Aviation Finance
Observations on Potential FAA Funding Options Gao ID: GAO-06-973 September 29, 2006The Federal Aviation Administration (FAA), the Airport and Airway Trust Fund (Trust Fund), and the excise taxes that support the Trust Fund are scheduled for reauthorization at the end of fiscal year 2007. FAA is primarily supported by the Trust Fund, which receives revenues from a series of excise taxes paid by users of the national airspace system (NAS). The Trust Fund's uncommitted balance decreased by more than 70 percent from the end of fiscal year 2001 through the end of fiscal year 2005. The remaining funding is derived from the General Fund. This report focuses on the portion of revenues generated from users of the NAS and addresses the following key questions: (1) What advantages and concerns have been raised about the current approach to collecting revenues from NAS users to fund FAA, and to what extent does available evidence support the concerns? (2) What are the implications of adopting alternative funding options to collect the revenues contributed by users that fund FAA's budget? (3) What are the advantages and disadvantages of authorizing FAA to use debt financing for capital projects? This report is based on interviews with relevant federal agencies, including FAA, the Office of Management and Budget, and the Congressional Budget Office. GAO also obtained relevant documents from these agencies, other key stakeholders, and academic and financial experts.
Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system there is a disconnect between revenues contributed by users and the costs they impose on the NAS that raises revenue adequacy, equity, and efficiency concerns. Trends and FAA projections in both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA's workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. The extent to which revenues and costs are linked, however, depends critically on how costs are allocated. Thus, to assess the extent to which the current approach or other approaches aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to assign costs to NAS users. The implications of adopting alternative funding options to collect revenue from NAS users and address concerns about the current excise tax system vary depending on the extent to which users' revenue contributions reflect the costs those users impose on FAA. This report considers six selected funding options, including two that modify the current excise tax structure and four that adopt more direct charges to users. Given the diverse nature of FAA's activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. Some stakeholders who support the adoption of direct user charges also support a change in FAA's governance structure, but GAO found no evidence adoption of direct charges requires this. Authorizing FAA to use debt financing for capital projects would have advantages and disadvantages. Some stakeholders identify debt financing as attractive because it could provide FAA with a stable source of revenue to fund capital developments, while at the same time spreading the costs out over the life of a capital project as its benefits are realized. Debt financing raises significant concerns, however, because it encumbers future resources, and expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. Concerns regarding borrowing costs, oversight, and encumbering future resources are particularly important in light of the federal government's long-term structural fiscal imbalance. The Departments of Transportation and Treasury provided comments and technical clarifications on a draft of this report which we have incorporated or responded to as appropriate. DOT's comments focused on governance reforms required to adopt a user fee approach, and whether we accurately described the status of FAA's accounting system. Treasury's raised concerns about the level of analytical development for the options and associated issues. Data was not available to conduct the analysis Treasury suggested, and we agree necessary. However, we believe the report provides useful information to facilitate debate on the options.
GAO-06-973, Aviation Finance: Observations on Potential FAA Funding Options
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2006:
Aviation Finance:
Observations on Potential FAA Funding Options:
Aviation Finance:
GAO-06-973:
GAO Highlights:
Highlights of GAO-06-973, a report to Congressional Committees
Why GAO Did This Study:
The Federal Aviation Administration (FAA), the Airport and Airway Trust
Fund (Trust Fund), and the excise taxes that support the Trust Fund are
scheduled for reauthorization at the end of fiscal year 2007. FAA is
primarily supported by the Trust Fund, which receives revenues from a
series of excise taxes paid by users of the national airspace system
(NAS). The Trust Fund‘s uncommitted balance decreased by more than 70
percent from the end of fiscal year 2001 through the end of fiscal year
2005. The remaining funding is derived from the General Fund. This
report focuses on the portion of revenues generated from users of the
NAS and addresses the following key questions: (1) What advantages and
concerns have been raised about the current approach to collecting
revenues from NAS users to fund FAA, and to what extent does available
evidence support the concerns? (2) What are the implications of
adopting alternative funding options to collect the revenues
contributed by users that fund FAA‘s budget? (3) What are the
advantages and disadvantages of authorizing FAA to use debt financing
for capital projects?
This report is based on interviews with relevant federal agencies,
including FAA, the Office of Management and Budget, and the
Congressional Budget Office. GAO also obtained relevant documents from
these agencies, other key stakeholders, and academic and financial
experts.
What GAO Found:
Some stakeholders support the current excise tax system, stating that
it has been successful in funding FAA, has low administrative costs,
and distributes the tax burden in a reasonable manner. Other
stakeholders, including FAA, state that under the current system there
is a disconnect between revenues contributed by users and the costs
they impose on the NAS that raises revenue adequacy, equity, and
efficiency concerns. Trends and FAA projections in both inflation-
adjusted fares and average plane size suggest that the revenue
collected under the current funding system has fallen and will continue
to fall relative to FAA‘s workload and costs, supporting revenue
adequacy concerns. Comparisons of revenue contributed and costs imposed
by different flights provide support for equity and efficiency
concerns. The extent to which revenues and costs are linked, however,
depends critically on how costs are allocated. Thus, to assess the
extent to which the current approach or other approaches aligns costs
with revenues would require completing an analysis of costs, using
either a cost accounting system or cost finding techniques to assign
costs to NAS users.
The implications of adopting alternative funding options to collect
revenue from NAS users and address concerns about the current excise
tax system vary depending on the extent to which users‘ revenue
contributions reflect the costs those users impose on FAA. This report
considers six selected funding options, including two that modify the
current excise tax structure and four that adopt more direct charges to
users. Given the diverse nature of FAA‘s activities, a combination of
alternative options may offer the most promise for linking revenues and
costs. Switching to any alternative funding option would raise
administrative and transition issues. Some stakeholders who support the
adoption of direct user charges also support a change in FAA‘s
governance structure, but GAO found no evidence adoption of direct
charges requires this.
Authorizing FAA to use debt financing for capital projects would have
advantages and disadvantages. Some stakeholders identify debt financing
as attractive because it could provide FAA with a stable source of
revenue to fund capital developments, while at the same time spreading
the costs out over the life of a capital project as its benefits are
realized. Debt financing raises significant concerns, however, because
it encumbers future resources, and expenditures from debt proceeds may
not be subject to the congressional oversight that appropriations
receive. Concerns regarding borrowing costs, oversight, and encumbering
future resources are particularly important in light of the federal
government‘s long-term structural fiscal imbalance.
The Departments of Transportation and Treasury provided comments and
technical clarifications on a draft of this report which we have
incorporated or responded to as appropriate. DOT‘s comments focused on
governance reforms required to adopt a user fee approach, and whether
we accurately described the status of FAA‘s accounting system.
Treasury's raised concerns about the level of analytical development
for the options and associated issues. Data was not available to
conduct the analysis Treasury suggested, and we agree necessary.
However, we believe the report provides useful information to
facilitate debate on the options.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-973].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gerald Dillingham at
(202) 512-4830 or dillinghamg@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Some Stakeholders Favor the Current Funding System, but Others Raise
Revenue Adequacy, Equity, and Efficiency Concerns:
Alternative Funding Options Present Both Advantages and Disadvantages:
Alternative Capital Financing Methods Have Advantages and
Disadvantages:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet
Flight Compared with Three Regional Jet Flights:
Table 2: Estimated Excise Tax Contribution by Flight Type:
Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet
Flight Compared with One Regional Jet Flight:
Figures:
Figure 1: FAA Activities:
Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005:
Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years
1971-2005:
Figure 4: General Fund and Trust Fund Contributions to FAA's Budget:
Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005:
Figure 6: Average Domestic Fares, 1981-2005:
Figure 7: Average Available Seats per Domestic Aircraft:
Figure 8: Potential FAA Process for Borrowing from the Treasury:
Figure 9: Potential FAA Process for Borrowing from the Private Capital
Market:
Abbreviations:
AIP: Airport Improvement Program:
AOPA: Aircraft Owners and Pilots Association:
ARTCC: air route traffic control center:
ATC: air traffic control:
BPA: Bonneville Power Administration:
CBO: Congressional Budget Office:
DOT: Department of Transportation:
FAA: Federal Aviation Administration:
GA: general aviation:
GO: general obligation bond:
GR: general revenue bond:
GAO: Government Accountability Office:
GARVEE: Grant Anticipation Revenue Vehicle:
IRS: Internal Revenue Service:
NAS: National Airspace System:
OMB: Office of Management and Budget:
SARS: Severe Acute Respiratory Syndrome:
TRACON: terminal radar approach control center:
TVA: Tennessee Valley Authority:
United States Government Accountability Office:
Washington, DC 20548:
September 29, 2006:
Congressional Committees:
The Federal Aviation Administration (FAA), the Airport and Airway Trust
Fund (Trust Fund), and the excise taxes that support the Trust Fund are
scheduled for reauthorization at the end of fiscal year 2007. Although
there have been fluctuations in its funding sources, FAA is primarily
supported by the Trust Fund (82 percent),[Footnote 1] which receives
revenues from a series of excise taxes paid by users of the National
Airspace System (NAS). The Trust Fund's uncommitted balance decreased
by more than 70 percent from the end of fiscal year 2001 through the
end of fiscal year 2005. These excise taxes apply to purchases of
airline tickets and aviation fuel, as well as the shipment of cargo.
FAA's remaining funding comes from the General Fund of the U.S.
Treasury (General Fund) (18 percent). The policy debate over the
reauthorization of FAA, the Trust Fund, and the excise taxes that fund
it encompasses a host of critical and complex issues, including the
modernization of the nation's air traffic control (ATC) infrastructure
and FAA's efforts to improve cost control and internal management
practices. The agency's reliance on revenues from both users and the
General Fund recognizes that FAA produces direct benefits for NAS users
and substantial public benefits, including safety, security, and
economic benefits. Stakeholders we talked with all agreed that these
public benefits justify a continued General Fund contribution to FAA's
budget. However, a key issue raised in the debate over FAA funding, and
the focus of this report, is how the revenues generated from users of
the NAS might be collected.[Footnote 2] Stakeholders are divided over
whether Congress should continue to rely on the current excise tax
structure or adopt an alternative structure to collect the funding
contributed by users.
You requested that we examine FAA's current funding system and
alternative funding options. Accordingly, we addressed the following
key questions: (1) What advantages and concerns have been raised about
the current approach to collecting revenues from NAS users to fund FAA,
and to what extent does the available evidence support the concerns?
(2) What are the implications of adopting alternative funding options
to collect the revenues contributed by users that fund FAA's budget?
(3) What are the advantages and disadvantages of authorizing FAA to use
debt financing for capital projects?
