The State Aeronautics Act establishes the Aeronautics Account in the State Transportation Fund, and continuously appropriates the moneys in the account for expenditure for airport purposes by the Division of Aeronautics within the Department of Transportation and the California Transportation Commission.

This bill, effective December 8, 2017, would require that the revenues from the imposition of state sales and use taxes, at the rate of 4.1875%, on the sale, storage, use, or other consumption of aviation fuel, as defined, be transferred to the Aeronautics Account for allocation in specified percentages to airports and for aviation-related purposes.

The bill would require the division to allocate 27% of these revenues for grants to be made available for nonhub commercial airports, as defined, with less than 300,000 enplanements annually to attract, establish, and expand air service through incentives, marketing, passenger studies, route analysis, and the acquisition of consultants, as specified. The bill would also require the division to provide at least 1% of these revenues annually in specified grants for aviation education. By increasing the sources of funding for and expanding the purposes for which money may be used from a continuously appropriated fund, the Aeronautics Account, the bill would make an appropriation.

The State Aeronautics Act establishes the Aeronautics Account in the State Transportation Fund, and continuously appropriates the moneys in the account for expenditure for airport purposes by the Division of Aeronautics within the Department of Transportation and the California Transportation Commission.

This bill would require that the revenues from the imposition of state sale sales and use taxes, at the rate of 4.1875%, on the sale, storage, use, or other consumption of aviation fuel, as defined, be transferred to the Aeronautics Account for allocation in specified percentages to airports and for aviation-related purposes.

The bill would require the division to allocate 27% of these revenues for grants to be made available for nonhub commercial airports, as defined, with less than 300,000 enplanements annually to attract, establish, and expand air service through incentives, marketing, passenger studies, route analysis, and the acquisition of consultants, as specified. The bill would also require the division to provide at least 1% of these revenues annually in specified grants for aviation education. By increasing the sources of funding for and expanding the purposes for which money may be used from a continuously appropriated fund, the Aeronautics Account, the bill would make an appropriation.

The State Aeronautics Act establishes the Aeronautics Account in the State Transportation Fund, and continuously appropriates the moneys in the account for expenditure for airport purposes by the Division of Aeronautics within the Department of Transportation and the California Transportation Commission.

The bill would require the department division to set aside $10,000,000 each fiscal year allocate 27% of these revenues for grants to be made available for nonhub airports commercial airports, as defined, with less than 300,000 enplanements annually to attract, establish, and expand air service through incentives, marketing, passenger studies, route analysis, and the acquisition of consultants, as specified. The bill would also require the department division to provide at least $150,000 1% of these revenues annually in specified grants for aviation education. By increasing the sources of funding for and expanding the purposes for which money may be used from a continuously appropriated fund, the Aeronautics Account, the bill would make an appropriation.

The State Aeronautics Act establishes the Aeronautics Account in the State Transportation Fund, and continuously appropriates the moneys in the account for expenditure for airport purposes by the Division of Aeronautics within the Department of Transportation and the California Transportation Commission. Existing law establishes the California Aid to Airports Program under which the department provides grants to political subdivisions for the planning, acquisition, construction, improvement, maintenance, or operation of a publicly owned airport, and to cities or counties on behalf of any privately owned, public use airport, as specified.

The State Aeronautics Act establishes the Aeronautics Account in the State Transportation Fund, and continuously appropriates the moneys in the account for expenditure for airport purposes by the Division of Aeronautics within the Department of Transportation and the California Transportation Commission. Existing law establishes the California Aid to Airports Program under which the department provides grants to political subdivisions for the planning, acquisition, construction, improvement, maintenance, or operation of a publicly owned airport, and to cities or counties on behalf of any privately owned, public use airport, as specified.

This bill would require the Department of Transportation to adopt and administer a grant program for the purpose of funding specified infrastructure projects to maintain and improve airport facilities and infrastructure owned or operated by a commercial service airport or general aviation airport. The bill would authorize one or more eligible airports to submit a joint application, as specified. The bill would also authorize the department to provide financial assistance for and to enter into agreements with commercial air carriers to, among other things, establish and market new or expanded service at airports with 400,000 or fewer annual enplanements and would authorize the department to use available moneys to provide financial assistance to underserved airports, as specified.

The bill would require the Division of Aeronautics to develop regulations for the department to adopt in order to implement these provisions. The bill would appropriate an unspecified sum from the Aeronautics Account in the State Transportation Fund for it purposes and would make unspecified percentage allocations to airports with annual enplanements of 1,000,000 or more, 1,000,000 or less, and to general aviation airports.

