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Theory and Law of Airport Revenue Diversion (2008)

Chapter: V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION

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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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Suggested Citation:"V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION." National Academies of Sciences, Engineering, and Medicine. 2008. Theory and Law of Airport Revenue Diversion. Washington, DC: The National Academies Press. doi: 10.17226/23092.
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17 provide guidance, and airports seek that guidance on whether a particular expenditure would violate the statutory requirements for the use of airport revenue. The airport sponsor must submit an annual auditing report and other financial reports that the U.S. DOT may reasonably request.127 The local government must support its capital and operating expenses charged to the airport with documented evidence.128 The FAA takes the position that although a city may transfer airport revenue into its general fund, it must expend those funds for airport purposes. 129 V. SYNTHESIS: FEDERAL LAW AND POLICY ON REVENUE DIVERSION130 A. Which Airports Are Subject to, or Immune from, the Revenue-Diversion Prohibition? 1. Airports That Receive “Federal Assistance” The revenue-use requirements apply to every airport that receives “federal assistance.”131 “Federal financial assistance” is defined by FAA policy as: (1) airport de- velopment and noise mitigation grants; (2) planning grants related to a specific airport; (3) transfers of fed- eral property under the Surplus Property Act;132 and (4) deeds of conveyance issued under specified federal stat- utes.133 However, the FAA’s installation and operation of navigational aids or the FAA’s operation of air traffic control towers is not considered federal financial assis- tance. Nor are reasonable fees paid by the federal gov- ernment to the operator of an airport for use of facili- ties, land, or services provided.134 2. Private Airports All airports that receive federal financial assistance are subject to the revenue-diversion prohibition. This now includes privately owned, public-use airports that to the City of North Bend. The City's sewage treatment plant is currently located on this parcel. The land is non-aeronautical property and will be sold at fair market value with proceeds used for airport capital improvement projects. 127 64 Fed. Reg. 7696, 7722. 49 U.S.C. §§ 47107(a)(15), (18), and (19). 128 Letter from FAA Office of Airport Safety and Standards Director David Bennett to Weschester County Commissioner Joseph Petrocelli (Feb. 14, 1997). 129 14 C.F.R. pt. 16. 130 Many of the letters and memoranda cited in this report were obtained by the researcher through his submission of a Freedom of Information Act Request to determine the outcome of cases and other information available. 131 49 U.S.C. § 47133. 132 49 U.S.C. § 47151. 133 The statutes are Federal Airport Act of 1946 § 16, the Airport and Airway Improvement Act of 1970 § 23, and the Airport and Airway Improvement Act of 1982 § 516. 134 64 Fed. Reg. 7696. received AIP grants after October 1, 1996.135 Moreover, once an airport is deemed to fall under these rules, the revenue-use requirement remains in effect so long as the airport functions as an airport, even should it de- cline AIP grants in any subsequent year.136 3. Privatized Airports Privatized airports, or the sale of airport land, would also fall under the revenue-diversion prohibition. Al- though the FAA will treat the proceeds from the sale or lease of an airport as revenue subject to the diversion prohibition, the FAA promises to remain “open and flexible in specifying conditions on the use of reve- nue…without unnecessarily interfering with the appro- priate privatization of airport infrastructure.”137 The FAA cannot waive the revenue-use requirement, but it promises to “exercise its authority to interpret the re- quirement in a flexible way to account for the unique circumstances presented by a change of ownership.”138 The FAA also would attach to its approval of the sale of any airport a condition that the proceeds of the sale would be used consistently with the revenue-use re- quirements.139 The United Kingdom sold many of its major airports to private investors in 1987. A number of other nations have since followed suit and privatized their airports. In 1992, President George W. Bush issued Executive Order 12803, which removed a general requirement that state and local governments that sell or lease fed- erally aided infrastructure assets must repay fully the federal money invested therein. However, as an Execu- tive Order, this action was not sufficient to overcome statutory requirements for repayment, such as those included in the statute governing AIP. As part of the Federal Aviation Reauthorization Act of 1996, the U.S. Congress created the Airport Privatization Pilot Pro- gram,140 a demonstration program authorizing the FAA to exempt five airports from certain statutory and regu- latory requirements governing the use of airport reve- nue, including the airport’s obligation to repay federal grants, to return property acquired under federal assis- tance, and to use the proceeds exclusively for airport purposes.141 The first two airports to apply to participate in the pi- lot privatization program were Brown Field near San Diego, California, and Stewart International Airport in 135 64 Fed. Reg. 7696. 136 49 U.S.C. § 47133. 137 61 Fed. Reg. 7134, 7140. 138 64 Fed. Reg. 7696. 139 49 U.S.C. §§ 47107(b), 47133. 64 Fed. Reg. 7696, 7717. 140 See Rowley, supra note 6, at 605, 628–29; Dan Kramer, How Airport Noise and Airport Privatization Effect Economic Development in Communities Surrounding U.S. Airports, 31 TRANSP. L.J. 213, 222 (2004); Paul R. Verkuil, Public Law Limitations on Privatization of Government Functions, 84 N.C.L. Rev. 397 (2006); and DEMPSEY, supra note 6, at 189–94. 141 49 U.S.C. § 47134.

