a result, there might be a shift in travelers’  demand toward more nonstop service, which might, in turn, lead airlines  to operate more nonstop service. Because there is a partial link between  the number of segments an airline operates and the cost of the services  FAA provides to that carrier, this option might have some advantages over  the present tax structure in terms of revenue adequacy, efficiency and  equity. However, because there is no link to the cost of some of the other  services that FAA provides, these advantages are limited.
Compared to the present funding structure, this option might address  concerns about revenue adequacy over time, but many of the concerns  associated with the current system would likely remain. One way in which  a passenger segment tax might better correlate to FAA’s workload is that  commercial flights that include a stop require more terminal services from  FAA than nonstop flights, and taxes based on the number of passenger  segments traveled will increase as the number of stops increases. In  addition, the current passenger segment tax is indexed to the Consumer  Price Index so that it is adjusted each year to account for inflation, which  preserves the purchasing power of the revenues collected. However, other  services that FAA provides could increase without any increase in  passenger segment tax revenues. For example, if the average distance of  commercial flights increases, the cost of providing en-route services will  rise, but the passenger segment taxes paid will not rise because they are  not based on distance traveled or time in controlled airspace.  Furthermore, passenger segment taxes apply only to commercial flights,  so they have no advantage over ticket taxes in providing revenue adequate  to fund cost increases associated with providing services to cargo and GA  aircraft. In addition, there would be no improvement in providing adequate  revenue for safety and security expenditures.
Compared to ticket taxes, higher flight passenger segment taxes have the  potential to increase equity by better aligning revenues with costs, and  they create some additional incentives for efficient use of FAA services.  However, these effects are likely to be limited because the tax revenues  are aligned only to some cost elements and the tax applies only to  commercial aircraft. With increased passenger segment taxes, the  difference in the amount of taxes commercial airlines would have to pay  for one-stop service compared with nonstop service would be greater. This  greater difference in taxes might represent an improvement in equity  compared to the present funding system because one-stop flights require  more terminal and approach services from FAA than nonstop flights. This  greater difference in taxes could also create an incentive to provide more  nonstop service. Substituting nonstop for one-stop service could reduce  the airlines’ need for FAA’s terminal and approach services. However, this  incentive could be quite small relative to other factors that influence  airlines’ service-offering decisions, so the effect on efficiency could also be  quite small. In addition, airlines would have no additional incentive to be  efficient in their use of en-route services because the passenger segment  tax is not linked to time in controlled airspace, and there would be no  change from the current structure in incentives for cargo and GA  operators.
Administrative and transition issues would be minimal, since this option  would require only a change in the current tax per flight segment and the  elimination of the passenger ticket tax.
section_title: Direct Charges
paragraphs: The four funding options we reviewed that would involve more direct  charges to users include weight/distance charges, en-route charges, flight  segment charges, and certification charges.
subsections: section_title: Weight/Distance Charges
paragraphs: Charges based on weight and distance traveled are used by a number of  foreign air navigation service providers and are supported by the  International Civil Aviation Organization. As suggested by the name, this  option would base charges to users on the weight of the plane and the  distance it travels within the NAS. According to their advocates,  weight/distance charges are more appealing than the current system  because they would establish a more direct relationship between revenues  and costs by incorporating distance into the formula, thereby creating an  incentive to limit excess use of FAA’s ATC en-route services. In addition,  advocates say, weight/distance charges would strike a balance between  basing charges on the ability-to-pay principle and more directly linking  costs and revenues by incorporating both weight and distance in the  distribution of costs among users.
A weight/distance charge, relative to the current funding system, would be  likely to improve the revenue adequacy of the system. Revenue adequacy  is addressed by the incorporation of a cost component into the  weight/distance formula. Generally, air navigation service providers that  use a weight/distance formula regularly adjust the cost component to  ensure that revenues match costs. For example, FAA’s counterpart in  France—la Direction Générale de l’Aviation Civile—annually adjusts the  cost component of its weight/distance formula on the basis of en-route  charges. This adjustment ensures that revenues not only cover costs, but  also do not exceed costs.
