Intercity Passenger Rail: Increasing Amtrak's Accountability for Its
Taxpayer Relief Act Funds (Testimony, 03/15/2000, GAO/T-RCED-00-116).

Pursuant to a congressional request, GAO discussed the National Railroad
Passenger Corporation's (Amtrak) use of Taxpayer Relief Act (TRA) funds,
focusing on: (1) how much Amtrak has spent in TRA funds and what types
of activities it has funded; (2) whether Amtrak used the funds in
accordance with the act; (3) to what extent the Amtrak Reform Council
and the Internal Revenue Service (IRS) have overseen Amtrak's use of TRA
funds; and (4) observations on Amtrak's capital needs, its progress
toward reaching operational self-sufficiency, and the administration's
fiscal year 2001 budget request for Amtrak.

GAO noted that: (1) through June 1999, Amtrak reported spending about
$1.3 billion of the $2.2 billion provided under the TRA; (2) Amtrak
spent nearly two-thirds of the funds for capital improvements, including
almost $400 million for its high-speed rail program; (3) it spent the
other third of these funds for equipment maintenance expenses and for
debt servicing; (4) Amtrak's use of these funds for capital improvements
have largely supported the initiatives laid out in its strategic
business plan; (5) GAO's review of 23 TRA expenditures revealed the
following: (a) 18 expenditures were consistent with the act; (b) for
three expenditures, GAO believes Amtrak improperly spent TRA funds to
reimburse itself for expenses incurred and paid prior to the act; and
(c) from information provided by Amtrak, GAO could not determined if two
expenditures associated with a Northeast Corridor capital improvement
project were eligible for TRA funding; (6) Amtrak does not review
individual expenditures to determine if they are eligible for funding
under the act but presumes that any expenditure charged to a capital
improvement project is an allowable expense, as long as it has reviewed
and approved the project as qualified under the TRA; (7) the Amtrak
Reform Council has not yet monitored Amtrak's use of TRA funds, and the
IRS has not yet examined Amtrak's use of these funds; (8) the Council
stated that it has lacked the resources to monitor Amtrak's use of these
funds and explained that it was deferring that activity until after GAO
completed its work, so as to avoid duplication of effort; (9) according
to the IRS, it is too early for the Service to have examined Amtrak's
tax return, including Amtrak's use of Taxpayer Relief Act funds, because
the first tax return showing Amtrak's use of these funds was filed in
March 1999; (10) since fiscal year (FY) 1997, Amtrak has not had a
multiyear plan that identifies its capital needs and sources of funds;
(11) in addition, it needed about $300 million annually in capital funds
to replace facilities and equipment that were wearing out; (12) Amtrak
has made only modest progress in reducing its need for federal operating
subsidies; (13) the administration has requested $468 million in funding
for FY 2001 for a proposed expanded intercity rail passenger service
program that could benefit Amtrak; and (14) the program would be
supported by the Highway Trust Fund and is likely to generate
considerable debate from those who oppose using the Highway Trust Fund
for non-highway purposes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-116
     TITLE:  Intercity Passenger Rail: Increasing Amtrak's
	     Accountability for Its Taxpayer Relief Act Funds
      DATE:  03/15/2000
   SUBJECT:  Railroad transportation operations
	     Financial analysis
	     Cost control
	     Equipment maintenance
	     Maintenance costs
	     Future budget projections
	     Federal aid to railroads
	     Program graduation
	     Financial management
IDENTIFIER:  Amtrak Northeast Corridor
	     Amtrak Strategic and Business Plan
	     Highway Trust Fund

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Testimony

Before the Subcommittee on Transportation and Related Agencies, Committee on
Appropriations, House of Representatives

For Release on Delivery

Expected at

10:00 a.m. EST

Wednesday

March 15, 2000

INTERCITY PASSENGER RAIL

Increasing Amtrak's Accountability for Its Taxpayer Relief Act Funds

Statement of Phyllis F. Scheinberg,

Associate Director, Transportation Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-00-116

Mr. Chairman and Members of the Subcommittee:

Since 1971, the federal government has provided the National Railroad
Passenger Corporation (Amtrak) with $23 billion in financial support. This
support includes a total of about $2.2 billion in 1998 and 1999 through the
Taxpayer Relief Act of 1997 (TRA). TRA funds were to be spent on acquiring
capital improvements and maintaining existing equipment in intercity
passenger rail service, among other things.

