June 25, 2002

June 25, 2002 | WebMemo on Federal Budget

Amtrak Gets More Than Its Fair Share of Federal Funding

Amtrak Gets More Than Its Fair Share of Federal Funding
by Ronald D. Utt, Ph.D. (6/25/02)

Amtrak and its supporters frequently argue that a key reason for Amtrak's manifest deficiencies is the "unfair treatment it receives within the federal budget." A typical example is the statement of Amtrak's former president in recent congressional testimony:

In fact, all we are asking for is fair treatment. In FY 2001, highways received $33.5 billion in federal funds, aviation received $12.6 billion, transit received $6.3 billion--but intercity rail received $0.5 billion--less than 1 percent of all transportation modal spending in FY 2001.

Adjusted for the generous rounding process applied by Amtrak's management in estimating shares, the figures show that Amtrak actually did not fare so badly in comparison with the other modes. In fact, its share of federal money (1.0 percent) is nearly double its intercity passenger market share (0.6 percent), suggesting that it got more than its fair share, not less. But even more significant in this skewed comparison is the presumption that all of these subsidies come out of a single, taxpayer funded pot, when in fact they do not.

The $33.5 billion in federal funds that was spent on highways in FY 2001 was derived entirely from user fees paid only by motorists via the federal fuel tax levied on each gallon of gasoline (18.3 cents) or diesel fuel. In fact, the $6.3 billion spent on transit that year represents money diverted from the fuel tax revenues paid by motorists. In effect, under the current federal system, motorists pay more than their fair share.

This fact belies the arguments of Amtrak advocates who claim that the federal self-sufficiency requirements are unfair because (1) motorists are not expected to meet the same requirements and (2) the federal highway program is not expected to "make a profit." To the contrary, they are and it does. Each year, motorists see billions of dollars of their fuel tax revenues spent on transit, hiking trails, roads on federal lands, Amtrak-operated commuter rail lines, bicycle paths, historic preservation, train station restoration projects, and other non-automotive functions. Indeed, each year, as much as 30 percent of highway funds is siphoned away from general purpose highway uses.

Similarly, and taking into account the recently imposed new airport security tax, users of commercial airlines are subject to a total of 11 separate federal user fees/taxes that fund airport construction and operation, air traffic control, and the safety and security of airlines. 12 The revenues generated by these taxes are the source of revenue for any federal funding that is given to commercial aviation.

Collectively, these taxes are now a significant component of the ticket price paid by passengers. For example, a round-trip fare between Washington, D.C., and Europe posted in late 2001 was $323.40, an amount that included $83.40 for FAA-imposed taxes and user fees. Buried in the remaining $240.00 of the ticket price were additional federally imposed user fees such as fuel taxes and landing fees, the costs of which were paid by the airline and then passed on to passengers.

As the federal funding mechanisms for the U.S. transportation system are currently configured, the "fairness" demanded by Amtrak's advocates and modal parity would best be achieved by adding similar fees and taxes to Amtrak tickets. Of course, if such taxes or user fees were added to the already steep prices that Amtrak charges its customers (or "guests" as they are described) to the same extent that such fees are now imposed on airline passengers, Amtrak's market share would likely fall below the 0.6 percent it ekes out today.

The above text is excerpted from Amtrak's Impending Collapse Offers One-Time Opportunity for Reform, by Ronald D. Utt, Ph.D.

News links

Subsidized Nostalgia, by Robert J. Samuelson

"It is time to let Amtrak die."

"Actually, Congress should never have created Amtrak and, having done so, should have long ago killed it. The Amtrak problem is not mainly about transportation, because passenger trains move so few travelers. It's about politics, which is to say Washington's inability to control spending."



Text of Sen. McCain's letter to Transportation Secretary Norman Mineta
(6/20/02)

The Honorable Norman Mineta
Secretary
U.S. Department of Transportation
400 Seventh Street, S.W.
Washington, D.C. 20590

Dear Secretary Mineta:

I am writing to commend you on the Administration's position outlined today on the need to significantly reform Amtrak and our national passenger rail policy. I fully agree that we cannot afford simply to throw billions of additional federal dollars at Amtrak and hope its problems will disappear, as some in Congress are advocating.

