Airport Governance and Ownership (2009)

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16 ft runway and a four-gate terminal building that is cur- rently under construction just south of Branson's com- mercial center.87 The private operators have been in negotiations with commercial airlines and, unconstrained by the Grant Assurances, are offering "initial development rights" (i.e., noncompete agreements) for particular city pairs.88 These "initial development rights" may make commer- cial service more likely by protecting the pioneer air- line(s) from competition for some period. The private operator of the Branson Airport is not using any federal funds or revenues from an existing airport. The airport opened in May 2009. The airport has announced agree- ments with Sun Country Airlines and Air Tran to provide service to Minneapolis, Milwaukee, and At- lanta. While it is unclear whether current turmoil in the economy and airline industry will affect this air- port, the Branson Airport certainly shows that it is pos- sible to secure approvals and financing for a purely pri- vate, for-profit airport. F. Conclusion State and federal law undeniably constrain the gov- ernance of commercial service airports. However, in general, neither state nor federal law meaningfully dis- tinguishes among governance models. Public entities operate airports pursuant to powers delegated by the state legislature and/or pursuant to limits set forth in the state constitution; however, very few courts have found that a particular action was be- yond a public entity’s delegated or reserved powers. Equally significant, airport authorities have an equally successful track record in suits contesting the particu- lar exercise of power. Where deemed necessary, the state legislature simply has changed state law to au- thorize a particular action. Federal law has a fundamentally different effect on airport governance. Rather than convey powers, federal law operates to, for example, bind public entities to long-term commitments in exchange for federal grant funding; regulate the operation of particular types of airports, such as through the airport operating certifi- cate and airport security program; and deny rights to public entities that otherwise might seek to intervene in airport operations and decision-making. As explored below, while federal law may create incentives and dis- incentives to take particular actions, such as seeking federal grant funding or transferring control to a pri- vate operator, federal law does not compel the use of any particular governance structure. 87 See Branson Airport Home Page, http://www.flybranson.com/about (Last visited May 4, 2009). 88 See Branson Airport, Branson Airport Background, http://www.flybranson.com/wp- content/downloadables/BransonAirportBackgrounder.doc (Last visited May 4, 2009). IV. TRANSFER AND DELEGATION OF POWER A. Forms of Transfer and Delegation As described in the preceding section, most public entities operating airports are imbued with sufficient powers under state law to operate an airport and satisfy their obligations under federal law. Public entities that have considered and implemented a transfer or delega- tion of power over an airport have done so not because of a lack of power but rather based on an indication or sense that the transfer or delegation would enable the airport to perform better. These transfers and delegations have taken many forms. Historically, several communities have trans- ferred power over airports from a general-purpose to a special-purpose entity. Prominent examples in recent decades include the creation and transfer of power to the Metropolitan Washington Airports Authority (1987), Allegheny County Airport Authority (1999), Wayne County Airport Authority (2002), and the San Diego County Regional Airport Authority (2003). The Louisiana legislature created the Southeast Regional Airport Authority in 2008 to potentially operate the Louis Armstrong New Orleans International Airport. Several other communities have looked closely at whether to transfer power to an airport authority, but either decided not to pursue such a transfer or have not yet made a final decision.89 As discussed further below, some transfers have been prompted by dramatic events and perceived needs. The Michigan Legislature created and transferred power to the Wayne County Airport Authority after a legislative committee identified “improper procedures for airport contracts, auditing discrepancies, a man- agement culture with questionable ethical conduct, and difficulties with the airport police.”90 The California leg- islature created the San Diego County Regional Airport Authority in large part to select a site and build a re- placement airport for the San Diego International Air- port, a feat that proved beyond the capacity of the pre- vious airport operator, the Unified Port District of San Diego (and so far has been beyond the Airport Author- ity’s reach as well). More commonly, general-purpose governments have transferred power to an airport authority when the air- port was perceived to be failing or in need of consider- able improvement. The individuals involved may have desired to limit the public entity’s financial responsibil- ity for a failing asset and, more optimistically, to help turn the airport around. This sentiment prompted the creation of the Allegheny County Airport Authority in 1999 and transfer of Pittsburgh International Airport. 89 App. D includes several reports prepared for or on behalf of public entities considering a change in governance structure. This list is not comprehensive. 90 Wayne County Bd. of Comm’rs v. Wayne County Airport Auth., 253 Mich. App. 144, 152, 658 N.W.2d 804, 813–14 (2002), citing Report of the Michigan Senate Detroit Metro Air- port Review Comm. (Oct. 25, 2001).

