United States General Accounting Office

GAO Testimony

Before the Subcommittee on Transportation, Committee

on Appropriations, U.S. Senate

For Release

on Delivery

Expected at

9:30 a.m. EST

Tuesday

March 24, 1998

INTERCITY PASSENGER

RAIL

Outlook for Improving

Amtrak’s Financial Health

Statement of Phyllis F. Scheinberg,

Associate Director, Transportation Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-98-134

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to testify today on Amtrak’s financial

condition. Less than a year ago, we appeared before this Subcommittee to

discuss Amtrak’s financial problems.1

 At that time, we said that Amtrak

was in a very precarious financial position. Amtrak itself raised the specter

of a corporate bankruptcy in 1997.2

 We are here today to report that

Amtrak continues to be in a very precarious position and will remain so

for the immediate future. We base this assessment on Amtrak’s financial

performance last year and during the first quarter of this fiscal year;

challenges that Amtrak will face in improving its financial health; and the

potential impact that recently enacted legislation may have on Amtrak’s

financial condition. In summary:

• Amtrak’s financial condition continues to deteriorate. Although Amtrak

has been able to reduce its net losses (total expenses less total revenues)

from about $892 million in fiscal year 1994 (in 1997 dollars) to about

$762 million in fiscal year 1997, the 1997 loss would have been $63 million

higher were it not for one-time increases in revenue from the sales of real

estate and access rights for telecommunications. Prospects for fiscal year

1998 are not bright. In March 1998, Amtrak projected that its net loss for

fiscal year 1998 could be about $845 million—about $56 million more than

planned.

• Amtrak will continue to face challenges in improving its financial health.

Amtrak hopes to improve its financial health by increasing revenues

through such actions as expanding mail and express service (delivery of

higher-value, time-sensitive goods) and instituting high-speed rail service

between New York City and Boston. However, Amtrak has had to

substantially scale back its net revenue projections for express business,

and positive net income from the high-speed rail program will not occur

for another 2 years. Amtrak does not currently plan to reduce routes, even

though only one of its routes—the Metroliner service between

Washington, D.C., and New York City—makes money. Instead it plans to

1

Transportation Financing: Challenges in Meeting Long-Term Funding Needs for FAA, Amtrak, and the

Nation’s Highways (GAO/T-RCED-97-151, May 7, 1997). See also, DOT’s Budget: Management and

Performance Issues Facing the Department in Fiscal Year 1999 (GAO/T-RCED/AIMD-98-76, Feb. 12,

1998); and Intercity Passenger Rail: Amtrak’s Financial Crisis Threatens Continued Viability

(GAO/T-RCED-97-147, Apr. 23, 1997).

2

See our report entitled Intercity Passenger Rail: Issues Associated With a Possible Amtrak Liquidation

(GAO/RCED-98-60, Mar. 2, 1998) for a discussion of the expected financial and other effects if Amtrak

were to undergo liquidation.

Page 1 GAO/T-RCED-98-134
fine-tune its route network and conduct a comprehensive market analysis.

• Federal funding and recently enacted reforms will not solve Amtrak’s

financial problems. Although the Taxpayer Relief Act of 1997, fiscal year

1998 capital appropriations, and the President’s proposed fiscal year 1999

budget, if enacted, will provide Amtrak with historic levels of capital

support, this support will fall short of Amtrak’s identified capital needs by

about $500 million. In addition, Amtrak plans to use $1.8 billion of the

$2.8 billion in requested federal capital grant funds to pay maintenance

expenses between fiscal years 1999 and 2003. The use of funds for this

purpose would substantially reduce the remaining level of funds available

to acquire new equipment or make the capital improvements necessary to

reduce Amtrak’s costs and/or increase revenues. Therefore, such use will

have a negative impact over the long term. Furthermore, the Amtrak

Reform and Accountability Act of 1997 significantly changed Amtrak’s

operations; but these reforms will provide few, if any, immediate financial

benefits.