Amtrak faces an immediate financial crisis and needs $200 million to continue operating through September. Clearly, a shut-down of Amtrak's entire system in the next few weeks would not be in the national interest. I understand the Administration is working with Amtrak to determine what, if any, federal assistance might be available in the near-term. However, I urge you to ensure that any funding made available through federal resources is clearly conditioned on the initiation of real and substantial reforms.

If the Administration is unable to assist Amtrak in securing additional funds, I expect that efforts will be made in Congress to add the $200 million to the emergency supplemental appropriations bill that is awaiting action by a conference committee. The Administration has already notified the Senate of a likely veto of this bill for other reasons, and I hope the Administration will work to impress upon the conferees that another bailout of Amtrak in the supplemental is also unacceptable to the President unless it is accompanied by real reforms.

One important step to reform Amtrak would be to call for resignation of the members of the Amtrak Reform Board of Directors appointed to oversee Amtrak and meet the directives under the Amtrak Reform and Accountability Act. These individuals have been responsible for what you described today as, "the fiction that Amtrak could achieve operational self-sufficiency by its statutory deadline of December 2002." Amtrak's Board has a fiduciary responsibility to protect the financial integrity of the corporation. Instead, it allowed Amtrak management to increase its debt and mortgage its assets to pretend to be improving its financial situation, a pretense maintained through misleading statements made to Congress and others. Considering the recent attention and concern about the actions taken by boards of directors of private corporations, we should be especially concerned about the Amtrak Board whose decisions affect a corporation that receives millions of dollars annually from the American taxpayers. I believe these Board members have failed to fulfill their fiduciary obligations and should be asked to step down.

In addition to Amtrak's most pressing financial situation, its long-term structure and funding must be addressed by Congress, the Administration, the states, and the private sector. As you clearly stated, the last three decades have proven that Amtrak's model of a national network of passenger rail is just not sustainable without massive, continued federal support. It makes no sense to expect American taxpayers to support a failed system which serves less than one percent of the traveling public, and has many routes with subsidies exceeding $200 per passenger. Action must be taken to acknowledge and address these fiscal realities which is why last February, I introduced S. 1958, the Rail Passenger Service Improvement Act of 2002. That measure largely addresses the principles you have outlined and I am working to modify it to incorporate the additional reforms you announced.

I stand ready to work with you to reform, streamline, and improve our intercity rail passenger system.

Sincerely,

John McCain
Ranking Member


cc: The Honorable Mitch Daniels
Director, Office of Management and Budget


Conditions of an Amtrak Bailout
by Wendell Cox (6/25/02)

As Amtrak lurches further toward bankruptcy, the best approach would be to allow it to file for bankruptcy and operate under the supervision of a court appointed trustee. Under railway bankruptcy law, most of the trains would continue to operate, without interruption. Those canceled would be the losers that the Amtrak board of directors could never muster the courage to discontinue. Nonetheless, it appears that there will be a bailout of Amtrak. If that is to be the case, some conditions should be attached, including, at a minimum, the following.

1. Removal of the Clinton board of directors and congressional oversight hearings. Bill Clinton appointed all but one member of the Amtrak board of directors. This board oversaw and sanctioned the financial destruction of the organization under the leadership of President George Warrington, who has since resigned. During the administration of Warrington and this board, Amtrak piled up $2.7 billion in new debt, even mortgaging Penn Station in New York to pay its operating expenses. Warrington and the board systematically misled both Congress and the American people with respect to Amtrak finances. Last summer, they told Congress that they would meet the congressionally mandated test of operational self-sufficiency (no operating subsidies) by the end of 2002. As late as February, President Warrington was assuring the Congress that Amtrak had enough money to make it through the current fiscal year. After new President David Gunn took office, a new $200 million loss from last year appeared --- approximately eight months after the end of the fiscal year. The parallels with the deceptions and falsehoods of the Enron debacle could not be clearer. This board of directors has failed in its fiduciary responsibility to the American people. Barring resignation, the board should be removed before any new financial aid is given to Amtrak. Finally, this textbook case of corporate misgovernance and public maladministration should be the subject of congressional oversight hearings. The lessons of the Amtrak failure need to be understood so that they are not repeated in other government enterprises.

