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Testimony: 

Before the Subcommittee on Aviation, Committee on Transportation and 
Infrastructure, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 2:00 p.m. EDT: 

Wednesday, September 27, 2006: 

National Airspace System Modernization: 

Observations on Potential Funding Options for FAA and the Next 
Generation Airspace System: 

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

Susan J. Irving Ph.D. Director, Federal Budget Analysis Strategic 
Issues: 

GAO-06-1114T: 

GAO Highlights: 

Highlights of GAO-06-1114T, a testimony before the Subcommittee on 
Aviation, Committee on Transportation and Infrastructure, House of 
Representatives 

Why GAO Did This Study: 

The transition to the Next Generation Air Transportation System 
(NGATS)—a system intended to safely accommodate a possible tripling of 
air traffic by 2025—will become one of the federal government’s most 
comprehensive and technically complex undertakings, and a preliminary 
estimate indicates it will also be expensive. However, the current 
approach to managing air transportation is becoming increasingly 
inefficient and operationally obsolete. In 2003, Congress authorized 
the creation of the Joint Planning and Development Office (JPDO) to 
coordinate the efforts of several federal partner agencies—including 
the Federal Aviation Administration (FAA), in which JPDO is housed—to 
plan for and develop NGATS. 

GAO’s testimony addresses (1) the current estimate and uncertainties 
over NGATS costs, (2) advantages and concerns that stakeholders have 
raised about the current approach to collecting revenues from national 
airspace users to fund FAA, (3) the advantages and disadvantages of 
adopting alternative funding options for FAA, and (4) the advantages 
and disadvantages of authorizing FAA to use debt financing for capital 
projects. 

This testimony is based in part on GAO’s analysis of FAA and JPDO 
documents and interviews with officials of those two agencies. 

What GAO Found: 

No comprehensive estimate of NGATS costs has been developed. However, 
an advisory committee to FAA has developed a limited, preliminary cost 
estimate, which has not yet been endorsed by any agency. This estimate 
suggests that with NGATS, FAA’s costs would average about $1 billion 
more per year (in today’s dollars) over the next 20 years than FAA’s 
appropriations for fiscal year 2006. The estimate is preliminary in 
part because JPDO has not yet completed its enterprise architecture, (a 
blueprint for NGATS) which will be needed to inform a reliable cost 
estimate. 

Some stakeholders support the current excise tax system because they 
believe it has been successful in funding FAA, has low administrative 
costs, and distributes the tax burden in a reasonable manner. Others, 
including FAA, state that under the current system, there is a 
disconnect between the revenues contributed by users and the costs 
those users impose on the national airspace system (NAS) that raises 
revenue adequacy, equity, and efficiency concerns. Trends over the past 
25 years in, and FAA’s projections of, both inflation-adjusted fares 
and average plane size suggest that the revenue collected under the 
current funding system has fallen and will continue to fall relative to 
FAA’s workload, supporting revenue adequacy concerns. 

Adopting alternative funding options to collect revenues from NAS users 
would have advantages and disadvantages. The degree to which 
alternative funding options could address concerns about the current 
excise tax system ultimately depends on the extent to which the 
contributions required from users actually reflect the costs they 
impose on the system. Given the diverse nature of FAA’s activities, a 
combination of alternative options may offer the most promise for 
linking revenues and costs. 

Allowing FAA to use debt-financing for capital projects, such as the 
replacement of facilities and equipment associated with the transition 
to NGATS, also presents advantages and disadvantages. Some stakeholders 
see debt financing as attractive because they believe it could provide 
FAA with a stable source of revenue to fund capital developments, while 
at the same time spreading the costs out over the life of a capital 
project as its benefits are realized. Debt-financing raises significant 
concerns, however, because it encumbers future resources, and 
expenditures from debt proceeds may not be subject to the same 
congressional oversight as expenditures from appropriations. Concerns 
about borrowing costs, oversight, and encumbering future resources are 
particularly important in light of the federal government’s long-term 
structural fiscal imbalance. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1114T]. 

To view the full product, click on the link above. For more 
information, contact Gerald L. Dillingham, PhD, (202) 512-2834, 
dillinghamg@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify at today's hearing on 
potential options for funding the transition to the next generation air 
transportation system (NGATS)--a system intended to safely accommodate 
a possible tripling of air traffic by 2025. As you know, in 2003, 
Congress authorized the creation of the Joint Planning and Development 
Office (JPDO) to coordinate efforts by several federal partner agencies 
(including the Federal Aviation Administration (FAA), in which JPDO is 
housed) to plan for and develop NGATS. NGATS is envisioned as a major 
redesign of the air transportation system that will include precision 
satellite navigation; digital, networked communications; an integrated 
weather system; and layered, adaptive security. The NGATS 
transformation effort will be an enormously complex undertaking, and a 
preliminary estimate indicates it will also be expensive. However, the 
current approach to managing air transportation is becoming 
increasingly inefficient and operationally obsolete. In fact, JPDO has 
estimated that failing to modernize to meet future demand for air 
transportation could result in billions of dollars in economic losses 
to the nation. 

Although JPDO is responsible for planning the transformation to NGATS 
and coordinating the efforts of its partner agencies, FAA will be 
largely responsible for implementing the policies and systems necessary 
for NGATS. Considering how to fund the near-term sustainment or 
modernization of our air transportation system takes on added 
importance given competing funding demands and the federal government's 
long term fiscal outlook. Our recent work, contained in a report that 
will be released to the public soon,[Footnote 1] analyzed the current 
funding structure, which relies mainly on revenues collected from 
national airspace system (NAS) users, and alternative funding options. 

