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Testimony:

Before the Subcommittee on Select Revenue Measures, Committee on Ways 
and Means, House of Representatives:

United States Government Accountability Office:

GAO:

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

Wednesday, August 1, 2007:

AVIATION FINANCE:

Observations on the Current FAA Funding Structure's Support for 
Aviation Activities, Issues Affecting Future Costs, and Proposed 
Funding Changes:

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

GAO-07-1163T:

GAO Highlights:

Highlights of GAO-07-1163T, a testimony before the Subcommittee on 
Select Revenue Measures, Committee on Ways and Means, House of 
Representatives

Why GAO Did This Study:

The Federal Aviation Administration (FAA) operates one of the safest 
air transportation systems in the world, but this system is under 
growing strain as the demand for air travel increases. Recognizing the 
need to transform this system, Congress created the Joint Planning and 
Development Office (JPDO), housed within FAA, to plan and conceptualize 
the Next Generation Air Transportation System (NextGen). The current 
authorization for FAA, the Airport and Airway Trust Fund (Trust Fund), 
and most of the excise taxes that support the Trust Fund will expire 
September 30, 2007. Several proposals, including two reauthorization 
bills—H.R. 2881 and S. 1300—identify various funding sources for FAA 
activities, including NextGen. Among these are current excise taxes, 
fees, and flight surcharges. Concerned about the need for stable, 
sustainable financing for the nation’s multibillion-dollar 
transportation infrastructure investments, including NextGen, GAO has 
designated transportation financing as high risk.

GAO’s statement addresses (1) the extent to which the current funding 
structure can support FAA’s activities, including NextGen, (2) issues 
that could affect the overall cost of NextGen, and (3) the implications 
of selected proposals to fund aviation activities. The statement is 
based on recent GAO reports and testimonies. 

What GAO Found:

Recent estimates indicate that FAA’s current funding 
structure—consisting primarily of Trust Fund revenues plus a 
contribution from the General Fund of the U.S. Treasury—can potentially 
support FAA’s activities, including NextGen. The current structure has 
provided sufficient funding for FAA’s activities to date, and both FAA 
and the Congressional Budget Office (CBO) have estimated that revenues 
will continue to increase. According to CBO projections through 2017, 
the current structure, if maintained, could support about $22 billion 
in additional spending over current spending levels (adjusted for 
inflation). Congress could also raise more revenue for FAA by raising 
excise tax rates or by increasing the General Fund contribution. 
However, contributions from the General Fund may be limited by the 
federal government’s long-term fiscal imbalance, and policy choices, 
structural changes in the aviation industry, and external events could 
affect Trust Fund revenues. Furthermore, the current funding structure 
raises concerns about equity and efficiency because users may pay more 
or less than the costs of the air traffic control services they 
receive, and therefore they may lack incentives to use the national 
airspace system as efficiently as possible.

Issues that could affect the overall cost of NextGen are primarily 
related to the content and cost of its infrastructure and research and 
development. JPDO is developing and has issued some key planning 
documents that will provide more insights into some of these issues, 
but questions remain over which entities will perform activities such 
as research and development. Other issues include the cost savings that 
could result from more efficient FAA operations and acquisition 
processes, which could reduce the need for new NextGen funding, and the 
extent to which public-private partnerships and leasing can be used to 
acquire NextGen infrastructure as flexibly and cost-effectively as 
possible.

Selected proposals for funding aviation activities could generate more 
revenue, but could also lead to unintended consequences. For example, a 
House committee recommendation to raise general aviation fuel tax rates 
could increase Trust fund revenue, but might reduce fuel purchases, 
which would limit the amount of the revenue increase. H.R. 2881 would 
raise airport passenger facility charges, mainly benefiting larger 
airports, and would establish or increase fees for certain FAA 
certification and registration activities. However, when fees are 
imposed for aviation activities, care must be taken to ensure that 
efforts to avoid the fees do not compromise safety. S. 1300 would 
authorize a surcharge of $25 per flight on many flights to help pay for 
NextGen capital projects. While a surcharge would create an incentive 
for efficient use of air traffic services, some stakeholders raise the 
possibility that such a fee could lead to reduced air service for small 
communities. S. 1300 would also allow FAA to seek debt financing for 
capital projects in the private capital market—a proposal designed to 
create a stable revenue source but resulting in higher interest costs 
than borrowing from the U.S. Treasury. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-11163T.]

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

[End of section]

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to participate in today's hearing on the 
future funding of the Federal Aviation Administration (FAA). As you 
know, FAA operates one of the safest air transportation systems in the 
world, but this system is under growing strain as the demand for air 
travel increases. According to FAA, over 740 million passengers flew in 
fiscal year 2006, and 1 billion passengers per year are expected to fly 
in 2015. FAA also predicts that 10,000 corporate aircraft, including 
traditional business jets, turboprops, and very light jets, will be 
added to the fleet between 2007 and 2017. To accommodate this increased 
traffic, instrument flight rule operations--the most significant source 
of demand on the air traffic control system--are projected to rise by 
36 percent, from roughly 45,000 per day to 61,000 per day over the same 
decade. Yet even at today's flight levels, flight arrival delays are 
approaching the record levels set in 2000, when one in four flights 
reached its destination late. The consensus is that the current air 
traffic control system cannot be expanded to meet this expected growth. 
According to an analysis of future demand and system capacity that was 
conducted by the Joint Planning and Development Office (JPDO),[Footnote 
1] the estimated cost to the U.S. economy of failing to meet future 
airspace demands could be $22 billion annually by 2023.

