oversight

Airport Financing: Compliance With Federal Grant Requirements

Published by the Government Accountability Office on 1997-06-19.

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

GAOo
~GA
      )
          ~United States
          General Accounting Office
          Washington, D.C. 204,8                                           -   r   -   iT1l1I1   III1111
          Resources, Community, and                                                158873
          Economic Development Division

           B-276936


           June 19, 1997


           The Honorable John McCain
           Chairman, Committee on Commerce,
             Science, and Transportation
           United States Senate

           Subject: Airport Financing: Compliance With Federal Grant Reauirements

           Dear Mr. Chairman:

           As you requested in your letter of March 7, 1997, we reviewed FAA's
           compliance with funding requirements for federal grants for airport-related
           development to determine if established regulations and procedures were
           satisfied. To do this, we used a case study that analyzed federal funding for the
           construction of the new Northwest Arkansas Regional Airport and its highway
           connector road. This airport, being built about 27 miles northwest of
           Fayetteville, Arkansas, is scheduled to open in late 1998. The Federal Aviation
           Administration (FAA) plans to provide-from the Airport and Airway Trust
           Fund-about $69 million of the $107 million needed to build the new airport. In
           February 1997, FAA issued a letter of intent for the new airport for
           $29.5 million of the federal share.' The airport authority plans to issue bonds-
           secured by the letter of intent-to fund several airfield projects, including
           pavement and lighting. Most of the remaining construction costs would be
           financed by revenue bonds issued by the Northwest Arkansas Regional Airport
           Authority, the entity responsible for developing the new airport.

           A new airport for the northwest Arkansas area has been under consideration
           since the 1950s. The expansion potential of the current commercial service
           airport-Drake Field-is limited, and a new airport was seen by some as a way to


           'FAA can provide Airport Improvement Program funds under either a grant or a
           letter of intent; the latter documents FAA's intent to obligate the funds in future
           years as reimbursement for grant-eligible expenditures, subject to congressional
           authorization and appropriations. In issuing a letter of intent, FAA believed it
           would be saving about $24 million in construction costs (see enc. 11).



                                      o qo~I /1 I87o
B-276936

improve air service to that area. In 1991, FAA provided funds to study the
feasibility of a new airport and gave its final approval to begin federal funding
for the new airport in 1994.2 The new airport will have an 8,800-foot runway
with a full instrument landing system for both runway ends, a 78,000-square
foot terminal, and a sponsor-funded and -operated air traffic control tower.

As agreed with your office, this case study focuses on four issues: (1) Did FAA
follow its process for awarding grants to the new airport? (2) Did FAA follow
its criteria in issuing a letter of intent for the new airport? (3) Was the federal
share' of funding for the new airport's highway connector consistent with the
federal share for other airport connector projects? (4) What are the key factors
that will affect the viability of the new airport? We provided an in-depth
briefing to your staff on these issues on May 21, 1997 (see enc. I).

In summary, we found the following:

- Grant Award Process: FAA followed its grant award process, which allows
  for a subjective assessment of needs. FAA allocates certain Airport
  Improvement Program (AIP) funds by ranking eligible projects through a
  national priority system. While projects receiving funding typically fall within
  a specified priority range, projects outside the priority range may still receive
  funding based on FAA's subjective assessment of needs. In this case, the
  project received a ranking outside the priority range for funding. FAA's
  approval of federal funding for the Northwest Arkansas Regional Airport was
  based, in part, on its subjective assessment that the new airport would
  replace Drake Field as the region's commercial service airport. However, it
  is uncertain whether that will occur. FAA made this assumption knowing
  that the city of Fayetteville passed two resolutions-in 1992 and 1994-stating
  its intent to keep Drake Field open as a commercial service airport and to let
  airlines choose which airport to use. The city of Fayetteville, which operates
  Drake Field, is actively seeking to retain commercial service there after the
  new airport opens, and airlines currently serving Drake Field have made no
  firm commitments to use the new airport. Thus, FAA may now have to use
  AIP funds to support two commercial service airports-in a relatively limited
  market-within 30 miles of each other.

