In 1970, almost a decade before airline deregulation, Congress created the trust fund to provide a dedicated source of funding for the aviation system. The trust fund is funded principally by a variety of excise taxes paid by users of the national airspace system, as well as by interest revenue. The excise taxes are imposed on airline ticket purchases and aviation fuel, as well as the shipment of cargo. Disbursement of revenues deposited in the trust fund is subject to congressional appropriations. These taxes are classified in six categories or “tax lines,” as shown in table 1. The trust fund finances capital improvements of the airport and airway system, and to the extent funds are made available, it funds the government’s operation and maintenance of that system. Figure 1 shows how trust-fund revenues were appropriated to FAA’s operations and capital accounts for fiscal year 2010, which generally represents the breakout of trust-fund revenue use for recent years. FAA’s three capital accounts include (1) the Facilities and Equipment 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 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. General revenues from the U.S. Treasury have been used to supplement trust-fund revenues for operations and have funded about 16 to 57 percent of FAA’s operation appropriation—or 8 to 33 percent of FAA’s total appropriation—during fiscal years 2001 through 2010. From the trust fund’s creation in 1970 through the late 1990s, appropriations from the trust fund were consistently lower than revenues deposited into the trust fund, resulting in a growing uncommitted balance. To ensure that revenue collected from persons and businesses paying taxes into the trust fund are used for aviation purposes, AIR-21 and Vision 100, which reauthorized FAA investments in the airport and airway system, added certain provisions. These provisions require that the total budget resources made available each fiscal year from the trust fund— that is, the appropriation from the trust fund—equal the President’s baseline budget projection, or forecast, for excise taxes and interest credited to the trust fund for the coming fiscal year (budget year).2000, appropriations from the trust fund have generally followed the forecast amounts, but they can, and have, varied—a point we discuss in more detail later in this report. The budget-year trust-fund revenue forecast, and accordingly FAA’s appropriation, is based on information available in the first quarter of the preceding fiscal year and more than 2 years before the final accounting for the forecast year is certified by IRS. Figure 2 shows the timeline for the fiscal year 2010 budget process, which generally reflects a typical budget cycle for recent years. Because the President’s budget is released about 8 months before the beginning of the fiscal year, the revenue forecast for the fiscal year 2010 budget submission to Congress was developed in the first quarter of fiscal year 2009—October through December of calendar year 2008—or about a year before the start of the fiscal year. Furthermore, the most recent available data on actual trust- fund revenues (IRS-certified tax-receipt data) for preparing this forecast were from the first three quarters of fiscal year 2008, or through June 30, 2008. Likewise, the accuracy of the fiscal year 2010 revenue forecasts could not be assessed against IRS-certified data until February 2011, which was 5 months after the end of the fiscal year. In addition to the budget-year forecast, the President’s budget includes revenue forecasts for the 9 years beyond the budget year (referred to as out-year forecasts), which are then updated during roughly the middle of the calendar year as part of the mid-session review. Through fiscal year 2010, FAA generated the trust-fund revenue forecast for the President’s annual budget request. Starting with fiscal year 2011, the responsibility for forecasting trust-fund revenues shifted from FAA to Treasury. According to Treasury officials, Treasury assumed this responsibility so that it would have responsibility for all federal excise-tax forecasts, including the revenues for other trust funds such as the Highway Trust Fund. In addition to budget-year and out-year revenue forecasts, the President’s annual budget request includes forecasts of FAA’s budget authority for the same period. Budget authority forecasts represent the estimated amount that may be requested for FAA to enter into obligations that will result in outlays of federal funds; in this report, we refer to FAA’s forecast budget authority as its forecast expenditures. According to OMB budget guidance, OMB forecasts the out-year budget-authority levels for agencies based on proposed changes in legislation along with the administration’s overall policy goals and forecasts of economic growth. As this guidance indicates, these forecasts are developed to allow an analysis of the long-term consequences of proposed program or tax-policy initiatives. FAA works with OMB to develop the proposed expenditures for a given budget year and then works to align its programs and plans with OMB’s out-year budget-authority targets. After the President submits his budget to Congress, Congress begins deliberations on the appropriate level of federal revenues and expenditures for a given fiscal year. Since the AIR-21 spending provisions were introduced in 2000, the trust fund’s uncommitted balance—that is, the revenues in the trust fund that remain after funds have been appropriated from the trust fund and a limitation on obligations established—has generally declined because it has been used to offset shortfalls in forecast trust-fund revenues. As we previously reported, the trust fund’s uncommitted balance, which exceeded $7 billion at the end of fiscal year 2001, declined to $299 million at the end of fiscal year 2009—the lowest balance over the past decade—before slightly rebounding in fiscal year 2010 (fig. 3). The largest decline in the uncommitted balance in the past decade occurred in 2002 following the sudden drop-off in aviation activity after the terrorist attacks of September 11, 2001. This decline occurred because revenue forecasts, which had been developed many months before the September 11 attacks and the subsequent decline in air travel, were considered in determining the level of appropriations from the trust fund. In addition, declines in passenger traffic, aircraft operations, and fuel consumption in 2009 resulted in actual revenues to the trust fund that fell well below forecast levels and an uncommitted trust-fund balance that approached zero. As previously reported, if the trust fund’s uncommitted balance approaches zero, FAA officials noted that they might be required to delay obligations for capital programs if they do not have adequate revenues in the trust fund to cover them—unless additional general revenues are first authorized and appropriated. As we have previously reported, NextGen will transform the way in which the air transportation system operates today, in part by using satellite-based surveillance as opposed to ground-based radar, using performance-based navigation instead of cumbersome step-by- replacing routine voice communications with data transmissions, and organizing and merging the disjointed data that pilots, controllers, airports, airlines, and others currently rely on to operate the system. Because of the potential benefits of modernizing the air transportation system and the substantial costs of modernization, NextGen implementation has been a top congressional priority. FAA has been planning and developing NextGen since 2003 and is now implementing near-term (through 2012) and midterm (through 2018) capabilities. According to FAA, approximately $2.9 billion was appropriated for NextGen for fiscal years 2004 through 2011—most of which was funded from the trust fund. FAA recently estimated the cost for NextGen for the agency to be between $15 billion and $22 billion, and another $5 billion to $7 billion for equipping aircraft with NextGen technology, for fiscal years 2012 through 2025—much of which will be funded from the trust fund. In FAA’s latest Capital Improvement Plan—which outlines FAA’s planned facilities and equipment expenditures for the next 5 years—about one-third, or $4.8 billion of the $14.3 billion, in planned capital improvements for fiscal years 2012 through 2016 is for NextGen or NextGen-related projects. In addition, given the incremental rollout of NextGen technology, FAA has stated that significant levels of investment—including those that rely on trust-fund revenues—will continue to be allocated to sustaining current infrastructure to prevent failures and maintain the reliability and efficiency of current operations. Beginning in fiscal year 2011, when the administration transferred the responsibility for developing trust-fund revenue forecasts from FAA to Treasury, Treasury has been forecasting trust-fund revenues (tax receipts) for both the budget year and out-years using a demand-based econometric model. Specifically, according to Treasury officials, Treasury begins its forecast by estimating activity measures that reflect aviation demand, such as domestic enplanements, international enplanements, revenue-ton miles, and purchased gallons of fuel and gasoline. For example, in estimating aviation demand as measured by domestic enplanements, Treasury assumes these enplanements grow with the economy and population and are a function of ticket prices and certain other factors, which is consistent with economic theory. Similarly, according to Treasury officials, Treasury forecasts all other aviation activity measures for future years based on elements of the economy that are likely to affect growth in those activities. In addition, Treasury estimates average ticket prices. Treasury uses these activity and pricing estimates, along with applicable tax rates, to forecast revenues for seven of the nine trust-fund-related tax sources listed in table 1 on page 5. Prior to the fiscal year 2011 budget, FAA was responsible for developing the trust-fund revenue forecasts used in the budget process. According to FAA officials, FAA developed its budget-year revenue forecast using airlines’ schedules for the upcoming several months to estimate airline capacity—most notably, available seat miles (the number of available seats and scheduled distance). These capacity measures, along with historical and economic data and professional judgment, enabled FAA to forecast several activity measures, such as revenue passenger miles and enplanements for both mainline and commuter carriers, as well as cargo and mail revenue-ton miles. For example, FAA used its estimate of available seat miles together with its estimate of average load factors (the percentage of seats that are filled) to forecast revenue passenger miles. Other capacity measures, such as available seat miles on international flights and the size and usage patterns of the general aviation fleet, enabled FAA to develop other aviation activity forecasts, such as international enplanements and gallons of purchased aviation fuels, respectively. In addition, FAA forecast pricing factors—such as mainline and commuter passenger yields as well as cargo yields—based largely on recent fares, cargo transport prices, trends, and professional judgment. In forecasting activity measures for the out-years (the 9 years beyond the budget year)—which are not used to determine the budget year’s appropriation—FAA used a demand-based econometric approach similar to Treasury’s current approach, both of which assume no limits on capacity that would prevent demand from being met. FAA officials told us they used a capacity-based approach for the budget-year forecast because they viewed the airlines’ recent and near-term planned capacity as a more accurate basis for projecting aviation activity in