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
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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 [email protected]. 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
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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.
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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.
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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
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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
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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.
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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.
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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.
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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
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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.
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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).
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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.
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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, [email protected]
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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