Intercity Passenger Rail: Issues for Consideration in Developing
an Intercity Passenger Rail Policy (30-APR-03, GAO-03-712T).
The Rail Passenger Service Act of 1970 created Amtrak to provide
intercity passenger rail service because existing railroads found
such service unprofitable. Amtrak operates a 22,000-mile network,
primarily over freight railroad tracks, providing service to 46
states and the District of Columbia. Most of Amtrak's passengers
travel on the Northeast Corridor, which runs between Boston,
Massachusetts, and Washington, D.C. On some portions of the
Corridor, Amtrak provides high-speed rail service (up to 150
miles per hour). Since its inception, Amtrak has struggled to
earn revenues and run an efficient operation. Recent years have
seen Amtrak continue to struggle financially. In February 2003,
Amtrak reported that it would need several billion dollars from
the federal government over the next few years to sustain
operations. However, some have indicated that there needs to be a
fundamental reassessment of how intercity passenger rail is
structured and financed. Options raise questions about whether or
not Amtrak should be purely an operating company, whether
competition should be introduced for providing service, and if
states should assume a greater financial role in the services
that are provided.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-712T
ACCNO: A06770
TITLE: Intercity Passenger Rail: Issues for Consideration in
Developing an Intercity Passenger Rail Policy
DATE: 04/30/2003
SUBJECT: Federal aid for transportation
Federal aid to railroads
Federal funds
Investments
Railroad transportation operations
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GAO-03-712T
Testimony Before the Subcommittee on Railroads, Committee on
Transportation and Infrastructure, House of Representatives United States
General Accounting Office
GAO For Release on Delivery Expected at 10: 00 a. m. EDT Wednesday, April
30, 2003 INTERCITY PASSENGER
RAIL Issues for Consideration in Developing an Intercity Passenger Rail
Policy
Statement of JayEtta Z. Hecker, Director Physical Infrastructure Issues
GAO- 03- 712T
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.
Compared to current levels of federal funding, substantially higher
federal investment will be required in the future to stabilize and sustain
Amtrak*s existing network. Amtrak will be seeking about $2 billion per
year over the next several years to stabilize its system and begin
addressing its deferred maintenance needs and to cover operating losses.
This is about twice the federal funding Amtrak has received annually over
the last 5 years. However, Amtrak*s identified funding requests do not
address potential
future needs to enhance or expand service or develop high- speed rail
corridors, which Amtrak has previously estimated at up to $70 billion over
the next 20 years. According to Amtrak, this will require additional
federal
and state investment* over and above the $2 billion annually in identified
needs.
Based on analyses of federal investment approaches across a broad stratum
of national activities, we have identified several key components of a
framework for evaluating federal investments. The Congress might find this
framework useful as it deliberates the future of intercity passenger rail.
At the outset, clearly defined goals would provide the foundation for
making other decisions. For example, if reducing air and highway
congestion were a goal, this may only be achievable in limited markets,
because Amtrak*s market share decreases rapidly as travel time and
distance increase. To improve the focus on outcomes, it will be important
for Congress to consider a systemwide approach, as opposed to a focus on
one mode or type of travel. Establishing the roles of governmental and
private entities could better ensure that goals are achieved. Finally, the
choice and design of financing mechanisms will also have important
consequences for performance as well as transparency and accountability.
Amtrak*s Market Share vs. Air Travel, by Time of Trip
The Rail Passenger Service Act of 1970 created Amtrak to provide intercity
passenger rail service because existing railroads found such service
unprofitable. Amtrak
operates a 22,000- mile network, primarily over freight railroad tracks,
providing service to 46 states and the District of Columbia. Most of
Amtrak*s passengers travel on the Northeast Corridor, which runs between
Boston, Massachusetts, and Washington, D. C. On some portions of the
Corridor, Amtrak provides highspeed rail service (up to 150 miles per
hour). Since its inception, Amtrak has struggled to earn revenues and run
an efficient operation. Recent years have seen Amtrak continue to struggle
financially. In February 2003, Amtrak reported that it would need several
billion dollars from the federal government over the next few years to
sustain operations. However, some have indicated that there needs to be a
fundamental reassessment of how intercity passenger rail is structured and
financed. Options raise questions about whether or
not Amtrak should be purely an operating company, whether competition
should be introduced for providing service, and if states should assume a
greater financial role in the services that are provided.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 712T. To view the full
testimony, click on the link above. For more information, contact JayEtta
Z. Hecker at (202) 512- 2834, or HeckerJ@ gao. gov. Highlights of GAO- 03-
712T, a testimony
before the Subcommittee on Railroads, Committee on Transportation and
Infrastructure, House of Representatives
April 30, 2003
INTERCITY PASSENGER RAIL
Issues for Consideration in Developing an Intercity Passenger Rail Policy
Page 1 GAO- 03- 712T Intercity Passenger Rail Policy Mr. Chairman and
Members of the Subcommittee: I appreciate the opportunity to testify on
the future of intercity passenger
rail. Passenger rail travel in the United States remains poised at a
critical juncture. Since its inception, the National Railroad Passenger
Corporation (Amtrak) has struggled to earn revenues and run an efficient
operation, balancing demands from a variety of stakeholders in a changing
market. Recent years have seen Amtrak continue to struggle financially. A
few months ago, in February 2003, Amtrak reported that it would need
several billion dollars from the federal government over the next few
years to
sustain operations. Last year, however, the Amtrak Reform Council 1
indicated that a focus on sustaining operations might not be the best way
for intercity passenger rail policy to proceed. Instead, it recommended
restructuring and rationalizing the national intercity passenger rail
system* a move that envisioned, among other things, breaking up Amtrak and
introducing competition to provide rail service. In testimony we provided
to this subcommittee last April, we stated that the current approach to
intercity passenger rail is likely not sustainable given historical
funding levels. 2 Today*s hearing, therefore, not only takes place against
a backdrop of Amtrak*s long- term and ongoing financial crises, but also
within a context of uncertainty about
how intercity passenger rail service should be provided to the nation. My
statement today attempts to aid the Congress as it debates the future of
Amtrak by (1) examining the levels of federal funding needed to support
the existing network for providing intercity passenger rail, and (2)
describing a framework that could facilitate the development of intercity
passenger rail policy. This statement is based primarily on reports we
have issued over the past several years. 3 In summary:
Compared to current levels of federal funding, substantially higher
federal investment will be required in the future to stabilize and sustain
Amtrak*s existing network. Amtrak will be seeking about $2 billion per
year over the next several years to stabilize its system and begin
addressing its deferred
1 The Amtrak Reform Council is an independent oversight body created by
the Amtrak Reform and Accountability Act of 1997. 2 U. S. General
Accounting Office, Intercity Passenger Rail: Congress Faces Critical
Decisions in Developing a National Policy, GAO- 02- 522T (Washington, D.
C.: April 2002). 3 See appendix III for a list of related GAO products.
Page 2 GAO- 03- 712T Intercity Passenger Rail Policy maintenance needs and
to cover operating losses. This is about twice the federal funding Amtrak
has received annually over the last 5 years.
