The Trust Fund’s uncommitted balance depends on the revenues flowing into the fund and the appropriations made available from the fund for various spending accounts. The amount of revenue flowing into the Trust Fund has fluctuated from year to year but has generally trended upward, as shown in figure 2. Some of the fluctuation has resulted from changes in economic conditions, but some has been due to other factors. For example, during 1981 and 1982, revenues (including interest) flowing into the fund averaged about $629 million—the lowest amount in the fund’s history—because of a lapse in the collection of aviation taxes. In 1999, revenue flowing into the fund totaled about $11.1 billion, the largest amount in the fund’s history. However, after revenues peaked in 1999, the amount of revenue flowing into the Trust Fund decreased in each of the next 4 years, reaching a level of about $9.3 billion in 2003. A number of factors contributed to this decrease. For example, within the airline industry, the growth of the Internet as a means to sell and distribute tickets, the growth of low-cost airlines, and fare reductions by legacy carriers all transformed the industry and led to lower average fares. These lower fares have resulted in lower ticket taxes and less revenue going into the Trust Fund. In addition, in the same time period, a series of largely unforeseen events, including the September 11, 2001, terrorist attacks, war in Iraq and associated security concerns, the Severe Acute Respiratory Syndrome (SARS), and global recessions seriously affected demand for air travel, resulting in a decrease in airline industry and Trust Fund revenue. Since the beginning of 2004, however, Trust Fund revenues have been increasing. In fact, revenues from tax sources in 2005 were nearly as high as in 1999, although total revenues were still below peak level because less interest was earned due to a lower Trust Fund balance. Similar to the revenue picture, the annual amount of expenditures from the Trust Fund also has generally increased since the fund’s inception, but with some fluctuation. One source of fluctuation has been that the share of FAA operations paid by the Trust Fund has varied over time. Figure 3 shows how expenditures from the fund have changed over time and how they have compared with revenues. In some years, they have exceeded revenues, but in other years they have been less than revenues. In the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21), the Congress created a link between Trust Fund revenues and appropriations from the fund to try to ensure that all fund receipts, including interest, were committed to spending for aviation purposes on an annual basis. According to a provision of AIR-21, which was continued in the Century of Aviation Reauthorization Act (Vision 100)—FAA’s current authorizing legislation—total appropriations made available from the fund in each fiscal year shall equal the level of receipts plus interest in that year, and these appropriations can be used only for aviation investment programs, which are defined as FAA’s capital accounts plus the Trust Fund’s share of FAA operations. Further, the level of receipts was specified to be the level of excise taxes plus interest credited to the fund for a fiscal year as set forth in the President’s budget baseline projection for that year. As shown in figure 4, with the exception of its first four years, the Trust Fund has ended each year with an uncommitted balance; however, the amount of the uncommitted balance has fluctuated substantially over time, generally increasing when Trust Fund revenues exceed appropriations from the fund and decreasing when they are less than appropriations. As noted in the figure, the uncommitted balance has decreased substantially in recent years. The Trust Fund’s uncommitted balance peaked at over $7 billion in 1991, 1999, and 2001. In contrast, because of lapses in the taxes that accrue to the fund, at the end of 1982, the uncommitted balance was about $2.1 billion, and at the end of 1997, it was about $1.4 billion. Specifically, the Trust Fund’s uncommitted balance decreased from $7.3 billion at the end of 2001 to $4.8 billion at the end of 2002 and has continued to decrease since then, reaching about $1.9 billion at the end of 2005. However, the rate of decrease has slowed; in 2005, the uncommitted balance decreased by about $500 million, after falling by at least $900 million in each of the previous 3 years. The uncommitted balance has fallen in recent years because Trust Fund revenues have fallen short of forecasted levels by over $1 billion in 3 out of the last 4 fiscal years. For example, in 2001, the difference between forecasted revenue and actual revenue coming in to the Trust Fund was $383 million less than expected. In 2002, the difference jumped to $2.3 billion due to the impact that unanticipated external events such as the September 11, 2001, terrorist attacks had on the aviation industry. Residual effects and other factors such as the war in Iraq and the SARS outbreak lasted through 2003 and 2004, with each year’s actual