oversight

Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports' Planned Capital Development

Published by the Government Accountability Office on 2003-02-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States General Accounting Office

GAO                          Testimony
                             Before the Subcommittee on Aviation,
                             Senate Committee on Commerce,
                             Science, and Transportation

For Release on Delivery
Expected at 9:30 a.m. EST
Tuesday, February 25, 2003
                             AIRPORT FINANCE
                             Past Funding Levels May
                             Not Be Sufficient to Cover
                             Airports’ Planned Capital
                             Development
                             Statement of Gerald L. Dillingham
                             Director, Civil Aviation Issues




GAO-03-497T
                             a
Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss airport financing issues, which
are particularly important as you prepare to reauthorize the Wendell H.
Ford Aviation Investment and Reform Act for the 21 Century (AIR-21).
Much has changed since the Congress enacted AIR-21 3 years ago. At that
time, the focus was on reducing congestion and flight delays. Today, flights
are being canceled for lack of business, two major air carriers are in
bankruptcy, and attention has shifted from increasing the capacity of the
national airspace system to enhancing aviation security. Furthermore, as
the federal budget deficit has increased, competition for federal resources
has intensified, and the costs of airport capital development are growing,
especially with the new requirements for security. Nonetheless, analysts
expect the demand for air traffic services to rebound. Until that time, the
unexpected slump in air traffic creates a window of opportunity to improve
the safety and efficiency of the national airport system.

My statement today is based on our ongoing and completed work on
airport funding and addresses the following questions:

1. What are the estimated costs of airports’ planned capital development?

2. How much funding did airports receive for planned capital
   development in recent years, and what were their principal sources of
   funding?

3. If past funding levels continue, will they be sufficient to meet estimates
   of planned capital development?

4. What options are available to address any potential difference between
   planned development and available funding?

Because our information on planned airport capital development, including
the information we obtained from surveying 400 smaller airports, is
preliminary, it is subject to change as we finalize our ongoing work.

In summary:

• Although there is general consensus among stakeholders that
  maintaining the integrity of the national airport system requires
  continual capital investment, estimates vary as to the type and cost of
  planned airport capital development required to ensure a safe and



Page 2                                                            GAO-03-497T
    efficient system. For 2001 through 2005, FAA has estimated annual
    planned capital development costs of about $9 billion, while the Airport
    Council International (ACI), a key organization representing the airport
    industry, has estimated annual costs of about $15 billion for 2002
    through 2006. The estimates differ primarily because FAA’s includes only
    projects that are eligible for federal funding, whereas ACI’s includes
    projects that may or may not be eligible for federal funding. Neither
    FAA’s nor ACI’s estimate covers the airport terminal modifications
    needed to accommodate the new explosives detection systems required
    to screen checked baggage. According to ACI, the total cost of these
    modifications could be $3 billion to $5 billion over the next 5 years.

• From 1999 through 2001, airports received an average of about $12
  billion a year for planned capital development. The primary source of
  this funding was bonds, which accounted for almost $7 billion, followed
  by federal grants and passenger facility charges, which accounted for
  $2.4 billion and $1.6 billion, respectively. The amounts and types of
  funding also varied by airport type. Of the $12 billion, large- and
  medium-hub airports received over $9 billion, and smaller airports
  received over $2 billion.

•    If airports continue to receive about $12 billion a year for planned
    capital development, they would be able to fund all of the projects
    included in FAA’s estimate, but they would not be able to fund about $3
    billion in planned development estimated by ACI. While this projected
    shortfall could change with revisions in future funding, planned
    development, or both, it nevertheless indicates where funding
    differences may be the greatest.

• Options are available to increase or make better use of the funding for
  airport development, and these options would benefit different types of
  airports to varying degrees. For example, raising the current cap on
  passenger facility charges would primarily benefit larger airports, while
  increasing or redistributing Airport Improvement Program grant funds
  would be more likely to help smaller airports.




Page 3                                                           GAO-03-497T
FAA’s and the Airport     The estimated costs of planned airport capital development vary depending
                          on which projects are included in the estimates. According to FAA’s
Industry’s Estimates of   estimate, which includes only projects that are eligible for Airport
Airports’ Planned         Improvement Program (AIP) grants, the total cost of airport development
                          will be about $46 billion, or about $9 billion per year, for 2001 through 2005.
Capital Development       FAA’s estimate is based on the agency’s National Plan of Integrated Airport
Vary Substantially        Systems, which FAA published in August 2002. ACI’s estimate includes all
                          of the projects in FAA’s estimate, plus other planned airport capital projects
                          that may or may not be eligible for AIP grants. ACI estimates a total cost of
                          almost $75 billion, or nearly $15 billion per year for 2002 through 2006.
                          Projects that are eligible for AIP grants include runways, taxiways, and
                          noise mitigation and noise reduction efforts; projects that are not eligible
                          for AIP funding include parking garages, hangars, and expansions of
                          commercial space in terminals.