Although Amtrak is currently taking actions to make its business more
efficient and control costs, it is unable to determine the extent of its
success because it lacks labor productivity measures to determine the
efficiency of its workforce. Amtrak*s identified funding requests also do
not address potential future needs to enhance or expand service or develop
high- speed rail corridors* estimated by Amtrak at up to $70 billion over
the next 20 years. According to Amtrak, this will require
additional federal and state investment* over and above the $2 billion in
identified needs.
Based on extensive analyses of federal investment approaches across a
broad stratum of national activities, 4 we have found that the key
components of a framework for evaluating federal investments include (1)
establishing clear, nonconflicting goals, (2) establishing the roles of
governmental and private entities, (3) establishing funding approaches
that focus on and provide incentives for results and accountability, and
(4) ensuring that the strategies developed address diverse stakeholder
interests and limit unintended consequences. The evaluation framework may
be useful in several ways as Congress develops intercity passenger rail
policy. For instance: Clearly defined goals could provide the foundation
for making other
decisions. For example, if the goal were to reduce air and highway
congestion by achieving particular market- share targets in select
originand- destination city- pairs, then that goal could shape decisions
about developing additional higher- speed rail corridors. To improve the
focus on outcomes and potential contributions to customers or communities,
it will be important for Congress to consider a systemwide approach as
opposed to a focus on one mode or type of travel. Established roles of
governmental and private sector entities might
better ensure that goals are achieved. For example, it will be important
to determine whether route and service decisions will be made using a
4 See, for example, U. S. General Accounting Office, Marine
Transportation: Federal Financing and a Framework for Infrastructure
Investment, GAO- 02- 1033 (Washington, D. C.: September 2002); U. S.
General Accounting Office, U. S. Infrastructure: Funding Trends and
Opportunities to Improve Investment Decisions, GAO/ RCED/ AIMD- 00- 35
(Washington, D. C.: Feb. 7, 2000); and U. S. General Accounting Office,
Executive Guide: Leading Practices in Capital Decision- Making, GAO/ AIMD-
99- 32 (Washington, D. C.: December 1998).
Page 3 GAO- 03- 712T Intercity Passenger Rail Policy top- down approach by
a central entity (whether the federal government or an organization like
Amtrak) or using a bottom- up approach by state and local governments, in
combination with private
entities. Appropriate financing mechanisms may increase performance,
transparency, and accountability. Different mechanisms are available (e.
g., grants, bonds, loans, or user fees), but they carry different
characteristics, which policy- makers should consider. Finally,
consideration of diverse stakeholder interests when crafting
policy changes could minimize unintended and adverse consequences.
Stakeholders such as commuter railroads, states, and freight railroads
could be significantly affected by a change in policy.
The Rail Passenger Service Act of 1970 created Amtrak to provide intercity
passenger rail service because existing railroads found such service
unprofitable. Amtrak operates a 22,000- mile network, primarily over
freight railroad tracks, providing service to 46 states and the District
of Columbia. (See fig. 1.) Amtrak owns 650 miles of track, primarily on
the Northeast Corridor, which runs between Boston, Massachusetts, and
Washington, D. C. The Northeast Corridor is the busiest passenger line in
the country, and some 200 million Amtrak and commuter rail travelers use
the Corridor, or some portion of it, each year. On some portions of the
Corridor, Amtrak provides high- speed rail service (up to 150 miles per
hour). In addition, access to the Corridor is crucial for eight commuter
railroads (operated by state and local governments) that service 1.2
million passengers each work day as well as six freight railroads.
Background
Page 4 GAO- 03- 712T Intercity Passenger Rail Policy Figure 1: Amtrak*s
Route System
At the present time, intercity passenger rail only plays a small part in
the nation*s overall transportation system (with the exception of some
shortdistance routes). In fiscal year 2002, Amtrak served about 23.4
million passengers, or about 64,000 passengers a day. According to Amtrak,
about two- thirds of its ridership is wholly or partially on the Northeast
Corridor. In contrast, preliminary figures for 2002, the latest year data
are available, indicate that airlines carried about 1.5 million domestic
passengers per
day. In 2001, intercity buses carried about 83,000 passengers per day.
Amtrak has won sizeable market shares (compared to travel by air), between
certain relatively close city- pairs. However, by far, most intercity
traffic remains by automobile.
Recent legislation introduced in the Congress has recognized the
substantial capital investment required for intercity passenger rail
systems. For example, legislation introduced by the Chairman of this
Page 5 GAO- 03- 712T Intercity Passenger Rail Policy Committee last year,
the Rail Infrastructure Development and Expansion Act for the 21st Century
(H. R. 2950), would have authorized the issuance
of tax- exempt bonds, grants, direct loans, and loan guarantees of over
$71 billion for high- speed rail infrastructure, corridor development,
rehabilitation, and improvement. Legislation introduced by a Member of
this Subcommittee in the current session of Congress, the National Rail
Infrastructure Program Act (H. R. 1617), would establish a national rail
infrastructure trust fund and make about $3 billion available to states
for projects that address railroad infrastructure deficiencies in order to
provide substantial public benefits, such as mitigating highway congestion
and reducing transportation emissions. Projects eligible for funds under
this legislation could potentially benefit intercity passenger rail
systems. Legislation introduced in the Senate this session (S. 104) would
authorize significant funding for passenger rail investment, including
about $2 billion annually for Northeast Corridor growth investments, about
$1.4 billion in capital investments, and about $1.5 billion annually for
development of
high- speed rail corridors. 5 In a hearing before the House Committee on
Appropriations, Subcommittee on Transportation, Treasury, and Independent
Agencies, held on April 10, 2003, the President of Amtrak and the Deputy
Secretary of Transportation offered differing views on Amtrak and the
future of intercity passenger rail service in America. Amtrak*s President
focused primarily on the importance of Amtrak*s receiving the funding it
needs to improve the condition of its equipment, its reliability and
utilization, and its infrastructure. The Deputy Secretary, in contrast,
stated that the administration has declared principles for a fundamental
restructuring of the manner in which federal assistance is provided for
intercity passenger rail service. These principles include creating a rail
service that is driven by sound economics, fosters competition, and
establishes a long- term partnership between states and the federal
government to sustain an economically viable system. 5 This bill would
also repeal the requirement that Amtrak be operationally self- sufficient.
