Theory and Law of Airport Revenue Diversion (2008)

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14 In 1996, congressional hearings focused on airport revenue diversion, and in particular, the diversion by the City of Los Angeles from Los Angeles International Airport (LAX). The U.S. DOT’s IG testified that FAA enforcement in this area was lax and that penalties for revenue diversion (then $50,000) were weak. The air- line trade association testified that the FAA had failed to promulgate rules mandated in earlier legislation.91 As a result, new legislation was introduced and passed strengthening the revenue diversion prohibition and the sanctions to be imposed. The Airport Revenue Protection Act of 199692 ex- panded the revenue restriction requirement to any air- port receiving federal financial assistance, public or private, after October 1, 1996.93 It codified the existing grant assurance revenue-use requirements.94 It also reaffirmed the power of the Secretary of Transportation (acting through the FAA Administrator) to withhold funds from a violator of the revenue-use requirements, to institute a civil action, and to impose civil penalties in an amount three times that of the unlawfully di- verted revenue.95 This legislation enacted a 6-year stat- ute of limitations for reimbursement for sponsor capital contributions or operating expenses, running from the date of the contribution or expense. IV. FEDERAL AVIATION ADMINISTRATION POLICIES AND PROCEDURES A. Evolution of Policy The statutes described in the preceding section are elucidated in a series of FAA policy statements and pro- cedures addressing what are or are not appropriate expenditures for federally-assisted airports. This sec- tion addresses the evolution of federal policy principally as described in the FAA’s attempts to apply legislative requirements to federal funding in a number of policy statements and regulations. In 1986, the FAA announced that it would consider an airport sponsor’s funds in support of nonaviation 91 Airport Revenue Diversion, supra note 54. 92 Title VIII of the Federal Administration Reauthorization Act of 1996, 104 Pub. L. No. 264 § 704, 110 Stat. 3213 (Oct. 9, 1996). 93 49 U.S.C. § 47133. 94 Id. 95 49 U.S.C. § 46301(n)(5). The Department of Transporta- tion and Related Agencies Appropriation Act of 1998, 105 Pub. L. No. 66, 111 Stat. 1425 (1998), included a provision relieving the State of Hawaii from reimbursing the airport for diverted airport revenue as compensation for ceded native land, but prospectively prohibiting further revenue diversion. Brian Duus, Reconciliation Between the United States and Native Hawaiians: The Duty of the United States to Recognize a Native Hawaiian Nation and Settle the Ceded Lands Dispute, 4 ASIAN- PACIFIC L. & POL'Y J. 393 (2003). See Office of Hawaiian Af- fairs v. Hawaii, 110 Haw. 338, 133 P.3d 767 (Hawaii 2006). facilities as an element militating against a grant of discretionary AIP funds.96 The U.S. DOT issued a “Policy Regarding Airport Rates and Charges” in February 1995.97 It provided that airports were not to charge more than aeronautic costs on a break-even basis. The rate base was to be valued according to historic cost, rather than fair market value (FMV). In 1996, the FAA issued a comprehensive policy statement on airport rates and charges that superseded the 1995 policy statement.98 It required that: • Fees for the use of airfield and public-use roadways should be based on cost, as valued by their historic cost to the original airport proprietor; • Rates, fees, and charges to aeronautical users must be fair and reasonable; • Unjustly discriminatory rates and charges are prohib- ited; and • The fee and rental structure for the airport must make it as self-sustaining as possible.99 The policy statement also required that the rate base be established by reasonable, consistent, and transpar- ent methods. Fees may be set by the compensatory method, by the residual method, by a combination of the two, or by any other reasonable methodology so long as it is applied consistently to similarly situated aero- nautical users and is just and reasonable. Capital and operating costs must be allocated to various cost centers on the basis of cost causation. New fees must not be imposed to create revenue surpluses, although reason- able reserves may be maintained to facilitate financing and cover contingencies.100 The policy statement stressed the use of airport–airline consultation and ne- gotiation as the preferred means of establishing fees.101 Also in 1996, the FAA issued its rules addressing practices in federally assisted airport proceedings, in- cluding rules for filing and adjudicating complaints.102 Among other things, it declared that persons alleging revenue diversion that do business with, or pay fees or rents to, a federally assisted airport are deemed directly 96 FAA, Policy on Use of Airport Improvement Discretionary Funds, 51 Fed. Reg. 20728 (June 6, 1986). 