In 2003, recognizing the need for a new and different type of air 
traffic control system to deal with the expected growth, Congress 
authorized the creation of JPDO to lead a collaborative effort of 
federal and nonfederal aviation stakeholders to conceptualize and plan 
the Next Generation Air Transportation System (NextGen). The 
transformation to NextGen will involve the acquisition of numerous 
systems to support precision satellite navigation; digital, networked 
communications; integrated weather information; and layered, adaptive 
security. The President's budget proposes to spend $4.6 billion over 
the next 5 years for NextGen, including both capital costs and research 
and development costs.

As you know, the current authorization for FAA, the Airport and Airway 
Trust Fund (Trust Fund), and most of the excise taxes that provide 
revenue for the Trust Fund will expire at the end of this fiscal year. 
Several proposals, including two reauthorization bills--H.R. 
2881[Footnote 2] and S. 1300[Footnote 3]--specify various revenue 
sources to fund FAA, including NextGen.[Footnote 4] Among these sources 
are the current excise taxes, including fuel taxes; certification and 
registration fees; and flight surcharges. As requested, my statement 
today will address the following questions: (1) To what extent can the 
current funding structure support FAA's activities, including NextGen? 
(2) What issues could affect the overall cost of NextGen? (3) What are 
the implications of selected provisions of proposals to fund aviation 
activities? My remarks are based on recent GAO reports and 
testimonies[Footnote 5] on FAA's current funding structure, NextGen, 
and funding options that might address concerns about FAA's current 
funding structure. For these reports and testimonies, we reviewed 
relevant literature, examined FAA data and forecasts, and interviewed 
FAA and other government agency officials, aviation industry group 
representatives, and academic and financial experts. We conducted our 
work during July 2007 in accordance with generally accepted government 
auditing standards.

Summary:

* Recent estimates indicate that FAA's current funding structure-- 
consisting primarily of Trust Fund revenues plus a contribution from 
the General Fund of the U.S. Treasury--can potentially support FAA's 
activities, including NextGen. In the aggregate, since the Trust Fund 
was created in 1970, revenues to the fund have exceeded appropriations 
from it, resulting in an uncommitted balance, or surplus. This balance 
has declined in recent years, from about $7.3 billion at the end of 
fiscal year 2001 to about $1.8 billion at the end of fiscal year 2006. 
This decline has occurred because expenditures from the fund are based 
on projected revenues and FAA has drawn down funds when actual revenues 
have fallen short of projected expenditures. To help ensure that 
revenues are sufficient to cover expenditures, H.R. 2881 proposes that 
Congress base expenditures from the Trust Fund on 95 percent, rather 
than 100 percent, of estimated Trust Fund revenues. Notwithstanding 
these recent shortfalls, both FAA and the Congressional Budget Office 
(CBO) have estimated that FAA's revenues will continue to grow over the 
next decade under the current structure. For example, CBO has projected 
that at current tax rates, the current structure could support about 
$22 billion in additional spending over current spending levels 
(adjusted for inflation) through 2017. Moreover, should Congress wish 
to provide additional funding for FAA activities, it could raise 
additional revenue under the current structure by raising the rates on 
one or more of the current excise taxes or by increasing the General 
Fund contribution. This contribution may, however, be limited by the 
federal government's long-term fiscal imbalance, and policy choices, 
structural changes in the aviation industry, and external events could 
affect revenues to the Trust Fund. Furthermore, the current funding 
structure raises concerns about equity and efficiency because users may 
pay more or less than the costs of the air traffic control services 
they receive, and therefore they may lack incentives to use the 
national airspace system as efficiently as possible.

* Although revenue estimates indicate that the current funding 
structure can potentially support FAA's activities, including NextGen, 
a number of issues could affect the overall cost of NextGen, especially 
those related to its technology requirements. A major issue is the 
specific systems and associated costs of NextGen infrastructure and 
research and development. JPDO is developing and has already released 
some key planning documents that describe the capabilities needed to 
transition to NextGen, establish time lines for completing essential 
tasks, and identify the responsibilities of the JPDO partner agencies 
for these tasks, together with the required funding. These documents, 
some of which are still being developed, should provide more insight 
into NextGen's requirements and costs. Additionally, questions remain 
over which entities will fund and conduct some of the necessary 
research, development, demonstration projects, and training that will 
be needed to achieve certain NextGen capabilities. Other issues include 
the cost savings that might result from improvements in FAA operations 
and acquisition processes, which could reduce the need for new NextGen 
funding, and the extent to which FAA uses public-private partnerships 
and leasing to acquire NextGen infrastructure as flexibly and cost- 
effectively as possible.