18 New York State.142 At this writing, Stewart is the only airport to have been privatized under this program, and it is abandoning privatization in favor of a purchase by the Port Authority of New York and New Jersey.143 4. Grandfathered Airports Certain grandfathered airport operators may use air- port revenue for local purposes that are forbidden under the revenue-diversion prohibition. If, on or before Sep- tember 2, 1982, a statute or ordinance controlling the airport operator's financing was enacted, or a covenant or assurance in an airport operator's debt obligation was issued, then airport revenue may be applied to general debt obligations or other facilities of the airport operator. Moreover, local taxes on aviation fuel in effect on December 30, 1987, may be used for any local pur- pose.144 The U.S. DOT has observed: The general purpose of [the revenue diversion prohibi- tion] is simply to prevent an airport owner or operator who receives federal assistance from using airport reve- nues for expenditures unrelated to the airport. Congress recognized, however, that not all sponsors were legally capable of so dedicating their revenue, due to legislation or covenants in their debt obligations. To avoid the ineq- uity of omitting them from the federal aid grant program, Congress did not impose the strict revenue retention re- quirement on them.145 Nonetheless, as directed by statute, the FAA consid- ers the use of airport revenue for local purposes under the grandfather provision as a factor militating against the award of discretionary AIP funding if the airport revenue so used in the fiscal year preceding the applica- tion for discretionary funds exceeded the amount of revenue used in the airport's first fiscal year ending after August 23, 1994, adjusted for inflation.146 More- over, should an airport fail to provide information nec- essary to determine whether these requirements were satisfied, that would also preclude the FAA from con- sidering an application for discretionary funds.147 142 U.S. GENERAL ACCOUNTING OFFICE, AIRPORT FINANCING: FUNDING SOURCES FOR AIRPORT DEVELOPMENT, GAO/RCED- 98-71 (Mar. 1998). In 2000, the State of New York transferred the operation of Stewart International Airport, in Newburgh, New York, to National Express Group, a private company, under a 99-year lease. New York’s Albany County airport sought FAA approval to be purchased by a private company. The FAA formed a taskforce to evaluate the application, but it deadlocked over the legal and financial feasibilities of the pro- posed sale, and ultimately denied the request. Kramer, supra note 140, at 213, 223. 143 Joe Mysak, Airport Privatization, PITTSBURGH TRIBUNE- REVIEW, Feb. 4, 2007. 144 49 U.S.C. §§ 47107(b), 47133(b). 145 Memorandum from Assistant DOT General Counsel Roberta Gabel to IG Regional Manager James Brucia (Apr. 12, 1994). 146 49 U.S.C. § 47115(f). 147 Factors Affecting Award of Airport Improvement Pro- gram (AIP) Discretionary Funding, 64 Fed. Reg. 31031 (June 9, 1999). The jurisprudence on grandfather clauses generally suggests they are to be strictly construed.148 However, U.S. DOT has taken the position that “grandfather clauses are generally calculated to prevent hardship by saving accrued rights and interests from the operation of a new rule. They are generally construed favorably to their benign purposes.”149 The U.S. DOT concluded that the use of airport reve- nue by Boston Logan Airport over a 2-year period to pay more than $13 million in lieu of taxes to surrounding cities and make community charitable contributions of nearly $300,000 for scholarship, athletics, culture, rec- reation, and art was grandfathered in under Massport’s 1956 Enabling Act and was consistent within the air- port’s right, as a corporation, to make charitable contri- butions.150 The U.S. DOT found that St. Louis Lambert Interna- tional Airport’s payments of 5 percent gross receipts to the city were grandfathered by virtue of the long- standing bond ordinances for these payments since 1962, even though several ordinances were issued after September 3, 1982.151 However, responding to an at- tempt by the State of Maryland to amend a preexisting statutory scheme governing its transportation trust fund so as to transfer $22 million to the state’s general fund to meet a budget shortfall, the U.S. DOT con- cluded: “A sponsor may not rely on the fact that its pre- AAIA statutory arrangements are grandfathered to enact additional direct or indirect diversion of airport revenue.”152 A 1988 City Council resolution seeking to transfer 1 percent of the historic value of property, plant, and equipment from the Palm Springs Airport (later increased to 2 percent) as an in lieu property fee was deemed not grandfathered since it was not in effect on September 3, 1982.153 148 See Spokane Inland RR v. United States, 241 U.S. 344, 350, 36 S. Ct. 668, 671, 60 L. Ed. 1037, 1041 (1915); United States v. Allan Drug Corp., 357 F.2d 713 (10th Cir. 1966). No reported court cases address grandfather provisions in the context of airport revenue diversion. However, different grand- father clauses have been applied to airports in the environ- mental context in Khodara Envtl. Inc. v. Blakey, 376 F.3d 187 (3d Cir. 2004), and Clay Lacey Aviation v. City of Los Angeles, 2001 U.S. Dist. Lexis 24492 (C.D. Cal. June 18, 2001); and in the aircraft operations context in San Francisco v. Federal Aviation Admin., 942 F.2d 1391 (9th Cir. 1991). 149 Memorandum from DOT Assistant General Counsel Roberta Gabel to IG Regional Manager James Brucia (Dec. 7, 1992). 150 Id. 151 Memorandum from DOT Assistant General Counsel Roberta Gabel to IG Regional Manager James Brucia (Dec. 8, 1992). 152 Memorandum from Assistant General Counsel Roberta Gabel to IG Regional Manager James Brucia (Apr. 12, 1994). 153 Memorandum from Assistant General Counsel Roberta Gabel to IG Regional Manager James Brucia (Nov. 18, 1992).