We and others have pointed out that the federal budget is on an 
unsustainable path. Although the drivers in this outlook are federal 
health and retirement programs, we have also said that a fundamental 
reexamination of the base of federal programs and activities is 
important to create a sustainable government appropriate for the 21st 
century.[Footnote 2] Given the uncertain fiscal environment in which 
the air transportation system operates, and will likely continue to 
operate during the transformation to NGATS, my testimony today is 
designed to provide this committee with information on a preliminary 
cost estimate for the NGATS transformation and potential options for 
funding FAA. Specifically, my statement today will briefly address the 
(1) current estimate and uncertainties over NGATS costs, (2) advantages 
and concerns that stakeholders have raised about the current approach 
to collecting revenues from national airspace users to fund FAA, (3) 
advantages and disadvantages of adopting alternative funding options 
for FAA, and (4) advantages and disadvantages of authorizing FAA to use 
debt financing for capital projects. 

To answer these questions, we reviewed relevant economic literature, 
policy analysis, congressional testimony, industry group publications, 
and stakeholders' responses to questions FAA asked them about its 
funding and alternative options.[Footnote 3] We also interviewed key 
stakeholders, including officials from FAA, JPDO, the Office of 
Management and Budget (OMB), the Congressional Budget Office (CBO), and 
the Department of the Treasury (Treasury); representatives of aviation 
industry groups; and academic and financial experts. In addition, we 
examined FAA budget data, Airport and Airway Trust Fund (Trust Fund) 
revenue data, FAA and JPDO forecasts, and aviation activity data. We 
also obtained information on an estimate of FAA's future costs under 
NGATS but did not review in detail the methodology or assumptions used 
to develop this estimate. We conducted our work between May 2005 and 
August 2006 in accordance with generally accepted government auditing 
standards. 

In summary: 

* Understanding the costs involved in the transition to NGATS is 
critical to its planning and implementation, yet no comprehensive 
estimate of these costs currently exists. An FAA advisory committee has 
developed a limited, preliminary cost estimate, which officials have 
emphasized is not yet endorsed by any agency. This estimate suggests 
that with NGATS, FAA's costs would average about $1 billion more per 
year (in today's dollars) over the next 20 years than FAA's 
appropriations for fiscal year 2006. However, the NGATS enterprise 
architecture (a blueprint for the systems and integration required 
under NGATS) has not yet been developed. Consequently, the estimate 
should be seen as providing only a sense of the order of magnitude of 
the potential increased costs to FAA. In addition, this estimate does 
not include the costs that the other partner agencies or the industry 
might incur in their implementation of NGATS systems and technologies. 
A more precise estimate of the total NGATS cost should emerge following 
the development of the NGATS enterprise architecture. 

* Some stakeholders support the current excise tax system because they 
believe it has been successful in funding FAA, has low administrative 
costs, and distributes the tax burden in a reasonable manner. Others, 
including FAA, state that under the current system, there is a 
disconnect between the revenues contributed by users and the costs 
those users impose on the NAS that raises revenue adequacy, equity, and 
efficiency concerns.[Footnote 4] Trends over the past 25 years in, and 
FAA's projections of, both inflation-adjusted fares and average plane 
size suggest that the revenue collected under the current funding 
system has fallen and will continue to fall relative to FAA's workload 
and costs, supporting revenue adequacy concerns. Comparisons of revenue 
contributed and costs imposed by different flights provide support for 
equity and efficiency concerns. 

* Adopting alternative funding options to collect revenues from NAS 
users would have advantages and disadvantages. The degree to which 
alternative funding options could address concerns about the current 
excise tax system ultimately depends on the extent to which the 
contributions required from users actually reflect the costs they 
impose on the system. Given the diverse nature of FAA's activities, a 
combination of alternative options may offer the most promise for 
linking revenues and costs. Switching to any alternative funding option 
would raise administrative and transition issues, such as the need to 
develop the administrative capacity to implement new charges. 

* Allowing FAA to use debt-financing for capital projects, such as the 
replacement of facilities and equipment associated with the transition 
to NGATS, also presents advantages and disadvantages.[Footnote 5] Some 
stakeholders have suggested that debt-financing--such as bonds--could 
be a means of funding FAA capital projects. These stakeholders argue 
that debt-financing is attractive because an agency could obtain 
capital assets without first having to secure funding through the 
appropriation process, while at the same time spreading the costs out 
over the life of a capital project as the project's benefits are 
realized. Debt-financing raises significant concerns, however, because 
it encumbers future resources, and expenditures from debt proceeds may 
not be subject to the same congressional oversight as expenditures from 
appropriations. In addition, debt-financing raises issues regarding 
federal borrowing costs that are particularly important in light of the 
federal government's long-term structural fiscal imbalance. 

Background: 

NGATS is envisioned as a system that will meet the needs of the year 
2025. Planning for NGATS began in 2003, when Congress passed Vision 
100,[Footnote 6] the legislation that authorized JPDO. Vision 100 
requires the office to operate in conjunction with multiple government 
agencies, including the Departments of Commerce, Defense, Homeland 
Security, and Transportation; FAA; the National Aeronautics and Space 
Administration; and the White House Office of Science and Technology 
Policy. JPDO submitted an integrated plan for NGATS to Congress in 
December 2004. In developing the integrated plan, the partner agencies 
agreed on a vision statement for the future system and on eight 
strategies that broadly address the goals and objectives for NGATS. 

Among its efforts, JPDO has begun developing an enterprise 
architecture--one of the most critical planning documents in the NGATS 
effort. An enterprise architecture is akin to blueprints for a 
building. It is meant to provide a common tool for planning and 
understanding the complex, interrelated systems that will make up 
NGATS. JPDO intends for the enterprise architecture to describe FAA's 
operation of the current NAS, JPDO's plans for NGATS, and the sequence 
of steps needed for the transformation to NGATS. JPDO expects that the 
enterprise architecture will provide the means for facilitating 
coordination among the partner agencies and private sector 
manufacturers, the alignment of relevant research and development 
activities, the integration of equipment, and the development of a more 
reliable cost estimate for NGATS. JPDO officials expect the first 
complete draft of the enterprise architecture to be issued in 2007. 