I am here today primarily to discuss Amtrak's use of TRA funds. My testimony
summarizes the findings in our recent report on this subject. More
specifically, I will discuss (1) how much Amtrak has spent in TRA funds and
what types of activities it has funded, (2) whether Amtrak used the funds in
accordance with the act, and (3) to what extent the Amtrak Reform Council
and the Internal Revenue Service (IRS) have overseen Amtrak's use of TRA
funds. Additionally, as you requested, I will offer some observations on
Amtrak's capital needs, its progress toward reaching operational
self-sufficiency, and the administration's fiscal year 2001 budget request
for Amtrak.

In summary:

   * Through June 1999 (the latest data available at the time of our
     review), Amtrak reported spending about $1.3 billion of the $2.2
     billion provided under the Taxpayer Relief Act. Amtrak spent nearly
     two-thirds of the funds ($804 million) for capital improvements,
     including almost $400 million for its high-speed rail program. It spent
     the other third of these funds for equipment maintenance expenses ($427
     million) and for debt servicing ($48 million). Amtrak's use of these
     funds for capital improvements have largely supported the initiatives
     laid out in its strategic business plan.

   * Our review of 23 Taxpayer Relief Act expenditures (totaling about $10
     million) revealed the following:

   * Eighteen expenditures (totaling about $1 million) were consistent with
     the act.

   * For three expenditures (totaling about $9 million), we believe that
     Amtrak improperly spent Taxpayer Relief Act funds to reimburse itself
     for expenses incurred and paid prior to the act. We did not determine
     if Amtrak similarly reimbursed itself for other expenses incurred and
     paid prior to the act.

   * From information provided by Amtrak, we could not determine if two
     expenditures (totaling about $19,000) associated with a Northeast
     Corridor capital improvement project were eligible for Taxpayer Relief
     Act funding.

In addition, we found that Amtrak does not review individual expenditures to
determine if they are eligible for funding under the act. Rather, Amtrak
presumes that any expenditure charged to a capital improvement project is an
allowable expense, as long as it has reviewed and approved the project as
qualified under the Taxpayer Relief Act. We recommended that Amtrak have its
Inspector General, in consultation with the Corporation's external auditor,
review the adequacy of Amtrak's internal controls over Taxpayer Relief Act
funds. Amtrak agreed to take this action, and, in response to our finding,
it has asked the Internal Revenue Service to determine whether the five
expenditures we questioned are allowable expenses under the act.

   * The Amtrak Reform Council has not yet monitored Amtrak's use of
     Taxpayer Relief Act funds, and the Internal Revenue Service has not yet
     examined Amtrak's use of these funds. The Council stated that it has
     lacked the resources to monitor Amtrak's use of these funds and
     explained that it was deferring that activity until after we completed
     our work, so as to avoid duplication of effort. According to the
     Internal Revenue Service, it is too early for the Service to have
     examined Amtrak's tax return, including Amtrak's use of Taxpayer Relief
     Act funds, because the first tax return showing Amtrak's use of these
     funds was filed in March 1999.

   * Several other issues face Amtrak and the Congress. First, since fiscal
     year 1997, Amtrak has not had a multiyear plan that identifies its
     capital needs and sources of funds. Yet it has important capital needs
     that must be met and has identified a few of them. For example, Amtrak
     has stated that about $12 billion (in 2000 dollars) through 2025 will
     be needed to modernize the infrastructure between Washington, D.C., and
     New York City. In addition, in recent years, it needed about $300
     million annually in capital funds to replace facilities and equipment
     that were wearing out. Second, Amtrak has made only modest progress in
     reducing its need for federal operating subsidies and meeting the
     requirement established by the Congress to be free of operating
     subsidies by the end of 2002. From 1995 through 1999, Amtrak reduced
     its need for operating subsides by $78 million. From 2000 through 2002,
     it must make further reductions totaling $291 million-nearly 4 times as
     much as it achieved in the past 5 years. Finally, the administration
     has requested $468 million in funding for fiscal year 2001 for a
     proposed expanded intercity rail passenger service program that could
     benefit Amtrak. The program would be supported by the Highway Trust
     Fund-which is funded from taxes on fuels used by trucks, buses, and
     passenger cars, among other things-and is likely to generate
     considerable debate from those who oppose using the Highway Trust Fund
     for non-highway purposes.