To answer these questions, we reviewed relevant economic literature,
policy analysis, congressional testimony, industry group publications,
and stakeholders' responses to questions FAA asked them about its
funding and alternative options.[Footnote 3] We also interviewed key
stakeholders, including officials from FAA, the Office of Management
and Budget (OMB), the Congressional Budget Office (CBO), and the
Department of the Treasury (Treasury); representatives of aviation
industry groups; and academic and financial experts. In addition, we
examined FAA budget data, Trust Fund revenue data, FAA forecasts, and
aviation activity data. We reviewed the reliability of these data and
concluded that they were sufficiently reliable for our purposes. We
conducted our work from May 2005 through August of 2006 in accordance
with generally accepted government auditing standards. Details of our
scope and methodology are provided in appendix 1.
Results in Brief:
Some stakeholders[Footnote 4] support the current excise tax system,
stating that it has been successful in funding FAA, has low
administrative costs, and distributes the tax burden in a reasonable
manner. Other stakeholders,[Footnote 5] including FAA, state that under
the current system there is a disconnect between the revenues
contributed by users and the costs they impose on the NAS. In their
view, this disconnect raises revenue adequacy, equity, and efficiency
concerns. Trends over the past 25 years in, and FAA projections of,
both inflation-adjusted fares and average plane size suggest that the
revenue collected under the current funding system has fallen and will
continue to fall relative to FAA's workload and costs, supporting
revenue adequacy concerns. Comparisons of revenue contributed and costs
imposed by different flights provide support for equity and efficiency
concerns. However, the extent to which revenues and costs are linked
depends critically on how costs are assigned to NAS users. Thus, to
assess the extent to which the current approach or any other approach
aligns costs with revenues would require completing an analysis of
costs, using either a cost accounting system or cost finding
techniques[Footnote 6] to assign costs to the various NAS users.
Adopting alternative funding options to collect revenues from NAS users
would have advantages and disadvantages. The degree to which
alternative funding options could address concerns about the current
excise tax system ultimately depends on the extent to which the
contributions required from users actually reflect the costs they
impose on the system. This report reviews both modifications to the
current excise tax system and more direct charges based on the use of
FAA's services. Given the diverse nature of FAA's activities, a
combination of alternative options may offer the most promise for
linking revenues and costs. Switching to any alternative funding option
would raise administrative and transition issues, such as developing
the administrative capacity to implement new charges. Some stakeholders
who support the adoption of direct user charges also support a change
in FAA's governance structure--for example, commercializing air
navigation services--but we found no evidence that the adoption of
direct charges would require a governance change.
Authorizing FAA to use debt financing for capital projects would have
advantages and disadvantages. The use of debt financing--such as bonds-
-has been identified by some stakeholders as a means of funding FAA
capital projects, such as components of the Next Generation Air
Transportation System (NGATS) or existing ATC facilities and
equipment.[Footnote 7] Some stakeholders believe debt financing is
attractive because it could provide FAA with a stable source of revenue
to fund capital development and, at the same time, spread the costs out
over the life of a capital project as its benefits are realized. Debt-
financing raises significant concerns, however, because it encumbers
future resources and expenditures from debt proceeds may not be subject
to the congressional oversight that appropriations receive. In
addition, debt financing is subject to federal budget scoring rules and
raises issues regarding borrowing costs that are particularly important
in light of the federal government's long-term structural fiscal
imbalance.
We provided a draft of this report to the Departments of Transportation
(DOT) and the Treasury for review and received comments from both
agencies. Neither DOT nor Treasury explicitly agreed or disagreed with
our observations, and both departments raised a number of concerns and
provided technical clarifications. We incorporated these comments and
technical clarifications throughout the report as appropriate, or
responded to them in the agency comments section at the end of the
report.
Background:
FAA engages in three primary activities: aviation safety oversight,
ATC, and airport infrastructure development (see fig. 1).[Footnote 8]
The costs associated with each of these activities generally depend on
the nature and usage of the specific service FAA provides. FAA safety
activities include the licensing of pilots and mechanics, as well as
the inspection of various aspects of the aviation system, such as
aircraft and airline operations. According to FAA, the costs associated
with these safety activities are primarily driven by the volume of each
(e.g., the number of licenses and inspections).
Figure 1: FAA Activities:
[See PDF for image]
Source: GAO.
[End of figure]
ATC includes a variety of complex activities that guide and control the
flow of aircraft through the NAS. Generally, commercial aircraft fly
under instrument flight rules (IFR) that require ATC services
throughout a flight. Such flights rely on FAA staff in control towers
to guide them from the terminal to the runway, and through takeoff.
Once in the air and beyond the immediate vicinity of the airport, they
rely on terminal radar approach control centers (TRACONs) to guide them
out of the airspace in a broader area surrounding the airport.[Footnote
9] Services provided by control towers and TRACONs are referred to as
terminal services. The TRACONs then pass flights off to air route
traffic control centers (ARTCC), which provide en-route control until
the flights near their destinations; services provided by ARTCCs are
referred to as en-route services. When a flight nears its destination,
control is passed back to a TRACON, and then to tower guidance, to land
and proceed to an airport gate. General aviation's (GA) use of these
services varies greatly. Nearly all business jet flights file flight
plans for IFR services, as do roughly half of GA piston flights. Many
GA flights operate entirely under visual flight rules (VFR) and may not
require any ATC services at all if they do not fly to airports that
have towers. These other GA flights may require ground control, or rely
on beacons or flight service stations en route. FAA states that the
costs imposed by each flight are influenced by the amount and nature of
the specific services it uses, and by whether the flight operates at
peak periods.
FAA funds airport infrastructure development through the Airport
Improvement Program (AIP). AIP is a multibillion-dollar grant program
that provides funding for the airports included in FAA's National Plan
of Integrated Airport Systems, which includes airports that range from
the largest commercial service airports in the United States to small
GA airports. Unlike safety and ATC services, AIP expenditures are not
the direct result of costs imposed by users of the NAS. FAA distributes
AIP funding based on congressional priorities established in
authorizing and appropriation legislation. Accordingly, apart from some
relatively small administrative expenses, FAA's spending for AIP does
not represent a "cost" of providing services to users. Therefore, it is
not possible to establish a direct link between AIP expenditures and
taxes or charges paid by system users based on their use of FAA
services.
FAA Funding:
The 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. The Trust Fund provides funding for FAA's two
capital accounts, AIP and the Facilities and Equipment account, which
funds technological improvements to the ATC system. The Trust Fund also
provides funding for the Research, Engineering, and Development
account, which funds continued research on aviation safety, mobility,
and environmental issues. In addition, the Trust Fund supports part of
FAA's operations.
To fund these accounts, the Trust Fund is credited with revenues
collected from system users through the following dedicated excise
taxes:
* 7.5 percent ticket tax on domestic airline tickets:
* $3.30 domestic passenger segment tax (excluding flights to or from
rural airports)[Footnote 10]
* 6.25 percent tax on the price paid for transportation of domestic
cargo or mail[Footnote 11]
* $0.043/gallon tax on domestic commercial aviation fuel:
* $0.193/gallon tax on domestic GA gasoline:
* $0.218/gallon tax on domestic GA jet fuel:
* $14.50[Footnote 12]/person tax on international arrivals and
departures, indexed to inflation:
* 7.5 percent tax on mileage awards (frequent flyer awards tax):
* $7.30 per passenger tax on flights between the continental United
States and Alaska or Hawaii (or between Alaska and Hawaii), indexed to
inflation[Footnote 13]
Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The
ticket tax was the largest single source of Trust Fund revenue in
fiscal year 2005, totaling about $5.2 billion, or about 48 percent of
all Trust Fund receipts. The passenger ticket tax was followed by the
passenger segment tax and the international departure/arrival taxes,
which each totaled about $1.9 billion; fuel taxes, which totaled $870
million; the cargo/mail tax, which totaled $461 million; and interest
income, which totaled $430 million. Figure 2 shows the shares received
from each source in fiscal year 2005.
Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005:
[See PDF for image]
Source: GAO analysis of FAA data.
[End of figure]
Since the Trust Fund's creation in 1970, revenues have, in aggregate,
exceeded spending commitments, resulting in a surplus or an uncommitted
balance, although expenditures from the Trust Fund exceeded revenues in
2005.[Footnote 14] The Trust Fund's uncommitted balance, which was
about $1.9 billion at the end of fiscal year 2005, depends on the
revenues flowing into the fund and the appropriations made available
from the fund for various spending accounts. Policy choices, structural
changes in the aviation industry, and external events have affected
revenues flowing into and out of the fund. For example, the uncommitted
balance has been declining in recent years because Trust Fund revenues
for the last 5 years have been less than FAA's forecasted
levels.[Footnote 15] Figure 3 shows the fluctuations in the Trust
Fund's uncommitted balance since its inception.
Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years
1971-2005:
[See PDF for image]
Source: GAO analysis of Congressional Budget Office and FAA budgets.
[End of figure]
In addition to Trust Fund revenues, in most years General Fund revenues
have been used to fund FAA. The General Fund contribution has varied
greatly, ranging from 0 percent to 59 percent of FAA's budget (see fig.
4). From fiscal year 1997, the year when existing Trust Fund excise
taxes were authorized, through fiscal year 2006, the General Fund
contribution has averaged 20 percent of FAA's total budget. About $2.6
billion was appropriated for fiscal year 2006 from the General Fund for
FAA's operations. This amount represents about 18 percent of FAA's
total appropriation.
Figure 4: General Fund and Trust Fund Contributions to FAA's Budget:
[See PDF for image]
Source: GAO analysis of FAA data.
[End of figure]
Congressionally Authorized Commission Recommended Changes in FAA's
Funding Structure:
The National Civil Aviation Review Commission (Commission) issued a
Congressional report in 1997 analyzing several issues, including
alternative funding means to meet the needs of the nation's aviation
system. The Commission's report[Footnote 16] identified a number of
concerns with FAA's funding structure as it existed at the time the
Commission began its work.[Footnote 17] To address these concerns, the
Commission made several unanimous recommendations, including that FAA's
revenues be more closely linked to the costs of services provided to
support ATC activities, including capital investments. The Commission
also recommended that General Fund revenues be used to fund aviation
security and safety activities and government use of the air traffic
system, and that GA operators continue to pay a fuel tax, although
perhaps at a higher rate.
