Impact of Regulatory Compliance Costs on Small Airports (2013)

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67 A number of conclusions can be drawn from the data, inter- views, and case studies compiled for this project. The conclu- sions are summarized below and discussed in more detail in the sections that follow. Two areas of potentially useful research were also identified. Finally, the research indicates a number of strategies that might help reduce the impact of new compliance requirements in the future. The conclusions are as follows: 1. The cost of federal compliance requirements continues to grow. 2. Small airports do not have the revenue-generating capacity to meet the costs associated with increased regulatory action. 3. Published cost estimates for regulatory requirements under- state the full cost of compliance. 4. The cost of unfunded requirements continues to grow. 5. Limited staff resources of small airports exacerbate the costs of federal requirements, especially at non-hub airports. 6. The prohibition on charging rent to the TSA costs airports substantial revenue. 7. The recent trend of applying uniform standards to all air- ports results in a disproportionate responsibility for small airports. 8.1 The Cost of Compliance with Federal Requirements Continues to Grow A total of 291 regulatory and compliance actions related to FAA/DOT, environmental, security, and occupational safety and health requirements were issued from 2000 through the end of 2010. Put another way, the federal agencies adopted new requirements at a rate equivalent to one requirement every 2 weeks during the study period. Many new require- ments add continuing costs to airports by specifying periodic updates, inspections, monitoring, etc. The FAA has an ongoing process to maintain and update all advisory circulars on a regular basis. The revisions may result in additional costs to airports as the FAA seeks to reduce the risk of accidents and incidents. In its continuing efforts to enhance airport safety, the FAA Office of Airports business plan has identified new ACs for publication, which will result in new costs to airports. For example, the 2012 business plan calls for issuance of a proposed AC on the use of transponders in airport vehicles. The FAA is currently developing requirements for SMSs and environmental management systems (EMSs) that will result in new costs for airports. The FAA is also moving toward requiring the use of GIS data to support airport sur- veys and development of approach procedures and electronic airport layout plans. Full implementation of these require- ments will likely add new costs for airports. In interviews for the case studies and survey follow-up, many airport manag- ers predicted that these initiatives would add to costs. Environmental regulations are also reviewed periodically to evaluate options that streamline requirements and update outdated practices. For example, prior to 2002, the SPCC regulations had not been updated since 1990. In some cases, the amended regulations minimized the regulatory impact for small airports (i.e., exemptions for underground storage tanks and containers with capacities less than 55 gallons). Other changes, however, resulted in increased regulatory costs (e.g., integrity testing and plan updates). In the security area, TSA funds for the LEO support pro- gram have remained flat or declined, while cost of providing LEO support has grown. In interviews for the case studies and survey follow-up, multiple airport managers said they were considering dropping out of the program, because they will save more in LEO costs than they currently receive from the TSA. During these interviews, airports have reported an increase in the number and complexity of TSA reviews and audits. These review and audit activities require full participation of airport staff during the audit itself and following the audit to respond to reports and recommendations. C H A P T E R 8 Conclusions

68 8.2 Small Airports Do Not Have the Revenue-Generating Capacity to Meet the Costs Associated with Increased Regulatory Action For many small airports, low levels of passenger enplane- ments and/or operations limit their ability to raise revenue to meet the cost of new regulatory requirements. Because of lower traffic levels and limited tenant operations, small airports have little leverage with airlines and other tenants to increase fees and charges to cover new federal compli- ance costs. Therefore, the additional costs reduce the oper- ating margin (if any) that airports generate and ultimately reduce the airport’s cash reserves. This situation is particu- larly important because small airports are typically subject to the same or similar regulatory requirements as large airports with greater revenue-generating capacity. For example, a new $500,000 regulatory requirement would cost a small airport with 20,000 passengers $25 per passenger. That same require- ment at an airport with 2 million passengers would cost only 25 cents per passenger. A number of airport executives interviewed in survey follow-ups and the case studies noted the higher costs to small airports of meeting the same standards for snow and ice con- trol plans, AEPs, and other administrative requirements that large airports meet. GTR’s AEP grew from 30 to 180 pages, because the FAA determined that all Part 139 airports should follow the same format for the AEP and include the same information. Financial data submitted by airports to the FAA demonstrate