The Trust Fund provides the primary source of funding for FAA and receives revenues principally from a variety of excise taxes paid by users of the national airspace system. The excise taxes are imposed on airline ticket purchases and aviation fuel, as well as the shipment of cargo. Revenues deposited in the Trust Fund are subject to congressional appropriations. In addition to Trust Fund revenues, in most years, General Fund revenues have been used to help fund FAA operations. As figure 1 shows, Trust Fund revenues have fluctuated since fiscal year 2000. A number of factors, such as external events and general economic conditions, contributed to this fluctuation in revenues because they affect the number of tickets purchased, the fares paid by passengers, the amount of fuel purchased, and the value of air cargo shipped. For example, revenues declined early in the decade because of a series of largely unforeseen events, including the September 11, 2001, terrorist attacks, that reduced the demand for air travel, resulting in a steep decline in airline industry revenue. Similarly, during the recent recession, Trust Fund revenues declined from $12.4 billion in fiscal year 2008 to $10.9 billion in fiscal year 2009, in part because of the 7 percent decline in domestic stic passenger traffic during that period. passenger traffic during that period. The Trust Fund is the primary source of funding for FAA’s capital programs and also provides funds for FAA’s Operations account. The capital accounts include (1) the Facilities and Equipment (F&E) account, which funds technological improvements to the air traffic control system, including the modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen); (2) the Research, Engineering, and Development (RE&D) account, which funds research on issues related to aviation safety, mobility, and NextGen technologies; and (3) the Airport Improvement Program (AIP), which provides grants for airport planning and development. In addition, the Trust Fund has provided all or some portion of the funding for FAA’s Operations account, which funds the operation of the air traffic control system and safety inspections, among other activities. Finally, the Trust Fund is used to pay for the Essential Air Service (EAS) program. In fiscal year 2010, FAA’s expenditures totaled about $15.5 billion, with Trust Fund revenues covering about $10.2 billion, or 66 percent, of those expenditures. As figure 2 shows, while total FAA expenditures grew about 60 percent from fiscal year 2000 through fiscal year 2010, the Trust Fund’s revenue contribution only increased 12 percent, while the contribution of general revenues from the U.S. Treasury has increased to cover a larger share of FAA’s operations expenditures. We discuss this change in more detail in the next section of this statement. Since the Trust Fund’s creation in 1970, revenues have in the aggregate generally exceeded spending commitments from FAA’s appropriations, resulting in a surplus. This surplus is referred to as the Trust Fund’s uncommitted balance—the balance in the Trust Fund that remains after funds have been appropriated from the Trust Fund and contract authority has been authorized. As of the end of fiscal year 2010, the Trust Fund’s uncommitted balance was about $770 million (see fig. 3). As figure 3 shows, the Trust Fund’s uncommitted balance has declined since reaching $7.35 billion in fiscal year 2001. This decline is largely a result of how Congress determines the amount of appropriations that should be made from the Trust Fund. Starting with the Wendell H. Ford Aviation Investment and Reform Act of the 21st Century (AIR-21) in 2000 and continuing with Vision 100, Congress has based FAA’s fiscal year appropriation from the Trust Fund on the forecasted level of Trust Fund revenues, including interest on Trust Fund balances, as set forth in the President’s baseline budget projection for the coming fiscal year. Each year’s forecast, and accordingly FAA’s appropriation, is based on information available in the first quarter of the preceding fiscal year. For example, the revenue forecast for fiscal year 2011 is prepared in the first quarter of fiscal year 2010. These revenue forecasts can be uncertain because it is difficult to anticipate, a year in advance, events that may significantly affect the demand for air travel or fuel usage, the fares that passengers pay, and other variables that affect Trust Fund revenues. In fact, as figure 4 shows, FAA’s forecasts of Trust Fund revenues (including both tax revenues and interest earned by the Trust Fund’s cash balance) have exceeded actual Trust Fund revenues (including interest) in 9 of 11 years, and in aggregate, these forecasted revenues have exceeded actual tax revenues by over $9 billion over that period. Accordingly, appropriations from the Trust Fund, which are based on these revenue forecasts, have also exceeded actual revenues, thus drawing the us drawing the uncommitted balance lower over the course of the last decade. uncommitted balance lower over the course of the last decade. Until recently, FAA generated a forecast for the President’s budget using models based on historical relationships between key economic variables, such as the growth rate of the economy, and aviation measures, such as passenger traffic levels and passenger fares, that affect Trust Fund revenues. The responsibility for forecasting Trust Fund revenues shifted from FAA to the U.S. Department of the Treasury (Treasury), which already had responsibility for other federal excise tax revenue forecasts, in fiscal year 2010. We have recently been asked by the Senate Commerce, Science, and Transportation Committee to examine the Trust Fund revenue forecasting process and how it might be improved; we expect to begin our review this year. The Trust Fund’s uncommitted balance, which exceeded $7.3 billion at the end of fiscal year 2001, dropped to $299 million at the end of fiscal year 2009—the lowest balance over the past decade. One of the greatest