17 Historically, several airport authorities were created and assumed responsibility for airports under similar conditions, including the City of Naples Airport Author- ity (Florida). Privatization, as a means of transferring power over an airport, has received considerable attention.91 For present purposes, the legal framework for airport priva- tization can be summarized succinctly. • Although common internationally, privatization has not taken hold in the United States.92 Historically, the greatest disincentive to privatization was the prohi- bition on revenue diversion. Under the principles sum- marized above and explored further below, sale and lease proceeds generally would have to be recycled into the airport, as would any profits derived by the private operator. In a 1996 study, the U.S. General Accounting Office—now the Government Accountability Office— identified this prohibition and others as significant ob- stacles to privatization.93 • Congress attempted to address revenue diversion and other legal barriers to privatization by creating an Airport Privatization Pilot Program94 in the Federal Aviation Reauthorization Act of 1996.95 The statute au- thorizes the FAA to approve the lease of up to five air- ports, including one general aviation airport and, at most, one large hub airport. Under the statute: 1) air- port sponsors are exempt from the prohibition on reve- nue diversion upon receiving the consent of 65 percent of air carriers at a primary airport (by number of carri- ers and landed weight) or 65 percent of based aircraft owners at a nonprimary airport;96 2) airport sponsors are exempt from repaying past grants or returning property previously conveyed by the federal govern- ment;97 3) private operators are exempt from the prohi- bition on revenue diversion;98 and 4) fees charged to air carriers cannot increase faster than the rate of inflation unless a higher amount is approved by 65 percent of the air carriers (by number of carriers and landed weight).99 91 For further sources containing information and analysis of airport privatization, see App. D. 92 The myriad differences between the United States and most other countries in terms of airport operation and man- agement, and the resultant prospects for privatization, have been examined in detail by others. We commend readers to the scholarly articles on this subject listed in App. D. In short summary, most experts to consider this issue agree that air- ports in most other countries are structured in such a way that privatization is more likely to confer dramatic benefits than in the United States. 93 U.S. GEN. ACCOUNTING OFFICE, GAO/RCED-97-3, AIRPORT PRIVATIZATION: ISSUES RELATED TO THE SALE OR LEASE OF U.S. COMMERCIAL AIRPORTS (1996). 94 49 U.S.C. § 47134 (2006). 95 104 P.L. No. 264, 110 Stat. 3213. 96 Id. § 47134(b)(1)(A). 97 49 U.S.C. § 47134(b)(2) (2006). 98 Id. § 47134(b). 99 Id. § 47134(c)(4). • The FAA has published detailed application proce- dures, which entail a preliminary application to reserve one of the five spots in the program, selection of a pri- vate operator, coordination with airlines and other air- port users, a final application to the FAA, public com- ment, and a final decision by the FAA.100 To date, only one airport operator has received ap- proval to privatize under the Privatization Pilot Pro- gram. In 2000, the State of New York received FAA approval to lease the Stewart International Airport to the National Express Group (NEG). The terms of the 99-year lease included an initial payment of $35 mil- lion, plus lease payments beginning in year 10 of the lease totaling 5 percent of gross airport income. The state did not receive an exemption from the prohibition on revenue diversion and thus recycled the rent into Stewart and other state-operated airports. While the private operator generally performed satisfactorily, NEG transferred its leasehold interest to the Port Au- thority of New York and New Jersey in 2007 for $78.5 million. Airport operators filed preliminary applications in efforts to privatize the New Orleans Lakefront Airport (Louisiana), Niagara Falls International Airport (New York), Brown Field Municipal Airport (California), and Rafael Hernandez Airport (Puerto Rico). For a variety of reasons, each peculiar to the circumstances at the individual airport, the FAA either rejected these appli- cations or the airport operator withdrew the applica- tions. In 2004, the FAA reported to Congress on the status of the Privatization Pilot Program and explained the perceived reasons for the low participation in the pro- gram: First, local governments are reluctant to give up control of the airport to a private entity. Second, airlines have traditionally opposed airport privatization based on their perception that the loss of governmental control may pro- duce higher costs. Finally, and perhaps most importantly, the public sector has access to tax-exempt financing, and other low cost financing options that may not always be available to the private sector.101 The FAA likely will decide on the City of Chicago’s final application under the Privatization Pilot Program to lease Midway Airport some time in 2009. The city submitted its preliminary application in 2006, reached agreement with a supermajority of airlines in order to obtain the exemption from the prohibition on revenue diversion, solicited bids and reached agreement with a private operator to lease the airport for $2.5 billion, and, in October 2008, submitted a final application to the FAA. 100 FAA Airport Privatization Pilot Program: Application Procedures, 62 Fed. Reg. 48,693 (Sept. 16, 1997). 101 FED. AVIATION ADMIN., REPORT TO CONGRESS ON THE STATUS OF THE AIRPORT PRIVATIZATION PILOT PROGRAM 6 (2004), available at http://www.faa.gov/airports_airtraffic/airports/airport_obligatio ns/privatization/ (Last visited May 4, 2009).

