August 28, 2000 | Backgrounder on Regulation
Legislation now before Congress proposes to dedicate as much as $16 billion of future budget surpluses to prop up Amtrak, America's federally chartered and subsidized passenger rail service. Members of Congress should view this new proposal with skepticism given Amtrak's record-breaking losses, stagnant ridership, and persistent failure to implement high-speed rail service, promised for 1997 and now delayed for a third straight year.
Instead, Congress should exercise its oversight responsibility to investigate the system's future viability. It should also weigh the value received from the $23 billion in direct federal subsidies--including $3.6 billion over just the past three years1--that U.S. taxpayers already have poured into the system merely to keep it afloat.
The High Speed Rail Investment Act (S.1900, H.R. 3700), introduced by Senator Frank R. Lautenberg (D-NJ) and Representative Amo Houghton, Jr. (R-NY), would allow Amtrak to borrow as much as $10 billion in interest-free loans over the next 10 years. Although Amtrak would pay no interest, lenders would still earn the equivalent of interest on the loans through a federal tax credit equal to the interest paid on long-term corporate bonds.2 Currently, this rate is about 8 percent per annum. In effect, the U.S. Treasury would pay the interest to the bondholders on behalf of Amtrak.
These implicit interest payments by the federal government could add up to as much as $16 billion over the life of the bonds. For example, at an 8 percent interest rate, an individual investor holding a $1,000 Amtrak bond would be entitled to an $80 tax credit each year the bond is held. This means that if the investor owed $10,000 in federal income taxes in a given year, the $1,000 Amtrak bond would reduce his or her tax obligation to $9,920. The bill authorizes the issuance of $10 billion worth of these bonds at maturities of up to 20 years. The loss of tax revenues to the U.S. Treasury would total $16 billion if interest rates remained unchanged at 8 percent.
Renewed congressional efforts to bail out Amtrak are a striking turnaround from commitments made just a few years ago. In 1994, Amtrak promised to improve its operations and performance so that it could eliminate the need for federal subsidies by 2002.3 In 1997, Congress confirmed that commitment when it passed the Amtrak Reform and Accountability Act (PL 105-134), which among other provisions established the Amtrak Reform Council, whose responsibility was to notify Congress and the President in the event Amtrak failed to meet its financial goals.
Currently, however, Amtrak is not meeting its goals; instead, its operating losses are escalating from year to year. Doubts about Amtrak's ability to meet its financial objectives are shared by the Department of Transportation's Inspector General, who observed in a recent report to Congress that meeting the goal of self-sufficiency by 2003 will be "difficult."4
Not only is Amtrak failing to meet its promise and statutory requirement to break even financially by 2002, but its financial situation has worsened. Amtrak's annual operating loss rose from $833 million in 1994 to a record $930 million in 1998. Its loss for 1999 was $916 million,5 and losses for the first half of fiscal year (FY) 2000 are reported to be higher than those during the same period in 1999.6
Furthermore, these losses have ballooned despite a booming economy that has sent Americans traveling in record numbers and caused business profits to soar. This suggests that Amtrak's management and strategic plan are not up to the task of meeting the FY 2002 financial objectives.
The rising prosperity of the 1990s has led to unprecedented mobility and travel opportunities for all Americans, and this in turn has benefited almost all segments of the transportation industry. Between 1990 and 1999, the number of domestic airline passengers rose by 37 percent, from 423 million at the beginning of the decade to 582 million last year.7 Automobile use as measured by passenger-miles increased by 25 percent from 1990 to 1998.8
Even intercity bus service, Amtrak's closest competitor, saw its passenger volume rise by 7 percent between 1990 and 1998.9 Indeed, intercity bus service currently carries 17 times more passengers than Amtrak, and Amtrak's share of the intercity passenger market amounts to only six-tenths of 1 percent nationwide when measured in passenger-miles.10
In contrast to its competitors' success, Amtrak was one of the rare American businesses that bucked the trend toward increased customers and soaring profits in the past decade. According to the railroad's most recent annual report, Amtrak's annual passenger level fell from 22.2 million passengers in 1990 to 21.5 million last year,11 and its operating loss widened from $704 million to $916 million over the same interval.
As it has done so many times before, the railroad's management has responded to failure by promising to do better next year--if only Congress will give Amtrak more money now. Amtrak's 1994 commitment to break even by 2002 was the most recent of these promises.
Recognizing that a history of broken promises is becoming tiresome to some in Congress, Amtrak has resorted to a clever new public relations tactic. It now proposes to implement a profitable, high-speed rail service called the Acela. Amtrak maintains that the Acela will be so profitable that it will make Amtrak financially self-sufficient and independent of future federal subsidies. The $10 billion loan proposal, under this scenario, would be America's down payment on this promise.