* Selected proposals for funding aviation activities could generate 
additional revenues, but in some cases could also lead to unintended 
consequences. For example, a recommendation from the House Committee on 
Transportation and Infrastructure to increase the tax rates for general 
aviation jet fuel and aviation gasoline would increase Trust Fund 
revenue, but could reduce fuel purchases, which would limit the amount 
of the revenue increase. In addition, a provision of H.R. 2881 would 
allow airports to raise their passenger facility charges 
(PFC).[Footnote 6] This action would provide additional revenues for 
aviation infrastructure, especially for larger airports. However, it 
could also reduce the demand for air travel. Another provision of H.R. 
2881 would establish new or increased fees for certain FAA 
certification and registration activities, and such fees would provide 
additional revenues. In general, though, when fees are imposed for 
aviation activities, care must be taken to ensure that efforts to avoid 
the fees do not compromise safety. An S. 1300 provision would authorize 
the FAA Administrator to impose a surcharge of $25 per flight on many 
aircraft owners and operators to help pay for NextGen capital projects. 
While a surcharge would create an incentive for efficient use of air 
traffic services, some stakeholders question the equity of charging the 
same fee for aircraft of all sizes, and other stakeholders are 
concerned that such a fee could lead to reduced air service for small 
communities. Another S. 1300 provision would allow FAA to seek debt 
financing for capital projects in the private capital market--a 
proposal that, according to proponents, would provide a stable funding 
source, but would result in higher interest costs for the government 
than borrowing from the Treasury.

Background:

Although there have been fluctuations in its funding sources, FAA has 
been supported by the current structure for decades. The agency is 
funded primarily by the Trust Fund (82 percent)--which receives 
revenues from a series of excise taxes paid by users of the national 
airspace system--and by the General Fund. The excise taxes are 
associated with purchases of airline tickets and aviation fuel, as well 
as the shipment of cargo, and most are scheduled to expire September 
30, 2007. Trust Fund revenues are available for use subject to 
appropriation. Including interest earned on its balances, the Trust 
Fund received about $11.2 billion in 2006. In addition, about $2.6 
billion was appropriated for fiscal year 2006 from the General Fund for 
FAA operations. Table 1 shows the distribution of Trust Fund revenues 
for fiscal year 2005 by source.[Footnote 7]

Table 1: Sources of Trust Fund Revenue, Fiscal Year 2005:

Dollars in millions.

Passenger ticket tax; 
Amount: $5,161; 
Percent: 48.

Passenger flight segment tax; 
Amount: 1,900; 
Percent: 18.

Cargo tax; 
Amount: 461; 
Percent: 4.

Fuel tax; 
Amount: 971; 
Percent: 9.

International departure and arrival tax; 
Amount: 1,922; 
Percent: 18.

Interest; 
Amount: 440; 
Percent: 4.

Refunds[A]; 
Amount: (101); 
Percent: (1).

Total; 
Amount: $10,754; 
Percent: 100.

Source: GAO analysis of FAA data.

[A] Includes refunds of taxes on aviation fuel other than gas 
(noncommercial) and on aviation gasoline (noncommercial) as well as 
other refunds or credits.

[End of table]

The Trust Fund was established by the Airport and Airway Revenue Act of 
1970[Footnote 8] to help fund the development of a nationwide airport 
and airway system and to fund investments in air traffic control 
facilities. It provides all of the funding for three of FAA's four 
accounts, including (1) the Facilities and Equipment (F&E) account, 
which funds technological improvements to the air traffic control 
system; (2) the Research, Engineering, and Development (RE&D) account, 
which funds research on issues related to aviation safety, mobility, 
and the environment as well as most of FAA's contribution to 
JPDO;[Footnote 9] and (3) the Airport Improvement Program (AIP), which 
provides grants for construction and safety projects at airports. In 
addition, at various times during its history, the Trust Fund has 
provided all or some portion of the funding for FAA's Operations 
account. In fiscal year 2006, expenditures from the Trust Fund totaling 
$11.2 billion were made among the four accounts as shown in figure 1.

Figure 1: Trust Fund Expenditures for Fiscal Year 2006:

[See PDF for image]

Source:  GAO analysis of FAA data.

[End of figure]

Estimates Indicate That Current Funding Structure Can Support FAA 
Activities, Including NextGen, but Structure Raises Concerns about 
Equity and Efficiency:

The current funding structure--excise taxes plus a General Fund 
contribution--has funded FAA for many years, and estimates indicate 
that this structure can potentially provide sufficient funds for the 
next several years to support the transition to NextGen. As the number 
of air travelers has grown, so have excise tax revenues. Even though 
revenues fell with the decline in air travel following the terrorist 
attacks of September 11, 2001, they began to rise again in fiscal year 
2004, and FAA estimates that if the current taxes remain in effect at 
their current rates, revenues will continue to increase.