Because any violation of the State Aeronautics Act is a crime and the provisions of the bill would be within the act, this bill would impose a state-mandated local program by creating a new crime.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 747 (McGuire) - Airports: financial assistance.

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 747 would require that the sales and use tax (SUT) revenue derived from aviation fuel be transferred to the Aeronautics Account, as specified.

Fiscal Impact:

Because this bill would transfer funds from the General Fund to the Aeronautics Account, the Board of Equalization (BOE) estimates the General Fund revenue loss in 2018-19 to be $140 million. With respect to only this bill’s specific requirements, BOE could incur administrative costs in the hundreds of thousands of dollars annually to revise jet fuel retailers’ returns and associated programming, and identify and track revenue (see staff comment).

The original Federal Aviation Administration (FAA) policy discusses permitted use of airport revenue, and allows certain government costs to be deducted from those revenues. It is unclear whether the BOE’s administrative costs would be included within the allowable deductions.

The Department of Transportation (Caltrans) indicates that, because the bill would create an entirely new state grant program, additional staff would be needed to provide administration. The amount would be dependent on the size of the annual General Fund transfer, but would likely reach the hundreds of thousands of dollars annually.

Background:

Current law imposes a state, local, and district SUT on retailers’ gross receipts derived from tangible personal property sold at retail, unless the sale is specifically exempted from the tax. Sales tax generally applies to sales of aviation fuel to air common carriers. However, current law provides an exemption from tax for the sale of fuel and petroleum products to air common carriers for immediate consumption or shipment in the conduct of its business as an air common carrier on an international flight. The average statewide SUT rate is 8.42 percent; the current-law General Fund SUT rate will be 3.94 percent in 2018-19.

Current law establishes the Aeronautics Account within the State Transportation Fund. This account is funded by revenues from fuel excise taxes of 18 cents per gallon on general aviation fuel and 2 cents per gallon on jet fuel. These rates were set in 1994 and 1969, respectively.

The Airport Improvement Program (AIP), administered by the FAA, provides grants to public agencies for the planning and development of public-use airports. In general, the federal grant covers 75 percent of eligible costs for large and medium primary hub airports, and 90-95 percent of eligible costs for small primary, reliever, and general aviation airports. Eligible projects include capital improvements related to safety, capacity, security, and environment. Operational and maintenance costs are generally not eligible for AIP assistance. To supplement AIP, Caltrans administers a State AIP Matching Grant Program. This program, which provides a state matching grant equal to 5 percent of the federal grant, is funded from the Aeronautics Account.

In November 2014, the FAA issued a directive (Docket No. FAA-2013-0988) to confirm its longstanding policy, based on federal law, that aviation fuel taxes be used for airport purposes and state aviation programs. The directive provides states one year to submit an action plan to the FAA; this plan should detail the process of amending any non-compliant state laws and local ordinances as necessary for compliance, as well as detailing the process to develop reporting requirements and tracking systems for aviation fuel tax revenues. The plan must be implemented within three years of the FAA directive, which took effect December 8, 2014. Failure to comply with the FAA mandate could result in ineligibility for AIP grants and possible civil penalties.

Proposed Law:

This bill would require General Fund SUT revenues, less refunds, derived aviation fuel be transferred to the Aeronautics Account beginning December 8, 2017. The bill would require Caltrans’ Division of Aeronautics to annually allocate these funds to eligible recipients, for airports and aviation-related purposes, as specified. The bill would become effective January 1, 2016, but be operative December 8, 2017.

Staff Comments:

BOE currently lacks the data infrastructure to make the necessary calculations to transfer the correct amount of revenue to the Aeronautics Account. BOE notes that there are roughly 225 jet fuel dealers operating in the State. Jet fuel dealers’ SUT returns currently capture taxable gross receipts for all products sold. Thus, BOE currently cannot precisely determine the amount of SUT revenue resulting from the sale of jet fuel, and consequently cannot calculate how much revenue to transfer.

The BOE revenue estimate is instead based on U.S. Energy Information Administration data, which indicate that annual sales of jet fuel to end users amounted to 2.4 billion gallons in 2014. BOE then used average historical growth rates to project annual sales through 2018-19, the first full year that the bill would be in effect. Next, BOE assumes that 46 percent of the total fuel is consumed by the military or international carriers, and thus would be exempt from the tax. The BOE revenue estimate is largely dependent on the price of jet fuel (assumed to be $2.54/gallon), which is volatile and generally tracks world crude oil prices. The aggregate impact of these assumptions is a General Fund revenue loss of $295 million. Of this amount, $140 million would be General Fund.

