[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
RAILROAD REHABILITATION AND IMPROVEMENT
FINANCING PROGRAM
=======================================================================
(111-24)
HEARING
BEFORE THE
SUBCOMMITTEE ON
RAILROADS, PIPELINES, AND HAZARDOUS MATERIALS
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
APRIL 22, 2009
__________
Printed for the use of the
Committee on Transportation and Infrastructure
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia VERNON J. EHLERS, Michigan
JERROLD NADLER, New York FRANK A. LoBIONDO, New Jersey
CORRINE BROWN, Florida JERRY MORAN, Kansas
BOB FILNER, California GARY G. MILLER, California
EDDIE BERNICE JOHNSON, Texas HENRY E. BROWN, Jr., South
GENE TAYLOR, Mississippi Carolina
ELIJAH E. CUMMINGS, Maryland TIMOTHY V. JOHNSON, Illinois
ELLEN O. TAUSCHER, California TODD RUSSELL PLATTS, Pennsylvania
LEONARD L. BOSWELL, Iowa SAM GRAVES, Missouri
TIM HOLDEN, Pennsylvania BILL SHUSTER, Pennsylvania
BRIAN BAIRD, Washington JOHN BOOZMAN, Arkansas
RICK LARSEN, Washington SHELLEY MOORE CAPITO, West
MICHAEL E. CAPUANO, Massachusetts Virginia
TIMOTHY H. BISHOP, New York JIM GERLACH, Pennsylvania
MICHAEL H. MICHAUD, Maine MARIO DIAZ-BALART, Florida
RUSS CARNAHAN, Missouri CHARLES W. DENT, Pennsylvania
GRACE F. NAPOLITANO, California CONNIE MACK, Florida
DANIEL LIPINSKI, Illinois LYNN A WESTMORELAND, Georgia
MAZIE K. HIRONO, Hawaii JEAN SCHMIDT, Ohio
JASON ALTMIRE, Pennsylvania CANDICE S. MILLER, Michigan
TIMOTHY J. WALZ, Minnesota MARY FALLIN, Oklahoma
HEATH SHULER, North Carolina VERN BUCHANAN, Florida
MICHAEL A. ARCURI, New York ROBERT E. LATTA, Ohio
HARRY E. MITCHELL, Arizona BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY, Pennsylvania ANH ``JOSEPH'' CAO, Louisiana
JOHN J. HALL, New York AARON SCHOCK, Illinois
STEVE KAGEN, Wisconsin PETE OLSON, Texas
STEVE COHEN, Tennessee
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
SOLOMON P. ORTIZ, Texas
PHIL HARE, Illinois
JOHN A. BOCCIERI, Ohio
MARK H. SCHAUER, Michigan
BETSY MARKEY, Colorado
PARKER GRIFFITH, Alabama
MICHAEL E. McMAHON, New York
THOMAS S. P. PERRIELLO, Virginia
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico
VACANCY
(ii)
SUBCOMMITTEE ON RAILROADS, PIPELINES, AND HAZARDOUS MATERIALS
CORRINE BROWN, Florida Chairwoman
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico
NICK J. RAHALL II, West Virginia
JERROLD NADLER, New York BILL SHUSTER, Pennylvania
ELIJAH E. CUMMINGS, Maryland THOMAS E. PETRI, Wisconsin
GRACE F. NAPOLITANO, California JERRY MORAN, Kansas
JASON ALTMIRE, Pennsylvania GARY G. MILLER, California
TIMOTHY J. WALZ, Minnesota HENRY E. BROWN, Jr., South
MICHAEL A. ARCURI, New York Carolina
CHRISTOPHER P. CARNEY, Pennsylvania TIMOTHY V. JOHNSON, Illinois
ALBIO SIRES, New Jersey SAM GRAVES, Missouri
MARK H. SCHAUER, Michigan JIM GERLACH, Pennsylvania
BETSY MARKEY, Colorado CHARLES W. DENT, Pennsylvania
MICHAEL E. McMAHON, New York LYNN A. WESTMORELND, Georgia
THOMAS S. P. PERRIELLO, Virginia JEAN SCHMIDT, Ohio
PETER A. DeFAZIO, Oregon CANDICE S. MILLER, Michigan
JERRY F. COSTELLO, Illinois VERN BUCHANAN, Florida
BOB FILNER, California ROBERT E. LATTA, Ohio
EDDIE BERNICE JOHNSON, Texas BRETT GUTHRIE, Kentucky
LEONARD L. BOSWELL, Iowa AARON SCHOCK, Illinois
RICK LARSEN, Washington ANH ``JOSEPH'' CAO, Louisiana
MICHAEL H. MICHAUD, Maine PETE OLSON, Texas
DANIEL LIPINSKI, Illinois
STEVE COHEN, Tennessee
LAURA A. RICHARDSON, California
JAMES L. OBERSTAR, Minnesota
(ex officio)
(iii)
CONTENTS
Page
Summary of Subject Matter........................................ vi
TESTIMONY
Pippin, Ken, President, Carolina Southern Railroad............... 6
Simmons, Patrick, Rail Director, North Carolina Department of
Transportation................................................. 6
Timmons, General Richard F., President and Treasurer, American
Short Line and Regional Railroad Association................... 6
Yachmetz, Mark, Associate Administrator for Railroad Development,
Federal Railroad Administration, U.S. Department of
Transportation................................................. 6
Zehner, Dale, Chief Executive Officer, Virginia Railway Express.. 6
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Cummings, Hon. Elijah E., of Maryland............................ 35
Markey, Hon. Betsy, of Colorado.................................. 42
Richardson, Hon. Laura A., of California......................... 46
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Pippin, Ken...................................................... 49
Simmons, Patrick................................................. 60
Timmons, General Richard F....................................... 65
Yachmetz, Mark................................................... 70
Zehner, Dale..................................................... 81
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
HEARING ON RAILROAD REHABILITATION AND IMPROVEMENT FINANCING PROGRAM
----------
Wednesday, April 22, 2009
House of Representatives
Committee on Transportation and Infrastructure,
Subcommittee on Railroads, Pipelines, and Hazardous
Materials,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:00 p.m., in
Room 2167, Rayburn House Office Building, the Honorable Corrine
Brown [chairwoman of the Subcommittee] presiding.
Ms. Brown of Florida. Good evening. Will the Subcommittee
on Railroads, Pipelines, and Hazardous Materials come to order?
The Subcommittee is meeting today to hear testimony on the
Railroad Rehabilitation And Improvement Financing Program,
RRIF.
It is clear that adequate investment in passenger and
freight rail infrastructure is crucial to our Nation's economic
growth, our global competitiveness, and the quality of life in
our communities. Recent studies show that an investment of $148
billion for rail infrastructure expansion over the next 28
years is required to meet the Department of Transportation's
projected demand.
Without this investment, 30 percent of rail miles in
primary corridors will be operating above capacity by 2035,
causing severe congestion that will affect every region of the
country and potentially shift freight to an already heavily
congested highway system.
However, the ability of the railroads, shippers, and States
to meet those rail infrastructure investment needs is becoming
increasingly difficult in the current economic climate.
According to the Association of American Railroads, U.S.
railroad car-loadings are down 24.5 percent from 2008.
Intermodal volume is down 21.6 percent; grain shipments are
down 28 percent; coal shipments are down 10.8 percent; chemical
shipments are down 22.2 percent; and automobile shipments are
down 54.8 percent from last year. One railroad reports that
there are more than 2,300 auto racks stored in Ohio because the
auto traffic volumes are down so low. More than 37 miles of
auto racks are not being used. Railroad revenues are also down.
A major Class I railroad just announced that first quarter
earnings have dropped from $351 million in 2008 to $246 million
in 2009. They have already cut employment and more job losses
are anticipated.
The RRIF program can help the railroads, shippers, and the
States finance the development of railroad infrastructure
during these difficult times. It can also help put people back
to work. Since 2002, the Federal Railroad Administration has
executed 23 agreements with 19 railroads for a total of $778.62
million in loans. To date, no recipient of a RRIF loan or loan
guarantee has defaulted on a loan or is in delinquency in
making payments. Additionally, three loans have been repaid in
full.
While I am pleased with those numbers, I remain concerned
about how the program has been implemented. In the past, the
OMB has tried time and again to derail the program, which I
hope will not be repeated by this Administration. What we need
to do now, given the current economic climate, is see how we
can encourage more uses of this effective program, and
reauthorization the surface transportation program will
provides us with that opportunity.
With that, I want to welcome today's panelists and thank
them for joining us. I look forward to hearing their testimony.
Before I yield to Mr. Shuster, I ask unanimous consent that
Members be given 14 days to revise and extend their remarks, to
remit and submit their additional statements and materials by
Members and witnesses. Without objection, so ordered. I yield
to Mr. Shuster for his opening statement.
Mr. Shuster. Well, I thank the Chairwoman and also want to
welcome everybody to today's hearing on the Railroad
Rehabilitation and Improvement Program, which of course we all
know is referred to as the RRIF program.
The program, originally created in 1998 in TEA 21, is a
dedicated source of loan funding for railroad's infrastructure
needs. It was limited to $3.5 billion in total outstanding
loans but Congress in the last highway bill recognized that we
needed to increase that amount. We increased the amount to $35
billion when we passed SAFETEA-LU back a couple years ago. We
also strengthened the RRIF program last year in the Amtrak and
Rail Safety bill by increasing repayment periods from 25 to 35
years.
I would support further improvements to the program in the
next surface reauthorization bill. That is a primary reason for
holding the hearing here today. Without a doubt, the RRIF
program is a top priority for this Subcommittee and we have
repeatedly demonstrated Congress' intent to make this a strong
program.
Unfortunately, I think it is safe to say the RRIF program
has been underutilized. Since 2002, the FRA has executed 23
loan agreements for a total of $778 million. And this is just a
small fraction, in fact, a little over 2 percent of the
authorized amount of loans.
On the one hand, I want to commend the FRA for doing an
outstanding job for selecting loan recipients. We have not had
a single default on any of the RRIF loans. You as well as the
railroads deserve a pat on the back for a job well done. If
only our Nation's banks had a loan portfolio that looked like
that, we wouldn't be in the mess we are in today.
On the other hand, I want to implore upon this
Administration to make this program more accessible to
borrowers. Again and again, Congress has butted heads with the
Executive branch--and I am sad to say that it was a Republican
Administration that we butted heads with over the past several
years on the RRIF programs--but at times it appeared that the
Administration had subverted the Congressional intent when
implementing the program.
I am confident that we will now come together to make the
RRIF program a stronger program. FRA has done, as I said, a
great job in supporting it over the past decades. I hope the
attitude will prevail because Congress intended for a strong
and well utilized program.
I am encouraged that the rulemaking in the process last
year that would have tightened the requirements on borrowers
has been withdrawn. The rule would have greatly increased the
degree of difficulty for railroads to obtain a loan, creating a
new higher bar for qualification. The rule also introduced
several other measures such as a cap on loans to individual
borrowers and a public benefit requirement that would have
crippled the RRIF loan program. And these were not in line with
Congressional intent.
I would like to see the Department pursue policies in the
opposite direction, making the program more accessible not
less, and making it a more attractive financing mechanism for
projects that are time sensitive or critical for the operation
of a line.
