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| Financing Small Commercial-Service Airports: Federal Policies and Options April 1999 |
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The federal government plays a major role in aviation in the United States. The Federal Aviation Administration (FAA) operates the air traffic control system and oversees safety and security through certifications, inspections, and regulations for airlines, airports, pilots, aircraft manufacturers, and other providers of aviation services. In addition, the FAA provides financial aid to airports in the form of grants from the Airport Improvement Program (AIP). The federal government's involvement in aviation stems from the many benefits--safety, security, and mobility throughout the airport and airway system--that accrue to the general public as well as to the providers and users of air transportation.
Since 1982, the FAA and its programs have generally been authorized for periods of two to five years. The last major legislation, in 1996, authorized the FAA through September 1998. In October 1998, the 105th Congress passed legislation to extend the FAA's authorization through March 1999.
In the 106th Congress, the House Committee on Transportation and Infrastructure and the Senate Committee on Commerce, Science, and Transportation have approved bills that would reauthorize the FAA and modify the AIP. Lacking time for consideration by the full House and Senate--and for reconciling substantial differences between the bills as approved--the Congress in March 1999 extended the FAA's authorization through the end of May 1999.
The House bill, the Aviation Investment and Reform Act for the 21st Century (H.R. 1000), would reauthorize the FAA for six years (through September 2004) at substantially higher annual funding levels and would amend several provisions of current law that govern AIP grants. The Senate bill, the Air Transportation Improvement Act (S. 82), would reauthorize the FAA through September 2000. The Administration has also sent a proposal to the Congress; introduced as the Federal Aviation Administration Authorization Act of 1999 (S. 545), it would authorize the FAA through September 2004.
In 1997, federal grants to airports totaled nearly $1.5 billion, of which about 41 percent went to larger airports and 59 percent to smaller ones. As the Congress considers legislation to reauthorize the AIP, some policymakers have questioned whether the limited amount of federal funding available could be distributed in a way that would enhance the performance of the national aviation system. Many experts believe that large airports could succeed without federal grants if certain constraints--in particular, limits on passenger facility charges (PFCs)--were removed. With the FAA's permission, airports may impose PFCs of up to $3 per boarding passenger. Smaller airports, however, may have more difficulty financing capital investment than larger airports; therefore, many policymakers are concerned about the effects on smaller airports of changing the grant program.
In this paper, "larger" airports refer to those classified by statute as large and medium hubs, the 68 airports that collectively handled 87.5 percent of passenger boardings in 1995. "Smaller" airports refer to commercial-service airports with fewer than 1.5 million passenger boardings a year. That category comprises small primary hub airports, primary nonhub airports, and nonprimary commercial-service airports. (The analysis in Chapter II excludes nonprimary airports because of a lack of data.) General aviation airports are excluded from the analysis.
A review of financial reports of airports receiving federal grants in
1996 and 1997 indicates that smaller airports have greatly varying financial
conditions. Some had strong financial results in 1996 and 1997; others
had weak results. About 66 percent of small hub airports and 57 percent
of nonhubs with passenger boardings of more than 75,000 a year had operating
surpluses, but only 25.5 percent of nonhubs with fewer than 75,000 passenger
boardings a year had operating surpluses. The different financial conditions
of smaller airports suggest that generalizing about those airports' finances
may be unproductive and that broad federal policies should be considered
carefully to avoid unintended consequences.
THE AIRPORT IMPROVEMENT PROGRAM
The FAA has designated about 3,300 airports in the United States (including U.S. possessions) as eligible for AIP grants; they are considered part of the National Plan of Integrated Airport Systems (NPIAS). Both commercial-service and noncommercial general aviation airports are eligible for AIP grants.
The law provides for both formula grants and discretionary grants. From 1982 to 1997, the FAA awarded about $10.7 billion (51.9 percent of the total) in formula grants and $9.9 billion (48.1 percent) in discretionary grants. Airports must provide matching funds to federal grants. In general, the federal government's share of each grant is 75 percent for large and medium hubs and 90 percent for smaller airports.
The formula grants, known as apportionments, are based on several factors. For primary airports (those with at least 10,000 passenger boardings a year), the formula is based on the number of passenger boardings at the airport: airports receive $7.80 for each of the first 50,000, $5.20 for each of the next 50,000, $2.60 for each of the next 400,000, $0.65 for each of the next 500,000, and $0.50 for each additional passenger boarding in excess of 1 million. For cargo airports, formulas are based on the weight of shipments.
For airports with fewer than 10,000 passenger boardings a year, formula funding is apportioned to states, territories, and possessions according to the population and land area of the jurisdiction. Airports in Alaska, however, are entitled to receive at least as much money as they received in 1980.
