Airport Improvement Program: Better Management Needed for Funds Provided Under Letters of Intent -- GAO/RCED-94-100



Airport Improvement Program: Better Management Needed for Funds  
  
Under the Airport Improvement Program, the Federal Aviation  
Administration (FAA) funds airport improvement projects. FAA can provide  
either grants or letters of intent, which document FAA's intent to  
obligate the money in future years, subject to authorization and  
appropriations. Between fiscal years 1988 and 1993, FAA issued letters  
of intent worth more than $2 billion, including nearly $1.5 billion that  
FAA plans to obligate in fiscal years 1994-2005. FAA is required to  
limit letters of intent to projects that significantly enhance  
systemwide airport capacity. FAA must also plan disbursements under  
letters of intent so that enough funds are available for other necessary  
airport improvements. This report (1) provides a profile of the letters  
of intent that FAA has issued and (2) discusses whether FAA has  
effectively managed the use of letters of intent.  
  
--------------------------- Indexing Terms -----------------------------  
  
 REPORTNUM:  RCED-94-100  
     TITLE:  Airport Improvement Program: Better Management Needed for   
             Funds Provided Under Letters of Intent  
      DATE:  02/02/94  
   SUBJECT:  Commercial aviation  
             Federal aid for transportation  
             Funds management  
             Grant administration  
             Discretionary grants  
             Future budget projections  
             Airports  
             Regulatory agencies  
IDENTIFIER:  FAA Airport Improvement Program  
             Military Airport Program  
             Denver International Airport (CO)  
             Steamboat Springs Airport (CO)  
             Chess-Lamberton Airport (PA)  
             Detroit Metropolitan Wayne County Airport (Detroit, MI)  
             Cincinnati-Northern Kentucky International Airport  
             Theodore F. Green State Airport (RI)  
             FAA Aviation System Capacity Plan  
             Nashville International Airport (TN)  
             Raleigh-Durham Airport (Raleigh-Durham, NC)  
             Golden Triangle Regional Airport (MS)  
             Reno Cannon International Airport (NV)  
               
**************************************************************************  
* This file contains an ASCII representation of the text of a GAO        *  
* report.  Delineations within the text indicating chapter titles,       *  
* headings, and bullets are preserved.  Major divisions and subdivisions *  
* of the text, such as Chapters, Sections, and Appendixes, are           *  
* identified by double and single lines.  The numbers on the right end   *  
* of these lines indicate the position of each of the subsections in the *  
* document outline.  These numbers do NOT correspond with the page       *  
* numbers of the printed product.                                        *  
*                                                                        *  
* No attempt has been made to display graphic images, although figure    *  
* captions are reproduced. Tables are included, but may not resemble     *  
* those in the printed version.                                          *  
*                                                                        *  
* A printed copy of this report may be obtained from the GAO Document    *  
* Distribution Facility by calling (202) 512-6000, by faxing your        *  
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *  
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *  
* for printed documents at this time.                                    *  
**************************************************************************  
  
  
Cover  
======================================= COVER
  
  
Report to the Chairman, Subcommittee on Transportation and Related  
Agencies, Committee on Appropriations, U.S.  Senate  
  
February 1994  
  
AIRPORT IMPROVEMENT PROGRAM -  
BETTER MANAGEMENT NEEDED FOR FUNDS  
PROVIDED UNDER  
LETTERS OF INTENT  
  
GAO/RCED-94-100  
  
AIP Letters of Intent  
  
  
Abbreviations  
====================================== ABBREV
  
  AIP - Airport Improvement Program  
  FAA - Federal Aviation Administration  
  GAO - General Accounting Office  
  LOI - letter of intent  
  
Letter  
====================================== LETTER  
  
  
B-256001  
  
February 2, 1994  
  
The Honorable Frank R.  Lautenberg  
Chairman, Subcommittee on Transportation  
 and Related Agencies  
Committee on Appropriations  
United States Senate  
  
Dear Mr.  Chairman:   
  
Under the Airport Improvement Program, the Federal Aviation  
Administration (FAA) funds projects to improve the nation's airport  
system.  FAA can provide program funds under either grants or letters  
of intent, which document FAA's intent to obligate the funds in  
future years, subject to authorization and appropriations.  Between  
fiscal years 1988 and 1993, FAA issued letters of intent worth over  
$2 billion, including about $1.43 billion that FAA plans to obligate  
in fiscal years 1994-2005.  Letters of intent provide attractive  
options not available with grants, such as the ability to draw  
multiyear funding from all three of the program's funding categories  
(entitlement, set-aside, and discretionary funds) and to schedule  
disbursements beyond the program's current authorization period.  In  
fiscal year 1993, the program's authorization period was 1 year, so  
airports have come to rely more on letters of intent.   
  