declines in the uncommitted balance occurred in 2002 following the sudden drop-off in aviation activity after the terrorist attacks of September 11. In addition, the declines in passenger traffic and aircraft operations and reduced fuel consumption in 2009 resulted in actual revenues to the Trust Fund that fell significantly below forecasted levels in fiscal year 2009 and an uncommitted Trust Fund balance that approached zero. In response, the fiscal year 2009 omnibus appropriation increased the general revenue contributions to FAA’s operations and decreased FAA’s appropriation from the Trust Fund by approximately $1 billion compared with what was originally outlined in the President’s fiscal year 2009 proposed budget for FAA. These additional general revenues kept the Trust Fund’s uncommitted balance from going negative, thereby avoiding budgetary challenges for FAA. As a result, general revenues accounted for 24 percent of FAA’s expenditures in fiscal year 2009 and reached 34 percent in fiscal year 2010 (see fig. 2). If the uncommitted balance is nearly depleted and actual Trust Fund revenues continue to fall below forecasted levels, there is a risk of overcommitting available resources from the Trust Fund—meaning revenues could be insufficient to cover all of the obligations that FAA has the authority to incur. A low uncommitted balance signals to FAA that limited revenues are available to incur new obligations while still covering expenditures on existing obligations and increases FAA’s challenge in moving forward with planned projects and programs. FAA officials have noted that they closely monitor the Trust Fund’s available cash and FAA’s obligations to ensure that enough cash and budget authority are available to cover FAA’s expenditures and obligations. In the short term, if there were a risk of overcommitting Trust Fund resources, FAA officials noted that they might delay obligations for capital programs if the Trust Fund did not have adequate revenues to cover those obligations without additional funding authorized and appropriated from the General Fund. According to FAA officials, they would first defer some capital program obligations so they could continue to fund operations, such as air traffic control and safety inspections. These actions would ensure that the agency did not incur obligations or expenditures in excess of the Trust Fund’s cash balance, which could potentially lead to a violation of the Antideficiency Act. Later this month, in the President’s budget, the administration will release its newest estimate of the Trust Fund’s fiscal year 2011 year-end uncommitted balance. Congress may choose to increase FAA’s authorized funding level in the near term to allow FAA to further develop NextGen, the new satellite- based air traffic management system that is designed to replace the current radar-based system. NextGen improvements include new integrated systems, procedures, aircraft performance capabilities, and supporting infrastructure needed for a performance-based air transportation system that uses satellite-based surveillance and navigation and network-centric operations. These improvements are intended to improve the efficiency and capacity of the air transportation system while maintaining its safety so that it can accommodate anticipated future growth. FAA has generally identified the NextGen capabilities that it plans to implement in the near term to midterm, through 2018. FAA’s capital investment is expected to be $11 billion to $12 billion through 2018. This cost does not include research, the airport and associated airfield improvements, or the aircraft equipage that is necessary to realize all benefits. In addition to FAA’s capital investment costs, FAA estimates that the equipage necessary to realize significant capabilities implemented through 2018 will cost in the range of $5 billion to $7 billion. Decisions about the long-term direction for NextGen (beyond 2018) have yet to be made, and two key planning documents—the NextGen Integrated Work Plan and Enterprise Architecture—contain a wide variety of possible ideas and approaches. Therefore, the costs of the system over the long term are uncertain, but have been estimated to be in the $40 billion range (combined public and private investment in ground infrastructure and avionics). FAA’s proposed budget for NextGen activities is $1.14 billion in fiscal year 2011, up from the $700 million spent in fiscal year 2009 and the $868 million spent in fiscal year 2010. In addition, as we have previously reported, NextGen’s ability to enhance capacity will partly depend on how well airports can handle greater capacity. FAA’s plans call for building or expanding runways at the nation’s 35 busiest airports to help meet the expected increases. However, even with these planned runway improvements and the additional capacity gained through NextGen technologies and procedures, FAA analyses indicate that 14 more airports will still need additional capacity, which could require additional Trust Fund resources. Additionally, the Future of Aviation Advisory Committee recently proposed to the Secretary of Transportation that the federal government undertake a significant financial investment to accelerate efforts to equip aircraft and train staff to use key NextGen technologies and operational capabilities, including performance-based navigation (PBN), automatic dependent surveillance—broadcast (ADS-B), ground-based augmentation system (GBAS) and data communications. The amount of investment required will depend on how any financial incentives are structured. Financial assistance can come in a variety of forms, including grants, cost- sharing arrangements, loans, loan guarantees, tax incentives, and other innovative financing arrangements. One financing option proposed by the NextGen Midterm Implementation Task Force to encourage the purchase of aircraft equipment is the use of equipage banks, which would provide federal loans to operators to equip their aircraft. Another