DWU CONSULTING

March 2026

Airport PILOT: Permissible Payments in Lieu of Taxes

The Revenue-Use Requirement

Federal law restricts airport revenue use under 49 U.S.C. § 47107(b), which requires airport sponsors accepting Airport Improvement Program (AIP) grants to expend all revenues for: (1) the capital or operating costs of the airport; (2) the capital or operating costs of the local airport system; or (3) the capital or operating costs of other local facilities owned or operated by the airport owner and directly and substantially related to air transportation of passengers or property.

This restriction applies to all airports receiving any federal assistance, not only AIP recipients, under 49 U.S.C. § 47133. FAA's definitive implementation guidance is the Policy and Procedures Concerning the Use of Airport Revenue (Revenue Use Policy), published as a final policy statement at 64 FR 7696, February 16, 1999.

Payments to a host government that exceed the fair and reasonable value of services provided, or are not based on a transparent cost allocation formula, are classified as revenue diversion and are prohibited.

Two Categories of PILOTs Under Federal Law

Permissible PILOTs

An airport may reimburse a governmental body for services and facilities actually provided to the airport, provided that: (1) the payment does not exceed the fair and reasonable value of those services and facilities; and (2) the payment is based on a reasonable and transparent cost allocation formula.

Permissible cost-based reimbursements include:

• A city fire department's proportional share of fire response costs, allocated by call volume, land area, or assessed value
• A city police department's law enforcement costs
• A city public works department's road maintenance costs
• General government overhead (executive offices, legislative functions, legal services), provided the sponsor allocates such costs using a methodology consistent with government cost-accounting standards

FAA Order 5190.6C, Chapter 15, § 15.9, provides that "a sponsor may pay for a portion of the general costs of government, including executive offices and the legislative branches, provided the sponsor allocates such costs to the airport" using an appropriate cost allocation methodology.

Prohibited PILOTs

Under 49 U.S.C. § 47107(k)(2)(C), PILOTs or other assessments that exceed the value of services provided to the airport, or that are not based on an acceptable cost allocation formula, are prohibited.

Under 49 U.S.C. § 47107(k)(2)(D), payments to compensate non-sponsoring governmental bodies for lost tax revenues are prohibited to the extent they exceed the stated tax rates applicable to the airport.

Many airport PILOTs are voluntary — not assessed by the receiving government. Such payments fall under the "lost tax revenues" provision of § 47107(k)(2)(D) rather than the "payments in lieu of taxes" provision of § 47107(k)(2)(C). A voluntary payment must be evaluated against whether it exceeds stated tax rates that would otherwise apply, while an assessed PILOT is tested against the fair value of services provided.

The Grandfathered Exception

The revenue-use requirement, enacted as part of the Airport and Airway Improvement Act of 1982, contained an exception for pre-existing financial arrangements. Under 49 U.S.C. § 47107(b)(2), certain airport sponsors that were diverting revenue for non-airport purposes before September 3, 1982 may continue to do so, subject to a cap equal to the amount diverted in the base year (generally FY 1994 or FY 1995).

As of the FAA's most recent list, published in the Compliance Activity Tracking System (CATS) on May 1, 2018, nine sponsors hold grandfathered status:

Sponsor	Grandfathered Payment Type	Basis
City of Chicago	Vehicle fuel tax (including aviation fuel) deposited into City's corporate fund	1981 sales tax; 1986 fuel tax of $0.05/gallon
City and County of Denver	Aviation fuel tax deposited into general fund	1981 tax of $0.04/gallon; 1986 amendment to $0.02/gallon
State of Hawaii	5% gross receipts surcharge from airport revenue fund to state general fund (15 airports)	1970 state statute
Maryland Aviation Administration	All MAA revenue deposited into MDOT Transportation Trust Fund	1970 state law creating MDOT
Massachusetts Port Authority	PILOTs to Cities of Chelsea, Winthrop, and Boston; Seaport deficits/surpluses	1956 state law creating Massport
Niagara Frontier Transportation Authority	Cross-utilization of revenues across airports, bus, light rail, and port operations	1967 New York state legislation
Port Authority of New York & New Jersey	Consolidated revenues across all authority facilities	Pre-1982 practice
City of St. Louis	5% of airport operating revenues to city general fund	1954 city ordinance
City and County of San Francisco	15% of non-airline concession revenues (or $5 million minimum) to City general fund	1980 City charter; 1981 airline settlement agreement

Grandfathered Payment Examples: Named Airports

San Francisco International Airport (SFO): SFO paid the City and County of San Francisco an Annual Service Payment (ASP) based on 15.0% of concession revenues (net of adjustments), with a minimum of $5.0 million annually, as reported in SFO's audited financial statements. Under SFO's residual Lease and Use Agreement, the ASP is included in the airline cost base and recovered through airline rates and charges (Source: SFO Financial Statements FY 2024, October 25, 2024).

Massachusetts Port Authority (Massport/Boston): Massport's PILOT obligation to the City of Boston operates under a 10-year negotiated agreement. The agreement effective in FY 2006 established a base payment of $14.0 million, escalating annually by CPI within a 2%–8% band, plus an additional $700,000 per year beginning in FY 2007. The total 10-year payout was approximately $167 million. Massport also makes PILOT payments to the Cities of Chelsea and Winthrop (Source: Boston Municipal Research Bureau, "Tax-Exempt Institutions Increase Pilot Payments," FY 2006).

