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Reauthorization Proposal' which was released on March 21, 2007. 

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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, March 21, 2007: 

Federal Aviation Administration: 

Observations on Selected Changes to FAA's Funding and Budget Structure 
in the Administration's Reauthorization Proposal: 

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

GAO-07-625T: 

GAO Highlights: 

Highlights of GAO-07-625T, a testimony before the Subcommittee on 
Aviation, Committee on Transportation and Infrastructure, House of 
Representatives 

Why GAO Did This Study: 

Recently, the administration submitted a proposal for reauthorizing the 
Federal Aviation Administration (FAA) and the excise taxes that fund 
most of its budget. FAA’s current authorization expires in 6 months. 
The proposal calls for major changes to FAA’s funding and budget 
structure that are intended to address concerns about the long-term 
revenue adequacy, equity, and efficiency of FAA’s current funding 
structure and to provide a more stable, reliable basis for funding a 
new air traffic control system that FAA is developing (at an estimated 
cost of $15 billion to 22 billion through 2025) to meet forecasted 
increases in air travel demand. The proposal would introduce cost-based 
charges for commercial users of air traffic control services, eliminate 
many current taxes, substantially raise fuel taxes for general aviation 
users, charge commercial and general aviation users a fuel tax to pay 
primarily for airport capital improvements, modify FAA’s budget 
accounts to align with specific FAA activities, and link the portion of 
FAA’s budget that comes from the Treasury’s General Fund with public 
benefits FAA provides. 

This statement offers GAO’s observations on the proposed changes in 
FAA’s (1) funding and (2) budget structure and is based on GAO’s 
analysis of FAA’s proposal and a recent GAO report on FAA funding 
options. 

What GAO Found: 

Funding Structure: The current funding structure has supported FAA as 
FAA’s budget has grown, and it can continue to do so to fund planned 
modernization. Excise tax revenues are forecasted to increase if the 
current taxes are reauthorized without change and thus could support 
additional spending. If necessary, Congress can obtain more revenue by 
increasing the excise tax rates or the General Fund contribution to 
FAA’s budget, although the nation’s fiscal imbalance could make such an 
increase difficult. FAA is concerned because revenues from the current 
funding structure depend primarily on ticket prices and passenger 
numbers, which are not well linked to FAA’s workload and costs. The 
proposed new funding structure would link revenues more closely with 
costs to ensure that revenues rise with increases in FAA’s air traffic 
control and safety activities. According to FAA, cost-based user 
charges would also be more equitable and could create incentives for 
more efficient use of the system by aircraft operators. How well FAA’s 
proposed funding structure, if enacted, would achieve these goals is 
uncertain because it depends on two unknowns—the soundness of a new FAA 
cost allocation methodology and the extent to which the proposed 
structure links revenues to costs. Also uncertain are the adequacy of 
FAA’s proposed fuel tax rate to collect anticipated revenues, the 
implications of a proposed advisory board, and the impact of a proposal 
to give FAA limited debt-financing authority. Furthermore, GAO notes, 
user charges would reduce Congress’s role in setting revenues. 

Budget Structure: Modifying FAA’s budget accounts is consistent with 
FAA’s emphasis on aligning revenues and costs, but may present 
implementation issues, in that some FAA activities may be difficult to 
categorize. More specifically, the proposed restructuring could allow 
FAA to better identify funding options that link revenues and costs and 
may improve transparency by showing how much is being spent on specific 
FAA activities. However, some activities, such as those related to 
safety, may not lend themselves to placement in discrete categories. 
Linking the General Fund contribution to public benefits is 
appropriate, but since some activities may provide both public and 
private benefits, judgment rather than a precise calculation may 
determine the contribution. 

Concluding Observations: The administration has introduced a complex 
proposal for funding FAA that GAO believes deserves serious and 
thoughtful consideration. While not necessary to provide more money for 
FAA, the proposed structure may address some of the concerns raised by 
the current structure if its cost allocation is sound. Because FAA’s 
cost allocation model is new, further analysis and more time may be 
needed to determine whether it can adequately support a cost-based 
funding structure for FAA. Timely reauthorization of funding for FAA 
for at least the next year is, however, critical to prevent a lapse in 
funding for most FAA activities, regardless of the action taken on the 
proposed changes. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrptGAO-07-625T]. 

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 this hearing today to 
present GAO's observations on major changes to the Federal Aviation 
Administration's (FAA) funding and budget structure that are included 
in the administration's recently submitted reauthorization proposal. 
FAA operates one of the safest air transportation systems in the world. 
This system is, however, under growing strain as the skies over America 
become more crowded. Demand for air travel has increased in recent 
years, with over 740 million passengers flying in fiscal year 2006 and 
1 billion passengers expected to fly in 2015, according to FAA 
estimates. Already, this increasing demand for air travel has led to an 
increase in flight arrival delays, which are now approaching the record 
levels set in 2000, when one in four flights reached its destination 
behind schedule. The system is also expected to absorb a growing 
variety of aircraft, from the jumbo Airbus A380, which can hold more 
than 500 passengers, to very light jets, which might greatly increase 
the number of aircraft in the sky while transporting six or fewer 
passengers on any given flight. FAA is therefore developing a 
modernized air traffic control system, called the Next Generation Air 
Transportation System (NextGen), to meet the forecasted increases in 
air travel demand. The administration's reauthorization proposal serves 
as a blueprint for funding FAA as it begins its transformation to 
NextGen. 

