Policy and Procedures Concerning the Use of Airport Revenue

SUMMARY: This document announces the final publication of the Federal

Aviation Administration policy on the use of airport revenue and

maintenance of a self-sustaining rate structure by Federally-assisted

airports. This statement of policy (``Final Policy'') was required by

the Federal Aviation Administration Authorization Act of 1994, and

incorporates provisions of the Federal Aviation Administration

Reauthorization Act of 1996. The Final Policy is also based on

consideration of comments received on two notices of proposed policy

issued by the FAA in February 1996, and December 1996, which were

published in the Federal Register for public comment. The Final Policy

describes the scope of airport revenue that is subject to the Federal

requirements on airport revenue use and lists those requirements. The

Final Policy also describes prohibited and permitted uses of airport

revenue and outlines the FAA's enforcement policies and procedures. The

Final Policy includes an outline of applicable record-keeping and

reporting requirements for the use of airport revenue. Finally, the

Final Policy includes the FAA's interpretation of the obligation of an

airport sponsor to maintain a self-sustaining rate structure to the

extent possible under the circumstances existing at each airport.

DATES: This Final Policy is effective February 16, 1999.

FOR FURTHER INFORMATION CONTACT: J. Kevin Kennedy, Airport Compliance

Specialist, Airport Compliance Division, AAS-400, Office of Airport

Safety and Standards, 800 Independence Avenue, SW., Washington, DC

20591, telephone (202) 267-8725; Barry L. Molar, Manager, Airport

Compliance Division, AAS-400, Office of Airport Safety and Standards,

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

267-3446.

SUPPLEMENTARY INFORMATION:

Outline of Final Policy

The Final Policy implements the statutory requirements that pertain

to the use of airport revenue and the maintenance of an airport rate

structure that makes the airport as self-sustaining as possible. The

Final Policy generally represents a continuation of basic FAA policy on

airport revenue use that has been in effect since enactment of the

Airport and Airway Improvement Act of 1982 (AAIA), currently codified

at 49 U.S.C. Sec. 47107(b). The FAA issued a comprehensive statement of

this policy in the Notice of Proposed Policy dated February 26, 1996

(Proposed Policy), and addressed four particular issues in more detail

in the Supplemental Notice of Proposed Policy dated December 18, 1996

(Supplemental Notice). The Final Policy includes provisions required by

the Federal Aviation Administration Authorization Act of 1994, Public

Law 103-305 (August 23, 1994) (FAA Authorization Act of 1994), and the

Airport Revenue Protection Act of 1996, Title VIII of the Federal

Aviation Administration Reauthorization Act of 1996, Public Law 104-264

(October 9, 1996), 110 Stat. 3269 (FAA Reauthorization Act of 1996).

The Final Policy also includes changes adopted in response to comments

on the Proposed Policy and Supplemental Notice.

The Final Policy contains nine sections. Section I is the

Introduction, which explains the purpose for issuing the Final Policy

and lists the statutory authorities under which the FAA is acting.

Section II, ``Definitions,'' defines federal financial assistance,

airport revenue and unlawful revenue diversion.

Section III, ``Applicability of the Policy,'' describes the

circumstances that make an airport owner or operator subject to this

Final Policy.

Section IV, ``Statutory Requirements for the Use of Airport

Revenue,'' discusses the statutes that govern the use of airport

revenue.

Section V, ``Permitted Uses of Airport Revenue,'' describes

categories and examples of uses of airport revenue that are considered

to be permitted under 49 U.S.C. 47107(b). The discussion is not

intended to be a complete list of all permitted uses but is intended to

provide examples for practical guidance.

Section VI, ``Prohibited Uses of Airport Revenue,'' describes

categories and examples of uses of airport revenue not considered to be

permitted under 49 U.S.C. 47107(b). The discussion is not intended to

be a complete list of all prohibited uses but is intended to provide

examples for practical guidance.

Section VII, ``Policies Regarding Requirement for a Self-Sustaining

Airport Rate Structure,'' describes policies regarding the requirement

that an airport maintain a self-sustaining airport rate structure. This

is a new section of the policy, which provides more complete guidance

on the subject than appeared in either the Proposed Policy or

Supplemental Notice.

Section VIII, ``Reporting and Audit Requirements,'' addresses the

requirement for the filing of annual airport financial reports and the

requirement for a review and opinion on airport revenue use in a single

audit conducted under the Single Audit Act, 31 U.S.C. Secs. 7501-7505.

Section IX, ``Monitoring and Compliance,'' describes the FAA's

activities for monitoring airport sponsor compliance with the revenue-

use requirements and the requirement for a self-sustaining airport rate

structure and the range of actions that the FAA may take to assure

compliance with those requirements. Section IX also describes the

sanctions available to FAA when a sponsor has failed to take corrective

action to cure a violation of the revenue-use requirement.

Background

Governing Statutes

Four statutes govern the use of airport revenue: the AAIA; the

Airport and Airway Safety and Capacity Expansion Act of 1987; the FAA

Authorization Act of 1994; and the FAA Reauthorization Act of 1996.

These statutes are codified at 49 USC 47101, et seq.

Section 511(a)(12) of the AAIA, part of title V of the Tax Equity

and Fiscal Responsibility Act, Public Law 97-248, (now codified at 49

USC 47107(b)) established the general requirement for use of airport

revenue. As originally enacted, the revenue-use requirement directed

public airport owners and operators 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 transportation of passengers or property.''

The original revenue-use requirement also contained an exception,

or ``grandfather'' provision, permitting certain uses of airport

revenue for non-airport purposes that predate the AAIA.

The Airport and Airway Safety and Capacity Expansion Act of 1987,

Public Law 100-223 (December 30, 1987), narrowed the permitted uses of

airport revenues to nonairport facilities that are ``substantially'' as

well as directly related to actual air transportation; required local

taxes on aviation fuel enacted after December 30, 1987, to be

[[Page 7697]]

spent on the airport or, in the case of state taxes on aviation fuel,

state aviation programs or noise mitigation on or off the airport; and

slightly modified the grandfather provision.

The FAA Authorization Act of 1994 Act included three sections

regarding airport revenue.

Section 110 added a policy statement to Title 49, Chapter 471,

``Airport Development,'' concerning the preexisting requirement that

airports be as self-sustaining as possible, 49 USC Sec. 47101(a)(13).

Section 111 added a new sponsor assurance requiring airport owners

or operators to submit to the Secretary and to make available to the

public an annual report listing all amounts paid by the airport to

other units of government, and the purposes for the payments, and a

listing of all services and property provided to other units of

government and the amount of compensation received. Section 111 also

requires an annual report to the Secretary containing information on

airport finances, including the amount of any revenue surplus and the

amount of concession-generated revenue.

Section 112(a) requires the Secretary to establish policies and

procedures that will assure the prompt and effective enforcement of the

revenue-use requirement and the requirement that airports be as self-

sustaining as possible.

Section 112(b) amends 49 USC Sec. 47111, ``Payments under project

grant agreements,'' to provide the Secretary, with certain limitations,

to withhold approval of a grant application or a new application to

impose a Passenger Facility Charge (PFC) for violation of the revenue-

use requirement. Section 112(c) authorizes the Secretary to impose

civil penalties up to a maximum of $50,000 on airport sponsors for

violations of the revenue retention requirement. Section 112(d)

requires the Secretary, in administering the 1994 Authorization Act's

revenue diversion provisions and the AIP discretionary grants, to

consider the amount being lawfully diverted pursuant to the

grandfathering provision by the sponsor compared to the amount being

sought in discretionary grants in reviewing the grant application.

Consequently, in addition to the prohibition against awarding grants to

airport sponsors that have illegally diverted revenue, the FAA

considers the lawful diversion of airport revenues by airport sponsors

under the grandfather provision as a factor militating against the

distribution of discretionary grants to the airport, if the amounts

being lawfully diverted exceed the amounts so lawfully diverted in the

airport's first year after August 23, 1994.

Section 112(e), which amended the Anti-Head Tax Act, 49 USC

Sec. 40116(d)(2)(A), prohibits a State, political subdivision, or an

authority acting for a State or political subdivision from collecting a

new tax, fee, or charge which is imposed exclusively upon any business

located at a commercial service airport or operating as a permittee of

the airport, other than a tax, fee, or charge utilized for airport or

aeronautical purposes.

Title VIII of the FAA Reauthorization Act of 1996 included new

provisions on the use of airport revenue. Among other things, section

804 codifies the preexisting grant-assurance based revenue-use

requirement as 49 U.S.C. Sec. 47133. Section 804 also expands the

application of the revenue-use restriction to any airport that is the

subject of Federal assistance.

Section 805, codified as 49 U.S.C. Sec. 47107(m) et seq., requires

recipients of Federal assistance for airports who are subject to the

Single Audit Act to include a review and opinion on airport revenue use

in single audit reports.

Under section 47107(n), the Secretary, acting through the

Administrator of the FAA, will perform fact finding and conduct

hearings in certain cases; may withhold funds that would have otherwise

been made available under Title 49 of the U.S. Code to a sponsor

including another public entity of which the sponsor is a member

entity, and may initiate a civil action under which the sponsor shall

be liable for a civil penalty, if the Secretary receives a report

disclosing unlawful use of airport revenue. Section 47107(n) also

includes a statute of limitations that prevents the recovery of funds

illegally diverted more than six years after the illegal diversion

occurs. The Secretary is also authorized to recover civil penalties in

the amount of three times the unlawfully diverted airport revenue under

49 U.S.C. Sec. 46301(n)(5).

Section 47107(o) requires the Secretary to charge a minimum annual

rate of interest on the amount of any illegal diversion of revenues.

Interest is due from the date of the illegal diversion.

Section 47107(l)(5) imposes a statute of limitation of six years

after the date on which the expense is incurred for repayment of

sponsor claims for reimbursement of past expenditures and contributions

on behalf of the airport. A sponsor may claim interest on the amount

due for reimbursement, but only from the date the Secretary determines

that the airport owes a sponsor.

Procedural History

In response to provisions in the 1994 Authorization Act, the FAA

issued the Proposed Policy. (61 FR 7134, February 26, 1996) After

reviewing all comments received in response to the notice, the FAA

issued the Supplemental Notice on December 11, 1996, and requested

further public comment. (61 FR 66735, December 18, 1996) Although the

FAA published both documents as proposed policies, both notices stated

that the FAA would apply the policies in reviewing revenue-use issues

pending publication of a final policy.

The Department received 32 comments on the Proposed Policy and

received 50 comments on the Supplemental Notice. Comments were received

from airport owners and operators, airline organizations, transit

authorities, and affected businesses and organizations. Most of the

commenters were airport owners and operators. The Airport Council

International-North America and the American Association of Airport

Executives also provided comments supporting the sponsor/operator

positions. Two major groups commented on behalf of the airlines--the

Air Transport Association of America and the International Air

Transport Association.

The Aircraft Owners and Pilots Association and the National Air

Transportation Association commented on behalf of the general aviation

and private aircraft owners. AOPA was primarily concerned with sponsor/

airport accountability and the prompt and effective enforcement of the

revenue diversion prohibitions.

Several port authorities, transit authorities, environmental

groups, other public interest groups, trade associations, private

businesses and individuals commented on a variety of specific issues.

The following discussion of comments is organized by issue rather

than by commenter. Issues are discussed in the order they arise in the

Final Policy. Airport proprietors and their representatives who took

similar positions on an issue are collectively referred to as ``airport

operators.'' Airlines and airline trade associations are referred to as

``air carriers'' when the organizations took common positions. The

summary of comments is intended to represent the general divergence or

correspondence in commenters' views on various issues. It is not

intended to be an exhaustive restatement of the comments received.

In addition, many comments on the original notice of proposed

policy were addressed in the supplemental notice.

[[Page 7698]]

Those comments are not addressed again in this discussion.

The FAA considered all comments received, even if they are not

specifically identified in this summary.

Discussion of Comments by Issue

1. Applicability

a. Applicability of Policy to Privately Owned Airports

In accordance with the statutes in effect at the time it was

published, the Proposed Policy applied only to public agencies that had

received AIP grants for airport development. The Proposed Policy

included a specific statement that it did not apply to privately owned

airports that had taken AIP grants while under private ownership. The

Supplemental Notice did not modify these provisions.

The Comments: A public interest group concerned about reducing

airport noise and mitigating its impacts recommended that the policy

should apply to operators of privately owned airports.

Final Policy: The new statutory provision added by the

Reauthorization Act of 1996, governing the restriction on the use

airport revenue, 49 U.S.C. Sec. 47133, does not differentiate between

publicly or privately owned airports. The statute applies to all

airports that have received Federal assistance. Under the AAIA certain

privately-owned airports that are available for public use are eligible

to receive airport development grants. As a result, any privately owned

airport that receives an AIP grant after October 1, 1996, (the

effective date of the FAA Reauthorization Act of 1996), is subject to

the revenue use requirements. The applicability section of the Final

Policy, Section III, is modified to reflect the expansion of the

revenue-use requirement to include privately-owned airports.

b. Applicability of Policy to Publicly and Privately Owned Airports

Subject to Federal Assistance

As a result of the same change in the law, recipients of Federal

assistance provided after October 1, 1996, other than AIP grants, are

also subject to the revenue-use restrictions. However, the

Reauthorization Act of 1996 did not define Federal assistance, and the

legislative history does not provide guidance on the meaning of this

term. In addition, it did not explicitly address the status of airports

that received Federal assistance other than AIP airport development

grants before October 1, 1996, and therefore were not already bound by

the revenue use restrictions. These issues are addressed in the Final

Policy, based on the FAA's review of the statute, its legislative

history and relevant judicial decisions.

Applicability of the revenue-use requirement under Sec. 47133

depends on the definition of the term ``Federal assistance.'' In the

absence of guidance in the statute and legislative history, the FAA has

relied on the interpretation given to the similar term ``Federal

financial assistance'' in Federal regulations and court decisions. 28

CFR part 41, ``Implementation of Executive Order 12250, Non-

discrimination on the Basis of Handicap in Federally Assisted

Programs,'' section 41.4(e) establishes the definition of ``Federal

financial assistance'' for all Federal agencies implementing Sec. 504

of the Rehabilitation Act of 1973, 29 U.S.C. Sec. 794. That definition

is in turn subject to the limitation of the Department of

Transportation v. Paralyzed Veterans, 477 U.S. 597 (1986) (Paralyzed

Veterans), which specifically addressed the issue of whether certain

facilities and services provided by the FAA in managing the national

airspace system constituted federal assistance. That decision held that

the provision of air navigation services and facilities to airlines by

the FAA did not make the commercial airline passenger service a

Federally assisted program within the meaning of Sec. 504.

The FAA's interpretation of the term ``Federal assistance'' is

included in Section II of the Final Policy, Definitions. The Final

Policy's definition of ``Federal assistance'' adapts the generalized

language of 28 CFR Sec. 41.4(e) to the specific circumstances of

airports receiving Federal support and reflects the holding of the

Paralyzed Veterans decision. The definition lists as Federal Assistance

the following:

(1) Airport development and noise mitigation grants;

(2) Transfers, under various statutory provisions, of Federal

property at no cost to the airport sponsors; and

(3) Planning grants related to a specific airport.

Under this definition, FAA installation and operation of

navigational aids and FAA operation of control towers are not

considered Federal assistance, based on the Supreme Court decision in

Paralyzed Veterans. Similarly, the FAA does not consider passenger

facility charges (PFCs) to be Federal assistance even though PFCs may

be collected only with approval of the FAA.

