oversight

Intercity Passenger Rail: Issues for Consideration in Developing an Intercity Passenger Rail Policy

Published by the Government Accountability Office on 2003-04-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States General Accounting Office

GAO                          Testimony
                             Before the Subcommittee on Railroads,
                             Committee on Transportation and Infrastructure,
                             House of Representatives


For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, April 30, 2003    INTERCITY PASSENGER
                             RAIL

                             Issues for Consideration in
                             Developing an Intercity
                             Passenger Rail Policy

                             Statement of JayEtta Z. Hecker, Director
                             Physical Infrastructure Issues




GAO-03-712T
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                                                April 30, 2003


                                                INTERCITY PASSENGER RAIL

                                                Issues for Consideration in Developing
Highlights of GAO-03-712T, a testimony
before the Subcommittee on Railroads,           an Intercity Passenger Rail Policy
Committee on Transportation and
Infrastructure, House of Representatives




The Rail Passenger Service Act of               Compared to current levels of federal funding, substantially higher federal
1970 created Amtrak to provide                  investment will be required in the future to stabilize and sustain Amtrak’s
intercity passenger rail service                existing network. Amtrak will be seeking about $2 billion per year over the
because existing railroads found                next several years to stabilize its system and begin addressing its deferred
such service unprofitable. Amtrak               maintenance needs and to cover operating losses. This is about twice the
operates a 22,000-mile network,
primarily over freight railroad
                                                federal funding Amtrak has received annually over the last 5 years.
tracks, providing service to 46                 However, Amtrak’s identified funding requests do not address potential
states and the District of Columbia.            future needs to enhance or expand service or develop high-speed rail
Most of Amtrak’s passengers travel              corridors, which Amtrak has previously estimated at up to $70 billion over
on the Northeast Corridor, which                the next 20 years. According to Amtrak, this will require additional federal
runs between Boston,                            and state investment—over and above the $2 billion annually in identified
Massachusetts, and Washington,                  needs.
D.C. On some portions of the
Corridor, Amtrak provides high-                 Based on analyses of federal investment approaches across a broad stratum
speed rail service (up to 150 miles             of national activities, we have identified several key components of a
per hour).                                      framework for evaluating federal investments. The Congress might find this
Since its inception, Amtrak has
                                                framework useful as it deliberates the future of intercity passenger rail. At
struggled to earn revenues and run              the outset, clearly defined goals would provide the foundation for making
an efficient operation. Recent                  other decisions. For example, if reducing air and highway congestion were a
years have seen Amtrak continue                 goal, this may only be achievable in limited markets, because Amtrak’s
to struggle financially. In February            market share decreases rapidly as travel time and distance increase. To
2003, Amtrak reported that it would             improve the focus on outcomes, it will be important for Congress to consider
need several billion dollars from               a systemwide approach, as opposed to a focus on one mode or type of travel.
the federal government over the                 Establishing the roles of governmental and private entities could better
next few years to sustain                       ensure that goals are achieved. Finally, the choice and design of financing
operations. However, some have                  mechanisms will also have important consequences for performance as well
indicated that there needs to be a              as transparency and accountability.
fundamental reassessment of how
intercity passenger rail is
structured and financed. Options                Amtrak’s Market Share vs. Air Travel, by Time of Trip
raise questions about whether or
not Amtrak should be purely an
operating company, whether
competition should be introduced
for providing service, and if states
should assume a greater financial
role in the services that are
provided.




www.gao.gov/cgi-bin/getrpt?GAO-03-712T.

To view the full testimony, click on the link
above. For more information, contact JayEtta
Z. Hecker at (202) 512-2834, or
HeckerJ@gao.gov.
    Mr. Chairman and Members of the Subcommittee:

    I appreciate the opportunity to testify on the future of intercity passenger
    rail. Passenger rail travel in the United States remains poised at a critical
    juncture. Since its inception, the National Railroad Passenger Corporation
    (Amtrak) has struggled to earn revenues and run an efficient operation,
    balancing demands from a variety of stakeholders in a changing market.
    Recent years have seen Amtrak continue to struggle financially. A few
    months ago, in February 2003, Amtrak reported that it would need several
    billion dollars from the federal government over the next few years to
    sustain operations.

    Last year, however, the Amtrak Reform Council1 indicated that a focus on
    sustaining operations might not be the best way for intercity passenger rail
    policy to proceed. Instead, it 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. In testimony we provided to this subcommittee last
    April, we stated that the current approach to intercity passenger rail is
    likely not sustainable given historical funding levels.2 Today’s hearing,
    therefore, not only takes place against a backdrop of Amtrak’s long-term
    and ongoing financial crises, but also within a context of uncertainty about
    how intercity passenger rail service should be provided to the nation.

    My statement today attempts to aid the Congress as it debates the future
    of Amtrak by (1) examining the levels of federal funding needed to support
    the existing network for providing intercity passenger rail, and (2)
    describing a framework that could facilitate the development of intercity
    passenger rail policy. This statement is based primarily on reports we have
    issued over the past several years.3 In summary:

•   Compared to current levels of federal funding, substantially higher federal
    investment will be required in the future to stabilize and sustain Amtrak’s
    existing network. Amtrak will be seeking about $2 billion per year over the
    next several years to stabilize its system and begin addressing its deferred


    1
    The Amtrak Reform Council is an independent oversight body created by the Amtrak
    Reform and Accountability Act of 1997.
    2
    U.S. General Accounting Office, Intercity Passenger Rail: Congress Faces Critical
    Decisions in Developing a National Policy, GAO-02-522T (Washington, D.C.: April 2002).
    3
    See appendix III for a list of related GAO products.




    Page 1                                        GAO-03-712T Intercity Passenger Rail Policy
    maintenance needs and to cover operating losses. This is about twice the
    federal funding Amtrak has received annually over the last 5 years.
    Although Amtrak is currently taking actions to make its business more
    efficient and control costs, it is unable to determine the extent of its
    success because it lacks labor productivity measures to determine the
    efficiency of its workforce. Amtrak’s identified funding requests also do
    not address potential future needs to enhance or expand service or
    develop high-speed rail corridors—estimated by Amtrak at up to $70
    billion over the next 20 years. According to Amtrak, this will require
    additional federal and state investment—over and above the $2 billion in
    identified needs.

•   Based on extensive analyses of federal investment approaches across a
    broad stratum of national activities,4 we have found that the key
    components of a framework for evaluating federal investments include (1)
    establishing clear, nonconflicting goals, (2) establishing the roles of
    governmental and private entities, (3) establishing funding approaches
    that focus on and provide incentives for results and accountability, and (4)
    ensuring that the strategies developed address diverse stakeholder
    interests and limit unintended consequences. The evaluation framework
    may be useful in several ways as Congress develops intercity passenger
    rail policy. For instance:

    •   Clearly defined goals could provide the foundation for making other
        decisions. For example, if the goal were to reduce air and highway
        congestion by achieving particular market-share targets in select origin-
        and-destination city-pairs, then that goal could shape decisions about
        developing additional higher-speed rail corridors. To improve the focus
        on outcomes and potential contributions to customers or communities,
        it will be important for Congress to consider a systemwide approach as
        opposed to a focus on one mode or type of travel.
    •   Established roles of governmental and private sector entities might
        better ensure that goals are achieved. For example, it will be important
        to determine whether route and service decisions will be made using a



    4
     See, for example, U.S. General Accounting Office, Marine Transportation: Federal
    Financing and a Framework for Infrastructure Investment, GAO-02-1033 (Washington,
    D.C.: September 2002); U.S. General Accounting Office, U.S. Infrastructure: Funding
    Trends and Opportunities to Improve Investment Decisions, GAO/RCED/AIMD-00-35
    (Washington, D.C.: Feb. 7, 2000); and U.S. General Accounting Office, Executive Guide:
    Leading Practices in Capital Decision-Making, GAO/AIMD-99-32 (Washington, D.C.:
    December 1998).