Background Amtrak was created by the Rail Passenger Service Act of 1970 to operate

and revitalize intercity passenger rail service. Prior to Amtrak’s creation,

such service was provided by private railroads, which had lost money,

especially after World War II. The act, as amended, gave Amtrak a number

of goals, including providing modern, efficient intercity passenger rail

service; giving Americans an alternative to automobiles and airplanes to

meet their transportation needs; and minimizing federal operating

subsidies. Through fiscal year 1998, the federal government has provided

Amtrak with over $20 billion in operating and capital subsidies, excluding

$2.2 billion from the Taxpayer Relief Act.

In December 1994, at the request of the administration, Amtrak established

a goal of eliminating federal operating subsidies for Amtrak by 2002. To

meet this goal and respond to continually growing losses and a widening

gap between operating deficits and federal operating subsidies, Amtrak

developed strategic business plans. These plans have attempted to

increase revenues and control costs through such actions as expanding

mail and express service and adjusting routes and service frequency.

Amtrak also has restructured its organization into strategic business units.

The Congress provided additional financial assistance to Amtrak in the

Taxpayer Relief Act of 1997, enacted in August 1997. This act makes a total

of about $2.2 billion available to Amtrak in 1998 and 1999 to acquire

Page 2 GAO/T-RCED-98-134
capital improvements, pay certain equipment maintenance expenses, and

pay principal and interest on certain debt, among other things. In addition,

the Amtrak Reform and Accountability Act of 1997, enacted in December

1997, makes certain reforms to Amtrak’s operations. These reforms

include, among other things, (1) eliminating current labor protection

arrangements on May 31, 1998; (2) repealing the ban on contracting out

nonfood and beverage work; and (3) placing a $200 million cap on the

amount of liability claims that can be paid as the result of an Amtrak

accident.

Amtrak’s Financial

Condition Continues

to Deteriorate

Amtrak’s financial condition has continued to deteriorate despite its

efforts over the past 4 years to reduce losses. While Amtrak has reduced

its net losses from about $892 million in fiscal year 1994 (in 1997 dollars)3

to $762 million in fiscal year 1997, it has not been able to close the gap

between total revenues and expenses. (See fig. 1.) For example, while

intercity passenger-related revenues grew by about 4 percent last year,

intercity passenger-related expenses grew by about 7 percent. Notably, the

net loss for fiscal year 1997 would have been much greater if Amtrak had

not earned about $63 million, primarily from the one-time sales of real

estate and telecommunications rights-of-way in the Northeast Corridor.

3

Unless otherwise noted, information on financial condition and performance was provided by Amtrak

and was not independently verified. The net loss for fiscal year 1994 excludes a one-time charge of

$261 million (in 1997 dollars) for accounting changes, restructuring costs, and other items.

Page 3 GAO/T-RCED-98-134
Figure 1: Revenues and Expenses,

Fiscal Years 1989-97 Dollars in millions

500

700

900

1100

1300

1500

1700

1900

2100

2300

2500

2700

1989 1990 1991 1992 1993 1994 1995 1996 1997

Fiscal year

Expenses

Revenues

Note: Amounts are in 1997 dollars.

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

Amtrak’s net loss for fiscal year 1998 will likely be substantially worse

than in 1996 and 1997. In March 1998, Amtrak projected that the net loss

for this year will be about $845 million, or $56 million more than budgeted.

Amtrak’s financial deterioration can be seen in other measures as well. For

example, Amtrak’s working capital—the difference between current assets

and current liabilities—generally declined between fiscal years 1995 and

1997, from a deficit of $149 million to a deficit of $300 million. As figure 2

shows, at the end of fiscal year 1997, Amtrak’s working capital was the

lowest it had been over the last 9 years. Declining working capital

jeopardizes a company’s ability to pay its bills as they come due. The

decline in working capital reflects an increase in accounts payable,

short-term debt, and capital lease obligations, among other items.