18 Importantly, the City of Chicago has been direct that a driving interest in privatizing Midway Airport is to make up a funding shortfall at the municipal level, spe- cifically in the municipal employee pension program. State law authorizing the lease, the Illinois Local Gov- ernment Facility Lease Act,102 expressly recognizes use of lease proceeds for this purpose. Several other airport operators, including Milwau- kee County (operator of the General Mitchell Interna- tional Airport), the City of New Orleans (operator of the Louis Armstrong New Orleans International Airport), and Kansas City (operator of the Kansas City Airport), seriously have considered privatization under the Pri- vatization Pilot Program. A full assessment of the policy considerations in fa- vor of or against privatization is beyond the scope of this digest. Certainly, the difficult financial conditions that many local governments face make the prospect of selling or leasing their airports in exchange for up-front cash quite attractive. The City of Chicago's effort to privatize Midway Airport is a good example: pressing pension fund requirements pushed the city to value up- front cash over long-term control. At the same time, there is increasing concern about the need to protect public control over critical pieces of infrastructure that reflect considerable local and federal investment and serve essential purposes. As a practical matter, the cur- rent economic downturn has decreased access to private capital for purposes of making a lease payment and constructing required capital improvements and raised questions about the long-term viability of any private operator. While transfer to airport authorities historically has been common and privatization may become more common in the future, there are many other ways in which public entities transfer or delegate power over airports. These options for partial privatization have been catalogued elsewhere103 and include the following: Management Contract. The public entity may con- tract with a private company to take responsibility for some or all of the day-to-day operation of the airport. Both the Indianapolis Airport Authority and the Sus- quehanna Area Regional Airport Authority (operator of the Harrisburg International Airport) entered into 10- year agreements with BAA plc to manage and operate their airports day-to-day and to upgrade or develop new facilities.104 Bob Hope Airport (Burbank, California) is managed by Thomas Bailey Investment, which is in charge of airport administration, operations, and main- tenance. A few other airports are privately managed. 102 50 ILL. COMP. STAT. 615/20 (2006). 103 These examples are taken principally from TRANSP. RESEARCH BD., ACRP SYNTHESIS 1: INNOVATIVE FINANCE AND ALTERNATIVE SOURCES OF REVENUE FOR AIRPORTS 35 (2007), http://onlinepubs.trb.org/onlinepubs/acrp/acrp_syn_001.pdf. 104 Harrisburg terminated BAA’s contract in 2001 (6 years early), and Indianapolis terminated its contract in 2007 (1 year early). Project Finance Privatization. A public entity may contract with a private company to build or redevelop, and then operate, an airport or a specific airport facil- ity, such as a terminal. The contract will be for a set period of time, after which ownership reverts to the government. This arrangement typically does not re- quire an upfront payment from the private entity, but rather a commitment to bear all the costs of building or redeveloping the project. Once it is built, the private entity must cover the operating costs and assume all related financial risks, but may reap the revenues until ownership of the property reverts to the government owner. Airlines have built and operated terminals at numerous airports around the country (e.g., Terminals A, C, and E at Dallas–Fort Worth International Airport (DFW), Terminal A at Logan International Airport (BOS), and Terminal 4 at Los Angeles International Airport (LAX)), and, in other instances, third parties have built terminals for multiple airlines (e.g., Termi- nal B at BOS and the