the near term than the demand-based econometric model they used for out-year forecasts. FAA used these activity and pricing forecasts to calculate its revenue forecasts for all nine trust-fund-related individual tax sources listed in table 1. One notable difference from Treasury’s current approach is that FAA separately forecast enplanements involving an airport in Alaska or Hawaii, which are taxed at a different rate from other enplanements. Additionally, because tickets sold through frequent-flyer programs are not assessed passenger ticket taxes, FAA used estimates of the sales of frequent-flyer mileage awards to augment its forecast for the domestic passenger ticket tax for these sales and reduce estimates of all segment taxes. After just 1 year and without certified receipts for the fourth quarter of 2011, it is too soon to tell whether Treasury’s demand-based econometric approach will provide more accurate revenue forecasts for the budget year than FAA’s more detailed, capacity-based approach. According to forecasting experts that we interviewed, neither approach is necessarily better given the inherent uncertainty associated with forecasting. Despite these differences in Treasury’s and FAA’s approaches, several years of Treasury forecasts and corresponding actual revenues would be needed to meaningfully compare the results of the two agencies’ methodologies and gauge the efficacy of their approaches. Furthermore, comparing forecast methods, even with several years of data, can be inconclusive. Forecasting is inherently uncertain, and, as one forecasting expert noted, luck can be a factor in accurate forecasting. Specifically, if forecasts for model components err, even slightly, in the same direction, the aggregate error can be considerable. However, if forecasts for model components err in opposite directions, even forecasts that are wildly inaccurate for individual components can be accurate in the aggregate. During the past 11 years, FAA overforecasted trust-fund revenues by a net total of $9.34 billion, with overforecasts in 9 of the 11 years. Because Congress considers forecast trust-fund revenues in its appropriation from the trust fund, this overforecasting has contributed to the decline in the trust fund’s uncommitted balance. However, the effect of this inaccuracy on the overall difference between appropriations and actual revenues— and ultimately, the trust fund’s uncommitted balance—was smaller than it would otherwise have been because, for fiscal years 2000 through 2010, Congress appropriated $2.4 billion less from the trust fund than the forecast revenues (fig. 4). More specifically, Congress can choose to appropriate more or less than the forecast trust-fund revenues—which include forecasts of tax receipts and interest revenue and serve as the basis for the authorized level of funding—and actual revenues may be higher or lower than forecast. For example, for fiscal year 2005, Congress appropriated $59 million less than the forecast revenues, and the revenue forecast was $414 million higher than the actual revenues. Together, these effects netted a $355 million decline in the trust fund’s uncommitted balance. For fiscal years 2009 and 2010, the amount Congress appropriated from the trust fund was substantially less than the forecast revenues—$2.7 billion—which prevented the trust fund’s balance from being overcommitted. To help offset declining revenues in 2009 and 2010, Congress increased FAA’s appropriations from general revenues in these years. The net outcome of these two effects varied during fiscal years 2000 through 2010, but together, appropriations from the trust fund were $6.9 billion greater than actual revenues over this period. Inaccurate forecasts of taxes on the transportation of persons by air—the tax line composed of the domestic passenger ticket tax, the domestic segment tax, and the mileage award tax—was the major factor affecting the aggregate forecast inaccuracy, as shown in figure 5. These taxes account for 70 percent of trust-fund tax receipts and 73 percent of FAA’s forecast error for fiscal years 2000 through 2010. Inaccuracy in forecasting both gasoline and fuel taxes and taxes on the transportation of property by air accounted for a disproportionate amount of the aggregate forecast inaccuracy. Taxes on gasoline and fuel accounted for 7 percent of total tax receipts for fiscal years 2000 through 2010, yet forecasts for them accounted for 20 percent of the total forecast inaccuracy. Similarly, taxes on the transportation of property by air accounted for 5 percent of total tax receipts for the same period, but forecasts for them accounted for 13 percent of the total forecast inaccuracy. Furthermore, the effects of these overforecasts were offset somewhat by underforecasts of taxes on the use of international air facilities. For fiscal years 2000 through 2010, these taxes accounted for 18 percent of total trust-fund tax receipts, yet the forecasts for these taxes were less than the actual revenues. Several factors make forecasting trust-fund revenues a challenge including: (1) unexpected events that rapidly shift the demand for aviation services, (2) the timing of the forecasts, and (3) the difficulty of recognizing when apparent changes in the industry are transitory or permanent. These factors can affect the accuracy of both activity and pricing forecasts used to generate the revenue forecasts. Unexpected events causing changes in aviation demand or airline capacity can considerably affect trust-fund revenues and the accuracy of trust-fund revenue forecasts. For example, geopolitical events, such as the terrorist attacks of September 11, 2001, which substantially reduced the demand for air travel and led to lower trust- fund revenues, could not have been foreseen. In fiscal year 2002, when the attacks had their greatest effect on aviation activity, revenue forecasts exceeded actual revenues by $2.7 billion, or 22 