At a time when our Nation is doing all it can to spur
economic activity, the RRIF program stands as a potential model
for how government can encourage economic growth because RRIF
is an innovative loan program and not a grant program where the
government simply hands out cash. The private sector has an
incentive to invest money in projects that will pay a financial
dividend down the road. The railroad knows the loan has to be
repaid and will only pick, I believe, the most critical
projects and those that make the most economic sense as
opposed, I believe, to a grant program which wouldn't be as
strong.
I look forward to hearing from our panelists this evening.
I would like to learn more about what Congress can do to make
sure this program is part of the solution to our economic
crisis that we face today.
Finally, Madam Chairwoman, I would like to introduce for
the record testimony submitted by the Kansas City Southern, a
Class I railroad supporting the RRIF program. KCS has made some
valuable recommendations in their testimony including
encouraging expedited environmental review for RRIF projects
and promoting RRIF loans as a means of refinancing other debt
obligations. I appreciate KCS's thoughtful testimony. It will
be closely considered as we work to improve the RRIF program in
the next highway reauthorization bill.
So thank you very much. I yield back.
Ms. Brown of Florida. Mr. Titus? You pass? Mr. Brown, yes
sir?
Mr. Brown of South Carolina. Thank you Madam Chairwoman. I
would like to welcome all the panel members here today that are
going to be testifying but particularly I would like to
represent one of my constituents, Ken Pippin.
Ken and his family run the Carolina Southern Railroad, a
short line providing services along 95 miles of track in North
and South Carolina. Ken's company ensures that communities like
Conway and Myrtle Beach and major customers like the Santee-
Cooper Grainger power plant and other industrial operations are
connected to CSX national rail network. Without the rail
service provided by Ken's train, many of these companies would
either not be able to operate or would see the cost of
operation significantly increased as they would be forced to
ship material in and out by truck.
Ken is going to tell you all about the situation facing his
rail line and how he has tried to work with the RRIF program to
improve his infrastructure, some of which is over 100 years
old, to ensure that his rail line is both able to meet the
needs of his current customers and also open to new customers
along the line. Unfortunately, it appears that Ken's railroad
fell through the cracks of this program. This is most
concerning considering that the RRIF loan program was tailor-
made to assist systems like the Carolina Southern.
I look forward to working with the Chairwoman, the Ranking
Member, and the rest of the Subcommittee to ensure that the
RRIF program is structured to ensure that railroads like
Carolina Southern are able to take advantage of the program as
Congress intended when it was created. Thank you again for
holding this hearing and I yield back.
Ms. Brown of Florida. Mr. Sires from New Jersey?
Mr. Sires. Thank you, Madam Chairwoman. Thank you for
calling this hearing today.
Our passenger rail and freight rail infrastructure needs
have received increasing attention over the last few months
through the high-speed rail initiative and as we push for clean
transportation alternatives for people and goods. As the
country looks to rail transportation to address a number of
challenges such as capacity, congestion, air quality, and
safety, we must also understand the crucial investments needed
in railroad infrastructure. If the proper investments are not
made, the many benefits that rail transportation offers will be
lost.
I thank the Chairwoman for giving us the opportunity to
discuss one important tool we have in meeting the growing
demands for rail infrastructure, the Railroad Rehabilitation
and Improvement Financial Program. I look forward to hearing
from the witnesses about their experiences and their
recommendations regarding this program. Thank you Madam
Chairwoman.
Ms. Brown of Florida. Thank you. Mr. McMahon from New York?
Mr. McMahon. Thank you, Chairwoman Brown and Ranking Member
Shuster, for having this very important hearing on our very
important rail infrastructure. As we all know, rail
transportation is critical to our Nation's transportation needs
both for passengers and for freight. Again, thank you for
holding this hearing. To our witnesses, thank you for coming
and giving us your testimony and guidance.
As you may know, I represent Staten Island and Brooklyn,
New York. My district is in desperate need of more mass
transit. With one of the longest average commute times in the
United States, many of my constituents commute for a long
period of time. But a complement to that is our existing
regional passenger rail line. Without that, our commutes would
be much worse. It is estimated that approximately 25 to 30
percent of all rail passengers in the United States are
commuters in the New York City metropolitan region. Amtrak is
crucial to that. Although our region's car traffic is
horrendous as it is, our highways would be in gridlock 24/7
without that passenger rail component.
But rail isn't just critical to the New York metro economy.
It also helps us protect our environment. As we sit here today
celebrating Earth Day, as my colleagues mentioned, we are
reminded how environmentally friendly moving people and freight
by rail is. So supporting our passenger rail network and our
freight network are extremely important.
As we know, on the freight side we transport approximately
40 percent of our Nation's freight tonnage on the rails. That
is freight that is not clogging our Nation's roads or polluting
our air. As we know, we can ship one ton of freight by rail for
436 miles on one gallon of gas. We would be hard pressed to
find a more energy efficient and clean way to ship goods across
the country than rail. That is why this hearing is so
important.
We know some of the challenges that the Railroad
Rehabilitation and Improvement Financing Program has faced over
the years and the efforts that have been undertaken by Congress
to make this program work. But despite its tortured
administrative history, since its creation through TEA 21, the
RRIF has been an important program. We need to provide
increased Federal investment in our Nation's rail
infrastructure but we need a program that actually can get
money out the door and upgrade our transportation system. I
know behind your leadership, Chairwoman, we will be able to do
that. Thank you again.
Ms. Brown of Florida. Thank you. With us today is Mr. Joe
Szabo, the President-nominee for the Federal Railroad
Administration. Would you please just stand so we can see you.
Okay, with a pretty purple tie. Thank you.
[Laughter.]
Ms. Brown of Florida. I will first thank you panelists for
being here today. Our first witness is Mr. Mark Yachmetz,
Associate Administrator for Railroad Development of the Federal
Railroad Administration. Next we have Mr. Patrick Simmons, Rail
Director of the North Carolina Department of Transportation. We
have Mr. Dale Zehner, Chief Executive Officer of the Virginia
Railway Express. We have General Richard Timmons, President and
Treasurer of the American Short Line and Regional Railroad
Association. And last, Mr. Ken Pippin, President of the
Carolina Southern Railroad.
Let me remind the witnesses that under our Committee rules
oral statements must be limited to five minutes but the entire
statement will appear in the record. We will also allow the
entire panel to testify before questioning the witnesses. We
are very pleased to have you here today. We will start with Mr.
Yachmetz.
TESTIMONY OF MARK YACHMETZ, ASSOCIATE ADMINISTRATOR FOR
RAILROAD DEVELOPMENT, FEDERAL RAILROAD ADMINISTRATION, U.S.
DEPARTMENT OF TRANSPORTATION; PATRICK SIMMONS, RAIL DIRECTOR,
NORTH CAROLINA DEPARTMENT OF TRANSPORTATION; DALE ZEHNER, CHIEF
EXECUTIVE OFFICER, VIRGINIA RAILWAY EXPRESS; GENERAL RICHARD F.
TIMMONS, PRESIDENT AND TREASURER, AMERICAN SHORT LINE AND
REGIONAL RAILROAD ASSOCIATION; AND KEN PIPPIN, PRESIDENT,
CAROLINA SOUTHERN RAILROAD
Mr. Yachmetz. Chairwoman Brown, Mr. Shuster, Members of the
Subcommittee, I am pleased to have this opportunity to appear
before you on behalf of Secretary of Transportation Ray LaHood
to update you on the status of the Railroad Rehabilitation and
Improvement Financing Program, also known as RRIF.
While I have met many Members of the Subcommittee and have
known most of the Subcommittee staff for years, this is the
first time I have appeared before this Committee's current
leadership as a witness. So, by the way of introduction, I am
the Associate Administrator for Railroad Development and I have
the honor to lead FRA's investment programs. Included among
these programs are supporting the Secretary in his role as a
member of the Amtrak Board of Directors; making operating and
capital grants to Amtrak; making grants to States for rail line
relocation and to the Alaska Railroad for rail line
improvements; implementation of FRA's responsibilities under
the Passenger Rail Investment and Improvement Act that Congress
passed last year; implementation of FRA's responsibilities
under the American Recovery and Reinvestment Act of 2009; and,
of course, FRA's credit program responsibilities under RRIF and
the Transportation Infrastructure Finance Innovation Act, also
known as TIFIA.
I joined the staff of FRA in 1978 to work in the program
providing credit assistance to the rail industry that was
authorized by Title V of the Railroad Rehabilitation and
Regulatory Reform Act of 1976. That program was the predecessor
of RRIF. Thus I have been involved in some degree with FRA's
credit program since just after its inception.
One note of interest is the first loan I worked on in 1978
was an application by the Boston and Maine Railroad to rebuild
its line between Boston and Albany. That loan was repaid in
full last week.
Touching on the highlights of the RRIF program since its
inception in TEA 21, the FRA has made 23 loans for $786.72
million. We have not yet guaranteed any loans. A list of the
recipients is attached to my written testimony. Three of the
loans, totaling $381 million, have been repaid in full. All
payments on all loans are current. There have been no defaults.
There are currently three complete applications being reviewed
by FRA with several additional draft applications in various
stages of development. And on March 30th, 2009 the U.S.
Department of Transportation published a notice in the Federal
Register withdrawing a proposed rulemaking initiated by the
prior Administration that would have changed RRIF policies and
procedures.
Having once worked for a House Subcommittee, I appreciate
the time constraints faced by the Members of this Subcommittee.
Thus I will not repeat my written testimony to afford more time
for questions. I will note, however, that the rail industry
appears to be affected by the same widely discussed problems in
the credit markets that are affecting every other industry.
Since mid-January, FRA has seen a significant increase in the
number of inquiries about the RRIF program. These inquiries
have covered the wide range of eligible applicants and the wide
range of the eligible uses of funds. Of particular note is that
we have received a number of inquiries from commuter railroads
or persons representing commuter railroads which may reflect
upon other challenges facing the Full Committee. These
inquiries have not yet been translated into an increase in the
number of pending applications. However, they may be a
harbinger of increased applications later this year.
Finally, while I have the attention of persons interested
in FRA's credit programs, I would like to say that we are
presently recruiting a credit program manager to fill a vacancy
that has resulted from a retirement. The position closes
Monday. Anybody who is interested, please log onto usajobs.gov.
With that, I will conclude my introductory comments and be
happy to address any comments you may have.
Ms. Brown of Florida. Mr. Simmons?
Mr. Simmons. Thank you, Madam Chairwoman. My name is
Patrick Simmons. I am Director of the Rail Division at the
North Carolina Department of Transportation. We operate what I
believe to be one of the most comprehensive State rail programs
in the country. We have detailed that somewhat in the written
testimony.
I recall reading with interest the opportunities afforded
when the Congress first authorized the RRIF program. We worked
closely with our Railway Association of North Carolina to let
our community of railroads know that our State was interested
in partnering with them to apply for loans and that we would
consider financial support of some of the analyses that are
required.
To that, we have had one railroad take us up on that, the
Great Smoky Mountains Railroad that operates between Dillsboro
and Bryson City, North Carolina. It's a scenic and tourism
railroad and is an important component of our tourism-based
economy in western North Carolina. We partnered with them in
the year 2000 to make a loan application. It took longer than
anyone had envisioned and I think we all learned a lot of
lessons from that.
