October 2, 2001 | Backgrounder on Regulation
Threatening to erode the already shrinking budget surplus are two costly proposals to bail out Amtrak, America's perennially troubled, government-subsidized passenger rail service. Amtrak's supporters have begun to push this initiative more forcefully since September 11 amidst bipartisan efforts to deal with the genuine dislocation caused by the terrorist attacks. Despite growing concern that the level of federal spending may eliminate the surplus, Amtrak proponents hope to use the recent events to divert billions of federal dollars from other priorities, such as pro-growth economic measures, into an enterprise that has failed to meet the government's mandate to become self-sufficient.
Better than another costly bailout would be to require specific reforms that would end Amtrak's subsidies in fiscal year (FY) 2003, as required by law, make Amtrak's management more accountable, and require the consideration of all proposals (including privatization) to make the service more cost-effective and responsive to market demands.
The costliest of the recent proposals to bail out is the Amtrak High Speed Rail Act of 2001,1 introduced by Senator Joseph Biden (D-DE) as S. 250 and by Representative Amory Houghton (R-NY) as H.R. 2329. This bill would provide a new tax credit for investors willing to lend Amtrak as much as $1.2 billion per year in each of the next 10 years. According to a recent analysis by the U.S. General Accounting Office (GAO), this investment scheme would cost the federal budget as much as $19.1 billion in future interest payment subsidies while doing little to improve passenger rail service.2
By Amtrak's own admission, the money provided by this misnamed High Speed Rail Act would be nothing more than "an important first step in providing seed money and building the partnerships with states, localities, and freight railroads critical to high speed rail in the United States."3 At a time when America is confronting one of its greatest challenges to its security, as many as 58 Senators and 177 Representatives have already signed on to this effort to divert $19 billion of the remaining surplus to partnership-building seed money on behalf of an enterprise that carries fewer than 1 percent of America's inter-city passengers.
Within weeks of the terrorist attacks, Amtrak floated a supplemental bailout proposal for an immediate cash infusion of $3 billion,4 allegedly as compensation for expenses incurred as a consequence of the terrorist attack. Notwithstanding the fact that the rail line incurred no damage during the attack, either direct or indirect, and that it is one of the few operations other than blood donor centers to receive a temporary boost in customers, Amtrak has adopted the pose of victim in an effort to extract a taxpayer subsidy amounting to $1 billion more than its annual revenues in FY 2000.5
Congress should reject these and other costly proposals to prop up America's federally supported passenger rail system and instead impose upon Amtrak a series of reforms that will lead it swiftly to break-even operations. Chief among the needed reforms:
How the Costly Bailout Plan Would
The proposed High Speed Rail Act of 2001 would create a new type of federally subsidized bond that Amtrak could use to borrow as much as $12 billion in interest-free loans over the next 10 years, for terms of up to 20 years. Rather than receive interest payments from Amtrak, holders of these bonds would receive an annual federal tax credit equal to what the loans would otherwise pay in interest. In effect, Amtrak's lenders would be able to reduce their federal tax burden by an amount equal to the interest payment they would be entitled to receive on the loan. The U.S. Treasury, not Amtrak, would be paying the interest.7
For example, at a 7 percent interest rate, an individual investor holding $10,000 in Amtrak bonds would be entitled to a $700 tax credit in each of the 20 years covering the bond's term to maturity. This means that if the investor owed $5,000 in federal income taxes in a given year, the $10,000 in bonds would reduce the investor's tax obligation to $4,300.8 The GAO estimates that the $12 billion in such bonds that the bill would authorize over the next 10 years would cost the budget as much as $19.1 billion in forgone tax revenue.
How the Money Would Be
Despite Amtrak's federal subsidies of more than $500 million each year and a one-time special "tax refund" for capital investment of nearly $2.3 billion paid out over 1998 and 1999, Amtrak remains in serious financial trouble. With few unencumbered assets to borrow against and annual losses exceeding the $521 million subsidy it will receive this year as well as next, Amtrak will likely be insolvent by next summer. Indeed, it would probably be insolvent now had it not just borrowed $300 million in operating funds against its ownership stake in New York's Pennsylvania Station. Further reflecting worsening financial problems, in August 2001 Amtrak announced a 15 percent reduction in the number of managers and the possibility of a 10 percent cut in the number of unionized employees.