percent. Additionally, rapid changes in the economy can lead to forecast inaccuracy. In fiscal year 2009, when the effects of the recent recession were greatest, revenues were overforecast by nearly $2.2 billion, or 17 percent. In response to high fuel prices and a weakening economy, the airline industry reduced its domestic capacity (the number of scheduled seats) in 2008, mostly by removing older, less- fuel-efficient aircraft from service. In fiscal year 2009, fuel and gasoline tax receipts were overforecast by 37 percent as the reduction in capacity led to a 13 percent decrease in fuel consumption from fiscal year 2008 to fiscal year 2009. According to an industry expert, the effects of certain exogenous events—events caused by factors outside the aviation industry—on demand for air travel are such that it is common for demand to drop much more quickly in response to a negative shock than it will build in response to overall good economic conditions. Thus, the likelihood that there will be years when revenues are considerably overforecast may be higher than the likelihood that there will be years when revenues are considerably underforecast. This pattern held for fiscal years 2000 through 2010. In fiscal years 2000 and 2007, revenues were underforecast by $399 million and $154 million respectively. In all other years during that decade, yearly revenues were overforecast by between $321 million and $2.7 billion. Similarly, other factors external to the industry and economy—such as health issues like an outbreak of a contagious virus—can cause rapid shifts in demand. The timing of budget forecasts exacerbates the potential for inaccurate trust-fund revenue forecasts, particularly in the face of unexpected events. Developed over a year in advance, the forecasts often cannot account for the effects of unexpected events, such as the September 11 attacks or changes in economic conditions. For example, the revenue forecast for fiscal year 2002 was developed in the final months of calendar year 2000, almost a full year before September 11, 2001. Additionally, because of the timing of the budget process, the revenue forecasts incorporate early forecasts of changes in gross domestic product (GDP), which is a critical exogenous factor affecting airline revenues and thus forecasts. Studies have found that predictions of, for example, recessions, are not very accurate more than a year in advance, and so the sharp drops in demand that occur as a result of rapidly changing macroeconomic conditions are likely to be missed in the relevant forecast. For example, OMB’s fiscal year 2009 forecast for real GDP growth from February 2008 was 3.0 percent, but real GDP actually declined by 3.5 percent, according to the Bureau of Economic Analysis. The difficulty of recognizing when apparent changes in the industry are transitory or permanent affects forecast accuracy because long-term structural changes require adjustments to forecast models. As we have previously reported, the airline industry has experienced significant structural changes over the last decade, but they were not usually apparent until well after they had occurred. Examples of apparent structural changes include the following: Short-distance markets (less than 250 miles between airports) have lost a large share of passenger traffic, likely because of the increased time required for aviation security measures implemented since September 11, 2001, has made driving a more viable option for short-distance routes. GAO, Commercial Aviation: Consumers Could Benefit from Better Information about Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees, GAO-10-785 (Washington, D.C.: July 14, 2010) and Airline Deregulation: Reregulating the Airline Industry Would Likely Reverse Consumer Benefits and Not Save Airline Pensions, GAO-06-630 (Washington, D.C.: June 9, 2006). Over the past 10 years the use of the Internet for ticket purchases has became ubiquitous and appears to have contributed to a reduction in fare dispersion and helped to suppress average fares. In particular, there appear to be fewer tickets that are high-priced tickets compared to average-priced tickets on a given route. Passenger load factors (the percentage of seats that are filled) have risen to levels previously thought not possible, according to industry experts. Increasingly, airlines are charging fees for a number of optional services, such as checked baggage, in-flight food and beverages, and ticket change or cancellation fees, for which separate fees did not previously exist. This change in pricing structure enables airlines to keep airfares lower while bringing in additional revenue through fees, which are not subject to excise taxes for the trust fund. These various factors—exogenous shocks, the timing of forecasts, and lags in recognizing structural changes to the airline industry—affect forecast accuracy for key activity and pricing measures, such as enplanements and ticket prices. In particular, experts told us that estimating how these factors may affect ticket prices is particularly hard because prices are closely tied to individual airline business decisions as well as to aggregate demand. For example, one airline’s decision to reduce fares may easily lead to a fare war, in which competing airlines attempt to undersell each other. Forecasters are unable to predict when these fare wars may occur and how they may affect on ticket prices. Similarly, forecasters are unable to predict changes airlines make to their business models, such as the addition of baggage checking and other ancillary fees. FAA’s analysis of forecast accuracy for key activity measures illustrates this difficulty in forecasting ticket prices. Specifically, for fiscal years 2003 through 2009, near-term forecasts of average ticket prices for mainline carriers were in error by an average of 3.4 percent, compared with errors that averaged 1.6 percent for forecasts of revenue passenger miles and 1.1 