2. Transfer of common assets. Amtrak has indicated that its stations might not be available to commuter rail operations in a shutdown. This could include Union Station in Chicago, 30th Street Station in Philadelphia and others. All Amtrak assets that are used by other organizations should be transferred on a temporary basis to a unit of the federal government. These assets should later be sold to the private sector, states or localities for continued operation in rail service. In the longer run, a similar approach should be applied to the Northeast Corridor trackage owned by Amtrak. These are not Amtrak's private property, they are held by Amtrak in trust for the American people.

3. Federal financial agency approval of all borrowing. A competent fiscal agency, such as the Department of the Treasury or the Office of Management and Budget should be required to approve any borrowing by Amtrak. Never again should a derelict board and a mismanaging administration be allowed to run up debts of this magnitude.

4. Substantial labor concessions. Amtrak and mass transit are the only passenger or freight modes of transport in the United States that have not made significant productivity improvements in the last two decades. In both of these industries, which are the only transport monopolies left, unit costs have risen well above inflation rates. A major factor in Amtrak's inferior productivity is high labor costs and inefficient labor practices. For example, average Amtrak employee compensation is 20 percent higher than that of the airline industry. Japan's privatized railroads move 3.5 times as many passenger miles per employee as Amtrak.

5. Administrative efficiencies: President David Gunn has rightly begun to downsize Amtrak's ponderous bureaucracy. But the management layoffs he has proposed will take effect over 90 days. Imagine a bankrupt company, which Amtrak is, taking 90 days to eliminate excess administrative fat. An independent advisory group, composed of representatives of the nation's most successful transportation companies, should be employed to review Amtrak's administrative structure and to develop a binding administrative budget to downsize the administrative staff to what would be required in the competitive market.

Finally, it is also time for Congress to get its facts right. Yesterday, Senator Robert Toricelli of New Jersey and Senator Charles Schumer of New York suggested that Amtrak subsidies were justified by the fact that the federal government subsidizes highways and the air system. The Senators have been misinformed. Yes, there was a special financial aid program for airlines to compensate for 9-11 service interruption losses, just as there was special assistance for the 9-11 damaged New York subway and just as flood relief is provided to flood victims. But outside this aid, the airline system pays for itself, with airports and the air system supported by eleven separate taxes paid by users. Similarly, the intercity highway system is paid for by users with the federal fuel tax, who also pay 15 percent of their taxes to mass transit, which carries barely one percent of the nation's travel.

In fact, it would take $1 trillion annually to provide the same level of subsidy per mile to auto users as Amtrak receives. That is more than one-half of the federal budget. It would take $110 billion to subsidize air users at the same rate as Amtrak passengers. Compare this to the less than $50 billion that the nation spends every years, mind you out of user fees, on the nation's highways and air system. The nation deserves a higher standard of discourse.

Wendell Cox is a member of the Amtrak Reform Council and Visiting Fellow at the Heritage Foundation.


Resources



End of the Line for Amtrak (Wall Street Journal)
by Joseph Vranich

"Although I worked to create Amtrak in 1970 and was its advocate for many years, I eventually concluded Amtrak is a colossal failure. Passenger rail travel could have a bright future on some lines, but only if we phase Amtrak out in an orderly fashion. A bankruptcy court is a good place to start, and establishing sensible partnerships between regional public agencies and private rail operators is a good place to finish."