FAA is required by statute to limit letters of intent to projects  
that significantly enhance systemwide airport capacity.  The statute  
also requires FAA to plan disbursements under letters of intent so  
that enough funds are available for other necessary airport  
improvements.  Your Subcommittee wished to know whether FAA had met  
these requirements and asked us to evaluate how FAA has used letters  
of intent.  As agreed with the Subcommittee, this report (1) provides  
a profile of the letters of intent that FAA has issued and (2)  
discusses whether FAA has effectively managed the use of letters of  
intent.   
  
  
   RESULTS IN BRIEF  
------------------------------------------------------------ Letter :1  
  
FAA has increasingly used letters of intent to provide funding under  
the Airport Improvement Program.  Of the 49 letters of intent issued  
between fiscal years 1988 and 1993, one-third were awarded in fiscal  
year 1993.  Also, in each fiscal year from 1988 through 1993, both  
the total amount of program funds and the percentage of total  
obligations used for disbursements under letters of intent increased.   
For example, letter-of-intent disbursements as a percentage of total  
program obligations jumped from 2 percent in fiscal year 1988 to 12  
percent in fiscal year 1993.  Furthermore, comparing 6-year periods,  
letter-of-intent disbursements are scheduled to increase from the  
$628 million actually paid in fiscal years 1988-93 to $1.28 billion  
in fiscal years 1994-99.  The total amount could increase if FAA  
awards additional letters of intent.  Even after accounting for  
anticipated inflation, the scheduled letter-of-intent disbursements  
represent a substantial increase in real funding.   
  
In two respects, FAA could have more effectively managed the use of  
letters of intent.  First, while most letter-of-intent commitments  
were for projects to improve capacity, FAA did not ensure that  
letters of intent were used only to significantly enhance systemwide  
capacity, as required by statute.  FAA did not establish criteria  
defining a "significant" enhancement by which to evaluate and approve  
letter-of-intent proposals.  Nor has the agency, as requested by the  
Congress in 1987, established goals and performance measures for the  
program, including a goal for improving systemwide capacity on which  
to base criteria for letters of intent.  Furthermore, although agency  
officials stated that they considered effects on capacity at  
individual airports and regional airport systems when reviewing  
letter-of-intent proposals, we found only one case in which they  
analyzed how a project funded under a letter of intent would affect  
the national airport system.  FAA also issued letters of intent for  
some projects that clearly could not significantly enhance systemwide  
capacity.  For example, FAA approved letters of intent for projects  
to construct water treatment facilities and access roads at two major  
airports and for projects at eight small airports where fewer than  
one-tenth of 1 percent of all U.S.  passengers are enplaned annually.   
Agency officials told us that they expanded the use of letters of  
intent in these cases because the program's authorization period was  
nearing expiration and multiyear grants could not be used.  However,  
FAA did not seek congressional approval to use letters of intent in  
this manner.   
  
Second, while FAA carried out the statutory planning requirement, the  
agency made incorrect assumptions about the program's future funding  
levels.  In 1992, FAA determined that letter-of-intent commitments  
should be limited to half of the discretionary funds available for  
letters of intent at the beginning of each fiscal year.  This  
approach would, in the view of FAA officials, preserve a reasonable  
level of discretionary funds for other airport improvement needs.   
FAA had met earlier planning goals and met the current goal in fiscal  
years 1992 and 1993.  However, the agency may not meet its goal in  
fiscal years 1994 and 1995.  The discretionary funds available for  
letter-of-intent disbursements at the beginning of the fiscal year  
decreased from fiscal year 1992 to fiscal year 1993 and may decrease  
further.  At the same time, the commitments under letters of intent  
are at a higher level.  Under these circumstances, FAA may have fewer  
discretionary funds available to meet the immediate needs of the  
national airport system.  More conservative assumptions about the  
program's future funding levels could help the agency better plan  
commitments under letters of intent.   
  
  
   BACKGROUND  
------------------------------------------------------------ Letter :2  
  
The Airport and Airway Improvement Act of 1982 created the Airport  
Improvement Program (AIP) to provide grants for airport improvement  
projects, including projects that would increase airport capacity.   
Increasing airport capacity is one way to reduce aircraft delays and  
better accommodate passenger and cargo traffic.  According to FAA,  
aircraft delays exceeded 20,000 hours at each of 23 major airports in  
1991.  FAA estimates that 33 major airports could experience delays  
at this level by the year 2002 if no improvements in capacity are  
made.   
  
