February 23, 2001 | Backgrounder on Regulation
When Amtrak releases its much-delayed financial report for fiscal year (FY) 2000 (which ended October 31, 2000), it is expected to show operating losses of $944 million for the year--a new record of red ink for the deeply troubled service.1 The losses will be greater than the previous record loss of $916 million achieved by Amtrak's management team in FY 1999.2 The rail service's operating losses have averaged $812 million per year over the past decade. Sustained deficits of this magnitude on an annual revenue base of passenger ticket sales of similar size means that Amtrak is incurring costs of $2 for every ticket dollar it sells. The more it sells, the more it loses.
This inability to get out of the red has led Amtrak's management to seek higher and higher subsidies from the federal government. Last year, Amtrak sought unsuccessfully to obtain $10 billion in federally subsidized bond-issuing authority.3 This year's request, formally unveiled on February 2, is for triple that amount in grants and interest-free loans.4
With another record-breaking loss soon to be reported, Amtrak's financial performance is moving further and further away from meeting its congressionally mandated and statutorily required5 goal of financial self-sufficiency by December 2, 2002.6 Because of Amtrak management's inability to reverse this slide toward fiscal self-destruction, Congress and the Bush Administration should demand the immediate resignation of the board of directors and top management of this troubled organization.
Despite the longest peacetime economic expansion in America's history, with unprecedented prosperity that allows Americans to travel in record numbers and profits to soar for most businesses, Amtrak's current management has achieved the company's worst-ever financial performance. There is little reason to expect that this management team will do any better in the future when the economic environment may be less favorable than it is today. The current management team has had its chance, but instead of improving service and costs, it has wasted more than $3.6 billion of the taxpayers' money. Amtrak's leadership should be replaced with individuals who have a proven record of success in business and/or transportation and who can give the passenger railroad a fighting chance to meet the FY 2002 goal of break-even operations.
Other countries have demonstrated that loss-making railroads can be turned around with new approaches and an infusion of new management personnel committed to those approaches. Passenger rail systems in Australia, the United Kingdom, Argentina, Japan, and New Zealand, for example, have been restructured and privatized, and these fundamental reforms have resulted in profitable (or at least less costly to operate) systems and higher ridership. The experience gained and lessons learned in reviving these once down-and-out passenger rail systems, combined with fresh management, could help Amtrak fulfill the promise of self-sufficiency that has eluded the current management team since it took over in 1998.
As dozens of dot-com companies demonstrated just last year, no business can survive a red ink hemorrhage of great magnitude for long. Amtrak has been an exception to the bottom-line rules of a competitive market because it has been allowed to reach repeatedly into the taxpayers' pockets for subsidies. All of the available evidence indicates that these huge subsidies--$23 billion since 1970--are now inadequate to the task of keeping the company afloat. In asking for a new 20-year, $30 billion bailout, Amtrak's management admits as much. Growing evidence suggests that unless management practices are drastically reformed, Amtrak may soon face a cash flow bind that could force reductions in operations.
Amtrak President George Warrington admitted that Amtrak is facing a serious financial squeeze when he presented the railroad's $30 billion subsidy request.7 A sense of desperation characterized Amtrak officials and supporters late last year when they attempted unsuccessfully to get Congress to approve $10 billion in subsidized bond-issuing authority. Although Amtrak's management justified the request as a necessary capital investment in the high-speed system of the future, the money most likely would have been used to meet pending cash flow shortfalls.
In the week before Clinton appointees at the Department of Transportation left office, Amtrak sought, but did not receive, a $28 million Transportation Infrastructure Finance and Innovation (TIFIA) loan8 for a $100 million locomotive remanufacturing project. This was another desperate effort to bridge a yawning financial gap with taxpayers' money.