It is not my point today to disparage the Federal Railroad
Administration but rather to say that I think they are very
capable in managing the program. I think that the Chairwoman
identified some of the behind-the-scenes issues that constrain
the staff's ability to do what they need to do in a timely and
prudent fashion. It is obviously a program that if we can get
it on good footing will be a useful tool that our industry
needs very much.
Again, to reflect upon some of what Administrator Yachmetz
said, we do have a number of applicants from our State, one of
which is here today, the Carolina Southern Railroad. But we
also were envisioning intermodal port related rail facilities,
commuter rail, and--something that is a little new to my
vocabulary--TIF for TOD or Tax Increment Financing for Transit
Oriented Development, the revenues of which would be dedicated
to repayment of potentially a RRIF loan.
Yesterday, our House of Representatives in Raleigh endorsed
legislation that would authorize the Research Triangle Park--at
their request--to levy a tax on themselves to be able to
support this kind of repayment plan.
So I would ask that the Committee ensure that our Federal
agency has the resources it needs to manage the program in a
timely and responsive manner. I know the Committee will
continue with its oversight of this important program. It is a
much needed tool for our industry so let us be about the
business of keeping it well honed and well used. Thank you,
Madam Chairwoman, for the opportunity to testify today.
Ms. Brown of Florida. Mr. Zehner?
Mr. Zehner. Good afternoon, Madam Chairwoman Brown, Ranking
Member Shuster, and Members of the Committee. I am Dale Zehner,
Chief Executive Officer of the Virginia Railway Express, a
commuter railroad that operates from northern Virginia into the
District of Columbia every day over the CSX and Norfolk
Southern freight lines.
We received a RRIF loan of $72.5 million from FRA in July
2006 for the purchase of rail cars, passenger coaches. We have
since that time purchased 60 rail cars with the funding and
currently are operating 50 of those rail cars. The last 10 will
be delivered in February 2010.
My assessment of the RRIF program is it was professionally
managed by FRA. The FRA staff was knowledgeable and helpful
through the entire process. The application process was quick
and streamlined. We received a favorable response from FRA
within five months of our application. I view this RRIF loan
process as another important alternative to public railroad
agencies' funding mechanism which is much more flexible than
issuing bonds.
My suggestion for a change in the legislation to the RRIF
process would be involving the credit risk premium. Determining
the credit risk premium for our loan took an additional two
months after the FRA recommended approval of our application.
The FRA recommended that our credit risk premium be zero for us
but OMB ultimately determined a rate of 1.88 percent of the
borrowed amount or approximately $1.4 million for VRE.
OMB's process for determining the premium for a public
agency was not clear at the time of our application. Knowing
that process at the time of the application would have
permitted us and the FRA to better estimate that premium. In
our case, we determined that using bond insurance would have
been cheaper than paying the credit risk premium but the timing
did not allow us to do that.
Thus my recommendation for any change to the RRIF process
would be to attempt to delineate how the credit risk premium is
calculated for public funded entities as a part of the FRA
evaluation. Second, provide the opportunity to the applicant to
insure the total loan amount using a bond insurer, which is
common in municipal bond financing, as an alternative to the
credit risk premium. In our case, that would have been probably
half the cost of the credit risk premium. Thank you very much
for the opportunity to testify today.
Ms. Brown of Florida. Mr. Timmons?
General Timmons. Madam Chairwoman and Members of the
Committee, I appreciate the opportunity to provide my thoughts
on the Railroad Rehabilitation and Improvement Financing
Program. I am Rich Timmons, President of the American Short
Line and Regional Railroad Association.
The short line railroad industry has been the primary user
of the RRIF program. Twenty-one of the twenty-three loans
approved to date are short line railroads and together they
borrowed approximately $614 million. These loans have helped
short lines maximize capital investment through direct
rehabilitation loans and, in some cases, through refinancing
existing debt so as to increase cash available for
rehabilitation. I am proud to say that in the 10 years the RRIF
loan program has been on the books, not a single short line
railroad has missed a single quarterly payment on its debt.
The Transportation and Infrastructure Committee developed
this program in 1998 and has improved it over the years.
Perhaps most importantly, it has been steadfast in protecting
the program from those in previous Administrations who would
have killed it. I want to particularly recognize Congressmen
Oberstar, Corrine Brown, Bill Shuster, and Jerry Moran who led
the charge last year to put a stop to a set of Administration-
proposed rules that could have effectively killed the program
through the back door. We thank you very much for that.
The returning Members of this Committee know the short line
story well and I will not repeat it here. For the new Members,
let me just say that the importance of the short line industry
is not in who but where we serve. America's 500 short lines
operate nearly 50,000 miles of track, almost a third of the
National network. For large areas of the country and
particularly for small town America, short lines are the only
connection to the National railroad network. For the small
businesses and farmers in those areas, our ability to take a
25-car train 75 miles to the nearest Class I interchange is
just as important as the Class I's ability to attach that same
block of traffic to a 100-car train moving across the country.
To paraphrase a popular saying, you can't get there from here
without us.
There are 22 new Members on the Railroad Subcommittee and
all but five of you have a short line in your district. Believe
me, we are working on a plan to buy properties in those
remaining five right now.
Let me emphasize three points about the current RRIF
program and propose two changes that we believe will greatly
enhance its economic and transportation benefits. First, RRIF
loans leverage substantial private investment in short line
infrastructure. The program allows short lines to undertake
projects that could not have been done or would have stretched
out over many years. Second, because these are loans that must
be repaid and are secured by an ironclad first lien on the
railroad's hard assets, RRIF loans are not being used to fund
cost-ineffective projects. I know that Congress and the new
Administration are keen on ensuring that all Federal monies
that are being used to stimulate economic growth be spent
wisely and as effectively as possible. Third, most short lines
do not have in-house manpower to undertake rehabilitation
projects and so must hire contractors and additional laborers
to do the work.
The Federal Railroad Administration estimates that
approximately 50 percent of every rehabilitation dollar is
spent on labor. Most of the RRIF rehabilitation loans approved
to date have individually generated over 100,000 man hours of
labor to complete the projects. In addition, 100 percent of the
ties and an overwhelming majority of the rest of the materials
used in track rehabilitation are U.S. made.
While the short line industry has been the primary user of
the RRIF program, it remains a highly underutilized program.
RRIF is currently authorized at $35 billion but it has yet to
reach a billion dollars in outstanding loans. This is due in
part to the slow start of the program originally and to the
lengthy delays in the approval process. I believe the FRA has
worked diligently to accelerate the process, particularly that
part of the process they are in control of.
Setting aside the delay issue, however, we believe there
are two changes that would significantly increase the use of
the RRIF program and that such an increase would help promote
the goals of maximizing private infrastructure funding and
creating immediate jobs. These are part of the three part
proposal we made last year. The third change, extending the
RRIF loan term from 25 to 35 years, was adopted by the
Transportation and Infrastructure Committee in last year's Rail
Safety legislation. Once again we are very grateful for that
change.
Now we propose that Congress subsidize an interest rate
reduction to 1 percent on RRIF loans. The current interest rate
is approximately equivalent to the rate on a 30 year Treasury
security, which today is about 3.5 percent. At today's rate, a
$500 million subsidy would support approximately $1.5 billion
in RRIF loans or three times the subsidy amount. So spending a
Federal dollar to leverage three of private infrastructure
investment seems to me to be well worth the expenditure.
We further propose that RRIF payments should be deferred in
a manner comparable to the deferral that is allowed in the
Transportation Infrastructure Finance and Innovation Act,
TIFIA. As many of you know, TIFIA is a credit assistance
program that provides low interest long term loans for large
public transportation and infrastructure projects, particularly
in the highway and transit areas. Under RRIF, repayment begins
immediately after the loan is drawn down. TIFIA provides that
repayment shall not commence later than five years after the
date of substantial completion.
The current RRIF statute gives the Secretary the discretion
to defer payments for up to six years. To the best of my
knowledge, that provision has never been exercised and I am led
to believe it is not something the Agency encourages. Part of
the difficulty may be that there does not appear to be a
definitive answer to the question of how the Congressional
Budget Office would score such a deferral.
I would argue that since 100 percent of the deferred
payments would be added to the remaining term of the loan,
there is no cost to the Government. Under TIFIA this is not an
issue because TIFIA receives an annual appropriation to cover
any subsidy associated with the loan.
The RRIF program was modeled after a similar loan program
known as Section 511 in the 1976 4R Act. It was used
extensively and effectively as part of the Federal Government's
efforts to save the Nation's railroads as they went into or
approached bankruptcy prior to the Staggers Act. The Section
511 program was valuable in saving Class I railroad
infrastructure in the 1970s and 1980s. Its successor, the RRIF
program, is proving to be equally valuable in saving short line
and regional railroad infrastructure today.
The program's only shortcoming is that it is not fully
utilized. That shortcoming can be addressed by insisting that
relevant agencies deal with applications as expeditiously as
possible. It can and should further be addressed by improving
the terms of the RRIF loans. The cost to the Federal Government
of those improvements is very small in comparison to the
benefits and, we believe, well worth the investment. I thank
you very much for your time and attention. At the appropriate
time, I will be happy to answer any questions you may have.
Ms. Brown of Florida. Thank you. Mr. Pippin?
Mr. Pippin. Madam Chairwoman, Ranking Member Shuster, and
Members of the Committee, I appreciate the opportunity to speak
before you today. I thank Congressman Brown for the
introduction. My name is Ken Pippin and I am the owner of a
short line railroad that runs through North and South Carolina,
known as the Carolina Southern.
Our line consists of approximately 100 miles of track, five
historic train depots, 85 various sized bridges--the major ones
crossing the Lumber, Pee Dee, and Waccamaw Rivers. We also
operate a Bastille bridge spanning the Intracostal Waterway
that links Myrtle Beach to the national rail network to the
rest of the United States, Mexico, and Canada.
I appear before you today as the temporary custodian of a
permanent and significant piece of infrastructure that for more
than 125 years has provided and continues to be vital to the
industries, the communities, and the citizens it serves. I
consider myself, my two sons, and the dedicated employees of
the railroad its temporary custodians because, regardless of
ownership, this valuable rail corridor connecting the Carolinas
to the rest of the world has been in place since the late
1800s. I am confident that long after I am gone, this railroad
will continue to maintain the same and eventually a higher
level of importance and perhaps in not the too distant future
will return to carrying passengers.
Our particular railroad, originally part of the famous
Atlantic Coast line, was spun off by the Class I because it
could no longer financially justify the cost of maintenance
versus the volume of traffic on the line. Many of the 500 plus
short lines that exist today fall in that same category. If we
hypothetically apply the same logic to the U.S. highway
systems, then we would close or discontinue maintenance on
roads that do not generate significant traffic to justify that
maintenance. I don't think we would ever do that.
One of the important services that the Carolina Southern
provides is being a mitigator of traffic. In the Myrtle Beach
area we have about 14 million people visiting every year. All
but about 900,000 come in by automobile. Our line runs parallel
to the major artery that serves Myrtle Beach and we take quite
a few trucks off the road with that one rail car rolling
through the woods in the middle of the night. For each one of
those, that is about 4.5 tractor trailers that aren't on our
local highway system.
The other importance of the Carolina Southern that is
significant is that we deliver coal trains to a power plant
which generates electricity for Myrtle Beach and the region.
