Intercity Passenger Rail: Amtrak's Progress in Improving Its Financial
Condition Has Been Mixed (Letter Report, 07/09/1999, GAO/RCED-99-181).
Since its creation in 1971, Amtrak has accumulated massive financial
losses, with recent losses averaging more than $800 million per year. To
help Amtrak sustain operations and make needed capital investments, the
federal government has provided Amtrak nearly $23 billion in financial
assistance since 1971. In this report, GAO discusses (1) Amtrak's
overall financial performance in fiscal year 1998, (2) the prospects for
Amtrak to meet its financial goals for operating self-sufficiency
outlined in its most recent strategic business plan, and (3) the extent
to which current and anticipated federal funding and recently enacted
legislative reforms aimed at helping Amtrak better control its costs are
likely to help improve its financial condition. Basically, GAO found
that Amtrak's overall losses increased in fiscal year 1998 after several
years of improvement.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-181
TITLE: Intercity Passenger Rail: Amtrak's Progress in Improving
Its Financial Condition Has Been Mixed
DATE: 07/09/1999
SUBJECT: Financial management
Railroad transportation operations
Cost control
Federal aid to railroads
Strategic planning
Program graduation
Losses
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United States General Accounting Office GAO Report
to the Chairman, Committee on Commerce, Science, and
Transportation, U.S. Senate July 1999 INTERCITY PASSENGER
RAIL Amtrak's Progress in Improving Its Financial Condition Has
Been Mixed GAO/RCED-99-181 GAO United States
General Accounting Office Washington, D.C. 20548 Resources,
Community, and Economic Development Division B-282088 July 9, 1999
The Honorable John McCain Chairman, Committee on Commerce,
Science, and Transportation United States Senate Dear Mr.
Chairman: Since its inception in 1971, the National Railroad
Passenger Corporation (Amtrak) has accumulated massive financial
losses, with recent losses averaging over $800 million per year.
To help Amtrak sustain operations and make needed capital
investments, the federal government has provided it with nearly
$23 billion in financial assistance since 1971. In 1994, in
response to a request from the administration, Amtrak established
a goal of eliminating its need for federal operating subsidies by
fiscal year 2002 (termed being "operationally self-sufficient").
To accomplish this goal, Amtrak developed a series of strategic
business plans designed to increase revenues and control costs. In
1998, we reported that Amtrak was in a precarious financial
condition.1 This report responds to your request to provide an
updated assessment of Amtrak's current financial performance as
well as its prospects for improved future financial performance.
In particular, this report discusses (1) Amtrak's overall
financial performance in fiscal year 1998; (2) the prospects for
Amtrak to meet its financial goals for operating self-sufficiency
outlined in its most recent strategic business plan; and (3) the
extent to which current and anticipated federal funding and
recently enacted legislative reforms aimed at helping Amtrak
better control its costs are likely to help improve its financial
condition. Results in Brief Amtrak's overall losses increased
in fiscal year 1998 after several years of improvement. In fiscal
year 1998, Amtrak's net loss (total expenses less total operating
revenues) was $930 million, the largest loss in the last 10
1Intercity Passenger Rail: Prospects for Amtrak's Financial
Viability (GAO/RCED-98-211R, June 5, 1998); Intercity Passenger
Rail: Financial Performance of Amtrak's Routes (GAO/RCED-98-151,
May 14, 1998); Intercity Passenger Rail: Outlook for Improving
Amtrak's Financial Health (GAO/T-RCED-98-134, Mar. 24, 1998); and
Intercity Passenger Rail: Issues Associated With a Possible Amtrak
Liquidation (GAO/RCED-98-60, Mar. 2, 1998). Page 1
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 years.2 By
comparison, Amtrak's net loss in fiscal year 1997 was $762
million. Amtrak has made some progress in reducing its reliance on
federal operating support. However, between now and 2002, it needs
to achieve about 5 times as much in financial improvements (or
what it terms "net impact") as it has been able to achieve over
the past 4 years to reach operational self-sufficiency. Amtrak's
current strategic business plan, approved by its Board of
Directors in October 1998, estimates that ongoing and planned
initiatives will result in a cumulative net impact of $1.6 billion
from fiscal year 1999 through fiscal year 2002, primarily through
increases in revenues as a result of taking business plan actions.
However, uncertainty surrounds Amtrak's ability to achieve this
net impact and to reach operational self-sufficiency by fiscal
year 2002. For example, the plan contains over $160 million in
"placeholders" for productivity increases and other reforms to be
defined at a later date. Furthermore, Amtrak's expectations to
increase revenues through other initiatives, such as implementing
new high-speed service between Boston and Washington, D.C., and
increasing its express service (the delivery of higher-value,
time-sensitive goods) are based on critical assumptions-about such
things as passenger ridership and the ability to obtain access to
specialized equipment-that have yet to be tested in the
marketplace. Current and anticipated annual federal funding and
recently enacted reforms aimed at helping Amtrak better control
its costs will likely have little short-term impact on improving
its overall financial condition. First, Amtrak plans to use nearly
$1 billion of the $1.6 billion it expects to receive in federal
capital appropriations over the next 3 fiscal years for
maintenance rather than capital improvements. While maintenance is
important for preserving assets and Amtrak's fiscal year 1999
capital appropriation could be used for equipment maintenance,
Amtrak's plans to continue to use capital appropriations in this
way means it will forgo or delay capital investment projects that
could increase future revenues and reduce future costs. However,
Amtrak's Board of Directors has approved plans for $1.3 billion of
capital improvements from the $2.2 billion made 2This net loss is
adjusted to exclude federal financial assistance counted as
revenues. The Amtrak Reform and Accountability Act of 1997
eliminated the requirement that Amtrak issue preferred stock to
the Department of Transportation in the value of the federal
appropriations received. As a result, beginning with its fiscal
year-end 1998 audited financial statements, Amtrak recorded a
significant amount of federal financial assistance as revenues
instead of preferred shareholder equity. In addition, Amtrak
received federal financial assistance in fiscal years 1998 and
1999 through the Taxpayer Relief Act and recorded a portion of
these funds as revenues. In this report, we present net loss
amounts, excluding the amount of federal financial assistance that
Amtrak's audited financial statements include as revenues in 1998.
