review of costs of the airfield on midway island PDF
Preview review of costs of the airfield on midway island
REVIEW OF COSTS OF THE AIRFIELD ON MIDWAY ISLAND Department of Transportation Report Number: FI2005079 Date Issued: September 30, 2005 U.S. Department of The Inspector General Office of Inspector General Washington, D.C. 20590 Transportation Office of the Secretary of Transportation September 30, 2005 The Honorable Maria Cino Deputy Secretary of Transportation U.S. Department of Transportation 400 Seventh Street SW Washington, DC 20590 The Honorable P. Lynn Scarlett Assistant Secretary—Policy, Management and Budget U.S. Department of the Interior 1849 C Street NW, Suite 5110 Washington, DC 20240 Dear Ms. Cino and Ms. Scarlett: This report presents the results of our review of the costsharing arrangements for the airfield located at the Midway Atoll National Wildlife Refuge. The Federal Aviation Administration (FAA) is responsible for ensuring the continued operation of Midway’s airfield, which is owned by the Department of the Interior. This joint mission has led to a dispute over funding the airfield’s operating costs. Unless the two agencies want to operate independently of one another in “remote field camps” on Midway, they need to agree to control operating costs and equitably share these costs. The Office of Management and Budget (OMB) requested that we review Midway operating costs to facilitate resolution of this dispute over airport costsharing arrangements. In November 2004, senior officials from both agencies also requested our assistance to determine a fair and equitable method to allocate costs. We are providing you with this report in response to that request. Midway consists of three small islets in the northern Pacific Ocean, totaling 1,549 acres of land and about 297,000 acres of coral reefs, approximately midway between Los Angeles and Tokyo. Midway is best known for the pivotal role it 2 played in a June 1942 naval battle that turned the tide of World War II in the Pacific. Until 1996, the Atoll was under the control of the Department of Defense. In 1996, Midway became a national wildlife refuge under the control of the Department of the Interior’s U.S. Fish and Wildlife Service (FWS). The primary purposes of the refuge are to maintain diverse wildlife, provide opportunities for research and education, and recognize and maintain the island’s historic significance. FWS also owns and operates Henderson Field Airport on Midway, which FAA has certificated as a commercial airport. 1 The underlying reason that the airport is certified as commercial is that commercial air carriers rely on Midway as a diversionary airport in the event of an emergency. Federal regulations, commonly referred to as ETOPS, 2 require that twinengine aircraft, such as the Boeing 777, stay within 180 minutes of an airport adequate for landing safely in an emergency. About 38,000 twinengine planes per year cross the Pacific Ocean. Those that cross the Northern Pacific rely on Midway as a diversionary airport. Without Midway, those aircraft would need to alter their routes, incurring additional flight time and fuelrelated costs. Although the airlines that rely on Midway as a diversionary airport benefit from its continued certification, they are not currently charged for that benefit. While commercial airlines benefit from the airport, Federal agencies are the primary airport users. For the 15month period of January 2004 through March 2005, there were 136 aircraft landings at Midway airfield, one of which was an emergency landing for a commercial airline. Over the past year, Federal agencies have used Midway for the following purposes, all made operationally possible or less expensive by the airport. • FWS and Other Department of the Interior Agencies: Refuge operations, endangered species research, and maintenance of historical sites. FWS, the primary user of the airport, regularly flies staff, volunteers, and supplies to support its refuge mission activities. The U.S. Geological Survey also conducts research, such as the translocation of endangered Laysan ducks on Midway. 1 As owner and operator (via a contractor) of the airfield, FWS’s responsibilities include maintaining the airfield, equipment, and facilities and funding airfield improvements (through Airport Improvement Program grants). 2 ETOPS (ExtendedRange TwinEngine Operations) is an airplane/pilot operating requirement for two engine aircraft. ETOPS requires that an adequate airport be available so that an airplane can land if an engine failure or other problems require a diversion. An adequate airport is defined as a certified airport or one that is found to be equivalent to a certified airport’s safety requirement. The fact that Midway is a certified airport makes it adequate for ETOPS. 3 • Department of Defense: Diversionary airport and national security. A Navy aircraft made an unscheduled landing on Midway to refuel. The Missile Defense Agency used Midway to support a test of the National Missile Defense System. • Department of Homeland Security: Diversionary airfield, search and rescue, and national security. A U.S. Coast Guard (USCG) aircraft medically evacuated a foreign national from Midway. The Transportation Security Administration performs security oversight and aviation security at airports such as Midway. • Department of Commerce: Monitoring geological events and endangered species research. Volcanic and earthquakemonitoring equipment are located on Midway, and the National Oceanic and Atmospheric Administration (NOAA) conducts research to monitor endangered Hawaiian monk seals. Neither FWS nor FAA believes its mission includes maintaining Midway as a diversionary