    Page 2                                      GAO-03-712T Intercity Passenger Rail Policy
                 top-down approach by a central entity (whether the federal
                 government or an organization like Amtrak) or using a bottom-up
                 approach by state and local governments, in combination with private
                 entities.
             •   Appropriate financing mechanisms may increase performance,
                 transparency, and accountability. Different mechanisms are available
                 (e.g., grants, bonds, loans, or user fees), but they carry different
                 characteristics, which policy-makers should consider.
             •   Finally, consideration of diverse stakeholder interests when crafting
                 policy changes could minimize unintended and adverse consequences.
                 Stakeholders such as commuter railroads, states, and freight railroads
                 could be significantly affected by a change in policy.


             The Rail Passenger Service Act of 1970 created Amtrak to provide intercity
Background   passenger rail service because existing railroads found such service
             unprofitable. Amtrak operates a 22,000-mile network, primarily over
             freight railroad tracks, providing service to 46 states and the District of
             Columbia. (See fig. 1.) Amtrak owns 650 miles of track, primarily on the
             Northeast Corridor, which runs between Boston, Massachusetts, and
             Washington, D.C. The Northeast Corridor is the busiest passenger line in
             the country, and some 200 million Amtrak and commuter rail travelers use
             the Corridor, or some portion of it, each year. On some portions of the
             Corridor, Amtrak provides high-speed rail service (up to 150 miles per
             hour). In addition, access to the Corridor is crucial for eight commuter
             railroads (operated by state and local governments) that service 1.2
             million passengers each work day as well as six freight railroads.




             Page 3                                GAO-03-712T Intercity Passenger Rail Policy
Figure 1: Amtrak’s Route System




                                  At the present time, intercity passenger rail only plays a small part in the
                                  nation’s overall transportation system (with the exception of some short-
                                  distance routes). In fiscal year 2002, Amtrak served about 23.4 million
                                  passengers, or about 64,000 passengers a day. According to Amtrak, about
                                  two-thirds of its ridership is wholly or partially on the Northeast Corridor.
                                  In contrast, preliminary figures for 2002, the latest year data are available,
                                  indicate that airlines carried about 1.5 million domestic passengers per
                                  day. In 2001, intercity buses carried about 83,000 passengers per day.
                                  Amtrak has won sizeable market shares (compared to travel by air),
                                  between certain relatively close city-pairs. However, by far, most intercity
                                  traffic remains by automobile.

                                  Recent legislation introduced in the Congress has recognized the
                                  substantial capital investment required for intercity passenger rail
                                  systems. For example, legislation introduced by the Chairman of this



                                  Page 4                                 GAO-03-712T Intercity Passenger Rail Policy
Committee last year, the Rail Infrastructure Development and Expansion
Act for the 21st Century (H.R. 2950), would have authorized the issuance
of tax-exempt bonds, grants, direct loans, and loan guarantees of over $71
billion for high-speed rail infrastructure, corridor development,
rehabilitation, and improvement. Legislation introduced by a Member of
this Subcommittee in the current session of Congress, the National Rail
Infrastructure Program Act (H.R. 1617), would establish a national rail
infrastructure trust fund and make about $3 billion available to states for
projects that address railroad infrastructure deficiencies in order to
provide substantial public benefits, such as mitigating highway congestion
and reducing transportation emissions. Projects eligible for funds under
this legislation could potentially benefit intercity passenger rail systems.
Legislation introduced in the Senate this session (S. 104) would authorize
significant funding for passenger rail investment, including about $2 billion
annually for Northeast Corridor growth investments, about $1.4 billion in
capital investments, and about $1.5 billion annually for development of
high-speed rail corridors.5

In a hearing before the House Committee on Appropriations,
Subcommittee on Transportation, Treasury, and Independent Agencies,
held on April 10, 2003, the President of Amtrak and the Deputy Secretary
of Transportation offered differing views on Amtrak and the future of
intercity passenger rail service in America. Amtrak’s President focused
primarily on the importance of Amtrak’s receiving the funding it needs to
improve the condition of its equipment, its reliability and utilization, and
its infrastructure. The Deputy Secretary, in contrast, stated that the
administration has declared principles for a fundamental restructuring of
the manner in which federal assistance is provided for intercity passenger
rail service. These principles include creating a rail service that is driven
by sound economics, fosters competition, and establishes a long-term
partnership between states and the federal government to sustain an
economically viable system.




5
This bill would also repeal the requirement that Amtrak be operationally self-sufficient.




Page 5                                        GAO-03-712T Intercity Passenger Rail Policy
                        Current federal funding is not sufficient to support the existing level of
Current Federal         intercity passenger rail service being provided by Amtrak. Over the long-
Funding Not             term, significantly higher levels of investment will be needed to stabilize
                        the existing system and get it into a state of good repair. Amtrak has
Sufficient to Support   reported that just doing that will require nearly $2 billion annually over the
Existing Level of       next several years—about twice the amount provided annually over the
                        last 5 years. The total amount of additional funding needed is not known
Intercity Passenger     but will likely be in the tens of billions of dollars. From fiscal year 1976
Rail                    through fiscal year 2003, the federal government has provided Amtrak with
                        over $26 billion (nominal dollars) in operating and capital subsidies.6

                        Amtrak’s financial condition has never been strong, and the corporation
                        has been on the edge of bankruptcy several times. The Amtrak Reform and
                        Accountability Act of 1997 required Amtrak to reach operational self-
                        sufficiency by December 2002.7 However, Amtrak’s financial outlook since
                        this legislation was enacted has remained troubled, and the corporation
                        has gone from one financial crisis to the next. In March 1998, we reported
                        that Amtrak’s financial condition had continued to deteriorate and that it
                        would continue to face challenges in improving its financial health.8 In
                        September 2000, we again reported that Amtrak was struggling in its quest
                        to achieve operational self-sufficiency and that it had made limited
                        progress in reducing its need for operating support.9 Amtrak’s financial
                        struggles have become even more acute in recent years. For example, in
                        2001 Amtrak mortgaged a portion of Pennsylvania Station in New York
                        City to generate enough cash to meet its expenses, and in July 2002, the
                        Department of Transportation approved a $100 million loan because the
                        railroad was running out of cash. As recently as a few months ago, Amtrak
                        said that its financial and physical condition was still precarious and that
                        federal support of about $1.8 billion would be required in fiscal year 2004


                        6
                        This is $41.7 billion in 2002 dollars.
                        7
                         The Amtrak Reform and Accountability Act of 1997 prohibited Amtrak from using federal
                        funds for operating expenses, except an amount equal to excess Railroad Retirement Tax
                        Act payments, after 2002. However, this prohibition would not apply if Congress
                        specifically appropriates funds for Amtrak to cover operating expenses in a particular
                        fiscal year, as Congress did in fiscal year 2003 (see the Consolidated Appropriations
                        Resolution, 2003, P.L. 108-7).
                        8
                         U.S. General Accounting Office, Intercity Passenger Rail: Outlook for Improving
                        Amtrak’s Financial Health, GAO/T-RCED-98-134 (Washington, D.C.: Mar. 24, 1998).
                        9
                         U.S. General Accounting Office, Intercity Passenger Rail: Decisions on the Future of
                        Amtrak and Intercity Passenger Rail Are Approaching, GAO/T-RCED-00-277
                        (Washington, D.C.: Sept. 26, 2000).