International Arrivals Building at John F. Kennedy International Airport (JFK)). Concessions and Other Services. Airlines, rental car companies, hotels, retailers, and ground transportation, parking, and cleaning companies make up the vast ma- jority of personnel at an airport. These companies also are responsible for a majority of the customer service provided to the traveling public. Some airport operators have negotiated agreements with private entities to oversee entire programs, such as terminal concessions and parking. Airport operators may pay a management fee for these services or share in the revenue generated by these companies. Airlines and Bondholders. Public entities indirectly delegate decision-making authority, especially in the area of capital development and expenditures, through, for example, majority-in-interest clauses in airline use and lease agreements and bond covenants. B. State and Federal Constraints on Transfers and Delegation As detailed above, many states authorize local gov- ernments to establish airport authorities and/or create airport authorities to operate specific airports. The fol- lowing are notable examples of recent challenges to the creation and transfer of power to airport authorities and other special-purpose public entities: Dulles and Washington National Airports. In 1987, Congress authorized the transfer of operating control of Dulles and National Airports.105 The Metropolitan Washington Airports Authority was created by a com- pact between the Commonwealth of Virginia and the District of Columbia to lease and operate the two air- ports. Congress attempted to condition the transfer on creation of a Board of Review that would be comprised of Members of Congress and vested with veto power over the Airport Authority’s Board of Directors. The U.S. Supreme Court declared that the Board of Review violated the constitutional principle of separation of 105 See 49 U.S.C. §§ 49101–49112 (2006).

19 powers.106 The U.S. Court of Appeals later struck down a modified version of the Board of Review on the same grounds.107 Congress thereafter abolished the Board of Review.108 Detroit Metropolitan Airport. In 2002, the Michigan Legislature created a public airport authority, the Wayne County Airport Authority, to assume responsi- bility for the management of Detroit Metropolitan Air- port. This largely involuntary transfer was prompted by an investigation conducted by a legislative committee examining alleged mismanagement by Wayne County. Wayne County thereafter leased the airport to the Wayne County Airport Authority; however, the Wayne County Board of Commissioners sued the Airport Au- thority on grounds that the transfer violated the state constitution and federal law. Among the challenges, the county asserted that the transfer would impair its abil- ity to repay bonds issued for the airport and that the involuntary transfer was an uncompensated taking. The Michigan Court of Appeals rejected each of the county’s claims.109 Rhode Island Airports. In the early 1990s, the Rhode Island Department of Transportation contemplated the transfer of T.F. Green Airport and five general aviation airports to the Rhode Island Airport Corporation (RIAC), a subsidiary of the Rhode Island Port Authority and Economic Development Corporation. The Governor sought an advisory opinion from the Supreme Court of Rhode Island on whether the state had the requisite statutory authority to lease the airports to RIAC, dele- gate the power to operate the airport system to RIAC, and delegate the duty to supervise and regulate aero- nautical activities to RIAC. The court answered each of these questions in the affirmative,110 and the state thereafter leased the airports and granted the contem- plated powers to RIAC. Federal law imposes both procedural and substan- tive constraints on transfer and delegation of power. Grant Assurance 5 prohibits an airport sponsor from taking any action that would render it unable to carry out its Grant Assurance obligations or to transfer its interest in property subject to the Grant Assurances without the approval of the Secretary of Transporta- tion.111 Grant Assurance 5 also requires that the airport 106 Metro. Wash. Airports Auth. v. Citizens for the Abate- ment of Aircraft Noise, 501 U.S. 252, 111 S. Ct. 2298, 115 L. Ed. 236 (1991). 