Policy and Procedures Concerning the Use of Airport Revenue

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

[Docket No. 28472]

Policy and Procedures Concerning the Use of Airport Revenue

AGENCY: Federal Aviation Administration (FAA), Department of

Transportation (DOT).

ACTION: Supplemental notice of proposed policy; request for comments.

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SUMMARY: On February 26, 1996, the FAA published for public comment, a

comprehensive statement of policy and procedures concerning the use of

airport revenue, based on the requirement that revenue at public

airports have received Federal grants generally be used only for

airport purposes. Comments received on the notice included comments on

four issues not discussed in detail in the February notice: (1) The use

of airport property and funds for community or charitable purposes; (2)

the extent to which airport funds may be used for marketing and

promotional activities; (3) guidance on the accounting and cost

allocation practices that the FAA considers acceptable for purposes of

compliance with the revenue retention requirement; and (4) the use of

airport

[[Page 66736]]

property for public transportation facilities. This supplemental notice

proposes additions to the policy proposed in February 1996 to include

specific policies and guidance on these four issues, based on comments

received. The final policy will reflect comments received on this

supplemental notice as well as the general notice published in

February. While the policy statement proposed is not made effective at

this time, statutory requirements relating to the use of airport

revenue remain in effect and will be enforced by the FAA. Airport

sponsors may assume that the FAA would act consistently with the views

expressed in this document in any enforcement action for revenue

diversion taken before a final policy statement is issued.

DATES: Comments must be received by February 18, 1997.

ADDRESSES: Comments should be mailed, in quadruplicate to: Federal

Aviation Administration, Office of Chief Counsel, Attention: Rules

Docket (AGC-200), Docket No. 28472, 800 Independence Avenue, SW.,

Washington, DC 20591. All comments must be marked: ``Docket No.

28472.'' Commenters wishing the FAA to acknowledge receipt of their

comments must include a pre-addressed, stamped postcard on which the

following statement is made: ``Comments to Docket No. 28472.'' The

postcard will be date stamped and mailed to the commenter.

Comments on this Notice may be examined in room 915G on weekdays,

except on Federal holidays, between 8:30 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Benedict D. Castellano, Manager,

Airport Safety and Compliance Branch, AAS-310, Federal Aviation

Administration, 800 Independence Ave. SW., Washington, DC 20591,

telephone (202) 267-8728; or Jonathan W. Cross, Airports Law Branch,

AGC-610, Office of the Chief Counsel, Federal Aviation Administration,

800 Independence Avenue, SW., Washington, DC 20591, telephone (202)

267-3473.

SUPPLEMENTARY INFORMATION:

This proposed statement of policy and related procedures is being

published pursuant to section 112(a) of the Federal Aviation

Administration Authorization Act of 1994, Pub. L. 103-305 (August 23,

1994) (1994 Authorization Act). That section requires the Secretary to

establish policies and procedures assuring the ``prompt and effective

enforcement'' of the requirement relating to the use of airport revenue

(also called the ``revenue retention requirement'') (49 U.S.C.

47107(b)) and the requirement that airports be as self-sustaining as

possible (49 U.S.C. 47107(a)(13)), and of the Airport Improvement

Program (AIP) sponsor assurances made under these sections. Section 112

includes specific guidance and requirements for the mandated policies

and procedures.

For convenience, the term ``sponsor'' is used throughout this

document to mean the state or local government body obligated under an

airport grant agreement. For purposes of the proposed policy statement

the term is generally interchangeable with the term ``airport owner or

operator'' used in some statutes. A sponsor may be an entity that

exists only to operate the airport, such as an airport authority

established by state law, or may be an authority established to operate

a variety of transportation facilities including an airport. Other

airports are owned by a state, county, or city government and operated

by an agency of that government, in which case the state, county, or

city is the sponsor, rather than the subordinate agency.