FAA, which will bear much of the responsibility for implementing NGATS, 
engages in three primary activities: aviation safety oversight, air 
traffic control (ATC), and airport infrastructure development.[Footnote 
7] The costs associated with each of these activities generally depend 
on the nature of the specific service FAA provides and how it is used. 
FAA safety activities include the licensing of pilots and mechanics, as 
well as the inspection of various aspects of the aviation system, such 
as aircraft and airline operations. FAA states that the costs 
associated with these safety activities are primarily driven by the 
volume of each (e.g., the number of licenses and inspections). ATC 
includes a variety of complex activities to guide and control the flow 
of aircraft through the NAS. According to FAA, the costs imposed by 
each flight are influenced by the amount and nature of the specific 
services that a flight uses, and whether a flight operates at peak 
periods. FAA supports airport infrastructure development through the 
Airport Improvement Program (AIP). Unlike safety and ATC services, AIP 
expenditures are not the direct result of costs imposed by users of the 
NAS. FAA distributes AIP funding according to congressional priorities 
established in authorizing and appropriating legislation. 

FAA is funded through appropriations from both the Trust Fund and the 
General Fund of the U.S. Treasury (General Fund). The Trust Fund was 
established by the Airport and Airway Revenue Act of 1970[Footnote 8] 
to help fund the development of a nationwide airport and airway system. 
It provides funding for FAA's capital accounts, including the AIP, 
which is a multibillion dollar grant program that provides funding for 
airports; the Facilities and Equipment account, which funds 
technological improvements to the air traffic control system; and the 
Research, Engineering, and Development account, which funds continued 
research on aviation safety, mobility, and environmental issues. In 
addition, the Trust Fund supports part of FAA's operations. 

To fund these accounts, the Trust Fund is credited with revenues 
collected from system users through the following dedicated excise 
taxes: 

* 7.5 percent tax on domestic airline tickets: 

* $3.30 domestic passenger segment tax (excluding flights to or from 
rural airports)[Footnote 9] 

* 6.25 percent tax on the price paid for transportation of domestic 
cargo or mail[Footnote 10] 

* $0.043/gallon tax on domestic commercial aviation jet fuel: 

* $0.193/gallon tax on domestic general aviation gasoline: 

* $0.218/gallon tax on domestic general aviation jet fuel: 

* $14.50/person tax on international arrivals and departures, indexed 
to inflation[Footnote 11] 

* 7.5 percent tax on mileage awards (frequent flyer awards tax): 

* $7.30 per passenger tax on flights between the continental United 
States and Alaska or Hawaii (or between Alaska and Hawaii), indexed to 
inflation.[Footnote 12] 

Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The 
ticket tax was the largest single source of Trust Fund revenue in 
fiscal year 2005, totaling about $5.2 billion, or about 48 percent of 
all Trust Fund receipts. The ticket tax was followed by the passenger 
segment tax and the international departure/arrival taxes, which each 
totaled about $1.9 billion; fuel taxes, which totaled $870 million; the 
cargo/mail tax, which totaled $461 million; and interest income, which 
totaled $430 million. Figure 1 shows the shares received from each 
source during fiscal year 2005. 

Figure 1: Trust Fund Revenues by Source, Fiscal Year 2005: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

[End of figure] 

In addition to Trust Fund revenues, in most years General Fund revenues 
have been used to fund FAA. The General Fund contribution has varied 
greatly, ranging from 0 percent to 59 percent of FAA's budget. From 
fiscal year 1997, the year when existing Trust Fund excise taxes were 
authorized, through fiscal year 2006, the General Fund contribution has 
averaged 20 percent of FAA's total budget. About $2.6 billion was 
appropriated for fiscal year 2006 from the General Fund for FAA's 
operations. This amount represents about 18 percent of FAA's total 
appropriation. 

There is Currently No Comprehensive Estimate of NGATS Costs: 

Understanding the costs involved in the transition to NGATS is critical 
to the NGATS planning effort, yet no comprehensive estimate of these 
costs has been developed. This cost information is particularly 
important to Congress, which will have the authority to make NGATS 
funding decisions. To begin estimating NGATS costs, JPDO is holding a 
series of investment analysis workshops with stakeholders,[Footnote 13] 
including representatives from commercial and business aviation; 
general aviation (GA); equipment manufacturers; ATC systems developers; 
airports; and regional, state, and local planning bodies. According to 
JPDO, participants in these workshops are asked to discuss and comment 
on the appropriateness of JPDO's current assumptions about factors that 
drive private sector costs. 

Although JPDO expects that these workshops will provide information to 
be used in developing a range of potential costs for NGATS, an 
enterprise architecture is needed to further define and better 
understand how a number of factors will drive NGATS costs. One of these 
drivers is the technologies expected to be included in NGATS. Some of 
these technologies are more complex and thus more expensive to 
implement than others. A second driver is the sequence for replacing 
current technologies with NGATS technologies. A third driver is the 
length of time required for the transformation to NGATS, since, 
according to JPDO, a longer period would impose higher costs. JPDO's 
first draft of its enterprise architecture could reduce some of these 
variables, thereby allowing improved estimates of NGATS costs. 

While JPDO is beginning to explore the issue of cost estimates for 
NGATS, an advisory committee to FAA--the Research, Engineering and 
Development Advisory Committee (REDAC)--has developed a limited, 
preliminary cost estimate, which officials have emphasized is not yet 
endorsed by any agency.[Footnote 14] REDAC estimated that FAA's budget 
under the NGATS scenario would average about $15 billion per year 
through 2025, or about $1 billion more annually (in today's dollars) 
than FAA's fiscal year 2006 appropriation. REDAC estimated that the 
cost for a status quo (i.e., no NGATS) scenario would also be about $15 
billion per year through 2025.[Footnote 15] These estimates came out 
roughly equal, on average, because future FAA spending would be higher 
under NGATS than under the status quo in the early years but lower than 
under the status quo toward 2025. This relationship is due primarily to 
the expectation that, under the NGATS scenario, capital expenditures 
would be higher than under the status quo scenario in the near term, 
but operations costs would be lower because of productivity 
improvements in the longer term. Moreover, the NGATS cost estimate 
assumes that capital costs decrease sharply toward 2025. Officials who 
developed this estimate explained that the estimate treats NGATS as an 
isolated event. In reality, these officials acknowledge that planning 
for the subsequent "next generation" system will likely be underway as 
2025 approaches and the actual modernization costs could therefore be 
higher in this time frame than the estimate indicates. 