According to FAA, the changes to its funding and budget accounts that 
the administration has proposed are intended to provide a more stable 
and reliable funding structure to pay for NextGen. FAA also says that 
the proposed changes would improve the revenue adequacy, equity, and 
efficiency of its funding and better link revenues with the costs that 
users of the National Airspace System (NAS) impose on the system. These 
funding changes include introducing user charges for commercial 
aircraft based on the cost of the air traffic control services they 
receive; eliminating many current taxes; substantially increasing the 
fuel taxes general aviation operators pay; charging both commercial and 
general aviation a fuel tax to pay for airport capital improvements, 
the Essential Air Service (EAS) program,[Footnote 1] and air traffic 
system research and development; modifying FAA's budget accounts to 
align with FAA's activities or lines of business; and linking the 
contribution to FAA's budget from the General Fund of the U.S. Treasury 
to the public benefits FAA provides.[Footnote 2] These changes would 
begin in fiscal year 2009. If implemented, the changes would alter the 
basis for funding FAA, in part by recovering the costs of services 
provided by FAA's Air Traffic Organization (ATO) in accordance with the 
cost assignments in a recently issued FAA cost allocation study. These 
changes would also redistribute the funding burden among user groups, 
increasing the share general aviation would contribute. FAA has stated 
that currently general aviation is not paying its fair share of the 
costs for services that it uses. Some stakeholders, such as general 
aviation, question whether all of the proposed changes are necessary, 
or even desirable, saying that the current funding structure has 
supported FAA adequately in the past and can generate more revenue in 
the future if Congress chooses to increase appropriations for aviation. 
These stakeholders also state that the current distribution of funding 
for FAA costs among aviation users is reasonable. 

The current authorization for FAA and for the excise taxes that fund 
most of FAA's budget expires at the end of September of this year. 
Regardless of the action taken on the proposed changes, timely 
reauthorization of funding for FAA for at least the next year is 
critical, because the uncommitted balance[Footnote 3] in FAA's 
principal funding source, the Airport and Airway Trust Fund (Trust 
Fund),[Footnote 4] is low relative to recent levels.[Footnote 5] 

In my statement today, I will present GAO's observations on the 
proposed changes in FAA's (1) funding and (2) budget structure, 
including the proposed method of determining the General Fund 
contribution to FAA's budget. 

My remarks are based in part on work we did for a report we issued last 
year that analyzed (1) FAA's current funding structure--both its 
advantages and the concerns that FAA and others had identified about 
its long-term revenue adequacy, equity, and efficiency--and (2) several 
funding options to assess how those options might address those 
concerns.[Footnote 6] For that report, we reviewed relevant literature, 
examined FAA data and forecasts, and interviewed officials from FAA and 
other government agencies, representatives of aviation industry groups, 
and academic and financial experts. In addition, for this statement, we 
analyzed selected funding and budget elements of the administration's 
reauthorization proposal and FAA's newly released cost allocation 
study, focusing on their implications for revenue adequacy, equity, and 
efficiency, and discussed them with FAA officials and representatives 
of aviation industry groups. We conducted our work from February to 
March 2007 in accordance with generally accepted government auditing 
standards. 

Summary: 

* Funding Structure: The current funding structure has supported FAA as 
FAA's budget has grown, and it can continue to fund planned 
modernization. Trust Fund revenues are forecasted to increase if the 
current excise taxes are extended without change and therefore could 
support additional congressional spending on aviation. If necessary, 
Congress can obtain more revenue by increasing excise tax rates or the 
General Fund contribution, although the nation's fiscal imbalance could 
make such an increase difficult. Nonetheless, FAA is concerned about 
the long-term revenue adequacy, equity, and efficiency of its current 
funding structure, and its proposed new funding structure is intended 
to address these concerns by linking revenues more closely with costs. 
By more closely linking revenues with workload and costs, FAA states 
that it will be better able to pay for future air traffic demands, for 
example the transition to NextGen, which is estimated to cost between 
$15 billion to $22 billion through 2025.[Footnote 7] It is uncertain 
how effective FAA's proposed cost-based funding approach, if enacted, 
will be in addressing these concerns. Its effectiveness depends on how 
accurately FAA's new cost allocation methodology assigns costs and on 
how closely the proposed approach adheres to the principle that there 
should be a direct link between a user's revenue contribution to 
funding FAA and the costs the user imposes. Stakeholders have raised 
questions about both of these considerations. Also uncertain are the 
equity of the tax burden commercial and general aviation would incur 
for airport capital improvements, the adequacy of FAA's proposed fuel 
tax rate to collect anticipated revenues, the implications of a 
proposed advisory board, and the impact of a proposal to give FAA 
limited debt financing authority. In addition, FAA has not taken into 
account a potential reduction in demand that could result from a fuel 
tax increase and could lead, in turn, to less fuel tax revenue than 
anticipated. The implications of an advisory board that has some 
influence but limited authority in setting user fees and the advantages 
of debt financing are unclear. 

* Budget Structure: FAA's proposal to modify its budget accounts is 
consistent with its emphasis on aligning revenues and costs but may 
present implementation issues in that some FAA activities may be 
difficult to categorize. More specifically, the proposed restructuring 
could allow FAA to better identify funding options that link revenues 
and costs and may improve transparency by showing how much is being 
spent on each line of business. However, some activities, such as those 
related to safety, may not lend themselves to placement in discrete 
categories. Linking the General Fund contribution to public benefits is 
an appropriate way to recognize that users are not the only 
beneficiaries of a safe air transportation system. Judgments, however, 
will still be necessary, since many activities that create public 
benefits, such as safety, also benefit users. 

Background: 

Although there have been fluctuations in its funding sources, FAA is 
primarily supported by the Trust Fund (82 percent), which receives 
revenues from a series of excise taxes paid by users of the NAS. These 
excise taxes are associated with purchases of airline tickets and 
aviation fuel, as well as the shipment of cargo. These Trust Fund 
revenues are then available for use subject to appropriations. In 
addition to these revenues, in most years, General Fund revenues have 
been used to fund FAA. 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. 

The Trust Fund was established by the Airport and Airway Revenue Act of 
1970 (P.L. 91-258) to help fund the development of a nationwide airport 
and airway system. The Trust Fund provides funding for FAA's two 
capital accounts--the Airport Improvement Program (AIP) and the 
Facilities and Equipment (F&E) account--which provide grants to 
airports and funds for modernizing the air traffic control system, 
respectively. The Trust Fund also provides funding for the Research, 
Engineering, and Development (RE&D) account and supports part of FAA's 
Operations account. To fund these accounts, the Trust Fund is credited 
with revenues collected from system users through the dedicated excise 
taxes. In fiscal year 2005,[Footnote 8] the ticket tax was the largest 
single source of Trust Fund revenue, followed by the international 
departure and arrival tax, the passenger segment tax, and fuel taxes 
(see table 1 for a description of current taxes). 