Depending on the project approved, single-year grants and funding for  
the initial year of multiyear grants can be made from all three AIP  
funding categories:  entitlement, set-aside, and discretionary funds.   
After the initial year, multiyear grants can be made only with  
entitlement funds.  In addition, grants cannot extend beyond the  
AIP's authorization period.  FAA distributes entitlement funds by  
formula to specific airports and states.  Set-aside and discretionary  
funds are distributed by type of project to any eligible airport  
sponsor.\1 Set-aside subcategories include reliever airports,  
nonprimary commercial service airports, airport noise compatibility  
programs, integrated airport system plans, and the Military Airport  
Program.  A congressionally mandated percentage of total AIP funds is  
allocated to each set-aside subcategory.  The remaining AIP funds are  
discretionary.  At the level authorized for fiscal year 1993,  
entitlement funds accounted for 56 percent, set-aside funds for 28  
percent, and discretionary funds for 16 percent of the total $1.8  
billion in AIP funds.   
  
The Airport and Airway Safety and Capacity Expansion Act of 1987  
established letters of intent (LOI) to support projects at primary  
and reliever airports that would significantly enhance systemwide  
airport capacity.\2 While airport sponsors must promise to comply  
with all AIP grant requirements while working on the projects, LOIs  
allow them to begin project development sooner and receive multiyear  
funding from all of the program's funding categories.  Thus, instead  
of waiting to receive a grant before beginning a project, an airport  
sponsor with an LOI can begin work using other funding sources, such  
as bonds or short-term loans, and receive reimbursement as the  
project progresses or after it is completed.  And because LOIs can  
draw multiyear funding from all three funding categories, more funds  
can be provided to some eligible projects.\3 Additionally, in 1988  
the Congress authorized FAA to issue LOIs with commitments scheduled  
beyond the date when the program's authorization expired so that  
funds could be spread out over longer periods.  As noted above,  
single-year and multiyear AIP grants do not provide these options.   
Under the 1987 act, FAA began issuing LOIs in fiscal year 1988.   
  
An LOI documents FAA's intent to obligate AIP funds on an established  
schedule.  However, an LOI is not an obligation of federal funds and  
is subject to authorization and appropriations.  LOIs also state that  
FAA may adjust the LOI disbursement schedule, disbursement amount, or  
both following consultation with the airport sponsor.  Such  
adjustments may be made if the project's actual allowable costs or  
completion time changes, FAA's actual or estimated future authority  
to obligate funds changes, or the FAA Administrator determines such  
changes to be in the best interest of the United States.   
  
  
--------------------  
\1 The airport sponsor is the public agency or private entity that  
owns or operates the airport.   
  
\2 Primary airports are publicly owned airports that enplane more  
than 10,000 passengers annually and receive scheduled air  
transportation service.  Reliever airports are airports that FAA has  
designated to reduce congestion at primary airports.  According to  
FAA, as of January 1994 there were 423 primary airports and 290  
reliever airports out of a total of 3,294 public-use airports  
eligible for AIP funds.   
  
\3 Set-aside funds committed under LOIs must be used for their  
intended purpose (e.g., airport noise compatibility programs).   
  
  
   USE OF LOI COMMITMENTS HAS  
   INCREASED  
------------------------------------------------------------ Letter :3  
  
FAA issued 49 LOIs worth over $2 billion for projects at 39 primary  
and 5 reliever airports between fiscal years 1988 and 1993.  Three  
primary airports each received two LOIs and one received three.   
One-third of the LOIs were awarded in fiscal year 1993--most drawing  
only on entitlement funds.  Of the 49 LOIs, 23 (47 percent) were  
issued in FAA's Southern Region and 22 (45 percent) were issued in  
four regions--the Eastern, Great Lakes, Southwest, and  
Western-Pacific.  At least one LOI was issued in eight of FAA's nine  
regions; none was issued in the Alaskan Region.   
  
Funding amounts and disbursement schedules for LOIs vary widely.   
Specifically, LOI commitments ranged from a high of $351 million in  
entitlement and discretionary funds for the new Denver International  
Airport to a low of about $400,000 in entitlement funds for the  
Steamboat Springs (Colorado) Airport and for the Chess-Lamberton  
(Pennsylvania) Airport.  LOI disbursement schedules ranged from 1 to  
15 years.  Through fiscal year 1993, FAA had paid all LOI commitments  
in full as scheduled, including final disbursements for nine LOIs.   
Final disbursements are scheduled for seven LOIs in fiscal year 1994  
and eight LOIs in fiscal year 1995 if funding is appropriated.   
Appendix I lists the 49 LOIs by airport, funding amount, and years of  
disbursements.   
  