In addition, this estimate should be viewed within the context of a 
number of factors. First, REDAC does not believe that maintaining the 
status quo is a viable option because it would provide insufficient 
capacity to meet projected future demand. REDAC stated that it 
presented the status quo option "for analytical purposes only since the 
current approach to air traffic control and management in use in the 
United States cannot be scaled up to handle the projected growth in 
traffic." In fact, JPDO has estimated the annual economic cost of not 
meeting future demand; by 2020, JPDO estimates this cost at $40 billion 
per year. Second, the REDAC estimate does not include the costs of the 
intermediate technology development work--a key step in developing 
NGATS. 

Last, and most important, this estimate was developed before JPDO 
completed important planning documents and does not include estimates 
of the other partner agencies' costs of implementing NGATS. For 
example, the estimate does not include costs that the Department of 
Homeland Security might incur to develop and implement new security 
technologies. JPDO's first complete enterprise architecture, which 
would include security, is not expected until the middle of 2007. 
Additional partner agency costs, along with other costs such as those 
for training of personnel in new technologies, must be explored to have 
a complete picture of NGATS costs. 

Some Stakeholders Favor FAA's Current Funding System, but Others Raise 
Concerns about Revenue Adequacy, Equity, and Efficiency: 

Our report on potential FAA funding options outlines several concerns 
stakeholders have raised about the current funding structure that 
supports the Trust Fund.[Footnote 16] Our observations from that report 
bear directly on questions about funding NGATS, because the bulk of the 
NGATS implementation--and, presumably, the costs of that 
implementation--will fall to FAA. Some stakeholders support the current 
excise tax system, stating that it has been successful in funding FAA, 
has low administrative costs, and distributes the tax burden in a 
reasonable manner. Other stakeholders, including FAA, state that under 
the current system there is a disconnect between the revenues 
contributed by users and the costs those users impose on the NAS that 
raises revenue adequacy, equity, and efficiency concerns. Aviation 
trend data, FAA projections, and FAA cost estimates support revenue 
adequacy, equity, and efficiency concerns. However, the extent to which 
revenue and costs are linked depends critically on how the costs of FAA 
services are assigned to NAS users. Thus, to assess the extent to which 
the current approach or any other approach aligns costs with revenues 
would require completing an analysis of costs, using either a cost 
accounting system or cost finding techniques to distribute costs to the 
various NAS users. 

Some stakeholders believe that maintaining the current funding 
structure for FAA is appropriate because it has been successful in 
funding FAA for many years, suggesting that there is no urgent reason 
to change it. According to these stakeholders, the revenues collected 
from users under the current funding system, along with General Fund 
revenues provided by the Congress, have been sufficient for the United 
States to develop a safe and efficient aviation system. As the number 
of air travelers grew, so did revenues going into the Trust Fund. Even 
though revenues fell during the early years of this decade as the 
demand for air travel fell, they began to rise again in 2004 (see fig. 
2) and FAA estimates they will continue to increase. In addition, 
according to these stakeholders, the administrative costs are 
relatively low. 

Figure 2: Trust Fund Revenues and Passenger Enplanements, 1971 through 
2005: 

[See PDF for image] 

Source: GAO analysis  of FAA data. 

Notes: Trust Fund revenue is presented by fiscal year and is adjusted 
to 2005 constant dollars. Lapses in tax authorizations were the cause 
of significant revenue decreases in 1981-1982 and 1996-1997. 
Enplanements are presented by calendar year and are total system 
scheduled enplanements for the United States. 

[End of figure] 

Another argument for maintaining the current funding structure advanced 
by some industry stakeholders and analysts is that this structure 
reasonably allocates the funding burden between commercial aviation and 
GA. Under the current funding structure, system users who are subject 
to commercial taxes--including commercial airlines, air taxis, and many 
fractional ownership operations--contribute about 97 percent of the tax 
revenue that accrues to the Trust Fund. The remaining GA operators, 
which include operators of purely private corporate and individual 
aircraft, contribute about 3 percent. Representatives of the GA segment 
of the industry contend that collecting the bulk of the user- 
contributed revenues from the commercial segment is appropriate because 
the air traffic control system exists at its current size to 
accommodate the demands of commercial aviation and GA users should not 
be asked to contribute more than the incremental costs that result from 
also providing services to GA aircraft. Although the incremental costs 
are not precisely known, GA representatives have told us that they 
believe that the revenues currently collected from fuel taxes are a 
rough approximation of the incremental costs that FAA incurs to provide 
services to GA aircraft. According to FAA, all of the agency's cost 
studies to date have concluded that GA users pay less than the costs 
they impose on the system, while commercial operators pay more than the 
costs they impose on the system. 

The disconnect between sources of Trust Fund revenues and FAA costs 
under the current funding system raises concerns that it will not 
produce adequate revenue in the future to keep pace with FAA's workload 
increases and, consequently, FAA's costs. The principle of revenue 
adequacy requires a funding system to produce revenues that keep pace 
with costs over time. Costs for FAA are largely driven by FAA's 
workload. However, under the current funding system, increases in FAA's 
workload will not necessarily be accompanied by revenue increases 
because users are not directly charged for the costs they impose on FAA 
from their use of the NAS. Rather, Trust Fund revenues are primarily 
dependent on the prices of tickets (the domestic ticket tax) and the 
number of passengers on a plane (the domestic ticket tax, the domestic 
passenger segment tax, and the international passenger tax); neither is 
related to workload, which includes controlling flights and safety 
activities. Long-term industry trends and FAA forecasts of declines in 
air fares and the growing use of smaller aircraft support revenue 
adequacy concerns. 

