Theory and Law of Airport Revenue Diversion (2008)

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25 defined by the FAA as “any activity which involves, makes possible, or is required for the operation of air- craft, or which contributes to or is required for the safety of such operations.”219 Certain use of property for community services, such as parks, recreational facilities, or bike and jogging paths are acceptable. However, the purchase or opera- tion of road maintenance equipment and services or police and fire services not directly in support of the airport are deemed impermissible.220 Certain uses of property for nonprofit aviation organizations at reduced rental rates, such as aviation museums, educational programs, or Civil Air Patrol operations, are acceptable. Moreover, nominal lease rates may be imposed upon military units.221 VI. CONFLICT BETWEEN FEDERAL AND LOCAL GOVERNMENTS OVER REVENUE DIVERSION A. Agency Application of Revenue-Diversion Policy This section succinctly introduces the policies de- scribed above in specific factual contexts, relying on U.S. DOT IG reports,222 GAO reports, and FAA and U.S. DOT orders.223 Tracing the outcome of all allegations and investigations of revenue diversion is beyond the scope of this project. This discussion, however, provides examples of how and why the question of revenue di- version has been raised or asserted in particular cases. B. Revenue Diversion Found Probably the most notorious case of revenue diversion involved Los Angeles International Airport. In the wake of the Los Angeles riots, city officials began to seek fi- nancial resources to rebuild the city and enhance police and fire services. In 1988, the City of Los Angeles hired a consultant to assist it in identifying ways of lawfully diverting airport revenue to the city. The George H.W. Bush Administration favored selling LAX, a sale that could have generated more than $1 billion. But an out- right sale was deemed politically problematic. Rather than sell the airport, the city proposed instead to amend the city charter to allow airport revenue to be placed in the city treasury. The airport’s cash surplus was $25 million in 1991, money that would enable the city to hire 800 police officers, 108 paramedics, and 60 fire- 219 Id. at 7710. See also DOT Policy Statement on Airport Rates and Charges, 61 Fed. Reg. 31994, 32017 (June 21, 1996). 220 64 Fed. Reg. 7696, 7721. 221 Id. at 7721. 222 The role of the Department of Transportation Office of the Inspector General is to audit and investigate as necessary to promote effectiveness in departmental programs. See http://www.oig.dot.gov/about.jsp (Last visited Jan. 28, 2008). 223 Many of the letters and memoranda cited were obtained by the researcher through his submission of a Freedom of In- formation Request to determine the outcome of cases and other information available. fighters; airport surpluses were projected to grow to $70 million annually. The charter amendment (Amendment K) passed in 1992.224 One source noted: The airline industry led the opposition to the diversion of revenue from the airport to the city treasury. Opponents argued that passage of Proposition K would drive up prices at the airport on everything from airline tickets to airport food concessions and would diminish airport maintenance and improvements. Roger Cohen, Vice President for Government Affairs of the Air Transporta- tion Association, said "the airport is the one thing in the city that works…. It has been run like a business and at no taxpayer expense. Proposition K represents the final blow in politicization of the airport." Cohen feared that, under Proposition K, city officials would use their power to review Airport Commission decisions to increase ter- minal rents, concession fees, and airline landing charges in order to bolster the funds in the city treasury. These costs would, of course, have to be passed on to consumers, thereby possibly decreasing the number of airline pa- trons.225 In 1994, the U.S. Supreme Court handed down its de- cision in Northwest Airlines v. County of Kent, uphold- ing a change in airport fee methodology from residual to compensatory. It held that an airport charge is reason- able “if it (1) is based on some fair approximation of the use of the facilities, (2) is not excessive in relation to the benefits conferred, and (3) does not discriminate against interstate commerce.”226 Under this approach, airports were “given wide latitude in selecting a particular rate methodology and fee structure.”227 Shortly after this decision, the City of Los Angeles changed its landing fee methodology from residual to compensatory. It imposed a FMV requirement in air- field valuation, based on the value of the land at the time it was ceded to the airport in 1928, adjusted for inflation. This resulted in a tripling of aircraft landing fees, from 51 cents per thousand pounds, first to $1.51, then to $2.06.228 The airlines filed suit, but the courts held the applicable federal statutes (particularly the Anti-Head Tax Act) accorded no private right of ac- 224 In 1992, the city passed Referendum K, which removed a prohibition in the city charter against taking airport revenue off the airport. Imes, supra note 79, at 1039, 1070–71 (1995). 225 Imes, supra note 79, at 1039, 1071–72 [citations omitted]. 226 510 U.S. 355, 368, 114 S. Ct. 855, 864, 127 L. Ed. 2d 183, 196 (1994). 227 Id. For a comprehensive review of this decision, see Rise J. Peters, Case Comment: Northwest Airlines v. County of Kent, Michigan: More Than You Ever Wanted to Know About Airport Ratesetting, Part One (Pricing in the Courts), 22 TRANSP. L.J. 291 (1994). 228 Airport Revenue Diversion, Hearings before the U.S. Sen. Subcomm. on Aviation of the Commerce Comm. (May 1, 1996), at 5-6 (statement of Sen. Wendell Ford), reproduced at http://books.google.com/books?id=nQEDkwETmdkC&dq=%22ai rport+revenue+diversion%22&printsec=frontcover&source= web&ots=f7QKBCZe8&sig=ZsilCY2rHH1ZSYysVMapyMALm MM#PPA46,M1 (Last visited Jan. 23, 2008).