LOI disbursements have increased significantly, growing nearly  
eightfold from $27.7 million in fiscal year 1988 ($34.1 million in  
fiscal year 1993 constant dollars) to $218.3 million in fiscal year  
1993.  Also, as of January 1994, LOI disbursements were scheduled to  
double from a total of $628 million in the 6 fiscal years 1988-93 to  
a total of about $1.28 billion in the 6 fiscal years 1994-99.  After  
expected inflation is taken into account, this represents an increase  
of 77 percent.  Furthermore, FAA can issue additional LOIs that could  
increase the total amount of scheduled disbursements.  Figure 1 shows  
the total actual and scheduled LOI disbursements by fiscal year.   
  
   Figure 1:  Total Actual and  
   Scheduled LOI Disbursements by  
   Fiscal Year, as of January 1994  
  
   (See figure in printed  
   edition.)  
  
Source:  FAA.   
  
LOI disbursements constitute an increasing percentage of total AIP  
obligations.  For example, LOI disbursements jumped from 2 percent of  
total AIP obligations in fiscal year 1988 to 12 percent in fiscal  
year 1993.  Cumulatively, LOI disbursements account for $628 million  
(6 percent) of the total $9.8 billion in AIP funds obligated during  
fiscal years 1988-93.  Figure 2 shows the percentage of total AIP  
obligations used for LOI disbursements by fiscal year.   
  
   Figure 2:  LOI Disbursements as  
   a Percentage of Total AIP  
   Obligations by Fiscal Year  
  
   (See figure in printed  
   edition.)  
  
Note:  The projection of the percentage for 1994 is based on FAA's  
estimate of $1.75 billion in total AIP obligations in that fiscal  
year.   
  
Source:  FAA.   
  
We believe there are two main reasons for the increased use of LOIs.   
First, LOIs allow sponsors to receive commitments for set-aside and  
discretionary funds and avoid having to compete with other sponsors  
for these funds in future years.  Second, LOIs are more flexible than  
AIP single-year or multiyear grants.  The flexibility in disbursement  
periods and funding sources is particularly important in facilitating  
project development.  This flexibility allows sponsors to plan and  
arrange financing for a project and either borrow funds or use bond  
financing, with the expectation that federal funds will be made  
available.   
  
Of the 49 LOIs, 41 (84 percent) included disbursements scheduled  
beyond the AIP's authorization period.  Additionally, 16 (33 percent)  
included disbursements scheduled over 6 or more years.  Such  
disbursement schedules would not have been possible with a multiyear  
grant because the AIP's authorization period was 5 years when FAA  
first began issuing LOIs in 1988 and 1 year in fiscal year 1993.\4  
  
In contrast, the longest disbursement schedule for an LOI extends  
over a 15-year period, through the year 2005, for the Detroit  
Metropolitan-Wayne County Airport.   
  
Of the 49 LOIs, 27 (55 percent) were funded from more than one AIP  
funding category.  For example, the LOI for $88.5 million to the  
sponsor of the Cincinnati/Northern Kentucky International Airport  
included $51.8 million in discretionary funds, $22 million in  
set-aside funds for the airport noise compatibility program, and  
$14.7 million in entitlement funds.  Appendix II lists the total  
actual and scheduled LOI disbursements by fiscal year and funding  
category.   
  
The LOIs issued to primary airports total about $1.85 billion and  
include entitlement funds, set-aside funds for airport noise  
compatibility programs, and discretionary funds.  The LOIs issued to  
reliever airports total about $200 million and include entitlement  
funds and set-aside funds for reliever airports and the Military  
Airport Program.  Figure 3 shows the percentage of total LOI  
commitments by funding category.   
  
   Figure 3:  Percentage of Total  
   LOI Commitments by AIP Funding  
   Category  
  
   (See figure in printed  
   edition.)  
  
Note:  The percentages are based on $2.054 billion in LOI commitments  
as of January 1994.   
  
Source:  FAA.   
  
  
--------------------  
\4 The AIP expired on September 30, 1993.  As of January 1994, the  
Congress had not reauthorized the program.   
  
  
   FAA COULD HAVE BETTER MANAGED  
   LOI COMMITMENTS  
------------------------------------------------------------ Letter :4  
  
Although most LOI commitments were for capacity projects, FAA did not  
ensure that LOIs were used only to significantly enhance systemwide  
capacity, as the 1987 act requires.  FAA did not establish criteria  
defining a "significant" enhancement and evaluate LOI proposals  
against such criteria.  Without a measurable way to evaluate LOI  
proposals, it is not clear how LOI-funded projects affect the  
national airport system.   
  
