Theory and Law of Airport Revenue Diversion (2008)

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11 port concessionaires, airport revenue diversion consti- tutes a hidden municipal tax upon them. Moreover, growing airport costs have been of increasing concern to airlines. According to the Air Transport Association of America (ATA): While the fees airlines pay to airports represent a small portion of overall airline operating costs (approximately 5 percent), they have been one of the industry's fastest- rising costs. Between 1992 and 1999, airport costs exclu- sive of PFCs, rose 35 percent. Including PFCs, they rose 70 percent. In contrast, the producer price index over that same period of time increased less than eight percent and airline prices rose less than four percent.52 The airlines are concerned that spending airport revenue on nonairport services results in increased rents, fees, and charges to airlines exceeding the cost of airport capital and operating expenses. ATA observes, “Of increasing concern to airlines (and many airport operators) has been local political interest in siphoning money away from airports for other nonaviation pur- poses.”53 According to ATA, “revenue diversion is a bur- den on interstate commerce—an unfair tax on airline passengers and shippers, not unlike forced ‘tribute’ charged in ancient times for safe passage through for- eign lands.”54 The funding of airports has been on a closed-loop financial basis, supported by fees paid by airlines, their passengers, and other users and not through local taxes: “Local tax revenues did not and do not support our national system of airports.” Moreover, “because airports are local monopolies, federal law also places significant restrictions on airports’ ability to take advantage of their monopoly status.”55 Similarly, the Aircraft Owners and Pilots Association (AOPA) opposes airport revenue diversion. AOPA Sen- ior Vice President of Government and Technical Affairs Andy Cebula insists, When an airport doesn't get the revenue it's due, its ex- penses still have to be paid. They often result in higher rates and fees charged to individual pilots and aircraft owners, which is one of the reasons AOPA fights to make sure airports get all the money that's coming to them.56 The AOPA argues that revenue diversion impacts aviation in many ways: “Airport tenants may be asked to pay higher rates and charges as a result of diverted revenue. The lack of funds could also impact much needed safety enhancements and capital improvement 52 Air Transport Association of America, supra note 11. 53 Air Transport Association of America, supra note 11. 54 Airport Revenue Diversion, Hearings Before the U.S. Sen. Subcomm. on Aviation of the Commerce Comm., May 1, 1996, at 49 (testimony of Edmund Merlis), reproduced at: http://books.google.com/books?id=nQEDkwETmdkC&dq=%22ai rport+revenue+diversion%22&printsec=frontcover&source =web&ots=f7QKBCZe8&sig=ZsilCY2rHH1ZSYysVMapyMAL mMM#PPA30,M1. 55 Id. at 48–49. 56 http://www.aopa.org/whatsnew/newsitems/2004/04-2- 096x.html (Last visited Jan. 23, 2008). projects at the airport.”57 Commercial airlines and gen- eral aviation aircraft operators have been successful in lobbying Congress to protect them from diversion, though several grandfather provisions have been carved out. However, the airport trade association, Airports Council International–North America (ACI-NA), has a different view. Airports, ACI-NA contends, are not predatory monopolies at all, but instead are govern- mental institutions that provide essential infrastruc- ture. ACI-NA argues that U.S. airports are self- sustaining and nonprofit enterprises, subject to inten- sive, if not excessive, government regulation. ACI-NA insists that airports are competitive with other airports and have little incentive to abuse their market power.58 In addition, a number of airports have concentrated on lowering, not increasing, costs charged to airlines and other aeronautical users. Examples include debt refi- nancings by Minneapolis/St. Paul and Denver. These transactions were primarily undertaken in order to re- duce the costs to airlines using the respective airports. Airports in different cities or within the same metro- politan area compete in many ways. For example, they compete for international traffic and cargo and vie for the status of becoming airline hubs. Thus, ACI-NA is generally opposed to federal regulation of airport rates and charges. Nevertheless, ACI-NA also opposes revenue diver- sion, insisting, “airport operators have been—and con- tinue to be—staunchly opposed to diversion of airport revenues….