Congress is considering legislation to reauthorize
the Federal Aviation Administration (FAA). The FAA, an agency of
the U.S. Department of Transportation, funds and operates the
nation's air traffic control system, enforces federal air safety
regulations, provides financial support to U.S. airports, and
performs other aviation-related functions. The FAA's authorization
expired in 1996, and since then Congress has granted several
temporary extensions as it tries to work out its differences with
the President and between competing proposals over the level of
funding for the agency.
The
main disagreements between the House and the Senate, and between
Congress and the President, over reauthorization of the FAA concern
how much to spend on aviation programs, the extent to which FAA
spending from the aviation trust fund will be supplemented with
general revenues, and whether future aviation trust fund spending
will be included in federal budget totals and subject to the
caps.
The
Aviation Investment and Reform Act (H.R. 1000) sponsored by
Representative Bud Shuster (R-PA) proposes that all or more of the
revenues flowing into the aviation trust fund be spent by the FAA
over the next five years. Although the bill in its original form
would have exceeded the fiscal year (FY) 2000 budget caps in the
1997 Balanced Budget Act, it was amended in late May 1999 to
conform to this year's caps, but not those applicable to fiscal
years after FY 2000. Alternatively, the Air Transportation Act (S.
82) introduced by Senator John McCain (R-AZ), as well as the
President's plan released with his FY 2000 budget in January 1999,
would allow the existing trust fund surplus to accumulate and the
spending caps to remain applicable.
Although the President has proposed trust
fund spending of $1.6 billion on the Aviation Improvement Program
(AIP) in FY 2000 and S. 82 would spend $2.8 billion, H.R. 1000 (the
House Committee on Transportation and Infrastructure plan) proposes
AIP spending of $2.5 billion for FY 2000 and more than $4 billion
per year between FY 2001 and FY 2004.
Some
in Congress object to the buildup of money in the aviation trust
fund and contend that all of, if not more than, the revenues now
flowing into the aviation trust fund should be spent on airport
improvements and other FAA operations. They argue that the
aviation-related user taxes should be dedicated to aviation and not
to other spending programs, deficit reduction, or tax cuts as has
often been the case with other federal trust funds. Revenues to the
aviation trust fund frequently have been diverted to "deficit
reduction" when less was spent on aviation-related funding than the
fund had received in dedicated revenues.
Unfortunately, the debate over the
mechanism for funding the FAA misses the more critical point: how
to improve and reform FAA programs so that they better serve
consumers, communities that own the airports, and the economy. For
more than a decade, both the media and the government's own
watchdogs, such as the U.S. General Accounting Office (GAO) and the
Office of the Inspector General of the Department of Transportation
(DOT), have reported on the FAA's failure to upgrade its
systems. The GAO once again has
placed the FAA's air traffic control modernization program on its
high-risk list, a distinction shared by such other troubled
agencies as the Department of Housing and Urban Development and the
Internal Revenue Service.
The
President and Congress also have neglected the obvious
opportunities to reform the management and funding of the nation's
commercial airports. Indeed, the failure to consider reforming the
FAA within the context of the debate over funding could eliminate
the likelihood of any real improvements in the foreseeable
future.
The
privatization of 66 airports around the world in the past two years
demonstrates that large airports can be self-funding, independent
of government financial support, and still provide substantial
windfall gains to their communities. Despite this record of
success, however, some in Congress appear determined to make
commercial airports even more dependent on scarce federal dollars
by proposing federal airport funding that is more than double that
of previous plans.
THE DEBATE ON AVIATION SPENDING
The
Federal Aviation Administration, which is expected to spend just
over $10 billion in FY 1999, is funded by a combination of general
revenues from the U.S. Treasury and ten separate dedicated taxes
imposed on users of the system. Chief among the user-related taxes
are the airline ticket tax, the aviation fuel tax, and the
international departure/arrival tax. In addition, depending on
which airports they use, air passengers may pay a federally
authorized and approved passenger facility charge (PFC) of up to $3
per flight, which is collected by
the airlines and returned to the airport from which the flight
originated.
Table 1 lists each of the trust fund's
taxes and the revenues it is estimated that they will provide the
fund in FY 1999.
Other user taxes are deposited in the
federal Airport and Airway Trust Fund, from which disbursements are
made to pay for the various FAA programs, including operation of
the air traffic control (ATC) system and grants to airports to
build, upgrade, or expand their equipment or facilities. Although
the PFC is not considered a federal tax, and the revenues so raised
are not deposited in the trust fund, about 10 percent (an estimated
$163 million of the estimated $1.45 billion the PFC will raise for
FY 1999) are passed on indirectly to smaller airports. Large and
medium hub airports that choose to implement the PFC (three-fourths
of the top 71 airports have done so) must give up 50 cents of trust
fund formula grants for every dollar they raise in PFCs. In turn, these offset
grants (called "foregone apportionments") are reallocated to other
projects, mostly at small airports.