revenues coming in at least $1 billion below forecasted revenues. As mentioned above, under Vision 100 and its predecessor, AIR-21, appropriations made available from the Trust Fund are based on forecasted revenues. Thus, if actual revenues approximate forecasted revenues, there should be no substantial change in the uncommitted balance. However, as shown in figure 5, for each year beginning with 2001, actual revenues, including interest, have been less than forecasted, so that in each year since then, the uncommitted balance has fallen. Based on its revenue forecast and appropriations for 2006, FAA forecasts that the Trust Fund’s uncommitted balance will decrease by the end of 2006 to about $1.7 billion. FAA forecasts that if, for 2007, the Congress continues to follow the Vision 100 formula for linking budget resources made available from the fund to expected revenues, then there will be little change in the uncommitted balance—$1.7 billion—during that year. If, instead, the Congress adopts the President’s budget request for FAA for 2007, FAA forecasts that the fund’s uncommitted balance by the end of 2007 will rise to about $2.7 billion. This higher forecasted uncommitted balance occurs because the President’s budget calls for an appropriation from the Trust Fund that is about $1 billion lower than the Vision 100 formula. In addition, compared with Vision 100, the President’s budget calls for a reduction in the appropriation to FAA from the general fund of about $500 million. Thus, in total, compared with Vision 100, the President’s budget calls for a reduction of about $1.5 billion in FAA’s appropriation. Figure 6 shows the forecasted year-end uncommitted balance under both scenarios through 2007. While the President’s budget calls for making a smaller appropriation available from the Trust Fund than under Vision 100, largely due to reductions in the AIP, it calls for greater reliance on the Trust Fund to fund FAA’s operations. Vision 100 uses the formula created in AIR-21 to determine how much funding for FAA operations should come from the Trust Fund, but the President’s budget proposal does not use this formula. Under Vision 100, the formula makes the amount of Trust Fund revenue that will be authorized for FAA operations and RE&D in a given year equal to projected Trust Fund revenues (as specified in the President’s budget) minus the authorizations for the capital accounts (AIP and F&E) in that year. Thus, under Vision 100, the Trust Fund is projected to support $4.6 billion of FAA’s operations, or 57 percent. In contrast, the President’s budget specifies a set amount of Trust Fund revenue to be used for FAA operations. Therefore, if Congress enacts the President’s budget request for FAA, the Trust Fund would provide $5.4 billion for FAA’s operations in 2007, or 65 percent of its total estimated cost for operations. Although the Trust Fund is projected to have a surplus at the end of 2007 under each of the expenditure proposals, this projection depends to a significant extent on achieving forecasted commercial passenger traffic levels and airfares, as they have the largest impact on the amount of revenues flowing into the Trust Fund. We recognize that it is difficult to anticipate future events that may significantly affect the demand for air travel, particularly since FAA makes a forecast that is contained in the President’s budget based on information available in the first quarter of the preceding fiscal year. However, our analysis shows that for each of the last 5 years, FAA’s projected revenue forecast for the President’s budget was higher than the actual amount of revenue received, as shown in figure 5. Given the differences in recent years between the forecasted revenue and actual amount of revenue received, we conducted sensitivity analyses to estimate what would happen to the Trust Fund’s uncommitted balance if Trust Fund revenues in 2006 and 2007 fall below the levels that FAA projected in March 2006. For example, table 2 shows the projected Trust Fund balances under Vision 100 and the President’s proposal and the impact if revenues, for whatever reason, are 5 percent or 10 percent less than currently projected. If revenues are 5 percent lower than projected, which they were in 2001, the Trust Fund would have a small but positive uncommitted balance under both expenditure proposals—Vision 100 and the President’s budget proposal. However, if the revenues were 10 percent lower than projected, as they were in 2004, the uncommitted balance would drop below half a billion dollars under the President’s proposal and would fall to zero by the end of 2007 under Vision 100. We believe these scenarios raise concerns because, in the past, the Trust Fund’s uncommitted balance was used to offset lower-than-expected Trust Fund revenues and decreased general fund contributions. FAA could help address these concerns by continuing to look for ways to improve efficiency and reduce costs. However, the zero-balance scenario would most likely have implications for Congress in funding FAA programs. To keep the Trust Fund from declining, the Congress