oversight

Airport and Airway Trust Fund: Factors Affecting Revenue Forecast Accuracy and Realizing Future FAA Expenditures

Published by the Government Accountability Office on 2012-01-23.

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

               United States Government Accountability Office

GAO            Report to the Committee on Commerce,
               Science, and Transportation, U.S.
               Senate


January 2012
               AIRPORT AND
               AIRWAY TRUST
               FUND

               Factors Affecting
               Revenue Forecast
               Accuracy and
               Realizing Future FAA
               Expenditures




GAO-12-222
                                             January 2012

                                             AIRPORT AND AIRWAY TRUST FUND
                                             Factors Affecting Revenue Forecast Accuracy and
                                             Realizing Future FAA Expenditures
Highlights of GAO-12-222, a report to the
Committee on Commerce, Science, and
Transportation, U.S. Senate


Why GAO Did This Study                       What GAO Found
Established in 1970, the Airport and         Actual trust-fund revenues fell short of FAA’s revenue forecasts for 9 of the past
Airway Trust Fund (trust fund) is the        11 years, contributing to a decline in the trust fund’s uncommitted balance from
primary source of funding for the            over $7 billion in fiscal year 2000 to $770 million in fiscal year 2010. Inaccurate
Federal Aviation Administration’s            forecasts for the taxes related to domestic passenger tickets, which account for
(FAA) investments in the airport and         over 70 percent of trust-fund revenues, drove the aggregate overforecast, but
airway system. Trust-fund revenues           inaccurate forecasts for other taxes also had an effect. This inaccuracy is largely
come largely from taxes on airline           attributable to unexpected events affecting aviation, such as the terrorist attacks
tickets and aviation fuel. The financial     of September 11, 2001, and the recession in 2009; the budget process requiring
health of the trust fund is important to
                                             the forecasts to be developed over a year in advance of the fiscal year; and lags
ensure sustainable funding for FAA
                                             in recognizing structural changes in the airline industry, such as airlines’
without increasing demands on general
revenues. Current law authorizes
                                             increased reliance on ancillary fees for which excise taxes for the trust fund are
appropriations from the trust fund           not collected. Changes in the methodology for forecasting trust-fund revenues
equal to forecast trust-fund revenues.       and the assumption of forecasting responsibility by Treasury, begun in fiscal year
However, if forecasts overestimate           2011, may also affect the future accuracy of forecasts, but it is too soon to tell
actual revenues and Congress                 what effect the changes will have after just 1 fiscal year.
appropriates the forecast level, the         Alternative options for how Congress determines available resources for
trust fund’s uncommitted balance—that        appropriation from the trust fund could provide for substantially greater protection
is, the balance in excess of what has
                                             against overcommitting trust-fund resources—that is, help ensure that trust-fund
been appropriated from the fund or
                                             revenues would be sufficient to cover FAA’s expenditures—or requiring
authorized as contract authority—is
drawn down.                                  additional general-revenue contributions than the current approach outlined in
                                             law. To this end, Congress could limit budget resources available for
Among its objectives, GAO was asked          appropriation from the trust fund to less than the forecast revenues—for
to examine (1) the accuracy of the           example, the current House FAA Reauthorization bill has a provision that would
trust-fund revenue forecasts and             make only 90 percent of forecast revenues available for appropriation from the
factors affecting forecast accuracy,         trust fund as well as any prior year differences between actual trust-fund
(2) different options for determining        revenues and appropriations from the trust fund. Other options would make only
appropriations from the trust fund that      actual revenues from the prior year available, or base appropriations on the
would reduce the risk of
                                             maintenance of a target level for the trust fund’s balance. However, unless a
overcommitting the fund, and (3) the
                                             sufficiently large minimum balance is established, there would still be some risk
extent to which trust-fund revenues
might cover planned FAA expenditures
                                             of overcommitting trust-fund resources under these options. The alternatives
through fiscal year 2021. GAO                could also result in greater swings in trust-fund appropriations, requiring varying
reviewed the Department of the               levels of general revenues to maintain overall stable spending levels for FAA.
Treasury’s (Treasury) and FAA’s              The extent to which trust-fund revenues might cover FAA’s future expenditures
forecasting methods, analyzed trust-         will depend on whether trust-fund revenue and FAA expenditure forecasts are
fund revenue and forecast data, and          realized. Under current revenue and expenditure forecasts, between 8 percent
interviewed federal officials and            and 32 percent of FAA’s annual expenditures for fiscal years 2013 through 2021
aviation-industry and forecasting
                                             could have to be paid for by general revenues unless spending is reduced or
experts. The Departments of
                                             additional taxes are paid into the trust fund. However, congressional decisions,
Transportation and Treasury and the
Office of Management and Budget              including the level of FAA’s appropriations; unexpected events affecting trust-
provided technical comments, which           fund revenues and FAA expenditures; and FAA’s implementation and
GAO incorporated into the report as          management of programs could significantly change forecast revenues and
appropriate.                                 expenditures in future years. For example, FAA’s modernization of the air traffic
                                             control system, called the Next Generation Air Transportation System (NextGen),
                                             is currently estimated to cost FAA $15 billion to $22 billion, and an additional $5
                                             billion to $7 billion for equipping aircraft with NextGen technology, but those costs
View GAO-12-222. For more information,       could change depending upon the speed of implementation and other factors.
contact Susan Fleming at (202) 512-2834 or
flemings@gao.gov.

                                                                                      United States Government Accountability Office
Contents


Letter                                                                                    1
             Background                                                                   5
             Treasury’s Demand-Based Approach to Forecasting Revenues
               Somewhat Differs from FAA’s Previous Approach                            13
             Overforecasting of Revenues Due to Aviation Shocks and Other
               Factors Has Contributed to a Significant Decline in the Trust
               Fund’s Uncommitted Balance                                               17
             Options Exist to Reduce, but Not Eliminate, the Risk of
               Overcommitting Trust-Fund Resources                                      25
             The Extent to Which Trust-Fund Revenues Might Support Future
               FAA Expenditures Will Depend on Differing Assumptions and
               Other Factors                                                            31
             Concluding Observations                                                    41
             Agency Comments                                                            42

Appendix I   GAO Contact and Staff Acknowledgments                                      44



Tables
             Table 1: Trust-Fund Excise Tax Lines, Revenue Sources, and
                      Current Rates                                                       5
             Table 2: Options for Determining Budget Resources to Be Made
                      Available for Appropriation from the Trust Fund                   28
             Table 3: Estimated End-of-year Trust-Fund Uncommitted Balance
                      under Different Options Assuming an Uncommitted
                      Balance of $770 Million at the Beginning of Fiscal Year
                      2000                                                              29
             Table 4: Proposed and Actual Appropriations for FAA for Fiscal
                      Year 2012                                                         38


Figures
             Figure 1: FAA Appropriations by Account for Fiscal Year 2010                 7
             Figure 2: Timeline of the Budget Process for FAA for Fiscal Year
                      2010                                                                9
             Figure 3: End-of-Year Trust-Fund Uncommitted Balance, Fiscal
                      Years 2000 through 2010                                           11
             Figure 4: Effects of Congressional Decision Making and Forecast
                      Accuracy on the Trust Fund, Fiscal Years 2000 through
                      2010                                                              19



             Page i                                 GAO-12-222 Airport and Airway Trust Fund
Figure 5: Total Trust-Fund Tax Receipts and Forecast Accuracy by
         Tax Line, Fiscal Years 2000 through 2010                                         21
Figure 6: Estimated Trust-Fund Appropriations under Different
         Options If Started in Fiscal Year 2000                                           30
Figure 7: Actual and Forecast Trust-Fund Revenues and FAA
         Expenditures, Fiscal Years 2000 through 2021                                     32
Figure 8: Actual and Forecast Trust-Fund Revenues and
         Uncommitted Balance and FAA Expenditures by Trust-
         Fund and General-Revenue Appropriations, Fiscal Years
         2000 through 2021                                                                34
Figure 9: Comparison of FAA’s Trust-Fund and General-Revenue
         Appropriations under OMB’s Approach and under the
         AIR-21 Method, Fiscal Years 2012 through 2021                                    36




Abbreviations

AIP               Airport Improvement Program
AIR-21            Wendell H. Ford Aviation Investment and Reform Act for
                  the 21st Century
ADS-B             Automatic Dependent Surveillance System Broadcast
CBO               Congressional Budget Office
DOT               Department of Transportation
ERAM              En Route Automation Modernization
FAA               Federal Aviation Administration
IRS               Internal Revenue Service
NextGen           Next Generation Air Transportation System
OMB               Office of Management and Budget
SWIM              System Wide Information Management
Treasury          Department of the Treasury
trust fund        Airport and Airway Trust Fund




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Page ii                                          GAO-12-222 Airport and Airway Trust Fund
United States Government Accountability Office
Washington, DC 20548




                                   January 23, 2012

                                   The Honorable John D. Rockefeller IV
                                   Chairman
                                   The Honorable Kay Bailey Hutchison
                                   Ranking Member
                                   Committee on Commerce, Science, and Transportation
                                   United States Senate

                                   Established in 1970, the Airport and Airway Trust Fund (trust fund)
                                   finances nearly all of the Federal Aviation Administration’s (FAA) capital
                                   investments in the airport and airway system, such as construction and
                                   safety improvements at airports and technological upgrades to the air
                                   traffic control system. 1 The trust fund also provides a substantial portion—
                                   between 43 and 84 percent over the last 10 years—of FAA’s operations
                                   spending, which includes the maintenance and operation of the air traffic
                                   control system and safety inspections. The trust fund is principally funded
                                   by a variety of excise taxes paid by users of the national airspace system,
                                   and its financial health is important to ensure sustainable funding for a
                                   safe and efficient aviation system without increasing demands on general
                                   revenues. Current law requires that all of the forecast trust-fund
                                   revenues—that is, the projected amount contained in the President’s
                                   annual budget request—be made available each fiscal year for
                                   appropriation. 2 However, in recent years, forecasting errors—particularly,
                                   several years of overestimated revenues—have contributed to a




                                   1
                                    Airport and Airway Revenue Act of 1970, Pub. L. No. 91-258, § 208, 84 Stat. 236, 250
                                   (1970).
                                   2
                                    Starting with the Wendell H. Ford Aviation Investment and Reform Act of the 21st
                                   Century (AIR-21) in 2000, Pub. L. No. 106-181 § 106, 114 Stat. 61, 72 (2000), and
                                   continuing with Vision 100—Century of Aviation Reauthorization Act (Vision 100), Pub. L.
                                   No. 108-176, § 104, 117 Stat. 2490, 2496 (2003), codified at 49 U.S.C. § 48114,
                                   Congress has based FAA’s fiscal year appropriation from the trust fund on the forecast
                                   level of trust fund revenues, including interest on trust fund balances, as set forth in the
                                   President’s baseline budget projections for the budget year. Under current law, total
                                   budget resources made available from the trust fund are to be appropriated to equal to the
                                   sum of annual obligation limitations and other budget authority, which in turn is equal to
                                   the forecast level of receipts plus interest credited to the trust fund for that fiscal year. 49
                                   U.S.C. § 48114(a)(1), (b)(1).




