COMMITTEE ON APPROPRIATIONS

C. W. BILL YOUNG, Florida, Chairman

JAMES W. DYER, Clerk and Staff Director

KENNETH M. MEAD, INSPECTOR GENERAL, U.S. DEPARTMENT OF TRANSPORTATION

PHYLLIS F. SCHEINBERG, DIRECTOR OF PHYSICAL INFRASTRUCTURE ISSUES, U.S. GENERAL ACCOUNTING OFFICE

GEORGE D. WARRINGTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK)

OPENING REMARKS

Mr. ROGERS. The Subcommittee will be in order. Welcome to our witnesses this morning. Good morning to you.

In 1971, Amtrak's enacting legislation stated that the railroad would be the country's only intercity passenger railroad, and it would be profit making. In the 1980s and early 1990s, the president of Amtrak repeatedly told Congress that Amtrak only needed a few more years of federal assistance before it could be profitable. However, that break even point was pushed into the future again and again. It is 30 years after Amtrak was created as a private corporation, and we are still subsidizing it with hundreds of millions of taxpayers' dollars. That is a long jump start.

Shortly after Republicans took control of the House, the Congress in 1997 increased the pressure for Amtrak to improve its financial performance by putting it into the law that the railroad would have five years to become operationally self-sufficient or there would be consequences. That date when Amtrak is required by law to be off the federal operating subsidy is December 2, 2002. That is just around the corner.

With the budget we have before us now, Amtrak has just a little over one year to eliminate their operating budget shortfall. It is a big shortfall, and they have not made much progress over the past year in reducing it, so we need to find whether or not they are going to be able to redouble their efforts to intensify their cost savings to eliminate this shortfall in the short time they have left. It is a daunting challenge, and we expect them to meet it.

Today, before this subcommittee sit three witnesses who are well versed in Amtrak's financial condition. However, each has a very different opinion about the railroad's health. For the past few

years, the General Accounting Office of the government has been pessimistic about Amtrak's ability to reach operational self-sufficiency and its ability to relieve highway and airport congestion.

In comparison, Amtrak has repeatedly testified that it will be able to meet the self-sufficiency goal mandated by the Amtrak Reform Act and has stated that it can be done so one year ahead of schedule.

The Inspector General has been somewhere in the middle. However, last week, just last week, he testified that Amtrak's ability to reach operational self-sufficiency was in jeopardy because increased revenues have not kept ahead of growing expenses.

There are two budget requests in front of this committee today that support Amtrak's mandate of reaching operational self-sufficiency. In mid February, Amtrak submitted its grant request to this subcommittee seeking $955 million in capital funding and asked that all these funds be available on October 1, 2001.

In comparison, the President's budget request is $521 million and a 100 percent outlay rate. The President's budget is $434 million less than what Amtrak says it needs, yet the president of Amtrak has recently stated that it could live with that reduced amount and presumably reach operational self-sufficiency.

Well, today we want to focus on two simple issues. Can Amtrak achieve self-sufficiency on time and, if so, at what cost? We are pleased to welcome three witnesses to the hearing, Mr. Kenneth Mead, the Inspector General for the Department of Transportation; Ms. Phyllis Scheinberg, Director of Physical Infrastructure Issues at the General Accounting Office; and Mr. George Warrington, the president and chief executive officer of Amtrak.

Before I recognize the first witness, let me recognize my co-worker, Mr. Sabo.

Mr. SABO. Thank you, Mr. Chairman. I welcome our witnesses and look forward to hearing from them.

Mr. ROGERS. Thank you.

Mr. Mead, you can begin.

Ms. Scheinberg, I hope you would follow Mr. Mead.

Mr. Warrington, I would like your testimony then third. As part of your testimony, I hope that you will respond to any concerns or criticisms expressed by myself, the Inspector General or the General Accounting Office as we go through if that would be satisfactory.

Mr. WARRINGTON. Certainly, Mr. Chairman.

INSPECTOR GENERAL OPENING REMARKS

Mr. ROGERS. Mr. Mead, you are recognized.

Mr. MEAD. Thank you, Mr. Chairman, Members of the subcommittee. I have some charts and some slides that should be in front of you. They are in color. I will be referring to those.

Amtrak, Mr. Chairman, is in the fourth year of its five year glide path to operating self-sufficiency. December 2, 2002, is the date on which operating self-sufficiency is to be attained, in our opinion. That is our reading of the legislative intent, and I think the best way to summarize our statement is to point to some vital signs which are depicted in these charts.

AMTRAK'S FINANCIAL RESULTS

I would like to turn first to the chart that is entitled Amtrak's Operating and Cash Losses, 1990 to 2000, the blue and yellow graph lines. Amtrak's financial results have not yet turned the corner. Amtrak's $944 million loss in 2000 was more than its 1999 loss. In 2000, their cash loss, which is represented by the yellow line, and that is the true test of operating self-sufficiency, the yellow line, was $561 million. It is modestly better than last year, but still around $120 million worse than Amtrak had planned.