Page 6 GAO- 03- 712T Intercity Passenger Rail Policy Current federal
funding is not sufficient to support the existing level of intercity
passenger rail service being provided by Amtrak. Over the longterm,
significantly higher levels of investment will be needed to stabilize the
existing system and get it into a state of good repair. Amtrak has
reported that just doing that will require nearly $2 billion annually over
the next several years* about twice the amount provided annually over the
last 5 years. The total amount of additional funding needed is not known
but will likely be in the tens of billions of dollars. From fiscal year
1976 through fiscal year 2003, the federal government has provided Amtrak
with over $26 billion (nominal dollars) in operating and capital
subsidies. 6 Amtrak*s financial condition has never been strong, and the
corporation
has been on the edge of bankruptcy several times. The Amtrak Reform and
Accountability Act of 1997 required Amtrak to reach operational
selfsufficiency by December 2002. 7 However, Amtrak*s financial outlook
since this legislation was enacted has remained troubled, and the
corporation has gone from one financial crisis to the next. In March 1998,
we reported that Amtrak*s financial condition had continued to deteriorate
and that it would continue to face challenges in improving its financial
health. 8 In September 2000, we again reported that Amtrak was struggling
in its quest to achieve operational self- sufficiency and that it had made
limited progress in reducing its need for operating support. 9 Amtrak*s
financial struggles have become even more acute in recent years. For
example, in 2001 Amtrak mortgaged a portion of Pennsylvania Station in New
York City to generate enough cash to meet its expenses, and in July 2002,
the Department of Transportation approved a $100 million loan because the
railroad was running out of cash. As recently as a few months ago, Amtrak
said that its financial and physical condition was still precarious and
that federal support of about $1.8 billion would be required in fiscal
year 2004
6 This is $41.7 billion in 2002 dollars. 7 The Amtrak Reform and
Accountability Act of 1997 prohibited Amtrak from using federal funds for
operating expenses, except an amount equal to excess Railroad Retirement
Tax Act payments, after 2002. However, this prohibition would not apply if
Congress specifically appropriates funds for Amtrak to cover operating
expenses in a particular fiscal year, as Congress did in fiscal year 2003
(see the Consolidated Appropriations
Resolution, 2003, P. L. 108- 7). 8 U. S. General Accounting Office,
Intercity Passenger Rail: Outlook for Improving Amtrak*s Financial Health,
GAO/ T- RCED- 98- 134 (Washington, D. C.: Mar. 24, 1998). 9 U. S. General
Accounting Office, Intercity Passenger Rail: Decisions on the Future of
Amtrak and Intercity Passenger Rail Are Approaching, GAO/ T- RCED- 00- 277
(Washington, D. C.: Sept. 26, 2000). Current Federal
Funding Not Sufficient to Support Existing Level of Intercity Passenger
Rail
Page 7 GAO- 03- 712T Intercity Passenger Rail Policy just to stabilize its
system. This is about twice the approximately $1 billion in federal
funding Amtrak has received annually over the last 5 years. For
fiscal years 1999 through 2003, Amtrak received a total of about $4.7
billion in federal operating and capital support. Amtrak has indicated
that it will require $2 billion annually in federal contributions over the
next few years, with a focus on stabilizing its system. It does not
address additional capital investments that might be required for
enhancements or expansions of Amtrak*s system. In February 2002, Amtrak
estimated that its deferred capital backlog was about $6 billion ($ 3.8
billion of which was attributed to the Northeast Corridor). Additional
capital funds would be needed to enhance and modernize its system, such as
undertaking infrastructure improvements that permit faster trip times for
Amtrak*s trains. For example, in January 2000, Amtrak estimated that about
$12 billion (in 2000 dollars) would be needed between fiscal years 2001
and 2025 to improve the Northeast Corridor between New York City and
Washington, D. C., in order to increase the reliability of the Corridor
and make enhancements that permit higher speed service. Amtrak*s share of
this cost* estimated at about $6 billion* is not fully included in its
expected funding request. 10 To cover needed operating subsidies, Amtrak
can be expected to need
about $800 million per year, or about $4 billion over the 5- year period
2005 to 2009. This amount appears to be included within the projected
request for $2 billion annually. For fiscal year 2004, Amtrak estimates
that it will require about $768 million in operating subsidies* nearly 50
percent above its 2003 appropriation ($ 522 million). By comparison,
Amtrak received about $200 million in fiscal year 2002. Operating
subsidies are needed because virtually all of Amtrak routes fail to
generate operating profits. For fiscal year 2002, only one of Amtrak*s
routes, the Acela Express/ Metroliner, earned an operating profit (about
$78 million).
Operating losses on other routes ranged from about $700,000 to about $77
million. 11 Although Amtrak*s President has said that actions to maintain
solvency and create a lean organization with tight financial controls have
10 The remaining $6 billion would come from commuter railroads and other
users of the
Northeast Corridor. 11 Operating results exclude depreciation, net
interest expense, and special trains. In addition to the Acela Express/
Metroliner, one other route, the Heartland Flyer between Texas and
Oklahoma, made a profit of $1. 1 million, primarily because state
contributions provided Amtrak with about $4. 9 million, about 83 percent
of the route*s total revenue.
Page 8 GAO- 03- 712T Intercity Passenger Rail Policy been initiated,
operating a national intercity passenger rail system structured similar to
Amtrak*s current system will likely require
substantial operating subsidies for the foreseeable future. The amount of
those operating subsidy needs, however, is unknown. Part of Amtrak*s need
for operating subsidies involves Amtrak*s ability to control costs. In
fiscal year 2002, Amtrak*s operating costs decreased by $76.7 million
compared with fiscal year 2001. 12 According to Amtrak, this
was partially accomplished by streamlining its business and eliminating
1,000 positions. Amtrak*s President recently testified before the House
Appropriations Committee that one of the challenges for Amtrak would be
generating a higher level of productivity from its workforce. As we
reported in 2000, Amtrak had attempted to control cost growth by improving
labor productivity, but it had no measures of labor productivity for its
different lines of business to measure its progress or efficiency. 13
Amtrak is still in the process of developing these measures.
Amtrak*s identified funding requests do not address the future needs that
might be required to expand or enhance service or develop high- speed rail
corridors. According to Amtrak, additional federal and state investment*
over and above the $2 billion per year* would be required to address these
issues and begin developing high- speed rail corridors. As we reported
last year, the total cost to develop high- speed rail corridors is unknown
because these initiatives are in various stages of planning. 14 However,
preliminary Amtrak estimates indicate the capital costs to
develop these other corridors (along with the Northeast Corridor) could be
between $50 billion and $70 billion over the next 20 years. The American
Association of State Highway and Transportation Officials* a trade
association of state and local transportation officials* also recently
reported that about $60 billion would be required to develop these
corridors and Amtrak*s Northeast Corridor over a 20- year period.
12 Excludes depreciation. 13 U. S. General Accounting Office, Intercity
Passenger Rail: Amtrak Will Continue to Have Difficulty Controlling Its
Costs and Meeting Capital Needs, GAO- RCED- 00- 138
(Washington, D. C.: May 31, 2000). 14 GAO- 02- 522T.
Page 9 GAO- 03- 712T Intercity Passenger Rail Policy Based on GAO*s
analyses of federal investment approaches across a broad stratum of
national activities, we have found several key components of a
framework for evaluating federal investments. 15 Congress may find this
framework useful to consider as it develops a national intercity passenger
rail policy. Components of the framework include: (1) establishing clear,
nonconflicting goals, (2) establishing the roles of governmental and
private entities, (3) establishing funding approaches that focus on and
provide incentives for results and accountability, and (4) ensuring that
the strategies developed address diverse stakeholder interests and limit
unintended consequences.
By clearly defining nonconflicting goals for an intercity passenger rail
system, the Congress could provide a basis for guiding federal
participation. Nonconflicting goals provide a clear direction, establish
priorities among competing issues, specify the desired results, and lay
the foundation for such other decisions as determining how the assistance
will be provided, the duration of that assistance, and what the total
value of the assistance should be. Such goals are best considered in the
context of the relationship of an intercity passenger rail system to other
transportation modes. Transportation experts highlight the need to view
any part the system plays in the context of the entire transportation
system in addressing congestion, mobility, and other challenges. A
systemwide approach to transportation planning and funding, as opposed to
focusing on a single mode or type of travel, could improve the focus on
outcomes and the contribution to customer or community needs.