The administration's reauthorization proposal would change FAA's 
financing system from one based mainly on excise taxes to one based 
more on cost-based charges. Under the proposed system, funding for ATO 
would come primarily from user charges on commercial aircraft and fuel 
taxes on general aviation aircraft.[Footnote 9] In addition, 
contributions from the General Fund would be appropriated to FAA to 
cover ATO costs of providing services to military and other public 
aircraft, flight service stations, and a few other services.[Footnote 
10] Funding for AIP, EAS, and part of RE&D would come from an equal 
fuel tax on both general and commercial aviation and a tax on arriving 
and departing international passengers. Funding for Safety and 
Operations would include some fees, but mostly General Fund 
contributions. The reauthorization proposal would also create an 
advisory board and give FAA limited borrowing authority.[Footnote 11] 
Table 1 compares elements of the current and proposed funding structure 
for FAA. 

Table 1: Elements of the Current and Proposed FAA Funding Structure: 

Current FAA funding structure: 7.5 percent tax on ticket price of 
domestic airline tickets; 
Proposed FAA funding structure: Eliminated. 

Current FAA funding structure: $3.30 per-passenger tax on domestic 
passenger flight segment; 
Proposed FAA funding structure: Eliminated. 

Current FAA funding structure: Not applicable; 
Proposed FAA funding structure: User fee for jet and turboprop 
commercial aircraft. Fees for en route and oceanic air traffic services 
may be based on distance traveled or other factors consistent with U.S. 
treaties and international agreements. A user fee for (1) operations 
conducted in terminal airspace may be based on aircraft weight and (2) 
takeoffs and landings at airports with more than 100,000 passenger 
boardings annually. 

Current FAA funding structure: Not applicable; 
Proposed FAA funding structure: Congestion fee for landings and 
takeoffs by all aircraft at congested large-hub airports based on time 
of day and day of week. Daytime fees could differ from nighttime fees. 

Current FAA funding structure: 6.25 percent tax on shipping price for 
transportation of domestic cargo or mail; 
Proposed FAA funding structure: Eliminated. 

Current FAA funding structure: $0.043 per-gallon tax on domestic 
commercial aviation fuel; 
Proposed FAA funding structure: $0.136 per gallon tax on domestic 
commercial aviation fuel to fund AIP, EAS, and RE&D account. 

Current FAA funding structure: $0.193 per-gallon tax on domestic 
general aviation gasoline; 
Proposed FAA funding structure: $0.70 per- gallon tax on both domestic 
general aviation gasoline and jet fuel, with $0.564 per gallon to fund 
air traffic control services and $0.136 per gallon to fund AIP, EAS, 
and RE&D account. 

Current FAA funding structure: $0.218 per-gallon tax on domestic 
general aviation jet fuel. 

Current FAA funding structure: $14.50 per-passengertax for 
international passenger arrivals and departures; 
Proposed FAA funding structure: $6.39 per-passenger tax on 
international passenger arrivals and departures to fund AIP, EAS, and 
RE&D account. 

Current FAA funding structure: 7.5 percent tax on award value of 
frequent flyer awards; 
Proposed FAA funding structure: Eliminated. 

Current FAA funding structure: $7.30 per-passenger fee for passenger 
service between the continental United States and Alaska or Hawaii or 
between Alaska and Hawaii; 
Proposed FAA funding structure: Eliminated. 

Current FAA funding structure: Minimal aircraft certification and 
registration fees set below the cost of providing the service; 
Proposed FAA funding structure: Aircraft certification and registration 
fees to fund additional activities and tied to the cost of providing 
service. 

Current FAA funding structure: General Fund contribution; 
Proposed FAA funding structure: General Fund contribution. 

Current FAA funding structure: No debt financing authority; 
Proposed FAA funding structure: $5 billion in Treasury debt financing 
authority for NextGen-related capital needs for fiscal years 2013-2017. 

Current FAA funding structure: Management Advisory Council reviews and 
makes recommendations on FAA management, policy, spending, funding and 
regulatory matters affecting the aviation industry; 
Proposed FAA funding structure: Air Transportation System Advisory 
Board established to make recommendations on setting of user fees. 

Source: GAO analysis of FAA data. 

[End of table] 

The administration's proposal also calls for changing FAA's budget 
structure by establishing two new budget accounts--(1) Air Traffic 
Organization and (2) Safety and Operations--to align with FAA's lines 
of business and proposed funding. These two new accounts would replace 
the Operations and F&E accounts. The proposal retains the AIP and RE&D 
accounts. See table 2 for a comparison of the current and proposed FAA 
budget structure. 

Table 2: Current and Proposed FAA Budget Accounts: 

Account name: Activity funded; 
Current budget account: Operations: Aviation safety; Commercial space 
transportation; FAA overhead; ATO salaries and expenses; 
Proposed budget account: Safety and Operations: Aviation safety; 
Commercial space transportation; FAA overhead. 

Account name: Funding source; 
Current budget account: Operations: Trust Fund (about 68 percent); 
General Fund (about 32 percent); 
Proposed budget account: Safety and operations: User fees (about 32 
percent); Trust Fund (about 4 percent); General Fund (about 64 
percent). 

Account name: Activity funded; 
Current budget account: Facilities and Equipment: Air traffic 
modernization; 
Proposed budget account: Air Traffic Organization (ATO): Air traffic 
modernization; ATO salaries and expenses. 

Account name: Funding source; 
Current budget account: Facilities and Equipment: Trust Fund (100 
percent); 
Proposed budget account: Air Traffic Organization (ATO); Trust Fund (11 
percent); User fees (74 percent); General Fund (15 percent). 