The
aviation trust fund's uncommitted balance stood at $4.3 billion at
the end of FY 1998, and President Clinton's FY 2000 budget
estimates that this will rise by $3.2 billion to $8.2 billion at
the end of FY 2000 from anticipated revenues exceeding the
President's spending proposals.
Table 2 presents current trust fund
spending as well as projected FY 2000 spending under both the
President's proposal and the competing proposals (H.R. 1000 and
S.82) now under consideration.
Some
in Congress have objected to the buildup of money in the aviation
trust fund and contend that all, if not more, of the revenues now
flowing into the aviation trust fund should be spent on airport
improvements and other FAA operations. They argue that the
aviation-related user taxes should be dedicated to aviation and not
to other spending programs, deficit reduction, or tax cuts. Whereas
the President has proposed trust fund spending on the AIP program
of $1.6 billion in FY 2000, the House Committee on Transportation
and Infrastructure proposes raising this to an average of $4.2
billion per year for each of the four years beginning in FY
2001.
Because an increase of this magnitude
would either break future budget caps or force harsh cuts in other
transportation programs, Representative Bud Shuster, chairman of
the House Transportation Committee, is proposing that aviation
spending be removed from the budget so that future budget caps no
longer apply to aviation trust fund spending. In contrast to the
substantially increased spending proposed in H.R. 1000, the Senate
proposal to reauthorize the FAA (S. 82) proposes spending levels in
line with current levels, with no change in the program's budgetary
treatment.
The
President also is proposing that his recommended FAA spending be
funded entirely from trust fund resources. Historically, trust fund
resources have been supplemented with general government revenues
when this has been necessary to meet the FAA's spending plans, and
this would continue under both S. 82 and H.R. 1000. By eliminating
general revenue funding, the President's budget proposal
effectively releases those general revenue funds to be spent
elsewhere. Such a diversion of funds is unacceptable to some in
Congress who prefer to maintain the status quo, albeit at higher
levels of spending.
Exacerbating the dispute between the
President and Congress is a higher than expected flow of user taxes
into the trust fund because of the healthy economy's influence on
air travel. Such taxes totaled $8.6 billion in FY 1998 but are
expected to rise to $11.1 billion this year and $11.6 billion in FY
2000. Many in Congress are reluctant to forego the opportunity this
windfall offers for more aviation infrastructure projects back in
their districts or states.
In
an effort to insulate this windfall from alternative uses by both
the President and other Members of Congress, legislation has been
introduced to remove the aviation trust fund from the budget and
set it up as a separate account with off-budget status. Off-budget
status would insulate aviation spending from any fiscal restraint
imposed by future budget resolutions and make it off-limits to
congressional appropriations committees that must make any spending
cuts mandated by the budget resolution. This special protection
also would diminish the incentive for Presidents, both now and in
the future, to use reductions in federal aviation spending to fund
other programs or to facilitate a tax cut.
AVOIDING FAA REFORM
Noticeably missing from the debate between
the President and Congress over how much to spend next year on
airport projects is any discussion of how the FAA should be
reformed and made more efficient so that consumers, the air
transportation industry, and the economy are better served. Various
government reports and studies have indicated that the FAA's
attempt to manage the system's necessary technical upgrades has
been a costly failure. "Over the past 17 years," according to the
GAO, "the modernization program has experienced cost overruns,
schedule delays and performance shortfalls of large
proportions." Others peg the misused
time at 23 years and the total invested so far at $43
billion. The DOT's own inspector
general recently acknowledged that the program was subject to cost
overruns and schedule slippage, and noted that an earlier attempted
ATC upgrade--called the Advanced Automated System--was canceled in
1990 after wasting $1.5 billion.
Beyond its intention to provide the FAA
with $13.1 billion to spend in FY 2001, compared with a projected
$10.2 billion in FY 1999 (FY 2000 proposed totals are still subject
to subsequent appropriations), nothing in H.R. 1000 or S. 82
addresses this problem, which has spanned five presidential terms
and nine separate Congresses. With neither the President nor
Congress proposing anything other than the status quo, the FAA
appears destined to add even more years to its lengthy record of
technical mismanagement. Opportunities for fundamental reform, such
as those explored earlier in President Clinton's
Administration and in the recent
restructuring of the Canadian ATC system, are largely ignored.
Similar neglect characterizes attitudes
toward the obvious reform opportunities applicable to the
management and funding of commercial airports. The privatization of
66 airports around the world in the past two years demonstrates
that large airports can be self-funding and independent of
government support. Yet some in Congress appear determined to make
airports even more dependent on scarce federal dollars by
increasing airport funding to $4.2 billion--more than two and a
half times higher than the sum suggested by the President.