Airport development and noise mitigation grants are considered

Federal assistance because they apply to a specific airport, and that

airport is, therefore, ``subject to Federal assistance'' under the

statute. Transfers of Federal property to an airport are considered

Federal assistance because they also apply to a specific airport.

Planning grants may apply to a specific airport or may be more general

in nature. Under Sec. 47133, the FAA considers only planning grants

related to a specific airport to be Federal assistance.

However, not all airports that are the subject of Federal

assistance are necessarily bound to the revenue-use assurance simply by

the passage of Sec. 47133. Established Federal grant law prevents a

statute from being construed to modify unilaterally the terms of

preexisting grant agreements absent a clear showing of legislative

intent to do so. Bennett v. New Jersey 470 U.S. 632 (1985), 84 L.Ed 2d

572, 105 S.Ct. 1555. Neither the statutory language nor its legislative

history indicates an intent by Congress to apply Sec. 47133 to impose

the revenue-use requirement on airports that were not already subject

to it. By contrast, a recent example of Congressional intent to modify

preexisting grant agreements exists in Sec. 511(a)(14) of the Airport

and Airway Improvement Act of 1982, 49 USC App. 2210(a)(14), which was

recodified at 49 USC 47107(c)(2)(B). That subsection, which was added

to the AAIA in 1987, established requirements for the disposal of land

acquired with Federal grants that is no longer needed for airport

purposes. The statute by its terms applied to an ``airport owner or

operator [who] receives a grant before on or after December 31, 1987''

for the purchase of land for airport development purposes. This

language demonstrated a clear Congressional intent to modify

preexisting grant agreements. The language of Sec. 47133 and its

legislative history lacks any such express direction.

Therefore, the FAA does not interpret Sec. 47133 to impose the

revenue-use requirements on an airport that was not already subject to

the revenue-use assurance on October 1, 1996. An airport that had

accepted Surplus Property from the Federal government, but did not have

an AIP grant in place on October 1, 1996, would not be subject to the

revenue-use requirement by operation of Sec. 47133. If that airport

accepted additional Federal property or accepted an AIP grant on or

after October 1, 1996, the airport would be subject to the revenue-use

requirement. As discussed below, by operation of Sec. 47133, the

revenue-use requirement would remain in effect as long as the airport

functioned as an airport.

[[Page 7699]]

For airports that were already subject to the revenue-use

requirement on October 1, 1996, and those that become subject to the

requirement after that date, the effect of Sec. 47133 is to extend the

duration of the requirement indefinitely. This application is not

explicit in the statute and reference to the legislative history of the

statute is necessary to determine congressional intent and the specific

meaning and application of the statutory language. The legislative

history of Sec. 47133 makes it clear that Congress enacted Sec. 47133

to extend the duration of the revenue-use requirement for airports that

are already subject to it. In describing an earlier version of

Sec. 47133, the Committee on Transportation and Infrastructure of the

House of Representatives stated that the reason for the change was

because ``revenue diversion burdens interstate commerce even if the

airport is no longer receiving grants. In recognition of this fact, the

bill applies the exact same revenue diversion prohibition to airports

that have a FAA certificate [modified to airports that are subject to

Federal assistance in conference] as now applied to airports that

receive AIP grants. For the most part, these will be the same

airports.'' H.R. Rep. 104-714 (July 26, 1996) at 38, reprinted at 1996

US Code, Congressional and Administrative News at 3675. The report

further stated that broadening the prohibition would ``make it clear

that an airport cannot escape this prohibition [on revenue diversion]

by refusing to accept AIP grants[;]'' remove ``this perverse incentive

to refuse AIP grants * * *[;].'' and ``once again [encourage] all

airports to use available Federal money to increase safety, capacity,

and reduce noise.'' Id.

Any airport that had an outstanding AIP grant agreement in effect

on October 1, 1996, was already bound to the same revenue use assurance

that is contained in Sec. 47133. Because Sec. 47133 is extending the

duration of an existing obligation, there is no conflict with the

principle of Federal grant law outlined above.

c. Relationship of Final Policy to Airport Privatization

In the applicability and definition section of the Proposed Policy,

the FAA stated that proceeds from the sale of the entire airport as

well as from individual parcels of land would be considered as airport

revenue. The FAA also stated that it did not intend ``to effectively

bar airport privatization initiatives,'' and that the FAA would take

into account ``the special conditions and constraints imposed by the

fact of a change in ownership of the airport.'' 61 Fed. Reg. at 7140.

The FAA proposed to remain ``open and flexible in specifying conditions

on the use of revenue that will protect the public interest and fulfill

the requirements and objectives of Sec. 47107(b) without unnecessarily

interfering with the appropriate privatization of airport

infrastructure.'' Id.

Airport operators: A number of airport operators expressed concern

that the guidance in the Proposed Policy was too ambiguous to encourage

privatization and might discourage privatization initiatives. One

operator suggested that the FAA should take a flexible approach to the

proceeds of a privatization transaction when an airport's concession

revenues are sufficient to allow a public owner to use some sales

proceeds for nonairport purposes without increasing fees charged to

aeronautical users and without continuing a need for Federal subsidy.

Another airport operator suggested that the financial terms of a

transaction would reflect the local circumstances in which the

transaction was negotiated and recommended that the FAA account for

this fact in reviewing revenue diversion claims.

Air carriers: ATA adamantly opposed the sale or transfer of a

public use airport in a situation when such an action would cause

airport revenue to be taken off the airport. ATA believes that the FAA

does not have the flexibility or the statutory authority to require

anything less than 100% compliance under 49 USC Sec. 47107(b).

General aviation: The AOPA is concerned that the policy gives the

impression that airport privatization is a fully resolved issue. The

AOPA believes that the policy must avoid any implication that the issue

is resolved or that the FAA endorses privatization.

Other commenters: Three public interest organizations addressed the

issue of privatization from different perspectives. A group concerned

with preventing and mitigating airport noise suggests that the FAA must

ensure that adequate funds remain available to meet current and future

airport noise mitigation needs. This group recommended that, before

approving a transfer, the FAA should conduct a thorough audit of the

airport's compliance with noise compatibility requirements, plans, and

promises, and that the FAA should assess the adequacy of resources to

address noise compatibility problems. The FAA should also require

enforcement mechanisms to ensure implementation of noise compatibility

and mitigation measures as a condition of the sale or transfer.

Two other groups supported a policy that does not discourage

airport privatization. One of these suggested that the FAA consider

defederalization of airports. The comments regarding defederalization

are beyond the scope of this proceeding, because they would require

statutory changes.

Final Policy: The Final Policy adopts the basic approach of the

Proposed Policy toward privatization, with some language changes for

clarity and readability. In addition, the Final Policy explicitly

acknowledges the Airport Privatization Pilot Program.

Guidance on the process for obtaining FAA approval of the sale or

lease of an airport is contained in FAA Order 5190.6a, Airport

Compliance Requirements. The Final Policy is not intended to modify the

process in any way. FAA approval is required for any transfer,

including those between government entities. The Final Policy makes

clear, however, that in processing an application for approval the FAA

will: (a) treat proceeds from the sale or lease as airport revenue; and

(b) apply the revenue-use requirement flexibly, taking into

consideration the special conditions and constraints imposed by a

change in ownership of the airport. For example, as is noted in the

Final Policy, if the owner of a single airport is selling the airport,

it may be inappropriate to require the seller to simply return the

proceeds to the private buyer to use for operation of the airport.

The FAA requires the transfer document to bind the new operator to

all the terms and grant assurances in the sponsor's grant agreement.

The FAA retains sufficient authority and power through its grant

assurances to ensure compliance by the new owner with all of its

obligations, including any grant-based obligations relating to

mitigation of environmental impacts of the airport; to conduct sponsor

audits and to take other appropriate action to ensure that the airport

is self-sustaining.

The Final Policy's approach to privatization does not represent, as

ATA suggests, less than 100 percent compliance with the revenue-use

requirement. The FAA agrees with the ATA that we cannot waive that

requirement. Rather, the FAA has committed to exercise its authority to

interpret the requirement in a flexible way to account for the unique

circumstances presented by a change of ownership.

The Final Policy is not an endorsement of privatization and it does

not resolve the policy debate about privatization. FAA will continue to

review the sale or lease of an airport on

[[Page 7700]]

a case-by-case basis, including transfers proposed under the Airport

Privatization Pilot Program, 49 U.S.C. 47134, created by Sec. 149 of

the FAA Reauthorization Act of 1996. The demonstration program

authorizes the FAA to exempt five airports from Federal statutory and

regulatory requirements governing the use of airport revenue. Under the

program, the FAA can exempt an airport sponsor from its obligations to

repay Federal grants, to return property acquired with Federal

assistance, and to use the proceeds of the sale or lease exclusively

for airport purposes. The latter exemption is also subject to approval

by the air carriers serving the airport.

The FAA notes the concerns that the revenue-use requirement may

discourage privatization. Congress addressed this prospect by enacting

the Privatization Pilot Program, which authorizes the FAA to grant

exemptions from sections 47107(b) and 47133 to permit the sponsor to

use sales or lease proceeds for nonairport purposes, on certain

conditions. That exemption would not be required unless sales or lease

proceeds were airport revenue. In addition, the FAA will consider the

unique circumstances--financial and otherwise--of individual

transactions in determining compliance with section 47107(b), and this

should address to some degree the commenters' concerns about

privatization.

d. Effect of Sec. 47133 on Return on Investment for Private Airport

Owners or Operators That Accept Federal Assistance

By extending the revenue-use requirement to privately-owned

airports, Sec. 47133 requires the FAA to consider a new issue--the

extent to which a private owner that assumes the revenue-use obligation

may be compensated from airport revenue for the ownership of the

airport. Section 47133 prohibits all such private airport owners or

operators from using airport revenue for any purpose other than the

capital and operating costs of the airport. However, the FAA does not

consider section 47133 to preclude private owners or operators from

being paid or reimbursed reasonable compensation for providing airport

management services. Private operators, presently, provide airport

management services at a number of airports. In many cases, these

airports are publicly owned and subject to the revenue-use requirement.

The private operator is providing these services under some form of

contract with the public owner. These services are considered part of

the operating cost of the airport owner, and the fees can be paid from

airport revenue.

It is reasonable to equate private operators managing publicly

owned airports with private owner/operators managing privately owned or

leased airports. To avoid any confusion of the issue, reasonable

compensation for management services provided by the owner of a

privately-owned airport is identified as a permitted use of airport

revenue in the Final Policy.

Private airport owners may typically expect a return on their

capital investment. Such investment could be considered a capital cost

of the airport. In the case of private owners or operators of airports

who have assumed the revenue-use obligation, that obligation would

limit the ability to use the return on capital invested in the airport

for nonairport purposes. In particular, the FAA expects private owners

to be subject to the same requirements governing a self-sustaining

airport rate structure and the recovery of unreimbursed capital

contributions and operating expenses from airport revenue as public

sponsors. Under section 47107(l)(5), private sponsors--like public

sponsors--may recover their original investment within the six-year

statute of limitation. In addition, they are entitled to claim interest

from the date the FAA determines that the sponsor is entitled to

reimbursement under section 47107(p). Any other profits generated by a

privately-owned airport subject to section 47133 (after compensating

the owner for reasonable costs of providing management services) must

be applied to the capital and operating costs of the airport.

This interpretation is required by provisions of 49 U.S.C. 47134,

the airport privatization pilot program. Section 47134 authorizes the

FAA to grant exemptions from the revenue-use requirement to permit the

private operator to ``earn compensation from the operations of the

airport.'' This exemption would not be necessary if section 47133 did

not restrict the freedom of the private owner of a Federally-assisted

airport to use the profits from the investment in the airport for

nonairport purposes. This interpretation does not unreasonably burden

private owners, because they receive a benefit (in the form of either

Federal property added to the airport or Federal grant funds) in

exchange for assuming the restrictions on the use of their profit.

e. Grandfather Provisions

The Proposed Policy included a discussion of the grandfather

provisions of section 47107(b) in the section on permitted uses of

airport revenue. That discussion included a list of examples of

financing obligations and statutory provisions that had been previously

found by the Department of Transportation to confer grandfather status.

The Comments: Two airport operators commented on this issue. One is

an airport operator whose status under the grandfather provisions was

under consideration by the FAA when the Proposed Policy was published.

Its concerns were addressed by the FAA's consideration of its

individual situation.

The second commenter is airport operator already established as a

grandfathered airport operator. This commenter recommends that the

Final Policy continue to recognize the rights of grandfathered

airports.

Final Policy: The Final Policy continues to recognize the rights of

grandfathered airport owners set forth at title 49 U.S.C. 47107(b)(2)

and 47133. To qualify an airport for grandfathered status, the statute

requires that local covenants, assurances or governing laws pre-dating

September 2, 1982, must specifically pledge the use of airport

generated revenues to support not only the airport but also the general

debt obligations or other facilities of the owner or operator. However,

the Final Policy is modified to reflect the requirement in the 1996 FAA

Reauthorization Act that the FAA consider the increase in grandfathered

payments of airport revenue as a factor militating against the award of

discretionary grants.

f. Applicability to Non-municipal Airport Authorities

Lehigh-Northampton Airport Authority (LNAA): LNAA asserted that the

airport revenue-use requirement does not allow FAA to regulate airport

transactions with non-governmental parties and does not empower FAA to

override state and local laws governing the use of airport revenue for

airport marketing and promotional activities. The commenter advanced a

number of arguments as to why FAA does not have authority to restrict

such transactions. First, Congress has shaped the revenue diversion

statute to identify financial irregularities in dealings between an

airport enterprise account and another unit of government. The statute

does not contemplate FAA regulation of airport financial relationships

with non-government parties. Second, Congress did not intend the

``capital or operating costs'' language in the revenue diversion

statute to authorize a new Federal regulatory scheme to narrow the

types or levels of airport expenditures beyond

[[Page 7701]]

what is legal under applicable state and local law. Third, there is not

a statutory requirement for FAA to regulate airport expenditures for

community events or charitable contributions in the absence of facts

suggesting that such expenditures are the result of undue influence by

a governmental unit.

The LNAA currently has a case pending before the FAA under FAR Part

13, in which certain expenditures that LNAA characterizes as marketing

and promotional expenses are being examined for consistency with the

revenue-use requirement. LNAA's assertions with respect to its own

promotional activities will be addressed by the FAA in that proceeding.

To the extent that LNAA's practices were inconsistent with this Final

Policy, LNAA will have an opportunity to argue that the Final Policy

should not be applied to its situation.

The general issues of the use of airport revenue for marketing and

promotional expenses and charitable donations are discussed separately

below.

The FAA is not modifying the applicability of the Final Policy

based on LNAA's other concerns. The language of section 47107(b)

explicitly states that revenue generated by the airport may only be

expended for the capital or operating costs of the airport or local

airport system; it contains no limiting language concerning ``financial

irregularities.'' The statute further defines expenditures for general

economic development and promotion as unlawful use of airport revenue,

providing specific authority over transactions that do not involve

transfers of airport revenue to other governmental entities. See 49

U.S.C. 47107(l)(2). This provision grants authority for regulation of

expenditures for charitable and community-use purposes.

In addition, the Congressional mandate to establish policies and

procedures to ``assure the prompt and effective enforcement'' of the

revenue use and self-sustainability requirements (49 U.S.C.