- Letter of Intent Criteria: FAA did not take sufficient steps to ensure that the
  project met two of five key criteria before issuing a letter of intent for the


2 Enc.II provides a detailed chronology of key events in the development and
construction of the new airport.

2                         GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

    new airport. To qualify for a letter of intent, federal statutes and policies
    require that a project meet these key criteria: the project must (1) be at a
    primary or reliever airport, (2) be for airside development, 3 (3) have financial
    commitment from the sponsor, (4) significantly enhance systemwide
    capacity, and (5) have a benefit/cost ratio that exceeds 1. Our review
    showed that FAA considered all of these criteria before issuing the letter of
    intent for the new airport. However, FAA's judgment on systemwide capacity
    was not based on a clear determination that the project significantly
    enhanced systemwide capacity, and its benefit/cost analysis was based on
    information that was, in some cases, unverified or outdated.

    FAA has not defined what would constitute a significant enhancement to
    systemwide capacity for projects at small airports. Instead, FAA officials
    determined that a new airport would add needed and reliable capacity by
    eliminating such existing operating constraints at Drake Field as weather-
    related flight delays and limited potential for runway expansion. Absent a
    definition of what constitutes a significant capacity increase for small
    airports, it is not clear that the additional capacity that the new airport would
    provide meets that requirement for a letter of intent.

    In conducting the benefit/cost analysis used to support the issuance-of the
    letter of intent, FAA included questionable data and assumptions and did not
    update the analysis to reflect changes that had occurred. First, FAA used
    unverified weather data to calculate delays at Drake Field. Weather data that
    FAA used had been gathered from two air traffic controllers at Drake Field,
    who, according to FAA, provided estimates based solely on their judgment,
    and not from official sources of weather-related data. FAA officials said they
    did not verify the data because they did not have time. FAA also factored in
    thundershower delays for Drake Field and assumed that these delays would
    not occur at the new airport. In maling this analysis, FAA had no reliable
    data on the frequency of thundershowers at the site of the new airport and at
    Drake Field or any rationale explaining why thundershower delays would be
    a safety issue at Drake Field but not at the new airport-located less than
    30 miles away. Second, before issuing a letter of intent in early 1997, FAA
    did not update the benefit/cost analysis to reflect conditions that had
    changed since the original analysis was prepared in 1994. For example,
    between the time when the analysis was conducted in 1994 but before the


3 Airsiderefers to airfield development projects, such as runways, taxiways, and
navigation aids. In contrast, landside projects include the passenger terminal
and parking facilities.
3                           GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

    the letter of intent was issued in 1997, Drake Field acquired an instrument
    landing system that improves access and stated its intent to actively compete
    for commercial traffic. These factors raise questions about a key assumption
    in the original analysis that all commercial service air traffic would move to
    the new airport.

- Federal Share for the Highway Connector: The federal funding share of
  95 percent for the new airport's highway connector was established by
  statute. A comparison with the federal share for other airport connectors
  could not be made because the Federal Highway Administration (FHWA),
  which administers funds from the Highway Trust Fund used for these
  projects, does not maintain the kind of information needed to make a
  comparison.

    Section 310(d) of the National Highway System Designation Act of 1995
    requires that the federal government pay 95 percent of the cost of the
    highway connector to the new airport from U.S. Route 71 in Arkansas.
    Current federal law establishes the level of federal funding for various types
    of projects-generally 90 percent for projects on the interstate system and
    80 percent for other projects. Federal funding in excess of these amounts
    may be provided where other statutory criteria are met. For example, states
    with significant amounts of Native American or federal lands may receive up
    to 95 percent for projects, including airport connectors. In addition, certain
    highway projects in rural areas, including airport connectors, can be funded
    at 95 percent.4 FHWA identified 15 airport connectors that were funded as
    demonstration projects at an 80 percent federal share.5 Other than the
    demonstration projects, FHWA could not identify specific airport connector
    projects in the United States and their corresponding federal shares because
    of limitations in its database.

    Aside from the issue of the federal funding share, it appears that better
    access roads to the new airport are needed, but it may be at least 5 years
    before the new airport connector is completed. In the meantime, current

4 Underthe Economic Growth Center Development Highways Program, a
highway, including an airport connector, is eligible for 95 percent federal
funding if it is in a rural area designated as an Economic Growth Center.
5Section 1108(b) of the Intermodal Surface Transportation Efficiency Act of
1991 (ISTEA) authorized 51 specific priority intermodal projects and specified
the amount of federal funds available for each. Fifteen of these projects were
airport connectors.
4                          GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936
    access roads to the new airport are substandard and potentially could pose
    safety hazards. For example, according to officials from the Arkansas
    Highway and Transportation Department, the traffic levels now exceed the
    roads' design capacity, the accident rates already exceed those on
    comparable roads in the state, sharp curves exist, and the roads have
    narrower than acceptable shoulders.