Indeed, under H.R. 1000, the incentive for
airports to privatize or withdraw from the federal system would be
greatly diminished because the new funding apportionment formulas
in the bill promise to triple the amount of AIP grants that each
existing airport is eligible to receive. Moreover, because such
grants account for only 10 percent of funding for large airports,
these higher federal funds most likely would displace other
non-federal sources that otherwise would be used.
Table 3 presents the current and proposed
apportionment formulas that would be applied to airport grants
under H.R. 1000. (By way of contrast, S. 82 would maintain current
formulas.)
Tapping into the Aviation Trust Fund
Although the argument raised in defense of
these proposals for higher spending and budgetary protection
emphasizes the need for airport construction and renovation to keep
pace with the booming commercial aviation industry, this rationale
is undermined by Chairman Shuster's announced willingness to allow
non-aviation transportation projects to tap into the fund in an
effort to broaden the proposal's political appeal. Whether this gambit will
help to ensure passage of the bill remains open to question, but it
certainly has generated a lot of interest among public transit
proponents who have rushed forward with costly projects.
In
Portland, Oregon, for example, the local transit system has
announced that it intends to seek funds generated by the Portland
Airport to build a light rail system from the city to the airport.
Although Portland voters have twice rejected the project, the
proposed diversion of aviation funds to transit would allow
revenues generated by airport passenger fees to override local
preferences.
Not
to be outdone, Senator Charles Schumer (D-NY) has proposed using
airline ticket tax revenues generated at New York City's two
airports to fund the construction of a Second Avenue subway line in
Manhattan. Calling the opportunity a "godsend in every way," the
Senator notes that the East Side of Manhattan now has only one
subway line (the Lexington), compared with three lines on the West
Side. According to press
reports, "The construction industry applauded Schumer's vow to
tackle mass-transit projects."
And well they should: Mile for mile, subways are the costliest form
of surface transportation that any community could choose.
Recognizing that even these pork-barrel
inducements may not be enough to ensure enactment of his
controversial proposal, Representative Shuster announced in late
March 1999 that he had reached an agreement with the House
leadership whereby he would support the Republicans' FY 2000 budget
resolution if they would allow him to bring H.R. 1000 to the floor
for a vote. The agreement further provides that if H.R. 1000 does
not pass, the excess of aviation user taxes over aviation trust
fund spending "would be returned to the traveling public in the
form of lower airline taxes."
Should it be defeated, or substantially modified in a House/Senate
conference committee, Congress would have an opportunity to
reconsider and possibly enact a series of far-reaching aviation
reforms to reduce federal spending, improve air travel, and provide
local communities throughout the country with an infrastructure
financial windfall.
|
THE ORIGINS OF FEDERAL
AVIATION PROGRAMS1
Federal involvement with commercial aviation began in the
earliest days of this century when aviation's military potential
was first realized.
Federal interest in aviation remained exclusively military until
1918, when the Post Office established an aviation service to
provide air mail. The Air Mail Act of 1925 allowed this service to
be contracted out to the private sector, and by 1928 this transfer
was complete. Then, because the cost of offering air mail to the
public exceeded the revenues generated by the service, to the
benefit of the budding commercial aviation industry, the Post
Office looked for ways to cut contractor fees. In the early 1930s,
it encouraged its air mail contractors to carry passengers as a way
to help defray costs. Between 1934 and 1938, passenger miles
doubled and a new industry emerged, as did several new federal
programs to regulate rates and safety- heretofore the
responsibility of the Post Office.
The Air Commerce Act of 1926 formalized the federal role in
commercial aviation regulation and development, including
navigation aids, weather forecasting, safety, licensing, and
investigation of accidents. Although the Act established a
well-defined and well-organized process of federal oversight of the
industry, it also specifically prohibited federal support
for airport development. Nevertheless, by the next decade, work
relief programs created during the Great Depression led to nearly
$400 million in federal financial support for airport
construction.
The Civil Aeronautics Act of 1938 created the Civil Aeronautics
Board (CAB) and authorized it to investigate whether the federal
government should support airport construction and development. The
CAB recommended in 1939 that it should, but not much was done until
1946 because of the interruption caused by World War II.
The Federal Airport Act of 1946 established an airport grant
program, and the Airport and Airway Development Act of 1970
established the trust fund financing mechanism and the key elements
of the federal aviation program as it exists today. Since 1971, the
Federal Aviation Administration has spent about $139 billion
(unadjusted for inflation) in support of commercial aviation.
1.This information is
drawn largely from an excellent review of U.S aviation policy in
John W. Fischer and Robert S. Kirk, "Aviation: Direct Federal
Spending, 1918-1998," CRS Report for Congress, Congressional
Research Service, February 3, 1999.
|
THE PROPER FEDERAL ROLE IN COMMERCIAL
AVIATION
The
federal government has supported commercial aviation financially
since 1918 and has spent $139 billion on behalf of the industry
just since 1971, when the aviation trust fund was created. There may have been
some justification for such extensive direct support in aviation's
early years, but the industry's commercial viability became obvious
half a century ago; yet federal financial support for commercial
aviation has continued. At the same time, the federal government is
still deeply involved in influencing and/or mandating a number of
important industry policies that have little to do with the FAA's
legitimate role of assuring minimum standards of passenger safety.
