Airport Financing: Annual Funding As Much As $3 Billion Less Than Planned Development

Published by the Government Accountability Office on 1999-02-10.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Aviation, Committee on
                    Transportation and Infrastructure, House of

For Release
on Delivery
Expected at
                    AIRPORT FINANCING
9:30 a.m. EST
February 10, 1999
                    Annual Funding As Much As
                    $3 Billion Less Than
                    Planned Development
                    Statement of Gerald L. Dillingham, Associate Director,
                    Transportation Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Subcommittee:

    We are here today to discuss airport funding issues. Over the last few
    years, your Committee and others have asked us to study these issues in
    considerable depth. Today’s testimony focuses on three questions: (1) how
    much are airports spending on capital development and what are the
    sources of these funds? (2) if current funding levels continue, how do they
    compare with airports’ plans for development? and (3) what effect will
    various proposals to increase or make better use of existing funding have
    on airports’ ability to fulfill their capital development plans?

    In summary,

•   In 1998, we reported that the 3,304 airports that make up the federally
    supported national airport system obtained about $7 billion from federal
    and private sources for capital development.1 More than 90 percent of this
    funding came from three sources: tax-exempt bonds issued by states and
    local airport authorities ($4.1 billion), federal grants from the Airport
    Improvement Program ($1.4 billion), and passenger facility charges paid
    on airline tickets ($1.1 billion).2 The magnitude and type of funding varies
    with airports’ size. The nation’s 71 largest airports accounted for nearly
    80 percent of the total funding. As a group, these airports are less
    dependent on federal grants: They received only about 10 percent of their
    funding from the Airport Improvement Program. By contrast, the 3,233
    smaller airports in the national airport system relied on the Airport
    Improvement Program for half of their funding.
•   Airports planned to spend as much as $10 billion per year for capital
    development for the years 1997 through 2001, or $3 billion per year more
    than they were able to fund in 1996. The difference between funding and
    the costs of planned development is greater for smaller commercial and
    general aviation airports than for their larger counterparts. Smaller
    airports’ funding would cover only about half the costs of their planned
    development, while larger airports’ funding would cover about 4/5 of their
    planned development. Airports’ planned development can be divided into
    four main categories based on the funding priorities of the Federal
    Aviation Administration’s (FAA) Airport Improvement Program. About
    $1.4 billion per year was planned for safety, security, environmental, and

     Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998). This
    report was based on airport funding in 1996, the most recent year for which we have conducted an
     Passenger facility charges are fees paid by passengers to an airport. Airports may currently impose a
    fee of $1, $2, or $3 per flight segment, up to a maximum of four segments per round trip to finance
    eligible airport-related projects, subject to FAA’s approval.

    Page 1                                                                            GAO/T-RCED-99-84
                 reconstruction projects, FAA’s highest priorities for Airport Improvement
                 Program funding. Another $1.4 billion per year was planned for projects
                 FAA regards as the next highest priority, primarily adding airport capacity.
                 Other projects FAA considers to be lower in priority, such as bringing
                 airports up to FAA’s design standards, add another $3.3 billion per year.
                 Finally, airports anticipated spending another $3.9 billion per year on
                 projects that are not eligible for Airport Improvement Program funding,
                 such as expanding commercial space in terminals and constructing
                 parking garages.
             •   Several proposals to increase or make better use of existing funding have
                 emerged in recent years, including increasing the amount of Airport
                 Improvement Program funding and raising the maximum amount airports
                 can levy in passenger facility charges. Under current formulas, increasing
                 the amount of Airport Improvement Program funding would help small
                 airports more than larger airports, while raising passenger facility charges
                 would help larger airports more. Other initiatives for making better use of
                 existing funding, such as Airport Improvement Program block grants to
                 states, have had varied success, but none appears to offer a major
                 breakthrough in reducing the shortfall between funding and airports’ plans
                 for development.

                 Airports are a linchpin in the nation’s air transportation system. Adequate
Background       and predictable funding is needed for airport development. The National
                 Civil Aviation Review Commission—established by Congress to determine
                 how to fund U.S. civil aviation—reported in December 1997 that more
                 funding is needed to develop the national airport system’s capacity,
                 preserve small airports’ infrastructure, and fund new safety and security
                 initiatives.3 Funding is also needed to mitigate the noise and other negative
                 environmental effects of airports on nearby communities.

