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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 10:00 a.m. EDT:

Wednesday, May 4, 2005:

Airport and Airway Trust Fund:

Preliminary Observations on Past, Present, and Future:

Statement of Gerald L. Dillingham, Ph.D., Director, Physical 
Infrastructure Issues:

GAO-05-657T:

GAO Highlights:

Highlights of GAO-05-657T, a report to Subcommittee on Aviation, House 
Committee on Transportation and Infrastructure:

Why GAO Did This Study:

The Airport and Airway Trust Fund (Trust Fund) was established in 1970 
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 FAAís accounts such as the Airport Improvement 
Program (AIP), which provides grants for construction and safety 
projects at airports, the Facilities and Equipment (F&E),which funds 
technological improvements to the air traffic control system, and the 
Research, Engineering, and Development (RE&D). In addition, the Trust 
Fund provides some funding for FAAís operations account. To fund these 
accounts, the Trust Fund relies on a number of taxes for revenue, 
including passenger ticket, fuel, and cargo taxes that are paid by 
passengers and airlines. Since 1970, revenues have generally exceeded 
expenditures óresulting in a surplus or an uncommitted balance. In 
2004, the Trust Fundís year end uncommitted balance was about $2 
billion. 

A number of structural changes in the aviation industry and external 
events have affected revenues flowing into and out of the Fund and have 
caused some aviation stakeholders to speculate about the Fundís 
financial condition. The various taxes that accrue to the Trust Fund 
are scheduled to expire in 2007. GAO was asked to provide information 
and analysis about the financial outlook of the Trust Fund. 

What GAO Found:

With the exception of its first four years, the Trust Fund has ended 
each year with an uncommitted balance; however, the amount of the 
uncommitted balance has fluctuated and is currently trending downward. 
In 1991 and 1999, the Trust Fundís uncommitted balance totaled over $7 
billionóits highest level. However, in several years, the Trust Fundís 
balance experienced dramatic decreases resulting in a lower uncommitted 
balance, in part, because of lapses in the taxes that accrue to the 
Fund or reductions in demand for air travel. The Trust Fundís 
uncommitted balance decreased from $7.3 billion in 2001 to $4.8 billion 
in 2002 and has continued to decrease by about $1 billion each year 
since. This declining uncommitted balance has been caused by a number 
of underlying factors, such as reductions in the demand for air travel. 

Over the next 3 years, the Trust Fund is projected to have sufficient 
revenue to fund authorized spending and end each year with an 
uncommitted balance under the current law, referred to as Vision 100, 
and the Presidentís 2006 budget proposal, as shown below. However, this 
financial outlook depends on the realization of FAAís forecasted 
commercial passenger traffic levels and airfares. If revenues are 5 
percent lower than projected, as they were in 2001, the Trust Fundís 
uncommitted balance would be $1.5 billion or lower under both Vision 
100 and the Presidentís budget proposal in 2006 and 2007. If the 
revenues were 10 percent lower than projected, as they were in 2004, 
the uncommitted balance would reach zero in 2006 under the Presidentís 
proposal and in 2007 under Vision 100. FAA officials told GAO that if 
the uncommitted balance reached zero, FAA would still fund air traffic 
control services but would have to suspend some AIP and F&E activities.
Trust Fundís Projected Year End Uncommitted Balance Under Vision 100 
and Presidentís 2006 Budget Proposal: 

[See PDF for image]

[End of figure]

www.gao.gov/cgi-bin/getrpt?GAO-05-657T. 

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gerald Dillingham at (202) 512-2834 or 
dillinghamg@gao.gov. 

[End of section]

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the financial condition of 
the Airport and Airway Trust Fund (Trust Fund). The Trust Fund was 
established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) 
to help fund the development of a nationwide airport and airway system 
and to fund investments in air traffic control facilities. It provides 
all or some of the funding for FAA's accounts which include the:

* Airport Improvement Program (AIP), that provides grants for 
construction and safety projects at airports,

* Facilities and Equipment (F&E) account that funds technological 
improvements to the air traffic control system,

* the Research, Engineering, and Development (RE&D) account, and:

* Operations account. 

