National Airspace System Modernization
Observations on Potential Funding Options for FAA and the Next Generation Airspace System Gao ID: GAO-06-1114T September 27, 2006The transition to the Next Generation Air Transportation System (NGATS)--a system intended to safely accommodate a possible tripling of air traffic by 2025--will become one of the federal government's most comprehensive and technically complex undertakings, and a preliminary estimate indicates it will also be expensive. However, the current approach to managing air transportation is becoming increasingly inefficient and operationally obsolete. In 2003, Congress authorized the creation of the Joint Planning and Development Office (JPDO) to coordinate the efforts of several federal partner agencies--including the Federal Aviation Administration (FAA), in which JPDO is housed--to plan for and develop NGATS. GAO's testimony addresses (1) the current estimate and uncertainties over NGATS costs, (2) advantages and concerns that stakeholders have raised about the current approach to collecting revenues from national airspace users to fund FAA, (3) the advantages and disadvantages of adopting alternative funding options for FAA, and (4) the advantages and disadvantages of authorizing FAA to use debt financing for capital projects. This testimony is based in part on GAO's analysis of FAA and JPDO documents and interviews with officials of those two agencies.
No comprehensive estimate of NGATS costs has been developed. However, an advisory committee to FAA has developed a limited, preliminary cost estimate, which has not yet been endorsed by any agency. This estimate suggests that with NGATS, FAA's costs would average about $1 billion more per year (in today's dollars) over the next 20 years than FAA's appropriations for fiscal year 2006. The estimate is preliminary in part because JPDO has not yet completed its enterprise architecture, (a blueprint for NGATS) which will be needed to inform a reliable cost estimate. Some stakeholders support the current excise tax system because they believe it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Others, including FAA, state that under the current system, there is a disconnect between the revenues contributed by users and the costs those users impose on the national airspace system (NAS) that raises revenue adequacy, equity, and efficiency concerns. Trends over the past 25 years 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, supporting revenue adequacy concerns. 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. Given the diverse nature of FAA's activities, a combination of alternative options may offer the most promise for linking revenues and costs. Allowing FAA to use debt-financing for capital projects, such as the replacement of facilities and equipment associated with the transition to NGATS, also presents advantages and disadvantages. Some stakeholders see debt financing as attractive because they believe 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 same congressional oversight as expenditures from appropriations. Concerns about borrowing costs, oversight, and encumbering future resources are particularly important in light of the federal government's long-term structural fiscal imbalance.
GAO-06-1114T, National Airspace System Modernization: Observations on Potential Funding Options for FAA and the Next Generation Airspace System
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Testimony:
Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Wednesday, September 27, 2006:
National Airspace System Modernization:
Observations on Potential Funding Options for FAA and the Next
Generation Airspace System:
Statement of Gerald L. Dillingham, Ph.D, Director, Physical
Infrastructure Issues:
Susan J. Irving Ph.D. Director, Federal Budget Analysis Strategic
Issues:
GAO-06-1114T:
GAO Highlights:
Highlights of GAO-06-1114T, a testimony before the Subcommittee on
Aviation, Committee on Transportation and Infrastructure, House of
Representatives
Why GAO Did This Study:
The transition to the Next Generation Air Transportation System
(NGATS)”a system intended to safely accommodate a possible tripling of
air traffic by 2025”will become one of the federal government‘s most
comprehensive and technically complex undertakings, and a preliminary
estimate indicates it will also be expensive. However, the current
approach to managing air transportation is becoming increasingly
inefficient and operationally obsolete. In 2003, Congress authorized
the creation of the Joint Planning and Development Office (JPDO) to
coordinate the efforts of several federal partner agencies”including
the Federal Aviation Administration (FAA), in which JPDO is housed”to
plan for and develop NGATS.
GAO‘s testimony addresses (1) the current estimate and uncertainties
over NGATS costs, (2) advantages and concerns that stakeholders have
raised about the current approach to collecting revenues from national
airspace users to fund FAA, (3) the advantages and disadvantages of
adopting alternative funding options for FAA, and (4) the advantages
and disadvantages of authorizing FAA to use debt financing for capital
projects.
This testimony is based in part on GAO‘s analysis of FAA and JPDO
documents and interviews with officials of those two agencies.