The Congress could choose any number or type of goals when developing a
national policy. For instance, it might decide that the goals should
maximize some or all of the benefits of intercity passenger rail. As we
15 See, for example, U. S. General Accounting Office, Marine
Transportation: Federal Financing and a Framework for Infrastructure
Investment, GAO- 02- 1033 (Washington, D. C.: September 2002); U. S.
General Accounting Office, Intercity Passenger Rail: Congress Faces
Critical Decisions in Developing a National Policy, GAO- 02- 522T
(Washington, D. C.: Apr. 11, 2002); U. S. General Accounting Office,
Commercial Aviation: A Framework for Considering Federal Financial
Assistance, GAO- 01- 1163T (Washington, D. C.: Sept. 20, 2001); U. S.
General Accounting Office, U. S. Infrastructure: Funding Trends and
Opportunities to Improve Investment Decisions, GAO/ RCED/ AIMD- 00- 35
(Washington, D. C.: Feb. 7, 2000); U. S. General Accounting Office,
Executive Guide: Leading Practices in Capital Decision- Making, GAO/ AIMD-
99- 32 (Washington, D. C.: December 1998); and U. S.
General Accounting Office, Federal Budget: Choosing Public Investment
Programs,
GAO/ AIMD- 93- 25 (Washington, D. C.: July 23, 1993). Framework for
Creating a National Intercity Passenger Rail Policy
Defining Goals Will Provide a Foundation for Making Other Decisions
Page 10 GAO- 03- 712T Intercity Passenger Rail Policy reported last year,
intercity passenger rail has the potential to provide broad public
benefits, such as stemming increases in highway and air
congestion, reducing automobile pollution, and reducing fuel consumption
and energy dependency. 16 We pointed out, however, that some of these
benefits might be difficult to obtain. For instance, for rail transport to
capture the market share
necessary to reduce air travel congestion, the distance between potential
intercity passenger rail cities must be short enough to make rail travel
times competitive with air travel times (at comparable costs and levels of
comfort). Amtrak*s market share decreases rapidly as travel time and
distance increases. As we previously reported, compared with air service
only (as most travel is by automobile), between New York City and
Philadelphia and between Philadelphia and Washington, D. C.* both
relatively short- distance markets* Amtrak*s market share was over 80
percent. But for longer distance markets, such as New York City to
Chicago, Illinois, and Chicago, to Washington, D. C., Amtrak*s market
share compared with air service was less than 10 percent. 17 (See fig. 2.)
Studies suggest that as the speed of intercity passenger rail increases,
the potential benefits attributable to reductions in airport and highway
delays increase, as does the potential distance over which passenger rail
is able to compete
with air transport. The potential for intercity passenger rail to reduce
air congestion is also greater where there is little, or no, room for
additional runways and where there is limited competition between airlines
resulting in relatively high air fares. See appendix I for more
information on potential benefits from intercity passenger rail travel.
16 GAO- 02- 522T. 17 GAO- 02- 522T.
Page 11 GAO- 03- 712T Intercity Passenger Rail Policy Figure 2: Amtrak
Market Share Compared to Air Service for Selected Origins and Destinations
To help ensure that the goals are achieved, conflicting goals should be
avoided to the maximum extent possible to reduce the possibility that
achieving one goal reduces the likelihood of attaining another goal. In
addition, the goals should be measurable* that is, they should identify
the amount of public benefits to be obtained. Having measurable goals
better assists in determining the success or failure in attaining the
goals and in holding intercity passenger rail systems accountable for
results.
In this context, we note that the statements made by the President of
Amtrak and the Deputy Secretary of Transportation on April 10 both reflect
efforts to establish goals. The President of Amtrak stated that his goals
over the past year were to maintain solvency, begin a program of critical
capital investment, create a lean organization with tight financial
controls, and build a zero- based budget. The Deputy Secretary stated that
the Administration would support specific performance targets that can be
met on an annual basis, and he discussed five principles articulated by
the
Page 12 GAO- 03- 712T Intercity Passenger Rail Policy Secretary of
Transportation for reforming intercity passenger rail. 18 While these
efforts are clearly important, a broader consideration of how the
passenger rail system fits with other modes of transportation and how
changes to the system might maximize public benefits would be a critical
first step in developing intercity passenger rail policy.
Establishing the relative roles of federal, state, and local governments
and private sector entities, to the extent practicable, could better
ensure that goals are achieved. The Deputy Secretary of Transportation
touched on this issue when he stated on April 10 that the department hopes
to establish a long- term partnership between the states and the federal
government to support intercity passenger rail service. The President of
Amtrak also described how Amtrak had entered into negotiations with state
partners to have them cover 100 percent of the direct operating loss for
intercity passenger rail services that receive state support. Defining
roles helps to establish incentives for leadership, financial
participation, risk- sharing, and accountability among the participating
parties. Roles are defined not only by specific structures and
organizations, but also by the forms, conditions, and terms of assistance.
Regarding structures and organizations as they pertain to intercity
passenger rail travel, the Congress will need to pose and resolve such
questions as:
Should there be a government- established entity, such as Amtrak, with a
monopoly over intercity passenger rail, or could federal and state
governments allow private operators to receive government assistance on a
competitive basis to provide intercity passenger rail service? How much
independence should the entity or entities providing rail
service have to make decisions? A recent report on passenger rail
restructurings in other countries stated that successful reform plans
involved an increasing degree of independence of the rail entity from 18
These five principles are to (1) create a system driven by sound
economics; (2) require
that Amtrak transition to a pure operating company; (3) introduce
carefully managed competition to provide higher quality rail services at
reasonable prices; (4) establish a longterm partnership between the states
and the federal government to support intercity passenger rail service;
and (5) create an effective public partnership, after a reasonable
transition, to manage the capital assets of the Northeast Corridor.
Establishing Roles of
Governmental and Private Sector Entities Will Better Ensure That Goals Are
Achieved
Page 13 GAO- 03- 712T Intercity Passenger Rail Policy political influence.
19 The Amtrak Reform Council reported in February 2002 that one of the
factors influencing Amtrak*s decisionmaking and
financial performance was a susceptibility to political pressure. 20
Will routes and services be determined using a top- down approach by a
central entity, such as the federal government or an organization like
Amtrak, or with a bottom- up approach at a state or local level focusing
on where intercity passenger rail can generate the most public benefits
for
particular citizens? Establishing the roles of the federal, state, and
local governments will be particularly important. The federal government
is currently the major financer of intercity passenger rail systems and
has provided Amtrak with about $1 billion per year in federal support over
the last 5 years. Although
several states and localities may receive significant benefits from
Amtrak*s operations, state support for Amtrak has been relatively limited*
about $168 million in fiscal year 2002. One option for restructuring
intercity passenger rail is to increase the role of state and local
governments in financing the rail system.
The ability of states to provide and maintain financial support for
intercity passenger rail is unknown, however. We reported last year that
most of the officials from 17 state departments of transportation we
contacted were willing to provide funds for intercity passenger rail. 21
However, they said
that continued federal investment would be required, and they expressed
concern over their ability to successfully form partnerships with other
states to finance intercity passenger rail service. One of the potential
impediments cited was determining a fair cost- sharing arrangement for
capital improvements. This is consistent with what we found in our 1998
report on the potential issues of Amtrak liquidation. 22 In that report,
officials from states we spoke with also cited potential problems with
compacts between states to provide intercity passenger rail service.
