    Amtrak Management: Systemic Problems Require Actions to Improve
    Efficiency, Effectiveness, and Accountability (04-OCT-05,
    GAO-06-145).

    Amtrak has struggled since its inception to earn sufficient
    revenues and operate efficiently. In June 2002, Amtrak's new
    president began major efforts to improve efficiency. However, the
    financial condition of the company remains precarious, requiring
    a federal subsidy of more than $1 billion annually. Capital
    backlogs are now about $6 billion, with over 60 percent being
    attributable to its mainstay Northeast Corridor service. GAO
    reviewed Amtrak's (1) strategic planning, (2) financial reporting
    and financial management practices, (3) cost containment
    strategies, (4) acquisition management, and (5) accountability
    and oversight.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-145
        ACCNO:   A39018
      TITLE:     Amtrak Management: Systemic Problems Require Actions to
    Improve Efficiency, Effectiveness, and Accountability
         DATE:   10/04/2005
      SUBJECT:   Accountability
    	     Cost control
    	     Financial management
    	     Financial management systems
    	     Internal controls
    	     Performance measures
    	     Procurement planning
    	     Procurement policy
    	     Procurement practices
    	     Railroad industry
    	     Strategic planning
    	     Systems analysis
    	     Performance plans
    	     Transparency
    	     Business planning
    	     Financial reporting

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    GAO-06-145

    United States Government Accountability Office

      GAO	Report to the Chairman, Committee on Transportation and Infrastructure,
                                House of Representatives

    October 2005

    AMTRAK MANAGEMENT

      Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and
                                     Accountability

                                           a

    GAO-06-145

    [IMG]

    October 2005

    AMTRAK MANAGEMENT

    Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and
    Accountability

      What GAO Found

    Amtrak's basic business systems need to be strengthened to help achieve
    financial stability and meet future operating challenges. Recently,
    Amtrak's management has taken positive steps to instill some discipline
    and control over operations. However, fundamental improvements beyond
    these efforts are needed to better measure and monitor performance,
    develop and maintain financial controls, control costs, acquire goods and
    services, and be held accountable for results. Several key themes emerged
    across all five areas GAO reviewed.

    o  	Amtrak lacks a meaningful strategic plan that provides a clear mission
    and measurable corporatewide goals, strategies, and outcomes to guide the
    organization. Also absent is a comprehensive strategic planning process,
    characteristic of leading organizations GAO has studied. Also, while
    Amtrak has recently taken steps to improve its acquisition function, GAO
    found that some major departments independently made large purchases and
    did not always adhere to Amtrak's procurement policies and procedures.
    Amtrak lacks adequate data on what it spends on goods and services,
    preventing it from identifying opportunities to leverage buying power and
    potentially reduce costs. Similarly, while Amtrak has recently reduced
    costs, revenues are declining faster than costs, leading to operating
    losses exceeding $1 billion annually. These losses are projected to grow
    by 40 percent within 4 years; no effective corporatewide cost containment
    strategy exists to address them.

    o  	Financial reporting and financial management practices are weak in
    several areas. Financial information and cost data for key operations,
    while improved, remain limited and often unreliable. For example, Amtrak's
    on-board food and beverage service lost over $160 million for fiscal years
    2002 and 2003. Amtrak's poor management and enforcement of its food and
    beverage contract (an outside contractor is responsible for procuring and
    distributing food and beverages for most of Amtrak's trains) may have
    contributed to this loss. Regarding financial reporting, GAO found that
    Amtrak had omitted or misallocated key expenses in several areas,
    substantially understating operating expenses in reports that managers use
    to assess performance. Similarly, Amtrak has not developed sufficient cost
    information to target potential areas to cut costs, accurately measure
    performance, and demonstrate efficiency.

    o  	Developing transparency, accountability, and oversight is critical for
    achieving operational success. Since Amtrak is neither a publicly traded
    private corporation nor a public entity, it is not subject to many of the
    mechanisms that provide accountability for results. Mechanisms that do
    apply, such as oversight by the board of directors and the Federal
    Railroad Administration, are limited or have not been implemented
    effectively. Current congressional review of Amtrak offers an opportunity
    for addressing these transparency and accountability issues.

    United States Government Accountability Office

    Contents

                                        Letter 1

      Executive Summary 2

    Purpose 2 Background 3 Results in Brief 4 Principal Findings 7 Matters for
    Congressional Consideration 18 Recommendations for Executive Action 18
    Agency Comments and GAO Evaluation 19

                              Amtrak's Financial Struggles Have Led to
    Chapter 1 Introduction Changes in Corporate Direction and            25 26
                              Organization
                              Most Recent Changes Have Focused on Improved
                              Management,
                                 Financial Stability, and Infrastructure       31
                                                 Renewal
                                       Amtrak's Operations, Governance, and
                                                 Oversight Are Covered by a
                                         Variety of Requirements               35
                                   Objectives, Scope, and Methodology          38

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    43 Leading Organizations Manage by Focusing on Missions and Goals Spelled
    Out in a Strategic Plan 44 Amtrak Lacks a Strategic Plan That Includes Key
    Elements Necessary to Comprehensively Manage the Corporation 46 Amtrak's
    Planning Process Could Benefit from Increased Use of a Performance-Based
    Framework to Achieve Its Goals 53 Amtrak's Proposed Strategic Reform
    Initiatives Face Significant

    Implementation Challenges 59 Conclusions 61 Recommendations for Executive
    Action 61

    Chapter 3 63 Financial Management Financial Reports Lacked Certain
    Relevant Information and

    Contained Significant Errors 63 Practices Could Better Internal Control
    Weaknesses Existed in the Two Areas GAO

    Reviewed 69Support Amtrak's Amtrak Has Made Progress in Improving
    Financial ManagementDecision Making Practices, but More Work Remains 80

                                        Contents

                 Conclusions 83 Recommendations for Executive Action 84

    Chapter 4
    Despite Increasing
    Operating Losses and
    Federal Subsidies,
    Amtrak Has Not
    Developed a
    Comprehensive Cost
    Control Strategy

    87

    Amtrak's Annual Operating Loss Has Grown to over $1 Billion and Is
    Projected to Increase to over $1.4 Billion, While Federal Subsidies Have
    Increased 88

    Amtrak Has Not Developed a Comprehensive Cost Control Strategy 93 Amtrak's
    Management Tools Do Not Constitute a Comprehensive Cost Control Strategy
    97

    Lack of Cost Data Limits Amtrak's Ability to Identify Areas to Efficiently
    Reduce Costs or to Measure the Results of Cost Control Actions 98

    Amtrak Should Continue to Use Common Rail Industry Practices in

    Focusing on Its Cost Control Efforts 101 Conclusions 102 Recommendations
    for Executive Action 103

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    104 Effective Acquisition Requires Key Organizational Elements 104
    Elevating Procurement Function in Organization Structure Has Not

    Yet Resulted in a More Strategic Approach to Acquisition 105 Communication
    and Enforcement of Policies and Procedures Have Been Limited 110 Amtrak's
    Knowledge and Information System Does Not Support a

    More Strategic Approach to Acquisitions 123 Conclusions 126
    Recommendations for Executive Action 126

    Chapter 6
    Amtrak Does Not Have
    Adequate Oversight of
    or Accountability for
    Its Performance and
    Results

    129 Public-Private Nature of Amtrak Significantly Influences Oversight and
    Accountability Efforts 130 Amtrak's Board of Directors Has Not Exercised
    Sufficient Oversight or Held Management Accountable for Results 133
    Oversight of Amtrak's Performance by Some Key Stakeholders Has Been
    Limited 138 Clarifying Amtrak's Role-and Its Key Overseers-Is Critical to
    Establishing Accountability 140

    Conclusions 143

    Matters for Congressional Consideration 144

                                        Contents

                        Recommendations for Executive Action 144

    Appendixes

    Appendix I:	Methodology for Selecting Procurement Contract Files for
    Review 146

    Appendix II:	Comments from the National Railroad Passenger Corporation 149
    GAO Comments 154

    Appendix III: GAO Contact and Staff Acknowledgments 157

    Tables	Table 1: Table 2:

    Table 3: Table 4:

    Table 5:

    Table 6:

    Table 7:

    Table 8:

    Table 9:

    Amtrak's Five Management Tools
    Summary of Effects of Understatements and Potentially
    Lost Revenue for the 3-year Period Ending September 30,
    2004
    Examples of Key SERP Terms That Were Not Defined
    Specific Recommendations-Financial Reporting and
    Financial Management Practices
    Assumptions in Amtrak's Strategic Reform Initiative for
    Fiscal Year 2011 Operating Savings
    Amtrak's Real Total Revenues, Operating Expenses, Total
    Expenses, and Operating Ratios, Fiscal Years 2002 to
    2004
    Procurement Presentations to Major Amtrak Departments
    in 2005
    Number of Contracts GAOReviewed, with Expenditures in
    Fiscal Years 2002 and 2003, That Were Competitively and
    Noncompetitively Awarded
    Extent to Which Noncompetitive Contract Awards GAO
    Reviewed Included Adequate Justifications

                                           33

                                         72 74

    85

    90

    91 111

    113 114 115 127

    Table 10: Contracts with Numerous Extensions Resulted in Significant
    Dollar Increases

    Table 11: Specific Recommendations-Acquisition Management

                                    Key Elements of a Strategic Plan Amtrak's
    Figures Figure 1: Figure 2:    Constant Dollar Operating Losses and      8
                                                     Federal
                                     Operating Subsidy, Fiscal Years 2002 to   13
                                                      2009
                         Figure 3:  Federal Subsidies to Amtrak, Fiscal Years  29
                                                  1971 to 2005
                         Figure 4: Intercity Passenger Rail Market Share, 1951 30
                                                     to 2004
                                    Amtrak Organization Chart, as of October   31
                         Figure 5:                    2004

    Contents

    Figure 6: Projected Funding Needs in Amtrak's June 2004 Strategic

    Plan 34 Figure 7: Key Elements of a Strategic Plan 45 Figure 8: Examples
    of Missions and Goals from Other Railroads 49 Figure 9: Snapshot of the
    Engineering Department's Dashboard

    System 57 Figure 10: Amtrak's Vision and Strategic Reform Initiatives 59
    Figure 11: Examples of Relevant Information Not Included in

    Amtrak's Monthly Performance Reports 65 Figure 12: Amtrak's Constant
    Dollar Operating Losses and Federal Operating Subsidy, Fiscal Years 2002
    to 2009 89 Figure 13: Organizational Elements Critical to Effective
    Acquisition 105 Figure 14: Components of a Framework for Evaluating
    Federal Investments 143

    Abbreviations

    AAMPS Amtrak Accounting, Material and Purchasing System
    Amtrak OIG Amtrak Office of Inspector General
    DOT Department of Transportation
    FMFIA Federal Managers Financial Integrity Act of 1982
    FRA Federal Railroad Administration
    GAGAS generally accepted government auditing standards
    GPRA Government Performance and Results Act of 1993
    IPA independent public accountant
    MBTA Massachusetts Bay Transportation Authority
    RPI route performance information
    SBU strategic business unit
    SEC Securities and Exchange Commission
    SERP Supplemental Executive Retirement Plan
    STB Surface Transportation Board

    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
    work may contain copyrighted images or other material, permission from the
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    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    October 4, 2005

    The Honorable Don Young Chairman, Committee on Transportation and
    Infrastructure House of Representatives

    Dear Mr. Chairman:

    As requested, this report discusses the National Railroad Passenger
    Corporation's (Amtrak) management and performance. This includes
    information on Amtrak's strategic planning and a performance-based
    framework, financial reporting and financial management practices, cost
    containment strategies, acquisition management, and accountability and
    oversight. We make recommendations in each of these areas as well
    suggestions to Congress about intercity passenger rail policy.

    As agreed with your office, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the report date. We will then send copies to other appropriate
    congressional committees, the President of Amtrak, and the Secretary of
    Transportation. We will also make copies available to others upon request.
    In addition, the report will be available at no charge on the GAO Web site
    at http://www.gao.gov.

    If you or your staff have any questions concerning this report, please
    contact me at (202) 512-2834 or heckerj@gao.gov. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. GAO staff who made major contributions to this
    report are listed in appendix III.

    Sincerely yours,

    JayEtta Z. Hecker Director, Physical Infrastructure Issues

    Executive Summary

    Purpose	In recent years, it has become clear that intercity passenger rail
    service has come to a critical juncture regarding its future in the United
    States. The National Railroad Passenger Corporation (Amtrak), the current
    provider of intercity passenger rail service, continues to rely heavily on
    federal subsidies, now totaling more than $1 billion per year. Since it
    began operating in 1971, Amtrak has received federal subsidies totaling
    about $29 billion. Given the precarious financial condition of the
    corporation, there is a wide diversity of proposals for what might be done
    to provide more self-sufficient and efficient intercity passenger rail
    service, ranging from limiting Amtrak's role and introducing competing
    rail service to keeping Amtrak intact and providing increased funding to
    improve its equipment and infrastructure.

    To help inform congressional deliberations on these issues, the Chairman,
    House Committee on Transportation and Infrastructure, asked GAO to examine
    Amtrak's management and performance. GAO's review focused specifically on
    aspects of Amtrak's management and financial operations. The five areas
    that GAO addressed, which collectively provide insight into the
    performance of Amtrak, include (1) strategic planning and a
    performance-based framework, (2) financial reporting and financial
    management practices, (3) cost containment strategies, (4) acquisition
    management, and (5) accountability and oversight.

    To address these issues, GAO reviewed documents on Amtrak's strategic
    planning process and preparation of goals and objectives, reviewed control
    activities related to Amtrak's financial reporting and the design of
    internal control policies over certain expenses, reviewed financial
    reports and obtained data on Amtrak's operating costs, and reviewed
    Amtrak's procurement policies and procedures. GAO also reviewed
    legislation relevant to the management and governance of Amtrak, including
    Amtrak's articles of incorporation and bylaws. GAO reviewed recent grant
    agreements between Amtrak and the Federal Railroad Administration,
    observed internal control practices over certain operating expenses, and
    evaluated selected contracts for the acquisition of various services for
    compliance with procurement policies and procedures. Finally, GAO
    interviewed Amtrak officials regarding the five areas addressed in this
    report, discussed management and accountability issues with members of
    Amtrak's board of directors, and interviewed officials at selected freight
    and commuter railroads. A more complete discussion of GAO's objectives,
    scope, and methodology is presented in chapter 1 of this report.

                                   Executive Summary

    Background	Amtrak, although federally established and unable to operate
    without substantial federal subsidies to remain solvent, is not a
    government agency, but rather a private, for-profit corporation. It
    currently operates a 22,000-mile network providing service to 46 states
    and the District of Columbia, mainly using track owned by freight
    railroads. Amtrak also owns about 650 miles of track, primarily on the
    Northeast Corridor between Boston, Massachusetts, and Washington, D.C.
    Amtrak served about 25 million passengers in fiscal year 2004 and about
    two-thirds of Amtrak's ridership takes trains on the Northeast Corridor.
    Its financial condition remains precarious, and, according to Amtrak's
    management, the corporation will require billions of dollars to improve
    infrastructure for operation of the nationwide intercity passenger rail
    service.

    Amtrak's financial struggles have led to numerous changes in corporate
    direction and organizational structure. Amtrak has also been influenced by
    requirements in the Amtrak Reform and Accountability Act of 1997 that it
    become operationally self-sufficient by 2002-a goal Amtrak did not meet.
    In 2002, under the direction of a new president, Amtrak established a more
    centralized, functional organization; adopted a new approach to
    management; and stated its intent to focus on financial stability and
    achieving a "state of good repair."1 As a centerpiece for these changes,
    Amtrak's president adopted a multipronged management approach that is
    based on the following five tools-all of which were designed to instill a
    sense of discipline to company operations:

    o  department goals that are to be a basis for Amtrak's budget;

    o 	defined organization charts that identify a clear chain of command and
    are to be used to control labor costs;

    o 	a capital program of specific projects and production targets needed to
    stabilize the railroad;

    o 	a zero-based operating budget with a focus on maintaining or reducing
    the budget; and

    1A "state of good repair" is the outcome expected from the capital
    investment needed to restore Amtrak's right-of-way (track, signals, and
    auxiliary structures) to a condition that requires only routine
    maintenance.

                                   Executive Summary

    o 	monthly performance reports, which are to be Amtrak's primary tool for
    reporting on company performance results, internally and externally.

    In April 2005, as GAO's report was being prepared, Amtrak's management and
    its board of directors released a proposed set of strategic reform
    initiatives-containing, among other things, a new vision statement-that
    would substantially change how the corporation operates. Among other
    things, this proposal would give states a larger role in deciding what
    services to offer and introduces greater potential for competition in
    providing intercity passenger rail service. The future of this proposal is
    largely unknown, and implementation will require both legislative changes
    (such as the federal government either assuming annual debt service
    payments or eliminating Amtrak's debt burden as well as removing Amtrak
    from the railroad retirement system) and extensive changes internally
    within Amtrak.

    Results in Brief	At a time when Amtrak is at a critical crossroads, GAO
    found that the corporation faces major challenges in instituting and
    strengthening its most basic business systems. Fundamental improvements
    are needed in the way Amtrak measures and monitors performance, develops
    and maintains financial controls, controls cost, acquires goods and
    services, and is held accountable for results. Although Amtrak management
    has taken steps to instill discipline and control over its operations, the
    corporation still lacks effective operating practices characteristic of
    well-run organizations, whether public or private. Regardless of the
    future role that the administration and Congress may determine for Amtrak,
    major improvements are needed in the corporation's strategic management
    and cost controls. The following are highlights of the progress made and
    improvements needed in each of the five core areas GAO reviewed:

    o 	Strategic planning and management: Amtrak has improved its management
    approach in recent years through the implementation of such things as
    organization charts and operating budgets and the monitoring of employment
    levels (called headcount). However, it lacks a comprehensive strategic
    planning process and performance-based framework characteristic of leading
    organizations (including government entities and private corporations)
    that GAO has studied in the past. For example, Amtrak lacks a meaningful
    strategic plan that articulates both a comprehensive mission statement and
    corporatewide goals to indicate how Amtrak plans to accomplish its
    mission. Amtrak has developed a capital plan (which it calls a strategic
    plan) that focuses

    Executive Summary

    on the corporatewide goal of achieving a state of good repair, but it
    lacks a strategic plan that includes measurable corporatewide goals,
    strategies, and outcomes to guide the entire organization. In addition,
    without a mission or corporatewide goals, Amtrak cannot ensure that the
    annual department-specific goals developed by Amtrak's various departments
    support or improve overall corporate performance. Although Amtrak's
    management tools provide a framework for developing annual goals and
    budgets, these tools do not provide a long-term, integrated approach for
    managing the corporation and focus on outputs, not outcomes. Amtrak also
    needs a performance-based approach to its strategic planning process-that
    is, developing action plans for improving performance, generating key data
    to monitor performance, and using incentives to ensure responsibility and
    accountability-to achieve goals. As part of its newly proposed reform
    initiative, Amtrak plans to release a strategic plan in the fall of 2005,
    which will include a mission and goals for the company. This is a step in
    the right direction, but challenges, such as the need for congressional
    action and the ability to keep employees focused on long-term change,
    exist to fully implementing these initiatives.

    o 	Financial reporting and financial management practices: In recent
    years, Amtrak's management has placed increased emphasis on providing
    reliable financial information, and progress has been made. For example,
    Amtrak's independent public accountant (IPA) previously reported multiple
    areas of significant internal control weaknesses as part of an annual
    audit of Amtrak's financial statements. For fiscal year 2004, the IPA
    reported that much progress had been made. In general, however, Amtrak has
    not implemented "preventive controls" necessary to better ensure the
    production of relevant and reliable financial information for management
    and stakeholders. GAO found that improvements are needed in the usefulness
    of information provided to management and stakeholders, in the design and
    implementation of internal control practices over certain areas of
    expense, and in Amtrak's efforts to strengthen financial management
    practices. For example, one key report used by Amtrak's management on a
    monthly basis omitted depreciation from each train route and business
    line, which totaled $606 million in 2003 and $479 million in 2002; this
    omission substantially understated reported expenses, which, in turn,
    hindered making a meaningful analysis of operating results and an
    assessment of performance. In another instance, as the result of omitting
    certain accrued benefit expenses in allocating such costs, employee
    benefits were understated by more than $100 million, and Amtrak failed to

    Executive Summary

    adequately document more than $500,000 in supplemental retirement benefits
    awarded to Amtrak executives.

    o 	Cost containment: Amtrak has instituted measures (such as controls over
    headcount levels) designed to contain costs, and its efforts have had some
    success. However, Amtrak's annual operating losses have grown and are now
    over $1 billion annually. These losses are projected to rise about 40
    percent over the next 4 years. Efforts to contain costs have been limited
    for two main reasons. First, the company has not yet developed a
    comprehensive, corporatewide cost containment plan that provides cost
    reduction goals, identifies how those goals are to be achieved, and
    provides for continuous improvement on those goals. Second, Amtrak has not
    fully developed unit cost and asset performance metrics that could help
    reduce costs and demonstrate efficient use of its resources. As part of
    its cost containment strategy, GAO found that Amtrak also needs to
    continue to use and seek to expand its use of cost reduction practices
    prevalent in the railroad industry-such as benchmarking and efficiency
    reviews. This would allow Amtrak to compare its practices with those of
    more efficient railroads and other transportation sector businesses to
    help decrease Amtrak's operating costs. Absent any changes, continued and
    increasing federal subsidization to keep the company solvent will be
    needed.

    o 	Acquisition management: Amtrak's system for acquiring goods and
    services-when compared with the best practices of leading
    organizations-lacks critical elements needed to ensure efficiency,
    cost-effectiveness, and accountability. In recent years, Amtrak has taken
    steps to centralize its purchasing function to provide more authority and
    oversight and Amtrak has recently published a procurement manual, which
    provides detailed guidance on acquisition policies and procedures.
    However, some Amtrak units have made spending decisions and purchased
    services independent of the procurement department and sometimes in
    violation of the company's stated procurement policies and procedures. In
    addition, GAO's review of certain contracts, for the purchase of such
    things as advertising and professional services, showed a high frequency
    of noncompetitive contracts-that is, either sole or single source
    awards-and questionable review and approval practices. Further, review of
    expenditure data and selected transactions revealed the inappropriate use
    of a purchasing tool (designed for small purchases of $5,000 or less) for
    which standards were clearly delineated. Finally, GAO found that Amtrak's
    knowledge and information systems related to procurement are fragmented
    and have

                                   Executive Summary

    limited ability to produce useful spending information. As a result of
    these problems, Amtrak cannot ensure that it is receiving the best value
    when acquiring goods and services.

    o 	Accountability and oversight: Although Amtrak operates in the public
    spotlight, few formal accountability mechanisms apply, and those that do
    have not been effectively used. Amtrak's position as an organization that
    is neither a publicly traded private corporation nor a public entity means
    that it is not subject to many of the mechanisms that provide information
    to stakeholders or hold the company accountable for results. For example,
    Amtrak is not subject to either Securities and Exchange Commission rules,
    regulations, or public disclosure requirements, nor is it accountable to
    shareholders holding common or preferred stock since, by law, shareholders
    have little or no role in selecting members of the board of directors.
    Accountability and oversight mechanisms that do apply, such as oversight
    by the board of directors and the Federal Railroad Administration, are
    limited or have not been implemented effectively.

      Principal Findings

        Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based Approach
        to Better Ensure Cost-effective Results

    Leading organizations GAO has studied-both public and private-use
    strategic planning as a foundation for articulating a comprehensive
    mission and goals for all levels of the organization. This effort involves
    several important elements. (See fig. 1.) The first element is developing
    a comprehensive mission that employees, clients, and other stakeholders
    understand and find compelling. Leading organizations also seek to
    establish clear hierarchies for performance goals and measures for each
    organizational level linking them to overall corporate goals. Without
    clear, hierarchically linked performance measures, managers and staff
    throughout the organization will not have straightforward road maps
    showing how their daily activities can contribute to attaining
    corporatewide goals and mission.

                                   Executive Summary

    Figure 1: Key Elements of a Strategic Plan

    Source: GAO.

    In contrast, Amtrak has not yet developed a meaningful strategic plan that
    includes critical elements characteristic of leading organizations we have
    studied. Specifically:

    o 	No comprehensive mission statement. Amtrak has no comprehensive mission
    statement to provide and communicate a clear focus for the company.
    Amtrak's president believes that the administration and Congress are
    responsible for developing a mission, but federal law already articulates
    the company's purpose-to operate a national rail passenger transportation
    system. As any public or private organization, Amtrak is responsible for
    taking this purpose and establishing a clearly defined mission, a critical
    task that neither the management or the board of directors has yet
    accomplished.

    o 	Limited corporatewide goals. Although Amtrak's management has
    established a goal for the corporation-returning the railroad to a state
    of good repair-this goal is too narrowly focused and does not encompass
    all corporate activities. For example, Amtrak's goal of a state of good
    repair and related capital plan address infrastructure aspects of the
    organization, such as repairing bridges and rails. Although this plan
    guides Amtrak's capital function, Amtrak lacks a strategic plan that
    articulates measurable corporatewide goals, strategies, and outcomes

    Executive Summary

    for other important aspects of its operations, such as human capital, and
    other lines of business, such as commuter rail and reimbursable services.

    o 	Annual goals are not tied to comprehensive mission or corporatewide
    goals. Absent an overall comprehensive mission and corporatewide goals,
    Amtrak's departments develop goals based on their activities and the
    priorities of Amtrak's president. Without a process for developing
    department-specific goals that relate to a comprehensive mission and
    corporatewide goals, departments cannot effectively assess or communicate
    whether their goals improve overall company performance. Moreover, the
    departments' abilities to establish and achieve goals are hampered by a
    lack of data analysis and Amtrak's organizational restructuring. Amtrak
    officials said that, in some cases, these goals are an expression of
    "aspiration," rather than a realistic target.

    o 	Management tools focused on the short term, not the long term. Although
    Amtrak's management tools provide a framework for developing annual goals
    and budgets, these tools do not provide a long-term, integrated approach
    for managing the corporation, and they focus on outputs, not outcomes.
    Without a strategic plan to guide all business activities, Amtrak does not
    have a process for integrating the efforts across the organization or for
    assessing and addressing company risks. Moreover, without a strategic
    plan, Amtrak does not have overall corporate performance measures and
    cannot establish a clear understanding of what it is trying to accomplish
    with its resources and company activities.

    Leading organizations GAO has studied also adopt a performance-based
    approach to ensure that all activities and individuals are working toward
    and achieving results. Although Amtrak's key departments are making some
    progress in this regard, GAO identified a number of ways in which they
    could improve. Specifically:

    o 	Develop specific strategies and action plans. Amtrak's key departments
    do not consistently develop specific strategies or action plans for
    critical actions and milestones to achieve goals. For example, in
    addressing train delays, one department was still in the process of
    developing a plan that deals mainly with mitigating passenger-loading
    problems and did not develop documented strategies or actions for

    Executive Summary

    other problems that affect on-time performance, such as freight or
    commuter train interference.

    o 	Provide performance-based incentives. While Amtrak managers say they
    hold their managers accountable for achieving department goals, Amtrak
    does not have a pay-for-performance management system to provide incentive
    for achieving goals. Although Amtrak has proposed such a system to its
    board of directors, the board has concerns about the system, such as which
    management positions would be eligible and the operational and financial
    metrics to make merit pay and bonus decisions.

    o 	Improve performance-based data. Amtrak's ability to monitor, evaluate,
    and report on performance is hindered by its data systems and reporting
    processes. This was a theme that was common across virtually every area
    GAO reviewed. For example, although the transportation, engineering, and
    mechanical departments report on their goals in a quarterly review, they
    do not report on all of their goals in this report. For example, the
    transportation department did not report on three of its eight goals at
    the end of fiscal year 2004.

    In April 2005, the board, in conjunction with Amtrak management, issued a
    set of strategic reform initiatives for Amtrak, which is a first step
    toward developing a more strategic approach for the company. These
    initiatives include a proposed vision for Amtrak and for the future of
    intercity passenger rail and a proposed transition to planning and
    reporting by lines of business. Amtrak intends to release a new strategic
    plan for fiscal year 2006, which would ultimately result in the
    development of a comprehensive mission and goals for each line of Amtrak's
    business. Department goals would then be aligned to each line of business,
    according to an Amtrak official. The proposed changes in planning and
    reporting could provide Amtrak with a more all-encompassing approach, but
    fully implementing these initiatives requires overcoming major challenges.
    For example, as the chairman of Amtrak's board noted, legislative action
    is required to implement many aspects of the plan. These legislative
    actions include, among other things, the federal government either
    assuming Amtrak's annual debt service payments or eliminating Amtrak's
    debt burden (about $3.8 billion in short-and long-term debt at the end of
    fiscal year 2004) as well as transitioning Amtrak out of the railroad
    retirement system. Amtrak officials also noted that major challenges
    internally within Amtrak, including the time and effort needed to
    implement these initiatives and the ability to keep its employees focused
    on long-term change, even with the

                                   Executive Summary

    uncertainty of Amtrak's future, may hinder implementation of the new
    planning process.

        Financial Management Practices Could Better Support Amtrak's Decision Making

    GAO examined the following three aspects of Amtrak's financial management
    and accountability framework: (1) the usefulness of financial information
    provided to management and external stakeholders, (2) the design of
    internal control over selected areas of expense, and (3) Amtrak's efforts
    to strengthen financial management practices. Opportunities for
    improvement are present in all three of these areas.

    o 	Although Amtrak has made progress in establishing a more systematic
    process to provide financial information to management and stakeholders,
    much of the financial information it uses for day-to-day management
    purposes lacks certain relevant information or is of questionable
    reliability. Amtrak's monthly performance report, which Amtrak's president
    had deemed a "critical" document for managing the company, demonstrated
    this issue in several respects. For example, the monthly reports did not
    include relevant information on Amtrak's food and beverage revenue and
    expenses, even though food and beverage financial losses were over $160
    million for fiscal years 2002 and 2003. Also, information in another key
    report was often of questionable reliability. For example, data reported
    in monthly reports subsequently required significant adjustments-requiring
    up to 7 months to complete-to correct errors in amounts before financial
    statements could be issued. As a result, the reliability of the
    information provided to managers and stakeholders during the fiscal year
    was limited.

    o 	GAO reviewed internal control practices in two areas-employee benefit
    expenses and food and beverage service-and found weaknesses in both.
    Employee benefits, for example, as reported in monthly performance
    reports, were understated by more than $100 million because certain
    accrued employee benefit expenses were not considered. Further,
    documentation was inadequate to fully support more than $500,000 of
    supplemental retirement benefits awarded to Amtrak executives. In the area
    of food and beverages, poor enforcement of contract provisions may have
    contributed to Amtrak's spending $2 for every $1 in revenue from on-board
    service. For example, Amtrak has never required the contractor supplying
    food and beverages for its trains to submit an independently audited
    annual report of budget variances for key items, even though the contract
    requires such a report. Also, Amtrak has never audited the contractor's
    purchase data-which is

                                   Executive Summary

    allowed under the contract-to ensure that the contractor is passing along
    any discounts or rebates the contractor receives on items purchased.

    o 	For fiscal years 2003 and 2002, Amtrak's IPA reported multiple areas of
    significant internal control weaknesses as part of an annual audit of
    Amtrak's financial statements. However, for fiscal year 2004, the IPA
    reported that much progress had been made and only one significant
    weakness remained-involving accounting for capital assets.2 Amtrak's
    progress in addressing its control weaknesses is an important achievement.
    In general, however, its efforts have been achieved primarily through the
    implementation of manual detective controls instead of preventive
    controls. Thus, improvements made by the end of fiscal year 2004 enable
    the production of useful financial information after the fact-typically, 5
    to 6 months after the end of the year. However, until effective controls
    are established that prevent errors in financial information and address
    their underlying causes, Amtrak's ability to produce relevant and reliable
    financial information for management and stakeholders to use for decision
    making will be hampered.

        Despite Increasing Operating Losses and Federal Subsidies, Amtrak Has Not
        Developed a Comprehensive Cost Control Strategy

    Amtrak's annual operating loss was over $1 billion in fiscal year 2004 and
    is projected to increase about 40 percent to over $1.4 billion by fiscal
    year 2009. (See fig. 2.) Amtrak has made efforts to cut costs, reducing
    its total expenses by 9 percent (in constant dollars) from fiscal years
    2002 to 2004 by reducing headcount and introducing organizational
    efficiencies, among other things. Amtrak reduced its total employment by
    about 3,500 employees and reduced its labor costs by about $200 million
    over the same period. Amtrak is working to reduce its costs through, among
    other things, labor negotiations with its unions; the introduction of
    health care contributions from its employees; the use of outsourcing for
    several of its mechanical, engineering, and other functions; and the
    creation of unit cost metrics in some of its operating departments to
    measure productivity. During the same period, Amtrak's revenues have
    decreased by 16 percent. In addition, Amtrak's projected losses may be
    understated, since they do

    2On June 27, 2005, Amtrak management provided GAO with a draft copy of the
    internal control report from its IPA, which is based on the IPA's audit of
    the fiscal year 2004 financial statements. GAO's comments on fiscal year
    2004 are based solely on the contents of this draft internal control
    report. This report was subsequently issued on August 12, 2005.

                                   Executive Summary

    not include interest expenses that are reported in its financial
    statements and rely on $377 million in reduced costs that Amtrak estimates
    could be achieved as a result of operating efficiencies and benefits from
    capital investments it plans to undertake in fiscal years 2005 to 2009.
    Amtrak also faces serious challenges to reducing costs in the future. For
    example, Amtrak's labor costs, which account for almost 50 percent of its
    total expenditures, are expected to increase over the next 5 years,
    putting more of a burden on Amtrak to reduce its other costs in order to
    significantly reduce its operational costs. These projections also do not
    take into account the removal in April 2005 of its Acela trainsets from
    service for an undetermined period due to brake-related problems. The
    absence of the Acela trainsets could have a significant impact on Amtrak's
    fiscal year 2005 revenues.

    Figure 2: Amtrak's Constant Dollar Operating Losses and Federal Operating
                           Subsidy, Fiscal Years 2002 to 2009

    Dollars in millions 1,000 -1,000

    -1,500

    -2,000

    2002 2003 2004 2005 2006 2007 2008 2009

    Projected Fiscal year

    Federal operating subsidy adjusted Operating loss adjusted Source: GAO
    analysis of Amtrak and Federal Railroad Administration data.

    Note: Amounts are in constant 2004 dollars. Fiscal years 2005 to 2009
    figures for operating loss and federal subsidy are Amtrak projections.
    Operating losses from fiscal year 2002 to 2004 and projected losses from
    fiscal years 2005 to 2009 do not include interest expenses.

    Executive Summary

    Amtrak's cost containment efforts have had limited success for two main
    reasons. First, Amtrak has not developed a comprehensive, corporatewide
    cost containment plan. Management's focus has been on creating and
    monitoring its yearly operating budget and managing headcount levels,
    leaving its various departments to decide on how much emphasis, if any, to
    place on other cost containment actions. Second, Amtrak has not fully
    developed unit cost and asset performance metrics that could help reduce
    costs and demonstrate efficient use of its resources. Amtrak officials
    said that such factors as recent increases in ridership and overhauls
    completed, when combined with recent decreases in employees (headcount),
    show that the company is "doing more with less." However, a significant
    portion of the reduction in headcount came as a result of termination of a
    commuter rail service and mail and express freight services-not
    necessarily from finding efficiencies while offering the same level of
    service. Without unit cost or asset performance statistics, Amtrak is less
    able to understand and measure its performance as well as demonstrate
    progress toward being more efficient. Some of Amtrak's departments are
    beginning to develop cost metrics, but they are encountering difficulty in
    obtaining detailed and reliable data as well as baseline statistics for
    trend analyses. Amtrak has some corporatewide efficiency metrics, such as
    ticket and passenger revenue per passenger mile, but these metrics do not
    demonstrate asset performance, such as output per unit of labor or per
    gallon of fuel consumed. The latter would give better insight into how
    efficiently Amtrak is using its assets.