Account name: Activity funded; 
Current budget account: Airport Improvement Program: Airport capital 
development; 
Proposed budget account: Airport Improvement Program: Airport capital 
development. 

Account name: Funding source; 
Current budget account: Airport Improvement Program: Trust Fund (100 
percent); 
Proposed budget account: Airport Improvement program: Trust Fund (100 
percent). 

Account name: Activity funded; 
Current budget account: Research, Engineering, and Development: 
Research on aviation safety, capacity, and environmental issues; 
Proposed budget account: Research, Engineering, and Development: 
Research on aviation safety, capacity, and environmental issues. 

Account name: Funding source; 
Current budget account: Research, Engineering, and Development: Trust 
Fund (100 percent); 
Proposed budget account: Research, Engineering, and Development: Trust 
Fund (about 88 percent); General Fund (about 12 percent). 

Source: GAO analysis of data from the Budget of the United States 
Government Fiscal Year 2008 (Washington, D.C.: Feb. 5, 2007). 

[End of table] 

In January 2007, FAA released a new cost allocation study.[Footnote 12] 
This report sets forth a methodology for assigning air traffic costs to 
user groups on the basis of aircraft type. The two principal user 
groups are the high-performance group, which includes all fixed-wing 
turbine engine aircraft operations, and the piston aircraft group, 
which includes piston engine fixed-wing aircraft operations and 
helicopters. According to FAA, this cost allocation methodology is 
based on the assumption that high-performance users generally compete 
for the same air traffic control resources and their operations are 
more time-sensitive than piston aircraft operations, requiring more 
complex air traffic equipment and procedures. Piston aircraft 
operations, on the other hand, tend to be less time-sensitive and 
typically rely on less complex equipment. Differences in the speed and 
cruising altitudes of the two aircraft types also affect their en route 
costs. 

Observations on Proposed Changes to FAA's Funding Structure: 

The current funding structure, with some modifications to the excise 
taxes and tax rates and changes in the levels of General Fund 
contributions, has successfully funded a growing FAA budget. Trust Fund 
revenues are projected to increase substantially at current excise tax 
rates. If, to fund the additional costs of NextGen or for other 
reasons, Congress chooses to increase spending on aviation beyond what 
can be paid for at current excise tax rates, it can obtain additional 
revenue through the current funding structure by increasing excise tax 
rates, the General Fund contribution, or both, although the nation's 
fiscal imbalance could make such an increase difficult. Nonetheless, 
because some factors that drive tax revenues, such as ticket prices, 
are not well linked to FAA's workload and costs, FAA has been concerned 
about the long-run revenue adequacy, equity, and efficiency of its 
funding.[Footnote 13] 

Some of the administration's proposed changes for funding FAA, such as 
establishing direct user charges for commercial aviation and 
substantially increasing fuel taxes for general aviation are intended 
to link FAA's revenues more closely with its costs. For other elements 
of FAA's budget, however, it is not possible to establish a direct link 
between revenues and costs. For example, because AIP expenditures are 
not the direct result of costs imposed by users of the NAS, the 
proposal to fund AIP through equal fuel taxes on all aircraft operators 
can best be evaluated on equity grounds. Better alignment of FAA's 
revenues and costs can address some of the concerns about the current 
funding system that derive from the lack of connection between some key 
drivers of current FAA revenues, such as ticket prices, and FAA's 
workload and costs. However, the effectiveness of the proposed funding 
structure in linking costs with revenues depends critically on how well 
FAA's new cost allocation method assigns costs to users and on how 
closely the proposed funding structure adheres to the principle of cost-
based funding, and questions remain about both considerations.[Footnote 
14] Furthermore, FAA's method for estimating the fuel tax rates needed 
to collect its intended level of fuel tax revenue may have 
underestimated the tax rates needed by not accounting for possible 
reductions in fuel consumption due to the higher tax rates. The 
implications of some of the other proposed changes, including one 
creating an advisory board that can make recommendations on fee setting 
and another authorizing limited authority for FAA to use debt 
financing, are uncertain. 

FAA's Current Funding Structure Has Kept Up with Demand for Many Years 
and Can Provide Funding to Cover the Development and Implementation of 
NextGen: 

Congress has used the current funding structure--excise taxes plus a 
General Fund contribution--to fund FAA for many years. As the number of 
air travelers has grown, so have excise tax revenues. Even though 
revenues fell during the early years of this decade as the demand for 
air travel fell, they began to rise again in fiscal year 2004, 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. 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.[Footnote 15] 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 fluctuation in the amount 
of the General Fund contribution occurs 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, RE&D accounts. Therefore, fluctuations in the Trust Fund 
revenues and FAA expenditures require different levels of General Fund 
contributions. 

As air traffic grows and FAA embarks on modernization through NextGen, 
Congress may appropriate additional funds to FAA to fund new investment 
and to maintain a safe and efficient airspace system, although there is 
considerable uncertainty about how much NextGen will cost. FAA 
estimates that NextGen will cost between $15 billion to $22 billion 
through 2025. However, funding NextGen does not mean that the current 
funding structure needs to be changed. According to projections 
prepared by the Congressional Budget Office (CBO),[Footnote 16] 
revenues obtained from the existing funding structure are projected to 
increase substantially. Assuming that the General Fund provides about 
19 percent of FAA's budget, CBO estimates that through 2016 the Trust 
Fund can support about $19 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. How far this money will go to fund 
modernization is subject to a number of uncertainties--including the 
future cost of NextGen investments, the volume of air traffic, the 
future costs of operating the NAS, and the levels of future 
appropriations for AIP, all of which may influence funding for FAA. 

However, if the desired level of spending exceeded what was likely to 
be available from the Trust Fund at current tax rates, Congress could 
make further changes within the current structure that would provide 
FAA with additional revenue if Congress believed that larger FAA 
appropriations were appropriate--for example, if FAA experienced 
increased workload demands as a result of increased demand for air 
traffic services. Congress could raise more revenue from airspace 
system users for NAS 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. Thus, it is necessary to look at factors other than a need 
for more revenues to justify a major change in FAA's funding structure. 