As with the fuel tax, the extent to which a weight/distance charge would  address equity issues appears to be limited. While there may be a  relationship between the distance a plane travels in the NAS and the costs  it imposes, the introduction of the weight component into the formula  weakens any such connection. For example, since heavier planes would  be charged more than lighter planes, they would be required to contribute  more for traveling the same distance in the system, even though they may  not impose greater costs on the ATC system. If a relationship between  weight and distance in the system and costs imposed can be established, it  is likely to be limited to en-route control costs. There is no obvious  relationship between the weight/distance formula and other FAA  activities—terminal control services and safety activities.
Since the connection between revenues and costs is incomplete because  of the weight component, the potential for a weight/distance charge to  address efficiency issues also appears limited. The distance component of  a weight/distance charge creates an incentive for operators to minimize  their use of the NAS. To the extent that distance in the system correlates  with costs imposed, this incentive could improve efficiency. However, the  correlation between distance and costs imposed is limited by the  introduction of the weight component. Furthermore, the relationship  between distance in the system and the costs imposed on FAA is likely to  be limited to en-route control costs, excluding consideration of the costs  associated with terminal control and safety activities.
Implementing a weight/distance charge would also involve significant  administrative and transition issues. FAA would have to determine how to  administer a weight/distance charging system for which it does not  currently have the organizational capacity. FAA stated that one option  would be to contract the billing out to a private party, much as European  Union countries such as France contract out their billing to Eurocontrol.
section_title: En-route Charges
paragraphs: En-route charges would be based on the time users spend in the NAS or  the distance they travel through the NAS. According to their advocates, en- route charges are more appealing than the current system because they  would create a more direct relationship between revenues and costs.  Therefore, compared to the current system, advocates say en-route  charges would (1) better ensure that revenues are adequate to cover costs  over time, (2) address equity issues, and (3) create incentives for efficient  use of the current system.
An en-route charge, relative to the current funding system, would be likely  to improve the revenue adequacy of the system. As with weight/distance  charges, en-route charges could address revenue adequacy concerns by  incorporating a cost component into the charging formula that could be  regularly adjusted to reflect any changes in costs. This approach could  ensure, over time, that revenues match costs.
As with other funding options discussed here, the ability of en-route  charges to address equity and efficiency issues raised by the current  system appears to be limited. According to FAA, there is a strong  relationship between time and distance in the system and en-route costs  imposed by users. Thus, if en-route charges were limited to funding en- route control costs, they might address equity issues raised by the current  system by equating charges to costs imposed, depending on how costs are  assigned. Furthermore, en-route charges for en-route control would create  clear financial incentives to use the system more efficiently; less use of the  system would lead to proportionately lower charges. However, there is no  obvious relationship between time or distance in the system and other  FAA activities—terminal control services and safety activities. As a result,  if en-route charges were used to fund all FAA activities, their ability to  address equity and efficiency issues is unclear.
Implementing en-route charges would also involve significant  administrative and transition issues. FAA would have to develop the  organizational capacity to administer and collect en-route charges, which  would include completing the appropriate cost analysis using either a cost  accounting system or cost finding techniques.
section_title: Flight Segment Charges
paragraphs: Flight segment charges to users would be based on the departures and  landings that aircraft make at various airports throughout the NAS.  According to their advocates, flight segment charges are more appealing  than the current system because they would establish a more direct  relationship between revenues and costs. Therefore, compared to the  current system, advocates say that flight segment charges would (1) better  ensure that revenues are adequate to cover costs over time, (2) address  equity issues, and (3) create incentives for efficient use of the current  system by directly connecting charges with costs imposed by users.
A flight segment charge, relative to the current funding system, would be  likely to improve the revenue adequacy of the system. As with  weight/distance charges, flight segment charges could address revenue  adequacy concerns by incorporating a cost component into the charging  formula that could be adjusted regularly to reflect any changes in costs.  This approach could ensure that, over time, revenues match costs.