Our railroad also delivers unit trains of stone for Martin
Marietta which are used for road construction in the ever
growing Myrtle Beach area. We move steel for Hitachi Metals,
who just recently announced a $20 million expansion that is on
our line. Within the past two months, a biodiesel manufacturer
has located on our line. We also serve Georgia Pacific, Purdue
Farms, and a number of other companies.
Our success and the success of most short lines stems from
our accessibility as local people and a local company that
knows each customer personally and communicates with them on a
regular basis. It is not every day that a company like Martin
Marietta or Hitachi Metals can come walking into an office and
see the decision makers right there, ask about a particular
move or rates or something that they need from a railroad
standpoint and get an answer just about on the spot. The
shippers and receivers really like that. That is one of the
main things they like about short lines in addition to the
excellent service that they get.
Our property, like many short lines, earns a profit. But we
do not earn enough for the many years of deferred maintenance
our lines have experienced under the former Class I owners.
This brings us to the RRIF program and why we are here today.
The railroad business is a highly fixed cost business. The
single most important part of our operation is our
infrastructure that we operate over every day: tens of
thousands of railroad ties, thousands of tons of stone, and
miles of iron rail. The bare iron and the wooden railroad ties
are exposed to the elements as well as to 150 ton locomotives
and thousands of rail cars loaded with coal and stone running
over them every day. I know this Committee understands the
attention and expense required to keep the freight moving and
to keep it moving safely.
In our specific case, some of the rail we operate on was
manufactured in 1905. It was purchased used in 1925 and brought
and installed in the area where we run. It wasn't designed to
carry the type of equipment and loads we have today. We face a
constant race to find funds to keep the railway up for the
safety of our employees and the ability to deliver the goods
that we ship. We also must meet all FRA safety standards.
In the last 15 years that we have owned this line, we have
maintained an excellent record with the FRA. We want to
continue that record. The average replacement cost for one mile
of rail is close to $1 million. For a small company that has 97
miles of track, some of it over 100 years old, it is easy to
see how the cost of maintenance and replacement can outpace our
ability to keep up without assistance of some kind.
Short lines are risky businesses. We are, after all,
operating in areas where Class I's could not succeed. As such,
it is very difficult to find funding from traditional banking
facilities. That is why the RRIF program was created and why
its existence is so vital to the short line industry. It is an
important financial resource that allows small railroads to
obtain funds to rehabilitate track and keep these vital
railways active and providing service to the communities they
serve.
Without the RRIF program available to small railroads,
specifically this one, there is no way to maintain this
valuable infrastructure. We would like to receive an
infrastructure loan fully secured at little risk to the
Government that would allow for the rehabilitation of this
vitally important rail network in the Carolinas.
We also feel that this program is vital to the health of
the entire railroad industry and their shippers. On behalf of
ourselves and other small railroads that desperately need these
funds, we ask the Committee to not only continue the RRIF but
to help make it more accessible to those who need it.
I went over my time. Thank you for your patience.
Ms. Brown of Florida. Thank you, Mr. Pippin. We want to
start with Mr. Yachmetz. SAFETEA-LU prohibits the Secretary
from requiring that an applicant for a RRIF loan first seek
financial assistance from other sources. Now, I understand that
the FRA is complying with SAFETEA-LU requirements but in a
hearing that the Subcommittee held on March 15th, 2006, the FRA
committed in order to avoid confusion pertaining to applicants
to reverse this regulation or remove the subsection. Has FRA
done this? If so, when and if not, why not?
Mr. Yachmetz. We have not done it yet. We will do it soon.
It was actually going to be part of the larger rulemaking that
the past Administration was pushing which, as you know since
you wrote in opposition to the rule, on balance it was not a
good idea to move that ahead. So now that that rule is dead, we
will address it going forward in something on a stand alone
basis.
Ms. Brown of Florida. You said ``soon.'' What does that
mean?
Mr. Yachmetz. Well, that is a good question. FRA has a
number of rulemaking priorities that have come from the Rail
Safety Improvement Act and the Passenger Rail Investment and
Improvement Act. We will put this in with those. I would like
to try to get all of my rulemaking done this year. Hopefully,
we can get the resources to move that ahead. So I will take the
message back to my bosses to be that you would like to get this
done quickly.
Ms. Brown of Florida. Okay. The law requires that the
Secretary approve or disapprove a RRIF application in no less
than 90 days after receiving a complete application. But all
the witnesses here today have raised concerns about the length
of the review process. Some state that it takes as much as 50
months. Why isn't FRA complying with the law? Has FRA
considered anything to streamline the review process so that
applications don't have to wait so long to secure a loan?
Mr. Yachmetz. Well, many of the examples cited, including
the one cited by my good friend to my left, actually happened
before the 90 day requirement. Perhaps they were the motivator
for the 90 day requirement.
There are a number of things that have to be done before an
application is complete. Frequently, for applicants to us, this
is their first time dealing with a number of Federal financial
assistance programs. They are not necessarily aware of the
complexity of completing the National Environmental Policy Act
reviews that are required prior to an application being
complete.
To the best of my knowledge, between the time we actually
have a complete application and the time that the DOT Credit
Council acts and then submits their recommendations to the
Administrator and the Administrator makes the final decision,
we have been meeting the 90 day standpoint.
There is a separate step that happens after our
Administrator's approval, and that is the Office's of
Management and Budget review of our estimate of the credit risk
premium. That does not fall within the 90 day timeframe because
that is subsequent to the Secretary's approval. So that may be
one of the things that contributes to the impression that we
are not meeting the 90 day timeframe.
Ms. Brown of Florida. Well, I guess at some point I have a
question for our lawyer on this issue, then. When we said 90
days, does that complete the process or does it have separate
steps? I mean, I am confused. But we really need to look at how
we can streamline the process and be in compliance with the
law. Would any of the other participants like to respond to
this question? Yes, sir.
Mr. Zehner. It was five months for us to get the FRA
approval. The way the process is set up, we submit an
application. FRA then assigns a third party financial firm to
review that application. Until that review is complete and that
package goes forward, I think that is when they are saying the
clock starts. I think that is reasonable. That is the way the
process is. I can speak only, if I was to do bond financing, it
would be at least a year. I am not sure that going to a bank
would be any faster than five months. So what occurred to us
was reasonable.
Now I know the law is something else. If you want the FRA
to do a very good look at the application before they make
their determination, you have got to give them some time.
Otherwise, what you are going to do is cause this process to
have bad loans. So I would just make that recommendation.
Ms. Brown of Florida. We absolutely don't want any bad
loans, just more loans.
Mr. Zehner. Yes, and that third party examination takes
about two months. They spend time with us; they spend time with
our auditors. Then they make a recommendation to FRA.
Ms. Brown of Florida. Mr. Pippin?
Mr. Pippin. In our case, the process was a little over 14
months. I don't know how much of that was our fault and how
much of it was the Administration's fault. But it would have
been nice it would have been 90 days, if everybody would have
been pressed to make it within 90 days somehow.
Ms. Brown of Florida. Yes, sir, Mr. Simmons?
Mr. Simmons. Thank you, Madam Chairwoman. I would just
simply like to add that I think that since we started our
experience, the Agency has now added a mandatory pre-
application meeting which I think is very constructive. I think
at that point, that is when the potential recipient of the loan
could be counseled and brought into the reality of what it
takes to actually pass muster with the loans.
Ms. Brown of Florida. Did you say that happened?
Mr. Simmons. No. I think that occurs now, though that was
not a FE
Ms. Brown of Florida. Initially when you first started the
process?
Mr. Simmons. Yes, ma'am. I think the most important
criterion is not so much a drop dead date of 90 days but a
predictable and timely process. I think any time you are in a
business where you can predict an outcome or you have some
security of knowing that it will take approximately this amount
of time and I have to make this sort of submittal, I think that
is a good way of doing business.
Ms. Brown of Florida. Yes, sir. All right, Mr. Brown?
Mr. Brown of South Carolina. Thank you, Madam Chairwoman.
Mr. Pippin, thank you for your testimony. Thank you for being
here today. Your presence here at this hearing is very
important since you are someone who's family business is moving
freight. You make your business and family decisions with all
of that in mind. Can you tell the Subcommittee about the
challenges that the short line industry has seen over your
years in the business?
Mr. Pippin. The biggest challenges are to keep this
infrastructure up to par so we can operate safely and
effectively. You know, there has been an increase in the sizes
of the equipment and the sizes of the loads. A lot of the short
lines don't have the ability to replace the infrastructure they
need to replace. That is our case. You know, we replaced a lot
of railroad. We have a lot of 132 pound rail but there are
sections--and this loan is important to us because of those
sections--where the rail is substandard. It is only 85 pound
rail.
Mr. Brown of South Carolina. A further question, the work
to be done on your railroad seems tailor made for assistance
through the RRIF program. Why do you believe that your loan
application to the Federal Railroad Administration was turned
down the staff of FRA?
Mr. Pippin. Well, there is a map of our line available. We
have a section of our track, of our 96 miles that we operate
there is about a 14 mile section that is owned by the county
government. It is down at the bottom of the screen in the dark
black there. That is owned by the county government. The FRA
felt like there was an ability there to cancel the lease we
have. In essence what they said was, you know, these folks
could put up a fence any time and you wouldn't be able to
operate over here.
Mr. Brown of South Carolina. Mr. Yachmetz, I don't want to
ask any particular questions about a loan but has the FRA ever
approved and provided a loan to a short line operation or track
that is leased either from a government entity or a Class I
railroad?
Mr. Yachmetz. We have approved loans to rehabilitate lines
that were leased from government. It was basically, though,
that the nature of the lease and the nature of the improvements
were clearly laid out. The challenge with the lease with Horry
County actually was that it was cancelable. It could be
canceled actually fairly quickly. That was one of the issues we
had with the loan, just trying to get clarification from the
county that during the pendency of the loan, regarding the
access to the Martin Marietta plant, that they would not
exercise their ability to cancel that part of the lease.
Mr. Brown of South Carolina. I guess just looking at that
map, if they cancel that loan what would they do with the
track? You know, it has got to be connected to something in
order to move freight. It looks like to me that the only
application for that little piece of land, that short line
rail, would be to connect Mr. Pippin's line to the major
carrier. So I don't know what they would do with it if they
would actually cancel. And if they cancel it, they would have
to pay some kind of a cancellation fee, too, I believe.
Mr. Yachmetz. Yes, well the cancellation fee unfortunately
would not be enough to offset the revenue that they were going
to need to pay back the loan. So again, I admit we are
relatively conservative on a number of these matters. We like
to try to have all the i's dotted and t's crossed before we
make a loan. So this is one of several areas where we felt as
if the application needed to be improved.
Mr. Brown of South Carolina. But you would agree that there
wouldn't be much use for it unless they could connect it to
some other shipment point?
Mr. Yachmetz. Yes, as a stand alone railroad it doesn't
have a whole lot of value. That is correct.
Mr. Brown of South Carolina. Well, let me congratulate you
for your loan payback. You don't have any loan losses which is
pretty unusual in the banking system which we find ourselves in
today. Mr. Pippin, I have one other question. If Horry County
broke the current lease and brought in another rail carrier to
operate on 14 miles of your line between Waccamaw River and
Myrtle Beach, who would handle getting rail traffic to and from
that line?