                          Both FAA’s and ACI’s estimates cover projects for every type of airport. As
                          table 1 indicates, the estimates are identical for all but the large- and
                          medium-hub airports, which are responsible for transporting about 90
                          percent of the traveling public. For these airports, ACI’s estimate of
                          planned development costs is about twice as large as FAA’s.



                          Table 1: Average Annual Planned Development Costs Estimated by FAA and ACI, by
                          Airport Type, 2001-2006

                           Dollars in millions
                                                                          Estimated average annual costs
                           Airport type              Number of airports               FAA             ACI
                           Large hub                                 31             $4,855         $8,554
                           Medium hub                                37              1,073          3,109
                           Small hub                                 71               675             675
                           Nonhub                                   280               807             807
                           Other commercial                         124               142             142
                           service
                           Reliever                                 260               526             526
                           General aviation                       2,558              1,167          1,167
                           Total                                  3,364             $9,245        $14,980
                          Source: FAA and ACI.




                          Page 4                                                              GAO-03-497T
According to FAA’s analysis of the planned capital development for 2001
through 2005, airports will use 61 percent of the $46 billion for capacity
enhancement, reconstruction, and modifications to bring airports up to the
agency’s design standards and 39 percent to fund safety, security,
environmental, and other projects. See figure 1.



Figure 1: Distribution of FAA’s Estimated $46 Billion for Planned Capital
Development at Airports by Project Type, 2001-2005




Note: “Standards” includes projects to bring airports up to FAA’s design criteria. “Other” includes
projects to, for example, develop terminals to accommodate more passengers or larger aircraft and to
enhance airfield capacity.


Neither ACI’s nor FAA’s estimate includes funding for the terminal
modification projects that are needed to accommodate the new explosives
detection systems required to screen checked baggage. ACI estimates that
these projects will cost a total of about $3 billion to $5 billion over the next
5 years. A key reauthorization issue facing the Congress is how these



Page 5                                                                                GAO-03-497T
                        terminal modification projects will be funded. In 2001, the Congress
                        allowed FAA to use AIP funds to help pay for some new security projects;
                        however, this use of AIP funds affected the amount of funding that was
                        available for some development projects. Specifically, in fiscal year 2002,
                        FAA used $561 million in AIP grant funds for security projects, or about 17
                        percent of the $3.3 billion available. The use of AIP grant funds for new
                        security projects in fiscal year 2002 reduced the funding available for other
                        airport development projects, such as projects to bring airports up to FAA’s
                        design standards and reconstruction projects. The use of AIP grant funds
                        for security also caused FAA to defer three letter-of-intent payments
                        totaling $28 million to three airports until fiscal year 2003 or later.1



Airports Recently       From 1999 through 2001, the 3,364 airports that make up the national
                        airport system received an average of about $12 billion per year for planned
Received About          capital development. The single largest source of these funds was bonds,
$12 Billion a Year,     followed by AIP grants and passenger facility charges. (See table 2.) It is
                        important to note that the authorized AIP funding for fiscal years 2002 and
Mostly from Bonds and   2003 totaled $3.3 billion and $3.4 billion, respectively. However, because
Federal Sources         data for funding from other sources were not available for these years, we
                        used the figures from 1999 through 2001, the most recent years for which
                        consistent data were available.




                        1
                         Letters of intent represent a nonbinding commitment from FAA to provide multiyear
                        funding to airports beyond the current authorization period. This commitment enables
                        airports to proceed with projects without waiting for future AIP grant funds because it
                        provides reasonable assurance of reimbursement for allowable costs.




                        Page 6                                                                         GAO-03-497T
Table 2: Sources of Airport Funding

Dollars in billions
                              1999-2001 average        Percent
Funding source                  annual fundinga        of total    Source of funds
                                                   b
Airport bonds                               $6.90            59    Usually, state and local
                                                                   governments or airport
                                                                   authorities issue tax-exempt
                                                                   debt. Funds also include notes.
Airport                                       2.42c          21    The Congress makes funds
Improvement                                                        available from the Airport and
Program grants                                                     Airway Trust Fund, which
                                                                   receives revenue from various
                                                                   aviation-related taxes.
Passenger                                     1.59d          13    Funds come from passenger fees
facility charges                                                   of up to $4.50 per trip segment at
                                                                   commercial airports.
State and local                                .44e            4   Funds include state and local
contributions                                                      grants, loans, and matching
                                                                   funds for AIP grants.
Airport revenue                                 .42f           4   Funds are generated from (1)
                                                                   “airside” revenues derived from
                                                                   the operation and landing of
                                                                   aircraft, passengers, or freight
                                                                   and (2) “landside” revenues
                                                                   derived from concessions and
                                                                   leases.
Total                                       $11.78          100
Source: GAO, FAA, and Thomson Financial.

