Aviation Finance
Observations on the Current FAA Funding Structure's Support for Aviation Activities, Issues Affecting Future Costs, and Proposed Funding Changes
Gao ID: GAO-07-1163T August 1, 2007
The Federal Aviation Administration (FAA) operates one of the safest air transportation systems in the world, but this system is under growing strain as the demand for air travel increases. Recognizing the need to transform this system, Congress created the Joint Planning and Development Office (JPDO), housed within FAA, to plan and develop the Next Generation Air Transportation System (NextGen). The current authorization for FAA, the Airport and Airway Trust Fund (Trust Fund), and most of the excise taxes that support the Trust Fund will expire September 30, 2007. Several proposals, including two reauthorization bills--H.R. 2881 and S. 1300--identify various funding sources for FAA activities, including NextGen. Among these are current excise taxes, fees, and flight surcharges. Concerned about the need for stable, sustainable financing for the nation's multibillion-dollar transportation infrastructure investments, including NextGen, GAO has designated transportation financing as high risk. GAO's statement addresses (1) the extent to which the current funding structure can support FAA's activities, including NextGen, (2) issues that could affect the overall cost of NextGen, and (3) the implications of selected proposals to fund aviation activities. The statement is based on recent GAO reports and testimonies.
Recent estimates indicate that FAA's current funding structure--consisting primarily of Trust Fund revenues plus a contribution from the General Fund of the U.S. Treasury--can potentially support FAA's activities, including NextGen. The current structure has provided sufficient funding for FAA's activities to date, and both FAA and the Congressional Budget Office (CBO) have estimated that revenues will continue to increase. According to CBO projections through 2017, the current structure, if maintained, could support about $22 billion in additional spending over current spending levels (adjusted for inflation). Congress could also raise more revenue for FAA by raising excise tax rates or by increasing the General Fund contribution. However, contributions from the General Fund may be limited by the federal government's long-term fiscal imbalance, and policy choices, structural changes in the aviation industry, and external events could affect Trust Fund revenues. Furthermore, the current funding structure raises concerns about equity and efficiency because users may pay more or less than the costs of the air traffic control services they receive, and therefore they may lack incentives to use the national airspace system as efficiently as possible. Issues that could affect the overall cost of NextGen are primarily related to the content and cost of its infrastructure and research and development. JPDO is developing and has issued some key planning documents that will provide more insights into some of these issues, but questions remain over which entities will perform activities such as research and development. Other issues include the cost savings that could result from more efficient FAA operations and acquisition processes, which could reduce the need for new NextGen funding, and the extent to which public-private partnerships and leasing can be used to acquire NextGen infrastructure as flexibly and cost-effectively as possible. Selected proposals for funding aviation activities could generate more revenue, but could also lead to unintended consequences. For example, a House committee recommendation to raise general aviation fuel tax rates could increase Trust fund revenue, but might reduce fuel purchases, which would limit the amount of the revenue increase. H.R. 2881 would raise airport passenger facility charges, mainly benefiting larger airports, and would establish or increase fees for certain FAA certification and registration activities. However, when fees are imposed for aviation activities, care must be taken to ensure that efforts to avoid the fees do not compromise safety. S. 1300 would authorize a surcharge of $25 per flight on many flights to help pay for NextGen capital projects. While a surcharge would create an incentive for efficient use of air traffic services, some stakeholders raise the possibility that such a fee could lead to reduced air service for small communities. S. 1300 would also allow FAA to seek debt financing for capital projects in the private capital market--a proposal designed to create a stable revenue source but resulting in higher interest costs than borrowing from the U.S. Treasury.
GAO-07-1163T, Aviation Finance: Observations on the Current FAA Funding Structure's Support for Aviation Activities, Issues Affecting Future Costs, and Proposed Funding Changes
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Testimony:
Before the Subcommittee on Select Revenue Measures, Committee on Ways
and Means, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Wednesday, August 1, 2007:
AVIATION FINANCE:
Observations on the Current FAA Funding Structure's Support for
Aviation Activities, Issues Affecting Future Costs, and Proposed
Funding Changes:
Statement of Gerald L. Dillingham, Director Physical Infrastructure
Issues:
GAO-07-1163T:
GAO Highlights:
Highlights of GAO-07-1163T, a testimony before the Subcommittee on
Select Revenue Measures, Committee on Ways and Means, House of
Representatives
Why GAO Did This Study:
The Federal Aviation Administration (FAA) operates one of the safest
air transportation systems in the world, but this system is under
growing strain as the demand for air travel increases. Recognizing the
need to transform this system, Congress created the Joint Planning and
Development Office (JPDO), housed within FAA, to plan and conceptualize
the Next Generation Air Transportation System (NextGen). The current
authorization for FAA, the Airport and Airway Trust Fund (Trust Fund),
and most of the excise taxes that support the Trust Fund will expire
September 30, 2007. Several proposals, including two reauthorization
bills”H.R. 2881 and S. 1300”identify various funding sources for FAA
activities, including NextGen. Among these are current excise taxes,
fees, and flight surcharges. Concerned about the need for stable,
sustainable financing for the nation‘s multibillion-dollar
transportation infrastructure investments, including NextGen, GAO has
designated transportation financing as high risk.