                 Airports provide important economic benefits to the nation and their
                 communities. Air transportation accounted for $63.2 billion, or 0.8 percent,
                 of U.S. Gross Domestic Product in 1996, according to the Department of
                 Transportation’s statistics. 1.6 million people are employed at airports in
                 1998, according to the Airports Council International-North America. In
                 our own study of airport privatization in 1996, we found that the 69 largest

                 Avoiding Aviation Gridlock and Reducing the Accident Rate: A Consensus for Change, National Civil
                 Aviation Review Commission (Dec. 1997).

                 Page 2                                                                        GAO/T-RCED-99-84
                                  U.S. airports had 766,500 employees (686,000 private and 80,500 public

                                  In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and
Funding Sources Vary              passenger facility charges (PFC) together provided about $6.6 billion of the
Depending on                      $7 billion in airport funding. State grants and airport revenue contributed
Airports’ Size                    the remaining funding for airports. Table 1 lists these sources of funding
                                  and their amounts in 1996.

Table 1: Sources of Funding for
Airports                          Dollars in billions
                                  Funding                      1996        Percentage Source
                                  source                     amount            of total of funds
                                  Tax-exempt                                           State and local governments or airport
                                  bonds                        $3.690a              53 authorities issue tax-exempt bonds.
                                  Airport                                              The Congress makes funds available from
                                  Improvement                                          the Airport and Airway Trust Fund, which
                                  Program (AIP)                                        receives revenues from taxes on domestic
                                                                                       and international travel, domestic cargo
                                                                                       transported by air, and noncommercial
                                                               $1.372               20 aviation fuel.
                                  Passenger                                             unds come from passenger fees of $1, $2,
                                  facility charges                                      or $3 per trip segment at commercial
                                                                                        airports, up to a maximum of four trip
                                                            $1.114 1                6 F segments per round trip.
                                  Special facility                                      Issued on the behalf of beneficiaries other
                                  bonds                         $.414                 6 than airports, such as airlines.
                                  State                                                 Funds come from such sources as state
                                  contributions                                         aviation fuel and airline property taxes,
                                                                                        aircraft registration fees, state bonds, and
                                                                                        state general fund appropriations. The
                                                                                        extent to which these sources are used
                                                                $.285b                4 varies by state.
                                  Airport revenue                                       Funds are generated from (1) revenues
                                                                                        derived from the operation and landing of
                                                                                        aircraft, passengers, or freight and (2)
                                                                                        revenues derived from concessions and
                                                                $.153c                2 leases.
                                  Total                        $7.028              100d
                                      Net of refinancing.
                                      State grants only. Amounts for local capital subsidies are unknown but, we believe, are minimal.
                                   Net operating revenue in excess of a minimum coverage ratio of 125 percent of debt service
                                  (principal and interest payments).
                                      May not total 100 due to rounding.
                                   Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports
                                  (GAO/RCED-97-3, Nov. 7, 1996).

                                  Page 3                                                                            GAO/T-RCED-99-84
                                         The amount and type of funding varies with airports’ size. The nation’s 71
                                         largest airports (classified by FAA as large hubs and medium hubs), which
                                         accounted for almost 90 percent of all passenger traffic, received more
                                         than $5.5 billion in funding in 1996, while the 3,233 other national system
                                         airports received about $1.5 billion. As shown in figure 1, large and
                                         medium hub airports rely most heavily on private airport bonds, which
                                         account for roughly 62 percent of their total funding. By contrast, the 3,233
                                         smaller national system airports obtained just 14 percent of their funding
                                         from bonds. For these smaller airports, AIP funding constitutes a much
                                         larger portion of their overall funding—about half.