While retaining the basic structure for funding FAA, Congress has at 
times changed the mix of excise taxes and some of the tax rates and has 
appropriated different amounts from the General Fund to offset Trust 
Fund fluctuations. For example, when the taxes were most recently 
reauthorized in 1997, Congress added the passenger segment tax while 
reducing the passenger ticket tax rate from 10 percent to 7.5 percent. 
Congress has also appropriated varying amounts of General Fund revenues 
for FAA during the past 25 years, ranging from 0 to 59 percent of FAA's 
budget and averaging around 20 percent since fiscal year 1997. The 
amount of the General Fund contribution fluctuates because the 
contribution is based on the incoming Trust Fund revenues that are 
available to fund the Operations account after revenues have been 
allocated to fund the F&E, AIP, and RE&D accounts. Therefore, 
fluctuations in Trust Fund revenues and FAA expenditures require 
different levels of General Fund contributions.

Since the Trust Fund's creation in 1970, revenues have in the aggregate 
exceeded spending commitments, resulting in an uncommitted balance, or 
surplus.[Footnote 10] As of the end of fiscal year 2006, the Trust 
Fund's uncommitted balance was about $1.8 billion. The Trust Fund's 
uncommitted balance depends on the revenues flowing into the fund and 
the appropriations made available from the fund for various spending 
accounts. Policy choices, structural changes in the aviation industry, 
and external events have affected revenues flowing into and out of the 
fund. For the last 6 years, for example, the uncommitted balance has 
been declining because expenditures from the fund are based on 
projected revenues and actual revenues have been less than FAA 
forecasted.[Footnote 11]

Figure 2: Airport and Airway Trust Fund End-of-Year Uncommitted 
Balance, Fiscal Years 1999-2007:

[See PDF for image]

Source: FAA.

Note: Amount for end of fiscal year 2007 is estimated.

[End of figure]

In prior work, we ran scenarios in which Trust Fund revenues continued 
to fall short of forecasted levels and the Trust Fund balance continued 
to decline, eventually falling to zero. We believe these scenarios 
raise concerns because in the past the Trust Fund's uncommitted balance 
has been used to offset lower-than-expected Trust Fund revenues and 
decreased General Fund contributions. The zero-balance scenario would 
most likely have implications for Congress in funding FAA programs, 
including NextGen. To address this concern, H.R. 2881 proposes to base 
expenditures from the Trust Fund on 95 percent, rather than 100 
percent, of estimated Trust Fund revenues, which would reduce the 
likelihood of running the Trust Fund balance to zero.

According to projections prepared by the Congressional Budget Office 
(CBO),[Footnote 12] the existing funding structure, if maintained, will 
generate substantially increasing revenues over the next decade. 
Assuming that the General Fund provides about 19 percent of FAA's 
budget, CBO estimates that through 2017 the Trust Fund can support 
about $22 billion in additional spending over the baseline FAA spending 
levels CBO has calculated for FAA (the 2006 funding level, growing with 
inflation) provided that most of that spending occurs after 
2010.[Footnote 13] According to FAA, the majority of the funding for 
NextGen will take place after 2010.

Moreover, if the desired level of spending exceeded what was likely to 
be available from the Trust Fund at current tax rates, Congress could 
make changes within the current structure that would provide FAA with 
additional revenue. For example, Congress could raise more revenue from 
airspace system users for modernization or for other purposes by 
raising the rates on one or more of the current excise taxes. Congress 
could also provide more General Fund revenues for FAA, although the 
nation's fiscal imbalance may make a larger contribution from this 
source difficult.

Although the current funding structure may produce enough revenue to 
fund FAA, including NextGen, this structure presents equity and 
efficiency concerns. FAA and others have stated that the current 
approach to collecting funds from users through excise taxes creates 
inequities because the revenue contributions of different flights are 
not directly linked to the costs of the services that these flights 
receive from FAA. Some stakeholders have also raised concerns that the 
current funding system does not provide aircraft operators with 
incentives to use FAA services in the most efficient manner. For users 
to make efficient decisions about their use of the national airspace 
system, their price for using the system (the taxes or charges they 
pay) should accurately reflect the costs their use imposes on the 
system.[Footnote 14] These prices, along with other factors influencing 
supply and demand, will influence users' decisions about the type, 
size, and number of aircraft to operate, and when and where to operate 
them.[Footnote 15]

Technology Requirements and Other Issues Could Affect NextGen's Overall 
Cost:

While revenue estimates indicate that the current funding structure can 
potentially fund NextGen, a number of issues could affect NextGen's 
overall cost, especially its technology requirements, which have not 
yet been fully determined. The specific systems and associated costs of 
NextGen infrastructure and research and development are not fully 
known, nor are the resources that will be contributed by other federal 
agencies. Other issues include the cost savings that might result from 
more efficient FAA operations and acquisition processes, which could 
reduce the need for new NextGen funding, and the extent to which FAA 
uses public-private partnerships or leasing arrangements to acquire 
NextGen infrastructure as flexibly and cost-effectively as possible.