Amtrak is quick to point out that its ridership recently has been increasing, but such gains are a burden, not a benefit, because Amtrak's management has designed a self-destructive cost-revenue relationship that yields higher losses at higher ridership levels. Amtrak incurs about $2 in costs for every ticket dollar sold, so the more it sells the more it loses. Its record loss of $944 million in FY 2000 beat the previous record of $916 million in 1999; and these bookkeeping measures of failure will likely be topped by Amtrak's projected FY 2001 losses, estimated to be running almost 5 percent above those of the same period a year ago.9 If that trend continues for the remainder of the year, Amtrak will lose an estimated $985 million during this fiscal year--almost twice this year's federal subsidy of $521 million.
Under the circumstances, the $1.2 billion in additional annual borrowing that the High Speed Rail Act would allow is nothing more than a thinly disguised means to address a cash flow crisis that threatens Amtrak's existence. The bill's proposed borrowing authority is described as limited to facilitating high-speed train travel, but few meaningful limits are actually imposed. As a result, the borrowed funds could be redirected to closing the $500 million gap between Amtrak's billion-dollar losses and this year's federal subsidy.
Although Section 54(d)(1)(C)(iii) of the bill would permit the issuance of these bonds only at the approval of the Secretary of Transportation, and only then for the purpose of funding projects identified and approved by the Department of Transportation (DOT), later parts of that section--(4)(A), to be precise--define "qualified projects" so broadly as to cover much of what Amtrak already does. Moreover, the project does not have to be connected with an action that leads to higher running speeds, because the bill defines as a qualified use of funds such projects as "station rehabilitation," an investment that would not contribute to faster trains.
Further undermining the promise of high-speed travel is the fact that the amount of borrowing permitted by this bill, even at a grand total of $12 billion, is substantially less than the sum needed to provide genuine high-speed rail, i.e., trains that can hit top speeds of 200 mph and that run at average speeds well above 100 mph over an entire route, as is the case with Japan's Shinkansen or "Bullet" train (with average speeds of 115 mph to 170 mph, depending on the route) or France's TGV (with average speeds of 140 mph to 160 mph, depending on the route).10 Indeed, as noted earlier, Amtrak admits as much when it describes the $12 billion in loans as "seed money."
The much heralded but troubled Acela, posing as a high-speed service in the Northeast Corridor, is capable of top speeds of 150 mph on only 18 miles of track, but because of poor quality road bed and track congestion, it is held to an average speed of only 66 mph between Boston and New York--the speed most automobiles can sustain on the same route using Interstate 95. To achieve the kind of passenger train speeds reached on the best lines in Europe and Japan along the 10 prospective high-speed rail corridors identified by the DOT (plus the Northeast Corridor) would require substantially more than the $12 billion proposed in the High Speed Rail Act. In January 2001, Amtrak acknowledged this fact when it reported that it would most likely need $30 billion more to accomplish the task.11
A recent proposal, known as Ride-21 and supported by House Transportation Committee Chairman Don Young (R-AK), argues for $70 billion in subsidized rail infrastructure loans, which the chairman believes would be necessary to support high-speed rail in America.12 In July 2001, the GAO estimated the cost of improving the Northeast Corridor and the 10 proposed high-speed rail corridors at between $50 billion and $70 billion;13 in September, the chairman of the Amtrak Reform Council estimated the cost to be $100 billion.
Evidence of Real
Even the $100 billion estimate might be inadequate to support high-speed rail in the United States, considering what other countries have already spent to provide faster and more extensive passenger rail service.
Given the comparatively high costs incurred to serve rail markets in a land mass that is a tiny fraction of America's, the $50 billion to $100 billion cost estimates that rail advocates have endorsed appear to be much too low.
Better Ideas Emerge
Notwithstanding Amtrak's promise to meet the 2003 goal of financial self-sufficiency mandated by the Amtrak Reform and Accountability Act of 1997, the rail service has no prayer of even coming close. Congress should use what little time is left before the 2003 deadline to set in motion a series of reform initiatives to impose on Amtrak when it fails to fulfill its legal obligation.
In considering options for reform, Secretary of Transportation Norman Mineta, now a member of Amtrak's board, offered a promising start when he observed earlier this year that Amtrak should "look at selected routes rather than blanket the country with rail service that is not...really viable."17
As the GAO discovered in auditing the 40 routes Amtrak operated in 1998, all but one--the Metroliner--had lost money, and some lost substantially more than others.18 Significantly, whereas Amtrak has emphasized the recent increase in ridership as one measure of its success, all of that increase is attributable to the Northeast and West Coast corridors, where boardings have increased almost 19 percent to 17 million since the 1996 low point in rail ridership. In contrast, on the inter-city routes where Amtrak loses most of its money, ridership remains flat at 5.5 million per year--about the same number of passengers leaving from the Kansas City airport each year.