Funds remaining after the FAA distributes formula grants flow into the discretionary account. Several rules govern the distribution of discretionary funds, including set-asides for noise abatement, for promoting civilian use of former military airports, and for nonprimary commercial-service, general aviation, and reliever airports.
Although the amount of AIP funding authorized for 1998 was $2.347 billion, the amount available for obligation was limited to $1.7 billion. (The Congress also rescinded some contract authority from previous years, resulting in actual spending of $1.51 billion in 1998.) The Congress has generally placed limitations on obligations--in appropriations or other legislation--that have kept actual spending below the amounts set in authorizing legislation. From 1982 to 1997, large and medium hubs together received 43.5 percent of AIP funds. Smaller commercial-service (small hub, primary nonhub, and nonprimary commercial-service) airports collectively received 30.5 percent, and general aviation (including reliever) airports received 22.8 percent.
In 1997, the FAA made a total of 1,066 AIP grants ranging in size from $750,000 to $46 million but averaging less than $1.4 million. For large and medium hubs, the average grant was $4.05 million, and for smaller airports, about $1 million.
The Airport and Airway Trust Fund finances AIP grants through taxes
on users of the aviation system. Those taxes consist of the airline passenger
ticket tax, a flight-segment tax, a tax on international arrivals and departures,
a tax on cargo waybills, and an aviation fuel tax. The trust fund also
finances capital investments in the air traffic control system and a portion
of the system's operations. (The general fund finances the rest of the
cost of operating the air traffic control system.)
AIRPORT FINANCES FOR THE 1996-1997 PERIOD
In general, financial data for airports in 1996 and 1997 support the conventional wisdom that large airports are better off financially than smaller airports. Larger airports, which have considerable capacity to generate funds for investment, use revenues from PFCs and bond proceeds as their main sources of investment funds.
Federal grants are by far the largest source of capital for smaller
airports. Some of those airports, however, also seem able to raise funds
from their own sources to finance capital investments. An increasing number
are turning to PFCs to support investment or debt repayment or to provide
funds to meet their matching share of federal grants, and some have successfully
tapped the bond market.
INCREASING INVESTMENT FUNDS FOR SMALLER AIRPORTS
The sources of funding for capital investment that airports are now tapping--PFCs, bond proceeds, and grants from the federal, state, and local governments--represent all the potential providers of funds: users, investors, and taxpayers. To increase revenues, airports will need to raise the amount of funds they receive from some or all of those sources.
Passenger Facility Charges
In 1990, the Congress authorized the Secretary of Transportation to allow airports to impose PFCs of up to $3 on each passenger boarding an airliner at an airport. PFC proceeds are to be used for airport-related capital projects.
One way of increasing revenues is for airports not currently charging PFCs to start charging them and for airports charging them to increase them. Of the latter, all but one are already charging the maximum amount permitted under current law.
After the Congress authorized PFCs in 1990, most large and medium hub airports quickly adopted them. The early conventional wisdom was that larger airports would find PFCs especially useful but that smaller airports would not find them as useful. In the past three years, however, many smaller airports have started to impose PFCs. As of September 30, 1997, 59 percent of primary nonhub airports (those with 10,000 to about 282,000 passenger boardings a year) and 9 percent of nonprimary commercial-service airports (those with fewer than 10,000 passenger boardings a year) were collecting PFCs. Many of those airports used PFC revenues as matches for AIP grants. The Administration has proposed raising the cap on PFCs to $5, and legislation approved by the House Committee on Transportation and Infrastructure would raise the cap to $6.
Bonds
Bond proceeds have been the main source of capital funding for creditworthy airports. Most large and medium hub airports have turned to the bond market to help finance their capital spending. Many smaller commercial airports have also succeeded in issuing bonds. Some of those airports mimic larger airports that issue bonds backed by revenues from user charges such as landing fees. Other smaller airports find that potential lenders insist on additional backing from tax revenues; in those cases, the airports typically ask a local government body with the power to impose taxes to issue general obligation bonds on the airport's behalf.
Despite airports' overall ability to borrow funds for investment, credit assistance might be useful in some cases. If, for example, a lack of complete information led bond-rating agencies to assign a lower credit rating to an airport than it merited, assistance in buying bond insurance or the provision of additional reserve funds could enable the airport to borrow funds for a worthwhile project. Credit-assistance measures would have to be carefully directed, however, to avoid simply substituting federal aid for capital from nonfederal sources. In any event, credit assistance is generally unnecessary. Still, no overriding reasons are apparent for not providing it in the few circumstances where it might expedite a project--assuming it required no additional outlays from the AIP.