GAO‘s statement addresses (1) the extent to which the current funding
structure can support FAA‘s activities, including NextGen, (2) issues
that could affect the overall cost of NextGen, and (3) the implications
of selected proposals to fund aviation activities. The statement is
based on recent GAO reports and testimonies.
What GAO Found:
Recent estimates indicate that FAA‘s current funding
structure”consisting primarily of Trust Fund revenues plus a
contribution from the General Fund of the U.S. Treasury”can potentially
support FAA‘s activities, including NextGen. The current structure has
provided sufficient funding for FAA‘s activities to date, and both FAA
and the Congressional Budget Office (CBO) have estimated that revenues
will continue to increase. According to CBO projections through 2017,
the current structure, if maintained, could support about $22 billion
in additional spending over current spending levels (adjusted for
inflation). Congress could also raise more revenue for FAA by raising
excise tax rates or by increasing the General Fund contribution.
However, contributions from the General Fund may be limited by the
federal government‘s long-term fiscal imbalance, and policy choices,
structural changes in the aviation industry, and external events could
affect Trust Fund revenues. Furthermore, the current funding structure
raises concerns about equity and efficiency because users may pay more
or less than the costs of the air traffic control services they
receive, and therefore they may lack incentives to use the national
airspace system as efficiently as possible.
Issues that could affect the overall cost of NextGen are primarily
related to the content and cost of its infrastructure and research and
development. JPDO is developing and has issued some key planning
documents that will provide more insights into some of these issues,
but questions remain over which entities will perform activities such
as research and development. Other issues include the cost savings that
could result from more efficient FAA operations and acquisition
processes, which could reduce the need for new NextGen funding, and the
extent to which public-private partnerships and leasing can be used to
acquire NextGen infrastructure as flexibly and cost-effectively as
possible.
Selected proposals for funding aviation activities could generate more
revenue, but could also lead to unintended consequences. For example, a
House committee recommendation to raise general aviation fuel tax rates
could increase Trust fund revenue, but might reduce fuel purchases,
which would limit the amount of the revenue increase. H.R. 2881 would
raise airport passenger facility charges, mainly benefiting larger
airports, and would establish or increase fees for certain FAA
certification and registration activities. However, when fees are
imposed for aviation activities, care must be taken to ensure that
efforts to avoid the fees do not compromise safety. S. 1300 would
authorize a surcharge of $25 per flight on many flights to help pay for
NextGen capital projects. While a surcharge would create an incentive
for efficient use of air traffic services, some stakeholders raise the
possibility that such a fee could lead to reduced air service for small
communities. S. 1300 would also allow FAA to seek debt financing for
capital projects in the private capital market”a proposal designed to
create a stable revenue source but resulting in higher interest costs
than borrowing from the U.S. Treasury.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-11163T.]
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gerald L. Dillingham at
(202) 512-2834 or dillinghamg@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to participate in today's hearing on the
future funding of the Federal Aviation Administration (FAA). As you
know, FAA operates one of the safest air transportation systems in the
world, but this system is under growing strain as the demand for air
travel increases. According to FAA, over 740 million passengers flew in
fiscal year 2006, and 1 billion passengers per year are expected to fly
in 2015. FAA also predicts that 10,000 corporate aircraft, including
traditional business jets, turboprops, and very light jets, will be
added to the fleet between 2007 and 2017. To accommodate this increased
traffic, instrument flight rule operations--the most significant source
of demand on the air traffic control system--are projected to rise by
36 percent, from roughly 45,000 per day to 61,000 per day over the same
decade. Yet even at today's flight levels, flight arrival delays are
approaching the record levels set in 2000, when one in four flights
reached its destination late. The consensus is that the current air
traffic control system cannot be expanded to meet this expected growth.
According to an analysis of future demand and system capacity that was
conducted by the Joint Planning and Development Office (JPDO),[Footnote
1] the estimated cost to the U.S. economy of failing to meet future
airspace demands could be $22 billion annually by 2023.
In 2003, recognizing the need for a new and different type of air
traffic control system to deal with the expected growth, Congress
authorized the creation of JPDO to lead a collaborative effort of
federal and nonfederal aviation stakeholders to conceptualize and plan
the Next Generation Air Transportation System (NextGen). The
transformation to NextGen will involve the acquisition of numerous
systems to support precision satellite navigation; digital, networked
communications; integrated weather information; and layered, adaptive
security. The President's budget proposes to spend $4.6 billion over
the next 5 years for NextGen, including both capital costs and research
and development costs.
As you know, the current authorization for FAA, the Airport and Airway
Trust Fund (Trust Fund), and most of the excise taxes that provide
revenue for the Trust Fund will expire at the end of this fiscal year.
Several proposals, including two reauthorization bills--H.R.
2881[Footnote 2] and S. 1300[Footnote 3]--specify various revenue
sources to fund FAA, including NextGen.[Footnote 4] Among these sources
are the current excise taxes, including fuel taxes; certification and
registration fees; and flight surcharges. As requested, my statement
today will address the following questions: (1) To what extent can the
current funding structure support FAA's activities, including NextGen?