airport, and therefore, neither believes it should be responsible to pay the cost of meeting ETOPS requirements. According to Department of the Interior officials, FWS does not require a certified airport to carry out its mission on Midway. Therefore, FWS does not believe it should pay the costs to maintain Midway as a certified airport. Similarly, FAA officials do not believe FAA should be required to pay the cost to operate Midway’s airport because FAA does not operate or pay to operate any other airport. Instead, its mission is to provide the safest, most efficient aerospace system in the world, which it does by regulating civil aviation and U.S. commercial space transportation; encouraging and developing civil aeronautics; developing and operating a system of air traffic control; researching and developing the National Airspace System and civil aeronautics; and developing and carrying out programs to control aircraft noise and other environmental effects of civil aviation. In fact, FAA officials emphasized that typically its primary role relating to airports involves capital investment and safety rather than airport operations. Congress, believing that Midway’s role as a diversionary airport is critical to safe and efficient air travel, has attempted on several occasions to get Federal agencies to work together to ensure the continued operation of the airport. In fiscal year (FY) 2003, Congress appropriated $3.5 million to the Department of Transportation (DOT) to maintain Midway airport. 3 It also authorized FWS to collect fees from users to offset airport costs. In FY 2004 and FY 2005, Congress did not include funds for FAA to pay for the airfield. Instead, Congress called for FAA to pay the cost to operate the airport and called for other Federal agencies 3 FAA and FWS signed an interagency agreement that transferred the funds from FAA to FWS to operate the airport. 4 that use Midway to reimburse FAA. FAA funded the airport’s costs in FY 2004 and FY 2005, but to date, no Federal agency has provided any reimbursement because no formula has been established to allocate costs among Federal agencies. In FY 2005, Congress directed OMB to establish an equitable formula for allocating the airport’s operational costs among appropriate Federal agencies. Congress called for the allocation to be based on potential airport use, interest in maintaining aviation safety, and applicability to Government operations and agency mission. The recently passed SAFETEALU law 4 reaffirms congressional interest in an equitable allocation of Midway costs by emphasizing interagency funding from FY 2006 through FY 2009. The purpose of this report is to provide OMB with an independent analysis to allocate costs among appropriate Federal agencies. Exhibit A contains additional background information and a photograph of the airfield. Our objectives were to identify (1) the costs of operating the Midway airfield, (2) a fair and equitable method for allocating costs among users, and (3) opportunities to reduce operating costs. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards prescribed by the Comptroller General of the United States and performed such tests as we considered necessary to detect fraud, waste and abuse. Our scope and methodology are described in Exhibit B. RESULTS IN BRIEF Midway’s operating costs are higher than would be expected for such a small operation. Reasons for this are that Midway has: • An oversized infrastructure. FAA and FWS are currently paying to maintain an infrastructure capable of supporting 5,000 people, although only about 50 people reside on Midway. • An aging and outdated infrastructure. Much of the infrastructure (i.e., equipment and related buildings that provide electricity, water, sewer, and other support services) is obsolete and expensive to operate and maintain. For example, the wastewater treatment system relies on pumps that are over 60 years old and portions have been shut down and salvaged to keep the remaining system operational. • A fixedprice contract that includes a higher level of activity than has actually occurred. FAA and FWS are paying for a fixedprice contract that has locked them into paying much more than is necessary to support Midway operations. 4 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, P.L. 10959 Section 10209 (August 10, 2005). 5 The agencies saved about $1.1 million in the second half of FY 2005 by modifying the existing contract to support only the activities currently necessary on Midway. • A remote location. Midway’s remote location, about 1,250 miles from Honolulu, is a major cause for the high costs, as all supplies must be brought in either by plane or boat. Based on our review, we believe that both FAA and FWS can operate the airfield and refuge for less: $4.4 million total annually for FY 2006 and beyond, which is slightly over half of the cost in FY 2004. We also determined a fair and equitable method for allocating costs between FAA and FWS for FY 2005. We provided our preliminary estimates and findings to the agencies on March 18, 2005, and they generally agreed with the results. Table 1 shows the operating costs of the airfield and the refuge by fiscal year. Table 1. Midway Operating Costs (in millions of dollars) Year Airfield Refuge Total FY 2004 $3.7 $4.4 $8.1 FY 2005 2.0 4.4 $6.4 (estimate) a FY 2006 1.6 2.8 $4.4 (estimate) b a Subject to adjustment at yearend based on actual costs and revenues. b Subject to significant uncertainty because the FY 2006 contract has not yet been awarded; therefore, the level of operations has not been determined. FAA and FWS are working together to ensure the continuous operation of the airfield. They modified the existing contract to eliminate unnecessary functions and to reduce operating costs for FY 2005. They are also in the process of upgrading the infrastructure. What remains to be done is developing agreements for FY 2006 and beyond. The agencies need to complete negotiations for a new contract with the Island service provider, sign a memorandum of understanding for sharing costs based on actual usage, 5 and develop an agreement for collecting reimbursements from other agencies using the airfield, such as USCG and NOAA. Having an equitable allocation of Midway costs is critical to holding agencies 5 Allocation based on actual usage and proper accounting is required by Federal accounting standards. 