19 B. What Constitutes “Airport Revenue”? Airport revenue subject to the diversion prohibition consists of all fees, rents, charges, or other payments received by the airport sponsor,154 including proceeds from the sale, lease, or disposal of airport property.155 It includes revenue received from “air carriers, tenants, lessees, purchasers of airport properties, airport per- mittees making use of airport property and services, and other parties.”156 Airport revenue also includes sponsor activities at the airport such as revenue re- ceived from any activity conducted on airport property acquired with federal assistance, any aeronautical ac- tivity directly connected to the sponsor’s ownership of the airport, and any noncommercial activity on airport property not acquired with federal assistance to the extent of the fair rental (or fair market) value of the property.157 Also included within the concept of airport revenue are state and local aviation fuel taxes in effect after December 30, 1987.158 For most public, and some pri- vate airports, such revenue is subject to the revenue- diversion prohibition. If the property was acquired with federal funds or donated by the federal government, even more restrictive rules apply. However, a city’s general sales tax, though collected by an airport from private tenants, is not considered airport revenue.159 PFCs are not considered “airport revenue” for pur- poses of the diversion prohibition. But they are subject 154 49 U.S.C. 47107(b). 155 Taxes levied by municipalities against parking patrons and not parking lot owners do not constitute airport revenue, and therefore do not violate 49 U.S.C. § 47133. Susquehanna Area Reg’l Airport Auth. v. Middletown Area Sch. Dist., No. 2005 CV 2052, 2006 Pa. Dist & Cnty. Dec. Lexis 95 (June 13, 2006). 156 64 Fed. Reg. 7696, 7716. It includes revenue received for: i. For the right to conduct an activity on the airport or to use or occupy airport property; ii. For the sale, transfer, or disposition of airport real prop- erty (as specified in the applicability section of this policy state- ment) not acquired with Federal assistance or personal airport property not acquired with Federal assistance, or any interest in that property, including transfer through a condemnation pro- ceeding; iii. For the sale of (or sale or lease of rights in) sponsor- owned mineral, natural, or agricultural products or water to be taken from the airport; or iv. For the right to conduct an activity on, or for the use or disposition of, real or personal property or any interest therein owned or controlled by the sponsor and used for an airport- related purpose but not located on the airport (e.g., a downtown duty-free shop). Id. 157 64 Fed. Reg. 7696. 158 However, these taxes may be used to finance State avia- tion programs or noise mitigation programs off the airport property. 159 Memorandum from DOT Assistant General Counsel Roberta Gabel to IG Regional Manager James Brucia (Dec. 8, 1992). to more stringent rules whereby charges collected may be used to fund only the allowable costs of preapproved projects. Moreover, a violation of the revenue-diversion policies may warrant denial of new authority to impose a PFC until corrective action is taken.160 In 1985, the Burlington Airport Authority sought an opinion as to whether the use of car rental revenue equal to the revenue from rentals not associated with the use of airport purposes could be used for nonairport purposes. The legislative history provided that the revenue diversion prohibition applied to “such facilities as terminal concessions…serving the terminal or other air transportation purposes.”161 From this, the FAA found that revenue derived from airport concessions constitutes airport revenue. The FAA concluded that the segregation of revenues received from Airport concessions in the manner proposed by you is not permitted. The fun- damental principle [of the statute] is that all activities which generate revenue at an airport do so because of the airport. Therefore, these revenues must be applied to the airport which made them possible.162 In contrast, that same year the Erie Municipal Air- port Authority sought an opinion as to whether royal- ties paid upon the discovery of natural gas on airport property constituted airport revenue. The airport sought to transfer the mineral rights to the City of Erie. The FAA observed that the statutory phrase “revenues generated by the airport” was broad enough to encom- pass gas royalties. However, the legislative history of the AAIA provided that: This provision is not intended to apply to revenue gener- ated by facilities which are located on airport property but are unrelated to air operations or services which sup- port or facilitate air transportation. It accordingly would not apply to revenue generated by such facilities as a wa- ter reservoir or a convention center which happen to be located on airport property but which serve neither the airport nor any air transportation service.163 Since natural gas production serves neither the air- port nor air transportation services, the royalties re- ceived therefrom were deemed not to constitute airport revenue. However, the FAA made it clear that it pre- ferred that the proceeds from such production be used “only for airport-related purposes,” and that diverting them to nonairport uses could be viewed negatively in the future in considering the issuance of discretionary federal airport grants.164 In 1995, the Portland International Jetport sought an opinion as to whether a proposed waiver of landing fees for 90 days to any carrier providing new and improved service constituted revenue diversion. The FAA replied 160 64 Fed. Reg. 7696, 7718. 161 S. REP. NO. 97-494, at 712 (1982). 162 Letter from FAA Chief Counsel J.E. Murdock III to Bur- lington Mayor Bernard Sanders (Jan. 8, 1985). 163 2 H.R. REP. NO. 97-760, at 712 (1982). 164 Letter from FAA General Counsel Jim Marquez to Wil- liam Sesler (May 21, 1985).