What GAO Found:
No comprehensive estimate of NGATS costs has been developed. However,
an advisory committee to FAA has developed a limited, preliminary cost
estimate, which has not yet been endorsed by any agency. This estimate
suggests that with NGATS, FAA‘s costs would average about $1 billion
more per year (in today‘s dollars) over the next 20 years than FAA‘s
appropriations for fiscal year 2006. The estimate is preliminary in
part because JPDO has not yet completed its enterprise architecture, (a
blueprint for NGATS) which will be needed to inform a reliable cost
estimate.
Some stakeholders support the current excise tax system because they
believe it has been successful in funding FAA, has low administrative
costs, and distributes the tax burden in a reasonable manner. Others,
including FAA, state that under the current system, there is a
disconnect between the revenues contributed by users and the costs
those users impose on the national airspace system (NAS) that raises
revenue adequacy, equity, and efficiency concerns. Trends over the past
25 years 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, supporting revenue adequacy concerns.
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. Given the diverse nature of FAA‘s activities, a
combination of alternative options may offer the most promise for
linking revenues and costs.
Allowing FAA to use debt-financing for capital projects, such as the
replacement of facilities and equipment associated with the transition
to NGATS, also presents advantages and disadvantages. Some stakeholders
see debt financing as attractive because they believe 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 same
congressional oversight as expenditures from appropriations. Concerns
about borrowing costs, oversight, and encumbering future resources are
particularly important in light of the federal government‘s long-term
structural fiscal imbalance.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1114T].
To view the full product, click on the link above. For more
information, contact Gerald L. Dillingham, PhD, (202) 512-2834,
dillinghamg@gao.gov.
[End of Section]
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to testify at today's hearing on
potential options for funding the transition to the next generation air
transportation system (NGATS)--a system intended to safely accommodate
a possible tripling of air traffic by 2025. As you know, in 2003,
Congress authorized the creation of the Joint Planning and Development
Office (JPDO) to coordinate efforts by several federal partner agencies
(including the Federal Aviation Administration (FAA), in which JPDO is
housed) to plan for and develop NGATS. NGATS is envisioned as a major
redesign of the air transportation system that will include precision
satellite navigation; digital, networked communications; an integrated
weather system; and layered, adaptive security. The NGATS
transformation effort will be an enormously complex undertaking, and a
preliminary estimate indicates it will also be expensive. However, the
current approach to managing air transportation is becoming
increasingly inefficient and operationally obsolete. In fact, JPDO has
estimated that failing to modernize to meet future demand for air
transportation could result in billions of dollars in economic losses
to the nation.
Although JPDO is responsible for planning the transformation to NGATS
and coordinating the efforts of its partner agencies, FAA will be
largely responsible for implementing the policies and systems necessary
for NGATS. Considering how to fund the near-term sustainment or
modernization of our air transportation system takes on added
importance given competing funding demands and the federal government's
long term fiscal outlook. Our recent work, contained in a report that
will be released to the public soon,[Footnote 1] analyzed the current
funding structure, which relies mainly on revenues collected from
national airspace system (NAS) users, and alternative funding options.
We and others have pointed out that the federal budget is on an
unsustainable path. Although the drivers in this outlook are federal
health and retirement programs, we have also said that a fundamental
reexamination of the base of federal programs and activities is
important to create a sustainable government appropriate for the 21st
century.[Footnote 2] Given the uncertain fiscal environment in which
the air transportation system operates, and will likely continue to
operate during the transformation to NGATS, my testimony today is
designed to provide this committee with information on a preliminary
cost estimate for the NGATS transformation and potential options for
funding FAA. Specifically, my statement today will briefly address the
(1) current estimate and uncertainties over NGATS costs, (2) advantages
and concerns that stakeholders have raised about the current approach
to collecting revenues from national airspace users to fund FAA, (3)
advantages and disadvantages of adopting alternative funding options
for FAA, and (4) 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, JPDO, 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, Airport and Airway Trust Fund (Trust Fund)
revenue data, FAA and JPDO forecasts, and aviation activity data. We
also obtained information on an estimate of FAA's future costs under
NGATS but did not review in detail the methodology or assumptions used
to develop this estimate. We conducted our work between May 2005 and
August 2006 in accordance with generally accepted government auditing
standards.