Some Stakeholders Favor the Current Funding System, but Others Raise
Revenue Adequacy, Equity, and Efficiency Concerns:
Some stakeholders support the current excise tax system, stating that
it has been successful in funding FAA, has low administrative costs,
and distributes the tax burden in a reasonable manner. Other
stakeholders, including FAA, state that under the current system, the
disconnect between the revenues contributed by users and the costs they
impose on the NAS raises revenue adequacy, equity, and efficiency
concerns. Trends in, and FAA's projections of, both inflation-adjusted
fares and average plane size suggest that the revenue collected under
the current funding system has fallen and will continue to fall
relative to FAA's workload and costs, supporting revenue adequacy
concerns. Comparisons of revenue contributed and costs imposed by
different flights provide support for equity and efficiency concerns.
However, the extent to which revenue and costs are linked depends
critically on how the costs of FAA's services are assigned to NAS
users. Thus, assessing the extent to which the current approach or any
other approach aligns costs with revenues would require completing an
analysis of costs, using either a cost accounting system or cost
finding techniques to distribute costs to the various NAS users. FAA
stated that it has made substantial progress in designing a cost
accounting system, implementing it throughout its lines of business,
and modifying it to determine costs by user group.
Stakeholders Who Favor Maintaining the Current Funding Structure Cite
Its Success and Reasonable Allocation of Funding Burden:
Some stakeholders believe that maintaining the current funding
structure for FAA is appropriate because it has been successful in
funding FAA for many years, suggesting that there is no urgent reason
to change it. According to these stakeholders, the revenues collected
from users under the current funding system, along with General Fund
revenues provided by Congress, have been sufficient for the United
States to develop a safe and efficient aviation system. As the number
of air travelers grew, so did revenues going into the Trust Fund. Even
though revenues fell during the early years of this decade as the
demand for air travel fell, they began to rise again in fiscal year
2004 (see fig. 5); FAA estimates that revenues will continue to
increase. In addition, these stakeholders state that administrative
costs of the current system are relatively low.
Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005:
[See PDF for image]
Source: GAO analysis of FAA data.
Notes: Lapses in tax authorizations were the cause of significant
revenue decreases in 1981-1982 and 1996-1997. Trust Fund revenue is
presented by fiscal year and is adjusted to 2005 constant dollars.
Enplanements are presented by calendar year and are total system
scheduled enplanements for the United States.
[End of figure]
Another argument put forward by some industry stakeholders and analysts
for maintaining the current funding structure is that this structure
provides a reasonable allocation of the funding burden between
commercial aviation and GA. With the current funding structure, system
users who are subject to the commercial taxes--including commercial
airlines, air taxis, and many fractional ownership operations--
contribute about 97 percent of the tax revenue that accrues to the
Trust Fund. The remaining GA operators, including those who operate
purely private corporate and individual aircraft, contribute about 3
percent. Representatives of the GA segment of the industry contend that
collecting the bulk of the user-contributed revenues from the
commercial segment is appropriate because the ATC system exists at its
current size to accommodate the demands of commercial aviation and GA
users should not be asked to contribute more than the incremental costs
that result from also providing services to GA aircraft. Although the
incremental costs are not precisely known, GA representatives have told
us that they believe that the revenues currently collected from fuel
taxes are a rough approximation of the incremental costs that FAA
incurs from providing services to GA aircraft. According to FAA, all
cost studies to date concluded that GA users pay less than the costs
they impose on the system, while commercial aviation users pay more
than the costs they impose on the system.
Disconnect between Trust Fund Revenues and FAA Costs Raises Concerns
That Revenues Will Not Keep Pace with Workload Increases under the
Current System:
The disconnect between sources of Trust Fund revenues and FAA costs
under the current funding system raises concerns that the current
system will not produce adequate revenue in the future to keep pace
with FAA's workload increases and, consequently, FAA's costs. The
principle of revenue adequacy requires a funding system to produce
revenues commensurate with workload changes over time. However, under
FAA's current funding system, increases in FAA's workload will not
necessarily be accompanied by revenue increases because users are not
directly charged for the costs they impose on FAA from their use of the
NAS. Rather, Trust Fund revenues are primarily dependent on the prices
of tickets (the domestic ticket tax) and the number of passengers on a
plane (the domestic ticket tax, the domestic passenger segment tax, and
the international passenger tax); neither of these factors are directly
related to workload, which is driven by flight control and safety
activities. Long-term industry trends and FAA forecasts of declines in
air fares and the growing use of smaller aircraft support revenue
adequacy concerns.[Footnote 18]
To illustrate the disconnect between revenues and costs, table 1
provides an example of revenues generated by different aircraft making
similar flights. The use of multiple flights by smaller aircraft to
carry the same number of travelers as one larger aircraft increases
FAA's workload, but will not necessarily be accompanied by increased
revenues from system users to fund FAA's additional costs associated
with the workload increase. This example shows the taxes that would be
generated from transporting 105 passengers from Los Angeles to San
Francisco by (1) one flight using a common narrow-body jet (Boeing
737), and (2) three flights using a common regional jet (CRJ-200). In
this case, the narrow-body jet has the capacity to carry 132
passengers, while each regional jet has the capacity to carry 48
passengers.
Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet
Flight Compared with Three Regional Jet Flights:
Approximately 300-mile flight from Los Angeles to San Francisco.
Plane type: Number of seats;
One 737 flight: 132;
Three CRJ-200 flights: 144.
Plane type: Number of passengers;
One 737 flight: 105;
Three CRJ-200 flights: 105.
Plane type: Average fare;
One 737 flight: $100;
Three CRJ-200 flights: $100.
Plane type: Gallons of fuel consumed;
One 737 flight: 937;
Three CRJ-200 flights: 1,797.
Plane type: Ticket tax;
One 737 flight: $788;
Three CRJ-200 flights: $789.
Plane type: Passenger segment tax;
One 737 flight: $348;
Three CRJ-200 flights: $348.
Plane type: Waybill tax;
One 737 flight: $2;
Three CRJ-200 flights: $0.
Plane type: Fuel tax;
One 737 flight: $40;
Three CRJ-200 flights: $78.
Total revenue;
One 737 flight: $1,178;
Three CRJ-200 flights: $1,215.
Source: GAO analysis of FAA data.
[End of table]
As the table shows, differences in FAA's workload are not reflected in
revenues. FAA states, all other factors being equal (e.g., time of
flight), that the total ATC costs of the three regional jet flights
would be about three times the cost of one narrow-body flight. Revenues
from the three regional jet flights, however, total only about $37, or
3 percent, more than the revenue generated by the one narrow-body jet
flight. Revenue increases are not linked to cost increases because,
under the current system, revenues are primarily influenced by the
number of passengers, the average price of tickets, and the amount of
fuel used--not the costs imposed on FAA through the use of its
services.
The disconnect between revenues and workload can work both ways;
increases in the number of passengers on planes (e.g., larger planes or
higher load factors[Footnote 19]) or increases in fares can result in
higher revenues relative to workload. In fact, load factors have
increased over the past several years, and fares have increased over
the past year. However, long-term trends and FAA's projections for both
domestic fares and plane size suggest that Trust Fund revenues have
declined relative to FAA's workload and will likely continue to do so
for the next several years.
Trends in average fares suggest that the Trust Fund is collecting less
revenue relative to workload than in the past, and FAA's projections
suggest that this decline will continue. Since the passenger ticket tax
is a percentage of the ticket price, reductions in the average ticket
price result in lower ticket tax revenues relative to FAA's workload.
Domestic airfares, adjusted for inflation, have steadily declined over
the past 25 years, from an average of $233 in 1981 to $148 in 2005 (see
fig. 6).[Footnote 20] This reduction represents an average decline of
about 1.9 percent per year.[Footnote 21] Even though there have been
increases in fares over the past year, FAA projects average fares will
continue to decline over time. In FAA's most recent forecast, inflation-
adjusted domestic yields--a proxy measure for fares--are projected to
decline approximately 8.5 percent over the next 10 years.[Footnote 22]
Figure 6: Average Domestic Fares, 1981-2005:
[See PDF for image]
Source: GAO analysis of FAA data.
[End of figure]
Trends in the average size of airplanes also suggest that the Trust
Fund is collecting less revenue relative to workload than in the past,
and FAA's projections suggest that this decline will continue (see fig.
7). Since smaller planes carry fewer passengers and burn less fuel,
reductions in average plane size mean lower ticket tax, segment tax,
and fuel tax revenue accrues to the Trust Fund relative to FAA's
workload.
Figure 7: Average Available Seats per Domestic Aircraft:
[See PDF for image]
Source: GAO analysis of FAA data.
[End of figure]
This decline in the average number of seats per aircraft is the result
of airlines' moving toward a substantially greater reliance on regional
and narrow-body jets.[Footnote 23] Scheduled capacity (available seat
miles) increased 29 percent from 1996 through 2005. During this time,
wide-body jet capacity fell 42 percent, narrow-body jet capacity grew
35 percent, and regional jet capacity grew over 2900 percent. As a
result, regional jets accounted for nearly 10 percent of scheduled
capacity in 2005, up from less than 1 percent in 1995. In addition to
projecting growth in commercial flights, FAA is projecting substantial
growth in GA traffic, which will also add to FAA's workload.
Some Stakeholders Have Raised Equity Concerns with the Current Funding
System:
Some aviation stakeholders have expressed concerns that the current
approach to collecting funds from users through excise taxes creates
inequities because the revenue contributions of different flights are
not directly linked to the costs of the services that these flights
receive from FAA. As noted, factors that influence the revenue
contribution that a commercial flight makes to the Trust Fund are the
number of passengers, the average price of tickets, and the amount of
fuel used. None of these factors, however, are directly related to the
cost of the ATC services that a flight receives from FAA. Table 2 shows
FAA's estimates of the revenue contributions made by various flights.
Since FAA estimates that similar flights impose similar costs on the
agency, the substantial differences in the revenue contributions of
these flights raise issues of fairness. One equity issue is that
similar commercial flights may contribute very different amounts of
revenue. As shown in this example, a 767 flight contributes more than
twice as much as two similar 737 flights. There is also a difference
between the contributions for the two similar 737 flights; one flight
contributes 14 percent more than the other flight.
Table 2: Estimated Excise Tax Contribution by Flight Type:
Approximately 300-mile flight from Los Angeles to San Francisco.
Number of seats;
Commercial flights: 767: 231;
Commercial flights: 737: 132;
Commercial flights: 737: 132;
GA business flights: Citation V Fractional: 9;
GA business flights: Learjet 35: [A].
Number of passengers;
Commercial flights: 767: 180;
Commercial flights: 737: 89;
Commercial flights: 737: 89;
GA business flights: Citation V Fractional: 5;
GA business flights: Learjet 35: [A].
