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entitled 'Aviation Finance: Observations om Potential FAA Funding 
Options' which was released on October 30, 2006. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

September 2006: 

Aviation Finance: 

Observations on Potential FAA Funding Options: 

Aviation Finance: 

GAO-06-973: 

GAO Highlights: 

Highlights of GAO-06-973, a report to Congressional Committees 

Why GAO Did This Study: 

The Federal Aviation Administration (FAA), the Airport and Airway Trust 
Fund (Trust Fund), and the excise taxes that support the Trust Fund are 
scheduled for reauthorization at the end of fiscal year 2007. FAA is 
primarily supported by the Trust Fund, which receives revenues from a 
series of excise taxes paid by users of the national airspace system 
(NAS). The Trust Fund’s uncommitted balance decreased by more than 70 
percent from the end of fiscal year 2001 through the end of fiscal year 
2005. The remaining funding is derived from the General Fund. This 
report focuses on the portion of revenues generated from users of the 
NAS and addresses the following key questions: (1) What advantages and 
concerns have been raised about the current approach to collecting 
revenues from NAS users to fund FAA, and to what extent does available 
evidence support the concerns? (2) What are the implications of 
adopting alternative funding options to collect the revenues 
contributed by users that fund FAA’s budget? (3) What are the 
advantages and disadvantages of authorizing FAA to use debt financing 
for capital projects? 

This report is based on interviews with relevant federal agencies, 
including FAA, the Office of Management and Budget, and the 
Congressional Budget Office. GAO also obtained relevant documents from 
these agencies, other key stakeholders, and academic and financial 
experts. 

What GAO Found: 

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 revenues contributed by users and the costs 
they impose on the NAS that raises revenue adequacy, equity, and 
efficiency concerns. Trends and FAA projections in 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. The extent to which revenues and costs are linked, however, 
depends critically on how costs are allocated. Thus, to assess the 
extent to which the current approach or other approaches aligns costs 
with revenues would require completing an analysis of costs, using 
either a cost accounting system or cost finding techniques to assign 
costs to NAS users. 

The implications of adopting alternative funding options to collect 
revenue from NAS users and address concerns about the current excise 
tax system vary depending on the extent to which users’ revenue 
contributions reflect the costs those users impose on FAA. This report 
considers six selected funding options, including two that modify the 
current excise tax structure and four that adopt more direct charges to 
users. 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. Some stakeholders who support the 
adoption of direct user charges also support a change in FAA’s 
governance structure, but GAO found no evidence adoption of direct 
charges requires this. 

Authorizing FAA to use debt financing for capital projects would have 
advantages and disadvantages. Some stakeholders identify debt financing 
as attractive because 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 congressional oversight that appropriations 
receive. Concerns regarding borrowing costs, oversight, and encumbering 
future resources are particularly important in light of the federal 
government’s long-term structural fiscal imbalance. 

The Departments of Transportation and Treasury provided comments and 
technical clarifications on a draft of this report which we have 
incorporated or responded to as appropriate. DOT’s comments focused on 
governance reforms required to adopt a user fee approach, and whether 
we accurately described the status of FAA’s accounting system. 
Treasury's raised concerns about the level of analytical development 
for the options and associated issues. Data was not available to 
conduct the analysis Treasury suggested, and we agree necessary. 
However, we believe the report provides useful information to 
facilitate debate on the options. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-973]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Gerald Dillingham at 
(202) 512-4830 or dillinghamg@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Some Stakeholders Favor the Current Funding System, but Others Raise 
Revenue Adequacy, Equity, and Efficiency Concerns: 

Alternative Funding Options Present Both Advantages and Disadvantages: 

Alternative Capital Financing Methods Have Advantages and 
Disadvantages: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet 
Flight Compared with Three Regional Jet Flights: 

Table 2: Estimated Excise Tax Contribution by Flight Type: 

Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet 
Flight Compared with One Regional Jet Flight: 

Figures: 

Figure 1: FAA Activities: 

Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005: 

Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years 
1971-2005: 

Figure 4: General Fund and Trust Fund Contributions to FAA's Budget: 

Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through 
2005: 

Figure 6: Average Domestic Fares, 1981-2005: 

Figure 7: Average Available Seats per Domestic Aircraft: 

Figure 8: Potential FAA Process for Borrowing from the Treasury: 

Figure 9: Potential FAA Process for Borrowing from the Private Capital 
Market: 

Abbreviations: 

AIP: Airport Improvement Program: 

AOPA: Aircraft Owners and Pilots Association: 

ARTCC: air route traffic control center: 

ATC: air traffic control: 

BPA: Bonneville Power Administration: 

CBO: Congressional Budget Office: 

DOT: Department of Transportation: 

FAA: Federal Aviation Administration: 

GA: general aviation: 

GO: general obligation bond: 

GR: general revenue bond: 

GAO: Government Accountability Office: 

GARVEE: Grant Anticipation Revenue Vehicle: 

IRS: Internal Revenue Service: 

NAS: National Airspace System: 

OMB: Office of Management and Budget: 

SARS: Severe Acute Respiratory Syndrome: 

TRACON: terminal radar approach control center: 

TVA: Tennessee Valley Authority: 

United States Government Accountability Office: 
Washington, DC 20548: 

September 29, 2006: 

Congressional Committees: 

The Federal Aviation Administration (FAA), the Airport and Airway Trust 
Fund (Trust Fund), and the excise taxes that support the Trust Fund are 
scheduled for reauthorization at the end of fiscal year 2007. Although 
there have been fluctuations in its funding sources, FAA is primarily 
supported by the Trust Fund (82 percent),[Footnote 1] which receives 
revenues from a series of excise taxes paid by users of the National 
Airspace System (NAS). The Trust Fund's uncommitted balance decreased 
by more than 70 percent from the end of fiscal year 2001 through the 
end of fiscal year 2005. These excise taxes apply to purchases of 
airline tickets and aviation fuel, as well as the shipment of cargo. 
FAA's remaining funding comes from the General Fund of the U.S. 
Treasury (General Fund) (18 percent). The policy debate over the 
reauthorization of FAA, the Trust Fund, and the excise taxes that fund 
it encompasses a host of critical and complex issues, including the 
modernization of the nation's air traffic control (ATC) infrastructure 
and FAA's efforts to improve cost control and internal management 
practices. The agency's reliance on revenues from both users and the 
General Fund recognizes that FAA produces direct benefits for NAS users 
and substantial public benefits, including safety, security, and 
economic benefits. Stakeholders we talked with all agreed that these 
public benefits justify a continued General Fund contribution to FAA's 
budget. However, a key issue raised in the debate over FAA funding, and 
the focus of this report, is how the revenues generated from users of 
the NAS might be collected.[Footnote 2] Stakeholders are divided over 
whether Congress should continue to rely on the current excise tax 
structure or adopt an alternative structure to collect the funding 
contributed by users. 

You requested that we examine FAA's current funding system and 
alternative funding options. Accordingly, we addressed the following 
key questions: (1) What advantages and concerns have been raised about 
the current approach to collecting revenues from NAS users to fund FAA, 
and to what extent does the available evidence support the concerns? 
(2) What are the implications of adopting alternative funding options 
to collect the revenues contributed by users that fund FAA's budget? 
(3) What are the 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, 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, Trust Fund revenue data, FAA forecasts, and 
aviation activity data. We reviewed the reliability of these data and 
concluded that they were sufficiently reliable for our purposes. We 
conducted our work from May 2005 through August of 2006 in accordance 
with generally accepted government auditing standards. Details of our 
scope and methodology are provided in appendix 1. 

Results in Brief: 

Some stakeholders[Footnote 4] 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,[Footnote 5] including FAA, state that under 
the current system there is a disconnect between the revenues 
contributed by users and the costs they impose on the NAS. In their 
view, this disconnect raises revenue adequacy, equity, and efficiency 
concerns. Trends over the past 25 years in, and FAA 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. However, the extent to which revenues and costs are linked 
depends critically on how costs 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[Footnote 6] to assign costs to the various NAS users. 

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. This report reviews both modifications to the 
current excise tax system and more direct charges based on the use of 
FAA's services. 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 developing 
the administrative capacity to implement new charges. 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. 