To fund these accounts, the Trust Fund relies on a number of taxes for 
revenue, including passenger ticket, fuel, and cargo taxes, that are 
paid by passengers and airlines. In fiscal year 2004, the Trust Fund 
received $9.7 billion in revenue and had expenditures of $10.4 
billion.[Footnote 1] Although Trust Fund expenditures exceeded revenues 
in 2004, since its creation in 1970, revenues have generally exceeded 
expenditures--resulting in a surplus or an uncommitted 
balance.[Footnote 2] At the end of 2004, the Trust Fund's uncommitted 
balance was about $2.4 billion, a decrease of about 67 percent since 
2001.[Footnote 3]

A number of structural changes in the aviation industry and external 
events have affected revenues flowing into and out of the Trust Fund 
and have caused some aviation stakeholders to speculate about the 
Fund's financial condition. For example, some aviation stakeholders 
believe that there is a reason to be concerned about the financial 
condition of the Trust Fund because revenues have not recently kept 
pace with expenditures. In contrast, other aviation stakeholders state 
that the Trust Fund is healthy because revenues are expected to 
continue increasing. The various taxes that accrue to the Trust Fund 
are scheduled to expire in 2007. 

My statement today is based on our ongoing work on the Trust Fund and 
discusses our preliminary observations on the past, present, and future 
financial outlook of the Trust Fund. We plan to issue a final report to 
this Subcommittee later this year. 

Historically, Trust Fund Has Generally Had an Uncommitted Balance but 
Recently the Balance Has Started to Trend Downward:

As shown in figure 1, with the exception of its first four years, the 
Trust Fund has ended each year with an uncommitted balance; however, 
the amount of the uncommitted balance has fluctuated and is currently 
trending downward. In 1991 and 1999, the Trust Fund's uncommitted 
balance totaled over $7 billion, which represented its highest 
amount.[Footnote 4] However, in several years, the Trust Fund's 
experienced dramatic decreases resulting in a lower uncommitted 
balance. For example, in 1982, the end of year uncommitted balance was 
$2.1 billion, and in 1997 it was $1.4 billion because of a lapse in the 
taxes that accrue to the Trust Fund. The Trust Fund's uncommitted 
balance also decreased from $7.3 billion in 2001 to $4.8 billion in 
2002 and has continued to decrease by about $1 billion each year since. 
There are a number of reasons for this downward trend, including 
changes in the amount of revenue flowing into and out of the Trust 
Fund. 

Figure 1: Trust Fund's Uncommitted Balance Has Recently Started to 
Trend Downward:

[See PDF for image]

[End of figure]

Revenues Have Generally Increased With Some Fluctuations:

The amount of revenues flowing into the Trust Fund has fluctuated from 
year to year but has generally trended upward, as shown in figure 2. 
The Trust Fund relies on a number of taxes for revenue, including 
passenger ticket, fuel, and cargo taxes that are paid by passengers and 
airlines. During 1981 and 1982 the amount of revenues including 
interest flowing into the Trust Fund averaged $629 million which was 
the lowest amount in its history because of a lapse in the collection 
of aviation taxes. In contrast, in 1999, revenue flowing into the Trust 
Fund totaled $11.1 billion, which was the largest amount in its 
history. 