Private Equity Participation
The private sector may also provide funds for airport investments. Regarding airport financing, private investment means different things to different people. For example, airport capital projects and operations already involve a substantial amount of private equity. Airlines invest in terminal and maintenance facilities, and other private businesses operating at airports also make capital investments. In addition, many airports contract out some of their operations to private firms.
A more extreme form of private investment in airports would be ownership of airports. Airports tend to have a local monopoly, and U.S. public policy has generally favored government regulation of public utility monopolies to protect the public interest. So privately owned airports would probably need to be regulated; however, regulation can lead to inefficiencies. Nonetheless, advocates of privatization note that private, for-profit concerns generally have greater incentives to reduce costs and operate efficiently than do government agencies.
Modifying the Federal Grant Program
Although the AIP plays a significant role in the financing of smaller airports within the confines of current funding, several options exist for modifying the program in ways to make more total funding available for smaller airports.
Shifting Funds from Large and Medium Hubs to Smaller Airports. One option is to phase out AIP grants to large and medium hubs and to redirect the funds to smaller airports. To mitigate the effect on larger airports, that option would also increase or eliminate the cap on PFCs.
The option would have several distributional consequences mainly because passengers help finance AIP grants through the passenger ticket tax. Since 90 percent of passengers use large and medium hubs, they contribute most of the revenues. For their taxes to go to smaller airports that they do not use may seem unfair. Most of the tax revenues, however, go toward covering the costs of the air traffic control system, which serves all commercial airline passengers.
Phasing in the option might be less disruptive than immediately ending grants to larger airports. It would give airports time to revise (and possibly postpone) capital spending plans, to build up capital reserves by increasing PFCs and other user fees, and to work with participants in the bond market to address any problems associated with the cutoff of one source of airport funding.
Directing Federal Funds to Airports Meeting Certain Criteria. Although similar to the first option, the second option would try to target airports, regardless of size, that need assistance in meeting federal requirements and goals. Compared with the first option, it would help larger airports that qualified for federal aid but would provide less funding for smaller airports with strong financial conditions.
Unless carefully crafted, the second option could create undesirable incentives by rewarding airports that did little to improve their financial condition. To qualify for aid, the federal government might require that an airport show that it was trying to increase revenues (for example, by imposing PFCs, increasing other user fees, or trying to attract more users) and reduce costs. In addition, the funding criteria could favor investments serving the national interest and discourage those aimed solely at local economic development.
Converting the Grant Program to a Loan Program. Another option is to convert all or part of the grant program to a loan program. A loan program could lend money at a market rate or a subsidized rate, and the rate could vary according to the federal government's assessment of the airport's needs, the importance of the project to the national aviation system, and other factors.
Converting the AIP to a State Block-Grant Program. Still another option would convert the AIP to a block-grant program in which federal aid flowed to the states instead of directly to individual airports. This option would enable states to set their own priorities in distributing funds to individual airports. Current law authorizes a nine-state program of block grants to states for nonprimary airports (commercial-service airports with fewer than 10,000 passenger boardings annually and general aviation airports).
Revising Requirements for Federal Aid. Airports receiving federal aid must meet several requirements. Although the requirements are generally intended to protect the national interest and ensure the prudent use of federal funds, they can also impose burdens on aid recipients and make it more difficult or costly for airports to carry out development projects. The following options could make federal aid more useful to airports:
Finally, other options could provide additional flexibility. Reducing regulations for airport design and construction standards could reduce costs and effectively provide more aid to airports. So could relaxing other restrictions on airports' use of federal aid. But doing that might enable recipients of aid--airports, cities, and states--to use the funds to further local interests at the expense of enhancing the national aviation system. If the Congress allowed airports to increase PFCs and other fees and to use the revenues as they wished, some aid recipients might use their local monopoly power to finance nonaviation activities or to lower local taxes.
Assistance from State and Local Governments
In addition to the funding sources already discussed, airports could look to state and local governments for greater financial assistance. Such assistance could especially appeal to state and local governments wanting to further economic development because air transportation is often an important criterion used by companies in choosing sites for new facilities.
Some state and local governments assist airports by issuing general obligation bonds on airports' behalf. Those bonds tend to get more favorable interest rates and enjoy better access to bond markets than otherwise similar revenue bonds because general obligations are backed by the jurisdiction's power to impose and increase taxes. But in turning to state and local governments for aid, airports compete with a wide range of other projects such as school buildings, prisons, parks, and sports stadiums. That makes obtaining money for airports from state and local governments difficult and uncertain.
