June 15, 2005

June 15, 2005 | WebMemo on Smart Growth

A Serendipitous Flaw: Could Bad Brakes Lead to Fundamental Reformof Amtrak?

In his proposed federal budget for FY 2006, released in February 2005, President George W. Bush recommended that federal subsidies for Amtrak cease after September 30, 2005. The federal subsidy covers about 40 percent of Amtrak's operating expenses, and the Administration's withdrawal of that support would force Amtrak to file for bankruptcy. Amtrak could then use the respite that bankruptcy protection affords to restructure its operations to reduce costs, raise revenues, and achieve financial self-sufficiency. Getting this plan through Congress would have been difficult, to say the least. But Amtrak's own ineptitude, along with an unexpected equipment failure, may seal the deal and finally force reform of the troubled railroad.

 

Bush's Amtrak reform plan is the most far-reaching that a president has ever recommended, and-no surprise-Amtrak's managers and employees, as well as its many congressional supporters, have aggressively opposed it. Indeed, few observers thought the plan had any chance; instead, they predicted, Congress would pour even more money into the system. Yet as the year has unfolded, the hapless railroad now finds that a long legacy of managerial incompetence has locked it into a self-inflicted financial death spiral that could give the President much of what he wants and leave the nation with a more effective passenger rail system.

 

The same week that the President sent Congress the details of his plan to restructure Amtrak, Amtrak announced that it was withdrawing all of its new Acela trains from the Northeast Corridor (NEC) because of flaws in the disc brakes that rendered them unsafe. Although Amtrak hoped to fix the defective systems quickly, the problem turned out to be the result of fundamental design flaws for which there may be no ready remedy. As a result, Acela service may not be restored for many months or even longer.

 

Because Acela provided 45 percent of NEC ticket revenues and the NEC accounts for 65 percent of all Amtrak ticket sales (excluding state-supported trains), the loss of the Acela will have a devastating effect on Amtrak's near-term finances. Some analysts predict that Amtrak could be financially insolvent by mid-August, in which case Amtrak, as a private corporation, would have no choice but to file for bankruptcy. Once the filing is approved, the court would appoint a trustee to sort through Amtrak's operations and assets, determine what can be salvaged, and recommend a path towards solvency. As part of this process, the trustee would no doubt consider the reforms proposed by the President and introduced in Congress by Senator John McCain (R-AZ) as S. 1510.

 

The President's plan includes three major reforms:

  • Transfer the NEC to the Department of Transportation, which in turn would lease it to a newly created entity that would operate NEC trains on behalf of a compact formed and financed by the eight states that the NEC serves.
     
  • Reduce federal operating subsidies for Amtrak's 17 long-distance routes by phasing in, between 2005 and 2008, incremental increases in the share of the Amtrak subsidy that states pay for routes in their regions. In the first year, states would have to cover any losses over 40 cents per passenger mile; in 2007, losses over 10 cents per passenger mile; and in 2008 and thereafter, all losses.
     
  • After three years of operation, contract out all Amtrak routes that are still in operation (except the NEC) to private operators on a competitive basis.

The Importance of the States

While many states, and especially those served by NEC, will object to the provision that they assume financial responsibility for subsidizing regional rail service, such a requirement would make the system more equitable. At present, Amtrak operates a total of 42 separate routes throughout the country. Of those, 23-including the 4 routes in the NEC-are the sole financial responsibility of Amtrak and federal taxpayers. The other 19 are "state-supported trains." These routes are operated by Amtrak and are largely, but not entirely, subsidized by the states that they serve. Among the 19 state-supported trains are the Pacific Surfliner in California; the Cascades, which connects Portland, Oregon, with Seattle; and the Downeaster, which connects Portland, Maine, with Boston.

 

In an enterprise seemingly characterized by pervasive failure, the existing state-supported trains are one of the few bright spots in the system. Carrying about a third of Amtrak's passengers, these 19 routes accounted for all of Amtrak's passenger growth during the first half of this fiscal year compared to the same period in 2004. The state-supported routes saw ridership increase by 6.6 percent between 2005 and 2004, at a time when there was no growth in overall ridership on the 23 routes for which Amtrak is fully responsible.