                        Page 6                                       GAO-03-712T Intercity Passenger Rail Policy
just to stabilize its system. This is about twice the approximately $1 billion
in federal funding Amtrak has received annually over the last 5 years. For
fiscal years 1999 through 2003, Amtrak received a total of about $4.7
billion in federal operating and capital support.

Amtrak has indicated that it will require $2 billion annually in federal
contributions over the next few years, with a focus on stabilizing its
system. It does not address additional capital investments that might be
required for enhancements or expansions of Amtrak’s system. In February
2002, Amtrak estimated that its deferred capital backlog was about $6
billion ($3.8 billion of which was attributed to the Northeast Corridor).
Additional capital funds would be needed to enhance and modernize its
system, such as undertaking infrastructure improvements that permit
faster trip times for Amtrak’s trains. For example, in January 2000, Amtrak
estimated that about $12 billion (in 2000 dollars) would be needed
between fiscal years 2001 and 2025 to improve the Northeast Corridor
between New York City and Washington, D.C., in order to increase the
reliability of the Corridor and make enhancements that permit higher
speed service. Amtrak’s share of this cost—estimated at about $6 billion—
is not fully included in its expected funding request.10

To cover needed operating subsidies, Amtrak can be expected to need
about $800 million per year, or about $4 billion over the 5-year period 2005
to 2009. This amount appears to be included within the projected request
for $2 billion annually. For fiscal year 2004, Amtrak estimates that it will
require about $768 million in operating subsidies—nearly 50 percent above
its 2003 appropriation ($522 million). By comparison, Amtrak received
about $200 million in fiscal year 2002. Operating subsidies are needed
because virtually all of Amtrak routes fail to generate operating profits.
For fiscal year 2002, only one of Amtrak’s routes, the Acela
Express/Metroliner, earned an operating profit (about $78 million).
Operating losses on other routes ranged from about $700,000 to about $77
million.11 Although Amtrak’s President has said that actions to maintain
solvency and create a lean organization with tight financial controls have



10
 The remaining $6 billion would come from commuter railroads and other users of the
Northeast Corridor.
11
 Operating results exclude depreciation, net interest expense, and special trains. In
addition to the Acela Express/Metroliner, one other route, the Heartland Flyer between
Texas and Oklahoma, made a profit of $1.1 million, primarily because state contributions
provided Amtrak with about $4.9 million, about 83 percent of the route’s total revenue.




Page 7                                       GAO-03-712T Intercity Passenger Rail Policy
been initiated, operating a national intercity passenger rail system
structured similar to Amtrak’s current system will likely require
substantial operating subsidies for the foreseeable future. The amount of
those operating subsidy needs, however, is unknown.

Part of Amtrak’s need for operating subsidies involves Amtrak’s ability to
control costs. In fiscal year 2002, Amtrak’s operating costs decreased by
$76.7 million compared with fiscal year 2001.12 According to Amtrak, this
was partially accomplished by streamlining its business and eliminating
1,000 positions. Amtrak’s President recently testified before the House
Appropriations Committee that one of the challenges for Amtrak would be
generating a higher level of productivity from its workforce. As we
reported in 2000, Amtrak had attempted to control cost growth by
improving labor productivity, but it had no measures of labor productivity
for its different lines of business to measure its progress or efficiency.13
Amtrak is still in the process of developing these measures.

Amtrak’s identified funding requests do not address the future needs that
might be required to expand or enhance service or develop high-speed rail
corridors. According to Amtrak, additional federal and state investment—
over and above the $2 billion per year—would be required to address
these issues and begin developing high-speed rail corridors. As we
reported last year, the total cost to develop high-speed rail corridors is
unknown because these initiatives are in various stages of planning.14
However, preliminary Amtrak estimates indicate the capital costs to
develop these other corridors (along with the Northeast Corridor) could
be between $50 billion and $70 billion over the next 20 years. The
American Association of State Highway and Transportation Officials—a
trade association of state and local transportation officials—also recently
reported that about $60 billion would be required to develop these
corridors and Amtrak’s Northeast Corridor over a 20-year period.




12
 Excludes depreciation.
13
 U.S. General Accounting Office, Intercity Passenger Rail: Amtrak Will Continue to Have
Difficulty Controlling Its Costs and Meeting Capital Needs, GAO-RCED-00-138
(Washington, D.C.: May 31, 2000).
14
 GAO-02-522T.




Page 8                                      GAO-03-712T Intercity Passenger Rail Policy
                           Based on GAO’s analyses of federal investment approaches across a broad
Framework for              stratum of national activities, we have found several key components of a
Creating a National        framework for evaluating federal investments.15 Congress may find this
                           framework useful to consider as it develops a national intercity passenger
Intercity Passenger        rail policy. Components of the framework include: (1) establishing clear,
Rail Policy                nonconflicting goals, (2) establishing the roles of governmental and
                           private entities, (3) establishing funding approaches that focus on and
                           provide incentives for results and accountability, and (4) ensuring that the
                           strategies developed address diverse stakeholder interests and limit
                           unintended consequences.


Defining Goals Will        By clearly defining nonconflicting goals for an intercity passenger rail
Provide a Foundation for   system, the Congress could provide a basis for guiding federal
Making Other Decisions     participation. Nonconflicting goals provide a clear direction, establish
                           priorities among competing issues, specify the desired results, and lay the
                           foundation for such other decisions as determining how the assistance will
                           be provided, the duration of that assistance, and what the total value of the
                           assistance should be. Such goals are best considered in the context of the
                           relationship of an intercity passenger rail system to other transportation
                           modes. Transportation experts highlight the need to view any part the
                           system plays in the context of the entire transportation system in
                           addressing congestion, mobility, and other challenges. A systemwide
                           approach to transportation planning and funding, as opposed to focusing
                           on a single mode or type of travel, could improve the focus on outcomes
                           and the contribution to customer or community needs.

                           The Congress could choose any number or type of goals when developing
                           a national policy. For instance, it might decide that the goals should
                           maximize some or all of the benefits of intercity passenger rail. As we



                           15
                             See, for example, U.S. General Accounting Office, Marine Transportation: Federal
                           Financing and a Framework for Infrastructure Investment, GAO-02-1033 (Washington,
                           D.C.: September 2002); U.S. General Accounting Office, Intercity Passenger Rail: Congress
                           Faces Critical Decisions in Developing a National Policy, GAO-02-522T (Washington,
                           D.C.: Apr. 11, 2002); U.S. General Accounting Office, Commercial Aviation: A Framework
                           for Considering Federal Financial Assistance, GAO-01-1163T (Washington, D.C.: Sept. 20,
                           2001); U.S. General Accounting Office, U.S. Infrastructure: Funding Trends and
                           Opportunities to Improve Investment Decisions, GAO/RCED/AIMD-00-35 (Washington,
                           D.C.: Feb. 7, 2000); U.S. General Accounting Office, Executive Guide: Leading Practices in
                           Capital Decision-Making, GAO/AIMD-99-32 (Washington, D.C.: December 1998); and U.S.
                           General Accounting Office, Federal Budget: Choosing Public Investment Programs,
                           GAO/AIMD-93-25 (Washington, D.C.: July 23, 1993).




