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PURPOSE

BACKGROUND

WITNESSES

The purpose of this hearing is to assess the financial condition of the Airport and Airway Trust Fund (commonly known as the Aviation Trust Fund), and discuss possible alternative mechanisms for financing the future needs of the aviation system.

In 1970 Congress enacted the Airport and Airway Development and Revenue Acts to address the inadequacy of the nation’s aviation system to meet projected growth in air travel. The 1970 Act is comprised of two titles: title I is the Airport and Airway Development Act of 1970 and title II is the Airport and Airway Revenue Act of 1970. Title I authorized funds mainly for the acquisition, establishment and improvement of air navigational facilities and for airport development. Title II established a trust fund comprised of aviation-related excise taxes to finance these activities. The aviation excise taxes enacted at that time included an increase in the gasoline tax on general aviation, an increase in the passenger ticket tax for domestic flights, a new tax on international commercial passengers, a new tax on air freight waybills, and a new annual aircraft registration tax.

The current aviation excise taxes that are deposited into the Trust Fund are shown below:

Tax	Comment	Tax Rate	Amt. Collected in FY 2004
PASSENGERS
Domestic Passenger Ticket Tax	Assessed as a percentage of ticket price.	7.5 %	$4,627 million
Domestic Flight Segment Fee	A segment is a flight leg consisting of one takeoff and one landing by a flight.	Rate is indexed to the Consumer Price Index. $3.20 per segment during CY2005. Does not apply to rural airports.	$1,800 million
International Arrival and Departure Tax	Head tax assessed on passengers arriving from or departing for foreign destinations (and some domestic, such as Puerto Rico and Guam).	Rate is indexed to Consumer Price Index. $14.10 during CY 2005.	$1,391 million
Flights between continental U.S. and Alaska or Hawaii	These flights fly through both domestic and international airspace, and therefore pay a mix of domestic and international aviation taxes.	Rate is indexed to Consumer Price Index. $7.00 international facilities fee (CY05 rate) + a 7.5% ticket tax on the “domestic portion” of the ticket price + full domestic segment fee.	Revenue included in domestic and international taxes above.
Frequent Flyer Tax	Percentage tax assessed on mileage awards.	7.5%	$145 million
FREIGHT/MAIL
Domestic Cargo/Mail	Assessed as a percentage of the carrier’s cost of transporting the package by air.	6.25%	$499 million
AVIATION FUEL
General Aviation Fuel Tax		AvGas: 19.3 cents per gallon Jet fuel: 21.8 cents per gallon	$177.9 million
Commercial Fuel Tax		4.3 cents per gallon	$534.3 million

Since its inception, there has been disagreement over how much of the trust fund revenues should be used to pay for Federal Aviation Administration (FAA) operations versus capital investments in the aviation system. This disagreement continues today.

The 1970 Act authorized $250 million annually for the acquisition, establishment and improvement of air navigational facilities, and another $280 million annually for airport development. It also required that the balance of the monies in the trust fund be allocated for administrative expenses incident to the airport grants, for the maintenance and operation of air navigation facilities, and for research and development.

Six months after passage of the 1970 Act, the Department of Transportation (DOT) proposed using only $100 million of the $280 million authorized for airport development, and $226 million of the $250 million authorized for air navigation facilities and equipment. The DOT proposed using the rest of the trust fund money to fund FAA operations and maintenance programs.

Congress responded by enacting the Airport and Airway Development Act Amendments of 1971, which amended the 1970 Act by deleting the language that permitted the use of the trust fund for maintenance and operations. The Senate Report said the amendments were necessary because “although Congress intended that the capital investment programs for aviation system modernization be fully funded from user tax revenues in the Trust Fund prior to the use of such funds for maintenance, operations and administrative expenses, the Administration has disregarded these statutory priorities and has given routine FAA expenses the same status as capital improvements.”

In 1976, the authorizing committees restored some authority to use trust fund monies for maintenance and operations, but placed caps on how much could be spent on these items, and added a penalty clause that reduced such caps in proportion to any shortfall of airport grants below the authorized amounts. These provisions limited trust fund spending to about 15 percent of FAA’s operations costs through 1980.

Subsequent legislation adjusted the caps and changed penalties, but continued to permit payments from the trust fund for some operation and maintenance expenses. The trust fund share of FAA’s operations and maintenance costs has varied over time, and reached as high as 100 percent in FY 2000 (when the statutory formula had expired due to a delay in reauthorizing FAA’s programs). In FY 2005, the Trust Fund supports 63 percent of the FAA’s operations budget. The remainder of the operations budget is provided from the General Fund of the Treasury.

The FAA’s capital and research programs are 100 percent funded from the Trust Fund. In terms of FAA’s total budget (operations, capital, and research programs), the trust fund has provided approximately 80 percent of FAA’s total funding in recent years.

The current statutory formula for determining the trust fund share of FAA’s operations costs has been in place since the Aviation Investment and Reform Act for the 21st Century (AIR 21) was enacted in 2000. In 2003, the Vision 100 – Century of Aviation Reauthorization Act extended this formula through FY 2007.