Background

TRA provided Amtrak with about $2.2 billion for "qualified expenses"-broadly
defined as expenses incurred for acquiring equipment, rolling stock (such as
locomotives and passenger cars), and other capital improvements; upgrading
maintenance facilities; and maintaining existing equipment in intercity
passenger rail service. The act also allows Amtrak to spend these funds for
interest and principal on obligations incurred for these uses. TRA does not
require that expenditures support intercity passenger rail service
exclusively; for example, Amtrak could use TRA funds to purchase or improve
assets that would benefit other aspects of its business, such as commuter
service, as long as its intercity service also benefited. The act allows
Amtrak to temporarily invest TRA funds and requires that the interest be
used for qualified expenses. Any funds not obligated by January 1, 2010, as
well as any funds used for purposes other than qualified expenses, are to be
repaid to the United States. Under a March 1998 agreement with the IRS,
Amtrak is to provide the IRS (as part of the Corporation's annual tax
return) with an annual accounting of its disbursement of TRA funds until the
funds have been fully expended or repaid. The IRS is ultimately responsible
for determining whether TRA funds were spent in accordance with the act.

The Amtrak Reform and Accountability Act of 1997 (Amtrak Reform Act)
established the Amtrak Reform Council and requires the Council to, among
other things, evaluate Amtrak's performance, make recommendations to Amtrak
for achieving cost containment and productivity improvements and financial
reforms, and report quarterly to the Congress on Amtrak's use of TRA funds.

Amtrak Has Devoted TRA Funds Principally to Capital Improvement Projects

Through June 1999, the latest data available at the time of our review,
Amtrak reported spending about $1.3 billion of its TRA funds for capital
improvement projects ($804 million), equipment maintenance ($427 million),
and debt service ($48 million). (See fig. 1.) In addition, Amtrak had earned
about $52 million in interest on TRA funds, all of which was reinvested in
TRA accounts. Amtrak's use of TRA funds for capital improvements has largely
supported the initiatives laid out in its strategic business plan

(adopted in Oct. 1998), such as implementing high-speed rail passenger
service on the Northeast Corridor and expanding Amtrak's mail and express
program.

Figure 1: Proportion of TRA Funds Spent for Various Activities, Through June
1999

Source: GAO's analysis of Amtrak's data.

Amtrak has a long-term goal of using TRA funds for capital improvement
projects. According to Amtrak, it uses TRA funds for equipment maintenance
only when it is running low on cash. To meet its long-term goal, Amtrak has
begun to "repay itself" for the TRA funds used for equipment maintenance
expenses. It repaid $100 million in October 1999. Amtrak expects to complete
the repayment of TRA funds used for these

expenses by the end of 2001 and does not anticipate borrowing additional TRA
funds for this purpose after that time.

Limited Review Shows Mixed Results on Whether

Amtrak Spent TRA Funds in Accordance With the Act

Our limited review of Amtrak's use of TRA funds found mixed results
concerning whether Amtrak spent the funds in accordance with the act. While
Amtrak does determine whether individual capital improvement projects and
equipment maintenance functional categories meet TRA requirements, it does
not determine whether individual expenditures for those projects and
categories do so. Amtrak presumes that any expenditure meets TRA
requirements if it is charged to a project approved by its board of
directors and if the project has been reviewed by its legal department for
TRA qualification. We examined (1) 10 of the 216 capital projects that
Amtrak's board approved for TRA funding, (2) 23 capital improvement
expenditures of the approximately 81,000 TRA expenditures recorded by Amtrak
as of May 1999, and (3) all 48 categories of equipment maintenance expenses
(such as extraordinary passenger car cleaning) to which Amtrak charged TRA
funds.