    Amtrak also needs to continue and expand its use of widely used industry
    cost containment practices-such as benchmarking, outsourcing, and
    efficiency reviews. Doing so would allow Amtrak to compare its practices
    with those of more efficient railroads and other transportation sector
    businesses to help decrease Amtrak's operating costs. Regarding
    benchmarks, freight railroads GAO contacted compare their cost containment
    strategies against those of their competitors as a means of incorporating
    best practices into their strategies. While some of Amtrak's departments
    have used benchmarking, other departments can use this technique to
    compare their performance against the other companies in the industry.
    With respect to outsourcing, Amtrak has outsourced several functions,
    including some maintenance of equipment and maintenance of way functions,
    and its commissary operations, and it has recently identified other
    noncore functions as possible candidates for outsourcing. However, Amtrak
    management has recognized that it must develop accurate cost statistics to
    effectively compare in-house costs with the costs of outsourcing. With
    respect to efficiency reviews, managers from freight

                                   Executive Summary

    railroads told us that they hire operational and process engineers and use
    cross-functional teams to study key aspects of their operations, such as
    internal processes, route schedules, and yard operations, to find out how
    to improve these functions and track improvement efforts. In 2001, an
    outside consulting firm reviewed Amtrak's operations and recommended
    numerous actions. However, not all of these findings were implemented, nor
    were any resulting savings tracked, because changes in Amtrak's leadership
    and a subsequent reorganization changed Amtrak's focus, according to
    Amtrak officials.

        Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
        Cost-effectiveness, and Accountability in Acquiring Goods and Services

    Amtrak's system for acquiring goods and services, when evaluated against a
    set of best practices that typify organizations with highly successful
    systems, is missing critical elements needed to ensure efficiency,
    cost-effectiveness, and accountability. In recent years, Amtrak has made
    improvements in this area, strengthening its purchasing function by (1)
    centralizing as well as elevating this function to the same level as other
    key departments, (2) issuing a procurement manual to communicate company
    procurement policies and procedures, and (3) performing outreach to major
    company departments to clarify and provide training on certain procurement
    policies and procedures. Nonetheless, as noted below, GAO identified
    several opportunities for improvement.

    First, Amtrak has not yet succeeded in fully integrating the procurement
    function and adopting a more strategic approach to acquisitions throughout
    the company. When planning acquisitions of goods and services, departments
    that need these goods and services have sometimes functioned independently
    of the procurement department. This does not allow leveraged buying and
    may have resulted in Amtrak paying more than necessary for some purchases.
    For example, in fiscal year 2004, the Amtrak technologies department
    issued and signed a contract modification expanding an existing software
    contract without the procurement department's knowledge and in violation
    of Amtrak's procurement policy. This expansion increased the value of the
    contract by $200,000.

    Second, while the procurement department has made efforts to become more
    involved with other departments' procurement of goods and services, it has
    not adequately communicated and enforced policies and procedures intended
    to promote competition, obtain best prices, and protect the financial
    interests of the company. Amtrak only recently (June 2005) issued a
    comprehensive procurement manual that provides detailed guidance for
    procurement staff to follow when awarding contracts, and, basically, some

    Executive Summary

    departments, acting independently in purchasing goods and services, have
    not conformed to Amtrak's own procurement policies and practices. The lack
    of clear direction and accountability until recently may have contributed
    to goods and services being acquired noncompetitively-that is, either sole
    or single source contracts-and independently of the procurement
    department. For example, GAO reviewed in detail a nonprobability sample of
    61 contracts that had expenditures in 2002 and 2003, a substantial number
    (36) were awarded noncompetitively, and these contracts often did not
    include sufficient justification, which was required for a noncompetitive
    award. Further, review of selected transactions revealed the inappropriate
    use of a purchasing tool (designed for small purchases of $5,000 or less)
    for which standards are clearly delineated. In some instances, this tool
    was used for purchases of over $100,000. Additionally, some departments
    have authority to acquire services independent of the procurement
    department. GAO's review of one of these services-acquisition of outside
    legal services-showed weaknesses indicating that Amtrak may not be
    receiving the best value for the money and may be making improper
    payments. Problems with respect to outside legal services included lack of
    competition, lack of spend analysis, lack of specificity in documenting
    terms and conditions of the services to be provided, inadequate review of
    invoices, and inadequate supporting documentation for payments.

    Finally, a poor knowledge and information system limits Amtrak's ability
    to identify opportunities for potential cost savings. Simply put, Amtrak
    cannot accurately determine how much it spends on goods and services,
    thereby missing opportunities to better leverage buying power and reduce
    overall spending. To make strategic, mission-focused acquisition
    decisions, leading private and public sector organizations establish spend
    analysis systems that provide knowledge about which goods and services are
    being acquired, the amount spent, and who is buying and supplying them.
    This knowledge allows organizations to identify opportunities to leverage
    buying, save money, and improve performance. In contrast, Amtrak's
    knowledge and information system does not produce the data needed to
    enable Amtrak to identify strategic sourcing opportunities. Such data
    could enable Amtrak to leverage its buying power and potentially reduce
    procurement costs.

                                   Executive Summary

        Amtrak Does Not Have Adequate Oversight of or Accountability for Its
        Performance and Results

    Fundamental changes are required to implement the needed improvements GAO
    identified with respect to measuring and monitoring performance,
    developing and maintaining financial records and internal controls,
    controlling costs, and procuring goods and services. However, as Amtrak
    focuses much of its attention on restoring its infrastructure to a state
    of good repair, there is a serious question regarding whether the company
    will sufficiently address these areas.

    Oversight and accountability mechanisms to better ensure that needed
    improvements are addressed are limited or have not been exercised
    effectively. A major contributing factor is the unusual situation under
    which Amtrak operates-as neither a publicly traded private corporation nor
    a public entity. This means that Amtrak is not subject to accountability
    and oversight mechanisms by which other private or public entities would
    have to abide. For example, unlike publicly traded private corporations,
    Amtrak is not subject to accountability to stockholders or financial
    markets or to Securities and Exchange Commission rules, filings, and
    public disclosure requirements. Also, unlike public entities, Amtrak is
    not subject to the Government Performance and Results Act of 1993, the
    Federal Managers Financial Integrity Act of 1982, or various other
    reporting and accountability requirements established in law or
    regulation. Another factor is that existing oversight mechanisms are not
    working or are limited in scope. For example, although Amtrak has a board
    of directors with oversight authority, the board has been operating with
    less than a full complement of positions filled for considerable periods
    of time and conducts little formal oversight of performance. Also, federal
    regulators, such as the Federal Railroad Administration, have exercised
    limited oversight of Amtrak's operations or overall performance.

    Both the administration and Amtrak have proposed reforms that would change
    the basic operating structure, establish competition for intercity rail,
    and provide a different method for distributing federal subsidies. The
    effect of these changes, if implemented, on improving oversight and
    accountability mechanisms is unknown at this juncture. Reaching agreement
    on to whom Amtrak is accountable, however, is a critical first step.
    Without it, inadequate accountability will continue, and the issues raised
    in this report may not receive the visibility needed to resolve them. The
    board and other key stakeholders can take actions within the current
    operating framework, such as developing policies and procedures to
    increase oversight and accountability.

                                   Executive Summary

    Congress has a central role in this issue. It created Amtrak and has
    continued to subsidize its operations over time. Amtrak's reauthorization
    expired in September 2002, and Congress is now considering what, if any,
    changes are needed in the structure and financing of intercity passenger
    rail. As part of this reauthorization, Congress will also play a role in
    determining the type of oversight to be provided and the accountability
    mechanisms to be used to ensure that the desired results and outcomes are
    achieved. As we reported in April 2003, the key components of a framework
    for evaluating federal infrastructure investments include (1) establishing
    clear, nonconflicting goals; (2) establishing the roles of government 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 the diverse stakeholder interests and
    limit unintended consequences. We continue to believe these components are
    important in evaluating and establishing federal policy toward intercity
    passenger rail.

    Matters for As part of the deliberation about the future of Amtrak and
    intercity

    passenger rail, Congress may wish to consider establishing a
    nationalCongressional policy for intercity passenger rail, and determining
    the appropriate role for Consideration Amtrak by ensuring that
    reauthorization or reform legislation (1)

    establishes clear, nonconflicting goals; (2) establishes the roles of both
    the federal and state governments as well as private entities; (3)
    establishes funding approaches that focus on and provide incentives for
    results and accountability; and (4) provides that the strategies developed
    address the diverse stakeholder interests and limit unintended
    consequences.

      Recommendations for Executive Action

    GAO is making detailed recommendations to Amtrak in all five areas
    examined. These recommendations are designed to improve (1) strategic
    planning to better guide the company, (2) financial information and
    financial management practices for better management of operations and for
    transparency internally and with key stakeholders, (3) corporatewide cost
    containment efforts to maximize efficiency and minimize operating losses,
    (4) acquisition of goods and services to ensure that the company gets the
    best value for the money, and (5) accountability and oversight mechanisms
    to better ensure that needed management improvements are sufficiently
    addressed and resolved and to provide needed transparency among key
    internal and external stakeholders. Specific recommendations in each area
    are found at the end of each report chapter.

                                   Executive Summary

      Agency Comments and GAO Evaluation

    GAO provided a draft of this report to the Department of Transportation
    (DOT) and Amtrak for review and comment. GAO received oral comments from
    DOT officials, including the department's general counsel. The DOT
    officials told GAO that, in general, they agreed with the draft report's
    findings, and they said the recommendations would be helpful as they work
    with Amtrak to achieve significant improvements in program and financial
    management (in accordance with Congress' statutory mandate that Amtrak
    become self-sufficient). The DOT officials agreed that if Amtrak receives
    federal funds, it needs to strengthen its accountability to the public and
    the federal government in a way that is effective, notwithstanding its
    peculiar corporate structure. Further, DOT officials told GAO that the
    department has worked with the Amtrak board of directors to enhance the
    board's oversight of Amtrak in a number of beneficial ways. DOT officials
    said that in 2005, the board has been especially active and has met with
    unusual frequency in an effort to require Amtrak management to address
    necessary changes. They also noted that the board's ability to work
    through board committees might benefit by having a full roster of
    congressionally confirmed directors in place, something that has not
    occurred since 2002. Finally, the DOT officials emphasized the potential
    utility of an expanded role for FRA, including additional legal authority
    to implement tools for enhanced oversight, such as the authority to impose
    more flexible and effective grant provisions for the funding it provides
    to Amtrak and the associated withholding of funds for nonperformance. FRA
    also provided clarifying and technical comments that GAO incorporated into
    this report as appropriate.

    Amtrak provided its comments in a letter from its president and chief
    executive officer. (See app. II.) Overall, the president said that he was
    not convinced that GAO's recommendations would produce the results GAO
    expects, saying that there is no "silver bullet" for fixing Amtrak, nor is
    there a cookie-cutter approach that can be taken. Rather, he said that
    steady incremental improvements are best. In general, Amtrak did not
    comment on GAO's specific recommendations. The president also said that
    since coming to Amtrak, management has focused on maintaining liquidity,
    cleaning up the books, and rebuilding its plant and equipment, which has
    allowed the company to do more work with fewer people and keep operating
    needs flat. Basically, he said that "the results speak for themselves."

    GAO believes that, although improvements have been made, the overall
    results have not been satisfactory. During the last 3 fiscal years,
    Amtrak's

    Executive Summary

    operating losses have increased to over $1 billion annually, and such
    losses are projected to increase about 40 percent by 2009. In addition,
    GAO found systemic problems in all five areas that it reviewed and found
    that Amtrak faces major challenges in instituting and strengthening its
    basic business systems. Certainly, the president's actions have helped
    quell what would likely have been even higher losses, but further
    fundamental changes are needed to help address a situation that is not yet
    under control. The recommendations contained in this report reflect sound
    and proven ways adopted by leading organizations to efficiently and
    effectively manage their operations. The importance of robust strategic
    planning, sound financial management, across-the-board cost control
    strategies, disciplined procurement practices, and strong oversight is
    undeniable. In GAO's opinion, not recognizing the value of these areas and
    not adapting them to Amtrak's environment will continue to lead to
    suboptimal results.

    The views reflected in the comments of Amtrak's president that steady
    incremental improvements are the best approach for addressing Amtrak's
    problems do not appear consistent with the magnitude of changes discussed
    in Amtrak's April 2005 strategic reform initiatives. In April 2005,
    Amtrak's management and board of directors released their strategic reform
    initiatives-initiatives characterized by Amtrak as a dramatic departure
    from business as usual that would substantially change how Amtrak
    operates. As Amtrak's board chairman stated in April 2005, these
    initiatives include structural, operating, and legislative changes that,
    among other things, would outline a new focus on planning, budgeting,
    accounting, and reporting of financial activity and performance along
    Amtrak's business lines; increase state financial involvement in existing
    and emerging rail corridors; and open the market for virtually all
    functions and services of intercity passenger rail to competition. The
    chairman also stated that, although Amtrak had made substantial progress
    in establishing an organizational structure and management controls that
    had resulted in cost savings, "we have considerable room for further
    improvement." GAO believes the strategic reform initiatives clearly
    acknowledge the substantial systemic problems facing Amtrak, including
    those discussed in this report, as well as the need for reform in how
    intercity passenger rail service is delivered. GAO encourages Amtrak's
    president and management to work together with the board of directors to
    ensure that the issues and challenges raised in the strategic reform
    initiatives are addressed. This will be important if Amtrak is to make
    meaningful progress in addressing its problems and becoming more
    efficient.

    Executive Summary

    Amtrak's president also commented about specific areas, as follows:

    o 	Strategic planning: The president said that Amtrak's management team
    has identified the problems "as only we can" and has developed an approach
    that "works best for us." He said that the strategic planning mechanisms
    we recommend or that government agencies adopt may not be in line with
    those followed by Amtrak, but the goals are the same. He reiterated that
    to him, while process is important, results are what matter. GAO agrees
    that results matter, but, overall, results are not improving. As both
    public and private organizations have long recognized, sound strategic
    planning mechanisms or "processes" are vital to chart a clear direction
    and mission, develop road maps for cost-effective operations based on this
    mission, and measure and be held accountable for results. The management
    tools Amtrak has adopted since May 2002, while helpful, are focused too
    narrowly and are clearly insufficient to stem the operating losses the
    company is experiencing. By focusing on "outputs," such as overhauls and
    track laid, rather than "outcomes," such as achieving on-time performance
    and a certain level of customer service, company management has no
    assurance that limited funds are being used for those areas that result in
    the highest return with respect to the impact on operating losses and the
    efficient and effective management of the company. GAO believes adopting a
    systematic and organized strategic approach-in line with GAO's
    recommendations-is necessary to achieve the results that both management
    and the public expect.

    o 	Procurement management: Amtrak's president said that many of the issues
    GAO raised in the draft report are ones that Amtrak has focused on for a
    number of years, and the company is in the process of implementing changes
    in this area. GAO commends Amtrak for recognizing the need to improve its
    procurement function. However, GAO's work shows that there continues to be
    substantial systemic problems with Amtrak's procurement function and that
    additional actions are needed to ensure Amtrak is getting the best value
    for its money in the acquisition of goods and services and in recognizing
    cost saving opportunities.

    o 	Financial management: Amtrak's president commented that, during his
    tenure, Amtrak's financial performance has improved dramatically and that
    the company closes its books on time and reports monthly results more
    quickly than most companies of its size. In addition, the president noted
    that Amtrak's material internal control weaknesses and

    Executive Summary

    reportable conditions (as reported by Amtrak's IPA), and the dollar value
    of net audit adjustments, had all decreased. Amtrak's president agreed
    that Amtrak's financial processes were labor intensive, but he said that
    lack of modern technology had not stymied Amtrak's efforts to produce
    results. GAO agrees that Amtrak has made improvements in its financial
    management and reporting and that the number of material internal control
    weaknesses and reportable conditions has decreased. This report
    acknowledges these improvements. However, GAO's work shows that there
    continue to be substantive problems related to financial management at
    Amtrak-problems that act to undermine the usefulness of financial
    information produced and adversely impact Amtrak's ability to make sound
    business decisions. These problems include monthly performance reports
    that are not as useful as they could be and that contain financial data
    that are not reliable, inadequate internal controls related to certain
    expenses (such as employee benefits expenses and Amtrak's food and
    beverage service), and weak efforts to strengthen management practices and
    make financial information transparent. GAO believes Amtrak will find it
    difficult to make sound business decisions related to its operations and
    its different lines of business, control its costs and operating losses,
    increase its efficiency and cost-effectiveness, and demonstrate progress
    in achieving outcome-based goals and objectives without addressing these
    financial management problems.

    o 	Food and beverage service: The president said that Amtrak has recently
    taken a number of actions to better manage this service, including
    reforming the delivery of food service (such as eliminating food and
    beverage service on selected short-distance trains) and renegotiating its
    contract with Gate Gourmet (formerly called Dobbs International). Amtrak's
    president also noted that GAO's draft report failed to mention the cost of
    labor as it relates to food and beverage service-a cost that both GAO and
    Amtrak agree is the largest single cost of the operation. GAO agrees that
    Amtrak's actions regarding its food and beverage service are steps in the
    right direction, and GAO encourages Amtrak to continue to seek ways to
    improve management and controls over this service. Both GAO's June 2005
    testimony before the Subcommittee on Railroads, House Committee on
    Transportation and Infrastructure, and its August 2005 report on Amtrak's
    food and beverage service discussed management and control problems
    related to this service and made

    Executive Summary

    recommendations for improving this control.3 Both the testimony and the
    report also acknowledged the labor costs associated with Amtrak's food and
    beverage operation. GAO agrees that labor costs associated with Amtrak's
    food and beverage service are substantial and should be an integral
    component in any strategies and plans Amtrak develops to improve the
    efficiency and cost-effectiveness of this service. GAO's June 2005
    testimony indicated that a recent Amtrak Inspector General report
    suggested a way that Amtrak could address its food and beverage labor
    costs. Since labor costs associated with the food and beverage service are
    part of Amtrak's overall labor cost structure, it was beyond the scope of
    GAO's work for this report to analyze these specific costs. This present
    report discusses internal controls related to Amtrak's food and beverage
    service and identifies ways Amtrak can strengthen these controls to ensure
    this service is operated more efficiently and cost-effectively.

    Amtrak also made various clarifying and technical comments that GAO has
    addressed in the text of this report. Among the technical comments was a
    proposal by Amtrak's procurement department to liberalize Amtrak's policy
    related to delegation authority for contract changes. This proposal was in
    response to GAO's recommendation that Amtrak ensure that contract changes
    be approved in accordance with the company's current delegation of
    authority policy. At the time of GAO's review, this policy limited change
    order approvals on the basis of the cumulative value of contracts-that is,
    the level of authority needed to approve contract change orders is
    determined by the cumulative value of the contract, not the amount of the
    change order. Amtrak's proposal would change this policy to allow approval
    of change orders by a contracting agent until the total value of all
    contract changes meets or exceeds the agent's delegated authority to
    approve changes. Additional changes beyond this dollar value would then
    require approval by an individual with a higher level of delegation
    authority. GAO agrees that some flexibility in the approval authority may
    be desirable, especially for relatively low-dollar value changes. However,
    in liberalizing its approval authority for change orders, Amtrak should
    proceed cautiously by setting monetary thresholds for contracting agents
    that represent a relatively low-dollar value when compared with the

    3GAO, Amtrak: Management and Accountability Issues Contribute to
    Unprofitability of Food and Beverage Service, GAO-05-761T (Washington,
    D.C.: June 9, 2005); and Amtrak: Improved Management and Controls over
    Food and Beverage Service Needed, GAO-05-867 (Washington, D.C.: Aug. 24,
    2005).

    Executive Summary

    original value of the contract. Doing so would allow more efficient use of
    procurement department resources while maintaining oversight of contract
    changes. Also, as GAO recommends in this report, Amtrak's procurement
    department, regardless of whether or not this proposal is adopted, should
    exercise proper oversight of its contracting agents to ensure adherence to
    its current delegation of authority policy.

    Chapter 1

    Introduction

    Intercity passenger rail is at a critical crossroads regarding its future
    in the United States. The current provider of intercity passenger rail
    service, the National Railroad Passenger Corporation (Amtrak), has
    struggled since its inception in 1970 to earn sufficient revenues and
    continues to rely heavily on federal subsidies to remain solvent;
    currently, these subsidies total more than $1 billion annually. Despite
    federal subsidies, the corporation has continued to experience financial
    difficulties. For example, in June 2001, Amtrak was forced to mortgage a
    portion of Pennsylvania Station in New York City to raise $300 million; in
    July 2002, it had to obtain a $100 million loan from the federal
    government in order to meet expenses and continue operating. In June 2002,
    under a new president and chief executive officer, Amtrak underwent
    reorganization. However, the financial condition of the corporation is
    still precarious, and, according to management, the railroad will require
    billions of dollars to improve its infrastructure and achieve a "state of
    good repair" as it continues to operate a nationwide intercity passenger
    rail service.1

    In recent years, various congressional and administration proposals have
    called for restructuring intercity passenger rail in the United States.
    These proposals have included breaking Amtrak up and introducing competing
    rail service. For example, one recent proposal would create a separate
    infrastructure corporation as a means to maintain and rehabilitate the
    Northeast Corridor-which runs from Washington, D.C., to Boston,
    Massachusetts, and is a critical component in Amtrak's passenger rail
    system-and other infrastructure. A separate operating corporation would be
    created to provide rail service. Under this proposal, much of the
    responsibility for intercity passenger rail service would be delegated to
    states or groups of states operating through interstate compacts, and the
    operating corporation that succeeds Amtrak would have to compete to
    provide service.2 In contrast, other proposals call for little
    restructuring at all and instead would keep Amtrak intact and provide it
    with increased funding to improve equipment and infrastructure.

    1A "state of good repair" is the outcome expected from the capital
    investment needed to restore Amtrak's right-of-way (track, signals, and
    auxiliary structures) to a condition that requires only routine
    maintenance.

    2On April 13, 2005, the Secretary of Transportation offered proposed
    legislation for restructuring intercity passenger rail, called the
    Passenger Rail Investment Reform Act. In general, this proposal would
    transition the ownership and management of the Northeast Corridor to an
    interstate compact of Northeast Corridor states and the District of
    Columbia, reduce (and after 4 years eliminate) operating subsidies for
    long-distance train service, and require that train operations be opened
    to competition.

                                 Chapter 1 Introduction

    To aid Congress as it deliberates on the future of Amtrak and intercity
    passenger rail in the United States, the Chairman, House Committee on
    Transportation and Infrastructure, asked us to examine various aspects of
    Amtrak's management and performance. This report discusses Amtrak's (1)
    strategic planning and a performance-based framework for achieving goals;
    (2) financial reporting and internal control practices and how well they
    support management and accountability of the corporation; (3) costs and
    cost containment strategies, including the existence and use of metrics to
    identify and understand the nature of the corporation's costs; (4)
    acquisition management, including the procurement department's placement
    within Amtrak and integration into other departments' acquisition
    activities, compliance with procurement policies and procedures, and the
    quality of Amtrak's knowledge and information systems; and (5) overall
    accountability and oversight of the corporation.

      Amtrak's Financial Struggles Have Led to Changes in Corporate Direction and
      Organization

    The Rail Passenger Service Act of 1970 created Amtrak to provide intercity
    passenger rail service because existing railroads found such service to be
    unprofitable. Currently, Amtrak operates a 22,000-mile network that
    provides service to 46 states and the District of Columbia. In operating
    this network, Amtrak mainly uses track owned by freight railroads. Amtrak
    owns about 650 miles of track, primarily on the Northeast Corridor between
    Boston, Massachusetts, and Washington, D.C. In fiscal year 2004, Amtrak
    served about 25 million passengers, or about 68,640 passengers per day.
    According to Amtrak, about two-thirds of its ridership is wholly or
    partially on the Northeast Corridor.

    Amtrak has undergone numerous changes in its corporate direction and
    organizational structure in an attempt to improve its financial condition.
    These changes were influenced, in part, by the Amtrak Reform and
    Accountability Act of 1997, which required Amtrak to become operationally
    self-sufficient by December 2002.3 Examples of changes over the last
    decade include the following:

    o 	Establishment of strategic business units (SBU). In September 1994,
    Amtrak's then president stated that a vision for the corporation needed to
    be articulated and that decisions needed to be more market-driven. Between
    October 1994 and January 1995, with the assistance of a

    3This act prohibited Amtrak from using federal funds for operating
    expenses, except an amount equal to excess Railroad Retirement Tax Act
    payments, after 2002.

    Chapter 1 Introduction

    management consulting firm, Amtrak reorganized into the SBUs in an attempt
    to address these issues. According to Amtrak, the SBUs were established to
    provide a method for better managing performances and differences in
    businesses or markets within the company and were designed to anticipate
    and facilitate rapid response to change, place decision making close to
    the customer, and establish authority and accountability. Amtrak
    established three SBUs-Northeast Corridor, Intercity, and West. The SBUs
    were largely self-contained units that had their own chief executive
    officers, handled their own rail service, procured their own materials and
    supplies, and handled their own financial management and planning. Amtrak
    also established corporate and service centers to support the SBUs and
    provide services that either had economies of scales or required special
    technical skills.4 In undergoing this reorganization and establishing the
    SBUs, the expectation was that this new structure would, among other
    things, result in fewer management positions, lower costs, and establish
    accountability for results.

    o 	Improvement of financial health by reducing service. In 1995, Amtrak
    attempted to improve its financial condition by changing its approach to
    route and service actions. In particular, Amtrak eliminated 9 routes,
    truncated 3 routes, and changed the frequency of service on 17 routes. The
    expectation was that Amtrak could save about $200 million from these
    actions while retaining a high percentage of revenues and passengers.

    o 	Improvement of financial health by expanding service. In December 1999,
    Amtrak again changed corporate direction by adopting a strategy that
    consisted of 15 planned route and service actions, the majority of which
    involved an expansion of service. The expectation was that by increasing
    service significant new revenue would be generated, especially from
    hauling mail and express cargo.

    None of the above changes met expectations. Instead of the SBUs leading to
    decreased costs, Amtrak's operating costs generally increased. For
    example, as we reported in May 2000, Amtrak incurred about $150 million

    4For example, Amtrak retained a chief financial officer, a general
    counsel, and a chief mechanical officer. The corporation also retained a
    board of directors to provide overall governance, a president to manage
    the company and establish strategic direction, and a management committee
    to set corporate policy.

    Chapter 1 Introduction

    more in expenses than planned over the 1995 to 1999 period.5 Employment
    levels were a significant factor. Although Amtrak's total employment
    generally decreased from 1994 to 1996, by 1999 Amtrak had about the same
    number of management employees and more agreement employees
    (union-represented) than in 1994.6 In addition, Amtrak's operating loss
    (total revenue minus total expense) fluctuated between fiscal years 1994
    and 2002 but generally increased from about $770 million in fiscal year
    1995 to about $1 billion in fiscal year 2002.7 At the same time, Amtrak
    continued to receive substantial federal operating and capital support.8
    (See fig. 3.) Subsequent financial results from the service actions in
    1995 and 1999 also did not meet expectations. As we reported in April
    2002, the 1999 service expansion failed, in part, because Amtrak
    overestimated the mail and express revenue it was able to generate and
    because Amtrak failed to obtain a full understanding of freight railroad
    concerns before implementing the expansion strategy.9 At the time of our
    report, most of the route actions of the service expansion had been
    canceled.

    5GAO, 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). As we reported, Amtrak missed its
    expense targets from 1995 through 1997 by about $355 million. However, in
    1998 and 1999, Amtrak spent less than planned by $205 million. The net was
    $150 million more than planned.

    6In 1999, Amtrak employed about 22,500 agreement employees and about 2,700
    management employees-about the same total number as in 1994. Between
    September 2000 and September 2002, total Amtrak employment decreased from
    24,886 to 21,442.

    7In nominal dollars; values exclude federal and state capital payments
    recognized as revenue.

    8In fiscal years 2004 and 2005, Amtrak received over $1 billion in federal
    subsidies.

    9GAO, Intercity Passenger Rail: Amtrak Needs to Improve Its Decisionmaking
    Process for Its Route and Service Proposals, GAO-02-398 (Washington, D.C.:
    Apr. 12, 2002).

    Chapter 1 Introduction

            Figure 3: Federal Subsidies to Amtrak, Fiscal Years 1971 to 2005

    Dollars in millions 2,000

    1,500

    1,000

    500 0

    1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
    2001 2003 2005

    Fiscal year Source: GAO analysis of Federal Railroad Administration data.

    Note: Amounts are in nominal dollars. Excludes $880 million in loan
    guarantees but includes about $2.2 billion in Taxpayer Relief Act funds
    received in fiscal years 1998 and 1999. Amounts for fiscal year 1998
    exclude $199 million in capital funds since Amtrak received Taxpayer
    Relief Act funds in that year. The receipt of Taxpayer Relief Act funds
    precluded Amtrak from receiving the $199 million in capital funds.

    Amtrak's financial condition, instead of improving, deteriorated. In June
    2001, Amtrak mortgaged a portion of Pennsylvania Station in New York City
    for $300 million to meet expenses. In November 2001, the Amtrak Reform
    Council-an independent oversight body created by the Amtrak Reform and
    Accountability Act of 1997-formally determined that Amtrak would not reach
    operational self-sufficiency by December 2002, as required by the act.
    Finally, in July 2002, Amtrak obtained a $100 million federal loan to meet
    expenses and continue operating. As we reported in April 2003, Amtrak also
    had developed a substantial deferred capital backlog of infrastructure
    improvements-about $6 billion worth ($3.8 billion, or about 63 percent, of
    which was attributable to the Northeast Corridor).10

    10GAO, Intercity Passenger Rail: Issues for Consideration in Developing an
    Intercity Passenger Rail Policy, GAO-03-712T (Washington, D.C.: Apr. 30,
    2003). In April 2005, the Department of Transportation Inspector General
    estimated this backlog at about $5 billion.

    Chapter 1 Introduction

    Aside from the financial struggles, reorganizations, and route and service
    actions, Amtrak has also struggled with a small share of the intercity
    travel market (see fig. 4). On the basis of data obtained from the Federal
    Railroad Administration (FRA), intercity passenger rail accounted for a
    relatively substantial portion (15 percent or more) of the travel market
    through the mid-1950s. However, by the early 1970s-about the same time
    Amtrak was created-the rail portion of intercity travel had declined to
    just over 1 percent of the intercity travel market. Since 1981, the
    passenger rail portion of the intercity travel market has been less than 1
    percent, and, in 2004, intercity passenger rail was estimated at 0.5
    percent of the market. FRA officials said decisions to invest in a
    national highway program and improvements in air travel, in part, led to
    the dramatic decreases in rail ridership.

    Figure 4: Intercity Passenger Rail Market Share, 1951 to 2004 Percentage
    25

    20

    15

    10

    5

    0

    Year

    Source: Federal Railroad Administration.

    Note: Data used to prepare this table are based on various estimates made
    by FRA. Unit of measure is millions of intercity passenger miles. A
    passenger mile is one person transported one mile. The market share is
    based on intercity passenger rail's share of the total intercity passenger
    miles of automobiles, buses, air carriers, and railroads.

                                 Chapter 1 Introduction

    Most Recent Changes In June 2002, under Amtrak's new president and chief
    executive officer, the

    corporation abolished the SBUs and reorganized again. In making thisHave
    Focused on organizational change, Amtrak recognized that the previous
    structure was Improved too complex, had overlapping management duties, and
    had inefficient Management, Financial management decision making. The
    reorganization was to establish a more

    centralized, functional structure; establish accountability; and form a
    moreStability, and orderly, lean hierarchy. (See fig. 5 for Amtrak's
    current organization chart.)

      Infrastructure Renewal

    Figure 5: Amtrak Organization Chart, as of October 2004

    Source: GAO analysis of Amtrak data.

    According to Amtrak's new president, the company faced a multitude of
    problems at the time of his arrival. These problems included (1) no
    approved and distributed budget (even though the fiscal year was half
    over); (2) a finance department that was unable to close its books for
    fiscal year 2001 (and did not do so until 1 year after the close of fiscal
    year 2001); (3) no organization charts; (4) little control over employment
    (called "headcount"); and (5) an organization with fragmented
    responsibility for

    Chapter 1 Introduction

    large functional areas, such as transportation, engineering, and
    mechanical (equipment). Amtrak's president told us that, when he arrived,
    he needed a structure to help him gain control of the company and that
    many functions were in poor shape. For example, he said that the
    procurement function was a part of the finance department and had no clear
    purchasing authority or review. Amtrak adopted a number of strategies to
    address these problems. These strategies included restoring company
    accounting practices to strict compliance with generally accepted
    accounting principles; preparing a multiyear project-specific capital plan
    to achieve a state of good repair; and using the budget process to
    establish operating goals and objectives and to hold managers accountable.
    Amtrak's president said these strategies were used to reduce headcount;
    increase production (e.g., ties installed, cars overhauled); and shift
    maintenance activities into planned production lines as opposed to spot
    repairs.

    In conjunction with the 2002 organizational change, Amtrak's president
    also adopted a new approach to management that focused on five management
    tools: (1) defined organization charts, (2) zero-based operating budget,
    (3) capital budget (communicated through a 5-year strategic plan), (4)
    department-by-department goals and objectives, and (5) monthly performance
    reports. (See table 1.) The performance reports were to contain financial
    as well as production and budget variance information. Amtrak uses the
    five management tools not only to manage the company but also to help
    contain costs. The changes were designed to increase control over Amtrak,
    instill a sense of discipline in how the company was operated, and
    simplify the management structure to assign more responsibility to fewer
    people and hold them accountable for results. Since the reorganization,
    Amtrak has centralized many of its departments (such as the mechanical and
    marketing and sales departments) and established a budget process focused
    on the five management tools and control of headcount.

    Chapter 1 Introduction

                        Table 1: Amtrak's Five Management Tools

    Tool Description

    1. Organization chart  o  Identifies a clear chain of command

    o  Basis for developing Amtrak's budgets

    o  Used to control Amtrak's labor costs

    2. Operating budget  o  Based on the headcounts and resources needed to
    accomplish department activities (zero-based budgeting process)

    o  Focuses on maintaining or reducing the budget

    3. Capital budget  o  Based on capital investment needed to stabilize the
    railroad

    o  Includes specific projects with production targets

    o  Communicated through Amtrak's strategic plan

    4. Goals and  o  Developed by each department objectives  o  Basis for
    Amtrak's budgets

    5. Monthly  o  Summarizes Amtrak's financial results, operating
    statistics, and performance report capital activity

    o  Primary tool for reporting Amtrak's performance, both internally and
    externally

    Source: GAO analysis of Amtrak data.

    As part of the reorganization, Amtrak also refocused its efforts on
    stabilizing the corporation financially and restoring the infrastructure
    to a state of good repair. For example, Amtrak's April 2003 strategic plan
    (covering the period of fiscal years 2004 to 2008) stated that intercity
    passenger rail was in crisis, in part, due to physical deterioration and
    financial instability. To address these issues, the plan identified over
    $5 billion in total capital funding needs-with annual funding needs (both
    operating and capital) ranging from about $1.8 billion in fiscal year 2004
    to about $1.4 billion in fiscal year 2008. These funds were to be used to,
    among other things, return plant and equipment to a state of good repair,
    control operating deficits, and restore liquidity to the corporation. The
    plan was designed to address Amtrak's immediate problems and to buy time
    for policy makers to decide the future structure of intercity passenger
    rail. Amtrak's June 2004 strategic plan (covering the period of fiscal
    years 2005 to 2009) similarly reiterated the need to stabilize the
    railroad and make capital investments in infrastructure. It identified
    about $4 billion in capital funding needs over the 5-year period-with
    about $1.7 billion in average annual funding needs (operating, capital,
    and debt service).11 Under this

    11The calculation of annual funding needs excludes $203 million in funds
    that were needed in fiscal year 2005 for working capital and were also
    needed to repay a Department of Transportation loan.

    Chapter 1 Introduction

    plan, operating support was projected to remain constant at $570 million
    per year, while capital funding needs were expected to increase from
    fiscal years 2005 to 2006 and then gradually to decrease. (See fig. 6.)
    Again, the June 2004 plan was designed to address Amtrak's immediate
    problems of stabilizing the railroad while bringing the infrastructure to
    a state of good repair.

    Figure 6: Projected Funding Needs in Amtrak's June 2004 Strategic Plan

    Note: The $203 million shown for fiscal year 2005 was a one-time need for
    working capital and was also needed to repay a Department of
    Transportation loan.

                                 Chapter 1 Introduction

      Amtrak's Operations, Governance, and Oversight Are Covered by a Variety of
      Requirements

    Amtrak's operations, governance, and oversight are covered by a hybrid of
    public and private sector requirements. Amtrak was created as a
    corporation under federal law. Until 1997, Amtrak was classified as a
    mixed-ownership government corporation under the Government Corporation
    Control Act. Although federally created and the recipient of substantial
    federal financial assistance-about $29 billion since it began operating in
    1971-Amtrak is to be operated as a for-profit corporation.