In an effort to maintain Amtrak's cash flow regardless of cost, the Clinton Administration last year forced the Massachusetts Bay Transportation Authority (MBTA) to continue contracting with Amtrak for maintenance of MBTA commuter rail cars, even though Amtrak offered the lowest quality at the highest cost.9 As federal law requires, the Authority had put the renewal of its maintenance contract out for bid shortly before the old contract with Amtrak expired. Although a qualified private contractor came in with the lowest bid at $175 million and Amtrak's offer was $291 million, the Clinton Administration ordered the MBTA to stick with Amtrak, thereby forcing the taxpayers and rail commuters of Massachusetts to pay an extra $116 million in unnecessary costs.
Congressional disappointment with Amtrak's performance, which has been ongoing since the government took over the service in 1970, reached a flash point in the mid-1990s when annual losses soared above $800 million, ridership declined, and Amtrak's management caved in to costly union wage and work rule demands. Congress responded by passing the Amtrak Reform and Accountability Act of 1997 (P.L. 105-134), which the President signed into law on December 2, 1997.
Among the many important provisions of this law were requirements that (1) Amtrak reach operating financial self-sufficiency after FY 2002 and (2) a new seven-person board of directors (called the Reform Board, not to be confused with the Amtrak Reform Council created by the same law) be appointed. Concurrent with these changes was the enactment of the Taxpayer Relief Act of 1997 (P.L. 105-34) with a provision that provided Amtrak with a refundable tax credit of $2.2 billion in 1998-1999, over and above the annual federal subsidies Amtrak receives through the appropriations process.11 The purpose of this tax credit was to give Amtrak and its new board the extra capital, equipment, and improvements necessary to facilitate attainment of the self-sufficiency goal. Yet as Amtrak's current financial performance reveals, neither the board nor the additional $2.2 billion made much difference in the system's financial performance.
While Amtrak's worsening performance should be sufficient reason for both Congress and the President to call for the resignation of Amtrak's board and top management team, the problem of poor management is compounded by the questionable nature of the board members' appointments in 1998. The individuals President Clinton appointed to the board for the most part failed to meet the qualifications set forth in law, including two who had served on the previous board that had been judged unsuited for the task by Congress.
Specifically, P.L. 105-134, which amended Title 49 of the United States Code, required that a new "reform" board take over the operations of Amtrak by July 1, 1998, and be comprised of members who "have technical qualifications, professional standing and demonstrated expertise in the fields of transportation or corporate or financial management."12 However:
A review of the qualifications of Amtrak's current board reveals that, at most, only one of the six members13 fits this requirement, and even that could be debated because the relevant experience of this member is limited to running a money-losing public transit system in New Jersey.
Another four of the six spent their professional careers as politicians and elected officials--three as governors, one as mayor--and, other than ceremonial appointments to transportation-related advisory councils, do not meet the qualifications stipulated in the law.
Of equal importance was Congress's intent that the board be comprised of members who had not served on the previous board. President Clinton ignored this request and reappointed two board members (as well as another who served in the early 1990s) despite congressional objections. Noting that one-third of the Clinton appointees were holdovers, Senator John McCain (R-AZ) remarked: "I thought even the President would recognize we did not call for a new Board only to appoint the same people."14
An added complication confronting the Bush Administration is the law's stipulation that only one of the seven board members can be an Amtrak or federal government employee. Under the Clinton Administration, this slot was filled (using an option provided in the reform law) by the Secretary of Transportation, an appointment that many would view as appropriate given the department's responsibility for, and expertise in, meeting America's transportation needs. Moreover, given Amtrak's worsening financial problems, the two years left on its legally mandated five-year path to financial independence, and its renewed demands for even larger taxpayer subsidies, it would seem logical that the Bush Administration would want one of its own transportation officials on the board.
But it may not get that opportunity. Amtrak board member Tommy Thompson, former governor of Wisconsin and now the Secretary of the U.S. Department of Health and Human Services, has indicated that he does not want to resign from the board. It is difficult to see how Secretary Thompson would be able to give Amtrak the intense attention it needs at this critical point while he also leads the Administration's strategy to win approval of major reform initiatives for Medicare, welfare, and health coverage for the uninsured.