(2) What issues could affect the overall cost of NextGen? (3) What are
the implications of selected provisions of proposals to fund aviation
activities? My remarks are based on recent GAO reports and
testimonies[Footnote 5] on FAA's current funding structure, NextGen,
and funding options that might address concerns about FAA's current
funding structure. For these reports and testimonies, we reviewed
relevant literature, examined FAA data and forecasts, and interviewed
FAA and other government agency officials, aviation industry group
representatives, and academic and financial experts. We conducted our
work during July 2007 in accordance with generally accepted government
auditing standards.
Summary:
* Recent estimates indicate that FAA's current funding structure--
consisting primarily of Trust Fund revenues plus a contribution from
the General Fund of the U.S. Treasury--can potentially support FAA's
activities, including NextGen. In the aggregate, since the Trust Fund
was created in 1970, revenues to the fund have exceeded appropriations
from it, resulting in an uncommitted balance, or surplus. This balance
has declined in recent years, from about $7.3 billion at the end of
fiscal year 2001 to about $1.8 billion at the end of fiscal year 2006.
This decline has occurred because expenditures from the fund are based
on projected revenues and FAA has drawn down funds when actual revenues
have fallen short of projected expenditures. To help ensure that
revenues are sufficient to cover expenditures, H.R. 2881 proposes that
Congress base expenditures from the Trust Fund on 95 percent, rather
than 100 percent, of estimated Trust Fund revenues. Notwithstanding
these recent shortfalls, both FAA and the Congressional Budget Office
(CBO) have estimated that FAA's revenues will continue to grow over the
next decade under the current structure. For example, CBO has projected
that at current tax rates, the current structure could support about
$22 billion in additional spending over current spending levels
(adjusted for inflation) through 2017. Moreover, should Congress wish
to provide additional funding for FAA activities, it could raise
additional revenue under the current structure by raising the rates on
one or more of the current excise taxes or by increasing the General
Fund contribution. This contribution may, however, be limited by the
federal government's long-term fiscal imbalance, and policy choices,
structural changes in the aviation industry, and external events could
affect revenues to the Trust Fund. Furthermore, the current funding
structure raises concerns about equity and efficiency because users may
pay more or less than the costs of the air traffic control services
they receive, and therefore they may lack incentives to use the
national airspace system as efficiently as possible.
* Although revenue estimates indicate that the current funding
structure can potentially support FAA's activities, including NextGen,
a number of issues could affect the overall cost of NextGen, especially
those related to its technology requirements. A major issue is the
specific systems and associated costs of NextGen infrastructure and
research and development. JPDO is developing and has already released
some key planning documents that describe the capabilities needed to
transition to NextGen, establish time lines for completing essential
tasks, and identify the responsibilities of the JPDO partner agencies
for these tasks, together with the required funding. These documents,
some of which are still being developed, should provide more insight
into NextGen's requirements and costs. Additionally, questions remain
over which entities will fund and conduct some of the necessary
research, development, demonstration projects, and training that will
be needed to achieve certain NextGen capabilities. Other issues include
the cost savings that might result from improvements in FAA operations
and acquisition processes, which could reduce the need for new NextGen
funding, and the extent to which FAA uses public-private partnerships
and leasing to acquire NextGen infrastructure as flexibly and cost-
effectively as possible.
* Selected proposals for funding aviation activities could generate
additional revenues, but in some cases could also lead to unintended
consequences. For example, a recommendation from the House Committee on
Transportation and Infrastructure to increase the tax rates for general
aviation jet fuel and aviation gasoline would increase Trust Fund
revenue, but could reduce fuel purchases, which would limit the amount
of the revenue increase. In addition, a provision of H.R. 2881 would
allow airports to raise their passenger facility charges
(PFC).[Footnote 6] This action would provide additional revenues for
aviation infrastructure, especially for larger airports. However, it
could also reduce the demand for air travel. Another provision of H.R.
2881 would establish new or increased fees for certain FAA
certification and registration activities, and such fees would provide
additional revenues. In general, though, when fees are imposed for
aviation activities, care must be taken to ensure that efforts to avoid
the fees do not compromise safety. An S. 1300 provision would authorize
the FAA Administrator to impose a surcharge of $25 per flight on many
aircraft owners and operators to help pay for NextGen capital projects.
While a surcharge would create an incentive for efficient use of air
traffic services, some stakeholders question the equity of charging the
same fee for aircraft of all sizes, and other stakeholders are
concerned that such a fee could lead to reduced air service for small
communities. Another S. 1300 provision would allow FAA to seek debt
financing for capital projects in the private capital market--a
proposal that, according to proponents, would provide a stable funding
source, but would result in higher interest costs for the government
than borrowing from the Treasury.
Background:
Although there have been fluctuations in its funding sources, FAA has
been supported by the current structure for decades. The agency is
funded primarily by the Trust Fund (82 percent)--which receives
revenues from a series of excise taxes paid by users of the national
airspace system--and by the General Fund. The excise taxes are
associated with purchases of airline tickets and aviation fuel, as well
as the shipment of cargo, and most are scheduled to expire September
30, 2007. Trust Fund revenues are available for use subject to
appropriation. Including interest earned on its balances, the Trust
Fund received about $11.2 billion in 2006. In addition, about $2.6
billion was appropriated for fiscal year 2006 from the General Fund for
FAA operations. Table 1 shows the distribution of Trust Fund revenues
for fiscal year 2005 by source.[Footnote 7]
Table 1: Sources of Trust Fund Revenue, Fiscal Year 2005:
Dollars in millions.