To illustrate the disconnect between revenues and costs, table 1 
provides an example of the revenues generated by different aircraft 
making similar flights. The use of multiple flights by smaller aircraft 
to carry the same number of travelers as one larger aircraft increases 
FAA's workload, but will not necessarily be accompanied by increased 
revenues from system users to fund the additional costs associated with 
the additional workload. Example 1 shows the taxes that would be 
generated from transporting 105 passengers from Los Angeles to San 
Francisco by (1) one flight using a common narrow-body jet (Boeing 
737), and (2) three flights using a common regional jet (CRJ-200). In 
this case, the narrow-body jet has the capacity to carry 132 
passengers, while each regional jet has the capacity to carry 48 
passengers. As the table shows, differences in FAA's workload are not 
reflected in the revenues. According to FAA, if all other factors are 
equal (e.g., time of flight), the total ATC costs of the three regional 
jet flights will be about three times the cost of one narrow-body 
flight. Revenues from the three regional jet flights, however, total 
only about $37, or 3 percent, more than the revenue generated by the 
one narrow-body jet flight. Revenue increases are not linked to cost 
increases because under the current system, revenues are primarily 
influenced by the number of passengers, the average price of tickets, 
and the amount of fuel used--not the costs imposed on FAA through the 
use of its services. 

Table 1: Estimated Excise Tax Contributions from Various Flights: 

Approximately 300 mile flight from Los Angeles to San Francisco. 

Plane Type: Number of seats; 
Example #1: One 737 flight: 132; 
Example #1: Three CRJ-200 flights: 144; 
Example #2: One 767 flight: 231; 
Example #2: One 737 flight: 132; 
Example #2: One Learjet 35 flight: [A]. 

Plane type: Number of passengers; 
Example #1: One 737 flight: 105; 
Example #1: Three CRJ-200 flights: 105; 
Example #2: One 767 flight: 180; 
Example #2: One 737 flight: 89; 
Example #2: One Learjet 35 flight: [A]. 

Plane Type: Average fare ($); 
Example #1: One 737 flight: $100; 
Example #1: Three CRJ-200 flights: $100; 
Example #2: One 767 flight: $82; 
Example #2: One 737 flight: $84; 
Example #2: One Learjet 35 flight: [A]. 

Plane type: Fuel consumed (gallons); 
Example #1: One 737 flight: 937; 
Example #1: Three CRJ-200 flights: 1,797; 
Example #2: One 767 flight: 1,646; 
Example #2: One 737 flight: 937; 
Example #2: One Learjet 35 flight: 190. 

Plane type: Ticket tax; 
Example #1: One 737 flight: $788; 
Example #1: Three CRJ-200 flights: $789; 
Example #2: One 767 flight: $1,100; 
Example #2: One 737 flight: $565; 
Example #2: One Learjet 35 flight: $0. 

Plane type: Passenger segment tax; 
Example #1: One 737 flight: $348; 
Example #1: Three CRJ-200 flights: $348; 
Example #2: One 767 flight: $544; 
Example #2: One 737 flight: $270; 
Example #2: One Learjet 35 flight: $0. 

Plane type: Waybill tax;
 Example #1: One 737 flight: $2; 
Example #1: Three CRJ-200 flights: $0; 
Example #2: One 767 flight: $27; 
Example #2: One 737 flight: $2; 
Example #2: One Learjet 35 flight: $0. 

Plane type: Fuel tax; 
Example #1: One 737 flight: $40; 
Example #1: Three CRJ-200 flights: $78; 
Example #2: One 767 flight: $71; 
Example #2: One 737 flight: $40; 
Example #2: One Learjet 35 flight: $41. 

Plane type: Total Revenue; 
Example #1: One 737 flight: $1,178; 
Example #1: Three CRJ-200 flights: $1,215; 
Example #2: One 767 flight: $1,742; 
Example #2: One 737 flight: $877; 
Example #2: One Learjet 35 flight: $41. 

Source: GAO analysis of FAA data. 

[A] Not applicable. 

[End of table] 

The disconnect between revenues and workload can work both ways; 
increases in the number of passengers on planes (e.g., larger planes or 
higher load factors[Footnote 17]) or increases in fares can result in 
higher revenues relative to workload. In fact, load factors have 
increased over the past several years, and fares have increased over 
the past year. However, long-term trends and FAA's projections for both 
domestic fares and plane size suggest that Trust Fund revenues have 
declined relative to FAA's workload, and will likely continue to do so 
for the next several years. 

Domestic airfares, adjusted for inflation, have steadily declined over 
the past 25 years, from an average of $233 in 1981 to $148 in 
2005.[Footnote 18] This reduction represents an average decline of 
about 1.9 percent per year.[Footnote 19] Even though there have been 
increases in fares over the past year, FAA projects that average fares 
will continue to decline over time. In FAA's most recent forecast, 
inflation-adjusted domestic yields--a proxy measure for fares--are 
projected to decline approximately 8.5 percent over the next 10 
years.[Footnote 20] Trends in the average size of airplanes also 
suggest the Trust Fund is collecting less revenue relative to workload 
than in the past, and FAA projections suggest this decline will 
continue. Since smaller planes carry fewer passengers and burn less 
fuel, reductions in average plane size mean that lower ticket tax, 
segment tax, and fuel tax revenue accrues to the Trust Fund relative to 
FAA's workload. 