6 accountable for their usage, which is reaffirmed by the Congress in the recently passed SAFETEALU. The following summarizes our results. The Present (FY 2005): Controlling and Allocating Costs We estimate that Midway operating costs should be about $6.4 million for FY 2005, down from about $8.1 million in FY 2004. Airfield operating costs should be about $2.0 million in FY 2005. After taking into account anticipated FY 2005 Midway revenues of $0.9 million, FAA’s payment should be about $1.8 million and FWS’s payment about $3.7 million. The airfield’s share of FY 2005 operating costs is substantially less than the $3.7 million FAA paid in FY 2004. FAA agreed to pay the airfield’s share of costs through FY 2005 in compliance with current congressional direction that FAA ensure the continuous, uninterrupted operation of the airfield for the safety of commercial aircraft. Neither FWS nor FAA has a sound methodology to calculate how much other Federal agencies should reimburse FAA in FY 2005. FAA and FWS Agreed to a Fair and Equitable Method for Allocating FY 2005 Costs. Recognizing that it was critical to reduce costs to an affordable level, FWS and FAA agreed to several immediate actions to lower costs substantially for the remainder of FY 2005 (from April to September), mainly by renegotiating the operations contract for Midway. The renegotiated contract has reduced the cost of operations for the second half of FY 2005 by approximately $1.1 million. FWS also agreed to apply all Midway revenues against Midway operating costs. Based on data provided and actions taken to reduce costs, we determined that Midway operating costs should total about $6.4 million in FY 2005. The airfield’s share of those costs is about $2.0 million ($1.8 million net, after the airfield’s share of revenues is applied). The remaining costs, $4.4 million ($3.7 million net), were assigned to refuge operations and will be paid by FWS. Properly allocating costs and revenues was a challenge because FWS’s accounting systems had not been set up to track or allocate costs and revenues. As a result, some costs that should have been assigned as direct costs to one agency were included as indirect costs and shared by both agencies. For example, although FWS should pay the cost to support its volunteers, because FWS did not track the cost to fly its volunteers between Midway and Honolulu, the cost was considered indirect and was partially paid by FAA. 7 Because FWS had not established mechanisms to allocate indirect costs based on usage of indirect services, we allocated indirect costs based on the number of missionrelated personnel on Midway. We estimated that there were 17 direct, missionrelated personnel on Midway—5 assigned to the airfield and 12 assigned to the refuge. The refuge personnel consisted of four FWS employees, one FWS employee’s spouse, and the equivalent of seven staffyears of FWS volunteers. Although FWS agreed with our methodology, it disagreed with the number of missionrelated personnel assigned to refuge operations, stating that FWS employed only eight missionrelated personnel. The difference between the counts is, first, that FWS did not include family members (neither the Midway employee’s spouse, who lives on the island, nor the wife and child of the prior refuge manager, who left in December 2004, were considered by FWS). Second, the number of volunteers differed. FWS stated that volunteers visiting Midway averaged about four staffyears “for the past few years.” Our estimate of seven staffyears was based on the actual number of years volunteers spent on Midway in FY 2004. Despite FWS’s disagreement with the number of mission related personnel, it agreed to allocate costs in FY 2005 on the basis we proposed. At the end of the fiscal year, the agencies also agreed to determine actual costs and revenues and to allocate those costs between airfield operations and refuge operations based on the actual number of direct, missionrelated personnel, including volunteers. FY 2006 and Beyond: Managing and Allocating Costs and Revenue Fairly and Equitably In the future, the agencies should apply generally accepted accounting principles to record financial transactions and allocate costs. This would involve assigning as many costs as possible as direct costs and then fairly allocating indirect costs and revenues. The agencies do not yet have a basis for allocating costs in FY 2006 using generally accepted accounting principles because they lack data on actual usage of services on Midway. Fees also did not fully recover the cost of providing the services and the resulting revenues were not applied to offset the costs of providing the services. Although actual costs could differ substantially, we estimate that if the agencies operated at the same level of service and costs as in the second half of FY 2005, invested in downsizing the infrastructure as agreed, and used the same reasonable method as employed in FY 2005 to share costs, the cost for the airfield’s FY 2006 operations would