percent for enplanement forecasts. Although the trust fund’s uncommitted balance was used to offset lower- than-forecast trust-fund revenues in the past, the current trust-fund balance provides less protection against overcommitting trust-fund resources. This means that trust-fund revenues could be insufficient to cover all of the obligations that FAA has the authority to incur if actual trust-fund revenues continue to fall below forecast levels and Congress appropriates funds from the trust fund at the forecast levels. The trust fund’s uncommitted balance was about $1.4 billion at the end of fiscal year 2011—up from $770 million at the end of fiscal year 2010. Despite the lapse in collecting certain taxes from July 23 through August 7, 2011, according to FAA, the trust fund’s uncommitted balance grew due to higher-than-expected revenues in fiscal year 2011. A substantial decline in the trust fund’s uncommitted balance could lead to budgetary challenges for FAA, if commitments from the trust fund exceed revenues deposited into the trust fund. As we have previously reported, a decline in the trust fund’s uncommitted balance toward zero signals to FAA that revenues available to incur future obligations could be limited, which could affect FAA’s ability to move forward with planned projects and programs. OMB, the Department of Transportation (DOT), and FAA budget officials noted that if the trust fund were to become overcommitted, there would be some time to determine what actions, if any, FAA might have to take and to address this issue through the appropriations process, given capital programs are paid for—or outlayed—over several years and because the trust fund maintains a cash balance ($9.4 billion as of the end-of-fiscal-year 2010), for which revenues are continually paid into the trust fund. However, as we have previously reported, in the short term, FAA officials have noted a risk of overcommitting trust-fund resources might require them to delay obligations for capital programs if they do not have adequate revenues in the trust fund to cover those obligations—unless additional funding was authorized and appropriated from general revenues. uncommitted balance, better matching of actual revenues to the appropriation from the trust fund would better ensure that trust-fund revenues are sufficient to cover FAA’s expenditures, thus reducing the potential risk of disruptions in funding for aviation projects and programs. For our analysis, we considered four alternative options for determining the amount that would be made available for appropriation from the trust fund—each of which would require a change in law to implement (table 2). First, the House of Representatives’ current FAA reauthorization bill (H.R. 658) includes a provision that would limit the budget resources made available for appropriation from the trust fund to 90 percent, rather than 100 percent, of forecast revenues and apply any differences between actual trust-fund revenues and appropriations from the trust fund to a subsequent year. The second option would use a prior year’s actual trust-fund revenue amount as the basis for the appropriation since this revenue amount would represent the level of actual revenues deposited into the trust fund from a prior year and therefore not make funding dependent on revenue forecasts. For example, the second preceding year’s revenue amount could be used, since it would be certified by IRS in time for the development of FAA’s budget. Finally, the third and fourth options would target a level for the trust fund’s uncommitted balance— such as $2 billion or $3 billion—and base appropriations on the goal of maintaining that target level. These options would increase the likelihood that uncommitted resources would be available to FAA if actual revenues fell short of forecast revenues. Our analysis of these options shows that although they provide for substantially greater protection to the trust fund than the provision in current law, they do not completely eliminate the risk of overcommitting revenues from the trust fund (table 3). For our analysis, we applied these four approaches to the actual and forecast trust-fund revenues for fiscal years 2000 through 2010, using the trust fund’s end-of-year fiscal year 2010 uncommitted balance of $770 million as the balance for the end of fiscal year 1999 to analyze how these options might function in starting with a low uncommitted balance. On the basis of this analysis, we determined that the four options provide better protection against overcommitting resources from the trust fund when it has low uncommitted balance than the current law (which we refer to as AIR-21 method) would have provided had it been followed. However, these alternatives could still result in the trust fund being overcommitted unless Congress appropriated more general revenues because if the uncommitted balance is close to zero, there is no margin for error if the actual revenues fall significantly short of the amounts appropriated. For example, in 2002 when appropriations exceeded actual revenues by over $3.2 billion (as previously shown in fig. 4), the H.R. 658 option and the $2 billion target option, if in place during that time, would have been insufficient to protect the trust fund’s uncommitted balance from being overcommitted. Our analysis of these options further shows that they—particularly the H.R. 658 provision—could also lead to greater swings in trust-fund contributions, which in turn would require greater variation in general- revenue appropriations to maintain overall stable appropriation levels for FAA. As figure 6 shows, the H.R. 658 provision, if in place during fiscal years 2000 through 2010, would have resulted in a wider variation in the total amount available for appropriation from the trust fund than the other options and current law. Because of these variations with the H.R. 658 option, general-revenue appropriations would also have to