In addition to revenue adequacy issues, the disconnect between revenues 
contributed and costs imposed also raises equity issues. Example 2 in 
table 1 shows FAA's estimates of the revenue contributions made by 
various flights. Since FAA estimates that similar flights impose 
similar costs on the agency, the substantial differences in the revenue 
contributions of these flights raise issues of fairness. One such issue 
is that similar commercial flights may contribute very different 
amounts of revenue. In this example, a 767 flight contributes nearly 
twice as much as the 737 flight. A second equity issue is the fairness 
of the distribution of the funding burden between commercial airlines 
and GA operators. Domestic commercial passenger flights[Footnote 21] 
are subject to, among other potential excise taxes, the passenger 
ticket tax, the passenger segment tax, the cargo waybill tax, and the 
jet fuel tax. GA flights (excluding those that carry commercial 
passengers) are subject only to a fuel tax. As a result, the revenue 
contributions of similar commercial and private GA flights may be 
substantially different. In this example, a private Learjet flight 
contributes approximately $40, while the commercial flights of a 767 
and a 737 contribute $1,742 and $877, respectively. 

Although commercial and GA flights might receive the same services from 
FAA, suggesting that the large difference in revenue contribution 
raises equity concerns, there is debate over whether commercial and GA 
flights should be assigned the same costs for similar flights because 
of disagreements about how to assign the fixed costs associated with 
the ATC system. Commercial aviation industry representatives favor 
assigning those costs among all system users in proportion to their use 
of the system. GA representatives, on the other hand, state that the 
system exists at its present size to serve the needs of the commercial 
aviation industry, and that GA should be assigned only the incremental 
costs that would not exist apart from the need to serve GA. Without a 
consensus on how to assign ATC costs among users, it is not possible to 
assess the extent to which the current approach or any other results in 
a distribution of the funding burden between commercial airlines and GA 
operators that approximates the distribution of costs attributable to 
those groups. 

Finally, the disconnect between revenues contributed and costs imposed 
raises efficiency issues. For users to make efficient decisions about 
their use of the NAS, their price for using the system (the taxes or 
charges they pay) should accurately reflect the costs their use imposes 
on the system. Existing price differences suggest that the current 
funding structure creates incentives for inefficient use of the NAS. 
Users who pay more in taxes than the costs they impose may use the 
system less than is optimal, while those who pay less than the costs 
they impose may use the system more than is optimal. An airline's 
decision about how many flights to operate to serve a market 
illustrates how the current system does not provide incentives for 
efficient use of the system. In example 1 from table 1 (the same one 
used for the revenue adequacy discussion), an airline is deciding how 
many daily flights to operate for the Los Angeles to San Francisco 
market. It estimates that the market demand at the fare it is charging 
totals 105 passengers per day, and faces the choice of providing one 
daily flight with a narrow-body jet (Boeing 737), or three daily 
flights with a regional jet (CRJ-200)--assuming all flights depart 
during peak periods. In this scenario, the revenue collected from three 
regional jet flights--$1,215--is about 3 percent more than the revenue 
collected from one narrow-body jet flight--$1,178. FAA states however, 
that each flight would impose similar costs on the agency, so FAA's 
costs would be roughly 3-times more for the three regional jet flights 
than for the one medium jet flight. In this example, however, there is 
little financial incentive ($37) for the airline to avoid imposing 
additional costs on FAA by using one flight instead of three flights. 

Alternative Funding Options for FAA Present Both Advantages and 
Disadvantages: 

Alternative options for funding FAA--which includes funding NGATS 
because the bulk of its implementation (and, presumably, its costs) 
will fall on FAA--have advantages and disadvantages. The degree to 
which alternative funding options could address concerns about the 
current excise system ultimately depends on the extent to which the 
contributions required from users reflect the costs they actually 
impose on the system.[Footnote 22] Our forthcoming report on options 
for funding FAA will examine six options, including two that would 
modify the current excise tax structure and four that would adopt more 
direct charges to users. This testimony briefly summarizes our 
observations for two of those six options.[Footnote 23] 

One example of a possible modification to the current system would be 
to increase the current aviation fuel taxes--which levy a specific 
amount per gallon of fuel--to replace revenue lost by eliminating the 
remaining excise taxes and charges. Fuel taxes compare favorably with 
other existing excise taxes from a revenue adequacy perspective because 
they are more directly linked to workload; all things being equal, 
increases in workload over time would likely result in fuel tax revenue 
increases. Over time, however, the incentive a fuel tax creates to 
conserve fuel and make technological advances--while beneficial--is 
likely to erode the fuel tax's ability to generate revenue. Thus, it is 
likely the fuel tax rate would have to be raised from time to time to 
ensure adequate revenue in the long run. The extent to which a fuel tax 
would address equity issues appears to be limited. Although FAA states 
that there is a correlation between the time a plane spends in the NAS 
and fuel consumption, the extent to which fuel consumption correlates 
with the costs imposed on FAA has not been established. First, there 
may be a relationship between time in the system and en-route control 
costs, but the relationship between time in the system and the costs of 
other FAA activities, such as terminal costs, is not obvious. Second, 
even if the fuel tax were limited to funding en-route costs, the 
connection between fuel consumption and those costs appears to be 
incomplete. For example, since heavier planes burn more fuel per mile 
than lighter planes, they would be required to contribute more for 
spending the same amount of time in the system. As with equity issues, 
the potential for a fuel tax to address efficiency issues appears 
limited because the connection between revenues and costs is 
incomplete. A fuel tax can create an incentive for operators to 
minimize their fuel consumption, and therefore their time in the NAS. 
To the extent that time in the system correlates with costs imposed, 
this incentive can lead to improved efficiency. However, any 
relationship between time in the system and costs imposed on FAA 
appears to be limited to en-route control costs. 