Note: Totals may not add because of rounding.
a
    Amounts expressed in inflation-adjusted 2001 dollars.
b
 Net of refinancing. Of this total, $1.43 billion per year represented the proceeds of special facility
bonds, which are secured by revenue pledges from the indebted facility and issued on behalf of
nonairport beneficiaries, such as airlines.
c
  Since the passage of AIR-21 in 2000, annual AIP funding has been at or above $3.2 billion. Before
that, it was less than $2 billion.
d
    Airports have been eligible to charge $4.50 since fiscal year 2001. Before that, the ceiling was $3.00.
e
 Net operating revenue in excess of a minimum coverage ratio of 125 percent of the debt service
(principal and interest payments) for commercial-service airports. For general aviation and reliever
airports, amounts are calculated as net operating revenue.
f
Does not include local grants and loans for commercial-service airports because we found no data to
document the amounts from these sources.


The amount and type of funding vary depending on the airport’s size. For
example, as shown in figure 2, the large- and medium-hub airports depend
primarily on bonds, while the smaller airports rely principally on AIP



Page 7                                                                                      GAO-03-497T
grants. Passenger facility charges are a more important source of revenue
for the large- and medium-hub airports because they have the majority of
commercial-service passengers.



Figure 2: Distribution of Sources of Funding, by Airport Type




Notes: The 1999 and 2000 figures were converted to inflation-adjusted 2001 dollars.
Special facility bonds are secured by the revenue from the indebted facility for projects such as
terminals, hangars, and maintenance facilities, rather than by the airport’s general revenue.




Page 8                                                                                   GAO-03-497T
Past Funding Levels        If the funding for airport capital development remains at about $12 billion a
                           year over the next 5 years, it would cover all of the projects in FAA’s
Would Cover All of         estimate. However, it would be about $3 billion less per year than ACI’s
FAA’s Planned              estimate. Figure 3 compares the average annual funding airports received
                           from 1999 through 2001 with FAA’s and ACI’s estimated annual planned
Development Estimate       development costs for 2001 through 2006. This difference is not an absolute
but Would Fall About       predictor of future funding shortfalls; both funding and planned
$3 Billion Short of        development may change in the future. However, it does provide a useful
                           indication of where funding differences may be the greatest.
ACI’s Estimate

                           Figure 3: Recent Average Annual Funding Compared with Estimates of Annual
                           Planned Development Costs




Funding Difference Would   In percentage terms, the difference between recent funding levels and
Affect Smaller Airports    ACI’s estimate of planned capital development is somewhat greater for
                           smaller airports than it is for large- and medium-hub airports. From 1999
Proportionally More Than
                           through 2001, smaller airports received an average of about $2.4 billion a
Larger Airports            year for planned capital development while large- and medium-hub airports



                           Page 9                                                            GAO-03-497T
received an average of about $9.4 billion. If these funding levels continued,
smaller airports would not be able to fund about 27 percent of their
planned development, while large- and medium-hub airports would not be
able to fund about 20 percent of their planned development. Figures 4 and 5
illustrate the differences between recent funding levels and the costs of
planned capital development projected for smaller and for large- and
medium-hub airports.



Figure 4: Average Annual Funding Compared with Estimated Annual Planned
Capital Development for Smaller Airports




Note: Totals may not add because of rounding.




Page 10                                                           GAO-03-497T
                            Figure 5: Average Annual Funding Compared with Estimated Annual Planned
                            Capital Development for Large- and Medium-Hub Airports




                            Note: The total for average annual funding may not add because of rounding.



Ability to Fund Planned     The difference between past funding and planned development has
Capital Development Has     declined over the past 5 years, and, at recent funding levels, airports would
                            be able to fund a higher percentage of their planned capital development
Improved for Both Smaller   than they could fund in 1998. At that time, we reported that smaller airports
and Larger Airports         could fund about 52 percent of their planned capital development,
                            compared with about 73 percent today, which represents an increase of 21
                            percent. We also reported that large- and medium-hub airports were able to
                            fund about 80 percent of their development and are able to fund the same
                            amount today.2 See figure 6.



