Intercity Passenger Rail: Issues for Consideration in Developing an Intercity Passenger Rail Policy
Published: 2003-04-30T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: The Rail Passenger Service Act of  1970 created Amtrak to provide  intercity passenger rail service  because existing railroads found  such service unprofitable.  Amtrak  operates a 22,000-mile network,  primarily over freight railroad  tracks, providing service to 46  states and the District of Columbia.  Most of Amtrak’s passengers travel  on the Northeast Corridor, which  runs between Boston,  Massachusetts, and Washington,  D.C.  On some portions of the  Corridor, Amtrak provides high- speed rail service (up to 150 miles  per hour).
Compared to current levels of federal funding, substantially higher federal  investment will be required in the future to stabilize and sustain Amtrak’s  existing network.  Amtrak will be seeking about $2 billion per year over the  next several years to stabilize its system and begin addressing its deferred  maintenance needs and to cover operating losses.  This is about twice the  federal funding Amtrak has received annually over the last 5 years.   However, Amtrak’s identified funding requests do not address potential  future needs to enhance or expand service or develop high-speed rail  corridors, which Amtrak has previously estimated at up to $70 billion over  the next 20 years.  According to Amtrak, this will require additional federal  and state investment—over and above the $2 billion annually in identified  needs.
Since its inception, Amtrak has  struggled to earn revenues and run  an efficient operation.  Recent  years have seen Amtrak continue  to struggle financially.  In February  2003, Amtrak reported that it would  need several billion dollars from  the federal government over the  next few years to sustain  operations.  However, some have  indicated that there needs to be a  fundamental reassessment of how  intercity passenger rail is  structured and financed.  Options  raise questions about whether or  not Amtrak should be purely an  operating company, whether  competition should be introduced  for providing service, and if states  should assume a greater financial  role in the services that are  provided.
Based on analyses of federal investment approaches across a broad stratum  of national activities, we have identified several key components of a  framework for evaluating federal investments.  The Congress might find this  framework useful as it deliberates the future of intercity passenger rail.  At  the outset, clearly defined goals would provide the foundation for making  other decisions.  For example, if reducing air and highway congestion were a  goal, this may only be achievable in limited markets, because Amtrak’s  market share decreases rapidly as travel time and distance increase.  To  improve the focus on outcomes, it will be important for Congress to consider  a systemwide approach, as opposed to a focus on one mode or type of travel.  Establishing the roles of governmental and private entities could better  ensure that goals are achieved.  Finally, the choice and design of financing  mechanisms will also have important consequences for performance as well  as transparency and accountability.
Amtrak’s Market Share vs. Air Travel, by Time of Trip  www.gao.gov/cgi-bin/getrpt?GAO-03-712T.
To view the full testimony, click on the link  above.  For more information, contact JayEtta  Z. Hecker at (202) 512-2834, or  HeckerJ@gao.gov.
Mr. Chairman and Members of the Subcommittee:  I appreciate the opportunity to testify on the future of intercity passenger  rail. Passenger rail travel in the United States remains poised at a critical  juncture. Since its inception, the National Railroad Passenger Corporation  (Amtrak) has struggled to earn revenues and run an efficient operation,  balancing demands from a variety of stakeholders in a changing market.  Recent years have seen Amtrak continue to struggle financially. A few  months ago, in February 2003, Amtrak reported that it would need several  billion dollars from the federal government over the next few years to  sustain operations.
Last year, however, the Amtrak Reform Council indicated that a focus on  sustaining operations might not be the best way for intercity passenger rail  policy to proceed. Instead, it recommended restructuring and rationalizing  the national intercity passenger rail system—a move that envisioned,  among other things, breaking up Amtrak and introducing competition to  provide rail service. In testimony we provided to this subcommittee last  April, we stated that the current approach to intercity passenger rail is  likely not sustainable given historical funding levels. Today’s hearing,  therefore, not only takes place against a backdrop of Amtrak’s long-term  and ongoing financial crises, but also within a context of uncertainty about  how intercity passenger rail service should be provided to the nation.
My statement today attempts to aid the Congress as it debates the future  of Amtrak by (1) examining the levels of federal funding needed to support  the existing network for providing intercity passenger rail, and (2)  describing a framework that could facilitate the development of intercity  passenger rail policy. This statement is based primarily on reports we have  issued over the past several years. In summary:    Compared to current levels of federal funding, substantially higher federal  investment will be required in the future to stabilize and sustain Amtrak’s  existing network. Amtrak will be seeking about $2 billion per year over the  next several years to stabilize its system and begin addressing its deferred  maintenance needs and to cover operating losses. This is about twice the  federal funding Amtrak has received annually over the last 5 years.  Although Amtrak is currently taking actions to make its business more  efficient and control costs, it is unable to determine the extent of its  success because it lacks labor productivity measures to determine the  efficiency of its workforce. Amtrak’s identified funding requests also do  not address potential future needs to enhance or expand service or  develop high-speed rail corridors—estimated by Amtrak at up to $70  billion over the next 20 years. According to Amtrak, this will require  additional federal and state investment—over and above the $2 billion in  identified needs.