Caltrans notes that the number of staff it would require to administer the bill cannot be accurately estimated without knowing the amount of grant funding to be distributed, the number of grant applications coming in, and the complexity of the grants.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

AIRPORTS: FINANCIAL ASSISTANCE

Appropriates aviation fuel tax revenues from the General Fund to the Aeronautics Account.

Background and Existing Law

Existing law establishes the Aeronautics Account within the State Transportation Fund. This account is funded by revenues from fuel excise taxes of 18 cents per gallon on general aviation fuel and 2 cents per gallon on aviation fuel. These rates were set in 1994 and 1969, respectively.

The Airport Improvement Program (AIP), administered by the Federal Aviation Administration (FAA), provides grants to public agencies for the planning and development of public-use airports. In general, the federal grant covers 75% of eligible costs for large and medium primary hub airports, and 90% to 95% of eligible costs for small primary, reliever, and general aviation airports. Eligible projects include capital improvements related to safety, capacity, security, and environment. Operational and maintenance costs are generally not eligible for AIP assistance. To supplement AIP, Caltrans administers a State AIP Matching Grant Program. This program, which provides a state matching grant equal to 5% of the federal grant, is funded from the Aeronautics Account.

In November 2014, the FAA issued a directive (Docket No. FAA-2013-0988) to confirm its longstanding policy, based on federal law, that aviation fuel taxes be used for airport purposes and state aviation programs. The directive does not apply to state and local taxes on aviation fuel in effect prior to December 30, 1987. The directive provides states one year to submit an action plan to the FAA. The action plan will detail the process of amending any non-compliant state laws and local ordinances as necessary for compliance, as well as detailing the process to develop reporting requirements and tracking systems for aviation fuel tax revenues. The plan must be implemented within three years of the FAA directive, which took effect December 8, 2014. Failure to comply with the FAA mandate could result in ineligibility for AIP grants and possible civil penalties.

California’s Sales and Use Tax Law currently imposes a state, local, and district sales tax on retailers’ gross receipts derived from tangible personal property sold at retail in this state, unless the sale is specifically exempted from the tax. Sales tax generally applies to sales of aviation fuel to air common carriers. However, existing law provides an exemption from tax for the sale of fuel and petroleum products to air common carriers for immediate consumption or shipment in the conduct of its business as an air common carrier on an international flight.

Proposed Law

Senate Bill 747 transfers 4.1875% of the revenues derived from aviation fuel taxes from the General Fund to the Aeronautics Account. SB 747 requires Caltrans’ Division of Aeronautics to annually allocate these funds to eligible recipients, for airports and aviation-related purposes, as follows:

1. 12% to the state’s 215 general aviation airports (e.g., Sacramento Executive Airport)

2. 2.4% to be divided among the state’s 33 commercial service airports as follows:

• 21% for the 20 non-hub commercial airports (e.g., Crescent City, Sonoma County, and Oxnard)

• 34% for the three large hub commercial airports (Los Angeles, San Diego, and San Francisco);

• 14% for the 6 medium hub commercial airports (e.g., Sacramento, Oakland, and San Jose international airports)

• 31% for the four small hub commercial airports (Fresno, Long Beach, Palm Springs, and Santa Barbara)

3. 27% for grants for non-hub airports with less than 300,000 enplanements annually to attract, establish, and expand airline service through incentives, marketing, passenger studies, route analysis, and acquisition of consultants.

4. 1% for aviation education grants, including but not limited to, scholarships for flight training and aviation-related degrees from accredited universities, with priority given to under-represented students, women, veterans, and low-income persons.

5. 5% for administrative costs

6. 15% for other state aviation programs and aviation related purposes pursuant to this bill

SB 747 goes into effect on January 1, 2016.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “California has been out of compliance with federal law on aviation tax revenues for decades. The state has transferred a total of nearly $15 million in aviation fuel tax revenues from the Aeronautics Account to the General Fund over three different fiscal years (2002-03, 2003-04, and 2010-11). Due to lack of funds, Caltrans was unable to administer any grants for general aviation airports in fiscal years 2011-12 and 2012-13, and could only partially fund the State Matching AIP Grant Program. In the last year alone, four commercial airports in California have announced that they have lost or will soon lose all commercial service activity: Modesto Airport, Chico Municipal Airport, Inyo-Kern Airport, and McClellan-Palomar Airport. This bill will help the state comply with the FAA mandate by directing revenue from aviation fuel sales taxes to the state’s underfunded aviation program and thereby provide relief to the state’s aviation industry.”