47107(l)(1)) provides statutory authority to adopt more detailed

guidance on permitted and prohibited uses of airport revenue. Many

airport operators have expressed concern over the difficulty of

responding to OIG findings of unlawful revenue use without clear and

specific FAA guidance on permitted and prohibited practices.

Finally, the grandfathering provision establishes Congressional

intent to prohibit certain airport revenue practices authorized by

state or local law that do not satisfy the specific requirements of the

grandfather provisions of the AAIA.

2. Definition of Airport Revenue

a. Proceeds From Sale of Airport Property

The Proposed Policy included proceeds from the sale of airport

property in the proposed definition of airport revenue. No distinction

was made between property acquired with airport revenue and property

acquired with other funds provided by the sponsor. In the explanatory

statement, the FAA discussed alternatives it had considered, including

limiting the definition to property acquired with airport revenue. (61

FR 7138) The FAA also stated that a sponsor would be able to recoup any

funds it contributed to finance the acquisition of airport property as

an unreimbursed capital contribution.

Airport operators: Airport operators objected to defining proceeds

from the sale of airport property as airport revenue. ACI/AAAE argued

that the definition would reduce incentives for airport sponsors to

pursue legitimate airport endeavors. One airport operator argued that

the definition constitutes a transfer of wealth from the taxpayers to

the airport users, and that cities would be less willing to contribute

to future airport projects. Another individual operator argued that the

policy should not apply to property acquired with the sponsor's own

funds and to property acquired with airport revenue before 1982. This

airport operator further argues that application of the policy to

property acquired before 1982 amounts to a taking of airport property

without just compensation and without Congressional authorization.

Finally, this operator argued that the proposed definition appears to

contradict a portion of the FAA Compliance Handbook, Order 5190.6A

(October 2, 1989), Paragraph 7-18, that states there is no required

disposition of net revenues from sale or disposal of land not acquired

with Federal assistance.

Air carriers: The ATA commented that the use of airport revenue for

repayment of contributions from prior years should be limited.

According to ATA, reimbursements should be permitted only when the

sponsor and airport enter into a written agreement concerning the terms

of reimbursement before the service or expenditure is provided.

Other commenters: A public interest organization opposed the

treatment of proceeds from the sale of airport property as airport

revenue. This commenter argued that the sponsor, as the principal

provider of airport's land and capital, has a legitimate claim to cash-

out the value of its investments and to use the proceeds for other

purposes.

The Final Policy: The Final Policy does not modify the treatment of

proceeds from the sale, lease or other disposal of airport property.

Proceeds from the sale lease or other disposal of all airport property

are considered airport revenue subject to the revenue-use requirement

and this policy, unless the property was acquired with Federal funds or

donated by the Federal government. While proceeds from disposal of

Federally-funded and Federally-donated property are also airport

revenue, these proceeds are subject to separate legal requirements that

are even more restrictive than the revenue-use requirement.

As discussed in the Proposed Policy, this definition is consistent

with the language of the original version of section 47107(b), which

applies to ``all revenues generated by the airport.''

In addition, the Airport Privatization Pilot Program, 49 U.S.C.

47134, permits the FAA to grant exemptions from the revenue-use

requirements to permit a sponsor to keep the proceeds from a sale or

lease transaction, but only to the extent approved by 65 percent of the

air carriers. An exemption would not be required unless the proceeds

from the sale or lease of the entire airport were airport revenue

within the meaning of section 47107(b) and 47133. Since the proceeds

from the sale of an entire airport are airport revenue, it follows that

the proceeds from the sale of individual pieces of airport property are

also airport revenue.

Further, section 47107(l)(5)(A) establishes a six-year period

during which sponsors may claim reimbursement for their capital and

operating contributions. This limitation on seeking reimbursement could

be avoided through the process of disposing of airport property, if the

proceeds of sales were not themselves considered airport revenue.

Through section 47107(l)(5)(A) Congress has defined the rights of

airport owners and operators to recover their investments in airport

property for use for nonairport purposes. Subject to the six-year

statute of limitations, the sponsor is entitled to use airport revenues

for reimbursement of such contributions. Section 47107(p) provides that

a sponsor may also claim interest if the FAA determines that a sponsor

is entitled to reimbursement, but interest runs only from the date on

which the FAA makes the determination. As discussed below, the Final

Policy provides flexibility to

[[Page 7702]]

structure future contributions to permit reimbursement over a longer

period of time in order to promote the financial stability of the

airport. The six-year limitation, which is incorporated in the Final

Policy, also addresses ATA's request for a time limit on the airport

owner or operator's ability to claim recoupment for past unreimbursed

requests.

The FAA does not accept the suggestion that the definition is an

unauthorized taking of sponsor property without just compensation.

First, as noted, the definition is supported by the 1996 FAA

Reauthorization Act, which included an express provision for an

exemption from the revenue use restriction for sale and lease proceeds.

Second, all airport sponsors, including the airport commenters,

voluntarily agreed to their restrictions on the use of airport revenue

when they accepted grants-in-aid under the AIP program. Finally, the

definition does not deprive the commenter of its property. The proceeds

from the disposal will still flow to the commenter sponsor to be used

for a legitimate local public purpose--operation and development of the

commenter's airport.

The FAA acknowledged in the Proposed Policy that existing FAA

internal orders contain provisions on the status of proceeds from the

disposal of airport property that are inconsistent with this Final

Policy. As stated in the Proposed Policy, this inconsistency does not

preclude the FAA from defining proceeds from the disposal of airport

property as airport revenue in this Final Policy. Rather, ``the Policy

takes precedence, and the orders will be revised to reflect the

policies in this statement.'' 61 FR 7138. In addition, the provisions

in the FAA internal orders are in conflict with the 1996 FAA

Reauthorization Act. Because of this statutory conflict, the FAA cannot

continue to apply them.

b. Revenue Generated by Off-airport Property

The Proposed Policy defined as airport revenue the revenue received

for the use of property owned and controlled by a sponsor and used for

airport-related purposes, but not located on the airport.

Airport operators: The ACI-NA/AAAE and two individual airport

operators objected to this definition of airport revenue. The ACI-NA/

AAAE stated that revenues received from off-airport activities should

ordinarily not be counted as airport revenue. One airport operator

argued that this definition is inconsistent with the statutory

definition of airport in the AAIA. The other airport operator (the

State of Hawaii) is especially concerned about revenue generated by

off-airport duty fee shops.

No other comments were received.

Final Policy: The Final Policy does not modify the definition of

airport revenue as it pertains to off-airport revenue. This definition

is consistent with FAA's prior interpretation, which has defined as

airport revenue the revenues received by the airport owner or operator

from remote airport parking lots, downtown airport terminals, and off-

airport duty free shops.

After enactment of the original revenue-use requirement, the FAA

initiated an administrative action to require the State of Hawaii to

use its revenue from off-airport duty free sales in a manner consistent

with section 47107(b). In response, Congress amended the revenue-use

requirement to provide a specific and limited exemption to the State of

Hawaii to permit up to $250 million in off-airport duty-free sales

revenue to be used for construction of highways that are part of the

Federal-Aid highway system and that are located in the vicinity of an

airport. See, 49 U.S.C. Sec. 47107(j). The statutory exemption would

only be necessary if the revenue from off-airport duty free shops is

airport revenue within the meaning of the statute.

c. Royalties From Mineral Extraction

The Proposed Policy included royalties from mineral extraction on

airport property earned by a sponsor as airport revenue.

Airport operators: One airport operator objected to including

revenue from the sale of sponsor-owned mineral, natural, or

agricultural products or water to be taken from the airport in the

definition of airport revenue. The operator stated that the retention

of mineral rights as airport property would represent a windfall to the

airport at the sponsor's expense; that the Proposed Policy is contrary

to congressional intent and that it would take, without compensation,

valuable property rights from the sponsor. The operator also cited a

prior decision where FAA concluded the production of natural gas at

Erie, Pennsylvania, does not serve either the airport or any air

transportation purpose. The royalties generated by such production were

determined to be outside the scope of the revenue-use requirement.

Final Policy: The Final Policy retains the proposed definition of

airport revenue to include the sale of sponsor-owned mineral, natural,

agricultural products or water to be taken from the airport. On further

review of the Erie interpretation in this proceeding, the FAA no longer

considers the analogy drawn in that interpretation--between mineral

extraction and operation of a convention center or water treatment

plant--to be appropriate. Rather, mineral and water rights represent a

part of the airport property and its value. Just as proceeds from the

sale or lease of airport property constitute airport revenue, proceeds

from the sale or lease of a partial interest in the property--i.e.

water or mineral rights--should also be considered airport revenue. The

FAA will not require an airport owner or operator to reimburse the

airport for past mineral royalty payments used for nonairport purposes

based on the Erie interpretation. However, all airport owners and

operators will be required to treat these payments as airport revenue

prospectively, starting on the publication date of the Final Policy.

With respect to agricultural products, the FAA has always treated

lease revenue from agricultural use of airport property as airport

revenue, even if that revenue is calculated as a portion of the revenue

generated by the crops grown on the airport property. The definition in

the Final Policy will assure that the airport gets the full benefit of

agricultural leases of airport property, regardless of the form of

compensation it receives for agricultural use of airport property.

The FAA does not consider this interpretation to create a taking of

airport owner or operator property. As discussed in other contexts, the

limitation on the use of airport revenue was voluntarily undertaken by

the airport operator upon receiving AIP grants. In addition, the

revenues generated by these activities will still flow to the sponsor

for its use for a legitimate local governmental activity, the operation

and development of its airport.

d. Other Issues

The Final Policy includes a discussion of the requirement of 49

U.S.C. Sec. 40116(d)(2)(A). This provision requires that taxes, fees or

charges first taking effect after August 23, 1994, assessed by a

governmental body exclusively upon businesses at a commercial service

airport or upon businesses operating as a permittee of the airport be

used for aeronautical, as well as airport purposes. This addition is

included, at the suggestion of a commenter, to comply with the

statutory provision, which was enacted as section 112(d) of the 1994

FAA Authorization Act.

[[Page 7703]]

3. Permitted Uses of Airport Revenue

a. Promotion/marketing of the Airport

Congress, in the FAA Authorization Act of 1994, permitted the use

of airport revenues for promotion of the airport by expressly

prohibiting ``use of airport revenues for general economic development,

marketing, and promotional activities unrelated to airports or airport

systems.'' The Supplemental Proposed Policy cited this law and

recognized that many airport sponsors engage in some form of

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

level of service. Accordingly, the Supplemental Notice provided that

``[a]irport revenue may be used for * * * [c]osts 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.'' 61 FR 66470.

However, the preamble to the Supplemental Notice stated that

promotional/marketing expenditures directed toward regional economic

development, rather than specifically toward promotion of the airport,

would not be considered a permitted use of airport revenue. In

addition, the FAA proposed to prohibit the use of airport revenue for a

direct purchase of air service or subsidy payment to air carriers

because the FAA does not consider these payments to be capital or

operating costs of the airport.

Airport operators: In their comments to the original proposed

policy, ACI-NA/AAAE requested that FAA establish a ``safe harbor,'' or

a maximum dollar amount (perhaps based on a percentage of airport

costs), under which an airport could spend airport revenue on certain

promotional and marketing activities. Greater percentage amounts would

be allowed for the costs of airport-specific activities, while lower

amounts would be allowed for joint efforts for campaigns and

organizations that have broader, regional marketing missions.

Several airport operators supported this ``safe harbor'' concept in

their comments to the docket for the original Proposed Policy. One such

commenter, without reference to ACI/AAAE's remarks, suggested a cap of

5% of an airport's budget as a ``safe harbor'' for marketing expenses

that are not directly related to the airport or airport system.

Furthermore, this commenter would limit the use of airport revenue to a

maximum share of 20 percent of the overall cost of any joint-project

budget.

ACI/AAAE did not pursue the concept of ``safe harbor'' in their

comments to the docket for the Supplemental Policy, focusing instead on

the discretion of the airport operator to use reasonable business

judgment to determine potential benefits to the airport. Several

airports concurred with the ACI-NA/AAAE position, and one airport

operator added that joint-marketing expenses, if reasonable and clearly

related to aviation, should be considered an operating cost of the

airport.

The ACI/AAAE and several individual airport operators commented

that an airport cannot be distinguished from the region served by the

airport. ACI/AAAE commented that the policy should permit reasonable

spending for marketing of communities and regions because airports are

not ultimate destinations of passengers. Therefore, airport operators

must be free to make a reasonable attempt to increase revenues by

investing in the promotion of their community as a destination.

Some airports specifically opposed the ATA's suggestion of a cap,

described below.

Air carriers: In its comments to the Supplemental Notice, the ATA

mentioned the concept of a maximum or ``cap'' under which expenditures

would be considered reasonable, but would apply it to efforts to

promote the services of the airport itself. The ATA would have the

policy prohibit entirely the use of airport revenue for the promotion

of regional development, because ``expenditures by an airport to

promote local or regional economic development--as opposed to the

services and functionality of an airport--should not be considered

legitimate airport costs.'' In regard to cooperative or joint-marketing

expenses, the ATA focused on airport participation in joint-marketing

of new airline services, suggesting that these activities be limited to

a 60-day promotional period. ATA also warned against abuses of

cooperative marketing, in particular programs that result in promotion

of a particular airline.

The ATA rejected the airport position that use of airport revenue

to fund regional promotional activities is acceptable, because airports

themselves are not destinations. They stated, ``[l]ocal governments

that are also airport sponsors should not be permitted to pass off

local and regional promotional activities in order to charge such costs

to an airport. Indeed, many civic organizations and chambers of

commerce undertake such activities directly, since continued economic

development directly benefits the local businesses that constitute such

organizations.''

The Final Policy: The FAA has modified the provisions on permitted

uses of airport revenue in regard to promotion and marketing in the

Final Policy. The FAA has applied the sections 47107(b) and 47107(l) to

determine to what extent various kinds and amounts of promotional and

marketing activities can be considered legitimate operating costs of

the airport. The permitted uses of airport revenue for marketing and

promotion are split into two paragraphs, V.A.2 and V.A.3., in the Final

Policy--one addressing costs that may be fully paid with airport

revenue, and one addressing costs that may be shared. The issues of

general economic development, direct subsidies of air carriers, the

waiving of fees to airport users and airport participation in airline

marketing and promotion is further addressed in Section VI.

The Final Policy provides, under V.A.2, that expenditures for the

promotion of an airport, promotion of new air service and competition

at the airport, and marketing of airport services are legitimate costs

of an airport's operation. These expenditures may be financed entirely

with airport revenue, and the expenditures may include the costs of

employees engaged in the promotion of airport services. In addition,

cooperative airport-airline advertising of air service at the airport

may be financed with airport revenue, with or without matching funds.

The FAA is prepared to rely on airport management to assure that the

level of expenditures for such purposes would be reasonable in relation

to the airport's specific financial situation. In addition, cooperative

airport-airline advertising of air service must be conducted in

compliance with applicable grant assurances prohibiting unjust

discrimination in providing access to the airport.

For other advertising and promotional activities, such as regional

or destination marketing, airport revenue may be used to pay a share of

the costs only if the advertising or promotional material includes a

specific reference to the airport. The share must be reasonable, based

on the benefits to the airport of participation in the activity. The

FAA construes the prohibition on ``use of airport revenues for general

economic development, marketing, and promotional activities unrelated

to airports or airport systems' to preclude the reliance on airport

management judgment to support the use of airport revenue for general

destination advertising containing no references to the airport.

