Enclosure II

 GAO-01-756R High-Speed Rail Investment Act of 2001

June 25, 2001

The Honorable Wayne Allard

The Honorable Robert F. Bennett

The Honorable Christopher S. Bond

The Honorable Phil Gramm

The Honorable John McCain

The Honorable Richard C. Shelby

The Honorable Bob Smith

United States Senate

Subject: The High-Speed Rail Investment Act of 2001 (S. 250)

The High-Speed Rail Investment Act of 2001 (S. 250) would allow the National

Railroad Passenger Corporation (Amtrak) to issue up to $12 billion in “tax credit

bonds” over 10 years, primarily for capital improvement projects on designated highspeed rail corridors and on Amtrak’s Northeast Corridor.1

 (See encl. I for a summary

of the bill.) You asked us to assess selected aspects of the bill, including (1) the cost

of the bond-financing mechanism and alternatives to the U.S. Treasury, (2) the degree

to which bond proceeds would meet the capital needs of federally designated highspeed rail corridors, and (3) the extent of the federal oversight role. On May 16, 2001,

we provided representatives of your offices with the preliminary results of our

review. Enclosure II contains the briefing slides that formed the basis of our

presentation.

In summary, we estimate that the tax credit for Amtrak bonds would cost the U.S.

Treasury between $16.6 billion and $19.1 billion (in nominal dollars) over 30 years.2

In present value terms, we estimate that the cost of these tax credits to the Treasury

would be between $7.7 billion and $10 billion. 3 The total cost of the bond program

 1

Amtrak is a private corporation that provides the nation’s intercity passenger rail service. Under the

bill, bondholders would receive tax credits rather than interest payments. Ten high-speed rail

corridors (with train speeds of at least 90 miles per hour) have been designated either by legislation or

by the Department of Transportation. Amtrak’s Northeast Corridor runs from Boston to Washington,

D.C. (See fig. I in encl. II.)

2

The tax credit that bondholders would receive is the product of the interest rate on outstanding longterm corporate debt and the outstanding face amount of the bond.

3

A present value computation adjusts the value of dollars spent (or received) in the future to make

them comparable with dollars spent (or received) today. Among other things, this adjustment is

important when comparing the costs of a program that extends over 30 years, such as the S. 250 bond

program, with a program whose costs to the government occur much sooner, such as one funded with

annual appropriations.

United States General Accounting Office

Washington, DC 20548
2 GAO-01-756R High-Speed Rail Investment Act of 2001

could increase to about $11.2 billion (in present value terms) if states finance their

contributions with tax-exempt borrowing and Amtrak uses its accumulated losses to

offset otherwise taxable earnings in the trust account established for the repayment

of bond principal. We estimate that the cost of providing equivalent annual

appropriations would be between $7.3 billion and $8.2 billion in present value terms.4

As a result, the cost of the tax credits to the U.S. Treasury under the bond approach

would be at least $400 million greater and could be more than $3 billion greater (in

present value terms) than providing annual appropriations of an equivalent amount.

The overall capital needs of fully developed federally designated high-speed rail

corridors are unknown because these initiatives are in various stages of planning.

However, a preliminary estimate by Amtrak puts the capital costs for fully developed

high-speed rail corridors and its Northeast Corridor at between $50 billion to $70

billion over 20 years.

Regarding the federal oversight role, the bill provides specific responsibilities to the

Departments of the Treasury and Transportation. Specifically, the Secretary of the

Treasury is required to report annually on whether the amount of money in the trust

account is sufficient to repay the bonds.5

 Another responsibility is to determine, as

part of its overall responsibilities under the Internal Revenue Code, whether tax

credits claimed by taxpayers qualify under S. 250. According to Treasury and Internal

Revenue Service officials, the bill and other provisions of the Internal Revenue Code

provide them with sufficient authority to do so. The Department of Transportation’s

role is to approve projects from those selected by Amtrak prior to Amtrak’s issuing

the bonds. In approving the projects, the Department may give preference to projects

with state matching contributions above the required 20 percent and shall consider

the regional balance for infrastructure investment and the national interest in

developing high-speed passenger rail projects.6

 Federal Railroad Administration

officials told us that more specific criteria could aid the Department in approving

projects. Finally, the bill provides Amtrak with significant programmatic

responsibilities for the development of high-speed passenger rail, including selecting

projects to be funded. The bill requires that projects funded through Amtrak bonds

be likely to financially benefit Amtrak. Yet, projects that might make the most

 4

Under the annual appropriations approach, the federal government would provide $960 million a year

for 10 years and states would contribute $240 million a year for 10 years, resulting in $12 billion

becoming available for passenger rail projects. The state contribution that we assumed is identical to

the contribution required under S. 250.

5

States provide at least 20 percent of the cost of the project to be financed with bond proceeds. State

matching contributions, temporary period investment earnings on bond proceeds, and earnings on

these amounts would be held in a trust account by a trustee independent of Amtrak. Amounts in the

trust account would be used to redeem the bonds.

6

The Department’s approval includes a determination by its Inspector General that projects would be

financially beneficial to Amtrak and that Amtrak’s investment evaluation process includes

consideration of the return on investment, leveraging of funds, cost effectiveness, safety and mobility

improvements, and feasibility.
3 GAO-01-756R High-Speed Rail Investment Act of 2001

important contributions to national transportation goals may not necessarily make

the greatest (or any) financial contributions to Amtrak and vice versa.

S. 250 is being proposed as one means of providing increased federal funding for

intercity passenger rail and high-speed rail. Amtrak’s most recent capital and finance

plan calls for $30 billion (as measured in 2000 dollars) in federal funding over 20

years to upgrade its operations and to invest as seed money in high-speed rail

corridors. Also, as discussed earlier in this letter, the capital needs to fully develop

Amtrak’s Northeast Corridor and the federally designated high-speed corridors could

be in the $50 billion to $70 billion range, with much of this funding expected to come

from the federal government. In March 2001, we testified that a number of benefits—

such as reducing congestion and increasing travel choices—have been attributed to

Amtrak and high-speed passenger rail systems.7

 These claimed benefits need to be

realistically examined to guide the Congress in its decisions over the potentially large

funding of such systems.