In summary:
* Understanding the costs involved in the transition to NGATS is
critical to its planning and implementation, yet no comprehensive
estimate of these costs currently exists. An FAA advisory committee has
developed a limited, preliminary cost estimate, which officials have
emphasized is not yet endorsed by any agency. This estimate suggests
that with NGATS, FAA's costs would average about $1 billion more per
year (in today's dollars) over the next 20 years than FAA's
appropriations for fiscal year 2006. However, the NGATS enterprise
architecture (a blueprint for the systems and integration required
under NGATS) has not yet been developed. Consequently, the estimate
should be seen as providing only a sense of the order of magnitude of
the potential increased costs to FAA. In addition, this estimate does
not include the costs that the other partner agencies or the industry
might incur in their implementation of NGATS systems and technologies.
A more precise estimate of the total NGATS cost should emerge following
the development of the NGATS enterprise architecture.
* Some stakeholders support the current excise tax system because they
believe it has been successful in funding FAA, has low administrative
costs, and distributes the tax burden in a reasonable manner. Others,
including FAA, state that under the current system, there is a
disconnect between the revenues contributed by users and the costs
those users impose on the NAS that raises revenue adequacy, equity, and
efficiency concerns.[Footnote 4] Trends over the past 25 years 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.
* 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. 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 the need to
develop the administrative capacity to implement new charges.
* Allowing FAA to use debt-financing for capital projects, such as the
replacement of facilities and equipment associated with the transition
to NGATS, also presents advantages and disadvantages.[Footnote 5] Some
stakeholders have suggested that debt-financing--such as bonds--could
be a means of funding FAA capital projects. These stakeholders argue
that debt-financing is attractive because an agency could obtain
capital assets without first having to secure funding through the
appropriation process, while at the same time spreading the costs out
over the life of a capital project as the project's 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 same congressional oversight as expenditures from
appropriations. In addition, debt-financing raises issues regarding
federal borrowing costs that are particularly important in light of the
federal government's long-term structural fiscal imbalance.
Background:
NGATS is envisioned as a system that will meet the needs of the year
2025. Planning for NGATS began in 2003, when Congress passed Vision
100,[Footnote 6] the legislation that authorized JPDO. Vision 100
requires the office to operate in conjunction with multiple government
agencies, including the Departments of Commerce, Defense, Homeland
Security, and Transportation; FAA; the National Aeronautics and Space
Administration; and the White House Office of Science and Technology
Policy. JPDO submitted an integrated plan for NGATS to Congress in
December 2004. In developing the integrated plan, the partner agencies
agreed on a vision statement for the future system and on eight
strategies that broadly address the goals and objectives for NGATS.
Among its efforts, JPDO has begun developing an enterprise
architecture--one of the most critical planning documents in the NGATS
effort. An enterprise architecture is akin to blueprints for a
building. It is meant to provide a common tool for planning and
understanding the complex, interrelated systems that will make up
NGATS. JPDO intends for the enterprise architecture to describe FAA's
operation of the current NAS, JPDO's plans for NGATS, and the sequence
of steps needed for the transformation to NGATS. JPDO expects that the
enterprise architecture will provide the means for facilitating
coordination among the partner agencies and private sector
manufacturers, the alignment of relevant research and development
activities, the integration of equipment, and the development of a more
reliable cost estimate for NGATS. JPDO officials expect the first
complete draft of the enterprise architecture to be issued in 2007.
FAA, which will bear much of the responsibility for implementing NGATS,
engages in three primary activities: aviation safety oversight, air
traffic control (ATC), and airport infrastructure development.[Footnote
7] The costs associated with each of these activities generally depend
on the nature of the specific service FAA provides and how it is used.
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. FAA states that the costs
associated with these safety activities are primarily driven by the
volume of each (e.g., the number of licenses and inspections). ATC
includes a variety of complex activities to guide and control the flow
of aircraft through the NAS. According to FAA, the costs imposed by
each flight are influenced by the amount and nature of the specific
services that a flight uses, and whether a flight operates at peak
periods. FAA supports airport infrastructure development through the
Airport Improvement Program (AIP). Unlike safety and ATC services, AIP
expenditures are not the direct result of costs imposed by users of the
NAS. FAA distributes AIP funding according to congressional priorities
established in authorizing and appropriating legislation.