    We reported in December 1995 that the Government Corporation Control Act
    was intended to make government corporations accountable to Congress for
    their operations while allowing them the flexibility and autonomy needed
    for their commercial activities.12 A mixed-ownership corporation can be
    defined as a corporation with both government and private equity. In the
    case of Amtrak, the federal government held preferred stock of the
    corporation, and there were private entities that held common stock.13 At
    the time of our 1995 report, Amtrak had nine board of director (board)
    members, five were appointed by the President and the remaining four were
    the Secretary of Transportation, the president of Amtrak, and two
    individuals selected by Amtrak's preferred stockholder (the federal
    government). Also at that time, Amtrak reported that it was not subject to
    and did not administratively adopt such statutes as the Government
    Performance and Results Act of 1993 (GPRA) and the Federal Managers
    Financial Integrity Act of 1982 (FMFIA). GPRA was designed to impose a new
    and more businesslike framework for management and accountability,
    including a requirement that federal agency missions be clearly defined
    and that both long-term strategic and annual goals be established and
    linked to mission statements. FMFIA imposed requirements for heads of
    federal agencies to evaluate and report on internal controls.14

    12GAO, Government Corporations: Profiles of Existing Government
    Corporations, GAO/GGD-96-14 (Washington, D.C.: Dec. 13, 1995).

    13At the end of fiscal year 2004, the federal government continued to hold
    preferred stock of Amtrak (approximately 109 million shares, with a book
    value of about $10.9 billion), and there were 9.4 million shares of common
    stock outstanding (with a book value of about $94 million) held by three
    railroads and a holding company.

    14Internal controls are plans of organization, methods, and procedures
    adopted by management to ensure that (1) resource use is consistent with
    laws, regulations, and policies; (2) resources are safeguarded against
    waste, loss, and misuse; and (3) reliable data are obtained, maintained,
    and fairly disclosed in reports.

    Chapter 1 Introduction

    The Amtrak Reform and Accountability Act of 1997 changed Amtrak's status
    as a mixed government corporation by removing Amtrak from the list of
    mixed-ownership government corporations. Today, Amtrak is at most similar
    in nature to a "government-established private corporation." Reflecting
    its private stature, Amtrak is not subject to most statutes that make
    federal establishments accountable. Statutes such as GPRA and FMFIA do not
    apply to Amtrak. Amtrak is a closely held corporation whose stock is not
    publicly traded; it is not subject to Securities and Exchange Commission
    oversight or to provisions of the Sarbanes-Oxley Act of 2002. However, as
    conditions to Amtrak's continued receipt of federal subsidies, Amtrak is
    subject to such federal statutes as the Freedom of Information Act and the
    Inspector General Act of 1978. Recent grant agreements between FRA and
    Amtrak have also made Amtrak subject to federal regulations applicable to
    for-profit organizations as well as certain federal procurement
    regulations.15 Amtrak is also subject to limited jurisdiction by the
    Surface Transportation Board over matters such as compensation disputes
    with other railroads, as well as federal railroad safety laws administered
    by FRA.16

    As a private, for-profit corporation, most statutes and regulations that
    govern the activities of federal entities do not apply to Amtrak. This
    includes federal acquisition regulations. Instead, Amtrak develops its own
    policies and procedures for handling the acquisition of goods and
    services. Under the terms of grant agreements between Amtrak and FRA,
    Amtrak is expected to comply with procurement, ethical, and other
    standards, including standards governing the conduct of employees engaged
    in the award and administration of contracts. Generally, contracts are to
    be awarded competitively using written procurement procedures, thereby
    ensuring that materials and services purchased with federal grant funds
    are obtained in a cost-effective and appropriate manner. The standards
    also require that procurement records and files shall include the basis
    for contractor selections, justifications for the lack of competition, and
    the basis for contract cost or price. Amtrak has incorporated both the
    federal

    15Under the fiscal year 2005 operating grant agreement between Amtrak and
    FRA, Amtrak is subject to 49 C.F.R. Part 19, Uniform Administrative
    Requirements for Grants and Agreements with Institutions of Higher
    Education, Hospitals, and Other Non-Profit Organizations, and 48 C.F.R.,
    Subpart 31.2, Contracts with Commercial Organizations.

    16Amtrak also told us it was subject to federal environmental laws
    (including the Clean Water Act, the Clean Air Act, and the Resource
    Conservation and Recovery Act); the Occupational Health and Safety Act;
    and regulations of the Food and Drug Administration.

    Chapter 1 Introduction

    standards and their requirements in its procurement manual issued in June
    2005. FRA is responsible for ensuring compliance with procurement
    standards.

    Amtrak's corporate governance is defined in its articles of incorporation
    and bylaws. Amtrak is domiciled in the District of Columbia. The board is
    responsible for managing the affairs and business of the corporation and
    for oversight of Amtrak's president and management team. The Amtrak Reform
    and Accountability Act of 1997 reduced Amtrak's board from nine to seven
    members, who are appointed by the President with the advice and consent of
    the Senate. The Secretary of Transportation represents the federal
    government as a member of Amtrak's board. The board has operated with less
    than a full complement of voting members (seven members) since July 2003.
    Between October 2003 and June 2004, the board had only two voting members
    (excluding the Secretary of Transportation or his designee).17 As of May
    2005, the board had three members, (excluding the Secretary of
    Transportation or his designee and the president of Amtrak). Amtrak's
    bylaws also authorize the establishment of committees to assist the board
    in carrying out its management responsibilities. In March 2002, the board
    eliminated ad hoc committees, along with the corporate strategy committee
    and the safety, service, and quality committee. At that time, the audit,
    corporate affairs, finance, compensation and personnel, and legal affairs
    committees were created. As of May 2005, the board continued to have these
    five committees. Finally, Amtrak's bylaws permit the corporation to
    conduct periodic shareholder meetings as necessary. Following enactment of
    the Amtrak Improvement Act of 1981, which abolished election of members of
    the board of directors by the common shareholders, Amtrak has not held a
    shareholders' meeting.

    Oversight of Amtrak's activities, other than through the board, is
    provided by a number of means. Congress plays a role through the
    authorization and appropriations process. The Amtrak Reform and
    Accountability Act of 1997 authorized federal appropriations for Amtrak
    through September 30, 2002.18 Although a new authorization had not been
    enacted as of July 2005, the authorization process permits Congress to
    review Amtrak's previous and planned use of federal resources. The
    appropriations process provides

    17The president of Amtrak is a member of the board but is not a voting
    member.

    18Amtrak continued to receive funds in fiscal years 2003 to 2005 through
    annual appropriations.

                                 Chapter 1 Introduction

    Congress with the opportunity to oversee Amtrak's stewardship of federal
    funds on an annual basis. Starting with Amtrak's fiscal year 2003
    appropriations legislation, Congress adopted measures to increase the
    Secretary of Transportation's responsibility for providing oversight and
    accountability for the federal funds used for intercity passenger rail
    service. Among other things, these measures require that Amtrak transmit a
    business plan to the Secretary of Transportation and Congress,
    supplemented by monthly reports describing work completed, changes to the
    business plan, and reasons for the changes. The business plan is to
    describe the work to be funded with federal funds. Consistent with
    requirements begun in the fiscal year 2003 appropriations act, Amtrak and
    FRA have entered into grant agreements for the use of fiscal years 2003,
    2004, and 2005 federal funds. FRA determines Amtrak's compliance with
    these grant agreements.

    Amtrak's activities are also subject to review by the Inspector General's
    offices within Amtrak and the Department of Transportation (DOT), as well
    as review by GAO. The Amtrak Office of the Inspector General (Amtrak OIG)
    was established by the Inspector General Act Amendments of 1988 to provide
    independent audits and investigations; promote economy, efficiency, and
    effectiveness; and prevent and detect fraud and abuse in Amtrak programs
    and operations.19 The Department of Transportation Inspector General also
    plays a role in assessing Amtrak's financial performance and is charged
    with assessing Amtrak's financial performance and needs for every year
    after 1998 in which Amtrak requests federal financial assistance. GAO has
    the authority to review Amtrak activities and transactions. Over the
    years, we have issued numerous reports and testimonies on Amtrak's
    financial performance and the need for federal financial assistance.

      Objectives, Scope, and Methodology

    The overall objective for our work was to determine whether Amtrak is
    using its federal resources in the most efficient and cost-effective
    manner. Our specific objectives were to determine (1) Amtrak's strategic
    planning process and the extent to which Amtrak has implemented a
    performance-based approach; (2) Amtrak's financial reporting and internal
    control practices and how well they support management and accountability
    of the corporation; (3) Amtrak's costs and cost containment strategies,
    including

    19GAO, Activities of the Amtrak Inspector General, GAO-05-306R
    (Washington, D.C.: Mar. 4, 2005).

    Chapter 1 Introduction

    the existence and use of metrics to identify and understand the nature of
    the corporation's costs; (4) Amtrak's acquisition of goods and services,
    including organizational alignment and strategic focus, compliance with
    procurement policies and procedures, and information management; and (5)
    the overall accountability and oversight of the corporation. We focused on
    these five objectives since these are key elements to addressing the
    efficiency and cost-effectiveness with which federal resources are used by
    Amtrak. We did not explicitly review information technology and human
    capital issues-which are two additional elements of a management and
    accountability framework used in leading organizations to successfully
    manage resources. We also did not review revenue issues, such as Amtrak's
    strategies and controls for setting fares or projecting revenue estimates.
    Our scope was primarily limited to Amtrak's policies and procedures from
    fiscal years 2002 to 2004. However, we collected data prior to this time
    period to provide context and to ascertain what trends, if any, exist.

    To address strategic planning and performance-based issues, we reviewed
    documents describing Amtrak's management tools; strategic planning
    process; and the process for preparing budgets, goals, and objectives. We
    reviewed minutes of Amtrak board meetings and interviewed Amtrak and FRA
    officials and members of Amtrak's board to understand the corporation's
    strategic planning process and interviewed Amtrak officials on the extent
    to which a performance-based management framework had been implemented. We
    used this information to analyze the nature of Amtrak's strategic planning
    process, identify whether Amtrak had established a clear statement of its
    mission, and determine whether this mission was linked to measurable goals
    and objectives. We also reviewed and analyzed Amtrak's monthly performance
    reports and the department quarterly reports for the transportation,
    mechanical, and engineering departments to assess performance information
    generated by Amtrak. We interviewed commuter and freight railroad
    officials and VIA Rail Canada (VIA Rail)20 officials to determine industry
    strategic planning practices. We used relevant GAO reports and widely used
    standards and best practices, as applicable, to determine criteria for
    assessing Amtrak's management structure as well as to suggest best
    practices to Amtrak.

    To assess Amtrak's financial reporting and management practices, we gained
    an understanding of control activities related to financial reporting, the
    design of internal control practices over the expenses related to food

    20VIA Rail Canada is Canada's intercity passenger rail provider.

    Chapter 1 Introduction

    and beverage operations and employee benefits, and efforts to strengthen
    management practices. We also reviewed selected workpapers for fiscal
    years 2002 and 2003 that were relied on by an independent public
    accountant (IPA) firm to issue an opinion on the Amtrak consolidated
    financial statements, IPA letters that considered internal control
    practices over financial reporting, and reports by the Amtrak OIG. We
    observed control practices over certain key areas of expense and analyzed
    interim financial information for areas such as train route performance,
    food and beverage operations, and employee benefit expense. To test the
    reliability of the financial data provided by Amtrak officials, when
    practical, we compared such information with amounts reported in Amtrak's
    audited financial statements for fiscal years 2002 and 2003. We
    interviewed officials from various Amtrak departments and the Amtrak OIG
    as well as officials from FRA, Amtrak's IPA, and the food and beverage
    contractor. In addition, we interviewed and collected information from
    officials from several freight and commuter railroads. This information
    was used in conjunction with GAO's Standards for Internal Control in the
    Federal Government, to assess how well Amtrak's financial reporting and
    management practices support the management and external stakeholders'
    efforts.

    To address cost and cost containment issues, we reviewed Amtrak financial
    reports and obtained data on Amtrak's operating costs. We also interviewed
    Amtrak, FRA, freight and commuter railroads, and VIA Rail officials about
    cost control practices. The freight railroads were selected on the basis
    of their size in terms of operating revenue and track mileage and carloads
    originated, and, in the case of commuter railroads, both the volume of
    ridership in 2002 and the size of capital and operating budgets, among
    other factors. VIA Rail was selected because it is a large (in terms of
    route miles operated) intercity passenger railroad and has characteristics
    similar to Amtrak in that VIA Rail operates both long-and short-distance
    intercity passenger service and relies on government support to maintain
    operations. We used Amtrak documents and interviews with Amtrak officials
    to assess Amtrak's cost containment strategy and the company's knowledge
    of its costs. In performing our analysis, we used information from
    Amtrak's audited financial statements for fiscal years 2002 and 2003. We
    also used information from Amtrak's preliminary financial statements for
    fiscal year 2004. These statements were in the process of being audited
    during our review. Amtrak released its audited financial statements in
    August 2005 after our audit work was completed. However, to test the
    reliability of the preliminary information we used, where practical, we
    compared data from the preliminary statements with the audited statements.
    We found no major differences.

    Chapter 1 Introduction

    To address acquisition issues, we reviewed Amtrak's procurement policies
    and procedures; drafts of Amtrak's procurement manual; and other
    documentation, such as organization charts and department goals. We also
    reviewed reports prepared by the Amtrak OIG on procurement issues. We
    observed how procurement requests are handled and processed and discussed
    Amtrak's acquisition practices with officials from the procurement
    department. We reviewed data on expenditures made for advertising, sales
    promotion, professional services, and consulting and reviewed a
    nonprobability sample of 61 contract files associated with these services
    to assess compliance with Amtrak's procurement policies and procedures.21
    (See app. I for our contract selection methodology.) We also (1) reviewed
    expenditure data related to Amtrak's use of outside legal services and the
    law department's guidelines applicable to outside legal services and (2)
    discussed the law department's practices for acquiring outside legal
    services with law department officials-including specific examples of how
    they acquire those services. In addition, we discussed procurement
    practices with officials in other departments, such as the finance,
    marketing and sales, engineering, and mechanical departments. To obtain an
    understanding of acquisition practices in other railroads, we discussed
    procurement practices with officials at four freight railroads and five
    commuter railroads as well as with procurement officials at VIA Rail.

    To assess the reliability of the procurement data Amtrak provided, we
    compared them with Amtrak audited financial statement data for fiscal
    years 2002 and 2003 for the accounts we reviewed. (The expenditure data
    came from a different database.) We then asked Amtrak to reconcile
    differences that we identified between the two sets of accounts. Because
    Amtrak officials said this reconciliation had to be done manually and
    would take substantial time, data were reconciled for only one
    account-sales promotion. Consequently, we used the procurement expenditure
    data only to select a nonprobability sample of procurement contracts to
    review. Similarly, we could not reconcile expenditure data for Amtrak's
    outside legal services-taken from the law department's case management
    system-with audited financial data. As a result, these data were only used
    to identify selected matters to discuss with law department officials
    about how outside legal services are acquired. Finally, we used
    information on payments of invoices for outside legal services from
    Amtrak's accounts

    21Results from nonprobability samples cannot be used to make inferences
    about a population, because in a nonprobability sample some elements of
    the population being studied have no chance or an unknown chance of being
    selected as part of the sample.

    Chapter 1 Introduction

    payable system. Again, because we could not reconcile the accounts payable
    information with the audited financial data, these data were used solely
    to select a nonprobability sample of 10 invoices to assist us in
    understanding the controls over payments for outside legal services.

    To address overall accountability and oversight issues, we reviewed
    legislation relevant to the management and governance of Amtrak, Amtrak's
    articles of incorporation and bylaws, and recent grant agreements between
    Amtrak and FRA. We also reviewed various proposals to reform both
    intercity passenger rail and Amtrak operations put forth by the
    administration and Amtrak's board and management. Finally, we discussed
    oversight and accountability issues with Amtrak, board, and FRA officials
    and reviewed previous GAO reports on Amtrak's financial condition and
    operations. We used this information to identify the type and degree of
    oversight and accountability that has been exercised by various Amtrak
    stakeholders and the potential role that reform efforts might play in
    future oversight and accountability of Amtrak or other intercity passenger
    rail operators.

    In performing our work, we reviewed and considered best practices
    described in documents from leading organizations in each of our five
    areas. These documents included various GAO reports and guides issued over
    the years on strategic plans and planning processes, financial management
    and internal controls, the implementation of GPRA requirements,
    acquisition practices, and the components of a framework for analyzing
    federal investments. These documents helped us to compare Amtrak's
    management practices with those of leading organizations.

    We conducted our work from April 2004 to July 2005 in accordance with
    generally accepted government auditing standards.

    Chapter 2

    Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based Approach to
    Better Ensure Cost-effective Results

    Although Amtrak has improved its management approach in recent years, it
    still lacks a comprehensive strategic planning process and
    performance-based framework characteristic of leading organizations.
    Leading organizations we have studied use strategic planning to articulate
    a mission and goals for all levels of the organization, measure progress
    toward those goals, and ensure accountability for results. Amtrak,
    however, has not developed a comprehensive strategic plan that includes a
    mission statement and corporatewide goals to articulate what it is trying
    to accomplish. In the absence of a clear statement of its overall mission,
    Amtrak developed a capital plan (titled by Amtrak a "strategic plan"),
    which focuses mainly on one goal-restoring the company's infrastructure to
    a state of good repair. Although this plan provides guidance for its
    capital funding, Amtrak lacks a meaningful strategic plan that articulates
    measurable corporatewide goals, strategies, and outcomes. Similarly, while
    the five management tools instituted by Amtrak's president provide a
    framework for determining annual goals and budgets, they do not provide an
    approach that sufficiently focuses on outcomes (such as service and
    on-time performance) rather than outputs (such as units of production).
    The departments within Amtrak have developed their own department-specific
    goals, but without a mission or corporatewide goals, Amtrak cannot ensure
    that its department-specific goals support or improve overall corporate
    performance. Further, many department goals were set without a sufficient
    understanding of current baselines or what was achievable.

    Evidence of a robust, corporatewide performance management framework is
    also absent. Key departments within the company-the engineering,
    mechanical, transportation, and marketing and sales departments-could
    benefit from a performance-based approach to achieving goals-that is,
    developing and documenting strategies or action plans to achieve goals;
    using an incentive-based system to help ensure clear responsibility and
    accountability for supporting corporate performance; and generating key
    data for monitoring, evaluating, and reporting on performance.

    In April 2005, Amtrak's board and management released a set of strategic
    reform initiatives that includes a vision for Amtrak and suggests that
    Amtrak, among other things, plan and report by lines of business-but
    challenges exist to fully implementing these initiatives. Specifically,
    Amtrak officials noted such challenges as the need for legislative action
    and the ability to keep its employees focused on long-term change. These
    challenges, along with the uncertainty of Amtrak's future, may all affect
    whether Amtrak's initiatives are adopted and implemented.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

      Leading Organizations Manage by Focusing on Missions and Goals Spelled Out in
      a Strategic Plan

    Leading organizations we have studied-both public and private-use
    strategic planning as the foundation for their activities.1 For these
    organizations, the strategic plan articulates a mission and goals for all
    levels of the organization that are tied to the strategies that will be
    used to achieve those goals. The strategic plan provides a foundation for
    strategic management initiatives, such as organizational realignment;
    performance planning, measurement, and reporting; accountability for
    results; and improvements to the capacity of the organization to achieve
    its goals. The strategic planning process facilitates communication within
    the organization as well as with external clients and allows oversight
    bodies to assess overall performance. For example, in the federal arena,
    GPRA established a strategic planning process as a way to demonstrate and
    communicate performance and focus federal agencies on the results of their
    activities (outcomes) as opposed to the activities themselves. Publicly
    traded, private companies-such as the freight railroads whose officials we
    interviewed-said they rely on strategic planning to establish, assess, and
    communicate company goals, resources, and strategies for the next 3 to 5
    years.

    Strategic plans developed by the leading organizations we studied include
    the basic elements outlined in figure 7. One of these elements is a clear
    linkage between the overall organizational mission, organizationwide
    strategic goals, and the activities of all organizational units. The first
    step in the process involves developing a comprehensive mission statement
    that employees, clients, customers, partners, and other stakeholders
    understand and find compelling.2 The leading organizations we studied then
    seek to establish clear hierarchies for performance goals and measures by
    linking the performance goals and measures for each organizational level
    to successive levels and ultimately to the corporatewide goals and
    mission. Annual goals provide a connection between the corporatewide
    strategic goals and the day-to-day activities of managers and staff and
    provide measures of progress toward achieving the

    1GAO, Executive Guide: Leading Practices in Capital Decision-Making,
    GAO/AIMD-99-32 (Washington, D.C.: December 1998). In this executive guide,
    criteria were developed to select a mixture of private and public
    organizations, including, but not limited to, the Mobil Corporation,
    General Electric, Washington State, and Minnesota.

    2GAO, Comptroller General's Forum: Highlights of a GAO Forum on
    High-Performing Organizations: Metrics, Means, and Mechanisms for
    Achieving High Performance in the 21st Century Public Management
    Environment, GAO-04-343SP (Washington, D.C.: Feb. 13, 2004).

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    corporatewide mission. Without clear, hierarchically linked performance
    measures, managers and staff throughout the organization lack
    straightforward road maps showing how their daily activities can
    contribute to attaining corporatewide goals and mission.

    Figure 7: Key Elements of a Strategic Plan

    Source: GAO.

    In addition, a performance-based framework is essential for ensuring that
    all activities and individuals within the organization are working toward
    goals and achieving results. Within this framework, organizations identify
    strategies and resources to achieve their goals; hold individuals
    accountable for contributing to those goals; and use performance data to
    monitor, evaluate, and report on progress toward goals. Once these
    organizations develop fact-based understandings of how their activities
    contribute to accomplishing their mission and broader results, they
    evaluate and adjust their efforts, if necessary, to optimize their
    contributions to corporate results.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

      Amtrak Lacks a Strategic Plan That Includes Key Elements Necessary to
      Comprehensively Manage the Corporation

    Amtrak has not developed a comprehensive strategic plan that articulates a
    mission, corporatewide goals that are tied to the mission, strategies that
    will be employed to achieve those goals, and outcomes for efforts needed
    to run all the components of its operations-both capital and operating.
    Amtrak developed a capital plan-which it calls a strategic plan-that
    covers capital projects, ties to the capital budget, and supports the
    state of good repair goal, but Amtrak does not have a documented plan that
    includes measurable or comprehensive corporatewide goals or strategies for
    other aspects of the company's operations. Units within Amtrak have
    developed department-specific goals, but without a strategic plan, Amtrak
    cannot ensure that these goals support corporatewide performance.

        Amtrak Lacks a Comprehensive Statement of Its Overall Mission

    Amtrak does not have a comprehensive statement of its overall mission to
    provide and communicate a clear focus for the company. One Amtrak official
    noted that the issue of Amtrak's mission is at the heart of the Amtrak
    debate. Amtrak's president has not established a comprehensive mission for
    Amtrak. Instead, he has focused on repairing and improving the railroad
    and believes that policy makers-such as the administration and
    Congress-are responsible for determining Amtrak's role. However, federal
    statute already articulates a purpose for the company-to operate a
    national rail passenger transportation system.3 To bring focus, Amtrak,
    like any public or private organization, is responsible for taking that
    broad purpose and establishing a clearly defined mission that describes
    specifically what the organization plans to do and how it plans to do it.

    Amtrak's board of directors has a role in defining this mission, but until
    recently, the board has not been active in doing so. The chairman of
    Amtrak's board agreed that the board is responsible for establishing a
    mission for Amtrak, but the Amtrak board meeting minutes between February
    2002 and August 2004 did not contain any written documentation of the
    board discussing a vision or mission for Amtrak. The board chairman said
    the absence of a full complement of board members has limited the board's
    ability to develop a mission for the company.4

    349 U.S.C. S: 24701.

    4Over the period of October 2003 to June 2004, the board only had two
    voting members, exclusive of the Secretary of Transportation or his
    designee.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

        Amtrak's Corporatewide Goal and Strategies Encompass Only Part of Its
        Operations

    Since April 2003, Amtrak's president focused the company's efforts on
    returning the railroad to a state of good repair-that is, to improve the
    condition of its equipment and infrastructure. In testimony before the
    Senate Committee on Commerce, Science, and Transportation in 2003,
    Amtrak's president noted that repairing and improving the railroad is in
    "everyone's interest" because regardless of Amtrak's future structure,
    Amtrak's infrastructure will have to be in a state of good repair to
    provide intercity passenger rail service. As we reported in April 2003,
    Amtrak had developed a substantial deferred capital backlog (about $6
    billion-$3.8 billion of which was attributable to the Northeast
    Corridor),5 and in reports dating back to 1995, we noted that this issue
    needed to be addressed soon. 6 Amtrak officials have noted that, in the
    past, the absence of a focus on a state of good repair had resulted in
    such things as deteriorating bridges, increased trip times, and decline in
    overall ride quality.

    Amtrak's goal of a state of good repair addresses infrastructure
    deficiencies. However, the company's focus on this one issue leads to an
    unbalanced approach to the management of its business. For example,
    Amtrak's goal of a state of good repair addresses the company's capital
    program, including the repair or replacement of rails, bridges, and
    locomotives, but does not encompass important elements of Amtrak's
    operations-such as human capital and customer service-and lines of
    business-such as commuter rail and reimbursable services.7 Focusing on one
    priority at the expense of others may skew the company's overall
    performance and keep managers and oversight bodies from seeing the whole
    picture. In the subsequent chapters, we explain how Amtrak has significant
    challenges in a number of areas, such as an increasing operating loss and
    the procurement of goods and services. Not broadening its focus to include
    the myriad of other challenges and critical areas at Amtrak could continue
    to jeopardize the future viability of the company and undermine efforts to
    control the required level of federal subsidies and ensure federal dollars
    are efficiently and effectively spent.

    5GAO-03-712T.

    6GAO, Intercity Passenger Rail: Financial and Operating Conditions
    Threaten Amtrak's Long-Term Viability, GAO/RCED-95-71 (Washington, D.C.:
    Feb. 6, 1995); Northeast Rail Corridor: Information on Users, Funding
    Sources, and Expenditures, GAO/RCED-96-144 (Washington, D.C.: June 27,
    1996); and GAO/RCED-00-138.

    7Amtrak operates six commuter rail services under contract and provides
    mechanical and engineering services for third parties.

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    Amtrak does not have a meaningful strategic plan but rather has developed
    a detailed 5-year capital plan to support its corporatewide goal of a
    state of good repair. Amtrak titled this document a "strategic plan," but
    Amtrak's president and board chairman both acknowledge that this plan is
    essentially a capital plan that covers capital projects and ties to the
    capital budget. The capital goals in Amtrak's plan translate to capital
    production goals for certain departments, such as the mechanical and
    engineering departments, and link to achieving the goal of a state of good
    repair. For example, the engineering department had a performance goal to
    install 155,760 concrete ties in fiscal year 2004. By completing this
    goal, the engineering department is supporting Amtrak's goal of achieving
    a state of good repair, although without a strategic plan, it is unclear
    how important this performance goal is toward achieving a state of good
    repair or to what extent achieving this goal will remedy the
    infrastructure deficiency.

    Although Amtrak has a detailed capital plan, Amtrak lacks a strategic plan
    that articulates a comprehensive mission, measurable corporatewide goals,
    strategies, and outcomes for the efforts needed to run all the components
    of its operations-both capital and operating. For example, Amtrak does not
    have a documented plan that states measurable corporatewide goals or
    strategies for controlling or reducing costs, managing on-time
    performance, increasing the productivity of the workforce, or reducing
    dependence on federal funding in its strategic plan. Amtrak's capital plan
    for fiscal years 2005 through 2009 includes information on Amtrak's
    operating loss-noting that its operating loss will increase over the next
    several years. To offset this increase, the plan proposes implementing
    "additional service, crew, and equipment efficiencies." This plan,
    however, does not include measurable targets or strategies to achieving
    these efficiencies. Amtrak's president maintains that the operating budget
    provides guidance for these initiatives. Although the operating budget
    provides financial targets for the departments, it does not, however,
    articulate measurable goals, strategies, or outcomes for the corporation.

    Amtrak's president acknowledged that there was very little documentation
    of plans, strategies, and goals. He said that Amtrak was looking to
    produce results, not develop documents and written strategies during this
    time. He also said that staff knew what they needed to get done during the
    2002 to 2005 time frame-reduce headcount and increase production. In our
    view, however, this is a risky approach since there is no assurance that
    goals and strategies are clearly communicated and understood by those
    responsible for carrying them out. Moreover, it is also important to
    establish clear, consistent goals at the organization and agency levels in
    order to identify

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    the risks that could impede the efficient and effective achievement of
    these goals.

    Unlike Amtrak, some of the railroads we contacted develop comprehensive
    corporatewide goals to support their missions. Figure 8 illustrates
    examples from these railroads. For example, one freight railroad company
    developed a mission statement that focuses on its three constituencies-
    customers, employees, and shareholders-and established six categories of
    business objectives to implement that mission and drive its strategic
    planning process. In another example, VIA Rail established a mission
    statement that is supported by its six corporatewide goals.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

        Without a Link to a Mission or Corporatewide Goals, Amtrak's
        Department-Specific Goals Do Not Demonstrate Support of Corporate Outcomes

    Absent a strategic plan containing a comprehensive mission and
    corporatewide goals and strategies, Amtrak lacks a process for developing
    annual department-specific performance goals that ensures these goals
    support or improve corporate outcomes. Leading organizations we studied
    developed fact-based understandings of how their activities contribute to
    accomplishing their overall mission and broader results.8 In contrast,
    Amtrak's capital-related goals link to its capital plan, while Amtrak's
    department heads generate operations-related goals that are based on the
    priorities and activities of their own departments and seek to align those
    goals with the priorities of Amtrak's president. Except for providing a
    standard template for stating the departments' goals, Amtrak has little
    companywide written guidance on how to develop department goals and
    objectives.

    The process Amtrak uses provides no assurance that goals developed by a
    department contribute to improved overall company performance. Amtrak
    managers said some department goals, such as those related to on-time
    performance, safety, and ticket revenue, are self-evident. We agree that
    these goals are important for Amtrak's performance. However, without a
    strategic plan that addresses all company activities, the departments
    cannot (1) assess or communicate the extent to which their
    department-specific goals are related to the priorities of the
    organization or (2) contribute to Amtrak's overall performance.

    In addition to the lack of a process for developing department-specific
    goals that relate to a mission and corporatewide goals, Amtrak's
    department-level targets9 in fiscal years 2003 and 2004 were not always
    set with a clear understanding of current baselines or what a department
    could hope to achieve. This lack of clarity, according to Amtrak
    officials, resulted from such things as the following:

    o 	Limited experience or data on which to set goals and targets. According
    to Amtrak officials, in previous years, goals existed in areas such as
    safety and on-time performance, and some departments developed their own
    set of goals. However, prior to fiscal year 2003,

    8GAO-04-343SP.

    9According to the Office of Management and Budget, a "target" is defined
    as a quantifiable or otherwise measurable characteristic that tells how
    well a program must accomplish a performance measure.

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    departments were not required to develop goals as a basis for Amtrak's
    budgets. As a result, some department-level targets in fiscal years 2003
    and 2004 were based on assumptions, not an analysis of data, because data
    did not exist. An Amtrak official acknowledged that in fiscal years 2003
    and 2004, there was no hard link between goal setting and data analysis.
    For example, the target for the transportation department's injury goal10
    in fiscal years 2003 and 2004 was based on the previous year's target
    since, according to an official in the transportation department, the
    department did not achieve its goal of a 3.8 injury ratio in the previous
    fiscal years. The engineering department established a delay minute target
    for fiscal year 2003 but missed the target by over 60,000 minutes because,
    according to the chief engineer, the department set the goal without an
    understanding of the impact of the company's increased capital
    activities.11 Without data, goals have also been set by making incremental
    improvements to historical trends. For example, the engineering department
    established an absenteeism target to reduce absenteeism by 10 percent over
    the fiscal year 2003 results. Amtrak officials said that, in some cases,
    Amtrak's goals are an expression of "aspiration" rather than a realistic
    target. For example, Amtrak's on-time performance has averaged about 75
    percent from fiscal years 1990 to 2003, yet the transportation department
    set its fiscal year 2004 on-time performance at 85 percent.

    o 	Organizational restructuring. According to officials, Amtrak's
    organizational restructuring effort also affected the departments' ability
    to establish and achieve goals. For example, officials in the mechanical
    department noted that although the department established goals in fiscal
    years 2003 and 2004, officials were more focused on the restructuring
    effort than on achieving department goals and maintain that organizing the
    department's structure, policy, and standards are critical components
    required to meet the departments' goals.

    10The injury ratio is determined by the number of injuries per 200,000
    work-hours, which is an industry standard in reporting employee injury
    rates.

    11In fiscal year 2003, the engineering department's target for reducing
    the number of delay minutes caused by capital work was 111,212 delay
    minutes. Amtrak's chief engineer noted that fiscal year 2003 was the first
    time an effort had been made to set a goal for delay minutes due to
    capital investment activities. He stated that the fiscal year 2003 capital
    program was a major increase in capital activities over the prior years
    and foreseeing the combined impact of these activities was beyond the
    department's capabilities in fiscal year 2003. However, he stated, in
    fiscal year 2005, these delays are being forecasted and measured and
    thoughtful goals are being established.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    Amtrak officials recognize that goal development at Amtrak is a work in
    progress and believe that the departments are more focused in setting more
    strategic and measurable goals. For example, in a review of the marketing
    and sales department's ticket revenue goals for fiscal years 2003, 2004,
    and 2005, we found that the department had established more specific
    targets for its 2005 goal than for its 2003 goal. However, without a
    mission statement or corporatewide goals, Amtrak cannot demonstrate or
    ensure that its departments' activities contribute to accomplishing
    corporate results.

        Amtrak's Five Tools Support Short-term Results but Not the Long-term
        Management of the Corporation

    Amtrak's five management tools provide a process for identifying Amtrak's
    need and use for resources on an annual basis and produced some results.
    As noted in chapter 1, Amtrak's president instituted five management
    tools-the organization chart, operating budget, capital program
    (communicated through a document that Amtrak calls a strategic plan),
    goals and objectives, and monthly performance reports. These tools are
    used to manage the corporation, control costs, and address the challenges
    that existed when Amtrak's president arrived at Amtrak. Annually, each
    department is required to develop budgets that are based on activity
    levels and clear, specific, measurable goals. Amtrak's president stated
    that because of these tools, Amtrak has seen results, including decreased
    headcount and increased production activities, from what Amtrak
    characterized as "a program that had been all but eliminated by fiscal
    year 2002" to a production line approach with tangible results.

    Although Amtrak's tools provide a framework for developing annual goals
    and budgets, these tools do not provide a long-term, integrated approach
    for managing the corporation and focus on outputs (units of production),
    not outcomes (results, such as better service or on-time performance). One
    important internal control standard is risk assessment, and a precondition
    to risk assessment is the establishment of clear, consistent goals and
    objectives both at the entity level and the activity (program or mission)
    level.12

    Without a strategic plan to guide all business activities, Amtrak does not
    have a process for integrating the efforts across the organization or for
    assessing and addressing company risks. Moreover, without a strategic

    12GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G
    (Washington, D.C.: August 2001).

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    plan, Amtrak does not have overall corporate performance measures and
    cannot establish a clear understanding of what it is trying to accomplish
    with its resources and company activities.

      Amtrak's Planning Process Could Benefit from Increased Use of a
      Performance-Based Framework to Achieve Its Goals

    While Amtrak's key departments-the mechanical, engineering,
    transportation, and marketing and sales departments-have made some
    progress in setting goals, they will likely continue to struggle in
    achieving those goals without incorporating elements of a
    performance-based framework. These elements include

    o 	developing strategies or action plans that describe the processes,
    methods, and resources necessary to achieve the goals;

    o 	linking unit goals to individual responsibilities to hold individuals
    accountable for contributing to the achievement of the goals; and

    o 	using reliable performance data to monitor, evaluate, and report
    performance results and determine how well activities and programs
    contribute to achieving goals and improving performance.

        Amtrak's Key Departments Do Not Consistently Develop Comprehensive
        Strategies to Achieve Department Goals

    Amtrak's key departments do not consistently develop comprehensive
    strategies or action plans for achieving their key goals. For example, the
    marketing and sales department articulated specific objectives or actions
    for achieving its ticket revenue goal in fiscal years 2003 and 2004. In
    contrast, the transportation department is still in the process of
    implementing a plan to address train delays caused by passengers boarding
    the train, but the department did not develop documented strategies or
    action plans for other elements that affect on-time performance, such as
    freight or commuter train interference. An official in Amtrak's
    transportation department noted that some goals lack action plans because
    some goals and objectives lend themselves to action plans better than
    others and that "aspirational goals" often come down to "just work
    harder."