Agency Comments and Our Evaluation

We sent a draft of this report to Amtrak, the Department of the Treasury, the Internal

Revenue Service, and the Department of Transportation for their review and

comment.

We met with several Amtrak officials on June 7, 2001, including a Senior Director for

Finance and a Director for Government Affairs. Amtrak supplemented its comments

with a letter on June 14. (See encl. IV.) In its letter, Amtrak stated that it concurred

with many of our observations on the bill. Amtrak emphasized that it believes that

the bill is an important first step in providing seed money and building the

partnerships with states, localities, and freight railroads critical to the development of

high-speed rail in the United States. Amtrak believes that a bond approach is a viable

way to provide such funds, especially since the prospects of receiving appropriations

are not encouraging. In addition, Amtrak stated that the bond approach is attractive

because it generates a considerable amount of funds in a relatively short period of

time.

In its letter Amtrak commented on our observation that if the amount in the trust

account is inadequate to repay the bonds upon maturity, the federal government may

be asked to make up any shortfall. Amtrak stated that the bill makes it clear that the

obligation to repay the principal of the bonds at maturity rests with Amtrak and not

the federal government. We agree that the United States would not be legally liable

for these obligations. Nevertheless, we recognize that bondholders could attempt to

recover losses from the federal government. To address this issue a provision could

be added to the bill stating that the federal government does not explicitly or

implicitly guarantee repayment of bond principal.

 7

Intercity Passenger Rail: Assessing the Benefits of Increased Federal Funding for Amtrak and

High-Speed Passenger Rail Systems (GAO-01-480T, Mar. 21, 2001).
4 GAO-01-756R High-Speed Rail Investment Act of 2001

In our June 7 meeting, Amtrak offered a number of specific comments on our draft

report. First, Amtrak stated that we overstated the bond bill’s cost to the Treasury

since the tax credits received by bondholders are treated as taxable income under S.

250. Thus, Amtrak believes that the cost to the Treasury of the bond program is the

cost of the tax credits less the increased income tax liability of the bondholders who

take the tax credits. We disagree. We assumed that if investors did not invest in S.

250 bonds they would have invested in other taxable instruments. Thus, the investor

would have incurred a similar additional tax liability in either case, and there would

be no additional tax revenue as a result of the credit.

Second, in our June 7 meeting, Amtrak receded from its statement that an important

consideration in its selection of high-speed rail projects would be the degree to which

the projects are financially beneficial to Amtrak. Among other things, Amtrak said

that it cannot determine selection criteria—and which of the criteria will have greater

weight—until legislative action on the bill has been completed. We agree with

Amtrak’s comment and have deleted Amtrak’s previous view from our report.

Third, during our review Amtrak told us that it was more appropriate to compare the

cost of another guaranteed source of funds to the bond program, rather than annual

appropriations. To address Amtrak’s view, we provided an example of a guaranteed

source of funds in our draft report because Amtrak did not offer one of its own. In

our June 7 meeting, Amtrak offered a sinking fund approach as a guaranteed source

of funds to compare with the bond program. Under this approach, the Congress

would provide Amtrak with a single appropriation. These funds would then be

invested and the investment earnings would be added to the fund. Amtrak would

draw down $960 million a year for 10 years from the fund. States would provide $240

million a year, thus making $1.2 billion a year available for high-speed rail projects, an

amount equal to the amount that could become available under the bond program

(not considering that bond proceeds may be used to defray bond issuance and other

costs). We substituted Amtrak’s approach for the example that we had devised.

Depending on the rate of return assumed, we estimate that the Congress would have

to appropriate between $7 billion and $8.3 billion (in present value terms) for the

sinking fund.8

 In present value terms, we estimate that the S. 250 bond program

would cost the Treasury from at least $700 million more to over $2.9 billion more (in

present value terms) than Amtrak’s sinking fund approach (see encl. II and III).

Fourth, in our June 7 meeting, Amtrak said that we should have contacted investment

firms as part of our work because these firms could provide insights into how the

investment community might view the bonds as investments. We did not do so

because we assumed that investors would view the Amtrak bonds as similar to other

risk-adjusted taxable bonds. Finally, Amtrak officials offered a number of clarifying

and technical comments and we made changes to the report where appropriate.

 8

These amounts assume that states finance their contributions with tax-exempt borrowing and Amtrak

uses its accumulated losses to offset otherwise taxable earnings in the sinking fund.
5 GAO-01-756R High-Speed Rail Investment Act of 2001

Neither the Department of the Treasury nor the Internal Revenue Service chose to

comment on our draft report. The Department of Transportation commented that the

portion of the draft transmittal letter summarizing the cost of the bond program was

confusing and appeared to unfairly compare the cost of the program with the face

value of the bonds. We agree with the Department and revised our presentation to

improve its clarity.

Scope and Methodology

To carry out our work, we reviewed the High-Speed Rail Investment Act of 2001, as

introduced on February 6, 2001. We discussed the bill with officials from the Federal

Railroad Administration within the Department of Transportation, the Internal

Revenue Service and the Office of Tax Analysis within the Department of the

Treasury, Amtrak, four of the seven large freight railroad systems over which highspeed rail service might operate, and representatives from 20 states within federally

designated high-speed rail corridors. We also reviewed Amtrak’s February 2001

finance and capital plan, the Amtrak Reform Council’s 2001 annual report, the

Federal Railroad Administration’s May 2000 report on high-speed rail systems, and

selected project descriptions for high-speed rail corridors. In addition, we

interviewed tax officials from five states and obtained property tax data on railroad

property. Enclosure III describes how we estimated lost tax revenue associated with

these bonds and the cost of alternative grant approaches.

We performed our work from March through June 2001 in accordance with generally

accepted government auditing standards.

We are sending copies of this report to congressional committees with

responsibilities for transportation issues; the Secretary of the Treasury; the

Commissioner of Internal Revenue; the Secretary of Transportation; the Acting

Administrator of the Federal Railroad Administration; the Director, Office of

Management and Budget; and the President and Chief Executive Officer of Amtrak.