This adjustment allow us to better compare Amtrak's net loss
position with those of previous years. Page 2
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 available to
it through the Taxpayer Relief Act of 1997. In addition, as we
reported in 1998, while the Amtrak Reform and Accountability Act
of 1997 provided Amtrak greater flexibility in its business
operations, the reforms provide few financial benefits in the
short term. We found this condition continues to exist largely
because Amtrak and its unions have not completed negotiations over
labor protection arrangements and reforms for contracting out
work. Background The Rail Passenger Service Act of 1970 created
Amtrak as the nation's intercity passenger railroad. Prior to
Amtrak's creation, intercity passenger service was provided by a
number of individual railroads, which had lost money, especially
after World War II. The act, as amended, gave Amtrak a number of
goals, including providing modern, efficient intercity passenger
rail service; giving Americans an alternative to automobiles and
airplanes to meet their transportation needs; and minimizing
federal operating subsidies. As of June 1999, Amtrak provided
intercity passenger service along 42 routes that include most
states. Like all major national intercity rail services in the
world, Amtrak receives substantial government support. From 1971
through June 1999, the federal government provided Amtrak with
nearly $23 billion in financial assistance. However, in December
1994, at the direction of the administration, Amtrak established
the goal of eliminating its need for federal operating subsidies,
that is, achieving operational self-sufficiency, by fiscal year
2002. In addition, the Amtrak Reform and Accountability Act of
1997 authorized appropriations for Amtrak's operating and capital
expenses through fiscal year 2002 but prohibited Amtrak from using
federal funds for operating expenses, except for an amount equal
to excess Railroad Retirement Tax Act payments after 2002.3 In
fiscal year 2002, Amtrak expects to spend only $185 million (its
estimated payments to the railroad retirement system in excess of
the retirement benefits for Amtrak employees) of federal funding
for expenses other than capital projects. To meet the goal of
operating self-sufficiency and respond to continually growing
losses and a widening gap between operating deficits and federal
operating subsidies, Amtrak developed a series of strategic
business plans. By following these plans, Amtrak has attempted to
increase revenues and control costs through such actions as
expanding mail and express service, 3Amtrak participates in the
railroad retirement system, under which each participating
railroad pays a portion of the costs for all retirements and
benefits in the industry. Page 3
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 adjusting
routes and service frequency, and reorganizing into strategic
business units. Its Board of Directors approved Amtrak's most
recent strategic business plan in October 1998. Historically,
Amtrak received separate federal appropriations for operating
expenses and capital improvements. For fiscal year 1999, Amtrak
received a single capital appropriation of $609 million instead of
separate appropriations for operating and capital assistance.
However, the conference report accompanying the appropriation
provided that Amtrak could use appropriated funds for the
maintenance of equipment (an operating expense) in addition to
traditional capital investments. The Congress also provided Amtrak
with financial assistance through the Taxpayer Relief Act of 1997.
This act made a total of about $2.2 billion available to Amtrak in
fiscal years 1998 and 1999 to acquire capital improvements and pay
for the maintenance of existing equipment, among other things. The
Amtrak Reform and Accountability Act of 1997 made certain reforms
to Amtrak's operations. Among other things, the act (1) eliminated
existing statutory and contractual labor protection arrangements
as of May 31, 1998, and required negotiations over new
arrangements; (2) repealed the statutory ban on contracting out
work when it would result in employee layoffs and made contracting
out part of the collective bargaining process (except for food and
beverage service, for which contracting out was already allowed);
and (3) placed a $200 million cap on the aggregate amount that
Amtrak and others must pay rail passengers for all claims
(including claims for punitive damages) arising from a single
accident or incident.4 The act also established an independent
council-the Amtrak Reform Council-to evaluate Amtrak's performance
and make recommendations for cost containment, productivity
improvements, and financial reforms. If at any time more than 2
years after the enactment of the act and the implementation of a
financial plan for operating within authorized funding levels, the
Council finds that Amtrak is not meeting its financial goals or
that Amtrak will require federal operating funds after December
2002, then the Council is to submit to the Congress, within 90
days, an action plan for a restructured national intercity
passenger rail system. In addition, if the 4These include claims
made against Amtrak, any high-speed railroad authority or
operator, any commuter authority or operator, any rail carrier, or
any state. Page 4
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 above events
occur, Amtrak is required to develop and submit an action plan for
its liquidation. The act also eliminated the requirement that
Amtrak issue preferred stock to the Department of Transportation
in the value of federal appropriations received. As a result,
beginning with its fiscal year-end 1998 audited financial
statements, Amtrak, following guidance from its external auditors,
recorded a significant amount of federal financial assistance as
revenues instead of preferred shareholder equity. In addition, a
significant amount of the federal funds made available by the
Taxpayer Relief Act was also recorded as revenues. One effect of
this situation is that Amtrak's fiscal year 1998 financial
statements are not comparable to previous financial reports unless
certain adjustments are made. In this report, we present net loss
and working capital amounts that exclude the amount of federal
assistance that Amtrak's audited financial statements include as
revenues or current assets in 1998. These adjustments allow us to
better compare Amtrak's net loss and working capital positions
over time. Amtrak's Overall Amtrak had made some progress in
reducing its net losses in recent 5 Losses Increased in years-
from about $833 million in fiscal year 1994 to $762 million in
fiscal year 1997. However, Amtrak's net loss (adjusted to exclude
$577 million of Fiscal Year 1998 federal funds that its
audited financial statements count as revenues)6 increased to $930
million in fiscal year 1998. (See fig. 1.) This amount is the
largest net loss in the last 10 years. One of the reasons for the
increase is that the 1998 figure includes retroactive payments
attributable to labor negotiations concluded by the end of 1998.7
But, even when the roughly $106 million of such labor payments are
not included in the net loss, the net loss is still $824 million,
$62 million more than in fiscal year 1997. 5The net loss for
fiscal year 1994 excludes a one-time charge of $244 million for
restructuring costs and other items. 6See the "Background" section
for why we made adjustments to the net loss and working capital
amounts we present for fiscal year 1998. 7Although these
retroactive payments are attributable to the period 1995 through
1998, Amtrak's fiscal year 1998 financial statements reflect the
liability for the retroactive portion of all labor agreements made
in fiscal year 1998 and expected to be made in fiscal year 1999.