 

The state-supported routes are also less expensive for Amtrak (and federal taxpayers) to operate than the routes that receive only federal subsidies, some of which are hideously expensive. For example, in FY 2004, Amtrak's Empire Builder, which serves Montana and the Northwest, required a per-passenger subsidy of $175, and the Three Rivers, in Pennsylvania, required a subsidy of $492 per passenger-the highest in the country. In contrast, the state-supported Pacific Surfliner cost federal taxpayers $18 per passenger; the Cascades, $21 per passenger; and the Downeaster, $16 per passenger. Shifting more responsibility and oversight to the states would likely reduce federal costs and lead to services that would better serve passengers.

 

Does Congress Even Care?

Because good service and cost effective operations have never been priorities for Congress or Amtrak's more than 20,000 employees, the Administration will have to impose the reforms necessary to attain these goals through bankruptcy proceedings, and Amtrak will be forced to comply. Past efforts to improve Amtrak through legislation and appropriations have largely failed because Amtrak and its officers often ignored the law and congressional spending priorities. In return, Congress often seems indifferent as to whether Amtrak obeys its laws.

 

Just such an instance was revealed at recent congressional hearings into the staggering sums of money that Amtrak loses by selling foods and drinks. Federal law states, "Amtrak may provide food and beverage service on its trains only if revenues from the services each year at least equal the cost of providing the service,"[1] But apparently the word "equal" has a different meaning for Amtrak's officers. According to the U.S. Government Accountability Office (GAO), in 2003 Amtrak spent $158.8 million dollars on food and drink that it sold to passengers for $78.4 million, thereby incurring a loss of $80.4 million-more than its gross revenues on those sales! And this estimate may actually understate the loss: according to Amtrak's Inspector General, Amtrak spends another $50 million annually to operate and maintain its dining, snack, and lounge cars. Altogether, financial losses on food service account for about 20 percent of Amtrak's annual federal operating subsidy.

 

In response to these reports, on June 13, 2005, Amtrak president David Gunn sent a letter to employees stating that "some of the testimony by… the GAO is false" and that Amtrak is preparing a rebuttal to GAO's analysis. But if anything, GAO's testimony was too optimistic. After all, a section in Amtrak's April 2005 Strategic Reform Initiatives and FY 06 Grant Request describes how "in an effort to significantly reduce annual losses from food service operations that now approach $100 million, Amtrak is evaluating several options for immediate action." Relative to Amtrak's internal accounting, GAO erred in Amtrak's favor by about $20 million.

 

How can a company lose so much money selling beer and burgers? Paying its food service workers $54,800 per year (plus tips) is part of the problem. Amtrak's shortage of customers also plays a role: its trains, on average, are less than half full (45 percent) when they leave the station.

 

The inefficiencies and incompetence that cause Amtrak's food services losses are present throughout the system-in the maintenance yards, ticket sales, train operations, track repair, janitorial services, and a host of other services that Amtrak performs. As a consequence of these collective missteps, Amtrak recorded a net loss of $645 million in its operations for the first six months of the current fiscal year. And because this period ended before the Acela was forced out of service, losses for the whole fiscal year could be more than twice this number and will set a new record for red ink.

 

Preparing For Victory

But Amtrak's current failings offer President Bush an opportunity to force change on the system. When his Office of Management Budget (OMB) proposed that the Amtrak subsidy end in FY 2006 to force the system into bankruptcy and then reform, it must have known that the prospect of success was limited because Congress was unlikely to cooperate. OMB could not have known then, however, that Amtrak's poor performance would obviate the need for congressional cooperation in FY 2006 because Amtrak will likely reach insolvency before the present fiscal year even ends.

 

While the chance that the railroad will be restructured is now better than it has ever been, there is always the risk that Congress will snatch defeat from the jaws of victory and attempt an emergency bailout before the end of the fiscal year. Already this year, many Members of Congress have attempted to maintain or increase Amtrak's federal subsidy for next year.

 

In response to the President's proposal to end the federal subsidy, a majority in the House of Representatives supported a budget resolution recommending the continuation of its funding, while members of the Senate narrowly defeated an amendment to their budget resolution that would have increased Amtrak's subsidy to $1.4 billion from the $1.2 billion it received for this year. Some legislators want even more. Rep. Dennis Rehberg (R-MT), for example, wants to make sure the costly Empire Builder keeps running through his state and bragged in a June 2005 press release that he supported legislation to raise Amtrak's annual subsidy to $2 billion per year!

 

As Amtrak approaches bankruptcy, such costly efforts to bail out the railroad will increase in number and intensity. In the face of such threats, the President should be prepared to veto any spending proposal that would threaten his plans for restructuring and improvement.

 

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.



[1] See 49 USC 24305 (c)(4).

About the Author

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