The United States, which possesses the largest, most extensive aviation system in the world, has more than 18,000 airports. U.S. airports range from large commercial transportation centers enplaning more than 30 million passengers annually to small grass strips serving only a few aircraft each year. Of these, 3,304 are designated as part of the national airport system and are therefore eligible for federal assistance. The federal interest in capital investment for airports has been guided by several objectives, most notably ensuring safety and security, preserving and enlarging the system’s capacity, helping small commercial and general aviation airports, funding noise mitigation, and environmental protection. National system airports are of two types—commercial service airports, of which there are 540, and general aviation airports, of which there are 2,764. The Federal Aviation Administration further divides commercial service airports, defined as those publicly owned airports that enplane 2,500 or more passengers and have scheduled service—into primary airports (enplaning more than 10,000 passengers annually) and other commercial service airports. The 413 designated primary airports are arranged into various classes of hub airports—large, medium, small, and nonhub—as explained in figure 1. Statutorily, large and medium hub airports are designated as large primary airports and must contribute a larger share to projects funded under the Airport Improvement Program (AIP) as well as forgo a portion of their AIP grants if they collect passenger facility charges (PFC). This report follows that convention in grouping large and medium hub airports together separate from all other national system airports in considering airports’ financial capabilities. In addition, financial information on each category of airport is presented in appendix II. Airports, airlines, FAA, and a congressionally commissioned study have made various estimates of the future financing requirements needed to meet airports’ future development plans. These estimated requirements have varied widely, ranging from $4 billion to $10 billion annually over the next several years. In our April 1997 report, we concluded that these estimates varied so widely because of differing views about what kinds of projects and airports to include as part of an estimate. In that report, we provided four estimates of future development, varying upon how many categories of projects are included. Our estimates ranged from $1.4 billion per year to fund safety, security, noise mitigation, and reconstruction projects; $2.8 billion if other high-priority projects, primarily capacity-related projects, are added; $6.1 billion for all AIP-eligible projects; and $10.1 billion per year to fund all types of projects, including those not eligible for AIP funding. Airports rely on a variety of funding sources, some public and some private, to finance their capital development. The major funding sources, listed in further detail in table 1, are federal and state grants, PFCs airport and special facility bonds, and airport-generated income. In 1996, U.S. airports raised an estimated $7 billion from these sources. Additional information on each of these funding sources and their distribution among various categories of airports is contained in appendix I. As figure 2 shows, total airport funding varies year to year. For example, funding in 1993 declined by 45 percent from 1992. This variability results primarily from year-to-year changes in the amount of funding from bonds, which in turn is affected by changing interest rates, the demand for air travel, and airlines’ agreements with airports. The amount and type of funding varies considerably by the type of airport. The 71 large and medium hub airports, which accounted for almost 90 percent of all passenger traffic, also obtained 79 percent of all funding in 1996, while the 3,233 other national system airports accounted for the remaining 21 percent of the funding. In addition, as shown in figure 3, large and medium hub airports rely most heavily on private airport bonds, which constitute roughly 62 percent of their total funding, while the other airports rely on federal grants for about half of their funding. Additional information on each of these funding sources and their distribution among various categories of airports is contained in appendix I. To test the strength of the relationship between the size of an airport and its reliance on the various funding sources, we analyzed the correlation between size, as measured by passenger enplanements, and funding sources, as measured by the proportion that each source contributes to the total funding for the 300 commercial airports for which we had complete financial data. We found that as an airport’s size increases, both within and across airport categories, an airport’s reliance on AIP diminishes, while the use of other funding sources, such as bonds and PFCs, increases. Airports’ planned capital development over the next 5 years may total as much as $10 billion per year, or $3 billion more per year than their 1996 funding. Figure 4 compares airports’ total capital development funding in 1996 to their annual planned development over the next 5 years. Funding for 1996 is shown by source; planned spending is shown by the relative priority of the projects. FAA’s highest priorities are for projects to meet safety, security, and