Likewise, the prohibition precludes adoption of a safe-harbor

[[Page 7704]]

provision for general promotional expenses.

Except as discussed above, the Final Policy does not limit the

amounts of airport revenue that can be spent for all permitted

promotional marketing and advertising activities. The FAA expects that

expenditure of airport revenues for these purposes would be reasonable

in relation to the airport's specific financial situation.

Disproportionately high expenditures for these activities may cause a

review of the expenditures on an ad hoc basis to verify that all

expenditures actually qualify as legitimate airport costs. Examples of

permissible and prohibited expenditures are included in the Final

Policy itself.

b. Reimbursement of Past Contributions

The Proposed Policy permitted airport revenue to be used to

reimburse a sponsor for past unreimbursed capital or operating costs of

the airport. The Proposed Policy did not include a limit on how far

back in time a sponsor could go to claim reimbursement, in accordance

with the law in effect at the time. In addition, the Preamble noted

that the FAA had not to date permitted a sponsor to claim reimbursement

for more than the principal amount actually contributed to the airport.

The FAA requested comment on whether the FAA should permit recoupment

of interest or an inflationary adjustment or whether, in the case of

contributed land, recoupment should be based on current land values.

Airport operators: ACI-NA/AAAE and a number of individual airport

operators supported recoupment of interest or inflation adjustment on

previous contributions or subsidies to the airport.

Air carriers: The ATA objected to the Proposed Policy and commented

that recoupment should be subject to a number of requirements to

prevent abuses.

The Final Policy: After the proposed policy was issued, Congress

enacted legislation to limit the use of airport revenue for

reimbursement of past contributions, and to limit claims for interest

on past contributions. 49 U.S.C. Secs. 47107(l)(5), 47107(p). The Final

Policy incorporates these statutory provisions. Based on Congressional

intent evidenced by the legislative history of these provisions,

airport revenue may be used to reimburse a sponsor only for

contributions or expenditures for a claim made after October 1, 1996,

when the claim is made within six years of the contribution or

expenditure. In addition, a sponsor may claim interest only from the

date the FAA determines that the sponsor is entitled to reimbursement,

pursuant to section 47107(p). The FAA interprets these statutory

provisions to apply to contributions or expenditures made before

October 1, 1996, so long as the claim is made after that date.

If an airport is unable to generate sufficient funds to repay the

airport owner or operator within six years, the Final Policy permits

repayment over a longer period, with interest, if the contribution is

structured and documented as an interest bearing loan to the airport

when it is made. The interest rate charged to the airport should not

exceed a rate that the sponsor received for other investments at the

time of the contribution.

c. Donations of Airport Revenue to Charitable/Community Service

Organizations

The Supplemental Proposed Policy addressed the use of airport

property for public recreational purposes, and addressed the use of

airport funds to support community activities and for participation in

community events. The FAA proposed that the use of airport revenue for

such donations would not be considered a cost of operating the airport,

unless the expenditure is directly related to the operation of the

airport. For example, expenditures 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. In contrast, expenditures to support a

sponsor's participation in a community parade would not be considered

to be directly related to the operation of the airport.

Airport operators: ACI-NA/AAAE contended that the expenditure of

airport revenue for community or charitable purposes is appropriate and

should be recognized as legitimate. Airports, regardless of their size,

type, and certification or lack thereof, are important members of their

local communities and, therefore, must be able to maintain their

prominent, highly visible roles in their respective communities.

Airports are regarded by their communities as local business

enterprises and, consequently, are expected to contribute to local non-

profit charitable concerns in the same manner as other local business

enterprises.

Individual airport operators generally supported the position of

ACI-NA/AAAE, although some individual operators acknowledged that some

limitation on the expenditures may be appropriate. One suggested a de

minimis standard; another proposed a ``safe harbor'' based on a

percentage of the airport's total budget. Another urged that airport

owners/operators be allowed leeway to make contributions of airport

funds, in reasonable amounts and consistent with the local

circumstances, and to use airport property for charitable purposes on

the same basis.

Other airport operators commented that the Final Policy should give

comparable treatment to the use of airport funds and airport property

for community goodwill by recognizing the limited use of airport

revenue to support charitable and community organizations as a

legitimate operating cost of the airport.

Air carriers: Air carriers did not comment specifically on

charitable contributions, although they commented extensively on the

use of airport property for community or charitable purposes. Generally

the air carriers suggested that use of airport property should be

subject to strict conditions to avoid abuse.

Other commenters: An advocacy group in support of a particular

airport commented that, in order for an airport to be as self-

sustaining as possible, the use of each income dollar is critical, and

that federally assisted airports must be fully responsive to the

citizens of the community by providing information on the use of

airport funds.

Final Policy: The Final Policy generally follows the approach of

the Supplemental Notice. Airport funds may be used to support community

activities, or community organizations, if the expenditures are

directly and substantially related to the operation of the airport. In

addition, the policy provides explicitly that where the amount of the

contribution is minimal, the airport operator may consider the

``directly and substantially related to air transportation'' standard

to be met if the contribution has the intangible benefit of enhancing

the airport's acceptance in local communities impacted by the airport.

Expenditures that are directly and substantially related to the

operation of the airport qualify inherently as operating costs of the

airport. The FAA recognizes that contributions for community or

charitable purposes can provide a direct benefit to the airport through

enhanced community acceptance, but that benefit is intangible and not

quantifiable. Where the amount of the contribution is minimal, the

value of the benefit will not be questioned as long as there is a

reasonable connection between the recipient organization and

[[Page 7705]]

the benefit of community acceptance for the airport.

However, if there is no clear relationship between the charitable

or community expenditure and airport operations, the use of airport

revenue may be an expenditure for the benefit of the community, rather

than an operating cost of the airport. The different treatment of the

use of airport funds (direct payments to charitable and community

organizations) and the use of airport property (less than FMV leases

for charitable or community purposes) is grounded in the applicable

laws: the revenue-use requirement (section 47107(b)), which governs the

use of airport funds, provides far less flexibility than the

requirement for a self-sustaining rate structure (section

47107(a)(13)), which applies to the use of airport property.

Examples of permitted and prohibited expenditures are included in

the Final Policy.

d. Use of Airport Revenue to Fund Mass Transit Airport Access Projects

The Supplemental Proposed Policy addressed in Part VII.C., the

circumstances in which an airport sponsor could provide airport

property at less than fair market value to a transit operator. The

Supplemental Proposed Policy did not address the use of airport revenue

to finance the construction of transit facilities. That issue, however,

was raised in the comments.

Airport Operators: Two airport operators supported the use of

airport revenue for the construction of transit facilities. One

commenter stated that an airport should be permitted to use airport

revenues and assets to provide mass transit service to on-airport

commercial uses. Another commenter referred to the AIP Handbook, FAA

Order 5100.38A Sec. 555, which provides AIP project eligibility for

rapid transit facilities.

Air carriers: Air carriers did not specifically discuss the use of

airport revenue to finance transit facilities. However, as discussed

below, they objected to providing airport property for transit

facilities at nominal lease rates.

Other Commenters: Two commenters representing transit operator

interests supported the expenditure of airport revenues to finance

transit facilities. A transit operator stated that in order to create a

better balance between transit and highway interests, transit

facilities should be totally eligible expenses, paid for in the same

manner as other road and parking enhancements. A transit trade

association urged the FAA to take appropriate actions to ensure that

passenger fees and other airport revenues are widely eligible to fund a

range of airport surface transportation modes, including public

transportation.

The FAA also received extensive comments on providing airport

property for use by transit providers at less than FMV rents. These

comments are addressed separately below.

Final Policy: The Final Policy has been modified to provide

guidance on the use of airport revenues to finance airport ground

access projects. The Final Policy states that airport revenue may be

used for the capital or operating costs of such a project if it can be

considered an airport capital project, or is part of a facility owned

or operated by the airport sponsor and directly and substantially

related to air transportation of passengers or property, relying

directly on the statutory language of Sec. 47107(b).

As an example, the Final Policy summarizes the FAA's decision on

the use of airport revenue to finance construction of the rail link

between San Francisco International Airport and the Bay Area Rapid

Transit (BART) rail system extension running past the airport. In that

decision, the FAA approved the use of airport revenues to pay for the

actual costs incurred for structures and equipment associated with an

airport terminal building station and a connector between the airport

station and the BART line. The structures and equipment were located

entirely on airport property, and were designed and intended

exclusively for use of airport passengers. The BART extension was

intended for the exclusive use of people travelling to or from the

airport and included design features to discourage use by through

passengers. Based on these considerations, the FAA determined that the

possibility of incidental use by nonairport passengers did not preclude

airport revenues from being used to finance 100 percent of the

otherwise eligible cost items. For purposes of this analysis, the FAA

considered ``airport passengers'' to include airport visitors and

employees working at the airport.

4. Accounting Issues

a. Principles for Allocation of Indirect Costs

Based on the comments to the Proposed Policy, the FAA addressed the

principles of indirect cost allocation in its Supplemental Notice. The

Supplemental Notice made clear that the allocation of indirect costs is

allowable under 49 USC Sec. 47107(b), and that no particular method of

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

ensure, however, that indirect costs are limited to allowable capital

and operating costs, the FAA proposed to apply certain general

principles and prohibitions to the allocation of costs. The

Supplemental Notice did not limit significantly the development of

local cost allocation methodologies, or interfere with the application

of Generally Accepted Accounting Principles (GAAP) and other accounting

industry recognized standards.

In the Supplemental Notice, the FAA stated that it 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 allowable under that guidance would be in

violation of the airport revenue retention requirement if allocated to

the airport.

The Supplemental Notice also required specifically that indirect

cost allocations be applied consistently across departments to the

sponsoring government agency, and not unfairly burden the airport

account. The general sponsor cost allocation plan could not result in

an over-allocation to an enterprise fund. In addition, the sponsor

would have to charge comparable users, such as enterprise accounts, for

indirect costs on a comparable basis.

Lastly, the Supplemental Notice proposed to prohibit the allocation

of general costs of the sponsoring government to the airport. However,

this prohibition would not affect direct or indirect billing for actual

services provided to the airport by local government.

Airport Operators: Generally, airport operators agreed with the

proposal to acknowledge that the allocation of indirect costs as

allowable under 49 USC Sec. 47107(b), and to provide that no particular

allocation methodology, including OMB Circular A-87, be required.

One airport operator requested the FAA to further clarify that it

is not imposing on airport sponsors all of the specific elements of OMB

CircularA-87. The operator was concerned that the statement in the

Supplemental Notice that the FAA ``believe[s] the specific principles

identified by the OIG are an appropriate construction of the revenue

retention requirement'' may lead to confusion over whether adherence to

OMB Circular A-87 is mandatory for

[[Page 7706]]

allocating costs to be paid by airport revenue.

Several airport operators were concerned that the FAA would not

accept the allocation of costs in accordance with a Federally-approved

cost allocation plan, but could review the plan to ensure that

allocation of specific cost items meet the special revenue retention

requirements. For example, one airport operator commented that the

FAA's approach would impose on airport sponsors burdens and

requirements in excess of the detailed requirements of OMB-Circular A-

87, which are designed to ensure a reasonable and consistent cost

allocation system. The airport proprietor proposed that such compliance

with a federally-approved cost allocation plan be considered sufficient

to satisfy the revenue retention requirement.

Another airport operator proposed that the FAA revise the policy to

clarify that a specific cost, as opposed to a type of cost, cannot be

treated as both a direct and an indirect cost. The airport operator

offered as an example a city-owned and operated airport at which some

police services are provided by officers assigned exclusively to the

airport and other services are provided by general duty police

officers. The commenter suggested that it should be permissible to

charge the airport for the officers assigned exclusively to the airport

as a direct cost and to charge for the general duty officers as an

indirect cost allocation.

Additionally, this commenter proposed revising the policy to

clarify that costs that are chargeable to one city department on a

direct basis may be charged to other city departments on an indirect

basis. The airport operator offered an example in which police are

exclusively assigned to a city-owned airport, but are not exclusively

assigned to other city departments. The commenter argued that it would

be reasonable to charge the airport for police services as a direct

cost, and to charge the other departments as an indirect cost

allocation.

Several airport operators were also concerned that the supplemental

policy implied that a local cost allocation plan must provide that all

users for a service be billed equally. For example, ACI-NA and AAAE

suggested that the requirement for consistent application should be

interpreted to require the local government to go through the exercise

of assessing indirect costs against all governmental departments,

including those wholly funded by that governmental entity. Likewise, an

airport operator requested that the FAA clarify that the supplemental

policy does not mean that an airport sponsor must actually bill all of

its General Fund agencies for certain municipal costs in order to be

able to charge such costs to its airports. All of those airport

proprietors that expressed concern over this proposed policy generally

commented that this issue was considered and rejected by the Department

of Transportation in the Second Los Angeles International Airport Rates

Proceeding, Docket OST-95-474. According to the airport proprietors,

the DOT recognized that in many cases sponsor agency operations are

paid from a common General Fund. Under those circumstances, it is

illogical and unnecessary for one General Fund agency to bill another

General Fund agency for municipal services.

One airport operator proposed that the word ``equally'' be removed

from VII.B.4 of the proposed policy. The commenter urged that the FAA

allow airport sponsors the flexibility to allocate costs to various

users on a reasonable, equitable basis relative to the benefits

received, even though specific users may sometimes be treated

differently. Returning to its example of police services, the commenter

suggested that if the sponsor chooses not to charge a housing authority

for costs of a special police unit assigned to that authority, it

should be of no concern to the FAA as long as those costs are not then

charged to the airport.

Another airport operator argued that each of its proprietary

departments are unique and governed by different City Charter

provisions; that they make different uses of city services; and have

different financial arrangements with the sponsor's general fund. This

commenter argued that treating the departments the same for cost

allocation purposes because the departments are enterprise funds would,

therefore, serve no valid purpose.

Several airport operators disagreed with FAA's proposed policy to

prohibit the indirect cost allocation of general costs of government.

Several commenters stated that the proposed policy would reverse

longstanding practice at many airports and could be inconsistent with

federally-approved cost allocation plans, which provide for the

allocation of a share of indirect costs of various local government

functions. One airport operator argued that there is no statutory basis

for prohibiting the allocation of general costs of government, other

than costs for particular identified services.

Finally, one airport operator commented that the proposed policy

does not sufficiently clarify the appropriate allocations for fire and

police stations that do not serve the airport exclusively. The airport

operator proposed that policy explicitly permit a sponsor to allocate

costs based on the intended purpose and value of the station to the

airport, not its actual use. The airport operator argues that a more

flexible approach could better implement the applicable statutory

provision that prohibits ``direct payments or indirect payments, other

than payments reflecting the value of services and facilities provided

to the airport.''

Airlines: ATA supports the proposed policy clarification that no

particular cost allocation methodology for indirect costs is preferred.

The Final Policy: The Final Policy reflects a different and

simplified approach to indirect cost allocation that is intended to

facilitate development of permissible cost allocation plans and the

review of those plans in the single audit process. The Final Policy

specifies that the cost allocation plans must be consistent with

Attachment A of OMB Circular A-87. Attachment A sets forth general

principles for developing cost allocation plans. Those principles are

essentially a restatement of the principles proposed in the

Supplemental Policy. By referring to Attachment A, the Final Policy

establishes a standard that is well understood by airport cost

accountants and by airport operators' independent auditors. The Final

Policy does not require compliance with the other attachments to OMB

Circular A-87, which include more rigid requirements and defines

categories of grant recipient costs that are eligible and ineligible

for reimbursement with Federal grant funds.