In fact, some critics have argued that the FAA's dual role of
promoting passenger safety and ensuring industry commercial
viability leads to inherent conflicts involving tradeoffs that
could compromise safety.
Areas of current operation subject to
federal involvement that may no longer be necessary include:
-
Financing and
regulating non-safety-related operations of
airports;
-
Funding and operating
the air traffic control system;
-
Subsidizing commercial
service to dozens of U.S. communities; and
-
Making competitive
pricing decisions in select markets and non-safety services
provided to customers by commercial carriers.
Of
all these areas, reform of the federal role in airports and the air
traffic control system would yield the greatest benefits, both in
operational efficiencies and in reduced federal spending. Because
of space and time constraints, however, this analysis will focus on
the federal airport program.
With
a few minor exceptions, American airports serving scheduled
commercial airlines are publicly owned, usually by a regionally
based airport authority which in turn is owned by a city, county,
or combination of local jurisdictions. A few, such as
Baltimore-Washington International Airport in Maryland, are owned
by state governments. Only two--Dulles International and Reagan
National--are federally owned, but they are now leased to regional
airport authorities that oversee all operations.
Although most airports are locally owned,
the federal government has contributed money to their construction
and improvements, estimated to amount to over $26 billion since
1971. The historic
accumulation appears substantial; yet on an annual basis, and
compared with other sources of airport financial resources, the
federal contribution is relatively small, particularly for the 71
largest airports, which handled 90 percent of the passenger traffic
in 1996.
Table 4 indicates that for the 3,300
civilian airports reviewed, federal AIP grants accounted for 20
percent of funding in 1996, with 80 percent coming from other
non-federal sources as described. Table 4 also reveals that AIP
grants are considerably less important for large airports than they
are for smaller ones. In 1996, such grants accounted for just 10.6
percent of funds for the top 71 airports but made up half the
funding for the 3,233 smaller airports.
THE BENEFITS OF
PRIVATIZATION
The
ability of large airports to tap into non-federal funding sources
and develop new ones represents the chief reason why they are
candidates for privatization. Even though most might be reluctant
at this point to take this step even if it were permitted, many are
reported to be willing to forego their federal AIP grant in return
for more regulatory freedom in airport operations and the
allocation of revenues generated in ways other than those approved
by the FAA.
FAA's Claim to a "Property
Right."
Regrettably, as a result of these historic and ongoing investments
in locally owned airports, the FAA contends that it has a de facto
property right, which it has invoked to prevent the sale, transfer,
or liquidation of any locally owned airport that received federal
funds. It is this claimed
property right, combined with the FAA's expansive interpretation of
other U.S. statutes governing the federal role in airport
operations, that has prevented the privatization of any U.S.
airport. (See the Appendix for key portions of the U.S. Code that
the FAA has invoked to impede privatization.)
Absent privatization and the financial
benefits that privatization provides, commercial airports have no
choice but to remain dependent on federal subsidies at a time when
commercial airports around the world are being privatized
successfully, to the considerable benefit of taxpayers and air
passengers. Moreover, by forbidding the exercise of the
privatization option, the federal government must continue to
support potentially self-sufficient airports despite the many valid
alternative uses for such funds.
Although several U.S. cities--notably,
Indianapolis and Pittsburgh--have contracted out the management of
some or all of their airports' operations to private companies,
efforts to sell or lease such facilities in the United States have
encountered numerous legal obstacles. The result, of course, is
little or no airport privatization activity in the United States.
Elsewhere, such activity has been occurring for the past dozen
years. In fact, privatization of airports is booming, with nearly
70 airports in Europe, Asia, and South America privatized in the
past two years.
Successful Privatizations in Other
Countries.
The first airport privatization occurred in Great Britain in 1987,
when the British government sold the British Airport Authority,
consisting of seven airports including the major international
airports of Heathrow and Gatwick, for $2.5 billion in a public
share offering. The proceeds were used to pay down the national
debt. In recognition of the monopoly status this would give the new
profit-making owner--BAA, plc.--the contract included a number of
stipulations to protect airport users, chiefly passengers and
airlines. For example, landing fees for airplanes would be
regulated according to a formula that limited annual increases to
less than the rate of inflation, ensuring the airlines that such
landing fees would decrease in real dollar terms.