Authorizing FAA to use debt financing for capital projects would have 
advantages and disadvantages. The use of debt financing--such as bonds-
-has been identified by some stakeholders as a means of funding FAA 
capital projects, such as components of the Next Generation Air 
Transportation System (NGATS) or existing ATC facilities and 
equipment.[Footnote 7] Some stakeholders believe debt financing is 
attractive because it could provide FAA with a stable source of revenue 
to fund capital development and, at the same time, spread 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 congressional oversight that appropriations receive. In 
addition, debt financing is subject to federal budget scoring rules and 
raises issues regarding borrowing costs that are particularly important 
in light of the federal government's long-term structural fiscal 
imbalance. 

We provided a draft of this report to the Departments of Transportation 
(DOT) and the Treasury for review and received comments from both 
agencies. Neither DOT nor Treasury explicitly agreed or disagreed with 
our observations, and both departments raised a number of concerns and 
provided technical clarifications. We incorporated these comments and 
technical clarifications throughout the report as appropriate, or 
responded to them in the agency comments section at the end of the 
report. 

Background: 

FAA engages in three primary activities: aviation safety oversight, 
ATC, and airport infrastructure development (see fig. 1).[Footnote 8] 
The costs associated with each of these activities generally depend on 
the nature and usage of the specific service FAA provides. 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. According to FAA, the costs associated 
with these safety activities are primarily driven by the volume of each 
(e.g., the number of licenses and inspections). 

Figure 1: FAA Activities: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

ATC includes a variety of complex activities that guide and control the 
flow of aircraft through the NAS. Generally, commercial aircraft fly 
under instrument flight rules (IFR) that require ATC services 
throughout a flight. Such flights rely on FAA staff in control towers 
to guide them from the terminal to the runway, and through takeoff. 
Once in the air and beyond the immediate vicinity of the airport, they 
rely on terminal radar approach control centers (TRACONs) to guide them 
out of the airspace in a broader area surrounding the airport.[Footnote 
9] Services provided by control towers and TRACONs are referred to as 
terminal services. The TRACONs then pass flights off to air route 
traffic control centers (ARTCC), which provide en-route control until 
the flights near their destinations; services provided by ARTCCs are 
referred to as en-route services. When a flight nears its destination, 
control is passed back to a TRACON, and then to tower guidance, to land 
and proceed to an airport gate. General aviation's (GA) use of these 
services varies greatly. Nearly all business jet flights file flight 
plans for IFR services, as do roughly half of GA piston flights. Many 
GA flights operate entirely under visual flight rules (VFR) and may not 
require any ATC services at all if they do not fly to airports that 
have towers. These other GA flights may require ground control, or rely 
on beacons or flight service stations en route. FAA states that the 
costs imposed by each flight are influenced by the amount and nature of 
the specific services it uses, and by whether the flight operates at 
peak periods. 

FAA funds airport infrastructure development through the Airport 
Improvement Program (AIP). AIP is a multibillion-dollar grant program 
that provides funding for the airports included in FAA's National Plan 
of Integrated Airport Systems, which includes airports that range from 
the largest commercial service airports in the United States to small 
GA airports. Unlike safety and ATC services, AIP expenditures are not 
the direct result of costs imposed by users of the NAS. FAA distributes 
AIP funding based on congressional priorities established in 
authorizing and appropriation legislation. Accordingly, apart from some 
relatively small administrative expenses, FAA's spending for AIP does 
not represent a "cost" of providing services to users. Therefore, it is 
not possible to establish a direct link between AIP expenditures and 
taxes or charges paid by system users based on their use of FAA 
services. 

FAA Funding: 

The Trust Fund was established by the Airport and Airway Revenue Act of 
1970 (P.L. 91-258) to help fund the development of a nationwide airport 
and airway system. The Trust Fund provides funding for FAA's two 
capital accounts, AIP and the Facilities and Equipment account, which 
funds technological improvements to the ATC system. The Trust Fund also 
provides funding for 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 ticket tax on domestic airline tickets: 

* $3.30 domestic passenger segment tax (excluding flights to or from 
rural airports)[Footnote 10] 

* 6.25 percent tax on the price paid for transportation of domestic 
cargo or mail[Footnote 11] 

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

* $0.193/gallon tax on domestic GA gasoline: 

* $0.218/gallon tax on domestic GA jet fuel: 

* $14.50[Footnote 12]/person tax on international arrivals and 
departures, indexed to inflation: 

* 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 13] 

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 passenger 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 2 shows the shares received 
from each source in fiscal year 2005. 

Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

[End of figure] 

Since the Trust Fund's creation in 1970, revenues have, in aggregate, 
exceeded spending commitments, resulting in a surplus or an uncommitted 
balance, although expenditures from the Trust Fund exceeded revenues in 
2005.[Footnote 14] The Trust Fund's uncommitted balance, which was 
about $1.9 billion at the end of fiscal year 2005, 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 example, the uncommitted 
balance has been declining in recent years because Trust Fund revenues 
for the last 5 years have been less than FAA's forecasted 
levels.[Footnote 15] Figure 3 shows the fluctuations in the Trust 
Fund's uncommitted balance since its inception. 

Figure 3: Trust Fund's End-of-Year Uncommitted Balance, Fiscal Years 
1971-2005: 

[See PDF for image] 

Source: GAO analysis of Congressional Budget Office and FAA budgets. 

[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 (see fig. 
4). 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. 

Figure 4: General Fund and Trust Fund Contributions to FAA's Budget: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

[End of figure] 

Congressionally Authorized Commission Recommended Changes in FAA's 
Funding Structure: 

The National Civil Aviation Review Commission (Commission) issued a 
Congressional report in 1997 analyzing several issues, including 
alternative funding means to meet the needs of the nation's aviation 
system. The Commission's report[Footnote 16] identified a number of 
concerns with FAA's funding structure as it existed at the time the 
Commission began its work.[Footnote 17] To address these concerns, the 
Commission made several unanimous recommendations, including that FAA's 
revenues be more closely linked to the costs of services provided to 
support ATC activities, including capital investments. The Commission 
also recommended that General Fund revenues be used to fund aviation 
security and safety activities and government use of the air traffic 
system, and that GA operators continue to pay a fuel tax, although 
perhaps at a higher rate. 

Some Stakeholders Favor the Current Funding System, but Others Raise 
Revenue Adequacy, Equity, and Efficiency Concerns: 

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, the 
disconnect between the revenues contributed by users and the costs they 
impose on the NAS raises revenue adequacy, equity, and efficiency 
concerns. Trends 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. 
However, the extent to which revenue and costs are linked depends 
critically on how the costs of FAA's services are assigned to NAS 
users. Thus, assessing 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. FAA 
stated that it has made substantial progress in designing a cost 
accounting system, implementing it throughout its lines of business, 
and modifying it to determine costs by user group. 

Stakeholders Who Favor Maintaining the Current Funding Structure Cite 
Its Success and Reasonable Allocation of Funding Burden: 

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 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 fiscal year 
2004 (see fig. 5); FAA estimates that revenues will continue to 
increase. In addition, these stakeholders state that administrative 
costs of the current system are relatively low. 

Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through 
2005: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

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

[End of figure] 

Another argument put forward by some industry stakeholders and analysts 
for maintaining the current funding structure is that this structure 
provides a reasonable allocation of the funding burden between 
commercial aviation and GA. With the current funding structure, system 
users who are subject to the 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, including those who operate 
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 ATC 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 from providing services to GA aircraft. According to FAA, all 
cost studies to date concluded that GA users pay less than the costs 
they impose on the system, while commercial aviation users pay more 
than the costs they impose on the system. 

Disconnect between Trust Fund Revenues and FAA Costs Raises Concerns 
That Revenues Will Not Keep Pace with Workload Increases under the 
Current System: 

The disconnect between sources of Trust Fund revenues and FAA costs 
under the current funding system raises concerns that the current 
system 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 commensurate with workload changes over time. However, under 
FAA's 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 of these factors are directly 
related to workload, which is driven by flight control 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.[Footnote 18] 

To illustrate the disconnect between revenues and costs, table 1 
provides an example of 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 FAA's additional costs associated 
with the workload increase. This example 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. 

Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet 
Flight Compared with Three Regional Jet Flights: 

Approximately 300-mile flight from Los Angeles to San Francisco. 

Plane type: Number of seats; 
One 737 flight: 132; 
Three CRJ-200 flights: 144. 

Plane type: Number of passengers; 
One 737 flight: 105; 
Three CRJ-200 flights: 105. 

Plane type: Average fare; 
One 737 flight: $100; 
Three CRJ-200 flights: $100. 

Plane type: Gallons of fuel consumed; 
One 737 flight: 937; 
Three CRJ-200 flights: 1,797. 

Plane type: Ticket tax; 
One 737 flight: $788; 
Three CRJ-200 flights: $789. 