Most Capital Projects We Reviewed Met TRA Criteria

Nine of the 10 TRA-funded projects we reviewed met the criteria in the act
as capital improvements in intercity passenger rail service. (The 10
projects were budgeted for a total of almost $29 million.) For example,
Amtrak used TRA funds to carry out environmental remediation efforts at its
Beech Grove maintenance facility in Indiana. The Beech Grove facility is
primarily used to maintain equipment in intercity passenger

rail service. Another project meeting TRA criteria was Amtrak's
implementation of its

Human Resources Information System. This system is designed to calculate
various aspects of pay and benefits for Amtrak's workers. While the project
benefits Amtrak generally and does not relate directly to the transportation
of passengers, it supports Amtrak's execution of administrative functions
critical to providing intercity passenger rail service.

However, after reviewing Amtrak documents and discussing with Corporation
officials the tenth project-to transform Northeast Corridor service
(budgeted for

$2 million)-we could not determine whether two of the project's three
components are capital improvements under either the Internal Revenue Code
or generally accepted accounting principles. (The three components are
modifying passenger cars, developing and implementing an emergency response
program for fire and rescue personnel, and developing operational and
marketing strategies for Northeast Corridor service.) Specifically, it was
unclear whether portions of the project were capital in nature (for example,
having future benefits). If a project is not allowable under the act, then
the expenses incurred for the project would not be allowable. In response to
our findings, Amtrak asked the IRS to determine whether the two components
of the Northeast Corridor capital project that we questioned were allowable
under the act.

Most Capital Improvement Expenditures We Reviewed Met TRA Eligibility
Criteria

Of the 23 capital improvement expenditures (totaling about $10 million) we
reviewed, 18 (totaling about 1 million) were reasonably related to the
acquisition of capital improvements in intercity passenger rail service and
therefore were eligible for TRA funding. Examples of the 18 expenditures are
payroll, the freight and shipping of an oven for a dining car, and the
renovation of a retail facility at Amtrak's 30th Street Station in
Philadelphia.

Five of the 23 expenditures presented a different picture. We determined
that three of the five expenditures (totaling about $9 million) were for the
reimbursement of expenses incurred and paid prior to the act and were not
eligible for TRA funding. Specifically, Amtrak used $600,000 of TRA funds to
reimburse itself for amounts paid in 1996 or 1997 to purchase two coach cars
for use in passenger service in the Pacific Northwest. Similarly, Amtrak
used $1.6 million of TRA funds to reimburse its cash account for payments
made between January and August 1997 in connection with acquiring 98 new
diesel locomotives. Finally, Amtrak used $7 million in TRA funds to
reimburse its cash account for 1997 debt service payments that had not been
included in its fiscal year 1997 capital plan as a result of
underestimation. Amtrak believes that the three expenditures were eligible
for TRA funding because neither the statute nor its legislative history
specifically prohibits Amtrak from using the funds to reimburse pre-act
expenses. We believe that TRA did not authorize Amtrak to reimburse itself
for expenses incurred and paid prior to the act because, among other things,
such use could effectively circumvent the restrictions imposed by the
Congress on the use of these funds. Because we did not review all TRA
expenditures, we did not determine if Amtrak similarly reimbursed itself for
other expenses incurred and paid prior to this act. In response to a
recommendation that we made, Amtrak agreed to have its Inspector General
determine whether Amtrak has used TRA funds to reimburse itself for other
expenses incurred and paid prior to the act.

In addition to the three capital improvement expenditures that, in our view,
were clearly not eligible for TRA funding, we identified two other
expenditures (totaling about $19,000) that were questionable. Specifically,
Amtrak paid about $17,000 to an executive recruiting firm to identify
candidates for a new position as Vice President for Northeast Corridor
Service Initiatives. In addition, Amtrak spent approximately $2,000 for
lunches for over 30 employees participating in meetings on the project over
2 days. From information provided by Amtrak, we could not determine whether
the project to which the two questionable expenditures were charged-the
project to transform Northeast Corridor service-was entirely capital in
nature. Therefore, we could not determine whether these two expenditures,
which appeared to relate to multiple aspects of the project, were allowable
under the act. Amtrak disagreed with our findings and believes that these
expenditures were eligible as TRA expenses. Despite these views, Amtrak
stated that, to put to rest any question about its commitment to the proper
expenditure of TRA funds, it has asked the IRS to determine whether the five
expenditures were qualified expenses under the act.