                            2
                             U.S. General Accounting Office, Airport Financing: Annual Funding As Much As $3
                            Billion Less Than Planned Development, GAO/T-RCED-99-84 (Washington, D.C.: Feb. 10,
                            1999).




                            Page 11                                                                       GAO-03-497T
Figure 6: Ability of Smaller and Larger Airports to Fund Estimated Planned Capital Development in 1998 and 2003




                                          Page 12                                                                 GAO-03-497T
                        The primary reason why smaller airports can fund more of their planned
                        capital development today than they could in 1998 is that AIR-21 increased
                        both the total amount of funding for AIP grants and the proportion of AIP
                        funding that went to smaller airports. Specifically, AIR-21 increased the
                        funding for two AIP funds that primarily or exclusively benefit smaller
                        airports—the state apportionment fund and the small airport fund—and it
                        created general aviation entitlement grants, which also benefit smaller
                        airports.3 As a result of these changes, smaller airports received almost 63
                        percent of the $2.4 billion in AIP grant funds that airports received each
                        year, on average, from 1999 through 2001. Large- and medium-hub airports
                        can also fund more of their planned development today than they could in
                        1998 primarily because they are able to issue more bonds and to charge a
                        higher passenger facility fee.



Options Are Available   Options are available to increase airport funding or to make better use of
                        the existing funding. These options, some of which were authorized or
to Address Difference   implemented as part of AIR-21, include increasing the AIP grant funding for
between Funding and     smaller airports, increasing passenger facility charges, creating a separate
                        fund for new security projects, and using innovative financing approaches.
Planned Development     The various options would benefit different types of airports to varying
                        degrees. It is also important to note that even though the airlines may be
                        experiencing financial problems, most large airports have very solid credit
                        ratings and could, if necessary, issue more debt without facing exorbitant
                        interest rates.

                        To help address the difference between funding and planned development,
                        AIR-21 provided that up to $150,000 a year in AIP grant funds be made
                        available to all general aviation airports for up to 3 years for airfield capital
                        projects, such as runways, taxiways, and airfield construction and
                        maintenance projects. On February 11, 2003, we reported that since the


                        3
                         Moreover, if we replaced the AIP figures for 1999 through 2001 with the AIP figures
                        appropriated for fiscal year 2002 and authorized for fiscal year 2003 in our analysis,
                        assuming no changes in the distribution of AIP funds, smaller airports would be able to
                        cover even more of the estimated cost of their planned development because AIP grant
                        funds for fiscal years 2002 and 2003 are about $1 billion more than the average annual AIP
                        funding for 1999 through 2001. Because data for funding from other sources were not
                        available for these years, we used the figures from 1999 through 2001, the most recent years
                        for which consistent data were available.




                        Page 13                                                                        GAO-03-497T
program’s inception in fiscal year 2001, general aviation airports have
received about $325 million, which they have used primarily to help build
runways, purchase navigational aids, and maintain pavements and airfield
lighting.4 Most of the state aviation officials and general aviation airport
managers we surveyed said the grants were useful in meeting their needs,
and some suggested that the $150,000 grant limit be increased so that
general aviation airports could undertake larger projects. However, a
number of state officials cautioned that an increase in the general aviation
entitlement grant could cause a decrease in the state apportionment fund
that states use to address their aviation priorities.

Another option would be to increase or eliminate the cap on passenger
facility charges. This option would primarily benefit larger airports,
because passenger facility charges are a function of the volume of
passenger traffic. However, under AIP, large- and medium-hub airports that
collect passenger facility charges must forfeit a certain percentage of their
AIP formula funds. These forfeited funds are subsequently divided between
the small airport fund, which is to receive 87.5 percent, and the
discretionary fund, which is to receive 12.5 percent. Thus, smaller airports
would benefit indirectly from any increase in passenger facility charges. In
our 1999 report on passenger facility charges,5 we estimated that a small
increase in these charges would have a modest effect on passenger traffic.
At that time, we estimated that each $1 increase would reduce passenger
levels by about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent.
Since AIR-21 raised the cap on passenger facility charges from $3.00 to
$4.50, the full effect of the increase has not been realized because only 17 of
the 31 large-hub airports (55 percent) and 11 of the 37 medium-hub airports
(30 percent) have increased their rates to $4.50. Additionally, 3 large-hub
airports and 6 medium-hub airports do not charge a passenger facility fee.
The reluctance to raise passenger facility charges is likely the result of
several factors, including the views of airlines, which are opposed to any
increase in passenger facility charges because such an increase would raise
passenger costs and reduce passenger traffic. Nonetheless, if all airports
were to increase passenger facility charges to the current ceiling,
additional revenue could be generated.