Average fare;
Commercial flights: 767: $82;
Commercial flights: 737: $84;
Commercial flights: 737: $67;
GA business flights: Citation V Fractional: $235;
GA business flights: Learjet 35: [A].
Gallons of fuel;
Commercial flights: 767: 1,646;
Commercial flights: 737: 937;
Commercial flights: 737: 808;
GA business flights: Citation V Fractional: 442;
GA business flights: Learjet 35: 190.
Ticket tax;
Commercial flights: 767: $1,100;
Commercial flights: 737: $565;
Commercial flights: 737: $449;
GA business flights: Citation V Fractional: $86;
GA business flights: Learjet 35: $0.
Passenger segment tax;
Commercial flights: 767: $544;
Commercial flights: 737: $270;
Commercial flights: 737: $270;
GA business flights: Citation V Fractional: $15;
GA business flights: Learjet 35: $0.
Cargo/Mail tax;
Commercial flights: 767: $27;
Commercial flights: 737: $2;
Commercial flights: 737: $2;
GA business flights: Citation V Fractional: $0;
GA business flights: Learjet 35: $0.
Fuel tax;
Commercial flights: 767: $71;
Commercial flights: 737: $40;
Commercial flights: 737: $35;
GA business flights: Citation V Fractional: $19;
GA business flights: Learjet 35: $41.
Total revenue;
Commercial flights: 767: $1,742;
Commercial flights: 737: $877;
Commercial flights: 737: $756;
GA business flights: Citation V Fractional: $120;
GA business flights: Learjet 35: $41.
Source: GAO analysis of FAA data.
[A] Not applicable.
[End of table]
Concerns also exist about the fairness of the distribution of the
funding burden between commercial airlines and GA operators. Domestic
commercial passenger flights, and some flights typically considered GA
flights that carry commercial passengers,[Footnote 24] are subject to,
among other potential excise taxes, the passenger ticket tax, the
passenger segment tax, the cargo/mail tax, and the fuel tax. GA flights
(excluding those that carry commercial passengers) are subject only to
a fuel tax. As a result, the revenue contributions of similar
commercial and GA flights may be substantially different. For example,
the taxes that the Trust Fund would receive from two different types of
business jet flights would be substantially less than the taxes
received from similar commercial flights (see table 2).
Although the commercial and GA flights might receive the same services
from FAA, raising equity concerns because of the large difference in
revenue contribution, there is debate over whether GA and commercial
flights should be assigned the same costs for similar flights because
parties disagree on how to assign the fixed costs associated with the
ATC system. Representatives of the commercial aviation industry favor
assigning those costs to all system users in proportion to their use of
the system. Representatives of GA, on the other hand, state that the
system exists at its present size to serve the needs of the commercial
aviation industry and that GA should be assigned only the incremental
costs of serving GA (i.e., those costs that would not otherwise exist).
Without a consensus on how to assign ATC costs to users, it is not
possible to assess the extent to which the current approach or any
other results in a distribution of the funding burden between
commercial airlines and GA operators that approximates the distribution
of costs attributable to those groups.
Current Funding System Lacks Strong Incentives to Encourage Efficient
Use of the NAS:
Some stakeholders have also raised concerns that the current funding
system does not provide aircraft operators with incentives to use FAA
services in the most efficient manner. For users to make efficient
decisions about their use of the NAS, their price for using the system
(the taxes or charges they pay) should accurately reflect the costs
their use imposes on the system. These prices, along with other factors
influencing supply and demand, will influence users' decisions about
the type, size, and number of aircraft to operate, and when and where
to operate them.[Footnote 25] Given the importance of some of these
other factors to users' decisions about using the NAS, the influence of
prices charged for FAA's services on these decisions may be
comparatively small for some users.
As discussed previously, FAA states that under the current funding
system the taxes collected from users do not accurately reflect the
costs those users impose on the system; some flights likely pay more
than the costs they impose, while others likely pay less. These price
differences suggest that the current funding structure creates
incentives for inefficient use of the NAS. Users who pay more in taxes
than the costs they impose may make less than optimal use of the
system, while those who pay less than the costs they impose may make
more than optimal use of the system.
An airline's decision about how many flights to offer in a given market
illustrates how the current system does not provide incentives for
efficient use of the system. In this example (the same one used for the
revenue adequacy discussion), an airline is deciding how many daily
flights it should provide for the Los Angeles to San Francisco market
(see table 3). It estimates that the market demand at the fare it is
charging totals 105 passengers per day, and it faces the choice of
providing the market with one daily flight with a narrow-body jet
(Boeing 737), or three daily flights with a regional jet (CRJ-200)--all
flight choices are assumed to depart during peak periods. In this
scenario, the revenue collected from the three regional jet flights--
$1,215--is about 3 percent more than the revenue collected from the one
narrow-body jet flight--$1,178. FAA states however, that each flight
would impose similar costs on the agency, so FAA's costs would be
roughly 3 times more to handle the three regional jet flights than to
handle the one medium jet flight. In this example, however, there is
little financial incentive ($37) for the airline to limit its
imposition of additional costs on FAA by using one flight instead of
three flights.
Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet
Flight Compared with One Regional Jet Flight:
Plane type: Number of seats;
737-300: 132;
CRJ-200: 48.
Plane type: Number of passengers;
737-300: 105;
CRJ-200: 35.
Plane type: Average fare;
737-300: $100;
CRJ-200: $100.
Plane type: Gallons of fuel consumed;
737-300: 937;
CRJ-200: 599.
Plane type: Ticket tax;
737-300: $788;
CRJ-200: $263.
Plane type: Passenger segment tax;
737-300: $348;
CRJ-200: $116.
Plane type: Waybill tax;
737-300: $2;
CRJ-200: $0.
Plane type: Fuel tax;
737-300: $40;
CRJ-200: $26.
Plane type: Total revenue;
737-300: $1,178;
CRJ-200: $405.
Source: GAO analysis of FAA data.
[End of table]
This situation is made worse during times when the NAS is congested.
There are two issues associated with congestion. The first is plane
size; if all other factors are equal, such as demand for air travel, it
is more efficient to serve congested airspace with larger planes
because they can move more passengers per flight. Second, when
congestion is a factor, efficiency requires consideration of the delay
costs imposed on other system users. Charging similar flights equally,
regardless of plane size, and incorporating congestion costs, would
create financial incentives to improve efficiency.
Alternative Funding Options Present Both Advantages and Disadvantages:
Alternative funding options for collecting revenues from NAS users
present both advantages and disadvantages.[Footnote 26] The degree to
which alternative funding options could address concerns about the
current excise system ultimately depends on the extent to which the
contributions required from users actually reflect the costs they
impose on the system. Given the diverse nature of FAA's activities, a
combination of alternative options may offer the most promise for
linking revenues and costs. Switching to any alternative funding option
would raise administrative and transition issues. For example, any cost-
based funding system would require FAA to complete the appropriate cost
analysis using either a cost accounting system or cost finding
techniques. Some stakeholders who support the adoption of direct user
charges also support a change in FAA's governance structure--for
example, commercializing air navigation services--but we found no
evidence that the adoption of direct charges would require a governance
change.
The six funding options considered here include two that would modify
the current excise tax structure and four that would adopt more direct
charges to users. Without more detailed information and an
understanding of the costs different flights impose on the NAS, any
assessment of the current system or alternative funding options is only
preliminary. The degree to which alternative funding options could
address revenue adequacy, equity, and efficiency concerns, relative to
the current system, ultimately depends on the extent to which the
contributions required from users actually reflect the costs they
impose on the system. More precise assessments of the current or
alternative funding options are possible only if cost finding
techniques are used throughout FAA.
Modifications to the Current System:
The two options we reviewed that would modify the current excise tax
structure are relying solely on a fuel tax and increasing the passenger
segment tax to replace the passenger ticket tax.
Fuel Taxes:
One possible modification to the current system would be to increase
the current aviation fuel taxes--which levy a specific amount per
gallon of fuel--to replace the revenue lost by eliminating the
remaining excise taxes and charges. Advocates of reliance on a fuel tax
funding system state that it is appealing compared to the current
system because there is a correlation between the time a plane spends
in the system and the amount of fuel a plane uses. To the extent that
time in the system is related to cost, this relationship creates at
least a partial link between revenues and costs, which could partially
address the revenue adequacy, equity, and efficiency concerns about the
current system. In addition, advocates of the fuel tax state that a
fuel tax is inexpensive and simple to administer. Under the current
system the Internal Revenue Service (IRS) is responsible for collecting
fuel taxes at the point of sale, and these funds are then deposited to
the Treasury, which then credits the Trust Fund. FAA has no
responsibility for collecting the revenue. Thus, transitioning to an
all-fuel-tax funding system would be relatively easy, since the
administrative system is already in place. Furthermore, the tax is easy
for consumers to understand, and compliance is simple and inexpensive.
From a revenue adequacy perspective, fuel taxes compare favorably with
other existing excise taxes because they are more directly linked to
workload. Thus, all things being equal, increases in workload over time
would likely result in fuel tax revenue increases. Nonetheless, two
factors that lead to lower fuel consumption will erode the ability of a
fuel tax to generate revenue over time. First, while the incentive
created through the tax to conserve fuel will promote more efficient
use of the system, it will lead to lower fuel consumption, which will
reduce revenues. Second, technological advances that increase the fuel
efficiency of airplanes will reduce fuel consumption relative to FAA's
workload, leading to lower revenues relative to FAA's workload; the new
787 aircraft[Footnote 27] and a recent effort to outfit planes with
winglets[Footnote 28] are examples of these advances. Thus, it is
likely that the fuel tax rate would have to be raised from time to time
to be adequate in the long run.
The extent to which a fuel tax would address equity issues appears to
be limited. Although FAA states that there is a correlation between the
time a plane spends in the NAS and fuel consumption, the extent to
which fuel consumption correlates with costs imposed on FAA has not
been established. First, there may be a relationship between time in
the system and en-route control costs, but the relationship between
time in the system and the costs of other FAA activities, such as
terminal costs, is not obvious. Second, even if the fuel tax were
limited to funding en-route costs, the connection between fuel
consumption and those costs appears to be incomplete. For example,
since heavier planes burn more fuel per mile than lighter planes, they
would be required to contribute more for spending the same amount of
time in the system.
As with equity issues, the potential for a fuel tax to address
efficiency issues appears limited because the connection between
revenues and costs is incomplete. A fuel tax can create an incentive
for operators to minimize their fuel consumption (e.g., by flying at
off-peak times to avoid congestion delays) and, therefore, their time
in the NAS. To the extent that time in the system correlates with costs
imposed, this incentive can lead to improved efficiency. However, any
relationship between time in the system and costs imposed on FAA
appears to be limited to en-route control costs.