Figure 1: Distribution of 1996 Funding Sources for Large and Medium Hub and Other National System Airports

          71 larger airports                                        3,233 smaller airports
            $5.584 billion                                              $1.547 billion

                                      10.6%           AIP        50.5%

                                        18%          PFC          7.2%

                                       1.8%                      11.9%
                                                  State grants
                                         3%                      16.2%
                                              Special facility
                                                   Airport         0%

                                      62.1%                      14.2%
                                              Airport bonds

                                         Airports’ planned capital development over the period 1997 through 2001
Funding Levels Fall                      may cost as much as $10 billion per year, or $3 billion more per year than
Short of Plans for                       in 1996. Figure 2 compares airports’ total funding for capital development
Development                              in 1996 with their annual planned spending for development. Funding for
                                         1996, the bar on the left, is shown by source (AIP, PFCs, state grants, and
                                         operating revenues). Planned spending for future years, the bar on the

                                         Page 4                                                          GAO/T-RCED-99-84
    right, is shown by the relative priority FAA has assigned to the projects, as

•   Reconstruction and mandated projects, FAA’s highest priorities, total
    $1.4 billion per year and are for projects to maintain existing infrastructure
    (reconstruction) or to meet federal mandates, including safety, security,
    and environmental requirements, including noise mitigation requirements.6

•   Other high-priority projects, primarily adding capacity, account for
    another $1.4 billion per year.

•   Other AIP-eligible projects, a lower priority for FAA, such as bringing
    airports up to FAA’s design standards, add another $3.3 billion per year for
    a total of $6.1 billion per year.

•   Finally, airports anticipate spending another $3.9 billion per year on
    projects that are not eligible for AIP funding, such as expanding
    commercial space in terminals and constructing parking garages.

     Estimates of planned development costs are based on our report entitled Airport Development Needs:
    Estimating Future Costs (GAO/RCED-97-99, Apr. 7, 1997). As that report noted, estimating future
    development is fraught with complications. Unanticipated needs and political and financial feasibility
    affect actual airport development, and the estimates themselves are subject to problems with data
     These estimates of planned development costs generally do not include the costs of maintaining the
    nation’s airport runways in good condition beyond the next few years. We recently reported that the
    cost of maintaining just one-third of these runways could reach $1.38 billion over 10 years. See Airfield
    Pavement: Keeping Nation’s Runways in Good Condition Could Require Substantially Higher Spending
    (GAO/RCED-98-226 Jul. 31, 1998).

    Page 5                                                                             GAO/T-RCED-99-84
Figure 2: 1996 Funding Compared With
Planned Annual Development Costs         Dollars in millions



                                                               $7,028 Available net operating               projects $3,930
                                                                      revenue $153
                                          $7,000                      Special facility
                                                                      bonds (net) $414

                                          $5,000                      Airport bonds
                                                                      (net) $3,690                          Other AIP-eligible
                                          $4,000                                                            $3,336

                                          $3,000                      State grants $285
                                                                                                            Other high-priority
                                                                      PFC $1,114
                                          $2,000                                                            projects $1,360

                                                                      AIP $1,372                            Reconstruction &
                                                                                                            mandates $1,414
                                                         Funding source 1996                    Planned development
                                                                                                1997 through 2001

                                       Within this overall picture of funding and planned spending for
                                       development, it is difficult to develop accurate estimates of the extent to
                                       which AIP-eligible projects are deferred or canceled because some form of
                                       funding cannot be found for them. FAA does not maintain information on
                                       whether eligible projects that do not receive AIP funding are funded from
                                       other sources, deferred, or canceled. We were not successful in developing
                                       an estimate from other information sources, mainly because
                                       comprehensive data are not kept on the uses to which airport and special
                                       facility bonds are put. But even if the entire bond financing available to
                                       smaller airports were spent on AIP-eligible projects, these airports would
                                       have, at a minimum, about $945 million a year in AIP-eligible projects that
                                       are not funded. Conversely, if none of the financing from bonds were
                                       applied to AIP-eligible projects, then the full $3 billion funding shortfall
                                       would apply to these projects.