As with other funding options discussed here, the ability of flight segment  charges to address equity and efficiency issues raised by the current  system appears to be limited. FAA states that there is a strong relationship  between departures and landings in the system and costs imposed by  flights for terminal control handled by TRACONs. Thus, if flight segment  charges were limited to funding terminal control costs, they might address  equity issues raised by the current system by equating charges to costs  imposed, depending on how costs were assigned. Furthermore, flight  segment charges for terminal control would create clear financial  incentives to use the system more efficiently: less use of the system would  lead to proportionately lower charges. However, there is no obvious  relationship between flight segments and other FAA activities—en-route  control and safety activities. As a result, if flight segment charges were  used to fund all FAA activities, their ability to address equity and  efficiency issues would be limited.
Implementing flight segment charges would involve administrative and  transition issues similar to those associated with en-route charges. FAA  would have to develop the organizational capacity to administer and  collect flight segment charges and complete the appropriate cost analysis  using either a cost accounting system or cost finding techniques.
section_title: Certification Charges
paragraphs: Certification charges to users would cover specific safety services  provided by FAA, such as certificates for air worthiness, air operators, and  air agencies; registration for air personnel, aircraft, and medical personnel;  designees and delegations; and international training. According to their  advocates, certification charges would be more appealing than the current  system because they would establish a direct relationship between  revenues and costs, which would address the revenue adequacy, equity,  and efficiency concerns associated with the current system.
Certification charges have the potential to fulfill revenue adequacy  requirements for safety costs over time because they are directly linked to  workload; charges would be assessed for each certificate issued. Thus, as  workload changed over time (increasing or decreasing), so would the  revenue from certification charges. In addition, any certification system  would likely have the flexibility to adjust charges as costs changed.  Certification charges, however, could not support all of FAA’s funding  requirements, so this option would have to be used in combination with  other revenue sources. According to FAA officials, there is a clear  relationship between certification charges and the specific safety activities  for which users would be charged. Thus, if certification charges were  limited to funding the associated safety costs, they would address equity  issues raised by the current system by equating charges to costs imposed;  this equity improvement, however, would be limited to funding for safety  activities. Furthermore, certification charges would likely create financial  incentives to use the system efficiently, since charges would increase in  proportion to use.
FAA raises the concern that imposing certification charges for safety  services would adversely affect safety because such charges would create  incentives to avoid the use of safety services and, in some cases, ATC  services. Our review of available data from five air navigation service  providers in other countries found that since their air traffic control  services were commercialized and charges were implemented, the safety  of the services remained the same or improved. For example, data from  New Zealand and Canada show fewer incidents of loss of separation (the  distance required between planes) since commercialization.
Implementing certification charges would involve administrative and  transition issues similar to those associated with en-route and flight  segment charges. FAA would have to develop the organizational capacity  to administer and collect certification charges and complete the  appropriate cost analysis using either a cost accounting system or cost  finding techniques.
section_title: Combining Funding Options Might Best Address Concerns
paragraphs: Using a combination of workload-related taxes or charges to fund FAA  might best address the revenue adequacy, equity, and efficiency concerns  associated with the current funding structure, given that the costs of FAA’s  ATC and safety activities are driven by different factors. No single option  that we reviewed creates a direct link between revenues and all  components of FAA’s activity costs. Fuel taxes, weight/distance charges,  or en-route charges based on time or distance spent in the NAS could be  used to create a more direct link with FAA’s costs of providing en-route  ATC services. A segment tax for passengers or a flight segment charge  could be used to create a more direct link with the costs of FAA’s terminal  services. Certification charges could be used to create a more direct link  with the costs of FAA’s various safety-related activities. Thus, some  combination of options, such as en-route charges to fund en-route costs,  flight segment charges to fund terminal control costs, and certification  charges to fund some safety costs, might best address concerns with the  current system by providing a better link between revenues and costs than  any of these options used separately. According to one stakeholder,  however, the administrative expense of using multiple funding options  might outweigh the benefits of such an approach. According to FAA, other  air navigation service providers, such as those in the European Union,  have been able to administer direct charges without incurring excessive  administrative costs.
section_title: Cost-Based Charges Can Be Imposed under FAA’s Current Governance System
paragraphs: In discussing alternative funding options, some stakeholders have stated  that if user charges are adopted, users should have more input into FAA’s  operation, citing the “user pays, user says” principle. To many  stakeholders, this principle implies that the adoption of direct user  charges would require a change in FAA’s governance structure that could  limit congressional influence on the agency while expanding the influence  of airlines and other users. Many stakeholders support such a change,  pointing out that many countries that rely on direct charges to fund  aviation activities have commercialized their air navigation service  providers.