Passenger Segment Tax:
A second option that represents a modification of the current system is
to increase the current passenger segment tax to replace revenues lost
by eliminating the current passenger ticket tax. Under this option, all
other current excise taxes would remain unchanged, implying no change
to revenues collected from cargo carriers and GA operators. This option
would likely increase the tax differential between passengers traveling
on one-stop (or more than one-stop) flights and those traveling on
nonstop flights on the same route. As a result, there might be a shift
in travelers' demand toward more nonstop service, which might, in turn,
lead airlines to operate more nonstop service. Because there is a
partial link between the number of segments an airline operates and the
cost of the services FAA provides to that carrier, this option might
have some advantages over the present tax structure in terms of revenue
adequacy, efficiency and equity. However, because there is no link to
the cost of some of the other services that FAA provides, these
advantages are limited.
Compared to the present funding structure, this option might address
concerns about revenue adequacy over time, but many of the concerns
associated with the current system would likely remain. One way in
which a passenger segment tax might better correlate to FAA's workload
is that commercial flights that include a stop require more terminal
services from FAA than nonstop flights, and taxes based on the number
of passenger segments traveled will increase as the number of stops
increases. In addition, the current passenger segment tax is indexed to
the Consumer Price Index so that it is adjusted each year to account
for inflation, which preserves the purchasing power of the revenues
collected. However, other services that FAA provides could increase
without any increase in passenger segment tax revenues. For example, if
the average distance of commercial flights increases, the cost of
providing en-route services will rise, but the passenger segment taxes
paid will not rise because they are not based on distance traveled or
time in controlled airspace. Furthermore, passenger segment taxes apply
only to commercial flights, so they have no advantage over ticket taxes
in providing revenue adequate to fund cost increases associated with
providing services to cargo and GA aircraft. In addition, there would
be no improvement in providing adequate revenue for safety and security
expenditures.
Compared to ticket taxes, higher flight passenger segment taxes have
the potential to increase equity by better aligning revenues with
costs, and they create some additional incentives for efficient use of
FAA services. However, these effects are likely to be limited because
the tax revenues are aligned only to some cost elements and the tax
applies only to commercial aircraft. With increased passenger segment
taxes, the difference in the amount of taxes commercial airlines would
have to pay for one-stop service compared with nonstop service would be
greater. This greater difference in taxes might represent an
improvement in equity compared to the present funding system because
one-stop flights require more terminal and approach services from FAA
than nonstop flights. This greater difference in taxes could also
create an incentive to provide more nonstop service. Substituting
nonstop for one-stop service could reduce the airlines' need for FAA's
terminal and approach services. However, this incentive could be quite
small relative to other factors that influence airlines' service-
offering decisions, so the effect on efficiency could also be quite
small. In addition, airlines would have no additional incentive to be
efficient in their use of en-route services because the passenger
segment tax is not linked to time in controlled airspace, and there
would be no change from the current structure in incentives for cargo
and GA operators.
Administrative and transition issues would be minimal, since this
option would require only a change in the current tax per flight
segment and the elimination of the passenger ticket tax.
Direct Charges:
The four funding options we reviewed that would involve more direct
charges to users include weight/distance charges, en-route charges,
flight segment charges, and certification charges.
Weight/Distance Charges:
Charges based on weight and distance traveled are used by a number of
foreign air navigation service providers and are supported by the
International Civil Aviation Organization. As suggested by the name,
this option would base charges to users on the weight of the plane and
the distance it travels within the NAS. According to their advocates,
weight/distance charges are more appealing than the current system
because they would establish a more direct relationship between
revenues and costs by incorporating distance into the formula, thereby
creating an incentive to limit excess use of FAA's ATC en-route
services. In addition, advocates say, weight/distance charges would
strike a balance between basing charges on the ability-to-pay
principle[Footnote 29] and more directly linking costs and revenues by
incorporating both weight and distance in the distribution of costs
among users.
A weight/distance charge, relative to the current funding system, would
be likely to improve the revenue adequacy of the system. Revenue
adequacy is addressed by the incorporation of a cost component into the
weight/distance formula. Generally, air navigation service providers
that use a weight/distance formula regularly adjust the cost component
to ensure that revenues match costs. For example, FAA's counterpart in
France--la Direction Générale de l'Aviation Civile--annually adjusts
the cost component of its weight/distance formula on the basis of en-
route charges. This adjustment ensures that revenues not only cover
costs, but also do not exceed costs.
As with the fuel tax, the extent to which a weight/distance charge
would address equity issues appears to be limited. While there may be a
relationship between the distance a plane travels in the NAS and the
costs it imposes, the introduction of the weight component into the
formula weakens any such connection. For example, since heavier planes
would be charged more than lighter planes, they would be required to
contribute more for traveling the same distance in the system, even
though they may not impose greater costs on the ATC system. If a
relationship between weight and distance in the system and costs
imposed can be established, it is likely to be limited to en-route
control costs. There is no obvious relationship between the weight/
distance formula and other FAA activities--terminal control services
and safety activities.
Since the connection between revenues and costs is incomplete because
of the weight component, the potential for a weight/distance charge to
address efficiency issues also appears limited. The distance component
of a weight/distance charge creates an incentive for operators to
minimize their use of the NAS. To the extent that distance in the
system correlates with costs imposed, this incentive could improve
efficiency. However, the correlation between distance and costs imposed
is limited by the introduction of the weight component. Furthermore,
the relationship between distance in the system and the costs imposed
on FAA is likely to be limited to en-route control costs, excluding
consideration of the costs associated with terminal control and safety
activities.
Implementing a weight/distance charge would also involve significant
administrative and transition issues. FAA would have to determine how
to administer a weight/distance charging system for which it does not
currently have the organizational capacity. FAA stated that one option
would be to contract the billing out to a private party, much as
European Union countries such as France contract out their billing to
Eurocontrol.[Footnote 30]
En-route Charges:
En-route charges would be based on the time users spend in the NAS or
the distance they travel through the NAS. According to their advocates,
en-route charges are more appealing than the current system because
they would create a more direct relationship between revenues and
costs. Therefore, compared to the current system, advocates say en-
route charges would (1) better ensure that revenues are adequate to
cover costs over time, (2) address equity issues, and (3) create
incentives for efficient use of the current system.
An en-route charge, relative to the current funding system, would be
likely to improve the revenue adequacy of the system. As with weight/
distance charges, en-route charges could address revenue adequacy
concerns by incorporating a cost component into the charging formula
that could be regularly adjusted to reflect any changes in costs. This
approach could ensure, over time, that revenues match costs.
As with other funding options discussed here, the ability of en-route
charges to address equity and efficiency issues raised by the current
system appears to be limited. According to FAA, there is a strong
relationship between time and distance in the system and en-route costs
imposed by users. Thus, if en-route charges were limited to funding en-
route control costs, they might address equity issues raised by the
current system by equating charges to costs imposed, depending on how
costs are assigned. Furthermore, en-route charges for en-route control
would create clear financial incentives to use the system more
efficiently; less use of the system would lead to proportionately lower
charges. However, there is no obvious relationship between time or
distance in the system and other FAA activities--terminal control
services and safety activities. As a result, if en-route charges were
used to fund all FAA activities, their ability to address equity and
efficiency issues is unclear.
Implementing en-route charges would also involve significant
administrative and transition issues. FAA would have to develop the
organizational capacity to administer and collect en-route charges,
which would include completing the appropriate cost analysis using
either a cost accounting system or cost finding techniques.
Flight Segment Charges:
Flight segment charges to users would be based on the departures and
landings that aircraft make at various airports throughout the NAS.
According to their advocates, flight segment charges are more appealing
than the current system because they would establish a more direct
relationship between revenues and costs. Therefore, compared to the
current system, advocates say that flight segment charges would (1)
better ensure that revenues are adequate to cover costs over time, (2)
address equity issues, and (3) create incentives for efficient use of
the current system by directly connecting charges with costs imposed by
users.
A flight segment charge, relative to the current funding system, would
be likely to improve the revenue adequacy of the system. As with
weight/distance charges, flight segment charges could address revenue
adequacy concerns by incorporating a cost component into the charging
formula that could be adjusted regularly to reflect any changes in
costs. This approach could ensure that, over time, revenues match
costs.
As with other funding options discussed here, the ability of flight
segment charges to address equity and efficiency issues raised by the
current system appears to be limited. FAA states that there is a strong
relationship between departures and landings in the system and costs
imposed by flights for terminal control handled by TRACONs. Thus, if
flight segment charges were limited to funding terminal control costs,
they might address equity issues raised by the current system by
equating charges to costs imposed, depending on how costs were
assigned. Furthermore, flight segment charges for terminal control
would create clear financial incentives to use the system more
efficiently: less use of the system would lead to proportionately lower
charges. However, there is no obvious relationship between flight
segments and other FAA activities--en-route control and safety
activities. As a result, if flight segment charges were used to fund
all FAA activities, their ability to address equity and efficiency
issues would be limited.
Implementing flight segment charges would involve administrative and
transition issues similar to those associated with en-route charges.
FAA would have to develop the organizational capacity to administer and
collect flight segment charges and complete the appropriate cost
analysis using either a cost accounting system or cost finding
techniques.
Certification Charges:
Certification charges to users would cover specific safety services
provided by FAA, such as certificates for air worthiness, air
operators, and air agencies; registration for air personnel, aircraft,
and medical personnel; designees and delegations; and international
training. According to their advocates, certification charges would be
more appealing than the current system because they would establish a
direct relationship between revenues and costs, which would address the
revenue adequacy, equity, and efficiency concerns associated with the
current system.
Certification charges have the potential to fulfill revenue adequacy
requirements for safety costs over time because they are directly
linked to workload; charges would be assessed for each certificate
issued. Thus, as workload changed over time (increasing or decreasing),
so would the revenue from certification charges. In addition, any
certification system would likely have the flexibility to adjust
charges as costs changed. Certification charges, however, could not
support all of FAA's funding requirements, so this option would have to
be used in combination with other revenue sources. According to FAA
officials, there is a clear relationship between certification charges
and the specific safety activities for which users would be charged.
Thus, if certification charges were limited to funding the associated
safety costs, they would address equity issues raised by the current
system by equating charges to costs imposed; this equity improvement,
however, would be limited to funding for safety activities.
Furthermore, certification charges would likely create financial
incentives to use the system efficiently, since charges would increase
in proportion to use.
FAA raises the concern that imposing certification charges for safety
services would adversely affect safety because such charges would
create incentives to avoid the use of safety services and, in some
cases, ATC services. Our review of available data from five air
navigation service providers in other countries found that since their
air traffic control services were commercialized and charges were
implemented, the safety of the services remained the same or improved.