Mr. Pippin. Well, no matter what happened if they got rail
traffic, as you can see from the map, they would have to get it
from us. You know, one of the issues with this section of track
is, I was invited to come to Horry County in 1992 because of
the difficulty they had trying to have two operators. Former
Congressman Napier and former Secretary Burnley brought me down
there to meet with the county and see what we could do to
resolve this. They would always have to get their freight from
us if they were going to continue to be a rail line. There
would be no alternative to that. They would have to go through
us. That is just a fact of the geography.
Mr. Brown of South Carolina. So if you didn't operate the
whole track, the 90 something miles, and you didn't have that
12 miles or whatever, you still have the other 80 or 70.
Mr. Pippin. Yes, we would have the majority of the
railroad. We call this the tip of the tail of the dog. Every
customer is important to us but, you know, if Horry County were
to cancel this lease, the penalty clause that Mark mentioned
will require them to pay us about $1.2 million. I will say that
in recent days we have received the letter from Horry County
talking about their commitment. We have submitted that recently
to the FRA for their consideration.
Mr. Brown of South Carolina. Thank you very much. Thank
you, Madam Chairwoman. My time has expired.
Ms. Brown of Florida. Yes. Mr. Yachmetz, I really think
this is a situation that, just from listening to it, deserved
review and for you all to take another look at this loan.
Mr. Yachmetz. Well, we certainly will take another look at
the loan. We had a post-review with the Carolina Southern. We
will review again with them all of the areas of concern we had
and how they can move forward.
Quite frankly, I have been in the railroad business for 31
years. People who come to work for FRA stay at FRA because
there is something about the railroad industry. So it gives us
little pleasure to turn down investments that we know need to
be done. There is nothing to say that if we ever do reject a
loan that the loan can't be reconsidered or reapplied for once
conditions are made to meet the basic financial needs of the
program.
Ms. Brown of Florida. Well, yes. I agree with you. But
perhaps some resolution from the county or something could give
you a comfort level. I mean, they have been operating the
railroad for 100 and something years. I just think it is
something that we really need to take another look at.
Mr. Yachmetz. We will get back to the railroad and we will
see what we can do.
Ms. Brown of Florida. Okay. Mr. Lipinski?
Mr. Lipinski. Thank you, Chairwoman and Ranking Member
Shuster for holding today's hearing on the RRIF program. It is
good to see Mr. Szabo here. I look forward to working with him
in the future. We have a lot of things for us to get
accomplished.
I certainly want to associate myself with the comments that
my colleagues have said about the importance of upgrading our
rail infrastructure in this country. As we are beginning
consideration right now of our new surface transportation
authorization, I am looking forward to a bill that improves
programs like RRIF and other existing programs. I want to make
sure that we have a bill that provides significant investment
to meet the long term transportation needs of our country.
At the same time, the legislation that we are working on
also presents us with a great opportunity to put a significant
number of people back to work fixing our roads, bridges,
transit, and rail and also boost America's domestic
manufacturing sector.
Now, in order to boost manufacturing, I really believe that
we must buy American. I think that is really crucial. Buying
American keeps all the direct and indirect economic benefits of
our investment here at home. It makes sure that we support the
industries and workers that are essential to our long term
economic success. It is good public policy and an investment in
our future. Especially in today's economic times it is
especially critical.
It has been the policy traditionally in the annual
Transportation Appropriations Bill that there has been a
provision in there that bars any agency from expending
appropriated funds unless the entity agrees that it will comply
with the Buy American Act. That is in the annual Transportation
Appropriations Act. It says they have to comply with the Buy
American Act. Now with this in mind I wanted to ask Mr.
Yachmetz, does the FRA follow the Buy American Act when
granting direct loans and loan guarantees under RRIF?
Mr. Yachmetz. The Buy American Act has actually not been an
issue as far as the management of the program up to now. As you
said, it follows annual appropriations and expenditure of
Federal funds. Arguably, these are actually expenditures of
private corporation funds.
But to this point it has really never been an issue
because, as General Timmons said, 21 of our 23 awards have gone
to small railroads who are doing basic infrastructure, buying
crossties and buying relay rail with a very heavy--over 50
percent--labor component. That would clearly meet any Buy
American standard. With the equipment, the VRE equipment was an
option on a larger order for metro cars in Chicago which had
already met the FTA standards for Buy American. So that wasn't
an issue. The only other equipment that has been acquired with
loans have been also American built equipment.
Now, going forward, I will have our counsel actually review
the law and find out indeed whether Buy American applies or how
it applies to this program. We will report back to the
Committee. If for some reason there is some ambiguity, then
this might be an appropriate place for the Committee to provide
us guidance in managing the program going forward.
Mr. Lipinski. Well, I really believe that the Buy American
Act does apply here. The Congressional Budget Office does
consider estimated credit subsidies and administrative costs of
Federal credit programs to be expenditures. Therefore, RRIF
would fit under expenditures and therefore under the Buy
American Act and so would have to comply with those provisions
then.
Mr. Yachmetz. Yes. We will take a look at it. But sort of
the thing that makes RRIF a little bit different than all the
other programs is the credit subsidy is actually provided by a
non-Federal party. Therefore, does that somehow affect the CBO
decision? As I said, we will have counsel review it. We will
report back to the Committee. If it is in any way ambiguous,
you all can provide us guidance on how to proceed in the
future.
Mr. Lipinski. I believe that it has not really been an
issue, as you have said, because generally there has been
compliance with it. But I believe that it should be a
requirement. I certainly believe the FRA should make that a
requirement. We need to work together on that as we move
forward to make sure that this just is not something that we
let go, that we do keep an eye on this and make sure that it is
actually enforced, that we just don't rely on it being
followed, and that it is made a requirement.
Mr. Yachmetz. Well, I agree that clarity will make the
program so much easier to manage and so I will look forward to
clarifying this. I will get back to the Committee and work with
you if it isn't clear.
Mr. Lipinski. Thank you.
Ms. Brown of Florida. Mr. Shuster?
Mr. Shuster. Thank you. Mr. Yachmetz, as I said in my
opening statement, I was very disappointed that the last
Administration didn't embrace this program especially after the
events of September. This is a way to, I believe, get credit
out into the markets. The last Administration, again, did not
embrace it, didn't utilize it. So to get a little clarity, I
hope you can let me know, what are you hearing from the new
Transportation Secretary? What are you hearing from OMB? What
are you hearing from the White House on this program? Have they
pushed it down to you to say, let us get some money out into
the railroads so that they can build some of this important
infrastructure?
Mr. Yachmetz. Mr. Shuster, to be honest, this issue has not
gone all the way to the White House and OMB yet. In part it is
because neither the RRIF program nor the TIFIA program has had
an application ready to go to that point where they have had to
focus in on it. Quite frankly, we have all been a little bit
busy implementing the Reinvestment Act. I expect over the next
few weeks if not sooner, we will get some sort of discussion
underway. Now that we have made our first two deadlines under
the Reinvestment Act, we have a little bit of a period now to
vet this thing through. Again, just like with Mr. Lipinski's
answer, clarity in policy and clarity in program structure
makes those of us who are charged with implementing the
program, it makes our lives a lot easier.
Mr. Shuster. Well and again, I just understand in the new
Administration there are certainly priorities but this isn't
chump change. It is $35 billion. It is half or even more than
half, depending upon how you look at it, of what we put out
there in stimulus. You can have this money out there working
for us to create jobs and build infrastructure.
I have a question for you. Do you accept applications
through the RRIF program on Class I railroads? Is it accurate
that you do that?
Mr. Yachmetz. Yes. All railroads subject to FRA safety
regulations are eligible applicants. There are a number of
other groups of eligible applicants. So Class I's, Class II's,
Class III's, commuter railroads all are eligible.
Mr. Shuster. So you do accept Class I applications?
Mr. Yachmetz. Yes.
Mr. Shuster. What is the general view at the FRA, your
position on Class I applications? Are they viewed the same as
Class II and Class III or is there a different view that you
take?
Mr. Yachmetz. Well in many ways,--actually Class I's, and I
know Kansas City Southern provided some testimony; we worked
with one of their subsidiaries, Tex-Mex--in many ways, Class
I's would be easier because they already have a credit rating.
Most of the Class I's, I should say, have a credit rating with
Standard and Poor's or Moody's or Fitch. So that makes our
review a lot easier and a lot faster. With Mr. Pippin's
railroad, we had to go out and interview shippers--we would not
have to go out and interview shippers if Kansas City Southern
came in for an application, as an example.
Mr. Shuster. The length of the process, and I guess in
North Carolina, Mr. Simmons, it took you 50 months for you to
get approved? Can you tell me what size was it? What amount of
money were you asking for?
Mr. Simmons. In partnership with the Great Smoky Mountains
Railway, $7.5 million was the loan facility that was requested
and awarded.
Mr. Shuster. It took 50 months.
Mr. Simmons. It was soup to nuts. I think if we were to
revisit that and start today, I think that would be a
significant improvement over that. I don't think we would
experience that again.
Mr. Shuster. Mr. Zehner, how much money did you request for
yours?
Mr. Zehner. We requested $72.5 million.
Mr. Shuster. It took you five months?
Mr. Zehner. Yes, sir.
Mr. Shuster. It seems to me it should be just the opposite.
With a larger some of money, you would do a little more due
diligence. I think 50 months, for any sum of money, this seems
to me to be far too long. But again, in this situation, that
makes no sense to me.
Mr. Yachmetz. I think what you are seeing, Congressman
Shuster, is a maturing of the program. The Great Smoky Mountain
was relatively early. Quite frankly, there was another aspect
of that application that was a little out of left field. It was
a tourist railroad. You know, we never really had thought that
such a railroad would end up as an applicant. But more
importantly, it was early in the program and the VRE reflects
the guidance, the statutory requirements that came out of the
SAFETEA-LU that we speed up the program. So I think that you
are seeing, you know, cause and effect here.
Mr. Shuster. Right. Well, my time has expired. I just
again, in viewing this program over the last several months, it
just makes no sense to me. I hope the new person that you bring
into the FRA is somebody that comes from a background with some
speed and wants to move things through because there is $35
billion out there. There is not a railroad I have spoken to--
Class I, II, or III--that hasn't said we can utilize a lot more
money through credit or other means. So I think this program
can go a long way in helping our economy and helping our
infrastructure. So I would encourage you to go back and light a
fire under some of those long term employees. I would ask you
to take a look at Mr. Pippin's project because again it seems
to me that the two ends don't meet up for me. Thank you.
Mr. Oberstar. Would the gentleman yield, Madam Chairwoman?
The gentleman has an additional minute.
Mr. Shuster. Yes.
Mr. Oberstar. Surely it is a lack of direction, lack of
understanding, lack of perhaps expertise in dealing with this
issue within the FRA that led to the early delays but it is the
Office of Management and Budget that drags this whole process
down. Not only this, but they interceded in the Federal Transit
Administration. They have interceded in the Highway Program and
a whole host of other things. Right now, the new OMB that is
supposed to be so forward looking and progressive, they have
held up the Clean Water State Revolving Fund under the Recovery
program. That is supposed to go out fast, shovel-ready. It is
the OMB that is the problem. We need to have them at this table
or in the woodshed.