En-route charges represent an option to switch to a more direct user 
charge. Such a charge would be based on the time users spend in the NAS 
or the distance they travel through the NAS. An en-route charge, 
relative to the current funding system, would be likely to improve the 
system's revenue adequacy because it could incorporate a cost component 
into the charging formula that could be adjusted regularly to reflect 
any changes in costs. This approach could ensure, over time, that 
revenues match costs. As with the fuel tax, the ability of en-route 
charges to address equity and efficiency issues raised by the current 
system appears to be limited. According to FAA, there is a strong 
relationship between time and distance in the system and the en-route 
costs imposed by users. Thus, if en-route charges were limited to 
funding en-route control costs, they might address equity issues raised 
by the current system by equating charges to costs imposed, depending 
on how costs are assigned. Furthermore, en-route charges for en-route 
control would create clear financial incentives to use the system more 
efficiently; less use of the system would lead to proportionately lower 
charges. However, there is no obvious relationship between time or 
distance in the system and other FAA activities--terminal control 
services and safety activities. As a result, if en-route charges were 
used to fund all FAA activities, their ability to address equity and 
efficiency issues is unclear. 

Switching to any alternative funding option would raise administrative 
and transition issues. For example, any cost-based funding system would 
require FAA to complete the appropriate cost analysis using either a 
cost accounting system or cost finding techniques. Some stakeholders 
who support the adoption of direct user charges also support a change 
in FAA's governance structure--for example, commercializing air 
navigation services--but we found no evidence that the adoption of 
direct charges would require a governance change. Recent reforms in 
France show how a government agency has moved toward a cost-based 
system to fund the air navigation services it provides without changing 
the underlying governance structure. 

Using a combination of workload-related taxes or charges to fund FAA 
might best address the revenue adequacy, equity, and efficiency 
concerns associated with the current funding structure, given that the 
costs of FAA's ATC and safety activities are driven by different 
factors. No single option that we reviewed creates a direct link 
between revenues and all components of FAA's activity costs. Fuel 
taxes, weight/distance charges, or en-route charges based on time or 
distance spent in the NAS could be used to create a more direct link 
with FAA's costs of providing en-route ATC services. A segment tax for 
passengers or a flight segment charge could be used to create a more 
direct link with the costs of FAA's terminal services. Certification 
charges could be used to create a more direct link with the costs of 
FAA's various safety-related activities. Thus, some combination of 
options, such as en-route charges to fund en-route costs, flight 
segment charges to fund terminal control costs, and certification 
charges to fund some safety costs, might best address concerns with the 
current system by providing a better link between revenues and costs 
than any of these options used separately. According to one 
stakeholder, however, state that the administrative expense of using 
multiple funding options might outweigh the benefits of such an 
approach. According to FAA, other air navigation service providers, 
such as those in the European Union, have been able to administer 
direct charges without incurring excessive administrative costs. 

Debt Financing for FAA Raises Budgetary Concerns: 

Over the years, agencies have used a variety of financing approaches to 
acquire capital assets. All of these approaches have both advantages 
and disadvantages. From an agency's perspective, acquiring needed 
capital without first having to secure sufficient appropriations to 
cover the full cost of the asset is very attractive, especially in an 
era of limited resources and growing mission demands. However, from a 
governmentwide perspective, such approaches--including debt financing-
-raise serious concerns because they ultimately may result in higher 
overall costs. Given the federal government's long-term structural 
fiscal imbalance, any action that may increase costs requires sound 
justification and careful consideration before it is adopted. 

Supporters of debt financing for FAA cite a number of advantages. One 
is the argument that debt financing could provide FAA with a stable and 
predictable revenue source for funding capital developments. FAA 
officials state that the uncertainty associated with the appropriation 
process makes planning for a large, complex, and expensive air traffic 
control system difficult. Another cited advantage is that debt 
financing would allow the costs of capital projects to be repaid as the 
benefits are received, better aligning costs and benefits. Finally, 
supporters of debt financing, including some investment firms, state 
that the private capital market may offer disciplinary mechanisms--such 
as bond covenants--that may encourage FAA to finance itself more 
efficiently. Treasury officials question whether the private capital 
market would provide any market discipline to FAA debt obligations 
because investors may perceive that the obligations are backed by the 
federal government and not just agency revenues. 

If Congress allowed FAA to use debt financing, it could grant statutory 
authority for FAA to borrow either through the Treasury or directly 
from the private capital market. In either case, for FAA to use debt 
financing, Congress would have to provide the agency with statutory 
authority to borrow. There is variation in the legal, financial, and 
structural ways borrowing authorities for other government entities 
have been established. For example, some government entities produce 
their own revenue to pay for borrowing costs, whereas others pay with 
appropriations.[Footnote 24] Federal entities that have borrowing 
authority include the Bonneville Power Administration (BPA), the U.S. 
Postal Service, and the Tennessee Valley Authority.[Footnote 25] If FAA 
were provided with borrowing authority, all revenue options to repay 
the funds--excise taxes, user fees, or appropriations--could be 
considered. According to some investment banks and the Treasury, no 
organizational changes such as a change to a government corporation or 
corporate entity would be needed. 

The use of debt financing by FAA to pay for capital projects raises 
budgetary concerns. If Congress grants FAA borrowing authority, the 
associated costs are likely to be higher if the agency borrows directly 
from the private capital market instead of through the Treasury. 
According to Treasury and representatives of investment firms, the 
Treasury would likely be charged a lower interest rate to borrow money 
from the private capital market than FAA and thus could pass along 
these lower costs to FAA. Interest rates charged to FAA would likely be 
higher because bonds issued by FAA would likely be viewed as a greater 
credit risk than Treasury bonds because debt issued by the Treasury is 
backed by the full faith and credit of the U.S. government, while FAA 
debt would not be. Instead, FAA debt would be backed by specific 
revenue sources. In addition, if FAA borrowed directly from the private 
capital market, the transaction costs of borrowing would likely be 
higher than if FAA borrowed through the Treasury; investment banks that 
serve as debt underwriters charge fees for these services, while the 
Treasury would charge a minimal administrative fee, if any. Given these 
advantages, Treasury officials told us that it is the department's long-
standing policy that all debt issued by federal entities, including 
FAA, should be issued solely to the Treasury because centralized 
financing of all such debt through the department is the least 
expensive, most efficient means of financing this debt. If FAA capital 
spending is financed through appropriations and results in an increase 
to the deficit, the cost to the government is comparable to the costs 
of borrowing through the Treasury.[Footnote 26] 

Borrowing costs are particularly important in light of the federal 
government's long-term structural fiscal imbalance. Absent a change in 
policy, federal health and retirement programs will consume an ever 
increasing share of the nation's federal budgetary resources and gross 
domestic product, placing severe pressures on all discretionary 
programs, including those that fund defense, education, and 
transportation. Our more optimistic simulations show that by 2040, 
federal revenues as a share of the economy will not be sufficient to 
cover any discretionary programs--and that balancing the budget could 
require raising taxes by almost 60 percent or reducing federal spending 
by about a third. Accordingly, any program or policy change that may 
increase costs requires sound justification and careful consideration 
before adoption. 

