Several new developments in recent weeks could have significant implications for airports and their financial arrangements. This special Airport Law Alert addresses these recent developments. Of particular note, legislation was introduced in Congress and the Internal Revenue Service has issued a private letter ruling, each of which may be beneficial to airports. There have also been two recent decisions that have significant precedential importance for airports nationwide.
On November 15, Senators Duckworth and Perdue introduced the TIFIA for Airports Act, which would expand the types of projects eligible for inclusion in the TIFIA program to include airport capital projects that are eligible for funding with passenger facility charges. The Transportation Infrastructure Finance and Innovation Act (TIFIA) provides credit assistance for qualified surface transportation projects but airport projects have not been eligible for this program.
The bill would make $10 million available for subsidy costs of TIFIA credit assistance agreements entered into prior to September 30, 2020. If enacted, the TIFIA for Airports Act would leverage this subsidy to provide a valuable new tool for low-cost financing for airport projects. The Department of Transportation’s Build America Bureau, which administers the TIFIA program, has been seeking ways to broaden the program to support airport development. It is important to note that a number of multi-modal airport projects have already benefitted from TIFIA loans or loan guarantees. While it is always difficult to provide a prognosis for legislation in this Congress, the fact that it has bipartisan support gives the bill a greater-than-usual likelihood of being enacted. We will continue to monitor this proposal. For more information, please contact Brent Butzin or Dave Bannard.
A private letter ruling issued by the Internal Revenue Service on November 23 clarifies how airports can maintain compliance with private activity bond requirements when developing non-traditional revenue sources from terminal concessions. Tax exempt bonds issued to finance terminals at airports are typically issued as qualified airport private activity bonds under section 142(a)(1) of the Internal Revenue Code. That section requires that at least 95 percent of the net proceeds of the bonds must be applied to provide airport facilities, but certain types of facilities, such as a health club facility, a facility primarily used for gambling or a store, the principal business of which is the sale of alcoholic beverages for consumption off premises, are prohibited uses of such bond proceeds.
The airport sponsor that sought the private letter ruling anticipated that, as part of its concession program, it was likely to have one or more shops the principal business of which would be selling alcoholic beverages for consumption off premises, such as a wine store. The airport sponsor proposed to contribute a certain sum of funds generated from airport revenues, and not from its revenue bonds (“equity”), and allocate that equity to finance the capital costs associated with the build-out in the terminal for the prohibited use. The sponsor also noted that it expected that over the life of the terminal facility, it was probable that the shop selling alcoholic beverages would be relocated one or more times. The IRS looked to the statutory history of the original provision prohibiting such uses and found that the application of a reasonable allocation method, such as proposed by the airport sponsor would not cause the interest on the bonds issued to fund the remaining terminal improvements to become taxable.
The primary lesson from this private letter ruling is that airports would be prudent to consider allocating the airport sponsor’s own funds to pay a certain percentage of the cost of terminal improvements to ensure that the sponsor retains the flexibility to take advantage of new concession opportunities that might not otherwise be permitted if 100 percent of the costs of the terminal were funded from tax exempt bond proceeds. This allocation can be done on a floating basis, in other words, the equity contributed by the airport sponsor can be allocated to capital costs associated with a prohibited use, rather than a specific portion of the terminal, so that the prohibited use can be moved within the terminal.
Given the importance of generating concession revenues and the never-ending search for new concessions concepts, this is an important principle for airport sponsors to incorporate into their financial plans when funding terminal improvements with tax exempt bonds.
For more information on this IRS ruling, please contact Dave Bannard.
On November 19, the FAA’s Director of Airport Compliance and Management Analysis issued a Director’s Determination in United Airlines v. Port Auth. N.Y. & N.J., finding that the Port Authority had violated its grant assurance obligations regarding the fee methodology in place at Newark Liberty International Airport (EWR) and its use of airport revenue. The Director’s Determination is particularly significant for sponsors whose historical use of airport revenue, like the Port Authority’s, enjoys grandfathered status under the airport revenue and highlighted the importance of airport sponsors having a transparent and well-documented rate setting methodology in place.
United Airlines alleged that certain fees imposed by the Port Authority at EWR were unreasonable and led to the accumulation of excess surplus revenues. The Port Authority assesses a “Flight Fee” based on the takeoff weight of aircraft whereby a derived markup is added to certain of the Port Authority’s actual costs attributable to EWR. The Port Authority intended that this combination of the actual costs and markup would recover the direct and indirect costs of operating EWR.