financing option, proposed in various forms by a variety of stakeholders, would involve setting up an equipage fund using private equity backed by federal loan guarantees. While the details of different proposals vary, they would all allow operators who purchase equipment through the fund to defer payments on the equipment until FAA makes improvements required for the operators to benefit from the equipment. As we have previously reported, prudent use of taxpayer dollars is always important; therefore, any financial incentives should be applied carefully and in accordance with key principles. For example, mechanisms for financial assistance should be designed so as to effectively target parts of the fleet and geographical locations where benefits are deemed to be greatest, avoid unnecessarily equipping aircraft (e.g., those that are about to be retired), and not displace private investment that would otherwise occur. Furthermore, it is preferable that the mechanism used for federal financial assistance result in minimizing the use of government resources (e.g., some mechanisms may cost the government more to implement or may place the government at greater risk than others). Given the uncertainty inherent in forecasting revenues and the decline in the uncommitted balance of the Trust Fund, we have suggested that Congress should work with FAA to develop alternative ways to reduce the risk of overcommitting budgetary resources from the Trust Fund. Better matching of actual revenues to the appropriation from the Trust Fund would help to ensure that Trust Fund revenues are sufficient to cover all the obligations that FAA has the authority to incur, thereby reducing the risk of disruptions in funding for aviation projects and programs. One approach would be to appropriate less than 100 percent of the forecasted revenues, especially until a sufficient surplus is established to protect against potential disruptions in revenue collection. This change would reduce the likelihood that FAA would incur obligations in excess of the cash needed to liquidate these obligations and thus reduce the risk of delaying or terminating projects. The House of Representatives’ FAA reauthorization bill proposed in the 111th Congress includes a provision that would limit the budgetary resources initially made available each fiscal year from the Trust Fund to 90 percent, rather than 100 percent, of forecasted revenues for that year; then 2 fiscal years later, when actual revenues would be known, any amount that exceeded 90 percent of forecasted revenues in the second previous year would be appropriated from the Trust Fund to FAA. Congress would need to provide additional general revenues in the first 2 years to make up the difference. Another approach would be to target a minimum level for the Trust Fund’s uncommitted balance and base appropriations on the goal of maintaining that target level. This change would make it more likely that uncommitted resources would be available to FAA in the event that actual revenues fell short of forecasted revenues in a future year. Either approach would result in fewer Trust Fund resources available for FAA for some period of time, requiring additional general revenues to make up the difference, unless FAA’s overall resources are reduced. In the longer term, future Trust Fund revenues under the current tax structure may be lower than previously anticipated. For example, in January 2011, the Congressional Budget Office forecast about $25 billion less in Trust Fund revenues over the next 6 years (through fiscal year 2017) than it forecast in 2007 for that same time period. Given the decline in expected future revenues, appropriations from the Trust Fund under current law will be lower in future years than previously projected unless new revenue sources are found. To maintain appropriations consistent with what earlier revenue forecasts would have afforded, Congress could take action such as increasing general revenue contributions or increasing Trust Fund revenues. For example, we suggested that if Congress determines that the benefit of added revenue to the Trust Fund warrants taxation of optional airline service fees, such as baggage fees, then it should consider amending the Internal Revenue Code to make mandatory the taxation of certain or all airline-imposed fees and require that the revenue be deposited in the Trust Fund. The Future of Aviation Advisory Committee also recommended that the Secretary of Transportation commission an independent study of the federal aviation tax burden on passengers, airlines, and general aviation to determine if existing levels of taxes and fees sufficiently balance the Department’s statutory mandates to “encourage efficient and well- managed air carriers to earn adequate profits and attract capital...;” “promot, encourag, and develop civil aeronautics and a viable, privately-owned United States air transport industry;” and “ensur that consumers in all regions of the United States, including those in small communities and rural remote areas, have access to affordable, regularly scheduled air service.” The committee recommended that the study address the following questions: How do the federal taxes imposed on the U.S. aviation industry compare to those imposed on other modes of transportation? Is the existing level of aviation taxes and fees levied efficiently and effectively for the services provided by the federal government? Are there more efficient ways to collect and administer existing aviation taxes and fees that would save taxpayer and aviation industry dollars? Would regular consultation between those departments and agencies that administer aviation taxes and fees prior to implementing any changes to tax rates and policies result in (1) a more efficient and rational aviation tax system and (2) the desired industry and social outcome? What is the appropriate balance between General Fund financing and Trust Fund financing of capital and operating costs of the national aviation system, recognizing