Amtrak: Limited Income From the Revenue Enhancement Program

Published by the Government Accountability Office on 1990-02-01.

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

                   United States
-GAO               General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community,   and
                   Economic Development    Division


                   February   1,199O

                   The Honorable John Breaux
                   The Honorable Robert Dole
                   The Honorable Jake Garn
                   The Honorable John Glenn
                   The Honorable James .4. McClure
                   IJnited States Senate

                   This report responds to your concerns about the National Railroad Pas-
                   senger Corporation’s (Amtrak) Revenue Enhancement Program, which
                   was designed to generate income by competing with the private sector in
                   areas other than passenger service in order to reduce federal subsidies.
                   Amtrak’s Revenue Enhancement Program currently consists of three
                   elements-Corporate Development, Real Estate Development, and Safe
                   Harbor Leases. Since its creation in 1971, Amtrak’s total operating
                   expenses and capital needs have exceeded its total operating revenues
                   and Amtrak has received a federal subsidy to cover these costs. Specifi-
                   cally, as agreed with your offices, we (1) obtained information on
                   Amtrak’s revenue enhancement activities and the impact of these activi-
                   ties on reducing the federal subsidy and (2) determined whether Amtrak
                   competed fairly when bidding on a 1988 rail welding contract.

                   Amtrak had stated in the past that it would rely on the Revenue
Results in Brief   Enhancement Program to help reduce federal subsidies and to provide
                   significant additional funding necessary for capital needs in the 1990s.
                   However, the net income of $140.9 million generated during the 5-year
                   period 1984-88 did not substantially contribute to reducing Amtrak’s
                   federal subsidy of $3 billion during that period although it did provide
                   38.5 percent of Amtrak’s capital funding. Further, with Amtrak project-
                   ing total net income of $165.2 million during the 5-year period 1989-93,
                   the Revenue Enhancement Program will not contribute much to helping
                   Amtrak meet its capital needs of about $1.2 billion during the 5-year
                   period or projected operating losses of about $2.5 billion. Amtrak’s Pres-
                   ident in 1989 said that a federal subsidy will be needed in the future to
                   meet the additional capital needs of replacing passenger cars and loco-
                   motives. In addition, Amtrak has not provided the Congress with
                   detailed financial information concerning current and planned revenue
                   enhancement projects and their contribution to total projected revenues.

                   It is unclear whether Amtrak competed fairly with the private sector
                   when it bid for a 1988 rail welding contract with New .Jersey Transit

                   Page 1                                                GAO/RCED9@76 Amtrak

                         (KJT). Its $5.15 million winning bid was based on outdated cost data. The
                         profit margin included in the bid of one-half percent was lower than
                         Amtrak’s customary profit margins. Further, Amtrak did not properly
                         assign all costs associated with executing the contract. As a result of not
                         fully assigning all costs, we estimate that Amtrak lost approximately
                         $88,870 rather than the $87,780 profit it reported.

                         Because of growing congressional concern about the size of and continu-
Background               ing need for federal financial support, the Congress enacted legislation
                         in 1981 creating Amtrak’s Revenue Enhancement Program. In the act,
                         the Congress encouraged Amtrak to (1) more fully utilize its employees,
                         facilities, and real estate by entering into agreements with the private
                         sector and (2) undertake initiatives that are consistent with sound busi-
                         ness judgment that will maximize revenues and minimize federal subsi-
                         dies The Senate Appropriations Committee 2 years later stated that
                         Amtrak’s revenue enhancement projects must in fact and in appearance
                         compete on an equal basis with its competitors.

                         In carrying out its congressional mandate, Amtrak established a Corpo-
                         rate Development Department that is responsible for developing and
                         implementing Amtrak’s revenue enhancement strategy through such
                         projects as: rail welding for urban commuter train systems, assembly of
                         commuter passenger rail cars, and leasing rights-of-way for fiber optics
                         communication lines.’ Amtrak also established Safe Harbor leases-sell-
                         ing the rights to the tax benefits associated with certain qualified assets
                         pursuant to the Economic Recovery Act of 1981. In addition, Amtrak
                         expanded its Real Estate Division, which is responsible for developing
                         ventures on Amtrak’s landholdings and surrounding track rights-of-
                         way. These revenue enhancement projects in the future may include
                         office buildings, parking facilities, and residential developments.