Passenger ticket tax;
Amount: $5,161;
Percent: 48.
Passenger flight segment tax;
Amount: 1,900;
Percent: 18.
Cargo tax;
Amount: 461;
Percent: 4.
Fuel tax;
Amount: 971;
Percent: 9.
International departure and arrival tax;
Amount: 1,922;
Percent: 18.
Interest;
Amount: 440;
Percent: 4.
Refunds[A];
Amount: (101);
Percent: (1).
Total;
Amount: $10,754;
Percent: 100.
Source: GAO analysis of FAA data.
[A] Includes refunds of taxes on aviation fuel other than gas
(noncommercial) and on aviation gasoline (noncommercial) as well as
other refunds or credits.
[End of table]
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 and to fund investments in air traffic control
facilities. It provides all of the funding for three of FAA's four
accounts, including (1) the Facilities and Equipment (F&E) account,
which funds technological improvements to the air traffic control
system; (2) the Research, Engineering, and Development (RE&D) account,
which funds research on issues related to aviation safety, mobility,
and the environment as well as most of FAA's contribution to
JPDO;[Footnote 9] and (3) the Airport Improvement Program (AIP), which
provides grants for construction and safety projects at airports. In
addition, at various times during its history, the Trust Fund has
provided all or some portion of the funding for FAA's Operations
account. In fiscal year 2006, expenditures from the Trust Fund totaling
$11.2 billion were made among the four accounts as shown in figure 1.
Figure 1: Trust Fund Expenditures for Fiscal Year 2006:
[See PDF for image]
Source: GAO analysis of FAA data.
[End of figure]
Estimates Indicate That Current Funding Structure Can Support FAA
Activities, Including NextGen, but Structure Raises Concerns about
Equity and Efficiency:
The current funding structure--excise taxes plus a General Fund
contribution--has funded FAA for many years, and estimates indicate
that this structure can potentially provide sufficient funds for the
next several years to support the transition to NextGen. As the number
of air travelers has grown, so have excise tax revenues. Even though
revenues fell with the decline in air travel following the terrorist
attacks of September 11, 2001, they began to rise again in fiscal year
2004, and FAA estimates that if the current taxes remain in effect at
their current rates, revenues will continue to increase.
While retaining the basic structure for funding FAA, Congress has at
times changed the mix of excise taxes and some of the tax rates and has
appropriated different amounts from the General Fund to offset Trust
Fund fluctuations. For example, when the taxes were most recently
reauthorized in 1997, Congress added the passenger segment tax while
reducing the passenger ticket tax rate from 10 percent to 7.5 percent.
Congress has also appropriated varying amounts of General Fund revenues
for FAA during the past 25 years, ranging from 0 to 59 percent of FAA's
budget and averaging around 20 percent since fiscal year 1997. The
amount of the General Fund contribution fluctuates because the
contribution is based on the incoming Trust Fund revenues that are
available to fund the Operations account after revenues have been
allocated to fund the F&E, AIP, and RE&D accounts. Therefore,
fluctuations in Trust Fund revenues and FAA expenditures require
different levels of General Fund contributions.
Since the Trust Fund's creation in 1970, revenues have in the aggregate
exceeded spending commitments, resulting in an uncommitted balance, or
surplus.[Footnote 10] As of the end of fiscal year 2006, the Trust
Fund's uncommitted balance was about $1.8 billion. The Trust Fund's
uncommitted balance 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 the last 6 years, for example, the uncommitted balance has
been declining because expenditures from the fund are based on
projected revenues and actual revenues have been less than FAA
forecasted.[Footnote 11]
Figure 2: Airport and Airway Trust Fund End-of-Year Uncommitted
Balance, Fiscal Years 1999-2007:
[See PDF for image]
Source: FAA.
Note: Amount for end of fiscal year 2007 is estimated.
[End of figure]
In prior work, we ran scenarios in which Trust Fund revenues continued
to fall short of forecasted levels and the Trust Fund balance continued
to decline, eventually falling to zero. We believe these scenarios
raise concerns because in the past the Trust Fund's uncommitted balance
has been used to offset lower-than-expected Trust Fund revenues and
decreased General Fund contributions. The zero-balance scenario would
most likely have implications for Congress in funding FAA programs,
including NextGen. To address this concern, H.R. 2881 proposes to base
expenditures from the Trust Fund on 95 percent, rather than 100
percent, of estimated Trust Fund revenues, which would reduce the
likelihood of running the Trust Fund balance to zero.
According to projections prepared by the Congressional Budget Office
(CBO),[Footnote 12] the existing funding structure, if maintained, will
generate substantially increasing revenues over the next decade.
Assuming that the General Fund provides about 19 percent of FAA's
budget, CBO estimates that through 2017 the Trust Fund can support
about $22 billion in additional spending over the baseline FAA spending
levels CBO has calculated for FAA (the 2006 funding level, growing with
inflation) provided that most of that spending occurs after
2010.[Footnote 13] According to FAA, the majority of the funding for
NextGen will take place after 2010.