                           Page 9                                       GAO-03-712T Intercity Passenger Rail Policy
reported last year, intercity passenger rail has the potential to provide
broad public benefits, such as stemming increases in highway and air
congestion, reducing automobile pollution, and reducing fuel consumption
and energy dependency.16

We pointed out, however, that some of these benefits might be difficult to
obtain. For instance, for rail transport to capture the market share
necessary to reduce air travel congestion, the distance between potential
intercity passenger rail cities must be short enough to make rail travel
times competitive with air travel times (at comparable costs and levels of
comfort). Amtrak’s market share decreases rapidly as travel time and
distance increases. As we previously reported, compared with air service
only (as most travel is by automobile), between New York City and
Philadelphia and between Philadelphia and Washington, D.C.—both
relatively short-distance markets—Amtrak’s market share was over 80
percent. But for longer distance markets, such as New York City to
Chicago, Illinois, and Chicago, to Washington, D.C., Amtrak’s market share
compared with air service was less than 10 percent.17 (See fig. 2.) Studies
suggest that as the speed of intercity passenger rail increases, the potential
benefits attributable to reductions in airport and highway delays increase,
as does the potential distance over which passenger rail is able to compete
with air transport. The potential for intercity passenger rail to reduce air
congestion is also greater where there is little, or no, room for additional
runways and where there is limited competition between airlines resulting
in relatively high air fares. See appendix I for more information on
potential benefits from intercity passenger rail travel.




16
 GAO-02-522T.
17
 GAO-02-522T.




Page 10                                GAO-03-712T Intercity Passenger Rail Policy
Figure 2: Amtrak Market Share Compared to Air Service for Selected Origins and Destinations




                                        To help ensure that the goals are achieved, conflicting goals should be
                                        avoided to the maximum extent possible to reduce the possibility that
                                        achieving one goal reduces the likelihood of attaining another goal. In
                                        addition, the goals should be measurable—that is, they should identify the
                                        amount of public benefits to be obtained. Having measurable goals better
                                        assists in determining the success or failure in attaining the goals and in
                                        holding intercity passenger rail systems accountable for results.

                                        In this context, we note that the statements made by the President of
                                        Amtrak and the Deputy Secretary of Transportation on April 10 both
                                        reflect efforts to establish goals. The President of Amtrak stated that his
                                        goals over the past year were to maintain solvency, begin a program of
                                        critical capital investment, create a lean organization with tight financial
                                        controls, and build a zero-based budget. The Deputy Secretary stated that
                                        the Administration would support specific performance targets that can be
                                        met on an annual basis, and he discussed five principles articulated by the



                                        Page 11                                  GAO-03-712T Intercity Passenger Rail Policy
                                  Secretary of Transportation for reforming intercity passenger rail.18 While
                                  these efforts are clearly important, a broader consideration of how the
                                  passenger rail system fits with other modes of transportation and how
                                  changes to the system might maximize public benefits would be a critical
                                  first step in developing intercity passenger rail policy.


Establishing Roles of             Establishing the relative roles of federal, state, and local governments and
Governmental and Private          private sector entities, to the extent practicable, could better ensure that
Sector Entities Will Better       goals are achieved. The Deputy Secretary of Transportation touched on
                                  this issue when he stated on April 10 that the department hopes to
Ensure That Goals Are             establish a long-term partnership between the states and the federal
Achieved                          government to support intercity passenger rail service. The President of
                                  Amtrak also described how Amtrak had entered into negotiations with
                                  state partners to have them cover 100 percent of the direct operating loss
                                  for intercity passenger rail services that receive state support.

                                  Defining roles helps to establish incentives for leadership, financial
                                  participation, risk-sharing, and accountability among the participating
                                  parties. Roles are defined not only by specific structures and
                                  organizations, but also by the forms, conditions, and terms of assistance.
                                  Regarding structures and organizations as they pertain to intercity
                                  passenger rail travel, the Congress will need to pose and resolve such
                                  questions as:

                              •   Should there be a government-established entity, such as Amtrak, with a
                                  monopoly over intercity passenger rail, or could federal and state
                                  governments allow private operators to receive government assistance on
                                  a competitive basis to provide intercity passenger rail service?

                              •   How much independence should the entity or entities providing rail
                                  service have to make decisions? A recent report on passenger rail
                                  restructurings in other countries stated that successful reform plans
                                  involved an increasing degree of independence of the rail entity from




                                  18
                                    These five principles are to (1) create a system driven by sound economics; (2) require
                                  that Amtrak transition to a pure operating company; (3) introduce carefully managed
                                  competition to provide higher quality rail services at reasonable prices; (4) establish a long-
                                  term partnership between the states and the federal government to support intercity
                                  passenger rail service; and (5) create an effective public partnership, after a reasonable
                                  transition, to manage the capital assets of the Northeast Corridor.




                                  Page 12                                         GAO-03-712T Intercity Passenger Rail Policy
    political influence.19 The Amtrak Reform Council reported in February
    2002 that one of the factors influencing Amtrak’s decisionmaking and
    financial performance was a susceptibility to political pressure.20

•   Will routes and services be determined using a top-down approach by a
    central entity, such as the federal government or an organization like
    Amtrak, or with a bottom-up approach at a state or local level focusing on
    where intercity passenger rail can generate the most public benefits for
    particular citizens?

    Establishing the roles of the federal, state, and local governments will be
    particularly important. The federal government is currently the major
    financer of intercity passenger rail systems and has provided Amtrak with
    about $1 billion per year in federal support over the last 5 years. Although
    several states and localities may receive significant benefits from Amtrak’s
    operations, state support for Amtrak has been relatively limited—about
    $168 million in fiscal year 2002. One option for restructuring intercity
    passenger rail is to increase the role of state and local governments in
    financing the rail system.

    The ability of states to provide and maintain financial support for intercity
    passenger rail is unknown, however. We reported last year that most of the
    officials from 17 state departments of transportation we contacted were
    willing to provide funds for intercity passenger rail.21 However, they said
    that continued federal investment would be required, and they expressed
    concern over their ability to successfully form partnerships with other
    states to finance intercity passenger rail service. One of the potential
    impediments cited was determining a fair cost-sharing arrangement for
    capital improvements. This is consistent with what we found in our 1998
    report on the potential issues of Amtrak liquidation.22 In that report,
    officials from states we spoke with also cited potential problems with
    compacts between states to provide intercity passenger rail service.



    19
     U.S. Congressional Research Service, “Foreign Intercity Passenger Rail: Lessons for
    Amtrak?” June 2002.
    20
     Amtrak Reform Council, An Action Plan for the Restructuring and Rationalization of the
    National Intercity Passenger Rail System (Feb. 2002).
    21
     See GAO-02-522T.
    22
     U.S. General Accounting Office, Intercity Passenger Rail: Issues Associated With a
    Possible Amtrak Liquidation, GAO/RCED-98-60 (Washington, D.C.: Mar. 2, 1998).