Funding Changes in Reauthorization Proposal Are Intended to Address 
Concerns about Long-term Revenue Adequacy, Equity, and Efficiency of 
Current Funding Structure: 

FAA has expressed concern that revenues from the current funding 
structure depend heavily on factors, such as ticket prices, that are 
not connected to FAA's workload and costs. According to FAA, under the 
current structure, increases in the agency's workload may not be 
accompanied by revenue increases because users are not directly charged 
for the costs that they impose on FAA for their use of the NAS. 
Revenues collected from excise taxes are primarily dependent on the 
price of tickets and the number of passengers on planes, while workload 
is driven by flight control and safety activities. This disconnect 
raises three key concerns about the current funding structure--its long-
term revenue adequacy, equity, and efficiency. Moreover, these three 
concerns are supported by long-term industry trends and FAA forecasts 
of declines in inflation-adjusted air fares, the growing use of smaller 
aircraft, and FAA's 2007 cost allocation study. The administration has 
used these concerns as its rationale for proposing major changes in 
FAA's funding. 

Many of the proposed changes for funding FAA contained in the 
administration's reauthorization proposal are intended to address the 
concerns about revenue adequacy, equity, and efficiency by linking 
FAA's revenues more closely with its costs. The proposal calls for a 
combination of methods for funding FAA, which we previously reported 
might best address concerns with the current system by providing a 
better link between revenues and costs than any option used 
separately.[Footnote 17] For example, the proposal would eliminate all 
the excise taxes except the taxes on fuel and the tax on arriving and 
departing international passengers. The ATO, the largest part of FAA's 
budget, would then be funded by direct user charges on commercial 
aircraft--including air taxis, fractionally owned aircraft, and 
aircraft providing charter service--that use the NAS, fuel taxes paid 
by general aviation users of the NAS (both turbine and piston), and 
General Fund revenues to cover the costs of exempt aircraft such as 
military and other state aircraft and flight service stations. 

The proposal would also allow FAA to establish a fee for all aircraft 
using the nation's most congested airports. Based on the time of day or 
day of the week, the fee would be designed to increase efficient use of 
the NAS by discouraging peak-period traffic at congested airports and, 
thus, reducing delays. Under such a fee, cargo carriers could pay lower 
fees by operating at night than they would pay by operating at peak 
periods of the day, creating an incentive for some cargo carriers to 
switch daytime operations to nighttime. The fee could also create 
incentives for general aviation aircraft flying to and from 
metropolitan areas with congested airports to use other nearby airports 
instead. 

The shares of ATO costs to be recovered from commercial and general 
aviation aircraft, respectively, and the General Fund contribution to 
cover the costs of exempt aircraft would be based on the results of 
FAA's cost allocation study. In addition, the proposal would authorize 
FAA to impose fees to pay for costs related to certain aircraft 
certification and registration activities that it conducts.[Footnote 
18] 

Basing cost recovery for ATO only on cost allocation is a policy 
choice. In many other countries, cost recovery is based in part on cost 
allocation and in part on other principles, such as ability to 
pay.[Footnote 19] For example, some countries charge a fee for en route 
services based on weight and distance; weight is included as a factor 
in charging formulas because many believe that it reflects an aircraft 
operator's ability to pay. Using additional principles for cost 
recovery could result in different distributions of the funding burden 
among user groups. 

For one large area of FAA's budget, AIP, it is not possible to 
establish a direct link between revenues and costs because AIP 
expenditures are not the direct result of costs imposed by users of the 
NAS. FAA distributes AIP grants on the basis of congressional 
priorities established in authorizations and appropriations. 
Accordingly, equity would appear to be the best criterion to use in 
evaluating the administration's proposal to fund AIP through a fuel tax 
of 13.6 cents per gallon on commercial and general aviation operators 
and a tax of $6.39 per passenger on the use of international travel 
facilities.[Footnote 20] 

According to an FAA official, the decision to establish equal tax rates 
for commercial and general aviation operators was made to achieve 
fairness and simplicity. One way to evaluate the fairness or equity of 
funding AIP in this way would be to compare the distribution of the 
funding burden among user groups with the distribution of the grants 
funded by AIP.[Footnote 21] With all aircraft being charged the same 
fuel tax rate, according to FAA forecasts for fiscal year 2009, 
commercial aircraft operators would pay about 88 percent of the fuel 
tax revenues collected primarily to fund AIP, while general aviation 
operators would pay 12 percent. However, under the current AIP program, 
about one-third of AIP grants would go to airports with no commercial 
service, and some additional grants would go to airports where general 
aviation traffic makes up a substantial share of the aircraft 
operations.[Footnote 22] Thus, under the administration's proposal, 
commercial aviation users would appear to be paying for a large share 
of the benefits that come from capital spending at general aviation 
airports. This result is no different from what happens today; 
commercial aviation users currently pay for a large share of these 
benefits, since the largest share of the Trust Fund comes from 
passenger ticket taxes. 

Some portion of these benefits may accrue to commercial aviation users 
if capital spending at general aviation airports keeps general aviation 
traffic from using congested commercial airports. However, most of the 
benefits from capital spending at general aviation airports would 
likely go to users of those airports or their surrounding communities-
-or to the general public to the extent a national system of airports 
that includes general aviation airports creates public benefits. In 
that case, funding those benefits by fuel taxes paid by commercial 
aircraft may raise equity issues. An alternative approach that would be 
consistent with a policy choice to charge general aviation users less 
than the cost of the benefits they receive from AIP grants would be to 
use General Fund revenues to fund part of AIP. 

Concerns about the Soundness of the Cost Allocation Methodology and 
Adherence to Principle of Cost-Based Funding May Limit Proposal's 
Ability to Address FAA's Key Concerns: 

A better alignment of FAA's revenues and costs can address revenue 
adequacy, equity and efficiency concerns, but the ability of the 
proposed funding structure to link revenues and costs to address these 
concerns depends critically on two things--first, the soundness of 
FAA's cost allocation system in allocating costs to users and, second, 
how closely the proposed funding structure adheres to the principle of 
cost-based funding. 