26 tion.229 The U.S. DOT Secretary mediated a standstill agreement. Congress responded with the FAAA Act, directing the U.S. DOT to promulgate policies and procedures within 90 days providing for the “prompt and effective en- forcement” of the revenue-diversion prohibition and giving the U.S. DOT authority to determine fee reason- ableness. (In fact, the FAA failed to promulgate the fi- nal policy until 1996.) Further, the 1994 legislation prohibited airport payment for city services unrelated to airport operations, imposed new reporting require- ments on airports, and authorized civil penalties up to $50,000.230 Nevertheless, in February 1995, the City of Los Ange- les transferred $52 million to its general fund from the airport, claiming this amount consisted of principal and interest on land condemned for the Century Freeway in 1988. In February 1995, the FAA issued an informal opinion letter reviewing the legality of the transfer and concluded that it would not block the transfer.231 The following month, the airline industry trade association filed a formal challenge.232 Subsequently, Los Angeles announced it intended to use airport revenue to cover various municipal operating expenses, including police protection for the city at large.233 In response, in 1997, the FAA froze $60 million in federal grants for capital improvements at Los Angeles's four airports, including LAX, and insisted upon repayment to the Los Angeles Airport Department of $30 million that the city had nves- n Air ee on 229 Air Transport Ass’n of America v. City of Los Angeles, 844 F. Supp. 550 (C.D. Cal. 1994). 230 49 U.S.C. § 47129. 231 Letter from Cynthia Rich, Associate Administrator for Airports, to Theodore O. Stein, President, Board of Airport Commissioners (Feb. 28, 1995), cited in Air Transport Ass’n of America v. City of Los Angeles, 1995 DOT Av. Lexis 193 (Apr. 3, 1995). By 2004, the Air Transport Association noted, “we understand that the FAA is nearing conclusion of its i tigation into the transfer of certain funds (eminent domai proceeds) from LAX to the City related to the acquisition of property and property rights used to construct the Century Freeway.” Statement of James C. May, President and CEO, Transport Association of America, Inc., Before the Committee on House Transportation and Infrastructure Subcommitt Aviation (Apr. 1, 2004). 232 More than a year later, the FAA had failed to take formal action on the complaint. Airport Revenue Diversion, Hearings before the U.S. Sen. Subcomm. on Aviation of the Commerce Comm. (May 1, 1996), at 46–47 (statement of Edmund Merlis), reproduced at http://books.google.com/books?id= nQEDkwETmdkC&dq=%22airport+revenue+diversion%22 &printsec=frontcover&source=web&ots=f7QKBCZe8&sig= ZsilCY2rHH1ZSYysVMapyMALmMM#PPA46,M1 (Last visited Jan. 23, 2008). 