In compliance with the statutory planning requirement, FAA set goals  
to ensure that a reasonable level of funds would be available for  
other needs after meeting LOI commitments.  FAA's current goal, set  
in 1992, limits LOI commitments to 50 percent of the AIP  
discretionary funds available at the beginning of the fiscal year.   
FAA met its planning goals before fiscal year 1994.  However, FAA  
officials assumed that discretionary funding would not decrease and  
scheduled LOI commitments accordingly.  As a result, lower funding  
levels in fiscal years 1994 and 1995 may cause the agency to exceed  
its goal.  Anticipating lower funding levels in fiscal year 1994, FAA  
officials made adjustments to decrease the LOI commitments that draw  
on discretionary funds.   
  
  
      FAA DID NOT ENSURE THAT  
      LOI-FUNDED PROJECTS  
      SIGNIFICANTLY ENHANCE  
      SYSTEMWIDE CAPACITY  
---------------------------------------------------------- Letter :4.1  
  
Most LOI commitments were for projects directly related to capacity.   
According to FAA's selection criteria for these projects, the only  
ones that may directly affect system capacity are those to construct  
or acquire new airports, or to construct, alter, or repair runways,  
taxiways, and aprons at existing airports.  FAA provided about $1.81  
billion in LOI commitments, generally with discretionary and  
set-aside funds, for such projects.  FAA also provided about $206  
million in LOI commitments, generally with entitlement funds, for  
associated projects such as constructing terminal buildings, access  
roads, and drainage ditches; purchasing rescue, firefighting, and  
snow removal equipment; and installing taxiway signs and fencing,  
among others.  For example, the LOI issued for improvements at  
Theodore F.  Green State Airport in Rhode Island included  
discretionary funds to construct taxiways and aprons and entitlement  
funds to construct a new terminal building, among other improvements.   
Of the 49 LOIs, 30 (61 percent) were issued to airports ranked in the  
top 100 of all primary airports for passenger enplanements in 1992  
and included projects directly related to capacity enhancement.\5  
  
While most LOI commitments were for capacity projects, FAA did not  
ensure that LOIs were used only to significantly enhance systemwide  
capacity, as the 1987 act requires, for three reasons.  First,  
although the Congress allowed FAA to define significant enhancement,  
the agency has not done so.  Nor have FAA officials established goals  
for the AIP, as requested by the Congress in 1987, including a goal  
for improving the nation's airport system capacity.  Such a goal  
could provide a basis for defining a "significant" enhancement of  
systemwide capacity.\6 For example, FAA could set a goal of reducing  
aircraft delays nationally by 50,000 hours and, for the purpose of  
awarding LOIs, define a significant capacity enhancement as one that  
reduces aircraft delays nationally by at least 1,000 hours annually.   
  
Second, FAA officials did not use the agency's selection criteria for  
capacity projects or any other criteria to analyze a project's  
potential effect on systemwide capacity, with the exception of the  
new Denver International Airport.\7  
  
Generally, in determining which projects should receive LOIs, agency  
officials relied on information provided by airport system and master  
plans and FAA's Aviation System Capacity Plan.\8 These plans consider  
a project's potential to enhance the capacity of an individual  
airport or a regional airport system.   
  
Third, FAA issued 10 LOIs worth over $35 million, using entitlement  
funds, for projects that clearly could not significantly enhance  
systemwide capacity.  FAA officials told us that these LOIs were  
issued because the AIP authorization period was nearing expiration  
and multiyear grants, which provide multiyear funding using only  
entitlement funds, could not be used.  These LOIs were for projects  
at (1) two major airports that were only undertaking improvements not  
related to capacity and (2) eight primary airports too small to have  
a significant effect on the national system regardless of the  
improvements.  For example, Nashville International Airport received  
an LOI to construct water quality and drainage treatment facilities.   
Additionally, Raleigh-Durham International Airport received an LOI to  
connect airport access roads with nearby interstate highways.  The  
eight small primary airports were not ranked in the nation's top 150  
airports for passenger enplanements.  Furthermore, each of the  
airports accounted for fewer than one-tenth of 1 percent of all  
annual passenger enplanements in the United States.  For example, FAA  
issued LOIs to Chess-Lamberton Airport in Pennsylvania and Golden  
Triangle Regional Airport in Mississippi; Chess-Lamberton had 10,165  
enplanements in 1992 and ranked 416th among 423 primary airports, and  
in the same year, Golden Triangle Regional Airport had about 50,000  
enplanements and ranked 269th among primary airports.  In contrast,  
over 250,000 passengers were enplaned at the airport ranked 150th for  
enplanements among the nation's airports in 1992.   
  
FAA officials recognize that the agency could better manage how LOIs  
are used and acknowledge that some LOIs have been issued for projects  
that do not significantly enhance systemwide capacity.  These  
officials stated that both FAA headquarters and field officials view  
their role as that of advocates for airport development who have used  
LOIs when, in their judgment, it was the best way to provide funding.   
FAA officials also acknowledged that awarding LOIs for projects that  
do not enhance systemwide capacity sets a precedent and makes it  
difficult for FAA to deny LOIs for the same types of projects to  
other airport sponsors.   
  