FAA is funded through appropriations from both the Trust Fund and the
General Fund of the U.S. Treasury (General Fund). The Trust Fund was
established by the Airport and Airway Revenue Act of 1970[Footnote 8]
to help fund the development of a nationwide airport and airway system.
It provides funding for FAA's capital accounts, including the AIP,
which is a multibillion dollar grant program that provides funding for
airports; the Facilities and Equipment account, which funds
technological improvements to the air traffic control system; and 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 tax on domestic airline tickets:
* $3.30 domestic passenger segment tax (excluding flights to or from
rural airports)[Footnote 9]
* 6.25 percent tax on the price paid for transportation of domestic
cargo or mail[Footnote 10]
* $0.043/gallon tax on domestic commercial aviation jet fuel:
* $0.193/gallon tax on domestic general aviation gasoline:
* $0.218/gallon tax on domestic general aviation jet fuel:
* $14.50/person tax on international arrivals and departures, indexed
to inflation[Footnote 11]
* 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 12]
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 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 1 shows the shares received from each
source during fiscal year 2005.
Figure 1: Trust Fund Revenues by Source, Fiscal Year 2005:
[See PDF for image]
Source: GAO analysis of FAA data.
[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. 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.
There is Currently No Comprehensive Estimate of NGATS Costs:
Understanding the costs involved in the transition to NGATS is critical
to the NGATS planning effort, yet no comprehensive estimate of these
costs has been developed. This cost information is particularly
important to Congress, which will have the authority to make NGATS
funding decisions. To begin estimating NGATS costs, JPDO is holding a
series of investment analysis workshops with stakeholders,[Footnote 13]
including representatives from commercial and business aviation;
general aviation (GA); equipment manufacturers; ATC systems developers;
airports; and regional, state, and local planning bodies. According to
JPDO, participants in these workshops are asked to discuss and comment
on the appropriateness of JPDO's current assumptions about factors that
drive private sector costs.
Although JPDO expects that these workshops will provide information to
be used in developing a range of potential costs for NGATS, an
enterprise architecture is needed to further define and better
understand how a number of factors will drive NGATS costs. One of these
drivers is the technologies expected to be included in NGATS. Some of
these technologies are more complex and thus more expensive to
implement than others. A second driver is the sequence for replacing
current technologies with NGATS technologies. A third driver is the
length of time required for the transformation to NGATS, since,
according to JPDO, a longer period would impose higher costs. JPDO's
first draft of its enterprise architecture could reduce some of these
variables, thereby allowing improved estimates of NGATS costs.
While JPDO is beginning to explore the issue of cost estimates for
NGATS, an advisory committee to FAA--the Research, Engineering and
Development Advisory Committee (REDAC)--has developed a limited,
preliminary cost estimate, which officials have emphasized is not yet
endorsed by any agency.[Footnote 14] REDAC estimated that FAA's budget
under the NGATS scenario would average about $15 billion per year
through 2025, or about $1 billion more annually (in today's dollars)
than FAA's fiscal year 2006 appropriation. REDAC estimated that the
cost for a status quo (i.e., no NGATS) scenario would also be about $15
billion per year through 2025.[Footnote 15] These estimates came out
roughly equal, on average, because future FAA spending would be higher
under NGATS than under the status quo in the early years but lower than
under the status quo toward 2025. This relationship is due primarily to
the expectation that, under the NGATS scenario, capital expenditures
would be higher than under the status quo scenario in the near term,
but operations costs would be lower because of productivity
improvements in the longer term. Moreover, the NGATS cost estimate
assumes that capital costs decrease sharply toward 2025. Officials who
developed this estimate explained that the estimate treats NGATS as an
isolated event. In reality, these officials acknowledge that planning
for the subsequent "next generation" system will likely be underway as
2025 approaches and the actual modernization costs could therefore be
higher in this time frame than the estimate indicates.
In addition, this estimate should be viewed within the context of a
number of factors. First, REDAC does not believe that maintaining the
status quo is a viable option because it would provide insufficient
capacity to meet projected future demand. REDAC stated that it
presented the status quo option "for analytical purposes only since the
current approach to air traffic control and management in use in the
United States cannot be scaled up to handle the projected growth in
traffic." In fact, JPDO has estimated the annual economic cost of not
meeting future demand; by 2020, JPDO estimates this cost at $40 billion
per year. Second, the REDAC estimate does not include the costs of the
intermediate technology development work--a key step in developing
NGATS.