Plane type: Passenger segment tax; 
One 737 flight: $348; 
Three CRJ-200 flights: $348. 

Plane type: Waybill tax; 
One 737 flight: $2; 
Three CRJ-200 flights: $0. 

Plane type: Fuel tax; 
One 737 flight: $40; 
Three CRJ-200 flights: $78. 

Total revenue; 
One 737 flight: $1,178; 
Three CRJ-200 flights: $1,215. 

Source: GAO analysis of FAA data. 

[End of table] 

As the table shows, differences in FAA's workload are not reflected in 
revenues. FAA states, all other factors being equal (e.g., time of 
flight), that the total ATC costs of the three regional jet flights 
would 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. 

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 19]) 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. 

Trends in average fares suggest that the Trust Fund is collecting less 
revenue relative to workload than in the past, and FAA's projections 
suggest that this decline will continue. Since the passenger ticket tax 
is a percentage of the ticket price, reductions in the average ticket 
price result in lower ticket tax revenues relative to FAA's workload. 
Domestic airfares, adjusted for inflation, have steadily declined over 
the past 25 years, from an average of $233 in 1981 to $148 in 2005 (see 
fig. 6).[Footnote 20] This reduction represents an average decline of 
about 1.9 percent per year.[Footnote 21] Even though there have been 
increases in fares over the past year, FAA projects 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 22] 

Figure 6: Average Domestic Fares, 1981-2005: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

[End of figure] 

Trends in the average size of airplanes also suggest that the Trust 
Fund is collecting less revenue relative to workload than in the past, 
and FAA's projections suggest that this decline will continue (see fig. 
7). Since smaller planes carry fewer passengers and burn less fuel, 
reductions in average plane size mean lower ticket tax, segment tax, 
and fuel tax revenue accrues to the Trust Fund relative to FAA's 
workload. 

Figure 7: Average Available Seats per Domestic Aircraft: 

[See PDF for image] 

Source: GAO analysis of FAA data. 

[End of figure] 

This decline in the average number of seats per aircraft is the result 
of airlines' moving toward a substantially greater reliance on regional 
and narrow-body jets.[Footnote 23] Scheduled capacity (available seat 
miles) increased 29 percent from 1996 through 2005. During this time, 
wide-body jet capacity fell 42 percent, narrow-body jet capacity grew 
35 percent, and regional jet capacity grew over 2900 percent. As a 
result, regional jets accounted for nearly 10 percent of scheduled 
capacity in 2005, up from less than 1 percent in 1995. In addition to 
projecting growth in commercial flights, FAA is projecting substantial 
growth in GA traffic, which will also add to FAA's workload. 

Some Stakeholders Have Raised Equity Concerns with the Current Funding 
System: 

Some aviation stakeholders have expressed concerns 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. As noted, factors that influence the revenue 
contribution that a commercial flight makes to the Trust Fund are the 
number of passengers, the average price of tickets, and the amount of 
fuel used. None of these factors, however, are directly related to the 
cost of the ATC services that a flight receives from FAA. Table 2 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 equity issue is that 
similar commercial flights may contribute very different amounts of 
revenue. As shown in this example, a 767 flight contributes more than 
twice as much as two similar 737 flights. There is also a difference 
between the contributions for the two similar 737 flights; one flight 
contributes 14 percent more than the other flight. 

Table 2: Estimated Excise Tax Contribution by Flight Type: 

Approximately 300-mile flight from Los Angeles to San Francisco. 

Number of seats; 
Commercial flights: 767: 231; 
Commercial flights: 737: 132; 
Commercial flights: 737: 132; 
GA business flights: Citation V Fractional: 9; 
GA business flights: Learjet 35: [A]. 

Number of passengers; 
Commercial flights: 767: 180; 
Commercial flights: 737: 89; 
Commercial flights: 737: 89; 
GA business flights: Citation V Fractional: 5; 
GA business flights: Learjet 35: [A]. 

Average fare; 
Commercial flights: 767: $82; 
Commercial flights: 737: $84; 
Commercial flights: 737: $67; 
GA business flights: Citation V Fractional: $235; 
GA business flights: Learjet 35: [A]. 

Gallons of fuel; 
Commercial flights: 767: 1,646; 
Commercial flights: 737: 937; 
Commercial flights: 737: 808; 
GA business flights: Citation V Fractional: 442; 
GA business flights: Learjet 35: 190. 

Ticket tax; 
Commercial flights: 767: $1,100; 
Commercial flights: 737: $565; 
Commercial flights: 737: $449; 
GA business flights: Citation V Fractional: $86; 
GA business flights: Learjet 35: $0. 

Passenger segment tax; 
Commercial flights: 767: $544; 
Commercial flights: 737: $270; 
Commercial flights: 737: $270; 
GA business flights: Citation V Fractional: $15; 
GA business flights: Learjet 35: $0. 

Cargo/Mail tax; 
Commercial flights: 767: $27; 
Commercial flights: 737: $2; 
Commercial flights: 737: $2; 
GA business flights: Citation V Fractional: $0; 
GA business flights: Learjet 35: $0. 

Fuel tax; 
Commercial flights: 767: $71; 
Commercial flights: 737: $40; 
Commercial flights: 737: $35; 
GA business flights: Citation V Fractional: $19; 
GA business flights: Learjet 35: $41. 

Total revenue; 
Commercial flights: 767: $1,742; 
Commercial flights: 737: $877; 
Commercial flights: 737: $756; 
GA business flights: Citation V Fractional: $120; 
GA business flights: Learjet 35: $41. 

Source: GAO analysis of FAA data. 

[A] Not applicable. 

[End of table] 

Concerns also exist about the fairness of the distribution of the 
funding burden between commercial airlines and GA operators. Domestic 
commercial passenger flights, and some flights typically considered GA 
flights that carry commercial passengers,[Footnote 24] are subject to, 
among other potential excise taxes, the passenger ticket tax, the 
passenger segment tax, the cargo/mail tax, and the 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 GA flights may be substantially different. For example, 
the taxes that the Trust Fund would receive from two different types of 
business jet flights would be substantially less than the taxes 
received from similar commercial flights (see table 2). 

Although the commercial and GA flights might receive the same services 
from FAA, raising equity concerns because of the large difference in 
revenue contribution, there is debate over whether GA and commercial 
flights should be assigned the same costs for similar flights because 
parties disagree on how to assign the fixed costs associated with the 
ATC system. Representatives of the commercial aviation industry favor 
assigning those costs to all system users in proportion to their use of 
the system. Representatives of GA, 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 of serving GA (i.e., those costs that would not otherwise exist). 
Without a consensus on how to assign ATC costs to 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. 

Current Funding System Lacks Strong Incentives to Encourage Efficient 
Use of the NAS: 

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 NAS, their price for using the system 
(the taxes or charges they pay) should accurately reflect the costs 
their use imposes on the system. 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 25] Given the importance of some of these 
other factors to users' decisions about using the NAS, the influence of 
prices charged for FAA's services on these decisions may be 
comparatively small for some users. 

As discussed previously, FAA states that under the current funding 
system the taxes collected from users do not accurately reflect the 
costs those users impose on the system; some flights likely pay more 
than the costs they impose, while others likely pay less. These 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 make less than optimal use of the 
system, while those who pay less than the costs they impose may make 
more than optimal use of the system. 

An airline's decision about how many flights to offer in a given market 
illustrates how the current system does not provide incentives for 
efficient use of the system. In this example (the same one used for the 
revenue adequacy discussion), an airline is deciding how many daily 
flights it should provide for the Los Angeles to San Francisco market 
(see table 3). It estimates that the market demand at the fare it is 
charging totals 105 passengers per day, and it faces the choice of 
providing the market with one daily flight with a narrow-body jet 
(Boeing 737), or three daily flights with a regional jet (CRJ-200)--all 
flight choices are assumed to depart during peak periods. In this 
scenario, the revenue collected from the three regional jet flights-- 
$1,215--is about 3 percent more than the revenue collected from the 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 to handle the three regional jet flights than to 
handle the one medium jet flight. In this example, however, there is 
little financial incentive ($37) for the airline to limit its 
imposition of additional costs on FAA by using one flight instead of 
three flights. 

Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet 
Flight Compared with One Regional Jet Flight: 

Plane type: Number of seats; 
737-300: 132; 
CRJ-200: 48. 

Plane type: Number of passengers; 
737-300: 105; 
CRJ-200: 35. 

Plane type: Average fare; 
737-300: $100; 
CRJ-200: $100. 