FAA's new cost allocation study was released at the end of January, so 
we and others have had only a short time to review it. However, we, as 
well as industry stakeholders, have raised a number of concerns about 
the study and its cost allocation methodology. For example, FAA divides 
NAS users into two groups: high-performance aircraft, such as jets and 
turboprop aircraft, and piston aircraft. According to FAA, dividing 
users this way creates two principal groups whose flights impose 
substantially different costs on FAA. High-performance aircraft which 
fly at higher altitudes and speeds, and normally use Instrument Flight 
Rules, are "controlled" through en route airspace and for landings and 
takeoffs by air traffic controllers. Therefore, they impose higher 
costs on FAA than piston aircraft which fly at lower altitudes and 
often use Visual Flight Rules, under which they are not "controlled" 
through en route airspace but can use air traffic control services for 
landings and takeoffs. 

However, FAA did not conduct a statistical cost analysis to determine 
whether high-performance aircraft of different types might impose 
sufficiently different costs on the system to warrant dividing NAS 
users into more than two groups. For example, differences in aircraft 
weight[Footnote 23] could affect terminal airspace costs even though 
they may not affect en route costs. Although there may be no effect of 
aircraft weight on en route costs, FAA officials told us that the 
administration's reauthorization proposal requests authority to set 
terminal airspace user fees based in part on weight because they 
believe that larger aircraft require greater separation, thus imposing 
greater terminal airspace costs. Under FAA's cost allocation 
methodology, fixed costs[Footnote 24] are assigned to the group that is 
the primary user of the air traffic control services that generate 
those costs. Accordingly, it might be more consistent to divide high- 
performance aircraft into subgroups before FAA allocated the fixed 
costs of air traffic control services used by aircraft in all groups to 
the group that is the primary user of that service.[Footnote 25] 

Creating only two principal groups resulted in the allocation of some 
portion of the fixed costs to general aviation jet aircraft, because 
the high-performance group, which FAA defines to include general 
aviation jet aircraft, is the primary user of services that are 
responsible for most fixed costs. If instead, for example, FAA had 
created three principal aircraft groups--piston, heavy high- 
performance, and light high-performance--and if the heavy high- 
performance group was the primary user of services that are responsible 
for most fixed costs, then the fixed costs would have been allocated 
only to that group. The effect of this change in methodology would 
likely have been that general aviation turbine users would have been 
allocated a smaller share of total ATO costs and a lower fuel tax rate 
would have been needed to collect their share of FAA's revenues. 

Because a sound cost allocation methodology is central to the 
successful application of cost-based funding, more time may be needed 
for FAA to further analyze the differences among aircraft types that 
lead to differences in the costs they impose on the NAS. More time may 
also be needed for a fuller analysis and discussion of FAA's cost 
allocation methodology, after which, perhaps, a wider consensus might 
be reached on FAA's cost allocation methodology. At the request of this 
Committee, we are continuing to review FAA's cost allocation 
methodology. 

In addition to our concerns about the cost allocation methodology, we 
have identified some instances in which the reauthorization proposal 
does not strictly adhere to the principle of cost-based funding. For 
example, FAA has made what it terms a policy decision to not apply the 
congestion charge for using terminal airspace near large, busy airports 
to all aircraft that fly through that airspace. Aircraft flying near 
busy airports and using the same airspace but not taking off or landing 
at these airports would not be charged, even though such flights would 
use air traffic control services provided by the same approach control 
centers. FAA officials told us that they made this decision because the 
approach control centers would not exist if they were not serving 
traffic at the busy airports. In addition, they said, FAA wanted to 
create incentives for general aviation aircraft to avoid flying to or 
from the busy airports and to use other nearby airports instead. 
Although that rationale could provide a justification for allocating 
the fixed costs of such centers to users of the busy airports, 
allocating all of the variable costs to users at those airports is a 
deviation from a cost-based approach. While such policy decisions on 
pricing may be appropriate in some instances for various reasons, but 
they create deviations from the principle of cost-based funding that 
may limit the ability of the administration's proposal to address 
concerns about the disconnect between revenues and costs associated 
with the current funding structure. 

Proposed Fuel Tax Rates May Not Yield the Revenue to Produce 
Anticipated Fuel Tax Revenues: 

The proposed fuel tax rates, although much higher than current rates, 
may not yield the revenue that FAA expects to collect from fuel taxes. 
FAA estimated the tax rates necessary to collect from general aviation 
operators the share of ATO costs allocated to them and from both 
commercial and general aviation operators the revenue needed to fund 
the proposed level of $2.75 billion for AIP, EAS, and the portion of 
the RE&D account to be funded through fuel taxes (less the share paid 
by international passengers). FAA officials confirmed for us that in 
performing these estimates they did not take into account possible 
reductions in fuel purchases due to the increase in the tax rates. 
Although we do not know by how much such purchases would decline, 
conventional economic reasoning, supported by the opinions of industry 
stakeholders, suggests that some decline would take place.[Footnote 26] 
Therefore, the tax rate should be set taking into consideration effects 
on use and the resulting impact on revenue. FAA officials told us that 
they believe that these effects would be small because the increased 
tax burden is a small share of aircraft operating costs and therefore 
there was no need to take its impact into account. Representatives of 
general aviation, however, have said that the impact could be more 
substantial. 

Even if there is no change in fuel purchases due to higher tax rates, 
FAA's forecasts suggest that fuel tax revenues might be less than the 
proposed spending to be funded by those tax revenues.[Footnote 27] 
Furthermore, we observe that the administration's proposed spending for 
AIP is substantially below the levels at which Congress funded the 
program in recent years. If Congress were to adopt the proposed funding 
structure but fund AIP at the same level as this year, fuel tax rates 
would need to be raised above the proposed level to obtain enough 
revenue to fully fund AIP without resorting to alternative funding 
sources, such as the General Fund or drawing down the Trust Fund 
balance. 