We find Amtrak's lack of review of individual expenditures troubling
because, without such a review, Amtrak does not have reasonable assurance
that TRA funds are spent in accordance with the law. Therefore, we made
several recommendations in our February 2000 report on this issue. In
addition to the actions described above and in response to our
recommendations, Amtrak has asked its Inspector General, in consultation
with the Corporation's external auditor, to review the adequacy of Amtrak's
internal controls over TRA funds. We will continue to follow up with Amtrak
to determine whether its subsequent actions will adequately resolve the
problems we found.

Equipment Maintenance Categories Were Eligible For TRA Funding

With regard to the TRA funds that Amtrak spent for equipment maintenance, we
reviewed Amtrak's 48 broad functional categories, such as extraordinary
passenger car cleaning and fumigation and shop overhead, and found they were
appropriate for TRA funding. Because Amtrak allocates TRA funds to a pool of
equipment maintenance expenses-rather than identifying the specific
expenditures paid for with TRA

funds-we did not determine whether individual expenses financed with TRA
funds were eligible under the act. According to Amtrak, there is always a
sizable pool of allowable equipment maintenance expenses, and it has used
TRA funds for an amount smaller than the pool. We do not object to Amtrak's
approach as long as the pool of qualified expenses is always larger than the
amount of reimbursements for equipment expenses that Amtrak applies to the
pool.

Neither the Amtrak Reform Council nor the

IRS Has Yet Overseen Amtrak's Use of TRA Funds

The Amtrak Reform Council has not reviewed either the legality or merits of
Amtrak's TRA expenditures. In addition, the Council has not made quarterly
reports to the Congress on Amtrak's use of Taxpayer Relief Act funds, as
required by the Amtrak Reform Act. According to the Council, it has not
monitored Amtrak's use of TRA funds because of (1) a lack of financial
resources provided by the Congress, (2) a legislative restriction
prohibiting the Council from hiring outside consultants, and (3) a delay in
obtaining the financial resources and authority to hire staff for the
Council. In addition, the Council decided to defer monitoring TRA
expenditures until after we completed our work, so as to avoid duplication
of effort. Finally, the Council has stated that it would be more efficient
in the future for Amtrak's external auditor to review Amtrak's TRA
expenditures for compliance with the act.

The IRS has not yet examined Amtrak's use of TRA funds. Amtrak filed its
income tax return for 1998-the first tax year for which TRA funds were
available-in March 1999. (Amtrak's 1998 tax year ended Dec. 31, 1998.) As of
February 2000, it was too early for the IRS to have reviewed the return,
including Amtrak's use of TRA funds, according to IRS.

Observations on Amtrak's Capital Needs and Quest for Operational

Self-Sufficiency and the Administration's Fiscal Year 2001 Budget Request

As you requested, I would now like to briefly discuss three related Amtrak
topics: (1) the Corporation's capital needs, (2) its progress toward
reaching operational self-sufficiency, and (3) the administration's fiscal
year 2001 budget request to the Congress for intercity passenger rail.

Amtrak Lacks a Multiyear Plan for Addressing Substantial Capital Needs

The railroad industry is capital-intensive, and Amtrak is no exception.
Amtrak faces expensive requirements that include modernizing the track and
other infrastructure it owns, and purchasing locomotives, passenger cars,
and other rolling stock-such as mail and express cars. Yet, since fiscal
year 1997, Amtrak has not produced a multiyear capital plan that identifies
its capital needs and the sources of funds to meet these needs.