The Final Policy continues to specify that the costs allocated must

themselves be eligible for expenditure of airport revenue under section

47107(b). Attachment A to OMB Circular A-87 provides principles for

cost allocation methodologies. The cost items that may be charged to

airport revenue are determined by the requirements of section 47107(b).

Therefore, sponsors, and the FAA, cannot rely solely on compliance with

OMB Circular A-87 to assure that the costs items charged to the airport

in a Federally approved cost allocation plan are consistent with

section 47107(b).

The Final Policy continues to specify that the airport must not be

charged directly and indirectly for the same costs. The FAA is not

persuaded that the example of police services offered by an airport

sponsor requires a modification of this requirement. This

[[Page 7707]]

provision is not intended to preclude both the direct and indirect

billing in the situation cited by the commenter--where police services

are provided to the airport on both an exclusive-use and a shared-use

basis. In the cited example, it would be preferable to bill for police

exclusively assigned to the Airport on a direct cost basis. It would be

impossible, however, to bill for the shared-use police without engaging

in some form of indirect cost allocation. The FAA did not intend the

supplemental policy to preclude treatment of police services as both

direct and indirect costs in these circumstances, only to preclude

double billing on both a direct and indirect basis, for the same police

costs.

Similarly, with respect to the second example of police services

where the airport receives exclusive-use police services and other

sponsor departments receive shared-use police services, the FAA did not

intend the Supplemental Notice to preclude disparate billing

methodologies. Inherent in Attachment A is that comparable units of a

sponsoring government making comparable uses of the sponsor's services

should have costs allocated and billed in a comparable fashion. The

clarification noted above should address this situation as well. In the

second example sited, the FAA would consider the sponsor departments

receiving shared-use police services not to be comparable to the

airport receiving exclusive use police services.

The Final Policy also provides that the allocation plan must not

burden the airport with a disproportionate share of allocated costs,

and requires that all comparable units of the airport owner or operator

be billed for indirect costs billed to the airport. The FAA is

unwilling to accept the suggestion that comparable users of a service

may sometimes be treated differently for billing purposes, so long as

the costs attributed to one unit of government are not then charged to

the airport. The FAA believes that such practices would result in an

unfair burden being placed upon the airport simply because of the

airport's ability to pay.

This provision, however, is not intended to require a sponsor's

General Fund activities to bill other General Fund activities for

indirect costs that are properly allocable to those activities, if the

airport is billed. The policy is clear that comparable billing for

services is required only for comparable users.

Enterprise funds need not be treated as comparable to units of a

sponsoring government financed from the sponsor's general fund, and

comparable billing between enterprise funds and other units of

government is not required. While the FAA may presume that enterprise

funds are comparable to each other, an airport sponsor is free to

demonstrate that particular enterprise funds are sufficiently different

in material ways--such as the way they consume sponsor services or

their overall financial relationships with the sponsor--to justify

different practices in charging for indirect costs. The Final Policy

does not further define comparability because decisions on

comparability will depend on the specific circumstances of a sponsor.

The Final Policy also explicitly permits the allocation of general

costs of government and central services costs to the airport, if the

cost allocation plans meets the Final Policy's requirements. As

specified in the Final Policy, however, the allocation of these costs

to the airport may require special scrutiny to assure that the airport

is not being burdened with a disproportionate share of the allocated

costs.

In addition, the FAA continues to recognize that use of airport

revenue to pay some expenses not normally considered to be allowable

pursuant to OMB Circular A-87, such as fire and police services, is

consistent with the revenue retention requirement. If such costs are

allocated as an indirect cost in accordance with the Final Policy, they

will be considered by the FAA as acceptable charges.

The Final Policy is modified to permit the allocation of certain

categories of a sponsor's general cost of government as an indirect

charge to the airport. Such charges include indirect expenses of the

Office of Governor of a State, State legislatures, offices of mayors,

county supervisors, city councils, etc. An airport owner's or

operator's central service costs may also be allocated to the airport.

The Final Policy specifies that allocation of these categories of costs

to the airport may require special scrutiny to assure that the airport

is not being burdened with a disproportionate share of the costs.

The FAA proposed to prohibit the allocation of all general costs to

the airport on the grounds that the payment of such costs with airport

revenue would be inconsistent with the purpose of the revenue use

restriction--to avoid subsidy of general sponsor governmental activity.

It is clear from the comments that airports routinely pay for a share

of the general costs the legislative and executive branches of the

governmental unit of which the airport is a part under cost allocation

plans prepared in accordance with GAAP. Further, the comments

demonstrate that the payment of legislative and executive branch costs

by airport revenue can be justified as a cost of the airport because

the legislative and executive branches have direct, tangible oversight

and control responsibilities for the airport, and their activities

provide direct benefits to the airport, such as in the areas of

funding, capital development, and marketing.

In addition, under the Final Policy, the costs of shared-use

facilities must be allocated to all users of the facility, even if the

original purpose of constructing the facility was to provide exclusive

use or benefit to the airport. While a sponsor-owned facility may have

originally been established for the benefit of the airport, the FAA

believes that the purpose of the facility can change from time to time

based on local circumstances and that allocation of costs should be

based on current purpose, as well as use. The FAA may consider a number

of factors in determining current purpose, including current use,

design and functionality.

b. Standard of Documentation for the Reimbursement of Cost of Services

and Contributions to Government Entities

In its administration of airport agreements, the FAA is not

normally concerned with the internal management or accounting

procedures used by airport owners. As a matter of policy and procedure,

the FAA has consistently required that reimbursement of capital and

operating costs of an airport made by a government entity must be

clearly supportable and documented.

Neither the Proposed Policy nor the Supplemental Notice explicitly

discussed a standard of documentation that must be achieved for a

sponsor to claim reimbursement for services and/or contributions it

provided to the airport. However, events subsequent to the issuance of

both documents indicate a need for FAA to provide specific guidance on

the standard of documentation that will support the expenditure of

airport revenues.

In the examination of a possible diversion of airport revenue by

the City of Los Angeles at Los Angeles International, Ontario, Van Nuys

and Palmdale Airports (FAA Docket No. 16-01-96), the FAA reviewed the

underlying documentation which the City of Los Angeles offered to

support the payment of approximately $31 million in airport revenue to

the Los Angeles' general fund as the reimbursement of sponsor

contributions and services provided to the airport. In the Director's

Determination dated March 17, 1997, the FAA stated its standard of

documentation to justify such reimbursements. Accordingly, the

[[Page 7708]]

FAA is including that standard in the Final Policy.

The Final Policy requires that reimbursements for capital and

operating costs of the airport made by a government entity, both direct

and indirect, be supported by adequate documentary evidence. Adequate

documentation consists of underlying accounting records and

corroborating evidence, such as invoices, vouchers and cost allocation

plans, to support all payments of airport revenues to other government

entities. If this underlying accounting data is not available, the

Final Policy allows reimbursement to a government entity based on

audited financial statements, if such statements clearly identify the

expenses as having been incurred for airport purposes consistent with

the Final Policy statement. In addition, the Final Policy provides that

budget estimates are not a sufficient basis for reimbursement of

government entities. Budget estimates are just that--estimates of

projected expenditures, not records of actual expenditures. Therefore,

budget estimates cannot be relied on as documentary evidence to show

that the funds claimed for reimbursement were actually expended for the

benefit of the airport.

Indirect cost allocation plans, however, may use budget estimates

to establish pre-determined indirect cost allocation rates. Such

estimated rates must, however, be adjusted to actual expenses in the

subsequent accounting period.

5. Prohibited Uses of Airport Revenue

a. Impact Fees/Contingency Fees

The Proposed Policy prohibited the payment of 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. The Supplemental Notice did not modify

this provision. The term ``impact fees'' was not defined in the

Proposed Policy.

Airport operators: One Florida airport sponsor stated that impact

fees should be allowable to either a sponsoring or non-sponsoring

governmental body. Another commented that the language referring to a

``non-sponsoring'' governmental body was vague and confusing. Within

the state of Florida, impact fees are typically administered by a non-

sponsoring government body. It was stated that the wording did not seem

to prohibit impact fee payments when assessed by a ``sponsoring''

agency, or impact fees that an airport sponsor is obligated to pay.

The Final Policy: For clarity, the Final Policy is modified to

delete the reference to ``non-sponsoring'' governmental body and to

delete the reference to fees the sponsor is not obligated to pay. In

addition, the FAA is adding a statement that in appropriate

circumstances, airport revenue may be used to reimburse a governmental

body for expenditures that the imposing government will incur as a

result of on-airport development, based on actual expenses incurred.

The effect of the deletions is to broaden the prohibition to all

impact fees, within the meaning of the term used in the policy

statement. As such, the deletions are consistent with the statutory

prohibition on payment of airport revenues that do not reflect the

value of services or facilities actually provided to the airport. Until

a governmental unit undertakes the activity for which the impact fee is

intended to compensate, it is impossible to know with certainty whether

the impact fee is an accurate reflection of the cost of the activity

attributable to the airport or its value to the airport, or even that

the activity will occur. This situation is true regardless of both the

status of the governmental unit as airport sponsor and the status of

the fee as discretionary. The FAA understands that many local laws or

regulations authorizing impact fees do not require the fees to be spent

to mitigate or accommodate the results of the airport action that

triggers the fee. The FAA has no basis for assuring the payment of

impact fees would be consistent with the purpose of section 47107(b)--

to prevent an airport sponsor who received Federal assistance from

using airport revenues for expenditures unrelated to the airports.

The broader prohibition is consistent with applicable FAA policies.

Longstanding FAA policy has permitted a sponsor to claim reimbursement

from airport revenue only for ``clearly supportable and documented

charges, * * * supported by documented evidence.'' FAA Order 5190.6A,

par. 4-20.a(2)(c)(ii). An impact fee assessed before the imposing

government incurred any expenses to accommodate airport growth would

not meet this standard.

In addition, a standard of documentation required by the Final

Policy applies to all expenditures of airport revenues subject to

section 47107(b), including impact fee payments. That standard requires

that expenditures of airport revenues be supported by data on the

actual costs incurred for the benefit of the airport, not by budget or

other estimates, which impact fees essentially are. The Final Policy

will allow submission of those assessed fees resulting from the

proposed development when the amount of the fees become fully

quantifiable, as provided for in Section IV of the Final Policy,

following implementation by the imposing government of the mitigation

measures for which the impact fee is assessed. At that time, the FAA

can best determine whether the fees assessed against airport revenue

satisfy the requirements of section 47107(b) and this policy. In

unusual circumstances, the FAA may permit a prepayment of estimated

impact fees at the commencement of a mitigation project, if the funds

are necessary to permit the mitigation project to go forward, so long

as there is a reconciliation process that assures the airport is

reimbursed for any overpayments, based on actual project costs, plus

interest.

However, the Final Policy does take into account the potential that

an airport operator may be required by state or local law to finance

the costs of mitigating the impact of certain airport development

projects undertaken by the airport sponsor. Therefore, where airport

development causes a government agency to take an action, such as

constructing a new highway interchange in the vicinity of the airport,

airport revenues may be used equal to the prorated share of the cost.

In all cases, the action must be shown to be necessitated by the

airport development. In the case of infrastructure projects, such

impact mitigation must also be located in the vicinity of the airport.

This proximity requirement is not being applied to all mitigation

measures because some mitigation measures--especially certain

environmental mitigation measures--may not occur in the vicinity of the

airport.

The Final Policy also acknowledges the possibility that an airport

operator may be bound by local or state law to use airport revenue to

pay an impact fee that is prohibited by this policy. The Final Policy

states that the FAA will consider any such local circumstances in

determining appropriate corrective action.

b. Subsidy of Air Carriers

As discussed in Section V ``Permitted Uses,'' the Supplemental

Notice acknowledged the fact that Congress, in the 1994 FAA

Authorization Act, effectively authorized the use of airport revenue

for promotion of the airport by expressly prohibiting ``use of airport

revenues for general economic development, marketing, and

[[Page 7709]]

promotional activities unrelated to airports or airport systems.'' At

the same time, that statutory provision also limited the scope of

acceptable promotional activity.

In the Supplemental Notice, the FAA proposed new policy language

that more clearly addressed the kinds of promotional and marketing

activities that are and are not legitimate operating costs of the

airport under 47107(b). In the Supplemental Notice, Section VIII(I),

the FAA proposed that ``[d]irect subsidy of air carrier operations'' is

a prohibited use of airport revenue because it is not considered a cost

of operating the airport. The FAA drew a distinction between methods of

encouraging new service. Supplemental Notice proposed to allow the use

of airport revenue to encourage passengers to use the airport through

promotional activities, including cooperative promotional activities

with airlines and to allow airport operators to enhance the viability

of new service through fee incentives, on the one hand. As noted, the

FAA proposed to prohibit the use of airport revenue to simply buy

increased use of the airport by paying an air carrier to operate

aircraft, on the other. The FAA considered the former activities to be

a permitted expenditure for the promotion and marketing of the airport

and the latter to be a prohibited expenditure for general economic

development. The FAA explained in the preamble to the Supplemental

Notice that neither promotional activities nor promotional fee

discounts would be considered a prohibited direct subsidy of airline

operations. 61 FR at 66738.

Airport operators: In their comments on the Supplemental Notice,

ACI-NA/AAAE state that, generally, an expenditure or activity should

not be considered revenue diversion if there is a reasonable

expectation that such an expenditure or activity will benefit the

airport. Furthermore, they note that the law does not single out direct

air carrier subsidy or fee waivers for more stringent scrutiny than

other marketing activities. This argument in favor of the reasonable

business judgement of the airport management should be applied to the

use of airport revenue for promotion and marketing not unrelated to the

airport, including direct air carrier subsidies and fee waivers. ACI/

AAAE stated ``both forms of financial assistance should be permitted,

if an airport has a reasonable expectation that the subsidy will

benefit the airport and the subsidy or discount is made available on a

non-discriminatory basis.''

ACI/AAAE further stated that there is no real distinction between

direct subsidy and fee waivers, as well as none between direct subsidy

and the residual airport costing methodologies, making the distinction

in the policy illogical. They predicted that the proposed policy is

likely to promote detrimental effects, including eliminating air

service to some small airports, increasing congestion at dominant hubs

at the expense of medium-sized airports, reducing potential competition

and raising fares.

Several individual airport operators concurred with the ACI-NA/AAAE

position. One operator commented that any subsidies should be

permitted, as long as the airport remains self-sustaining and the

subsidies are not included in airline costs in calculating landing

fees, terminal rents and other user charges.

Another airport operator, the LNAA, which is engaged as a party in

a 14 CFR Part 13 investigation regarding its former air carrier subsidy

program, commented that there is no real difference between an airport

making a direct subsidy to an air carrier or waiving fees.

Two airport operators expressed different views. One operator

agreed that airport revenues should not be used to subsidize new air

carrier service because the practice of subsidization could lead to

destructive competition for air service among airports. Another airport

operator stated that it ``does not currently engage in nor does it

contemplate any form of direct subsidy to air carriers in exchange for

air service.'' This operator considers the Supplemental Notice to

provide adequate flexibility to airport operators to foster and promote

air service development.

