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Statement of Edward A. Merlis,
Senior Vice President, Government Affairs
Air Transport Association of America
Before the National Civil Aviation Review Commission
Regarding FAA Budgeting and Financial Issues
May 28, 1997
"The FAA, like nearly all other Federal entities, does not have solid information on the full costs of its services or operations the lack of detailed cost accounting information particularly information on product and service costs makes it all but impossible to analyze detailed information regarding which projects, which operations, or which investments make the most sense."
- Independent Financial Assessment - Final Report, February 28, 1997
Mr. Chairman and Members of the Commission, I am Edward A. Merlis, Senior Vice President of the Air Transport Association of America (ATA). ATA represents the major commercial passenger and cargo air carriers in the United States. Collectively, our members account for over 95 percent of all revenue passenger and cargo ton miles that scheduled air carriers operate in this country.
We appreciate this opportunity to present to the Commission the views of the commercial airline industry on the issue of FAA budgeting and financial requirements. First, however, I want to applaud the Commission members for accepting the difficult challenge which lies ahead. After listening to this panel, some of you may be having second thoughts.
As you know, unlike any other industry, the airline industry is completely at the mercy of a Federal government agency, the FAA. The FAA is the only Federal government agency which provides continuous operational control over private sector activities. The regulatory powers of other government agencies may affect the manner in which the private sector conducts business, but the FAAs provision of air traffic control services is unique in that it interacts with the private sector at every step in the operation of civil air transportation. Thus, the commercial aviation system is totally dependent upon the effective and efficient provision of air traffic control services, which necessitates an effective and efficient FAA. Moreover, the effective and efficient operation of the FAA has a direct bearing on the vitality of air commerce which, in turn, has a large and direct impact on the overall U.S. economy.
With the passage of the Federal Aviation Reauthorization Act of 1996, and the establishment of this Commission, Congress clearly realized that difficult budget and financial issues facing the FAA necessitate independent analysis and judgment. As the government goes about the difficult process of reducing the Federal deficit, and as you deal with the thorny issues presented by my two predecessors on this panel concerning how to finance the FAA, I want to focus on a different issue -- identifying the FAAs financial requirements. You too may find, as we in the airline industry have, that you hit roadblocks in attempting to identify these financial requirements. These roadblocks are due to shortcomings in the governments budgeting process.
We recommend that the Commission, irrespective of any proposals as to how to finance the FAA, must pay equal attention to the overall financial requirements of the FAA. We should not let this opportunity go by. We recommend that you quantify the FAAs financial requirements, its potential savings, and its operational efficiencies, drawing, where appropriate, on the wealth of material that Coopers and Lybrand uncovered as well as the experience that Commissioners themselves have in the real world. You have the power to ask questions, to be skeptical of answers, to challenge conventional wisdom, and to make businesslike recommendations and conclusions. We need you to do that.
Most importantly, be specific. Your work will be all the more meaningful if you address the issues head on. While your task will not be easy, it is essential.
Let me explain why.
Less than two years ago, in a performance which would have made chicken little proud, the aviation community was informed that there existed a shortfall, over the next seven years, between FAAs budget requirements and available funds. This so-called shortfall was identified, with surprising precision, as being $14.2 billion. Later, this figure was re-estimated to be $12.1 billion. In light of Congressional appropriations for FY 1996 and 1997, and the budget agreement adopted last week, its clear that this shortfall is even less. However, all of this estimating of the shortfall has been done in a vacuum. We are relying upon estimates based upon government budgeting; not on a business plan.
We need to know what the real budget shortfall is, how is it derived, and what can be done to remedy it.
We hope you will be able to ascertain the answer. It wont be easy. We havent been able to. The independent financial assessment performed by Coopers and Lybrand wasnt able to, although Coopers did confirm that the FAAs estimate of its future financial need is not supportable by the evidence.
Coopers suggested that $59.8 billion in financial requirements over the next six years was reasonable, only if you assume a "status quo operating environment" for the FAA. The aviation community cannot afford a "status quo operating environment" for the FAA. The Congress, by virtue of legislation it has passed to change the culture of the FAA, has firmly stated that it will not tolerate a "status quo" operating environment. And in an era of change, its inequitable to force the American people to tolerate a "status quo" operating environment.
Whats wrong with the status quo? As the Coopers and Lybrand report notes:
"Some of the key issues as to why we believe the status quo operating environment is not acceptable are:
Coopers has identified a critical list of priorities for the FAA. These priorities can serve as a guide to where the FAA needs to focus its attention, and we suggest that you look at these too as guideposts for financial improvements.
Overestimating Projected Needs and Costs
One critical area where your judgment and expertise is necessary is in the area of projected needs and costs. Coopers found that the FAA historically overestimates its future needs by significant percentages averaging about 8 percent. Coopers also noted that that past FAA five-year forecasts are notorious for this fault. Although no absolute quantification of a total amount is presented (presumably, because of insufficient and imprecise FAA accounting data), the report suggests that projected needs are being overstated.
