Time to rethink US airport funding

Recently, Airport Investor Monthly posed the question “Is management outsourcing the answer to the growing need for privately-run airport operational activities in the United States?” On a similar theme, Bob Poole, Director of Transportation Policy at the Reason Foundation in the US, argues that given the impending collision between reduced federal funding and large unmet airport investment needs, it is high time to deregulate airports.

Growing political concern about the fiscal condition of the federal government has prompted a flurry of activity by US airports, calling for a fundamental rethink of traditional means of airport funding, and in particular federal Airport Improvement Programme (AIP) grants and the federally-controlled local passenger facility charge (PFC).

The basic problem is that with the federal budget essentially out of control due largely to entitlement programmes that Congress is thus far unwilling to tackle, there are increasing pressures to reduce the deficit by cutting back discretionary programmes.

AIP “at risk”

That means all federal grant programmes (such as AIP) are at risk, even though they may be largely funded by means of user taxes. The overall FAA budget in recent years has increasingly depended on general-fund support; as recently as 2007, the general fund provided less than 16% of the FAA budget, but in FY2011 that percentage has grown to over 31%. If and when Congress cuts way back on general-fund support, AIP would likely be the “least-bad” candidate for cutbacks (as opposed to air traffic controller payroll or NextGen ATC modernisation funding, which are the other two major budget categories).

US aviation structure lags behind Panama and Chile

Yet at the same time, the need for airport investment is huge. The World Economic Forum ranks US aviation infrastructure 32nd in the world, behind that of Panama, Chile, and Malaysia. The Airports Council International-North America (ACI-NA) identifies some USD80 billion worth of airport capital projects (while the FAA puts the figure at a still sizeable USD52 billion), the implementation of which would go a long way towards improving airport capacity and quality. AIP, by contrast is about USD3.5 billion per year.

Given the impending collision between reduced federal funding and large unmet airport investment needs, airport CEOs and the two major airport organisations — ACI-NA and the American Association of Airport Executives (AAAE) — have been holding meetings to brainstorm major changes in how US airports are funded. The main theme seems to be that it is high time — 33 years after airline deregulation — to deregulate airports, too. As ACI-NA President Greg Principato put it recently, “The financial regulatory framework under which airports operate dates from the days when the federal government told the airlines where to fly and how much to charge, and when someone [Richard M. Nixon] actually thought wage and price controls were a good idea.”

Principato invokes Moses in bid to minimise AIP grants as a quid pro quo for decontrolling the level of PFCs

Thinking bold thoughts, airport leaders are considering the following trade-off for air-carrier airports: give up some or all AIP grants in exchange for decontrol of the level of PFCs. In Aug-2011, for example, ACI-NA’s Principato wrote to all 12 Senators and House members comprising the deficit-reduction Super Committee asking them to get the federal government out of setting the level of PFCs. (Principato calls ACI-NA’s reform effort the “Moses initiative” — as in “let my airports go.”) A group of 10 of the country’s largest airports sent the Super Committee a letter on 14-Sep-2011 saying they would be willing to give up AIP entitlement funds in exchange for PFC autonomy. Several member airports wanted to go further, giving up all AIP funding if they got PFC autonomy, sources say. Leaders of 12 commercial airports in Texas met in Houston on 27-Sep-2011 to discuss the same set of issues. In addition to PFC reform, they argued that Congress should make permanent the exemption of airport revenue bonds from the Alternative Minimum Tax. There are reports that similar airport groups now exist in California, Florida, and New York.

Way back in 1990, in my (David Bentley) first Reason Foundation policy paper on airport privatisation, I analysed FAA data on the 50 largest US airports, comparing how much federal ticket tax revenue each generated in 1987 and the amount each received in 1987 AIP entitlement grants. Most of the largest airports (Boston, New York La Guardia, Los Angeles LAX, San Francisco, etc) got back less than 12% of what they generated, compared with significantly higher rates of return at medium-size airports (Dallas Love Field got 42.5% back, Maui [Hawaii] got 33.6%, Memphis 30.6%). In other words, the very airports that were most congested and providing the largest amounts of air travel services were getting short-changed by this sort of redistribution. But that tends to be the way the political process works.

Canada provides a workable model

Canada de-federalised its airports several decades ago, devolving nearly complete control to newly created local airport authorities. Instead of getting federal grants, each airport is free to set its own Airport Improvement Fee — essentially an uncapped PFC. The result has been significant improvements in airport capacity and quality, not a proliferation of “Taj Majal” terminals (as feared by US airlines).

Conservatives and tax-cutters should welcome a deal that would significantly cut AIP in exchange for having the federal government excuse itself from telling locally governed airports how to fund their capital improvements. This is precisely the kind of devolution many of them are supporting when it comes to highways and transit.