Britain's airport privatization turned out
to be highly successful and widely profitable, despite the
regulated landing fees. In 1998, BAA, whose major holdings still
consist primarily of the British airport properties, earned profits
of $463 million. Since 1987, it has
invested over $5 billion in airport and related infrastructure,
including $750 million in a new rail link connecting Heathrow with
London (and the London Underground)--which, incidentally, operates
profitably. In the United States, such rail links are built with
general tax revenues, revenues from passenger facilities charges
that the FAA permits airports to levy under certain circumstances,
or from the aviation trust fund itself, as Chairman Shuster has
proposed. Moreover, whereas U.S. airports continue to be tax users,
British airports have become substantial taxpayers. In 1998, BAA
paid $340 million in taxes on its profits to the British
government, as well as millions in property taxes to local
governments.
Several other overseas privatizations
followed Britain's, notably in Denmark and Austria, and additional
facilities in Great Britain; but they accelerated dramatically in
the late 1990s: 12 airports in five countries were privatized in
1997, and 51 airports in six countries were privatized in 1998.
These transactions took place either through an outright sale
(public offering) of all or a portion of the airport or through
long-term leases (for 50 to 100 years).
Table 5 lists these airports and provides
summary financial information on each transaction.
Benchmarks for Estimating an
Airport's Value.
Column 5 of Table 5 provides the price paid (or the capitalized
value of the lease payments) for the airport, and column 6
expresses this price in terms of the number of passengers enplaned
at the airport each year (adjusted for full or partial ownership).
The sale price expressed on a per-enplaned passenger basis
generally serves as a proxy or rule of thumb in making rough
estimates of what any other airport might be worth if sold, in much
the same way the costs per square foot are used to estimate
approximate costs to build a house, shopping center, or any other
construction project. Enplaned passengers serve as the generally
accepted benchmark in estimating the potential value of airports,
because passengers provide an airport's revenues through landings,
food and retail sales, parking fees, car rentals, facilities use
charges, passenger ticket taxes, and any other service that can be
sold to a captive collection of prosperous customers.
The
information contained in Table 5 can be summarized and presented in
a variety of ways, but the most meaningful presentation for
purposes of estimating the likely value of an airport is to
categorize the transactions by full and partial sale. It appears
from the transactions listed in Table 5 that sharing ownership with
a public entity greatly reduces the price per passenger (adjusted
for ownership share) that an investor/buyer is willing to pay.
During 1997 and 1998, and for airports
serving a million or more passengers per year, partial sales
yielded an average per-passenger price of $81, while the sale or
lease of 100 percent of the airport yielded average prices of $162
per passenger--twice the partial sale rate. This suggests that
sales that result in long-term partnerships with a government
entity are less valuable than those that do not. For the sale or
lease of all airports serving more than a million passengers, the
average price per passenger was $116 in 1997 and 1998.
Of
course, these are only benchmark prices, and the final transactions
would be subject to a number of adjustments, up or down, for such
factors as physical condition of the airport, future growth
prospects for the market served, existing contracts with labor and
airlines, airline ownership of gates, regulatory mandates,
political stability, prospective local taxes, and other factors
that may affect an operator's revenues.
Table 6 (Tables A and B) applies these
benchmark prices to the top 70 airports in the United States in
order to estimate their approximate gross value if sold or leased.
In appreciation of the rough nature of these estimates, Table 6
uses the transaction prices from Table 5 to provide three possible
values for each airport based on (1) a partial sale, (2) an average
for all sales, and (3) a 100 percent sale. These prices are
multiplied by the number of 1997 passenger enplanements (the latest
available data) to estimate the value of each airport.
It
is important to note that these estimates represent gross values
and, in addition to the factors cited above, must be adjusted for
any of the airport's outstanding debt obligations as well as the
repayment of the depreciated value of the federal grants received.
Because such debt and federal grants can vary substantially from
airport to airport, no attempt is made in Table 6 to adjust for the
impact these deductions may have on an airport's net asset
value.
As
Table 6 reveals, the potential gross value of many U.S. airports is
extraordinary. Indeed, were these values to be re-estimated with
the much higher level of 1999 enplanements, it is likely that
Hartsfield (Atlanta) and O'Hare (Chicago) would approach $6 billion
apiece if sold or leased in their entirety.
Again, it must be kept in mind that these
are rough estimates based on an average of recent transactions and
are subject to a number of adjustments, as briefly discussed above,
which may raise or lower the final sale or lease price. However,
given the robust prosperity and growth prospects of the U.S.
commercial aviation market, a case could be made for above-average
prices for some U.S. airports. If, for example, Hartsfield and
O'Hare fetch the same average price per passenger as the average of
the three Australian airports ($197 per passenger) privatized in
1997, then each would have been worth about $6.5 billion in 1997
and as much as $7 billion in 1999.