The promise, however, is not likely to be fulfilled. Amtrak has never made a real profit on any of its existing lines, and there is no reason to expect that this 30-year record of disappointment is about to end. For example, one of Amtrak's particularly costly lines is the Cardinal route, running between Chicago and Washington, D.C., via West Virginia, which incurs $3.29 of cost for every dollar of earned revenue. Overall, according to the U.S. General Accounting Office (GAO), Amtrak incurs costs of $1.86 for each dollar of revenue it receives.12
Even Amtrak's contention that it makes a small profit on its Metroliner service in the Northeast Corridor is true only under Amtrak's less-than-complete accounting standards. To declare the Metroliner profitable, Amtrak must neglect the capital costs associated with road bed, rolling stock, engines, buildings, and signal systems.
While the perennial optimist could argue that Amtrak might improve its operations, Amtrak's high-speed rail performance to date suggests that the Acela program will not be the catalyst. Service was scheduled to begin in 1997, but a series of design, mechanical, and testing problems have delayed the opening, and a new date has not been set for Acela's debut.13
Assuming that the high-speed line ultimately does open, its anticipated profitability depends upon substantially increased ridership. The increased ridership figures, however, may be overly optimistic. Taking the Acela rather than the Metroliner on the route where it would work best--between New York and Washington--would save a traveler only 15 minutes, reducing the trip from three hours to two hours and 45 minutes. While this represents some improvement, the change is not likely to convince passengers to abandon cars or planes.
On the Boston to New York run, Amtrak projects the Acela will reduce train times from four hours and 30 minutes to three hours.14 This is a significant improvement, but it is still substantially longer than flying. The same trip on a scheduled airline is currently only one hour and 20 minutes.
Perhaps the most troublesome aspect of the proposed $10 billion federally subsidized loan is not its projected taxpayer cost of $16 billion. While worrisome, the cost is eclipsed by the potential for even greater taxpayer costs as a result of the opportunities for fiscal blackmail that a debt of that magnitude would create. If the federal government decided to end its funding of Amtrak at some point, it might feel bound to assume the costs of the loan. If Amtrak were to add the cost of the loan to the cost of its liquidation, it would have leverage with which to argue against such a liquidation.
In past efforts to prolong the life of a failing Amtrak, supporters argued that the government's liquidation cost if it were to allow Amtrak to go bankrupt would vastly exceed the subsidies necessary to achieve Amtrak's financial independence. In 1997, for example, Amtrak claimed that the costs associated with its liquidation could be as high as $10 billion to $14 billion. Congress asked the General Accounting Office to confirm this,15 but the GAO was unable to estimate Amtrak's likely liquidation costs with confidence.
However, if Congress passes the High Speed Rail Investment Act, it might feel obliged to incur the cost of the $10 billion in federally subsidized bonds; this would be in addition to the other costs that it could incur if it chose to liquidate Amtrak. Although the legislation would not grant the government's full faith and credit to the special Amtrak tax credit bonds, the government would have a moral obligation to reimburse those who invest in these bonds. Because the government created, subsidizes, and directs Amtrak, it would be expected to shoulder the responsibility of making good on the loan if Amtrak were to fail.
Notwithstanding Congress's long-standing obsession with socialized rail passenger service and its $23 billion investment in Amtrak, intercity travelers continue to shun Amtrak in favor of alternate modes of transport. For this reason, the High Speed Rail Act represents an exceptionally costly bailout of an enterprise that has failed to provide cost-effective service during its 30 years of operation.
When Congress passed the Amtrak Reform and Accountability Act in 1997, it gave the Amtrak Reform Council the responsibility to assess Amtrak's progress toward financial independence by 2002. If that goal is not met, the Council will have to determine whether Amtrak should be restructured or liquidated. Congress should make no additional financial commitments to Amtrak until the council submits its report and recommendations and Congress reviews them.
In the meantime, Congress should study the growing number of privatization reforms that have been applied successfully to government-operated passenger rail service in other countries, including Great Britain and Japan.16 Given Amtrak's long history of failed schemes and operating losses, such innovations--not $10 billion for an unproven high-speed rail program--are the only way Amtrak will improve its own operations.
Ronald D. Utt, Ph.D. is Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
5. National Railroad Passenger Corporation, 1999 Annual Report , p. 41. On an operating basis, 1999's loss was the highest ever because 1998's loss included one-time costs associated with a labor settlement.
7. Air Transport Association of America, Inc., "Traffic Summary 1960-1999: U.S. Scheduled Airlines," at www.air-transport.org/public/industry/24.asp, August 2000.
14. National Railroad Passenger Corporation, "Acela Questions & Answers," at www.acela.com/questions/index.htm, August 2000. In reality, the diminished time for the Boston-New York run is closer to an hour, not the 90 minutes claimed. Amtrak has already reduced the time on the run by 30 minutes by eliminating the engine change in New Haven, Connecticut, now that the line from New Haven to Boston has been electrified.
16. For additional details on the success of transit privatization worldwide, see Ronald D. Utt, "Congress Should Accept Industry Offers to Buy Amtrak," Heritage Foundation Backgrounder No. 1179, May 18, 1998.