Because FAA officials are concerned with better focusing limited  
resources, the agency has chartered a task force to review the  
process used to evaluate and approve LOI proposals and to recommend  
changes.  In March 1994, FAA plans to publish proposed new LOI  
requirements in the Federal Register, with a 60-day comment period.   
FAA plans to issue the final new requirements by June 1994.   
  
Despite the eligibility requirements in the 1987 act, FAA did not  
propose legislative changes to the AIP that would allow the agency to  
issue LOIs for projects with objectives other than significantly  
enhancing systemwide capacity.  While systemwide capacity development  
was viewed as a top priority to be facilitated with LOIs in 1987, FAA  
may now believe that other types of projects need to be facilitated  
with LOIs.  However, FAA is not in the best position to advise the  
Congress on possible changes in the program, including changes to  
when LOIs can be used, because the agency has not developed goals and  
performance measures for the AIP, as requested by the Congress in  
1987.  Such goals and performance measures could provide focus and  
direction for the AIP and form a basis for tracking the program's  
accomplishments.  Furthermore, clear goals and information about  
progress in meeting these goals could help FAA justify expanding the  
use of LOIs.   
  
  
--------------------  
\5 Enplaned passengers are the revenue-producing passengers boarding  
aircraft.   
  
\6 We discussed the need for FAA to establish goals in our testimony  
Airport Improvement Program:  Opportunity to Consider FAA's Role in  
Meeting Airport System Needs (GAO/T-RCED-93-43, May 26, 1993).   
  
\7 The selection criteria for capacity projects are identified in  
FAA's AIP Handbook (Order 5100.38A, app.  25).  These are the  
criteria developed for selecting capacity projects under section  
507(c)(3) of the Airport and Airway Improvement Act of 1982.  That  
section was incorporated by reference and made a part of the 1987  
act's provision on LOIs.   
  
\8 Airport system plans identify the aviation facilities required to  
meet the air transportation needs of a state, region, or metropolitan  
area.  Airport master plans identify the development necessary at  
individual airports on the basis of 5-, 10-, and 20-year forecasts of  
aviation activity, environmental and community compatibility, and  
financial feasibility.  FAA's Aviation System Capacity Plan shows the  
magnitude of delays at the nation's top 100 airports for  
enplanements.  It also catalogs and summarizes programs that have the  
potential to enhance capacity and reduce delays at each airport.   
  
  
      LOI PLANNING ASSUMPTIONS MAY  
      LIMIT FAA'S FUTURE  
      FLEXIBILITY WITH  
      DISCRETIONARY FUNDS  
---------------------------------------------------------- Letter :4.2  
  
To provide funding flexibility, the 1987 act requires FAA to plan LOI  
disbursements on the basis of its estimate of (1) the total AIP funds  
in future years and (2) the amount of these funds that FAA determines  
will be needed for projects not funded under LOIs.  Such planning is  
critical because there are always more eligible projects than the  
available AIP funding can support.  Also, FAA must be prepared to  
meet unanticipated airport funding needs.  For example, following  
fatal airplane crashes, airports have been required to install  
additional security systems and new runway signs.   
  
In 1992, FAA set an internal planning goal of limiting LOI  
commitments to no more than 50 percent of the discretionary funds  
available at the beginning of the fiscal year.  This approach would,  
in the view of FAA officials, preserve a reasonable level of AIP  
funds for other airport improvement needs.  FAA set a limit only on  
the use of discretionary funds because (1) LOI disbursements do not  
constitute a significant portion of set-aside funds and (2) the  
allocation of entitlement funds is determined by formula.  FAA met  
earlier planning goals and the current goal in fiscal years 1992 and  
1993.   
  
On the basis of historical AIP funding levels and budget projections  
for the future, FAA officials assumed that discretionary funding  
levels would not decrease.  Authorized funding levels for the AIP  
quadrupled from $450 million in fiscal year 1982 to $1.9 billion in  
fiscal year 1992, with corresponding increases in discretionary  
funds.  Although there was substantial inflation during this period,  
even in constant dollars this represents an increase of about 183  
percent.  At the 1992 AIP funding level, the percentage of  
discretionary funds available for LOI disbursements in fiscal years  
1994 and 1995 would be below the goal FAA set.   
  