environmental requirements, including noise mitigation, and for projects that maintain existing infrastructure (reconstruction). Other high-priority projects are primarily for adding capacity, while other AIP-eligible projects are a relatively lower priority, such as projects aimed at helping airports better meet FAA’s design standards. Some projects, such as expanding commercial space in terminals and parking garages, are typically not eligible for funding from FAA. Although a difference may exist between funding and planned spending in total, there is a much closer match between funding from AIP and planned spending on FAA’s highest-priority projects (reconstruction and mandates). In the aggregate, the $1.372 billion in AIP grants in 1996 roughly equates to the $1.414 billion in estimated development planned for the highest-priority projects. However, because about one-third of AIP grants are awarded to airports on the basis of the number of passengers enplaned and not necessarily projects’ priority, the full amount of AIP grants may not be going to the highest-priority projects. The difference between current funding and planned development for smaller airports represents a greater proportion of their total planned development than for large and medium hub airports. Current funding at the 3,233 small, nonhub, other commercial service, and general aviation airports is a little over half of the estimated cost of their total planned development, producing a difference of more than $1.4 billion (see fig. 5). The difference may actually be even greater if it were not for $250 million in special facility bonding for a single cargo/general aviation airport. For this group of airports, the $782 million in 1996 AIP grants surpasses the annual estimate of $750 million for reconstruction, noise mitigation, and federally mandated projects. As a portion of total funding, the potential funding difference for the 71 large and medium hub airports is comparatively less than for their smaller counterparts (see fig. 6). However, because total expenditures for capital projects are so much greater for these airports, this smaller portion represents a potential shortfall of $1.5 billion, or $87 million greater than smaller airports’ collective shortfall. Figure 6 also indicates that $590 million in AIP grants falls $74 million short of the estimated cost to meet FAA’s highest-priority development—meeting federal mandates and maintaining current infrastructure. For a more detailed analysis that shows the difference between current funding and planned development for each of the six categories of airports, see appendix II. Evaluating the various proposals to provide additional funding for airport development involves the consideration of the trade-offs among the various funding types as well as the potential effect each proposal would have on airports. Initiatives to increase funding for airport development include increasing AIP funding, raising the ceiling on PFCs, and other initiatives, such as FAA’s pilot programs for innovative financing and privatization. In addition, we examined the potential benefits of state-administered revolving funds. Choosing to increase one source of funding instead of another involves making trade-offs because the current funding sources differ in several key characteristics, as shown in table 2. For example, increasing funding through grant programs will increase the extent to which the government can specify the recipient, the project, and the amount of funds that will be awarded because grant programs facilitate such targeting better than other funding mechanisms. However, because grant programs in general are relatively costly to administer, increasing funding through grants would increase administrative costs more than a similar amount from bonds or airport revenues. The funding mechanisms also differ with respect to who bears the cost of airport financing. These differences affect the extent to which beneficiaries pay in proportion to the benefits they receive—a measure of economic efficiency and equity. In choosing, for example, between bonds and grants, it is useful to consider that they may have different efficiency and equity effects because of differences in the share of costs borne by users and nonusers of airports under each funding mechanism. Grants are funded through AIP, which is, in turn, funded primarily by the ticket tax. Thus, users pay for grants to airports. In contrast, part of the cost of tax-exempt bonds is borne by nonusers of airports because the interest earned by bondholders is exempt from federal income taxation. As a result, more of the cost of bond financing is borne by nonusers of airports than in the case of grants. Even so, it is uncertain whether using bonds to increase funding would improve or worsen the overall efficiency and equity of airport financing. This uncertainty arises because of the uncertainty in determining how much nonusers benefit from airport development that may stimulate economic development in the community surrounding any given airport. As a result, it is difficult to compare such benefits with the costs that nonusers currently bear. If, as some believe, these benefits are small, then increasing the use of bonds could reduce the overall efficiency and equity of airport financing. But this decrease in equity and efficiency might be justified because bonds have lower administrative costs than grants.