Figure 2: Trust Fund Revenues Have Fluctuated but Generally Increased:

[See PDF for image]

[End of figure]

However, after revenues peaked in 1999, the amount of revenue flowing 
into the Trust Fund started to trend downward, totaling $9.7 billion in 
2004. A number of factors may have contributed to this decrease. For 
example, within the airline industry, the growth of the Internet as a 
means to sell and distribute tickets, the growth of the low cost 
airlines, and fare reductions by legacy carriers all transformed the 
industry and led to lower average fares. These lower fares may have 
resulted in lower ticket taxes and less revenue into the Trust 
Fund.[Footnote 5] In addition, a series of largely unforeseen events, 
including the September 11 terrorist attacks, war in Iraq and 
associated security concerns, the Severe Acute Respiratory Syndrome 
(SARS), global recessions, and a steep decline in business travel 
seriously reduced the demand for air travel resulting in a sharp 
decrease in airline industry revenue. 

Trust Fund Expenditures Have Also Increased and Exceeded Revenue in 
Some Years:

The amount of funds flowing out of the Trust Fund also has generally 
increased since the Fund's inception and has also exceeded revenues in 
some years. For example, as shown in figure 3, from 2002 through 2004, 
expenditures exceeded revenues by an average of about $938 million, or 
about 9 percent. 

Figure 3: Expenditures Exceeded Revenues in Some Years:

[See PDF for image]

[End of figure]

As mentioned earlier, the Trust Fund provides all the funding for AIP, 
F&E, and RE&D and provides some funding for operations. Trust Fund 
expenditures have grown because of increases in both spending for these 
accounts and in the amount of FAA operations funded by the Trust Fund. 
For example, the amount of funding provided for AIP increased from 
about $1.5 billion in 1998 to $3.5 billion in 2005. In addition, as 
shown in figure 4, since its inception the Trust Fund has funded some 
portion of FAA's operations. In 1972 and 2000, the Trust Fund funded 
100 percent of the cost of FAA operations. In 2004, the Trust Fund 
funded 60 percent and it is expected to fund 63 percent in 2005. 

Figure 4: FAA Operations Cost Funded By Trust Fund and General Fund:

[See PDF for image]

[End of figure]

Projected Trust Fund's Uncommitted Balance Is Positive but Depends on 
Realization of Forecasted Passenger Traffic Levels and Airfares:

Over the next 3 years, the Trust Fund is projected to have sufficient 
revenue to fund authorized spending and end each year with an 
uncommitted balance under Vision 100 and the President's 2006 budget 
proposal. However, this financial outlook depends on the realization of 
FAA's forecasted commercial passenger traffic levels and airfares. As 
shown in figure 5, under the current law--the Century of Aviation 
Reauthorization Act (Vision 100)--the Trust Fund's year-end uncommitted 
balance is projected to be about $2.6 billion in 2006. Under the 
President's proposal, it is projected to be slightly over $1 billion in 
2006. 

Figure 5: Trust Fund's Projected Uncommitted Balances Under Vision 100 
and President's Budget Proposal:

[See PDF for image]

[End of figure]

The primary reason that the Trust Fund's uncommitted balance would be 
higher under Vision 100 is that it uses the formula created in the 
Wendell H. Ford Aviation Investment and Reform Act for the 21st Century 
(AIR-21) to determine how much funding for FAA Operations should come 
from the Trust Fund, and the President's proposal does not. Under AIR-
21, the formula sets the amount of Trust Fund revenue that will be 
authorized for FAA Operations in a given year equal to projected Trust 
Fund revenues (as specified in the President's budget) minus the 
authorizations for AIP, F&E, and RE&D in that year. Thus, under Vision 
100, the Trust Fund is projected to support almost $15 billion, or 63 
percent of FAA Operations from 2005 through 2007. In contrast, the 
President's proposal specifies a set amount of Trust Fund revenue to be 
used for FAA Operations. Therefore, if Congress enacts the President's 
proposal, the Trust Fund would provide $17.7 billion for FAA Operations 
from 2005 through 2007, or about 74 percent of its total estimated 
costs for Operations. 

In contrast to 2006, in 2007, the Trust Fund's uncommitted balance 
would be about $300 million higher under the President's budget 
proposal than under Vision 100. According to FAA officials, this is 
primarily because of reduced spending for AIP and F&E under the 
President's budget proposal. 