20 that it did not consider such a waiver a use of airport revenue, though it did express concerns that such a waiver might jeopardize its statutory obligation to make the airport as self-sustaining as possible.165 In the early 1990s, when Trans World Airlines (TWA) was in financial extremis and had entered one of its three bankruptcies, the City of St. Louis Airport Au- thority agreed to purchase certain property and equip- ment of TWA at and near Lambert International Air- port. In Phase I of the transaction, the city would acquire property and equipment (such as gates, hold- room seating, and ramp equipment) used in TWA’s day- to-day operations for $30 million, consisting of $24.7 million in cash, and $5.3 million in forgiveness of prepe- tition debt; TWA would repay the $24.7 million cash through rental payments over the remaining useful life of the acquired property and equipment. The FAA found that TWA’s lease payments constituted airport revenue. Because the FAA also concluded that the property and equipment acquired constituted airport capital assets, it found the use of airport revenue in their acquisition was consistent with the city’s federal obligations. In Phase II of the transaction, the city would acquire some on-airport assets (i.e., a hanger and office build- ing); property adjacent to the airport (i.e., a flight train- ing center); and off-airport assets (i.e., a reservations center), to be funded by airport revenue bonds. The FAA concluded, Unlike accumulated airport capital surpluses that are de- rived from airport revenues, bond proceeds themselves are not airport revenue. Rather, they are a fresh infusion of capital. As such, nothing prohibits an airport operator from issuing bonds to acquire assets that are not “airport capital”…so long as airport revenues…are not used to re- pay the bonds.166 The FAA found that to the extent that certain assets to be acquired were airport capital assets, the pro rata share of TWA’s lease payments for those facilities would constitute airport revenue, but for the purchase of as- sets not qualifying as airport capital assets, the pro rata share of TWA’s lease payments for those facilities would constitute something other than airport revenue.167 With respect to the three properties to be acquired, the FAA concluded that the on-airport facilities were air- port capital assets; because the city planned to incorpo- rate the adjacent training center into the airport, it too would become an airport capital asset; and because the value of the leasehold interest in the off-airport training center was de minimus, its acquisition also did not ap- pear to violate federal obligations.168 165 49 U.S.C. § 47107(a)(13). Letter from FAA Airports Law Branch Manager Barry Molar to Portland Int’l Jetport Man- ager Jeffrey Schultes (Oct. 21, 1995). 166 Letter from FAA Ass’t Chief Counsel David Bennett to Joseph Niemann (Dec. 2, 1993). 167 Id. 168 Id. C. What Constitutes Unlawful Revenue Diversion? The FAAA Act of 1994 gives the Transportation Sec- retary the authority to issue policies defining lawful vis- à-vis unlawful revenue diversion. The Act provides that revenue diversion shall consist, at minimum, of (A) direct payments or indirect payments, other than payments reflecting the value of services and facilities provided to the airport; (B) use of airport revenues for general economic develop- ment, marketing, and promotional activities unrelated to airports or airport systems; (C) payments in lieu of taxes or other assessments that exceed the value of services provided; or (D) payments to compensate nonsponsoring governmental bodies for lost tax revenues exceeding stated tax rates.169 Unlawful revenue diversion consists of the use of air- port revenue for purposes other than the capital or op- erating costs of the airport, the local airport system, or other local facilities owned or operated by the airport owner or operator, and directly and substantially re- lated to the air transportation of passengers, baggage, freight, or mail. An exception exists for uses which are grandfathered, uses also known as “lawful revenue diversion.” The grandfather exception permits revenue diversion if done pursuant to a law regulating airport financing enacted prior to September 2, 1982, or a covenant in a debt obli- gation entered into before that date.170 Under the FAA’s policy statement, examples of unlawful revenue diversion include: • Payments that exceed the fair value of services and facilities provided to the airport;171 • Payments based on a cost allocation formula inconsis- tent with FAA guidelines or not calculated consistently for the airport or other units or cost centers of govern- ment; • Payments for general economic development; • Marketing or promotional activities unrelated to the airport or airport systems;172 • Payments in lieu of taxes or assessments exceeding the value or services provided or not based on a cost allocation formula consistent with comparable govern- mental units or cost centers; 169 49 U.S.C. § 47107(l)(2). 170 FAA, Policy and Procedures Concerning the Use of Air- port Revenue, 64 Fed. Reg. 7696 (Feb. 16, 1999). The grand- fathering provision is 49 U.S.C. § 47107(b)(2). 171 The FAA “considers the cost of providing the services or facilities to the airport as a reliable indicator of value.” Policy and Procedures Concerning the Use of Airport Revenue–Part II, 64 Fed. Reg. 7696 (Feb. 16, 1999) [hereinafter 1999 Poli- cies]. 172 Examples include “participation in [a] program to provide hospitality training to taxi drivers and funding an airport op- erator's float containing no reference to the airport, in a New Years Day parade.” 1999 Policies, supra.