Moreover, if the desired level of spending exceeded what was likely to
be available from the Trust Fund at current tax rates, Congress could
make changes within the current structure that would provide FAA with
additional revenue. For example, Congress could raise more revenue from
airspace system users for modernization or for other purposes by
raising the rates on one or more of the current excise taxes. Congress
could also provide more General Fund revenues for FAA, although the
nation's fiscal imbalance may make a larger contribution from this
source difficult.
Although the current funding structure may produce enough revenue to
fund FAA, including NextGen, this structure presents equity and
efficiency concerns. FAA and others have stated 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. 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 national airspace
system, their price for using the system (the taxes or charges they
pay) should accurately reflect the costs their use imposes on the
system.[Footnote 14] 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 15]
Technology Requirements and Other Issues Could Affect NextGen's Overall
Cost:
While revenue estimates indicate that the current funding structure can
potentially fund NextGen, a number of issues could affect NextGen's
overall cost, especially its technology requirements, which have not
yet been fully determined. The specific systems and associated costs of
NextGen infrastructure and research and development are not fully
known, nor are the resources that will be contributed by other federal
agencies. Other issues include the cost savings that might result from
more efficient FAA operations and acquisition processes, which could
reduce the need for new NextGen funding, and the extent to which FAA
uses public-private partnerships or leasing arrangements to acquire
NextGen infrastructure as flexibly and cost-effectively as possible.
JPDO recently estimated that the total federal cost for NextGen
infrastructure through 2025 will range between $15 billion and $22
billion. JPDO also reported that a preliminary estimate of the
corresponding cost to system users, who will have to equip with the
advanced avionics that are necessary to realize the full benefits of
some NextGen technologies, ranges between $14 billion and $20
billion.[Footnote 16] Thus, according to JPDO, the total costs for
NextGen could be anywhere between $29 billion and $42 billion. We
consider $13 billion to be a significantly wide range and believe there
is a need to better define the costs of NextGen.
According to JPDO officials, more precise cost estimates will depend on
information contained in several key planning documents, some of which
have been released and some of which are still being developed. In June
2007, JPDO released both the latest version of the NextGen Concept of
Operations[Footnote 17] and the first version of the NextGen Enterprise
Architecture.[Footnote 18] JPDO is developing an Integrated Work Plan
that will describe the capabilities needed to transition to NextGen
from the current system and provide the research and development,
policy and regulation, and acquisition time lines necessary to achieve
NextGen by 2025. The Integrated Work Plan, scheduled for release at the
end of this month, is akin to a project plan and will be critical for
planning the partner agencies' fiscal year 2009 budgets and programs.
JPDO is also developing an Office of Management and Budget (OMB)
Exhibit 300 for NextGen that will be used as input to funding decisions
for NextGen research and development and acquisitions across JPDO's
partner agencies.[Footnote 19] This Exhibit 300 will be due to OMB in
September 2007 and will inform decisions about the partner agencies'
2009 budget submissions. It will be important that these various
documents be used in the near term to develop more refined cost
estimates for NextGen.
Although JPDO has released estimates for NextGen, questions remain over
how much it will cost and which entities will fund and conduct some of
the necessary research, development, demonstration projects, and
training that will be key to achieving certain NextGen capabilities. In
the past, the National Aeronautics and Space Administration (NASA) has
performed a significant portion of federal aeronautics research and
development, including intermediate technology development. However,
NASA's aeronautics research budget and proposed funding show a 30-
percent decline in real terms (i.e., constant 2005 dollars) from fiscal
year 2005 through fiscal year 2011. To its credit, NASA plans to focus
its research on the needs of NextGen. However, NASA is also moving
toward an emphasis on fundamental research and away from developmental
work and demonstration projects, which could negatively affect NextGen
if other agencies do not assume these efforts. According to FAA and
JPDO officials, they are currently studying these issues and trying to
assess how much research and development work FAA can assume. FAA has
proposed increasing its research and development funding by $280
million over the next 5 years. However, a draft report by an advisory
committee to FAA stated that FAA would need at least $100 million
annually in increased funding to assume NASA's research and development
work. Furthermore, according to the draft report, establishing the
necessary infrastructure within FAA could delay the implementation of
NextGen by 5 years.
The overall cost of NextGen could be reduced to the extent that FAA
realizes cost savings from improved operations and acquisition
processes. We have reported that, over the past few years, FAA has made
significant progress in moving to more businesslike and cost-effective
operations, which should better position the agency for the complex
implementation of NextGen.[Footnote 20] Cost savings could come about
by, for example, consolidating facilities or outsourcing services,
should Congress choose to approve such measures. In addition, FAA has
reported improvements in its management of major system acquisitions.
To the extent that FAA can keep NextGen systems on schedule, FAA may be
able to avoid the escalation in acquisition costs that plagued its past
modernization efforts. Keeping acquisitions on schedule will also mean
realizing more quickly the increased efficiencies or safety benefits of
new systems and technologies, as well as avoiding the costs and
inefficiencies of maintaining existing systems.
Finally, the extent to which FAA employs public-private partnerships or
leasing arrangements as part of its acquisition strategy for NextGen
could affect the system's overall cost. FAA is currently exploring
these types of options for its future nationwide rollout of Automatic
Dependent Surveillance-Broadcast, a surveillance system that FAA
considers a cornerstone technology of NextGen. We believe that these
types of arrangements could produce significant cost savings and lessen
some risks for FAA. However, such arrangements must be carefully
structured to protect the interests of the public and the federal
government, and to ensure proper governmental oversight.