Amtrak will make these retroactive payments in fiscal years 1999
and 2000. Page 5
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 Figure 1:
Amtrak's Net Losses, Fiscal Years 1994 Through 1999
-1000 Dollars in millions -700 -400 -100 1994
1995 1996 1997 1998 1999
estimated Fiscal year Note: The amount shown for fiscal year 1998
has been adjusted to exclude federal financial assistance from
revenues. Source: GAO's analysis of Amtrak's data. Amtrak
officials stated that the increase in net loss is also due to an
increase in capital investment that resulted in increased
depreciation expenses. Specifically, depreciation expenses, a
noncash item, increased by $52 million in 1998-from $242 million
in fiscal year 1997 to $294 million in fiscal year 1998. Amtrak
expects that depreciation expenses will grow by another $66
million in fiscal year 1999 and by additional amounts in
subsequent years as it makes additional capital investments. While
an increase in depreciation-which reflects the amount of capital
equipment that is consumed and must be replaced in future years-
increases net loss, Amtrak points out that investments resulting
in Page 6 GAO/RCED-
99-181 Amtrak's Financial Condition B-282088 increased
depreciation expenses are expected to have positive effects in the
future, such as increasing revenues, reducing costs, and
eliminating the need for federal operating support. In October
1998, Amtrak estimated that the net loss for fiscal year 1999 will
be $930 million. However, through April 1999, Amtrak's net loss
for the current fiscal year is $11.4 million less than expected.
Another measure of Amtrak's overall financial condition is its
working capital (current assets less current liabilities). Working
capital measures a corporation's ability to pay its bills when
due. Amtrak's working capital deficit (adjusted to exclude $647
million in short-term investments and related interest resulting
from unspent Taxpayer Relief Act funds) at the end of fiscal year
1998 was about $400 million. This amount is $100 million worse
than the $300 million working capital deficit Amtrak recorded at
the end of fiscal year 1997 and is the worst such deficit in at
least the last 10 years. Figure 2 shows the degree to which
working capital balances have fallen over the past 4 years. Page 7
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 Figure 2:
Amtrak's Working Capital, Fiscal Years 1994 Through 1998 -
500 Dollars in millions -400 -300 -200 -100 0
1994 1995 1996 1997 1998
Fiscal year Working Capital Source: GAO's analysis of Amtrak's
data. Amtrak continues to need to borrow money to pay its current-
year operating expenses, including those for payroll, fuel, ticket
stock, and food. At the end of fiscal year 1997, Amtrak had
outstanding borrowing of $75 million to meet its operating
expenses. At the end of fiscal year 1998, the amount of
outstanding borrowing needed to meet operating expenses had fallen
to $50 million. This $50 million in year-end borrowing was half of
what Amtrak had estimated at the beginning of the fiscal year.
However, at the end of fiscal year 1999, Amtrak estimates, it will
need to have $100 million in borrowing to meet its operating
expenses. Additionally, Amtrak plans to have short-term borrowing
of $100 million outstanding at the end of fiscal year 2000. Page 8
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 To help its
cash flow, Amtrak is seeking legislation specifically authorizing
it to use its fiscal year 2000 capital appropriation to pay for a
wider variety of maintenance expenses than in fiscal year 1999.
This would be similar to the flexibility allowed recipients of
federal transit financial assistance. For fiscal year 2000, Amtrak
is requesting the authority to use its capital appropriation for
maintenance-of-way expenses (e.g., costs for maintaining tracks)
in addition to maintenance-of-equipment expenses, as permitted in
fiscal year 1999. Without this authority, Amtrak has stated that
it will not be able to use existing cash to cover $50 million of
its operating expenses in fiscal year 2000. As of June 1999,
Amtrak had not developed a way to meet its financial obligations
if the Congress does not allow this flexibility. Amtrak's
Prospects Amtrak's October 1998 strategic business plan
does not anticipate that the for Achieving
corporation will use any federal subsidies for operating expenses
(other than for excess railroad retirement expenses) in fiscal
year 2002-1 year Operating earlier than
requested by the administration and specified in the Amtrak Self-
Sufficency Are Reform and Accountability Act of 1997.