the financial challenges facing small airports. Figure 35 pres- ents the aggregate operating results for small hub and non- hub airports for 2011. The data is submitted to the FAA based on each airport’s fiscal year, and the non-hub data includes the results for non-primary commercial service airports that were not included in the scope of this study. As a group, small hub airports suffered operating losses of $221 million, and non-hub airports suffered operating losses of $530 million. Each group also generated net operating losses in 2010. Figure 36 presents the results on a per-airport basis. Small hub airports on average lost $3.0 million and non-hub air- ports on average lost $1.5 million. Most small airports do not have access to ancillary revenues generated by industrial parks or multimodal transportation centers like those oper- ated by HSV and SBA. In contrast, large hub airports generated total operating surplus of $985 million in 2011 ($32.9 million per airport average). Medium hub airports, however, generated operat- ing deficits of $104 million ($2.9 million per airport average). 8.3 Published Cost Estimates for Regulatory Requirements Understate the Full Cost of Compliance There are two primary causes for the understatement of costs. First, agencies publish cost estimates for only a small portion of the federal requirements identified in the study. Second, even when agencies estimate cost impacts, the esti- mates are frequently low. In general, only formal rulemaking documents may be subject to a requirement for a cost analysis. For example, only six of the 140 requirements adopted by the FAA were formal Source: FAA Compliance Activity Tracking System data, http://cats.airports.faa.gov/Reports/reports.cfm. -$1,000,000 -$500,000 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 Small Hubs Non-hubs Operating Revenue (000) Operating Expenses (000) Net Operating Results (000) Figure 35. Aggregate operating results for small airports, 2011.

69 regulatory documents. The FAA typically adopts ACs, PGLs, CertAlerts, and other guidance documents without analyz- ing compliance costs, even when the guidance is effectively binding on airports. Out of 81 security requirements adopted during the study period, only two were formal regulatory documents. Even when formal rulemaking is employed, unless the requirement will meet minimum cost levels, or will have a sig- nificant impact on small entities, a detailed estimate of costs is not required. Only two of the six FAA regulatory documents issued during the study period included a full analysis of com- pliance costs. Fourteen of the 39 environmental requirements included specific cost projections. Only one security regula- tion had a cost analysis, and that analysis did not provide a separate breakout for airports. Additionally, in many cases, regulatory actions had multiple components. Costs may be projected separately for each component, and some rules may include combinations of components with cost reductions and increases. Based on the survey results, cost estimates published by the agencies are not consistent with airports’ actual experi- ence. For example, the FAA’s projections of the cost of com- pliance with the 2004 amendments to Part 139 were lower than the initial and recurring costs reported by existing certificate holders and lower than the initial costs reported by newly certificated carriers. Estimated costs from the eco- nomic analysis for Phase I environmental site assessments ranged from $2,185 to $2,190. Industry experience for air- ports and related properties are usually between $5,000 and $9,000. Similarly, the reported average costs for SPCC train- ing ($4,000) exceeds the range of published estimated costs ($1,930 to $3,650 per year). 8.4 The Cost of Compliance with Unfunded Requirements Continues to Grow The 291 federal requirements identified in this study (with limited exceptions) either added to or expanded upon exist- ing requirements. Airports must absorb at least some of the costs of these requirements and, in many cases, must absorb the full costs. Except for the LEO support program discussed in Sec- tion 8.4.3, federal assistance is not available to cover the O&M costs associated with new compliance requirements. For exam- ple, one airport reported that a significant cost of a new FAA airfield signage requirement is the cost of keeping the signs clear of snow and ice during the winter and clear of grass during the rest of the year. 8.4.1 FAA/DOT requirements DOT has no independent funding programs available for airports. Only those FAA requirements that involve capital develop- ment may be eligible for federal AIP funding. Requirements that affect airport operations, administration, or mainte- nance are ineligible for AIP funds. Moreover, AIP eligibility does not guarantee funding. For example, one of the case study airports with a substantial RSA project received only a 50 percent contribution from the FAA, even when statutory federal share was 95 percent. At least one airport that incurred costs for perimeter fencing, runway pro- tection work, and airfield signage work reported receiving no federal funds. Moreover, the level of AIP funding remained −$5,000,000 $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Small Hubs Non-hubs Operating Revenue Operating Expenses Net Operating Results Source: FAA Compliance Activity Tracking System data, http://cats.airports.faa.gov/Reports/reports.cfm. Figure 36. Average operating results for small airports, 2011.