Fortunately, some in Congress have recognized this situation and are urging new leadership at the railroad and a restructuring of Amtrak's routes to bring costs in line with revenues and with passenger interest. Following the critical March 2001 report by the Amtrak Reform Council,19 House Transportation Committee Chairman Don Young echoed earlier Heritage Foundation proposals20 when he noted:
The Amtrak Reform Council's comprehensive report confirms that Amtrak is nearing the failure point in its effort and will continue to fail without substantive and immediate changes in its management and administration.21
In August 2001, following extensive hearings into Amtrak's problems, Representative John Mica, a member of the Transportation Committee, recommended that potentially profitable routes such as the Northeast Corridor be separated from the rest of the system to create a financially viable transportation enterprise that is free of taxpayer subsidies and operated by the private sector.22
Representative Mica's plan also includes the proposal that the more scenic coast-to-coast routes be offered on a competitive basis to tour operators that cater to the lucrative leisure travel market. For the rest of the routes that have limited tourist potential and no meaningful inter-city mobility value, and where most of Amtrak's financial losses occur, he proposes to offer them to the states they serve to fund and operate if they wish or to private-sector operators.
In making this proposal, Representative Mica drew upon successful passenger rail reforms in other countries that turned to the private sector to restructure and operate their once inefficient government-operated rail systems. Where such reforms have been introduced, subsidies have been reduced, service improved, and ridership increased.
Options for Success
With Amtrak facing the prospect of financial failure within the next six to 12 months, it is likely that the congressionally mandated goal of financial self-sufficiency by 2003 will be missed by a wide margin. In anticipation of this failure, Congress and the President should begin the process of redirecting Amtrak toward better service and lower-cost operations.
One way to achieve this goal is to require Amtrak to implement some of the privatization techniques that Great Britain, Japan, Australia, Argentina, and New Zealand have applied with considerable success beginning in the 1990s. Japan, for example, began selling off portions of its passenger rail system early in that decade, and all are now operating at a profit. Also in the 1990s, Australia and New Zealand privatized passenger rail service, and their systems are also profitable.
In reforming their inefficient rail systems, both Great Britain and Argentina adopted the "concession" or franchise approach under which the government maintains an ownership interest in the system but "sells" the right to operate service over specific routes for specific intervals of time. Private operators compete for these route rights by offering the highest lease payment or the lowest subsidy. As a result of improved service from the more efficient private-sector concession winners, Great Britain in 1999 experienced its highest rate of rail ridership since 1947.23 More recently, Germany has implemented the concession system on several of its commuter rail lines.
Although much of the current discussion of rail privatization trends focuses on recent activities occurring abroad, it should be remembered that the first successful rail privatization (and largest privatization up until that time) occurred in 1987 in the United States when the federal government sold its 85 percent ownership stake in the freight railroad Conrail to private investors for a combined payment of $1.9 billion. As a result of better management following its privatization, Conrail's value increased more than fivefold between 1987 and 1998 when it was acquired by CSX and Norfolk Southern for $10.3 billion.
Although some contend that Amtrak would not receive the same level of investor interest as seen by Conrail or the systems in Europe and Asia, there is every reason to believe that a number of serious proposals from qualified bidders would be received if the federal government expressed an equally serious interest in considering them. Indeed, formal expressions of interest from U.S.-based investors were made prior to the 1997 enactment of the Amtrak Reform and Accountability Act, which subsequently took Amtrak "out of play" for at least five years by guaranteeing substantial federal subsidies through 2002. In mid-1997, for example, President Bill Clinton's Secretary of Transportation Rodney Slater received a letter from the president of the Massachusetts-based Guilford Transportation Industries requesting a meeting to:
immediately begin negotiations with your department as leinholder, for the sale or lease of the Northeast Corridor. Our company is prepared to purchase or lease the rail line and operate private passenger service throughout the corridor.24
With the congressionally mandated five-year rehabilitation period coming to a close, and with Amtrak showing less promise of self-sufficiency now than when it entered the period, several other qualified investors and transportation companies are putting together prospective offers that may soon be made formal and public if some official encouragement is forthcoming.