                                       Page 6                                                               GAO/T-RCED-99-84
Funding Difference at        The difference between current and planned funding for development is
Smaller Airports Is More     bigger, in percentage terms, for smaller airports than for larger ones.
Significant Than at Larger   Funding for the 3,233 smaller airports in 1996 was a little over half of the
                             estimated cost of their planned development, producing a difference of
Airports                     about $1.4 billion (see fig. 3). This difference would be even greater if it
                             were not for $250 million in special facility bonding for a single
                             cargo/general aviation airport.6 For this group of airports, the $782 million
                             in 1996 AIP funding exceeds the annual estimate of $750 million for FAA’s
                             highest-priority projects—those involving reconstruction, noise mitigation,
                             and compliance with federal mandates. However, there is no guarantee
                             that the full amount of AIP funding will go only to the highest-priority
                             projects, because one-third of AIP funds are awarded to airports on the
                             basis of the number of passengers boarding commercial flights and not
                             necessarily on the basis of projects’ priority.

                              Fort Worth Alliance Airport, a general aviation-cargo airport, issued $250 million in special facility
                             bonds in 1996.

                             Page 7                                                                              GAO/T-RCED-99-84
Figure 3: 1996 Funding Compared to
Annual Planned Development Costs      Dollars in millions
for Smaller Airports                  $3,500

                                                                                                          projects $465


                                      $2,000                                                              Other AIP-eligible
                                                                      Special facility
                                                                      bonds (net) $250
                                                                      Airport bonds (net) $220
                                                                                                          Other high-priority
                                                                      State grants $184                   projects $373
                                      $1,000                          PFC $111

                                       $500                                                               Reconstruction &
                                                                      AIP $782
                                                                                                          mandates $750

                                                                      Available net
                                                            -$104     operating revenue
                                                    Funding source 1996                    Planned development 1997
                                                                                           through 2001 (annualized)

                                     As a proportion of total funding, the potential funding difference between
                                     1996 funding and planned development for the 71 large and medium hub
                                     airports is comparatively less than for their smaller counterparts (see fig. 3
                                     and fig. 4). Larger airports potential shortfall of $1.5 billion represents 21
                                     percent of their planned development costs, while smaller airports’
                                     potential shortfall of $1.4 billion represents 48 percent of their
                                     development costs. Therefore, while larger and smaller airports’ respective
                                     shortfalls are similar in size, the greater scale of larger airports’ planned
                                     development causes them to differ considerably in proportion. Figure 4
                                     also indicates that $590 million in AIP funding falls $74 million short of the
                                     estimated cost to meet FAA’s highest priorities for
                                     development—reconstruction, noise mitigation, and compliance with
                                     federal mandates.

                                     Page 8                                                               GAO/T-RCED-99-84
Figure 4: 1996 Funding Compared to Annual Planned Development Costs for Large and Medium Hub Airports

 Dollars in millions



 $6,000                $5,584 Available net operating
                              revenue $257
                              Special facility                    AIP-ineligible
                              bonds (net) $165                    projects $3,464

                              Airport bonds
                              (net) $3,469
                                                                  Other AIP-eligible
 $2,000                       State grants $100
                                                                  Other high-priority projects
                              PFC $1,003                          $987
                                                                  Reconstruction &
                              AIP $590                            mandates $664
                 Funding source 1996              Planned development
                                                  1997 through 2001

                                          Proposals to increase airport funding or make better use of existing
Effect of Proposals to                    funding vary in the extent to which they would help different types of
Increase and Better                       airports and close the gap between funding and the costs of planned
Use Airport Funding                       development. For example, increasing AIP funding would help smaller
                                          airports more because current funding formulas would channel an
Is Mixed                                  increasing proportion of AIP to smaller airports. Conversely, any increase
                                          in PFC funding would help larger airports almost exclusively because they
                                          handle more passengers and are more likely to have a PFC in place.
                                          Changes to the current design of AIP or PFCs could, however, lessen the
                                          concentration of benefits to one group of airports. FAA has also used other

                                          Page 9                                                        GAO/T-RCED-99-84
                                         mechanisms to better use and extend existing funding sources, such as
                                         letters of intent, state block grants, and pilot projects to test innovative
                                         financing. So far, these mechanisms have had mixed success.