The Revenue Retention Requirement

Under the Airport and Airway Improvement Act of 1982, as amended

(AAIA), part of title V of the Tax Equity and Fiscal Responsibility

Act, Pub. L. 97-248, repealed and reenacted without substantive change,

Pub. L. 103-272 (July 5, 1994), 49 U.S.C. 47101, et seq., as amended by

Pub. L. 103-305 (August 23, 1994), public agencies receiving Federal

grants for airport development since September 3, 1982, are required to

comply with the revenue retention requirement, section 511(a)(12) of

the AAIA, now codified at 49 U.S.C. 47107(b). The revenue retention

assurance requires airport owners to use ``* * * all revenues generated

by the airport * * * for the capital or operating costs of the airport,

the local airport system, or other local facilities which are owned or

operated by the owner or operator of the airport and directly related

to the actual air transportation of passengers or property.''

The Requirement To Be as Self-Sustaining as Possible

A related requirement of the AAIA with respect to airport revenue

is the requirement that an airport have a rate structure that makes the

airport as self-sustaining as possible under the circumstances existing

at the airport. 49 U.S.C. 47101(a)(13). The reason for this requirement

is to minimize an airport's reliance on Federal funds, and also to

minimize the need for the airport to be supported by local taxation.

Many of the OIG audits of airport revenue have found instances of a

rate structure in which the airport apparently could have charged more

for the non-aeronautical use of property than it has. Several of these

findings related specifically to the use of property for community-

relations purposes, such as for parks. In another case, the OIG found

that the airport operator did not charge a sufficient rate for the use

of airport property for a local public bus terminal.

In general, the FAA interprets the self-sustaining assurance to

require that a sponsor charge a fair-market commercial rate for non-

aeronautical leases and activities on an airport. The FAA has not

insisted on the airport's standard commercial rate for uses of property

for which it is unreasonable to expect a commercial rent, and has

permitted temporary uses of property at below-market rates pending

future commercial use.

Notice of Proposed Policy

On February 26, 1996, the FAA published a Notice of Proposed Policy

entitled ``Policy and Procedures Concerning the Use of Airport

Revenue'' (61 FR 7134). The period for public comment closed on April

26, 1996. The FAA received comments from 34 commenters on all aspects

of the proposed policy. Comments were received from various nonprofit

and trade organizations including the Air Transport Association and

International Air Transport Association, the American Association of

Airport Executives (AAAE) and the Airports Council International-North

America (ACI-NA), and the Aircraft Owners and Pilots Association; from

individual airport operators and state and local governments; and from

an automobile rental firm. The comments will be addressed in the final

policy statement to be issued in this docket.

The February notice listed several examples of uses of airport

revenue that respectively are or are not considered appropriate

expenditures under the terms of section 47107(b). The lists were not

exhaustive, however, and not all possible uses of airport revenue were

included. Many of the commenters submitted comments on issues that they

believed should be included in the final policy, but which were not

addressed in detail in the February proposal. In consideration of the

comments, the FAA believes that several of these issues are

sufficiently significant that supplemental guidance should be proposed

for public comment before the adoption of a final policy. In summary,

these issues are (1) The use of airport

[[Page 66737]]

property and funds for community or charitable purposes; (2) the extent

to which airport funds may be used for marketing and promotional

activities; (3) guidance on the accounting and cost allocation

practices that the FAA considers acceptable for purposes of compliance

with the revenue retention requirement; and (4) the use of airport

property for public transportation facilities. This notice proposes to

add new language to the policy statement published in the February

notice to address each of these issues. Each issue is discussed

separately below.

As with the practices specifically discussed in the proposed policy

published in February, the four practices discussed below are not new

requirements, but rather are an articulation of the FAA's proposed

implementation of a statute that has been in effect since 1982.

It should be noted that the use of airport property for community

purposes and public transit at less-than-market rates generally

involves the self-sustaining requirement rather than the revenue

retention requirement. The revenue retention requirement and the self-

sustaining requirement often arise in the same circumstances at an

airport, and both requirements are cited frequently in audits of

airport revenue by the Office of the DOT Inspector General (OIG). In

order to provide comprehensive guidance on the use of airport revenue

and property consistent with the airport's grant assurances, the FAA is

proposing to include more specific guidance on the self-sustaining

requirement in the final revenue diversion policy to the extent

necessary to address the use of airport property for community ``good-

will'' and public transit purposes.

1. Use of Airport Property for Community Charitable Purposes; Donation

of Airport Funds for Community Charitable Purposes

Discussion of Comments.