                                   Page 1                                             GAO-12-222 Airport and Airway Trust Fund
drawdown of the trust fund’s uncommitted balance. 3 As the uncommitted
balance approaches zero, the trust fund could become overcommited—
that is, revenues could be insufficient to cover all of the funding that
Congress has committed. This risk of overcommitting funds could create
budgetary challenges for FAA and require larger general-revenue
appropriations to fund FAA’s operations spending. For example, as we
have previously reported to this committee, Congress increased the
general-revenue appropriation for FAA’s operations by nearly $1 billion in
fiscal years 2009 and 2010. If these actions had not occurred, the trust
fund would have been overcommitted. 4

In this context, you asked us to examine the trust-fund revenue-
forecasting process. To address your request, we examined (1) how trust-
fund revenues are forecast for the budget year; (2) the accuracy of past
trust-fund revenue forecasts and the factors affecting forecast accuracy;
(3) how different options for estimating appropriations from the trust fund
might reduce the risk of overcommitting the trust fund; and (4) the extent
to which trust-fund revenues might cover planned FAA expenditures in
fiscal years 2012 through 2021.

To determine how trust-fund revenues are forecast for the President’s
budget, we interviewed FAA and Department of the Treasury (Treasury)
officials on the forecasting methods used and the forecasts developed for
fiscal years 2000 through 2011. To determine the accuracy of trust-fund
revenue forecasts, we obtained FAA’s forecasts of excise tax receipts
and interest revenue for fiscal years 2000 through 2010, which we
compared to the sum of trust-fund tax receipts, as certified by the Internal


3
  FAA considers the committed balance of the trust fund to include amounts that have
been appropriated from the trust fund (directly or to liquidate prior contract authority) and
authorized contract authority (contract authority up to the annual obligation limitation),
whether or not an actual obligation has been incurred. The uncommitted balance is the
revenue that would remain in the trust fund after subtracting the committed balance. The
financial condition of the trust fund generally can be evaluated by looking at the
uncommitted balance and the cash balance. The uncommitted balance is used to evaluate
FAA’s ability to enter into future commitments as provided in authorization and
appropriations acts. The cash balance reflects all cash on hand in the trust fund—both
that which may be required to satisfy outstanding obligations and funds for which no
commitments may have been made. This balance is used to evaluate the trust fund’s
ability to pay outstanding bills as they become due.
4
 GAO, Commercial Aviation: Airline Industry Contraction Due to Volatile Fuel Prices and
Falling Demand Affects Airports, Passengers, and Federal Government Revenues,
GAO-09-393 (Washington, D.C.: Apr. 21, 2009).




Page 2                                            GAO-12-222 Airport and Airway Trust Fund
Revenue Service (IRS), and interest revenue data from FAA. 5 We
reviewed academic literature and interviewed aviation-industry and
forecasting experts to identify factors affecting forecast accuracy. 6 To
evaluate different options for estimating appropriations from the trust
fund, we identified four options based on our previous trust-fund work 7
and analyzed these options using actual and forecast trust-fund tax-
receipt data for fiscal years 2000 through 2010. One of these options
includes a provision in the current House FAA reauthorization bill that
would limit the budget resources made available for appropriation from
the trust fund to 90 percent, rather than 100 percent, of forecast revenues
and apply any differences between actual trust-fund revenues and
appropriations from the trust fund to a subsequent year. 8 The other
options include using a prior year’s actual trust-fund revenue amount as
the basis for the appropriation and setting a target level for the trust fund’s
uncommitted balance—such as $2 billion or $3 billion. Through analyzing
these options, we determined how they might have affected the total
amount of budget resources made available from the trust fund for
appropriation and the trust fund’s uncommitted balance, if the options had
been followed in fiscal years 2000 through 2010. For this report, our
analysis assumes that obligations against the trust fund will equal the
amounts authorized and that FAA’s outlays in a given year to liquidate
obligations equal the amounts appropriated for that purpose. 9




5
 For fiscal year 2000, IRS was able to provide documentation for only one quarter of
refunds and credits. However, because refunds and credits pertain only to fuel and
gasoline, we inferred that the difference between FAA’s aggregate tax receipts and the
aggregate tax receipt data we compiled from IRS documentation was wholly attributable to
fuel and gasoline.
6
 Through a review of the literature on trust fund revenue forecasting, we identified
individuals with expertise on federal government revenue forecasting, aviation-activity
forecasting, or the trust fund, or a combination of these subjects. We selected a group of
these individuals to provide perspectives on our engagement objectives. While others with
expertise in the area may have provided different opinions, our process resulted in a
group of experts—three from academia, three from the private sector, and one from the
airport industry—that we believe provided a balanced set of perspectives.
7
GAO-09-393.
8
 FAA Reauthorization and Reform Act of 2011, H.R. 658, 112th Cong. (as passed by the
House of Representatives on Apr. 1, 2011).
9
For simplicity, this analysis does not consider accrued interest.




Page 3                                           GAO-12-222 Airport and Airway Trust Fund
To determine the extent to which trust-fund revenues might cover FAA
expenditures in fiscal years 2012 through 2021, we examined Treasury’s
trust-fund revenue forecasts and the Office of Management and Budget’s
(OMB) budget authority forecasts for FAA for fiscal years 2012 through
2021 from the President’s fiscal year 2012 budget request and mid-
session review (the latest available forecast). We reviewed OMB budget
guidance and interviewed OMB, Treasury, and FAA officials to
understand the basis of these forecasts and potential factors affecting
forecast accuracy. We also reviewed FAA’s fiscal year 2012
appropriation 10 and the House and Senate FAA reauthorization bills 11 and
drew from our previous work on FAA’s program and acquisition
management to identify potential factors affecting forecast accuracy. 12 We
assessed the reliability of the FAA, IRS, OMB, and Treasury data by (1)
performing electronic testing of required data elements, (2) reviewing
existing information about the data and the systems that produced them,
and (3) interviewing agency officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the purposes of this
report. We conducted this performance audit from April 2011 to January
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




10
  Consolidated and Further Continuing Appropriations Act, 2012, Pub. L. No. 112-55, div.
C, 125 Stat. 552, 644-649 (2011).
11
  H.R. 658; FAA Air Transportation Modernization and Safety Improvement Act, S. 223,
112th Cong. (as passed by the Senate on Feb. 17, 2011 and incorporated by the Senate
in H.R. 658).
12
  GAO, Next Generation Air Transportation System: FAA Has Made Some Progress in
Implementation, but Delays Threaten to Impact Costs and Benefits, GAO-12-141T
(Washington, D.C.: Oct. 5, 2011) and NextGen Air Transportation System: FAA’s Metrics
Can Be Used to Report on Status of Individual Programs, but Not of Overall NextGen
Implementation or Outcomes, GAO-10-629 (Washington, D.C.: July 27, 2010).




Page 4                                          GAO-12-222 Airport and Airway Trust Fund
Background
Source of Trust-Fund                           In 1970, almost a decade before airline deregulation, Congress created
Revenues                                       the trust fund to provide a dedicated source of funding for the aviation
                                               system. The trust fund is funded principally by a variety of excise taxes
                                               paid by users of the national airspace system, as well as by interest
                                               revenue. 13 The excise taxes are imposed on airline ticket purchases and
                                               aviation fuel, as well as the shipment of cargo. Disbursement of revenues
                                               deposited in the trust fund is subject to congressional appropriations.
                                               These taxes are classified in six categories or “tax lines,” as shown in
                                               table 1.

Table 1: Trust-Fund Excise Tax Lines, Revenue Sources, and Current Rates

Tax line                              Revenue source                                        Rate effective as of January 1, 2011
Transportation of Persons by Air      Domestic passenger ticket tax                         7.5 percent
                                                                   a
                                      Domestic flight segment tax (excluding                $3.70 per passenger per segment; indexed to the
                                      flights to or from rural airports)                    Consumer Price Index
                                      Tax on mileage awards (frequent flyer awards 7.5 percent of value of miles
                                      tax)
Transportation of Property by Air     Tax on domestic cargo or mail                         6.25 percent of the price paid for transportation of
                                                                                            domestic cargo or mail
Use of International Air Facilities   Tax on international arrivals and departures          $16.30 per passenger; indexed to the Consumer
                                                                                            Price Index
                                      Tax on flights between the continental United         $8.20 per passenger; indexed to the Consumer
                                      States and Alaska or Hawaii (or between               Price Index
                                      Alaska and Hawaii)
Aviation Fuel Commercial Use          Domestic commercial fuel tax                          $0.043 per gallon
                               b
Aviation Fuel Other than Gas          Domestic general aviation jet fuel tax                $0.218 per gallon
Aviation Gasoline                     Domestic general aviation gasoline tax                $0.193 per gallon
                                               Source: FAA and IRS data.


                                               Note: In addition to the excise taxes deposited into it, the trust fund accrues interest.
                                               a
                                                A flight segment consists of one takeoff and one landing.
                                               b
                                                Pub. L. No. 109-59 § 11161, 119 Stat. 1144, 1969 (2005) requires that taxes collected on kerosene
                                               used in aviation—previously deposited directly into the trust fund—be initially deposited in the
                                               Highway Trust Fund and then transferred by accounting adjustments to the trust fund.




                                               13
                                                   The trust fund accrues interest on its cash balance.




                                               Page 5                                                    GAO-12-222 Airport and Airway Trust Fund
Use of Trust-Fund and      The trust fund finances capital improvements of the airport and airway
General Revenues for FAA   system, and to the extent funds are made available, it funds the
                           government’s operation and maintenance of that system.14 Figure 1 shows
                           how trust-fund revenues were appropriated to FAA’s operations and capital
                           accounts for fiscal year 2010, which generally represents the breakout of
                           trust-fund revenue use for recent years.15 FAA’s three capital accounts
                           include (1) the Facilities and Equipment account, which funds technological
                           improvements to the air traffic control system, including the modernization of
                           the air traffic control system called the Next Generation Air Transportation
                           System (NextGen); (2) the Research, Engineering, and Development
                           account, which funds research on issues related to aviation safety, mobility,
                           and NextGen technologies; and (3) the Airport Improvement Program (AIP),
                           which provides grants for airport planning and development. In addition, the
                           trust fund has provided all or some portion of the funding for FAA’s
                           operations account, which funds the operation of the air traffic control system
                           and safety inspections, among other activities. 16 General revenues from the
                           U.S. Treasury have been used to supplement trust-fund revenues for
                           operations and have funded about 16 to 57 percent of FAA’s operation
                           appropriation—or 8 to 33 percent of FAA’s total appropriation—during fiscal
                           years 2001 through 2010.



                           14
                             Since 1976, the trust fund has been used to fund both capital and operations expenses.
                           Before that, however, the fund was restricted to capital funding. Specifically, in 1971,
                           Congress amended the original 1970 law establishing the trust fund to eliminate the
                           provision permitting the use of the trust fund to finance FAA operations. Pub. L. No. 92-
                           174, 85 Stat. 491, 492 (1971). The trust fund continued to serve as a capital funding
                           mechanism until the Airport and Airway Development Act Amendments of 1976 (Pub. L.
                           No. 94-353, § 6, 90 Stat. 871 (1976)) established that trust-fund revenues could be used
                           for some maintenance and operations costs. As the Congressional Research Service
                           (CRS) has reported, there has been general acceptance that there is a public interest
                           component to the operation of the national aviation system, which is appropriated from the
                           Treasury’s general revenues. This compensates for what the military, government, and
                           nonuser beneficiaries (also known as societal users) might have contributed if they had
                           actually paid into the trust fund. See GAO, Whether the Airport and Airway Trust Fund
                           was created solely to finance aviation infrastructure, B-281779 (Feb. 12, 1999) and CRS,
                           Aviation Finance: Federal Aviation Administration (FAA) Reauthorization and Related
                           Issues (Washington, D.C.: Apr. 21, 2008).
                           15
                             The trust fund also funds the Essential Air Service (EAS) program, which was
                           established when the airline industry was deregulated in 1978 to subsidize air service to
                           eligible communities that would otherwise not have scheduled air service. See 49 U.S.C.
                           §§ 41731–48. In fiscal year 2010, the appropriation for EAS was $150 million, with $50
                           million funded from overflight fees.
                           16
                             General revenues are held in general fund accounts, which are U.S. Treasury accounts
                           holding all federal money not allocated by law to any other fund account.