Selected Proposals for Funding Aviation Activities Could Generate More
Revenue but Could Also Lead to Unintended Consequences:
Several proposals, including a recommendation from a House committee
and selected provisions of the House and Senate reauthorization bills,
specify different types of revenue sources to fund FAA and NextGen.
These proposals have implications for revenue generation, but could
also lead to unintended consequences.
The House Committee on Transportation and Infrastructure has
recommended to the House Committee on Ways and Means that it increase
the tax rates for general aviation jet fuel and aviation gasoline. If
these rate increases are enacted, the fuel taxes would provide
additional revenue to the Trust Fund. However, the increases, although
relatively small, might also lead to reductions in fuel purchases by
general aviation aircraft operators. Any estimate of the revenue gain
from the higher tax rates should take into account these possible
reductions in fuel purchases. Other factors that could be considered in
setting general aviation fuel tax rates are the extent to which the
rates should be set to make FAA's funding more cost-based and how much
users are able to pay.
A provision of H.R. 2881 would allow airports to increase PFCs to a
maximum of $7, while an S. 1300 provision would retain the cap at
$4.50. Increasing the cap on PFCs would generate more revenue,
especially for larger airports. A $7 PFC could generate nearly $2
billion in additional revenues for airports assuming all airports
imposed the maximum PFC (see table 2).
Table 2: Projected Maximum PFC Collections for 2007 with a $7 PFC:
Dollars in millions.
Airport Size: Large hub;
2007 PFC collections[A]: $1,869;
2007 PFC collections if only airports currently at $4.50 increased to
$7: $2,831;
2007 PFC collections if all airports had a $7 PFC: $3,152.
Airport Size: Medium hub;
2007 PFC collections[A]: 487;
2007 PFC collections if only airports currently at $4.50 increased to
$7: 706;
2007 PFC collections if all airports had a $7 PFC: 914.
Subtotal;
2007 PFC collections[A]: $2,356;
2007 PFC collections if only airports currently at $4.50 increased to
$7: $3,537;
2007 PFC collections if all airports had a $7 PFC: $4,066.
Airport Size: Small hub;
2007 PFC collections[A]: 184;
2007 PFC collections if only airports currently at $4.50 increased to
$7: 262;
2007 PFC collections if all airports had a $7 PFC: 354.
Airport Size: Nonhub;
2007 PFC collections[A]: 71;
2007 PFC collections if only airports currently at $4.50 increased to
$7: 108;
2007 PFC collections if all airports had a $7 PFC: 144.
Airport Size: Nonprimary Commercial Service;
2007 PFC collections[A]: 1;
2007 PFC collections if only airports currently at $4.50 increased to
$7: 1;
2007 PFC collections if all airports had a $7 PFC: 5.
Subtotal;
2007 PFC collections[A]: $256;
2007 PFC collections if only airports currently at $4.50 increased to
$7: $371;
2007 PFC collections if all airports had a $7 PFC: $503.
Total[B];
2007 PFC collections[A]: $2,612;
2007 PFC collections if only airports currently at $4.50 increased to
$7: $3,907;
2007 PFC collections if all airports had a $7 PFC: $4,569.
Source: GAO analysis of FAA data.
[A] There are currently 517 commercial service airports eligible to
apply for a PFC. These are airports with more than 2,500 annual
enplanements.
[B] May not total due to rounding.
[End of figure]
However, not all airports are expected to move to the maximum ceiling
right away because many airports have a lesser or no PFC in place
currently. If only those airports with a PFC at the current maximum of
$4.50 increased their PFC to $7.00 and the others made no change, the
proposed fee increase would yield approximately $1.3 billion per year
in additional revenues. These calculations assume that the increased
PFC would not affect passenger demand for air travel. We have
previously calculated that a PFC increase could reduce passenger
demand, which would reduce the PFC revenue collected at the higher
rate. Nevertheless, our previous work suggests the revenue reduction
due to demand effects would likely be small.[Footnote 21] Smaller
airports (small and nonhub) would not benefit directly as much from
this ability to increase PFCs because smaller airports have fewer
passengers from whom to collect PFCs.[Footnote 22] However, smaller
airports, which rely primarily on AIP grants for capital funding, would
benefit indirectly from an increased cap on PFCs. AIP's Small Airport
Fund, which totaled $428 million in 2006, is funded by the turnback of
up to 75 percent of large and medium hub airports'
entitlements.[Footnote 23] H.R. 2881 would increase the turnback to 100
percent of entitlements for large hub airports that impose a PFC above
$4.50. While S. 1300 does not include an increase in PFCs, it does
include a pilot program for up to six airports to impose unlimited PFCs
if the airports collect the fee directly from passengers.