19 U. S. Congressional Research Service, *Foreign Intercity Passenger
Rail: Lessons for Amtrak?* June 2002. 20 Amtrak Reform Council, An Action
Plan for the Restructuring and Rationalization of the National Intercity
Passenger Rail System (Feb. 2002).
21 See GAO- 02- 522T. 22 U. S. General Accounting Office, Intercity
Passenger Rail: Issues Associated With a Possible Amtrak Liquidation, GAO/
RCED- 98- 60 (Washington, D. C.: Mar. 2, 1998).
Page 14 GAO- 03- 712T Intercity Passenger Rail Policy Among the potential
problems cited was reaching agreement on the allocation of costs between
states. Officials from three states we spoke
with that were not on the Northeast Corridor but whose states generated a
large volume of intercity rail passengers also expressed concerns about
(1) the potentially high cost of continuing service, (2) possible
difficulties in negotiating access to tracks, and (3) lack of an incentive
to continue service if Amtrak*s national route network were ended.
As previously mentioned, the Amtrak Reform Council has recommended
introducing competition for intercity passenger rail service. The
Secretary of Transportation also supports carefully managed competition.
If intercity passenger rail service were restructured to allow private
rail operators to bid on the opportunity to provide service, however,
those operators would still likely require operating subsidies. Four of
the five private rail companies we contacted last year said that, even
though they would provide efficient passenger rail service, they would
still need operating subsidies. A fifth company had not yet determined if
operating subsidies would be required.
The choice and design of financing mechanisms, including mechanisms used
to provide federal assistance, will have important consequences for
performance, transparency, and accountability. A wide variety of
mechanisms are available to provide financial assistance, including
grants, bonds, tax subsidies, loans, loan guarantees, and user fees. Each
of these vary in the extent they provide a stable source of revenue that
covers capital needs, ensure that investments provide an appropriate
return on investment relative to investments in other intercity
transportation systems, leverage the federal dollar, and balance
accountability and flexibility. These mechanisms can be structured to
support or facilitate public- private partnerships. According to a recent
report, a lesson learned from intercity passenger rail restructuring in
other countries was that one goal of most such reforms was to increase the
transparency of government financial support. In general, the intent of
policy makers was to hold railroads more accountable by eliminating cross-
subsidization of services. 23 23 U. S. Congressional Research Service,
*Foreign Intercity Passenger Rail: Lessons for
Amtrak?* June 2002. Choice and Design of
Financing Mechanisms Will Have Important Consequences for Performance,
Transparency, and Accountability
Page 15 GAO- 03- 712T Intercity Passenger Rail Policy In choosing the
funding mechanism, it will be important to protect the federal
government*s interests. This can be done in a variety of ways. Most
recently, in Amtrak*s fiscal year 2003 appropriations, the Congress
adopted measures to increase the oversight and accountability over federal
funds used for intercity passenger rail. These measures include requiring
(1) federal funds be allocated by the Secretary of Transportation using a
grant making process, and (2) Amtrak prepare and submit to the Congress a
business plan and limiting federal spending on projects not contained in
the plan. In addition, the conference report requires the Secretary of
Transportation to vouch for the accuracy of Amtrak*s financial
information. We believe these are good first steps. Other measures that
are available include establishing criteria for the evaluation of projects
and the use of federal funds similar to that used by the Federal Transit
Administration in its New Starts program, incorporating accountability
requirements similar to those in the Government Performance and Results
Act, and requiring intercity passenger operators to assume some level of
financial risk in their operations.
Finally, it will be important to consider diverse stakeholder interests in
developing intercity passenger rail policy and limit unintended
consequences. Revising the structure of intercity passenger rail could
have
substantial effects on a number of stakeholders, including Amtrak and its
employees, the railroad retirement and unemployment systems, commuter
railroads, states, and freight railroads. Amtrak, its employees and
creditors, and the railroad retirement and unemployment systems all have
substantial financial involvement with Amtrak and could be the most
directly affected by a change in intercity passenger rail policy,
particularly if Amtrak were to be liquidated. At the request of this
Committee, we have reported on the potential costs that might emerge if
Amtrak were liquidated. 24 We take no position on whether Amtrak should be
liquidated but our work shows that there could
24 U. S. General Accounting Office, Intercity Passenger Rail: Potential
Financial Issues in the Event That Amtrak Undergoes Liquidation, GAO- 02-
871 (Washington, D. C.: Sept. 20, 2002). Our report did not discuss the
likelihood or advisability of liquidating Amtrak. The report also did not
discuss secondary effects, such as damage to a creditor if it did not
collect amounts owed to it by Amtrak. Finally, the report did not discuss
the effects of a
cessation of Amtrak service, or the potential effects on commuter and
freight railroads that rely on access to Amtrak*s tracks or rely on Amtrak
to operate their trains. These issues were discussed in our testimony
before this committee in April 2002 and in our 1998 report on Amtrak
liquidation. (See GAO- 02- 522T and GAO/ RCED- 98- 60.) Diverse
Stakeholder
Interests Need to Be Considered
Page 16 GAO- 03- 712T Intercity Passenger Rail Policy be substantial
financial issues associated with such an action. We reported that if
Amtrak had been liquidated on December 31, 2001, secured and
unsecured creditors, along with Amtrak*s stockholders, would have had
about $44 billion in claims against Amtrak*s estate. The federal
government would have been by far the largest claimant. However, it is not
likely these claims would have been fully satisfied since, aside from the
Northeast Corridor, the value of Amtrak*s assets would have been less than
the claims against them. Amtrak liquidation would also have affected the
railroad retirement and unemployment systems. Appendix II provides
additional information on the financial implications of a potential
liquidation. Stakeholders such as commuter railroads, states, and freight
railroads could also be significantly affected by a change in policy.
Commuter railroads in the Northeast could be especially affected since
Amtrak*s Northeast Corridor is a vital piece of infrastructure that
handles about 1,200 Amtrak, commuter, and freight trains a day. Since
commuter railroads are by far the heaviest users of the Northeast Corridor
and depend on this corridor to bring, on average, about 1.2 million
passengers a day into major cities, it will be important to deal with this
corridor carefully. As previously mentioned, state concerns largely focus
on costs to provide intercity passenger rail service as well as access
rights to freight railroad tracks and the cost of this access. How these
issues are handled could materially affect state decisions concerning
whether to support
intercity passenger rail. Finally, freight railroads are concerned about
the degree to which intercity passenger rail affects their ability to
serve their customers and earn profits. Increased conventional or high-
speed
passenger rail service could severely affect their operations. While the
various stakeholders may all be able to share a general vision of the
intercity passenger rail system, they may diverge in their priorities.
Policy changes, if not thoroughly thought through, could have unintended
and disagreeable consequences for one or more of these stakeholders.