The OIG has found either revenue diversion or failure to obtain

fair rental value for airport property, or both, in 38 audits. In

several of those cases the OIG has cited the practice of leasing

airport property for charitable or community purposes, such as a park

or ball field, at no cost or at a below-market rental rate. The OIG

considers this practice to be a violation of the grant assurance

obligating the airport to maintain a fee and rental structure which

will make the airport as self-sustaining as possible under the

circumstances. Where the property is made available to an agency of the

sponsor, such as a parks department, the below-market lease could also

be considered a violation of the revenue retention requirement, since

the sponsor is choosing to subsidize its own non-aeronautical

activities with airport resources and could modify the arrangement at

any time.

Similarly, in an audit of revenues at airports operated by the City

of Los Angeles, the OIG found the donation of airport funds (as opposed

to no-cost use of land) to non-profit and community groups to be an

unlawful diversion of airport revenue.

The February notice of proposed policy does not discuss an

exception for community-purpose use of property, but in practice the

FAA has in limited circumstances permitted use of property at less than

fair market rental without finding a violation of the self-sustaining

or revenue use requirements. For example, in Arlington, Washington, the

FAA permitted the City of Arlington to maintain a park on airport

property for which there was no current commercial demand, if the

property remained available for commercial use, permanent improvements

for the park were not made, and no airport funds were used for the

park. In the comments on the proposed policy, a substantial number of

commenters requested a policy permitting practices of the kind found by

the OIG at Los Angeles airports. Specifically, commenters used various

terms to argue that the policy should permit: Use of airport land for

non-profit, public service agencies for a nominal fee; de minimis

support for a community purpose; use of property which is not otherwise

productive at less than FMV for local government, parks and recreation,

or other community purposes; use of airport property by community

groups, with limits; de minimis community participation expenditures;

goodwill community events; community involvement; minor community

goodwill expenses, etc. Supporting commenters argue that an airport

operator needs some flexibility to maintain positive relations with

surrounding communities, in consideration of the adverse impacts of the

airport (e.g., noise, commercial zoning), to ensure that the airport is

accepted as much as possible and that present and future airport

development is not restricted by local political action.

On the basis of the substantial number of similar comments received

on this issue, and the fact that similar practices have been found in

several OIG audits, the FAA believes that some form of below-market

contribution of the use of property for community use is a common and

long-standing practice at U.S. airports. In consideration of the

apparent prevalence of this practice and the comments received on the

issue, and of the FAA's past practice, the FAA is proposing to adopt a

policy that would permit the limited use of airport property for

certain community-related purposes as a legitimate cost of operating

the airport.

In specifying the permissible use of airport property for

`community' purposes and appropriate limits on such use to maintain

consistency with the requirements of 49 U.S.C. 47107(b) or

47101(a)(13), the FAA has considered the following issues raised by the

OIG audits and the public comments received:

Should the airport's need to ``be a good neighbor'' to the local

community be considered a ``circumstance existing at the airport''

under section 47107(a)(13(A) that would justify permitting use of

airport land for public purposes, at below-market or zero rent, by

local governments and non-profit organizations?

How should the commercial desirability of the property, or the

availability of the property for unrestricted development, affect the

determination of whether its lease at below-fair-market rent is

consistent with the self-sustaining requirement? I.e., should it be

easier to find justifying circumstances for the below-market lease of

property that is subject to some airport-related impairment on use?

Examples of impairments of commercial land use could be, for example,

part 77 surfaces close to the surface, location of the land in a runway

protection zone, or location of the land within a noise contour that is

not compatible with the prevailing land uses in the area.

Should expenditure of airport funds for purposes of community

goodwill be considered an ``operating cost of the airport'' for

purposes of section 47107(b)?

If so, should some limit be established on ``community goodwill''

expenditures? E.g., ACI-NA and AAAE have proposed a ``safe harbor'' for

community participation expenditures at a de minimis level.