Based on extensive analyses of federal investment approaches across a  broad stratum of national activities, we have found that the key  components of a framework for evaluating federal investments include (1)  establishing clear, nonconflicting goals, (2) establishing the roles of  governmental and private entities, (3) establishing funding approaches  that focus on and provide incentives for results and accountability, and (4)  ensuring that the strategies developed address diverse stakeholder  interests and limit unintended consequences. The evaluation framework  may be useful in several ways as Congress develops intercity passenger  rail policy. For instance:   Clearly defined goals could provide the foundation for making other  decisions. For example, if the goal were to reduce air and highway  congestion by achieving particular market-share targets in select origin- and-destination city-pairs, then that goal could shape decisions about  developing additional higher-speed rail corridors. To improve the focus  on outcomes and potential contributions to customers or communities,  it will be important for Congress to consider a systemwide approach as  opposed to a focus on one mode or type of travel.
Established roles of governmental and private sector entities might  better ensure that goals are achieved. For example, it will be important  to determine whether route and service decisions will be made using a  top-down approach by a central entity (whether the federal  government or an organization like Amtrak) or using a bottom-up  approach by state and local governments, in combination with private  entities.
Appropriate financing mechanisms may increase performance,  transparency, and accountability. Different mechanisms are available  (e.g., grants, bonds, loans, or user fees), but they carry different  characteristics, which policy-makers should consider.
Finally, consideration of diverse stakeholder interests when crafting  policy changes could minimize unintended and adverse consequences.  Stakeholders such as commuter railroads, states, and freight railroads  could be significantly affected by a change in policy.
subsections: section_title: Background
paragraphs: The Rail Passenger Service Act of 1970 created Amtrak to provide intercity  passenger rail service because existing railroads found such service  unprofitable. Amtrak operates a 22,000-mile network, primarily over  freight railroad tracks, providing service to 46 states and the District of  Columbia. (See fig. 1.) Amtrak owns 650 miles of track, primarily on the  Northeast Corridor, which runs between Boston, Massachusetts, and  Washington, D.C. The Northeast Corridor is the busiest passenger line in  the country, and some 200 million Amtrak and commuter rail travelers use  the Corridor, or some portion of it, each year. On some portions of the  Corridor, Amtrak provides high-speed rail service (up to 150 miles per  hour). In addition, access to the Corridor is crucial for eight commuter  railroads (operated by state and local governments) that service 1.2  million passengers each work day as well as six freight railroads.
At the present time, intercity passenger rail only plays a small part in the  nation’s overall transportation system (with the exception of some short- distance routes). In fiscal year 2002, Amtrak served about 23.4 million  passengers, or about 64,000 passengers a day. According to Amtrak, about  two-thirds of its ridership is wholly or partially on the Northeast Corridor.  In contrast, preliminary figures for 2002, the latest year data are available,  indicate that airlines carried about 1.5 million domestic passengers per  day. In 2001, intercity buses carried about 83,000 passengers per day.  Amtrak has won sizeable market shares (compared to travel by air),  between certain relatively close city-pairs. However, by far, most intercity  traffic remains by automobile.
Recent legislation introduced in the Congress has recognized the  substantial capital investment required for intercity passenger rail  systems. For example, legislation introduced by the Chairman of this  Committee last year, the Rail Infrastructure Development and Expansion  Act for the 21st Century (H.R. 2950), would have authorized the issuance  of tax-exempt bonds, grants, direct loans, and loan guarantees of over $71  billion for high-speed rail infrastructure, corridor development,  rehabilitation, and improvement. Legislation introduced by a Member of  this Subcommittee in the current session of Congress, the National Rail  Infrastructure Program Act (H.R. 1617), would establish a national rail  infrastructure trust fund and make about $3 billion available to states for  projects that address railroad infrastructure deficiencies in order to  provide substantial public benefits, such as mitigating highway congestion  and reducing transportation emissions. Projects eligible for funds under  this legislation could potentially benefit intercity passenger rail systems.  Legislation introduced in the Senate this session (S. 104) would authorize  significant funding for passenger rail investment, including about $2 billion  annually for Northeast Corridor growth investments, about $1.4 billion in  capital investments, and about $1.5 billion annually for development of  high-speed rail corridors.
In a hearing before the House Committee on Appropriations,  Subcommittee on Transportation, Treasury, and Independent Agencies,  held on April 10, 2003, the President of Amtrak and the Deputy Secretary  of Transportation offered differing views on Amtrak and the future of  intercity passenger rail service in America. Amtrak’s President focused  primarily on the importance of Amtrak’s receiving the funding it needs to  improve the condition of its equipment, its reliability and utilization, and  its infrastructure. The Deputy Secretary, in contrast, stated that the  administration has declared principles for a fundamental restructuring of  the manner in which federal assistance is provided for intercity passenger  rail service. These principles include creating a rail service that is driven  by sound economics, fosters competition, and establishes a long-term  partnership between states and the federal government to sustain an  economically viable system.
section_title: Current Federal Funding Not Sufficient to Support Existing Level of Intercity Passenger Rail
paragraphs: Current federal funding is not sufficient to support the existing level of  intercity passenger rail service being provided by Amtrak. Over the long- term, significantly higher levels of investment will be needed to stabilize  the existing system and get it into a state of good repair. Amtrak has  reported that just doing that will require nearly $2 billion annually over the  next several years—about twice the amount provided annually over the  last 5 years. The total amount of additional funding needed is not known  but will likely be in the tens of billions of dollars. From fiscal year 1976  through fiscal year 2003, the federal government has provided Amtrak with  over $26 billion (nominal dollars) in operating and capital subsidies.