The current statutory formula requires that trust fund revenues first be used to fully fund the FAA’s capital programs (i.e., Airport Improvement Program and Facilities & Equipment) at the authorized levels, and also fund research and development, before being used to fund FAA operations. The formula also requires that the total amount appropriated from the trust fund each year must equal the amount of tax receipts and interest estimated to be deposited into the Trust Fund that same year. In other words, the formula requires that what is estimated to go into the Trust Fund each year is the same amount that must go out that year, with preference given to fully funding the FAA’s capital programs before using trust fund revenues to fund operations.

To calculate the total amount that must be appropriated from the trust fund each year, the statutory formula relies upon the trust fund revenue estimates published in the President’s Budget for that year. For example, in February 2003 the President’s Budget estimated that trust fund receipts plus interest would equal $10.927 billion in FY 2004. The FY 2004 appropriations bill largely adhered to the statutory requirement to appropriate this amount out of the Trust Fund. Prior to the 0.59 percent across-the-board cut that was imposed in the FY 2004 Consolidated Appropriations Act, the amount appropriated from the Trust Fund was $10.907 billion, just $20 million below the $10.927 billion required by the statutory formula. (After the across-the-board cut was applied to FAA’s appropriations, the amount appropriated from the Trust Fund decreased to $10.831 billion.)

For the past several years, the appropriations acts have appropriated from the trust fund roughly the amount estimated to be deposited into the trust fund each year, as required by the statutory formula. Under these conditions, one would expect the Trust Fund balance to remain relatively stable. However, the trust fund revenue estimates published in the President’s Budget for the past four years have been overly optimistic.

Source: Department of Transportation, Office of the Inspector General

A similar situation existed in each of FYs 2001-2003. These overoptimistic revenue projections in FYs 2001-2004, combined with the statutory requirement to appropriate from the Trust Fund the amount of revenues projected in the President’s Budget, have resulted in a significant decrease in the Trust Fund’s uncommitted cash balance. If the Administration’s revenue projections for FYs 2005 and 2006 are as overoptimistic as they have been in recent years, the uncommitted cash balance could potentially reach zero before the next reauthorization bill takes effect (FY 2008).

Source: Department of Transportation, Office of the Inspector General

The declining uncommitted cash balance, together with industry trends the FAA believes will exacerbate the “mismatch” between its workload and its revenues, have caused Secretary Mineta and Administrator Blakey to call for a dialogue on alternative ways to finance the aviation system in the future. This dialogue is in preparation for possible legislative action in 2007, the year in which both the FAA’s authorization and the current aviation excise taxes expire.

Cost-based user fees are often mentioned as an alternative funding mechanism. Such fees have been recommended by several Commissions in the past, most recently by the National Civil Aviation Review Commission (known as the “Mineta Commission”) in 1997. Specifically, the Mineta Commission recommended that the FAA be primarily funded through cost-based user charges for commercial passenger and cargo air carriers and a fuel tax for general aviation aircraft. The Commission also recommended that a continuing general fund contribution pay for safety, security, and governmental (e.g., military) use of the air traffic control system.

The Commission made two basic arguments for cost-based user fees. The first was an economic efficiency argument – that cost-based user fees would provide the right incentives for users to be more efficient in using FAA services, and for the FAA to be more efficient in providing services.

The second argument was a budget treatment argument – that cost-based user fees were more likely to receive the special budget treatment recommended by the Commission. Specifically, the Commission recommended that FAA’s budget treatment must change to ensure that revenues from aviation users and spending on aviation services are directly linked and shielded from discretionary budget caps.

Under the existing budget treatment for FAA, it costs the Appropriations Committee the same amount whether they appropriate funds from the trust fund or the general fund. Either way, the amount of the appropriation (General Fund or Trust Fund) counts against the Appropriations Committee’s overall discretionary spending limit. This means that, even if trust fund revenues were booming, spending out of the trust fund would still have to compete with all other discretionary spending in the Federal budget. Therefore, increasing trust fund revenues will not, in and of itself, solve the FAA’s funding crunch. This is because aviation user charges are currently subject to a split budget treatment whereby the aviation revenues come in on the mandatory side of the budget, but must be spent on the discretionary side of the budget, where they are subject to the discretionary spending cap. In other words, the existing budget treatment for FAA does not link aviation revenues to aviation spending. For reasons of Committee jurisdiction and longstanding Federal budget concepts, cost-based user fees are considered more likely to be given a budget treatment that would permit such fees to be spent outside the constraint of the overall discretionary spending limit.

Bonding, or borrowing authority, is also frequently mentioned as an alternative funding mechanism. The Mineta Commission addressed this issue as well, by recommending that the new user fee-financed air traffic system be authorized to borrow up to $15 billion to acquire, improve, dispose of and eliminate air navigation facilities or equipment. Under the Commission’s recommendation, user fee revenues would be pledged to pay the principal and interest on the borrowing.

Bonding is seen by some as an attractive way to provide the spike in investment needed to modernize the air traffic control system without requiring the users to pay for that investment up-front. However, under a bonding scenario, it would be particularly important to have a well-defined investment plan that would provide an adequate return on investment to the users who finance it.