Proposed Policy

The FAA proposes to recognize that making airport property

available for general, public community purposes such as parks and

recreation areas, for the purpose of maintaining positive airport-

community relations, can be a legitimate function of an airport

proprietor in operating the airport. Accordingly, in certain

circumstances providing airport land for such purposes will not be

considered a violation of the

[[Page 66738]]

self-sustaining requirement. Generally, below-market use of airport

land for community purposes will be considered consistent with the

assurance if the community use of the property can be justified as

benefiting the airport and the property involved is not expected to

produce substantial income at the time the community use is

contemplated. Benefit to the airport can be tangible, in the form of

action to maintain the condition or security of the airport property

used, or intangible, such as the contribution to good relations with

surrounding communities. The greater the difference between the fair

rental value of the property and the actual amount of the lease, the

greater the burden of showing an airport-related benefit. Some

indications that the property would not be expected to produce

commercial income at the time would be that (1) The property is subject

to airport-related restrictions on use and structures, (2) the property

is subject to terrain, access limitations, or other factors that make

it unsuitable for commercial use, or (3) there is no apparent

commercial demand for the property due to general market conditions in

the area. In any event the above conditions would be considered in

determining the fair rental value of the property in question.

The use of airport funds to support community activities and

participation in community events would not be considered an airport

cost unless the expenditure is directly related to the operation of the

airport. For example, expenditure to support participation in the

Airport's Federally approved disadvantaged business enterprise program

would be considered permissible as supporting a use directly related to

the operation of the airport.

Use of airport property for community purposes by other departments

of the sponsoring government agency with park, recreational, or similar

responsibilities could meet the test of this policy, but would be

subject to special scrutiny for evidence that the use was beneficial to

the airport. This exception would not apply where the sponsor was using

airport property simply as a source of inexpensive land for the

sponsor's general governmental purposes.

II. Use of Airport Revenue for Economic Development, Airport Marketing,

and Airport Promotion

Discussion

Many if not most sponsors of commercial airports engage in some

form of promotional effort, to encourage use of the airport and

increase the level of scheduled service for passengers and cargo

shippers. Congress, in the FY 94 Authorization Act, effectively

affirmed the legitimacy of some promotion for airport purposes by

expressly prohibiting ``use of airport revenues for general economic

development, marketing, and promotional activities unrelated to

airports or airport systems;'' and the notice of proposed policy

reflects this distinction.

A number of commenters on the notice of proposed policy expressed

the opinion that some kinds of promotion should be considered a

legitimate use of airport revenue. ACI-NA/AAAE requested that FAA

establish a ``safe harbor'' for certain promotional and marketing

activities, perhaps based on a percentage of costs. Specific issues

raised by the audits and the comments are:

What kinds of promotional and marketing activities are and are not

considered legitimate operating costs of the airport under section

47107(b)?

Should the amount of expenditures on legitimate promotional and

marketing activities be limited, as a matter of policy?

Proposed Policy

The FAA proposes to adopt a policy that expenditures for the

promotion of an airport and marketing of the general services available

at the airport are legitimate costs of airport operation. Promotion and

marketing of the community or region, or promotional/marketing

expenditures directed toward regional economic development rather than

specifically toward promotion of the airport would not be considered an

airport cost. Under the policy proposed, procurement of air

transportation or air service by payment or direct subsidy, as opposed

to promotional activities to encourage such service, would be

considered regional economic promotion and would not be considered a

cost of operating the airport. The FAA understands that the purpose of

such a subsidy is essentially the same as the purpose of other

promotional activities directed toward air service development.

However, a distinction may be made between encouraging use of the

airport, through advertising and other promotional activities or even

through fee incentives, and simply buying increased use of the airport

by paying an air carrier to operate aircraft. The FAA proposes to

clarify in the final policy that this latter activity is ineligible for

the use of airport revenues, because it cannot be considered a capital

or operating cost of the airport.

Direct payments to carriers to provide service from a community's

general funds or from a local chamber of commerce, for example, would

not involve airport revenue and would not be subject to the revenue

retention requirement.

The policy would not define specific limits on spending for

promotional purpso9es, but would state that the FAA assumes that any

expenditures for promotional and marketing costs would be reasonable in

relation to the airport's financial situation. Disproportionately high

costs for promotion and marketing could be reviewed to see if the

expenditures actually qualified as ``airport costs'' under section

47107(b). The FAA could also consider whether excessive promotional

expenditures should be taken into account in the award of discretionary

grants.

Generally, the following would be considered costs of operating the

airport:

(1) Costs of activities directed toward promoting public and

industry awareness and use of airport facilities and services.

(2) Salary and expenses of persons engaged in efforts to promote

air service at the airport.