Page 4 GAO/T-RCED-98-134
Figure 2: Amtrak’s Working Capital

Surplus/Deficit, Fiscal Years 1989-97 Dollars in millions

-350

-300

-250

-200

-150

-100

-50

0

50

100

1989 1990 1991 1992 1993 1994 1995 1996 1997

Fiscal year

84

27

-36

-67

-100

-227

-149

-195

-300

Note: Amounts are in nominal dollars.

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

Amtrak’s poor financial condition has also affected its cash flow and its

need to borrow money to make ends meet. In fiscal year 1997, Amtrak had

to borrow $75 million to meet its operating expenses. The prospects in

fiscal year 1998 are worse. Amtrak originally planned a cash-flow deficit of

$100 million in fiscal year 1998; however, in January 1998, Amtrak

increased this estimate to $200 million.4

 This projected increase is

primarily due to (1) reductions in expected revenues from Amtrak’s pilot

express program ($47 million); (2) a liability for the wage increases

provided by Amtrak’s recent agreement with the Brotherhood of

Maintenance of Way Employees ($35 million);5

 and, (3) an increase in

accounts payable that resulted from deferring fiscal year 1997 payables to

4

As of mid-March 1998, Amtrak had $150 million of its $170 million in short-term lines of credit

available to help meet cash-flow deficits.

5

This $35 million reflects Amtrak’s estimate of the cost in fiscal year 1998 of extending the

Brotherhood of Maintenance of Way Employees labor settlement to Amtrak’s 12 other labor unions.

Amtrak is in the process of negotiating with the other unions.

Page 5 GAO/T-RCED-98-134
fiscal year 1998 ($16 million). Amtrak began borrowing in February 1998

to make ends meet.

Improving Amtrak’s

Financial Health

Presents Challenges

Amtrak will continue to face challenges to its financial health. Despite

efforts to improve revenues and cut costs, the railroad continues to lose

more money than it planned. This situation may get worse. Amtrak’s

recent agreement with the Brotherhood of Maintenance of Way Employees

is expected to increase Amtrak’s fiscal year 1998 labor costs by between

$3 million to $5 million. According to Amtrak, extending this type of

settlement to all of its labor unions could cost between $60 million and

$70 million more each year than is currently planned, from fiscal years

1999 through 2002.6

 Amtrak’s plans to reduce its financial losses by

“growing” its way to financial health—that is, increasing revenues, rather

than cutting train routes—may also encounter difficulty. These plans

depend, at least in part, on expanding mail and express services. However,

Amtrak’s efforts to increase its express business have been frustrated and

it has had to reduce anticipated revenues in its express pilot program by

$47 million.7

 As a result, in January 1998 Amtrak increased its projected

overall loss8

 for fiscal year 1998 from $52 million to $99 million. Another

Amtrak initiative—establishing high-speed rail service between New York

City and Boston—also will not provide immediate financial benefits. In

establishing high-speed rail transportation between these two cities,

Amtrak expects to decrease travel time from 4-1/2 hours to 3 hours and

significantly increase revenue and ridership. Amtrak’s goals are for the

high-speed rail program to begin providing positive net income in fiscal

year 2000.

Amtrak will also continue to find it difficult to take actions to reduce

costs, such as making route and service adjustments. During fiscal year

1995, Amtrak was successful in reducing and eliminating some routes and

saving an estimated $54 million. In fiscal year 1997, Amtrak was less

successful in taking such actions. Amtrak does not currently plan to

reduce any more routes. Instead, it plans to fine-tune its route network.

For example, in February 1998, Amtrak added a fourth train per week

6

This is net of any one-time payments or productivity increases or efficiency gains negotiated with the

unions.

7

In addition, the Surface Transportation Board has been asked to rule on whether a freight railroad

must make its tracks and facilities available to Amtrak for express service. An adverse ruling could

further reduce revenue opportunities. Amtrak has reduced its anticipated net revenues from express

service from about $75 million annually to about $27 million annually after fiscal year 1998.