We did not find any evidence that a change in FAA’s governance structure  would be required if direct charges were adopted. Federal law provides  general authority for federal agencies to institute user charges except  when otherwise prohibited. In FAA’s case, Congress has specifically  prohibited the agency from instituting any new user charges under this  general authority in every DOT appropriation act since 1998. Furthermore,  under the current funding system, users already provide most of the  revenue used to fund FAA programs through excise taxes. Adopting direct  charges would change the manner in which revenues are collected from  users, but would not necessarily change the aggregate contribution from  users. Since users pay most of FAA’s program costs now, it is unclear what  additional role users should play in FAA’s decision-making under an  alternative system.
Recent reforms in France’s Direction Générale de l’Aviation Civile  illustrate how a government agency has moved toward a cost-based  system of charges to fund the air navigation services it provides without  changing the underlying governance structure. The French organization’s  activities fall into two broad divisions —safety and regulation, and ATC.  Safety and regulation are funded through a combination of general  government support and specific user charges. For example, there are  charges for pilots’ licenses, medical certificates, inspections, and aircraft  registration. ATC activities are split into two categories—en-route control  and terminal control. For en-route control, France must abide by the  European Union’s regulations, which are based on principles established  by the International Civil Aviation Organization. This approach  incorporates a weight/distance formula that is used to determine charges  for specific aircraft based on their activity. Although the formula  distributes charges across aircraft differently by incorporating weight as a  factor, the amount of the charges is based on cost data that are verified by  the European Union. Eurocontrol actually bills users of the system; all  European Union countries collect en-route charges through this  organization. Terminal control charges are not directly based on cost  factors, but are billed along with the en-route control charges through  Eurocontrol.
section_title: Alternative Capital Financing Methods Have Advantages and Disadvantages
paragraphs: Allowing FAA to use debt financing for capital projects have advantages  and disadvantages. Many stakeholders have identified the use of debt  financing—such as bonds—as a means of funding FAA capital projects,  such as components of NGATS or existing ATC facilities and equipment.  Some stakeholders believe debt financing is attractive because it could  provide FAA with a stable source of revenue to fund capital development  and, at the same time, spread the costs out over the life of a capital project  as its benefits are realized. If Congress approved the use of debt financing  for FAA, the agency could borrow through the Treasury or directly from  the private capital market, depending on what authority Congress  provided. Debt-financing raises significant concerns, however, because it  encumbers future resources and because expenditures from debt  proceeds may not be subject to the congressional oversight that  appropriations receive. In addition, debt financing is subject to federal  budget scoring rules and raises issues associated with borrowing costs  that are particularly important in light of the federal government’s long- term fiscal imbalance.
subsections: section_title: Some Stakeholders Believe Debt Financing Offers Advantages
paragraphs: According to its supporters, debt financing has a number of advantages,  one of which is that it could provide FAA with a stable source of revenue  to fund capital development. FAA officials state that the uncertainty  associated with the appropriation process makes planning for large,  complex, and expensive ATC systems difficult. Another advantage cited is  that debt financing would allow the costs of capital projects to be repaid  as the benefits are received, better aligning costs and benefits. Finally,  supporters of debt financing, including an investment firm, state that the  private capital market may offer disciplinary mechanisms that may  encourage FAA to manage itself more efficiently. The discipline occurs  because, to receive funding for projects, FAA would need to adhere to  bond covenants, which are rules that govern how FAA will pay obligations.  One investment firm noted, however, that projects could be  overcapitalized, or “gold plated,” if FAA were given the authority to  borrow without caps on the number and costs of projects it funds. For  example, a significant amount of debt could be issued for projects with  minimal marginal benefits to users. As a result, an investment firm noted,  there may need to be a governing board with multiple aviation  stakeholders, including airlines, airports, and air traffic controllers, to  determine which capital projects are needed and how they will be funded.  Treasury officials also question whether the private capital market will  provide any market discipline to FAA debt obligations because investors  may perceive that the obligations are backed by the federal government,  and not just agency revenues. Treasury officials further noted that they  could perform credit analyses similar to those done by private investment  firms, which, when combined with statutory borrowing caps and other  credit terms and conditions, would serve to protect the financial interests  of the general taxpayer.