70 flat between 2008 and 2011 at approximately $3.5 billion. It declined by $165 million in 2012 and will remain at this lower level through 2015. Even when AIP funding is available, airports must pay a local matching share. This matching share recently increased from 5 to 10 percent of eligible project costs. Finally, use of AIP funds to comply with federal require- ments reduces the amount of funds available for actual project implementation. AIP funding is fixed each year at an abso- lute dollar amount. In the aggregate, each dollar of AIP funds spent on compliance requirements is one dollar less available to spend on project implementation. Similarly, there is a max- imum amount of AIP funds the FAA can feasibly afford to provide an individual airport each year. Each dollar the air- port spends on compliance requirements out of this amount is one less dollar available to the airport to finance project implementation. PFCs are available to help pay for compliance costs associated with eligible capital projects. However, like AIP funds, PFCs cannot be used for operational costs. In addition, the PFC ceil- ing has not been raised since 2001. The only source of increased PFC revenue since that time has been through increased passenger traffic. Since 2007, the year before the last recession started, passenger traffic at small hub and non-hub airports has declined by 8 percent and 3 percent, respectively. In short, PFC revenue opportunities for small airports have declined while compliance costs have increased. This situation is reflected in the survey results discussed in Section 3.6.2. For most require- ments, a majority of airports reported using no PFCs. 8.4.2 Environmental Requirements Funding to comply solely with environmental require- ments is even more limited than funding for FAA/DOT com- pliance requirements. There is no distinct federal program (comparable to AIP) for general environmental compliance. ACRP Synthesis of Airport Practice 24: Strategies and Financ- ing Opportunities for Airport Environmental Programs (2011) provides a comprehensive listing of federal and state fund- ing sources for environmental initiatives. However, in many cases, funds are provided only for voluntary initiatives, not for mandatory compliance actions. In some cases, AIP funds associated with other projects may be used to fund a portion of the environmental mitigation measures necessary for the project or for projects needed to comply with air and water quality requirements. However, the limitations on AIP funding discussed in Section 8.4.1 apply. 8.4.3 Security Requirements TSA and AIP funds have been provided for projects to com- ply with security requirements. Local matching requirements and limits on annual appropriations are also issues. Moreover, small airports may not receive the same priority for funding as larger airports with perceived greater security concerns. In the aftermath of the events of 9/11, Congress amended the AIP statute to make projects to accommodate in-line EDSs for checked baggage screening eligible for AIP funding. Rely- ing on this expanded eligibility, the FAA provided substantial AIP funding in FY 2001 and FY 2002. However, Congress has prohibited the use of AIP grants for baggage screening proj- ects since 2003, and airports have been required to use their own resources to finance these projects, unless TSA funding is provided. Federal funding is not available for operational and admin- istrative costs, which have been growing. For example, airports interviewed for the case studies and survey follow-up report that the TSA has increased its monitoring, auditing, and inves- tigation activities, with a corresponding increase in costs to airports. The LEO support program provides reimbursement to participating airports for LEO staffing at screening check- points. However, airports interviewed for this research report that the costs of meeting TSA requirements for program fund- ing are substantial. In addition, the TSA has been reducing its share of costs reimbursed. 8.4.4 Occupational Safety and Health Requirements OSHA does not have direct jurisdiction over airports. In these circumstances there is no direct federal support for com- pliance with occupational safety and health requirements. When airport contractors reflect OSHA compliance costs in their bids, AIP funding could be available, but with the limi- tations noted previously. However, OSHA requirements may be applied through states or included in voluntary programs. During the study period, 21 compliance actions were adopted by OSHA, without federal funding attached. 8.5 Limited Staff Resources of Small Airports Exacerbate the Cost of Compliance with Federal Requirements, Especially at Non-hub Airports Non-hub airports, in particular, have limited staff available to satisfy new compliance requirements. For example, the three non-hub airports included in the case studies average 10 full-time employees for all administrative and operational functions. Moreover, the limited revenue opportunities avail- able preclude hiring additional staff or contracting out for assistance with compliance requirements. Non-hub airports averaged operating losses of $1.5 billion per airport in 2011. They also suffered operating losses in 2010.