                         In 1983, we reported that the scope of Amtrak’s Revenue Enhancement
Revenue Enhancement      Program, in terms of number of projects being actively developed and
Has Lim ited Potential   projected revenues, was limited in comparison to its future potential to
for Reducing Federal     contribute to capital costs. At that time, Amtrak was initiating four rev-
                         enue enhancement projects-leasing its Washington, DC., to New York
Subsidy                  City right-of-way for fiber optics communication; assembling passenger
                         cars for the Washington, DC., Metro system; developing electrical and

                          ‘Amtrak has several additional nonpassenger-related income areas that are separate from Corporat?
                          Devebpment. such as carrying regular and express mail on its passenger trains.

                          Page 2                                                                 GAO/RCED-90-76 Amtrak

  steam energy powerplants; and overhauling mass transit passenger cars.
  Our current review shows that, for various reasons, Amtrak’s current
  revenue enhancement activities will not significantly reduce future

  Amtrak officials had said earlier that beginning in 1985, income from
  the Revenue Enhancement Program would cover its capital needs and a
  federal subsidy would no longer be needed. In its 1987 annual report, for
  example, Amtrak stated that it would rely on its Revenue Enhancement
  Program to provide the additional funding necessary to purchase new
  passenger cars and locomotives by the mid-1990s. Amtrak’s President,
  however, in March 1989 testimony before the Senate Subcommittee on
  Transportation and Related Agencies said that “. in time, we expect
  these (revenue enhancement) activities to generate sufficient funds to
  cover a significant portion of those (capital) requirements. However, our
  short-term needs exceed $150 million exclusive of rolling stock and we
  still must look to the federal government for the difference.” (Emphasis
  added). Although the program’s net income has grown from $12.3 mil-
  lion in 1984 to $29.6 million in 1988, the contribution of Amtrak’s reve-
  nue enhancement activities to reduce Amtrak’s $3 billion federal
   subsidy during the 5-year period has been small.

  Although Amtrak has increased revenue from its revenue enhancement
  projects since our earlier report, we do not believe that Amtrak’s current
  revenue enhancement activities will greatly reduce the need for federal
  subsidies in the future because

. the majority of Amtrak’s revenue enhancement profits have been gener-
  ated by the Safe Harbor leases; however, the revenue from these leases
  is on a declining scale and Amtrak officials said that all leases will
  expire by 2004;
. the other major contributor to Amtrak’s revenue enhancement profits
  has been the fiber optics communication leases, and Amtrak officials
  said that they are actively marketing excess communication capacity,
  but market conditions are limiting this activity;
. maintenance facilities that could be used for mass transit passenger car
  assembly and/or overhaul are at or near capacity, and Amtrak officials
  said that they are studying the costs and benefits of expanding facilities
  to accommodate additional passenger car assembly and overhaul activi-
  ties; and

   ‘Amtrak’s Income Diversification Program: Potential for Increased Earnings and Reduced Federal
   Financial Support (GAO/RCED-84-41, Oct. 14, 1983).

   Page 3                                                                 GAO/RCED-9076 Amtrak

.   competition for rail welding contracts outside the Northeast is limited
    because of the high cost of transporting rail to and from Amtrak’s New
    Haven, Connecticut, rail welding facility.

    In 1983, we also reported that Amtrak’s real estate ventures had the
    potential to generate additional income. Amtrak’s real estate strategy
    paper for fiscal year 1983 projected real estate development revenues of
    $1 million in fiscal year 1985, $2 million in fiscal year 1986, $4 million in
    fiscal year 1987, and $8 million in fiscal year 1988. These revenues were
    expected from 18 major real estate ventures Amtrak had under consid-
    eration at that time. However, Amtrak had no real estate development
    revenues for fiscal years 1985-87. In fiscal year 1988, Amtrak earned
    $1.2 million in real estate development and received $7.1 million from
    the sale of land. Amtrak does, however, have additional non-revenue
    enhancement real estate activities such as leasing commercial space in
    its train stations, the revenue from which goes into Amtrak’s general
    operating fund. In fiscal year 1988, Amtrak earned $22.4 million from
    these leasing activities.

    Amtrak is currently considering numerous real estate ventures. Amtrak
    has identified seven major real estate ventures with projected annual
    revenues of $17.1 million for fiscal years 1992-96. The potential of some
    of these real estate ventures, however, is not clear because projects
    remain to be negotiated and financial terms are unknown because of
    uncertainties associated with real estate development. In fact, some of
    the real estate projects currently under consideration were also under
    consideration at the time of our 1983 review.