Although the Trust Fund is projected to have a positive uncommitted 
balance from 2005 to 2007 under each of the expenditure proposals, this 
projection depends to a significant extent on achieving forecasted 
commercial passenger traffic levels and airfares that affect the amount 
of revenues flowing into the Trust Fund. We recognize that it is very 
difficult to anticipate future events that may significantly affect the 
demand for air travel and our analysis shows FAA's projected revenue 
forecast exceeds the actual amount of revenue received for four of the 
last five years as shown in figure 6. According to FAA officials, the 
major reasons why projected revenues were lower than actual revenues is 
because forecasted airline yields[Footnote 6] were higher than the 
actual yields and aviation activity was below anticipated levels for 
the last several years. 

Figure 6: Comparison of Forecasted Revenue with Actual Revenue Received:

[See PDF for image]

[End of figure]

Given the difference between the forecasted revenue and actual amount 
of revenue received, we conducted sensitivity analyses to estimate what 
would happen to the Trust Fund's uncommitted balance if passenger 
traffic or yields fall below the levels that FAA projected in November 
2004. For example, table 1 shows the projected Trust Fund balances 
under Vision 100 and the President's proposal and the impact if 
revenues are 5 percent or 10 percent less than currently projected. If 
revenues are 5 percent lower than projected, as they were in 2001, the 
Trust Fund's uncommitted balance would be $1.5 billion or lower under 
both Vision 100 and the President's budget proposal in 2006 and 2007. 
However, if the revenues are 10 percent lower than projected, as they 
were in 2004, the uncommitted balance would reach zero in 2006 under 
the President's proposal and in 2007 under Vision 100. 

Table 1: Sensitivity Analysis of the Trust Fund's Uncommitted Balance 
to Revenue Shortfalls:

Dollars in millions. 

Baseline projections as of November 2004; 
Vision 100; 
Fiscal year uncommitted balance: 2005: $2,103; 
Fiscal year uncommitted balance: 2006: $2,571; 
Fiscal year uncommitted balance: 2007: $2,615. 

Baseline projections as of November 2004; 
President's budget; 
Fiscal year uncommitted balance: 2005: $2,103; 
Fiscal year uncommitted balance: 2006: $1,195; 
Fiscal year uncommitted balance: 2007: $2,937. 

If revenues are 5 percent less than projected; 
Vision 100; 
Fiscal year uncommitted balance: 2005: $1,577; 
Fiscal year uncommitted balance: 2006: $1,459; 
Fiscal year uncommitted balance: 2007: $855. 

If revenues are 5 percent less than projected; 
President's budget; 
Fiscal year uncommitted balance: 2005: $1,577; 
Fiscal year uncommitted balance: 2006: $83; 
Fiscal year uncommitted balance: 2007: $1,176. 

If revenues are 10 percent less than projected; 
Vision 100; 
Fiscal year uncommitted balance: 2005: $1,051; 
Fiscal year uncommitted balance: 2006: $346; 
Fiscal year uncommitted balance: 2007: $0. 

If revenues are 10 percent less than projected; 
President's budget; 
Fiscal year uncommitted balance: 2005: $1,051; 
Fiscal year uncommitted balance: 2006: $0; 
Fiscal year uncommitted balance: 2007: $0. 

Source: GAO analysis of FAA data. 

[End of table]

A scenario in which the Trust Fund reaches zero is cause for concern. 
According to FAA officials, the elimination or reduction of the Trust 
Fund's uncommitted balance could also pose budgetary challenges. For 
example, if the Trust Fund's uncommitted balance reached zero in 2006 
it might require FAA to make significant spending cuts to aviation 
programs currently supported by the Trust Fund unless additional 
funding were authorized and appropriated from the General Fund. 
According to FAA officials, they would continue to fund air traffic 
control services because it is considered an emergency function that 
involves the safety of human life. However, to fund air traffic control 
services, FAA officials said it would have to suspend activities for 
AIP, F&E, and RE&D accounts including some F&E contracts. 