However, considerable uncertainty exists about whether Amtrak will
be able to achieve its targets Clouded by for
revenues and expenses for several key business plan actions, and
Uncertainties in Its Amtrak historically has not met its
financial goals for increasing revenues Business Plan and by
and reducing expenses. Past Performance Amtrak Cites a Narrowing
Amtrak's efforts are pointed toward achieving operating self-
sufficiency by Budget Gap fiscal year 2002. To do
this, Amtrak's strategic business plan focuses on reducing what it
calls its "budget gap,"8 which Amtrak defines as the corporation's
net loss less capital-related expenses, including depreciation of
its physical plant (such as locomotives, cars, and stations),
other noncash expenses, and expenses from its program to
progressively overhaul railcars (i.e., to conduct a limited
overhaul of cars each year rather than a single comprehensive
overhaul every several years). In essence, the budget gap
represents expenses not funded by its revenues or its capital
program. According to Amtrak, its budget gap fell by $18 million
in fiscal year 1998-from $512 million in fiscal year 1997 to $494
million in fiscal year 1998 after an adjustment for the cost of
retroactive labor payments is made. (See fig. 3.) Even though
Amtrak's audited financial statements 8Amtrak also calls this its
"budget result." Page 9
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 allocated
the full $106 million amount of the retroactive payments for
recently negotiated labor agreements to fiscal year 1998 expenses,
Amtrak officials, in calculating the budget gap, allocated the
amounts over the years for which those payments actually accrued
($35 million in fiscal year 1996 and in fiscal year 1997 and $36
million in fiscal year 1998). Amtrak officials told us that they
believe that such an allocation is a more appropriate methodology
for presenting its financial situation. The result of this
allocation improves Amtrak's fiscal year 1998 budget gap by $70
million. Amtrak's October 1998 strategic business plan estimates
that the budget gap will be reduced by another $10 million in
fiscal year 1999. Page 10 GAO/RCED-
99-181 Amtrak's Financial Condition B-282088 Figure 3: Amtrak's
Budget Gap and Progressive Overhaul Expenses, Fiscal Years 1994
Through 1999 -600 Dollars in millions -500 -400 -300
-200 -100 0 1994 1995 1996 1997
1998 1999 estimated Fiscal year Progressive
Overhauls Budget Gap Note: Amtrak's progressive overhaul program
started in fiscal year 1995 (and affected its expenses starting in
fiscal year 1996). For fiscal year 1998, amounts for progressive
overhauls include $4 million to prepare for the Year 2000 date
change. Source: GAO's analysis of Amtrak's data. However, even
with these improvements in Amtrak's budget gap, Amtrak must still
reduce its losses substantially if it is to become operationally
Page 11 GAO/RCED-99-181
Amtrak's Financial Condition B-282088 self-sufficient by the end
of fiscal year 2002. In the next 4 fiscal years, Amtrak must
reduce its budget gap by $309 million, from $494 million to an
amount equivalent to excess railroad retirement payments9
(estimated at $185 million in fiscal year 2002). This needed
improvement by 2002 is about 5 times the $60 million improvement
Amtrak was able to achieve in the previous 4 fiscal years, 1995
through 1998. Another issue in Amtrak's calculation of the budget
gap is the treatment of progressive overhaul expenses. Amtrak does
not include these expenses in its calculation of the budget gap
even though they are considered to be operating expenses under
generally accepted accounting principles. As described, the Amtrak
Reform and Accountability Act of 1997 prohibits Amtrak from using
federal funds for operating expenses, except for an amount equal
to excess Railroad Retirement Tax Act payments after 2002.
According to Amtrak officials, while generally accepted accounting
principles require the recording of such spending as operating
expenses, Amtrak funds progressive overhauls through its capital
program and therefore believes that the costs for them should be
counted as capital costs.10 If progressive overhauls are included
in the calculation of the budget gap, the gap increases by $12
million in fiscal year 1998-from $549 million in fiscal year 1997
to $561 million in fiscal year 1998-and in fiscal year 1999 will
be $560 million. Amtrak's Strategic Under its October
1998 strategic business plan, Amtrak plans to reach Business Plan
Emphasizes financial health by emphasizing business growth,
that is, primarily by Revenue Growth to increasing
revenues. Amtrak expects significant revenue increases from
Achieve Operational implementing new high-speed rail
service between Boston and Self-Sufficiency Washington,
D.C., and expanding its express service (delivery of higher-value,
time-sensitive goods). Amtrak also plans to increase its revenues
and control costs by developing a market-based intercity route
network that aligns its passenger service more closely with
customer demand (adding trains to certain routes or starting new
service where appropriate, for instance). Amtrak does not plan to
eliminate any routes or services in fiscal year 1999 but has not
made any long-term decisions about routes. (In 1997, 39 of
Amtrak's 40 routes were unprofitable when 9See the "Background"
section. 10According to Amtrak, if it is unable to fund its
progressive overhaul program from federal funds after 2002, it may
be forced to move to a heavy overhaul program. Amtrak officials
believe that the progressive approach keeps its equipment in a
higher average state of good repair and is less expensive. Page 12
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 train,
route, and system costs are included.)11 In addition, by
developing and implementing service standards (such as improving
service to passengers), Amtrak expects to increase ridership (and
revenues) through higher-quality and more consistent service.
Finally, Amtrak plans to contain costs primarily by reducing the
costs of electric power in the Northeast Corridor and enhancing
productivity in a number of ways throughout its system. Amtrak
estimates that its business plan initiatives will result in net
financial improvements of $1.6 billion for fiscal years 1999-2002.
(See table 1.) In particular, it expects to begin obtaining most
revenue increases and cost savings beginning in fiscal year 2000.
For example, over the period covered by the plan, Amtrak expects
that its initiative for express service will generate a cumulative
net impact of about $60 million. Of this $60 million, Amtrak
expects to obtain about $56 million between fiscal years 2000 and
2002. Amtrak also estimates that its new high-speed rail service,
which will begin in fiscal year 2000, will have a $408 million net
impact during the period. Over one-third ($631 million) of the
total net impact of $1.6 billion is expected to occur in fiscal
year 2002, the last year of the plan. 11Intercity Passenger Rail:
Financial Performance of Amtrak's Routes (GAO/RCED-98-151, May 14,
1998.) Page 13 GAO/RCED-99-
181 Amtrak's Financial Condition B-282088 Table 1: Estimated
Financial Results of Amtrak's Initiatives From Fiscal Year 1999
Through Fiscal Year 2002 Dollars in millions Change in
Change in Initiative
revenues expenses Net impact Basis for estimate
Align network to meet customer demand $60
($45) $105 Officials' professional judgment Implement
service standards to improve
Officials' professional judgment quality
85 (20) 105 Undertake actions to be
defined later 56 (154)
210 Placeholders to balance annual budgets Begin high-speed
service 822 414a
408 Ridership forecast Expand express service
248 188a 60 Analyses of market
potential Purchase electricity at wholesale rates
(5) (34) 29 Contract with a utility
company Subtotal
$1,266 $349 $917 Implement hundreds of
other initiativesb 840 148
692 Strategic business units' forecasts Total
$2,106 $497 $1,609 aThe expenses for
high-speed rail service and express service exclude $179 million
and $8 million for depreciation, respectively. bThese hundreds of
individual initiatives have been developed by Amtrak's three
strategic business units-the Intercity, Northeast Corridor, and
West business units, as well as Corporate/Service centers. We did
not review the bases for these estimates. Source: GAO's analysis
of Amtrak's October 1998 strategic business plan. Table 1 also
shows that the expected financial impact from six key initiatives
will account for nearly 60 percent of the expected net impact-$917
million. The remaining benefits come from hundreds of individual
actions outlined in Amtrak's business plan. Overall, Amtrak
projects that if it achieves the financial benefits associated
with these initiatives, including 100 percent of the $631 million
in financial improvements it projects for fiscal year 2002, it
will gradually reduce its reliance on federal operating
assistance, and achieve operating self-sufficiency in 2002. To
Achieve Estimated Net All plans are subject to
uncertainty and Amtrak's estimates for six key Impacts for Six Key
initiatives reflect this uncertainty. First, Amtrak plans to align
its service to Initiatives, Amtrak Must better
meet customer demand, referred to as implementing a market-based
Address Uncertainties in network. Amtrak
expects to generate $105 million in net impact over the Its
Strategic Business Plan period by such actions as
serving currently unserved markets that have good demand
potential. According to Amtrak officials, for the most part this
estimate was based on senior officials' judgment of changes in
revenues and expenses resulting from analysis of the potential for
Page 14 GAO/RCED-99-181
Amtrak's Financial Condition B-282088 partnerships with states and
local governments in certain transportation corridors. However,
Amtrak did not supply us with any information on how it derived
the $105 million amount. Second, Amtrak expects to generate
another $105 million in net impact by implementing a variety of
service standards designed to ensure a consistent, high-quality
product. These service standards will be focused on encouraging
employees to provide consistent, high-quality service; improving
customer-to-staff ratios; addressing customers' complaints and
resolving them as quickly as possible; and instituting a service
guarantee program (such as providing a transportation credit) if
service does not meet established standards. Overall, Amtrak
expects that these efforts will increase revenues by generating
additional ridership and reduce operating costs by lowering
employees' absenteeism. However, the service standards had not
been defined at the time the $105 million estimate was made.