    Although Amtrak officials have said in the past that the Revenue
    Enhancement Program would substantially reduce the federal subsidy,
    we believe it will play a minor role in reducing the subsidy through fis-
    cal year 1993. This is because total revenue enhancement profits are
    estimated to be about $162.5 million for fiscal years 1989-93 compared
    with projected operating losses of $2.5 billion and capital needs of about
    $1.2 billion. The Congress has recognized that Amtrak has significant
    capital needs that it cannot meet without a federal subsidy. The House
    in September 1989 and the Senate in November 1989 passed bills
    authorizing subsidies to Amtrak of up to $656 million in fiscal year
    1990, $684 million in fiscal year 1991, and $712 million in fiscal year

    Page 4                                                   GAO/RCED9076   Amtrak

Information Needed on   In 1983, we were asked to provide specific details of revenue enhance-
                        ment projects under consideration by Amtrak because Amtrak had not
Scope of Revenue        provided that information to the Congress. In our 1983 report’ we stated
Enhancement Projects    that Amtrak had not outlined the details of the program showing its
                        potential or the major projects it had under consideration either in its
                        annual report or in its appropriations hearings. We stated that it would
                        be desirable for Amtrak to provide information in its annual report to
                        the Congress about specific revenue enhancement projects it is consider-
                        ing so that the relevant congressional committees are fully informed of
                        Amtrak’s current and future plans in this area. Because Amtrak stated
                        that its Revenue Enhancement Program would generate sufficient
                        income to reduce the federal subsidy, we concluded that this type of
                        reporting would enable the Congress to more effectively exercise its
                        oversight role in determining the amount of federal subsidy needed by
                        Amtrak. We further stated that the Congress should consider requiring
                        Amtrak to initiate a systematic annual process of reporting on its reve-
                        nue enhancement activities on a project-specific basis.

                        Amtrak officials said that the Congress has not requested information
                        on its revenue enhancement activities other than through its annual
                        report, annual grant request, or appropriations hearings. We found that
                        these data were general and did not include information on the scope or
                        details of Amtrak’s current and planned revenue enhancement projects.
                        We continue to believe. as we did in 1983, that the Congress, in order to
                        make informed decisions about the federal subsidy, needs information
                        on current and planned projects and their respective contribution to
                        total projected revenues. Appendix I contains a description of Amtrak’s
                        past and future revenue enhancement activities and their impact on the
                        federal subsidy.

                        Amtrak, in 1988, entered into a competitive track welding contract with
It Is Unclear Whether   New Jersey Transit (KJT) worth $5.15 million.’ Although the Senate
Amtrak Competed         Appropriations Committee in reporting on Amtrak’s fiscal year 1983
Fairly on Track         appropriations stated that Amtrak should compete fairly and on an
                        equal basis with the private sector and its corporate policy is that all
Welding Contract        projects make a profit, it is unclear whether Amtrak competed fairly on
                        the NJT contract.

                        ‘IbId, p-3.

                        ‘The track welding project wai one of four projects in which Amtrak successfully competed against
                        private companies. Of the fb~lr rwnpvtitive rontracts only one. the NJT contract, was for track

                        Page 6                                                                  GAO/RCED-90-76 Amtrak

  The Senate Appropriations Committee in a report on Amtrak’s fiscal
  year 1983 appropriations stated that Amtrak must, in fact and in
  appearance, compete fairly with the private sector when bidding on rev-
  enue enhancement pro.jects by ensuring that (1) costs are fully
  accounted for and completely segregated and (2) funds used for financ-
  ing a revenue enhancement project come completely from sources other
  than federal appropriations. While this Senate Appropriations Commit-
  tee guidance is not binding, both Amtrak officials and corporate devel-
  opment policy state that Amtrak must compete fairly and on an equal
  basis with the privatct sector. For example, Amtrak’s Vice President for
  Corporate Developmt,nt recently said that, Amtrak believes it is bound
  by the Senate Appropriations Committee language. In addition,
  Amtrak’s corporate development policy states that all revenue enhance-
  ment projects must adhere to the following additional principles:

. Amtrak must be full!, reimbursed for any costs imposed as a result of a
  revenue enhanccmcnt. project.
. All revenue enhanc,cment projects should make a profit.

  Amtrak’s President stated in correspondence to several members of the
  Congress that these corporate development principles were designed to
  ensure that revenue r>nhancement projects do not cause unfair competi-
  tive injury to other bllsiness entities.