71 Small airport staff members are responsible for a variety of duties from performing administrative, maintenance, and operational tasks to understanding, planning, implementing, and enforcing regulatory requirements. When a new require- ment is adopted, existing staff must assume the responsibil- ity for compliance. In addition, management cannot readily reassign existing duties to other employees to compensate for the added responsibility of meeting the new requirement. For example, one non-hub airport manager stated that the primary impact from the FAA’s new airfield signage require- ments was not the cost of installation of the signs themselves, but the ongoing costs of maintaining visibility. In the summer, additional staff time is required to mow around signs. In the winter, additional time is required to keep signs clear of snow. Furthermore, non-hub airport staff members typically do not have the time or expertise to understand all the require- ments applicable to the airport, especially new ones. The lack of expertise and limited time available could increase the risk of inadvertent non-compliance. Small hub airports generally have greater staff resources, but more complex operational and administrative requirements, than non-hub airports. Even with larger staff, department heads and line personnel are still more likely to be generalists than specialists. As with non-hub airports, small hub airports have comparable impediments to raising revenue to pay for special- ized expertise (through staff or contractors) needed to under- stand and implement new compliance requirements as they are adopted. Small hub airports had operating losses of $3 million per airport in 2011 and suffered losses in 2010 as well. 8.6 The Prohibition on Charging Rent to the TSA Costs Airports Substantial Revenue Airports are prohibited from charging rent to the TSA for the use of passenger and baggage screening space. For the case study airports, the lost revenue ranged from $46,000 to $350,000. For airports with TSA space funded by AIP grants, this prohibition would not have an impact, because the grant assurances would prohibit a charge. Airports are permitted to charge for utilities and janitorial services for screening space, but most airports do not seem to be aware of this policy, or they do not exercise the privilege. 8.7 The Recent Trend of Applying Uniform Standards to All Airports Results in a Disproportionate Responsibility for Small Airports The FAA, in particular, has in recent years moved toward applying uniform requirements for all airports. The FAA has determined there are benefits for the safety and efficiency of the aviation system when airports adopt uniform practices and procedures. However, when the FAA has mandated uni- form requirements, the requirements tended to reflect the operations and airfield design of large airports, not small ones. Therefore, small airports are paying added costs to develop plans and procedures that may be excessive to their needs. Small airports are concerned that the FAA will continue this practice when it implements the requirements for SMSs and EMSs. For example, GTR’s AEP grew from 30 to 180 pages, because the FAA determined that all Part 139 airports should follow the same format for the AEP and include the same information. 8.8 Additional Research Two areas for future research that could increase under- standing of the issues studied in this report or improve airport practices were identified. First, airports and agencies use a variety of methods to esti- mate current and projected cost impacts of regulations. The development of a standardized methodology was beyond the scope of this research. Additional research to develop stan- dard procedures for cost projections and calculations could lead to improved projections of cost impacts of regulatory actions and could be useful to airport operators in developing capital and operating budgets. It is recognized that a single approach may not be suitable for all federal agencies and all regulatory actions, however. Second, it was not possible to identify a relationship between costs and two measures of activity—enplanements and com- mercial operations. The small number of responses to indi- vidual questions may have contributed to this outcome. Additional research focused on determining whether rela- tionships exist between cost and activity level or other vari- ables (e.g., airport size) would be useful. If such relationships do exist, they could be used by small airports to estimate their federal compliance costs, without the need to implement costly and complex accounting systems. 8.9 Options to Reduce Future Impacts In the research undertaken in this study, including the case studies, a number of options were identified that could mitigate or reduce the impact of small airports’ exposure to unfunded requirements in the future. Most of the options, however, are not within the airports’ control (and are out- side the scope of this study); they would require action by the government agencies and regulators—for example, increased funding, changes to policy or procedures to account for dif- ferences in the size and complexity of airports, or changes to

72 policy or procedures that would estimate compliance costs more frequently and improve the accuracy and reliability of agency cost projections. The following options were identi- fied that are within the airports’ control: • Consider engaging federal, state, and local regulators dur- ing the regulatory comment period. Increased participa- tion by small airports during this period could include providing comments in narrative form and/or submitting cost data. For example, when the FAA amended Part 139 in 2004, it adjusted its economic analysis to reflect cost data that had been submitted by individual airports. • Provide public comment responses when agencies issue ACs, policy statements, PGLs, and related documents in draft form. The public comment process provides airports a chance to inform agencies of the cost impact of new proposals. Increased participation by small airports when agencies seek public comment on proposed requirements could lead to improved agency cost projections or reduced regulatory impacts.