    Page 13                                      GAO-03-712T Intercity Passenger Rail Policy
                       Among the potential problems cited was reaching agreement on the
                       allocation of costs between states. Officials from three states we spoke
                       with that were not on the Northeast Corridor but whose states generated a
                       large volume of intercity rail passengers also expressed concerns about (1)
                       the potentially high cost of continuing service, (2) possible difficulties in
                       negotiating access to tracks, and (3) lack of an incentive to continue
                       service if Amtrak’s national route network were ended.

                       As previously mentioned, the Amtrak Reform Council has recommended
                       introducing competition for intercity passenger rail service. The Secretary
                       of Transportation also supports carefully managed competition. If intercity
                       passenger rail service were restructured to allow private rail operators to
                       bid on the opportunity to provide service, however, those operators would
                       still likely require operating subsidies. Four of the five private rail
                       companies we contacted last year said that, even though they would
                       provide efficient passenger rail service, they would still need operating
                       subsidies. A fifth company had not yet determined if operating subsidies
                       would be required.


Choice and Design of   The choice and design of financing mechanisms, including mechanisms
Financing Mechanisms   used to provide federal assistance, will have important consequences for
Will Have Important    performance, transparency, and accountability. A wide variety of
                       mechanisms are available to provide financial assistance, including grants,
Consequences for       bonds, tax subsidies, loans, loan guarantees, and user fees. Each of these
Performance,           vary in the extent they provide a stable source of revenue that covers
Transparency, and      capital needs, ensure that investments provide an appropriate return on
Accountability         investment relative to investments in other intercity transportation
                       systems, leverage the federal dollar, and balance accountability and
                       flexibility. These mechanisms can be structured to support or facilitate
                       public-private partnerships. According to a recent report, a lesson learned
                       from intercity passenger rail restructuring in other countries was that one
                       goal of most such reforms was to increase the transparency of government
                       financial support. In general, the intent of policy makers was to hold
                       railroads more accountable by eliminating cross-subsidization of
                       services.23




                       23
                        U.S. Congressional Research Service, “Foreign Intercity Passenger Rail: Lessons for
                       Amtrak?” June 2002.




                       Page 14                                      GAO-03-712T Intercity Passenger Rail Policy
                       In choosing the funding mechanism, it will be important to protect the
                       federal government’s interests. This can be done in a variety of ways. Most
                       recently, in Amtrak’s fiscal year 2003 appropriations, the Congress
                       adopted measures to increase the oversight and accountability over
                       federal funds used for intercity passenger rail. These measures include
                       requiring (1) federal funds be allocated by the Secretary of Transportation
                       using a grant making process, and (2) Amtrak prepare and submit to the
                       Congress a business plan and limiting federal spending on projects not
                       contained in the plan. In addition, the conference report requires the
                       Secretary of Transportation to vouch for the accuracy of Amtrak’s
                       financial information. We believe these are good first steps. Other
                       measures that are available include establishing criteria for the evaluation
                       of projects and the use of federal funds similar to that used by the Federal
                       Transit Administration in its New Starts program, incorporating
                       accountability requirements similar to those in the Government
                       Performance and Results Act, and requiring intercity passenger operators
                       to assume some level of financial risk in their operations.


Diverse Stakeholder    Finally, it will be important to consider diverse stakeholder interests in
Interests Need to Be   developing intercity passenger rail policy and limit unintended
Considered             consequences. Revising the structure of intercity passenger rail could have
                       substantial effects on a number of stakeholders, including Amtrak and its
                       employees, the railroad retirement and unemployment systems, commuter
                       railroads, states, and freight railroads. Amtrak, its employees and
                       creditors, and the railroad retirement and unemployment systems all have
                       substantial financial involvement with Amtrak and could be the most
                       directly affected by a change in intercity passenger rail policy, particularly
                       if Amtrak were to be liquidated.

                       At the request of this Committee, we have reported on the potential costs
                       that might emerge if Amtrak were liquidated.24 We take no position on
                       whether Amtrak should be liquidated but our work shows that there could


                       24
                        U.S. General Accounting Office, Intercity Passenger Rail: Potential Financial Issues in
                       the Event That Amtrak Undergoes Liquidation, GAO-02-871 (Washington, D.C.: Sept. 20,
                       2002). Our report did not discuss the likelihood or advisability of liquidating Amtrak. The
                       report also did not discuss secondary effects, such as damage to a creditor if it did not
                       collect amounts owed to it by Amtrak. Finally, the report did not discuss the effects of a
                       cessation of Amtrak service, or the potential effects on commuter and freight railroads that
                       rely on access to Amtrak’s tracks or rely on Amtrak to operate their trains. These issues
                       were discussed in our testimony before this committee in April 2002 and in our 1998 report
                       on Amtrak liquidation. (See GAO-02-522T and GAO/RCED-98-60.)




                       Page 15                                       GAO-03-712T Intercity Passenger Rail Policy
be substantial financial issues associated with such an action. We reported
that if Amtrak had been liquidated on December 31, 2001, secured and
unsecured creditors, along with Amtrak’s stockholders, would have had
about $44 billion in claims against Amtrak’s estate. The federal
government would have been by far the largest claimant. However, it is not
likely these claims would have been fully satisfied since, aside from the
Northeast Corridor, the value of Amtrak’s assets would have been less
than the claims against them. Amtrak liquidation would also have affected
the railroad retirement and unemployment systems. Appendix II provides
additional information on the financial implications of a potential
liquidation.

Stakeholders such as commuter railroads, states, and freight railroads
could also be significantly affected by a change in policy. Commuter
railroads in the Northeast could be especially affected since Amtrak’s
Northeast Corridor is a vital piece of infrastructure that handles about
1,200 Amtrak, commuter, and freight trains a day. Since commuter
railroads are by far the heaviest users of the Northeast Corridor and
depend on this corridor to bring, on average, about 1.2 million passengers
a day into major cities, it will be important to deal with this corridor
carefully. As previously mentioned, state concerns largely focus on costs
to provide intercity passenger rail service as well as access rights to freight
railroad tracks and the cost of this access. How these issues are handled
could materially affect state decisions concerning whether to support
intercity passenger rail. Finally, freight railroads are concerned about the
degree to which intercity passenger rail affects their ability to serve their
customers and earn profits. Increased conventional or high-speed
passenger rail service could severely affect their operations. While the
various stakeholders may all be able to share a general vision of the
intercity passenger rail system, they may diverge in their priorities. Policy
changes, if not thoroughly thought through, could have unintended and
disagreeable consequences for one or more of these stakeholders.


In summary, Mr. Chairman, intercity passenger rail continues to be at a
crossroads. Maintaining the current approach will likely require
substantial federal operating and capital support—but at much higher
levels than currently provided. It will be important to consider a
systemwide approach for considering how the passenger rail system fits
with other modes of transportation. Alternative approaches to providing
intercity passenger rail service may be available that can provide public
benefits and complement other modes of transportation as an integrated
part of the national transportation network. Such approaches will


Page 16                                GAO-03-712T Intercity Passenger Rail Policy
                  undoubtedly require a substantial political and financial commitment over
                  an extended period of time. When Japan restructured its intercity
                  passenger rail system in the late 1980s and 1990s, for example, the reform
                  plan was carried out over a decade and two political administrations.