Plane type: Gallons of fuel consumed; 
737-300: 937; 
CRJ-200: 599. 

Plane type: Ticket tax; 
737-300: $788; 
CRJ-200: $263. 

Plane type: Passenger segment tax; 
737-300: $348; 
CRJ-200: $116. 

Plane type: Waybill tax; 
737-300: $2; 
CRJ-200: $0. 

Plane type: Fuel tax; 
737-300: $40; 
CRJ-200: $26. 

Plane type: Total revenue; 
737-300: $1,178; 
CRJ-200: $405. 

Source: GAO analysis of FAA data. 

[End of table] 

This situation is made worse during times when the NAS is congested. 
There are two issues associated with congestion. The first is plane 
size; if all other factors are equal, such as demand for air travel, it 
is more efficient to serve congested airspace with larger planes 
because they can move more passengers per flight. Second, when 
congestion is a factor, efficiency requires consideration of the delay 
costs imposed on other system users. Charging similar flights equally, 
regardless of plane size, and incorporating congestion costs, would 
create financial incentives to improve efficiency. 

Alternative Funding Options Present Both Advantages and Disadvantages: 

Alternative funding options for collecting revenues from NAS users 
present both advantages and disadvantages.[Footnote 26] 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 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. 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. 

The six funding options considered here include two that would modify 
the current excise tax structure and four that would adopt more direct 
charges to users. 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. 

Modifications to the Current System: 

The two options we reviewed that would modify the current excise tax 
structure are relying solely on a fuel tax and increasing the passenger 
segment tax to replace the passenger ticket tax. 

Fuel Taxes: 

One 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 the revenue lost by eliminating the 
remaining excise taxes and charges. Advocates of reliance on a fuel tax 
funding system state that it is appealing compared to the current 
system because there is a correlation between the time a plane spends 
in the system and the amount of fuel a plane uses. To the extent that 
time in the system is related to cost, this relationship creates at 
least a partial link between revenues and costs, which could partially 
address the revenue adequacy, equity, and efficiency concerns about the 
current system. In addition, advocates of the fuel tax state that a 
fuel tax is inexpensive and simple to administer. Under the current 
system the Internal Revenue Service (IRS) is responsible for collecting 
fuel taxes at the point of sale, and these funds are then deposited to 
the Treasury, which then credits the Trust Fund. FAA has no 
responsibility for collecting the revenue. Thus, transitioning to an 
all-fuel-tax funding system would be relatively easy, since the 
administrative system is already in place. Furthermore, the tax is easy 
for consumers to understand, and compliance is simple and inexpensive. 

From a revenue adequacy perspective, fuel taxes compare favorably with 
other existing excise taxes because they are more directly linked to 
workload. Thus, all things being equal, increases in workload over time 
would likely result in fuel tax revenue increases. Nonetheless, two 
factors that lead to lower fuel consumption will erode the ability of a 
fuel tax to generate revenue over time. First, while the incentive 
created through the tax to conserve fuel will promote more efficient 
use of the system, it will lead to lower fuel consumption, which will 
reduce revenues. Second, technological advances that increase the fuel 
efficiency of airplanes will reduce fuel consumption relative to FAA's 
workload, leading to lower revenues relative to FAA's workload; the new 
787 aircraft[Footnote 27] and a recent effort to outfit planes with 
winglets[Footnote 28] are examples of these advances. Thus, it is 
likely that the fuel tax rate would have to be raised from time to time 
to be adequate 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 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 (e.g., by flying at 
off-peak times to avoid congestion delays) 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. 

Passenger Segment Tax: 

A second option that represents a modification of the current system is 
to increase the current passenger segment tax to replace revenues lost 
by eliminating the current passenger ticket tax. Under this option, all 
other current excise taxes would remain unchanged, implying no change 
to revenues collected from cargo carriers and GA operators. This option 
would likely increase the tax differential between passengers traveling 
on one-stop (or more than one-stop) flights and those traveling on 
nonstop flights on the same route. As a result, there might be a shift 
in travelers' demand toward more nonstop service, which might, in turn, 
lead airlines to operate more nonstop service. Because there is a 
partial link between the number of segments an airline operates and the 
cost of the services FAA provides to that carrier, this option might 
have some advantages over the present tax structure in terms of revenue 
adequacy, efficiency and equity. However, because there is no link to 
the cost of some of the other services that FAA provides, these 
advantages are limited. 

Compared to the present funding structure, this option might address 
concerns about revenue adequacy over time, but many of the concerns 
associated with the current system would likely remain. One way in 
which a passenger segment tax might better correlate to FAA's workload 
is that commercial flights that include a stop require more terminal 
services from FAA than nonstop flights, and taxes based on the number 
of passenger segments traveled will increase as the number of stops 
increases. In addition, the current passenger segment tax is indexed to 
the Consumer Price Index so that it is adjusted each year to account 
for inflation, which preserves the purchasing power of the revenues 
collected. However, other services that FAA provides could increase 
without any increase in passenger segment tax revenues. For example, if 
the average distance of commercial flights increases, the cost of 
providing en-route services will rise, but the passenger segment taxes 
paid will not rise because they are not based on distance traveled or 
time in controlled airspace. Furthermore, passenger segment taxes apply 
only to commercial flights, so they have no advantage over ticket taxes 
in providing revenue adequate to fund cost increases associated with 
providing services to cargo and GA aircraft. In addition, there would 
be no improvement in providing adequate revenue for safety and security 
expenditures. 

Compared to ticket taxes, higher flight passenger segment taxes have 
the potential to increase equity by better aligning revenues with 
costs, and they create some additional incentives for efficient use of 
FAA services. However, these effects are likely to be limited because 
the tax revenues are aligned only to some cost elements and the tax 
applies only to commercial aircraft. With increased passenger segment 
taxes, the difference in the amount of taxes commercial airlines would 
have to pay for one-stop service compared with nonstop service would be 
greater. This greater difference in taxes might represent an 
improvement in equity compared to the present funding system because 
one-stop flights require more terminal and approach services from FAA 
than nonstop flights. This greater difference in taxes could also 
create an incentive to provide more nonstop service. Substituting 
nonstop for one-stop service could reduce the airlines' need for FAA's 
terminal and approach services. However, this incentive could be quite 
small relative to other factors that influence airlines' service- 
offering decisions, so the effect on efficiency could also be quite 
small. In addition, airlines would have no additional incentive to be 
efficient in their use of en-route services because the passenger 
segment tax is not linked to time in controlled airspace, and there 
would be no change from the current structure in incentives for cargo 
and GA operators. 

Administrative and transition issues would be minimal, since this 
option would require only a change in the current tax per flight 
segment and the elimination of the passenger ticket tax. 

Direct Charges: 

The four funding options we reviewed that would involve more direct 
charges to users include weight/distance charges, en-route charges, 
flight segment charges, and certification charges. 

Weight/Distance Charges: 

Charges based on weight and distance traveled are used by a number of 
foreign air navigation service providers and are supported by the 
International Civil Aviation Organization. As suggested by the name, 
this option would base charges to users on the weight of the plane and 
the distance it travels within the NAS. According to their advocates, 
weight/distance charges are more appealing than the current system 
because they would establish a more direct relationship between 
revenues and costs by incorporating distance into the formula, thereby 
creating an incentive to limit excess use of FAA's ATC en-route 
services. In addition, advocates say, weight/distance charges would 
strike a balance between basing charges on the ability-to-pay 
principle[Footnote 29] and more directly linking costs and revenues by 
incorporating both weight and distance in the distribution of costs 
among users. 

A weight/distance charge, relative to the current funding system, would 
be likely to improve the revenue adequacy of the system. Revenue 
adequacy is addressed by the incorporation of a cost component into the 
weight/distance formula. Generally, air navigation service providers 
that use a weight/distance formula regularly adjust the cost component 
to ensure that revenues match costs. For example, FAA's counterpart in 
France--la Direction Générale de l'Aviation Civile--annually adjusts 
the cost component of its weight/distance formula on the basis of en- 
route charges. This adjustment ensures that revenues not only cover 
costs, but also do not exceed costs. 

As with the fuel tax, the extent to which a weight/distance charge 
would address equity issues appears to be limited. While there may be a 
relationship between the distance a plane travels in the NAS and the 
costs it imposes, the introduction of the weight component into the 
formula weakens any such connection. For example, since heavier planes 
would be charged more than lighter planes, they would be required to 
contribute more for traveling the same distance in the system, even 
though they may not impose greater costs on the ATC system. If a 
relationship between weight and distance in the system and costs 
imposed can be established, it is likely to be limited to en-route 
control costs. There is no obvious relationship between the weight/ 
distance formula and other FAA activities--terminal control services 
and safety activities. 