We will also make copies available to others upon request and on our home page at

http://www.gao.gov.
6 GAO-01-756R High-Speed Rail Investment Act of 2001

As arranged with your offices, unless you publicly announce its contents earlier, we

plan no further distribution of this report until 14 days after the date of this letter. If

you or your staff have any questions about this report, please contact me at (202) 512-

2834. Key contributors to this report were Kevin Daly, Helen Desaulniers, Paul

Posner, Teresa Russell, James Ratzenberger, and James Wozny.

John H. Anderson, Jr.

Managing Director, Physical

 Infrastructure Issues

Enclosures - 4
Enclosure I

7 GAO-01-756R High-Speed Rail Investment Act of 2001

A General Description of the High-Speed Rail Investment Act of 2001

• The bill authorizes Amtrak to issue up to $1.2 billion in tax credit bonds each year

from 2002 through 2011. 9 Unused bond authority in any 1 year can be carried

over to the following year, through 2015.

• Bondholders receive a credit on their federal income taxes instead of interest

payments. The credit is the product of the interest rate on outstanding long-term

corporate debt and the outstanding face amount of the bond.

Bond Funds for Capital Projects

• With limited exceptions, bond proceeds are to be used for the acquisition,

financing, or refinancing of equipment, rolling stock, and other capital

improvements, including station rehabilitation or construction, track or signal

improvements, or the elimination of grade crossings (the intersection of railroad

tracks and roads).

• No more than $3 billion in bond authority may be used for Amtrak’s Northeast

Corridor or any one designated high-speed rail corridor. No more than $100

million may be used in any 1 year for projects on other intercity passenger rail

corridors (for increasing speeds up to 90 miles per hour). Finally, the Secretary of

Transportation may allocate a portion of the bond authority to the Alaska

Railroad.

• At least 95 percent of bond proceeds must be used on qualified projects. Bond

proceeds may be used for independent assessments of projects’ costs and benefits

(see below). Amtrak must reasonably expect to spend at least 95 percent of the

proceeds of a bond issue on qualified projects within 5 years and must exercise

due diligence to complete projects and spend such proceeds.

Project Selection and Approval

• The Secretary of Transportation must approve projects selected by Amtrak for

funding before Amtrak issues bonds. The Secretary may give preference to those

projects with state contributions exceeding 20 percent of the projects’ costs (see

below). The Secretary shall consider regional balance in infrastructure

investment and the national interest in ensuring the development of a nationwide

high-speed rail transportation network.

• In addition, the Department’s Inspector General must find that there is a

reasonable likelihood that proposed projects will result in a positive financial

return to Amtrak and that the investment evaluation process includes

 9

As introduced (the “star print” on Feb. 6, 2001). The provisions of the bill could change during the

legislative process. For example, the bill’s sponsors expect that the provisions on state and local tax

exemption and the ability of states to use federal funds for their matching contributions, summarized

below, will be removed.
Enclosure I

8 GAO-01-756R High-Speed Rail Investment Act of 2001

consideration of the return on investment, the leveraging of funds, cost

effectiveness, safety and mobility improvements, and feasibility.

• For certain projects, Amtrak must enter into agreements on the scope and the

estimated cost of the projects and their impact on freight capacity with the freight

railroads whose properties are to be improved by the projects.

State Contributions to Redeem the Bonds

• A state whose high-speed rail project is to be funded with bond proceeds must

contribute at least 20 percent of the project’s cost. This contribution is to be held

in a trust account and used, along with investment earnings on bond proceeds and

other earnings, to redeem the bonds issued for the project. Excess state

contributions must be used to fund other projects or redeem other qualified

Amtrak bonds.

• States may use federal funds, including amounts made available from the Highway

Trust Fund, for their contributions, as well as the value of land contributed for a

high-speed rail right-of-way.

Oversight of the Use of Bond Funds

• The Internal Revenue Service determines whether amounts claimed as tax credits

qualify under S. 250. If a bond issued under the act ceases to be a qualified

Amtrak bond in any 1 year, Amtrak must repay the amounts allowed as tax credits

for that year plus amounts allowed for the preceding 2 years (plus interest). If

Amtrak fails to repay these amounts, the bondholders become liable.

• The Secretary of the Treasury is to report annually to the Congress on whether

amounts in the trust account are sufficient to repay the bonds.

• Amtrak is required to contract for an annual independent assessment of the costs

and the benefits of the projects undertaken, including an assessment of the

corporation’s investment evaluation process.

Other Provisions

• Freight railroads are not liable for taxes and fees imposed by the Internal Revenue

Code or by any state or local government with respect to the acquisition,

improvement, or ownership of (1) personal or real property funded by the

proceeds of the bonds or any state or local bond or revenues or income from such

acquisition, improvement, or ownership and (2) rail lines in designated high-speed

rail corridors that are leased by Amtrak.
Enclosure II

9 GAO-01-756R High-Speed Rail Investment Act of 2001

Financial and Oversight Issues Associated

With the High-Speed Rail Investment Act of 2001

1

High-Speed Rail Investment Act

of 2001 (S. 250)

2

To assess

• the total cost of the proposed financing mechanism;

• the cost of the proposed financing mechanism as compared

to a grant program funded by annual appropriations;

• the degree to which $12 billion would meet the capital needs

of high-speed rail projects;

• the extent of the federal oversight role;

Objectives
Enclosure II

10 GAO-01-756R High-Speed Rail Investment Act of 2001

3

Objectives

• the financial impact of the tax exemption provisions on states;

• the financial impact of the bill on freight railroads;

• the extent to which federal funds, including highway trust

fund monies, can be used for the state matching requirement;

and

• the extent to which prior debt incurred by Amtrak and the

states could be reimbursed or paid off.

4

Background

S. 250 allows Amtrak to issue up to $12 billion in tax credit

bonds ($1.2 billion each year) from 2002 through 2011.

Bondholders receive a credit against their federal income

taxes instead of interest payments.

With limited exceptions, bond proceeds are to be used for the

acquisition, financing, or refinancing of equipment, rolling

stock and other capital improvements, including station

rehabilitation or construction, track or signal improvements,

or the elimination of grade crossings.
Enclosure II

11 GAO-01-756R High-Speed Rail Investment Act of 2001

6

Background

Figure 1: Designated High-speed Rail Corridors and Amtrak’s

Northeast Corridor

Empire Corridor

Northern New

England Corridor Keystone

Corridor

Northeast

Corridor

Southeast

Corridor

Florida

Corridor

Gulf Coast

Corridor

South Central

Corridor

Chicago Hub

California

Corridor

Pacific

Northwest

Corridor Montreal

Portland/Auburn

Boston Albany

New York City

Philadelphia

Washington, D.C.