Amtrak’s financial condition has never been strong, and the corporation  has been on the edge of bankruptcy several times. The Amtrak Reform and  Accountability Act of 1997 required Amtrak to reach operational self- sufficiency by December 2002. However, Amtrak’s financial outlook since  this legislation was enacted has remained troubled, and the corporation  has gone from one financial crisis to the next. In March 1998, we reported  that Amtrak’s financial condition had continued to deteriorate and that it  would continue to face challenges in improving its financial health. In  September 2000, we again reported that Amtrak was struggling in its quest  to achieve operational self-sufficiency and that it had made limited  progress in reducing its need for operating support. Amtrak’s financial  struggles have become even more acute in recent years. For example, in  2001 Amtrak mortgaged a portion of Pennsylvania Station in New York  City to generate enough cash to meet its expenses, and in July 2002, the  Department of Transportation approved a $100 million loan because the  railroad was running out of cash. As recently as a few months ago, Amtrak  said that its financial and physical condition was still precarious and that  federal support of about $1.8 billion would be required in fiscal year 2004  just to stabilize its system. This is about twice the approximately $1 billion  in federal funding Amtrak has received annually over the last 5 years. For  fiscal years 1999 through 2003, Amtrak received a total of about $4.7  billion in federal operating and capital support.
Amtrak has indicated that it will require $2 billion annually in federal  contributions over the next few years, with a focus on stabilizing its  system. It does not address additional capital investments that might be  required for enhancements or expansions of Amtrak’s system. In February  2002, Amtrak estimated that its deferred capital backlog was about $6  billion ($3.8 billion of which was attributed to the Northeast Corridor).  Additional capital funds would be needed to enhance and modernize its  system, such as undertaking infrastructure improvements that permit  faster trip times for Amtrak’s trains. For example, in January 2000, Amtrak  estimated that about $12 billion (in 2000 dollars) would be needed  between fiscal years 2001 and 2025 to improve the Northeast Corridor  between New York City and Washington, D.C., in order to increase the  reliability of the Corridor and make enhancements that permit higher  speed service. Amtrak’s share of this cost—estimated at about $6 billion— is not fully included in its expected funding request.
To cover needed operating subsidies, Amtrak can be expected to need  about $800 million per year, or about $4 billion over the 5-year period 2005  to 2009. This amount appears to be included within the projected request  for $2 billion annually. For fiscal year 2004, Amtrak estimates that it will  require about $768 million in operating subsidies—nearly 50 percent above  its 2003 appropriation ($522 million). By comparison, Amtrak received  about $200 million in fiscal year 2002. Operating subsidies are needed  because virtually all of Amtrak routes fail to generate operating profits.  For fiscal year 2002, only one of Amtrak’s routes, the Acela  Express/Metroliner, earned an operating profit (about $78 million).  Operating losses on other routes ranged from about $700,000 to about $77  million. Although Amtrak’s President has said that actions to maintain  solvency and create a lean organization with tight financial controls have  been initiated, operating a national intercity passenger rail system  structured similar to Amtrak’s current system will likely require  substantial operating subsidies for the foreseeable future. The amount of  those operating subsidy needs, however, is unknown.
Part of Amtrak’s need for operating subsidies involves Amtrak’s ability to  control costs. In fiscal year 2002, Amtrak’s operating costs decreased by  $76.7 million compared with fiscal year 2001. According to Amtrak, this  was partially accomplished by streamlining its business and eliminating  1,000 positions. Amtrak’s President recently testified before the House  Appropriations Committee that one of the challenges for Amtrak would be  generating a higher level of productivity from its workforce. As we  reported in 2000, Amtrak had attempted to control cost growth by  improving labor productivity, but it had no measures of labor productivity  for its different lines of business to measure its progress or efficiency.  Amtrak is still in the process of developing these measures.
Amtrak’s identified funding requests do not address the future needs that  might be required to expand or enhance service or develop high-speed rail  corridors. According to Amtrak, additional federal and state investment— over and above the $2 billion per year—would be required to address  these issues and begin developing high-speed rail corridors. As we  reported last year, the total cost to develop high-speed rail corridors is  unknown because these initiatives are in various stages of planning.  However, preliminary Amtrak estimates indicate the capital costs to  develop these other corridors (along with the Northeast Corridor) could  be between $50 billion and $70 billion over the next 20 years. The  American Association of State Highway and Transportation Officials—a  trade association of state and local transportation officials—also recently  reported that about $60 billion would be required to develop these  corridors and Amtrak’s Northeast Corridor over a 20-year period.
section_title: Framework for Creating a National Intercity Passenger Rail Policy
paragraphs: Based on GAO’s analyses of federal investment approaches across a broad  stratum of national activities, we have found several key components of a  framework for evaluating federal investments. Congress may find this  framework useful to consider as it develops a national intercity passenger  rail policy. Components of the framework include: (1) establishing clear,  nonconflicting goals, (2) establishing the roles of governmental and  private entities, (3) establishing funding approaches that focus on and  provide incentives for results and accountability, and (4) ensuring that the  strategies developed address diverse stakeholder interests and limit  unintended consequences.
subsections: section_title: Defining Goals Will Provide a Foundation for Making Other Decisions
paragraphs: By clearly defining nonconflicting goals for an intercity passenger rail  system, the Congress could provide a basis for guiding federal  participation. Nonconflicting goals provide a clear direction, establish  priorities among competing issues, specify the desired results, and lay the  foundation for such other decisions as determining how the assistance will  be provided, the duration of that assistance, and what the total value of the  assistance should be. Such goals are best considered in the context of the  relationship of an intercity passenger rail system to other transportation  modes. Transportation experts highlight the need to view any part the  system plays in the context of the entire transportation system in  addressing congestion, mobility, and other challenges. A systemwide  approach to transportation planning and funding, as opposed to focusing  on a single mode or type of travel, could improve the focus on outcomes  and the contribution to customer or community needs.