City of St. Louis (STL): A 1954 ordinance requires St. Louis Lambert International Airport to pay 5% of airport operating revenues annually to the City's general fund (Source: FAA CATS, May 1, 2018).

State of Hawaii: Under a 1970 state statute, the State Department of Transportation's Airports Division transfers a 5% gross receipts surcharge to the state general fund. This applies to all 15 state-owned airports, including Daniel K. Inouye International Airport (HNL), Kahului Airport (OGG), and Kona International Airport (KOA) (Source: FAA CATS, May 1, 2018).

Grandfathered Payment Caps and Enforcement

The grandfathered exception is not unlimited. Under 49 U.S.C. § 47115(f), the FAA must consider excess revenue diversion — diversion above the base year amount — as a factor against the award of AIP discretionary funds to the airport.

FAA Compliance Guidance Letter 2018-01 clarifies that: (1) the base year amount is tracked by FAA and verified against audited financial statements; (2) if the sponsor diverts amounts above the cap, FAA considers any overage as a militating factor against AIP discretionary funding for any airport owned by the sponsor; and (3) if supporting documents for the original 1994/1995 base calculation are no longer available, the sponsor may need to reverse-engineer the calculation.

Consequences of Revenue Diversion

For airports that are not grandfathered, any excessive PILOT or revenue diversion carries layered consequences:

• AIP funding: Under 49 USC § 47115(f), the Secretary may withhold AIP discretionary grants
• Civil penalties: Up to $50,000 per violation under 49 USC § 47107
• Cross-modal funding: Withholding of federal transit and highway funds from any local government that violates the airport revenue retention restriction
• PFC eligibility: Disapproval of an airport's application to impose or use Passenger Facility Charge (PFC) revenues
• Grant repayment: Requirement to repay previously awarded grants

As of 2019, FAA Associate Administrator for Airports Kirk Shaffer reported that of 177 jurisdictions with which FAA had worked over the preceding five years on revenue diversion issues, 107 remained noncompliant. The DOT Office of Inspector General initiated an audit in May 2022 to assess whether FAA's oversight policies are sufficient to prevent or detect airport revenue diversion, specifically noting the elevated risk created by the $20 billion in COVID-era airport relief funds (Source: DOT OIG, "Audit Initiated of FAA's Prevention and Detection of Airport Revenue Diversion," May 20, 2022).

Structuring a Compliant PILOT

For airports that are not grandfathered, the Revenue Use Policy and FAA Order 5190.6C establish the boundaries for a compliant PILOT arrangement:

Cost allocation methodology: The payment must be grounded in a documented cost allocation formula that identifies the specific services provided to the airport and allocates costs using a quantifiable basis — such as call volume, square footage, population served, or assessed value (Source: FAA Order 5190.6C, Chapter 15, § 15.10).

Services must be actually provided: The payment must reflect services the airport actually receives. A payment to compensate a municipality for "lost property tax revenue" on airport land is evaluated under 49 USC § 47107(k)(2)(D) and is permissible only to the extent it does not exceed the stated tax rates that would otherwise apply.

Documentation: FAA may review the payment at any time. The cost allocation formula, underlying service records, and financial accounting trail linking airport revenue to the PILOT payment should be maintained and available for audit. Airports submit financial data to FAA annually using Forms 5100-126 and 5100-127 through the CATS system (Source: FAA Order 5190.6C, Chapter 15).

No general government subsidy: A payment structured as a flat percentage of airport revenue that flows to the sponsor's general fund — without a corresponding cost allocation — is not compliant. The grandfathered airports are lawful only because they predate the statutory restriction.

How PILOTs Flow Through Airport Finances

A PILOT is an airport operating expense. Its treatment in airline rates and charges depends on the airport's rate-setting methodology:

Residual methodology: The PILOT is included in the airline cost base and recovered through airline landing fees, terminal rents, or both. SFO's Annual Service Payment of $55.6 million is included in the residual rate calculation — meaning airlines bear the cost through their rates.

Compensatory methodology: The PILOT is allocated to the appropriate cost center (airfield, terminal, other) and recovered through rates applicable to that cost center. If the PILOT covers general government services not attributable to a specific cost center, it may be allocated proportionally.

Hybrid methodology: The treatment depends on which cost centers use residual versus compensatory approaches.

In all cases, the PILOT increases the airport's operating cost base and, by extension, the cost per enplanement (CPE) or equivalent airline cost metric. For airports operating under residual agreements, an increase in the PILOT directly increases the airline rate requirement.

Considerations

• Cost allocation review: For airports making PILOT payments under cost-based reimbursement arrangements, periodic review of the underlying cost allocation formula — including the services covered, allocation methodology, and reasonableness of allocated amounts — is a compliance safeguard.
• Grandfathered amounts: Sponsors of grandfathered airports should periodically verify that reported grandfathered amounts do not exceed the base year cap, as overages create a militating factor against AIP discretionary funding for all airports owned by the sponsor.
• Bond disclosure: PILOTs and grandfathered payments are disclosed in airport revenue bond Official Statements as operating expenses under SEC Rule 15c2-12. The magnitude of PILOT obligations is relevant to credit analysis, particularly for airports where the PILOT represents a material share of operating costs.
• Governance transitions: When an airport transitions from city/county department governance to an independent airport authority, existing PILOT arrangements may require renegotiation.