                  The framework I have described today is meant to help the Congress as it
                  asks some fundamental questions about the future of intercity passenger
                  rail: What does the nation want or need from this mode of transportation?
                  Who should pay for it? How should it be paid for? And if changes to the
                  current system are necessary, how can we make those changes while
                  minimizing unintended consequences and maximizing public benefits? We
                  stand ready to assist the Congress as it deliberates answers to those
                  questions.

                  This concludes my prepared remarks. I would be pleased to answer any
                  questions you or other Members of the Subcommittee might have.


                  For further information, please contact JayEtta Z. Hecker at
Contacts and      heckerj@gao.gov or at (202) 512-2834. Individuals making key
Acknowledgments   contributions to this statement include Colin Fallon, Richard Jorgenson,
                  and Steve Martin.




                  Page 17                              GAO-03-712T Intercity Passenger Rail Policy
Appendix I: Potential Public Benefits from
Intercity Passenger Rail

                           Intercity passenger rail has the potential to generate benefits to society
                           (called “public benefits”) by complementing other more heavily used
                           modes of transportation in those markets in which rail transport can be
                           competitive. These benefits include reduced highway and air congestion,
                           pollution, and energy dependence, and provide an option for travelers to
                           use passenger rail systems in the future.1


Intercity Passenger Rail   One potential public benefit of intercity passenger rail service is the
May Help Alleviate         reduced highway congestion that will result if some people travel by train
Highway and Air            rather than on highways. Where congestion exists, intercity passenger rail
                           would not have to capture a large share of the travelers who would
Congestion                 otherwise use other modes of transportation in order to generate a
                           substantial public benefit from reduced highway congestion. Roadway
                           congestion often results when vehicles access a roadway that is already at
                           or near capacity. The additional users have a disproportionate, detrimental
                           effect on the flow of traffic. As a result, diverting a small group of highway
                           users to rail transport could reduce congestion and have a substantial
                           public benefit.

                           The specific markets where intercity passenger rail has the most potential
                           to generate public benefits by reducing highway congestion are regions
                           where the highway systems are consistently operating beyond capacity
                           and are characterized by slow moving traffic. (See fig. 3.) Therefore, rail
                           service likely to alleviate the most highway congestion would parallel
                           congested corridors that link cities with significant intercity transportation
                           demand and urban congestion, such as in the Northeast. However,
                           realizing these benefits might be difficult because the prices people pay to
                           drive do not reflect the true costs of driving (and some costs due to
                           pollution and congestion are borne by others) and Americans have a
                           strong attachment to cars as their principal means of transportation.




                           1
                            When considering increasing transportation capacity, federal, state, and other
                           decisionmakers will need to understand the extent to which travelers are using existing
                           capacity and are likely to use increased capacity in various modes. If new capacity is
                           underutilized (e.g., because it is not cost competitive or convenient), then the expected
                           benefit will not be fully realized.




                           Page 18                                        GAO-03-712T Intercity Passenger Rail Policy
Figure 3: Interstate and Expressway Highways That Have Exceeded Their Capacity, 1998




                                       Intercity passenger rail could also potentially ease air travel congestion.
                                       This is contingent on intercity passenger rail being able to capture enough
                                       market share to reduce the number of flights between cities through
                                       frequent, competitively priced, and attractive service. For rail transport to
                                       capture the market share necessary to reduce air travel congestion, the
                                       distance between potential intercity passenger rail cities must be short
                                       enough to make rail travel times competitive with air travel. Amtrak’s
                                       market share decreases rapidly as travel time and distance increases. For
                                       example, as we reported last year, Amtrak’s market share compared with
                                       air service between New York City and Philadelphia, Pennsylvania, and
                                       Philadelphia and Washington, D.C.—relatively short-distance markets—
                                       was over 80 percent. But, for longer distance markets, such as New York
                                       City to Chicago, Illinois, and Chicago to Washington, D.C., Amtrak’s




                                       Page 19                                  GAO-03-712T Intercity Passenger Rail Policy
                           market share compared with air service was less than 10 percent.2 Studies
                           suggest that as the speed of intercity passenger rail increases, the potential
                           benefits attributable to reductions in airport and highway delays increase,
                           as does the potential distance over which passenger rail is able to compete
                           with air transport. The potential for intercity passenger rail to reduce air
                           congestion is also greater where there is little, or no, room for additional
                           runways and where there is limited competition between airlines resulting
                           in relatively high air fares.


Intercity Passenger Rail   Intercity passenger rail may also generate potential public benefits by
May Also Reduce Vehicle    reducing vehicle emissions, lowering pollution, and indirectly mitigating
Emissions and Provide      health and environmental costs. This could happen if intercity passenger
                           rail can provide the incentive to shift people out of their cars and onto rail.
Other Public Benefits      However, the magnitude of this benefit depends to a large extent on the
                           type of technology used to power rail locomotives. Conventional electric
                           rail systems (taking into account the emissions of electricity generating
                           power plants) emit less carbon monoxide, hydrocarbons, and nitrous
                           oxides per passenger-mile from burning coal, natural gas, or fuel oil than
                           conventional diesel-powered rail.3 In addition, within the range that most
                           vehicles are driven, automobile carbon monoxide and hydrocarbons
                           emissions increase as vehicle speed decreases. Therefore, to the extent
                           intercity passenger rail can reduce roadway congestion, these forms of
                           pollution could be reduced by having fewer vehicles on the highway(s).

                           The ability of intercity passenger rail to generate these benefits depends
                           on both the level of pollution and the likelihood that travelers will choose
                           rail service over other modes of transportation. Markets where intercity
                           passenger rail service could be competitive with other modes in terms of
                           price, travel time, and quality of service offer the greatest opportunity to
                           reduce pollution. In general, intercity passenger rail can be competitive
                           with other transportation modes in short-distance markets (such as New
                           York City to Philadelphia). However, intercity passenger rail is less
                           competitive in longer distance markets. The extent of emissions reduction
                           could also vary and be small. For example, a 2002 study by the California



                           2
                           See GAO-02-522T.
                           3
                            For particulate matter, coal-generated electric rail produces more emissions than diesel,
                           but natural gas- and fuel-oil-generated electric rail produces less than diesel. Wayson, R.L.
                           and W. Bowlby, “Noise and Air Pollution of High-Speed Rail Systems,” Journal of
                           Transportation Engineering, Vol. 115, No. 1, January 1989.




                           Page 20                                        GAO-03-712T Intercity Passenger Rail Policy
Department of Transportation of improvements to three state-supported
Amtrak intercity rail routes in California found that hydrocarbon and
carbon dioxide emissions would decrease with the improvements.4 But,
certain nitrous oxide and particulate compounds emitted from diesel-fuel
burning locomotives would increase. Similarly, our 1995 analysis of the
Los Angles to San Diego corridor projected that eliminating rail service
between these cities would result in a net increase—albeit small—in
vehicle emissions from additional automobiles, intercity buses, and
aircraft.5

Intercity passenger rail may also generate public benefits by reducing the
nation’s dependence on gasoline and fossil fuels. This result would only be
achieved if intercity passenger rail would require less fuel than the amount
of fuel used by other modes of transportation that travelers might use if
intercity passenger rail were not available. The extent of the benefits
would depend on how many fewer trips were taken on other, less fuel-
efficient modes of transportation and on the technology of the
locomotive(s) used. Again, the 2002 California Department of
Transportation study of improvements to the three Amtrak intercity routes
in California (see above) estimated, that in 2011, making the improvements
and expanding service could save 13 million gallons of gasoline.6 Similarly,
in October 2002, the Federal Railroad and Federal Highway
Administrations made a preliminary finding that making various
improvements that would extend high-speed rail service (up to 110 miles
per hour) from Washington, D.C., to Charlotte, North Carolina, could save
between 6.6 million and 10.4 million gallons of gasoline per year.7