- Viability of the New Airport: Ultimately, the viability of the new airport
  depends largely on four factors: (1) the volume of passenger traffic at the
  new facility, (2) the airport authority's access to and the costs of capital for
  the remaining construction, (3) the ability of project managers to control the
  remaining construction costs within established budgets, and (4) the
  accuracy of projected nonairline revenues. However, a degree of uncertainty
  exists with each of these components. In our view, the most problematic of
  the factors affecting the airport's viability is the degree to which the volume
  of passengers meets the projections. The airport authority's financial plan
  for the new airport assumes that all of the air traffic now serving Drake
  Field, plus additional traffic currently diverted to other airports, will transfer
  to the new airport by early 2000. However, because none of the air carriers
  currently serving Drake Field has committed to use the new airport, the
  degree to which these projections can be achieved within specified time
  frames remains unknown.

    Completing airport construction will depend on issuing a $29.5 million bond
    backed by the letter of intent for airfield construction and a $48 million
    airport revenue bond to finish the terminal and parking areas. The bond
    backed by the letter of intent is unusual; it would be the first airport bond
    secured only by a letter of intent. Heretofore, the only other bond secured
    by a letter of intent was issued in 1993 for Reno Airport, but that bond had a
    secondary lien against the airport's revenue in order to obtain an investment-
    grade rating. The new airport authority does not plan any such secondary
    lien, but airport officials are confident that the underwriter for this bond will
    be able to privately place the bonds.

    As of April 1997, managers of the new airport have kept construction costs
    within budget, although contract awards for major projects, such as the
    terminal, have not been made. Projections of nonairline revenue for the new
    airport are above average for similar-sized airports but reasonable as long as
    traffic projections are met.




5                           GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

OBSERVATIONS

The results of one case study are not sufficient evidence to evaluate the
adequacy of FAA's processes and criteria for awarding grants and issuing letters
of intent. However, in this period of budget constraint, when funds for the AIP
have been declining, FAA must ensure that projects are sound and that the
allocation of the program's scarce funds represents the best use of its limited
dollars. By developing and using rigorous, disciplined approaches and analyses
as a basis for making decisions on airport investments, FAA can optimize the
use of scarce federal funds for future airport development.

 Several concerns about FAA's processes surfaced during our review of this
 project. First, in performing key analyses to justify the initial grants and the
 letter of intent for the new airport, FAA did not consistently use reliable,
complete, and verifiable data. This was evident from FAA's use of unverified
weather data in its benefit/cost analysis and its reliance, for the letter of intent,
on a benefit/cost analysis that was not updated to reflect changes, such as the
improved access to Drake Field. FAA's use of more credible information could
have produced a more reliable benefit/cost analysis. Second, FAA has no
quantifiable means to demonstrate compliance with certain of its funding
 criteria, such as showing that a project will significantly enhance systemwide
airport capacity. A clear definition of what constitutes a significant
 enhancement of system capacity for projects at small airports could have
provided a more credible demonstration that key criteria were met as a basis
 for committing federal funds to this project. Having such a definition would
 not have to preclude FAA's use of qualitative analyses or discretionary
judgment but could provide a common reference point for assessing the
potential impact of competing projects. Finally, in some cases, FAA did not
document the rationale for makirg assumptions or decisions, especially where
subjective judgment was a major component of its decisions. For example,
 FAA did not provide a documented rationale for assuming that all air traffic
 would transfer to the new airport from Drake Field.

SCOPE AND METHODOLOGY

To address our review's objectives, we had discussions with and collected
documents from officials at a variety of organizations, including FAA
headquarters, FAA's Southwest Region, FAA district offices, FHWA
headquarters and Arkansas offices, the Arkansas State Highway and
Transportation Department, the Northwest Arkansas Regional Airport Authority,
Drake Field, the Northwest Arkansas Council, the Northwest Arkansas Regional
Planning Commission, five airlines currently serving Drake Field, DHL

6                          GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

Worldwide Express, Federal Express, such local corporations as Walmart and
Tyson, Drake Field's air traffic control tower, and bond rating agencies and
underwriting firms (including the Llama Company, the underwriter for the new
airport). We also talked with the mayor and a councilman from Fayetteville,
airport consultants for the new airport and for Drake Field, and private citizens
from the northwest Arkansas area who had information or voiced strong
opinions about the new airport. We examined numerous documents pertaining
to the new airport, including the feasibility study; the environmental impact
study;. the record of decision; the financial plans; and FAA's benefit/cost
analysis, project schedule, and complete project/grant files. We also examined
pertinent statutes and regulations on the criteria to award AIP grants and letters
of intent and to determine the federal share for airport-related highway
projects.