Amtrak's capital needs total many billions of dollars and the Corporation
has identified some of these needs. For example, in a recent study, Amtrak
estimated that about $12 billion (in constant 2000 dollars) through 2025
will be needed to modernize the south end of the Northeast Corridor (between
Washington, D.C., and New York City), which is used by its trains as well as
commuter and freight railroads. In addition, in recent years, Amtrak has
needed about $300 million in capital funds per year just to replace
facilities and equipment that are wearing out. Finally, Amtrak recently
announced a planned expansion of its route system that is aimed at improving
its financial condition. While we have not looked at this plan in detail, we
note that at least one element-the acquisition of about 2,000 mail and
express cars-will require a substantial investment. Relatedly, Amtrak
currently spends a considerable portion of its annual federal capital
appropriations on equipment maintenance rather than on capital investment.
This means that Amtrak is not spending these funds to make the enhancements
that could improve its competitive position in the various markets it
serves.

Amtrak Faces Challenges in Reaching Operational Self-Sufficiency

In 1994, the administration requested that Amtrak be free of operating
subsidies by 2002. The Amtrak Reform and Accountability Act of 1997
prohibited Amtrak from using federal funds for operating expenses, except
for an amount equal to excess Railroad Retirement Tax Act payments, after
2002. Amtrak has made only modest progress toward operational
self-sufficiency. In the past 5 fiscal years, 1995 through 1999, Amtrak has
reduced its need for operating subsidies by only a total of $78 million.
Over the next 3 years, 2000 through 2002, it must make further reductions
totaling $291 million---nearly 4 times as much as it has achieved in the
past 5 years.

We believe that Amtrak will have difficulty meeting the requirement to be
free of operating subsidies by the end of 2002. While it met its full year
financial goals for reducing its need for operating subsidies for the first
time in 1999, this goal was relatively modest. According to Amtrak, for
fiscal year 1999, it reduced its need for operating subsides by $18 million.
However, the bulk of the financial improvements-$291 million-that Amtrak
must make are in 2000 and the next 2 years. In addition, in July 1999, we
reported that Amtrak's current Strategic Business Plan, adopted in October
1998, contains over $200 million in net financial improvements that were
either undefined or listed as actions not yet developed. Amtrak expects to
issue its next Strategic Business Plan later this month.

Fiscal Year 2001 Budget Request Contains a New Intercity Passenger Rail
Program

The administration's budget request for fiscal year 2001 includes $521
million for capital funds for Amtrak and $468 million for a new grant
program for expanded intercity rail passenger service. The Highway Trust
Fund, which is funded from fuel taxes on trucks, buses, and passenger cars,
among other things, would be the source of the funds for the new program.
The proposal is likely to generate considerable opposition from those who
are against using the Highway Trust Fund for non-highway purposes.

If the budget request is enacted, the Secretary of Transportation would
award funds for the new program to Amtrak and/or a state (or consortium of
states) for capital investments needed to support intercity passenger rail
service across the country. The grants, which would be awarded on a 50/50
matching basis, could be used to acquire equipment, make infrastructure
improvements, and undertake planning and design

activities. The program would also require that the investments generate a
positive financial contribution for Amtrak (as measured by Amtrak's
recovering all variable and fixed/overhead costs associated with the new
service) and public benefits in excess of public costs. To the extent that
net revenues on a joint Amtrak-state venture do not occur, states would be
responsible for the equivalent amount of Amtrak's net operating loss for the
service.

The proposed program appears designed to ensure that the projects make money
or at least recover their costs. This is a way to ensure that joint
Amtrak-state projects do not adversely affect Amtrak's financial condition.
(Amtrak has large financial losses-it lost $916 million in fiscal year
1999.) However, requiring states that participate in joint ventures with
Amtrak to make up, dollar-for-dollar, any loss provides no incentive for
Amtrak to maximize revenues and minimize costs.

- - - - -

Mr. Chairman, this concludes my prepared testimony. I would be pleased to
respond to any questions that you or Members of the Subcommittee may have.

Contact and Acknowledgements

For information regarding this testimony, please contact Phyllis F.
Scheinberg at

(202) 512-2834. Individuals making key contributions to this testimony were
Helen Desaulniers, Richard Jorgenson, James Ratzenberger, and Teresa Spisak.

(348213)
  
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