21 • Payments to other governmental units for lost tax revenue exceeding the stated tax rates applicable to the airport; • Loans or investment of funds in a governmental unit at less than prevailing interest rates; • Land rented or used for nonaeronautical purposes at less than FMV;173 • Impact fees paid to a governmental unit exceeding the value of facilities or services provided;174 • Fees paid for certain community activities or events;175 and • Direct subsidies of airline operations, except waivers of fees or discounted landing or other fees for a promo- tional period.176 The FAA also has taken the position that proceeds from the sale or rental of surplus airport land should be used for airport operation maintenance or development. According to the FAA, 173 An exception exists “to the extent permitted by Section- VII.D of this policy.” The DOT has taken the position that an airport proprietor need not charge fair market value for aero- nautical uses of airport land. Instead, the proprietor has dis- cretion “to weigh the volume of traffic, economy of collection, and other circumstances at the airport, with the use made of the airport’s facilities and services, to arrive at a schedule of charges that will make the airport as self-sustaining as possi- ble.” Memorandum from DOT Acting General Counsel Rosa- lind Knapp to FAA Assistant Secretary Melissa Spillenkothen (Oct. 11, 1995). 174 However, airport revenue may be used where airport devel- opment requires a sponsoring agency to take an action, such as undertaking environmental mitigation measures contained in an FAA record of decision approving funding for an airport de- velopment project, or constructing a ground access facility that would otherwise be eligible for the use of airport revenue. Pay- ments of impact fees must meet the general requirement that airport revenue be expended only for actual documented costs of items eligible for use of airport revenue under this Policy State- ment. In determining appropriate corrective action for an impact fee payment that is not consistent with this policy, the FAA will consider whether the impact fee was imposed by a non- sponsoring governmental entity and the sponsor's ability under local law to avoid paying the fee. 64 Fed. Reg. 7696. 175 Such fees are prohibited, “except to the extent permitted by this policy. See Section V, Uses of Airport Revenue. Exam- ples of prohibited expenditures in this category include expen- diture of $50,000 to sponsor a local film society's annual film festival; and contribution of $6,000 to a community cultural heritage festival.” 64 Fed. Reg. 7696. 176 Direct subsidies are considered to be payments of airport funds to carriers for air service. Prohibited direct subsidies do not include waivers of fees or discounted landing or other fees during a promotional period. Any fee waiver or discount must be offered to all users of the airport, and provided to all users that are willing to provide the same type and level of new services consistent with the promotional offering. Likewise prohibited di- rect subsidies do not include support for airline advertising or marketing of new services to the extent permitted by Section V of this Policy Statement. 64 Fed. Reg. 7696. each conveyance of revenue-producing property obligates the transferees to use the revenues derived from nonair- port use of the property for operation, maintenance, or development of the airport. If the land has been identified and agreed upon by the FAA as revenue-producing prop- erty…then the revenue must be used on the airport or put into the airport fund.177 The FAA prohibits renting surplus property at a dis- count to support community nonprofit organizations or subsidize nonairport objectives. Specifically, the FAA insists that any lease or other rental arrangement covering the use of surplus property at an airport must assure that the fair rental value of the property will accrue to the airport and be available to meet airport expenses. Such property may not be rented at a discount to support community non- profit organizations or to subsidize nonairport objec- tives.178 Airport real estate may not be released for sale with- out approval from the FAA. The FAA will not authorize the sale or disposal of airport real estate unless its FMV is sustained by an independent appraisal.179 D. What Are Lawful Uses of Airport Revenue? Grandfathered airports, or private airports not re- ceiving federal funds after October 1, 1996, are eligible to spend revenue in ways that other airports are not. Such expenditures by grandfathered airports are con- sidered “lawful revenue diversion,” while expenditures by private airports not receiving federal funds are not subject to the revenue-diversion prohibitions. The FAA also has identified other types of expenditures that, if reasonably related to the airport’s financial situation, are considered legitimate: • Capital or operating costs of the airport, the local air- port system or other local facilities directly and sub- stantially related to air transportation;180 • Promotional expenditures for the airport designed to increase air travel at the airport;181 • Expenditures to stimulate new air service and compe- tition at the airport; • Airport marketing expenses; 177 FAA Order 5190.6A, Airport Compliance Requirements (Oct. 2, 1989). 178 Id. at 4-18(f). Memorandum from DOT General Counsel Stephen Kaplan to Particia Parrish (Sept. 26, 1994). However, the FAA has taken the position that the use of airport land for community purposes, such as parks and recreational areas, or the rent or lease of land at below fair market value rates, can maintain positive community relations and be a legitimate use of airport revenue. But the greater the gap between the lease or rental rate, on the one hand, and its fair market value, on the other, the greater the burden of demonstrating an airport- related benefit upon the airport proprietor. 61 Fed. Reg. 66735 (Dec. 18, 1996). 179 FAA Order 5190.6A, Airport Compliance Requirements, Oct. 2, 1989 § 7-8(d). 180 64 Fed. Reg. 7696, 7718. 181 Id.