AGENCY COMMENTS AND OUR EVALUATION

We provided the Department of Transportation's FHWA and FAA with a copy of
our draft report for review and comment. We met with representatives of
FHWA, including the Group Leader for Federal-Aid Programs, and FAA,
including the Director for Airport Planning and Programming. FHWA provided
clarifying and technical comments, which we incorporated as appropriate. FAA
representatives said they were pleased the draft report recognized that FAA had
followed established procedures in awarding AIP grants to the Northwest
Arkansas Regional Airport. FAA officials stated that providing a letter of intent
for this project was consistent with the congressional intent for capacity
enhancement as expressed in Senate Appropriations Committee Report 103-310.
They emphasized that funds made available pursuant to the letter of intent will
complete FAA's financial participation in the new airport, which had been
initiated with AIP grants. They explained that the letter of intent will allow a
reduction in construction time from 3 years to slightly more than
1 year, thereby saving an estimated $24 million in project costs relative to
continued funding through annual AIP grants.

FAA officials indicated that Drake Field, which currently serves the region, is
safe but has physical limitations, due in large measure to the surrounding
mountains. Moreover, FAA officials noted that Drake Field does not meet
FAA's current design standards, such as those for taxiways. They also noted
that estimates to make Drake Field conform with design standards to
accommodate its current commuter fleet mix would approach $40 million, with
as much as $35 million eligible for AIP grants. FAA officials maintained that
the cost to bring Drake Field up to FAA's design standards would equal or
exceed the amount of federal funds to be provided through the letter of intent

7                         GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

that completes FAA's investment in the new airport. Finally, FAA officials
clarified that Drake Field has not acquired a full instrument landing system, as
indicated in the draft report. Rather, they indicated that Drake Field's new
landing system will provide significantly less approach capability than a full
instrument landing system.

FAA officials told us that the completion of the new airport will provide the
northwest Arkansas area with an airport that conforms to all of FAA's design
standards for all commercial aircraft likely to serve the region today and in the
future. FAA officials indicated that the new airport will provide a longer
runway, with standard precision approaches on both runway ends, and will
have a much greater physical area to accommodate aviation-related activities
and enterprises. As a result, FAA officials indicated that air carriers will be
able to serve the region with a broader mix of aircraft and in a wider range of
weather conditions, permitting faster and more reliable air service. They also
noted that businesses in the region have announced a collective commitment to
use competitive air service from the new airport. FAA officials indicated that
the economic advantages associated with providing service from the new
airport would cause air carriers to use the new airport once it becomes
operational. Finally, they maintained that the new airport's location will
minimize the adverse effects of noise associated with large jet aircraft serving
the region and will readily permit expansion when the need arises.

In our view, the points raised by FAA officials do not relieve FAA of its
responsibility to ensure compliance'with the criteria for letters of intent nor to
ensure that decisions, especially when subjective judgment is a major
component, are based on reliable,'complete, and verifiable data. First, although
the Senate Appropriations Committee Report supported "expeditious
consideration" of a letter of intent for the new airport and expressed the
Committee's view that the airport wouldfenhance systemwide capacity, FAA
was not relieved of the statutory, regulatory, and policy requirements that must
be met in order to issue a letter of intent. For example, FAA is still bound
under section 47110(e)(2)(C) of title 49 of the U.S. Code to demonstrate that
the project would enhance systemwide capacity significantly. FAA officials
concur that they have not defined what would constitute a significant
enhancement of systemwide capacity for projects at smaller airports. Without
that determination, it is not clear that this criterion for a letter of intent has
been met.

Second, while FAA believed it was saving money by issuing a multiyear letter of
intent instead of financing the remaining projects through three annual grants,
the same could be said for most multiyear projects. There are currently about

8                         GAO/RCED-97-179R Compliance With Federal Grant Requirements
B-276936

26 other projects under consideration for letters of intent. We also do not
dispute FAA's assertion that the new airport will have capabilities superior to
those at Drake Field. However, letters of intent are supposed to be issued for
projects that significantly enhance systemwide capacity and have a benefit/cost
ratio that exceeds 1. At a time when AIP funds are diminishing, it is important
to ensure that, among competing projects, scarce funds are awarded to those
that meet program requirements.