The following practices would not be considered costs of operating

the airport under section 47107(b):

(1) Expenditures for promotion of general economic development that

is not specifically related to the airport.

(2) Direct subsidy of airline operations. For this purpose direct

subsidies would be considered to be payments of airport funds to

carriers for air service, and would not include waivers of fees or

discounted landing or other fees during a promotional period or support

for airline expenditures for advertising or marketing of service in

specific markets.

The issue concerning direct subsidies to air carriers is one of

several issues currently being addressed in a formal investigation,

``Investigation into Lehigh-Northampton Airport Authority's Air Service

Development Program,'' FAA Docket No. 13-93-30, being conducted by the

FAA under the procedures set forth in 14 CFR part 13, subpart F.

Formal complaints filed by Delta Air Lines, Inc., Northwest

Airlines, Inc., United Air Lines, Inc., USAir, Inc., Atlantic Coast

Airlines, Inc., Allegheny Airlines, Inc., Piedmont Airlines, Inc., and

Midway Airlines, Inc., allege that the subsidization by the Authority

of certain air service, in exchange for air carrier's agreement to

provide service on certain schedules and at certain fares, constitutes

unlawful diversion of airport revenue in violation of Federal law. The

Authority asserts that it is traditional

[[Page 66739]]

and accepted industry practice for airport sponsors to expend airport

revenues for air service marketing and promotion purposes, including

direct subsidies of airline operations, and to pass some or all of

those costs through to the airlines by allocation to various cost

centers. It also argues that providing start-up carrier service

reflects a legitimate business judgment by an airport operator to

enhance air service and represents an appropriate airport operating

cost.

To the extent that the supplemental notice of proposed policy would

affect the Subpart F investigation, any issues considering those

effects and the question of retroactive application of the policy would

best be addressed within the context of the formal investigation.

III. Principles for Allocation of Indirect Costs

Discussion

The Notice of Proposed Policy did not discuss acceptable principles

of indirect cost allocation, but several commenters requested guidance

on cost allocation. Specifically, guidance was requested on approval of

indirect sponsor charges calculated according to a federally approved

cost allocation plan; allocation of shared costs; and the use of

generally accepted accounting principles in lieu of Office of

Management and Budget (OMB) Circular A-87, as recommended by the OIG.

Capital and operating costs of the airport under section 4710(b)

may include indirect costs allocated to the airport. Local governments

have great flexibility under generally accepted accounting principles

(GAAP) to develop a plan for allocation of indirect costs among

government departments, and the propriety of particular allocations has

been a subject of OIG audits of airport revenue.

In several audits, the OIG has recommended that the FAA require

that sponsors comply with OMB Circular A-87 in the allocation of

indirect costs of airport operation. In response, the FAA has noted

that A-87 applies by its terms only to the expenditure of funds on

federally funded projects, and sponsors are under no legal obligation

to use A-87 for cost allocation involving locally generated funds. FAA

has agreed with the OIG that cost allocation by a sponsor should be

applied consistently, and in compliance with the GAAP that apply to

local government enterprise funds.

A-87 is apparently the only set of guidelines that provides

specific guidance on indirect cost allocation for local government

accounting systems. In the Denver audit, the OIG listed several

principles derived from A-87 that the OIG believes ought to apply to

the allocation of indirect costs by an airport. First, the general

costs of government, such as costs of the city council, may not be

allocated to the airport. Second, each item of cost must be treated

consistently either as a direct or an indirect cost. Third, a local

cost allocation plan must provide that all users of a service must be

billed equally. This last is consistent with FAA Order 5190A, Sec. 4-

20(c)(ii), which states:

If an indirect charge is levied against the airport in support

of capital or operating expenses, the indirect charge must also be

levied against other governmental cost centers in accordance with

generally accepted accounting procedures and practices.

While the FAA continues to believe that the FAA cannot require A-87 in

its entirety as a strict guide to the allowability of expenditures for

capital and operating costs of an airport, we do believe the specific

principles identified by the OIG are an appropriate construction of the

revenue retention requirement.