                           Page 6                                           GAO-12-222 Airport and Airway Trust Fund
Figure 1: FAA Appropriations by Account for Fiscal Year 2010




Annual Budget Process                   From the trust fund’s creation in 1970 through the late 1990s,
and Appropriations from                 appropriations from the trust fund were consistently lower than revenues
the Trust Fund                          deposited into the trust fund, resulting in a growing uncommitted balance.
                                        To ensure that revenue collected from persons and businesses paying
                                        taxes into the trust fund are used for aviation purposes, AIR-21 and
                                        Vision 100, which reauthorized FAA investments in the airport and airway
                                        system, added certain provisions. These provisions require that the total
                                        budget resources made available each fiscal year from the trust fund—




                                        Page 7                                  GAO-12-222 Airport and Airway Trust Fund
that is, the appropriation from the trust fund 17—equal the President’s
baseline budget projection, or forecast, for excise taxes and interest
credited to the trust fund for the coming fiscal year (budget year). 18 Since
2000, appropriations from the trust fund have generally followed the
forecast amounts, but they can, and have, varied—a point we discuss in
more detail later in this report.

The budget-year trust-fund revenue forecast, and accordingly FAA’s
appropriation, is based on information available in the first quarter of the
preceding fiscal year and more than 2 years before the final accounting
for the forecast year is certified by IRS. Figure 2 shows the timeline for
the fiscal year 2010 budget process, which generally reflects a typical
budget cycle for recent years. 19 Because the President’s budget is
released about 8 months before the beginning of the fiscal year, the
revenue forecast for the fiscal year 2010 budget submission to Congress
was developed in the first quarter of fiscal year 2009—October through
December of calendar year 2008—or about a year before the start of the


17
   Appropriations from the trust fund includes contract authority up to the annual obligation
limitation.
18
   The legislative objective in FAA’s authorizing legislation, which seeks to mandate that
annual spending from the trust fund be equal to annual trust-fund receipts, is enforced by
two spending guarantees. One makes it out-of-order in the House or Senate to consider
legislation that fails to use all forecast trust-fund revenues each year. The second makes it
out-of-order to consider any bill that provides funding for research, engineering, and
development or operations and maintenance if it fails to fully fund the FAA’s two capital
programs, AIP and facilities and equipment, at their authorized levels. The authorized
level equals total budget resources, which FAA’s authorizing legislation defines “as the
total amount made available from the Airport and Airway Trust Fund for the sum of
obligation limitations and budget authority made available for a fiscal year for the …
budget accounts that are subject to the obligation limitation on contract authority provided
[in title 49, U.S.C.] and for which appropriations are provided pursuant to [title 49]
authorizations” for airport grants-in-aid, facilities and equipment, research and
development, and trust fund share of operations. 49 U.S.C. § 48114(b)(1). The
guarantees are only enforceable if a point of order is raised and if it has not been waived.
While these procedural guarantees have not been employed, appropriations from the trust
fund have generally reflected the President’s baseline projection for trust fund revenues
(tax receipts plus interest). Also, according to a 2008 CRS report, the history of these
guarantees indicates that broader budget policy goals or spending priorities of the
appropriators can trump these guarantees. For more information, see CRS, Aviation
Spending Guarantee Mechanisms (Washington, D.C.: Mar. 25, 2008) and Aviation
Spending Guarantee Mechanisms (Washington, D.C.: Oct. 6, 2006).
19
  These dates reflect the actual dates for the fiscal year 2010 budget process. Specific
dates, such as those for the budget submission and passage of the fiscal year
appropriation, can vary from year to year.




Page 8                                            GAO-12-222 Airport and Airway Trust Fund
                                         fiscal year. Furthermore, the most recent available data on actual trust-
                                         fund revenues (IRS-certified tax-receipt data) for preparing this forecast
                                         were from the first three quarters of fiscal year 2008, or through June 30,
                                         2008. 20 Likewise, the accuracy of the fiscal year 2010 revenue forecasts
                                         could not be assessed against IRS-certified data until February 2011,
                                         which was 5 months after the end of the fiscal year. In addition to the
                                         budget-year forecast, the President’s budget includes revenue forecasts
                                         for the 9 years beyond the budget year (referred to as out-year forecasts),
                                         which are then updated during roughly the middle of the calendar year as
                                         part of the mid-session review.

Figure 2: Timeline of the Budget Process for FAA for Fiscal Year 2010




                                         a
                                          Congress enacted another continuing resolution providing appropriations for FAA on October 30,
                                         2009.




                                         20
                                            IRS collects taxes and currently takes over 4 months after the end of each quarter to
                                         certify tax receipts for that quarter. Before fiscal year 2007, IRS took about 6 months after
                                         the end of each quarter to certify tax receipts for that quarter. In addition, IRS certifies tax
                                         receipts collected each quarter but does not track whether the tax receipts collected
                                         correspond to tax liability incurred during that quarter. Thus, for any given quarter, the
                                         taxes collected may or may not correspond to tax liability incurred during that quarter.
                                         However, IRS officials stated that the vast majority of taxes reported for any given quarter
                                         likely reflect taxes paid on liability incurred during that quarter. Though this is an imperfect
                                         measure of actual receipts, FAA used IRS-certified tax receipts in a review of its forecast
                                         accuracy in 2006 because although these receipts are estimates, these data are expected
                                         to be a more accurate reflection of tax receipts generated by aviation activity in a given
                                         fiscal year.




                                         Page 9                                               GAO-12-222 Airport and Airway Trust Fund
                           Through fiscal year 2010, FAA generated the trust-fund revenue forecast
                           for the President’s annual budget request. Starting with fiscal year 2011,
                           the responsibility for forecasting trust-fund revenues shifted from FAA to
                           Treasury. According to Treasury officials, Treasury assumed this
                           responsibility so that it would have responsibility for all federal excise-tax
                           forecasts, including the revenues for other trust funds such as the
                           Highway Trust Fund.

                           In addition to budget-year and out-year revenue forecasts, the President’s
                           annual budget request includes forecasts of FAA’s budget authority for the
                           same period. 21 Budget authority forecasts represent the estimated amount
                           that may be requested for FAA to enter into obligations that will result in
                           outlays of federal funds; in this report, we refer to FAA’s forecast budget
                           authority as its forecast expenditures. According to OMB budget guidance,
                           OMB forecasts the out-year budget-authority levels for agencies based on
                           proposed changes in legislation along with the administration’s overall
                           policy goals and forecasts of economic growth. As this guidance indicates,
                           these forecasts are developed to allow an analysis of the long-term
                           consequences of proposed program or tax-policy initiatives. FAA works
                           with OMB to develop the proposed expenditures for a given budget year
                           and then works to align its programs and plans with OMB’s out-year
                           budget-authority targets. 22 After the President submits his budget to
                           Congress, Congress begins deliberations on the appropriate level of
                           federal revenues and expenditures for a given fiscal year.


Status of the Trust Fund   Since the AIR-21 spending provisions were introduced in 2000, the trust
                           fund’s uncommitted balance—that is, the revenues in the trust fund that
                           remain after funds have been appropriated from the trust fund and a




                           21
                             Budget authority is the authority provided by federal law to incur financial obligations. It
                           includes both appropriations and contract authority.
                           22
                             FAA’s planned capital improvements, which are funded through the Facilities and
                           Equipment account, are outlined in the agency’s Capital Improvement Plan while its
                           planned research and development projects are detailed in FAA’s National Aviation
                           Research Plan. FAA updates both of these plans annually.




                           Page 10                                            GAO-12-222 Airport and Airway Trust Fund
limitation on obligations established 23—has generally declined because it
has been used to offset shortfalls in forecast trust-fund revenues. As we
previously reported, the trust fund’s uncommitted balance, which
exceeded $7 billion at the end of fiscal year 2001, declined to $299 million
at the end of fiscal year 2009—the lowest balance over the past
decade—before slightly rebounding in fiscal year 2010 (fig. 3). 24

Figure 3: End-of-Year Trust-Fund Uncommitted Balance, Fiscal Years 2000 through
2010




23
  Limitations of obligations limit the exercise of contract authority. Contract authority is the
authority to incur an obligation in advance or in excess of an appropriation. A subsequent
appropriation is needed to liquidate (pay off) the obligations incurred using contract
authority. Budget authority is the authority provided by federal law to incur financial
obligations. It includes both appropriations and contract authority. FAA considers the
committed balance to include amounts that have been appropriated from the trust fund
and authorized contract authority, whether or not obligated.
24
  GAO, Airport and Airway Trust Fund: Declining Balance Raises Concerns over Ability to
Meet Future Demands, GAO-11-358T (Washington, D.C.: Feb. 3, 2011). The trust fund’s
uncommitted balance was recently estimated at about $1.4 billion at the end of fiscal year
2011.




Page 11                                             GAO-12-222 Airport and Airway Trust Fund
                        The largest decline in the uncommitted balance in the past decade
                        occurred in 2002 following the sudden drop-off in aviation activity after the
                        terrorist attacks of September 11, 2001. This decline occurred because
                        revenue forecasts, which had been developed many months before the
                        September 11 attacks and the subsequent decline in air travel, were
                        considered in determining the level of appropriations from the trust fund.
                        In addition, declines in passenger traffic, aircraft operations, and fuel
                        consumption in 2009 resulted in actual revenues to the trust fund that fell
                        well below forecast levels and an uncommitted trust-fund balance that
                        approached zero. As previously reported, if the trust fund’s uncommitted
                        balance approaches zero, FAA officials noted that they might be required
                        to delay obligations for capital programs if they do not have adequate
                        revenues in the trust fund to cover them—unless additional general
                        revenues are first authorized and appropriated. 25


Planned NextGen Costs   As we have previously reported, NextGen will transform the way in which
                        the air transportation system operates today, in part by

                        •     using satellite-based surveillance as opposed to ground-based radar,

                        •     using performance-based navigation instead of cumbersome step-by-
                              step procedures,

                        •     replacing routine voice communications with data transmissions, and

                        •     organizing and merging the disjointed data that pilots, controllers,
                              airports, airlines, and others currently rely on to operate the system. 26

                        Because of the potential benefits of modernizing the air transportation
                        system and the substantial costs of modernization, NextGen implementation
                        has been a top congressional priority. FAA has been planning and
                        developing NextGen since 2003 and is now implementing near-term
                        (through 2012) and midterm (through 2018) capabilities. According to FAA,
                        approximately $2.9 billion was appropriated for NextGen for fiscal years
                        2004 through 2011—most of which was funded from the trust fund. FAA
                        recently estimated the cost for NextGen for the agency to be between $15



                        25
                            GAO-09-393.
                        26
                            GAO-12-141T.




                        Page 12                                     GAO-12-222 Airport and Airway Trust Fund
                         billion and $22 billion, and another $5 billion to $7 billion for equipping aircraft
                         with NextGen technology, for fiscal years 2012 through 2025—much of
                         which will be funded from the trust fund. 27 In FAA’s latest Capital
                         Improvement Plan—which outlines FAA’s planned facilities and equipment
                         expenditures for the next 5 years—about one-third, or $4.8 billion of the
                         $14.3 billion, in planned capital improvements for fiscal years 2012 through
                         2016 is for NextGen or NextGen-related projects. In addition, given the
                         incremental rollout of NextGen technology, FAA has stated that significant
                         levels of investment—including those that rely on trust-fund revenues—will
                         continue to be allocated to sustaining current infrastructure to prevent failures
                         and maintain the reliability and efficiency of current operations.


