CM 1: Airport Financial Management

Ojective 5: Understand the federal requirements in airport financial management and understand the federal policies that influence the setting of airport rates and charges.

All airport revenues are _______, non-_______ or non-_____.

aeronautical, aeronautical, operating

Aeronautical charges being the most restricted in rate-______ and ____.

setting and use

_____ assurances affect the rate-setting process and the federal requirements in airport rate- setting.

Grant

In many communities where airport revenues are insufficient to support the airport’s needs, _____ revenues are used to supplement airport _____.

tax, income

Others argue that airports are commercial industries and, subsequently, are profit-making ventures. Furthermore, businesses locate themselves at an airport to make a profit. In that case, some will argue that airports should be ____ sustaining and not supported by community ______.

profit; self, taxes

Office of Airport Compliance and Management Analysis (ACO) oversees airport _____ practices relevant to federally mandated obligations that are conditions for receiving federal _____.

fiscal; grants

ACO has two divisions: _______ ________ Analysis and ______ ________ Program.

Financial Management; Airport Compliance

The accounting function properly ______ and ______ any and all activities that have some financial value or impact.

records and reports

This accounting function is responsible for the recording and processing of transactions that involve the payment of funds.

accounts payable

This accounting function has the responsibility to record, process and ensure the receipt of money coming into the organization.

accounts receivable

This accounting function involves the payment of salaries, wages, overtime, etc., of airport employees but also includes the management and administration of employment taxes and employee payroll deductions.

payroll

This accounting function contains all the accounts that the organization needs to properly develop the airport organization’s financial statements

general ledger

The general ledger accounts are “____-___” accounts that summarize transactions recorded, through journal entries, in sub-ledger

accounts such as those in the accounts payable and accounts receivable ledgers.

roll-up

This accounting function is process for applying for, receiving, drawing down upon, recording and closing out grants can be complex.

Grant Accounting

Accounting for enterprise funds is generally done on a modified _____ basis.

accrual

Accrual basis accounting is an accounting method where revenue is recognized when it's earned, and expenses are recognized when they're incurred, regardless of when cash is exchanged. This means a company records income when the service or product is delivered, not when payment is received, and records expenses when the liability is created, not when the bill is paid

Fixed asset accounting for airports is especially complex given their _____-intensive nature and much less frequent expensing of _____.

capital and assets

A budget is a forecast of ______ and _______ for a specific time. There are two types of budgets: ________ and ________.

revenues and expenses; operating and capital

_____ can optimize the use of the airport resources and help the airport achieve its overall strategic ________.

Budgets; objectives

Most state and municipal governments operate on a fiscal year that begins on _____ and ends on ______ of the following year.

July 1 and June 30

The FAA operates on a fiscal year that begins on ______ and ends on ________ of the following year.

October 1; September 30

____-______ is defined as the annual cost for providing, operating, maintaining and administering an airport facility. It includes both _____ and ________ costs and the local share of any capital investments.

Break-even; fixed; variable

An operating budget’s objective is to provide an accurate estimate of the ______ and _______ of the airport for a _______ period, which is typically one year.

revenues and expenses; future

In formulating an operating budget, four critical tasks must be addressed:

• ____ for the operational needs of the organization.

• _____ resources for the airport operating environment.

• ______ those resources throughout the organization.

• ______ the resource expenditures to ensure they are used effectively and efficiently.

plan, obtain, distribute, and track

Capital budgets plan for the acquisition of assets that have a useful life of more than ____ fiscal year. Capital budgets frequently are prepared for a time frame as long as _____ fiscal years.

one; 5-10

The FAA requires airport sponsors to submit a five-year ______ _______ plan (and update it annually), indicating expected capital expenditures during that time. This assists the FAA with planning for _____ _______

capital improvement; grant awards

The capital expenses include:

• Debt ______ on financed assets.

• _________/_____________ on assets funded with airport reserves (e.g., renewal and replacement funds).

• A coverage requirement on any ________ bond.

service; depreciation/amortization; revenue

_____ ________ - a predetermined budget limit set for specific cost items or the overall project cost.

Cost Threshold

A threshold cost, as determined by the airport or organization

and a useful life of more than ____ months, is typically identified as a ______ item.