  It is unclear whether Amtrak competed fairly with the private sector for
  the 1988 N.JT contract because in developing its bid Amtrak used out-
  dated manufacturing data, causing its bid to be underestimated. The
  profit margin inc+uded in the bid of one-half percent was lower than
  profit margins customarily included in Amtrak bids. Further, after win-
  ning t,he contract, Amtrak did not properly segregate and assign all con-
  t.ract costs. 13ccausc~
                        .\mtrak’s bid was lower than it should have been,
  Amtrak was unabk to G\arn a profit on the XJT contract when all costs
  were considered.

  In developing the X.I’Ibid, Amtrak used 1986 cost data, which were
  based on welding mdivldual39-foot rail sections into quarter mile con-
  tinuous welded rail In 1987, however, Amtrak converted its track weld-
  ing facility from w&ling individual 39.foot sections of rail into quarter
  mile sections to wt’ldmg individual 78.foot sections into quarter mile sec-
  tions which causc~i IIS c.ost per weld to increase. Amtrak’s policy is to
  accumulate actual l~lsts monthly, so as to provide a basis for estimating
  prices of future i1c.tI\ itirs. Amtrak’s General Accounting Department

   Page 6                                               GAO/RCED-SO-76 Amtrak

    maintains actual cost data for rail welding and is responsible for devel-
    oping the manufacturing costs used in establishing bid prices. Amtrak’s
    manufacturing costs as of September 30, 1987,2 months prior to sub-
    mitting its N.JT bid, were 27 percent higher for welding 7%foot rail than
    the 1986 figures Amtrak actually used.

    Amtrak officials said that they considered the cost difference between
    the two different rail lengths but had doubts about the validity of the
    cost data for the longer rail because the data reflected what they
    believed to be abnormally high per-weld figures. However, Amtrak
    entered into several noncompetitive contracts with other railroads for
    welding the longer rail before submitting its MT bid and charged 20 per-
    cent more than for welding shorter rail. Amtrak officials said that
    charging 20 percent more for the noncompetitive contracts was a busi-
    ness pricing decision based primarily on their perception of the market.
    IIowever, we believe that because more up-to-date, accurate cost infor-
    mation was available, Amtrak should have used that information in
    developing the bid.

    Amtrak’s profit margin of one-half percent of the total bid was lower
    than Amtrak’s cust.omary profit margins. While the establishment of a
    profit margin is a marketing decision, Amtrak officials said that profit
    margins are generally set between 5 and 15 percent of the total bid. The
    profit margin included in Amtrak’s successful bid for NJT’S 1989 rail
    welding contract was less than 3 percent, although Amtrak did increase
    its manufacturing (.osts by 41 percent to better reflect the cost of weld-
    ing longer rail.

    In accounting for the actual costs of executing the 1988 NJT contract,
    Amtrak did not. assign 1o the contract all the costs for transporting the
    rail, totaling $58,270. and the cost for defective welds, totaling $73,870,
    which were known prior to completion of the contract. In addition,
    Amtrak did not assign material handling and depreciation costs.’
    Amt,rak reported a pt’ofit of about $87,780 which was reported as funds
    available for fiscal yc*ar 1989 capital programs. However, by comparing
    the co& Amtrak did not include in its reported profit, we estimate that
    Amtrak lost about $88.870 on this contract. Although we believe
    Amtrak experiencc,tl ,I loss on this contract, some contribution was made

     Page 7                                                GAO/RCED-9076 Amtrak

                   to Amtrak’s fixed overhead costs for operating the track welding facility
                   as a result of the NJT contract, thereby reducing the federal subsidy.

                   An Amtrak official said that Amtrak would not knowingly enter into a
                   contract solely to reduce fixed costs associated with established facili-
                   ties. The official added, however, that underestimating costs and estab-
                   lishing narrow profit margins to recognize the marketplace could result
                   in a project only breaking even or incurring a slight loss. Appendix II
                   contains a detailed discussion of how Amtrak developed its bid and sub-
                   sequently assigned contract costs.

                    While Amtrak’s Revenue Enhancement Program has grown in the past 5
Conclusions         years,
                    ”       its contribution to Amtrak’s capital requirements or reducing fed-
                    era1 subsidies over the past 5 years and in the near future is not signifi-
                    cant. In addition, Amtrak has not provided the Congress detailed
                    financial information on its revenue enhancement activities, which, as
                    we previously reported, would be useful to the Congress in its oversight
                    of the Revenue Enhancement Program and in its funding

                    In our view, Amtrak’s efforts to secure the NJT contract by using out-
                    dated costs when better data were available and by establishing a nar-
                    row profit margin raises a question as to whether Amtrak met either the
                    congressional directive to compete fairly or its own policy of making a
                    profit on each contract, Furthermore, after winning the contract,
                    Amtrak did not ensure that all project costs were properly identified
                    and applied to the N,JT contract. The NJT contract, although having an
                    inconsequential effect on Amtrak’s overall financial viability, is incon-
                    sistent with congressional guidance, which directed Amtrak to-in fact
                     and appearance-compete fairly and on an equal basis with other busi-
                    nesses and to properly segregate and fully account for all project costs.