Treasury’s Demand-
Based Approach to
Forecasting Revenues
Somewhat Differs
from FAA’s Previous
Approach

Revenue Forecasts Now    Beginning in fiscal year 2011, when the administration transferred the
Used for Trust-Fund      responsibility for developing trust-fund revenue forecasts from FAA to
Budgeting Are Based on   Treasury, Treasury has been forecasting trust-fund revenues (tax
                         receipts) for both the budget year and out-years using a demand-based
Treasury’s Model         econometric model. 28 Specifically, according to Treasury officials,
Estimates of Aviation
Demand


                         27
                           Statement of the Honorable Michael P. Huerta, Deputy Administrator, Federal Aviation
                         Administration, before the Committee on Transportation and Infrastructure, Subcommittee
                         on Aviation, on the Benefits of the Next Generation Air Transportation System (Oct. 5,
                         2011).
                         28
                           Econometric techniques are applied to estimate, based on historical values, the
                         relationships used to project future values of a key variable. Treasury’s approach to
                         forecasting aviation trust-fund revenues is largely similar to its approach to forecasting
                         revenues for the Highway Trust Fund. FAA forecasts interest revenues earned on the
                         trust-fund balance based on the administration’s economic assumptions for the
                         President’s budget.




                         Page 13                                            GAO-12-222 Airport and Airway Trust Fund
                          Treasury begins its forecast by estimating activity measures that reflect
                          aviation demand, such as domestic enplanements, international
                          enplanements, revenue-ton miles, 29 and purchased gallons of fuel and
                          gasoline. 30 For example, in estimating aviation demand as measured by
                          domestic enplanements, Treasury assumes these enplanements grow
                          with the economy and population and are a function of ticket prices and
                          certain other factors, which is consistent with economic theory. Similarly,
                          according to Treasury officials, Treasury forecasts all other aviation
                          activity measures for future years based on elements of the economy that
                          are likely to affect growth in those activities. In addition, Treasury
                          estimates average ticket prices. Treasury uses these activity and pricing
                          estimates, along with applicable tax rates, to forecast revenues for seven
                          of the nine trust-fund-related tax sources listed in table 1 on page 5.


FAA’s Previous Revenue    Prior to the fiscal year 2011 budget, FAA was responsible for developing
Forecasts Were Based on   the trust-fund revenue forecasts used in the budget process. According to
Estimates of Aviation     FAA officials, FAA developed its budget-year revenue forecast using
                          airlines’ schedules for the upcoming several months to estimate airline
Capacity                  capacity—most notably, available seat miles (the number of available
                          seats and scheduled distance). These capacity measures, along with
                          historical and economic data and professional judgment, enabled FAA to
                          forecast several activity measures, such as revenue passenger miles 31
                          and enplanements for both mainline and commuter carriers, 32 as well as
                          cargo and mail revenue-ton miles. For example, FAA used its estimate of
                          available seat miles together with its estimate of average load factors (the
                          percentage of seats that are filled) to forecast revenue passenger miles.
                          Other capacity measures, such as available seat miles on international



                          29
                           A revenue-ton mile is 1 ton of revenue freight transported 1 mile.
                          30
                            Treasury forecasts these aviation activities using a demand-driven model that assumes
                          growth in demand in future years will be unimpeded by any limitations on aviation
                          infrastructure capacity.
                          31
                            Revenue passenger miles are the number of miles revenue-paying passengers are
                          transported.
                          32
                            FAA defines mainline carriers as the commercial airlines that use jets over 90 seats and
                          regional carriers as the commercial carriers that use smaller piston, turboprop, and
                          regional jet aircraft with up to and including 90 seats. According to FAA officials, FAA
                          generated separate yield forecasts for mainline and regional carriers because regional
                          carriers, which generally travel shorter routes, have higher yields.




                          Page 14                                         GAO-12-222 Airport and Airway Trust Fund
flights33 and the size and usage patterns of the general aviation fleet,
enabled FAA to develop other aviation activity forecasts, such as
international enplanements and gallons of purchased aviation fuels,
respectively. In addition, FAA forecast pricing factors—such as mainline
and commuter passenger yields34 as well as cargo yields—based largely
on recent fares, cargo transport prices, trends, and professional
judgment. In forecasting activity measures for the out-years (the 9 years
beyond the budget year)—which are not used to determine the budget
year’s appropriation—FAA used a demand-based econometric approach
similar to Treasury’s current approach, both of which assume no limits on
capacity that would prevent demand from being met.35 FAA officials told
us they used a capacity-based approach for the budget-year forecast
because they viewed the airlines’ recent and near-term planned capacity
as a more accurate basis for projecting aviation activity in the near term
than the demand-based econometric model they used for out-year
forecasts.36

FAA used these activity and pricing forecasts to calculate its revenue
forecasts for all nine trust-fund-related individual tax sources listed in
table 1. One notable difference from Treasury’s current approach is that
FAA separately forecast enplanements involving an airport in Alaska or
Hawaii, which are taxed at a different rate from other enplanements.



33
  As it does for domestic enplanements, FAA forecasts international enplanements by
using carrier schedule information to estimate the level of committed capacity for flights
between the United States and other countries. FAA performs this analysis by region (e.g.,
Pacific, Atlantic, and Latin America), as well as by individual country for 6 or 7 countries in
each region that have the most U.S. air traffic.
34
  Yield is a measure of revenue per revenue passenger mile flown.
35
  For years further into the future, the use of an unconstrained demand forecast may
become increasingly unrealistic. Many airports in the United States are facing or are
expected to face significant capacity issues by 2015, so as demand grows, airport
capacity may become a more limiting factor that would hold demand to a level less than
the unconstrained forecast. However, if this were to occur, the effect on aviation tax
revenue is difficult to predict. While this would likely mean that fewer passengers would be
handled and thus fewer tickets on which taxes are levied, it could also mean that ticket
prices would grow faster than assumed under an unconstrained demand forecast, so the
passenger ticket tax revenues could rise.
36
  FAA continues to produce aviation-activity forecasts for its annual aerospace forecast.
Treasury officials responsible for forecasting trust-fund revenues told us that they do not
use FAA’s aviation-activity data because they do not have access to FAA’s detailed and
up-to-date activity data on a timely basis for developing their revenue forecasts.




Page 15                                            GAO-12-222 Airport and Airway Trust Fund
                            Additionally, because tickets sold through frequent-flyer programs are not
                            assessed passenger ticket taxes, FAA used estimates of the sales of
                            frequent-flyer mileage awards to augment its forecast for the domestic
                            passenger ticket tax for these sales and reduce estimates of all segment
                            taxes.37


It Is Too Soon to Compare   After just 1 year and without certified receipts for the fourth quarter of
the Accuracy of FAA’s and   2011, it is too soon to tell whether Treasury’s demand-based econometric
Treasury’s Budget Year      approach will provide more accurate revenue forecasts for the budget
                            year than FAA’s more detailed, capacity-based approach.38 According to
Forecasting Approaches
                            forecasting experts that we interviewed, neither approach is necessarily
                            better given the inherent uncertainty associated with forecasting. Despite
                            these differences in Treasury’s and FAA’s approaches, several years of
                            Treasury forecasts and corresponding actual revenues would be needed
                            to meaningfully compare the results of the two agencies’ methodologies
                            and gauge the efficacy of their approaches. Furthermore, comparing
                            forecast methods, even with several years of data, can be inconclusive.
                            Forecasting is inherently uncertain, and, as one forecasting expert noted,
                            luck can be a factor in accurate forecasting. Specifically, if forecasts for
                            model components err, even slightly, in the same direction, the aggregate
                            error can be considerable. However, if forecasts for model components
                            err in opposite directions, even forecasts that are wildly inaccurate for
                            individual components can be accurate in the aggregate.




                            37
                              FAA began making these adjustments in fiscal year 2007 after a 2005 study of FAA’s
                            revenue forecasting model by GRA Inc., a private transportation-consulting firm, reported
                            that the adjustments would improve the accuracy of FAA’s revenue estimates.
                            38
                              Since 2006, the Congressional Budget Office (CBO) has independently forecasted trust
                            fund revenues. In 2009, CBO reported that its recent forecasts at that time had been very
                            similar to those produced by FAA, suggesting that the historical track record may have
                            been similar.




                            Page 16                                         GAO-12-222 Airport and Airway Trust Fund
Overforecasting of
Revenues Due to
Aviation Shocks and
Other Factors Has
Contributed to a
Significant Decline in
the Trust Fund’s
Uncommitted Balance

Overforecasting of           During the past 11 years, FAA overforecasted trust-fund revenues by a
Revenues for 9 of the Past   net total of $9.34 billion, with overforecasts in 9 of the 11 years. Because
11 Years Has Contributed     Congress considers forecast trust-fund revenues in its appropriation from
                             the trust fund, this overforecasting has contributed to the decline in the
to a Decline in the Trust    trust fund’s uncommitted balance. However, the effect of this inaccuracy
Fund’s Uncommitted           on the overall difference between appropriations and actual revenues—
Balance                      and ultimately, the trust fund’s uncommitted balance—was smaller than it
                             would otherwise have been because, for fiscal years 2000 through 2010,
                             Congress appropriated $2.4 billion less from the trust fund than the
                             forecast revenues (fig. 4). More specifically, Congress can choose to
                             appropriate more or less than the forecast trust-fund revenues—which
                             include forecasts of tax receipts and interest revenue and serve as the
                             basis for the authorized level of funding—and actual revenues may be
                             higher or lower than forecast. 39 For example, for fiscal year 2005,




                             39
                               Beginning with the enactment of AIR-21, the revenue forecast has served as the basis
                             for the authorized level of funding, and trust-fund appropriation levels have closely tracked
                             the authorized level of funding in most years. However, Congress may choose not to
                             appropriate the amount of funding it authorized.




                             Page 17                                           GAO-12-222 Airport and Airway Trust Fund
Congress appropriated $59 million less than the forecast revenues, and
the revenue forecast was $414 million higher than the actual revenues.
Together, these effects netted a $355 million decline in the trust fund’s
uncommitted balance. For fiscal years 2009 and 2010, the amount
Congress appropriated from the trust fund was substantially less than the
forecast revenues—$2.7 billion—which prevented the trust fund’s balance
from being overcommitted. To help offset declining revenues in 2009 and
2010, Congress increased FAA’s appropriations from general revenues in
these years. 40 The net outcome of these two effects varied during fiscal
years 2000 through 2010, but together, appropriations from the trust fund
were $6.9 billion greater than actual revenues over this period.




40
  The 2009 appropriation excludes the general revenues provided under the American
Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, Title XII, 123 Stat. 115
(2009).




Page 18                                       GAO-12-222 Airport and Airway Trust Fund
Figure 4: Effects of Congressional Decision Making and Forecast Accuracy on the Trust Fund, Fiscal Years 2000 through
2010




                                        Page 19                                     GAO-12-222 Airport and Airway Trust Fund
Note: These data include forecast and actual (IRS-certified) tax receipts and interest revenue.
Because FAA calculates the trust fund’s end-of-the-year uncommitted balance using income-
statement data, our calculation of the total effect on the trust fund does not precisely match the year-
over-year change in the trust-fund balance, as reported by FAA. We excluded the fuel and gasoline
data for fiscal year 2006 in our analysis because, according to FAA officials, the initial 2006 financial
statements for the trust fund did not accurately account for the provisions of Pub. L. No. 109-59
requiring that taxes collected on kerosene used in aviation be initially deposited in the Highway Trust
Fund and then transferred by accounting adjustments to the trust fund; these errors were addressed
in the fiscal year 2006 financial statements and during the fiscal year 2007 processing activities, but
the fiscal year 2006 certified numbers were not revised.


