Intercity Passenger Rail: National Policy and Strategies Needed  
to Maximize Public Benefits from Federal Expenditures (13-NOV-06,
GAO-07-15).							 
                                                                 
Intercity passenger rail service is at a critical juncture in the
United States. Amtrak, the current service provider, requires $1 
billion a year in federal subsidies to stay financially viable	 
but cannot keep pace with its deteriorating infrastructure. At	 
the same time, the federal government faces growing fiscal	 
challenges. To assist the Congress, GAO reviewed (1) the existing
U.S. system and its potential benefits, (2) how foreign countries
have handled passenger rail reform and how well the United States
is positioned to consider reform, (3) challenges inherent in	 
attempting reform efforts, and (4) potential options for the	 
federal role in intercity passenger rail. GAO analyzed data on	 
intercity passenger rail performance and studied reform efforts  
in Canada, France, Germany, Japan, and the United Kingdom.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-15						        
    ACCNO:   A63328						        
  TITLE:     Intercity Passenger Rail: National Policy and Strategies 
Needed to Maximize Public Benefits from Federal Expenditures	 
     DATE:   11/13/2006 
  SUBJECT:   Accountability					 
	     Federal aid to railroads				 
	     Federal funds					 
	     Federal/state relations				 
	     Financial analysis 				 
	     Foreign governments				 
	     National policies					 
	     Passengers 					 
	     Policy evaluation					 
	     Railroad industry					 
	     Strategic planning 				 
	     Transportation					 
	     Benefit-cost tracking				 
	     Program goals or objectives			 
	     Canada						 
	     France						 
	     Germany						 
	     Japan						 
	     United Kingdom					 

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GAO-07-15

   

     * [1]Report to the Chairman, Committee on Transportation and
       Infrastructure, House of Representatives

          * [2]November 2006

     * [3]INTERCITY PASSENGER RAIL

          * [4]National Policy and Strategies Needed to Maximize Public
            Benefits from Federal Expenditures

     * [5]Contents

          * [6]Results in Brief
          * [7]Background
          * [8]Existing U.S. Intercity Passenger Rail System Is in Poor
            Financial Condition and Appears to Provide Limited Benefits for
            Federal Expenditures

               * [9]Existing U.S. Intercity Passenger Rail System Appears
                 Unsustainable at Current Levels of Federal Funding

                    * [10]Operating Losses
                    * [11]Substantial Capital Needs and Debt Obligations
                    * [12]Federal Funding

               * [13]Current Intercity Passenger Rail Network Appears to
                 Provide Limited Public Benefits at a High Cost to the
                 Federal Government

                    * [14]Long-Distance Routes are Characterized by
                      Relatively High Costs and Potentially Limited Benefits
                    * [15]Ridership and Financial Characteristics
                    * [16]Transportation Benefits and Public Benefits
                    * [17]Corridor Services Appear to Provide More Public
                      Benefits at Reduced Cost, but Opportunities for
                      Improvement Remain
                    * [18]Ridership and Financial Characteristics
                    * [19]Potential Transportation Benefits and Public
                      Benefits
                    * [20]Potential Opportunities for Improvement

               * [21]Current Intercity Passenger Rail System Is Not
                 Adequately Focused Where It Can Be the Most Financially
                 Viable and Provide the Most Public Benefits

          * [22]Foreign Experiences Illustrate Various Approaches to
            Restructuring and Key Reform Elements

               * [23]Various Approaches Have Been Used Abroad to Support a
                 Broad Range of National Intercity Passenger Rail Objectives
                 Aimed at Improving Value for Funds Spent
               * [24]Shifts in the Roles and Responsibilities of Intercity
                 Passenger Rail Stakeholders
               * [25]Changing the Public Funding Structure Used to Support
                 Intercity Passenger Rail
               * [26]Changing the Organization of Existing Passenger Rail
                 Systems

                    * [27]Introducing Competition and Privatization in
                      Intercity Passenger Rail Operations

               * [28]Foreign Countries Addressed Key Reform Elements in
                 Implementing New Approaches to Intercity Passenger Rail

          * [29]The United States is Not Well Positioned for Reform

               * [30]United States Will Need to Address Three Key Elements to
                 Improve the Benefits of Intercity Passenger Rail

                    * [31]Policy Goals
                    * [32]Stakeholder Roles and Responsibilities

               * [33]Funding
               * [34]Amtrak Can Take Actions to Reduce Costs and Increase
                 Efficiency but It Is Not Positioned to Address Key Reform
                 Elements

                    * [35]Amtrak Has the Authority to Take a Number of
                      Actions to Reduce Costs and Increase Corporate
                      Efficiency
                    * [36]Benefits of the Legislative Freedoms Are Limited by
                      Constraints
                    * [37]Amtrak Is Not Positioned to Address the Three Key
                      Reform Elements

          * [38]Addressing Reform Elements for Intercity Passenger Rail Will
            Require Overcoming Stakeholder and Funding Challenges

               * [39]Variety of Stakeholder Interests and Challenges Makes
                 Reaching Consensus on Change Difficult

                    * [40]Federal Issues and Challenges
                    * [41]Federal-State Partnership Issues and Challenges
                    * [42]Freight Railroad Issues and Challenges
                    * [43]Workforce Issues and Challenges
                    * [44]Private Sector Issues and Challenges

               * [45]Funding Issues also Present Challenges
               * [46]Not Addressing Challenges Will Hinder Opportunities to
                 Increase the Benefits of Federal and Nonfederal Intercity
                 Passenger Rail Expenditures

          * [47]Options for the Future of Intercity Passenger Rail Will
            Determine the Level of Federal Involvement

               * [48]Fundamental Reexamination Criteria and Key Components of
                 Decision-Making Framework Could Help Guide Consideration of
                 Options for Future Federal Role in Intercity Passenger Rail
               * [49]First Option: Keep Existing Structure and Funding of
                 Intercity Passenger Rail

                    * [50]Establish Goals to Maintain Current Structure
                    * [51]Define the Federal Role within the Current
                      Structure
                    * [52]Continue Existing Funding

               * [53]Second Option: Incremental Change within Existing
                 Intercity Passenger Rail Structure

                    * [54]Establish Goals to Improve Performance within
                      Existing Structure
                    * [55]Define the Federal Role within the Current
                      Structure
                    * [56]Determine the Appropriate Federal Funding
                      Mechanisms to Improve Performance

               * [57]Third Option: Discontinue Federal Role in Intercity
                 Passenger Rail

                    * [58]Establish Goals that Discontinue the Federal Role
                    * [59]Define the Appropriate Stakeholder Roles
                    * [60]Determine Funding Level for Federal Exit Strategy

               * [61]Fourth Option: Restructure Intercity Passenger Rail
                 Service

                    * [62]Establish Goals for Restructured Intercity
                      Passenger Rail Service
                    * [63]Define the Federal and Other Stakeholder Roles in a
                      New Intercity Passenger Rail Structure
                    * [64]Determine the Appropriate Federal Funding Sources

               * [65]Each Option Carries Advantages, Disadvantages, and
                 Challenges, However Restructuring Presents Substantial
                 Opportunity for Improving the Intercity Passenger Rail
                 System

                    * [66]Keeping the Status Quo Forgoes Benefits that May
                      Accrue from Improving the System
                    * [67]Incremental Change Does Not Address Fundamental
                      Flaws in the Current System
                    * [68]Discontinuing Federal Involvement May Reduce
                      Services and Would Require Detailed Planning and
                      Substantial Federal Expenditures
                    * [69]Restructuring Provides Path to Increased
                      Transportation and Public Benefits from National
                      Intercity Passenger Rail Network

          * [70]Conclusions
          * [71]Recommendations for Executive Action
          * [72]Matter for Congressional Consideration
          * [73]Agency Comments and Our Evaluation

     * [74]Scope and Methodology
     * [75]Selected Performance Characteristics of Amtrak Long-Distance and
       Corridor Routes
     * [76]Reform Overviews in Five Site Visit Countries

          * [77]Canada

               * [78]Background
               * [79]Operations
               * [80]Infrastructure
               * [81]Funding and Debt

          * [82]France

               * [83]Background
               * [84]Operations
               * [85]Infrastructure
               * [86]Funding and Debt

          * [87]Germany

               * [88]Background
               * [89]Operations
               * [90]Infrastructure
               * [91]Funding and Debt

          * [92]Japan

               * [93]Background
               * [94]Operations
               * [95]Infrastructure
               * [96]Funding and Debt

          * [97]The United Kingdom

               * [98]Background
               * [99]Operations
               * [100]Infrastructure
               * [101]Funding and Debt

     * [102]Current Amtrak Reform Efforts
     * [103]Operational Challenges Associated with Access, Capacity, and
       Liability Issues

          * [104]Infrastructure Access and Capacity Issues
          * [105]Liability against Accident Risks

     * [106]Workforce Issues Associated with Intercity Passenger Rail Reform
     * [107]Financial Reporting, Internal Control, and Governance
       Requirements and Practices for Federal Entities and Public Companies

          * [108]Current Accountability Requirements and Practices

               * [109]Federal Entities

                    * [110]Financial Reporting
                    * [111]Internal Control
                    * [112]Governance (Audit Committee)

               * [113]Public Companies

                    * [114]Financial Reporting
                    * [115]Internal Controls
                    * [116]Governance (Audit Committees)

               * [117]Amtrak

                    * [118]Financial Reporting
                    * [119]Internal Control
                    * [120]Governance (Audit Committee)

          * [121]Opportunities for Improvement at Amtrak

               * [122]Financial Reporting

                    * [123]MD&A
                    * [124]Quarterly Financial Statements
                    * [125]Certification by CEO and CFO
                    * [126]Review of Financial Statements

               * [127]Internal Control

                    * [128]Management's Assessment and Report on Internal
                      Controls
                    * [129]Auditor's Attestation

               * [130]Governance (Audit Committee)

     * [131]Comments from National Railroad Passenger Corporation

          * [132]GAO Comments

     * [133]GAO Contact and Staff Acknowledgments
     * [134]cov1&2.pdf

          * [135]Report to the Chairman, Committee on Transportation and
            Infrastructure, House of Representatives

               * [136]November 2006

          * [137]INTERCITY PASSENGER RAIL

               * [138]National Policy and Strategies Needed to Maximize
                 Public Benefits from Federal Expenditures

Contents

Tables

Figures

Abbreviations

November 13, 2006Letter

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

Dear Mr. Chairman:

The future of intercity passenger rail service in the United States has
come to a critical juncture. The National Railroad Passenger Corporation
(Amtrak) continues to rely heavily on federal subsidies--over $1 billion
annually in recent years--and operating losses have remained high. In
addition, Amtrak will require billions of dollars to address deferred
maintenance and achieve a "state of good repair."^1 These needs for Amtrak
come at a time when the nation faces long-term fiscal challenges. As we
reported in February 2005, the federal government's financial condition
and long-term fiscal outlook present enormous challenges to the nation's
ability to respond to emerging forces reshaping American society, the
United States' place in the world, and the future role of the federal
government.^2 Addressing the projected fiscal gaps will require policy
makers to examine the affordability and sustainability of all existing
programs, policies, functions, and activities throughout the federal
budget.

Our February 2005 report outlines some of the criteria that should be
considered in reexamining the future federal role toward intercity
passenger rail in this country. These criteria include: (1) the relevance
of and purpose for the federal role, (2) measures of success, (3) targeted
benefits, and (4) the affordability and cost effectiveness of federal
expenditures. A reexamination will include asking questions such as: Does
intercity passenger rail have a clear federal role and mission? Does
intercity passenger rail have outcome-based performance measures? Do
intercity passenger rail expenditures target areas with the greatest needs
and least capacity? Do federal expenditures and investments encourage
state and local governments, and the private sector, to invest resources?
Do these expenditures appear affordable and sustainable in the long term?
Considering the performance of the current system relative to all these
factors will be critical in deciding the future of intercity passenger
rail, the federal role in intercity passenger rail, and how intercity
passenger rail is structured, operated, and funded in the United States.

Reexamining the federal role and expenditures on intercity passenger rail
service will be particularly difficult because of the divergent opinions
about what this service should be. Some advocate a greatly expanded
federal role and the expansion of intercity passenger rail to relieve
growing congestion on highways and airways and (as energy prices increase)
to provide more fuel-efficient transport; others believe the federal role
should be scaled back, and that at least some federal operating subsidies
should be eliminated. Specific proposals vary--while one proposal would
keep Amtrak largely intact and provide more funding for capital and other
improvements, another proposal would significantly restructure the
management and accountability for intercity passenger rail with regional,
state, and local entities making fundamental decisions about what
intercity passenger rail services are justified and will receive public
financial support. Amtrak itself has proposed a new vision for intercity
passenger rail service that would include a greater role for states in
planning and developing passenger rail corridors. The acting president of
Amtrak told us that, in his view, Amtrak itself is not a substitute for a
national intercity passenger rail policy and that Congress needs to
develop such a policy. One of the primary difficulties in developing a
clear national intercity passenger rail policy will be reconciling the
wide diversity of views about what intercity passenger rail service should
be and what it should achieve.

To assist Congress as it assesses the future of intercity passenger rail
service in the U. S., and the federal role in such service, you asked us
to identify critical issues and options that Congress should consider in
deciding the future federal role. In response to your request, this report
addresses the following:

othe characteristics of the current U.S. intercity passenger rail system
and the potential benefits obtained from this system^3;

oforeign experiences with passenger rail reform and observations for the
United States;

ohow well the United States is positioned for reforming^4 its intercity
passenger rail system;

ochallenges the United States faces in overcoming obstacles to reform; and

opotential options for the future of intercity passenger rail service.

To address these issues, we collected information on the characteristics
of Amtrak's routes, including ridership, costs, and the extent of public
subsidies provided on routes. We conducted extensive analyses of both
long-distance routes and short-distance corridor routes.^5 We analyzed
data on passenger demographics, financial performance, on-time
performance, and connectivity between routes, and synthesized the results
to determine the actual and potential benefits provided by both types of
routes. We also collected and analyzed data on passenger rail operations
and restructuring efforts in Canada, France, Germany, Japan, and the
United Kingdom (U.K.). This included interviews with government and
private sector officials in these countries, and reviews of
passenger-rail-related policies and funding. We interviewed officials from
Amtrak as well as the Federal Railroad Administration (FRA), states,
various travel and tour associations, rail labor unions, freight
railroads, and the operator of a luxury passenger rail service in the
United States. We also compared Amtrak's current accountability and
financial reporting mechanisms to the basic requirements and practices for
federal entities and public companies in the United States. Finally, we
reviewed studies on passenger rail reform efforts around the world and
consulted with international rail experts knowledgeable about passenger
rail reform efforts. Our work was conducted from January 2006 to October
2006 in accordance with generally accepted government auditing standards.

Results in Brief

The existing U.S. intercity passenger rail system remains in poor
financial condition, characterized by continued high operating losses and
substantial levels of deferred capital and maintenance projects. Moreover,
the current structure does not appear to effectively target federal funds
where they may provide the greatest level of public benefits, such as
reduced traffic congestion and pollution. Amtrak currently operates two
types of intercity routes--long distance and corridors--that provide
service to a wide range of passengers in urban and rural communities
across the country. These routes exhibit markedly different financial
characteristics and operating characteristics. Long-distance routes
account for about 80 percent of Amtrak's financial losses although they
serve 15 percent of Amtrak's total ridership, and are characterized by
poor on-time performance. Support for these routes is often linked to a
number of potential public benefits--one public benefit is the provision
of transportation for rural residents located along the route who might
have few, if any, other transportation options; another is the national
connectivity between regional rail corridors. However, these benefits may
be limited by infrequent or inconvenient service, and are provided at high
cost to the federal government. In contrast, corridor routes account for
most of Amtrak's ridership and growth in recent years, account for about
20 percent of the financial losses (which do not include federal capital
grants to maintain Amtrak-owned infrastructure in the Northeast), and
appear to offer greater potential to provide public benefits. For example,
these services tend to be more time- and cost-competitive with other modes
of transportation--potentially mitigating highway and air congestion--and
they offer increased flexibility over long-distance rail services to adapt
schedules and services to meet potentially shifting demographics and
trends in passenger travel. To maximize the public benefits for federal
expenditures for intercity passenger rail services in this country, a
reevaluation of the existing structure may be required to better target
federal funding to services where rail may have a comparative advantage,
is more effectively positioned to provide public benefits, and is better
integrated into the national transportation system.

Intercity passenger rail reform efforts in other countries illustrate
that, to be more cost effective and offer increased benefits in relation
to expenditures, there are a variety of approaches--and several key reform
elements--that need to be addressed when implementing any approach. Over
the past 20 years, several countries have employed a variety of approaches
in reforming their intercity passenger rail systems to meet national
intercity passenger rail objectives--that is, primarily achieving more
cost effective, value-added passenger service for the level of subsidies
spent. These approaches, alone or in combination with each other, have
been used to support other national objectives as well, such as increasing
transparency in the use of public funds and providing transportation
benefits and public benefits. Prior to, or during, implementation of these
various approaches, several elements key to comprehensive reform were
addressed. The national governments of most countries we visited focused
their efforts on the following elements: (1) clearly defining national
policy goals; (2) clearly defining the various roles and responsibilities
of all government entities involved; and (3) establishing stable,
sustainable funding for intercity passenger rail. These elements were
important to determining how passenger rail fit into the national
transportation system and to increase the value of both federal and
nonfederal expenditures on such systems.

The United States is not well positioned to undertake any reform of
intercity passenger rail. The experience of the countries we studied
indicates that U.S. reform will require a more fundamental reexamination
of the goals and performance of the system by policymakers than has taken
place to date. Specifically, the United States will need to address the
three reform elements--clearly defined national policy goals, clear
definition of government and stakeholder roles, and establishing
consistent funding devoted to these goals--to better position itself for
improving the performance and benefits of intercity passenger rail system.
The goals and expected outcomes of the current passenger rail policy are
ambiguous, stakeholder roles are unclear, and funding has been constrained
due to competing priorities and a lack of consensus on the level of
funding to devote to these goals. The primary provider of U.S. intercity
passenger rail, Amtrak, has the authority to take a number of actions, but
has a history of poor financial and operating performance. Recently,
Amtrak has proposed a reform strategy and is undertaking efforts to reduce
costs and increase efficiency within Amtrak's authority. However, the
benefits Amtrak can achieve are limited by constraints. For example,
possible route and service changes could trigger expensive labor
protections payments. Even if Amtrak could manage its operations more
efficiently, Amtrak is not in a position to address the key elements of
reform we observed in other countries. Federal leadership will be needed
to fundamentally improve the performance of intercity passenger rail.

There are a number of challenges associated with addressing the key
elements of reform for intercity passenger rail. The variety of
stakeholders, all with different interests and issues, makes reaching
consensus on any change difficult. Central among federal challenges is
determining what the vision and role for intercity passenger rail in the
U.S. should be and the federal role, if any, within this vision and
reconciling the wide diversity of views about intercity passenger rail
service. Challenges in promoting a more equitable federal-state
partnership include the varying ability and willingness of states to
participate in funding intercity passenger rail and identifying
appropriate policy changes to overcome the disadvantages intercity
passenger rail faces relative to leveraging of federal funds. Currently,
states are challenged to leverage their expenditures on such service.
However, federal-state cost sharing is common in highway and transit
programs where investment is encouraged through matching grants. Other
challenges include freight railroad concerns about infrastructure access
and capacity, workforce issues, and defining the role of the private
sector. Addressing important funding issues will also present challenges.
This includes identifying funding sources to achieve national policy goals
and developing incentives for state participation. Each of these
challenges presents opportunities to increase the benefits of federal and
nonfederal expenditures on intercity passenger rail and not addressing
them will likely continue the stalemate in moving toward a well defined
role for federal subsidies for intercity passenger rail in the U.S.

For simplicity in outlining the choices, we discuss four possible options
for the future of the federal role in intercity passenger rail service.
The first option would be no change in the current structure or funding of
intercity passenger rail. The second option would focus on incremental
reforms within the current intercity passenger rail structure. The third
option would discontinue federal involvement and devolve responsibility
for intercity passenger rail service to states and others. The fourth
option would reexamine the entire structure of intercity passenger rail
service with the focus on optimizing its performance and benefits for both
federal and nonfederal expenditures. All four options for the future of
intercity passenger rail present challenges that could impede both their
selection and their effectiveness once chosen. Of the four options,
however, restructuring presents the opportunity to substantially improve
the intercity passenger rail system. This option would allow Congress and
policymakers to establish intercity passenger rail's goals, define the
roles of stakeholders, and develop funding mechanisms that could provide
improved performance and accountability for intercity passenger rail
expenditures.

To maximize the transportation benefits and public benefits of intercity
passenger rail service and any federal funds expended on this service, we
recommend that Congress consider restructuring the current intercity
passenger rail system in the United States. In restructuring the intercity
passenger rail system, Congress should establish clear goals for the
system, define the roles of government and other stakeholders, and develop
funding mechanisms that include sharing costs between the federal
government and other beneficiaries. Due to the complex nature of intercity
passenger rail issues and the wide diversity of views about its future, an
independent and properly designed commission may be effective in
developing a consensus on the approach for changing its structure. We also
recommend bringing Amtrak's financial reporting, internal control, and
governance practices in line with basic requirements for federal entities
or public companies.

We provided draft copies of this report to Amtrak and the Department of
Transportation for their review and comment. In general, Amtrak did not
take an overall position on the report. However, Amtrak did agree that
intercity passenger rail in the United States has come to a critical
juncture and that a national dialogue about the future direction of rail
service is needed. Amtrak also strongly agreed that the three key elements
to comprehensive reform of intercity passenger rail are establishing
clearly defined national policy goals, clearly defining government and
stakeholder roles, and establishing committed funding. In response to our
recommendation, Amtrak offered comments about specific steps that could be
taken in that regard. For example, Amtrak agreed that including a
Management Discussion and Analysis with its annual audited financial
statements is reasonable. Amtrak took exception to other examples of
oversight such as the chief executive officer and chief financial officer
certifying Amtrak's financial statements similar to requirements in the
Sarbanes-Oxley Act. Amtrak also took exception to bringing its reporting
under the Securities and Exchange Commission and believes such an effort
would not be an effective use of federal funds given the oversight
currently provided by FRA and the Amtrak and Department of Transportation
Inspector Generals'. While we recognize that Amtrak is subject to
oversight already, we believe there are opportunities to improve current
reporting practices, while identifying opportunities for potential
streamlining. The Department of Transportation did not indicate agreement
or disagreement with the report or its recommendations. Instead, it
provided primarily technical comments that we incorporated where
appropriate.

Background

The Rail Passenger Service Act of 1970 created Amtrak to provide U.S.
intercity passenger rail service because existing railroads found such
service unprofitable. Today, Amtrak continues to be the main provider of
intercity passenger rail service in the United States, operating a
22,000-mile network that provides service to 46 states and Washington,
D.C., primarily over tracks owned by freight railroads.^6 Federal law
requires that freight railroads typically give Amtrak trains priority
access and, in general, charge Amtrak the incremental cost--rather than
the full cost--associated with the use of their tracks. Amtrak also owns
about 650 miles of track, primarily on the Northeast Corridor (NEC), which
runs between Boston, Massachusetts, and Washington, D.C. Access to this
corridor is also critical for the operations of nine commuter railroads
run by state and local governments serving 1.2 million passengers each
work day. According to Amtrak, four freight railroads also use the
corridor each day. Amtrak employs about 19,000 people.

The Amtrak Reform and Accountability Act of 1997 gave Amtrak significant
flexibility with respect to its route system, but directed it to continue
to operate "a national passenger rail transportation system which ties
together existing and emergent regional rail passenger service and other
intermodal passenger service."^7 To meet this mandate, Amtrak currently
operates 41 intercity passenger rail routes that fall into two distinct
types, long-distance routes and short-distance corridors (see fig. 1).
There are 14 long-distance routes, which generally travel over 750 miles
and include an overnight component.^8 Twenty-seven routes are short
distance, or "corridor" services, and are further classified into two
distinct categories. The first is the NEC. According to Amtrak, about
two-thirds of its ridership is either wholly or partially on this
corridor. The second category of corridor service is primarily comprised
of routes partly funded by states, but also includes several other routes
that Amtrak continues to operate as part of the original or "legacy"
system.^9 These corridor services have several similarities, such as a
relatively high frequency of service and route distances generally under
500 miles.

Figure 1: Amtrak's Route Map, Fiscal Year 2005

The 1997 act also established a Reform Board (to assume the
responsibilities of Amtrak's Board of Directors) and a Reform Council (to
review and recommend changes in Amtrak's route structure). The act
provided for the Reform Board to serve for 5 years and then be replaced by
a new Amtrak Board of Directors; meanwhile, the Reform Council's mandate
was to look at "Amtrak's operation as a national passenger rail system
which provides access to all regions of the country and ties together
existing and emerging rail passenger corridors."^10 In November 2001, the
Reform Council reported that Amtrak would not achieve operational
self-sufficiency by December 2, 2002, as envisioned by the act and, in
2002, the Reform Council recommended restructuring and rationalizing the
national intercity passenger rail system--a move that envisioned, among
other things, breaking up Amtrak and introducing competition to provide
rail service. As of October 2006, Congress was still considering Amtrak
issues, such as its funding level, the size of its network, the
introduction of competition for routes, and Amtrak restructuring.

Since Amtrak's inception, it has struggled to become financially solvent.
Amtrak has run a deficit each year and required federal assistance to
cover operating losses and capital investment. Amtrak has received
approximately $1.2 billion in annual appropriations since fiscal year 2003
for operational support, capital improvements, and debt obligations.
Amtrak, like other intercity transportation systems, is capital-intensive.
From fiscal years 1971 through 2006, Amtrak has received just over $30
billion in federal support, of which about $11 billion has been for
infrastructure improvements and equipment overhauls.^11 Additional capital
funding has also been obtained from state and local governments, generally
for specific capital investments required to support corridor routes
operating within their jurisdiction.

The Amtrak Reform and Accountability Act of 1997^12 removed Amtrak from
the list of government corporations under 31 U.S.C. S 9101. While listed,
Amtrak was required to submit annual management reports to Congress under
the Government Corporation Control Act of 1945. Relieved from this
requirement, Amtrak remains a government-established private corporation
which is neither an agency nor instrumentality of the U.S. government, nor
an issuer of securities to the public. Therefore, since 1997, Amtrak has
not been subject to the basic accountability requirements of either
federal entities or public companies. Such requirements cover financial
reporting, internal control, and governance. Through its loan agreement
and grant agreements for operating and capital expenses, Amtrak is subject
to a variety of reporting requirements--including providing a monthly
performance report to its board, the Department of Transportation (DOT),
and Congress; providing FRA with a daily cash balance report; and
providing FRA with a monthly progress report on actions addressing our
previous recommendations. Due to Amtrak's long-term challenges, several
reform proposals and legislation have recently been introduced to address
Amtrak's financial problems. The suggested reforms vary in the level of
federal subsidies proposed and the extent to which the current U.S.
intercity passenger rail system would be restructured. Among these
proposals is the administration's 2005 proposal, which would phase out
federal operating subsides for long-distance trains and split Amtrak into
three entities: an oversight company to manage the restructuring process,
a private infrastructure management company, and a train operating
company.^13 This proposal would ultimately give states greater
decision-making authority with respect to rail service and capital
improvements. Conversely, the Senate Committee on Commerce, Science, and
Transportation proposed a reauthorization bill in 2005 that would
authorize just under $2 billion per year over a 6-year period to fund
Amtrak's capital and operating expenses to maintain current operations,
upgrade equipment, and return the NEC to a state of good repair. Although
operating subsidies over the life of this bill would be reduced 40 percent
through cost cutting and other actions, capital funding to Amtrak and
states would increase. See table 1 for key aspects of recent intercity
passenger rail reform proposals and legislation.

Table 1: Key Aspects of Selected Recent Intercity Passenger Rail Reform
Proposals

                                        

                Proposal                            Key aspects               
Amtrak Reauthorization Act of 2005 oAuthorizes $2 billion per year for FY  
(H.R. 1630)                        2006-2008 with funds set aside for      
                                      retirement and commuter rail            
                                      obligations                             
                                                                              
                                      oRequires no restructuring, but allows  
                                      Amtrak to continue with its current     
                                      5-year plan                             
                                                                              
                                      oRequires periodic reporting by Amtrak  
                                      on its annual business plan             
Passenger Rail Investment and      oAuthorizes $11.4 billion in            
Improvement Act of 2005 (S. 1516)  appropriations for 6 years (FY          
                                      2006-2011)                              
                                                                              
                                      oAuthorizes the issuance of $13 billion 
                                      in federal bonds for additional capital 
                                      improvements                            
                                                                              
                                      oReduces operating subsidies by 40      
                                      percent over 6 years                    
                                                                              
                                      oRequires Amtrak to evaluate            
                                      long-distance routes to improve         
                                      performance                             
                                                                              
                                      oAllows transfer of Amtrak operating    
                                      rights to host freight railroads        
                                                                              
                                      oAllows the Surface Transportation      
                                      Board to levy penalties against freight 
                                      railroads for failing to give           
                                      scheduling priorities to Amtrak trains  
                                      on freight railroad tracks              
Passenger Rail Investment Reform   oSubjects Amtrak to annual              
Act (H.R. 1713). (This is the      appropriations with specific reform     
administration's bill.)            requirements                            
                                                                              
                                      oAuthorizes appropriation of funds for  
                                      the purposes of the act over a 6-year   
                                      period                                  
                                                                              
                                      oPhases out operating subsidies         
                                                                              
                                      oReorganizes Amtrak into three          
                                      functional entities: (1) an oversight   
                                      company to manage the restructuring     
                                      process, (2) a private infrastructure   
                                      company, and (3) a train operating      
                                      company                                 
                                                                              
                                      oProposes to create an interstate       
                                      compact to operate the NEC              
                                                                              
                                      oGives states greater participation     
                                      with respect to provision of rail       
                                      service and capital improvements        
                                                                              
                                      oEstablishes a matching grant program   
                                      for capital projects                    
                                                                              
                                      oAllows potential operators to bid to   
                                      operate intercity passenger rail        
                                      service                                 
                                                                              
                                      oAuthorizes buyouts for current         
                                      employment contracts                    
Systemic Passenger Infrastructure  oTransfer ownership of property along   
and Network Overhaul through       the NEC to the Secretary of             
Financial Freedom Act (H.R. 3851)  Transportation                          
                                                                              
                                      oAllow companies to compete for the     
                                      maintenance and operation of services   
                                      on the NEC                              

Source: GAO analysis.

The U.S. system is not the only intercity passenger rail system that has
experienced financial deficits and economic inefficiencies. Many countries
have undertaken efforts to reform their systems in order to alleviate
financial and structural problems. While the intercity passenger rail
experiences of other countries are often cited in the debate over the U.S.
system, there are some key differences between the U.S. system and other
foreign systems, including:

oInfrastructure ownership. In the United States, nearly all of the
infrastructure that intercity passenger rail operates on is owned by
private freight rail companies and is located on private land. Although
Amtrak, by law, has a statutory right of access to infrastructure at
incremental cost, it enters into operating agreements with freight and
other railroads to use their lines. In contrast, in most of the countries
in Europe, infrastructure is publicly owned.

oFreight and passenger railroad industry. In addition to owning the
infrastructure, freight rail dominates the rail industry in the United
States. This is a stark contrast to most other countries, where passenger
rail is the primary component of the rail industry and freight plays a
more secondary role.

oGeography and demographics.  Geographic and demographic factors also make
the United States significantly different from other countries, in
particular those in Europe and Japan. The United States is relatively
larger geographically than most of these other countries. Europe and Japan
are more compact than the United States, making more intercity travel by
rail between major cities as fast as by air. Additionally, experts and
prior research highlight the greater population density of European
cities--making rail a more attractive option for transportation.

Existing U.S. Intercity Passenger Rail System Is in Poor Financial
Condition and Appears to Provide Limited Benefits for Federal Expenditures

The existing U.S. intercity passenger rail system remains in poor
financial condition, characterized by continued high operating losses and
substantial levels of deferred capital and maintenance projects. Moreover,
the current structure does not appear to effectively target federal funds
where they may achieve the greatest level of public benefits.^14 That is,
many services are not focused on the markets where rail may have a
comparative advantage over other modes and is most likely to be a viable
and cost-effective option to meet public transportation demands.

Amtrak operates two types of intercity routes--long distance and
corridors--that provide service to a wide range of passengers across the
country; however, each of these route types exhibit markedly different
financial and operating characteristics. Long-distance routes account for
about 80 percent of Amtrak's financial losses although they serve about 15
percent of Amtrak's total ridership, and are characterized by poor on-time
performance. These routes are often associated with a number of public
benefits, including offering service to a number of rural residents and
providing national connectivity; however, these benefits may be limited by
infrequent or inconvenient service and are provided at high cost to the
federal government. In contrast, corridor routes account for most of
Amtrak's ridership and appear to offer greater potential to provide
passenger transportation benefits and public benefits. For example, these
services tend to be more time- and cost-competitive with other modes of
transportation--potentially mitigating highway and air congestion--and
they offer greater flexibility over long-distance rail services to adapt
schedules and services to the demands of the traveling public. While
several challenges related to funding and capacity constraints exist,
corridors appear to be where the comparative strength for intercity
passenger rail services lies and where the greatest potential exists for
rail to provide increased public benefits for federal expenditures.
Corridors could also facilitate integrating intercity passenger rail into
the national transportation system.

Existing U.S. Intercity Passenger Rail System Appears Unsustainable at
Current Levels of Federal Funding

Although the Amtrak Reform and Accountability Act of 1997 proposed that
Amtrak reach operational self-sufficiency by December 2002, Amtrak did not
achieve this goal and its financial condition since this legislation was
enacted remains precarious.^15 In addition, to stabilize and sustain the
existing system, Amtrak is likely to need increased levels of funding.
Amtrak continues to incur substantial operating deficits and is faced with
billions of dollars in deferred capital maintenance and debt obligations.
No combination of service cuts or productivity improvements can fully
eliminate the need for public operating and capital subsidies,
particularly if Congress continues to mandate that Amtrak operate a
national system. However, at a time when the federal government faces a
long-term structural fiscal imbalance, these poor financial
characteristics lead to questions about how the system should be
structured and funded in the future.

Operating Losses

The U.S. intercity passenger rail system ends each fiscal year with
substantial operating losses. Although Amtrak has made some progress in
containing operating expenses in recent years, it continues to run an
annual operating deficit (total operating revenues minus operating
expenses) of over $1 billion dollars and relies heavily on federal
subsidies to cover this deficit. In fiscal year 2005, Amtrak reported a
net operating

loss of $1.2 billion, including an annual cash loss of $450 million (see
fig. 2).^16 Although exhibiting a slight decrease from the record deficit
in fiscal year 2004, operating losses have shown few signs of substantial
long-term improvement. In fact, Amtrak projected in its 2005-2009
Strategic Plan that, under the existing structure, annual operating losses
will increase to over $1.5 billion by 2009.^17

Figure 2: Amtrak Annual Operating Losses and Cash Losses, Fiscal Years
2002 through 2005

^aOperating losses represent the net results reported per Statement of
Operations in Amtrak's audited financial statements

^bCash losses include Amtrak reported earnings before interest, taxes,
depreciation, and other post-employee benefits.

