TABLE OF CONTENTS(Click on Section)

PURPOSE

BACKGROUND

WITNESSES

To examine Amtrak's current financial and operational situation and prospects.

Creation of Amtrak

Amtrak was created by the Rail Passenger Service Act of 1970 (P.L. 91-518) under which the nation's railroads were relieved of the common carrier responsibility for carrying passengers. The government relieved the freight railroads of passenger service because ridership had been declining almost continuously since 1920 and passenger service had become a financial burden on them.

The Act created Amtrak as a quasi-public corporation to operate the nation's intercity passenger trains over a basic route network prescribed by the Secretary of Transportation. Amtrak was declared to be a "for-profit" corporation and "not to be an agency or establishment of the United States Government." [49 U.S.C. 24301] At the outset, Amtrak was expected to pursue conflicting goals. Amtrak was supposed to provide a national rail passenger service while simultaneously operating as a commercial enterprise. There is a dispute whether anyone expected that Amtrak would be profitable. A recent search by the Congressional Research Service for expectations of profitability when Amtrak was created found only a single hopeful statement by then DOT Secretary Volpe.

Amtrak began service on May 1, 1971, over an initial basic system of 21,000 miles--a significant reduction from the 49,500 route miles operated by the railroads on April 30, 1971. The number of daily trains was reduced from 290 to 180.

The Boston-Washington Northeast Corridor (NEC), was only transferred to Amtrak 5 years after Amtrak commenced operations, having been owned by the bankrupt Penn Central Railroad and then briefly by Conrail. The NEC is subject to a 999-year mortgage held by the Department of Transportation. In addition, DOT acquired a general mortgage on all Amtrak assets as part of the mortgaging of Pennsylvania Station property in New York in 2001.

All preferred stock, which had a liquidation preference against all Amtrak assets and the only voting rights, was held by the Department of Transportation. Common stock in Amtrak was issued to certain private sector railroads that contributed start-up equipment and rolling stock to Amtrak. The common shareholders and their proportionate interests are as follows:

Amtrak's Performance Before the Reform Law

The number of passengers Amtrak carried increased from 16.2 million in 1972 to 21.2 million in 1980. Nevertheless, Amtrak’s current ridership remains around that level with 22.5 million passengers riding Amtrak annually.

Amtrak always has had financial problems. Amtrak has run a deficit every year since its creation and has received over $34 billion (or about $1 billion per year in constant 1999 dollars) in assistance from the federal government in both operating and capital support during that period.

Amtrak undertook a major restructuring of its inherited route system in 1979 in an attempt to get losses under control. Studies by the GAO and others regularly documented that the Congress needed to appropriate more funds for Amtrak if Amtrak were to do any more than survive. In 1995, GAO reported that Amtrak's programs continued to be underfunded and "it is unlikely that Amtrak can overcome its problems in financing, capital investments and service quality--and continue to operate the present nationwide system--without significant increases in revenues and /or subsidies from Federal, State, and local governments.” By the late 1990's it was clear that Amtrak's situation was critical and it could not survive without an infusion of public funds in addition to the appropriations it received.

The Taxpayer Relief Act of 1997

Amtrak received additional assistance of $2.3 billion under the Taxpayer Relief Act of 1997, which mandated a tax refund to Amtrak. (The tax refund was above and beyond the general fund appropriations authorized in the reform law.)

The Amtrak Reform and Accountability Act of 1997 (P.L. 105-134)

1. Corporate Governance and Structure

The 1997 reform law created a new board of 7 voting members with 5-year terms. The members were to be appointed by the President with Senate confirmation (except that the DOT Secretary could be optionally appointed as a member without reconfirmation). [49 U.S.C. 24302(a)(1)-(2)]. All members of the board were required to “have technical qualifications, professional standing, and demonstrated expertise in the fields of transportation or corporate or financial management.” [49 U.S.C 24302(a)(2)(C)(i)]. The president of Amtrak was made an ex officio, nonvoting board member. [49 U.S.C. 24302(a)(2)(D)]. Under the current Amtrak statute, if Amtrak is receiving federal funds in Fiscal Year 2003 (as it is), then a new board is to be selected by the same Presidential nomination and Senate confirmation process applied in 1998. [49 U.S.C. 24302(b)] Four of the incumbent board members' 5-year terms expire in June 2003, two more in September 2003, and one in the spring of 2004. The statute does not authorize holding over by board members after the expiration of their 5-year terms. No nominations have yet been announced by President Bush.