For example, data from New Zealand and Canada show fewer incidents of
loss of separation (the distance required between planes) since
commercialization.[Footnote 31]
Implementing certification charges would involve administrative and
transition issues similar to those associated with en-route and flight
segment charges. FAA would have to develop the organizational capacity
to administer and collect certification charges and complete the
appropriate cost analysis using either a cost accounting system or cost
finding techniques.[Footnote 32]
Combining Funding Options Might Best Address Concerns:
Using a combination of workload-related taxes or charges to fund FAA
might best address the revenue adequacy, equity, and efficiency
concerns associated with the current funding structure, given that the
costs of FAA's ATC and safety activities are driven by different
factors. No single option that we reviewed creates a direct link
between revenues and all components of FAA's activity costs. Fuel
taxes, weight/distance charges, or en-route charges based on time or
distance spent in the NAS could be used to create a more direct link
with FAA's costs of providing en-route ATC services. A segment tax for
passengers or a flight segment charge could be used to create a more
direct link with the costs of FAA's terminal services. Certification
charges could be used to create a more direct link with the costs of
FAA's various safety-related activities. Thus, some combination of
options, such as en-route charges to fund en-route costs, flight
segment charges to fund terminal control costs, and certification
charges to fund some safety costs, might best address concerns with the
current system by providing a better link between revenues and costs
than any of these options used separately. According to one
stakeholder, however, the administrative expense of using multiple
funding options might outweigh the benefits of such an approach.
According to FAA, other air navigation service providers, such as those
in the European Union, have been able to administer direct charges
without incurring excessive administrative costs.
Cost-Based Charges Can Be Imposed under FAA's Current Governance
System:
In discussing alternative funding options, some stakeholders have
stated that if user charges are adopted, users should have more input
into FAA's operation, citing the "user pays, user says" principle. To
many stakeholders, this principle implies that the adoption of direct
user charges would require a change in FAA's governance structure that
could limit congressional influence on the agency while expanding the
influence of airlines and other users. Many stakeholders support such a
change, pointing out that many countries that rely on direct charges to
fund aviation activities have commercialized their air navigation
service providers.
We did not find any evidence that a change in FAA's governance
structure would be required if direct charges were adopted. Federal law
provides general authority for federal agencies to institute user
charges except when otherwise prohibited.[Footnote 33] In FAA's case,
Congress has specifically prohibited the agency from instituting any
new user charges under this general authority in every DOT
appropriation act since 1998. Furthermore, under the current funding
system, users already provide most of the revenue used to fund FAA
programs through excise taxes. Adopting direct charges would change the
manner in which revenues are collected from users, but would not
necessarily change the aggregate contribution from users. Since users
pay most of FAA's program costs now, it is unclear what additional role
users should play in FAA's decision-making under an alternative system.
Recent reforms in France's Direction Générale de l'Aviation Civile
illustrate how a government agency has moved toward a cost-based system
of charges to fund the air navigation services it provides without
changing the underlying governance structure. The French organization's
activities fall into two broad divisions --safety and regulation, and
ATC.[Footnote 34] Safety and regulation are funded through a
combination of general government support and specific user charges.
For example, there are charges for pilots' licenses, medical
certificates, inspections, and aircraft registration. ATC activities
are split into two categories--en-route control and terminal control.
For en-route control, France must abide by the European Union's
regulations, which are based on principles established by the
International Civil Aviation Organization. This approach incorporates a
weight/distance formula that is used to determine charges for specific
aircraft based on their activity. Although the formula distributes
charges across aircraft differently by incorporating weight as a
factor, the amount of the charges is based on cost data that are
verified by the European Union. Eurocontrol actually bills users of the
system; all European Union countries collect en-route charges through
this organization. Terminal control charges are not directly based on
cost factors, but are billed along with the en-route control charges
through Eurocontrol.
Alternative Capital Financing Methods Have Advantages and
Disadvantages:
Allowing FAA to use debt financing for capital projects have advantages
and disadvantages. Many stakeholders have identified the use of debt
financing--such as bonds--as a means of funding FAA capital projects,
such as components of NGATS or existing ATC facilities and equipment.
Some stakeholders believe debt financing is attractive because it could
provide FAA with a stable source of revenue to fund capital development
and, at the same time, spread the costs out over the life of a capital
project as its benefits are realized. If Congress approved the use of
debt financing for FAA, the agency could borrow through the Treasury or
directly from the private capital market, depending on what authority
Congress provided. Debt-financing raises significant concerns, however,
because it encumbers future resources and because expenditures from
debt proceeds may not be subject to the congressional oversight that
appropriations receive. In addition, debt financing is subject to
federal budget scoring rules[Footnote 35] and raises issues associated
with borrowing costs that are particularly important in light of the
federal government's long-term fiscal imbalance.
Some Stakeholders Believe Debt Financing Offers Advantages:
According to its supporters, debt financing has a number of advantages,
one of which is that it could provide FAA with a stable source of
revenue to fund capital development. FAA officials state that the
uncertainty associated with the appropriation process makes planning
for large, complex, and expensive ATC systems difficult. Another
advantage cited is that debt financing would allow the costs of capital
projects to be repaid as the benefits are received, better aligning
costs and benefits. Finally, supporters of debt financing, including an
investment firm, state that the private capital market may offer
disciplinary mechanisms that may encourage FAA to manage itself more
efficiently. The discipline occurs because, to receive funding for
projects, FAA would need to adhere to bond covenants, which are rules
that govern how FAA will pay obligations. One investment firm noted,
however, that projects could be overcapitalized, or "gold plated," if
FAA were given the authority to borrow without caps on the number and
costs of projects it funds. For example, a significant amount of debt
could be issued for projects with minimal marginal benefits to users.
As a result, an investment firm noted, there may need to be a governing
board with multiple aviation stakeholders, including airlines,
airports, and air traffic controllers, to determine which capital
projects are needed and how they will be funded. Treasury officials
also question whether the private capital market will provide any
market discipline to FAA debt obligations because investors may
perceive that the obligations are backed by the federal government, and
not just agency revenues. Treasury officials further noted that they
could perform credit analyses similar to those done by private
investment firms, which, when combined with statutory borrowing caps
and other credit terms and conditions, would serve to protect the
financial interests of the general taxpayer.
FAA Could Borrow from the Treasury or the Private Capital Market:
To borrow from the Treasury, FAA would need borrowing authority from
Congress. There are various ways Congress can provide borrowing
authority, each with different legal, financial, and structural
implications. For example, some government entities generate their own
revenue to pay for borrowing costs, whereas others pay with
appropriations.[Footnote 36] Some government entities with borrowing
authority are federal agencies, such as the Bonneville Power
Administration (BPA), while others are independent establishments, such
as the U.S. Postal Service.[Footnote 37] Once borrowing authority is
granted, the Treasury sets the terms and conditions for borrowing. FAA
could borrow from the Treasury, using revenue options such as taxes,
user fees, or appropriations to repay the debt, depending on the type
of bond. Figure 8 describes the process for borrowing from the
Treasury.
Figure 8: Potential FAA Process for Borrowing from the Treasury:
[See PDF for image]
Source: GAO analysis of Treasury documents and interviews.
[End of figure]
In borrowing from the private capital market, FAA could issue general
revenue (GR) or general obligation (GO) bonds. Both types of bonds
would require FAA to pay interest and principal to bond holders, but
the revenue sources used to make these payments would differ. A GR bond
requires taxes or user fees to pay the interest and principal, while a
GO bond uses expected appropriations. Several nonfederal government
entities currently borrow from the private capital market using GR and
GO bonds. In aviation, most commercial airports issue GR bonds for
airport capital improvements that are backed by general revenues from
the airport, including aircraft landing fees, concessions, and parking
fees, for airport capital improvements. In surface transportation, some
states issue grant anticipation revenue vehicle (GARVEE) bonds backed
by anticipated federal apportionments to fund highways. However, the
eligibility of a GARVEE bond for reimbursement with federal
apportionments does not constitute a commitment by the federal
government to provide for paying the principal or interest on the bond.
The Department of Transportation, which oversees the GARVEE program,
reimburses the state for debt service expenses as part of the annual
federal-aid obligation authority. Figure 9 describes the process for
borrowing from the private capital market.
Figure 9: Potential FAA Process for Borrowing from the Private Capital
Market:
[See PDF for image]
Source: GAO analysis of Treasury documents and interviews.
[End of figure]
For FAA to borrow from the private capital market, Congress would need
to give the agency statutory authority. Depending on how Congress
writes the statute, FAA could use any revenue option--taxes, user fees,
or appropriations--to secure the bond. According to some
representatives of investment banks and Treasury officials, no
organizational changes for FAA, such as a change to a government
corporation or corporate entity, would be needed.
Currently, some government corporations borrow from the private capital
market, including the Tennessee Valley Authority (TVA). TVA is an
independent, wholly owned federal corporation established by the
Tennessee Valley Authority Act of 1933 that sells bonds in the private
capital market to finance its capital improvements for power programs.
TVA pays for its operations and debt service with revenues from its
energy sales. Since TVA first issued bonds, Moody's Investors Service
and Standard & Poor's have assigned TVA's bonds their highest credit
rating--Aaa/AAA.[Footnote 38] TVA does not receive a direct federal
guarantee, although the interest rate charged by the private capital
market suggests that there is an implied federal guarantee.[Footnote
39]
Debt Financing Raises Budgetary Concerns:
Debt financing is subject to federal budget scoring rules and raises
issues regarding borrowing costs that are particularly important in
light of the federal government's long term structural fiscal
imbalance. How the borrowing authority is carried out will affect both
budget scoring and costs. When an agency uses borrowing authority to
finance a capital project, budget authority and obligations are
recorded in the budget when the investments are made. Current budget
scoring rules require that budget authority and obligations for the
full cost of capital projects be scored upfront in the year that the
obligations are made. Over time, the outlays will equal the budget
authority and obligations that were scored upfront. As an example, if
FAA borrowed $5 million with a 10 year bond to purchase air traffic
control equipment, the $5 million would be scored as budget authority
and obligations in the year or years in which FAA signed the contract
or contracts to purchase the equipment, and not distributed annually
over 10 years. Since this budget treatment is the same as if
appropriations were obtained, there is little scoring incentive for an
agency to borrow.