Hampton Roads

Raleigh

Columbia

Jacksonville

Orlando

Miami

Tampa

Atlanta

Charlotte

Louisville

Indianapolis

Detroit

Chicago

Minneapolis/St. Paul

Kansas City

Tulsa

Oklahoma City

Dallas/Ft. Worth

Los Angeles

San Diego

Sacramento San Francisco

Bay Area

Eugene

Portland

Seattle

Vancouver

San Antonio

Houston

St. Louis

Mobile

New Orleans

Little Rock

Birmingham

Buffalo

Cleveland

Pittsburgh

Richmond

5

Background

Eligible projects must be located on

• Amtrak’s Northeast Corridor,

• corridors designated by legislation or the Secretary of

Transportation as high-speed corridors (see fig. 1),

• other intercity passenger rail corridors (for increasing

speeds up to 90 miles per hour), and

• the Alaska Railroad.
Enclosure II

12 GAO-01-756R High-Speed Rail Investment Act of 2001

7

Background

With the exception of projects for the Alaska Railroad,

participating states must contribute at least 20 percent of the

cost of the project to be financed with bond proceeds. These

contributions, along with investment earnings on bond

proceeds and earnings on these amounts, are to be held in a

trust account by an independent trustee and used to redeem

the bonds.

8

Valuing the Costs of the 30-Year Bond

Program

Federal budget numbers are stated in “nominal” dollars,

meaning that no distinction is made between dollars spent (or

received) today and dollars spent (or received) in future

years.

However, costs of long-term programs should be compared in

present value terms. A present value computation adjusts

the value of dollars spent (or received) in future years to

make them comparable to dollars spent (or received) today.
Enclosure II

13 GAO-01-756R High-Speed Rail Investment Act of 2001

9

Valuing Costs

For example, current interest rates on long-term bonds indicate

that, to the government and investors, the present value of a

dollar to be spent 30 years from now is less than 25 cents.

As a result, those dollars should not be treated as equivalent

to dollars spent today, or in the next few years.

Among other things, this adjustment is important when

comparing the costs of a program that extends over 30 years,

such as the S. 250 bond program, with a program under

which the costs to the government occur much sooner, such

as one funded with annual appropriations.

10

Tax Credit Bond Program Estimated to

Cost More Than $16 Billion

We estimate that over the 30-year life span of the bond

program the Treasury would forgo revenues amounting to

between $16.6 billion and $19.1 billion in nominal dollars

(between $7.7 billion and $10 billion in present value) due to

the tax credits.

• The size of this loss will depend on future interest rates,

which will determine the amounts of the tax credits.
Enclosure II

14 GAO-01-756R High-Speed Rail Investment Act of 2001

11

Cost of the Bond Program

The Treasury could incur an additional revenue loss if states

increased their tax exempt borrowing to finance their

matching contributions. We estimate that this loss would be

less than $1 billion in nominal dollars (less than $0.6 billion in

present value).

• If states do not issue additional tax exempt bonds, there

would be no additional loss.

12

Cost of the Bond Program

The Treasury would incur a further revenue loss if Amtrak used

its accumulated losses to offset the taxable earnings of the

trust account. We estimate that if Amtrak’s entire

accumulated losses to date (in excess of $5 billion) were

used to offset these earnings, the additional revenue loss

could be as much as $0.4 billion in nominal dollars

($0.6 billion in present value), depending on:

• the size of the account’s earnings;

• the extent to which money in the account would have

earned a taxable return elsewhere, in the absence of

S. 250.
Enclosure II

15 GAO-01-756R High-Speed Rail Investment Act of 2001

13

Cost of the Bond Program

If in the future Amtrak accumulates additional losses that can

only be used to offset income of the trust account, then the

additional revenue cost to the Treasury could be greater.

However, if future federal subsidies are treated as taxable

income to Amtrak and these subsidies are large enough to

make Amtrak profitable, then this additional revenue loss

may not occur and there may even be a revenue offset to the

federal costs.

• Amtrak’s most recent financial statement notes that (in

the absence of S. 250) it is unlikely to be able to use its

accumulated losses.

14

Appropriations Could Be Less Costly

Than the Bond Program

We estimate that the tax credit bonds could cost the Treasury

from $0.4 billion to over $3 billion more than a grant program

funded through annual appropriations (in present value).

Annual appropriations are typically the mechanism used to

fund Amtrak’s capital improvements.

• As discussed earlier, the cost of the bond program could

be as low as $7.7 billion in present value.
Enclosure II

16 GAO-01-756R High-Speed Rail Investment Act of 2001

15

Appropriations

• We estimate that the Congress could provide the same

amount of funding for high-speed rail through annual

appropriations, at a cost as low as $7.3 billion in present

value--or $0.4 billion less than the lower estimate of the

bond program. (We assume that state contributions

would remain the same as under S. 250.)

• Also as discussed earlier, the cost of the bond program

could exceed $11.2 billion in present value if (1) future

interest rates are higher than current projections; (2)

states finance all of their contributions with additional tax

exempt bonds; and (3) Amtrak uses at least $5 billion of

(otherwise unusable) accumulated losses to offset the

income of the fund.

16

Appropriations

• Using the same assumptions about the financing of state

contributions for the higher bond program estimate, we

estimate that providing the same amount of funding

through annual appropriations (with state contributions)

could cost as much as $8.2 billion in present value--or

$3 billion less than the higher estimate for the bond

program.
Enclosure II

17 GAO-01-756R High-Speed Rail Investment Act of 2001

18

Appropriations

• We estimate that the bond program would cost the

Treasury at least $700 million more and could cost over

$2.9 billion more than Amtrak’s sinking fund approach in

present value terms.

17

Appropriations

Amtrak believes that the appropriate comparison would be

another guaranteed funding source (e.g., appropriating

about $7 billion at one time, which could be invested and

used as a sinking fund, with state contributions the same

as under S. 250).