The DOT preferred stock lost its voting rights and liquidation preference against Amtrak assets (thus reviving the original voting rights of the 4 common shareholders). The former requirement that additional preferred be issued to DOT for new increments of federal capital funding was also repealed. All other former federal requirements specifying Amtrak's stock structure were deleted. The common stock was required to be redeemed by Amtrak at fair market value by October 1, 2002. This has not been done.

2. Ending Legal Restrictions to Achieve Operational Self-Sufficiency

The reform law also required Amtrak to achieve operating self-sufficiency (exclusive of so-called "excess" railroad retirement obligations) by the December 2002, remaining silent on federal capital assistance after that date. [49 U.S.C. 24101] Amtrak was also given additional freedom to alter its route network and undertake other cost saving changes to meet the self-sufficiency mandate.

Amtrak claimed it could achieve self-sufficiency by growing revenues--primarily through new express services and Acela high-speed service on the Northeast Corridor, rather than focusing on reducing expenses. No significant alterations were made to the route system after the reform law, even though it repealed a requirement that Amtrak serve a statutorily mandated “basic system” of routes established in 1971, permitting Amtrak to terminate any service at will after providing 180 days notice, and often less. [49 U.S.C. 24706]. The reform law also ended Amtrak's former legal monopoly on intercity passenger rail service, but not its unique compulsory access to freight railroads' tracks. [49 U.S.C. 24308, 24309, 24311]

Prior to the 1997 reform law, the Amtrak statutes required Amtrak to pay up to 6 years of pay and benefits to each employee adversely affected by any service reduction below 3 train weekly, year-round, on any route. This requirement was repealed, effective 6 months after the reform law's enactment. Amtrak did not follow the detailed, compressed Railway Labor Act bargaining procedure specified in the reform law for addressing labor protection within 6 months of enactment, and instead deferred that renegotiation to an arbitration process that took nearly 2 years and ended with Amtrak's routes being subject to a 5-years-of-pay regime of labor protection with the same 3-trains-weekly minimum service trigger repealed in the reform law. [P.L. 105-134, Secs. 141-142]. (Amtrak's current president announced in the fall of 2002 that he had no intention of attempting any renegotiation of these requirements, even though Amtrak's labor agreements are currently open for negotiation.)

Amtrak did not use its authority to contract out work. The 1997 reform law repealed a requirement that had prohibited Amtrak from contracting out work other than food services and made the issue of whether Amtrak could contract out services a subject for contract negotiations pursuant to the Railway Labor Act. [P.L. 105-134, Sec. 121].

Instead, Amtrak relied on new high-speed Acela trains in the Northeast Corridor and new revenue initiatives including expanded mail and express operations, to generate enough additional revenue both to achieve operational self-sufficiency and support a status quo operation everywhere else. After the 1997 reform law, Amtrak’s revenues did grow, but its expenses grew faster, as confirmed in annual assessments by the DOT Inspector General and studies by the General Accounting Office. Amtrak recently announced the complete termination of the failed express venture, and its current president has stated that no more Acela trains will be purchased. Acela has encountered major engineering, reliability, and structural problems, while generating revenues far below the $200-250 million per year projected by Amtrak.

3. Amtrak Restructuring Proposal and Liquidation Analysis

The 1997 Reform Act also created the Amtrak Reform Council, a temporary advisory body that was to monitor Amtrak's progress toward meeting a requirement that Amtrak operate without operating subsidies by December 2002. If at any point two years after the passage of the Reform Act, the Council found that Amtrak was not going to reach the self-sufficiency target, the Council was to make that finding known to the Congress and prepare and submit to Congress a restructuring plan. [Sec.204, P.L. 105-134] Amtrak was also required to respond to such a finding with its own liquidation plan, but this was putatively excused by a provision in the FY 2002 defense supplemental appropriations measure. The Council made its finding in November 2001 and submitted its restructuring plan to Congress on February 7, 2002. This Subcommittee examined the Amtrak Reform Council’s restructuring plan in a hearing on February 14, 2002.