Proposal to Create an Advisory Board Has Uncertain Implications While 
Proposal Authorizing Limited Borrowing Authority Is Unlikely to Have a 
Major Impact: 

The proposed creation of an advisory board raises questions about the 
influence that NAS users would have on fee setting and the impact that 
such a board would have on congressional oversight. According to the 
reauthorization proposal, the advisory board would be able to recommend 
user fee amounts to the FAA Administrator, who would have the final 
decision in setting fees. If the advisory board objected to the fee, 
the Administrator would be required to publish a written explanation in 
the Federal Register. Aviation stakeholders could appeal the fee to the 
Secretary of Transportation but there would be no judicial review of 
the Secretary's appeal decision.[Footnote 28] According to a recent 
report by the Congressional Research Service, the FAA Administrator 
would have substantial discretion in how much to use the advisory 
board's expertise.[Footnote 29] Congress would have no role in setting 
fees, whereas under the current system, Congress sets the tax rates. 
The combination of these elements raises the issue of how to ensure the 
appropriate level of congressional oversight. With a user fee, Congress 
would set the total amount to collect and spend from the fees through 
the appropriations process. 

The authorization of limited borrowing authority (up to $5 billion) for 
FAA in the administration's proposal seems unlikely to have a major 
effect on FAA's ability to pay for capital investment associated with 
moving to NextGen, because the payback period is relatively short. With 
a maximum payback period of 5 years, the advantage of matching the time 
period for paying for a capital investment with the time period in 
which the benefits of that investment are realized is unlikely to be 
achieved. As a result, the advantage of this type of borrowing compared 
to appropriations also funded by Treasury debt is less clear. In either 
case, user fee collections could offset the borrowing. However, it is 
possible that having FAA borrow from the Treasury with a relatively 
short time period for repayment could serve as a way to tighten and 
make more explicit the link between the borrowing and the fees that are 
the source of repayment--and could ensure that the fees were set at a 
level sufficient to provide the needed funds. 

Limiting FAA's authority to borrow from the Treasury and collecting 
revenue from user fees, as proposed, is preferable to giving FAA direct 
access to capital markets or repaying debt with appropriations or new 
borrowing. The Treasury can borrow at lower interest rates than FAA 
could achieve by going to the capital markets because Treasury 
securities are considered risk-free, since they are backed by the 
federal government. We have recommended that only those agencies that 
would be able to repay their borrowing through revenue collections be 
granted authority to borrow. In addition, we have reported that debt 
financing raises issues about borrowing costs that are particularly 
important in light of the federal government's long-term structural 
fiscal imbalance. Mandatory federal commitments to health and 
retirement programs will consume an ever-increasing share of the 
nation's gross domestic product and federal budgetary resources. 
Accordingly, any program or policy change that may increase costs 
requires sound justification and careful consideration before adoption. 

Observations on Proposed Changes to the Budget Structure and on the 
Method for Determining the General Fund Contribution: 

The reauthorization proposal to align FAA's budget accounts with FAA's 
lines of business has advantages and disadvantages. Such a 
restructuring is consistent with FAA's emphasis on aligning revenues 
and costs and could allow FAA to more specifically distinguish those 
funding options that provide a better links between costs and revenues. 
For example, an ATO account dedicated to the operation, maintenance, 
and upgrade of the NAS could better enable the agency to charge for 
direct usage of the NAS. In addition, such a system could show the 
costs attributable to each line of business, thereby supporting the 
agency's internal financial management. However, some FAA activities 
may not be clearly divisible into discrete categories. For example, one 
new account--the Safety and Operations account--includes safety- 
related activities. Nonetheless, there could be some ambiguity in how 
safety activities are defined and in how their costs should be 
allocated between aviation users which benefit directly from a safe air 
traffic control system and the public which receives general safety 
benefits. 

Linking the General Fund contribution to FAA's budget, as the 
administration is proposing, would explicitly recognize that users of 
the system are not the only beneficiaries of it. Such an approach 
allows for a "bottom up" calculation of the General Fund contribution 
that is based on the different public benefits that FAA provides, such 
as safety and use of the NAS by federal agencies. This approach is 
different from the current one, which bases the General Fund 
contribution on how much money is left in the Trust Fund to fund the 
Operations account after Trust Fund revenues for that particular year 
have been allocated to fund the F&E, AIP, and RE&D accounts. An 
approach that links a General Fund contribution to public benefits is 
consistent with the principle of public finance that public benefits 
should come from the General Fund and not from user contributions. This 
should not, however, be viewed as a precise determination. Some 
aviation activities, such as safety, benefit both users and the nonuser 
public. Others, such as a national airport system that includes small 
airports that receive federal grants, may be seen as a benefit solely 
to the users of those airports, to their communities, or to the broader 
public. In addition, such a change in the method of determining the 
General Fund contribution may result in an increase or a decrease in 
that contribution, which would have implications for how aviation 
activities are funded. 

Concluding Observations: 

The administration has introduced a complex proposal for funding FAA, 
and we believe that it deserves serious and thoughtful consideration. 
Adopting this proposal is not necessary to provide more money to FAA if 
Congress thinks that additional spending on aviation is needed to 
address air traffic increases and new investment demands, including 
NextGen, because additional funding can be provided within the current 
structure. However, given the current federal fiscal imbalance, 
appropriating additional funds to aviation may be difficult. 
Furthermore, the proposal may address some of the concerns that FAA and 
other stakeholders have raised with the current funding structure, such 
as equity, but only if the cost allocation from which the cost-based 
funding is derived is sound. FAA's cost allocation methodology is new 
and has raised issues, suggesting that further analysis and more time 
may be needed to reach a consensus as to whether it is sufficiently 
sound to support a cost-based funding structure for FAA. 