Since the connection between revenues and costs is incomplete because 
of the weight component, the potential for a weight/distance charge to 
address efficiency issues also appears limited. The distance component 
of a weight/distance charge creates an incentive for operators to 
minimize their use of the NAS. To the extent that distance in the 
system correlates with costs imposed, this incentive could improve 
efficiency. However, the correlation between distance and costs imposed 
is limited by the introduction of the weight component. Furthermore, 
the relationship between distance in the system and the costs imposed 
on FAA is likely to be limited to en-route control costs, excluding 
consideration of the costs associated with terminal control and safety 
activities. 

Implementing a weight/distance charge would also involve significant 
administrative and transition issues. FAA would have to determine how 
to administer a weight/distance charging system for which it does not 
currently have the organizational capacity. FAA stated that one option 
would be to contract the billing out to a private party, much as 
European Union countries such as France contract out their billing to 
Eurocontrol.[Footnote 30] 

En-route Charges: 

En-route charges would be based on the time users spend in the NAS or 
the distance they travel through the NAS. According to their advocates, 
en-route charges are more appealing than the current system because 
they would create a more direct relationship between revenues and 
costs. Therefore, compared to the current system, advocates say en- 
route charges would (1) better ensure that revenues are adequate to 
cover costs over time, (2) address equity issues, and (3) create 
incentives for efficient use of the current system. 

An en-route charge, relative to the current funding system, would be 
likely to improve the revenue adequacy of the system. As with weight/ 
distance charges, en-route charges could address revenue adequacy 
concerns by incorporating a cost component into the charging formula 
that could be regularly adjusted to reflect any changes in costs. This 
approach could ensure, over time, that revenues match costs. 

As with other funding options discussed here, 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 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. 

Implementing en-route charges would also involve significant 
administrative and transition issues. FAA would have to develop the 
organizational capacity to administer and collect en-route charges, 
which would include completing the appropriate cost analysis using 
either a cost accounting system or cost finding techniques. 

Flight Segment Charges: 

Flight segment charges to users would be based on the departures and 
landings that aircraft make at various airports throughout the NAS. 
According to their advocates, flight segment charges are more appealing 
than the current system because they would establish a more direct 
relationship between revenues and costs. Therefore, compared to the 
current system, advocates say that flight segment charges would (1) 
better ensure that revenues are adequate to cover costs over time, (2) 
address equity issues, and (3) create incentives for efficient use of 
the current system by directly connecting charges with costs imposed by 
users. 

A flight segment charge, relative to the current funding system, would 
be likely to improve the revenue adequacy of the system. As with 
weight/distance charges, flight segment charges could address revenue 
adequacy concerns by incorporating a cost component into the charging 
formula that could be adjusted regularly to reflect any changes in 
costs. This approach could ensure that, over time, revenues match 
costs. 

As with other funding options discussed here, the ability of flight 
segment charges to address equity and efficiency issues raised by the 
current system appears to be limited. FAA states that there is a strong 
relationship between departures and landings in the system and costs 
imposed by flights for terminal control handled by TRACONs. Thus, if 
flight segment charges were limited to funding terminal control costs, 
they might address equity issues raised by the current system by 
equating charges to costs imposed, depending on how costs were 
assigned. Furthermore, flight segment charges for terminal 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 flight 
segments and other FAA activities--en-route control and safety 
activities. As a result, if flight segment charges were used to fund 
all FAA activities, their ability to address equity and efficiency 
issues would be limited. 

Implementing flight segment charges would involve administrative and 
transition issues similar to those associated with en-route charges. 
FAA would have to develop the organizational capacity to administer and 
collect flight segment charges and complete the appropriate cost 
analysis using either a cost accounting system or cost finding 
techniques. 

Certification Charges: 

Certification charges to users would cover specific safety services 
provided by FAA, such as certificates for air worthiness, air 
operators, and air agencies; registration for air personnel, aircraft, 
and medical personnel; designees and delegations; and international 
training. According to their advocates, certification charges would be 
more appealing than the current system because they would establish a 
direct relationship between revenues and costs, which would address the 
revenue adequacy, equity, and efficiency concerns associated with the 
current system. 

Certification charges have the potential to fulfill revenue adequacy 
requirements for safety costs over time because they are directly 
linked to workload; charges would be assessed for each certificate 
issued. Thus, as workload changed over time (increasing or decreasing), 
so would the revenue from certification charges. In addition, any 
certification system would likely have the flexibility to adjust 
charges as costs changed. Certification charges, however, could not 
support all of FAA's funding requirements, so this option would have to 
be used in combination with other revenue sources. According to FAA 
officials, there is a clear relationship between certification charges 
and the specific safety activities for which users would be charged. 
Thus, if certification charges were limited to funding the associated 
safety costs, they would address equity issues raised by the current 
system by equating charges to costs imposed; this equity improvement, 
however, would be limited to funding for safety activities. 
Furthermore, certification charges would likely create financial 
incentives to use the system efficiently, since charges would increase 
in proportion to use. 

FAA raises the concern that imposing certification charges for safety 
services would adversely affect safety because such charges would 
create incentives to avoid the use of safety services and, in some 
cases, ATC services. Our review of available data from five air 
navigation service providers in other countries found that since their 
air traffic control services were commercialized and charges were 
implemented, the safety of the services remained the same or improved. 
For example, data from New Zealand and Canada show fewer incidents of 
loss of separation (the distance required between planes) since 
commercialization.[Footnote 31] 

Implementing certification charges would involve administrative and 
transition issues similar to those associated with en-route and flight 
segment charges. FAA would have to develop the organizational capacity 
to administer and collect certification charges and complete the 
appropriate cost analysis using either a cost accounting system or cost 
finding techniques.[Footnote 32] 

Combining Funding Options Might Best Address Concerns: 

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, 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. 

Cost-Based Charges Can Be Imposed under FAA's Current Governance 
System: 

In discussing alternative funding options, some stakeholders have 
stated that if user charges are adopted, users should have more input 
into FAA's operation, citing the "user pays, user says" principle. To 
many stakeholders, this principle implies that the adoption of direct 
user charges would require a change in FAA's governance structure that 
could limit congressional influence on the agency while expanding the 
influence of airlines and other users. Many stakeholders support such a 
change, pointing out that many countries that rely on direct charges to 
fund aviation activities have commercialized their air navigation 
service providers. 

We did not find any evidence that a change in FAA's governance 
structure would be required if direct charges were adopted. Federal law 
provides general authority for federal agencies to institute user 
charges except when otherwise prohibited.[Footnote 33] In FAA's case, 
Congress has specifically prohibited the agency from instituting any 
new user charges under this general authority in every DOT 
appropriation act since 1998. Furthermore, under the current funding 
system, users already provide most of the revenue used to fund FAA 
programs through excise taxes. Adopting direct charges would change the 
manner in which revenues are collected from users, but would not 
necessarily change the aggregate contribution from users. Since users 
pay most of FAA's program costs now, it is unclear what additional role 
users should play in FAA's decision-making under an alternative system. 

Recent reforms in France's Direction Générale de l'Aviation Civile 
illustrate how a government agency has moved toward a cost-based system 
of charges to fund the air navigation services it provides without 
changing the underlying governance structure. The French organization's 
activities fall into two broad divisions --safety and regulation, and 
ATC.[Footnote 34] Safety and regulation are funded through a 
combination of general government support and specific user charges. 
For example, there are charges for pilots' licenses, medical 
certificates, inspections, and aircraft registration. ATC activities 
are split into two categories--en-route control and terminal control. 
For en-route control, France must abide by the European Union's 
regulations, which are based on principles established by the 
International Civil Aviation Organization. This approach incorporates a 
weight/distance formula that is used to determine charges for specific 
aircraft based on their activity. Although the formula distributes 
charges across aircraft differently by incorporating weight as a 
factor, the amount of the charges is based on cost data that are 
verified by the European Union. Eurocontrol actually bills users of the 
system; all European Union countries collect en-route charges through 
this organization. Terminal control charges are not directly based on 
cost factors, but are billed along with the en-route control charges 
through Eurocontrol. 