the significant role commercial and general aviation play in fostering economic growth and development? Based on the results of the study, the committee recommends that the Secretary pursue appropriate legislative and regulatory actions that may be needed to ensure that existing and any new aviation taxes and fees applied to passengers, airlines, and general aviation are effective and collected efficiently, appropriately recognizing the role commercial and general aviation play in fostering economic growth and development. Thank you, Mr. Chairman, that concludes my statement. I will be pleased to answer any questions that you or other Members of the Committee might have. For future questions about this statement, please contact me at (202) 512- 2834 or dillinghamg@gao.gov. Individuals making key contributions to this report were Paul Aussendorf, Assistant Director; Amy Abramowitz; Jessica Bryant-Bertail; Lauren Calhoun; Carol Henn; Bess Eisenstadt; Heather Krause; Hannah Laufe; Maureen Luna-Long; and Andrew Von Ah. 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Summary: This testimony discusses the status of the Airport and Airway Trust Fund (Trust Fund). Established in 1970, the Trust Fund helps finance the Federal Aviation Administration's (FAA) investments in the airport and airway system, such as construction and safety improvements at airports and technological upgrades to the air traffic control system, as well as FAA operations, such as providing air traffic control and conducting safety inspections. FAA, the Trust Fund, and the excise taxes that support the Trust Fund (which are discussed later in this statement) must all be periodically reauthorized. The most recent reauthorization expired at the end of fiscal year 2007. Proposed reauthorization legislation was considered but not enacted in the 110th and 111th Congresses, although several short-term measures were passed to extend the authorization of aviation programs, funding, and Trust Fund revenue collections. The latest of these extensions--the Airport and Airway Extension Act of 2010, Part IV--was enacted on December 22, 2010, extending FAA programs, expenditure authority, and aviation trust fund revenue collections through March 31, 2011. The financial health of the Trust Fund is important to ensure sustainable funding for a safe and efficient aviation system without increasing demands on general revenues. This testimony provides an update on the status of the Airport and Airway Trust Fund, including the current financial condition of the Trust Fund, anticipated Trust Fund expenditures for planning and implementing improvements in the nation's air traffic management system that are expected to enhance the safety and capacity of the air transport system, and options for ensuring a sustainable Trust Fund. This statement draws on our body of work on these issues, supplemented with updated information on the Trust Fund from FAA and the Congressional Budget Office. All dollars reported in this statement are nominal, unless otherwise noted. The Trust Fund is the primary source of funding for FAA's capital programs and also provides funds for FAA's Operations account. The capital accounts include (1) the Facilities and Equipment (F&E) account, which funds technological improvements to the air traffic control system, including the modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen); (2) the Research, Engineering, and Development (RE&D) account, which funds research on issues related to aviation safety, mobility, and NextGen technologies; and (3) the Airport Improvement Program (AIP), which provides grants for airport planning and development. In addition, the Trust Fund has provided all or some portion of the funding for FAA's Operations account, which funds the operation of the air traffic control system and safety inspections, among other activities. Finally, the Trust Fund is used to pay for the Essential Air Service (EAS) program. In fiscal year 2010, FAA's expenditures totaled about $15.5 billion, with Trust Fund revenues covering about $10.2 billion, or 66 percent, of those expenditures. While total FAA expenditures grew about 60 percent from fiscal year 2000 through fiscal year 2010, the Trust Fund's revenue contribution only increased 12 percent, while the contribution of general revenues from the U.S. Treasury has increased to cover a larger share of FAA's operations expenditures. Since the Trust Fund's creation in 1970, revenues have in the aggregate generally exceeded spending commitments from FAA's appropriations, resulting in a surplus. This surplus is referred to as the Trust Fund's uncommitted balance--the balance in the Trust Fund that remains after funds have been appropriated from the Trust Fund and contract authority has been authorized. As of the end of fiscal year 2010, the Trust Fund's uncommitted balance was about $770 million. the Trust Fund's uncommitted balance has declined since reaching $7.35 billion in fiscal year 2001. This decline is largely a result of how Congress determines the amount of appropriations that should be made from the Trust Fund. Starting with the Wendell H. Ford Aviation Investment and Reform Act of the 21st Century (AIR-21) in 2000 and continuing with Vision 100,10 Congress has based FAA's fiscal year appropriation from the Trust Fund on the forecasted level of Trust Fund revenues, including interest on Trust Fund balances, as set forth in the President's baseline budget projection for the coming fiscal year. Each year's forecast, and accordingly FAA's appropriation, is based on information available in the first quarter of the preceding fiscal year. For example, the revenue forecast for fiscal year 2011 is prepared in the first quarter of fiscal year 2010. These revenue forecasts can be uncertain because it is difficult to anticipate, a year in advance, events that may significantly affect the demand for air travel or fuel usage, the fares that passengers pay, and other variables that affect Trust Fund revenues.