Is the FAA about to run out of money? Well, it all depends on whom you ask

May 31, 2005

Is the FAA about to run out of money? Well, it all depends on whom you ask

Concerns over FAA funding spur discussion of fee-based systems
AOPA will continue steadfast opposition

With some predicting the FAA will run out of money by 2007 and others predicting a surplus in the aviation trust fund through 2010, there's more than a little concern about how to handle FAA funding in the future. That's one big reason that user fees have become a hot topic in recent months as think tanks, the airlines, and the Bush administration argue for changes in the current excise tax structure.

Although the user-fee threat has been around for many years, current talk of a "funding crisis" plus skyrocketing costs have turned up the heat on the debate. And AOPA has risen to the challenge using its Washington, D.C.-based legislative affairs staff to explain to key legislators the importance of bringing the FAA's costs under control while insisting that user fees are not a viable solution.

"Our message to Congress is simple: AOPA members, your constituents, are strongly opposed to a user fee-funded aviation system," said AOPA President Phil Boyer. "It is also important that the aviation community work with the FAA to identify areas for cost savings and design the ATC system for the future."

During recent months Boyer and key AOPA staffers have testified before Congress and met with members and staff of the House and Senate aviation subcommittees to educate them about AOPA's position.

What exactly is that position?

First, excise taxes on aviation fuel are the appropriate way for general aviation to help pay for the aviation system. User fees are not. Imposing such fees could discourage pilots from using life-saving ATC and weather briefing services. The current excise taxes on aviation fuel are efficient to collect, directly relate to operating the aircraft, and are transparent to pilots.

Second, since the air transportation system is vital to the U.S. economy, at least 25 percent of the cost to fund the FAA should be supported by general tax revenues.

Third, the aviation community should help the FAA find ways to cut its costs and support reasonable measures to do so, as AOPA has done in supporting efforts to reduce the cost of providing flight service station services and eliminating redundant NDB approaches. AOPA has also offered to help the FAA find other ways to reduce its costs by generating alternatives to existing systems.

Fourth, the FAA and the aviation community should develop the design and determine the cost for modernizing the air traffic control system.

"We understand that there's no magic bullet that will take user fees off the table and that is why we are committed to maintain this fight as long as the threat exists," Boyer said. "But we also know that innovative thinking can bring FAA costs under control and ensure that all pilots have access to vital safety services for many years to come."

Transportation Secretary Norm Mineta and FAA Administrator Marion Blakey are using every available public opportunity to predict an FAA funding meltdown by 2007. However, according to the White House Office of Management and Budget (OMB), revenue into the trust fund will be up 53 percent. At a May 4 House aviation subcommittee hearing, AOPA President Phil Boyer cited the OMB prediction of aviation trust fund surpluses out to the year 2010. It might not be as bad as painted," Boyer told the committee, as he showed them a chart of the OMB's projections predicting the growth in trust fund revenue.

In addition, the FAA's independent Management Advisory Council weighed in by stating, "In sum, trust fund revenues are not expected to be the problem going forward," in a May 17 report.

So how bad is it really, and why do even the government's own experts disagree?

"It all has to do with how you keep the books," said Andy Cebula, AOPA senior vice president of government and technical affairs. "Keep the traditional spending formula, and there's no problem. Change the formula, and the FAA runs out of money."

So why monkey with a formula that works? The details are complex, but we'll try to make it as painless as possible.

The aviation trust fund and the general fund

The FAA has two funding sources - the general fund and the aviation trust fund. Trust fund money can only be spent on aviation, but general funds are up for grabs by everybody. Hence the politics. The Bush administration wants to cut almost in half the amount of general fund money dedicated to the FAA. If that happens, current aviation taxes alone aren't enough to meet the FAA's growing budget, particularly the burgeoning operations costs. Simple as that. The trust fund isn't failing; they're just trying to change the rules.

Okay, now for the messy details.

The bulk of the FAA's budget comes from the aviation trust fund (more properly called the Airport and Airway Trust Fund). The trust fund gets its money from taxes on aviation fuel, airline tickets, and airfreight and a few small miscellaneous aviation-related taxes.

But for the government as a whole, the money for aviation is appropriated from the general fund. When you pay your taxes on April 15, the money goes into the general fund, as do most federal taxes and fees. The general fund also pays for many federal programs, from the Department of Defense to the weather service. That means there are a lot of hands dipping into the general fund, lots of programs with powerful congressional allies. More programs than funds, actually, and the FAA is a very small fish in the general fund ocean.