section_title: FAA Could Borrow from the Treasury or the Private Capital Market
paragraphs: To borrow from the Treasury, FAA would need borrowing authority from  Congress. There are various ways Congress can provide borrowing  authority, each with different legal, financial, and structural implications.  For example, some government entities generate their own revenue to pay  for borrowing costs, whereas others pay with appropriations. Some  government entities with borrowing authority are federal agencies, such as  the Bonneville Power Administration (BPA), while others are independent  establishments, such as the U.S. Postal Service. Once borrowing  authority is granted, the Treasury sets the terms and conditions for  borrowing. FAA could borrow from the Treasury, using revenue options  such as taxes, user fees, or appropriations to repay the debt, depending on  the type of bond. Figure 8 describes the process for borrowing from the  Treasury.
In borrowing from the private capital market, FAA could issue general  revenue (GR) or general obligation (GO) bonds. Both types of bonds  would require FAA to pay interest and principal to bond holders, but the  revenue sources used to make these payments would differ. A GR bond  requires taxes or user fees to pay the interest and principal, while a GO  bond uses expected appropriations. Several nonfederal government  entities currently borrow from the private capital market using GR and GO  bonds. In aviation, most commercial airports issue GR bonds for airport  capital improvements that are backed by general revenues from the  airport, including aircraft landing fees, concessions, and parking fees, for  airport capital improvements. In surface transportation, some states issue  grant anticipation revenue vehicle (GARVEE) bonds backed by anticipated  federal apportionments to fund highways. However, the eligibility of a  GARVEE bond for reimbursement with federal apportionments does not  constitute a commitment by the federal government to provide for paying  the principal or interest on the bond. The Department of Transportation,  which oversees the GARVEE program, reimburses the state for debt  service expenses as part of the annual federal-aid obligation authority.  Figure 9 describes the process for borrowing from the private capital  market.
For FAA to borrow from the private capital market, Congress would need  to give the agency statutory authority. Depending on how Congress writes  the statute, FAA could use any revenue option—taxes, user fees, or  appropriations—to secure the bond. According to some representatives of  investment banks and Treasury officials, no organizational changes for  FAA, such as a change to a government corporation or corporate entity,  would be needed.
Currently, some government corporations borrow from the private capital  market, including the Tennessee Valley Authority (TVA). TVA is an  independent, wholly owned federal corporation established by the  Tennessee Valley Authority Act of 1933 that sells bonds in the private  capital market to finance its capital improvements for power programs.  TVA pays for its operations and debt service with revenues from its energy  sales. Since TVA first issued bonds, Moody’s Investors Service and  Standard & Poor’s have assigned TVA’s bonds their highest credit rating— Aaa/AAA. TVA does not receive a direct federal guarantee, although the  interest rate charged by the private capital market suggests that there is an  implied federal guarantee.
section_title: Debt Financing Raises Budgetary Concerns
paragraphs: Debt financing is subject to federal budget scoring rules and raises issues  regarding borrowing costs that are particularly important in light of the  federal government’s long term structural fiscal imbalance. How the  borrowing authority is carried out will affect both budget scoring and  costs. When an agency uses borrowing authority to finance a capital  project, budget authority and obligations are recorded in the budget when  the investments are made. Current budget scoring rules require that  budget authority and obligations for the full cost of capital projects be  scored upfront in the year that the obligations are made. Over time, the  outlays will equal the budget authority and obligations that were scored  upfront. As an example, if FAA borrowed $5 million with a 10 year bond to  purchase air traffic control equipment, the $5 million would be scored as  budget authority and obligations in the year or years in which FAA signed  the contract or contracts to purchase the equipment, and not distributed  annually over 10 years. Since this budget treatment is the same as if  appropriations were obtained, there is little scoring incentive for an  agency to borrow.