Instead, Amtrak officials told us that the $105 million estimate
was based on extensive analysis completed by senior management,
including benchmarking against corporations that had implemented
similar types of programs, such as the United States Postal
Service, Ritz Carlton, Sears, and Continental Airlines. Amtrak
then estimated that it could have a net impact of $59 million per
year from (1) a reduction in occasions in which customers will not
ride Amtrak again as the result of poor, inconsistent service ($10
million per year); (2) fare increases justified by higher-quality,
more consistent service ($20 million per year); (3) increases in
employees' productivity ($23 million per year); and (4) reductions
in absenteeism ($6 million per year). An Amtrak official told us
that Amtrak chose to be conservative in estimating a $105 million
in savings over the life of the 4-year plan, rather than utilizing
the full $59 million per year in its estimate of savings. Third,
Amtrak's plan contains a broad category of undefined actions
referred to as "undefined initiatives" and "planned management
actions to be developed." These categories represent $210 million
in net impact for which Amtrak had not identified specific
initiatives or developed any plan of action at the time the plan
was approved. The amounts were placeholders to balance the yearly
budgets. According to Amtrak officials, these initiatives
represent the gap that Amtrak must fill even if it successfully
implements all of its other business plan actions. Amtrak intends
to achieve this net impact primarily through cost savings that it
will identify on an ongoing basis. By June 1999, Amtrak officials
had identified actions representing a net impact of about $49
million, reducing the dollar amount of actions yet to be defined
to about $161 million. Page 15
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 Fourth,
Amtrak's plan estimates $408 million in net impact from
implementing high-speed rail service in the Northeast Corridor.
This estimate was based on an extensive ridership forecast.
However, in November 1998 the Department of Transportation's
Office of Inspector General questioned $192 million of the gross
revenue projections for fiscal years 1999 through 2002. In
particular, the Inspector General's review indicated that Amtrak
was too optimistic regarding the system's ability to generate
ridership in the early years of the forecast.12 While Amtrak
disagreed with the Inspector General's assessment of the expected
gains in ridership in the early years, this type of disagreement
highlights the inherent uncertainty in estimating revenues from
high-speed rail service. Fifth, Amtrak estimates that its express
service will result in a net impact of $60 million, which Amtrak
officials stated was based on their assessment of the market
potential for this service. Amtrak has made some initial steps in
this area. For example, it has entered into a partnership with the
United Parcel Service and four other carriers to provide time-
sensitive express service generating an estimated $2.9 million in
annual revenues (less than 1 percent of Amtrak's estimate of
revenues from express service over the period covered by the
business plan). However, Amtrak is new to this area and does not
yet have a track record on which to base its projections. In
addition, Amtrak does not yet have long-term contracts to support
much of the projected financial benefit. Furthermore, much of the
expected benefit depends on Amtrak's expanding its fleet of
express equipment through acquisition, leasing, or other
arrangements, most of which still need the approval of Amtrak's
Board of Directors. Thus, while it is possible that Amtrak may
achieve its net revenue goal, many important actions remain to be
taken. Finally, Amtrak plans to have net savings of $29 million
from buying electric power in the Northeast Corridor at wholesale
rates. Currently, Amtrak buys electricity at retail rates for its
own use and for resale to commuter railroads owned by state and
local governments. Its estimated cost savings were based on
negotiations with a utility under which Amtrak would purchase
power at a wholesale price. However, the Federal Energy Regulatory
Commission denied a request to treat Amtrak as a government entity
that would be exempt from the Federal Power Act's restrictions on
wholesale power purchases. Consequently, Amtrak now plans to seek
enactment of legislation that would designate the railroad as a
power wholesaler. Amtrak's estimate of savings is contingent upon
obtaining this 12Amtrak officials pointed out that the Inspector
General's report included greater estimated revenues than Amtrak
did after 2003, resulting in a convergence of the estimates by
2006. Page 16 GAO/RCED-
99-181 Amtrak's Financial Condition B-282088 legislation by
September 30, 2000. In the meantime, Amtrak officials stated that
Amtrak will help cut its electricity costs by using a competitive
bid process allowed under deregulation, including "retail choice"
programs in Pennsylvania, New York, Massachusetts, Rhode Island,
and Connecticut for electric power purchases. However, this
approach will not achieve Amtrak's estimated $29 million in
savings. Amtrak Has Not Achieved Amtrak has been
unable to achieve its planned budget gap in any of the Its Plans
for the Budget last 4 years. Specifically, from fiscal
year 1995 through fiscal year 1998, Gap, Although
Amtrak's budget gap was, in total, $285 million more than planned,
as Performance Is Improving shown in table 2.13 This
result occurred primarily because Amtrak's expenses were
significantly higher than planned. During the 4-year period,
Amtrak's revenues were $34 million less than planned, and expenses
were $251 million more than planned. As a result, Amtrak's actual
budget gap was higher than it expected. However, the table also
shows that the difference between the planned budget gap and the
actual budget gap has been decreasing since fiscal year 1996.
