June 6, 2002

June 6, 2002 | WebMemo on Federal Budget

No Bailout for Amtrak; Board Members Should Resign

David Gunn, the new president of Amtrak, told the Washington Post yesterday that Amtrak would have to shut down all its passenger rail service if it does not obtain a bank loan by the end of the month.

Regrettably, even the new management at Amtrak seems more inclined to play political funding games than to act as a serious business. What businesses do when they have reached the financial embarrassment of Amtrak is file bankruptcy. And, with respect to railroad bankruptcies, service does not stop. Payments to trade creditors stop, but service continues to operate and employees are paid.

A bankruptcy trustee, in the case of Amtrak, would be required, unlike the management and the Board of Amtrak; to impose financial and commercial discipline on an organization that has long operated as if its role is to incinerate the taxes paid by the American people.

The current mess is not Gunn's fault. Forsaking the routine grace period towards predecessors that's typical for new public administrators, he has criticized former Amtrak president George Warrington. He further indicates that the financial situation is worse than is generally understood, pointing out that he has discovered Amtrak is now $3.7 billion in debt. Indeed, Amtrak told the American people and Congress that it was on track for reaching the Congressionally mandated goal of self-sufficiency as late as last summer.

Amtrak had been misleading the public and the Congress for years and has been grossly mismanaged.

Gunn has nothing to do with that, because he was not there. However, the Amtrak board that hired and supported George Warrington's misleading and disastrous strategies remains largely intact today. They and former Amtrak president George Warrington should be dragged before Congressional committees to explain what went wrong, like the Enron executives who lied about the financial condition of their company. Were the board members conscious participants in this fabrication, or did they simply fail to exercise their fiduciary responsibility? In either case, the appropriate course of action is resignation.

But Gunn is off base when he says the financial objective of operational self-sufficiency was wrong and that no passenger railroad in the world operates without subsidies. If Amtrak's costs were in line with airline and bus costs per passenger mile, Amtrak would be self-sustaining today, not only with respect to operating costs but also capital costs. Further, the industrial world's largest passenger railroad system, in Japan, is not only profitable, but it pays taxes.

As for the prospect of the $200 million loan, Gunn intends to put up as collateral next year's Congressional appropriation. Should Amtrak file bankruptcy after receiving the money, the entire new bank loan - or much of it - will have to be written off. Banks always take a great risk when they loan to the likes of failing third world countries and Amtrak.

The worst thing that could happen would be for Congress to bail out Amtrak. This would only perpetuate Amtrak's bloated cost structure and put off for months or years the next reckoning, which will, of course, be worse.

Finally, the federal government has no legal obligation to pay the debts of Amtrak. The banks knew that when they provided the billions to support Mr. Warrington's house of cards. No one asked the American people whether or not Amtrak should dig itself into a hole. And no one should expect them to pay.

Wendell Cox is a visiting fellow at The Heritage Foundation and a member of Amtrak Reform Council.

About the Author

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

Related Issues: Federal Budget