vary widely from year to year to maintain the same appropriation levels during that time frame. In addition, these options could result in the availability of fewer resources for some period of time than under current law, unless a general-revenue appropriation made up the difference. According to the President’s fiscal year 2012 budget request and mid- session review, FAA expenditures (as reflected by OMB’s estimates of FAA’s budget authority) are expected to continue to exceed forecast trust- fund revenues through fiscal year 2021 (see fig. 7). FAA expenditures not covered by trust-fund revenues are projected to be paid for by general revenues. In the near term, the administration forecasts reductions in FAA’s expenditures in fiscal years 2013 through 2015, primarily because of the President’s directive to reduce discretionary spending for non-security agencies.expenditure levels for these years below fiscal year 2008 levels, primarily because of the $1 billion proposed reduction to AIP, according to OMB. OMB uses inflation adjustments and other factors to project out-year These forecasts, if realized, would reduce total FAA expenditures, resulting in FAA’s fiscal years 2016 to 2021 expenditures growing roughly at the forecast rate of GDP growth—around 2.3 percent to 2.5 percent annually. Under these assumptions, total forecast FAA expenditures would require $20 billion in general revenues to supplement trust-fund revenues. OMB’s forecasts base future years’ general-revenue contribution for FAA on the current budget year’s (fiscal year 2012) proposed general-revenue proportion. Specifically, OMB assumes trust-fund revenues cover about 68 percent of FAA’s estimated total expenditures, and general revenues cover the remaining 32 percent for each year of this same period. This level of general revenue funding for FAA is among the highest levels since fiscal year 2000 (see fig. 8). Since the assumptions behind the President’s budget forecasts keep the general-revenue and trust-fund contributions constant in the out-years, OMB’s forecasts differ from the AIR-21 approach in that they assume all forecast trust-fund revenues are not made available for appropriation. As a result, OMB projects a growing trust-fund uncommitted balance—from $770 million at the end of fiscal year 2010 to almost $30 billion at the end of fiscal year 2021. Although such growth does not reflect what has historically happened under the AIR-21 method—which makes the forecast level of receipts available for appropriation—OMB officials noted that this approach aligns with how OMB forecasts out-year budget authority for other agencies. By contrast, applying the AIR-21 approach to current revenue and expenditures forecasts would reduce the amount of additional general revenues needed to cover forecast expenditures but would maintain the current uncommitted balance level and still require some level of additional general revenues or increases in aviation tax levels or sources into the trust fund to fund FAA expenditures as compared to OMB’s approach (fig. 9). Specifically, applying the AIR-21 approach would make approximately $27 billion more in trust revenues available for appropriation for fiscal years 2013 through 2021 than OMB projects. Although this approach would reduce the amount of general revenues needed to cover forecast FAA expenditures, the assumption that all forecast trust-fund revenues would be appropriated halts the growth in the trust fund’s uncommitted balance holding it at the most recent estimate of $1.4 billion for fiscal year 2011 and providing limited protection against forecast error. Additionally, projected FAA expenditures under the AIR-21 approach would still require some level of general-revenue appropriation—specifically, 20 percent for fiscal year 2013, respectively, and then about 8 percent to 16 percent for fiscal years 2014 through 2021. While these forecasts provide perspectives on future FAA expenditures and trust-fund revenues, the extent to which these forecasts are more accurately realized in future years depends on changing economic, technological, political, industry, and other factors. In particular, congressional decisions, including the level of FAA’s appropriations or the trust-fund tax structure; unexpected changes affecting trust-fund revenues and FAA expenditures; and FAA’s implementation and management of programs, such as NextGen, could significantly affect trust-fund revenues and FAA expenditures in future years. In its deliberations on the appropriate level of federal revenues and expenditures for a given year, Congress decides on the level of FAA’s appropriations—which could be more or less than the President’s budget request—and the level of trust-fund and general revenues to fund FAA. As previously noted, in fiscal years 2009 and 2010, the level of appropriations from the trust fund was reduced and the general-revenue appropriation was increased from the President’s budget request. FAA’s fiscal year 2012 appropriations generally funded the President’s fiscal year 2012 request, with the exception of the President’s request for $3.35 billion in general revenues for the AIP and Facilities and Equipment accounts for a proposed infrastructure initiative (table 4). Additionally, FAA’s fiscal year 2012 appropriations cover approximately 30 percent of FAA’s total expenditures from general revenues. As CRS has reported, the House-passed FAA reauthorization bill calls for reductions to all FAA accounts, setting flat funding levels for fiscal years 2012 through 2014. These levels would reduce FAA’s annual budget by about $1 billion compared with fiscal year 2010 enacted levels and, except for AIP, are slightly below the OMB’s fiscal year 2012 budget forecasts for these same years. Changes in trust-fund taxes and fees, if enacted, would also affect trust- fund revenue forecasts. For example, the Senate-passed FAA reauthorization bill calls for an increase of 14.1 