22 • Cooperative airline–airport marketing expenses pro- moting air service at the airport;182 • Reimbursements of certain sponsors of capital or op- erating costs;183 • Support of community activities or organizations so long as the expenditures are directly and substantially related to airport operations;184 • Certain mass transit airport access projects located entirely on airport property and designed and intended exclusively for use by airport passengers;185 182 However, such expenses must be consistent with applica- ble grant assurances prohibiting unjust discrimination be- tween carriers. Moreover, the direct payment of subsidies to airline involves the expendi- ture of airport funds and hence raises questions under the reve- nue-use requirements. The FAA continues to believe that the costs of operating aircraft, or payments to air carriers to 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 promo- tion, 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 re- gional 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. 64 Fed. Reg. 7696, 7709-10. 183 The claim must be made after Oct. 1, 1996, and within 6 years of the contribution or expenditure. Moreover, the direct and indirect reimbursements of airport capital and operating expenses must be supported by adequate documentary evi- dence. 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 ac- counting data is not available, the Final Policy allows reim- bursement 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 reimburse- ment of government entities. 64 Fed. Reg. 7696. 184 An example would be an expenditure that enhances the airport’s acceptance in local communities impacted by the air- port. 64 Fed. Reg. 7696. 185 64 Fed. Reg. 7696, 7718-19. In its decision approving the use of airport revenue for the extension of the Bay Area Rapid Transit (BART) line to San Francisco International Airport, the FAA approved the use of airport revenues to pay for the ac- tual 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 peo- ple traveling to or from the airport and included design features to discourage use by through passengers. Based on these consid- erations, the FAA determined that the possibility of incidental use by non-airport passengers did not preclude airport revenues from being used to finance 100 percent of the otherwise eligible • Costs incurred by government officials for services to the airport; and • Lobbying and attorney fees used to support any activ- ity or project consistent with these policies.186 E. What Payments May Be Made for Taxes? Federal law prohibits states and subdivisions thereof from taxing airline passengers, as such taxes have been deemed an unreasonable burden on interstate com- merce.187 Specifically, they may not impose a tax upon: “(1) an individual traveling in air commerce; (2) the transportation of an individual traveling in air com- merce; (3) the sale of air transportation; or (4) the gross receipts from that air commerce or transportation.”188 They may, however, impose a tax on a flight taking off or landing within the state, although the application of this provision is generating some controversy.189 But some local governments have sought to tax “around the edges” of the prohibition. In Susquehanna Area Regional Airport Authority v. Middletown Area School District,190 a regional airport authority challenged a tax imposed by a school board upon airport parking patrons. The airport alleged that the tax violated various federal statutes and the “Com- merce Clause.” Federal law prohibits a state or political subdivision thereof from imposing “a tax, fee, or charge, first taking effect after August 23, 1994, exclusively upon any business located at a commercial service air- port or operating as a permittee of such an airport other than a tax, fee, or charge wholly utilized for airport or aeronautical purposes.”191 A lower Pennsylvania court concluded, Since we find that the Tax is levied against parking pa- trons and not parking lot owners, this money is not air- port revenue. At no point does the money from this tax ever become the property of the Airport, and therefore it is not a violation [the Federal revenue-diversion prohibi- tion] of § 47133 to use the money for the benefit of the School District.192 cost items. For purposes of this analysis, the FAA considered "airport passengers" to include airport visitors and employees working at the airport. 64 Fed. Reg. 7696, 7704. The project must be either considered an airport capital project, or part of a facility owned and operated by the airport, and directly and substantially related to air transportation. 49 U.S.C. § 47107(b). 64 Fed. Reg. 7696. 186 64 Fed. Reg. 7696, 7718. 187 49 U.S.C. § 40116. 188 49 U.S.C. § 40116(b). The DOT has taken the position that both interstate and intrastate transportation are subject to this prohibition. Letter from DOT General Counsel Jim Marquez to Karen Haley (Dec. 18, 1985). 189 49 U.S.C. § 40116(c). 190 No. 2005 CV 2052, 2006 Pa. Dist & Cnty. Dec. Lexis 95 (June 13, 2006). 191 49 U.S.C. § 40116(d)(2)(A)(iv). 192 Id. at 46. Said the court, “the tax is paid by the patrons and never becomes airport revenue.” Id. at 76.