Air carriers: The ATA strongly opposed the assertion that direct

subsidies of airline operations with airport revenue may be considered

to be operating costs of the airport and would extend the prohibition

to indirect subsidies. They argued that the distinction in the proposed

policy that allows fee waivers under certain circumstances, but

prohibits direct subsidy is illogical. Both result in revenue

diversion, whether the beneficiary is ``a start up carrier, a new

entrant in a market, or an existing carrier at an airport.'' The ATA

further commented, in connection with joint marketing endeavors, that

the permissible ``promotional period'' should be defined, as should the

scope of permissible marketing activities.

The Final Policy: The FAA has clarified the policy provision on the

direct subsidy of air carriers with airport revenue; however, the

prohibition remains, as does the distinction between direct subsidy and

the waiving of fees and the joint promotion of new service. The FAA has

applied the test of section 47107(b) to determine to what extent

various kinds and amounts of promotional and marketing activities can

be considered legitimate operating costs of the airport.

In pursuit of uniformity, the FAA has integrated references to the

section on the permitted uses of airport revenue, as well as to the

section on self-sustainability, to assist airport operators in pursuing

reasonable strategies to promote the airport and provide incentives to

encourage new air service. Among other things, marketing of air service

to the airport, and expenditures to promote the airport to potential

air service providers can be treated as operating costs of the airport.

Of course, support for marketing of air service to the airport must be

provided consistently with grant assurances prohibiting unjust

discrimination.

The setting of fees is a recognized management task, based on a

number of considerations, including the airport management's assessment

of the services needed by airport consumers, and the airport

management's assessment of the financial arrangements necessary to

secure that service. The FAA has consistently maintained that fee

waivers or discounts involving no expenditure of airport funds raise

issues of compliance with the self-sustaining rate structure

requirement, not the revenue-use requirement. The Final Policy

therefore, permits fee waivers and discounts during a promotional

period. The waiver or discount must be offered to all users that are

willing to provide the type and level of new service that qualifies for

the promotional period. The Policy limits the fee waiver or discount to

promotional periods because of the requirement that the airport

maintain a self-sustaining airport rate structure. In addition,

indefinite fee waivers or discounts could raise questions of compliance

with grant assurances prohibiting unjust discrimination. The Final

Policy does not define a permitted promotional period. There is too

much variation in the circumstances of individual airports throughout

the country to permit adoption of a single national definition of a

suitable promotional period.

In contrast, the direct payment of subsidies to airline involves

the expenditure of airport funds and hence raises questions under the

revenue-use requirements. The FAA continues to believe that the costs

of operating aircraft, or payments to air carriers to

[[Page 7710]]

operate certain flights, are not reasonably considered an operating

cost of an airport. In addition, payment of subsidy for air service can

be viewed as general regional economic development and promotion,

rather than airport promotion. Use of airport revenue for these

purposes is expressly prohibited under the terms of the 1994 FAA

Authorization Act. The Final Policy does not preclude a sponsor from

using funds other than airport revenue to pay airline subsidies for new

service, and it does not preclude other community organizations-- such

as chambers of commerce or regional economic development agencies--from

funding a program to support new air service. Therefore, the Final

Policy maintains the distinction between direct subsidy of air carriers

and the waiving of fees, and prohibits the former.

6. Policies Regarding the Requirement for a Self-Sustaining Rate

Structure

As noted in the summary, the Final Policy contains a separate

section on the requirement that an airport maintain a rate structure

that makes the airport as self-sustaining as possible under the

circumstances at the airport, to provide more comprehensive guidance in

a single document. The 1994 FAA Authorization Act directed the FAA to

adopt policies and procedures to assure compliance with both the

revenue uses and self-sustaining airport rate structure requirement.

The general guidance repeats the guidance appearing in the Department

of Transportation Policy Statement Regarding Airport Rates and Charges,

61 FR 31994 (June 21, 1996). The Final Policy interprets the basic

requirement and addresses exceptions to the basic rule for leases of

airport property at nominal or less-than fair market value (FMV) to

specific categories of users.

Each federally assisted airport owner/operator is required by

statute and grant assurance to have an airport fee and rental structure

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

particular airport circumstances, in order to minimize the airport's

reliance on Federal funds and local tax revenues. The FAA has generally

interpreted the self-sustaining assurance to require airport sponsors

to charge FMV commercial rates for nonaeronautical uses of airport

property. However, in the case of aeronautical uses, user charges are

also subject to the standard of reasonableness. In applying the two

standards together for aeronautical property, the FAA has considered it

acceptable for an airport operator to charge fees to aeronautical users

that are less than FMV, but more than nominal charges. The FAA defines

``aeronautical use'' as any activity which involves, makes possible, or

is required for the operation of aircraft, or which contributes to or

is required for the safety of such operations. Policy Statement

Regarding Airport Fees, Statement of Applicability, 61 FR at 32017.

Many entities lease airport property for aeronautical and

nonaeronautical uses at nominal lease rates. The FAA has determined

that nominal leases to many of these entities is consistent with the

requirement to maintain a self-sustaining airport rate structure. The

Final Policy provides specific guidance regarding nominal leases for

six categories of users. This guidance is discussed below.

a. Use of Property at Less Than FMV for Community/Charitable/

Recreational Use

Airport operators: The ACI-NA/AAAE agree with the general

conclusion that use of airport property for community and charitable

purposes at less than FMV should be permissible. However, they argued

that the criteria listed in the Supplemental Notice are too narrow.

Other criteria should be considered, and an airport should be required

to provide no more than one justification. The ACI-NA/AAAE specifically

mentioned aeronautical higher education institutions and not-for-profit

air and space museums as additional permitted uses, based on H.R. Rep.

104-714, 104th Cong. 2nd Sess. at 39 (1996) reprinted in 1996 USCC.A.N.

3676.

Individual airport operators also requested more flexibility in

various forms. One operator suggested that the Supplemental Notice

establishes an unnecessary two-part test which many community uses of

airport property will fail to satisfy. Another operator argued that

such airport property use should not be limited to temporary

arrangements, e.g., parks and baseball fields, which indicates that

only uses that allow property to be returned rather quickly to the

airport inventory would be permitted.

In contrast, another airport operator suggested that, in order to

place less burden on the airport operator, such uses should be limited

in scope and that the below-market value amount that an airport

operator could charge for such usage should be established as some

percentage of the appraised value of the property.

Air carriers: The ATA agrees in principle with the concept of

limited use of airport property for certain specified community

purposes at less than FMV. However, ATA stated that the Supplemental

Notice lacks specificity and that its application would consequently be

inconsistent with the self-sustaining and revenue-use requirements. The

ATA proposed to narrow the first element of the standard to permit

contribution of property if the property is put to a general public use

desired by the local community and the use does not adversely affect

the capacity, safety or operations of the airport. The ATA would narrow

the second test by permitting the use of property that is expected to

generate no more than minimal revenue, which the ATA would define as

minimal revenue equal to or less than 20 percent of revenue that could

be earned by similar airport property in commercial or air carrier use.

When the property could be expected to earn more than this defined

minimal amount, the ATA would permit less than FMV rental if the

revenue earned by the community use approximates the revenue that would

otherwise be generated.

The ATA would also require that the community use be subject to

periodic review and renewed justification and that the airport

proprietor retain absolute discretion to reclaim the property for

airport use.

Other commenters: A member of the United States House of

Representatives expressed concern that the policy, if adopted as

proposed, does not provide sufficient flexibility to airport operators

to be good neighbors within their community. This commenter suggested

that in rural areas, requiring community organizations to pay FMV could

reduce airport revenue as paying community organizations are forced off

of the airport by higher rents and no new tenants are found.

Final Policy: The Final Policy generally permits below-FMV-rental

of airport property for community uses, but generally limits the uses

to property that is not potentially capable of producing substantial

income and not needed for aeronautical use. Consistent with the

suggestions of the ATA, the permitted community uses of such property

will be limited to those that are compatible with the safe and

efficient operation of the airport and which are for general local use.

In addition, the community use should not preclude reuse of the

property for airport purposes, if the airport operator determines that

such reuse will provide greater benefits to the airport than the

continued community use. Leases to private, non-profit organizations

generally will be required to be at market rates unless the sponsor can

demonstrate a ``community goodwill''

[[Page 7711]]

purpose to the lease, or can demonstrate a benefit to aviation and the

airport, as discussed below.

While the Final Policy states that property provided for community

use at no charge should be expected to produce no more than minimal

revenue, we are not adopting a definition of minimal. For property that

is capable of generating more than minimal revenue, a sponsor could

charge less than FMV rental rates for community use, if the revenue

earned from the community use approximates that revenue that could

otherwise be generated. Providing such property for community use at no

charge would not be appropriate.

The FAA has determined that this approach to community use strikes

an appropriate balance between the needs of the airport to be a good

neighbor and the Federal requirements on the use of airport revenue and

property. This formulation provides substantial flexibility to airport

operators. At the same time, the self-sustaining requirement and the

policy goal of the revenue-use requirement justify some limitation on

local discretion in this area.

The requirement that community use not preclude reversion to

airport use is based on both the self-sustaining requirement and the

airport sponsor's basic AIP obligation to operate a grant-obligated

airport as an airport.

Under the Final Policy, the lease of airport property to a unit of

the sponsoring government for nonaeronautical use at less than fair

market value is considered a prohibited revenue diversion unless one of

the specific exceptions permitting below-market rental rates applies.

If a sponsor's use of airport property qualifies as community use, and

the other requirements for community-use leases are satisfied, the FAA

would not object to a lease at less than fair market value. Qualified

uses could include park or recreational uses or other public service

functions. However, such use would be subject to special scrutiny to

ensure that the requirements for below-FMV community use is satisfied.

The community use provision of the Final Policy does not apply to

airport property used by a department or subsidiary agency of the

sponsoring government seeking an alternative site for the sponsor's

general governmental purposes at less-than-commercial value. For

example, a city cannot claim the community use exception for a nominal

value lease of airport property for a municipal vehicle maintenance

garage. Such usage, while beneficial to the taxpaying citizens of the

sponsoring government, would be difficult to justify as benefiting the

airport by improving the airport's acceptance in the community.

b. Not for Profit Aviation Museums

The DOT OIG has cited instances in which an aviation museum at a

federally assisted airport is leasing airport property at less than a

fair market rental rate. In clarifying the revenue diversion

prohibitions recommended for inclusion in the FAA Authorization Act of

1996, the House Transportation and Infrastructure Committee urged the

FAA to take a flexible approach to the lease of airport property at

below-market rates to not-for-profit air and space museums located on

airport property. H.R. Rep. No. 104-714, 104th Cong. 2nd Sess. at 39

(1996) reprinted in 1996 U.S.C.C.A.N. 3676 (House Report). The

Committee recommended that this type of rental arrangement should not

be considered revenue diversion because of the contribution that such

museums make to the understanding and support of aviation.

One airport operator commented that long-term, less-than-market

value rental arrangements, particularly for leaseholds encompassing

permanent facilities, should be permitted when such arrangements serve

a clear and valuable aviation-related purpose. This comment could

include aviation museums.

One operator of a not-for-profit aviation museum urged the FAA to

permit nominal rate leases. This operator stated that a FMV-based lease

for its museum property would double its current operating budget.

The Final Policy: The Final Policy permits airport operators to

charge reduced rental rates and fees, including nominal rates, to not-

for-profit aviation museums, to the extent that the reduction is

reasonably justified by the tangible and intangible benefits to the

airport or civil aviation. This provision recognizes the potential for

aviation museums to provide benefits to the airport by stimulating

understanding and support of aviation, consistent with the suggestion

contained in the House Report, U.S.C.C.A.N. 3676. Benefits to the

airport may include any in-kind services provided to the airport and

airport users by the aviation museum. The limitation to not-for profit

museums is consistent with the requirement for a self-sustaining

airport rate structure, because there is no reason to give for-profit

aviation museums preferential treatment over other commercial

aeronautical activities. All for-profit aeronautical activities provide

some benefit to the airport, by making it more attractive for potential

airport users. If this benefit were a sufficient reason to permit

reduced rental rates to commercial aviation businesses on a routine

basis, the requirement for a self-sustaining airport rate structure

would be virtually unenforceable.

The Final Policy permits but does not require below-market rental

rates, including nominal rates. The airport operator is free to treat a

qualified aviation museum as it would any other aeronautical activity

in setting rental rates and other fees to be paid by the museum.

c. Aeronautical Higher Education Programs

The DOT OIG has cited instances in which aeronautical secondary and

post-secondary education programs at federally assisted airports are

leasing airport property at less than a fair market rental rate.

In the House Report, 1996 U.S.C.C.A.N. 3676, the House

Transportation and Infrastructure Committee also urged the FAA to take

a flexible approach to aeronautical higher education programs located

on airports. The Committee recognized that some federally obligated

airports have leased property to non-profit, accredited collegiate

aviation programs, and that facilitating these programs will help build

a base of support for airport operations by giving students, who will

be the future users of the national airspace system, easy access to

aviation facilities.

The Final Policy: The Final Policy permits reduced rental rates,

including nominal rates, to not-for-profit aeronautical secondary and

post-secondary education programs conducted by accredited educational

institutions, to the extent that the reduction is justified by tangible

or intangible benefits to the airport or to civil aviation. This

treatment is justified for the same reason that reduced rental rates

and fees to certain aviation museums are permitted. Again, the benefits

may include in-kind services provided to the airport and airport users.

As with aviation museums, the educational institution and education

program must be not-for-profit. For-profit aviation education, such as

flight-training, is a standard commercial aeronautical activity at many

airports. Permitting reduced rental rates and fees to for-profit

aviation education programs would seriously undermine compliance with

the self-sustaining requirement and could raise questions of compliance

with the grant assurances prohibiting unjust discrimination.

[[Page 7712]]

The Final Policy permits but does not require below-market rental

rates, including nominal rates. The airport operator is free to treat a

qualified not-for-profit aeronautical education program as it would any

other aeronautical activity in setting rental rates and other fees to

be paid by the education program.

d. Civil Air Patrol Leases

Reduced-rental leases, including nominal leases, to the Civil Air

Patrol/United States Air Force Auxiliary (CAP) at a number of airports

have also been criticized in OIG audits. As a result of this criticism,

some airport operators have been seeking higher rents from the CAP when

leases have come up for renewal.

In its comments, the CAP contends that the current standard airport

industry practice of permitting CAP use of airport property for a

nominal rent confers substantial benefits to the airport and, in

general, to the aviation community. The CAP, therefore, requests that a

policy be adopted which would formally permit CAP units to continue to

occupy facilities on federally obligated airports at a nominal rent,

whether under formal lease arrangements, or otherwise, at the

discretion of the airport owner/operator.

The Final Policy: The Final Policy permits reduced rental rates and

fees to CAP units operating at the airport, in recognition of the

benefits to the airport and benefits to aviation similar to those

provided by not-for-profit aviation museums and aeronautical secondary

education programs. As with other not-for profit-aviation entities, the

reduction must be reasonably justified by benefits to the airport or to

civil aviation. In-kind services to the airport and airport users may

be considered in determining the benefits that the CAP unit provides.

In addition, this treatment of the CAP, which has been conferred with

the status of an auxiliary to the United States Air Force, is not

identical to the treatment provided to military units in the Final

Policy, as discussed below, but is consistent with that treatment.