    Without action plans, Amtrak lacks clearly stated strategies for how it
    intends to achieve its goals. For example, the mechanical department
    established a goal in fiscal year 2004 to create a "national" mechanical
    department but did not develop a specific action plan to achieve that
    goal. Although Amtrak's president acknowledged that Amtrak did not have a
    written action plan for establishing the national mechanical department,
    he

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    maintains that he and his staff knew what needed to be done to establish
    the national department. Officials in the mechanical department stated
    that organizational charts were used to detail the position requirements
    and equipment assignments by location, and that standard work scopes were
    also developed. However, without a documented action plan, Amtrak cannot
    ensure that critical actions and milestones are established and accurately
    communicated to those involved in the transition or monitor progress
    toward the transition.13

        An Incentive-Based Performance Management System Could Strengthen
        Accountability for Achieving Goals

    To hold the department heads accountable for goals and budgets, Amtrak's
    president holds quarterly and periodic reviews with department heads, who
    are required to sign off on financial and headcount information in the
    company's monthly performance reports. For example, the department heads
    within the operations department-including the engineering, mechanical,
    and transportation departments-review the status of their budgets and
    goals every quarter in a meeting with Amtrak's president and senior vice
    president of operations. Departments outside of the operations department,
    such as the marketing and sales department, meet with Amtrak's president
    on a periodic basis to review the department's budget and discuss the
    status of some department goals.

    Although Amtrak managers told us that they hold their managers accountable
    for achieving department goals and the results of the goals are factored
    into annual personnel evaluations, Amtrak does not have a
    pay-for-performance management system to provide incentive for achieving
    goals. That is, individual performance is not directly tied to
    compensation. Leading organizations we have studied seek to create pay,
    incentive, and reward systems that clearly link employee knowledge,
    skills, and contributions to organizational results. Amtrak officials
    noted that management has considered implementing a performance-based
    compensation system and has discussed a plan with Amtrak's board of
    directors. However, because of other concerns being addressed by the
    board, Amtrak management's pay-for-performance plan has not been on the

    13In our December 2004 report, we found that Amtrak did not develop an
    implementation plan for addressing the key challenges related to the
    settlement between Amtrak and the Consortium of Bombardier and Alstom. We
    also reported in February 2004 that Amtrak's lack of comprehensive project
    management for the Northeast High-Speed Rail Improvement Project
    contributed to its inability to achieve project goals.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    board's agenda as of March 2005, and, according to an official, Amtrak
    does not plan to implement such a plan this fiscal year.

    According to an Amtrak official, the board has been working with
    management to resolve their concerns about the pay-for-performance system,
    such as which management positions would be eligible and the operational
    and financial metrics to make merit pay and bonus decisions. Another
    Amtrak official noted that the current performance evaluations do not have
    much impact on performance because there is no satisfactory or
    unsatisfactory rating and no tie to compensation. An Amtrak official from
    the strategic planning department noted that a pay-for-performance system
    is critical to successfully implementing Amtrak's strategic reform
    initiatives. This type of system, he stated, is essential for Amtrak to
    act more like a private entity. However, it would be difficult for Amtrak
    to implement a pay-for-performance system without first establishing
    organizationwide goals that provide the basis for aligning daily
    activities with broader results.

        Amtrak's Data Systems and Processes Limit Its Ability to Monitor, Evaluate,
        and Report on Performance

    A common theme we found in numerous areas we reviewed involved Amtrak's
    limited ability to effectively monitor, evaluate, and report on
    performance due to the shortcomings of some of its data systems and
    reporting processes. These shortcomings were manifested in several ways.
    First, we found numerous instances where key reports were missing relevant
    information or where information was of questionable reliability. As
    discussed in more detail in chapter 3, we found that Amtrak's monthly
    performance reports, a key document used by managers and stakeholders
    alike, did not contain information that would enhance their relevance to
    users. For example, information on Amtrak's food and beverage service did
    not include gross profit analysis, revenues, cost of meals, and other
    basic metrics. Second, as discussed in detail in chapter 4, Amtrak lacks
    certain key cost metrics, such as cost-per-revenue passenger mile and
    cost-per-locomotive overhaul that would allow managers to better measure
    performance, assess whether resources are being used efficiently, and
    identify potential cost-saving areas. Finally, as discussed in detail in
    chapter 5, Amtrak's procurement and financial databases are limited such
    that management does not have detailed, reliable, and comprehensive data
    on total spending for the estimated $500 million it spends annually on
    goods and services. The absence of such information, which is due, in
    part, to limitations in Amtrak's computer systems and lax controls over
    data reliability, makes it difficult to identify strategic sourcing
    opportunities, leverage Amtrak's buying power, and reduce procurement
    costs.

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    One department we reviewed had made progress. That is, Amtrak's
    engineering department has developed a data system that allows the
    department's managers to monitor performance in a real-time basis. The
    department developed a computer "dashboard" system that is updated every
    day and requires the department's 45 managers to review the status of
    their goals on a daily basis after they log into their computers. See
    figure 9 for a snapshot of the dashboard. For example, one "dial" on the
    dashboard shows the real-time status of the department's safety goal
    compared with the year-to-date and month-to-date targets. The chief
    engineer said that if these data show a variance in a goal, he can "drill"
    into the data to determine the unit within the department that is
    experiencing problems and the person responsible for that unit. He then
    contacts the head of the specific division to discuss the cause and the
    actions taken to address the problem. Although this system does not
    monitor all of the department's goals, it allows managers to monitor,
    analyze, and quickly respond to changes in performance goals on the basis
    of real-time information.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    Figure 9: Snapshot of the Engineering Department's Dashboard System

    Source: Amtrak.

    Despite positive developments in some areas, Amtrak's overall reporting
    processes lack management controls, which can lead to an incomplete and
    inaccurate picture of performance. Leading organizations we have studied
    prepare annual performance reports that document the results the
    organization achieved compared with the goals they established. To be
    useful for oversight and accountability results, these reports, among
    other things, clearly communicate performance results. In contrast,
    although an Amtrak official noted that all departments are encouraged to
    report on their goals through the monthly performance reports, Amtrak's
    key departments do not consistently report on all their goals through an

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    established process, such as quarterly reviews or the monthly performance
    reports. For example:

    o 	Although the transportation, engineering, and mechanical departments
    report on budgets and goals in a quarterly review process with Amtrak's
    president and senior vice president of operations, they do not report on
    all of their goals in these reports. For example, the transportation
    department did not report on three of its eight goals at the end of fiscal
    year 2004-including goals on reducing road vehicle equipment expenses and
    meeting public health and Food and Drug Administration standards relating
    to food handling, water point inspection, and facility comprehensive
    plans. According to one official, these goals are not included in these
    reports because they have less emphasis for the department than safety and
    on-time performance goals and involve only $1.5 million of the
    department's $1 billion budget. He noted that the managers within the
    transportation department report on these goals to the vice president of
    transportation. Without a formal process for reporting on these goals, it
    is unclear whether these goals were achieved.

    o 	Similarly, officials in the marketing and sales department stated that
    they work with the finance department to determine which goals to report
    in the monthly performance reports. Through the monthly performance
    report, the marketing and sales department reported on its ticket revenue,
    ridership, and safety targets but did not report on the status of its
    targets relating to developing and implementing service and product
    improvements. Officials in the marketing and sales department noted that
    the department monitors the progress of its goals and updates the progress
    on a quarterly basis.

    Amtrak officials told us that the departments report on "key" department
    goals through the monthly performance reports and monitor other goals
    within their departments. This selective reporting does not provide the
    complete transparency needed to provide management and key stakeholders
    with a complete and accurate picture of each department's performance and
    the performance of Amtrak as a whole. Also, presumably all established
    goals, while perhaps not all equal in terms of importance to the
    department, are relevant and important or they would not have been
    established. Reporting on only certain goals is counter to a systematic
    performance-based approach and may ultimately impede stakeholders from
    knowing the complete information from which to judge overall performance.

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    Amtrak's Proposed In April 2005, the board, in conjunction with Amtrak
    management, released

    its proposed strategic reform initiatives, which included a proposed
    visionStrategic Reform for the future of intercity passenger rail
    service14 and Amtrak's role in this Initiatives Face vision. 15 (See fig.
    10.)

    Significant

    Implementation

    Challenges Figure 10: Amtrak's Vision and Strategic Reform Initiatives

    Amtrak's vision for its role in an intercity passenger rail system

    0M  Deliver superior service - including continued excellence in
    operational safety and security, and infrastructure/asset management,
    while becoming more market- and customer-oriented

    0M  Serve as a catalyst for change - helping the nation's intercity
    passenger rail system achieve the long-term objectives described above

    0M  Evolve into one of a number of competitors for passenger rail services
    and routes, all positioned on equal competitive footing

    Amtrak's strategic reform initiatives for advancing its vision for
    intercity passenger rail

    0M  Amtrak's structural initiatives Establish and reinforce management
    controls Organize planning and reporting by business lines Advance
    competition and privatization

    0M  Amtrak's operating initiatives Enhance financial performance Improve
    customer service and on-time performance Transition operating and capital
    funding responsibilities

    0M  Legislative initiatives Establish adequate, reliable long-term federal
    funding for intercity passenger rail Initiate state leadership in
    developing and managing rail corridors Establish federal legislation to
    promote competition

    Sources: Amtrak Strategic Reform Initiatives and FY06 Grant Request, April
    2005.

    14This vision for an intercity passenger rail system is outlined through
    four objectives: (1) development of passenger rail corridors based on a
    federal-state capital matching program, with states serving as the
    developers and "purchasers" of competitively bid corridor services; (2)
    return of the Northeast Corridor infrastructure to a state of good repair
    and operational reliability, with all users gradually assuming financial
    responsibility for their proportionate share of operating and capital
    needs; (3) continuation and possible addition/elimination of certain
    national long-distance routes based on established performance thresholds;
    and (4) emergence of markets for competition and private commercial
    participation in all passenger rail functions and services.

    15Amtrak Strategic Reform Initiatives and FY06 Grant Request, April 2005.

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    Unlike in prior years, the proposal notes that the strategic plan for
    fiscal years 2006 through 2010 will contain business plans for each line
    of business, along with operating and capital investment plans to meet the
    objectives-driven by milestones, goals, and timetables. According to an
    official in Amtrak's strategic planning group, Amtrak intends to develop a
    strategic plan for fiscal year 2006 that would include a company mission
    statement and goals that would tie to the mission and goals of each line
    of business, and Amtrak's department goals would be based on the mission
    and goals for Amtrak's lines of business. In addition, the proposal states
    that Amtrak will (1) provide regular reports on its progress toward this
    plan, as well as continued monthly performance and financial reports,
    along with future annual assessments of lessons learned at each phase, and
    (2) will propose any adjustments to the plan details or overall objectives
    as necessary. Amtrak proposes to complete the implementation planning
    process during the summer of 2005 and release the plan in the fall of
    2005.

    If fully implemented, these proposed changes in planning and reporting
    could potentially provide Amtrak with a more comprehensive management
    approach and guidance for the various components of its business,
    including its capital program, and provide better information both
    internally and externally on Amtrak's overall performance. However,
    challenges exist to fully implementing these initiatives. First, as
    Amtrak's board chairman noted, legislative action is required to implement
    many aspects of the plan. These legislative actions include, among other
    things, the federal government either assuming Amtrak's annual debt
    service payments or eliminating Amtrak's debt burden (about $3.8 billion
    in short-and long-term debt at the end of fiscal year 2004) and
    transitioning Amtrak out of the railroad retirement system. Second, Amtrak
    officials noted that major challenges within Amtrak exist in implementing
    this new planning process, including the time and effort needed to
    implement these initiatives and the ability to keep people focused on
    long-term change, even with the uncertainty of Amtrak's future.

    As of May 2005, the missions and goals for the lines of business were in
    the process of being developed and should be completed within the next
    couple of months, according to an Amtrak official. In addition, the
    departments were developing their goals for fiscal year 2006, using the
    same process from the past 3 fiscal years. With the goal development
    process already under way, this official noted that Amtrak decided that
    the departments would continue to develop their goals while the mission
    and goals for the lines of business were also being developed. Once the
    mission and goals for the lines of business are determined, Amtrak
    officials will

     Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
                    Approach to Better Ensure Cost-effective Results

    assess whether the departments' goals conflict with the goals established
    for each line of business and, if so, adjust the goals accordingly. Amtrak
    officials also told us that the departments met in June 2005 to discuss
    goals and ensure coordination and support between departments.

    Conclusions	Amtrak's management tools have allowed the company to operate
    with a more structured process. Among other things, these tools provide
    Amtrak with a clearer organizational structure, a mindset of managing to
    goals and objectives, and a means of reporting progress. These tools
    represent a good first step. In a number of respects, however, these tools
    present a limited framework when compared with other organizations that
    have progressed further in their strategic planning efforts. It is clear
    that Amtrak will need to continue moving aggressively in this area,
    because current efforts have not been sufficient to provide all elements
    of the organization with a clear mission, an understanding of how to set
    and accomplish goals that contribute to this mission, or sufficient
    information on the progress being made toward a mission. This action will
    be needed in spite of what may happen with regard to Amtrak's proposed
    changes to its structure and its role in intercity passenger rail. To
    address the multitude of challenges facing Amtrak and provide useful
    performance information to Congress, Amtrak needs to build the capability
    to define goals, set priorities, ensure follow-through, and monitor
    progress.

      Recommendations for Executive Action

    To build on the strategic planning efforts already under way at Amtrak, we
    recommend that Amtrak's president take the following four steps to create
    a strategic planning and performance-based management approach:

    o 	prepare a comprehensive strategic plan with a clearly defined mission,
    organizational goals and objectives that encompass all of Amtrak's
    activities, and strategies or action plans to achieve those goals;

    o establish annual performance goals that tie to the mission and corporate
    goals;

    o 	develop an incentive-based performance management system that ensures
    responsibility for goals is clearly articulated at all levels of the
    organization; and

    Chapter 2 Amtrak Lacks a Comprehensive Strategic Plan and a
    Performance-Based Approach to Better Ensure Cost-effective Results

    o 	assess and develop the data systems and processes necessary to monitor,
    evaluate, and report-both internally and externally-on progress toward
    Amtrak's mission and strategic and annual performance goals.

    Chapter 3

    Financial Management Practices Could Better Support Amtrak's Decision Making

    Improvements are needed to ensure that Amtrak's management and
    stakeholders are provided with useful financial information, and that
    financial management practices are sufficient. We examined three aspects
    of Amtrak's financial management: (1) the usefulness of financial
    information provided to management and external stakeholders, (2) the
    design of internal control over selected areas of expense, and (3)
    Amtrak's efforts to strengthen management practices. While progress has
    been made, all three areas are in need of further improvement.

    First, although Amtrak has made progress in establishing a more systematic
    process to provide financial information to management and external
    stakeholders, much of the financial information it uses for day-to-day
    management purposes lacks certain relevant information or is of
    questionable reliability. Second, our review of the design of internal
    control practices in two areas-employee benefit expenses and food and
    beverage service--identified a number of weaknesses. For example, not
    considering certain accrued employee benefit expenses resulted in an
    understatement of more than $100 million in employee benefit expenses and
    a potential lost revenue of $12 million under reimbursable agreements, and
    poor enforcement of contract provisions may have contributed to Amtrak's
    spending $2 for every $1 in revenue from on-board food and beverage
    service. Third, although progress has been made in responding to other
    internal control weaknesses identified by Amtrak's IPA in recent reports,
    the progress has come mainly through the implementation of manual
    after-the-fact detective controls that do not prevent errors from entering
    the system. In addition, Amtrak missed opportunities to increase the
    usefulness and transparency of financial information by restricting public
    reporting of work performed by its IPA.

      Financial Reports Lacked Certain Relevant Information and Contained
      Significant Errors

    In recent years, Amtrak has placed increased emphasis on improving the
    financial information used to manage the company. However, although Amtrak
    has made progress in improving its financial information, we found that
    this information could be more useful. After reviewing 29 monthly
    performance reports and three year-end addenda1 issued from May 2002
    through September 2004, we found that the reports' shortcomings limited
    their usefulness to management and external stakeholders. They lacked
    certain relevant information and contained significant errors. Since these

    1Two of these addenda were for fiscal year 2002, and the third was for
    fiscal year 2003. The year-end addendum for fiscal year 2004 was not
    available at the time of our analysis.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    reports were issued, Amtrak has made further progress, but more remains to
    be done.

        Certain Relevant Information Was Not Included in Monthly Performance Reports

    Our past work has shown that one common component of strategies adopted by
    leading organizations in the area of financial management is providing
    meaningful information to managers and external stakeholders. Amtrak has
    taken steps in this area by creating monthly performance reports
    containing a variety of financial information, including financial
    information for specific train routes, called route performance
    information (RPI). According to Amtrak officials, these reports are now
    one of Amtrak's key management tools. We view the reports as a positive
    step: they represent a significant contribution toward establishing a
    systematic process to provide financial information to internal and
    external stakeholders.

    Although the monthly performance reports are an improvement, we found that
    practices were not in place to ensure the monthly reports contained
    information that would enhance the relevance to management and external
    stakeholders. The information available in the reports included
    preliminary financial statements and budget reports. Amtrak officials view
    the monthly reports as summary documents and believe a sufficient amount
    of information is being provided. We agree the monthly reports are summary
    documents. Missing, however, was information that could enhance management
    decision making and stakeholder input, such as information about food and
    beverage service activities, employee benefits, and core business
    operations (see fig. 11). For example, enhanced food and beverage-related
    information would include gross profit analysis, revenue information
    (including separate amounts for food and beverage sales), information on
    the cost of meals, and other metrics basic to a food service operation.
    The absence of this information hinders the assignment of accountability
    for performance internally or externally by key stakeholders.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    Figure 11: Examples of Relevant Information Not Included in Amtrak's
    Monthly Performance Reports

    Food and beverage service

    Revenue and expense information specific to Amtrak's food and beverage
    service, an area with significant financial challenges. Despite food and
    beverage-related financial losses totaling about $160 million for fiscal
    years 2002 and 2003, the monthly performance reports we reviewed did not
    separately report any information on food and beverage revenue or expense,
    but instead combined these amounts with other reporting line item amounts.

    Employee benefits

    Employee benefit cost trends, changes in the components of benefit costs,
    and initiatives to manage these costs were not included in the monthly
    reports. While the monthly reports include a comparison of actual employee
    benefit expenses to budgeted amounts, additional information related to
    these significant costs, which totaled over $1.5 billion in the 3 fiscal
    years ended September 30, 2004, or about 16 percent of Amtrak's total
    operating expenses, was not provided.

    Lines of business

    For core business operations (rail passenger service) and each noncore
    line of business (commuter rail operations, reimbursable agreements, and
    commercial activities): (1) components of key expenses (i.e., salaries and
    benefits) and (2) trends in key expense categories and differences in
    actual versus budgeted results.

    Source: GAO analysis of Amtrak monthly performance reports.

    The RPI included in the monthly performance reports also lacked certain
    relevant information, as follows:

    o 	First, the financial information was at a summary level that did not
    allow detailed analysis of individual train routes. Only aggregate amounts
    were provided for total revenue, expense, and net profit or loss for each
    of the approximately 45 train routes that are Amtrak's core business line
    (rail passenger transportation) as well as for its noncore business lines
    (principally, commuter rail operations and reimbursements for equipment
    and right-of-way maintenance services). Not available, for example, were
    specific amounts for such expense components as salaries, employee
    benefits, and overhead for each train route and noncore business line.
    Also absent was comparative expense information, such as month-to-month
    and year-to-year changes in expenses. Such information could be useful in
    addressing issues raised in congressional testimony by Amtrak's board
    chairman on April 19, 2005. In this testimony, the chairman outlined a
    need to focus on providing reporting of financial activity and performance
    along Amtrak's business lines.2

    2Testimony of David M. Laney, Esq., chairman of Amtrak's board of
    directors, before the Subcommittee on Surface Transportation and Merchant
    Marine, Senate Committee on Commerce, Science, and Transportation, on
    Tuesday, April 19, 2005.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    o 	Second, even the summary information for each train route and business
    line did not include depreciation expense. This expense, which totaled
    $606 million in 2003 and $479 million in 2002, was not allocated by train
    route or by business line. Amtrak did not include the allocation of
    depreciation expense, because management believes allocating such a large
    noncash item is not helpful in determining the operational result of a
    route. For example, Amtrak told us that total depreciation expense
    includes depreciation of the capitalized costs of certain sale and
    leaseback transactions, the required accounting for which Amtrak believes
    inflates the "true" capitalized costs of these assets and, thus, the
    related depreciation expense. However, not allocating these significant
    expenses had the effect of understating reported expenses for core and
    noncore business lines by 19 percent and 15 percent, respectively. For a
    capital-intensive business, this information is critical to assessing
    performance and making business choices about individual train routes and
    noncore business line activities, such as commuter rail operations.

        Information in Monthly Performance Reports Was of Questionable Reliability

    A third limitation of the information in the monthly performance reports
    was that it was of questionable reliability. We identified several
    problems related to reliability, as follows:

    o 	Financial information was incorrect and had to undergo subsequent
    adjustments. Information in the monthly reports was generated from data
    that subsequently required significant adjustments to correct errors in
    amounts before audited financial statements could be issued. As a result,
    the reliability of the information provided to managers and stakeholders
    during the fiscal year was questionable. For example, according to Amtrak,
    after the close of the fiscal year, corrections made to the Amtrak
    financial information included management entries and audit adjustments,
    with the latter being made only after receiving sign-off from the external
    auditor (the fiscal year 2002 opinion was dated March 31, 2003 and the
    fiscal year 2003 opinion was dated February 25, 2004).3 These adjustments,
    which totaled hundreds of millions of dollars

    3In its technical comments on a draft of this report, Amtrak told us that
    releasing unaudited data on a monthly basis and then releasing final
    audited data after sign-off by independent auditors is the norm for all
    corporations. We agree; however, because of the magnitude of the
    misstatements in Amtrak's unaudited monthly data and the time required
    after the end of the year before the information is corrected, the
    information used for decision making during the year is not reliable and,
    therefore, is not useful.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    for fiscal years 2002 and 2003 and required 197 separate entries to
    correct the books and records, were not reflected in the monthly reports
    and the RPI data until 7 months after the end of the fiscal year. The
    magnitude of these misstatements might have been detected had Amtrak
    performed a comprehensive risk assessment to identify the core causes of
    these vulnerabilities in accounting and financial reporting controls that
    adversely impacted the usefulness of the monthly performance reports and
    RPI data. Amtrak has noted that financial audit adjustments, one of the
    types of corrections made at year-end, have decreased significantly from
    fiscal years 2002 through 2004, which would have a positive effect on the
    reliability of interim financial information provided to stakeholders.
    However, a risk assessment would be particularly important to identifying
    the need for and designing practices to improve the reliability of
    information in monthly performance reports by reducing all types of
    adjustments at year-end. In our discussions with Amtrak officials, we were
    told that no such risk assessment had been performed.

    o 	Changes to methods for allocating costs to individual train routes were
    insufficiently documented. Amtrak officials could not provide us with
    documentation to support any of the changes made to how expenses were
    allocated for any of the reports we reviewed. For example, Amtrak did not
    document who authorized the changes, the reason for or effect of the
    changes, or even the number of changes that were made. Further, without
    documentation to support changes made to how expenses were allocated, it
    was not practical for us to independently replicate the amount of expenses
    charged to individual train routes. As a result, we were unable to
    determine the effect of the changes we identified on the quality of
    information provided to stakeholders. In addition, officials advised us
    that since the beginning of RPI publication in 1993, no comprehensive
    review had been performed of the allocation methods to assess the
    reasonableness, consistency, and reliability of results.4 In providing
    technical comments on a draft of this report, Amtrak officials told us on
    September 2, 2005, that many areas, such as fuel and insurance expenses,
    have been reviewed through special studies over the years and that
    allocation methodologies are

    4Amtrak officials told us that at the start of fiscal year 2004, Amtrak
    began documenting some of the changes to allocation rules. This effort
    could be a positive change in controls. However, our limited review of
    certain supporting documentation generated from this practice identified
    inconsistencies in the amount and nature of the support. In addition, we
    could not ensure that all changes to the allocation rules were documented.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    reviewed continuously, eliminating the necessity for a comprehensive
    review. We were not provided with evidence of such reviews and, as
    previously noted, we found that changes to how expenses were allocated
    were not documented.

    o 	Overreliance on allocation of cost. It is generally preferable to
    directly identify as many costs as practical to cost centers or activities
    such as train routes and to indirectly allocate the remainder on some
    reasonable and consistent basis.5 However, Amtrak relied heavily on
    indirect cost allocation methods in assigning costs to individual routes.
    In all, for fiscal years 2002 and 2003, Amtrak allocated about $4.3
    billion of costs using cost allocation methods and directly assigned only
    about $357 million, or about 8 percent. This practice impacts the
    reliability of the RPI being presented to key stakeholders. Amtrak
    officials told us that a significantly higher percentage of costs is, in
    effect, direct. That is, certain costs pertain only to a single route and
    are accordingly allocated fully to that route, producing the same result
    as direct assignment. However, we were not provided with evidence to
    support the assertion that a percentage significantly higher than 8
    percent of costs is directly assigned.

    o 	Sufficient support for reported amounts was not available. Amtrak did
    not generate sufficient support for amounts reported as reconciling items
    of the RPI to the grand total of expenses reported in Amtrak's statement
    of operations. For example, we requested support for $2 billion of
    expenses reported as RPI reconciling amounts in fiscal years 2003 and
    2002. We sought this supporting information to assess the reliability of
    the total expense amounts allocated to the individual train routes.
    However, an Amtrak official said that the information was not readily
    available and would need to be developed for our purpose, and that such a
    reconciliation was considered redundant and unnecessary. When we received
    some of the information that we requested for 2003, we found errors
    affecting the reliability and credibility of the RPI. For example,
    approximately $11 million of employee benefit expense had been improperly
    included with the expenses for noncore lines of business and was not, as
    should have occurred, allocated in an equitable manner to all business
    lines. As a result, we estimated that the information in the RPI for the
    expenses of core business lines (intercity rail passenger transportation)
    was understated by an estimated $9.5

    5Statement of Federal Financial Accounting Standards, Number 4.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    million; the expenses for commuter rail operations and other noncore
    business lines were overstated by the same amount.

    In addition, we found that depreciation expense in the amount of $479.3
    million was reported in the RPI for fiscal year 2002 at $44.3 million, an
    understatement of $435 million. A corresponding overstatement of $435
    million was reported in the RPI for the expense of noncore business lines.
    Amtrak officials have suggested this instance was an insignificant
    "typographical error"; however, we view it as the product of inadequate
    control procedures over the generation of the RPI. We also found that an
    amount of $19.8 million, which was identified as prior period adjustments,
    was not consistent with the audited financial statements for 2003, which
    reflected no prior period adjustments. In total, expenses per the RPI
    agreed with total expenses per the audited financial statements. However,
    given the specific errors identified, this situation could only occur with
    offsetting differences of like amounts in other RPI-reported amounts.
    Thus, the RPI also included misstatements in one or more other areas to
    adjust the report for these errors.

      Internal Control Weaknesses Existed in the Two Areas GAO Reviewed

    A sound, entitywide system of internal control is an integral part of
    effective management. Internal control helps to ensure effectiveness and
    efficiency of operations, reliability of financial reporting, and
    compliance with applicable laws and regulations. Managers need to
    continually assess and evaluate their internal control practices to ensure
    that they are well-designed and well-operated, are appropriately updated
    to meet changing conditions, and provide reasonable assurance that
    organizational objectives are being met.

    We reviewed the internal control practices in two key areas of Amtrak's
    business and found weaknesses in both areas.6 The two areas we reviewed,
    selected because of their size and importance, were the following:

    6We conducted our review using the principles underlying GAO's Standards
    for Internal Control in the Federal Government. We applied these
    principles as our standard because of the significance of the federal role
    in Amtrak's operations and the importance of Amtrak's responsibility to
    account for its stewardship of the billions of dollars of government
    resources provided to it. These principles are consistent with the
    internal control principles established by the American Institute of
    Certified Public Accountants and are used in audits of nongovernmental
    entities.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    o 	Employee benefit expenses. These expenses totaled more than $1.5
    billion over the 3-year period ending September 30, 2004, and represent
    approximately 16 percent of the total operating expenses over that period.

    o 	Food and beverage service. Food and beverage service expenses totaled
    more than $324 million over the 2-year period ending September 30, 2003,
    and represent approximately 5 percent of the total operations expenses
    over that period. In addition, food and beverage service is critical from
    a financial standpoint because, as our analyses show, Amtrak loses
    substantial sums of money on food and beverage service.

    The weaknesses we found adversely affected the quality of financial
    information provided to management and external stakeholders. In the
    employee benefit area, for example, control weaknesses resulted in a
    misstatement of expenses among lines of business of nearly $105 million
    and in potential lost revenue from third-party reimbursements totaling $12
    million for the 3-year period we reviewed. In the food and beverage area,
    although Amtrak incurred $2 in expense for every $1 in revenue, it did not
    ensure compliance with key contractual provisions that would have enhanced
    the quality of the information available for management purposes.

        Internal Control over Employee Benefit Expenses Needs Further Improvements

    Costs of Providing Benefits Were Understated and Not Fully Recovered

    During our review of the 3-year period ending September 30, 2004, we noted
    improvements in Amtrak's monitoring of actual and allocated employee
    benefit costs; however, control weaknesses exist in the benefits programs
    for both Amtrak's employees and its senior executives. The weaknesses in
    the larger program relate primarily to how benefit costs are allocated and
    adjusted, while the weaknesses in the senior executive program relate
    primarily to establishing the basis for performance award amounts.

    Amtrak did not allocate accrued postretirement health benefit expenses
    among its lines of business; instead, it allocated only the company's

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    estimated cash contributions to fund health benefit expenses for current
    retirees.7 As a result, the cost information provided to stakeholders on
    the different lines of business was incomplete and understated. Amtrak's
    practice of allocating only the estimated cash contributions is also
    different from the practice used by Class I freight railroads in
    developing shipping rates.8 In setting their rates, these railroads
    identify and include as a basis for setting rates the full costs of these
    benefits, whereas Amtrak identifies and recovers only the cash basis costs
    for services performed for third parties.

    In addition, for fiscal years 2002 through 2004, Amtrak used standard
    rates that did not result in the allocation of the actual amount of
    benefit expenses to all of its different lines of businesses, including
    reimbursable work performed for other entities in return for a fee, which
    resulted in potentially lost revenue totaling $12 million. Amtrak
    established standard benefit expense rates at the beginning of each year
    and applied the rates to actual labor expenses as they were incurred
    throughout the year. However, it was not until fiscal year 2003 that
    Amtrak began to periodically adjust its benefit expense rates to reflect
    actual experience. We noted that the amount of the misstatements decreased
    in 2004 when compared with the earlier years we reviewed. Also, because
    the following year's benefit expense rates are established before Amtrak
    issues its audited financial statements, the company would need to adjust
    the rates used for the effect of prior year-end adjustments-a practice it
    first employed in 2004.

    The net effect of these weaknesses was an understatement of benefit
    expenses among Amtrak's lines of business totaling nearly $105 million and
    potentially lost revenue totaling $12 million. (See table 2.) The largest
    understated amount-$76.9 million-resulted from the difference between the
    amount Amtrak allocated using estimated cash contributions ($25.8

    7The cash basis method of accounting reflects revenues when received and
    expenses when paid rather than at the time the revenue is earned or the
    expense is incurred, which applies to accrual accounting.

    8These methods are governed by applicable law and related regulations
    issued by the Surface Transportation Board (STB). The STB developed a
    standardized costing model for the freight railroads that is used for,
    among other things, developing variable expenses the STB needs to evaluate
    the reasonableness of maximum shipping rates during dispute proceedings.
    We recognize that Amtrak is not required to comply with requirements
    imposed on the freight railroads, but the practices of the freight
    railroads offer an interesting illustrative comparison to those of Amtrak.
    Class I railroads are the nation's largest railroads.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    million) and the total accrued postretirement expenses ($102.7 million).
    Also, by not adjusting standard benefit rates to reflect higher actual
    amounts, Amtrak understated expenses among its lines of business by
    another $28 million.

    Table 2: Summary of Effects of Understatements and Potentially Lost
    Revenue for the 3-year Period Ending September 30, 2004

    Dollars in millions

                                                                 Potentially lost
                                            Issue Understatement          revenue
             Not allocating full accrued costs of
                                employee benefits          $76.9             $7.5
             Not adjusting standard benefit rates
                                               to
                                   actual amounts           28.0
                                            Total         $104.9            $12.0

    Source: GAO analysis of Amtrak data.

    By not including accrued postretirement expenses in billings to outside
    parties, Amtrak may potentially lose revenue; it also risks not collecting
    all accrued benefit expenses should commuter or reimbursable contracts be
    terminated. When we brought this issue to the attention of Amtrak
    officials, they said that outside parties might be resistant to
    reimbursing Amtrak for an allocable share of these expenses. However, we
    reviewed examples of commuter and reimbursable contracts and found that a
    reasonable interpretation of the contractual provisions supports the use
    of full accrual expenses as the basis for amounts charged under these
    agreements consistent with how such amounts are determined under Amtrak's
    overall method of accounting.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    Control Practices over Supplemental Executive Retirement Plan Awards Were
    Weak

    Control practices over Amtrak's Supplemental Executive Retirement Plan
    (SERP) were weak.9 In February 2000 and January 2004, $551,765 was granted
    in 34 separate SERP awards. Five awards totaling $147,580 were given to
    the two individuals who served as Amtrak's president and chief executive
    officer during this period; the remaining awards went to 25 other persons.
    We identified three main weaknesses with the way in which these awards
    were made:

    o 	Criteria to evaluate performance were absent. The employment contract
    for Amtrak's current president provides that the board will authorize
    payment of a SERP award after a review of performance, based on criteria
    or goals set forth in a separate document as a guide. After we inquired
    about these criteria, an Amtrak official told us that no separate document
    existed setting forth the criteria that the board should use in evaluating
    performance. Board minutes approving the awards did not identify any
    specific performance goals that were achieved. For example, the board
    approved an award to a former president on the basis of Amtrak's
    performance in fiscal year 1999 and the positive outlook for fiscal year
    2000. However, Amtrak reported losses of $846 million, $840 million, and
    $877 million for fiscal years 1998, 1999, and 2000 (ending September 30,
    1998, 1999, and 2000, respectively).

    o 	Key terms needed to implement the process effectively were not defined.
    The SERP document contains important terms that are not adequately defined
    and, in some cases, are inconsistent with language found in board minutes
    and resolutions that implemented the plan. (See table 3 for examples.) The
    most important term that is not defined in the SERP is the "target" that
    must be met before the board will approve an award. Two terms included in
    the SERP-"financial targets" and "corporate plan targets"-can mean
    different things. For example, the latter term may include nonfinancial
    performance measures. Amtrak's management informed us that these terms had
    not been expressly

    9Amtrak's board passed a resolution in September 1999 approving the
    implementation of a SERP. The board also accepted management's proposal
    that, "contingent on Amtrak meeting its annual Corporate Plan targets and
    subject to board approvals, the SERP would provide an additional
    contribution of up to 10 percent of management committee members' pay into
    individual non-qualified deferred compensation accounts that will be 100
    percent vested at the time contribution is made.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    defined.10 Such ambiguity leaves open the possibility that the board could
    apply inconsistent definitions, adversely affecting the credibility of
    award decisions.

    o 	Awards were granted before financial results were finalized. The board
    granted awards in February 2000 and January 2004; the awards granted in
    2004 were given before the company had issued its audited financial
    statements. This practice may not be prudent, given Amtrak's history of
    significant changes to reported operating results upon audit.

    Table 3: Examples of Key SERP Terms That Were Not Defined

    Term used in SERP Term used in board
    document resolution Potential effects

    Financial targets Corporate plan targets No consistency in basis for award

    Management committee member; senior staff employee Management committee
    member Lack of clarity as to who is eligible; when asked, management could
    not provide a definitive list

    Compensation Pay	Inconsistency in how amount of award is determined

    Source: GAO analysis of Amtrak data.