Finally, intercity passenger rail may generate public benefits from
providing an option demand—that is, by being an alternative to other


4
 California Department of Transportation, California State Rail Plan: 2001-02 to 2010-11
(Jan. 2002). The three routes evaluated were the Pacific Surfliner route between San Diego
and San Luis Obispo, the San Joaquin route between Oakland/Sacramento and Bakersfield,
and the Capitol Corridor route between San Jose and Auburn.
5
 U.S. General Accounting Office, Amtrak: Issues for Reauthorization, GAO/T-RCED-95-132
(Washington, D.C.: Mar. 13, 1995). Carbon monoxide and hydrocarbons emissions were
predicted to increase, while nitrous oxides and sulfur dioxide emissions were predicted to
decrease.
6
 California Department of Transportation, California State Rail Plan: 2001-02 to 2010-11
(Jan. 2002).
7
 Federal Railroad Administration and Federal Highway Administration, Record of Decision
For The Tier I Southeast High Speed Rail Project (Oct. 2002).




Page 21                                       GAO-03-712T Intercity Passenger Rail Policy
transportation modes (such as air and automobiles) that society is willing
to pay for just to retain the option to use it in the future. For some people,
having the option of rail service available in case their circumstances
change or they have concerns about using another transportation mode
has value, even if they do not plan to currently use rail service. Similarly,
intercity passenger rail may have nonuse, or existence, value. Under this
concept, people receive value from intercity passenger rail from knowing
that it exists, even if they do not plan to use it. Quantifying these benefits
is difficult and has been known to be controversial.




Page 22                                 GAO-03-712T Intercity Passenger Rail Policy
Appendix II: Potential Financial Issues If
Amtrak Were to Undergo Liquidation

                      In September 2002, we reported on some of the potential financial issues if
                      Amtrak were to undergo liquidation.1 These issues are discussed in this
                      appendix.


                      If Amtrak had been liquidated on December 31, 2001, secured and
Creditor Claims and   unsecured creditors, including the federal government and Amtrak’s
Ownership Interests   employees, and stockholders would have had about $44 billion in potential
                      claims and ownership interests against Amtrak’s estate. (See fig. 4.) The
                      federal government would have been by far the largest secured creditor
                      (for property and equipment) and would have had the largest ownership
                      interest (in preferred stock)—accounting for about 80 percent (about
                      $35.7 billion) of the total amount.




                      1
                      See GAO-02-871. Our report did not discuss the likelihood or advisability of liquidating
                      Amtrak.




                      Page 23                                       GAO-03-712T Intercity Passenger Rail Policy
Figure 4: Creditor Claims and Stockholder Interests in the Event That Amtrak Had
Been Liquidated on December 31, 2001




Note: Stockholder interests are different from creditor claims. Stockholders receive funds only after
secured, unsecured, and administrative expenses related to liquidating the estate are satisfied. The
amount of the stockholder interest consists of the total of the recorded value of the stock (common
and preferred) plus cumulative unpaid preferred stock dividends.


The federal claims largely arise from two promissory notes issued by
Amtrak and held by the federal government. The first note represents a
secured interest on Amtrak’s real property (primarily Amtrak’s Northeast
Corridor) and matures in about 970 years. However, in June 2001, in
conjunction with Amtrak’s mortgage of a portion of Pennsylvania Station
in New York City, the federal government strengthened its position in
relation to this note and made the principal and interest due and payable if
Amtrak files for bankruptcy and is liquidated or if Amtrak defaults under




Page 24                                             GAO-03-712T Intercity Passenger Rail Policy
the mortgage.2 Based on information provided by the Federal Railroad
Administration, we calculated that had Amtrak been liquidated on
December 31, 2001, the federal government would have been due about
$14.2 billion in principal and interest on this note. The second note is
secured by a lien on Amtrak’s passenger cars and locomotives and
matures on November 1, 2082. This note has successive 99-year renewal
terms. If Amtrak had been liquidated on December 31, 2001, this note
would have been accelerated, and about $4.4 billion in principal and
interest would have become immediately due and payable. The majority of
non-U.S. government lenders’ secured property claims would have been
associated with passenger cars and equipment ($1.5 billion) and
locomotives ($941 million).

As of December 31, 2001, Amtrak’s data showed that unsecured liabilities
totaled about $4.4 billion. About 70 percent ($3.2 billion) would have been
for labor protection payments to terminated Amtrak employees if Amtrak
had been liquidated.3 Materials and supplies provided by vendors ($304
million) and unpaid employees’ wages and vacation and sick pay ($278
million) were among the largest remaining obligations.

The potential claims for labor protection on December 31, 2001, were
about $2.9 billion less than we reported in 1998.4 The difference stems
from changes made by the Amtrak Reform and Accountability Act of 1997.
This act eliminated the statutory right to labor protection, made labor
protection subject to collective bargaining, and required Amtrak to
negotiate new labor protection arrangements with its employees. As a
result of these changes and an October 1999 arbitration decision, labor
protection was capped at 5 years (compared with 6 years under the
statutory provisions), made employees with less than 2 years service
ineligible for labor protection payments, and based payments on a sliding
scale that provided for less payout for each year worked than did the
previous system. According to Amtrak, this accounted for about $1.8



2
 As we reported last year, in the event of liquidation, the trustee appointed to handle
Amtrak’s estate could file a plan that could cure all defaults and reinstate the original
maturity of the note, and the bankruptcy court would then consider whether to approve
such a plan. Our work examined the potential claims against Amtrak in the event of
bankruptcy, or other default, leading to liquidation, in which event the acceleration clause
would take effect.
3
Labor protection payments stem from collective bargaining agreements.
4
See GAO/RCED-98-60.




Page 25                                        GAO-03-712T Intercity Passenger Rail Policy
billion of the cost difference. Amtrak attributed an additional $950 million
to management employees no longer being eligible for labor protection
payments since they were not represented by a formal labor organization
and the Amtrak Reform and Accountability Act of 1997 provided for no
process to provide substitute protection for these employees.

The U.S. government holds all of Amtrak’s preferred stock, and four
corporations hold Amtrak’s common stock.5 The preferred and common
stock had recorded values of about $10.9 billion and $94 million,
respectively, as of December 31, 2001. In addition, preferred stock holders
were entitled to an annual cumulative dividend of at least 6 percent until
1997, when Amtrak’s enabling statute was amended to eliminate the
requirement that preferred stock holders were entitled to dividends. No
preferred stock dividends were ever declared or paid. However, Amtrak
had calculated cumulative preferred stock dividends from 1981 to 1997 to
be about $6.2 billion. In a liquidation, the amount of the preferred stock
holders’ interest would include all cumulative unpaid dividends. Thus, the
federal government, as the sole preferred stock holder, would have had
about $17 billion in ownership interest had Amtrak been liquidated on
December 31, 2001.

