ACI’s estimate of planned capital development costs is considerably larger than FAA’s because it reported a broader base of projects. According to FAA’s estimate, which includes only projects that are eligible for AIP grants, the total cost of airport development will be about $41 billion, or about $8.2 billion per year for 2007 through 2011. (See table 1.) ACI estimates annual costs of about $78 billion, or about $15.6 billion per year, for the same period. These estimates differ mainly because ACI’s estimate includes all future projects that may or may not have an identified funding source or be eligible for federal funding and also because they are based on different estimating approaches. Projects that are eligible for AIP grants include runways, taxiways, and noise mitigation and reduction efforts; projects that are not eligible for AIP funding include parking garages, hangars, and expansions of commercial space in terminals. Several factors account for the differences between the FAA and ACI estimates of future development costs. The biggest difference stems from ACI’s inclusion of projects that are not eligible for AIP grants, while FAA’s estimate includes only AIP-eligible projects (see table 2). However, even when comparing just the AIP-eligible portions of the respective estimates, ACI’s estimate is 20 percent ($8 billion in total or $1.6 billion annually) greater. This points to differences in how the two estimates are formed. One difference is the estimating approach. FAA’s estimates cover projects for every airport in the national system, while ACI surveyed the 100 largest airports (mostly large and medium hub airports) and then extrapolated a total based on cost per enplanement calculations for small, medium, and large hub airports that did not respond. Further analysis on a project-by-project level shows variances related to three other factors: Definition—FAA data are based on planned project information taken from airport master plans and state system plans, minus projects that already have an identified funding source, while ACI includes all projects, whether funding has been identified or not. For example, ACI’s estimate for Washington Dulles airport includes $278 million for an automated people mover, but FAA’s estimate does not because it is being funded by a PFC approved in 2006. Measurement—FAA data include only the portion of a project that is eligible for AIP, while ACI estimates the total value project cost. On a terminal construction project at Dulles International Airport, ACI estimated total costs of $1.6 billion for construction; however, only a small portion is eligible for AIP funding. FAA did not report any amount because under FAA AIP rules only a small portion ($20 million) was eligible for AIP funding and the airport had exhausted the AIP funds that could be used for this type of project. Timing—The ACI and FAA estimated planned development costs for the same five year time period, but the estimates were made at different times—the ACI survey was completed in early 2007, while FAA’s estimate is based on information collected in early 2006. Further, the ACI estimate includes projects that FAA does not believe will be commissioned during the next 5 years. At Fort Lauderdale International Airport, for example, ACI reported a $700 million runway project but FAA reports less than $200 million for the same project. According to FAA, the remaining costs are beyond 2011. FAA and ACI estimates do not consider cost increases such as rising construction costs. Going forward these costs may increase, especially construction costs which have jumped 26 percent in 30 major U.S. cities over the past three years. Industry experts predict that construction costs will continue to increase project costs. FAA acknowledges that development estimates may or may not include increase in costs based on construction uncertainty and that annual costs increases are not captured. From 2001 to 2005, the 3,364 active airports that make up the national airport system received an average of about $13 billion per year for planned capital development from a variety of funding sources. These funds are used for both AIP-eligible and ineligible projects. The single largest source of these funds was bond proceeds, backed primarily by airport revenues, followed by AIP grants, PFCs, and state and local contributions (see table 3). The amount and source of funding vary with the size of airports. The nation’s 67 larger airports, which handled almost 90 percent of the passenger traffic in 2005, accounted for 72 percent of all funding ($9.4 billion annually), while the 3,297 other smaller commercial and general aviation airports that make up the rest of the national system accounted for the other 28 percent ($3.5 billion annually). As shown in figure 1, airports’ reliance on federal grants is inversely related to their size—- federal grants contributed a little over $1.3 billion annually to larger airports (14 percent of their total funding) and $2.3 billion annually to smaller airports (64 percent of their total funding). Based on past funding levels, airports’ funding is about $1 