Moreover, through April of the current fiscal year, the budget gap
is about $10 million less than what Amtrak had estimated for the
first 7 months of fiscal year 1999.14 Table 2: Degree to Which
Amtrak's Budget Gap Exceeded Its Goals for Dollars in millions
Fiscal Years 1995 Through 1998
Difference between planned and actual performance-Better/(Worse)
1995 1996 1997 1998a
Total Revenues $152 ($48)
$48 ($186) ($34) Expenses
(163) (77) (155) 144
(251) Budget gap ($11) ($125)
($107) ($42) ($285) Note: Expenses of about
$106 million in fiscal year 1998 retroactive labor payments were
not included in this analysis because they were not in Amtrak's
strategic business plans. aCompares differences based on Amtrak's
September 1997 strategic business plan rather than the revised
March 1998 plan. See the "Agency Comments and Our Evaluation"
section for a pertinent discussion. Source: GAO's analysis of
Amtrak's data. 13This table focuses on the difference between
actual and planned performance. See fig. 3 for total losses
reflected by the budget gap. 14Amtrak's budget result was a loss
of about $35 million for the first 7 months of fiscal year 1999,
as opposed to the estimated $45 million loss. Page 17
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 The table
shows that Amtrak's revenues exceeded planned amounts for 2 of the
4 years. Fiscal year 1998 revenues were significantly lower than
planned (by $186 million), primarily because of lower than
expected express service business. In contrast, expenses were
greater than planned in fiscal years 1995 through 1997 but much
lower than planned (by $144 million) in fiscal year 1998. The
better than planned results were primarily due to lower than
expected train operation costs, such as lower than expected fuel
costs. If Amtrak experiences difficulties in controlling expenses
over the next 4 years, it will have to generate significantly more
revenues than planned in order to achieve operating self-
sufficiency. Federal Funding and Current and planned
annual federal funding and reforms contained in the Reform
Legislation Amtrak Reform and Accountability Act of 1997
are likely to have little short-term impact on improving Amtrak's
overall financial condition. In Will Likely Have Little the
short term, continued annual federal funding will help Amtrak
cover a Short-Term Impact on significant portion of its
operating expenses for maintenance and help meet its cash flow
needs. However, in the long term, using these funds for Improving
Amtrak's maintenance expenses will limit the use of
funding for capital investments Overall Financial that
would help Amtrak reduce its costs and increase its revenues in
the Condition future. Finally, although the act
allowed Amtrak greater flexibility in its business operations,
these reforms are not likely to provide immediate financial
benefits. Use of Federal Funds for According to its October
1998 strategic business plan, Amtrak ultimately Maintenance
Expenses plans to use $559 million (about 92 percent) of
its $609 million fiscal year Limits Needed Capital 1999
capital appropriation to pay for the maintenance of equipment-a
use Investments specifically referred to in the
conference report accompanying the appropriation. Most of the
remaining $50 million will be used to pay principal on its capital
debt. Amtrak plans to continue using a large portion of the
appropriations that it expects to receive from fiscal year 2000
through fiscal year 2002 for maintenance expenses (including
progressive overhauls)-in total, about $1 billion. This $1 billion
represents nearly two-thirds of the $1.6 billion Amtrak expects to
receive through annual federal capital appropriations.15 The
short-term benefits of using substantial portions of its capital
appropriations for maintenance carry long-term consequences.
Capital investments play a critical role in supporting Amtrak's
business plan and 15According to Amtrak's October 1998 strategic
business plan, the Office of Management and Budget's 5-year
funding plan incorporated anticipated capital support of $571
million for fiscal year 2000 and $521 million each year for fiscal
2001 and 2002, for a total of about $1.6 billion for the 3 fiscal
years. Page 18
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 ultimately
in building and maintaining Amtrak's viability.16 However, as we
reported last year, Amtrak had a $500 million shortfall between
its estimated capital needs and available funding.17 Using federal
funds for maintenance will limit the funds available for needed
capital investments that would help Amtrak reduce its costs and
increase its revenues in the future. By using its federal
appropriations to cover maintenance expenses, Amtrak may widen
this gap between its stated capital needs and expected available
funds. However, in fiscal year 1999, Amtrak has plans to use $758
million of the $2.2 billion it received through the Taxpayer
Relief Act of 1997 for capital improvements in addition to the
$558 million its Board of Directors approved for capital
investments in fiscal year 1998. Amtrak does not yet have a
capital plan detailing its capital investments for the remainder
of these funds. Amtrak has pledged to ultimately use all of the
$2.2 billion for high-return capital initiatives and for certain
mandatory and tactical projects. In the short term, Amtrak plans
to temporarily use a significant portion of these funds for
certain authorized expenses for equipment maintenance because
(under an agreement with the administration) the railroad will not
draw down all of its fiscal year 1999 federal capital
appropriation in the year in which the funds are appropriated.18
Amtrak expects that as its revenues increase as a result of its
strategic business plan initiatives, it will repay the borrowed
Taxpayer Relief Act funds. Finally, after 2002, questions about
whether Amtrak is truly operationally self-sufficient would arise
if Amtrak's capital appropriations are made available and used for
maintenance expenses, which are operating expenses. On the other
hand, if Amtrak is not permitted to continue to use appropriated
funds for maintenance, then it would have to look for additional
ways to increase revenues and reduce expenses. Short-Term
Financial The Amtrak Reform and Accountability Act of
1997 was intended to help Effects of Amtrak Reform improve
Amtrak's financial condition by making reforms to Amtrak's
Legislation May Be Limited operations to help the railroad
better control and manage its costs. Among the act's reforms aimed
at improving Amtrak's financial condition were provisions that
16See GAO/T-RCED-98-134. 17See GAO/T-RCED-98-134. As of early June
1999, Amtrak's Board of Directors had not approved a revised
capital plan showing capital needs and the funds expected to be
available to meet those needs. 18Amtrak's October 1998 strategic
business plan assumes that it may draw down only 40 percent of
each year's general capital appropriation on the first day of the
fiscal year and the remaining 60 percent on the first day of the
following fiscal year. Page 19
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 *
eliminated, as of May 31, 1998, existing statutory and contractual
labor protection arrangements that provided up to 6 years of
compensation for employees who lost their jobs because of the
discontinuance of service on a route or such other covered actions
and required negotiation over new arrangements; * repealed the
statutory ban on contracting out work that would result in
employee layoffs (except for food and beverage service, which
could already be contracted out), incorporated the ban into
existing collective bargaining agreements, and made contracting
out subject to negotiation by November 1999; and * placed a $200
million cap on the aggregate amount that Amtrak and others must
pay rail passengers for all claims (including claims for punitive
damages) arising from a single accident or incident. As we
reported in 1998, the reforms contained in the act may have
little, if any, immediate effect on Amtrak's financial performance
for several reasons. First, regarding labor protection
arrangements, after 10 negotiating sessions, Amtrak and its unions
agreed to submit the matter to binding arbitration. As of early
June 1999, the panel of arbitrators had not reached a decision.