[A]irport operators reaffirm their commit- ment to the dedication of user charges and fees, and other revenue derived from airport activities, to be used only for airport purposes.”59 One can understand the aversion an airport operator might have to seeing its revenue siphoned off for use by the local government for nonairport purposes. III. FEDERAL LEGISLATION A. The Federal Relationship with Airports In the United States, the overwhelming number of public commercial airports have been owned and oper- ated by local governments with federal financial sup- port and federal regulatory oversight.60 Congressional enactments governing aviation began with the Kelly Act (Contract Air Mail Act of 1925), which gave the Postmaster General authority to award contracts for 57 http://www.aopa.org/whatsnew/region/revenue.html (Last visited Jan. 23, 2008). 58 David Plavin, The Top 10 Myths about Airports—The North American Experience (Apr. 15, 2004), http://www.aci- na.org/dexa/docs/70_Myths%20about%20Airports.ppt#256,1 (Last visited Jan. 23, 2008). 59 Airport Revenue Diversion, supra note 54, at 87–88. 60 At one time, the federal government owned and operated Washington National and Washington Dulles International Airports, but divested itself of them in the 1980s.

12 the carriage of mail to private carriers—essentially, a subsidy system for the nascent airline industry. The first federal legislation addressing airport finance, the Air Commerce Act of 1926, provided initial federal fund- ing for airport infrastructure. It authorized the Secre- tary of Commerce to regulate the design of aircraft and materials used in their construction, as well as the safety and maintenance of airways, airports and air navigation facilities.61 That statute was replaced by the Civil Aeronautics Act of 1938, creating the Civil Aero- nautics Authority (whose name was changed to the Civil Aeronautics Board 2 years later) and vesting in it safety and economic (pricing, entry, and antitrust) regu- latory jurisdiction.62 That legislation was subsumed by the Federal Aviation Act of 1958, which gave safety jurisdiction to the FAA.63 The FAA was housed in the U.S. Department of Transportation (DOT) with the U.S. DOT’s creation in 1966. The federal government pro- vides financial support to airports through the AIP pro- gram, authorizes the collection of additional revenue from local passengers through the PFC program, and provides regulatory oversight over certain airport prac- tices, including issues surrounding both revenue and expenditures. B. Airport Revenue Statutes Several federal statutes govern the use of airport revenue, including principally: • The Anti-Head Tax Act of 1973 • The AAIA • The Airport and Airway Safety and Capacity Expan- sion Act of 1987 • The Aviation Safety and Capacity Expansion Act of 1990 • The Federal Aviation Administration Authorization Act of 1994 (FAAA Act) • The Airport Revenue Protection Act of 1996. In Evansville–Vanderburgh Airport Authority v. Delta Air Lines,64 the U.S. Supreme Court rejected a “Commerce Clause” challenge to a $1.00 airport tax imposed upon airline passengers to fund local airport construction and maintenance. The Court held that “a charge designed only to make the user of state-provided facilities pay a reasonable fee to help defray the costs of their construction and maintenance may constitution- ally be imposed on interstate and domestic users alike.”65 Congress responded by promulgating the Anti- Head Tax Act of 1973, prohibiting head taxes (taxes on passengers traveling in air commerce), taxes on the transportation of an individual, taxes on the sale of air transportation, or air commerce or transportation gross 61 69 Pub. L. No. 254, 44 Stat. 568 (May 20, 1926). 