233 The LAX conflict is discussed in Imes, supra note 79, at 1039, and Peters, supra note 227, at 22, and PAUL DEMPSEY & LAURENCE GESELL, AIR COMMERCE & THE LAW 474–75 (2004). The DOT Inspector General Report on Los Angeles’ revenue diversion is available at http://www.oig.dot.gov/StreamFile? file=/data/pdfdocs/r9fa7005.pdf (Last visited Jan. 23, 2008). transferred into the city’s general fund.234 Ultimately, the city agreed to repay $30 million to the Airport De- partment.235 Allegations of the use of airport revenue for nonair- port purposes are abundant. Of the 47 airports it in- spected between 1991 and 1995, the U.S. DOT IG esti- mated revenue diversion on the order of $55 million annually.236 The IG alleged that Westchester County, New York, spent nearly $24 million on nonairport pro- jects in the early 1990s,237 while in Hawaii, $64 million was spent on a dog track next to the airport. In Denver, Colorado, $4.7 million in indirect costs were charged to the airport in 1992–1993 for such things as nonairport- related lobbying, costs of the mayor and city council, and defense of a lawsuit from a concrete contractor who had never done any airport work.238 The only category of airports in which the IG alleged no revenue reversion 234 The city had transferred a total of over $31 million based on its contention that this sum represented the total with in- terest of prior unreimbursed general fund contributions to LAX by the city. The FAA found, “Of the $31,114,463 transferred from the Airport, the City provided documentation sufficient only to establish that the City provided contributions and ser- vices to the Airports Department in the amount of $1,159,674.” The FAA concluded: The Determination finds that the City must return $30,287,835, with interest, to the Airport Revenue Fund in or- der to remain in compliance with its grant obligations, based on the finding that the City has not provided a legal basis or suffi- cient documentation to justify that amount. Until such time as this amount is returned, the FAA is suspending for 180 days, or until further notice, all payments of funds on FAA grants for projects at Los Angeles International (LAX), Ontario, Palmdale, and Van Nuys Airports, and considers the City and its airports ineligible to apply for new FAA grants. In the Matter of Revenue Diversion by the City of Los Ange- les at Los Angeles Int’l, Ontario, Van Nuys and Palmdale Air- ports, 1997 FAA Lexis 1535 (Mar. 17, 1997). 235 Rectrix Lawsuit Charges Barnstable Airport Commission- ers Illegally Diverted Airport Funds in Violation of FAA Regu- lations; Suit Says Commissioners Conducted Illegal Racketeer- ing Scheme to Monopolize Jet Fuel Sales, PR NEWSWIRE (July 21, 2006). 236 Airport Revenue Diversion, Hearings Before the U.S. Sen. Subcomm. on Aviation of the Commerce Comm. (May 1, 1996), at 49 (testimony of Edmund Merlis), reproduced at: http://books.google.com/books?id=nQEDkwETmdkC&dq=%22ai rport+revenue+diversion%22&printsec=frontcover&source= web&ots=f7QKBCZe8&sig=ZsilCY2rHH1ZSYysVMapyMALm MM#PPA30,M1 (Jan. 31, 2008). 237 In 1997, the FAA concluded that the city owed the airport nearly $7 million in improperly diverted revenue. Letter from FAA Office of Airport Safety and Standards Director David Bennett to Weschester County Commissioner Joseph Petrocelli (Feb. 14, 1997). 238 Airport Revenue Diversion, Hearings Before the U.S. Sen. Subcomm. on Aviation of the Commerce Comm. (May 1, 1996), at 50 (statement of Edmund Merlis), reproduced at: http://books.google.com/books?id=nQEDkwETmdkC&dq=%22ai rport+revenue+diversion%22&printsec=frontcover&source= web&ots=f7QKBCZe8&sig=ZsilCY2rHH1ZSYysVMapyMALm MM#PPA30,M1 (Jan. 31, 2008).