Now if you could turn to Slide 2, which is entitled Systemwide Passenger Revenue and Ridership Growth? Revenue and ridership are in fact up. Passenger revenues in 2000 approached a record $1.2 billion, which was ten percent better than in 1999. Systemwide ridership also grew by about five percent, and in terms of people that is about 22.5 million people.

You will see on the chart the blue line indicates the spike in ridership from the time that Amtrak's reauthorization measure was passed in 1997, and the red line similarly reflects the revenue. That line has also increased.

If you turn to Slide 3, which is entitled Passenger and Non-Passenger Revenues, non-passenger revenues were about $880 million in 2000, which was better than 1999. It is quite interesting. The railroad is a passenger railroad, but its non-passenger revenues are now accounting for about 43 percent of its total revenue. Ten years ago that number was around 29 percent.

Amtrak has not been successful in curbing expense growth, and that is the real down side. That is the real challenge for Amtrak. In 2000, the cash operating expenses increased by around nine percent over 1999 from about $2.4 billion to $2.6 billion, and they are increasing in 2001 as well. The bottom line is they are spending more than they take in by about $560 million.

If you could turn to Slide 4. Slide 4 is an illustration of one of the expense items that is greatly increasing for Amtrak. It is a chart that depicts the growth in interest expense, which, of course, reflects what you are paying on your debt, which in turn reflects an increasing debt load that is associated with Amtrak's financing of new equipment in recent years.

In 1994, Amtrak's annual interest expenses were about $24 million, $86 million in 2000, and it is headed up. By 2002, that figure is expected to be around $164 million a year. That is quite a bit, and you can see that for the several years after that it would probably be in the same neighborhood, so there is a big plus up in interest on debt.

OPERATIONAL SELF-SUFFICIENCY

I would like to speak to Amtrak's mandate for self-sufficiency. We think that Amtrak's ability to reach self-sufficiency by 2003, and this is operating self-sufficiency, not self-sufficiency from capital is in serious jeopardy. They still have an opportunity to turn the corner.

Last September we said that time was running short for Amtrak to close the holes in its business plan, and I think the Chairman is right in how he characterized our position. Last year I have to

say I was more optimistic than I am at the present time. I think they are in serious jeopardy.

I think the capital shortfall is in effect driving up operating expenses because when you cannot get new equipment and replace new equipment or replace catenary in the northeast corridor, you end up spending more money on maintenance and fixing things when they break. We said there were holes in Amtrak's business plan. Today, the gaps are fewer, but they are still significant, and Amtrak's time is almost up.

That said, it is too early to say, Mr. Chairman, that Amtrak will not meet its deadline, but Amtrak will have to do three things to make it happen.

First, they are going to have to fully implement high speed rail in the northeast corridor. You will recall that the Acela high speed trains were about a year late in becoming operational, but this year they have to ramp up. Just because there are one or two trains there now is not enough. They have about 20 train sets coming, and they have to ramp all those up this year in order to generate sufficient revenue.

Second, they have to fully ramp up the mail and express business. Amtrak projects their revenues here to total about $402 million by 2003. They are now at $122 million, so we are talking phenomenal growth in that category.

Third, they have to make significant strides in curbing expense growth. We found in our last report there are about $737 million in undefined management actions Amtrak was going to take. They have tried to fill some of those gaps, but not all of them. We can go into in the Q&A period what some of those gaps still are. Also, just because you define an action that you are going to take in a plan does not mean that you are going to deliver on that action.

NORTHEAST CORRIDOR HIGH SPEED RAIL IMPLEMENTATION

Acela Express is delayed approximately one year, and that is going to hurt Amtrak's revenues in 2001, this year, by about $83 million. Amtrak expects to make up for the lost revenues with other actions this year. If Amtrak can meet its current target of 2001 to have all 20 train sets and 15 high horsepower locomotives in service, they ought to see full revenue in 2002. In other words, by the time we come back next year, we ought to see the proof in the pudding. In fact, if the airline delays continue to flood the northeast, Amtrak's projections could turn out to be conservative.

CAPITAL FUNDING NEEDS

I would like to say a word about capital at Amtrak, the shortand long-term capital needs. Amtrak is not going to survive if the Congress does not address the capital shortfall at Amtrak. Even if they were somehow to meet their operating self-sufficiency by the due date, they are going to need substantial amounts of capital. We do not see any set of circumstances in the foreseeable future where Amtrak will be able to operate without substantial capital.

Amtrak values their capital need at about $970 million in 2002 and 2003. We see their minimum capital needs during those years at about $370 million and $409 million, and that is the bare bones minimum.