62 75 Pub. L. No. 706, 52 Stat. 973 (June 23, 1938). 63 85 Pub. L. No. 726, 72 Stat. 731 (Aug. 23, 1958). 64 405 U.S. 707 (1972), 92 S. Ct. 1349, 31 L. Ed. 2d 62. 65 Id. at 714. receipts taxes.66 However, the statute does authorize airports to collect property, income, franchise, and sales and use taxes, as well as reasonable and nondiscrimina- tory rental charges, landing fees, and other service charges.67 The AIAA68 established the current framework for federal financing of U.S. airport development and im- provement projects.69 As originally enacted, AAIA re- quired that the airport owner and operator “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 prop- erty.”70 The AAIA also provides that, as a condition precedent for receiving federal funds, airports must agree that their facilities “will be available for public use on fair and reasonable terms and without unjust discrimination.”71 Certain prior uses of airport revenue for nonairport purposes were grandfathered.72 The AAIA73 prescribes assurances to which an airport sponsor receiving federal funds must agree as a condi- tion precedent to receipt of federal financial assis- tance.74 These grant assurances are the quid pro quo for AIP funding. Upon acceptance of an AIP grant by an airport sponsor, the assurances contained in the AIP grant agreement become a binding obligation between the airport sponsor and the federal government. Such sponsorship assurances must be included in every AIP grant agreement.75 The airport operator must give writ- 66 49 U.S.C. § 40116(b). 67 93 Pub. L. No. 44, 87 Stat. 88; 49 U.S.C. § 40116(e)(2) (1995). See Airway Arms, Inc. v. Moon Area Sch. Dist., 498 Pa. 286, 446 A.2d 234 (Pa. 1982); Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank, 64 Cal. App. 4th 1217, 76 Cal. Rptr. 2d 297 (Cal. App. 1998). 68 Title V of the Tax Equity and Fiscal Responsibility Act, 97 Pub. L. No. 287, 96 Stat 1225 (now codified at 49 U.S.C §§ 47107(b), 47133). 69 Roy Goldberg, Airline Challenges to Airport Abuses of Economic Power, 72 J. AIR L. & COM. 351 (2007); PAUL DEMPSEY, AIRPORT PLANNING & DEVELOPMENT: A GLOBAL SURVEY 174 (2000). 70 49 U.S.C. § 47107(b). 71 49 U.S.C. § 2210(a)(1). See James F. Gesualdi, Gonna Fly Now: All the Noise about the Airport Access Problem, 16 HOFSTRA L. REV. 213, 232–33 (1987). 72 FAA, Policy and Procedures Concerning the Use of Air- port Revenue, 64 Fed. Reg. 7696 (Feb. 16, 1999). 73 49 U.S.C. § 47107(a). 74 Id. 75 Section 511(b) of the AAIA, 49 U.S.C. § 47107(g)(1) and (i) as amended by Pub. L. No. 103-305 (Aug. 23, 1994) authorizes the DOT Secretary to prescribe project sponsorship require- ments to ensure compliance with §§ 511(a), 49 U.S.C. § 47107(a)(1)(2)(3)(5)(6). See FAA Order 5100.38A, Airport Im- provement Program Handbook, ch. 15, Sponsor Assurances and Certification, § 1, Assurances-Airport Sponsors (Oct. 24, 1989). Current assurances are set forth at

13 ten assurances that airport revenue will be used for the capital and operating costs of the airport, the local air- port system, or other facilities directly and substan- tially related to air transportation.76 Therefore, airports must provide an annual report specifying all sums paid by the airport to other governmental entities, the pur- poses thereof, and all services provided to other gov- ernmental entities and the amount of compensation received. The Airport and Airway Safety and Capacity Expan- sion Act of 198777 circumscribed the use of airport reve- nues to facilities “substantially” and directly related to air transportation. It also required local aviation fuel taxes enacted after December 30, 1987, to be spent on the airport or, in the case of state fuel taxes, state avia- tion programs or noise mitigation.78 The Aviation Safety and Capacity Expansion Act of 1990 established the PFC program as a means of allow- ing airports to collect revenue locally for approved in- frastructure improvements. This program is discussed in Section II.B.4. Responding to the financial crisis in the airline in- dustry in 1993, President Bill Clinton appointed a committee—the National Commission to Ensure a Strong Competitive Airline Industry—to study "whether the nation's beleaguered air carriers