Third, Drake Field, like many airports throughout the country, is operating
under FAA's waivers, and because of the nearby terrain its instrument landing
system will not provide the same instrument landing capabilities as a typical
system. However, these situations highlight our position that the benefit/cost
analysis for the letter of intent should have been updated to include verifiable
information and to reflect changes that occurred since the original analysis was
completed. For example, the cost estimate of $38 million that was used in the
benefit/cost analysis to measure the cost of bringing Drake Field up to FAA's
design standards was developed by consultants, hired by the Northwest
Arkansas Regional Airport Authority, without consultation with officials at
Drake Field. Drake Field managers dispute this cost estimate. Also, while
Drake Field's new instrument landing system cannot provide the same landing
capabilities as a typical instrument landing system because of the nearby
terrain, it does provide pilots with improved access to Drake Field. This
change-along with such others as federal grants already expended on the new
airport, Drake Field's efforts to compete for regional commercial traffic, and the
use of verifiable weather data-would have affected the final outcome of an
updated benefit/cost analysis.

Fourth, although FAA indicated it believes that advantages associated with
providing service from the new airport would cause air carriers to move to the
new airport, those advantages would not guarantee that they will move.
Nevertheless, the assumption that al} commercial airlines would move to the
new airport was a key assumption in FAA's approval of grants and in the
benefit/cost analysis. However, it is uncertain that all commercial airlines
serving Drake Field will move to the new airport That assumption was made
in spite of the knowledge that the city of Fayetteville intended to keep Drake
Field open. Furthermore, from our discussions with the five airlines that serve
Drake Field, we learned that only one airline is clearly interested in moving to
the new airport and that among the things all the airlines will consider when
deciding whether to move is the cost differential between using the two
airports.



9                         GAO/RCED-97-179R Compliance With Federal Grant Requirements
      B-2 76936

      As agreed with your office, unless
                                           you publicly announce its contents
      we plan no further distribution                                            earlier,
                                       of this report until 7 days from
      letter. At that time, we will send                                 the date of this
                                         copies to interested congressional
     committees; the Secretary of Transportation;
     Highway Administration; the Administrator, the Administrator, Federal
     and the Director, Office of Management         Federal Aviation Administration;
                                                 and Budget. Copies will also be
     available to other interested parties                                         made
                                            on request.
     We performed our work from March
     generally accepted government auditing  1997 to May 1997 in accordance
                                                                                with
                                                standards. Major contributors to
     report were Paul Aussendorf, Beverly                                           this
     Desaulniers, Dana Greenberg, David       Bendekgey,  Sarah  Brandt,  Helen
     me at (202) 512-3650 if you have       Hooper, and Randy Williamson.
                                        any questions.                         Please call

     Sincerely yours,



      harScd              Ad~4
 Gerald Dillingham, Ph.D.
 Associate Director, Transportation
                                    Issues
 Enclosures - 2




10                           GAO/RCED-97-179R Compliance
                                                         With Federal Grant Requirements
ENCLOSUREI                                                  ENCLOSURE




6Ao Transportation Issues


       AIRPORT FINANCING: Compliance
       With Federal Grant Requirements



       Case Study on Northwest Arkansas
       Regional Airport




11               GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                    ENCLOSURE I




GAO Background
    New Airport
     * Airport has an 8,800-foot runway with full
       instrument landing system for both
       runway ends.
     * Control tower is sponsor-funded and
       -operated.
     * Terminal has 78,000 square feet.
     * Runway's aggregate base has been laid;
       pavement will be poured in June 1997.
     * Airport to open in the fall of 1998.




12                  GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                          ENCLOSURE I




GAD Background
    Total Estimated Cost
     * As of January 1997, the new airport's
       cost was estimated to be $107.4 million.
     · AIP will pay almost two-thirds of this
       cost, with $32.7 million already paid.
              Federal   65.0%




                                                  State 6.0%

                                       Sponsor 29.0%




13                        GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                            ENCLOSURE I




GA      Background
        Actual and Proposed AIP Costs
     Fiscal year     AIP funds    Purse
     1991            $ 601,538    Master plan study
     1992                     0
     1993               656,904   Environmental impact statement
     1994             9,019,075   Land acquisition and relocation
     1995           12,371,000    Site preparation
     1996           10,000,000    Site preparation
     1997             7,000,000   Landside infrastructure and equipment
     1998             3,500,000   Runway, taxiway, and apron construction
     1999             5,000,000   Runway, taxiway, and apron construction
     2000             7,000,000   Runway, taxiway, and apron construction
     2001             7,000,000   Runway, taxiway, and apron construction
     2002             7,000,000   Runway, taxiway, and apron construction
     Total         $69,148,517




14                        GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                      ENCLOSURE I




GAo     Review Questions

     * Did FAA follow its process for awarding
       AIP grants to the new airport?
     • Did FAA follow its criteria for issuing the
       letter of intent (LOI) for the new airport?
     * Was the federal share for the new
       airport's highway connector consistent
       with other airport connector projects?
     * What are the key factors that will affect
       the new airport's viability?