The Congress could choose any number or type of goals when developing  a national policy. For instance, it might decide that the goals should  maximize some or all of the benefits of intercity passenger rail. As we  reported last year, intercity passenger rail has the potential to provide  broad public benefits, such as stemming increases in highway and air  congestion, reducing automobile pollution, and reducing fuel consumption  and energy dependency.
We pointed out, however, that some of these benefits might be difficult to  obtain. For instance, for rail transport to capture the market share  necessary to reduce air travel congestion, the distance between potential  intercity passenger rail cities must be short enough to make rail travel  times competitive with air travel times (at comparable costs and levels of  comfort). Amtrak’s market share decreases rapidly as travel time and  distance increases. As we previously reported, compared with air service  only (as most travel is by automobile), between New York City and  Philadelphia and between Philadelphia and Washington, D.C.—both  relatively short-distance markets—Amtrak’s market share was over 80  percent. But for longer distance markets, such as New York City to  Chicago, Illinois, and Chicago, to Washington, D.C., Amtrak’s market share  compared with air service was less than 10 percent. (See fig. 2.) Studies  suggest that as the speed of intercity passenger rail increases, the potential  benefits attributable to reductions in airport and highway delays increase,  as does the potential distance over which passenger rail is able to compete  with air transport. The potential for intercity passenger rail to reduce air  congestion is also greater where there is little, or no, room for additional  runways and where there is limited competition between airlines resulting  in relatively high air fares. See appendix I for more information on  potential benefits from intercity passenger rail travel.
To help ensure that the goals are achieved, conflicting goals should be  avoided to the maximum extent possible to reduce the possibility that  achieving one goal reduces the likelihood of attaining another goal. In  addition, the goals should be measurable—that is, they should identify the  amount of public benefits to be obtained. Having measurable goals better  assists in determining the success or failure in attaining the goals and in  holding intercity passenger rail systems accountable for results.
In this context, we note that the statements made by the President of  Amtrak and the Deputy Secretary of Transportation on April 10 both  reflect efforts to establish goals. The President of Amtrak stated that his  goals over the past year were to maintain solvency, begin a program of  critical capital investment, create a lean organization with tight financial  controls, and build a zero-based budget. The Deputy Secretary stated that  the Administration would support specific performance targets that can be  met on an annual basis, and he discussed five principles articulated by the  Secretary of Transportation for reforming intercity passenger rail. While  these efforts are clearly important, a broader consideration of how the  passenger rail system fits with other modes of transportation and how  changes to the system might maximize public benefits would be a critical  first step in developing intercity passenger rail policy.
section_title: Establishing Roles of Governmental and Private Sector Entities Will Better Ensure That Goals Are Achieved
paragraphs: Establishing the relative roles of federal, state, and local governments and  private sector entities, to the extent practicable, could better ensure that  goals are achieved. The Deputy Secretary of Transportation touched on  this issue when he stated on April 10 that the department hopes to  establish a long-term partnership between the states and the federal  government to support intercity passenger rail service. The President of  Amtrak also described how Amtrak had entered into negotiations with  state partners to have them cover 100 percent of the direct operating loss  for intercity passenger rail services that receive state support.
Defining roles helps to establish incentives for leadership, financial  participation, risk-sharing, and accountability among the participating  parties. Roles are defined not only by specific structures and  organizations, but also by the forms, conditions, and terms of assistance.  Regarding structures and organizations as they pertain to intercity  passenger rail travel, the Congress will need to pose and resolve such  questions as:    Should there be a government-established entity, such as Amtrak, with a  monopoly over intercity passenger rail, or could federal and state  governments allow private operators to receive government assistance on  a competitive basis to provide intercity passenger rail service?
How much independence should the entity or entities providing rail  service have to make decisions? A recent report on passenger rail  restructurings in other countries stated that successful reform plans  involved an increasing degree of independence of the rail entity from  political influence. The Amtrak Reform Council reported in February  2002 that one of the factors influencing Amtrak’s decisionmaking and  financial performance was a susceptibility to political pressure.
Will routes and services be determined using a top-down approach by a  central entity, such as the federal government or an organization like  Amtrak, or with a bottom-up approach at a state or local level focusing on  where intercity passenger rail can generate the most public benefits for  particular citizens?
Establishing the roles of the federal, state, and local governments will be  particularly important. The federal government is currently the major  financer of intercity passenger rail systems and has provided Amtrak with  about $1 billion per year in federal support over the last 5 years. Although  several states and localities may receive significant benefits from Amtrak’s  operations, state support for Amtrak has been relatively limited—about  $168 million in fiscal year 2002. One option for restructuring intercity  passenger rail is to increase the role of state and local governments in  financing the rail system.
The ability of states to provide and maintain financial support for intercity  passenger rail is unknown, however. We reported last year that most of the  officials from 17 state departments of transportation we contacted were  willing to provide funds for intercity passenger rail. However, they said  that continued federal investment would be required, and they expressed  concern over their ability to successfully form partnerships with other  states to finance intercity passenger rail service. One of the potential  impediments cited was determining a fair cost-sharing arrangement for  capital improvements. This is consistent with what we found in our 1998  report on the potential issues of Amtrak liquidation. In that report,  officials from states we spoke with also cited potential problems with  compacts between states to provide intercity passenger rail service.