JPDO recently estimated that the total federal cost for NextGen 
infrastructure through 2025 will range between $15 billion and $22 
billion. JPDO also reported that a preliminary estimate of the 
corresponding cost to system users, who will have to equip with the 
advanced avionics that are necessary to realize the full benefits of 
some NextGen technologies, ranges between $14 billion and $20 
billion.[Footnote 16] Thus, according to JPDO, the total costs for 
NextGen could be anywhere between $29 billion and $42 billion. We 
consider $13 billion to be a significantly wide range and believe there 
is a need to better define the costs of NextGen.

According to JPDO officials, more precise cost estimates will depend on 
information contained in several key planning documents, some of which 
have been released and some of which are still being developed. In June 
2007, JPDO released both the latest version of the NextGen Concept of 
Operations[Footnote 17] and the first version of the NextGen Enterprise 
Architecture.[Footnote 18] JPDO is developing an Integrated Work Plan 
that will describe the capabilities needed to transition to NextGen 
from the current system and provide the research and development, 
policy and regulation, and acquisition time lines necessary to achieve 
NextGen by 2025. The Integrated Work Plan, scheduled for release at the 
end of this month, is akin to a project plan and will be critical for 
planning the partner agencies' fiscal year 2009 budgets and programs. 
JPDO is also developing an Office of Management and Budget (OMB) 
Exhibit 300 for NextGen that will be used as input to funding decisions 
for NextGen research and development and acquisitions across JPDO's 
partner agencies.[Footnote 19] This Exhibit 300 will be due to OMB in 
September 2007 and will inform decisions about the partner agencies' 
2009 budget submissions. It will be important that these various 
documents be used in the near term to develop more refined cost 
estimates for NextGen.

Although JPDO has released estimates for NextGen, questions remain over 
how much it will cost and which entities will fund and conduct some of 
the necessary research, development, demonstration projects, and 
training that will be key to achieving certain NextGen capabilities. In 
the past, the National Aeronautics and Space Administration (NASA) has 
performed a significant portion of federal aeronautics research and 
development, including intermediate technology development. However, 
NASA's aeronautics research budget and proposed funding show a 30- 
percent decline in real terms (i.e., constant 2005 dollars) from fiscal 
year 2005 through fiscal year 2011. To its credit, NASA plans to focus 
its research on the needs of NextGen. However, NASA is also moving 
toward an emphasis on fundamental research and away from developmental 
work and demonstration projects, which could negatively affect NextGen 
if other agencies do not assume these efforts. According to FAA and 
JPDO officials, they are currently studying these issues and trying to 
assess how much research and development work FAA can assume. FAA has 
proposed increasing its research and development funding by $280 
million over the next 5 years. However, a draft report by an advisory 
committee to FAA stated that FAA would need at least $100 million 
annually in increased funding to assume NASA's research and development 
work. Furthermore, according to the draft report, establishing the 
necessary infrastructure within FAA could delay the implementation of 
NextGen by 5 years.

The overall cost of NextGen could be reduced to the extent that FAA 
realizes cost savings from improved operations and acquisition 
processes. We have reported that, over the past few years, FAA has made 
significant progress in moving to more businesslike and cost-effective 
operations, which should better position the agency for the complex 
implementation of NextGen.[Footnote 20] Cost savings could come about 
by, for example, consolidating facilities or outsourcing services, 
should Congress choose to approve such measures. In addition, FAA has 
reported improvements in its management of major system acquisitions. 
To the extent that FAA can keep NextGen systems on schedule, FAA may be 
able to avoid the escalation in acquisition costs that plagued its past 
modernization efforts. Keeping acquisitions on schedule will also mean 
realizing more quickly the increased efficiencies or safety benefits of 
new systems and technologies, as well as avoiding the costs and 
inefficiencies of maintaining existing systems.

Finally, the extent to which FAA employs public-private partnerships or 
leasing arrangements as part of its acquisition strategy for NextGen 
could affect the system's overall cost. FAA is currently exploring 
these types of options for its future nationwide rollout of Automatic 
Dependent Surveillance-Broadcast, a surveillance system that FAA 
considers a cornerstone technology of NextGen. We believe that these 
types of arrangements could produce significant cost savings and lessen 
some risks for FAA. However, such arrangements must be carefully 
structured to protect the interests of the public and the federal 
government, and to ensure proper governmental oversight.

Selected Proposals for Funding Aviation Activities Could Generate More 
Revenue but Could Also Lead to Unintended Consequences:

Several proposals, including a recommendation from a House committee 
and selected provisions of the House and Senate reauthorization bills, 
specify different types of revenue sources to fund FAA and NextGen. 
These proposals have implications for revenue generation, but could 
also lead to unintended consequences.

The House Committee on Transportation and Infrastructure has 
recommended to the House Committee on Ways and Means that it increase 
the tax rates for general aviation jet fuel and aviation gasoline. If 
these rate increases are enacted, the fuel taxes would provide 
additional revenue to the Trust Fund. However, the increases, although 
relatively small, might also lead to reductions in fuel purchases by 
general aviation aircraft operators. Any estimate of the revenue gain 
from the higher tax rates should take into account these possible 
reductions in fuel purchases. Other factors that could be considered in 
setting general aviation fuel tax rates are the extent to which the 
rates should be set to make FAA's funding more cost-based and how much 
users are able to pay.