Because all but two of the 70 U.S.
airports studied are owned by local governments and a few by
states,
these estimates suggest that some governments are sitting on
considerable wealth that could be redeployed to meet other public
infrastructure needs, such as surface transportation, school
construction and renovation, water supply, and wastewater
treatment. The estimated values presented in Table 6 demonstrate
that through privatization, local communities can have their cake
and eat it too. By cashing out of their airports and letting
private companies own and operate them (under contractual
guidelines to ensure that the interests of the flying public and
the airlines are accommodated), many cities and counties would
receive a windfall that could be used to meet other community needs
and still receive the services and benefits of the local airport.
Moreover, some of this windfall would accrue to the federal
government as repayment (of the depreciated value) of the $26.5
billion in construction grants made since 1971.
THE LEGAL OBSTACLES TO PRIVATIZATION
Although there is no formal legal
prohibition against private airports (3,000 smaller airports are
privately owned and operated on a for-profit basis under FAA
regulations) or against the privatization of existing ones, the
laws governing airports that receive federal money, as well as
contracts with DOT that result from grant agreements, are
interpreted by the FAA in ways that effectively preclude such
privatization. As noted earlier, any federal investment in an
airport, no matter how many years ago it occurred, is interpreted
by the FAA as a de facto property right that allows the
FAA to subject the airport to a series of restrictions that could
make privatization economically impossible.
The
chief obstacles are the provisions in the Airport and Airway
Improvement Act of 1982 (as amended), which require airport
owners/sponsors to use all of the revenue generated at the airport
for capital and operating needs and explicitly prohibit any
diversion of such revenues to non-airport purposes. (See the
Appendix for statutory language governing the diversion of aviation
revenues. ) Although such restrictions
against diverting revenues are typical of many federal
infrastructure grant programs and are designed to prevent the
misuse of federal funds, their repetition in existing law, as well
as recent amendments to strengthen them, appear excessive relative
to the anti-diversion restrictions applied to other federal
infrastructure funding programs.
The
primary rationale for these legal prohibitions on grant and revenue
diversion is to prevent the grant money, as well as any prospective
financial benefits accruing from a targeted federal grant, from
being used for non-grant purposes. For example, wastewater
treatment grants should be limited to that purpose, and any
revenues that flow from the project should remain within that
purpose and should not be diverted to pay for roads, schools, or
pay raises, as some cities occasionally have done. An example of
the diversion of airport revenues would be the imposition of an
airline ticket tax on passengers at an airport to fund improvements
in its sewer system. More recently, the city of Los Angeles has
attempted to divert airport revenues to non-airport purposes.
The
anti-diversion provisions of federal statutes represent reasonable
restrictions to ensure that federal monies are applied to the
agreed upon purpose. But the FAA views this prohibition as a
perpetual obligation from which a community can never be free, even
if it is willing to buy its way out of the obligation by paying
back the federal grant. As a result, if an airport were
to be privatized, any revenues and profits flowing from the
operation of the airport would have to remain within the airport
and be reinvested in FAA-approved aviation projects. This, of
course, removes any incentive for private investors to acquire an
airport. In effect, the FAA appears to be going beyond the law's
original purpose of ensuring some measure of integrity for the
federal grant-giving process by using the prohibitions to freeze in
perpetuity the current organizational structure of the U.S. airport
system.
As
if the above prohibition on revenue diversion were not enough, the
FAA has interpreted these anti-diversion provisions to mean that
any revenues generated by the sale or lease of an airport also
represent revenues that cannot be diverted to non-aviation
purposes. Such an extreme interpretation removes much of the
incentive that a community would have to privatize an airport
through lease or sale. If actually implemented as a consequence of
an airport privatization, it would lead to the peculiar result of
reinvesting all of the sale proceeds in the asset just sold, to the
considerable benefit of the new private owners who, of course,
could never benefit from the windfall because they would be
forbidden to take any profits from the operation.
Although the law does not explicitly
prohibit privatization, the anti-diversion provisions in the U.S.
Code (of which there are at least five) could have the effect of
making such privatizations impossible if interpreted in an
expansive fashion. For example:
-
Section 47101(a)(13)
cites "revenues from all sources" as under the restriction, and
this could be stretched to include sale proceeds;
-
Section 47107(b)
defines prohibited payments in a way that is general enough to
cover sale or lease proceeds;
-
Section 47107(l)(2)
prohibits direct payments or indirect payments other than those
reflecting the value of services provided;
-
Section 47111(e)
authorizes the Secretary of Transportation to enforce these
prohibitions; and
-
Section 47133
reiterates these restrictions but applies them to an airport that
"is" the subject of federal assistance rather than to one that
"was," suggesting that if an airport privatizes and relinquishes
access to AIP grants, it may no longer be subject to the
prohibitions. However, when airports sign a grant agreement with
the DOT, the agreement generally runs for the 20 years following
the receipt of the grant, potentially making such semantic
distinctions irrelevant.