The costly proposals that have been put forth to prop up Amtrak should be rejected, and Congress should instead impose upon Amtrak a series of reforms. Chief among these reforms:
Given the many successes experienced both at home and abroad in reforming financially troubled rail systems with varying degrees of private-sector participation, any review by the Bush Administration of proposals that might be adopted as remedies for the ailing passenger rail service should be as wide and open as possible, and emphasize that options for private-sector participation will be welcome. To facilitate the widest possible review and to stimulate the development of innovative solutions, the Administration should encourage interested parties--whether from the private sector, the financial community, the unionized work force, Congress, passenger associations, hobbyists, or current management--to submit proposals that could lead to better passenger rail service at lower cost, or at no cost at all to taxpayers.
In effect, and in appreciation of the approaching date for Amtrak's required financial self-sufficiency as set by the Amtrak Reform and Accountability Act of 1997, the Administration would be fostering a national citizen symposium on the future of national rail passenger service in America. All options should be discussed and subjected to expert analysis and scrutiny. In the end, as opinion and support coalesce around one or a few options that seem more viable than others, Congress and the Administration would have valuable guidance on what steps should be taken next.
Dr. Ronald D. Utt, is a Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
1. The High Speed Rail Act of 2001 is not to be confused with the Rail Infrastructure Development and Expansion Act for the 21st Century (RIDE-21) proposed by House Transportation Committee Chairman Don Young on September 6, 2001. Chairman Young's proposal would subsidize as much as $70 billion for rail infrastructure investment over the next 10 years, but it would exclude Amtrak from directly receiving any funds from these loans.
5. In comparison to the proposed $3 billion bailout, Amtrak earned total revenues of $2.1 billion in FY 2000--just two-thirds of the subsidy it seeks. In contrast, the also questionable airline bailout of $5 billion amounted to about two weeks of revenue for the airline industry.
6. Ronald D. Utt, Ph.D., "End of the Line for Amtrak's Current Management," Heritage Foundation Backgrounder No. 1412, February 23, 2001.
7. For a more detailed review of these bonds, see Ronald D. Utt, Ph.D., "New Amtrak Boondoggle May Outdo All Others," Heritage Foundation Backgrounder No. 1392, August 28, 2000.
8. Although the tax credit in this example would be $700 to this hypothetical lender, the overall net reduction in the tax obligation would be somewhat less than $700 depending upon the bondholder's marginal tax rate. This difference is a result of the bill's requirement that the value of the credit also be added to the lender's adjusted gross income. In the case of a borrower in the 30 percent tax bracket, the addition of the $700 credit to adjusted gross income would increase the tax obligation by $210, yielding a net tax reduction of $490.
9. "Amtrak's Financial Performance and Requirements," statement of the Honorable Kenneth M. Mead, Inspector General, U.S. Department of Transportation, before the Subcommittee on Railroads, Committee on Transportation and Infrastructure, U.S. House of Representatives, 107th Cong., 1st Sess., July 25, 2001.
10. Germany also has a high-speed service called the InterCity Express, which averages in the 80 mph range over most of its routes. In June 1998, one of its trains derailed in Eschede, Germany, killing 101 passengers. See Glen Johnson, "High Speed Trains Hitting Road Blocks," Fredericksburg Free Lance Star, January 26, 1999, p. B5.
12. Ride-21 Proposal, a Power Point demonstration provided by the House Transportation Committee on September 6, 2001. See also Don Phillips, "GOP Plans $71 Billion Rail Bill," The Washington Post, September 7, 2001, p. E1.
16. "World Class in Both Speed and Losses: France's Expensive Toy," The Economist, May 31, 2001. Amtrak, however, contends in its Strategic Business Plan that the French spent only $2 million on the TGV, a figure that is inconsistent with French reports to the European Commission.
19. Amtrak Reform Council, Intercity Rail Passenger Service in America: Status, Problems, and Options for Reform, The Second Annual Report of the Amtrak Reform Council, Washington, D.C., March 20, 2001.
20. Utt, "End of the Line for Amtrak's Current Management."
21. "Transportation Chairman Young Says New Report Raises Serious Questions About Amtrak's Future Operations," press release, U.S. House Committee on Transportation and Infrastructure, March 20, 2001.
22. Representative John Mica, "It Is Time to Cut Taxpayer Losses on Amtrak," Federal Times.com, August 13, 2001, at http://www.federaltimes.com/commentary/main081301.html.
25. Utt, "End of the Line for Amtrak's Current Management."