In summary, Mr. Chairman, intercity passenger rail continues to be at a
crossroads. Maintaining the current approach will likely require
substantial federal operating and capital support* but at much higher
levels than currently provided. It will be important to consider a
systemwide approach for considering how the passenger rail system fits
with other modes of transportation. Alternative approaches to providing
intercity passenger rail service may be available that can provide public
benefits and complement other modes of transportation as an integrated
part of the national transportation network. Such approaches will
Page 17 GAO- 03- 712T Intercity Passenger Rail Policy undoubtedly require
a substantial political and financial commitment over an extended period
of time. When Japan restructured its intercity
passenger rail system in the late 1980s and 1990s, for example, the reform
plan was carried out over a decade and two political administrations. The
framework I have described today is meant to help the Congress as it asks
some fundamental questions about the future of intercity passenger rail:
What does the nation want or need from this mode of transportation? Who
should pay for it? How should it be paid for? And if changes to the
current system are necessary, how can we make those changes while
minimizing unintended consequences and maximizing public benefits? We
stand ready to assist the Congress as it deliberates answers to those
questions.
This concludes my prepared remarks. I would be pleased to answer any
questions you or other Members of the Subcommittee might have.
For further information, please contact JayEtta Z. Hecker at heckerj@ gao.
gov or at (202) 512- 2834. Individuals making key contributions to this
statement include Colin Fallon, Richard Jorgenson, and Steve Martin.
Contacts and
Acknowledgments
Page 18 GAO- 03- 712T Intercity Passenger Rail Policy Intercity passenger
rail has the potential to generate benefits to society (called *public
benefits*) by complementing other more heavily used
modes of transportation in those markets in which rail transport can be
competitive. These benefits include reduced highway and air congestion,
pollution, and energy dependence, and provide an option for travelers to
use passenger rail systems in the future. 1 One potential public benefit
of intercity passenger rail service is the
reduced highway congestion that will result if some people travel by train
rather than on highways. Where congestion exists, intercity passenger rail
would not have to capture a large share of the travelers who would
otherwise use other modes of transportation in order to generate a
substantial public benefit from reduced highway congestion. Roadway
congestion often results when vehicles access a roadway that is already at
or near capacity. The additional users have a disproportionate,
detrimental
effect on the flow of traffic. As a result, diverting a small group of
highway users to rail transport could reduce congestion and have a
substantial public benefit.
The specific markets where intercity passenger rail has the most potential
to generate public benefits by reducing highway congestion are regions
where the highway systems are consistently operating beyond capacity and
are characterized by slow moving traffic. (See fig. 3.) Therefore, rail
service likely to alleviate the most highway congestion would parallel
congested corridors that link cities with significant intercity
transportation demand and urban congestion, such as in the Northeast.
However, realizing these benefits might be difficult because the prices
people pay to drive do not reflect the true costs of driving (and some
costs due to
pollution and congestion are borne by others) and Americans have a strong
attachment to cars as their principal means of transportation. 1 When
considering increasing transportation capacity, federal, state, and other
decisionmakers will need to understand the extent to which travelers are
using existing capacity and are likely to use increased capacity in
various modes. If new capacity is underutilized (e. g., because it is not
cost competitive or convenient), then the expected benefit will not be
fully realized. Appendix I: Potential Public Benefits from Intercity
Passenger Rail
Intercity Passenger Rail May Help Alleviate Highway and Air Congestion
Page 19 GAO- 03- 712T Intercity Passenger Rail Policy Figure 3: Interstate
and Expressway Highways That Have Exceeded Their Capacity, 1998
Intercity passenger rail could also potentially ease air travel
congestion. This is contingent on intercity passenger rail being able to
capture enough market share to reduce the number of flights between cities
through frequent, competitively priced, and attractive service. For rail
transport to capture the market share necessary to reduce air travel
congestion, the distance between potential intercity passenger rail cities
must be short enough to make rail travel times competitive with air
travel. Amtrak*s market share decreases rapidly as travel time and
distance increases. For example, as we reported last year, Amtrak*s market
share compared with air service between New York City and Philadelphia,
Pennsylvania, and Philadelphia and Washington, D. C.* relatively short-
distance markets* was over 80 percent. But, for longer distance markets,
such as New York City to Chicago, Illinois, and Chicago to Washington, D.
C., Amtrak*s
Page 20 GAO- 03- 712T Intercity Passenger Rail Policy market share
compared with air service was less than 10 percent. 2 Studies suggest that
as the speed of intercity passenger rail increases, the potential benefits
attributable to reductions in airport and highway delays increase, as does
the potential distance over which passenger rail is able to compete
with air transport. The potential for intercity passenger rail to reduce
air congestion is also greater where there is little, or no, room for
additional runways and where there is limited competition between airlines
resulting in relatively high air fares.
Intercity passenger rail may also generate potential public benefits by
reducing vehicle emissions, lowering pollution, and indirectly mitigating
health and environmental costs. This could happen if intercity passenger
rail can provide the incentive to shift people out of their cars and onto
rail. However, the magnitude of this benefit depends to a large extent on
the type of technology used to power rail locomotives. Conventional
electric rail systems (taking into account the emissions of electricity
generating power plants) emit less carbon monoxide, hydrocarbons, and
nitrous oxides per passenger- mile from burning coal, natural gas, or fuel
oil than conventional diesel- powered rail. 3 In addition, within the
range that most
vehicles are driven, automobile carbon monoxide and hydrocarbons emissions
increase as vehicle speed decreases. Therefore, to the extent intercity
passenger rail can reduce roadway congestion, these forms of pollution
could be reduced by having fewer vehicles on the highway( s).
The ability of intercity passenger rail to generate these benefits depends
on both the level of pollution and the likelihood that travelers will
choose rail service over other modes of transportation. Markets where
intercity passenger rail service could be competitive with other modes in
terms of price, travel time, and quality of service offer the greatest
opportunity to reduce pollution. In general, intercity passenger rail can
be competitive with other transportation modes in short- distance markets
(such as New York City to Philadelphia). However, intercity passenger rail
is less competitive in longer distance markets. The extent of emissions
reduction could also vary and be small. For example, a 2002 study by the
California
2 See GAO- 02- 522T. 3 For particulate matter, coal- generated electric
rail produces more emissions than diesel, but natural gas- and fuel- oil-
generated electric rail produces less than diesel. Wayson, R. L. and W.