The White House Role
Just
as the general nature of some of these statutes could be used to
deter privatization by an administration hostile to the approach,
it could be used by an administration sympathetic to privatization
to interpret the law in ways that would allow airport privatization
to move forward. The administration of President George Bush placed
a high priority on infrastructure privatization, and airports were
viewed as one of the promising targets. Indeed, so convinced was
the Bush Administration that there would be no legislative
impediments that it issued an executive order to guide the process
of infrastructure privatization, with emphasis on airports.
Executive Order 12803 was released on
April 30, 1992, to establish an orderly process to guide the
privatization of federally funded infrastructure by defining the
various federal and state financial claims and the order in which
they should be satisfied. The Bush Administration viewed commercial
airports as a high priority, and one of the purposes of E.O. 12803
was to provide the Administration's interpretation of the FAA
statutes in dispute.
Although E.O. 12803 was implemented by
President Bush, the Clinton Administration has not rescinded it; in
fact, it has used it on nearly half a dozen occasions to guide the
privatization of locally owned wastewater treatment plants that
received federal grants from the U.S. Environmental Protection
Agency. Moreover, the Clinton Administration's own E.O. 12893,
implemented in 1994, affirmed E.O. 12803 and directed federal
agencies to seek greater private-sector participation in
infrastructure investment and management, and to minimize regulatory and
legal barriers to private participation in providing infrastructure
facilities and services.
Briefly, Executive Order 12803 specifies
that, to the extent permitted by law, sale or lease proceeds are to
be distributed in the following manner: (1) Local and state
governments shall first recoup in full the unadjusted dollar amount
of their portion of the asset's total costs; (2) if sale or lease
proceeds remain, the federal government shall recoup the full
amount of federal grants associated with the asset, less the
applicable share of accumulated depreciation on the asset; and (3)
local and state governments shall keep any remaining proceeds if
they are used only for investment in additional assets or for debt
or tax reduction.
In
issuing this order, the Bush Administration believed that its
efforts to privatize airports were not in conflict with the
statutes and that a reasonable interpretation of them would allow
airport privatization to go forward with the assurance that the
depreciated value of the federal investment would be repaid. Of
course, some in Congress and at the DOT held, and continue to hold,
a different interpretation and have used this to discourage or
reject privatization proposals.
An
argument could be made that the FAA itself, by its deeds and
statements, is not always of one mind on the issue. In 1992, for
example, the Atlantic City airport was leased to a private
contractor and the lease proceeds were diverted to the city's
general fund. According to the GAO:
Atlantic City is the only public owner
that was able to lease its airport to a private company and collect
annual payments to use for non-airport purposes although it had
received federal grants. In 1986, the city leased the main
airport's terminal and a general aviation field to a private firm
for a minimum yearly payment of $400,000, which was diverted to the
city's general fund and not used for airport purposes. We could not
determine, nor could FAA explain, why this lease was approved, when
the agency has subsequently opposed similar proposals.
Occasional FAA announcements on the issue
of airport privatization add to the uncertainty regarding intent.
As the GAO reported in late 1996, according to new FAA-proposed
policy, "the agency [FAA] will be open and flexible on the
conditions for the use of airport revenue if it determines that
privatization would not harm the public interest or undermine
aviation policy."
Notwithstanding any executive order or the
FAA's conflicting actions and statements, in the end it likely will
be a court's interpretation that is the deciding factor with
respect to whether an airport can or cannot be privatized. But the
courts will not have to rule on the issue until someone, whether a
mayor or a President, pushes a project forward and induces the
litigation likely to bring the issue before the courts.
The Pilot Program to Privatize
Airports
If
the experience to date under the pilot privatization program
authorized by Congress during the last FAA reauthorization is any
indication of the reaction of some of the aviation interest groups,
such litigation could follow as soon as a city announces its
intention to privatize its airport. Under the pilot program enacted
during the 1996 reauthorization of FAA, Congress agreed to waive
the anti-diversion provisions of the law for up to five pilot
privatization projects. However, in order to move forward with an
airport privatization, a city or state needed to have the consent
of at least 65 percent of carriers serving the airport. So far, no
airport serving commercial carriers has been able to garner the
necessary consent from a supermajority of the carriers serving
it.
Stewart Airport in New York, a small hub
airfield providing scheduled service for the several counties just
north of New York City, was thought to be a top prospect and had
the strong support of New York Governor George Pataki (R). A
99-year lease was agreed to in 1998 at a present value equal to
$133 per enplaned passenger. Unfortunately, the majority of
the carriers serving Stewart objected and filed their objections
with the FAA, thereby preventing any revenues from being diverted
to non-airport uses. New York will divert the proceeds for New York
airport purposes, which is an allowable diversion under the federal
laws governing airports.
The
reluctance of the carriers serving airports to agree to full
privatization may be one of the key reasons why so few U.S.
airports serving scheduled airlines have taken advantage of the
options available under the federal pilot program. Another might be
that many local officials are unaware of the option and are
therefore unaware of the potential value that their airports
possess and the revenues this could yield in support of other city
services. Despite privatization activity elsewhere, these events
have received little reporting in the mainstream U.S. press.
