Misperception #1: Airport Uses City Tax Money

 

Before reading this post, you might want to read this previous posting, Cameroon Monkeys & Leaky Windshields, Redux. Today we’re tackling the number one misperception about the airport: the airport receives tax dollars from the City of Springfield. Recently, two more questions have come along:

  1. How can the airport spend money on projects (like the new terminal) while the city of Springfield has a budget shortfall?
  2. Why doesn’t the airport give the city money to help with the city budget?

The answer to these two questions can be summed up in two words: revenue diversion. To explain what this means, let’s start with where our airport’s funding comes from. There are two basic sources:

  • The federal government. The feds send us money through the Federal Aviation Administration (FAA). FAA money comes mainly from fees on airline tickets, aviation fuel and cargo shipments..
  • The rest of the funding comes from revenue that the airport generates. This includes income from fees and rents charged to airlines, restaurants, rental car companies, gift shops, etc. To put in simply: any business that does business at the airport must pay the airport for the privilege of doing so.

That’s it. Our airport doesn’t get a cent of money from the city or state. With the exception of the federal funds, the airport supports itself. In fact, the airport pays the city for the following support services: finance, human resources, legal and purchasing. The cost of these city services is negotiated and must be approved by the FAA. Let’s move on and talk about the strings that are attached to FAA money.

When the airport gets money from the FAA, it agrees to follow FAA spending rules. One rule towers above the rest: all airport generated revenue should be spent at the airport. To spend airport generated money elsewhere, without explicit approval of the FAA, is “revenue diversion.” Under federal law, revenue diversion is illegal. If airport money is diverted, the FAA can withhold all federal funding. That can cause financial havoc. For example: the debt service for our airport’s new terminal is based, in part, on anticipated federal money. If that anticipated money suddenly goes away, the airport could, in a worst case scenario, default on the terminal loan.

So what’s up with this “revenue diversion” idea? Why does the FAA care? The Florida Department of Transportation explains it this way—by the way, “grant,” is one of the bureaucratic terms for “money:”

The intent of federal/state aviation funding is to ensure that the national network of airports is well-functioning, efficient and financially viable. Since the federal and state governments are capable of providing only a fraction of airports’ development needs, airports need to spend all the revenues they generate for the operations and development of the airport to ensure adequate infrastructure investment. The ultimate goal of any airport development grant is to make the airports as self-sustaining as possible and minimize the need for further federal/state assistance. The diversion of airport revenue for non-aviation use limits the effectiveness of grant assistance and jeopardizes the goal of achieving self-sustainability. The main rationale for the revenue retention provision is the intent of government to ensure an effective, efficient and safe aviation system. The state and federal contributions to this goal can only be maximized when local aviation-related funds are solely used to achieve the same purpose.

Let’s put all this in the perspective of the current economy and the declining revenues faced by many cities.  In 2008, a legal digest, written by the Airport Cooperative Research Program (ACRP), said this about airport revenue diversion:

The fiscal problems facing municipal governments more generally (including infrastructure needs and such operating costs as fire and police protection), coupled with a declining tax base, have forced many to search for new sources of revenue. Congress has stepped in and enacted laws to circumscribe the ability of federally funded airports to support local governments generally. Unlawful revenue diversion is the use of airport revenue for other than airport purposes.

The digest continues:

It is understandable that financially strapped local governments look to airports as “cash cows.” Indirect taxes can be levied upon airlines and passengers who may have no vote in the local jurisdiction; hence there will be no political price for the local politician to pay for imposing unjust fees upon them for services they do not receive. Indeed, the local politician can be viewed as a hero among his constituents, who enjoy enhanced governmental services with no corresponding local financial burden.

Note this point in the above paragraph: “Indirect taxes can be levied upon airlines and passengers…"

Here’s what the ACRP legal digest says on this point:

Airlines and aircraft operators, as well as airport concessionaires, have objected to diversion on grounds that if airport revenue is spent on non-aviation uses, they will be forced to shoulder the economic burden thereby created. Airports account for between 4 percent and 6 percent of airline industry costs, and a diversion of revenue could, according to the airlines, only worsen the airlines’ financial condition, which, since deregulation, has fallen to historic lows… The airlines are concerned that spending airport revenue on non-airport services results in increased rents, fees, and charges to airlines exceeding the cost of airport capital and operating expenses.

In other words, airlines don’t like revenue diversion. If a city diverts airport revenue, it could end-up forcing some airlines to leave town.

If all this makes your head hurt, well, it’s understandable. Please bear with us for one more point.

When a city owned airport accepts money from the FAA, it’s actually the city that’s accepting the money. In the jargon of the business, the city is the airport “sponsor.” When the money is accepted, there is a “binding obligation between the airport sponsor and the federal government.” That’s according to the ACRP legal digest. If a sponsor diverts money from its airport, the feds can, and will, drop the hammer. Here’s how the Florida Department of Transportation explains it:wingsdollars

Federal transportation officials can also withhold general transportation funds from any local government that diverts revenue generated by a public airport. Under 49 USC §47107, the U.S. Secretary of Transportation “may withhold any amount from funds that would otherwise be made available to the sponsor, including funds that would otherwise be made available to a State, municipality or political subdivision thereof (including any multimodal transportation agency or transit authority of which the sponsor is a member entity) as part of an apportionment or grant if the sponsor fails to reimburse the airport for unlawfully diverted revenue.” This means that the U.S. Secretary of Transportation has the authority to withhold not only aviation, but also transit and rail funds from local governments that fail to reimburse airports for illegally diverted funds.

There you have it. Now you know why the airport can spend money on its own projects while the city of Springfield has a budget shortfall, and why the airport can’t give the city money to help with the city budget.

Read about the most infamous case of revenue diversion by clicking here. Here's a link to another well known case.

 

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