Mr. Shuster. You are absolutely right. I think, the
gentleman, his name was mentioned for Secretary of
Transportation. They probably should have considered you to be
Director of OMB and a lot more would have gotten done a lot
faster in transportation.
Ms. Brown of Florida. Mr. Carney?
Mr. Carney. Thank you, Madam Chairwoman. Mr. Yachmetz, I
have just a quick question. Does RRIF funding, can it apply to
the creation of sidings and things like that?
Mr. Yachmetz. Yes. We can build sidings as long as the, you
know, eligible applicant was one of these on long lists of
railroads and public authorities. Yes, we could.
Mr. Carney. Great, great. General Timmons, first of all,
thank you for your service. We certainly appreciate that. You
mentioned in your testimony that if we were able to reduce the
percent rate interest from 3.5 to 1, we would stimulate a lot
more. What is a lot more in terms of infrastructure investment?
General Timmons. The logic, first off, behind this of
course is to assuage the concerns of the Federal Railroad
Administration for payback. So the issues related to the
duration of time or OMB or other issues related to non-approval
or delays are always tied to is there a way, can we be sure of
a non-default on a payback condition. You can assure that by
doing three things. I mentioned them all the testimony. You can
extend the length of the loan, you can reduce the percentage,
and you can change the deferral period from immediately to six
years. That gives the small railroads the opportunity to get
going. It ensures that there is greater likelihood of payback.
Now, without getting too far off the subject, one of the
frustrations associated with this whole RRIF process is the
triple safety net that is built into the legislation to ensure
that there is payback. One is the collateral, which is the
entire railroad. Two is the credit risk premium, which is
pretty substantial. By the way, the credit risk premium is not
built into the RRIF loan; that is a stand alone large piece of
money on the front end that they have got to pay once the
credit risk premium is identified. Three, there is a detailed
evaluation of their cash flow after the project is completed to
ensure that there is enough money to pay the loan off.
So when you say how many additional projects can be
generated on all this, it is hard to say. I can tell you this,
when we were looking at how many projects could we immediately
initiate in order to capitalize on the potential for some
stimulus money, we could come up with just short of $1 billion
of expenditures putting probably 70,000 to 80,000 people to
work. We could do that in anywhere from three to five months.
If you extrapolate from that a little bit and say what if these
RRIF loans were possible, how could you ramp that up, well that
is a pretty good indicator.
There is not a whole lot of architectural work associated
with railroads unless you are building new bridges or
overpasses. The business of putting in infrastructure
improvements from point A to point B is an ongoing situation in
the railroad industry--big railroads, small railroads, and
switching and terminal railroads--with constant plans each year
to do that. So if you are investing in a segment from A to B
and somebody says, well listen, here is stimulus money, here is
RRIF money, all you are doing is moving the ball from B to C
and from C to D without a whole lot of work associated with it.
So you can put an awful lot of people to work.
This whole issue associated with what Mr. Lipinski brought
up with Buy American, well, the vast majority of materials used
in the railroad industry are U.S. manufactured, U.S. made.
Small railroads don't have big maintenance crews built into
their overhead so they are hiring contractors all over the
countryside to do all that. Those contractors are buying that
material for that job from American industries and American
corporations all over the place. So this is a marvelous domino
effect. We have truly missed a great opportunity here both from
RRIF and, from my standpoint, from the stimulus opportunity.
Mr. Carney. Well, we can revisit that opportunity hopefully
here. No further questions; I yield back, Madam Chair.
Ms. Brown of Florida. Mr. Timmons, you know that Mr.
Oberstar put in and recommended almost $1 billion for the short
line.
General Timmons. Indeed, I do.
Ms. Brown of Florida. That really would have put how many
people to work?
General Timmons. Well, $1 million probably would easily
have put somewhere around 35,000 people to work.
Ms. Brown of Florida. Ms. Titus?
Ms. Titus. Thank you, Madam Chairwoman. I appreciate the
fact that it is difficult for people who are potential
applicants to sit at the table and criticize the Administration
to which you will be applying for money. Nonetheless, after
listening to you and also reading some of the testimony, I have
heard words to describe the program like cumbersome;
unprofessional; lengthy; costly; unclear; and in short,
discouraging to a number of potential applicants. I think Mr.
Simmons even called it a vapor program. Nobody really expects
to get any money. Well, that to me becomes the worst kind of
Government program because it sets up false hopes. If it is not
delivering anything, it becomes symbolic rather than
substantive.
You have all said, though, it should be continued. You have
made some financial suggestions like lowering the interest rate
and eliminating some of those triple layers of security for the
Government. But you haven't been very specific about some of
the procedural changes that we could make so that this wouldn't
be unprofessional. Shorten the time, but what else could we do
that might be not so difficult but could make a big difference
in encouraging applicants?
Mr. Simmons. If I can speak to that, I would be pleased. I
mean, this is a program of great hope. It is a program with
good application across our industry. It is one that needs to
overcome some of the past. I think the Agency through its
leadership, with the counsel granted to the Agency by this
Committee and others on how to improve the program, I think
they are steadfast and they are ready to go forward. Hopefully,
Mark's advertisement earlier today will result in a jim dandy
candidate to help manage the program. So there is great hope
and faith there. I think the Chairwoman of this Committee and
the Chairman of the Full Committee pointed to kind of the hand
behind curtain that has controlled the outcome. I am not a
Washington insider so I don't know the solution to that. But I
think that is an important part in rebuilding the credibility
within our industry. I know that I will be meeting with our
industry at their annual meeting in June and I will be talking
about the program to talk it up. I think we can depend upon
States around the country to do that and work in partnership
with the railroads to say, well, we need to give this another
chance. We need to give it another opportunity.
Ms. Titus. General?
Mr. Pippin. Well, in our case it would have been helpful.
We got a one paragraph letter. Talk about anticipation, we were
very confident that we were going to get this loan and we got a
letter after 14 months basically saying you are not getting the
loan. Now, the issues that were raised when we asked for the
meeting and went in and talked about it, we wish that they had
been raised in the process. The testimony you heard about the
lease situation, if we would have had an opportunity to address
that and then bring in the lessor and have the FRA get a level
of confidence with them, you know, maybe it would have been a
different outcome. But now we are after the fact. You know, now
we are 16 or 18 months later. So that part of the process would
have been helpful to have that be different.
Ms. Titus. Thank you. General?
General Timmons. You know, this process when it started a
number of years ago, the FRA was not resourced or focused on
it. There was tremendous confusion in trying to figure out how
to do this. They were not staffed to do it. So it is abundantly
clear that in the first four or five years there was an awful
lot of confusion and misdirection. The FRA set about fixing
that and they did. They reorganized, they dedicated analysts to
it, and they came up with a process that is very, very
deliberate and very well defined. I would give them high marks
for the procedures that are in place today.
Now, one of the complexities associated with this is that
railroads have believed that they could deal with this
application themselves. To be blunt about it, they did a very,
very shoddy job. So these applications would come to the FRA in
a sore state and would be sent back for fixing. What it really
requires, the complexity and the analytical dimension of this
thing is so difficult that you really must hire as a small
railroad outside assistance, people that really know how to do
this for a living. That costs money.
So even when you get that prepared document into the FRA,
the strength that they have in their analytical staff is thin.
So they need more people to do that kind of work to expedite
it. They have done a good job in the last two or three years in
moving these things through the system.
The Chairman mentioned a few moments ago the problems
associated with OMB. In my experience in watching this for
about seven years at point blank range, that is where the
problem rests over and over and over again. Now, I can't speak
to the current leadership of the OMB and whether they are
sensitive to this process or whether they are even aware of it.
But the reality has been historically that trying to get it
through that bottleneck was clearly the dilemma that the short
line railroad industry had over and over and over again.
Now, the spillover effect of that is demoralizing. That is
the right word for it because as everybody realizes how complex
it is and how difficult it is and how uncertain it is, it
becomes one of these initiatives that you seriously question
its utility and whether you want to spend the money for the
analysts, whether you want to wait all the time, and whether
you want to prepare to spend the money or give up on the
project. So there is a general sense that the RRIF is
enormously complicated and difficult. I mean, and it is.
There only have been 20 in 10 years totally $614 million
for the small railroad industry. That is 3 percent of the $35
billion that has been available all these years. So it really
does need a push and a shove or I am afraid that no matter what
the levels of efficiency that Mr. Yachmetz and his colleagues
undertake in the FRA offices, that we will continually run into
this roadblock unless that can be addressed somehow.
Ms. Brown of Florida. Mr. Oberstar?
Mr. Oberstar. That was a good line of questioning from our
colleague from Nevada. Thank you very much for those thoughtful
questions and your good responses. Madam Chairwoman, thank you
for pursuing in so persistent a fashion the issue of financing
of the railroads.
Clearly had the previous Administration's proposals been
implemented, the RRIF program would be in dire straits. It
wouldn't have been able to make a single loan. Chairwoman Brown
and I in the Minority raised issues about the way they were
managing the program. Then when we won the Majority we went on
the offensive and caused them to back off. But still, there are
$35 billion roughly. Even with those 20 or so loans made, it is
grossly inadequate to the needs for the short line railroads to
invest in track, in switch, and in rail cars to get up to the
286,000 pound level that we need to be interactive with and
competitive with the Class I's. But it takes money to do that.
Now, in the market today, the Class I's finance their
expansion needs or their growth requirements out of accumulated
capital or borrowing in the marketplace. Do you know what their
interest rates are on their borrowing?
General Timmons. I don't know exactly, Mr. Chairman. I do
know that they have jumped very dramatically. Of course,
unspoken is that the Class I railroads can absorb those kinds
of interest rates for short term lines of credit for a
relatively brief period of time. The dilemma for small
railroads is they certainly can't do that.
Mr. Oberstar. The reason I ask is that when in the years
past, Madam Chairwoman, Mr. Brown, and other colleagues, we
have raised this matter of the RRIF program with the Class I
railroads they have said, you know, we can borrow at lower
interest rates than the Government will charge us. Well, I
don't think there is a lower rate than nearly zero, which the
Treasury rate is about now. Treasury has literally no more
capacity to influence the marketplace through its interest rate
structuring because they have lowered it to near zero, the
lowest in history. So that is about where the RRIF loan is.
That is awfully good money.
General Timmons. It is very good money.
Mr. Oberstar. So what is the difference between borrowing
from the Federal Railroad Administration program and borrowing
in the marketplace? Is it the amount of paperwork, the dance
you have to go through to comply with all of these
requirements? Is that it?
General Timmons. You mean for the small railroads?
Mr. Oberstar. Yes.
General Timmons. The real advantage is that these lines of
credit for the small railroads, and correct me if you would
like, Ken, but it is my understanding that those bank loans are
roughly eight years in length. And those interest rates could
be anywhere from 6, 7, or 8 percent or maybe more.
Mr. Oberstar. But the timeline taken or required by those
financial institutions and the filing requirements by the
railroads, is that comparable to, greater than, less than
applying to FRA for a RRIF loan?
General Timmons. It must be about the same. I would guess
these bank loans are probably somewhere close to eight or ten
months.
Mr. Pippin. Well, you know, it usually depends on the bank.
I think, though, that one answer to your question is that the
banks consider these loans to be exotic. Generally, they have
no railroad loans in their portfolios. They don't understand
them. But they look at them as something that is an exotic loan
and if they can, especially now, they will stay away from them.