It is not likely that all secured or unsecured creditor claims or ownership
interests would have been satisfied because, aside from the Northeast
Corridor, Amtrak’s assets available to satisfy these claims and interests
(such as equipment and materials and supplies) are old, have little value,
or appear unlikely to have a value equal to the claims against them. In
addition, the value of Amtrak’s most valuable asset, the Northeast
Corridor, has not been tested. While the corridor has substantial value, it is




5
 The federal government received preferred stock in the value of federal operating
payments and most federal capital payments that it made to Amtrak between October 1981
and December 2, 1997. When Amtrak was formed, some railroads that provided or
contributed passenger equipment, crews, and other services received Amtrak common
stock or a federal income tax credit. This common stock is now held by three railroads and
a holding company. The Amtrak Reform and Accountability Act of 1997 required Amtrak to
redeem the common stock at fair market value by October 1, 2002.




Page 26                                      GAO-03-712T Intercity Passenger Rail Policy
                       subject to easements and has, according to Amtrak, at least $3.8 billion in
                       deferred maintenance.6


                       Liquidation of Amtrak would also affect the railroad retirement and
Financial Effects on   unemployment systems. Amtrak is a participant in both systems. Since the
the Railroad           retirement system is on a modified pay-as-you-go basis, the financial
                       health of the system largely depends on the size of the workforce, the
Retirement and         taxes derived from this workforce, and the amount of benefits paid to
Unemployment           retired and disabled individuals and their beneficiaries. Payroll taxes
                       levied on employers and employees are the primary sources of the
Systems                retirement system’s income. In 2001, Amtrak paid about $428 million in
                       payroll taxes into the railroad retirement account. A loss of this
                       contribution would have a significant financial impact on the system.

                       The Railroad Retirement Board (Board) estimated that, if Amtrak had
                       been liquidated on December 31, 2001, and no action had been taken to
                       increase tier II payroll taxes beyond that already planned or to reduce
                       benefit levels, the railroad retirement account would have started to
                       decline in 2006 and would have been depleted by 2024. If tier II taxes had
                       been increased immediately (that is, in 2002) to offset the expected deficit
                       in 2024, the Board estimated that tier II tax rates would have had to
                       increase about 8 percent in 2002 (to 22.1 percent), decrease slightly in
                       2003, and then level off until 2018. After 2018, the tier II rate would have
                       increased about 7 percent again (to 24.6 percent). In all cases, the tier II
                       tax rate would have been 1.64 percentage points higher than it would have
                       been if Amtrak had not undergone liquidation. Similarly, Amtrak
                       liquidation would have affected tier I tax revenues and benefit payments
                       as the result of Amtrak employees’ retiring and beginning to collect benefit
                       payments or Amtrak employees no longer being entitled to tier I benefits
                       because they were no longer earning tier I service credits.7




                       6
                        As we reported in 2002, we have concluded that the United States would not be legally
                       liable for either secured or unsecured creditors claims in the event of an Amtrak
                       liquidation. This conclusion is primarily based on the fact that (1) the federal government is
                       not a party to contracts between Amtrak and its creditors, and (2) Amtrak is not a
                       department, agency, or instrumentality of the U.S. government, and there is no explicit or
                       implicit commitment by the United States government to assume Amtrak’s obligations.
                       7
                        See GAO-02-871 for a more detailed discussion of potential financial impacts of Amtrak
                       liquidation on the railroad retirement system.




                       Page 27                                        GAO-03-712T Intercity Passenger Rail Policy
Similarly, participants in the railroad unemployment system would have
also been affected by an Amtrak liquidation. However, the financial effects
would have been immediate, but short-term. The Board estimated that if
Amtrak had been liquidated on December 31, 2001, separated Amtrak
employees would have received a total of $344 million in benefit payments
during fiscal years 2002 and 2003. The cash reserves of the unemployment
system would have been exhausted in 2002, and a total of about $340
million would have been borrowed from the railroad retirement account,
as permitted by statute, from 2002 through 2004 to make these benefit
payments. The peak loan balance would have been $349 million, including
interest, with all loans repaid in 2005. To pay for these benefits and repay
the loans, the Board would have required that other railroads and
participants in the unemployment system increase their payroll tax
contributions. The Board estimated that, between 2002 and 2004, the
average tax rate would have increased from about 4 percent to 12.5
percent, before decreasing to 9.6 percent in 2005.8




8
 The railroad unemployment system is financed exclusively by contributions from railroad
employers, on the basis of taxable earnings of their employees. For 2002, the tax rates
ranged from 3.15 percent (including a 2.5 percent surcharge) to a maximum of 12 percent
on employee monthly earnings of up to $1,100. If the balance of the system’s account is less
than zero, the maximum rate is 12.5 percent. In performing this analysis, the Board
assumed that all terminated Amtrak employees had exhausted their unemployment
benefits and had not received labor protection benefits. The Federal Railroad
Administration said unemployment insurance benefits received reduce potential labor
protection claims by the same amount.




Page 28                                       GAO-03-712T Intercity Passenger Rail Policy
Appendix III: Selected GAO Products


                      Major Management Challenges and Program Risks: Department of
Developing National   Transportation. GAO-03-108. Washington, D.C.: January 2003.
Strategies
                      Marine Transportation: Federal Financing and a Framework for Future
                      Infrastructure Investment. GAO-02-1033. Washington, D.C.: September 9,
                      2002.

                      Regulatory Programs: Balancing Federal and State Responsibilities for
                      Standard Setting and Implementation. GAO-02-495. Washington, D.C.:
                      March 20, 2002.

                      Combating Terrorism: Key Aspects of a National Strategy to Enhance
                      State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1,
                      2002.

                      Budget Issues: Long-Term Fiscal Challenges. GAO-02-467T. Washington,
                      D.C.: February 27, 2002.

                      Commercial Aviation: A Framework for Considering Federal Financial
                      Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.

                      Mass Transit: Many Management Successes at WMATA, but Capital
                      Planning Could be Enhanced. GAO-01-744. Washington, D.C.: July 3, 2001.

                      Executive Guide: Leading Practices in Capital Decision-Making.
                      GAO/AIMD-99-32. Washington, D.C.: December 1998.

                      Federal Budget: Choosing Public Investment Programs. GAO/AIMD-93-
                      25. Washington, D.C.: July 23, 1993.

                      Guidelines for Rescuing Large Failing Firms and Municipalities.
                      GAO/GGD-84-34. Washington, D.C.: March 29, 1984.


                      Intercity Passenger Rail: Potential Financial Issues in the Event That
Amtrak                Amtrak Undergoes Liquidation. GAO-02-871. Washington, D.C.:
                      September 20, 2002.

                      Financial Management: Amtrak’s Route Profitability Schedules Need
                      Improvement. GAO-02-912R. Washington, D.C.: July 15, 2002.




                      Page 29                             GAO-03-712T Intercity Passenger Rail Policy
           Intercity Passenger Rail: Congress Faces Critical Decisions in
           Developing a National Policy. GAO-02-522T. Washington, D.C.: April 11,
           2002.

           Intercity Passenger Rail: The Congress Faces Critical Decisions About
           the Role of and Funding for Intercity Passenger Rail Systems. GAO-01-
           820T. Washington, D.C.: July 25, 2001.

           Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty
           Controlling Its Costs and Meeting Capital Needs. GAO/RCED-00-138.
           Washington, D.C.: May 31, 2000.

           Intercity Passenger Rail: Issues Associated With a Possible Amtrak
           Liquidation. GAO/RCED-98-60. Washington, D.C.: March 2, 1998.




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