A provision of H.R. 2881 would allow airports to increase PFCs to a 
maximum of $7, while an S. 1300 provision would retain the cap at 
$4.50. Increasing the cap on PFCs would generate more revenue, 
especially for larger airports. A $7 PFC could generate nearly $2 
billion in additional revenues for airports assuming all airports 
imposed the maximum PFC (see table 2).

Table 2: Projected Maximum PFC Collections for 2007 with a $7 PFC:

Dollars in millions.

Airport Size: Large hub;  
2007 PFC collections[A]: $1,869; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: $2,831; 
2007 PFC collections if all airports had a $7 PFC: $3,152.

Airport Size: Medium hub; 
2007 PFC collections[A]: 487; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: 706; 
2007 PFC collections if all airports had a $7 PFC: 914.

Subtotal; 
2007 PFC collections[A]: $2,356; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: $3,537; 
2007 PFC collections if all airports had a $7 PFC: $4,066.

Airport Size: Small hub; 
2007 PFC collections[A]: 184; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: 262; 
2007 PFC collections if all airports had a $7 PFC: 354.

Airport Size: Nonhub; 
2007 PFC collections[A]: 71; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: 108; 
2007 PFC collections if all airports had a $7 PFC: 144.

Airport Size: Nonprimary Commercial Service; 
2007 PFC collections[A]: 1; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: 1; 
2007 PFC collections if all airports had a $7 PFC: 5.

Subtotal; 
2007 PFC collections[A]: $256; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: $371; 
2007 PFC collections if all airports had a $7 PFC: $503.

Total[B]; 
2007 PFC collections[A]: $2,612; 
2007 PFC collections if only airports currently at $4.50 increased to 
$7: $3,907; 
2007 PFC collections if all airports had a $7 PFC: $4,569.

Source: GAO analysis of FAA data.

[A] There are currently 517 commercial service airports eligible to 
apply for a PFC. These are airports with more than 2,500 annual 
enplanements.

[B] May not total due to rounding.

[End of figure]

However, not all airports are expected to move to the maximum ceiling 
right away because many airports have a lesser or no PFC in place 
currently. If only those airports with a PFC at the current maximum of 
$4.50 increased their PFC to $7.00 and the others made no change, the 
proposed fee increase would yield approximately $1.3 billion per year 
in additional revenues. These calculations assume that the increased 
PFC would not affect passenger demand for air travel. We have 
previously calculated that a PFC increase could reduce passenger 
demand, which would reduce the PFC revenue collected at the higher 
rate. Nevertheless, our previous work suggests the revenue reduction 
due to demand effects would likely be small.[Footnote 21] Smaller 
airports (small and nonhub) would not benefit directly as much from 
this ability to increase PFCs because smaller airports have fewer 
passengers from whom to collect PFCs.[Footnote 22] However, smaller 
airports, which rely primarily on AIP grants for capital funding, would 
benefit indirectly from an increased cap on PFCs. AIP's Small Airport 
Fund, which totaled $428 million in 2006, is funded by the turnback of 
up to 75 percent of large and medium hub airports' 
entitlements.[Footnote 23] H.R. 2881 would increase the turnback to 100 
percent of entitlements for large hub airports that impose a PFC above 
$4.50. While S. 1300 does not include an increase in PFCs, it does 
include a pilot program for up to six airports to impose unlimited PFCs 
if the airports collect the fee directly from passengers.

H.R. 2881 includes new and increased user fees to pay for the costs of 
certain certification and registration activities of FAA. Such fees 
would provide additional revenue and more directly link revenue 
contributions to the cost of the services. These fees cover services 
and activities for issuing certain certificates, registering aircraft 
and airmen, issuing airmen medical certificates, and providing legal 
opinions pertaining to aircraft registration or recordation. In some 
cases, such as the registration of aircraft, FAA already charges a 
modest fee ($5), but this fee has not been raised since 1964. We have 
reported that this fee does not cover the cost of reviewing and 
processing a registration application and have recommended that FAA 
increase it.[Footnote 24] The proposal would raise the fee to $130 and 
allow FAA to periodically adjust this and other fees based on the cost 
of providing the service. However, in general, when fees are imposed 
for aviation activities, care must be taken to ensure that efforts to 
avoid the fees do not compromise safety.

S. 1300 includes a provision requiring the FAA Administrator to impose 
a surcharge of $25 per flight to be available to pay the costs of 
NextGen capital projects. All owners or operators of aircraft in the 
national airspace system would be required to pay this surcharge except 
those that fall into certain exempt categories.[Footnote 25] FAA 
estimates that this fee could yield $400 million a year by 2011. We 
estimate, on the basis of 2006 operations, that commercial airlines 
would contribute 36 percent of the fees; regional airlines would 
contribute 31 percent, though carrying far fewer passengers; and 
general aviation would contribute 11 percent (see fig. 3).