While Amtrak has experienced a steady increase in ridership over the last
decade, there has not been a corresponding increase in total annual
revenues. Between fiscal years 2002 and 2005, passenger revenues remained
relatively stable--declining from $1.34 billion to $1.29 billion (3.3
percent)--despite growth in annual ridership of nearly 2 million
passengers during this period, an increase of 8.2 percent (see fig. 3).^18
These results suggest that it is unlikely that Amtrak can grow its way out
of financial difficulty through additional increases in ridership.
Further, these trends of continued high operating losses and stagnating
passenger revenues, despite a number of cost-cutting efforts, have led the
DOT Inspector General and others to conclude that Amtrak also cannot "save
its way to financial health" and--in the absence of increased federal
funding--may require long-term structural operating reforms.^19

Figure 3: Amtrak Annual Passenger Revenue and Ridership, Fiscal Years 2002
through 2005

Substantial Capital Needs and Debt Obligations

In addition to the burden of its annual operating deficit, the intercity
passenger rail system is faced with substantial financial obligations
related to capital repairs and infrastructure maintenance, as well as
accumulated debt. Both of these obligations have received substantial
federal subsidies each year and are likely to continue affecting the
financial outlook of Amtrak into the foreseeable future.

oCapital needs and deferred maintenance. Lacking the funds to complete all
of its identified capital repair and maintenance projects, Amtrak has
deferred an estimated $6 billion in capital and infrastructure maintenance
spending.^20 In addition to increasing the risk of a major failure on the
system, the deteriorated condition of Amtrak's rolling stock and
infrastructure may contribute to higher operating costs and reduced
reliability of service.^21 Further, over 60 percent of this deferred
maintenance is attributable to Amtrak's mainstay NEC service. Disruptions
of service on this corridor, due to needed repairs or safety concerns,
would have significant financial impacts. While Amtrak has identified the
restoration of rail infrastructure to a state of good repair as one of its
primary goals, the cost and extent of the needed improvements remain a
significant burden to the financial viability of the existing intercity
passenger rail system. Although the level of federal capital funding has
increased in recent years, there remains a fundamental mismatch between
the level of investment Amtrak and the DOT Office of Inspector General
(DOT OIG) have estimated is needed to maintain the existing network and
the amount of funding provided. For example, in fiscal years 2005 and
2006, Amtrak identified capital funding needs of nearly $800 million
dollars annually; however, actual funds appropriated for capital projects
in those years totaled $369 million and $495 million, respectively.

oDebt obligations. Significant federal funds are also spent each year to
service Amtrak's substantial debt burden. At the end of fiscal year 2005,
Amtrak carried a total of $3.6 billion in debt and capital lease
obligations.^22 Principal and interest payments on these accumulated debts
is estimated at $295 million for fiscal year 2007 and will likely remain
at about this level for the foreseeable future. These payments accounted
for over 20 percent of Amtrak's total federal appropriation for fiscal
year 2006 and, in light of Amtrak's other financial obligations, are
likely to continue to require funding from other sources.

Federal Funding

Given high annual deficits, deferred capital spending, and debt
obligations, the current levels of federal subsidies are likely
insufficient to maintain the existing level of passenger rail service
being provided by Amtrak. Since Amtrak's authorizing legislation expired
in 2002, federal funding for intercity passenger rail has been far below
what Amtrak and others have estimated is needed to sustain and stabilize
the current system. For example, Amtrak submitted budget requests of
approximately $1.8 billion for fiscal years 2004 through 2006. However,
the average amount of federal funding received over this period totaled
about $1.24 billion per year--enough to keep the system operating but not
enough to meet the level Amtrak estimated is needed to prevent the
continued deferral of significant maintenance projects (see fig. 4). The
President's budget in fiscal year 2006 proposed no funding for Amtrak in
the absence of significant operating and structural reforms; however,
Amtrak eventually received federal funding in the amount of $1.29 billion.

Figure 4: Amtrak's Annual Budget Request and Appropriation Levels, Fiscal
Years 2003 through 2006

For fiscal year 2007, Amtrak's budget request totaled $1.6 billion. This
figure included $498 million to support cash operating losses, $730
million for capital spending, $295 million for debt service, and $75
million for

working capital.^23 The DOT OIG issued estimates similar to those proposed
by Amtrak, reporting that $1.4 billion would be required in fiscal year
2007 just to maintain the currently configured system in a steady state,
without addressing the backlog of infrastructure projects or investing in
new corridor development.^24 This report also identified that up to $125
million in additional working capital may be needed to protect Amtrak from
insolvency risks posed by any significant unforeseeable events, such as
the Acela brake problem experienced in 2005.^25

Current Intercity Passenger Rail Network Appears to Provide Limited Public
Benefits at a High Cost to the Federal Government

The nation's intercity passenger rail system serves a variety of purposes,
but many routes appear to provide limited public benefits for the level of
federal expenditures required to operate them. While none of the 41 routes
comprising the current U.S. intercity passenger rail network earn
sufficient revenue to fully cover the operating and capital costs of
providing the service, the two types of routes that Amtrak operates--long
distance and corridors--have markedly different operating and financial
characteristics. Some of these differences include annual ridership and
passenger demographics, financial performance, and the scope of potential
transportation benefits and public benefits that the service is likely to
provide.

Long-Distance Routes are Characterized by Relatively High Costs and
Potentially Limited Benefits

While Amtrak's 14 long-distance routes serve a number of different
geographical and traveler markets, they often do so inefficiently and at a
high cost to the federal government. That is, long-distance routes account
for nearly 80 percent of Amtrak's financial losses although they serve 15

percent of Amtrak's annual ridership.^26 In addition, long-distance rail
services also tend to be infrequent and exhibit poor dependability--as
measured by on-time performance--due to increased trip distances and
potential issues associated with operating on freight-owned
infrastructure. As a result, actual transportation and public benefits
potentially deriving from these routes, such as rural transportation and
national connectivity, may be limited.

Ridership and Financial Characteristics

Long-distance routes comprise a relatively small percentage of total
Amtrak ridership, yet they consume a disproportionate amount of federal
subsidies. Ridership on Amtrak's long-distance routes has remained
relatively stable, averaging approximately 3.8 million passengers per year
between fiscal years 2002 and 2005. This figure represents approximately
15 percent of Amtrak's total reported ridership of 25.4 million passengers
in fiscal year 2005. Since many of these passengers travel longer
distances than passengers on corridor routes, long-distance routes
accounted for 47 percent (2.5 billion) of Amtrak's total of 5.4 billion
passenger miles in fiscal year 2005.^27 However, many of the trips taken
on these routes are for relatively shorter distances as opposed to
end-to-end trips, with riders often traveling between city pairs on
existing Amtrak corridors or planned corridor routes. For example, the DOT
OIG issued a statement in 2003 which estimated that the share of trips
taken on long-distance routes that were corridor in nature was 34
percent.^28 In fiscal year 2005, nearly 30 percent of all trips on
long-distance routes were for fewer than 300 miles and 46 percent were for
fewer than 500 miles (see fig. 5). In this regard, many passenger trips on
long-distance routes may be similar to those on Amtrak's corridor
services, where rail service is more likely to be time- and
cost-competitive with other modes of intercity transportation. For
example, on the Empire Builder--one of Amtrak's best-performing
long-distance routes--over 24 percent of all passenger trips on the
2,200-mile route take place on the 417-mile stretch between Chicago,
Illinois, and Minneapolis/St.Paul, Minnesota; this stretch represents 1 of
10 potential high-speed rail corridors designated by FRA.^29

Figure 5: Trip Distance on Long-Distance Routes, Fiscal Year 2005

Ridership demographic data also indicate that Amtrak's long-distance
routes serve a large percentage of vacation and leisure travelers.
According to Amtrak passenger profile surveys, most passengers (over 80
percent) report utilizing long-distance routes for recreational and
"leisure" trips, including visits with family and friends and for personal
business, compared with other types of travel, such as business or
commuting. In addition, Amtrak passenger data indicate that, overall, many
long-distance customers tend to be retirees--33 percent versus 16 percent
for the total travel market.^30

Long-distance routes operate with substantial financial losses and consume
a disproportionate amount of federal operating subsidies. Financial losses
allocated to long-distance routes amounted to $539 million in fiscal year
2005, accounting for approximately 80 percent of Amtrak's total reported
loss of $659 million. This figure also accounts for nearly 95 percent of
the total federal appropriated operating grant of $570 million provided to
Amtrak for that year. Based on data provided by Amtrak, operating losses
on long-distance routes averaged $154 per passenger with considerable
variation illustrated between the individual routes.^31 Financial
performance over the past several years also indicates that Amtrak is
unlikely to substantially reduce these losses through increased revenue or
cost reductions. Between fiscal years 2002 and 2005, Amtrak reported a
nearly 30 percent decline in annual long distance revenue.^32 However,
during this time period, operating costs decreased only about 9 percent.
As a result, the budget gap between revenues and costs shows no sign of
improvement (see fig. 6).

Figure 6: Annual Revenues and Costs of Amtrak's Long-Distance Routes,
Fiscal Years 2002 through 2005

^aRevenues were calculated as the aggregate of all reported revenues for
individual long-distance routes in Amtrak's Route Profitability System
(RPS).

^bCosts include FRA-defined train costs (primarily train crews, food and
beverage, fuel, railroad costs, commissions, and certain shared
costs--primarily equipment maintenance and reserves), as well as
additional direct and non-direct costs identified by Amtrak, such as
training, infrastructure repair and maintenance, and overhead costs
allocated to individual routes.

Contributing to the high operating losses on many of Amtrak's
long-distance trains are the costs of extra services and amenities, such
as sleeper services and dining cars.^33 While these auxiliary services
generate additional revenue over coach-class seats, the additional
revenues do not cover incremental costs. In fact, passengers traveling in
first-class sleeper cabins on Amtrak long-distance trains are actually
more heavily subsidized than coach passengers. The DOT OIG estimated that
sleeper services increase the operational loss over coach class seats by
an average of $109 per passenger.^34 When capital costs for providing such
services are also included, these additional losses average $206, with
losses on some routes as high as $358 per passenger (see app. II). Amtrak
is currently evaluating several alternatives to their existing sleeper
services in an aim to eliminate incremental financial losses. Some of
these alternatives include making equipment and service enhancements on
the Empire Builder to reposition it as a luxury service and potentially
outsourcing premium sleeper services on select routes for passengers
seeking a luxury "land cruise" experience.^35

Transportation Benefits and Public Benefits

Amtrak's long-distance routes are generally associated with a number of
transportation benefits and public benefits; however, these benefits are
obtained at high cost to the federal government and may be limited by
infrequent or undependable service. In addition to offering a relatively
safe mode of transportation, long-distance routes are commonly associated
with their role in providing (1) an intercity transportation option for a
number of rural passengers, and (2) national connectivity to link regional
corridors and other long-distance routes. While there are public benefits
associated with filling these roles, it appears that other transport modes
may be better positioned to provide these benefits at reduced cost to the
federal government. Moreover, the infrequent service and poor on-time
performance of many of Amtrak's long-distance trains may further limit the
benefits provided by intercity passenger rail along these routes.

Intercity passenger rail provides access to many of the nation's rural
residents but air and bus services continue to be the principal modes of
public or common carrier transportation for these residents. In 2005, the
Bureau of Transportation Statistics estimated that scheduled intercity
public transportation (e.g., by air, bus, rail, or ferry) provides
coverage to

93 percent of the 82.4 million residents classified as rural.^36 Intercity
bus and air services have the deepest penetration within rural America--at
89 and 71 percent of the population, respectively--and rail services were
reported to cover approximately 42 percent of the rural population. While
many of these residents have access to more than one transportation
option, the Bureau of Transportation Statistics estimated that intercity
passenger rail (i.e., Amtrak) is the sole public transportation option for
approximately 350,000 people nationwide.^37 Georgia and South Carolina
were reported as the two states with the largest number of rural residents
(with a combined total of 94,000) that were solely dependent on scheduled
intercity passenger rail. In contrast, scheduled intercity air and bus
services provide the sole transportation option for 2.4 million and 14.4
million rural residents nationwide, respectively. In addition, it appears
that if rural transportation were a targeted public policy objective,
other modes of transport could be better positioned to provide this
benefit to a greater number of residents at lower cost. For example, in
fiscal year 2004, federal grants available to the intercity bus industry
to support rural service amounted to just $22 million, with rural coverage
for that mode exceeding twice the level provided by rail. However, as the
DOT reported in 2005, the goal of rural mobility should be to offer
flexible and sustainable travel options to those with the greatest
mobility needs--and not necessarily to preserve or promote use of any
specific transportation mode.^38 Achieving this goal may require the
establishment of objective criteria by which to evaluate the needs of
these communities. It may also require the awarding of competitive
franchise agreements to whatever mode that could provide service with the
least amount of subsidy.^39

Intercity passenger rail also provides connectivity between different
regions of the country and other rail routes; however, alternatives may
exist to meet passenger demands at reduced cost. Federal law currently
directs Amtrak to tie together existing and emerging regional rail
passenger service. On a system wide basis, relatively few passenger trips
(8 percent) include a train-to-train connection--that is, a passenger
changing from one train to another. However, on long-distance routes the
percentage of train-to-train connections is somewhat higher (an estimated
22.6 percent in fiscal year 2004). Consequently, national
interconnectivity provided by long-distance routes appears to be a
potential benefit to approximately 3.5 percent of Amtrak's total annual
passengers. While this population is a very small proportion of the
overall intercity passenger market, some rail proponents believe national
connectivity may also provide public benefits by providing transportation
redundancy to the country. Such redundancy may be important, particularly
if air services were grounded as they were in the immediate aftermath of
the September 11, 2001, terrorist attacks. However, to the extent that
transportation redundancy is a meaningful policy option, intercity
passenger rail may not be positioned to provide cost-effective service to
the greatest number of people. As previously cited, intercity buses
currently provide much greater coverage across the United States without
federal operating assistance. Therefore, determining whether these public
benefits warrant federal subsidies involves consideration of the
substantial costs required to achieve them, as well as evaluation of
alternative options, such as intercity buses, that may be better
positioned to provide these benefits.

Amtrak's long-distance services are often infrequent and hindered by poor
on-time performance, which may further diminish the benefits provided by
these services and offer reduced potential to meet the public's
transportation demands. For example, nearly all of the long-distance
trains have limited frequencies--typically one daily departure in each
direction--and, due to increased travel times, they are often scheduled to
arrive outside of convenient traveling hours.^40 For example, many of
Amtrak's long-distance trains operating within Georgia and South
Carolina--the states with the most rural residents dependent solely on
rail--are scheduled to arrive at the station between 3:20 a.m. and 6:50
a.m. The infrequent and inconvenient nature of many long-distance
schedules is likely to severely limit rail as a viable transportation
option for many passengers. While increased frequency of service may
potentially address these limitations, this option could be costly due to
the increased level of federal subsidies that more frequent service would
entail if the population and other characteristics of long-distance
corridors did not warrant increased frequency of service.

On-time performance also continues to be a major limitation affecting the
potential benefits provided by Amtrak's long-distance services. In fiscal
year 2005, Amtrak reported an average on-time performance of 41.4 percent
for long-distance routes, ranging from a low of 7.1 percent on the Sunset
Limited to a high of 83 percent on the City of New Orleans (see app. II).
While several factors contribute to the wide variation in performance,
Amtrak attributes operating delays on the six host railroads--on which
Amtrak trains operate--as the largest single factor affecting Amtrak
on-time performance, contributing as much as 75 to 80 percent of the delay
minutes.^41 Since fiscal year 2000, average on-time performance for all
long-distance trains has been in decline (see fig. 7).^42

Figure 7: Average Annual On-time Performance of Long-Distance Routes,
Fiscal Years 2000 through 2005

On average, in fiscal year 2005, trains on long-distance routes arrived at
their final destinations approximately 98 minutes late. Trains on the
poorest performing route, the Sunset Limited, averaged nearly 5 hours
late. Such poor on-time performance is likely to significantly affect the
extent that passengers choose rail services to meet their transportation
needs.

Corridor Services Appear to Provide More Public Benefits at Reduced Cost,
but Opportunities for Improvement Remain

Corridor rail services--which include NEC operations, as well as state
supported and legacy corridor routes--appear to offer increased potential
to provide transportation benefits and public benefits to a greater number
of people at reduced cost to the federal government. Corridor routes
comprise most of Amtrak's annual ridership--providing service to a wide
variety of business and leisure travelers--and they account for much of
the growth in passenger rail in recent years, particularly on the
state-supported routes (see app. II for a list of states and associated
corridor services). Relative to the long-distance routes, corridor
services also operate with lower costs and better on-time performance.
They also appear to be better aligned to provide more cost-effective
transportation benefits and public benefits. For example, they are
generally more time- and cost-competitive with other transport modes and
offer increased flexibility over long-distance rail services, adapting
schedules and services to changing demographics and passenger travel
demands. However, despite their relative financial and operating
performance, many of the corridor routes face challenges such as capacity
constraints and funding issues, which may limit opportunities for rail to
increase market share and play a more significant role in the nation's
transportation system.

Ridership and Financial Characteristics

Corridor routes account for most of the intercity passenger rail travel in
the United States and they illustrate substantially reduced financial
losses relative to the long-distance routes. Most intercity passenger rail
travel in the United States is comprised of relatively short trips on a
small number of corridor routes. In fiscal year 2005, the average trip
length for all routes--both long distance and corridor--was 213 miles,
with corridor routes servicing approximately 85 percent of the total
Amtrak ridership. Among these corridor routes, over half of the ridership
in fiscal year 2005--nearly 11 million passengers--occurred on the NEC
alone. The Washington-New York City-Boston main line of the NEC remains
the most heavily utilized rail route in the country, forming an essential
link for intercity passenger and freight transportation, as well as nine
different commuter rail operations in the Northeast. On an average
weekday, over 1,800 commuter and Amtrak trains operate over the NEC.

On the 26 non-NEC corridors, ridership in fiscal year 2005 was 10.6
million, with 52 percent of this total generated on the four most heavily
traveled routes.^43 These corridor services, namely the state supported
routes, also represent the market that is exhibiting the strongest
ridership growth. Since fiscal year 2002, there has been an 18-percent
increase in ridership on state-supported routes as states continue to
increase spending for operations and capital improvements of corridor rail
services (see fig. 8).

Figure 8: Corridor Ridership Trends by Route Class, Fiscal Years 2002
through 2005

Given the high number of passengers and the relative importance of the
NEC, passenger profiles for Amtrak-operated trains on this corridor
illustrate some clear distinctions from those on long-distance routes. For
example, a much higher percentage of ridership is comprised of commuters
and business travelers in comparison to the long-distance routes,
particularly on the higher-end NEC trains, the Acela Express and
Metroliner. Amtrak survey data indicates that in fiscal year 2004, 82
percent of travel on these services was business-related. Passengers on
Amtrak's Regional Service--the other primary NEC trains--reported that 49
percent were traveling or commuting for business or school; 50 percent
reported traveling for personal or family business, or traveling primarily
for leisure purposes.^44

For non-NEC corridors, the designated trip purpose varied widely between
the routes because they operate in a number of different states and
passenger markets. For example, the Empire service in New York caters to a
number of business travelers and commuters, while the California corridor
routes are characterized by a larger share of leisure and personal travel.

As for financial performance, the Acela Express and Metroliner trains
operating on the NEC are Amtrak's only services in which passenger
revenues cover the cost of operation (excluding depreciation and
interest). In fiscal year 2005, Amtrak reported a positive total annual
contribution of $65.3 million for this service. However, Amtrak's other
scheduled trains on the NEC ended the year with operating losses,
resulting in a net contribution of approximately $45 million for intercity
passenger rail service on this corridor. While these results indicate
relative financial success, they do not take into account the substantial
amount of capital spending invested to fund infrastructure improvements
and maintain operations on the NEC. For example, in fiscal year 2005,
Amtrak reported a capital allocation to the NEC of $190.4 million--over
four times the reported operating contribution. In addition, Amtrak has an
estimated system backlog of up to $6 billion in deferred maintenance and
infrastructure improvements, with the NEC comprising more than 60 percent
of this total.

All of the non-NEC corridor routes also incur financial losses to Amtrak;
however, considerable variation exists among them. In fiscal year 2005,
Amtrak reported a total annual loss from all non-NEC corridor services of
approximately $164 million, with losses on individual services ranging
from a low of $200,000 (Illinois Zephyr) to a high of $23.3 million
(Empire Service).^45 In the aggregate, these losses represent an average
operating subsidy of about $20 per passenger for non-NEC operations. One
reason for the wide variance in Amtrak's financial performance among these
corridor routes is the level of state support provided. Overall, state
payments to Amtrak for operating and capital costs have increased
considerably in recent years--rising from $148 million to $272 million
between fiscal years 2000 and 2005 (see fig. 9). However, states have
generally not been required to pay the full subsidies for these routes.^46
Moreover, many states that have corridor services have not paid anything
at all, thus producing issues of equity among states. For example, Amtrak
operates a number of weekly departures of the Hoosier State
service--between Indianapolis and Chicago--although it has the lowest cost
recovery of any short-distance route and neither state contributes any
level of operating support.^47

Figure 9: Annual State Operating and Capital Contributions, Fiscal Years
2000 through 2005

Potential Transportation Benefits and Public Benefits

Both types of Amtrak's corridor routes illustrate significant potential to
provide transportation benefits and public benefits, but they each
illustrate a number of unique attributes and opportunities for
improvement. Transportation experts generally agree that intercity
passenger rail services that serve large, relatively close population
centers--and that are time- and cost-competitive with other transportation
modes--represent the greatest potential markets for rail worldwide.
Moreover, these markets are the ones most likely to offer the greatest
opportunity to mitigate pollution and reduce the growth of highway
congestion through increased rail use. However, the ability of intercity
passenger rail to generate these benefits depends on the likelihood that
travelers will choose rail service over other modes of transportation. As
we have reported previously, congestion is most likely to be alleviated
when rail routes run parallel to congested roadways and where travelers
view rail as a more attractive "door-to-door"

travel option (in terms of price, time, comfort, and safety) than
driving.^48 Similarly, rail becomes less competitive with other modes of
transportation, particularly air services, as travel time and prices
increase over longer distances (see app. II). For these reasons, corridor
services appear to be most competitive with automobile and air travel in
markets between 100 and 300 miles. In this regard, many existing and
developing corridor rail services appear to be well positioned to provide
a viable alternative to other modes of transport and potentially offer a
number of public benefits:

oNEC. With over 30 million metropolitan residents, the NEC has a
population density of over 65,000 residents per route mile. According to
the American Association of State Highway and Transportation Officials,
such a large population density helps to explain why the NEC accounts for
such a large proportion of Amtrak's total corridor ridership.^49 Many of
the rail services on the NEC are very competitive with air and auto travel
in several markets. For example, Amtrak serves 50 percent of the combined
air/rail market between Washington, D.C., and New York, and 40 percent
between New York and Boston. Moreover, in fiscal year 2005, Amtrak
reported air/rail market shares greater than 90 percent for other shorter
distance city pairs such as Philadelphia-New York and
Philadelphia-Washington, D.C. The Northeast region also illustrates
characteristics of the type of urban congestion and capacity constraints
that may benefit the most from travelers being diverted away from the
highways and onto rail.

oState-Supported Corridors. State-supported routes are the fastest growing
routes and illustrate significant potential to provide a viable
transportation option; however, further development of new and existing
rail corridors may require funding beyond what has been previously
provided. A growing number of individual states and groups of states have
made the public policy decision to utilize state funds to subsidize
additional corridor rail service and invest in related capital projects.
Some of the potential benefits cited for such expenditures include the
potential for rail to accommodate regional growth and enhance economic
competitiveness. Over 80 percent of the nation's population now lives in a
metropolitan area. Officials in many states are interested in identifying
and developing regional rail corridors that link these economies and
provide a viable transportation option to large numbers of residents.
Officials in several states with whom we spoke also indicated that
corridor rail services are an important component of state and local
transportation plans. For example, in Washington State, corridor rail
service between Seattle, Washington, and Portland, Oregon, comprised over
60 percent of the air/rail market share in fiscal year 2005 and was
identified for its potential role in reducing the growth rate of highway
congestion within the region. The nine member states of the Midwest
Regional Rail Initiative also identified where potential public benefits
may be provided through additional funding for increased train frequencies
and extensions of existing corridor routes.^50 In addition, this group has
set out a "grand vision" to link all of the major industrial centers in
the region with high-speed rail service (operating at speeds up to 110
miles per hour). If completed, this network would reach over 35 million
residents--a number that exceeds the entire metropolitan population of the
NEC. An additional benefit attributed to increased development of corridor
services is that the state (or other public authority) has the ability to
contract for the specific services that it chooses to subsidize, including
scheduling, frequency, and the stations served. In this manner, services
can be adjusted over time according to regional growth patterns and
changing population demographics.

Potential Opportunities for Improvement

While Amtrak's corridor routes serve millions of passengers each year and
appear to provide a number of public benefits, there may be additional
opportunities to further develop rail corridors to improve existing
services and reach new markets. For example, a number of issues associated
with infrastructure improvements and capacity constraints may need to be
addressed to ensure that rail services continue to provide an effective
alternative to other transport modes. To be successful, corridor trains
must operate with adequate on-time performance to provide competitive
travel times and reasonably predictable schedules. In addition, overcoming
funding issues will likely be required in order to realize the
opportunities identified by states for the further development of regional
rail corridors.

Infrastructure improvements and capacity constraints are critical issues
on the NEC. Although it is Amtrak's most viable route, the NEC faces a
high level of unmet infrastructure spending, maintenance spending, and
growing capacity constraints, which may affect its ability to effectively
compete with other transportation modes in the future. Amtrak's most
recent legislative grant request asks for $730 million in fiscal year 2007
to complete major projects such as replacing bridges, ties, power supply
systems, and overhauling the existing fleet of rolling stock, with the NEC
being targeted as a critical priority for such investments. In addition,
the many users operating on the NEC present a constraint on capacity that
may impact the ability of Amtrak trains to reach their destinations on
time. Backups are becoming more common among freight, commuter, and Amtrak
trains, causing delays that result in dissatisfaction among riders. Delays
affecting on-time performance may be particularly important on the NEC,
where a high number of business and commuter travelers rely on these
services.

In fiscal year 2005, Amtrak reported that train services on the NEC
reached their destinations on time an average of 78 percent of the
time.^51 While this represents a slight improvement over fiscal year 2004
levels, this indicator has decreased from fiscal year 2000 levels (see
fig. 10).^52 Recognizing that the deteriorated condition of the
infrastructure contributes to increased operating costs and reduced
reliability of services, Amtrak has committed to developing a NEC master
plan in conjunction with the states and commuter agencies that utilize it.
This effort aims to identify long-term needs and service improvements, and
work together to fund such projects.^53 An example of such a project
designed to address capacity constraints and improve service is
illustrated by Amtrak's current efforts working with the state of Virginia
to develop an additional track dedicated

to passenger trains between Washington, D.C., and Richmond, Virginia.^54
The benefits identified by Amtrak for projects such as this one include
increased capacity, potentially higher speeds, reduced trip times, and
overall improvement in reliability and on-time performance.

Figure 10: Annual On-time Performance of Corridor Routes, Fiscal Years
2000 through 2005

Non-NEC corridor routes also face a number of the same infrastructure and
capacity challenges affecting train speeds and the predictability of
travel times as the NEC services. In fiscal year 2005, on-time performance
for these services was reported at 70.4 percent, reflecting a 6-percent
decline since fiscal year 2000. A state official in New York cited the
Empire Service as an example of one such corridor facing significant
congestion and capacity constraints associated with heavy use by freight
trains, commuter services, and Amtrak trains. A recent study estimated
that $700 million would be needed just to complete infrastructure
improvement projects on one segment of this corridor, the 141-mile line
between Albany and New York City. Similar projects to reduce congestion
and increase speeds have been identified on a number of other state
supported and "legacy" corridors in Pennsylvania, California, and the
Midwest.

Overcoming funding challenges is another issue that needs to be addressed
if Amtrak and state partners are going to work together to continue
developing and expanding intercity passenger rail services. Although some
states have identified where additional corridor services may provide
significant transportation benefits and public benefits, these projects
often require substantial levels of public funding. For example, the total
cost required to develop the 3,000-mile high-speed rail network as
envisioned by the Midwest Regional Rail Initiative is estimated at $4.8
billion. All the state officials with whom we spoke indicated that any
additional state funding for rail will require some type of federal match
program similar to other transportation modes. Moreover, Amtrak's plans to
recover additional overhead and other shared costs expended on
state-supported corridor routes beginning in 2008 will place further
demands on limited state funding for rail. Undertaking the significant
infrastructure improvement projects needed to expand capacity and improve
operational performance on existing corridors would also be expensive. For
example, a report issued by a coalition of rail stakeholders in the
Mid-Atlantic region estimated that funding to address major congestion
bottlenecks in that region would cost approximately $6.2 billion over 20
years.^55 In addition, a report issued by state transportation officials
in 2002 estimated that capital investment projects outlined for 21
corridors across the country could cost as much as $60 billion over a
20-year period.^56 Regardless of which projects are ultimately funded, it
appears that, if rail is to play a more significant role in the nation's
transportation system, overcoming issues of funding and capacity will be
an important component.

Current Intercity Passenger Rail System Is Not Adequately Focused Where It
Can Be the Most Financially Viable and Provide the Most Public Benefits

The current intercity passenger rail system is not adequately focused on
its comparative strengths; it exists much as it did when Amtrak began over
35 years ago. While Amtrak has made notable upgrades along the NEC and
implemented a number of contractions and expansions of its route structure
over the years, the system remains similar in its size and endpoints as
the original "basic system" that the DOT designated in 1971 (see app. II
for a map of Amtrak's routes in 1971). As the DOT General Counsel recently
testified, this system has not effectively adapted to shifting
demographics and market demands over time, as other transportation modes
have done.^57 While the current model may provide limited service
offerings across the country's broad geography, it does so at a very high
cost to the federal government. Amidst a number of fiscal constraints and
increased pressure to reduce or better target federal rail subsidies in
the future, this model may no longer be viable. However, intercity
passenger rail continues to illustrate the potential to become an
important element with greater integration into the nation's overall
transportation system if it is focused on the markets where rail exhibits
comparative strength. As reported by the Congressional Budget Office (CBO)
in September 2003, these opportunities are most likely to be found on
routes of about 100 to 300 miles that connect cities with large
populations. In these markets, rail is most likely to be both time- and
cost-competitive with highway and air travel, and may be best positioned
to meet both the demands of the traveling public and the demands of
sponsoring public authorities.^58

As our work illustrates, the current intercity passenger rail system
targets substantial resources toward the operation of long-distance
services, which the CBO and others have reported is an area of comparative
weakness for rail services. In addition to accounting for about 80 percent
of Amtrak's operating losses, these services do not appear to be meeting
Amtrak's goal of providing "basic transportation" very effectively.
Services are often unreliable--averaging 41 percent on-time
performance--and serve communities infrequently or at inconvenient times
(often one train daily in each direction).

While these characteristics do not serve Amtrak's long-distance passengers
well, the several distinct "client" markets on these routes are also not
efficiently targeted. For example, many passengers on long-distance trains
travel relatively short distances--400 miles or less--suggesting that a
substantial share of long-distance service may actually be corridor
service. However, these services are not managed like corridors, which are
characterized by higher speeds and more frequent train service. Passengers
in rural communities along these routes also do not appear to be
effectively targeted by rail services. These services are inherently
limited to those communities fortunate enough to be located next to
historical rail lines. Further, there is reason to believe that
alternative modes of transportation may be better positioned to provide
much greater rural coverage at potentially lower cost to the government.
Finally, for those passengers traveling longer distances, Amtrak often
operates costly amenities (e.g., sleeper and dining cars) which account
for even higher levels of federal subsidies than coach-class seats. Amtrak
survey data also suggests that, on average, the 16 percent of riders on
long distance trains who utilize sleeper services are typically the most
affluent passengers. For example, passengers in Sleeper/First Class
reported an average household income over one-third higher than
coach-class passengers.^59 Consequently, substantial federal dollars are
currently being spent to subsidize costly services to individuals with
higher-than-average incomes. All of these characteristics raise questions
about the appropriate federal role in long-distance service, such as
whether federal expenditures should be used to subsidize leisure services
to affluent travelers, and whether there may be more cost-effective
alternatives to provide corridor services and efficient rural
transportation.

In contrast, the current intercity passenger rail system also includes
corridor services, which have been identified as the comparative strength
of passenger rail and where passenger rail services hold the most promise
to be financially viable and provide a number of potential public
benefits. There has been a relative growth of passenger rail ridership on
corridor routes, especially state-supported corridors, and 85 percent of
Amtrak's riders live and work along corridors. Aside from the heavily
populated NEC where Amtrak has achieved its best results, a number of
other corridors--such as those in California, New York, the Midwest, and
the Pacific Northwest--exhibit many of the key characteristics that
indicate there may be potential public benefits that could justify public
subsidies for passenger rail services, namely clusters of densely
populated areas within 300 miles of each other. Moreover, many officials
with whom we spoke agreed that the promise of intercity passenger rail is
likely along corridors, not over long distances. States have further
supported this view by providing substantial funds to support corridor
operations and/or capital investments on these routes.

Foreign Experiences Illustrate Various Approaches to Restructuring and Key
Reform Elements

Over the past 20 years, several countries have employed a variety of
approaches in reforming their intercity passenger rail systems in order to
meet national intercity passenger rail objectives. These approaches--alone
or in combination with each other--have been used to support national
objectives such as increasing the cost effectiveness of public subsidies,
increasing transparency in the use of public funds, and providing
transportation benefits and public benefits. Despite the variation or
combination of approaches used, during the restructuring process these
countries addressed several key elements of reform, such as establishing
clear goals for intercity passenger rail, clearly defining stakeholder
roles that are necessary in implementing any approach, and establishing
stable sustainable funding.

Prior to implementing these new approaches, many countries' passenger rail
systems consisted of "monolithic" state-owned and state run organizations
in which customer service and financial performance were not the main
concerns of the railroad. Rather, other concerns, such as socioeconomic
issues (e.g., providing employment) were more important. Similar to the
current situation in the United States, passenger rail in many countries
was losing market share to other modes of transportation and this loss of
market share, along with mounting dependence on public subsidies and
decreasing transparency with respect to where public funds were being
spent, prompted change in the passenger rail industry. Table 2 discusses
the different passenger rail structures that existed in the five countries
in which we conducted site visits for this report. These countries were
chosen because they have transitioned from state-owned fully integrated
organizations to more consumer driven market-dependent entities.  ^60
While it is important to be aware of the key differences between these
countries and the United States (e.g., infrastructure ownership,
geography, and political culture) the general catalyst for reform--the
need to deliver a better value for the expense of public funds--is the
same as the current passenger rail environment in the United States.