107 Hechinger v. Metro. Wash. Airports Auth., 36 F.3d 97, 308 U.S. App. D.C. 283 (D.C. Cir. 1994). 108 Metropolitan Washington Airports Amendments Act of 1996, 104 P. L. No. 264 tit. IX, 110 Stat. 3274 (1996). 109 Wayne County Bd. of Comm’rs v. Wayne County Airport Auth., 253 Mich. App. 144, 658 N.W.2d 804 (2002). 110 In re Advisory Opinion to the Governor (Rhode Island Airport Corporation), 627 A.2d 1246 (R.I. 1993). 111 FAA Updated Grant Assurances (“Grant Assurances”), Program Guidance Letter No. 05-03, Attachment 1: Airport Sponsor Assurances, § C(5) (June 3, 2005) sponsor reserve such rights and authorities as neces- sary to comply with federal law and the Grant Assur- ances.112 For a public entity to transfer all of its interest in an airport, the FAA would have to release the airport sponsor from the Grant Assurances, determine that the public entity assuming control has the requisite prop- erty interest and authority to become the airport spon- sor, and authorize the transfer of Grant Assurance and other obligations to the new airport sponsor. The FAA must publish notice in the Federal Register of its intent to rule on any such application and provide an opportu- nity for public comment.113 Among many details, the FAA also would need to approve the transfer of an Air- port Operator Certificate, and TSA would need to ap- prove transfer of obligations under the airport security program. These actions likely would be categorically excluded from environmental review under the Na- tional Environmental Policy Act.114 Because airport transfers occur infrequently, the FAA has not been called upon to publish detailed procedures.115 (a. It will not take or permit any action which would operate to deprive it of any of the rights and powers necessary to per- form any or all of the terms, conditions, and assurances in the grant agreement without the written approval of the Secre- tary… b. It will not sell, lease, encumber, or otherwise transfer or dispose of any part of its title or other interests in the prop- erty shown on Exhibit A to this application or, for a noise com- patibility program project, that portion of the property upon which Federal funds have been expended, for the duration of the terms, conditions, and assurances in the grant agreement with- out approval by the Secretary.) http://www.faa.gov/airports_airtraffic/airports/aip/guidance_let ters/media/PGL_05-03.pdf. 112 Grant Assurances, § C(5)(f) (If an arrangement is made for management and operation of the airport by any agency or person other than the sponsor or an employee of the sponsor, the sponsor will reserve sufficient rights and authority to insure that the airport will be operated and maintained in accordance [with] Title 49, United States Code, the regulations and the terms, conditions and assurances in the grant agreement and shall insure that such arrangement also requires compliance therewith.). 113 49 U.S.C. § 47107(h) (2006) (Subject to paragraph (2), before modifying an assurance re- quired of a person receiving a grant under this subchapter and in effect after December 29, 1987, or to require compliance with an additional assurance from the person, the Secretary of Transportation must—(A) publish notice of the proposed modifi- cation in the Federal Register; and (B) provide an opportunity for comment on the proposal.) 114 See FAA Order No. 1050.1E, Environmental Impacts: Policies and Procedures, § 307m (2004) (providing categorical exclusion for “FAA administrative actions associated with transfer of ownership or operation of an existing airport, by acquisition or long-term lease, as long as the transfer is limited to ownership, right of possession, and/or operating responsibil- ity.”). 115 See FAA Order No. 5190.6A, Airports Compliance Re- quirements, ch. 7 (1989).