• We estimate that the cost of this sinking fund alternative

would be between about $7 billion and $8.3 billion (in

present value terms) depending on assumptions relating

to the rate of return earned by the fund, the states’

issuance of tax-exempt bonds to finance their

contributions, and Amtrak’s ability to offset the fund’s

earnings with its tax losses.
Enclosure II

18 GAO-01-756R High-Speed Rail Investment Act of 2001

19

Appropriations

Both the bond program and the appropriations alternative would

provide about $12 billion in funding for high-speed rail (worth

between $9.1 billion and $9.6 billion in present value).

• The exact amount of money provided for high-speed rail

projects through the bond program depends on (1) bondissuance costs and (2) whether the bonds will be sold at,

above, or below par value.

20

Appropriations

Financing through the tax code can be a means of achieving

certain federal objectives. However, several budgetary

implications arise from adopting this approach.

• Using S. 250’s funding mechanism, high-speed rail is

funded without competing for resources within the

appropriations process. (Funding high-speed rail through

the appropriations process could result in lower spending

for other discretionary programs.)

• Under the Budget Enforcement Act, other entitlement

spending would have to be cut or taxes increased if

S. 250 is enacted. If the rules are waived, the surplus

would be lower.
Enclosure II

19 GAO-01-756R High-Speed Rail Investment Act of 2001

21

Appropriations

• Once enacted, programs funded through the tax code

typically receive less scrutiny than those that receive

annual appropriations.

22

$12 Billion Will Not Meet the Capital

Needs of High-Speed Rail Corridors

Estimates of the total capital costs are incomplete because of

the status and changing nature of the federally designated

corridor initiatives.

• Some of the projects identified within the designated

corridors might be cancelled or might be altered.

• Some states within existing corridors do not have an

estimate of their capital costs. For example, four of the

states we contacted could not provide us with an estimate

because they had just begun planning.

• Some states have said their estimates of capital needs

may increase if additional corridors were identified.
Enclosure II

20 GAO-01-756R High-Speed Rail Investment Act of 2001

23

Capital Needs

Although a reliable estimate of the capital needs is not

available, $12 billion will not be enough. Amtrak’s preliminary

estimate to fully develop the 10 federally designated corridors

and its Northeast Corridor is between $50 billion and

$70 billion in capital over the next 20 years.

• Representatives from 16 states within the designated

corridors told us they currently estimate their total capital

needs at $18.2 billion. Thirty-four states are participating

in the development of high-speed rail.

24

Departments of the Treasury and

Transportation Have Specified Roles

The bill assigns specific responsibilities to the Departments of

the Treasury and Transportation.

The Secretary of the Treasury monitors the use of the bonds as

a financing mechanism.

• The bill requires the Secretary of the Treasury to report

annually on whether or not the amount of money in

Amtrak’s trust fund is sufficient to pay off the issued

bonds.
Enclosure II

21 GAO-01-756R High-Speed Rail Investment Act of 2001

25

Federal Roles

• According to Treasury and IRS officials, the bill and other

provisions of the Internal Revenue Code provide them

with sufficient authority to determine whether amounts

claimed as tax credits qualify under S. 250.

• IRS officials told us they would have to write tax

regulations for S. 250 but the 90 days provided in the bill

would not be enough time.

26

Federal Roles

The Secretary of Transportation approves projects selected by

Amtrak prior to bond issuance.

• The Secretary’s approval includes the Inspector

General’s determination that projects would be financially

beneficial to Amtrak and that Amtrak’s investment

evaluation process includes consideration of the return on

investment, leveraging of funds, cost effectiveness, safety

and mobility improvements, and feasibility.
Enclosure II

22 GAO-01-756R High-Speed Rail Investment Act of 2001

27

Federal Roles

In approving qualified projects, the Secretary

• may give preference to projects with state matching

contributions above the required 20 percent.

• shall consider regional balance for infrastructure

investment and the national interest in ensuring the

development of high-speed passenger rail when

approving projects.

Federal Railroad Administration officials told us more specific

criteria would aid the Secretary in approving projects.

28

Federal Roles

The bill provides Amtrak with significant programmatic

responsibility for the development of high-speed passenger

rail.

• Amtrak officials told us they will consider the factors

identified in S. 250 in selecting projects--financial benefits

to Amtrak, the amount of the state match (more than

20 percent), and improvements to mobility and safety,

among other things.

• Amtrak is required to contract for an annual independent

assessment of the costs and the benefits of projects

receiving bond financing.
Enclosure II

23 GAO-01-756R High-Speed Rail Investment Act of 2001

29

Impact on State and Local Government

Revenues Cannot Be Reliably Estimated

S. 250 exempts railroads from certain state and local taxes. Bill

sponsors expect that these provisions will be removed.

The impact of S. 250 on state and local tax revenues cannot be

reliably estimated because:

• the exemptions are subject to varying interpretations,

• it is unclear how states would implement the exemptions,

and

• it is unknown what property would be acquired or

improved with the proceeds of the Amtrak bonds and the

state or local tax exempt bonds and what rail lines would

be leased by Amtrak.

30

Exemptions are Subject to Different

Interpretations

One provision of S. 250 clearly exempts railroads from state

and local taxes attributable to acquisitions and

improvements funded by proceeds of Amtrak bonds or

state or local bonds, and from taxes otherwise due on

revenues or income from the acquired or improved

property.

• Under a broader (and less reasonable) interpretation,

the exemption might also apply to state and local taxes

on the total value of the property improved.
Enclosure II

24 GAO-01-756R High-Speed Rail Investment Act of 2001

31

Exemptions

A second provision of S. 250 would exempt Amtrak-leased

rail lines (presumably roadbed and track) in designated

corridors from state and local property taxes. The

exemption would not be limited to improvements on these

lines.

• Under a broader (and less reasonable) interpretation,

the exemption might also apply to taxes in addition to

property taxes.