cents per gallon in general-aviation jet fuel taxes and a new surcharge of 14.1 cents per gallon surcharge on general-aviation jet fuel purchased for fractionally owned aircraft.provision could result in about $50 million in additional trust-fund revenues for fiscal years 2012 through 2014. In addition, the administration has proposed a fee of $100 per flight as part of the September 2011 deficit-reduction plan that it submitted to Congress. This fee would be deposited into the trust fund and, according to administration estimates, could generate an additional $11 billion in trust- fund revenues over the next 10 years. The Joint Committee on Taxation estimates that this Unanticipated changes affecting aviation can affect the realization of trust-fund revenues and FAA expenditure forecasts. Although Treasury forecasts continuous growth in trust-fund revenues, actual revenues have fluctuated considerably from year to year. year change in trust-fund revenues has ranged from a 13 percent increase to an over 10 percent decline during fiscal years 2000 through 2010. As we previously described, events, such as the economic recession in 2009 and structural changes in the industry, can cause trust- fund revenues to vary from year to year. For example, in 2007, airline capacity grew more slowly than air traffic leading to growth in airline revenues and better-than-expected trust-fund revenues in that year. In addition, unanticipated events can affect FAA’s expenditures, as well as trust-fund revenues. For example, major airline accidents and terrorist actions can create additional resource needs for the agency that cannot be easily forecast. Additionally, these incidents can cause passenger demand to fall with airlines responding by lowering fares—with both of these factors leading to reduced trust-fund revenues. Treasury forecasts growing trust fund revenues because aviation activity generally grows with the expected growth in economic activity. Long-term revenue forecasts generally show a continuous growth even though economic cycles will cause revenues to fluctuate from year to year. However, long-term forecasts, in aggregate, should reflect the total effect of economic cycles. expenditures. Much of this proposed reduction is in NextGen and NextGen-related expenditures that are being scaled back or deferred to later years. Although FAA also reduced its forecast operations expenditures because of budget constraints, these forecasts do not account for potential efficiency gains that may occur from the implementation of NextGen technology, which could reduce the overall cost of FAA operations. GAO-12-141T. programs.NextGen—both in the midterm (through 2018) and in the long term (beyond 2018)—and FAA’s overall costs will be affected by how well FAA manages program interdependencies. Thus, looking more broadly, the implementation of While FAA’s budget generally identifies the NextGen capabilities that FAA plans to implement in the near term to midterm (through 2018), the out- year expenditure forecasts are not tied to specific FAA programs and will be affected by decisions that have yet to be made on the long-term direction of NextGen. Specifically, although FAA estimates that it will incur total NextGen costs of between $15 billion and $22 billion for fiscal years 2012 through 2025, two key planning documents—the NextGen Integrated Work Plan and Enterprise Architecture—contain a wide variety of possible ideas and approaches for the long-term direction of NextGen (beyond 2018). approaches will be implemented remain to be made. Additionally, FAA estimates that the avionics needed on aircraft to realize significant NextGen capabilities will cost private operators in the range of $5 billion to $7 billion through 2018. FAA has not determined whether they will provide financing to help aircraft operators cover these costs. The Enterprise Architecture, commonly referred to as the “blueprint” for NextGen, is a technical document that describes the segments, capabilities, operational activities, and identified relationships to the key target components of NextGen in the year 2025. The NextGen Integrated Work Plan is a document that describes when NextGen capabilities and potential improvements will be introduced and who will be responsible for them. Additionally, FAA’s NextGen cost estimate for 2012 through 2025 is in 2011 constant dollars. Thus, even though the present value of the cost are represented by this estimate, the actual dollars needing to be appropriated to cover those expenses in the years that they are incurred will be higher due to inflation. balance. Deciding on the appropriate mechanism for determining the level of appropriations from the trust fund requires Congress to weigh trade- offs between the amount available for appropriations from the trust fund, the amount of general revenues in a given year, and the overall level of FAA expenditures, all while ensuring stable and sustainable funding for aviation investment. As we have previously suggested, a better mechanism may be needed to match actual revenues with trust-fund appropriations, and thereby help to protect the trust fund’s uncommitted balance and provide Congress, FAA, and the larger aviation community with greater certainty about the trust fund’s sustainability. Congress will determine the future budget resources available to meet FAA’s operating and capital investments, including NextGen improvements. Even within the currently constrained federal budget environment, it appears that based on the President’s budget request estimates, FAA expenditures will continue to exceed trust-fund revenues in future years. As federal budget resources continue to be constrained, Congress may face some difficult choices about whether to reduce FAA’s appropriations, which could increase FAA’s total costs and delay the benefits associated with investments such as NextGen, or to either increase revenues going into the trust fund or