    Adequate control practices over activities involving the SERP are
    necessary for Amtrak to fulfill its responsibilities to be accountable for
    stewardship of its resources, including federal subsidies.

        On-board Food and Beverage Service Control Practices Need Strengthening

    During fiscal years 2002 and 2003, Amtrak incurred $2 in expense for every
    $1 in revenue from its on-board food and beverage service. The total loss
    for these 2 years was over $160 million. This loss must be funded by other
    revenue sources, including federal subsidies; reduction in expenses; or
    some combination of the two. Amtrak's control practices over its on-board
    food and beverage service need strengthening. We found that, although this

    10For the January 2004 awards, the board's resolution stated the reasons
    for the awards were that "Amtrak achieved significant reductions in
    spending and managed to complete the year under budget, meeting its
    financial goals for FY03." However, it is not clear what aspects of the
    budget the board was referring to in its resolution. Amtrak's management
    could not tell us whether the board's reference to the budget meant
    revenue, expenses, net income, or some or all of these. The board did not
    expressly approve in advance the financial targets that would serve as
    performance measures for any subsequent SERP awards.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    activity has significant inherent risk, Amtrak did not ensure compliance
    with key provisions of its contract11 or adequately monitor contractor
    activity.

    Contract Provisions Were Not Amtrak has not enforced key contract
    provisions, which has negated its

    Enforced	ability to prevent and detect improper payments for food and
    beverage service. We identified three key provisions that were not
    enforced.

    o 	Providing an annual report. The contract requires the contractor to
    provide an independently audited annual report within 120 days following
    the end of each contract year. This report was to be certified by
    contractor officials. Within the annual report, the contractor was to
    provide (1) actual and budgeted amounts for key line items and (2) a
    narrative explanation for any actual to budget variance greater than 1
    percent in the aggregate for all commissaries.12 However, Amtrak has not
    required the contractor to provide this annual report for any of the 5
    years the contract has been in place. Amtrak was unable to provide
    documentation regarding why this key contract provision was not enforced.
    Amtrak officials told us that they relied on contractor-provided monthly
    operating statements and on reports from the Amtrak OIG instead of the
    annual report.

    These mechanisms, while useful, would not meet fundamental control
    purposes. We found that the monthly operating statements lacked critical
    information that was to be included in the annual report and, importantly,
    lacked independence because they were prepared by the party seeking
    reimbursement and were not audited. In contrast, the contractually
    required annual report was to have been certified by contractor officials
    and audited by a certified IPA. The Amtrak OIG reports, while providing
    management with information on some aspects of Amtrak's food and beverage
    service activities, should not be viewed as a substitute for a
    comprehensive internal control program. Internal control should be a
    continuous built-in component of

    11In January 1999, Amtrak entered into a contract with Dobbs International
    (now called Gate Gourmet International (Gate Gourmet)). This contract
    expires on September 30, 2006. Under the terms of the contract, Gate
    Gourmet supplies substantially all food and beverage service items for
    on-board sales by Amtrak employees. The contract includes one 5-year
    extension option.

    12Amtrak owns 11 commissaries nationwide. Gate Gourmet operates these
    commissaries for Amtrak.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    operations that, among other things, considers the results of audits and
    ensures prompt resolution. This component is especially critical in an
    operational area where Amtrak is losing considerable money. In addition,
    upon reviewing the Amtrak OIG's work, we found that certain scope
    limitations existed. For example, the Amtrak OIG noted in a report on the
    food and beverage contract to Amtrak management that its work in this area
    had been limited due to the contractor's failure to provide certain
    requested information and documentation.

    o 	Determining whether discounts and rebates were adequately passed along.
    Under the contract with Gate Gourmet, Amtrak is permitted to receive
    discounts and rebates on food and beverage purchases by the supplier.
    However, Amtrak has not implemented processes to ensure that rebates and
    discounts received directly from suppliers or indirectly through its
    contractor are accurate and complete. The contract allowed Amtrak to audit
    the contractor's allocations of trade and quantity discounts received from
    purchases of food and beverages. However, Amtrak has neither requested an
    audit of the discounts credited to it over the 5 years the contract has
    existed, nor requested that the contractor certify that all discounts due
    to Amtrak had been credited to its account. Again, Amtrak was unable to
    provide us with written documentation supporting its decision or its
    consideration of this issue. Contractor representatives told us that many
    discounts are immediately reflected in the prices billed and, therefore,
    directly provided to Amtrak. They said that other supplier-offered
    discounts are paid or credited to the contractor retroactively, which are
    then allocated to individual accounts of the contractor (like Amtrak) on
    the basis of the percentage of aggregate purchases of the discounted
    items. Amtrak officials advised us that discounts and rebates totaling
    $278,385 and $278,073 for fiscal years 2003 and 2002, respectively, had
    been received on gross purchases subject to discounts and rebates of $3.6
    million and $2.9 million, respectively.13 Amtrak officials also explained
    that the majority of rebates are received directly from suppliers and
    reviewed. However, no formal procedures have been established to review
    and verify the accuracy of the amount of rebates and discounts actually
    received from the suppliers. Because Amtrak did not require an independent
    audit or

    13Total purchases by the contractor for Amtrak exceeded $90 million for
    the 2-year period, roughly 13 times the amount of purchases the contractor
    reported as being subject to discounts and rebates.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    otherwise analyze the trade and quantity discounts received, it has
    limited assurance that such amounts were reasonable and complete.

    o 	Measuring contractor performance. The contract called for performance
    standards and measures to assist Amtrak in monitoring and evaluating
    contractor performance. These standards and measures have not been
    established in accordance with the provisions of the contract. Amtrak
    officials explained that these standards are addressed elsewhere in the
    contract. However, we believe that preparation of formal standards and
    measures, as called for in the contract, would have facilitated increased
    oversight. Under the contract, these standards include timeliness and
    completeness of deliveries, adherence to product specifications, food
    safety and sanitization practices, proper accounting for stock, and
    compliance with laws and regulations. Performance measurements could be
    used to evaluate performance against established performance standards,
    with the appropriate incentives and penalties applied on the basis of
    performance. In addition, appropriately used performance standards would
    be a mitigating control to partially address the risk associated with
    relying on contractor-produced monthly reports as the basis for payment to
    the same contractor.

    Contractor Purchases Need While Amtrak performs several activities to
    monitor food and beverage

                                    More Monitoring

    purchases by the contractor, these activities could be bolstered. We found
    that items were purchased at amounts that varied significantly without
    sufficient explanation or documentation of the variances. Amtrak officials
    said that they monitored contractor purchases using daily reports that
    listed quantity, unit size, cost, and the last prior purchase of the
    previous day's purchases. Also, Amtrak staff at its various commissaries
    sign off on a daily summary of invoices paid by its contractor and
    randomly verify the consistence of supplier invoices and receiving
    documentation. Further, Amtrak makes available to all employees via its
    intranet, various revenue reports that capture information by train, car
    type, location, dates, and usage reports that allow the review of stock
    issued to trains. However, Amtrak has not formally established internal
    control procedures, which would include ensuring that (1) all reviews are
    conducted in a timely and consistent manner, (2) identified errors or
    other issues are documented and tracked, and (3) corrective actions taken
    are documented to ensure completion. During fiscal years 2002 and 2003,
    Amtrak's data showed that it incurred $2 in expense for every $1 in food
    and beverage revenue, which resulted in a 2-year loss of over $160
    million.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    We used forensic auditing techniques, including data mining,14 to
    selectively review over $80 million of purchase order information for
    fiscal years 2002 and 2003. Our review found that the contractor was
    generating purchase orders with significant variances in unit order prices
    during both fiscal years 2002 and 2003. For example, the order prices of a
    12-ounce Heineken beer ranged from $0.43 to $1.04 per bottle in 2003, the
    order prices of a 4-ounce beef tenderloin ranged from $3.37 to $7.19, and
    the order prices of a 10-ounce strip steak ranged from $3.02 to $7.58. In
    2002, the Heineken beer order prices ranged from $0.63 to $3.93 per
    bottle, the beef tenderloin ranged from $0.30 to $6.60, and the strip
    steak ranged from $3.52 to $16.35 per portion.

    Amtrak officials told us that purchase order information did not always
    reflect actual amounts paid-either in total or per unit. For example,
    Amtrak officials said a price change may have occurred between the time an
    item was ordered and when it was delivered. They also said record-keeping
    errors may have occurred, and unit prices in the inventory system may, for
    example, be based on a different pack size than that received or from that
    used for the last purchase. However, given the importance of purchase
    orders in a food and beverage operation, it is important that internal
    control practices include processes to systematically analyze and monitor
    purchase order information. No such procedures were established by Amtrak.

    To determine whether order prices reflected actual amounts paid, we
    nonstatistically selected 37 payment transactions and reviewed the
    underlying supporting documentation provided by Amtrak, including purchase
    orders, receiving records, vendor invoices, and evidence of payments. The
    supporting documentation provided for these transactions identified
    significant variances in certain unit prices paid during fiscal years 2002
    and 2003. For instance, our review of the supporting documentation
    provided for the 37 payment transactions found payments for the Heineken
    beer ranged from $0.43 to $1.04 per bottle, payments for the beef
    tenderloin ranged from $3.05 to $6.59 per portion, and payments

    14Data mining applies a search process to a data set, analyzing for
    trends, relationships, and interesting associations. For instance, data
    mining can be used to efficiently query transaction data for
    characteristics that may indicate potentially improper activity.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    for the strip steak ranged from $4.70 to $5.28 per portion.15 Amtrak
    officials stated that the strip steak examples were "emergency purchases."
    However, following our request for documentation to support this claim,
    the Amtrak senior director of food and beverage service told us on June
    29, 2005, that documentation to support the assertion that these were
    emergency purchases did not exist. The establishment of internal control
    procedures that require the documentation of the (1) identification and
    correction of errors and (2) approval for emergency purchases would ensure
    that adequate documentation is readily available for review by internal
    and external parties.

    We also found that, Amtrak, on the basis of amounts reported by the
    contractor, paid the contractor each month for the cost of food and
    beverages purchased for Amtrak, as well as for commissary and associated
    labor expenses and other expenses incurred-the contract is a reimbursable
    contract. The contractor was also paid a fee based on the cost of on-board
    stock. However, Amtrak did not establish adequate internal control to
    address the potential risk of paying the contractor on the basis of
    contractor-reported amounts that did not include adequate supporting
    documentation. During fiscal years 2002 and 2003, contractor-prepared
    monthly operating statements were the basis for amounts paid by Amtrak
    totaling over $138 million to the contractor for goods and services
    provided. However, because proof of actual contractor payments made to
    suppliers was not required, and because of the other significant internal
    control weaknesses we previously listed, Amtrak had limited assurance that
    the amounts paid to the contractor were valid.

    15In our June 2005 testimony on Amtrak's food and beverage service
    (GAO-05-761T), we stated that in 2002 Amtrak purchased Heineken beer, in
    12-ounce bottles, at a price as high as $3.93 per bottle. This information
    was based on the documents provided to us by Amtrak. However, based on
    additional documents that Amtrak provided us on June 29, 2005, it appears
    that this purchase was for 10 half-kegs of beer, not 10 cases as indicated
    on the documents Amtrak previously provided.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

      Amtrak Has Made Progress in Improving Financial Management Practices, but More
      Work Remains

    For fiscal years 2002 and 2003, Amtrak's IPA reported multiple areas of
    significant internal control weaknesses as part of an annual audit of
    Amtrak's financial statement.16 However, for fiscal year 2004, the IPA
    reported that much progress had been made and only one significant
    weakness involving accounting for capital assets remained.17 Amtrak's
    progress in addressing its control weaknesses is an important achievement.
    In general, however, its efforts have been achieved primarily through the
    implementation of manual detective controls instead of preventive
    controls. Thus, improvements made by the end of fiscal year 2004 enable
    the production of useful financial information after the fact-typically, 5
    to 6 months after the end of the year. However, until effective controls
    are established that prevent errors in financial information and address
    their underlying causes, Amtrak's ability to produce relevant and reliable
    financial information for management and stakeholders to use for decision
    making will be hampered.

    Progress Was Made in In audits for fiscal years 2002 and 2003, Amtrak's
    IPA noted that the Addressing Internal Control company had made progress
    in addressing internal control weaknesses Weaknesses that previously had
    been reported to Amtrak's board of directors. Further,

    based on its audit of Amtrak's fiscal year 2004 financial statements, the
    IPA reported that much progress had been made and that only one
    significant weakness-involving accounting for capital assets-remained.
    However, the IPA noted that improvement had been achieved primarily from
    the implementation of manual detective controls compared with preventative

    16As of June 27, 2005, Amtrak's IPA had not issued its report on the audit
    of Amtrak's financial statements for the fiscal year ending September 30,
    2004-approximately 9 months earlier; however, on this same day, Amtrak
    management provided us with a copy of the internal control report from the
    IPA based on its work on the audit of the fiscal year 2004 financial
    statements. Our comments on fiscal year 2004 are based solely on the
    contents of this internal control report.

    17Amtrak's IPA reported one material weakness in this internal control
    report. A material weakness, under standards established by the American
    Institute of Certified Public Accountants, is a reportable condition in
    which the design or operation of one or more internal control components
    does not reduce to a relatively low level the risk that errors or fraud in
    amounts that would be material in relation to the financial statements may
    occur and be detected within a timely period by employees in the normal
    course of performing their assigned functions. Reportable conditions are
    matters coming to the IPA's attention that, in its judgment, relate to
    significant deficiencies in the design or operation of internal control
    and could adversely affect the organization's ability to record, process,
    summarize, and report financial data consistent with the assertions of
    management in the financial statements.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's
    Decision Making

    controls. Such detective, or "back-end," controls take place after
    transactions have been recorded and then corrected for misstatements after
    the fact. These controls are subject to human error, and a loss of key
    individuals could result in control breakdowns. In addition, it is
    relatively labor-intensive to ensure that such controls are operating
    effectively.

    We reviewed Amtrak's response to the IPAs findings in fiscal years 2002 to
    2003 with respect to internal control weaknesses regarding capital assets
    and found that Amtrak's response could be improved. We selected this area
    because of its size and significance-depreciation and amortization
    represented approximately 20 percent of Amtrak's total operating expenses
    for fiscal year 2003, and Amtrak's capital assets represent more than 83
    percent of its total assets. Amtrak's IPA had identified ongoing problems
    in this area in fiscal year 2001 audits. Similar to what the IPA observed,
    we found that Amtrak's response was limited mainly to back-end control
    procedures-that is, Amtrak looks at transactions after they had been
    recorded and corrects for misstatements after the fact. Such back-end
    procedures do not identify core causes of accounting mistakes and prevent
    the errors from entering the system.18 In contrast, front-end prevention
    control practices should, if fully and properly implemented, among other
    things, improve the usefulness of Amtrak's internal financial information.
    Importantly, without the appropriate front-end procedures to prevent
    errors from entering the system, information used by management and
    external stakeholders for decision making may not be reliable. Potential
    front-end procedures could include such things as monthly or more frequent
    reviews for accuracy and appropriateness by management of (1) capital
    expenditures incurred to date, (2) expected costs to complete against
    initial and revised project budgets, and (3) all proposed manual journal
    entries.

    18We discussed with Amtrak's IPA the approach Amtrak had taken.
    Representatives of the IPA told us their work did not extend to
    considering the appropriateness of the strategy Amtrak employed or whether
    the approach would be sufficient for interim financial reporting, such as
    the preparation of monthly reports that are to be provided to management
    and external stakeholders.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

        Other Opportunities to Increase the Usefulness and Transparency of Financial
        Information Have Been Missed

    Report on Internal Control and Compliance Was Not Made Public

    Amtrak management missed several other opportunities to use its IPA's work
    to increase the usefulness and transparency of its financial information.
    These opportunities relate to making all audit reports available to the
    public and expanding the work that the IPA conducts.

    Amtrak's IPA is engaged to report on the results of the audit of the
    consolidated financial statements of Amtrak. The IPA reports on the
    results of the audit of the consolidated financial statements, conducting
    this work in accordance with Generally Accepted Auditing Standards issued
    by the American Institute of Certified Public Accountants. This set of
    standards is typically used for audits of publicly and privately owned
    organizations. Amtrak's IPA is also separately charged with reporting in
    accordance with generally accepted government auditing standards issued by
    the Comptroller General of the United States. These standards, which are
    designed to meet the needs of users of government audits, prescribe two
    additional reporting requirements-reporting on internal control and
    reporting on compliance with laws, regulations, and provisions of
    contracts or grant agreements.

    The public sees the results of only one of these efforts. Amtrak tasked
    its IPA with issuing two reports, but the only report that is publicly
    available is the report that provides an opinion on the results of the
    audit of Amtrak's financial statements. The second report, which covers
    internal control and compliance with laws, regulations, contracts, and
    grants, is restricted to the use of Amtrak's management and the board of
    directors. DOT officials told us that they also receive the second report.
    Many other entities with significant federal ties (through direct
    subsidies, loan guarantees, or other direct and indirect relationships)
    receive and make publicly available reports by their IPAs that are in
    accordance with generally accepted government auditing standards. These
    entities include the United States Postal Service, Pension Benefit
    Guaranty Corporation, and Railroad Retirement Board. Amtrak officials were
    not able to provide us with a distribution list for this second report,
    and, according to these officials, they had no recollection of these
    reports being requested by or sent to any external parties.

    The concept of accountability for public resources is important in our
    nation's governing processes. Legislators, government officials, and the
    public want to know, among other things, whether (1) government

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    resources, such as the over $29 billion in subsidies provided to Amtrak,
    are managed properly and used in compliance with laws and regulations and
    (2) services are being provided efficiently, economically, and
    effectively. The desirability of transparency with respect to audit
    information on Amtrak's internal control and compliance with laws and
    regulations is, in our view, high given Amtrak's public mission and the
    large federal subsidies involved.

    Increasing IPA Role Could Help Amtrak's financial information could also
    be improved by using additional

    Improve Information	expertise available from the IPA-some of this
    expertise is already called for by contract but not utilized. The contract
    between Amtrak and its IPA called for work addressing compliance with
    certain federal regulations concerning overhead rates developed and
    applied to recover indirect costs associated with work performed for
    outside parties.19 While the contract contemplated this type of work,
    Amtrak did not engage the IPA to perform the work. Amtrak could also use
    the IPA's experience and knowledge by engaging the auditor for additional
    work related to making its financial information more useful to
    management. For example, engaging the IPA to review financial statements
    on an interim basis may have identified opportunities for improvement in
    the reliability and timeliness of data provided to stakeholders. Further,
    Amtrak could benefit from engaging an IPA to perform work specific to
    enhancing the timeliness and reliability of financial information used in
    monthly reports and for day-to-day decision making by management and
    external stakeholders. While this increased role by the IPA would not be
    without cost, the IPA is in a good position to efficiently identify the
    core causes of errors in financial information and other issues and
    develop controls and processes to prevent these errors.

    Conclusions	Although Amtrak has made progress in providing financial
    information for management purposes, the current information lacks the
    relevance and reliability needed to support managers and external
    stakeholders in exercising stewardship over the agency's operations,
    including federal subsidies. The current information is incomplete, in
    terms of both what is included and how specifically Amtrak's various train
    routes and lines of businesses can be evaluated. This information also
    contains significant errors. These deficiencies point not only to a need
    to improve financial reporting practices, but also to a deep-seated set of
    concerns: that is, the

    1948 C.F.R. Parts 140 and 646 and 48 C.F.R. Part 31.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

    types of internal control practices that are needed to help ensure the
    reliability of financial reporting are not in place. Amtrak's management
    may be able to correct a number of these issues on its own, but the
    company is likely to need outside help in developing a comprehensive
    approach to address internal control weaknesses and improve the financial
    information for management and external stakeholders.

      Recommendations for Executive Action

    To ensure that Amtrak's financial reporting and financial management
    practices support sound business decisions and the efficient and effective
    use of federal funds provided to Amtrak, we recommend that the Secretary
    of Transportation direct the Federal Railroad Administrator to take the
    following three actions:

    o 	require Amtrak to submit a plan, which includes specific actions to be
    taken, anticipated outcomes (consistent with the recommendations outlined
    below), and completion dates, to improve its financial reporting and
    financial management practices;

    o 	review and provide Amtrak with feedback and direction, as necessary, on
    this plan to ensure that the most effective approach(s) to improving
    financial reporting and financial management practices are implemented;
    and

    o 	monitor Amtrak's performance under the plan and report, at least
    annually, to Congress on progress being made by Amtrak regarding
    improvements of its financial reporting and financial management
    practices-this report should identify any specific actions either Amtrak
    or Congress should take to facilitate such improvements.

    To improve Amtrak's efforts in addressing financial management challenges
    and better support management decision making, we recommend that the
    president of Amtrak take the following eight actions discussed in table 4:

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

     Table 4: Specific Recommendations-Financial Reporting and Financial Management
                             Practices Issue Recommendation

    Improve usefulness of financial reporting

    Include relevant information in monthly performance reports Add the
    following information to monthly performance reports:

    o  Food and beverage services: separate revenue and expense information,
    gross profit analysis, information on the cost of meals, and other metrics
    basic to a food service operation.

    o  Employee benefits: cost trends, changes in the components of benefit
    costs, and initiatives to manage these costs.

    o  Each line of business: components of key expense line items and
    functional activities (such as salaries and benefits), trends in key
    expense components, differences in actual versus budgeted results, and
    appropriate performance metrics (such as revenue per passenger mile and
    expense per passenger mile).

    o  Each train route in the route performance information (RPI):
    comparative expense and net profitability or loss, amounts for
    depreciation expense, and amounts for other components of expenses (such
    as salaries and benefits).

    Increase reliability of information in Perform a comprehensive risk
    assessment of financial reporting processes that support

    monthly performance reports	preparation of monthly performance reports and
    the RPI, to include determining areas of vulnerability, implementing
    appropriate compensating and mitigating internal controls, and ongoing
    monitoring to ensure compliance.

    Make allocation policies and Document policies and procedures related to
    controlling the information in the monthly

    procedures more transparent	performance reports, including the RPI. The
    policies and procedures should cover how expenses are allocated to
    Amtrak's routes, as well as specific guidance on documenting the
    justification and authorization of changes made to allocation methods.

                         Improve financial management practices

    Ensure benefit costs are complete Allocate accrued postretirement health
    benefit expenses among Amtrak's lines of business and and can be recovered
    in billings to reflect accrued costs in billings for employee benefits
    under reimbursable agreements with outside parties outside entities.
    Adjust standard benefit expenses rate on a timely basis.

    Make compensation decisions more Modify existing controls:

    transparent  o  Clearly define all significant terms used in Supplemental
    Executive Retirement Plan (SERP) determinations (such terms include
    management committee member, senior staff employee, compensation,
    financial targets, and performance goals) so that they can be consistently
    applied throughout the process.

    o  Reconsider the timing of management proposals for SERP awards to ensure
    that decisions are based on information from audited financial statements.

    Develop internal control Develop a comprehensive action plan for
    immediately implementing preventive controls to

    enhancements	enhance the reliability of financial data and address the
    reportable condition over accounting for capital assets in the most recent
    reports and letters of comment from the independent public accountant.

    Seek assistance in strengthening Engage an independent public accountant
    to provide

    procedures  o  special services as necessary to provide assurance over
    compliance with federal regulations concerning overhead rates developed
    and applied to recover indirect costs associated with work performed for
    outside parties and

    o  review-level attestation work on Amtrak's quarterly financial
    statements.

    Chapter 3 Financial Management Practices Could Better Support Amtrak's Decision
                                         Making

                             (Continued From Previous Page)

                                  Issue Recommendation

    Enhance accountability and Continue to have annual audits of its financial
    statements performed under U.S. generally

    transparency	accepted government auditing standards (GAGAS) and, effective
    beginning with its fiscal year 2004 financial statement audit, make
    publicly available the auditor reports prepared under GAGAS reporting
    standards for financial audits, including those on internal control and
    compliance with laws, regulations, and provisions of contracts and grants.

    Source: GAO.

    Recommendations on the findings pertaining to Amtrak's food and beverage
    service are contained in a separate report issued in August 2005.20

    20GAO, Amtrak: Improved Management and Controls over Food and Beverage
    Service Needed, GAO-05-867 (Washington, D.C.: Aug. 24, 2005).

    Chapter 4

    Despite Increasing Operating Losses and Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control Strategy

    Although its operating losses and federal subsidy have been increasing,
    Amtrak has not developed a comprehensive cost control strategy. While
    Amtrak's operating expenses have decreased over the past 3 fiscal years,
    its operating losses have grown each year and are now over $1 billion1
    annually. These losses are projected to increase by about 40 percent over
    the next 4 years. Amtrak's cost-cutting focus has been on creating and
    monitoring its yearly operating budget and managing headcount levels, with
    its various departments deciding how much emphasis, if any, to place on
    any other cost control actions. However, such cost control actions have
    not been integrated into a comprehensive cost control strategy. Without a
    comprehensive strategy for containing costs, Amtrak will likely miss
    opportunities to reduce its operating losses. Furthermore, Amtrak does not
    have complete and reliable cost data that would support a comprehensive
    strategy. Without these data, Amtrak has limited ability to understand its
    corporate and unit costs and to identify where potential cuts might be
    most effective. Finally, Amtrak needs to continue to employ widely used
    industry cost reduction practices-such as benchmarking, outsourcing, and
    efficiency reviews-to help decrease its operating costs.

    1All dollar figures in this chapter are adjusted to constant 2004 dollars,
    unless otherwise noted.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

      Amtrak's Annual Operating Loss Has Grown to over $1 Billion and Is Projected
      to Increase to over $1.4 Billion, While Federal Subsidies Have Increased

    Although Amtrak's operating expenses have decreased, Amtrak's annual
    operating loss (total revenues minus operating expenses) has grown to over
    $1 billion each year over the last 3 fiscal years. During this same
    period, Amtrak's federal operating subsidy2 increased over 200 percent,
    from about $200 million in fiscal year 20023 to over $700 million in
    fiscal year 2005.4 Amtrak is projecting that its federal operating subsidy
    will remain stable from fiscal years 2006 to 2009, but that its operating
    losses will increase about 40 percent to over $1.4 billion by fiscal year
    2009.5 (See fig. 12.)

    2Amtrak's federal subsidy-separated as operating and capital subsidies-is
    distributed as a grant from FRA. Operating subsidies generally support
    Amtrak's day-to-day operations, including operating and maintaining
    rolling stock (locomotives and passenger or other cars), tracks, and
    stations. Amtrak's capital subsidy is designed for the acquisition or
    improvement of the railroad's rolling stock and infrastructure.

    3The amount for Amtrak's operating support in fiscal year 2002 does not
    include the following: $230 million in capital for maintenance, which,
    according to Amtrak officials, Amtrak considers an operating expense; $105
    million appropriated for various security and life safety improvements; or
    FRA's fiscal year 2002 $100 million emergency loan to Amtrak.

    4As shown in chapter 1, Amtrak's total federal subsidy since 1971 has been
    variable- ranging from about $9 million in fiscal year 1973 to over $1.7
    billion in fiscal year 1999.

    5For this report, we focused on Amtrak's expenditures, rather than
    revenues.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

    Figure 12: Amtrak's Constant Dollar Operating Losses and Federal Operating
                           Subsidy, Fiscal Years 2002 to 2009

    Dollars in millions 1,000 -1,000

    -1,500

    -2,000

                        2002 2003 2004 2005 2006 2007 2008 2009

    Fiscal year Projected

    Federal operating subsidy adjusted

    Operating loss adjusted

    Source: GAO analysis of Amtrak and Federal Railroad Administration data.

    Note: Amounts are in constant 2004 dollars. Fiscal years 2005 to 2009
    figures for operating loss and federal subsidy are Amtrak projections.
    Operating losses from fiscal year 2002 to 2004 and projected losses from
    fiscal years 2005 to 2009 do not include interest expenses.

    Amtrak's operating loss projections may be understated, however, since
    they do not include interest expenses6 and rely on $377 million in
    operating efficiencies that Amtrak estimates it could achieve as a result
    of operating efficiencies and benefits from capital investments in its
    Fiscal Year 2005 to 2009 Strategic Plan. In its April 2005 Strategic
    Reform Initiatives proposal, Amtrak estimates that it can achieve
    operating savings of nearly $550 million by fiscal year 2011. To achieve
    these savings, however, all of the elements in the reform proposal must be
    implemented, including the following: receiving an 80 percent federal
    capital match for state intercity passenger rail funds, realizing
    increased revenues from passengers,

    6Amtrak's interest expenses (net of interest income) averaged over $140
    million between fiscal years 2002 and 2004 (in constant 2004 dollars).

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

      obtaining additional state operating contributions for corridor trains, and
      eliminating all of its legacy debt by the federal government. (See table 5.)

    Table 5: Assumptions in Amtrak's Strategic Reform Initiative for Fiscal
    Year 2011 Operating Savings

    Dollars in millions

                   Assumptions Proposed savings Revenue enhancements

                    Cumulative benefit from gas price increases $80

                        Customer service enhancement benefit 100

    Proportionate share access payment increase from Northeast Corridor
    commuter agencies

    Additional state operating contributions from
    fully allocated costing on all corridor trains 115

    Additional state operating contributions from fully allocated costing on
    all long-distance trains

                                     Subtotal $340

    Cost reductions

                                    Outsourcing $90

    Productivity

    Phase-out of Railroad Retirement Tax

                                     Subtotal $205

                                       Total $545

    Source: GAO analysis of Amtrak data.

    Note: This table does not include the financial impact of a working
    capital infusion or other assumptions, such as no restructuring charges,
    from fiscal years 2006 to 2011.

    These projections also do not take into account the removal in April 2005
    of Amtrak's Acela trainsets from service for an undetermined period due to
    brake-related problems. The absence of Acela trains could have a
    significant impact on Amtrak's fiscal year 2005 revenues.7

    Both Amtrak's revenues and total expenses decreased between fiscal years
    2002 and 2004. Amtrak's revenues decreased by over 16 percent, and its

    7Amtrak's senior vice president of operations recently stated that Amtrak
    is losing over $1 million each week the Acela trainsets are out of
    service. According to Amtrak's May 2005 monthly performance report,
    between April 15 and May 31, 2005, Amtrak lost $17.5 million in revenue as
    a result of the Acela trainsets being out of service.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

    total expenses decreased by over 9 percent.8 Amtrak's revenues decreased
    more than its expenses by over $50 million. (See table 6.) The
    relationship between these decreases in both revenues and expenses can be
    reflected by the change in Amtrak's operating ratio, which shows that for
    every $1.00 in revenue, Amtrak spent $1.51 in fiscal year 2002. In fiscal
    year 2004, this increased to $1.63. As of July 2005, this number for the
    fiscal year to date decreased slightly to $1.61.

     Table 6: Amtrak's Real Total Revenues, Operating Expenses, Total Expenses, and
                      Operating Ratios, Fiscal Years 2002 to 2004

                                  Dollars in thousands

                                      Fiscal yeara

                                                               Change from fiscal
                                                                            years
            Description             2002       2003       2004      2002 to 2004b
          Total revenuesc    $2, 313,642 $2,117,908 $1,931,512         $(382,130)
        Operating expensesd   2,849,451  2,652,004  2,450,472           (398,979)
         Operating ratioe           1.23       1.25       1.27
          Total expensesf    $3,488,917  $3,417,610 $3,158,016         $(330,901)
         Total revenue to
           total expense
               ratio                1.51       1.61       1.63

    Source: GAO analysis of Amtrak data.

    aAmounts for fiscal years 2002, 2003, and 2004 include mail and express
    revenues and expenses. For fiscal year 2004, operating expenses and total
    expenses do not include $82.4 million in noncash special charges for
    discontinuance of mail and express service.

    bAmounts may not equal due to rounding.

    c Total revenues exclude federal operating subsidies.

    dThe operating ratio is calculated as operating expenses divided by total
    revenues. Operating ratios more than 1 indicate total operating expenses
    are higher than total revenues.

    eTotal operating expenses do not include interest or depreciation
    expenses.

    fTotal expenses include interest and depreciation expenses.

    The reasons for decreasing revenues and expenses include the following:

    o 	Revenues: The termination of the Massachusetts Bay Transportation
    Authority (MBTA) commuter rail contract resulted in a $150 million revenue
    loss in fiscal year 2004, or about 40 percent of the total

    8Fiscal year 2004 total expenses include depreciation and net interest
    expenses but do not include a one-time special charge of $82.4 million in
    noncash expenses Amtrak took as a result of termination of its mail and
    express business.

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    reduction in Amtrak's revenue. Revenues also decreased in part because
    Amtrak phased out its mail and express freight line of business in fiscal
    year 2004.9

    o 	Operating expenses: Decreases occurred in most of Amtrak's major
    expense categories. Labor costs, Amtrak's largest single expenditure
    category, accounted for about $200 million, or over 60 percent, of the
    overall decrease in expenses. Amtrak reduced its overall labor costs alone
    by almost 12 percent from fiscal years 2002 to 2004. This reduction was
    mainly achieved by reducing employees by about 3,500 over the same time
    period; about 1,500 of this reduction was due to the termination of the
    MBTA contract.10

    Amtrak will likely face challenges to reduce its operating costs through
    reductions in labor costs in the future. Amtrak's labor costs account for
    almost 50 percent of its total expenditures in fiscal year 2004. The labor
    force is about 85 percent unionized; therefore, attempts to reduce labor
    costs for much of Amtrak's labor force must be negotiated with the unions.
    According to Amtrak officials, by April 2005, Amtrak had signed contracts
    with 3 of its 15 unions, representing about 37 percent of Amtrak's union
    workforce. If the pattern from these three agreements extends to the
    agreements with the other unions, Amtrak officials estimate that wage
    costs could increase by almost 10 percent over the 5-year life of the
    agreements. Amtrak officials expect that each labor union settlement will
    include this same level of wage increase, since Amtrak has extended this
    level of wage increase to every union as part of its initial offer in the
    current bargaining round. Amtrak's labor relations officials are
    negotiating changes to work rules to increase productivity and lower
    headcount, which could lower labor costs. However, since Amtrak does not
    keep formal track of labor productivity savings or have labor productivity
    measures for its workforce, it is unclear how Amtrak will know if these
    savings are actually being achieved. As union labor wages increase and
    other labor cost reductions are uncertain, Amtrak may be pressured to
    reduce other costs in order to achieve significant reduction in its
    operating costs.

    9Part of the revenue decrease between fiscal years 2003 and 2004 can also
    be attributed to a one-time $30 million sale of assets in fiscal year
    2003.

    10Amtrak operated MBTA's trains and maintained their equipment and
    infrastructure under a contract that ended on June 30, 2003.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

    According to Amtrak officials, Amtrak may be able to offset other cost
    increases, such as health care costs, by introducing employee
    contributions toward health insurance premiums. Prior to the current round
    of labor negotiations, union employees did not contribute toward their
    health insurance costs, which constituted about 18 percent of Amtrak's
    total labor costs in fiscal year 2004. Amtrak officials stated that Amtrak
    has successfully implemented employee contributions in the three
    agreements it has already signed, and that these contributions are a part
    of Amtrak's initial negotiation offer to each of its unions.11 However,
    since both work rule changes and employee health care contributions are
    subject to negotiation with each labor union, it is uncertain if Amtrak
    will be able to implement them across its workforce.

      Amtrak Has Not Developed a Comprehensive Cost Control Strategy

    Amtrak has not developed a comprehensive cost control strategy that uses
    performance or cost information to most effectively direct its cost
    control efforts. In our work on GPRA, we noted that leading organizations
    in the public and private sector-in their efforts to improve performance
    while reducing costs-use performance information as a basis for allocating
    scarce resources and for assessing which of their processes are in the
    greatest need of improvement in terms of cost, quality, and timeliness. In
    particular, we found that no picture of how taxpayers' money is being
    spent is complete without adequate cost and performance information. By
    analyzing the gap between where they are and where they need to be in
    order to achieve desired outcomes, management in leading organizations can
    target those processes that are in the most need of improvement, set
    realistic improvement goals, and select appropriate improvement
    techniques.12

    We found examples of comprehensive cost strategies at several of the
    railroads we studied. One freight railroad, for example, adopted a
    corporatewide review of its entire cost structure to identify less
    incremental and more strategic cost saving opportunities. Railroad
    officials said this effort, under its chief financial officer, resulted in
    $90 million to $100 million in cost savings per year. VIA Rail, Canada's
    intercity passenger

    11In the three agreements signed, employees are ultimately expected to
    contribute $75 per month toward their health insurance premiums.

    12GAO, Executive Guide: Effectively Implementing the Government
    Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996).