32

How the Property Tax Exemption Would

Be Implemented Is Unclear

How states would value improvements of railroad property is

unclear because an improvement at one location in the rail

system may also be viewed as an improvement in the

performance (and therefore the value) of other parts of the

system.
Enclosure II

25 GAO-01-756R High-Speed Rail Investment Act of 2001

33

Implementation

The valuation of improvements and acquisitions would pose

additional difficulties for the states that use the unitary

method of property valuation (under which the total value of

the railroad is determined nationwide and allocated by

formulas to specific states, then to localities within the

states). Thirty-nine states use this approach.

• It is not clear how these states would adjust the formulas or

otherwise change the unitary method to ensure that an

improvement or acquisition funded with bond proceeds is not

taxed.

34

Property Tax Exemption’s Impact Would

Vary by Locality and Type of Property

Current property tax collections indicate that the revenue effect

of the exemption would vary by locality and type of property.

For example:

• Revenue from the property tax on roadbed and track in

the Southeast Corridor (Washington, D.C., to Richmond)

ranged from a low of 0.01 percent of total property tax

revenue in Fairfax County to 3.6 percent of total property

tax revenue in Caroline County.

• The localities in this portion of the Southeast Corridor

collected a total of $3.1 million in property tax on railroad

property, with $1.5 million, or about 50 percent of the

total, coming from the tax on the roadbed and track.
Enclosure II

26 GAO-01-756R High-Speed Rail Investment Act of 2001

35

The Effect on Other State and Local Tax

Revenues Is Unclear

S. 250’s effect on other tax revenue is unclear because

• state corporate income tax revenues will depend on how

income will be attributed to the exempt railroad property,

• sales tax revenue will depend on any existing exemptions

or special rates for the acquired property, and

• revenue from sales and corporate income taxes (as well

as the property tax) will depend on what properties would

be acquired or improved with the proceeds of the Amtrak

bonds and state or local tax exempt bonds issued to

support these projects and what rail lines would be

leased by Amtrak.

36

The Financial Benefits to Freight

Railroads Appear to Be Limited

The freight railroads we contacted do not see large financial

benefits from participating in high-speed passenger rail

systems.

The bill could exempt freight railroads from certain local, state,

and federal taxes. As stated previously, it is unclear how the

state and local exemptions would be implemented and to

what they would apply. This is also the case with the federal

exemptions.
Enclosure II

27 GAO-01-756R High-Speed Rail Investment Act of 2001

37

Freight Railroads

• IRS and Treasury officials said it would be difficult to

implement the federal tax exemption as written. Neither

the bill nor existing tax laws provides guidance on how to

determine the amount of income attributable to the

“acquisition, improvement, or ownership of” property

“funded” by Amtrak bonds. IRS would have to develop an

approach for making this determination.

• Amtrak interprets the federal exemption as simply

excluding any amounts paid for an acquisition or

improvement from the incomes of freight railroads in the

year that the acquisition or improvement occurs.

38

Freight Railroads

• Clarification of the bill’s wording would resolve the

potential differing interpretations.
Enclosure II

28 GAO-01-756R High-Speed Rail Investment Act of 2001

39

Freight Railroads

The four major freight railroads we contacted were unsure if

tax-exemption provisions in the bill would provide significant

financial benefits.

• While the railroads recognized that some tax relief could

be realized from S. 250, they said the tax benefits did not

appear to be significant.

• The railroads stated they were unlikely to lease additional

rail lines to Amtrak, even though they could receive tax

exemptions, if they had to give up train dispatching rights.

Bill sponsors expect that these provisions will be

removed.

40

Freight Railroads

The freight railroads provided examples of how passenger rail

could have a negative financial impact on operations

including increased maintenance costs, increased equipment

costs not necessary for freight operations, and reduced time

available to move freight.

As a result, the freight railroads had mixed reactions about

participating in high-speed passenger rail projects.
Enclosure II

29 GAO-01-756R High-Speed Rail Investment Act of 2001

41

Freight Railroads

Two of the railroads stated they would work with the states

in further developing passenger rail service.

• One railroad stated it currently has agreements with

three states to participate in passenger rail projects.

• Another railroad stated it preferred to work with states

on projects that did not require it to share its track.

42

Freight Railroads

However, the remaining two railroads were reluctant to

participate in additional high-speed passenger rail

projects.

• They stated there would be no room for additional

passenger trains in some of their urban areas.

• One freight railroad stated it would not allow

passenger trains traveling at speeds higher than

90 mph to share its right-of-way.

• The other freight railroad stated it would not enter into

any passenger rail agreements unless another party

assumed 100 percent of the increased maintenance

costs.
Enclosure II

30 GAO-01-756R High-Speed Rail Investment Act of 2001

43

States Can Use Federal Funds for

Matching Contributions

S. 250 has two provisions that when read together would allow

states to use federal funds for their matching contributions for

projects on designated corridors.

• One provision prohibits states from using federal funds,

including amounts made available from the Highway

Trust Fund, for matching contributions required for bond

issuance, subject to a specific exception.

44

Use of Federal Funds

• The exception largely defeats the prohibition. This

exception appears to allow states to use federal funds for

their matching contributions for projects on designated

high-speed rail corridors, as well as the value of land to

be contributed for right-of-way.

• Bill sponsors expect that revisions to the bill will prohibit

states from using federal funds, including amounts made

available from the Highway Trust Fund, for matching

contributions.
Enclosure II

31 GAO-01-756R High-Speed Rail Investment Act of 2001

45

Bond Proceeds Appear Unavailable for

Prior Amtrak and State Debt

The bill implies that bond proceeds would not be available for

costs or indebtedness incurred by Amtrak prior to enactment.

• The bill does not explicitly prohibit Amtrak from using the

bond proceeds for prior debts, except in connection with

refinancing. However, the general principle against

retroactive application of statutes, together with the bill’s

language and purpose, support this interpretation.

• An explicit provision on the issue would remove any

doubt.

46

Prior Debt

• In addition, while the bill implies that bond proceeds are

to be invested, it does not expressly direct Amtrak to

make investments (or specify the types of investments),

segregate bond proceeds from other funds, or separately

account for these amounts. An explicit provision covering

the treatment and use of bond proceeds between the

date of receipt and expenditure for qualified projects

would help to eliminate the possibility that bond proceeds

would be available to Amtrak for other purposes,

including prior debt.
Enclosure II

32 GAO-01-756R High-Speed Rail Investment Act of 2001

47

Prior Debt

The bill similarly suggests that bond proceeds would not be

available to states for costs incurred prior to enactment for

reasons like those applicable to Amtrak.