Increasing AIP Would Help                Under the existing distribution formula, increasing total AIP funding would
Smaller Airports Most                    proportionately help smaller airports more than large and medium hub
                                         airports. Appropriated AIP funding for fiscal year 1998 was $1.7 billion;
                                         large and medium hub airports received nearly 40 percent and all other
                                         airports about 60 percent of the total.7 We calculated how much funding
                                         each group would receive under the existing formula, at funding levels of
                                         $2 billion and $2.347 billion. We chose these funding levels because the
                                         National Civil Aviation Review Commission and the Air Transport
                                         Association (ATA), the commercial airline trade association, have
                                         recommended that future AIP funding levels be stabilized at a minimum of
                                         $2 billion annually, while two airport trade groups—the American
                                         Association of Airport Executives and the Airports Council
                                         International-North America—have recommended a higher funding level,
                                         such as AIP’s authorized funding level of $2.347 billion for fiscal year 1998.
                                         Table 2 shows the results. As indicated, smaller airports’ share of AIP
                                         would increase under higher funding levels if the current distribution
                                         formula were used to apportion the additional funds.

Table 2: Estimated Distribution of AIP
Funds at Different Funding Levels        Dollars in millions
                                                                                                                    Small, nonhub, other
                                                                                Large and medium hub              commercial service, and
                                                                                       airportsa                     general aviationa
                                         AIP funding                                             Percentage                         Percentage
                                         level                                    Amountb            of total        Amountb            of total
                                         $1,700.0                                    $628.9               39.4          $965.8               60.6
                                         $2,000.0                                    $718.1               37.9        $1,176.7               62.1
                                         $2,347.0                                    $821.2               36.6        $1,420.6               63.4
                                          Dollar amounts are based on the number of passengers boarding commercial flights in 1996 and
                                         exclude about $105.2 million in estimated carryover amounts.
                                          The distribution of funds were based on the proportional distribution of those funds during fiscal
                                         year 1997, the first year under the revised distribution formula established in the 1996

                                          Fiscal year 1999 AIP funding is $1.95 billion, though AIP is authorized only through Mar. 31, 1999, and,
                                         therefore, not more than $975 million may be obligated until AIP is further extended. (Title I, section
                                         101(g) of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (P.L.
                                         105-277, Oct. 21, 1998)).

                                         Page 10                                                                            GAO/T-RCED-99-84
Increasing PFC-Based       Increasing PFC-based funding, as proposed by the Department of
Funding Would Aid Larger   Transportation and backed by airport groups, would mainly help larger
Airports                   airports, for several reasons. First, large and medium hub airports, which
                           accounted for nearly 90 percent of all passengers in 1996, have the greatest
                           opportunity to levy PFCs. Second, such airports are more likely than
                           smaller airports to have an approved PFC in place.8 Finally, large and
                           medium hub airports would forego little AIP funding if the PFC ceiling were
                           raised or eliminated. Most of these airports already return the maximum
                           amount that must be turned back for redistribution to smaller airports in
                           exchange for the opportunity to levy PFCs.9

                           If the airports currently charging PFCs were permitted to increase them
                           beyond the current $3 ceiling, total collections would increase from the
                           $1.35 billion that FAA estimates was collected during 1998. Most of the
                           additional collections would go to larger airports. For every $1 increase in
                           the PFC ceiling, we estimate that large and medium hub airports would
                           collect an additional $432 million, while smaller airports would collect an
                           additional $46 million (see fig. 5). In total, a $4 PFC ceiling would yield
                           $1.9 billion, a $5 PFC would yield $2.4 billion, and a $6 PFC would yield
                           $2.8 billion in total estimated collections.10

                            As of Oct. 1, 1998, 273 commercial service airports—about 52 percent of eligible airports—imposed a
                           PFC, but 80 percent of all large and medium hub airports had a PFC.
                            49 U.S.C. §47114(f) requires that the yearly grants to large and medium hub airports be reduced by 50
                           percent of their annual collections or 50 percent of their annual apportionment, whichever is less. The
                           foregone grants are redistributed as discretionary grants, primarily to smaller airports. Through fiscal
                           year 1998, $921 million in AIP funding had been redistributed under this provision, $806 million of it to
                           smaller airports.
                             Estimates are based on PFCs in place as of Oct. 1, 1998, 1997 passenger boardings, and median
                           collection rates for each airport category in 1997. We are currently studying the effects of a PFC
                           increase and plan to report our results later this year.