23 Presumably then, had the tax been imposed upon parking lot companies holding an airport concession, rather than individuals, it would have been prohibited. In City of Syracuse v. Comerford,193 a lower New York court addressed a challenge brought by the City of Syracuse against the Town of Dewitt. For many years, Syracuse property in Dewitt had been exempt from taxation. Dewitt later imposed property tax assess- ments upon the Syracuse airport totaling more than $200 million. Syracuse argued that “the payment of such tax would represent impermissible diversion of airport revenue by payment of funds to the Town in excess of the value of services received from it; because it is alleged that no services are received from the Town, their value is claimed to be zero.”194 The court concluded that 49 U.S.C. § 47107 did not prohibit the imposition of real estate taxes, express authorization therefore being found in § 40116(e).195 The payment to a local municipality of lost taxes be- cause of an airport’s acquisition of land has also been an issue. The Burbank–Glendale–Pasadena Airport Au- thority sought an FAA opinion letter as to whether its payment to the City of Burbank of an amount equal to the lost tax revenue as a result of the airport’s acquisi- tion of land would constitute revenue diversion. The city was neither the airport owner nor the operator. The FAA identified three limitations on such payments: (1) they must be made to a nonsponsoring entity; (2) they must constitute compensation for lost tax revenue based on a preexisting tax rate; and (3) they must relate to property transfers occurring after promulgation of the FAAA Act or, more precisely, after August 23, 1994. The FAA found that the proposed payment in lieu of lost taxes by the airport authority was a proper use of airport revenue.196 Sales and use taxes of ancillary goods and services purchased by airlines, such as taxes on prepackaged meals purchased by airlines and served to passengers, or on aviation fuel, have been upheld.197 The determina- tion on sales taxes on fuel led to the 1987 amendments including fuel taxes within the scope of requirements on the use of revenue. However, taxes sought to be im- posed upon air taxi, charter or scheduled interstate operations, or airline tickets have been deemed unlaw- ful.198 193 2003 NY Slip. Op. 51356U, 2003 N.Y. Misc. Lexis 1336 (Sup. Ct. N.Y., Oct. 16, 2003). 194 Id. at 11. 195 Id. at 12. 196 Letter from FAA Chief Counsel David Leitch to Richard Simon (July 9, 2001). 197 49 U.S.C. § 40116(e). 198 Letter from DOT Deputy General Counsel Rosalind Knapp to Elizabeth Cuandra (Oct. 3, 1986). F. How May Revenue Generated from Fuel Taxes Be Spent? The Airport and Airway Safety and Capacity Expan- sion Act of 1987199 required that local taxes on aviation fuel enacted after December 30, 1987, be spent on the airport, but allowed state taxes on aviation fuel to be spent on state aviation programs or noise mitigation at or near the airport.200 Local aviation fuel taxes collected after December 30, 1987, may be spent only on the capi- tal or operating costs of the airport, the local airport system, or other local facilities owned and operated by the airport owner and operator if the costs are directly and substantially related to the transport of persons or property.201 In 1989, the FAA was asked whether the imposition of an aviation fuel tax by a state or locality, the pro- ceeds of which were to be used for nonaviation purposes such as human services, would be consistent with fed- eral airport revenue requirements. The FAA noted that in 1987 Congress amended the law to make it clear that local fuel taxes were subject to airport revenue-use re- quirements. Congress also expanded the uses to which revenue generated from aviation fuel taxes could be spent to include aviation programs and noise mitigation efforts on or off the airport. The FAA concluded that “Congress, having expressly permitted two specific uses of aviation fuel tax monies, necessarily excluded other non-airport-related purposes.”202 Hence, the use of such proceeds for nonairport related human services would violate the statutory revenue use requirements. In 1992, the State of Missouri enacted a new use tax on aviation fuel, the revenue of which was to be distrib- uted to local governments under a local use tax fund, with no limitations on how the funds were to be spent. The FAA responded that “unless the tax revenue col- lected at the airport were used to fund the airport and airport related activities of the airport sponsor, a State aviation program, or a noise mitigation project, this tax plan could jeopardize the grant compliance status of federally-funded airports in the State of Missouri.” The FAA urged the state to consider directing the tax pro- ceeds away from the local use tax fund and restricting the use of such funds to those permitted under federal law.203 In 2000, the legislature of the State of Tennessee con- templated changing to general purposes its 4.5 percent state transportation fuel tax, the aviation portion of which was theretofore used to fund aviation programs within the State. The FAA took the position that even if the fuel tax were grandfathered in as promulgated prior to December 30, 1987, the Airway Safety and Capacity 199 100 Pub. L. No. 223, 101 Stat. 1486 (Dec. 30, 1987). 200 64 Fed. Reg. 7696-97. 201 49 U.S.C. § 47133. 64 Fed. Reg. at 7717. 202 Letter from FAA Chief Counsel Gregory Walden to U.S. Senator Slade Gorton (Jan. 11, 1990). 203 Letter from FAA Chief Counsel Kenneth Quinn to U.S. Senator Christopher Bond (Mar. 17, 1992).