20 Substantively, one of the biggest impediments to transferring control over an airport is the prohibition on revenue diversion. Although the FAA has not been called upon to issue definitive guidance on this issue, the transfer of an airport from one public entity to an- other generally is subject to the prohibition on revenue diversion, meaning that a public entity theoretically should not be able to profit from the sale of an airport. The reasoning is as follows. The FAA defines airport revenue broadly to include proceeds from the sale or lease of airport property.116 Airport revenue specifically includes proceeds from the sale or lease of airport prop- erty not acquired with federal assistance; proceeds from the transfer of airport property acquired with federal assistance must be used according to the terms of the agreement with the federal government and may be treated as equivalent to airport revenue.117 Further, the FAA considers the allowance to extract sale proceeds under the Privatization Pilot Program to be an excep- tion to the general definition of airport revenue and the prohibition on revenue diversion. Importantly, FAA policy is to treat sale proceeds from transfers to private operators not pursuant to the Privatization Pilot Pro- gram to be airport revenue subject to the general prohi- bition.118 The broad definition of airport revenue and the narrow exception for airport privatization pursuant to the pilot program strongly suggest that the transfer of an airport to another public entity (e.g., an airport au- thority) would be subject to the prohibition on revenue diversion. A somewhat more challenging issue is whether the prohibition on revenue diversion applies to rent pay- ments, such as where the public owner of the underly- ing property leases the property to an airport authority or other public operator. Again, the FAA recognizes that 116 See FAA Policy and Procedures Concerning the Use of Airport Revenue, 64 Fed. Reg. 7696, 7716, Policy Statement § II(B) (Feb. 16, 1999) (airport revenue includes “[r]evenue from air carriers, tenants, lessees, purchasers of airport prop- erties, airport permittees making use of airport property and services, and other parties. Airport revenue includes all reve- nue received by the sponsor for the activities of others or the transfer of rights to others relating to the airport….”). 117 FAA Policy and Procedures Concerning the Use of Airport Revenue, 64 Fed. Reg. 7696, 7716, Policy Statement § II(B) (Feb. 16, 1999) (airport revenue includes revenue re- ceived [f]or the sale, transfer, or disposition of airport real property (as specified in the applicability section of this policy statement) not acquired with Federal assistance or personal airport prop- erty not acquired with Federal assistance, or any interest in that property, including transfer through a condemnation pro- ceeding…. While not considered to be airport revenue, the pro- ceeds from the sale of land donated by the United States or ac- quired with Federal grants must be used in accordance with the agreement between the FAA and the sponsor. Where such an agreement gives the FAA discretion, FAA may consider this pol- icy as a relevant factor in specifying the permissible use or uses of the proceeds.). 118 Id. at 7716-17, Policy Statement § III(C). lessees may be airport sponsors and further has found that public entities may be eligible for AIP grant funds to prepay a lease from another public entity so long as the payments do not exceed current fair market value.119 Moreover, where the owner of the underlying property is not the airport sponsor and has not otherwise com- mitted to be bound by the Grant Assurances, the FAA has limited control over the nonsponsoring govern- ment’s collection and subsequent use of the revenue; the FAA’s authority is limited to the airport sponsor’s use of its revenue. The Port Authority of New York and New Jersey pays a substantial amount annually to the cities of New York and Newark to lease JFK Interna- tional, LaGuardia, and Newark Liberty International Airports. This is permissible in part because the Port Authority is grandfathered from the prohibition on revenue diversion for such payments. However, in the instance in which a city or county transfers power to an airport authority but continues to act as the airport sponsor, the prohibition on revenue diversion seemingly would apply and preclude use of rent payments for non- airport purposes. Largely due to the disincentive created by the prohi- bition on revenue diversion, shifts from one public en- tity to another are likely only in a few specific contexts. First, a shift may be desirable when an airport requires continued subsidies from general tax revenues, and a general-purpose government desires to stem future ex- penditures on the airport. Several general-purpose gov- ernments transferred airports to special-purpose enti- ties specifically to eliminate continuing financial responsibility for a money-losing enterprise. Many of these transfers occurred at no or nominal cost to the special-purpose entity. Somewhat ironically, many spe- cial-purpose entities have succeeded in making their airports self-sustaining, to the point that the general- purpose government has investigated means to try and secure higher rent or other revenues from the airport. Here again, the prohibition on revenue diversion may present a check on such attempts to extract profits from an airport. Second, the governing body may perceive that the current management structure is not successful or as successful as it could be, such that a transfer or delega- tion will lead to more economic development, lower costs, easier access to capital, improved chances of ap- proving needed infrastructure, or some other aim. Pittsburgh International Airport is an example of an airport at which the airport operator, originally Alle- gheny County, determined that its objectives would be better met through a transition from a general-purpose government to an airport authority. The Allegheny County Airport Authority has determined that the tran- sition was a success insofar as it has better met airport objectives than previous direct management by the 119 FAA Order No. 5100.38C, Airport Improvement Program Handbook, ¶ 725 (2005), available at http://www.faa.gov/airports_aitraffic/airports/aip/aip_handbook / (select appropriate part). (Last visited May 4, 2009).