Bowlby, *Noise and Air Pollution of High- Speed Rail Systems,* Journal of
Transportation Engineering, Vol. 115, No. 1, January 1989. Intercity
Passenger Rail
May Also Reduce Vehicle Emissions and Provide Other Public Benefits
Page 21 GAO- 03- 712T Intercity Passenger Rail Policy Department of
Transportation of improvements to three state- supported Amtrak intercity
rail routes in California found that hydrocarbon and
carbon dioxide emissions would decrease with the improvements. 4 But,
certain nitrous oxide and particulate compounds emitted from diesel- fuel
burning locomotives would increase. Similarly, our 1995 analysis of the
Los Angles to San Diego corridor projected that eliminating rail service
between these cities would result in a net increase* albeit small* in
vehicle emissions from additional automobiles, intercity buses, and
aircraft. 5 Intercity passenger rail may also generate public benefits by
reducing the
nation*s dependence on gasoline and fossil fuels. This result would only
be achieved if intercity passenger rail would require less fuel than the
amount of fuel used by other modes of transportation that travelers might
use if intercity passenger rail were not available. The extent of the
benefits would depend on how many fewer trips were taken on other, less
fuelefficient modes of transportation and on the technology of the
locomotive( s) used. Again, the 2002 California Department of
Transportation study of improvements to the three Amtrak intercity routes
in California (see above) estimated, that in 2011, making the improvements
and expanding service could save 13 million gallons of gasoline. 6
Similarly, in October 2002, the Federal Railroad and Federal Highway
Administrations made a preliminary finding that making various
improvements that would extend high- speed rail service (up to 110 miles
per hour) from Washington, D. C., to Charlotte, North Carolina, could save
between 6.6 million and 10.4 million gallons of gasoline per year. 7
Finally, intercity passenger rail may generate public benefits from
providing an option demand* that is, by being an alternative to other 4
California Department of Transportation, California State Rail Plan: 2001-
02 to 2010- 11 (Jan. 2002). The three routes evaluated were the Pacific
Surfliner route between San Diego and San Luis Obispo, the San Joaquin
route between Oakland/ Sacramento and Bakersfield, and the Capitol
Corridor route between San Jose and Auburn. 5 U. S. General Accounting
Office, Amtrak: Issues for Reauthorization, GAO/ T- RCED- 95- 132
(Washington, D. C.: Mar. 13, 1995). Carbon monoxide and hydrocarbons
emissions were predicted to increase, while nitrous oxides and sulfur
dioxide emissions were predicted to decrease.
6 California Department of Transportation, California State Rail Plan:
2001- 02 to 2010- 11 (Jan. 2002). 7 Federal Railroad Administration and
Federal Highway Administration, Record of Decision For The Tier I
Southeast High Speed Rail Project (Oct. 2002).
Page 22 GAO- 03- 712T Intercity Passenger Rail Policy transportation modes
(such as air and automobiles) that society is willing to pay for just to
retain the option to use it in the future. For some people, having the
option of rail service available in case their circumstances
change or they have concerns about using another transportation mode has
value, even if they do not plan to currently use rail service. Similarly,
intercity passenger rail may have nonuse, or existence, value. Under this
concept, people receive value from intercity passenger rail from knowing
that it exists, even if they do not plan to use it. Quantifying these
benefits is difficult and has been known to be controversial.
Page 23 GAO- 03- 712T Intercity Passenger Rail Policy In September 2002,
we reported on some of the potential financial issues if Amtrak were to
undergo liquidation. 1 These issues are discussed in this
appendix. If Amtrak had been liquidated on December 31, 2001, secured and
unsecured creditors, including the federal government and Amtrak*s
employees, and stockholders would have had about $44 billion in potential
claims and ownership interests against Amtrak*s estate. (See fig. 4.) The
federal government would have been by far the largest secured creditor
(for property and equipment) and would have had the largest ownership
interest (in preferred stock)* accounting for about 80 percent (about
$35.7 billion) of the total amount.
1 See GAO- 02- 871. Our report did not discuss the likelihood or
advisability of liquidating Amtrak. Appendix II: Potential Financial
Issues If
Amtrak Were to Undergo Liquidation Creditor Claims and Ownership Interests
Page 24 GAO- 03- 712T Intercity Passenger Rail Policy Figure 4: Creditor
Claims and Stockholder Interests in the Event That Amtrak Had Been
Liquidated on December 31, 2001
Note: Stockholder interests are different from creditor claims.
Stockholders receive funds only after secured, unsecured, and
administrative expenses related to liquidating the estate are satisfied.
The amount of the stockholder interest consists of the total of the
recorded value of the stock (common and preferred) plus cumulative unpaid
preferred stock dividends.
The federal claims largely arise from two promissory notes issued by
Amtrak and held by the federal government. The first note represents a
secured interest on Amtrak*s real property (primarily Amtrak*s Northeast
Corridor) and matures in about 970 years. However, in June 2001, in
conjunction with Amtrak*s mortgage of a portion of Pennsylvania Station in
New York City, the federal government strengthened its position in
relation to this note and made the principal and interest due and payable
if Amtrak files for bankruptcy and is liquidated or if Amtrak defaults
under
Page 25 GAO- 03- 712T Intercity Passenger Rail Policy the mortgage. 2
Based on information provided by the Federal Railroad Administration, we
calculated that had Amtrak been liquidated on
December 31, 2001, the federal government would have been due about $14.2
billion in principal and interest on this note. The second note is secured
by a lien on Amtrak*s passenger cars and locomotives and matures on
November 1, 2082. This note has successive 99- year renewal terms. If
Amtrak had been liquidated on December 31, 2001, this note would have been
accelerated, and about $4.4 billion in principal and interest would have
become immediately due and payable. The majority of non- U. S. government
lenders* secured property claims would have been associated with passenger
cars and equipment ($ 1.5 billion) and locomotives ($ 941 million).
As of December 31, 2001, Amtrak*s data showed that unsecured liabilities
totaled about $4.4 billion. About 70 percent ($ 3.2 billion) would have
been for labor protection payments to terminated Amtrak employees if
Amtrak
had been liquidated. 3 Materials and supplies provided by vendors ($ 304
million) and unpaid employees* wages and vacation and sick pay ($ 278
million) were among the largest remaining obligations.
The potential claims for labor protection on December 31, 2001, were about
$2.9 billion less than we reported in 1998. 4 The difference stems from
changes made by the Amtrak Reform and Accountability Act of 1997. This act
eliminated the statutory right to labor protection, made labor protection
subject to collective bargaining, and required Amtrak to negotiate new
labor protection arrangements with its employees. As a result of these
changes and an October 1999 arbitration decision, labor protection was
capped at 5 years (compared with 6 years under the statutory provisions),
made employees with less than 2 years service ineligible for labor
protection payments, and based payments on a sliding scale that provided
for less payout for each year worked than did the previous system.
According to Amtrak, this accounted for about $1.8 2 As we reported last
year, in the event of liquidation, the trustee appointed to handle
Amtrak*s estate could file a plan that could cure all defaults and
reinstate the original maturity of the note, and the bankruptcy court
would then consider whether to approve such a plan. Our work examined the
potential claims against Amtrak in the event of bankruptcy, or other
default, leading to liquidation, in which event the acceleration clause
would take effect. 3 Labor protection payments stem from collective
bargaining agreements.
4 See GAO/ RCED- 98- 60.
Page 26 GAO- 03- 712T Intercity Passenger Rail Policy billion of the cost
difference. Amtrak attributed an additional $950 million to management
employees no longer being eligible for labor protection
payments since they were not represented by a formal labor organization
and the Amtrak Reform and Accountability Act of 1997 provided for no
process to provide substitute protection for these employees. The U. S.
government holds all of Amtrak*s preferred stock, and four
corporations hold Amtrak*s common stock. 5 The preferred and common stock
had recorded values of about $10.9 billion and $94 million, respectively,
as of December 31, 2001. In addition, preferred stock holders were
entitled to an annual cumulative dividend of at least 6 percent until
1997, when Amtrak*s enabling statute was amended to eliminate the
requirement that preferred stock holders were entitled to dividends. No
preferred stock dividends were ever declared or paid. However, Amtrak had
calculated cumulative preferred stock dividends from 1981 to 1997 to be
about $6.2 billion. In a liquidation, the amount of the preferred stock
holders* interest would include all cumulative unpaid dividends. Thus, the
federal government, as the sole preferred stock holder, would have had
about $17 billion in ownership interest had Amtrak been liquidated on
December 31, 2001.