could benefit from a healthy dose of government authority." Its report to the President and Congress made several recommendations, including "rigorous enforcement of existing Airport Improvement Program grant assurance language barring diversion of airport revenues to non- airport purposes…[and] continued close scrutiny of air- port proposals to collect [PFCs]."79 Also in 1993, the U.S. House of Representatives Sur- veys and Investigations Staff reported that airport revenue was being diverted at 17 of the 30 airports in- vestigated, though most diversions were lawful. Out of approximately $900 million diverted, $641 was diverted lawfully under the grandfather provisions, and $141 million was diverted where the airport sponsors pro- claimed eligibility for grandfather diversion. But $112 million was diverted under circumstances where the sponsor did not appear to meet the statutory exemption requirements.80 In 1994, the U.S. DOT Office of Inspec- tor General (IG) reported that FAA monitoring of air- port revenue was not adequate to ensure that fee and rental structures were maintained at the level neces- sary to ensure that airports were as self-sustaining as http://www.faa.gov/airports_airtraffic/airports/aip/grant_assur ances/media/airport_sponsor_assurances.pdf (Last visited Jan. 23, 2008). 76 49 U.S.C. § 47107(b). 77 100 Pub. L. No. 223, 101 Stat. 1486 (Dec. 30, 1987). 78 FAA, Policy and Procedures Concerning the Use of Air- port Revenue, 64 Fed. Reg. 7696 (Feb. 16, 1999). 79 Suzanne Imes, Comment: Airline Passenger Facility Charges: What Do They Mean for An Ailing Industry?, 60 J. AIR L. & COM. 1039, 1051–52 (1995) [citations omitted]. 80 61 Fed. Reg. 7134. possible or that unlawful revenue diversion was not occurring.81 The FAAA82 reaffirmed that airports must be as self- sustaining as possible83 and that airport charges, fees, or taxes must be reasonable and used for airport or aeronautical purposes.84 Airports should not attempt to create revenue surpluses exceeding the amount needed for the airport system, including reasonable reserves and funds needed to facilitate financing or cover contin- gencies.85 The U.S. DOT Secretary was instructed to enforce the revenue-use requirement promptly and ef- fectively. The FAAA Act requires the U.S. DOT Secre- tary to establish policies and procedures to assure en- forcement of the airport’s self-sustaining and revenue- use grant assurances. These policies and procedures must prohibit airport revenue diversion for various uses, including direct or indirect payments other than those reflecting the value of services and facilities pro- vided, as well as payments in lieu of taxes or other as- sessments that exceed the value of services provided.86 Impermissible uses of revenue may include: • Direct or indirect payments, other than payments reflecting the value of services provided to the airport; • The use of airport revenue for general economic de- velopment, marketing, or promotional purposes unre- lated to the airport; • Payments in lieu of taxes that exceed the value of services provided; and • Payments to compensate nonsponsoring governmen- tal bodies for lost tax revenue in excess of stated tax rates.87 The Secretary may withhold approval of a grant ap- plication seeking to impose a PFC for violating the revenue-diversion requirements and may impose civil penalties up to $50,000 upon airport sponsors for viola- tions.88 The FAAA Act prohibits a state or political sub- division thereof from imposing a new tax, fee, or charge exclusively upon a business located at a public airport, other than a tax, fee, or charge whose revenue is used for airport or aeronautical purposes.89 The FAAA Act also authorizes the Secretary of Transportation to de- termine the reasonableness of airport fees, though the Secretary is not to set the level of the fee.90 The legisla- tion explicitly affirms that different rate methodologies may be employed. 81 Id. 82 103 Pub. L. No. 305, 108 Stat. 1569 (Aug. 23, 1994). 83 49 U.S.C. § 47101(a)(13). 84 49 U.S.C. § 47129. 85 49 U.S.C. § 47101. 86 49 U.S.C. § 47107. 87 49 U.S.C. § 47107(b)(2). 88 49 U.S.C. § 47111. 89 49 U.S.C. § 40116(d)(2)(A). 90 49 U.S.C. § 47129.