Among the negative consequences of not scoring all government
activities in the year in which obligations are made, according to CBO,
is that the federal government's obligations are understated.[Footnote
40] A Treasury official said the Treasury is supportive of budget
scoring, noting that if the borrowing is for a purely governmental
purpose, then that activity should be scored according to federal
budget scoring rules. We have also reported that up-front budget
scoring for capital projects should be maintained, since the budget
should reflect the government's commitments up front.[Footnote 41]
If FAA was granted borrowing authority, the associated costs would
likely be higher if the agency borrowed directly from the private
capital market instead of through the Treasury. According to Treasury
and representatives of investment firms, the federal government's costs
associated with debt financing for FAA's capital projects would likely
be lower if FAA borrowed through the Treasury than if FAA borrowed
directly from the private capital market because the Treasury would
likely be charged a lower interest rate to borrow money. Interest rates
charged to FAA would likely be higher because bonds issued by FAA would
likely be viewed as a greater credit risk compared to Treasury bonds
because Treasury's bonds are backed by the full faith and credit of the
U.S. government, whereas FAA debt would not be. In addition, if FAA
borrowed directly from the private capital market, the transaction
costs of borrowing would likely be higher than if FAA borrowed through
the Treasury; investment banks that serve as debt underwriters charge
fees for these services, while the Treasury would charge a minimal
administrative fee, if any. Treasury officials told us that it is the
agency's long-standing policy that all debt issued by federal entities,
including FAA, should be issued solely to the Treasury because
centralized financing of all such debt through the agency is the least
expensive, most efficient means of financing this debt. The costs to
the government associated with funding FAA's capital spending through
appropriations would be comparable to the costs of borrowing through
the Treasury.[Footnote 42]
The costs of borrowing from the private sector are based, in part, on
how risky the revenue is that will be used for bond interest payments.
Although all revenue options--taxes, user fees, and appropriations--can
be used to repay borrowings, each option has a different risk profile.
The Treasury noted that if FAA were to borrow from the private capital
market against revenues that were subject to appropriations, there
would most likely be a risk premium added to the credit rating to
compensate for the risk that appropriations may not be provided. This
risk premium would make borrowing more expensive. However,
representatives from investment firms we interviewed noted that FAA may
receive a high credit rating given that ATC services are essential and
FAA has a monopoly in providing them.[Footnote 43] If a capital project
has a high degree of "essentiality," then it is assumed that the
government will pay for the project through appropriations if that is
the revenue source. Representatives of an investment firm we
interviewed also noted that FAA may receive an implied federal
guarantee because it is a federal agency. However, representatives of
another investment firm we interviewed also said that many of FAA's
assets may have a low degree of marketability. That is, lenders may
have difficulty selling an asset in the market in case of a bond
default because there may be few willing buyers in the market for it.
Borrowing costs are particularly important in light of the federal
government's long-term fiscal imbalance. As the baby boom generation
ages, mandatory federal commitments to health and retirement programs
will consume an ever-increasing share of the nation's gross domestic
product and federal budgetary resources, placing severe pressures on
all discretionary programs, including those that fund defense,
education, and transportation. Our simulations show that by 2040,
revenues to the federal government might barely cover interest on the
debt--leaving no money for either mandatory or discretionary programs-
-and that balancing the budget could require cutting federal spending
by as much as 60 percent, raising taxes by up to 2½ times their current
level, or some combination of the two.[Footnote 44] Accordingly, any
program or policy change that may increase costs requires sound
justification and careful consideration before adoption. We previously
reported that agencies with authority to borrow were financing a large
portion of their programs with debt and were repaying their debt with
appropriations or new borrowing, rather than through revenue
collections.[Footnote 45] As a result, we recommended that only those
agencies that would, in all likelihood, be able to repay their
borrowing through revenue collections be granted authority to borrow.
Agency Comments:
We provided a draft of this report to DOT and Treasury for review and
comment. We received comments from DOT through an e-mail from FAA's
Director of the Office of Aviation Policy and Plans on September 11,
2006, and from Treasury through an e-mail from the Deputy Assistant
Secretary of Government Financial Policy on September 8, 2006. Neither
DOT nor Treasury explicitly agreed or disagreed with our observations,
and both raised a number of concerns.
DOT stated that, in its opinion, although a change in FAA's governance
may not be statutorily required, it may be important as a matter of
policy. DOT stated that because air navigation service providers are by
nature monopoly providers, users need assurance that their concerns are
taken into account in cost control and investment decisions,
particularly under a system that more closely ties users' contributions
to the costs of the system. DOT stated that an alternative governance
mechanism, along with user fees, could give system users a structured
advisory role in how moneys are spent, costs are allocated, and charges
are set to recover those costs, while still retaining the inherently
governmental decision-making authority within FAA and DOT. In addition,
DOT maintained that a governance mechanism specifically designed to
give users input into investment decisions and cost recovery would add
a valuable layer of discipline in optimizing the system to accommodate
users' needs most efficiently.
In contrast, according to DOT, a system in which FAA/DOT could charge
fees to cover costs with no meaningful stakeholder involvement would be
much less attractive to the stakeholders. Finally, DOT stated, such an
arrangement is fully consistent with the position of the International
Civil Aviation Organization, which calls for user charges to be set in
consultation between the service provider and the user community.
DOT may want to encourage Congress to consider the issue of governance
structure. However, we did not include an analysis of governance issues
in the scope of our review; therefore, we did not provide a more
detailed discussion of the issue in this report.
DOT stated that our discussion of the need to analyze FAA's costs
implied FAA has not developed any cost accounting or cost allocation
systems. Although we agree that FAA has made progress in implementing a
cost accounting system, its current accounting system is not able to
provide the information required for a cost allocation analysis.
Therefore, in our view, our report does not mischaracterize the status
of FAA's cost accounting system by stating that an analysis of the
extent to which the current funding approach, or alternative funding
approaches, aligns costs with revenues would require the completion of
a cost accounting system or the use of cost finding techniques. Our
point is that this capability would be needed to operate under a cost-
based user charge system.
DOT stated that it believes user fees would provide greater revenue
stability than taxes because user fees could be set up to be adjusted
periodically without changes in the law, thus providing greater
flexibility in aligning revenues to cover costs. Nonetheless, we
continue to believe that revenue stability is not likely to vary much
across the funding options. Significant decreases in the demand for air
travel would decrease revenue regardless of whether the current funding
structure is maintained or any of the options are adopted. Furthermore,
increasing direct user charges while air travel demand was falling
would increase costs for aircraft operators at the same time as their
revenues were declining and might be no easier than increasing excise
taxes.
DOT also provided some clarifying and technical comments, which we
incorporated where appropriate.
According to Treasury, GAO raised several critical issues, but did not
provide any analysis that would help policymakers judge reform options.
Specifically, Treasury expressed concern that we did not (1) provide a
more comprehensive discussion of FAA costs and cost shares, including
any available cost information that provides insight into the issue,
(2) evaluate FAA's efforts to implement cost accounting, and (3) state
whether FAA's cost accounting program is likely, when completed, to
generate cost information that is useful in determining a fair and
efficient distribution of costs among users. We agree with Treasury
that a more detailed analysis of FAA costs and cost shares should be
conducted to inform the FAA reauthorization debate, and that this
information would improve the analysis of specific alternative funding
options. FAA's current accounting system is not able to provide the
information required for a cost allocation analysis. We believe that
using partial cost information, as suggested by Treasury, would not be
appropriate. Moreover, conducting a comprehensive cost analysis was
beyond the scope of this report.
Treasury also said that our report repeats claims made by interest
groups without evaluating them, giving the sense that each argument is
equally valid, even though policymakers need some way to evaluate them.
This was not the objective of the report. We provided a basis for
evaluating the current and alternative funding options by outlining
criteria, including revenue adequacy, equity, and efficiency, and
discussing the implications of these criteria with respect to specific
funding options.
Treasury raised concerns that a number of statements were attributed to
"some stakeholders," rather than the specific groups or individuals
that made the statements, noting that attribution helps the reader
evaluate the statements. In response, we added some attribution as
appropriate.
Treasury also noted its long-standing policy that all debt issued by
federal entities, including FAA, should be issued solely to the
Treasury, because centralized Treasury financing of all such debt is
the least expensive, most efficient means of financing this debt.
Treasury further maintained that market discipline would not be applied
to FAA debt obligations issued directly to the private capital market
because investors would perceive the obligations were backed by the
federal government. We added language to the report to clarify
Treasury's position on these issues.
Treasury also provided some clarifying and technical comments, which we
incorporated where appropriate.
As agreed with your offices, unless you announce the contents of this
report earlier, we plan no further distribution until 30 days from the
date of this letter. At that time, we will send copies of this report
to interested congressional committees; the Secretary of
Transportation; the Administrator, FAA; the Secretary of the Treasury;
and the Director, OMB. Copies will also be available to others upon
request and at no cost on GAO's Web site at www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3834 or dillinghamg@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 key contributions
to this report are listed in appendix II.
Signed by:
Gerald L. Dillingham, Ph.D.
Director, Physical Infrastructure Issues:
List of Committees:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Co- Chairman:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Conrad Burns:
Chairman, Subcommittee on Aviation:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable John L. Mica:
Chairman:
The Honorable Jerry F. Costello:
Ranking Democratic Member:
Subcommittee on Aviation:
Committee on Transportation and Infrastructure:
House of Representatives:
[End of section]
[End of section]
Appendix I: Scope and Methodology:
To accomplish all of our objectives, we reviewed relevant research,
including GAO products, academic research, congressional testimony,
industry group publications, and stakeholders' responses to questions
FAA asked them about its funding.[Footnote 46] We also interviewed:
* officials from government agencies, including the Federal Aviation
Administration (FAA), the Office of Management and Budget (OMB), the
Congressional Budget Office (CBO), and the Department of the Treasury
(Treasury);
* representatives of aviation industry groups, including the Air
Transport Association, the Aircraft Owners and Pilots Association
(AOPA), and the National Business Aviation Association; and:
* academic and financial experts.
In addition, as discussed in the following paragraphs, we performed
further work to accomplish each objective.
To assess the advantages and concerns that have been raised about the
current approach to collecting revenues from national airspace system
(NAS) users to fund FAA and the extent to which the available evidence
supports the concerns, we examined FAA budget data, Airport and Airway
Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to
the Department of Transportation (DOT) on aircraft size and airfares
(DOT Form 41 data), and FAA aviation activity data. We used data on tax
revenues associated with different types of flights to assess the link
between increases in FAA's workload and increases in Trust Fund
revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation
activity data from FAA. To assess the reliability of these data, we
interviewed knowledgeable officials and reviewed the quality control
procedures FAA applies to these data, and subsequently determined that
the data were sufficiently reliable for our purposes. We obtained the
DOT Form 41 data from BACK Aviation Solutions, a private contractor
that provides these data to interested parties. We used these data to
examine trends in aircraft size and airfares because of their impact on
the relationship between Trust Fund revenues and FAA's workload.