In the absence of an Amtrak liquidation proposal as originally required under the reform law, Chairman Young commissioned a GAO liquidation analysis of Amtrak. That study, Intercity Passenger Rail: Potential Financial Issues in the Event That Amtrak Undergoes Liquidation (GAO-02-871, September 2002) comprehensively inventoried Amtrak's assets and liabilities as of a hypothetical liquidation date of December 31, 2001. The study also detailed the legal processes applicable to any Amtrak bankruptcy, including the current law prohibiting any court restructuring of railroad labor agreements in bankruptcy [11 U.S.C. 1167]. The study is available on the GAO website and is expected to be discussed in the GAO testimony at this hearing.

4. Federal Funding After the 1997 Reform Law

Finally, the 1997 reform law authorized general fund appropriations for Amtrak through FY 2002. [P.L. 105-134, Sec. 301]. The table in Appendix A summarizes the Administration-requested, actual, and authorized appropriations for Amtrak for the period covered by the 1997 authorization and afterward. The 1997 reform law provides that Amtrak shall submit a report annually to Congress that may “include recommendations for . . . the amount of financial assistance needed for operations and capital improvements.” [49 U.S.C. sec. 24315(b).] Amtrak, however, did not request general fund appropriations in excess of those requested in the President’s budget (usually slightly over half the authorized amount) during the period 1998-2001. At the same time, as confirmed in the GAO liquidation analysis, Amtrak was tripling its commercial debt load, which now stands at about $4.4 billion.

Beginning in FY 2002, Amtrak first publicly acknowledged that it could not achieve the operational self-sufficiency required by the reform law, and would also require operating subsidies substantially larger than any authorized for the FY 1998-2002 period. For FY2003, Amtrak sought $1.2 billion (and received $1.05 billion, plus a $100 million federal loan on which payment has been deferred to the end of FY 2003). For FY 2004, Amtrak has requested $1.82 billion, the Administration $900 million.

The enacted omnibus appropriations measure for FY 2003 included a series of new restrictions on disbursement of funds to Amtrak by DOT. In general, these include a route-specific Amtrak business plan as a condition of funding disbursement, with monthly updates, and a prohibition on Amtrak expenditures of federal operating or capital funds outside the parameters of the DOT-approved business plan. DOT and Amtrak are also required to reserve sufficient amounts from Amtrak's appropriated funds to satisfy Amtrak's contractual obligations for commuter and intercity rail service.

The Future of Amtrak

In the summer of 2002, contemporaneously with the $100 million emergency federal loan to Amtrak, the Administration announced a series of reform principles to guide future Amtrak policy. These included separation of the Northeast Corridor from Amtrak with infrastructure responsibilities residing elsewhere, emphasizing competition in selecting intercity rail passenger operators, and using an increased decisional and financial role by states in determining the scope of Amtrak service.

Congress and the Administration are faced with fundamental decisions regarding the future of Amtrak and intercity rail passenger service in the United States. Amtrak now claims that it will require a minimum of $1.82 billion in FY 2004 simply to maintain the existing service. (Amtrak’s president has stated that Amtrak will not undertake any comprehensive changes in routes and service.) Moreover, both the DOT Inspector General and the GAO have identified billions of dollars in unmet capital needs that must be funded if Amtrak is to operate safely and securely. This includes major deficiencies and continuing physical deterioration on the Northeast Corridor. Although a wide range of proposals have been suggested for funding or restructuring Amtrak, the fundamental dichotomy will be between preventive policies (legislative or administrative) and the continued decline of Amtrak into likely bankruptcy. (Because of Amtrak's virtually totally encumbered assets, its absence of any profit center, and the peculiarities of the railroad-specific provisions of the Bankruptcy Code, any Amtrak bankruptcy may well be tantamount to liquidation, absent federal intervention.)