However, fiscal year 1993 discretionary funds decreased sharply from  
the 1992 level.  Specifically, from fiscal year 1992 to 1993, the  
discretionary funds available for LOI disbursements at the beginning  
of the fiscal year dropped 25 percent, from $411 million to $307  
million.\9 This decrease occurred for two reasons.  First, the fiscal  
year 1993 AIP appropriation set the total funding level at $100  
million below the fiscal year 1992 level.  Second, the AIP  
authorization allocated a greater proportion of total funds to  
entitlements for cargo airports and set-asides for airport noise  
compatibility programs and the Military Airport Program.  According  
to FAA officials, such changes in AIP funding make long-term planning  
for LOI commitments difficult.   
  
From fiscal year 1993 to 1994, the discretionary funding decreased  
again when AIP's total funding level dropped from $1.8 billion to  
$1.69 billion, as set by the Congress in the 1994 appropriation act.   
At this level, fiscal year 1994 LOI commitments will take 70 percent  
of the $227 million in discretionary funds available for LOI  
disbursements at the beginning of the fiscal year, assuming that the  
program is not amended during the pending AIP reauthorization  
process.\10 Figure 4 shows the percentage of discretionary funds  
available for LOI disbursements at the beginning of the fiscal year.   
  
   Figure 4:  LOI Disbursements as  
   a Percentage of Discretionary  
   Funds Available at the  
   Beginning of the Fiscal Year  
  
   (See figure in printed  
   edition.)  
  
Note:  The projections of the percentages for fiscal years 1994 and  
1995 are based on a $1.69 billion funding level and no amendments to  
the program.   
  
Source:  FAA.   
  
If all of the LOI commitments scheduled for fiscal year 1994 are  
paid, fewer discretionary funds will be available for new grants than  
FAA had anticipated.  As a result, FAA has less flexibility to use  
AIP funds to meet other immediate needs of the nation's airport  
system.  FAA has taken steps to decrease LOI commitments for  
discretionary funds in fiscal year 1994, including (1) paying $8  
million in fiscal year 1994 discretionary commitments with fiscal  
year 1993 funds, (2) negotiating with a sponsor to provide no  
discretionary funds in fiscal year 1994 and few funds in fiscal year  
1995, and (3) not approving two LOIs that would have drawn on  
discretionary funds.  According to FAA officials, the agency also has  
the option of deferring all or a portion of scheduled LOI  
disbursements in order to free up more discretionary funds.   
  
Most airport sponsors are not prepared for shortfalls in LOI  
disbursements.  Although an LOI is not an obligation of federal  
funds, airport officials told us that they expect LOI commitments to  
be paid in full as scheduled.  These officials told us that,  
generally, they had three options for covering a decrease in  
scheduled LOI disbursements in order to meet LOI-funded commitments:   
(1) stop the project, (2) delay the project, or (3) obtain  
replacement financing, which could increase development costs.   
  
Bond underwriters at a major firm told us that the investment  
community's confidence in using LOI disbursements exclusively to  
leverage investment-grade bonds would be undermined if the  
disbursements are not made in full as scheduled.  In part, bond  
rating agencies provided an investment-grade rating to LOI-backed  
bonds for the Reno Cannon International Airport's sponsor because FAA  
had established a record of meeting LOI disbursements in full as  
scheduled.\11  
  
The retirement of principal on the Reno Cannon International  
Airport's LOI-backed bonds is matched to its LOI disbursement  
schedule.  Bond underwriters told us that if FAA fails to provide LOI  
disbursements in full as scheduled, additional LOI-backed bonds would  
probably not receive an investment-grade rating, resulting in less  
favorable financing.   
  
  
--------------------  
\9 Generally, any unused entitlement funds are returned to FAA in the  
last quarter of the fiscal year and converted to discretionary  
funding that may be used for LOI commitments.  However, FAA does not  
schedule LOI disbursements that would be paid with those returned  
entitlement funds because (1) FAA does not know the amount of unused  
entitlement funds that will be returned and (2) LOI disbursements may  
be needed before the last quarter of the fiscal year.   
  
\10 As of January 1994, pending AIP reauthorization, the Congress had  
agreed to a funding level of $1.69 billion.  However, the Congress is  
considering two amendments to the program.  One amendment would  
increase discretionary funds; the other would increase entitlement  
funds and set-aside funds for integrated airport system plans.   
According to FAA's analysis, the discretionary funding level would  
range from about $206 million to $280 million, depending on whether  
the Congress declines to adopt the amendments, adopts only one of the  
amendments, or adopts both amendments.  At these levels, LOI  
commitments as a percentage of discretionary funding would range from  
57 to 77 percent.   
  
\11 As of January 1994, the Reno Cannon International Airport's  
sponsor is the only airport sponsor that has used LOI commitments  
exclusively to back bonds.   
  