The reduced rental rates and fees are available only to those CAP

units operating aircraft at the airport. For CAP units without

aircraft, a presence at the airport is not critical. The airport

operator can accommodate those CAP units with property that is not

subject to Federal requirements on maintaining a self-sustaining rate

structure, without compromising the effectiveness of the CAP units. Of

course, if such units provide in-kind services that benefit the

airport, the value of those services may be recognized as an offset to

FMV rates.

The Final Policy permits but does not require nominal rental rates.

The airport operator is free to treat a qualified not-for-profit

aeronautical CAP lease as it would any other aeronautical activity in

setting rental rates and other fees to be paid by the education

program.

e. Police/Firefighting Units Operating Aircraft at the Airport

Many airports host police or fire-fighting units operating aircraft

(often helicopters). The OIG has frequently criticized reduced rate or

no-cost leases to these units of government as inconsistent with the

self-sustaining and revenue-use requirements.

The Final Policy requires the airport operator to charge reasonable

rental rates and fees to these units of government. In effect, these

units of government must be treated the same as other aeronautical

tenants of the airport. This treatment is consistent with the policy's

general approach toward dealings between units of government--fees

should be set at the level that would be produced by arm's-length

bargaining. The treatment is also justified because police and fire-

fighting aircraft units provide benefits to the community as a whole,

and not necessarily to the airport. However, as with other police and

fire-fighting units located at an airport, the policy does allow rental

payments to be offset to reflect the value of services actually

provided to the airport by the police and fire-fighting aircraft units.

f. Use of Property by Military Units

The US Air Force Reserve and the Air National Guard both have

numerous flying units located on federally obligated, public-use

airports. The majority of these aircraft-operating units are located on

leased property at civilian airports established on former military

airport land transferred by the US Government to the airport owner/

operator under the Surplus Property Act of 1944, as amended, or under

other statutes authorizing the conveyance of surplus Federal property

for use as a public airport. Frequently, the favorable lease terms were

contemplated in connection with the transfer of the former military

property and may have been incorporated in property conveyance

documents as obligations of the civilian airport sponsor. As with other

reduced-rate leases, these arrangements have been criticized in

individual OIG audits.

The Final Policy: The Final Policy provides that leasing of airport

property at nominal lease rates to military units with aeronautical

missions is not inconsistent with the requirement for a self-sustaining

rate structure. The Department of Defense (DOD) has a substantial

investment in facilities and infrastructure at these locations, and its

operating budgets are based on the existence of these leases. Moving

those facilities upon expiration of a lease or the payment of FMV rent

for facilities to support military aeronautical activities required for

national defense and public safety would be beyond the capability of

the DOD without additional legislation and enlargement of the DOD

operating budget. In all of the enactments on the self-sustaining rate

structure requirement and use of airport revenue and the accompanying

legislative history, the FAA can find no indication that Congress

intended the airport revenue requirements to be applied in a way to

disrupt the United States' defense capabilities or add significantly to

the cost of maintaining those capabilities. Moreover, Congress

specifically charged the FAA, in 49 U.S.C. Sec. 47103, with developing

a national plan of integrated airport systems (NPIAS) to meet, among

other things, the country's national defense needs. Inclusion in the

NPIAS is a prerequisite for eligibility for AIP funding. Thus, Congress

clearly contemplated a military presence at civil airports. Therefore,

the FAA will not construe the requirement for a self-sustaining airport

rate structure to prohibit nominal leases to military units operating

aircraft at an airport.

The Final Policy permits but does not require nominal rental rates.

The airport operator is free to treat a qualified military unit as it

would any other aeronautical activity in setting rental rates and other

fees to be paid by the military unit.

7. Lease of Airport Property at Less Than FMV for Mass Transit Access

to Airports

The Supplemental Notice proposed that airport property could be

made available at less than fair rental value for public transit

terminals, rights-of-way, and related facilities, without being

considered in violation of the requirements governing airport finances,

under certain conditions. The transit system would have to be publicly

owned and operated (or privately operated by contract on behalf of the

public owner) and the transit facilities directly related to the

transportation of air passengers and airport visitors and employees to

and from the airport. Twenty-one responses addressed this issue.

Airport commenters: The airport operators concur with the principle

of making airport land available for mass

[[Page 7713]]

transit at rates below fair market value. ACI-NA/AAAE stated that the

determination to use airport property for a transit terminal, transit

right-of-way, or related facilities at less than fair rental value is

consistent with the grant assurance requiring airports to be self-

sustaining.

Air carriers: The ATA asserted that FAA has exceeded its statutory

authority in the proposal. ATA's considers transit facilities to be

like commercial business enterprises, because they occupy airport

property and charge their customers for their services. ATA also

stressed that airport transit facilities are non-aeronautical

facilities which are not ``directly and substantially related to the

air transportation of passengers or property.''

Other commenters: Transit operators, including a transit operator

trade association generally supported the position in the Supplemental

Notice.

Another commenter stated that making airport property available at

less than fair market rental value or making airport revenue available

for transit facilities equates to the airport paying a hidden taxation.

This commenter argued that it was not the intention of Congress, when

it passed the AAIA, to have grant funds used to subsidize, either

directly or indirectly, any activity that provides no benefit to air

travel.

The Final Policy: The Final Policy incorporates the provision

proposed in the Supplemental Notice, with a technical correction to

include transit facilities use for the transportation of property to or

from the airport. The FAA does not consider public transit terminals to

be the equivalent of commercial business enterprises. Rather, they are

more like public and airport roadways providing ground access to the

airport. Generally speaking, the FAA does not construe the self-

sustaining assurance to require an airport owner or operator to charge

for roadways and roadway rights-of-way at FMV.

Moreover, even though publicly-owned transit systems charge

passengers for their services, they generally operate at a loss and are

subsidized by general taxpayer revenue. Charging fair market value for

on airport facilities would thus burden general taxpayers with the

costs of providing facilities used exclusively by transit passengers

visiting the airport. Therefore, a requirement to charge FMV would not

further the purpose of the self-sustaining assurance--to avoid

burdening local taxpayers with the cost of operating the airport

system.

a. Private Transit

ACI-NA/AAAE and four airport operators commented that private

transit operators should have treatment equal to public transit

operators. They argued that the concepts of public-private

partnerships, and privatization of transportation facilities, may be

realities in the not-too-distant future. Moreover, private ownership

would not detract in the least from the functions identified in the

Notice for these facilities, such as bringing passengers to and from

the airport. They also noted that the language in the AIP Handbook

(Order 5100.38A, Section 6) does not specifically exclude private

operators. The language states transit facilities will be allowable

provided they will primarily serve the airport.

One state Department of Transportation also urged that reduced

rental rates should be offered to privately-owned and operated transit

systems on the same basis as publicly-owned systems.

Final Policy. The Final Policy retains some distinctions between

privately and publicly owned systems. In general, privately-owned

systems are more analogous to other ground transportation providers--

private taxis and limousine services, rental car companies--and even

private parking lot operators. These entities are commercial

enterprises that operate for profit and are a significant source of

revenue for the airport. Most importantly, they are not supported by

general taxpayer funds, and charging FMV would not raise questions of

burdening local taxpayers with the cost of the airport.

However, the FAA is aware that, in many communities with no

publicly-owned bus systems or very limited systems, privately-owned bus

systems fulfill the role of providing public transit services to the

airport. Accordingly, the FAA is revising the Final Policy to permit an

airport operator to provide airport property at less than FMV rates to

privately-owned systems in these limited circumstances.

b. Airport Passengers

Nine airport commenters addressed the proposed requirement that

transit facilities be directly related to the transportation of air

passengers and airport visitors and employees to and from the airport

to qualify for less-than-FMV rentals. The commenters argue that the

provision is too narrow by restricting the transit service to air-

passengers and airport visitors and employees. One airport operator

states that airport sponsors must have the flexibility to build airport

transit systems that principally serve airport passengers, employees

and other users but which may also secondarily transport some

nonairport users. Two airport operators with general-use rail transit

systems planned or operating on or near their airports argue that the

airport benefits from improved ground access, reduced traffic

congestion and improved air quality of general use systems and that

rent-free property should, therefore, be provided to general use

systems.

Final Policy: The Final Policy incorporates the language of the

Supplemental Notice. That language does not preclude any use of transit

facilities constructed on airport property by nonairport passengers if

the property is to be leased at less-than-FMV. The requirement that the

facilities be ``directly related'' to the airport does not equate to a

requirement that the facilities be ``exclusively used'' for airport

purposes. However, if the intended use of a facility is not exclusive

airport use, some rental charge may be necessary to reflect the

benefits provided to the general public. The determination on whether

the facilities are ``directly related'' will be made on a case-by-case

basis.

It appears that some of the concern about this issue was generated

by the language in the preamble, which referred to transit facilities

``necessary for the transportation of air passengers, airport visitors

and airport employees to and from the airport.'' The preamble offered a

maintenance/repair facility as an example of facilities that would not

qualify. The FAA is not convinced that the benefits to the airport of

having such facilities on the airport is sufficient to justify less-

than-FMV rental rates. However, as noted, the FAA does not construe the

policy language ``facilities directly related the transportation of

[airport passengers]'' to require that the facilities be used

exclusively by airport passengers.

8. Military Base Conversions Issues

In its comments to the Proposed Policy, one airport operator argued

that using airport revenue to assist in development of revenue-

generating properties on former military bases that are converted to

civil airports should not be considered a prohibited use of revenue.

In addition, ACI-NA/AAAE state that a base closure and conversion

to civilian use often results in the existence of significant

recreational facilities on property owned by an airport. In regard to

these facilities on converted military bases, ACI/AAAE stated, ``[a]

leasing

[[Page 7714]]

arrangement whereby a municipality assumes all liability and operating

expenses in exchange for a no-revenue lease is beneficial to the

airport and should not be prohibited.''

Final Policy: The Final Policy provides for no special treatment of

converted military bases with respect to airport revenue use, and no

special provisions are included in the final policy.

The FAA policy on the use of public and recreational use of

property will be consistently applied to airports whether or not they

are former military bases. Ordinarily, airport revenue may not be used

to finance the costs of public and recreational facilities at the

airport, just as airport revenue may not be used to develop other

facilities not needed for the airport, even if those facilities will

generate revenue for the airport. In addition, unless the recreational

facilities qualify under the community-use exception, the airport

operator would be expected to receive FMV-based rental payments for the

recreational or public property. Operational costs borne by a

municipality as a result of a base conversion can be considered in the

analysis of whether a reduced rent is justified by tangible or

intangible benefits to the airport.

9. Enforcement Policy, Whether to Impose Civil Penalty Even if Funds

are Returned

The Proposed Policy provided that if the FAA received information

that improper use of airport revenue had occurred, the FAA would

investigate the matter and attempt to resolve the issue informally. The

matter could be resolved if the sponsor persuaded the FAA that the use

of airport revenue was not improper, or if the sponsor took corrective

action (which usually would involve crediting the diverted amount to

the airport account with interest). The proposed policy provided that

the FAA would propose enforcement action only if the FAA made a

preliminary finding of noncompliance and the sponsor had failed to take

corrective action. The Proposed Policy outlined the enforcement actions

available to the FAA as of the date of publication. The actions

included: (1) withholding of new AIP grants and payments under existing

grants (49 USC Secs. 47111(e) and (d), respectively); (2) withholding

of new authority to impose PFCs (49 USC 47111(e)); (3) withholding of

all Federal transportation funds appropriated in Fiscal Years 1994 and

1995 (as provided in the Department of Transportation appropriation

legislation for those years); (4) assessment of civil penalties not to

exceed $50,000 (49 USC Sec. 46301); and (5) initiation of a civil

action to compel compliance with the grant assurances (49 USC

Sec. 47111(f)).

The Proposed Policy outlined the administrative procedural rules

applicable to airport compliance matters at the time of publication, 14

C.F.R., Part 13 ``Investigation and Enforcement Procedures.''

Airport operators: ACI-NA and AAAE strongly urged the FAA to

provide in the final policy that remittance of any diverted amounts,

together with associated interest, should be sufficient to ``cure''

instances of revenue diversion, regardless of how those instances come

to the attention of the FAA. In particular, a non-airport party should

not be given the capacity, through the filing of a formal compliant, to

eliminate an airport's ability to cure the problem.

Air carriers: ATA suggested that the proposed policy should be

strengthened, backed up by a stronger enforcement policy and aggressive

monitoring and vigorous enforcement action. ATA additionally argued

that FAA should promulgate one rule that sets forth in detail the

substantive requirements regarding revenue retention and diversion and

a separate compliance and enforcement policy document.

ATA objected that the proposed policy continues to provide a

passive monitoring procedure and this approach is not sufficient to

provide prompt and efficient enforcement. IATA objected that the

Proposed Policy does not promote prompt or effective enforcement.

ATA suggested that the FAA establish a formal compliance monitoring

and inspection program that includes compliance monitoring and audits/

inspections similar to those it conducts at certificated airlines, such

as for drug and alcohol testing. Further, ATA stated that FAA's

enforcement policy should result in civil penalties being assessed with

the same vigor with which they are assessed against airlines for

alleged regulatory violations. In addition, ATA urged that FAA should

maintain the threat of assessing civil penalties for each day an

airport or sponsor is in violation of the revenue-use requirement and

for each day a sponsor fails to repay amounts determined to have been

diverted unlawfully. IATA similarly supported assessment of the maximum

civil penalty for each instance of unlawful revenue use.

The Final Policy: After publication of the Proposed Policy, the FAA

Reauthorization Act of 1996 mandated new remedies for improper use of

airport revenues and new compliance monitoring programs. The Final

Policy has been modified to reflect the new requirements.

Implementation of the requirements will result in more active and

systematic monitoring of airport revenue use and more systematic

resolution of questionable airport practices, as requested by the ATA

and the IATA. It should be noted that the FAA had already assumed a

more active role in monitoring through the implementation of the

financial reporting requirements of the 1994 FAA Authorization Act.

In accordance with the requirements of the 1996 FAA Reauthorization

Act, the Final Policy reflects the clear congressional intent that the

FAA focus compliance efforts on the lawful use of airport revenue. The

FAA will use all means at its disposal to monitor and enforce the

revenue-use requirements and will take appropriate action when a

potential violation is brought to the FAA's attention by any means. To

detect whether airport revenue has been diverted from an airport, the

FAA will use four primary sources of information: (1) the annual

airport financial reports submitted by the sponsor; (2) findings from a

single audit conducted in accordance with OMB Circular A-133 (including

the audit review and opinion required by the 1996 Reauthorization Act);

(3) investigation following a third-party complaint, and, (4) DOT

Office of Inspector General audits.

The FAA will seek penalties for the diversion of airport funds if

the airport sponsor is not willing to correct the diversion and make

restitution, with interest, in a timely manner. This approach is

consistent with the FAA's objective of achieving compliance with a

sponsor's obligations. Moreover, it is consistent with section 805 of

the 1996 Reauthorization Act, which provides for imposition of

administrative and civil penalties only after a sponsor has been given

an opportunity to take corrective action and failed to do so.

10. Form of Policy

As is reflected in the Proposed Policy and Supplemental Notice, the

FAA proposed to implement section 112 of the 1994 Act by publishing a

policy statement, rather than adopting a regulation.

The Comments: The ATA argued that the FAA should promulgate a

regulation establishing substantive requirements for use of airport

revenue and a separate enforcement policy. The ATA argued that a

substantive regulation will provide more clarity on prohibited and

permitted practices and be less

[[Page 7715]]

susceptible to conflicts over interpretation.