Table 2: Summary of State-Owned Rail Services (Pre- and Post-Reform) in
Countries We Visited

                                        

                   Canada          France          Germany          Japan          United      
                                                                                  Kingdom^a    
Pre-reform     Operations      Operations      Operations      Operations      Operations      
structure      integrated with integrated with integrated with integrated with integrated with 
               infrastructure. infrastructure. infrastructure. infrastructure. infrastructure. 
                                                                                               
                                               (Two existed,                                   
                                               East Germany                                    
                                               and West                                        
                                               Germany).                                       
Reason for     To increase     To reduce       To improve      To improve      To improve      
reform         focus on cost   national        efficiency,     financial       efficiency and  
               control and     government      reduce the      performance and cost control,   
               customer        debt, deficits, federal debt,   management of   improve the     
               service.        and the rate of and reduce the  the system, and business plan,  
                               public subsidy  burden on the   reduce mounting and             
                               growth.         federal budget. long term debt. depoliticize    
                                                                               inconsistent    
                                                                               capital         
                                                                               funding.        
Post-reform    Single operator Single operator Multiple        State-owned     Multiple        
operations     (State-owned    (State-owned    private         split into six  private         
               private stock   company).       operators       passenger       operators,      
               company).                                       operators       which compete   
                               Multiple        (Primary        organized       for franchises. 
                               private         operator        geographically                  
                               operators after state-owned     and integrated                  
                               2012.           joint-stock     with                            
                                               company;        infrastructure.                 
                                               infrastructure                                  
                                               owner is owned                                  
                                               by same holding                                 
                                               company).                                       
Post-reform    Multiple        Single owner.   Single owner.   Multiple        Single owner.   
infrastructure owners.         (State-owned    (Joint-stock    owners. (Three  (First a public 
                               company).       company;        largest owners  stock company;  
               (Primarily                      primary         are privatized  now, a private  
               freight                         operator is     and three       corporation     
               railroads, with                 owned by same   smallest lease  governed by     
               130 miles owned                 holding         some            members).       
               by passenger                    company).       infrastructure                  
               operator).                                      from the                        
                                                               government).                    
                                                                                               
                                                               Integrated with                 
                                                               operations.                     

Source: GAO analysis of site visit data.

^aOur summary of the railway reform effort in the U.K. encompasses two
major efforts in 1993 and 2004. In 1993, the U.K. began privatizing its
rail system partly to control cost and improve quality. As part of the
continuing effort to improve the rail system, the U.K. undertook another
major restructuring effort in 2004. See app. III for further details.

Various Approaches Have Been Used Abroad to Support a Broad Range of
National Intercity Passenger Rail Objectives Aimed at Improving Value for
Funds Spent

The foreign countries we visited^61 have met a broad range of national
objectives by implementing various approaches to improve the cost
effectiveness of their intercity passenger rail systems. All the countries
we visited reformed their systems in large part to improve the value of
service they were receiving for the amount of public money being spent on
the service. For example, the desire for increased transparency in the use
of public funds, mounting public subsidies and rail-related debt, and a
desire for economic efficiency were all key factors in the European
Union's 2001 directive requiring all member states to improve the
efficiency of their rail systems. Three of the five countries we
visited--France, Germany, and the U.K.--are members of the European Union
and have all begun implementing changes to meet these goals. Similarly,
Canada and Japan both reformed their systems to increase the value in
service they were receiving for the funds being spent. While the countries
we studied reformed their systems in order to meet financial objectives,
the national governments of these countries still provided heavy financial
support to the system after the reforms. Table 3 shows the current levels
of financial support provided by these governments.

Table 3: Post-Reform Financial Involvement by National Governments of Five
Countries We Visited

                                        

                 Canada        France         Germany            Japan             U.K.      
Debt at time   None        30EUR billion  35EUR billion   YEN37.1 trillion    -L-540         
of reform                  debt^a         debt ^b         debt^c              million^d      
Post-reform    None, and   20EUR          35EUR billion^g YEN25.5 trillion^h  -L-8 billion^i 
debt           operator    billion^e      transferred to  and all pensions of infrastructure 
               has no      transferred to national        former national     debt           
               authority   infrastructure government with rail employees      accumulated    
               to issue    company in     all employees   transferred to a    after reform.  
               debt        (estimated     of former rail  government-owned    Current        
               instruments value of       authorities     corporation.        infrastructure 
               or to go    infrastructure                 Remainder was       debt is about  
               into the    debt); 10EUR                   transferred to a    -L-18          
               debt market billion^f to                   holding company and billion.^j     
               to raise    operations                     to the four rail    Expected to    
               funds       company                        companies           rise to -L-21  
                                                                              billion^k by   
                                                                              2009           
Post-reform    $170        2EUR           7EUR            Three of the six    Subsidies      
operating      million     billion/year   billion/year to passenger rail      provided based 
subsidies      CAD/year^l  to regions^m   regions^o       companies are fully on contracted  
                           (fixed                         privatized and      franchise      
                           subsidy).      10EUR           receive no          agreements.    
                                          billion/year^p  subsidies. A        (Remaining     
                           5.5EUR         to repay debt   business/management costs covered  
                           billion/year^n and support     stabilization fund  by fares.)     
                           to repay debt; federal rail    was set up for the                 
                           support some   employees.      other three to                     
                           pension plans  (Fixed regional invest and use                     
                           and social     subsidy, but    interest for                       
                           fares.         current debate  operating and                      
                                          to reduce       capital                            
                                          regional        improvements.                      
                                          subsidy).                                          
Post-reform    Periodic    Annual subsidy State provided  A negotiated cost   Government     
infrastructure subsidy     provided from  interest free   sharing arrangement provides an    
subsidies      (Variable-- national and   loans and       between the         indemnity for  
               requested   regional       grants to       national and local  the network    
               from        government.    develop/renew   governments, and    manager's debt 
               Parliament)                infrastructure. the railroads.      of up to 50%   
                                                                              of income.     
                                                                              (Remainder is  
                                                                              in access      
                                                                              fees.)         

Source: GAO analysis of site-visit data.

^aApproximately $35 billion at the time of reform in 1997. Conversion of
France's debt to U.S. dollars was done using the exchange rate for the
Euro introduced January 1999, and therefore is not the exact value of the
actual debt in 1997.

^bApproximately $39 billion at the time of reform in 1994.

^cApproximately $257 billion at the time of reform in 1987.

^dApproximately $806 million at the time of reform in 1994.

^eApproximately $24 billion at the time of reform in 1997. Conversion of
France's debt to U.S. dollars was done using the exchange rate for the
Euro introduced January 1999, and therefore is not the exact value of the
actual debt in 1997.

^fApproximately $12 billion at the time of reform in 1997. Conversion of
France's debt to U.S. dollars was done using the exchange rate for the
Euro introduced January 1999, and therefore is not the exact value of the
actual debt in 1997.

^gApproximately $39 billion at the time of reform in 1994.

^hApproximately $176 billion at the time of reform in 1987.

^iApproximately $15 billion in September 2006.

^jApproximately $34 billion in September 2006.

^kApproximately $39 billion in September 2006.

^lApproximately $152 million in September 2006.

^mDue to fluctuations in exchange rate, the subsidy varied from
approximately $1.7-$2.5 billion between 1999-2006.

^nDue to fluctuations in exchange rate, the subsidy varied from
approximately $4.7-$7 billion between 1999-2006.

^oDue to fluctuations in exchange rate, the subsidy varied from
approximately $5.9-$8.9 billion between 1999-2006.

^pDue to fluctuations in exchange rate, the subsidy varied from
approximately $8.5-$12.7 billion between 1999-2006.

Passenger rail reform in the countries we visited was also undertaken to
achieve a number of other objectives. For example, reform was used as an
opportunity to provide viable transportation benefits and public benefits
that might not otherwise be achieved. The Canadian, Japanese, and French
governments all financially support passenger rail service to areas of the
country that have small or isolated populations and that may not be well
served by other means of transport. For the most part, this service is
unprofitable and would not otherwise be provided. Another objective was to
address growing urban congestion through enhanced passenger rail service.
In the European Union member countries we visited passenger rail reform
was used to address environment and urban congestion issues. Finally, the
countries we visited used reform to improve the operational performance of
existing intercity passenger rail systems. For example, in Germany, a
large part of its reform was to consolidate the two highly inefficient
rail systems that existed after the country was reunified into one
cost-efficient rail system. Similarly, in Canada a major reexamination of
long-distance intercity passenger rail service took place in order to
better market these routes and, therefore improving the routes' financial
performance. Additionally, Germany and France have established performance
metrics such as on-time performance and train cleanliness, which result in
bonuses or penalties for the rail operators based on their ability to meet
the standards established in the metrics.

These reform objectives have been addressed through various approaches.
Each approach reorganized a different aspect of the existing intercity
passenger rail system. See figure 11 for a summary of the approaches each
country took. These approaches are not mutually exclusive of each other,
and have included, but are not limited to: 1) changing the roles and
responsibilities of the various stakeholders involved in the intercity
passenger rail system, 2) changing the funding structures of the existing
system, 3) changing the organizational structure of the existing passenger
rail entity, and 4) the introduction of competition or privatization in
rail operations.

Figure 11: Reform Approaches Used by Site Visit Countries

Shifts in the Roles and Responsibilities of Intercity Passenger Rail
Stakeholders

One approach taken by the five countries we visited was a shift in the
roles and responsibilities of the stakeholders involved in intercity
passenger rail--primarily the national and regional governments. This was
generally undertaken to remove political and state interests from the
operation of the rail system in order to increase efficiency.

oShift from service operator to service regulator/oversight. In both the
U.K. and Germany, the national government shifted from being the operator
of intercity passenger rail service to taking on more of a regulatory
role, overseeing the competitive bidding process used by private
operators.^62 By taking on an oversight role, these governments are
facilitating competition and, in turn, supporting their objective of
creating a more cost effective and transparent use of public funds. A more
cost effective and transparent use of public funds helps facilitate
improved operational performance of intercity passenger rail operators.

oShift away from infrastructure manager, yet remaining owner. In the
countries we visited, some of the national governments no longer provide
day-to-day management of the infrastructure; however, they remain the
owner of the infrastructure companies in order to ensure that the state's
best interests with respect to decision making can be maintained. For
example, in France and Germany, government-owned private companies were
established to manage and maintain the entire rail infrastructure,
including granting access to operators and collecting access fees.^63 In
the U.K., a member-owned private company handles infrastructure matters.
By moving away from the day-to-day management of the infrastructure,
governments are able to put those tasks in the hands of individuals best
suited to manage the infrastructure, while still being able to set the
strategic direction. Shifting away from day-to-day management allows the
government to be more of a customer of the infrastructure manager, thereby
enhancing transparency in costs as well as accountability in the financial
performance of the infrastructure companies.

oDevolving decision-making authority to local and regional governments.
One of the most prevalent changes made in two of the three European Union
countries we visited was the devolution of specific roles and
responsibilities from the national government to local or regional
governments. These roles included decision making (e.g., selecting the
operator through a bidding process), as well as determining the quantity
and frequency of intercity passenger rail service. By letting governments
that were geographically closest to the service make decisions about it,
the national governments have been able to be more cost effective by
targeting public and transportation benefits to the specific preferences
of the localities. In cases where the localities are able to select their
operator through competitive bidding, service can be purchased for the
lowest bid--as opposed to having no choice if there were only one operator
to choose from.^64 For example, in Germany, all of the national operation
subsidies are given directly to the Laender (analogous to U.S. states);
the Laender are then able to issue a request for proposal outlining
specific service needs, and receive competing bids for the level of
service they request.

oShift from service operator to customer. The U.K. and Germany, as well as
France and Canada, have transitioned their relationships with rail
operators from that of operator to that of customer--the governments
determine what type of service they want to make available to their
citizens, and then purchase that service from the rail operators.
Frequently, the governments establish performance metrics to hold the
operators accountable. In the U.K. and Germany there are multiple
operators that can bid to provide this service, but in France and Canada
the service is provided by a single national operator.^65 By taking on a
customer role--even if the national provider is still fully owned by the
government--these nations have been better able to define the type of
service they want, and then pay for those services. This can lead to more
cost-effective service, and better provision of public benefits and
transportation benefits. For example, officials in the Ile de-France
region (greater Paris area) told us that they have received better service
from the national operator since they were able to deal with them
directly, and in 2004 the operator received 1.8EUR million^66 in bonus
payments from the region for meeting metrics such as the handling of
passenger claims and station cleanliness.

Changing the Public Funding Structure Used to Support Intercity Passenger
Rail

Another approach taken by some of the countries we visited involved
changing the public funding structure used to support intercity passenger
rail.

oChanges to government commitment to funding. In all the countries we
visited, the national governments made commitments to fund intercity
passenger rail. Four of these countries dedicated annual funding towards
investing in the intercity passenger rail system in order to provide the
resources needed to achieve a desired level of rail service. Japan
established a one-time fund for its railroads that needed financial
assistance, allowing the railroads to invest these funds in order to
operate off the interest earned on these investments. Changing the
commitment to funding allows these countries to get the best value for
their money by requiring rail operators to provide specified levels of
service for the amount of funds required to conduct these services. Also,
as shown by Canada, cuts to the level of annual funding can push an
operator to improve its operations, reduce costs, and grow revenues in
order to operate within its funding limits.

oChanges to funding mechanisms for infrastructure. Another major funding
change made in the three European Union countries we visited was the
establishment of new funding mechanisms (i.e., grants and loans) for
intercity passenger rail operations and infrastructure. By splitting the
funding sources for these two distinct functions, the governments are
better able to determine what the subsidy is being used for and increase
the transparency in the use of public funds; in addition, constant and
expensive infrastructure projects now have a specific source of funding,
allowing infrastructure managers to better plan for future projects.

oChanges to funding dissemination. Another funding change made by both
France and Germany occurred in conjunction with the devolution of decision
making to local and regional governments. These two countries now provide
national funds directly to local and regional governments in order to
support the purchase of intercity passenger rail service. By doing this,
these countries have enabled local and regional governments to be more
flexible and purchase service that best fits the preferences of the users;
funds can therefore be targeted at the transportation benefits and public
benefits preferred by local areas.

In addition to these changes in the structure of the public funds, another
factor played an important role in changing the funding structure--a
national commitment to provide stable sustainable funding. For example, in
Germany, part of the motor fuel excise tax was dedicated to rail;
meanwhile, Japan created Business Stabilization Funds in order to support
operations and capital improvements of the three island railway companies
with smaller passenger rail markets. In Canada, officials told us the
national government has informally made an ongoing commitment to support
intercity passenger rail operations by consistently providing the same
level of funding each year.^67 By committing to provide the funds each
year, all the national governments above allowed rail operators to better
manage their resources and planning capabilities.

As part of this commitment, four of the five countries we visited
transferred or reduced the debt that the railways were carrying. In
Germany, reform took place in 1994 and the debt was transferred to the
government; a new public agency was then created to take over and pay off
the 35EUR billion in debt (about $39 billion)^68 incurred by the
preexisting railways, as well as by the employees of the former railways.
In Japan, during the 1987 reform, the national government relieved the
railway of its YEN37.1 trillion debt (about $257 billion)^69 by
transferring most of it--along with part of the railway's employee
pensions--to the national government, and splitting the remainder of the
debt among the operators.^70 In France, the 1997 reform resulted in 20EUR
billion in debt (about $24 billion) being transferred to the new
infrastructure manager. In exchange, the new manager received the
country's entire rail infrastructure at no cost; the remaining 10EUR
billion in debt (about $12 billion) was transferred to the national
operator.^71 While the British government wrote off the initial debt of
the railway in 1994, the U.K. is currently carrying an infrastructure debt
of about -L-18 billion (currently about $34 billion). According to U.K.
officials we interviewed, this amount is expected to increase to -L-21
billion (currently about $39 billion) by 2009. Officials with U.K.'s
infrastructure manager noted, though, that borrowing is limited to 85
percent of the value of its regulatory asset base. Canada did not have
debt at the time of their restructurings.^72 Relieving the debt of the
rail operators created a viable capital structure for the new railways to
operate in, and has been an important factor in their ability to move
forward more cost effectively.

Changing the Organization of Existing Passenger Rail Systems

Restructuring the organization of existing passenger rail systems is
another approach often taken by governments when reforming their rail
systems. Historically, most national rail systems have been comprised of
monolithic government-owned and government-managed entities, where the two
major functions--managing infrastructure (e.g., tracks and stations) and
managing daily operations--were integrated. The three European countries
we visited began their reform by separating the operational and
infrastructure functions of their passenger rail systems. Separating these
two functions from each other can result in more transparency and a better
estimate of what the costs for each function are.

This separation can take place in a variety of ways. For example, the U.K.
went from a government monopoly with full control over both functions to a
private company owned by "members" that own and manage all of the rail
infrastructure; operations were turned over to private operators in 1993.
In France, the government monopoly was separated into two separate
government-owned companies. One company is responsible for managing all
rail operations and the other is responsible for managing the
infrastructure. In Germany the government rail monopoly was turned over to
a private state-owned holding company, with separate independent
subsidiary business units in charge of infrastructure and operations.
Additionally, in Germany, although the same holding company that owns the
infrastructure also includes the primary passenger rail operator, other
private operators are permitted to provide intercity passenger rail
service on their tracks. Conversely, in Japan, the infrastructure and
operational function of the passenger rail system have remained
integrated--instead, the country divided its rail system into six distinct
geographic regions allowing each area of the country to address issues
specific to its passenger markets. Restructuring the rail system is
generally implemented to create more transparency in the costs incurred by
the rail companies; once accurate costs are known, companies can better
gauge how much to charge for their services, as well as identify
opportunities for cost savings.

Introducing Competition and Privatization in Intercity Passenger Rail
Operations

The introduction of competition and/or privatization in rail operations is
another approach to reform intercity passenger rail. This approach was
used by some of the countries we visited.^73 Over the past two decades,
countries have been reforming their railway systems through various forms
of privatization in order to improve the quality of service and efficiency
offered to customers, and to reduce costs. Competition and privatization
are two market mechanisms that are often used to improve service
efficiency while meeting financial objectives. The use of competition and
privatization can lead to a market that is more responsive to customers as
well as investors. However, regardless of the degree of success, deep and
continuing government involvement will likely continue to be necessary in
order to balance the financial needs of the railways with the
transportation coverage desired by the state.

Competition and privatization have been particularly prevalent in Europe,
where a European Union directive requires the existence of competition in
the freight rail industry; an additional directive has been proposed
requiring the allowance of competition in the international passenger rail
industry as well, although some countries have already opened their
markets to multiple operators. Germany makes extensive use of private
operators, with over 300 operators providing rail service on many regional
routes. In the U.K., all passenger rail services are franchised and open
to competitive bidding by operators. The introduction of competition and
privatization is largely dependent on the government changing its role to
that of a customer, with the primary focus on purchasing the best service
for the best price. In Germany, the dissemination of national funding to
regional governments has facilitated the extensive presence of multiple
operators. Japan, meanwhile, aims to have its passenger rail system
completely privatized; currently three of Japan's six passenger rail
systems are managed by individual private companies. By turning its
passenger rails over to the private sector, Japan has improved its quality
of service and substantially reduced the number of its employees; the
demand for railway service continues to increase.

Foreign Countries Addressed Key Reform Elements in Implementing New
Approaches to Intercity Passenger Rail

Several key reform elements were addressed by the five countries we
visited as part of their planning and implementation of new approaches to
intercity passenger rail. Based on our review, implementing these
approaches appears to improve the cost effectiveness of intercity
passenger rail service. For example, officials with the primary operator
in Germany told us that their company has seen a 187-percent increase in
staff productivity between 1993 and 2004; at the same time, the company
was able to reduce its workforce by 40 percent.^74 These officials stated
that the German rail reform resulted in taxpayers paying 44EUR billion
less during this time period than what they would have been expected to
pay if there had been no reform. The key reform elements addressed
throughout implementation of these approaches include:

oEstablishing clearly defined national policy goals. In making major
changes to an intercity passenger rail system, it is essential that the
national government establish a clear vision for what the goals of the
system should include while making decisions to implement new approaches
to meet these goals. During our review of the five countries we visited,
we observed that each country established goals that their reforms were
intended to achieve. As we reported in February 2005, a key component in
reforming a national program includes determining if there is a clear
federal role and mission.^75 All of the approaches taken by the five
countries we visited were tailored to meet the specific national policy
goals established by those countries. For example, in the U.K., there was
a national goal to reduce the role government played in managing the
passenger rail system. To meet this national goal, the U.K. used
approaches such as introducing competition in its system, and changing the
role of the national government from service operator to that of a
customer of private rail operating companies.

oClearly defining government and stakeholder roles. The second key reform
element we learned about during our site visits is that government and
stakeholder roles should be clearly defined prior to (or during)
implementation of any reform approach. Deciding what these roles should be
was the first step in several of the approaches. For example, in order to
shift the national government's role, the responsibilities of the
government first needed to be defined; it then had to be decided which of
these responsibilities would continue to be government functions, and
which would be those of other stakeholders.

oEstablishing consistent, committed funding. Consistent, committed funding
is the final reform element key to successful implementation of a new
approach to intercity passenger rail. In the five countries we visited,
the national governments made a commitment to provide intercity passenger
rail service. The governments also committed to provide the system, on an
annual basis, with the funds necessary to maintain this service. Whether
the approach taken was to increase the annual subsidy, provide subsidies
to regional levels of government, or establish a consistent subsidy for
each year, all of these governments made financial commitments to provide
intercity passenger rail service.

See app. III for more detailed information about each of the countries we
reviewed.

The United States is Not Well Positioned for Reform

The United States is not well positioned to reform or restructure
intercity passenger rail service. Based on our review of foreign intercity
passenger rail reforms, a more fundamental reexamination of the system by
policymakers than has taken place to date will be needed if the United
States wants to better position itself to improve the performance and
benefits of the intercity passenger rail system in this country. The
national governments of the countries we visited addressed three main
elements through the process of reforming or restructuring their intercity
passenger rail systems: (1) clearly defining national policy goals, (2)
clearly defining the various roles and responsibilities of public and
private sector entities involved, and (3) establishing consistent
committed funding for intercity passenger rail. Currently, the goals and
expected outcomes of U.S. passenger rail policy are ambiguous, stakeholder
roles are unclear, and funding is limited because of other priorities and
a lack of consensus on the level of funding to devote to goals. As the
primary provider of U.S. intercity passenger rail, Amtrak has the
authority to take a number of actions, but has a history of poor financial
and operating performance. Amtrak has recently proposed a reform strategy
and is undertaking efforts to reduce costs and increase corporate
efficiency. However, constraints, such as expensive labor protection
payments that may be triggered by possible route and service changes,
limit the benefits Amtrak can achieve on its own. Even if Amtrak were to
fully exercise its authority, Amtrak is not in a position to address the
key elements of reform we observed in other countries. Federal leadership
will be needed to fundamentally improve the performance of intercity
passenger rail.

United States Will Need to Address Three Key Elements to Improve the
Benefits of Intercity Passenger Rail

We found that other countries we visited addressed key reform elements in
the process of reforming or restructuring their intercity passenger rail
systems. U.S. policymakers will need to reexamine national policy goals
and objectives, stakeholder roles and responsibilities, and funding
mechanisms for intercity passenger rail if the United States wants to
better position itself to improve the performance and benefits of federal
expenditures on intercity passenger rail.

Policy Goals

Based on our review of intercity passenger rail systems in five countries,
we found that, in the process of reforming or restructuring their systems
all five national governments clearly defined national policy goals and
objectives for the system. For example, a specific goal of the reform
process in France, Germany and the U.K. was to increase transparency in
the use of public funds and restructuring included separating the
management of their rail infrastructure and passenger operations. In
Germany, the government's objectives in consolidating two state railways
into one private holding company, Deutsche Bahn AG (DB), was to improve
efficiency, and to allow DB to function independently of the government
and manage its railway like a private business. During the restructuring
process in Japan, by defining specific goals and outcomes for the system,
the national government was able to determine an overall structure for the
system. Some of the goals Japan defined for the railway before
restructuring it were reducing the accumulated debt, minimizing the
national government's role in maintaining the railway, increasing
efficiency, and strengthening competitiveness. Additionally, a desired
outcome of restructuring the state-owned provider into six private
regional passenger rail operating companies was to better position rail
service to compete for passengers.

Goals provided by Congress focus narrowly on Amtrak management, rather
than providing guidance and direction for the entire U.S intercity
passenger rail system. The current legislation governing Amtrak directs it
to operate a national passenger rail transportation system that ties
together existing and emerging regional corridors and other intermodal
service. However, it does not provide specific objectives for the system
Amtrak is required to operate, such as defining transportation benefits
and public benefits or increasing the transparency of public funds, nor
does it specify how the system should be structured to achieve certain
outcomes. This broad mandate, as previously discussed, has resulted in the
current intercity passenger rail system--a system that does not target
markets where rail may have a comparative advantage over other
transportation modes nor makes the most cost-effective choices to meet
public transportation needs. In April 2005, Amtrak released a set of
proposed strategic reform initiatives, which included a vision for the
future of intercity passenger rail service and Amtrak's role. Recently,
Amtrak developed a mission statement, which aims to improve financial and
operational performance by tying specific goals to the mission statement.
Although the vision and mission statement provide a direction for the
company, senior Amtrak officials told us that this mission for the company
should not be a substitute for Congress setting a national intercity
passenger rail policy. Furthermore, they said that a national rail policy
should be explicit and clearly indicate the transportation services that
the federal government wants operators to offer; Congress should then
provide funding for the desired level of service.

Determining the system's structure, as well as determining how to position
passenger rail within the entire U.S. transportation system, will remain
uncertain without specific goals and outcomes for intercity passenger
rail. To change the current structure of intercity passenger rail, policy
decisions need to be made. As the Congressional Research Service (CRS)
reported in December 2004, maintaining the status quo of passenger rail
policy allows policymakers to avoid making decisions, such as shutting
down Amtrak and eliminating its long distance routes or alternatively,
committing to a

major financial program.^76 Without a more explicit national policy, the
future role of intercity passenger rail in the national transportation
system is uncertain.

Stakeholder Roles and Responsibilities

Similarly, establishing clear stakeholder roles and responsibilities was
important to helping improve the efficiency of intercity passenger rail
systems in several of the countries we reviewed. For example, the U.K.
reorganized its structure by creating separate organizations (e.g.,
organizations to provide train service, manage the rail infrastructure,
and regulate infrastructure access fees and costs). Each of these
organizations has defined responsibilities and is transparent with respect
to the responsibility of achieving specific goals. According to a U.K.
official, in privatizing some of these organizations, the U.K. sought
greater efficiency, tighter cost control, a reduction in government
interference in the railway industry, and more consistent and reliable
funding. Our study also showed that clarifying stakeholder roles and
responsibilities may require the creation of new entities. For instance,
when Japan National Railways restructured its railways in 1987, the
government created the Japan National Railways Settlement Corporation to
settle the accumulated debt of Japan National Railways. In addition, an
official from Japan's Ministry of Land, Infrastructure, and Transport told
us that the railway split into six passenger railroads in order to have
more efficient regional service.

In the United States, stakeholder roles and responsibilities for managing,
operating, and funding intercity passenger rail services are unclear. For
example:

oIt is unclear what Amtrak's main responsibility should be as the primary
intercity passenger rail operator in the United States, given that the
purposes of Amtrak are in conflict. Although Amtrak is incorporated as a
for-profit corporation, any expectation of being a profitable company has
not been realized--partly because it is responsible for maintaining an
intercity passenger rail system with many unprofitable routes.^77

oThe federal role in intercity passenger rail service has primarily been
to subsidize Amtrak's operations and, in the past, manage capital
improvements to the infrastructure along the NEC.^78 Only recently has the
Secretary of Transportation been tasked with overseeing these funds, but
such funding has been tied to Amtrak's business plan and not a national
policy or vision that articulates goals, objectives, and outcomes for
intercity passenger rail services.

oCurrent law offers states a narrow role in decision making, but permits
states to subsidize additional intercity passenger rail service. Some
states see benefits to subsidizing intercity passenger rail and choose to
spend their own funds for additional service not provided as part of
Amtrak's national route system--a system that has not had substantial
changes since 1971. Those states have had a role in making decisions, such
as what stations will be served and whether food service will be provided
on the subsidized route, unlike states that do not provide funding.
Forty-two states receive basic long distance service with no state
support, while 13 of these states have decided to subsidize additional
corridor services based, partly, on demand. For example, Amtrak's legacy
route system has provided service on some corridors without state support,
(e.g., from Pittsburgh, Pennsylvania, to New York City), but on other
corridors, states have subsidized additional service, such as Washington
state paying for additional frequencies for the Cascades Service between
Seattle, Washington, and Portland, Oregon. Additionally, in December 2004,
CRS reported that there are those who view that state governments may be
better positioned to make regional service decisions.^79 The
administration's proposal also favors giving states a greater role in
decision making with respect to rail service and capital improvements.

oThe role that freight railroads should play in shaping the future of
intercity passenger rail service is not defined. Management of and access
to infrastructure is dominated by the freight railroads. Since passenger
railroads and freight railroads must often share access to privately owned
tracks, the freight railroads' control over infrastructure has an
influence on both national passenger rail policy and day-to-day passenger
rail operations. Specifically, freight railroads may be concerned with
intercity passenger rail policy decisions that affect access to their
rights-of-way and capacity on existing tracks; these decisions could
potentially affect the freight business. While their decisions may
influence passenger rail service, freight railroads do not have a defined
role in decision making or the funding of intercity passenger rail.

Funding

Finally, as part of their overall restructuring process, all of the
countries we reviewed committed to funding intercity passenger rail
service. For example, in the U.K., the Secretary of State for Transport is
tasked with determining what services the railway should deliver. This
determination is made through a document called the High Level Output
Specification: available funds for these services over a 5-year planning
period are set down in a statement of funds available.^80 An official in
the U.K. Department for Transport told us that this funding cannot be
reallocated for other purposes without great political and financial risk.
In addition, a 2002 CRS report observed that reorganization of the
railways in several countries required substantial political and financial
commitment over an extended period. ^81 Besides establishing funding tied
to goals, countries we visited also devoted funds to capital improvements
separate from operating subsidies. In France, about 2EUR billion per year
(currently this is approximately $2.5 billion) is provided for new rail
lines: additionally, the government also offers interest-free loans to
support new infrastructure projects. In addition to providing funding
specifically for capital improvements, three of the five countries
disseminate the national subsidy to regional governments, allowing
passenger rail subsidy options to be decided by regional governments
instead of the national governments. For instance, about 7EUR billion per
year (about $8.9 billion) in operating subsidies is divided among the 15
German Laender to be used at their discretion, and in France a 2EUR
billion per year (currently this is about $2.5 billion) subsidy is divided
among the 21 regions to support operations.

The U.S. federal government has annually subsidized Amtrak since its
inception. The funding for intercity passenger rail has been constrained
due to competing priorities; possibly, funding has also been constrained
due to the inability to reach consensus over the federal role in intercity
passenger rail, which is demonstrated in the status of Amtrak's
reauthorization. Grants to Amtrak have not been expressly reauthorized
since its previous 5-year authorization expired in 2002, despite the
number of proposals presented to the Congress.^82 Nonetheless, Amtrak
developed a 5-year strategic plan (covering the period of fiscal years
2005 to 2009) that was designed to address its immediate needs.^83 (The
plan identified inadequate and uncertain levels of funding as a risk.) In
recent years, Amtrak has received over $1 billion in annual operating
grants and capital grants through the annual appropriations process. Some
other transportation programs have established funding mechanisms that
share costs between the federal government and other parties. For example,
the Federal-aid Highway Program--a portion of which is subject to the
annual appropriations process for budget authority--has a dedicated trust
fund, the Highway Account, which is mainly funded by highway user fees,
such as taxes on motor fuels, tires, and trucks.^84 Transit projects have
access to the Federal Transit Administration's full-funding grant
agreement--a mechanism that requires identifying and committing federal
and nonfederal funds to support the multiyear capital needs of
construction projects. According to the Federal Transit Administration,
dependable levels of funding for the full-funding grant agreements have
improved the ability of transit agencies to finance, plan, and execute
projects.^85 Without consensus over the federal role in funding intercity
passenger rail and competing priorities for federal funds, Amtrak will
continue to operate in an uncertain environment--impairing its ability to
make strategic and operational decisions, and often deferring capital and
infrastructure maintenance.

Amtrak Can Take Actions to Reduce Costs and Increase Efficiency but It Is
Not Positioned to Address Key Reform Elements

In general, Amtrak's Board of Directors and management have the
flexibility to make numerous changes in its corporate direction and
organizational structure to improve financial performance. However, Amtrak
has a history of poor financial and operating performance. As we have
previously reported, many of its efforts at internal restructuring over
the last decade have largely failed and the company lacks many basic
management and reporting practices. More recently, in April 2005, Amtrak
proposed a more strategic approach for the company with a broad set of
reform initiatives. Amtrak is taking actions within its existing authority
to implement these initiatives, although most of the actions currently
being taken are operating in nature. While the Amtrak Reform and
Accountability Act of 1997 provided Amtrak with greater flexibility to
make more significant improvements, constraints limit the benefits that
can be achieved from this increased freedom. For example, although Amtrak
no longer requires approval by the Secretary of Transportation to make
changes to its route structure, route changes that result in elimination
of service could trigger expensive labor protection requirements.^86
Regardless of the internal changes Amtrak could make to manage its
operations more efficiently, Amtrak, as an operator, is not in a position
to address the key elements of reform. Federal leadership is needed to
establish national policy goals and stakeholder roles related to these
goals, and to identify funding levels needed to support these goals.

Amtrak Has the Authority to Take a Number of Actions to Reduce Costs and
Increase Corporate Efficiency

Amtrak's Board of Directors and management have the authority to make
numerous changes and have made changes in its corporate direction and
organizational structure. Amtrak is incorporated as a for-profit
corporation, but has been the recipient of substantial federal financial
assistance since its inception and has historically struggled to earn
sufficient revenues and operate efficiently. Without annual federal
subsidies for Amtrak's operating costs, the corporation would not survive
as presently configured and operated. Amtrak's financial condition has
never been strong and it has been on the edge of bankruptcy several times.
In 2001, Amtrak lost about $1.2 billion and mortgaged a portion of
Pennsylvania Station in New York City to generate enough cash to meet its
expenses. In July 2002, Amtrak also received a federal loan of $100
million to meet expenses.

Management of Amtrak has also generally been ineffective and the company
lacks basic tools for comprehensive planning. For example, some of
Amtrak's internal changes over the last decade, such as establishing
strategic business units and modifying Amtrak's routes, have not met
expectations. Instead, Amtrak's financial condition deteriorated.
Additionally, as we reported in February 2004, Amtrak's ineffective
management of a large-scale infrastructure project resulted in the
incompletion of many critical elements of the project, increased project
costs, and the project goal--a 3 hour trip time between Boston and New
York City--was not achieved.^87 Finally, in October 2005, we reported that
the corporation lacked many basic management and financial reporting
practices.^88 Among other things, we found that much of the financial
information Amtrak used for day-to-day management purposes lacked certain
relevant information or was of questionable reliability.

Amtrak's Board of Directors and management have recently taken actions to
address these concerns. These actions include appointing a new president
and creating a planning and analysis department to develop and manage a
company-wide strategic plan. However, impacts on the corporation's
performance remain to be seen. Additionally, in April 2005, Amtrak's Board
of Directors and management proposed a set of broad strategic reform
initiatives designed to improve the operational efficiency of the company,
transition Amtrak into one of a number of competitors to provide intercity
passenger rail service, and change how federal subsidies are distributed
for intercity passenger rail.^89 Specifically, changes outlined include
reinforcing management controls, organizing planning and reporting by
lines of business, and cultivating competition and private commercial
activity in passenger rail functions and services.