Alternative Capital Financing Methods Have Advantages and 
Disadvantages: 

Allowing FAA to use debt financing for capital projects have advantages 
and disadvantages. Many stakeholders have identified the use of debt 
financing--such as bonds--as a means of funding FAA capital projects, 
such as components of NGATS or existing ATC facilities and equipment. 
Some stakeholders believe debt financing is attractive because it could 
provide FAA with a stable source of revenue to fund capital development 
and, at the same time, spread the costs out over the life of a capital 
project as its benefits are realized. If Congress approved the use of 
debt financing for FAA, the agency could borrow through the Treasury or 
directly from the private capital market, depending on what authority 
Congress provided. Debt-financing raises significant concerns, however, 
because it encumbers future resources and because expenditures from 
debt proceeds may not be subject to the congressional oversight that 
appropriations receive. In addition, debt financing is subject to 
federal budget scoring rules[Footnote 35] and raises issues associated 
with borrowing costs that are particularly important in light of the 
federal government's long-term fiscal imbalance. 

Some Stakeholders Believe Debt Financing Offers Advantages: 

According to its supporters, debt financing has a number of advantages, 
one of which is that it could provide FAA with a stable source of 
revenue to fund capital development. FAA officials state that the 
uncertainty associated with the appropriation process makes planning 
for large, complex, and expensive ATC systems difficult. Another 
advantage cited 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 an 
investment firm, state that the private capital market may offer 
disciplinary mechanisms that may encourage FAA to manage itself more 
efficiently. The discipline occurs because, to receive funding for 
projects, FAA would need to adhere to bond covenants, which are rules 
that govern how FAA will pay obligations. One investment firm noted, 
however, that projects could be overcapitalized, or "gold plated," if 
FAA were given the authority to borrow without caps on the number and 
costs of projects it funds. For example, a significant amount of debt 
could be issued for projects with minimal marginal benefits to users. 
As a result, an investment firm noted, there may need to be a governing 
board with multiple aviation stakeholders, including airlines, 
airports, and air traffic controllers, to determine which capital 
projects are needed and how they will be funded. Treasury officials 
also question whether the private capital market will 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. Treasury officials further noted that they 
could perform credit analyses similar to those done by private 
investment firms, which, when combined with statutory borrowing caps 
and other credit terms and conditions, would serve to protect the 
financial interests of the general taxpayer. 

FAA Could Borrow from the Treasury or the Private Capital Market: 

To borrow from the Treasury, FAA would need borrowing authority from 
Congress. There are various ways Congress can provide borrowing 
authority, each with different legal, financial, and structural 
implications. For example, some government entities generate their own 
revenue to pay for borrowing costs, whereas others pay with 
appropriations.[Footnote 36] Some government entities with borrowing 
authority are federal agencies, such as the Bonneville Power 
Administration (BPA), while others are independent establishments, such 
as the U.S. Postal Service.[Footnote 37] Once borrowing authority is 
granted, the Treasury sets the terms and conditions for borrowing. FAA 
could borrow from the Treasury, using revenue options such as taxes, 
user fees, or appropriations to repay the debt, depending on the type 
of bond. Figure 8 describes the process for borrowing from the 
Treasury. 

Figure 8: Potential FAA Process for Borrowing from the Treasury: 

[See PDF for image] 

Source: GAO analysis of Treasury documents and interviews. 

[End of figure] 

In borrowing from the private capital market, FAA could issue general 
revenue (GR) or general obligation (GO) bonds. Both types of bonds 
would require FAA to pay interest and principal to bond holders, but 
the revenue sources used to make these payments would differ. A GR bond 
requires taxes or user fees to pay the interest and principal, while a 
GO bond uses expected appropriations. Several nonfederal government 
entities currently borrow from the private capital market using GR and 
GO bonds. In aviation, most commercial airports issue GR bonds for 
airport capital improvements that are backed by general revenues from 
the airport, including aircraft landing fees, concessions, and parking 
fees, for airport capital improvements. In surface transportation, some 
states issue grant anticipation revenue vehicle (GARVEE) bonds backed 
by anticipated federal apportionments to fund highways. However, the 
eligibility of a GARVEE bond for reimbursement with federal 
apportionments does not constitute a commitment by the federal 
government to provide for paying the principal or interest on the bond. 
The Department of Transportation, which oversees the GARVEE program, 
reimburses the state for debt service expenses as part of the annual 
federal-aid obligation authority. Figure 9 describes the process for 
borrowing from the private capital market. 

Figure 9: Potential FAA Process for Borrowing from the Private Capital 
Market: 

[See PDF for image] 

Source: GAO analysis of Treasury documents and interviews. 

[End of figure] 

For FAA to borrow from the private capital market, Congress would need 
to give the agency statutory authority. Depending on how Congress 
writes the statute, FAA could use any revenue option--taxes, user fees, 
or appropriations--to secure the bond. According to some 
representatives of investment banks and Treasury officials, no 
organizational changes for FAA, such as a change to a government 
corporation or corporate entity, would be needed. 

Currently, some government corporations borrow from the private capital 
market, including the Tennessee Valley Authority (TVA). TVA is an 
independent, wholly owned federal corporation established by the 
Tennessee Valley Authority Act of 1933 that sells bonds in the private 
capital market to finance its capital improvements for power programs. 
TVA pays for its operations and debt service with revenues from its 
energy sales. Since TVA first issued bonds, Moody's Investors Service 
and Standard & Poor's have assigned TVA's bonds their highest credit 
rating--Aaa/AAA.[Footnote 38] TVA does not receive a direct federal 
guarantee, although the interest rate charged by the private capital 
market suggests that there is an implied federal guarantee.[Footnote 
39] 

Debt Financing Raises Budgetary Concerns: 

Debt financing is subject to federal budget scoring rules and raises 
issues regarding borrowing costs that are particularly important in 
light of the federal government's long term structural fiscal 
imbalance. How the borrowing authority is carried out will affect both 
budget scoring and costs. When an agency uses borrowing authority to 
finance a capital project, budget authority and obligations are 
recorded in the budget when the investments are made. Current budget 
scoring rules require that budget authority and obligations for the 
full cost of capital projects be scored upfront in the year that the 
obligations are made. Over time, the outlays will equal the budget 
authority and obligations that were scored upfront. As an example, if 
FAA borrowed $5 million with a 10 year bond to purchase air traffic 
control equipment, the $5 million would be scored as budget authority 
and obligations in the year or years in which FAA signed the contract 
or contracts to purchase the equipment, and not distributed annually 
over 10 years. Since this budget treatment is the same as if 
appropriations were obtained, there is little scoring incentive for an 
agency to borrow. 

Among the negative consequences of not scoring all government 
activities in the year in which obligations are made, according to CBO, 
is that the federal government's obligations are understated.[Footnote 
40] A Treasury official said the Treasury is supportive of budget 
scoring, noting that if the borrowing is for a purely governmental 
purpose, then that activity should be scored according to federal 
budget scoring rules. We have also reported that up-front budget 
scoring for capital projects should be maintained, since the budget 
should reflect the government's commitments up front.[Footnote 41] 

If FAA was granted borrowing authority, the associated costs would 
likely be higher if the agency borrowed directly from the private 
capital market instead of through the Treasury. According to Treasury 
and representatives of investment firms, the federal government's costs 
associated with debt financing for FAA's capital projects would likely 
be lower if FAA borrowed through the Treasury than if FAA borrowed 
directly from the private capital market because the Treasury would 
likely be charged a lower interest rate to borrow money. Interest rates 
charged to FAA would likely be higher because bonds issued by FAA would 
likely be viewed as a greater credit risk compared to Treasury bonds 
because Treasury's bonds are backed by the full faith and credit of the 
U.S. government, whereas FAA debt would not be. 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. Treasury officials told us that it is the 
agency'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 agency is the least 
expensive, most efficient means of financing this debt. The costs to 
the government associated with funding FAA's capital spending through 
appropriations would be comparable to the costs of borrowing through 
the Treasury.[Footnote 42] 

The costs of borrowing from the private sector are based, in part, on 
how risky the revenue is that will be used for bond interest payments. 
Although all revenue options--taxes, user fees, and appropriations--can 
be used to repay borrowings, each option has a different risk profile. 
The Treasury noted that if FAA were to borrow from the private capital 
market against revenues that were subject to appropriations, there 
would most likely be a risk premium added to the credit rating to 
compensate for the risk that appropriations may not be provided. This 
risk premium would make borrowing more expensive. However, 
representatives from investment firms we interviewed noted that FAA may 
receive a high credit rating given that ATC services are essential and 
FAA has a monopoly in providing them.[Footnote 43] If a capital project 
has a high degree of "essentiality," then it is assumed that the 
government will pay for the project through appropriations if that is 
the revenue source. Representatives of an investment firm we 
interviewed also noted that FAA may receive an implied federal 
guarantee because it is a federal agency. However, representatives of 
another investment firm we interviewed also said that many of FAA's 
assets may have a low degree of marketability. That is, lenders may 
have difficulty selling an asset in the market in case of a bond 
default because there may be few willing buyers in the market for it. 