Help Passenger Rail by Privatizing Amtrak (CATO)
by Joseph Vranich and Edward L. Hudgins

A Plan to Liquidate Amtrak (CATO)
by Joseph Vranich, Cornelius Chapman, and Edward L. Hudgins



Congress Should Call Amtrak's Bluff
by Wendell Cox (6/24/02)
WebMemo #115


Press reports indicate that Amtrak's new president, Dave Gunn, has threatened to not only close down the intercity rail system, but also close down commuter rail operations in the Boston, Philadelphia, Baltimore and Washington areas. This is unnecessary and punitive.

  1. Amtrak currently provides commuter rail services under contract to transit agencies in Boston, Baltimore, Washington, San Francisco and Los Angeles, which could be threatened with closure. All of these are profitable contracts for Amtrak, and there is no reason whatever for Amtrak to discontinue service. Fortunately, there are immediate alternatives for the transit authorities -- both freight railroads and international commuter rail operators could quickly substitute for Amtrak, because the trains are owned by the local authorities, not Amtrak.
  2. Amtrak claims that its Acela service in the Washington-New York-Boston corridor is also profitable. If this is the case, there is no reason for this service to shut down. If Amtrak shuts down the money losing slower trains in the Northeast corridor, intercity bus companies stand ready to provide an alternative, virtually immediately.
  3. Because Amtrak owns the Northeast corridor, Gunn's draconian closure could threaten commuter services in the Philadelphia and New York area on Amtrak lines. There is no reason for this. The local commuter railroads pay for track access and dispatch and provide badly needed revenues to Amtrak. If Ronald Reagan could keep the much larger air traffic control system operating when the controllers went on strike, surely they can keep Northeast corridor commuter services running.
  4. Concern has been expressed that commuter services might not have access to Amtrak owned stations, such as Union Station in Chicago. Again, commuter railroads pay profitable rates for access to Amtrak stations and there is no reason that they should not continue to be served. In the final analysis, Amtrak's assets belong to the people, to whom they should not be denied by the unnecessary and precipitous strategies of Amtrak management.

What all of this indicates is a railroad that is way off-track. After five years of mismanagement and deception, Amtrak's new and highly touted management has unwisely raised the stakes beyond credibility. Mr. Gunn's strategy would hold hostage not only customers of Amtrak's own profitable services, but also thousands of commuters who are the customers of local transit agencies. Indeed, in the Northeast Corridor, Mr. Gunn's strategy could precipitate a regional crisis. This is not even thinly veiled blackmail, a tactic that has no place in civilized society. That a government-owned, taxpayer-subsidized corporation is prosecuting it makes it all the more offensive.

The Bush Administration should meet this challenge head on and implement a strategy to keep Amtrak's profitable service lines in operation. The administration should seek whatever legal or administrative strategy available to bring Amtrak under control. Either bankruptcy or a form of federal administration, under which a trustee would continue to operate trains and undertake the financial reforms that have so long been avoided by Amtrak's management and board of directors. Whether they know it or not, Dave Gunn, the Congress and the Bush Administration are embroiled in a game of brinkmanship and Mr. Gunn has raised the stakes well beyond what he or Amtrak can sustain. Neither Congress nor the President should blink.

Wendell Cox is a member of the Amtrak Reform Council and Visiting Fellow at the Heritage Foundation.


Resources

No Bailout for Amtrak; Board Members Should Resign by Wendell Cox

Amtrak's Impending Collapse Offers One-Time Opportunity for Reform by Ronald D. Utt, Ph.D. (May 13, 2002)

Proposed Amtrak Bailout Would Bust the Budget by Ronald D. Utt, Ph.D. (October 2, 2001)

Opportunities to Improve Passenger Rail Service Testimony by Ronald D. Utt, Ph.D. March 7, 2002.

News Links

Amtrak Under the Gunn (Wall Street Journal)

Amtrak, Shamtrak: The national rail system needs an overhaul (Dallas Morning News)

The Great Pork Express (St. Louis Post-Dispatch)

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Wendell Cox Visiting Fellow
Thomas A. Roe Institute for Economic Policy Studies