Amtrak's proposed initiatives are a step toward a more strategic approach
for the corporation and include both reforms Amtrak could pursue
internally, such as changes to its maintenance services and facilities,
and those that require legislative action, such as the enactment of a
federal-state capital matching program for corridor development in
partnership with states. However, according to senior Amtrak officials,
Amtrak is initially focused on internal reforms that Amtrak believes it
has greater control over. Currently, Amtrak is implementing operational
changes in 15 areas based on the broader proposed set of strategic reform
initiatives. (See app. IV for a list of Amtrak's operational initiatives
and their status.) These efforts are primarily associated with improving
business efficiency and reducing costs. For example, Amtrak's management
proposed to redesign some aspects of the sleeper car service offered on
long-distance trains, such as reducing the number of sleeper cars and
offering new sleeper service products targeted at different markets. This
effort is projected to reduce Amtrak's losses from offering sleeper
service by about 46 percent.^90

Although Amtrak's recent efforts are expected to result in some savings,
these changes alone will not be sufficient to address broader structural
issues. According to a July 2006 DOT OIG report, Amtrak's 15 operational
changes have resulted in a $46 million reduction in annual operating
losses through May 2006. But the projected incremental operating savings
from full implementation of Amtrak's operational changes over the next 5
or 6 years will not be sufficient to fund needed improvements to the
intercity passenger rail system such as addressing capital and maintenance
needs, returning the system to a state-of-good repair, and promoting
corridor development.^91 In April 2005, Amtrak estimated that the
strategic reform initiatives could achieve total operating savings of
nearly $550 million by fiscal year 2011. Amtrak said achieving these
savings would require a number of legislative actions, such as the
enactment of an 80 percent federal capital match for state intercity
passenger rail funds, as well as realizing increased revenues from
passengers, obtaining additional state operating contributions for
corridor trains, and having the federal government cover Amtrak's legacy
debt obligations. Some or all of these could increase federal costs.

Benefits of the Legislative Freedoms Are Limited by Constraints

The Amtrak Reform and Accountability Act of 1997 provided Amtrak with
greater flexibility to alter its route network and undertake other cost
saving changes to meet the goal of operating self-sufficiency by the end
of December 2002, which Amtrak did not achieve. However, the benefits that
Amtrak can achieve from these provisions are limited by practical
constraints. For example, while the act eliminated the statutory ban on
Amtrak contracting out or outsourcing work, except for food and beverage
service that could already be contracted out,  ^92 it made outsourcing a
part of the collective bargaining process. Amtrak officials also told us
that this provides less flexibility rather than more since it is more
difficult to change collective bargaining agreements with unions than for
Congress to change a statutory requirement.^93 This could limit the extent
to which Amtrak could contract out services, depending on the outcome of
negotiations with unions. Amtrak officials told us that little progress
has been made on labor negotiations since only three contracts (of the 24
collective bargaining agreements Amtrak maintains with its agreement
employees) have been signed and these all technically expired on December
31, 2004. As a result, Amtrak is currently in negotiations with all of its
unions and employee councils over collective bargaining agreements.

The benefits of making route changes to better meet the demands of the
public may also be limited as a result of labor protection requirements,
which are also part of the collective bargaining process. The Amtrak
Reform and Accountability Act of 1997 relieved Amtrak from getting
approval from the Secretary of Transportation to make changes to its route
structure and allowed Amtrak to discontinue routes without having to
preserve the "basic system" formerly mandated by Congress, as long as the
remaining route structure tied existing and emergent regional rail
passenger service and other intermodal passenger service.^94 One Amtrak
official told us that while Amtrak is legally allowed to change the route
network, decisions are often met with a variety of reactions including
resistance by Congress. In addition, if route changes result in the
elimination of jobs, Amtrak employees may be entitled to labor protection
benefits. As we reported in September 2002, if Amtrak had been liquidated
on December 31, 2001, potential Amtrak employee claims for immediate labor
protection payments could have been as much as $3.2 billion.^95 Further,
if an employee loses his or her job as a result of a reduction in service
on a route or closing of a maintenance shop, then he or she could receive
labor protection benefits for up to 5 years.^96

Finally, several potential constraints exist in gaining benefits from
Amtrak adopting a "user pays" principle for the provision of its services.
Under the user pay concept, costs to build and maintain rail
infrastructure, including along the NEC, would be paid for by the full
range of users of the system, including states, commuter rail agencies,
freight railroads, and the public. If adopted, a better matching of fees
paid to costs incurred by the diverse users of the NEC could provide
incentives for both public and private users to make modal choices and
transportation options based on true costs.^97 One issue in implementing
this approach is Amtrak's ability to accurately define the true costs of
intercity passenger rail services. We discussed examples of this issue in
two recent reports. In October 2005, we reported concerns with how Amtrak
captured and reported financial information, such as Amtrak's overreliance
on indirect cost allocation methods.^98 In April 2006, we reported that it
is difficult to determine Amtrak's revenues and costs associated with
providing services and access to infrastructure to commuter rail agencies,
in part due to the limitations of Amtrak's accounting practices.^99 Since
then, Amtrak has made some changes to its reporting and financial systems,
but according to Amtrak officials and progress reports, more work is
needed. A senior Amtrak official told us that identifying direct route
costs may be difficult since Amtrak uses many different systems to capture
costs.

Another constraint may be the ability and willingness of users to pay
additional fees. For example, we recently reported that the ability and
willingness of private rail companies to invest in infrastructure capacity
to

meet projected future demand for freight rail transportation is
uncertain.^100 While some states see a benefit to intercity passenger rail
and pay for additional service, two state officials we spoke with opined
that a proposal which required states to further subsidize existing
intercity passenger rail service would face political opposition at the
state level unless a federal capital matching program comparable to other
transportation modes is enacted. In addition, commuter rail agencies that
use the NEC raised several concerns about FRA's efforts to establish a fee
on them as mandated in Amtrak's fiscal year 2006 appropriations. Among
other concerns, these agencies stated that their usage of the NEC is
different from Amtrak's, which should dictate different levels of payment
for use of the same infrastructure.

Amtrak Is Not Positioned to Address the Three Key Reform Elements

Amtrak, as an operator, is not in a position to adopt and ultimately
implement key elements to begin reforming intercity passenger rail in the
United States. Amtrak's efforts will not likely change the structure of
intercity passenger rail without legislative action. Most of all, Amtrak
cannot address the three key elements of reform we observed in other
countries: 1) clearly defining national policy goals, 2) clearly defining
the various roles and responsibilities of public and private sector
entities involved, and 3) establishing a level of funding to devote to
these goals.

Amtrak's role is to provide intercity passenger rail service to the
public. Congress sets the national policy and goals for intercity
passenger rail, especially in the context of the entire national
transportation system. Since 2002, federal policymakers have been
struggling with what to do about U.S. intercity passenger rail in general.
Policymakers have not adopted the legislative actions in Amtrak's
strategic reform proposal. Additionally, in June 2006, CRS reported that
policymakers have not endorsed Amtrak's strategy of maintaining its
current route network while restoring its infrastructure to a state of
good repair, nor did they provide Amtrak with the requested funds to meet
these goals. CBO also said there has been a lack of consensus about the
role intercity passenger rail service should play in the national
transportation system and Amtrak's role in providing such services. While
Amtrak's efforts are a step to improving the corporation's financial and
operating performance, these changes do not address the reform elements
necessary to maximize transportation and public benefits of, and the
effectiveness of federal expenditures for, intercity passenger rail
service. Any fundamental change of intercity passenger rail will involve a
number of difficult operational challenges and policy decisions and all of
them will require federal leadership.

Addressing Reform Elements for Intercity Passenger Rail Will Require
Overcoming Stakeholder and Funding Challenges

There are a number of challenges associated with addressing the key
elements of reform for intercity passenger rail. The variety of
stakeholders, all with different interests and issues, makes it difficult
to reach consensus on any change. Central among federal challenges is
determining what the vision and role for intercity passenger rail in the
United States should be, the federal role, if any, within this vision, and
the reconciliation of the wide diversity of views on how the intercity
passenger rail service fits into the national transportation system.
Challenges in promoting a more equitable federal-state partnership include
the varying ability and willingness of states to participate in funding
intercity passenger rail and identifying appropriate policy changes to
overcome the disadvantages intercity passenger rail faces relative to the
leveraging of federal funds. Currently, states are challenged to leverage
their expenditures on such service. However, federal-state cost sharing is
common in highway and transit programs where investment is encouraged
through matching grants. Other challenges include freight railroad
concerns about infrastructure access and capacity, workforce issues, and
the role of the private sector. Addressing funding issues will also
present challenges. This includes identifying funding sources to achieve
national policy goals and developing incentives for state participation.
Each of these challenges presents opportunities to increase the benefits
of federal and nonfederal expenditures on intercity passenger rail; not
addressing them will likely continue the stalemate in moving toward a
well-defined role for federal subsidies for intercity passenger rail in
the United States.

Variety of Stakeholder Interests and Challenges Makes Reaching Consensus
on Change Difficult

One of the most difficult aspects of addressing reform elements for
intercity passenger rail will be reaching consensus among stakeholders on
the topic of change. Stakeholders include federal and state governments,
freight and commuter railroads, the passenger rail workforce, and
potential private sector operators. There are a variety of stakeholder
interests in intercity passenger rail and, at virtually every level, there
are challenges that will need to be overcome before consensus can be
reached to change any policies, goals, or stakeholder roles involved with
intercity passenger rail.

Federal Issues and Challenges

The federal government's interest, as laid out in statute, is in seeing
that intercity passenger rail service is provided on a national basis.
However, the Amtrak Reform and Accountability Act of 1997 removed direct
federal involvement in making route decisions, and DOT and FRA have, until
recently, largely taken a "hands-off" approach to Amtrak and intercity
passenger rail. As we reported in October 2005, FRA officials have told us
that, even though FRA has a seat on Amtrak's Board of Directors, the
agency has historically refrained from advocating a particular approach to
running Amtrak; neither has it specifically held Amtrak management
accountable for meeting particular goals.^101 In addition, 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. 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 Amtrak
to transmit a business plan to the Secretary of Transportation and
Congress and provide monthly reports about this plan. In response to these
measures, FRA has entered into grant agreements with Amtrak. Although
measures are in place to increase FRA's oversight of Amtrak's operations
through grant agreements, FRA attributed the lack of resources for its
limited and focused approach to Amtrak oversight. These measures address
oversight and accountability but do not necessarily address establishing a
vision for intercity passenger rail service, and the role of such service,
in the national transportation system. DOT commented that FRA's role has
never been to "establish a vision for intercity passenger rail" regardless
of resources available.

The challenges of establishing a national policy vision for intercity
passenger rail and the federal role, if any, within this vision are
illustrated by the wide diversity of intercity passenger rail service
proposals introduced in recent years. For example, one recent
congressional proposal would largely keep Amtrak intact and instead focus
on various reforms related to improving financial management, corporate
governance, and the development of metrics and standards for measuring
performance and the quality of service. This proposal would, among other
things, require Amtrak to develop a capital spending plan for restoring
the NEC to a state of good repair, and would allow freight railroads to
bid for operating long-

distance trains.^102 In contrast, a proposal by the administration would
significantly restructure Amtrak. This proposal includes splitting Amtrak
into three functionally independent entities: a corporate entity to
oversee the restructuring and manage residual responsibilities; a
passenger operating company; and an infrastructure management company. It
would also, among other things, encourage the creation of an interstate
compact made up of northeastern states and the District of Columbia, to
operate the NEC.^103 Amtrak itself has recognized the need for change. In
April 2005, Amtrak's management released a proposed set of strategic
reform initiatives that, if fully implemented, could substantially change
how it is operated. Under this proposal, states would play a larger role
in deciding what services to offer, and there would be increased
opportunities for competition in providing intercity passenger rail
service.

Federal-State Partnership Issues and Challenges

There are also a variety of interests and challenges in promoting a more
equitable federal-state partnership that make reaching consensus
difficult. One is the number of states that have the interest or
willingness to participate in intercity passenger rail. On the one hand,
there are a number of states that are willing to participate in
subsidizing intercity passenger rail and have made commitments to do so.
In fiscal year 2005, 13 states paid about $140 million to subsidize
additional service from Amtrak. Amtrak also received about $130 million
from 8 states and 3 state agencies for capital improvements on passenger
rail corridors and at stations. In addition, a coalition of 27
states--called the States for Passenger Rail--have come together to
promote the development, implementation, and expansion of intercity
passenger rail services with the involvement and support from state
governments. This organization's policy statement indicates that states
have taken, and will continue to take, a lead role in the planning and
development of new, expanded and enhanced regional passenger rail corridor
services. The states in the organization maintain that these systems
cannot be fully programmed and implemented without a federal-state funding
partnership similar to existing highway, transit, and aviation programs.
On the other hand, there are a number of states that receive the benefits
of intercity passenger rail service but do not subsidize such service, and
may or may not be willing to do so. This situation reflects the legacy
service that existed when Amtrak was created in the early 1970s. For
example, as of April 2006, there were 12 Amtrak trains scheduled to
operate daily Monday through Friday between New York City and Albany, New
York. The state subsidizes only 1 of these trains--the Adirondack. Even on
this train the state only subsidizes service north of Albany to Montreal,
Canada. New York City to Albany is part of the legacy service that dates
to when Amtrak began service in 1971. The extent to which states would be
willing to pay for the intercity passenger rail service currently received
for free is an open question.

Another federal-state challenge is the leveraging of financial assistance
to intercity passenger rail. Recent surface transportation acts have
authorized some federal financial assistance for the development of
high-speed rail and other passenger rail corridors. In addition, states
can finance passenger rail projects through the Federal Highway
Administration's Congestion Mitigation and Air Quality Improvement program
when the project will result in demonstrable air quality improvements.
However, states are challenged to leverage their expenditures on intercity
passenger rail. In general, states work directly with Amtrak to obtain
service above the basic service provided. Some states also work directly
with Amtrak to finance intercity passenger rail capital improvement
projects that benefit their state. An FRA official told us that states
could start their own intercity passenger rail service, but doing so would
be difficult given the potential cost and lack of statutory access to
infrastructure at the incremental cost that Amtrak currently enjoys. Some
other transportation programs--such as the interstate highway program and
the Federal Transit Administration's New Starts program for transit
systems--share responsibility for planning, design, and funding between
the federal government and state and local governments. Federal agencies
generally set the design and quality standards for projects and encourage
investment through matching grants. State and local governments prepare
transportation plans which identify the need for investment, develop a
business case for the investment, and contribute a portion of the funding.

Finally, reform initiatives designed to increase state roles in intercity
passenger rail will likely face the challenge of finding mechanisms for
states to work cooperatively together in the development of routes and
corridors that cross state lines. One mechanism is an interstate compact.
Interstate compacts for intercity passenger rail were proposed in the
Amtrak Reform and Accountability Act of 1997. Interstate compacts are
agreements between states that are constitutionally permitted when
approved by Congress. Several interstate compacts are currently being used
to study the feasibility of, or advocate for, intercity passenger rail
service. These include the Midwest Interstate Rail Passenger Compact and
the Interstate High Speed Intercity Passenger Rail Compact. Currently,
however, there are few passenger rail systems being operated under an
interstate compact. State officials have told us that interstate compacts
are a very difficult mechanism to use when more than two states are
involved. They said that not only do compacts take a substantial amount of
time and burden to create, but, in the context of passenger rail, there
are practical issues involved--such as deciding what service is provided,
how the costs of such service are allocated to participants, and what
happens when one or more states do not fulfill their financial obligations
to the compact.

There may be other mechanisms available for states to work cooperatively
with each other. For example, the Appalachian Regional Commission (ARC) is
a federal-state partnership that, in general, was created to promote
economic development in Appalachia.^104 Although the current definition of
Appalachia includes 13 states, the governance structure is made up of only
two co-chairs--one representing the federal government and one
representing the collective interests of 13 member states. Each co-chair
has one vote on ARC matters. ARC officials told us that because of the
governance structure of ARC, virtually all decisions are reached by
consensus. In fact, they said that one of the advantages of ARC is that
more can be accomplished together than separately. They also cited as a
disadvantage the difficulties in reaching decisions.

Freight Railroad Issues and Challenges

Freight railroads play an integral role in intercity passenger rail. Over
95 percent of Amtrak's route system operates over lines owned by freight
railroads. As such, the freight railroads have a keen interest in the
volume of passenger rail service provided and the potential impacts of
such service on their business. One of the main challenges associated with
passenger and freight railroads is infrastructure access and the cost of
such access. Since Amtrak's creation, federal law has generally required
freight railroads to give Amtrak trains priority access and charge Amtrak
an incremental cost--rather than the full cost--associated with the use of
their tracks. These legal rights currently apply only to Amtrak. However,
efforts to reform intercity passenger rail service raise questions about
the status of Amtrak's priority access and incremental charge rights--that
is, can, or should, these rights be transferred to non-Amtrak operators or
will some other arrangement need to be made? Other arrangements could
significantly increase both the difficulty and cost of introducing
non-Amtrak operators, possibly through competitive bidding for subsidies,
to provide intercity passenger rail service.

Commuter rail service offers an example of access negotiations on
commercial, rather than incremental, cost terms. As we reported in January
2004, unlike Amtrak, commuter rail agencies do not possess statutory
rights of access to freight railroad track.^105 As a result, commuter rail
agencies must negotiate with freight railroads to purchase, lease, or pay
to access the railroads' right-of-way. Negotiations for these agreements
can last from a few months to several years. Our report noted that when
negotiating a lease or access agreement, freight railroads typically want
to be compensated for all operating, capital, and other costs associated
with hosting commuter and other trains. These costs would include direct
costs, such as dispatching trains and maintaining the rights-of-way, and
indirect costs, such as the cost of foregone opportunities (e.g., the
incremental value of "lost" train slots). Infrastructure access is also
difficult from the perspective of a freight railroad company. Since
freight service is the companies' core business, the ability to move
freight through the system must be protected. Freight railroad officials
with whom we spoke for our earlier report insisted that they must protect
their systems' capacity to handle both today's freight traffic as well as
future traffic projections. Protecting capacity becomes difficult when
passenger trains, either intercity or commuter, consume available capacity
without some sort of infrastructure enhancement, expansion, or
market-based compensation for line capacity used.

In addition to infrastructure access, capacity and capacity-availability
issues--that is, the ability of rail lines and infrastructure to handle
current and future traffic volumes--are also of concern to freight
railroad companies. After years of reducing infrastructure and
rationalizing their property, plant, and equipment, freight railroads have
recently experienced a substantial growth in traffic--a growth that some
project will continue into the future. In January 2006, the CBO reported
that total freight carried

by all modes of transportation in the United States has been growing.^106
CBO indicated that railroads, in particular, experienced a sharp increase
in traffic in the 1990s, with traffic increasing more than 50 percent
between 1990 and 2003 (from about 1 trillion ton-miles to about 1.6
trillion ton-miles).^107 This growth is expected to continue. For example,
the Department of Energy's Energy Information Administration has projected
that railroad ton-miles will increase 1.7 percent annually between 2004
and 2030, reaching about 2.4 trillion ton-miles in 2030.^108 Other
organizations have similarly predicted increases. This growth has acted to
limit available capacity on the rail network, at least in some locations.
In April 2006 testimony before the U.S. House Committee on Transportation
and Infrastructure, Subcommittee on Railroads, the president and chief
executive officer of the Association of American Railroads said that the
traffic density (i.e., ton-miles per route-mile owned) for Class I
railroads had more than doubled from 1990 to 2005 (see fig. 12).^109 He
went on to say that the traffic increases had resulted in capacity
constraints and service issues at certain junctions and corridors within
the rail network. These constraints and service issues will all affect the
ability of both passenger and freight rail carriers to provide the quality
and frequency of service the carriers may be asked to provide.

Figure 12: Class I Ton-Miles per Route-Mile Owned

Any reform that changes the type and frequency of intercity passenger rail
service will need to address system infrastructure access and capacity
issues. In doing so, any federal policy responses regarding freight
infrastructure should consider several things in this regard: (1)
subsidies can distort the performance of markets; (2) the federal fiscal
environment is constrained; (3) policy responses should occur within the
context of a National Freight Policy that reflects
system-performance-based goals and a framework for intergovernmental and
public-private cooperation; and (4) federal involvement should occur where
demonstrable wide-ranging public benefits--and mechanisms to appropriately
allocate the cost of financing these benefits--exist between the public
and private sectors.^110 In addition, federal involvement should focus on
benefits that are more national than local in scope.

Freight railroads have other concerns as well. These include concerns
about liability issues--that is, adequate protection against the risks of
accidents involving passenger trains using their lines. In general,
freight railroads seek full indemnification against any risks that might
exist because of passenger rail service. See appendix V for a more
complete discussion of infrastructure access, capacity, and liability
issues.

Workforce Issues and Challenges

Finally, efforts to reform intercity passenger rail require consideration
of workforce issues. That is, having enough people with the requisite
knowledge and skills to provide the amount and type of service called for
in a reformed system. There are several issues that need to be considered
in this regard, including the following:

oAvailability of a qualified labor pool. The reform of intercity passenger
rail resulting in new services or operators will require that there be
sufficient staff to provide service, conduct maintenance, and perform
other duties related to running passenger railroads. In the short term,
obtaining sufficient staff could be a challenge. As we reported in April
2006 (in the context of commuter railroad services), if Amtrak were to
abruptly cease to provide service, some commuter railroad agencies would
be able to replace Amtrak employees dedicated to their particular commuter
rail service with employees from another railroad.^111 However, there were
a number of agencies that said they would not be able to quickly replace
current Amtrak employees because of workforce limitations, such as the
availability of a qualified labor pool.

oWorkforce flexibility and productivity. Reform of intercity passenger
rail resulting in new services or operators will also require
consideration of workforce flexibility and the extent that labor
productivity can be increased. One key to providing cost effective
intercity passenger rail service is to have high levels of labor
productivity. Collective bargaining agreements and their related work
rules specify the work that employees are expected to do and the amount of
compensation they will receive for performing this work. Although such
agreements can and do include changes designed to increase employee
productivity by increasing or broadening the types of tasks that employees
can perform, such agreements can also affect productivity by limiting the
amount or type of work that employees can perform.

oPotential labor protection payments. If, as the result of a reform of
intercity passenger rail, Amtrak employees lose their jobs, there could be
liability for labor protection payments. In general, labor protection
payments are made to employees who lose their jobs as a result of a
discontinuation of service. The Amtrak Reform and Accountability Act of
1997 made a number of changes to labor protection, including eliminating
the statutory right to such protection; this made labor protection subject
to collective bargaining, and required Amtrak to negotiate new labor
protection arrangements with its employees. Amtrak labor-relations
officials observed that bringing labor protection under collective
bargaining (and therefore subject to the constraints of the Railway Labor
Act), as opposed to being statutorily mandated, has actually limited
Amtrak's flexibility to respond to marketplace changes. They observed that
their flexibility was reduced because it is generally easier to change a
statutory requirement than it is to change a collective bargaining
agreement. With regard to the potential magnitude of labor protection
payments, in September 2002 we reported that Amtrak would have had
potential unsecured labor protection claims of about $3.2 billion had it
been liquidated on December 31, 2001.^112 Although any restructuring might
not involve a bankruptcy, potential labor protection payments could still
be substantial if employees lose their jobs.

Workforce challenges also include determining how a potentially reformed
intercity passenger rail system fits into the current scheme of
railroad-specific labor-management relations, retirement, and
injury-compensation systems. Amtrak is currently subject to, among other
laws, the Railway Labor Act, the Railroad Retirement Act of 1974, and the
Federal Employers' Liability Act, which govern labor-management relations,
retirement, and injury compensation, respectively, in the railroad
industry. Amtrak's collective bargaining agreements generally do not
expire and are subject to requirements designed to reduce labor strikes;
Amtrak participates in, and provides financial contributions to, the
railroad retirement-system (approximately $400 million annually);^113 and
Amtrak and its employees are subject to a tort-based injury compensation
system under the Federal Employers' Liability Act.^114 We have reported
that these legal requirements raise railroad costs compared to nonrailroad
industries.^115 Amtrak's April 2005 Strategic Reform Initiatives also
suggested that meaningful reform of intercity passenger rail will require
changing how some of these requirements apply to passenger rail. On the
other hand, rail labor has argued for the importance of these laws in
protecting employee rights, providing critical retirement benefits, and
adequately compensating employees injured on the job.

State officials with whom we spoke expressed general concerns about the
potential impact of Amtrak's labor agreements and obligations on the
future of passenger rail. Some state officials viewed Amtrak's labor
agreements as a significant barrier to restructuring. One official stated
that serious labor reform is needed for intercity passenger rail reform to
succeed. State officials also questioned whether alternative operators
would be bound by Amtrak's labor agreements and thought that it was
unlikely another operator could provide significant improvements in cost
savings if they were. Another official stated that Amtrak's labor
agreements would put Amtrak at a considerable disadvantage over
alternative operators in a competitive market if the alternative operators
were not bound by the same agreements.

Rail labor union officials with whom we spoke expressed several concerns
about the effects any potential reform of intercity passenger rail might
have on their members. First and foremost, union officials told us of
their concern about the history of Amtrak's successive reforms and said
these reforms had a detrimental effect on union employees. In their view,
past Amtrak reforms have brought fewer union jobs and the loss of health
and safety programs with no real improvement in Amtrak's financial
performance or service to the public. Union officials also told us that
any reform should attempt to make Amtrak, among other things, find new
leadership dedicated to working with employees and growing the business,
fix basic business practices, and improve customer service. Finally, union
officials emphasized that rail labor is the monopoly workforce for
passenger rail. Any reforms of intercity passenger rail would still
require any operator--Amtrak, alternative operators, or a successor to
Amtrak--to work through the unions to maintain a labor force. Rail union
officials noted the success of the Massachusetts Bay Commuter Railroad,
which provides commuter rail service in and around Boston, Massachusetts.
In this instance, a private operator took over operations from Amtrak and
was able to maintain existing work rules (collective bargaining agreement
provisions that specify tasks employees can perform) while offering a
24-percent increase in wages.^116

See appendix VI for more information about workforce issues.

Private Sector Issues and Challenges

Private sector issues and challenges primarily focus on what role, if any,
the private sector will play in any reformed intercity passenger rail
system. Currently, there is little private sector involvement beyond the
infrastructure provided by freight railroads to operate intercity
passenger rail service. Amtrak is the sole operator of intercity passenger
rail service, and, although organized as a private, for-profit
corporation, is heavily dependent on federal subsidies to remain solvent.
In general, there are no other private sector operators outside of leisure
travel providers such as GrandLuxe Rail Journeys (previously American
Orient Express). This contrasts with the pre-1971 situation when, before
Amtrak began service, freight railroads provided all intercity passenger
rail service.

There are suggestions that the private sector could play a larger role,
including being contract operators under a system in which competition and
bidding is used to select service providers. For example, Amtrak's April
2005 Strategic Reform Initiatives suggests that there are opportunities
for increased competition, and part of Amtrak's vision for itself under
these initiatives is to evolve into one of a number of competitors for
contracts to provide passenger rail service. However, there are a number
of issues

associated with increasing the private sector role in intercity passenger
rail.^117 These issues include the following:

oAvailability of potential private sector operators. Since Amtrak is the
sole provider of intercity passenger rail service, there has been little
opportunity to test the market for potential new operators.^118 However,
there are indications that potential operators may exist and may be
willing to participate in any opportunities that might arise, especially
corridor service. For example, an official of one firm with worldwide rail
and transportation operations said he believes there is a U.S. market for
rail service in corridors--especially corridors with city-pairs 100 to 300
miles apart. An official from another firm with extensive passenger rail
operations in the U.K. said his firm is very much interested in entering
the U.S. passenger rail market, especially in operating the NEC. In his
opinion, the NEC is a very viable corridor and could be wholly or
partially privatized.

oCosts of private sector operators and the need for public subsidies. One
of the key questions associated with competition and the use of private
sector operators is how costs will change, and whether public subsidies
can be reduced or eliminated. Again, since the U.S. market has not been
tested, it is difficult to know what the specific cost or subsidy impacts
from competition might be. On the one hand, European experience has shown
that franchising and competitive bidding has not necessarily reduced the
need for government subsidies. In fact, in 2 of the European countries we
visited (Germany and the U.K.) there is substantial government financial
involvement in competitively bid systems. On the other hand, in the U.K.,
some franchise operators have recently been financially successful enough
to allow them to pay the

government a premium for excess profits they have made.^119 Aside from
government financial assistance, foreign officials also pointed to other
things--such as increases in ridership and quality of service--as the
benefits of a more competitive system. For example, data from the
Association of Train Operating Companies indicate that passenger rail
ridership in the U.K. increased about 38 percent over roughly the last
decade (from about 745 million trips to just over 1 billion trips
annually).^120 The largest growth was in the long-distance market.^121
Similarly, government data show that the number of complaints per 100,000
passenger trips in the U.K. generally decreased from about 120 in April
1999 to 70 in April 2005.^122

oPotential requirements to encourage private sector participation. There
may be certain requirements for encouraging private sector participation
in providing intercity passenger rail service. These requirements may
include maintaining Amtrak's current statutory rights of infrastructure
access. An official from one firm with worldwide transportation operations
with whom we spoke emphasized that access to tracks, stations,
rights-of-way, and maintenance facilities would be key for his firm and
other operators to be successful participants in the intercity passenger
rail market. This firm would look to states or Amtrak to provide these
access arrangements prior to their taking over operations. Officials from
all 5 states we talked to agreed there would be a number of barriers to
competition and that access issues would be a critical issue. Flexibility
in allowing firms to branch into nonrail operations may also be important.
In Japan, passenger rail officials told us that their firms not only
provide passenger rail service but are also involved in other activities
such as real estate development, retail stores, and light manufacturing.

Funding Issues also Present Challenges

There are also a number of challenges associated with funding for
intercity passenger rail service. One is identifying funding sources to
meet long-term funding needs. Being in a capital intensive business,
intercity passenger rail has substantial ongoing and long-term funding
needs. For example, Amtrak is currently receiving over $1 billion annually
in federal subsidies and it has an estimated $6 billion in deferred
capital backlog of infrastructure improvements, including about $4 billion
on the NEC. In March 2006, the DOT OIG reported that, for fiscal year
2007, Amtrak would need about $1.4 billion just to maintain Amtrak and
keep its system from falling into further disrepair.^123 This would not
include amounts to address the backlog of capital maintenance, invest in
short-distance corridors, or renew equipment. This official went on to say
that none of the corridors around the country, including the NEC, can
provide the type of mobility needed without significant capital
investment. This limitation applies to the development of new corridors as
well, including high-speed rail corridors. As we testified in April 2003,
the total cost to develop high-speed rail corridors is unknown because
these types of corridors are in various stages of planning.^124 However,
the costs could be substantial. The American Association of State Highway
and Transportation Officials--a trade association of state and local
transportation officials--has reported that about $60 billion would be
required to develop these corridors, including Amtrak's NEC, over a
20-year period.

Funding challenges also include finding funding sources to meet whatever
national intercity passenger rail policy goals are established. Currently,
virtually all federal funding for intercity passenger rail comes from
general appropriations; therefore, intercity passenger rail must compete
with a myriad of other needs to obtain funding. This practice allows
Congress to set spending priorities. As discussed earlier, the existence
of funding sources to meet national policy goals was a component in many
foreign passenger rail reform efforts. Even in Canada, where there was no
major restructuring, the government was willing to commit, albeit not on a
formal basis, to identifying funding amounts so as to provide a stable
level of annual operating funding for its intercity passenger rail
provider, VIA Rail. This commitment has continued for about 8 years^125
and through several changes in government. According to Transport Canada
officials, this commitment allowed VIA Rail management some stability in
planning. They also said that, while there was no explicit rationale for
the amounts provided, the objective was clearly to "set VIA's feet to the
fire" by not increasing the subsidy. However, reducing the level of
support would make it difficult to preserve services. Finding funding
sources to meet national policy goals for intercity passenger rail will
not be easy, especially as the nation faces increasing fiscal constraints
at the federal level. As discussed earlier in this report, the federal
government faces significant fiscal challenges in future years and will
need to reexamine its role and financial support for virtually all federal
programs, including intercity passenger rail. The challenge will be in
finding a funding source(s) that can meet long-term needs while retaining
the accountability of an annual appropriations process.

Funding challenges include aligning the decision making for, and the
benefits of, intercity passenger rail service with the responsibility for
paying for such service. Currently, there is a basic misalignment in these
elements. Historically, states have not been required to subsidize basic
intercity passenger rail service. States may subsidize additional service
that would benefit residents. As discussed earlier, in fiscal year 2005,
13 states paid about $140 million to subsidize additional service from
Amtrak. However, there were over 30 states that did not subsidize
intercity passenger rail service even though such service was provided in
their state. In general, Amtrak is the focal point for decision making
about what intercity passenger rail service is provided and where.^126
Under this structure, some states benefit from having intercity passenger
rail service but play little role in deciding what service is provided or
in subsidizing the services received. Some states are aware of the
benefits of this structure--for example, an official from one state we
contacted told us that Amtrak is "a great deal" for the state because the
state pays nothing for service, even though there are numerous Amtrak
trains that operate daily within the state. This official said his state
would like to see additional service, but the state has little voice in
the matter because the state does not pay. On the other hand, an official
with another state said his state believes it is paying an inequitable
amount for service compared to other states. As we reported in April 2003,
the willingness and ability of states to provide and maintain financial
support for intercity passenger rail is unknown.^127 This willingness and
ability is a challenge that will need to be considered in aligning the
decision making and benefits of intercity passenger rail with payment for
such benefits.

Finally, funding challenges will involve developing incentives to ensure
participation and cost sharing by states and other stakeholders.
Currently, there are few means for cost sharing of federal and nonfederal
expenditures on intercity passenger rail. The current funding structure
provides appropriations for both federal operating and capital improvement
funds directly to Amtrak by way of grant agreements. These grant
agreements specify what federal funds are to be used for but do not
require Amtrak or others to contribute matching funds, either for
operating or capital purposes. Some other federal surface transportation
programs require matching contributions to create incentives and leverage
federal funds. For example, the Federal-aid Highway program generally
limits the federal financial share of the cost of highway projects
(generally 80 percent of costs) and requires states or others to
contribute matching funds for the remaining cost of such projects.
Similarly, federal statute limits the maximum federal share for some mass
transit projects and requires project sponsors to contribute matching
funds.^128 In fact, one of the criteria the Federal Transit Administration
considers in selecting new transit projects to finance under its New
Starts program is the amount of local financial commitment. The absence of
similar cost sharing mechanisms makes it difficult for intercity passenger
rail projects to compete for federal or state dollars.

The equitable and sustainable response to funding challenges is more
complex than providing some "comparable" funding for intercity passenger
rail to that provided for other transport modes. First, while advocates
for increased federal support for passenger rail often cite the billions
of dollars provided to highways and airports, in fact these funds are
derived from explicit taxes or user fees. Second, in spite of the
historical user-based funding of these modes, we have recently reported
that commitments made are no longer sustainable; there is an urgent need
for identifying new, more sustainable, and adequate funding to support the
defined federal role.^129 Finally, the modal comparisons of the magnitude
of federal funding are most appropriately grounded in the magnitude of
current and potential public benefits. As such, the order of magnitude of
public funds to support intercity passenger rail would appropriately be
grounded in the role intercity passenger rail does (or could) play in
national mobility, relative to the dominance of highway and air travel for
medium- and long-distance travel and the public benefits that would
result. Any consideration of dedicated funding for intercity passenger
rail also needs to account for the potential downsides of such funding. In
May 2006, we reported that, despite the advantages of dedicated funding,
there are risks of revenue volatility and loss of budgetary flexibility.
That is, there is a risk that revenues may fluctuate and not meet funding
expectations; and, that setting government funds aside for a specific use
may affect the funding available for other spending priorities.^130

Not Addressing Challenges Will Hinder Opportunities to Increase the
Benefits of Federal and Nonfederal Intercity Passenger Rail Expenditures

Not addressing the challenges discussed earlier may very well hinder
opportunities to increase the benefits of both federal and nonfederal
expenditures on intercity passenger rail. Amtrak has efforts under way to
analyze and implement various changes to its operations to reduce costs,
increase efficiency, and move states closer to paying for the services
they receive. Although these efforts are a step in the right direction,
they are expected to have only marginal impacts on the financial
performance of intercity passenger rail service. These efforts will not,
and should not be expected to, address some of the more fundamental reform
elements (e.g., clearly defining both a national policy and stakeholder
roles for intercity passenger rail service, and finding funding to support
national policy goals) associated with increasing public benefits provided
by intercity passenger rail service. Amtrak itself has said that its
existence is not a substitute for a national policy. The incremental
changes being taken by Amtrak do not necessarily go to the root of the
challenges that policymakers need to address to bring about increased
public benefits of any federal expenditure on intercity passenger rail
service.