The AOPA also raised concerns over the prompt and effective

enforcement of airport revenue diversion within the terms of this

Proposed Policy.

The Final Policy: The FAA will publish policy guidance on airport

revenue use and enforcement as a policy rather than as a regulation.

Section 112 of the 1994 FAA Authorization Act directs the Secretary to

``establish policies and procedures'' to assure ``prompt and effective

enforcement'' of the revenue retention grant assurances, which clearly

contemplates the issuance of a policy statement for this purpose.

As discussed in connection with specific issues, the wide variation

in airport situations makes it impractical for the FAA to promulgate

standards with the specificity and inflexibility urged by ATA.

Moreover, a regulation is not required to obtain compliance with the

revenue-use requirement. Airports are obligated by the statutory

assurance in AIP grant agreements pursuant to Sec. 47107(b)(2), or

directly under Sec. 47133, and rulemaking is not required to implement

those statutes.

On the issue raised by ATA and AOPA concerning the prompt and

effective enforcement mechanism to address specific revenue diversion

issues, the FAA had been using 14 CFR Part 13. However, on December 16,

1996, 14 CFR Part 16, Rules of Practice for Federally Assisted Airport

Proceedings, took effect. Part 16 established new investigation and

enforcement procedures for airport compliance matters, including

compliance with the revenue-use requirement. Part 16 includes time

deadlines and processes to assure that FAA promptly and effectively

investigates and adjudicates specific airport compliance matters

involving Federally Assisted Airports. The FAA considers the procedural

requirements of the Reauthorization Act of 1996 to be self-executing

and will apply the statutory provisions in the case of any conflict

with Part 16. However, the FAA is in the process of revising Part 16 to

incorporate those new procedural requirements.

Paperwork Reduction Act Requirements

The Office of Management and Budget (OMB) has previously approved,

pursuant to the Paperwork Reduction Act, the annual airport financial

reports described in Section VIII.A of the Final Policy under OMB

Number 2120-0569.

Policy Statement

For the reasons discussed above, the Federal Aviation

Administration adopts the following statement of policy concerning the

use of airport revenue:

Policies and Procedures Concerning the Use of Airport Revenue

Table of Contents

Section I--Introduction

Section II--Definitions

A. Federal Financial Assistance

B. Airport Revenue

C. Unlawful Revenue Diversion

D. Airport Sponsor

Section III--Applicability of the Policy

A. Policy and Procedures on the Use of Airport Revenue and State

or Local Taxes on Aviation Fuel

B. Policies and Procedures on the Requirement for a Self-

Sustaining Airport Rate Structure

C. Application of the Policy to Airport Privatization

Section IV--Statutory Requirements for the Use of Airport Revenue

A. General Requirements, 49 USC Secs. 47107(b) and 47133

B. Exception for Certain Preexisting Arrangements (Grandfather

Provisions)

C. Application of 49 USC Sec. 47133

D. Specific Statutory Requirements for the Use of Airport

Revenue

E. Passenger Facility Charges and Revenue Diversion

Section V--Permitted Uses of Airport Revenue

A. Permitted Uses of Airport Revenue

B. Allocation of Indirect Costs

C. Standard of Documentation for the Reimbursement to Government

Entities of Costs of Services and Contributions Provided to Airports

D. Expenditures of Airport Revenue by Grandfathered Airports

Section VI--Prohibited Uses of Airport Revenue

A. Lawful and Unlawful Revenue Diversion

B. Prohibited Uses of Airport Revenue

Section VII--Policies Regarding Requirement for a Self-Sustaining

Airport Rate Structure

A. Statutory Requirements

B. General Policies Governing the Self-Sustaining Rate Structure

Assurance

C. Policy on Charges for Nonaeronautical Facilities and Services

D. Providing Property for Public Community Purposes

E. Use of Property by Not-for-Profit Aviation Organizations

F. Use of Property by Military Units

G. Use of Property for Transit Projects

H. Private Transit Systems

Section VIII--Reporting and Audit Requirements

A. Annual Financial Reports

B. Single Audit Review and Opinion

Section IX--Monitoring and Compliance

A. Detection of Airport Revenue Diversion

B. Investigation of Revenue Diversion Initiated Without Formal

Complaint

C. Investigation of Revenue Diversion Precipitated by Formal

Complaint

D. The Administrative Enforcement Process

E. Sanctions for Noncompliance

F. Compliance with Reporting and Audit Requirements

Section I.--Introduction

The Federal Aviation Administration (FAA) issues this document to

fulfill the statutory provisions in section 112 of the Federal Aviation

Administration Authorization Act of 1994, Pub.L. No. 103-305, 108 Stat.

1569 (August 23, 1994), 49 USC 47107(l), and Federal Aviation

Administration Reauthorization Act of 1996, Public Law 104-264, 110

Stat. 3213 (October 9, 1996), to establish policies and procedures on

the generation and use of airport revenue. The sponsor assurance

prohibiting the unlawful diversion of airport revenues, also known as

the revenue-use requirement, was first mandated by Congress in 1982.

Simply stated, the purpose of that assurance, now codified at 49 USC

Secs. 47107(b) and 47133, is to provide that an airport owner or

operator receiving Federal financial assistance will use airport

revenues only for purposes related to the airport. The Policy Statement

implements requirements adopted by Congress in the FAA Reauthorization

Acts of 1994 and 1996, and takes into consideration comments received

on the interim policy statements issued on February 26, 1996, and

December 18, 1996.

Section II--Definitions

A. Federal Financial Assistance

Title 49 USC Sec. 47133, which took effect on October 1, 1996,

applies the airport revenue-use requirements of Sec. 47107(b) to any

airport that has received ``Federal assistance.'' The FAA considers the

term ``Federal assistance'' in Sec. 47133 to apply to the following

Federal actions:

1. Airport development grants issued under the Airport Improvement

Program and predecessor Federal grant programs;

2. Airport planning grants that relate to a specific airport;

3. Airport noise mitigation grants received by an airport operator;

4. The transfer of Federal property under the Surplus Property Act,

now codified at 49 USC Sec. 47151 et seq.; and

5. Deeds of conveyance issued under Section 16 of the Federal

Airport Act of 1946, under Section 23 of the Airport and Airway

Improvement Act of 1970, or under Section 516 of the Airport and Airway

Improvement Act of 1982 (AAIA).

[[Page 7716]]

B. Airport Revenue

1. All fees, charges, rents, or other payments received by or

accruing to the sponsor for any one of the following reasons are

considered to be airport revenue:

a. Revenue from air carriers, tenants, lessees, purchasers of

airport properties, airport permittees making use of airport property

and services, and other parties. Airport revenue includes all revenue

received by the sponsor for the activities of others or the transfer of

rights to others relating to the airport, including revenue received:

i. For the right to conduct an activity on the airport or to use or

occupy airport property;

ii. For the sale, transfer, or disposition of airport real property

(as specified in the applicability section of this policy statement)

not acquired with Federal assistance or personal airport property not

acquired with Federal assistance, or any interest in that property,

including transfer through a condemnation proceeding;

iii. For the sale of (or sale or lease of rights in) sponsor-owned

mineral, natural, or agricultural products or water to be taken from

the airport; or

iv. For the right to conduct an activity on, or for the use or

disposition of, real or personal property or any interest therein owned

or controlled by the sponsor and used for an airport-related purpose

but not located on the airport (e.g., a downtown duty-free shop).

b. Revenue from sponsor activities on the airport. Airport revenue

generally includes all revenue received by the sponsor for activities

conducted by the sponsor itself as airport owner and operator,

including revenue received:

i. From any activity conducted by the sponsor on airport property

acquired with Federal assistance;

ii. From any aeronautical activity conducted by the sponsor which

is directly connected to a sponsor's ownership of an airport subject to

49 U.S.C. Secs. 47107(b) or 47133; or

iii. From any nonaeronautical activity conducted by the sponsor on

airport property not acquired with Federal assistance, but only to the

extent of the fair rental value of the airport property. The fair

rental value will be based on the fair market value.

2. State or local taxes on aviation fuel (except taxes in effect on

December 30, 1987) are considered to be airport revenue subject to the

revenue-use requirement. However, revenues from state taxes on aviation

fuel may be used to support state aviation programs or for noise

mitigation purposes, on or off the airport.

3. While not considered to be airport revenue, the proceeds from

the sale of land donated by the United States or acquired with Federal

grants must be used in accordance with the agreement between the FAA

and the sponsor. Where such an agreement gives the FAA discretion, FAA

may consider this policy as a relevant factor in specifying the

permissible use or uses of the proceeds.

C. Unlawful Revenue Diversion

Unlawful revenue diversion is the use of airport revenue for

purposes other than 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, when the use is not

``grandfathered'' under 49 U.S.C. Sec. 47107(b)(2). When a use would be

diversion of revenue but is grandfathered, the use is considered lawful

revenue diversion. See Section VI, Prohibited Uses of Airport Revenue.

D. Airport Sponsor

The airport sponsor is the owner or operator of the airport that

accepts Federal assistance and executes grant agreements or other

documents required for the receipt of Federal assistance.

Section III--Applicability of the Policy

A. Policy and Procedures on the Use of Airport Revenue and State or

Local Taxes on Aviation Fuel

1. With respect to the use of airport revenue, the policies and

procedures in the Policy Statement are applicable to all public

agencies that have received a grant for airport development since

September 3, 1982, under the Airport and Airway Improvement Act of 1982

(AAIA), as amended, recodified without substantive change by Public Law

103-272 (July 5, 1994) at 49 Sec. U.S.C. 47101, et seq., and which had

grant obligations regarding the use of airport revenue in effect on

October 1, 1996 (the effective date of the FAA Authorization Act of

1996). Grants issued under that statutory authority are commonly

referred to as Airport Improvement Program (AIP) grants. The Policy

Statement applies to revenue uses at such airports even if the sponsor

has not received an AIP grant since October 1, 1996.

2. With respect to the use of state and local taxes on aviation

fuel, this Policy Statement is applicable to all public agencies that

have received an AIP development grant since December 30, 1987, and

which had grant obligations regarding the use of state and local taxes

on aviation fuel in effect of October 1, 1996.

3. Pursuant to 49 U.S.C. Sec. 47133, this Policy Statement applies

to any airport for which Federal assistance has been received after

October 1, 1996, whether or not the airport owner is subject to the

airport revenue-use grant assurance, and applies to any airport for

which the airport revenue-use grant obligation is in effect on or after

October 1, 1996. Section 47133 does not apply to an airport that has

received Federal assistance prior to October 1, 1996, and does not have

AIP airport development grant assurances in effect on that date.

4. Requirements regarding the use of airport revenue applicable to

a particular airport or airport operator on or after October 1, 1996,

as a result of the provisions of 49 U.S.C. Sec. 47133, do not expire.

5. The FAA will not reconsider agency determinations and

adjudications dated prior to the date of this Policy Statement, based

on the issuance of this Policy Statement.

B. Policies and Procedures on the Requirement for a Self-Sustaining

Airport Rate Structure

1. These policies and procedures apply to the operators of publicly

owned airports that have received an AIP development grant and that

have grant obligations in effect on or after the effective date of this

policy.

2. Grant assurance obligations regarding maintenance of a self-

sustaining airport rate structure in effect on or after the effective

date of this policy apply until the end of the useful life of each

airport development project or 20 years, whichever is less, except

obligations under a grant for land acquisition, which do not expire.

C. Application of the Policy to Airport Privatization

1. The Airport Privatization Pilot Program, codified at 49 U.S.C.

Sec. 47134, provides for the sale or lease of general aviation airports

and the lease of air carrier airports. Under the program, the FAA is

authorized to exempt up to five airports from Federal statutory and

regulatory requirements governing the use of airport revenue. The FAA

can exempt an airport sponsor from its obligations to repay Federal

grants, in the event of a sale, to return property acquired with

Federal assistance and to use the proceeds of the sale or lease

exclusively for airport purposes. The exemptions are subject to a

number of conditions.

2. Except as specifically provided by the terms of an exemption

granted under the Airport Privatization Pilot

[[Page 7717]]

Program, this policy statement applies to a privatization of airport

property and/or operations.

3. For airport privatization transactions not subject to an

exemption under the Pilot Program:

FAA approval of the sale or other transfer of ownership or control,

of a publicly owned airport is required in accordance with the AIP

sponsor assurances and general government contract law principles. The

proceeds of a sale of airport property are considered airport revenue

(except in the case of property acquired with Federal assistance, the

sale of which is subject to other restrictions under the relevant grant

contract or deed). When the sale proposed is the sale of an entire

airport as an operating entity, the request may present the FAA with a

complex transaction in which the disposition of the proceeds of the

transfer is only one of many considerations. In its review of such a

proposal, the FAA would condition its approval of the transfer on the

parties' assurances that the proceeds of sale will be used for the

purposes permitted by the revenue-use requirements of 49 U.S.C.

Secs. 47107(b) and 47133. Because of the complexity of an airport sale

or privatization, the provisions for ensuring that the proceeds are

used for the purposes permitted by the revenue-use requirements may

need to be adapted to the special circumstances of the transaction.

Accordingly, the disposition of the proceeds would need to be

structured to meet the revenue-use requirements, given the special

conditions and constraints imposed by the fact of a change in airport

ownership. In considering and approving such requests, the FAA will

remain open and flexible in specifying conditions on the use of revenue

that will protect the public interest and fulfill the objectives and

obligations of revenue-use requirements, without unnecessarily

interfering with the appropriate privatization of airport

infrastructure.

4. It is not the intention of the FAA to effectively bar airport

privatization initiatives outside of the pilot program through

application of the statutory requirements for use of airport revenue.

Proponents of a proposed privatization or other sale or lease of

airport property clearly will need to consider the effects of Federal

statutory requirements on the use of airport revenue, reasonable fees

for airport users, disposition of airport property, and other policies

incorporated in Federal grant agreements. The FAA assumes that the

proposals will be structured from the outset to comply with all such

requirements, and this proposed policy is not intended to add to the

considerations already involved in a transfer of airport property.

Section IV--Statutory Requirements for the Use of Airport Revenue

A. General Requirements, 49 U.S.C. Secs. 47107(b) and 47133

1. The current provisions restricting the use of airport revenue

are found at 49 U.S.C. Secs. 47107(b), and 47133. Section 47107(b)

requires the Secretary, prior to approving a project grant application

for airport development, to obtain written assurances regarding the use

of airport revenue and state and local taxes on aviation fuel. Section

47107(b)(1) requires the airport owner or operator to provide

assurances that local taxes on aviation fuel (except taxes in effect on

December 30, 1987) and the revenues generated by a public airport will

be expended for the capital or operating costs of--

a. The airport;

b. The local airport system; or

c. 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.

B. Exception for Certain Preexisting Arrangements (Grandfather

Provisions)

Section 47107(b)(2) provides an exception to the requirements of

Section 47107(b)(1) for airport owners or operators having certain

financial arrangements in effect prior to the enactment of the AAIA.

This provision is commonly referred to as the ``grandfather''

provision. It states:

Paragraph (1) of this subsection does not apply if a provision

enacted not later than September 2, 1982, in a law controlling

financing by the airport owner or operator, or a covenant or

assurance in a debt obligation issued not later than September 2,

1982, by the owner or operator, provides that the revenues,

including local taxes on aviation fuel at public airports, from any

of the facilities of the owner or operator, including the airport,

be used to support not only the airport but also the general debt

obligations or other f

This text is long and has been trimmed here. Open the source document for the complete record.