billion per year less than estimated planned capital development costs. If the $13 billion annual average funding continues over the next 5 years and were applied only to AIP-eligible projects, it would cover all of the projects in FAA’s estimate. However, much of the funding available to airports is for AIP- ineligible projects that can attract private bond financing. We could not determine how much of this financing is directed to AIP-eligible versus ineligible projects. Figure 2 compares the $13 billion average annual funding airports received from 2001 through 2005 (adjusted for inflation to 2006 dollars) with the $14 billion in annual planned development costs for 2007 through 2011. The $14 billion is the sum of FAA’s estimated AIP- eligible costs of $8.2 billion annually and ACI’s estimated ineligible costs of $5.8 billion annually. The overall difference of about $1 billion annually is not an absolute predictor of future funding shortfalls; both funding and planned development may change in the future. The difference between current funding and planned development costs for larger airports is about $600 million if both AIP-eligible and ineligible projects are considered. From 2001 through 2005, larger airports collected an average of about $9.4 billion a year for capital development, as compared to over $10 billion in annual planned development costs. Figure 3 shows the comparison of average annual funding versus planned development costs for larger airports. At $5.7 billion annually, the ineligible portion of costs is 57 percent of the total planned development costs. The difference between past funding and planned development costs for smaller airports is roughly $400 million annually. At smaller airports, average annual funding from 2001 through 2005 was about $3.6 billion a year (expressed in 2006 dollars). Annual planned development costs for smaller airports from 2007 through 2011 is estimated at about $4 billion. Figure 4 compares average annual funding to planned development costs. As the figure shows, the portion of smaller airports’ project costs not eligible for AIP funding is relatively small—about $75 million annually, or about 2 percent of total planned development costs. The financial health of airports is strong and has generally improved since September 11, 2001, especially for larger airports. Passenger traffic has rebounded to 2000 levels and bond ratings have improved. Following September 11, many airports cut back on their costs and deferred capital projects. However, credit rating agencies and financial experts now agree that larger airports are generally financially strong and have ready access to capital markets. A good indicator of airports’ financial strength is the number and scale of underlying bond ratings provided by bond rating agencies. More bonds were rated in 2007 than 2002, and more bonds are rated at the higher end of the rating scale in 2007, meaning that the rating agencies consider them less of a risk today. Furthermore, larger airports tended to have higher ratings than smaller airports. The administration’s reauthorization proposal for AIP would increase funding for larger airports, but its effect on smaller airports is uncertain because of the overall reduction in AIP and the proposed changes in how AIP grants are allocated between larger and smaller airports. The 2008 fiscal year budget reduces AIP funding from its past level of $3.5 billion in fiscal years 2006 and 2007 to $2.75 billion in 2008. The proposal also would eliminate entitlement, otherwise known as apportionment, grants for larger airports while increasing the PFC ceiling from $4.50 to $6 per passenger. While larger airports that account for 90 percent of all passengers will come out ahead, an increased PFC may not compensate smaller airports for the overall reduction in AIP, even with the proposed changes in how AIP is allocated between larger and smaller airports. As a separate issue, the administration’s reauthorization proposal would change the way that AIP and other FAA programs are funded and may not provide enough monies for these programs, even at the reduced levels proposed by the administration. The administration’s 2008 FAA reauthorization proposal would reduce AIP, change how AIP is allocated, and increase the PFC available to commercial airports. (Key changes in the proposal’s many elements are outlined in appendix I.) Unlike previous reauthorization proposals, which made relatively modest changes in the structure of the AIP program, this proposal contains some fundamental changes in the funding and structure of the AIP program. Notably, following the pattern set by the 2000 FAA reauthorization, which required larger airports to return a certain percentage of their entitlement funding in exchange for an increase in the PFC, the administration proposes eliminating entitlement grants for larger airports altogether and at the same time allowing those airports to charge a higher PFC. The reauthorization proposal would eliminate some set-aside programs and increase the proportion of discretionary grant funds available to FAA at higher AIP funding levels.