Last, and most important, this estimate was developed before JPDO
completed important planning documents and does not include estimates
of the other partner agencies' costs of implementing NGATS. For
example, the estimate does not include costs that the Department of
Homeland Security might incur to develop and implement new security
technologies. JPDO's first complete enterprise architecture, which
would include security, is not expected until the middle of 2007.
Additional partner agency costs, along with other costs such as those
for training of personnel in new technologies, must be explored to have
a complete picture of NGATS costs.
Some Stakeholders Favor FAA's Current Funding System, but Others Raise
Concerns about Revenue Adequacy, Equity, and Efficiency:
Our report on potential FAA funding options outlines several concerns
stakeholders have raised about the current funding structure that
supports the Trust Fund.[Footnote 16] Our observations from that report
bear directly on questions about funding NGATS, because the bulk of the
NGATS implementation--and, presumably, the costs of that
implementation--will fall to FAA. 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 the revenues
contributed by users and the costs those users impose on the NAS that
raises revenue adequacy, equity, and efficiency concerns. Aviation
trend data, FAA projections, and FAA cost estimates support revenue
adequacy, equity, and efficiency concerns. However, the extent to which
revenue and costs are linked depends critically on how the costs of FAA
services 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 to distribute costs to the
various NAS users.
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 the 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 2004 (see fig.
2) and FAA estimates they will continue to increase. In addition,
according to these stakeholders, the administrative costs are
relatively low.
Figure 2: Trust Fund Revenues and Passenger Enplanements, 1971 through
2005:
[See PDF for image]
Source: GAO analysis of FAA data.
Notes: Trust Fund revenue is presented by fiscal year and is adjusted
to 2005 constant dollars. Lapses in tax authorizations were the cause
of significant revenue decreases in 1981-1982 and 1996-1997.
Enplanements are presented by calendar year and are total system
scheduled enplanements for the United States.
[End of figure]
Another argument for maintaining the current funding structure advanced
by some industry stakeholders and analysts is that this structure
reasonably allocates the funding burden between commercial aviation and
GA. Under the current funding structure, system users who are subject
to 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,
which include operators of 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 air traffic control 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 to provide
services to GA aircraft. According to FAA, all of the agency's cost
studies to date have concluded that GA users pay less than the costs
they impose on the system, while commercial operators pay more than the
costs they impose on the system.
The disconnect between sources of Trust Fund revenues and FAA costs
under the current funding system raises concerns that it 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 that keep pace
with costs over time. Costs for FAA are largely driven by FAA's
workload. However, under the 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 is
related to workload, which includes controlling flights 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.
To illustrate the disconnect between revenues and costs, table 1
provides an example of the 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 the additional costs associated with
the additional workload. Example 1 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. As the table shows, differences in FAA's workload are not
reflected in the revenues. According to FAA, if all other factors are
equal (e.g., time of flight), the total ATC costs of the three regional
jet flights will be about three times the cost of one narrow-body
flight. Revenues from the three regional jet flights, however, total
only about $37, or 3 percent, more than the revenue generated by the
one narrow-body jet flight. Revenue increases are not linked to cost
increases because under the current system, revenues are primarily
influenced by the number of passengers, the average price of tickets,
and the amount of fuel used--not the costs imposed on FAA through the
use of its services.
Table 1: Estimated Excise Tax Contributions from Various Flights:
Approximately 300 mile flight from Los Angeles to San Francisco.
Plane Type: Number of seats;
Example #1: One 737 flight: 132;
Example #1: Three CRJ-200 flights: 144;
Example #2: One 767 flight: 231;
Example #2: One 737 flight: 132;
Example #2: One Learjet 35 flight: [A].
Plane type: Number of passengers;
Example #1: One 737 flight: 105;
Example #1: Three CRJ-200 flights: 105;
Example #2: One 767 flight: 180;
Example #2: One 737 flight: 89;
Example #2: One Learjet 35 flight: [A].
Plane Type: Average fare ($);
Example #1: One 737 flight: $100;
Example #1: Three CRJ-200 flights: $100;
Example #2: One 767 flight: $82;
Example #2: One 737 flight: $84;
Example #2: One Learjet 35 flight: [A].