8

Overall loss is the same as net loss, except the federal operating support received and noncash items

(such as depreciation) are excluded. Amtrak refers to overall loss as its “budget result.”

Page 6 GAO/T-RCED-98-134
between Chicago and San Antonio on the Texas Eagle route, in part to

accommodate expanded mail and express business. Amtrak is also

planning to begin daily passenger rail service between Los Angeles and Las

Vegas by January 1999.

In explaining the rationale for attempting to increase revenues through

fine-tuning Amtrak’s routes rather than through cutting back on service,

Amtrak and Federal Railroad Administration (FRA) officials pointed to

Amtrak’s mission of maintaining a national route system. They noted that

such a system will consist of routes with a range of profitability, including

poorer-performing routes that provide needed linkages to

better-performing routes. Furthermore, poorer-performing routes may

provide public benefits, such as serving small cities and rural areas. These

officials stressed that cutting the routes with the worst performance could

damage the national network and cause the loss of revenue on connecting

routes. Amtrak has just begun a market analysis that could result in

several alternatives for a national intercity passenger rail network.

The decision to make route adjustments is a difficult one, even though

Amtrak’s data show that only one of the railroad’s 40 routes (Metroliners

between Washington, D.C., and New York City) covers all its operating

costs.9

 For the remaining 39 routes, Amtrak loses an average of $53 for

each passenger. Amtrak data show that it loses over $100 per passenger on

14 of these routes, and only 5 routes covered their train costs in fiscal year

1997. However, Amtrak encounters opposition when it proposes to

discontinue routes because of the desire by a range of interests to see

passenger train service continued in potentially affected communities. In

addition, Amtrak maintains that every route that covers its variable costs

(costs of running trains) makes a contribution toward its substantial fixed

costs. Finally, simply pruning Amtrak’s worst-performing routes could

exacerbate Amtrak’s financial condition because eliminating one route is

likely to affect ridership on connecting routes that are perhaps performing

better.

9

The costs include the costs of running trains (e.g., fuel and train crew); route costs (e.g., costs to

maintain stations); and allocated system costs (overhead).

Page 7 GAO/T-RCED-98-134
Federal Funding and

Reform Legislation

May Not Meet

Amtrak’s Financial

Needs

As a result of the Taxpayer Relief Act and funds requested through the

appropriations process, record amounts of federal funds could be

available to fund Amtrak’s capital improvement needs. However, Amtrak

projects that it will still be short of the funds it believes are necessary to

meet these needs. In addition, Amtrak plans to use a substantial portion of

these funds to meet maintenance needs—needs that have traditionally

been considered operating expenses. Finally, recently enacted reform

legislation will likely have little financial impact in the short term.

Available Funds May Fall

Short of Amtrak’s Capital

Investment Needs and May

Be Used to Pay

Maintenance Expenses

Capital investments will continue to play a critical role in supporting

Amtrak’s business plans and ultimately in maintaining Amtrak’s viability.

Such investment will not only help Amtrak retain revenues by improving

the quality of service but will also be important in facilitating the revenue

growth predicted in the business plans. Although Amtrak stands to receive

historic levels of federal capital funds in the next few years, it is not likely

that sufficient funds will be available to meet Amtrak’s identified capital

investment needs. Amtrak’s September 1997 strategic business plan

identified about $5.5 billion in capital investment needs from fiscal years

1998 through 2003.10 This amount includes such items as completing the

high-speed rail program between New York and Boston (about $1.7

billion), making infrastructure-related investments (about $900 million),

and overhauling existing equipment (about $500 million). However, federal

funding from the Taxpayer Relief Act, the fiscal year 1998 capital

appropriation,11 and the President’s proposed fiscal year 1999

budget—along with about $800 million that Amtrak anticipates receiving

from state, local, and private financing—would provide about $5.0 billion,

or about $500 million short of the $5.5 billion that it states that it needs for

capital funding.

Amtrak plans to use a substantial amount of these federal funds for

maintenance expenses, such as preventative maintenance, rather than for

high-yield capital investments. The use of these available federal funds for

maintenance expenses could have long-term financial impacts on Amtrak.