Background information provided by Airport Investor Monthly:

The Airport Improvement Programme (AIP) is a US federal grant programme that provides funds to airports to help improve safety and efficiency. Improvement projects relate to runways, taxiways, ramps, lighting, signage, weather stations, NavAids, land acquisition, and some areas of planning. The money is raised through taxes on air travel tickets sold to the public (the PFC) and a tax on aviation fuel. In 2009, funds under the programme went to 389 airports used by airlines to offer scheduled passenger service, and to 1,121 general aviation airports in communities with no airline service. As of 2009, the 389 airline airports were allocated USD2,199,335,046 at an average of USD5.5 million per airport. The 1,121 GA airports shared USD831,717,227 at an average of USD741,942 per airport.

Passenger Facility Charge. In the United States, the federal Passenger Facility Charge (PFC) Programme allows the collection of PFC fees up to USD4.50 for every enplaned passenger at commercial airports controlled by public agencies. Airports use such fees to fund FAA-approved projects that enhance safety, security, or capacity; reduce noise; or increase air carrier competition. Federal law limits use of PFC funds strictly to the above categories. There is an argument that airports that are leased to private companies or consortia should pay back some or all of the cost of projects that have been funded in this manner;

NextGen. The Next Generation Air Transportation System (NextGen) is the name given to a new national Airspace System that is due for implementation across the US in stages between 2012 and 2025. NextGen proposes to transform America’s air traffic control system from an ageing ground-based system to a satellite-based system.

Deficit Super Committee. The Joint Select Committee on Deficit Reduction, also known as the Supercommittee or Super Congress, is a joint select committee of the United States Congress, created by the Budget Control Act of 2011. The act was intended to prevent the rapid process of sovereign default that would have resulted from the 2011 US debt-ceiling crisis and has been interpreted as a reaction to frustration over prolonged partisan political disputes during an uncertain economic struggling to recover from the late-2000s recession.

Alternative Minimum Tax (AMT). The AMT is an income tax imposed by the US federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (exemption). This exemption is substantially higher than the exemption from regular income tax.

A two-year exemption for airport private activity bonds (PABs) from the AMT was sought and achieved, driven by representations from ACI-NA and others, and including the refinancing of bonds issued within the past five years under the exemptions. It did away, at least briefly, with a tax that was hampering airport investment. US airports bonds have been subject to the AMT, and the market for these bonds had decreased to the point there was no market as such. The American Recovery and Reinvestment Act (ARRA), better known as the Economic Stimulus Package (ESP) offered a two year fix for airport bonds and provided that:

  • New money bonds issued in 2009 and 2010 could be issued on a non-AMT basis and later current refunded on a non-AMT basis;
  • AMT new money bonds issued after 01-Jan-2004 but before 01-Jan-2009 could be refinanced during 2009 and 2010 into non-AMT debt.

Before this decision Federal tax law unfairly classified the vast majority of bonds that airports use as ‘private activity’ – even though they are used to finance runways, taxiways and other facilities that benefit the public. Since private activity bonds were subject to the AMT, airport bond issuers were charged higher interest rates on their borrowing. Consequently, airports were being forced either to postpone key infrastructure projects or find other sources of short-term financing. Eliminating the AMT penalty allowed airports to find buyers for their bonds so they could fund infrastructure projects that will create jobs and stimulate the economy.

The AMT extension for all private activity bonds (including those for airports) expired on 31-Dec- 2010. 

Reinstating the exemption on airport private activity bonds from the AMT is an ongoing effort for ACI-NA, which is pleased that a two-year extension of the AMT penalty for private activity bonds was included in President Obama’s jobs bill.

ACI-NA continues to work with the student loan groups and the American Association of Port Authorities to garner additional political support.  Both its champions, Senator John Kerry and Congressman Richard Neal, remain staunch supporters.  Senator Kerry has included an AMT exemption provision in a larger bill he introduced to create a national infrastructure bank and with was able to get Senate Commerce Committee Ranking Member Senator Kay Bailey Hutchison on board.

The Reason Foundation. The Los-Angeles based Reason Foundation advances a free society by developing, applying, and promoting libertarian principles, including individual liberty, free markets, and the rule of law.

Robert Poole. Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the previous four presidential administrations on transportation and policy issues. He is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Poole's studies also launched a national debate on airport privatisation in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatisation of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatisation Pilot Programme and the privatisation of Indianapolis' airport management under Mayor Steve Goldsmith. He is credited as the first person to use the term "privatisation" to refer to the contracting-out of public services and is the author of the first-ever book on privatisation, Cutting Back City Hall, published by Universe Books in 1980.

This article was first published in Airport Policy News, Oct-2011

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