                           Page 11                                                                            GAO/T-RCED-99-84
Figure 5: Projected PFC Collections
Under $3, $4, $5, and $6 PFC Ceilings,   Dollars in billions
January 1999






                                                          $3                      $4             $5                              $6
                                                                                       PFC Ceiling
                                                   Large and Medium Hub
                                                   Other Airports

                                         Increased PFC funding is likely to be applied to different types of projects
                                         than would increased AIP funding. Most AIP funding is applied to “airside”
                                         projects like runways and taxiways. “Landside” projects, such as
                                         terminals and access roads, are lower on the AIP priority list. However, for
                                         some airports, congestion may be more severe at terminals and on access
                                         roads than on airfields, according to airport groups.11

                                          FAA measures airfield congestion and delays but does not gather information on congestion on
                                         access roads or in terminals.

                                         Page 12                                                                       GAO/T-RCED-99-84
                                The majority of PFCs are currently dedicated to terminal and airport access
                                projects and interest payments on debt, and any additional revenue from
                                an increase in PFCs may follow suit.

FAA’s Efforts to Make           In recent years, the Congress has directed FAA to undertake other steps
Better Use of Existing AIP      designed to allow airports to make better use of existing AIP funds. Thus
Grants Have Had Mixed           far, some of these efforts, such as letters of intent and state block grants,
                                have been successful. Others, such as pilot projects to test innovative
Results                         financing and privatization, have received less interest from airports and
                                are still being tested. Finally, one idea, using AIP grants to capitalize state
                                revolving loan funds, has not been attempted but could help small airports.
                                Implementing this idea would require legislative changes.

Letters of Intent Are an        Letters of intent are an important source of long-term funding for airport
Important Source of Funding     capacity projects, especially for larger airports. These letters represent a
for Larger Airports             nonbinding commitment from FAA to provide multiyear funding to airports
                                beyond the current AIP authorization period. Thus, the letters allow
                                airports to proceed with projects without waiting for future AIP grants and
                                provide assurance that allowable costs will be reimbursed. Airports may
                                also be able to receive more favorable interest rates on bonds that are sold
                                to finance a project if the federal government has indicated its support for
                                the project in a letter of intent. For a period, FAA stopped issuing letters of
                                intent, but since January 1997, it has issued 10 letters with a total funding
                                commitment of $717.5 million. Currently, FAA has 28 open letters
                                committing a total of $1.180 billion through 2010.12 Letters of intent for
                                large and medium airports account for $1.057 billion, or 90 percent, of that
                                total. Airports’ demand for the letters continues—FAA expects at least 10
                                airports to apply for new letters of intent in fiscal year 1999.

State Block Grant Program Has   In 1996, we testified before this Subcommittee that FAA’s state block grant
Helped Smaller Airports         pilot program was a success.13 The program allows FAA to award AIP funds
                                in the form of block grants to designated states, that, in turn, select and
                                fund AIP projects at small airports. States then decide how to distribute
                                these funds to small airports. In 1996, the program was expanded from
                                seven to nine states and made permanent. Both FAA and the participating
                                states believe that they are benefiting from the program.

                                   Airport Improvement Program: Planned Funding Under Letters of Intent (GAO/RCED-99-33R) Dec. 9,
                                 Airport Improvement Program: State Block Grant Pilot Program Is a Success
                                (GAO/RCED-96-86) Mar. 14, 1996.