Mr. Oberstar. So the Federal Railroad Administration now,
Mr. Yachmetz, doesn't have to go through all those hoops and
steps? We need to cut out some of this paperwork. You have to
show ability to repay. There are a few other things. You know,
I have been around in Congress long enough that we have taken
the Small Business Administration loan application from papers
nearly 14 inches thick to three pages or less. Now we ought to
be able to do that with the Federal Railroad Administration as
well.
Mr. Yachmetz. Well our loan application, which is on our
website, is actually not that extensive. I don't think
paperwork is the issue. I think that part of it is getting the
financial information. If people have suggestions on how we can
still get the financial information in an easier format, we are
happy to deal with that.
One of the challenges that we do run into that some of our
railroad applicants don't realize is that making a loan is a
major Federal action under the National Environmental Policy
Act. So sometimes we actually do have to do environmental
assessments, findings of no significant impact, or even
environmental impacts statements prior to us being able to act
on a loan.
Mr. Oberstar. We have a finding of no significant time left
on this vote. So we are going to have to leave. But you are
going to continue the hearing, Madam Chairwoman?
Ms. Brown of Florida. Yes, sir. We will be back. Just one
thing is that the loan we are talking about, Mr. Pippin's loan,
was denied not because of any of the financial issues but
because the county government had a portion of it, 14 miles.
All this to me is something that really needs to be reviewed.
Mr. Oberstar. We sure do.
Ms. Brown of Florida. Yes.
Mr. Oberstar. Thank you.
[Recess.]
Ms. Brown of Florida. Will the Committee officially come to
order? The votes took longer than we thought but that is the
excitement of being a Member of the House of Representatives.
Now, Mrs. Napolitano?
Ms. Napolitano. Thank you, Madam Chairwoman. Thank you for
calling this hearing on railroads and continuing the issues
that I have long been interested in.
To Mr. Yachmetz, the law requires the Secretary to
establish a repayment schedule requiring payments to commence
no later than the sixth anniversary date of the original loan
dispersement. But General Timmons testified that he doesn't
believe that any of the loans have included the six year grace
period. Is that accurate and if not, why not?
Mr. Yachmetz. That is accurate. The way we have managed the
program to date is not to necessarily discourage the late
payments. We have viewed it more as if you are borrowing money
to do an investment and the revenue stream to repay the loan
would not be available until the investment was complete, then
we would defer it for that amount. As an example, if a railroad
was going to borrow money to build a line to an ethanol plant
that was under construction, we would have deferred the loan
until both the line was complete and the ethanol plant was
under construction. Up until this point, we have not had
applications that have gone that way. Similarly, if one was
trying to acquire railroad equipment and the equipment would be
on order, you know, we would defer it until the equipment was
delivered. But again, we haven't had applications that have
dealt with projects like that.
Mrs. Napolitano. But you make some of those allowances for
some of those areas?
Mr. Yachmetz. We would consider a request in that way. We
have not been discouraging of requests in that way.
Mrs. Napolitano. Then you would be amenable to working on
those?
Mr. Yachmetz. Yes, we would.
Mrs. Napolitano. Okay. The other question, sir, would be
also that General Timmons suggested Congress provide an
authorization for reducing the interest rates on loans to 1
percent. The law states the Secretary must require interest to
be paid on a direct loan at a rate not less than that necessary
to recover the cost of making that loan. Would a 1 percent
interest rate recover the Government's cost of making the loan?
If so, what are your views on this proposal? Is it doable? Can
you do it? Will you do it?
Mr. Yachmetz. First off, I will preface my comments by
saying they are my personal comments here. Certainly this has
not been vetted to the Administration.
One of the things that makes the RRIF program a viable
program with great potential, even if that potential has not
yet been realized, is it does not require action by your
colleagues on the Appropriations Committees for us to go ahead.
If there was going to be a credit subsidy, that would require
an appropriation. With the passage of the Credit Reform Act in
1990 until TEA 21, there was a loan program in place but no
loans were made because Congress appropriated no credit
subsidy. So if you were to go down that road, if that was the
interest of the Congress to do that, I would do that as an
addition to the current authority rather than as a replacement
of the current authority so that we don't have to go through
Appropriations and would still be able to use in the event the
appropriators chose not to act in any particular year.
Right now, we actually have an issue with the TIFIA program
in that the credit subsidy, the current amount has been used up
and so there is a limit on how many more TIFIA loans can be
done. We need to maintain that flexibility.
Mrs. Napolitano. Would the number of years on that loan
make a difference?
Mr. Yachmetz. No. I really don't think that those two would
have a significant change on it. Again, there is room for
having maybe two different versions, two different
opportunities to progress it. But I would certainly maintain
the base level of the program as it is currently defined and
maybe make this as an alternative approach.
Mrs. Napolitano. The other question I would have is whether
the current legal definition of allowable uses of funds for the
Railroad Rehabilitation and Improvement Financing, the RRIF,
would include Positive Train Control, the PTC? I am very
concerned about the accidents that have occurred in southern
California, especially. I am wondering whether that is an
allowable use for them to be able to add that to their loans as
promoting safety of the employees and of the passengers and of
the loads or whatever happens to be on those trains?
Mr. Yachmetz. Yes, it is. In fact, it is my understanding
that the extension from 25 to 35 years had been discussed for
years but actually was done in the Rail Safety Improvement Act
in part because of the view that this could be a good way to
address PTC.
Mrs. Napolitano. Okay. But what portion of the Railroad
Rehabilitation, the RRIF loan recipients are commuter versus
freight?
Mr. Yachmetz. Currently, we only have the one commuter
railroad. That is VRE and that is $72 million, I believe is
their amount. But I have noticed since mid-January when the
number of inquiries picked up about the program that a
significant percentage of those are commuter properties. To me,
part of this may be a reflection of the status of the Mass
Transit Account. The fact is, there are no penalties for
prepaying a RRIF loan so we could conceivably be a transition
program while the future of the Mass Transit Account is figured
out. That may be what is behind so many of these inquiries.
They haven't been reflected in applications yet. I do have one
more commuter application where we are wrapping up the
environmental assessment. It will be complete and we will start
its financial review within the next week or two. But I expect
that this may be a big line of business for us later this year.
Mrs. Napolitano. Well this Subcommittee--at least I know I
have--has been kind of focusing a little more on providing mass
transit, being able to move people along with freight goods,
simply to be able to continue getting cars off the road to
clean up the environment and the exhaust that they provide. So
I hope that, keeping this in mind, that we continue to, not
favor necessarily, but look with some support to those agencies
that are going to be providing commuter transportation.
Mr. Yachmetz. Well, livable communities and addressing
greenhouse gasses and energy efficiency are all goals of Mr.
LaHood so I am sure that his views and yours align up very
closely.
Mrs. Napolitano. Thank you. Madam Chairwoman, I know I have
overstepped my time. I have others but I will wait until the
next round if you wish.
Ms. Brown of Florida. Thank you. Mr. Zehner one more time
for me what happened with the credit risk premium and how much
it ended up costing you? I want Mr. Zehner to respond to it,
but how do you feel that we can improve the system?
Mr. Zehner. Yes, ma'am. I think one of the issues we faced
was we were the first public agency to come to the RRIF, to
make an application. So we made the application with the FRA
and it was processed in five months. They approved the loan. At
that point in time, it then moved to the OMB because of the
credit risk premium issue. The FRA had recommended no credit
risk premium. It got into OMB and it sat there. We worked with
FRA to try to get it out of there because we needed the money
relatively quickly to make the purchase of equipment.
Eventually, it got to the point where we couldn't get it out.
At that point, we had to go to our Congressmen and Senators and
ask them to intercede for us, which they did and called the
Director of the OMB. Then it came out. It came out at 1.88
percent of the total amount. That is about $1.4 million. We pay
on that $1.4 every time we make a draw from the FRA for money.
They don't just give us all the money; we take the money as we
need it. We pay that portion of that draw for the credit risk
premium.
The issue I have, being a public agency and if you do debt
financing, is you can insure debt financing. It is very typical
in the public world. We could have insured this loan for about
half the price of the credit risk premium. So we went back to
the OMB. With the help of FRA we went back and asked them can
we insure it. They said, well, I am not sure. It went for
months. At that point in time, we had the approval so we
initiated the buy of the equipment. So we didn't really need
the money at that moment in time. But by the time they got back
to us, it was really too late for us to do anything.
But what I would recommend, and this probably applies more
to public agencies maybe than private agencies, is allow in the
legislation the credit risk premium or, maybe with the approval
of the FRA, allow us to insure the loan to the Federal
Government with a private insurance company. It could be
cheaper. It is just another option working with the FRA. The
other aspect is FE
Ms. Brown of Florida. How much more do you think it cost
you since that option wasn't available?
Mr. Zehner. Well, I am really guessing here. We think over
the course of the loan, we will pay about $1.4 million. We
might have paid $700,000 up front to insure it right off the
top.
Ms. Brown of Florida. Okay.
Mr. Zehner. The other issue if you could do it is in the
initial application process, if we knew how the OMB was going
to calculate the credit risk premium, and they may know that
now. Again part of that problem, I understand, was that we were
a public agency and they were looking at us differently than a
private firm. So if we knew that going in with the FRA, we
would have an idea what the cost of that credit risk premium
would be. I think that would just help us evaluate it a little
bit better. I understand the need for a credit risk premium. I
think that is reasonable. It just is how is it calculated and
if we can get it in the up front process.
Ms. Brown of Florida. Yes, sir. Those are some very good
recommendations. Mr. Yachmetz?
Mr. Yachmetz. Well, we worked closely with VRE. I think if
the goal that we are trying to achieve, and I think is the
goal, is that the Government has a high degree of confidence
that we are going to be repaid, how you get there should
reflect all the opportunities that are available out in the
financial sector. But it is really the history of public
agencies. I also do Amtrak on the side and, you know, Amtrak
has done the same thing. So this was not rocket science. I
think we should be looking at these things.
Ms. Brown of Florida. We should be looking at what, sir?
Mr. Yachmetz. At opportunities such as the equivalent of
bond insurance as one option available to public agencies.
Ms. Brown of Florida. Yes, sir. Mr. Brown, do you have any
questions?
Mr. Brown of South Carolina. I have no questions
Ms. Brown of Florida. All right. Mrs. Napolitano?
Mrs. Napolitano. Yes, Madam Chairwoman. I have just a
couple of wrap ups because I hear FRA making some statements
that it is really OMB sometimes. The rest of you have mentioned
that that as the stumbling block. But is it resources that you
need for additional assistance to be able to provide more
expedient assistance to these railroads to get some of the
items processed faster and smoother?
Mr. Yachmetz. With the current level of activity, I think
FRA's resources are adequate. If the number of applications
picks up, then we will have to deal with that issue when it
comes. One of the things that you may wish to consider is the
fact that we deal with a wide range of applicants. We could
deal with Class I railroads like Kansas City Southern and
commuter agencies and Class II railroads that all are fairly
sophisticated and have internal finance departments. We also
deal with railroads like Mr. Pippin's who have a person who
does their books and their taxes and a bunch of other things,
too. So the responsiveness to questions is really different. Is
there was an interest in having us or some other entity provide
some sort of assistance to put together applications on the
part of the smaller railroads. So I don't think the resource
issue is ours but it may be a resource issue for some of the
smaller applicants.