                    We recommend that the President of Amtrak
                    periodically provide the Congress with financial information on actual
                    and projected results of revenue enhancement activities and
                  . implement management controls to ensure that Amtrak competes fairly
                    and on an equal basis with the private sector by using the most up-to-
                    date and accurate cost data in developing bids and subsequently fully
                    assign costs after contracts are awarded.

                    Page I)                                                GAO/RCED-90-76 Amtrak

                    We discussed the draft report’s contents with Amtrak headquarters offi-
Views of A m trak   cials and have incorporated their comments where appropriate. How-
Officials           ever, as requested by your offices, we did not obtain official agency
                    comments. Amtrak officials said that the intent of the Revenue
                    Enhancement Program is to generate funds to help reduce the federal
                    subsidy for capital and views the revenues generated as significant
                    when compared to the federal appropriations available during the
                    period of our review. We would agree that revenue from the Revenue
                    Enhancement Program accounted for 38.5 percent of new capital fund-
                    ing available to Amtrak during 1984-88. However, based on Amtrak’s
                    estimates, this percentage will decrease to about 13.7 percent for the
                    1989-93 time frame if its projected capital needs are funded.

                    Amtrak officials disagreed that they should periodically report to the
                    Congress on revenue enhancement projects. They said that they keep
                    the oversight committees fully apprised of their revenue enhancement
                    activities, Amtrak responds to congressional committee requests for
                    information on its revenue enhancement activities as well as to individ-
                    ual member’s requests about a particular project or projects. This infor-
                    mation does not, however, provide the Congress a detailed picture of all
                    ongoing and planned revenue enhancement activities and how much
                    these activities will contribute to total projected revenues. We continue
                    to believe, as stated in our 1983 report, that Amtrak should periodically
                    provide the Congress detailed information on planned revenue enhance-
                    ment activities so that the relevant congressional committees can exer-
                    cise their oversight responsibilities.

                    Amtrak officials also said that they competed fairly on the NJT contract
                    and that the use of fiscal year 1986 data to prepare its bid was proper.
                    We continue to believe that Amtrak should have used more up-to-date
                    manufacturing data in its bid preparation because it had considerable
                    experience welding the longer rail and, in fact, used higher costs in con-
                    tracts awarded prior to submitting the MT bid.

                    In preparing this report, we reviewed documents and interviewed
                    Amtrak officials located at Amtrak headquarters in Washington, DC.,
                    and its Philadelphia office. We performed the field work for this review
                    from January 1989 to July 1989 in accordance with generally accepted
                    government auditing standards. Appendix III contains details of our
                    objectives, scope, and methodology.

                     Page !J                                               GAO/RCED9@76 Amtrak

          As arranged with your offices, unless you publicly announce its contents
          earlier, we plan no further distribution of this report until 30 days from
          the date of this letter. At that time we will send copies to the President,
          Amtrak; the Secretary, Department of Transportation; and other inter-
          ested parties. Copies will also be provided to others upon request.

          This work was performed under the direction of Kenneth M . Mead,
          Director, Transportation Issues, who can be reached at (202) 2751000.
          Other major contributors are listed in appendix IV.

/J        J. Dexter Peach
          Assistant Comptroller General

          Page 10                                               GAO/RCED-SO-76 Amtrak
Page 11   GAO/RCED-96.76 Amtrak

Appendix I
Revenue Enhancement
Activities and Federal
Appendix II
Whether Amtrak
Competed Fairly on
Track Welding
Contract Is Unclear
Appendix III                                                                                   21
Objectives, Scope, and
Appendix IV                                                                                    22
Major Contributors to
This Report
Tables                   Table I. 1: Revenue Enhancement Program Revenues and                  16
                             Profits Fiscal Years 1984-1988
                         Table 1.2: Amtrak’s Major Real Estate Development                     18
                             Projects Estimated Revenues Fiscal Year 1992
                             Through 1996
                         Table 1.3: Amtrak’s Tot al Revenue and Federal Subsidies              18


                         GAO       General Accounting Office
                         NJ?       New Jersey Transit

                         Page 12                                             GAO/RCED+O-76 Amtrak
Page 13   GAO/RCEDSO-76 Amtrak
Appendix I

Revenue Ehhancement Activities and
Federal Subsidy

               Amtrak has pursued several revenue enhancement areas that are cur-
               rently developed. In addition, while its real estate ventures continue to
               hold great promise of future profits several are still under negotiation.