Regarding the long-term financial outlook of the Trust Fund, we believe 
that it is difficult to project beyond 2007 because the Trust Fund 
expires in 2007 and it is unknown if the current tax schedule will 
change. In addition, as mentioned earlier, forecasting aviation 
activity is difficult in part because of the complexities and 
uncertainties associated with anticipating future events that may 
affect the demand for air travel. Projecting the long-term financial 
outlook of the Trust Fund also requires some consideration of the 
planned spending of the programs that it finances. 

According to FAA officials, over the next 4 years, there may be an $8.2 
billion dollar gap between costs and revenues, which reflects a $5 
billion shortfall for operations and $3.2 billion shortfall for capital 
development. If this projected gap is realized, our past work suggests 
that the cost saving initiatives that FAA has identified will not be 
sufficient to close this gap.[Footnote 7] Consequently, additional 
reductions will be needed. For example, to meet air traffic controller 
staffing needs FAA could consider making greater use of the Air Traffic 
Collegiate Training Initiative Program which could save millions of 
dollars annually. In addition, FAA could save millions of dollars by 
eliminating redundant ground based navigational aids. 

Concluding Observations:

Deciding what changes may need to be made to the Trust Fund to help 
ensure a safe, efficient, and adequately funded national airspace 
system will require some tough choices by Congress and FAA. One of the 
critical questions that will need to be addressed is not only the 
amount of the Trust Fund's uncommitted balance but also whether the 
government has the fiscal capacity to fund current and future Trust 
Fund obligations while concurrently addressing the needs of other 
competing programs for scarce resources. 

FAA and Congress will also have to find a way to better align FAA's 
costs with revenue and to better address both the cost and revenue 
sides of the ledger. In terms of cost savings, our past work suggests 
that the cost saving initiatives that FAA has identified will not be 
sufficient to close its projected 4-year cumulative $8.2 billion 
shortfall. On the revenue side, this decision-making will include the 
consideration of a number of alternatives that have been proposed by 
various aviation stakeholders--ranging from increasing the current 
taxes that accrue to the Trust Fund to adopting user fees that would be 
more cost related--and the trade-offs associated with each. We plan to 
review these alternatives as part of our ongoing review of alternative 
approaches for funding FAA that we are doing at the request of this 
Subcommittee. 

This concludes my statement. I would be pleased to answer any questions 
that you or other members of the Subcommittee may have. 

Contacts and Acknowledgments:

For further information on this testimony, please contact Dr. Gerald 
Dillingham at (202) 512-2834 or by email at dillinghamg@gao.gov. 
Individuals making key contributions to this testimony include, Jay 
Cherlow, Tammy Conquest, Colin Fallon, David Hooper, Maren McAvoy, and 
Nicolas Zitelli. 

FOOTNOTES

[1] For purposes of this report, we are using the expenditure amount 
rather than the appropriated amount. The expenditure amount includes 
the amount of funding spent on AIP, F&E, RE&D, and operations and does 
not include commitments. 

[2] The Trust Fund's uncommitted balance represents money against which 
there is no outstanding budget commitment or authority to spend. 

[3] All dollar amounts in this testimony are in nominal dollars. 

[4] Because of price level increases that reduced the value of a dollar 
over time, in terms of purchasing power, the Trust Fund was larger in 
1991 than in 1999. 

[5] Increased traffic from these lower fares may have offset some of 
the decline in tax revenue. 

[6] Yields are commonly measured in cents per revenue passenger mile--
with revenue passenger miles being the number of miles revenue 
passengers are transported. 

[7] U.S. Government Accountability Office, National Airspace System: 
Progress and Ongoing Challenges for the Air Traffic Organization, GAO-
05-485T (Washington, D.C.: April 14, 2005).