Second, Amtrak officials do not expect to address contracting out
work unrelated to food and beverage service before November 1,
1999. The officials believe the repeal of the ban may provide
long-term flexibility, including flexibility in union negotiations
and in controlling costs, but at this time cannot predict what
changes may result from these negotiations and what the effect on
costs may be. Finally, Amtrak believes the limit of $200 million
per accident for rail passenger liability claims may have a
limited financial effect because this cap is significantly higher
than amounts Amtrak has historically paid on such claims. This
reform may not result in measurable financial savings as much as
in additional flexibility in negotiating with labor unions and in
addressing the freight railroads' concerns over such issues as
liability payments.19 The act also made other changes that have
the potential for a significant impact on Amtrak's future. For
example, it established an independent council-the Amtrak Reform
Council-to evaluate Amtrak's performance and make recommendations
for cost containment, productivity 19The financial effects-if any-
of the March 15, 1999, crash of Amtrak's City of New Orleans train
operating on Illinois Central Railroad Company tracks in
Bourbonnais, Illinois, are not yet known. Page 20
GAO/RCED-99-181 Amtrak's Financial Condition B-282088
improvements, and financial reforms. If, at any time more than 2
years after the enactment of the act and implementation of a
financial plan for operating within authorized funding levels, the
Council finds that Amtrak is not meeting its financial goals or
that it will require operating funds after December 2002, then the
Council is to submit to the Congress, within 90 days, an action
plan for a restructured national intercity passenger rail system.
In addition, if the above events occur, Amtrak is required to
develop and submit an action plan for its liquidation. Conclusions
Amtrak has focused its strategic business plan on the near-term
goal of becoming operationally self-sufficient by 2002-a goal
established by the administration and the Congress. Amtrak's plan
is ambitious; and, to its credit, it is currently somewhat ahead
of the plan's financial goals. Yet the overwhelming bulk of the
expected financial benefits of the plan are still to come-with
most to be achieved in the final year of the plan. Our concerns
are two-fold. First, several aspects of the plan are subject to
considerable uncertainty, including, but not limited to,
identifying over $160 million in productivity and other
improvements during the remaining 3 years of the plan. Second,
Amtrak has a history of not meeting its financial goals, and the
current 4-year plan anticipates achieving about 5 times as much in
financial improvements as Amtrak was able to achieve through its
business plans over the previous 4 years. We recognize that all
plans by their very nature are subject to uncertainty. However,
given the uncertainties in the current plan, Amtrak's history of
missing financial goals, and the magnitude of the savings still to
be achieved, it is difficult to be confident that Amtrak will
become operationally self-sufficient within the next 3 years. The
stakes are high: The Congress gave Amtrak until the end of fiscal
year 2002 to reach operational self-sufficiency and required that
plans for restructuring and liquidating Amtrak be prepared if the
railroad does not meet this goal. Agency Comments We
provided Amtrak and the Federal Railroad Administration within the
and Our Evaluation Department of Transportation copies of a
draft of this report for their review and comment. We met with
Amtrak officials, including the Vice-President for Government and
Public Affairs and the Controller. In general, Amtrak believed
that the draft report contained inappropriate analyses and
mischaracterized how Amtrak derived selected expected financial
benefits in its strategic business plan. Page 21
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 Amtrak
believes that the preferred measure of progress toward achieving
operating self-sufficiency is not net loss but rather its "budget
gap," an Amtrak financial measure that excludes expenses funded
from its capital program. Amtrak apparently misunderstood the
purpose of our work. As stated in the draft report, the objective
of this portion of our work was to assess Amtrak's financial
performance in 1998. The work was not limited to assessing
progress in meeting its goal of operational self-sufficiency.
Consequently, a discussion of financial performance that is
limited to Amtrak's budget gap would be inappropriate and
incomplete. We have clarified the objective and the discussion of
this topic in the report. Amtrak also disagreed with our inclusion
of expenses for progressive overhauls in our discussion of
Amtrak's progress in achieving operational self-sufficiency.
Amtrak stated that while generally accepted accounting principles
require Amtrak to record such spending as operating expenses, it
funds progressive overhauls through its capital program and
therefore believes that they should be counted as capital costs.