could use an alternate basis for authorizing and appropriating money out of the Trust Fund that does not rely on the revenue forecast in the President’s budget. One alternative that would still maintain the link between revenues and spending would be for appropriations from the Trust Fund to be based on the actual Trust Fund revenues from the most recent year for which data are available. That would mean, for example, that the Congress would appropriate for 2007 the Trust Fund revenues received in 2005. Although that would make it less likely that the Trust Fund balance would decline further, it could also mean that a smaller appropriation would be made available for aviation. Whereas Trust Fund revenues in 2005 were about $10.8 billion, the President’s budget for 2007 forecasts Trust Fund revenues of about $11.8 billion. Future policy decisions concerning spending for aviation will affect the Trust Fund balances beyond 2007. If general fund appropriations for FAA’s operations are maintained at recent levels, future projected Trust Fund revenues under the current tax structure may be insufficient to pay for the expenditures that FAA says are needed to maintain and modernize the current system. According to FAA, its aviation infrastructure is aging, and replacing it will cost $32 billion. Even more, Trust Fund revenues would be needed to pay for those expenses if general fund appropriations for operations are reduced. Insufficient Trust Fund revenues could result in critically needed capacity-enhancing air traffic control modernization investments being deferred or canceled at a time when commercial activity is returning to or exceeding pre-September 11 levels. In addition to costs projected just to maintain FAA’s current system, additional capital expenses are on the horizon to modernize the system. Vision 100 directed the administration to develop a comprehensive plan for a Next Generation Air Transportation System (NGATS) that can accommodate the changing needs of the aviation industry and meet air traffic demands by 2025. The act chartered the Joint Planning and Development Office (JPDO) within FAA to coordinate federal and private- sector research related to air transportation. FAA leads the interagency effort that leverages expertise and resources within the Departments of Transportation, Defense, Homeland Security, and Commerce as well as at the National Aeronautics and Space Administration and the White House Office of Science and Technology Policy. The Congress appropriated $5 million to FAA in seed money in 2005, and appropriated $18 million to FAA for JPDO in 2006, while additional funding and in-kind support comes from the participating agencies. For 2007, the President’s budget requests $18 million for JPDO critical system engineering and planning efforts for NGATS, as well as funding for two NGATS systems at a combined cost of $104 million. JPDO published the Integrated Plan for the Next Generation Air Transportation System in December 2004, but the plan did not specify what new capabilities would be pursued or how much they would cost to implement and maintain. Vision 100 also directed that an annual progress report, including any changes to the Integrated Plan, be submitted at the time of the President’s budget request. In March 2006, JPDO published its 2005 Progress Report to the Next Generation Air Transportation System Integrated Plan and reported it is working to identify the longer-term costs. JPDO conducted a financial analysis of the air traffic management portions of NGATS, including examining the existing 2025 operational vision, to understand the hardware and software components that may be required to implement NGATS. However, because of the high level of uncertainty in some areas and a significant number of assumptions in others, JPDO reported more work is required before this analysis can be useful and credible. A clear understanding of proposed future capabilities for NGATS (and how they will be paid for) will be important as the Congress prepares to reauthorize FAA programs and explores financing mechanisms. While FAA has made great efforts in its cost-control program, cutting costs will remain a challenge for FAA well into the future. In 2005, FAA outsourced its flight service stations to a private contractor, resulting in total savings estimated at $2.2 billion. Also in 2005, FAA put in place a number of cost-control initiatives that affected smaller programs and that, if successful, will generate smaller levels of savings. We are reviewing options to fund FAA, at the request of this subcommittee, and we will address this issue in detail later this year. Although FAA has initiated several of these cost-control measures, these initiatives alone cannot reduce expenses enough to free up sufficient Trust Fund revenues to pay for the expenditures that FAA says are necessary to maintain and modernize the current airspace system, let alone finance future NGATS initiatives. Through the reauthorization process, the Congress will determine both the level of appropriations for aviation and the way in which that commitment