15                    GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSUREI                                                        ENCLOSUREI




Go Results in Brief
   Grant Award Process
     * FAA followed its grant award process, which
       allows subjective assessment of needs.
     * FAA approved a grant based, in part, on its
       subjective assessment that the new airport
       would replace Drake Field as the region's
       commercial service airport, but
      . airlines serving Drake Field have made no
        firm commitment to use the new airport and
      * Drake Field is actively seeking to retain
        commercial service.




16                     GAO/RCED-97-179R Compliance With Federal Grant Requirements
 ENCLOSURE I                                                     ENCLOSURE I




.GAO    Results in Brief
        LOI Criteria
         FAA considered five key LOI criteria but did
         not demonstrate that two were met.
        * FAA has not defined what constitutes a
          significant capacity enhancement for
           projects at small airports.
        * GAO's concerns on benefit/cost analysis are
          * questionable assumptions and data were
            used and
          * information and conditions were not
            updated for the LOI.




 17                   GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                    ENCLOSURE I




GAD Results in Brief
    Highway Connector Funding
     · The federal share of funding for the new
       airport's connector was set at 95 percent by
       the National Highway System Designation Act
       of 1995.
     * Other statutory provisions allow states to
       obtain the 95 percent federal share for
       highway funding based on many factors.
     · A comparison with the federal share of
       funding for other airport connectors could not
       be made because FHWA does not maintain
       such information.




18                  GAO/RCED-97-179R Compliance With Federal Grant Requirements
 ENCLOSURE I                                                     ENCLOSURE I




GxA     Results in Brief
        New Airport's Viability
      . The viability of the new airport depends on
        * how much scheduled air traffic transfers
           from Drake Field,
        * obtaining capital and minimizing financing
           costs,
        * controlling remaining construction costs, and
        * the accuracy of projected nonairline
           revenues.
      * Some uncertainty exists with all of these
         factors.




 19                   GAO/RCED-97-179R Compliance With Federal Grant Requirements
 ENCLOSURE I                                                      ENCLOSURE I




SDA0     AlP Grant Awards
         FAA's Project Selection Process
       * FAA allocates AIP discretionary funds by
         applying a national priority system:
          * projects receiving funding typically fall
            within a specified priority range and
          * projects outside the priority range may
            still receive funding based on FAA's
            judgment.
       * The new airport received a ranking
         outside the priority range for funding.




 20                    GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSU'RE I                                                      ENCLOSURE [




GAO AIP Grant Awards
         FAA's Project Selection Process
     * FAA chose to fund the project because of
       * population growth between 1980-90 at 18.1
         percent--nearly twice the national average,
       * constraints at Drake Field (e.g., operating
         under FAA's waivers, weather, no precision
         landing approach, and constrained runway
         expansion), and
       * local community and airline support.
     · Once approved, future AIP funding is a priority.




21                     GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                    ENCLOSURE I




GMQ    AIP Grant Awards
       Questionable Assumption Used
        FAA's justification was based on the
        assumption that the new airport would
        replace Drake Field as the region's
        commercial service airport, but
       · the city of Fayetteville stated its intent
         to retain commercial traffic at Drake
         Field and
       * no airline had committed to use the new
         airport, although some were interested.




 22                 GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                   ENCLOSURE I




       LOI for New Airport
       Key Criteria for an LOI
 *An LOI can be issued only
  * to a primary or reliever airport,
  * for airside development,
  * with financial commitment from the sponsor,
  * for projects that significantly enhance
    systemwide capacity, and
  * when the benefit/cost ratio is greater than 1.




23                 GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                    ENCLOSURE I




GAD    LOI for New Airport
       Compliance With Key Criteria
        FAA did not demonstrate that two criteria
        were met.
       * First, FAA has not defined what constitutes
          a significant capacity enhancement for
          projects at small airports.
         · FAA determined that the new airport
           would add capacity by eliminating
           constraints affecting Drake Field.
         * It is not clear that the added capacity
           would be a significant enhancement.