97 60 Fed. Reg. 6906 (Feb. 3, 1995). See also FAA, Proposed Policy Regarding Airport Rates and Charges – Part VIII (sup- plemental notice of proposed policy), 59 Fed. Reg. 51836 (Oct. 12, 1994), and FAA, Policy Regarding Airport Rates and Charges—Part IV (request for comments), 60 Fed. Reg. 6906 (Feb. 3, 1995). 98 FAA, Policy Regarding Airport Rates and Charges (policy statement), 61 Fed. Reg. 31994 (June 21, 1996). 99 61 Fed. Reg. 31994 (June 21, 1996). 100 See Alaska Airlines v. Los Angeles World Airports, Doc. No. OST-2007-27331-184 (recommended decision of A.L.J. Richard Goodwin, May 15, 2007). 101 61 Fed. Reg. 31994, 32018. 102 FAA, Rules of Practice for Federally-Assisted Airport Proceedings (final rule), 61 Fed. Reg. 53998 (Oct. 16, 1996).

15 and substantially affected for purposes of having stand- ing to file a revenue diversion complaint.103 The FAA takes the position that if the sale of airport property for nonairport purposes causes an increase in airport fees, carriers serving the airport may file a complaint under 49 U.S.C. § 47129 to challenge the increase. The fees or rents they pay are considered airport revenue. An asso- ciation will be allowed to file a complaint by its mem- bers who are directly and substantially affected by po- tential revenue diversion. Nonaeronautical users may also be deemed directly and substantially affected for purposes of standing. However, an airport employee does not have standing.104 The FAA expected that before formal complaints were filed, complainants would first make good faith efforts to resolve the disputes infor- mally.105 In 1999, the FAA concluded that the impact on AIP discretionary funding of revenue diversion, delinquent submission of financial reports, unsatisfactory progress on outstanding grant agreements, and the use of AIP funds on low-priority development was a priority in the FAA’s National Priority System development plan.106 Where the FAA concludes that an airport is not in com- pliance with the revenue-diversion prohibition, the FAA may, after opportunity for notice and hearing, and upon failure of the sponsor to take corrective action, with- hold: (1) future AIP entitlement and discretionary grants;107 (2) approval for the modification of existing grant agreements that seek an increase in the amount of AIP funds available;108 and/or (3) payments under existing grants.109 Also in 1999, the FAA issued comprehensive policies and procedures on the use of airport revenue.110 A per- son directly and substantially aggrieved by any alleged noncompliance may file a complaint with the FAA.111 The complainant must provide a concise and complete statement of the facts relied upon to substantiate each allegation and describe how he or she was directly and 103 49 U.S.C. § 47107(b); 14 C.F.R. § 16.23(a). 104 Clarke v. City of Alamogordo, 2006 FAA Lexis 629 (2006). 105 14 C.F.R. pt. 16. See also FAA, Policy and Procedures Concerning the Use of Airport Revenues (supplemental notice of proposed policy), 61 Fed. Reg. 66735 (Dec. 18, 1996); and FAA, Policy and Procedures Concerning the Use of Airport Revenue (notice of proposed policy), 61 Fed. Reg. 7134 (Feb. 26, 1996). 106 FAA, Factors Affecting Award of Airport Improvement Program (AIP) Discretionary Funding, 64 Fed. Reg. 31031 (June 9, 1999). 107 49 U.S.C. §§ 47106(d), 47111(e). 108 49 U.S.C. § 47111(e). 109 49 U.S.C. § 47111(d). 110 FAA, Policy and Procedures Concerning the Use of Air- port Revenue–Part II (final policy), 64 Fed. Reg. 7696 (Feb. 16, 1999). See also FAA, Policy Regarding Airport Rates and Charges (advance notice of proposed policy), 63 Fed. Reg. 43228 (Aug. 12, 1998). 