  
   CONCLUSIONS  
------------------------------------------------------------ Letter :5  
  
FAA's increasing use of letters of intent underscores their  
importance as a tool for facilitating improvements to the nation's  
airport system.  However, FAA needs to better manage its use of  
letters of intent in two respects.  First, to clearly establish that  
it is complying with the 1987 act, FAA must analyze projects proposed  
for letters of intent on the basis of a definition of what  
constitutes a significant capacity enhancement.  Furthermore, despite  
a long-standing congressional request, FAA has not established goals  
and performance measures for the Airport Improvement Program.   
Program goals would help provide a clearer overview of the  
development needed to best improve the overall airport system.   
Performance measures would provide a method for reviewing the extent  
to which goals were being achieved.  Such information could also form  
a basis for considering the expanded use of letters of intent.   
  
Second, the agency made additional commitments under letters of  
intent expecting no decrease in funding levels.  But AIP funding  
decreased in fiscal year 1993 and may be set at a lower level in  
fiscal years 1994 and 1995.  As a result, fewer discretionary funds  
are available for projects not funded with letters of intent than FAA  
had anticipated.  Although future funding levels are difficult to  
predict, it would be prudent for FAA to make commitments under  
letters of intent on the basis of conservative assumptions about the  
program's discretionary funding levels--such as the lowest level in  
the last 5 years.  This conservative approach would give FAA greater  
assurance that any future cuts in discretionary funding would not  
affect (1) existing commitments under letters of intent or (2) FAA's  
ability to meet other airport improvement needs.   
  
  
   RECOMMENDATIONS  
------------------------------------------------------------ Letter :6  
  
To ensure that letters of intent are used in accordance with  
congressional direction, we recommend that the Secretary of  
Transportation direct the FAA Administrator to  
  
  set a timetable to establish a goal for improving systemwide  
     capacity and a definition of a significant capacity enhancement  
     in relation to this goal, and analyze projects proposed for  
     letters of intent against this goal and definition;  
  
  provide justification and obtain approval from the Congress if the  
     agency wants to expand the statutory criteria for the use of  
     letters of intent beyond projects that significantly enhance  
     systemwide capacity; and  
  
  plan commitments under letters of intent for each fiscal year on  
     the basis of more conservative assumptions about future  
     discretionary funding levels in the Airport Improvement Program.   
  
  
   AGENCY COMMENTS  
------------------------------------------------------------ Letter :7  
  
As requested, we did not obtain written comments on a draft of this  
report.  However, we discussed our findings and recommendations with  
FAA's Manager, Airports Financial Assistance Division, and Manager,  
Programming Branch, and with other Department of Transportation  
officials.  These officials provided us with some clarifying  
information, and we revised the text as necessary.  FAA officials  
generally agreed with our recommendations.  The agency's task force  
to revise LOI policy will address our concerns about ensuring that  
(1) LOIs are used only for projects that significantly enhance  
systemwide capacity and (2) an adequate level of discretionary funds  
is available.   
  
  
   SCOPE AND METHODOLOGY  
------------------------------------------------------------ Letter :8  
  
To address our objectives, we performed work at FAA headquarters in  
Washington, D.C.; FAA's Central Region in Kansas City, Missouri; and  
FAA's Southern Region in Atlanta, Georgia.  We interviewed FAA  
headquarters, regional, and field officials about the review and  
approval process for LOIs.  We also interviewed officials from the  
Airports Council International-North America and Air Transport  
Association.   
  
We reviewed agency regulations, policies, and procedures governing  
the use of LOIs.  We analyzed the LOIs that FAA issued in fiscal  
years 1988-93 and supporting documentation.  We also analyzed FAA's  
data base and other records on LOI funding.  In addition, we reviewed  
FAA's proposed new LOI policy.  To better understand the  
circumstances surrounding airport sponsors' requests for and use of  
LOIs, we interviewed officials from each of the 44 airports that  
received LOIs.   
  
We performed our review between February 1993 and January 1994 in  
accordance with generally accepted government auditing standards.   
  
  
---------------------------------------------------------- Letter :8.1  
  
As agreed with your office, unless you publicly announce its contents  
earlier, we plan no further distribution of this report until 30 days  
from the date of this letter.  At that time, we will send copies to  
appropriate congressional committees; the Secretary of  
Transportation; the Administrator, FAA; the Director, Office of  
Management and Budget; and other interested parties.  We will make  
copies available to others on request.   
  
This report was prepared under the direction of Kenneth M.  Mead,  
Director, Transportation Issues, who may be reached at (202)  
512-2834.  Other major contributors to this report are listed in  
appendix III.   
  
Sincerely yours,  
  
Keith O.  Fultz  
Assistant Comptroller General  
Click here for appendixes