12; capital

_______ Budgeting is one of the most common forms of budgeting and simply takes the previous year or period’s actual numbers and adjusts those figures by a predetermined percentage.

For example, the airport leadership may state that operating expenses should be budgeted at an increase of 4 percent. Therefore, all expense line items will be budgeted 4 percent higher than the most recently available actual amounts.

Incremental

Advantages of Incremental budging:

• ______ and the ____ of resources spent calculating and justifying the budget amounts

Disadvantage:

• A disadvantage of incremental budgeting includes the potential to “sandbag” and _____ items that don’t need to

  be adjusted, perpetuating ______ spending.

simplicity; lack; increase; wasteful

____-______ _______ in its ideal form is a process that assumes the budget for each year has no historical information, and all items must be justified on their own.

Zero-based Budgeting (ZBB)

Advantages of ZBB:

• A fresh perspective and reanalysis of all items every year

• Does not allow for the items or amounts to be budgeted just because that is what occurred in the past.

reanalysis; past

_____ _____ _______ (MBO) - Managers understand what

the airport objectives and targets are and develop the budget to obtain those results.

Management by Objectives

Advantages of MBO:

• Increased ________ between management and employees.

Disvantages of MBO:

• Increases ______ on employees to meet the goals in a specified time frame.

communication; strain

_______ _______ ______ (ABB) focuses on the activities of the airport to determine budget amounts rather than the functions of the airport.

Activity-Based Budgeting

Advantages of ABB:

• Concentrates on volume of ______ and _______ costs and can be very useful in an environment where overhead costs are a significant portion of operating expenses.

Disvantages of ABB:

• time and expense of implementation (usually requires software support) and that it is only effective for airports that are using Activity Based Costing (ABC).

activities and overhead; time and expense

Airport management relies heavily upon the monthly reporting cycle to evaluate the financial performance of the airport against _______ or _________ established for the organization

objectives or benchmarks

Annual Reporting includes the following:

• Statement of Net ______ _______ (balance sheet).

• Statement of ______, ________, and _______ in Net Position/Assets (income statement).

• Statement of ____ ______.

Position/Assets; Revenues, Expenses and Changes; cash flows

The Statement of Net Assets (aka the balance sheet) shows the balance of the airport’s ______ against the airport’s _______. Can be seen as a snapshot of the airport on this specific date.

assets; liabilities; snapshot

The Statement of Revenues, Expenses, and Changes in Net Assets also is known as an Income Statement shows the _______,________, and ________ in net assets over a period of time.

Revenues, Expenses, and Changes

The Statement of Cash Flows describes how the airport ______ its cash over the course of the fiscal year and how it _____ cash during that same period

received; spent

_____ is the lifeblood of the on-going operation and, therefore, certainly worthy of its own financial statement

cash

Every governmental entity should prepare and publish, as a matter of public record, a __________ _______ __________ _______ (CAFR) that

encompasses all funds of the primary government.

Comprehensive Annual Financial Report

Grant Assurance 26, _______ and ________, which implements the financial reporting provisions of the 1994 Authorization Act.

Reports and Inspections

Commercial service airports enplaning 2,500 passengers or more (since 1995) annually, are required to file Form 5100-126 ______ ________ _______ Report and Form 5100-127, _______ and ________ Summary.

Financial Governmental Payment; Operating and Financial

Form 5100-126 requires sponsors to file the form as the annual report on _______ paid to other units of government and on compensation the airport received for _______ and ______ provided to other units of government.

revenue; services and property

______ _______ Funds are used to account for the financing of

goods or services provided by one department of a government unit to another on a cost-reimbursement basis. A common example is when the municipality provides police or fire services to an airport.

Internal Service

Form 5100-127, Operating and Financial Summary requires the airport executive to break down revenues and expenses by:

• ______ operating revenue

• Non-______ operating revenue

• Non-_____ revenues

• _______ expenses

Aeronautical; aeronautical; operating; operating

_____ ________ revenue generated from landing fees, fuel flowage fees, ground leasing and building leasing.

Aeronautical operating

Non-_____ ________ revenue generated by land and non-terminal facilities, terminal food and beverage and retail store activities, rental car, and parking lot activities.

aeronautical operating

____-_______ revenues generated by interest income, sale or lease of properties, grant receipts and PFCs.

Non-operating

________ expenses that include personnel compensation and benefits, communications and utilities, supplies and materials, repairs and maintenance, contractual services, insurance claims and settlements.

Operating

Airports collecting PFCs must file a ______ ______ report and submit it to the ____ ______ and the FAA.

quarterly PFC; air carriers

Airports also must file AIP reports. This includes:

• Must file a quarterly report providing an update on the _____ of the AIP project(s) and their _____ on other AIP- or PFC-funded projects.

• The ______ ______ Report, must be filed upon project closure of any grant project.

status; impact; Federal Financial

Aeronautical charges as low as practical preferring the airport to seek more non-________ sources and to better promotes ________ and _______.

aeronautical; aviation and travel

Land designated as aeronautical use is depicted on the ______.

ALP

Aeronautical activity as any activity that involves, makes possible, or is required for the operation of ______ or that contributes to or is required for the ______ of such operations. Unmanned Aerial Vehicles used for

public or civil use, are considered an aeronautical activity

aircraft; safety

At general aviation airports, the majority of aeronautical revenue is from _____ _____ fees and _______leasing for hangars.

fuel flowage; ground

Landing fees are generally charged at air carrier airports either based on a per-____ basis or a per-______/per-_______ basis.

operation; weight/operation

Landing fees may be determined based on the _______ and _________ costs of the aeronautical use areas under the cost accounting method.

operation; maintenance

A combination of a per-operation/weight-based charge can happen if:

• the two-part fee reasonably allocates costs to users on a _______ and ________ justified basis

• the total revenues from the two part landing fee do not exceed the allowable costs of the airfield

rational and economically; allowable

Fuel flowage fee, which is a ________ of fuel sold on the airport to be collected as airport revenue.

percentage

Make a comment stating that fuel flowage fees could be substitute for ______ fees, and also at FBO’s can be paid as a pre-predetermined _________ on a monthly quarterly basis.

landing; percentage

Aeronautical use _______ can be from terminal sources, such as the leasing of office space, ticket counters

leaseholds

Leasing hangar space can be a significant source of ________, particularly for a GA airport

revenue

Non-aeronautical charges ______ to those operations and use that are ______ to aircraft operation

relate; incidental

Non-________ revenue at major airports can exceed 50 percent of gross annual revenue for an airport.

aeronautical

The airport executive should make an effort to:

• Each tenant’s ______-base and their related ______ needs and behaviors

• How to ______ a positive shopping environment to ________ consumer transactions

• How to ______ the mix of branding (local and national) and products/services found at an airport.

customer; buying; create; facilitate; balance

Other methods of generating airport revenue can include:

• Going green as ________ _______ _______ Emissions (VALE) program grants.

• ______ vacant airport property or mineral rights to

• Eliminate free ______ or valuate parking _____ structures.

Voluntary Airport Low; Lease; parking; rate

Non-aeronautical commercial revenue _____, _______, _______ generally are not burdened rate limitations. (i.e., FAA guidance on setting rates at a level commensurate with use)

rates, fees and charges

_______ ______ _____ _______ (PILOTS) are intended to compensate the airport owner (i.e., the municipality) for the removal

of the airport land from the tax roll.

Payments in lieu of taxes

The unallowable use of airport revenues for non-airport purposes is known as _______ _______.

Revenue Diversion

Possessory interest is generally defined as when a private party takes “possession,” through ______ or some other agreement, of the government’s ____ _______.

It becomes taxable when a person or entity has the right to use tax-exempt, government-owned real property with or without ______ or _______. The tax may also relate to actual improvements made on the property

lease; real property; rent or fees

It has been argued successfully that ______ interest and _____ ______ taxes produced by the airport, but returned to the community-at-large, represent a fair trade for ______ provided by the community for the operation of the airport

possessory; real property, subsidies

“All revenues generated by the airport, if it is a public airport, will be expended for the _______ or _______ costs of the airport, the local airport system, or other local facilities which are owned or operated by the owner or operator of the airport, and directly related to the actual transportation of ________ or _______.”

capital or operating; passengers or property

Revenue generated by airport _______ is not “airport revenue” and, therefore, is not subject to Grant Assurance 25, Airport Revenue, except for any airline revenue _____ or ________ minimum annual guarantee agreements.

tenants; share or concessions

Not included as airport revenue are taxes assessed by a ______ ______ district surrounding the airport and dedicated for the airport’s

_______, but not derived from the ____ of the airport.

special taxing; support, use

Revenue diversion includes:

• Direct or indirect payments that exceed the fair and reasonable value of services received.

• Loans to, or investment of, airport funds in a state or local agency at less than the prevailing interest rate.

• Leasing property or allowing the use of property for non-aeronautical purposes at less than fair market value rent.

• Use of land for free or nominal rental rates by the airport sponsor for aeronautical purposes

______ expenses are essential business costs that are not taxable. They aren't considered part of a company's taxable profits. You therefore don't pay tax on these expenses

Allowable

Allowable expenses include:

• Charging less-than-fair-market value charges for nonprofit or community use of airport land or facilities.

• Reimbursements to sponsors for capital or operating costs.

Under the Single Audit Act of 1984, the airport must conduct an ______ audit and assure the _______ that airport funds have been distributed appropriately

annual; government

Airport sponsors who view the airport as a public ______ will strive to set the lowest fees, rates and charges possible. In contrast, those who view the airport as a _______ enterprise will attempt to set fees, rates and charges commensurate with what the market will pay

utility; business

Due to the governmental function of most commercial service airports, the airport can set _____ and _______ for aeronautical use by ordinance, statute, resolution, regulation or agreement.

rates and charges

Grant Assurance 24, Fee and Rental Structure, requires the airport sponsor to set fees and lease rates and other charges directed at making the airport as _____- _____ as possible

self sustaining

Grant Assurance 24 also assures:

• there should be no “________” deals whereby the airport sponsor is charging fees or lease rates far below the market

• prohibits airport executives from establishing fees, rates and charges based on federal money spent for airport

  ________ or ______ mitigation programs.

sweetheart; improvements; noise

The AAAE Airport Certified Employee (ACE) Airport Finance Module 5 has summarized the five general principles of airport rates and charges setting:

1. Direct Negotiation and Resolution

   • Establishes preference for direct negotiation between the airport Sponsor and airlines

     and other aeronautical tenants and sets a minimum expectation for meaningful consultation between airport Sponsors and Aeronautical tenants.

2. Fair and Reasonable Fees

   • Allows airport sponsors to utilize various cost recovery rate-making approaches in setting

     airline rates and charges in the absence of an

     airline agreement.

3. No Unjustly Discriminatory Rates

   • Requires airport sponsors to use consistent

     methodologies to set rates for comparable

     airport users.

4. Self-Sustaining Rate Structure

   • Requires airport sponsors to employ a rate making

     regime that makes the airport as

     financially self-sustaining as possible.

5. No Revenue Diversion

   • Requires airport sponsors to employ a rate making

     regime that makes the airport as

     financially self-sustaining as possible.

Airport executives must employ a reasonable, consistent and ‘‘transparent’’ (i.e., clear and fully justified) method of _______ the rate base and _______ the rate base on a timely and predictable schedule.

establishing; adjusting

The airline operator takes the risk in a _______ agreement as it must “make up the difference” between the airport’s revenue and expenses. The airport operator takes the risk in a ________ agreement as it must set its rates and charges to cover all foreseeable expenses.

residual; compensatory

Unless otherwise agreed upon by aeronautical users, the airport operator must allocate capital and operating costs among cost centers with the following guidance:

• Costs of airfield ______ and _______ directly used by the aeronautical users.

• Costs of airport facilities used for both aeronautical and non-aeronautical uses, if the _______ or ______ supports the

  airfield activity reflected in the rate base (i.e., ARFF)

facilities and services; facility or service

Some governing bodies may operate more than one airport. The cost from multiple airports may be included in the rate base only if:

1) the airport proprietor is also the ________ of the second

(2) the second airport is currently in ____

(3) the costs of the other airports are reasonably related to the aviation ______ that they provide to the first airport, such as relieving GA traffic or providing support to the aeronautical users of the first airport (e.g., a

Navigational Aid [NAVAID] facility).

proprietor; use; benefits