               Table I.1 shows Amtrak’s total revenues and profits from revenue
               enhancement projects for the period fiscal years 1984-1988. Table I.2
               shows Amtrak’s major real estate projects and estimated revenues for
               the period fiscal years 1992-1996. Table I.3 provides information on
               Amtrak’s total revenue, expenses, and subsidy for fiscal years 1984-

               Page 14                                                GAO/RCED-90-76 Amtrak
Page 16   GAO/RCED-90-76 Amtrak
                                      Appendix I
                                      Revenue Enhancement   Activities   and
                                      Federal Subsidy

Table 1.1: Revenue Enhancement
Program Revenues and Profits Fiscal                                          Fiscal Year 1984                  Fiscal Year 1985
Years 1984-1988                       Activities                           Revenues           Profit        Revenues            Profit
                                      RatI Welding/ Purchasing              $327,223        $60,894           $809,567       $194,066
                                      Car Assembly/ Overhaul                   3,528,282      1,031,043      3,275,289      1,045,537
                                      Kght-of-Way Leases
                                      -.________                               1,86&139       1,868,139    - 8,166,662      8,166,662
                                      Equipment Rental                           906,637        906,637         194,256       194,258
                                      Safe Harbor Leases                       7,900,000      7,900,000     5; ,100.000    21,100,000
                                      Other       .~      ~-~~               4,517.654        1,112,072      3,661,099        210,369”
                                      Real Estate Development                         0                0              0              0
                                      Total                                19,047,935       12,878,705     37,206,875     30,910,892
                                      Less, Corporate Development
                                        Expense                                                 556,383                      608,257
                                      Total                                                $12.322.402      _~~     ___ $30.302.635

                                      Page 16                                                                GAO/RCED9076      Amtrak
                                                  Appendix I
                                                  Revenue Enhancement       Activities   and
                                                  Federal Subsidy

              Fiscal Year 1986                      Fiscal Year 1987                   Fiscal Year 1980                1984Throuqh1988
        Revenues                     Profit    Revenues                Profit      Revenues               Profit     Revenues               Profit
---.__             ..-.-~-~--__.~
        $1.390.240               $194,699 -. $1,400,014            $424,305         6,392,118         $254,570      $10,319,162       $1,128,534
         2,689,313                 854,699       1,935,379           720,743        1,215,284          246,384       12,643,547 ~~...~~_3,898,406
        10,338,728             10,247,702      13.137,735        13,024,212         7,117,102        7,022,028       40.628,366       40,328,743
             250,735               250,735 --      240,957           240,957     .- 399,023            399,023        1,991,610         1,991,610
        17.600,OOO             17,600,OOO      27,200,OOO -- 27,200,OOO -- -13,800,OOO              13,800,000       87,600,OOO       87,600.OOO
-.-.-     1,068.095  __--~        (360,454)        779,608 --       (764,937) ~.. _ 928,159
                                                                                        -.      -      258,652        2,775,862          (866.739)
          1,425,692                623,249         514,693           195,106          253,005           147,983      10,372,143         2,288,779
_._ .._ - . .._. -~-.----.-.--.~~~_..          --
                      0                     0             0                   0     8,300,000        8.300.000        87300,000         8,300,000
       34,762,803             29,410,630      45,208,386        47,040,386        38,404,691       30,420,640      174,630,690      144,669,333
                             716,901                             1,025,029"                             795,449                        3,702,019
                       $28,693,729                            $40,015,357 --_                      $29,633,191                     $140,967,314

                                                   “Lltlllty expense ad)ustment 01 582,629 00

                                                   “Includes accounts recwablt write-off of $134.508
                                                   Source Amtrak flnanclal sum~nar~es

                                                    Page 17                                                             GAO/RCED-96.76    Amtrak
                                             Appendix I
                                             Revenue Enhancement          Activities    and
                                             Federal Subsidy