Not addressing the challenges makes it likely that a well-defined role for
federal subsidies for intercity passenger rail in the United States will
also remain elusive. As CRS reported in June 2006, Congress has
essentially reached a stalemate with respect to Amtrak and intercity
passenger rail.^131 This stalemate was illustrated by the fact that both
the 107^th and 108^th Congresses were unable to reauthorize funding for
Amtrak or reach consensus on what kind of passenger rail system it would
be willing to fund. This stalemate has largely continued in the 109^th
Congress. As discussed earlier, part of this stalemate has resulted from
the wide diversity of views and opinions on how the intercity passenger
rail system should be structured, what role the federal government,
states, and others should play in the system, and required funding levels.
All of these speak to the fundamental challenges described above.

Finally, addressing challenges has been integral to reform efforts
elsewhere in the world. Although passenger rail reform efforts worldwide
are still largely evolving and continue to face challenges, addressing
such challenges has been part of moving forward. For example, in the early
2000s, the U.K. realized it faced problems with insufficient
infrastructure investment and rising costs of train operators. In
response, a new structure was developed that changed the infrastructure
manager and the governance structure of this manager, and significantly
increased government involvement in specifying the services to be provided
by train operating franchises. The U.K. has also established a process
that will develop expected national outputs for its passenger rail system
in 2007, develop a cost estimate for these outputs, and ensure that
adequate funds are available to support these outputs. Accompanying this
output document will be a broader and longer-term strategy document
looking ahead to about 2035. Similarly, to address the costs of intercity
passenger rail service and growing federal budget pressures, Canada
initially considerably reduced VIA Rail's annual subsidy from 1992 to 1998
from $344 million (Canadian) to $171 million (Canadian), then imposed
informal caps on VIA Rail's operating subsidy. Along with the caps came
informal funding commitments designed to facilitate management stability
in planning. The funding also came with incentives by allowing VIA Rail to
finance capital improvements or meet operating shortfalls by retaining any
annual operating subsidy amounts not used.^132 Further, Japan addressed
funding challenges associated with financially weak passenger rail systems
by establishing a business stabilization fund that is expected to provide
sufficient income to continue operations without using an annual federal
subsidy. Japanese rail officials told us that the business stabilization
fund has allowed smaller railroads to operate more independently of
government interference.

Options for the Future of Intercity Passenger Rail Will Determine the
Level of Federal Involvement

As the federal government is the primary provider of funds, oversight, and
direction for intercity passenger rail service, federal policy makers
should take the lead in deciding what the federal government's role in
intercity passenger rail service should be and what changes, if any, need
to be made to its goals, structure, and funding. Using our previous work,
the work of other government agencies, and our review of other selected
countries, we defined four basic options that represent the potential
range of options for reforming intercity passenger rail service in the
United States. They are maintaining the status quo, introducing
incremental changes within the existing structure, discontinuing federal
support, and restructuring the entire intercity passenger rail system.
This section discusses each option separately, although some combination
of these options could also be implemented. All four options for the
future of intercity passenger rail present challenges that could impede
both their selection and their effectiveness once chosen. Of the four
options, however, restructuring presents the opportunity to substantially
improve the intercity passenger rail system. This option would allow
Congress and policymakers to establish intercity passenger rail's goals,
define the roles of stakeholders, and develop funding mechanisms that
provide performance and accountability for intercity passenger rail
expenditures. Any substantial reorganization of intercity passenger rail
will be difficult and can be expected to occur over a long period of time.

In the sections that follow, we (1) lay out the framework for examining
the options, (2) describe each option in more detail, and (3) offer
observations on the advantages, disadvantages, and challenges associated
with each option.

Fundamental Reexamination Criteria and Key Components of Decision-Making
Framework Could Help Guide Consideration of Options for Future Federal
Role in Intercity Passenger Rail

It is important for federal policy makers to determine whether or not the
federal government should be involved in intercity passenger rail and, if
so, how federal participation can be both cost-effective and sustainable,
particularly in light of the federal government's long-term structural
fiscal imbalance. In our report on 21^st century challenges facing the
federal government, we defined a set of fundamental reexamination criteria
that are useful for evaluating the federal role in any government program,
policy, function or activity. The criteria are designed to address the
legislative basis for the program, its purpose and continued relevance,
its effectiveness in achieving goals and outcomes, its efficiency and
targeting, its affordability, its sustainability, and its management.
These fundamental criteria can be used to inform and evaluate the
continued federal involvement in intercity passenger rail service (see
table 4 below for an example of how these criteria may be applied).

Table 4: Application of Critical Reexamination Questions Defining the
Federal Role in Intercity Passenger Rail

                                        

       Fundamental criteria                  Critical questions               
Relevance and purpose of the Does intercity passenger rail, as currently   
federal role                 provided, have a clear federal role and       
                                mission?                                      
Measuring success            Does intercity passenger rail, as currently   
                                provided, have outcome-based performance      
                                measures?                                     
Targeting benefits           Do current intercity passenger rail           
                                expenditures target areas with the greatest   
                                needs and least capacity?                     
Affordability and cost       Do these expenditures encourage state and     
effectiveness                local governments, and the private sector, to 
                                invest their own resources?                   
                                                                              
                                Are these expenditures affordable and         
                                sustainable in the long term?                 

Source: GAO analysis.

If policy makers determine that there is a clear federal role in
subsidization of intercity passenger rail service, the implementation of
that role should have several essential elements. From our past work on
federal investments in transportation,^133 and our analysis of foreign
efforts on intercity passenger rail reform, we have defined a framework
that can guide the implementation of any of the basic options for the
future of intercity passenger rail. This framework includes three
components: creation of solid goals, establishment of clear stakeholders'
roles, and the provision of sustainable funding. This framework has three
components (see table 5).

Table 5: Three Components of Framework for Defining Federal Involvement in
Intercity Passenger Rail

                                        

             Component                           Description                  
Set national goals for the    These goals, which would establish what      
system                        federal participation in the system is       
                                 designed to accomplish, should be specific,  
                                 measurable, achievable, and outcome-based.   
Establish and clearly define  The federal government is one of many        
stakeholder roles, especially stakeholders involved in intercity passenger 
the federal role relative to  rail service. Others include state and local 
state, local, and             governments and riders themselves, all of    
private-business              whom benefit from intercity passenger rail   
transportation roles          service. Given the broad range of            
                                 beneficiaries, it is important in order to   
                                 gain consensus as to what the system is to   
                                 achieve and to help ensure that the federal  
                                 role does not negatively affect the          
                                 participation or transportation role of      
                                 other stakeholders.                          
Determine which funding       This component can help expand the ability   
approaches, such as cost      to provide funding resources and to promote  
sharing for investment in new cost sharing responsibilities. Given the     
infrastructure, will maximize current budgetary environment and the        
the impact of any federal     long-range fiscal challenges confronting the 
expenditures and investment   country, federal funding for future          
                                 transportation projects involving intercity  
                                 passenger rail service will require a high   
                                 level of justification. This justification   
                                 should have a solid vision and identify      
                                 funding that will deliver maximum public     
                                 benefits for money expended for intercity    
                                 passenger rail.                              

Source: GAO analysis.

All four basic options we identified would also benefit from a process for
evaluating performance periodically to determine if the anticipated
benefits are being realized. Evaluations also provide a means to
periodically reexamine established goals, stakeholder roles and funding
approaches, and provide a basis to modify them, as necessary. Leading
private and public organizations we have studied in the past, such as
General Electric and the state of Washington, have stressed the importance
of developing performance measures and then linking investment decisions
and their expected outcomes to overall strategic goals and objectives.^134
While federal funding is currently a major source of financial support for
intercity passenger rail service in the United States, currently there are
no requirements for a periodic, regular evaluation of the use of federal
funds (outside of annual appropriations legislation and yearly FRA grant
reviews).^135

Each of the four options we identified has different implications for the
three elements of our framework--goals, roles, and funding. (See fig. 13
for an overview.) For example, the federal role changes from managing the
different aspects of a federal exit from intercity passenger rail service
in the discontinuance option to one where it provides strategic direction
and targeted funding to increase the benefits of intercity passenger rail
service in the restructuring option.

Figure 13: Applying the Framework for Deciding the Future of Federal
Involvement in U.S. Intercity Passenger Rail

First Option: Keep Existing Structure and Funding of Intercity Passenger
Rail

This option would continue the existing structure and about the same level
of federal funding for intercity passenger rail service. Under this
option, the federal government would continue to ensure that a national
intercity passenger rail system exists. However, the existing
inefficiencies, uneven service levels, and limited capital investment
would also continue.

Establish Goals to Maintain Current Structure

The goal of this option would be to preserve and maintain the current
intercity passenger rail structure and federal funding levels. This option
would also maintain the current route structure and levels of capital
investment. The federal mandate to have a national route structure
connecting intercity corridors would continue to influence the route
structure of the intercity passenger rail system. With no increased
federal direction to change Amtrak, intercity passenger rail operations
would continue without any major structural changes or increased federal
expenditure.

Define the Federal Role within the Current Structure

The federal role under this option would be to continue to support the
current structure of intercity passenger rail. The federal requirement to
run a national system would remain and Amtrak's route structure and
management of the NEC would continue. The current stakeholder roles of the
federal government, state and local governments, freight railroads, and
commuter rail agencies would also remain the same. This option would also
retain the current relationships between Amtrak and the states and
commuter rail agencies, which in some cases are uneven. For example,
extensive service provided by Amtrak for some city pairs allows some
states to benefit from basic or "free" intercity corridor services from
Amtrak, while other states pay Amtrak to run corridor services that were
not part of Amtrak's original service structure. Likewise, some commuter
rail agencies would continue to pay lower access fees than other commuter
rail agencies for using Amtrak-owned infrastructure. These access fee
differences, the result of a 1982 Interstate Commerce Commission ruling,
are depicted in figure 14.

Figure 14: Commuter Rail Agency Contributions to Amtrak on the NEC

Commuter Railroads and Transit Agencies

Long Island Rail Road (LIRR) Maryland Rail Commuter Service (MARC)
Massachusetts Bay Transportation Authority (MBTA) Metro North Commuter
Railroad (MNCR) State of New York Metropolitan Transit Authority (MTA) New
Jersey Transit (NJT) Connecticut Department of Transportation's Shore Line
East service (SLE) Southeastern Pennsylvania Transportation Authority
(SEPTA)

Departments of Transportation Delaware Department of Transportation
(DelDOT) Connecticut Department of Transportation (CDOT)

Continue Existing Funding

Federal funding to support Amtrak's operations and capital expenditures
would continue at current levels (between $1.25 billion and $1.5 billion
per year) under this option. Although a small portion of the overall
federal transportation budget, this level of expenditure could maintain
Amtrak's current operations and level of capital investment in the short
term. However, the longer this level of expenditure continues without any
other changes in Amtrak's route structure or expenditures, the less likely
that Amtrak will be able to cover any losses from extended operational
difficulties (such as the Acela brake issue in April 2005 or the loss of
electrical power on the NEC in June 2006), or be able to start improving
the condition of its core asset, the NEC.

Second Option: Incremental Change within Existing Intercity Passenger Rail
Structure

Federal policy makers could determine that the current level of federal
involvement in, and funding of, intercity passenger rail is generally
adequate and appropriate, as in the first option. Under this second
option, however, federal policy makers could introduce incentives for
incremental improved operational and financial performance and
accountability within the current intercity passenger rail structure, such
as financial, accounting, or operational improvements. These incremental
improvements could come from federal policymakers or Amtrak's management.
The aim of this option would be to make some positive financial and
operational improvements without substantially changing Amtrak's financial
situation or the current structure of intercity passenger rail in the
national transportation system.

Establish Goals to Improve Performance within Existing Structure

Under this option, the goal of federal involvement could be defined as
continuing to support the current intercity passenger rail structure while
incrementally improving its performance. This goal would be achievable
within the current system and funding structure and would focus on
incremental operational and financial improvements. For example,
provisions in Amtrak's fiscal year 2006 appropriations legislation specify
that Amtrak must show savings from operational reforms or federal funds
could not be used to cover losses from sleeper or food and beverage
services.

Another improvement federal policy makers could consider is making Amtrak
subject to basic requirements that are consistent with either
federal-entity or public-company financial reporting and accountability
requirements. Many of the basic accountability practices and requirements
of federal entities or public companies would improve Amtrak's
accountability and transparency to Congress, the public, and key
stakeholders; and could be implemented while streamlining current
practices. An integral step in this process would be to first evaluate
Amtrak's current practices and requirements in comparison with those of
federal entities and public companies and use the evaluation as the basis
for a plan to move forward.

Currently, Amtrak is not subject to many of the basic accountability
requirements of either federal entities or public companies due to its
status as a government-established private corporation. However, the
current financial reporting and accountability requirements specific to
Amtrak require it to submit annual audited financial statements and an
operations report to Congress.^136 Amtrak is also subject to additional
reporting requirements as a result of its current funding structure, where
annual grant agreements for operating and capital expenses are established
and a prior loan agreement remains in effect. The monthly performance
report--an extensive report containing financial results, route
performance, workforce statistics, and performance indicators--is one of
the various daily, monthly, and annual reports that Amtrak is required to
provide under these agreements. In our October 2005 report on Amtrak's
management and performance, we noted that certain relevant information was
not included in monthly performance reports and the information in the
monthly performance reports was of questionable reliability.^137 We also
noted in our October 2005 report that Amtrak had made improvements in its
financial information, and we recommended including relevant information
and increasing the reliability of the information in the monthly
performance report, as well as preparing an action plan to put certain
financial management and reporting mechanisms in place.

Although financial reporting requirements of federal entities vary
somewhat, most federal entities are required to issue annual performance
and accountability reports (PAR). These PARs contain audited financial
statements; management's discussion and analysis of the current year in
comparison to the prior year; an analysis of the agency's overall
financial position, the results of its operations, and a discussion of key
financial related measures; and management's assurance statement on the
effectiveness of internal control, including a report on identified
material weaknesses and corrective actions. OMB, which oversees the
financial reporting of federal entities, reviews the PARs submitted by
agencies.^138 In addition, agency Inspectors General report semi-annually
on their assessments of the agencies' most serious management and
performance challenges.

Public companies, in addition to annual reports, are required to (1)
provide, with their annual financial statements (management's discussion
and analysis), information relevant to an assessment of financial
condition and the results of operations; (2) issue quarterly financial
statements that are reviewed by external auditors; (3) have the chief
executive officer and chief financial officer certify that the financial
statements do not contain any untrue statements; and (4) have management
assess and report on the effectiveness of internal controls over financial
reporting. Independent audit committees provide oversight of public
companies' financial reporting, internal control, and the audit process.
The Securities and Exchange Commission oversees accountability at public
companies through reviewing the financial reports and other filings of
public companies. (See app. VII for a more detailed discussion of
financial accountability standards and oversight that could be applied to
Amtrak.)

Define the Federal Role within the Current Structure

As this option would not represent a dramatic shift in the current
intercity passenger rail structure, a clear definition of roles may not
occur. The current roles for states, local governments, Amtrak, freight
railroads, and commuter railroads, would stay the same. As in the first
option, this option would perpetuate Amtrak's current service structure
that provides more basic intercity service between some city pairs than
others. It would also perpetuate its current relationship with commuter
rail agencies on the NEC.

Determine the Appropriate Federal Funding Mechanisms to Improve
Performance

One approach would be to reach an agreement among key legislative and
executive branch decision makers on a multiyear funding level for federal
operating of subsidies for intercity passenger rail service. Such a
multiyear agreement was successful in Canada when VIA Rail used the
imposition of a cap on its operating subsidies from the Canadian
government to reduce its operating costs. Although the spending cap was
originally intended to save the Canadian government money during a time of
high fiscal deficits, VIA Rail used its imposition to increase its
emphasis on internal cost control by reducing its labor costs for managers
by 50 percent and its equipment maintenance costs by 65 percent. The
operating funds are planned for over 10 years, giving VIA Rail the
stability to plan its operational expenditures over that time. While the
funds are not adjusted for inflation, VIA Rail is allowed to retain any
amount of its operating subsidy it does not use from year to year to save
for capital improvement projects or other needs.

While the funding approach could take several forms, federal support under
this option would likely not rise substantially, as the goal of the option
is to make incremental improvements without substantially changing the
federal commitment. While some savings could result from incremental
reforms, it is likely that, as with the first option, Amtrak would remain
unable to cover any losses from extended operational difficulties or to
start improving the condition of the NEC.

Third Option: Discontinue Federal Role in Intercity Passenger Rail

Under this option, the federal government would end its financial support
of the intercity passenger rail system. This would shift responsibility
for all intercity passenger rail service and federally owned rail
infrastructure in the Northeast to state and local governments and other
stakeholders. While this option could ultimately reduce federal
expenditures by eliminating operating and capital funds for Amtrak,
according to CBO, discontinuing federal support for intercity passenger
rail could also force a liquidation of Amtrak.^139 Consequently, federal
funds could be needed in the immediate and long terms to cover
implementation costs of Amtrak liquidation, including labor protection
payments and the disposition of Amtrak's assets.^140 Also, although this
option could create opportunities for states to contract for intercity
passenger rail service from other operators,^141 many states may not be
able or willing to fund existing intercity passenger rail service with
state transportation funds without access to federal capital matching
funds. Any federal exit strategy and transition plan would also need to be
comprehensive and detailed.

Establish Goals that Discontinue the Federal Role

Under this option, federal policy makers would determine that there is no
federal role in the support of intercity passenger rail service. A goal of
successfully implementing this option could be an orderly withdrawal of
federal support and involvement from long distance and corridor intercity
passenger rail service. The federal government would create an exit
strategy that would enact this goal, in part by creating a detailed and
comprehensive transition plan that would address several important issues
resulting from federal withdrawal of support. One of these issues is the
disposal of the federal interest in Amtrak and in Amtrak owned portions of
the NEC.^142 The NEC is the busiest rail corridor in the United States,
with over 1,800 intercity passenger, commuter, and freight trains using
its tracks per day. Amtrak owns a substantial portion of the NEC,
including portions over which several commuter rail agencies and freight
railroads operate. Amtrak operates trains, controls the movement of train
traffic over the NEC, and maintains most of the NEC.

One example of how to handle the NEC under this option could be similar to
how the Mexican government sold franchise agreements for different
segments of its freight rail network.^143 Following privatization efforts
in Argentina and Brazil, the Mexican government, between 1996 and 2000,
sold nine different 50-year franchises (each with a 50-year renewal
option) to private bidders to operate freight rail service.^144 According
to the World Bank, considerable care was taken by the Mexican government
when creating the franchises to preserve competition and avoid
cross-holding and cross-subsidization between the bidders and eventual
franchise operators. Since privatization, freight traffic has grown and
substantial investments in the rail infrastructure have been made by the
private operators.

As we pointed out in our April 2006 report on Amtrak and commuter rail
issues,^145 access to Amtrak's skilled labor and its infrastructure are
two critical issues to commuter railroads--especially to those railroads
that operate over the NEC. Some commuter rail agencies could not continue
to fully operate service--or would cease service altogether--without
access to Amtrak's skilled labor and infrastructure. Any transition plan
would also need to include, among other things, strategies for addressing
the challenges identified earlier in this report (e.g., federal-state
partnerships, and infrastructure access and capacity), the financial
viability of Amtrak, and concerns of freight railroads and others about
the viability of the railroad retirement system.

Define the Appropriate Stakeholder Roles

The heart of any federal exit strategy and transition plan would be to
define the appropriate role for freight and commuter railroads, Amtrak,
and any new owner or manager of the NEC in relation to any continued
intercity passenger rail service. Since following this option would
involve a major shift in national transportation policy, the federal exit
strategy and transition plan would need to clearly define the roles of
stakeholders in the new intercity passenger rail structure in the United
States. The federal role would be discontinued and responsibility for any
continued intercity passenger rail service could be transferred to states
(either to individual states or to groups), local governments, or the
private sector. Amtrak, as a private corporation, could potentially
continue as a provider of service; other private transportation companies
could also compete for subsidies to provide service on current or new
routes sponsored by the states. However, many states may choose not to
invest their scarce transportation funds in a transportation mode for
which there are no federal capital matching funds--especially considering
passenger rail's capital costs. For example, two state transportation
officials said their states would be willing to consider taking over
operational responsibility for corridor Amtrak service in their states,
but only if the federal government would match state capital funds at an
80-percent to 20-percent rate, similar to highway and airport
expenditures.

The financial incentive for private transportation companies to continue
or start any intercity passenger rail service would be reduced, or may not
exist at all, without federal subsidies for either operations or capital
projects. For example, officials from one private transportation company
with whom we spoke stated that virtually every intercity passenger route
would require public subsidies. However, according to the official, if
competition for intercity passenger rail service were introduced, it could
motivate private transportation companies to reduce their costs. While
probably not enough to eliminate the public subsidy, competition could
lead to lower overall costs.

If states did want to continue intercity passenger rail service
(especially across state borders) without direct federal involvement,
different intergovernmental structures could be adopted. One structure
could be interstate compacts, under which a group of states can work
together to achieve a common regional goal or provide a regional service
without direct federal involvement. An example is the Washington, D.C.,
Metropolitan Area Transit Authority (WMATA). WMATA is an agency created by
an interstate compact (although the federal government is also a signatory
to the compact) that provides bus and rail transit service in Virginia,
Maryland, and Washington, D.C. WMATA operations are funded by fare and
non-fare revenue and contributions from local governments, the two states
and Washington, D.C. Capital projects are funded by these states and
Washington, D.C., and are matched by the federal government.

Determine Funding Level for Federal Exit Strategy

While the federal government could eventually save the amount of Amtrak's
annual capital and operating subsidy if it decided not to support
intercity passenger rail service, this option could have substantial
immediate and long-term costs to the federal government, especially if

Amtrak were liquidated as a result of withdrawal of federal support.^146
In our 2002 report on potential issues associated with an Amtrak
liquidation,^147 we identified $44 billion in total claims against
Amtrak's estate--including $3.2 billion for potential payments Amtrak
would owe its terminated employees (if Amtrak had been liquidated on
December 31, 2001). Payments to the railroad retirement system could be as
high as $400 million annually if former Amtrak employees were not
reemployed in the railroad industry. In addition, currently, Amtrak has
about $3.5 billion in long-term debt and capital lease obligations that
could be unfunded in an Amtrak liquidation. The federal government may
also decide to fund Amtrak's other liabilities as a last resort if the
sale of Amtrak assets does not cover them.^148 In addition, as we found in
2002, the market value of Amtrak's most valuable asset, its portion of the
NEC, has not been tested. The corridor clearly has substantial value and
some consideration could be given to a long-term lease to a private
operator. However, the railroad is subject to numerous easements and has,
as of our October 2005 report, over $3.8 billion of deferred capital
maintenance that any future owner or operator would need to address for
continued safe, reliable operations.

Fourth Option: Restructure Intercity Passenger Rail Service

Substantial restructuring of intercity passenger rail service could take
many different forms. However, the core challenge of this approach is that
critical decisions would have to be made with all stakeholders about what
goals the restructured intercity passenger rail system should try to meet,
what roles the various stakeholders should play, and what federal funding
sources and mechanisms would be available to operate and maintain the
restructured system while maximizing cost sharing by all who benefit from
intercity passenger rail. Some examples of ways that substantial
restructuring could be implemented could include the following:

ocontinuing corridor intercity routes where the benefits of intercity
passenger rail are higher while discontinuing long distance routes where
the benefits are lower;

orestructuring Amtrak into separate companies;

otransferring Amtrak-owned infrastructure to a compact or commission of
states to oversee its operations and improvements;

ocreating competition for federal- and state-subsidized routes between
private operators and Amtrak;

oproviding a one-time endowment to Amtrak as an incentive for it to run as
a more market-oriented business without continued federal involvement and
support; or

oproviding states flexible capital matching grants to create their own
solutions to transportation needs, including intercity passenger rail
service.

Establish Goals for Restructured Intercity Passenger Rail Service

Under this option, policy makers would determine that there are sufficient
public benefits at a national level to justify subsidies for an intercity
passenger rail service that is different from the current structure. The
primary goal for the federal government, under this option, would focus on
increasing the national transportation benefits and public benefits of
intercity passenger rail service relative to the federal expenditure. For
example, furthering this goal could include using federal subsidies for
intercity passenger rail to: reduce highway congestion, increase
intermodal connectivity, provide environmental benefits, or increase
redundancy in regional or urban transportation. Specifically, one of the
goals under this option could be to increase the use of intercity
passenger rail service between major cities with trip times under 3 hours.
Two examples of how this goal could be achieved include the U.K. model of
intercity passenger rail service or the German model for regional rail
service.  ^149 In both models, passenger rail operating companies openly
bid for the lowest amount of government subsidy to operate a specific
route. These franchise agreements are multiyear contracts backed by either
national or regional government subsidies. The operator would collect
ticket revenues and the agreed-upon government subsidy to operate a
specific level of service over the route. This approach makes the
government an explicit buyer of intercity passenger rail services from a
private operator and increases the transparency of costs for a given level
of service. Contracts for service could include operational and capital
expenditures and specify such things as service frequency, trip length,
stops, a payment schedule, and performance metrics.

Importantly, spending federal funds for intercity passenger rail service
to increase public benefits will not necessarily lower the cost of
providing intercity passenger rail service. As discussed earlier in this
report, in many of the countries we visited the level of federal
expenditures on passenger rail after reform remained high or increased.

Define the Federal and Other Stakeholder Roles in a New Intercity
Passenger Rail Structure

There are many different ways that the federal government and other
stakeholders could define their respective roles within a new intercity
passenger rail structure. The federal government could narrow or expand
its role in the new structure. However, the key opportunity of a
restructuring effort is in defining the roles of all stakeholders to
create incentives and promote equity across all beneficiaries, both public
and private, in the new structure. For example, the federal government
could determine--in partnership with states, local governments, Amtrak,
and various transportation providers (including freight and commuter
railroads)--the route structure, service frequency, and infrastructure
access arrangements for all intercity passenger rail routes. In order to
ensure that intercity passenger rail service does not significantly
interfere with freight rail service, any restructuring approach should
also take into consideration the national freight transportation policy
currently being developed by DOT.

One of the more challenging areas to define roles is the NEC, where Amtrak
is the owner of most of the infrastructure while many other railroads are
the main users. As discussed above, participation is uneven and the vital
infrastructure is not being maintained effectively. One structure that
could facilitate a federal-state partnership to manage the NEC could
resemble the Delta Regional Commission or the Appalachian Regional
Commission. These commissions consist of a group of states and a federal
representative to foster partnerships between state and federal government
entities and distribute economic development funds throughout a specified
economically distressed region. For example, the federal government and
thirteen states make up the Appalachian Regional Commission to distribute
economic development and highway construction funds throughout the
410-county Appalachian region. Federal economic development grant funds
are distributed to member states according to criteria based on such
factors as population, land area, and economic need.

Recognizing its fiscal constraints, the federal government could provide
matching funds (either for operating or capital expenditures, or both) for
routes that meet certain goal-related criteria (such as reducing highway
congestion or increasing intermodal connectivity) and that are partially
funded and proposed by states or groups of states under a process similar
to the New Starts program for federal transit funding. However, regardless
of the eventual structure or tools used to implement the structure,
federal leadership would be needed to reach a consensus on goals,
structure, and funding with all stakeholders.

Determine the Appropriate Federal Funding Sources

Given the long term federal fiscal imbalance, finding federal funds
necessary to fund a substantial restructuring of intercity passenger rail
could be a significant challenge. In four out of the five countries we
visited, the national government currently provides a substantial amount
of funding for intercity passenger rail service.^150 Finding sufficient
funding could be crucial in order to restructure current service, attract
increased capital investment from nonfederal sources and give other
transportation providers the incentive to provide intercity passenger rail
service by significantly increasing the incentives for non-federal
partners. However, the scarcity of federal funds puts a premium on sharing
costs of equipment, infrastructure, and service. State and local
governments may be willing to invest to support continued, expanded or new
intercity passenger rail service. Moreover, increased state participation
would more effectively integrate decision making on intercity passenger
rail priorities with investments in competing and complementary modes
including highways, airports and mass transit.

An example of how costs could be shared across stakeholders could be seen
in the Federal Highway Administration's Innovative Financing Program. This
program includes several different forms of highway financing, which are
designed to stimulate additional investment and private participation.
Different financing approaches in the program include the use of state
infrastructure banks and credit assistance under the Transportation
Infrastructure Finance and Innovation Act. These financing approaches
could be adapted to allow states to leverage federal funds for investment
in intercity passenger rail projects.

Funding for intercity passenger rail could come from a number of sources.
For example, some funding to subsidize federal and state intercity
passenger rail service could be provided through taxes paid by, or
franchise payments received from, private operators on those routes that
may be profitable and not require a subsidy (as is the case for some
railroads in Japan). Capital funds used to increase capacity, reduce
bottlenecks, and increase train speeds (especially on freight railroad
owned track) could come from existing federal taxes, including taxes on
railroads or fuel taxes. For example, regional governments in Germany are
allocated funds from a federal automobile fuel tax to support regional
(i.e., short-distance, intraregion) passenger rail service. This is not
necessarily a new tax--rather, it is a change in how these funds are
allocated by the German federal government. Another funding option would
be for the federal government to create an endowment or "business
stabilization fund," such as was used in Japan, to stabilize its smaller
privatized railroads. This endowment would help Amtrak transition from
being dependent on federal support to being a more market-based company.
Any funding for a stabilization fund would need to recognize the fiscal
constraints on the federal government and competing priorities. During the
privatization of its national railroad system, the Japanese national
government identified the railroads that were least likely to be
profitable and provided them with a one-time set-aside of government funds
to provide continuous interest income for those railroads. While the
companies were prohibited from using the invested capital to cover
expenses, the earned interest could be used to stabilize the business and
provide long-term funds not subject to annual government appropriations.

Each Option Carries Advantages, Disadvantages, and Challenges, However
Restructuring Presents Substantial Opportunity for Improving the Intercity
Passenger Rail System

All four options for the future of intercity passenger rail present
challenges that could impede both their selection and their effectiveness
once chosen. Of the four options, however, restructuring presents the
opportunity to substantially improve the intercity passenger rail system.
This option allows all stakeholders to establish intercity passenger
rail's goals, the roles of stakeholders and the funding mechanisms that
provide performance and accountability for intercity passenger rail
expenditures. Consensus on any change to the current intercity passenger
rail structure has been difficult to achieve in the past. As a result, if
a decision is made to proceed with restructuring, a commission may be a
useful mechanism for reaching consensus on a method of restructuring among
stakeholders and for recommending a restructuring approach.

Keeping the Status Quo Forgoes Benefits that May Accrue from Improving the
System

While keeping intercity passenger rail's current structure and federal
funding levels would preserve a federal role in intercity passenger rail,
it would also preserve all of the current problems and limitations. States
and commuter rail agencies would continue to have unequal relationships
with Amtrak. The current route structure would continue to dilute the
public benefits of federal intercity passenger rail expenditures.
Investment in and the quality of commuter and intercity service on the NEC
would likely continue to decline and in states where intercity passenger
rail could provide the most public benefits states' transportation funds
would continue to be spent on other modes without considering public
benefits from spending on intercity passenger rail. Any extended
operational difficulties may leave Amtrak without significant cash
reserves to cover lost revenues and may result in more financial
difficulty.

With the current general level of federal funding, Amtrak will continue to
be faced with a deteriorating infrastructure and aging equipment that will
increase its operating costs and limit its ability to provide its current
levels of service. Without a significant capital infusion, the capital
maintenance backlog on the Amtrak-owned portion of the NEC will continue
to increase, negatively affecting Amtrak's performance on its key route
and diminishing the benefits of intercity passenger rail in the most
densely populated area of the country. In addition, any new equipment (or
a refurbishment of old equipment) would have to be financed either with
Amtrak's limited capital funds or with commercial debt, which would
increase Amtrak's operating expenses. With current levels of funding and
the lack of a clear definition of roles for intercity passenger rail
service, significant opportunities--for instance, cost sharing for service
in corridors where the public benefits of such service may be high--could
go unrealized. Amtrak will also face the continued annual uncertainty
about its financial situation, which will damage its relationship with its
creditors, suppliers, freight railroads and its riders. Freight railroads
will receive the same compensation from Amtrak for the use of increasingly
scarce capacity on their major rail lines in addition to not benefiting
from increased public investment to increase capacity for passenger and
freight traffic where they co-exist on their rail lines.

Intercity passenger rail riders could also face disadvantages under this
option. A deterioration in service and equipment could force Amtrak to
raise ticket prices for a lower quality service (which may also be
affected by increased freight rail traffic). In addition to the
uncertainty surrounding federal and state investment in intercity
passenger rail service, this deterioration of service may drive away
current and future riders and increase highway and airway congestion in
areas where intercity passenger rail has made progress in increasing
ridership, such as on the NEC and in California. Finally, the federal
government would receive no increased benefits, and may receive less
benefit due to declining capital investment, for its expenditures and
would have no accountability or performance measures in place to gauge the
effectiveness of those expenditures. In addition, no performance or
outcome based goals would be established for intercity passenger rail
service, clear stakeholder roles would not be defined, and there would be
no opportunity to restructure funding mechanisms to include share costs
across all stakeholders.

Incremental Change Does Not Address Fundamental Flaws in the Current
System

Though there may be some increase in public benefits, incremental change
within the existing intercity passenger rail structure retains many of the
same problems that would be retained under the first option. States and
commuter rail agencies may still have unequal roles and face declining
investment in Amtrak's infrastructure. While some savings could result
from incremental reforms, the need for federal subsidies would remain,
continuing the uncertainty of Amtrak's financial future. Freight railroads
would continue to receive the same level of compensation for increasingly
constrained rail capacity and may not see more investment where public
demand for intercity passenger rail service on their railroads increases.
Riders could also face reductions in amenities due to cost cutting
measures in addition to the same or decreased service levels due to, among
other things, increased freight traffic and deteriorating equipment that
could reduce ridership on some routes.

With current levels of funding and the lack of a clear definition of roles
for intercity passenger rail service, significant opportunities--for
instance, to share the costs of intercity passenger rail service in
corridors where the public benefits of such service may be high--could go
unrealized. While the federal government or Amtrak may impose new
accountability and performance measures, the route structure may stay
generally the same, still diluting the impact of federal expenditures.
Also, no overall goals will be established for federal expenditures, roles
will not be clarified and costs of intercity passenger rail service will
not be equally shared across all beneficiaries.