                                Page 13                                                                      GAO/T-RCED-99-84
Benefits of Innovative        In recent years, FAA, with congressional urging and direction, has sought to
Financing Are Being Tested    expand airports’ available capital funding through more innovative
                              methods, including the more flexible application of AIP funding and efforts
                              to attract more private capital. The 1996 Federal Aviation Reauthorization
                              Act gave FAA the authority to test three new uses for AIP
                              funding—(1) projects with greater percentages of local matching funds,
                              (2) interest costs on debt, and (3) bond insurance. In all, these three
                              innovative uses could be tested on up to 10 projects.14 Another innovative
                              financing mechanism that we’ve recommended—using AIP funding to help
                              capitalize state airport revolving funds—while not currently permitted,
                              may hold some promise.15

                              FAA is testing 10 innovative uses of AIP funding totaling $24.16 million, all at
                              smaller airports. Five projects tested the benefits of the first innovative
                              use of AIP funding—allowing local contributions in excess of standard
                              matching amount, which for most airports and projects is otherwise fixed
                              at 10 percent of the AIP grant.16 FAA and state aviation representatives
                              generally support the concept of flexible matching because it allows
                              projects to begin that otherwise might be postponed for lack of sufficient
                              FAA funding; in addition, flexible funding may ultimately increase funding
                              to airports. The latter five projects test the other two mechanisms for
                              innovative financing. Applicants have generally shown less interest in the
                              latter two options, which, according to FAA officials, warrant further study.

State Revolving Loan Funds    Some federal transportation, state aviation, and airport bond rating and
Could Extend the Use of AIP   underwriting officials believe using AIP funding to capitalize state revolving
Grants for Smaller Airports   loan funds would help smaller airports obtain additional financing.
                              Currently, FAA cannot use AIP funds for this purpose because AIP
                              construction grants can go only to designated airports and projects.
                              However, state revolving loan funds have been successfully employed to

                                Section 148 of the Federal Aviation Reauthorization Act of 1996 (P.L. 104-264).
                                Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).
                                There are three exceptions to the 10-percent local matching requirement, each of which entails a
                              higher local contribution: terminal development (25 percent), airport planning and development for
                              large and medium hub airports (25 percent), and noise compatibility programs for large and medium
                              hub airports (20 percent).

                              Page 14                                                                             GAO/T-RCED-99-84
                                    finance other types of infrastructure projects, such as wastewater projects
                                    and, more recently, drinking water and surface transportation projects.17

                                    While loan funds can be structured in various ways, they use federal and
                                    state moneys to capitalize the funds from which loans are then made.
                                    Interest and principal payments are recycled to provide additional loans.
                                    Once established, a loan fund can be expanded through the issuance of
                                    bonds that use the fund’s capital and loan portfolio as collateral. These
                                    revolving funds would not create any contingent liability for the U.S.
                                    government because they would be under state control.

Interest in Airport Privatization   Declining airport grants and broader government privatization efforts
Pilot Program Is Limited            spurred interest in airport privatization as another innovative means of
                                    bringing more capital to airport development, but thus far efforts have
                                    shown only limited results. As we previously reported, the sale or lease of
                                    airports in the United States faces many hurdles, including legal and
                                    economic constraints.18 As a way to test privatization’s potential, the
                                    Congress directed FAA to establish a limited pilot program under which
                                    some of these constraints would be eased.19 Starting December 1, 1997,
                                    FAA began accepting applications from airports to participate in the pilot
                                    program on a first-come, first-served basis for up to five airports. Thus far,
                                    two airports have applied to be part of the program.20

                                    Mr. Chairman, this concludes our prepared statement. We would be happy
                                    to respond to any questions that you or Members of the Subcommittee
                                    may have.

                                      Florida has an established revolving loan program. Between 1985 and 1998, the state has provided
                                    $75 million in loans to airports for land acquisition and capital projects. While some of the loans are
                                    later reimbursed through AIP funding for eligible projects, the state funds the loan program itself. In
                                    addition, the Virginia legislature is considering establishing a state airport revolving fund. In total, 39
                                    states have established state infrastructure banks using federal and state grant money to fund surface
                                    transportation projects. This same arrangement could be used if authorized by the state to fund
                                    aviation projects, and at least one state—Ohio—has already authorized its state infrastructure bank to
                                    fund aviation projects with state funds.
                                     Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports
                                    (GAO/RCED-97-3, Nov. 7, 1996).
                                      Section 149 of the Federal Aviation Reauthorization Act of 1996 (P.L. 104-264).
                                      These airports are Brown Field near San Diego, a general aviation airport, and Stewart International
                                    in New York, a nonhub airport, which has submitted its final application.

(348152)                            Page 15                                                                              GAO/T-RCED-99-84
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