Table 1.2: Amtrak’s Major Real Estate
Development Projects Estimated                                                                                                        Average     revenues
Revenues Fiscal Year 1992 Through 1996        Projects                                        Type of development                                   1992-96
                                              Chicago Unwon Statron                           Redevelopment of station,                          $7,000,000
                                                                                              construction of two offrce towers,
                                                                                              leases for arr rights, and
                                                                                              development of air rights parcels.
                                              Phrladelphra 30th Street                        Rehabilitatron of statron and
                                                                                              proposed mrxed-use commercral
                                                                                              develooment of associated air
                                              tiashrngton.       D C., Unon StatIon           Development of two sites for
                                                                                              office space.
                                              Sunnysrde Yards, N Y                            Various predevelopment actrvrtres,                   2300,000
                                                                                              rncluding resrdential unrts, and
                                                                                              offlce and commercral space.
                                              N Y Penn Statron                                Redevelopment of station for new                      800,000
                                                                                              retarl space and development of
                                                                                              offrce space on air rights.
                                              Baltrmore Statron                               Joint development of multilevel                       500,000
                                                                                              parking facility and plaza.
                                              Spnngfreld, Massachusetts                       Lease or sale of air rights for                       300,000
                                                                                              mixed-use commercral and
                                                                                              resrdential development
                                              Total                                                                                             $17,100,000

Table 1.3: Amtrak’s   Total Revenue and Federal     Subsidies     (1984-89)
Dollars rn mrllrons
                                          1984                    1985                   1986                1987               1988               1989 est.
Revenues                                5758 8                  $825 8                 $861 4              $973 5            $1,1067                $1,121 0
Expenses ’                              1,522 1                 1,600 1                1,563 6             1,672 0            1.757.1                1.675.0
Federal Subsrdres
  Operating Grant’                       618 1                   627 7                  586 7                580 5                 534 6               554 0
  Capita Grant                            98 3                    52 3                    20                  26 5                  46.2                28 0
                                                  “Expenses and operating yrar+ Include labor protection costs which Amtrak reports as a separate
                                                  Source Amtrak s 1988 Annl~aI I-epurt Amtrak’s Internal 1989 Five Year Busyness Plan

                                                  Page 18                                                                      GAO/RCED90-76         Amtrak
Appendix II

Whether Amtrak Competed Fairly on Track
Welding Contract Is Unclear

              In developing the New Jersey Transit (KJT) bid for welding 78-foot rail,
              Amtrak used 1986 cost data, which were based on welding 39-foot rail
              into quarter mile continuous welded rail. Prior to submitting its bid for
              the KJT track welding project, however, Amtrak entered into several
              contracts for welding 78-foot rail where it charged a 20.percent higher
              rate. Amtrak said that it used the 1986 actual cost data for welding 39-
              foot rail, adjusted for inflation to 1988 dollars, for the N.JT contract
              because the 1987 actual data for welding 78-foot rail reflected an abnor-
              mally high cost per weld due to various factors, such as the downtime
              involved in converting the plant to weld 7%foot rail, initial engineering
              problems, and more frequent machine breakdowns.

              According to Amtrak’s 1987 Annual Report, after converting the rail
              welding plant from handling 39-foot sections to 78.foot sections, the
              plant was running on two shifts for the bet,ter part of the year (1987).
              Virtually all the work was for commuter railroads. Amtrak’s cost and
              production data for welding rail, as of September 30, 1987, 2 months
              prior to submittiTg its bid, were 27 percent higher than its cost of weld-
              ing 39 foot rails in 1986. Accordingly, Amtrak could have developed
              reliable cost data, taking into account any additional costs, considering
              the significant amount of production and Amtrak’s ability to account for
              costs on a monthly basis. Amtrak did, in fact, increase its manufacturing
              cost estimate by 41 percent, from it,s earlier bid t,o reflect 1988 cost, and
              production data in successfully bidding on LJT’S 1989 track welding

               In addition to not using up-to-date manufacturing cost data, Amtrak
               omitted depreciation cost,s and established a profit rate of one-half per-
               cent on the total cost of the contract. Amtrak’s policy requires that all
               business ventures make a financial contribution to the Corporation suf-
               ficient to justify th<i time, risks, and corporate resources involved. This
               policy recognizes thcscontribution of revenue enhancement projects to
               reducing Amtrak’s fixed costs even though an individual project might
               only be marginally profitable. However, Amtrak officials said that it is
               intended that individual projects make a profit as well as a contribution
               toward reducing fisc,d c.osts.Amtrak officials further said that Amtrak
               would never knowingly enter into a revenue enhancement project that
               was not prqjected to be profitable.