In the meantime, the taxes that currently provide most of the revenue 
for FAA are scheduled to expire at the end of the current fiscal year. 
Given the relatively low uncommitted balance in the Trust Fund, a lapse 
in tax revenues could affect the funding of most FAA activities. Thus, 
timely reauthorization of the current tax revenues to avoid a tax lapse 
is critical even if Congress chooses to continue its consideration of 
the administration's proposal or other alternatives for funding FAA 
beyond this fiscal year. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the 
subcommittee might have. 

Contacts and Acknowledgments: 

For further information about this testimony, please contact Gerald L. 
Dillingham at (202) 512-2834. Other key contributors to this testimony 
include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, 
Jennifer Kim, and Elizabeth Eisenstadt. 

FOOTNOTES 

[1] The EAS program, established after airline deregulation in 1978, is 
designed to ensure that small communities that received passenger air 
service before deregulation continue to have access to the nation's air 
transportation system. 

[2] Appropriations from the General Fund supplement appropriations from 
the Airport and Airway Trust Fund as necessary to pay for budgeted FAA 
programs. 

[3] The uncommitted balance represents money against which there is no 
outstanding budget commitment or budget authority to spend. 

[4] Excise tax revenues are deposited in the Trust Fund, from which 
they can be appropriated by Congress to fund FAA. 

[5] The Trust Fund's uncommitted balance at the end of fiscal year 2006 
was less than $2 billion. At the end of fiscal year 2001 it was $7.3 
billion. 

[6] GAO, Aviation Finance: Observations on Potential FAA Funding 
Options, GAO-06-973 (Washington, D.C.: September 29, 2006). 

[7] FAA is working through the Joint Planning and Development Office 
with other government agencies to design NextGen. The Joint Planning 
and Development Office is responsible for NextGen cost estimates. 

[8] Fiscal year 2005 is the last year for which complete tax data are 
available. 

[9] FAA would also receive authority to impose a fee for use of 
congested major airports that would apply to both commercial and 
general aviation aircraft. 

[10] Military and public aircraft include flights for government 
purposes, such as those used by the Departments of Defense, State, and 
the Interior. These aircraft are internationally defined as state 
aircraft that are exempt from paying fees and taxes. A flight service 
station is an air traffic facility that provides weather briefings and 
flight planning services, largely to general aviation pilots. Other 
services that FAA proposes to exempt from fees include, but are not 
limited to, air ambulances, aviation safety regulation and oversight, 
and the operation of air traffic control towers at airports with fewer 
than 100,000 passenger boardings per year. 

[11] Other provisions in the reauthorization proposal address funding 
during the transition to a user-based funding structure and the 
creation of a reserve fund to be available in case future revenues fall 
short of expectations. 

[12] Federal Aviation Administration, FY2005 Cost Allocation Report 
(Washington, D.C.: Jan. 31, 2007). 

[13] Revenue adequacy refers to the ability of FAA's funding system to 
produce revenues commensurate with workload changes over time. Equity 
refers to the fairness of the distribution of costs to aviation users. 
Efficiency refers to incentives that encourage the efficient use of the 
NAS. 

[14] Cost-based funding attempts to establish a more direct link 
between a user's payment for services and the costs the user imposes on 
a system. 

[15] At that time, Congress also increased the international departure 
tax from $6 to $12 per person, applied this tax to international 
arrivals, and added the frequent flyer tax and the Hawaii/Alaska 
passenger taxes. 

[16] Congressional Budget Office, Financing Investment in the Air 
Traffic Control System (Washington, D.C.: Sept. 27, 2006). 

[17] GAO-06-973. 

[18] FAA issues certificates and registrations to aircraft owners as 
well as certifications of domestic and foreign repair stations that are 
authorized to perform maintenance on U.S. registered aircraft. Other 
certification fees include charges to flight schools, training centers, 
and maintenance technical schools and fees for training provided to 
foreign aviation authorities, among others. 

[19] The ability-to-pay principle is a concept of tax fairness that 
states that those individuals with a greater financial capacity-- 
measured by wealth, income, or other levels of well-being--to bear a 
tax burden should pay more in taxes than those individuals with a 
lesser financial capacity. 

[20] The fuel tax and the international passenger tax also pay for EAS 
and for part of the RE&D account. 

[21] Other ways to evaluate the equity of funding AIP in this way might 
lead to different findings. 

[22] This allocation of AIP grants among airport types might change if 
the AIP provisions of the reauthorization bill are adopted. 

[23] We cite weight only as an example. Statistical cost analysis might 
identify other factors that could be relevant in dividing aircraft into 
principal groups that impose different costs on the NAS. 

[24] Fixed costs refer to the costs associated with a product or 
service that remain constant when the level of output changes. 

[25] According to FAA, one potential concern with dividing the high- 
performance group into smaller groups by weight is that the dividing 
point would be arbitrary and could result in large differences in costs 
assigned to aircraft that do not differ much by weight but do fall near 
the dividing line, yet on opposite sides. 

[26] FAA could use variations in fuel prices over time, such as the big 
increase in 2005 due to crude oil price increases, to estimate the 
decline in fuel purchases likely to result from fuel tax increases of 
the magnitude proposed. We recognize that in making such estimates FAA 
would need to take into account the effect that other factors such as 
the state of the economy that can have on fuel purchases. 

[27] For example, FAA's fuel consumption forecasts for fiscal year 2009 
imply fuel tax revenues for the Trust Fund of about $2.2 billion, and 
about $0.5 billion is forecasted to be collected in tax revenue from 
international passengers, for a total of about $2.8 billion (differs 
from components because of rounding). However, proposed AIP obligations 
for that year are about $2.9 billion and spending for EAS and RE&D to 
be funded from these revenues will increase that amount. 

[28] Appeals would need to be based on evidence that the fees (1) are 
not based on appropriate costs, or (2) do not fairly allocate costs 
among users or (3) are unreasonably discriminatory to a particular 
category of users or (4) are not in accordance with the agency's 
strategic business plan. 

[29] Congressional Research Service, Federal Aviation Administration 
Reauthorization: An Overview of Selected Provisions in Proposed 
Legislation (Washington, D.C.: Mar. 14, 2007). 

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