24 Expansion Act made it clear that all revenue generated by a public airport and any local taxes on airport fuel must be expended for airport purposes.204 The FAA con- cluded that the State of Tennessee may not rely on the fact that its 1986 State aviation fuel tax may be grandfathered to en- act new measures to divert, directly or indirectly, airport revenue. In other words, if a tax on aviation fuel was in effect prior to December 30, 1987, but proceeds were on that date limited to purposes permitted by 47107(b), the FAA will not treat that tax as grandfathered. Passage of the legislation to permit general use of the proceeds from the aviation fuel tax may jeopardize continued Federal funding of the airport and noise abatement projects at Federally-assisted airports throughout the State of Ten- nessee.205 Hence, a state acts at its peril if it amends a grand- fathered tax to redirect its use for nonairport purposes. G. Which Expenditures for Intermodal Transportation Infrastructure Are Authorized? Among the aviation statutes is a declaration of na- tional policy "to develop a national intermodal transpor- tation system that transports passengers and property in an efficient manner."206 The Wendell H. Ford Avia- tion Investment and Reform Act for the 21st Century of 2000 amended this provision to provide for the encour- agement and development "of intermodal connections on airport property between aeronautical and other transportation modes to serve air transportation pas- sengers and cargo efficiently and effectively and pro- mote economic development."207 The FAA has imple- mented this policy in a series of decisions involving AIP grants, PFC authorizations, and local revenue expendi- tures. As explained above, various federal statutes and regulations require that public airports accepting AIP funding agree that all revenue generated by the airport be used exclusively for the capital or operating costs of the airport, the local airport system, or facilities owned or operated by the airport directly and substantially related to the air transportation of persons or prop- erty.208 One question that has arisen is whether airport funds spent on building or operating transit or rail lines or stations are to be owned or operated by the airport and directly and substantially related to the air trans- portation of passengers.209 204 49 U.S.C. §§ 47107(b)(1), 47133(a). 205 Letter from FAA Airports Division Manager Stephen Brill to Tenn. Ass’t Att’y Gen. Winston Sitton (May 24, 2000). 206 49 U.S.C. § 47101(b)(1). 207 106 Pub. L. No. 181; 114 Stat. 61 (Apr. 5, 2000). 208 49 U.S.C. § 47107(b). 209 49 U.S.C. § 47107(b). 14 C.F.R. pt. 158. FAA Order 5100.3A ¶ 553(a), AIP Handbook (Oct. 24, 1989). U.S. DEP’T OF TRANSP., INTERMODAL GROUND ACCESS TO AIRPORTS: A PLANNING GUIDE 16, 202 (Dec. 1996). More recent interpreta- tions by the FAA have liberalized this rather constricted view of the types of landside projects which are appropriate for fed- eral airport funding. Federal funding of an airport with the Rail lines at Atlanta, Chicago, Cleveland, and Wash- ington, D.C., airports have been financed by transit systems rather than airports. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) included a special appropriation for extension of a Bay Area Rapid Transit (BART) line to San Francisco Interna- tional Airport (SFO). The Federal Transit Administra- tion committed $750 million, or about 64 percent of the $1.2 billion project. The remaining $417 came from state and local funding sources.210 But airport revenue funds were used to finance only the connector. The FAA approved airport funding for construction of a BART station at SFO, including the structures and equipment in the airport terminal building and a connector be- tween that station and the BART line.211 The FAA con- sidered “airport passengers” to include the incidental use of the line by airport visitors and employees.212 The 8.7-mile extension was the largest since BART was built in the early 1970s. About 68,000 riders a day were expected to use the line.213 Public transit terminals and rights of way may be made available at less than FMV rental so long as the facilities are directly related to air transportation, in- cluding the use by airport visitors and employees.214 The FAA has taken the position that it believes “the use of airport property for a public transit terminal, transit right-of-way, or related facilities at less than fair rental value to be consistent with the self-sustaining assur- ance.”215 The transit system must be publicly owned and directly related to the transportation of passengers and airport visitors and employees to and from the air- port.216 H. What Are the Requirements for a Self- Sustaining Airport Rate Structure? To reduce the burden on federal and local tax re- sources, airports are required to adopt an airport fee and rental structure that is as self-sustaining as possi- ble. Generally, airport sponsors must impose FMV commercial charges for nonaeronautical uses of airport property.217 Aeronautical user charges are subject to the standard of reasonableness and nondiscrimination, but may be less than FMV.218 An aeronautical charge is surrounding highway, rail, or transit networks can come from the FAA, FHWA, or FTA. 210 U.S. GENERAL ACCOUNTING OFFICE, SURFACE INFRASTRUCTURE: COSTS, FINANCING AND SCHEDULES FOR LARGE-DOLLAR TRANSPORTATION PROJECTS 18 (Feb. 1998). 211 Letter from FAA Associate Administrator Susan Kurland to SFO Airport Director John Martin (Oct. 18, 1996). 212 64 Fed. Reg. 7696. 213 Benjamin Pimentel, BART’s 4-Year Trip to SFO Starts Today, SAN FRANCISCO EXAMINER, Nov. 3, 1997, at 1. 214 64 Fed. Reg. 7696, 7721. 215 61 Fed. Reg. 66735 (Dec. 18, 1996). 216 Id. 217 64 Fed. Reg. 7696, 7721. 218 Id. at 7720-21.

Next: VI. CONFLICT BETWEEN FEDERAL AND LOCAL GOVERNMENTS OVER REVENUE DIVERSION »
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TRB’s Airport Cooperative Research Program (ACRP) Legal Research Digest 2: Theory and Law of Airport Revenue Diversion explores the issue of airport revenue diversion, what prompted Congress to address it, how it has manifested itself, and how the prohibition against revenue diversion has been enforced.

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