               Subsequent, t,o winning the 1988 NJT contract, Amtrak did not assign all
               costs associated with executing the contract. Amtrak’s accounting sys-
               tem did not allocate approximately $58,270 in transportation costs asso-
               ciated with the 1988 WI rail welding contract. According to Amtrak

               Page 19                                                 GAO/RCED-90-76   Amtrak
Appendix II
Whether Amtrak Competed Fairly      on Track
Welding Contract Is Unclear

records, the majority of the train crews responsible for transporting the
rail did not charge their labor hours directly to the N.JT contract but,
according to Amtrak officials, charged their time to general Amtrak
work orders. Also, Amtrak did not accumulate and document costs asso-
ciated with operating the locomotives as well as the rental charges for
the rail cars.

Amtrak, in its September 30, 1989, financial summary, omitted depreci-
ation costs associated with Amtrak’s rail welding plant and material
handling costs.’ Amtrak policy requires that these costs be allocated
monthly through the use of established rates.

Amtrak reduced by 60 percent the general and administrative costs
charged to revenue enhancement projects. Amtrak in applying this
reduced rate to the LJ1’ contract eliminated the cost of materials (rail)
from its calculation, contrary to normal practice. This omission is not
reflected in our calculations. Amtrak should have developed and docu-
mented a reasonable basis for including its cost of materials in calculat-
ing its general and administrative expcnsc

Last, Amtrak did not include costs associated with defective welds. On
February 13, 1989, Amtrak agreed to reimburse KIT $73,870 for its costs
in repairing known defective welds associated with the 1988 contract,
and it issued a letter of credit ensuring payment for the costs of repair-
ing any additional defects. Although Amtrak reported a profit on the
SIT contract which was recorded as funds available for capital expendi-
tures, we estimate that Amtrak actually lost about $88,870-including
the cost of defective welds. However, in performing the N.JT contract,
Amtrak did experience a contribution to the fixed costs of its rail weld-
ing facility which it would not have experienced absent the N.JT contract.

‘We calculated matenal handling and depreciation costs for this contract on the basis of Amtrak’s bid
;utd their normal monthly rstahlished rates for each. However. these costs are not shown because
Amtrak considers them proprwtary marketing information

Page 20                                                                   GAO/RCED-99.76 Amtrak
Appendix III

Objectives, Scope, and Methodology

               Senators Breaux, Dole, Garn, Glenn, and McClure requested that we (1)
               obtain information on Amtrak’s revenue enhancement activities and the
               impact of these activities on the federal subsidy and (2) determine
               whether Amtrak competed fairly when bidding against a private firm
               for a 1988 rail welding contract.

                To determine the scope of its revenue enhancement activities and earn-
                ings, we examined Amtrak’s annual reports and other financial data. We
                compared projected revenue enhancement earnings to estimated capital
                requirements for fiscal years 1990 through 1993 and evaluated the
                impact on federal subsidies, We examined Amtrak’s business agreements
                with private firms, including rail welding for urban commuter t,rain

                As requested, we reviewed Amtrak’s fiscal year 1988 New Jersey
                Transit track welding project to determine if Amtrak competed fairly
                with companies in the private sector when bidding on proposals for ser-
                vices We were asked t,o review this contract because of congressional
                concern that Amtrak may not have competed fairly with the private sec-
                tor. In reviewing this contract, we examined how Amtrak prepared its
                bid and how it subsequently accounted for contract costs. The project
                had been recently completed and not yet audited by an independent
                auditing firm.

                We interviewed Amtrak’s Assistant Vice Presidents for Corporate Devel-
                opment, Real Estate Development, Government Affairs, and the
                Mechanical Division. We also met with other senior Amtrak officials
                regarding the Revenue Enhancement Program and its potential. We dis-
                cussed Amtrak’s accounting system and policies with Amtrak account-
                ing officials and with officials of its independent auditing firm, Arthur
                Andersen & Company.

                Our audit work was done primarily at Amtrak headquarters in Washing-
                ton, DC., and its Philadelphia corporate office, from January through
                June 1989. We visited Amtrak’s Rail Welding Plant in New Haven, Con-
                necticut, to observe the rail welding process and its facilities; and Heavy
                Maintenance Facility in Beech Grove, Indiana, to observe the overhaul
                process and assembly of passenger cars.

                Our review was performed in accordance with generally accepted gov-
                ernment auditing standards.

                Page 21                                                GAO/RCED-9076   Amtrak
Major Contributors to This Report

Resources,              John S. Kalmar, Jr., Assignment Manager
Community, and
Development Division,
Washington, D.C.

                        Richard A. McGeary, Regional Management Representative
Philadelphia Regional   William J. Gillies, Evaluator-in-Charge
Office                  William Vera, Evaluator

(343811)                Page 22                                          GAO/RCED-90.76   Amtrak