Discontinuing Federal Involvement May Reduce Services and Would Require
Detailed Planning and Substantial Federal Expenditures

Discontinuing the federal role presents strong challenges to all intercity
passenger rail stakeholders. The federal government will need to create a
comprehensive transition plan and exit strategy, especially in disposing
of the NEC. The federal government could also face pressure from states,
commuter rail agencies, and Amtrak's creditors and workforce to continue
infrastructure investment in the NEC, and to cover Amtrak's outstanding
debts and labor protection payments, respectively. Amtrak would face
bankruptcy and a possible shutdown of all services without federal
financial support. States will likely need to take on the responsibility
to continue intercity passenger rail service, which may result in some
routes being discontinued if they are not financially viable and states or
others are not willing or able to subsidize service. In addition, an
Amtrak bankruptcy may take away its equipment and its right of access to
freight rail infrastructure. Without a comprehensive federal transition
plan, commuter rail agencies that rely on Amtrak for services or
infrastructure would face service disruptions and financial difficulties.
This would be especially acute in the NEC, where most commuter railroads
rely on Amtrak infrastructure or services. Freight railroads may gain
increased capacity on some of their network, but would have to separately
negotiate with individual or groups of states that wished to continue
intercity passenger rail service on their railroads and deal with any new
intercity passenger rail operators as well. Finally, riders could be
forced to other modes of intercity and commuter transportation as a result
of the federal exit from intercity passenger rail, either temporarily or
permanently, increasing congestion on those modes. Under the
discontinuation option there could be gaps in the national transportation
system to the extent there are areas where the public relies solely on
intercity passenger rail for mobility or travel between regions if states
or groups of states choose not to retain the service.

Restructuring Provides Path to Increased Transportation and Public
Benefits from National Intercity Passenger Rail Network

The restructuring option provides the opportunity to address the key
reform elements necessary for a sustainable, equitable, intercity
passenger rail system that delivers increased public benefits for federal
and nonfederal expenditure where the other options do not. The status quo
and incremental change options do not allow for a reexamination by all
stakeholders of the goals, roles and funding mechanisms of the system and
would not significantly increase the potential benefits of the system
relative to the expenditures required. Discontinuing federal support would
transfer responsibility for the system to other stakeholders, possibly
creating disruption and loss of benefits for a possible decrease in
federal expenditures. Although specific approaches may vary as to the
goals, roles, funding and challenges faced by different stakeholders,
restructuring the intercity passenger rail system potentially allows each
stakeholder to more fully participate and build consensus toward
addressing these key reform elements and to move toward a more equitable
sharing of costs between the federal government and other beneficiaries of
intercity passenger rail service.

Several challenges would need to be addressed before a restructured
intercity passenger rail system could provide increased public benefits
and accountability for federal expenditures. Federal policymakers will
need to determine the goals of the restructured system, the roles of all
the stakeholders, how federal expenditures will support the new system and
mechanisms for its implementation. Increased funding for private operators
may be needed to create a competitive marketplace for intercity passenger
rail, as well as increased funding or financial backing for capital
improvements in the NEC to ensure higher quality service. Federal
policymakers could also face pressure to compensate those who might lose
intercity passenger rail service or jobs due to the restructuring. States
and commuter rail agencies may have to shoulder more of the financial,
maintenance, and management burden in a restructured intercity passenger
rail system, especially in the NEC, but may receive other benefits (such
as improved service) in return. Amtrak would need to adjust to the new
intercity passenger rail structure or face bankruptcy. Freight railroads
may face increased public pressure for the use of their infrastructure for
intercity passenger rail service and may need to accommodate non-Amtrak
intercity passenger rail operators on their railroads. Riders may
experience some disruption as routes are re-routed or discontinued.

Due to the complex nature of intercity passenger rail issues and the wide
diversity of views about the future of intercity passenger rail service,
an independent and properly designed commission may be an effective
mechanism for building a consensus that helps determine a restructuring
approach. For example, a commission might be able to facilitate public
dialogue around a variety of options. While it may be difficult for
citizens to discuss the federal role in the abstract, preferences about
that role can be inferred from their reactions to and comments on the
various restructuring approaches. By facilitating public dialogue focused
on feasible alternatives, the commission could help the President and the
Congress as they define the role for the federal government in providing
or subsidizing such service and specifying how the service could fit into
our national transportation system. As discussed above, reaching consensus
about federal policy toward intercity passenger rail has been difficult.
While the stalemate in part reflects widely divergent views of the
appropriate federal role, the debate has been stymied by the lack of
objective, rigorous exploration of the operating challenges, costs, and
distributional impacts of alternative strategies.

Prior commissions^151 and initiatives have recommended options for
restructuring intercity passenger rail service; however, their
recommendations have not been implemented. This inaction is due, in part,
to the challenges facing Amtrak as stated earlier in this report and, in
part, to a failure to reach public consensus on the recommended
restructuring approaches, which more fundamentally, requires a consensus
on the future role of intercity rail in the nation's transportation
system. Although motivated to define the federal role in intercity
passenger rail, these prior commissions and current strategic initiatives
have assumed a federal role in intercity passenger rail service without
explicitly stating what that role is, what other stakeholders' roles are,
and how that federal role will be funded.

Conclusions

If the role of intercity passenger rail is to be effectively integrated
into the national transportation system and federal support is to be
targeted to assure its performance, results and accountability, we believe
that there is a clear need to change the current structure of and the
federal role in intercity passenger rail in the United States. This change
would be consistent with GAO's position that all federal activities should
be reexamined with an eye to whether they fit in the changing world of the
21^st century. The current and future fiscal imbalance underscores the
importance of assuring that all federal programs and policies, including
those for intercity passenger rail service, are subject to reexamination,
review and possible change. The extended stalemate in developing a clear
vision for how intercity passenger rail can be a part of the national
transportation system has reflected the significant challenge in achieving
consensus. As recently reported by the CBO, in the absence of any
consensus on intercity passenger rail issues, Amtrak is likely to continue
"limping along" as it has since its inception. We agree that without any
changes to its current structure, roles, and funding, the current
intercity passenger rail structure will continue to underserve,
underinvest, and underachieve.

Consensus will be needed, in addition to legislative action--both in the
short and long term--to improve the focus, performance, and sustainability
of federal support for intercity passenger rail. Development of a national
passenger rail policy to guide investments of federal funds should have: a
clearly defined federal role, outcome-based policy goals, an approach to
financing that stimulates investment by others commensurate with their
benefits, and appropriate accountability mechanisms. The current U.S.
intercity passenger rail structure meets none of these criteria--it does
not have clear transportation related goals, the roles of stakeholders
have grown haphazardly over time, federal funding is not based on cost
sharing and not focused on maximizing public benefits, and its results are
not outcome-based. With regard to its accountability and financial
reporting, Amtrak is not subject to the same basic requirements for
financial reporting, internal control and governance that are typically
required of federal entities or public companies.

Recommendations for Executive Action

To improve Amtrak's financial and internal control reporting and overall
accountability, we recommend that the president of Amtrak:

Immediately take steps to evaluate Amtrak's accountability--particularly
its financial reporting, internal control, and governance practices--and
formulate a plan to bring the financial reporting, internal control, and
governance practices in-line with the basic requirements that federal
entities or public companies practice, while also identifying
opportunities to improve and streamline current reporting practices. The
evaluation should include a comparison of Amtrak's current accountability
requirements and practices to those of federal entities as well as public
companies. This evaluation should serve as the basis for the formulation
of Amtrak's plan to bring Amtrak's financial reporting, internal control,
and governance practices in-line with the basic requirements that federal
entities and public companies practice, based on a determination of which
practices are most appropriate given Amtrak's overall mission, funding
sources, and current situation. The plan should include developing
management discussion and analysis as part of its annual financial
reporting and developing management's assessment of internal control over
financial reporting, while identifying opportunities to streamline other
reporting practices. The plan should be submitted to Amtrak's
Congressional oversight committees.

Matter for Congressional Consideration

In order to address longer term needs to maximize the transportation
benefits and public benefits of intercity passenger rail service and any
federal funds expended on this service, we recommend that Congress
consider restructuring the approach for the provision of intercity
passenger rail service in the United States. Only Congress can provide the
national vision and has the authority to put in place a wide-ranging
restructuring effort. This restructuring should include establishing clear
goals for the system, defining the roles for states and the federal
government, if any, commuter rail agencies, freight railroads and other
stakeholders, focusing expenditures where they will achieve the most
public benefits, and developing funding mechanisms that include cost
sharing between the government and beneficiaries.

In undertaking this restructuring, it will be important to solicit input
from all stakeholders, particularly DOT and FRA given their responsibility
for transportation and rail matters. Evaluation of restructuring
approaches should also consider the relationship between passenger and
freight railroads and give due consideration to the national freight
transportation policy being developed by DOT. Due to the complex nature of
intercity passenger rail issues and the wide diversity of views about the
future of intercity passenger rail service, an independent and properly
designed commission may be an effective mechanism for developing a
consensus over the future of intercity passenger rail service and helping
determine a restructuring approach.

By addressing the key reform elements, Congress can create a structure
that not only efficiently and effectively serves travelers but also
promotes performance and accountability and the chance for increased
transportation and public benefits from federal expenditures for intercity
passenger rail.

Agency Comments and Our Evaluation

We provided copies of the draft report to Amtrak and DOT for comment prior
to finalizing the report. Amtrak provided its comments in a letter from
its president and chief executive officer (see app. VIII). In general,
Amtrak did not take an overall position on the report or the Matter for
Congressional Consideration. However, Amtrak agreed that intercity
passenger rail in the United States has come to a critical juncture and
that a national dialogue about the future direction of rail service is
needed. Amtrak also said that the three key elements to comprehensive
reform of intercity passenger rail are establishing clearly defined
national policy goals, clearly defining government and stakeholder roles,
and establishing committed funding. Finally, Amtrak commented that a more
efficient, improved, and expanded intercity passenger rail service can
play an important role in relieving congestion, both in the air and on the
highways, and that rail has unique advantages compared to other transport
modes. We agree and our report discusses the importance of the three key
elements of reform and the role they have played in reform efforts in
foreign countries. We also agree that intercity passenger rail can play an
important role in the nation's transportation system. For this reason, as
well as the fact that intercity passenger rail service does not currently
provide the most transportation benefits and public benefits that it can
and the growing federal fiscal challenges, it is more important than ever
for serious efforts to begin on identifying how intercity passenger rail
service can be restructured to focus on its comparative advantages. We
believe that success of this restructuring effort can best be achieved in
the context of national policies and goals for intercity passenger
rail--goals that are performance and outcome based. In addition, all
relevant stakeholders need to participate and realistic assessments need
to be made of potentially available funds for sustaining the restructured
system. It will be very difficult to maximize the transportation benefits
and public benefits of intercity passenger rail service without these
foundations.

In response to our recommendation that Amtrak evaluate its
accountability--particularly its financial reporting, internal control,
and governance practices--Amtrak offered comments about specific steps
that could be taken in that regard. For instance, Amtrak agreed that
creating a Management Discussion & Analysis with its annual audited
financials is reasonable and could help the uninformed readers understand
the results and trends. Amtrak took exception with other examples of
oversight such as the CEO and CFO certifying Amtrak's financial statements
similar to those done under Section 302 of Sarbanes-Oxley Act. However,
our recommendation notes some general steps that Amtrak needs to take in
order to evaluate Amtrak's current accountability practices in order to
formulate a plan to bring Amtrak's practices in-line with the basic
practices of federal entities or public companies, while identifying
opportunities to streamline Amtrak's current reporting practices. In its
response, Amtrak did not specifically address our recommendation to
conduct such an evaluation for purposes of formulating a plan. Therefore,
we have included additional information to our recommendation further
elaborating on the objectives of the evaluation and the formulation of a
plan to bring Amtrak's practices in-line with the basic practices of
federal entities and public companies.

In its comments, Amtrak also pointed out that among the Federal Railroad
Administration, the Department of Transportation Inspector General's
office and the independent Amtrak Inspector General's office they have
three existing oversight agencies that oversee Amtrak on a monthly,
quarterly and annual basis and increasing oversight by adding the
Securities and Exchange Commission seems an unnecessary use of federal
funds with little real benefit for stakeholders. While we recognize that
Amtrak is subject to oversight already, we believe there are opportunities
to improve reporting practices, while identifying opportunities for
potential streamlining of Amtrak's current reporting and related
oversight. These opportunities should be considered as part of the
evaluation of Amtrak's current accountability requirements and practices.

Amtrak also commented on a number of other issues. These included (1) the
Amtrak deficit, (2) passenger revenues, (3) public benefits of Amtrak
services, (4) state corridors, and (5) freight railroad impacts. These
comments and our evaluation can be found in appendix VIII. Finally, Amtrak
offered technical comments that we incorporated where appropriate.

DOT provided its comments in an e-mail message on October 12, 2006. The
department did not indicate agreement or disagreement with the report or
its recommendations but primarily provided technical comments that we
incorporated where appropriate. However, the department did observe that
effectively targeting federal funds where they may achieve the greatest
level of public benefits is not one of the existing goals for Amtrak. The
department also commented that it has never been FRA's role to "establish
a vision for intercity passenger rail" regardless of resources that might
be available to the agency. While we recognize that FRA's involvement with
and oversight of Amtrak has increased in recent years, our report makes it
clear that, as currently structured, intercity passenger rail does not
maximize either transportation benefits or public benefits for federal
funds expended. Although Congress will play the key role in establishing a
national vision for intercity passenger rail service and putting in place
a structure for maximizing the benefits from this service, we believe
executive branch leadership, particularly from DOT as being responsible
for transportation issues and FRA for rail matters, would be helpful in
establishing this vision. DOT and FRA leadership will also be essential
for identifying the optimum structure for meeting this vision and the role
stakeholders will be expected to play within this structure, as well as in
identifying potential funding sources to ensure sustainability of the
system. Such leadership and participation by these agencies will be even
more important in light of the growing fiscal challenges faced by the
federal government and the resulting constraints these challenges will
place on resources provided to all modes of transportation.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 14 days from
the report date. We will then send copies to other appropriate
congressional committees, the President of Amtrak, the Secretary of
Transportation, the Administrator of the Federal Railroad Administration,
and the Director, Office of Management and Budget. 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 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 Office of Congressional Relations and Public Affairs Office may be
found on the last page of this report. GAO staff that made major
contributions to this report are listed in appendix IX.

Sincerely yours,

JayEtta Z. Hecker
Director
Physical Infrastructure Issues

Appendix I
Scope and Methodology

Our work was focused on identifying the critical issues and options that
Congress could consider in providing more cost-effective intercity
passenger rail. In particular, we focused on: (1) the characteristics of
the U.S. intercity passenger rail system and the value and benefits
provided by this system, (2) foreign experiences with passenger rail
reform and lessons learned for the United States, (3) how well the United
States is positioned to reform intercity passenger rail, (4) challenges
that must be addressed in any reform efforts, and (5) potential options
for the federal role in intercity passenger rail. Our scope was primarily
limited to identifying the financial characteristics and other
characteristics of the U.S. intercity passenger rail system from fiscal
years 2001 to 2005. In reviewing route-related information, it was not the
intent of our work to suggest that any particular routes or services be
retained or eliminated. Similarly, in reviewing potential options for the
federal role in intercity passenger rail it was not our intent to suggest
that any particular option should be selected over any other option.
Rather, the scope of our work was intended to identify a series of options
that might exist for addressing the future federal role in intercity
passenger rail service.

To determine the characteristics of the current U.S. intercity passenger
rail system we collected information on all of the National Railroad
Passenger Corporation's (Amtrak) routes, including ridership, revenues and
costs, federal grants and state payments to Amtrak, and on-time
performance for fiscal years 2000 through 2005. We also gathered and
analyzed data provided by Amtrak to determine passenger demographics,
connectivity between routes, and the potential transportation benefits and
public benefits provided by Amtrak's different route types. We utilized
route ridership data provided by Amtrak from their "data warehouse"
database. To assess the reliability of this data and address discrepancies
from figures reported in Amtrak's Route Profitability System (RPS), we
conducted interviews with Amtrak officials and assessed the methodology
used to develop this database. Based on this assessment, we determined
that the data were sufficiently reliable for our purposes. To evaluate the
financial performance of Amtrak's routes, we utilized information from the
RPS database. Due to previously identified concerns regarding the
reliability of this database, we conducted an interview with Amtrak's
Chief Financial Officer, reviewed documentation of RPS's sources and
methodology, and compared route-related financial information to Amtrak's
"data warehouse" database to determine any major discrepancies. While
these databases exhibit some variation due to the reporting format and
source information, we determined that the financial information provided
by the RPS database was sufficiently reliable to illustrate aggregate
route-related costs, and general trends between Amtrak's different route
types, for the purposes of this report. For the purposes of reporting
on-time performance we utilized data provided by Amtrak. We compared these
figures to other reports issued by Amtrak and the Department of
Transportation (DOT) and determined that the data were sufficiently
reliable for our purposes. To determine passenger demographic information,
we utilized survey data for all long-distance routes and select corridor
routes in the Northeast and California in 2004 and 2005; these data were
provided by Amtrak and collected by a third party contractor to Amtrak. We
did not independently determine the accuracy or precision of Amtrak's
survey estimates, however, based on our understanding of the overall
survey methodology, we determined that the estimates were sufficiently
reliable for our purposes in illustrating general demographic differences
in riders across route types. Finally, to identify potential
transportation benefits and public benefits provided by intercity
passenger rail, we spoke with officials in five states;^1 private
transportation companies; and transportation officials in several foreign
countries. We also reviewed our previous work and reports issued by the
Congressional Budget Office (CBO), Congressional Research Service, the
Bureau of Transportation Statistics, the American Association of State
Highway and Transportation Officials, and statements by officials at DOT.

To learn about foreign experiences with passenger rail restructuring and
lessons learned for the United States, we collected data on several
foreign countries that have reformed their intercity passenger rail
system. This data included reports from the World Bank, the European
Commission, the Congressional Research Service, as well as reports drafted
by several private consulting firms at the request of the European Union.
We conducted interviews with World Bank and European Commission officials,
and using these reports and interviews, we developed criteria for
selecting countries for site visits. These criteria included: the extent
of rail privatization or competition introduced, geographic
characteristics, market characteristics, national funding levels and
sources, and the legislative regulatory environment. We reviewed data for
Australia, Canada, France, Germany, Japan, Sweden, and the United Kingdom
(U.K.). Five countries--Canada, France, Germany, Japan, and the U.K.--were
all selected because they represented a wide range of reform experiences,
and implemented a variety of approaches in reforming their systems. We
conducted site visits to these countries, which included interviews with
the Ministries of Transport for each of these countries. We also
interviewed the primary rail operators in Canada, France, Germany, and
Japan. In the U.K. we conducted interviews with one train operator, as
well as the Association of Train Operating Companies. In France, Germany,
the U.K., and Japan we also met with the infrastructure managers.
Additionally, we met with other rail industry groups, such as Angel Trains
and HSBC (rolling stock leasing companies) in the U.K., and the Paris Ile
de France Public Transport Authority.

To determine the extent to which the United States is positioned to reform
intercity passenger rail we analyzed the information we learned from the
experiences of the five countries described above, and reviewed statutes
related to intercity passenger rail, historical information on federal
grants requested by and provided to Amtrak, government and association
reports on Amtrak, and our past reports on various issues (including
reports on Amtrak's management, commuter rail issues, and funding for
other modes of transportation). We used the three key lessons learned from
the five countries as our criteria for assessing how well the United
States is positioned to reform intercity passenger rail; these criteria
were (1) clearly defining national policy goals; (2) clearly defining the
various roles and responsibilities of all government entities involved;
and (3) establishing consistent committed funding for intercity passenger
rail. For example, we compared the current U.S. intercity passenger rail
policy to policies formed in other countries during the process of reform.
A limitation of our assessment is that we only focused on comparing the
United States to five countries with relatively different compositions in
railroad infrastructure ownership, freight and passenger railroad markets,
geography, and demographics. To determine the extent to which Amtrak's
efforts address the three criteria, we obtained and analyzed a list of
planned and under-way initiatives from Amtrak. We also reviewed Amtrak's
April 2005 Strategic Reform Initiatives, congressional hearings on
intercity passenger rail, and DOT's financial study on Amtrak's
initiatives. In addition, we interviewed Amtrak officials about the status
of reform initiatives and intercity passenger rail reform in general.

To address the challenges associated with addressing reform elements we
reviewed pertinent legislation related to federal involvement with Amtrak
and intercity passenger rail issues. We also reviewed various legislative
proposals that have been introduced in recent years addressing intercity
passenger rail issues and reviewed Amtrak's April 2005 Strategic Reform
Initiatives to identify the wide diversity of views on what intercity
passenger rail service can and should be. We also obtained data from
Amtrak showing state payments in fiscal year 2005 for additional passenger
rail service and state contributions for capital improvement projects. We
reviewed our previous reports addressing, among other things,
infrastructure access and workforce issues, as well as Amtrak management
and performance issues. We also reviewed reports from the CBO and the
Department of Energy, and testimony from the Association of American
Railroads on infrastructure capacity issues. As part of our work we
solicited information from both Amtrak and selected commuter railroads
about infrastructure access and liability costs.^2 We used the types and
amounts of costs incurred by Amtrak and the commuter railroads to develop
a comparison that highlights the differences between Amtrak's access
agreements and access agreements negotiated under commercial arrangements.
We did not perform a quantitative analysis of the differences in access
charges between Amtrak and commuter railroads. Rather, our focus was
limited to a qualitative description of the types and ranges of costs.
Finally, we interviewed officials from Amtrak, the Federal Railroad
Administration (FRA), state departments of transportation, rail labor
unions, and freight railroads about issues they see in addressing the
potential reform of intercity passenger rail. We also interviewed
officials from the Appalachian Regional Commission about the structure of
the organization, how it is governed, and the potential application of
this federal-state governance structure to intercity passenger rail
service.

To address future intercity passenger rail options, we reviewed pertinent
legislation and our past reports, along with reports from the World Bank,
the DOT Inspector General, the CBO, and the Congressional Research
Service. We also interviewed railroad and government officials in the
United States and the countries we visited. We reviewed the reports of
various commissions including: the House Committee on Transportation and
Infrastructure's Working Group on Intercity Passenger Rail, the Amtrak
Reform Council, the President's Commission on the United States Postal
Service, and the National Commission of Social Security Reform. The
criteria for a fundamental reexamination of the federal role were
developed in our report on 21st Century Challenges, and the framework to
guide the implementation of the options was reported in several of our
previous reports and testimonies.

Our work was conducted from January 2006 to October 2006 in accordance
with generally accepted government auditing standards.

Appendix II
Selected Performance Characteristics of Amtrak Long-Distance and Corridor
Routes

The following are selected performance characteristics of Amtrak's long
distance and corridor routes.

Table 6: Coach Class versus Sleeper Class: Net Loss per Passenger, Fiscal
Year 2004

                                        

                           Operating          Fully-allocated 
                             basis                basis^a     
                               Coach Sleepers                  Coach Sleepers 
Sunset Limited               $286     $366                   $416     $627 
Crescent                      114      330                    194      552 
Southwest Chief               198      307                    279      484 
Silver Service                 99      244                    168      439 
Cardinal                      129      238                    175      420 
California Zephyr             140      234                    202      416 
Lake Shore Limited            106      225                    195      379 
City of New Orleans            88      217                    165      352 
Capitol Limited               112      208                    159      321 
Texas Eagle                   111      198                    132      311 
Coast Starlight                81      157                    139      290 
Empire Builder                 94      154                    126      283 
Auto Train                     26      124                    117      269 
Average loss per           $121.8   $230.9                 $189.8   $395.6 
passenger                                                                  

Source: DOT OIG analysis of Amtrak Fiscal Year 2004 data.

^a "Fully-allocated" loss includes capital depreciation and interest
expenses.

Table 7: On-Time Performance of Long-Distance Trains, Fiscal Year 2005

                                        

            Routes                 Percent on-time       Average minutes late 
Auto Train                                37.7%                         80 
California Zephyr                          24.4                        158 
Capitol Limited                            26.4                         90 
Cardinal                                   38.0                         89 
City of New Orleans                        83.0                         21 
Coast Starlight                            23.3                        173 
Crescent                                   57.3                         48 
Empire Builder                             68.3                         39 
Lake Shore Ltd.                            20.3                         99 
Silver Service                             25.9                        120 
Southwest Chief                            71.6                         37 
Sunset Limited                              7.1                        300 
Texas Eagle                                53.1                         60 
Three Rivers                              58.6%                         54 

Table 8: List of States with Corridor Services, Fiscal Year 2005

                                        

California                           New York                              
                                                                              
Pacific Surfliner                    Empire                                
                                                                              
Capitols                             Adirondack                            
                                                                              
San Joaquins                         Ethan Allen                           
                                                                              
Connecticut                          North Carolina                        
                                                                              
New Haven-Springfield                Carolinian                            
                                                                              
Indiana                              Piedmont                              
                                                                              
Hoosier State                        Oklahoma                              
                                                                              
Wolverine                            Heartland Flyer                       
                                                                              
Illinois                             Oregon                                
                                                                              
Chicago-St. Louis                    Cascades (with Washington)            
                                                                              
Illini                               Pennsylvania                          
                                                                              
Illinois Zephyr                      Keystone                              
                                                                              
Hiawatha (with Wisconsin)            Pennsylvanian                         
                                                                              
Maine                                Texas                                 
                                                                              
The Downeaster                       Heartland Flyer                       
                                                                              
Massachusetts                        Washington                            
                                                                              
The Downeaster                       Cascades (with Oregon)                
                                                                              
New Haven-Springfield                Wisconsin                             
                                                                              
Michigan                             Hiawatha (with Illinois)              
                                                                              
Wolverine                            Vermont                               
                                                                              
Blue Water                           Ethan Allen                           
                                                                              
Pere Marquette                       Vermonter                             
                                                                              
Missouri                             Virginia                              
                                                                              
Kansas City-St. Louis                Carolinian                            
                                                                              
Chicago-St. Louis                    Washington-Newport News               
                                                                              
New Hampshire                                                              
                                                                              
The Downeaster                                                             
                                                                              
Vermonter                                                                  

Source: Amtrak.

Note: The Hoosier State service between Indianapolis and Chicago is
currently classified by Amtrak as a corridor route but was not included in
the original DOT analysis. Does not include Regional and Keystone service
on Boston-Washington NEC Spine. Illinois listing does not include routes
that serve only Chicago. Texas has recently indicated that it will begin
funding Heartland Flyer service.

Figure 15: Amtrak's Market Share Compared to Air Services for Selected
Origins and Destinations

Figure 16: Amtrak's Route System--1971

Appendix III
Reform Overviews in Five Site Visit Countries

The following is an overview of the five countries we visited as part of
this review.

Canada

Background

Reformation of Canada's intercity passenger rail system initially took
place in 1978 with the creation of VIA Rail, a state-owned corporation.
Prior to this, both the passenger and freight rail systems were integrated
and service was provided by two companies, Canadian National Railway and
Canadian Pacific Railway. While there has been no major organizational
changes since its creation, VIA Rail was subject to several national
policy actions throughout the 1990s leading to significant changes in how
the rail operator conducted its business, in addition to the changes in
the amount of funding it receives.

    Snapshot of the Canadian Rail System                                      
                                                                              
    oMonopoly state owned operator, VIA Rail.                                 
                                                                              
    oAlmost all infrastructure is owned by two freight rail companies.        
                                                                              
    oOperating subsidies are consistent from year to year in order to force   
    efficiencies and enable better planning for VIA Rail's management.        
                                                                              
    oVIA's corporate plan is approved annually by the federal cabinet.        

Operations

The primary provider of intercity passenger rail operations in Canada is
VIA Rail, a government-owned corporation with shares held solely by the
Canadian government. However, the government agency, Transport Canada, is
responsible for overseeing VIA Rail. VIA Rail operates almost all of the
intercity corridor and long-distance routes throughout Canada, and has
some flexibility in setting its routes and services: however, all route
and service changes must be approved by Transport Canada, the Canadian
Minister of Transport, and the Canadian government. The majority of VIA
Rail's usage occurs on a corridor that runs between Quebec City, Quebec,
and Windsor, Ontario. (This corridor is in the southeast part of the
country, and shares similarities with the Amtrak's Northeast Corridor, but
with a lower population density.) Similar to the United States, Canada's
long-distance routes operated with higher losses than the corridor
service, and because of this in 1992 a reevaluation of the Canadian (a
long-distance train which runs across the country from Toronto, Ontario,
to Vancouver, British Columbia) was conducted. Analysis of this route
revealed that it was primarily serving a leisure/tourist market, and a
decision was made to transition service on the Canadian to a luxury train
offering "premium service at a premium price" along with its coach
service. In addition, cutbacks in all cost categories and labor
renegotiations, combined with substantial revenue growth, allowed VIA Rail
to operate more efficiently within its budget.

Infrastructure

VIA Rail does not own most of the tracks on which it operates, and similar
to Amtrak, operates on private tracks owned by freight rail.^1 VIA Rail
does not have any statutory guarantee of access to tracks, and must
negotiate access agreements with the freight operators. Current access
agreements with freight railroads are 10-year agreements and are set to
expire in 2008. VIA Rail owns and maintain most of its stations.

Funding and Debt

VIA Rail receives an annual subsidy from the Canadian Parliament.
Currently VIA Rail receives about $170 million (CAD) annually to support
its rail operations.^2 In 1991, the Canadian government began informally
capping the subsidy received by VIA Rail. The subsidy at the time was $350
million (CAD)^3 and, due to governmentwide cost cutting, was gradually
reduced to its current level. Despite the decrease in its subsidy, VIA
Rail did not make any reductions in its service offerings--it concentrated
on improving customer service while reducing costs through more efficient
management, instead. This operating subsidy does not include funds for
capital improvements. VIA Rail does not receive a capital subsidy each
year, but instead must request special capital subsidies from Parliament.

The last funding it received for capital improvements was in 2000 for $400
million (CAD)  ^4 to replace locomotives and rolling stock, and to perform
work on its Montreal, Quebec-Ottawa, Ontario, line. VIA Rail has no
authority to issue debt instruments, or to go into the debt market to fund
rail operations. Any attempt to do this would require permission from
Transport Canada, the Minister of Transport, and the Minister of Finance.
At the time of its creation, VIA Rail did not have any debt, and currently
has no authority to issue debt instruments or to go into the debt market
to raise funds.

France

Background

The French intercity passenger rail system was reformed in 1997 in order
to create an infrastructure manager distinct from the national operator
and address the financial crisis that had been created by the fully
integrated intercity passenger rail system. The monopoly intercity
passenger rail operator in France is Societe Nationale des Chemins de Fer
Franc,ais (SNCF), a public company with 100 percent of its assets owned by
the state. Until the 1997 reform, SNCF was responsible for both intercity
passenger rail operations, as well as for managing the country's rail
infrastructure. During the reform, Reseau Ferre de France (RFF) was
created to take over management of the infrastructure. RFF is also a
public company with 100 percent of its assets owned by the state.

Operations

SNCF is the monopoly intercity passenger rail operator in France. SNCF
primarily provides intercity rail service through contracts with 20
geographical regions of France. At the time of the 1997 reform, the French
government began experimenting with regionalization of its intercity
passenger rail system. Through this experiment six geographic regions were
provided with subsidies so that intercity passenger rail needs could be
purchased from SNCF. This was successful, and, as of 2002, 20 regions in
France are given direct subsidies to purchase intercity passenger rail
service. This allows the regions to enter into contracts with SNCF for the
appropriate quantity and frequency of service needed to meet the unique
characteristics of the region's passengers. In addition to operating
passenger rail services, SNCF provides infrastructure management services
under contract with RFF. SNCF performs traffic management on the national
network, and operates and maintains the national safety system.

Infrastructure

RFF was created through the reform in order to establish an infrastructure
manager separate from the national operator. This was intended to clarify
the responsibilities and costs for rail infrastructure in France. All rail
infrastructure is owned by RFF, and it was given the mission of ensuring
coherence of the French rail network through improving existing lines,
developing the network through building new lines, and enhancing the
network by selling land property and lines not in use. RFF's main sources
of income are access charges for use of the rail network, income relative
to land properties included in the network, and a state subsidy. As part
of the creation of RFF, two-thirds of the former SNCF's debt was
transferred to RFF in exchange for SNCF's infrastructure assets (31,000 km
of track).^5

Funding and Debt

Funding for both RFF and SNCF is provided by the French Ministry for
Transport. The state provides about 7.5EUR billion^6 to subsidize the rail
system each year including 2EUR billion^7 to France's 21 geographic
regions so that intercity passenger rail service can be purchased from
SNCF. The state provides RFF about 800EUR million^8 annually to pay off
the debt it inherited during the reform, and about 900EUR million^9 each
year to perform infrastructure renewal. The cost of track maintenance is
supported through infrastructure access fees. RFF contracts with SNCF to
perform some infrastructure management, and in 2004 RFF paid SNCF 2.6EUR
billion (approximately $3.2 billion (USD))^10 for its services. SNCF pays
RFF access fees in order to operate its trains on RFF tracks, and in 2004
it paid 2.16EUR billion (approximately $2.6 billion (USD))^11 in access
fees. Since the reform, these access fees have continued to increase, and
the public subsidy for infrastructure is decreasing proportionally. At the
time of the reform, SNCF was carrying about 30EUR billion in debt
(approximately $25 billion (USD)), and was operating with a 2EUR billion
(approximately $2.4 billion (USD)) deficit. 20EUR billion (approximately
$18 billion) of this debt was transferred to RFF in exchange for
infrastructure, and the remainder stayed with SNCF. RFF's debt has
stabilized since the 1997 reform, and a public financial agency for
funding transportation infrastructure was recently formed to provide
infrastructure subsidies and zero-percent interest loans for new projects.
RFF receives on average 2EUR billion annually for capital investments for
new lines and anticipates 7.5EUR billion from this agency for 2005 through
2012 (currently this is approximately $9.6 billion).

Germany

Background

In 1994, Germany implemented its first rail reform initiative.^12 Germany
began by separating its governmental and commercial rail-related tasks and
by opening its markets to competition. This was done by merging the two
preexisting national railway properties, Deutsche Bundesbahn (West
Germany) and Deutsche Reichsbahn (East Germany) into the Federal Railway
Property Agency (BEV).^13 The commercial section of BEV was then separated
and transformed into DB, a state-owned joint-stock company that acts
independently in the transport market, and includes separate business
units for both long and short distance passenger rail operations and
infrastructure management. Although DB owns the entire rail infrastructure
network in Germany, all shares of the DB infrastructure company are held
by the state. The German intercity passenger rail system is also open to
competition. Any rail operator who wants to enter the market is free to
bid on contracts to provide service, and while this has yielded a large
number of intercity passenger rail operators in Germany, DB remains the
primary operator in most markets.

    Snapshot of the German Rail System                                        
                                                                              
    oMultiple operators, market open to competition (over 300 competing       
    operators).                                                               
                                                                              
    oSingle infrastructure manager; private company that is part of a state   
    owned holding company.                                                    
                                                                              
    oNational subsidies for regional passenger rail operations are provided   
    to the Laender (the German federal states), and not directly to the       
    operators.                                                                

Operations

The German passenger rail market is open to competition, and currently
there are over 300 different operators providing rail service in Germany.
Despite this, most rail service in Germany is operated by DB. National
funding for short-distance passenger rail service is provided directly to
the Laender by the national government and the Laender then receive bids
for service from operators based on the specific needs they outline in a
request for proposal. Laender are not required to tender the service to
multiple operators, and can provide payment directly to DB for it to
continue operating preexisting service. The contracts established with
operators are generally for about 10-15 years. If the Laender want to
purchase service that exceeds the amount of the subsidy available to them,
they are welcome to do so, and can spend their own funds to do this. In
some cases, the Laender have further delegated the authority to decide
rail services to the local level. In addition to winning contracts to
provide regional service, passenger operators can provide long-distance
service at their own risk. However, long-distance rail operators are
required to pay infrastructure access fees. After reform, several of the
money-losing long-distance routes that were in existence were shut down by
DB, in compliance with public law.