Inaccurate forecasts of taxes on the transportation of persons by air—the
tax line composed of the domestic passenger ticket tax, the domestic
segment tax, and the mileage award tax—was the major factor affecting
the aggregate forecast inaccuracy, as shown in figure 5. These taxes
account for 70 percent of trust-fund tax receipts and 73 percent of FAA’s
forecast error for fiscal years 2000 through 2010. Inaccuracy in
forecasting both gasoline and fuel taxes 41 and taxes on the transportation
of property by air accounted for a disproportionate amount of the
aggregate forecast inaccuracy. Taxes on gasoline and fuel accounted for
7 percent of total tax receipts for fiscal years 2000 through 2010, yet
forecasts for them accounted for 20 percent of the total forecast
inaccuracy. Similarly, taxes on the transportation of property by air
accounted for 5 percent of total tax receipts for the same period, but
forecasts for them accounted for 13 percent of the total forecast
inaccuracy. Furthermore, the effects of these overforecasts were offset
somewhat by underforecasts of taxes on the use of international air
facilities. For fiscal years 2000 through 2010, these taxes accounted for
18 percent of total trust-fund tax receipts, yet the forecasts for these taxes
were less than the actual revenues.




41
  For the purposes of our analysis, we combined all taxes on fuel and gasoline into one
category.




Page 20                                                  GAO-12-222 Airport and Airway Trust Fund
Figure 5: Total Trust-Fund Tax Receipts and Forecast Accuracy by Tax Line, Fiscal Years 2000 through 2010




                                        Note: The fuel/gasoline category includes the domestic commercial fuel tax, the general aviation jet
                                        fuel tax, and the general aviation gasoline tax as well as related refunds and credits. The percentage
                                        totals may not equal 100 percent because of rounding. We excluded the fuel and gasoline tax data for
                                        fiscal year 2006 in our analysis because, according to FAA officials, the initial 2006 financial
                                        statements for the trust fund did not accurately account for the provisions of Pub. L. No. 109-59
                                        requiring that taxes collected on kerosene used in aviation be initially deposited in the Highway Trust
                                        Fund and then transferred by accounting adjustments to the trust fund; these errors were addressed
                                        in the fiscal year 2006 financial statements and during the fiscal year 2007 processing activities, but
                                        the fiscal year 2006 certified numbers were not revised.



A Variety of Factors Affect             Several factors make forecasting trust-fund revenues a challenge
the Accuracy of Trust-                  including: (1) unexpected events that rapidly shift the demand for aviation
Fund Revenue Forecasts                  services, (2) the timing of the forecasts, and (3) the difficulty of
                                        recognizing when apparent changes in the industry are transitory or
                                        permanent. These factors can affect the accuracy of both activity and
                                        pricing forecasts used to generate the revenue forecasts.

                                        •    Unexpected events causing changes in aviation demand or airline
                                             capacity can considerably affect trust-fund revenues and the accuracy
                                             of trust-fund revenue forecasts. For example, geopolitical events,
                                             such as the terrorist attacks of September 11, 2001, which
                                             substantially reduced the demand for air travel and led to lower trust-
                                             fund revenues, could not have been foreseen. In fiscal year 2002,
                                             when the attacks had their greatest effect on aviation activity, revenue
                                             forecasts exceeded actual revenues by $2.7 billion, or 22 percent.
                                             Additionally, rapid changes in the economy can lead to forecast


                                        Page 21                                                GAO-12-222 Airport and Airway Trust Fund
    inaccuracy. In fiscal year 2009, when the effects of the recent
    recession were greatest, revenues were overforecast by nearly $2.2
    billion, or 17 percent. In response to high fuel prices and a weakening
    economy, the airline industry reduced its domestic capacity (the
    number of scheduled seats) in 2008, mostly by removing older, less-
    fuel-efficient aircraft from service. In fiscal year 2009, fuel and
    gasoline tax receipts were overforecast by 37 percent as the reduction
    in capacity led to a 13 percent decrease in fuel consumption from
    fiscal year 2008 to fiscal year 2009.

    According to an industry expert, the effects of certain exogenous
    events—events caused by factors outside the aviation industry—on
    demand for air travel are such that it is common for demand to drop
    much more quickly in response to a negative shock than it will build in
    response to overall good economic conditions. Thus, the likelihood
    that there will be years when revenues are considerably overforecast
    may be higher than the likelihood that there will be years when
    revenues are considerably underforecast. This pattern held for fiscal
    years 2000 through 2010. In fiscal years 2000 and 2007, revenues
    were underforecast by $399 million and $154 million respectively. In
    all other years during that decade, yearly revenues were overforecast
    by between $321 million and $2.7 billion. Similarly, other factors
    external to the industry and economy—such as health issues like an
    outbreak of a contagious virus—can cause rapid shifts in demand.

•   The timing of budget forecasts exacerbates the potential for
    inaccurate trust-fund revenue forecasts, particularly in the face of
    unexpected events. Developed over a year in advance, the forecasts
    often cannot account for the effects of unexpected events, such as the
    September 11 attacks or changes in economic conditions. For
    example, the revenue forecast for fiscal year 2002 was developed in
    the final months of calendar year 2000, almost a full year before
    September 11, 2001. Additionally, because of the timing of the budget
    process, the revenue forecasts incorporate early forecasts of changes
    in gross domestic product (GDP), which is a critical exogenous factor
    affecting airline revenues and thus forecasts. Studies have found that
    predictions of, for example, recessions, are not very accurate more
    than a year in advance, and so the sharp drops in demand that occur
    as a result of rapidly changing macroeconomic conditions are likely to




Page 22                                 GAO-12-222 Airport and Airway Trust Fund
     be missed in the relevant forecast. 42 For example, OMB’s fiscal year
     2009 forecast for real GDP growth from February 2008 was 3.0
     percent, but real GDP actually declined by 3.5 percent, according to
     the Bureau of Economic Analysis. 43

•    The difficulty of recognizing when apparent changes in the
     industry are transitory or permanent affects forecast accuracy
     because long-term structural changes require adjustments to forecast
     models. As we have previously reported, the airline industry has
     experienced significant structural changes over the last decade, but
     they were not usually apparent until well after they had occurred. 44
     Examples of apparent structural changes include the following:

     •    Short-distance markets (less than 250 miles between airports)
          have lost a large share of passenger traffic, likely because of the
          increased time required for aviation security measures
          implemented since September 11, 2001, has made driving a more
          viable option for short-distance routes. 45




42
  Grace Juhn and Prakash Loungani, “Further Cross-Country Evidence on the Accuracy
of the Private Sector’s Output Forecasts,” IMF Staff Papers, vol. 49, no. 1 (2002); Pew
Center on the States and the Nelson A. Rockefeller Institute of Government, States’
Revenue Estimating: Cracks in the Crystal Ball (Washington, D.C., and Albany, N.Y.:
March 2011).
43
  The types of challenges faced by aviation forecasters mirror those of other revenue
forecasters. For example, states need to estimate revenues a little more than a year
ahead of a budget year, and these estimates underlie planned spending. According to a
recent study on state revenue forecasting, during the recent recession most state
revenues were overforecast, with a median error in 2009 of about 10 percent over actual
revenues. This study examined the causes of forecasting problems and identified key
issues: (1) apparent changes in the linkage of certain state tax revenues to economic
cycles, (2) inaccurate forecasts of GDP before the recession began, and (3) the inability to
know when natural disasters, such as floods or tornados, will strike, potentially placing
unexpected demands on state revenues.
44
  GAO, Commercial Aviation: Consumers Could Benefit from Better Information about
Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees,
GAO-10-785 (Washington, D.C.: July 14, 2010) and Airline Deregulation: Reregulating the
Airline Industry Would Likely Reverse Consumer Benefits and Not Save Airline Pensions,
GAO-06-630 (Washington, D.C.: June 9, 2006).
45
  As reported in GAO-06-630, the number of short-distance flights (under 250 miles) fell
26 percent between 2000 and 2005, while the number of flights of over 1,000 miles
increased by 15 percent during that time.




Page 23                                          GAO-12-222 Airport and Airway Trust Fund
     •    Over the past 10 years the use of the Internet for ticket purchases
          has became ubiquitous and appears to have contributed to a
          reduction in fare dispersion and helped to suppress average fares.
          In particular, there appear to be fewer tickets that are high-priced
          tickets compared to average-priced tickets on a given route. 46

     •    Passenger load factors (the percentage of seats that are filled)
          have risen to levels previously thought not possible, according to
          industry experts.

     •    Increasingly, airlines are charging fees for a number of optional
          services, such as checked baggage, in-flight food and beverages,
          and ticket change or cancellation fees, for which separate fees did
          not previously exist. This change in pricing structure enables
          airlines to keep airfares lower while bringing in additional revenue
          through fees, which are not subject to excise taxes for the trust
          fund. 47
These various factors—exogenous shocks, the timing of forecasts, and
lags in recognizing structural changes to the airline industry—affect
forecast accuracy for key activity and pricing measures, such as
enplanements and ticket prices. In particular, experts told us that
estimating how these factors may affect ticket prices is particularly hard
because prices are closely tied to individual airline business decisions as
well as to aggregate demand. For example, one airline’s decision to
reduce fares may easily lead to a fare war, in which competing airlines
attempt to undersell each other. Forecasters are unable to predict when
these fare wars may occur and how they may affect on ticket prices.
Similarly, forecasters are unable to predict changes airlines make to their
business models, such as the addition of baggage checking and other


46
  GAO-06-630.
47
   As we previously reported, although fares have decreased, airlines have imposed fees
for a variety of passenger services, most notably for checked bags, for which separate
charges did not previously exist. Fees have also been imposed for early boarding, seat
selection, and meals, among other services. Under governing Treasury regulations and
IRS guidance, the 7.5 percent excise tax is not collected on amounts paid by passengers
for these optional airline services, and consequently, those revenues are not deposited
into the trust fund. If baggage fees alone had been subject to the 7.5 percent excise tax in
fiscal year 2010, the trust fund would have received approximately an additional $248
million in revenues. This potential amount of trust fund revenues from fees is expected to
grow in future years if airlines continue to shift toward more fee revenue relative to fare
revenue. See GAO-10-785.




Page 24                                           GAO-12-222 Airport and Airway Trust Fund
                         ancillary fees. FAA’s analysis of forecast accuracy for key activity
                         measures illustrates this difficulty in forecasting ticket prices. Specifically,
                         for fiscal years 2003 through 2009, near-term forecasts of average ticket
                         prices for mainline carriers were in error by an average of 3.4 percent,
                         compared with errors that averaged 1.6 percent for forecasts of revenue
                         passenger miles and 1.1 percent for enplanement forecasts. 48


                         Although the trust fund’s uncommitted balance was used to offset lower-
Options Exist to         than-forecast trust-fund revenues in the past, the current trust-fund
Reduce, but Not          balance provides less protection against overcommitting trust-fund
                         resources. This means that trust-fund revenues could be insufficient to
Eliminate, the Risk of   cover all of the obligations that FAA has the authority to incur if actual
Overcommitting           trust-fund revenues continue to fall below forecast levels and Congress
Trust-Fund Resources     appropriates funds from the trust fund at the forecast levels. The trust
                         fund’s uncommitted balance was about $1.4 billion at the end of fiscal
                         year 2011—up from $770 million at the end of fiscal year 2010. Despite
                         the lapse in collecting certain taxes from July 23 through August 7, 2011,
                         according to FAA, the trust fund’s uncommitted balance grew due to
                         higher-than-expected revenues in fiscal year 2011. 49

                         A substantial decline in the trust fund’s uncommitted balance could lead
                         to budgetary challenges for FAA, if commitments from the trust fund
                         exceed revenues deposited into the trust fund. As we have previously
                         reported, a decline in the trust fund’s uncommitted balance toward zero



                         48
                           This average refers to the mean absolute error—that is, the average value of the
                         difference between forecast and actual revenues, regardless of whether the difference
                         was positive or negative.
                         49
                           FAA’s authority to collect trust fund revenues and expend money from the trust fund
                         expired on July 22, 2011. In response to the lapse in program expenditure and revenue
                         collection authority, FAA halted work on a number of construction projects at airports and
                         air traffic control facilities and furloughed almost 4,000 employees effective July 23, 2011.
                         On August 5, 2011, the Senate reached an agreement and passed H.R. 2553 without
                         amendment by unanimous consent. The measure was signed by the President later that
                         day, becoming the Airport and Airway Extension Act of 2011, Part IV, Pub. L. No. 112-27,
                         125 Stat. 270. Although this law retroactively reinstated the taxes as though they never
                         expired, IRS granted relief for airlines and taxpayers who purchased tickets during the two
                         week lapse. Tax collection for the trust fund started up again on August 8, 2011, thus
                         ending the partial shutdown of FAA and the lapse in trust-fund revenue collection
                         authority, including passenger ticket taxes. FAA estimated the lapse to have resulted in
                         approximately $200 million of foregone trust fund revenues each week—or roughly $400
                         million for the tax lapse.