Plane type: Fuel consumed (gallons);
Example #1: One 737 flight: 937;
Example #1: Three CRJ-200 flights: 1,797;
Example #2: One 767 flight: 1,646;
Example #2: One 737 flight: 937;
Example #2: One Learjet 35 flight: 190.
Plane type: Ticket tax;
Example #1: One 737 flight: $788;
Example #1: Three CRJ-200 flights: $789;
Example #2: One 767 flight: $1,100;
Example #2: One 737 flight: $565;
Example #2: One Learjet 35 flight: $0.
Plane type: Passenger segment tax;
Example #1: One 737 flight: $348;
Example #1: Three CRJ-200 flights: $348;
Example #2: One 767 flight: $544;
Example #2: One 737 flight: $270;
Example #2: One Learjet 35 flight: $0.
Plane type: Waybill tax;
Example #1: One 737 flight: $2;
Example #1: Three CRJ-200 flights: $0;
Example #2: One 767 flight: $27;
Example #2: One 737 flight: $2;
Example #2: One Learjet 35 flight: $0.
Plane type: Fuel tax;
Example #1: One 737 flight: $40;
Example #1: Three CRJ-200 flights: $78;
Example #2: One 767 flight: $71;
Example #2: One 737 flight: $40;
Example #2: One Learjet 35 flight: $41.
Plane type: Total Revenue;
Example #1: One 737 flight: $1,178;
Example #1: Three CRJ-200 flights: $1,215;
Example #2: One 767 flight: $1,742;
Example #2: One 737 flight: $877;
Example #2: One Learjet 35 flight: $41.
Source: GAO analysis of FAA data.
[A] Not applicable.
[End of table]
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 17]) 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.
Domestic airfares, adjusted for inflation, have steadily declined over
the past 25 years, from an average of $233 in 1981 to $148 in
2005.[Footnote 18] This reduction represents an average decline of
about 1.9 percent per year.[Footnote 19] Even though there have been
increases in fares over the past year, FAA projects that 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 20] Trends in the average size of airplanes also
suggest the Trust Fund is collecting less revenue relative to workload
than in the past, and FAA projections suggest this decline will
continue. Since smaller planes carry fewer passengers and burn less
fuel, reductions in average plane size mean that lower ticket tax,
segment tax, and fuel tax revenue accrues to the Trust Fund relative to
FAA's workload.
In addition to revenue adequacy issues, the disconnect between revenues
contributed and costs imposed also raises equity issues. Example 2 in
table 1 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 such issue
is that similar commercial flights may contribute very different
amounts of revenue. In this example, a 767 flight contributes nearly
twice as much as the 737 flight. A second equity issue is the fairness
of the distribution of the funding burden between commercial airlines
and GA operators. Domestic commercial passenger flights[Footnote 21]
are subject to, among other potential excise taxes, the passenger
ticket tax, the passenger segment tax, the cargo waybill tax, and the
jet 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 private GA flights may be
substantially different. In this example, a private Learjet flight
contributes approximately $40, while the commercial flights of a 767
and a 737 contribute $1,742 and $877, respectively.
Although commercial and GA flights might receive the same services from
FAA, suggesting that the large difference in revenue contribution
raises equity concerns, there is debate over whether commercial and GA
flights should be assigned the same costs for similar flights because
of disagreements about how to assign the fixed costs associated with
the ATC system. Commercial aviation industry representatives favor
assigning those costs among all system users in proportion to their use
of the system. GA representatives, 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 that would not exist apart from the need to serve GA. Without a
consensus on how to assign ATC costs among 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.
Finally, the disconnect between revenues contributed and costs imposed
raises efficiency issues. 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. Existing 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 use the
system less than is optimal, while those who pay less than the costs
they impose may use the system more than is optimal. An airline's
decision about how many flights to operate to serve a market
illustrates how the current system does not provide incentives for
efficient use of the system. In example 1 from table 1 (the same one
used for the revenue adequacy discussion), an airline is deciding how
many daily flights to operate for the Los Angeles to San Francisco
market. It estimates that the market demand at the fare it is charging
totals 105 passengers per day, and faces the choice of providing one
daily flight with a narrow-body jet (Boeing 737), or three daily
flights with a regional jet (CRJ-200)--assuming all flights depart
during peak periods. In this scenario, the revenue collected from three
regional jet flights--$1,215--is about 3 percent more than the revenue
collected from 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 for the three regional jet flights
than for the one medium jet flight. In this example, however, there is
little financial incentive ($37) for the airline to avoid imposing
additional costs on FAA by using one flight instead of three flights.
