A. Recommendation

The Commission believes that if users of FAA services are expected to pay special aviation charges, every dollar raised should be directly linked to supporting FAA programs. The Commission recommends that the FAA's funding and financing system should receive a budget treatment ensuring that revenues from aviation users and spending on aviation services are directly linked, and shielded from discretionary budget caps. In general, funds raised for aviation purposes should be available for aviation purposes. In the same manner, services provided to the users should be supported by them financially. However, the services that are of a general public benefit should be supported by the general taxpayers.

This was the first recommendation made by the Commission and acts as the foundation for the other recommendations. Commission Chairman Mineta, on behalf of all the Commissioners, wrote the following to the House of Representatives and Senate leadership in early June:

B. Background

Because the FAA is part of the federal government, the treatment of its budget and spending, currently follows federal budget rules. Like most federal agencies, the FAA's budget must be annually passed by the Congress and signed into law by the President. However, unlike many agencies in the federal government, users of FAA facilities and services must pay special aviation excise taxes (including the aviation ticket tax, the flight segment tax, the cargo waybill tax, the international departure and arrival fee, and certain fuel taxes) ostensibly levied to support the FAA's programs. These excise taxes are deposited into the Airport and Airway Trust Fund.

The Aviation Trust Fund was established in 1970 with the purpose of financing the FAA's capital investment in the airport and airway system. Over the years, Trust Fund monies have also been increasingly used to support the FAA's operations. Statutory language limits the amount of Trust Fund money allowed to support FAA's operations.

The law is intended to encourage more capital investment; if more Trust Fund money is appropriated for capital needs, then more Trust Fund money can be spent on the FAA's operations.

But, with the FAA's total budget limited due to federal deficit concerns, the immediate needs of the FAA's operations must take priority over capital investment needs. Since not all of the Trust Fund money is spent annually, the balance grows. Every year that there is an aviation Trust Fund surplus, some fees are not being spent on the intended aviation purposes. With the new taxes the Congress has levied and the limits placed on spending due to federal deficit concerns, Trust Fund balances are expected to dramatically increase. There are some estimates that, with the new aviation taxes, projections of FAA requirements, and statutory limits on Trust Fund spending, the uncommitted balance (surplus) of the Trust Fund could grow in excess of $9 billion by 2002. This buildup in the Trust Fund clearly reflects that annual tax revenues extracted from aviation users soon will exceed annual spending on aviation allowed by current budget constraints.

The ATC function of the FAA is unique in our federal government. The government is charged with running the "production line" of a major commercial industry; every unit of production -- in this case every flight -- needs the FAA's input to make it a deliverable product. If that operation is to become performance-based and financed by the users and beneficiaries of the system, it must have its revenues driven by demand, which in turn drives expenditures. If the ATC system remains part of a budget process driven by external forces, such as reducing total federal domestic discretionary spending, it will never be performance based, no matter what label anyone might wish to hang on it.

The lack of any direct linkage between revenues and spending was crystallized by the tax-writing committees in the Congress during consideration of this year's budget reconciliation bill. Taxes will be dramatically increased on airline passengers and air carriers without assuring that the additional revenue raised will be dedicated to aviation safety and capacity improvements. As we move toward and past the turn of the century, the revenues from this increased aviation consumer and carrier tax will not be invested in additional modernization of the aging air traffic control infrastructure unless the budget treatment is changed. Without change, passengers will pay more and receive less efficient ATC service in the form of more delays and less safety.

C. The FAA's Revenues and Spending Should Be Linked and Spending Shielded from Budget Caps

1. Current Situation

The FAA is funded through the appropriations process and must compete for funding, with other modes of transportation (and other government programs like education or health programs), even though the FAA is primarily supported with money from the Airport and Airway Trust Fund. The Trust Fund is fully supported with revenues from aviation users. Under existing budget process rules, the budget cap that applies to the Department of Transportation and related agencies does not take into consideration the seemingly dedicated revenue stream derived from its aviation users.

In the simplest form, there are two types of federal government revenues and spending: mandatory and discretionary. The rules for spending and controlling mandatory versus discretionary funds are completely different. While the FAA's spending is considered discretionary, the revenue supporting the Trust Fund is considered mandatory. Decisions made regarding the FAA's mandatory revenues are made with little consideration of the FAA's discretionary spending, and vice versa. Therefore, there is very little relationship between the revenues flowing into the Trust Fund and the level of the FAA funding. For instance, in FY 1995, there was a $5 billion uncommitted balance (surplus) in the Trust Fund; however, the FAA's appropriations were reduced 4 percent from the FY 1994 level (see Appendix 2 for additional information on budget issues).

The FAA's budget classification also means that, if the FAA proposes a program that would significantly reduce its costs, there would be no reason for the tax committees to implement a corresponding reduction in aviation taxes. Since the FAA's spending is discretionary, any cost savings could only benefit other discretionary programs. In fact, there is little incentive for cost savings by the FAA because any savings usually translate into lower funding the next year rather than rewards for productive employees or additional investments in capital programs.