Among the potential problems cited was reaching agreement on the  allocation of costs between states. Officials from three states we spoke  with that were not on the Northeast Corridor but whose states generated a  large volume of intercity rail passengers also expressed concerns about (1)  the potentially high cost of continuing service, (2) possible difficulties in  negotiating access to tracks, and (3) lack of an incentive to continue  service if Amtrak’s national route network were ended.
As previously mentioned, the Amtrak Reform Council has recommended  introducing competition for intercity passenger rail service. The Secretary  of Transportation also supports carefully managed competition. If intercity  passenger rail service were restructured to allow private rail operators to  bid on the opportunity to provide service, however, those operators would  still likely require operating subsidies. Four of the five private rail  companies we contacted last year said that, even though they would  provide efficient passenger rail service, they would still need operating  subsidies. A fifth company had not yet determined if operating subsidies  would be required.
section_title: Choice and Design of Financing Mechanisms Will Have Important Consequences for Performance, Transparency, and Accountability
paragraphs: The choice and design of financing mechanisms, including mechanisms  used to provide federal assistance, will have important consequences for  performance, transparency, and accountability. A wide variety of  mechanisms are available to provide financial assistance, including grants,  bonds, tax subsidies, loans, loan guarantees, and user fees. Each of these  vary in the extent they provide a stable source of revenue that covers  capital needs, ensure that investments provide an appropriate return on  investment relative to investments in other intercity transportation  systems, leverage the federal dollar, and balance accountability and  flexibility. These mechanisms can be structured to support or facilitate  public-private partnerships. According to a recent report, a lesson learned  from intercity passenger rail restructuring in other countries was that one  goal of most such reforms was to increase the transparency of government  financial support. In general, the intent of policy makers was to hold  railroads more accountable by eliminating cross-subsidization of  services.
In choosing the funding mechanism, it will be important to protect the  federal government’s interests. This can be done in a variety of ways. Most  recently, in Amtrak’s fiscal year 2003 appropriations, the Congress  adopted measures to increase the oversight and accountability over  federal funds used for intercity passenger rail. These measures include  requiring (1) federal funds be allocated by the Secretary of Transportation  using a grant making process, and (2) Amtrak prepare and submit to the  Congress a business plan and limiting federal spending on projects not  contained in the plan. In addition, the conference report requires the  Secretary of Transportation to vouch for the accuracy of Amtrak’s  financial information. We believe these are good first steps. Other  measures that are available include establishing criteria for the evaluation  of projects and the use of federal funds similar to that used by the Federal  Transit Administration in its New Starts program, incorporating  accountability requirements similar to those in the Government  Performance and Results Act, and requiring intercity passenger operators  to assume some level of financial risk in their operations.
section_title: Diverse Stakeholder Interests Need to Be Considered
paragraphs: Finally, it will be important to consider diverse stakeholder interests in  developing intercity passenger rail policy and limit unintended  consequences. Revising the structure of intercity passenger rail could have  substantial effects on a number of stakeholders, including Amtrak and its  employees, the railroad retirement and unemployment systems, commuter  railroads, states, and freight railroads. Amtrak, its employees and  creditors, and the railroad retirement and unemployment systems all have  substantial financial involvement with Amtrak and could be the most  directly affected by a change in intercity passenger rail policy, particularly  if Amtrak were to be liquidated.
At the request of this Committee, we have reported on the potential costs  that might emerge if Amtrak were liquidated. We take no position on  whether Amtrak should be liquidated but our work shows that there could  be substantial financial issues associated with such an action. We reported  that if Amtrak had been liquidated on December 31, 2001, secured and  unsecured creditors, along with Amtrak’s stockholders, would have had  about $44 billion in claims against Amtrak’s estate. The federal  government would have been by far the largest claimant. However, it is not  likely these claims would have been fully satisfied since, aside from the  Northeast Corridor, the value of Amtrak’s assets would have been less  than the claims against them. Amtrak liquidation would also have affected  the railroad retirement and unemployment systems. Appendix II provides  additional information on the financial implications of a potential  liquidation.
Stakeholders such as commuter railroads, states, and freight railroads  could also be significantly affected by a change in policy. Commuter  railroads in the Northeast could be especially affected since Amtrak’s  Northeast Corridor is a vital piece of infrastructure that handles about  1,200 Amtrak, commuter, and freight trains a day. Since commuter  railroads are by far the heaviest users of the Northeast Corridor and  depend on this corridor to bring, on average, about 1.2 million passengers  a day into major cities, it will be important to deal with this corridor  carefully. As previously mentioned, state concerns largely focus on costs  to provide intercity passenger rail service as well as access rights to freight  railroad tracks and the cost of this access. How these issues are handled  could materially affect state decisions concerning whether to support  intercity passenger rail. Finally, freight railroads are concerned about the  degree to which intercity passenger rail affects their ability to serve their  customers and earn profits. Increased conventional or high-speed  passenger rail service could severely affect their operations. While the  various stakeholders may all be able to share a general vision of the  intercity passenger rail system, they may diverge in their priorities. Policy  changes, if not thoroughly thought through, could have unintended and  disagreeable consequences for one or more of these stakeholders.