Among the negative consequences of not scoring all government activities  in the year in which obligations are made, according to CBO, is that the  federal government’s obligations are understated. A Treasury official said  the Treasury is supportive of budget scoring, noting that if the borrowing  is for a purely governmental purpose, then that activity should be scored  according to federal budget scoring rules. We have also reported that up- front budget scoring for capital projects should be maintained, since the  budget should reflect the government’s commitments up front.
If FAA was granted borrowing authority, the associated costs would likely  be higher if the agency borrowed directly from the private capital market  instead of through the Treasury. According to Treasury and  representatives of investment firms, the federal government’s costs  associated with debt financing for FAA’s capital projects would likely be  lower if FAA borrowed through the Treasury than if FAA borrowed  directly from the private capital market because the Treasury would likely  be charged a lower interest rate to borrow money. Interest rates charged  to FAA would likely be higher because bonds issued by FAA would likely  be viewed as a greater credit risk compared to Treasury bonds because  Treasury’s bonds are backed by the full faith and credit of the U.S.  government, whereas FAA debt would not be. In addition, if FAA  borrowed directly from the private capital market, the transaction costs of  borrowing would likely be higher than if FAA borrowed through the  Treasury; investment banks that serve as debt underwriters charge fees for  these services, while the Treasury would charge a minimal administrative  fee, if any. Treasury officials told us that it is the agency’s long-standing  policy that all debt issued by federal entities, including FAA, should be  issued solely to the Treasury because centralized financing of all such debt  through the agency is the least expensive, most efficient means of  financing this debt. The costs to the government associated with funding  FAA’s capital spending through appropriations would be comparable to  the costs of borrowing through the Treasury.
The costs of borrowing from the private sector are based, in part, on how  risky the revenue is that will be used for bond interest payments. Although  all revenue options—taxes, user fees, and appropriations—can be used to  repay borrowings, each option has a different risk profile. The Treasury  noted that if FAA were to borrow from the private capital market against  revenues that were subject to appropriations, there would most likely be a  risk premium added to the credit rating to compensate for the risk that  appropriations may not be provided. This risk premium would make  borrowing more expensive. However, representatives from investment  firms we interviewed noted that FAA may receive a high credit rating given  that ATC services are essential and FAA has a monopoly in providing  them. If a capital project has a high degree of “essentiality,” then it is  assumed that the government will pay for the project through  appropriations if that is the revenue source. Representatives of an  investment firm we interviewed also noted that FAA may receive an  implied federal guarantee because it is a federal agency. However,  representatives of another investment firm we interviewed also said that  many of FAA’s assets may have a low degree of marketability. That is,  lenders may have difficulty selling an asset in the market in case of a bond  default because there may be few willing buyers in the market for it.
Borrowing costs are particularly important in light of the federal  government’s long-term fiscal imbalance. As the baby boom generation  ages, 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, placing severe pressures on all  discretionary programs, including those that fund defense, education, and  transportation. Our simulations show that by 2040, revenues to the federal  government might barely cover interest on the debt—leaving no money for  either mandatory or discretionary programs—and that balancing the  budget could require cutting federal spending by as much as 60 percent,  raising taxes by up to 2½ times their current level, or some combination of  the two. Accordingly, any program or policy change that may increase  costs requires sound justification and careful consideration before  adoption. We previously reported that agencies with authority to borrow  were financing a large portion of their programs with debt and were  repaying their debt with appropriations or new borrowing, rather than  through revenue collections. As a result, we recommended that only  those agencies that would, in all likelihood, be able to repay their  borrowing through revenue collections be granted authority to borrow.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOT and Treasury for review and  comment. We received comments from DOT through an e-mail from FAA’s  Director of the Office of Aviation Policy and Plans on September 11, 2006,  and from Treasury through an e-mail from the Deputy Assistant Secretary  of Government Financial Policy on September 8, 2006. Neither DOT nor  Treasury explicitly agreed or disagreed with our observations, and both  raised a number of concerns.