To identify potential alternative funding options for FAA and criteria
for comparing these options, we obtained information on the experience
of foreign air navigation service providers by reviewing relevant GAO
reports and other literature and interviewing officials at Eurocontrol
and France's FAA counterpart, la Direction Générale de l'Aviation
Civile. We also interviewed representatives of Air France, AOPA-France,
the International Air Transport Association, the Association of
European Airlines, and Aéroports de Paris. Through our literature
review and these interviews, we identified longer-run revenue adequacy,
equity, efficiency, and administrative considerations as appropriate
criteria for assessing the current and alternative funding options. We
considered both modifications to the current excise tax structure and
various forms of direct charges for FAA services as possible
alternatives to the current tax structure. In selecting options for
analysis, we considered whether there was a link between the option and
some element of FAA's workload.
To identify the advantages and disadvantages of authorizing FAA to use
debt financing for capital projects, we reviewed the borrowing
authorities of other U.S. governmental entities, including the
Tennessee Valley Authority and the Bonneville Power Administration.
We conducted our work from May 2005 through August of 2006 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Dr. Gerald L. Dillingham, (202) 512-2834:
Staff Acknowledgments:
In addition to the contact named above, the following individuals made
key contributions to this report: Ashley Alley, Christine Bonham, Jay
Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper,
Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman.
FOOTNOTES
[1] These percentages reflect FAA's revenue composition in fiscal year
2006; from fiscal year 1997, the year the current tax structure became
effective, through fiscal year 2006, the Trust Fund has contributed an
average of 80 percent of FAA's budget, while General Fund contributions
have averaged 20 percent.
[2] This report does not address the question of what proportion of
FAA's budget should be derived from the General Fund because of the
public benefits created by FAA activities.
[3] In September 2005, FAA provided stakeholders with information on
its operations and costs and asked for responses to questions about how
to fund the agency.
[4] Stakeholders that support the current funding system include the
Aircraft Owners and Pilots Association and the National Business
Aviation Association.
[5] Stakeholders that have expressed concerns about current funding
system include the Air Transport Association and the FAA.
[6] Cost finding techniques produce cost data by analytical or sampling
methods and typically involve analyses of available cost data using
spreadsheet applications or manual calculations.
[7] In addition, to debt financing, some stakeholders have identified
other methods of funding capital investments, such as leasing or
contracting out services (e.g., flight service stations). An analysis
of these other methods was beyond the scope of this report.
[8] FAA is also responsible for commercial space licensing and
oversight; this line of business is beyond the scope of this report.
[9] Depending on the airport's location, the approach control
facilities may be located within the airport's control tower or at
separate facilities.
[10] The domestic segment tax is levied on each domestic segment a
passenger travels on a flight. For example, a passenger traveling on a
flight from New York to Seattle, with a connection in Chicago, travels
two segments--one from New York to Chicago, and a second from Chicago
to Seattle. The segment tax rate was $3.30 in 2006; this tax rate
changes annually as it is indexed to the Consumer Price Index.
[11] This is also known as the waybill tax.
[12] The international arrival and departure tax rates are $14.50 in
2006; both rates change annually because they are indexed to the
Consumer Price Index.
[13] The per passenger tax on flights between the continental United
States and Alaska or Hawaii (or between Alaska and Hawaii) is $7.30 in
2006; this rate changes annually because it is indexed to the Consumer
Price Index.
[14] The Trust Fund's uncommitted balance represents money against
which there is no outstanding budget commitment or budget authority to
spend.
[15] For a more complete discussion of the Trust Fund, see GAO, Federal
Aviation Administration: An Analysis of the Financial Viability of the
Airport and Airway Trust Fund, GAO-06-562T (Washington, D.C.: Mar. 28,
2006).
[16] National Civil Aviation Review Commission, Avoiding Aviation
Gridlock and Reducing the Accident Rate: A Consensus for Change
(Washington, D.C.: Dec. 1997).
[17] The following changes were made after the Commission began its
work but before it issued its final report: the passenger segment tax
was added; the passenger ticket tax was reduced from 10 percent to 7.5
percent; the international departure tax was increased from $6 to $12
and was also applied to international arrivals; the frequent flyer tax
was added; and the Hawaii/Alaska passenger taxes were added.
[18] In addition to revenue adequacy, a criterion that economists often
use to compare funding methods is year-to-year revenue stability, which
generally refers to the degree to which both short-term fluctuations in
economic activity and other factors not directly linked to the business
cycle affect the level of revenue collected from a funding source.
Revenue stability has been an important concern for FAA's funding
because of the impact of the September 11, 2001, terrorist attacks, the
war in Iraq and associated security concerns, the Severe Acute
Respiratory Syndrome (SARS) outbreak, and global recessions on the
demand for air travel, and, therefore, on the revenues flowing into the
Trust Fund (see GAO-06-562T). However, the revenue stability concern
will likely exist in a roughly similar way under each of the options we
reviewed because significant decreases in demand are likely to decrease
revenues whether they are derived from excise taxes on aviation-related
activities or from direct user charges. Thus, in this report, we do not
address revenue stability because it is not likely to vary much across
options, including the current funding system.
[19] A load factor is the percentage of a flight's total available seat
miles actually used to transport passengers.
[20] We have adjusted airfare data to 2005 dollars.
[21] This is the annual compounded rate of decline.
[22] Yield is the amount of revenue airlines collect for every mile a
passenger travels.
[23] Generally speaking, wide-body jets are the largest jets, with the
capacity to transport approximately 200 or more passengers; narrow-body
jets are smaller, with the capacity to transport approximately 100 to
200 passengers; regional jets are the smallest of these three plane
types, with the capacity to transport approximately 50 to 90
passengers.
[24] This includes some flights typically considered GA flights, such
as those by air taxis and some fractional ownership operations.
[25] Supply factors that influence users' decisions include other costs
of operating aircraft, such as labor, fuel, and capital costs. Demand
factors include the state of the economy and the price and convenience
of flying compared with using other modes of transportation.
[26] As discussed earlier, some elements of FAA's budget cannot be
directly linked with taxes or charges that system users pay for their
use of FAA's services. One example is money given to airports in grants
through the Airport Improvement Program. Another example might be
expenditures required to control government planes, both military and
civilian, unless other government agencies were treated as system
users. As a result, if any of these options are adopted and the tax or
charge rates are based on the costs of services to users, then the
revenue collected will not cover all of FAA's budget. Contributions
from the General Fund or revenues from other taxes that are not linked
to costs would also be needed.
[27] The 787 aircraft is a new plane under development by Boeing that
emphasizes fuel efficiency through the use of lightweight composite
material and more fuel-efficient engines.
[28] Winglets are attachments to the wings of planes that reduce fuel
consumption.
[29] The ability-to-pay principle is a concept of tax fairness that
states that those individuals with a greater financial capacity--
measured by wealth, income, or other levels of well-being--to bear a
tax burden should pay more in taxes than those individuals with a
lesser financial capacity.
[30] Eurocontrol is the European Organisation for the Safety of Air
Navigation. Eurocontrol's core activities span the entire range of gate-
to-gate air navigation service operations--from strategic and tactical
flow management to controller training; from regional control of
airspace to development of leading-edge, safety-proofed technologies
and procedures, and the collection of air navigation charges.
[31] See GAO, Air Traffic Control: Characteristics and Performance of
Selected International Air Navigation Service Providers and Lessons
Learned from Their Commercialization, GAO-05-769 (Washington, D.C.:
July 29, 2005).
[32] FAA is currently prohibited from charging certain certification
and registration fees under 49 U.S.C. §45302 until several specific
regulations have been promulgated.
[33] 31 U.S.C. 9701.
[34] Most airports in France are independent from the national
government, and their infrastructure is funded through charges levied
by individual airports.
[35] Budget scorekeeping rules or guidelines are developed by the House
and Senate Budget Committees, CBO, and OMB (the scorekeepers). The
purpose of the guidelines is to ensure that the scorekeepers measure
the effects of legislation on the deficit consistent with established
scorekeeping conventions and with the specific requirements of the
Congressional Budget Act of 1974 and the Balanced Budget and Emergency
Deficit Control Act of 1985. Budget scorekeeping rules are published in
OMB Circular A-11.
[36] GAO, Budget Issues: Agency Authority to Borrow Should Be Granted
More Selectively, GAO/AFMD-89-4 (Washington, D.C.: Sept. 15, 1989).
[37] BPA is a self-supporting agency in the Department of Energy that
borrows from the Treasury to finance capital investments such as new
transmission facilities that it owns. BPA receives no appropriations
and is solely funded by revenues from power sales, which it uses to
finance its operations and to make debt payments. BPA received direct
borrowing authority from Congress in 1974 and has a borrowing cap of
$4.5 billion. Since BPA is a federal agency that is performing a
federal function, it is borrowing for federal purposes, and its assets
are federally owned, the interest rate on BPA debt to Treasury is equal
to the rate on debt of comparable maturity issued by government
corporations.
[38] Between 1974 and 1988, TVA borrowed exclusively from the
Treasury's Federal Financing Bank and the debt was not rated.
[39] GAO, Tennessee Valley Authority: Bond Ratings Based on Ties to the
Federal Government and Other Nonfinancial Factors, GAO-01-540
(Washington, D.C.: Apr. 30, 2001).
[40] CBO, Third-Party Financing of Federal Projects (Washington, D.C.:
June 2005).
[41] GAO, Capital Financing: Partnerships and Energy Savings
Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-
55 (Washington, D.C.: Dec. 16, 2004).
[42] Although funding through appropriations might appear less costly
to FAA because borrowing from the Treasury would require FAA to make
interest payments to the Treasury, from the broader perspective of the
federal government as a whole, there is no difference if the government
is running a deficit.
[43] Representatives of investment firms said that "essentiality" is
the importance of a particular government project or service. The
representatives of investment firms we spoke with generally agreed that
FAA's core service, which is to provide ATC services, is highly
essential because the services are a vital part of the national
economy.
[44] GAO, The Nation's Long-Term Fiscal Outlook: September 2006 Update,
GAO-06-1077R (Washington, D.C.: Sept., 15, 2006).
[45] GAO, Budget Issues: Agency Authority to Borrow Should Be Granted
More Selectively, GAO/AFMD-89-4 (Washington, D.C.: Sept. 15, 1989).
[46] In September 2005, FAA provided stakeholders with reauthorization
packages (packages of data on its operations and costs) and asked for
responses to questions about how to fund to agency.
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