Infrastructure

Most of the infrastructure in Germany is owned by DB Netz, one of DB's
corporate business units. Currently DB Netz is part of a state owned
holding company. All operators that use infrastructure in Germany pay
access fees to DB Netz, including other DB business units (freight,
commuter rail and intercity passenger rail). Currently there is ongoing
debate about transforming DB's status as a state-owned private-stock
company to a publicly traded company. The largest issue at hand is whether
or not to include DB Netz as part of the initial public offering.
According to DB officials, the company sees an advantage to including the
infrastructure in an initial public offering. Based on several reports,
government representatives also expect significant public financial
benefits from an integrated initial public offering, but some fear this
model will lessen their ability to influence infrastructure decisions.

Funding and Debt

The national government provides about 7EUR billion annually^14 to the
Laender to operate regional passenger rail. The source of this federal
subsidy is a transportation fund, which is supported by an automobile fuel
tax. DB Netz receives about 4EUR billion^15 each year in federal subsidies
in order to renew and develop new infrastructure (including stations).
About 2.5EUR billion of this goes towards maintaining the current
infrastructure, and about 1.5EUR billion goes towards renewal and new
infrastructure.^16 By establishing DB, the German government relieved it
of approximately 35EUR billion debt (approximately $38 billion at the time
of reform in 1994) and transferred the responsibility for paying and
managing this debt to BEV. About 10EUR billion per year^17 is paid to BEV
for debt relief and other administrative responsibilities (e.g.,
pensions).

Japan

Background

Reform of the Japanese rail system through privatization was initiated in
1987. Before reform, the Japanese railway was a fully integrated
state-owned monolithic railway entity, Japan National Railways, which
operated at considerable cost to the government and carried extensive
debt. After reform, Japan kept its intercity passenger rail system
vertically integrated, that is, it did not separate out operations from
infrastructure, but instead it divided the system geographically, and
created separate private intercity passenger railways for the country
based on six distinct geographic regions (and a separate company for
freight rail). The government also assumed the majority of the debt for
the preexisting state-owned system, which at about $300 billion was a
substantial sum.

    Snapshot of Japanese Rail System                                          
                                                                              
    oVertically integrated operations and infrastructure; market split into   
    six geographic regions.                                                   
                                                                              
    oEach region has its own rail company.                                    
                                                                              
    oDebt of pre-existing state owned railway divided among three largest     
    passenger rail companies, JR Freight, Shinkansen Holding Corporation, and 
    JNR Settlement Corporation.                                               
                                                                              
    oThree largest intercity passenger rail companies are fully private,      
    while government supports the other three.                                

Operations

After the reform, the fully integrated state owned operator, Japan
National Rail, was broken up into six passenger rail entities based on six
geographic regions. Three of these regions are on the mainland (JR East,
JR Central, and JR West) and the other three are each on an island (JR
Hokkaido, JR Shikoku, and JR Kyushu). A freight company was also created
to serve the entire country. Each of these six passenger rail operations
are vertically integrated, that is within each rail company infrastructure
and operations are both managed by the same company. The three companies
on the mainland are fully privatized, and do not receive any financial
assistance from the government. The other three passenger companies have
not yet reached a point where they are financially independent from the
state.

Infrastructure

The six passenger railway companies own their own tracks and JR Freight
has legal access to the JR's tracks at marginal or incremental cost. In
1991, JR West, East and Central purchased their tracks from the Shinkansen
Holding Company and the proceeds went toward paying down the company's
portion of Japan National Railway's long term debt. The Japan National
Railway developed an implementation plan for its division that included
how much land was needed for each railroad, which was approved by the
Ministry of Land, Infrastructure and Transport. The companies were then
given existing stations and offices from the old Japan National Railway.
Some of the non-railroad-oriented land was retained by the Japan National
Railway Settlement Corporation because it was not needed by the new
railroads for operations. JR Freight pays a relatively low
state-determined access fee for using the tracks of the other passenger
railroads. Japan also has Shinkansen (high-speed) lines that connect most
of the highly populated cities. The Japan Railway Construction,
Transportation, and Technology Agency builds new Shinkansen lines; it also
holds title to some existing Shinkansen lines and leases them to the
passenger railroads for high-speed train operations.

Funding and Debt

When reform occurred in 1987, the Japanese government provided a one-time
Business Stabilization Fund, which provided funding for three passenger
railroads that were not yet privatized and needed subsidies to survive. JR
Hokkaido was given YEN682 billion,  ^18 JR Shikoku was given YEN208
billion,^19 and JR Kyushu was given about YEN388 billion.^20 These three
railroads were allowed to invest these funds and use any money made from
them for operations and capital improvements. However, they were not
allowed to draw down any principal--only the profits or interest from
investments. Therefore, currently the three companies have maintained the
original amounts given to them by the state in 1987. However, the
performance of the fund has been declining as Japanese interest rates have
declined since the establishment of the fund. It is not clear what will
happen to these amounts if any of these three companies are fully
privatized at a later date. However, Japanese Board of Audit officials
feel that it will be a long time, if ever, before the three companies are
financially able to achieve privatization. Of these three passenger
railroads, only JR Kyushu is given a reasonable chance of achieving the
financial stability necessary to privatize.

There are two other forms of assistance to JR Hokkaido, JR Shikoku, and JR
Kyushu. A guaranteed interest rate was offered for the stabilization fund
that was higher than the market rate available to the three mainland JR's.
The government reduced the tax rate on fixed railroad assets as well. In
addition, at the time of reform, the Japan National Railways had
accumulated about YEN37 trillion^21 of long-term debt. About YEN25.5
trillion^22 was placed with a newly created entity, called the Japan
National Railways Settlement Corporation, and the remaining debt was
distributed among the three mainland railroads, JR Freight, and the
Shinkansen Holding Company. The state government determined the debt
allocation, apparently on the basis of expected future profits of each
entity. The Hokkaido, Shikoku, and Kyushu railroads were not allocated any
of this debt because of their more precarious financial positions.

The United Kingdom

Background

The U.K. began its major reform in 1993 in an effort to privatize its rail
system, and then undertook another significant restructuring effort in its
2004. The 1993 reform took place over 5 years and involved radical
restructuring. The preexisting monolith, British Railways, was broken up
into many pieces, including a private infrastructure company, Railtrack,
which was replaced in 2002 with Network Rail, over 20 train operating
companies, three rolling stock ownership and leasing companies, and three
government regulators (currently there is only one entity, the Office of
Rail Regulations). In 2004, the U.K. restructured again to restore the
long-term efficiency and keep the affordability of rail within the level
of public expenditures defined by the British government, as well as to
recover performance levels, maintain high standards of safety, and enable
the industry to meet its customers' needs.

    Snapshot of the U.K. Rail System                                          
                                                                              
    oMultiple operators; market split into franchises which are open to       
    competition.                                                              
                                                                              
    oSingle infrastructure manager; owned "members" consisting of             
    representatives from a range of industry interests.                       
                                                                              
    oBritish Rail's rolling stock was divided between the three rolling stock 
    ownership and leasing companies and is available for lease to interested  
    operators.                                                                
                                                                              
    oThe national government was unable to completely exit the industry, and  
    mainly plays a role in setting the strategic direction for the railways.  

Operations

After the initial reform effort, intercity passenger rail operations were
no longer conducted by British Railways but were instead turned over to
the private sector. The rail network was broken up into different
franchises, and private operators were permitted to bid on franchises for
the provision of services. These operators are essentially private
companies that enter into franchise agreements with the government, where
the government will subsidize unprofitable service or receive a premium
for services that see excess profits. In addition, these operators pay
access fees to the infrastructure manager in order to access the tracks,
and the U.K. government adjusts subsides paid to, or premium received
from, operators to compensate for any change to the fixed access charge
made by the independent regulator.

Infrastructure

Rail infrastructure in the U.K. is currently all managed by Network Rail.
Network Rail is a private corporation, run by a board of directors, and
overseen by more than 100 members of the railroad industry and some
members of the general public. The members do not have day-to-day
responsibilities for making management decisions, but they do elect and
dismiss the board of directors, approve the long-term remuneration of
board members, approve Networks Rail's annual report, and approve specific
resolutions put forth before the membership. Network Rail was not the
first infrastructure company formed after the U.K.'s reform. At the time
of reform, a private for-profit corporation, Railtrack, was established to
own and manage all of the U.K.'s infrastructure. In 2001, Railtrack went
bankrupt, and Network Rail's bid to take over Railtrack was accepted; it
then assumed control over the infrastructure in 2002. Currently, Network
Rail earns income from three sources--network access fees paid by the
operators (and which are set by the Office of Rail Regulation), direct
government grants, and other income such as commercial property.

Funding and Debt

Although privatized, the intercity passenger rail system in the U.K.
receives operating subsidies from the government. Generally about 50
percent of all costs are covered through public subsidies, but U.K.
government officials expect this percentage to fall in the future. Total
debt for Network Rail is currently at -L-18 billion and is projected to
peak at -L-21 billion between 2008-2009.^23 This debt did not exist at the
time of reform, and was incurred through paying for enhancements to its
regulatory asset base. Network Rail also assumed -L-8 billion^24 of this
debt from Railtrack.

Appendix IV
Current Amtrak Reform Efforts 

In April 2005, Amtrak's board of directors and management proposed a set
of broad strategic reform initiatives. Since the release of these
initiatives, Amtrak formed a new planning and analysis department to
manage the strategic reform initiative plan and implementation, among
other duties (such as developing a capital and asset plan). Thus far, 15
operational initiatives have been developed, which are described as either
corporate or business-line initiatives (see table 9). Recently, to further
develop these initiatives, Amtrak has begun to refine the structure of
these initiatives into five issue areas: (1) business efficiencies, (2)
service levels, (3) cost recovery, (4) labor, and (5) legislative.
According to Amtrak, most of the 15 initiatives will fall into the
business efficiency category, which the company views as having greater
control over. The labor, long-distance, corridor, and infrastructure
initiatives will fall within more than one of the categories, and full
implementation of these initiatives would require legislative action. In
addition, initiatives associated with each of the train operations
business lines (long distance, NEC, and state corridor) will fall under
all five categories.

Amtrak's 15 initiatives are largely designed to reduce costs, increase
revenue, and improve its financial reporting. Among the initiatives Amtrak
has planned or undertaken to reduce costs is the overhead function
initiative, which it estimates will save $5.1 million in fiscal year 2006
through reductions in outside legal fees, software, and communications
costs. The NEC operations initiative is designed to increase revenue,
partly through the implementation of revenue management on NEC's Regional
Service, by charging variable rates.^1 The management information
initiative calls for reforming how Amtrak currently reports financial and
operating information. Amtrak's Chief Financial Officer told us that
reports to management will focus more on performance outcomes, such as
performance per passenger mile. In addition, Amtrak is in the process of
developing a new cost-accounting system as directed through fiscal year
2006 appropriations to improve accountability. As of May 2006, the
operational initiatives have resulted in annual savings of $46 million for
fiscal year 2006, but are expected to save $190 million a year when fully
implemented.

Table 9: Objectives and Status of Amtrak's 15 Reform Initiatives

                                        

Type of initiative          Objective                     Status           
    and description                                                           
Corporate          
Food and beverage  Enhance service flexibility, oThe contract for Gate     
                      redesign equipment, and      Gourmet, Amtrak's food     
                      outsource certain service    vendor, is being           
                                                   renegotiated. Amtrak       
                                                   expects savings of close   
                                                   to $1 million in fiscal    
                                                   year 2006.                 
                                                                              
                                                   oThe Simplified Dining     
                                                   program has been           
                                                   implemented,  which,       
                                                   through June 2006,         
                                                   resulted in savings of     
                                                   $3.7 million.^a            
                                                                              
                                                   oAmtrak is redesigning     
                                                   cars to offer continuous,  
                                                   restaurant-style dining    
                                                   service and enhanced       
                                                   customer service.          
                                                                              
                                                   oAmtrak will continue to   
                                                   monitor and evaluate       
                                                   service levels, staffing   
                                                   models, and savings,       
                                                   against goals for food and 
                                                   beverage services.         
Mechanical         Adopt reliability-centered   oAmtrak plans to evaluate  
                      maintenance, consolidate     its facility locations for 
                      facilities, and outsource    cost savings.              
                      selected activities                                     
                                                   oA review of maintenance   
                                                   requirements is under way  
                                                   to minimize costs and      
                                                   maximize reliability.      
                                                                              
                                                   oAs of July 2006, one      
                                                   maintenance service has    
                                                   been identified for        
                                                   outsourcing, but a request 
                                                   for proposal has not been  
                                                   posted.                    
Customer service   Modernize ticket issuance,   oOn July 5, 2006, Amtrak   
                      collection, and reporting    completed training and     
                      processes; and improve       deployment of service      
                      service quality measurement  managers on long-distance  
                      and delivery                 trains to create           
                                                   consistency in supervision 
                                                   of customer service        
                                                   delivery.                  
                                                                              
                                                   oAmtrak is developing an   
                                                   e-ticketing system to      
                                                   replace the paper ticket   
                                                   system and a customer      
                                                   service quality            
                                                   measurement system, and    
                                                   has begun planning for     
                                                   route/product-level        
                                                   management oversight.      
Management         Develop more accurate and    oAmtrak is in the process  
information        timely                       of evaluating its current  
                                                   financial information      
                      information on costs of      system as the initial step 
                      routes, individual           to replacing it with an    
                      activities, and functions    integrated financial       
                                                   system.                    
                                                                              
                                                   oA report on the           
                                                   activity-based management  
                                                   system project is being    
                                                   finalized.                 
                                                                              
                                                   oThe Route Profitability   
                                                   System (RPS) is being      
                                                   updated to ensure its      
                                                   reliability. Changes to    
                                                   the RPS system are         
                                                   expected to be completed   
                                                   by the end of FY 2007.     
Improve and update Address Americans with       oThe analysis of stations  
stations           Disabilities Act (ADA)       is under way to reduce     
                      compliance,                  operating cost.            
                      state-of-good-repair, and                               
                      reduce station operating     oAmtrak is currently       
                      costs                        monitoring the impact of   
                                                   staffing changes on ADA    
                                                   service to customers and   
                                                   plans to continue this     
                                                   process.                   
Call centers       Reduce ticketing costs by    oAmtrak plans to solicit   
                      reducing staffing,           vendors for proposal to    
                      increasing utilization of    outsource call center      
                      lower cost distribution      positions.                 
                      channels, and outsourcing                               
Overhead functions Reduce unit costs of         oAmtrak has planned and    
                      corporate support functions  implemented some savings   
                      through selective            through technology- and    
                      outsourcing, staffing        energy-management          
                      reductions, skills           efficiencies.              
                      development, and greater use                            
                      of technology                                           
Service            Improve on-time performance  oAmtrak officials          
reliability        of Acela and NEC trains      discussed on-time          
                      through operational          performance improvements   
                      modifications and targeted   to Acela trains with FRA   
                      investments                  for plan approval.         
Labor contracts    Reduce unit costs and        oAmtrak has been           
                      increase flexibility by      advocating legislative     
                      negotiating new labor        changes to amend the       
                      agreements that eliminate    railroad retirement-system 
                      certain work-rule and        to make Amtrak competitive 
                      outsourcing restrictions,    with other operators, but  
                      and base wages on market     as of August 2006 no       
                      levels                       legislative action has     
                                                   taken place.               
Ongoing            Enhance financial            oAmtrak has focused on     
efficiencies       performance of other         improving efficiencies in  
                      activities and functions     four areas to reduce       
                      through continued business   cost-- safety, engineering 
                      improvements (e.g.,          productivity, fuel         
                      operating crew optimization, conservation, and labor.   
                      maintenance-of-way                                      
                      productivity)                                           
Business line      
Long distance      Improve performance of all   oAmtrak completed an       
                      routes by redefining         analysis of the overall    
                      sub-brands, restructuring    performance of             
                      services/routes, selected    long-distance routes to    
                      luxury outsourcing,          identify poorly performing 
                                                   routes.                    
                      and corporate initiatives                               
                                                   oAmtrak developed a plan   
                                                   to restructure the sleeper 
                                                   service offered on         
                                                   long-distance trains to    
                                                   reduce cost. This plan     
                                                   includes evaluating new    
                                                   sleeper products and       
                                                   reconfiguring the number   
                                                   of cars.                   
                                                                              
                                                   oAmtrak developed a plan   
                                                   to evaluate Amtrak's       
                                                   entire route network,      
                                                   which will establish       
                                                   network goals, match       
                                                   structure to national      
                                                   trends, and provide        
                                                   network options.           
NEC operations     Boost financial contribution oShort-, mid-, and         
                      through improved load        long-term plans have been  
                      factors, adjusted service    developed to improve Acela 
                      patterns, re-launching       service to increase        
                      sub-brands, trip time        customer satisfaction,     
                      investments, and corporate   ridership, revenue, and    
                      initiatives                  market share.              
Corridors          Improve competitiveness of   oAmtrak launched a state   
                      state services, establish a  competition pilot project  
                      pilot competition project,   with support from FRA to   
                      and                          promote competition. As of 
                                                   July 2006, four proposals  
                      transition states to full    have been evaluated for    
                      cost recovery for all        implementation.            
                      corridor routes                                         
                                                   oAmtrak developed a plan   
                                                   to transition states to    
                                                   full operating cost        
                                                   recovery, but the plan     
                                                   hinges on legislative      
                                                   changes to funding         
                                                   structure.                 
Fleet utilization  Optimize use of fleet,       oAmtrak is developing a    
                      maximize load factors, and   multiyear fleet plan for   
                      increase revenues by making  fleet optimization.        
                      train configurations more                               
                      efficient and retiring or                               
                      redeploying excess equipment                            
Infrastructure     Develop a long-term capital  oAmtrak is developing a    
                      master plan and operate NEC  long-range plan to bring   
                      efficiently on behalf of all the corridor into a state  
                      users, while establishing a  of good repair over 20     
                      fair sharing of operating    years, which includes a    
                      and capital costs among all  long-term capital plan.    
                      users                                                   
                                                   oAmtrak has met with       
                                                   stakeholders regarding an  
                                                   advisory committee for the 
                                                   NEC.                       

Source: GAO analysis of DOT OIG and Amtrak data.

^aThe Simplified Dining program provides pre-plated meals that utilize
less labor.

Appendix V
Operational Challenges Associated with Access, Capacity, and Liability
Issues

Any effort to reform the United States' intercity passenger rail system
must recognize that there are access, capacity, liability, and workforce
issues. For instance, Amtrak benefits from a number of statutory access
rights that mask the potential capacity impacts of passenger rail service
on freight traffic. In addition, the potential liability associated with
operating passenger rail must be accounted for, as must statutory and
contractual workforce requirements. Currently, the liability framework
surrounding intercity passenger rail is complex, with statutory exceptions
and negotiated indemnification agreements altering default negligence
rules.

Infrastructure Access and Capacity Issues

Amtrak's statutory access and priority rights for intercity passenger
service--and the subsequent impact on freight capacity--is a source of
contention in the rail industry. Amtrak owns very little of the
infrastructure that it uses, and, in fact, most of the 22,000 miles of
rail lines that Amtrak uses are owned by four private, U.S.-based Class I
freight companies--CSX, Union Pacific, BNSF, and Norfolk Southern. Amtrak
has three statutory rights to privately owned rail infrastructure that no
other operator has: (1) access to tracks and facilities of railroads and
regional transportation authorities; (2) access charges at incremental
cost; and (3) priority over freight trains.

No other passenger rail service receives the benefit of statutory rights.
For instance, commuter rail agencies must negotiate with host railroads
for infrastructure access.^1 Similarly, any private operator of intercity
passenger rail in the United States would have to negotiate for access to
host-railroad infrastructure without the benefit of these statutory
rights. Because other operators do not have these statutory rights, one
state official said that his state feels "stuck" with Amtrak. This state
official said his state is frustrated because there is no real alternative
to Amtrak as long as these rights belong solely to Amtrak. The freight
railroad industry is adamantly opposed to permitting a transfer of Amtrak
access and incremental charge rights to non-Amtrak operators, which was
confirmed by officials from freight railroads with whom we spoke.

One state official told us that, without Amtrak's access rights, passenger
rail access fees are a "seller's market"--that is, freight railroads can
charge whatever they want. State officials with whom we spoke generally
estimate that Amtrak's per train-mile costs are approximately one quarter
to one half of what the freight railroads would charge another operator.
Similarly, an official from one freight railroad estimated that
infrastructure access costs for an intercity passenger rail operator
negotiating "at arm's length" would be three to four times Amtrak's
current costs, and possibly as high as ten times as much as current rates.
According to this official, even these rates would not capture the full
impact of passenger trains on freight line capacity.

While Amtrak's access costs cannot be directly compared with a competing
intercity passenger rail operator, a comparison with commuter rail access
costs is informative. According to information provided by Amtrak, on
average, Amtrak paid $1.16 per train-mile for access to freight-owned
infrastructure in fiscal year 2005.^2 In contrast, commuter rail agencies
with whom we spoke that operate primarily on freight railroad
infrastructure identified three types of access charges: per train-mile
fees, fixed-access fees, and capital contributions.^3 All of these
commuter agencies reported paying per train-mile access fees for each
line, with a range from $3.38 to $40 per train-mile. These agencies
reported paying either a one-time up front access fee or an annual access
fee for most lines as well (see table 10). In addition, all four commuter
rail agencies with whom we spoke made capital contributions to freight
infrastructure for each line, either to gain initial access to the freight
infrastructure or to expand established commuter rail operations.^4
According to Amtrak, commuter rail trains--which are concentrated in the
morning and evening weekday peak periods and have long track occupancy due
to frequent stops--require greater rail line capacity, and therefore,
impose much higher costs on the track owner than a comparable number of
intercity passenger rail trains that are spread throughout the day or
week.

Table 10: Examples of Costs Paid by Commuter Rail Agencies to Gain
Infrastructure Access

                                        

              Description             Range of cost reported by commuter rail 
                                                                     agencies 
Fixed-access fee^a                                                         
One-time, up front fee                           $4,000,000 to $23,700,000 
Annual fee                                             80,000 to 1,800,000 
Capital contribution^b                                                     
Annual capital contribution                           400,000 to 3,000,000 
Up front fee (for additional train                   60,000 to 350,000,000 
frequencies)                                                               

Source: GAO analysis of commuter rail data.

^aMost commuter rail agencies we contacted paid a one-time up front
fixed-access fee or an annual fee as part of their access agreement for
each line on which they provided service.

^bAll commuter rail agencies with whom we spoke made capital
contributions, either to gain access to freight infrastructure or to add
train frequencies.

According to several state officials, increases in intercity passenger
rail service, particularly corridor services, could conflict with freight
rail traffic for line capacity. For example, one state official stated
that the rail lines between New York City and Albany, New York, are
heavily used by freight railroads, commuter rail service, and Amtrak. Even
today this line has congestion problems, leading to delays for both
passenger and freight traffic. Desired improvements to address capacity
restrictions will cost about $700 million in capital improvements. An
official with another state, talking about the line between Washington,
D.C., and Richmond, Virginia, said that--between freight, Amtrak, and
commuter service--the amount of traffic on the corridor is increasing and
delays are becoming more common. Further, capacity constraints are causing
delays that cause dissatisfaction among riders.

Freight railroad officials have emphasized the growing challenge
associated with infrastructure capacity issues. An official at one
railroad said that, while freight traffic on his railroad had grown and
decreased capacity, nothing in the Amtrak model had changed, which he
described as increasing his railroad's subsidy to Amtrak. An official of
another railroad stated that under the current Amtrak model--with
guaranteed access to track at incremental cost--freight railroads do not
recover the lost value created when freight trains are delayed because of
passenger train priority. He also stated that the current Amtrak model
skews the incremental value of freight and passenger train slots on a line
in such a way that freight railroads cannot capture the difference in
value between low value passenger train slots and higher value freight
train slots. This official went on to say that, without new capacity,
there would be ripple effects throughout the entire freight railroad
industry as both freight and passenger railroads try to accommodate
ever-increasing traffic on a fixed-infrastructure network. He also stated
that for intercity passenger rail to be successful it must be attractive,
efficient, and reliable.

In addressing capacity issues associated with passenger rail reform it
will be important to recognize balancing public and private investment
with public and private benefits. An official with the Washington State
Department of Transportation said his state is willing to pay for capital
projects that benefit passenger rail, and that freight railroads should
pay for projects, or parts of projects, that benefit their operations.
This official said most states use the "but for" argument in determining
public rail infrastructure investments--that is, would there be a need for
investment but for the passenger rail service? Similarly, the state of
Virginia works with host railroads to fund rail projects that increase
both the freight and passenger rail capacity of privately owned rail
infrastructure in the state to achieve public benefits. As we testified in
June 2006, federal involvement with rail infrastructure should depend on
identifying wide-ranging public benefits from potential projects and
appropriately allocate the cost of financing these benefits between public
and private sectors, and, to the extent possible, focus investments that
yield national rather than just local benefits.^5

Liability against Accident Risks

In addition to the access-to-infrastructure issues, there are also
challenges associated with liability against accident and other
train-related risks. If a passenger rail accident should occur, injured
passengers may sue the transportation provider for their damages. As our
January 2004 report on commuter rail noted, freight railroads have been
traditionally sheltered from this exposure when they haul freight.^6
However, when a freight railroad allows a commuter rail service (or
intercity passenger rail service) to operate over its rights-of-way, the
freight railroad becomes exposed to these risks--as passengers may sue the
commuter rail's (or intercity passenger rail's) provider and owner of the
tracks. Consequently, freight railroads do not want to allow such service
on their rights-of-way unless they are protected from liability. Freight
railroads often use the "but for" argument for requiring passenger rail
operators to assume all risks associated with their presence--that is, but
for the presence of the service, the freight railroad would not be exposed
to certain risks and therefore should be held harmless. Freight railroad
officials have stated that they must take this position to protect their
businesses and shareholders from lawsuits. As a result, passenger rail
operators must contractually indemnify freight railroads against all
liability and obtain insurance as a guarantee that payments will be made
for any damages.

Amtrak currently has no fault liability agreements with most freight
railroads to cover risks associated with its operations. Under these
agreements, Amtrak indemnifies the host railroads against liability
resulting from any damages that occur to Amtrak passengers, equipment, or
employees regardless of fault if an Amtrak train is involved. Similarly,
the host railroads indemnify Amtrak against any liability resulting from
damages to host railroad employees and property regardless of fault.^7 At
one time, Amtrak compensated the host railroads for the risk that they
bear by paying a negotiated risk charge of 7.34 cents per train-mile to
the host railroad. Amtrak has subsequently negotiated away this charge for
all but one line. In contrast, commuter rail operators with whom we spoke
manage liability with the freight railroads their own way. In the view of
one commuter rail official, the host railroads charge his company more per
train-mile for infrastructure access that Amtrak to compensate for the
liability costs associated with commuter rail operations. Another commuter
rail official stated that in addition to the per train-mile fees, his
agency purchases an insurance policy that indemnifies the host railroads
against all liability, including gross negligence and willful misconduct.

Both railroad and state officials with whom we spoke believe liability
will be a major issue should competition for intercity passenger rail
service be introduced. Officials from all 5 states cited concerns about
liability issues, particularly the potential cost of liability coverage.
An official from one state, Washington, told us that his state would not
be able to pay for the liability coverage freight railroads would require
if Amtrak ceased operating intercity passenger rail service and this
service was taken over by the state--the cost would be too prohibitive. An
official from California also said that liability would be a significant
issue associated with competition. Besides cost, this official said
California is prohibited by law from providing full indemnification to
third parties. Consequently, any non-Amtrak passenger rail operators would
have to provide their own liability coverage that would indemnify not only
the state, but also any freight railroads they operated over. Freight
railroad operators also expressed concern about liability issues. An
official from one freight railroad said his company would not "bet the
company" on the liability risk that could exist with multiple passenger
rail operators, and that his company would expect full indemnity against
liability risks created by passenger rail operators. It would also be
expected that this indemnity be backed up with sufficient insurance
coverage similar to the arrangement this company currently has with
Amtrak. Similar sentiments were expressed by another freight railroad
official.

Recognizing the freight railroads' exposure to liability when hosting
passenger rail trains, Congress established liability provisions in the
Amtrak Reform and Accountability Act of 1997. Specifically, the act limits
the aggregate overall damages that may be awarded to all passengers for
all claims (including punitive damages) from a particular rail accident to
$200 million. The act also permits Amtrak and other providers of rail
transportation to enter into indemnification agreements allocating
financial responsibility for passenger claims arising from accidents
involving passenger rail. As we reported in January 2004, our review of
this legislation concluded that the liability cap applies to commuter rail
operations on the basis of the plain language of the statute and our
review of pertinent legislative history. Our review of the statute and
legislative history also indicates this cap would apply to non-Amtrak
providers of intercity passenger rail service. However, our report goes on
to note that there are limitations to the protections provided by the
legislation, such as the fact that the legislation does not limit damages
for claims brought by nonpassengers; in addition, the application of the
liability cap has not been tested in federal court. As a result of these
limitations many carriers are being "super cautious" in requiring high
levels of insurance.

Appendix VI
Workforce Issues Associated with Intercity Passenger Rail Reform

Efforts to reform or restructure intercity passenger rail require
consideration of workforce issues that is, having enough people with the
requisite knowledge and skills to provide the amount and type of service
called for in a restructured system. This may not be as easy as it seems.

Amtrak employees currently provide a number of services that are integral
to operation of intercity passenger rail. This includes train and engine
crews that operate trains, on-board staff such as conductors and
attendants that take tickets and arrange for sleeping accommodations, and
maintenance staff that repair equipment and maintain the rights-of-way
over which trains operate. In addition, Amtrak employees dispatch trains
and maintain communication and signal systems, among other things. Over
the last several years Amtrak has reduced its employment levels as it has
tried to control costs (see fig. 17). In fiscal year 2005, 87 percent of
Amtrak's workforce was unionized (14 unions and two councils covering a
variety of crafts and skills) and covered by collective bargaining
agreements. These employees are referred to as agreement employees. The
collective bargaining agreements specify not only wage and benefit rates
but also specific duties (defined in work rules) that employees can
perform. Between fiscal years 2001 and 2005 the number of unionized
employees decreased from 22,163 to 16,687 (a 25 percent decrease).^1 There
has also been an overall 7 percent decrease in non-union employees over
this time period, with a slight increase in the number of non-union
employees between fiscal years 2003 and 2005. While these decreases might
have benefits in terms of cost reduction, they might also limit the pool
of qualified people available to operate intercity passenger rail under a
restructuring scenario.

Figure 17: Changes in Amtrak's Union and Nonunion Workforce, Fiscal Years
2001 through 2005

Note: Amtrak labor-relations officials estimate that one-half to
two-thirds of Amtrak's total employment is dedicated to directly or
indirectly supporting long-distance services.

There are several workforce issues that will likely present challenges in
efforts to reform or restructure intercity passenger rail. These include:

oAvailability of a qualified labor pool. Reform of intercity passenger
rail that results in new services or operators will require that there be
sufficient staff to provide service, conduct maintenance, and perform
other duties related to running passenger railroads. In the short term,
obtaining sufficient staff could be a challenge. As we reported in April
2006, in the context of commuter railroad service, if Amtrak were to
abruptly cease to provide service, some commuter railroad agencies might
be able to replace Amtrak employees dedicated to their particular

commuter rail service with employees from another railroad.^2 However,
according to agency officials, a number of agencies would not be able to
quickly replace current Amtrak employees because of workforce limitations,
such as the availability of a qualified labor pool. In part, this is
because of strains on the current workforce due to growth in the demand
for freight rail transportation.^3 In addition, it was estimated that it
could take months to train replacements if Amtrak train crews were
unavailable. Over the short term it is feasible that a restructuring that
resulted in new intercity passenger rail services could face a shortage of
qualified employees if (1) Amtrak employees did not transfer to the new
services or operators, (2) they retire or leave the railroad industry, or
(3) there are insufficient applicants with necessarily skills to provide
the employees needed.

oWorkforce flexibility and productivity. Reform of intercity passenger
rail resulting in new services or operators will also require
consideration of workforce flexibility and the extent labor productivity
can be increased. One key to providing cost-effective service is to have
high levels of labor productivity. Collective bargaining agreements and
their related work rules specify the work that employees are expected to
do and the amount of compensation they will receive for performing this
work. Although such agreements can and do include changes designed to
increase employee productivity by increasing or broadening the types of
tasks that employees can perform, such agreements can also affect
productivity by limiting the amount or type of work that employees can
perform. Foreign passenger rail reform efforts have included actions to
increase workforce flexibility and productivity. For example, from 1993 to
1998, as a result of revenue growth and an increased focus on cost
control, VIA Rail entered into negotiations with rail labor in order to
obtain more flexibility in its workforce.^4 Among other things, these
negotiations resulted in a significant consolidation of jobs. According to
VIA Rail, union members got enhanced pension benefits in return for
reduced employment levels and increased job responsibility. The latter
included consolidating a number of on-board service and conductor
positions into one customer-service manager who has the flexibility to
interchange positions for on-board service staff and is responsible for
everything that goes on inside a train.

oPotential labor protection payments. If, as the result of reforming
intercity passenger rail, Amtrak employees lose their jobs, there could be
liability for labor protection payments. In general, labor protection
payments are made to employees who lose their jobs as a result of a
discontinuation of service. The Amtrak Reform and Accountability Act of
1997 made a number of changes to labor protection, including eliminating
existing rights to such protection--again subjecting labor protection to
collective bargaining, and requiring Amtrak to negotiate new labor
protection arrangements with its employees. As we have previously
reported, after Amtrak and its employees could not reach agreement, an
October 1999 arbitration decision (1) capped labor protection payments at
a 5-year maximum (rather than 6 years under the statutory arrangement),
(2) made employees with less than 2 years of service ineligible for
payments, and (3) based payments on a sliding scale that provided less
payout for each year worked than did the previous system.^5 Even with
these changes, in September 2002, we reported that Amtrak would have had
unsecured labor protection claims of about $3.2 billion had Amtrak been
liquidated on December 31, 2001.^6 Although a reform of intercity
passenger rail may or may not involve a liquidation of Amtrak, it is clear
that should Amtrak employees lose their jobs as the result of a
discontinuation of service there could be substantial financial
obligations as a result. To the extent that Amtrak employees can and do
accept jobs elsewhere (whether in the railroad industry or not) this
obligation could be reduced. In general, should this be the case, then
labor protection payments would be limited to the differences, if any,
between what the employees were previously making at Amtrak and their
wages at the new jobs.

Amtrak labor-relations officials state that a significant barrier to any
attempts to reform--or to negotiating their collective bargaining
agreements even in the absence of broader corporate restructuring--is the
lack of flexibility in the current labor agreements. First, the provision
of the Amtrak Reform and Accountability Act of 1997 that altered rail
labor protection--eliminating the statutory labor protection provision and
allowing Amtrak and the affected labor unions to negotiate contractual
labor protection arrangements in their place--did not give Amtrak as much
flexibility as it had hoped. Although significant changes resulted from
negotiations about new labor protection arrangements (such as limiting the
maximum number of years' wages that could be received in the event of job
loss to 5 years instead of 6), Amtrak is still bound by expensive labor
protection obligations if jobs are lost because of route cancellations or
service reductions.^7 Amtrak officials referred to rail labor protection
as the "last of the last" of the old type of unemployment benefits. As
such, labor protection continues to be a stumbling block in Amtrak's
internal restructuring efforts, as well as collective bargaining. In
addition, Amtrak officials stated that Amtrak would like additional
flexibility in the work rules that define the tasks that employees can
perform to improve productivity. The current work rules allow most
employees to perform tasks outside their enumerated work duties only 2
hours per day. According to Amtrak labor relations officials, current work
rules allow Acela employees 4 hours of flexibility per day. Amtrak would
like to extend this to all labor contracts. Amtrak officials stated that
Amtrak wants the increase to 4 hours of flexibility to gain desired
improvements in efficiency of operations. Without the work rule change,
these improvements will be difficult to achieve.