111 14 C.F.R. § 16.23. substantially affected by the purported noncompli- ance.112 If a prima facie case is established, the FAA will investigate.113 In rendering its initial determination, the FAA may render a decision based on informal proce- dures (without a formal, on-the-record hearing) consist- ing of evidence adduced from the complaint and the responsive pleadings and documents provided by each party.114 A party adversely affected by the decision of the Di- rector of the FAA Office of Airport Safety and Stan- dards may file an appeal with the FAA Associate Ad- ministrator within 30 days of the date of service of the initial determination. The airport sponsor may request an evidentiary hearing if the Director’s determination found a violation and entitlements are to be withheld. On appeal, the Associate Administrator assesses whether (1) the findings of fact made by the Director are supported by a preponderance of reliable, probative, and substantial evidence, and (2) the conclusions of law are consistent with applicable law, precedent, and pub- lic policy.115 In making his or her determination, the Associate Administrator issues a final decision without a hearing.116 If no appeal is filed within the prescribed period, the Director's determination becomes final and is not judicially reviewable.117 The FAA may impose sanctions against an airport operator if it concludes unlawful revenue diversion has occurred: “The FAA seeks current compliance by airport sponsors and generally does not take punitive action for past behavior except in very limited circumstances (such as in the case of unlawful diversion of airport revenue).”118 The FAA may not withhold new grants and payments or withhold approval of an application for entitlement funds for more than 180 days unless the airport sponsor is provided with an opportunity for a hearing and a final decision of noncompliance is made.119 B. Less Formal Policies In addition to formal policies published in the Federal Register, FAA policies also are expressed in FAA Chief Counsel and U.S. DOT General Counsel Opinions and in Guidance Letters issued by Airport Division Staff, as well as in Airport Grant Agreements. Several of these are discussed below. 112 14 C.F.R. § 16.23(b)(3),(4). 113 But see Continental Micronesia, Inc. v. Commonwealth of the Northern Mariana Islands and Commonwealth Ports Auth., DOT Order 95-4-14 (1995) (where the DOT concluded it had no jurisdiction over an airport revenue diversion com- plaint). 114 14 C.F.R. § 16.29. 115 See Ricks v. Millington Municipal Airport, FAA Docket No. 16-98-19, at 21 (Dec. 30, 1999), and 14 C.F.R., § 16.227. 116 14 C.F.R. § 16.33. 117 Id. 118 Jim Martyn v. Port of Anacortes, Wash- ington, 2003 FAA Lexis 162 (Apr. 14, 2003). 119 49 U.S.C. § 47111(d).

16 C. Contractual Obligations of Airport Operators: Grant Assurances As noted above, 49 U.S.C. § 47107, originating in the AAIA, requires that the U.S. DOT may approve a pro- ject grant application for airport development only if the airport provides certain written assurances, includ- ing assurances on the use of airport revenue.120 The grant assurance on use of airport revenue provides: [A]ll revenues generated by the airport and any local taxes on aviation fuel established after December 30, 1987, will be expended by it 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 op- erator of the airport and directly and substantially re- lated to the actual air transportation of passengers or property; or for noise mitigation purposes on or off the airport. Provided, however, that if covenants or assur- ances in debt obligations issued before September 3, 1982, by the owner or operator of the airport, or provi- sions enacted before September 3, 1982, in governing statutes controlling the owner or operator's financing, provide for the use of the revenues from any of the airport owner or operator's facilities, including the airport, to support not only the airport but also the airport owner or operator's general debt obligations or other facilities, then this limitation on the use of all revenues generated by the airport (and, in the case of a public airport, local taxes on aviation fuel) shall not apply.121 Thus, before a new grant is conferred, the FAA may insist that such funds be used only for specified pur- poses. Moreover, prospectively, theses grant assurances may hold the airport operator to certain commitments beyond those explicitly enumerated in the applicable statutes and regulations. The FAA has noted: The federal role in civil aviation has been augmented by various legislative actions that authorize programs for providing federal funds and other assistance to local communities for the development of airport facilities. In each such program, the airport sponsor assumes certain obligations, either by contract or restrictive covenants in property deeds and conveyance instruments, to maintain and operate its airport facilities safely, efficiently and in accordance with specified conditions. Commitments as- sumed by airport sponsors in property conveyance or grant agreements are important factors in maintaining a high degree of safety and efficiency in airport design, con- struction, operation, and maintenance, as well as ensur- ing the public has fair and reasonable access to the air- port.122 120 49 U.S.C. § 47107(b). 