The
aviation trade press, of course, has covered the issue extensively,
presenting both sides on a regular basis. But with a readership
limited largely to aviation and airport professionals, most of whom
benefit from the status quo, such coverage is unlikely to change
any minds or induce positive action. In the end, the issue will
have to be pushed by local elected officials and their
constituents, whose communities will be the chief beneficiaries of
the financial windfall that an airport privatization could produce.
Until they are informed and energized, as in Indianapolis several
years ago and in New York City and New York State today, the issue will
languish and opportunities will be lost.
WHAT CONGRESS SHOULD DO
The
two FAA reauthorization bills now before Congress differ
dramatically in their intent and scope, as well as in the extent to
which they would permit fundamental reforms. H.R. 1000 proposes to
spend substantially more on airports than would be spent under S.
82 and would make major airports even more financially dependent on
federal spending. It also would grant special budgetary privileges
that would be difficult to undo in the future; this, in turn, would
make it more difficult for future Congresses and Administrations to
enact major reforms in airport and air traffic control funding and
operations. S. 82 does not alter the budgetary treatment now
applied to the FAA. H.R. 1000 would reauthorize the FAA through FY
2004, while S. 82 would reauthorize it only through FY 2000.
As a
result of these significant differences, S. 82 provides a better
near-term window of opportunity for Congress, the President, and
state and local officials to conduct a comprehensive review of
potential reform options that could allow them to make such reforms
operational by October 2000.
CONCLUSION
The
FAA authorization bill that prevails will be of critical importance
to those who seek fundamental FAA reform, including airport
privatization, in the future. The two reauthorization bills now
before Congress are dramatically different in their intent and
scope, as well as in the extent to which they would permit
fundamental reform in the future. In considering these bills,
however, only S. 82 provides Congress, the President, and state and
local officials with a better near-term opportunity to conduct a
comprehensive review of the potential reform options.
Governors, mayors, and the American people
generally would be the chief beneficiaries of an aggressive airport
privatization program. Based on recent transaction prices of
foreign airports that have been privatized, the privatization of
America's airports could provide cities and states with windfall
financial benefits in the billions of dollars--dollars that could
be reinvested in other public infrastructure, such as schools,
wastewater treatment, transit, surface transportation, or any other
costly project that is a high community priority.
Dr.
Ronald D. Utt is Grover M. Hermann Fellow in Federal
Budgetary Affairs at The Heritage Foundation.
APPENDIX
Provisions of the U.S.
Code That Prohibit Diversion of Airport Revenues to Non-Airport
Purposes,
49 U.S.C. 47101-47133
Section
47101(a)(13).
Airports should be as self-sustaining as possible under the
circumstances existing at each particular airport and in
establishing new fees, rates, and charges, and generating revenues
from all sources, airport owners and operators should not seek to
create revenue surpluses that exceed the amounts to be used for
airport system purposes for which airport revenues may be spent
under section 47107(b)(1)....
Section 47107(b).
Written Assurances on Use of Revenue.
(1) The Secretary of Transportation may approve a project grant
application under this subchapter for an airport development
project only if the Secretary receives written assurances,
satisfactory to the Secretary, that local taxes on aviation
fuel...and the revenues generated by a public airport will be
expended for the capital or operating costs of (A) the airport; (B)
the local airport system; (C) other local
facilities...substantially related to the air transportation of
passengers....
Section 47107(l)(2). Revenue
Diversion.
Policies and procedures to be established pursuant to paragraph
(1) [which describes enforcement mechanisms] of this subsection
shall prohibit, at a minimum, the diversion of airport revenues
(except as authorized under subsection (b) of this section [above]
through (A) direct payments or indirect payments, other than
payments reflecting the value of services and facilities provided
to the airport....
Section 47111(e). Action on Grant
Assurances Concerning Airport Revenues.
If, after notice, and opportunity for hearing, the Secretary finds
a violation of Section 47107(b) of this title, as further defined
by the Secretary under section 47107(l) of this title...and the
Secretary has provided an opportunity for the airport sponsor to
take corrective action to cure such violation...the Secretary shall
withhold approval of any new grant application for funds under this
chapter, or any proposed modification to an existing grant that
would increase the amount of funds made available...and withhold
approval of any new application to impose a fee under Section 40117
of this title.... [Section 40117 allows airports to impose the
passenger facility charge (PFC).]
Section 47133. Restriction on Use
of Revenues.
(a) Local taxes on aviation fuel...or the revenues generated by an
airport that is the subject of federal assistance may not be
expended for any purpose other than the capital or operating costs
of (1) the airport; (2) the local airport system; or (3) any other
local facility that is...substantially related to air
transportation....
Endnotes