In summary, Mr. Chairman, intercity passenger rail continues to be at a  crossroads. Maintaining the current approach will likely require  substantial federal operating and capital support—but at much higher  levels than currently provided. It will be important to consider a  systemwide approach for considering how the passenger rail system fits  with other modes of transportation. Alternative approaches to providing  intercity passenger rail service may be available that can provide public  benefits and complement other modes of transportation as an integrated  part of the national transportation network. Such approaches will  undoubtedly require a substantial political and financial commitment over  an extended period of time. When Japan restructured its intercity  passenger rail system in the late 1980s and 1990s, for example, the reform  plan was carried out over a decade and two political administrations.
The framework I have described today is meant to help the Congress as it  asks some fundamental questions about the future of intercity passenger  rail: What does the nation want or need from this mode of transportation?  Who should pay for it? How should it be paid for? And if changes to the  current system are necessary, how can we make those changes while  minimizing unintended consequences and maximizing public benefits? We  stand ready to assist the Congress as it deliberates answers to those  questions.
This concludes my prepared remarks. I would be pleased to answer any  questions you or other Members of the Subcommittee might have.
section_title: Contacts and Acknowledgments
paragraphs: For further information, please contact JayEtta Z. Hecker at  heckerj@gao.gov or at (202) 512-2834. Individuals making key  contributions to this statement include Colin Fallon, Richard Jorgenson,  and Steve Martin.
section_title: Appendix I: Potential Public Benefits from Intercity Passenger Rail
paragraphs: Intercity passenger rail has the potential to generate benefits to society  (called “public benefits”) by complementing other more heavily used  modes of transportation in those markets in which rail transport can be  competitive. These benefits include reduced highway and air congestion,  pollution, and energy dependence, and provide an option for travelers to  use passenger rail systems in the future.
subsections: section_title: Intercity Passenger Rail May Help Alleviate Highway and Air Congestion
paragraphs: One potential public benefit of intercity passenger rail service is the  reduced highway congestion that will result if some people travel by train  rather than on highways. Where congestion exists, intercity passenger rail  would not have to capture a large share of the travelers who would  otherwise use other modes of transportation in order to generate a  substantial public benefit from reduced highway congestion. Roadway  congestion often results when vehicles access a roadway that is already at  or near capacity. The additional users have a disproportionate, detrimental  effect on the flow of traffic. As a result, diverting a small group of highway  users to rail transport could reduce congestion and have a substantial  public benefit.
The specific markets where intercity passenger rail has the most potential  to generate public benefits by reducing highway congestion are regions  where the highway systems are consistently operating beyond capacity  and are characterized by slow moving traffic. (See fig. 3.) Therefore, rail  service likely to alleviate the most highway congestion would parallel  congested corridors that link cities with significant intercity transportation  demand and urban congestion, such as in the Northeast. However,  realizing these benefits might be difficult because the prices people pay to  drive do not reflect the true costs of driving (and some costs due to  pollution and congestion are borne by others) and Americans have a  strong attachment to cars as their principal means of transportation.
Intercity passenger rail could also potentially ease air travel congestion.  This is contingent on intercity passenger rail being able to capture enough  market share to reduce the number of flights between cities through  frequent, competitively priced, and attractive service. For rail transport to  capture the market share necessary to reduce air travel congestion, the  distance between potential intercity passenger rail cities must be short  enough to make rail travel times competitive with air travel. Amtrak’s  market share decreases rapidly as travel time and distance increases. For  example, as we reported last year, Amtrak’s market share compared with  air service between New York City and Philadelphia, Pennsylvania, and  Philadelphia and Washington, D.C.—relatively short-distance markets— was over 80 percent. But, for longer distance markets, such as New York  City to Chicago, Illinois, and Chicago to Washington, D.C., Amtrak’s  market share compared with air service was less than 10 percent. Studies  suggest that as the speed of intercity passenger rail increases, the potential  benefits attributable to reductions in airport and highway delays increase,  as does the potential distance over which passenger rail is able to compete  with air transport. The potential for intercity passenger rail to reduce air  congestion is also greater where there is little, or no, room for additional  runways and where there is limited competition between airlines resulting  in relatively high air fares.
section_title: Intercity Passenger Rail May Also Reduce Vehicle Emissions and Provide Other Public Benefits
paragraphs: Intercity passenger rail may also generate potential public benefits by  reducing vehicle emissions, lowering pollution, and indirectly mitigating  health and environmental costs. This could happen if intercity passenger  rail can provide the incentive to shift people out of their cars and onto rail.  However, the magnitude of this benefit depends to a large extent on the  type of technology used to power rail locomotives. Conventional electric  rail systems (taking into account the emissions of electricity generating  power plants) emit less carbon monoxide, hydrocarbons, and nitrous  oxides per passenger-mile from burning coal, natural gas, or fuel oil than  conventional diesel-powered rail. In addition, within the range that most  vehicles are driven, automobile carbon monoxide and hydrocarbons  emissions increase as vehicle speed decreases. Therefore, to the extent  intercity passenger rail can reduce roadway congestion, these forms of  pollution could be reduced by having fewer vehicles on the highway(s).