Because of the "reform" board's three-year track record of fiscal failure and programmatic delays, Congress and President Bush should insist on appointing a new board. The appointees should be highly experienced executives and experts whose sole focus is rescuing the railroad and ending the hemorrhaging of taxpayers' money. Amtrak's existing board and senior managers should tender their resignations immediately, and the President should submit--and Congress should approve--a new slate of candidates consistent with the qualifications described in Title 49, Section 24302 (2)(C)(i) of the United States Code.
How to Get to a New Board
Although the laws governing Amtrak have no provision to allow either Congress or the President to replace members of the board at their discretion, neither branch of government is without sufficient means of persuasion to achieve that end. Some would argue that it is a virtually implied statutory power for the appointing authority to fill vacancies using the same process that governs the original appointment.
The President, for example, in submitting his own FY 2002 budget to Congress, could make that year's Amtrak subsidy--likely to be near the $500 million provided this year--contingent upon the resignation of the current board and congressional approval of a new one. If Congress appropriates funds without requiring a new board, the President could threaten to veto the bill unless a new board capable of exercising effective stewardship over the taxpayers' money were in place. More immediately, the President could withhold a decision on the still pending $28 million TIFIA loan request that Amtrak has submitted to the Transportation Department until a new board is in place.
For its part, Congress could simply delay appropriating any money for Amtrak's FY 2002 subsidy until such time as the current board agrees to step aside. Likewise, the tax committees of Congress could delay review of any Amtrak-related tax proposals until such time as a new board is in place with members who could more skillfully implement and manage the long-overdue reforms at Amtrak as well as any financial support Congress may choose to provide.
For too long, Congress and the executive branch have accepted Amtrak's management view that a passenger rail system operating in today's environment must be a government-operated monopoly requiring large, perpetual taxpayer subsidies. Such views are becoming increasingly outdated around the world.
By the late 1980s and early 1990s, innovative leaders willing to think outside the box had realized that there were alternatives to the socialist model and had begun to act upon this realization. In countries from Argentina to New Zealand, reforms that rely upon competition and private-sector participation have been implemented, with improved service at lower costs as the consequences. Amtrak's worsening fiscal outlook is an opportunity for Congress and the President to act decisively and to implement needed reforms to achieve these results in the United States as well.15
Ronald D. Utt, Ph.D., is Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
1. "Management Oversight Issues," statement of the Honorable Kenneth M. Mead, Inspector General, U.S. Department of Transportation, before the Subcommittee on Transportation, Committee on Appropriations, U.S. Senate, 107th Cong., 1st Sess., February 14, 2001, p. 22.
2. Amtrak's reported loss for FY 1998 was actually $930 million, but that figure included a one-time payment of $106 million in retroactive labor payments. See U.S. General Accounting Office, Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty Controlling Its Costs and Meeting Capital Needs, GAO/RCED-00-138, p. 20. These payments, however, were for contracts that became negotiable almost upon ratification. Thus, Amtrak is currently accruing another substantial retroactive payment for eventual successor contracts.
4. See Amtrak, Amtrak 2001 Strategic Business Plan: Building a Commercial Enterprise (FY01-05 Financial Plan Update), and Investing in the Future of Passenger Rail (Long-Term Capital Plan), released February 2, 2001.
6. According to the U.S. General Accounting Office, it is unlikely that Amtrak will meet the mandated self-sufficiency targets. See U.S. General Accounting Office, "Performance and Accountability: Challenges Facing the Department of Transportation," statement of John H. Anderson, Jr., Managing Director, Physical Infrastructure, testimony before the Subcommittee on Transportation, Committee on Appropriations, U.S. Senate, 107th Cong., 1st Sess., GAO-01-443T, February 14, 2001.
8. TIFIA is technically limited to capital expenditures and generally available to public transit systems. This would have marked the first time that eligibility was extended to Amtrak; it is still possible that the loan could be approved.
15. See Ronald D. Utt, "Congress Should Accept Industry Offers to Buy Amtrak," Heritage Foundation Backgrounder No. 1179, May 18, 1998, for a brief review of some of the reforms implemented in other countries.