• Bond proceeds would clearly be available for state costs

incurred after enactment but prior to bond issuance to

fulfill statutory requirements necessary for project

implementation.

• Amtrak believes that proceeds would be available to

states for costs incurred prior to enactment to fulfill such

statutory requirements.

• An explicit provision on this issue would eliminate the lack

of clarity.

48

Observations

In March 2001, we testified that a number of benefits to the

public--such as reducing congestion and increasing travel

choices--have been attributed to high-speed passenger rail

systems. These claimed benefits need to be realistically

examined to guide the Congress in its decisions over

potentially large funding of such systems.

The bill provides DOT’s Inspector General with a programmatic

role--determining that selected projects would be financially

beneficial to Amtrak. This role may affect the IG’s

independence in auditing the bond program.
Enclosure II

33 GAO-01-756R High-Speed Rail Investment Act of 2001

49

Observations

The bill provides that projects to be funded with Amtrak bonds

are to be expected to result in positive financial contributions

to Amtrak. However, those projects that might make the

greatest contributions to national transportation goals may

not necessarily make the greatest (or any) financial

contribution to Amtrak and vice versa.

50

Observations

Several uncertainties are associated with this funding

mechanism.

• The bonds might generate more (less) than the expected

amounts for high-speed rail projects if the bonds are

issued at a premium (discount). It is not known whether

any premiums or discounts would be significant.

• Project costs could grow beyond bond proceeds.
Enclosure II

34 GAO-01-756R High-Speed Rail Investment Act of 2001

51

Observations

• There are reasonable scenarios where the amount of

money in the trust fund would be sufficient to repay the

bonds’ principal. Under other scenarios, the amount in

the trust fund would not be sufficient. If the amount in the

trust fund is insufficient to repay the bonds’ principal, the

federal government could be asked to honor Amtrak’s

obligation to the bond holders, despite the absence of a

federal guarantee.

Investors may be reluctant to purchase bonds until IRS issues

its regulations. This could delay the start of the bond

program.

52

Scope and Methodology

• Interviewed officials from Amtrak, IRS, the Treasury, FRA

and DOT’s Office of Inspector General.

• Interviewed representatives from four major freight railroads,

• Obtained capital estimates from representatives of 20 states

within the federally designated corridors. We did not review

or verify these estimates.

• Reviewed S. 250, Amtrak’s 2001 capital and finance plan,

FRA reports on high-speed rail, and selected state passenger

rail improvement plans.
Enclosure II

35 GAO-01-756R High-Speed Rail Investment Act of 2001

53

Scope and Methodology Cont.

• Estimated total cost to Treasury under a number of plausible

assumptions.

• Interviewed tax officials from 5 states and obtained property

tax data on railroad property.
Enclosure III

36 GAO-01-756R High-Speed Rail Investment Act of 2001

Methodology for Estimating the Cost of the Bond

Program and Annual Appropriations as an Alternative

We estimated three separate components of the potential revenue loss to the

Treasury as a result of the bond financing program that S. 250 would establish. The

predominant cost of the program would be the tax credits that Treasury would give

to bond purchasers in lieu of interest payments from the bond issuer. Smaller

additional revenue losses could also arise from the issuance of tax-exempt bonds by

state governments to finance their matching contributions and Amtrak’s use of

accumulated operating losses to offset income generated by the trust account that

would be used to pay off the bonds. We also estimate the costs of a hypothetical

alternative grant program funded and a sinking fund arrangement, both funded by

annual appropriations which would provide the same amount of money for highspeed rail projects as S. 250. We computed all of our estimates in both nominal

dollars and present values.10

The Cost of the Tax Credits

We estimated the amounts of credits that the Treasury would pay by obtaining

projections of the future rates of credit and then multiplying these rates by the

amount of bonds that we assumed would be outstanding each year. S. 250 sets the

rate of credit on the Amtrak bonds equal to “an average market yield (as of the day

before the date of sale of the issue) on outstanding long-term corporate debt

obligations.” A Treasury official told us that the credit rate would likely be set equal

to an average of the corporate AA 20-year bond rate. To get projections of this

average rate, we obtained the latest AAA corporate bond projections from the

Congressional Budget Office and adjusted these projections for the historical

difference between AAA corporate bond rates and AA corporate bond rates. Given

the uncertainty surrounding future interest rates, we computed alternative estimates

using interest rates that were 0.5 percentage points above and below this adjusted

projection. Our computation of the number of bonds outstanding in each of the next

30 years is based on the assumptions that (1) Amtrak would issue bonds up to the full

limit and (2) Amtrak would use the longest allowable term for each issue—20 years.11

 10The discount rate that we used for our present value computations is the interest rate on Treasury

debt with a maturity that is equal to the length of the stream of benefits/costs of the activity being

examined. Given that these rates change from year to year, we computed alternative estimates using

discount rates that were 0.5 percentage points above and below the relevant interest rates.

11To reflect normal start-up delays, we assume that only one-fourth of the annual limit would be

reached in the first fiscal year that the bonds were allowed. The remainder of the limit would be

reached in the following fiscal year. For each of the next nine annual tranches of issuance authority,

we assume that half of the limit would be reached in the first fiscal year and the remainder of the limit

would be reached in the following year.
Enclosure III

37 GAO-01-756R High-Speed Rail Investment Act of 2001

Potential Cost of Additional Tax-Exempt Financing

To estimate a likely upper bound for any revenue loss that would occur if states

financed their matching contributions by issuing tax-exempt bonds, we used the

following assumptions:

• States would issue $2.4 billion of tax-exempt bonds (that they would not

otherwise have issued) over a 10-year period and that each bond would have a 20-

year term.

• If the new tax-exempt bonds were not available to investors, those investors

would have purchased assets yielding an 8-percent taxable rate of return. This

rate is approximately equal to the upper bound projections we use for the

corporate bond rate.

• The average marginal tax rate of the bond purchasers is 31 percent.12

The loss to Treasury is equal to the tax rate multiplied by the taxable return that the

investors otherwise would have earned.