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    rail company, also has had a focused corporatewide effort to reduce costs
    since its government funding decreased in the early 1990s. Since that
    time, according to VIA Rail officials, VIA Rail has maintained its
    corporatewide cost reduction efforts in large part due to its fixed
    subsidy level from the Canadian government. Because VIA Rail's management
    knows that it will receive a set amount every year in government subsidy
    and no more, it has a clear incentive to contain its costs below its
    revenues and subsidy amount. VIA Rail is further incentivized to reduce
    costs because any amount of the federal subsidy not spent can be set-aside
    by the railroad for future use.

    Amtrak's efforts to develop a cost control strategy or to obtain the
    information necessary to do so have been unsuccessful. For example,
    Amtrak's chief financial officer announced a department goal for fiscal
    year 2003 "to develop system-wide costs and standards for major
    activities," which would "provide a better understanding of its cost
    structure, leading to better [cost] control." However, Amtrak's former
    chief financial officer stated that this goal "did not take off," leaving
    no effective corporatewide impetus or action plan to ensure it was
    implemented. Amtrak's controller cited two reasons why Amtrak has not
    created a corporatewide cost containment strategy. First, Amtrak does not
    have any detailed benchmarks (i.e., information or standards) available
    that could be used in its efforts to create corporatewide cost
    information. Amtrak has not developed reliable and accurate unit cost
    information or standards to construct benchmarks because it has no
    reliable cost information on which to base them. Second, Amtrak does not
    have an integrated, reliable, or timely way to track and collect cost
    information across all departments. Amtrak's controller told us that
    Amtrak's current financial software was not designed to capture cost
    information from different departments across the country. The software
    currently in use has been implemented piecemeal over time, making it
    difficult for different versions to interact and share data.

    Amtrak's acquisition function is a good example of the company's
    difficulties in identifying costs and cost saving opportunities. Although
    Amtrak officials told us that they analyzed procurement spending, we
    subsequently found that they were unable to conduct an enterprisewide

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    spend analysis13 to develop a picture of what the company is spending on
    goods and services and to identify those cost areas for strategic
    sourcing14 and potentially substantial savings opportunities. When we
    asked Amtrak for examples of a spend analysis, it took company officials
    several months to provide such examples, and what was provided was
    primarily a compilation of savings that had been achieved through various
    procurement department initiatives. On the basis of data provided, we
    could not determine how much, if any, of these savings had been achieved
    through an analysis of spending. Procurement officials subsequently
    explained that no specific individual or group within the department is
    responsible for conducting a spend analysis, and there is no systematic
    process for conducting such analyses. Rather, Amtrak officials told us
    that all procurement department staff are responsible for identifying cost
    savings opportunities. Moreover, while not disagreeing with the value of a
    spend analysis, procurement department officials indicated that such
    analyses would be extremely difficult without a system that accurately
    produced the necessary data-a system that does not currently exist at
    Amtrak.

    Setting up a spend analysis program can be challenging, according to our
    prior research on leading companies that have used this tool to reengineer
    their approach to procurement and produce billions of dollars in
    savings.15 Like Amtrak, companies have had problems accumulating
    sufficient data from internal systems that (1) do not capture all of what
    a company buys or (2) are being used by different parts of the company but
    are not connected. What private companies and federal agencies are doing
    to overcome the data challenges could serve as a guide to improving
    Amtrak's ability to conduct a spend analysis to strategically reduce
    procurement costs. Private

    13A "spend analysis" is a tool that provides companies with knowledge
    about how goods and services are being acquired, about the amount spent,
    and about who is doing the buying and supplying. Conducting a spend
    analysis also provides opportunities to leverage buying power and reduce
    costs for commonly purchased goods and services.

    14"Strategic sourcing" is a process used by leading commercial companies
    and a small number of federal agencies to establish an organizationwide
    approach to leveraging the organization's buying power and fostering new
    ways of doing business.

    15GAO, Best Practices: Using Spend Analysis to Help Agencies Take a More
    Strategic Approach to Procurement, GAO-04-870 (Washington, D.C.: Sept. 16,
    2004); Best Practices: Improved Knowledge of DOD Service Contracts Could
    Reveal Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 2003);
    and Best Practices: Taking a Strategic Approach Could Improve DOD's
    Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    companies have developed formal, centralized spend analysis programs
    through the use of five spend analysis key processes-automating,
    extracting, supplementing, organizing, and analyzing data.16 Companies
    that use a spend analysis find that they are buying similar products and
    services from numerous providers, often at greatly varying prices. For
    example, one company conducted a spend analysis of the telecommunications
    services it used and reduced the number of vendors from three to one,
    thereby saving $3.2 million in the first 8 months of the new contract.17

    Similarly, other railroads confirmed the value of spend analyses as well
    as the need to have consolidated, organized, and reliable procurement data
    to conduct such an analysis. For example, officials at VIA Rail indicated
    that they have not yet conducted a central, comprehensive analysis of
    their spending because they have not had the necessary information
    systems. However, they have worked to improve their systems to a level
    that will permit this type of formal, centralized spend analysis. An
    official at another freight railroad indicated that the railroad has a
    department specifically dedicated to conducting spend analyses and
    identifying ways to maximize the cost-effectiveness of certain
    procurements. While this department does not analyze the railroad's
    procurement spending across the board, it can identify companywide areas
    for coordinated purchasing and potential cost savings. Like the commercial
    best practices identified in our prior work, members of this
    cross-functional group are drawn from other departments, such as the
    finance department and a user department (a department that needs
    acquisition services), to work on special projects and analyze spending in
    given areas and to work closely with the procurement department.18 This
    department found that they could save $4.9 million in 1 year by paying for
    prep work services (maintenance or repair services) for freight cars on a
    per car basis, rather than by the hour. This new approach provides an
    incentive for the service provider to work more efficiently.

    16GAO-04-870, pp. 5-9.
    17GAO-02-230, p. 10.
    18GAO-02-230, GAO-03-661, and GAO-04-870.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

      Amtrak's Management Tools Do Not Constitute a Comprehensive Cost Control
      Strategy

    Amtrak currently seeks to control costs through the use of five management
    tools,19 which Amtrak's president has used to manage and try to stabilize
    Amtrak's financial situation. For example, according to Amtrak officials,
    Amtrak's management uses its annual budget to focus on the structure and
    size of Amtrak's labor force, which has facilitated Amtrak's making labor
    force reductions-resulting in lower labor costs. However, even though they
    are implemented across the company, these tools alone do not constitute a
    corporatewide cost control strategy. These tools are not a part of a
    corporatewide plan that identifies cost goals, identifies how these goals
    are to be achieved, and provides for the continuous improvement on those
    goals. For example, Amtrak's monthly performance reports, while providing
    information about past performance, does not provide any explicit cost
    reduction goals or identify ways to reduce costs.

    In the absence of a corporatewide cost containment strategy, Amtrak's cost
    control efforts, outside of using its five management tools, have been
    largely unfocused and inconsistently applied throughout the company.
    According to Amtrak finance officials, Amtrak's focus has been on
    producing and monitoring its annual operating budget, among other things,
    which has taken emphasis away from a more strategic view of its cost
    structure. Amtrak's executive management provides verbal guidance on
    department goals each year, but each department then individually chooses
    what costs to focus on when creating their goals. Consequently, each
    department's management decides how much focus (if any) to place on cost
    containment. This practice may lead to a narrow focus on specific costs or
    lead to conflicting cost containment efforts among departments. For
    example, Amtrak's chief engineer said that, without strategic coordination
    and planning, a goal to reduce overtime in the engineering department
    could lead to an increase in repair times for signals on the Northeast
    Corridor, which in turn could lead to significantly increased train
    delays. This situation could adversely affect the transportation and other
    departments.

    19As discussed in chapter 1, Amtrak's five management tools include the
    following: clear goals and objectives, defined organization charts,
    zero-based operating budget, capital program, and monthly performance
    reports.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

      Lack of Cost Data Limits Amtrak's Ability to Identify Areas to Efficiently
      Reduce Costs or to Measure the Results of Cost Control Actions

    In our work on effectively implementing GPRA, we found that in
    establishing unit cost information, an organization can

    o  demonstrate the cost-effectiveness and productivity to stakeholders,

    o  link levels of performance with budget expenditures,

    o 	provide baseline and trend data for stakeholders to compare
    performance, and

    o 	provide a basis for focusing an organization's efforts and resources to
    improve its performance.20

    The railroad industry is an asset-intensive business, and the efficient
    performance of those assets is critical to the financial performance of
    any railroad. For example, unit cost metrics, such as cost-per-passenger
    revenue mile, cost-per-locomotive overhaul, or cost-per-mile of rail
    replaced, could show the cost performance of each of Amtrak's core
    functions (e.g., transportation, maintenance of equipment, and maintenance
    of track and infrastructure). However, Amtrak has not fully developed unit
    cost and asset performance metrics like these that could demonstrate the
    efficient use of its resources and help to identify and reduce costs.

    Most of the freight railroads we contacted, as well as VIA Rail, used unit
    cost and performance metrics to inform their business decisions in key
    areas, such as transportation, maintenance of equipment, and maintenance
    of infrastructure. As one railroad executive stated, unit cost and
    performance metrics are "predictive tools to understand how improvement
    translates into increased revenue, lower expenses, and/or higher profits."
    In addition, the Association of American Railroads has developed a set of
    asset performance metrics for the freight railroad industry, such as
    ton-miles per employee, ton-miles per locomotive, and ton-miles per dollar
    of operating expense, to show how efficiently that industry uses its
    assets and spends its money relative to output.

    In 2000, we reported on the importance of these measures for Amtrak
    because these measures indicate the efficiency with which Amtrak's

    20GAO/GGD-96-118.

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    resources, such as labor, are being utilized.21 We said that without
    productivity metrics, Amtrak can neither demonstrate nor manage the
    efficiency of its individual resources. For example, Amtrak uses
    production statistics like overall ridership, number of overhauls
    completed, or miles of rail replaced to demonstrate production in its core
    activities. Amtrak believes that recent increased production in these core
    activities, when combined with its recent decrease in employees, show that
    it is "doing more with less." However, as we previously noted, a
    significant portion of the reduction in Amtrak's headcount came from the
    termination of MBTA and mail and express freight services-not necessarily
    from finding efficiencies while offering the same level of service.
    Without unit cost or asset performance metrics, it is unclear how well
    Amtrak is performing per unit of production, how well it is utilizing any
    specific asset, or where it could most effectively target its cost
    reduction efforts.

    Some of Amtrak's departments are now beginning to develop some unit cost
    metrics for selected maintenance of equipment and infrastructure
    functions, such as cost per car or locomotive overhauled. These efforts,
    which involve creating new metrics and data systems, have not yet been
    coordinated across the company and have proven to be challenging. One
    obstacle encountered so far is the lack of detailed data. For example,
    Amtrak's chief mechanical officer stated that the mechanical department
    had to first redesign the way information was gathered in their
    maintenance facilities to create meaningful unit cost statistics per car
    or locomotive overhauled, inspected, or repaired. Current cost benchmarks
    for labor and material costs were developed when the mechanical
    department's system was first implemented but have not been updated with
    new labor rates or material prices-making estimation and benchmarking for
    these costs unreliable until new information is gathered.

    Labor cost figures are also unreliable, since there is no link between
    Amtrak's payroll system and the mechanical department's system. Department
    officials stated that they plan to add links to Amtrak's payroll and add
    material cost and ordering capabilities to their current system once it is
    stabilized. A department official stated that testing of the link to
    Amtrak's payroll system has started, and the department is planning to
    fully implement the link by the end of fiscal year 2006. In addition, a
    mechanical department official stated that there are no production
    statistics available prior to fiscal year 2003, thereby forcing the
    department to construct new

    21GAO/RCED-00-138.

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

    baseline production statistics for each maintenance facility. Department
    officials attributed this lack of data to several recent reorganizations,
    the storage of data in several unconnected computers, and the departure of
    several key department staff. Department officials also stated that
    because Amtrak's approach to equipment maintenance has changed since
    fiscal year 2002, any production statistics that were available would not
    be directly comparable.

    According to Amtrak's chief engineer, the engineering department is also
    currently designing an Internet-based system using Global Positioning
    System devices in maintenance vehicles to help gather data about how much
    time maintenance crews spend on maintenance tasks. The department plans to
    use these data in developing unit cost information. Prior to implementing
    this project, the department did not have a mechanism for gathering
    accurate cost data. Further, the department has just started to set
    productivity benchmarks and will soon begin an infrastructure inventory.
    According to the chief engineer, this system will take about a year to
    implement and to begin gathering data. This information will be used to
    begin establishing cost and productivity benchmarks. Using the information
    gathered by this new system, the engineering department hopes to achieve 3
    to 4 percent productivity gains each year for the next 5 years.

    A lack of detailed data also prevents Amtrak from creating more
    comprehensive corporatewide efficiency metrics. Amtrak does have some
    corporatewide efficiency metrics that demonstrate overall corporate
    revenue and expense performance. These metrics include ticket and
    passenger revenue per passenger mile and total and core revenues and
    operating expenses per seat mile.22 However, these metrics do not
    demonstrate asset performance, such as output per unit of labor or per
    gallon of fuel consumed. The latter data would give insight into how
    efficiently Amtrak is utilizing its assets. When we tried to emulate some
    of Association of American Railroad's corporate performance metrics for
    Amtrak, we found that Amtrak could not provide comparable output or asset
    data to allow for the creation of some of the measures. For example, we
    could not create a clear revenue-per-passenger-mile-per-employee measure.
    Although Amtrak could provide the number of revenue passenger miles for
    its core intercity passenger business, it could not provide the

    22"Core revenues and operating expenses" refer to those revenues and
    expenses for Amtrak intercity passenger rail train operations. They do not
    include commuter rail service.

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

    number of employees broken out between its different lines of business. An
    Amtrak official stated that because some employees work across its
    different lines of business, this breakout could not be completed.

      Amtrak Should Continue to Use Common Rail Industry Practices in Focusing on
      Its Cost Control Efforts

    Amtrak has implemented some commonly used rail industry practices- such as
    benchmarking, outsourcing, and efficiency reviews of operations- to
    contribute to its cost control efforts. Amtrak could also identify more
    opportunities to use these practices. Doing so would allow Amtrak to
    compare its practices with those of more efficient railroads and other
    transportation sector businesses to help decrease Amtrak's operating
    costs. Examples of actions Amtrak could take in this area include the
    following:

    o 	Benchmarking: Officials at most of the freight railroads we spoke with
    stated that they compared their cost containment strategies against their
    competitors in the industry. Such comparisons may be beneficial to share
    best practices within the industry. While some Amtrak departments have
    used benchmarking to improve their safety and other practices, other
    departments could use the same techniques to learn best practices and
    benchmark themselves against the best railroads and other organizations to
    improve performance. DOT officials also believed that Amtrak needs to do a
    better job at developing benchmarks for assessing performance, and that
    such benchmarks should be based on other passenger transportation
    providers, such as airlines.

    o 	Outsourcing: Officials at some of the railroads we interviewed told us
    that they have outsourced some of their noncore functions to reduce their
    operating costs. For example, all of the freight railroads we contacted
    have contracted out some of their functions, such as car and locomotive
    maintenance services or legal representation, to outside contractors.
    Amtrak officials stated that they have been very aggressive in their use
    of outsourcing. They said Amtrak has outsourced half of its engineering
    functions; most of its information technology work; and some of its
    mechanical function, including locomotive painting and some wreck repairs.
    Amtrak officials stated that they are looking to outsource more locomotive
    repair activities in the future, including overhauls of its Acela
    trainsets. Recently, Amtrak has tentatively identified other noncore
    functions that it could outsource to outside contractors, such as
    janitorial/cleaning and food service functions. In addition, Amtrak's
    April 2005 Strategic Reform Initiatives noted that accurate cost
    statistics for those functions would have to be created in

                                       Chapter 4
                        Despite Increasing Operating Losses and
                           Federal Subsidies, Amtrak Has Not
                         Developed a Comprehensive Cost Control
                                        Strategy

    order to compare Amtrak's cost performance against any prospective
    contractor's cost performance.

    o 	Efficiency reviews: One railroad official with whom we spoke said that
    his railroad had hired operational and process engineers to study the
    railroad's internal processes, route schedules, and yard operations to
    find out how to improve these functions and reduce their operating costs.
    Another railroad had internal cross-functional teams-comprising
    departments such as train operations, engineering, finance, and
    others-that continually analyzed up to seven different areas of operating
    costs, implemented ways to reduce costs, and tracked the resulting
    savings. An outside consulting firm studied Amtrak's operations and
    organization in fiscal year 2001. This review recommended several changes
    to reduce or control costs, including, among other things, increasing
    employee productivity, reducing crew sizes and overtime expenditures, and
    reducing food and beverage costs. However, not all of these findings were
    implemented nor were any resulting savings tracked because changes in
    Amtrak's leadership, and its subsequent reorganization, changed Amtrak's
    focus, according to Amtrak officials.

    Conclusions	With operating losses having reached $1 billion and projected
    to increase even more, Amtrak's cost reduction efforts need to have as
    much impact as possible. Cost containment efforts are of particular
    interest for the federal government because without significant progress
    in reducing operating losses, substantial and continued federal subsidies
    will likely be needed to keep the company solvent. Our review of Amtrak's
    cost containment efforts indicates that Amtrak has opportunities for a
    more corporatewide approach for containing costs-for example, it can
    ensure that all relevant departments are taking meaningful steps to
    examine such issues as ways to reduce injuries or overtime. While Amtrak
    has looked to outsource functions to reduce costs, there are also
    indications that it can learn from other railroads' efforts in this regard
    as well as from these railroads' efforts to benchmark performance and
    conduct efficiency reviews. However, developing a successful strategy will
    be challenging, if not impossible, unless Amtrak can develop comprehensive
    and reliable cost data. A lack of cost standards and benchmarks, coupled
    with the lack of corporatewide integrated data collection software, will
    continue to prevent Amtrak from obtaining the detailed information it
    needs to understand its cost structure and to develop a sound strategy for
    attacking costs.

    Chapter 4
    Despite Increasing Operating Losses and
    Federal Subsidies, Amtrak Has Not
    Developed a Comprehensive Cost Control
    Strategy

      Recommendations for Executive Action

    To ensure that Amtrak can better meet the challenge of increasing its
    efficiency and reducing its operating costs, we recommend that the
    president of Amtrak take the following four actions:

    o 	comprehensively assess Amtrak's cost structure and the performance of
    its assets;

    o 	establish efficiency and unit cost measures with clear inputs to
    benchmark individual asset and corporate productivity, which will
    demonstrate efficient use of Amtrak's resources;

    o 	develop a cost containment strategy that uses these new cost measures
    and guides the cost reduction actions across all departments; and

    o 	continue the use of and seek more opportunities to use cost containment
    practices that are widely used in the railroad industry, including a spend
    analysis of goods and services procured, benchmarking, outsourcing, and
    efficiency reviews.

    Chapter 5

    Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
    Cost-effectiveness, and Accountability

    Amtrak's system for acquiring goods and services, which accounts for an
    estimated $500 million to $600 million in annual expenditures for the
    company, is missing critical elements necessary for efficient,
    cost-effective purchasing. Our past work in assessing the effectiveness of
    the acquisition function in leading organizations shows that several
    elements are key to ensuring that sound purchasing processes are being
    followed and to promoting efficiency, cost-effectiveness, and
    accountability. These elements include placing the function appropriately
    in the organization and backing it with organization leadership, creating
    and enforcing clear and consistent policies and procedures throughout the
    organization, and ensuring that its knowledge and information system1 can
    provide meaningful and reliable data.

    Amtrak's acquisition function, while improving, continues to face
    challenges in all three areas. First, although Amtrak has centralized and
    elevated its procurement function, there is still ample evidence to show
    that other departments have made sizable acquisitions without involving
    the procurement department. This practice can limit Amtrak's ability to
    obtain goods and services at the most economical prices or to otherwise
    protect the company. Second, in the past, Amtrak did not adequately
    communicate or enforce its procurement policies and procedures, limiting
    its ability to ensure that sound contracting practices are followed.
    Amtrak has recently taken actions that may help in this regard, including
    developing a procurement manual, conducting more training, and monitoring
    purchases more thoroughly. Finally, an inadequate knowledge and
    information system limits Amtrak's ability to analyze spending and
    identify opportunities for potential cost savings. As a result, Amtrak
    cannot ensure that its resources have been utilized appropriately when
    acquiring goods and services.

      Effective Acquisition Requires Key Organizational Elements

    Our body of work on acquisition best practices has identified several
    factors that can help organizations better ensure that their procurements

    1An effective knowledge and information system is an enterprisewide system
    that integrates financial and operating data to support both management
    decision making and external reporting requirements.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    are undertaken in an efficient and effective manner.2 As figure 13
    indicates, these factors include a company's or agency's organizational
    leadership and alignment, acquisition policies and procedures, and
    knowledge and information management system.3

    Figure 13: Organizational Elements Critical to Effective Acquisition

    Organizational leadership and alignment

    The appropriate placement of the procurement function within an
    organization can facilitate effective management of acquisition
    activities, including planning and overseeing acquisitions throughout the
    organization. In addition, organization leaders need to create a climate
    that fosters good acquisition practices.

    Policies and procedures

    To facilitate effective planning, award, administration, and oversight of
    contracts, and to help ensure the best value for goods and services, the
    organization must have clear, consistent, and enforceable policies and
    procedures. Internal controls and performance and accountability measures
    help to ensure that policies and procedures are implemented and have the
    desired outcomes.

    Knowledge and information management

    To make informed strategic decisions aimed at reducing costs, improving
    service levels, measuring compliance, and managing providers, the
    organization must have a knowledge and information system that can produce
    meaningful and reliable data.

                               Source: GAO-04-544, p. 2.

      Elevating Procurement Function in Organization Structure Has Not Yet Resulted
      in a More Strategic Approach to Acquisition

    An effective acquisition function requires the appropriate placement
    within the organization, leadership's fostering of good acquisition
    practices, and a strategic focus toward acquisition planning and
    management throughout the company.4 To its credit, Amtrak has made
    improvements to its procurement function, particularly related to its
    organizational leadership and alignment. For example, after Amtrak's
    current president eliminated the SBUs in 2002, the procurement units from
    each of the SBUs were centralized into a single procurement department,
    and the department head was elevated to the level of vice president,
    reporting directly to the

    2GAO, Transportation Security Administration: High-Level Attention Needed
    to Strengthen Acquisition Function, GAO-04-544 (Washington, D.C.: May 28,
    2004).

    3A fourth factor identified in GAO-04-544 concerns human capital issues,
    which we do not address in this report.

    4GAO, Homeland Security: Successes and Challenges in DHS's Efforts to
    Create an Effective Acquisition Organization, GAO-05-179 (Washington,
    D.C.: Mar. 29, 2005).

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    president.5 In previous years, the procurement department had been part of
    Amtrak's finance department, which, according to the vice president of the
    procurement department, made it difficult to ensure the use of sound
    acquisition practices. He also said that elevating his position to the
    level of other key departments within the organization, such as
    operations, marketing, and finance, provided him with more authority to
    oversee and enforce acquisition policies throughout the company.
    Additionally, Amtrak adopted a new electronic system-known as eTrax-that
    tracks the acquisition process and allows for greater oversight. For
    example, this system includes controls over purchase requisitions prepared
    by user departments-those departments that need acquisition services-as
    well as controls over payment requests, a tool used for small dollar
    purchases.

    Further, adherence to acquisition policies has taken on greater
    significance as a result of the grant agreement between FRA and Amtrak. As
    we discussed in chapter 1, the grant agreement requires Amtrak to follow
    procurement standards that ensure that goods and services are acquired in
    a cost-effective manner and in compliance with applicable federal statutes
    and executive orders. Although FRA is responsible for ensuring compliance
    with procurement standards, its oversight has been limited because of a
    lack of resources. FRA officials have told us that they have had to rely
    on Amtrak for assurance that they are in compliance with the requirements
    of the grant agreement. An FRA official told us that, although the grant
    agreement for fiscal years 2003 and 2004 included language that Amtrak
    comply with federal procurement standards, it was not until the fiscal
    year 2005 grant agreements that Amtrak, for the first time, was expected
    to fully comply with the procurement standards in the grant agreements.
    This compliance includes seeking, to the maximum extent practicable,
    competition in the acquisition of goods and services. The FRA official
    said that, in fiscal years 2003 and 2004, FRA was concerned about whether
    Amtrak could comply with such standards, and, therefore, the standards
    were not strictly enforced.

    Despite these attempts to oversee and increase controls over the
    acquisition process, the procurement department has yet to become fully
    integrated into Amtrak's planning and management process, limiting the

    5Currently, the procurement department is responsible for the acquisition
    of goods and services throughout Amtrak, with the exception of acquiring
    outside legal services, labor arbitration agreements, executive
    recruitment search services, electric propulsion agreements, and audit and
    investigative services.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    extent to which good acquisition practices have spread throughout the
    organization. When planning spending for service acquisitions, user
    departments have often functioned independently of the procurement
    department and made spending decisions without coordinating or partnering
    with the procurement department. Procurement department officials told us
    that the extent of their involvement in user departments' planning process
    depends on whether user departments inform them of their plans before
    submitting requisitions.

    Our work disclosed numerous examples of acquisitions made by user
    departments independent of the procurement department. For example:

    o 	The engineering, mechanical, and marketing and sales departments
    frequently used payment requests to purchase services well in excess of
    $5,000, the maximum threshold specified by Amtrak.6

    o 	In 2003, the operations planning department agreed to terms and fees
    with a software vendor for a pilot program, although Amtrak policies
    require that only the procurement department agree to terms and
    conditions. Documentation in the contract file indicated that the
    operations planning department had already authorized $8,500 in travel
    expenses by the time the procurement department was brought into the
    process. Subsequently, the vendor refused to provide the procurement
    department with a cost breakdown and comply with certain travel
    requirements because of the agreements already reached. The contract was
    initially valued at $60,000, and 1 1/2 years later, its value increased by
    another $500,000 when Amtrak fully implemented the pilot program. When the
    contract manager processing the acquisition learned what the operations
    planning department had done, she required that it document why the travel
    requirements were not included in the contract.

    o 	More recently, in fiscal year 2004, Amtrak technologies (a unit of
    Amtrak's finance department) issued and signed a contract modification
    expanding an existing software services contract without the procurement
    department's knowledge. This expansion increased the value of the contract
    by $200,000. The Amtrak OIG detected what Amtrak technologies had done
    during the course of an audit that the procurement requested on the
    contract. The Amtrak OIG recommended

    6Amtrak increased the maximum threshold for payment requests from $2,000
    to $5,000 in November 2004.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    that Amtrak technologies follow established procurement policies when
    acquiring services.

    These activities were detected after the fact; no controls existed at the
    time to prevent their occurrence. In the case of payment requests, the
    vice president of procurement has since taken on the role of approving
    payment requests for departments that have used them inappropriately. In
    the case of user departments awarding contracts and agreeing to terms and
    conditions independently, procurement department officials indicated that,
    before fiscal year 2002, very few controls were in place and departments
    frequently operated independent of the procurement department. Since
    fiscal year 2002, the vice president of procurement has been working to
    reign in departments that were considered to be "out of control." While
    procurement department officials believe that they have brought more
    acquisitions under control, they explained that changing the culture
    within Amtrak has been a gradual process, and they believe that they still
    have a long way to go.

    The independent acquisition of services has prevented the procurement
    department from managing these procurements and controlling spending.
    Moreover, Amtrak has likely paid more for services than it would have
    otherwise. When user departments negotiate terms and fees on their own,
    they lose the opportunity to use the procurement department's expertise in
    negotiating terms that are in Amtrak's best interest. Further, when user
    departments award contracts independently, they put Amtrak at both a
    business and a financial risk. The procurement department's standard
    service contracts are written to ensure that Amtrak's interests are
    protected. Contracts issued outside of the department may obligate Amtrak
    to the prices and terms of the agreement, but may not include the language
    that protects Amtrak's interests.

    Both in previous studies and in discussions with freight railroads, we
    have found that a more centralized approach can save money and provide
    other benefits. As we reported in 2002, leading companies have taken a
    more strategic approach when acquiring services by identifying
    opportunities to leverage their buying power, reduce costs, and better
    manage their suppliers.7 For example, these companies helped business
    managers acquire key services and made extensive use of cross-functional
    teams to help better identify service needs, select providers, and manage
    contractor

    7GAO-02-230.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    performance. Similarly, officials from a freight railroad we contacted for
    this study told us that they used strategic sourcing8 to completely
    restructure their acquisition function. They explained that, as a result
    of significant staff reductions and a need to outsource to suppliers, they
    changed from a department that primarily processed purchase orders to one
    that used cross-functional teams focused on procurement planning,
    sourcing, and managing suppliers. The officials indicated that this
    restructuring saved the railroad more than $240 million over 3 years. We
    also recently reported that the Department of Homeland Security had
    demonstrated some successes in implementing a strategic sourcing program
    to leverage the department's buying power. These successes involved
    greater collaboration among the department's various organizations and a
    savings of over $14 million since the program's creation.9

    Amtrak's procurement department has recently taken additional steps to
    more fully integrate the procurement department into user departments'
    acquisition planning and management. For example, the procurement
    department is currently working with the human resources and labor
    relations departments to identify all health benefits contracts. Once
    these contracts have been identified, procurement department officials
    told us that they will develop a strategy, consolidate the contracts, and
    open them for competition as they come up for renewal in an effort to
    achieve cost savings. Additionally, the procurement department official
    responsible for services contracts is becoming more involved in user
    departments' planning activities by attending their staff meetings and
    developing a tracking system to alert departments when contracts are
    expiring or running low on funds.

    8Strategic sourcing is a process used by leading commercial companies and
    a small number of federal agencies to establish an organizationwide
    approach to leveraging the organizations' buying power and fostering new
    ways of doing business.

    9GAO-05-179.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    Communication and Amtrak has not always adequately communicated and
    enforced acquisition

    policies and procedures for services, which limited its ability to ensure
    thatEnforcement of sound contracting practices were followed. Recent steps
    have been more Policies and positive: that is, the procurement department
    has issued a manual of Procedures Have Been acquisition policies and
    procedures, and the department also is taking

    steps to ensure that existing policies, along with review and
    approvalLimited processes, are followed. The types of problems we
    identified with past procurements illustrate the importance of these
    steps.

        Acquisition Policies and Procedures Were Not Clearly Communicated in the
        Past

    Amtrak's acquisition policies and procedures have not always been clearly
    communicated to the entire organization. Leading organizations we have
    studied adopt clear, transparent, and consistent policies and procedures
    that govern the planning, award, administration, and oversight of
    acquisitions. These policies and procedures must also be clearly
    communicated to all involved in the acquisition function.10 Although the
    procurement department periodically issued directives specifying policies
    and procedures for the acquisition of goods and services, these directives
    did not provide detailed guidance for procurement staff to follow when
    awarding contracts. Additionally, according to procurement department
    officials, user departments either circumvented or were unaware of
    existing acquisition policies and procedures set forth in these
    directives.

    Recently, Amtrak has taken steps to address the lack of clear and
    comprehensive guidance. In June 2005, the procurement department issued a
    comprehensive procurement manual for acquisition staff. The procurement
    department's staff said their initial goal was to complete the manual by
    October 2003. However, according to a procurement department official,
    completion of the manual was delayed because of needed reviews by the law
    department and the need to incorporate FRA grant agreement language during
    the course of developing the manual.

    Amtrak's procurement department officials also have conducted outreach
    efforts to inform user departments of current acquisition policies and
    procedures. For example, since February 2005, the vice president of the
    procurement department has made presentations about acquisition policies
    and procedures to user departments. (See table 7.) According to a
    procurement official, the intent was to deliver these presentations only
    to

    10GAO-04-544.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    major departments. However, other departments, such as the human resources
    and transportation departments, which are responsible for providing
    medical benefits and food and beverage service, were not scheduled to
    receive this presentation. Procurement and finance department officials
    have also made presentations to field offices about the various
    acquisition tools available. These presentations covered specific
    acquisition tools, such as payment requests for small purchases and the
    use of purchase cards for low-cost items, as well as the process for
    paying invoices.

    Table 7: Procurement Presentations to Major Amtrak Departments in 2005

    Department or unit Date of presentation

    Engineering February 1, 2005

    Finance February 15, 2005

    Law March 3, 2005

    Police and security March 7, 2005

    Amtrak technologies (unit of the finance March 21, 2005 department)

    Mechanical April 12, 2005

    Environmental, health, and safety May 2, 2005

    Marketing and sales June 20, 2005

                                    Source: Amtrak.

        Established Acquisition Policies and Procedures Have Not Been Enforced

    Amtrak has not consistently enforced established policies and procedures
    for the acquisition of goods and services. As we recently reported,
    leading organizations recognize the need to ensure that their prescribed
    policies and procedures are being enforced so that acquisitions are made
    appropriately.11 We found, however, that Amtrak was not following such
    policies and procedures in many instances. Our review of a nonprobability
    sample of 61 service contract files covering $85.3 million (75 percent) of
    the expenditures for professional services, consulting, marketing, and
    sales promotion services in fiscal years 2002 and 2003, as well as our
    review of expenditure data and our discussions with officials from both
    the

    11GAO-04-544.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    procurement department and user departments, demonstrated the following
    four problems:12

    o  a high frequency of noncompetitive awards,

    o 	insufficient or no justification for many noncompetitive contract
    awards,

    o 	a lack of appropriate approval for sizable increases in contract costs,
    and

    o 	bypassing of the procurement department through inappropriate use of
    payment requests.

    Frequency of Noncompetitive Of the 61 contracts we examined in detail, 13
    a substantial number, 36 (59

    Contract Awards	percent), of the awards were made noncompetitively.14 As
    table 8 indicates, the majority of them were made before fiscal year 2003.
    The vice president of the procurement department generally acknowledged
    that the extent of Amtrak's noncompetitive procurement of services was too
    high and needed to be reduced. Leading organizations we have studied15
    recognize the importance of competition to better ensure that the best
    value is obtained in awarding contracts. In fact, Amtrak's acquisition
    policies and procedures

    12Results from nonprobability samples cannot be used to make inferences
    about a population, because in a nonprobablity sample some elements of the
    population being studied have no chance or an unknown chance of being
    selected as part of the sample. See appendix I for the file selection
    methodology that we used in conducting this review. We focused on fiscal
    years 2002 and 2003 because they were the most recent years for which
    audited financial statements were available for the purpose of assessing
    the reliability of expenditure data.

    13Of the 61 contracts we reviewed, Amtrak could locate no documentation
    for 4. They provided printouts of information from their acquisition
    system for these 4 contracts. These printouts contained minimal
    information, which allowed minimal analysis. For another contract, Amtrak
    was missing one of the three folders of documents prepared during the
    course of the contract. We analyzed this contract to the extent allowed by
    the available documentation.

    14We define noncompetitive awards as those that Amtrak considered as
    either sole or single source. We obtained information regarding whether a
    contract was a sole or single source award by reviewing documentation in
    the contract file and, if necessary, discussing them with procurement
    department officials.

    15GAO-03-661 and GAO-02-230.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    require that goods and services be acquired competitively to the maximum
    extent practicable.

    Table 8: Number of Contracts GAO Reviewed, with Expenditures in Fiscal
    Years 2002 and 2003, That Were Competitively and Noncompetitively Awarded

                                   Contracts reviewed

                 Time frame  Competitively Noncompetitively
                    awarded        awarded           awarded Undetermined   Total
              Before fiscal
                  year 2002             12                14             3
                Fiscal year
                       2002              6                13             0
                Fiscal year
                       2003              3                 9             1
                      Total             21                36             4

    Source: GAO analysis of Amtrak data.

    Insufficient or No Justification A significant number of the
    noncompetitive contracts we reviewed had

    for Noncompetitive Contracts	either no justification or insufficient
    justification. Amtrak acquisition policies in force at the time these
    contracts were awarded required justifications spelling out the specific
    circumstances warranting a noncompetitive procurement for procurements
    valued at $100,000 or more.16 Guidance in effect at the time identified
    specific circumstances that were not acceptable justifications for
    noncompetitive awards, such as a preference for a particular vendor by the
    user department. Of the 36 noncompetitively awarded contracts we reviewed,
    21 were valued at $100,000 or more and thus required justifications.
    However, 10 of these 21 contracts did not include justifications or had
    justifications that did not conform to the guidance in effect at the time.
    As table 9 illustrates, the degree of compliance has increased since 2002,
    when SBUs were eliminated. Procurement department officials attributed the
    lack of compliance before 2002 to poor overall controls over service
    acquisitions.