Workforce challenges also include determining how a potentially reformed
intercity passenger rail system fits into the current scheme of
railroad-specific labor-management, retirement, and injury compensation
systems. Amtrak is currently subject to, among other things, the Railway
Labor Act, the Railroad Retirement Tax Act, and the Federal Employers'
Liability Act, which govern labor-management relations, retirement, and
injury compensation, respectively, in the railroad industry. Amtrak's
collective bargaining agreements generally do not expire and are subject
to requirements designed to reduce labor strikes; Amtrak participates in,
and provides financial contributions to, the railroad retirement-system^8
(approximately $400 million annually); and Amtrak and its employees are
subject to a tort-based injury compensation system under the Federal
Employers' Liability Act.^9 We have reported that these legal requirements
raise railroad costs compared to nonrailroad industries. Amtrak's April
2005 Strategic Reform Initiatives also suggested that meaningful reform of
intercity passenger rail will require changing how these apply to
passenger rail. On the other hand, rail labor has argued for the
importance of these laws in protecting employee rights, ensuring a
sustainable retirement system, and adequately compensating employees
injured on the job.

State officials we interviewed expressed more general concern about the
potential impact of Amtrak's labor agreements and obligations on the
future of passenger rail. Some state officials viewed Amtrak's labor
agreements as a significant barrier to reform. One official stated that
serious labor reform is needed for intercity passenger rail reform to
succeed. Some state officials with whom we spoke also questioned whether
alternative operators would be bound by Amtrak's labor agreements and
thought that it was unlikely another operator could provide significant
improvements in cost savings or quality of service if they were. Another
official stated that Amtrak's labor agreements would put Amtrak at a
considerable disadvantage over alternative operators in a competitive
market if the alternative operators were not bound by the same agreements.

Rail labor union officials with whom we spoke expressed several concerns
about the effects any potential reform of intercity passenger rail might
have on their members. Foremost, union officials expressed concern about
the history of Amtrak's successive "reforms" and the detrimental effects
on labor-management relations and employee morale. In their view, past
Amtrak reforms have brought fewer union jobs and the loss of health and
safety programs with no improvement in Amtrak's service to the public,
while it continues to flounder with funding uncertainty. A union official
stated that the first step should be getting Amtrak to operate like other
for-profit businesses, including the freight railroads. The emphasis
should be on applying basic business principles, including transparent
accounting, and repairing its relationship with the unions and improving
national railroad passenger service--rather than on reducing the federal
subsidy. This should be addressed before moving on to something other than
the current system and route structure. In addition, union officials
emphasized that some union members are highly skilled and highly
specialized and cannot be easily replaced. Any restructuring of intercity
passenger rail would still require any operator--Amtrak, alternative
operators, or a successor to Amtrak--to work through the unions to
maintain a labor force or to train additional workers. Total compensation
for employees moving forward is another concern; however, union officials
told us, where alternative operators have succeeded Amtrak in operating
commuter railroads, unionized employees have been offered more
compensation than they received from Amtrak with no accompanying change in
work rules.

Appendix VII
Financial Reporting, Internal Control, and Governance Requirements and
Practices for Federal Entities and Public Companies 

Current Accountability Requirements and Practices

The Amtrak Reform and Accountability Act of 1997^1 removed Amtrak from the
list of government corporations subject to the Government Corporation
Control Act of 1945.^2 The 1997 act, however, did not change Amtrak's
status as a private, for-profit corporation established to provide
intercity and commuter rail passenger transportation in the United States
and is neither an agency nor an instrumentality of the U.S. government,
nor an issuer of securities to the public. Consequently, Amtrak is not
subject to the basic accountability requirements of either federal
entities or public companies, but has been subject to specific reporting
requirements contained in its grant and loan agreements and
Amtrak-specific statutory provisions in Title 49 of the U.S. Code.
Following are the basic accountability requirements that encompass
financial reporting, internal controls, and governance at these
organizations.

Federal Entities

Financial Reporting

The Chief Financial Officers Act of 1990 (CFO Act), as amended by the
Government Management Reform Act of 1994 (GMRA), requires the major 24
agencies^3 of the federal government to submit annual  audited financial
statements to the Office of Management and Budget (OMB).  ^4 The
Accountability of Tax Dollars Act of 2002 (ATDA) expanded this
requirement^5 to include most other executive agencies.^6 Federal
government corporations had been subject to financial reporting
requirements for many years under the Government Corporation Control
Act.^7 Quarterly, the executive agencies required to submit annual
financial statements under the CFO Act, GMRA, and ATDA (31 U.S.C. S 3515)
are required by OMB to submit unaudited financial information to OMB.  ^8
These interim unaudited financial statements, required on a quarterly
basis, may be submitted without footnotes and limited to a balance sheet,
statement of net cost, and statement of budgetary resources. Management
discussion and analysis and supplementary information are not required for
quarterly reporting. Chapter 91 of Title 31 of the U.S. Code, commonly
known as the Government Corporations Control Act, requires government
corporations to submit annual management reports to Congress (with copies
to the President, OMB, and us) no later than 180 days after the end of the
government corporation's fiscal year. OMB has accelerated the submission
deadline to no later than 45 days after the end of the government
corporation's fiscal year.^9 Annual management reports are therefore
required to include the following:

oa statement of financial position;

oa statement of operations;

oa statement of cash flows;

oreconciliation to the budget report of the corporation, if applicable;

oa statement of internal accounting and administrative control systems by
the head of corporation management, consistent with the requirements under
amendments to the act made by 31 U.S.C. S 3512 (c), (d), commonly referred
to as the Federal Managers' Financial Integrity Act of 1982 (FMFIA);

oa financial statement audit report; and

oany other information necessary to inform Congress about the operations
and financial condition of the corporation.^10

Government corporations are not required by OMB to submit quarterly
information. The federal government does not have a certification for
government corporations or federal agencies comparable to section 302 of
the Sarbanes-Oxley Act of 2002,^11 which requires the chief executive
officers (CEO) and chief financial officers (CFO) of public companies to
certify their company's financial statements.

Under OMB Circular No. A-136, Financial Reporting Requirements (rev. July
24, 2006),  annual performance and accountability reports (PAR) issued by
federal government agencies consist of the Annual Performance Report
required by the Government Performance and Results Act of 1993 (GPRA)^12
with audited financial statements and other disclosures, such as agencies'
(1) assurances on internal control, (2) accountability reports by agency
heads, and (3) Inspectors General's assessments of the agencies' most

serious management and performance challenges.^13 OMB Circular No. A-136
states that PARs are intended to provide financial and performance
information to enable the President, Congress, and the public to assess
the performance of an agency relative to its mission and to demonstrate
the agency's accountability. The PAR's management's discussion and
analysis (MD&A) section, which serves as a brief overview of the entire
PAR,^14 should include the most important matters that could lead to
significant actions or proposals by top management of the reporting unit;
are significant to the managing, budgeting, and oversight functions of
Congress and the administration; or could significantly affect the
judgment of citizens about the efficiency and effectiveness of their
federal government.

OMB Circular No. A-136 also requires federal entities in their MD&A to
include information to help users understand the entity's financial
results, position, and condition as conveyed in the principal financial
statements. The MD&A also includes comparisons of the current year to the
prior year and should provide an analysis of the agency's overall
financial position and results of operations to assist users in assessing
whether that financial position has improved or deteriorated as a result
of the year's activities. The MD&A should also include a discussion of key
financial measures that emphasize financial trends and assess financial
operations.

Internal Control

According to OMB, the passage of the Sarbanes-Oxley Act of 2002 served as
an impetus for the federal government to reevaluate its current policies
related to internal control over financial reporting and management's
related responsibilities.  ^15 While section 404 of the Sarbanes-Oxley Act
created a new requirement for managers of publicly traded companies to
report on the internal controls over financial reporting, federal managers
have been subject to similar internal-control reporting requirements for
many years.

Federal agencies are subject to many legislative and regulatory
requirements that promote and support effective internal control:

o31 U.S.C. S 3512(c), (d), commonly referred to as FMFIA, provides the
statutory basis for management's responsibility for, and assessment of,
internal control. OMB Circular No. A-123, Management's Responsibility for
Internal Control (rev. Dec. 21, 2004), sets out the guidance for
implementing the statute's provisions.

oThe CFO Act of 1990 requires agency CFOs to maintain an integrated
accounting and financial management system that includes financial
reporting and internal controls. 31 U.S.C. S 902(a)(3).

oThe Federal Financial Management Improvement Act (FFMIA) of 1996,^16 as
implemented by OMB Circular No. A-127, Financial Management Systems (rev.
Dec. 1, 2004), requires the 24 CFO Act  agencies to implement and maintain
integrated financial management systems that comply substantially with
federal financial management system requirements, applicable federal
accounting standards, and the U.S. Standard Government Ledger at the
transaction level.

oThe Inspector General Act of 1978, as amended, requires Inspectors
General to submit semiannual reports to Congress on significant abuses and
deficiencies identified during agency reviews, and recommended actions to
correct those deficiencies. 5 U.S.C. Appx. S 5.

oGovernment Auditing Standards, [141]GAO-03-673G (rev. June 2003) 
(commonly referred to as the "Yellow Book"), and OMB Bulletin No. 06-03,
Audit Requirements for Federal Financial Statements, (Aug. 23, 2006),
require auditors to report on internal control as part of a federal agency
financial-statement audit, including a description of reportable
conditions and material weaknesses in internal control over financial
reporting.

Recent federal governmentwide initiatives have contributed to improvements
in financial management and placed greater emphasis on implementing and
maintaining effective internal control over financial reporting. In
December 2004, OMB issued a significant update to its Circular No. A-123,
the implementing guidance for FMFIA. The update requires the 24 CFO Act
agencies to include the FMFIA annual report in their PAR, under the
heading "Management Assurances." The FMFIA annual report must include a
separate assurance on internal control over financial reporting, along
with a report on identified material weaknesses and actions taken by
management to correct those weaknesses.

FMFIA and OMB Circular No. A-123 apply to each of the three objectives of
internal control outlined in our Standards For Internal Control in the
Federal Government: effective and efficient operations, reliable financial
reporting, and compliance with applicable laws and regulations. OMB
Circular No. A-123 calls for internal control standards to be applied
consistently toward each of the objectives. The circular's new Appendix A,
which applies only to the 24 CFO Act agencies, requires management to
document the process and methodology for applying A-123 standards when
assessing internal control over financial reporting. Appendix A also
requires management to use a separate materiality level when assessing
internal control over financial reporting. The agency head's annual
assurance statement on the effectiveness of internal control over
financial reporting required by Appendix A is a subset of the assurance
statement required under FMFIA on the overall internal control of the
agency.

Governance (Audit Committee)

Audit committees are becoming increasingly important in federal entities
and public companies as a mechanism to improve accountability and enhance
oversight. Overall, in the federal government, audit committees are
intended to protect the public interest by promoting and facilitating
effective accountability and financial management, which is accomplished
by providing management with independent, objective, and experienced
advice and counsel.

In 2002, the Government Finance Officers Association (GFOA)--a
professional association of state and local finance officers--recommended
that every government entity establish an audit committee or its
equivalent.^17 An audit committee can facilitate communication between
management, the auditor, and the governing board, according to GFOA, and
is also useful in focusing on and documenting the process for managing the
organization's financial statement audit. GFOA's guidelines for
establishing an audit committee include recommendations that (1) the audit
committee should be formally established by charter, enabling resolution,
or other appropriate legal means; (2) the members of the audit committee
collectively should possess the expertise and experience in accounting,
auditing, financial reporting, and finance needed to understand and
resolve issues raised by the independent audit of the financial
statements; and (3) a majority of the members of the audit committee
should be selected from outside of management. GFOA also states that the
audit committee's primary responsibility should be to oversee the
independent audit of the government's financial statements, from the
selection of the independent auditor to the resolution of audit findings.
GFOA further recommends that the audit committee should present annually
to the governing board and management a written report of how it has
discharged its duties and met its responsibilities, and that the report be
made public.

Public Companies

The corporate failures and fraud that resulted in substantial financial
losses to institutional and individual investors at the turn of the 21^st
century led to renewed focus on accountability and governance in public
companies^18 and culminated in the enactment of the Sarbanes-Oxley Act of
2002, which enhanced the disclosure and internal control requirements
imposed by the Securities Exchange Act of 1934 as amended (Exchange
Act);^19 the Sarbanes-Oxley Act also implemented new accounting reforms
for public companies. The Sarbanes-Oxley Act contains provisions for the
governance, auditing, and financial reporting of public companies,
including provisions intended to deter corporate accounting fraud and
corruption and to punish violators. The 2002 act generally applies to
companies required to file reports with the Securities and Exchange
Commission (SEC) under the Securities and Exchange Act of 1934.

Financial Reporting

The Exchange Act, including SEC implementing regulations, requires
publicly traded companies to make periodic filings with the SEC that
disclose their financial status and changes in financial condition,
including annual and quarterly financial reports. Annually, public
companies file reports containing audited financial statements prepared in
conformity with generally accepted accounting principles (GAAP) and
audited by registered accounting firms. Quarterly reports, which may be
unaudited, contain financial statements and the MD&A. In addition to the
company's financial statements, annual filings contain information
including (1) selected financial data, (2) supplementary financial
information, and (3) the MD&A of the company's financial condition and
results of operations. The objective of the MD&A is to enable the reader
to assess material changes in financial condition and the results of
operations of the company. The MD&A is not audited; however, the auditor
is required to consider whether the information is materially consistent
with information appearing in the financial statements. The SEC reviews a
selection of annual and quarterly filings for compliance with accounting
and disclosure requirements. Generally, the MD&A is required to contain a
discussion of material changes in liquidity, capital resources,
off-balance sheet arrangements, aggregate contractual obligations, and
results of operations; known material trends, events, and uncertainties
that could render historical financial information non-indicative of
future operations or financial condition; the cause of material changes in
line items of the interim financial statements from prior-period amounts;
and any other information necessary for an understanding of the company's
financial condition, changes in financial condition, and results of
operations.^20

Since the enactment in 2002 of the Sarbanes-Oxley Act, public companies
have been required by section 404 to file annual reports with the SEC that
include (1) management's assessment of the effectiveness of internal
controls over financial reporting, and (2) the auditor's attestation and
report on management's assessment.  ^21 Public companies are also required
to disclose in both quarterly and annual reports filed with the SEC any
changes in their internal control over financial reporting that occurred
during the last fiscal quarter that has materially affected, or is
reasonably likely to affect, the company's internal control over financial
reporting. In addition, most companies are required to evaluate the
effectiveness, as of the end of each fiscal quarter, of its disclosure
controls and procedures and disclose in its quarterly report filed with
the SEC the conclusions of the company's CEO and CFO regarding the
effectiveness of such procedures.^22

Under SEC rules adopted pursuant to section 302 of the Sarbanes-Oxley Act,
each annual and quarterly report a public company files with the SEC must
include, as an exhibit, the certification signed by the company's CEO and
CFO stating in pertinent part that they each have reviewed the report
being filed and that, based on their knowledge, it does not contain untrue
statements or omissions of a material fact resulting in a misleading
report and that, based on their knowledge, the financial information in
the report is fairly presented.^23 The act includes criminal penalties for
certifying the financial statements while knowing that the financial
statements do not fairly present the financial condition and results of
the public company.^24 The certification requirement motivated corporate
executives and managers to increase their scrutiny of the company
financial statements and, in many cases, put specific accountability
mechanisms in place in their companies to help assure reliable financial
statements.

The SEC's Division of Corporate Finance reviews public company filings
periodically to determine whether publicly held companies are meeting
their disclosure requirements and whether improvements are needed in the
quality of the disclosures. To meet the SEC's requirements for disclosure,
a company issuing securities must make available all information, whether
it is positive or negative, that might be relevant to an investor's
decision to buy, sell, or hold securities in the company.

Internal Controls

Internal control serves as a first line of defense in safeguarding assets,
preventing and detecting errors and fraud, and in providing assurance over
the reliability of financial reporting. Internal control is defined as a
process that is effected by an entity's board of directors, management,
and other personnel, and is designed to provide reasonable assurance
regarding the achievement of the following objectives: (1) effectiveness
and efficiency of operations; (2) reliability of financial reporting; and
(3) compliance with laws and regulations.^25

Section 404 of the Sarbanes-Oxley Act establishes requirements on internal
control for companies and auditors. It requires companies to publicly
report on (1) management's responsibility for establishing and maintaining
an adequate internal control structure, including controls over financial
reporting and (2) the results of management's assessment of the
effectiveness of internal control over financial reporting. Section 404
requires accounting firms that serve as external auditors for public
companies to (1) attest to the assessment made by the companies'
management and (2) report on the results of their attestation and whether
they agree with management's assessment of the company's internal control
over financial reporting.

Internal control over financial reporting is further defined in SEC
regulations implementing Section 404.^26 These regulations define internal
control over financial reporting as a process providing reasonable
assurance regarding the preparation of financial statements and the
reliability of financial reporting, including policies and procedures that
do the following:

opertain to the maintenance of records that accurately and fairly reflect
the transactions and dispositions of company assets;

oprovide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP, and
that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company;
and

oprovide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of company assets.

Governance (Audit Committees)

Independent audit committees have become, within public companies, an
integral part of governance and oversight over financial reporting,
internal control, and the audit process. The 1987 Treadway Commission's
Report on Fraudulent Financial Reporting recognized as a key practice in
reducing fraudulent financial reporting the establishment by the company's
board of directors of "an informed, vigilant, and effective" audit
committee to oversee the financial reporting process. In 1998, the New
York Stock Exchange (NYSE) and the National Association of Securities
Dealers (NASD) formed the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees. The committee released a
10-point plan in 1999 toward improving audit committee effectiveness.
NYSE-, Amex-, and NASD-listing standards--which were the primary guidance
for audit committees of public companies--were changed to reflect the
recommendations of the Blue Ribbon Committee. Although this guidance, as
well as recommendations of the Treadway Commission, existed prior to
enactment of the Sarbanes-Oxley Act of 2002, the act provided a statutory
basis--primarily in sections 202, 204, 301, and 407--for the composition
and responsibilities of public-company audit committees in provisions
similar to the Treadway Commission and the Blue Ribbon Committee
recommendations.

Section 301 of the Sarbanes-Oxley Act of 2002 requires that audit
committee members be selected from the company's board of directors and
that they be independent (i.e., unaffiliated with the company and
receiving no consulting fee, advisory fee, or other compensatory fee from
the company). The audit committee is responsible for the appointment,
compensation, and oversight of the auditor, oversight of  company
management regarding financial reporting, and the resolution of
disagreements between management and the auditor. Finally, Section 301
provides that the audit committee should have the authority and funding to
engage advisors when necessary; ensure that processes are in place for the
receipt, retention, and treatment of any complaints from "whistle-blowers"
about accounting, internal controls, or auditing issues; and maintain open
channels for employees to use in communicating knowledge of malfeasance or
errors to the audit committee without fear of management retaliation.

Section 202 of the act requires the audit committee to preapprove all
audit and nonaudit services by an auditor to guard against potential
conflicts that could occur if services such as bookkeeping and
information-system design and implementation are provided by the company's
auditor.

Section 204 of the act requires that the auditor report to the audit
committee all critical accounting policies followed in the course of an
audit, all alternative accounting treatments within GAAP related to
material items discussed with company management, and other material
written communications between the auditor and company management.

Finally, Section 407 of the act and implementing SEC regulations requires
public companies to disclose whether the audit committee has at least one
financial expert,^27 the expert's name, and the expert's independence from
management. If the company does not have a financial expert on the audit
committee, it is required to explain why.

Amtrak

Financial Reporting

Until 1997, Amtrak was classified as a mixed-ownership government
corporation under the Government Corporation Control Act. 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.
Generally, 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 its preferred stock, and there were private
entities that held common stock (three railroads and a holding company).
The Amtrak Reform and Accountability Act of 1997 changed Amtrak's status
as a mixed-ownership government corporation by removing Amtrak from the
list of mixed-ownership government corporations in the context of making
Amtrak operationally self-sufficient by 2002. As we noted in our October
2005 report, today Amtrak is most similar to a "government-established
private corporation."  ^28

Consistent with Amtrak-specific statutory provisions in Title 49 of the
U.S. Code,^29 Amtrak's management and Board of Directors annually shall
submit the financial statements to Congress with its operations reports.
The annual financial report prepared and issued by Amtrak includes the
audited financial statements and accompanying notes. However, the report
does not include an MD&A section. Amtrak's annual financial statements are
required to be submitted to Congress, but are not submitted to, or
formally reviewed by, OMB or any regulatory agency. However, Amtrak is
required in its grant and loan agreement to produce a variety of daily,
monthly, and annual reports that are submitted to its board, Congress, and
FRA. The monthly performance report is an extensive report averaging 80 to
90 pages that contains financial results, route performance, workforce
statistics, and performance indicators; it is also posted to Amtrak's Web
site.

Internal Control

As a government-established private corporation, Amtrak is not subject to
the internal control requirements that govern either federal entities or
publicly traded companies, and thus its annual report does not include a
management report on internal control. An annual audit is performed using
Government Auditing Standards; therefore, Amtrak's management and Board of
Directors receive a report on internal controls and compliance with laws,
regulations, contracts, and grant agreements. However, the internal
control report is not included in Amtrak's annual report.^30 In our
October 2005 report, we noted that DOT officials told us that they receive
the internal control and compliance report. We also stated in our October
2005 report that Amtrak officials were not able to provide us with a
distribution list and they had no recollection of the report being
requested by, or sent to, any external party.

Governance (Audit Committee)

In its original authorizing legislation in 1970, Amtrak's Board of
Directors was authorized for 15 members, but there have never been more
than 13 members serving. The current limit of 7 members was a reduction
from 9 made by the Amtrak Reform and Accountability Act of 1997. The
members are appointed by the President with the advice and consent of the
Senate.  ^31 The board has operated with less than a full complement of 7
voting members since July 2003. Between October 2003 and June 2004, the
board had only 2 voting members (excluding the Secretary of Transportation
or his designee). As of September 2006, the board had 5 members (excluding
the Secretary of Transportation or his designee and the President of
Amtrak); however, the term of 2 members is expiring in January 2007, so
the board will be back to 3 members. 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, committees were established
for audits, corporate affairs, finance, compensation and personnel, and
legal affairs. Amtrak's bylaws permit it to conduct periodic meetings
between the Board of Directors and the shareholders, as necessary.
Following enactment of the Amtrak Improvement Act of 1981, which abolished
the election of any members of the Board of Directors by the common or
preferred shareholders,^32 Amtrak has not held a shareholders' meeting.

Currently the board is using the former audit committee charter in
carrying out its responsibilities for the oversight of its accounting and
financial reporting processes and the audits of Amtrak's financial
statements by an independent auditor. Since the Board of Directors
includes the President and CEO, the audit committee would not be
considered "independent" under the requirements and practices for public
companies, as provided in section 301 of the Sarbanes-Oxley Act of 2002.

In commenting on a draft of our October 2005 report, both DOT and Amtrak
officials told us that, given the limited number of board members,
Amtrak's full board of directors had assumed the functions of the audit

committee.^33 DOT officials said these functions included meeting with
Amtrak's auditor to discuss audit and internal control issues, and that
some of these meetings were held without the presence of Amtrak
management. Our analysis showed that the board performed some audit
committee oversight functions. Currently, the board is using the audit
committee charter in carrying out its responsibilities for the oversight
of the corporation's accounting and financial reporting processes and the
audits of Amtrak's financial statements by an independent auditor.

Opportunities for Improvement at Amtrak

Financial Reporting

MD&A

Currently, Amtrak's financial statements do not include an MD&A, an
important part of financial statements that is required for federal
entities and public companies. The MD&A provides users with information
relevant to an assessment of the organization's financial condition and
the results of its operations as determined by an evaluation of the
amounts and certainty of cash flows from operations and from outside
sources.  ^34 For a hybrid organization such as Amtrak--a for-profit
corporation that receives substantial federal subsidies^35--an MD&A would
seem especially important to understand the numbers presented in its
financial statements, and for users of the financial statements to
interpret material changes in financial condition and the results of
operations.

Quarterly Financial Statements

Currently, Amtrak does issue a variety of reports, but does not issue
quarterly financial statements that include footnotes. Public companies
are required to file quarterly financial statements with footnotes and
MD&A with the SEC. Under OMB Circular No. A-136, the executive agencies
required to submit annual financial statements under the CFO Act, GMRA,
and ATDA (whose requirements are now all codified at 31 U.S.C. S 3515) are
also required to submit quarterly financial statements without footnotes
to OMB. To issue quarterly financial statements, an organization must
adopt a rigorous financial reporting process that, by its frequency,
becomes more practiced and routine. Companies that are more successful at
closing their accounting systems and issuing financial statements on a
regular basis tend to have more automated systems and routine processes,
which can minimize fraud and errors. We previously recommended that Amtrak
should engage an independent public accountant to provide review-level
attestation work on Amtrak's quarterly financial statements in order to
strengthen financial reporting procedures. Preparation of quarterly
financial statements with footnotes is a basic financial reporting
function that contributes to the overall effectiveness of financial
reporting and the organization's control environment.

Certification by CEO and CFO

An important provision of the Sarbanes-Oxley Act, section 302, requires
the CEO and CFO of public companies to certify that they have reviewed the
company's financial statements and that, based on their knowledge, the
financial statements do not contain any untrue statements or omissions of
material fact; also, they must certify that the financial statements are
fairly presented. Amtrak's executives are not required to so certify the
organization's financial statements. Amtrak's CEO and CFO would need to
implement additional internal processes and controls to allow them to make
such a certification. Because Amtrak relies heavily on federal subsidies,
such a certification process would be useful for those charged with making
decisions about the level of financial subsidies that are being used.

Review of Financial Statements

Currently, Amtrak is required to provide various financial and performance
reports to FRA and/or DOT; however, Amtrak's financial statements are not
reviewed by OMB or any other regulatory agency. Requiring Amtrak's
financial statements to be filed with, and subject to review by, SEC or
OMB (or both) could further strengthen accountability and assurance that
Amtrak's financial statements represent its true financial condition. If
Congress were to require Amtrak to file annual reports and other periodic
reports with the SEC, Amtrak would need to adhere to the SEC's regulations
and guidance, which require consistent disclosure of financial and
operations information. If Congress were to require Amtrak to submit its
financial report to OMB, Amtrak would need to comply with appropriate OMB
and federal financial reporting regulations and guidance, and respond to
OMB's inquiries about Amtrak's reported financial information.

Internal Control

Management's Assessment and Report on Internal Controls

Currently, Amtrak does not have requirements for management to evaluate
and report on internal control effectiveness. A management evaluation of
the effectiveness of internal control and a management report on the
results of the assessment holds management accountable for understanding
the organization's internal control, recognizing and correcting
deficiencies, and maintaining effective internal controls. FMFIA and OMB
Circular No. A-123 and section 404(a) of the Sarbanes-Oxley Act have
requirements for management's assessment of internal controls for federal
agencies and public companies, respectively.

Auditor's Attestation

An auditor's opinion on the effectiveness of internal control provides an
independent assessment of management's assessment of its internal
controls. Although not required for federal entities, we support internal
control opinions as an important accountability mechanism. In addition, an
independent auditor's opinion on internal control was a key provision of
the Sarbanes-Oxley Act. Under section 404(b), public companies are
required to have an independent auditor attest to, and report on,
management's assessment of the effectiveness of internal control over
financial reporting.

Governance (Audit Committee)

Amtrak currently does not have an audit committee separate from its Board
of Directors due to its current board size. A minimum of three audit
committee members is required for NYSE-listed companies, and a minimum of
three members was recommended by the Blue Ribbon Committee on Improving
the Effectiveness of Corporate Audit Committees. Because Amtrak relies
heavily on federal subsidies, an audit committee with duties and
responsibilities that mirror those of publicly traded companies and meets
regularly is important to oversight of Amtrak's accountability for federal
funds.

Appendix VIII
Comments from National Railroad Passenger Corporation 

The following are GAO's comments on National Railroad Passenger
Corporation's letter dated October 23, 2006.

GAO Comments

1.Our report is not intended to imply that Amtrak's mission is to generate
profits rather than provide services that produce public benefits on a
break-even basis. In fact, the first section of the report discusses the
characteristics (both financial and non-financial) of the types of service
provided by intercity passenger rail in the United States and the types of
service that could increase the transportation benefits and public
benefits of intercity passenger rail. Regarding operating losses, we
recognize that Amtrak's operating loss is projected to decrease in fiscal
year 2006 and have changed the report to reflect that, instead of
increasing, operating losses continue to remain high. Finally, we do not
believe our report is inconsistent in how operating loss is portrayed.
Non-cash items such as depreciation and interest expenses are legitimate
expenses to the business and were reported based on Amtrak's audited
financial statements. The report also includes a figure excluding these
items to illustrate their relative contribution over Amtrak's reported
cash losses. In our discussion of the financial performance of routes, we
used the route financial data provided to us by Amtrak, which does not
include non-cash items such as depreciation charges.

2.The trend in passenger rail revenue between fiscal years 2002 and 2005
was stable. Based on data provided by Amtrak we included a footnote to
recognize the projected increase in passenger rail revenue in fiscal year
2006. We have eliminated any reference to "promotional pricing" being the
reason for revenue decreases.

3.We recognize that a significant percentage of long distance passengers
that are not traveling for work purposes may be traveling for family or
personal/family business reasons. This is still a form of leisure travel
and we have modified our definition of "leisure" to include travel for
family or personal business reasons. Regarding long distance passengers
traveling less than 500 miles, our report notes that many--but certainly
not all--of these passenger trips may have characteristics similar to
those on corridor routes. The example cited in the report, on the Empire
Builder route, is intended to illustrate the type of circumstances where
this may apply. Regarding the financial performance of long distance
routes, we agree that on a per passenger mile basis the difference between
long distance service and other non-NEC trains may be attributable to
state subsidies. Our report notes that one reason for the wide variance in
financial performance among corridor routes is the level of state support.

4.Our report also recognizes the growth in state-supported services and
that these services are the fastest growing in terms of ridership and
illustrate the significant potential for further growth. Finally, we agree
that on state-supported routes, states play a much greater decision making
role. We have changed our report to recognize this role.

5.We agree that rail network capacity is an important national policy
issue and that freight and passenger railroads, as well as governments at
all levels need to work together to address this issue. This will be
particularly important in the future as rail infrastructure capacity
continues to become constrained. Our report discusses the challenges
associated with addressing this issue. We also address the issue of cost
sharing between the federal and state governments and how this is common
in some transportation modes other than intercity passenger rail.
Moreover, we identify factors that need to be considered in making federal
investments in private infrastructure. Finally, the report identifies some
of the factors as to why commuter railroads pay amounts different from
incremental cost to access freight and other privately owned
infrastructure. It was for this reason that we made a qualitative, rather
than a quantitative, comparison between Amtrak and commuter rail
infrastructure access costs.

Appendix IX
GAO Contact and Staff Acknowledgments

JayEtta Z. Hecker, (202) 512-2834 or [email protected]

In addition to the above individual, Randy Williamson (Assistant
Director), Tida Barakat, Jay Cherlow, Jeanette Franzel, Greg Hanna, Bert
Japikse, Richard Jorgenson, Ryan Lambert, Kimberly McGatlin, John Saylor,
Stan Stenersen, Lacy Vong, and Diana Zinkl made key contributions to this
report.

(544117)

www.gao.gov/cgi-bin/getrpt?GAO-07-15 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact JayEtta Z. Hecker at (202) 512-2834 or
[email protected].

Highlights of [144]GAO-07-15 , a report to Chairman, Committee on
Transportation and Infrastructure, House of Representatives

November 2006

INTERCITY PASSENGER RAIL

National Policy and Strategies Needed to Maximize Public Benefits from
Federal Expenditures

Intercity passenger rail service is at a critical juncture in the United
States. Amtrak, the current service provider, requires $1 billion a year
in federal subsidies to stay financially viable but cannot keep pace with
its deteriorating infrastructure. At the same time, the federal government
faces growing fiscal challenges. To assist the Congress, GAO reviewed (1)
the existing U.S. system and its potential benefits, (2) how foreign
countries have handled passenger rail reform and how well the United
States is positioned to consider reform, (3) challenges inherent in
attempting reform efforts, and (4) potential options for the federal role
in intercity passenger rail. GAO analyzed data on intercity passenger rail
performance and studied reform efforts in Canada, France, Germany, Japan,
and the United Kingdom.

[145]What GAO Recommends

GAO recommends that Congress consider restructuring the nation's intercity
passenger rail system. Any change should include establishing clear goals
for the system, defining the roles of key stakeholders, and developing
funding mechanisms that include cost sharing between the federal
government and other beneficiaries. Amtrak agreed intercity passenger rail
is at a critical juncture and said that reform includes establishing
national policy goals, stakeholder roles, and committed funding.

The existing intercity passenger rail system is in poor financial
condition and the current structure does not effectively target federal
funds to where they provide the greatest public benefits, such as
transportation congestion relief. Routes of 750 miles or more, while
providing service for some rural areas and connections between regions,
show limited public benefits for dollars expended. These routes account
for 15 percent of riders but 80 percent of financial losses. "Corridor"
routes (generally less than 500 miles in length) have higher ridership,
perform better financially, and appear to offer greater potential for
public benefits.

The countries GAO studied varied in their reform approach, but their
experience shows the United States needs to consider three key elements in
attempting any reform: (1) define national policy goals, (2) define the
roles of government and other participants, and (3) establish stable
funding. Countries found these elements important in setting the role of
passenger rail in the national transportation system and increasing the
benefit from investing in passenger rail. Currently, however, the United
States is not well positioned to address these key elements. The goals or
expected outcomes of intercity passenger rail policies are ambiguous,
participants' roles are unclear, and there is widespread disagreement
about the level of funding to devote to this effort. Amtrak is taking
actions within its authority to reduce costs and increase efficiency, but
Amtrak is not in a position to address all key elements. To undertake
reform, federal leadership is needed.

Addressing key elements of reform poses many challenges, because those who
have a stake in the process have divergent goals or points of view. Amtrak
workers, freight railroads that own much of the rail system over which
passenger trains operate, and federal and state governments would be among
those affected. The diversity of viewpoints poses challenges for
determining both the overall goal for passenger rail in the United States
and the federal role in achieving this goal. Funding-related challenges
include identifying how to pay for achieving these goals and how to
overcome disadvantages intercity passenger rail faces relative to
leveraging of federal funds. Although federal-state cost sharing is common
in highway and transit programs, states face difficulty leveraging their
expenditures on rail service.

There are four main options for the federal role in intercity passenger
rail service: (1) keep the existing structure and funding, (2) make
incremental changes to improve financial or operational performance, (3)
discontinue federal involvement, or (4) fundamentally restructure the
system. Each option has advantages and disadvantages, and each faces its
own challenges. Each requires some level of federal funding, a clear
articulation of expected goals, and, except for the status quo option,
substantial time to implement. Of these options, the fourth--fundamental
restructuring--would allow for effectively integrating rail into the
national transportation system and substantially improving overall
performance and accountability.

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

November 2006

INTERCITY PASSENGER RAIL

National Policy and Strategies Needed to Maximize Public Benefits from
Federal Expenditures

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