4
 U.S. General Accounting Office, Aviation Finance: Implementation of General Aviation
Entitlement Grants, GAO-03-347 (Washington, D.C.: Feb. 11, 2003).
5
 U.S. General Accounting Office, Passenger Facility Charges: Program Implementation
and the Potential Effects of Proposed Changes, GAO/RCED-99-138 (Washington, D.C.: May
19, 1999).




Page 14                                                                   GAO-03-497T
Recently, the head of the Transportation Security Administration suggested
setting up a separate fund for security projects. Such a fund might be
comparable to AIP, which receives revenue from various aviation-related
taxes through the Airport and Airway Trust Fund. Having a separate fund
would be consistent with the recent separation of aviation safety and
security responsibilities.

FAA has introduced other mechanisms to make better use of existing
funding sources, the most successful of which has been letters of intent, a
tool that has effectively leveraged private sources of funding. As noted,
letters of intent represents a nonbinding commitment from FAA to provide
multiyear funding to an airport beyond the current AIP authorization
period. Thus, the letter allows the airport to proceed with a project without
waiting for a future AIP grant because the airport and investors know that
allowable costs are likely to be reimbursed. A letter of intent may also
enable an airport to receive a more favorable interest rate on bonds that are
sold to refinance a project because the federal government has indicated its
support for the project. FAA has issued 64 letters of intent with a total
commitment of about $3 billion; large- and medium-hub airports account
for the majority of the total.

Other approaches to making better use of existing funding resources were
authorized under AIR-21. Specifically, the act authorized FAA to continue
its innovative finance demonstration program, which is designed to test the
ability of innovative financing approaches to make more efficient use of
AIP funding. Under this program, FAA enabled airports to leverage
additional funds or lower development costs by (1) permitting flexible local
matching on some projects, (2) purchasing commercial bond insurance, (3)
paying interest costs on debt, and (4) paying principal and interest debt
service on terminal development costs incurred before the enactment of
AIR-21. FAA has provided about $31 million for smaller airports to test
these innovative uses of AIP funding. According to FAA officials, the results
of the program have been mixed. The most popular option for airports has
been flexible matching, which has resulted in several creative loan
arrangements.


In conclusion, Mr. Chairman, the aviation industry and the national
economy are still struggling to recover their health. Analysts nonetheless
expect the demand for air travel to rebound, and the nation’s aviation
system must be ready to accommodate the projected growth safely and
securely. As the Congress moves forward with reauthorizing FAA, it will



Page 15                                                           GAO-03-497T
              have to decide on several key issues, including how it wants to consider the
              airports’ estimate of $15 billion a year for planned capital development over
              the next 5 years, how terminal modification projects will be funded, and
              what priorities it wants to set, both for development and security.
              Sustaining recent funding levels would allow the majority of planned
              airport capital development to move forward, but it would not cover all of
              the airports’ estimated costs, and it would not address the costly terminal
              modifications needed to accommodate explosives detection systems.
              Options such as additional AIP grant funds, increases in passenger facility
              charges, or the creation of a separate fund for new security projects could
              make more funding available for airport improvements. However, the
              growing competition for federal budget dollars and concerns about the
              impact of higher charges on airline ticket sales may limit the practicality of
              these options.



Scope and     To determine how much planned development would cost over the next 5
              years, we obtained planned development data from FAA and ACI. ACI
Methodology   provided its estimate to us in January 2003, and we are still analyzing the
              data on which the estimate is based. To determine the sources of airport
              funding, we obtained capital funding data from FAA, the National
              Association of State Aviation Officials, Thomson Financial, and our survey
              of 400 general aviation and reliever airports. We obtained funding data from
              1999 through 2001 because these were the most recent years for which
              consistent data were available. We screened the planned development and
              funding data for accuracy and compared funding streams across databases
              where possible. We also clarified ambiguous development or funding
              source information directly with airports. We did not, however, audit how
              the databases were compiled, except for our own survey. However, we
              have not finished analyzing the results of our survey, and the results
              presented in this testimony are still preliminary.

              We have been performing our ongoing work from May 2002 through
              February 2003 in accordance with generally accepted government auditing
              standards.

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




              Page 16                                                            GAO-03-497T
Contact information   For further information on this testimony, please contact Gerald
                      Dillingham at (202) 512-2834. Individuals making key contributions to this
                      testimony include Jon Altshul, Tammy Conquest, Elizabeth Eisenstadt,
                      Gary Lawson, David Lehrer, Maren McAvoy, and Richard Swayze.




(540054)              Page 17                                                         GAO-03-497T