Alternative Funding Options for FAA Present Both Advantages and
Disadvantages:
Alternative options for funding FAA--which includes funding NGATS
because the bulk of its implementation (and, presumably, its costs)
will fall on FAA--have advantages and disadvantages. 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 reflect the costs they actually
impose on the system.[Footnote 22] Our forthcoming report on options
for funding FAA will examine six options, including two that would
modify the current excise tax structure and four that would adopt more
direct charges to users. This testimony briefly summarizes our
observations for two of those six options.[Footnote 23]
One example of a 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 revenue lost by eliminating the
remaining excise taxes and charges. Fuel taxes compare favorably with
other existing excise taxes from a revenue adequacy perspective because
they are more directly linked to workload; all things being equal,
increases in workload over time would likely result in fuel tax revenue
increases. Over time, however, the incentive a fuel tax creates to
conserve fuel and make technological advances--while beneficial--is
likely to erode the fuel tax's ability to generate revenue. Thus, it is
likely the fuel tax rate would have to be raised from time to time to
ensure adequate revenue 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 the 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, 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.
En-route charges represent an option to switch to a more direct user
charge. Such a charge would be based on the time users spend in the NAS
or the distance they travel through the NAS. An en-route charge,
relative to the current funding system, would be likely to improve the
system's revenue adequacy because it could incorporate a cost component
into the charging formula that could be adjusted regularly to reflect
any changes in costs. This approach could ensure, over time, that
revenues match costs. As with the fuel tax, 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 the 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.
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. Recent reforms in
France show how a government agency has moved toward a cost-based
system to fund the air navigation services it provides without changing
the underlying governance structure.
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, state that 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.
Debt Financing for FAA Raises Budgetary Concerns:
Over the years, agencies have used a variety of financing approaches to
acquire capital assets. All of these approaches have both advantages
and disadvantages. From an agency's perspective, acquiring needed
capital without first having to secure sufficient appropriations to
cover the full cost of the asset is very attractive, especially in an
era of limited resources and growing mission demands. However, from a
governmentwide perspective, such approaches--including debt financing-
-raise serious concerns because they ultimately may result in higher
overall costs. Given the federal government's long-term structural
fiscal imbalance, any action that may increase costs requires sound
justification and careful consideration before it is adopted.
Supporters of debt financing for FAA cite a number of advantages. One
is the argument that debt financing could provide FAA with a stable and
predictable revenue source for funding capital developments. FAA
officials state that the uncertainty associated with the appropriation
process makes planning for a large, complex, and expensive air traffic
control system difficult. Another cited advantage 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 some investment firms, state
that the private capital market may offer disciplinary mechanisms--such
as bond covenants--that may encourage FAA to finance itself more
efficiently. Treasury officials question whether the private capital
market would 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.
If Congress allowed FAA to use debt financing, it could grant statutory
authority for FAA to borrow either through the Treasury or directly
from the private capital market. In either case, for FAA to use debt
financing, Congress would have to provide the agency with statutory
authority to borrow. There is variation in the legal, financial, and
structural ways borrowing authorities for other government entities
have been established. For example, some government entities produce
their own revenue to pay for borrowing costs, whereas others pay with
appropriations.[Footnote 24] Federal entities that have borrowing
authority include the Bonneville Power Administration (BPA), the U.S.
Postal Service, and the Tennessee Valley Authority.[Footnote 25] If FAA
were provided with borrowing authority, all revenue options to repay
the funds--excise taxes, user fees, or appropriations--could be
considered. According to some investment banks and the Treasury, no
organizational changes such as a change to a government corporation or
corporate entity would be needed.
The use of debt financing by FAA to pay for capital projects raises
budgetary concerns. If Congress grants FAA borrowing authority, the
associated costs are likely to be higher if the agency borrows directly
from the private capital market instead of through the Treasury.