DOT stated that, in its opinion, although a change in FAA’s governance  may not be statutorily required, it may be important as a matter of policy.  DOT stated that because air navigation service providers are by nature  monopoly providers, users need assurance that their concerns are taken  into account in cost control and investment decisions, particularly under a  system that more closely ties users’ contributions to the costs of the  system. DOT stated that an alternative governance mechanism, along with  user fees, could give system users a structured advisory role in how  moneys are spent, costs are allocated, and charges are set to recover those  costs, while still retaining the inherently governmental decision-making  authority within FAA and DOT. In addition, DOT maintained that a  governance mechanism specifically designed to give users input into  investment decisions and cost recovery would add a valuable layer of  discipline in optimizing the system to accommodate users’ needs most  efficiently.
In contrast, according to DOT, a system in which FAA/DOT could charge  fees to cover costs with no meaningful stakeholder involvement would be  much less attractive to the stakeholders. Finally, DOT stated, such an  arrangement is fully consistent with the position of the International Civil  Aviation Organization, which calls for user charges to be set in  consultation between the service provider and the user community.
DOT may want to encourage Congress to consider the issue of governance  structure. However, we did not include an analysis of governance issues in  the scope of our review; therefore, we did not provide a more detailed  discussion of the issue in this report.
DOT stated that our discussion of the need to analyze FAA’s costs implied  FAA has not developed any cost accounting or cost allocation systems.  Although we agree that FAA has made progress in implementing a cost  accounting system, its current accounting system is not able to provide the  information required for a cost allocation analysis. Therefore, in our view,  our report does not mischaracterize the status of FAA’s cost accounting  system by stating that an analysis of the extent to which the current  funding approach, or alternative funding approaches, aligns costs with  revenues would require the completion of a cost accounting system or the  use of cost finding techniques. Our point is that this capability would be  needed to operate under a cost-based user charge system.
DOT stated that it believes user fees would provide greater revenue  stability than taxes because user fees could be set up to be adjusted  periodically without changes in the law, thus providing greater flexibility  in aligning revenues to cover costs. Nonetheless, we continue to believe  that revenue stability is not likely to vary much across the funding options.  Significant decreases in the demand for air travel would decrease revenue  regardless of whether the current funding structure is maintained or any of  the options are adopted. Furthermore, increasing direct user charges while  air travel demand was falling would increase costs for aircraft operators at  the same time as their revenues were declining and might be no easier  than increasing excise taxes.
DOT also provided some clarifying and technical comments, which we  incorporated where appropriate.
According to Treasury, GAO raised several critical issues, but did not  provide any analysis that would help policymakers judge reform options.  Specifically, Treasury expressed concern that we did not (1) provide a  more comprehensive discussion of FAA costs and cost shares, including  any available cost information that provides insight into the issue, (2)  evaluate FAA’s efforts to implement cost accounting, and (3) state  whether FAA’s cost accounting program is likely, when completed, to  generate cost information that is useful in determining a fair and efficient  distribution of costs among users. We agree with Treasury that a more  detailed analysis of FAA costs and cost shares should be conducted to  inform the FAA reauthorization debate, and that this information would  improve the analysis of specific alternative funding options. FAA’s current  accounting system is not able to provide the information required for a  cost allocation analysis. We believe that using partial cost information, as  suggested by Treasury, would not be appropriate. Moreover, conducting a  comprehensive cost analysis was beyond the scope of this report.
Treasury also said that our report repeats claims made by interest groups  without evaluating them, giving the sense that each argument is equally  valid, even though policymakers need some way to evaluate them. This  was not the objective of the report. We provided a basis for evaluating the  current and alternative funding options by outlining criteria, including  revenue adequacy, equity, and efficiency, and discussing the implications  of these criteria with respect to specific funding options.