In particular, such use would reduce the amount of money available to

Amtrak to acquire new equipment and/or acquire those capital

improvements necessary to reduce costs and/or increase revenues.

10As of mid-March 1998, the capital portion of this business plan had not been approved by Amtrak’s

board of directors.

11The fiscal year 1998 capital appropriation excludes $199 million, which was not to be made available

for obligation if Amtrak’s reform legislation was enacted before such capital appropriation was

distributed. The Amtrak Reform and Accountability Act was enacted in December 1997. The

$199 million would have been distributed in July 1998.

Page 8 GAO/T-RCED-98-134
In this regard, the President’s proposed fiscal year 1999 budget would

allow Amtrak to use capital grant funds for maintenance purposes, such as

overhauling rail rolling stock and providing preventative maintenance. The

administration believes such flexibility would allow Amtrak to manage its

capital grant appropriation more efficiently and make clearer trade-offs

between maintenance and capital investment costs. Amtrak’s March 1998

revised strategic business plan indicates that it plans to use $511 million

(82 percent) of the $621 million in capital grant funds proposed in the

President’s fiscal year 1999 budget for maintenance expenses. In total,

Amtrak plans to use $1.8 billion (65 percent) of $2.8 billion in capital

grants under the President’s budget proposal to pay maintenance expenses

from fiscal years 1999 through 2003.

In addition, Amtrak plans to temporarily use some of the Taxpayer Relief

Act funds for the allowed maintenance of the existing equipment used in

intercity passenger rail service. To help stay within its credit limits,12

Amtrak plans to temporarily use $100 million in Taxpayer Relief Act funds

for a portion of allowed maintenance expenses in fiscal year 1998,

according to Amtrak’s March 1998 revised strategic business plan.

Amtrak’s use of a portion of its federal capital grant for maintenance

expenses, as is currently allowed for transit, is expected to enable it to

repay this $100 million. Amtrak also plans to temporarily use $317 million

and $200 million in Taxpayer Relief Act funds in 1999 and 2000,

respectively, for a portion of allowed maintenance expenses. In this way,

Amtrak expects to reduce its cash flow deficits to $100 million in each of

those years. Amtrak officials told us that the Taxpayer Relief Act funds,

including these repayments, will ultimately be used for investments that

have a high rate-of-return and that are highly leveraged.

According to Amtrak, temporarily using a portion of Taxpayer Relief Act

funds for allowed equipment maintenance will help the corporation avoid

additional borrowing from its credit lines over the original planned

amount. Amtrak believes using Taxpayer Relief Act funds for this purpose

will help keep it below its maximum short-term credit limit. Amtrak

officials told us that using a portion of the federally appropriated capital

grant funds for maintenance will provide stability for Amtrak over the next

several years, thus averting a possible bankruptcy. This stability will

provide Amtrak with some breathing room to (1) determine how to

address the capital shortfall and (2) complete a market analysis that would

12As discussed earlier, Amtrak is currently projecting a cash-flow deficit of about $200 million by the

end of fiscal year 1998, or about $100 million more than planned.

Page 9 GAO/T-RCED-98-134
result in several alternatives for a national intercity passenger rail

network.

Short-Term Financial

Effects of Amtrak Reform

Legislation May Be Limited

The Amtrak Reform and Accountability Act was also designed to address

Amtrak’s poor financial condition by making certain reforms to Amtrak’s

operations to help Amtrak better control and manage its costs. For

example, the act

• eliminates, as of May 31, 1998, existing labor protection arrangements for

employees who lose their jobs as the result of a discontinuation of service

(currently eligible employees may be entitled to up to 6 years of

compensation) and requires Amtrak and its unions to negotiate new

arrangements;

• repeals the statutory ban on contracting out work (except food and

beverage service, which can already be contracted out) and makes

contracting out subject to negotiations by November 1999; and

• places a $200 million cap on the amount of liability claims (including

punitive damages) that can be paid as the result of an Amtrak accident.