According to Treasury and representatives of investment firms, the
Treasury would likely be charged a lower interest rate to borrow money
from the private capital market than FAA and thus could pass along
these lower costs to FAA. Interest rates charged to FAA would likely be
higher because bonds issued by FAA would likely be viewed as a greater
credit risk than Treasury bonds because debt issued by the Treasury is
backed by the full faith and credit of the U.S. government, while FAA
debt would not be. Instead, FAA debt would be backed by specific
revenue sources. 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. Given these
advantages, Treasury officials told us that it is the department'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 department is the least
expensive, most efficient means of financing this debt. If FAA capital
spending is financed through appropriations and results in an increase
to the deficit, the cost to the government is comparable to the costs
of borrowing through the Treasury.[Footnote 26]
Borrowing costs are particularly important in light of the federal
government's long-term structural fiscal imbalance. Absent a change in
policy, federal health and retirement programs will consume an ever
increasing share of the nation's federal budgetary resources and gross
domestic product, placing severe pressures on all discretionary
programs, including those that fund defense, education, and
transportation. Our more optimistic simulations show that by 2040,
federal revenues as a share of the economy will not be sufficient to
cover any discretionary programs--and that balancing the budget could
require raising taxes by almost 60 percent or reducing federal spending
by about a third. Accordingly, any program or policy change that may
increase costs requires sound justification and careful consideration
before adoption.
Mr. Chairman, this concludes my statement. I would be pleased to answer
any questions that you and Members of the Subcommittee may have.
Contact and Staff Acknowledgments:
For further information on this testimony, please contact Gerald
Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making
key contributions to this statement include Ashley Alley, Jay Cherlow,
Maria Edelstein, Colin Fallon, Carol Henn, David Hooper, Andrew
Huddleston, Edmond Menoche, Faye Morrison, and Rich Swayze.
FOOTNOTES
[1] GAO, Aviation Finance: Observations on Potential FAA Funding
Options, GAO-06-973 (Washington, D.C.: September 2006).
[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[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; stakeholders that have expressed concerns about
the current funding system include the Air Transport Association and
the FAA.
[5] 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 testimony.
[6] Pub. L. No. 108-176, Vision 100--Century of Aviation
Reauthorization Act, December 12, 2003.
[7] FAA is also responsible for commercial space licensing and
oversight; this line of business is beyond the scope of this testimony.
[8] Pub. L. No. 91-258.
[9] 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 is $3.30 in 2006; this tax rate changes
annually because it is indexed to the Consumer Price Index.
[10] This is also known as the waybill tax.
[11] The international arrival and departure taxes are $14.50 in 2006;
both rates change annually because they are indexed to the Consumer
Price Index.
[12] 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; the rate changes annually because it is indexed to the Consumer
Price Index.
[13] JPDO held its first workshop in April 2006 and its second workshop
in August 2006. No date has been announced at this time for the third
workshop.
[14] In developing their estimate, REDAC used FAA's projected
facilities and equipment costs under an NGATS scenario as well as
REDAC's own estimates for the costs of operations; airport
improvements; and research engineering and development--the remaining
three components of FAA's appropriation.
[15] In this testimony, we describe REDAC's "base case" scenarios,
which assumed that FAA's operations costs would increase between 2006
and 2010, but then remain constant through 2025 (except for inflation),
as productivity increases offset the higher cost of increased demand.
The working group also developed estimates for lower-cost "best case"
and higher-cost "worst case" scenarios using differing assumptions of
productivity gains.
[16] GAO-06-973
[17] A load factor is the percentage of a flight's total available seat
miles used to transport passengers.
[18] We have adjusted airfare data to 2005 dollars.
[19] This is the annual compounded rate of decline.
[20] Yield is the amount of money an airline collects for every mile a
passenger travels.
[21] This includes some flights typically considered GA flights, such
as air taxis and some fractional ownership operations.
[22] It is important to note that 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.
[23] The other four funding options considered in the forthcoming
report are (1) weight/distance fees, (2) flight segment fees, (3)
certification fees, and (4) increasing the passenger segment tax to
replace revenues lost from the elimination of the passenger ticket tax.
[24] GAO, Budget Issues: Agency Authority to Borrow Should Be Granted
More Selectively, GAO-AFMD-89-4 (Washington, D.C.: Sept. 15, 1989).
[25] BPA is a self-supporting agency in the Department of Energy that
borrows from the Treasury, which in turn borrows from the public, 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. Because it 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.
[26] 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.
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