                         Page 25                                           GAO-12-222 Airport and Airway Trust Fund
signals to FAA that revenues available to incur future obligations could be
limited, which could affect FAA’s ability to move forward with planned
projects and programs. 50 OMB, the Department of Transportation (DOT),
and FAA budget officials noted that if the trust fund were to become
overcommitted, there would be some time to determine what actions, if
any, FAA might have to take and to address this issue through the
appropriations process, given capital programs are paid for—or
outlayed—over several years and because the trust fund maintains a
cash balance ($9.4 billion as of the end-of-fiscal-year 2010), for which
revenues are continually paid into the trust fund. However, as we have
previously reported, in the short term, FAA officials have noted a risk of
overcommitting trust-fund resources might require them to delay
obligations for capital programs if they do not have adequate revenues in
the trust fund to cover those obligations—unless additional funding was
authorized and appropriated from general revenues. 51

While appropriating less-than-forecast revenues from the trust fund in
recent years has helped to keep the trust fund from being overcommitted,
we and others have recommended the development of an alternative
approach to guiding appropriations from the trust fund that could help
reduce the risk of overcommitting budget resources from the trust fund. 52
Given the inherent uncertainty of forecasting and the deteriorating



50
  GAO-09-393. We have also made recommendations to help DOT reduce the likelihood
of a funding shortfall in the Highway Account of the Highway Trust Fund, including
identifying changes to existing solvency mechanisms designed to make annual
adjustments to this account. See GAO, Highway Trust Fund: Improved Solvency
Mechanisms and Communication Needed to Help Avoid Shortfalls in the Highway
Account, GAO-09-316 (Washington, D.C.: Feb. 6, 2009).
51
  According to FAA officials, they would start by deferring or deobligating some existing
capital-program obligations so they could continue to first fund operating expenses, such
as air-traffic control and safety inspections. These actions would ensure that the agency
did not improperly incur obligations in excess of the trust fund’s cash balance, which could
potentially lead to a violation of the Antideficiency Act. This act prohibits an officer or
employee of the federal government from making or authorizing an obligation or
expenditure in advance or in excess of an appropriation or fund. 31 U.S.C. § 1341(a)(1).
FAA would have to stop making payments if the fund were to be exhausted for any reason
before all outstanding obligations were discharged. However, FAA’s aviation programs are
partly funded with contract authority, to which section 1341(a)(1) does not apply and which
allows FAA to incur obligations in advance or in excess of an appropriation. However, FAA
must receive an appropriation from the trust fund in order to liquidate the contract-
authority obligations.
52
 GAO-09-393.




Page 26                                          GAO-12-222 Airport and Airway Trust Fund
uncommitted balance, better matching of actual revenues to the
appropriation from the trust fund would better ensure that trust-fund
revenues are sufficient to cover FAA’s expenditures, thus reducing the
potential risk of disruptions in funding for aviation projects and programs.
For our analysis, we considered four alternative options for determining
the amount that would be made available for appropriation from the trust
fund—each of which would require a change in law to implement (table
2). First, the House of Representatives’ current FAA reauthorization bill
(H.R. 658) includes a provision that would limit the budget resources
made available for appropriation from the trust fund to 90 percent, rather
than 100 percent, of forecast revenues and apply any differences
between actual trust-fund revenues and appropriations from the trust fund
to a subsequent year. The second option would use a prior year’s actual
trust-fund revenue amount as the basis for the appropriation since this
revenue amount would represent the level of actual revenues deposited
into the trust fund from a prior year and therefore not make funding
dependent on revenue forecasts. For example, the second preceding
year’s revenue amount could be used, since it would be certified by IRS
in time for the development of FAA’s budget. Finally, the third and fourth
options would target a level for the trust fund’s uncommitted balance—
such as $2 billion or $3 billion—and base appropriations on the goal of
maintaining that target level. These options would increase the likelihood
that uncommitted resources would be available to FAA if actual revenues
fell short of forecast revenues.




Page 27                                  GAO-12-222 Airport and Airway Trust Fund
Table 2: Options for Determining Budget Resources to Be Made Available for Appropriation from the Trust Fund

Option                        Description of option
Option 1: Provision in        Total budget resources made available in the first fiscal year after enactment (i.e., fiscal year 2011) equal
                       a
Section 104 of H.R. 658       90 percent of the forecast trust-fund revenues for that year.
                              In the year after enactment (i.e., fiscal year 2012) and each fiscal year thereafter, total budget resources
                              made available during that fiscal year equal 90 percent of the forecast trust-fund revenues for that fiscal
                              year (i.e., fiscal year 2012) in addition to the difference between the second preceding fiscal year’s (i.e.,
                              fiscal year 2010) actual revenues and budget resources made available for obligation from the trust fund.
Option 2: Prior year’s        Total budget resources made available each fiscal year equal the amount of a prior year’s revenues.
revenues                      The second preceding year’s actual trust-fund revenue amount would be certified in time for use in
                              developing FAA’s budget.
Option 3: $2 billion target Total budget resources made available each fiscal year would be based on maintaining an uncommitted
level for the uncommitted   balance of $2 billion in the trust fund. Specifically, the $2 billion target level for the trust fund’s uncommitted
balanceb                    balance would be subtracted from the total of the budget year’s revenue forecast and the previous year’s
                            uncommitted balance to determine the amount available for appropriation from the trust fund.
Option 4: $3 billion target Total budget resources made available each fiscal year would be based on maintaining an uncommitted
level for the uncommitted   balance of $3 billion in the trust fund. Specifically, the $3 billion target level for the trust fund’s uncommitted
balanceb                    balance would be subtracted from the total of the budget year’s revenue forecast and the previous year’s
                            uncommitted balance to determine the amount available for appropriation from the trust fund.
                                                Source: H.R. 658 and GAO analysis.

                                                a
                                                 This provision was also contained in section 105 of H.R. 915, the FAA Reauthorization Act of 2009,
                                                which passed the House of Representatives on May 21, 2009, as well as in the Democratic Members
                                                of the House Transportation and Infrastructure Committee recommendations to the Joint Select
                                                Committee on Deficit Reduction.

                                                b
                                                 We chose these levels because from fiscal year 2000 through fiscal year 2010, forecast revenues
                                                exceeded actual revenues by no more than $3 billion, so a target of $3 billion could help to protect the
                                                uncommitted balance. A target of $2 billion could also help to protect the uncommitted balance
                                                because forecast revenues exceeded actual revenues by more than $2 billion only twice in that same
                                                period—in fiscal years 2002 and 2009—and could also allow for slightly higher appropriation levels
                                                from the trust fund.


                                                Our analysis of these options shows that although they provide for
                                                substantially greater protection to the trust fund than the provision in
                                                current law, they do not completely eliminate the risk of overcommitting
                                                revenues from the trust fund (table 3). For our analysis, we applied these
                                                four approaches to the actual and forecast trust-fund revenues for fiscal
                                                years 2000 through 2010, using the trust fund’s end-of-year fiscal year
                                                2010 uncommitted balance of $770 million as the balance for the end of
                                                fiscal year 1999 to analyze how these options might function in starting with
                                                a low uncommitted balance. 53 On the basis of this analysis, we determined


                                                53
                                                  Our analysis assumes that appropriation levels will equal authorization levels. Currently,
                                                FAA’s authorizing legislation defines the total budget resources made available from the
                                                trust fund.




                                                Page 28                                                 GAO-12-222 Airport and Airway Trust Fund
                                        that the four options provide better protection against overcommitting
                                        resources from the trust fund when it has low uncommitted balance than
                                        the current law (which we refer to as AIR-21 method) would have provided
                                        had it been followed. However, these alternatives could still result in the
                                        trust fund being overcommitted unless Congress appropriated more
                                        general revenues because if the uncommitted balance is close to zero,
                                        there is no margin for error if the actual revenues fall significantly short of
                                        the amounts appropriated. For example, in 2002 when appropriations
                                        exceeded actual revenues by over $3.2 billion (as previously shown in fig.
                                        4), the H.R. 658 option and the $2 billion target option, if in place during
                                        that time, would have been insufficient to protect the trust fund’s
                                        uncommitted balance from being overcommitted.

Table 3: Estimated End-of-year Trust-Fund Uncommitted Balance under Different Options Assuming an Uncommitted Balance
of $770 Million at the Beginning of Fiscal Year 2000

Dollars in millions
Option                      2000    2001       2002          2003         2004            2005      2006      2007      2008      2009      2010
Current Law: AIR-21         1,168    825    (1,765)       (2,624)      (3,263)       (3,693)      (4,935)   (4,807)   (5,262)   (7,342)   (8,015)
#1 H.R. 658                 2,093   1,019   (1,775)         (592)        2,585            2,039   (1,247)      561     4,601     1,970    (1,573)
#2 Prior year’s revenuesa   2,319   1,221        165        (315)           670           2,095    2,594     3,817     5,377     4,398     3,784
#3 Target $2 billion        2,398   1,657      (589)        1,141        1,361            1,569      759     2,128     1,544       (80)    1,327
#4 Target $3 billion        3,398   2,657        411        2,141        2,361            2,569    1,759     3,128     2,544       920     2,327
                                        Source: GAO analysis based on FAA and IRS data.


                                        Notes: Our analysis of each option assumes the errors in forecasting that occurred in fiscal years
                                        2000 through 2010 and that appropriations do not vary from the prescribed approach. Additionally, for
                                        simplicity, we estimated the end-of-year uncommitted balance by adding together the start-of-the-year
                                        uncommitted balance and actual revenues for a given year and subtracting the estimated
                                        appropriation from the trust fund based depending on the option.

                                        a
                                         Under the prior year’s revenue option, appropriating the level of actual trust-fund revenues from a
                                        prior year can lead to a growing uncommitted balance if revenues are generally increasing, because
                                        appropriations would be based on a prior year’s lower trust-fund revenues. If the actual revenues
                                        from the second preceding year—which are the basis for the appropriation—are greater than the
                                        actual revenues for the year being appropriated, the uncommitted balance would decline. The
                                        balance can even become negative if, as in this case, the actual revenues from 2 years prior—which
                                        is the basis for the appropriation—are higher than the actual revenues in the budget year and the
                                        uncommitted balance is too low to make up the difference.