The Director held that the “application of a markup as a means to recover certain costs is not impermissible,” but emphasized that “the markup must be explained and justified” in order to satisfy the Port Authority’s obligation to allocate costs through a reasonable and transparent cost allocation formula. Here, the Director found that the Port Authority’s use of a single ledger for all of its facilities (i.e., JFK, EWR, LGA, as well as non-airport facilities) made it virtually impossible for the FAA or the airlines to understand and validate the Port Authority’s allocation of expenses to EWR. Even if EWR’s fees were ultimately reasonable and not unjustly discriminatory, the FAA found that the failure to provide transparency as to the rate methodology in place at EWR was, in and of itself, a grant assurance violation. Notably, the Director rejected the Port Authority’s argument that the rate methodology was not reviewable because it was embodied in an agreement between the parties.
United also alleged that the Port Authority was unlawfully diverting airport revenue to other projects, in violation of the FAA’s Revenue Use Policy and the terms of the Port Authority’s grandfathering agreement which allows the Port Authority to divert a portion of airport revenue to non-airport facilities owned by the Port Authority.
The Director concluded that the revenue use statute did not allow grandfathered airports to fund “facilities not owned or operated by the [sponsor], or  facilities that merely support [sponsor] owned facilities or operation.” The Director also found that the Port Authority had committed funding for such ineligible facilities. But, because of the Port Authority’s accounting practices, the FAA could not determine whether airport revenue was used for such facilities. Indeed, the Director observed, “[i]t is probably true that not every dollar used on these projects was from revenue generated at the airport. However, because [Port Authority] funds are commingled, it is reasonable to conclude that airport revenues were used for impermissible purposes.” The Port Authority’s inability to clearly and transparently document the sources and uses of airport revenues, in other words, led the FAA to conclude that the Port Authority had unlawfully diverted airport revenue.
The Port Authority will have thirty days to submit a corrective action plan demonstrating how it will modify its accounting practices, as well as determine the total amount of airport revenues unlawfully diverted over the past six years and credit EWR accounts accordingly. The Port Authority may also appeal the Director’s Determination to the Associate Administrator.
The Director’s Determination stands as a sharp reminder of the importance of documenting the sources and uses of airport revenues, even for sponsors with grandfathered airport revenue uses. Further, the decision clarifies that revenue use statute does not permit the lawful diversion of airport revenue toward facilities that are not owned or operated by the airport sponsor.
For more information on this decision and its implication for other airports nationwide, please contact Eric Pilsk or Dave Bannard.
On November 30, the D.C. Circuit issued an unpublished memorandum decision denying four Petitions for Review challenging the FAA’s implementation of NextGen arrival, departure, and en route procedures in Southern California, known collectively as the SoCal Metroplex. The case involved claims by Culver City, the Santa Monica Canyon Civic Association, and two individuals focusing on whether the FAA adequately addressed environmental impacts relating to noise, air quality, and climate change.
In a short, non-precedential decision, the D.C. Circuit rejected all of Petitioners’ arguments with only a brief discussion of each point. In summary, here are the Court’s principal holdings:
Unlike in the Phoenix case, in which the FAA relied on a Categorical Exclusion for its environmental analysis of NextGen procedures, the FAA prepared an Environmental Analysis and Finding of No Significant Impact before implementing the SoCal Metroplex. On that record, the Court was willing to give the FAA considerable deference, with respect to both the FAA’s balancing of interests in designing the new air traffic control procedures and in the FAA’s construction of its own orders and guidance. This decision underscores how difficult it is to challenge FAA decisions regarding air traffic control and safety.
The case is Vaughn v. FAA, Case No. 16-1377 (D.C. Cir. Nov. 30, 2018) and a copy of the Court’s decision can be found here. For more information about the litigation, please contact John Putnam.
With the midterm elections and changes in Congressional leadership, there will be several changes that will affect airport-related matters in the Congress. While some formal appointments have yet to be made, we do know that Congressman Peter DeFazio, Democrat from Oregon will be leading the House Transportation and Infrastructure Committee. DeFazio is an outspoken opponent of privatization of the air traffic system and a supporter of greater infrastructure investment. Rep. Sam Graves of Missouri will be the ranking Republican on the Committee. The House Aviation Subcommittee will be led by Rep. Rick Larsen, Democrat of Washington.
On the Senate side, while there has not been a shift in party control, several members of the Commerce Committee have changed and the leadership of that committee will also be changing. At this writing, it is not entirely clear who will lead the aviation panel, though Sen. Roger Wicker of Mississippi will lead the Committee. Other appointments should be announced in coming weeks.
On the Administration side, there is no new definitive news from the FAA. There remains no permanent FAA Administrator or Associate Administrator for Airports, two positions that are key to airport sponsors. The Washington gossip mills are working overtime but the White House has not made any announcements. There are personnel acting in those and other senior FAA positions. There is no timetable for filling the political positions.
For more information about Washington political happenings, please contact Steven Osit or Peter Kirsch.
Kaplan Kirsch & Rockwell publishes Airport Law Alerts to announce late-breaking developments in legislation, regulation, and policy for our clients and colleagues. Nothing in our Alerts is intended as legal advice, and readers are reminded to contact legal counsel for legal advice on the matters that appear in our Alerts.