Figure 3: Distribution of Surcharge by User, Based on 2006 Operations:

[See PDF for image]

Source: GAO Analysis of FAA data.

[End of figure]

Note: Regional airlines include jets with 60 or fewer seats (18 
percent), jets with 61 or more seats (4 percent), and turbo/piston 
aircraft (9 percent).

One potential advantage of this type of charge is that it would 
establish a more direct relationship between revenue and costs compared 
with the current excise taxes. Advocates of this approach say that 
funding FAA in part through such a charge would do more than the 
current structure to ensure that revenues are adequate to cover costs 
over time and to create incentives for efficient use of the national 
airspace system by directly connecting charges with the costs imposed 
by users. On the other hand, although this connection would appear to 
exist for FAA's costs of providing terminal control services--the more 
flights, the more charges an operator pays--there is no obvious 
connection with the costs of en route services because the charge would 
be the same for short and long flights. In addition, concerns have been 
raised about the equity of a charge that would apply equally to all jet 
aircraft regardless of size. Another concern has been raised that the 
fee might lead to reduced air service by turboprop operators providing 
regular service to small communities as well as reduced service 
provided through the Essential Air Service program to small communities 
because of the increased expense that the fee would represent.

Another S. 1300 provision would grant FAA the authority to seek debt 
financing by issuing bonds directly to the private capital market. 
Supporters of this bonding proposal for FAA claim a number of 
advantages to this financing approach. One claim is that debt financing 
could provide FAA with a stable and predictable revenue source for 
funding capital development. FAA officials state that the uncertainty 
associated with the appropriation process makes planning for a large, 
complex, and expensive air traffic control system like NextGen 
difficult. Over the years, federal agencies have used a variety of 
financing approaches to acquire capital assets. However, from a 
governmentwide perspective, some approaches, such as bonding, raise 
serious concerns because they ultimately will result in higher overall 
costs. Moreover, if FAA were granted borrowing authority, the 
associated costs would be higher by borrowing directly from the private 
capital market instead of through the Treasury. According to Treasury 
officials and representatives of investment firms, this occurs because 
the Treasury is charged a lower interest rate to borrow money. The 
costs of borrowing may also be higher if the revenue option--such as 
taxes or user charges--used to pay back the bond is subject to 
appropriations because there would most likely be a risk premium added 
to the credit rating to compensate for the risk that appropriations may 
not be provided. We have reported that given the federal government's 
long-term structural fiscal imbalance, any action that may increase the 
government's costs requires sound justification and careful 
consideration before it is adopted.[Footnote 26]

With most of the excise taxes that largely fund FAA's budget scheduled 
to expire at the end of September 2007, Congress will need to act to 
avoid a lapse in revenue to the Trust Fund. FAA estimates that two 
previous lapses in 1996 and 1997 resulted in the Trust Fund not 
receiving about $5 billion in taxes and fees that were never recovered.

FAA estimates that the uncommitted balance in the Trust Fund at the end 
of fiscal year 2007 will be about $1.8 billion dollars. At current 
monthly spending levels, a 2-to 3-month lapse in fiscal year 2008 could 
reduce the revenue in the Trust Fund enough to cause the uncommitted 
balance to fall to zero. If the Trust Fund balance falls to zero, the 
continuation of FAA's programs--including the development of NextGen 
and grants to airports--would depend on providing additional revenues 
from the General Fund.

Thank you, Mr. Chairman, that concludes my statement. I will be pleased 
to answer any questions that you or other Members of the Subcommittee 
might have.

GAO Contact and Staff Acknowledgments:

For further information about this testimony, please contact Gerald L. 
Dillingham at (202) 512-2834. Other key contributors to this testimony 
include Paul Aussendorf, Jay Cherlow, Bess Eisenstadt, Carol Henn, 
Maureen Luna-Long, Faye Morrison, Teresa Spisak, and Tristan To.

FOOTNOTES

[1] JPDO was authorized by the Vision 100--Century of Aviation 
Reauthorization Act (Pub. L. No. 108-176). 

[2] H.R.2881, 110th Cong., 1st Sess. (June 27, 2007).

[3] S.1300, 110th Cong., 1st Sess. (May 3, 2007).

[4] In addition, H.R. 2698 would authorize appropriations for FAA's 
civil aviation research and development projects.

[5] Airport Finance: Observations on Planned Airport Development Costs 
and Funding Levels and the Administration's Proposed Changes in the 
Airport Improvement Program, GAO-07-885 (Washington, D.C.: June 29, 
2007); Federal Aviation Administration: Observations on Selected 
Changes to FAA's Funding and Budget Structure in the Administration's 
Reauthorization Proposal, GAO-07-625T (Washington, D.C.: Mar. 21, 
2007); Next Generation Air Transportation System: Progress and 
Challenges Associated with the Transformation of the National Airspace 
System, GAO-07-25 (Washington, D.C.: Nov. 13, 2006); Aviation Finance: 
Observations on Potential FAA Funding Options, GAO-06-973 (Washington, 
D.C.: Sept. 29, 2006); National Airspace System Modernization: 
Observations on Potential Funding Options for FAA and the Next 
Generation Airspace System, GAO-06-1114T (Washington, D.C.: Sept. 27, 
2006); and Federal Aviation Administration: An Analysis of the 
Financial Viability of the Airport and Airway Trust Fund, GAO-06-562T 
(Washington, D.C.: Mar. 28, 2006).