                                        Our analysis of these options further shows that they—particularly the
                                        H.R. 658 provision—could also lead to greater swings in trust-fund
                                        contributions, which in turn would require greater variation in general-
                                        revenue appropriations to maintain overall stable appropriation levels for
                                        FAA. As figure 6 shows, the H.R. 658 provision, if in place during fiscal
                                        years 2000 through 2010, would have resulted in a wider variation in the



                                        Page 29                                                        GAO-12-222 Airport and Airway Trust Fund
total amount available for appropriation from the trust fund than the other
options and current law. 54 Because of these variations with the H.R. 658
option, general-revenue appropriations would also have to vary widely
from year to year to maintain the same appropriation levels during that
time frame. In addition, these options could result in the availability of
fewer resources for some period of time than under current law, unless a
general-revenue appropriation made up the difference.

Figure 6: Estimated Trust-Fund Appropriations under Different Options If Started in
Fiscal Year 2000




54
  When analyzing alternatives, including the AIR-21 method, we omitted interest revenues
from all calculations because of the complexity involved in forecasting interest revenues
for each of the alternatives and because interest revenues are a relatively small portion of
total trust-fund revenue—about 5.1 percent of all revenue for fiscal years 2000 through
2010.




Page 30                                          GAO-12-222 Airport and Airway Trust Fund
The Extent to Which
Trust-Fund Revenues
Might Support Future
FAA Expenditures
Will Depend on
Differing Assumptions
and Other Factors

The President’s Budget    According to the President’s fiscal year 2012 budget request and mid-
Forecasts Show FAA        session review, FAA expenditures (as reflected by OMB’s estimates of
Expenditures Continuing   FAA’s budget authority) are expected to continue to exceed forecast trust-
                          fund revenues through fiscal year 2021 (see fig. 7). 55 FAA expenditures
to Exceed Trust-Fund
                          not covered by trust-fund revenues are projected to be paid for by general
Revenues                  revenues.




                          55
                            For the fiscal year 2012 mid-session review, Treasury forecast a slight decrease in
                          revenues from fiscal year 2010 through fiscal year 2011, due in part to the lapse in FAA’s
                          authority to collect certain taxes from July 23 through August 9, 2011. Treasury then
                          anticipated trust fund revenue growth at an annual rate of about 3 percent to 5 percent
                          from fiscal year 2013 through fiscal year 2018 with the growth rate slowing to about 2.7
                          percent to 2.9 percent through fiscal year 2021. As previously noted, according to FAA,
                          the trust fund received higher-than-expected revenues in fiscal year 2011, which is
                          reflected in the most recent estimate of the trust fund’s uncommitted balance. The
                          updated revenue forecast for the out-years will be released as part of the President’s fiscal
                          year 2013 budget request.




                          Page 31                                           GAO-12-222 Airport and Airway Trust Fund
Figure 7: Actual and Forecast Trust-Fund Revenues and FAA Expenditures, Fiscal Years 2000 through 2021




                                       Notes: The actual (IRS-certified) trust fund revenues for 2000 through 2010 include interest revenues.
                                       The 2009 expenditures exclude the general revenues provided under the American Recovery and
                                       Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009).

                                       In the near term, the administration forecasts reductions in FAA’s
                                       expenditures in fiscal years 2013 through 2015, primarily because of the
                                       President’s directive to reduce discretionary spending for non-security
                                       agencies. 56 These forecasts, if realized, would reduce total FAA
                                       expenditure levels for these years below fiscal year 2008 levels, primarily
                                       because of the $1 billion proposed reduction to AIP, according to OMB.
                                       OMB uses inflation adjustments and other factors to project out-year



                                       56
                                          The Budget Control Act, Pub. L. No. 112-25, 125 Stat. 240 (2011), established caps on
                                       the amount of money that could be spent through the annual appropriations process for
                                       the next 10 years and created a Joint Select Committee on Deficit Reduction that was
                                       instructed to develop a bill to reduce the federal deficit by at least another $1.5 trillion over
                                       the 10-year period ending in fiscal year 2021. Since the joint committee did not reach an
                                       agreement before the committee’s deadline of January 15, 2012, under the act, a $1.2
                                       trillion automatic spending reduction process has been triggered to begin in January 2013
                                       unless Congress and the President first act to eliminate or change the process.




                                       Page 32                                                GAO-12-222 Airport and Airway Trust Fund
expenditures, resulting in FAA’s fiscal years 2016 to 2021 expenditures
growing roughly at the forecast rate of GDP growth—around 2.3 percent
to 2.5 percent annually. Under these assumptions, total forecast FAA
expenditures would require $20 billion in general revenues to supplement
trust-fund revenues.

OMB’s forecasts base future years’ general-revenue contribution for FAA
on the current budget year’s (fiscal year 2012) proposed general-revenue
proportion. Specifically, OMB assumes trust-fund revenues cover about
68 percent of FAA’s estimated total expenditures, and general revenues
cover the remaining 32 percent for each year of this same period. This
level of general revenue funding for FAA is among the highest levels
since fiscal year 2000 (see fig. 8). Since the assumptions behind the
President’s budget forecasts keep the general-revenue and trust-fund
contributions constant in the out-years, OMB’s forecasts differ from the
AIR-21 approach in that they assume all forecast trust-fund revenues are
not made available for appropriation. As a result, OMB projects a growing
trust-fund uncommitted balance—from $770 million at the end of fiscal
year 2010 to almost $30 billion at the end of fiscal year 2021. Although
such growth does not reflect what has historically happened under the
AIR-21 method—which makes the forecast level of receipts available for
appropriation—OMB officials noted that this approach aligns with how
OMB forecasts out-year budget authority for other agencies.




Page 33                                GAO-12-222 Airport and Airway Trust Fund
Figure 8: Actual and Forecast Trust-Fund Revenues and Uncommitted Balance and FAA Expenditures by Trust-Fund and
General-Revenue Appropriations, Fiscal Years 2000 through 2021




                                      By contrast, applying the AIR-21 approach to current revenue and
                                      expenditures forecasts would reduce the amount of additional general
                                      revenues needed to cover forecast expenditures but would maintain the
                                      current uncommitted balance level and still require some level of
                                      additional general revenues or increases in aviation tax levels or sources
                                      into the trust fund to fund FAA expenditures as compared to OMB’s
                                      approach (fig. 9). 57 Specifically, applying the AIR-21 approach would
                                      make approximately $27 billion more in trust revenues available for
                                      appropriation for fiscal years 2013 through 2021 than OMB projects.
                                      Although this approach would reduce the amount of general revenues


                                      57
                                        CBO also prepares forecasts of trust-fund revenue, expenditures, and uncommitted
                                      balance using both a fixed general-revenue contribution approach, similar to OMB’s
                                      approach, and the AIR-21 approach.




                                      Page 34                                       GAO-12-222 Airport and Airway Trust Fund
needed to cover forecast FAA expenditures, the assumption that all
forecast trust-fund revenues would be appropriated halts the growth in the
trust fund’s uncommitted balance holding it at the most recent estimate of
$1.4 billion for fiscal year 2011 and providing limited protection against
forecast error. Additionally, projected FAA expenditures under the AIR-21
approach would still require some level of general-revenue
appropriation—specifically, 20 percent for fiscal year 2013, respectively,
and then about 8 percent to 16 percent for fiscal years 2014 through
2021. 58




58
  Additionally, each of the four options that we analyzed for determining budget resources
for appropriations from the trust fund, if implemented, would reduce the trust fund’s
contribution in some years to help protect the trust-fund balance.




Page 35                                         GAO-12-222 Airport and Airway Trust Fund
                        Figure 9: Comparison of FAA’s Trust-Fund and General-Revenue Appropriations
                        under OMB’s Approach and under the AIR-21 Method, Fiscal Years 2012 through
                        2021




Realizing Revenue and   While these forecasts provide perspectives on future FAA expenditures
Expenditure Forecasts   and trust-fund revenues, the extent to which these forecasts are more
Depends on Several      accurately realized in future years depends on changing economic,
                        technological, political, industry, and other factors. In particular,
Factors                 congressional decisions, including the level of FAA’s appropriations or the
                        trust-fund tax structure; unexpected changes affecting trust-fund
                        revenues and FAA expenditures; and FAA’s implementation and
                        management of programs, such as NextGen, could significantly affect
                        trust-fund revenues and FAA expenditures in future years.




                        Page 36                                   GAO-12-222 Airport and Airway Trust Fund
Congressional Decisions   In its deliberations on the appropriate level of federal revenues and
                          expenditures for a given year, Congress decides on the level of FAA’s
                          appropriations—which could be more or less than the President’s budget
                          request—and the level of trust-fund and general revenues to fund FAA.
                          As previously noted, in fiscal years 2009 and 2010, the level of
                          appropriations from the trust fund was reduced and the general-revenue
                          appropriation was increased from the President’s budget request. FAA’s
                          fiscal year 2012 appropriations generally funded the President’s fiscal
                          year 2012 request, with the exception of the President’s request for $3.35
                          billion in general revenues for the AIP and Facilities and Equipment
                          accounts for a proposed infrastructure initiative (table 4). 59 Additionally,
                          FAA’s fiscal year 2012 appropriations cover approximately 30 percent of
                          FAA’s total expenditures from general revenues. As CRS has reported,
                          the House-passed FAA reauthorization bill calls for reductions to all FAA
                          accounts, setting flat funding levels for fiscal years 2012 through 2014. 60
                          These levels would reduce FAA’s annual budget by about $1 billion
                          compared with fiscal year 2010 enacted levels and, except for AIP, are
                          slightly below the OMB’s fiscal year 2012 budget forecasts for these
                          same years.




                          59
                            As part of the administration’s $50 billion proposed infrastructure initiative, the
                          administration requested $3.35 billion for AIP and NextGen improvements.
                          60
                            The Senate reauthorization bill only encompassed the previous 2 fiscal years—2010
                          and 2011. It proposed increasing total authorized funding levels for the FAA by just under
                          $500 million from fiscal year 2010 to fiscal year 2011, and its proposed authorization
                          levels for fiscal year 2011 were considerably greater than the approved amounts for fiscal
                          year 2010 for all accounts except operations. By contrast, the House-passed H.R. 658
                          sought considerable budget reductions compared with the fiscal year 2010 approved
                          amounts for all FAA accounts. Authorized totals for fiscal year 2011 would have been
                          $548 million below fiscal year 2010 enacted levels. For fiscal year 2011, the only year in
                          which the House and Senate bills overlap, the House-passed bill specified a total
                          authorization level of approximately $2 billion below the Senate-passed amount. See
                          CRS, Federal Aviation Administration (FAA) Reauthorization: An Overview of Legislative
                          Action in the 112th Congress (Washington, D.C.: Sept. 29, 2011).




                          Page 37                                             GAO-12-222 Airport and Airway Trust Fund
Table 4: Proposed and Actual Appropriations for FAA for Fiscal Year 2012

Dollars in millions
                                                            President’s budget                       H.R. 658, FAA     Fiscal year 2012 omnibus
Budget category                                                        request                    authorization bill               appropriation
Operations                                                                       9,823                        9,168                          9,653
                                                                                                                   a
      General revenues                                                           4,865                                                       4,593
                                                                                                                   a
      Trust-fund revenues                                                        4,958                                                       5,060
Facilities & Equipment                                                           3,120                        2,600                          2,731
                                                                                                                   a
      Trust-fund revenues                                                        2,870                                                       2,731
                                                                                                                   a
      General revenues                                                              250                                                         0
Research, Engineering, & Development                                                190                         147                           168
                                                                                                                   a
      Trust-fund revenues                                                           190                                                       168
AIP                                                                              5,524                        3,000                          3,435
                                                                                                                   a
      Trust-fund revenues                                                        2,424                                                       3,435
                                                                                                                   a
      General revenues                                                           3,100                                                          0
Budget authority for FAA                             15,307 excluding general                                14,915                         15,987
                                                      revenues to the facilities
                                                       and equipment and AIP
                                                                       accounts
                                                         18,657 with additional
                                                       general revenues to the
                                                       facilities and equipment
                                                               and AIP accounts
                                                                         68 percentb                               a
Percentage of trust-fund revenue appropriation                                                                                        71 percent
                                                                                        b                          a
Percentage of general-revenue appropriation                              32 percent                                                   29 percent
                                           Source: OMB, relevant legislation, and GAO analysis.