It is not likely that all secured or unsecured creditor claims or
ownership interests would have been satisfied because, aside from the
Northeast Corridor, Amtrak*s assets available to satisfy these claims and
interests (such as equipment and materials and supplies) are old, have
little value, or appear unlikely to have a value equal to the claims
against them. In addition, the value of Amtrak*s most valuable asset, the
Northeast Corridor, has not been tested. While the corridor has
substantial value, it is
5 The federal government received preferred stock in the value of federal
operating payments and most federal capital payments that it made to
Amtrak between October 1981 and December 2, 1997. When Amtrak was formed,
some railroads that provided or
contributed passenger equipment, crews, and other services received Amtrak
common stock or a federal income tax credit. This common stock is now held
by three railroads and a holding company. The Amtrak Reform and
Accountability Act of 1997 required Amtrak to redeem the common stock at
fair market value by October 1, 2002.
Page 27 GAO- 03- 712T Intercity Passenger Rail Policy subject to easements
and has, according to Amtrak, at least $3.8 billion in deferred
maintenance. 6 Liquidation of Amtrak would also affect the railroad
retirement and
unemployment systems. Amtrak is a participant in both systems. Since the
retirement system is on a modified pay- as- you- go basis, the financial
health of the system largely depends on the size of the workforce, the
taxes derived from this workforce, and the amount of benefits paid to
retired and disabled individuals and their beneficiaries. Payroll taxes
levied on employers and employees are the primary sources of the
retirement system*s income. In 2001, Amtrak paid about $428 million in
payroll taxes into the railroad retirement account. A loss of this
contribution would have a significant financial impact on the system.
The Railroad Retirement Board (Board) estimated that, if Amtrak had been
liquidated on December 31, 2001, and no action had been taken to increase
tier II payroll taxes beyond that already planned or to reduce benefit
levels, the railroad retirement account would have started to decline in
2006 and would have been depleted by 2024. If tier II taxes had been
increased immediately (that is, in 2002) to offset the expected deficit in
2024, the Board estimated that tier II tax rates would have had to
increase about 8 percent in 2002 (to 22. 1 percent), decrease slightly in
2003, and then level off until 2018. After 2018, the tier II rate would
have increased about 7 percent again (to 24. 6 percent). In all cases, the
tier II tax rate would have been 1.64 percentage points higher than it
would have been if Amtrak had not undergone liquidation. Similarly, Amtrak
liquidation would have affected tier I tax revenues and benefit payments
as the result of Amtrak employees* retiring and beginning to collect
benefit payments or Amtrak employees no longer being entitled to tier I
benefits because they were no longer earning tier I service credits. 7 6
As we reported in 2002, we have concluded that the United States would not
be legally
liable for either secured or unsecured creditors claims in the event of an
Amtrak liquidation. This conclusion is primarily based on the fact that
(1) the federal government is not a party to contracts between Amtrak and
its creditors, and (2) Amtrak is not a
department, agency, or instrumentality of the U. S. government, and there
is no explicit or implicit commitment by the United States government to
assume Amtrak*s obligations. 7 See GAO- 02- 871 for a more detailed
discussion of potential financial impacts of Amtrak liquidation on the
railroad retirement system. Financial Effects on
the Railroad Retirement and Unemployment Systems
Page 28 GAO- 03- 712T Intercity Passenger Rail Policy
Similarly, participants in the railroad unemployment system would have
also been affected by an Amtrak liquidation. However, the financial
effects would have been immediate, but short- term. The Board estimated
that if Amtrak had been liquidated on December 31, 2001, separated Amtrak
employees would have received a total of $344 million in benefit payments
during fiscal years 2002 and 2003. The cash reserves of the unemployment
system would have been exhausted in 2002, and a total of about $340
million would have been borrowed from the railroad retirement account, as
permitted by statute, from 2002 through 2004 to make these benefit
payments. The peak loan balance would have been $349 million, including
interest, with all loans repaid in 2005. To pay for these benefits and
repay the loans, the Board would have required that other railroads and
participants in the unemployment system increase their payroll tax
contributions. The Board estimated that, between 2002 and 2004, the
average tax rate would have increased from about 4 percent to 12.5
percent, before decreasing to 9.6 percent in 2005. 8 8 The railroad
unemployment system is financed exclusively by contributions from railroad
employers, on the basis of taxable earnings of their employees. For 2002,
the tax rates ranged from 3.15 percent (including a 2.5 percent surcharge)
to a maximum of 12 percent on employee monthly earnings of up to $1, 100.
If the balance of the system*s account is less
than zero, the maximum rate is 12.5 percent. In performing this analysis,
the Board assumed that all terminated Amtrak employees had exhausted their
unemployment benefits and had not received labor protection benefits. The
Federal Railroad Administration said unemployment insurance benefits
received reduce potential labor protection claims by the same amount.
Page 29 GAO- 03- 712T Intercity Passenger Rail Policy Major Management
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and a Framework for Future
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Regulatory Programs: Balancing Federal and State Responsibilities for
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Combating Terrorism: Key Aspects of a National Strategy to Enhance State
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Budget Issues: Long- Term Fiscal Challenges. GAO- 02- 467T. Washington, D.
C.: February 27, 2002.
Commercial Aviation: A Framework for Considering Federal Financial
Assistance. GAO- 01- 1163T. Washington, D. C.: September 20, 2001.
Mass Transit: Many Management Successes at WMATA, but Capital Planning
Could be Enhanced. GAO- 01- 744. Washington, D. C.: July 3, 2001.
Executive Guide: Leading Practices in Capital Decision- Making. GAO/ AIMD-
99- 32. Washington, D. C.: December 1998.
Federal Budget: Choosing Public Investment Programs. GAO/ AIMD- 93- 25.
Washington, D. C.: July 23, 1993.
Guidelines for Rescuing Large Failing Firms and Municipalities.
GAO/ GGD- 84- 34. Washington, D. C.: March 29, 1984.
Intercity Passenger Rail: Potential Financial Issues in the Event That
Amtrak Undergoes Liquidation. GAO- 02- 871. Washington, D. C.: September
20, 2002.
Financial Management: Amtrak*s Route Profitability Schedules Need
Improvement. GAO- 02- 912R. Washington, D. C.: July 15, 2002. Appendix
III: Selected GAO Products
Developing National Strategies
Amtrak
Page 30 GAO- 03- 712T Intercity Passenger Rail Policy Intercity Passenger
Rail: Congress Faces Critical Decisions in Developing a National Policy.
GAO- 02- 522T. Washington, D. C.: April 11,
2002.
Intercity Passenger Rail: The Congress Faces Critical Decisions About the
Role of and Funding for Intercity Passenger Rail Systems. GAO- 01- 820T.
Washington, D. C.: July 25, 2001.
Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty
Controlling Its Costs and Meeting Capital Needs. GAO/ RCED- 00- 138.
Washington, D. C.: May 31, 2000.
Intercity Passenger Rail: Issues Associated With a Possible Amtrak
Liquidation. GAO/ RCED- 98- 60. Washington, D. C.: March 2, 1998.
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