The ability of intercity passenger rail to generate these benefits depends  on both the level of pollution and the likelihood that travelers will choose  rail service over other modes of transportation. Markets where intercity  passenger rail service could be competitive with other modes in terms of  price, travel time, and quality of service offer the greatest opportunity to  reduce pollution. In general, intercity passenger rail can be competitive  with other transportation modes in short-distance markets (such as New  York City to Philadelphia). However, intercity passenger rail is less  competitive in longer distance markets. The extent of emissions reduction  could also vary and be small. For example, a 2002 study by the California  Department of Transportation of improvements to three state-supported  Amtrak intercity rail routes in California found that hydrocarbon and  carbon dioxide emissions would decrease with the improvements. But,  certain nitrous oxide and particulate compounds emitted from diesel-fuel  burning locomotives would increase. Similarly, our 1995 analysis of the  Los Angles to San Diego corridor projected that eliminating rail service  between these cities would result in a net increase—albeit small—in  vehicle emissions from additional automobiles, intercity buses, and  aircraft.
Intercity passenger rail may also generate public benefits by reducing the  nation’s dependence on gasoline and fossil fuels. This result would only be  achieved if intercity passenger rail would require less fuel than the amount  of fuel used by other modes of transportation that travelers might use if  intercity passenger rail were not available. The extent of the benefits  would depend on how many fewer trips were taken on other, less fuel- efficient modes of transportation and on the technology of the  locomotive(s) used. Again, the 2002 California Department of  Transportation study of improvements to the three Amtrak intercity routes  in California (see above) estimated, that in 2011, making the improvements  and expanding service could save 13 million gallons of gasoline. Similarly,  in October 2002, the Federal Railroad and Federal Highway  Administrations made a preliminary finding that making various  improvements that would extend high-speed rail service (up to 110 miles  per hour) from Washington, D.C., to Charlotte, North Carolina, could save  between 6.6 million and 10.4 million gallons of gasoline per year.
Finally, intercity passenger rail may generate public benefits from  providing an option demand—that is, by being an alternative to other  transportation modes (such as air and automobiles) that society is willing  to pay for just to retain the option to use it in the future. For some people,  having the option of rail service available in case their circumstances  change or they have concerns about using another transportation mode  has value, even if they do not plan to currently use rail service. Similarly,  intercity passenger rail may have nonuse, or existence, value. Under this  concept, people receive value from intercity passenger rail from knowing  that it exists, even if they do not plan to use it. Quantifying these benefits  is difficult and has been known to be controversial.
section_title: Appendix II: Potential Financial Issues If Amtrak Were to Undergo Liquidation
paragraphs: In September 2002, we reported on some of the potential financial issues if  Amtrak were to undergo liquidation. These issues are discussed in this  appendix.
subsections: section_title: Creditor Claims and Ownership Interests
paragraphs: If Amtrak had been liquidated on December 31, 2001, secured and  unsecured creditors, including the federal government and Amtrak’s  employees, and stockholders would have had about $44 billion in potential  claims and ownership interests against Amtrak’s estate. (See fig. 4.) The  federal government would have been by far the largest secured creditor  (for property and equipment) and would have had the largest ownership  interest (in preferred stock)—accounting for about 80 percent (about  $35.7 billion) of the total amount.
The federal claims largely arise from two promissory notes issued by  Amtrak and held by the federal government. The first note represents a  secured interest on Amtrak’s real property (primarily Amtrak’s Northeast  Corridor) and matures in about 970 years. However, in June 2001, in  conjunction with Amtrak’s mortgage of a portion of Pennsylvania Station  in New York City, the federal government strengthened its position in  relation to this note and made the principal and interest due and payable if  Amtrak files for bankruptcy and is liquidated or if Amtrak defaults under  the mortgage. Based on information provided by the Federal Railroad  Administration, we calculated that had Amtrak been liquidated on  December 31, 2001, the federal government would have been due about  $14.2 billion in principal and interest on this note. The second note is  secured by a lien on Amtrak’s passenger cars and locomotives and  matures on November 1, 2082. This note has successive 99-year renewal  terms. If Amtrak had been liquidated on December 31, 2001, this note  would have been accelerated, and about $4.4 billion in principal and  interest would have become immediately due and payable. The majority of  non-U.S. government lenders’ secured property claims would have been  associated with passenger cars and equipment ($1.5 billion) and  locomotives ($941 million).
As of December 31, 2001, Amtrak’s data showed that unsecured liabilities  totaled about $4.4 billion. About 70 percent ($3.2 billion) would have been  for labor protection payments to terminated Amtrak employees if Amtrak  had been liquidated. Materials and supplies provided by vendors ($304  million) and unpaid employees’ wages and vacation and sick pay ($278  million) were among the largest remaining obligations.
The potential claims for labor protection on December 31, 2001, were  about $2.9 billion less than we reported in 1998. The difference stems  from changes made by the Amtrak Reform and Accountability Act of 1997.  This act eliminated the statutory right to labor protection, made labor  protection subject to collective bargaining, and required Amtrak to  negotiate new labor protection arrangements with its employees. As a  result of these changes and an October 1999 arbitration decision, labor  protection was capped at 5 years (compared with 6 years under the  statutory provisions), made employees with less than 2 years service  ineligible for labor protection payments, and based payments on a sliding  scale that provided for less payout for each year worked than did the  previous system. According to Amtrak, this accounted for about $1.8  billion of the cost difference. Amtrak attributed an additional $950 million  to management employees no longer being eligible for labor protection  payments since they were not represented by a formal labor organization  and the Amtrak Reform and Accountability Act of 1997 provided for no  process to provide substitute protection for these employees.