                                           Notes: This table excludes payments to air carriers for the Essential Air Service program, which are
                                           also drawn from the trust fund. The Senate reauthorization bill only encompasses the previous 2
                                           fiscal years—2010 and 2011—and therefore is omitted from this table.
                                           a
                                              This bill does not establish the amount of trust-fund and general revenues for funding FAA.
                                           b
                                            This calculation does not assume the general revenues requested through the President’s proposed
                                           infrastructure initiative.

                                           Changes in trust-fund taxes and fees, if enacted, would also affect trust-
                                           fund revenue forecasts. For example, the Senate-passed FAA
                                           reauthorization bill calls for an increase of 14.1 cents per gallon in
                                           general-aviation jet fuel taxes and a new surcharge of 14.1 cents per
                                           gallon surcharge on general-aviation jet fuel purchased for fractionally




                                           Page 38                                                         GAO-12-222 Airport and Airway Trust Fund
                           owned aircraft. 61 The Joint Committee on Taxation estimates that this
                           provision could result in about $50 million in additional trust-fund
                           revenues for fiscal years 2012 through 2014. In addition, the
                           administration has proposed a fee of $100 per flight as part of the
                           September 2011 deficit-reduction plan that it submitted to Congress. This
                           fee would be deposited into the trust fund and, according to
                           administration estimates, could generate an additional $11 billion in trust-
                           fund revenues over the next 10 years.

Unanticipated Changes      Unanticipated changes affecting aviation can affect the realization of
Affecting Aviation         trust-fund revenues and FAA expenditure forecasts. Although Treasury
                           forecasts continuous growth in trust-fund revenues, actual revenues have
                           fluctuated considerably from year to year. 62 Specifically, the year-over-
                           year change in trust-fund revenues has ranged from a 13 percent
                           increase to an over 10 percent decline during fiscal years 2000 through
                           2010. As we previously described, events, such as the economic
                           recession in 2009 and structural changes in the industry, can cause trust-
                           fund revenues to vary from year to year. For example, in 2007, airline
                           capacity grew more slowly than air traffic leading to growth in airline
                           revenues and better-than-expected trust-fund revenues in that year. In
                           addition, unanticipated events can affect FAA’s expenditures, as well as
                           trust-fund revenues. For example, major airline accidents and terrorist
                           actions can create additional resource needs for the agency that cannot
                           be easily forecast. Additionally, these incidents can cause passenger
                           demand to fall with airlines responding by lowering fares—with both of
                           these factors leading to reduced trust-fund revenues.

FAA’s Implementation and   FAA’s capital and research plans align with OMB’s expenditure forecasts
Management of NextGen      for FAA, but these forecasts do not consider potential efficiency gains
                           from improvements in the air traffic control system. As part of the forecast
                           reduction in FAA’s expenditures for fiscal years 2013 through 2015, FAA
                           adjusted its capital plans to absorb a $2.8 billion reduction in its capital



                           61
                             Under fractional aircraft-ownership programs, aircraft owners purchase a minimum
                           share of an aircraft and share the aircraft with others having an ownership interest in that
                           aircraft.
                           62
                              Treasury forecasts growing trust fund revenues because aviation activity generally
                           grows with the expected growth in economic activity. Long-term revenue forecasts
                           generally show a continuous growth even though economic cycles will cause revenues to
                           fluctuate from year to year. However, long-term forecasts, in aggregate, should reflect the
                           total effect of economic cycles.




                           Page 39                                           GAO-12-222 Airport and Airway Trust Fund
expenditures. Much of this proposed reduction is in NextGen and
NextGen-related expenditures that are being scaled back or deferred to
later years. 63 Although FAA also reduced its forecast operations
expenditures because of budget constraints, these forecasts do not
account for potential efficiency gains that may occur from the
implementation of NextGen technology, which could reduce the overall
cost of FAA operations.

In addition, delays in implementing capital programs could result in
additional costs, which are not factored into forecasts until the delays are
known. As we recently reported, some key acquisitions may soon
encounter delays, which can increase the acquisitions’ overall costs, as
well as the costs to maintain current systems. 64 For example, due to
technical problems, the En Route Automation Modernization (ERAM)
program—a critical program for NextGen—has been delayed, increasing
the program’s estimated costs by $330 million over 4 years, as well as
adding an estimated $20 million per year to the costs of maintaining the
system that ERAM was meant to replace. 65 Moreover, because of the
integrated nature of NextGen, many of its component systems are
mutually dependent on one or more other systems. For example, ERAM
is critical to the delivery of the Automatic Dependent Surveillance System
Broadcast (ADS-B)—the satellite-based information-broadcasting system
that will enable more precise air traffic management—because ADS-B
requires the use of some ERAM functions. ERAM is also pivotal to the on-
time implementation of two other key NextGen acquisitions—Data
Communications and System Wide Information Management (SWIM)—
and the delays in ERAM have, in part, resulted in delays to both of these


63
  As we have previously reported, FAA has not detailed how the planned funding
reductions or the implementation delays will affect its modernization efforts, making it
difficult for Congress to understand the trade-offs in deferring, eliminating, or reducing
funding for different NextGen programs. As a result, we recommended that providing such
information would help Congress assess the implications of approving annual budget
submissions for NextGen and NextGen-related activities that support more
comprehensive efforts to modernize the national airspace system, particularly under a
constrained budget environment. GAO, National Airspace System: FAA Has Made
Progress but Continues to Face Challenges in Acquiring Major Air Traffic Control
Systems, GAO-05-331 (Washington, D.C.: June 10, 2005). According to an FAA official,
FAA has communicated to appropriators how potential reductions in funding might affect
the implementation of NextGen programs.
64
 GAO-12-141T.
65
 ERAM is a new en route air traffic control system for high-altitude traffic.




Page 40                                           GAO-12-222 Airport and Airway Trust Fund
               programs. 66 Thus, looking more broadly, the implementation of
               NextGen—both in the midterm (through 2018) and in the long term
               (beyond 2018)—and FAA’s overall costs will be affected by how well FAA
               manages program interdependencies.

               While FAA’s budget generally identifies the NextGen capabilities that FAA
               plans to implement in the near term to midterm (through 2018), the out-
               year expenditure forecasts are not tied to specific FAA programs and will
               be affected by decisions that have yet to be made on the long-term
               direction of NextGen. Specifically, although FAA estimates that it will incur
               total NextGen costs of between $15 billion and $22 billion for fiscal years
               2012 through 2025, two key planning documents—the NextGen
               Integrated Work Plan and Enterprise Architecture—contain a wide variety
               of possible ideas and approaches for the long-term direction of NextGen
               (beyond 2018). 67 Decisions about which of these—or other—ideas and
               approaches will be implemented remain to be made. Additionally, FAA
               estimates that the avionics needed on aircraft to realize significant
               NextGen capabilities will cost private operators in the range of $5 billion
               to $7 billion through 2018. FAA has not determined whether they will
               provide financing to help aircraft operators cover these costs.


               Since 1970, the trust fund has provided a stable and dependable source
Concluding     of funding for aviation-infrastructure investments. To ensure that taxes
Observations   paid by aviation users are directed only to aviation, in 2000, Congress
               introduced a mechanism to fully appropriate all forecast revenues.
               However, the inherent difficulty in accurately forecasting revenues
               contributed to over a $6 billion decline in the trust fund’s uncommitted


               66
                 SWIM is the information-management architecture for the national airspace system.
               FAA pushed the Data Communications program’s start date from September 2011 to
               February 2012, plans to revise the original SWIM-segment 1 cost and schedule plan, and
               delayed the SWIM-segment 2 start date from 2010 to December 2012. The long-term
               result of this decision is not yet known.
               67
                 The Enterprise Architecture, commonly referred to as the “blueprint” for NextGen, is a
               technical document that describes the segments, capabilities, operational activities, and
               identified relationships to the key target components of NextGen in the year 2025. The
               NextGen Integrated Work Plan is a document that describes when NextGen capabilities
               and potential improvements will be introduced and who will be responsible for them.
               Additionally, FAA’s NextGen cost estimate for 2012 through 2025 is in 2011 constant
               dollars. Thus, even though the present value of the cost are represented by this estimate,
               the actual dollars needing to be appropriated to cover those expenses in the years that
               they are incurred will be higher due to inflation.




               Page 41                                          GAO-12-222 Airport and Airway Trust Fund
                  balance. Deciding on the appropriate mechanism for determining the level
                  of appropriations from the trust fund requires Congress to weigh trade-
                  offs between the amount available for appropriations from the trust fund,
                  the amount of general revenues in a given year, and the overall level of
                  FAA expenditures, all while ensuring stable and sustainable funding for
                  aviation investment. As we have previously suggested, a better
                  mechanism may be needed to match actual revenues with trust-fund
                  appropriations, and thereby help to protect the trust fund’s uncommitted
                  balance and provide Congress, FAA, and the larger aviation community
                  with greater certainty about the trust fund’s sustainability.

                  Congress will determine the future budget resources available to meet
                  FAA’s operating and capital investments, including NextGen
                  improvements. Even within the currently constrained federal budget
                  environment, it appears that based on the President’s budget request
                  estimates, FAA expenditures will continue to exceed trust-fund revenues
                  in future years. As federal budget resources continue to be constrained,
                  Congress may face some difficult choices about whether to reduce FAA’s
                  appropriations, which could increase FAA’s total costs and delay the
                  benefits associated with investments such as NextGen, or to either
                  increase revenues going into the trust fund or increase appropriations
                  from general revenues.


                  We provided a draft of this report to OMB, Treasury, and DOT for review
Agency Comments   and comment. Each entity provided technical comments that we
                  incorporated, as appropriate.


                  As arranged with your offices, unless you publicly announce the contents
                  of this report earlier, we plan no further distribution until 30 days after the
                  date of this letter. At that time, we will send copies of this report to
                  interested congressional committees, the Director of OMB, the Secretary
                  of Transportation, the Acting Administrator of FAA, the Secretary of the
                  Treasury, and other parties. In addition, the report will be available at no
                  charge on the GAO website at http://www.gao.gov.




                  Page 42                                    GAO-12-222 Airport and Airway Trust Fund
If you or your staff have any questions about this report, please contact
me at (202) 512-2834 or flemings@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 major contributions to
this report are listed in appendix I.




Susan A. Fleming
Director, Physical Infrastructure Issues




Page 43                                    GAO-12-222 Airport and Airway Trust Fund
Appendix I: GAO Contact and Staff
                  Appendix I: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Susan Fleming, (202) 512-2834 or flemings@gao.gov
GAO Contact
                  In addition to the individual named above, key contributors to this report
Staff             were Paul Aussendorf (Assistant Director), Heather Krause (Assistant
Acknowledgments   Director), Amy Abramowitz, Lauren Calhoun, Bess Eisenstadt, Bert
                  Japikse, Carol Henn, Hannah Laufe, Sara Ann Moessbauer, Joshua
                  Ormond, and Rebecca Rygg.




(541081)
                  Page 44                                  GAO-12-222 Airport and Airway Trust Fund
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