H.R. 2881 includes new and increased user fees to pay for the costs of
certain certification and registration activities of FAA. Such fees
would provide additional revenue and more directly link revenue
contributions to the cost of the services. These fees cover services
and activities for issuing certain certificates, registering aircraft
and airmen, issuing airmen medical certificates, and providing legal
opinions pertaining to aircraft registration or recordation. In some
cases, such as the registration of aircraft, FAA already charges a
modest fee ($5), but this fee has not been raised since 1964. We have
reported that this fee does not cover the cost of reviewing and
processing a registration application and have recommended that FAA
increase it.[Footnote 24] The proposal would raise the fee to $130 and
allow FAA to periodically adjust this and other fees based on the cost
of providing the service. However, in general, when fees are imposed
for aviation activities, care must be taken to ensure that efforts to
avoid the fees do not compromise safety.
S. 1300 includes a provision requiring the FAA Administrator to impose
a surcharge of $25 per flight to be available to pay the costs of
NextGen capital projects. All owners or operators of aircraft in the
national airspace system would be required to pay this surcharge except
those that fall into certain exempt categories.[Footnote 25] FAA
estimates that this fee could yield $400 million a year by 2011. We
estimate, on the basis of 2006 operations, that commercial airlines
would contribute 36 percent of the fees; regional airlines would
contribute 31 percent, though carrying far fewer passengers; and
general aviation would contribute 11 percent (see fig. 3).
Figure 3: Distribution of Surcharge by User, Based on 2006 Operations:
[See PDF for image]
Source: GAO Analysis of FAA data.
[End of figure]
Note: Regional airlines include jets with 60 or fewer seats (18
percent), jets with 61 or more seats (4 percent), and turbo/piston
aircraft (9 percent).
One potential advantage of this type of charge is that it would
establish a more direct relationship between revenue and costs compared
with the current excise taxes. Advocates of this approach say that
funding FAA in part through such a charge would do more than the
current structure to ensure that revenues are adequate to cover costs
over time and to create incentives for efficient use of the national
airspace system by directly connecting charges with the costs imposed
by users. On the other hand, although this connection would appear to
exist for FAA's costs of providing terminal control services--the more
flights, the more charges an operator pays--there is no obvious
connection with the costs of en route services because the charge would
be the same for short and long flights. In addition, concerns have been
raised about the equity of a charge that would apply equally to all jet
aircraft regardless of size. Another concern has been raised that the
fee might lead to reduced air service by turboprop operators providing
regular service to small communities as well as reduced service
provided through the Essential Air Service program to small communities
because of the increased expense that the fee would represent.
Another S. 1300 provision would grant FAA the authority to seek debt
financing by issuing bonds directly to the private capital market.
Supporters of this bonding proposal for FAA claim a number of
advantages to this financing approach. One claim is that debt financing
could provide FAA with a stable and predictable revenue source for
funding capital development. FAA officials state that the uncertainty
associated with the appropriation process makes planning for a large,
complex, and expensive air traffic control system like NextGen
difficult. Over the years, federal agencies have used a variety of
financing approaches to acquire capital assets. However, from a
governmentwide perspective, some approaches, such as bonding, raise
serious concerns because they ultimately will result in higher overall
costs. Moreover, if FAA were granted borrowing authority, the
associated costs would be higher by borrowing directly from the private
capital market instead of through the Treasury. According to Treasury
officials and representatives of investment firms, this occurs because
the Treasury is charged a lower interest rate to borrow money. The
costs of borrowing may also be higher if the revenue option--such as
taxes or user charges--used to pay back the bond is subject to
appropriations because there would most likely be a risk premium added
to the credit rating to compensate for the risk that appropriations may
not be provided. We have reported that given the federal government's
long-term structural fiscal imbalance, any action that may increase the
government's costs requires sound justification and careful
consideration before it is adopted.[Footnote 26]
With most of the excise taxes that largely fund FAA's budget scheduled
to expire at the end of September 2007, Congress will need to act to
avoid a lapse in revenue to the Trust Fund. FAA estimates that two
previous lapses in 1996 and 1997 resulted in the Trust Fund not
receiving about $5 billion in taxes and fees that were never recovered.
FAA estimates that the uncommitted balance in the Trust Fund at the end
of fiscal year 2007 will be about $1.8 billion dollars. At current
monthly spending levels, a 2-to 3-month lapse in fiscal year 2008 could
reduce the revenue in the Trust Fund enough to cause the uncommitted
balance to fall to zero. If the Trust Fund balance falls to zero, the
continuation of FAA's programs--including the development of NextGen
and grants to airports--would depend on providing additional revenues
from the General Fund.
Thank you, Mr. Chairman, that concludes my statement. I will be pleased
to answer any questions that you or other Members of the Subcommittee
might have.
GAO Contact and Staff Acknowledgments:
For further information about this testimony, please contact Gerald L.
Dillingham at (202) 512-2834. Other key contributors to this testimony
include Paul Aussendorf, Jay Cherlow, Bess Eisenstadt, Carol Henn,
Maureen Luna-Long, Faye Morrison, Teresa Spisak, and Tristan To.
FOOTNOTES
[1] JPDO was authorized by the Vision 100--Century of Aviation
Reauthorization Act (Pub. L. No. 108-176).
[2] H.R.2881, 110th Cong., 1st Sess. (June 27, 2007).
[3] S.1300, 110th Cong., 1st Sess. (May 3, 2007).
[4] In addition, H.R. 2698 would authorize appropriations for FAA's
civil aviation research and development projects.