    16In February 2004, this threshold was reduced to $25,000.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    Table 9: Extent to Which Noncompetitive Contract Awards GAO Reviewed
    Included Adequate Justifications

                                   Contracts reviewed

                                          No justification
                         Justification         provided or
                          conformed to justification did       Insufficient
                                       not
              Time frame        Amtrak conform to Amtrak   documentation to
                 awarded  requirements        requirements        determine Total
                  Before
                  fiscal
               year 2002             1                   5                2
            Fiscal years
            2002 or 2003             8                   5                0
                   Total             9                  10                2

    Source: GAO analysis of Amtrak data.

    Beginning in 2002, after the procurement function was centralized and
    continuing through 2004, the procurement department began instituting new
    controls, which included adherence to the justification requirement for
    noncompetitive procurements. Current policies allow noncompetitive
    procurements in circumstances such as the following:

    o  Only one source is known to satisfy Amtrak's requirements.

    o  Contractor has unique capability, expertise, or equipment.

    o  Emergency situations.

    o 	Follow-on work, when awarded to another contractor, would increase cost
    substantially or result in unacceptable delays or risk.

    o 	Need is of such compelling urgency that Amtrak would be seriously
    harmed without the acquisition.

    Several procurement department officials indicated that, more recently,
    user department requests for noncompetitive procurements have been
    rejected more often, and it has become much more difficult for user
    departments to get approval for such contracts. To illustrate, procurement
    department officials provided several examples of noncompetitive requests
    that the vice president of procurement had rejected. For example, an
    August 2004 request from the mechanical department and a March 2005
    request from the engineering department were both rejected because they

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    would have likely resulted in additional noncompetitive acquisitions. The
    vice president of procurement also noted that the engineering department's
    request was based on a noncompetitive acquisition that had been obtained
    inappropriately through the use of a tool intended for small dollar
    purchases.17

    Contract Changes Were Many of the contracts we reviewed-38 of the
    61-included changes, some

    Inappropriately Approved	of which increased the contract's cost. In four
    instances, the final dollar amount was several times larger than the
    initial amount as a result of these changes. (See table 10.)

    Table 10: Contracts with Numerous Extensions Resulted in Significant
    Dollar Increases

                                    Type of contract

    Number of extensions

    Initial dollar amount

    Final dollar amount

                  Frequent rider loyalty
                                 program       6   $6,118,407         $32,362,167
                        Software support       7     397,200            1,029,688
                    Software development      12     318,418            1,460,238
                  Signal survey services       4          45,000          764,418

    Source: GAO analysis of Amtrak data.

    Note: The above information was based on our review of 61 contracts for
    professional services and advertising, sales promotion, and consulting
    services. Dollar amounts in this table represent the amounts authorized in
    the contracts, not the expenditures actually made.

    Although the cost of contracts can change over time, many of the changes
    to the 38 contracts were not approved in compliance with Amtrak's policies
    and procedures. Amtrak requires that, when a contract is changed, the
    person approving the extension should have approval authority equal to the
    new total dollar value of the contract. Of the 91 total changes in these
    contracts, however, at least 41 were approved by individuals who did not
    have the appropriate level of authority. The majority-28-occurred in
    fiscal year 2003 or later.18 For example, in the software development

    17Procurement department officials provided two other examples of denials
    from earlier in fiscal years 2003 and 2004. However, we found, during the
    course of our contract file reviews, that one of these denials was
    ultimately approved.

    18Although the contracts we reviewed were awarded in fiscal years 2002 and
    2003 or earlier, we reviewed all contract changes that had occurred
    through our review in fiscal year 2005.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    contract identified in table 10, a director with an approval authority of
    $100,000 for noncompetitive contracts approved a series of changes that
    were each individually less than $100,000. However, as indicated in the
    table, the cumulative value of the contract exceeded his level of
    authority. Amtrak's vice president for procurement indicated there is
    debate within the procurement field about change order approval authority.
    In his opinion, the authority to approve changes should be based on the
    incremental amount of the change because having higher level officials
    approve small dollar changes is not an efficient use of their time.
    However, as evidenced by our contract file reviews, a series of small
    changes could result in a much larger contract.

    Inappropriate Use of Payment We found many instances in which user
    departments were inappropriately

    Requests

    using payment requests to purchase services. Payment requests are intended
    to be used for small dollar acquisitions having a maximum threshold of
    $5,000.19 These requests allow user departments to acquire goods and
    services directly from vendors without involving the procurement
    department. Goods and services acquired using payment requests are not
    obtained competitively, and user departments lose the opportunity to use
    the procurement department's expertise in negotiating contract terms.
    Additionally, payment requests are not considered contracts and,
    therefore, do not protect Amtrak's rights and interests as would a
    contract. Using payment requests makes it impossible for the procurement
    department to track and oversee acquisitions because they obviate the need
    for purchase orders, Amtrak's primary means of monitoring contract
    purchases.

    Because reliable expenditure data were absent, we did not quantify the
    extent to which payment requests were used. Nevertheless, procurement
    department officials acknowledged that payment requests are often used
    inappropriately, and we found numerous instances of their inappropriate
    use. Some of these requests exceeded the threshold substantially. For
    example:

    o 	In fiscal year 2002, the engineering department used a payment request
    for inspection services from a single supplier valued at more than
    $72,000.

    19The $5,000 threshold has been in effect since November 2004. Previously,
    the threshold was $2,000.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    o 	In fiscal year 2004, the engineering department used two payment
    requests for the same vendor to acquire services valued at more than
    $79,000.

    o 	In fiscal year 2004, the mechanical department used a payment request
    for software services from one vendor valued at almost $13,000.

    o 	In fiscal year 2004, the marketing and sales department used a payment
    request for photography services from one company valued at $109,000.

    We also found instances in which user departments utilized payment
    requests for goods and services when Amtrak also had contracts in effect.
    For example:

    o 	The marketing and sales department used payment requests to pay
    invoices of $68,596 and $109,888 in fiscal years 2003 and 2004, even
    though a specific contract covering those services was already in effect.

    o 	The mechanical department used payment requests to pay invoices of
    $2,500 for professional services to a vendor for 3 consecutive fiscal
    years, despite having contracts for similar services in effect with the
    same vendor.

    Amtrak officials gave several reasons for the inappropriate use of payment
    requests. First, not all officials were aware of the procurement policies
    and procedures. Marketing and sales department officials said they
    incorrectly interpreted the policy governing the use of payment requests.
    For example, one department official said he incorrectly thought that
    involving the procurement department was required only for significant and
    recurring expenditures, such as those exceeding $1 million; he was not
    aware of the $5,000 limit for the use of payment requests. Second,
    procurement officials noted that user departments likely find it more
    convenient to use payment requests because the vendor gets paid faster.
    Officials in the engineering and mechanical departments confirmed this.
    For example, Amtrak's chief engineer said that engineering department
    staff had likely used payment requests out of convenience, but he
    acknowledged that their use was not justified. Similarly, the chief
    mechanical officer also said that his department probably found payment
    requests to be more convenient and noted that they sped up the acquisition
    process. Procurement officials also explained that if funding or time is
    running out on a purchase order, user departments will use payment
    requests to ensure that the vendor gets paid.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    Marketing and sales, engineering, and mechanical department officials all
    acknowledged that their departments had used payment requests
    inappropriately in the past but said this situation had been corrected.
    The vice president of marketing and sales also indicated that she had
    taken corrective actions to ensure adherence to procurement policies and
    procedures. These actions include scheduling training for staff and
    bringing acquisitions previously made using payment requests under the
    control of the procurement department.

    Procurement department officials indicated they also have been working to
    reduce the misuse of payment requests through several means. For example,
    as previously mentioned, the vice president for procurement approves all
    payment requests-through eTrax-from user departments, such as engineering
    and mechanical, that have misused these payments in the past. Information
    from the procurement department indicates that the vice president denied
    29 payment requests totaling more than $255,000 between December 2004 and
    May 2005. Also, a new database has been established to better track the
    expiration date and remaining funds for contracts exceeding $1 million.
    Although smaller contracts are not included in the database, a senior
    director in procurement indicated that individual contract managers in the
    procurement department are expected to monitor them on their own. He
    noted, however, that user departments are ultimately responsible for
    monitoring their contracts.

    Review of Procurement of In addition to the acquisition activities under
    Amtrak's procurement Outside Legal Services department, we also discussed
    acquisition activities with officials from Showed Weaknesses in other
    departments authorized to acquire selected services independently.

    Amtrak's delegation of authority specifically provides selected
    departmentsAreas Exempt from with the authority to procure goods and
    services in five areas without the Procurement Department involvement of
    the procurement department. We reviewed one of these Review areas,20
    outside legal services, because of the relatively large dollar value of

    the legal services procured-$48 million during a 2-year period, ending

    20The other four services acquired independently of the procurement
    department are electrical power for the Northeast Corridor, labor
    arbitration agreements, audit and investigative services, and the use of
    executive recruitment firms.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    September 30, 2003.21 We found several weaknesses in the processes for the
    procurement and payment of outside legal services that increase the risk
    that Amtrak is not receiving best value for these services and is making
    improper payments for these services. These weaknesses included (1) a lack
    of competition in selecting firms, (2) a lack of spend analysis on outside
    legal services, (3) a lack of specificity in documenting terms and
    conditions of the services to be provided, (4) an inconsistent review of
    invoices for compliance with established billing guidelines, (5)
    inadequate documentation supporting purchases for certain matters, and (6)
    a lack of segregation of key approval and payment functions.

    Lack of Competition 	Amtrak makes limited use of competition in acquiring
    outside legal services. Law department officials said they normally
    contract with firms they have used in the past as long as their
    performance has been good and their prices are reasonable. While Amtrak's
    procurement policy is to obtain goods and services as competitively as
    possible, law department officials said the only time the department would
    have firms compete for outside legal services is if a matter is highly
    sensitive or visible, or if the matter concerns a relatively new area.
    They explained that many matters are time-sensitive and do not allow time
    for competition. Other matters require specific legal expertise, including
    an understanding of Amtrak's history, business, and statutory and
    regulatory environment. Additionally, law department officials said they
    need to use attorneys admitted to the bar in the states in which lawsuits
    are filed and thus need to use attorneys throughout the country.

    While selecting outside legal counsel may involve many important
    considerations besides price, officials of other railroads we contacted
    indicated that they have been successful when using competition to acquire
    either some or all of their outside legal services. For example, VIA Rail
    requires that all user departments, including their law department, obtain
    two or more bids before acquiring goods and services. Although VIA Rail's
    law department acquires its own outside legal services, it is still
    subject to the company's procurement policies and procedures. Officials
    from one freight railroad said they competitively selected a law firm to
    handle all of their outside legal work on intellectual property.
    Additionally, officials

    21In commenting on a draft of this report, Amtrak noted that its legal
    costs compare favorably with Class I railroads. Since our purpose was to
    evaluate how Amtrak acquires legal services and related internal controls
    over such acquisitions, we did not compare Amtrak's costs for legal
    services with other railroads'.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    responsible for acquiring outside legal services at three commuter
    railroads indicated that they periodically compete legal services to
    develop a list of firms that they plan to use over a period of time, such
    as 3 to 5 years.

    In commenting on a draft of this report, Amtrak indicated that it has
    retained law firms based on solicitation to multiple firms with varying
    degrees of success. We acknowledge that the acquisition of legal services
    can be unique, and it can be difficult in certain circumstances to obtain
    competition for such services. However, we believe Amtrak can more
    aggressively seek competition in its acquisition of outside legal
    services. The examples we describe represent a variety of ways in which
    other railroads have tried to use competition and leverage buying power
    that Amtrak should consider in its efforts to more efficiently manage
    spending on outside legal services.

    Lack of a Spend Analysis on Amtrak's law department has not used a spend
    analysis22 on outside legal

    Outside Legal Services	services in order to determine whether it receives
    the best value possible in terms of service and cost. Law department
    officials said they have undertaken some efforts to control spending-for
    example, within a given practice area or for support services such as
    copying. However, the department has not analyzed its spending as a whole
    to identify opportunities to reduce spending.

    One such opportunity to reduce spending could be to reduce the number of
    law firms used. Although law department officials said they do not have
    enough work to direct to a specific firm to leverage buying and obtain
    volume discounts, Amtrak used 149 outside law firms in fiscal year 2002
    and 157 the following year. In contrast, officials at one freight railroad
    (that operates in multiple states similar to Amtrak) indicated that they
    analyzed spending on outside legal services and found that they could
    effectively reduce the number of firms they used. At one time, the freight
    railroad used about 250 outside law firms but decided to pare down this
    number in order to develop stronger partnerships. They believed that
    frequently used firms would be more familiar with the railroad's business
    and be in a position to serve the railroad more efficiently. Ultimately,
    this railroad reduced the number of firms to 8 core counsels and about 50
    additional firms to be used for specific areas of expertise or to obtain
    geographic coverage. According to railroad officials, this action reduced
    costs and enhanced collaborative cooperation between the railroad and the
    outside law firms.

    22Spend analysis is discussed more fully in chapter 4.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    Amtrak officials advised us that in 2005 they purchased and installed
    legal case management software that will allow the tracking and analysis
    of legal fee expenses. However, an official confirmed that the new system
    still will not capture payment attributes, such as hourly rates, hours
    expended per matter, professional staff levels, and the time period the
    services covered.

    Lack of Specificity in Amtrak units do not specifically document the scope
    and terms of outside

    Documenting the Terms and legal work to be performed. According to law
    department officials, the

    Conditions of Services	work to be done is frequently discussed with the
    firm by the attorney working on a matter, but there is not necessarily a
    record of these discussions. Outside law firms are provided with a copy of
    Amtrak's billing guidelines.23 These guidelines include topics such as how
    bills are to be processed, allowable reimbursable costs, budgets,
    staffing, and conduct of litigation. However, the guidelines do not
    specifically outline the scope of work to be completed, outline the costs
    of services provided, or require acceptance of terms by authorized
    signature for each individual engagement. In contrast, Amtrak procurement
    policies generally require that contracts be signed and that they outline
    the scope of work to be performed and delivery dates for work products.
    The lack of documentation for outside legal services leaves Amtrak
    vulnerable to miscommunication concerning the work expected of outside law
    firms.

    Inadequate Review of Invoices	The law department does not have a
    sufficient process to ensure that the outside legal firm invoices
    submitted for payment are compliant with Amtrak's billing guidelines,
    which are to be used to ensure payments are made properly. Formal
    protocols-such as specific review procedures to ensure compliance with the
    billing guidelines-do not exist, thereby limiting the effectiveness of the
    compliance reviews. When the law department receives an invoice for
    services, an attorney is expected to review it for compliance with the
    guidelines, in addition to verifying that the work was authorized and the
    time charged was reasonable based on their knowledge of the case. 24 Law
    department officials told us an attorney's review of invoices for
    compliance with billing guidelines is limited to assessing general
    compliance and identifying prohibited practices such as "block billing,"
    which is the aggregation of time spent on

    23Amtrak, Amtrak Guidelines for Outside Counsel (March 1998).

    24For invoices less than $10,000, the deputy counsel of the practice group
    managing the matter is responsible for approving the invoices, while the
    Amtrak general counsel approves invoices for amounts of $10,000 or more.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    different activities into one amount and billing increments other than 6
    minutes-the standard increment for billing purposes. We reviewed 10
    invoices from fiscal years 2002 and 2003, totaling $843,105, to gain an
    understanding of the attorney review process. We found that 4 of the 10
    invoices, valued at $118,947, did not comply with one or more of the
    requirements in the billing guidelines.25 All 4 of these invoices had
    insufficient detail to assess compliance, and 1 of the 4 invoices
    reflected billed time increments greater than the 6-minute standard
    billing increment.

    Inadequate Documentation For settlement agreement payments, the law
    department does not provide

    Requirements for Payments	sufficient documentation to the accounts payable
    section of Amtrak's finance department when seeking payment. Amtrak policy
    requires that accounts payable receive adequate documentation to avoid
    making duplicate payments. However, law department officials have
    determined that settlement payments are confidential; therefore, they only
    send "disclaimer" sheets showing the firm's name, the amount of fees and
    expenses, a stamp of authorization from the department, and a statement
    that the original document is on file. Amtrak officials told us that
    payment requests associated with settlements receive three levels of
    review within the law department prior to approval and, therefore, any
    concerns about inappropriate payment processing is misplaced. We disagree
    with this conclusion. The lack of documentation ensuring adequate review
    has taken place by the internal group with such responsibility-accounts
    payable-increases the possibility of duplicate payments and payments for
    other than approved amounts.

    Insufficient Segregation of Key Duties

    The law department does not adequately segregate key duties related to
    authorizing, reviewing, and receiving payments for outside legal services.
    These key duties need to be segregated among employees to reduce the risk
    of error, including improper payment. Law department officials said that
    it was common practice to have attorneys obtain the payment on behalf of
    the vendors (rather than having accounts payable send the payments
    directly to the vendor) and then forward these payments with

    25Due to significant weaknesses in the design of controls over the review,
    approval, payment, and monitoring of amounts for outside legal services
    and the results of our walk-through of the process, including inspection
    of a nonprobability sample of 10 invoices, we did not statistically sample
    payments for outside legal services to estimate what portion of the
    population of payments were appropriately reviewed and approved or to
    estimate if the payments represented a valid use of Amtrak's funds.

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    accompanying documents. Also, attorneys are allowed to create and edit the
    payee's name and address in addition to approving and receiving payment.
    This practice increases the risk that payments may be sent to unauthorized
    parties and to addresses other than that of the vendor. According to an
    Amtrak official, the practice of the accounts payable section sending
    payments to the law department ended sometime in fiscal year 2004, in all
    cases except settlement agreements. For payments related to settlement
    agreements, the law department still receives and determines when payment
    in a settlement agreement will be disbursed to vendors, because management
    has determined that the law department is in the best position to disburse
    the check. Again, the basis for not establishing sufficient procedures
    does not mitigate the fact that these payments are subject to a higher
    risk of being improper due to inadequately designed control practices.

      Amtrak's Knowledge and Information System Does Not Support a More Strategic
      Approach to Acquisitions

    Amtrak is missing the third key element of an effective acquisition
    process-meaningful and reliable data stemming from an organization's
    knowledge and information system. Amtrak's knowledge and information
    system currently does not produce the data needed that would enable Amtrak
    to identify strategic sourcing opportunities. Such data could enable
    Amtrak to leverage its buying power and reduce procurement costs.

    In discussing the first key element of an effective acquisition function,
    we described how a number of leading companies have achieved significant
    savings by adopting a strategic approach to their procurement
    activities.26 To do so, companies and a small number of federal agencies
    use a spend analysis, which involves automating, extracting,
    supplementing, organizing, and analyzing procurement data. However,
    Amtrak's procurement and financial databases were able to provide only
    limited information on specific accounts or the types of goods and
    services being purchased (such as professional services, advertising, and
    sales promotion), which precludes conducting a spend analysis. Although
    the vice president of procurement estimated that the company's annual
    expenditures for goods and services totaled $500 million to $600 million,
    the company was unable to provide detailed, reliable, and comprehensive
    data on total spending.

    26We also discuss these efforts in more detail in GAO-04-870. See also
    GAO-02-230 and GAO-03-661.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    Our review identified several reasons impeding Amtrak's ability to improve
    its knowledge of procurement spending to support a more strategic
    approach. These reasons include the following:

    o 	Amtrak's knowledge and information system is old and requires manual
    manipulation. Leading companies have adopted systems that are programmed
    to routinely extract vendor payment and related procurement data from
    other financial and information systems, thereby allowing them to easily
    obtain needed information. In contrast, procurement department officials
    indicated that the Amtrak Accounting, Material and Purchasing System
    (AAMPS), which is used to process acquisition information and interfaces
    with Amtrak's financial systems, is a "batch system" that dates to the
    early 1980s.27 As such, this system requires manual manipulation to
    retrieve data. To retrieve data, each data request must be individually
    programmed, by an employee who is very familiar with the complex coding
    inherent in the system, and then manually processed. Officials told us
    that it is difficult to obtain needed data because they must be requested
    in the precise manner necessary.

    o 	Amtrak cannot readily ensure that data are reliable. We identified
    significant discrepancies between the procurement expenditure data we
    obtained and the data shown in the audited financial statements, bringing
    the reliability of these data into question. For example, fiscal year 2003
    AAMPS expenditure data showed that Amtrak spent $34.2 million on
    advertising; however, the audited financial statements for the same year
    listed advertising expenses of $31.6 million, a difference of about 8
    percent. Similarly, fiscal year 2003 AAMPS data showed expenditures of $31
    million for professional services; financial statement data showed $24.4
    million, a 27 percent difference. One control procedure that can ensure
    data reliability is to reconcile the discrepancies between AAMPS and the
    financial system. However, this type of reconciliation is difficult and,
    therefore, not part of Amtrak's normal procedures. For example, company
    officials recently undertook-at our request-a reconciliation between AAMPS
    data on sales promotion and the amounts reported in Amtrak's audited
    financial statements-discrepancies totaled almost $3 million in fiscal
    year 2002

    27The eTrax system that we previously discussed is a user-friendly
    interface that feeds into AAMPS. The system is used, for example, to
    process purchase requisitions and payment requests.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

    and $165,000 in fiscal year 2003. This process took about 1 month and
    considerable staff time because it had to be done manually.

    o 	Questionable reliability of AAMPS data prevents accurate tracking of
    spending. Our review disclosed two problems that resulted in inaccurate
    acquisition data that hinders Amtrak management's ability to accurately
    track spending. First, a limited review of acquisition transactions
    revealed charges coded to incorrect accounts. For example, payments of
    about $2 million to municipal and state governments between fiscal years
    2002 and 2004 were incorrectly charged to the professional services and
    consulting accounts. Amtrak procurement officials agreed and said these
    payments were likely tax payments. We found several other instances of
    miscoding and brought these to the attention of procurement officials, who
    agreed that they too were incorrectly charged to wrong accounts. Other
    incidents of miscoding involved the cost of a dump truck ($122,000) and
    ballast ($150,000), both of which had been charged-in total or in part-to
    the professional services account. Procurement officials attributed data
    reliability problems to poor data entry and review procedures in user
    departments. Various employees in user departments often select the
    accounts to be charged when initiating transactions, and they may select
    accounts incorrectly. Although approving officials within the user
    departments are supposed to check to ensure that the accounts are charged
    correctly, they may not do so. Moreover, neither the procurement
    department nor the finance department reviews the coding of expenditure
    transactions, even on a spot-check basis. Even if errors are found, the
    extent to which they can be corrected is limited. Procurement and finance
    officials explained that AAMPS data cannot be corrected. They further
    explained that data in the financial systems can be corrected. However,
    this adjustment would correct only the dollar amounts in the account; it
    would not correct the information used by procurement officials to track
    spending on individual transactions.

    A second source of unreliable data results from the heavy use of payment
    requests by user departments. As previously mentioned, Amtrak's ability to
    track spending is constrained when payment requests are used to acquire
    goods and services. Payment requests are used for a variety of
    expenditures, such as outside legal services, utility bills, and payments
    to other railroads. As previously discussed, user departments have
    inappropriately used payment requests to acquire goods and services. In
    these instances, Amtrak cannot track spending on acquisitions because
    payment requests do not require purchase

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    orders, which are Amtrak's primary means of monitoring contracting
    spending.

    Conclusions	Amtrak's improvements in its acquisition function, such as
    elevating it to the same level as other key departments and centralizing
    activities, are good first steps in establishing better control over
    acquisitions. There are, however, several opportunities for improvement on
    the part of Amtrak and FRA. One opportunity relates to more fully
    integrating this centralized function throughout the company, so that user
    departments are aware of and follow established company policies and
    procedures concerning acquisitions and coordinate more closely with the
    procurement department so that it has greater opportunity to add value to
    the acquisition process. Another opportunity relates to ensuring that
    established policies and procedures are followed more closely within the
    procurement department, and that adequate controls are in place for
    acquisitions handled outside of the procurement department (such as
    procurement of outside legal services). Our review showed that not
    following policies and procedures has likely increased what Amtrak has
    paid for services. Addressing these issues, as well as taking steps to
    develop a more meaningful knowledge and information system, would allow
    Amtrak to track and analyze spending and thus better manage its
    acquisitions. Further, increased oversight by FRA could help ensure that
    procurements are cost-effective and in compliance with federal
    requirements.

      Recommendations for Executive Action

    To ensure that Amtrak's acquisition management practices support sound
    business decisions and the efficient and effective use of federal funds
    provided to Amtrak, we recommend that the Secretary of Transportation
    direct the Federal Railroad Administrator to take the following three
    actions:

    o 	Increase oversight by requiring Amtrak to submit a plan, possibly as
    part of the company's application for grant funds, identifying the
    specific actions that will be taken, consistent with the recommendations
    outlined below, to improve its acquisition management practices.

    o 	Review and provide comments on this plan to Amtrak and work with Amtrak
    management and staff to develop the most cost-effective approach(es) to
    improving acquisition management practices. The approach(es) developed
    should ensure that Amtrak, FRA, and others, as

      Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting Efficiency,
                         Cost-effectiveness, and Accountability

    appropriate, have adequate information on which to make business decisions
    regarding the acquisition of goods and services and the use of federal
    resources provided to do so.

    o 	Report at least annually to Congress on progress being made by Amtrak
    regarding improvement of its acquisition management. This report should
    identify any specific actions either Amtrak or Congress should take to
    facilitate improvement in acquisition management, particularly improvement
    in its knowledge and information system and the use of acquisition data in
    identifying opportunities for cost savings.

    To help improve Amtrak's acquisition function and better promote
    efficiency, effectiveness, and accountability when acquiring goods and
    services, we recommend that Amtrak's president work with the vice
    president of procurement to take actions that will address the various
    issues raised in this chapter. These issues, along with the five specific
    recommendations to address them, are shown in table 11:

               Table 11: Specific Recommendations-Acquisition Management

    Issue Recommendation

    Distributing and promoting Ensure that all departments receive information
    on procurement policies and procedures, similar to the

    current procurement policies and procedures

    presentations that have already been given to a number of departments, and
    ensuring that all departments are held accountable for following those
    policies and procedures.

    Enhancing the role of the Take additional action to become more integrated
    into the planning of all service acquisitions, similar to centralized
    procurement the actions Amtrak's human resources and labor relations
    departments are taking with regard to function awarding health benefits
    contracts.

    Building greater adherence to established procurement procedures Develop
    an action plan to better ensure that acquisition policies and procedures
    are communicated, followed, and enforced. This includes

    o  ensuring that user departments required to procure goods and services
    through the procurement department cannot acquire them independently;

    o  ensuring that services are acquired competitively to the maximum extent
    possible, such as enforcing the requirement to obtain justifications for
    noncompetitive acquisitions;

    o  ensuring that changes increasing the cost of contracts are approved in
    accordance with current delegation of authority, which requires that
    approvals are based on the cumulative value of contracts, not the
    incremental value of change orders; and

    o  ensuring the appropriate use of payment requests by enforcing the
    requirement that payment requests not exceed $5,000 and ensuring that they
    are not used when a contract and corresponding purchase order are in
    effect for a particular vendor.

    Chapter 5 Amtrak's Acquisition Function Is Limited in Promoting
    Efficiency, Cost-effectiveness, and Accountability

                             (Continued From Previous Page)

                                  Issue Recommendation

    Providing better control over Together with the law and finance
    departments, develop standardized acquisition policies and
    acquisition of outside legal procedures for acquiring outside legal
    services to ensure that
    services  o  acquisition of outside legal services is competitive to the
    maximum extent possible;

    o  spending on outside legal services is analyzed to identify
    opportunities to control and reduce spending;

    o  documentation specifying the terms and conditions of the work to be
    prepared;

    o  attorneys completely and consistently review invoices for compliance
    with Amtrak's billing guidelines;

    o  the law department follows Amtrak policy by providing approved invoices
    to the accounts payable section for payment; and

    o  key duties, such as authorizing, reviewing, and receiving payments for
    outside legal services, are segregated, and that attorneys not be allowed
    to create and edit payees' names and addresses.

    Addressing knowledge and  o  Create an automated, centralized spend
    analysis system for capturing the type of reliable and

    information system problems	complete spending data needed to identify
    opportunities to leverage Amtrak's buying power and provide better
    management and oversight of purchasing activities and suppliers. The
    system should include features that would

    o  provide data on what categories of goods and services are being
    acquired; how many suppliers are being used for specific categories; and
    how much is being spent on specific categories, in total and for each user
    department and with each supplier; and

    o  ensure that data are more readily and reliably retrievable on an
    automated and repeatable basis.

                                      Source: GAO.

    Chapter 6

    Amtrak Does Not Have Adequate Oversight of or Accountability for Its Performance
    and Results

    Our work demonstrates that fundamental improvement is needed in the way
    Amtrak measures and monitors performance, develops and maintains financial
    records and internal controls, controls costs, and acquires goods and
    services. In the preceding chapters, we have outlined recommendations to
    improve the policies, procedures, and practices in these areas. However,
    as long as Amtrak continues to focus much of its attention on capital
    needs, there is a serious question concerning whether the company will
    sufficiently address these areas. Without sufficient accountability
    mechanisms and oversight to ensure that needed actions are implemented,
    Amtrak increases the risk of its having continued ineffective use of
    resources; increasing federal subsidies; and, in an extreme case, facing
    possible bankruptcy.

    Currently, Amtrak's accountability mechanisms are weak and oversight is
    insufficient. Two factors contribute to this situation. First, although
    the federal government has an interest in Amtrak's mission, Amtrak
    operates in an unusual situation-that is, as neither a publicly traded
    private corporation nor as a public entity. This means Amtrak is not
    subject to the accountability and oversight mechanisms by which those
    types of entities would have to abide. For example, unlike publicly traded
    private corporations, Amtrak is not accountable to stockholders or
    financial markets and is not subject to Securities and Exchange Commission
    (SEC) rules, regulations, or public disclosure requirements. Also, unlike
    public entities, Amtrak is not subject to GPRA, FMFIA, or to various other
    reporting and accountability requirements established in law or
    regulation. The second factor is that accountability and oversight
    mechanisms that are applicable, such as oversight by Amtrak's board of
    directors and FRA, are limited or are not being implemented effectively.

    Both the administration and Amtrak have proposed reforms that would change
    Amtrak's basic operating structure, establish competition for intercity
    rail, and provide a different method for distributing federal subsidies.
    The effect of these changes, if implemented, on strengthening oversight
    and accountability mechanisms is unknown. Reaching agreement on to whom
    Amtrak is accountable, however, is a critical first step. Without such a
    step, inadequate accountability will continue, and the issues raised in
    this report may not receive the sustained visibility needed to resolve
    them. Even within the current operating framework, Amtrak's board and
    other key stakeholders can take actions, such as developing policies and
    procedures and identifying needed information for conducting oversight, to
    increase oversight and accountability. Congress may also want to play a
    stronger role in (1) establishing an accountability mechanism for Amtrak
    or

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    (2) determining the extent and parties involved in holding Amtrak
    accountable for its performance and results and for the efficient and
    effective use of federal resources.

      Public-Private Nature of Amtrak Significantly Influences Oversight and
      Accountability Efforts

    Amtrak operates as neither a public entity nor a publicly traded private
    organization, a factor that influences both the degree of oversight it
    receives and the ability to hold it accountable for results-potentially
    reducing both. In general, Amtrak does not receive the same type of
    oversight that publicly traded, for-profit companies or a government
    corporation might receive. Some typical accountability and oversight
    mechanisms from which Amtrak is exempted are discussed below:

    o 	Stockholder accountability. In general, Amtrak is not subject to the
    oversight and accountability of the financial markets. This situation is
    attributable to the fact that Amtrak's stock is closely held and not
    publicly traded. In publicly traded companies, poor financial or
    operational performance and nonachievement of goals can quickly be
    reflected by falling stock prices, declining ratings on bonds or other
    forms of corporate financial instruments, and a possible change in board
    membership. As a result, publicly traded companies have a strong incentive
    to perform as efficiently and effectively as possible and to take action
    if performance is not up to expectations. In addition, company management
    has an incentive to work on behalf of its owners- stockholders-to maximize
    the value of the business and achieve the highest return to stockholders
    possible. Currently, Amtrak does not have such an explicit incentive,
    since stockholders do not hold Amtrak accountable for its performance and
    results.1 Amtrak has common stockholders,2 but they have not played a
    significant role in corporate governance since the early 1980s when the
    Amtrak Improvement Act of 1981 removed the authority of common
    stockholders to elect board

    1This discussion is not meant to imply that Amtrak's stock should be
    publicly traded. Rather, it is to indicate that Amtrak is not subject to
    the same oversight and accountability mechanisms to which a publicly
    traded private business might be subject.

    2The common stock is held by four entities: American Premier Underwriters,
    BNSF Railway Company, Canadian National Railway Company, and Canadian
    Pacific Railway Company. In general, these entities received stock at the
    time that Amtrak was created in exchange for equipment and services
    provided to allow Amtrak to begin operations. The Amtrak Reform and
    Accountability Act of 1997 required Amtrak to redeem the common stock by
    October 2002. However, as of May 2005, this stock had not been redeemed.

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    members. Since 1981, selection of board members has been controlled by the
    federal government-which holds all of Amtrak's preferred stock. The
    President appoints board members with the advice and consent of the
    Senate. The Secretary of Transportation currently has a seat on Amtrak's
    board. Although this is a voting membership, the degree of accountability
    is questionable since the Secretary represents only one of seven votes and
    does not appoint board members. Finally, according to FRA, it can withhold
    grant funding until Amtrak has complied with the specific requirements of
    that funding. Consequently, in this instance, Amtrak is accountable to FRA
    for grant compliance, not necessarily for corporate performance.

    o 	Financial market scrutiny. Since Amtrak is not a publicly traded stock
    company, there is no stock market discipline to hold Amtrak accountable
    for its performance and results. The financial market does play some role
    in overseeing Amtrak's financial performance, since Amtrak receives credit
    ratings that assess the company's capacity to pay its financial
    obligations. For example, Amtrak receives credit ratings from Standard &
    Poor's and Moody's Investor Service.3 Debt has become more of an issue for
    Amtrak since the corporation's total short-and long-term debt has
    increased in recent years-from about $1.7 billion to about $4.8 billion
    from fiscal years 1997 to 2002. At the end of fiscal year 2004, Amtrak's
    total short-and long-term debt was about $3.8 billion.4 However, the
    credit market assesses Amtrak's ability to repay its debt obligations, not
    overall corporate performance or achievement of results. The limited
    market assessment of Amtrak's debt reflects Amtrak's continued and heavy
    reliance on federal subsidies to remain solvent.

    o 	Public disclosure requirements. Although organized as a for-profit
    company with a substantial investment of public funds, Amtrak's stock

    3As of March 31, 2005, Amtrak's credit rating with Standard & Poor's was
    BBB/Negative. This meant that Amtrak obligations had adequate protection
    but adverse economic conditions or changing circumstances could lead to
    weakened capacity to meet financial commitments. As of February 8, 2005,
    Amtrak's credit rating with Moody's Investor Service was A3. This meant
    that Amtrak's bonds had favorable investment attributes and were
    considered upper-medium-grade. However, elements may be present that could
    suggest impairment at some point in the future.

    4This amount includes both long-term debt and capital lease obligations
    (about $3.7 billion) plus the current maturities of long-term debt and
    capital lease obligations (about $129 million).

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    is closely held by a limited number of stockholders, and the stock is not
    publicly traded. As a result, in general, Amtrak is not subject to either
    SEC rules and regulations or SEC public financial disclosure requirements.
    This includes the filing of 10-K and 8-K reports-which are designed to
    provide information to the public and investors on a company's financial
    condition and major events shareholders need to know about.5 In publicly
    traded businesses, these reports serve as a form of oversight and
    accountability concerning financial condition and business practices. In
    lieu of SEC financial disclosure requirements, Amtrak does make certain
    information available about its business. Each year, Amtrak is required to
    submit to Congress by February 15th an annual operations report that
    identifies such things as ridership, revenues, and federal subsidies for
    each of its intercity routes. Amtrak also is required to annually submit
    to Congress a general and legislative report that discusses its operations
    and activities and includes a statement of revenues and expenditures for
    the prior fiscal year. In recent years, this report has been significantly
    late-repeatedly months after the close of the fiscal year and the due date
    of the report to Congress. Since fiscal year 2003, Amtrak also has been
    required to prepare and submit to the Secretary of Transportation and
    Congress a business plan to support its request for federal grant funds,
    which, according to FRA, Amtrak has done.

    o 	Application of certain federal laws and requirements. Many laws and
    requirements that apply to federal entities do not apply to Amtrak. As
    discussed in chapter 1, Amtrak is not a government corporation even though
    it continues to rely heavily on federal support to remain financially
    solvent. Certain laws, such as GPRA (which is designed to ensure that
    programs are efficiently and effectively administered, and that agencies
    are held accountable for results) and FMFIA (which requires that financial
    systems and internal controls are in place and functioning as intended)
    are not applicable to Amtrak. As a result, the federal government must
    rely on other means, such as congressional oversight during authorization
    and appropriations hearings and FRA's oversight of grant agreements, to
    ensure that Amtrak is using federal monies wisely, and that results and
    expectations from federal

    5The 10-K report is an annual report filed with SEC that provides a
    comprehensive overview of a company's business and financial condition and
    includes audited financial statements. The 8-K is a report that companies
    file with SEC to announce major events that shareholders should know
    about. These events include completion of the acquisition or disposition
    of assets as well as changes in corporate governance and management, among
    other things.