Borrowing costs are particularly important in light of the federal 
government's long-term fiscal imbalance. As the baby boom generation 
ages, mandatory federal commitments to health and retirement programs 
will consume an ever-increasing share of the nation's gross domestic 
product and federal budgetary resources, placing severe pressures on 
all discretionary programs, including those that fund defense, 
education, and transportation. Our simulations show that by 2040, 
revenues to the federal government might barely cover interest on the 
debt--leaving no money for either mandatory or discretionary programs-
-and that balancing the budget could require cutting federal spending 
by as much as 60 percent, raising taxes by up to 2½ times their current 
level, or some combination of the two.[Footnote 44] Accordingly, any 
program or policy change that may increase costs requires sound 
justification and careful consideration before adoption. We previously 
reported that agencies with authority to borrow were financing a large 
portion of their programs with debt and were repaying their debt with 
appropriations or new borrowing, rather than through revenue 
collections.[Footnote 45] As a result, we recommended that only those 
agencies that would, in all likelihood, be able to repay their 
borrowing through revenue collections be granted authority to borrow. 

Agency Comments: 

We provided a draft of this report to DOT and Treasury for review and 
comment. We received comments from DOT through an e-mail from FAA's 
Director of the Office of Aviation Policy and Plans on September 11, 
2006, and from Treasury through an e-mail from the Deputy Assistant 
Secretary of Government Financial Policy on September 8, 2006. Neither 
DOT nor Treasury explicitly agreed or disagreed with our observations, 
and both raised a number of concerns. 

DOT stated that, in its opinion, although a change in FAA's governance 
may not be statutorily required, it may be important as a matter of 
policy. DOT stated that because air navigation service providers are by 
nature monopoly providers, users need assurance that their concerns are 
taken into account in cost control and investment decisions, 
particularly under a system that more closely ties users' contributions 
to the costs of the system. DOT stated that an alternative governance 
mechanism, along with user fees, could give system users a structured 
advisory role in how moneys are spent, costs are allocated, and charges 
are set to recover those costs, while still retaining the inherently 
governmental decision-making authority within FAA and DOT. In addition, 
DOT maintained that a governance mechanism specifically designed to 
give users input into investment decisions and cost recovery would add 
a valuable layer of discipline in optimizing the system to accommodate 
users' needs most efficiently. 

In contrast, according to DOT, a system in which FAA/DOT could charge 
fees to cover costs with no meaningful stakeholder involvement would be 
much less attractive to the stakeholders. Finally, DOT stated, such an 
arrangement is fully consistent with the position of the International 
Civil Aviation Organization, which calls for user charges to be set in 
consultation between the service provider and the user community. 

DOT may want to encourage Congress to consider the issue of governance 
structure. However, we did not include an analysis of governance issues 
in the scope of our review; therefore, we did not provide a more 
detailed discussion of the issue in this report. 

DOT stated that our discussion of the need to analyze FAA's costs 
implied FAA has not developed any cost accounting or cost allocation 
systems. Although we agree that FAA has made progress in implementing a 
cost accounting system, its current accounting system is not able to 
provide the information required for a cost allocation analysis. 
Therefore, in our view, our report does not mischaracterize the status 
of FAA's cost accounting system by stating that an analysis of the 
extent to which the current funding approach, or alternative funding 
approaches, aligns costs with revenues would require the completion of 
a cost accounting system or the use of cost finding techniques. Our 
point is that this capability would be needed to operate under a cost- 
based user charge system. 

DOT stated that it believes user fees would provide greater revenue 
stability than taxes because user fees could be set up to be adjusted 
periodically without changes in the law, thus providing greater 
flexibility in aligning revenues to cover costs. Nonetheless, we 
continue to believe that revenue stability is not likely to vary much 
across the funding options. Significant decreases in the demand for air 
travel would decrease revenue regardless of whether the current funding 
structure is maintained or any of the options are adopted. Furthermore, 
increasing direct user charges while air travel demand was falling 
would increase costs for aircraft operators at the same time as their 
revenues were declining and might be no easier than increasing excise 
taxes. 

DOT also provided some clarifying and technical comments, which we 
incorporated where appropriate. 

According to Treasury, GAO raised several critical issues, but did not 
provide any analysis that would help policymakers judge reform options. 
Specifically, Treasury expressed concern that we did not (1) provide a 
more comprehensive discussion of FAA costs and cost shares, including 
any available cost information that provides insight into the issue, 
(2) evaluate FAA's efforts to implement cost accounting, and (3) state 
whether FAA's cost accounting program is likely, when completed, to 
generate cost information that is useful in determining a fair and 
efficient distribution of costs among users. We agree with Treasury 
that a more detailed analysis of FAA costs and cost shares should be 
conducted to inform the FAA reauthorization debate, and that this 
information would improve the analysis of specific alternative funding 
options. FAA's current accounting system is not able to provide the 
information required for a cost allocation analysis. We believe that 
using partial cost information, as suggested by Treasury, would not be 
appropriate. Moreover, conducting a comprehensive cost analysis was 
beyond the scope of this report. 

Treasury also said that our report repeats claims made by interest 
groups without evaluating them, giving the sense that each argument is 
equally valid, even though policymakers need some way to evaluate them. 
This was not the objective of the report. We provided a basis for 
evaluating the current and alternative funding options by outlining 
criteria, including revenue adequacy, equity, and efficiency, and 
discussing the implications of these criteria with respect to specific 
funding options. 

Treasury raised concerns that a number of statements were attributed to 
"some stakeholders," rather than the specific groups or individuals 
that made the statements, noting that attribution helps the reader 
evaluate the statements. In response, we added some attribution as 
appropriate. 

Treasury also noted its long-standing policy that all debt issued by 
federal entities, including FAA, should be issued solely to the 
Treasury, because centralized Treasury financing of all such debt is 
the least expensive, most efficient means of financing this debt. 
Treasury further maintained that market discipline would not be applied 
to FAA debt obligations issued directly to the private capital market 
because investors would perceive the obligations were backed by the 
federal government. We added language to the report to clarify 
Treasury's position on these issues. 

Treasury also provided some clarifying and technical comments, which we 
incorporated where appropriate. 

As agreed with your offices, unless you announce the contents of this 
report earlier, we plan no further distribution until 30 days from the 
date of this letter. At that time, we will send copies of this report 
to interested congressional committees; the Secretary of 
Transportation; the Administrator, FAA; the Secretary of the Treasury; 
and the Director, OMB. Copies will also be available to others upon 
request and at no cost on GAO's Web site at www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-3834 or dillinghamg@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix II. 

Signed by: 

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

List of Committees: 

The Honorable Ted Stevens: 
Chairman: 
The Honorable Daniel K. Inouye: 
Co- Chairman: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Conrad Burns: 
Chairman, Subcommittee on Aviation: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable John L. Mica: 
Chairman: 
The Honorable Jerry F. Costello: 
Ranking Democratic Member: 
Subcommittee on Aviation: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

[End of section] 

[End of section] 

Appendix I: Scope and Methodology: 

To accomplish all of our objectives, we reviewed relevant research, 
including GAO products, academic research, congressional testimony, 
industry group publications, and stakeholders' responses to questions 
FAA asked them about its funding.[Footnote 46] We also interviewed: 

* officials from government agencies, including the Federal Aviation 
Administration (FAA), the Office of Management and Budget (OMB), the 
Congressional Budget Office (CBO), and the Department of the Treasury 
(Treasury); 

* representatives of aviation industry groups, including the Air 
Transport Association, the Aircraft Owners and Pilots Association 
(AOPA), and the National Business Aviation Association; and: 

* academic and financial experts. 

In addition, as discussed in the following paragraphs, we performed 
further work to accomplish each objective. 