Mrs. Napolitano. But has it been a resource issue on your
agency's part in the past?
Mr. Yachmetz. Since the SAFETEA-LU amendments, no. I mean,
prior to the SAFETEA-LU amendments, we could not actually use
the investigation charge. That was fixed in SAFETEA-LU. So I
think our resources are okay for now. Again, if we get a
deluge, then I will have to revisit that answer.
Mrs. Napolitano. There was some mention of a post-meeting
on loan applications. Some of you have indicated that it has
been helpful. Is that program being developed and put into use?
What other recommendations would you suggest to make that
process less cumbersome for the applicants? Maybe the
applicants can join in and give some of those comments.
Mr. Yachmetz. I think that we are the Government and we owe
our customers, our citizens an explanation of what actions we
take. We will do a review of every rejection. We will do a
review of every award. But generally speaking, you know, when
you get your award you are pretty happy and you really don't
want to come in and talk about it again. We are also very
receptive to suggestions to improve our program. Nothing is set
in concrete, particularly now when we have new leadership
coming in. If people who have had experience with us in the
past and if the Committee want to make suggestions, I am sure
that Mr. Szabo and we would be very happy to consider those and
see if we can't improve our processes. My goal is to make the
program and the process as low on the stress meter as possible
for both the applicants and the agency.
Mrs. Napolitano. That is your commitment?
Mr. Yachmetz. That is my commitment.
Mrs. Napolitano. Gentlemen, do you have any comments?
General Timmons. Ma'am, if I can make a couple of follow on
comments to Mr. Yachmetz's discussion of staff requirements? As
we look to the future of the Rail Safety Improvement Act and
focus on tunnels, focus on bridges, and focus on a variety of
things, it is pretty apparent to me that there are going to be
heavy funding demands on the small railroad industry. Clearly
the RRIF is one conduit for trying to get at funding to offset
those needs. I would say that from an analyst standpoint, he is
probably fairly shorthanded internally to take a look at these
RRIF loans, just the numbers of analysts that you need. That is
pretty much where the real work is done. The applications come
in and once they are fine tuned, it is the analysts that are
really shredding them, trying to make judgements as to the
viability of that application.
The other piece gets to a budgetary aspect of the FRA where
it might well be, as he mentioned a few moments ago, the larger
railroads have the capacity--internally built-in staffs and
finance and accounting departments--to work these problems
expeditiously and respond very quickly to the questions the FRA
may have. That is not the case with the small railroads. So
they have no wherewithal to really rely on anybody that might
focus on small railroads. So it would be great and very, very
efficient if you had contractors and you had the money to hire
some contractors that could focus on small railroads' needs and
problems as these loans were being processed. As it is right
now, there is no capacity for him to do that. If he did have
some appropriation each year to hire contractors specifically
for small railroad matters related to the RRIF, that would be
very, very useful.
Mrs. Napolitano. Any comments, sir?
Mr. Yachmetz. We try to help. I mean, with our limited
staff we try to work as much as we can with the small
railroads. But there are limits to what we can do. So however
we could help out, we would like to do that. As I said earlier,
most people are in the railroad business because there is
something special about railroads. We would like to see these
railroads succeed. To the extent that we can help people
develop better applications, it is a win-win for us.
Mrs. Napolitano. Then what is the difference between the
loans dispersed through the TIFIA and the RRIF? Is there
anything Congress can do to improve that, specifically the
suggestion that Mr. Timmons has indicated?
Mr. Yachmetz. Well, I have seen the proposal and my one
concern--and I don't know what the answer is, it is just a
concern--is if we defer for six years and it is not linked to
something happening like a plant coming online to pay back, how
that will factor into the credit risk premium calculation and
whether that would actually end up costing more for the loan.
So certainly that is something we will take back and consider.
But that is the one area that I am not sure about, whether that
would increase the perception of risk and therefore the
calculation of the credit risk premium.
Mrs. Napolitano. Madam Chairwoman, my time is up and I am
sure there are other questions that you might want to ask. But
I certainly would like to have this taken into consideration
with Secretary LaHood in terms of being able to address the
needs of small railroads. Thank you.
Ms. Brown of Florida. Thank you. I have just a couple of
more questions. We are going to try to get out of here in the
next 10 minutes at the most. The law says that FRA cannot
require an applicant for a direct loan guarantee to provide
collateral. The testimony from other witnesses seems to suggest
that that is a requirement to provide it. Could you comment on
that, Mr. Yachmetz?
Mr. Yachmetz. It is not a requirement.
Ms. Brown of Florida. You said it is not?
Mr. Yachmetz. It is not a requirement and we are clear that
it is not a requirement. However, the calculation of the credit
risk premium, which we do the estimate but the final
calculation is OMB's responsibility under the Credit Reform
Act, takes into account two things: the strength of the
business case and the strength of any collateral that is
provided. So you don't have to provide collateral but the
calculation of the credit risk premium is significantly
influenced in a favorable way if collateral is provided. So
that is sort of what happens and why I think people perceive
that it is required because the credit risk premium goes down
significantly if it is provided.
Ms. Brown of Florida. Well, I guess if you have all the
collateral, you might not need the loan.
Mr. Yachmetz. Yes, but the fact of the matter is if the
railroads have a lot of value in the asset, it is harder to get
the cash out. We provide a way for them to get cash to do their
necessary repairs and stuff. So I think it is just part of
normal financing. If they went to a bank, a bank would look for
collateral, too.
Ms. Brown of Florida. Well, I guess my question to all of
the participants is do you think the RRIF program is a valuable
program? If so, how come we don't have more applicants applying
for the program? We will start with Mr. Pippin because I think
you have a real good story because it doesn't relate to
collateral or application. It was some other factor.
Mr. Pippin. It was some other factor but the factors you
are talking about now do play a part. I think to answer your
question why aren't more, and from my standpoint, small
railroads taking advantage of this program is with a bank loan
you do not have a credit premium. I think a lot of the
railroads wonder how they are going to come up with, if they
need money to do infrastructure improvements, how are they
going to come up with $300, $400, $500, and $600 thousand on a
credit risk premium. Their answer is, you know, if we apply and
we get down to where they say yes and we have to turn over that
kind of money, that is not going to be possible. I think that
is a major deterrent in the program.
From a collateral standpoint, in our case, we were
fortunate enough. We have paid our acquisition debt that we
took on in 1995 down to really almost nothing. So the
Government would be getting almost 100 miles of railroad as
collateral at about three times at least the value of the money
that they were lending. So they would be pretty secured. So I
am not really sure if they ask for $20 million collateral on a
$6 million loan and give me $300 or $400 or $600 thousand, if
that is really reasonable for a small railroad. That is my
answer.
Ms. Brown of Florida. Just one follow up question to you,
Mr. Pippin. The amount of area that we are talking about was
part of your denial. How much was that in comparison to the
length of your railroad?
Mr. Pippin. Well, we have 94 miles, roughly. We own 76
miles so the remainder of that, about a little under 14 miles,
was the leased portion if that is the question.
Ms. Brown of Florida. Mr. Timmons, would you respond to my
initial question?
General Timmons. Yes, ma'am. I can make this very
condensed. One, the RRIF program has enormous unrealized
potential. It is very, very valuable. We just have not been
able to fully capitalize on the potential of that money that
can be turned lose. Here are the reasons. I have six reasons
for you: the obstinacy of the Office of Management and Budget;
the extended period of time it takes to get these things
approved; the technical complexity of the application, in other
words you must hire some outside expert at some cost to help
you with that application; the uncertainty of the end result of
all of this; and then the cost of the credit risk premium,
which are not borne under a bank loan, but which you must pay
in addition. So those are the six things that I think are in
the way. All of those have conspired with a lot of small
railroad guys that just say, man, this is just too hard to work
your way through and it costs money and you are not sure what
you get at the other end. There is no certainty in all of this.
You can spend this money and get nothing for it.
Ms. Brown of Florida. Mr. Simmons, do you want to respond
to that? Or anyone else? You don't have to if you don't want
to. Yes, sir. Mr. Zehner?
Mr. Zehner. As a public agency, and I am a little different
from the private firms here, as a public agency our cheapest
form of financing is tax-free bonds, which we are capable of
doing, but it is a long process, in our case a year. The RRIF
for us is another alternative method to finance. It is not the
cheapest but from our experience it is much faster. So
depending upon the situation you are in, it has applicability
to public agencies. I am not sure how many public agencies know
it exists. I have talked to a few other CEOs. Generally, most
will try to go with tax-free financing because it is much
cheaper.
The credit risk premium is an issue for us also. Normally a
bank will put the credit risk in the rate itself. When we got
our loan, it was 4.74 percent. That was the Federal
Government's borrowing cost at that time, which I think was
July of 2006. In other words, you could have increased that
rate and put the credit risk premium in the rate. Therefore you
don't have to pay it out of pocket. Generally, that is how
banks do it. So that is another opportunity to help one of the
problems these gentlemen have and, of course, we have, too.
But it is an important program for a public agency. Maybe
it is not as important as for a private firm, but it is very,
very important. It is another alternative way to do business
and I think it is important to have that. VRE is the only
public agency that has done it. I think others will do it. You
probably are not going to have as many public agencies as
private firms but it is important. It is very important.
Ms. Brown of Florida. I guess my concern is that you said
it is not cheap. We need to look at it being cost effective. We
want to encourage the investment in the infrastructure.
We all love the railroad. I just returned from Europe and I
mean, you know, they are really investing in their
infrastructure. And they are our competitors. They are moving
forward and we need to figure out how we can not be the
caboose. They don't even use cabooses anymore. So you know we
are all on the same page. You know, everybody in here loves the
railroad. That is why we are in here. We realize the importance
of moving people, goods, and services so we can compete and our
people can be competitive.
We have one other question for Mr. Timmons and I am going
to give it to you in writing because it is on 286 pound cars
and what percentage of the fleet uses those cars. So I am just
going to give you this last question in writing. Would you like
to have any closing remarks?
Mr. Yachmetz. No, I just thank you for the opportunity to
be here and talk about the program. We look forward to moving
forward. As I said, we don't consider ourselves sort of set in
concrete or knowing all the answers. So suggestions people
provide to us for improving our program within the context of
our current legislative restrictions, we would be happy to
receive those.
Ms. Brown of Florida. Well, I just want you to know I do
like your disposition and your personality. I am looking
forward to--what is it--one team, one fighter. We are going to
move this industry. Thank you.
Mr. Brown, do you want to have any closing remarks?
Mr. Brown of South Carolina. Thank you, Madam Chairwoman. I
just wanted to say, too, to echo your sentiment. It has been a
good discussion. I think we have been able to discover some
weaknesses in the program. I hope that certainly we can come
together in that one team approach and move this program
forward. Thank you very much, gentlemen, for coming.
Ms. Brown of Florida. I want to thank the witnesses for
their testimony and the Members for their questions. Again, the
Members of this Subcommittee may have additional questions for
the witnesses. We ask you to respond to those in writing. The
hearing records will be held over for 14 days for Members
wishing to make additional statements or ask further questions.
Unless there is further business, this Subcommittee is
adjourned.
[Whereupon, at 5:08 p.m., the Subcommittee was adjourned.]
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