[5] Airport Finance: Observations on Planned Airport Development Costs
and Funding Levels and the Administration's Proposed Changes in the
Airport Improvement Program, GAO-07-885 (Washington, D.C.: June 29,
2007); Federal Aviation Administration: Observations on Selected
Changes to FAA's Funding and Budget Structure in the Administration's
Reauthorization Proposal, GAO-07-625T (Washington, D.C.: Mar. 21,
2007); Next Generation Air Transportation System: Progress and
Challenges Associated with the Transformation of the National Airspace
System, GAO-07-25 (Washington, D.C.: Nov. 13, 2006); Aviation Finance:
Observations on Potential FAA Funding Options, GAO-06-973 (Washington,
D.C.: Sept. 29, 2006); National Airspace System Modernization:
Observations on Potential Funding Options for FAA and the Next
Generation Airspace System, GAO-06-1114T (Washington, D.C.: Sept. 27,
2006); and 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).
[6] The PFC program allows the collection of PFC fees up to $4.50 for
every enplaned passenger at commercial airports controlled by public
agencies. Airports use these fees to fund FAA-approved projects that
enhance safety, security, or capacity; reduce noise; or increase air
carrier competition.
[7] As recommended by FAA, we are using 2005 data to show the breakdown
of Trust Fund revenue by source because of uncertainty in the available
2006 data regarding the distribution of fuel tax revenues between
commercial and general aviation.
[8] Pub. L. No. 91-258.
[9] For the past few years, FAA and the National Aeronautics and Space
Administration have been the primary supporters of JPDO activities. The
administration's proposed budget for fiscal year 2008 for FAA includes
$17.8 million to support JPDO activities. The National Aeronautics and
Space Administration is planning to contribute about $18 million to
JPDO in fiscal year 2008.
[10] The Trust Fund's uncommitted balance represents money against
which there is no outstanding budget commitment or budget authority to
spend.
[11] In recent years, the difference between forecasted and actual
Trust Fund revenues has been smaller than it was earlier in the decade,
in part because the external demand shocks have been smaller and in
part because of efforts by FAA to improve its forecasting models.
However, the actual balance at the end of fiscal year 2007 will likely
be lower than forecasted, according to FAA.
[12] CBO, Financing Investment in the Air Traffic Control System
(Washington, D.C.: Sept. 27, 2006).
[13] This estimate takes into account expected increases in air travel
in estimating revenues, but, by law, it does not take into account any
possible increases in expenditures for FAA's Operations account due to
these increases in air travel because increases in expenditures are
based on a baseline figure adjusted for inflation.
[14] Assessing both the equity and the efficiency of a funding
structure requires knowledge of how costs are divided among users. FAA
recently completed a cost allocation study that assigns air traffic
control costs to user groups based on aircraft type. However, we
determined that FAA's methodology lacked certain analyses and
documentation that would be important in determining whether costs as
assigned reasonably reflect the services received by various users.
[15] 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. Given the
importance of some of these other factors to users' decisions about
using the national airspace system, the influence on these decisions of
the prices charged for FAA services may be comparatively small for some
users.
[16] JPDO noted that this range for avionics costs reflects uncertainty
about equipage costs for individual aircraft, the number of very light
jets that will operate in high-performance airspace, and the amount of
out-of-service time required for installation.
[17] The NextGen Concept of Operations provides written descriptions of
how the NextGen system is envisioned to operate in 2025 and beyond,
including highlighting key research and development and policy issues
that will need to be addressed. Following an introductory section, the
Concept of Operations has eight sections covering air traffic
management operations, airport operations and infrastructure services,
net-centric infrastructure services, shared situational awareness
services, security services, an environmental management framework,
safety management services, and performance management services.
[18] The NextGen Enterprise Architecture is a technical description of
the NextGen system, akin to a blueprint for a building. The Enterprise
Architecture is meant to provide a common tool for planning and
understanding the complex, interrelated systems that will make up
NextGen.
[19] Section 300 of OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget (Nov. 2, 2005), sets forth requirements for
federal agencies for planning, budgeting, acquiring, and managing
information technology capital assets. Exhibit 300 is designed to
ensure that the business case for an investment is tied to an agency's
mission statement, long-term goals and objectives, and annual
performance plans. It is submitted with an agency's budget submission
to OMB.
[20] GAO, Federal Aviation Administration: Key Issues in Ensuring the
Efficient Development and Safe Operation of the Next Generation Air
Transportation System, GAO-07-636T (Washington, D.C.: Mar. 22, 2007).
[21] GAO, Passenger Facility Charges: Program Implementation and the
Potential Effects of Proposed Changes, GAO/RCED-99-138 (Washington,
D.C.: May 19, 1999).
[22] General aviation airports are excluded since they do not have
passengers that would pay a PFC.
[23] Entitlements are AIP funds apportioned to airport sponsors and
states for eligible projects based on formulas.
[24] GAO, Aviation Safety: Unresolved Issues Involving U.S.-Registered
Aircraft, GAO/RCED-93-135 (Washington, D.C.: June 18, 1993).
[25] These exempt categories include military and public aircraft,
piston engine aircraft, and turboprop aircraft operating outside of
controlled airspace, among others.
[26] GAO-06-1114T.
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