be about $1.6 million (of Midway’s total operating costs of $4.4 million). The decrease in costs would primarily be the result of scheduled capital investments and a new contract with reduced operations (similar to the one 8 in place for the second half of FY 2005). This level of costs will not be achievable unless FWS and FAA carefully limit the scope of services under the new contract. Both agencies provided us with cost estimates that indicate that they can each fulfill their respective missions at lower costs by reducing operations to minimum levels, which they referred to as their “remote field camp” scenarios. According to FAA, after making the initial investment to set up a standalone airport operation, the annual costs for the airfield would be about $1.5 million. Similarly, FWS estimates that its annual costs for the refuge would be about $1.7 million. Based on these cost estimates, we see no reason why they cannot work together to control costs. Costs and Revenues Need To Be Properly Tracked and Assigned. Improvements are needed to properly account for costs and revenue and to allocate them fairly based on generally accepted cost accounting and cost allocation principles. Specifically: • Whenever possible, costs should be directly assigned to the appropriate user. • Costs that cannot be directly assigned (indirect costs) should be allocated based on usage. • Fees should cover the costs of providing the service. • Revenues (fees) should be properly recorded and applied to offset costs, subject to laws and regulations. To illustrate, in coordination with FWS, we identified the following activities that should have been characterized as direct costs: airfield, refuge, fuel farm, visitor operations, national defense, historical buildings and memorials, environmental monitoring, and research. However, airfield and refuge were the only two activities that were assigned direct costs due to the limited availability of information. The airfield’s direct costs were derived using information from the current contractor, and the refuge’s direct costs were obtained from FWS’s budget for Midway. Information on visitor operations, such as landings, fuel sales, and paid lodging at “Hotel Midway,” were available from the contractor and FWS, but the documents provided did not indicate why the visitors were on Midway. In addition, costs that cannot be directly assigned (indirect costs) should be allocated based on each agency’s use of Midway services and facilities (e.g., the costs of electricity should be allocated according to the percentage of use, which can be measured using meters or other methods). A New Contract is Needed. FWS plans to award a new contract for operating Midway for FY 2006 and beyond. The new contract should (1) tightly define the 9 scope of work to ensure that costs do not increase significantly from current levels, and (2) segregate direct costs so they can be assigned to the responsible agency. However, FWS has indicated that the reduced costs achieved by renegotiating the contract for the last 6 months of FY 2005 are not representative of the level of service necessary for FY 2006. 6 In contrast, during our review, FWS indicated that it could complete its mission with as few as four people. Based on this statement, we believe that both agencies can continue their missions by working together and contracting for operations at levels no more than those that exist for the second half of FY 2005. Operating Costs Should Be Kept at a Sustainable Level. The challenge for FWS and FAA will be to keep operating costs at a sustainable level in the future. FAA and FWS should continue the current level of operations (similar to the second half of FY 2005) with the contractor to operate the airfield and infrastructure and properly account for and track costs and revenues. This includes FWS’s refuge operations remaining constant. Additionally, all constructionrelated costs, such as fuel used for construction and transporting labor to Midway, need to be charged to the proper capital fund and not to indirect operating costs. We estimate that if the same methodology for sharing costs in FY 2005 is used in FY 2006, the airfield’s FY 2006 operating costs should be no more than $1.6 million (of Midway’s total operating costs of $4.4 million); this amount, which includes indirect costs, carries the assumption that FAA and FWS will agree to: • Assign all airfieldrelated costs as direct costs to the airfield and allocate indirect costs based on the airfield’s share of direct missionrelated personnel on Midway. (However, we suggested they allocate indirect costs based on usage in accordance with generally accepted accounting principles.) • Complete planned capital investments. The agencies also agreed to start construction in the summer of 2005 on capital investments to downsize and improve the infrastructure and the airfield. Midway’s new infrastructure will support 30 to 100 people, resulting in a more efficient operation. Midway can operate with as few as 8 to 10 people, which includes 4 to 5 people to operate a certified airfield and 4 to 5 people to manage the wildlife refuge. Designing the infrastructure to support more people than the 8 to 10 needed for basic operations is necessary to facilitate visitors to the refuge. FWS will fund all 6 According to the statement of work for the new contract, in the event that a viable visitor services program is reestablished at Midway, the contractor shall have the means and personnel to perform the following:hotel services; food services; rental services; scuba center; educational programs; transportation; and morale, welfare, and recreation.
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