Potential Cost Associated With the Use of Amtrak’s Accumulated Losses

State matching contributions and Amtrak’s earnings from the temporary investment

of unspent bond proceeds are to be placed in a trust account. Amtrak intends to

offset the income of the trust account with accumulated and future net operating

losses, thereby avoiding the payment of tax on that income. In the absence of S. 250,

the money in the trust account might be held by private sector investors who would

earn a taxable return on those funds. This shifting of funds from taxable investments

into a tax-sheltered investment would result in a revenue loss to the Treasury equal to

the difference between any tax that Amtrak might pay on fund earnings and the

amount of tax that otherwise would have been paid by the private investors.

The size of the revenue loss would depend on three factors:

1. the extent to which Amtrak has losses available to use that (in the absence of S.

250) it would not otherwise be able to use;13

2. the extent to which the money placed in the trust account is obtained from the

private sector, where it would otherwise be earning a taxable return;14 and

3. the amount of earnings that the trust account generates.

 12Purchasers of tax-exempt bonds tend to be in higher income tax brackets. Other analysts have

assumed the average marginal tax rate for these bond holders to be about 28 percent. We use a

slightly higher rate to ensure that our estimate is an upper bound.

13If Amtrak could use the losses even without S. 250, then the bill would not result in an additional loss

for the Treasury.

14If states were to finance their contributions by cutting back on other spending that they would have

done, rather than by raising taxes or borrowing, then those contributions would not take money out of

the private sector.
Enclosure III

38 GAO-01-756R High-Speed Rail Investment Act of 2001

To estimate a likely upper bound for the revenue loss that could occur if Amtrak had

$5 billion in tax losses that it otherwise could not use,15 we assumed the following:

• State contributions would equal 25 percent of bond proceeds (because Amtrak

expects that states will contribute more than the minimum match).

• All of these contributions would be obtained by taxing or borrowing money from

private individuals whose average marginal tax rates are 31 percent.

• For each issue of bonds, 90 percent of the proceeds would remain unspent in the

first year, and this amount gradually would be reduced to zero by the end of the

sixth year. Amtrak assumes that a maximum of 20 percent of the bond funds

would be spent in the first year and not more than 40 percent in the next year. In

this upper-bound scenario, we estimate what would happen if Amtrak were to

generate higher earnings for the trust account by spending the bond proceeds

more slowly.

• The funds in the account would earn an annual rate of return slightly over 6

percent, which we assume is the same return that the private sector investors

would have earned in the absence of S. 250.16

We computed how much tax would be paid on the investible funds under these

assumptions if S. 250 were adopted and how much would be paid if S. 250 were not

adopted. The revenue loss to Treasury equals the difference between the two

amounts.

Cost of the Alternative Grant Program

To estimate the present value cost of the grant program funded by annual

appropriations, we assumed that the timing of the grant payments would be the same

as the timing of the bond issues. We then applied the discount rates identified above.

 15Amtrak’s latest financial statement notes that, as of the September 30, 2000, the company had

accumulated over $5 billion in net operating losses, which it does not expect to use (in the absence of

S. 250). Prior to 1998, Amtrak issued preferred stock to the Department of Transportation in amounts

equal to all federal operating subsidies and most federal capital subsidies that it received. For this

reason, Amtrak’s accounts did not treat these subsidies as income. The Amtrak Reform and

Accountability Act of 1997 established that Amtrak would no longer issue preferred stock in exchange

for federal grants. If future federal subsidies are treated as taxable income to Amtrak and these

subsidies were large enough to offset future operating losses, including depreciation, then Amtrak

would not accumulate further losses for tax purposes.

16This is the rate of return that would maximize the loss, given the combination of other assumptions

used in this scenario. A higher rate of return could reduce the revenue loss if Amtrak does not

generate additional operating losses (including depreciation) in the future. This is because, once

Amtrak uses up all of its losses, the income in the trust account could be subject to a 35-percent

corporate tax rate, while the private sector investors are assumed to pay tax at a rate of no more than

31 percent. Amtrak would pay tax only if it actually became profitable on its own account or if the

federal government subsidized it beyond the break-even point.
Enclosure III

39 GAO-01-756R High-Speed Rail Investment Act of 2001

Cost of Amtrak’s Sinking Fund Alternative

To estimate the cost of Amtrak’s sinking fund alternative, we calculated the size of

the appropriation that would be needed to generate $960 million of spending in each

of the next 10 years, using both the 6 percent rate of return that Amtrak assumed and

an 8 percent rate of return (roughly equivalent to the upper bound we use for the AA

corporate bond rate). We also varied our assumption concerning Amtrak’s ability to

offset the income of the fund with its accumulated tax losses. One assumption was

that Amtrak could offset all of the fund’s earnings with its accumulated losses; the

alternative assumption was that it could not offset any of the earnings.17 As it turned

out, varying the assumption about the accumulated losses did not have a significant

effect on our results. If Amtrak were able to offset the fund’s earnings, then the size

of the required appropriation would be smaller; however, this benefit to the

government would be offset by the additional revenue loss associated with Amtrak’s

use of accumulated losses that would otherwise expire. The total cost to the

Treasury of the sinking fund alternative could be as low as $7 billion if the fund could

earn an 8 percent rate of return or as high as $8.4 billion if the fund earned only a 6

percent rate of return.18 The higher cost estimate includes the potential cost

associated with states issuing tax-exempt bonds to finance their matching

contributions.

 17The losses that Amtrak has accumulated to date would be more than sufficient to offset all of the

earnings of the fund, unless Amtrak generated other significant sources of income against which the

losses could be used. We used the same assumptions regarding the average tax rate of private sector

investors that we used for our other revenue loss estimates.

18The lower cost estimate for the sinking fund is less than the lower cost estimate for the annual

appropriations because the 8-percent rate of return is higher than the government’s discount rate.
Enclosure IV

40 GAO-01-756R High-Speed Rail Investment Act of 2001

Comments from Amtrak
Enclosure IV

41 GAO-01-756R High-Speed Rail Investment Act of 2001
Enclosure IV

42 GAO-01-756R High-Speed Rail Investment Act of 2001

(392007)