Treasury raised concerns that a number of statements were attributed to  “some stakeholders,” rather than the specific groups or individuals that  made the statements, noting that attribution helps the reader evaluate the  statements. In response, we added some attribution as appropriate.
Treasury also noted its long-standing policy that all debt issued by federal  entities, including FAA, should be issued solely to the Treasury, because  centralized Treasury financing of all such debt is the least expensive, most  efficient means of financing this debt. Treasury further maintained that  market discipline would not be applied to FAA debt obligations issued  directly to the private capital market because investors would perceive the  obligations were backed by the federal government. We added language to  the report to clarify Treasury’s position on these issues.
Treasury also provided some clarifying and technical comments, which we  incorporated where appropriate.
As agreed with your offices, unless you announce the contents of this  report earlier, we plan no further distribution until 30 days from the date  of this letter. At that time, we will send copies of this report to interested  congressional committees; the Secretary of Transportation; the  Administrator, FAA; the Secretary of the Treasury; and the Director, OMB.  Copies will also be available to others upon request and at no cost on  GAO’s Web site at www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3834 or dillinghamg@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 key contributions to this report  are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: To accomplish all of our objectives, we reviewed relevant research,  including GAO products, academic research, congressional testimony,  industry group publications, and stakeholders’ responses to questions FAA  asked them about its funding. We also interviewed    officials from government agencies, including the Federal Aviation  Administration (FAA), the Office of Management and Budget (OMB), the  Congressional Budget Office (CBO), and the Department of the Treasury  (Treasury);  representatives of aviation industry groups, including the Air Transport  Association, the Aircraft Owners and Pilots Association (AOPA), and the  National Business Aviation Association; and   academic and financial experts.
In addition, as discussed in the following paragraphs, we performed  further work to accomplish each objective.
To assess the advantages and concerns that have been raised about the  current approach to collecting revenues from national airspace system  (NAS) users to fund FAA and the extent to which the available evidence  supports the concerns, we examined FAA budget data, Airport and Airway  Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to the  Department of Transportation (DOT) on aircraft size and airfares (DOT  Form 41 data), and FAA aviation activity data. We used data on tax  revenues associated with different types of flights to assess the link  between increases in FAA’s workload and increases in Trust Fund  revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation  activity data from FAA. To assess the reliability of these data, we  interviewed knowledgeable officials and reviewed the quality control  procedures FAA applies to these data, and subsequently determined that  the data were sufficiently reliable for our purposes. We obtained the DOT  Form 41 data from BACK Aviation Solutions, a private contractor that  provides these data to interested parties. We used these data to examine  trends in aircraft size and airfares because of their impact on the  relationship between Trust Fund revenues and FAA’s workload.
To identify potential alternative funding options for FAA and criteria for  comparing these options, we obtained information on the experience of  foreign air navigation service providers by reviewing relevant GAO reports  and other literature and interviewing officials at Eurocontrol and France’s  FAA counterpart, la Direction Générale de l’Aviation Civile. We also  interviewed representatives of Air France, AOPA-France, the International  Air Transport Association, the Association of European Airlines, and  Aéroports de Paris. Through our literature review and these interviews, we  identified longer-run revenue adequacy, equity, efficiency, and  administrative considerations as appropriate criteria for assessing the  current and alternative funding options. We considered both modifications  to the current excise tax structure and various forms of direct charges for  FAA services as possible alternatives to the current tax structure. In  selecting options for analysis, we considered whether there was a link  between the option and some element of FAA’s workload.
To identify the advantages and disadvantages of authorizing FAA to use  debt financing for capital projects, we reviewed the borrowing authorities  of other U.S. governmental entities, including the Tennessee Valley  Authority and the Bonneville Power Administration.
We conducted our work from May 2005 through August of 2006 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, the following individuals made  key contributions to this report: Ashley Alley, Christine Bonham, Jay  Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper,  Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman.