Denver International Airport Passenger Facility Charges Performance Audit

Transcription

1 Denver International Airport Passenger Facility Charges Performance Audit May 2011 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Jeffrey Hart Timothy O Brien Robert Bishop Robert Haddock Bonney Lopez Audit Staff John Carlson, Deputy Director, CIA, CICA Sonia Montano, Internal Audit Supervisor, CGAP, CICA Jessica Quintana, Senior Internal Auditor Kristin Donald, Lead Internal Auditor Mary Kay Mutchler, Senior Internal Auditor, CICA Manijeh Taherynia, Senior Internal Auditor, CPA, CFE You can obtain free copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at:

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor Ms. Kim Day, Manager Department of Aviation City and County of Denver Dear Ms. Day: May 19, 2011 Attached is the Auditor s Office Audit Services Division s report of the Department of Aviation s management of the Denver International Airport s (DIA) Passenger Facility Charge (PFC) program. The purpose of this performance audit was to review public policy issues and pending legislation surrounding the PFC program and assess current compliance with rules and regulations to determine whether adequate internal controls are in place. We would like to acknowledge DIA for the controls it has developed regarding PFC collection and accounting. Our work determined that duties related to the cash collection process and PFC accounting are properly segregated and appropriately reviewed. However, our audit work identified opportunity for improvement in controls over PFC payments and airline PFC reporting. The finding and recommendations presented in this report provide specific areas for program enhancements. Pending federal legislation may alter the PFC program in the future and any modification could have an impact on DIA. Because PFC collection is vital to airport operations, my hope is that the DIA Senior Team is actively monitoring the situation and is ready to respond in a nimble and informed manner. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, Dennis J. Gallagher Auditor DJG/ect cc: Honorable Guillermo Vidal, Mayor Honorable Members of City Council Members of Audit Committee Mr. Jack Finlaw, Chief of Staff Mr. Edward Scholz, Chief Financial Officer To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 Ms. Kim Day, Manager May 19, 2011 Page 2 Mr. David Broadwell, City Attorney Mr. L. Michael Henry, Staff Director, Board of Ethics Ms. Lauri Dannemiller, City Council Executive Staff Director Ms. Beth Machann, Controller Mr. Patrick Heck, Chief Financial Officer of Aviation

5 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed a performance audit of the Department of Aviation s management of the Denver International Airport s (DIA) Passenger Facility Charge (PFC) program for the audit period January 1, 2009 through December 31, The purpose of this performance audit was to report on public policy and legislative issues surrounding the PFC program and examine the administration of the PFC program to identify possible inefficiencies or opportunities for program improvement. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. While the audit provided a level of assurance regarding the controls over internal accounting and PFC reporting, it also revealed weaknesses that raise the risk of inaccurate airline reporting. DIA relies on self-reported PFC revenues from airlines. Although the Federal Aviation Administration (FAA) and Denver Municipal Airport Rules and Regulations require submission of quarterly and annual reports, DIA does not enforce this requirement. These reports can serve as an important oversight control that DIA is missing. We extend our appreciation to the Department of Aviation who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CICA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

6 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 Opportunities Exist to Further Improve Internal Controls over Payments and Reporting of Passenger Facility Charges by Airlines 1 INTRODUCTION & BACKGROUND 2 What are Passenger Facility Charges? 2 Passenger Facility Charge Governance and Requirements 3 How Airports Utilize Passenger Facility Charges 4 Legislative Issues Surrounding the Passenger Facility Charge Program 7 SCOPE 10 OBJECTIVE 10 METHODOLOGY 10 FINDING 1 12 Opportunities Exist to Further Improve Internal Controls over Payments and Reporting of Passenger Facility Charges by Airlines 12 RECOMMENDATIONS 17 APPENDICES: 18 Appendix A Cost per Enplanement Metrics 18 Appendix B U.S. Department of Transportation Press Release 19 Appendix C House Press Release 20 Appendix D Pending Passenger Facility Charge Legislation 22 AGENCY RESPONSE 23

7 EXECUTIVE SUMMARY Opportunities Exist to Further Improve Internal Controls over Payments and Reporting of Passenger Facility Charges by Airlines Denver International Airport (DIA) has received authorization from the Federal Aviation Administration (FAA) to impose a fee collected by air carriers from passengers called a Passenger Facility Charge (PFC). PFC s are collected based on the itinerary of a passenger s ticket and air carriers remit these payments to DIA as required by the FAA. DIA utilizes these funds for FAA-approved purposes and to pay down certain approved debt. Our work noted PFC collection and accounting processes at DIA had certain internal control elements in place. However, audit fieldwork identified specific enhancements which, if implemented, will provide greater assurance of proper and timely air carrier PFC payments. Federal law coupled with DIA Rules and Regulations require PFC payments to be remitted the last day of the following month. Our review identified instances of late payments. Further, we identified issues with collections of required reports. FAA requires air carriers to submit quarterly reports containing PFC amounts collected and remitted to the airport. Audit testing found 13% of the reports were not submitted and of those submitted; 33% percent were late and contained no documentation of follow-up action taken by DIA. The FAA also requires an annual audit of air carrier PFC accounts. DIA does not enforce this requirement nor does it review the reports that are received. Finally, contracts require air carrier compliance with DIA rules and regulations, which include the submission of timely payments, quarterly reports and annual audits. In 2010, DIA reported over $100 million in PFC collection. Lax controls over timeliness of PFC remittance and enforcement of reporting increases risk of financial loss. DIA should consider leveraging its contract terms to require air carriers to comply with payment timeliness and properly remit quarterly and annual audits. In addition, DIA should use required reports to ensure proper airline payment. Pending federal legislation may alter the PFC program in the future. Because PFC s play such an important role in airport operations and available financing models, DIA should actively monitor developments in the PFC program to ensure it is aware of changes in order to respond accordingly to the benefit of the City. P a g e 1 Office of the Auditor

8 INTRODUCTION & BACKGROUND What are Passenger Facility Charges? Passenger Facility Charges (PFC) are fees collected by air carriers from passengers for each ticket purchased for departure at any airport that has received approval from the Federal Aviation Administration (FAA) to participate in the PFC program. Once the FAA has approved PFC collections at a given airport, the PFC may not be waived by the airport or by air carriers collecting the funds. A PFC of up to $4.50 is collected based on the itinerary of each passenger at the time of ticket issuance. For each one-way trip shown on the complete itinerary of an air travel ticket, issuing air carriers and their agents collect a PFC from a passenger only for the first two airports where PFC is imposed (up to $9.00 total). For each round trip, the air carrier collects a PFC only for enplanements at the first two enplaning airports and the last two enplaning Passenger Facility Charges Fees of up to $4.50 per enplanement are charged to traveling passengers at each authorized airport up to four times per round trip. airports where the PFC is imposed (up to $18.00 total). 1 An enplanement, as defined by the FAA, is a single, revenuegenerating passenger departing from or arriving at an airport. PFC rates are set and regulated by federal regulations and can vary depending on the airport. A PFC should not be confused with a Cost per Enplanement (CPE). CPE represents the amount air carriers pay per enplaned passenger or said another way, the estimated carrier operating cost for each passenger. CPE measures the net cost to the airline primarily for landing fees and terminal related fees divided by the total number of enplaned passengers. CPE is commonly used as a comparative metric among airports to gauge unit costs to airlines for operation at different facilities. In addition, CPE can be used as an indicator of impact that airport business decisions have on airlines. 2 A majority of airlines combine various costs on tickets into one lump sum so it is difficult for consumers to identify the individual rates. However, recent rulemaking from the U.S. Department of Transportation has expanded airline passenger protections. The rule will require airlines to prominently disclose all potential fees on their websites, including government taxes and fees. 3 Air carriers have responsibility for all PFC funds from the time of collection to the time of remittance to the airport. While air carriers receive compensation for PFC collection, they have no property interest in PFC revenue. Carriers are allowed to withhold $0.11 per PFC collected and may retain any interest or other investment return earned on PFC revenue between the time of collection and the time of remittance. However, carriers are not 1 Title 14 C.F.R places limits on the type of passenger that pays a PFC. The regulation does not allow PFC collection on non-revenue passenger traffic or tickets acquired through frequent flyer programs. Moreover, a PFC cannot be collected for enplanements related to Department of Defense travel. 2 For additional CPE data see Appendix A on page For additional information regarding the rulemaking, see Appendix B on page 19. The final rule, proposed rule and comments are available on the Internet at docket DOT-OST City and County of Denver P a g e 2

9 entitled to any interest earned on PFC revenue that is held beyond the remittance period specified by law. 4 In addition, air carriers have no legal standing to withhold PFC revenue for any reason, including airline bankruptcy. Once air carriers submit the PFC funds to the airport, the airport is required to deposit the PFC funds into an interest-bearing account or in other interest-bearing instruments and maintain separate PFC accounting records. PFC funds and associated interest revenue may only be used for FAA approved expenditures. More specifically, when the FAA approves a request to levy the PFC, it designates the total amount an airport may collect, including principal and interest, and what projects those funds may finance. PFC s are only allowed for eligible projects which preserve or enhance capacity, safety, or security; reduce noise; or furnish opportunities for enhanced competition, and are adequately justified. Airports may only collect fees up to the amount allowed by the FAA and in no event may an airport utilize the funds for projects not approved in the Record of Decision (ROD) issued by the FAA. 5 The airport may modify the terms of the ROD by submitting amendment requests to the FAA and receiving approval for the modification. In addition, an airport may institute certain modifications without prior notification to the FAA by issuing a written notice to the air carriers and the FAA. Using this procedure, the airport may decrease the PFC level, decrease the total approved PFC revenue, or increase the total approved PFC revenue by 15% or less. Passenger Facility Charge Governance and Requirements Title 49 of United States Code (U.S.C.) grants power to the Secretary of Transportation (further delegated to the FAA Administrator) to authorize airports to impose PFC s. Title 14 of the Code of Federal Regulations (C.F.R.) 158 promulgates rules and requirements pertaining to authorization, collection, remittance, and administration of the PFC program. This regulation was adopted in May 1991, and was substantially amended in May In addition, the FAA published Order which provides guidance and procedures for the administration of the PFC program. Order was created by the FAA based on their interpretation of federal laws resulting from their experience in administering the PFC program. Although the FAA desires uniform administration nationwide regarding the procedures and requirements dictated by legislation, regulation and Order , it recognizes there is diversity among the various regions and the needs and available resources within those regions. Therefore, the FAA has provided flexibility in the administration of the program to the FAA regional offices to address elements not specifically included in the regulations. 4 PFC revenue recorded in the accounting system of the carrier, pursuant to Title 14 C.F.R shall be remitted to the public agency no later than the last day of the following calendar month (or if that date falls on a weekend or holiday, the first business day thereafter). See Handling of PFC s, Title 14 C.F.R (2011). 5 Pursuant to Title 14 C.F.R , the FAA issues a PFC Record of Decision (ROD) to public agency applicants which outlines approved and disapproved projects, the amounts of approved collections and authority to use PFC s on these projects, and other conditions of approval. See Title 14 C.F.R (2011). P a g e 3 Office of the Auditor

10 When an airport desires to begin imposing PFC s, it is required to complete an extensive application process through the FAA regional office. Part of this process is to provide documentation of planned improvements for which a PFC financed project is proposed. In addition, the process includes a mandatory consultation with the airlines and public comment. The FAA must approve an airport s request to levy the fee, including the total amount to be collected and the projects to be funded. A specific expiration date is included for each application. Expiration of PFC collection authority occurs upon the earlier of the date designated by FAA or when collections plus interest earned equals the total amount approved. Once PFC s have been approved, airports are required to adhere to applicable federal regulations. Some of the requirements set forth in Title 14 C.F.R. 158 include: The airport must notify air carriers required to collect PFC s at its airport of the FAA s approval. The airport must keep any unliquidated PFC funds in an interest-bearing account or in other interest-bearing instruments. The airport may only utilize PFC revenue, as well as interest earned on such revenue, to finance approved projects. The airport must maintain separate accounting records for each approved PFC application. The airport must provide quarterly reports to carriers collecting PFC s as well as the FAA which identify: o Revenue earned from collecting carriers, interest earned, expenditures for the quarter o Cumulative revenue earned, interest earned, expenditures and the amount committed for use on currently approved projects o The PFC level for each project o The current project schedule. The airport must track air carrier remittances and reports and notify carriers when they are out of compliance with federal requirements. The airport must allow an annual audit of the PFC account. How Airports Utilize Passenger Facility Charges Expiration of PFC Collection Authority Occurs upon the earlier of the date designated by the FAA, or when PFC revenue and interest revenue equal the total amount approved. Although the application process is rigorous and thorough, 95% of all PFC applications are submitted to the FAA and processed without opposition. However, imposing PFC s is not without consequence. In addition to funding individual airports, PFC s help fund the federal Airport Improvement Program (AIP). 6 Large and medium hub airports which collect PFC s have their AIP entitlement funds reduced. These entitlement funds are then redistributed. Under federal law, small airports with little or no ability to raise funds through 6 For additional information regarding the program, refer to the Denver International Airport Airport Improvement Program Performance Audit released August The audit may be found at City and County of Denver P a g e 4

11 PFC s can indirectly benefit from the program. Large airports which levy the charge must return to the FAA up to one half of the amount due from the AIP entitlement funds. Denver International Airport (DIA) is one of fifteen Colorado airports and one of 381 airports approved to collect PFC s, which includes 98 of the top 100 busiest airports in the United States. DIA operates similarly to the other top four busiest airports in the United States. 7 The top five U.S. airports all collect PFC s at a rate of $4.50 per enplanement. Table 1: Comparison of the Top Five Busiest Airports in the U.S. Airport Hartsfield-Jackson Atlanta International Chicago O Hare International 2009 Passenger Traffic PFC s Collected * 88,032,086 PFC Uses $166,911,292 Debt 64,158,343 $121,180,181 Approved Projects Los Angeles International Dallas/Fort Worth International 56,520,843 $103,982,511 56,030,457 $104,902,704 Approved Projects Debt and Approved Projects Denver International 50,167,485 $96,864,736 Debt + Source: Airports Council International. Total Passengers: total passengers enplaned and deplaned, passengers in transit counted once. * Source: FAA Compliance Activity Tracking System Airports Financial Reports. DIA reports as of December 31, 2009, it has collected $1.1 billion in PFC s, expended $105 million on approved projects and expended $1.02 billion on debt service. Of these collections, DIA has not yet expended $8.2 million. 8 Nationwide, PFC collections from calendar years 1992 to 2009 totaled approximately $30 billion. Estimated collections from January 1, 2010 through December 31, 2010 are $2.8 billion with an additional $224 million collected in January The U.S. Government Accountability Office (GAO) found that the airport system received an average of $13 billion per year from all sources for capital development. The primary 7 This comparison is depicted in Table 1. 8 Figures include fees collected at both Stapleton International Airport and Denver International Airport. 9 Federal Aviation Administration, Key Passenger Facility Charge Statistics, airports pfc monthly reports (Accessed March 16, 2011). P a g e 5 Office of the Auditor

12 sources for airport capital projects are: bonds (50%), AIP funds (29%), and PFC s (17%). 10 Beginning in 2003, federal law allowed airports to utilize PFC's for debt payments on noneligible, non-airport related projects, so the actual amount of funds available for capital development may have been somewhat less than $13 billion. "In recent years, PFC approvals have most often been for interest on bonds and for landside projects. For fiscal year 2008, PFC s approved were 22.1% for interest on bonds, 45.4% for landside (primarily terminal) projects, 5.9% for access (mostly roads), 20.8% for airside projects, and 5.7% for noise projects. 11 Figure 1: U.S. Expenditures of PFC Funds Airports are able to issue bonds that include a pledge of PFC revenue or can be repaid in part or in full from PFC revenue. The following are various approaches: Combined flow funds - Combine airport revenues including PFC revenue can be used to pay General Airport Revenue Bonds (GARB) Direct debt service offset - PFC revenue can be used to pay all or part of the GARB debt service, but they do not secure the bonds. 12 Back-up pledge of subordinate airport revenues - These are secured by PFC revenue with a back-up pledge of airport revenue. Stand-alone PFC bonds - These are bonds solely backed by PFC revenues. Convertible lien PFC bonds - These are initially backed solely by PFC revenues, then convert to GARB s Kirk, Robert S. Airport Improvement Program (AIP): Reauthorization Issues for Congress. Congressional Research Service. January 27, 2010, opencrs rpts (Accessed February 2, 2011). 11 Ibid. 12 DIA utilizes this structure to pay debt service. 13 Airport Cooperative Research Program, Innovative Finance and Alternative Sources of Revenue for Airports, (2007) pages City and County of Denver P a g e 6

13 Legislative Issues Surrounding the Passenger Facility Charge Program Tax and fee funding authorization for the aviation trust fund and aviation program authority was set forth in Vision 100-Century of Aviation Reauthorization Act (P.L ) which expired on September 30, Since then, the only related legislation enacted consisted of several short-term extensions. While the FAA Reauthorization debate has continued to the 112th Congress in 2011, previous short-term extensions have been passed to extend the authorization of aviation programs, funding, and aviation trust fund revenue collections. As part of the Reauthorization, the FAA proposed major changes in the way that grants are funded and allocated to the 3,400 airports in the national airport system. In June 2007, GAO issued a report which addressed the FAA s proposed transition to the Next Generation Air Transportation System (NextGen). The purpose of the transition to NextGen is to relieve the strain on the national aviation system. The report comprises capital development estimates made by FAA and Airports Council International, a leading industry association; analyzes how much airports have received for capital development and if sustained, whether it can meet future planned development; and summarizes the effects of proposed changes in funding for airport development. 14 NextGen is an umbrella term for the ongoing, wide-ranging transformation of the National Airspace System. At its most basic level, NextGen represents an evolution from a ground-based system of air traffic control to a satellite-based system of air traffic management. This evolution is vital to meet future air transportation demand and to avoid gridlock in the sky as well as on the ground. NextGen will open America's skies to continued growth and increased safety while reducing aviation's environmental impact. When fully implemented, NextGen will allow more aircraft to safely fly closer together on more direct routes, reducing delays and providing unprecedented benefits for the environment and the economy through reductions in carbon emissions, fuel consumption and noise. 15 Since 2007, the FAA Reauthorization has been simply extended due to various congressional debates. The current reauthorization bill is heavily influenced by budget issues surrounding the adequacy of aviation trust fund revenues and general fund money availability. The AIP program will basically remain as it is should congress increase funding for the program. However, if the program funding is reduced, the program will need additional adjustments such as altering the funding formulas or project eligibility requirements. 14 Additional information can be found in the following report: GAO, Airport Finance, Observations on Planned Airport Development Costs and Funding Levels and the Administration s Proposed Changes in the Airport Improvement Program, GAO , (June 2007). 15 Federal Aviation Administration, What is NextGen? nextgen (Accessed March 17, 2011). P a g e 7 Office of the Auditor

14 FAA Reauthorization and Reform Act of 2011 This FAA Reauthorization and Reform Act of 2011 (H.R. 658) addresses many issues including the Passenger's Bill of Rights (for example, limit on the amount of time a passenger may sit on a runway in a plane), creating and protecting more than 600,000 jobs, identifying $4 billion in savings over the current funding levels, streamlining processes, providing funding for NextGen projects, providing funding for rural airports, and a component regarding airport construction. More specifically to the PFC program, the recent reauthorization debate in the 111 th Congress questioned whether to raise the current $4.50 PFC cap or to eliminate it. However, current versions of the bill do not include an increase to the PFC. 16 Supporters of the PFC feel that its funding is more reliable than AIP funding, it helps build gates and improve facilities, and it is an appropriate user-paid fee. Supporters, such as airports, argue that the cap should be raised or eliminated due to inflation and want fewer restrictions on the use of PFC revenues. Opponents of the PFC, such as airlines, claim the PFC is a "head tax" which increases passenger costs, possibly leading to decreasing passenger traffic. They also object to what some of the money has been spent on because currently PFC expenditures do not require agreement from air carriers. H.R. 658 was received in the Senate on April 4, "In the 112th Congress, one of the Committee's top priorities is a fiscally responsible reauthorization of our nation's aviation programs that improves our air transportation system for the good of the economy and helps create jobs. 17 On February 16, 2011, the House Transportation Committee approved Bill H.R. 658, the Congressional bill related to the FAA Reauthorization and Reform Act. H.R. 658, section 112 Airport Access Flexibility Program offers additional flexibility in how PFC funds are used by airports. 18 Under current law, a PFC may be used to fund intermodal ground access projects and facilities. However, these projects must be located on airport property and dedicated solely for airport use. Section 112 creates a pilot program allowing up to five airports to use PFC s to fund ground access projects using a more flexible standard. PFC revenues that can be dedicated to these intermodal projects is limited as a percentage of total project costs taking into the account the percentage of individuals using the project to gain access to the airport. FAA Air Transportation Modernization and Safety Improvement Act The Senate version of the bill, the FAA Air Transportation Modernization and Safety Improvement Act (S.223) does not provide substantial changes to the PFC program. However, in addition to the new PFC pilot program, S.223 requires the Comptroller General to perform a study, which identifies alternative means of collecting PFC s rather than including them in the ticket price. On February 17, 2011, the Senate passed S See The FAA Reauthorization and Reform Act of 2011 (H.R. 658) and the Senate version, FAA Air Transportation Modernization and Safety Improvement Act (S.223). 17 House Transportation and Infrastructure Committee, Federal Aviation Administration Reauthorization, press release dated February 8, 2011, (Accessed February 8, 2011). 18 For additional information, see Appendix C on page 20. City and County of Denver P a g e 8

15 While the Senate and House legislation differ slightly, both maintain the current PFC of $ S.223 and H.R. 658 are similar, however there are differences that a conference committee must address before the bill can be presented to the president for his signature. In the conference committee, Senate and House leaders will negotiate a resolution on any differences so a final conference agreement can again be voted on by the House and Senate. Upon approval, the final conference agreement will then head to President Obama for his signature of the bill into law. 19 For more details on S.223 and H.R. 658, see Appendix D on page 22. P a g e 9 Office of the Auditor

16 SCOPE This audit examined the administration practices for Denver International Airport s Passenger Facility Charge (PFC) program to assess effectiveness and compliance with rules and regulations from January 1, 2009 through December 31, OBJECTIVE In September 2000, the Federal Aviation Administration (FAA) issued the Passenger Facility Charge Audit Guide for Public Agencies. We utilized this guide to identify initial audit objectives. We performed a risk assessment to identify key areas for our review and focused our efforts so as not to duplicate an annual PFC program audit conducted by external audit firm BKD as part of its Denver single audit review. Objectives of our performance audit included: Determining if proper internal controls were in place over the collection of PFC funds Ascertaining if the PFC revenue remitted to the airport is deposited and accounted for in accordance with Title 14 C.F.R (a) and (b) requirements Determining that the airport has in place and utilizes procedures to track air carrier remittances and reporting, and to notify carriers of their obligations when they are not in compliance with Title 14 C.F.R Determining if the airport is in compliance with the quarterly reporting procedures Ascertaining if the airport is in compliance with applicable provisions of Title 14 C.F.R. 158 pertaining to permissible project costs. METHODOLOGY We utilized several methodologies to achieve our audit objectives. These evidence gathering techniques included, but were not limited to: Verifying DIA s reports of PFC s to the FAA are in accordance to governing rules and regulations Reviewing the Charter, ordinances and Denver Revised Municipal Code Reviewing the applicable FAA Rules and Regulations Reviewing the applicable DIA Airport Rules and Regulations and DIA Finance and Administration s Procedures Reviewing the City s Comprehensive Annual Financial audits and other prior audits related to PFC s Reviewing airline mandated audits Interviewing appropriate DIA personnel City and County of Denver P a g e 10

17 Interviewing FAA personnel who work with DIA Reviewing accounts that maintain PFC dollars Reviewing a sample of airline payments for timeliness and proper accounting Reviewing a sample of airline quarterly and annual reports to verify compliance with applicable requirements Reviewing DIA s management of PFC s Verifying PFC s were expended per the approved Records of Decision Interviewing a judgmental sample of airlines that collect and remit PFC s and reviewing PFC accounting practices. P a g e 11 Office of the Auditor

18 FINDING 1 Opportunities Exist to Further Improve Internal Controls over Payments and Reporting of Passenger Facility Charges by Airlines Our work determined DIA has certain elements of control over collection and internal accounting for Passenger Facility Charge (PFC) payments in place. However, DIA s controls over airlines compliance with the applicable rules and regulations are in need of improvement. Although federal law and Denver Municipal Airport Rules and Regulations (DIA Rules and Regulations) clearly set specific deadlines for remittance of PFC s and submission of quarterly reports of PFC s collected, DIA does not enforce airlines to comply with these requirements. 20 Additionally, DIA does not monitor airlines compliance with the requirements related to submission of the federally-mandated annual audited reports from airlines. 21 To enforce airlines compliance with the requirements described earlier, DIA can also leverage important provisions included in all airlines contracts. Those contracts require compliance with all federal, state, and local rules affecting airline operations at the airport. DIA has reported over $100 million in collected PFC revenue from airlines in Considering the importance of the PFC funding for DIA and significance of the amount, it is crucial for DIA to have strong controls over timeliness of PFC remittance. These controls are equally important for receipt and review of quarterly and annual reports from airlines to obtain better assurance about accuracy and completeness of PFC s collected and remitted by airlines. DIA has Important Elements of Control over PFC Collection and Accounting in Place Our review of PFC s included gaining an understanding of the collection process and transfer of funds. The following flowchart is a high-level overview of the PFC collection and payment to debt service process, along with a description about each step within the process. 20 Promulgated in C.F.R (2011). 21 Title 14 C.F.R require that airlines collecting more than $50,000 of PFC s annually have their PFC account audited annually by an accredited independent public accountant and provide each airport with a copy of such audit upon request. DIA Rules and Regulations, requires the same review. City and County of Denver P a g e 12

19 Passenger Facility Charge Collection and Transfer of Funds Airlines Issues Payments Payments and Payments Reports Reports DIA Cashiers Collect Checks Controller s Office Collect Electronic Payments (EFT) DIA Finance Initiates Accounting Collection Process, Collects Reports, and Completes Reconciliations Treasury and DIA Finance Confirm Debt Transfer Amounts Controller s Office Accounts for PFC s in Peoplesoft Treasury Allocates PFC s to Debt Initial PFC Collection - Airlines remit collected PFC s to the City by check or through electronic funds transfer (EFT). DIA receives and processes check payments, while the Controller s Office collects EFT payments. Our audit work determined duties related to the cash collection process and accounting for PFC s are properly segregated and supervisory reviews are performed. P a g e 13 Office of the Auditor

20 Initial Accounting for Collected PFC s - The DIA Finance Section prepares and maintains a monthly schedule of PFC revenue, by airline, and performs reconciliations to the general ledger. DIA s Financial Accounting Manager reviews the monthly reconciliations by comparing to the general ledger and maintains a schedule of PFC revenue used for quarterly reporting to the FAA. Accounting for PFC s in the City s Financial System - The DIA Finance Section prepares journal vouchers and s them to the Controllers Office. This process transfers PFC funds from DIA s AMS Advantage System (AMS) to the City s financial system (PeopleSoft). Transfer of PFC Funds to Debt - The Controller s Office records PFC funds into a separate account that the Treasury Division uses to pay debt services. Then DIA s Financial Accounting Manager reconciles the transfer to ensure it is in accordance with DIA s records. DIA is required to submit quarterly reports of PFC activities to the FAA. These reports must contain information of quarterly and cumulative data of PFC collections, interest earned on PFC s collected from airlines, and disbursements of PFC s for approved projects. 22 Audit work determined DIA submitted the required reports in a timely manner and the amount of PFC s collected in these reports reconciled to PFC s received according to the DIA general ledger. During our review of the allocation of PFC funds, we noted that the most recent Record of Decision in 2001 allows DIA to use PFC s to pay off debt. For our audit period, we confirmed that the entire $4.50 of the PFC funds were allocated to debt service. When United Airlines filed bankruptcy in 2005, DIA entered into an agreement with United Airlines, which noted DIA would pay a portion of the automated baggage system. 23 Specifically, DIA agreed to allocate $1.50 of PFC funds to the automated baggage system until February Auditors were able to trace PFC funds from AMS to PeopleSoft and confirm that all PFC funds are maintained separately in accordance with federal regulations. DIA s Reliance on Self-Reported PFC Revenues from Airlines Increases the Risk of Inaccurate Reporting While the audit provided a level of assurance regarding the controls over internal accounting and reporting of PFC s, it also revealed weaknesses that raise the risk of inaccurate reporting from the airlines. Our office recently issued an audit of DIA s Revenue Contract Management practices, which found that DIA does not verify airport concessionaires accurately report revenue information. 24 Our current audit found that DIA relies on self-reported PFC revenues from airlines. Although federal law and DIA Rules 22 Consistent with the approved ROD, DIA currently expends a portion of its PFC funds on debt services. The DIA quarterly report to FAA show PFC s disbursed in a lump sum amount. 23 The City currently has an ordinance in place that requires certain PFC funds to be utilized for the Airport System. This ordinance includes various bonds that are associated with multiple airlines. 24 For additional information refer to the Denver International Airport Revenue Contract Management Performance Audit released March The audit may be found at City and County of Denver P a g e 14

21 and Regulations require submission of quarterly and annual reports, DIA does not enforce this requirement. Controls over the submission of quarterly reports are inadequate and review of such reports is not documented. Although the following three sources require airlines to submit both quarterly reports and annual audit reports upon the airports request, airlines do not always submit these reports to DIA. Title 14 C.F.R. 158 requires submission of quarterly and annual audited reports. 25 DIA Rules and Regulations require airlines to comply with the applicable provisions of 14 C.F.R. and submission of PFC reports. 26 Airline contract terms require airlines to comply with federal, state, and local regulations affecting operations. 27 As a result, DIA s lenient controls over report submissions further highlight that the data in these reports is not always used effectively. Audit work found: Three of twenty-four (13%) quarterly reports due from the airlines were missing. Ten out of the twelve (83%) major airlines reviewed by the audit team failed to submit the required annual audited reports for the year ended December 31, DIA does not monitor airlines compliance with Title 14 C.F.R. 158 and DIA Rules and Regulations. In addition to not requiring submission of these reports, when the airlines voluntarily submit the reports, DIA does not document timeliness. Audit review found that quarterly reports did not contain a date stamp and reconciliations are not completed between the annual audit reports and payments, as required by DIA Rules and Regulations. DIA Revenue and Accounts Receivable Procedures do not contain specific requirements to reconcile airline quarterly reports to airline payments. As a result, DIA personnel do not document their review of airline quarterly reports or resolution of any discrepancies between the reported amounts and PFC payments received from airlines. Both the quarterly and annual audited reports serve as important oversight controls for DIA. By not enforcing these requirements, DIA is merely relying on the self-reported information, which increases the risk of inaccurate reporting. Documentation of any discrepancies is important for subsequent reviews and serves as an audit trail. In addition, DIA is not monitoring timeliness of PFC payments, which demonstrates additional weaknesses related to PFC monitoring. Title 14 C.F.R requires PFC s collected by airlines be remitted to airports no later than the last day of the month following the collection month. DIA Rules and Regulations, mirror the federal requirements with regard to the PFC remittance due date. 25 Title 14 C.F.R and specifies submission of the quarterly and annual audited reports. 26 DIA Rules and Regulations specifies submission of the quarterly and annual audited reports. 27 Airline contracts typically contain 5.05, a provision that requires airlines to comply with all federal, state, and local regulations affecting operations at DIA. P a g e 15 Office of the Auditor

22 Specifically, audit work determined the following weaknesses in the controls over the timeliness of PFC payments: Twenty-five out of sixty-nine monthly PFC payments due and paid during the two sample quarters, or 36% of the total number of payments, were received after the due date as evidenced by DIA date stamp. DIA was unable to provide evidence that follow-up on late payments occurred. Considering DIA reported over $100 million in collected PFC revenue for 2010, DIA s lenient control over timeliness of PFC remittance increases the risk of loss of substantial funds due to DIA. Verifying accuracy and completeness of PFC remittance and annual reports of PFC s audited by an independent public accountant are valuable control tools for DIA. City and County of Denver P a g e 16

23 RECOMMENDATIONS We offer the following recommendations to assist DIA in improving control over timeliness of airlines PFC payments and monitoring airlines compliance with the PFC reporting requirements: 1.1 Timely PFC Payments. The DIA Chief Financial Officer should leverage individual airlines contract terms requiring airlines to comply with all applicable federal, state and local rules and regulations. These contract provisions hold airlines accountable for compliance with federal requirements and Denver Municipal Airport Rules and Regulations pertaining to due date for PFC remittance. 1.2 PFC Quarterly Reports. The DIA Chief Financial Officer should leverage individual airlines contract terms requiring airlines comply with all applicable federal, state and local rules and regulations. These contract provisions hold airlines accountable for compliance with federal requirements and Denver Municipal Airport Rules and Regulations pertaining to submission of quarterly reports of PFC s collected by the required deadline. 1.3 Annual Audited PFC Reports. The DIA Chief Financial Officer should leverage individual airlines contract terms requiring airlines comply with all applicable federal, state and local rules and regulations. These contract provisions hold airlines accountable for compliance with federal requirements and DIA Rules and Regulations pertaining to submission of annual audited reports of PFC s collected by airlines collecting more than $50,000 of PFC s annually. 1.4 Document follow-up procedures for late PFC reports. The Financial Accounting Manager should update the current DIA Revenue and Accounts Receivable Procedures to require the DIA Accounting Section to document follow-up with the airlines for late submission of required payments and reports. 1.5 Date stamp quarterly PFC reports. The Financial Accounting Manager should update the current DIA Revenue and Accounts Receivable Procedures to require the DIA Accounting Section to closely monitor airlines submission of the required quarterly reports, and to ensure all reports are date stamped by appropriate responsible personnel. 1.6 Document discrepancy resolution process. The Financial Accounting Manager should update the current DIA Revenue and Accounts Receivable Procedures to include reconciliations of airline quarterly and annual audited reports with PFC s paid by airlines and documentation of any discrepancy resolution. P a g e 17 Office of the Auditor

24 APPENDICES: Appendix A Cost per Enplanement Metrics Costs per Enplanement (CPE) Metrics for the Top Five U.S. Airports Airport Hartsfield-Jackson Atlanta International Chicago O Hare International Los Angeles International Dallas/Fort Worth International 2009 CPE Metrics $3.40* $12.83 $11.56 $7.17 Denver International $12.60 *2010 CPE metric Cost per enplanement (CPE) represents the fees airlines pay for facility rental and landing fees divided by the number of enplaned passengers. Enplaned passengers comprise the number of passengers boarding a flight, including origination, stopovers and connections. Source: Compiled from Airport Comprehensive Annual Financial Reports, Capital Financing Plan, FAA Compliance Activity Tracking System Airport Financial Reports, and Fitch Ratings. City and County of Denver P a g e 18

25 Appendix B U.S. Department of Transportation Press Release Source: United States Department of Transportation. U.S. Department of Transportation Expands Airline Passenger Protections. (Accessed April 20, 2011). P a g e 19 Office of the Auditor

26 Appendix C House Press Release City and County of Denver P a g e 20

27 Source: House Transportation Subcommittee. House Transportation Committee Approves FAA Bill. (Accessed February 23, 2011). P a g e 21 Office of the Auditor

28 Appendix D Pending Passenger Facility Charge Legislation Pending Passenger Facility Charge Legislation United States Congress 112th Congress ( ) Current Law S.223 H.R. 658 Title VISION 100 FAA Air Transportation Modernization and Safety Improvement Act FAA Reauthorization and Reform Act of 2011 Expiration Date Status Passenger Facility Charge (PFC) PFC Pilot Program GAO PFC Study Expired September 30, 2007 Latest extension - H.R.1079, continues FAA funding for 60 days, expires May 31, 2011 Maximum PFC of $4.50 N/A N/A Expires October 1, 2013 Expires September 30, 2014 February 17, 2011 Passed in the Senate No increase or decrease to maximum PFC of $4.50 Revises procedural requirements for imposition of PFCs. Establishes an alternative PFC collection pilot program. Requires the Comptroller General (GAO) to study PFC collections using alternative methods without including the PFC in the ticket price. April 4, 2011 Received in the Senate No increase or decrease to maximum PFC of $4.50 Directs the Secretary of Transportation to establish a pilot program to authorize, at up to five airports, a PFC to finance the eligible cost of an intermodal ground access project. Directs the Comptroller General (GAO) to study an alternative means to collect PFCs without their inclusion in the price of an airline ticket. Source: The Library of Congress, THOMAS, City and County of Denver P a g e 22

29 AGENCY RESPONSE P a g e 23 Office of the Auditor

30 City and County of Denver P a g e 24

31 P a g e 25 Office of the Auditor

32 City and County of Denver P a g e 26