Proposed Policy

The FAA proposes to make clear that allocation of indirect costs is

allowable under 49 U.S.C. 47107(b), and that no particular method of

cost allocation will be required, including OMB Circular A-87. However,

it remains important that only capital and operating costs of the

airport, airport system, and facilities directly and substantially

related to air transportation may be allocated indirectly to the

airport. To ensure that indirect costs are limited to allowable capital

and operating costs, the FAA proposes to apply certain general

principles and prohibitions to the allocation of costs. The proposed

guidance would not limit significantly (if at all) the development of

local cost allocation plans under OMB Circular A-87 or other state,

local, or Federal cost allocation guidance, or interfere with the

application of GAAP to airport accounting and cost allocation.

FAA would expect that a Federally approved cost allocation plan

that complied with OMB Circular A-87 or other Federal guidance and was

consistent with GAAP would be reasonable and transparent, and would

generally meet the requirements of section 47107(b). However, the use

of a Federally approved cost allocation plan does not rule out the

possibility that a particular cost item allowed under that guidance

would be in violation of the airport revenue retention requirement if

allocated to the airport. For example, a local allocation plan may

allocate general costs of government to various sponsor departments.

This may not be inherently improper from an accounting standpoint, but

would be considered by the FAA to be a diversion of airport revenue for

general, non-airport purposes. Even under a plan developed in

accordance with A-87, the calculation of depreciation costs or the

allowance of contributions to or membership fees in charitable

organizations could be inconsistent with the February 1996 notice of

proposed policy and this supplemental notice.

The FAA proposes to require specifically that indirect cost

allocations be applied consistently across departments to the

sponsoring government agency, and not unfairly burden the airport

account. Allocation of costs to comparable users, such as proprietary

or enterprise accounts, must be applied in the same manner. The general

sponsor cost allocation plan may not result in an overallocation to

proprietary or enterprise accounts.

Also, the allocation of the general costs of the sponsoring

government could not be allocated to the airport; however, this would

not affect direct or indirect billing for actual services provided to

the airport by local government.

IV. Use of Airport Land for Public Transit Facilities

Many commercial airports have some facility for the accommodation

of public transit passengers, ranging from curbside terminal bus stops

to dedicated airport stations for local mass transit systems. These on-

airport facilities that are owned or operated by the airport are

eligible for the use of airport revenue under section 47107(b).

Similarly, the capital costs of such on-airport facilities may be

eligible for the funds from Federal airport grants and passenger

facility charges as part of an airport development project. The public

transit systems at issue are publicly owned, not private, and are often

subsidized by public funds. Terminal facilities at the airport, whether

a curbside bus stop or a metro station, are generally provided only for

the use of air passengers and airport visitors and employees traveling

to and from the airport.

Public transit facilities are not aeronautical. As a result, the

general rule of interpretation of the self-sustaining assurance would

require the sponsor to charge commercial rates for the use of airport

property by local transit systems. However, in determining the

sponsor's obligation to develop a rate structure under the self-

sustaining requirement, the FAA does

[[Page 66740]]

not believe that public transit facilities can be grouped either with

commercial business enterprises or with non-aeronautical uses of the

airport that have no direct benefit for air travel. Public transit

facilities provide benefits to the airport by maximizing public access,

lessening ground traffic congestion, and improving air quality.

Therefore, the FAA believes that public transit facilities are more

appropriately analogized to public roadways, which are also public

facilities for transporting passengers, visitors, and employees to and

from the airport.

Proposed Policy

Accordingly, the FAA proposes to consider the use of airport

property for a public transit terminal, transit right-of-way, or

related facilities at less than fair rental value to be consistent with

the self-sustaining assurance. The exception would apply only to

publicly-owned transit systems, and only to facilities necessary for

the transportation of air passengers, airport visitors, and airport

employees to and from the airport. For example, a maintenance/repair

facility for transit buses would not need to be located at the airport,

and a commercial lease rate would be required for any airport land used

for this purpose.

In some cases the local public transit system may be owned and

operated by another department of the sponsoring government agency. The

FAA believes the same policy should apply to sponsor-owned transit

systems as to systems owned by other jurisdictions, and a sponsor-owned

transit facility located at the airport for the use of airport

passengers, visitors, and employees, at a below-market lease rate,

would not represent a diversion of airport revenue by the sponsor.