Mr. Chairman, this concludes my statement. I would be pleased to answer 
any questions that you and Members of the Subcommittee may have. 

Contact and Staff Acknowledgments: 

For further information on this testimony, please contact Gerald 
Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making 
key contributions to this statement include Ashley Alley, Jay Cherlow, 
Maria Edelstein, Colin Fallon, Carol Henn, David Hooper, Andrew 
Huddleston, Edmond Menoche, Faye Morrison, and Rich Swayze. 

FOOTNOTES 

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

[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[3] In September 2005, FAA provided stakeholders with information on 
its operations and costs and asked for responses to questions about how 
to fund the agency. 

[4] Stakeholders that support the current funding system include the 
Aircraft Owners and Pilots Association and the National Business 
Aviation Association; stakeholders that have expressed concerns about 
the current funding system include the Air Transport Association and 
the FAA. 

[5] In addition to debt-financing, some stakeholders have identified 
other methods of funding capital investments, such as leasing or 
contracting out services (e.g., flight service stations). An analysis 
of these other methods was beyond the scope of this testimony. 

[6] Pub. L. No. 108-176, Vision 100--Century of Aviation 
Reauthorization Act, December 12, 2003. 

[7] FAA is also responsible for commercial space licensing and 
oversight; this line of business is beyond the scope of this testimony. 

[8] Pub. L. No. 91-258. 

[9] The domestic segment tax is levied on each domestic segment a 
passenger travels on a flight. For example, a passenger traveling on a 
flight from New York to Seattle, with a connection in Chicago, travels 
two segments--one from New York to Chicago, and a second from Chicago 
to Seattle. The segment tax is $3.30 in 2006; this tax rate changes 
annually because it is indexed to the Consumer Price Index. 

[10] This is also known as the waybill tax. 

[11] The international arrival and departure taxes are $14.50 in 2006; 
both rates change annually because they are indexed to the Consumer 
Price Index. 

[12] The per passenger tax on flights between the continental United 
States and Alaska or Hawaii (or between Alaska and Hawaii) is $7.30 in 
2006; the rate changes annually because it is indexed to the Consumer 
Price Index. 

[13] JPDO held its first workshop in April 2006 and its second workshop 
in August 2006. No date has been announced at this time for the third 
workshop. 

[14] In developing their estimate, REDAC used FAA's projected 
facilities and equipment costs under an NGATS scenario as well as 
REDAC's own estimates for the costs of operations; airport 
improvements; and research engineering and development--the remaining 
three components of FAA's appropriation. 

[15] In this testimony, we describe REDAC's "base case" scenarios, 
which assumed that FAA's operations costs would increase between 2006 
and 2010, but then remain constant through 2025 (except for inflation), 
as productivity increases offset the higher cost of increased demand. 
The working group also developed estimates for lower-cost "best case" 
and higher-cost "worst case" scenarios using differing assumptions of 
productivity gains. 

[16] GAO-06-973 

[17] A load factor is the percentage of a flight's total available seat 
miles used to transport passengers. 

[18] We have adjusted airfare data to 2005 dollars. 

[19] This is the annual compounded rate of decline. 

[20] Yield is the amount of money an airline collects for every mile a 
passenger travels. 

[21] This includes some flights typically considered GA flights, such 
as air taxis and some fractional ownership operations. 

[22] It is important to note that without more detailed information and 
an understanding of the costs different flights impose on the NAS, any 
assessment of the current system or alternative funding options is only 
preliminary. The degree to which alternative funding options could 
address revenue adequacy, equity, and efficiency concerns, relative to 
the current system, ultimately depends on the extent to which the 
contributions required from users actually reflect the costs they 
impose on the system. More precise assessments of the current or 
alternative funding options are possible only if cost finding 
techniques are used throughout FAA. 

[23] The other four funding options considered in the forthcoming 
report are (1) weight/distance fees, (2) flight segment fees, (3) 
certification fees, and (4) increasing the passenger segment tax to 
replace revenues lost from the elimination of the passenger ticket tax. 

[24] GAO, Budget Issues: Agency Authority to Borrow Should Be Granted 
More Selectively, GAO-AFMD-89-4 (Washington, D.C.: Sept. 15, 1989). 

[25] BPA is a self-supporting agency in the Department of Energy that 
borrows from the Treasury, which in turn borrows from the public, to 
finance capital investments, such as new transmission facilities that 
it owns. BPA receives no appropriations and is solely funded by 
revenues from power sales, which it uses to finance its operations and 
to make debt payments. BPA received direct borrowing authority from 
Congress in 1974 and has a borrowing cap of $4.5 billion. Because it is 
a federal agency that is performing a federal function, it is borrowing 
for federal purposes, and its assets are federally owned, the interest 
rate on BPA debt to Treasury is equal to the rate on debt of comparable 
maturity issued by government corporations. 

[26] Although funding through appropriations might appear less costly 
to FAA because borrowing from the Treasury would require FAA to make 
interest payments to the Treasury, from the broader perspective of the 
federal government as a whole, there is no difference if the government 
is running a deficit. 

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