2. Why now? The FAA directive requires each state to submit an action plan by December 8, 2015. The action plan should detail the process necessary to develop reporting requirements and tracking systems on aviation fuel tax revenues, and outline the process to amend any non-compliant state laws and local ordinances as necessary to conform. The plan must be fully implemented by December 8, 2017. To date, an action plan has not been adopted or drafted. This begs the question, is SB 747 premature? A comprehensive action plan has not been drafted to address the FAA directive, and California still has over 7 months to develop one. Alternatively, SB 747 may be the impetus to start the conversation, moving California in the direction of developing the required action plan before the deadline.

3. 4.1875%. The percentage is comprised of the General Fund component and the Education Protection Account portion of the sales and use tax rate. The current rates are 3.9375% and 0.25% respectively. The Education Protection Account portion is set to expire on January 1, 2017 and was approved by the voters as a part of 2012’s Proposition 30. This percentage represents the portion on the sales and use tax rate that is not earmarked for a specific fund or spending purpose.

4. Double-referral. The Senate Rules Committee ordered a double-referral of SB 747 to the Senate Committee on Transportation and Housing, which considered the bills’ transportation funding provisions, and to the Senate Governance and Finance Committee, which will consider the bills’ tax provision. The bill was heard in the Senate Committee on Transportation and Housing on April 21, 2015.

5. Technical amendments. The author suggests the following technical amendments to correct a drafting error:

• Reverse the percentage allocations in Public and Utilities Code Section 21689 (a) (2).

• Change the operative date to December 8, 2017.

Senate Actions

Senate Committee on Transportation and Housing 9-0

Support and Opposition

(4/23/15)

Support: Aircraft Owners and Pilots Association; American Association of Airport Executives, Southwest Chapter; Association of California Airports; California Airports Council; California Pilots Association; Marin County Board of Supervisors.

Opposition: Unknown.

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SENATE COMMITTEE ON TRANSPORTATION AND HOUSING

Senator Jim Beall, Chair

2015 - 2016 Regular

Bill No: SB 747 Hearing Date: 4/21/2015

SUBJECT: Airports: financial assistance

DIGEST: This bill provides for an annual appropriation of aviation fuel tax revenues from the General Fund to the Aeronautics Account in order to comply with federal law.

ANALYSIS:

Existing law establishes the Aeronautics Account within the State Transportation Fund. This account is funded by revenues from fuel excise taxes of 18 cents per gallon on general aviation fuel and 2 cents per gallon on jet fuel. These rates were set in 1994 and 1969, respectively.

The Airport Improvement Program (AIP), administered by the Federal Aviation Administration (FAA), provides grants to public agencies for the planning and development of public-use airports. In general, the federal grant covers 75% of eligible costs for large and medium primary hub airports, and 90% to 95% of eligible costs for small primary, reliever, and general aviation airports. Eligible projects include capital improvements related to safety, capacity, security, and environment. Operational and maintenance costs are generally not eligible for AIP assistance. To supplement AIP, Caltrans administers a State AIP Matching Grant Program. This program, which provides a state matching grant equal to 5% of the federal grant, is funded from the Aeronautics Account.

In November 2014, the FAA issued a directive (Docket No. FAA-2013-0988) to confirm its longstanding policy, based on federal law, that aviation fuel taxes be used for airport purposes and state aviation programs. The directive provides states one year to submit an action plan to the FAA. The action plan will detail the process of amending any non-compliant state laws and local ordinances as necessary for compliance, as well as detailing the process to develop reporting requirements and tracking systems for aviation fuel tax revenues. The plan must be implemented within three years of the FAA directive, which took effect December 8, 2014. Failure to comply with the FAA mandate could result in ineligibility for AIP grants and possible civil penalties.

This bill:

Transfers from the General Fund to the Aeronautics Account revenues derived from aviation fuel taxes. Requires Caltrans’ Division of Aeronautics to annually allocate these funds to eligible recipients, for airports and aviation-related purposes, as follows:

1. 12% to the state’s 215 general aviation airports (e.g., Sacramento Executive Airport)

2. 40% to be divided among the state’s 33 commercial service airports as follows:

• 21% for the 20 non-hub commercial airports (e.g., Crescent City, Sonoma County, and Oxnard)

• 34% for the three large hub commercial airports (Los Angeles, San Diego, and San Francisco);

• 14% for the 6 medium hub commercial airports (e.g., Sacramento, Oakland, and San Jose international airports)

• 31% for the four small hub commercial airports (Fresno, Long Beach, Palm Springs, and Santa Barbara)

3. 27% for grants for non-hub airports with less than 300,000 enplanements annually to attract, establish, and expand airline service through incentives, marketing, passenger studies, route analysis, and acquisition of consultants