Note that a below-market rate is optional, not required; the policy

would not prevent the sponsor from charging market rates. However,

sponsors would have the freedom to charge below-market rates in order

to derive environmental, mobility, and other benefits achieved through

public transit to and from airports. Comments are requested on whether

some compensation for the use of airport property should be required,

or whether a lease at no cost or only nominal cost would be considered

consistent with the self-sustaining requirement.

Policy Statement Concerning Airport Revenue

For the reasons discussed above, the Federal Aviation

Administration is modifying the proposed policy concerning the use of

airport revenue, as published in the Federal Register on February 26,

1996, as follows:

Policies and Procedures Concerning the Use of Airport Revenue

* * * * *

VII. Uses of Airport Revenue

A. Permitted Uses of Airport Revenue

Airport revenue may be used for:

1. The capital or operating costs of the airport, the local airport

system, or other local facilities owned or operated by the airport

owner or operator and directly and substantially related to the air

transportation of passengers or property. Such costs may include

reimbursements to a state or local agency for the costs of services

actually received and documented, subject to the terms of this policy

statement. Operating costs for an airport may be both direct and

indirect and may include all of the expenses and costs that are

recognized under the generally accepted accounting principles and

practices that apply to the airport enterprise funds of state and local

government entities, as discussed in paragraph VII.B.

2. Costs of activities directed toward promoting public and

industry awareness of airport facilities and services, and salary and

expenses of employees engaged in efforts to promote air service at the

airport.

3. The repayment of the airport owner (which may or may not be the

sponsor) of funds contributed by the owner for capital and operating

costs of the airport and not heretofore reimbursed.

4. Purposes other than capital and operating costs of the airport,

the local airport system, or other local facilities owned or operated

by the sponsor and directly and substantially related to the air

transportation of passengers or property, if the ``grandfather''

provisions of 49 U.S.C. 47107(b)(2) are applicable to the sponsor and

the particular use. Examples of grandfathered airport sponsors may

include, but are not limited to, a port authority or state department

of transportation which owns or operates other transportation

facilities in addition to airports, and which have pre-September 3,

1982, debt obligations or legislation governing financing and providing

for use of airport revenue for non-airport purposes. Such sponsors may

have obtained legal opinions from their counsel to support a claim of

grandfathering. Previous DOT interpretations have found the following

examples of pre-AAIA legislation to provide for the grandfather

exception:

(a) Bond obligations and city ordinances requiring a five percent

``gross receipts'' fee from airport revenues. The payments were

instituted in 1954 and continued in 1968.

(b) A 1955 state statute for the assessing of a five percent

surcharge on all receipts and deposits in an airport revenue fund to

defray central service expenses of the state.

(c) City legislation authorizing the transfer of a percentage of

airport revenues, permitting an airport-air carrier settlement

agreement providing for annual payments to the city of 15 percent of

the airport concession revenues.

(d) A 1957 state statutory transportation program governing the

financing and operations of a multi-modal transportation authority,

including airport, highway, port, rail and transit facilities, wherein

state revenues, including airport revenues, support the state's

transportation-related, and other, facilities. The funds flow from the

airports to a state transportation trust fund, composed of all ``taxes,

fees, charges, and revenues'' collected or received by the state

department of transportation.

(e) A port authority's 1956 enabling act provisions specifically

permitting it to use port revenue, which includes airport revenue, to

satisfy debt obligations and to use revenues from each project for the

expenses of the authority. The act also exempts the authority from

property taxes but requires annual payments in lieu of taxes to several

local governments and gives it other corporate powers. A 1978 trust

agreement recognizes the use of the authority's revenue for debt

servicing, facilities of the authority, its expenses, reserves, and the

payment in lieu of taxes fund.

B. Allocation of Indirect Costs

Indirect costs of sponsor services may be allocated to the airport,

but the allocation must result in an allocation to the airport only of

those costs which would otherwise be allowable under 49 U.S.C.

47107(b).

In determining whether an indirect cost allocation is allowable,

the following principles apply:

1. Each allocation of cost and each procedure or plan for cost

allocation should be transparent and justifiable and should be a matter

of public record available to airport users and the general public.

Allocation of costs is also expected to be consistent with generally

accepted accounting principles (GAAP) applicable to local government

and to enterprise funds, although GAAP guidance on cost allocation is

limited.