121 Assurance 25(a), "Airport Revenues," implementing the requirements of 49 U.S.C. §§ 47107(b) and 47133, reproduced at http://www.faa.gov/airports_airtraffic/airports/aip/grant_assur ances/media/airport_sponsor_assurances.pdf (Last visited Jan. 23, 2008). See also In the Matter of Revenue Diversion by the City of Los Angeles at Los Angeles Int’l, Ontario, Van Nuys and Palmdale Airports, 1997 FAA Lexis 1535 (Mar. 17, 1997). 122 Boca Aviation v. Boca Raton Airport Auth., 2003 FAA Lexis 143 (Mar. 20, 2003). D. The Airport Compliance Program The FAA ensures that airport sponsors adhere to their federal obligations through its Airport Compliance Program.123 The FAA seeks to achieve voluntary com- pliance with such obligations. Sponsor obligations are imposed by statute and regulation, as well as through grant agreements, when the sponsor receives federal funds, or when accepting the transfer of federal prop- erty for airport purposes. Obligations incorporated into grant agreements and instruments of conveyance be- come contractually binding upon airport sponsors. Through the Airport Compliance Program, the FAA seeks to ensure compliance by airport owners with their contractual obligations as specified in their grant agreements and instruments of conveyance.124 One way an airport operator avoids conflicts over is- sues of revenue diversion with the FAA is to seek prior approval of land transfers. For example, certain air- ports have sought and obtained prior FAA approval for the exchange of airport land with private developers for privately owned land of greater potential for airport use.125 Similarly, the sale of airport property at FMV has received FAA approval.126 The FAA has authority to 123 FAA Compliance Handbook, FAA Order 5190.6A (Oct. 2, 1989), contains guidance on the policies and procedures for FAA personnel to carry out in implementing the FAA Airport Compliance Program and interpreting and administering the commitments airport operators make as a condition of receiv- ing federal grants or property. 124 Airport compliance enforcement procedures are set forth in FAA Rules of Practice for Federally-Assisted Airport Pro- ceedings, 14 C.F.R. pt. 16. See the current requirements at http://www.faa.gov/airports_airtraffic/airports/aip/grant_assur ances/media/airport_sponsor_assurances.pdf (Last visited Jan. 23, 2008). 125 Notice of Intent To Rule on Request To Release Airport Property at the Deer Park Municipal Airport, Deer Park, WA, 69 Fed. Reg. 63,191 (Oct. 29, 2004): The Deer Park Municipal Airport requests the release of non-aeronautical airport property consisting of approximately 5 acres on the east side of the airport to a private developer. The purpose of this release is to trade unimproved airport land to a private developer for use as a residential emergency egress, for 8.88 acres of improved light industrial property adjacent to the west side of the airport. The airport property proposed for re- lease has not been used for aviation purposes and no aeronauti- cal use of the property is planned or anticipated. The City of Deer Park has determined that the property requested is not within critical areas affecting safety of flight and that the pro- posed use of the property as a residential emergency egress would not interfere with airport operations. The property to be acquired by the Airport in trade would benefit the airport for fu- ture revenue producing development. The airport would realize a net gain of property. 126 Notice of Intent To Rule on Transfer of Airport and Re- quests To Release Airport Property at the North Bend Mu- nicipal Airport, North Bend, OR, 69 Fed. Reg. 44,707 (July 27, 2004): The City of North Bend Oregon plans to transfer all assets and liabilities associated with the North Bend Municipal Air- port, including surplus government land and AIP Grant obliga- tions, to the Coos County Airport District. After the transfer, the Coos County Airport District will sell 6.92 acres of airport land