[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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20402-0001







             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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