As a result, in Amtrak's view, the costs of progressive overhauls
would be excluded from the calculation of Amtrak's progress toward
achieving operational self-sufficiency by 2002. As discussed in
our report, generally accepted accounting principles consider
progressive overhaul expenses to be operating expenses. As a
result, we have not revised how these costs are categorized. We
have added to this report Amtrak's rationale for excluding
progressive overhaul expenses from its budget gap and show the
impact of both including and excluding it. Amtrak stated that we
did not recognize that the higher net loss in fiscal year 1998 was
partially the result of higher depreciation expenses resulting
from investments and that these investments will have positive
impacts for ridership and revenues in the future. We agree and
have included information regarding the impact that Amtrak's
capital investments have had on its operating expenses and net
loss. We have also added a discussion of the important role that
these investments will have on Amtrak's ability to increase
revenues in the future. Amtrak officials stated that our analysis
of actual versus planned financial results for fiscal year 1998
was inappropriate because we used Amtrak's original strategic
business plan issued in September 1997 rather than its revised
plan issued in March 1998. They stated that the revised March plan
is a better benchmark to judge its fiscal year performance because
it reflects business changes resulting from the enactment of the
Amtrak Reform and Accountability Act and the Taxpayer Relief Act
in 1997, as Page 22 GAO/RCED-99-181
Amtrak's Financial Condition B-282088 well as other factors, such
as significant management changes. We disagree. We believe that
the most appropriate benchmark for evaluating yearly performance
is the plan approved at the beginning of the fiscal year. Revising
a plan 6 months into a fiscal year significantly reduces the
uncertainty inherent in preparing an initial estimate of
performance. In addition, the March 1998 plan was an exception-
Amtrak typically produces a plan in September or October of each
year. Finally, while we agree that the enactment of the two laws
and Amtrak's change in leadership were significant events for
Amtrak, the primary financial revisions contained in the March
1998 plan were reductions in revenues associated with Amtrak's
mail and express service initiatives. These reductions were
primarily due to revised assumptions about the market for express
service, rather than a direct result of the above mentioned
events. Amtrak also objected to our characterization of how it
derived estimates for the expected financial benefits associated
with the initiatives to (1) implement service standards and (2)
align its route network to meet customer demand. Amtrak stated
that the estimates were based on extensive analyses completed by
senior management officials and included benchmarking with other
service providers. We believe that the characterization in our
draft report was wholly consistent with the information that we
obtained from top financial officials and others within Amtrak. In
commenting on our draft report, Amtrak officials supplied us with
a rationale for how they derived the estimate for financial
benefits associated with implementing service standards. We have
added this material to our report. The officials did not supply
any additional information on how they derived the estimate for
the expected financial benefits associated with aligning Amtrak's
route network to meet customer demand. Based on the additional
information received, we revised our report to characterize how
Amtrak developed its expected financial benefits as using
"professional judgment" rather than making "best guesses."
Finally, Amtrak officials offered a number of technical and
clarifying comments that we incorporated throughout the report,
where appropriate. In commenting on our draft report, the
Department of Transportation stated that when the goal of
achieving operational self-sufficiency was established, the
administration understood that meeting the goal would not be easy.
(See app. I.) It believes that Amtrak's strategic business plan
provides a credible path for achieving operational self-
sufficiency. The Page 23 GAO/RCED-99-
181 Amtrak's Financial Condition B-282088 Department also stated
that it believes Amtrak is moving in the right direction and is
currently ahead of its financial targets identified in the
corporation's strategic business plan. It stated that our report
should recognize Amtrak's increased investment in traditional
capital projects. As discussed above, we have added this
information to our report. The Department also commented that the
Taxpayer Relief Act of 1997 authorizes Amtrak to use Taxpayer
Relief Act funds for some maintenance activities. Although the
draft report provided to the Department included this fact, we
have added to our report a further reference to this allowed use
of Taxpayer Relief Act funds. Scope and To determine the
status of Amtrak's financial condition, we reviewed its
Methodology fiscal year 1998 annual report, October 1998
strategic business plan, and fiscal year 2000 legislative report
and federal grant request. We also interviewed Amtrak's Chief
Financial Officer and other financial systems officials. To obtain
a historical perspective on Amtrak's financial condition, we also
reviewed Amtrak's annual reports for fiscal years 1994 through
1997. To provide information on Amtrak's current strategic plan
for obtaining operating self-sufficiency, we reviewed its current
and previous strategic business plans and the Department of
Transportation's Office of Inspector General's Summary Report on
the Independent Assessment of Amtrak's Financial Needs Through
Fiscal Year 2002. We also discussed the current strategic business
plan with a variety of Amtrak officials, including officials in
its Intercity and Northeast Corridor strategic business units and
Amtrak's Chief Financial Officer. We did not independently verify
the accuracy of Amtrak's financial data in its current strategic
business plan. Finally, to provide information on the extent to
which federal funding and recently enacted legislative reforms
will help Amtrak resolve its financial problems, we first reviewed
the Amtrak Reform and Accountability Act of 1997, the Taxpayer
Relief Act of 1997, and Amtrak's fiscal year 1999 appropriation.
We then discussed the likely impact of these acts with Amtrak
officials. We also reviewed Amtrak's proposed capital plan and
interviewed Amtrak officials about its contents. We conducted our
review from January 1999 through June 1999 in accordance with
generally accepted government auditing standards. Page 24
GAO/RCED-99-181 Amtrak's Financial Condition B-282088 As agreed
with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30
days after the date of this letter. At that time, we will send
copies of this report to interested congressional committees;
George D. Warrington, the President and Chief Executive Officer of
Amtrak; the Honorable Rodney E. Slater, the Secretary of
Transportation; the Honorable Jolene M. Molotoris, the
Administrator of the Federal Railroad Administration; the
Honorable Jacob J. Lew, the Director of the Office of Management
and Budget; and Gil Carmichael, the Chairman of the Amtrak Reform
Council. We will also make copies available to others on request.
If you or your staff have any questions about this report, please
call me at (202) 512-3650. Key contributors to this report were
Ruthann Balciunas, Catherine Colwell, David Lichtenfeld, and James
Ratzenberger. Sincerely yours, Phyllis F. Scheinberg Associate
Director, Transportation Issues Page 25
GAO/RCED-99-181 Amtrak's Financial Condition Appendix I Comments
From the Department of Transportation Page 26 GAO/RCED-99-181
Amtrak's Financial Condition Appendix I Comments From the
Department of Transportation (348146) Page 27
GAO/RCED-99-181 Amtrak's Financial Condition Ordering Information
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