2. Commission Recommendations

The Commission believes that this lack of linkage between the FAA's revenues and spending is inappropriate and unnecessarily causes very difficult consequences for the FAA and the aviation industry. The FAA and the industry should be able to benefit from the user revenues that are collected. The FAA should also be able to reduce charges on aviation users if the FAA's needs are below the level of funds raised by the current charges. In other words, the FAA should have the flexibility to alter the user charges relative to aviation system demands. Under the current system these options are not available to the FAA.

The Commission believes that since the FAA is largely funded by its own revenue sources supported by users, the agency's spending of user charges should be controlled by its revenues, not by the budget caps. The budget caps are to reduce the federal deficit. If the level of FAA spending was limited to its means, then it would have the same overall impact as the budget caps. Therefore, the Commission believes the FAA's user supported budget should be able to function outside the federal budget caps so long as that does not increase the deficit. This change will also alter the terms of overall FAA spending decisions. Currently, the funding trade-offs are between FAA spending relative to other government programs. Instead, the focus needs to be the appropriate level of spending within the FAA, prioritized by the anticipated economic efficiencies and benefits. The Commission's recommended budget treatment will achieve this result.

The Commission recommends a change that would, in its simplest form, allow aviation user revenues to be spent on FAA programs. The Commission understands that the federal government must function under strong budget rules to control spending. In addition, the Commission believes that certain budget controls for the FAA are necessary. For example, the FAA should not be allowed to spend beyond its means. However, the budget rules regarding aviation revenues currently lead to some inappropriate or unwise policy choices, needless delay in implementing programs, and decreased employee efficiency and morale.

In a recent case, the FAA attempted to use internal reprogramming authority (established by Congress) to address a commissioning backlog of Automated Surface Observation System (ASOS) weather measurement equipment. The backlog was a result of congressional direction on purchasing the systems, although there were already many ASOS in the FAA inventory. Funds appropriated by Congress for ASOS covered the acquisition of new systems and did not cover the commissioning costs for new and previously procured systems. FAA attempted to reprogram internally in FY 1997 to address a portion of the backlog but that was met with a significant resistance from congressional staff, resulting in the need for a formal and time consuming reprogramming request. The FAA had other important shortfalls at the time, and after the initial feedback from congressional staff, chose not to pursue a formal ASOS reprogramming request at that time to concentrate on other priorities.

The budgetary treatment of the collection and spending of aviation user charges will, in all likelihood, depend upon the precise nature of the user charges. Therefore, the Commission's decision to move toward a more cost-based funding system (which is discussed in detail in Section V of this report) has an impact on how future collection and spending would be scored in the budget, unless changes or exceptions are made to the existing budget rules. In general, cost-based funding should be scored consistent with the budget treatment advocated in this report.

3. Budget Scoring

The Commission recommends that the FAA revenues and spending, should be on the same side of the budget. This would allow any increases in need to be compensated with increases in revenues and spending. This would also allow any reduction in spending to be countered with a reduction in revenues. The Commission's recommended budget treatment for the FAA should not increase the federal deficit estimates through FY 2002.

As discussed later in Section IV appropriate budget scoring of borrowing activity would enable the agency to utilize financial resources available to it in a business like manner. The changes in budget treatment should recognize that borrowing by a day-to-day operating organization, such as the air traffic system, is a necessary flexibility to achieve the safety and efficiency benefits the public demands.

Regardless of the nuances of the current budget system, the Commission recommends that the majority of the FAA's funding be placed on the mandatory side of the federal budget so that spending would be limited to the monies raised through dedicated user charges. This would be similar to the "permanent appropriations" treatment the United States Postal Service (USPS) receives, whereby all revenues generated from USPS services (i.e., first class stamps) are automatically appropriated (see U.S.C. Title 39, Section 2401) and transferred to USPS accounts for their use (U.S.C. Title 39, Section 2003). Under such a plan, the statutory budget caps on overall federal discretionary spending would be lowered and used as a one-time offset for the increase in mandatory spending that would occur.

The remainder of the FAA's programs (safety, security and the governmental usage of the ATC system) would continue to be discretionary in nature since the Commission is also recommending that those programs be funded through an appropriated general fund contribution (discussed in Section V). The Commission believes that such appropriations (approximately $1.4 billion in 1995) should be made on a multiyear basis so that there would be funding stability for those important safety and security activities.

Although not the preferred course of action, it would be acceptable to move the collection of user charges to the discretionary side of the budget (as offsetting collections) with spending on the majority of the FAA's programs being placed in its own budgetary category much as has been done with the Violent Crime Reduction Trust Fund (which is not subject to many of the usual budget pressures). This would require a one-time budget scoring exemption (a pay-as-you-go offset) if the current mandatory aviation taxes were replaced by an equal amount (through FY 2002) of aviation user charges on the discretionary side of the budget.

If Congress should decide that the budget process for aviation programs should not be changed as the Commission recommends, then taxes must be reduced subsequent to when appropriations fall below the authorized amount or there will be a buildup in the Trust Fund balance. Simple fairness requires that the taxes to fund aviation programs be in line with the programs funded by those taxes, otherwise the American traveling public is being misled and overcharged.

The FAA is providing services to aviation travelers, the aviation industry, and the general public. The beneficiaries of the aviation system should pay for those services that relate to them -- services provided to the aviation community should be funded by the users, and services to the general public should be funded by the general tax revenues.

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