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    investments are achieved. These means do not necessarily provide for a
    systematic mechanism to ensure adequate oversight of Amtrak or ensure that
    Amtrak is held accountable for achieving the results it sets out for
    itself.6

      Amtrak's Board of Directors Has Not Exercised Sufficient Oversight or Held
      Management Accountable for Results

    Amtrak's board of directors and its committees have also not played a
    strong oversight role and held the company accountable for results.
    Generally, an organization's board of directors plays a key role in
    corporate governance through its oversight of executive management,
    corporate strategies, risk management and audit and assurance processes,
    and communications with corporate stakeholders. As we recently reported,
    corporate governance can be viewed as the formation and execution of
    collective policies and oversight mechanisms to establish and maintain a
    sustainable and accountable organization, while achieving its mission and
    demonstrating stewardship over its resources.7 Accountability requires
    that an organization effectively demonstrate, internally and externally,
    that its resources are managed properly and used in compliance with laws
    and regulations, and that its programs are achieving their intended goals
    and outcomes and are being provided efficiently and effectively.

        Amtrak's Board Has Not Been Fully Engaged in Oversight and Accountability
        Efforts

    Although responsible for managing the affairs of the corporation and
    ensuring good stewardship over resources, Amtrak's board has not exercised
    sufficient oversight of the corporation or held management accountable for
    results. Three main factors have contributed to the board's
    ineffectiveness in this area. First, the board has not had a full
    complement of members over the last several years. As previously discussed
    in this report, Amtrak has not had a full complement of seven voting
    members since July 2003. Over the period of October 2003 to June 2004, the
    board only had two voting members, exclusive of the Secretary of
    Transportation or his designee. According to Amtrak's board chairman, in
    the absence of a full membership, the board has tried to provide adequate
    oversight of the

    6This discussion is not intended to imply that Amtrak should be made a
    federal agency or necessarily brought under federal laws and requirements.
    This is also not a discussion of federal railroad safety laws that do
    apply to Amtrak. Rather, this discussion is to illustrate the unique
    environment surrounding oversight and accountability of Amtrak's
    performance.

    7GAO, Millennium Challenge Corporation: Progress Made on Key Challenges in
    First Year of Operations, GAO-05-625T (Washington, D.C.: Apr. 27, 2005).

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    company, but he acknowledged that oversight has been difficult without a
    full complement of members. Further, he said that, the board has relied
    heavily on FRA for oversight of company operations. In his opinion, FRA
    has both the staff and expertise to evaluate operational-type issues, and
    it can "bridge the gap" on oversight until a full board is in place. DOT's
    General Counsel, in commenting on a draft of this report, said that the
    department first looks to Amtrak's board of directors to perform adequate
    oversight of the company and then, working through grants, performs a more
    limited and focused oversight of the company. The General Counsel
    acknowledged that lack of a full complement of members has hindered
    Amtrak's board from providing sufficient oversight. However, he believes
    that given its limited resources, the board has done the best job it can
    and has been proactive in getting management to address problems.

    Second, board oversight has been hindered by the lack of an established
    process or structure for conducting oversight or for ensuring management
    is held accountable for achieving financial and operational goals.
    Although Amtrak's board is to meet monthly, there is no established
    process or protocol for reviewing corporate performance, and, according to
    the board chairman, the board has mainly focused on capital spending and
    capital projects. The board has deferred to Amtrak management to handle
    issues that arise if financial or other performance does not match
    established goals or budgets. The chairman noted that the board's action
    in this regard is to ask questions of Amtrak's president and senior vice
    president for operations about whether Amtrak is achieving results;
    however, in general, the board does not take specific actions when there
    are variances between expectations and performance results. Amtrak's board
    chairman believes that Amtrak's management is doing a good job in running
    the company, and that the president, in particular, has done a good job in
    bringing discipline to the corporation. However, he acknowledged that the
    board has not been as engaged in oversight of the company as it should
    have been.

    Third, as discussed in previous chapters, good information necessary for
    effective oversight has been lacking. For example, Amtrak's monthly
    performance report-a report, deemed by Amtrak's president as "critical,"
    that is a primary means for reporting Amtrak's financial and nonfinancial
    performance, both internally and externally-has significant limitations in
    the context of oversight and accountability. These limitations include the
    following:

    o 	Few measures of overall corporate performance exist. For example, one
    of Amtrak's stated goals is to bring the railroad to a state of good

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    repair. However, there is little in the monthly performance report
    indicating the corporation's overall progress toward achieving this goal
    or how much remains to be done to accomplish the goal. While individual
    pieces of information, such as the number of concrete ties laid, may
    indicate work accomplished, these data are not useful as an oversight
    mechanism if they are not set in the context of specific goals,
    objectives, and performance targets that must be accomplished to achieve a
    state of good repair. Amtrak's board chairman agreed, saying that,
    although the reports provided much financial information, more and better
    metrics on company performance are needed. He said that the availability
    of such information would better assist the board in its oversight role.

    o 	Information on the status of operating improvements is lacking. The
    monthly performance report includes little information about initiatives
    to increase Amtrak's operational efficiency. Amtrak's June 2004 strategic
    plan identified nearly $380 million in proposed incremental operating
    improvements8 over fiscal years 2005 to 2009. These improvements included
    such things as additional service, crew, and equipment efficiencies and
    increased ridership and revenue. While there is information on some
    specific initiatives, such as ridership and revenue, there is little, if
    any, comprehensive, consolidated information about the status of these
    initiatives in the monthly performance report. This may be partially
    attributable to the fact the strategic plan did not link the dollar value
    of incremental improvements to specific initiatives. Since these
    initiatives were integral in determining the amount of Amtrak's operating
    grant needed, such information is important for the oversight of actual
    grants as well.

    o 	Usefulness of financial information is limited. As discussed in chapter
    3, much of the financial information provided to management and external
    stakeholders lacked certain relevant and reliable information. For
    example, the monthly performance reports contained significant errors that
    were not corrected until several months after the end of the fiscal year
    as part of the annual audit process. This delay affects the accuracy of
    the information for oversight purposes. Further, the monthly performance
    reports we reviewed did not separately report any relevant information on
    food and beverage revenue or expense, despite

    8The strategic plan identified these improvements as operating
    efficiencies and benefits from capital investments.

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    food and beverage-related financial losses totaling about $160 million in
    fiscal years 2002 and 2003. Finally, Amtrak's president told us that cost
    data for individual routes were unreliable.

        Amtrak Board Committees Also Have Not Been Fully Engaged in Oversight and
        Accountability Efforts

    Not only has the board exercised insufficient oversight, but the board's
    committees9 also have not fulfilled their oversight requirements as set
    out in their charters. In March 2002, Amtrak revamped its board committee
    structure.10 Several board committees, such as the audit, corporate
    affairs, and finance committees, have oversight responsibilities. However,
    many board committees have not met since September 2003. Under the board
    committee charters, the audit committee should meet at least four times
    annually, and the legal affairs committee should meet at least quarterly
    or as necessary. The corporate affairs and finance committees should meet
    monthly or as necessary.

    Amtrak's audit committee is a good example of a board committee's not
    fully fulfilling its oversight responsibilities. This committee's primary
    functions include oversight of the corporation's accounting and financial
    reporting processes and the audits of Amtrak's financial statements and
    internal controls. Although we found that Amtrak's audit committee
    charter, as amended, contains audit committee duties and responsibilities
    that are consistent with good governance, the audit committee meets
    irregularly and did not fully carry out its oversight responsibilities. In
    fiscal year 2004, the audit committee did not meet at all. Amtrak
    officials told us that there were never enough members on the board in
    fiscal year 2004 to constitute a quorum. Further, while the committee met
    eight times in fiscal year 2003, it met only once in fiscal year 2002. Our
    review of committee minutes for fiscal years 2002 and 2003 and through
    August 2004 found there was no written record of the committee's reviewing
    and discussing auditor independence, or of management's code of ethical
    conduct and its compliance with such code. Further, the meeting minutes
    did not reflect

    9Amtrak's board has the following committees: Audit, Compensation and
    Personnel, Corporate Affairs, Finance, and Legal Affairs.

    10Prior to March 2002, Amtrak's board had the following committees:
    Corporate Strategy; Ad Hoc Committee on Legislative Matters; Finance,
    Audit, and Administration; Budget and Management Ad Hoc Committee; Legal
    Affairs Ad Hoc Committee; Safety, Service, and Quality; and Ad Hoc
    Committee on Safety. One Amtrak official noted that prior to March 2002,
    most of Amtrak's board committees were inactive, and that the board put
    little emphasis on board committees.

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    that any independent meetings were held by the audit committee with the
    IPA.

    In commenting on a draft of this report, both DOT and Amtrak officials
    told us that given the limited number of board members, Amtrak's board had
    assumed the functions of the audit committee. DOT officials said these
    functions included meeting with Amtrak's IPA to discuss audit and internal
    control issues, some of these meetings were held without the presence of
    Amtrak management. Analysis we performed showed that the board performed
    some audit committee functions or oversight. For example, our review of
    board minutes for fiscal year 2004 indicated that the board did hold one
    independent meeting with the IPA in January 2004, and received periodic
    status reports on the IPA's audit of Amtrak's fiscal year 2003 financial
    statements.11 However, the board minutes contained no written
    documentation of the full board performing other audit committee
    functions, such as reviewing and discussing auditor independence or
    management's code of ethical conduct and Amtrak's compliance with such a
    code-important audit and internal control oversight functions.

        Reform Strategies May Contribute to Better Alignment of Accountability and
        Performance

    Although the board and its committees have not been fully engaged in
    oversight and accountability efforts, in April 2005, Amtrak's board and
    management jointly issued a set of reform strategies. These strategies
    embodied a new vision for Amtrak, and intercity passenger rail in general,
    that called for a number of changes, including reinforcing management
    controls, organizing planning and reporting by lines of business, and
    cultivating competition and private commercial activity in passenger rail
    functions and services. The new vision anticipates developing
    activity-based costing capabilities, increasing the outsourcing of
    activities, and pricing contracts for services on a unit cost basis. In
    addition, the reform strategies envision better aligning management
    accountability with performance, both by business line and by train route.
    Although it is yet to be seen how these initiatives will develop, we
    believe better aligning

    11We did not review the fiscal years 2002 and 2003 board minutes for
    specific audit committee functions because the audit committee held
    meetings during this time period. In its comments on a draft of this
    report, Amtrak noted that the board committees held regularly scheduled
    meetings until September 2003 when there was an insufficient number of
    board members to fulfill the committee functions. As previously discussed,
    from October 2003 to June 2004, the board only had two voting members,
    exclusive of the Secretary of Transportation or his designee. During this
    time period, the audit committee did not hold any meetings.

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    management accountability with performance will be an important step in
    both better facilitating the oversight of Amtrak and in ensuring better
    accountability for results.

      Oversight of Amtrak's Performance by Some Key Stakeholders Has Been Limited

    FRA and the Amtrak OIG, as key stakeholders in overseeing various aspects
    of the company's operations, have provided limited oversight of Amtrak's
    overall performance. Although responsible for providing billions of
    federal dollars to Amtrak each year in operating and capital subsidies,
    FRA has largely focused its efforts on Amtrak's compliance with grant
    agreements (about $1.2 billion in each of fiscal years 2004 and 2005) and
    safety regulations. Since fiscal year 2003, Congress has imposed measures
    to increase the Secretary of Transportation's responsibility for providing
    oversight of and accountability for the federal funds used for intercity
    passenger rail service. Among other things, these measures require that
    Amtrak transmit a business plan to the Secretary of Transportation and
    Congress, supplemented by monthly reports describing work completed,
    changes to the business plan, and reasons for the changes. As we reported
    in February 2004, these measures impacted DOT's role with respect to the
    expenditure of federal funds provided to Amtrak.12 However, these measures
    only apply to specific years for which they are included in appropriations
    acts. So far, these measures have applied to appropriations for fiscal
    years 2003, 2004, and 2005. In response to these measures, FRA has entered
    into grant agreements with Amtrak, and, according to FRA officials, Amtrak
    has provided the requisite business plans and monthly reports.

    Although measures are in place to increase FRA's oversight of Amtrak's
    operations through grant agreements, FRA officials said they mainly
    dedicate their resources to the oversight of Amtrak's implementation of
    and funding needs for capital projects and to Amtrak's cash flow needs. In
    addition, FRA officials said they have been focused on the development and
    implementation of new intercity passenger rail policy. There has been less
    emphasis on oversight of operations and operating budgets. Such oversight
    has mainly come through the review of budgets and budget variances. FRA
    officials said there also has been less emphasis on oversight of overall
    corporate performance or on the extent to which Amtrak is

    12GAO, Intercity Passenger Rail: Amtrak's Management of Northeast Corridor
    Improvements Demonstrates Need for Applying Best Practices, GAO-04-94
    (Washington, D.C.: Feb. 27, 2004).

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    making progress toward meeting goals it establishes. FRA officials noted
    that Amtrak has no external baseline for performance statistics presented,
    and that better benchmarking of data to similar industries by line of
    business is needed. According to FRA officials, the quality of Amtrak's
    reporting has been improving. They said, however, that capital spending
    data continue to have problems because of financial system-related
    problems. FRA said Amtrak is aware that it needs to start from scratch
    with its financial system, but funding such an overhaul has been
    difficult.

    FRA officials said DOT has a seat on Amtrak's board and by virtue of this
    position is knowledgeable about Amtrak's operations and goals. However,
    according to FRA, historically, the agency has not forced a particular
    approach toward running Amtrak or specifically held Amtrak management
    accountable for meeting or not meeting particular goals. An FRA official
    told us that the agency must be careful about its involvement with
    management decisions since, legally, Amtrak is a private, for-profit
    corporation. FRA officials said the agency can withhold funds from Amtrak
    for grant noncompliance but, to date, no funds have been withheld. In
    commenting on a draft of this report, DOT officials said there are both
    legal and practical issues associated with withholding money from Amtrak.
    According to DOT, legally, FRA can withhold grant monies if Amtrak
    violates specific provisions of the grant agreements. DOT believes its
    oversight role would be more effective if it had broader explicit
    statutory authority to withhold funds from Amtrak as a means to encourage
    achievement of Amtrak's annual business plan, its financial plan, and
    other performance measures. Such statutory authority would permit DOT to
    withhold discrete specific federal funds, if needed, instead of the
    current situation where withholding grant funds would involve large sums
    and could have a severe impact on Amtrak's continued operations.

    FRA also attributed the lack of resources for its limited, focused
    approach to overseeing Amtrak. For example, FRA officials told us that
    they have had to rely on Amtrak's procurement department to tell them if
    Amtrak is complying with procurement requirements that are in the grant.
    According to FRA, there has been no direct verification of this
    compliance. As of March 2005, FRA had about six people assigned to
    intercity passenger rail policy development and implementation and Amtrak
    oversight. Three individuals were mostly full-time with the others being
    part-time. This number of staff was expected to increase through the
    creation of a new

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    division in March 2005 with a new division chief and two new hires
    designated to Amtrak oversight.13

    Similar to FRA, the Amtrak OIG also has exercised limited oversight of
    Amtrak's corporate performance and accomplishment of goals. The Amtrak OIG
    was created by the Inspector General Act Amendments of 1988 to provide
    independent audits and investigations; promote economy, efficiency, and
    effectiveness; and prevent and detect fraud and abuse in Amtrak programs
    and operations. For fiscal year 2004, the Amtrak OIG had a staff of 88 and
    a $12.5 million budget. The Amtrak OIG's Office of Audits is responsible
    for, among other things, conducting independent reviews of Amtrak's
    internal controls, overseeing and assisting in audits of Amtrak's
    financial statements, reviewing certain procurements and materials
    acquisitions, and monitoring compliance with laws and regulations.
    Evaluations include measuring Amtrak's compliance with corporate policies.
    However, as we recently reported, much of the work of this office (47
    percent of all audits in fiscal year 2004) was focused on specific
    internal matters, such as environmental issues, inventory, and ticket
    sales.14 An additional 29 percent of fiscal year 2004 audits focused on
    procurement-related matters. In general, oversight by this office is
    limited and does not include broader evaluations of programmatic matters
    or corporate performance based on corporate goals and metrics.

    Clarifying Amtrak's Clarifying Amtrak's role-and its key overseers-will be
    critical for

    establishing accountability. While stronger oversight performance
    byRole-and Its Key Amtrak's board and refocused efforts by Amtrak's
    outside overseers can Overseers-Is Critical potentially bring about some
    oversight and accountability improvements, to Establishing Amtrak will
    continue to have difficulty being more fully accountable if its

    role and the range of stakeholders to which it is accountable are
    notAccountability clarified.

    13According to FRA, as of June 2005, responsibility for intercity
    passenger rail policy analysis, board of director issues, and oversight
    had been consolidated into the existing program development division.
    According to FRA, the final staffing level of this division is being
    developed. The division currently has two full-time staff, with a third
    position being recruited. The division also has access, on a part-time
    basis, to staff of other divisions in FRA's Office of Railroad
    Development.

    14GAO-05-306R.

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    As we reported over a decade ago, Amtrak and the federal government need
    to make important decisions about the future of intercity passenger rail
    service and the government's commitment to subsidize such operations.15 We
    stated, at that time, our belief that continuing to operate the nationwide
    passenger rail system would require significantly increased resources if
    Amtrak were to offer quality service. Since our previous report, Amtrak
    has received more than $10 billion in federal subsidies (capital and
    operating).16 Although ridership has increased about 27 percent over the
    period, other measures of service, such as on-time performance, has
    fluctuated and generally decreased from 79 percent in fiscal year 1999 to
    about 71 percent in fiscal year 2004. Amtrak's market share has also
    largely stabilized at about 0.5 percent of the intercity travel market.
    However, Amtrak's need for federal support has not abated. Amtrak
    indicated in its April 2005 strategic reform initiative that the company
    is spending at a rate of $1.4 billion per year, and that further increases
    in the level of capital investment will be required to minimize the risks
    of operational breakdown due to years of deferred maintenance.

    Multiple proposals exist for what Amtrak's future should be, not only in
    defining what Amtrak should be doing, but in defining to whom Amtrak
    should be accountable. In particular, the administration's current
    proposal for Amtrak would move much of the focus of accountability to the
    regional, state, and local levels. The administration's proposal would
    significantly restructure the management and accountability of intercity
    passenger rail transportation in the United States. Modeled after the
    federal-state-local partnership in the federal transit program, the
    proposal would have regional, state, and local entities making the
    fundamental decisions about what intercity passenger rail services are
    justified and will receive public financial support. It would also make
    these entities responsible for planning, managing, and financing this
    service. The federal role would be to participate in making capital
    investments on a grant basis similar to the federal transit program, but
    not to subsidize operation of services that local entities would not
    subsidize themselves. The proposal would essentially split Amtrak's
    current responsibilities into two separate corporations. One corporation
    would transition train operations to a competitive basis, make Amtrak
    compete to operate intercity passenger service, and introduce the
    competitive forces of the marketplace to provide high-quality service at

    15GAO/RCED-95-71. 16This amount excludes federal loan guarantees.

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    reasonable prices. The other corporation would continue, for a period of 6
    years, to provide the dispatching, maintenance, and infrastructure
    services provided by Amtrak and carry out a multiyear infrastructure plan
    prepared by Amtrak. Title to Amtrak's assets, including the Northeast
    Corridor, would be transferred to the Secretary of Transportation. An
    interstate compact of eight states and the District of Columbia would
    manage all rail operations on the Northeast Corridor.

    Amtrak has proposed a somewhat similar vision that would include a greater
    role for states in planning and developing passenger rail corridors. Its
    April 2005 strategic reform initiatives states that the current structure
    of intercity passenger rail service is unsustainable, and that a more
    aggressive approach that includes the introduction and development of
    competition is needed. Under both this initiative and the administration's
    reform proposal, it is clear that states would play an increased role in
    deciding what services are provided, who would provide them, who would
    cover operating losses, and who would oversee the results.

    While there is growing agreement that the current model for providing
    intercity passenger rail service needs to be reexamined, there is much
    less agreement on what should be done. Deciding on a course of action,
    however, is critical. In our view, concerns about Amtrak's performance and
    accountability will remain unresolved as long as the current situation
    goes unchanged. Better resolve on Amtrak's board and management's part to
    hold the company accountable is not enough.

    Congress has a central role in this issue. It created Amtrak and has
    continued to subsidize its operations over time. Amtrak's authorization
    expired in September 2002, and Congress is now considering what, if any,
    changes are needed in the structure and financing of intercity passenger
    rail. As part of this reauthorization, Congress will also play a role in
    determining the type of oversight to be provided and the accountability
    mechanisms to be used to ensure that desired results and outcomes are
    achieved. As we reported in April 2003, the key components of a framework
    for evaluating federal infrastructure investments include (1) establishing
    clear, nonconflicting goals; (2) establishing the roles of government 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 the diverse stakeholder interests and
    limit unintended consequences. (See fig. 14.) We continue to believe these
    components are important in evaluating and establishing federal policy
    toward intercity passenger rail.

     Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for Its
                                Performance and Results

    However, it is clear that Amtrak's ability to articulate its mission,
    align its various enterprises, and operate a results-oriented organization
    would be enhanced by a clarification of its role.

    Part and parcel to the debate over the future of intercity passenger rail
    is the issue of adequate oversight and accountability for results and
    outcomes. In part, the current situation is the result of how Amtrak has
    evolved over time in its governance and accountability-an evolution that
    has largely left Amtrak unaccountable to anyone in particular. These
    problems have been exacerbated by the limited oversight exercised by
    Amtrak's board, and the relatively narrow scope of review activity by
    other oversight bodies, such as FRA. These groups have not filled the
    void. The reauthorization process offers an opportunity for Congress to
    take a new approach in whatever structure it elects to adopt for intercity
    passenger rail-an approach that ensures there is a clear and transparent
    mechanism for oversight and accountability, and that there are
    consequences if desired results and outcomes are not achieved. Without a
    clear mechanism and consequences, an intercity passenger rail provider
    (whether Amtrak or some other entity) will have less incentive to ensure
    achievement of results and outcomes and ensure that resources made
    available, whether federal or nonfederal, are used in the most efficient
    and effective manner possible.

    Matters for As part of the deliberation about the future of Amtrak and
    intercity

    passenger rail, we believe Congress may want to consider establishing
    aCongressional national policy for intercity passenger rail and
    determining the appropriate Consideration role for Amtrak by ensuring that
    reauthorization or reform legislation (1)

    establishes clear, nonconflicting goals; (2) establishes the roles of both
    the federal and state governments as well as private entities; (3)
    establishes funding approaches that focus on and provide incentives for
    results and accountability; and (4) provides that the strategies developed
    address the diverse stakeholder interests and limit unintended
    consequences.

    Recommendations for 	To strengthen the oversight of corporate performance
    and to increase the accountability of Amtrak's management for achieving
    the goals and

    Executive Action	objectives it establishes, and to provide the needed
    transparency among key internal and external stakeholders, we recommend
    that the chairman of Amtrak's board and the board members take the
    following three actions:

    Chapter 6 Amtrak Does Not Have Adequate Oversight of or Accountability for
    Its Performance and Results

    o 	develop policies related to the oversight of corporate performance and
    the specific procedures to be used to implement these policies;

    o 	identify, in consultation with Amtrak's president and senior
    management, the type and frequency of information required to implement
    the policies and procedures for oversight; and

    o 	in conjunction with Amtrak's management, assess the financial and other
    resources that will be required to develop the measures and information
    required to conduct cost-effective oversight, and prepare an action plan
    to implement needed changes in information and data systems to provide the
    reports and other documents required to meet the oversight policies and
    procedures adopted.

    To strengthen DOT and FRA oversight of Amtrak's performance, we recommend
    that the Secretary of Transportation direct the Federal Railroad
    Administrator to take the following four actions:

    o 	work with Amtrak's board and management to develop measures of overall
    corporate performance and related outcomes;

    o 	require Amtrak to report on these measures of corporate performance and
    outcomes at least annually;

    o 	identify and make known to Amtrak the range of potential consequences
    of not meeting, or making sufficient progress toward, a minimum level of
    performance on the corporate measures and outcomes; and

    o 	report annually to Congress on the results of FRA's oversight of
    Amtrak's corporate performance and Amtrak's progress toward meeting
    minimum levels of performance and outcomes (this report should identify
    any specific actions Congress should consider taking to better facilitate
    progress on achieving specific outcomes or to identify alternative ways
    the outcome might be achieved).

    Appendix I

    Methodology for Selecting Procurement Contract Files for Review

    In order to assess the National Railroad Passenger Corporation's (Amtrak)
    compliance with its acquisition policies and procedures, we reviewed a
    nonprobability sample of 61 service contract files1 that covered 75
    percent of the total expenditures for fiscal years 2002 and 2003 in the
    following accounts:2

    o  Advertising (Account 553201).

    o  Sales promotion (Account 553209).

    o  Professional services (Account 505111).

    o  Consulting (Account 505115).

    We selected the files we reviewed from data identifying expenditures made
    under purchase orders during fiscal years 2002 and 2003; the results of
    our analysis cannot be projected to the universe. Our objective was to
    obtain a mix of contracts with small, medium, and large dollar
    expenditures during fiscal years 2002 and 2003. Because our basis for
    selection was expenditures, as opposed to actual contract awards, the
    contracts selected include those awarded before fiscal year 2002 as well
    as contracts awarded during fiscal years 2002 and 2003.

    Specifically, we selected contracts as follows:

    Amtrak provided data on expenditures made under purchase orders during
    fiscal years 2002 and 2003. These data were segregated by financial
    account and identified specific transactions. These data included
    information such as vendors, purchase order numbers, and expenditure
    amounts for each transaction. Each purchase order number-also used as the
    contract

    1Results from nonprobability samples cannot be used to make inferences
    about a population, because in a nonprobability sample some elements of
    the population being studied have no chance or an unknown chance of being
    selected as part of the sample.

    2We initially selected 2 additional contracts but subsequently excluded
    them from our analysis. One of these was a contract that had been
    originally awarded in 1994 and, according to a procurement department
    official, was to provide personnel in support of the engineering
    department. Work under this contract had started and stopped over the
    years and assessing it for compliance with Amtrak policies and procedures
    was not possible. The second contract we excluded from our analysis was a
    contract for maintenance on the Acela trainset. In this case, the
    consortium that had built the Acela had formed a corporation for the
    purposes of performing maintenance, and a purchase order had been created
    solely for the purposes of tracking payments to the consortium.

    Appendix I
    Methodology for Selecting Procurement
    Contract Files for Review

    number-indicates whether it is a blanket purchase order (B), which allows
    purchases to be made over a period of time, or a standard purchase order
    (S), which is used for one-time purchases.3

    To assess the reliability of the procurement data Amtrak provided, we
    compared it with Amtrak audited financial statement data for fiscal years
    2002 and 2003 for the accounts we reviewed. (The expenditure data came
    from a different database.) We then asked Amtrak to reconcile differences
    that we identified between the two sets of accounts. Because Amtrak
    officials said this reconciliation had to be done manually and would take
    substantial time, data were reconciled for only 1 account-sales promotion.
    Consequently, we used the procurement expenditure data only to select a
    nonprobability sample of procurement contracts to review.

    For each year and each account, we sorted the expenditure data by purchase
    order type and amount. For each account, we selected 2 to 10 purchase
    orders within each type of order-blanket or standard-in order to obtain a
    mix of large, medium, and small dollar expenditures so that we could
    assess compliance with acquisition policies and procedures for contracts
    with significant dollar values, as well as for contracts of lesser values.

    We also noted that expenditures made under a given purchase order could be
    charged to more than one account. We only selected each contract once.
    However, for purposes of determining the extent of dollar coverage
    resulting from our selections, we included the expenditures under a given
    purchase order that were charged to another of the accounts within our
    scope (advertising, sales promotion, professional services, and
    consulting). According to Amtrak's expenditure data, total blanket and
    standard purchase order expenditures for the four accounts within our
    scope was $114.3 million. The expenditures for the purchase orders we
    selected- according to the same data-totaled $85.3 million in fiscal years
    2002 and 2003, or 75 percent of the total expenditures for these accounts.

    3The expenditure data also included construction purchase orders, which we
    excluded because construction contracts were outside of the scope of our
    review.

    Appendix I
    Methodology for Selecting Procurement
    Contract Files for Review

    When we reviewed the contracts, we determined whether they were awarded
    competitively or noncompetitively4 and assessed them for compliance with
    policies and procedures in effect at the time of the contract award, or
    the guidance in effect when a change to the contract was processed. For
    example, if a contract was awarded in 2002, we used guidance applicable at
    the time of the award. If a change to the contract occurred, for example,
    in 2003 or 2004, we applied the guidance in effect at that time.

    Finally, Amtrak could not locate any documentation for 4 of the contracts
    we selected. Instead, they provided printouts from the acquisition system.
    These printouts contained minimal information about the contract, such as
    the vendor name, amount of the award, and whether it was a competitive or
    noncompetitive award. Additionally, for another contract, one folder-out
    of three-was missing. We analyzed these contracts on the basis of the
    limited information available.

    4We define noncompetitive awards as those that Amtrak considered as either
    sole or single source. We obtained information as to whether a contract
    was a sole or single source award by review of documentation in the
    contract file and, if necessary, discussion with procurement department
    officials.

    Appendix II

    Comments from the National Railroad Passenger Corporation

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    See comment 1.

    See comment 2.

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

                                     See comment 3.

                                     See comment 4.

                                     See comment 5.

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

                                     See comment 6.

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

                                      Appendix II
                          Comments from the National Railroad
                                 Passenger Corporation

    The following are GAO's comments on the National Railroad Passenger
    Corporation's (Amtrak) letter dated September 2, 2005.

      GAO Comments 1.

    2.

    Amtrak believes that there is no "silver bullet" for fixing its problems
    and that making steady incremental improvements is the best approach.
    These views do not appear to be consistent with the magnitude of changes
    discussed in Amtrak's April 2005 strategic reform initiatives. This
    document-which was characterized by Amtrak as a dramatic departure from
    business as usual and would substantially change how Amtrak
    operates-outlines a number of structural, operating, and legislative
    changes that would, among other things, place a new focus on planning,
    budgeting, accounting, and reporting of financial activity and performance
    along Amtrak's business lines and open to competition the market for
    virtually all functions and services of intercity passenger rail. We
    believe the strategic reform initiatives clearly acknowledge the
    substantial systemic problems facing Amtrak, including those discussed in
    this report, as well as the need for reform in how intercity passenger
    rail service is delivered. As previously discussed in this report, we
    encourage Amtrak's president and management to work with the board of
    directors to ensure that the issues and challenges raised in the strategic
    reform initiatives are addressed.

    Amtrak commented that it has recently taken a number of actions to better
    manage its food and beverage service, including reforming the delivery of
    food service and renegotiating its contract with Gate Gourmet (formerly
    called Dobbs International). Amtrak's comments also stated that our draft
    report failed to mention or recognize the cost of labor associated with
    the food and beverage service. We agree that Amtrak has taken actions
    regarding its food and beverage service, and we encourage Amtrak to
    continue to seek ways to improve the management and controls over this
    service. Both our June 2005 testimony before the Subcommittee on
    Railroads, House Committee on Transportation and Infrastructure, and our
    August 2005 report on Amtrak's food and beverage service made
    recommendations for

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

    improving this control.1 Both the testimony and report also acknowledge
    the labor costs associated with the food and beverage service. We agree
    with Amtrak that this is the single largest cost of this service. Because
    labor costs associated with the food and beverage service are a part of
    Amtrak's overall labor cost structure, it was beyond the scope of our work
    in this report to analyze these specific costs. However, our June 2005
    testimony indicated that a recent Amtrak Inspector General report
    suggested a way Amtrak could address its food and beverage labor costs.

    3.	Amtrak commented that it was in the process of implementing changes in
    the procurement area, many of which coincide with our recommendations. We
    commend Amtrak for recognizing areas for improvement in its procurement
    area and for making changes. However, we found numerous systemic problems
    with the procurement function that still need to be addressed. The
    recommendations contained in this report are designed to help Amtrak
    address these problems.

    4.	Amtrak commented that it has identified the problems, "as only we can,"
    and has developed an approach that "works best for us." Amtrak's president
    also commented that the strategic planning mechanisms we recommend or that
    government agencies adopt may not be in line with those followed by
    Amtrak, but the goals are the same. Further, he states that while the
    process is important, results are what matter. We agree results matter,
    but, overall, results are not improving. Our report notes that both public
    and private organizations have long recognized that sound strategic
    planning mechanisms or "processes" are vital to chart a clear direction
    and mission, develop road maps for cost-effective operations based on this
    mission, and be held accountable for results. We believe the management
    tools Amtrak has adopted in recent years, while helpful, are focused too
    narrowly and insufficient to stem the operating losses the company is
    experiencing. We also believe adopting a systematic and organized
    strategic approach is necessary to achieve the results management and the
    public expect.

    1GAO, Amtrak: Management and Accountability Issues Contribute to
    Unprofitability of Food and Beverage Service, GAO-05-761T (Washington,
    D.C.: June 9, 2005); and Amtrak: Improved Management and Controls over
    Food and Beverage Service Needed, GAO-05-867 (Washington, D.C.: Aug. 24,
    2005).

    Appendix II
    Comments from the National Railroad
    Passenger Corporation

    5.	Amtrak commented that its financial performance has improved
    dramatically in recent years and that, among other things, it closes its
    books on time and reports monthly results faster than most other companies
    of its size. We agree that improvements have been made and that this is a
    step in the right direction. Our report recognizes these improvements.
    However, our work shows there continues to be substantive problems related
    to financial management at Amtrak. These problems include monthly
    performance reports that are not as useful as they could be and that
    contain financial data that are not reliable, and inadequate internal
    controls related to certain expenses. As we previously discussed, Amtrak
    will find it difficult to make sound business decisions and improve its
    efficiency and cost-effectiveness without addressing these problems.

    6.	Amtrak commented that, at times, our draft report seemed to be more
    concerned with the process for achieving results, rather than the actual
    results. We believe actual results are important and that the results are
    not satisfactory. Although improvements have been made, during the past 3
    fiscal years, Amtrak's operating losses have increased to over $1 billion
    annually, and such losses are projected to increase about 40 percent by
    2009. In addition, we found systemic problems in all five areas we
    reviewed, and we found that Amtrak faces major challenges in instituting
    and improving its basic business systems. Amtrak's recent improvements
    have likely quelled what would have been even higher losses, but the
    situation is still not under control. The recommendations contained in
    this report reflect sound and proven ways adopted by leading organizations
    to more efficiently and effectively manage Amtrak's operations. We believe
    that not recognizing the value of these approaches and adapting them to
    Amtrak's environment will continue to lead to suboptimal results.

    Appendix III

                         GAO Contact and Staff Acknowledgments

    GAO Contact	JayEtta Z. Hecker, Director, Physical Infrastructure Issues,
    (202) 512-2834, heckerj@gao.gov

      Staff Acknowledgments

    Acquisition and Sourcing Carolyn Kirby Management Team

    Applied Research and SaraAnn Moessbauer
    Methods/Center for Design,
    Methodology, and Analysis

        Financial Management and Robert Martin, Director

    Assurance Team	Fred Evans Irvin McMasters

    Scott McNulty Robert Owens

        Office of General Counsel	Edda Emmanuelli-Perez Bert Japikse

    Physical Infrastructure Randall Williamson, Assistant Director

    Team	Colin Fallon Lynn Filla-Clark Gregory Hanna Richard Jorgenson Heather
    Krause Stephanie Purcell

    Appendix III GAO Contact and Staff Acknowledgments

        Strategic Issues Team	Elizabeth Curda Sarah Veale

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