To assess the advantages and concerns that have been raised about the 
current approach to collecting revenues from national airspace system 
(NAS) users to fund FAA and the extent to which the available evidence 
supports the concerns, we examined FAA budget data, Airport and Airway 
Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to 
the Department of Transportation (DOT) on aircraft size and airfares 
(DOT Form 41 data), and FAA aviation activity data. We used data on tax 
revenues associated with different types of flights to assess the link 
between increases in FAA's workload and increases in Trust Fund 
revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation 
activity data from FAA. To assess the reliability of these data, we 
interviewed knowledgeable officials and reviewed the quality control 
procedures FAA applies to these data, and subsequently determined that 
the data were sufficiently reliable for our purposes. We obtained the 
DOT Form 41 data from BACK Aviation Solutions, a private contractor 
that provides these data to interested parties. We used these data to 
examine trends in aircraft size and airfares because of their impact on 
the relationship between Trust Fund revenues and FAA's workload. 

To identify potential alternative funding options for FAA and criteria 
for comparing these options, we obtained information on the experience 
of foreign air navigation service providers by reviewing relevant GAO 
reports and other literature and interviewing officials at Eurocontrol 
and France's FAA counterpart, la Direction Générale de l'Aviation 
Civile. We also interviewed representatives of Air France, AOPA-France, 
the International Air Transport Association, the Association of 
European Airlines, and Aéroports de Paris. Through our literature 
review and these interviews, we identified longer-run revenue adequacy, 
equity, efficiency, and administrative considerations as appropriate 
criteria for assessing the current and alternative funding options. We 
considered both modifications to the current excise tax structure and 
various forms of direct charges for FAA services as possible 
alternatives to the current tax structure. In selecting options for 
analysis, we considered whether there was a link between the option and 
some element of FAA's workload. 

To identify the advantages and disadvantages of authorizing FAA to use 
debt financing for capital projects, we reviewed the borrowing 
authorities of other U.S. governmental entities, including the 
Tennessee Valley Authority and the Bonneville Power Administration. 

We conducted our work from May 2005 through August of 2006 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Dr. Gerald L. Dillingham, (202) 512-2834: 

Staff Acknowledgments: 

In addition to the contact named above, the following individuals made 
key contributions to this report: Ashley Alley, Christine Bonham, Jay 
Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper, 
Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman. 

FOOTNOTES 

[1] These percentages reflect FAA's revenue composition in fiscal year 
2006; from fiscal year 1997, the year the current tax structure became 
effective, through fiscal year 2006, the Trust Fund has contributed an 
average of 80 percent of FAA's budget, while General Fund contributions 
have averaged 20 percent. 

[2] This report does not address the question of what proportion of 
FAA's budget should be derived from the General Fund because of the 
public benefits created by FAA activities. 

[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. 

[5] Stakeholders that have expressed concerns about current funding 
system include the Air Transport Association and the FAA. 

[6] Cost finding techniques produce cost data by analytical or sampling 
methods and typically involve analyses of available cost data using 
spreadsheet applications or manual calculations. 

[7] 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 report. 

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

[9] Depending on the airport's location, the approach control 
facilities may be located within the airport's control tower or at 
separate facilities. 

[10] 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 rate was $3.30 in 2006; this tax rate 
changes annually as it is indexed to the Consumer Price Index. 

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

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

[13] 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; this rate changes annually because it is indexed to the Consumer 
Price Index. 

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

[15] For a more complete discussion of the Trust Fund, see GAO, 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). 

[16] National Civil Aviation Review Commission, Avoiding Aviation 
Gridlock and Reducing the Accident Rate: A Consensus for Change 
(Washington, D.C.: Dec. 1997). 

[17] The following changes were made after the Commission began its 
work but before it issued its final report: the passenger segment tax 
was added; the passenger ticket tax was reduced from 10 percent to 7.5 
percent; the international departure tax was increased from $6 to $12 
and was also applied to international arrivals; the frequent flyer tax 
was added; and the Hawaii/Alaska passenger taxes were added. 

[18] In addition to revenue adequacy, a criterion that economists often 
use to compare funding methods is year-to-year revenue stability, which 
generally refers to the degree to which both short-term fluctuations in 
economic activity and other factors not directly linked to the business 
cycle affect the level of revenue collected from a funding source. 
Revenue stability has been an important concern for FAA's funding 
because of the impact of the September 11, 2001, terrorist attacks, the 
war in Iraq and associated security concerns, the Severe Acute 
Respiratory Syndrome (SARS) outbreak, and global recessions on the 
demand for air travel, and, therefore, on the revenues flowing into the 
Trust Fund (see GAO-06-562T). However, the revenue stability concern 
will likely exist in a roughly similar way under each of the options we 
reviewed because significant decreases in demand are likely to decrease 
revenues whether they are derived from excise taxes on aviation-related 
activities or from direct user charges. Thus, in this report, we do not 
address revenue stability because it is not likely to vary much across 
options, including the current funding system. 

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

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

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

[22] Yield is the amount of revenue airlines collect for every mile a 
passenger travels. 

[23] Generally speaking, wide-body jets are the largest jets, with the 
capacity to transport approximately 200 or more passengers; narrow-body 
jets are smaller, with the capacity to transport approximately 100 to 
200 passengers; regional jets are the smallest of these three plane 
types, with the capacity to transport approximately 50 to 90 
passengers. 

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

[25] 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. 

[26] As discussed earlier, some elements of FAA's budget cannot be 
directly linked with taxes or charges that system users pay for their 
use of FAA's services. One example is money given to airports in grants 
through the Airport Improvement Program. Another example might be 
expenditures required to control government planes, both military and 
civilian, unless other government agencies were treated as system 
users. As a result, if any of these options are adopted and the tax or 
charge rates are based on the costs of services to users, then the 
revenue collected will not cover all of FAA's budget. Contributions 
from the General Fund or revenues from other taxes that are not linked 
to costs would also be needed. 

[27] The 787 aircraft is a new plane under development by Boeing that 
emphasizes fuel efficiency through the use of lightweight composite 
material and more fuel-efficient engines. 

[28] Winglets are attachments to the wings of planes that reduce fuel 
consumption. 

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

[30] Eurocontrol is the European Organisation for the Safety of Air 
Navigation. Eurocontrol's core activities span the entire range of gate-
to-gate air navigation service operations--from strategic and tactical 
flow management to controller training; from regional control of 
airspace to development of leading-edge, safety-proofed technologies 
and procedures, and the collection of air navigation charges. 

[31] See GAO, Air Traffic Control: Characteristics and Performance of 
Selected International Air Navigation Service Providers and Lessons 
Learned from Their Commercialization, GAO-05-769 (Washington, D.C.: 
July 29, 2005). 

[32] FAA is currently prohibited from charging certain certification 
and registration fees under 49 U.S.C. §45302 until several specific 
regulations have been promulgated. 

[33] 31 U.S.C. 9701. 

[34] Most airports in France are independent from the national 
government, and their infrastructure is funded through charges levied 
by individual airports. 

[35] Budget scorekeeping rules or guidelines are developed by the House 
and Senate Budget Committees, CBO, and OMB (the scorekeepers). The 
purpose of the guidelines is to ensure that the scorekeepers measure 
the effects of legislation on the deficit consistent with established 
scorekeeping conventions and with the specific requirements of the 
Congressional Budget Act of 1974 and the Balanced Budget and Emergency 
Deficit Control Act of 1985. Budget scorekeeping rules are published in 
OMB Circular A-11. 

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

[37] BPA is a self-supporting agency in the Department of Energy that 
borrows from the Treasury 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. Since BPA 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. 

[38] Between 1974 and 1988, TVA borrowed exclusively from the 
Treasury's Federal Financing Bank and the debt was not rated. 

[39] GAO, Tennessee Valley Authority: Bond Ratings Based on Ties to the 
Federal Government and Other Nonfinancial Factors, GAO-01-540 
(Washington, D.C.: Apr. 30, 2001). 

[40] CBO, Third-Party Financing of Federal Projects (Washington, D.C.: 
June 2005). 

[41] GAO, Capital Financing: Partnerships and Energy Savings 
Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-
55 (Washington, D.C.: Dec. 16, 2004). 

[42] 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. 

[43] Representatives of investment firms said that "essentiality" is 
the importance of a particular government project or service. The 
representatives of investment firms we spoke with generally agreed that 
FAA's core service, which is to provide ATC services, is highly 
essential because the services are a vital part of the national 
economy. 

[44] GAO, The Nation's Long-Term Fiscal Outlook: September 2006 Update, 
GAO-06-1077R (Washington, D.C.: Sept., 15, 2006). 

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

[46] In September 2005, FAA provided stakeholders with reauthorization 
packages (packages of data on its operations and costs) and asked for 
responses to questions about how to fund to agency. 

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