increase appropriations from general revenues. We provided a draft of this report to OMB, Treasury, and DOT for review and comment. Each entity provided technical comments that we incorporated, as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to interested congressional committees, the Director of OMB, the Secretary of Transportation, the Acting Administrator of FAA, the Secretary of the Treasury, and other parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or flemings@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 major contributions to this report are listed in appendix I. In addition to the individual named above, key contributors to this report were Paul Aussendorf (Assistant Director), Heather Krause (Assistant Director), Amy Abramowitz, Lauren Calhoun, Bess Eisenstadt, Bert Japikse, Carol Henn, Hannah Laufe, Sara Ann Moessbauer, Joshua Ormond, and Rebecca Rygg.

Summary: Established in 1970, the Airport and Airway Trust Fund (trust fund) is the primary source of funding for the Federal Aviation Administrations (FAA) investments in the airport and airway system. Trust-fund revenues come largely from taxes on airline tickets and aviation fuel. The financial health of the trust fund is important to ensure sustainable funding for FAA without increasing demands on general revenues. Current law authorizes appropriations from the trust fund equal to forecast trust-fund revenues. However, if forecasts overestimate actual revenues and Congress appropriates the forecast level, the trust funds uncommitted balancethat is, the balance in excess of what has been appropriated from the fund or authorized as contract authorityis drawn down. Among its objectives, GAO was asked to examine (1) the accuracy of the trust-fund revenue forecasts and factors affecting forecast accuracy, (2) different options for determining appropriations from the trust fund that would reduce the risk of overcommitting the fund, and (3) the extent to which trust-fund revenues might cover planned FAA expenditures through fiscal year 2021. GAO reviewed the Department of the Treasurys (Treasury) and FAAs forecasting methods, analyzed trust-fund revenue and forecast data, and interviewed federal officials and aviation-industry and forecasting experts. The Departments of Transportation and Treasury and the Office of Management and Budget provided technical comments, which GAO incorporated into the report as appropriate. Actual trust-fund revenues fell short of FAAs revenue forecasts for 9 of the past 11 years, contributing to a decline in the trust funds uncommitted balance from over $7 billion in fiscal year 2000 to $770 million in fiscal year 2010. Inaccurate forecasts for the taxes related to domestic passenger tickets, which account for over 70 percent of trust-fund revenues, drove the aggregate overforecast, but inaccurate forecasts for other taxes also had an effect. This inaccuracy is largely attributable to unexpected events affecting aviation, such as the terrorist attacks of September 11, 2001, and the recession in 2009; the budget process requiring the forecasts to be developed over a year in advance of the fiscal year; and lags in recognizing structural changes in the airline industry, such as airlines increased reliance on ancillary fees for which excise taxes for the trust fund are not collected. Changes in the methodology for forecasting trust-fund revenues and the assumption of forecasting responsibility by Treasury, begun in fiscal year 2011, may also affect the future accuracy of forecasts, but it is too soon to tell what effect the changes will have after just 1 fiscal year. Alternative options for how Congress determines available resources for appropriation from the trust fund could provide for substantially greater protection against overcommitting trust-fund resourcesthat is, help ensure that trust-fund revenues would be sufficient to cover FAAs expendituresor requiring additional general-revenue contributions than the current approach outlined in law. To this end, Congress could limit budget resources available for appropriation from the trust fund to less than the forecast revenuesfor example, the current House FAA Reauthorization bill has a provision that would make only 90 percent of forecast revenues available for appropriation from the trust fund as well as any prior year differences between actual trust-fund revenues and appropriations from the trust fund. Other options would make only actual revenues from the prior year available, or base appropriations on the maintenance of a target level for the trust funds balance. However, unless a sufficiently large minimum balance is established, there would still be some risk of overcommitting trust-fund resources under these options. The alternatives could also result in greater swings in trust-fund appropriations, requiring varying levels of general revenues to maintain overall stable spending levels for FAA. The extent to which trust-fund revenues might cover FAAs future expenditures will depend on whether trust-fund revenue and FAA expenditure forecasts are realized. Under current revenue and expenditure forecasts, between 8 percent and 32 percent of FAAs annual expenditures for fiscal years 2013 through 2021 could have to be paid for by general revenues unless spending is reduced or additional taxes are paid into the trust fund. However, congressional decisions, including the level of FAAs appropriations; unexpected events affecting trust-fund revenues and FAA expenditures; and FAAs implementation and management of programs could significantly change forecast revenues and expenditures in future years. For example, FAAs modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen), is currently estimated to cost FAA $15 billion to $22 billion, and an additional $5 billion to $7 billion for equipping aircraft with NextGen technology, but those costs could change depending upon the speed of implementation and other factors.