The reforms contained in this act may have little, if any, immediate effect

on Amtrak’s financial performance for several reasons. First, Amtrak

officials pointed out that no route closures are currently planned.

Therefore, no new labor protection costs are expected to be incurred.

Amtrak officials also noted that the existing labor protection arrangements

for employees affected by route closures have primarily resulted in

payments of wage differentials because many eligible employees were

transferred to lower-paying jobs. According to Amtrak, in the past 5 years,

only 5 employees have received severance pay and 11 employees are

currently in arbitration over this issue. Second, the ban on contracting out

work need not be negotiated until November 1, 1999.13 Amtrak officials

believe that while the repeal of the ban may provide long-term flexibility,

including flexibility in union negotiations and in controlling costs, the

repeal is not likely to have much effect before November 1999. Finally,

Amtrak believes the $200 million limit on liability claims may have limited

financial effect because this cap is significantly higher than amounts

Amtrak has historically paid on liability claims. Amtrak and FRA officials

believe the benefits of these reforms are unclear at this time. These

13Amtrak and one or more of its trade unions may mutually agree to collectively bargain this issue

sooner.

Page 10 GAO/T-RCED-98-134
reforms may not result in measurable financial savings as much as in

additional flexibility in negotiating with labor unions and in addressing the

freight railroads’ concerns over such issues as liability payments.

The act also made other changes that have the potential for a significant

impact on Amtrak’s future. First, the act replaced the current board of

directors with a “Reform Board.”14 Second, it established an independent

commission—the Amtrak Reform Council—to evaluate Amtrak’s financial

performance and make recommendations for cost containment,

productivity improvements, and financial reforms. If at any time after

December 1999 the Council finds that Amtrak is not meeting its financial

goals or that Amtrak will require operating funds after December 2002,

then the Council is to submit to the Congress, within 90 days, an action

plan for a restructured national intercity passenger rail system. In addition,

under such circumstances, Amtrak is required to develop and submit an

action plan for the complete liquidation of the railroad.

Mr. Chairman, in 1995, we concluded that the Congress needed to decide

on the nation’s expectations for intercity passenger rail service and the

scope of Amtrak’s mission in providing that service. These decisions

require defining a national route network, determining the extent to which

the federal government would contribute funds, and deciding on the way

any remaining deficits would be covered. In 1997, we concluded that, as

currently constituted, Amtrak will need substantial federal operating and

capital support well into the future. Whether Amtrak will be able to

improve its financial position in the near term is doubtful. If not, the

Congress will be asked to continue to provide substantial sums of money

each year to support Amtrak. If the Congress is not willing to provide such

levels of funds, then Amtrak’s future could be radically different, or

Amtrak may not exist at all. We believe that this is the right time for

Amtrak’s new Reform Board to work with the Congress to consider and

act on the issues that will chart Amtrak’s future.

14The Reform Board is to assume its responsibilities by March 31, 1998, or as soon as four members

have been appointed and qualified. As of mid-March 1998, the Reform Board had not been established.

Unrelated to the act, Amtrak’s president and chief executive officer resigned in December 1997. A

successor had not been named as of mid-March 1998.

Page 11 GAO/T-RCED-98-134
Mr. Chairman, this concludes my testimony.15 I would be happy to respond

to any questions that you or Members of the Subcommittee may have.

(348082)

15The information contained in this testimony is based on our review of Amtrak’s financial reports and

plans; recently-enacted legislation; and discussions with Amtrak and FRA officials. We met with

Amtrak officials, including Amtrak’s Vice President for Government and Public Affairs, to obtain

comments on a draft of our statement. Amtrak said that our presentation of the issues was fair; and

they asked that we provide additional information on Amtrak’s planned use of capital grant funds and

Taxpayer Relief Act funds. We have included this information in our statement. We performed our

work in March 1998 in accordance with generally accepted government auditing standards.

Page 12 GAO/T-RCED-98-134
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