For example, Coopers says that FAA estimates it will need an additional $8.5 billion between FY 1997 and 2002, or a 16.5% increase in resources. However, the report points out that 60% of the $8.5 billion in cost growth can be attributed to the FAAs estimates of heavy increases in salary growth in Operations, and that Operations represents 60 to 70% of the perceived funding gap. Coopers strongly disagrees with the FAA about these costs being "uncontrollable."
Coopers identifies hundreds of millions of dollars in potential savings in more than a dozen areas funded out of the FAAs Operations account. These include modifications and savings accruing from a host of actions which can be taken as a result of the personnel and procurement reforms adopted by the Congress such as:
We need your best judgment as to the adequacy of this FAA assumption.
In addition to these line items" for Operations savings, Coopers is very critical of the FAAs lack of assumptions about future productivity in Operations:
"While some may argue that the FAA has improved productivity, much of this appears to instead be more a matter of cost avoidance. In addition, the FAA has not assumed productivity improvements from the introduction of new technology or business process in its budget estimates through FY 2002. Productivity needs to be further addressed at the FAA."
We need your best judgment as to the significant productivity increases which can be introduced to the FAA .
Controller Compensation and Benefits: Coopers believes the opportunities for savings in these areas are substantial. This area comprises 77.3% of the FAAs entire Operations budget, and must not be treated as though it were uncontrollable. The reason controller pay and benefit costs are so high, according to the Report, is that the FAA has no incentive to hold down costs.
The FAA has created a series of special pay provisions (36 different ones in all) that are unique to the FAA and that are a significant portion of their base labor costs. These special provisions also drive future labor costs. As the Report notes, special controller pay provisions alone make up almost 7.5% (in excess of $260 million) of the FAAs controller PC&B.
Coopers also notes that the FAA greatly overestimates the need for controllers system-wide. The FAA determines controller staffing needs through "staffing standards," which are mathematical models for computing the number of personnel required to perform a job, expressed as a function of some measurable quantity known as "workload." Staffing standards developed by the FAA for controllers assume that controllers are on position 6 ½ hours a day. Coopers points out that, based on the daily peaks and valleys in the controllers work day, this provides "significant excess coverage" in most facilities during the slow periods of the day. According to the report, this view has been supported in the past by OMB, GAO, DOT, and the DOT IG.
We need your best judgment as to how much can be saved by implementing better staffing standards.
Facility Consolidation and Closure: It is possible to achieve cost savings with a more aggressive timeline for contracting out low-level towers, consolidating flight service stations and air route traffic control centers, decommissioning primary surveillance radars, and implementing GPS/WAAS.
Organizational Reengineering: The impact of a focused reengineering effort supported by top management at the FAA would be "monumental," according to the Report.
Management Reforms: Recently enacted personnel, acquisition and travel reforms, according to the Report, are in their infancy, but should have "a major impact" on the way the FAA conducts business. None of the savings associated with these reforms have been assumed by the FAA in their calculation of future requirements.
Although, in most cases, the specific savings (where savings can be quantified) are small, the cumulative effect as generalized in categories above is large. They range from a projected $1.4 billion savings from implementation of GPS/WAAS, to less impressive amounts for dozens of smaller F&E and RE&D items and programs.
One of this Commissions responsibilities is to look at airport funding requirements. Coopers found that the FAA, ACI/AAAE and ATA attempts to determine airport capital needs all have varying weaknesses, and GAO basically validated all airport capital needs proposed by the various interest groups.
For example, Coopers said:
We agree with these comments about our study and have revised it. Our new assessment more closely resembles the airport capital requirements which Coopers has identified. Moreover, GAO randomly selected three airports in an attempt to identify the variances between the three assessments, and found that the ATA assessment contained the highest capital requirements for the three airports studied. Suffice it to say, we do not low-ball.
Nevertheless, I think it is fair to say that existing sources of revenue are sufficient to pay for airport capital improvements, obviating the need for an increase in the Passenger Facility Charge (PFC).
But let me make one last point which Coopers drove home to us. Its hard to believe, that after the Congress has authorized in excess of $20 billion for AIP, and a PFC program which has already been authorized to collect $15 billion, the experts tell us that the FAA needs to develop a "model that independently forecasts airport capacity and capital requirements, similar to the manner in which large commercial business enterprises with numerous facilities estimate their funding requirements."
Just think of it -- $35 billion has already been committed or approved by the Federal government, and we are only now trying to figure out how much is required.
Mr. Chairman and members of the Commission, we cannot emphasize strongly enough that the aviation community is looking to you to determine the FAAs financial requirements. We view that responsibility as important as the thorny questions addressed by my colleagues on this panel. For, irrespective of the method used to collect money to fund the FAA, it is absolutely critical that we know exactly how much needs to be collected.
Let me throw out one last item for your consideration. Maybe the FAA isnt underfunded at all, but rather it is overfunded. Let me explain. If one were to extract from the budget the FAAs grant making and regulatory authority, the vast majority of
the FAAs spending is for the provision of air traffic control services and attendant research and development and capital acquisition programs. Within this subset of the FAA, that is, the part of the FAA that resembles a communications business, the capital program exceeds 50% of its overall budget. Is there any organization, public or private, which can manage a complex, innovative, high technology capital development program which exceeds 50% of the organizations overall budget?
I would be pleased to respond to any questions you, or any member of the Commission may have.