The U.S. government holds all of Amtrak’s preferred stock, and four  corporations hold Amtrak’s common stock. The preferred and common  stock had recorded values of about $10.9 billion and $94 million,  respectively, as of December 31, 2001. In addition, preferred stock holders  were entitled to an annual cumulative dividend of at least 6 percent until  1997, when Amtrak’s enabling statute was amended to eliminate the  requirement that preferred stock holders were entitled to dividends. No  preferred stock dividends were ever declared or paid. However, Amtrak  had calculated cumulative preferred stock dividends from 1981 to 1997 to  be about $6.2 billion. In a liquidation, the amount of the preferred stock  holders’ interest would include all cumulative unpaid dividends. Thus, the  federal government, as the sole preferred stock holder, would have had  about $17 billion in ownership interest had Amtrak been liquidated on  December 31, 2001.
It is not likely that all secured or unsecured creditor claims or ownership  interests would have been satisfied because, aside from the Northeast  Corridor, Amtrak’s assets available to satisfy these claims and interests  (such as equipment and materials and supplies) are old, have little value,  or appear unlikely to have a value equal to the claims against them. In  addition, the value of Amtrak’s most valuable asset, the Northeast  Corridor, has not been tested. While the corridor has substantial value, it is  subject to easements and has, according to Amtrak, at least $3.8 billion in  deferred maintenance.
section_title: Financial Effects on the Railroad Retirement and Unemployment Systems
paragraphs: Liquidation of Amtrak would also affect the railroad retirement and  unemployment systems. Amtrak is a participant in both systems. Since the  retirement system is on a modified pay-as-you-go basis, the financial  health of the system largely depends on the size of the workforce, the  taxes derived from this workforce, and the amount of benefits paid to  retired and disabled individuals and their beneficiaries. Payroll taxes  levied on employers and employees are the primary sources of the  retirement system’s income. In 2001, Amtrak paid about $428 million in  payroll taxes into the railroad retirement account. A loss of this  contribution would have a significant financial impact on the system.
The Railroad Retirement Board (Board) estimated that, if Amtrak had  been liquidated on December 31, 2001, and no action had been taken to  increase tier II payroll taxes beyond that already planned or to reduce  benefit levels, the railroad retirement account would have started to  decline in 2006 and would have been depleted by 2024. If tier II taxes had  been increased immediately (that is, in 2002) to offset the expected deficit  in 2024, the Board estimated that tier II tax rates would have had to  increase about 8 percent in 2002 (to 22.1 percent), decrease slightly in  2003, and then level off until 2018. After 2018, the tier II rate would have  increased about 7 percent again (to 24.6 percent). In all cases, the tier II  tax rate would have been 1.64 percentage points higher than it would have  been if Amtrak had not undergone liquidation. Similarly, Amtrak  liquidation would have affected tier I tax revenues and benefit payments  as the result of Amtrak employees’ retiring and beginning to collect benefit  payments or Amtrak employees no longer being entitled to tier I benefits  because they were no longer earning tier I service credits.
Similarly, participants in the railroad unemployment system would have  also been affected by an Amtrak liquidation. However, the financial effects  would have been immediate, but short-term. The Board estimated that if  Amtrak had been liquidated on December 31, 2001, separated Amtrak  employees would have received a total of $344 million in benefit payments  during fiscal years 2002 and 2003. The cash reserves of the unemployment  system would have been exhausted in 2002, and a total of about $340  million would have been borrowed from the railroad retirement account,  as permitted by statute, from 2002 through 2004 to make these benefit  payments. The peak loan balance would have been $349 million, including  interest, with all loans repaid in 2005. To pay for these benefits and repay  the loans, the Board would have required that other railroads and  participants in the unemployment system increase their payroll tax  contributions. The Board estimated that, between 2002 and 2004, the  average tax rate would have increased from about 4 percent to 12.5  percent, before decreasing to 9.6 percent in 2005.
section_title: Appendix III: Selected GAO Products
subsections: section_title: Developing National Strategies
paragraphs: Major Management Challenges and Program Risks: Department of  Transportation. GAO-03-108. Washington, D.C.: January 2003.
Marine Transportation: Federal Financing and a Framework for Future  Infrastructure Investment. GAO-02-1033. Washington, D.C.: September 9,  2002.
Regulatory Programs: Balancing Federal and State Responsibilities for  Standard Setting and Implementation. GAO-02-495. Washington, D.C.:  March 20, 2002.
Combating Terrorism: Key Aspects of a National Strategy to Enhance  State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1,  2002.
Budget Issues: Long-Term Fiscal Challenges. GAO-02-467T. Washington,  D.C.: February 27, 2002.
Commercial Aviation: A Framework for Considering Federal Financial  Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.
Mass Transit: Many Management Successes at WMATA, but Capital  Planning Could be Enhanced. GAO-01-744. Washington, D.C.: July 3, 2001.
Executive Guide: Leading Practices in Capital Decision-Making.  GAO/AIMD-99-32. Washington, D.C.: December 1998.
Federal Budget: Choosing Public Investment Programs. GAO/AIMD-93- 25. Washington, D.C.: July 23, 1993.
Guidelines for Rescuing Large Failing Firms and Municipalities.  GAO/GGD-84-34. Washington, D.C.: March 29, 1984.
section_title: Amtrak
paragraphs: Intercity Passenger Rail: Potential Financial Issues in the Event That  Amtrak Undergoes Liquidation. GAO-02-871. Washington, D.C.:  September 20, 2002.
Financial Management: Amtrak’s Route Profitability Schedules Need  Improvement. GAO-02-912R. Washington, D.C.: July 15, 2002.