[6] The PFC program allows the collection of PFC fees up to $4.50 for 
every enplaned passenger at commercial airports controlled by public 
agencies. Airports use these fees to fund FAA-approved projects that 
enhance safety, security, or capacity; reduce noise; or increase air 
carrier competition.

[7] As recommended by FAA, we are using 2005 data to show the breakdown 
of Trust Fund revenue by source because of uncertainty in the available 
2006 data regarding the distribution of fuel tax revenues between 
commercial and general aviation.

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

[9] For the past few years, FAA and the National Aeronautics and Space 
Administration have been the primary supporters of JPDO activities. The 
administration's proposed budget for fiscal year 2008 for FAA includes 
$17.8 million to support JPDO activities. The National Aeronautics and 
Space Administration is planning to contribute about $18 million to 
JPDO in fiscal year 2008.

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

[11] In recent years, the difference between forecasted and actual 
Trust Fund revenues has been smaller than it was earlier in the decade, 
in part because the external demand shocks have been smaller and in 
part because of efforts by FAA to improve its forecasting models. 
However, the actual balance at the end of fiscal year 2007 will likely 
be lower than forecasted, according to FAA.

[12] CBO, Financing Investment in the Air Traffic Control System 
(Washington, D.C.: Sept. 27, 2006).

[13] This estimate takes into account expected increases in air travel 
in estimating revenues, but, by law, it does not take into account any 
possible increases in expenditures for FAA's Operations account due to 
these increases in air travel because increases in expenditures are 
based on a baseline figure adjusted for inflation. 

[14] Assessing both the equity and the efficiency of a funding 
structure requires knowledge of how costs are divided among users. FAA 
recently completed a cost allocation study that assigns air traffic 
control costs to user groups based on aircraft type. However, we 
determined that FAA's methodology lacked certain analyses and 
documentation that would be important in determining whether costs as 
assigned reasonably reflect the services received by various users. 

[15] Supply factors that influence users' decisions include other costs 
of operating aircraft, such as labor, fuel, and capital costs. Demand 
factors include the state of the economy and the price and convenience 
of flying compared with using other modes of transportation. Given the 
importance of some of these other factors to users' decisions about 
using the national airspace system, the influence on these decisions of 
the prices charged for FAA services may be comparatively small for some 
users.

[16] JPDO noted that this range for avionics costs reflects uncertainty 
about equipage costs for individual aircraft, the number of very light 
jets that will operate in high-performance airspace, and the amount of 
out-of-service time required for installation.

[17] The NextGen Concept of Operations provides written descriptions of 
how the NextGen system is envisioned to operate in 2025 and beyond, 
including highlighting key research and development and policy issues 
that will need to be addressed. Following an introductory section, the 
Concept of Operations has eight sections covering air traffic 
management operations, airport operations and infrastructure services, 
net-centric infrastructure services, shared situational awareness 
services, security services, an environmental management framework, 
safety management services, and performance management services.

[18] The NextGen Enterprise Architecture is a technical description of 
the NextGen system, akin to a blueprint for a building. The Enterprise 
Architecture is meant to provide a common tool for planning and 
understanding the complex, interrelated systems that will make up 
NextGen.

[19] Section 300 of OMB Circular No. A-11, Preparation, Submission, and 
Execution of the Budget (Nov. 2, 2005), sets forth requirements for 
federal agencies for planning, budgeting, acquiring, and managing 
information technology capital assets. Exhibit 300 is designed to 
ensure that the business case for an investment is tied to an agency's 
mission statement, long-term goals and objectives, and annual 
performance plans. It is submitted with an agency's budget submission 
to OMB.

[20] GAO, Federal Aviation Administration: Key Issues in Ensuring the 
Efficient Development and Safe Operation of the Next Generation Air 
Transportation System, GAO-07-636T (Washington, D.C.: Mar. 22, 2007).

[21] GAO, Passenger Facility Charges: Program Implementation and the 
Potential Effects of Proposed Changes, GAO/RCED-99-138 (Washington, 
D.C.: May 19, 1999). 

[22] General aviation airports are excluded since they do not have 
passengers that would pay a PFC. 

[23] Entitlements are AIP funds apportioned to airport sponsors and 
states for eligible projects based on formulas.

[24] GAO, Aviation Safety: Unresolved Issues Involving U.S.-Registered 
Aircraft, GAO/RCED-93-135 (Washington, D.C.: June 18, 1993).

[25] These exempt categories include military and public aircraft, 
piston engine aircraft, and turboprop aircraft operating outside of 
controlled airspace, among others.

[26] GAO-06-1114T.

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