will be funded. Congressional decisions pertaining to the link between annual Trust Fund revenues and appropriations made available for aviation programs, as well as the method for funding the Trust Fund, will continue to influence future Trust Fund balances. To assess the current financial status and projected financial viability of the Airport and Airway Trust Fund, we obtained financial data from FAA and interviewed FAA officials familiar with the information. To assess the comparisons of Vision 100 with the President’s budget, we analyzed the legislation and the administration’s 2007 budget proposal. We used a sensitivity analysis to project what would happen if Trust Fund revenues in fiscal years 2006 and 2007 were 5 percent and 10 percent lower than the levels projected by FAA in March 2006 under each of these proposals. Accordingly, our findings on the financial outlook of the Trust Fund are based on GAO projections, not FAA’s. We performed our work in February and March 2006 in accordance with generally accepted government auditing standards. Mr. Chairman, this concludes my prepared statement. At this time, I would be pleased to answer any questions that you or other Members of the Subcommittee may have. For further information on this testimony, please contact Dr. Gerald Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making key contributions to this testimony include Chris Bonham, Jay Cherlow, Tammy Conquest, Colin Fallon, David Hooper, Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: The Airport and Airway 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 and to fund investments in air traffic control facilities. It provides all of the funding for the Federal Aviation Administration's (FAA) capital accounts, including: (1) the Airport Improvement Program, which provides grants for construction and safety projects at airports; (2) the Facilities and Equipment account, which funds technological improvements to the air traffic control system; and (3) the Research, Engineering, and Development account, which funds continued research on aviation safety, mobility, and environment issues. In addition, at various times during its history, the Trust Fund has funded all or some portion of FAA's operations. To fund these accounts, the Trust Fund is credited with revenues from a variety of excise taxes related to passenger tickets, passenger flight segments, international arrivals/departures, cargo waybills, and aviation fuels. Including interest earned on its balances, the Trust Fund received $10.8 billion in fiscal year 2005. The various taxes that accrue to the Trust Fund are scheduled to expire at the end of fiscal year 2007. GAO was asked to provide information and analysis about the financial condition and future viability of the Trust Fund. The Trust Fund's uncommitted balance decreased from $7.3 billion at the end of fiscal year 2001 to about $1.9 billion at the end of fiscal year 2005. In 3 of the last 4 fiscal years, the Trust Fund's uncommitted balance has fallen by over $1 billion because revenues were lower than FAA forecasted due to the impact of unanticipated events such as the September 11, 2001, terrorist attacks. However, the rate of decrease has slowed; during fiscal year 2005, the uncommitted balance decreased by about $500 million. Under FAA's current authorization, appropriations from the Trust Fund are based on forecasted revenues. Thus, if actual revenues approximate forecasted revenues, there should be no substantial change in the uncommitted balance. However, for each fiscal year since 2001, because actual revenues have been less than forecasted, the uncommitted balance has fallen. Based on its revenue forecast and appropriation for fiscal year 2006, FAA forecasts that the Trust Fund's uncommitted balance will fall by the end of 2006 to about $1.7 billion. If the Congress continues to follow the formula from Vision 100--FAA's current authorizing legislation that links appropriations made available from the fund to revenue forecasts--then FAA expects there will be little change in the uncommitted balance for fiscal year 2007. If, instead, the Congress adopts the President's budget for FAA for fiscal year 2007, FAA forecasts that the fund's uncommitted balance by the end of 2007 will rise to about $2.7 billion. This higher forecasted uncommitted balance occurs because the President's budget calls for an appropriation to FAA from the Trust Fund that is about $1 billion lower than the Vision 100 formula. If revenues in fiscal years 2006 and 2007 are below forecasted levels, the Trust Fund's uncommitted balance will be less than forecasted and, in one scenario we analyzed, will reach zero by the end of 2007. This scenario raises concerns because, in the past, the Trust Fund's uncommitted balance was used to offset lower-than-expected Trust Fund revenues and decreased general fund contributions. FAA could help address these concerns by continuing to look for ways to improve efficiency and reduce costs. However, the zero-balance scenario would most likely have implications for the Congress in funding FAA programs.