27 was that of independent port authorities, not subjected to rule by mayors and city councils.239 In the mid-1990s, the IG asserted the existence of revenue diversion or failure to obtain fair rental value for airport property, or both, in 38 cases. In its audit of Los Angeles, the IG determined the donation of airport funds to nonprofit and community groups to constitute revenue diversion. In 2003, U.S. DOT IG Kenneth Mead testified before Congress that: ….Airports that receive Federal grants are required to put any revenue generated at the airport back into the airport operating or capital funds in order to minimize Federal assistance. Any other use of the revenue is con- sidered a diversion. Examples of common revenue diver- sions include airport sponsors or local governments (1) charging the airport for property or services that were not provided, or (2) renting airport property at less than fair market value. At a time when airports are continuing to look for new ways to fund their operations, we continue to find cases of airport revenue diversion. For example, at a sample of five airport sponsors reviewed, we found approximately $40.9 million in potential revenue diversions that were not detected by FAA's primary oversight methods…240 The FAA does not agree with the IG’s interpretation that renting at less than FMV is diversion, unless the sponsor is renting to itself for nonaeronautical pur- poses. The IG initially determined that between 1998 and 2002, approximately $12.5 million of airport revenue was diverted from SFO to city and county uses.241 The FAA and IG ultimately concluded that the City and County of San Francisco were required to repay SFO approximately $4.5 million dollars. The U.S. DOT also concluded that SFO’s transfer of 15 percent of its con- cession revenue (about $20 million) to the City each year is authorized under the grandfather provisions of the statute.242 The U.S. DOT IG asserted the existence of a $4.3 mil- lion revenue diversion from Dade County, Florida, be- tween 1989 and 1996.243 A smaller amount was diverted 239 MARY SCHIAVO, FLYING BLIND, FLYING SAFE 125–27 (1997). 240 Statement of The Honorable Kenneth M. Mead, Inspector General, U.S. Department of Transportation, House Commit- tee on Budget (July 9, 2003), http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/cc2003 132.pdf (Last visited Jan. 28, 2008). 241 http://www.oig.dot.gov/item.jsp?id=1283 (Jan. 23, 2008). 242 Nisid Hajari, A Walk in the Clouds, TIME, June 22, 1998; George Raine, What’s Up at SFO?, SAN FRANCISCO EXAMINER, Feb. 17, 1998, at A-1. Memorandum from Assistant DOT Gen- eral Counsel Robert Gabel to James Brucia (Nov. 23, 1993). 243 http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/r4fa7035. pdf (Last visited Jan. 28, 2008). at Imperial County, California,244 and Augusta– Richmond, Georgia.245 The FAA has ordered refunds of fees paid by airports deemed to be excessive.246 In 2007, U.S. DOT IG Calvin Scovel testified: Since the early 1990s, we have identified hundreds of mil- lions of dollars in airport revenue diversions, revenues that should have been used for the capital or operating cost of an airport but were instead used for non-airport purposes. In the last 4 years, we reported on revenue di- versions of more than $50 million at seven large airports, including one airport whose sponsor…diverted about $40 million to other projects not related to the airport.247 The U.S. DOT IG’s Web site248 contains a number of airport investigations and findings on revenue diver- sion. However, its web site does not provide a complete picture of the issue because it does not describe the FAA’s resolution of the particular issues raised in the IG’s reports. In many cases, following additional inves- tigation, the FAA concluded that no unlawful revenue diversion occurred or that the amount of unlawfully diverted revenue was less than the IG found, and the IG concurred. Several airport operators also have sought informal opinion letters from the FAA before making question- able expenditures. As an example, the Susquehanna Regional Airport Authority sought an opinion as to whether it could use airport revenue to make an annual payment in lieu of taxes to the local school district. The FAA concluded that the payment would exceed the value of services rendered to the airport, and therefore would constitute unlawful revenue diversion.249 C. Revenue Diversion Not Found In the early 1990s, Albany County, New York, the owner of Albany Airport, proposed to lease its airport to a private joint venture. The county proposed an initial lease payment of $30 million to cover the capital and operating costs it incurred over the preceding three decades. The FAA took the position that the airport 244 http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/av199819 6.pdf (Last visited Jan. 28, 2008). 245 http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/av199809 3.pdf (Last visited Jan. 28, 2008). 246 See, e.g., Second Los Angeles International Airport Rates Proceeding, DOT Order 96-1-18 (1996); Los Angeles Interna- tional Airport Rates Proceeding; Second Los Angeles Interna- tional Airport Rates Proceeding, Order 97-12-31 (1997). 247 Testimony by Calvin L. Scovel III, DOT Inspector Gen- eral, on Fiscal 2008 Appropriations: Federal Aviation Admini- stration, Before the Subcomm. on Transportation, Housing And Urban Development, and Related Agencies of the U.S. Senate Appropriations Committee (May 10, 2007), available at http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/Final_Bu dget_Statement_w-508.pdf (Last visited Jan. 31, 2008). 248 http://www.oig.dot.gov/Room?subject=26 (Jan. 28, 2008). 249 Letter from FAA Airport Compliance Division Manager Charles Erhard to Timothy Edwards (Mar. 20, 2007).