2. Allocation of costs as allowed under OMB Circular A-87 or a

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Federally approved local cost allocation plan will be considered to

result in a reasonable and transparent cost allocation, but may still

need to be reviewed to assure that allocation of specific cost items

meets the special revenue retention requirements applicable to airport

revenue under 49 U.S.C. 47107(b).

3. Each item of cost must be treated consistently either as a

direct or an indirect cost, and the method of allocation must not

permit a cost item to be charged both directly and indirectly.

4. A charge to the airport under a local cost allocation plan must

be charged to all comparable users of a service equally.

5. The general costs of government, such as costs of the city

council, may not be allocated to the airport.

C. Permitted Uses of Airport Property

Making airport property available at less than fair market rental

for public community uses, for the purpose of maintaining positive

airport-community relations, can be a legitimate function of an airport

proprietor in operating the airport. Accordingly, in certain

circumstances, providing airport land for such purposes (other than to

the sponsor itself) will not be considered a violation of 49 U.S.C.

47107(b) or 47107(a)(13), which requires an airport proprietor to

maintain an airport rate structure that makes the airport as self-

sustaining as possible. Generally, the circumstances in which below-

market use of airport land for community purposes will be considered

consistent with the grant assurances are:

1. The community use of the property can be justified as benefiting

the airport, and

2. The property involved would not reasonably be expected to

produce substantial income at the time the community use is

contemplated. The greater the difference between the fair rental value

of the property and the actual amount of the lease, the greater the

burden of showing an airport-related benefit.

Making airport property available at less than fair market rental

for public transit terminals, right-of-way, and related facilities will

not be considered a violation of 49 U.S.C. 47107(b) or 47107(a)(13) if

the transit system is publicly owned and operated (or operated by

contract on behalf of the public owner), and the facilities are

directly related to the transportation of air passengers and airport

visitors and employees to and from the airport.

D. Consideration of Lawful Diversion of Revenues in Awarding

Discretionary Grants

Airport owners or operators who lawfully divert airport revenue in

accordance with the ``grandfather'' provision should be aware that 49

U.S.C. 47115(f) requires the Secretary of Transportation to consider

such usage as a factor militating against the approval of an

application for discretionary funds when, in the airport's fiscal year

preceding the date of application for discretionary funds, the

Secretary finds that the amount of revenues used by the airport for

purposes other than capital or operating costs exceeds the amount used

for such purposes in the airport's first fiscal year ending after

August 23, 1994, adjusted by the Secretary for changes in the Consumer

Price Index of All Urban Consumers published by the Bureau of Labor

Statistics of the Department of Labor.

VIII. Prohibited Uses of Airport Revenue

Prohibited uses of airport revenue include but are not limited to:

A. Direct or indirect payments, other than payments that reflect

the value of services and facilities provided to the airport, that are

not based on a reasonable, transparent cost allocation formula

calculated consistently for other comparable units or cost centers of

government.

B. Use of airport revenues for general economic development,

marketing, and promotional activities unrelated to airports or airport

systems;

C. Payments in lieu of taxes, or other assessments, that exceed the

value of services provided or are not based on a reasonable,

transparent cost allocation formula calculated consistently for other

comparable units or cost centers of government;

D. Payments to compensate nonsponsoring governmental bodies for

lost tax revenues exceeding stated tax rates;

E. Loans of airport funds to a state or local agency at less than

the prevailing rate of interest.

F. Land rental to, or use of land by, the sponsor for

nonaeronautical purposes at less than the amount that would be charged

a commercial tenant, consistent with Paragraph VII.C. of this policy.

G. Impact fees assessed by a nonsponsoring governmental body that

the airport sponsor is not obligated to pay or that exceed such fees

assessed against commercial or other governmental entities;

H. Expenditure of airport funds for support of community activities

and participation in community events, or for support of community-

purpose uses of airport property, unless the expenditure is directly to

the operation or marketing of the airport;

I. Direct subsidy of air carrier operations.

J. Indirect payment for the general costs of government (but not

including billing for specific services provided to the airport).

Issued in Washington, DC, on December 11, 1996.

Susan L. Kurland,

Associate Administrator for Airport.

[FR Doc. 96-32019 Filed 12-17-96; 8:45 am]

BILLING CODE 4910-13-N