24                  GAO/RCED.97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                    ENCLOSURE I




GAO    LOI for New Airport
       Compliance With Key Criteria
         Second, the benefit/cost analysis
         included questionable assumptions and
         data and was not updated. For example,
         it
        * assumed a 100 percent transfer of air
           traffic to the new airport,
        * used unverified weather data, and
        · was not updated to reflect installation of
           a new instrument landing system that
           improves access to Drake Field.




25                  GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSUREI                                                      ENCLOSUREI




GAO New Airport Connector
    Comparison With Other Connectors
     . The National Highway System Designation
       Act of 1995 set the federal share of funds for
       the new airport connector at 95 percent.
     * Other statutory provisions allow a 95 percent
       federal funding share--for example, for states
       with a high percentage of Native American or
       federal lands.
     * A comparison with the federal share of other
       airport connectors can not be made because
       FHWA does not maintain such data.




26                   GAO/RCED-97-179R Compliance With Federal Grant Requirements
     ENCLOSURE I
                                                                    ENCLOSURE I




GAO New Airport Connector
            Condition of Current Access Roads
          *Current access to the new airport is via
             state highways 264 and 12, which are
             inadequate for the anticipated increases
             in traffic.
            * Both highways are two-lane roads with
              narrow lanes and shoulders and sharp
              curves.
           * Highway 264--the airport's primary
              access--has a higher accident rate than
              similar highways in the state.




27                     GAO/ICED-97-179R Compliance With Federal Grant
                                                                      Requirements
ENCLOSURE I                                                      ENCLOSURE I




SGD Viability of New Airport
    Air Traffic Projections
        Ultimately, the new airport's viability depends
        on whether projected air traffic is realized.
          Drake Field will compete for commercial
          traffic.
       * No airline has committed to use the new
          airport, but airlines are evaluating it.
         · The new airport's costs exceed Drake
            Field's ($10 vs. $1.50 per enplanement).
         * Airlines will consider operating costs.
         * Airlines will consider new market potential.




28                    GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE I                                                   ENCLOSURE I




GAf Viability of New Airport
    Access to and Cost of Capital
     *Outside financing depends on privately
       placed and narrowly secured debt:
      * below-market bridge loans,
      * $29.5 million bond backed by LOI,
      * $48.0 million revenue bond, and
      * $10.0 million hangar bond (uncertain).




29                 GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSUREI                                                     ENCLOSUREI




Gcd    Viability of New Airport
       Project Costs & Nonairline Revenues
      · The new airport's construction costs are
        within budgeted levels, but terminal
        construction has not started.
      * Nonairline revenues (e.g., concessions,
        parking, and tenants) seem reasonable if
        projected levels of passenger traffic are
        met.




30                  GAO/RCED-97-179R Compliance With Federal Grant Requirements
ENCLOSURE II                                                                    ENCLOSURE II

        KEY EVENTS IN THE DEVELOPMENT AND CONSTRUCTION OF THE
                   NEW NORTHWEST ARKANSAS AIRPORT


 Date             Key event
 1950-1990        Local consideration was given to a new airport for Northwest Arkansas,
                  but no actions were taken or agreements reached due to local concerns.
 September 1990   Representative Hammerschmidt convened a field hearing concerning the
                  need for a new regional airport.
 December 1990    Local communities voted to create the Northwest Arkansas Regional
                  Airport (NWARA) Authority to explore the feasibility of a new airport.
 January 1991     The NWARA Authority selected a team to study the feasibility/site
                  selection of a new airport in northwest Arkansas. Initially, the airport was
                  envisioned as a cargo airport with dual 12,500-foot runways.
 March 1991       FAA provided a $601,538 grant for a feasibility study of NWARA,
 August 1991      The study team issued its feasibility report on the NWARA. The report
                  did not reject the idea of a cargo airport; it projected 16 flights per day
                  for this activity. The report cited the potential for a new commercial
                  service airport to serve northwest Arkansas.
 February 1992    A new master plan was completed for Drake Field; the plan
                  acknowledged limitations for expansion.
 June 1992        The city of Fayetteville passed a resolution acknowledging that (1)the
                  region needed new airport facilities at Drake Field or a new airport; (2)a
                  new airport may replace Drake Field; and (3)the city would not stand in
                  the way of airlines who want to transfer operations to a new airport.
 November 1992    Seven local communities that were part of the NWARA Authority held a
                  referendum to determine if any of the entities wanted to withdraw from
                  the authority; 74 percent of voters rejected the referendum, thereby
                  electing to remain in the authority.
 May 1993         A master plan for NWARA was completed and accepted by FAA. The
                  basic cost of the airport was projected to be about $145 million.
 September 1993   FAA provided an AIP grant of $656,904 for the environmental impact
                  study (EIS) at NWARA.




