# Policy and Procedures Concerning the Use of Airport Revenue

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URL: https://www.frixlaw.com/law-library/documents/fr%3A99-3529

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** February 16, 1999
- **Citation:** 64 FR 7696

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-3529. Public record. Not legal advice.