What was the aviation trust fund supposed to do?

When Congress created the aviation trust fund in 1970, the intention was that it pay for "capital" improvements such as runways, radios, radars, and other hardware and infrastructure.

The general fund was supposed to pay for "operations" - paper clips to personnel salaries. Because the general public benefits from the FAA's regulatory and safety functions, taxes on everybody should help pay for them. And with the FAA's greater responsibilities now for homeland security, there is even a stronger argument for the general fund paying for some of the agency's operations.

But restricting trust fund monies to capital improvements didn't last long. Remember that while general funds can be spent on anything, aviation trust funds can only be spent on aviation. So if you pay more of the FAA's expenses with aviation trust funds, general funds can be spent on other programs.

And that's exactly what happened. The executive branch immediately began dipping into the trust fund for operational expenses, regardless of the law. By 1975, Congress accepted the inevitable and changed the law to allow "some" aviation trust funds to be spent on FAA operations but established various rules and formulas to ensure that infrastructure improvements got priority over operations for trust fund spending.

Meanwhile, the general fund "contribution" dropped from a high of about half of the FAA's budget to zero in some years. This year (fiscal year 2005), the general fund contribution is 20 percent.

But the Bush administration wants to drop the contribution from general tax revenues lower, to about 13 percent. That means that even more of the aviation trust fund would go toward FAA operations.

If the general fund picks up a much smaller proportion of the FAA's expenses, some experts predict that the FAA's draw on the trust fund account will exceed the taxes coming in, and in a few short years, the trust fund surplus will be exhausted.

What happened to the surplus?

Surplus? Yeah, weren't we talking about spending the surplus on aviation just a few years ago?

Yes, we were. For years there was a surplus, in part because it made the government's overall balance sheet look better. (If you have a surplus in a trust fund account, it can be used to offset a deficit elsewhere.) But then two things started eroding the surplus - an increasing amount of trust fund money being spent on aviation infrastructure and more trust fund money being used for operations.

AIR-21, passed into law in 2000, required that all revenue coming into the trust fund be spent. And it required that the airport improvement program and the FAA's facilities and equipment program be fully funded. That meant that more money started flowing out of the trust fund - a good thing for aviation.

But at the same time, more and more of the money that was intended for capital improvements was going to operations. In 1980, the trust fund supported about 20 percent of the FAA's operations costs. Today the trust fund pays for 63 percent of operations.

The effect of 9/11 and low-cost air carriers

But what about 9/11 and low-cost carriers? Didn't they affect the income to the trust fund?

Trust fund income did drop after 9/11, but now it's back up, and trust fund revenue is expected to reach an all-time-record high of $10.5 billion this year.

The FAA also says that low-cost carriers and regional jets have contributed to a decline in trust fund revenue and an increase in FAA's costs. And there is a certain intuitive logic to that. Since the ticket tax is - in part - a percentage of the ticket price, more low-cost tickets should theoretically reduce the amount of revenue.

But it hasn't. If you track trust fund income relative to the number of air traffic control operations, they hold pretty constant. Operations go up, revenue goes up by about the same percentage. So even though the average ticket price has gone down, there hasn't been a correlating drop in trust fund revenue.

Part of the reason may be the other part of the ticket tax. While there is a 7.5 percent tax on each ticket, there is also a segment tax (currently $3.20) on each ticket for each stop. That tax is indexed to inflation, not the ticket price.

So here are some bottom line points to take away from all of this:

  • Aviation trust fund income is increasing and is predicted to continue growing.
  • There is no direct correlation between operations and the FAA's "cost of doing business." The FAA's costs have increased much more rapidly than general inflation or the amount of service provided.
  • If the general fund contribution to the FAA's total budget remains at 20 percent, there is no funding crisis. There's enough money to go around.

"In the end, we will need to determine whether there is the political will to maintain a reasonable level of general funds to the FAA," said Cebula. "AOPA's position is three fold: First, aviation taxes are the fairest, most efficient way to finance the FAA. No user fees! Second, because of the public benefits derived from FAA activities, the general fund should pay at least 20 percent of the FAA's budget. Finally, the FAA must get costs under control, and we in the industry will do everything we can to identify ways to make the FAA more efficient."

May 31, 2005