31                                 GAO/RCED-97-179R Compliance With Federal Grant Requirements
     ENCLOSURE II
                                                                                      ENCLOSURE I
      June 1994         The NWARA Authority began circulating a proposed cooperative
                        agreement among the seven communities comprising
                        would have designated NWARA as the exclusive commercialthe authority that
                        airport for northwest Arkansas. The initiative                 service
                                                                       was never executed due to
                        concerns over its legality.
      June 1994         FAA completed its EIS affirming that the project was
                        existing national
                                                                             consistent with
                                         environmental policies and objectives.
     July 1994         The NWARA Authority submitted a request to FAA for
                                                                                 AIP funds
                       (preapplication) for a new airport. The airport, as planned,
                       an 8,800-foot runway, an instrument landing system,            would include
                       and an airport access road. Advantages given for the    a terminal  building,
                                                                                 new airport
                       included a longer runway suitable for jet aircraft operations,
                       approach, obstruction-free terrain, avoidance of ground         a precision
                       and expansion capability.                                  fog conditions,
     July 1994         The Senate Appropriations Committee expressed support
                                                                                     (Report 103-
                       310) for a $54 million multiyear letter of intent for
                                                                             NWARA.
     August 1994       FAA issued an affirmative Record of Decision on the
                                                                               EIS for NWARA,
                       which made the airport eligible for AIP grants for land
                       construction.
                                                                               acquisition and
     September 1994    FAA awarded an AIP grant for $9,019,075 for land acquisition
                       NWARA.                                                       at
     October 1994     The city of Fayetteville passed a second airport-related
                      reiterating its earlier June 1992 position on a new airport;resolution
                      its intent to retain control of Drake Field and reaffirmed it also stated
                      be a party to the cooperative agreement being circulatedthat it would not
                      Authority.                                                    by the NWARA
 June 1995            FAA awarded $4,430,804 in AIP funds for site preparation
                      NWARA.                                                   at the
 August 1995          The Senate Appropriations Committee (Report 104-126)
                                                                           reaffirmed its
                      support of a letter of intent for NWARA and encouraged
                                                                             FAA to enter
                      into such an agreement.
 August 1995           FAA awarded $7,440,196 in AIP funds for site preparation
                                                                                     at NWARA.
 September 1995       After learning that FAA would not be able to fund the
                                                                               new airport
                      sufficiently with AIP funds and fearing that costs per
                                                                              enplaned passenger
                      would be too high, the NWARA Authority scaled back
                      of the airport, dropping the total cost from $144 million the size and cost
                      $107 million. The authority also produced an alternativeto about
                      feasibility study to accompany the scaled back airport financial
                                                                                design.

32                                    GAO/RCED-97-179R Compliance With Federal
                                                                               Grant Requirements
ENCLOSURE II                                                                 ENCLOSURE II

 February 1996   FAA awarded a $10 million AIP grant for site grading and drainage at the
                 NWARA.
 March 1996      Construction began at NWARA; the contract for grading and drainage
                 was awarded for about $6.5 million less than anticipated.
 July 1996       The Senate Appropriations Committee (Report 104-325) endorsed
                 expeditious consideration of a multiyear letter of intent for NWARA.
 November 1996   The NWARA Authority made a final request for a letter of intent for
                 NWARA.
 February 1997   FAA approved a letter of intent to fund the NWARA for $29.5 million
                 beginning in fiscal year 1998 and ending in fiscal year 2002. In
                 approving a letter of intent, FAA officials believed they were preventing
                 increases in construction costs. According to FAA officials, remaining
                 construction costs eligible for federal funding exceeded what could be
                 provided in.a single-year federal grant. The airport authority estimated
                 that bidding construction of the runway, taxiway, and apron as one
                 package would save about $24 million over a three-phased construction
                 approach. Issuing a letter of intent would allow the airport authority to go
                 forward with construction through a single package while retaining
                 eligibility for federal funding on a reimbursable basis.




(341533)

33                                GAO/RCED-97-179R Compliance With Federal Grant Requirements