4. 1% for aviation education grants, including but not limited to scholarships for flight training and aviation-related degrees from accredited universities, with priority given to under-represented students, women, veterans, and low-income persons

5. 5% for administrative costs

6. 15% for other state aviation programs and aviation related purposes pursuant to this bill

COMMENTS:

1. Purpose. The author states that California has been out of compliance with federal law on aviation tax revenues for decades. The state has transferred a total of nearly $15 million in aviation fuel tax revenues from the Aeronautics Account to the General Fund over three different fiscal years (2002-03, 2003-04, and 2010-11). Due to lack of funds, Caltrans was unable to administer any grants for general aviation airports in fiscal years 2011-12 and 2012-13, and could only partially fund the State Matching AIP Grant Program. In the last year alone, four commercial airports in California have announced that they have lost or will soon lose all commercial service activity: Modesto Airport, Chico Municipal Airport, Inyo-Kern Airport, and McClellan-Palomar Airport. This bill will help the state comply with the FAA mandate by directing revenue from aviation fuel sales taxes to the state’s underfunded aviation program and thereby provide relief to the state’s aviation industry.

2. How much money? The state Board of Equalization has initially estimated the annual taxable fuel sales amount for fiscal year 2013-14 at approximately $30 million. The annual appropriation authorized in this bill would vary somewhat from year to year, due to the impact of oil price volatility on jet fuel prices. Regardless, this bill would result in significantly increased revenues for the Aeronautics Account, which currently has a balance of about $9 million. However, questions have arisen about exactly which revenues should be directed to the Aeronautics Account under the FAA directive; for example, some sales tax revenues are constitutionally protected. These issues will need to be worked out as this bill moves forward.

3. Rationale for distribution. The author worked with the California Airports Council, sponsor of this bill, to determine the allocations. These percentages are based on passenger volumes and funding needs for operations and maintenance.

4. Federal law on aviation tax revenues. AIP was established by the federal Airport and Airway Improvement Act of 1982. This act requires an airport sponsor accepting an AIP grant to provide assurance that any revenues received by the airport will be used for the capital and operating expenses of the airport, the local airport system, or other local air transportation-related facilities owned or operated by the sponsor. This requirement aims to prevent a “hidden tax” on air transportation and to ensure that federal airport grants are used to supplement funding for airport projects, rather than substituting for funds diverted to other programs. Congress amended the act in 1987 to allow revenues from a state fuel tax to also be used for state aviation programs. In 1996, Congress enacted legislation extending the revenue use requirements to all airports that have been the subject of federal assistance, regardless of whether the airport is currently subject to an FAA grant agreement.

5. Why now? In response to requests from various U.S. senators and state legislatures, the FAA issued five opinions between 1990 and 2010 to affirm its revenue use policy. The FAA Reauthorization Act of 1994 directed the FAA to establish policies and procedures to assure the prompt and effective enforcement of illegal diversion of airport revenue. In 2013, the FAA began soliciting comments to initiate a process to formally clarify the policy. The majority of comments supported the general purpose of the revenue use policy and underlying statutes: namely, to direct aviation revenues to aviation purposes. Comments focused on issues such as ensuring that airport operators are not held responsible for taxes imposed by other entities, the definition of aviation taxes, and the length of the compliance period. These issues are addressed in the directive issued in November 2014.

6. Is California in compliance? As noted earlier, the state has made several transfers from the Aeronautics Account to the General Fund, with no statutory requirement for repayment. The 2014-15 budget agreement transferred $4 million from the Local Airport Loan Account, a revolving loan fund, to the Aeronautics Account, bringing the Aeronautics Account balance up to $9 million. The General Fund loans, however, have not been repaid. According to Caltrans, all funds in the Aeronautics Account are expended in accordance with current state and FAA requirements.

7. Amendments. The author will accept amendments to correct the implementation date in the legislative intent language to December 8, 2017, and to add Senator Fuller as a coauthor.

Related Legislation:

SB 616 (Wright, 2014) — would have allowed Caltrans to provide state matching funds through AIP to projects that commence prior to receiving those funds. (Caltrans regulations require that in order to be eligible for a state AIP grant, a sponsor cannot yet have broken ground on the project.) SB 616 was passed unanimously by this committee, but was eventually pulled back from the Governor’s desk late in the legislative session due to ongoing negotiations.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: No

POSITIONS: (Communicated to the committee before noon on Wednesday,

April 15, 2015.)

SUPPORT:

California Airports Council (sponsor)

Aircraft Owners and Pilots Association

American Association of Airport Executives, Southwest Chapter

Association of California Airports

California Pilots Association

Marin County Board of Supervisors

OPPOSITION:

None received.

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